Strategy and Digital Technologies
Whilst the potential of digital technologies to create and capture value is undeniable, it is most likely to be actualised when they are integrated and implemented in the context of strategy and culture. This relationship between digital technology on the one hand, and on strategy and culture (and leadership) on the other hand, is multi-level and mutual. Digital technologies have the potential to turbo-charge strategy, and strategy provides the canvas (in terms of firm’s purpose and value, future goals, and customer value creation) that digital technologies can paint a picture on.
This section discussions the relationship between strategy and technology in three sub-sections. It first discusses the dilemmas in the traditional strategy process, and argues that digital technologies provide an opportunity to re-set some of these dilemmas. The next sub-section discusses some of the differences between the traditional strategic thinking (mostly informed by industrial economics) and new business models (in particular, platforms and eco-systems) enabled by digital technologies. The final sub-section discusses different forms of structural relationships between the business strategy and digital technologies.
1) Strategic dilemmas under “traditional” strategy contexts
Strategy is a fuzzy discipline[1], and, as Mintzberg and Lamel noted, “Almost half a century after seminal works in the field, corporate strategy boasts of at least 10 separate schools of thought and more than a dozen definitions that focus on rather divergent perspectives”[2]. This observation made almost 15 years back not only applies today with greater import due to digital technologies. It also highlights the need for a greater epistemic understanding of the digital technologies from the lens of strategy and vice-versa.
Given that the concepts and process of strategy were developed in a context (first military, and then to compete in a stable and predictable environment with long term investments), strategy was mostly implemented as a top-down process with set business reviews at regular intervals. The stability and predictability of both traditional assets and the environment called for distinct processes depending on the specific objectives to pursue under value-creation and value-appropriation, cost minimization and differentiation, and strategy formulation and implementation. Strategic choices made by leaders, implicitly or otherwise, reflected biases in favour of one over the other.
Digital technologies provide a way to review this established mind-set, and re-align the considerations involved in the dilemma, so that there is less of a trade-off between them.
1.1) Value Creation and Value Appropriation
Though, as stated previously, there are multiple approaches to analyse strategy, one core issue relates to how and what a strategy does to “value”, howsoever the term is defined, analysed and practised. Microeconomics deals with value as a “rent” proposition, finance addresses it as “shareholder value”, marketing as “customer value”, other stakeholders (particularly employees and Boards) as division of value (profits) between employees, shareholders and ESG/social responsibility.
The stance of firm’s strategy towards “value” can be analysed in two main ways, namely, value creation and value appropriation (also referred to as, value realization, extraction or capture). Value-creation, in simplified terms, is an outcome of innovation, creation of new markets/products, identification of unmet customer needs, and, in general, any other activity, which increases consumer surplus and consumer welfare. Value-Appropriation refers to capture, sustenance, and protection of value currently accessible. Value-creation and value appropriation are two related, but distinct processes, and, in many cases, value-creation is a pre-condition for value-appropriation.
Although both value-creation and value-appropriation are needed to create a sustainable competitive advantage, “a firm has a significant latitude in deciding the extent to which it emphasizes one over the other”[3](pp 63). Todd Zenger[4] in his paper “What Is the Theory of Your Firm” noted “Essentially, a leader’s most vexing strategic challenge is not how to obtain or sustain competitive advantage—which has been the field of strategy’s primary focus— but, rather, how to keep finding new, unexpected ways to create value.” Moran and Ghoshal[5] argued that “Historically, in theories of firm-level strategy, scholars have tended to focus relatively more on the issues of value appropriation (sustainable competitive advantage) and its distribution (shareholder wealth) than on the issue of value creation (i.e., creation of new rent sources.” (pp. 408). In a similar vein, Jacobides, Knudsen and Augier[6]., argued that, “Focussing excessively on value appropriation can, we would argue, impede value creation” (pp. 1206).
In practice, value-appropriation could, if not done mindfully, become a short-hand for improving operational efficiency though cutting costs, lay-offs, outsourcing, and higher prices. The danger, as Michael Porter[7]. reminds us, is that operational effectiveness is necessary, but not sufficient, and that operational Effectiveness is not strategy. As Frédéric Fréry[8] noted, “The uniqueness of a strategy resides in value creation: increasing customer value beyond cost is the seminal assumption of strategy” (pp. 72).
Understanding value from digital is a complex area, because they enable both positive and negative value-creation. On the positive side, digital technologies enable consumer surplus, economic well-being and choices, and consumer welfare and leisure (through time saved or entertainment and choices offered at home itself)[9]. Some of these, such as time-saved or more choices, do not form part of GDP, but play a role in improving general well-being. On the other hand, digital technologies could amplify fake-news, generate algorithmic biases, and prone to privacy violation and ethical lapses, if governance processes and leadership are not sufficiently mindful and alert to such risks. It is also argued that digital contributes to income inequality in the economic system. One can rightly argue that digital technologies themselves do not have an agency to bring to life the negative value, but digital technologies and the tools they enable are not “passive” even if they do not have agency like human being have. With less leadership intervention and governance, digital technologies can be on auto-pilot and generate negative value.
a) Digital Technologies and Value Creation
At the organization level, digital technologies potentially enable both value-appropriation and value-creation. It is argued that digital creates more value for customers than for the firms[10]. Another research[11] found that firms create three types of value from digital business: value from operations, value from customer and value from eco-systems. Researchers found that collectively these values explained 39% of revenue growth and 24% of net profit margins. Further, companies were on average 54% effective in creating value from operations (reduced cost, increased efficiency and speed), 40% more effective in creating value from customers (cross-selling, new offerings, customer stickiness, plus interdependencies from operations), and 30% effective in creating value from eco-systems (includes also new value from operations and customers).
In practice, value-creation is facilitated greatly by organizational innovations (enabled through digital technologies), such as innovative strategies, new business models, building of eco-systems and digital organizational capabilities. This is perhaps best exemplified by the digital transformation process at MasterCard.
Following its IPO in 2016, despite its efforts to grow in a significant way, Mastercard remained stuck in second place. Ajay Banga, the CEO, emphasized the extent of opportunity saying that 85% of the world’s payments were still made in cash or cheque and created “new pathways for innovation …to compete with cash” (pp 4)[12]. Its separate partnerships with Tfl (Transport for London), Gilead, and NGOs created new opportunities and value through application of digital technologies to develop new capabilities and services, such as data platforms, data as a service, and digital ids, which were used to reach out and offer services, where previously it was not possible. Importantly, these changes require considerable internal organizational innovations in organizational design and processes, incentives, and most importantly in culture or mind-set.
Following a survey[13] to find out the state of practice on AI practices, organizations were divided into four categories: Pioneers (understand and have adopted AI, 20% of sample), Investigators (display knowledge of AI and its application, but not deployed them beyond the pilot stage, 30% of sample), Experimenters (piloting or adopting AI without deep understanding, 18% of sample) and Passive (no AI adoption and very little understanding of AI, 32% of sample). Survey report noted that “Across all maturity groups, respondents who report only cost reductions to date are less optimistic about achieving further savings with AI than those who have seen revenue gains … Companies can use AI for cost cutting and productivity benefits. But advanced AI users focus on revenue generation opportunities to a far greater extent than less advanced users. Pioneers are twice as likely as Experimenters to use AI to boost revenues (53% compared with 24%)… potential of AI is particularly important in contexts where non-cost factors dominate” (pp. 8), such as safety, detecting fraud, etc.
Though it is tempting to consider technical innovation (such as new “disruptive” technologies – examples include Blockchain and Quantum Computing) as an example of value-creation, it is an incomplete and risky lens to understand “value creation”. Technical innovation could be risky and reduce value, both in the firm and general economic system, if right conditions are not present, as the recent example of crash in the cyber-currency market crash shows. One can argue that a mass adoption of disruptive innovation requires the right conditions to be present at the economic and societal level as well, as the example of automatous vehicles suggest. Technical innovation requires right organizational (strategy, culture, management processes) alignment.
1.2) Cost Minimization and Differentiation
In the general industrial economics literature, competitive advantage is created and sustained through cost-minimization, differentiation or focus (niche) strategy. It posits a “conflict” between cost minimization and differentiation strategy. As an example, a focus on differentiation (say personalized services) increased costs, and therefore inconsistent with cost minimization.
Given that digital technologies result in low (or even zero) marginal cost, reduced transaction costs, real-time data and analytics, they could potentially lead to both lower costs and differentiation. Whilst examples in consumer and service industries are familiar, capital manufacturing and product firms are also able to aim for cost reduction and differentiation through IoT based predictable maintenance, operations of digital twins, and “Performance as a Service” based business models, as digital transformation examples from GE[14] and Siemens[15] suggest. Ram Charan argued in similar vein that “Today, digital technology and the Internet have made both low cost and personalization “must haves” for every consumer.”[16] (pp. 41).
As the above examples indicate, managing the above trade-off is facilitated by digital technologies, which enable a new compact between information and time (which leads to personalisation), cost and strategy. It is not surprising that there is a new concept called “mixed” or “hybrid” strategy (Note: Not to be confused with “stuck in the middle” strategy discussed in Porter’s work) emerging as an alternative to the generic competitive strategy.
Yet another way to overcome the pressures of the above trade-off is to look beyond competitive advantage and consider “value-innovation” as a strategic plank. The theory and concept of “Blue-ocean” strategy seeks to achieve this, and through “value-innovation” provide a way to compete through competitive cost and innovation at the same time. Though blue-ocean strategies do not depend on digital technologies, their availability and potentially facilitate, if not always enable, them.
1.3) Strategy Formulation and Implementation
Given the stable nature of “traditional” resources and the environment, it was efficient to separate the strategy formulation and implementation process. The underlying assumptions were top management have all the information needed (which did not change frequently) to make decisions on strategy, which can be broken down into various sub-goals and operationally translated into goals and activities to be performed, which again did not change much. In a simplified version[17], just to belabour the point, strategy making was a top-down, waterfall, prescriptive in nature, and once is decided through a formal process, the implications for implementation can be derived easily and handed over to the rest of the organization. The efficiency with which strategy is executed decided its’ success, as all extraneous factors, such as competitors plans, economic forecasts, supply chain performance, etc., were either factored in, ring-fenced, or did not change much.
The assumption that strategic considerations (plans, resources, and external environment) remain stable over reasonable time is a risky one in a digital context, where not only environment shows VUCA (volatility, uncertainty, complexity and ambiguity) features, but it also shows the characteristics of a dancing landscape. In addition, digital resources change in terms of their value, opportunity cost, and relevance frequently requiring more flexibility in both strategy formulation and implementation.. In a Mckinsey Quarterly article[18], this was stated in simple and effective terms as follows:
The breadth of digital means that strategy exercises today need to involve the entire management team, not just the head of strategy. The pace of change requires new, hard thinking on when to set direction. Annual strategy reviews need to be compressed to a quarterly time frame, with real-time refinements and sprints to respond to triggering events. Ever more complex competitive, customer, and stakeholder environments mean that the what of strategy needs updating to include role playing, scenario planning exercises, and war games. Traditional frameworks such as Porter’s Five Forces will no longer suffice. Finally, the importance of strategic agility means that, now more than ever, the “soft stuff” will determine the how of strategy. This will enable the organization to sense strategic opportunities in real time and to be prepared to pivot as it tests, learns, and adapts.
2) Emergent, Deliberate and Realized Strategy
In addition to process aspects stated in the above cited paragraph, success in a dynamic and VUCA context also require relevant strategy lenses. In their article, noted management thinkers, Mintzberg and Waters[19] made a distinction between intended and realized strategies, and between deliberate and emergent strategies. These distinctions provide a useful framework, as digital firms pursue platform and eco-system strategies/business models (the distinction between the two is outside the scope of this paper).
Intended strategy refers to the goals and process of strategy, as it was formulated or designed. Realized strategy is the strategy that the firm ends up with because of execution issues, mid-course adjustments, unintended consequences, or new opportunities requiring organization pivot. On the other hand, deliberate strategy is realized strategy to the extent it was intended, and emergent strategy refers to the “patterns or consistencies realized despite, or in the absence of, intentions” (pp 257)[20].
The insight that realized strategy could vary from intended strategy, because, unexpected and unknown events materialise, is a crucial insight, whilst operating in a dynamic environment. Its implications include flexibility in approach (in case a serendipitous opportunity is discovered, as in case of Amazon diversification into Amazon Web Services), and an appreciation that strategy may experience unintended consequences (as in the case of Facebook) and therefore strategy needs to evolve.
To sum up, digital context makes the strategy process less linear and less top-down. It changes the nature and process of strategy and makes it more multidimensional, organic, process oriented and flexible. Given that digital contexts have more exposure to pivotal, strategy changing events, it is important that process be organic and empowering to exploit narrow windows of opportunities when they open up, or understand and proactively manage risks, before they pose serious challenges to the firm.
3) Digital Technology and Business Strategy
(Platforms and Ecosystems).
The new compact between information (digital technologies), cost/time, uncertainty and value, does more than address some of the above dilemmas faced in the traditional strategy process. The new compact enables new strategies and business models, which differ from the traditional businesses and require a new mind-set, organizational capabilities, and organizational culture and leadership.
Whilst platforms and eco-systems – and their different variants and mutations – provide most familiar examples of business models enabled by digital technologies, there are numerous other business models (some of them include platform centricity) that create value in innovative ways and also address the trade-offs discussed above. Examples include “Performance as a service”, Freemium, fractionalization, “OnDemand” marketplace, Peer to Peer lending, disintermediation, crowd-sourcing, bundling, automation-enabled services, predictive maintenance remote repairs, and optimization of systems (as in wind-farms and solar parks, referred to as System of Systems[21]) as opposed to single machine or product systems enabled through digital technologies.
At a more granular level, additional forms of business models and platforms based on technology (Blockchain, IoT, robotics, etc), industry (as in financial services[22], Neo Bank, Distributed Bank, Relegated Bank, Disintermediated Bank, and Better Bank) are being constantly experimented and innovated upon.
4) Differences between strategy under “traditional” and digital technology led context
Platforms and Eco-systems operate on a different strategic basis than the traditional or conventional businesses, referred to as pipeline businesses[23].
Pipelines businesses are organized around linear value-chains and value is generally created through internal optimization (mostly efficiency). The focus is mostly internal in relation to decision-making, strategy, efficiency, and performance matrices. To the extent, a firm has external dependencies, they are covered through tight contracts, exclusive arrangements, internalising operations that could pose risk or where competitive advantage needs to be maintained (as in exclusive distribution or R&D).
As noted by a set of researchers, “The engine of the industrial economy was, and remains, supply-side economies of scale …firms achieve market power by controlling resources, ruthlessly increasing efficiency, and fending off challenges from any of the five forces”[24]. In traditional businesses, competitive positions are built around the five forces and regarded as depletive, or “extracting value from a firm, and so argues for building barriers against them”.[25] The focus of traditional businesses is on maintaining tight firm boundaries (where needed, predefined and set external arrangements), control and optimization (fixed strategy and efficiency in execution), and linearity (all value-chain activities including from external suppliers and customers follow a pre-set modes of behaviour and arrangements).
Platform and eco-systems are based on network effects (which could be both positive and negative) and follow Metcalfe’s law, which states that a network value is based on number of links between the nodes (or users)[26]. A positive network creates virtuous cycle and gets more users/connections and in the process starts acting as a competitive barrier to entry. In traditional businesses, gaining additional customers does not add corresponding value due to diminishing returns. In contrast, platform businesses become more useful with more connection and activities in them.[27] In pipeline businesses, Porter’s five forces are depletive, i.e., they need to be defended against. In business models that are platform and eco-system centric, Porter’s five forces are accretive, i.e., they add value to the platform and eco-system through addition of complementors, micro-services, exposure to a different markets and customers, and finally more and richer data, which can be used, in a responsible and ethical ways, to build more customer and business value.
Digital technologies allow strategy to take advantage of network effects through platforms and eco-systems. Digital technologies also allow business models, such as platforms and eco-systems to have greater access to markets, consumer segments, data, micro-services and complementors. They also allow to re-write or up-end legacy business practices.
- As strategy observers note, industry boundaries are increasingly blurred, and that competition is now now between firms, but platforms and ecosystems. It is argued that in a platform market, it is better to have best platform than have the best product[28].
- They “allow digital players to move easily across industry and sector borders are destroying the traditional model …digital platforms and ecosystems upend the (economic) fundamentals of supply and demand”[29], but making the supply available through better prediction and forecasting, and other tools of digital technologies.
A similar point highlighting the risks and potential of platforms was made by Iansiti and Lakhani[30], when they argued that, “Hub firms don’t compete in a traditional fashion—vying with existing products or services, perhaps with improved features or lower cost. Rather, they take the network-based assets that have already reached scale in one setting and then use them to enter another industry and “re-architect” its competitive structure— transforming it from product-driven to network-driven. They plug adjacent industries into the same competitive bottlenecks they already control.”
In view of the above, it is not surprising that platforms and eco-systems are valued highly by investors.
5) Strategic and leadership implications
In strategic terms, to the extent, platforms or eco-systems are used, the boundaries of the firm are likely to be fluid. (Note: Platforms and eco-systems could also be closed and tightly controlled, but in most cases the raison d’etre of platform is to have more partners that could contribute complementors and innovations, and therefore would need limited access.) Fluidity and constantly evolving nature of platforms and eco-systems puts a premium on strategy and leadership that is flexible, agile, adaptable and also comfortable with the uncertainty and ambiguity (albeit with right governance level) that the large number of partners, who are not employees, will not self-destruct. Platforms and eco-systems derive their influence from the trust that they engender.
An important strategic implication includes not limiting the scope of strategy to industry, but also include emerging and existing threats, which could be from established competitors, but also other eco-systems (as in case of banking industry with payment services offered by Google and Apple), or start-ups with innovative technologies (as in the banking industry with FinTech’s), or from eco-system partners themselves. As argued in a paper, “In a world of ecosystems, as industry boundaries blur, strategy needs a much broader frame of reference. CEOs need a wider lens when assessing would-be competitors— or partners. Indeed, in an ecosystem environment, today’s competitor may turn out to be a partner or “frenemy.” Failure to grasp this means that you will miss opportunities and underplay threats.”[31]
This also may involve making choices, which are unconventional, if analysed through established strategy lens. Examples include opening the platform to competitors. GE[32] planned to partner and open its’ system to competitors. Similarly, in 2016, Goldman Sachs[33] opened its platform SIMON to competitors. Another example relates to differences in how the money-making is perceived. As Ram Charan[34] noted, digital-born firms can consume a ton of cash and their EPS (earning per share) can be zero for many years, but leaders of digital age know that money-making is different in the digital age. Ram Charan argued, “Of course the components of moneymaking—things like revenues, cash, gross margin, cost structure, and funding—are the same as ever. But the emphasis, the patterns, the timing, and the relationships among them are different. Using these differences to create value for both the consumer and shareholders at the same time is a new kind of business savvy and a source of competitive advantage… Bezos’s business acumen was not to focus on earnings per share…but on revenue growth and cash gross margin…when revenues grow, as does something less obvious: gross margin…this is where the power of the law of increasing returns is on full display” (pp.108-111)
Given that strategy process will have to account for more volatility, uncertainty, complexity and ambiguity in the environment, yet another implication is to have a strategy process that is more dynamic, fluid and flexible, allows for unexpected pivots (when unintended outcomes or serendipitous events happen) and involves bottom-up participation in the process. The fluidity of strategy does not imply a lack of direction or even randomness. Leaders still needs to set institutional strategy (purpose, values and principles), but provide for flexibility in lower order strategic and operational choices. This also means a tighter integration between strategy formulation and implementation, if dissolving the two distinct processes into one interactive process is not possible. As Daugherty and Wilson[35] note:
“Leading companies are pioneering a fundamentally new approach to strategy and, in the process, creating powerful engines of value creation. Enabled by intelligent technologies, these business models are built on an unprecedented integration of strategy and execution that advances both nearly simultaneously … these companies know they can no longer afford to sequentially devise a strategy, experiment, and then execute.” (pp. 9).
VUCA environments challenge the idea and process of strategy in another important way, as environmental unpredictability makes any planning, including strategic planning, difficult. One such popular (but contested as incorrect) view is VUCA environments make activities like strategic planning “as mere exercises in futility”[36] as it impossible to predict and plan. This is contested by many, and, as Roger Martin[37] argues, “A VUCA world doesn’t render the rules and discipline of strategy any less applicable; it actually raises the bar on the thinking discipline required to succeed.” In other words, there is more premium on strategy, leadership and critical thinking in a VUCA environment.
Whilst digital technologies enable to re-align the balance between value creation and apportionment, cost and differentiation, and strategy formulation and implementation, it also creates few challenges of its own. Business models, such as platform and eco-systems, are not risk-free, and careful choices and risk management considerations need to be built into their planning. The strategic and operational challenges multiply, when platform and eco-system approach is applied to businesses having established traditional businesses, as various digital transformation cases at GE, Siemens and Klöckner & Co [38] demonstrate.
6) Relationship between Strategy and Digital Technology
Whilst the potential of technology is undeniable, by itself, it does not provide a lasting competitive advantage. As a survey[39] noted, it is strategy not digital transformation, that drives digital transformation. In a similar vein, it was argued that unless a technology is proprietary, it does not provide competitive advantage on its own and cited examples of electricity and rail transport[40]. To state it differently, even a simple technology, such as email, does not provide a competitive advantage. To create value and provide advantage, it needs to be integrated with strategy, culture and processes in a way that it is impossible for competitors to replicate using plug-and-play approach.
This section discusses, three such forms of relationships. A more detailed discussion on digital leadership and culture will follow in the following sections.
6.1) Operational relationship between strategy and digital technologies
Tactical relationship between strategy and digital technologies exists when the strategy is fixed, and digital technology is expected to improve its’ execution. It is largely a one-directional relationship between strategy and digital technologies with the latter being passive recipient of the strategic requirements. It implies largely a single user case or application-oriented technology mind-set, when looking at the role of digital technologies within the firm. The focus is on solving discrete problems and the main idea is to deploy digital technologies provide plug and play solutions or solutions that entail minimum customisation. Examples of discrete problems include improving customer conversion rate, cost reduction, better logistics, and implementation of BAU digital practices, such as use of e-commerce channels/e-marketing or use of social media for marketing.
In this tactical (one-directional relationship), technology plays largely a passive role within the overall strategic context. The firm may predominantly use IT as opposed to digital technologies in executing the strategy better, and the Head of IT or technology may or may not be a member of the top management committee. The functional characterisation is more likely to be IT strategy as opposed to digital strategy.
This form of relationship is mostly to be found in firms, which are in traditional businesses and small scale, where the talent needed for a full scoped digital strategy is limited. This could also be present in established firms, which are big and do not face an existential crisis, and therefore consider building a full-scoped digital transformation as cost intensive and risky. In terms of strategy process, this form of relationship is likely to exist where a “top-down” strategy and administration processes are in place. The focus of digital is likely to be internal or limited to boundaries set by the strategy.
This form of relationship does not, as expected, apply to the digitally-native businesses, because their business – and therefore business strategy itself – is digital.
6.2) Strategy-focused relationship
Strategy focused relationship between strategy and digital technology exists, when digital technologies are expected to proactively contribute to make the strategy richer in terms of choices and content. It implies largely a strategy mind-set, when looking at the role of digital technologies within the firm. Unlike the one-directional relationship, the role of digital technology in the strategy process is more inclusive, active and mutual. Digital technology is not considered as limited to executing a given strategy better; rather, its role is to make strategy itself better by making available options that relate to big-problems that strategy is trying to solve. The exam question for digital technologies (or the department and leaders) is, what are the high levels problems that strategy is trying to address and how can digital technology help in that process. It is expected that there will be a proper digital strategy, which is integrated with business strategy (note: in most non-digitally native firms, business strategy and digital strategy are distinct concepts). Firms having this symbiotic relationship start build digital capabilities to be able to execute complex strategic expectations and mandates in the future.
This form of relationship, whilst more useful for both digital technologies (or its’ department) and strategy (or senior most leaders) requires a mind-set change, which could be challenging in the initial stages. For the technology leaders, the mind-set challenge would involve learning the business context and strategy, and importantly conceding the ground to strategy as an important partner. For the senior business leaders, the mind-set change could involve an appreciation that strategy is about business, but it is increasingly informed by how digital technologies can add value to a greater extent to the strategy. It could mean, counter-intuitively, conceding some ground to technology, and also learning about technology itself (an area covered under digital culture and leadership sections).
6.3) Organizational capability building relationship
Organizational capability building relationship between strategy and digital technology exists, when the senior most leaders (including technologists) consider digital technology not only to make strategy more effective, but, if required, change the nature of firm from doing digital to being digital. This involves that digital is not limited to technologies or strategy, but also involves culture, employees, myriad of other applications and external stakeholders. In this relationship, senior leaders seek to make digital technologies an organization (strategic) resource that enables every process within the firm. The full suite of digital resources is is available broadly within the firm, and, to the extent competitive reasons allow, also to external world (note: as indicated in previous section, platforms and eco-systems enable participants to partners with the help of digitally enabled tools). Another feature of this form of relationship is that employees, functions and teams are empowered, if not encouraged, to take initiative, suggest ideas and experiment to add value digitally. Digital projects are not always initiated or mandated by senior leaders. . In this relationship, leaders build digital culture, capabilities and also deeper relationship with functions on how digital technology can become an organizational resource. It implies largely an organizational mind-set, when looking at the role of digital technologies within the firm.
This form of relationship is “multi-directional” in nature as it implies openness to explore options in multiple directions including external partnerships to acquire capabilities and means needed to actualize the potential of strategy and digital technology. On the digital capabilities front, there is an awareness that the firm may need to build more digital capabilities than exists within the firm, and therefore hiring, external tie-ups and even acquisitions are considered. Similarly, strategy may need external tie-ups, which could be complementors, service providers, eco-system partners, or platform participants.
Firms in this category may choose to make changes in their business model itself, try platforms leadership, build their own eco-systems, or consider blue ocean strategies. These options present a significant departure in terms of their existing strategic considerations enabled in no small part by digital technologies. This multi-dimensional relationship between strategy and digital transformation is on-going, dynamic, and constantly evolving, as new partners are added to the platform and eco-system, new frontiers of blue-ocean strategies are explored, and business models are adapted and innovated with new digital technologies.
7) Key ideas
The main ideas in this section can be summarised as follows:
- The normal top-down strategy process with periodic review is aligned to normal resources of economic production (such as capital, resources, manufacturing) and stable and predictable environment. In such non-digital contexts, main competitive externalities and risks are accounted for through internalization of key sources of uncertainty, extensive internal processes and, where needed, detailed (external) agreements. Digital organizations compete in dynamic and uncertain environments (also commonly referred to as VUCA environments), which, whilst making strategy more difficult, increases the premium on it to the extent it is effectively done.
- Digital firms build their competitive advantage using digital resources (information, data, algorithms, etc) and operate in a dynamic, unpredictable and inter-connected environments. This context requires a strategy approach, which is multi-modal (top-down, but also bottom-up, more strategic empowerment at various levels, and flexibility to review, when needed). Digital context also requires flexibility in the strategy process to account for emergent and realized strategies.
- Digital technologies and resources provide opportunities to enable a closer integration between value-creation and capture, strategy formulation and implementation, and cost minimization and differentiation (personalization). In the manufacturing and product contexts, the strategy process treated them as distinct, and either did not require it in an appreciable way or it was not easy to achieve integrations in these distinct processes.
- Digital technologies enable new business models and business strategies that enable innovation and value-creation. Two main such business models are platform and eco-systems, and within and between them, there are variations possible. These models are different in terms of their focus on resource orchestration (as opposed to resource control), external orientation (as opposed to internal focus), core-value proposition (value, efficiency and innovation as opposed to efficiency)[41].
- Digital technologies blur industry boundaries requiring senior leaders to broaden their strategic view to include related and adjacent industries, ecosystems, and new start-ups. Competition is no longer defined in terms of industry alone.
- Relationship between digital technologies and strategy can be tactical, strategic or organizational capability oriented. For digital technologies to contribute maximally to strategy, and for strategy to have maximum leverage from digital technologies, the relationship between them needs to be closely integrated, involved, and enterprise-oriented. Developing a sustainable competitive advantage requires digital technologies as a strategic and organizational capability, and this entails their alignment with culture, leadership and organizational design.
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[11] Sebastian, Ina M., Weill, Peter and Woerner, Stephanie L. (2021). Three Types of Value Drive Performance in Digital Business. Research Briefing. No XXI-3. March 18, 2021. MIT Center for Information Systems Research. Three Types of Value Drive Performance in Digital Business | MIT CISR
[12] Furr, Nathan and Shipilov, Andrew. (2018). How Does Digital Transformation Happen? The Mastercard Case” (A). Case No 1463. INSEAD.
[13] Ransbotham, Sam., Khodabandeh, Shervin., Fehling, Ronny, LaFountain, Burt., and Kiron, David.(2019) “Winning with AI: Pioneers Combine Strategy, Organizational Behaviour, and Technology”. MIT Sloan
[14] Duke, Lisa (2019). Case: Digital Transformation at GE: Shifting Minds for Agility. International Institute for Management Development, Lausanne. IMD-7-2011 IMI 007.
[15] Collins, David J and Junker, Tonia. (2018). Case: Digitalization at Siemens. Harvard Business School. 9-717-428.
[16] Ram Charan and Geri Willigan, Rethinking Competitive Advantage: New Rules for the Digital Age. (London: Penguin Random House, United Kingdom, 2021)
[17] Though the above view was made richer in strategy literature through additional perspectives, such as distinctions between content (goals) and process (top down or bottom-up) of strategy, formulated and formed strategy, levels of strategy (institutional, corporate, business, functional), types of strategy (vertical integration, related diversification, conglomerate), and more. These lenses also included political and organizational processes. For example, Bower in one of the foundational works in the area, found that by the time, capital projects are presented for approval at senior levels, the window of rejection is significantly narrowed given the investments in the proposal process and its socialization that took place.
[18] Bughin, Jacques., Catlin, Tanguy., Hirt, Martin., and Willmot, Paul., (2018). Why digital strategies fail. McKinsey Quarterly. January 2018.
[19] Mintzberg, Henry and Waters, James A. (1985) Of Strategies, Deliberate and Emergent. Strategic Management Journal, Vol. 6, 257-272.
[20] As above.
[21] Porter, Michael E. and Heppelmann, James E (2014). How Smart, Connected Products Are Transforming Competition. Harvard Business Review. November 2014.
[22] Saluja, Sushil (2021). Banking on Change: The Digital Revolution is Now Here. In Anil K. Khandelwal (Eds.), Transformational Leadership in Banking: Challenges of Governance, Leadership and HR in a digital and disruptive world. Sage.
[23] Van Alstynes, Marshall W., Parker, Geoffrey G., and Chouday, Sangeet Paul. (2016) Pipelines, Platforms and the New Rules of Strategy. Harvard Business Review, April 2016.
[24] Ibid.
[25] Ibid.
[26] Iansiti, Marco and Lakhani, Karim R. (2017). Managing Our Hub Economy. Harvard Business Review. September – October 2017.
[27] Ibid.
[28] Cusumano, Michael A., Gawer, Annabelle., and Yoffie, David B. (2019) Business of Platforms. Strategy in the Age of Digital Competition, Innovation, and Power. (London: HarperCollins Publishers Ltd.)
[29] Bughin, Jacques., Catlin, Tanguy., Hirt, Martin., and Willmot, Paul., (2018). Why digital strategies fail. McKinsey Quarterly. January 2018.
[30] Iansiti, Marco and Lakhani, Karim R. (2017). Managing Our Hub Economy. Harvard Business Review. September – October 2017.
[31] Bughin, Jacques., Catlin, Tanguy., Hirt, Martin., and Willmot, Paul., (2018). Why digital strategies fail. McKinsey Quarterly. January 2018.
[32] Lakhani, Karim R., Iansiti, Marco and Herman, Kerry. (2015). Case: GE and the Industrial Internet. Harvard Business School. 9-614-032. Rev: March 8, 2015
Also,
Duke, Lisa (2019). Case: Digital Transformation at GE: Shifting Minds for Agility. IMD, Lausanne. IMD-7-2011. IMI007. April 16, 2019.
[33] Gupta, Sunil and Simonds, Sara. (2019). Case: Goldman Sachs’ Digital Journey. Harvard Business School. 9-518-039. Rev: May 10, 2019.
[34] Charan, Ram. (2017). Boards Can’t Wait for CEOs to Priortize Digital Transformation”. Harvard Business Review. September 2017.
[35] Daugherty, Paul R. and Wilson, James, H. (2021). Radically Human. How New Technology is Transforming Business and Shaping Our Future. Harvard Business Review Press. Massachusetts: Boston.
[36] Bennett, Nathan and Lemoine, G. James (2014). What a difference a word makes: Understanding threats to performance in a VUCA world. Business Horizon, 57, 311-317.
[37] Martin, Roger (2012). Opening Up the Boundaries of the Firm. Rotman Magazine, Pp 5- 9.
[38] Korotov, Konstantin and Sack, Norbert (2019) Case: Gisbert Rühl: Leading digital transformation at Klöckner & Co. ESMT European School of Management and Technology GmbH, Berlin, Germany. May 20, 2019.
[39] Kane, Gerald C., Palmer, Doug., Phillips, Anh Nguyen., Kiron, David., and Buckley, Natasha. (2015) “Strategy, not Technology, Drives Digital Transformation: Becoming a digitally mature enterprise”, Findings from the 2015 Digital Business Global Executive Study and Research Project”. MIT Sloan Management Review Research Report in collaboration with Deloitte University Press. . Summer 2015.
[40] Carr, N.G., (2003) “IT Doesn’t Matter”, Harvard Business Review, May 2003.
As cited in
Kane, Gerald C., Palmer, Doug., Phillips, Anh Nguyen., Kiron, David., and Buckley, Natasha. (2015) “Strategy, not Technology, Drives Digital Transformation: Becoming a digitally mature enterprise”, Findings from the 2015 Digital Business Global Executive Study and Research Project”. MIT Sloan Management Review Research Report in collaboration with Deloitte University Press. . Summer 2015.
[41] Van Alstynes, Marshall W., Parker, Geoffrey G., and Chouday, Sangeet Paul. (2016) Pipelines, Platforms and the New Rules of Strategy. Harvard Business Review, April 2016.
