6 minutes reading time (1102 words)

Digital transformation: a cautionary tale from history

Digital transformation: a cautionary tale from history

Many large companies, agencies, consultancies are talking at the moment about “Digital transformation". This is both a theoretical and practical approach to corporate strategy, where the organisation is redesigned in order to compete in a market where both market and consumer demand is “digital first". The public now expects, and assumes, products and services from any organisation in a manner consistent with the largest technology-driven companies on the planet.

Inevitably, organisations approach digital transformation in different ways and execute such programmes with different levels of impact. However, digital transformation is not, in and of itself, a panacea. Perhaps the best example of why it isn't, exists in time; our story begins in 1985.

The liberalisation of financial markets under Margaret Thatcher's premiership gave rise to a new index of company shares. Called the FTSE 100 Index, its creation in 1984 gave prominence to the UK's 100 largest publicly-quoted companies.

Behind Shell and BP in third place was the General Electric Company, commonly known as GEC (not to be confused with the American GE). Run for over 30 years by Alfred Weinstock, it was the archetypal conglomerate: building everything from ships to televisions, fridges to missile launchers, GEC employed over 250,000 people across the world and regularly made over a billion Pounds in profit per year.

Every CEO has to hand over the reins at some point and after much headhunting, Weinstock gave way to George Simpson. The boss of Rover Group until its sale to BMW in 1994, Simpson was handed the role in 1996 under a long shadow cast by his predecessor. Weinstock was an industrial legend though cautious, and Simpson was an energetic younger CEO with an eye on the future.

Soon into his tenure, Simpson ordered a strategy review. It concluded that GEC should be a world leader in fewer industries, one of which should be IT. To achieve this, the company was to sell off most of its legacy assets (including the low-growth cash cows), and spend the proceeds on acquisitions. Additionally, the board's view was that debt should be used for acquisitions, this giving GEC the firepower to make big buys.

This was a phenomenal attempt at digital transformation. Whilst fundamentally changing an organisation is hard enough without changing its structure or frameworks, GEC was due to be totally, and fundamentally, digitally transformed. Given that most companies were only at the start of their Internet journeys, this strategy was challenging to say the least.

In this metamorphosis, Simpson and his board agreed to change the company's name. Gone was the famous, historical name and logo of GEC; in its place was the name of one of its subsidiaries, Marconi – a historical name in itself, synonymous with telecommunications. The feeling in the stock markets and the media was that as demand for Internet equipment was to rise, Marconi would become Europe's Cisco and, once again, a national champion.

Marconi started to rapidly buy Internet companies across the world, principally in the US, to quench this thirst for transformation in the dot-com era. Proceeds from disposals were not enough to fuel these acquisitions, given that the target companies' market value was increasing all of the time. As such, while Marconi transformed, it became more indebted. The asset value hoarded up by Weinstock started to erode – and quickly.

Then, two seismic events happened.

Firstly, the dot-com bubble burst. Whilst legacy GEC businesses such as ships and domestic appliances still had their share of customers, Marconi suddenly found that it had way fewer customers than it had hoped. Although it had transformed itself to being an Internet-first company, it suddenly found itself on the receiving end of a very cold wind indeed.

Secondly, those customers who were still around had far shallower pockets than was planned for. Telecoms companies, who were to be Marconi's key customers, were spending tens of billions of pounds bidding for 3G licences. The cash spent on them meant that equipment manufacturers, such as Marconi, were receiving far fewer orders. At the time, Simpson still believed that Marconi could “achieve growth for the full year as a result of our relative strength supplying these operators."

By 2001, the company's share price had dropped by 95% in less than 12 months. Thousands of employees were made redundant, profit warnings were issued, and the company, rather than sitting on a cash pile of £2bn as GEC, was over £4bn in debt… in the space of around five years.

In 2003, Marconi effectively collapsed, with shareholders receiving just 0.5% of the new company. By 2005, such as the brittleness of the thread by which it was hanging that it, and the press, were confidently hoping that BT would commission it to supply a major chunk of its network upgrade. That commission wasn't forthcoming. Shortly after, much of the company was sold to Ericsson, with the remaining networks division split off as Telent. The remaining Marconi business was wound up in October 2006.

Within ten years, a bellwether of British industry was wiped out.

Simpson and deputy John Mayo have been chastised for their decisions but I believe that view to be too simplistic. Where Fred Goodwin at RBS also transformed a business only to see it (nearly) die, one could argue that Simpson was rather ahead of his time. He saw the ways in which the Internet would fundamentally change businesses, by fundamentally changing his own. Looking back to the late 90s, that now might be seen as genius.

However, the strategic error was that rather than transform the old GEC from the inside out – looking at how defence, consumer electronics, or industrial equipment could be transformed through the Internet – he transformed it from the outside in. He, to paraphrase the Guardian's famous quote from its digital strategy, wanted Marconi to be of the Internet, rather than just be on it.

By taking this outside-in approach, Marconi bet its new assets on a market which was about to implode. Taking an inside-out approach could have let the company more pragmatically apply new ways of working and new technologies into existing businesses, processes and offers, enabling it to hedge its bets rather more conservatively. It would have been a slower burn, but it could have led to the company becoming the pre-eminent business for “Industry 4.0".

Neither the strategy or execution of digital transformation can be done overnight. Changing the shop window, as it were, doesn't necessarily change the fundamentals of the business – its culture, its executive – but it does change where the threats come from. You need to be aware of what's around you if you're running fast. That was unfortunately too true for Marconi, and remains true today.

Paul Squires is the Publisher of Imperica.

Facebook launches video chat device
Banksy - a help or hindrance to art?