MITSloan MANAGEMENT

The Digital Advantage: How digital leaders outperform their peers in every industry

Transform to the power of digital Introduction

New digital technologies like social media, mobile, and analytics are advancing rapidly on the economic landscape. These innovations are used widely by consumers and employees alike. Facebook has more than 1 billion users.1 There are more than 6 billion mobile phones.2 Employees often have better digital solutions at home than they do at work, and many customers are more technology savvy than the people trying to sell to them.

Executives in every industry – from media to electronics to paint manufacturing – face a bewildering array of new digital opportunities. They are paying attention, but they have few signposts to guide them. Most stories in the business media focus on fast-moving startups like Zynga and Pinterest, or on a few large high-tech firms like Apple, Google, or Amazon. Unfortunately, to many leaders, stories of these nimble and innovative firms just do not make sense for traditional companies that are older, larger, and burdened with inflexible legacies.

We decided to find out what fast-moving digital innovations mean for large traditional companies. In two years of study covering more than 400 large firms (See About the Research), we found that most large firms are already taking action. They are using technologies like social media, mobile, analytics and embedded devices to change their customer engagement, internal operations and even their business models. But few firms have positioned themselves to capture the real business benefits. Our research points to a real “digital advantage” to those that do.

Digital maturity matters. It matters in every industry. And the approaches that digitally mature companies use can be adopted by any company that has the leadership drive to do so.

Few firms have positioned themselves to capture the real business benefits. Our research points to a real “digital advantage” to those that do.

2 What is Digital Maturity?

Some companies are what we call the Companies in all industries are separately in social media, digital “Digirati.” They have the digital maturity investing in interesting digital initiatives. product design, custom manufacturing, not only to build digital innovations, However, in many firms, these and other areas (See page 19). but also to drive enterprise-wide investments are uncoordinated and The elements of transformation transformation. And they benefit from sometimes duplicative. management intensity work together their actions. Digirati have significantly – through a combination of top- higher financial performance than their Firms maturing in the second down leadership and bottom-up less digitally-mature competitors. dimension, transformation innovation – to drive ongoing digital management intensity, are creating transformation. However, in many Digital maturity is a combination of two the leadership capabilities necessary companies, these elements are overly separate but related dimensions (See to drive digital transformation in the slow or conservative, preventing figure 1). The first,digital intensity, organization. Transformation intensity the company from investing in is investment in technology-enabled consists of the vision to shape a new innovative opportunities. initiatives to change how the company future, governance and engagement operates – its customer engagements, to steer the course, and IT/business internal operations, and even business relationships to implement technology- models. Burberry (See page 5) used based change. Volvo developed a technology to improve the in-store vision and governance capabilities experience and increase operational before it began to implement new excellence. Codelco (See page 5) digital services in its cars.3 Nike built is automating mining operations to a digital division called Nike Digital improve efficiency and safety while Sport to coordinate and extend creating new business opportunities. the successful activities it had built

Figure 1. The What-and-How of Digital Transformation

DIGITAL INTENSITY TRANSFORMATION MANAGEMENT INTENSITY

Technology-enabled initiatives in: Leadership capabilities including:

• Customer Engagement • Vision • Internal Operations • Governance • Engagement Location-based marketing • IT-Business Relationships Connected products Digital Design Real-time monitoring of operations Vision of the firm’s future Mobile sales Cross-silo coordination Optimized Pricing Evolving the culture Communities in social media … New skills …

3 The two dimensions spell out four with the vision of gaining synergies aiming to spend wisely, their careful different types of digital maturity among the items. Digital Fashionistas approach may cause them to miss (See figure 2). Companies in the are motivated to bring on digitally- valuable opportunities upon which their lower left are Digital Beginners. These powered change, but the digital more stylish competitors will pounce. firms do very little with advanced transformation strategy is not founded digital capabilities, although they on real knowledge of how to maximize Firms at the top right are Digirati. may be mature with more traditional business benefits. Companies lacking They truly understand how to drive applications such as ERP or electronic enterprise-level governance may value with digital transformation. They commerce. Although companies may find they are in this quadrant at the combine a transformative vision, be Beginners by choice, more often corporate level, even if digital efforts are careful governance and engagement, than not they are in this quadrant by more mature in some business units. with sufficient investment in new accident. They may be unaware of the opportunities. Through vision and opportunities, or may be starting some Companies in the bottom right engagement, they develop a digital small investments without effective are Digital Conservatives. They culture that can envision further transformation management in place. favor prudence over innovation. changes and implement them Conservatives understand the need for wisely. By investing and carefully Firms in the top left are Digital a strong unifying vision as well as for coordinating digital initiatives, they Fashionistas. These companies have governance and corporate culture to continuously advance their digital implemented or experimented with ensure investments are managed well. competitive advantage. many sexy digital applications. Some of However, they are typically skeptical these initiatives may create value, but of the value of new digital trends, many do not. While they may look good sometimes to their detriment. Though together, they are not implemented

Figure 2. Four Types of Digital Maturity

FASHIONISTAS DIGIRATI Y IT NS L INTE TA GI DI

BEGINNERS CONSERVATIVES

TRANSFORMATION MANAGEMENT INTENSITY

4 Codelco: Revolutionizing Mining Through Digital Technologies

Codelco Digital was created in 2003. to promote new ideas and encourage It has both operational and strategic our workers to innovate.”4 objectives: to drive initiatives in mining- Today, the firm is shifting from the automation and also to support the traditional “Codelco 1.0” model to Codelco, the largest copper producer CEO in developing, evolving and “Codelco 2.0”, a real-time mining model in the world, has its roots back in the communicating a digital vision. Today, with highly automated processes and 1800s. Owned by the Chilean State, it four mines in Chile are operated remotely-controlled machines. And operates internationally and employs automatically: trucks drive themselves, there is already a vision for “Codelco over 18,000 people. At the beginning operations are controlled remotely, 3.0”: an intelligent mining model relying of the millennium – facing increasing information is shared in real-time, on integrated information networks and challenges around workers’ security, and so on. This was more than just a fully-automated processes.5 environment and productivity – Codelco technology implementation challenge. took a hard strategic look at what the It involved a new culture, employee future of mining could be. An important engagement, and new skills. As CIO goal was to automate mining operations, Marco Antonio Orellana Silva explains: shifting from a physical-intensive “Our company is very conservative, so model to a knowledge and technology- changing the culture is a key challenge. intensive one. To turn vision into reality, We created internal innovation awards

Burberry: The Digital Transformation of an Iconic Luxury Brand

as online, Burberry also leveraged Ahrendts, “Digital has been a catalyst digital technologies to enrich the for everything in the company and, in-store customer experience, while when we got everyone on board with at the back end, it rolled-out a global this concept, they were clamoring to Burberry is an iconic British luxury ERP program to unify processes and become even more connected.” While brand established in 1856. When CEO integrate data across the globe. this transformation is now bearing fruit, Angela Ahrendts took over in 2006, Ahrendts already has one eye on the Achieving this transformation was it was significantly underperforming future possibilities: “Consumer data much more than new technology against its peers: while the overall will be the biggest differentiator in implementation. This was a closely sector was growing at around 12-13% the next two to three years. Whoever managed change program to achieve a year, Burberry’s rate was about 1-2%. unlocks the reams of data and uses it cross-channel consistency, engage To address these issues, Ahrendts strategically will win.”6 employees, secure the right skills, launched a significant transformation and develop strong IT-business program covering multiple business relationships. Specific governance areas, from customer experience to was put in place, new roles were operational excellence, and largely created, and missing skills were driven by digital technologies. As well developed or acquired. According to

5 Digital Maturity Matters

Companies take different paths Asian Paints went the other way, and business models. Both firms are to digital maturity. Nike started creating vision, governance and IT reaping huge benefits. by developing digital intensity in capabilities to become a more unified silos. Then it added elements of company.7 Then it repeatedly built on These companies are not alone. transformation management intensity its capabilities to transform its customer The 391 companies in our survey vary to link the silos and launch new engagement, internal operations widely on digital maturity (See figure 3). capabilities. Indian paint manufacturer

Figure 3. Digital Maturity Varies Widely

FASHIONISTAS DIGIRATI

BEGINNERS CONSERVATIVES

To understand the relationships to their less-mature competitors, we Digirati – those companies that are between digital maturity and financial found striking differences (See figure mature in both dimensions – have the performance, we analyzed industry- 4). Companies that are mature in highest performance, far outperforming adjusted financial performance of either of the two dimensions outstrip less-mature firms on multiple financial the 184 publicly traded firms on our industry competitors along different measures. sample (See About the Research). dimensions of financial performance. Comparing digitally mature companies

6 Figure 4. Financial Performance

REVENUE GENERATION

Companies with stronger digital intensity derive more revenue from their physical assets

+6% +9%

Basket of indicators: • Revenue / Employee • Fixed Assets Turnover (Revenue / Property, Plant & Equipment) -4% -10%

PROFITABILITY

Companies with stronger transformation management intensity are more profitable

-11% +26%

Basket of indicators: • EBIT Margin • Net Profit Margin -24% +9%

MARKET VALUATION

Companies with stronger transformation management intensity achieve higher market valuations -12% +12%

Basket of indicators: • Tobin’s Q Ratio • Price / Book Ratio -7% +7%

7 Digital Intensity and Digirati outperform all Revenue Generation others Companies that are mature on the Companies that Firms that are more mature on digital intensity dimension (vertical are mature in either dimension outperform their axis in the matrix) are better at driving competitors in specific and different revenue through their existing assets. transformation ways. The Digirati – the 25% of On a basket of measures including management intensity firms that are more mature in both revenue per employee and fixed dimensions – far outperform the asset turnover, Fashionistas and are more profitable. others. On average, Digirati are 26% Digirati outperform average industry more profitable than their industry performance by 6-9%. Hospitality firm competitors. They generate 9% more Caesars Entertainment, for example, revenue through their employees and has launched a location-based mobile physical assets. And they create more marketing capability (See page 16). value, generating 12% higher market Customers get offers when and where Transformation valuation ratios. The Digirati advantage they need them, and Caesars is able to Management Intensity and is more than just the sum of learn – in real time – about the personal Profitability performance gains for Conservatives preferences of each customer. and Fashionistas. Digirati combine Moving in the other dimension, digital intensity and transformation Digital intensity helps companies companies that are mature in intensity to achieve performance that to gain and manage more volume transformation management intensity is greater than either dimension can with existing physical capacity. The are more profitable. On average, deliver on its own. difference is substantial. For example, Conservatives and Digirati are 9-26% Fashionistas – strong on digital intensity more profitable than their average but not on transformation management industry competitors on a basket of intensity – drive 16% more revenues measures including EBIT margin and through their human and physical net profit margin. For these firms, assets than Conservatives do. strong vision and governance help to align investments along a common direction. They weed out activities that run counter to the future vision of the transformed firm. Then they engage their employees in identifying new opportunities. Executives of French Digital intensity helps yellow pages firm Pages Jaunes companies to gain and declared that all future investment, other than maintenance, must focus on manage more volume growing digital revenues and profits, with existing physical not improving the traditional paper- based business. Meanwhile, through capacity. communication and training, executives engaged the workforce to enact the vision and generate new ideas.

8 Digital Maturity Matters in Every Industry

The results are clear. On average, data points. High Technology firms Manufacturers and CPG firms, for Digirati are 26% more profitable than lead in digital maturity, as might be example, are still in the Beginner their industry competitors. For the large expected. Banking and retail are in the quadrant on average, although traditional companies we studied – Digirati space, but are not as mature as some firms are more advanced. most of which are $1 Billion or larger in high tech. The bankers’ Digirati status Pharmaceutical firms, while still revenues – the difference can be many may be because digital features such Beginners on average, look more millions of dollars on the bottom line. as online or mobile banking are good like Fashionistas than the other two But, does this mean every industry is for both banks and their customers. industries. Pharma companies are equally affected? Can companies in Digital offerings provide convenience to starting to invest, but may be having some industries afford to wait? customers while serving as lower-cost difficulty in linking organizational silos – channels for the banks. a legacy of a long history of acquisition Digital transformation is moving more and decentralization – or executives rapidly in some industries than in Telecom and travel are in the may believe they have time before they others. Companies in the travel and Fashionista space. They have launched need to transform. music industries were hit early by important technology-based features threats from digital competition, and and business model changes, but Beginners have already undergone profound on average their transformation transformation, but still have more management intensity is not quite Pharmaceuticals – Executives challenges to face. Industries such enough to move them into the Digirati. see threat in digital transformation as financial services and retail but less opportunity than other underwent major transformation due Insurance and utilities are in the industries do, perhaps because to electronic commerce in the 2000s, Conservative space. Some insurers of regulation. Many are building and are now starting to innovate with are focused on innovating with new capabilities in analytics and technologies such as social media, technologies, but many are being held worker enablement, but most mobility and analytics. Other industries, back by regulatory concerns or difficult firms are just beginning their however, have yet to be hit hard by organizational legacies. Similarly, digital journeys, leaving many fast-changing technologies. utilities may be hindered by legacies of opportunities untapped. culture or regulatory environment that Figure 5 shows digital maturity, by force a focus on cost reduction rather CPG – Digital opens new industry, for our survey. Each dot than broader innovation. possibilities for firms to engage represents the average maturity of directly with customers. 24% of firms industries for which we have 20 or more Other industries are less mature. surveyed stand out as Digirati, while others lag far behind. Generally, less-mature CPG firms can improve Figure 5. Maturity by Industry through stronger visions, greater digital investments and more robust transformation management.

Travel and Telecom Manufacturing – Traditionally slow hospitality to react to digital,8 Manufacturing

High Technology is on the cusp of emerging from Beginner status. Efforts in digital remain focused on operational

Retail Banking efficiencies and worker enablement, but the B2B nature of many Pharmaceuticals Consumer Packaged Goods companies may limit their attention to digital customer engagement. Insurance Manufacturers see less opportunity Utilities and threat in digital transformation than other industries. To mature, Manufacturing firms may need a transformative digital vision, plus the engagement and governance to develop impetus for digital investments.

* Average digital maturity for all industries with 20 or more companies represented in the survey

9 Figure 6 helps to clarify maturity Conservatives Retailers, surprisingly, look more differences among industries. It like utility companies in their digital Insurance – High expectations shows the percentage of firms in each maturity profile than like faster-moving for digital and strong vision and industry by quadrant. Note that more technology companies. Although governance suggest that the than 80% of travel and hospitality many retailers have mastered both insurers should be leading the digital firms are Digirati or Fashionistas, and dimensions of maturity when managing revolution. Yet, this is not the case there are no Beginners in the industry. multichannel e-commerce, some others for most firms. Generally, scores Many travel and hospitality firms have still struggle with the multichannel for engaging customers through made extensive investments in digital integration. Investing in transformation social media and mobile are lower intensity, but not all have invested in management intensity may help these than average, suggesting that transformation management intensity retailers master multichannel business the combination of strong digital necessary to drive additional value from while launching new ways to enhance governance capabilities, regulatory digital transformation. They may even sales and service through social media, worries, and a risk-averse culture be Digirati in disconnected silos. These mobile and analytics. firms, having already implemented could be an innovation-stifler. digital innovations, can invest in Other retailers may have slipped from Utilities – For the Conservative ways to develop a more coordinated Digirati to Conservative quadrants Utilities industry, efficiency is and efficient approach to digital if they were slow to invest in newer the name of the game in digital transformation. Given the large number technologies like social media, mobile, transformation. Constant pressure of Digirati in the travel and hospitality and analytics. The large number of to reduce costs and the advent industry, Fashionistas should carefully Conservatives in retail – already having of smart metering create digital consider investing in transformation transformation management intensity to opportunities in customer leadership capabilities. gain value from technology investments experience, worker enablement, – could move quickly into the Digirati analytics and process improvement. quadrant by increasing their digital intensity in newer technologies.

Figure 6. Maturity Breakdown by Industry

High Technology 38% 25% 21% 17%

Banking 35% 23% 23% 19%

Insurance 33% 33% 13% 21%

Travel and hospitality 31% 19% 50% 0%

Telecom 30% 17% 48% 4%

Retail 26% 30% 17% 26%

Consumer Packaged Goods 24% 16% 28% 32%

Utilities 20% 40% 20% 20%

Manufacturing 12% 26% 17% 45%

Pharmaceuticals 7% 17% 43% 33%

Digirati Conservative Fashionista Beginner

10 Fashionistas Do we have time to wait? Telecom – Facing ever-increasing Executives in industries such as CPG, levels of connectivity and data pharmaceuticals and manufacturing Digital Beginners consumption, Telecom firms have been might be tempted to believe they in any industry are quick to respond. Of the organizations do not yet need to engage in digital in our study, 78% are high on digital transformation. Their industries are less several years from intensity (Digirati or Fashionistas) and digitally mature than others, so they gaining the digital Beginners are almost non-existent. might have time to wait. To complement their digital strengths, maturity that their Telecom firms can focus on stronger Digirati competitors digital leadership to integrate and align Digirati initiatives across silos. Banking – Digital is revolutionizing already possess. the relationship between customers Travel and hospitality – Since the and retail banks, who have advent of the web, digital has turned responded with strong capabilities However, Figure 6 shows an the industry upside down. The industry in customer service, analytics and important message even for has responded, with 81% of firms in even social media. Banks have these industries. Every industry, the Digirati or Fashionista quadrants an opportunity to parlay these regardless of how digitally mature, and no Beginners. Opportunities exist successes into new innovations hosts companies that are Digirati. In to improve worker enablement in in mobile or social customer other words, every industry – from many companies. To make the jump engagement and internal knowledge manufacturing to high technology into Digirati territory, Fashionistas will sharing. In addition, opportunities – has firms that have already need to build levels of excellence in exist to integrate initiatives and begun to gain the benefits of digital transformation management to match processes across corporate silos. transformation. their high digital intensity, including a transformational vision for the future. Retail – A decade-long history with This should be a call to action for digital disruption has seasoned executives in every firm. It takes retailers and produced a number several years to build maturity, of Digirati (26% of firms surveyed). especially in the transformation Retailers are generally confident in management intensity dimension. the potential for social and mobile, Digital Beginners in any industry as well as their digital skill set. are several years from gaining the Moving forward, firms may want to digital maturity that their Digirati focus on cross-channel consistency competitors already possess. and worker enablement while Every industry – from building analytics capabilities. manufacturing to High-Tech – For High-tech, digital is high technology – close to home. Firms generally enjoy well-developed capabilities and high has firms that have digital maturity. They are also – not already begun to gain surprisingly – enthusiastic about digital’s potential. This momentum the benefits of digital may create further opportunities in transformation. mobile and embedded devices.

11 Building Digital Maturity: Digital DNA

Digital maturity matters. It matters the business of connecting small person to suggest and even drive for every industry. But how can you businesses to local customers. digital initiatives; in other cases develop your own digital maturity? Books were just a technology that the digital agenda will be driven by We have identified common patterns could be replaced by websites or business or joint IT-business teams. 9 for how companies have built their location-aware smartphone apps. In any case, shared understanding between IT and business executives digital advantage. All Digirati invest ƒƒDigital governance. Effective is critical to success. in the elements of transformation investment rules and coordination management – vision, governance, mechanisms improve efficiency By definition, both Conservatives and engagement. They also perform and ensure digital efforts are and Digirati perform well on the well on the digital intensity dimension. moving in the right direction. When four components of transformation But, Digirati status is more than simply Spanish media conglomerate Prisa management intensity. What separates launched its digital transformation a combination of sound management Digirati, however, is Vision. Where program, one of the first initiatives and digital capability – there is Conservatives focus on control and was to create a central digital unit something inherently different about to coordinate and assist in building alignment, Digirati have also developed Digirati DNA that separates them from digital businesses. Appointing a a strong transformative vision that the rest. Digirati make strategic choices Group-level Chief Digital Officer, energizes employees to make change about how they will be excellent in reporting directly to the CEO, happen. digital intensity. They build their digital was a major signal. Local CDOs intensity through a set of common were appointed in each division, patterns that exploit complementary coordinating with the central unit.10 capabilities to deliver ever-greater levels ƒƒEngagement. When employees of digital value. are engaged in a shared vision they help to make the vision a reality. They Strong transformation offer less resistance to change and often identify new opportunities that management capabilities were not previously envisioned. At We identified four key transformation Codelco, engaging employees in the management practices that enable digital vision was critical to succeed, but difficult because of the firm’s companies to align their digital Conservative culture. Codelco’s top efforts under a common vision and management launched innovation coordination structure, and engage the contests for employees in order company in making that vision a reality. to foster a culture of change and These practices are: innovation in the firm.11

ƒƒTransformative vision. A strong ƒƒIT-Business relationships. Digital vision helps to frame in people’s transformation is about re-defining minds a picture of how the company big parts of the business, and IT will be different in the future. It also is essential in doing it. In some helps people understand what companies, the CIO is the perfect former assumptions may no longer be valid. Executives in the French yellow pages, Pages Jaunes, seeing their traditional print model lose 10% of revenues annually in the face of digital search competitors like Google, re-envisioned their business. CEO Jean-Pierre Remy helped employees understand they were not in the business of producing heavy yellow books. They were in

12 Digirati make strategic Figure 7. Focus on Excellence choices on where to excel digitally To understand how Digirati distinguish FASHIONISTAS DIGIRATI themselves in digital intensity, we examined six digital intensity domains: 11% 33% customer experience, social media, 39% mobile, customer analytics, process 19% digitization and internal collaboration 70% (See figure 8 overleaf). 27%

Our analysis of these capabilities yielded two important findings. First, although both Digirati and Fashionistas have strong digital intensity, Digirati BEGINNERS CONSERVATIVES distinguish themselves by excelling in one or more areas (See figure 7). 2% 2% 11% Two-thirds of the Digirati exhibit one 18% or more domains of excellence. 70% of Fashionistas have none, despite comparable average levels of digital intensity. This gap is even more 87% 79% significant compared to Conservatives and Beginners. No Excellence Mono Excellence Multi-Excellence

Note: charts represent percentage of companies that exhibit Excellence in one or more of the six digital intensity domains. We define excellence as an average score > 6 (on a 1-7 scale) on all questions of a given domain, after dropping the question with the lowest score.

13 Second, there are clear patterns exploit synergies between them. Figure in how and where Digirati invest 8 illustrates patterns we identified in these domains. Though every between the six domains, plus data company’s journey is unique, certain integration. Although not an end in What do you want to combinations of investment appear its own right, data integration is – not be famous for? Where to be complementary. Companies surprisingly – an important enabling seem to combine digital capabilities to capability for a number of domains. to start? What to do next?

Figure 8. Most Common Linkages Between Domains of Excellence

CUSTOMER-FACING PROCESSES OPERATIONAL PROCESSES

Social Media - Monitor reputation - Promote products and services - Sell products and services - Provide customer service - Build customer communities Analytics Process Digitization Internal Collaboration - Target marketing more - Automating processes - Active knowledge sharing effectively - Monitoring operations in - Use of internal social - Personalize marketing real-time networks and video communications - Adaptability to external conferencing - Optimize pricing changes - Working anywhere, anytime, - Better qualify sales prospects any device Customer Experience - Ensure cross-channels - consistency - Personalize the customer experience Data Integration - Offer self-service - Customer Data - Other data (finance, supply-chain, operations) Mobile Channel - Promote products and services - Sell products and services - Provide customer service

Executives can use this model to build What do we have that our peers While Burberry started with the left their digital vision and define their digital don’t?… And we did have a number of our model and moved to the right, transformation journey: What do you of key differentiators in the luxury other firms go the other way. Indian want to be famous for? Where to start? sector we could exploit.” Building on paint manufacturer Asian Paints What to do next? A careful analysis of these strengths, Burberry decided to started with process excellence and the company’s strategic assets can transform its customer experience, moved leftward. Manish Choksi, CIO help answering these questions. both in-store and online, including and Head of Strategy, explained: “in advanced customer interactions in the early 2000s, our focus was on For example, when Burberry initiated social media. Internally, Burberry rolled internal efficiencies. We implemented its transformation journey in 2006, the out a large ERP program to improve a traditional enterprise-wide ERP and management team identified how to data integration and find ways to excel advanced supply chain. This was the build on its strategic assets to succeed in operational processes. According to basis for further improvements in sales in the digital world. According to Ahrendts, “we wanted to be as admired and customer processes.”12 CEO Angela Ahrendts, “we began to and respected for the back end of our develop our five-year strategy, asking: business as for the front end.”

14 In both cases, strong data integration reaching new customers, linking is critical to linking customer-facing and operational and customer-facing operational processes. Analytics are processes in new ways, and even often considered the next important Digirati are far better launching new businesses. Digirati game changer. Companies mastering than other types of often engaged in more than one these domains have many strategic change. For example, when Volvo options both on the customer and firms at changing their developed automobile connectivity operational sides. In the mid-2000s, business models. features, a key goal was to deliver a Caesars Entertainment developed better experience to clients: drivers can analytics excellence that helped it to use a smartphone to lock the car, start offer highly personalized customer the heater remotely, or locate the car, experiences to its clients both online or buy roadside assistance and theft and in its facilities (See page 16). In Figure 9 shows the extent to which protection services.13 But customer the early 2010s, Caesars extended its companies in each quadrant are able experience was not the only objective. excellence to the mobile channel by to execute these changes. Digirati are Connectivity brings Volvo closer to providing new services and information far better than other types of firms at end customers who traditionally had a and even engaging in personalized changing their business models. They relationship only with dealers. It enables location-based marketing. are able to link their implementation Volvo to augment its traditional B2B capabilities and leadership capabilities model of selling cars to dealerships Transforming Business to fundamentally transform how the with a B2C model of interacting directly Models company operates. Companies in other with customers. quadrants are less able to do so. Changing customer experience or operational process – two key elements The business model changes we of digital intensity – is difficult. Changing analyzed included topics such as a business model or globalizing adding value to products and services, a company is even more difficult.

Figure 9. Business Model Changes

Percentage of companies in each quadrant achieving business model changes through the use of digital technologies

FASHIONISTAS DIGIRATI

10% 20% 38% 20%

70% 42%

BEGINNERS CONSERVATIVES

4% 11%

17%

96% 72%

Little business model change Some business model changes Extensive business model changes (average score <5 on a 1-7 scale) (average score between 5 and 6 on a 1-7 scale) (average score >6 on a 1-7 scale)

15 Caesars Entertainment: Creating the Data-Driven Mobile Experience

after 6 p.m., we could send you an offer associated with a Jerry Seinfeld show for the Bette Midler show,” explains promotion, directing them to a video Neal Narayani, director of e-mail and about the show and a website where mobile marketing for Caesars. “We they can buy a ticket. Global resort and gaming firm Caesars might have some additional show is a leader in improving customer According to one executive, “Most tickets left over, so knowing where the loyalty and revenues by enhancing decisions with our guests happen on customer is, is a great way to get those customer satisfaction. For more than the casino floor. That’s where you have tickets pushed.”15 a decade, the firm’s award winning14 to reach them.”18 Every phone in the loyalty program, Total Rewards, has Apps: Caesars’ apps put more of its pocket of a Caesars guest represents used analytics to deliver an extremely services at guests’ fingertips during a unique opportunity to deliver personalized experience for its their stay. The myTR app allows Total personalized service. Monica Sullivan, customers. Now, Caesars is extending Rewards members to keep track of VP of Advertising, explained, “There its data-driven approach with mobile. special offers, manage reward points will continue to be more opportunities and even book rooms. The firm’s Las with mobile devices to engage with our Texpress: Upon arrival at one of Vegas or Atlantic City apps16 provide guests both when they plan travel and Caesars’ 40 properties, guests that have access to a mobile concierge, real-time while travelling.”19 “Social, local, and opted into Caesars’ Texpress service event information, in-room dining, and mobile are huge areas of innovation are invited to check-in via SMS. They even wake-up calls. and places to win.”20 can bypass registration lines and get their keys at the bell desk. Texpress also Linking mobile and other channels: combines mobile location data and SMS Caesars has optimized its website to to deliver timely and relevant special make mobile access “sleek and easy offers. “If you’re at Paris, we could send to navigate.”17 It is now integrating you two free admissions to the Eiffel mobile and physical promotions. For Tower ride or if you’re at Caesars Palace example, a guest may scan a QR code

16 Conducting Your Own Digital Transformation

CEOs and other senior executives are A critical input to driving change is organizations do business. Companies increasingly asking practical questions a transformative digital vision. in other sectors, where the pace about what digital transformation Without a vision of change, employees of change is less rapid, have the means for their businesses: How and tend to do what they have been opportunity to create value by adapting where do I start? How do I compare doing for years, even if it is no longer their business models – adding value with my peers or versus best practices? useful in the digital world. Executives to products and services, reaching Where do I invest? Although there is no typically build visions with a focus on new customers, linking operational one-size-fits-all approach, our two-year operational effectiveness (inside-out), and customer-facing processes in research program provides some useful superior customer experience and new ways, and even launching entirely pointers for successfully executing sales (outside-in), or a combination of new businesses. a digital transformation. Conducting the two. P&G, for example, uses a clear your digital transformation requires inside-out vision: “Centralization and High-performing companies have taking action in four key areas: framing, digitization will improve productivity strong enterprise-level governance investing, engaging, and sustaining. and create deeper, more sustainable around their digital initiatives. These organizational capabilities.”21 Whatever governance mechanisms aim to Frame the digital the focus, the senior team should increase the level of coordination and challenge have a common vision of how sharing across silo-run digital initiatives. to proceed. Only then can they Three key governance mechanisms As with all transformation, CEOs first help to drive change throughout are common: dedicated committees, need to ensure that their senior leaders the organization. shared units, and new roles including have a common vision of how to Digital Czars. P&G created a shared proceed. They need to understand why Focus Investment digital unit to accelerate the diffusion to change, and how the future will be of digital services across the global better than the current situation. To make the digital vision a reality, brands. Starbucks recently hired a executives must ensure their Chief Digital Officer (CDO) to create The first step is tounderstand the organizations invest in the right synergies among the many ways the threats and opportunities that digital areas. This requires cutting back in company engages customers. represents to the organization. Will unproductive areas while ramping up existing ways of working continue to be investment where it needs to occur. effective in a digital world? Are there Digirati differentiate themselves by new opportunities available in customer excelling in a few areas – customer experience, operational processes experience, social media, mobile, or business models? Assess your customer analytics, process digitization Conducting your digital firm’s digital maturity – both digital or internal collaboration – but rarely in initiatives undertaken and leadership all. Executives must identify where transformation requires capabilities to drive transformation. the company should excel now, taking action in four Then, you can take steps to move based on its existing capabilities and depending on your current maturity strategic assets. Then, as capabilities key areas: framing, level. For example, Conservatives improve, they can refocus toward new investing, engaging, need to energize the organization to areas of excellence. engage in valuable digital opportunities. and sustaining. Fashionistas, on the other hand, An important question is to decide if should aim to rationalize a myriad you need to adapt your business of digital initiatives and add proper model. In some industries, there is transformation management practices no choice. The structural changes to unite functional silos. in postal services, for instance, are calling for a radical rethinking of how

17 Engage the organization at Sustain the transformation Finally, no transformation can be planned fully in advance. As they scale Successful digital transformation is proceed in their transformation and built on a foundation of core skills Putting the organization in motion better understand the impact of and capabilities. Although more than early is essential. CEOs and top digital, executives should look for half of the executives we surveyed teams of digital leaders often send opportunities to iterate and improve. believe their firms have the necessary an unequivocal signal that change Executives at Asian Paints started their digital skills, nearly all believe that they is necessary, and that it needs to transformation by unifying information need to improve in some areas. To start immediately. The CEO of L’Oréal and centralizing basic order taking. fill skills gaps, consider hiring some declared that 2010 was the “Digital This created new opportunities to experienced executives who can Year.” L’Oréal’s CMO explained: “That refocus the role of salespeople and make an impact quickly and coach year was therefore one of intense to rethink the way that factories were existing employees. Redesign your effort … with strategic digital initiatives managed. These changes opened training programs to develop skills your impacting all of our 23 brands in all up new opportunities to sell new 22 company needs, such as Intel’s “Digital countries.” Leaders can use a wide types of services and to reduce the IQ” program that trains and certifies array of digital channels, such as risk of expanding beyond the firm’s employees in social media.25 Where broadcast, web, video, and social geographical base in India. Each useful, partner with vendors to gain networks to generate continuous investment, each year, and each skills and cross-sector experience that two-way communication at scale. new technology creates new ways complements your capabilities. Some Richard Branson, CEO of Virgin Group, to transform the business for those companies even acquire small firms encourages customers to get in touch executives who take time to envision to gain specific digital skills such as with him through a custom hashtag on and act on the possibilities. Twitter. 23 mobile marketing or analytics.

Equally important is to encourage Beyond skills, executives must focus employees to identify new on building and sustaining momentum practices and opportunities that for change. Quantify and monitor will advance the vision. Technology progress toward the digital ambition No transformation can firm EMC runs an annual innovation through KPIs or digital scorecards. be planned fully in competition through which employee Scorecards such as these have power teams can suggest new initiatives. beyond just measuring the impact advance. Retailer Sainsbury runs a panel of of major investments. They help to more than 2,000 employees who give change the culture. For example, Prisa feedback every month about key issues uses a transformation index to drive affecting the organization.24 accountability and cooperation across all employees in the organization.

18 Nike: From Separate Initiatives to Firm-Level Transformation

‘Here’s some product, and here’s Connecting digital silos: Nike was some advertising. We hope you like it.’ innovating successfully in silos, but Connecting today is a dialogue.”26 missing potential synergies between them. In 2010, Nike created a division Nike, the world’s leading maker of Mass-customizing products: called Nike Digital Sport. The new unit athletic shoes, apparel, equipment, Nike’s custom shoe offerings allow provides skilled resources, budget, and and accessories, has traditionally built customers to design and order shoes coordination across the enterprise.29 its business through a combination of online, share designs with friends, and The goal was to create a unified strong innovative products, intensive vote on others’ designs. These social consumer experience that can respond brand-building, and efficient operational media capabilities enable customers to to – and even shape – rapidly-evolving processes. As new digital innovations engage with the product online before consumer preferences. The unit now appeared, Nike was fast to capitalize in and after they buy. And listening to leads most customer-facing digital all three areas. these online conversations allows Nike projects, releasing products under to identify popular designs and sense Social Media: Nike entered social the Nike+ brand. Teams of marketers, new trends.27 media by building a presence on major designers and IT people work together Digital product design: Nike started social media platforms around the to develop digital innovations. They are using 3D design tools to create new world, and then by launching social sites also finding ways to mine mountains products in the early 2000s. It then dedicated to specific sports, products, of highly accurate customer data – a diffused digital design and collaboration or major events such as the soccer key strategic asset for marketing and capabilities to the whole supply chain. World Cup. Nike then went much farther product development in the highly The transition did more than improve by developing the Nike+ concept for competitive digital space. Looking to the firm’s design capability. It also runners. Nike+ monitors and tracks the future, Nike plans to become ever- supported sustainability policies and each workout by connecting sensors in closer to each of its customers around appealed to younger designers who shoes with devices such as the iPhone the world. and an internet platform. Runners can expected digital design capabilities. share their performance online and CEO Parker explained “Materials, even receive customized advice from componentry, construction methods, coaches. Meanwhile, Nike gathers manufacturing methods, the whole detailed data about how customers digital revolution … We are embedding 28 use its products. According to CEO all that thinking into the product.” Mark Parker, “Connecting used to be,

19 Conclusion

The pace of technological change is accelerating, and executives in every industry are paying attention. They face a vast set of alternatives for gaining digital advantage. Unfortunately, they also hear a bewildering barrage of advice – sometimes conflicting No firm is immune and often wrong – about how to move forward digitally. In our two-year study, from digital we discovered that many common perceptions about digital transformation were actually myths (See figure 10). These myths can lead executives to make unfortunate transformation. and costly decisions.

Figure 10. Myths and Realities of Digital Transformation Myth Reality

1 Digital is primarily about the customer experience Huge opportunities exist also in efficiency, productivity and employee leverage

Digital primarily matters only to technology Opportunities exist in all industries with 2 or B2C companies no exceptions

Let a thousand flowers bloom; bottom-up activity 3 Digital transformation must be led from the top is the right way to change

Transformation management intensity is more 4 If we do enough digital initiatives, we will get there important for driving overall performance Business/IT relationships are key, and in 5 Digital transformation will happen despite our IT many companies they must be improved

Digital transformation approach is different for Digital Leaders exhibit a common DNA 6 every industry and company

In our industry we can wait and see how There are digital leaders outperforming their 7 digital develops peers in every industry today

Fortunately, our global survey of nearly 400 large firms, supplemented by 157 in-depth interviews with senior executives in more than 50 large companies, provides fact-based answers. First, digital maturity matters. Digirati are statistically significantly more profitable than their competitors, and the markets reward them. Second, no firm is immune from digital transformation. Every company in every industry already has competitors who are Digirati. Since it takes time to become digitally mature, senior executives in every industry should take active steps immediately to consider the opportunities and threats available through digital transformation. Finally, once you decide to act, you can map a strategy for your digital transformation based on common transformation patterns distilled from the most digitally mature firms in our research. The future is arriving quickly. Take action now to create your own digital advantage.

20 About the Research

Last year, we set out to understand how leaders in large traditional Figure 11. Sample Metrics companies were gaining advantage from digital technology. We identified a. Industries what companies are doing digitally, and Others 10% Banking 8% what it means to be digitally mature. Government 8% Insurance 7% That study resulted in a research Oil, Gas and 2% Other Financial report, “Digital Transformation: Chemicals Services 2% A Roadmap for Billion-Dollar Telecoms 6% Companies”30 that was named one Utilities 6% High Technology of the five most influential thought Travel and 5% leadership papers of the past decade.31 Hospitality 7% This year, we set out to quantify Manufacturing Transportation 3% the findings – to benchmark digital 14% and Logistics practices around the globe, to identify the most essential components of Retail 7% Pharmaceuticals digital maturity, and to examine the 8% links between digital maturity and Consumer 7% financial performance. We gathered Packaged surveys from 469 senior executives in Goods 391 large companies around the world. b. Company Size (See figure 11). Greater than Less than $500 million We analyzed the surveys to identify $20 billion 18% 19% detailed drivers of digital maturity, and classified firms in two dimensions. $10 billion - $500 million - Then, we went one step further. $20 billion $999 million For each of the 184 publicly traded 11% 11% companies on our sample, we obtained 2011 financial performance from $5 billion - $1 billion - COMPUSTAT, converted all figures to $9.9 billion $4.99 billion US Dollars, and calculated standard 30% 11% financial ratios such as EBIT margin, Revenue per Employee, Price/Book and Fixed Asset Turnover. Then, controlling for industry and geography, c. Respondent Titles Other we conducted rigorous statistical CEO, President 18% analysis to establish the relations 11% between digital maturity and financial performance. We then conducted a CFO Other Director 2% separate analysis to quantify average 23% financial performance gaps between CIO, CTO, the four digital maturity quadrants. Head of Technology The findings from our statistical 22% analyses, supplemented by our earlier CMO qualitative research and additional 5% interviews, serve as the basis for the findings and recommendations in SVP, VP, Other this report. C-Level Executive 17% COO 2%

21 About the Authors

George Westerman, a Research Scientist in MIT Sloan’s Center for Digital Business (CDB), is also faculty chair for the MIT Sloan executive course Essential IT for the Non-IT Executive. George’s research examines the role of executive leaders in driving competitive advantage from digital technology. George is co-author of two award-winning books, The Real Business of IT: How CIOs Create and Communicate Value, and IT Risk: Turning Business Threats into Competitive Advantage. Prior to earning his Doctorate from Harvard Business School, he gained more than thirteen years of experience in innovation and technology management. [email protected]

Maël Tannou is a Managing Consultant at Capgemini Consulting. He has worked for the last five years at the Paris Office and is currently a visiting scientist at the MIT Center for Digital Business, working with the researchers. He is specialized in Digital Transformation, and graduated from the French business school Audencia. [email protected]

Didier Bonnet is Senior Vice-President and Global Practice Leader at Capgemini Consulting. Didier has more than 25 years’ experience in strategy development, globalization, internet & digital economics and business transformation for large multinational corporations and private equity firms. He has authored several research articles and is regularly quoted in the press e.g., WSJ, FT, the Economist and provides commentary for broadcasters such as the BBC, CNN, Reuters and CNBC. Didier graduated from a French Business School and holds a DPhil from Oxford University. He is based in London. [email protected]

Patrick Ferraris is the Global Leader of the Technology Transformation practice at Capgemini Consulting. With over 20 years of consulting experience, Patrick has supported large multinational organizations in their digital strategy and transformation with a focus in Telecom, Media, Internet, Insurance and Transportation. He is an alumnus from M.I.T and Ecole Nationale des Ponts & Chaussées. [email protected]

Andrew McAfee, a principal research scientist in MIT, studies the ways that information technology affects businesses. He coined the phrase “Enterprise 2.0”; his book on the topic was published in 2009 by Harvard Business School Press. He has also held appointments as a professor at Harvard Business School and a fellow at Harvard’s Berkman Center for Internet and Society. In 2008, he was named the 38th most influential person in IT. [email protected]

Jérôme Buvat and Michael Welch, from Capgemini Consulting, deserve a special mention for their outstanding contribution in helping to put this research paper together.

We would like also to acknowledge the invaluable support of a number of colleagues at Capgemini Consulting who have either helped with the data collection or have contributed with their ideas and insights. They are too numerous to mention individually, but you know who you are. A warm thank you from the research team.

22 References

1 See “Facebook: The Making of 1 Billion Users” – Bloomberg BusinessWeek, 2012.

2 ITU. Global Mobile-Cellular Subscriptions, Total and Per 100 Inhabitants, 2001-2011, ITU World Telecomunication /ICT Indicators database. http://www.itu.int/ITU-D/ict/statistics/ Accessed 04Jan2012.

3 See “Volvo Car Corporation – from a B2B to a B2B+B2C Business Model” – MIT Center for Digital Business and Capgemini Consulting, 2012

4 See “Codelco CIO transforms business with business process automation” – SearchCIO.com, 2011

5 Asociación Chilena de Empresas de Tecnología de Información A.G.

6 See “Digital Leadership: An interview with Angela Ahrendts, CEO of Burberry” – Capgemini Consulting, 2012

7 See “Digital Transformation: a Roadmap for Billion-Dollar Organizations” – MIT Center for Digital Business and Capgemini Consulting, 2011

8 Are Manufacturing Companies Ready to Go Digital? Capgemini 2012

9 See “Digital Transformation: a Roadmap for Billion-Dollar Organizations” – MIT Center for Digital Business and Capgemini Consulting, 2011

10 See “Digital Transformation: a Roadmap for Billion-Dollar Organizations” – MIT Center for Digital Business and Capgemini Consulting, 2011

11 See “Codelco CIO transforms business with business process automation” – SearchCIO.com, 2011

12 See “Digital Transformation Review n°2” – Capgemini Consulting, 2012

13 See “Volvo Car Corporation – from a B2B to a B2B+B2C Business Model” – MIT Center for Digital Business and Capgemini Consulting, 2012

14 See “Master of Enterprise Loyalty Award” – Colloquy, 2012

15 http://www.lasvegassun.com/news/2010/jan/08/harrahs-launches-iphone-app-caesars-bypasses-check/

16 “Caesar’s Palace LV” app supports all Las Vegas locations: Bally’s Las Vegas; Flamingo Las Vegas; Caesars Las Vegas Casino; Imperial Palace; O’Sheas Casino; Paris Las Vegas, Bill’s Gamblin’ Hall & Saloon and Rio All-Suite Hotel & Casino. Total Connect app supports 3 Atlantic City locations.

17 http://www.caesars.com/mobile/wap

18 See “Take a Gamble on Technology” – News Mail, 2010

19 http://www.4hoteliers.com/4hots_fshw.php?mwi=6132

20 http://www.4hoteliers.com/4hots_fshw.php?mwi=6132

21 See P&G 2011 annual report

22 http://www.capgemini-consulting.com/ebook/Marc-Menesguen-Interview/files/assets/basic-html/page2.html

23 See “Social Media: Secret Of The Successful CEO” – Media Post, September 2012

24 See “The vital connection between staff and the bottom line” – Marketing Week, November 2011

25 See “Intel Planning Next Steps with Social Media Recruiting” – www.ere.net, November 2010

26 http://management.fortune.cnn.com/2012/02/13/nike-digital-marketing/

27 See Nike Digital Privacy Policy at http://help-en-us.nike.com/app/answers/detail/article/privacy-policy/a_id/16378/p/3897

28 http://www.fastcompany.com/1676902/how-nikes-ceo-shook-shoe-industry

29 Paragraph based on the article published at http://management.fortune.cnn.com/2012/02/13/nike-digital-marketing/

30 See “Digital Transformation: a Roadmap for Billion-Dollar Organizations” – MIT Center for Digital Business and Capgemini Consulting, 2011

31 In 2012 Source.com, along with their large membership base, conducted a multi-stage analysis of more than 22,000 papers. “Digital Transformation” was ranked among the five most influential papers of the decade.

23 About Capgemini Consulting

Capgemini Consulting is the global strategy and transformation consulting organization of the Capgemini Group, specializing in advising and supporting enterprises in significant transformation, from innovative strategy to execution and with an unstinting focus on results. With the new digital economy creating significant disruptions and opportunities, our global team of over 3,600 talented individuals work with leading companies and governments to master Digital Transformation, drawing on our understanding of the digital economy and our leadership in business transformation and organizational change.

For more information: http://www.capgemini-consulting.com/ Follow us on Facebook: http://www.facebook.com/capgemini.consulting.global Follow us on Twitter: @CapgeminiConsul

About the MIT Center for Digital Business

Founded in 1999, the MIT Center for Digital Business (http://digital.mit.edu) joins leading companies, visionary educators, and some of the best students in the world together in inventing and understanding the business value made possible by digital technologies. We are supported entirely by corporate sponsors with whom we work in a dynamic interchange of ideas, analysis, and reflection intended to solve real problems. The Center has funded more than 50 faculty and performed more than 75 research projects focused on understanding the impact of technology on business value, and developing tools and frameworks our sponsors can use for competitive advantage.

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