Five Reasons Why Digital Transformation Fails in Companies

Sep 13, 2022

Shi Weilei, Professor of Managerial Practice, CKGSB

Many academics and practitioners study successful companies that have gone through digital transformation to discover the secret behind their success. But in this case, we look at the failed cases, ones that have gone bust. By doing so, we hope to find common causes that lead to failure. We studied 12 state-owned enterprises (SOEs), private companies and foreign-capital companies in China’s financial sector, which failed in their attempts to transform digitally. Here are the top 5 reasons for their failure – strategic inconsistency, mismatched organizational structure, environmental challenges, lack of digital resources and human resource issues.

1. Strategic inconsistency causes digital transformationfailure.


Achieving digital transformation is quite different for companies, for some are more established than others and each has their unique culture and vision. In an enterprise without consistent digitalization-oriented policies and strategies, internal digital transformation will be difficult to achieve.

If the long-term strategic goals and short-term interests are not aligned, it will be hard for the company to make the right strategic decisions. Enterprises may often choose short-term growth over long-term strategic considerations to achieve digital transformation, even though the latter would help them better grasp the digital trend and tap into new growth opportunities, as digital transformation requires large, continuous investment before generating returns.

Inconsistency in strategy between policymakers and executives also stands in the way of corporate digital transformation. Take SOEs as an example – As SOEs’ executives are often appointed to their positions for a limited period of time, they often prefer to see quick returns before their term ends, which, in a way, hinders the needs of digital transformation, where changes take a longer time to see.

Finally, company decision makers and those who deal with day-to-day business operations often have inconsistent interests and mindsets. If decision-makers don’t have the motivation to reach a strategic consensus on digital transformation throughout the organization via a top-down approach, then the transformation is less likely happen from the bottom up. Managers engaged in daily business operations are often focusing on their immediate performances and hence less motivated to push the technical teams to develop forward-looking digital technologies that may come into use in the far future.

Solutions:

a. Build a shared vision.

Vision, the most critical link in digital transformation, should be formulated by the entire company, rather than solely by the CEO or by the management team. In my strategy class, I once devised an activity for my students to learn what a shared vision is and why it matters. I divided my students into several groups, each group representing a household brand. I asked team members to not discuss with one another and to choose an image based on how they understand their company’s vision which they then used to produce a photo collage. Then when I asked students to guess what companies these groups represented based on the vision collage, very few of them gave the right answer. One group of students even guessed another team’s company to be China’s liquor company, Moutai, when it was actually Starbucks. It shows that lack of alignment on the vision throughout a company leads to severe deviation in its development. A shared vision makes digital transformation much easier.

b. Provide strategic guidance.

Incorporation of digitalization in a company requires strategic guidance. Digital technology should not be regarded as a simple tool to realize digital transformation, but a means to transform a company’s culture, leadership style and vision. Strategic guidance should be in place so that it is possible for companies to embrace new business models.

2. Organizational Structure: Reshape the Organizational Structure to Fit Digitalization-oriented Strategies


Companies ith a traditional organizational structure are usually not responsive to change in the market and slow in getting information across, and thus struggle to coordinate internal efforts. For traditional companies to be more digital, an inflexible traditional structure will undoubtedly drag out the progress of digital transformation.

Traditional companies also lack an interdisciplinary team to drive digitalization. In traditional financial companies, the IT department and the finance teams hardly understand each other’s job, which makes it difficult to empower businesses with digital technologies. Companies need to build a versatile team to solve the issue. But then it means that it either has to spend continuous efforts to provide internal trainings or to bear the cost of bringing in external talents.

Solutions:

a. Reshape the organizational structure.

Normally there are three ways to reshape a company’s structure to acclimatize its culture, business and technologies to digitalization.

  • Take small steps to reform internally, or
  • Build a separate team that includes IT experts and business specialists, or
  • Set up a wholly-owned subsidiary.

b. Change the ways in which different departments collaborate.

  • Build an incentive mechanism to encourage cross-departmental communications.
  • Establish a task force (or a special working group) within the company, which includes IT talents and business professionals to facilitate communications between the two functions.
  • Foster interdisciplinary talents who can explain the technologies to non-tech colleagues who run the business and help IT staff understand business.

3. Environmental Challenges: Adapt to the Changing Business Environment


Challenges in the macro environment, industrial environment and the company environment could all hold back digital transformation.

In the macro environment, consumers are usually the biggest challenge for companies in becoming more digital. Nowadays, consumers are also very different. Take the financial industry as an example. In the past, only people with a certain amount of fortune would buy wealth management products. Now more and more people are considering financial products. Consumers are also pickier on the user-friendliness of products. To satisfy a changing consumer group, companies need to constantly update their products and services.

When looking at the industry level, we found many small and medium-sized financial institutions are facing a hard time in their digital transformation. Small in scale and impact, these financial SMEs often don’t have an advantageous position in the industry. Not to mention that they have to spare their limited resources to improve their organizational structure amidst unfair competition and monopoly.

Digital transformation creates data transparency and reduces moral hazard, but increases other risks such as risks of data management. The diversity of data means that data analyzing will become more complex and risk control departments will find it harder to predict the future. Second, data security and personal privacy are tested during transmission. Also, as the regulatory policies on digital operations get stricter, implementing digital transformation strategies in different regions will become more difficult.

Solutions:

a. Become customer-oriented.

Traditionally, only business departments have direct contact with consumers. To prosper in the digital era, we need to reshape the value chain so that more departments including operations and logistics can connect with consumers and every aspect of the services provided can generate more accurate data that could be used to provide tailored and comprehensive services to consumers.

b. Deepen external collaboration.

Companies could explore and deepen collaboration with their partners on their supply chain. For example, Toyota’s Production System, which Toyota built in-depth collaboration with small and medium-sized suppliers to better weather through industrial challenges.

Likewise, financial companies can also actively coordinate their efforts with regulatory agencies in their digital transformation, in order to collectively improve the ecosystem of digital finance.

4. Resources: There aren’t Enough Resources to Fuel Digital Transformation


In the current state, there aren’t enough resources to fuel digital transformation in financial institutions.

The financial sector lacks investment designated to drive digital transformation. Leaders in financial companies who would like to see quick benefits and are usually reluctant to invest in digital transformation that requires long-term investment.

Besides money, data is also not amply leveraged. Researchers found that only 10% of all data was utilized in most of the surveyed financial institutions, resulting in a huge waste of data.

Technologies are also not fully tapped into. Most of the technical resources are grasped by the IT department that was established long ago with a traditional mindset. If the IT team doesn’t change their mindset, companies are unable to update and integrate their technologies to embrace digital transformation.

Solutions:

a. Create synergies.

Companies need to create an environment where departments can create synergies with their own resources and advantages to drive digital transformation.

b. Become data-driven.

Enterprises need to construct new data-driven business scenarios to improve services and optimize efficiency. Taking NETFLIX as an example, it went from a DVD rental company to video streaming in 2010 and that was when it started building its business around data. Then in 2015, it seized the opportunity to transform again to fully personalize its services using its data-rich recommendation engine, which challenged the Hollywood approach.

5. Human Resource: Changed Demand & Conflicting Mindsets


As people who carry out digital transformation for companies, employees can make or break the transformation.

If employees are unwilling to change their mindset and upgrade their skillsets to facilitate digital transformation, it will dampen companies’ plans to become more digital.

Conflicting interests of employees and companies could also result in failed digital transformation. In the process of digital transformation, employees need to spend a lot of time entering data into the system. This can quickly become tedious and discouraging if the company has not placed a high priority into digital transformation. The conflicts between standardized procedures and the power of decision also create hurdles for digital transformation. Our study found that after digital transformation, employees of many companies feel their interests and power are somewhat deprived as they have less say in decision-making in the process as it has been standardized.

Solutions:

a. Support employees’ growth.

Provide employees with room to grow. For example, Disney built a digital platform internally for its employees to improve their skills and awareness of digitalization.

b. Leaders have to be there for the digital transformation

If a company wants to succeed in digital transformation, its CEO must be personally involved. Encourage and support employees’ ideas and formulate a synergy between management and employees to create a shared vision that makes digital transformation possible.

Conclusion:


There is not a one-size-fits-all solution to achieve digital transformation. Each company should choose their own path based on their specific situation and needs.

The key to digital transformation is not the technology itself, but the upgrade of business models.

A shared understanding of the vision between companies’ policymakers and employees is vital to the success of digital transformations.

* This article was originally published in Chinese on Harvard Business Review’s China edition. It was written by CKGSB Professor of Managerial Practice Shi Weilei and his co-authors Jingru Jean Liu (EY China Financial Services Partner), Ding Chunchun (Deputy Director of China Center for Law and Finance, Shanghai Jiao Tong University) and Zhou Li (Assistant Dean of CKGSB).

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