March 26, 2023

While a few firms—the digital giants—are winning big from digital technology, many large firms are investing heavily in electronic, by recruiting IT specialists and spending on digital technology—including artificial intelligence, cloud computing, machine learning, and algorithmic decision making, yet getting disappointing returns.

What firms need to realize is that digital transformation is only partly to do with technologies. Equally important is the fundamental change in the way the particular firm will be managed.

Industrial-era Management

Let’s first take a glance backwards at the history of management. Towards the end of the 20th century, business thinking tended to converge on a generic “right way to run an organization. ” This thinking comprised the set associated with internally-focused principles including a goal of making money for the firm and its shareholders ; hierarchical-work structures with individuals reporting to bosses; and key indicators being short-term profits and current stock price .

These principles were supported by processes , including leadership that was top-down ; strategy which was backward looking and defensive ; innovation that protected the particular existing company ; sales that induced customers to buy ; HR that controlled workers as the firm’s resources ; operations that battle for sources among the silos ; plus compensation where gains mostly went to the top .

Each of these processes had its own set of rules and sub-processes, that backed both the overriding principles, and the other processes, and that were administered by people who specialized in the process, and built their careers within that will function.

Although there were exceptions, most big successful companies in the twentieth century were run in this way. And many still are. That’s what business schools mainly taught, plus many still teach. In 1997, the particular Business Round Table endorsed it . Many people in large firms continue to believe that this is “the right method to operate an organization. ”

This set associated with ideas can become so deeply embedded in the systems, habits, attitudes, and assumptions that they are usually almost invisible to those within the firm. It is “the way we do things around here. ” Silent acceptance and support of running the company this method can become almost a condition of membership in the firm .

This way of operating an business had no specific name. It is mostly known simply as “management. ” It was, and often still will be, assumed to be the particular only coherent and internally consistent way to run an corporation. Let’s call this way associated with running an organization “industrial-era management, ” as shown below inside Figures 1 and 3.

It can thus be useful in order to view a good organization as a kind of complex adaptive system i. e. “a system that is complex in that will it is a dynamic network associated with interactions, but the behavior of the ensemble may not end up being predictable according to the particular behavior of the components. It is usually adaptive in that the individual and collective behavior mutate and self-organize corresponding to the change-initiating micro-event or collection of events. ”

The principles and processes of a firm function together like the immune system of the human body, and view industrial-era processes plus practices as anomalies to be resisted and eliminated.

Digital-era management is different

Although industrial-era management was financially successful inside the 20th century, and still is today for many huge firms, within the first two decades of the particular 21st century, the context changed and another way associated with managing has begun to emerge. At first, little serious attention was paid it. The relevant firms were seen as anomalies or mocked for having a name like a piece of fruit .

Nevertheless, beginning in 2011 , the financial world began recognizing that firms operate in this different way were becoming more monetarily successful than firms run with industrial-era management.

As the particular new method became more and a lot more financially successful, a decade-long process of inquiry began as to what exactly has been this various way of working a business? How did it relate to industrial-era management? That inquiry is still ongoing, but the main elements are getting steadily clearer.

Over time, this has become increasingy apparent that the most effective of these firms have a different group of principles that include the goal of co-creating value for customers , an accompanying company model that will generates earnings as a result; team-based and network structures . The important indicator is definitely long-term growth of market capitalization .

It also emerged that these principles are supported simply by procedures that are quite different from those associated with industrial-era administration. Leadership now occurs at every level, not just the top ; strategy is dynamic, interactive, value-creating ; innovation enhances existing businesses and creates new companies ; product sales is now about making a difference for customers plus users ; HR can be about attracting and enabling talent ; operations is about exceeding expected outcomes in lower cost ; budget is driven by technique ; compensation is becoming more based on worth created . (See Numbers 2 and Figure 3)

While simply no individual company observes all these concepts and processes in every detail, the particular convergence towards this pattern one of the electronic winners is certainly striking.

Because firms being run in the new way have been out-performing industrial-era firms in their core value—making money—the brand new way of running a firm has come to seen as a good irresistible evolution of industrial-era management.

“Transforming the organization to reap the benefits promised by advanced digital technologies, ” writes London Business School professor Julian Birkinshaw plus colleagues is no longer the question associated with ‘if’ or ‘when’ it’s a question of ‘how. ’”

Needless to say, people that experienced devoted their careers and lives in order to industrial-era management were not happy with these developments plus strenuously denigrated the new way. For industrial-era management practitioners and theorists, an alternative to industrial-era management has been almost a logical impossibility .

Two types of management

So in 2022, we right now have two strikingly different ways of running a corporation in a coherent plus internally consistent fashion—industrial-era administration and digital-age management.

We may also see that the principles and processes in the two management systems are usually polar opposites of each other.

The key challenge in transforming an industrial-era firm into digital-age organization is convincing tens, or even hundreds, associated with thousands of staff that “the way we carry out things close to here” needs to be upended inside almost each important respect.

Given that many of those who have to change their own views are highly educated and experienced executives who have been very prosperous in operating within the industrial-era mode with regard to decades, it is no surprise that most big firms experience difficulty in making the particular transition. Some even wonder whether transformation is possible.

In Part 2 associated with this article, I will examine principal paths that productive transformations possess followed.

In Part 3, I will examine ways of diagnosing progress within conducting the transformation journey.

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