Digital transformation is not as risky as you think

Source code on black background
Photo: Markus Spiske / Unsplash
By Lars Arvei Moen

9 March 2020 15:15

Digital transformation is not as risky as you think

The decision to make changes to an existing business model can be a major source of concern for top-management of a company. How to navigate this change process successfully?

Introduction

The decision to make changes to an existing business model can be a major source of concern for top-management of a company. One of management’s responsibilities is to mitigate future risk and uncertainty to the business. However, just as markets are dynamic and ever-changing, so is the way companies create and capture value. The need for renewal of the business model is a necessity for companies wanting to remain competitive. Navigating this change is thus also an essential task for management. This article highlights research into how companies may successfully navigate this change process without jeopardizing it all. 

The opposition for change

With the rapid digitalization of “everything”, companies need to provide their products and services in new ways to stay competitive in a digital economy. One way to assist this change is through business model innovation[i], which allows companies to improve or change how they do business to create better value for their target customers.

Yet, innovating the business model also means changing the existing source of revenue. And not all changes are equally successful. Unless the company is facing a major shift in customer base, many managers will resist jeopardizing the current source of revenue for a future uncertain outcome. This is normal and part of management’s responsibility.

This resistance is a common challenge for intrapreneurial change champions to face within organizations, and especially for changes to the core business model as it is the key provider of cash flow. Additionally, a new digital business model requires new business logic that changes the organizational structure and may disrupt deep-rooted business and cultural practices within the organization.

A digital business model innovation proposal will, therefore, be scrutinized on all levels in direct comparison to the existing business model, as managers are biased towards the existing business model. Too much uncertainty increases ambiguity and thus reduces decision-speed and momentum for a successful pivot[ii].

In the following sections, we will highlight case study research into how previous organizations have successfully implemented a new business model into an existing organization without facing an existential threat and jeopardizing it all.

Management mindset and decision ambiguity

As earlier stated, a key responsibility for top management is to mitigate risk and future uncertainty. This causational mindset[iii] evaluates new digital business opportunities by seeking to control the outcome through a pre-set goal, an action plan and an expected ROI based on pre-existing knowledge, capabilities, and resources to maximize shareholder value. However, as digital change processes in industries are far from predictable, managers cannot control future outcomes in the same way as they are used to. This causational mindset is not useful to facilitate new digital sources of revenue.

Instead, companies need to evaluate these new digital business model opportunities with an experimental approach that is iterative and agile. By borrowing from the entrepreneurial literature, companies should adopt the intrapreneurial effectuation mindset which emphasizes the creation of something new by utilizing resources for ideation and innovation, while also limiting potential losses from negative outcomes[iv].

The solution of dual business models

For this new approach to be successful, the literature advocates for companies to set up a separate organizational structure for the new business model, governed by effectuation mentality[v]. This dual business model structure helps to reduce management uncertainty, goal ambiguity, logic plurality and internal political battles for resources[vi].

It is important that this structure operates and is managed under a different decision-making logic, namely effectuation, which allows for higher innovation-uncertainty. It is important that the structure is allocated its own independent financial and human capital resources so that it do not compete with existing business. Lastly, the structure should nurture the 13 essential dynamic capabilities for successful data-driven business models

Keeping the predictability of financial stability and cash flow from the existing business while separately innovating a new business model allows the company to make a softer transition of its culture and organizational structure. As the new digital business model matures and starts to find its superior value offering, customers will begin to prefer the new business model, and value will start to migrate from the old to the new business model[vii]. This organic transformation allows the company to continue to operate in familiar ways (keeping existing business model), while also allowing for a digital transformation to grow until it becomes the primary driver for value creation, and a pivoting occurs organically.

In summary, research supports that companies looking to make the transition into a digital business model, but struggles with decision ambiguity, should keep managing their core business as usual with a causational mindset (unless they are facing a major disruption in the immediate future). In a separate structure, companies should create the conditions to innovate a new digital business model that builds on effectuation logic. Facilitating this dual business model logic, helps companies reduce core business risks while simultaneously building for future upside potential.



[i] Foss, N. J. and Saebi, T. (2017) ‘Fifteen Years of Research on Business Model Innovation: How Far Have We Come, and Where Should We Go?’, Journal of Management, 43(1), pp. 200–227.

[ii] Hess, T. et al. (2016) ‘Options for formulating a digital transformation strategy’, MIS Quarterly Executive, and Kreutzer, R. T., Neugebauer, T. and Pattloch, A. (2017) Digital Business Leadership, Digital Business Leadership.

[iii] Heinze, K. L. and Weber, K. (2015) ‘Toward organizational pluralism: Institutional intrapreneurship in integrative medicine’, Organization Science

[iv] Brettel, M. et al. (2012) ‘Corporate effectuation: Entrepreneurial action and its impact on R&D project performance’, Journal of Business Venturing.

[v] Brenk, S. et al. (2019) Learning from failures in business model innovation: solving decision-making logic conflicts through intrapreneurial effectuation, Journal of Business Economics. Springer Berlin Heidelberg.

[vi] Casadesus-Masanell, R. and Ricart, J. E. (2010) ‘From strategy to business models and onto tactics’, Long Range Planning, and Pache, A.-C. and Santos, F. (2010) ‘When Worlds Collide : The Internal Dynamics of Organizational Responses’, Academy of Management Journal.

[vii] Hacklin, F., Björkdahl, J. and Wallin, M. W. (2018) ‘Strategies for business model innovation: How firms reel in migrating value’, Long Range Planning, 51(1)