Optimisation works only for so long; then it becomes a liability.
What do the terms digital transformation and digital business optimisation mean to your business? 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.
To what extent should your digital business journey aim to optimise the existing business model or introduce new business models and revenue sources? In other words, what is the digital ambition of your 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 Amazon, as well as the potential of the Internet of Things. However, most companies don’t aim at digital transformation, at least for now.
Gartner’s 2017 CEO survey indicates that 42 per cent of enterprises plan to use digital technology to optimise the current business, not for transformation. Seventeen per cent have no ambition for digital business at all.
Both paths carry risks. If the enterprise goes for transformation, but the market or organisation isn’t 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 optimisation while the market and competitors are transforming, it will lose relevance and may never be able to catch up.
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.
Weigh up your options
CEOs and boards will often consult CIOs and digital business leaders about which direction their digital business strategy should take. You can formulate a recommendation by taking three steps:
1. Consider the options for digital ambition
Start by considering whether your enterprise should optimise its existing business model or introduce new business models and revenue sources.
Digital business transformation has the ambition of pursuing net-new revenue streams, product/services and business models. It is favoured by enterprises that must adapt to an industry in disruption, or pioneers that want to disrupt their industries.
In contrast, digital business optimisation has the ambition of significantly improving existing business models through improved productivity, greater revenue generation of existing streams and improved customer experience. It is favoured by enterprises whose industries are not going through disruption in the near term.
2. Look at the timing of transformation in your industry
Even if you recommend an optimisation approach, you should pay attention to digital transformation in your industry. Digital transformation creates a new paradigm that makes the old business model obsolete. Consequently, an optimisation strategy leaves the enterprise in a weaker competitive position. In other words, optimisation works only for so long; then it becomes a liability.
In the digital world, it's often technology driven new business capabilities that emerge to make possible a new product or business model. It grows until it disrupts the industry. At the height of its dominance, an even newer combination of technology and business can appear that fuels new products and business models. This takes revenue from the old model and transforms the industry.
The music industry is a perfect example, having undergone several rapid transformations. Other industries, on the other hand, have resisted transformation for a long time, such as the hotel industry, which looked the same for decades until Airbnb changed the terms of competition.
An optimisation strategy can work for a long time, but even the most stable industry is liable to transform at some point. You’ll need to make judgment calls about when to urge your enterprise to invest.
3. Consider your competitive stance
Once you understand when/if your industry will hit a tipping point, you will be 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 optimisation path.
However, the industry dynamics are not the only determinant. The competitive or enterprise culture profile also determines the chosen path. More pioneering companies often choose to follow a digital transformation path ahead of the tipping point — they want to be early adopters. Some even plan on being the disruptor that will cause the rest of the industry to tip.
It’s important to set a planning horizon and investment posture 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’re truly pursuing digital business transformation, you should ensure executive and board commitment to a new vision; utilise business change capabilities well-suited to a transformation path; and proactively manage the people and cultural change critical success factors.
Graham Waller is a research vice president and distinguished analyst at Gartner, working with CIOs, CEOs and digital business leaders on contemporary leadership and realising business advantage via technology. He is a co-author of two Gartner books: Digital to the Core: Remastering Leadership for Your Industry, Your Enterprise and Yourself and The CIO Edge: Seven Leadership Skills You Need to Drive Results. He will speak about digital business at Gartner Symposium/ITxpo in Australia on 30 October-2 November 2017.
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