How Should Companies Tackle DX?

Measures for the private sector
2021.8.1

Takashi Mori
Business DX Division

Key Points

  • The gateways to digital business transformation are customer interaction and inter-company collaboration
  • The next generation of DX promotion leaders can be fostered by nurturing personnel selected to carry out DX initiatives
  • Pursuing transformation should be prefaced by: setting the company’s desired future state as the ultimate goal and defining guiding principles based on a comprehensive understanding of the situation

1. Challenges for Japanese Companies in the Post-COVID-19 Era

The COVID-19 pandemic has caused substantial damage to Japan’s economy. Existing businesses cannot expect to recover the demand they have lost due to COVID-19 by simply continuing to provide the same services as before.
Driven by a tailwind of changes in lifestyles and work, certain sectors of the economy have seen growing profits such as digital platforms, life sciences, and e-commerce. To survive in a post-COVID-19 world, large traditional companies with massive capital assets will need to recover lost demand while also generating new demand through digital business transformation; these should be positioned to produce sustainable growth.

2. Essential Elements of Successful Digital Transformation

The COVID-19 pandemic has dramatically changed economic demand due to shifts in behavior and lowered economic activity. As the world transitions to a post-pandemic era, companies will need to take full advantage of technological innovation and data, helping to shape a resilient and sustainable society sought after by Industry 4.0 and Society 5.0. For this, they need to develop new services that are efficient and offer high added-value; companies can achieve this by applying digital technologies to the rework of their approach to customer interaction and the reform of their operations in general. To meet the needs of existing customers, companies must refine their core competencies.

A Mitsubishi Research Institute original survey* revealed that 79% of corporations that are working aggressively at digital transformation (DX) are proactively collaborating with partner companies in their supply chains. When asked about the impact of this collaboration, allowing for multiple answers, the leading response by far was “Higher value to customers through better integration of products and services” at 69%. The next most frequent answers were “Expansion of sales opportunities” at 47% and “Higher productivity” at 30%.

These survey results point to two success factors for digital business process reform and ultimately transformation: providing more value in customer interactions and utilizing digital technology for inter-company collaboration within supply chains.

*Mitsubishi Research Institute conducted a survey in April 2021 of executives from 747 companies with annual sales of at least ¥1 billion. Of these, 161 responded to confirm that they were seriously pursuing DX in their business operations

(1) Greater value in customer interactions

Digital technologies offer much potential to companies that have maintained real-world interactions with customers; these companies can look forward to fortified capabilities in customer acquisition and consumption-propensity analysis. For example, business opportunities can be found in digitizing the content of customer interactions and analyzing customer data in detail.

The direct-to-consumer sphere has seen digital business transformation spearheaded by those that excel at using the internet to communicate a specific field of information. After being unable to access their customers for a long time due to the pandemic, many salespeople in traditional companies have used their innate marketing abilities to win new customers online.

Transformation in the business-to-business sphere has been led by companies successful in combining new technologies with their existing strengths. For example, Japan’s specialized trading firms have combined centralized AI-based inventory management technologies with the tacit knowledge of their staff, who are very familiar with industry characteristics and customer needs. The companies were able to replicate a system of advance delivery traditionally used by medicine sellers in the 1800s: an assortment of products are left with customers to be charged at a later date only for what has been used. This method has boosted the chance of sale and eliminated delivery times for the trading firms while ensuring tailored services for their customers.

(2) Use of digital technology for collaboration across the supply chain

Major companies often take a leading role in raising the digitalization level of all companies across a particular supply chain. These DX leaders share successful implementations of digital business process reforms with their fellow companies. This enhances the overall optimization of procurement, production, logistics, and sales processes; the entire supply chain benefits from greater profitability, lower environmental impacts, and less labor shortages. (See Figure 1)
Figure 1: Digital transformation across supply chain championed by a DX leader company
Figure 1: Digital transformation across supply chain championed by a DX leader company
Source: Mitsubishi Research Institute, Inc.
Boosting digitalization across a supply chain can even benefit those outside of that supply chain: key factors for creating synergy can be uncovered through the analysis of data accumulated among collaborating companies. Initiatives like this are noted for their potential to change the structure of entire industries.

The development of applications, the primary interface for customer interaction, must maintain speed even in the face of the eventual renewal of legacy systems; in such a case, a staged approach must be facilitated for the transition. The companies at the forefront of DX have achieved a staged approach by building middleware interfaces that connect applications with legacy systems.

3. Barriers to Achieving DX and Ways to Overcome Them

In Japan, there are companies that have mistaken true digital transformation for simply utilizing digital technologies to improve their business—something relatively easy to achieve under the circumstances of COVID-19. Consequently, these companies have ended up implementing measures in a haphazard fashion.

A number of factors lie at the root of this problem: pursuing DX only for its own sake; the dilemma of innovation; a lack of digital literacy and personnel to promote DX; and a misunderstanding that legacy systems need to be totally renewed.

(1) Pursuing DX for its own sake

Many often fail to perceive DX as a wider initiative; company measures are often limited to the introduction of new tools and systems, only one aspect of the wider initiative. These new technologies go unused as soon as the novelty wears off and before they can lead to any meaningful change. This phenomenon is akin to what happened when companies were pushed to adopt computers—no genuine reform took hold.

(2) The dilemma of innovation

Traditional large companies need to extract the resources for innovation from their existing businesses. For this reason, they inadvertently prioritize the profitability and competitiveness of their existing businesses despite understanding the importance of focusing on new growth opportunities. Efforts fail to grow beyond half-hearted attempts at digital business transformation through innovation.

(3) A lack of digital literacy and personnel to promote DX

A lack of digital literacy prevails in Japan’s large companies even among chief digital officers and other executives assigned the task of leading DX. This stems from the fact that executives are often appointed based on business experience rather than engineering expertise.

(4) Misunderstanding that legacy systems need to be totally renewed

Legacy systems have a tendency to become complicated and bloated due to the repeated addition of functions over time. Many issues also arise due to the increasing age of engineers that oversee these systems as well as the large budgets required for their operation and maintenance. There are even cases in which a company will give up on DX because of misconceptions that it requires complete renewal of systems. The benefits of DX will remain unknown as long as such misconceptions persists.
To overcome these barriers, companies must establish a team for digital innovation that is comprised of young personnel enthusiastic about reforming work practices and processes. These young personnel should be assigned to highly strategic themes focused on customer interaction and inter-company collaboration. To train subsequent generations of DX leaders, these teams should be operated under a philosophy that nurtures all members selected for the team, instead of reverting to the most capable members for the answers.

This digital innovation team should also involve the entire company to raise the level of DX literacy throughout the organization. This can accelerate efforts to achieve the original goal of digital business transformation.

4. DX Journey: A navigational chart essential for success

DX initiatives can be guided to success by using a navigational chart that includes both the steps a company should follow and the vantage point from which executives in charge should lead. (Figure 2)
Figure 2: Navigational chart for successful digital business transformation
Figure 2: Navigational chart for successful digital business transformation
Source: Mitsubishi Research Institute, Inc.
To draw up a grand design for DX, executives need begin by establishing a vantage point; they need to conceptualize, taking into consideration long-term societal and industrial megatrends, the ideal future for their company. This must include both the envisioning of work process reforms and the formulation of growth strategies for new businesses. Executives may find it helpful to imagine: how companies will collaborate using digital technologies, how interaction with customers could change, and what value will be offered to customers. The benefits of DX are enjoyed more by the whole supply chain than by individual companies. Digital business transformation has the potential to change the structure of an industrial sector and even that of entire industries.

The first step for a company as a whole is to define its digital business transformation in terms of its projected digitally-transformed state. Next, a backcasting process must be used to identify and analyze the differences between the company’s current state and its future digitally-transformed state, with goals for digital work process reforms to be set based on these findings. The focus needs to be on promoting data-driven initiatives, supplementing real-world business activities with digital technology. More specifically, the objective data generated through operations can be utilized in decision-making to enhance profitability and competitiveness of core businesses.

The company must also use its future digitally-transformed state to develop new businesses that fortify existing strengths. It is common for large corporations to lose their positioning despite leading the very innovations behind the formation of new markets, and organizational productivity must be improved in tandem with other initiatives by digitalizing decision-making processes. Companies must offer employees with sufficient care for physical and mental health and fortify information security—both issues laid bare by the spread of remote work due to the COVID-19 pandemic.

In proceeding along the way to successful DX, the executives and employees involved need to work from the same navigational chart, confirming and sharing the proper path from one strategic goal to another. This navigational chart doubles as a company’s DX Journey. No two navigational charts for DX are the same. Goals unique to each company must be set to achieve that company’s own definition of its future digitally-transformed state–naturally these initiatives should be in line with the company’s overall philosophy and growth strategy. The navigational chart is a big picture for all to stay on track.