With the growing need for digital transformation across many di erent organizations and industries, the idea of Organizational Agility has become a major buzzword and is often seen as the secret sauce for winning in digital. Many top leaders see Agility as a key enabler for exibility, increased speed to market and nally as a weapon to beat aggressive startups.
In our 2012 Digital Readiness Study we had already identi ed Agility as core driver for business success, explaining 47% of the success in digital transformation (see exhibit 1 – con rmed in our new study 2017). While the direct impact of having a good strategy is not too valuable (17% of success), Digital Agility really makes the di erence.
We understand Agility as "an organization's ability to sense and respond quickly to consumers' and market's needs". This capability is related to many different aspects of a company’s organization, leadership and more (see exhibit 2).
Digital Agility as a key driver for firm performance
Some, even large organizations, seem to be doing this better than others. Tesla for example, in a recent e ort was able to incorporate consumer feedback directly into the car’s production line, within a timeframe of seven days.
Typically, Organizational Agility is one of the capabilities that startups bring to the table based on their organizational setup, the fragile environment they live and work in (lack of resources, threat of failure, etc.). But more and more incumbents and large organizations try to copy agile work methods and tools. However, many leaders and companies lack a full picture on the implications of building an agile company for strategy, structure, culture, leadership and even recruiting and the work environment.
To answer this question, we have extended our 2012 study and built on the dimensions of Organizational Agility outlined below.
Relevant dimensions of Organizational Agility
The objective of our 2017 study on Digital Agility was to understand in more depth what really drives business performance and success in digital and develop recommendations for transforming businesses. We used the dimensions of Organizational Agility as a starting point to derive key success factors and an understanding of tools and methods that really work.
"While 72% of German companies have a digital strategy, almost 80% fail in their Digital Transformation because of a lack of agility. Execution wins over strategy."
Based on the individual performance along the key indicators speed of innovation, growth and profitability of the 500 companies interviewed, we split our sample in three clusters.
They act like prisoners and run their business more or less with a survival strategy, rather passive, suffering from everyday inertia and having no success whatsoever in Digital Transformation. Only 1% of the companies in this cluster would consider their Digital Transformation as a success.
They act like passengers and walk on pre-qualified paths only. They run the business behind a certain “fear to loose” and make first steps in Digital Transformation by observing in the Digital Transformation. They focus rather on explaining the past and are still scared of making mistakes. Still, only 6% of the companies in this cluster consider their Digital Transformation journey a success.
They behave like true players and show a high passion to win and learn. They are willing to experiment, look for opportunities, accept errors and failure if they can conclude the right learnings and are in general future-oriented. An astounding 66% of the companies in this sample see their Digital Transformation already as a success.
Side note on study design: Sample includes around 500 (n=483) companies represented through middle and top managers with decision power in digital. Panel data was conducted in Q4/2016 through an online questionnaire. Study design in collaboration with a graduate student team from the LMU University of Munich.
But Digital Leaders not only have a strategy: they adapt it continuously, having an agile “interpretation” of their strategy. We see a big di erence between Digital Leaders and Laggards: 81% of the companies in the leading cluster continuously adapt their strategies to market developments, trends and other impact factors (see chart below). This interpretation of strategy as a guiding principle, especially the role of a strong vision, the ability and willingness to continuously adapt strategies, is an important capacity of winning digital leaders.
This interpretation of strategy as a guiding principle, especially the role of a strong vision and the ability and willingness to continuously adapt strategies is an important capacity of Digital Leaders.
Digitalization's impact on corporate strategy
Furthermore, the top management of Digital Leaders has substantial knowledge around the relevant digital topics: In 82% of these organizations, top management has the relevant knowledge (vs. only 25% in the group of the Digital Prisoners).
Although we see strong di erences in how Digital Leaders understand and practice strategy vs. laggards, our data has shown no signi cant impact of strategy on the success factors speed of innovation, growth and pro tability. Success in Digital Transformation is not driven by strategy – strategy needs to create the burning platform, not more not less.
Key drivers for a successful Digital Transformation
Strategy is important but execution wins digital transformation. After a period of heavy investments in conceptualizing new digital products and business models, we are now entering a time where fast execution embedded in a strong cultural change, i.e. the openness to fail are becoming key drivers of success. Too many companies have spent millions on strategic work, setting up heavy and complex accelerator models, and investing in risky startups without creating sustainable success. With many managers asking “why are we doing this”?
The Digital Leaders in our sample act differently. They have a very strong bias on execution and on embracing a culture that supports the openness to fail and actively reduces learning and failure anxieties (see exhibit 5).
Learning and survival anxieties as key barriers in digital transformation
Embracing Agility requires to actively emphasize, nurture, grow, supercharge. Charge means to bill (or attack but here we want this fear to get bigger than Learning anxiety) “Survival Anxieties” and lower “Learning Anxiety”: Within the group of Digital Leaders, 74% openly accept mistakes as an opportunity to learn and improve. That is only the case for 24% Digital Laggards (see exhibit 6 below). Promoting a risk taking behavior, allowing mistakes, and sharing failure experience during special meetings/events (such as Failure Fridays) is essential to establish the right culture.
Accepting failure as an opportunity
Also, Digital Leaders claim a signi cantly higher team spirit, empowerment and responsibility. More than two thirds of them have established agile working methods, stand-up meetings and open o ce spaces. Such changes seem to have a signi cant impact, although they are just an expression of a more open working culture.
Agile work methods, meeting routines and open office spaces as a success factor
Although agile working methods seem to become the latest trend in large companies, not many of them really understand the fundamental ideas and how and when to apply them. The unre ected establishment of pure scrum methodologies lead to instability and misinterpretations. Agile is not the holy grail for large organizations!
However, Digital Leaders test prototypes (Minimum Viable Products) with customers, worrying less about the imperfections and focusing more on the insights they may gain (fail fast and fail cheap). Co-creation with customers, early testing with lead users and consumers in general and MVP testing have become key di erentiators (see exhibit 8 below).
MVP testing and customer co-creation as a key success factor for agile execution
To support the agility of an organization, leadership style has to transform dramatically. 60% of Digital Leaders agree that their leadership style has changed during the Digital Transformation process, while this is only the case for 18% of Digital Laggards. The keys to success in agile leadership are predominantly independence, direct responsibilities and self-motivation of employees, i.e. of those team members working on digital projects. (see exhibit 9 below).
Agile leadership to support self-motivation and independence of teams
Consequently, leaders need to adopt the so called “Host Leadership Style” in contrast to the “old”, incumbent “Hero Leadership Style”. Host Leaders have to follow the below principles:
Agile leadership principles
Leadership also need to make a signi cant change with respect to another behavior: prioritizing the operational daily business at the expense of long-term company goals (incl. resource allocation) is slowing down execution and putting agility at risk. Yet, for most of the organizations in our sample, not only budgets but also human resources are seen as a major hurdle to speed up the Digital Transformation process (see exhibit below).
Key barriers to Digital Transformation
Agile leaders need to set the right priorities and guide teams towards fast execution. The necessary budgets and resources to sustain digital transformation must be protected.
Our data shows that companies running a combination of internal innovation labs and external accelerators are more successful in their transformation. 42% of Digital Leaders run a combination of internal and external digital units. While this is only the case for 21% of Digital Lagards.
Based on our experience of over a hundred projects related to digital transformation, what we call the triple transformation approach best supports digital transformation by combining managerial pull (usually provided by the CEO and/or the board) with business unit push (e.g. accelerators). Triple transformation covers 1) the internal core organization, 2) partially integrated units and 3) external units. Accelerators and other organizational structures that work outside the core, i.e. on disruptive projects, are fundamental to the success in transformation:
"Creating an agile organizational structure that ensures flexibility and speed in key strategic projects is the third fundamental driver for a successful digital transformation, explaining 20% of the success."
Our data shows that overperforming Digital Leaders (10% of Digital Leaders) actually run a combination of all three transformations simultaneously. Partially integrated innovation lab for the more modest digital innovations and external unit for the disruptive.
However, there is also a difference in the role of external units. Our learnings from the numerous organizational projects we have done are now being verifed by data: Digital Leaders are using external accelerators not only as a playing field for connecting with startups or spotting investment opportunities: Digital Leaders take action and build substantial new products and services. They use the external unit to develop faster, test with customers and launch new businesses in a protected and agile environment (see exhibit 12 below for details).
Activities of external units
Another key challenge related to internal and external innovation units is related to IT resources and innovation. Even if key digital projects are handled in separate units, many companies struggle to align IT architecture with their digital strategy. As digital strategies are often driven by the board's office or strategy departments, their lack of IT know-how leads to gaps in the architecture, scoping and budgets: Only 57% of companies consider that their digital strategy and vision can be implemented and executed by the existing IT architecture. Typically, a lack of CRM systems, marketing automation, data analytics and big data know-how are the key barriers.
This is why most of the companies today need to rely heavily on expensive yet more agile external IT resources (see following exhibit 13).
Need for agile, external IT resources
Finally, our data shows that companies having the openness to learn and collaborate with technology startups are benefitting the most. 44% of Digital Leaders are actively engaged startups, while only 11% of the organizations in the Digital Laggards cluster have such initiatives. It is important to see that in this context, the number of startups involved in the collaboration scheme seem to have an important effect on success. Within the group of Digital Leaders, working with at least 5 different startups (see exhibit 14) has become the norm. This requires the corresponding resources.
However, working with startups (regardless of equity and approach) requires the buildup of effective rewalls to protect their independence, especially during scale up stage where the culture of the start-up is undergoing mutation.
Cooperation with startups
Cascading relevant training through the organization was identi ed as another key to drive organizations towards agility. Our data reveals the importance of running senior and especially middle management through digital training classes at a very early stage to minimize their learning anxiety.
Digital Leaders spend signi cantly more time on training top and middle management on agile procedures, new project management tools and other digital topics than other clusters (see exhibit 15 below). These trainings for middle management are crucial to loosen the “bed of clay” that often blocks digital innovation and potentially paralyzes entire organizations (see following exhibit for more details):
Role of trainings for digital on top and middle leadership level
To win in digital transformation, building up competencies in the management teams is not enough. It is also important to develop employees at all levels, i.e. particularly the ones playing key roles in digital projects and new business building. Therefore, it is crucial to identify of digital experts or digital natives and to support them to become digital ambassadors. We see a signi cant di erence between Digital Leaders, where 64% of the organization have speci c processes to identify digital talents and entrepreneurs digital experts and intrapreneurs, compared to only 8% of Digital Laggards (see also exhibit 16).
Formats for identification of digital experts and natives
Recruiting digital natives to accelerate change is another fuel to Agility. Hence, having recruiting formats speci ed to digital natives is a major di erentiator between Digital Leaders and Digital Laggards (63% of the Leaders vs. 11% of the Laggards). The bene ts of recruiting digital natives lie in the diversity they infuse into the organizational culture. Especially for the role of product owners for new digital businesses (i.e. in innovation hubs) it becomes crucial to recruit from the outside (see exhibit 17) - too many organizations have tried to ll those positons from the inside without success. The right combination of internal know-how and agility of external product owners seems to be the best recipe for success.
Recruiting digital experts from outside