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Get Ready for Digital Business With the Digital Business Development Path Published: 23 June 2014

Analyst(s): Jorge Lopez, Patrick Meehan, Stephen Prentice, Mark Raskino, Chris Howard, David A. Willis

Digital business is the creation of new business designs by blurring the digital and physical worlds. CIOs and IT leaders can use this framework to identify the current state of the business, determine the future state and gauge the change required to become a digital business.

Key Findings ■ CEOs and other leaders don't have a framework to guide their journey into digital business.

■ While many businesses call themselves digital businesses, Gartner's digital business survey reveals that most have yet to graduate to being digital businesses and are instead operating as e-businesses and digital marketing businesses. This lack of awareness makes them vulnerable to digital business competitors.

■ Today, 41% of businesses say their greatest focus is on digital marketing, according to the same survey. Fully 50% of businesses expect to be digital businesses in 24 months, which will include 75% of those currently in digital marketing businesses only.

Recommendations CIOs and IT leaders:

■ Use the Digital Business Development Path to build the map that takes your organization from its current status as an e-business or digital marketing business, to a digital business.

■ In addition to understanding your current business model, identify the leverage points for revenue growth that could exist in a digital business scenario. For example, the disruptive capabilities of 3D printing could be useful in a complete redesign of how supply chains work.

■ In briefings to the board of directors on digital business, clearly describe the high amount of cultural change that will be required.

■ Start planning for the infrastructure to support fully autonomous systems.

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Table of Contents

Strategic Planning Assumption............................................................................................................... 2

Analysis..................................................................................................................................................2

What Does It Mean to Be a Digital Business?................................................................................... 2

Six Business Era Models in the Digital Business Development Path.................................................. 5

How to Use This Tool........................................................................................................................7

The Stages of Development and Recommendations to Advance......................................................7

Gartner Recommended Reading.......................................................................................................... 10

List of Tables

Table 1. Six Business Stages Toward Becoming a Digital Business.........................................................8

List of Figures

Figure 1. CEO Survey Results on the Meaning of Digital Business.......................................................... 3

Figure 2. Current Business Status of Enterprises.................................................................................... 4

Figure 3. The Digital Business Development Path................................................................................... 6

Strategic Planning Assumption By 2020, 75% of businesses will be a digital business or will be preparing to become one.

Analysis

What Does It Mean to Be a Digital Business?

Digital business is the creation of new business designs by blurring the digital and physical worlds. It promises to usher in an unprecedented convergence of people, business and things that disrupts existing business models — even those born of the Internet, e-business and digital marketing eras. By 2020, more than 7 billion people and businesses, and at least 35 billion devices, will be connected to the Internet. With people, businesses and things communicating, transacting and even negotiating with one another, a new world comes into being — the world of digital business. Businesses that succeed in this new and disruptive world will be the ones that can capture the combined power of people, businesses and things by picturing how new value is created. CIOs who ignore the potential of digital business will find themselves losing relevance in the enterprise.

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When we asked CEOs, "What do you mean when you think about 'digital business' in the context of your business and industry?" the answers covered a range that includes all the older ways of doing business, any ways of doing e-business, and finally, areas of digital marketing and digital business. In sum, no definition at all among the leaders of today's businesses emerged from their collective responses (see Figure 1 and "The 2014 Gartner CEO and Senior Executive Survey: 'Risk-On' Attitudes Will Accelerate Digital Business").

Figure 1. CEO Survey Results on the Meaning of Digital Business

M2M = machine to machine

Source: Gartner (June 2014)

A more orderly picture emerged when we asked about the structure of the Digital Business Development Path. In a digital business survey, we asked, "Which level best describes your

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organization's business today?" (see Figure 2, and the Evidence section for the survey methodology).

Figure 2. Current Business Status of Enterprises

Analog business 1%

Web-based business

24%

E-business 12%

Digital marketing 41%

Digital business 22%

Business

People

Business

People

Things

Before the Nexus of Forces 77%

People

Source: Gartner (June 2014)

The survey results provide insight on the current state of the art:

■ 22% of the survey respondents defined themselves as already being a digital business, one focused on a world where people, businesses and things communicate, interact and even negotiate with one another.

■ As expected, a large segment, 41%, defined themselves as a digital marketing business, a stage that leverages the Nexus of Forces (social, mobile, cloud and information) to build intimate relationships with their customers that advance their businesses.

■ Another 12% responded by saying they were in an e-business, that powerful disruption wrought by the World Wide Web in the 1990s.

■ Finally, nearly 25% of the respondents said they were in a Web business, with the final 1% saying they were in an analog business — one that predated the Web.

The insight this provides for CIOs, business executives and planners is highly valuable. At one moment, two things are addressed:

1. Clarity on the current position — Rather than fall into the dangerous trap that everyone, and everything, is somehow "digital," the CIO and planners can now see more clearly that, even if

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they are a very successful e-business (for example), a new entrant leveraging the capabilities of a digital business can make their current model irrelevant.

2. A means for classifying competitors — For many industries, the competitive landscape is fluid, inviting new entrants, while also revitalizing the vision of existing players. This is similar to the Internet era, in which many found themselves irrelevant in the short term by their inability to capitalize on the Internet, but many other companies fully embraced the challenge of the new capabilities and rebuilt their businesses accordingly.

Six Business Era Models in the Digital Business Development Path

The Digital Business Development Path consists of a table that examines six different business era models and their characteristics (see Figure 3).

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Figure 3. The Digital Business Development Path

Analog Web E-Business Digital

Marketing Digital

Business Autonomous

Focus

Build relationships that

drive business or lower cost

Extend relationships into new markets or

geographies

Transform sales channel into a

global medium to drive efficiencies

Exploit the nexus to drive greater

efficiency

Extend potential customers from people to things

Smart, semiautonomous things become the primary "customer"

Outcomes Optimize

relationships Extend

relationships Optimize channels

Optimize interactions

Build new business models

Maximize retention of and relationships

with things

Entities

Disruptions Emerging

technologies

Internet and digital

technologies

Automation of business operations

Deeper customer relationships,

analytics

Creation of new value and new nonhuman

customers

Smart machines and things

as customers

Technologies ERP, CRM

CRM, Web

EDI, BI,

portals

Mobile, big data,

social

Sensors, 3D printing,

smart machines

Robotics, smarter machines,

automation

After the Nexus of ForcesBefore the Nexus of ForcesBefore the Web

Business

People

Business

People

Business

PeoplePeople

Business

People

Things

Business

People

Things

Change of kind Change of degree

BI = business intelligence; EDI = electronic data interchange

Source: Gartner (June 2014)

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This will help CIOs make the case for digital business investments. The characteristics are divided into five segments:

1. Focus — The business focus of a particular model, usually stated as a goal for optimization. Sometimes, these were internally focused as internal productivity improvements drove cost savings. For example, the analog business model has a focus to build relationships that drive business revenues or drive lower cost.

2. Outcomes — This contains the outcomes expected from a particular model, starting with the optimization of relationships and going to the optimization of the relationship with things.

3. Entities — This catalogs the specific entities that make up the value networks on the Internet. For analog business, it is about how people served as a proxy for things and even business. For Web business, e-business and digital marketing, it is about people and business, how they transact with one another. For digital business and beyond, it is about the three entities of people, business and things, integrated together. This new and disruptive landscape, spawned from the explosive growth in the Internet of Things, creates new businesses and new industries. It also creates new career opportunities for CIOs to influence their businesses.

4. Disruptions — This seeks to identify the mechanism by which industry disruption is waged. For example, the focus of digital marketing on deepening relationships with the business and its customers through technologies that consumers used posed a disruptive wave for several industries.

5. Technologies — This identifies technologies that enable a particular business era model, which will be of intense interest to those seeking to improve their overall performance.

How to Use This Tool

The Digital Business Development Path is designed to help companies clearly see their current business, and then to identify the ultimate destination. For example, a company in e-business today seeking to transform into a digital business will require the support of top management and board of directors, given the complexities of integrating with the world of digital business. CIOs and IT leaders should use this tool to help communicate with peers, the team and the board of directors.

The Stages of Development and Recommendations to Advance

Table 1 describes the business era models as stages toward digital business, and provides recommendations for advancing the business.

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Table 1. Six Business Stages Toward Becoming a Digital Business

Business Stage

Description Recommendation

Analog business

This stage of development is at the height of business prior to the appearance of the Internet. This stage focuses on optimizing the performance of business relationships, working on improving revenue or reducing costs. If there is any use of the Internet at all, it is so that the employees of the business can communicate among themselves or to key suppliers and customers. The business can be disrupted by new technologies, such as mobile, social or business analytics, which provide greater insights on business operations. While generally not using the latest in technology, this business is not, in any manner, unsophisticated. It can have very good reasons for avoiding the Internet.

Before deciding to move away from an analog business era model, CIOs should have a clear idea for how to make a profit from customers and how moving to a more advanced approach will build on current success. CIOs should be careful when a current advantage is due to a government regulation that is about to expire. So that should be included in a catalog of threats and weaknesses in the CIO's analysis.

Web business

In this stage, the business has erected a presence on the Internet for announcing its existence and providing relevant facts and contact information. The attributes of this level of business are: ■ The business is engaged in making its presence

known to increase its business volumes by increasing personal traffic, phone calls or email.

■ Moving to this is a "change in kind," a change that is much more than just doing something better, faster or cheaper. The appearance of businesses on the Web added a new entity with a new purpose.

■ Many businesses are still in this mode. The reasons for being in this arena are many, including:

■ A business model that does not require massive communications to be sustained. It may be a government license to operate that grants an effective monopoly for purposes that range from the political to the practical.

■ A mandate that considers Internet connection too risky for security purposes.

■ A business that is in parts of the world where Internet infrastructure is not yet available with enough reliability or security to operate.

The sophistication of a business in this stage can be, otherwise, at the very top of capabilities. The risk, of course, is that, by remaining in this stage, the business exposes itself to disruption by competitors that have leveraged the capabilities and economics of a globally connected world.

The CIO and the board of directors should be informed that advancing from a Web business to more- advanced models will require a massive change in culture. Digital business should be approached in an incremental manner, starting with e-business, incorporating digital marketing and finishing with a move to digital business.

E-business In this stage, the disciplines and goals of the analog business achieve greater performance when combined with the reach

For many CIOs and e-businesses, it will be important to critically

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Business Stage

Description Recommendation

and ubiquity of the Internet. For many businesses, e- business is the greatest expression of their success. For many, it will continue to be so until a business utilizing digital business strategies invades their space. The attributes are: ■ The key to e-business is not only the focus on

relationships, but also integration. It achieves through the use of the Internet what businesses found difficult to do — leverage the extraordinary reach and ubiquity of the Internet to achieve performance capabilities not achieved in prior art.

■ An e-business exploits the reach, availability and ubiquity of the Internet to connect customers and businesses together.

evaluate the move to digital business, if only because there may still be a substantial window in time, for some industries, where a digital business will not appear within the three- to five-year time frame. Further e-business investments will be required to sustain the revenue streams through that period.

Digital marketing

Consumers have declared their mobile devices and social networks as preferred gateways to companies. This has affected nearly every marketing discipline as consumers exercise enormous influence on brands, markets, products and even pricing. In the predigital age, brands were filters of information. Today, the digitally oriented chief marketing officer (CMO) wrestles with a world where consumers have more influence than ever. Harnessing that influence and using it to grow the company is the single biggest challenge that digital CMOs and chief digital officers face. Some attributes are: ■ Digital marketing transforms the relationship a

company has with its customers, building on a preferred technology platform.

■ The advent of digital marketing has disrupted the entire field of marketing by gaining more intimacy with customers than was possible through prior art.

Investments in digital marketing will continue to provide the returns sought during the next few years. The level of investment from the rest of the industry will probably continue to escalate.

Digital business

Digital business promises to usher in an unprecedented convergence of people, business and things that disrupts existing business models — even those born of the Internet and e-business eras. Some of the attributes of digital business are: ■ Things become agents for themselves, for people

and for businesses. The added connectivity, communications and intelligence of things make many of them agents for services that are currently requested and delivered through people.

■ The business creates "business moments" — a transient opportunity that is exploited dynamically — and is dynamic and responsive to them, based on the current context.

These are the early days of this transformation, so the most important task for the CIO is to devote time and resources to learning as much as possible about how digital business provides the means to change how the company does business, and then to test these ideas to find the ones that will have the greatest impact on the industry. CIOs should be on the lookout for ideas that create new industries. This has occurred in other parts of business, such as when Apple created the smartphone industry.

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Business Stage

Description Recommendation

■ Nearly all physical and virtual assets in the value chain are digitalized. Intelligent things are incorporated into end-to-end processes.

■ Digital business represents another change in kind. With the introduction of the Internet of Things, the world after digital business is substantially different from that before it.

Autonomous systems

The final stop for the Digital Business Development Path is part of the steady improvement in the intelligence that is embedded in the Internet of Things. Already, many parts of people's lives are affected by the rise of autonomous systems. Autonomous vehicles are already a reality in industries such as mining and defense, and will proliferate and have autonomous systems communicating within them. In addition to the self-managing parts of these devices, there will be marked improvements in the ability of these systems to negotiate in the sphere of digital business. Some of the attributes of an autonomous age of business are: ■ The goal is to optimize the retention of and the

relationship with things.

■ There are levels of autonomy that include self- managing and self-healing.

The key to managing autonomous systems is to realize they are increasingly independent and will be attracted by offers that benefit their sense of mission and of economic return.

Source: Gartner (June 2014)

Gartner Recommended Reading Some documents may not be available as part of your current Gartner subscription.

"Agenda Overview for Digital Business, 2014"

"Internet of Things Scenario: When Things Negotiate"

Evidence

Gartner fielded 356 surveys in a research study between March and May 2014 to determine how businesses and institutions understand, identify and exploit the new opportunities that digital business represents. Surveys were conducted through a combination of online and telephone methodologies among organizations that use digital marketing techniques or that have implemented or currently plan implementation of some digital business activities.

These definitions were presented:

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■ Gartner defines "digital marketing" as a set of techniques, enabled by technology (such as social, mobile, analytics and big data), which allows businesses to engage in a dynamic conversation with people who are influencers and buyers, and ultimately, to target, acquire and retain customers.

■ Digital business is, however, the creation of new business designs that not only connect people and businesses, but also connect people, businesses and things (physical objects that are active players and contribute to business value) to drive revenue and efficiency. Examples include the use of sensors, asset tracking, smart machines, smart grids, 3D printing and robotics, smart cities, and drone delivery.

A total of 356 surveys was distributed in the U.S. (203 respondents), the U.K. (52), Germany (50) and Australia (51). Respondents were screened for involvement in their organizations' digital business activities.

Companies were required to have more than $250 million in 2012 annual revenue, and operate in one of the following industries: manufacturing, retail, government, healthcare provider, banking, insurance or communications, media, and services.

The survey was developed collaboratively by a team of Gartner analysts who follow the executive leadership market and was reviewed, tested and administered by Gartner's Research Data and Analytics (RDA) team. The results of this study are representative of the respondent base and not necessarily the market as a whole.