Digitization: Threat or Opportunity?

Over the last three years, MIT CISR has done more workshops for boards and/or executive committees of companies than in the previous thirty-eight years since the center was founded. The reason? These senior committees want to understand how the digitization of business will affect their companies’ futures. In particular, how might digitization disrupt the business or deliver future profits? In this briefing, we will ask you to assess the level of threat digitization poses to your business, and to compare your results with those of senior executives who have participated in our research. Then we will describe the relative firm performance of companies that have adopted each of four business models we see as viable options for the digital economy. This briefing continues the conversation begun in the MIT CISR briefing of April 2013 on next-generation businesses.[foot]P. Weill and S. L. Woerner, “The Next-Generation Enterprise: Thriving in an Increasingly Digital Ecosystem,” MIT Sloan CISR Research Briefing, Vol. XIII, No. 4, April 2013, https://cisr-mit-edu.ezproxyberklee.flo.org/publication/2013_0401_DigitalEcosystems_WeillWoerner[/foot]

What Is the Impact of Digitization on Your Business? 

The business world is rapidly digitizing and connecting individuals, enterprises, devices, and governments; enabling easier transactions, collaborations, and social interactions; breaking down traditional industry boundaries; and changing how profits are made. To better understand how powerfully digitization will affect your business, complete the seven questions in figure 1. Focus the assessment by answering the questions with respect to your bestselling product or service. Add your answers, then double the total for a score out of approximately 100. The higher your score, the greater the threat and the more urgent your need to experiment with new business models. Figure 2 shows the scores of 105 senior executives who attended an MIT CISR workshop on digital business models. What is your score? How do you compare?

About 55% of respondents said their companies had a score of 70% or above, an area we call “the red zone.” In the red zone, an enterprise faces significant impact from digitization. On the upside, increasing digitization offers opportunities: it can leverage a strong customer relationship and increase cross-selling opportunities. For example, Coles, the largest retailer in Australia, introduced insurance services as it expanded multichannel offerings and became one of the leading sellers of insurance in the country. Coles is now applying for a banking license. 

On the downside, the threats are often real and immediate. The insurance companies in Australia are scratching their heads, wondering how to compete in this newly digital multichannel world where retailers are now strong competitors. They are not alone. 67% of respondents said they were experiencing a red-zone level of threat from enterprises in other industries that had relationships with their customers and were able to offer competing products or services, thus potentially disrupting their businesses. In addition, 32% of respondents said that a competitor’s alternative digital offering presented a red-zone level of threat to their core business—this is a big issue universities are facing!

How Attractive Are the Business Model Options in a Digital World? 

In the April 2013 MIT CISR briefing, we introduced a 2x2 framework describing four viable business models for companies in an increasingly digital world (see figure 3). The horizontal axis is your business’s design, with value chain and ecosystem as the two options. The vertical axis is the business’s depth of knowledge of its end consumer, a continuum from none to extraordinary. Each of the business models has distinct opportunities and challenges. By locating your company on both dimensions, you identify your targeted business model. 

Figure 3 identifies the percent of companies in each quadrant by the dominant model[foot]MIT CISR–Gartner 2013 Ecosystem Survey, N=93.[/foot]: 40% of companies identified their dominant model as Omnichannel, 8% as Ecosystem Driver, 42% as Supplier, and 10% as Modular Producer. When asked how this would change in five years, the answers look radically different. Senior executives expect their companies to move up and to the right on the 2x2. For example, they expect that in five years the percentage of their total revenues from value chains will drop from 80% to 68%. 

We also asked companies to estimate their relative performance; figure 4 provides a summary of the results by quadrant. The best-performing quadrant on time to market was Ecosystem Driver. Consider how quickly Amazon—an Ecosystem Driver—can add new products and services from the multiple vendors that sell on the “world’s biggest retailer’s” site. Ecosystem Drivers also have the highest revenue growth, followed closely by Omni-channels. We see many companies first move up to Omnichannel, by collecting and consolidating insights about their customers, and then venture to the right. BBVA, the global Spanish-based bank, is investing heavily in new-style branches, ATMs, and online to improve the customer experience and move up the 2x2, becoming a more effective Omnichannel. At the same time, it is experimenting by opening up its core banking system to third parties such as software vendors, telecommunications companies, and retailers that can benefit from applications that embed BBVA’s core banking services. For example, a telco could build a mobile phone peer-to-peer payment offering that calls on BBVA’s core banking services like risk, payments, and foreign exchange. With this experiment, BBVA is moving to the right on the 2 x 2. 

In terms of profitability, Omnichannels are the leader, with Suppliers not far behind. Next on profitability are Ecosystem Drivers, with Modular Producers bringing up the rear. We see two very interesting trends here. First, we expect the movement up and to the right to lead to a consolidation in several industries. For example, how many successful Ecosystem Drivers can there be in each customer domain? We expect there will one main Ecosystem Driver for retail and in each other market such as financial services, entertainment, healthcare, etc. Sure, we as consumers may shop around, but just as Amazon is the default for many shoppers, we see this trend continuing in other domains. And not just for B2C, but also for B2B businesses, such as the significant consolidation we have already seen of foreign exchange providers. 

The second trend is around Modular Producers. A modular producer like PayPal provides plug and play products or services that can adapt to any number of ecosystems. To survive, they will have to be one of the best producers in a narrow domain, such as payments. We expect to see the top one to three players dominate in each niche with the many other players picking up the scraps, and the average profitability for Modular Producers being relatively low. 

What To Do? 

We suggest that you get a group of your colleagues across your businesses to complete the assessment (figure 1) and share the results—and then repeat for all of your major products and services. If your scores are in the red zone, we recommend reviewing the experiments currently underway in your enterprise that buy it strategic options. Are they sufficient? If not, it’s time to have a discussion in earnest and come up with a portfolio of experiments that move your enterprise up and to the right on the 2 x 2. As you ponder how a digital future will change your business, please consider the words of Alan Kay: “The best way to predict the future is to invent it.”