By Pierre Leroy and Ryan McManus
Digital’s impact on value creation and company valuations across industries is vast, with estimates including the global digital economy accounting for 22% of the world’s economy in 2015 and forecast to grow to 25% in 2020 [i], $19 trillion of value at stake from the emerging Internet of Everything [ii], to some estimates of digital’s market impact as high as $100trn [iii]. Whereas digital first emerged as a marketing tactic and progressed into the operations domain--offering opportunities for cost efficiencies--it is now a major strategic imperative evolving at a staggering pace.
The term “digital” is used in a myriad of ways in today’s economy, but its basic definition is relatively straightforward—it refers to the information intensity and connectivity of resources. While the definition is simple, digital’s impact on an organization is exceptionally broad, affecting a company’s product portfolio, functional and investment strategies, business and operating model, and potentially its very survival. Digital business strategy therefore requires a combination of reengineering, creating an agile company, innovation, personnel talent and capabilities, cyber security and reimagining business models.
In this new environment, the companies that win will have a Board of Directors supporting a broad digital strategy led by the CEO, including a focus on financial performance and company culture. This article provides directors with a board-level strategic overview of the digital revolution and its implications; as well as strategic considerations for investors concerning the structure, leadership and financial promise of a company in an economy where winners and losers are more and more defined by their digital prowess.
Considerations for Directors and Investors
This article addresses the following five points:
- The speed at which digital is creating, transferring and destroying value is unprecedented, with significant and measurable implications on culture, strategy, competitors, revenue, profitability and share price.
- Digital is no longer evolutionary, it is revolutionary with ramifications similar to the Industrial Revolution.
- Digital’s power lies in creativity and collaboration. Creativity, which has been given lip service but not serious investment in many industries, is the most important element in collaboration yielding results.
- Cyber security is an extremely important risk but needs to be managed like any other risk, namely without missing digital opportunities. Superior management of cyber risks will create opportunities for competitive advantage.
- Digital requires new investments in innovation, as well as directors who support experimental investments that may require rapid and unforeseeable changes midstream. Only CEOs can lead the enterprise-wide strategic and cultural change to realize a successful digital strategy, and it is almost impossible for them to do so without board level support and understanding.
Triangulating Digital‘s Impact on Enterprise Value
An emerging body of research describes how leading companies across industries employ differentiated digital strategies to create competitive advantage. These companies are outperforming their competitors in financial terms. Financial indicators include:
· Large companies on average are looking to invest $100m in digital initiatives annually.[iv]
· Digital leaders address both growth and cost efficiency in their digital strategies, but they are twice as focused on growth than are digital followers.[v]
· Digital leaders significantly outperform their competitors in financial performance (figure 1).[vi]
|Figure 1: Digital Leaders Outperform their sector average|
Shareholder and Analyst Attention
As digital leaders continue to outperform their competition, this data provides a new lens through which analysts, investors and other stakeholders can evaluate a company’s future growth outlook and its management. As digital’s impact on competitiveness and markets is better understood, and more and more data correlating performance and digital strategy becomes available, digital leaders across sectors will garner higher valuations while digital followers will draw activists and unfriendly takeover attempts. Indeed, one of the authors was invited by a major global asset management organization to discuss the subject of digital and emerging valuation models, attended by portfolio managers with over $1 trillion under management.
Digital is Revolutionary, not Evolutionary
Despite digital’s impact on business performance, many companies consider the advantages of digital as limited and functional. They continue to think of digital in terms of tactical marketing/channel, operational efficiencies, customer applications, or specific SMAC technologies (Social, Mobility, Analytics, Cloud). Other companies consider multiple elements but do so through isolated, disjointed efforts.
Figure 2 describes the cycle of digital transformation and its impact on businesses.
|Figure 2: The Digital Transformation Cycle|
During recent years, digital has evolved through the convergence of consumer expectations, sensors and SMAC. "What's new about the digital enterprise is the emergence of all these new technologies coming together at the same time," says George Westerman, an MIT research scientist and co-author of the book Leading Digital: Turning Technology Into Business Transformation.
What’s Changed Since the Internet Bubble
Massive increases in data and computing power, combined with the digitization of previously analog resources across industries, create exponential opportunities to commercialize new value creating combinations. It is faster, easier and cheaper than ever for companies of all sizes to innovate and experiment, resulting in a wave of startup and non-traditional competitive products. During the Internet Bubble companies needed to invest substantially to create their own technology infrastructures and code base, hire their own talent, and stand up the enterprise. Now companies can rent or acquire just the resources they need, in most cases at a cost advantage. Scale is no longer a barrier to entry and may even be a handicap if it represents expensive and antiquated infrastructure.
For example, companies like Instagram, Spotify, and Netflix operate on a third party’s cloud platform. Firms now have access to speed and scale without having to pay the considerable costs of their own full infrastructure. They can rent a bundle of infrastructure services (SMAC and more) and scale up or down to meet demand.
Furthermore, Clive Longbottom, founder of Quocirca, notes non-cloud IT platforms run at approximately 10% server utilization, 30-60% storage utilization and 30% network utilization. Cloud-based services provide 80% utilization rates in most cases [vii]. These utilization rates drive lower operational costs which most companies are not able to replicate internally, creating a huge advantage for subscribing companies as they pass these savings along to customers in an effort to disrupt traditional players. During capital reviews for additional IT capacity, directors may want to ask about current utilization rates and if cloud-based solutions would be preferable to purchasing additional hardware or building another IT center.
Digital Business Strategy
As digital’s impact eclipses marketing and operations, winning companies evolve both their business and digital strategies. Figure 3 describes the four levels of digital strategy and the competitive impact associated with each level.
Characteristics of the four levels of digital strategy:
Customer centricity—understanding, anticipating and delivering new value to meet customers’ continuously evolving digital expectations—should be the focus of any digital strategy. Customer centricity in the digital revolution means more than customer satisfaction or giving the customer a great experience, although it includes both of these. In the new environment customer centricity starts with the question, “What new and enhanced value can we provide to both our current customers and customers in new markets?”
These four levels of digital strategy are not mutually exclusive, i.e. digitally savvy companies will generally address all four levels. Furthermore, every digital strategy depends on operational efficiency, user experience, a combination of SMAC technologies and data--and more and more importantly, big data.
Big data can be understood as the massively sized combination of a company’s internal and external data as well as data it has acquired from other sources, organized such that it can be analyzed and repurposed. Data needs to move seamlessly within and outside of a company, including to customers and partners; and potentially represents new monetization opportunities through either entirely new analytics-based revenue streams or analytics offerings added to existing products. Companies must also plan to stay abreast of the continuing rapid developments in big data, including data lakes, machine learning and other applications of artificial intelligence.
Successful companies start to distinguish themselves from the pack at the product and services and business model levels, which bring greater opportunity for competitive advantage. Companies which focus their digital strategies at the products and services level look to either add a digital element to an existing offering (e.g. mobile banking) or create new offerings from newly available digital combinations.
The first instances of business model disruption largely occurred in media and communications, but now impacts every sector:
- Automotive OEMs need to reimagine vehicles as part of a broader, connected information ecosystem as well as adjust for changing models of ownership as companies like Uber or Google’s self driving vehicles challenge traditional notions of vehicle ownership.
- Consumer financial services firms see their revenues under threat as startup and nontraditional competitors take bites out of specific elements of their value chains (e.g. Wealthfront in wealth management or Venmo in payments).
- Even staid utilities need to grapple with changing business models, as more consumers install alternative energy solutions and sell energy back to the grid—their relationship is now bidirectional in terms of both energy and payments.
Examples of emerging digital business models exist across nearly every sector. They require leaders to reconsider not only products and services, but the entire strategy of their organization across corporate, business, operating, talent, culture, risk, legal and functional levels as well as how their company fits into rapidly changing and converging value chains across sectors. In fact, more and more organizations are looking to nontraditional ecosystem partnerships and acquisitions in an attempt to create customer value.
- IBM and Apple work together and with the startup Box to create a new analytics offering providing file sharing, cloud services and analytics services on Apple devices.
- Santander teams with mobile payment company Monitise to jointly invest in and build new Fintech startups.
- Audi, BMW and Daimler purchase the mapping service Nokia Here for $2.7bn to own a key element behind self-driving cars.[viii]
A successful digital strategy defines new opportunities to create new value for companies and their customers. It aligns the technology, functional, cultural and operational considerations in service of these new value outcomes, potentially rendering obsolete or reducing the value of what previously existed.
The understanding of digital and digital strategy is varied among directors, which can lead to gridlock in the boardroom. Some directors view large investments in people, systems and cultural change as a waste that doesn’t create shareholder value. In addition these directors are hesitant in experimenting and investing in projects more experimental in nature. Others understand without transforming the organization it will not survive.
Digital director searches are becoming more common with boards primarily seeking directors from Internet companies, former CIOs or directors with digital marketing backgrounds. These profiles may not fit culturally with the rest of the board or, worse, may even perpetuate an outdated and exclusively tactical digital perspective. Digital directors should have demonstrated digital creativity, a broad understanding of digital business strategy and be “culturally-bilingual” in that they are able to bridge any gaps within the board while serving as the CEO’s digital champion.
Representing Shareholders in a Digital World
It used to be that change was the only constant. Now the only constant is dramatic, rapid change where digital is the primary driver.
When digital was primarily concerned with marketing or incremental improvements to operations it was appropriate for it to be a minor item on the board agenda. When cyber security became a major risk issue, digital became a more important agenda item. In these times of digital disruption, a lack of creativity and a fear of experimentation will prevent companies from succeeding.
As digital has evolved into a major driver of value creation, business strategy and competitive differentiation, some boards have created a digital/technology committee. Given digital’s importance to a company’s competitive advantage and in some cases their survival, establishing a board-level committee with members who are or will become digitally savvy is prudent. As investors incorporate digital’s importance into company valuations and governance, they will insist on it.
About the Authors:
Pierre Leroy is the Founder of the Aspiture, a Venture and Strategy Consulting firm. He currently serves on the boards of Capital One Financial Corporation and Rocore. Previously, he was the CEO of Vigilant Solutions (a digital software and hardware company) and served on the boards of Fortune Brands, RSC, and United Rentals. He is the retired President of Worldwide Construction & Forestry Equipment and President, Global Parts Division, at Deere & Co.
Ryan McManus is the SVP of Partnerships and Development for EVRYTHNG, an IOT smart products platform, and currently serves on the board of Nortech Systems. He is the co-founder of Aspiture and collaborates with TheVenture Lab on digital strategy and transformation topics including new ventures, growth, product development and innovation for startup, growth and large companies. He previously founded Accenture’s Digital Business Strategy practice and served as the Accenture Strategy COO and a leader in the firm’s Corporate Strategy, M&A and International Expansion businesses. He is the author of several publications and a frequent presenter on digital and business strategy.
[i] Digital Economic Value Index, Accenture, January 2016
[vi] MITs Center for Digital Business and Cap Gemini report “The Digital Advantage: how digital leaders outperform their peers in every industry”