Setting the Board’s Sights on Digital Transformation and Innovation

At a recent NACD Master Class program for active directors, one session focused on how boards and their companies can best leverage digital transformation to compete and thrive in a disruptive world. The various stages of the digital maturity journey were discussed: organizations start as skeptics and beginners, progress into followers and more advanced experts, and ultimately, some companies become industry leaders.

This “journey” offers directors a context for evaluating where their respective organizations stand, with the point being that digital transformation prepares businesses to be more resilient when market disruptions arise.

Participants of the NACD event offered several insights, included below.

There is a distinction between the impact of technology on the business model and its impact on other enterprise threats. Digital technologies can transform business models but can also create new risks, such as different kinds of cyber threats. With respect to transformation, one breakout group consisted of directors serving banking, real estate, and other related companies that were principally digital followers in an industry undergoing significant disruption. In these sectors, innovation is critical to the business model remaining viable. The group recognized that organizations like Apple, Amazon.com, Alibaba Group Holding, Samsung, and PayPal Holdings (which are not small start-ups that can be bought out) may be, with their digital wallet offerings, the real financial technology, or fintech, companies.

With respect to creating new enterprise threats, corporate leaders may be focusing more on keeping employees and customers safe and sustaining business, given the health complexities of COVID-19, through a virtual workplace. However, as new technologies are implemented to accomplish these objectives, they may require different information security measures to ward off novel threats created by these advances.

Companies accelerated their innovation cycle during the pandemic. Several examples of rapid mobilization to enable working from home were shared. For example, an event support company highly dependent on brick-and-mortar events pivoted rapidly to support virtual events with a digital platform that had been under development for four years. Meanwhile, a flooring company, striving for contactless customer service and delivery, achieved rapid innovation by implementing visualization software that enabled customers to see samples very clearly on their computers and envision how their selections would appear in their homes.

These and other examples are inspiring, but are they representative of true digital transformation? They certainly demonstrate that companies can make quick decisions, get things done out of necessity, and trust their people to work from home. But if reinvention ceases post-pandemic, it won’t be enough.

Demographics are a factor when implementing new technologies over a compressed time period. A health-care system accelerated innovation by shifting 80 percent of its patient visits to a telehealth model as the pandemic limited mobility. However, when lockdowns were lifted, only 10 percent of health visits remained virtual, as older people were less comfortable with them.

When implementing new technologies over a short period of time, it is essential to consider the demographics of users of a company’s products and services and their evolving preferences and changing needs. It may also be necessary to educate segments of the market about the advantages of virtual options (such as the telehealth option for older patients).

Look for alterations in supply chains to reduce risk. To learn a major lesson from the pandemic, look to its effect on global supply chains, which has forced businesses to build resilience into procurement processes. Such restructuring focuses more on speed in a digital world and could ultimately entail shifting the attention of traditional procurement processes to reducing life-cycle costs, managing operational risk factors, and achieving enduring business partnerships (rather than relying on the vendor model in which the relationship ends when the transaction is completed) as part of a high-performance procurement ecosystem. A strategic mindset not only solves current supply-chain issues but also helps mitigate potential future challenges.

Many companies may not be well-prepared for the next disruptive scenario. COVID-19’s health complexities are not fully understood or realized yet, so unexpected effects will likely still play out. Disruption comes from unexpected developments; for example, when two regulators merge, they set new expectations for the organizations they regulate. But the velocity of disruption can vary. Disruptive innovation can take a long time to generate returns, hampering profitability. For instance, the consumer preferences of millennials and Generation Z are expected to drive dramatic market shifts, but the lag time between initial digital innovation investments to prepare for those shifts and ultimate profitability could be significant.

Every company doesn’t need to be a digital leader. From a risk and reward standpoint, many companies may prefer to watch others take risks, assess what works in the market based on the outcomes of taking on those risks, and adopt best practices as they evolve, but do so in an agile manner. Ultimately, companies do not necessarily need to be leaders to succeed. Agile followers can also succeed when they focus on the market and continuously assess new ways to reach customers with a keen, watchful eye on leading competitors. The counterpoint, however, is that digital leaders may pull farther ahead.

A team with a proven track record of disruption and digital innovation should devise the optimal strategy—and ask the right questions. Most businesses are people businesses; thus, technology innovations should be driven by people. Companies should assign a diverse, multidisciplinary team to focus on digital disruption and innovation and to formulate a coherent strategy with the most cost-effective means to implement it, considering the nature of the business and asking and answering the appropriate questions: What do our customers need? What are our competitors doing? As for needed innovation, do we buy it? Do we build it? When? Engaging younger generations in decision-making processes can support digital thinking.

Use data to drive decision-making for the business. Regardless of where the business stands on the digital maturity continuum, there is an opportunity to use data and information for insights around how to better reach and serve the company’s customers and improve operational efficiency.

The NACD Master Class discussion illustrates that many companies have implemented new ideas in a matter of days and weeks, not months and years, during the COVID-19 pandemic. They have taken risks out of necessity. And in doing so, they have discovered for themselves the power of digital transformation and an innovative culture.

Going forward, directors should be cognizant that the biggest risk with regard to digital disruption comes from not acting, being slow or overly methodical, failing to focus on being agile, and engaging in broad and lengthy debates that frustrate the imperative of being an early mover in rapidly changing markets.