What is business transformation?
Business transformation is a term used to describe what happens when a company makes fundamental changes to how it operates, typically with the aim of enhancing both operational and financial performance. A business transformation initiative could apply to the organization as a whole or a part of it, such as a department or product line.
The big difference between business transformation efforts and other kinds of business improvements is the commitment by company leadership to a wholesale change in how something is done, as opposed to making incremental changes to a business process or product.
What are the different types of business transformation?
Business transformation can involve multiple types of transformational change, including the following:
Business transformation initiatives can involve mergers and acquisitions, staff changes, outsourcing, supply chain reorganization and new business models. In practice, the business transformation process typically involves making major changes to an organization’s people, processes and technology.
Business transformation can be opportunistic or responsive.
Netflix adding a streaming movie service to gain a competitive advantage in a new market is an example of opportunistic business transformation.
The radical changes some companies had to make to support remote work in the wake of COVID-19 restrictions is an example of responsive business transformation. The reorganization of a supply chain in the wake of new trade restrictions is another example of a responsive approach to business transformation.
There are different dimensions of business transformation. Efforts focused on performance improvement include basic business goals such as cost savings and adding new revenue streams. A business portfolio transformation could involve mergers and acquisitions, the creation or termination of product lines, new sales channels and new partnerships.
Technology often plays a central role in transformation initiatives, as, for example, when the implementation of a modern enterprise resource planning application, customer resource management platform or electric health records system drives major changes to how business gets done.
Other kinds of transformation, however, such as outsourcing a business function or terminating an unproductive product line, might have less impact on existing technology or not require new technology.
15 examples of business transformation initiatives
Initiatives that involve the kind of fundamental change — and change management — indicative of business transformation include the following:
- consolidating operations after mergers and acquisitions;
- developing new product lines outside the scope of existing business lines;
- terminating an unsuccessful product lines or services;
- refactoring Capex products to provide similar functionality as-a-service;
- consolidating multiple business systems into one integrated system;
- migrating core business applications to the cloud;
- streamlining the supply chain to improve efficiency or resilience;
- consolidating different types of risk management into a single group;
- business process reengineering;
- Business process outsourcing or insourcing;
- democratizing application development or analytics across business users;
- cultural transformation aimed at driving data science literacy;
- implementing new data governance to keep pace with privacy regulations;
- adopting a new security process to cope with changing threat landscape; and
- adopting a new incentive model to align employee and company goals.
What are the drivers of business transformation?
Many factors can trigger the need for business transformation, including the following:
Business slump. A decline in business growth can incentivize businesses to invest in new product lines, R&D, or customer satisfaction initiatives to stay relevant.
Efficiency gains. Enterprises can realize efficiency gains by automating and improving the processes that help fulfill business goals. Advanced tools like process mining can trigger a business process management initiative by automatically identifying opportunities for eliminating, streamlining and optimizing business processes.
Leadership change. The introduction of a new leader provides an opportunity to rethink the business’s strategic priorities. A new approach to profitability, the desire to dominate a particular market segment or an interest in ESG (environmental, social and governance) issues are examples of regime change transformations.
Mergers and acquisitions. The integration of multiple organizations under one structure after a merger or acquisition provides many opportunities to streamline back-end processes and product lines or combine technologies for competitive advantage.
New business restrictions. Social distancing restrictions implemented in the wake of COVID-19 required most businesses to adopt a work-from-home model. Changes ran the gamut from shifting meetings online to reworking business processes that required physical steps like signatures or access to dedicated banking terminals.
New technology. Innovations in cloud architectures, services or capabilities like machine learning can encourage leaders to adopt new technology to improve costs, pursue new opportunities or create a more efficient process.
Reduce costs. Various ways businesses might pursue significant change to cut costs include outsourcing certain low-value activities or taking advantage of new services that perform a similar function at a lower price.
Supply chain disruption. Trade wars, pandemic shutdowns, logistical bottlenecks and new political considerations can all reveal kinks in fragile supply lines. As a result, companies may shift their focus from supply chain efficiency to building a more resilient supply chain. For example, Tesla recently announced plans to go into the mining business to stay on top of the rising cost of Lithium.
Steps to implement business transformation
- Clarify goals. Teams first need to develop clearly defined goals that clarify the purpose of the business transformation and a theory about what steps could help address these goals.
- Executive buy-in. Next, it is essential to enroll an executive champion to support the goals. This person can help flesh out the initial theory into a more substantive business strategy with specific steps, participants and funding requirements. The champion can also help overcome any hurdles or conflicts around funding, departmental control or communication.
- Develop metrics. At this stage, the core team needs to clarify what success looks like. What are key metrics to pay attention to that indicate the business transformation is moving in the right direction? What are some potential risks that could derail the efforts, and how can these be mitigated and managed?
- Employee buy-in. Once the overall vision is clarified, the core idea must be translated to characterize how it can positively impact employees. This might be as simple as coming up with a new message and broadcasting it across various corporate channels. Another approach may involve attracting employees to the new vision to allow the effort to slowly blossom.
- Demonstrate success and build on it. Change of all kinds of hard. Early success on a few pilot implementations can build enthusiasm and buy-in for a new idea across the organization. A center-of-excellence model can consolidate enterprise learnings related to the initiative in a single location and help share success stories to inspire others to participate.
Best practices for a successful business transformation
Many business transformation efforts fail to reach their goals. An oft-cited 2018 McKinsey study reported that only 30% of digital transformation efforts succeeded. The group defined success as equipping the organization to sustain performance and equipping the organization to support improvements over time. Prior McKinsey surveys claimed success rates were as low as 20% in 2016 and 2012.
Boston Consulting Group made a similar observation in 2020. However, BCG discovered that businesses that adopt the following six practices increased successful transformation rates to 80%:
- Craft a clear, integrated strategy — focus on simple goals and a map to get there.
- Secure committed leadership from the top through the middle — get buy-in from managers at multiple levels.
- Put the best people in the right places — include business and tech experts and provide strong incentives.
- Adopt an agile governance mindset — apply agile to tech, new business experiments and other areas.
- Monitor and measure your transformation progress — track clear, quantifiable goals.
- Create a business-led tech and data platform — align technology with business goals.