Digitalization & Corporate Strategy

Posté le 4 juillet 2016

Summary

This paper aims at enlightening some questionings firms may raise regarding digitalization, especially its relationship with corporate strategy. Despite general wisdom, digitalization is not limited to social media, web site and so on. It includes any activity, process made possible by digital technology.

The raising firms’ interest in digitalization is explained by its daily presence and its significant impact on revenue, margin, productivity, and innovation. Furthermore, it is not only impacting companies, which businesses are based on technologies, it affects or will affect any firm, any sector, any type of job, any function in companies. All organizations will be dramatically affected by digital technologies.

Digitalization is altering the traditional competitive landscape of companies. Indeed, it drives multiple changes including, among others, the followings:

  • It blurs the boundaries and definition of industries
  • It lowers the barriers to entry
  • It modifies the Key Success Factors
  • It enhances the alteration of customers’ expectation and behavior
  • It enlarges the sources of expertise available
  • It shortens time horizons and increases uncertainty
  • It modifies the relevant pillars that one has to think about when creating a strategy
  • It increases the speed of the evolution of business models

It is disrupting traditional business rules. It provides new ways to create and capture value, as well as revenue. The right combination of digital technology, information and physical assets can grant a digital edge that may constitute a competitive advantage. However, a large number of companies underestimate the considerable influence of this technology.

The real threat from the use of digitalization emanates from companies able to enhance their performance by combining digital technology and physical resources. A truly digital company incorporates digital principles into its strategy, business model, operations and culture.

Today, any company needs to exploit the potential of this technology by developing a digital strategy.  Such a strategy consists in a combination of digital technology, information and physical resources that allows raising human performance. Failing to implement it will undermine the competitiveness of a firm. Indeed, the more digitalized companies in the U.S lead in terms of products, services, business model innovation, and revenue growth.

The development of a digital strategy implicates the understanding of the transformation and disruption faced. A framework inspired by McKinsey & Company provides a good start to assess the sources of disruption. It also suggests solutions to avoid being vulnerable.

The relationship between digital strategy and corporate strategy is still under debate. However, authors of articles tend to agree that the digital strategy of a company needs to become the essence of its corporate strategy. Digital strategy must at least be incorporated into the corporate strategy.

In brief, a digital strategy is not a choice. It is becoming a requirement for any organization that wants to remain competitive on its markets.

Introduction

Digitalization is raising more and more interest in today’s economic fabric. Its importance will even grow exponentially in the near and long term. Some talk about “the forth industrial revolution” (Reymondin, 2016). The concern about digitalization arises mainly from the daily presence and usage of digital technologies. It profoundly modifies the strategic context of companies. It is reshaping the structure of competition, the conduct of business, and as a result, the performance across industries.

Since the digital world is gaining in importance, companies may raise questions about the place or even the impact of this technology in organizations. They may inquire whether its influence is limited to information technology systems or whether its effect is larger and touches other departments of the organization. With the aim of enlightening part of these questionings, this paper will discuss the impact of digitalization on companies’ strategy and especially its relationship with corporate strategy. 

Why digitalization raises interest?

Digitalization is not only about social media, platforms, websites etc. It is the “integration of digital technologies into everyday life by the digitization [“conversion of analog information in any form to digital form” (BusinessDictionay.com, 2016)] of everything that can be digitized” (BusinessDictionay.com, 2016). It includes any activity, process made possible by digital technology. This explains its considerable influence.

As stated above, the democratization of digitalization as a subject of discussion emanates from its influence on daily life. In fact, 3.175 billions people, 43% of the world population, are active on the Internet (we are social, 2015). This number increased by 7.6% compared to 2014 (we are social, 2015). This statistic and others available on “We are social” demonstrate partially the importance of digital technology in individual life. Nevertheless, the global digitalization has also multiple effects on the corporate world. Digital is reconfiguring business landscapes and therefore altering the key drivers of value creation and value capture. This is why companies need to rethink their strategy in order to adapt and compete in this evolving environment.

Several companies are aware of the need for changes, but only a few are searching for solutions to prevent digital disruption. According to a published study by Forrester in 2015 (Fenwick, 2015), 46% of executives surveyed in the United States think that digital will have an impact on more than half of their sales in less than 5 years. This proves the awareness of the potential for this technology to reshape business. Furthermore, these executives predict that 47% of their revenue will be influenced by digitalization by 2020, compared to the estimate of 24% in 2014 and 29% in 2015. As a result, these companies are willing to invest in digital. Failing to undertake actions regarding digital technology would undermine their competitiveness. In addition to Forrester’s study, recent researches from McKinsey Global Institute revealed that, over the past 20 years, the most digitally advanced U.S sectors increased their productivity and improved their profit margins by two to three times the average rate in other sectors (Manyika & al., 2016). Moreover, the more digitalized companies in the U.S lead in terms of products, services, business model innovation, and revenue growth, as well as are usually the ones disrupting the sectors (Manyika & al., 2016).  

In brief, the raising firms’ interest in digital is explained by its daily presence and its significant influence on revenue, margin, productivity, and innovation. However, it seems that most of the companies are not yet ready for changes. Besides, a large number of them underestimate the potential influence of this “forth industrial revolution” (Reymondin, 2016).

Changes brought in by digitalization

On the one hand, the key external digital trends includes the pervasive connectivity, the information abundance, the global supply chains, the improved price/performance of IT, the growth of cloud computing, and the emergence of big data. On the other hand, the key organizational shifts include the limitations of traditional business models, the trans-functional role of IT, and the increased familiarity with IT. As a result, digitalization is reshaping the competitive landscape of companies. They now have to take into account various altered elements when evaluating or rethinking their strategy.

The following table presents a few examples of the changes brought in by digitalization, although it is not an exhaustive list.

Corporate_Strategy__Digitalization_MBD_Consulting_1.jpg

As mentioned above, knowledge sources, cost of IT, entry barriers, boundaries etc., all alter the landscape of organizations and the competition. In brief, Digitalization provides new ways to create value but also increase the difficulty to capture the value created.

Digitalization is not only impacting companies, which businesses are based on technologies, it affects or will affect any sector, any type of job, any function in companies. Firms even in manufacturing and other traditional industries start investing in the digitalization of their physical resources. Furthermore, not all digitally more developed companies are young and small firms contrary to general wisdom. Digitalization challenges as well large and small, as old and new companies. All companies will be dramatically affected by it.

While some incumbents get surprised by unexpected new comers, some others immerse themselves in the same world as challengers, and seek to harness digital technology and rethink their business model to face potential disruptions. In fact, companies, which do not understand the worth and importance of digital undermine their future competitiveness. Interestingly, digital start-ups do not constitute the real danger for incumbents. The real threat emanates from companies able to enhance their performance by combining digital technology and physical resources; the organizations that understand and take proper actions regarding digital technology.

What is a Digital Strategy?

Although the terms digital and strategy are relatively well known, their common understanding has been revised with organizations’ experience regarding digital technologyOn the one hand, “Digital is more than a set of technologies” (McDonald, 2015). “It is about the abilities those technologies create” (McDonald, 2015). “Digital is the application of information and technology to raise human performance” (McDonald, 2015). Digital is just another technology when investments do nothing for changing what people do in ways that improve their performance, and are thought as limited to marketing. On the other hand, “strategy is setting a direction, sequencing resources and making commitments” (McDonald, 2015). M & BD Consulting combines the two terms and defines digital strategy as being “a set of maneuvers that allows the company to lead successfully its competitive conquest in the digital world. It is a process of decision and actions, which are intentional and proactive. It is from this process that the company defines its priorities in the digital world, allocates and reallocates its resources” (Gonzalez, 2015).

Until recent years, digitalization was mostly part of the IT strategy. While most companies may have an IT strategy that includes digital technology, not all can pretend to have a proper digital strategy. It is worth pointing out that an IT strategy is not similar to a digital strategy. In fact, most IT strategies consider technology in isolation. The company may have a cloud strategy, a social strategy, even a mobile strategy, but all of them are independent strategies. In the past, an IT strategy was sufficient for companies to be competitive. But now IT technology alone does not create sustainable value anymore. Any firm needs to develop a digital strategy for its business to compete in this fast digital evolving environment.

A digital substitution strategy is neither sufficient. Digital substitution based on automating and substituting physical resources for digital only creates virtual copies of the real world by developing e-surrogates for physical processes. In order to generate value and revenue, companies need to create a digital edge by combining digital and physical resources. Companies seeking to achieve this objective transform processes, business models, and customer experience by using the digital connections between systems, people, places, and things. They must merge digital technology, information, and physical resources to enhance collaborators’ abilities.

In sum, a truly digital company incorporates digital principles into its strategy, business model, operations and culture. Those limiting the changes to establishing and unifying digital technology into existing corporate strategy, model and operations only feel digital. They actually are only digital veneers.

Why is a digital strategy necessary?

As partially stated previously, some researches showed that companies with above their industry average levels of digital revenue outperform their peers, grow faster, enjoy higher margins, are more capital efficient, and offer more shareholder equity. As of today, firms that do not take actions to properly utilize digital have larger risks to fall behind their competitors.

Having a digital strategy today is essential, especially since digital changes the rules, and thus reduces the effectiveness of past practices. As illustrated by the graphic from Expert interviews; McKinsey analysis below, digital can reshape each aspect of the modern enterprise (Olanrewaju & al., 2013).

Corporate_Strategy__Digitalization_M__BD_Consulting_2.jpg

Insights for the conception of a digital strategy

A digital strategy must transcends traditional functional areas and IT-enabled business processes. Although it includes the digitalization of products and services, as well as the information around them, it also extends beyond firm boundaries and supply chains to dynamic ecosystems that cross traditional industry borders. The strategy cannot be developed without taking into account the business ecosystem, the alliances, the partnerships, and the competitors, since the ecosystems are intertwined.

In order to make the right decisions and develop the most adapted digital strategy, firms need to understand the transformation and disruption faced rather than the specific actors that might initiate these changes.

Strategy& suggests to think about, among others, the following questions before creating a digital strategy (PwC, 2016):

  • « How will digitalization affect our current business model and positioninig within our industry’s value chain ? »
  • « How can we identify and enter business areas where value is being created, both inside and outside our industry ? »
  • « What areas of our business model are vulnerable to disruptions form new entrants, and how can we best address them ? »
  • « Which capabilities do we need to build to be a leader in the field ? » (PwC, 2016)

Further questions should be addressed regarding innovation and product development, supply chain and operations, marketing, sales and services, and the workplace. Indeed, digitalization is changing how companies innovate and develop products. It is raising questions regarding the utilization of technologies to improve efficiency and control on the supply chain and operations. It is influencing the rapid evolution of marketing, sales and services methods. It is also altering the workplace, which requires from companies to adapt in order to continue to attract best talents (PwC, 2016).

Digital Strategy framework

McKinsey&Company has created a framework aiming at making sense of digital disruption, raising awareness about potential indicators of vulnerability to this disruption, and providing companies with ways to address it (Dawson & al., 2016). In sum, it helps companies to understand their situation in order to use this information when developing, modifying, or adapting their digital strategy.

Digitalization can disrupt industries when it modifies the nature of supply, demand or both. This is why the authors explored supply and demand across the extent to which elements change because of digital disruption.

The first part of the framework illustrates the modest changes in supply and demand, while the second part explains the more extreme shifts.

Corporate_Strategy__Digitalization_MBD_Consulting_3.jpg

Second part of the framework

Corporate_Strategy__Digitalization_MBD_Consulting_4.jpg

This framework allows measuring the potential threats and opportunities of digital disruption. Any company, in any industry, in any business needs to watch out for threats and opportunities beyond their traditional boundaries. Companies today should systematically analyze the potential sources of disruption. This can be done, as shown by this framework, through the assessment of the supply and demand. It leads to a better understanding of the threats faced in the digital world and allows proactively looking for opportunities.

In sum, this framework enables companies to better identify the potential sources of disruption and better respond to them. It highlights some elements that need to be addressed by a digital strategy to reduce the companies’ vulnerability to disruption.

Place of Digital Strategy in Organizations

The digital strategy of a company needs to become the essence of its corporate strategy. Coupling the digital infrastructure with the corporate strategy gives the ability to rapidly adapt to the dynamic requirements of the digital marketplace. A firm can win in the digital world using information and technology to raise human performance by having a digitally informed corporate strategy. Digital strategy has to be incorporated into the corporate strategy.

The article “Digital Business Strategy: Toward a Next Generation of Insights” goes even further and states that a “digital business strategy” should not be considered below the corporate strategy but treated as the corporate strategy itself for the digital era (Bharadwaj, 2013). The authors envision that the “digital business strategy” will be the corporate strategy. In other words, digital strategy and corporate strategy are combined into one strategy.

In sum, the digital strategy must at least be the essence of the corporate strategy, if not the corporate strategy itself.

Conclusion – A digital strategy is becoming a requirement!

The pace of digital evolution is accelerating, and companies in every industry must pay attention. All of them face a large set of alternatives to gain a digital advantage. They have to analyze and choose from these options to enhance their competitiveness.

Today, any company, whatever its size and its industry, willing to remain competitive must integrate a digital strategy into its corporate strategy. This strategy is more than just taking advantage of social media, website and so on. It has to combine information, technology and physical resources to enhance collaborators’ abilities. In addition, a digital strategy on its own will not grant sufficient results. It has to be incorporated into the corporate strategy to have a chance to deliver a competitive advantage.

In brief, a digital strategy is not a choice. It is becoming a requirement for any organization that wants to remain competitive on its markets.

Recommendations M & BD

Understanding the scope of digital strategy is essential. It is not limited to social media strategy, website strategy, and technology strategy. Digital technology impacts far more activities and processes. It is or will be present all over the company, in any function, any division, any operation, in sum in any activity available within the firm. As a result, no aspect of the company should be spared by the digital strategy.

Companies should use digital technology to generate new sources of value and revenue, or even to create a digital edge. Applying technology to operations is not enough and will not provide the results expected. Benefiting properly from digital infrastructures requires creating a digital strategy.

This digital strategy needs implications and applications all over the firm. A digital substitution strategy will not provide a sustainable digital edge, as it does not exploit the whole potential of digital technology. Companies willing to create value and revenue from this technology need a proper digital strategy that is integrated into the corporate strategy.

 

Appendix

Potential decisions faced in the digital age

The changes from digitalization raise many challenges and questions for companies. The article “Strategic principles for competing in the digital age” mentions six decisions that companies may have to make in the digital age (Hirt, 2014). The followings consists in five of them:

  1. Since the growth and profitability of some businesses decrease in a digital world, and the capabilities needed change as well, companies may have to modify their portfolio of businesses. 
  2. Whether to launch disruptive strategies oneself or forego the digital moves constitutes another key decision. The answer depends on the industry, the entry barriers, the regulatory complexities and so on. 
  3. What is the reaction to adopt with attackers? Depending on the situation, competing with challengers is worth, while in others it might be better to cooperate. Indeed, digital technology is enhancing the ways to create collaborative innovation.
  4. The digital opportunities and challenges multiply the areas where to invest. Therefore, companies have to think about whether to diversify or invest more in an existing domain. 
  5. Companies have to decide who will be in charge of the digital agenda. Although the CEO may be the right person, as digital changes impact most of the organization, he is often already overwhelmed. Hiring a chief digital officer may be another solution. However, difficulties may rise from its level of influence for implementing the changes needed across the whole company.

 

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References

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http://blogs.forrester.com/nigel_fenwick/15-12-08-the_state_of_digital_business_2016_to_2020

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http://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/strategic-principles-for-competing-in-the-digital-age

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