Back to The Strategy and Corporate Finance blog

Digital success requires a digital culture

An old-world organization will doom your reinvention for the new world.
digital

– Netflix CEO Reed Hastings once explained in a famous presentation that his company’s culture was built on self-driven, high-performing individuals. “Great workplace is not espresso, lush benefits, sushi lunches,” he said. “Great workplace is stunning colleagues.” This culture of self-discipline, which he compared to that of a pro-sports team, was especially key for a fast-moving digital business like Netflix that expanded into hundreds of countries in less than a decade—roughly 10 times faster than traditional media companies such as Time-Warner or Disney had done.

Our recent research, which I discussed in my earlier postings here, backs Hastings’ focus on getting the culture right. We’ve found that while a strong digital strategy is critical, you need a culture conducive to its execution. That’s particularly important when you pursue the strategy of becoming a “fast follower”—one of two approaches that tend to produce digital winners—where you’re not the disruptor shaking up your industry but you join the attacker’s game quickly, then play it better and on a bigger scale. That approach will only succeed in the long term if your execution is nearly perfect. And to get this perfection, you must have the right culture.

In a digital world, one of the biggest risks is not taking risks.

This is not easy for incumbent companies to achieve. In fact, our clients tell us that the main bottleneck in digital transformations is the lack of a strong and common culture. A quarter of the companies we polled report that their biggest challenge is a culture averse to risk and experimentation, while another 20% find a lack of a common understanding of the company culture is a major impediment to digital success.

Three steps to overcoming cultural barriers

So how do you get your culture in line with your digital strategy? We tested multiple cultural elements in our study, and found that prioritizing the following three areas has the biggest impact on easing the bottlenecks.

Support from the top: It’s now widely understood that a digital transformation needs active CEO support throughout the journey. This top-down support, however, has to go beyond the chief executive. Companies should start by putting a chief digital officer in charge of the full digital agenda. Truly changing culture, moreover, requires that support for a digital reinvention flow through the management hierarchy right down to every front-line employee, so the full organizational pyramid is tuned towards digital. All leaders need to shift their style from top-down decision-maker to coach.

In addition, corporate leaders need a strong vision of the company’s digital opportunities and experience in the digital arena that gives them credibility with employees. ING is one company that got this right. In transforming itself into a digitally focused organization, the bank eliminated most of its middle-management layer and shifted from command-and-control style of leadership to having senior leaders set high-level direction and strategy but giving considerable autonomy to teams charged with execution.

Removing silos: The general manager of a digital business unit in a media company told us recently, “The innovation committee sits in an ivory tower and isn’t close enough to the customer needs.” This type of complaint about a lack of interaction and collaboration is a common refrain. Digital organizations remove such silos between departments, functions and reporting lines, instead creating cross-functional teams that are self-organized, non-hierarchical, and empowered to execute projects from start to finish.

Digital winners create so-called “squad” teams flexibly deployed across the organization and focused on end-to-end customer journeys rather than locked into a single department or function. The teams typically comprise fewer than 100 people to ensure that responsibility always resides within the equivalent of a small to medium-size business—a more agile model than a global, multi-tier organization.

Breaking through risk aversion: In a digital world, one of the biggest risks is not taking risks. Companies standing still are the ones that lose the most from digital disruption. In fact, organizations that have high levels of digital maturity (what we call the digital quotient, or DQ) tend to embrace leaders open to bold (and thus risky) initiatives, our research finds.

Taking risks does not mean you should take any risk. The amount of risk often depends on the size of the investment at stake. An investment that bets the company on an untested strategy should rightly give leaders pause. However, at lower levels of the organization, the bets tend to be smaller, as when a mid-level sales and marketing executive changes product prices or adapts the product mix. Digital opens the door to running multiple small-scale experiments that entail a limited cost in case of failure but can produce highly valuable discoveries.

Without the right culture, reinventing your business for the digital age will likely fail. In our research, we discovered that roughly 30% of the variance in performance among companies in the same industry related to their ability to develop and sustain a culture that embraced digital objectives.

Jacques Bughin is a senior partner in our Brussels office and a director of the McKinsey Global Institute.