Chapter 1: What is Digital Transformation

In simple terms, Digital Transformation is the adoption of technology in a company. However, we believe it’s much more than that. To understand what Digital Transformation is deeper, let’s take an in-depth look at what problems businesses actually face.

Problems Indonesian Businesses Face

Growing a business is hard. 20% of new businesses fail during the first 2 years, 50% fail during the first 5 years, 70% fail during the first 10 years. Only 25% make it to 15 years or more.

However, 97% of Indonesian workforce work for new businesses, causing employment problems.

There are 4 main functional areas of businesses: Marketing, Finance, Operations, Human Resources.

Marketing

The goals of Marketing departments should be to:

1. Find out the needs and wants of potential customers, and
2. Promote the company’s products or services.

Through ways that are:

1. Repeatable
2. Optimum
3. Data-driven

However, many marketing departments are too busy with short-term selling through actions that do not bring much impact based on feelings and luck because:

1. There are no data to know what actions are optimum and repeatable, and
2. There are no systems and procedures in place

Finance

The goals of Finance departments should be to:

1. Ensure the company has enough cash to grow, and
2. Plan ahead through financial projections and budgets

Through ways that are repeatable, optimum, and data-driven.

However, many finance departments are too busy with financial data preparation and administrative work because

1. The current accounting system only prepares standard financial statement and does not give customized reports, and
2. The current accounting system is not integrated with systems from other departments.

Operations

The goals of Operations departments should be to:

1. Deliver products and services
2. That satisfy customers
3. In a timely manner

Through ways that are repeatable, optimum, and data-driven.

However, many Operations departments are too busy with only delivering products and services because

1. Systems and procedures are not optimum or nonexistent,
2. Current system is not integrated with systems from other departments, and
3. Lack of proper planning due to lack of data

Human Resources

The goals of Human Resources departments should be to:

1. Ensure there are sufficient qualified people
2. Ensure people are productive and consistently grow
3. Ensure people are happy and high performers stay

Through ways that are repeatable, optimum, and data-driven.

However, many Human Resources departments are too busy with administrative work in areas like recruitment, payroll, and workforce management because

1. Systems and procedures are not optimum or nonexistent,
2. Current system is not integrated with systems from other departments, and
3. Lack of proper planning due to lack of data

How do we solve these problems so that companies can grow? To understand it better, let’s take a look at what “business growth” really means.

5 Business Growth Stages

According to Harvard Business Review, new business growth is divided into 5 stages.

Stage 1 is called the Existence Stage, where companies are busy trying to exist, usually with less than 10 employees. There is a crisis of leadership and the owner’s creativity to get customers and deliver products and services well is key to move on to the next stage. Usually Excel, POS, or accounting systems are enough for Stage 1 companies.

Stage 2 is called the Survival Stage, where companies are busy trying to survive, usually with 10-20 employees. There is a crisis of autonomy and the key to growth is through direction from the owner to get positive cash flows. Usually Stage 2 companies require accounting, POS, CRM, or project management tools to optimize productivity.

Stage 3 is called the Success Stage, where companies have found their identity and are comfortable with its cash flows, usually with 20 – 100 employees. There is a crisis of control and the key to growth is through proper work delegation which involves hiring managers and installing systems and procedures. At this stage, integration between divisions and automation are crucial and this is where companies start needing ERP and HR systems.

Stage 4 is called the Take-off Stage, where companies already have different divisions and procedures in place, but they are far from perfect. The number of employees typically range from 100 to 1,000, depending on the industry and the company structure. Productivity is low, lots of manual work, fraud, lack of data to identify business problems accurately, and there is no unity among the different divisions. At this stage, managers’ ability to handle increasing complexity as well as systems and procedures are crucial, and companies can move on to the next stage through coordination. At this stage, ERP and HR systems become more crucial, and some system customizations are needed to fully support growth.

Stage 5 is called the Resource Maturity Stage, where companies have different divisions and proper procedures, usually with more than 1,000 employees. The problems companies face vary widely depending on the industry, market conditions, business model, company structure, and what they did during Stage 4. However, a lot of companies have difficulties innovating. Their main concerns are generally the same, which are planning, control, management decentralization, and more extensive systems and procedures. At this stage, ERP and HR systems become even more crucial and much customizations are generally needed.

Management Factors

For companies at Stages 1 and 2, the owner’s ability to execute and cash flows are crucial in ensuring the companies’ survivability, while everything else is moderately irrelevant.

Upon entering Stage 3, people’s quality and diversity, strategic planning, systems and controls, as well as owner’s ability to delegate becomes important while cash flows are not as important anymore.

Upon entering Stage 4, the owner’s ability to execute continues to slowly become less important while everything else becomes critical.

Upon entering Stage 5, strategic planning becomes critical since companies are not as flexible as before, and everything else becomes less important.

Companies have to go through transformations in order to successfully move on to the next stage. If companies do not go through transformations, or if they do it poorly, it will affect them at the next stage, or even worse, they are not able to move on to the next stage at all. This is the reason why business owners often feel like they’ve done their best but their companies still can’t grow.

Majorities of companies that close down fail at Stages 1 and 2, while companies at Stages 3 and 4 have difficulties growing due to operational inefficiencies, lack of proper systems and procedures, bad hiring, and bad strategic planning.

A lot of long-time companies are stuck at Stages 3 and 4, and many business owners decided to accept that “that’s how business is,” and ignored the problems since they are comfortable with their cash flows and standard of living.

However, they become bad at adjusting to changes in market conditions, causing problems when it is time for the next generation to take over. This is where Digital Transformation comes in.

What is Digital Transformation

Let’s gather the facts.

1. Companies can’t move on to the next stage because there are problems that need to be solved (regardless whether people realize them or not)
2. Company problems are different depending on their stages
3. Critical factors to company growth are different depending on their stages
4. Transformations are necessary in order for companies to move on to the next stage

From the facts, we can learn three things:

1. Transformation does not depend on whether companies think they need it (many of them don’t). Transformation depends on whether companies can identify what their company problems are, which of those problems are to be solved at their stage, and what the solutions are.
2. There are different types of transformations for different company stages. To be more precise, each transformation is different for each company.
3. Transformation is not a one-time process. It is a continuous process throughout a company’s journey.

However, we know that there are at least 3 similarities between the different types of transformations:

1. It involves reducing the companies’ dependencies on the owner’s ability to execute
2. It involves automation
3. It involves integration

In order to achieve a proper transformation, technology undoubtedly plays a crucial role and we think that true transformation can’t happen without technology, because there will always be human errors and unpredictability when companies rely too much on humans (also, hiring and retaining great people is very hard and takes a long time).

Therefore, our definition of Digital Transformation is:

“A continuous process by growth-seeking companies through solving the right problems at the right stages with the help of technology.”

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