The Digital Transformation Trap

The last few years have seen a wave of interest in “digital transformation”. Many companies have now publicly committed to a digital transformation strategy, often linked to the appointment of a Chief Digital Officer to the Executive team.

There are several definitions of digital transformation.  In simple terms it is about improving performance in every part of the organization through the smart use of technology, typically broken down into Social, Mobile, Analytics and Cloud.

Most digital transformation efforts are focused on improving performance of the current business model, what Clayton Christensen called “sustaining innovation”.  In a recent survey only 15% of executives said digital was helping them to create new business models or “disruptive innovation” to use Christensen’s terminology[1].

I think it helps to think of innovation across the two dimensions of cost to the business and quality to the customer (see matrix below).  The top-right quadrant comprises the most competitive innovations in the market, delivering both improved quality and lower cost.  Of these, most digital transformation initiatives are “sustaining” innovations that incrementally improve the current model. A few digital transformation initiatives are “disruptive” innovations that support a new and superior model in the top-right of the matrix.

While it makes no sense to adopt a disruptive strategy if it is not possible or desirable, companies should be mindful that sustaining digital initiatives will not protect them against a disruptive new entrant. Sustaining innovation is like sharpening your axe so you can chop down a tree more quickly.  Disruptive innovation is about taking a step back and making a decision to chop down a completely different tree. 

A company that appears to have mis-judged the balance between sustaining and disruptive innovation is Walmart.  Walmart is the world’s largest retailer and was a case study in using technology to deliver great business results, years before anyone started talking about digital transformation.  Walmart led the world in its sophisticated use of data analytics to collaborate with suppliers to improve supply chain performance and on-shelf availability. Yet despite its strong track record in technology innovation, Walmart seemed to ignore the disruptive threat to its core grocery business from companies such as Amazon.

When I was in the US in 2003 and 2004 helping establish its online grocery business, Walmart did not have an online grocery offer in the US.  Walmart only started testing online grocery in the US in 2011, with a trial in its home state. In 2015 Walmart is making significant investment in online grocery and having to solve challenges that could have been addressed over ten years ago. Meanwhile Amazon has been making steady progress and in 2015 Amazon’s stock market value exceeded that of Walmart for the first time.


Reflection points

1.     What is the balance in your organization between sustaining and disruptive innovation?

2.     Are your digital transformation efforts focused on the areas of biggest opportunity?


[1] Didier Bonnet and George Westerman, cited in HBR (January 20, 2015)