Whether you have realized it or not, the era of digital disruption is already upon us. Triggered by the emergence of social media, mobile and cloud computing technologies, digital disruption is being redefined and accelerated by the Internet of Things (IoT) revolution. The American economy that once thrived on manufacturing is in transition, and more and more it’s evolving into a digital-services economy.

{{RELATEDLINKS}} That means companies must adapt – or risk withering away.
This new digital age is the connectivity of going from a thousand devices connected to the Internet to 500 billion by 2030. It will transform business. It will transform our lives, our healthcare system, cities and governments. Business models will rise and fall at an unprecedented pace. It is expected to create huge opportunities and probably $19 trillion in incremental economic value over the next decade. That’s the size of the U.S. economy and then some.

A study done by the Babson Olin School of business published by Fast Company estimates that 40 percent of Fortune 500 companies would cease to exist in the next 10 years. The exponential increase in business opportunity will lead to the rise of new companies that can master the digital transformation and force the demise of companies that fail to do so.

What Is Digital Disruption?
Digital disruption is using technology to transform everything about the way businesses are run and the way they interact with customers. Data being produced at a breakneck velocity will be leveraged to make customer acquisition easier and the customer experience front and center. Disintermediation between producers, suppliers, and customers will exponentially increase customer choices and shift the focus on collaboration to drive more customer value.

Disrupt…or Be Disrupted
If you’re a leader in today’s world, whether you’re a government or a business leader, you have to focus on the fact that this is the biggest technology transition ever. This digital era will dwarf what’s occurred in the information era and the value of the Internet today. Make no mistake. As leaders, if you don’t transform to master the digital era to disrupt, you will get disrupted. And it’ll be a brutal disruption, where the majority of companies will not exist in a meaningful way 10 to 15 years from now.

The American economy that once thrived on manufacturing is in transition, and more and more it’s evolving into a digital-services economy. Three Critical Success Factors for the new Digital Era
There are three critical success factors that every leader will need to control to lead their organization through this new digital era.

1. Build to Last Every organization (or reorganization) must be built to have three characteristics.

• Nimble: A nimble organization that is adapted to the emerging industry dynamics and competitive pressure is best suited to navigate market transitions and help you leap to a number one or two leadership position in the market.
• Evolutionary: No organization should be stagnant but should continue to evolve as your business and the market evolve. There should be an emphasis on screening the market for inflections coupled with the readiness to adapt your organization to lead through them.
• Integrative: Make the notion of integrated customer-value delivery the centerpiece of your organizational strategy and decisions. Define clear complementary roles for the organizational substructures, and assign success measures that add up to customer success.

2. Exercise Rigorous Governance
It is critical to have the right governance in place to ensure the effectiveness of every organization. Portfolio councils — as they had come to be called at Cisco, my former employer — had an important role in driving the right governance and execution of the various business entities. Although the makeup of councils at Cisco changed from year to year to adjust to market dynamics and strategic vectors, councils were generally of two kinds:

Segment councils (also called business councils, such as the Service Provider Business Council) focused on market segments that included cross-functional executives from all functional areas, such as engineering, sales, and services. Functional councils, such as the Services Portfolio Council, would focus on aligning the various services-delivery portfolio components to the segment priorities (strategic vectors) for that year.

Portfolio councils were designed to ensure cross-functional collaboration and integrated strategy oversight and planning. The key word here is integrated because it requires interlock of the cross-functional leadership teams that make up the councils at all three levels — customer satisfaction, margins, and revenue.

• Customer satisfaction focuses on three elements: outside-in customer requirements (customer requirements derived from an external customer’s perspective), the right product and service offers (just good enough to deliver committed satisfaction levels), and a superior customer experience.
• Margins hone in on three elements: maximize return on investment through an integrated cross-functional focus on the right big bets, drive efficiencies in portfolio delivery, and ensure a rationalized portfolio evolution (exit nonperforming elements and shift investments to big bets).
• Revenue opportunities are maximized through three factors: an optimized (carefully selected) portfolio that drives the highest revenue, maximizes partner enablement and leverage, while ensuring full impact of the revenue opportunity on both the product and services businesses.

Simply put, the portfolio council at Cisco was a great example of an effective organizational governance mechanism and was ultimately responsible for the entire life cycle of the strategy from understanding the market requirements and prioritizing the portfolio to execution, market launch, and optimization (or revision) of the market portfolio to adjusting to new market dynamics. This digital era will dwarf what’s occurred in the information era and the value of the Internet today.

3. Organize for Success
This brings me to the critical importance of the right organizational strategy as a key component of every CEO’s toolkit for the new digital economy. It can make all the difference if you want to build for sustainable profitability. Every new organization should include three aspects that enable organizations to maximize the intellectual capital of their people: affordability, scalability, and people clustering.

• Affordability: To drive high margins, affordability becomes a key aspect of every business’s organizational strategy. Three criteria that should be carefully analyzed and proactively influenced during organizational design are resource forecasting, grade (job levels) distribution, and development cost.
• Scalability: This dimension of organizational strategy enables the deployment of the least number of resources for the highest degree of customer success. The leverage of partners, a talent pool acceleration strategy, and a shared knowledge center enable organizations to adapt to growth and scale.
• Clustering: This is a key factor in establishing and maintaining competitive advantage at the lowest cost. Specialized resources should be clustered in close proximity to physical or regional locations for best practices sharing, thought leadership, and driving new innovation.

Organizational strategy and design is critical to enable a competitive position in the new digital economy and has to be carefully built and evolved to secure and retain a long-term sustainable leadership position.

The People Strategy
It should have become clear by now that there is one foundational element at the core of these critical success factors — a robust people strategy. It is crucial for businesses to understand that a services economy is about people, and the people who are key to making success happen are the managers and employees within the business itself.

Employees are the true intellectual capital of the company and that means businesses must invest in their people. There are at least four ways businesses can “turn people into your secret weapon”:

• Align employees to a common goal. No organization works well if everyone is a maverick, going off in his or her own direction. It’s important to communicate what the goal is and to make sure everyone is on the same page.
• Create a nurturing environment. Any business should want to motivate its employees to excel. One way this can be done is through rewards and recognitions, so that employees know that their hard work and efforts are appreciated.
• Harness employees’ intellectual horsepower. It’s important to get the most out of employees and that can be accomplished through helping them build their skills. Cisco, for example, used certification programs to train employees and promote personal growth. This wasn’t just for our experienced people. We developed special programs to prepare our junior talent to become the Cisco workforce of the future.
• Drive exceptional thought leadership. It’s critical to hire the right leaders because so much else can hinge on how they perform. Companies should look for people with a command and understanding of the business’ mission; who have stellar reputations and ability to attract new talent; and who have the potential to grow to the next level of leadership.

When products are a company’s focus, it’s important to invest in research and development, and product innovation. But when it is services that drive a company’s success, then the investment should be in people. Get them inspired, because inspired people make the difference.