We got great feedback on our Boardroom Summit in April—especially the session we did with Ram Charan on the need for boards and companies to embrace digital transformation.
Charan, one of the world’s pre-eminent counselors to corporate leaders and author of Boards That Lead and more than two dozen other books, has been researching a new book (due out next year) focused on the phenomenon. He sees it as the most foundational change to the way global business is being conducted in more than a century, with an impact on business and society as profound as the introduction of mass production—perhaps even larger.
Yet, he says, most board members and managers do not truly understand the ramifications or how they must change their organizations to thrive—or even just survive.
We asked Charan to expand on the ideas he presented at the event in May and share some practical advice on how boards can help their companies take advantage of this new opportunity. What follows are excerpts from that conversation, edited for length and clarity:
What is a digital transformation? I get asked this question all the time. I find that the term is often misunderstood. The “digital” part is simply a matter of converting information—whether it’s text, video or voice—into 0s and 1s. Digital transformation is much more. It means creating the capability for algorithms, A.I. or machine learning to convert data into required outputs that are central to running your business. It involves fundamentally changing the way you conceive of and operate your business.
A digital company is, first and foremost, totally focused on the consumer and treats each consumer as an individual. I call that N=1, where N is a market segment. Focusing on the consumer means getting to know everything about them—all the touchpoints and pain points—and reconceiving a new kind of end-to-end experience through the use of digital technology.
Under this model, the marketplace is boundless, because beyond a certain point, digital technology makes the incremental cost of delivering that end-to-end experience to consumers close to zero. The cash that is generated can be used to further increase the market. Amazon is now heading up to $200 billion in sales, and little stands in the way of it going to $500 billion. I have no doubt it could reach $1 trillion in revenue in years to come. That would be 20 percent of a total addressable market of roughly $5 trillion.
I call this concept of exponential growth “100x.” If you own a market whose size is X before digitization, you must try to conceive a new market that is 100 times bigger. The consumer is at the epicenter: What could be a new end-to-end experience for the consumer? How can you surprise that consumer with needs they never thought of but find compelling?
“If you’re already a board member, your mindset and attitude has to be focused on learning, and you have to make time for it. Many board members don’t have it.”
A focus on the consumer’s end-to-end experience is the basis for rethinking all parts of the company. It will lead to a different kind of enterprise. Henry Ford’s assembly line unleashed the benefits of mass production. Ralph Cordiner created a decentralized structure at General Electric and remade the way companies were organized. Now digitization is creating a new set of rules and new breed of company.
There’s no such thing as an industry anymore. The more important unit is the ecosystem. And a new kind of leader is coming in, creating new ways to manage, where you’re a partner with the competition, and, at the same time, you’re competing head on. That is a new game.
Many boards don’t fully grasp the profound impact digitization can have on a business, as a threat or opportunity. The imagination is not quite there. Many companies are on the defensive as they deal with the impact of born-digital companies like Apple, Amazon, Facebook and Google. There is a real lack of literacy in this new game—and that lack of literacy is a very big negative.
Boards have to get up to speed on the why and how of digital transformation. Whether you are a private company board or a public company board, you are representing owners. Owners care to preserve their wealth, but they also expect the company to catch the wave of change. So the board must learn, must become digitally literate, to ensure that the company is making the necessary changes. Board composition and practices must be up to the task:
Every board needs a leader. Many times the CEO exercises leadership of the board—and that has a bias. So the first thing is for a board to have a strong nonexecutive chairman or a strong lead director who can invest time and has the courage and skill to lead the board’s work and education, and develop its digital literacy, while being a congenial member and guiding its relationship with the stockholders and the CEO.
There must also be at least one person who is truly technology literate, hopefully a CEO from a digital company who knows what the technology can do, someone who has done it—but also someone who has a broader viewpoint of the company and its business.
There are a number of places to find these new directors. Obviously, the CEOs of companies like Amazon, Apple, Google, Netflix and so on would be excellent candidates to recruit, although of course that’s going to be very rare. But in those 10 or 12 companies that are leading the world in digital transformation, there are people who are not in the CEO role but may have been a CEO before somewhere else. They are now in staff positions, line positions, one to two levels below the CEO. They are great potential candidates for board seats.