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Vallabh Sambamurthy & Robert W. Zmud

Guiding the Digital Transformation of Organizations - Second Edition

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Strategic Focus

Chapter

11

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 11. Strategic Focus

The abilities to recognize valuable digital opportunities and to explain to others

the rationales that underlay these opportunities are important skills for all managers.

Twenty-five years ago, relatively few senior managers found themselves involved

with digital investment decisions as such decisions, to a large extent, were handled

by organizations’ technology executives and managers. But, things have

dramatically changed.69 In 1987, for example, U.S. corporations’ investment in

digital technologies per employee averaged around $1,500. By 2004, that amount

had more than tripled to over $5,000 per employee. Today, U.S. corporations spend

more on digital technologies each year as they do on offices, warehouses and

equipment.

Why this increased spending on digital technologies? There are two rather

obvious answers. First, the traditional form of industrial economies, the pipeline

ecosystem, has been extensively digitized and digitalized. Digitization refers to the

purely technical processes associated with converting sensed and captured data into

binary digits, storing and transmitting these data, and both performing operations on

these data and storing/transmitting the outcomes of these operations; and,

digitalization refers to the application of digitization within organizations and the

social and economic contexts within which these organizations are embedded. As

depicted in Figure 11-1, a pipeline ecosystem finds a producer (actually, many

competing producers) offering products and services to a consumer community

69 A. McAfee, “Mastering the Three Worlds of Information Technology,” Harvard

Business Review, November/December 2006, p. 141.

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(typically comprised of multiple consumer segments) and fashioning a linear value

stream involving numerous upstream (e.g., raw material suppliers, component

suppliers, etc.) and downstream (e.g., distributors, retailers, etc.) participants.

Increasingly, the operational and managerial processes being executed across this

value stream are digitalized and hosted on business platforms, which in turn are

enabled through technology services provided through digital platforms.

Figure 11-1 The Pipeline Ecosystem

ConsumersProducer IntermediariesIntermediaries

Markets

Material & Component Suppliers

Markets

Upstream Midstream Downstream

Second, digitization and digitalization are spawning new forms of economic

organization, the most significant of which is the network ecosystem. As depicted in

Figure 11-2, a network ecosystem finds an organization – referred to as the

network orchestrator – designing, operating and evolving a market platform

(comprised of digital platforms and business platforms) that brings together multiple

communities to exchange information, products and services. Within a network

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ecosystem, the vast majority of market-related, participant interactions (within a

community and between communities) occur through this market platform.

Figure 11-2 The Network Ecosystem

Producer Network

Consumer Network

Market

Network Orchestrator

Markets

Intermediaries

Material & Component Suppliers

Markets

Upstream Midstream Downstream

The extensive digitalization of pipeline ecosystems and of network ecosystems

has resulted in exceptional competitive successes being enjoyed by organizations

possessing finely-tuned digitalization capabilities. However, spending on

digitalization has reached heights where it cannot be ignored by organizations’ most

senior executives. Unrestrained spending on digitalization is most certainly a thing

of the past, if it ever existed at all.

Two researchers, Andrew McAfee and Erik Brynjolfsson, after analyzing data

about digitalization investment and organization performance, have made two

particularly striking observations useful in grasping how and when digital investments

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produce significant value for the investing organization.70 First, more-digitalized

firms tend to operate in more-turbulent business environments. When you think

about it, this is quite intuitive as organizations facing turbulent environments are

likely to stand the most to gain from the speed and response advantages of

digitalization. Second, McAfee and Brynjolfsson found:

 With more-digitalized organizations, higher-performing organizations achieved about a 50% higher average gross margin than lower-performing

organizations.

 With less-digitalized organizations, higher-performing organizations achieved

about a 20% higher average gross margin than lower-performing organizations.

Clearly, the performance implications from making the right digitalization investment

decisions at the right time are much more important for more-digitalized

organizations than for less-digitalized organizations.

What should you take away from these observations? First, not all of today’s

organizations need to invest in risky digitalization projects. If your competitive

environment is relatively stable (i.e., products, services, processes, facilities and

equipment, and market participants change rather slowly), you are generally better

off delaying a digital investment until other organizations have convincingly

demonstrated the value of the investment. Second, while digitalization can deliver

significant performance gains, the majority of these gains flow to those organizations

that have invested most heavily in digitalization. Importantly, the organizations

investing most heavily in digitalization are likely to have developed strong digitization

capabilities and, perhaps more important, strong digitalization capabilities.

70 A. McAfee and E. Brynjolfsson, “Investing in the IT that Makes a Competitive

Difference,” Harvard Business Review, July/August 2008, pp. 98-107.

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Digitization capabilities refer to an organization’s readiness to: apply digital

technologies, digitized content and technology services; manage digital platforms;

and, attract, manage and retain highly-skilled technology professionals.

Digitalization capabilities refer to an organization’s readiness to attract, manage

and retain individuals highly skilled in: identifying digitalization opportunities,

building and assessing business cases for digitalization investments, implementing

funded digitalization investments, managing business platforms, and achieving the

strategic aims sought through digitization.

This chapter covers what might be considered the most crucial of these

digitalization capabilities – conceptualizing and articulating the strategic focus of a

digital investment. If the proponents of a digitalization investment idea are unable

to clearly describe both their intentions and the target of these intentions, then it is

unlikely that others will be able to contribute in significant ways to the co-creation of

a digitalization proposal. Organizations lacking individuals possessing this capability

are likely to experience significant difficulties in beginning, let alone successfully

completing, digitalization initiatives. The topics covered include:

 The IT Productivity Paradox

 Strategic Focus

 Impacting Overall Financial Performance

The IT Productivity Paradox

Despite organizations’ ever-increasing investment in digitalization, consistent

evidence of positive returns from these investments has not always been apparent.

In fact, quite mixed evidence existed until the mid-1990s, which led economists to

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coin the term IT productivity paradox after Robert Solow observed, “We see

evidence of the computer age everywhere except in the productivity statistics.”71

A productivity gain occurs when it becomes possible to carry out a given

amount of work with fewer resources. Evidence of economy-wide productivity gains

from digitization are all around us. Think of your favorite airline, bank or grocer:

 Airlines offer online reservations and have built business processes for ticketless travel with self-service check-in.

 Retail banks have used their investments in ATMs and online banking to drive down the unit cost of operations in customer-facing activities.

 Retail groceries have negotiated electronic replenishment processes with their suppliers to dramatically reduce stock-outs and the cost of moving stock from the supplier through distribution centers to the retail store.

Most of these productivity gains have greatly benefited the consumer. Examples of

improvements in consumer welfare include: 24x7 product/service availability,

lower prices, less chance of a desired product being out-of-stock when you attempt

to purchase it, more product/service choice, more information (prices, availability,

reviews, etc.) about products and services, and a greater tailoring of products and

services to your specific needs.

But, many, if not most, of these gains in consumer welfare occurred without

corresponding profitability gains by the organizations investing in digitalization.

Consider, for example, the first firm in an industry to introduce a 24x7 online

customer support capability. The innovating firm may initially observe improvements

in customer satisfaction, sales growth and market share. However, if competitors

quickly take imitative actions, then a competitive equilibrium soon returns: customer

71 R. Solow, “We'd Better Watch Out,” New York Times Book Review, July 12, 1987, p.

36.

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satisfaction, sales growth and market share all return to where they were before the

innovating firm transformed the market space by providing the 24x7 online customer

support capability. Long-term, the only clear winner seems to be the consumer.

Since the mid-1990s, however, the accumulating body of economic evidence

has shown that superior decisions about when, where and how to invest in

digitalization can improve an organization’s performance across areas as diverse as

cost structures, sales growth, profit margins and stock prices. While numerous

factors are involved in explaining organization-specific performance gains, two

factors stand out above all.

First, organizations making superior digitalization decisions have invested

heavily to build and interconnect large stores of digitized content and an increasing

number of digitalized operational and managerial processes. With more content

being digitized and accessed by digitalized processes, a tipping point is reached where

new sources of business value, heretofore unavailable, arise. For example, by

bringing diverse sets of data and analytic tools to a decision-making situation, the

decision situation can be more comprehensively assessed – producing significantly

enhanced outcomes. And, by seamlessly interconnecting digitalized processes (e.g.,

interconnecting new product development processes, market research processes,

and manufacturing design processes), not only are each of the processes enhanced

but the combined effects can produce outcomes which previously were unattainable

or even unimagined. Each additional digital investment unveils a string of new

possibilities.

Second, organizations making superior decisions about digitalization have

invested heavily to increase their digitalization capabilities. As digitalization

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capabilities develop broadly and deeply across an organization, the organization’s

managers and professionals are increasingly able to combine their abilities and

experiences to identify and assess digital investments, to make savvy decisions about

which of these investments to fund, and to successfully implement the funded

investments such that anticipated benefits are realized. These digitalization

capabilities largely hinge on individuals’ abilities to envision the strategic aims sought

by a proposed digitalization investment. We examine these strategic aims next.

Strategic Focus

Adapting and extending a framework introduced initially by researchers Jeanne

Ross and Cynthia Beath, Table 11-1 identifies the four strategic focuses that are the

targets of most digitalization investments, the value drivers of each of these strategic

foci, and associated performance metrics. We begin by providing brief overviews of

the key concepts used in this table:

 A business model reflects an organization’s value-creating strategy.

 The digitized content and digitalized functionalities enabling business models are hosted on business platforms.

 Business platforms are enabled through the technology services provided by digital platforms.

 A value driver refers to a core factor underlying anticipated performance gains.

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Table 11-1 Digitalization Strategic Aims

Strategic Focus Value Drivers Performance Metrics

Digital Platform Operations & Technology

Services

• Digital technology performance-price ratios

• Digitization capabilities • Digitalization capabilities

• Costs of operations • Quality of services (security,

responsiveness, reliability, availability, scalability)

Business Platform Efficiency

• Digitization capabilities • Digitalization capabilities • Business platform first-order learning

• Transaction cycle times • Sales & general administrative costs • Inventory costs & ratios • Customer/participant support costs

Business Platform

Effectiveness

• Digitization capabilities • Digitalization capabilities • Business platform first-order learning • Market ecosystem first-order learning

• Sales revenue & market share • Customer/participant loyalty & share

of wallet

Business Model

Innovation

• Digitization capabilities • Digitalization capabilities • Business platform first-order learning • Market ecosystem first-order learning • Business platform second-order

learning • Market ecosystem second-order

learning

• Rate of new product/service introductions

• New product/services sales growth & gross margin

• Rate at which new communities are engaged

Digital Platform Operations and Technology Services

Digital investments are almost always, to some extent at least, aimed at

improving digital platform operations and services. Digital platform operations

refers to activities involved in planning, designing, running, managing and evolving

the technology services required to enable and support an organizations’ business

platforms, that in turn host organizations’ operational and managerial processes.

Examples of digital platform operational activities include: managing and operating

hundreds or thousands of servers, managing data storage devices, managing and

operating local area networks, etc. Technology services refer to the digitized

functionalities and the technical support provided to an organization’s employees

and, increasingly, to its customers and suppliers. Basic examples of such services

include: electronic mail, document copying and printing, help desks, website design,

establishing network interconnections, Internet-enabled messaging and chatting, etc.

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The incessant advances occurring with digital technologies are relentlessly

increasing these technologies’ performance-price ratios: processor speeds and

memory sizes increase, while prices decrease; storage device capacity increases,

while access times and prices decrease; communications bandwidth and speed

increase, while prices decrease, etc. As a result, organizations have found it

advantageous to regularly upgrade or replace their installed digital platforms. In

addition to upgrading and replacing digital platforms, digitalization leaders also invest

to improve the knowledge and skills of their technology professionals and,

consequently, their digitization and digitalization capabilities – enabling future

improvements aimed at digital platforms, business platforms and business models.

The distinction between investing in new digital technologies and investing to

improve digitization/digitalization capabilities is critical as it makes clear the

distinction between the value to be derived directly from installing a new digital

technology (such as new storage devices or more sophisticated data management

software) and the value obtained from deploying the digital technology in smarter

and more creative ways. Saying that you have developed a particular capability

implies that you are now able to bring together and apply a particular set of resources

to achieve a desired outcome. Most organizations are more or less equal in their

ability to acquire and install digital technologies. However, organizations are not

equally blessed with the abilities to apply these technologies in a superior manner

and, in doing so, dramatically improve an organization’s business platforms and

business models.

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Business Platform Efficiency

A second target of digitalization investments is business platform

efficiency, e.g., improving the cycle times and costs associated with one or more of

the business processes being hosted on a business platform. A specific investment

initiative might be targeted at the platform itself (affecting all of the platform’s hosted

business processes) or at a limited set of these hosted business processes.

A business process refers to a sequence of work tasks that converts inputs

into outputs, and these work-task sequences can involve operational activities,

managerial activities, or both. Business process inputs and outputs can be digital in

nature, non-digital in nature, or some combination of both. Generally, business

platform efficiency is increased as more of these inputs and outputs are digitized.

Business processes consist of operating procedures and business rules.

Operating procedures specify each of the tasks that comprise a business process

(e.g., obtaining required inputs, producing specified outputs, the nature of the

decisions and actions to be taken in transforming inputs into outputs, whom is

involved with these decisions and actions, etc.), as well as the relationships among

these tasks (e.g., which tasks must occur before other tasks can be started, how a

task’s outputs serve as inputs to other tasks, etc.). Business rules describe the

conditions that must be met when taking actions or making decisions. For example,

the creation of a purchase requisition might involve the following business rules:

 If the purchase amount is less than $500, then the requisition does not need

to be approved by a department head.

 If the purchase amount is greater than $500, but less than $5,000, then the requisition needs the approval of a department head.

 If the purchase amount is greater than $5,000, then it must be approved by

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both a department head and a divisional finance director.

Business process efficiency gains are achieved by automating (i.e., replacing

humans with digitalized solutions) and rationalizing (i.e., eliminating processing

steps, waste, errors, delays, etc.) operating procedures and business rules. Table

11-2 describes a business platform critical to the core business models of FedEx, Dell,

Walmart and Southwest Airlines. Exploiting their exceptional digitization capabilities

and digitalization capabilities, all four of these organizations fine-tuned the efficiency

of these business platforms and, as a consequence, obtained industry-leading

positions.

Table 11-2 Business Platform Efficiency Enhancement Examples

Company Business Platform Description

FedEx Package Tracking

Placing a digitized identifier on each package, installing readers throughout the logistics network, capturing the identifier & a time stamp for package movements, and maintaining these data in an accessible database.

Dell Customer Order

Scheduling

Specifying component delivery & assembly timings for a customer order and communicating these timings to suppliers & logistics partners.

Walmart Retail Store Shelf

Replenishment

Capturing & archiving product purchase activity at the retail-store level, and analyzing these purchase data to determine the replenishment cycles for restocking products at specific retail stores.

Southwest Airlines

Aircraft Ground- Handling

(Turnaround)

Maintaining accurate & timely data on aircraft arrival/departure times & passenger loads, and then scheduling (and rescheduling) aircraft servicing requirements based on these data.

Initiatives that apply digitalization to improve business platform efficiency

most often engage participants in first-order learning with regard to the targeted

business platform. First-order learning engages participants in refining their

understandings – and, as a result, the collective understanding – of a business

process, but does not substantially change the assumptions and foundational

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reasoning on which these understandings are based. Consider, for example, a

customer support business platform. First-order learning takes an organization’s

existing approach to customer support and strives to incrementally improve this

current approach as knowledge is gained about what is working well and what is not

working well. It is only natural in a well-run customer support operation to expect

customer support staff to identify problems, find solutions for these problems, and

then embed these solutions within ongoing customer support work activities. Such

incremental knowledge accumulation represents the learning curve often observed

with repetitive work activities.

Business Platform Effectiveness

A third target of digitalization investments is business platform

effectiveness, or improving the quality of the platform (e.g., convenience,

availability, security, etc.) or the quality of one or more of the hosted business

processes (e.g., ease-of-use, accuracy, responsiveness, comprehensiveness,

reliability, etc.). The value drivers for business platform effectiveness tend to be

similar to those affecting business platform efficiency, with the addition of first-order

learning about the market ecosystem within which a business operates. Learning

about a market ecosystem involves better understanding the natures of the products

and services being exchanged within the ecosystem and better understanding both

the natures of each of the communities (e.g., consumers, producers, suppliers,

intermediaries, competitors, etc.) participating in the ecosystem and the motivations

that underlie community members’ decisions to participate. Referring back to Table

11-2, FedEx, Dell, Walmart, and Southwest Airlines have each proven to be

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exceptional in their abilities to apply digitalization to improve the effectiveness of the

identified business platforms.

Business Model Innovation

The fourth target of digitalization investments involves organizations’ business

models – more precisely, initiatives focused on disrupting one or more market spaces

through business model innovation. A business model is a simplified and

aggregated conceptualization of the value-creating, profitability-sustaining activities

of an organization. Regardless of whether an organization is one of many producers

competing in the same market ecosystem or a network orchestrator that has

fashioned its own market ecosystem (typically within a market space populated by

competing market ecosystems), the organization’s business model consists of four

distinct elements:

 A value proposition defines how an organization will distinguish itself within the markets that it has chosen to participate through its ability to

attract consumers (for organizations competing in pipeline ecosystems) or the members of participating communities (for organizations competing in network ecosystems).

 A profit model consists of revenue and cost models. Revenue models describe where, when and how revenue streams materialize. Cost models

describe the costs to be borne in producing the revenue streams associated with the value proposition and how these costs will be controlled to provide requisite levels of profitability.

 Core capabilities refer to the tangible resources (e.g., facilities, machinery, digital devices, etc.) and intangible resources (e.g., people, knowledge,

operational and managerial processes, patents, architectures, etc.) needed to successfully implement the value proposition and profit model.

 Dynamic capabilities refer to the intangible resources (e.g., people,

knowledge, relationships, managerial processes, architectures, etc.) needed to (1) sense and assess opportunities for business model innovation and (2)

successfully implement these innovations.

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Figures 11-3 and 11-4, respectively, depict a business model applied by Apple and

by Walmart (both of which are pipeline organizations); and, Tables 11-3 and 11-4

depict business models applied by TopCoder and Metropia (both of which are network

organizations).

Figure 11-3

Apple’s Business Model for the Consumer Smart Device Market

Value Proposition Profit Model

Core Capabilities

Dynamic Capabilities

• Value-unit: Consumer smart digital devices • Consumer: Technically-receptive &

technically-savvy segments of the personal smart device market

• Innovative & trend-setting products • Seamless access to content across all digital

media

• High product prices driven by stimulating demand and by limiting supply

• Moderate manufacturing & marketing costs • High margins

• Brand management • Technology patents • Product design & product architecture design • Tightly-directed sales & marketing • Tightly-controlled manufacturing & logistics,

performed by third-parties • Relationships with content providers and

with manufacturing & logistics partners

• Knowledge of new digital technologies • Knowledge of evolving desires of first-

adopter consumers • Knowledge of new digital media and of new

means for accessing digital media • Knowledge of product designers & architects • Knowledge of content management

architects

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Figure 11-4 Walmart’s Business Model for the Household Goods Retail Market

Value Proposition

Profit Model

Core Capabilities

Dynamic Capabilities

• Value-unit: Household groceries & products

• Consumer: Cost-sensitive segment of the mass market

• ‘Everyday Low Prices’ • Retail store availability of a broad range

of products, enabling one-stop shopping

• Low prices, low costs • Moderate margin • High volume, high product

turnover

• Store site selection & store layout design • Tailor local inventory to local market • Shelf-space optimization (merchandizing &

replenishment) • Logistics optimization • Supplier relationships

• Knowledge of new digital technologies • Knowledge of evolving shopping-experience

desires of mass-market consumers • Knowledge of digitalization trends &

innovations in retail-store operations and in logistics

• Logistics designers & technologists • Retail store designers & technologists

Table 11-3

TopCoder’s Business Model

Business Model Element

Description

Client Community Value Proposition

Obtain quality code (e.g., tested against specifications, secure, etc.) within agreed-on schedule and budget.

Client Community Profit Model

 Clients pay subscription fee.  Clients provide contest incentives (payments to winning

developers).

Developer Community Value Proposition

Earn income, acquire new skills, demonstrate skills and interact with forward-looking technologists.

Developer Community Profit Model

No associated revenue stream (the developer community is the subsidy-side of this network ecosystem).

Core Capabilities

 Software development & software development management.  Translating software development projects into contests.  Contest design & fulfillment.  Acquiring, developing and retaining community participants.  Creating a sense of community for participants.

Dynamic Capabilities  Sensing & identifying software development trends &

innovations.  Sensing & identifying new participant sources.

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Table 11-4 Metropia’s Business Model

Business Model Element Description

Commuter Value Proposition  Provide optimal mobility solutions for going from point A to point B.  Provide reward points for contributing to the common good .

Commuter Profit Model  Subscription fees & transaction fees.

Provider Value Proposition  Gain exposure with the commuter community.  Gain revenue from servicing the commuter community.

Provider Profit Model  Negotiated mobility services costs.

Merchant Value Proposition  Build reputation with commuter community.

Merchant Profit Model  Exchange goods/services for reward points.

Government Agency Value Proposition

 Enhance commuting common good.  Obtain mobility-related data.  Obtain knowledge from Big Data analytics.

Government Agency Profit Model

 Revenue (from developing, launching & enhancing local market platforms).

 Licenses fees (from (Big Data/analytics products & services).

Core Capabilities  Traffic optimization & Big Data analytics.  Interconnect market platform with government/provider processes.  Relationship management (all communities).

Dynamic Capabilities  Sensing and identifying new mobility services and providers.  Sensing and identifying new government regulations.

Devising innovative twists to an existing business model (e.g., Amazon’s one-

click purchase feature) or conceiving of a truly innovative business model (e.g.,

Google’s search platform) requires a special kind of thinking – popularly termed out-

of-the-box thinking – about digital platforms, about business platforms, about market

ecosystems, and about how digitalization can be creatively applied to disrupt the

nature of competition within a market ecosystem. This type of learning is referred

to as second-order learning, where pre-existing ideas and assumptions are up-

ended and looked at with a fresh and open mind. Well-known and very successful

outcomes of inspirational second-order learning within pipeline ecosystems can be

observed with FedEx’s overnight delivery business model, Dell’s build-to-order

business model, Walmart’s Everyday Low Prices business model, and Southwest

Airline’s no-frills, short-haul, have-fun business model. Table 11-5 describes these

four business model innovations. And, just about every early entrant into a network

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ecosystem market space – think Airbnb, Kickstarter, Uber, TaskRabbit, Groupon, etc.

– has applied an innovative business model.

Table 11-5 Four Pipeline Organization Business Model Innovations

Company

Business Model Elements

Customer Value Proposition

Profit Model Enabling Capabilities

FedEx • Overnight delivery • Guaranteed

delivery

• High margins • Controlled logistic

costs • Customer self-service

• Package visibility • Logistical coordination • Data management

Dell

• Customer- configured products

• Low-cost products

• Competitive prices • Minimal inventories • Industry-leading

cash management

• Product design • Supply chain coordination • Supplier/partner

collaboration

Walmart • Everyday low prices • Product availability

• Industry-leading cost structures

• Sales volume

• Local store merchandising • Supply chain coordination • Supplier/partner

collaboration

Southwest Airlines

• Low fares • Satisfying customer

experience

• Competitive fares • Industry-leading cost

structures • Customer self-service

• Aircraft/terminal operations • Route portfolio

management • Employee relations

Impacting Overall Financial Performance

The end-game objective sought from all organization investments is to improve

the organization’s bottom line: a larger profit for a for-profit organization and a

balanced budget (along with a larger rainy-day fund) for a non-profit organization.

The potential for realizing significant financial gains from digitalization investments

will generally be greater with initiatives that are larger in size and in scope.

Realistically, though, just how much overall financial improvement might be expected

from digitalization investments having differing strategic foci?

Figure 11-5 offers general guidelines about the likelihood of an organization

experiencing an overall financial performance impact from digital investments. In

Figure 11-5, the thicker the arrow going towards Overall Financial Performance, the

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greater is the likelihood that an impact will be realized. The successful

implementation of a new, innovative business model is likely to have a direct and a

sizable impact on an organization’s overall financial performance. On the other hand,

investments targeted at improving digital platforms most likely will have little direct

impact on overall financial performance – but, improvements in digital platforms

often indirectly impact an overall financial performance via effected business platform

enhancements and/or business model innovations. An example of such an indirect

impact would be an investment to upgrade the servers supporting all of an

organization’s customer-facing websites. While these server upgrades would have

very little immediate financial performance impact, the upgrades should improve the

responsiveness of the customer-facing websites and, in doing so, improve customer

ease-of-use and satisfaction, both of which are likely to spur increased revenues.

Figure 11-5 Impact of Digitalization Investments on Overall Financial Performance

Digital Platform Operations &

Technology Services

Business Platform Efficiency

Overall Financial

Performance

 Value  Risk

D ig

it a

l I n

v e

s tm

e n

ts

Business Platform Effectiveness

Business Model Innovation

Note also that two aspects of overall financial performance are depicted in

Figure 11-5: value and risk. Value refers to the size of an anticipated financial gain

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and risk refers to the likelihood that this anticipated financial gain will be realized.

The thickness of the horizontal arrows in Figure 11-5 reflects the potential impact of

digitalization investments on value and on risk. Digitalization investments targeted

at digital platforms generally have little direct impact on an organization’s financial

performance, but relatively little risk is involved. On the other hand, digital

investments targeted at improving business platform effectiveness generally have

sizable direct impacts on an organization’s financial performance, but considerable

risk is present. This risk might arise, for example, because the changes to a business

platform may have been ill-conceived or because the employees expected to engage

with the new business platform revert back to their old ways of doing things. In

either case, some promised benefits may never be realized.

The point just made in the prior paragraph underscores the reality that the

outcomes anticipated from digital investments often require that affected employees

and ecosystem participants must often change their behaviors if anticipated financial

gains are to be realized. Operational personnel are expected to carry out new work

practices, managers are expected to apply better decision processes and/or to act in

a timely fashion, customers are expected to react favorably to product improvements

and to engage with service improvements, and suppliers, intermediaries and strategic

partners are expected to take advantage of newly-exposed content or improved

interorganizational data flows. Such behavioral changes tend to be much more

difficult to put into place than are technology changes.

A Recap and Look Ahead

For better or worse, digitalization has become the dominant enabler of

organizations’ competitive actions – with organizations possessing greater

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digitalization capabilities outpacing competitors possessing lesser digitalization

capabilities. All competitive actions (be they proactive or reactive in nature) start as

someone’s idea that is fleshed out and then bounced off others. Normally, the greater

the number and variety of contributors, the better the final product. And, the clearer

is a digitalization investment’s strategic focus, the more likely it is that others’

contributions will be on-target and value-adding.

Still, far too many executives, managers and professionals lack an adequate

appreciation of how digital investments are affecting, or might affect, their

organizations’ competitive success and, subsequently, their organizations’ financial

outcomes. This chapter has identified the four targets – digital platform operations

and technology services, business platform efficiency, business platform

effectiveness, and business model innovation – that most often serve as the strategic

focus of digitalization investments. By making clear both an investment’s strategic

focus and the importance of the investment to the organization’s bottom line,

proponents of an investment opportunity are more likely to attract the attention and

interest of others. The next chapter drills deeper into the relationship between a

proposed investment and financial performance outcomes by identifying six value

pathways by which digital investments most commonly affect performance outcomes.

GLOSSARY

Business model – a simplified and aggregated conceptualization of the value-

creating, profitability-sustaining activities of an organization.

Business platform effectiveness – improving the quality of the platform or the

quality of one or more of the business processes being hosted on the platform.

Business platform efficiency – improving the cycle times and costs associated with one or more of the business processes being hosted on a business platform.

Business process – a sequence of work tasks that converts inputs into outputs, and these work-task sequences can involve operational activities, managerial activities,

or both.

Business rules - the conditions that must be met when taking actions or making decisions.

Capability – the ability to achieve a desired outcome by bringing together and applying a particular set of resources.

Consumer welfare – the benefits received from consumers (rather than producers) from productivity increases in an economy.

Core capabilities – an element of a business model that describes the tangible and

intangible resources needed to successfully implement a business model’s value proposition and profit model.

Digital platform operations – activities involved in planning, designing, running, managing and evolving the technology services required to enable and support an

organization’s business platforms.

Digitalization – applying digitization within organizations and within the social and economic contexts within which organizations are embedded.

Digitalization capabilities – an organization’s readiness to attract, manage and retain individuals highly skilled in: identifying digitalization opportunities, building

and assessing business cases for digitalization investments, implementing funded digitalization investments, managing business platforms, and achieving the strategic aims sought through digitization.

Digitization – the purely technical processes associated with converting sensed and captured data into binary form, storing and transmitting these binary data,

manipulating these data, and storing/transmitting the outcomes of these data manipulations.

Digitization capabilities – an organization’s readiness to: apply digital technologies, digitized content and technology services; manage digital platforms;

and, attract, manage and retain highly-skilled technology professionals.

Dynamic capabilities – an element of a business model that describes the

intangible resources needed to (1) sense and assess opportunities for business model enhancement, replication and innovation, and (2) successfully implement these enhancements, replications and innovations.

First-order learning - engages participants in refining their understandings of a business process, but does not substantially change the assumptions and

foundational reasoning on which these understandings are based.

IT productivity paradox – the recognition (prior to the mid-1990s) that the ever- increasing investments in digital technologies produced mixed evidence regarding

productivity improvement across the US economy.

Network ecosystem – a market-focused ecosystem in which a network of value-

unit producers and a network of value-unit consumers are brought together by a network orchestrator.

Operating procedures – the sequenced tasks that comprise a business process as

well as the relationships among these tasks.

Performance-price ratio – the capabilities of a digital technology relative to the

technology’s cost.

Pipeline ecosystem – a market-focused ecosystem in which a producer

organization targets a collection of value-units at one or more consumer segments and fashions a linear value stream involving numerous upstream, midstream and downstream organizations to deliver the value-units to consumers.

Profit model – an element of a business model that defines how an organization expects to be profitable; consists of revenue models and cost models.

Risk – the likelihood that an anticipated financial gain will be realized.

Second-order learning – pre-existing ideas and assumptions are up-ended and looked at with a fresh and open mind.

Strategic focus – a conceptualization and articulation of a digitization/digitalization intention and the target(s) of this intention.

Technical services – the digitized functionalities and technical support provided to an organization’s employees and, increasingly, to its customers and suppliers.

Value – the size of an anticipated financial performance gain.

Value driver – a core factor underlying performance gains.

Value proposition – an element of a business model that defines how an organization will distinguish itself within the market(s) that it has chosen to

participate. Pipeline organizations distinguish themselves by creating value for consumers. Network organizations distinguish themselves by creating value for

participating communities.