By Pierre
Leroy and Ryan McManus
Introduction
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.
|
Figure 3: Four Levels of Digital Strategy |
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.
For
example:
- 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.
Digital
Directors
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
[ii]
https://www.weforum.org/agenda/2014/01/are-you-ready-for-the-internet-of-everything/
[iii]
http://reports.weforum.org/digital-transformation-of-industries/an-introduction-to-the-digital-transformation-of-industries-initiative/
[iv]
http://sites.tcs.com/stateofdigital/
[v]
https://www.accenture.com/us-en/insight-doubling-down-drive-digital-transformation
[vi] MITs Center for Digital Business
and Cap Gemini report “The Digital Advantage: how digital leaders outperform
their peers in every industry”
[vii] http://www.cybertrend.com/article/17307/managing-cloud-disruption
[viii] http://www.wsj.com/articles/bmw-daimler-audi-agree-to-buy-nokias-here-maps-business-1438580698
[ix]
https://hbr.org/2015/03/why-data-breaches-dont-hurt-stock-prices
[x] http://money.cnn.com/2014/12/15/investing/sony-stock-hack/