How a Legacy Business Should Undertake Digital Transformation

Digital disruption is one of the biggest risks facing legacy businesses today. The risk arises from the entry of digital upstarts into literally every industry, as well as from legacy businesses that were ahead of the curve in joining the ranks of digital businesses themselves. Digital transformation is how legacy businesses build digital capabilities to counter digital disruption. 

According to a February 2022 report by the Boston Consulting Group, only about 30%  of the S&P Global 1200 companies have successfully undertaken digital transformation. They outperform their less digital competitors, capture and deliver more value to shareholders and other stakeholders, and are more resilient in face of adversity and changes in market conditions. So, what is digital transformation and how do legacy businesses build digital capabilities? 

With so much written about digital transformation in just the last two-three years, there’s often confusion regarding terms like digitization, digitalization, and digital transformation – in media, and even in professional magazines; sometimes these terms are used interchangeably. But there are key differences among them.

Digitization is the conversion of something from an analog source (such as data, written documents, images, or sound) into a series of zeros and ones so it can be deciphered by computers. Digitization converts analog content into digital content without making any changes to the underlying process itself. Changing the process is what digitalization does. Digitalization is the process of moving to digital business; it cannot occur unless the different elements involved in a process have first been digitized. Digitalization involves transforming business processes using digital technologies. It is ubiquitous in our daily lives, so much so it is hard to visualize a world without digitalization. Digitization and digitalization are what used to be called computerization in an earlier era.  

Digital transformation requires the use of digital technologies in the conduct of business as well as any needed organizational changes to make digital transformation successful. Salesforce offers a good workable definition of digital transformation: It’s “the process of using digital technologies to create new – or modify existing – business processes, culture, and customer experiences to meet changing business and market requirements.” It’s a reimagining of business for the digital age.

This article is about digital transformation of legacy, traditional Businesses. To understand what all is involved in digital transformation, it will be best to look at some case studies of how legacy businesses went about transforming themselves as digital businesses. Several erstwhile legacy businesses, such as Nestlé, a B2C company, and Bosch, a B2B company, have been pursuing digital transformation for quite some time and are now effectively digital businesses.

Nestlé

Nestlé S.A., a 155-year-old Swiss company, is the world’s largest manufacturer of foods and beverages. It has factories in 86 countries (including 150 connected factories), sells its products in more than 196 countries, had group sales of CHF 94.4 billion (US$ 102.4 billion) and 291,000 employees as of 2022. Currently, the company’s vast product portfolio has more than 2,000 global and local brands of infant and toddler foods, nutrition, confectionary, snacks, ice cream, beverages like coffee and water, and pet foods. The United States is Nestlé’s largest market by sales volume, followed by Greater China accounting for less than a fourth of US sales; Switzerland accounts for about 1.4% of the company’s total global sales. Several Nestlé brands, like Nescafé, KitKat, and Maggi, have achieved iconic status globally.

Digital Transformation at Nestlé

Digital transformation at Nestlé covered practically all aspects of the company’s business, virtually rebuilding the company to help new growth, enhance agility, and generate efficiencies. Started in 2018, digital transformation at Nestlé is a huge, complex, and continuing effort, involving acceleration of e-commerce, digitalization of operations, data analytics, digital innovation, and raising employees’ digital footprint. 

E-Commerce at Nestlé’s. Most companies today are involved in e-commerce whether or not they are systematically pursuing digital transformation. Nestlé has been involved in e-commerce for over a decade, achieving increasing share of e-commerce sales in total group sales. E-Commerce sales contributed 15.8% of Nestlé’s total group sales in 2022—more than three times the share of e-commerce sales in total group sales in 2016—with plans to increase e-commerce sales to 25% of total group sales by 2025. Nestlé expects to achieve this by continuing to offer online and offline choices to consumers wherever and whenever they decide to shop, growing first-party consumer data records, and increasing investment in digital marketing from 55% of total media spend in 2022 to 70% by 2025.

Digitalization of operations. It includes multi-year initiatives throughout the company’s operating network, applying technologies such as AI, predictive analytics, collaborative robots supporting factory automation, and blockchain. It has also helped strengthen Nestlé’s capacity to capture and share data across the value chain. All such initiatives are ongoing at the company. 

Data analytics. By partnering with leading digital innovators, Nestlé is using its technologies to, for instance, understand the return on marketing spend, the effectiveness of each brand interaction, and maximize the value of strategic direct-to-consumer investments. With a recently created hub for data science in Bangalore and 275 million first-party data records, Nestlé builds models to predict best investment scenarios, carries our adjustments to channel strategies in real time, and personalizes consumer engagement and experience. The company uses artificial intelligence (AI) with end-to-end analytics to deepen collaboration with customers, improve product assortment, and enhance promotional effectiveness.

Digital innovation. Nestlé uses digital technologies to continuously learn from consumers, customers, and technology partners to develop new business opportunities such as offering personalized nutrition advice and deploying AI chatbots, like digital cooking assistants, to boost consumer engagement and retention. 

Raising employees’ digital expertise. To build employees’ digital competence, Nestlé has established e-business academies that offer employees relevant, easy-to-consume learning materials. These academies are built on a gaming format so that employees have fun while learning. Building a data culture within the company meant overhauling the company’s internal culture with data placed at the center of decision making. A social media platform was established within the company to encourage a culture of social networking among employees. 

Bosch

Bosch (Robert Bosch GmbH) is a pre-eminent, global engineering and technology company founded by Robert Bosch in Stuttgart, Germany in 1886 as the “Workshop for Precision Mechanics and Electrical Engineering.” Starting with literally any kind of electrical work that came his way, Bosch became a world-leading supplier of automotive products like ignition systems by 1902. During the next several decades, Bosch diversified into many areas including automotive electric lighting, power tools, radios for cars and homes, cinema projectors, equipment for television studios, diesel engines, and household appliances, among others. 

The Bosch Group today is a leading supplier of consumer, industrial, and technology goods and services with 420,000 employees worldwide as of December 31, 2022. With global sales of €88.4 billion (US$91.4 billion) in 2022, the company operates in four business sectors: Mobility Solutions, Consumer Goods, Industrial Technology, and Energy and Building Technology. 

Bosch.IO. In the 2000s, the Bosch Group, like some other large industrial companies (such as GE and Schneider Electric), decided to make industrial internet of things (IIoT) the core of its business foundation and created the Bosch.IO subsidiary in 2008. As a vertically integrated business, Bosch.IO has expertise in sensor technology, manufacturing, systems integration, AI research, and software and services. It has over 900 professionals worldwide, including consultants, coaches, cloud software developers, digital marketers, UX and business model designers, solution architects, and project managers. They work on digitalization and IIoT projects, collaborating with over 38,000 software developers and AI experts throughout the company. Bosch manufactures over four million sensors every day for internal use and third-party applications.

Digital transformation at Bosch 

Digital transformation at a legacy, established company requires not just changes in technology, but also changes in organizational structure, organizational processes, investment priorities, new capabilities, and—more than anything else—changes in organizational culture. Bosch faced many challenges during its digital transformation from an industrial company to an industrial-internet of things company.

Digital transformation at Bosch Group involved:

• Managing tension between traditional business and the internet of things (IoT) way of doing things, and balancing investment priorities between traditional businesses (still very substantial) and IoT businesses.
• Tying products with services (called product servitization) to derive revenue from not just product sales but also by providing ongoing services to customers; this involved increasing the value of hardware sold through the company’s 3S Strategy—sensors, software, and services—in everything the company made.
• Changing approach to product development—balancing user experience, e.g., ease of use of a device with device data security.
• Changing approach to sales and customer relationship management—from one-time sale of equipment to continuing customer engagement with the company through services (and recurring revenues).
• Updating organizational culture, a major driver of digital transformation (e.g., staff to rip off ties, celebrate error culture, and adopt a just do it way of doing things).
• Building capabilities for the new digital environment:
  • sourcing new tech talent from universities,
  • a comprehensive AI training program to make almost 30,000 associates AI-savvy, 
  • acquiring smaller companies with the products, especially IoT products, technologies, and skills Bosch needed, and
  • developing pockets of excellence within the company. 

All of the above needed continuing focus on innovation, being achieved through:

• inhouse AI research centers (in Bangalore, Palo Alto, and Deiningen),
• grow platform, an internal incubation platform at Bosch for start-ups and intrapreneurs originating from within the company,
• a €420 million venture fund created in 2017, and
• partnerships (e.g., with Tesla for autonomous vehicles and with Amazon for Alexa to be used in smart-home systems). 

Five Takeaways

1. Digital transformation is a journey, not a destination. Once you embark on the journey, you must continue, if only to keep pace with fast-changing technologies.  
2. As part of digital transformation, make sure to leverage the full power of digitalization, including internal operations and external relationships. 
3. Add digital or IoT products (or both) to the company’s product portfolio. If a company’s existing physical product can be converted into an IoT product by embedding it with sensors and connecting it to the internet, so much the better. If not, consider developing digital or IoT products in-house or acquiring a company that has such products. 
4. Use digital business models, such as product servitization, to create and capture value throughout the product lifecycle. 
5. Digital transformation requires, more than anything else, changes in organizational culture and educating employees to become technology savvy.

Written by Dr. Vinod K. Jain.
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