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"And Then a Miracle Occurs …" - Engaging the challenge of operationalizing theories of success in digital transformation

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Digital transformation programs do not have an enviable track record of success. The technical potential of digital technologies is seemingly limitless but it must be grounded in a clear understanding of how the firm creates fundamental values. While there are significant differences between startup firms with no existing business infrastructure and well-established firms seeking to leverage benefits from applying digital technologies to existing operations, both rely on an underlying theory of success. In the case of a completely new business, a built-in approach to integrating digital technology with the basic theory of success is appropriate. For existing businesses with business models in place, the integration could result in a bolted-on approach. This has some unique challenges, not least in relation to employee resistance and acceptance. Digital leadership is about building a shared theory of success for digital business transformation. Developing management flight simulators (MFS) helps to surface assumptions and beliefs about current business model behavior and aims to enhance learning about the consequences of changing the logic of the business model. Systems thinking and modeling provides a powerful approach to developing dynamic business models for operationalizing and communicating the utilization of innovative digital technology.
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“And Then a Miracle Occurs …” - Engaging the challenge of operationalizing
theories of success in digital transformation
Michael VON KUTZSCHENBACH
Institute for Information Systems, School of Business
University of Applied Sciences and Arts Northwestern Switzerland
CH-4002 Basel, Switzerland
ABSTRACT
Digital transformation programs do not have an enviable
track record of success. The technical potential of digital
technologies is seemingly limitless but it must be
grounded in a clear understanding of how the firm creates
fundamental values.
While there are significant differences between startup
firms with no existing business infrastructure and well-
established firms seeking to leverage benefits from
applying digital technologies to existing operations, both
rely on an underlying theory of success. In the case of a
completely new business, a built-in approach to
integrating digital technology with the basic theory of
success is appropriate. For existing businesses with
business models in place, the integration could result in a
bolted-on approach. This has some unique challenges, not
least in relation to employee resistance and acceptance.
Digital leadership is about building a shared theory of
success for digital business transformation. Developing
management flight simulators (MFS) helps to surface
assumptions and beliefs about current business model
behavior and aims to enhance learning about the
consequences of changing the logic of the business
model.
Systems thinking and modeling provides a powerful
approach to developing dynamic business models for
operationalizing and communicating the utilization of
innovative digital technology.
Keywords: Digital Transformation, Digitalization,
Wicked Problem, Business Model, Theory of Success,
Systems Thinking, Management Flight Simulator, Digital
Leadership.
1. INTRODUCTIONTHEY KNOW NOT WHAT
THEY DO (OR HOW TO DO IT)
All ideas for new products, markets, innovations and
organizations arise from an idea in the mind(s) of people
who are interested in developing them. Regardless of the
origin of the ideas, if they are seen as having potential,
then the next step will be to develop the means to achieve
the desired objectives. When managers plan, they
anticipate what may happen in the future in order to
decide what to do in the present. At this stage, the idea
becomes more structured, taking the form of a business
model and plans for implementation. As the humorous
cartoon in Figure 1 illustrates, there is often a gap
between the initial ideation and enthusiastic activity and
the realization of desired results.
This gap is generally filled by the 'business plan' or
model (see [1]). Teece [2] describes business models as
being either implicit or explicit architectures that a
business enterprise employs to create value. It is the
managers' hypothesis regarding how the firm can be
organized and operated to meet customers' expectations
and demands, at a profit. Thus, business models can be
interpreted as cognitive schemas. They are the implicit
cognitive structures that emerge from the mental models
held by the managers in the organization [3].
Fig. 1: ”Then a Miracle Occurs” (modified from [4])
In digital business transformation management, a
business model is often used as the blueprint for how a
firm might conduct business by implementing digital
technologies. In this way it translates strategic issues into
goals and actions and specifies how the conceptual model
is converted into a viable operational form.
Digital transformation programs and business models
changes due to innovative information technologies are
particularly complex and uncertain. Accordingly, the
analysis and understanding of the business model is
crucial in maximizing the utilization of new technology
and understanding its consequences.
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There are a variety of approaches used to develop and
analyze business models. The most recently used one is
the business model canvas [5]. This tool provides a
business model framework by addressing nine building
blocks: key partners, key resources, key activities, value
proposition, customer relationships, channels, customer
segments, cost structure, and revenue streams.
Aside from the advantages of standardizing the
development of a business model and supporting better
communicating of the business idea and its
operationalization, the business model canvas is weak on
explaining the causal relationships between the involved
elements and their dynamics over time ([6], [7]). In
particular, when addressing the issue of how strategic
changes such as digital transformation programs will
affect an established business the business model canvas
is limited due to its static perspective.
Systems thinking is both a philosophy and a methodology
for understanding the behavior of complex dynamic
systems, of which business organizations are an
important exemplar [8]. Furthermore, complex and
adapting systems make learning about them difficult and
consequently ordinary decision-making becomes fraught
with problems. In particular, in the case of managing
business transformations, decision-makers usually do not
have the time to wait and see if their interventions are
going to work well, and then readjust accordingly.
Systems thinking and modeling offer a set of tools that
support communications and engagement with
stakeholders as well as processes for learning and
designing actions within these complex systems.
2. PROBLEM STATEMENT - WHY DO SO MANY
WELL-INTENTIONED DIGITAL
TRANSFORMATION EFFORTS GO ASTRAY
Digital transformation challenges are far from technical
(routine) challenges. Research has shown that many
organizations have trouble in readily transforming their
activities and structures to take advantage of new
information technologies effectively [9].
Despite the proliferation of digital transformation
initiatives, most executives recognize that their
organizations are not adequately prepared. Nearly 90% of
respondents to a 2015 global survey of executives and
managers, conducted by MIT Sloan Management Review
and Deloit [10], agreed with the statement "[d]igital
technologies have the potential to fundamentally
transform the way people in their organization work.
However, at the same time, only 44% of this group of
respondents indicated that their organizations are
adequately prepared, as they know their business and are
able “to conceptualize how digital technologies can
impact current business processes/models". 44% of this
group indicated that businesses lack the “willingness to
experiment and take risks”.
Transforming an existing business model with the help of
innovative information technologies is far from a routine
task. Some key challenges to digital transformation
management are:
- Developing digital strategies are often based on
incomplete, fuzzy, or ambiguous data;
- Because of uncertainty and time delays in the real
world, it is difficult to link investment in digital
transformation programs to real world outcomes;
- It’s difficult to create buy-in among key stakeholders
due to diverse interests and perspectives, agendas and
perspectives, and languages; and
- People do not have a shared definition (that is a
common understanding) of a digital organization.
Consequently, most digital transformation initiatives are
complex challenges. The distinction between routine and
complex challenge, can also be related to Rittel and
Webber’s [11] typology of ‘tame’ (routine) and ‘wicked’
(complex) problems. A ‘tame problem’ may be
complicated but there is a known solution/routine to
follow in order to resolve it. Thus, it is resolvable through
unilinear acts and it is likely to have occurred before.
Tame problems are akin to puzzles for which there is
always an answer and therefore formal analysis is a
sufficient approach to problem solving simply apply a
proven approach properly and the best solution will
naturally emerge. Various digital transformation
management frameworks have been developed to provide
appropriate processes to successfully manage digital
business transformation endeavors.
Conversely, a complex challenge is a situation without an
established set of standard process about how to solve the
problem. Horst Rittel coined the term “wicked problems”
to describe that class of problems which are ill-
formulated, where the information is confusing, where
there are many decision makers and clients with
conflicting values, and where the ramifications in the
whole system are confusing ([12], p. B141) Digital
transformation initiatives that enable the organization to
enter completely new competitive environments are
‘wicked problems.’ They are more complex, rather than
just complicated that is, they cannot be removed from
their environment, solved, and returned without affecting
the environment.
The essence of the digital transformation challenge was
well captured by Schön [13]: “In the swampy lowland,
messy, confusing problems defy technical solution. The
irony of this situation is that the problems of the high
ground tend to be relatively unimportant to individuals or
society at large, however great their technical interest
may be, while in the swamp lie the problems of greatest
human concern.” The quotation highlights a fundamental
feature of organizations. They are comprised of tightly
inter-related systems that must operate harmoniously for
proper performance. In this system, making changes to
one subsystem (the technical) will also affect the other
subsystem (the social). Digital transformations have
102 SYSTEMICS, CYBERNETICS AND INFORMATICS VOLUME 15 - NUMBER 6 - YEAR 2017 ISSN: 1690-4524
significant implications for both subsystems with the
consequences of “going digital” becoming apparent only
after some time delay and in unexpected areas of the firm
or its environment [14].
Three ways an organization can react include generating
unintended consequences, demonstrating counterintuitive
behaviors, and pushback, or policy resistance, from key
stakeholders ([15], [8]). One potential explanation for
these dysfunctions can be found in the perspectives that
the people in charge have on the system and their
understanding of how it functions, that is their theory of
success [16]. The cognitive organizing structures that
decision-makers rely upon, known as mental models, are
the collection of assumptions, routines, and networks of
causal relations that describes how a system operates.
Consequently, the quality of transformation road map
planning and decision-making depends on the adequacy
of the mental models their theory of success - in the
problem context.
While there is no foolproof method for avoiding the
undesirable reactions to change, one effective antidote to
relying on a linear routine framework (which is what
most digital transformation frameworks are based on) is
to adopt a feedback systems [17] view of the digital
transformation initiative. This is an effective alternative
perspective that enables managers to recognize the
importance of relationships between and among
organizational stakeholders and to identify the interaction
dynamics of actions, results, and reactions in a closed
loop system.
3. MODELING FOR LEARNING - MAKING
THEORIES OF SUCCESS EXPLICIT
Embarking on a strategy that involves digital
transformation introduces significant uncertainties for
many organizations. The degree of digital transformation
has a broad range of consequences. At one level, digital
transformation can result in incremental initiatives that
affect organizational efficiency (digitization, according to
[18]), but which requires no significant changes to the
core business model. At the other end of the spectrum,
digital transformation (digitalization, according to [19])
can enable the organization to enter completely new
competitive environments. In this case, efficacy is a key
organizational attribute and the business model must be
resistant to a wide range of influences. These new
competitive conditions present the organization with a
strategic wicked problem [20]. Therefore, the strategic
focus of the firm's business model must emphasize
learning, rather than optimization. It is under these
conditions that business models serve as powerful
learning tools.
When the business model is operationalized using system
dynamics tools, it becomes the basis for a type of
simulation model called a management flight simulator
(MFS). Flight simulators are employed in a wide range of
complex training situations, the best known being pilot
training and plant operations. Flight simulators provide
training in routine operations, but are perhaps most
effective in supporting decision making in 'real-time'
emergency situations. MFS simulations of complex
operational and strategic issues in businesses and other
organizations have a long history in systems thinking and
modeling [21].
A management flight simulator (MFS) is a virtual world
[22], or a learning laboratory, that is ideal in applications
where real-life experimentation is unethical or otherwise
impractical. A flight simulator permits the exploration of
both short- and long-term consequences of strategic plans
under controlled conditions. Through applying the system
dynamics methodology, MFS promote understanding of
the underlying feedback structures that generate complex
dynamic organizational behavior. When experimentation
is too costly, unethical or just plain impossible, when the
(un-)intended consequences of the decisions are difficult
to track over time or place, when multiple stakeholders
have different perceptions about the issue, which is the
case for almost all digital business transformation
initiatives, simulation becomes the main - perhaps the
only - way decision-makers can discover how complex
systems work and where high leverage points may lie.
At the core of the virtual world is the firm's theory of
success in the strategic environment. The process of
developing the MFS is also an explication of the firm's
operational business model. This is the missing step in
Figure 1. The learning component is strengthened
through the group effort needed to construct the
simulator. Key in this process is surfacing assumptions
and beliefs that underpin the theory of success, specifying
the positive feedback loops that generate growth and,
crucially, identifying the negative feedback loops. The
latter are important in identifying the situations where
insufficient strategic resources (financial, human, service
infrastructure, and knowledge, for example) can place
limits on the growth engine (see [23]). These simulators
make it possible to identify and test leverage points in the
business model, support high quality managerial dialogue
about strategic initiatives, and introduces a structured,
experimental and evidence-based approach to strategy
development and implementation.
4. DISCUSSION LEADING DIGITAL
TRANSFORMATIONS IS ABOUT BUILDING
SHARED THEORIES OF SUCCESS
Implementing business models based on systems thinking
principles and methods has two important advantages
over traditional implementation.
The first is that the business model explicitly represents
the organization's managerial understanding of how
things are done, in essence their theory of success as to
how value is created in a digital environment. Digital
technology-driven transformation can increase the firm’s
potential for organizational growth and development. At
the same time, it presents managers with significant
ISSN: 1690-4524 SYSTEMICS, CYBERNETICS AND INFORMATICS VOLUME 15 - NUMBER 6 - YEAR 2017 103
organizational risks. Externally, it affects the
organization’s strategic position in its industry; internally,
it influences the nature of the relationships both between
individuals as well as between organizational units.
The second benefit is that the business model explicitly
incorporates the dynamic relationships among the
primary value-creating components. The causal loop
methodology captures the overall feedback relationships
and identifies the nature of the growth engine (see [8],
chapter 10 for a comprehensive discussion of various
growth engines). Growth is generated by reinforcing
feedback loops. Balancing, or negative, feedback loops
define constraints on the system that may limit the
growth potential. Taken together, a systems-based model
identifies both opportunities and limitations for growth,
as well as providing a means to study how to overcome
them.
Business transformation management in complex
dynamic organizational systems that are undergoing
digitalization is a difficult environment in which to
learning about decision-makers reactions to introduced
changes (like new digital service offerings). They usually
do not have the time to wait and see if their interventions
are going to work well, and then readjust accordingly.
Furthermore, disruptive information technologies impose
significant challenges both on the organizations’ internal
processes as well as on their relationships with their
customers and business partners. Consequently, the
decision to “go digital” requires managers to develop
perspectives that have the requisite variety to cope with
these challenges. The feedback systems approach 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 ([24], [16]) illustrates how a feedback
systems approach can be applied to understanding how
digital transformation affects both the business model and
the established business environment. Uber is a child of
the extreme forms of new organizations that digital
technologies can enable. Started in 2009, Uber has
become a contentious competitor in the traditional taxi
industry in cities around the world. Enabled by
smartphone technology, Uber’s radically different
business model has dramatically increased both consumer
efficiency and company revenues. The result is one of
largest point-to-point transportation networks in the
world. Technology plays the central role in providing
consumers with ‘me-here-now’ logistics services that
drives the efficiency gains.
One of Uber’s core challenges is that it must manage
satisfaction on both sides of a two-sided market (riders
and drivers). At the same time, as its business model
seeks to address future customer needs and relationships,
it is also outpacing many of the laws that regulate the taxi
industry [24]. Uber’s business model reveals that the
company relies on a set of feedback loops that reinforce
the power of the system from one side of the market to
the other, thereby creating a growth engine. The central
component of this growth engine is known as a ‘get-big-
fast’ (GBF) strategy [25]. However, regardless of how
compelling their service is, there are also a number of
limiting feedback loops in Uber’s GBF strategy.
Modeling Uber’s theory of success in applying a GBF
strategy enables decision-makers to identify and
investigate the potential side effects of digital
transformation. The model captures the interplay of
powerful reinforcing feedbacks that drive Uber’s rapid
growth and their interaction with constraints arising from
the behavioral changes of major stakeholders, potential
decline of the customer base resulting from limited
availability of capital, and delays in deploying the
capabilities and competencies needed to provide an
attractive Uber app. Thus, decision-makers understand
better the interdependencies of socio-technical changes
and how balancing feedback loops can limit growth
through, for example, service erosion.
Driving digital business transformation is a delicate
balancing act between the fundamental changes in
business due to advanced technologies and disruptive
business models on the one hand, and developing
infrastructures required to serve changing customer
demands, keeping customers attracted, as well as
managing the resulting frictions with the established
environment on the other.
5. SUMMARY AND CONCLUSION
Digital leadership is about building shared theories of
success. In moving beyond slogans about
interconnectedness and systems and overcoming
organizational dysfunction, however, we need to develop
specific approaches and tools to foster our systems
thinking and modelling capabilities. Building a shared
theory of success is effective when the decision-makers
are able to engage people in what Schön ([26] in [22])
called “reflective conversation with the situation.”
Management flight simulators aim to enhance learning
about the intended and unintended consequences of a
digital strategy. The purpose of developing and running
MFS is to gain a deeper understanding and insights into
why the business model behave the way it does, and how
changing the logic of the business affects its internal and
external environments and vice versa. Building a MFS
should help the participants make their theory of success
explicit, test their mental models and assumptions about
the behavior of the new business model, and discover
inconsistencies and blind spots in the digital strategy and
the resulting transformation roadmap.
This article has presented the challenges we face in
moving to the next level of digital transformation
management meeting complex challenges requires
learning “new ways of thinking.” This demands an
increased capacity to build and apply a systemic
understanding of the nature of the systems we are trying
104 SYSTEMICS, CYBERNETICS AND INFORMATICS VOLUME 15 - NUMBER 6 - YEAR 2017 ISSN: 1690-4524
to improve. Systems thinking provides a process, a set of
thinking skills and technologies that can improve our
ability to develop that systemic understanding.
Systems thinking and modeling is a powerful tool for
supporting the explication of mental models and
understanding the consequences of these models in the
real world. However, simply having a powerful and
flexible language is in itself not sufficient to assure that
the process will have a successful outcome. Framing the
digital business transformation challenge as a wicked
problem shifts our focus from being solution-oriented to
becoming learning and process-oriented. Wicked
problems have no ‘solutions’ in the sense of a result
being right or wrong. Instead, we are more concerned
with the process of working together with others to craft a
business model that enables working effectively towards
a vision of the future that incorporates an improvement
over the current situation.
Ultimately, an organization’s ability to succeed in an
increasingly complex environment will depend on its
ability to learn - about itself, the market, its competitors,
the utilization of new technologies, and its place in the
larger natural and social environment. Systems thinking
and modeling provide a powerful approach for
representing and operationalizing the mental models that
strategic decision-makers bring to the table.
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Chapter
Digitalisierung und Nachhaltigkeit werden die zwei großen Veränderungsbeschleuniger der kommenden Jahre sein. In Anbetracht des Umfangs und der Geschwindigkeit, in der sich die Rahmenbedingungen fürUnternehmen ändern, wird es in Zukunft nicht mehr ausreichen, dass Unternehmen im Rahmen der digitalen Transformation nur die Effizienz ihrer bestehenden Prozesse verbessern. Stattdessen müssen sie kontinuierlich hinterfragen, wie sie weiterhin für ihre Kunden Probleme lösen und gleichzeitig einen Beitrag zur nachhaltigen Entwicklung leisten können. Dies macht die aktive Gestaltung der digitalen Transformation als offenen Such- und Lernprozess notwendig. Eine zentrale Voraussetzung hierfür ist der Mut zur Zusammenarbeit mit verschiedensten Akteuren und Anspruchsgruppen sowie die Bereitschaft, mit Unsicherheit zu experimentieren. Erste Beispiele zeigen, wie Digitalisierung und Nachhaltigkeit für zukunftsfähige Geschäftsmodelle erfolgreich genutzt werden.
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“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.
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Insightful modelling of dynamic systems for better business strategy The business environment is constantly changing and organisations need the ability to rehearse alternative futures. By mimicking the interlocking operations of firms and industries, modelling serves as a 'dry run' for testing ideas, anticipating consequences, avoiding strategic pitfalls and improving future performance. Strategic Modelling and Business Dynamics is an essential guide to credible models; helping you to understand modelling as a creative process for distilling and communicating those factors that drive business success and sustainability. Written by an internationally regarded authority, the book covers all stages of model building, from conceptual to analytical. The book demonstrates a range of in-depth practical examples that vividly illustrate important or puzzling dynamics in firm operations, strategy, public policy, and everyday life. This updated new edition also offers a rich Learners' website with models, articles and videos, as well as a separate Instructors' website resource, with lecture slides and other course materials (see Related Websites/Extra section below). Together the book and websites deliver a powerful package of blended learning materials that: • Introduce the system dynamics approach of modelling strategic problems in business and society • Include industry examples and public sector applications with interactive simulators and contemporary visual modelling software • Provide the latest state-of-the-art thinking, concepts and techniques for systems modelling The comprehensive Learners' website features models, microworlds, journal articles and videos. Easy-to-use simulators enable readers to experience dynamic complexity in business and society. Like would-be CEOs, readers can re-design operations and then re-simulate in the quest for well-coordinated strategy and better performance. The simulators include a baffling hotel shower, a start-up low-cost airline, an international radio broadcaster, a diversifying tyre maker, commercial fisheries and the global oil industry.
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In today's complex world, companies often find themselves facing confounding strategy problems. These issues are not just tough or persistent; they're "wicked" - a label used by urban planners for problems that cannot be definitively resolved. Poverty and terrorism are classic examples. A wicked problem has innumerable causes, morphs constantly, and has no correct answer. It can be tamed, however, with the right approach. In this article, Camillus, a professor at the Katz Graduate School of Business, explains how executives can tell if they're dealing with a wicked strategy problem. In a 15-year study involving 22 companies, he identified five key criteria. If a problem involves many stakeholders with conflicting priorities; if its roots are tangled; if it changes with every attempt to address it; if you've never faced it before; and if there's no way to evaluate whether a remedy will work, chances are good that it's wicked. According to the author, the need for faster growth is, in all likelihood, a wicked issue for Wal-Mart. Traditional linear processes - identifying the issue, gathering data, studying all the options, choosing one strategy - don't work with wicked problems. They instead demand social processes that constantly engage stakeholders, explore related issues, reevaluate the problem's definition, and reconsider the assumptions of stakeholders. A strong corporate identity is essential: It serves as a rudder that helps the enterprise navigate a sea of choices. Because it's impossible to tell which options are appropriate, executives should stop analyzing them and start experimenting with actions. Eventually they will make progress by muddling through. Envisioning possible futures and identifying moves that will realize the one the company hopes for will uncover promising remedies. That's how PPG Industries, a 100-year-old manufacturer, has successfully coped with its wicked strategy issues.