How to reconstruct your business’s value chain for the digital world

Imagine you are CEO of a company that has been growing steadily for decades. You have always pivoted for economic and market shifts, and you have a deep knowledge of your operations, suppliers, and business model. 

But along come digital technologies, and everything changes. How do you avoid the fate of other CEOs who have missed the mark on digital? Guy Hadari, who has held CIO roles at Shire and Teva Pharmaceuticals, advises CEOs to deconstruct and reconstruct their business’s own value chain.

Martha Heller: What are some challenges common to digital transformation?

Guy Hadari: When executives define their digital transformation as a set of technologies, they are not driving real digital transformation. They are using technology as an excuse not to drill down and define the real problem they are trying to address.

The real problem most CEOs are trying to address is the potential of digital technologies to disrupt a value chain that, in the past, has been foundational to their business’s success.

Uber, for example, destructed an analog value chain — you go into the street, put your arm up, the taxi driver sees you, you get in, you pay the driver — and reconstructed it as a real-time online demand-supply match. Uber used digital technologies to unlock the tremendous value that was locked in the analog value chain.

CEOs do not want to be the next victim of the value chain destruction. But instead of constructing a new value chain, they go to the CIO and say “bring me artificial intelligence” without understanding the new value chain they need to create in the digital world.

What are the four dimensions of digital transformation?

1. Value chain destruction and reconstruction: Teva, for example, is a pharmaceuticals manufacturer. Between Teva and the patient there are four intermediators who take a cut from the value chain — a pharmacy benefits management company, wholesalers, retailers, and insurers — until the drug leaves the plant and lands in the hands of the patient.

That analog value chain is cumbersome and raises the cost of drugs, but that is how the pharmaceuticals business has been run for 100 years. What would happen if Teva were to destruct this value chain and go directly to the patient? That’s what Amazon is doing. Amazon is using a smart packaging solution called PillPack for chronically ill patients who have a large number of pills to take.  

With PillPack, the patient’s doctors write multiple prescriptions, and instead of sending them over to a pharmacy, where the patient picks them up, the doctors send the scripts to PillPack. Pillpack receives the scripts electronically, it enters that data into a robot, the robot prepares the pills in a user-friendly box that has clearly marked compartments for the week, and it ships the box to the patient. Amazon is disrupting the analog pharmaceuticals value chain.

2. Relationship management: In the analog world, relationship with your vendors, customers, and partners was linear, one at a time. In the new world, these relationships are multiform and multichannel. As a business, you can now provide multiple ways for the outside world to connect with you.

3. The product: In the digital world, we are now taking analog, standalone products and changing their characteristics to make them connected products. For example, at Teva, we manufacture inhalers for asthma patients. We’ve turned that product into a connected inhaler by putting a chip inside. Every time a patient takes a puff from the inhaler, the chip connects to an app that connects to a data lake, which will report on whether the patient took the puff correctly. These digitized products will all be a part of a connected home.

4. Internal business processes: What’s the big advantage of digital? It allows you to disconnect yourself from physical constraints. With uber, you no longer have to be in the street to hail a cab. You can order a cab from anywhere.

If you digitize the supply-chain process, you are no longer linking the production of the product to one physical location. In the analog world, a person would check the inventory and write an order for supplies. When there was a spike in demand, that person would call more people and write more orders for more supplies. But in the digital world, you can create a manufacturing process where your inventory, recipes, and prices are all available on a digitized, harmonized ecosystem. When demand spikes, you can turn the dial on your [robotic process automation] RPA tool. When we digitize and harmonize complex business processes, we no longer have to call a guy who orders a part. Instead, you have a view into the inventory across multiple suppliers. 

What is the CIO’s role in digital transformation?

The CIO has a unique and critical role in digital transformation, as long as they don’t fall into a few common traps. One such trap is when the CEO throws money at you and tells you, “Bring me this shiny new technology.” The CIO has to hold the line and drive a business discussion about where the company wants to be in the value chain.

The second trap is mistaking technology modernization for digital transformation. When you put a great new CRM system in place, that is not digital. That’s just a license to operate. Don’t ignore the need for a new CRM, but don’t think that by implementing it, you are changing your value chain. That’s just your job running the IT function. It’s not digital transformation.

What is the biggest obstacle to true digital transformation?

This one is easy: People do not want to change. They do not want to acknowledge how many successful companies have disappeared in the last 10 years or recognize that if they do not change their place in the value chain, they may disappear too.

For the CIO, the biggest obstacle is mindset. We CIOs were trained to use the left side of our brains and think about technology and processes and project plans because the business will fail if we do not. But digital transformation requires the right side of the brain. That’s why this is all so hard. It requires a bi-modal way of behaving and thinking, which is why some companies are splitting technology into two roles — the CIO and CDO — because each requires a different mindset and different behaviors.

About Guy Hadari

Guy Hadari is a global CIO with extensive operations and P&L experience in Fortune 100 companies. Most recently, Hadari was senior vice president, global CIO at Shire Pharmaceutical, where he oversaw a team of over 2,000. Prior to Shire, he was senior vice president, global CIO at Teva Pharmaceuticals, the world’s largest generic pharmaceutical company.