Digital transformation: How to start your journey?
The picture above shows the construction of the Empire State Building, which began on March 17th, 1930. About 14 months (or about 409 days) later, on May 1st, 1931, President Hoover pressed a button in Washington, D.C., officially opening and turning on the Empire State Building’s lights. Empire State has about 2.7 million square feet of office space, which took 14 months to complete. That’s about 6500 sq ft a day.
The order of magnitude of this has not changed much in the last century.
No wonder the infrastructure building and many similar traditional businesses are now actively looking for digital transformation. In this blog post, I focus on how to start with the digital transformation journey.
What would be your first step in the digital transformation journey?
Should you be looking at a bunch of new startups in your space? Import those technologies into your organization? All that might help you solve your immediate needs. Yes, but that’s where most legacy businesses make mistakes and get lost in concentrating on point solutions alone. These are all necessary steps and bring value to you, but that’s not where you start.
Your first step is to get the direction right. Remember, the direction is more critical at the start than the speed. To get the direction right, you need deep insight into your transforming business.
I usually spend at least a quarter getting my hands dirty doing ground-level operations to get a first-hand feel of the business. Starting with the CEO, I talk to first-line leaders and ground-level staff. I spend time doing what they are doing, asking them the right questions, and understanding the problem to solve.
All my questions are usually directed to find out:
What is the most critical problem in your space?
It needs a bit of first-principles thinking and a point of view on the future. It’s not easy to unlearn the biases.
Many other industries have undergone massive changes - the automobile OEM factory today looks nothing like the one 100 years ago. However, infrastructure building and construction primarily operate at the same level of productivity.
E.g., in the construction industry, the most crucial problem might well be:
Building a structure takes a lot of time and resources.
Let’s take the first part of this problem: Building a structure takes a long time. Let’s stick with this problem and try to go a bit deeper into it. The following question is:
What would be disruptive solution to the problem?
If we were to build a structure similar to the Empire State Building, the answer to the above question might look something like:
Building the Empire State in 40 days, from scratch!
Is that even possible, technically? I don’t know enough about civil engineering to answer that question. But I know that now we are thinking in the right direction. Any effort, small (0.1x or automation efforts) or big (10x disruptive approach), towards the 40-day goal will push us in the right direction to create an impact.
By the way, for every “this is not possible” comment, I ask them a lot of “WHYs?” And then get everyone to do first principal thinking. That is,
My people: “40 days is impossible”.
Me: “Why?”
My people: “Building things one by one on the site just takes a lot of time. It also takes time to build electrical plumbing into it.”
Me: “Then can we pre-build stuff offsite? Bring them to the site and just assemble them. .”
“Yes, but we can only construct a small house with this method. Not an Empire State building, or a cable stay bridge.”
Me: “Really? Why not?
People: “No one has every built it before”.
Me: “But I see that companies like Revolution and Katerra (which is now bankrupt) are/were building shopping malls, hospitals, hotels, and residential apartments using these same principles.”
People: “Yes, but it will have a lot of cost implications.”
ME: “How much is ‘‘a lot,” and what are we saving because of that? Worker time and accidents? Financial risks?” ….
So you see:
Digital transformation is more about ‘transformation.’
E.g. In this space, the transformation is less digital and more technical. Of course, digital project management, building information modeling (BIM), vehicle tracking, fuel monitoring, safety wearables, remote monitoring, etc., will all further optimize operations. But taking these projects first up into your journey will sway you away from the focus. Transformation in this space requires a change in building design, materials supply, and construction. It needs to make things modular to reduce the uncertainties, shorten the building times, and lower the risks.
A bit about digital thinking
Before we end, let me comment a bit about digital thinking. Start your digital review with a mindset of a business technology company like AWS (Amazon Web Service) or salesforce.com rather than a traditional construction company. Think like a digital native and design an end-to-end digital customer journey. This thinking is far different than just automating a few business processes. With this mindset, we can now start solving much bigger problems. Think of bundling/re-bundling your offerings.
I will leave you with the Asian Paints case study demonstrating how Asian Paints followed the same approach to disrupt the paint industry.
Asian Paints Case Study: Creating long-lasting moat and superior financial performance through digital transformation.
Background:
Asian Paints was founded in 1945 in a garage in Gaiwadi, Girgaum - Mumbai, by four friends Champaklal Choksey, Chimanlal Choksi, Suryakant Dani, and Arvind Vakil.
Asian Paints (AP) has produced 20% revenue growth every year, for the last 70 years.
It might be one of the few in global history to do it.
Business has doubled in size every year for the last 30 years. Promotors are worth USD 12 billion.
AP doesn't have the best paint. (They spend only 0.3% of their revenue on R&D). Yet their financial performance is far superior to their competitors.
What's driving this fantastic performance?
During World War II and the Quit India Movement of 1942, a temporary ban on paint imports left only foreign companies and Shalimar Paints in the market.
Asian Paints took up the market and reported an annual turnover of INR 230 million in 1952, with only a 2% PBT margin.
By 1967, it became the leading paint manufacturer in the country. But the profit margins were low.
The question that changed AP
That's when Champaklal Choksey asked the question:
Q: "What's the most critical problem in this business?"
A: Low profit margin.
Q: What are the main areas that will help us improve it?
A: 20% of AP’s revenue was spent on wholesalers and distributors margins. (Paint was sold like an FMCG product. From the factory, the paint goes to a wholesaler for a city. Then, it is handed over to the distributor for a local area. In the end, a dealer gets it for hyperlocal sale.)
Q: Can we avoid wholesalers and distributors and directly go to the dealers? What are the problems in doing that?
A: Dealers can't stock a lot of paints on their premises. They have small shops. Even if they were to have space, they can't invest in working capital to hold the inventory.
Q: How can we solve this problem?
A: By knowing which dealers need paints and when.
Q: But how would we know that?
A: Data mining demand requirements for every hour for every dealer. Based on that data, we deliver paints every few hours to the dealers.
Q: Can we do that?
A: Yes. But we need a computer.
The digital transformation
AP started to deliver paints four times daily to 40,000 dealers across India. That is about 160,000 deliveries a day. Now, AP has started pocketing 97% of the MRP. (3% goes to the dealer). In FMCG, 30-40% of the MRP goes to the distribution intermediaries, and only about 60-70% comes to manufacturers. Today, AP has around 70,000 dealers. They do about 250,000 - 300,000 deliveries a day. Their closest competitor, Berger Paints, delivers 40,000 times a day, and the #3 player, AkzoNobel (which owns the best product in the industry - Dulux) delivers 10,000 times a day. Most of the FMCGs don't deliver more than 10,000 times a week.
So how do Asian Paints do it? The answer is technology. (Note how late in the transformation comes the ‘digital’.) In 1970, Mr. Choksey spent INR 80 million (about USD 10 million at an exchange rate of USD 1 = INR 7.5 in 1969.) to buy the first supercomputer in India. Ever since AP has captured data points on dealers demand patterns in terms of quantity, SKUs etc.. The algorithms make sense of the data and make calls on the entire supply chain - from raw material procurement to the delivery schedule. The whole organization is designed to execute it.
As a result of this journey, the working capital cycle (raw material to cash in the bank) for AP is 8 days. For #2 Berger Paints (topline is 1/3rd of AP), the working capital cycle is 45 days. For AkzoNobel (toppling 1/10th of AP), the working capital cycle is 105 days. ROC: AP=40, Burger=25, Aksonobel=16.
This digital transformation has provided them with a moat that can’t be crossed easily. The moat keeps getting deeper and deeper as they collect data faster than the competitors and deliver superior financial performance, year after year.
Additional info:
Revolution, a startup dedicated to pre-fab houses, condominiums, hotels, etc., is now a unicorn. Even Google has invested $300 million in offsite construction to produce homes for its employees. Offsite construction has an upside potential that traditional companies cannot ignore. But there are other reasons for companies to participate in the offsite market. Offsite is going to be highly disruptive to construction as a whole, and existing companies are at risk of losing a significant amount of value.
Katerra (now defunc) asked the right questions! 
Ref for Asian Paints case study: https://www.amazon.in/gp/product/B06XXZ6C6S/ref=dbs_a_def_rwt_bibl_vppi_i2
