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Vallabh Sambamurthy & Robert W. Zmud

Guiding the Digital Transformation of Organizations - Second Edition

© 2017 Legerity Digital Press

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ISBN 978-0-9857955-9-7

Value Pathways

Chapter

12

Guiding the Digital Transformation of Organizations By Vallabh Sambamurthy and Robert W. Zmud

Second Edition Copyright © 2017

First Edition Copyright © 2012

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ISBN 978-0-9857955-9-7

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Chapter 12. Value Pathways

Invariably, or so it seems, the proponents of a newly-conceived digital

investment believe that the best way to gain support for this investment is to claim

that it will provide their organization with a competitive advantage. In reality, few

digital investments provide the investing organization with a competitive advantage.

Instead, most digital investments are aimed at improving – usually in an incremental

rather than radical fashion – the functionalities already present on digital platforms

or on business platforms.

Consider, for example, a bank’s mobile personal banking solution, or a retail

store’s self-checkout system, or an airline’s mobile check-in application. The very

first introduction of such functionalities provided the investing organization with a

(typically short-lived) competitive advantage. But, once a novel digitalized

functionality is found to be well-received by market participants, imitative

investments by competitors return the market ecosystem to a competitive parity and

are not considered as initiatives taken to gain a competitive advantage. Further,

ensuing investments taken to improve the efficiency or effectiveness of either this

functionality or of the platform hosting the functionality typically have slight, if any,

competitive impact. Of course, a stream of incremental improvements taken over a

period of time may accumulate into a significant competitive advantage, especially

as these investments build on one another – but any one of these investments by

itself is unlikely to produce a competitive advantage.

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As a rule, justifying any type of investment on unsound grounds just does not

work. Or, worse, the pitch seemingly does work, but only to set expectations that

can never be met.

Organizations undertake digital investments for a variety of reasons. Building

off of the strategic focus concept, each of the topics of this chapter describes one of

six value pathways that collectively reflect how value is created through digitization

and/or digitalization:

 Mandate Value Pathway

 Digital Platform Renewal Value Pathway

 Business Platform Enhancement Value Pathway

 Competitive Necessity Value Pathway

 Competitive Advantage Value Pathway

 Options Generator Value Pathway

Mandate Value Pathway

Organizations regularly make digital investments in response to mandates, or

directives, by external parties. Table 12-1 lists the sources (along with examples) of

many of the mandates imposed on U.S. organizations. Some of these mandates

reflect the requirement to regularly modify installed digital platforms and business

platforms (e.g., accounting system revisions emanating from annual state and federal

tax law changes, the seemingly weekly Microsoft Windows security updates, etc.).

Other mandates occur infrequently, such as changes required in publicly-owned

organizations’ financial reporting systems in response to new governmental

legislation, such as the Sarbanes-Oxley Act of 2002, or the demand imposed on a

producer by a powerful consumer (e.g., a big box retailer) to modify the producer’s

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downstream-facing business processes. The digital investments associated with the

mandate value pathway are directed toward reducing an organization’s risk

exposure. In other words, by complying with the mandate, the organization reduces

its susceptibility to non-compliance penalties, to possible lawsuits or to lost revenues.

Table 12-1

Sources of Digitalization Mandates

Mandate Source Examples

Federal & State Regulators

• SEC Sarbanes-Oxley requirements • EPA requirements • Privacy requirements

Federal & State Agencies

• Tax agency rules and regulations • Social Security Administration rules

& regulations

External Auditors • Internal control requirements • Business continuity requirements

Technology Vendors • Software upgrades • Hardware upgrades

Strategic Partners • Interorganizational data flows • Interfacing business platform • Interfacing digital platform

Figure 12-1 illustrates this mandate value pathway. There are two primary

(but often intertwined) ways by which digital investments address external

mandates. First, digital investments can remove deficiencies in the business

platforms or specific business processes affected by a mandate. An example of such

a deficiency would be efforts taken to bolster the internal controls built into

accounting or financial information systems in response to Sarbanes-Oxley

regulations. Second, the digital platforms (or the technical services being executed)

enabling these business platforms can be enhanced. For example, another aspect of

the Sarbanes-Oxley regulations involves the necessity of building operational

redundancies into the digital platforms hosting accounting and financial systems to

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ensure that these systems continue to operate if and when hardware devices,

software systems or networks fail or are crippled.

Figure 12-1 Mandate Value Pathway

Business Processes

Digital Platform(s)

Compliance with

Mandates

Reduced Risk

Exposure

Investment

Business Platform(s)

Digital Platform Renewal Value Pathway

The digital platform renewal value pathway refers to the regular

refreshing of hardware and software technologies that leverage the performance-

price advances experienced with digital technologies and that broaden and deepen

an organization’s digitization/digitalization capabilities. Two avenues typify how the

digital platform renewal value pathway contributes to organizations’ financial

performance improvement (see Figure 12-2). First, upgrading the technology

services used in enabling or supporting business platforms can translate into

operational efficiencies. A common example might involve upgrading the dedicated

servers supporting an Internet sales platform, thereby reducing the per-transaction-

cost of handling an Internet sale. Second, if a digital platform overhaul is broad and

deep, then associated meaningful overall cost-structure improvements may result.

For example, externally sourcing the operation and ownership of an organization’s

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data centers may reduce the organization’s asset base (e.g., installed digital

technologies, technology professional staff engaged in operating and maintaining

these technologies, etc.) such that a meaningful improvement in the organization’s

return-on-assets metric is observed.

Figure 12-2

Digital Platform Renewal Value Pathway

Business Processes

Digital Platform(s)

Enhanced Business Platforms

Improved Financial

Performance

Investment

Business Platform Enhancement Value Pathway

The business platform enhancement value pathway (the most common

of the value pathways) involves investments aimed at producing significant (most-

often, incremental) improvements to existing business platforms. As depicted in

Figure 12-3, these business platform enhancements are directed at automating

operational and managerial processes, at improving the efficiency and effectiveness

of these processes, and at more fully tapping into the innate talents of the humans

engaged with these processes. Examples might include: providing customers with a

greater variety of ordering or payment options, providing managers with more timely

and accurate data on work-in-process statuses, making it easier for patients at a

medical clinic to update their personal data and medical histories, etc.

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Figure 12-3 Business Platform Enhancement Value Pathway

Business Processes

Digital Platform(s)

Business Platform

Enhancement

Improved Financial

Performance

Investment

Business Platform(s)

Human Capital

Competitive Necessity Value Pathway

The competitive necessity value pathway reflects organizations’ digital

investments taken in response to competitors’ actions. These responses are most

commonly undertaken for one of two reasons. The first reason refers to an

organization formulating and implementing a competitive action after a key

competitor has struck an action that meaningfully diminishes the organization’s

executing business model. In the absence of a responsive action to enhance – or

replace – this executing business model, some degradation of the organization’s

market position, i.e., market share, reputation, etc., is sure to occur.

The second reason refers to an organization enhancing the business processes

executing on its business platform such that these business processes meet or exceed

what are now recognized as best practices within a market ecosystem within which

the organization participates. Best practices represent the operational and

managerial processes that need to be executed if an organization is to maintain its

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competitiveness within a market ecosystem. In the absence of best-practice business

processes, some degradation of an organization’s market position is sure to occur.

While a competitive necessity digital investment might have produced short-

term financial performance gains for first-movers, the value of the investment for

most market-ecosystem participants is derived from reducing the competitive risk

exposure that would otherwise arise (see Figure 12-4).

Figure 12-4 Competitive Necessity Value Pathway

Business Processes

Digital Platform(s)

Business Model Enhancement

or Business Platform

Enhancement

Reduced Risk

Exposure

Investment

Business Platform(s)

Human Capital

Competitive Advantage Value Pathway

Some organizations, typically market ecosystem leaders aggressive in their

use of digital technologies and with a high level of digitalization capabilities,

undertake investments aimed at creating business models that will dramatically

differentiate themselves from rivals. While the risks (lowered likelihoods of success

along with high implementation costs) of being a first-mover dissuade many

organizations from such strategies, successful competitive-advantage investments

can provide an organization with significant short-term financial returns and, if the

gained-advantage is sustained, significant long-term financial returns.

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There are two major tactics followed in applying the competitive advantage

value pathway (see Figure 12-5): building sets of distinctive information capabilities

(most frequently for controlling work activities and/or empowering employees or

customers), and building sets of distinctive business processes. Innovative

information capabilities and innovative business processes, when well-targeted and

well-executed, can enable business models whose value propositions and profit

models go well beyond those being executed by their competitors.

Figure 12-5 Competitive Advantage Value Pathway

Distinctive Business Processes

Digital Platform(s)

Business Model Enhancement

or Business Model

Innovation

Financial Performance Improvement

Investment

Business Platform(s)

Distinctive Human Capital

Distinctive Information Capabilities

Progressive Insurance serves as a vivid example of how enhancing information

capabilities can empower market ecosystem participants and, in turn, dramatically

disrupt the ecosystem. Traditionally in the automobile insurance industry, customers

were given a phone number to call to report an accident involving their insured

automobile. During this call, the customer was assigned a claim number and asked

to visit the insurer’s claim center at a pre-appointed time. At that date and time, the

insurer’s claims adjuster examined the damaged vehicle, determined the extent to

which damages would be covered, and approved a certain payment to the customer.

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Customers experienced a variety of delays with this business model, the most

important of which were delays in gaining repair approval and receiving payment

from the insurance company.

Progressive Insurance innovatively used digitalization to execute a very

different business model. Roving claims adjusters are able to quickly arrive at an

accident site (usually within fifteen minutes) and, once at the site, use mobile

technologies to register the claim and look up data about the customer, the policy,

and repair histories for the damaged automobile. Finally, while still at the accident

site, the claims adjuster is able to arrange for the automobile to be repaired or to

provide immediate payment to the customer. Progressive Insurance has aggressively

sought ways to empower their employees and, in the process of doing so, distinguish

themselves from other automobile insurance companies.

The other primary tactic for using digitalization to differentiate an organization

competitively involves executing distinctive business processes that fundamentally

change the nature of competition within a market ecosystem. To a large extent, the

business model put into play by Progressive Insurance has done just this. Another

vivid example comes from what might be seen as an unexpected market ecosystem

– the cement industry.

In the mid-1990s, Cemex, a Mexican cement manufacturer, realized that it

was stuck in a commodity business in which price was the primary basis of

competition and where prevailing best practices found cement manufacturers

guaranteeing building-site cement deliveries within a three-hour time window. In

the process of devising a strategy for growing both sales and margins, Cemex realized

that their larger customers would be willing to pay a higher price for ready-to-pour

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concrete if guarantees were provided that the concrete would be delivered

consistently and reliably within a twenty-minute time window.

Sensing their ability to move into a previously nonexistent market niche,

Cemex built three distinctive business processes for their large customers:

 A convenient, responsive and changeable ordering process through which

contractors provide project details, including dates and times when specific mixes of ready-to-pour concrete are needed.

 A coordinated manufacturing/delivery planning process enabling Cemex to

schedule when trucks should leave a manufacturing facility loaded with the appropriate mixes of ready-to-pour concrete in order to meet the delivery

guarantee.

 A dynamic operational delivery process able to automatically adjust delivery schedules and routes based on weather and traffic conditions, as well as

developments occurring at a building-site.

These new business processes required numerous digitalization investments.

Internet portals were used to provide customers a convenient, easy-to-use means of

placing orders. Delivery trucks were equipped with two-way radios so that a dispatch

center could continually re-route trucks to destinations, if necessary. Satellite space

was leased to facilitate communication and coordination between manufacturing

facilities and trucks across wide geographic areas. Automated decision systems were

implemented that used continually-updated weather and traffic conditions to adjust

manufacturing and delivery schedules. As a result, Cemex has changed the basis of

competition in the cement industry, becoming a leading global competitor.

Options Generator Value Pathway

The options generator value pathway finds an organization investing in

new digitization and/or digitalization capabilities and recognizing up-front that:

although the anticipated near-term benefits will not cover investment costs, the

newly-acquired capabilities will provide the means for obtaining future benefits.

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Importantly, while some of these future benefits might be clearly envisioned at the

time of the investment, most are not. Typically, then, while the options generator

value pathway provides some immediate financial performance improvements, the

primary investment motivation is to create options for taking yet-to-be-determined

competitive actions – thereby reducing the investing organization’s long-term

competitive risk exposure (see Figure 12-6).

Figure 12-6 Options Generator Value Pathway

Future Digitalization Capabilities

Digital Platform(s)

Future Business

Platforms

Reduced Risk Exposure

Investment

Business Platform(s)

Future Digitization Capabilities

Financial Performance Improvement

Consider, for example, a full-service financial services organization such as

Bank of America. In deciding to offer its customers a suite of mobile personal banking

services, two approaches might be taken. With the first approach, the bank might

introduce the needed digital platforms and business platforms via a piece-by-piece

basis, fully justifying associated investments as each new set of new mobile banking

services is introduced. Following such a strategy, the first banking service

implemented might enable customers to check the status of checking and savings

accounts from a smartphone or tablet. This might be followed, in turn, by

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implementing services enabling customers to: transfer funds between accounts,

deposit checks, pay a bill, send money to someone else, or link to an investment

account, etc. The advantage of such a piece-by-piece approach is that the

investment required to offer each new mobile banking service is relatively small. The

disadvantage is that fundamental changes might be required for already-installed

digital and business platforms with each subsequent step, resulting in high overall

investment costs.

With the second approach, the bank makes a larger initial digitalization

investment to build a robust (scalable, adaptable, secure, etc.) mobile banking

platform from which just about any type of mobile banking service could be launched.

Building this robust banking platform generates many future options (i.e., the

capability to launch a variety of services, flexibility in deciding when to launch a

specific service, flexibility regarding the nature of each launched service, the ability

to easily change the nature of an already-launched service, etc.). The advantage of

this second approach is two-fold: the strategic flexibility provided, and the likelihood

that the total cost of launching a complete set of mobile banking services will be

lower than that experienced through the step-by-step approach. The primary

disadvantages include the much larger initial investment (an investment that might

never be fully recovered if only a few mobile banking services are actually launched

from the platform) and the delay experienced in launching an initial set of banking

services.

A Recap and Look Ahead

Awareness of the six value pathways described in this chapter should make it

easier for you to both explain to others the justification for a digital investment that

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you support and understand the justifications made by others for the investments

that they support. You may find that a single value pathway captures the essence of

a proposed investment. Or, as more often is the case, you may find that multiple

value pathways need to be combined in order to paint a complete picture of a

proposed investment’s bottom-line impact:

 An initiative proposed to meet the requirements of an external mandate might also upgrade certain digital platform components and incrementally

enhance the affected business processes.

 An initiative proposed to meet the demands of a powerful customer might

introduce new digitization capabilities likely to prove invaluable, both now and in the future, in enhancing numerous other business platforms.

Tracing through the distinct value pathways involved in such proposals are sure to

suggest ways to embellish a storyline, with each of these embellishments appealing

to different stakeholders.

Generally, however, convincing others to support an investment proposal

requires more than providing an understandable storyline. Organizations’ investment

funds tend to be a scarce resource, with numerous proposals competing for a limited

resource pool. An effective investment proposal must be both understandable and

persuasive. What is involved in building a persuasive business case for a digital

investment is covered next.

GLOSSARY

Business platform enhancement value pathway – digital investments are

directed toward making significant improvements to the operational and managerial processes being hosted on existing business platforms.

Competitive advantage value pathway – digital investments are directed toward creating business models aimed at dramatically differentiating themselves from rivals.

Competitive necessity value pathway – digital investments are directed toward either enabling an organization to respond to a competitor’s actions or enabling an

organization to meet or exceed what are considered to be best practices within a market ecosystem in which the organization participates.

Digital platform renewal value pathway – digital investments are directed toward

refreshing the hardware and software artifacts that comprise a digital platform as a means of broadening and deepening an organization’s digitization and digitalization

capabilities.

Mandate value pathway – digital investments are directed toward reducing an organization’s risk exposure associated with not complying with a statutory

requirement.

Options generator value pathway – digital investments are directed toward

providing the means for obtaining future benefits (which may or may not be clearly envisioned at the time of the investment), recognizing the anticipated near-term

benefits will not cover investment costs.

Value pathway – a common way by which value is created through digitization and through digitalization.