History Matters in Case of Digital Transformation
What does history mean for a company? Simply put, a company is more than the sum of its parts. It consists of capabilities and routines and is the result of decisions and developments that have their origin in the past. Capabilities are extensive, there are certain machines as well as skills of employees or computer systems. Why does history matter in business? 40 years ago, Paul David [1] described the emergence of the QWERTY-standard for keyboards as an example of a “Lock-In” effect and the development of standards. The QWERTY standard is a perfect example for the emergence of dependencies on past decisions and developments in present and future. At a certain point, the QWERTY standard was widely accepted and from this point on every new keyboard hat the same design, the users got used to it and expected exactly this keyboard: A “lock-in” happened. These dependencies exist in entire industries, but also at the company level.
This insight is important, companies usually cannot simply reinvent themselves. There is a dependency on previous developments of the company. This means that the development of companies does not proceed in isolation but along paths: A company follows its path dependency. To sum up, every company has a history, and this legacy is especially important regarding digital transformation.
Digital Transformation is Different
Why is digital transformation different from other changes in a company? Of course, companies must constantly adapt to safeguard competitive advantages. With digital transformation, however, the challenge lies firstly in the breadth and secondly in the speed required for the transformation. Given the high environmental dynamics, it seems no longer possible to adapt a company step by step. For example, product innovations can no longer be separated from process innovations, as both must now be carried out in parallel at the same time and thoroughly coordinated.
Since technology is the foundation and an important part of digital transformation, but follows its own paths, this further increases the complexity of any digital transformation.
Path Dependencies Explained
Path dependencies play an important role in the development of companies, they are the result of previous decisions and built skills. This means that a company rarely or never starts a new development but always builds on existing capabilities, resources, and structures. If these strongly influence the future development, one speaks of path dependence. Path dependencies can have a positive effect, for example if a company can build on capabilities that are also relevant for the future. However, path dependencies can also hinder this development if existing skills stand in the way of necessary change. Path dependencies can become problematic for the development of companies when structural inertia arises. This can result in an inability to adapt to changing competitive conditions and a loss of competitive advantage or market position.
Digital transformation requires a sustainable change in the business model and, unlike other programs, therefore requires a holistic change to be implemented throughout the company.
To understand path dependencies, Jörg Sydow et al. [2] is a good read. In general, the forces behind path dependencies are systemic and cannot be controlled by actors within a company. The most critical event is the described “Lock-In” effect, which could lead to a strategic trap. At this point, a change of that pattern is extremely difficult and cost intense. Such dependencies are very relevant in the case of digital transformation, which must deal with organizational paths as well as technology-based paths. Therefore, a digital transformation seems to be particularly challenging, on the one hand the organization of the company must be adapted but at the same time new technology is often needed. Both organizational development and the use of technology have direct interactions and dependencies.
How Can Leaders Respond to Existing Path Dependencies?
To deal with path dependencies, one needs to understand them. It is the foundation for successful digital transformation. The art is to create a connection between the past, the present and the future. Hence, leaders must not only define a north star, but also facilitate the creation of the path towards them.
- Know your history: It is important to accept the legacy of a company and include them in strategic considerations about the future of a company. Rarely does a company have the opportunity and the luxury to start a digital transformation from scratch. This means that leaders must develop a deep understanding of the root-cause for a company’s existing competitive advantage.
- Understand technology: Regarding digital transformation, the technological basis of the business model and the understanding of this technology is of particular importance. Therefore, an honest stocktaking must be carried out to develop viable strategies as to whether and how technological renewal needs to take place. Especially with the high involvement of technology, the risk of a “lock-in” is particularly high.
- Be flexible: During development and especially the implementation of digital transformation, managers must think dynamically. On the one hand, it is important to have a clear picture of the company’s future competitive advantages, on the other hand, execution and implementation are crucial. It is important to continuously adapt the strategy in iterations to the competitive environment and the progress of adaptation through digital transformation.
In summary, it should be noted that the success of a company’s digital transformation also depends on its history. If leaders understand these and integrate existing capabilities wisely into their planning, transformations will be more successful.
Although the legacy often seems to stand in the way of the future, in many cases companies have competitive advantages that can be used in the future and can even be expanded with the use of technology.
Therein lies the opportunity for digital transformations.
[1] David, P. A. (1985). Clio and the Economics of QWERTY. American Economic Review, 75, 332–337.
[2] Sydow, J., Schreyögg, G., & Koch, J. (2009). Organizational path dependence: {Opening} the black box. Academy of Management Review, 34(4), 689–709.
