Digital transformation about to face business reality vs investment tug of war

Digital transformation sounds great until the core business slows down and shareholders want better returns. Get ready to juggle priorities and possibly executives, too.
Written by Larry Dignan, Contributor

Digital transformation isn't cheap and old-line enterprises are about to struggle to balance current results and future investments and swap out executives. In other words, investing in the future is swell until the core business starts to show signs of weakness.

Here are three recent examples of stalwart enterprises that are investing for the future with new captains.

To wit:

Mattel outlined a digital transformation overhaul that focused on building toys that will teach and develop toddlers and prep them more for science, tech, and engineering careers well into the future. Mattel also talked analytics, user experience, and a design cadence that rhymed with what you'd hear from a tech company.

But there's a cost. Mattel also cut its dividend and pulled its practice of shorter-term financial guidance and replaced it with longer increments. Mattel CEO Margo Georgiadis will take the funds that would have gone to a dividend and put it on digital transformation. She said:

We are building our power brands into connected 360-play systems and experiences. We are accelerating our emerging markets with digital-first solutions. We are focusing in strengthening our innovation pipeline, and we are reshaping our operations to enable our strategy leaner, faster, smarter. And we are reigniting our culture and our team.

Indeed, Mattel's investor day on Wednesday outlined a master plan that had a lot of tech, new age design thinking, and platform talk. What's unclear is the runway Georgiadis, who joined Mattel in February, will have to revamp Mattel and bank on internet-connected toys. Georgiadis became CEO of Mattel after leaving Google, where she was an executive for eight years leading the Americas business and various technology projects.

GE outlined succession plans as CEO Jeffrey Immelt steps aside for John Flannery, who was CEO of GE Healthcare. GE has made a big bet on digital with its Predix platform as well as a focus on the industrial internet. However, Wall Street was worried about GE's cash flow and profit margins under Immelt. Flannery said he sees the value of digital and investing in transformation. However, Flannery also said he's going to review the digital efforts going forward.

"There's no change in the view that this is a defining characteristic of the company going forward. It's going to transform every industry we're in. And we're going to play to win in that space and we'll lead that space," said Flannery. Nevertheless, there's a cost to going digital. How will Flannery balance earnings, cash flow and investing in a digital business that is seeing increased costs to hire talent and develop platforms? Wall Street is already doing sum of the parts valuations for GE and wondering whether GE Digital should be spun off.

Ford also recently replaced Mark Fields as CEO. Fields was one of the main players behind Ford's push into digital platforms and new business models. The new CEO at Ford, James Hackett, ran Ford Mobility. The problem: Ford, like other automakers, is facing a slowdown ahead. Car leases could be a debt time bomb and Ford switched captains.

Evercore ISI analyst George Galliers said Hackett has to move quickly.

New CEO Hackett needs to get his message out quickly. Investors need to know his plans going forward; particularly, how he intends to reverse the earnings drag of the last 12 months and his strategy with respect to electrification and future mobility.

And even if Hackett does move faster into digital, Ford shareholders may balk at the investment in digital transformation.

These companies -- Nike, Taser, Campbells Soup, QVC and yours too -- have quite the juggling act. Here's what to watch in the months ahead.

  • Digital transformation efforts, which will take more than a few quarters to really pay off, will be increasingly questioned. Patience and Wall Street are two words that don't go together especially when the core business is slipping.
  • Technology vendors will step up their digital transformation talk. Why? Vendors all want to sell a magic bullet to help customers revamp. The enterprise tech sector already pitches this idea, but the volume is about to increase. Ever wonder why retailers, which are closing stores at a rapid clip, are such enterprise tech darlings? The retail sector will have to invest in tech to survive. Tech vendors are happy to sell them a dream.
  • The magic bullets and the patience for digital transformation (a murky term at best) will be tested. This reality will create a backlash to the digitization movement. Of course, there is no alternative, but rest assured there will be some of Gartner's trough of disillusionment in store.

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