Computer Science

Guiding the Digital Transformation

Vallabh Sambamurthy Robert W. Zmud

2nd Editionof Organizations

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

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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

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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

Years Rank

1 2 3 4 5

2014-2016 Apple Google Amazon Berkshire Hathawaya Walt Disney

2011-2013 Apple Google Amazon Coca Cola 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 Southwest Airlines General Electric Berkshire Hathaway Microsoft

1999-2001 General Electric Microsoft Walmart Cisco Systems

Dell Southwest Airlines

1996-1998 Coca Cola Microsoft Intel Merck Johnson & Johnson

1993-1995 Rubbermaid Coca Cola 3M

Microsoft Home Depot

1990-1992 Merck Rubbermaid Walmart Proctor & Gamble PepsiCo

1987-1989 Merck Rubbermaid Liz Claiborne 3M Boeing

Phillip Morris

1983-1986 IBM Dow Jones HP Merck Coca Cola

a Berkshire 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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primarily through pricing mechanisms and contractual mechanisms, whereas

economic exchanges within a firm occurs primarily through hierarchical structures

and control structures. Discrete market exchanges can occur between two people

(C2C, or consumer-to-consumer), two organizations (B2B, or business-to-

business) or between an organization and a person (B2C, or business-to-

consumer). Successful markets bring two parties together such that each party is

confident that the exchange will be evenhanded; that is, one party, the consumer,

receives a sought value-unit at a fair price and the other party, the producer, receives

fair compensation for delivering this value-unit to the consumer.

Successful markets are characterized by three key attributes:

 Demand exists for the value-units being exchanged.

 The market is profitable.

 The market is efficient.

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