Why some organisations resist digital transformation

Whether they knew it or not, every company I have ever worked with had its own ‘theory of business’. Each company’s theory of business was critical to making—or blocking—progress in its digital transformation.

So what is a theory of business?

Every organisation believes there is one critical thing it has to do to thrive. That critical thing is its ‘theory of business’. The theory of business is often different for each firm.

For example, a few years back I worked with a large wealth management firm that was still run by its founding partners. They’d built the business by creating a network of great customer advisors (sales people). The theory of business was ‘we will succeed if our advisors succeed’.

A mortgage lender I worked with had been shaken up by the 2007 financial crisis to the extent that its theory of business became ‘we will succeed if we manage risk in our loan book’.

In each case, the organisation was arranged around its theory of business. As a result their digital capability fell behind their competitors because, in each case, it was irrelevant to the theory that drove the organisation.

Often the theory of business goes unsaid. It’s not written down or repeated. Instead it’s a set of assumptions that are taken as being so fundamental that no one ever needs to say them out loud.

In those cases, the theory is especially difficult to challenge. How can you push back against something that doesn’t appear to be there?

Whether spoken or unspoken, over time, the theory of business shapes every aspect of the organisation: key performance indicators, products, budget allocation, IT infrastructure, and the structure of the organisation.

As it does so, the organisation becomes resistant to change. Even motivated chief executives can find their organisation is unwilling to listen. For change to happen, a crisis must take place.

A crisis can hit an organisation at any time. A new competitor can enter the market, a key contract can be lost, new regulations can force change.

Sometimes, the crisis hits many organisations at once - like the global pandemic today.

When the crisis comes, everyone within an organisation starts to question whether the old ways will get them to safety and growth. They question their theory of business.

At that point, the organisation is ready for change.

When organisations look for change, most return to the fundamentals.

Back in 1980, Michael Porter summed those fundamentals up with powerful simplicity.

Porter observed that organisations win by adopting one of three ‘generic’ strategies: cost leadership, differentiation, or focus.

Cost leadership means offering the lowest price to as many customers as possible. In air travel, Ryanair does this relentlessly.

Differentiation means commanding a higher price by finding an aspect (such as product quality) that some customers are willing to pay more for. Emirates Emirates airlines is an example.

Focus means delivering the perfect service to a highly targeted niche. You may not have heard of Rise, but they offer a service that’s just right for people who commute regularly between Dallas and Houston.

Each of Porter’s strategies demands a relentless focus on the customer.

Cost leadership means asking: what are the basics that customers need? Differentiation means asking: what are the things that a large group will pay more for? And niche focus means understanding the precise needs of a tightly defined group.

In other words, when the crisis comes, organisations that have been shaken out of their comfort zone find themselves asking: who are our customers, and what do they want?

This is why user centred design is such a powerful tool in a moment of crisis: it can answer these questions and rebuild the products and services that drive competitive advantage.

In my career, I’ve seen three major crises: the dot com crash, the financial crisis, and the global pandemic.

Each crisis was bigger than the last. Each crisis has caused more organisations to adopt user centred design as their theory of business: we win by focussing on delivering products and services that our users value.

For organisations looking to ‘digitally transform’, the first question is: why? The only answer that makes sense is: because it’s valuable to the people we serve.

That is why so many organisations are still talking about digital transformation after so many years: they’ve been unable to align digital transformation to their theory of business.

It takes a crisis to change, and it takes insight to realise that it’s not digital transformation, but customer transformation that really matters.

For organisations to successfully change, they need to adopt this theory of business. That means it needs to explicitly affect every aspect of the organisation - from culture, to infrastructure.

These changes run deep. That means they often take years to put in place. And they beg the question, ’what does a user-centred organisation look like?’. 

The simple answer is: nothing like most of the hierarchical. output-focussed organisations that we see today.

In customer focussed organisations, every team has frequent contact with customers, shapes their ideas around what it learns from that contact, and insight into what customers want is the most valuable commodity in the organisation.

In customer focussed organisations, the infrastructure has been established to allow rapid changes to the customer experience as that new information comes in.

In customer focussed organisations, change doesn’t spring from the vision of a powerful stakeholder; it's shaped by constant dialogue with customers, because everyone recognises that listening to customers is how we win.

But before profound, lasting change can take place, the organisation must first recognise the nature of the change.

In other words, it has to recognise its current theory of business. It must understand that theory has moulded it to its present shape. And it must articulate and embrace a new theory, and begin the journey of restructuring.

If you’re wondering why change is failing, a good first step is to uncover your organisation’s theory of business and bring it into the light where it can be questioned.