This is a republication of the paper “Successful Digital Transformation is All About Value”, with the title above.
Harvard Business Review
by Stephanie L. Woerner, Peter Weill, Ina M. Sebastian
October 21, 2022
Chief Researcher and Site Editor:
Joaquim Cardoso MSc.
the health transformation
October 28, 2022
Summary:
In the digital era, how firms create and capture value has changed profoundly.
But with digital transformation, many firms are leaving substantial value on the table, getting caught up in “doing” digital transformation rather than staying focused on how they will create and capture value with digital.
To do this, first companies need to understand the three different types of digital value:
- value from customers (cross-selling, increased loyalty, great customer experience);
- value from operations (increased efficiency, modularity and reuse of components, automating processes); and
- value from ecosystems (leveraging partners for both access to more customers and range of products and services).
With these types of value in mind, firms can then take action to create digital value by:
- identifying domain opportunities;
- building mutually-reinforcing capabilities;
- tracking digital value with a dashboard;
- recruiting digital partners; and
- investing in digital savviness of everyone at the firm.
Companies that do this will become truly “future ready.”
ORIGINAL PUBLICATION (full version)
Introduction:
A global financial services firm we worked with really seemed to get the digital message.
They hired a chief digital officer who led many locally successful projects to improve the customer experience.
These included making it easier to move from in-person to online for certain tasks, plus targeted offers based on customer data.
They felt confident they were creating great customer value.
But there was a problem.
Those local innovations ended up adding more complexity to the existing fragmented business processes, systems, and data.
Although the customer experience often improved — and in some cases, revenue increased — the rise in the cost-to-serve eclipsed the gains and added other risks like cybersecurity and system crashes.
But there was a problem. The local innovations ended up adding more complexity to the existing fragmented business processes, systems, and data.
Although the customer experience often improved — and in some cases, revenue increased — the rise in the cost-to-serve eclipsed the gains and added other risks like cybersecurity and system crashes.
In the digital era, how firms create and capture value has changed profoundly.
But most aren’t keeping up.
Our research shows that the average firm today is leaving an eye-opening 50% of potential digital value or more on the table, compared to leading firms.
… the average firm today is leaving an eye-opening 50% of potential digital value or more on the table, compared to leading firms.
In our experience working with global enterprises in every industry, the main reason for this seems clear:
firms often get caught up in thinking about “doing” a digital transformation initiative rather than thinking concretely about how they will create and then capture value with digital.
In our experience working with global enterprises in every industry, the main reason for this seems clear: firms often get caught up in thinking about “doing” a digital transformation initiative …
… rather than thinking concretely about how they will create and then capture value with digital.
The focus should start and end with value.
This means changing the way you think, operate, develop talent, keep score, organize, partner, and innovate to compete in the digital economy.
We call companies that are doing this “future ready,” and the most successful among them are generating 70% or more of the potential value from their digital initiatives — significantly more than the average firm.
Three Types of Digital Value
In helping leaders and their firms shift to a future ready mindset, a key step is recognizing three types of digital value — these types represent where and how value can be created, as well as the areas where there is a risk of leaving value on the table.
We’ll use the global building materials firm CEMEX to illustrate.
- 1.Value from customers.
- 2.Value from operations
- 3.Value from ecosystems.
1.Value from customers.
This encompasses increased revenue from cross-selling and new offerings, as well as more customer stickiness and loyalty.
Helping customers meet their needs, providing a great customer experience, and acting consistently and with purpose helps create value.
CEMEX started their transformation by focusing on customer value. Recognizing that construction site managers are key customers with a tough job, in 2017 the firm created the CEMEX Go mobile app, a single place for those managers to get everything they need from CEMEX such as advice, pricing, ordering, and an Uber-like tracking experience for cement delivery.
CEMEX Go was the breakthrough initiative for the firm, resulting in a strong increase in revenue for the channel as well as a substantially higher net promoter score.
2.Value from operations.
The foundation of digital business, value from operations includes reduced cost and increased efficiency and speed.
Firms can create this type of value by developing modular components, creating digital components that can be reused, automating processes, and becoming more open and agile.
CEMEX focused broadly on operational efficiency and reducing the app’s cost-to-serve while continuing to improve customer experience.
Firms can create this type of value by developing modular components, creating digital components that can be reused, automating processes, and becoming more open and agile.
3.Value from ecosystems.
This includes revenue from a company’s ecosystem participants plus new value from customers and operations through partnering.
This type is the most overlooked, or deferred as risky, but as firms move to more digitally-enabled and partner-based models, value from ecosystems becomes more important and influential on the bottom line.
Almost any firm can generate substantial value from ecosystems in which they leverage partners for both reach (to access more customers) and range (to add more products and services).
…value from ecosystems … is the most overlooked, or deferred as risky, …
… but as firms move to more digitally-enabled and partner-based models, value from ecosystems becomes more important and influential on the bottom line.
CEMEX does this with its building materials distribution network, Construrama, the largest retail building material store chain in Mexico, and in other Latin American countries where CEMEX operates.
In 2018 CEMEX launched its Construrama Online Store to continue efforts to transform the construction industry using an ecosystem approach.
Taking Action to Create Digital Value
Once you’ve got a clearer view on the different types of value, our research identifies several key actions you can take to create digital value:
- 1.Identify domain opportunities.
- 2.Build mutually-reinforcing future ready capabilities.
- 3.Track digital value with a dashboard
- 4.Recruit digital partners
- 5.Invest in digital savviness
1.Identify domain opportunities.
This means thinking beyond your industry.
Digital is about imagining what’s next, and what you didn’t think is possible, to develop entirely new value propositions for your customers.
For example, Shopify enables the domain of online business, providing a platform with partners that supports the entire customer journey, cutting across several industries.
Services include building a brand, creating an online presence, setting up a store, selling, logistics and shipping, processing payments, and managing day-to-day.
Any one of these activities could be its own business — Shopify creates value by offering an integrated solution to meet customers’ entire domain need and is now number two behind Amazon with 10.3% of U.S. retail e-commerce sales in 2021.
Any one of these activities could be its own business — Shopify creates value by offering an integrated solution to meet customers’ entire domain need and is now number two behind Amazon with 10.3% of U.S. retail e-commerce sales in 2021.
To identify domain opportunities, start by looking at your typical customer’s end-to-end journey, …
… including beyond your company’s scope, and consider how you could improve it — or even own it as a one-stop destination by partnering to add complementary services.
To identify domain opportunities, start by looking at your typical customer’s end-to-end journey, …
including beyond your company’s scope, and consider how you could improve it — or even own it as a one-stop destination by partnering to add complementary services.
2.Build mutually-reinforcing future ready capabilities.
Lots of companies fail by setting out to change their culture, often with a program dedicated to describing (or, really, prescribing) the to-be culture. This is putting the cart before the horse.
Culture is built through routines, shared values, and informal norms — the work habits of the enterprise — not by dictates and training.
This kind of habits change is better tackled by building the future ready capabilities that will help your firm create value from your digital initiatives, and by ensuring they reinforce each other.
Lots of companies fail by setting out to change their culture…
Culture is built through routines, shared values, and informal norms — the work habits of the enterprise — not by dictates and training.
For example, CEMEX integrated CEMEX Go with new systems and processes for order fulfillment and CRM, including a digital confirmation capability — an automatic review of inventory, transport, and other components of the customer journey when an order is confirmed online.
By 2022, CEMEX had automated order fulfillment for the cement product type, and was then able to build on that capability and its constituent components to automate the more complex coordination process for delivering the ready-mix concrete product type.
The complementary systems and their associated habits and processes provided mutually-reinforcing learning that accumulated over time.
3.Track digital value with a dashboard.
Dashboards can be very helpful for measuring milestones of capability and digital value creation along the way, …
… as well as for inspiring the company to stay on track, as it can often take significant time for changes to show up in the bottom line.
Effective dashboards enable everyone to see current status and progress, and to make better course corrections, helping to move from a command-and-control model to a coach-and-communication orientation.
Effective dashboards enable everyone to see current status and progress, and to make better course corrections, helping to move from a command-and-control model to a coach-and-communication orientation.
Schneider Electric’s Digital Flywheel provides a good example of the benefits of using a dashboard.
They built the flywheel to help drive their efforts to expand digital offerings to include energy efficiency management, going beyond selling energy products.
The dashboard does this by illustrating the four components of their IoT-enabled business model and capturing and tracking financial performance for each of the four individually.
But just as important, it shows how the four components work together to produce higher value and sales for the company — and increased value for clients, often measured as energy efficiency improvement.
The dashboard helped them understand how to grow this distinctive business model, which now accounts for 50% of their annual revenue of 30 billion Euros.
The dashboard helped them understand how to grow this distinctive business model, which now accounts for 50% of their annual revenue of 30 billion Euros.
4.Recruit digital partners.
Partnering is not the goal, but rather a way for future ready firms to achieve their goal of creating value from ecosystems.
Digital partners can help increase a company’s reach and range through digital connections.
Look at companies like Zillow that are finding new ways to meet customers’ needs in the home buying journey.
They started with helping customers locate a home, but the journey soon spanned six or more industries such as insurance and finance.
Bringing in partners like real estate agents, mortgage brokers, and lawyers, and providing many of those services digitally as an integrated offering, makes that home buying journey simpler and a better experience. And it creates opportunities for Zillow to capture more value from the transaction spend.
Partnering is not the goal, but rather a way for future ready firms to achieve their goal of creating value from ecosystems.
Digital partners can help increase a company’s reach and range through digital connections.
5.Invest in digital savviness.
Digitally savvy firms don’t have an “us vs. them” or a finger-pointing mentality between IT/digital and rest of the organization.
Everyone aspires to be digitally savvy from the board to new hires. There is joint accountability for the benefits (innovation) and the risks (outages and cyber attacks).
DBS in Singapore decided early on in its transformation to foster digital savviness throughout the entire enterprise, with initiatives such as embedding innovation advocates in each business unit, implementing agile practices, training to reskill and upskill employees, and promoting hands-on experience with technology.
Digitally savvy firms don’t have an “us vs. them” or a finger-pointing mentality between IT/digital and rest of the organization.
Everyone aspires to be digitally savvy from the board to new hires. There is joint accountability for the benefits (innovation) and the risks (outages and cyber attacks).
The digital wave continues and it is easy to get swept away in the flood of transformation initiatives.
But in order to become truly future ready — and to avoid leaving substantial money on the table — stay focused on specific ways to create and capture digital value, and track that value for all to see.
… in order to become truly future ready — and to avoid leaving substantial money on the table — stay focused on specific ways to create and capture digital value, and track that value for all to see.
Originally published at https://hbr.org on October 21, 2022.
About the authors & affiliations:
Stephanie L. Woerner is Principal Research Scientist at the MIT Sloan School of Management and Director of MIT CISR. She is a renowned researcher and speaker, and coauthor of Future Ready: The Four Pathways to Capturing Digital Value and What’s Your Digital Business Model? Six Questions to Help You Build the Next-Generation Enterprise, both published by Harvard Business Review Press.
Dr. Peter Weill is a Senior Research Scientist at the MIT Sloan School of Management and Chairman Emeritus of the Center for Information Systems Research (CISR) .
Dr. Ina M. Sebastian is a Research Scientist at the MIT Sloan Center for Information Systems Research (MIT CISR). Ina studies how large enterprises transform for success in the digital economy. Her current research areas are digital partnering (including strategies to grow with digital partners and partnering strength), and value creation and value capture in digital models. In previous research projects at MIT CISR, Ina focused on ecosystem business models, digital strategies and organizational redesign, and digital workplace and talent.
Originally published at https://hbr.org
