Striving for Digital and Physical Excellence

In this new series based on NTT DATA's value of foresight, Senior Executive Vice President Shigeki Yamaguchi explores perspectives on critical industry themes. In this episode, Yamaguchi and Dr. Robert E. Siegel of Stanford Graduate School of Business consider how to develop leadership in the pursuit of digital transformation (DX).

NTT DATA Senior Executive Vice President Yamaguchi draws on his extensive experience in DX initiatives and enhancing success for NTT DATA teams to help executives transform their businesses through cutting-edge technology.

Dr. Robert E. Siegel is author of "The Brains and Brawn Company: How Leading Organizations Blend the Best of Digital and Physical," based on Dr. Siegel's' conversations with business executives. A lecturer in Management at the Stanford Graduate School of Business, Dr. Siegel's expertise includes strategy and innovation, financial management for entrepreneurs and strategies for effective product management.

This article is based on Yamaguchi's discussion with Dr. Siegel.

Striving for Digital and Physical Excellence

About Brains & Brawn

The traditional competencies of large companies are usually expressed as "physical strengths," such as logistics and manufacturing at scale, but they often lag in digital capabilities. Conversely, disruptors in a given space will have a solid digital presence but are often weak in "physical" realms. To break out and move forward, both types of organizations need to recognize that physical excellence and digital expertise complement each other and can give businesses a competitive edge.

Dr. Siegel's book, "The Brains and Brawn Company," explores the essential characteristics of over 80 organizations. Some are incumbents, while others are disruptors. The most successful companies incorporate both physical and digital aspects. In addition, large traditional companies should leverage existing assets, capabilities, and strengths that are often difficult to imitate as they drive toward digitalization.

"The Brains and Brawn Framework" comprises five digital and five physical attributes that every company needs. Prioritizing these attributes is crucial. For example, some companies may start with brawn (or physical) capabilities such as a strong presence in manufacturing. In the course of improving their logistics, they realized they needed to invest in brain, i.e., digital capabilities. Correspondingly, businesses founded on digital DNA must develop their physical capabilities.

Leaders must determine both their strengths and weaknesses to identify new capabilities - whether physical or digital - that will serve consumers better.

NTT DATA's New Management and Organizational Concept

NTT DATA has devoted substantial resources to understanding how companies can move through digital transformation while remaining firmly grounded in the physical world. Through this research and experimentation, a system of effective management and organization has emerged that especially supports large traditional companies and their push into DX.

Yamaguchi believes a flat and customer-focused management style, independent from the present organization, is best for capturing digital technology's ability to minimize the cost of acquiring client information as well as internal processing and business experimentation.

Using CAFIS, Japan's largest comprehensive cashless payment processing platform, as a case study, Yamaguchi raised the issues CAFIS faced in introducing new services that can sync with a range of different payment methods while ensuring the payment platform remains stable and dependable.

To accelerate the development and deployment of new services, NTT DATA established a dedicated organization to create new payment services. This organization was set apart from the existing IT department.

Yamaguchi believes that, as observed in the CAFIS case study, effective hybrid management of traditional and digital businesses requires organizations to create a common vision and to make data-driven decisions.

Successful Cases of Management

In Brains and Brawn, Dr. Siegel similarly cites examples of companies that have successfully blended digital and physical. Use cases include the agricultural machinery manufacturer John Deere, which purchased a Silicon Valley startup to push technology adoption and bring a risk-taking culture to its traditional businesses. At the same time, brewer and beverage maker Anheuser-Busch InBev began its technological transformation by formulating an entirely independent organization that was distinct from core business units (CBUs). Over the next few years, the company incorporated its innovations and technology developments into other CBUs.

Digital technology has repeatedly reshaped entire industries, and the trend of digital disruption is accelerating. Large traditional companies must develop and expand new services - as they always have - yet they simultaneously should adjust their structure and approach to developing products and services. In the digital era, companies need to pursue digital transformation of their operations.

One way this transformation has become evident is how companies previously preferred to own the assets needed to produce analog products. Further, these products were not updated periodically. In this model, customers would typically make a one-time purchase, and companies leveraged scale to produce goods at lower cost. Two-tier distribution models were typical as companies relied on distributors rather than touching end users directly. At the same time, large corporations were focused on efficient delivery based on frameworks such as Six Sigma, which focused on improving system capabilities. Decisions were made intuitively, and experience and hierarchy were paramount.

However, in the Digital Age, renting assets is far more commonplace, and the significance has shifted to digital products. The value of a network is determined by the number of people linked to that network, i.e., the "network effect." Since every product and service is connected, organizations now enjoy direct distribution and client engagement. The interconnected nature of all products, even physical ones like cars and healthcare devices, allows businesses to have continuous interaction with customers and serve them better. Ongoing customer conversations are now viewed as revenue opportunities. In addition, product life cycles that formerly were measured in years have transformed into daily product updates.

This is the direction organizations need to embrace, evolving to be increasingly responsive to consumer needs, decentralizing decision-making and placing decision-making authority closer to customers. Products should no longer be conceptualized from a management-centric worldview but rather by observing how customers use the product. Then organizations must optimize outcomes to suit these customer behaviors.

NTT DATA's New Leadership Concept

These changes require solid leadership and talent to tackle the ever-changing DX landscape. Digital and traditional organizations demand distinct management styles. NTT DATA recommends putting in place "reinvention leaders" who recognize business and technology, identify potential consumer problems, convert solutions into value, and propel the company forward for successful DX. Holistically, these "reinvention leaders" should also have the emotional intelligence to lead members through ongoing high levels of uncertainty and constant disruption.

While a "Plan, Do, Check, Action" framework helps current enterprises enhance efficiency and accuracy, Yamaguchi introduces the "HYPER Cycle" in which the hypothesis precedes the "Plan." The new systematic process is "Hypothesis, Plan, Experiment, and Review."

What is a Systems Leader?

Similar to Reinvention Leaders, System Leaders drive both Brains and Brawn. Dr. Siegel dissects a Systems Leader's persona as follows:

Systems Leader Versus Traditional Leader

In the past, organizations often saw operations and innovations as residing in different departments. Traditional leaders remained within a specific business function (e.g., finance, engineering, manufacturing) and typically preferred to think within their vertical or horizontal domain. Digital thinkers think horizontally and incorporate software, functionality, and workers onto a single platform. In today's interconnected world, it is vital that leaders embrace both approaches.

System Leaders must now be scalable on both axes -- understanding hardware and software and pushing for more significant market share while simultaneously applying a mix of intelligence and emotional knowledge (IQ and EQ) in management.

This requires System Leaders to step out of departmental silos and collaborate with other organizational segments to form a system of event flows. They also need to develop a range of expertise and practice managing their workforce for the short and long term.

Success requires leaders to have a clear understanding of their teammates and workforce, the organization, its ecosystem, and the interactions between various parts of the organization, all while maintaining a firm grasp on internal and external happenings.

Necessary Training for a Systems Leader

The first step to becoming a great Systems Leader is to develop a natural curiosity about your strengths and areas for development. Being conscious of your weaknesses -- while also being eager to retrain and acquire new skills for the thrill of discovering new things - will help you, especially when you know that the world will change, and technology will continue to advance at a breakneck pace.

Next, Dr. Siegel advises us to think and say, "Okay, I'm acquiring new skills and new capabilities," whether that's in artificial intelligence, automation, or analytics. We must then evaluate how that would apply to a business to determine if we have a product manager's perspective. Begin by understanding what consumers need, knowing how to design a product that fits those demands, and then develop a commercialization plan to sell the product. Great Systems Leaders virtually seek out disruption to chase a better world for their employees and customers.

Systems Leadership in Japan

In Japan, particularly, Dr. Siegel believes organizations need to improve in two overall areas.

The first area is to understand the connected experience from the customer's perspective, which can be done by answering three simple, yet profound, questions:

  1. What does it mean when a product is "connected?"
  2. What is that experience like on the other side, i.e., how do hardware and software determine this?
  3. How frequently does communication happen?

The second area is to have an increased speed to respond to global trends. Dr. Siegel has seen incredible activity reported in China, South America, and Europe. Companies worldwide need to respond at an equally blistering pace. Speaking from his experience with Japanese companies, Dr. Siegel believes Japanese leaders should build a connected mindset for hardware, software, and network from the consumer side. This equips Japanese companies to quicken decision-making and change implementation while being responsive to customers for better service.

The Way Forward: Systems Leaders for Society

Dr. Siegel foresees that business leaders worldwide will have a more significant effect on society as companies of all sizes cross borders in a connected world. Interactions between companies and business leaders can pose challenges and create opportunities that impact governance over aspects like healthcare, even extending to war and peace.

Dr. Siegel urges leaders to consider complex issues, such as how the future of work will look, how it will be shaped between in-person and hybrid models, and how younger generations prefer to interact and communicate with companies when doing business. Consider approaches to issues that are nuanced, subtle, and complex, especially in a world with so much information that is decaying at a rapid pace.

How will corporate and non-business leaders deal with major societal issues?
How will we steward and lead our communities, businesses, and countries when all this information is available?

To answer these questions, Dr. Siegel hopes to work further with NTT DATA, even as the company prepares a translation of his book.

NTT DATA’s Digital Transformation Framework

NTT DATA will continue to talk to thought leaders about the future of digitalization and how it can sustain their vision. The NTT DATA Digital Transformation Framework categorizes digital technologies into four groups: Convert, Connect, Algorithm, and Cognize (become aware of). In combination, these technology groups transform economies and society.

Digital technology advancement impacts traditional large companies' strategy, capabilities, and organizational structure. Managers in these companies should understand and leverage this impact.

NTT DATA's categorization framework is uniquely based on the economic principles digital technology creates, such as ubiquitous touchpoints, personalization, and mitigation of uncertainty through data. Using this framework, we can logically deduce the strategy, organizational capabilities, and structures required for a company.

NTT DATA's "Customer Value Reinvention Strategy" assists clients in solving fundamental issues in planning new services and businesses by using DX to solve customer issues. Digitizing a company's activities should leverage customer data to solve customer issues and increase customer value.

Large traditional companies should leverage existing assets and strengths in DX for a more considerable business impact. Their clients' trust, a network of customer touchpoints, good knowledge of customer needs, a track record of high-quality products and services delivered in the real world, and high productivity and supply capacity are all powerful strengths to leverage.

Through NTT DATA's Customer Value Reinvention Strategy, companies can extend existing capabilities in the real world and acquire new ones in the digital world by leveraging existing strengths. This method of DX promises to solve real customer issues and re-invent customer value meaningfully.