Digital transformation and strategy

May 2018

A few years ago, many companies were still in the early stages of assessing digital technologies. Today, the opportunities and threats of digital disruption are front and center as companies struggle to adapt and entire sectors are transformed. Some studies suggest that half of the companies in the S&P 500 list could be replaced over the next 10 years. To avoid this fate, companies must foresee how digital technologies could change their business—including the fundamentals of how value is created—and move there faster than their competitors.

This kind of transformation is by no means easy. It requires both inspired vision and effective execution at all levels of an organization. Incumbents in an industry have certain advantages over challengers.But will complex, global organizations have the requisite speed, agility, and entrepreneurial creativity? What strategies can help them succeed?

On April 16–17, 2018, members of the European and North American Audit Committee Leadership Networks (EACLN and ACLN) returned to the topic of digital transformation, which they began exploring at their 2016 summit. Informed by their experiences since that summit, they focused on the strategic issues that companies and boards must resolve as they move forward.The two expert guests who joined the group in 2016, Laurence Buchanan of EY and Paul Willmott of McKinsey, returned to offer their latest insights and recommendations. 

Members and guests highlighted several themes:

  • Digital has hit an inflection point
    Mr. Buchanan identified a profound, recent shift: digital transformation is now front and center for most companies. EACLN and ACLN members agreed with this observation, noting that boards are acutely aware of both the threats and opportunities of digital. The guests and the members also noted that although large companies face challenges in pivoting to a digital strategy, they also enjoy significant advantages as incumbents with market share, brand recognition, and other resources.

  • Transformation requires integrating innovation efforts into the business
    Mr. Buchanan and Mr. Willmott argued that digital efforts must permeate the entire business rather than stand apart from it. They noted that these efforts should include a focus on revamping the core business, not just creating radically new business models. This approach requires a delicate balance between encouraging creative independence for transformation projects and ensuring integration into the overall organization. Companies must be willing to cannibalize their existing businesses, if necessary, and they should combine in-house development, partner relationships, and acquisitions to secure the capabilities required for moving forward.

  • Boards face new risks and are considering new approaches to oversight
    These new challenges for companies entail fresh challenges for boards as well. Both guests and members pointed to added risks stemming from digital efforts, such as increased threats to the security of customer data and the difficulty of auditing automated operations. They noted that boards should revisit the delegation of responsibilities among board committees and even consider creating new committees focused on strategy or innovation.