Which is the better path to digital transformation — should your company take a giant, radical leap or a series of small, incremental steps?
Both approaches are effective for top-performing companies, although each entails different risks, according to a research brief recently published by the MIT Sloan Center for Information Systems Research.
The paper examined results of CISR’s Future Ready survey, which polled over 4,000 companies about their digital journeys, to assess which approach correlated with better financial performance.
Some 56% of the organizations were following an incremental approach, using technology to gradually improve their products, services, and customer engagement. The other 44% were undergoing radical transformation, developing fully digitally enabled products and services as well experimenting with new revenue models.
The researchers began by assessing each company’s “digital savviness,” defined as “an understanding, tested by experience, of how digital technologies will impact how companies will succeed in the next decade.” They based their savviness assessment on six specific attributes of an organization:
- Capability to effectively collaborate in ways that deliver business change.
- A long-term mindset on technology implementation and platforms.
- A portfolio of digital technologies that advances business strategy.
- Effective use of cloud technologies.
- Ability to maximize data use throughout the enterprise.
- Building of customer trust through superior service and customer knowledge.
Not surprisingly, top-performing companies pursuing radical transformation scored higher in digital savviness, at 66%, than top performers following the incremental approach, which had a score of 57%. But overall, companies that scored higher in digital savviness had better financial performance, regardless of which path they were following, according to the paper.
The researchers looked at two measures of financial performance: revenue growth and net margin. Top performing companies using the radical transformation approach had 17% higher revenue growth and 9% higher net margin than the average for their industry category. Top performers using the incremental approach had both strong revenue growth (15% above average) and significantly improved margin (19% over industry average).
Both approaches carry risks, although different ones. Incrementalists could be digitally disrupted by fast-moving technology. Radical transformers risk unproven revenue models and are betting on their ability to successfully change cultures and skill sets.
The researchers found no difference in the effectiveness of CIOs, though they used different methods to attain their transformation. Incrementalists focused on increasing IT budgets, retaining talent, scaling experiments, and using robots to automate. Radical transformers focused on effective use of data and decentralizing the IT budget, with more technology spending coming from outside the traditional IT budget.
The researchers concluded that, while both approaches can produce impressive results, the incremental approach is the safe bet. “Companies should typically only pursue a radical transformation approach if their threat of digital disruption is high and they are willing to both spend significantly more on technology and drive cultural change,” they said.
The paper was authored by Stephanie L. Woerner, research scientist; Peter Weill, CISR chairman and senior research scientist; and Aman M. Shah, senior research support associate.