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Research Briefing

Thriving with Digital Disruption: Five Propositions

We share five propositions about management practice in the digital economy that our research suggests are true. But the verdict is still out.
By Peter Weill, Jeanne W. Ross, and Stephanie L. Woerner
Abstract

The digital economy is introducing an onslaught of potential—and increasingly required—business changes and is shaking up our assumptions about what it takes to succeed. Most companies are trying, often failing, and sometimes succeeding with new digital strategies. In this briefing we share five propositions about management practice in the digital economy that MIT CISR research suggests are true. But the verdict is still out. We then invite you to join @MIT_CISR and members of the MIT CISR community in debating the propositions on Twitter under the hashtag #FiveProps.

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Welcome to the digital economy! In the ‘80s and ‘90s, MIT CISR researched how IT might have a strategic impact. Those worries are gone. Today, MIT CISR is examining the impacts of the rapid pace of technology innovation. The digital economy is introducing an onslaught of potential—and increasingly required—business changes. Whether you greet this onslaught with excitement, fear, resolve, intrigue, or delight, you have undoubtedly noticed that the digital economy is shaking up our assumptions about what it takes to succeed. 

There is no playbook for digital. Most companies are trying, often failing, and sometimes succeeding with new digital strategies. In this briefing we share five propositions about management practice in the digital economy that MIT CISR research suggests are true. But the verdict is still out. We then invite you to join in the debate. 

1. The Appointment of the CDO Is a Cop‐out 

In an already packed management schedule, an attractive choice for a CEO and executive committee is to say, “Hmm … digital is quite important  for our company, but we are not sure what to do. Let's hire a chief digital officer to take care of it." Nice try. Although the digital economy offers lots of opportunities for new greenfield businesses, and you can put someone like a CDO in charge of your new digital business, a CDO cannot make your existing business a digital success.

The innovations that will generate business value will rely on your organization's distinct value propositions and capabilities.

That’s because digital success is not simply a function of introducing new technologies in innovative ways. Anybody can do that. Just look at the new apps that competitors and partners (as well as companies you’ve never heard of before) are introducing. Many can be easily copied, and thus the impact is to raise the bar for doing business. The only digital innovations that will not simply raise the bar are those that cleverly leverage unique competencies. 

And that is exactly why you should not put a CDO in charge: the innovations that will generate business value will rely on your distinct value proposition and organizational capabilities. In a word, they will integrate—for example, offer a single view of the customer relationship, create a seamless omnichannel experience, package products from across different parts of the business, or add services to transform products into solutions. Integration requires coordination among people and processes in ways that seem unnatural.[foot]Nils Fonstad, “The Growing Demand for Digital Leadership,” MIT CISR Blog, December 23, 2014, accessed July 1, 2015, https://cisr-mit-edu.ezproxyberklee.flo.org/blog/blogs/2014/12/23/digital-leadership/[/foot] Think about how CMOs and CIOs have become best buddies. It’s this unnaturalness that makes your digital initiatives valuable. 

One person cannot coordinate organizational parties that aren’t more committed to integration than to their individual pursuits. We’ve observed even the most talented CDOs get frustrated at their inability to move the needle in how the company thinks and operates. Two or three years into the CDO’s tenure, the executive committee often asks, “… so what’s changed?” And given that the CDO can often only point to a few pockets of innovation—typically at the edges of the organization—the company removes the person and sometimes the role. 

Instead of assigning one person to lead the company to digital success, debate the opportunities to integrate existing capabilities with new offerings. Then find the multiple people who will need to commit to making it happen and let them work out the rules of engagement. 

2. Going Digital Requires Organizational Surgery 

Companies will not succeed in the digital economy merely by tweaking management practices that led to success in the ‘90s and early 2000s. To successfully execute a digital strategy, a company will need to make substantial design changes to its organization such as reworking business processes or restructuring. Consider the taxi industry, which Uber CEO Travis Kalanik has disrupted by reinventing the personal mobility experience. Uber competes directly with taxi companies that in comparison look slow and expensive and deliver a generally inferior customer experience. This is no time for these companies to simply improve some logistical processes—the changes needed are more surgical. 

Even companies whose value propositions center on physical products are making huge changes in how they go about doing business. Recognizing the increased demands for collaboration and coordination in the digital economy, LEGO has increased its management team from five to twenty-two members. Such flattening of the organizational hierarchy appears to be an essential change for accelerating organizational decision making. 

To successfully execute a digital strategy, a company will need to make substantial design changes to its organization such as reworking business processes or restructuring.

Similarly, many banks are facing a fork in the road.[foot]Peter Weill and Stephanie L. Woerner, “How Digitization Is Creating a Fork in the Road for Banks,” MIT CISR Blog, January 27, 2015, accessed July 1, 2015, https://cisr-mit-edu.ezproxyberklee.flo.org/blog/blogs/2015/01/27/how-digitization-is-creating-a-fork-in-the-road-for-banks/; and P. Weill, “Digital Disruption in the Financial Services Industry,” video during the panel presentation “Remaining Competitive – Disruptive Business Models for Financial Services” at the American Bankers Association 2014 Annual Convention.[/foot] Without organizational surgery, banks are limited to being highly regulated, strongly industrialized, efficient transaction processing engines, performing the key back-office operations of financial services such as payment processing and providing credit. These are commodity services that lead to a race to the bottom in terms of margins. In this scenario, other organizations with strong customer bases—like Apple, Amazon, or IKEA—will make the sale, manage the relationship with the customer, or be their go-to partner. As a result, the banks' relationships with customers are at risk. The alternative is to reinvent how a bank goes to market and meets customer needs, in order to become the first point of call for a customer with a need that has a financial component, while it also efficiently processes back-office transactions. 

Recognizing the need to reformulate its business, BBVA has over the last few years moved aggressively toward becoming a more effective omni-channel business. It has invested heavily in improving customer experience— opening branches that encourage consultative conversations with customers, redesigning ATMs, and delivering all services via digital banking—while attempting to keep costs low through automation. Meanwhile, the bank is experimenting with opening up its core banking system to customers and third parties such as software vendors, telecommunications companies, and retailers in order to create business applications that embed these services. For example, a telecommunications company might develop a peer-to-peer payment offering that uses BBVA’s core services for executing payments. 

In May 2015, BBVA Chairman and CEO Francisco González performed organizational surgery by reorganizing the company into four main areas: business development, engineering, customer solutions, and risk management. The change was made to help accelerate BBVA’s business transformation and boost the development of new digital businesses. President and COO Carlos Torres Vila, formerly the head of the digital bank within BBVA, is now leading the redesigned organization. 

3. Value Chains Are Becoming Irrelevant 

Circa 1980, Michael Porter defined value chains as a way to help companies formulate and execute strategy. Today most companies are better defined as a set of integrated services that are far less linear. Companies provide services by developing a distinctive set of internal competencies enriched by the services of a broad set of partners. 

Think of Walmart as a historically quintessential example of a value chain: purchasing inventory, taking delivery, and then selling products to customers in its stores. This is a sequential process with a beginning and an end. Amazon is the contemporary example of an ecosystem; it serves up a growing set of nonlinear business services, such as selling goods it has never ordered or received.[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]Meanwhile, any transaction is simply an instance in a never-ending cycle of information exchange between customer and Amazon, customer and other customers, customer and partners, and partners and Amazon. This ecosystem of service providers give consumers greater choice and more information about prices, quality, and other customers’ experiences. 

Companies such as Fidelity, Aetna, Apple, and Microsoft have established ecosystems by creating relationships with providers that offer complementary (or sometimes competing) services. Fidelity’s ecosystem offers its own mutual funds but also includes funds from competitors such as Vanguard, and products and services from complementors such as personal investment advisors. Aetna’s ecosystem has expanded its range of services well beyond the healthcare insurance that formerly defined the company’s value proposition. Now Aetna views its value proposition as building a healthier world. Identifying, packaging, delivering—and to a lesser extent, building—business services is the essence of doing business in the digital economy. 

4. Don’t Have a Digitized Platform? You’re Cooked! 

Because the digital economy makes rapid innovation possible, it also makes it essential. Often lost in the rush to innovate, however, is the fact that an underlying digitized platform is table stakes for rapid innovation. Prior MIT CISR research has described how amidst all the changes, most companies have some elements of their business that are not changing.[foot]J.W. Ross and A. Quaadgras, “Enterprise Architecture is Not Just for Architects,” MIT Sloan CISR Research Briefing Vol. XII, No. 9, September 2012, https://cisr-mit-edu.ezproxyberklee.flo.org/publication/2012_0901_ArchitectureLearning_RossQuaadgras[/foot] For example, most commercial airlines will—probably forever—have passengers who want to book flights, check baggage, and fly safely from one planned destination to another. An effective digitized platform will automate the repetitive activities within these stable processes so that costs are low, the experience is high quality and predictable, and outcomes are easily measured. This platform dramatically cuts implementation time for an innovation. Consider the development of a new customer mobile app: if it can’t be integrated onto the platform, you end up with data that can’t easily be analyzed and transactions that take time to process (if they can be processed at all). With a digitized platform and its associated APIs, the app can plug in to the platform and immediately start delivering service, speeding roll-out and resulting in great experience. 

As the platform is not sexy, companies will be tempted to funnel funds to flashy innovations rather than solid underpinnings, but they will pay dearly for such actions. The long-term success of platform-dependent companies like Procter & Gamble, Apple, and USAA speaks to the benefits of platform investments. It’s important to note that the platform is never finished. Platforms become outdated as businesses and technologies change. Companies that are sincere about the desire to foster digital innovation will invest continuously in developing and upgrading the platforms that support core processes like supply chain management, customer relationship management, and human resources development. What makes the digital economy challenging is that companies must build and sustain platforms at the same time that they introduce digital innovations intended to delight their customers. 

5. Forget About Products; Think Solutions 

For many companies, thriving in the digital economy requires replacing their product-based strategies and structures with solutions that solve their customers’ needs. These solutions are typically multiproduct and multichannel, and often challenge the status quo of product-based P&L’s in companies. GE, for example, sells big assets. But its value proposition— and increasingly, its revenue stream—is shifting from the sale of assets to performance management of those assets. Similarly, USAA doesn’t position itself as selling financial services. Rather, the Texas-based financial services company facilitates its members’ life events, such as buying a car or retiring from the military.[foot]M. Mocker and J.W. Ross, “USAA: Capturing Value from Complexity,” MIT Sloan CISR Working Paper No. 389, March 2013, https://cisr-mit-edu.ezproxyberklee.flo.org/publication/MIT_CISR_wp389_USAA_Mocker[/foot]

Philips’ CEO Frans van Houten believes that the company’s ability to compete against lower-cost Asian manufacturers depends on developing holistic, complex solutions that integrate software and workflow management into products like medical scanners.[foot]M. Mocker and J.W. Ross, “How Royal Philips Is Moving Toward Its Complexity Sweet Spot,” MIT Sloan CISR Research Briefing, Vol. No. July 2014, https://cisr-mit-edu.ezproxyberklee.flo.org/publication/2014_0701_RoyalPhilips_MockerRoss[/foot] Of course, selling an integrated healthcare solution to hospitals is not the same process as selling an electric toothbrush. For most companies the product-to-solutions shift is a massive change of culture, incentives, structure, systems, and skills (thus reinforcing our other propositions). 

Certainly many companies will continue to sell products, and digital search will enable consumers to cherry-pick the best of those products in a low-margin race. However, we believe the best customer strategies will be around providing multiproduct, multichannel solutions for both B2B and B2C customers. 

Often lost in the rush to innovate is the face that an underlying digitized platform is table stakes for rapid innovation.

© 2015 MIT Sloan CISR, Weill, Ross, and Woerner. CISR Research Briefings are published monthly to update MIT CISR patrons and sponsors on current research projects. 

Join the Discussion! 

In this period of dramatic change, we encourage you to ponder these five propositions. We recommend that you talk with your colleagues and take a position on the relevance and implications of each proposition. Together these answers can help you shape your digital playbook. 

Join @MIT_CISR and members of the MIT CISR community on Twitter for a public discussion of the five propositions under the hashtag #FiveProps. Also, watch the conversation for notices of related content and future opportunities to engage. 

About the Authors

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Jeanne W. Ross, Director & Principal Research Scientist, MIT Sloan Center for Information Systems Research (CISR)

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