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Digital Business Ambition: Transform or Optimize?

Published: 30 June 2017 ID: G00333254

Analyst(s):

Summary

When building and expanding a digital business, CIOs will benefit from being more specific about the ambition of the digital business strategy. Is the goal to transform the business model or to optimize the existing one? This document guides CIOs through this decision.

Overview

Key Findings

  • Digital business transformation is a type of digital journey that has the ambition of pursuing net-new revenue streams, product/services and business models. It is favored by enterprises that must adapt to an industry in disruption, or ones that want to disrupt their industries.

  • Digital business optimization is a type of digital journey that has the ambition of significantly improving existing business models through improved productivity, greater revenue generation of existing streams and improved customer experience. It is favored by enterprises whose industries are not going through disruption in the near term.

  • Enterprises will tend to minimize the amount of change and risk by favoring optimization over transformation. This can be a risky course, as there have been some major misreads on industries being disrupted in recent years. Between the Internet of Things, platform business models and blockchain, almost any industry has the potential to be disrupted.

Recommendations

CIOs who are building or expanding a digital business:

  • Determine your enterprise's mix of digital business optimization and transformation by looking outside your enterprise first. If your industry (or an adjacent industry) is going through disruptive changes, then you will have no choice but to set a transformation course yourselves. If your industry is not undergoing a transformation, then you have the option of pursuing a business optimization course — unless you want to be the disruptor and force the industry to transform.

  • Set a budget and planning horizon that reflects your chosen digital ambition. This problem is especially pertinent to enterprises choosing a transformation course. Many times we see enterprises claim that they are pursuing transformation, but then rely on a small innovation team and budget to pursue these ends. If you are truly pursuing digital business transformation, you should plan on starting new business units, adding/shifting manufacturing capacity, adding new products to your pipeline and/or making mergers and acquisitions.

Analysis

Digital transformation and digital business optimization — what do these terms mean to your enterprise? Many CIOs and digital business leaders are at a stage where they need to get more specific about how far their enterprise will pursue digital business.

Should the digital business journey aim to optimize the existing business model and/or introduce new business models and revenue sources?

Said another way, what is the digital ambition of the enterprise? The answer to this question fundamentally changes the scope of work and roadmap in becoming a digital business.

The transformational aspects of digital business receive the most attention. Everyone has heard about the phenomenal growth of Uber and the potential of the Internet of Things (IoT). However, most companies do not aim at digital transformation, at least for now. According to the 2017 Gartner CEO survey, 42% of enterprises plan to use digital technology to optimize the current business, not for transformation, while 17% have no ambition for digital business at all (see "2017 CEO Survey: CIOs Must Scale Up Digital Business" ). Both paths carry risks. If the enterprise goes for transformation but the market or organization is not ready, the results are below expectations. Money is made, but just not enough to satisfy the growth expectations of the investment. If the enterprise focuses on optimization while the market and competitors are transforming, it may never be able to catch up. CEOs and boards will often consult the digital business leader about which direction their digital business strategy should take.

CIOs and digital business leaders can formulate a recommendation by taking three steps:

  1. Consider the options for digital ambition: business optimization and/or transformation?

  2. Look at the timing of transformation in your industry and adjacent industries.

  3. Consider your competitive stance when choosing a digital ambition.

Consider the Options for Digital Ambition: Business Optimization and/or Transformation?

Start by considering whether the enterprise should optimize the existing business model or introduce new business models and revenue sources (see Figure 1). The answer to this question determines the scope of work in becoming a digital business. Each option in turn offers further choices to narrow the focus of the enterprise's digital business strategy.

Figure 1. What Is Your Digital Ambition?
Research image courtesy of Gartner, Inc.

Source: Gartner (June 2017)

Digital Business Optimization

Digital business technologies and approaches can be used to improve the enterprise without changing its business model (represented on the left side of Figure 1). Specifically, an enterprise can:

  • Improve productivity by removing cost, improving productivity of machines and employees. The IoT can improve asset productivity. Robotic process automation can improve employee productivity, and so can a digital workplace. These are all examples of types of initiatives that lead to improved productivity without changing the business model.

  • Improve existing revenue by leveraging analytics and AI to better forecast demand/supply and optimize prices and promotions. Digital marketing and sales technologies and approaches will also increase spend by customers while customer service initiatives can improve retention.

  • Improve the customer experience: Digital channels often add both a self-serve and improved experience. Using IoT to track the length of queues, ETA of vehicles and inventory status of tanks or shelves also improves the customer experience, providing more visibility to statuses they care about. AI in the form of virtual assistants can also improve the customer experience. These are all examples of initiatives that don't change the business model, yet improve the enterprise's ability to serve its customers and constituents.

The combination of these three goals lead to a type of digital ambition that is best described as digital business optimization .

A more detailed perspective of the options of pursuing digital business optimization is highlighted in Figure 2. Use this graphic to identify the possible areas of business optimization.

Figure 2. Digital Business Optimization Adds Significant Value Without Changing Business Model
Research image courtesy of Gartner, Inc.

Source: Gartner (June 2017)

Digital Business Transformation

In contrast to digital business optimization, there are digital business initiatives that result in net-new revenue streams, products/services and even new business units with a new business model:

  • Launch net-new digitally enabled products and services: The IoT enables manufacturers of products to sell a brand-new class of their product (e.g., a connected lamp or a connected industrial dryer). Once connected, connected services (e.g., monitoring services) can also generate new revenue. Even new revenue-generating services can be borne out of digital approaches and technologies:

    • New loan products are being created for individuals and small businesses who don't have formal credit bureaus/scores. Fintechs (e.g., Kabbage) and companies like Alibaba use new data sources coming from digital ecosystems (e.g., payment, reputation scores, social networks) and new risk algorithms to assess credit worthiness. The end result is a class of loan products that serve a market that has never been served by formal financial services institutions.

  • Pursue new business models: New business models that are made financially viable and technically possible by digital technologies and approaches include platform businesses such as:

    • Multisided markets (e.g., Uber)

    • New insurance models that leverage P2P approaches (e.g., Friendsurance)

    • Metered and as-a-service models such as pay as you drive insurance

    • Commerce-that-comes-to-you models such as Booster Fuels, which delivers fuel to your vehicle instead you going to a gas station

  • Large enterprises can create new business units or acquire startups to pursue these new business models. Sometimes the new business models lead to ventures in adjacent or new industries. For example, utility companies may get into battery storage, car companies may get into public transportation or wealth management may get into health insurance.

The combination of these two goals leads to a type of digital ambition that is best described as digital business transformation . A more detailed perspective of the options for pursuing Digital Business Transformation is highlighted in Figure 3. Use this graphic to identify the possible areas of business transformation. You can also reference "Six Ways to Earn New Digital Revenue" for detailed explanations and examples.

Figure 3. Digital Business Transformation Leads to Net-New Revenue and Business Models
Research image courtesy of Gartner, Inc.

Source: Gartner (June 2017)

Look at the Timing of Transformation in Your Industry and Adjacent Industries

Even CIOs and digital business leaders who recommend an optimization approach should pay attention to digital transformation in their industry. Digital transformation creates a new paradigm that makes the old business model obsolete. Consequently, an optimization strategy leaves the enterprise in a weaker competitive position. In other words, optimization works only for so long; then it becomes a liability.

Digital transformations come at the apex of an S-curve (see Figure 4). In the digital world it's often a technology that emerges to make possible a new product or business model. It grows until it dominates the industry. At the height of its dominance, an even newer technology can appear, along with new products and business models. This takes revenue from the old model and transforms the industry:

  • During the growth period, along the rising slope of the S-curve, an optimization strategy makes sense.

  • When the industry nears the apex, a transformation strategy makes sense.

An industry can undergo a series of transformations. Take the example in Figure 4. Physical a sold in record stores dominated the music industry well into the 1990s. Then music pirate sites such as Napster changed listeners' habits. In the mid-2000s, digital download services such as Apple's iTunes became popular. Streaming music services such as Pandora and Spotify changed the industry again.

Figure 4. Technology-Driven Transformation in the Music Industry
Research image courtesy of Gartner, Inc.

Source: Gartner (June 2017)

The cadence of transformation will vary, depending on the nature of the industry and technology developments. The music industry has undergone rapid transformations. Other industries have resisted transformation for a long time. The hotel industry, dominated by global brands, looked the same for decades until Airbnb changed the terms of competition. Thus, an optimization strategy can work for a long time, but even the most stable industry is liable to transform at some point.

When Will Your Industry Hit Its Tipping Point?

The triple tipping point consists of three variables that determine the moment of transformation:

  • Culture Technology tests our cultural and social boundaries. CIOs and digital business leaders will have to make judgment calls about when cultural tipping points will happen — there are no simple demographics or mathematical calculations for it. The rate of cultural change is not the same across countries, communities and social groups.

  • Regulation New regulations and tax changes can create new business opportunities. More often, regulation will hold back digital business innovation; however, the lack of regulatory certainty also can be an enabler. New technology can be positioned in a way that circumvents existing regulation.

  • Technology Don't underestimate the nonlinear pace of change. Previously, technology companies mainly had to wrestle with information technology tipping points. Now, all companies do because the next generation of everyday products will include digital capability. A digital business leader focused on internal systems and ERP will quickly fall behind the curve.

When these variables align, transformation occurs rapidly.

CIOs and digital business leaders pursuing optimization can use the triple tipping point to determine how long their strategy will remain valid. Those pursuing transformation can use the triple tipping point to assess when is the right time to move (see "Master the Triple Tipping Point to Time Investments in Digital Business Strategy" ).

Enterprises also need to consider whether society is ready for the new paradigm, and whether laws and regulations permit it. The variables will seldom mature at the same rate and converge perfectly at the same time. Thus, CIOs and digital business leaders will need to make judgment calls about when to urge the enterprise to invest.

Consider Your Competitive Stance When Choosing a Digital Ambition

Once CIOs, digital business leaders and their enterprises understand when/if their industry will hit a tipping point, they are in a position to choose a digital ambition. At a simplistic level, if the industry is about to tip, then the enterprise should pursue a transformation path. If it is not about to tip, then they can choose a digital business optimization path.

However, the industry dynamics are not the only determinant. The competitive or enterprise culture profile also determines the chosen path. More aggressive companies often choose to follow a digital transformation path no matter how far the tipping point is — they want to be early adopters. Some even plan on being the disruptor that will cause the rest of the industry to tip.

Combining the industry's tipping point with an enterprise's chosen competitive stance or culture results in Figure 5. At a point in time (noted by the vertical line), a more aggressive company may be pursuing a transformation path well before the tipping point. An average company may pursue an optimization path. Late-adopter companies may actually be pursuing neither of these paths. They may be implementing digital technologies such as using more cloud or adding more digital channels (e.g., mobile) — but the enterprise is not going any further to improve the business in the ways listed in Figure 1. We call this state digital technology enablement . Often, a digital technology enablement path is not one that is deliberately chosen by the enterprise. It is a situation that can occur when IT wants to push digital technologies and concepts forward, but the rest of the organization does not have the same aspirations to use these to improve the business. What they end up with is a more digitally capable IT (think cloud, SaaS, mobile, application programming interfaces [APIs], digital channels), but not a digitally optimized or transformed business.

Figure 5. When to Transform, Optimize or Enable?
Research image courtesy of Gartner, Inc.

Source: Gartner (June 2017)

The Path to Becoming a Digital Business Is Nonsequential

A digital business leader can take their enterprise from digital technology enablement, to digital business optimization, to digital business transformation. Yet, we have found that this is usually not the chosen approach. Enterprises will tend to pursue a combination of these paths in parallel (see Figure 6).

Figure 6. Planning Your Digital Journey
Research image courtesy of Gartner, Inc.

Source: Gartner (June 2017)

Transformation class These enterprises adopt emerging technologies and approaches rapidly in order to gain a competitive advantage. They will invest early on in digital business transformation. They also look for ways to accelerate it, such as by:

  • Lobbying the government for favorable regulations

  • Launching marketing campaigns to get people used to a new technology

Transformation-class enterprises see digital transformation occurring within their planning horizon, meaning that they dedicate significant funding and head count to transformation in the current (and future) fiscal year. They place the greatest strategic importance on investments to exploit the coming transformation and less importance on optimizing current business models. They give attention to digital technologies as a foundation for their enablement of their transformation and optimization goals.

Optimization class These enterprises view industry tipping points as occurring beyond their planning horizon. Most of their funding and head count will go into optimizing their core businesses. They believe that digital business can super-charge their existing business model — even while they wait for the transformation stage. Most current efforts go into areas such as:

  • Productivity improvements

  • Better customer and employee experiences

  • Better utilization of assets and inventory

Although they focus on optimization, these enterprises also have a modest effort in exploring and monitoring upcoming transformative and disruptive opportunities (represented by the thin blue line in Figure 6). For example, there may be a small innovation group looking ahead and experimenting. They calculate that they will deal with transformation when it actually occurs in future planning horizons.

Enablement class CIOs and digital business leaders in these enterprises may not be able to win support for either a digital business optimization or transformation strategy. Instead, they can lay some of the groundwork by implementing cloud services, mobile computing or other conventional IT projects that digital business often uses. Enablement-class enterprises believe that digital transformation will occur far in the future (or in different regions — not theirs). They put their current efforts into enabling digital technologies and hold off on pursuing optimization or transformation-class journeys.

Risks of Choosing the Wrong Digital Ambition

Enterprises can choose to pursue any mix of digital ambitions but choosing the wrong ones will cause problems:

  • Transformation-class enterprises can waste a lot of time and money on a transformation that doesn't materialize. In some cases, they make "bet the enterprise" commitments to digital transformation. If they succeed, though, they can set the terms of competition for the whole industry. The best performers learn how to drive transformation as standard practice.

  • Optimization-class enterprises will not invest on digital transformation, but they also deny themselves the chance to change the competitive dynamics in their market. Enterprises choosing optimization should not allow the industry tipping point to take them by surprise. This risk is pronounced in industries that have a fast pace of change.

  • Enablement-class enterprises bet that their market will endure and look the same as it has always looked. If they are right, they will continue with minor improvements. If a transformation does occur, they may be so far behind that they cannot compete anymore.

Recommendations:

CIOs and digital business leaders:

  • Determine your enterprise's mix of digital business optimization and transformation by looking outside your enterprise first. If your industry (or an adjacent industry) is going through disruptive changes, then you will have no choice but to set a transformation course yourselves. If your industry is not undergoing a transformation, you have the option of pursuing a business optimization course — unless you want to be the disruptor and force the industry to transform.

  • Set a budget and planning horizon that reflects your chosen digital ambition. This problem is especially pertinent to enterprises choosing a transformation course. Many times we see enterprises claim that they are pursuing transformation, but then rely on a small innovation team and budget to pursue these ends. If truly pursuing digital business transformation, you should plan on starting new business units, adding/shifting manufacturing capacity, adding new products to your pipeline, and/or making mergers and acquisitions.