Education for Managing Digital Transformation: A Feedback Systems Approach

Abstract

“Digital transformation” is becoming the newest mantra of business leaders. It is clear that there are tremendous business opportunities resulting from this revolution, but there is also a price to be paid. Most management literature focuses on the benefits of digitalization, reflecting the desire to increase investments in selected business units. However, digital transformations may lead to the disruption of established ways of doing the work of the firm, stakeholder power may be fundamentally changed, and there is the potential for redefining the nature of the firm itself. Consequently, the decision to “go digital” requires managers to develop perspectives that have the requisite variety to cope with the challenges. Feedback systems thinking is a powerful means for managers to develop and communicate business models that include those aspects of digitalization that affects their firm’s theory of success. The Uber case illustrates the principles of applying feedback systems thinking to the dramatic changes that it has presented the public transportation sector.

Full text

Education for Managing Digital
Transformation
A Feedback Systems Approach
Dr. Michael von Kutzschenbach
University of Applied Sciences and Arts Northwestern Switzerland
michael.vonkutzschenbach@fhnw.ch
ICETI 2017, Orlando(Florida)

Digital Transformation is on Everybody’s Mind
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Search term: Digital Transformation
March 13th, 2017
Approx. 10.100.000 results (0,56 sec.)

Cashless
paying
Robotic
exoskeleton
Picture source: http://www.ibtimes.co.uk/iron-man-style-
robot-suit-soldiers-factory-workers-development-by-hyundai-
1560327
Picture source: http://www.apple.com/apple-pay/
Applications of Advanced Technologies
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Picture source: http://www.focusedgrowth.solutions/our-services/
A Typical Approach to Managing Digital
Transformation
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22.03.2017Institut 5
Envisioning
Create a vision/strategy
Engaging
Empower people to
act on the vision
Optimizing
Institutionalize and optimize
the change
Transforming
Change structure,
processes, and values
Envisioning Engaging Transforming Optimizing
Every business transformation is an iterative process that goes through different
phases in recurring cycles.
“Reality is made of circles but we see
straight lines” -Peter M. Senge (The Fifth Discipline: The Art &
Practice of The Learning Organization)

Business occurs at the
intersection of two sub-
systems:
Socio-cultural system
Technological system
Managing digital transformations is a complex
endeavor!
The Real Challenge of Digital Transformation
is Not Technology…
3/22/2017Dr. Michael v. Kutzschenbach (Institut for Information Systems) 6
Picture Source: J. Peppard and J. Ward, The strategic management of information
systems: building a digital strategy, 4th edition, Hoboken: Wiley, 2016.

We all have our Theory of Success
Source: Drucker, P. (1994, p.96). “The Theory of the Business.”
Harvard Business Review
, September-October, pp. 95-104
3/22/2017Dr. Michael v. Kutzschenbach (Institut for Information Systems) 7
If this is true, how good are we at developing, sharing
and adapting useful theories of success?

Some Key Challenges to Digital Transformation
Developing strategies are based on incomplete,
fuzzy, ambiguous data
Because of uncertainty and time delays in the real
world, it is difficult to link investment in programs
to outcomes
It’s difficult to create buy-in among key
stakeholders due to diverse interests, agendas,
and language
People do not have a shared definition –common
understanding –of a digital/smart enterprise
There is one thing in common
that we use in each phase of the
digital business transformation
loop. It is your “Theory of
Success”!
Do you know our “Theory of Success”?
3/22/2017Dr. Michael v. Kutzschenbach (Institut for Information Systems) 8

Source: Kane, G.C., D. Palmer, A.N. Phillips, D. Kiron, and N. Buckley (2015). “Strategy, not Technology, Drives Digital
Transformation: Becoming a Digitally Mature Enterprise.”
http://sloanreview.mit.edu/projects/strategy-drives-digital-transformation/
A Feedback
Systems
Approach
addresses
these issues {
Report from Reality
3/22/2017Dr. Michael v. Kutzschenbach (Institut for Information Systems) 9

… a different way of seeing the world -a different way of
thinking, speaking and acting in the world.
We Need to Improve at Theory-Building:
Shifting from Factors to Loops
3/22/2017Dr. Michael v. Kutzschenbach (Institut for Information Systems) 10

The common ways of (linear, event-oriented) thinking hampers our
ability to generate effective mental models of digital transformation.
ACTION &
RESULTS
SITUATION
GOALS
DECISION
DISCREPANCY
Event-oriented World View: The Standard
Approach
3/22/2017Dr. Michael v. Kutzschenbach (Institut for Information Systems) 11

The feedback systems
approach adopts a
holistic perspective on
complex organizational
systems.
Feedback-oriented World View: The Alternative
Approach
3/22/2017Dr. Michael v. Kutzschenbach (Institut for Information Systems) 12
These most likely
are not
considered!
These most likely are
not consistent or
compatible!
Decision
Environment
Actions of
Other Agents
Goals of
Other Agents
(Your)
Goals Side Effects
of Your
actions
Side Effects
of Others'
Actions

Applying Feedback Systems Thinking Requires…
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Dr. Michael v. Kutzschenbach (Institut for Information Systems) 13
A Paradigm:
Systems Thinking
Dynamic Thinking –Looking for trends/patterns
of behavior –shift from ”event focus“
10,000 Meter Thinking –Taking a Big Picture
View (from the balcony)
System-as-Cause Thinking –Choosing to
focus on the system within the organization’s
controll as responsible for performance
Operational Thinking –Looking for explicit
causal explanations for behavior (How does
this work?)
Closed-loop (Feedback)Thinking –Move
beyond linear thinking to circular causality –the
world is made up of feedback loop
relationships
Scientific Thinking –Building the most useful,
entertainable theory of causality
Generic Thinking –Seeing the world composed
of generic structures
Empathic Thinking –Expandingpersonal
boundaries and creating the ability to
understand other perspectives/mental models
A Method:
The Scientific Method
Identify Issues
Map Systems
and Processes
Generate and
Test Solutions
Communicate and
Disseminate
Solutions and
Insights
A Language:
Visual Mapping
Stress Drug Usage
Health
Productivity
+
-
-
+
-
B
R
Inventory of
cars on the lot
deliveries sales
delivery
delay
Orders to factory
response
delay
discrepancy desired
inventory perceived sales
perception delay
customer
demand
FACTORY
Production
Control
Workforce
Management
Workforce Production
Schedule
Incoming
orders
Shipments

The Uber Case
3/22/2017Dr. Michael v. Kutzschenbach (Institut for Information Systems) 14
Uber provides a unique opportunity to illustrate feedback systems
thinking to represent a theory of success for platform businesses.

The Uber Case: Uber’s GBF Strategy
GBF strategies promote a strong focus on reinforcing feedbacks
that create a large customer base and the accquisition of captial
for rapid growth.
Uber’s underlying strategy can be described as a ‘Get Big Fast’
(GBF) strategy.
3/22/2017Dr. Michael v. Kutzschenbach (Institut for Information Systems) 15
Uber App
Attractiveness
Number of
Uber Users
Transactions
Revenues
Available
Capital
Growth
Activities
+
+
+
+
+
+
R1
Uber
GBF-Strategy

The Uber Case: Managing a Two-Sided-Market
One of Uber’s core challenges is that it must manage satisfaction
on both sides of a two-sided-market (riders and drivers, and
investors).
Users’ satisfaction depends on rapid availability of cars and
drivers, while keeping the business attractive to investors.
3/22/2017Dr. Michael v. Kutzschenbach (Institut for Information Systems) 16
Uber App
Attractiveness
Number of Uber
Users
Transactions
Revenues
Available
Capital
Growth
Activities
+
+
+
+
+
+
R1
Uber
GBF-Strategy
Investor
Capital
+
+
R3
Attractiveness
to Investors
Number of
Uber Drivers
++
R2
Satisfaction
Loop

The Uber Case: Reinforcing Feedback Loops –
The Growth Engine
Uber’s theory of
success relies on a
set of positive
feedback loops that
reinforce the power
of the system from
one side of the
market to the other
side, thereby
creating a growth
engine.
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The Uber Case: Balancing Adjustment Loops
Regardless of how
compelling Uber’s
service is, there
are also a number
of limiting feedback
loops.
Some of them are
caused by time
delays between
decisions and
results.
3/22/2017Dr. Michael v. Kutzschenbach (Institut for Information Systems) 18
Uber App
attra c ti vness Uber us er s Transaction Revenues Available
capital
Uber
drivers
+
+
R1
+
+++
Investor capi ta l
+
+
R2
IT
dev el op ment
Adequacy of IT
infrastructure +
+
R3
Ma r keti ng
Brand equity +
+
+
R5
Ser vi c e
dev el op ment
Adequacy of
s erv i ce
infrastructure
+
+
+
R4
-
B1
Drivers
on hold
Behavioral
changes
-
+
B2
Disrupting
trends
Data volume
+
-
B3
Cybe r
se curity
-
B4
Service
adjustment
B5
IT
adjustment
-
B6
Marketing
adjustment
-

The Uber Case: Growth and Underinvestment
Archetype – The Trap
Managers are often
unaware that
capacity
adjustment takes
more time than
earning revenues.
Withholding
investments or
reductions in
capacity can lead
to financial
problems.
3/22/2017Dr. Michael v. Kutzschenbach (Institut for Information Systems) 19
Uber App
attra c ti vness Uber us er s Transaction Revenues Available
capital
Uber
drivers
+
+
R1
+
+++
Investor capi ta l
+
+
R2
IT
dev el op ment
Adequacy of IT
infrastructure
+
+
R3
Ma r keti ng
Brand equity
+
+
+
R5
Ser vi c e
dev el op ment
Adequacy of
s erv i ce
infrastructure
+
+
+
R4
-
B1
Drivers
on hold
Behavioral
changes
-
+
B2
Disrupting
trends
Data volume
+
-
B3
Cybe r
se curity
-
B4
Service
adjustment
B5
IT
adjustment
-
B6
Marke ting
adjustment
-
Service
Investment

From resource control to resource orchestration
From process optimization to stakeholder
engagement
From a focus on value creation of a single system
to a focus on ecosystem value creation
Lessons Learned
3/22/2017Dr. Michael v. Kutzschenbach (Institut for Information Systems) 20

Contact Details
Dr. Michael von Kutzschenbach
FHNW University of Applied Sciences and Arts Northwestern Switzerland
Institute for Information Systems
Peter Merian-Strasse 86
CH-4002 Basel, Switzerland
Phone: +41 61 279 17 70
E-Mail: michael.vonkutzschenbach@fhnw.ch
3/22/2017Dr. Michael v. Kutzschenbach (Institut for Information Systems) 21