Consultants like to warn CIOs that if they don't embrace modern technologies to meet customer demands that they will be left in the dust by more nimble rivals. Such sky-is-falling proclamations have been taken lightly because they've been difficult to back up. However, new research from Harvard Business School (HBS) professor Marco Iansiti and Keystone Strategy suggests that a divide is forming between organizations that have accelerated their digital transformations and those that are still figuring out a working digital model.
Digital leaders, defined in the report as companies that landed in the top quarter of its research, generate better gross margins as well as better earnings and net income than organizations in the bottom digital quarter. Leaders post a three-year average gross margin of 55 percent, compared to just 37 percent for the laggards. Leaders also outstrip laggards in three-year average earnings 16 percent to 11 percent. And in three-year average net income, leaders have the advantage 11 percent to seven percent.
"It's a pretty substantial gap and it correlates with performance in significance ways," says Iansiti, a professor of business administration at HBS, who collected his research from more than 300 senior business and technology decision makers from large enterprises. "The bad news is that it's not going to go away so this is a call to action to go out there and do something about this."
Digital is disrupting the business
Digital technologies are increasingly weaving their way through society’s fabric. Smartphones, tablets and, increasingly, wearable deviceshave replaced or complemented laptops for many people. Everyday machines equipped with sensors and IP addresses are throwing off data to devices, which are listening and reacting. Chat bots are augmenting order placement at chains such as Taco Bell and Dominos Pizza.
CIOs have blanketed such efforts under the phrase "digital transformation" over the past two years. The report, which included input from retail, manufacturing, financial services and consumer packaged goods companies, suggests that researchers are starting to ask the hard yet valid questions about how these efforts are paying off. “Digital transformation has become the new normal,” Iansiti says.
While some enterprises, such as General Electric, Ford and Burberry are spending billions of dollars to facilitate technology, operational and cultural changes, others have lagged behind, says Iansiti. "Our research shows that a substantial performance gap is opening between digital leaders and laggards, effectively creating a “digital divide” across companies," says Iansiti.
CIOs may be tempted to argue that digital leaders boast bigger budgets than their laggard counterparts, but Iansiti quashed this notion. The highest performing companies have technology budgets on par with digital laggards, with average IT spending as a percentage of revenue at 3.5 percent, compared to 3.2 percent for their counterparts.
The difference, Iansiti says, lies in how companies put their data to use. Using their data platforms, leaders have implemented a comprehensive data acquisition strategy and differentiate themselves from competitors. That means they are more likely to have access to a consistent set of current metrics with which to make decisions and are able to generate predictions about their business. Digital leaders are two-and-a-half times more likely to harness real-time data and analytics to deliver tailored customer experiences and are also two-and-a-half times more likely to use analytics to prescribe business actions that limit customer turnover.
“Digitization is dramatically changing the nature, focus and speed of these decisions, as well as the technology, services and systems that enable effective and efficient operating performance,” Iansiti says.
Platform strategy is key to cultivating a network
To adequately capture value, digital transformations requires a strategic rethinking of business and operating models, emphasizing CRM and engagement, product creation and service delivery, and recruiting talent to work with new and emerging technologies.
Ideally, the business focus will shift toward a platform strategy that cultivates network effects in which value multiplies as the network expands. And that requires rich API sets that allow organizations to connect disparate applications that share data. For example, Walgreens has opened up its APIs to allow third-party developers to integrate with the drugstore retailer’s mobile application. And Pitney Bowes now counts on APIs to allow developers to leverage its logistics capabilities.
Although companies that lack data management, digital operating models and platform strategies are behind the digital leaders, Iansiti remains optimistic. He says technology, including mobile and cloud platforms, enables businesses to accelerate their time to market. Analytics has moved from its traditional back-of-the-house function to the forefront of business decision -making, with self-service capabilities that allow business analysts to generate insights without appealing to IT for help.
“It’s not as impossible or insurmountable as it used to be,” says Iansiti, of the likelihood of laggards catching rivals. “There are a lot of good platforms to bring in to drive change.”
Iansiti conducted his research, "The Digital Business Divide: Analyzing the operating impact of digital transformation," in collaboration with Keystone Strategy, funded in part by Microsoft. (Download the report here.) Researchers interviewed 344 senior business and technology leaders via phone, asking them 74 questions about the technologies they have deployed. The research focused on upper-midmarket and enterprise organizations, with a median company size of more than 6,000 employees and $3.4 billion in company revenue.