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Ideas Made to Matter

Digital Economy

5 building blocks of digital transformation


Pressured by disruptive startups on one side and tech behemoths on the other, established companies in nearly every market segment are feeling pressure to transform themselves into digital organizations.

Businesses are scrambling to leverage an ever-evolving array of digital technologies — social, mobile, analytics, cloud, artificial intelligence, blockchain, and the “internet of things” — to develop new value propositions for their customers.

At Audi AG, that means experimenting with shared economy-type services that help customers solve their mobility problems without necessarily having to buy a car. At Schneider Electric, it means not just selling electrical equipment, but offering a digital services platform that allows customers to intelligently manage their sourcing and use of energy.

But the path toward digital transformation isn’t straightforward — or quick.

“There’s an impatience to get going and show results, but becoming a successful digital business is not easy,” said Jeanne Ross, principal research scientist at the MIT Sloan Center for Information Systems Research. “Our research suggests the reason why it’s so hard is that most established companies do not yet have the capabilities they need to become digital.”

Along with fellow CISR colleague Martin Mocker and UT Austin professor emeritus Cynthia Beath, Ross spent years studying companies at the forefront of digital transformation, including DBS Bank, LEGO, Toyota, Royal Philips, and USAA, among many other global organizations.

As detailed in their forthcoming book, “Designed for Digital: How to Architect Your Business for Sustained Success,” the team found that, on average, 5% of these companies’ revenues are coming from new digital value propositions. “And those are the companies that are multiple years into their digital journeys,” Ross said.

“That’s five years of having a vision and pursuing that vision, and revenue from digital offerings is accounting for just 5% of their [total],” Ross said. “Any of these companies will tell you there is a level of capability development and customer development that has to be done, and it’s not easy.”

To help companies develop the new capabilities they need to succeed in the digital marketplace, Ross and her co-authors identified five foundational building blocks to digital transformation.

Three of the five are technology platforms: an operational backbone, a digital platform, and an external developer platform. The other two are organizational capabilities: shared customer insights, and an accountability framework that coordinates the efforts of autonomous teams. 

Together, they form a foundation on which companies can rapidly develop and scale their digital offerings:

Operational backbone — a set of integrated and shared systems, processes, and data that ensure efficiency, reliability, and transparency of operations and transactions.

“An operational backbone is the underlying foundation of standardized, automated business processes to ensure operational excellence in your core business,” said Ross. The backbone typically incorporates customer resource management, enterprise resource planning, and other enterprisewide systems and processes.

Without an operational backbone, leadership is typically consumed with executing and maintaining core processes, preventing them from developing and commercializing digital offerings. On the flip side, if companies already have a powerful backbone, the other building blocks can build on that foundation, Ross said.

Digital platform — a repository of business, technology, and data components facilitating rapid innovation of new offerings and enhancements.

A digital platform provides components — business, data, and infrastructure — that you can assemble and reuse as you create digital offerings for your customers,” said Ross. "The platform allows you to take your offerings and personalize them for different customers with different needs.”

Without a platform, companies are in danger of creating for their digital offerings the same kind of siloed systems that are apt to burden their legacy systems. 

Shared customer insights — organizational knowledge about what kinds of digital offerings customers want and are willing to pay for.

Platforms provide the technological and organizational basis for developing digital offerings, but they’re worthless if companies don’t leverage them to develop offerings that customers find valuable, Ross said.

In order to successfully develop and deliver constantly evolving digital offerings, companies must develop a reservoir of organizational knowledge about both customer problems and potential solutions. “It’s the process of accumulating knowledge about what a customer will buy,” said Ross, who presented her ideas at the recent MIT Sloan CIO Symposium. “It involves a lot of experiments, innovation, and tests to see what your customers actually want.”

General Electric Co. ambitiously set out to develop Predix, its cloud-based platform for the “industrial internet of things,” but grossly underestimated demand. “They had a wonderful concept, but in the end, they were far behind in understanding what their customers wanted — and what they would pay for,” Ross said. GE spun off its digital business, including Predix, into a separate company early in 2019.

Accountability framework — clear ownership of, and coordination among, a growing set of digital offerings and components.

As they shift to a component-centric model of business that’s able to deliver digital offerings quickly, companies need to adopt a new framework of accountability organized around components rather than functions, product lines, or geographies. “We need empowered teams that own components and create and improve them constantly,” Ross said.

Under such an organizational structure, individuals and teams have the agency to make decisions related to the performance and cost-effectiveness of their components, in contrast to traditional, hierarchical decision-making processes that can slow progress and stifle innovation.

External developer platform — a digital platform that allows an ecosystem of partners to contribute to and use digital components.

“If we get our customers excited about our offerings, they’re going to want more and more and more. For that we will need partners to also create offerings,” Ross said. An external developer platform helps foster a community capable of delivering end-to-end solutions to customers, much in the way that Amazon and Apple have extended their platforms with integrated offerings from partners.

Ross’s word of advice: “Don’t start with an external developer platform, and don’t start this too soon. Your executives may want this, but the other four have to be done first.”

Drawing up a road map

So where should you begin? CISR’s five building blocks unfortunately do not come with assembly instructions. “I wish I could tell you there was a single path to building these capabilities,” Ross said, “[but] our research has found that what works best depends on what offerings you’re creating, what capabilities you already have, and who your leadership team is.”

That said, in studying companies that were well on the road to becoming digital businesses, two things stood out. “They had a least some kind of operational backbone to give them data, and they had some kind of customer insights that helped them change their habits and recognize new value propositions to offer their customers,” Ross said.

What companies don’t want to do is rush to build an ambitious new digital platform as a first step — an endeavor that can cost tens of thousands of dollars.

“We've seen a couple of companies — GE is the big example — that started by saying, ‘Why don't we build a platform?’ But if you don't have a strong operational backbone, which they didn't, and if you don't have strong customer insights and a way to keep ratcheting those up, the platform you build is much more likely to be a waste of money,” Ross said.

A more prudent approach, she said, is to get started on the operational backbone and customer insights, and let them drive the incremental buildout of a digital platform.Progress will feel slow, Ross warned, but your cash outlay will be low and your company’s existing bottom line protected. “You're going to feel very impatient. But if you spend it as you need it, and the rest of your business is still making money, your quarterly results will still be just fine.”

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For more info Tracy Mayor Senior Associate Director, Editorial (617) 253-0065