Guiding the Digital Transformation of Organizations

574 Pages·2017·3.93 MB·English

by  Vallabh Sambamurthy and Robert W. Zmud

Guiding the
Digital Transformation
of Organizations
2nd Edition
Vallabh Sambamurthy Robert W. Zmud
Guiding the Digital Transformation of Organizations
By Vallabh Sambamurthy and Robert W. Zmud

Second Edition Copyright © 2017
First Edition Copyright © 2012

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Cover Illustration by Aaron Z. Williams
TABLE OF CONTENTS

PART 1. DIGITAL STRATEGY 1
Chapter 1 Digital Innovation and Disruption 2
Chapter 2 Digital Strategy Fundamentals 26
Chapter 3 Digitalized Business Models for Pipeline Ecosystems 44
Chapter 4 Digital Strategy Formulation for Pipeline Organizations 70
Chapter 5 Digital Strategy and the External Sourcing of Capabilities 102
Chapter 6 Digitalized Business Models for Network Ecosystems 123
Chapter 7 Digital Strategy Formulation for Network Organizations 150
Chapter 8 Grappling with the Risks of Digitalization 177
Chapter 9 Executive Mandates: Digital Strategy 206

PART 2. DIGITAL INVESTMENT 225
Chapter 10 The Digital Investment Enigma 226
Chapter 11 Strategic Focus 231
Chapter 12 Value Pathways 252
Chapter 13 Building a Persuasive Business Case 265
Chapter 14 Monetizing Benefits Flows 281
Chapter 15 Implementation Planning 300
Chapter 16 Project Management Planning 317
Chapter 17 Executive Mandates: Digital Investment 346

PART 3. PLATFORM MANAGEMENT 353
Chapter 18 A Perpetual Balancing Act 354
Chapter 19 Business Processes 362
Chapter 20 Business Platforms 383
Chapter 21 Enterprise Resource Planning Systems 401
Chapter 22 Digital Platforms 425
Chapter 23 Platform Management Challenges 441
Chapter 24 Enterprise Architecture Design 450
Chapter 25 Digitalization Governance Design 474
Chapter 26 Digitalization Organization Design 497
Chapter 27 Executive Mandates: Platform Management 513

Appendix Basic Concepts 521

Glossary ……………………………………………………………………………………………… 537
PART 1. DIGITAL STRATEGY
Chapter 1 Digital Innovation and Disruption
Chapter 2 Digital Strategy Fundamentals
Chapter 3 Digitalized Business Models for Pipeline Ecosystems
Chapter 4 Digital Strategy Formulation for Pipeline Organizations
Chapter 5 Digital Strategy and the External Sourcing of Capabilities
Chapter 6 Digitalized Business Models for Network Ecosystems
Chapter 7 Digital Strategy Formulation for Network Organizations
Chapter 8 Grappling with the Risks of Digitalization
Chapter 9 Executive Mandates: Digital Strategy

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Chapter 1. Digital Innovation and Disruption
Today there are clear signs of intense, continuous and unprecedented waves
of economic competition. Traditional industries are being disrupted by the arrival of
new firms and, more significant, the emergence of new industries offering novel ways
of fulfilling customer needs and desires. Firms that were household names at the
turn of the century (Walmart, Sears, Cisco, and Dell) are now replaced with new firms
(Facebook, Apple, Google1 and Tesla).
Since 1983, Fortune magazine has published an annual ranking of the most
admired companies. Though methodology and criteria have varied somewhat over
the years, the overall process has remained remarkably consistent. For the 2016
list, these criteria involved assessments of a candidate firm’s: ability to attract and
retain talented people, quality of management, social responsibility, innovativeness,
product/service quality, use of corporate assets, financial health, long-term
investment value, and effectiveness in doing business globally.2
Table 1-1 provides a ranking of the top-ranked most admired companies from
1983 to 2016. In compiling this listing, three-year intervals and companies’ average
rank in the annual top-ten of most admired companies were used. Note two key
insights. First, a number of companies have multiple appearances, suggesting that
these companies were steered by especially-strong leadership teams able to unravel

1 Google is actually one of the business units within Alphabet, a multinational holding
company formed in 2015 by Google’s founders. The more familiar name of Google is used
throughout this book.
2 For more information, see: http://www.kornferry.com/institute/fortune-worlds-
most-admired-companies#sthash.TqIusyvP.dpuf

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their firms’ competitive situations, formulate effective business strategies, and
successfully implement these strategies. Not surprisingly, the stocks of these most-
admired companies have proven to be extremely good investments.3 Second, there
are two points of major discontinuity in the table: the first appearing in the latter-
years of the 1990s, and the second in the latter-years of the 2000s. These two
points-of-discontinuity reflect two substantive business disruptions.
Table 1-1
Most Admired Companies: 1983-2016
Rank
Years
1 2 3 4 5
2014-2016 Apple Google Amazon Berkshire Hathawaya Walt Disney
2011-2013 Apple Google Amazon CocaCola Berkshire Hathaway
2008-2010 Apple Google Berkshire Hathaway Toyota Motors Johnson & Johnson
2005-2007 General Electric Starbucks Southwest Airlines FedEx Berkshire Hathaway
2002-2004 Walmart SouthwestAirlines GeneralElectric Berkshire Hathaway Microsoft
Cisco Systems
1999-2001 General Electric Microsoft Walmart Dell
Southwest Airlines
1996-1998 Coca Cola Microsoft Intel Merck Johnson & Johnson
3M
1993-1995 Rubbermaid Coca Cola Home Depot
Microsoft
1990-1992 Merck Rubbermaid Walmart Proctor& Gamble PepsiCo
Boeing
1987-1989 Merck Rubbermaid LizClaiborne 3M
Phillip Morris
1983-1986 IBM Dow Jones HP Merck Coca Cola
aBerkshire Hathaway is a multinational conglomerate that wholly owns a number of companies (e.g., GEICO, BNSF, Fruit of
the Loom, Helzberg Diamonds, Duracell, and McLain Trucking, among others) and enjoys substantial holdngs of other
companies (e.g., Johnson and Johnson, Coca Cola, IBM, and American Express, among others).

Significant business disruptions occur when an industry’s incumbents face
one or more challengers whose business models offer far greater value to customers
than the incumbents’ business models and these incumbents are unable to effectively
respond to the ensuing competitive threat. A key element in this definition is that of

3 J. Anderson and G. Smith, “A Great Company Can Be a Great investment,” Financial
Analysts Journal, July/August 2006, pp. 86-93).
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a business model – a simplified and aggregated conceptualization of the value-
creating, profitability-sustaining activities of an organization. Importantly, not all
business innovations are disruptive. A business innovation that is compatible with
an industry’s established business models generally creates short-term benefits (i.e.,
revenue and profitability gains) for the innovating firm, and long-term benefits (i.e.,
the exposure of previously-uncontested competitive niches) for all incumbents.
The two points-of-discontinuity noted above in Table 1-1 reflect periods of
digital disruption, where (1) incumbents in existing industries faced overwhelming
competitive challenges, and (2) entirely new industries (e.g., Internet sales channel,
Internet search) were created. Two forces explain much of this digital disruption:
unceasing advances in digital technologies and globalization.
Digital technologies refer to the many technologies (encompassing
hardware, software and, most often, sophisticated combinations of hardware and
software) involved in specifying, capturing, processing, storing and transmitting data.
Here, data refers to attributes of objects or events represented in digital (discrete
sets of ones and zeroes) form. Through hardware and software innovations
(especially those associated with microprocessor miniaturization), digital
technologies have experienced sustained, exponential growth in performance relative
to cost. Popularly referred to as Moore’s Law, the capability per dollar of digital
technologies essentially doubles each year – enabling an unending stream of new
technological possibilities. Importantly, these technological innovations yield new
digitally-enabled, value-creating functionalities (e.g., Amazon’s digital ordering
process and fulfillment processes), which can be creatively recombined to produce
new functionalities (e.g., Amazon’s 1-Click ordering process), and so on. It is the
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confluence of such streams of innovative functionalities that periodically drive truly
substantive business disruptions. Today, five technologies represent the tip of the
spear of digital disruption – social, mobile, analytics, cloud, and the Internet of
Things.
Globalization refers to a process of interaction and, especially, integration
among the people, companies and governments of different nations. The
extraordinary advances in digital technologies have broken through well-established
barriers of space and time, ushering in a largely irreversible globalization of business
characterized by vast streams of data (and information) endlessly moving around the
world. As a consequence, firms are rethinking what it means to be global.
Digitally-enabled globalization is requiring established companies to reinvent
themselves in order to: leverage global capabilities, present a common face to global
customers, and compete with digital startups. Prime examples of such globalized
firms are those providing logistics services (UPS and DHL) and technology services
(IBM and Infosys). As economic activity accommodates emerging markets and
refocuses on local communities, new competitive spaces arise – such as firms focused
on meeting consumers’ localized needs regarding travel information (TripAdvisor and
Feefo), temporary asset use (Airbnb and Zipcar), and personalized services (Uber
and TaskRabbit).
In essence, the mind-set that digital technologies primarily represent a
productivity-enhancing tool is being replaced with a new mindset that recognizes
digital technologies as a platform for strategic innovation, transformation and
disruption. Consider, for example, the fintech revolution – the disruptions currently
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affecting financial services.4,5 The business models of retail banks have traditionally
sought to meet all of their customers’ financial needs. Here, low-cost checking
accounts serve as ‘loss leaders’ to earn attractive margins in other areas (e.g., home
mortgages, car loans, credit cards, investment management, etc.).
Recently, new entrants to the financial services industry seek to exploit
technological advances along with shifts in consumer behavior gravitating toward
self-service and digitally-enabled transaction channels. They are finding success in
weakening and dismantling the relationships that retail banks have developed over
the years with their customers. Typically, these challengers (startups, established
digital banks, and established firms holding strong, broad-based digital capabilities)
target the more-profitable segments of retail banking, making it clear that they have
little interest (at least for now) in handling all of a person’s banking needs. The
people most attracted to these fintech challengers are millennials, small businesses,
and the underbanked – retail banking customer segments particularly sensitive to
costs and to the enhanced consumer experience provided through digital transaction
channels.
The first wave of the fintech revolution focused on payment transactions (e.g.,
PayPal and Square), which represents about six percent of global banking
transactions. The next waves seem to be converging on retail lending (roughly twelve
percent of global banking transactions, e.g., Affirm and SoFi) and retail
savings/investment (roughly fifteen percent, e.g., CircleUp and Loyal3). These

4 G. Bacso, M. Dietz and M. Radnai, “Decoding Financial-Technology Innovation,”
McKinsey Quarterly, Number 2, 2015, pp. 26-27).
5 M. Dietz, P. Härle and S. Khanna, “A Digital Crack in Banking’s Business Model,”
McKinsey Quarterly, Number 2, 2016, pp. 50-53.
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disruptive business innovations improve on how incumbent retail banks do business
and are ripe for imitation. Taken together, these financial services innovations are
forcing a reinvention of what it means to be a retail bank.
Most of today’s fintechs, which number in the thousands globally, remain under
the regulatory radar but are quickly attracting attention as they reach meaningful
scale. Why all this entrepreneurial activity? Simply put, the potential rewards are
enormous. Capturing just a tiny slice of the $1 trillion global retail banking market
can deliver very attractive returns for owners and investors.
This ongoing disruption of the financial services industry is not an isolated
exception. Digital competitors are entering all industries, creating a need for
strategic responses by established businesses and by the early new entrants. At the
same time, an organization’s digitally-enabled operational business processes have
become mission critical. There is no room for operational errors, even as
organizations strive to increase their pace of digital innovation.
The objective of this book is to depict how today’s exemplar organizations set
and evolve their digitally-enabled business strategies, or stated more directly – their
digital strategies. In this chapter, we begin this conversation by introducing three
key notions:
 The Evolving Nature of Markets and Firms
 Three Eras of Digital Disruption
 The Evolving Landscapes of Industries
The Evolving Nature of Markets and Firms
Markets and firms are historically regarded as significant mechanisms for the
organization of economic activities. Economic exchanges in a market occurs
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