Business transformation is the wholesale rethinking and restructuring of an organization’s business planning, operations, technology, development, and customer experience to achieve business goals.
Business transformations enable organizations to radically reinvent how work gets done at an enterprise scale, create new business models, and modernize technologies to unlock new business value.
These transformations stem from an examination of how the business operates and how it can improve. The resulting analysis often leads to significant changes that prepare the organization to better compete in an increasingly challenging environment.
Business transformation includes several specific transformations, all of which contribute to the overall business.
- Digital transformation focuses on how best to use digital tools to serve customers and employees.
- Organizational transformation focuses on how businesses organize their resources and operating models to maximize the ability to compete.
- Cultural transformation deals with how to treat employees and other stakeholders, and how the business communicates its company culture, values and mission to internal and external audiences.
Organizations often implement business transformation to dive deeper into core competencies, branch out and make new products or pursue new markets that were not part of their original mission. Transformation initiatives require an organization to make fundamental changes that impact everything from customer experience to human resources to IT development.
Benefits include maintaining or growing a competitive advantage, streamlining operations, improving customer satisfaction and ultimately improving the bottom line.
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The demands on companies and the pace of change have increased significantly, requiring organizational leaders to be leaner than in the past. Without a true embrace of business transformation, too few organizations can make the necessary changes that are needed to meet these goals. Many organizations are under pressure to:
Companies are pledging to meet goals as directed by governments and nongovernmental organizations (NGOs), one example is net zero pledges. This refers to a business’ aim to reach neutrality between the greenhouse gas (GHG) emissions they cause and the amount that they can claim is removed from the atmosphere. Achieving that promise requires fundamental shifts in how the company sources energy, the raw materials that are used, and how it operates with or manufactures goods. To accomplish this, organizations need to revolutionize their own processes and conduct diligence on their suppliers. Achieving sustainability goals might require an organization to change suppliers or rethink how they make goods or supply services.
Many leading organizations have long known the importance of diversity. But the rise of diversity, equity and inclusion (DEI) practices and support groups has brought a level of accountability to this pursuit. In other words, organizations want to show demonstrable results from their efforts. The data supports DEI as a business goal. A McKinsey study1 (link resides outside ibm.com) found the companies with top-quartile representatives among both women and ethnic diversity representation outperformed the bottom-quartile companies by almost 40%.
Customers are increasingly making purchasing decisions online through more channels2 (link resides outside ibm.com) and sometimes without ever talking to a company before buying their products or services. Therefore, it’s important to reach customers wherever they might be searching for information.
Organizations must continue their transformation to attract and retain the right talent. Employees are increasingly unlikely to join organizations that do not prioritize the employee experience and are willing to leave existing organizations3 (link resides outside ibm.com) even without a new job lined up. Companies also need to recruit a more diverse workforce and reach global audiences. They cannot recruit from the same schools or prioritize the same employee experience as generations past. Organizations and their leaders need a new playbook to thrive in this more complicated world.
Companies are increasingly looking to modernize legacy technologies and workloads, through cloud migrations and the adoption of artificial intelligence and automation. Doing so can maximize cost savings, agility, and innovation.
No two business transformations are alike. According to HBR, there are four types of business transformation4 (link resides outside ibm.com). These four types exist in a quadrant; they differ depending on pace and whether the responsible party for initiating was internal or external to the organization.
Businesses that initiate transformations themselves can either engage in a quick transformation (sprint) or a slower-moving one (slow-motion). Sometimes, organizations are forced to pursue a transformation in response to competitors or other external factors. In these scenarios, they can either sprint fast (hijacked transformation) or slow (negotiated transformation).
For example, a business might change its strategy due to new technologies like artificial intelligence (AI). If the business acts early, it can pursue a slow-motion strategy that weighs all benefits and risks to create the best possible approach. If the business acts late, they might find that a sprint is required.
Other businesses might transform to face external pressures or consumer habits. The rise of mobile phones with cameras weakened stand-alone camera businesses, so they had to pivot to new business models to stay solvent. The rise of the Internet threatened traditional newspaper and magazine publishers. These businesses needed to create digital properties to coexist with their print offerings; some abandoned print completely.
Organizations undergoing transformations are under great pressure to get them right and might have difficulties transforming themselves without help. That’s why most work with an external partner with experience running multiple transformations across industries and the globe.
Partners might have reusable platforms or business model templates that organizations can use as a starting point. They also have years of best-practice experience from helping other organizations. They also know that how transformations have failed and can help those in transition avoid pitfalls.
Finally, they can help organizations better use technology, data, and market research to modernize systems and transform their operating models to drive agility and business impact.
Organizations pursuing transformation strategies must focus on several key areas of their businesses.
Modern businesses need to become data-driven to compete in a fast-paced environment. Organizations need to identify which structured and unstructured data pipelines they have on hand and which ones they need to build to truly harness their data. Then, they need to build up or enhance business intelligence capabilities, increasingly powered by AI, so a human or automated process can make accurate decisions.
A management transformation is a required component of any business transformation. That means, executives must look inward to see how they must change to go along with the new business strategy. They must reflect upon their decision-making and assess whether they have been too timid or too bold. Are there areas of competency that have lapsed or were never fully developed? What do they need to do to upskill so they can continue leading their organizations into a bigger and brighter future?
IT leaders not only need to embrace new technologies, but also new ways of working. They need to identify what type of production project management approaches, such as waterfall or agile, make sense. They need to ensure that they are using the right coding language to not only build better internal products but also to better connect with external ecosystems.
For example, the global economy now runs on application programming interfaces (APIs), which allow companies to connect services to each other. For example, a budget management tool uses APIs to connect to various bank, credit card and investment accounts so that users have a full picture of their assets and debts. A bank that did not have an API would perhaps lose clients who wanted to use this management tool and couldn’t get real-time access to that bank’s information.
Businesses that depend on the supply chain need to change internally to better take advantage of the modern environment and also demand changes from their partners. Real-time supply chain orchestration is now possible, enabling organizations to view raw materials and finished goods in transit or warehouse stock levels on a minute-by-minute basis.
While business transformations are primarily driven by management, employees have an important optimization role to play. McKinsey has found5 (link resides outside ibm.com) organizations that include at least 7% of their workforces in transformation initiatives are “twice as likely... to have total returns to shareholders (TRS) in excess of their representative sector and geographic stock index.”
Like other change management initiatives, business transformation always starts, but never ends. Here are some of the most important milestones in a transformation journey.
Many business transformations start from the top-down, where a CEO or the Board advocates for a wholesale transformation. In other scenarios, the business transformation might start as a small idea that turns into a larger initiative. In the latter scenario, business leaders need to buy into the cost and resources that are required to truly transform.
Businesses looking to navigate an increasingly dynamic, complex, and competitive world must have a clear idea of what they want to focus on. They might want to change their business model. They might need to serve a new type of customer. They might need to enter new markets or leave existing markets. Understanding the goals of any transformation is imperative to know what needs to be done.
Businesses cannot lose sight of the fact that they need to continue their business operations while transforming the organization. So, the business must understand its overall resources and allocate them correctly to fulfill day-to-day requirements while undergoing its business process transformation. It must create milestones along the transformation journey to ensure that they are on the right path.
Business transformation is sometimes considered synonymous with digital transformation merely because so much of how businesses need to change relates to new technologies6 (link resides outside ibm.com). Netflix’s business transformation occurred when it transitioned from a DVD provider of third-party content to an entertainment producer and streamer. To do so, it needed to move to the cloud and invest heavily in content production.
Modern business transformation will increasingly use technological advancements like automation, AI, and machine learning (ML) to improve workflows, make employees more efficient and increase time-to-market speeds. Many of these technologies help drive cost savings. In another example, Anthem transitioned from legacy systems to cloud computing by investing in AI to automate core processes and use predictive analytics to build a more resilient and self-healing infrastructure. As a result, it experienced a 25% reduction in the number of high-priority system incidents, significantly improving system up-time and reliability.
Businesses must be mindful of the human element of business transformations. It is entirely likely that organizations will find employees or groups of employees that do not have the requisite skills for the intended goals of the transformation. Executives and HR leaders must map out what options they have for these employees, including reskilling or redeployment to other areas of the business.
Business transformations are intended to be thoughtful exercises. It does no business any good to ignore its strategic goals and chase market trends to pursue a shiny new opportunity that might hurt its bottom line. At every stage of the journey, they must keep customer expectations in mind. They must ask, “Will this transformation ultimately deliver customer value?”
Business transformations require a large amount of resources and time. Therefore, organizations must use metrics to measure how effective their approach has been. This way, they can course-correct their business operations or expand their successes to new areas. There are several KPIs an organization can monitor for each major focal point of a business transformation.
- Return on Investment (ROI): Transformed businesses should more consistently deliver value above the cost of initiatives. Many organizations transform to increase efficiency, which makes them more likely to achieve higher returns on investments for both their overall transformations and future endeavors.
- Customer satisfaction (CSAT) scores and net promoter scores (NPS): Increasing customer satisfaction should be a major goal of almost every business transformation. Organizations that improve how they meet customer needs should see satisfaction scores increase and more people willing to promote the business to their networks.
- Customer acquisition cost (CAC): Transformations should enable organizations to reach and convert prospects quicker than before they began. Reasons might include new products or services that resonate with a broader array of customers or digital tools that make it easier for customers to buy. Organizations post-transformation should also have more streamlined marketing and sales functions, with AI tools and reskilled employees that can better communicate with prospects.
- Employee productivity: Organizations that have transformed can often better track employee productivity and initiate changes to improve it. By viewing output per employee over time, executives and HR representatives can better understand whether the organization has the right number of employees and whether those employees have the requisite skills.
- Operational efficiency: Employee productivity is only one part of the overall puzzle. A transformed company needs to determine whether it can increase efficiency across the organization. They can measure how quickly they can produce and ship goods or provide services to customers and gauge their success against competitors. Analyses can help forecast how quickly the organization can make the large decisions that will make or break their fiscal year. They can review how quickly they can hire the right employees. All those components identify whether there is high operational efficiency or a need for improvement.
- Cost reductions: The inefficiencies and low productivity that business transformations should unearth can ultimately lead to cost savings. Automating laborious manual processes will free up existing employees to perform higher-level duties and prevent future overhiring. Transformations identify unused inventory, poorly designed factories, and underperforming workflows. Fixing all of those removes real costs from the equation.
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Business transformation combines several key transformative initiatives that better prepare an organization to thrive today and in the future.
Digital transformation evaluates an organization’s processes, products, operations and technology stack to identify ways to improve operational efficiency and bring products to market faster.
Change management is the method by which an organization communicates and implements change. This includes a structured approach to managing people and processes through organizational change.
Organizational development is the planned, systematic process of changing the strategies, procedures and culture of an organization to improve its performance, effectiveness and growth.
Digital transformation is the adoption of digital-first customer, business partner and employee experiences. In other words, these patterns have emerged as strategic drivers of technology-led business transformation.
Organizations implementing successful business transformations are more likely to grow their existing businesses, eliminate silos, create revenue growth and business models and reinvent how they handle their operations.
Here are a few essential—but often overlooked—guidelines for any leader aiming to influence people’s decisions and drive change.
Footnotes
All links reside outside ibm.com
1 Diversity matters even more: The case for holistic impact, McKinsey, 5 December 2023
2 B2B sales: Omnichannel everywhere, every time, McKinsey, 15 December 2021
3 What this new vocabulary says about your workplace, Los Angeles Times, 4 March 2024
4 4 Types of Business Transformation, HBR, 21 June 2022
5 How many people are really needed in a transformation?, McKinsey, 23 September 2021
6 What is a business transformation?, McKinsey, 17 April 2023