Introduction
THE DIGITIZATION OF YOUR CORE BUSINESS IS NECESSARY, BUT THE FUTURE OF YOUR COMPANY LIES IN ITS NEW, DISRUPTIVE BUSINESS

YOUR BUSINESS MUST TRANSFORM TWICE TO SURVIVE

This book starts with a bit of bad news (which you already know) and some good news. The bad news, of course, is your legacy business is like a dinosaur, and threatened with the same fate-extinction. New start-ups, powerful tech companies, and other game changers are threatening the existence of every successful organization (see Figure 0.1). The good news is that firms (unlike literal dinosaurs) can prepare for drastic changes. This book is designed to help organizations prepare to meet the threat and succeed, by guiding them along the path of transformation.

The take-home message is, you actually have to transform twice: legacy firms need to transform their core, legacy-driven business while in parallel setting up new, disruptive (digital) businesses. That is, all firms. Irrespective of their industry, geography, or size, companies will need to strike that balance between two very different worlds. Large, well-known companies - like Michelin, Volkswagen, AB InBev, Nestlé, Novartis, and BNP Paribas - are just as much affected as smaller, hidden champions - such as Ohio-based manufacturer of precision instruments Mettler-Toledo, Swiss-based diversified tech conglomerate Bühler, or BTPN of Indonesia. We interviewed all of these - and many more - only to find that there is no safe haven for any particular kind of organization. Our apologies.

Figure 0.1 Dinosaur companies won't survive

Why is that, though? In essence, it's wrong to distinguish based on size or geography when it comes to digital transformation. Though some differentiation based on industry is possible due to differing sector maturity and the resulting differences in urgency to transform, the most relevant distinguishing factor is the age of the organization in question, making this a "start-up versus legacy firm" competition. Start-ups can launch disruptive innovations more easily than legacy firms because they are not bogged down by past (infra-) structural or mindset baggage. Legacy firms, on the other hand, cannot act as quickly because the organizational realities they face are more complex and harder to overcome. For them to continue to be successful in the old world while at the same time succeeding in a new world is a challenge no holistic consultant model captures - so far. We are trying to tackle the problem in this book.

The good news is, the digital world order that organizations need to brave is not as dystopian as one might think. On the contrary - it bears great potential that firms can tap into when they open their minds to disruptive innovations, including business model innovation paired with or based on the use of artificial intelligence, platform-based businesses, product-as-a-service, digitized customer journeys, and many more of those all-too-well-known buzzwords. We go beyond the buzzword hype, though, to illustrate how organizations not only can understand but can master the challenge of creating a radically new business which will rely on fundamentally different success factors than the core business.

Avid management literature readers will know that some books and concepts have addressed the necessity for disruptive innovations already. Think Blue Ocean Strategy, which talks about how companies can create new demand in previously untapped market spaces rather than fight over a shrinking profit pool with fierce competitors. Or think Three Horizons, which depicts innovation as occurring on three time horizons, with these time horizons gradually shortening, thus disadvantaging bureaucratic incumbents and advantaging nimble attackers well positioned to act swiftly. Yet one thing is missing: a concrete guide to the differing success factors in the core business versus those in the new disruptive business, particularly as relates to the implementation of such a transformation, and to how the tension inherent in the coexistence of these two businesses can best be managed. This is where we come in - the book at hand guides digital transformation practitioners from all sorts of organizations and across all career levels along the implementation of a holistic, two-tier digital transformation.

SOFTWARE IS EATING THE WORLD - AND COMPANIES STILL DON'T KNOW HOW TO ADAPT

Digitization is complicated and exciting and perilous. The possibility of autonomous cars has led automotive players to make huge investments in radically rethinking mobility - like Daimler and BMW, which have formed a joint venture covering new-generation services.1 Now you can schedule a doctor's appointment via your phone while riding the subway to work. And don't we all value being able to search property listings online instead of having to drive to dozens of properties? On the more negative, perilous side of digitization, besides the much covered collapse of Nokia2 and Kodak,3 you may remember Nike halving the size of its digital unit, Lego defunding its Digital Designer virtual building program, and P&G not being able to achieve its ambition of becoming "the most digital company on the planet."4 And, if nothing else, you have surely wondered how jobs, including your own, will be affected by digitization - especially given that 60% of occupations have at least 30% of constituent work activities that could be "automated away" and because significant skill shifts are expected as a result of automation and digitization.5 It's understandable then that individuals and sometimes entire occupational groups fear digitization.

Digitization affects how we live, work, communicate, and consume products and services. It has enormous effects on how organizations operate - because established rules and best practices of doing business now have a rapidly approaching expiration date.6 Also, established firms are being threatened by emerging start-ups and diversifying tech players, at the same time that traditional industry boundaries are falling. (Think about Google entering the healthcare and biosciences field by venturing into cancer detection and diabetes diagnosis.) Digitization also brings with it challenges like increased competition from China (Alibaba's possible expansion into North America and Europe), drastic shifts in customer preferences (TV's shift to streaming on demand), and new digital phenomena like ecosystems and platforms (can you think of a mobile operating system that is not a platform for thousands of third-party software developers?).

All these trends have gained momentum over the last few years. Nevertheless, we find that surprisingly few established firms have a clear view on how to best navigate the change brought about by digitization. All of them will, however, need to rethink their business if they want to ensure sustainable success. The bad news: sprinkling a bit of "digital glitter" over incumbents' core businesses does not suffice. Instead a fundamental overhaul of the business is necessary - a digital transformation.

It feels intimidating but transformation at this scale is actually nothing new. Think about the fundamental changes to ways of working as part of the industrial revolution in the 18th century. Digital transformation will have similarly wide-ranging effects. Arguably, transformations happen all the time across many organizations. But digital transformation is unprecedented in pace and impact, and thus drives profound changes in our economy and society.

From a fundamental economic and business perspective, the beauty and power of digitization comes from the fact that any digital representation can be perfectly replicated and transmitted at almost no marginal cost to a practically infinite number of globally dispersed customers.7 Savor this slowly: virtually no marginal cost. This basic fact means that when a digital technology replaces an analog technology, the change it brings with it will be comprehensive, to say the least, thus fundamentally affecting the organizations and industries the technology touches. The organizations that can reap the most benefits from this are the digital pure players who lose any limit to scale and whose costs to scale are decimated. Meanwhile, some companies will continue to be bound by constraints rooted in the non-digital nature of their assets (for instance, physical constraints to cloud computing), though they may still be able to take advantage of the power of digitization (see the surge in demand for cloud computing).

It is this re-architecting of the nature of business that enables digital transformation to give rise to a wave of new opportunities for firms to take advantage of. And, generally speaking, it is exactly this fundamental disruption that makes a digital transformation structurally different from your typical plain-Jane business transformation, like cost-cutting transformations that have become commonplace for managers and employees alike.

In other words, a real digital transformation is not simply the deployment of information technology to aid traditional business models. Instead, a two-tier transformation is necessary: (a) careful thought needs to be given to how the traditional core of your organization can benefit...