Guiding_the__Digital_TransformationVallabh_Sambamurthy_Robert_W

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

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

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

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).

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

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

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.

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

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.

An efficient market exists when maximal opportunities are provided to producers

and consumers to effect transactions with minimal transaction costs. Inefficient

markets are susceptible to market failure, with four conditions explaining a

preponderance of market failures:

 One or both parties hold incomplete information about the market, e.g., existence of alternative buyers/sellers, knowledge of the other party and this party’s history of performance, goods/services quality, production costs,

availability of substitute goods/services, etc.

 One or both parties are exposed to excessive risk, i.e., trust mechanisms are

lacking or are of inferior quality.

 One or more third-parties not directly involved in an exchange or in facilitating the exchange benefit from the exchange, e.g., a ‘kickback’.

 One of the parties holds undue influence, e.g., monopoly power or huge size, and dictates the parameters of the exchange to the detriment of the

other party.

When one or more of these conditions are present, the likelihood of market

participation decreases and the likelihood of participant dissatisfaction increases.

As the value-units being exchanged increased in complexity and sophistication

as a result of the first (specialized machinery and economies of scale) and second

(railroads and telecommunication) industrial revolutions, firms emerged as an

alternative to markets. Viewed simply, a firm (or, an organization) consists of a

set of operating units coordinated and integrated by a hierarchy of managers,

supported by other employees – all of which are located within an overarching

organizational structure. Each operating unit itself has managers and workers

engaged in specialized economic activities. And, the firm as a whole interacts with

customers and suppliers within a market-focused ecosystem that, typically, engages

multiple markets for goods and services.

Today, the distinctions between markets and firms are blurred via the

emergence of two distinctive, market-focused ecosystems: the pipeline ecosystem

and the network ecosystem.

With the pipeline ecosystem (the dominant ecosystem over the last century;

depicted as Figure 1-1), a producer organization targets a collection of value-units at

one or more consumer segments and fashions a linear value stream involving

numerous upstream (e.g., raw material suppliers, component suppliers, etc.),

midstream (e.g., producers) and downstream (e.g., distributors, retailers, etc.)

organizations to deliver the value-units to consumers. This ecosystem is referred to

as a linear value stream because it involves a sequence of value-adding steps: raw

materials are assembled first into components and then into finished value-units

(information, a good or a service) that are delivered to consumers, either through a

complex downstream process facilitated by intermediaries or through a simpler,

direct-to-consumer downstream process. These value-stream steps are often

performed by different organizations (exploiting specialization), but may all be

performed by the producer; such a producer is referred to as being fully vertically-

integrated.

Figure 1-1 The Pipeline Ecosystem

ConsumersProducer IntermediariesIntermediaries

Markets

Material & Component Suppliers

Markets

Upstream Midstream Downstream

The producer organization in a pipeline ecosystem has:

 Full authority for determining the targeted consumers and the nature of the

value-units being offered to these consumers.

 Full authority for fashioning and overseeing the linear value stream.

 Full ownership of the assets used in assembling the finished value-units, as

well as the assets used in any vertically-integrated portions of the linear value chain.

The primary market defining a pipeline ecosystem is that between the producer and

the consumer. In a B2C pipeline ecosystem, the predominant consumer is an

individual. In a B2B pipeline ecosystem, the predominant consumer is an

organization. In addition, a variety of secondary markets (usually B2B markets for

raw materials, for component parts, for products to stock a retail store, etc.) are

associated with pipeline ecosystems.

With the network ecosystem (an ecosystem that has become increasingly

visible over the last decade; depicted as Figure 1-2), a network of value-unit

producers and value-unit consumers are brought together by a network orchestrator.

The primary market defining a network ecosystem involves value-unit exchanges

between producers and consumers. The network orchestrator creates and

manages the market environment and the transaction environment within which

these value-unit exchanges occur. Importantly, the network orchestrator neither

determines the nature of the value-units being exchanged nor owns any of the assets

involved in producing these value-units.

Figure 1-2 The Network Ecosystem

Producer Network

Consumer Network

Market

Network Orchestrator

Markets

Intermediaries

Material & Component Suppliers

Markets

Upstream Midstream Downstream

What is the difference between a retailer, such as Walmart, and a network

orchestrator, such as eBay? Doesn’t Walmart create a market environment (a retail

store with a finely curated stock of products) within which producers and consumers

are brought together? The difference is that:

 Walmart determines which specific products are stocked in each retail store, takes ownership of these products once they have left the manufacturer, has

fashioned very sophisticated linear value streams to bring these products to their stores, and owns many of the logistical assets used in these value

streams.

 eBay does not determine the nature of the products to be sold by the producers using eBay’s market environment, never takes ownership of these

products, and has no responsibility for nor owns any of the assets deployed to produce these products or to transfer ownership of the products from

producers to consumers.

As a consequence, Walmart represents a pipeline organization, whereas eBay

represents a network organization.

Digital disruption is having profound effects on the roles that humans serve in

market-focused ecosystems, especially as employees of participating organizations.

Digital technologies and humans differ markedly in the types of work tasks each best

handles, and Table 1-2 suggests the probability of different types of work tasks being

performed digitally rather than being performed by humans.

Table 1-2 Probability of Work Tasks Being Performed Digitally

Type of Work

Definition Probability

Learning Acquiring new knowledge by interpreting & integrating captured data and experiences

Situational Awareness

Interpreting environmental & situational cues

Word/Image Analysis

Interpreting the meaning of words (textual & audio) and images (sketches, photos & video)

Numerical Analysis

Performing complex algorithmic operations

Repetitive Physical Activity

Programming robot-like digitalized solutions to carry-out simple & complex physical tasks

Repetitive Data Processing

Programming software to carry-out simple & complex data processing tasks

Lower

Higher

Digital solutions are especially good for executing pre-specified rules, but not

as effective at pattern recognition, complex communication, and creativity – types of

activities that well-informed, talented humans can be exceptional at performing. For

example, think about how important it is during a brainstorming session to quickly

filter out bad ideas, but recognize and enhance the good ideas. It is hard to conceive

that a digital solution could outperform a human with such a work task. Still, the

relentless advances in digital technologies are making significant headway with the

digital enablement of work tasks requiring considerable levels of situational

understanding and prediction. Perhaps the best that can be said for now is that the

roles served by digital technologies and by humans in innovative business models

are in flux and will certainly continue to evolve in the future.

Three Eras of Digital Disruption

Figure 1-3 presents timelines for three eras of digital disruption. These eras

reflect the influence of increasing digitization and increasing digitalization.

Digitization refers to the purely technical processes associated with converting

sensed and captured data into binary form, storing and transmitting these binary

data, manipulating these data, and storing/transmitting the outcomes of these data

manipulations. Digitalization, on the other hand, refers to more complex processes

of applying digitization within organizations and within the social and economic

contexts within which organizations are embedded – thence producing changes (often

incremental, but occasionally radical and disruptive) to these organizations and to

their social and economic contexts.

Figure 1-3 Three Eras of Digital Disruption

1950 2200201020001990198019701960

Data Processing & Proprietary Connectivity

Coordination & Open Connectivity

Era 1

Era 2

Era 3

Mobility & Ubiquitous Connectivity

The start date for each of the three eras is, at best, an approximation. While

it is fairly easy to identify when a specific digital technology first appeared, it is very

difficult to identify when novel instances of digitalization are applied by early-

adopters. Early-adopters refer to organizations whose leadership teams are

regularly among the first to apply new forms of digitalization. It takes time for early-

adopters to learn about and expose the usefulness of new forms of digitalization and

for these exposed uses to take root across organizations, industries and societies.

While some early-adopters may experience huge competitive gains from their

innovative actions, a greater number experience little gain or suffer losses because

innovative actions tend to be costly and often prove to be ill-founded or ill-timed.

It is important to note that the lapse in time between the start of an era and

when implementations of new forms of digitalization consistently yield significant

value for adopters shortened considerably between the first and second eras, and is

expected to shorten even further between the second and third eras. There are a

number of possible explanations as to why this is the case, and these will be raised

throughout this book. One of these reasons is that the forms of digitalization

emerging in one era, e.g., Era 1, become pervasively adopted over time and are

continuously enhanced, thus providing an ever-expanding digitalization foundation

that is leveraged as newer forms of digitalization emerge in succeeding eras, e.g.,

Eras 2 and 3.

New forms of digitalization are rendered through four engines of digitalization

(i.e., automation, control, empowerment and interaction), and applied within three

domains of digitalization (i.e., operational, analytical and collaborative). The

engines of digitalization refer to four fundamental mechanisms through which

digital technologies effect changes within organizations and their broader

social/economic contexts. The domains of digitalization refer to three

fundamental spheres of organizational activity within which digitalization occurs.

The four engines of digitalization (automation, control, empowerment, and

interaction) operate individually or in combination in fabricating new forms of

digitalization. Definitions of and examples of the benefits to be obtained from

applying these digitalization engines are provided in Table 1-3.

Table 1-3 Four Engines of Digitalization

Digitalization Engine

Definition Examples of Realized Benefits

Automation

Simplifying & digitalizing complex tasks & task-sequences, eliminating unneeded tasks, and, as appropriate, performing tasks via digitalization rather than via humans.

•Cost reduction. •Transaction cycle-time improvement. •Responsiveness improvement. •Productivity improvement.

Control

Embedding digitalized rules to identify out-of-control events/situations, such that out-of-control events/situations either do not occur or, if they do occur, are quickly addressed.

•Real-time event/situation monitoring. •Real-time event/situation visibility. •Minimizing the occurrence of inferior decisions & inferior actions.

Empowerment

Providing humans facing decisions with timely, accurate & comprehensive information and with easy-to-use, relevant decision aids & business intelligence tools.

•Broad distribution of and access to data, information & knowledge. •Broad availability of & access to decision aids & business intelligence tools.

Interaction

Enabling humans, digitalized solutions or both to engage in timely, meaningful dialogues (overcoming barriers of space and time).

•Complex & non-routine business activities handled quicker & better . •Problems & opportunities handled quicker & better. •Innovative activities handled quicker & better.

The three digitalization domains (operational, analytical, and

collaborative) are best seen as being complementary. In other words, a specific

digitalization initiative might target, within a specific entity (i.e., one or more of an

organization’s subunits, the entire organization, subunits of a set of cooperating

organizations, etc.): a single domain, two of the three domains or all three of the

domains. Definitions of and examples of the benefits to be obtained within each

domain from digitalization are provided in Table 1-4.

Table 1-4 Three Domains of Digitalization

Digitalization Domains

Definition Examples of Realized Benefits

Operational

Organizational activities involved in getting tasks done. The entities engaged in task-related activities could include digitalized solutions, humans, teams, organizational subunits, organizations and/or sets of collaborating organizations.

•Enhanced task effectiveness (accuracy, comprehensiveness, timeliness, convenience, etc.) •Enhanced task efficiency (productivity, cost, error, rework, etc.)

Analytical

Organizational activities involved in improving understandings of what things should be done, what things need to be done, what things can be done, how things are done, and how what has been done is assessed.

•Enhanced decision effectiveness (accuracy, comprehensiveness, timeliness, convenience, etc.) •Enhanced decision efficiency (productivity, cost, error, rework, etc.)

Collaborative

Organizational activities involved in enabling digitalized solutions, humans and/or organizational entities to share data, information & knowledge and to cooperate in making decisions and in getting things done.

•Enhanced task effectiveness •Enhanced task efficiency •Enhanced decision effectiveness •Enhanced decision efficiency

Table 1-5 presents an overview of the key features of each of the three eras

of digital disruption. A few aspects of this table would benefit from a brief introduction

before each of the eras is described. First, an architecture refers to an overarching

design framework specified to (1) maintain established policies, e.g., all digitalized

transaction-handling should make use of a common database, and (2) enable

component interoperability, e.g., all business applications should operate through the

use of an agreed-on set of communications devices. When two or more digital

solutions are interoperable, these solutions are able to seamlessly exchange data

and able to apply these exchanged data. Second, digital technologies can be

proprietary or open. Stated simply, a proprietary technology is tightly controlled

by its developer, while an open technology is available for use (and for modification)

by anyone (though some form of payment may be required to gain access to the

technology). Third, the lower part of the table illustrates the relative extent to which

each era exploited the four engines of digitalization. As can be seen below, while

digitalization in Era 1 focused on automation and control, Era 3 digitalization is

characterized by high levels of each of the digitalization engines.

Table 1-5 An Overview of the Three Eras of Digital Disruption

Era 1 •Data Processing •Proprietary Connectivity

Era 2 •Coordination •Open Connectivity

Era 3 •Mobility •Ubiquitous Connectivity

Key Digital Technologies

Computer systems, remote terminals, networks, database management, packaged software

Personal computers, servers, ERP systems, analytics software, World Wide Web

Smart personal devices, social technologies, Internet of Things, Big Data

Digitization Architecture

Centralized Distributed Ubiquitous

Connectivity Architecture

One-to-Many Proprietary

One-to-Many Open

Many-to-Many Proprietary

Many-to-Many Open

Digitalization Architecture

Transaction Handling Decision/Action Coordination Value-Unit Enhancement

Digitalization Purpose

Efficiency Optimization Community-Building

Digitalization Engines

Automation

Control

Empowerment

Interaction

Organizations recognized as digitalization leaders during Era 1 emphasized

automation and control, driving growth and profitability through heightened

efficiency. During this era, most typically, digitization was centralized, connectivity

accentuated establishing proprietary links with preferred suppliers/customers, and

digitalization focused on the handling of transactional data and the use of these data

in supporting operational decisions and actions. Table 1-6 provides a brief glimpse

of innovative initiatives introduced by two Era 1 disruptors: American Airlines and

Merrill Lynch.

Table 1-6 Era 1: Innovative Digitalization Initiatives

American Airlines Sabre Reservation System

Merrill Lynch Cash Management Account

Digitalization Realized Benefits Digitalization Realized Benefits

Common database of current flights, routes & pricing offered by multiple airlines.

Desktop-based software allowing travel agents to dial-in to the Sabre System to search for flights & prices and to make direct bookings.

Enabled travel agents to book passenger flights with greater efficiency, speed & flexibility. In this booking process, American used the system to display its own flights before other airlines’ flights, increasing American’s bookings.

Other airlines paid a fee to American for the ability to list their flights and an even higher fee for a priority listing.

American gained valuable intelligence about competitors’ prices & routes.

Integrated database of all of a business customer’s accounts (e.g., savings, checking, brokerage).

Digitalized decision- making system enabling a business customer to log onto their Cash Management Account to track investment opportunities and to execute account- related actions.

Offered business customers a financial management service for maintaining a desired level of liquidity while sweeping daily excess cash into higher-yield brokerage accounts.

The digitalized decision- making system monitored market conditions and executed customer-initiated actions across a customer’s accounts.

Organizations recognized as digitalization leaders during Era 2 continued

emphasizing automation and control, but also made significant headway with

empowerment (via Enterprise Resource Planning systems and business analytics) and

interaction (via the open connectivity offered by the technologies that underlay the

World Wide Web), further boosting growth and profitability by tightly coordinating

decisions and actions. Typically, digitalization was distributed across centralized and

localized sites, connectivity proliferated across value-stream participants via open

one-to-many connections (B2C e-commerce) and proprietary many-to-many

connections (B2B), and digitalization focused on coordinating operational and tactical

decisions and actions both within and across organizations’ boundaries. Table 1-7

provides a brief glimpse of innovative initiatives introduced by two Era 2 disruptors:

United Parcel Service (UPS) and Boeing.

Table 1-7 Era 2: Innovative Digitalization Initiatives

United Parcel Service (UPS) Package Flow System

Boeing 777 Parts Tracking System

Digitalization Realized Benefits Digitalization Realized Benefits

Smart (bar-coded) labels are placed on packages, providing detailed delivery information.

Once a package arrives at a Delivery Center, truck loading plans and delivery routes are optimized.

Route details are sent to drivers’ hand-held devices.

Loads are balanced across trucks, drivers & routes.

Routes are optimized to increase efficiency & effectiveness.

Drivers are able to speed up deliveries and to make more deliveries on a route.

Parts delivery processes from suppliers to Boeing capture real-time data (across the globe) on movement, route location, weather conditions and road conditions.

Parts delivery processes are coordinated & optimized (part manufacturing lead times, modes of transport, delivery routes).

Costs are better contained (delivery, inventory, assembly) while handling over 3 million parts from over 500 (domestic & international) suppliers.

Parts arrive as they are needed in the assembly process.

Organizations recognized as digitalization leaders during Era 3 emphasize all

four engines of digitalization: automation, control, empowerment and interaction.

Especially important for heightened empowerment and heightened interaction is the

mobility and ubiquitous connectivity offered through the convergence of smart

personal devices (e.g., smartphones and tablets), the Internet of Things

(miniaturized microcircuitry embedded within all types of products), and the

advanced analytics made possible through Big Data (streams of digital data created

via the real-time capture of messages and events). Along with new efficiency and

optimization opportunities, growth and profitability are being spurred through the

active formation and mobilization of the stakeholder-communities (e.g., material and

component suppliers, services providers, producers, retailers, and/or consumers)

that comprise market-focused ecosystems. Today, digitization and digitalization are

both on the verge of being ubiquitous, connectivity is increasingly many-to-many and

open, and digitalization focuses on value-unit (e.g., products, services, and/or

information) enhancement. Table 1-8 provides a brief glimpse of innovative

initiatives introduced by two Era 3 disruptors: LEGO6 and Airbnb.

Table 1-8 Era 3: Innovative Digitalization Initiatives

LEGO LEGO Ideas

Airbnb Community Center

Digitalization Realized Benefits Digitalization Realized Benefits

A digitally-enabled open community where LEGO fans: propose ideas for new LEGO sets (using existing LEGO bricks), review proposed ideas, and vote on proposed ideas.

Ideas receiving 10,000 votes within a year are moved into LEGO’s product development process.

Thousands of fresh and innovative ideas are proposed for new LEGO sets.

LEGO sets obtaining 10,000 or more votes are likely to be market successes.

Since 2014, nine new LEGO sets have evolved from the LEGO Ideas program.

The interactions occurring across the fan community (as ideas are reviewed & actively supported) provides essentially free promotion for LEGO.

A digitally-enabled community of Airbnb hosts where ideas & advice are exchanged, thus easing the effort taken by participants in learning how to succeed as a host.

Topics are personalized to a host’s language and country, hot topics are promoted, and top contributors are listed.

A relatively low cost mechanism for: • Educating & supporting

new hosts. • Establishing & evolving

a desired culture across the host community.

• Building enthusiasm & comradery across the host community.

• Mobilizing local host- communities’ face-to- face sharing and political action.

Revisiting Fortune’s Most Admired Companies

Table 1-9 revisits our synthesis of Fortune’s annual listing of the most admired

companies. Now, however, many of the table cells are color-coded:

 Red – digital technology product/service providers

 Blue – Era 1 organizations listed multiple times

6 O. El Sawy, H. Amsinck, P. Kraemmergaard and A.L. Vinther, “How LEGO Built the

Foundations and Enterprise Capabilities for Digital Leadership,” MIS Quarterly Executive, June

2016, pp. 141-166.

 Orange – Era 2 organizations listed multiple times

 Green – Era 3 organizations listed multiple times

Two key insights about successful digital strategizing can be gleaned from this table.

Table 1-9 Revisiting Fortune’s Most Admired Companies

Years Rank

1 2 3 4 5

2014-2016 Apple Google Amazon Berkshire Hathaway 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

Home Depot Microsoft

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

First, the highlighted companies in Eras 1 and 2 all represent pipeline

organizations, aside from Berkshire Hathaway.7 In Era 3, however, the highlighted

firms (again, aside from Berkshire Hathaway), represent a pure network

organization, i.e., Google, and two blended organizations, i.e., Apple and Amazon.

7 General consensus suggests that Berkshire Hathaway’s success as a holding company

rests on three factors: acquiring exceptionally well-run businesses, retaining these

businesses’ existing leadership teams and allowing these leaders considerable autonomy to

run their business, and moving slack financial resources across these businesses to take

advantage of temporal and sectoral opportunities.

Blended organizations operate both as pipeline organizations and as network

organizations:

 Apple produces consumer-oriented technology products via tightly-managed value streams and orchestrates iTunes and Apple Music, markets that bring together communities of music producers and music consumers.

 Amazon manages a pipeline-like B2C e-commerce business and orchestrates consumer and business marketplaces, bringing together communities of

sellers and consumers.

We anticipate that organizations’ digital strategies will increasingly incorporate

elements of both pipeline organizations and network organizations.

Second, highlighted organizations in Eras 1 and 2 include technology-

producing firms and technology-using firms. Era 3, however, lacks pure technology-

producing firms. Instead, Apple, Google and Amazon are both producing (alone and

with strategic partners) advanced digital technologies and introducing streams of

digitalization innovations. Additionally, Google and Amazon are technology services

providers. Interestingly, the highlighted Era 2 organizations, i.e., General Electric,

Southwest Airlines and Walmart, were noted for their large and superb technology

groups that, alone and with strategic partners, introduced streams of digitalization

innovations. We anticipate that organizations’ digital strategies will increasingly

incorporate homegrown digitalization innovations.

The Evolving Landscapes of Industries

The constant threat of digital disruption places organizations’ leadership teams

in increasingly hostile and competitive environments. A variety of competitors exist

(nimble digital startups, established companies with strong market positions and

well-honed operational processes, and everything in-between) across all industry

sectors. N. Venkatraman8 provides a framework for understanding the industry

forces now at play by identifying the three sets of influential competitors that are

active in most industries today:

 Incumbents: These are firms who have been traditionally operating in an

industry for a long time with well-established business models, organization structures, and resource control structures. Many of these incumbents have

attained industry leadership positions by virtue of their mastery over business models. For example, CBS, Disney, ABC, Comcast, Verizon, and AT&T would be considered to be examples of incumbents in the

entertainment and media industry.

 Digital Giants: These firms have mastered digitalization and are able to

harness their business models and digitalization expertise to disrupt a wide range of industries. Well-known digital giants include Google (Alphabet), Facebook, Amazon, Apple, and Microsoft, each of whom has demonstrated a

sustained prowess in digital disruption across multiple industries.

 Technology Entrepreneurs: These firms are younger or smaller firms that

bring specialized digitalization expertise to innovate, transform or disrupt certain aspects of an industry’s value stream or value-units (i.e., product or

services offerings). Examples of such firms for the entertainment industry would be Sling and Hulu.

Industry strategic landscapes today must be seen as being populated by not only

incumbents, but also by digital giants and technology entrepreneurs. As a

consequence, digital strategists within today’s emerging market-focused ecosystems

must weave together the interests and capabilities held by incumbents, digital giants

and technology entrepreneurs in fashioning the business models most likely to

produce competitive success.

A Recap and Look Ahead

Conventional notions about competitive strategy are being challenged with the

power of digital technologies to provide the means for innovation, organization

8 N. Venkatraman, The Digital Matrix: New Rules for Business Transformation through

Technology, Life Tree Media, 2017.

transformation, and market disruption. As firms across all industries are feeling the

heat, it is imperative that fresh ways of thinking are surfaced about the nature of

competition and about what is needed to achieve competitive success. The next

chapter provides insights regarding these fundamental ideas that underlay effective

digital strategies.

Chapter 2. Digital Strategy Fundamentals

How should firms master the challenges and opportunities of digital innovation

and disruption? What types of models and mindsets will help managers effectively

lead their organizations in today’s digital economy? The following three sets of

fundamental ideas regarding digital strategy are described in this chapter:

 The Goal of Digital Strategy: Agility

 The Grammar of Digital Strategy: Business Models

 The Logic of Digital Strategy: Competitive Moves

The Goal of Digital Strategy: Agility

In modern competitive arenas, the pursuit of sustained competitive advantage

is an illusion because of the tremendous disruptive pressures facing firms and

industries. Therefore, the hallmark of a successful digital strategy is succinctly

described via the concept of agility. Agility is a firm’s ability to detect potentially

disruptive threats and opportunities and, then, to marshal the resources and

managerial insights required to subdue threats and/or exploit opportunities. Agility

addresses two seemingly contradictory objectives: achieving stability, i.e., the

ability to withstand disruptions by maintaining operational reliability and efficiency;

and, achieving dynamism, i.e., the ability to innovate, transform and disrupt by

demonstrating strategic adaptability, speed and entrepreneurism. In essence, agility

requires organizations to execute a portfolio of business models that simultaneously

account for two aims – ensuring stability in currently-executing operational processes

(so as to meet stakeholders’ expectations and competitors’ performance levels), and

ensuring an ongoing stream of well-founded, future-oriented competitive actions.

This duality is reflected in the need for competitively-successful organizations to

exhibit two forms of agility. Adaptive agility refers to the ability to aggressively

introduce incremental enhancements into currently-executing business models,

whereas entrepreneurial agility refers to the ability to aggressively introduce

radical enhancements into currently-executing business models or to introduce new

business models.

Adaptive and entrepreneurial agilities are important because the only sure

thing that can be said about today’s market ecosystems is that they are highly

uncertain as a consequence of:

 Finely-tuned and highly-differentiated consumers.

 Near-constant value-unit innovation and operational process innovation.

 The regular appearance of new entrants (startups, established players from

adjacent markets, digital giants, technology entrepreneurs).

 The periodic restructuring of value-streams and participants’ relative influence within market-focused ecosystems.

To paraphrase Project Runway’s Heidi Klum: one day you’re in and the next day

you’re out. Extending, or even maintaining, a strong competitive position demands

a continual stream of well-targeted competitive actions.

Therefore, organizations’ digital strategies are unlikely to take the form of

methodically-stipulated, lengthy (over a two- or three-year planning horizon) and

tightly-coordinated series of competitive actions. Instead, organizations’ competitive

actions are most likely to occur opportunistically or reactively, but in accordance with

a strategic intent that establishes strategic direction and strategic purpose. A

strategic intent directs digital strategists’ thought processes as competitive moves

are formulated and implemented – without dampening the flexibility and autonomy

necessary and adaptive/entrepreneurial agilities. A broadly-communicated strategic

intent focuses strategists’ opportunity-seeking, thereby exerting a dominant

influence on the formulation of competitive moves (see Figure 2-1). Even though

organizations’ strategic intents do evolve, they serve the critically important role of

ensuring that organizations’ investments in digital resources are guided in a

consistent fashion across time – increasing the likelihood that new investments

leverage and complement in-place resources.

Figure 2-1 The Influence of Strategic Intents on Competitive Moves

Business Model Enhancement, Replication &

Innovation

Digital Strategists’ Knowledge,

Perspectives & Insights

Competitive Moves

Competitive Outcomes

Strategic Intent

A strategic intent is derived from the knowledge, perspectives and insights

held by digital strategists. In envisioning and evolving a strategic intent, an

organization’s digital strategists are especially influenced by their understanding of

the core capabilities that underlie the value propositions expected to most appeal to

consumers and the extent to which their organization has digitalized these

capabilities – key underpinnings of a business model.

The Grammar of Digital Strategy: Business Models

Business models reflect the choices made by organizations’ leadership teams

about how value is created and how profitability is realized. As shown in Figure 2-2,

there are four distinct elements of agile business models:

 A value proposition defines how an organization will distinguish itself

within the market(s) that it has chosen to participate. Pipeline organizations distinguish themselves by creating value for consumers. Network organizations distinguish themselves by creating value for participating

communities.

 A profit model consists of revenue and cost models. Revenue models

describe where, when, and how sustainable revenue streams materialize. Cost models describe the costs to be borne in producing the revenue streams and how these costs will be controlled to provide requisite levels of

profitability.

 Core capabilities refer to the tangible resources (e.g., facilities, machinery,

digital devices, etc.) and intangible resources (e.g., people, knowledge, operational and managerial processes, patents, architectures, etc.) needed

to successfully implement the value proposition and profit model.

 Dynamic capabilities refer to the intangible resources (e.g., people, knowledge, relationships, managerial processes, architectures, etc.) needed

to (1) sense and assess opportunities for business model enhancement, replication and innovation, and (2) successfully implement these

enhancements, replications and innovations.

Figures 2-3 and 2-4, respectively illustrate each of these elements via portraits of

agile business models reflective of Apple’s participation in the consumer smart device

market and Walmart's participation in the retail market.

Figure 2-2 Elements of an Agile Business Model

Value Proposition

Profit Model

Core Capabilities

Dynamic Capabilities

•What is the value-unit? •Who is the consumer? •What does the consumer desire and expect with regard to this value-unit?

•How is revenue generated? •What is the cost structure? •How is profit created?

What are the resources & activities critical to providing consumers with a value-unit they value and to do so in a profitable manner?

What are the resources & activities critical to ensuring that well-founded business model enhancements, replications & innovations are undertaken to maintain competitive positions within the markets we participate and the new markets we enter?

Figure 2-3

Apple’s Business Model for the Consumer Smart Device Market

Value Proposition Profit Model

Core Capabilities

Dynamic Capabilities

• Value-unit: Consumer smart digital devices • Consumer: Technically-receptive &

technically-savvy segments of the personal smart device market

• Innovative & trend-setting products • Seamless access to content across all digital

media

• High product prices driven by stimulating demand and by limiting supply

• Moderate manufacturing & marketing costs • High margins

• Brand management • Technology patents • Product design & product architecture design • Tightly-directed sales & marketing • Tightly-controlled manufacturing & logistics,

performed by third-parties • Relationships with content providers and

with manufacturing & logistics partners

• Knowledge of new digital technologies • Knowledge of evolving desires of first-

adopter consumers • Knowledge of new digital media and of new

means for accessing digital media • Knowledge of product designers & architects • Knowledge of content management

architects

Figure 2-4

Walmart’s Business Model for the Retail Market

Value Proposition

Profit Model

Core Capabilities

Dynamic Capabilities

• Value-unit: Household groceries & products

• Consumer: Cost-sensitive segment of the mass market

• ‘Everyday Low Prices’ • Retail store availability of a broad range

of products, enabling one-stop shopping

• Low prices, low costs • Moderate margin • High volume, high product

turnover

• Store site selection & store layout design • Tailor local inventory to local market • Shelf-space optimization (merchandizing &

replenishment) • Logistics optimization • Supplier relationships

• Knowledge of new digital technologies • Knowledge of evolving shopping-experience

desires of mass-market consumers • Knowledge of digitalization trends &

innovations in retail-store operations and in logistics

• Logistics designers & technologists • Retail store designers & technologists

Value disciplines are a fundamental element of business models and align

the value propositions with the expectations of their consumers.9 Some types of

consumers seek low prices, quality and convenience; organizations pursuing this

consumer adopt the operational excellence value discipline. Other consumers are

more concerned with having their needs and preferences met fully and are willing to

pay a premium for this to occur; organizations pursuing this consumer adopt a

customer intimacy value discipline. Finally, some consumers seek the state-of-

the-art, the trendy and/or the stylish and are willing to pay a premium for this to

occur; organizations pursuing this customer adopt a product leadership value

9 M. Treacy and F. Wiersema, “Customer Intimacy and other Value Disciplines,”

Harvard Business Review, January-February 1993, pp. 84-93.

discipline. Table 2-1 summarizes the value propositions and core capabilities

associated with each of the value disciplines.

Table 2-1 The Three Value Disciplines

Value Discipline

Value Proposition Core Capabilities Examples

Operational Excellence

 Quality, low-cost value- unit

 Reliable, convenient delivery process

 Manufacturing, assembly and/or merchandising

 Order processing & fulfillment  Inventory management  Upstream/downstream logistics

Amazon Dell

General Electric FedEx

Walmart

Customer Intimacy

 Tailored value-unit  Tailored delivery

process

• Micro-segmentation • Consumer relationship management • Advertising & marketing • Campaign management

Amazon Google

Harrah’s Kraft Foods Ritz Carlton

Product Leadership

 State-of-the-art, trendy and/or stylish value- units

 State-of-the-art, trendy and/or stylish delivery process

 Research & development  Rapid commercialization  Quality assurance  After-sales support

3M Apple Intel

Merck Johnson & Johnson

General Electric (GE): Operational Excellence in Action

GE’s consumer appliance business10 adopted the operational excellence value

discipline in the 1980s by introducing the Direct Connect initiative to become a low-

cost, hassle-free supplier to appliance dealers. Historically, the company fully loaded

its dealers – that is, it expected dealers to stock full inventories of appliances by

incentivizing them to purchase full truckloads. This strategy lost favor when the

independent dealers began to face severe competition from lower-priced, multi-brand

chains such as Best Buy.

10 As part of their Industrial Internet business strategy, GE sold their appliance

business to Qingdao Haier in 2016.

With the Direct Connect initiative, dealers were no longer required to maintain

their own inventories of major appliances. Instead, they could rely on GE’s virtual

inventory – a digitalized merchandizing and inventory system that allowed the

dealers to retrieve information about available appliances, sell them to their

customers, provide these customers with delivery information, and have the

appliances shipped directly to the customers from GE distribution centers. The Direct

Connect initiative not only reduced the inventory carried by dealers, but provided the

dealers’ customers with access to the full breadth of GE’s appliance product lines. GE

now links this dealer-order processing system to its forecasting and demand planning

processes, enabling GE to manufacture to the product sales rather than to dealers’

inventories.

Since 2011, GE has been transforming itself through a multibillion-dollar

initiative called the Industrial Internet. Essentially, GE has embraced the Internet of

Things and the world of Big Data by embedding sophisticated digitized sensors to its

machines and connecting the ensuing data streams to operational and analytical

platforms. While GE has long embedded sensors in its machines, the data from these

sensors was primarily accessed and used on-site by repair and maintenance

technicians. Today, the huge volumes of data being captured are transmitted to

digitalized platforms enabling a broad spectrum of operational and managerial

processes.

As an example, consider GE’s jet engine business, whose business model is

built around the product leadership value discipline. Noticing that some of its engines

were beginning to require more frequent unscheduled maintenance, GE engineers

aggregated and analyzed real-time functioning, maintenance and performance data

for every jet engine in use across the globe. Through this analysis, the GE engineers

were able to identify the problem: engines operated in harsh conditions (e.g., heat,

humidity, dust, smog, etc.) tended to clog, heat up and function inefficiently. By

thoroughly cleaning the engines used on such routes more frequently, engines

operated more efficiently, required less maintenance and exhibited longer peak

lifetimes – saving airlines millions of dollars annually in fuel costs. But, designing,

building, installing, operating and maintaining state-of-the-art, interconnected

machines demands operational excellence.

All of this has dramatically transformed the business model of GE’s jet engine

business. The value proposition involves two value disciplines requiring a broad

range of core and dynamic capabilities; and, the profit model has shifted from being

based solely on revenues from sales transactions to one based on revenues from

sales transactions and from a contracted portion of airlines’ savings from better

performing engines (engine operating and maintenance costs, aircraft miles flown

per year, etc.).

Kraft Foods: Customer Intimacy in Action

In packaged food pipeline ecosystems, the focal market exchange is that

between a shopper and a retailer. For producers like Kraft Foods, the immediate

consumers, or customers, are grocery retailers. By tailoring promotions,

merchandizing and logistics relationships with retail stores (or clusters of stores

associated with the same retail chain), Kraft was among the first firms to apply

analytics in reaching out through retail stores to the stores’ consumers to benefit

both the stores and Kraft.

Kraft decentralized much of its marketing to sales teams holding relationships

with retail stores (or store clusters) and built a marketing analytic capability that

combined data from three sources: digitized sales transactions from the retail stores,

demographic and buying-habit data on the customers of 30,000 food stores

nationwide, and an external geo-demographic database organized by nine-digit zip

code. A centralized group of marketing specialists and brand specialists applies

analytics to develop deep understandings of how sales of products, product

categories and brands vary by store, retailer, geographic area, customer segment,

time-of-the-year, etc., and how these sales are influenced by taken-actions, e.g.,

campaigns, coupons, sales, displays, product-shelfing, etc. This centralized group

then consults with the decentralized sales teams as the teams plan for subsequent

retail account interactions, i.e., creating customized, store-level promotional

programs.

More recently, Kraft has broadened their consumer-outreach in three major

ways. First, as Kraft now reaches shoppers through B2C sales channels (pure-play

online retailers such as Amazon and mixed-play retailers such as Target and

Walmart), Kraft’s retail analytics and retailer relationship programs have had to

account for the nuances of e-commerce. Second, while not selling directly to

shoppers, Kraft is building online shopper communities, e.g., social media channels,

www.kraftrecipes.com and the iFood Assistant app, that are used to build awareness

about and promote Kraft products and brands and to interact with shoppers. Third,

the streams of data gathered from these online communities have been incorporated

within Kraft’s analytics platforms – enabling marketing and brand specialists to tap

into the fuzzy front-ends of shopper wants and needs (e.g., flavor trends, absent-

but-desired products, in-store or online shopping likes/dislikes, promotions

likes/dislikes, brand perceptions, etc.). Insights such as these, when combined with

the results of more-traditional marketing analytics, can be invaluable for a broad

array of marketing decisions, including: establishing brand pricing strategies, filling

out product lines, planning joint-brand/product promotions (single product

promotions can cannibalize overall sales), and optimizing promotional spending

across media.

Apple: Product Leadership in Action

Following Steve Jobs’ leadership, Apple has very successfully pursued the

product leadership value discipline. Because Apple’s products are perceived by its

customers as innovative, trendy, reliable and easy-to-use - and as providing the

purchaser with peer-group panache - Apple is able to command premium prices for

their products. The firm has accomplished this by maintaining tight control of product

design and development and by reinforcing the Apple brand through stylistic

promotional programs and uniquely designed retail stores.

Apple’s approach to product leadership is not to tap into the leading edge of

consumer trends, but rather to inspire these trends. It is not enough to understand

your customer’s desires - Apple’s objective is to create these desires. Clear examples

of this are the iPod, the iPhone, the iPad and, most recently, the Apple Watch. The

Apple Watch, for example, is not intended to be a smaller, wearable version of the

iPhone. Instead, the Apple Watch is envisioned as a lifestyle accessory that brings

the digital content most meaningful to a person in real-time at the turn of the wrist.

Was this something that the consumer needed before it was released? Not likely.

But, it is Apple’s expectation that, after becoming aware of the usefulness of the

Apple Watch, its targeted consumer segments will perceive not only that this need is

real, but that it has always existed.

In order for Apple’s market success to continue into the future, two factors

are crucial: releasing a steady stream of exciting products, and growing its extremely

loyal (some might say insanely loyal) customer base. The first of these factors is

captured with the product leadership value discipline, and the second with the

customer intimacy value discipline. Apple’s more recent focus on customer intimacy

is perhaps best represented by the opening, growth and market success of the Apple

Store. As conceived by Apple, its retail stores are more than just stores. Instead,

the Apple Store is intended to be an inviting and creativity-releasing space where

people are exposed to a variety of enriching experiences: trying out new products,

learning how to do neat things with a product, overcoming product usage problems,

being exposed to new ideas (about technology, art, music, culture, entrepreneurial

startups, etc.), interacting with others on topics of mutual interest, and, most simply,

being entertained. The objective, thus, is to fashion and reinforce stronger consumer

relationships, one at a time.

Final Thoughts about Business Models

As a final point, the digital strategy for a given organization often involves

multiple business models. Multiple business models arise because most organizations

participate in multiple, differing markets. While Walmart’s digital strategy is directed

toward a single, overarching business model, Apple‘s digital strategy incorporates

two overarching business models: one associated with the consumer smart device

pipeline ecosystem, and the other with the iTunes business model that operates as a

network ecosystem. Further, while the digital strategy for a holding company such

as Berkshire Hathaway is framed around a single dominant business model, each

subsidiary’s digital strategy is framed around one or more self-contained business

model(s).

The Logic of Digital Strategy: Competitive Moves

The third element of the modern approach to digital strategy recognizes a

dynamic perspective realized through competitive moves and countermoves. Unlike

the traditional perspective on strategy that is based on competing around static

positions, the dynamic perspective emphasizes the continual pursuit of competitive

advantage through innovations in business models, products and services. Agile

firms regularly conduct small-scale, tightly-contained strategic experiments to

learn about potential innovations and disruptions and then adapt their business

models for strategic success. In his recent book, Venkatraman11 describes three

types of competitive moves that collectively represent the logic of digital strategy:

 Experimentation at the Edge

 Collision at the Core

 Reinvention at the Root

Each of these are now briefly described.

Experimentation at the Edge

Today, in virtually every industry, technology entrepreneurs are developing

new digital business models that have the potential to cause dramatic disruptions

and transformations. History is replete with examples of such disruptors: Amazon

11 N. Venkatraman, The Digital Matrix: New Rules for Business Transformation through

Technology, Life Tree Media, 2017.

and the retailing industry (1995), Netflix and the movie rental business (1998), Uber

and the people transportation industry (2011), Tesla and the automobile industry

(2014), etc. All firms must direct their managers’ attentions and their resources

toward understanding and recognizing the plethora of business model experiments

that might possibly affect their industry. Consider the many ongoing experiments

occurring today with Bitcoin. Though its implications and business trajectory are not

clear today, no financial services firms can afford to ignore experiments around this

fintech-created opportunity. The leadership teams of industry participants (both

incumbents and new entrants) must manage their attention toward

experimentation at the edge of their industries or ignore them at their own peril.

Collision at the Core

Consider the automobile industry today. Should the automotive

manufacturers still be making cars or are they in the business of mobility solutions?

The smart money would be on the latter and this would have significant implications

for the business models and ecosystems of today’s automobile industry. Apple’s Car

Play entertainment, Google’s Waymo self-driving car technologies, Peloton’s

automated transportation solutions, and Mobileye’s advanced driver assistance

systems are all examples of novel solutions that are likely to affect, in yet

undetermined ways, the core of today’s automotive industry. Every car manufacturer

is reexamining its business models, ecosystems, and offerings to develop the needed

adaptive and entrepreneurial agilities. The jury is out on how we will view cars and

mobility solutions ten years from now and what will be the ownership and

consumption models affecting the fortunes of car manufacturers. However, it is quite

clear that during the past three years, the industry’s business models are undergoing

significant transformations. Savvy firms participating in automobile-related

ecosystems are examining a breadth of collision at the core competitive moves

aimed at renovating industry ecosystems and business models by establishing

relationships with digital giants and technology entrepreneurs, committing to

investments in new digital capabilities, and reinventing organization structures and

incentive systems to attract the needed in-house talent.

Reinvention at the Root

It seems we continue to hear, almost daily, about the demise of the traditional

retail industry and the emergence and dramatic growth not just of Amazon, but of

other digital retail firms. The fundamental business models of retailing have been

reinvented and the industry is witnessing a shakeout, with many of the traditional

incumbents on the verge of disappearing. But, some incumbents are doing fine with

their digital transformations (e.g., Walmart, Target, Walgreens, Starbucks, Sephora,

Macy’s, Marks & Spenser, IKEA, Nordstrom, among others). Invariably, these

successful retailers: actively engage in experimentation at the edge and collision at

the core competitive moves, and introduce radical changes to their business models

as they move toward becoming, to varying extents, blended organizations.

Reinvention at the root refers to competitive moves aimed at cannibalizing

traditional capabilities and scaling up significant investments in new digitization and

digitalization capabilities.

The Logic of Digital Strategy Formulation and Evolution

Figure 2-5 depicts the central role served by competitive moves in the process

of digital strategy formulation and evolution – a process that begins and evolves

through the knowledge, perspectives and insights held by digital strategists. Four

domains of knowledge, perspectives and insights are especially critical:

 Currently-executing business models.

 The markets within which these business models are executing.

 Markets adjacent to those within which the current business models are

executing. Increasingly, the genesis of radical business model enhancement and business model innovation is derived not only from analyzing the

outcomes of competitive moves within a targeted market, but also from observing the outcomes of other organizations’ competitive moves in adjacent markets – especially when an adjacent market involves

complementary or substitute value-units, similar customer segments, similar value-stream activities, similar strategic partners, etc.

 The digitization and digitalization landscapes relevant to the currently- executing business models and to any new business models being formulated, especially as these landscapes affect experimentation at the

edge, collision at the core, and reinvention at the root.

Table 2-2 provides overviews of these four domains. Importantly, the key to

fabricating and evolving effective competitive moves is not necessarily the nature of

the specific planning processes applied (many differing planning processes can lead

to successful outcomes), but rather to ensure that these planning processes actively

involve participants (e.g., digital strategists, leadership team members, functional

specialists, etc.) whom collectively hold and/or have ready access to these four

domains of knowledge, perspectives and insights.

Figure 2-5 The Digital Strategy Formulation and Evolution Process

Business Model Enhancement, Replication &

Innovation

Competitive Moves Experimentation at the Edge

Collision at the Core Reinvention at the Root

Competitive Outcomes Targeted Market Adjacent Markets

Digital Strategists’ Knowledge, Perspectives & Insights

Table 2-2 Key Knowledge-Perspectives-Insights Domains

Target Market Adjacent Markets

• Value-units, complements, substitutes

• Consumer expectations • Revenue-generating tactics • Value stream participants &

activities

• Value-units, complements, substitutes • Consumer expectations • Revenue-generating tactics • Value stream participants & activities

Executing Business Models

Digitization & Digitalization Landscapes

• Value proposition • Profit model • Core capabilities • Dynamic capabilities

• Current digitization & digitalization capabilities

• Digital technology advances & innovations • Digitization best-practices, trends &

innovations • Digitalization best-practices, trends &

innovations

A Recap and Look Ahead

This chapter has introduced fresh ideas regarding three key elements

associated with the formulation of successful digital strategies. First, digital

strategists must focus on agility as the predominant goal in formulating their

organization’s digital strategy. Successful digital-age firms excel with both adaptive

and entrepreneurial agilities. Second, business model design represents the new

grammar through which an organization’s digital strategy is formulated and

evolved. Digital strategists’ creativity and attention must be focused on business

model design, adaptation, and reinvention in response to a plethora of digitalization

threats and opportunities. Third, the logic of digital strategy formulation and

evolution is based on taking and learning from three types of competitive moves:

experimentation at the edge, collision at the core, and reinvention at the root.

Bolstered by these ideas, we are now ready to examine how digitalization can be

applied to confront digital disruption in, first, pipeline ecosystems and, then,

network ecosystems.

Chapter 3. Digitalized Business Models for Pipeline Ecosystems

Over the last century, pipeline ecosystems have been the dominant organizing

paradigm. In just about all established economic arenas, e.g., automotive, packaged

foods, personal care goods, pharmaceuticals, smartphones, mobile communication

services, healthcare services, big box retailers, etc., value-units are delivered to

consumers through tightly-coordinated value streams. This chapter examines the

nature of pipeline ecosystems by describing:

 Why Pipeline Ecosystems Exist

 Digitalizing Pipeline Ecosystems

 Disintermediation, Reintermediation and Intermediary Transformation

Why Pipeline Ecosystems Exist

Figure 3-1 depicts a simplified industry value stream for companies - like Ben

and Jerry’s, Häagen-Dazs, and Baskin Robbins - that produce ice cream (through a

mix of upstream channels) and then market finished products to consumers (through

a mix of downstream channels). In such a pipeline ecosystem, the ice cream

producer determines which ice cream raw materials, flavors and delivery channels

are likely to be most favored by consumers and fashions a value stream to produce

and deliver ice cream products to these consumers. However, if one or more of the

upstream/downstream participants does a poor job carrying out its responsibilities,

or if the ice cream producer does a poor job anticipating the consumers’ expectations

or coordinating value stream work flows, then the consumers’ expectations will not

be met. Further, because of the complexities involved in coordinating value stream

work flows, the producer could choose to perform all of the activities involved with

the value stream, i.e., be fully vertically integrated. However, as explained below, it

usually is neither economically nor operationally desirable for the producer to do so.

Three concepts explain why this is the case: economies of scale and scope,

transaction costs, and intermediation.

Figure 3-1

Ice Cream Industry Value Stream

Distributors

Retailers

Ice Cream Production

Ice Cream Storage & Shipping

Packaging Suppliers

Paper Suppliers

Ice Cream

Ingredient Suppliers

Upstream Activities Downstream ActivitiesMidstream Activities Consumers

Retail Store

eCommerce

Ice Cream

Production

Economies of Scale and Scope

Economies of scale refers to the advantages that arise with increased volume

of output, and economies of scope refers to the advantages that arise when a

family of related goods are produced rather than a single good. Viewed most

simplistically: by covering fixed costs with larger activity volume, the cost to execute

the activity drops; by specializing in an activity, the activity’s variable costs can be

reduced through experience, analysis and training; by performing a set of similar

activities, the fixed and variable costs of each activity can be reduced. It is the

existence of economies of scale and scope that are at the basis of the consideration

given by most producers to using the services of other organizations to carry out

many, if not most, value stream work activities.

Transaction Costs

Transaction costs are involved with a fundamental market-related decision,

generally referred to as the make-versus-buy decision: when does a company

(individual) decide to make an item or perform an activity itself (herself) rather than

another company (person) make the item or perform the activity? Answering this

question is intuitively simple: compare the total cost of doing it yourself against the

total cost of having someone else doing it for you.

The total cost to produce an item or perform an activity can be represented as

sum of associated production and transaction costs. Production costs are the direct

costs to produce an item or perform an activity; transaction costs are the additional

costs involved when an item or activity is acquired from someone else. Table 3-1

defines common transaction costs.

Table 3-1 Common Transaction Costs

Types of Transaction

Costs Description

Search Locating suppliers willing & able to provide goods & services.

Locating buyers willing & able to purchase good & services.

Bid Selection

Assessing bids.

Assessing suppliers/buyers.

Selecting a supplier/buyer.

Contract Negotiation

Determining mutually agreeable contract provisions.

Renegotiating contract provisions.

Bonding Insuring against failure to deliver/purchase.

Insuring against substandard performance.

Legal Insuring against inadequate contract provisions.

Monitoring Monitoring ongoing supplier/customer performance.

Deciding to terminate or renegotiate contract.

Because of economies of scale and scope, organizations specializing in

producing a family of items or performing a family of activities have the potential to

provide higher-quality, lower-cost goods and services than does a non-specialist.

However, acquiring an item or a service from a specialist always involves transaction

costs (refer back to Table 3-1). The key question, thus, becomes: “Overall, is it less

expensive to do it myself or to have the specialist do it for me?” Often, the answer

is to have the specialist do it for you.

Intermediation

Intermediation refers to an organization’s choosing to reach suppliers or end

consumers through another organization, an intermediary, rather than directly.

Say, for example, that you would like a dish of ice cream made by a specific ice cream

producer. You could buy a pint directly from a retail store operated by the producer

or from a nearby grocery store (who buys the ice cream directly from the producer

or, more likely, from a distributor or wholesaler). Unless you live close to a producer

retail outlet, the transaction costs (e.g., search, travel, etc.) you would experience

are likely to be quite high. As a result, you would not buy a pint of ice cream directly

from the ice cream producer; instead, you would buy a pint from a nearby grocery

store. Because of such difficulties faced by producers in reaching consumers, most

producers use downstream intermediaries in order to reach a large number of

consumers. A similar logic can be applied in explaining the use of upstream

intermediaries. Table 3-2 describes common activities undertaken by intermediaries.

Table 3-2 Common Intermediary Activities

Types of Activities Performed by

Intermediaries Description

Search Efficiency Locate & procure products/services/information.

Locate suppliers.

Demand Aggregation

Gather orders from multiple consumers and negotiate prices & contracts with producers.

Gather products/services/information from multiple suppliers and negotiate prices & contracts with producers.

Create Packages Buy in bulk and reassemble into packages that meet the needs of specific consumers or producers.

Guarantee Transactions Handle complex transactions.

Insure payments & shipments.

Manage Logistics Delivery of goods: upstream & downstream.

Adding a new intermediary to an existing value stream always introduces

additional costs, as each intermediary naturally wishes to make a profit from their

involvement in the value stream. However, as these additional profits are spread

across the large number of value-units moving through the value stream, it often

proves to be the case that both producers and consumers ultimately benefit from the

presence of the new intermediary.

Digitalizing Pipeline Ecosystems

The nature of market-focused ecosystems has evolved dramatically over the

three eras of digital disruption, particularly with regard to the value-units delivered

to consumers, the enabling digitization and digitalization, and the payment and trust

systems employed. Table 3-3 provides an overview of the major changes that have

occurred. The most significant of these changes for pipeline ecosystems are

described below. Each one of the three eras of digital disruption within pipeline

ecosystems is now described, with this section ending with a discussion of how these

changes have resulted in the value streams associated with pipeline ecosystems

being disintermediated, reintermediated and characterized by intermediary

transformation.

Table 3-3 Evolution of Pipeline Ecosystems

Era Value-Units Digitization & Digitalization Exchange Currency

Trust Systems

1 Digital

complements

 Data/document standards  Point-to-point connectivity  Intra- and inter-organizational

(managerial & operational) business process efficiencies

 Banking system

 Credit/debit card systems

 Government & third- party institutions

 Contracts  Brand  Social capital

2 Digital

value-units

 Internet  One-to-many connectivity  Data, process, analytic &

collaboration platforms  Social media  Omni-channel producer-

consumer interaction

 Digitalized payment systems

 Third-party digital trust seals

 Consumer monitoring (product & producer reviews)

3 Social

complements

 Many-to-many connectivity  Smart devices  Big data platforms  Big data analytic platforms  Social messaging platforms

 Reputation  Social capital  Bitcoins

 Community monitoring

 Peer-regulation  Self-regulation

Era 1

Leadership teams of organization-participants within pipeline ecosystems

expect their operations, staff and managerial employees to be looking for ways to

enhance value-units, cut costs, improve market responsiveness, and accelerate the

development of new, revenue-generating value-units. These beneficial outcomes all

derive from efforts taken to improve organizations’ internal managerial and

operational processes. Figure 3-2 provides a way to conceptualize these processes.12

Primary processes refer to work activities directly involved in delivering value-units

to customers, and support processes refer to work activities that provide direction,

resources and oversight for the primary processes. All too often, however, these

work activities are hindered by constraints – both real (e.g., time, space, resource

limitations, etc.) and imagined (i.e., ingrained in employees’ thinking as a result of

culture, history, inadequate supervisory direction, inadequate training, etc.).

12 This conceptualization is derived from ideas introduced by: M. E. Porter, Competitive

Advantage: Creating and Sustaining Superior Performance, New York: Free Press, 1998.

Figure 3-2 A Pipeline Organization’s Managerial and Operational Processes

Indirect Materials & Supplies Procurement

Human Resource Recruitment & Development; Benefits Management

Financial Services; Accounting Services

Business/Digital Strategizing; Administrative Services

Manufacturing

Work-in- Process

Inventory

Quality Control

Direct Materials

and Supplies Procurement

Inbound Logistics

Order Fulfillment

Finished- Goods

Inventory

Outbound Logistics

Sales

Marketing

Merchandising

Customer Support

Reverse Logistics

S u

p p

o rt

P ro

c e

s s e

s P

ri m

a ry

P ro

c e

s s e

R&D; New Product Development; New Product Rollout

Digital Technology Services & Management

The availability of new digital technologies, industry data/document standards

and results from analyzing digitized transactional data proved instrumental in

enabling value stream participants to overcome many of the constraints that

otherwise were inhibiting efforts to improve internal processes and external

workflows. Data/document standards allow data and documents to be accessed

and used by value stream participants. For example, many industry groups

developed data and document specifications as a means of facilitating B2B

transaction flows. This was referred to as EDI (Electronic Data Interchange). As

might be expected, EDI made it possible for value stream participants to interconnect

their (increasingly-digitized) workflows. When operational processes improve within

and across a value stream’s participants, two things occur. First, the performance of

the entire value stream improves – to the benefit of all participants, but especially

for consumers. Second, as intermediaries are specialized to a greater extent than

are producers, intermediaries are able to more-quickly apply process improvements

to enhance their business models. As a result, intermediaries tended to gain

increased influence in value streams and, correspondingly, to increase their relative

shares of the value being created. However, such gains in the influence of

intermediaries were somewhat attenuated by the abilities of creative producers to

lower their cost structures and to attach digital complements (e.g., better and more

information, information-based services, product/service migration paths, etc.) to

the value-units being delivered to, thereby enhancing the producer’s value-

proposition and strengthening both the producer’s market position and relative

influence within the value stream.

For the most part, Era 1 pipeline ecosystems made use of well-established

payment and trust systems. The only true innovation that occurred was the

emergence of a digitally-enabled payment system: credit and debit card payment

systems.

Era 2

The digital technology that ushered in Era 2 was the development and wide-

spread adoption of the World Wide Web. At its core, the WWW (World Wide Web)

serves as a one-to-many connectivity mechanism enabling organizations (and

individuals) to store data and documents in an online space such that these data and

documents can easily and inexpensively be accessed and used by other organizations

(and individuals). The WWW (along with its enabling technologies) led to three

digitalization innovations that irreversibly disrupted pipeline ecosystems: purely-

digital value-units, platforms, and omni-channel promotion, ordering and delivery.

Purely-Digital Value-Units

Like their physical counterparts, purely-digital value-units do not exist in a

vacuum but require a vast enabling-ecosystem. For example, consider a very familiar

physical product – the automobile. In order for you to buy a car directly off of the

sales lot and drive it, a huge number and variety of things must exist: automobile

retailers, service/repair shops, insurance providers, fuel stations, roadways, traffic

lights and signage, traffic laws and regulations, etc. Most important, a

correspondingly huge number of standards need to have been established and need

to be followed in order for the entire automobile ecosystem to operate seamlessly.

A similar enabling-ecosystem needs to exist for purely-digital value-units, such

as digital books, mp3 audio tracks, navigation maps, and digital coupons. Devices

must exist through which a purchased value-unit can be accessed and used, retailers

must exist to offer the value-unit to a consumer and then deliver a purchased copy

to the consumer’s device, and payment systems must exist so that the exchange can

take place between the retailer and the consumer. As with physical goods, many

standards must be established and followed for the ecosystem to operate seamlessly.

Although physical and digital value-units both require enabling-ecosystems,

the markets for physical and digital value-units differ in two major ways. First, the

cost-structures of digital value-units tend to be much lower than the cost-structures

of physical value-units. Second, long-tail effects characterize digital value-unit

markets to a much greater extent than physical value-unit markets.

Relative to digital value-units, physical value units have moderate-to-high

initial costs (e.g., design, testing and marketing) and moderate-to-high variable

production costs (e.g., labor and materials). Let us compare the costs between

manufacturing a car and developing a digital book. Car manufacturers incur high

fixed costs (e.g., large plants, sophisticated manufacturing and design technologies,

etc.) and high variable costs (e.g., parts and assembled components, labor). In

contrast, while a digital book may have high initial costs (the labor costs involved in

authoring, editing and formatting the book), a digital book has very low variable

production costs - often approaching zero. This is because the costs of replicating

digital goods are minimal, unlike most physical goods. For example, the 100th car

coming off of an assembly line will cost essentially the same to produce as the first

car off of said assembly line. However, the 100th digital copy of a text book costs

only a minute fraction of the expense involved in producing the first digital version.

The production costs associated with digital goods are dominated by the cost of

producing a first copy, with few constraints limiting growth in demand. Simply put,

digital goods have far more opportunities for large-scale growth than do physical

goods.

The long-tail phenomenon refers to the ability of digital markets to offer a

far broader variety of value-units than could be offered in comparable physical

markets. Participants in physical markets are constrained in the breadth of value-

units being offered because of the costs of holding inventory. Generally, firms strive

to offer the 20% of value-units that generate 80% of sales. It simply is not

economical to cater to the remaining 80%. Consider a hardcopy book that was a

bestseller a year ago, but has since been displaced by more recent bestsellers. Even

though a small demand for this hardcopy book is likely to persist over time, most

hardcopy retailers will keep few, if any, copies of the book on hand due to acquisition

costs and physical storage space constraints. Similarly, consider a book on hiking in

the Andes mountain ranges written by an authoritative expert. While there might be

a sizeable demand for such a book among hiking enthusiasts (especially those

planning a near-term hiking expedition in the Andes), the book is unlikely to have

the broad popularity needed to merit space on most hardcopy retailer’s bookshelves

(unless, perhaps, you walk into a bookstore in Cuzco, Peru).

On the other hand, digital retailers are finding it profitable to service the needs

of customers whose tastes represent the more specialized products populating the

long-tail of the demand spectrum. For example, an MIT study from the early 2000s

found that nearly 30-40% of Amazon’s book sales represent products in this long-

tail.13 This ability of digital markets to service the long-tail of demand can be

explained by a number of factors:

 Digital retailers experience lower costs of stocking inventory because they do not use physical shelf space to stock and display their products. Instead,

they apply digitalized product inventories, often including products held by other ecosystem participants.

 Digital retailers experience lower costs of promotion and advertising via a proliferation of Internet and social media sites.

 Digital retailers experience lower acquisition costs.

 Digital markets are not constrained by geography. They can reach customers locally, regionally, nationally or globally. At that scale, digitized

retailers can aggregate the demand for niche products to achieve dramatic scale economies.

 Digital consumers can make use of digitalized search mechanisms to locate

digital retailers and specific digital value-units.

 Digital consumers have access to massive amounts of value-unit-related

information (e.g., reviews of specific value-units or of value-unit categories, such as lists of the best point-and-shoot cameras).

13 E. Brynjolfsson, Y. Hu, and M. D. Smith, "From Niches to Riches: Anatomy of the

Long Tail," Sloan Management Review, Summer 2006, pp. 67-71.

Platforms

Value streams in pipeline ecosystems become longer and wider each time

another upstream or downstream intermediary is added. Although each added-

participant offers new capabilities to be leveraged, the complexities involved in

coordinating data, information and material flows between value stream participants

increase as well.

Consider the value stream shown in Figure 3-3. Note that numerous

data/information flows and material flows are involved, and that all of these flows

occur between adjoining participants. Each participant determines demand forecasts

from data and information provided by only the most adjacent participants. Without

access to consolidated data from all participants in a value stream, these forecasts

tend to be error-prone, erratic and worsen over time. Participants experiencing high

levels of demand uncertainty often suffer late deliveries, overstocking, high

expediting costs, stressed employees, dissatisfied customers, and lost revenue.

Figure 3-3

Conventional Value Stream

Tiered Suppliers

Contract Manufacturers

Assemblers

Retailers

Distributors

Consumers

Data & Information Flows

Material Flows

Producer

Value stream participants developed tactics to deal with demand uncertainty,

the two most common being vertical integration and stock holding. With vertical

integration, an organization chooses to do more value stream activities itself, thus

shortening and narrowing its value stream. But, in doing so, the advantages gained

through specialization and intermediation are lost. With stock holding, an

organization builds up various kinds of inventories, thus providing buffers that soften

the effects of poor demand forecasts. But, in doing so, higher inventory costs arise

that can lead to higher prices (stressing consumer demand) and/or lower profit

margins.

Era 2 digitalization provided a much better way to cope with the challenges of

long and wide industry value streams. Figure 3-4 depicts a platform-enabled value

stream. In general terms, a platform uses digital technologies to host digital and

digitally-enabled resources. In this case of a value stream platform, these hosted

resources are likely to include: digitized data and documents, digitalized managerial

and operational processes that operate on these data/documents, tools for analyzing

data, and tools enabling employees from participating organizations to interact and

collaborate. By using the resources available through value stream platforms, value

stream participants can: better plan their own work activities; better plan and then

coordinate the data, information and material flows that permeate a value stream;

and, collaborate to resolve problems that arise.

Figure 3-4 Platform-Enabled Value Stream

Tiered Suppliers

Contract Manufacturers

Assemblers

Distributors

Retailers

Consumers

Data & Information Flows

Material Flows

Value Stream Platform  Data/Documents  Processes  Analytic Tools  Collaboration Tools

Producer

Many successful value stream platforms have been built, owned and

managed by powerful value stream participants. Classic examples include Dell’s

platform for executing its build-to-order business model (see Figure 3-5) and

Enterprise Rent-A-Car’s platform for executing its repair rental car business model

(see Figure 3-6). Considerable efforts have been taken by industry consortiums,

(e.g., electronics manufacturing, automobile manufacturing, chemical production,

etc.), to define and implement platforms to be used across the varied value streams

that comprise these industries’ market ecosystems.

Figure 3-5 Dell’s Value Stream Platform

Component Suppliers &

Contract Manufacturers

Dell Consumer

Outbound (Downstream)

Logistics Provider

Inbound (Upstream)

Logistics Providers

Data & Information Flows

Product & Material Flows

Dell’s Value Stream Platform

Contracted Assembler

Figure 3-6 Enterprise Rent-A-Car’s Value Stream Platform

Insurance Companies

Auto Repair Shops

Enterprise Rent-A-Car

Consumer

Enterprise’s Value Stream

Platform

Data & Information Flows

Omni-Channel Promotion, Ordering and Delivery

As Era 2 progressed, advances with WWW technologies accelerated, increasing

the functionality, ease-of-use and availability of value stream platforms. One of the

key targets of platform enhancement involves the variety of channels used for

promotion, ordering and delivery activities (see Table 3-4). As a consequence, value

stream participants enlarged the portfolio of channels through which participant

interactions occurred. Such interactions involve data, information and/or material

flows between:

 Participants’ digitalized processes (e.g., a producer’s component ordering

system interacts with a supplier’s sales order processing system).

 Participants’ employees (e.g., a producer’s purchasing clerk interacts with a supplier’s customer support representative via a series of texts).

 A participant’s digitalized process and another participant’s employee (e.g., a producer’s purchasing clerk interacts with a supplier’s order tracking

system).

 A participant’s digitalized process and an individual consumer (e.g., a consumer interacts with a producer’s online storefront).

 A participant’s employee and an individual consumer (e.g., a consumer interacts with a producer’s customer support representative via an online

chat capability).

 Two (or more) individual consumers (e.g., two consumers interact through a

producer’s online customer forum).

Table 3-4 Value Stream Participant Interaction Channels

Medium

Era 1 Channels Era 2 Channels

Promotion Ordering &

Delivery Promotion

Ordering & Delivery

Mass

Radio Television Print

Magazines Newspapers Catalogs

Direct Mail

Retail Store Internet Ads Producer Website Retailer Website Informational Websites Posted Reviews Messaging

email/text

eCommerce B2C B2B

Personal

Telephone Face-to-Face

Mail Services Parcel Services Telephone Face-to-Face

Search-Targeted Ads Messaging

email/text/chat

Messaging

Social

Group Event Avon Tupperware

Group Event Social Media Groups Messaging Interactions Targeted Ads

Blogs

Payment and Trust Systems

The accelerating growth of B2C e-commerce witnessed innovations in both

payment systems and trust systems. Purely-digital alternatives, such as PayPal and

Amazon’s 1-Click, have emerged in response to consumers’ desire for more

accessible and convenient payment systems for online transactions. Similarly,

innovations were targeted at increasing consumers’ willingness to engage with e-

commerce retailers (e.g., third-party institutions such as VeriSign) and to purchase

products on a sight-unseen basis (e.g., consumer reviews). Consumer reviews, in

particular, have become a culturally-accepted trust mechanism, despite concerns14

about fake reviews and a tendency for contributed reviews to possess a socially-

influenced bias toward positive ratings.

Era 3

Era 3 digitalization emerged largely as a consequence of the coming together

of smart devices, value-unit social media complements and pervasive connectivity.

A smart device refers to an assembled piece of digital technology (e.g., a product,

a component, a tool, an accessory, etc.) that provides a digital capability to sense,

analyze and act on environmental signals. Table 3-5 describes some familiar but, in

contrast to what is happening today, not-so-smart smart devices. Value-unit social

media complements refer to the opportunities made available to value-unit

consumers to engage with the value-unit’s producer and/or retailer and with other

consumers via social media. Pervasive connectivity is a characteristic of an

14 S. Aral, “The Problem with Online Ratings,” Sloan Management Review, Winter 2014,

pp. 47-52.

ecosystem where collections of smart devices across the ecosystem are

interconnected, thus creating opportunities for anywhere, anytime interaction; these

interactions contribute (e.g., sensed data, novel ideas, reviews, etc.) significantly to

business model value propositions. How are individuals (typically, employees and/or

consumers) motivated to contribute to the ecosystem? While (direct or indirect)

monetary payment has traditionally been a dominant primary mechanism, alternative

mechanisms - reputation and social capital - are proving to be equally, if not more,

effective.

Table 3-5

Some Familiar Smart Devices

Device What is Sensed What Action is Taken

Smartphone Screen icon touch An app is launched

Home Thermostat

Ambient room temperature Furnace (air conditioner) turned on when ambient temperature too low (high)

Tire Pressure Sensor

A tire’s current air pressure Dashboard icon lights up when the tire’s air pressure is too low

Smart Refrigerator

The condition of a refrigerator’s water filter

A display icon lights up when the water filter needs to be changed

Vehicle Navigation GPS

Unit

Satellite signals indicating the coordinates of the unit’s geographic location

An icon is positioned on a displayed digital map that indicates the vehicle’s position, direction & speed

Shipment Unit Packaging

Sensor

The force exerted on a shipped unit if and when the unit shifts or drops while in transit

If sufficient force is detected, the shipped unit is returned to the point of origination for damage assessment

Electronic Device Fault-

Diagnosis Temperature of the device

A series of pre-programmed tests are performed on the device’s circuitry

The pervasive connectivity of smart devices can produce huge volumes of

streamed data, popularly referred to as Big Data, to be captured, organized and

analyzed. Era 3 digitalization enables value stream participants to: maintain an

awareness of targeted events occurring across a value stream, as well as within

adjacent value streams; to capture data about these events; and, to apply statistical

and mathematical models to these data in developing deeper understandings of the

competitive context, of value stream participants (e.g., raw material suppliers,

component suppliers, services providers, downstream-consumers, etc.), and of

specific competitive situations. Table 3-6 provides two relatively straightforward

examples of the benefits obtainable from Big Data analytics.

Table 3-6 Big Data Analytics Examples

Bicycle Pump Producer Buzz Analytics

City of Boston Street Bump iPhone App

Digitalization

Captured consumers’ messages on social media (Facebook, Twitter, etc.) about bicycle pumps.

Analyzed messages to prioritize pump features and to identify the weaknesses of the producer’s pump vis-a-vis competitors’ pumps: less durable, hose harder to use, and contained a costly but low-ranked built-in gauge.

Tearing down competitors’ products revealed higher- quality components and less bulky packaging.

Drivers turn on app and placed iPhone on car dashboard.

App captures data about potholes encountered (location, estimated depth/size, etc.) and transmits these data to a City of Boston data server.

Captured data cleansed (e.g., non-pothole bumps filtered out) & analyzed to prepare listings of potential potholes to be filled.

Outcomes

Removed pressure gauge and reduced packaging.

Applied cost savings to use higher-quality components.

Potholes fixed before they become major road hazards and while repair costs are relatively low.

Recurrent potholes can signal serious road management problems.

Source

D. Fedewa, G. L. Velarde and B. O’Neill, “Using Buzz Analytics to Gain a Product and Marketing Edge,” McKinsey Quarterly, Number 2, 2016, pp. 14-15.

D. O’Leary, “Exploiting Big Data from Mobile Device Sensor-Based Apps: Challenges and Benefits,” MIS Quarterly Executive, December 2013, pp. 179-187.

This capability to capture, archive and analyze large streams of transaction-

related data has made viable a new trust mechanism: self-regulation. With self-

regulation, an organization captures data associated with critical market-related

transactions, monitors these data for problems, reacts responsively and responsibly

if (and when) problems arise, and keeps (governmental or third-party) regulators

and value stream participants aware of these activities.

The Promise of Car Data15

To catch a glimpse of what is on the horizon as Era 3 progresses and intensifies,

let us take a not-so-futuristic look at how Big Data analytics is changing automotive-

related competitive contexts.

During the coming decade, technology entrepreneurs and digital giants are

expected to partner with incumbents in the automotive industry to exploit an

expected surge in the availability of car data and to introduce innovative car-related

features and services for which consumers are expected to be very willing to pay.

What exactly is car data? A short list would include data about: the road and

environmental conditions, the status of a car’s various components (e.g., engine,

battery, tires, etc.) and systems (e.g., power, steering, safety, etc.), vehicle usage

history (e.g., speed, direction, location, past and current trips, etc.),

driver/passenger personal data and preferences, and direct communications from the

vehicle (e.g., phone, text, email, calendar, social media, etc.). At present, a key

unknown is: “Will most people be willing to share this information for free?” Most

observers feel the answer will be Yes given the immediate benefits to be derived by

a vehicle’s driver and passengers (see Table 3-7). What do you think?

15 This section is based on material from: D. Mohr, G. Camplone, D. Wee, T. Moller

and M. Bertoncello, “Car data: Paving the Way to Value-Creating Mobility”, McKinsey

Quarterly, March 2016: https://www.mckinsey.de/files/mckinsey_car_data_march_2016.pdf

Table 3-7 Immediate Driver/Passenger Benefits from Sharing Car Data

Safety Time

 Real-time emergency calls  Early on-scene accident reporting  Information to support rescue

services  Real-time road hazard warning

 Reduced travel time through optimized routing, navigation & traffic management systems

 Reduced time to locate parking through connections with parking services

Convenience Cost

 Reduced breakdown risk and vehicle downtime through predictive maintenance and connections with repair & spare parts service providers

 Concierge services (refueling, carwash, in-trunk delivery)

 Overall, a more-connected lifestyle

 Reduced insurance cost through pay-as-you-drive insurance schemes

 Reduced toll/road tax rates through an automated payment infrastructure

Why is this scenario so appealing to ecosystem participants? The answer lies

in both sides of the profit model component of a business model: generating revenue

and reducing cost. New sources of revenues include: selling or leasing new products

and services to car owners, leveraging car data with other sources of data to push

tailored advertisements to drivers and passengers, and selling/leasing curated car

data to third-parties. New means of cutting costs involve creative uses of car data

and car connectivity to reduce the R&D, production, delivery and marketing costs

associated with automobile-related products and services. In essence, the

connected-car is increasingly being seen as the first step into the store and, when

combined with autonomous driving, as a prime space for retail where producers and

retailers directly interact with a captive consumer.

Disintermediation, Reintermediation and Intermediary Transformation

Over the last two decades, digital disruption has introduced seemingly constant

participant turnover into most pipeline ecosystems. Established organizations are

frequently losing prominence in markets and, not infrequently, exiting markets –

think Borders, Blockbuster and Circuit City. Simultaneously, scores of new, highly-

digitalized entrants are participating in these same markets (as well as discovering

new, profitable niches in existing markets or creating entirely new markets).

Today, the ever-accumulating stocks of digitalization capabilities arising from

the three eras of digital disruption have seeded and continue to see radical structural

changes in pipeline ecosystems. The primary drivers of these ecosystem structural

changes are disintermediation, reintermediation and intermediary transformation.

Disintermediation occurs when an intermediary is bypassed, thus shortening and

narrowing a value stream. Reintermediation occurs with the appearance of a new

intermediary, whose presence lengthens and broadens a value stream.

Intermediary transformation occurs when an existing intermediary vertically

integrates, thus becoming a producer. Table 3-8 describes these structural change-

events for the upstream and downstream segments of pipeline ecosystems. Below,

we provide examples of each type of change-event for the downstream context.

Table 3-8 Value Stream Structural Change-Events

Downstream

Disintermediation Producer bypasses intermediaries to directly engage in market exchanges with consumers.

Reintermediation

Entry of digitalized retailer, whom facilitates market exchanges between producers & consumers.

Entry of digitalized infomediary (an intermediary dealing solely with data & information), whom identifies sought value-units and/or producers to consumers.

Intermediary Transformation

Intermediary integrates backwards to become a producer creating & delivering value- units to consumers.

Upstream

Disintermediation

Producer bypasses intermediaries to directly engage in market exchanges with raw material suppliers, component suppliers and/or service providers.

Supplier bypasses intermediaries to directly engage in market exchanges with producers and/or bypasses producers to directly engage in market exchanges with consumers.

Reintermediation

Entry of digitalized distributor facilitating market exchanges between producers & raw material suppliers, component suppliers and/or service providers.

Entry of digitalized infomediary identifying sought raw materials, components & services, as well as suppliers/providers, to producers.

Intermediary Transformation

Intermediary integrates backwards to become a producer, creating and delivering value- units to suppliers, intermediaries, producers and/or consumers.

Almost all producers in consumer markets (e.g., clothing, shoes, digital

devices, furniture, grocery products, art, music, etc.) are disintermediating, to

varying extents, their downstream ecosystem via a B2C sales channel. B2C channels

provide many benefits – most are obvious, but some are not-so-obvious - to

producers and to consumers. Producers enjoy: a new revenue-generating sales

channel complementing, rather than cannibalizing, existing sales channels; higher

profit-margins on B2C sales, especially with overstocked items; the opportunity to

directly touch and interact with consumers, building loyalty and engagement; and,

the opportunity to indirectly and directly involve consumers in new product

development activities. Consumers enjoy: access to a producer’s entire product line

and to product-support content; immediate, and often early, access to a producer’s

new and overstocked products; the ability to express feelings of satisfaction and

dissatisfaction directly to a producer; opportunities to engage with the producer and

with other consumers in learning about a product and product-related activities; and,

opportunities to influence a producer’s next generation of products. Who loses?

Clearly, the intermediaries, i.e., distributors and retailers, who have been partially or

fully disintermediated.

As described in Table 3-8, there are two primary reintermediation pathways

with downstream ecosystems: the entry of a digitalized intermediary and the entry

of a digitalized infomediary. An infomediary is a digitized intermediary that gathers

content from across the WWW, curates the content and provides access to this

curated content. Amazon’s foray into the retail marketplace for books is the iconic

example of a digitalized entrant serving as disruptive intermediary, and Google’s

reshaping of Internet search is the iconic example of a digitalized entrant serving as

a disruptive infomediary.

Finally, highly-capable and influential intermediaries able to develop deep

knowledge of a pipeline ecosystem may be able to exploit this knowledge to become

a producer of the value-units being delivered to consumers. Two examples nicely

illustrate the breadth of possibilities. Netflix successfully disrupted the pipeline

ecosystem for film and television video not once, but twice: first as a partially-

digitalized intermediary renting DVDs, and later as a fully-digitalized intermediary

streaming video provider. Now, Netflix is producing and delivering its own content,

strengthening its ecosystem influence such that the company is universally

recognized both as one of the industry’s more powerful and innovative players.

Amazon, on the other hand, has followed two very different paths in becoming a

producer. Having by necessity developed (1) deep knowledge of the pipeline

ecosystem that creates and delivers books to consumers and (2) strong digital

capabilities as this ecosystem transitioned from hardcopy to digital books, Amazon

has become a successful publisher of digital books through its Kindle Direct Publishing

operation. Again, having by necessity developed superb digitalization capabilities in

executing its massive B2C and B2B business models, Amazon has also become a

successful provider of digitization services (e.g., computer processing power, data

storage, content management, etc.) through its Amazon Web Services operation.

A Recap and Look Ahead

This chapter has both explained the economic foundations that have enabled

pipeline ecosystems to dominate most industries over the past century and the

manner by which digitization and digitalization have transformed pipeline

organizations and pipeline ecosystems over the three eras of digital disruption. Given

this understanding of pipeline ecosystems, the next chapter examines digital strategy

formulation and evolution for pipeline organizations.

Chapter 4. Digital Strategy Formulation for Pipeline Organizations

Today, most of the data and documents that move between and within value

stream participants in a pipeline ecosystem, as well as most of these participants’

operational and managerial processes, are extensively digitalized. As a result,

digitized data and documents can be quickly accessed, absorbed and shared,

reassembled for new uses, and analyzed to produce specific answers, fresh insights

and reports. Digitalized processes can be quickly executed, incrementally or radically

modified, adapted to new contexts, and analyzed to recover the knowledge

embedded within a process’s logic. Importantly, the greater the extent of

data/document digitization and of process digitalization, the easier it becomes for an

organization’s leadership team to display adaptive and entrepreneurial agilities.

This chapter builds upon the earlier ideas provided on digital strategy

fundamentals and on pipeline ecosystems by providing insights about the digital

strategy formulation for pipeline organizations. It covers the following topics:

 Digitalization and the Value Disciplines

 Platform Design

 Platforms and the Domains of Digitalization

 Digital Strategy Formulation

 Digital Strategy Formulation in Practice

 Sustaining Held Competitive Positions

Digitalization and the Value Disciplines

Value disciplines are incorporated within an organization’s digital strategies

through a collective mindset and capabilities for execution. Today, many of the

needed capabilities are provided through the technical services being hosted on

digital platforms and through the operational and managerial business processes

being hosted on business platforms. Invariably, a business platform makes use of

multiple digital platforms.

Table 4-1 sums up how the engines of digitalization (automation, control,

empowerment and interaction) can enhance business processes associated with each

of the three value disciplines. Two significant trends regarding digital strategies are

reflected in just such investments in digitalized business platforms.

Table 4-1

Enhancing the Value Disciplines via Digitalization

Digitalization Engine

Value Discipline

Operational Excellence Customer Intimacy Product Leadership

Automation

Upstream, midstream & downstream work activities handled quickly, accurately & completely in a less- costly, more-timely manner.

Availability of a broad range of media channels through which customers are touched.

R&D, product commercialization, quality assurance & after-sales support work activities handled quickly, accurately & completely in a less-costly, more-timely manner.

Control

Fewer suboptimal actions taken and quicker sensing of exceptional or changed situational contexts.

Digitalized business solutions & employees touching customers produce fewer suboptimal results.

Digitalized business solutions & employees engaged in R&D, product commercialization, quality assurance & after-sales support produce fewer suboptimal results.

Empowerment

Employees engaged in operational/managerial work produce fewer poorly- informed or ill-informed results.

Employees touching customers are better informed about the customer and the situation.

Employees engaged in R&D, product commercialization, quality assurance & after-sales support are better informed.

Interaction

Digitalized business solutions & employees engaged in work activities exchange more & better data & information.

Customers & customer communities can be engaged across time and space.

Employees engaged in R&D, product commercialization, quality assurance & after-sales support can engage one another, employees of strategic partners & customer communities.

First, well-architected digitalization helps firms develop both adaptive and

entrepreneurial agilities. As more competitors in a market-focused ecosystem

demonstrate these agilities, the pace at which organizations must implement and

respond to competitive actions quickens dramatically. Since the competitive actions

taken by competitors emphasize differing value disciplines, organizations striving to

gain a competitive advantage or maintain competitive parity are increasingly forced

to target multiple value disciplines. Vivid examples of this phenomenon were

provided in Chapter 2’s discussions of General Electric and Apple.

Second, many of the core capabilities needed for organizations to achieve

competitive parity are increasingly available from technology providers in the form

of pre-packaged business platforms. Digitally-savvy organizations can quickly

acquire a business platform, integrate the acquired platform within its installed

assemblage of digital platforms and business platforms, and competitively exploit this

expanded set of capabilities. Essentially, such practices find organizations innovating

by imitating other firms’ innovations – a much-faster and less-risky form of

innovation.16 However, such practices only serve to further speed up the pace of

competition within market-focused ecosystems.

Platform Design

Well-architected platforms are the means by which organizations are able to

evolve their business models and execute competitive actions in a timely manner.

But, what exactly is meant by a well-architected platform? A well-architected

platform exhibits an appropriate balance in (1) the stability and agility of the hosted

functionality and (2) the costs of building, enhancing and extending platforms across

functional, unit and organization boundaries. In order to fabricate a well-architected

platform, three design issues must be addressed: modularity; tight-coupling vs.

loose-coupling; and, global vs. local.

16 O. Shenkar, Copycats: How Smart Companies Use Imitation to Gain a Strategic

Edge, Boston: Harvard Business School Publishing, 2010.

Modularity

With modularity, each of a platform’s major functionalities, or modules,

operates independent of other functionalities and obtains needed information or

resources from a common coordinating module. Therefore, it is easy to add modules

to or remove modules from the platform. Additionally, once a platform is built, it is

relatively easy to modify any of the platform’s modules.

Tight-Coupling and Loose-Coupling

Tight-coupling and loose-coupling refer to the nature of the interconnections

that enable data, messages and documents to be exchanged between platforms.

With tight-coupling, one or both of the interconnected platforms are modified so

that the data, messages and/or documents being exchanged are consistently

interpreted across both platforms. Because the required modifications require both

time and effort, tight-coupling can be very intrusive for one or both of the platforms.

With loose-coupling, one of two tactics is generally applied:

 Some form of interconnection component is used to translate the data,

messages or documents flowing from one platform to the other platform. While time and effort is required to devise the translation rules, once

devised the rules can be applied to facilitate exchanges of the data, messages and/or documents with other platforms.

 The functions being executed on each of the platforms conform to the same

set of data/message/document standards (often established by an industry association or by a consortium of powerful industry players). While time and

effort are initially required to negotiate standards and conformance policies, platforms hosting ‘standards-compliant’ functions are relatively easy to interconnect.

Both of the loose-coupling tactics are far less intrusive than tight-coupling.

Figures 4-1 and 4-2 contrast tight-coupling and loose-coupling. In general,

tight-coupling can provide for greater stability (being seamless and using less

complex technology, it is easier to harden and secure) and loose-coupling can provide

for greater agility (both the platform and its connections to other platforms are easier

to modify). In terms of cost, initial connection costs are greater with loose-coupling,

but subsequent connection costs tend to be less.

Figure 4-1

Tight-Coupling and Loose-Coupling

data, messages, documents

Tightly Coupled

Loosely Coupled

• Interconnection Artifact

• Agreed-to Standards

Module A Module B

Figure 4-2 Contrasting Tight-Coupling and Loose-Coupling

L o

o s e

ly -C

o u

p le

T ig

h tly

-C o

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• Seamless • Less Complex Technologies • More Intrusive • Best for a One-to-One connection

• Interceded • More Complex Technologies • Less Intrusive • Best for a One-to-Many Connection

Global and Local

The term global, as used throughout this book, refers to a digital solution that

is designed and built to be used by most of an organization’s work units (another

term often used to connote a global digital solution is enterprise-wide). A local digital

solution is designed and built to be used by one or only a few of an organization’s

work units.

Figure 4-3 summarizes the advantages of global and local platforms. Global

platforms are more cost-effective to build, support and modify because associated

costs are spread across a large base of users. Additionally, the digital solutions that

comprise global platforms are highly-leverageable, as these solutions can be reused

as new functionalities are appended to a platform. However, considerable time and

effort is required to negotiate the design of and to implement global platforms (as

well as subsequent modifications to global platforms). Further, it is all too often

infeasible to use global platform functionalities to meet a work unit’s needs (e.g., a

functionality unique to the work unit, an innovative functionality, an extremely quick

response to an identified opportunity or problem, etc.). In such situations, fashioning

and implementing a local platform is more effective and timely. That said, an over-

dependence on local platforms can quickly lead to excessive costs: work units

undertake digitization and digitalization projects to gain functionalities that have

already been built by other work units; and, when reuse tactics are followed,

unforeseen complexities invariably arise when integrating and/or interconnecting

independently-designed digital solutions.

Figure 4-3

Contrasting Global and Local Platforms

G lo

b a

l P

la tf

o rm

L o

c a

l P la

tfo rm

• Tailored Solutions • Innovative Solutions • Timely Solutions • More-Easily Implemented Solutions

• Lower-Cost Solutions • Leveraged Solutions • More-Easily Supported & Modified

Solutions

Platforms: Best Practices

It is increasingly accepted that organizations’ platforms, ideally, should be

modularly-designed and that optimal balance should be achieved regarding these

platforms being tightly/loosely coupled and being implemented as a global/local

resource. Although platform modularity is a key feature of newly-built and acquired

platforms, most organizations are in the midst of extensive (and expensive) journeys

to re-architect their installed platforms. Achieving an optimal balance in the use of

tight-/loose-coupling is an ongoing endeavor for most organizations – an endeavor

having two overarching design rules:

 If a platform is expected to be frequently adapted, then loose-coupling is used to incorporate a bias toward dynamism.

 If a platform is expected to be infrequently adapted, then tight-coupling is used to incorporate a bias toward stability.

Achieving an optimal balance in the use of global and local platforms is an ongoing

endeavor for most organizations. However, most organizations have a bias toward

global platforms, with a few exceptions:

 Digitalized functionalities expected to serve a single work unit (or a few work units) should be implemented as local platforms.

 Digitalized functionalities that must be implemented quickly for competitive reasons should be initially implemented as local platforms (to avoid having

to follow constrained and time-consuming design and implementation policies and processes for global platforms) and then, once proven and stabilized, be considered as candidates for reimplementation as global

platforms.

 Digitalized functionalities that apply unproven solutions or that introduce

novel forms of digitalization should be initially implemented as local platforms (to contain risk) and then, once proven and stabilized, be considered for reimplementation as global platforms.

Platforms and the Domains of Digitalization

Today, platforms host most of the capabilities enabling organizations to carry

out day-to-day work activities and undertake competitive actions. This section

describes how digital platforms and business platforms have transformed

organizations’ operational, analytical and collaborative domains.

The Operational Domain

Digitalization of the operational domain is directed at two primary aims: event

visibility and channel multiplicity. Event visibility refers to making key events (an

order, a sale, an inventory movement, a shipment movement, a shipment delay,

etc.) and non-events (a consumer leaving without a purchase, an out-of-stock

inventory situation, etc.) known to the individuals and the digitalized solutions taking

action so that appropriate actions can be taken.

Currently available digital technologies have overcome many of the challenges

that previously restricted event visibility. However, it is important to recognize that

event visibility is also affected by cultural practices. If an organization’s work units

are insufficiently incentivized to work together, it can be difficult to get all employees

to dance to the same song. Sales personnel, for example, tend to be rewarded for

sales growth, while manufacturing personnel tend to be rewarded for productivity

and quality control. As a result, manufacturing personnel may decide not to let sales

personnel know about a spike in defect rates – information that the sales unit needs

when interacting with customers. Such issues only intensify with information flows

that cross organizational boundaries. Should a manufacturer let a supplier know the

nuances that underlie customers’ purchasing behaviors? How about if the supplier

also supplies the manufacturer’s prime competitors? Should a component-supplier

let a manufacturer-customer know about an emerging supply chain issue likely to

delay future component shipments? Does your answer change if the manufacturer-

customer could easily switch to other suppliers?

Channel multiplicity refers to ensuring that a sufficient mix of

interconnection channels are available to handle the data, messages and documents

flowing to and from individuals and digital solutions so that a preferred channel is

available for use. Channel multiplicity is particularly important when connecting with

humans, as people tend to develop strong preferences for using specific channels for

different interconnection situations. Consider your own behavior, for instance. Do

you communicate most with others who use the same communication channels (e.g.,

email, texting, phone, etc.) that you prefer? Do you tend to use specific

communication channels for communicating specific types of information (e.g.,

texting for good news, but speaking face-to-face for bad news, or vice versa)?

Figure 4-4 depicts a generic operational platform. Note that the platform hosts

an organization’s primary and support processes, as well as the data captured and

used by these processes. Further, these processes extend externally to connect with

the processes of value stream participants through a mix of interconnection channels.

It is by appropriately tuning these processes and by using appropriate interconnection

channels that key events occurring inside and outside an organization are made

visible to individuals and digital solutions.

Figure 4-4 A Generic Operational Platform

Global Operational

Database

Support Processes

Primary Processes

Downstream Intermediaries

Consumers

Upstream Intermediaries

Material & Component Suppliers

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The operational domain is especially important for passenger airlines, such as

Delta Airlines.17 Consumers are very concerned with safety, with on-time departures

and arrivals, and with having their in-flight needs met. Not surprisingly, all airlines

pursue the operational excellence value discipline. Figure 4-5 provides a high-level

view of Delta’s operational platform. Operating a heavy schedule of flights across a

mix of aircraft, routes and airports is like choreographing and directing the largest

ballet ever conceived. Unless all employees and all executing digitalized solutions

are collectively able to maintain a close-to-real-time awareness of the thousands of

events occurring each minute, problems are sure to arise.

17 This discussion of Delta’s operational platform is adapted from material in: J.W.

Ross, P. Weill and D.C. Robertson, Enterprise Architecture as Strategy, Boston: Harvard

University Press, 2006.

Figure 4-5 Delta Airline’s Digitalized Operational Platform

Core Data

Primary Processes

Allocate resources Prepare for flight departure Load aircraft Flight departure & closeout Monitor flight Flight arrival & closeout Unload aircraft Clean & service aircraft

Location Flight

Schedule

Maintenance

Equipment

Employees

Aircraft

Customer

Ticket

The Analytical Domain

Digitalization in the analytical domain is also directed at two primary aims:

improving decision processes, and accumulating knowledge about these decisions to

improve operational and managerial performance. Organizations amass analytical

capabilities by providing (suitably-trained) employees with easy-to-use tools with

which to access and analyze comprehensive collections of data. Increasingly, subsets

of these same analytic capabilities are provided to employees of other value stream

participants (e.g., a retail chain’s buyers, a supplier’s manufacturing management

team, etc.).

Figure 4-6 depicts a generic analytical platform. Collections of data typically

reside in either a data warehouse (a single, comprehensive archive of organized

data across multiple spheres of work; e.g., marketing, logistics and manufacturing)

or a more focused data mart (a smaller archive of organized data focused on a

specific sphere of work; e.g., marketing, logistics or manufacturing). These data

archives are populated from operational databases, from other internal sources, and

from external sources (e.g., market research firms, economic forecasters,

governmental agencies, etc.). Furthermore, these data are most often analyzed to

achieve one or more of the following four purposes: description, diagnosis, prediction

or prescription. The most common analytical tools used in achieving these purposes

are defined in Table 4-2.

Figure 4-6

A Generic Analytical Platform

Data Warehouse

and/or Data Marts

Global Operational

Database

External Data

Sources

Other Internal

Data Sources

Description  Events  Objects  Situations

Diagnosis  Failure  Success  Event

occurrences

Prediction  Events  Outcomes

Prescription  Optimal actions

Ad Hoc Queries

Predefined Queries

Statistical Analyses

Math. Modeling

Data Mining

Machine Learning

Analytic Purpose

Table 4-2 Common Analytical Tools

Analytic Tool Description

Ad Hoc Queries

Data retrieval via user-generated search criteria & display formats.

Predefined Queries

Data retrieval with pre-defined search criteria & display formats.

Statistical Analyses

Descriptive (organizing and summarizing data to better understand the data) & inferential (confidently drawing conclusions from samples of data).

Mathematical Modeling

Combining large amounts of data and sophisticated algorithms to make accurate predictions and to derive optimal solutions to complex problems.

Data Mining & Machine Learning

Discovery of patterns within sets of data that lead to insights regarding the relationships amongst these data.

The analytical domain is important for organizations tailoring value-units for

consumers - especially for a customer-intimacy company like Netflix that strives to

provide subscribers with a customized, fresh experience each time they access the

Netflix content catalog. Figure 4-7 provides a high-level view of Netflix’s digitalized

analytical platform. Netflix has fashioned a huge data archive from three major

sources: subscriber-provided data (a self-profile and content ratings), content data

(largely put together by Netflix staff), and real-time data streams capturing very-

detailed views of subscribers‘ content-viewing behaviors. By analyzing these data

via numerous proprietary algorithms, Netflix is able to optimize the content

recommendations and viewing experiences provided to each subscriber (increasing

engagement and decreasing cancellation likelihood) and is able to make more-

informed decisions about buying, licensing and producing content.

Figure 4-7 Netflix’s Digitalized Analytical Platform

Core Data

Critical Analytic

Processes

Predicting & prescribing a subscriber’s content selections.

Diagnosing & predicting actions of subscriber segments.

Prescribing content types/amounts for the current content catalog.

Prescribing how content should be stored & delivered to provide the best subscriber experience.

Prescribing content to acquire, license & produce.

Subscriber ProfilesSubscriber

Real-Time Viewing

Behaviors

Subscriber Content Ratings

Content Attributes

(genre tags, technical data,

artist data, etc.)

The Collaborative Domain

Digitalization in the collaborative domain involves the fabrication of

interaction platforms through which people are brought together virtually, rather

than physically, to jointly accomplish work activities. Such a capability is becoming

increasingly important in today’s highly-competitive, far-flung markets. Often, the

best people to bring together to solve a problem or to tackle an opportunity are

employed by participants across a value stream (see Table 4-3).

Table 4-3 Value Stream Collaboration Opportunities

Collaboration Opportunity

Description

Downstream Processes

Employees from manufacturers, distributors & retailers collaborate to better understand consumer demand patterns, to develop joint strategies & tactics for marketing & fulfillment, and to detect & resolve downstream supply-demand imbalances.

Upstream Processes

Employees from manufacturers, raw material & component suppliers, and upstream intermediaries collaborate to better understand procurement & production patterns & costs, and to detect & resolve upstream supply-demand imbalances.

Upstream & Downstream

Logistics

Employees from manufacturers, suppliers, subcontractors, distributors, retailers & logistics providers collaborate to better understand transportation demand patterns & costs, to develop joint strategies & tactics regarding transportation solutions, and to detect & resolve upstream/downstream logistics problems.

Product & Process Design

Employees from manufacturers, suppliers & engineering design firms collaborate to better understand the nature, timeframes & costs of new product/process designs, to develop joint strategies & tactics for enhancing design processes, and to detect & resolve design problems.

There are two basic types of collaboration arrangements. The first involves

recurrent collaborations where the (more or less) same people work on an ongoing

task (e.g., a marketing group consulting with sales teams, a weekly meeting of a

manufacturer’s plant managers, etc.). Typically, a local collaboration platform is

configured and used to support a recurrent collaboration. The second type of

collaboration arrangement is ad hoc and temporary in nature (e.g., a task force

brought together to accomplish a one-time task). Generally, groups engaged in ad

hoc collaborations use global collaboration platforms, with a group’s interactions

facilitated (initially and perhaps longer) by a collaboration specialist.

Figure 4-8 depicts a generic collaboration platform. Each participant has

access to their own digital resources in addition to the resources provided via the

collaboration platform. The platform contains a data archive that holds data and

documents uploaded by the participants as well as data, messages and documents

that are created as participants interact within the various work spaces provisioned

through the platform. Figure 4-8 identifies four such work spaces: messaging and

conferencing, idea processing, joint-work and decision making.

Figure 4-8 A Generic Collaboration Platform

Data Archive

oint

Idea Processing  Generation  Curation  Refinement

Messaging & Conferencing

Joint-Work  Designing  Problem Solving  Authoring

Decision Making

Collaboration Spaces

Person

Collaboration platforms are especially important for organizations pursuing the

product leadership value discipline, as new product development often requires the

bringing together of dispersed expertise. A nice example of this can be seen with the

exceptional outcome attained in a project undertaken by Boeing-Rocketdyne, the

major U.S. manufacturer of liquid fuel rocket engines, to produce a next-generation

rocket engine.18,19 The project team consisted of eight individuals (a project team

leader, a concept designer, a combustion analyst, two thermal analysts, a

18 A. Malhotra, A. Majchrzak, R. Carman and V. Lott, “Radical Innovation without

Collocation: A Case Study at Boeing-Rocketdyne,” MIS Quarterly, June 2001, pp. 229-249. 19 In 2005, Boeing sold the Rocketdyne Division to United Technologies Corporation,

which sold the Division to GenCorp in 2013, which merged with Aerojet to form Aerojet

Rocketdyne.

manufacturability engineer, a CAD (computer-aided design) specialist, and a stress

analyst) from Boeing-Rocketdyne and two partner-companies. These individuals

were located at different geographic locations as a result of a selection process aimed

at getting the very best talent available involved in the project.

The project lasted for ten months with participants devoting less than 15% of

their work time to the project. Participants met physically only twice: six of the

eight participants were able to get together for a project kick-off meeting (that also

included training on the collaboration tools) and all eight members were able to

physically meet for a project-ending celebration. Table 4-4 describes the

collaboration tools made available to the project team. The engine design that was

produced far exceeded expectations, e.g., the rocket’s thrust chamber had only six

parts (compared to the typical 1,200 parts) and a first-unit production cost of

$47,000 (compared to the typical $4,500,000).

Table 4-4 Next-Generation Rocket Engine Project Collaboration Tools

Collaboration Tool Description

Internet Notebook

Shared work space enabling project team members to create, comment on, reference links to, search & sort entries whose content consists of text, templates, sketches, images and/or hot links to desktop applications.

Electronic Whiteboard Shared workspace enabling project team members to have near-instantaneous access to the same materials.

Project Vault Shared data archive enabling project team members to store & access files via a common file server.

Email Telephone

Voice Conferencing

Available digital communication channels enabling project team members to interact with one another.

Digital Strategy Formulation

Table 4-5 presents the overarching strategic challenges that need to be

constantly addressed by pipeline organizations’ digital strategists as these strategists

cope with digital disruption. The first of these strategic challenges addresses how to

handle heterogeneity within the consumer community, which is especially important

for this section’s treatment of digital strategy formulation. If distinct consumer

segments exist and if each segment varies significantly in how it relates to value-

units and associated value propositions, then each segment is likely to require its

own business model. While some of these business models might be expected to

demonstrate considerable similarity, others undoubtedly will not. This section’s

treatment of digital strategy formulation focuses on the design and evolution of a

single business model, with this business model targeting either a homogeneous

consumer community or one of the segments of a heterogeneous consumer

community. Most often, digital strategists are involved with formulating and evolving

multiple business models.

Table 4-5 Pipeline Organization Strategic Challenges

Strategic Challenges Key Issues

How differentiated is the consumer community?

 Have we segmented, through analytics, the consumer community?

 Is a distinctive business model required for each segment?

How can our current competitive positions be

improved?

 How can we enhance our customer value proposition and our profit model?

 Should we deepen & broaden our core capabilities and our dynamic capabilities?

 To what extent can we further exploit the capabilities of value stream participants?

Can we enter an adjacent market by replicating a

currently-executing business model?

 Which adjacent markets are most susceptible for one of our currently executing business models?

 What type of business model modifications would be required to gain a favorable competitive position in the adjacent market?

Can we create a new market through business

model innovation?

 Is it possible to apply our capabilities along with our strategic partners’ capabilities to create an innovative business model that creates a new niche within an existing market or a new market?

How can we sustain successful market

positions?

 Can we deter (for some period of time) competitors’ responses to our competitive actions?

 Can we keep our business models two or more steps ahead of those of our competitors?

Figure 4-9 provides an overview of the factors driving digital strategists’

deliberations as they deal with the remaining four strategic challenges listed in Table

4-5: deliberations framed by a strategic intent espoused by their organizations’

leadership teams and focused on the four elements of a business model.

Figure 4-9

Factors Driving Business Model Enhancement, Replication & Innovation

Business Model Enhancement, Replication &

Innovation

Business Model Deliberations  Value proposition  Profit model  Core capabilities  Dynamic capabilities

Strategic Intent

Beliefs about:  Consumers’ needs

& desires  Core capabilities  Dominant value

discipline(s)

 Installed platforms  Held digitization capabilities  New digital technologies  Others’ digitalization innovations

 Competitors’ actions  Adjacent market business

model innovations  Socioeconomic trends  Cultural trends  Consumers’ needs & desires

Strategic Intent

A strategic intent represents a leadership team’s effort to make more-

actionable their organizations’ vision and mission statements, which most-typically

are presented in an aspirational and intentionally-vague manner. In essence, a good

strategic vision answers the question: “What kind of organization do we wish to

become?”; and, a good mission statement answers the question: “What must we

do to achieve this vision?” Table 4-6 provides vision and mission statements for

Apple and Walmart.20,21

20 Apple’s mission and vision statements obtained from: http://panmore.com/apple-

mission-statement-vision-statement 21 Walmart’s mission and vision statements obtained from:

http://panmore.com/walmart-vision-mission-statement-intensive-generic-strategies

Table 4-6 Vision & Mission Statements for Apple and Walmart

Vision Statement Mission Statement

Apple

We believe that we are on the face of the earth to make great products and that’s not changing. We are constantly focusing on innovating. We believe in the simple not the complex. We believe that we need to own and control the primary technologies behind the products that we make, and participate only in markets where we can make a significant contribution. We believe in saying no to thousands of projects, so that we can really focus on the few that are truly important and meaningful to us. We believe in deep collaboration and cross-pollination of our groups, which allow us to innovate in a way that others cannot. And frankly, we don’t settle for anything less than excellence in every group in the company, and we have the self-honesty to admit when we’re wrong and the courage to change. And I think regardless of who is in what job those values are so embedded in this company that Apple will do extremely well.

Apple designs Macs, the best personal computers in the world, along with OS X, iLife, iWork and professional software. Apple leads the digital music revolution with its iPod and iTunes online store. Apple has reinvented the mobile phone with its revolutionary iPhone and App store, and is defining the future of mobile media and computing devices with iPad.

Walmart To be the best retailer in the hearts and minds of consumers and employees.

Saving people money so they can live better.

A good strategic intent answers the question: “What must we do specifically

and now to achieve our vision and mission?” In doing so, a strategic intent provides

deliberating digital strategists with a sense of purpose, direction, discovery and

destiny. Invariably, as indicated earlier in Figure 4-9, a strategic intent likely involves

expressions of consumers’ near-term needs and desires and of the value-disciplines

to be embodied for these needs and desires to be met.

Business Model Enhancement, Replication and Innovation

Digital strategists’ deliberations focus on discovering and shaping business

model adaptations likely to strengthen current market positions or to establish

positions in new markets. By far, most formulated competitive moves are taken to

strengthen a current market position.

Business model enhancement, replication and innovation involve distinct

competitive pursuits:

 Business Model Enhancement: incremental changes are made to one or more of the four elements of business models.

 Business Model Replication: a business model proven successful in one market is applied within an adjacent market; most often, this adjacent

market is characterized by value-units, consumers and/or value streams similar to the market where the business model has demonstrated success.

 Business Model Innovation: Radical changes are made to one or more of

the four elements of business models or a novel configuration of these elements is fashioned; this novel business model is typically implemented

within a newly-defined niche of an existing market or is used in creating a new market.

Despite the differing trajectories reflected in business model enhancement,

replication and innovation, similar types of adaptations (summarized in Table 4-7)

tend to be observed.

Table 4-7 Business Model Adaptations

Value Propositions Profit Models

 Satisfy unmet needs & desires of current consumers about a value-unit and/or the delivery of the value-unit.

 Satisfy anticipated needs & desires of current consumers about a value-unit and/or the delivery of the value-unit.

 Identify new consumers or a more-finely segment of current consumers and satisfy the needs & desires of this newly-defined consumer segment.

 Increase current revenue streams.  Add new revenue streams.  Reduce cost structures.  Identify new pricing mechanisms for

generating revenue by delivering value- units to consumers.

 Eliminate unprofitable or less-profitable revenue streams.

Core Capabilities Dynamic Capabilities

 Add new digitalization capabilities.  Enrich the functionality of currently-

executing platforms.  Add new platforms.  Harden platforms operating in

environments benefiting from stability.  Modularize platforms operating in

environments benefiting from agility.

 Modify assessment frequencies.  Modify environment scanning reach &

range.  Modify digital strategists’ offensive-

defensive orientation.  Modify composition of the digital-strategist

group.

For the most part, the profit model adaptations are quite straightforward. The

one profit model adaptation that might not be readily apparent is that involving

pricing mechanisms. A pricing mechanism refers to the means by which a value-

stream participant captures its share of the value being created by the value stream.

A variety of value-capture mechanisms exist, with the most common defined in Table

4-8. Often, a business model applies multiple value-capture mechanisms.

Table 4-8

Different Value-Capture Mechanisms

Pricing Mechanism

Price determined as/by …

Cost-Plus A percentage on top of cost of producing and delivering a value-unit.

Competitor-Based Calibrating against competitors’ prices for the same or similar value-unit.

Multi-Tiered The number & sophistication of the features provided in a value-unit variant.

Freemium A multi-tiered mechanism where the base (first-level) tier is free.

Bundling The nature of value-unit aggregations provided to consumers.

Segmented The producer for specific customer segments.

Pay-What-You-Want The consumer.

Fenced Pay-What-You-Want

The consumer selecting a price-segment and the producer after fencing the consumer into this segment.

Demand The real-time demand for a value-unit.

Auction An auctioning mechanism.

Installed-Base The joint cost of an installed-base (e.g., the razor) and the use of this installed-base over time (e.g., the razor blade).

Futures Contracting The predicted demand (at a future point-in-time) for a value-unit.

The modifications to the dynamic capabilities element are not quite as

straightforward. Four types of modifications were listed in Table 4-7:

 Assessment frequency – the prescribed frequency by which digital strategists deliberate on a business model or on particular aspects of a

specific business model; and, the continuing-suitability of certain business models and certain business model elements.

 Environmental scanning reach and range – the variety of entities (range: substitute value-units, intermediaries, suppliers, etc.) and contexts (reach:

edges of a pipeline ecosystem and beyond) covered in digital strategists’ environmental scanning.

 Offensive/defensive orientation – whether the primary objective of the

digital strategists, as a group, is to strengthen or to protect current competitive positions.

 Composition of the digital strategists group: the knowledge domains (e.g., value disciplines, core capabilities, cost structures, etc.) and constituencies

(e.g., producer subunits, suppliers, intermediaries, consumers, etc.) influentially represented during deliberations.

Each of these modifications produces significant changes in a digital strategy group’s

collective awareness of the need for and nature of business model adaptations and

the effort (time, complexity and cost) associated with digital strategists’ individual

and group deliberations.

Digital Strategy Formulation in Practice

Digital strategies implemented by Finnair and by UPS Supply Chain Solutions

(UPS-SCS) are illustrative of the thought-processes exercised by digital strategists.

In addition, these examples illustrate two not-uncommon trends regarding

organizations’ digital strategies: embracing customer intimacy after having

established a reputation based on operations excellence, and actively involving

consumer communities in co-creating a value proposition. Table 4-9 summarizes key

business model adaptations for the Finnair and UPS-SCS episodes.

Table 4-9 Business Model Adaptations: Finnair & UPS Supply Chain Solutions

Organization Finnair UPS Supply Chain Solutions

Value Proposition

 Offer long-haul travelers innovative & valued services

 Customized, complex solutions  Quick implementations

Profit Model  Higher-margin market

segment

• Higher-margin market segment • Low configuration costs • Low implementation costs

Core Capabilities

 Institutionalized social media use

 Individualized social media use

 Modularized solution services  Modular architecture  Educate digital strategists on

modular architecture  Deploy cross-functional teams to

integrate marketing, sales & digitalization specialists

Dynamic Capabilities

 Co-creation of new services with customer community

 Outward-looking organizational culture

 Co-creation of digitalized solutions with customer

 Modify investment criteria for digitization & digitalization

Finnair22

Finnair is the world’s oldest, midsize airline with a unionized labor force. Like

similar airlines, Finnair embodied the operations excellence value discipline.

However, the company’s high fixed-costs and the influx of low-cost short-haul

competitors had seriously eroded its competitive position – particularly within short-

haul markets.

Exploiting the airline’s geographic advantage (the Helsinki hub provides one of

the fastest routes between Europe and Asia), Finnair’s leadership team had chosen

in 2009 to focus the airline on long-haul Asian routes – a market niche within which

Finnair was relatively unknown. Consequently, a series of competitive actions were

taken to strengthen the airline’s position in the long-haul Asian market, with a key

target area being the creation of innovative services to enrich the airline’s value

proposition for the long-haul consumer.

Finnair’s use of social media technology (SMT) has played a key role in

engaging the consumer community in co-creating these new services - and in the

process enhancing the airline’s image with this consumer community. Heavy usage

has occurred around blogging, Facebook and Twitter, with special attention given to

integrating customer interactions across these SMTs. Importantly, both institutional

(structured, tightly-moderated interactions orchestrated by Finnair employees) and

individualized (unstructured, loosely-moderated interactions with individual

consumers) SMT tactics have been applied. The outcome? Since 2009, around 300

22 This material is adapted from: S.L. Jarvenpaa and V.K. Tuunainen, “How Finnair

Socialized Customers for Service Co-Creation with Social Media,” MIS Quarterly Executive,

September 2013, pp. 125-136.

meaningful ideas for new services have been generated, two of which were

implemented in 2013: a book-swapping station at the Helsinki airport, and the

availability of a high-quality vegetarian meal option (for business-class and economy

travelers) on all long-haul flights.

UPS-SCS23,24

UPS is the parent company of UPS-SCS. It was formed in the early 1990s, is

positioned in a mature market for transportation solutions, and has a strong culture

rooted in the operations excellence value discipline. UPS-SCS, on the other hand,

was established in order to pursue a differentiation strategy by developing a wide

variety of specialty services and offering its B2B consumers customized, complex and

comprehensive supply chain solutions.

In the early 2000s, the UPS-SCS leadership team realized that its growth was

about to hit a brick wall. Two factors explained this portending crisis. First, low-cost

competitors had entered the UPS-SCS competitive space and were eating away at

the low-hanging-fruit, i.e., less-complex, less-comprehensive, but profitable

solutions. Second, too many of UPS-SCS’s customer engagements requiring

complex, comprehensive solutions were proving to be unprofitable because of the

high-cost and lengthy lead-time required to design and implement a solution.

The leadership team’s strategy to address this situation involved three

objectives:

23 M. Lewis, A. Rai, D. Forquer and D. Quinter, “UPS and HP: Value Creation through

Supply Chain Partnership,” Case 9B07D002, Ivey Management Services, 2007. 24 A. Rai, V. Venkatesh, H. Bala and M. Lewis, “Transitioning to a Modular Enterprise

Architecture: Drivers, Constraints and Actions,” MIS Quarterly Executive, June 2010, pp. 83-

94.

 Operational B2B readiness – provide the capability to quickly integrate UPS- SCS services into a customized solution and to seamlessly interconnect this

solution with a customer’s business platforms.

 Internal services awareness – increase the working knowledge of UPS-SCS

sales employees and managers about the breadth and depth of UPS-SCS service offerings and how these services could be configured together in producing customer solutions.

 Customer familiarity – increase the working knowledge of UPS-SCS sales employees and solution designers about current/potential customers and the

idiosyncrasies that distinguish each customer from its competitors.

Achieving these objectives involved building a number of platforms: a modularized

operational platform hosting and executing the UPS-SCS portfolio of digitalized

solutions; analytical platforms that organized and enabled easy access to information

about services, solutions and customers; and, collaboration platforms enabling

solution designers, sales staff and customers to jointly configure and implement

solutions.

Sustaining Competitive Positions

When competitive actions strengthen an organization’s competitive position,

the organization ideally desires to sustain the gained competitive advantage for as

long as possible (the fifth strategic challenge listed earlier in Table 4-5). For example,

after the successful implementation of a first-mover customer loyalty program aimed

at identifying and retaining high-value customers, increases in market share and

sales revenues are likely to be realized. However, if competitors are able to quickly

imitate the loyalty program, then these initial gains are likely to dissipate as

competitive parity returns to the market.

Digital disruption is making it more difficult than ever to sustain a newly-gained

competitive advantage. As many, if not most, of the digital platforms and business

platforms enabling competitive advantages are readily available today, competitor

imitative responses occur promptly and frequently. Further, as these imitative

responders can learn from the innovator’s actions, these responses are often better

and less costly.

The tactic taken most often to sustain a newly-gained competitive advantage

is to construct one or more barriers to competitive retaliation. The less-

penetrable these erected barriers are, the longer the competitive advantage can be

sustained. Piccoli and Ives categorize these barriers into four types (see Table 4-

10):25 digital resources, complementary resources, project management capabilities

and preemption.

Table 4-10

Barriers to Competitive Retaliation

Barrier Characteristics of a Strong Barrier

Digital Resources

 Unique and/or rare

 Not available from a third-party

 Difficult, time-consuming and/or costly to build from scratch

Complementary Resources

 Unique and/or rare

 Not available from a third-party

 Difficult, time-consuming and/or costly to build from scratch

Project Management Capabilities

 Complexity of an imitative response

 Difficult, time-consuming and/or costly to develop needed capabilities

Preemption

 High consumer switching costs

 Difficult, time-consuming and/or costly to identify & attract value-stream participants and to build the platforms to coordinate value-stream data, document & information flows

The digital resources barrier is based on an organization’s investment in

unique or rare digital/digitalized assets and capabilities. For example, if an

organization has developed unique capabilities to build, operate and secure value

25 G. Piccoli and B. Ives, “IT-dependent Strategic Initiatives and Sustained Competitive

Advantage: A Review and Synthesis of the Literature,” MIS Quarterly, December 2005, pp.

747-776.

stream upstream/downstream platforms and if a gained competitive advantage is

dependent on such a capability, then it would likely take a rival a prolonged period

of time to put in place similar platforms. Just such a barrier was invoked when

Walmart pioneered vendor-managed inventory with Procter and Gamble. Walmart

provided Procter and Gamble with the ability to access Walmart point-of-sale data in

real-time so that Procter and Gamble could monitor Walmart’s store-level inventories

and replenish stock on an as-needed basis.

The complementary resources barrier is based on requirements for unique

or rare non-digital resources in establishing a digitalized competitive advantage.

Harrah’s, for example, has been a pioneer in using analytics to build and exploit

superior customer relationships. However, Harrah’s also undertook a radical

organizational change when it launched its customer-analytics strategic initiative.

Casinos in a chain traditionally operate independent of one another. With the

organizational change, Harrah’s introduced reporting structures and incentives to

build an enterprise-wide customer relationship management culture where customers

are owned by the corporation rather than by a specific casino, and where employees

are expected (and rewarded for doing so) to make decisions on the basis of customer-

related analytics.

Digitalized competitive actions are often implemented as large, complex and

risk-laden projects involving a large number of people holding a variety of skills.

Such projects can be extremely difficult to complete on-time, on-budget and as

specified. The project management capabilities barrier involves the presence of

needed project management capabilities. For example, when Amazon launched its

B2C retail bookstore, a large number of complex activities needed to be carried out

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well and in a highly-coordinated fashion: building the needed digital and business

platforms; putting in place a powerful and reliable technical infrastructure to host its

online store; establishing efficient, effective and reliable physical operational and

managerial processes (e.g., warehouse operations, order packing and shipping,

customer service, processes, etc.); and, negotiating relationships with value stream

participants (e.g., book publishers and distributors, logistics providers, financial

services firms, etc.). Any competitor would need to possess correspondingly-high

levels of project management capabilities.

A preemption barrier limits competitors’ opportunities and incentives to

undertake retaliatory action. One such barrier involves customer switching costs,

or the costs to be borne by a consumer choosing to move to a competitor’s products

and/or services: learning a new set of product/service interface actions and rules,

changing work practices, out-of-pocket expenses, etc. When substantial switching

costs exist, the competitor must not only induce consumers to switch, but also

compensate the consumer for borne switching costs. For example, while eBay has

faced stiff competition from other auction sites, a key switching cost that works in its

favor is that reputations built on eBay are lost. A second type of preemption barrier

involves the anticipated effort required to identify and attract new value stream

participants and to assimilate these new participants within a value stream’s

platforms. For example, Dell’s success in negotiating the participation of other firms

in its build-to-order pipeline ecosystem proved to be a dominating preemption

barrier.

How effective are these barriers to competitive retaliation in the face of digital

disruption? With competitors reacting faster and faster and with markets increasingly

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susceptible to new entrants, about the only things that can be said with confidence

are that the length of time any competitive gain can be sustained is growing shorter

and that the best defense is to take the offense; that is, take a second competitive

action before the competition can react to the initial action.

A Recap and Look Ahead

This chapter has examined how digitalization has transformed pipeline

organizations’ digital strategies and digital strategy formulation processes. However,

one critically important topic was not discussed – today’s reality that many, if not

most, of the digitization and digitalization capabilities being applied by both pipeline

organizations and network organizations in taking competitive moves and in

executing business models are externally-sourced, rather than internally-sourced.

Explanations of why this is the case and of the strategic implications of this

phenomenon are covered in the next chapter.

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Chapter 5. Digital Strategy and the External Sourcing of Capabilities

Pipeline organizations rarely compete solely through their own capabilities.

Instead, they leverage the capabilities of suppliers, service providers, intermediaries,

strategic partners and consumers. While this has always been the case, the two

drivers of digital disruption – ever-accelerating advances with digital technologies

and globalization – have dramatically enhanced the availability, ease-of-

implementation, reliability and cost-attractiveness of externally-sourced capabilities.

As an illustration of what is possible today, consider the publisher of this book:

Legerity Digital Press (LDP). Owned, managed and operated by five individuals

(contributing intangible assets but little else), LDP has no employees and few assets

(e.g., an acquired digitalized accounting system, personal productivity tools, etc.),

other than the digital books that have been published. The vast majority of the

resources applied across LDP’s value stream are provided by external parties: the

digital platform hosting LDP’s website, the digitalized platform hosting LDP’s B2C

storefront, the digitalized platforms hosting payment and banking processes, the

digitalized platforms producing hard copies and course packs, the digitalized

platforms providing sales channels to university books stores and to libraries, and a

provider of advanced accounting and tax services.

While the experiences of entrepreneurial startups like LDP are clearly different

from those of mid- and large-sized organizations, an ever-increasing portion of the

capabilities enabling organizations’ business models have been (or are being)

externalized – that is, handled (in full or in part) by other organizations. The

externalization of a capability, popularly referred to as outsourcing, involves

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transferring ownership and decision rights regarding a capability, the assets used in

executing the capability, and/or the management of the capability from inside an

organization’s boundary to outside this boundary.

Capabilities are externalized in order to accomplish work activities quicker,

more effectively, more efficiently and/or less costly. By making measured decisions

about which capabilities to externalize and the governance of these externalized

capabilities, significant improvements in organization performance can occur. This

chapter describes how external sourcing is brought into digital strategy formulation

by covering the following topics:

 Externalizing Organizations’ Capabilities

 Tactics for Lessening Clients’ Dependence on Sourcing Providers

 External Sourcing and Digital Strategy Formulation

 Achieving External Sourcing Agility at Commonwealth Bank of Australia

Externalizing Organizations’ Capabilities

Organizations apply a broad array of capabilities in developing, marketing,

producing, selling, delivering and supporting the value-units offered to consumers.

It is useful to recognize that this broad array of capabilities can be categorized into

three capability-sets, each of which focuses on a value discipline: operations

excellence, customer intimacy and product leadership.26,27 These capability-sets,

described in Table 5-1, drive distinct operational and managerial processes, benefit

from distinct orientations, and have distinct underlying economics. Because of these

26 M. Treacy and F. Wiersema, “Customer Intimacy and Other Value Disciplines,”

Harvard Business Review, January-February 1993, pp. 84-93. 27 J. Hagel, III, Out of the Box, Boston: Harvard Business School Press, 2002.

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differences, it can be challenging for any organization to execute all three capability-

sets exceptionally well. As a result, organizations tend to be organized as three

separate units (each focused on a specific value discipline) that are coordinated so

as to operate as a single enterprise. Invariably, though, these units’ distinctive

incentive systems and control systems bump into and work against one another.

Table 5-1 Three Distinct Capability Sets

Value Discipline Capability Set

Operations Excellence

Customer Intimacy Product Leadership

Key Operational

& Managerial Processes

Production

Purchasing

Logistics

Value Proposition Development

Consumer Development

Consumer Retention

Research and Development

Value-Unit Launch

New Market Development

Organization Orientation

Focus

Quality

Cost

Growth

Consumer Responsiveness

Innovation

Adaptation

Underlying Economics

Economies of Scale

Economies of Scope

Economies of Speed

Executive leadership teams thus face a complex trade-off. Should they

unbundle – that is, fully or partially externalize - one or two of these capability-sets

so that their enterprise has a singular strategic/operational focus? Or, should they

maintain all three units within their organization’s boundaries in order to avoid the

challenges that arise in coordinating work across multiple organizations? If the

decision process of unbundling is handled well and if externalized capabilities are

governed well, clear benefits can arise (see Table 5-2).

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Table 5-2 Benefits from the External Sourcing of a Capability

Benefits How Benefits Are Realized

Operational Efficiency &

Effectiveness

 Provider exploits economies-of-scale.  Provider uses leading-edge digital resources in enabling offered

capabilities.  Provider embeds leading-edge technical, business and managerial

expertise within offered capabilities.

Leverage Provider’s Capital

 Provider owns the digital resources enabling offered capabilities.  Client transfers to the provider ownership of some (or all) of the digital

resources previously used to enable the externalized capabilities.

Adaptive & Entrepreneurial

Agility

 Client replaces fixed costs with variable costs.  Provider exploits economies-of-scope & economies-of-speed.  Provider uses leading-edge digital resources in enabling offered

capabilities.  Provider embeds leading-edge technical, business & managerial expertise

within offered capabilities.

Innovation

 Provider exploits economies-of-scale, economies-of-scope & economies- of-speed.

 Provider uses leading-edge digital resources in enabling offered capabilities.

 Provider embeds leading-edge technical, business & managerial expertise within offered capabilities.

These benefits can be especially attractive when an offshore provider, rather

than an onshore provider, is used. An offshore provider is located in a different

country than the client, and an onshore provider is located in the same country as

the client. Offshore providers can provide appealing rate structures (attributed to

low labor rates, tax incentives, etc.), as well as access to scarce skill-sets, and often

exhibit exceptional production/delivery capabilities as a result of their exploitation of

economies-of-scale, economies-of-scope and economies-of-speed. Additionally,

organizations that aggressively pursue globalization are often able to leverage their

relationships with offshore providers to enrich their understandings of other

countries’ business and social cultures.

The benefits from externalizing capabilities do not come without risk (see Table

5-3), and these risks only intensify when offshore providers are used. Why do these

risks intensify? Note, in particular, the first two risks listed in Table 5-3. First,

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because an off-shore provider’s employees can exhibit linguistic and cultural

differences relative to a client’s employees, communication can prove troublesome

with seemingly subtle differences in interpretations leading to severe and unexpected

problems. Second, over time and all too often, a client externalizing a capability can

become overdependent on the provider, as internal expertise regarding the capability

is lost (because internal staff is transferred to the provider, assigned other internal

roles or let go). As a consequence, the client’s capabilities to govern the provider’s

performance and to incorporate the externalized capability within digital strategizing

are both reduced. Client-provider misunderstanding and client overdependence on

a provider also exacerbate the remaining risks listed in Table 5-3. Of course, many

other factors (e.g., technical, contractual, legal, political, etc.) also contribute to

these other risks.

Table 5-3 Potential Risks Arising from the External Sourcing of Capabilities

Client Risks How Risks Unfold

Client-Provider Misunderstanding

 Failures of client & provider managerial/operational staffs to understand each other’s values, perspectives, objectives, concerns, directions, etc.

Overdependence on Provider

 Loss of internal capability expertise and of attention.

Inadequate Efficiency &

Effectiveness

 Expected cost reductions not fully realized and those that are realized dissipate over time.

 Externalized capabilities and the execution of these capabilities are insufficiently enhanced over time.

Inability to Leverage

Provider’s Capital

 Provider fails to refresh the digital resources enabling externalized capabilities.

 Client allows transferred digital resources to reappear internally.

Inadequate Adaptive Agility

 Provider fails to respond to best-practice adaptations regarding externalized capabilities.

 Provider fails to transfer best-practice knowledge regarding externalized capabilities to client.

Inadequate Entrepreneurial

Agility

 Provider fails to maintain leading-edge expertise regarding externalized capabilities.

 Provider fails to transfer leading-edge expertise regarding externalized capabilities to client.

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Tactics for Lessening Clients’ Dependence on Sourcing Providers

A particularly troublesome concern whenever capabilities are externalized is

the threat of becoming overdependent on the sourcing provider. Best practices

aimed at forestalling provider-overdependence include:

 Maintaining internal expertise regarding externalized capabilities.

 Enlarging the set of providers with whom capabilities are externalized.

 Establishing effective governance of externalized capabilities.

Among these, the maintenance of internal expertise is most important because it’s

absence precludes the other two practices. Today, the two tactics most commonly

used to enlarge the set of providers are multisourcing and crowdsourcing, and they

are described in the remainder of this section. Tactics relating to governance are

covered in the next section.

Multisourcing

Multisourcing refers to contracting with multiple providers rather than a

single provider. Initially, this tactic involved a client separating the capabilities to be

externalized into relatively independent sets, and then using different providers for

each of these capability-sets. Note, however, that a threat of overdependence

remained. Over time, multisourcing has evolved to become much more

sophisticated, with current best practices advocating:28

 A capability-set to be externalized is modularized, such that each of the

modules can be optimized without considering the modules (of this same

28 These steps are derived from: B.A. Aubert, C. Saunders, C. Wiener, R. Denk and T.

Wolfermann, “How Adidas Realized Benefits from a Contrary IT Multisourcing Strategy, MIS

Quarterly Executive, September 2016, pp. 175-194.

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capability-set or of other capability-sets) with which it might interact.

 Providers, possessing comparable capabilities, are identified as suitable

candidates for handling the capability-set to be externalized.

 Multiple providers are then selected to handle a subset of each of these

modules, ensuring that considerable overlap occurs in the nature of the modules assigned to the providers.

 Provider assessment and reselection procedures are regularly undertaken.

While such practices do introduce increased managerial overhead, the benefits are

many: reduced operational and strategic risks, greater likelihood of finding the best-

fitting provider for a module (or set of modules), and sustained competition among

the providers (e.g., price, quality, responsiveness, reliability, innovativeness, etc.).

A further twist on multisourcing involves incorporating a long-tail perspective.

Here, the selection of providers to handle the externalized capabilities “… combines

a few key partnerships with a dynamically changing and unrestricted number of

smaller contracts with other suppliers.” 29 This long-tail aspect thus embraces and

fosters a flow of new providers offering new capabilities to drive the client’s adaptive

and entrepreneurial agilities.

Crowdsourcing

Crowdsourcing involves externalizing a capability to a community of

individual agents, more popularly referred to as the wisdom of the crowd. The

fundamental idea of crowdsourcing is that a crowdsourcer proposes to a community

of potential contributors the voluntary undertaking of a task that consists of or is

enabled by the capability being externalized. Most often, crowdsourcing reflects a

29 N. Su, N. Levina and J.W. Ross, “The Long Tail Strategy for IT Outsourcing,” Sloan

Management Review, Winter 2016, p. 82.

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partial, temporary externalization of a capability. Community members contribute to

task accomplishment via a collaboration platform.

The power of crowdsourcing lies in aggregating and integrating knowledge

from diverse, independent contributors. These individual contributors bring with

them personal knowledge and social information, i.e., information formed through

exposure to the contributions of other community members and these members’

expressed confidence in their contributions. When personal knowledge is weak,

people tend to rely more on social information. But, overdependence on social

information (which can be systematically-biased if a community’s members share

common values, backgrounds and experiences) can lead to overconfidence and

groupthink. For this reason, crowdsourcing tends to produce the highest quality

outcomes when the interacting contributors hold diverse sets of personal perspectives

and knowledge.

There are two basic types of crowdsourcing: collaboration and tournament. In

collaboration-based crowdsourcing, contributors collectively create a single task

outcome. Usually, the community collectively generates ideas, selects the most

promising of these ideas, and refines these selected ideas into the single task

outcome. By contrast, tournament-based crowdsourcing involves community

members (working individually or in teams) submitting finalized, independent task

solutions. The crowdsourcer then selects one of these contributed solutions, or

perhaps a few of the solutions, in exchange for financial or non-financial

compensation. Tournament-based and collaboration-based crowdsourcing can be

combined, e.g., by first engaging a community to submit individual solutions, and

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then collectively engaging the community to evaluate the individually-submitted

solutions and to refine the best of these into a final task outcome.

Table 5-4 defines three common crowdsourcing arenas. Many organizations

have applied crowdsourcing to generate innovative ideas. Most often, this arena finds

an organization (for example: Dell, Finnair, LEGO, Nestle and Starbucks) engaging a

consumer community through social media to generate ideas for enhancing a value

proposition or to extend a product line. But other communities can be targeted, as

well. For example, Zara, the Spanish clothing retailer, targets its internal community

of retail store staff to generate a constant stream of ideas regarding fashion trends -

ideas gleamed from the staff members observing customer behaviors and talking

with customers.

Table 5-4 Three Crowdsourcing Arenas

Arena Description

Generate Innovative

Ideas

Engage a community to generate innovative ideas for improving current value propositions and/or developing new value-units and markets.

Solve a Problem or Accomplish a

Task

Engage a scientific/analytic community to (1) solve a problem or accomplish a task or (2) handle problems/tasks that otherwise would be assigned to internal staff.

Prediction Market

Engage a broad, diverse community to contribute their personal judgments regarding an issue. Contributors both state their opinions and convey the strength of the sentiments underlying these opinions, and then receive almost instantaneous feedback on how their opinions compare & contrast with others’ opinions.

The second crowdsourcing arena targets a community of skilled-individuals to

solve a problem or to handle a recurring task. Notable examples of the former

objective are the tournaments established by Netflix to produce a next-generation

recommendation engine and by NASA to design a laundry system for the

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International Space Station. Many examples of the later objective exist, especially

with regard to software coding and Big Data analytics.

Prediction markets, the third crowdsourcing arena, targets broad, diverse

communities to predict events or outcomes. While early uses were directed at

election campaigns and sports contests, business organizations (such as Google, Ford

and Best Buy) are realizing considerable value from prediction markets in areas as

diverse as forecasting the sales of about-to-be-introduced video games or songs,

filtering the ideas about to enter a new product development process, designing and

selecting between marketing campaign themes, and selecting projects to be funded.

Prediction markets operate in a manner similar to financial stock markets:

 A question is posed to participants (e.g., “Do you wish to buy specific

stock?”).

 Participants convey their opinions along with the strength of the sentiments underlying these opinions (e.g., “Yes, and here is what I am willing to pay

for that stock.”).

 Participants receive almost instantaneous feedback on how their opinions

compare and contrast with those of other participants (e.g., the current market price for the stock).

Governing the External Sourcing of Capabilities

Table 5-5 describes the challenges that are confronted in the design of the

governance systems used with externalized capabilities. Two key insights should be

gleamed from this table. First, the pragmatic purpose in externalizing a capability is

to externalize the work activities (that is, the operational and managerial processes)

enabled by the capability. As work activities are far more tangible than are

capabilities, work activities tend to be the focus of governance systems. Second,

these challenges underscore the importance of building and then maintaining internal

expertise regarding a to-be-externalized capability – and, accordingly, internal

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expertise of the work activities enabled by an externalized capability. If a client’s

employees do not possess deep understandings of a work activity, low likelihoods

exist that these employees would be able to negotiate an effective contract with a

provider and to nurture a meaningful trust between themselves and the provider’s

employees carrying out the work activity.

Table 5-5 Challenges in Governing an Externalized Capability

Challenge Description

Understanding of a

Work Activity Enabled by

Externalized Capabilities

Codifying the Work Activity

Specifying what is to be done, how it is to be done and expected performance outcomes

Monitoring the Work Activity

Observing what is being done, how it is being done and performance outcomes

Devising Metrics of Work Activity

Performance

Measuring what is being done, how it is being done and performance outcomes

Developing Trust between Client Employees & Provider Employees

Client employees and provider employees:  understand what is expected of one

another  are confident that each will perform their

respective work tasks in an ethical, competent & timely manner

 are confident that each will adapt to unexpected situations in a manner consistent with relationship objectives.

In devising a governance system for an externalized capability, it is critical to

recognize that all external-sourcing engagements focus on one, two or three goals:

 Lowering a capability’s cost structure.

 Improving the quality of the capability.

 Introducing innovation into the capability.

What varies across arrangements – hence, what varies in the governance systems

being applied - is the relative importance (and presence) of these three goals.

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Governance system designs for externalized capabilities can be placed on a

tight-governance/loose-governance continuum (see the top half of Figure 5-1). This

is important, as the design used affects the goals realized through an engagement:

tight-governance works best for cost and quality goals, while loose-governance works

best for quality and innovation goals. Of course, engagements rarely strive to

achieve a cost, quantity or innovation goal. As a result, most engagements tend to

involve aspects of both tight-governance and loose-governance (i.e., tight-

governance is applied to some work activities, loose-governance is applied to other

work activities, and more-nuanced governance designs are applied to yet other work

activities).

Figure 5-1

Tight-Governance and Loose-Governance Designs

Contract

Administrative Costs

People Costs

 Lengthy  Detailed

 Short  Broad

Tight-Governance Loose-Governance

High

HighLow

Low

Cost-Focus Innovation-FocusQuality-Focus

Table 5-6 contrasts the natures of tight-governance and loose-governance.

Tight-governance, or compliance monitoring, is characterized by a constant,

detailed and deep visibility into how a work activity is being carried out and the extent

to which a comprehensive set of negotiated obligations is being met. If both the

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client and the provider have digitalized their operational business processes, such a

visibility is relatively straightforward to implement and is accompanied by associated

governance-related costs that are recovered through a lowered risk exposure. With

loose-governance, or intent monitoring, the increased discretion given to the

provider inherently increases this risk exposure – an exposure managed

(accompanied by associated costs) through the client-provider relationship and by

regularly assessing whether or not an engagement continues to prove beneficial for

both the client and the provider. As indicated in the bottom half of Figure 5-1, the

natures of the costs borne with tight-governance and loose-governance are quite

distinct.

Table 5-6

Attributes of Tight-Governance and Loose-Governance Designs

Tight Governance (Compliance Monitoring)

Loose Governance (Intent Monitoring)

Monitoring Philosophy

Precise execution of well- specified work activities

Meet agreed-on overall performance outcomes

Decision Making Philosophy

Defined standards of execution

Joint decision making

Governance Mechanisms

Service Level Agreements (SLAs)

 Client-provider oversight board  Client-provider management

team  Client engagement manager  Client-provider execution team

Metrics Detailed specifications of the tasks and outcomes to be monitored and reported

Aggregate specifications of work-related outcomes and risks

Visibility Rights Specific transactions and events

Work-related outcomes

Access Rights Data Knowledge

External Sourcing and Digital Strategy Formulation

External sourcing influences the deliberations of digital strategists in numerous

ways. Consider, for example, the following questions:

 What is the portfolio of capabilities being applied, as we gain and sustain

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advantageous competitive positions?

 Realistically, how good are we at executing and continuously enhancing

these capabilities?

 Are providers available who are likely to execute and enhance these

capabilities better than we can?

 Are some of these capabilities strategically more important than others?

 Is handling all of these capabilities ourselves the best way to utilize our

(limited) internal resources?

 What would be the risk exposure of externalizing a specific capability or set

of capabilities?

 Would we deliver better value to consumers (and to stockholders) if we only hosted internally those capabilities critical to our gaining and sustaining

competitive advantages and relied on best-of-class providers to host most (perhaps all) other capabilities?

As stated earlier, such deliberations are increasingly resulting in organizations

choosing to externalize many, if not most, of the capabilities enabling business

models.

As organizations’ digital strategists and leadership teams become comfortable

with the idea of externalizing capabilities to arms-length providers (via tight-

governance) and to strategic partners (via loose-governance), strategic opportunities

may arise where an organization’s internal capabilities are recognized as being world

class and become the basis of a new business model. If a manufacturing organization

has developed a world-class inventory management capability, why not take over its

suppliers’ or customers’ inventory processes (referred to as vendor-managed

inventory) or offer this capability to other manufacturing organizations? If a

hospitality organization has developed world-class customer support capabilities, why

not spin off a subsidiary offering this capability to other companies?

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Digital strategists today find themselves regularly considering whether or not

internally-hosted capabilities should be externalized, whether externalized

capabilities should be brought back inside the organization, and whether or not

internal, world-class capabilities should be offered to other organizations. More than

ever before, organizational boundaries seem to be in an almost perpetual state of

flux – a state of flux incessantly driven by the continued advances occurring with

digital technologies and by the forces of globalization.

Digital Strategy Formulation

Figure 5-2 provides an overview of how the external sourcing of capabilities

influences digital strategists’ deliberations. The key element introduced in this Figure

is an explicit categorization of capabilities within the operant strategic intent:

 Strategic core capabilities – the capabilities that lie at the heart of an organization’s competitive advantage.

 Peripheral core capabilities – the capabilities that are necessary for an organization to gain and maintain its competitive positions, but that are not

a source of competitive advantage.

 Commodity capabilities – the capabilities that are required or are otherwise beneficial for an organization to operate and are readily available

from external sources, but do not contribute to competitive positions (aside from their absence).

Strategic core capabilities are seldom considered for external sourcing – and only

when a trusted world-class provider exists that is able to outperform the organization

now and into the future. Peripheral core capabilities should always be candidates for

external sourcing – aside for capabilities for which an organization demonstrates

word-class performance. Commodity capabilities should be externally-sourced in the

absence of a strong business case for not doing so.

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Figure 5-2 Influence of External Sourcing of Capabilities on Digital Strategizing

Business Model Enhancement, Replication &

Innovation

Business Model Deliberations  Value proposition  Profit model  Core capabilities  Dynamic capabilities

Strategic Intent Beliefs regarding capabilities  Strategic core  Peripheral core  Commodity

 Internally-sourced capabilities  Externally-sourced capabilities  New providers  Innovative provider business

models

 External sourcing of capabilities by competitors

 External sourcing of capabilities in adjacent markets

 Consumers’ beliefs & preferences about the external sourcing

With digital disruption, it is important to recognize that today’s peripheral core

capabilities may very well become tomorrow’s strategic core capabilities or

tomorrow’s commodity capabilities. (Similar statements could just as well be said

about strategic core capabilities or commodity capabilities.) Why do we see, over

time, movements in organizations’ core capabilities across these three categories?

Four explanations should immediately come to mind:

 Existing markets and business models evolve over time and eventually

disappear, while new markets and new business models regularly emerge.

 Existing participants regularly leave markets, while new participants

regularly appear.

 Organization’s internally-hosted capabilities improve and diminish with time.

 Existing digital technologies incessantly improve, but eventually get replaced

by technological innovations providing lower costs, improved performance and new capabilities.

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Business Model Adaptations

Table 5-7 lists the main pathways through which the external sourcing of

capabilities contributes to organizations’ business model adaptations. Most of these

adaptations are quite straightforward and, hence, are not discussed. However, the

adaptations regarding value propositions may benefit from some elaboration.

Table 5-7 Business Model Adaptations Associated with External Sourcing

Value Propositions Profit Models

 Meet consumer preferences regarding external sourcing.

 Modify if and how a capability is sourced to become more aware of and more responsive to ecosystem events & trends.

 Exploit provider capabilities to increase current revenue streams, add new revenue streams and reduce cost structures.

 Reduce or reallocate investments in internal assets.

 Renegotiate, replace or eliminate unprofitable or less-beneficial external- sourcing engagements.

Core Capabilities Dynamic Capabilities

 Externalize a capability.  Re-internalize an externalized capability.  Enhance a capability or add a new capability

via external-sourcing.  Harden or modularize platforms via the

external-sourcing of enhanced or new capabilities.

 Reassign capabilities into the strategic core, peripheral core and commodity categories.

 Enhance environment scanning aimed at identifying and nurturing new providers.

 Modify the composition of the digital- strategists group (including strategic partners’ digital strategists).

First, consumers are heard to voice a bias against the external sourcing of

capabilities – perhaps most commonly observed with customer support processes,

but extending as well to consumers’ preferences regarding external sourcing in

general. As a consequence, insourcing a previously-externalized capability may serve

as an effective competitive move – especially when an organization has begun to

embrace the customer intimacy value discipline and/or if most competitors have

externalized the capability.

Second, an organization’s proximity to innovative upstream and downstream

ecosystems is critical for the organization to demonstrate agility in modifying value

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propositions. Employees directly in touch - physically and, most importantly,

culturally - with consumers and with ecosystem participants are simply far better

able to identify, incorporate and act upon significant events and trends. As a

consequence, it is not uncommon today to observe organizations: transferring to

onshore providers those capabilities that were previously externalized to offshore

providers, and deciding to internally host capabilities that were previously

externalized.

Achieving External-Sourcing Agility at Commonwealth Bank of Australia30

The strategic advantages of demonstrating agility with regard to the external

sourcing of capabilities – that is, easily shifting capabilities from being internally

sourced to being externally sourced (or vice versa), and shifting the handling of a

capability from one provider to another provider – should be obvious. Organizations

demonstrating and maintaining agility significantly enhance the likelihoods of their

business models maintaining alignment with today’s dynamic competitive

environments. But, is agility with external sourcing feasible and cost-effective? The

experience of the Commonwealth Bank of Australia (CBA) indicates that it is both

feasible and cost-effective.

CBA is a large, multinational bank headquartered in Sydney, Australia. It has

built a strong reputation as a leading worldwide commercial user of digital

technologies (in regard to both spending and innovation). The banking sector is

especially challenging for digitalization, given the importance of consumer trust – a

30 This section has been adapted from: D. Schlagwein, A. Thorogood and L.P. Willcocks,

“How Commonwealth Bank of Australia Gained Benefits Using a Standards-Based, Multi-

Provider Cloud Model,” MIS Quarterly Executive, December 2014, pp. 209-222.

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trust based largely in consumer perceptions regarding the security, reliability and

availability of digitalized banking services.

CBA has taken three different approaches to external sourcing over the past

twenty years:

 1996: CBA externally sourced much of its digitization and digitalization to

EDS (now part of Hewlett-Packard). This single-provider, ten-year contract emphasized fixed fees, guaranteed transaction volumes and lowered costs. Having reduced its internal digitalization-related staffing, CBA’s executive

leadership in the early 2000s realized that the bank had lost much of the internal capabilities necessary to launch digitally-enabled competitive

actions.

 2006: CBA transitioned to a multisourcing approach to the external sourcing of capabilities. Specifically, the bank launched initiatives to rebuild internal

digitalization capabilities and to negotiate/manage individual sourcing contracts with a portfolio of external providers. By the end of the 2000s,

CBA had rebuilt its internal digitalization capabilities. However, a new concern had arisen: accelerating digitalization costs.

 2010: CBA initiated a multi-provider, cloud-based approach to the external sourcing of capabilities. Cloud computing promised a cost-effective, pay-as- you-go approach to external sourcing and a means to launch competitive

actions quicker and less-expensively. By 2016, this new approach to external sourcing had resulted in significant digitalization-related cost

reductions and significant improvements to the bank’s adaptive and entrepreneurial agilities.

What exactly is CBA’s multi-provider, cloud-based approach to external sourcing? To

answer this question, a very brief introduction to cloud computing is needed.

Cloud computing involves provisioning a pool of digital assets and digitally-

enabled services such that these services can, on demand, be accessed and applied

by clients via the Internet. Cloud computing solutions provide individuals and

organizations with suites of capabilities in either private or public clouds, where these

clouds may be located close to or very distant from the client. The economics of

cloud computing are based on the sharing of a pool of resources across many uses

and many users, such that significant economies of scale and scope are realized.

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CBA’s multi-provider, cloud-based model has three layers (see Figure 5-3).

The top layer consists of the business platforms that execute CBA’s operational and

managerial processes. The bottom layer includes internal (designed and operated by

CBA’s technology group), private external and public clouds – all of which comply

with CBA’s cloud standards. CBA collaborated with several cloud providers and other

strategic partners to develop and mandate these cloud standards. The middle layer,

which consists of a cloud management system, matches the digitalized applications

hosted in the top-layer business platforms to the bottom-layer digital platforms

(within which data processing and storage actually occurs). The primary purpose of

the cloud management system is to dynamically determine which provider’s cloud

should execute an application and to assign this application to that cloud. This cloud

management system is located inside CBA’s firewall, and CBA manages and controls

the system. Actual computing could take place on either side of the firewall according

to the cloud management system’s on-demand allocations.

Figure 5-3

CBA’s Multi-Provider, Cloud-Based External Sourcing Model

Cloud Management System

Internal

Cloud

External

Private

Cloud

External

Public

Cloud

External

Public

Cloud

External

Public

Cloud

Business Platforms

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The cloud management system executes operational and managerial

processes on-the-go, depending on current cloud workloads, the prices and service

level agreements negotiated with providers, and general requirements for security,

reliability and availability. In addition, the structure shown in Figure 5-3 makes it

relatively easy, as long as architectural standards are met, to enhance business

platforms, to replace business platforms or to add new business platforms. Finally,

this structure is not limited by the number of connected cloud-providers, and it allows

for the rapid connection of newly-contracted providers and the rapid disconnection of

terminated providers.

A Recap and Look Ahead

Organizations implementing competitively-successful business models must be

able to quickly and competently apply numerous digitized and digitalized capabilities,

many of which are quite sophisticated and some of which have only recently emerged.

It would be simply impossible for any organization to accomplish this on their own

today. This chapter has explained why and how organizations externally source

many, if not most, of the capabilities being applied, and then described how the

external sourcing of capabilities is factored into organizations’ processes for digital

strategy formulation.

While the external sourcing of capabilities is important for both pipeline

organizations and network organizations, it is especially critical for network

organizations given these organizations’ intense reliance on digital platforms and

business platforms in the launch and evolution of their business models. The next

chapter describes the nature of business models within network ecosystems.

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Chapter 6. Digitalized Business Models for Network Ecosystems

Today, when you use your smartphone or tablet to post content on Facebook

statuses, to tweet, exchange photos, or search for information on the Internet, you

expect these types of Internet-based services to be provided mostly free-of-charge.

In economic terms, this amounts to a vast consumer surplus being provided by

organizations offering such services. Why do organizations (e.g., Facebook, Twitter,

WhatsApp, Google, etc.) offer these free services? The not-so-subtle answer is quite

straightforward – to generate revenue streams (via advertising or access fees) by

enabling other organizations to touch an expanding network of consumers or to gain

access to information about these consumers.

But, how does this occur? Most often, it occurs through the creation of a

network (market-focused) ecosystem, with the core transaction of the market being

the free service: a Facebook post, a Twitter tweet, a WhatsApp photo-share, or a

Google Internet search. The core transaction of a network ecosystem is the

primary market exchange activity driving both producers and consumers to an

ecosystem’s market platform. The market platform of a network ecosystem is the

organized collection of digital and business platforms that hosts the content and

functionalities that establish, operate and govern the ecosystem’s market. In order

to better grasp the nature of a network ecosystem, let’s take a closer look at Google

and Facebook. Also, for the ease of understanding, we will refer to the networks

being brought together within a network ecosystem as communities.

The core transaction enabled by Google is a consumer’s search for specific

content (some unit of information) believed to exist on one or more producer websites

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(see Figure 6-1). Note especially the third community involved with Google’s

ecosystem: advertisers. Having developed state-of-the-art search algorithms and an

innovative auction scheme for selling advertising associated with specified search

outcomes, Google has built a business model that profitably monetizes Internet

search by attracting large customer and advertiser communities. Interestingly,

considerable overlap does exist across the three communities interacting through

Google’s search platform: website producers and advertisers do Internet searches

(that is, act as consumers), website producers do advertise, and advertisers do place

content on websites.

Figure 6-1

Google’s Network Ecosystem

Consumers Seeking

Information

Advertisers Producers of Websites

• Relevant, useful information

• Ease of use • Access from anywhere

• Increased traffic • Revenue opportunities • Access to network of

advertisers

• Access to network of potential buyers

• Measurable ROI on ads • Precise campaign control:

pay for clicks

Google’s Market

Platform

The core transaction enabled by Facebook is a person’s posting of content

(accompanied by Facebook immediately notifying the consumer’s friends of the

posting). As depicted in Figure 6-2, the person posting content is a member of a

producer community and the friends wishing to see the posted content are members

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of a consumer community. Somewhat unique to social media sites, these consumer

and producer communities essentially overlap their memberships (aside from pure

lurkers within the consumer community). Note also that Facebook’s ecosystem

involves two additional communities: advertisers and Facebook App producers.

Facebook generates revenue streams from these advertisers and App producers.

Figure 6-2 Facebook’s Network Ecosystem

Consumers Seeking Content

Advertisers Producers of Content

• Relevant, useful content

• Ease of use • Access from

anywhere

• Increased traffic • Revenue opportunities • Access to network of

advertisers

• Global audience of potential buyers

• Measurable ROI on ads • Precise campaign control:

pay for clicks

Facebook’s Market

Platform

Producers of Facebook

Apps

• Access to networks of consumers & producers

• Revenue opportunities

• Access to network of advertisers

This chapter introduces intuitive ways of thinking about network ecosystems

and about the digital and business platforms used to orchestrate the market spaces

established by network ecosystems. The following topics are covered:

 Why Network Ecosystems Exist

 Crowd-Based Capitalism

 Digitalizing Network Ecosystems

 Blended Organizations

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Why Network Ecosystems Exist

In explaining the economic concepts that underlie network ecosystems, we use

the example of a simplified hypothetical social media ecosystem (see Figure 6-3).

Here, community members take on the roles of producers and consumers in order to

share content. By sharing content – and, hence, gaining exposure to each other’s

likes, dislikes, experiences and perspectives - members enrich their relationships

with each other. What is the value proposition that drives a person to join,

participate, and remain in a social media ecosystem? It is the promise of more-

intensively sharing content with individuals with whom a personal relationship

already exists or of sharing content with individuals with whom no (or, at best, a

casual) personal relationship currently exists, but with whom a richer personal

relationship is desired.

Figure 6-3 Simplified Social Media Ecosystem

Consumers Seeking Content

Producers of Content

Social Media

Platform

Social Media Community

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This social media ecosystem value proposition is driven by what economists

refer to as network effects. Stated simply, as the social community grows linearly,

the number of possible relationships amongst the community’s members grows

exponentially: 1 member - 0 possible relationships, 2 members – 1 relationship, 4

members – 6 possible relationships, 12 members – 66 possible relationships, 100

members – 4,950 possible relationships, and so on. Bigger networks, as a general

rule, are more valuable to participants; thus, network effects give network

ecosystems with the largest participant communities an advantage that is hard for

competitors to overcome. We explore network effects further, starting with two-

sided markets, moving on to multi-sided markets, and concluding with a discussion

of winner-take-all markets - the competitive endgame of a market-focused network

ecosystem.

Network Effects

Network effects, or what economists term a network externality, refer to

situations where the worth of or demand for a value-unit grows as an exponential

function of the number of current consumers of a value-unit and/or the number of

complements available to these consumers. A complement increases the perceived

worth of a value-unit. A good example of a complement would be the apps available

for a particular social media ecosystem, e.g., apps that make it easier to manipulate

and share content across the ecosystem. Would you be more inclined to join a social

media ecosystem that had more or fewer of your current friends as participants?

And, is this more likely for larger or smaller social media ecosystems? Now, given

two social media ecosystems comparable regarding the likelihood of you being able

to share content with your friends, would you prefer the ecosystem with more or

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fewer valued complements (e.g., an image manipulation app)? And, would app

producers be more inclined to create apps for larger or smaller social media

ecosystems? This is the power of network effects!

How can firms capture the opportunities available through positive network

effects? Positive network externalities occur only when a customer network is

satisfied with – better yet, enthused about – the value-unit being offered. Much of

Apple’s surge in product success (iPod, iPhone, iPad, iTunes, iMusic, etc.) is a direct

result of positive word-of-mouth chatter. In contrast, negative customer experiences

and perceptions can be devastating.

The competition between HD DVD and Blu-ray as the standard for DVD players

provides an example of network externalities in action. Consider this quote from

Matthew Smith, a former SVP of merchandising for Blockbuster:31 “The consumers

are sending us a message. I can’t ignore what I’m seeing. Blockbuster has been

renting both Blu-ray and HD DVD titles in 250 stores since late last year and found

that consumers were choosing Blu-ray titles more than 70 percent of the time.”

Relatively quickly, word-of-mouth and consumer purchase decisions led to a positive

network effect for Blu-ray titles, subsequent growth in the number of Blu-ray titles

offered for sale or rent relative to the number of HD titles, and Blu-ray ultimately

winning the DVD standards war.

Because of the power of network effects, it is critical for network ecosystems

to exploit the influence of word-of-mouth and enlist their communities in growing

both community membership and member participation within a community.

31 R. Harris, “Blu-ray vs. HD DVD: Game Over,” http://blogs.zdnet.com/storage/?p=149.

http://blogs.zdnet.com/storage/?p=149

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Another tactic for capturing network effects with network ecosystems is to carefully

define the architectural standards enabling connectivity and interoperability and

promote these standards such that the standards become dominant in the network

ecosystem market space. Winning standards wars is critical as this increases the

number and variety of complements available to participants. A primary factor

behind Microsoft’s dominance in PC operating systems was the wide variety of

software applications compatible with the Windows operating system. This reinforces

the dominance of Windows in the market for PC operating systems. Firms become

successful in standards wars either by leveraging their brand and existing market

presence (e.g., a Microsoft, an IBM, an Apple, a Google, etc.) or by forming alliances

with other firms and collectively engaging in persuasive tactics to influence an

industry-wide movement toward a favored standard (e.g., Bluetooth, GSM for

mobility services, Android for smart phones, etc.).

Two-Sided Markets

A key notion for understanding the nature of network ecosystems involves the

economics of two-sided markets.32 With a two-sided market, the ecosystem

owner/builder – the network orchestrator – brings together two distinct communities

to engage in value-unit exchanges. Most typically, this is accomplished by growing

one side of the market as a means of attracting participants to the other side of the

market. The two sides of the network ecosystem are perhaps best thought of as a

subsidy-side and a money-side, with the ecosystem’s market platform providing

32 T. Eisenmann, G. Parker and M. Van Alstyne, “Strategies for Two-Sided Markets,”

Harvard Business Review, October 2006, pp. 92-101.

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the rules, functionalities and resources to attract participants and to facilitate value-

unit exchanges. As a general rule, the subsidy-side is provided incentives to

participate in a network ecosystem as the primary role of the subsidy-side is to attract

the money-side, from which revenues are generated. The basic idea, thus, is to grow

the subsidized community to the point that its size becomes sufficient to attractive

money-side participants willing to pay a fee to gain access to the subsidy-side

participants.

As an example of a two-sided market, consider Figure 6-4, which depicts a

generic job-recruiting network ecosystem, e.g., CareerBuilder, Monster, Job.com,

etc. The subsidy-side is the community of individuals looking for a job. By heavily

subsidizing (free?) participation and by offering useful rules (e.g., privacy),

functionalities (e.g., resume-builder) and resources (e.g., career advice content), a

large pool of job candidates is built. If this pool of job applicants is large and of high

quality (e.g., broad ranges of skills and experiences), a high likelihood exists that a

sizable pool of recruiters will be attracted despite the participation fees being charged

to these recruiters (typically, a recruiter might be charged a modest fee to post a job

opportunity, a slightly larger fee for each match that occurs, and a much larger fee

if and when an applicant is offered a position).

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Figure 6-4 Generic Job Recruiting Network Ecosystem

Applicants

(Consumers of Jobs)

Recruiters

(Producers of Jobs)

Market Platform

Rules Functionalities Resources

Another, quite different, example of a two-sided market involves Adobe and

its Adobe Reader and Adobe Acrobat software (see Figure 6-5). Before Adobe Reader

and Acrobat were released, the established standard for sharing and printing

documents was a tool called PostScript. In order to make inroads into the lucrative

document creation software market, Adobe made its document reader software freely

available (subsidizing the consumers of digital documents) and encouraged adopters

to share information about Adobe Reader and how to obtain it. With positive word-

of-mouth by a large number of Adobe Reader adopters, Adobe Reader became the

de facto standard for document reading and sharing. Once Adobe Reader became

the dominant document reader for viewing any type of document, Adobe was able to

sell its document-creation software, Acrobat, to all types of document creators:

publishers, law firms, authors, etc. While Adobe continues to give Adobe Reader

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away for free, it generates sizeable revenues through its Acrobat software (now

available only by lease, a more-profitable pricing tactic).

Figure 6-5 Adobe’s Two-Sided Market Business Strategy

Consumers of Digital Documents

Producers of Digital Documents

Market Platform

Software Products to Download

User Authentication & Account Management

Payment Systems Customer Support & User Manuals

What is important about Adobe’s strategy? Adobe could have enjoyed the

benefits of network effects by only offering Adobe Reader - by standardizing their use

around it, consumers of digital documents would be able to easily exchange

documents and read them on any type of device. However, would this positive

network effect benefit Adobe to the same extent it benefited Adobe’s customers? In

other words, would Adobe have been able to eventually sell Adobe Reader at a price

sufficient to generate a lucrative profit? What price could it charge without hurting

its ability to build a critical mass of document reader users? Adobe recognized that

rather severe limits existed regarding what people would be willing to pay for a

document reader. But, Adobe also recognized that it could generate substantial

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revenue from document-creation software given that it could achieve a large,

installed base of Adobe Reader users.

Figure 6-6 provides a more nuanced depiction of the logic underlying a two-

sided market. Note that two types of positive network effects are in play. The first

is called the same-side effect and refers to the possibility of network effects with

each side of the market. In the case of Adobe, as more people adopt Adobe Reader

for viewing documents, each is presented with more opportunities to easily share

documents. This represents a positive, same-side network effect for the adopters of

Acrobat Reader. Potential same-side network effects exist, as well, for document

producers. As more producers adopt Adobe Acrobat for document creation, more

opportunities arise for these producers to exchange content in order to create

bundled offerings.

Figure 6-6 Same-Side and Cross-Side Network Effects

Side #2 Side #1

Market Platform

Same-side effect

Cross-side effect

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The second type of positive network effect is called a cross-side effect. This

refers to the potential value that one side derives when there are more participants

on the other side. Again, using the Adobe example, adopters of Adobe Reader benefit

as more producers adopt the Adobe Acrobat document creation software (because of

the increase in the number of compatible digital documents), and document

producers benefit with an increase in the number of consumers reading digital

documents through the use of Acrobat Reader (a larger consumer market for

produced digital documents).

So far, our discussion has been based on the assumption that same-side and

cross-side network effects are always positive. This is not the case, as these network

effects could be negative. Refer back to the job recruiting network ecosystem

portrayed earlier as Figure 6-4. Are the same-side network effects positive or

negative? Does a growing pool of job applicants benefit each applicant participating

in the ecosystem? Does a growing list of recruiters benefit each recruiter participating

in the ecosystem? Possibly not, as this may translate into greater competition among

applicants for the best jobs, as well as greater competition among recruiters for the

best candidates. Even though each side benefits from positive, cross-side network

effects, the potential for negative, same-side network effects could limit the number

of job seekers or job providers willing to participate in the ecosystem.33

33 The way job recruiting network systems typically deal with negative, cross-side

network effects is to segment the pools of available jobs and applicants into ‘sub-markets’

that become more-level playing fields for both recruiters and applicants.

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Multi-Sided Markets

Increasingly, today’s network ecosystems are designed as multi-sided markets

rather than as two-sided markets. A multi-sided market involves more than two

actively participating communities. In this chapter’s introduction, we described a

three-sided market (the Google search network ecosystem) and a four-sided market

(the Facebook social media network ecosystem).

With multi-sided markets, each added community presents an opportunity to

generate additional revenue streams. Facebook, for example, receives revenue from

advertisers and from app producers. But, this potential for increased revenue is

accompanied by three management challenges:

 Creating and then evolving attractive value propositions for each

participating community.

 Identifying and optimizing positive same-side/cross-side network effects.

 Identifying and minimizing negative same-side/cross-side network effects.

As the number of communities participating in a multi-side network increases, the

complexity of these management challenges tends to increase in a nonlinear fashion.

Winner-Take-All Markets

Increasingly, the payoff gap between being the best competitor in a market

and the second-best is widening into a canyon. This applies to labor markets (e.g.,

professional athletes), to technology markets (e.g., technology producers), and

especially to network ecosystems. In explaining the nature of winner-take-all

markets, we begin with the most straightforward context – that of a digital

product/service.

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As positive network effects drive more consumers to adopt a product or

service, the product/service can gain a critical mass of adopters and become

dominant in its market space. This same phenomenon occurs with network

ecosystems. A critical mass of network ecosystem participants is achieved when the

momentum produced by an ecosystem’s positive network effects is unlikely to be

reversed by the entry into the market space of an appealing new network ecosystem,

regardless of how appealing this new ecosystem’s value-units might be. Think of the

market dominance held by Microsoft Windows and Office, by Google’s Android and

Gmail, and by Blu-ray DVD players and movies. In each of these cases, the

respective markets are said to have tipped over with the winner crowding out rival

products or services. A winner-take-all market, thus, refers to a market where

the potential exists that a critical mass of consumers will adopt one producer’s

products/services.

Nintendo’s entry into the home video gaming market nicely demonstrates how

competition unfolds in winner-take-all markets. In 1985, Atari was the dominant

firm in the video game market. By Christmas 1986, the Nintendo Entertainment

System (NES) had emerged as a very popular product, creating positive network

effects with both customers and, importantly, game developers, in turn attracting

even more customers. At some point, the market tipped over to Nintendo as the

dominant competitor. Once this occurred, game developers were willing to produce

their software exclusively for Nintendo for a two-year period – indicating the

significant rewards winners can obtain in winner-take-all markets. Microsoft’s

business strategies with its operating systems and its Office software suite reflect

similar competitive dynamics.

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Network ecosystems are particularly susceptible to winner-take-all markets.

Three factors tend to characterize winner-take-all network ecosystems:

 Strong producer economies of scale.

 Strong positive cross-side network effects.

 High consumer switching costs.

The latter factor is especially important. When participating in a competitor network

ecosystem is perceived as being costly (i.e., a non-trivial investment is required to

participate in a network ecosystem and this investment is then lost in moving to a

different ecosystem), consumers will be reluctant to either participate in multiple

network ecosystems or to switch ecosystems.

Importantly, not all market spaces are susceptible to winner-take-all market

dynamics. Consider the market space for daily deals, e.g., Groupon and

LivingSocial.34 Many early investors believed that strong cross-side network effects

would produce high stock valuations for Groupon and for LivingSocial. However, as

consumers participating in Groupon and in LivingSocial experienced very low

switching costs, little allegiance was shown to any one market platform with

consumers instead skipping through multiple platforms looking for the most attractive

deals. As one might expect, the high valuations have yet to materialize.

Generally, a market space susceptible to winner-take-all dynamics is most

likely to be seen as a winner-take-all network ecosystem when:

 Participants experience significant, positive network effects.

34 A. Haigu, “Strategic Decisions for Multi-Sided Platforms,” Sloan Management

Review, Winter 2014, pp. 71-80.

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 Participants are reluctant to move to a competing ecosystem.

 One of the network ecosystems begins to attract a majority of the new

participants entering the market space.

 This same ecosystem attracts an accelerating flow of participants from

competing ecosystems.

Competition in early-stage winner-take-all network ecosystem market spaces can be

fierce. More profitable competitors, because they are more profitable, are able to

invest more in R&D and to provide greater incentives to participants - enabling their

participating communities to grow even faster. This intense competition often results

in winner-take-all market spaces being dominated by just a few firms (two or three,

at most).

Crowd-Based Capitalism

The past decade has witnessed a reemergence of bartering, the earliest type

of market-focused ecosystem, in the form of crowd-based capitalism – that is, a

two-sided market that brings together two crowds, or communities, of individuals:

one community possessing an under-used asset or skill (the value-unit) and the other

possessing a short-term need for such an asset or skill. This new bartering ecosystem

differs from the original in two important ways:

 The medium for the short-term sharing of the value-unit is money. In other words, the person that owns the shared value-unit gets paid by the person being granted short-term use of the value-unit.

 The market is enabled through a digitalized market platform built, managed and owned by a third-party, the network orchestrator.

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This form of market-focused ecosystem is the basis for what is popularly referred to

as to as the sharing economy.35 Essentially, digital technologies (e.g., the Internet,

interconnected smart devices, social media, payment systems, trust systems, etc.)

are extending peoples’ options for obtaining goods and services beyond family,

friends, neighborhood stores and national/global retailers toward crowds of

entrepreneurs.

Table 6-1 lists some of the crowd-based network ecosystems that have

emerged over the last decade. As you look over this listing, notice the attributes of

value-units likely to be shared via crowd-based capitalism: low-use and high-value.

Low-use implies unused capacity (of an asset) or idle time (of a skill-provider); high-

value infers that the value-created – the consumer payment subsequently

appropriated and shared by a producer (an asset-owner or skill-provider) and a

network orchestrator – will exceed the costs associated with an exchange.

35 A. Sundararajan, The Sharing Economy: The End of Employment and the Rise of

Crowd-Based Capitalism, MIT Press, Cambridge, MA, 2016.

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Table 6-1 Examples of Crowd-Based Network Ecosystems

Crowd-Based Network Ecosystem

Value-Unit Examples

Educational Services Idle Skill Capacity SkillShare,TradeSchool, Udemy

Freelance Work Idle Expertise Capacity Amazon Mechanical Turk, InnoCentive, TopCoder, Upwork

Fundraising Idle Capital AngelList, FundiingCircle, Kickstarter

Handyman Chores Idle Labor Capacity Handy, TaskRabbit, TimesFree

High-End Fashion Unused Clothes Designer24, Rendevoux, Rent My Wardrobe, Rent the Runway, StyleLand

Lodging Unused Housing Capacity Airbnb, CouchSurfing

Personal Services Idle Labor Capacity Lux, Postmate, Shyp, Washio, Wag

Philanthropy Idle Capital DonorsChoose, Kiva

Transportation Unused Automobile

Capacity BlaBlaCar, Getaround, Lyft, Turo, Uber, Zipcar

Digitalizing Network Ecosystems

Network ecosystems existed prior to the eras of digital disruption. For

example, three pervasive pre-digital network ecosystems were those involving (as

network orchestrators) real estate brokerages, independent insurance agencies and

travel agencies. In these network ecosystems, the network orchestrator (via the

work processes shown in Figure 6-7):

 Built up a portfolio of offerings from a producer community.

 Attracted a consumer community.

 Enriched producers’ offering creation capabilities.

 Enriched consumer demand.

 Matched the needs of individual consumers with the producer’s offerings.

 Facilitated both exchange transactions and exchange fulfillment.

 Worked to retain the members of the producer and consumer communities.

With digitalized network ecosystems, the vast majority of work processes are carried

out through a market platform (i.e., a collection of digital platforms and business

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platforms). The digitization and digitalization reflective of the three eras of digital

disruption (see Table 6-2) have produced two types of effects on network

ecosystems. First, the pre-digital network ecosystems have either radically

transformed themselves through both digitalization and specialization or have exited

their markets. Second, scores of new network ecosystems have emerged and

continue to emerge (see Table 6-3).

Figure 6-7 A Network Orchestrator’s Managerial and Operational Processes

Indirect Materials & Supplies Procurement

Human Resource Recruitment & Development; Benefits Management

Financial Services; Accounting Services

Business/Digital Strategizing; Administrative Services

Matching Consumer Demand

With Producer Supply

Growing a Producer

Community

Growing a Consumer

Community

Transaction Execution Efficiency & Safety

Exchange Fulfillment Execution & Safety

Retaining Producer

Community

Retaining Consumer

Community

S u

p p

o rt

P ro

c e

s s e

s P

ri m

a ry

P ro

c e

s s e

R&D; New Services Development; New Services Rollout

Digital Technology Services & Management

Facilitating Producer

Value-Unit Creation

Stimulating Consumer Demand

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Table 6-2 Evolution of Network Ecosystems

Era Value-Units Digitization & Digitalization Exchange Currency

Trust Systems

1 Digital complements

 Data/document standards  Point-to-point connectivity  Intra- and inter-

organizational (managerial and operational) process efficiencies

 Banking system

 Credit/debit card systems

 Government & 3rd- party institutions

 Contracts  Brand  Social capital

2 Digital value- units

 Internet  One-to-many connectivity  Data, process, analytic and

collaboration platforms  Social media  Omni-channel producer-

consumer interaction

 Digitalized payment systems

 3rd-party digital trust seals

 Consumer monitoring (product & producer reviews)

3 Social complements

 Many-to-many connectivity  Smart devices  Big Data platforms  Big Data analytic platforms  Social messaging platforms

 Reputation  Social capital  Bitcoins

 Community monitoring

 Peer-regulation  Self-regulation

Table 6-3 Examples of Network Ecosystems

Era Variation Examples Community 1 Community 2 Community 3

Services Platform Visa, MasterCard Producing

Organizations Banks Consumers

Digital Architecture Microsoft’s PC

Operating System Application Producers

PC Producers Consumers

B2B Horizontal Marketplace

Alibaba.com, Thomasnet.com

Producing Organizations

Advertisers Consuming

Organizations

B2B Vertical Marketplace

e-Steel, Farms.com

Producing Organizations

Advertisers Consuming

Organizations

B2C e-Commerce Amazon

Marketplace Producing

Organizations Advertisers Consumers

C2C e-Commerce eBay, Craigslist Producers Advertisers Consumers

Search Platform Google Content

Producers Advertisers

Content Consumers

Social Media Platform

Twitter Content

Producers Advertisers

Content Consumers

Crowd-Based Capitalism

Airbnb, Uber Asset/Skill

Owner Advertisers

Asset/Skill User

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Era 1

Two types of network ecosystems emerged during Era 1. The first of these

applied proprietary, point-to-point connectivity to create new markets based on

digitalized services. Perhaps the most familiar example is that of credit card

providers, such as Visa and MasterCard. By establishing a digitalized (in part)

services platform, merchants were able to offer a convenient, safe payment channel

to consumers and banks gained a new revenue stream.

The second type of network ecosystem that emerged involved proprietary

architectures for digital products and these product’s complements. By promoting

and licensing a product architecture that tips over a market, the architecture’s creator

is able to sustain high-margin sales for a lengthy period of time. Perhaps the most

familiar example of this is that of personal computer (PC) operating systems, such

as Microsoft OS (and then Windows). The Intel PC operating system market tipped

over to Microsoft OS because the PC application software community gave priority to

developing products to run on OS (and then on Windows) – increasing the likelihoods

that software producers would gain large revenue streams and that consumers

purchasing PCs would be able to run needed software.

Era 2

The availability of one-to-many connectivity enabled by the Internet triggered

a rapid growth in network ecosystems. Four distinct types of e-commerce

ecosystems emerged: B2B horizontal (producers offering a broad range of value-

units to any type of consumer-business) marketplaces, B2B vertical (producers

offering value-units to consumer-businesses in a single industry) marketplaces, B2C

marketplaces, and C2C marketplaces.

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B2B marketplaces generally operate in the upstream portions of industry value

streams. Connecting (raw material and component) suppliers to producers, these

intermediaries aim to disintermediate established supplier-producer relationships

with the promise of a more efficient market. The value-propositions of these B2B

marketplaces vary considerably, as reflected in the four levels of functionality that

can be established between producers and consumers: information exchange, value-

unit exchange/fulfillment transaction execution, logistical flow coordination, and

collaboration enablement.

B2C and C2C marketplaces generally operate in the downstream portions of

industry value chains. Connecting finished goods producers to consumers, these

intermediaries aim to disintermediate established retailer-consumer relationships,

again with the promise of a more efficient market. Notice in Table 6-3 (shown earlier)

that the example given for an Era 2 B2C network ecosystem is Amazon Marketplace

rather than Amazon, given Amazon Marketplace’s objective of bringing together a

broad community of small producers to interact with Amazon’s consumer community.

Two examples of C2C marketplaces, eBay and Craigslist, are used to illustrate the

variety that exists. For example, eBay utilizes an auction pricing mechanism and

offers the parties of value-unit exchanges a range of transactional and fulfillment

services, while Craigslist utilizes fixed prices and offers little in the way of

transactional and fulfillment services.

Era 3

The digital technologies associated with the third era of digital disruption –

most notably many-to-many connectivity, smart devices, social messaging and peer

regulation – triggered a fresh, explosive wave of network ecosystems focused on

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enabling and exploiting individuals’ desires to maintain anytime, anywhere

connections with the people, institutions and opportunities that are most important

to them. As listed earlier in Table 6-3, the dominant types of Era 3 network

ecosystems involve digital services (e.g., search, photo sharing, music sharing, etc.),

social media, and crowd-based capitalism. As many of these network ecosystems

involve participants and activities outside of the purview of established markets and

institutions, new forms of community-based and peer-based trust systems have

emerged. For example, there are limited regulations at present to assure consumers

of the accuracy of host-provided Airbnb lodging descriptions. In response, Airbnb

has implemented two trust mechanisms: the capturing and reporting of consumers’

lodging reviews, and host identity verification systems that combine the digitized

social capital of social media with governmental ID infrastructures. In addition,

Airbnb proactively involves hosts and consumers in developing and evolving

standards and expectations guidelines that must be agreed-to by hosts and

consumers.

Blended Organizations

Today’s most successful organizations are increasingly exhibiting the qualities

of both pipeline ecosystems and network ecosystems, and in the process becoming

a blended organization. This primarily occurs via one of two approaches:

 An organization operates multiple, largely independent business models,

some of which are executed as a pipeline organization and others as a network organization.

 A pipeline organization incorporates a private or semi-private network- ecosystem as a means of enhancing efficiency, effectiveness or both.

Each of these approaches is briefly described.

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The organization that best illustrates the first approach of operating both

pipeline ecosystem and network ecosystem business models is Amazon. Amazon’s

initial business model was that of a pipeline ecosystem retailer: interacting physically

with suppliers to stock product inventories, then interacting digitally with customers

to sell these products, and then interacting physically and digitally with third-party

package delivery providers in fulfilling customers’ purchases from Amazon’s brick-

and-mortar distribution centers. Over time, Amazon has expanded its portfolio of

business models to include operating as:

 A pipeline ecosystem retailer that stocks, sells and delivers digital products

and smart devices.

 A pipeline ecosystem producer of digital technology services for businesses

and for individuals.

 A network ecosystem orchestrator of media streaming services.

 A network ecosystem orchestrator of B2B and B2C marketplaces.

While Amazon’s various business models are targeted at distinct markets, they all

make extensive use of Amazon’s world-class capabilities to design, build, operate and

evolve digital platforms and business platforms.

The second approach to becoming a blended organization involves a focus on

upstream, internal and/or downstream processes.

With regard to upstream processes, for many producers (e.g., automobiles,

durable appliances, electronic products, etc.) a few of the raw materials used in

procured components represent a significant percentage of production costs. Part A

of Figure 6-8 portrays a traditional upstream value stream for a pipeline

manufacturing organization. Note that value stream participants engage with two

largely-independent markets: Market 1 involves raw material suppliers and

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component suppliers, and Market 2 involves these component suppliers and the

producers. Because of the potential for supply/demand imbalances and information

asymmetries, component suppliers tend to be disadvantaged in Market 1, passing on

market inefficiencies to the manufacturer in the form of higher prices and logistical

delays in Market 2. Part B of Figure 6-8 introduces the notion of a supply hub as a

means of overcoming these potential market inefficiencies in this upstream portion

of the traditional pipeline value stream.36 Here, the manufacturer creates a pseudo-

market (Market 3) within the established market for raw materials. After aggregating

raw material requirements and production plans across all component suppliers, a

producer is able to apply a comprehensive understanding of component supplier

demand (volumes and timings) in negotiating prices with raw material suppliers on

behalf of the component suppliers.

36 A. Agrawal, A. De Meyer and L.N. Van Wassenhove, “Managing Value in Supply

Chains: Case Studies on the Sourcing Hub Concept,” California Management Review, Winter

2014, pp. 23-54.

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Figure 6-8 Introducing a Supply Hub into a Pipeline Ecosystem Value Stream

Component Suppliers

Markets

Raw Material Suppliers

Producer Component Suppliers

Markets

Raw Material Suppliers

Producer

A. Traditional Value Stream B. Raw Material Supply Hub

1 2

With regard to internal processes, organizations can obtain a variety of benefits

(e.g., productivity, employee goodwill, reputation enhancement, etc.) by employing

a private network ecosystem solely inside their boundaries. The platforms used with

such internal marketplaces can be developed in-house or licensed from a third-party

platform-provider. A nice example of using a private market ecosystem is that of

Zimride, the ride-sharing platform that Lyft’s founders licensed to universities and

businesses as a private ride-sharing service used solely by a subscribing

university’s/business’s employees.37 Zimride provides a useful benefit for employees

in the form of a convenient and safe mechanism for solving employees’ commuting-

to-work problems and positions the organization as being socially-responsible, a

quality likely valued by many of the organization’s stakeholders.

37 R. Lawler, “Lyft-Off: Zimride’s Long Ride to Overnight Success,” TechCrunch, August

29, 2014: https://techcrunch.com/2014/08/29/6000-words-about-a-pink-mustache/

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With regard to downstream processes, Table 6-4 provides examples of three

organizations that have appended C2C marketplaces as complements to their

traditional sales channels. When carefully conceived and executed, the network

effects engendered can be exploited to enrich a brand and grow the consumer base

without cannibalizing pre-existing sales channels.

Table 6-4 Introducing a C2C Marketplace into a Pipeline Ecosystem Value Stream

Pipeline Organization

Network Ecosystem Strategic Value

Ikea Group Ikea Family loyalty program community: members post & sell used Ikea items.

 Supports Ikea’s eco-friendly ethos.

 Opens up room in members’ homes for new Ikea items.

Patagonia Partnership with eBay: consumers easily sell used Patagonia clothing items.

 Supports Patagonia’s eco-friendly ethos.

 Increases the visibility of the Patagonia brand both online and on the street.

DM (German

Drugstore Chain)

Sponsors & arranges clothing swap events, at which makeup/styling products & techniques are demonstrated.

 Generates new consumers in the targeted demographic.

 Enriches brand by leveraging the green spirit of sharing rather than buying.

 Gains brand visibility as these events are featured on social media and by fashion bloggers.

A Recap and Look Ahead

Network ecosystems, as introduced and fleshed out in this chapter, represent

a rapidly increasing segment of most countries’ GNPs. In the process, existing

markets and industries are being transformed and new markets and industries are

being formed. The next chapter examines the digital strategy formulation process

for network orchestrators, regardless if a network orchestrator offers a market

platform for a public or private network ecosystem.

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Chapter 7. Digital Strategy Formulation for Network Organizations

Within a network ecosystem, market participants connect and conduct

interactions with one another using a market platform provided by a network

organization – the network orchestrator. While interacting, market participants make

use of platform content/functionality to exchange data, exchange items of value

(e.g., value-units, monetary payments, etc.), and collaborate in co-creating new

value-units.

This chapter discusses digital strategy formulation within network

organizations. Because of the huge variety of network ecosystems, our discussion

will be in the form of general concepts and frameworks – that are then grounded

through two different network organizations (see Figure 7-1 and Table 7-1):

TopCoder38,39 and Metropia40. TopCoder is an established organization that has

constituted a single network ecosystem handling all of TopCoder’s work activities;

Metropia is a relatively young organization that aims to constitute many local

(geographically-bound) network ecosystems.

38 H. Tajedin and D. Nevo, “Value-Adding Intermediaries in Software Crowdsourcing,”

47th Hawaii International Conference on System Sciences, IEEE, January 2014, pp. 1396-

1405. 39 H. Tajedin, D. Nevo and R.W. Zmud, “Beyond Matching: Intermediaries’ Market

Design and Market Development Roles in Software Development Crowd Markets,” working

paper, Rensselaer Polytechnic Institute, January 2017. 40 The Metropia material has been gathered by one of this book’s authors through

interviews with two members of Metropia’s leadership team, including the founder/CEO.

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Figure 7-1 The Communities Participating in TopCoder and Metropia

Clients Developers

Market Platform

TopCoder

Commuters

Market Platform

Metropia

Mobility Service

Providers

Merchants Government

Agency

Table 7-1 Describing and Contrasting TopCoder and Metropia

TopCoder Metropia

Core Transaction

Delivering a solution (software code) that satisfactorily meets a client’s specification (a software project)

Provide an optimal mobility solution for moving the commuter from point A to point B

Community 1 Clients

(money-side) Commuters

(money-side)

Community 2 Developers

(subsidy-side) Mobility Providers

(subsidy-side)

Community 3 Merchants

(subsidy-side)

Community 4 Government Agencies

(money-side)

Market Geographic Scope

Global Local

Maturity Established Young

Founded in 2001, TopCoder offers crowdsourced software design and

development services to (mostly North American Fortune 500) clients across

numerous industries. As of May 2015, TopCoder had built a community of over

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700,000 developers, of which nearly 20% were active. Metropia was founded in 2010

as a Mobility-as-a-Service (MaaS) platform for commuters in congested urban areas.

At the time this case material was collected, Metropia was in five urban areas (Austin,

El Paso, Houston, New York City and Tucson) and was in various stages of rolling out

platforms in five additional urban areas.

The chapter introduces intuitive ways of thinking about the digital strategies

formulated by network organizations as they establish and evolve network

ecosystems by covering the following topics:

 Business Models for Network Organizations

 Strategic Intent for Network Organizations

 Market Design and Market Platform Design

 Digital Strategy Formulation

 Sustaining a Network Organization’s Market Position

Business Models for Network Organizations

Business models for network organizations (see Figure 7-2) differ from those

of pipeline organizations in two primary ways:

 The presence of an additional business model element – the number of communities interacting through a network organization’s market platform.

 The existence of a unique value proposition and a unique profit model for each of the interacting communities.

Typically, two of these interacting communities are directly associated with the core

transaction: the producer and the consumer of the value-unit(s) being exchanged via

the constituted market. Other interacting communities are then attracted by the

opportunity to touch producer participants, consumer participants, or both. A

network organization’s success is ultimately linked to (1) the (continuing) presence

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of engaging value propositions for each of the interacting communities, and (2) a set

of community profit models that additively produce a profitable revenue stream.

Figure 7-2 Business Models for Network Organizations

Community Value

Propositions

Community Profit Models

Core Capabilities

Dynamic Capabilities

Number of Communities

Similar to pipeline organization business models, network organizations deliver

value propositions and profit models through sets of core capabilities and dynamic

capabilities. As might be expected, these capabilities tend to vary somewhat with

regard to the community (or communities) being targeted. Consequently, capability

development and management requires the balancing (for effectiveness and

efficiency purposes) of local (a single community) and global (all communities)

interests.

Table 7-2 provides an overview of TopCoder’s business model. Here,

tournament-style crowdsourcing is applied to incentivize a developer community (the

producer) to deliver software solutions (the value-unit) to a client community (the

consumers). Importantly, the client community is the money-side of the market,

while the developer community is the subsidy-side. Client software projects are

broken into a series of contests (project specification, architecture design, version

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specification, version design, version coding/testing, etc.), with three (or so) winning

solutions selected for each contest. The client accepts one of these winning solutions

as the overall winner and the project-related work then moves on to the next contest.

The core transaction is contest design and fulfillment – the delivery of a satisfactory

contest solution to a client.

Table 7-2 TopCoder’s Business Model

Business Model Element

Description

Client Community Value Proposition

Obtain quality code (e.g., tested against specifications, secure, etc.) within agreed-on schedule and budget.

Client Community Profit Model

 Clients pay subscription fee.  Clients provide contest incentives (payments to winning

developers).

Developer Community Value Proposition

Earn income, acquire new skills, demonstrate skills and interact with forward-looking technologists.

Developer Community Profit Model

No associated revenue stream (the developer community is the subsidy-side of this network ecosystem).

Core Capabilities

 Software development & software development management.  Translating software development projects into contests.  Contest design & fulfillment.  Acquiring, developing and retaining community participants.  Creating a sense of community for participants.

Dynamic Capabilities  Sensing & identifying software development trends &

innovations.  Sensing & identifying new participant sources.

Metropia’s business model (summarized in Table 7-3) is more complex. The

core transaction involves a commuter desiring to move from point A to point B by

selecting one of a number of offered mobility solutions: self-navigation (driving,

walking, bicycling), toll roads, car-pooling, ride-sharing, car-sharing, bike-sharing,

ride-hailing, various mass transportation modes, etc. The mobility service portfolios

vary across the local market platforms, and the offered solutions are produced

through the application of sophisticated traffic algorithms on massive collections of

historical and streaming traffic-related data. The commuter earns reward points for

selecting solutions that contribute to the common good, and these reward points are

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exchanged for goods/services at participating merchants. Each local platform is

supported by one or more governmental agencies, motivated by a desire to improve

the transportation common good by changing commuter behaviors and by obtaining

enhanced capabilities for collecting and analyzing transportation-related data.

Table 7-3

Metropia’s Business Model

Business Model Element Description

Commuter Value Proposition  Provide optimal mobility solutions for going from point A to point B.  Provide reward points for contributing to the common good .

Commuter Profit Model  Subscription fees & transaction fees.

Provider Value Proposition  Gain exposure with the commuter community.  Gain revenue from servicing the commuter community.

Provider Profit Model  Negotiated mobility services costs.

Merchant Value Proposition  Build reputation with commuter community.

Merchant Profit Model  Exchange goods/services for reward points.

Government Agency Value Proposition

 Enhance commuting common good.  Obtain mobility-related data.  Obtain knowledge from Big Data analytics.

Government Agency Profit Model

 Revenue (from developing, launching & enhancing local market platforms).

 License fees (from Big Data/analytics products & services).

Core Capabilities  Traffic optimization & Big Data analytics.  Interconnect market platform with government/provider processes.  Relationship management (all communities).

Dynamic Capabilities  Sensing and identifying new mobility services and providers.  Sensing and identifying new government regulations.

Strategic Intent for Network Organizations

A strategic intent directs, rather than constrains, organizations’ digital

strategists’ thought processes as competitive actions are formulated and as the

capabilities necessary for implementing these and future competitive actions are

developed. With pipeline ecosystems, strategic intents are established to emphasize

and evolve a dominant consumer value proposition – and, hence, the capabilities that

enable the value disciplines (i.e., operational excellence, customer intimacy and/or

product leadership) that underlie this value proposition. Given the multiplicity of

value propositions that co-exist with network ecosystems, these organizations’

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strategic intents tend to be considerably broader than those of their pipeline

organization counterparts. In essence, network organizations’ digital strategists face

a more complex and more dynamic competitive space than do pipeline organizations’

digital strategists - think about not only juggling more balls, but balls that are

erratically moving about.

Table 7-4 illustrates the primary value propositions offered by TopCoder and

Metropia. As suggested, all three value disciplines are critical to the competitive

success of both of these organizations.

Table 7-4

TopCoder’s and Metropia’s Value Propositions

Community Value Proposition

Value Disciplines

Operational Excellence

Customer Intimacy

Product Leadership

TopCoder

Clients Obtain software code that meets specifications within agreed-on schedule & budget.

Developers Earn income, develop skills, demonstrate skills and interact with forward-looking community.

Metropia

Commuters Obtain optimized mobility solutions & reward points.

Providers Gain exposure to and services revenue from the commuter community.

Merchants Build reputation within the commuter community.

Government Enhance the transportation common good, access a new source of traffic data, and enhance Big Data analytic capabilities.

Market Design and Market Platform Design

The competitive moves taken by a network organization’s leadership team can

be viewed, conceptually, as focused on one of two levels of design: market design,

or moves aimed at enhancing the efficiency of the constituted market; and, market

platform design, or moves aimed at building market platform content/functionality

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in order to enhance community participants’ satisfaction with offered value

propositions. Table 7-5 describes each of these design levels by providing the

primary attributes serving as each level’s focus and offering examples of competitive

moves addressing these attributes. While moves taken at either of these design

levels can affect both market efficiency and participants’ satisfaction, distinguishing

competitive moves in this manner can ease the cognitive and communication efforts

of leadership team members and of digital strategists as they formulate their

organizations’ digital strategies. It is also important to note that taken competitive

moves can be initially implemented by fully-digitalized processes (i.e., built into a

platform’s functionality) or by staff being supported through digitalized processes.

Over time, the operational and managerial processes associated with competitive

moves handled initially by humans are typically digitalized as the processes are

institutionalized.

Table 7-5 Market Design and Platform Design

Attribute Targets of Competitive Moves

Market Design

Market Thickness

 Recruitment of community members.  Retention of community members.

Market Congestion

 Maintenance of an effective balance in community sizes.  Occurrence of value-adding matches.

Market Safety

 Perceived fairness & trustworthiness of market transactions.  Perceived trustworthiness of platform content.  Perceived level of platform security.

Market Platform Design

Core Transaction Fulfillment

 Core transaction fulfillment rate.  Participants’ satisfaction with community value propositions.

Ease-of-Use  Participants’ abilities to access platform functionality & content.

Data & Information Exchange

 Participants’ abilities to contribute data & information.  Participants’ abilities to interact with other participants.

Adaptability  Ease of adding or removing: communities, participants, platform

functionalities & platform content.

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Market Design

The objective of market design is to create the conditions most conducive to

efficient market operation. Three such conditions are suggested as being most

important:41,42

 Market thickness: ensuring sufficiently large numbers of producers and

consumers such that a strong likelihood exists that satisfactory producer- consumer matching will occur.

 Market congestion: ensuring the ease by which producers and consumers

are able to consider a sufficient number of alternatives in arriving at a satisfactory match.

 Market safety: ensuring that market transactions are sufficiently safe such that producers and consumers are willing to reveal or act on confidential information and are willing to keep the transactions inside the market.

Let’s now look more closely at each of these market design attributes.

A classic example for understanding market thickness is that involving credit

cards. What do you, as a consumer, value in a credit card? While things like reward

programs and interest rates are obviously important, you would not even consider a

credit card unless it was accepted by most of the merchants you patronize. What

leads a merchant to decide to accept a specific credit card? While setup costs and

transaction fees are clearly important, a merchant would hesitate to invest in a card

that was not held by a sizeable portion of the merchant’s customers. Invariably, the

decision by producers or consumers (or, in general, market participants) to join a

specific network ecosystem is largely a function of the size of the cross-side

community. Successfully resolving this chicken-and-egg problem represents a major

41 A.E. Roth, “What Have We Learned from Market Design?,” The Economic Journal,

March 2008, pp. 285-310. 42 H. Tajedin, Three Essays on Crowdsourcing as a New Mode of Organizing, 2016

Doctoral Dissertation, Schulich School of Business, York University, Toronto, CA.

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challenge for network organizations. Further, because of the learning costs borne by

participants engaging with a new market platform, ensuring sufficient market

thickness requires a simultaneous focus on attracting and on retaining participants.

Your first thoughts when hearing the term congestion is likely to bring up

images of difficulties faced by participants as they navigate through a market

platform in order to locate attractive value-unit matches. While such navigation

challenges can certainly deter market platform use and hinder market efficiency,

market congestion tends to be most problematic when the demand for available

value-units is highly skewed, resulting in too few participants being able to satisfy

their needs through a marketplace. To counter demand skewness, network

orchestrators need to undertake initiatives aimed at balancing demand by (1)

attracting or developing producers of the in-demand value-units, and/or (2)

educating consumers on how available value-units in less demand might as well

satisfy their needs.

Many potential threats to market safety arise when market participants

interact and carry out transactional exchanges via a market platform, such as:

 Is my exchange partner trustworthy?

 Is the market platform content trustworthy?

 Will all data or information I provide in carrying out a market transaction be treated in a confidential and protected manner?

 Will the value-unit(s) delivered to me meet my expectations?

 Will the value-unit(s) delivered to me be free of intellectual property or licensing concerns?

 Can I be confident that financial exchanges will be carried out in a secure and protective environment?

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If potential market participants develop safety-related concerns, one of two things is

most likely to occur. First, many of these potential participants will simply decide not

to participate. Second, many of the participants who do decide to participate will end

up identifying, but not consummating, a match; instead, matched participants will be

motivated to consummate the match (along with associated revenue streams)

outside the market platform.

Many of the competitive moves taken by TopCoder and by Metropia have been

aimed at enriching market design, with associated market platform functionality put

in place to enable or support the taken moves. Tables 7-6 and 7-7 illustrate these

market design competitive actions for, respectively, TopCoder and Metropia.

Table 7-6

TopCoder’s Market Design Competitive Moves

Primary Processes

Market Design

Attribute Competitive Moves

Grow Developer Community

Thickness  Talent teams engage in on-campus campaigns.  Talent teams run algorithm challenges (competitions).

Grow Client Community

Thickness  Sales teams target, market to and interact with potential clients.

Enrich Developer Skills

Congestion  Account teams induce clients to offer projects requiring hot skills.  Internal R&D offers projects requiring hot skills.

Enrich Client Demand

Congestion  Account teams broaden clients’ views of what can be done via software

development crowdsourcing and on the crowds’ capabilities.

Match Developers with Contests

Congestion  Account teams work with clients to break projects into contests.  Account teams modify contests not attracting sufficient developers.

Enrich Solution Fulfillment Safety

Safety  Staff managers and developer co-pilots monitor projects & contests.  Staff & developer-crowd assess solution completeness/trustworthiness.  Contest appeals process for non-winning developers.

Retain Developers Thickness  Contest reviews & project management increasingly outsourced to the

developer community.  Enrich the developer community through events & developer forums.

Retain Clients Thickness  Long-term contracts, strong client relationships, and the provision of

rich metrics regarding contest, project & client success.

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Table 7-7 Metropia’s Market Design Competitive Moves

Primary Processes Market Design

Attribute Competitive Moves

Grow Commuter Community Thickness

 Partner with government agency in promoting platform.

 Partner with an organization sponsoring a traffic-congesting event to promote platform.

Add a Provider Thickness  Leverage government agency (permitting &

regulatory) relationships with providers.

Grow Government & Merchant Communities

Thickness  Establish program managers/teams.

Enrich Commuter Perspectives

Congestion  Programs directed at broadening commuters’

understandings of mobility alternatives.

Enhance Data/ Algorithms Congestion  Continual improvement

Enhance Platform Safety Safety

 Reengineer reward points schemes, processes & algorithms to detect and to prevent fraud.

 Commuter data shared only in aggregate forms.

Retain Commuters Thickness  Threat of losing accumulated reward points.

Retain Government Agencies Thickness  Threat of losing data/analytic capabilities.

Market Platform Design: Digitalizing the Operational Domain

Table 7-8 describes five major operational purposes of all network

organizations’ market platforms. Most of the activities listed should be familiar to

you, but one may not: ancillary transactions. As explained earlier, the core

transaction refers to the market exchanges that bring a producer community and a

consumer community together. Ancillary transactions refer to transactions

associated with the value propositions that bring communities other than producers

and consumers to the platform. Perhaps the most familiar example of this distinction

can be seen with Google. Google’s core transaction involves finding satisfactory

matches between consumers’ search cues and producers’ website content. Google’s

ancillary transactions involve the placing of and clicking on the advertisements that

show up along with search results.

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Table 7-8 Operational Purposes of Network Organizations’ Market Platforms

Platform Purpose

Associated Activities

Community Hosting

 Adding a new community.  Removing an existing community.

Community Member Hosting

 Adding a new community participant.  Providing functionality & content through which participants can

develop & promote their needs & capabilities.  Removing an existing community participant.

Matching Facilitation

 Providing functionality & content enabling participants to identify matches aligned with sought value propositions.

 Providing functionality enabling participants to select a match.

Core Transaction Facilitation

 Providing functionality & content to negotiate & execute transactions.

 Providing functionality & content to verify completed transactions.

Ancillary Transaction Facilitation

 Providing functionality & content to negotiate & execute transactions.

 Providing functionality & content to verify completed transactions.

A number of critical operational performance requirements are reflected in

Table 7-8: ease-of-use (simplicity, multi-channel convenience, mobility and

flexibility), efficiency in executing platform functionalities, cost-effectiveness

(especially with regard to subsidy-side communities), scalability (as communities

grow rapidly), and adaptability (adding/removing communities, participants,

functionalities and content). Collectively, these performance requirements dictate

that network organizations’ market platforms adopt particular architectural features:

many-to-many connectivity, modularity, the tight-coupling of modules delivering

global (i.e., used by multiple communities, including internal staff) functionalities,

and the loose-coupling of modules delivering local (i.e., used by a single community)

and experimental functionalities.

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Market Platform Design: Digitalizing the Analytical Domain

The nature of network ecosystems – that is, communities with large numbers

of members, participants’ interaction within and between communities, participants’

navigation through the market platform provided by a network orchestrator,

participants’ transaction exchanges, etc. – results in the capture and generation of

huge amounts of data. These data can then be stored and organized for a variety of

analytical purposes, including:

 Learning about each community in order to better understand and anticipate community members’ capabilities, perspectives, desires, needs and expectations in order to grow/retain community members, to enhance value

propositions and to enhance profit models.

 Learning about participants’ platform navigation behaviors, as well as

participants’ use of platform functionality and content, in order to improve ease-of-use, to enhance community value propositions and to enhance profit

models.

 Learning about the core transaction and, if they exist, ancillary transactions in order to better understand, improve and predict fulfillment success in

order to enhance value propositions and to enhance profit models.

Importantly, the capabilities fashioned to undertake such analyses can be used by

network organization staff and by participants. Figures 7-3 and 7-4, respectively,

illustrate some of the ways in which TopCoder and Metropia are digitalizing the

analytical domain.

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Figure 7-3 Digitalizing the Analytical Domain at TopCoder

Example Core Data

Example Analytic

Processes

Diagnosing & predicting the success of a proposed project.

Prescribing how projects should be broken up into contests.

Predicting contest success and prescribing contest modifications.

Metrics production for contests, projects, clients, developers & matching.

Project, contest & matching post-mortem analyses to identify areas for primary process improvements and to identify hot developer skills.

Project Data

Client Profiles

Contest Data

Developer Profiles

Primary Process Performance

Data

Figure 7-4 Digitalizing the Analytical Domain at Metropia

Example Core Data

Example Analytic

Processes

Traffic flow modeling – overall and for each mobility service.

Scheduling routines – overall and for each mobility service.

Routing routines – overall and for each mobility service.

Determining reward points for commuter trip selections.

Commuter behavior modeling.

Mobility Provider Profiles

Commuter Profiles

Historical Transportation

Data

Merchant Profiles

Commuter Trip, Common Good,

Provider & Merchant Outcomes

Streaming Transportation

Data

Commuter Services

Usage Data

Market Platform Design: Digitalizing the Collaborative Domain

A primary function of network organizations’ market platforms involves the

facilitation of information exchanges – between community members, between the

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members of different communities, and between network organization staff and

members of different communities. These information exchanges are crucial, as such

exchanges enable participants to learn about offered value propositions and to decide

whether or not to participate further (and, ultimately, take advantage of offered value

propositions).

These information exchanges occur through one-to-one, one-to-many and

many-to-many connections. Importantly, establishing a connection involves much

more than providing the necessary connectivity. As these information exchanges

tend to be directed toward specific purposes (e.g., exploring or negotiating a potential

match, learning more about a value-unit or value-proposition, co-creating an idea or

value-unit, etc.), sophisticated digitalized collaboration environments are established

– environments characterized by specific functionalities, content and behavioral rules.

Given the heterogeneity present across the members of most interacting

communities, a variety of collaboration modes (messaging, social media,

conferencing and collaboration tools) are typically provided to participants. Tables

7-9 and 7-10, respectively, illustrate some of the digitalized collaboration

environments that have proved invaluable for TopCoder and Metropia.

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Table 7-9 Digitalizing the Collaborative Domain at TopCoder

Collaboration Environment

Examples

Messaging & Conferencing

 Peer-to-peer messaging: client/developer, staff/client, staff/developer, staff/staff, and developer/developer

 Forums: client/developer, staff/client, and staff/developer.

Ideas Processing  Identifying hot technology trends & skills.

Joint-Work Space

 Project & contest monitoring.  Project design (contests, deliverables).  Contest software design (specifications, architecture).  Contest software coding/testing.  Assessing contest solution completeness &

trustworthiness.

Decision-Making Processes

 Setting contest incentives.  Modifying contests & contest incentives.  Ranking contest solutions (selecting winners).

Table 7-10 Digitalizing the Collaborative Domain at Metropia

Collaboration Environment

Examples

Messaging & Conferencing

 Peer-to-peer messaging: commuter/commuter, staff/commuter, staff/government, staff/provider, and staff/merchant.

 Forums: staff/commuters and staff/government.

Social Network  Commuters.

Joint-Work Space

 Real-time resolution of traffic congestion hot spots.  Improving algorithm accuracy & reliability.  Big Data analytics: staff/staff and staff/government.  Market platform functionality development.  Promotional campaigns.

Decision-Making Processes

 Reengineering of reward schemes.  Product launch.  New market platform (urban area) launch.

Digital Strategy Formulation

The task facing network organizations’ digital strategists is quite daunting. In

addition to having to confront many of the same strategic challenges as those facing

pipeline organizations’ digital strategists, network organizations’ digital strategists

have to design and build a market ecosystem from scratch and motivate participants

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to engage in value-unit exchanges through the market platform. The heightened

complexity facing network organizations’ digital strategists is perhaps best

understood through the five strategic challenges summarized in Table 7-11. We

begin this section by discussing these five strategic challenges. Then, we describe

how digital strategists evolve their organizations’ business models.

Table 7-11 Network Organization Strategic Challenges

Strategic Challenges Key Issues

How fast should each community grow?

 How can we overcome the chicken-and-egg challenge?  Is it possible to exploit side-switching?  How can we keep a balance in community sizes?

Which pricing mechanisms should be applied to each

community?

 Which communities should be subsidized and which represent viable sources of profit?

 How will a particular pricing mechanism affect participant behavior or community growth?

 Should price-differentiated functionality levels be used?

Should a new feature be added?

 Is the expected benefit greater than the expected cost?  Will one or more communities be negatively affected?

Should transactions and participant behaviors be

regulated?

 Which types of market failures are most likely to occur?  Which community members should be allowed to join?  What should members of each community be able to do?

How many communities should connect to the

business platform?

 How does the presence of a community influence other communities’ value propositions?

 How does the presence of a community affect platform complexity?

 What is the economic viability of a community?

How Fast Should each Community Grow?

When a network organization first launches its market platform, the first hurdle

to overcome is the chicken & egg problem: producers only wish to participate in a

market with a large pool of potential consumers, and consumers only wish to

participate in a market with a large pool of potential producers. Table 7-12

summarizes a selection of tactics that can be used to resolve this chicken & egg

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problem.43 And, in certain situations, growth can be accelerated by promoting side-

switching. With side-switching, existing producers become consumers and/or

existing consumers become producers (e.g., with Airbnb, short-term renters often

decide to become hosts, and hosts often become short-term renters).

Table 7-12

Tactics for Overcoming the Chicken & Egg Problem

Tactic Description

Follow-the-Rabbit Build a producer community by incenting members to create value-units, which in turn will attract a consumer community.

Piggy-Back Connect with members of an existing community - either a producer community to gain access to value-units or a consumer community (if value-units already exist).

Seeding Attract an ancillary community by first growing the producer and/or consumer community to which the ancillary community is attracted.

Marquee Provide incentives to attract highly-visible and influential participants (producers or consumers), whose presence attracts other participants.

Pipeline Begin as a pipeline organization to build a targeted producer or consumer community; then, attract other communities desiring to interact with this first community.

Big-Bang Marketing

Invest heavily in traditional push marketing strategies to attract the communities critical to the in-play business model.

Micromarketing Begin by targeting a niche market whose producer & consumer communities are already interacting.

However, if one side grows too fast, negative network effects are felt: too

many consumers leads to insufficient supply, resulting in unsatisfied consumers; too

many producers leads to insufficient demand, resulting in unsatisfied producers. It

can be difficult, if not impossible, to retain or to regain an unsatisfied participant.

How can the threat of negative same-side network effects be managed? Three

common tactics are (1) invest in growing an undersized community, (2) impose rules

43 G.G. Parker, M.W. Van Alstyne and S.P. Choudhury, Platform Revolution: How

Networked Markets are Transforming the Economy – And How to Make Them Work for You,

2016, New York: W. W. Norton.

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that constrain the behaviors of members of the oversized community (e.g., limit the

number of allowed transactions), and (3) segment the market so as to increase the

likelihood of successful matches within each segment.

What Pricing Mechanisms Should Be Applied to each Community?

With few exceptions, communities are brought to a network organization’s

market platform for one of two reasons: to serve as a revenue source (a money-

side), and to attract other communities that can serve as revenue sources (a subsidy-

side). Determining an appropriate profit model for each community is critical because

of the powerful growth dynamics of network ecosystems:

 Charging (or charging too much) for access will limit or reduce community

size.

 Charging (or charging too much) for feature use will inhibit participants’

engagement with the business platform.

 Charging (or charging too much) for value-units will reduce demand.

 Charging (or charging too much) for production will reduce supply.

Generally, pricing mechanisms are imposed on the members of a community when

these members are able to use the market platform to extract value from the

members of another community. The greater the value being appropriated, the

greater the price that can be imposed.

Often, pricing mechanisms can also be imposed on subsidy-side communities,

providing a revenue stream from the subsidy-side. This can occur if the value

proposition is highly-attractive and unique (i.e., not available elsewhere), and if these

subsidy-side community members are likely to accept some level of access/usage

charges. That said, it is wise to never charge any participant for services he/she has

become accustomed to receiving for free. Instead, add new features to the value

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proposition, attach the charges to these new features, and continue to make the

base-level (initial) features available for free to community members.

Should a New Feature Be Added?

An infinite variety (limited only by creativity and capability) of new, ideally

innovative, features can be added to a market platform to enhance the value

propositions offered to the platform’s interacting communities. Generally, these

deliberations about new features are quite straightforward: add any new feature

whose acquisition and implementation costs are less than the value being created.

However, if the new feature being considered is not viewed as a benefit by all

communities or, even worse, if the new feature portends to bring some participants

in conflict with other participants, this decision can become quite challenging. In

such situations, the trade-offs to be reasoned across communities can be extremely

difficult to navigate, especially prior to the new feature’s actual implementation. For

this reason, network organizations often engage in strategic experimentation to

assess the likely impacts of new platform features. With a strategic experiment, a

new feature is implemented – but only for a limited set of participants and a limited

set of transactions – and relevant data is captured that can be analyzed in

determining the positive and negative impacts of the feature. Further, digital

strategists need to recognize that short-term revenue gains (from one community)

may need to be bypassed so as not to alienate participants (from another community)

and that it is not always best to favor the community that brings in the largest share

of current revenues, as this community may not be the most important source of

future revenues.

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Should Transactions and Participant Behaviors Be Regulated?

Some regulation is indispensable as a means for preventing market failures,

i.e., an improperly-functioning (or collapsing) network ecosystem:

 Insufficient information and transparency in the market with respect to the

value-units and payments being exchanged can result in low-quality participants driving out high-quality participants.

 Excessive competition within an interacting community or an unwillingness by a community’s members to maintain their capabilities reduces the value being created in the market and, hence, the market’s attractiveness to other

interacting communities.

Accordingly, network organizations develop regulations targeted at participants’ use

of a market platform’s content and functionalities.

These regulations are most often imposed to force a trade-off of quality over

quantity. The strength of any cross-side network effect is ultimately a function of

the number and the quality of the market exchanges taking place. If, over time, a

growing proportion of market exchanges are seen by participants as decreasing or of

low quality, the positive cross-side effect will attenuate – eventually becoming a

negative cross-side effect that results in the market’s collapse.

How Many Communities Should Connect to the Market Platform?

The advantages of attracting a new community to a network ecosystem’s

market platform are often very appealing to digital strategists. The addition of a new

community raises the promise of additional positive cross-side network effects, the

promise of a new revenue source, and the promise of greater scale.

However, adding a new community does not always result in positive

outcomes. If not mindfully thought out and carefully timed, a new community can

produce: negative cross-side network effects (when the new community’s value

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proposition conflicts with aspects of the value propositions of one or more existing

communities), increased operational and strategic complexity, and increased

operational costs. Further, a tendency exists for innovativeness to be dampened as

additional communities are added. Here, the radicalness of a functional innovation

targeted at one community is toned down to maintain the acceptability of the

functionality to other communities, appropriating little value from this functionality

enhancement.

Evolving Network Organizations’ Business Models

The strategic challenges summarized in Table 7-11 serve as a backdrop that

pervades digital strategists’ deliberations as they evolve their organizations’ business

models via competitive moves targeting market design, market platform design, or

both. Figure 7-5 overviews the factors typically considered in fashioning specific

competitive moves.

Figure 7-5 Factors Driving Business Model Evolution

Business Model Evolution

Business Model Deliberations  Number of communities  Value propositions  Profit models  Core capabilities  Dynamic capabilities

Strategic Intent

Beliefs about:  Communities’ needs &

desires  The core transaction &

adjacent transactions  Same-side & cross-side

network effects  Core capabilities  Dominant value

discipline(s)

 Installed platforms  Held digitization capabilities  New digital technologies  Others’ digitalization innovations

 Natures of adjacent (competitive & substitute) markets

 Adjacent market business model innovations

 Socioeconomic & cultural trends

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A taken competitive move typically affects multiple elements of a business

model. Table 7-13 organizes a sample of TopCoder’s competitive moves by the

primary business model element affected. Examples of this include:

 Having platform-related R&D carried out by the developer community via

contests both incents developers to participate in the market and develops their capabilities. In addition, the R&D project outcomes produce

functionality improvements that can enhance the client communities’ value proposition, as well as TopCoder’s capabilities and the community profit models.

 Providing incentives for non-winning developers clearly enhances the developer community value proposition, thus finding more developers willing

to invest their time and effort in contests (and in the process honing their capabilities by participating in a greater variety of contests). The client community value proposition is also enhanced, as retaining and honing the

capabilities of the developer community increases the likelihoods that matches will be found for clients’ projects and that these projects will be

satisfactorily fulfilled. Finally, by growing the developer and client communities and by improving project fulfillment rates, TopCoder’s

community profit models are likely to improve.

The above examples illustrate that a taken action targeted at one purpose often spills

over to affect other purposes. It is important to remember that such spillovers are

not always positive. Clearly, fashioning successful competitive moves for network

organizations requires considerable analysis – that often must be performed quickly

and imprecisely given the fast-moving dynamics of network ecosystems.

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Table 7-13 Examples of TopCoder’s Competitive Moves

Business Model Element

Business Model Evolution

Communities None observed.

Value Propositions

 Platform R&D carried out as contests.  Transferring software development management tasks (contest-

co-pilot, solution assessment, solution appeals process, etc.) to the crowd.

 Incentives to ensure winners of a project’s completed contests are available to interact with participants in the project’s subsequent contests.

 Crowd-engaged appeals process regarding winning solutions.  Imposing a 30-day time period for vetting winning solutions.

Profit Models  Incentives provided for non-winning developers.

Core Capabilities

 Contest success prediction.  Contest fulfillment.  Client capability development.  Crowd skill development.  Develop crowd into a community.

Dynamic Capabilities None observed.

Table 7-14 similarly lists some of Metropia’s competitive moves directed at

specific business model elements. Which of these are likely to spillover to other

business model elements?

Table 7-14

Examples of Metropia’s Competitive Moves

Business Model Element

Business Model Evolution

Communities  Host private mobility service markets (e.g., car-pooling, ride-sharing,

etc.) for use by a specific organization’s employees.

Value Propositions

 No platform subscription fees for commuters at initial launch.  Develop a personalized mobility health checkup functionality that

uses data on a commuter’s commuting behavior to broaden the commuter’s mobility perspectives and to offer the commuter customized trip solutions.

 Customized consulting services for government agencies.  Customized performance reports provided to participating

commuters, providers, merchants & government agencies.

Profit Models  Commuter subscription fees added as a local platform matures, the

platform’s portfolio of mobility services broadens, and commuter platform interactions are personalized.

Core Capabilities  Big Data transportation analytics consulting services.  Commuter & government agency capability development.

Dynamic Capabilities

None observed.

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Sustaining a Network Organization’s Competitive Position

Two pathways exist for sustaining a network organization’s market position,

with the preferred path depending on whether or not winner-take-all market

dynamics apply:

 Winner-take-all market dynamics - apply: act quickly to become one of the

two or three dominant firms in the market space and then sustain this market position.

 Winner-take-all market dynamics - do not apply: grow both the market

space and the firm’s share of the market space more deliberately by evolving a business model that becomes increasingly attractive to all

interacting communities, and then sustains (or increases) this market position.

Our focus here is on sustaining a strong market position in the face of the constant

threat of digital disruption, regardless of the above market-position pathways.

Perhaps this most important insight for digital strategists is the realization that

a focus on just amplifying positive cross-side network effects cannot guarantee the

barriers to entry that protect a firm from existing competitors and from new entrants.

Attention must also be directed at finding ways to:

 Impose switching costs on participants.

 Drive down market platform costs (the average costs to host communities, to facilitate participant interactions, and to execute transactions), thus

making it cost-prohibitive for new entrants to enter the market space.

 Continuously improve market platform ease-of-use.

 Introduce business model innovations, especially those related to community

value propositions and profit models.

 Quickly imitate (ideally with enhancements) competitors’ and new entrants’

business model innovations.

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Network ecosystems are powerful and hard-to-replicate because of their inherent

community dynamics. However, achieving and then sustaining a strong market

position is difficult, requiring high levels of both strategic vigilance and creativity.

A Recap and Look Ahead

While network organizations represent a smaller share of nations’ GNPs than

do their pipeline organization counterparts, this rapidly growing segment of most

nations’ economies is spurring much of the digital innovation (and digital disruption)

being observed today. This chapter has described how digitalization is applied within

network organizations, as well as the processes used by network organizations to

formulate their digital strategies.

While well-reasoned digital strategies have become a dominant driver of

competitive success for both pipeline organizations and network organizations, the

pervasive digitalization that results can raise serious threats for organizations’

leadership teams. The next chapter examines these threats, and the tactics being

applied to attenuate the threats.

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Chapter 8. Grappling with the Risks of Digitalization

The enabling nature of digital disruption might best be captured by three ideas:

pervasive digitization, pervasive connectivity and pervasive mobility. Invariably,

pipeline ecosystem participants and network ecosystem participants find themselves

constantly accessing and exchanging digitized content (e.g., data, information,

goods, services and currencies) and it is precisely these type of activities that are

creating an abundance of competitive opportunities for digital strategists able to act

smartly and nimbly.

However, the technological underpinnings of organizations’ digital strategies

also pose significant strategic risks. If digitalization risks are not appropriately

addressed by organizations’ leadership teams, the competitive wins that are realized

are likely to be short-lived, at best. Consider what happened in January 2003 when

a small (376 bytes) data virus infected a single processing device with the Slammer

worm.44 After launching itself onto the Internet, it infected close to 100,000 large

computer systems worldwide in just 30 minutes. The impact was chilling: air and rail

transport were delayed, electrical and pipeline utilities were interrupted, ATMs were

disabled, call centers were shut down, etc. In today’s highly digitized, connected and

mobile world, a single person’s lapse can quickly spread across the platforms to which

the person is directly or indirectly connected.

Nothing demonstrates the challenges presented to digital strategists better

than the paradox surrounding the capture and use of personal data. Data privacy

44 T. Goles, G. White and G. Dietriech, “Dark Screen: An Exercise in Cyber Security,”

MIS Quarterly Executive, June 2005, pp. 303-318.

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concerns exist wherever personally-identifiable or other sensitive information is

captured, collected, stored and used. That said, tomorrow’s waves of digitalization

innovation and growth will surely involve intelligent analytics, highly-customized

goods and services, and always-available mobile connectivity offering one-touch

transactions, where these transactions require the collection and use of vast

quantities of personal data: socio-demographic data, location data, transaction

histories, etc. People can be motivated – through the expectation that the value of

the goods and services obtained will outweigh potential liabilities – to allow the

capture and collection of these data, but only if trust is established and maintained

that any collected personal data will be protected and will not be used in the absence

of permission to do so.

A key factor differentiating those organizations able to successfully exploit

digitalization for competitive purposes is a set of strong capabilities for managing

digitalization risk. Supporting evidence for the value of managing digitalization risk

is illustrated by a study that found voluntary disclosures of initiatives aimed at

reducing digitalization risks improved organizations’ stock prices by, on average,

6%.45 Effective digitalization risk management, however, involves much more than

enhancing an organization’s cybersecurity. The real challenge is to achieve an

effective balance in stability (as evidenced by efficient, secure, reliable and available

platforms) and agility (as evidenced by a readiness to formulate and implement

timely and innovative competitive moves).

45 L. Gordon, M. Loeb and T. Sohail, “Market Value of Voluntary Disclosures Concerning

Information Security,” MIS Quarterly, September 2010, pp. 567-594.

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Managing digitalization risks in a manner that balances stability and agility is

a participation sport that demands the involvement of all of an organization’s

members. With the aim of providing a mindset and a foundation conducive for

effectively managing digitalization risk, this chapter covers the following topics:

 Nature of Digitalization Risks

 Risk Management: A General Overview

 Digitalization Risk Management Practices

 The Board of Directors and Digitalization Risk Management

 Accounting for Digitalization Risks in Digital Strategy Formulation

Nature of Digitalization Risks

A digitalization risk refers to the likely occurrence of digitalization-related

incidents that have the potential to negatively impact an organization’s operational

performance and/or competitive position. What are these negative impacts? A useful

way of thinking about these negative effects is the following loss categories:

 Financial loss: theft; fraud; extortion; destruction of uninsured facilities,

equipment and materials; drops in stock valuations; regulatory fines; legal fees, court awards and out-of-court settlements; etc.

 Revenue loss: short-falls in revenue streams or lost revenue streams traced to operational disruptions, reputation loss, the inability to respond effectively to competitors’ actions, etc.

 Intellectual property loss: thefts of digitized ideas, innovations and other forms of creative expression (e.g., trade secrets, blueprints, digitalized

processes, proprietary digital content, digital strategies, business models, etc.).

 Reputation loss: depreciation of an organization’s image or of its brands

that undermines the trust and goodwill held by participants in the various market-focused ecosystems with which the organization participates.

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These negative impacts can be huge. Consider, for example, the losses suffered by

the TJX Companies after a security breach46 (reported in late 2006) that enabled

hackers to obtain data from over 45 million customer payment cards.47 Access into

the TJX Companies’ s business platform was gained by digitally eavesdropping on the

POS transactions associated with the in-store customer return process. It has been

estimated that the direct costs (the largest portion of which involved contacting and

offering assistance to affected customers) to the TJX Companies for the breach might

have been as high as $1.6 billion.48 Other of these direct costs involved obtaining

legal advice, internal investigations, public relations and regulatory fines. However,

these direct costs do not include the very sizeable revenue and stock valuation losses

that occurred during 2007.

Figure 8-1 provides a visual framework simplifying the complexities of the

digitalization risk context. Here, three entities are brought together: a set of threats,

a set of targets, and the actors most significantly associated with the occurrence of

digitalization-risk incidents. Table 8-1 lists the loss categories typically associated

with each of the types of threats and targets.

46 A security breach refers to an incident that results in the confirmed disclosure of

data to an unauthorized third-party. 47 W. Xu, G. Grant, H. Nguyen and X. Dai, “Security Breach: The Case of TJX

Companies, Inc.,” Communications of the Association of Information Systems, Vol. 23,

November 2008, pp. 575-590. 48 C.R. Speechlys, “The Real Cost of a Data Breach,” Lexology, November 12, 2012:

http://www.lexology.com/library/detail.aspx?g=2aaa771a-2523-4e60-a0bc-306db8323d0e

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Figure 8-1 Framing the Digitalization Risk Context

Threats

Digitalization Risks

Business Platform Operations

Digital Assets

Internal Controls

Targets

Legal & Regulatory

Natural Disaster

Actions of a Competitor

Platform Architectures

New Digital Technology

Outsiders Cybercriminals

Terrorists Hacktavists

Ecosystem Participants

Insiders Employees

Senior Executives

A c to

Inability to Respond

Malicious Intrusion

External Sourcing

Digitalization Capabilities

Table 8-1 Losses Typically Associated with Digitalization-Risk Threats and Targets

Loss Categories

Threats

Malicious Intrusion Financial, Revenue, Intellectual Property, Reputation

Natural Disasters Financial, Revenue, Intellectual Property, Reputation

Legal & Regulatory Financial, Revenue, Reputation

New Digital Technology Revenue, Reputation

Actions of a Competitor Revenue, Reputation

External Sourcing Financial, Revenue, Intellectual Property, Reputation

Inability to Respond Revenue, Intellectual Property, Reputation

Targets

Business Platform Operations Revenue, Reputation

Digital Assets Financial, Revenue, Intellectual Property, Reputation

Internal Controls Financial, Reputation

Platform Architectures Financial, Revenue, Reputation

Digitalization Capabilities Financial, Revenue, Reputation

Let’s take a look at the actors (described in Table 8-2). Actors are associated

with threat incidents in two ways. Most often, actors are thought of as the

perpetrators of malicious intrusions – or, acts of commission. Cybercriminals (by

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far the most common type of perpetrator), terrorists and hactavists clearly

instigate digitalization-risk incidents, as can ecosystem participants and

organizations’ employees (either acting alone or collaborating with others).

Table 8-2

Actors Associated with Digitalization-Risk Incidents

Actor Description

Outsider

Cybercriminal Uses hacking techniques & tools in order to take illegal actions for financial gain or to take over digital assets in order to launch a series of illegal actions.

Terrorist Uses hacking techniques & tools for the purpose of causing harm & havoc within an established geo-political order.

Hactavist Uses hacking techniques & tools for the purpose of bringing attention to a social or political issue.

Ecosystem Participant

Pipeline ecosystem participants (suppliers, upstream intermediaries, downstream intermediaries, consumers) and network ecosystem participants (members of interacting communities), who connect to organizations’ business/market platforms to facilitate ecosystem transactions.

Insider

Employee Operational, staff & managerial employees, who connect to the organization’s business platform to carry out their work roles.

Senior Executive

Members of the leadership team, whom are collectively responsible for: seeding & overseeing digital strategy formulation & implementation, setting policies for digitalization, and allocating the resources necessary for effective digitalization.

Just as serious, though typically overlooked, are the acts of omission traced

back to organizations’ employees and senior executives. It is not uncommon for

employees to claim ignorance of their organizations’ digitalization-risk

policies/procedures or to be lax in following these policies/procedures. Because of

employees’ acts of omission, organizations experience greater likelihoods of

experiencing losses regarding three, in particular, digitization-risk incidents:

malicious intrusion, natural disasters and legal/regulatory violations. Even more

problematic, it is not uncommon for organizations’ most senior executives to abdicate

some, if not most, of their managerial and fiduciary responsibilities regarding seeding

and overseeing digital strategy formulation and implementation, setting policies for

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digitalization, and for allocating the resources necessary for effective digitalization.49

Because of senior executives’ acts of omission, organizations have a greater

likelihood of experiencing incidents regarding all nine digitization-risk threats.

Figure 8-2 illustrates the relationships between threats and targets. Acts of

commission, i.e., malicious intrusion, are most often directed at two threat targets:

business platform operations and digital assets. Business platform operations

refers to the execution of an organization’s digitalized operational and managerial

processes that are hosted on business platforms (and on market platforms); and,

digital assets refer to the digital technologies (hardware and software), digitized

data, and digitization/digitalization capabilities applied in configuring digital platforms

and business platforms. The most common incidents directed at business platform

operations are denial-of-service attacks, where the aim is to disrupt business

continuity either by flooding a platform with transactions, dramatically increasing

transaction volumes (slowing response times) or by inserting a virus that damages

the processing being performed on a platform (hence, shutting down the platform or

producing processing faults that result in the platform being shut down for repair).

The most common incidents directed at digital assets involve theft of digital content,

with content then being used for criminal or business-espionage purposes.

49 A. Masli, V. Richardson, M.W. Watson and R.W. Zmud, “Senior Executives IT

Management Responsibilities: Serious IT-Related Deficiencies and CEO/CFO Turnover,

Management Information Systems Quarterly, September 2016, pp. 687-708.

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Figure 8-2 Associations Between Threats and Targets

Legal & Regulatory

Natural Disaster

Actions of Competitors

New Digital Technology

Inability to Respond

Malicious Intrusion

Business Platform Operations

Digital Assets

Internal Controls

Platform Architectures

External Sourcing

Digitalization Capabilities

Acts of omission play out across all five threat targets as needed digitalization-

related investments and policies are either not pursued or pursued ineffectively and

as sanctioned digitalization-related investments and policies are poorly implemented

and/or followed. The consequences of not attending to business platform operations

and to digital assets were addressed in the preceding paragraph. An organization’s

internal controls refer to the processing logic and rules embedded within digitalized

financial reporting systems to ensure the correct handling of financial transactions

and the accuracy of produced financial reports. If an organization’s internal controls

are in error or incomplete, the organization’s financial systems are susceptible to

malicious intrusions and the organization – along with its CEO and CFO – are subject

to penalties under the Sarbanes-Oxley Act. If organizations’ platform architectures

are not designed and maintained so as to remain aligned with these organizations’

digital strategies, it is unlikely that appropriate stability/agility balances can be

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achieved. Finally, organizations lacking the digitalization capabilities to quickly

respond to competitors’ actions or to introduce innovative business models are

unlikely to maintain, let alone enhance, their competitive positions.

Prior to moving on to discussions of risk management and risk management

tactics, let’s briefly examine each of the digitalization-risk threats.

Malicious Intrusions

A malicious intrusion refers to a perpetrator’s success in getting through an

organization’s security-related defenses, i.e., the systems software and digitalized

work procedures aimed at identifying and authenticating all physical and digitized

attempts to access an organization’s digitalized business platforms and digital assets.

Successful intrusion usually begins via either phishing or through a POS device, but

then moves on to a wide gamut of abuses: theft, fraud, sabotage, denial-of-service

attacks, viruses, worms, website defacement, electronic eavesdropping, etc. As

these perpetrators and the hacking tools and techniques they use get better and

better, the time it takes to compromise a victim just gets shorter and shorter.

Today’s public and private digital infrastructures are becoming so large and so

complex that they are beyond the control of any one organization. As a result, no

matter how prudently an organization moves forward with security policies,

procedures and programs, the organization remains exposed to the threat of

malicious intrusion. The objective should not be to prevent all malicious intrusions,

but rather to prevent less-sophisticated intrusion attempts and to minimize the

damage caused by more-sophisticated intrusion attempts through quick detection,

removal and repair.

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Natural Disasters

Natural disasters (e.g., tornadoes, hurricanes, earthquakes, tsunamis,

nuclear emergencies, collapsed dams, broken gas or water pipes, etc.), are worst-

case scenarios for any organization. If affected directly by a natural disaster,

business operations might be nonfunctional for days, weeks or months – resulting in

significant, if not catastrophic, revenue losses. Even if affected only indirectly by a

natural disaster, most organizations are likely to suffer some disruption to their

inbound/outbound logistics flows. While it is impossible to predict the occurrence of

such events, all organizations need to be prepared to act to minimize the effects of

and quickly recover from any operational disruptions. The implications of critical

business platforms becoming unavailable can be devastating, especially as ever-

greater portions of organizations’ business processes – the lifeblood of most

organizations’ revenue streams – are digitalized.

As natural disasters are unpreventable, the digitalization risk emphasis is on

achieving a graceful degradation in platform operational performance and a quick

recovery. Graceful degradation means that operations affected by a natural

disaster do not immediately shut down, but instead gradually slow down, allowing

time for affected operations to be shifted to other physical locations prior to a

complete shutdown. Both graceful degradation and quick recovery are typically

achieved by designing multiple redundancies into operational sites and activities. For

example, the physical sites housing digitalization operations are outfitted with backup

power systems, have all platform content (data and software) backed up on a regular

basis (say, every two hours) at a distant recovery site, and might even have all

processing activity instantly mimicked at the distant recovery site.

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Legal and Regulatory Requirements

Organizations today face a broad array of digitalization-related legal and

regulatory requirements requiring protective actions most often aimed at

preventing harm to others. Included among these regulations, that originate from

federal, state and local governmental agencies, are those aimed at:

 Protecting personal data (about customers, employees, visitors, etc.) that is collected, held, processed and provided to others.

 Ensuring the security and accuracy of financial transactions and reports.

 Requiring data collection and information reporting by organizations whose

products, services and work activities are environmentally-sensitive.

 Requiring data collection and information reporting by organizations whose products, services and work activities are potentially harmful to consumers

or employees.

Organizations (and, possibly, specific employees) found noncompliant with statutory

requirements can suffer legal and civil penalties, as well as significant reputation

losses.

What makes the digitalization-related environments especially confusing and

complex is that the nature of regulations (statutory versus voluntary, breadth and

depth of coverage, sanctions for noncompliance, etc.) varies considerably across geo-

political boundaries (e.g., cities, states, nations, the EU, etc.). Table 8-3 describes a

few of the more well-known digitalization-related regulations facing U.S.

organizations.

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Table 8-3 Examples of U.S. Digitalization-Related Regulations

Regulation Description

Family Educational Rights & Privacy Act of 1974

Educational agencies & institutions receiving funding from the U. S. Department of Education are required to provide students with access to their education records, an opportunity to seek to have the records amended, and some control over the disclosure of information from the records.

Health Insurance Portability & Accountability Act of 1996

Health care providers, insurance providers and employers are required to safeguard the security & privacy of patients’ health records and personal data.

Gramm-Leach-Bliley Act of 1999

Financial institutions are required to protect the security & privacy of the financial information that they collect, hold and process.

Sarbanes-Oxley Act of 2002 Publicly traded companies are required to provide assurance of the security, accuracy & reliability of their financial reporting systems.

State Security Breach Notification Law (First enacted

by California in 2002)

50 States have enacted Security Breach Notification laws requiring businesses to make notifications regarding security breaches. While no similar Federal law exists, bills have been introduced.

Payment Card Industry Data Security Standard

(Initially released in 2004)

Created by the Payment Card Industry Security Standards Council, this standard applies to all institutions that hold, process or exchange cardholder information. The standard strives to prevent credit card fraud through increased controls around data and its exposure to compromise.

New Digital Technologies

The continued advancements with digital technologies result in seeming

endless arrivals of innovative digital products and services, as well as innovative

digitalized solutions from both established and new vendors. While all new

technologies are largely untested when first released, those organizations able and

willing to subject a seemingly-relevant new technology to early assessment and

experimentation stand to gain the most from adopting that technology. Likewise,

those organizations that delay their assessing of what turns out to be a game-

changing technology are likely to have dug themselves into a deep competitive hole.

Actions of Competitors

The business model enhancements and innovations of established

organizations and startups pose a constant threat to any organization. While this has

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always been the case, what is new today is the rapidity with which competitively-

meaningful actions appear and the fact that the organizations taking action

increasingly lie beyond the boundaries of the primary market ecosystems within

which an organization participates.

What is perhaps most insidious are the rapid inroads that a new competitor

can achieve regarding market share. This can be especially damaging when an

innovative business model creates a protectable, highly-profitable niche within an

existing market, subsequently drawing away participants from established

competitors and attracting a majority of new market participants.

External Sourcing

Most typically, an externalized capability takes the form of a digitalized process

developed by a provider (or another third-party) hosted on the provider’s business

platform and accessed by the client via public or private Internet connections. When

managed well, external sourcing provides an organization with significant cost,

operational and strategic benefits. But, along with these benefits comes a heightened

exposure to digitalization risk. Table 8-4 lists the digitalization risks, organized by

target, most commonly attributed to external sourcing.

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Table 8-4 Digitalization Risks Associated with External Sourcing

Target Digitalization Risks

Business Platform

Operations

 Operational gains (efficiency, security, scalability, etc.) not realized.

 Provider platforms insufficiently enhanced, over time.

Digital Assets  Provider platforms lack sufficient security.  Data captured by or created by externally-hosted processes are

typically owned by the provider (unless otherwise negotiated).

Internal Controls

 Processes executed on provider platform lack sufficient transaction & reporting integrity.

Platform Architectures

 Provider platform architectures insufficiently enhanced, over time.

 Provider platform architectures lose, over time, an acceptable stability/agility balance.

Digitalization Capabilities

 Loss of internal-to-the-client digitalization capabilities.  Provider fails to enhance digitalization capabilities.  Provider fails to transfer new digitalization capabilities.

Inability to Respond

The most debilitating digitization risk – though the risk that perhaps receives

the least attention – is the inability to respond to competitors’ actions. Given the

power of network effects (affecting consumer communities in pipeline ecosystems

and all communities in network ecosystems), organizations must act effectively and

quickly to meet or, ideally, to advance competitors’ competitive actions. An

organization failing to act or acting in an ineffective or untimely manner is sure to

suffer some erosion in market position – an erosion that will only spiral in the face of

a continuing stream of competitors’ actions.

What is the root cause of an inability to respond to a competitor’s action? A

number of factors come to mind:

 A delay in becoming aware of the competitor’s action.

 An incomplete understanding of the competitor’s business model.

 An incomplete understanding of how the competitor executed the

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competitive action.

 Inconsistencies between in-place platform architectures and the

architectures needed to implement an effective response.

 Deficiencies in one or more of the platforms needed to implement an

effective response.

 Deficiencies in one or more of the digital assets needed to implement an effective response.

 Deficiencies in one or more of the capabilities needed to implement an effective response.

 Delays encountered in resolving deficiencies in platforms, digital assets and capabilities.

And, as might be expected, failure to respond in an effective and timely manner

increases when more than one of these factors apply to the situation-at-hand.

Risk Management: A General Overview

Risk management is a topic that applies across all aspects of organizational

life, including digitalization. The aim of this section is to provide a general

introduction to the topic area.

It is important to recognize, first of all, that the intent of risk management is

not to eliminate risks, but to manage risks. Risk is an inherent aspect of

organizational life. While we can perfectly predict how an engineered system will

perform, it is impossible to perfectly predict how humans (e.g., operational

employees, managers, executives, consumers, suppliers’ employees, intermediaries’

employees, consultants, etc.) will perform. And, even if you could predict human

behavior by limiting the available choices, would you want to? Investments

promising high returns are generally riskier than investments promising low returns

precisely because we cannot predict the outcomes of high-return investments very

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well. By limiting the choices available to humans, you also limit the potential for

individuals to act creatively and innovatively.

Risk management strives to accomplish two objectives: creating awareness

and a common understanding across an organization’s members about the existence

and nature of a risk domain; and, putting in place risk management policies,

procedures and programs to ensure that the critical risks in the domain are

appropriately addressed by appropriate individuals. In accomplishing these

objectives, risk management involves three activities: risk planning, risk assessment

and ongoing risk control.

Risk Planning

Risk planning establishes the contexts within which risk management

activities are carried out. Risk planning begins by identifying and categorizing the

areas of risk most likely to affect an organization. Next, each risk area is assigned

an owner. It is the risk owner’s responsibility to perform regular risk assessments,

and to actively manage associated risks. Then, overall risk management policies

need to be developed that provide a context within which risk owners can implement

area-specific risk management policies, procedures and programs. Finally, high-level

objectives are devised to articulate the importance of risk management. Examples

of such high-level objectives might include:50 “Protecting the integrity and security

of client and corporate information is the responsibility of every employee.”; and,

50 Adapted from: H.A. Smith and J. McKeen, “Developments in Practice XXXIII: A

Holistic Approach to Managing IT-based Risk,” Communications of the AIS, December 2009,

p. 525.

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“We need to embed an attention to digitalization risk management into all work

processes, business functions, work roles and positions, and employees.”

Risk Assessment

During risk assessment, each risk owner, usually with the support of in-

house experts and external consultants, estimates the risk exposure associated

with each of the risk areas for which the owner is responsible. Usually, some variant

of the following formula is used:

Risk Exposure = (Probability of Risk Occurring) X (Expected Loss If Risk Occurs)

Organizations specializing in overall or domain-specific risk management have

considerable knowledge, experience and data that can be tapped to produce

estimates of risk probabilities and expected losses. Just remember that these generic

estimates are only starting points that need to be tailored to the nuances of a given

organization and that expected losses should include both tangible and intangible

losses, as well as short-term and long-term losses. The risk of underestimating

expected losses is that an organization is then likely to under-invest in risk-related

policies, procedures and programs.

Once a risk area has been assessed, the owner must decide (again, with input

from others) how risks are to be addressed. Three actions are possible, alone or in

combination:

 Risk assumption: Accepting that losses are likely to arise if and when an incident occurs in a risk area, covering these losses through internal funds

and third-party insurance.

 Risk deterrence: Taking action to reduce the likelihood that an incident will occur in a risk area.

 Ongoing risk control: Monitoring a risk area such that the incident

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occurrences are detected and resolved before excessive losses occur.

The risk assessment matrix shown as Figure 8-3 provides general guidance on

selecting an appropriate strategy for a risk area. Risk areas with low incident

probabilities and low expected losses can reasonably be assumed without taking

further action, while risk areas with high incident probabilities and high expected

losses require sophisticated strategies involving combinations of risk assumption, risk

deterrence and ongoing risk control.

Figure 8-3

Risk Assessment Matrix

Monitor continuously to immediately mitigate detected risk incidents

Take preemptive action to reduce the incident likelihood

Monitor continuously to immediately mitigate detected risk incidents

Take preemptive action to reduce the incident likelihood

Monitor continuously to immediately mitigate detected risk incidents

Monitor regularly to mitigate detected risk incidents

Monitor continuously to immediately mitigate detected risk incidents

Take preemptive action to reduce the incident likelihood

Monitor continuously to immediately mitigate detected risk events

Simply assume the risk Monitor regularly to mitigate detected risk incidents

Monitor continuously to immediately mitigate detected risk events

Expected Loss If a Risk Event Occurs

High

Medium

Low

Ongoing Risk Control

Ongoing risk control involves monitoring for risk incidents, detecting that an

incident is about to occur (ideally) or has occurred (more likely), and taking action to

mitigate any losses arising from the incident. Risk mitigation involves tempering

(as much as possible) the consequences of a risk incident by taking corrective actions.

Prior to implementing ongoing control procedures, the risk owner needs to determine

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the level of cost and effort to put into the procedures. Figure 8-4 illustrates the

complexity of this decision. The rational risk owner desires to neither under-invest

or over-invest in ongoing risk control. Here, again, heavy use is made of others’

knowledge and experience.

Figure 8-4

Determining the Cost of Ongoing Risk Control

Cost

Risk

Expected loss in the Absence of Risk

Deterrence/Mitigation

Cost of Risk Deterrence/Mitigation

Sweet Spot

An Exercise in Digitalization Risk Assessment51

An important element of the Coors Brewing Company’s marketing strategy

involves having retailers place eye-catching point-of-sales (POS) displays in their

stores. In implementing this strategy, Coors works with third-party marketing

partners and third-party providers to produce these display materials. However,

Coors owns the business processes that engage distributors and retailers in ordering

these POS display items. To motivate POS display orders, Coors provides each

51 This hypothetical exercise (used for illustrative purposes only) was developed by the

authors based on material from: J. Buffington and D.J. McCubbery, “Coors Brewing Company

Point of Sales Application Suite: Winning Mindshare with Customers, Retailers, and

Distributors,” Communications of the AIS, Volume 13, 2004, pp. 81-96.

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wholesaler and retailer with a budget that can only be used to order POS display

items. Coors anticipates that at least some of the wholesalers and retailers will find

the display materials valuable in their efforts to increase sales and, in turn, that they

will order (display materials) beyond the Coors-provided funding.

Coors’ solution for digitalizing the business processes enabling distributors and

retailers to order promotional materials involved the building of a local (loosely

connected to other business platforms) business platform hosting five sets of

functionalities:

 Internet Interaction Portal: Enables distributors and retailers to

communicate with Coors and to gain access to the digitized business processes.

 Ordering General Materials: Enables distributors and retailers to order general promotional materials.

 Ordering Licensed Materials: Enables distributors and retailers to order licensed (i.e., NFL logos) promotional materials.

 Ordering Customized Materials: Enables distributors and retailers to design

and order customized promotional materials.

 Retail Store Display Placement: Enables distributors and retailers to visualize

and optimize, through the use of digitalized tools, the physical placement of promotional materials within a retail store.

These functionalities were collectively aimed at achieving three main objectives:

increasing sales of Coors products, having distributor and retailer staffs performing

much of the work autonomously, and building stronger relationships with the

distributors and retailers.

Now, consider a risk assessment that might have been performed by the risk

owner for this digitalized business platform. Table 8-5 summarizes this risk

assessment. Given this assessment, it would be reasonable to expect that a

digitalization risk management strategy put forward by the risk owner would involve:

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 Deterring and mitigating malicious intrusions, through the local business platform, into Coors’ global digital platforms and business platforms.

 Ensuring that any future decision process to externalize any of the digital platforms enabling the local business platform carefully examine the

providers’ capabilities to secure their platforms against malicious intrusions.

 Establishing a vigilance regarding the potential for competitors to introduce retail shelf space innovations that could prove effective in taking market

share away from Coors’ products.

 Establishing a vigilance regarding the development of analytics technologies

and solutions aimed at the retail shelf space context.

Table 8-5 Risk Assessment for Coors’ POS Display Business Platform

Threat Situational Assessment Incident

Probability Expected

Losses

Malicious Intrusion

• Coors is a prominent firm selling a product (alcohol) that could be considered controversial.

• Internet exposure & distributor/retailer connectivity.

• Low loss exposure with the local business platform. • High loss exposure with global platforms.

High Low (local)

High (global)

Natural Disasters

• Favorable geographic location (Colorado front range).

Very Low Moderate

Legal & Regulatory

• Limited access to financial systems. • Limited privacy concerns.

Low Low

New Digital Technology

• Analytics technologies. • Collaboration technologies.

Moderate High

Actions of a Competitor

• Retail floor & shelf spaces are highly competitive commodities.

High High

External Sourcing

• Business platform unlikely to be externalized. • Digital platform likely to be externalized.

Moderate Moderate

Inability to Respond

• Analytic capabilities focused on optimizing the use of retail store shelf space.

Moderate High

Digitalization Risk Management Practices

Digitalization risk management practices (i.e., policies, procedures and

programs) cover a very broad range of complex and ever-moving topics – topics for

which it is impossible to do justice in a few pages of text. To provide a glimpse of

what organizations are doing, this section describes a few of the current practices

regarding one threat area: that of malicious intrusions. This threat area was selected

for two reasons. First, since significant cyber-security breaches are reported on by

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news media on a regular basis today, most people are well aware of the topic.

Second, cyber-security breaches can result in huge financial losses, the size of which

is increasing annually. Data from 2010, for example, indicated that the average cost

of a security breach exceeded US $7 million.52

As a selection of the more common risk management practices for combating

malicious intrusions are described, note that a mix of technical and social mechanisms

are required. All too often, it seems, much more attention is given to the technical

practices, with the just-as-critical social practices being overlooked and/or

underfunded.

Securing Digital and Business Platforms Against Malicious Intrusions

It is impossible for any organization to fully protect itself against malicious

intrusions. That said, all organizations need to understand the intrusion risk

exposures of their digital and business platforms and take commiserate steps to both

harden these platforms and detect (and mitigate) any intrusions that occur.

Hardening a platform involves installation of hardware, software and

physical impediments that increase the effort required by a perpetrator, such that all

but the most determined perpetrators either bypass the platform (moving on to

easier targets) or are so hindered that they quickly give up. Detection involves

putting in place software and manual scanning processes that identify problematic

behaviors transpiring within digital platforms and business platforms.

52 R. Appan and D. Becic, “Impact of Information Technology (IT) Security Information

Sharing among Competing IT Firms on Firm’s Financial Performance: An Empirical

Investigation,” Communications of the Association of Information Systems, Vol. 39, 2016, pp.

214-241.

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Perhaps the most recognized hardening tactics involve the use of firewalls,

encryption technologies, access control mechanisms, and physical barriers to develop

multi-layered defensive shields around an organization’s digital and business

platforms. Less prominent is identity management software that seeks to identify

(“Who are you?”), authenticate (“Can you prove your identity?”) and authorize

(“What are you allowed to do?”) attempts, legitimate and illegitimate, to access

platforms and their contents. The most difficult of these questions is

authentication. As the technology improves and costs drop, authentication

methods are moving away from examining what you know (e.g., a password) to

examining something you have (e.g., biometrics such as the use of fingerprints, iris

scans, voice scans, etc.).

The most familiar detection tools are those directed at viruses (i.e., malicious

software code), that have eluded the barriers erected in hardening a platform. Less

visible are the huge investments organizations make in (1) capturing and then

analyzing the streams of digitalized transactions being executed on digital and

digitalized platforms, and (2) embedding processing logic into the software handling

these transactions to identify and reroute problematic transactional events.

Intra-Organizational Information Sharing Regarding Malicious Intrusions

As emphasized earlier, digitalization risk management is a participation sport

demanding the involvement of all employees. However, organizations’ employees

demonstrate wide variance in: their awareness of, knowledge of and sensitivity to

security breaches; their platform access privileges; their willingness to act in

compliance with security breach policies and procedures; and, their abilities to act

appropriately in the face of a security breach.

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Because of these variances, many organizations are including comprehensive

intra-organizational information dissemination and sharing programs as prominent

components of their efforts to prevent and mitigate malicious intrusions. These

programs typically include:

 Awareness Training: All employees are made aware of the basics of cyber-

security risk management (both work-related and home-computer use) and, specific to each employee, those risks most likely to arise as employees carry out their day-to-day work activities.

 Platform Usage Training: Each employee interacting with a specific digital or business platform is provided with the knowledge and skills to effectively

deal with the digitalization risks associated with that platform.

 Specialized Training: All technology professionals and all risk owners are provided with advanced education to develop the capabilities needed for

them to carry out their assigned responsibilities.

 Technical Support: All employees are provided ready access to a cyber-

security support group that can answer questions that arise regarding the risk of malicious intrusions and that can aid an employee when faced with a

probable or actual security breach.

Extra-Organizational Information Sharing about Malicious Intrusions

Organizations’ leadership teams are increasingly recognizing the value of the

external sharing of information about security breaches. Initially, most organizations

were reluctant to report on security breach incidents because of the expectation that

most stakeholders (e.g., consumers, value stream participants, strategic partners,

securities analysts, etc.) would react negatively, at least in the short-term. However,

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the consequences of reported security breaches, while still negative, have been

declining over time.53,54 Three explanations for this decline are:

 More effective remediation and disaster recovery by firms, as well as a decrease in customers refraining from doing business with firms that experienced a security breach.

 The U.S. Government’s promotion, since 1999, of industry-based trade associations known as information sharing and analysis centers (ISACs). As

of 2016, there are eighteen sector-based ISACs coordinated under a National Council of ISACs.

 The enactment of federal and state security breach notification laws.

As more organizations actively gather and share information on digitalization-

risk threats, vulnerabilities and incidents, as well as best practices in digitalization

risk management, their capabilities to combat malicious intrusions will only improve.

Rather than feeling as if they are working alone against an increasingly hostile world,

organizations’ risk specialists and risk owners will increasingly find themselves

coordinating with and collaborating with their peers in other organizations, including

competitors, in order to drive informed decision making.

The Board of Directors and Digitalization Risk Management

As a general rule, those organizations most successful in applying digitalization

for competitive purposes have developed exceptional capabilities in digitalization risk

management. But, who, ultimately, is accountable for the quality of an organization’s

53 L. Gordon, M. Loeb and L. Zhou (2011), “The Impact of Information Security

Breaches: Has There Been a Downward Shift in Costs?”, Journal of Computer Security, Vol.

19, No. 1, 2011, pp. 33–56. 54 S. Goel and H.A. Shawky, "The Impact of Federal and State Notification Laws on

Security Breach Announcements," Communications of the Association for Information

Systems: Vol. 34, January 2014, pp. 37-50.

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digitalization risk management capabilities? With a public firm, it is the firm’s Board

of Directors.

However, most Boards of Directors have only gradually – and grudgingly –

stepped up to their oversight responsibilities regarding digitalization risk

management. For example, studies55,56,57 of Boards of Directors portray the following

practices:

 Board members are not actively recruited for their digitalization expertise. Few executives of organizations recognized as digitalization leaders are

members of Boards of Directors.

 Very limited discussions of digitalization take place at Board meetings.

 When digitalization is discussed at Board meetings, these discussions tend to

be after-the-fact updates regarding recent, significant digitalization initiatives.

 Most of this limited discussion of digitalization occurs in Board committee meetings. Most often, this committee tends to be the audit committee,

where the issues raised are done so in reaction to a problematic event.

 Few Boards of Directors have a committee focused exclusively on digitalization.

Overall, a state of complacency regarding digitalization continues, with Board

members believing that their organization’s leadership team has a solid handle on

managing the risks of digitalization. That said, a growing number of exceptions to

this general depiction can be observed in recent trends regarding Boards of Directors

and digitalization.

55 S. Huff, P. Maher and M. Munro, “Information Technology and the Boards of

Directors: Is there an IT Attention Deficit,” MISQ Executive, June 2006, pp. 55-68 56 M. Parent and B. Reich, “Governing Information Technology Risk,” California

Management Review, Spring 2009, pp. 134-152. 57 S. Andriole, “Boards of Directors and Technology Governance: The Surprising State

of the Practice,” Communications of the CAIS, Volume 24, Article 22, 2009, pp. 373-394.

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What should be the role of Boards of Directors in managing digitalization risk?

Three Board responsibilities are most important. The Board of Directors must assure

that their organization is not overly exposed to digitalization risks that threaten

business continuity, regulatory compliance and competitive success. In order for

these responsibilities to be met, Boards of Directors need to adopt best practices such

as:58,59

 Bringing members with digitalization experience and expertise onto the Board.

 Regularly inviting senior executives whose work responsibilities involve strategically-critical digitalization initiatives to Board meetings.

 Systematically including digitalization issues on the agenda of full Board

meetings. For the most part, the focus of these discussions needs to address strategic rather than tactical issues, including Board reviews of all

major digitalization-related assets, investments and initiatives.

 Establishing a Board digitalization committee.

Accounting for Digitalization Risks in Digital Strategy Formulation

Digitalization risks affect digital strategists’ thinking in two ways: by adding

layers of complexity onto their efforts to enhance existing business models and to

innovate with new business models, and by requiring that the requisite capabilities

are in place to enable both business model formulation and business model

implementation. Table 8-6 describes how each of the four elements of business

models are influenced.

58 M. Bloch, B. Brown and J. Sikes, “Elevating Technology on the Boardroom Agenda,

McKinsey Quarterly, 2013, No. 1, pp. 99-103. 59 H. Sarrazin and P. Willmott, “Adapting Your Board to the Digital Age,” McKinsey

Quarterly, 2016, No. 3, pp. 89-95.

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Table 8-6 How Business Models Are Affected by Digitalization Risks

Value Propositions Profit Models

 Provide value in return for personal data that is captured, archived and/or used.

 Ensure the security, and hence the trustworthiness, of digital platforms and business platforms.

 Comprehensively and accurately account for the digitalization risk management costs associated with developing, implementing and evolving a business model.

Core Capabilities Dynamic Capabilities

 Digitalization risk management capabilities (accounting for all threat areas).

Tuning of digital strategists’ environmental scanning regarding:  Digitalization threats.  Digital technologies.  Strategic capabilities.  External sourcing providers.  Competitors’ business model

innovations.

Increasingly, critical features of the value propositions being offered to pipeline

ecosystem consumers and network ecosystem participants are dependent on

personal data provided by or collected about individuals. If an individual feels the

quid pro quo is inadequate, the individual is unlikely to engage, partially or fully, in

market ecosystem interactions. Similarly, market ecosystem participants lacking

trust in the platforms enabling a value proposition would be expected to refrain from

platform interactions.

The long-term expectation from aggregating the profit models associated with

a business model is that the business model will prove profitable. However, if a

business model’s risk exposure requires extensive digitalization risk management

capabilities, and if the investment and operating costs associated with these

capabilities are not fully accounted for in the business model’s aggregated profit

models, then what might appear initially to be a very successful business model is

likely to become a huge liability over time.

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If nothing else, this chapter’s content should have driven home the point that

in a world of pervasive digitalization, digitalization risk management has become a

core capability for all organizations and a strategic capability for some (e.g., financial

services organizations, e-commerce organizations, cloud-based organizations, etc.).

If digitalization knowledge and experience is not represented within organizations’

senior leadership teams, as well as within the Board of Directors of private firms,

then it becomes unlikely that a strong digitalization risk management capability will

be developed.

Finally, and most importantly, as extensive digitalization pervades an

organization’s strategies and operations, the breadth of the organization’s dynamic

capabilities must span an increasingly-wide gamut of markets, competitors, strategic

partners, strategic capabilities and digital technologies.

A Recap and Look Ahead

Competitive success in the face of digital disruption requires organizations’

leadership teams and digital strategists to demonstrate relentless vigilance with

regard to digitalization opportunities and, as covered in this chapter, digitalization

threats. But, how can such a mindset be established within an organization’s

members? In the next chapter, six actions aimed at just such an objective are

described.

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Chapter 9. Executive Mandates: Digital Strategy

Today, leadership teams are likely to find themselves spending an

inordinate amount of time examining the opportunities and threats pervasive

digitalization poses to their organization, their industry, their employees and

themselves. The digitalization of pipeline ecosystems and network ecosystems, of

the products and services being exchanged within these ecosystems, and the core

capabilities driving competitive success continues at an incessant pace. Most

worrisome, perhaps, is a realization that it is increasingly difficult to predict the

source and direction of the next potentially-damaging move by a competitor.

Then, once a competitive attack has occurred, deciding how to respond

becomes just as perplexing. The options seem endless:

 Doing nothing at all, hoping that the attack will dissipate quickly with minimal effect.

 Distracting your existing customers from the competitor’s move through surface-level enhancements to the value propositions offered to these

customers.

 Boosting the effectiveness of your executing business model through a series of digitalization initiatives.

 Quickly imitating the attack (as best as is possible given held-capabilities), hoping to ride the wave, limit the damage and capture some of the new

value being created.

 Introducing a well-thought-out but small-scale disruption of your executing business model in order to capture a niche in or to redefine your current

market space or to create a new market space.

 Aggressively reallocate resources from the digitally-threatened market space

to a digitally-promising one that matches well with your core capabilities.

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If anything, arriving at an effective competitive response can prove to be a greater

challenge than recognizing and understanding the implications of a threatening move

by a competitor.

So, how should organizations’ leadership teams position themselves and their

organizations for incessant digital disruption? The first step is to acknowledge that,

while digital technologies are the basis of digital disruption, digital technologies are

not the basis of effective digital strategy. Instead, what is critical is the adoption of

a digitalization mindset across the leadership team (and, ideally, all of an

organization’s members), the building of a digitalization culture across the

organization, and the infusion of key notions into the thought-processes of digital

strategists. The following six mandates are offered to senior executives desiring to

maintain their organizations’ competitiveness in the face of digital disruption:

 Embrace a Digitalized Ecosystem Mindset

 Innovate and Iterate for Digitalization Success

 Invest in Data and Analytics

 Evolve Processes and Platforms at Multiple Speeds

 Track and Valuate Intangible Digital Assets

 Cultivate a Digitalization Culture

Embrace a Digitalized Ecosystem Mindset

The dominant mindset held by many, if not most, senior executives today is

that their organizations operate in a well-defined competitive space, engage in

mostly-linear upstream and downstream processes, and execute a relatively-stable

business model. But, digitalization shakes up the competitive space in many ways:

incumbent competitors are reinventing themselves; new entrants (startups, digital

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giants, technology entrepreneurs, etc.) regularly emerge; and, suppliers,

intermediaries and consumers are demonstrating increasing flexibility in deciding

with which organizations to interact and with which markets to participate, as each

seeks out the value propositions that best meet their ever-evolving desires and

requirements.

Successful leadership teams today are increasingly adopting a digitalized

ecosystem mindset – that is, a view of competitive spaces as markets characterized

by high rates of business model evolution/innovation, high levels of information

sharing and value co-creation by market participants, and high rates of participant

entry/exit. In such competitive environments, competitive success largely hinges on

leadership teams: looking outward first, and then inward; and, developing

capabilities to identify, assess, engage, collaborate with and disassociate from

strategic partners.

The primary intent driving the digitalized ecosystem mindset is to become the

partner of choice in each market space in which an organization participates. What

makes an organization an attractive partner in the face of digital disruption? A

deceptively short list of desired qualities includes:

 Capable, creative digital strategists (often referred to as chief digital officers) across an organization’s operating and staff units, able to

orchestrate (internally and externally) innovative, value-adding digitalization initiatives.

 A talented, digitally-savvy workforce.

 Efficient, secure, adaptable and interconnected platforms that can be connected to or decoupled from quickly and with little investment.

Two organizations whose leadership teams are noted for having demonstrated

digitalized ecosystem mindsets are General Electric (GE) and LEGO.

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Recognizing that it needed to transform itself into a modern digital business,

GE has invested over $1 billion to position itself to become a competitive leader of

the emerging, highly-digitalized market ecosystems within which it was already and

would be participating.60 To infuse a digitalized ecosystem mindset into the firm’s

executive leadership, GE consolidated each business unit under a chief digital

officer (CDO), with these CDOs reporting to the business unit CEOs. Importantly,

these CDOs have approval authority for digitalization-related investments. GE has

also gone on an ambitious hiring spree, bringing in thousands of new software

engineers, user-experience experts, and data scientists to acquire needed skillsets

and embed the right innovation mind-set.

After having verged on defaulting on its debt in the early 2000s, LEGO has

again become a thriving business once its leadership team adopted a digitalized

ecosystem mindset in which there was no longer a separate digital strategy that was

aligned with business strategy, but rather a corporate business strategy executed

through digitalization.61 The three core elements of LEGO’s overarching digitalized

business strategy involved: product innovation and the product ecosystem; digital

marketing; and, a transition toward global, rather than local, platforms. Key

initiatives put in place to enable this overarching strategy included: distributing much

of the corporate information technology function into business units; appointing CDOs

60 T. Catlin, L. Harrison, C.L. Plotkin and J.r Stanley, “How B2B Digital Leaders Drive

Five Times More Revenue Growth than Their Peers,” McKinsey Quarterly, October 2016,

http://www.mckinsey.com/business-functions/marketing-and-sales/our-insights/how-b2b-

digital-leaders-drive-five-times-more-revenue-growth-than-their-peers 61 O.A. El Sawy, P. Kraemmergaard, H. Amsinck and A.L. Vinther., “How LEGO Built

the Foundations and Enterprise Capabilities for Digital Leadership,” MIS Quarterly Executive,

June 2016, pp. 53-64.

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within business units for the purpose of orchestrating digitalized innovation;

nurturing an experiment, learn and iterate capability across the firm, leveraging the

complementary digitalization capabilities of LEGO’s ecosystem partners;

implementing flexible and open engagement platforms, while reducing complexity and

maintaining security in enterprise platforms; and, hiring flexible, dynamic and adaptable

employees able to cope with task and position changes and to work on digitalization

projects anywhere in the firm.

Innovate and Iterate

LEGO’s tactic of innovation via iteration is not uncommon among digitalization

leaders. Being a first-mover (or, an early adopter) with a new digital technology or

a new digitally-enabled functionality is fraught with risk. Will the technology work as

expected, and at what cost? Will enhancements to customers’ or employees’

interactive experiences be favorably received and, hence, contribute to improving the

value propositions of executing business models or lead to the creation of new

business models? Will the operational improvements made possible by new

functionality improve the profit models of executing business models or enable an

executing model to be applied to an adjacent market space? Iteration – that is,

engaging in a series of mindful strategic experiments – allows the proponents of an

innovation to gain some of the innovation’s anticipated benefits while still learning

about and improving the innovation.

Amazon, for example, uses an internal experimental platform to evaluate

improvements to its websites and products through a factual, experimental approach

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to constant innovation.62 If anything, the number of these experiments is increasing

over time – as can be observed from an April 2014 letter to Amazon shareholders

that reported the number of these experiments growing from 546 in 2011 to 1,092

in 2012 to 1,976 in 2013.

Successful digitalization requires that organizations transform how they think

about innovation in two key ways. First, digitally-savvy talent must be deeply

involved with innovative initiatives at every stage: creating the idea, improving the

concept, building early prototypes, assessing the viability of these prototypes,

designing and launching a series of strategic experiments, and, finally, incorporating

the innovation as a standard way of doing business. Second, at their start, successful

digitally-enabled innovations are almost always kept separate from the standard way

of doing business. By separating innovative initiatives from normal operations, two

things occur: it becomes easier to attract creative, digitally-savvy talent to work on

the initiatives, and the innovative initiatives are less likely to be impeded by

entrenched ways-of-thinking, policies and procedures.

At some point, leadership teams need to make a critical decision: “Is a

successful digital innovation maintained as a separate entity or is it folded into the

standard way of doing business?” The ultimate goal for any established organization

is to develop capabilities that competitors are unable or unwilling to imitate.

Consequently, most leadership teams will want to eventually integrate the digital

innovation with the rest of the organization. Doing so creates a seamless digital-

physical experience, enables greater efficiency via economies of scale and scope,

62 P. Bell, “Sustaining an Analytics Advantage,” Sloan Management Review, Spring

2015, pp. 21-23.

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permits better coordination, avoids duplicated effort, and facilitates timely

communications and decisions. But, what if an organization’s established business

models are severely threatened by a digital innovation? In such situations, it just

might be best to keep separate the innovative business models and the established

business models, letting these compete for market share until only one is left.

Invest in Data and Analytics

Increasingly, the most telling pathway to value creation through digitalization

involves applying analytic models to the vast quantities of data permeating digitalized

market ecosystems. To take advantage of this pathway, an organization must

possess the capabilities to recognize the value potential of data streams that are both

fleeting and voluminous, and to capture, organize, analyze and apply these data in

value-creating ways. Thus, investing smartly and proactively in the technologies,

tools and talent needed to position an organization such that it is able to quickly and

effectively exploit data-related, value-creating opportunities as they arise can pay

huge dividends over time.

What exactly are these value-creating opportunities? Invariably, the

immediate answer to this question involves being able to combine data and analytic

models by using:

 Transactional data along with efficiency and effectiveness metrics to improve operational process (upstream, internal, downstream) performance and managerial process (decisions, coordination, oversight) performance.

 Customer/client, community, product, service and promotional data along with market, industry and macroeconomic data to better understand

customer/client/community motivations and behaviors, product/service portfolios, and market and business model viabilities.

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Less obvious, however, are data monetization opportunities. Data monetization

refers to the bundling together of well-defined sets of data and analytic models such

that the intangible value of data is transformed into something of tangible value. Two

primary approaches to data monetization exist.

With the first approach, streams of data involved in an organization’s

operations are captured, cleaned and repackaged (via analytics) such that the data

become valuable to other organizations. Think of the vast amounts of data a big box

retailer collects on POS devices, which can be complemented by associated

customer/geographic data. Or, think about the vast amounts of data collected by

auto insurance companies on the devices installed by car owners to monitor driving

behavior. Or, consider that one oil rig with 30,000 sensors may examine only one

percent of the data collected because it uses these data to detect and control

anomalies63 – ignoring the value of the data in supporting drilling optimization and

oil/gas prediction activities, when combined with similar data from hundreds of other

rigs. Such data products can be sold directly to organizations desiring to use the

data or to third-party data marketplaces.

With the second approach, an organization offering specialized services to

clients can use historical client-engagement data to develop optimized algorithms

that can then be applied to data collected on a new client engagement, enabling

superior services to be provided to this new client at a price-point below that of many,

if not most, competitors.

63 J. Deichmann, K. Heineke, T. Reinbacher and D. Wee, “Creating a Successful

Internet of Things Data Marketplace, McKinsey Quarterly, October 2016,

http://www.mckinsey.com/business-functions/digital-mckinsey/our-insights/creating-a-

successful-internet-of-things-data-marketplace

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Consider, for example, ExcelShore, a digitalized tool developed by Cybage, an

Indian technology services provider.64 Initially conceived as tool for analyzing

Cybage’s internal resources, ExcelShore analyzes collected client data (e.g., the

client’s business history, current operations, prospective projects and resources; data

about the client’s industry; etc.) to generate solution recommendations for the client,

as well as a customized dashboard used by ExcelShore staff to manage the client

engagement. With ExcelShore, Cybage is able to offer fee structures (to its clients)

that are generally 20-25 percent lower than the fee structures offered by its larger-

scaled competitors – without compromising service quality or consistency.

For another example, consider the strategy followed by Littler, a global

employment and labor law practice, in unbundling many of the tasks involved in

delivering services to clients by assigning these tasks either to knowledgeable people

(possibly contractors) with pay scales below those of specialized attorneys or to

digitalized products with automation and analytics capabilities, depending on the level

of sophistication involved.65 Now, instead of billing clients for the hours its attorneys

spend on claims, Littler uses a fixed-fee pricing model based on productivity (per

grievance or complaint) for certain of its legal services. This change has resulted in

lower legal costs for clients (figures ranging from 10-35 percent), enabling Littler to

win new business.

64 A. Kathuria and B. Yen, “The Art of Winning an Unfair Game: Cybage & India’s IT

Industry,” Communications of the Association for Information Systems, Vol. 37, 2016, pp.

753-766. 65 M. Sawhney, “Putting Products into Services,” Harvard Business Review, September

2016, pp. 83-89.

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Evolve Processes and Platforms at Multiple Speeds

Organizations embarking on a digitalization journey almost always face a

recurring challenge – projects targeted at enhancing digitalized products, services,

engagement platforms and customer/community-facing processes tend to be more

numerous and to move at a much faster pace than projects aimed at enhancing the

mission-critical and house-keeping transactional processes and platforms that keep

an organization running and compliant with regulators. This in itself is not a problem.

What is a problem is that sooner or later – actually, mostly sooner – the process or

platform that evolves at a fast pace must be interconnected to and synchronized with

processes or platforms that evolve at a slower pace; and, it is with these efforts

aimed at interconnection and synchronization that serious problems can arise:

 Fast-paced projects are slowed down or derailed.

 Processes or platforms that must be quick, efficient, reliable and secure

begin to exhibit performance problems.

 Governance systems put in place to ensure process/platform stability

impede process/platform agility (or vice versa).

What can an organizations’ leadership teams do to minimize such problems?

Actually, the challenge is more severe than might be inferred from the above

discussion. All organizations today depend on digitalized processes executed from a

mélange of digital platforms and business platforms. Depending on the nature of the

processes hosted on a platform, a platform’s design could:

 Emphasize stability, agility or both.

 Emphasize operational excellence, customer intimacy and/or product

leadership.

 Evolve at a rate to maintain alignment with the rate at which crucial

ecosystem elements change; this could be a fast rate, a slow rate, or

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anywhere in between.

Think of a juggler having to keep a set of balls moving despite the fact that each ball

is also moving in a unique orbit around a central orbital point. So, ideally, these

processes and platforms are not evolving at two rates of speed or at three rates of

speed, but at many rates of speed. Process owners and platform owners across the

organization must evolve their processes/platforms at very different rates of speed

and, over time, are likely to have to adjust these rates of speed.

So, again, what can an organization’s leadership team do? An easy, quick,

one-size-fits-all solution just does not exist. Instead, a leadership team needs to

fashion, over time, a new and consistent set of organization, platform and governance

models:

 Organization Design: establishing process and platform management reporting structures to enable seamless process/platform design, development, operation and evolution.

 Platform Design: transitioning to modular platform architectures, a consistency in module interfaces, and an understanding of when and where

to use tight or loose inter-platform and intra-platform connections.

 Governance Design: redesigning an organization’s expansive collection of planning, control and budgeting systems to facilitate, rather than inhibit, an

appropriate rate of evolution for each process and platform.

While organizations’ leadership teams may not possess the expertise involved in

carrying out these activities, it is critical that leadership teams provide direction and

oversight. Issues related to reporting structures, to platform architecture and to

negotiations regarding priorities, investment funds and operating budgets are

precisely those that can produce severe intra- and inter-unit conflicts – conflicts that

often can only be resolved by an organization’s most senior executives.

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Track and Evaluate Intangible Digital Assets

Two forms of capital underlay organizations’ digitalization success. The first

involves tangible digital assets, or the commodity technologies (e.g., servers,

routers, messaging services, Internet standards and software, etc.) that serve as the

building blocks of digital platforms and of business platforms. Invariably,

organizations’ investments in tangible digital capital appear as capital investment on

company books.

The second type of capital involves intangible digital assets, such as:

 Market, product, services and platform designs that attract, engage and

retain large numbers of ecosystem participants.

 Operational and analytical processes that capture, organize and exploit data

regarding market events, about operational and managerial activities, and about participant beliefs, expectations, behaviors and perspectives.

 Knowledge and skills held by an organization’s employees as well as its partners’ employees.

 Digitalization reputation acquired by an organization.

Well-known examples of intangible digital assets are Amazon’s and Netflix’s

recommendation engines, both of which have contributed significantly to each

company’s revenue growth and served as long-lived competitive barriers.

Conventional accounting invariably treats intangible digital capital as an expense,

rather than as a capital investment, thus creating an investment disincentive (at least

in the short-term).

With little guidance from conventional accounting methods regarding how to

track and attach financial value to intangible digital assets, many organizations’

financial groups perform this task poorly or not at all. As a consequence, an

organizations’ leadership teams have little solid evidence on which to assess their

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organizations’ investment in digitalization over time or to compare these investments

against that of competitors. Both a retailer lacking rich data on consumers or a bank

unable to control the capture of customer data (because customers access banking

services through a third-party digital platform) face increasingly daunting competitive

disadvantages. Organizations’ leadership teams must ensure that their organizations

have taken on the difficult tasks of:

 Reclassifying expenditures to separate out intangible digital assets.

 Tracking the spending on intangible digital assets (typically overlooked by

accounting procedures).

 Assigning appropriate value to investment in intangible digital assets.

 Treating these investments, minimally with regard to digital strategy

formulation, as capital investments rather than current expenses.

Cultivate a Digitalization Culture

Acquiring and developing technology-based capabilities – such as those based

on Big Data, Big Data analytics and cloud services – are obviously crucial to

digitalization success. However, consider the issues presented as mandates for

executive action: mindsets, innovation, experimentation, data monetization,

operating at multiple and variable speeds, and a preoccupation with intangible assets.

Each of these, at their core, reflect aspects of a digitalization organization culture.

Organization culture is one of those terms that are intuitively understood but

that prove difficult to define simply. Suffice it to say that an organization culture

is comprised of the assumptions, values and norms of behavior collectively held by

an organization’s members. Spend time observing how an organization’s members

act and interact, and you will inevitably come away with an understanding of the

organization’s culture. The more time spent observing, the richer the understanding.

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This same thing happens as new employees sense and adopt the particular culture

of their organization and act accordingly.

In stable environments, executives tend to rely on what has been learned from

past experiences to build the system of policies, directives, rules, routines and top-

down reporting relationships that mold employees’ perspectives and actions. In

volatile environments, however, organization structures that protect and exploit

current mindsets and capabilities often induce strategic inertia, where attention and

investment is given to things that no longer matter. As has been recurrently

emphasized, environments beset with the constant threat of digital disruption are

anything but stable. As the drivers of this instability are strongest at the edges of

organizations and at the edges of market-focused ecosystems, the importance of

local knowledge and strategic agility intensifies. As a result, executives striving to

position their organization for digitalization success are advised to transition their

organizations and themselves toward a very different organization culture, a

digitalization culture that largely relies on the capabilities and judgments of

employees – working alone and in small groups – holding local knowledge and

unencumbered by bureaucratic or overly-burdensome hierarchical constraints.

What does this emerging digitalization culture look like? A good starting

point is to recognize how digitalization is enabling us, as we carry out our consumer

and employee roles, to achieve better outcomes from taken-actions:66 we are being

given more options, more information about these options, and more permission to

act as we think best. To grasp what is implied by – and gained from – a culture that

66 B. Libert, M. Beck and J. Wind, The Network Imperative: How to Survive and Grow

in the Age of Digital Business Models, Boston, MA: Harvard Business Review Press, 2016.

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first and foremost relies on employees’ capabilities and judgement, consider the

following two illustrations.67

 An Asian insurance company hosted an intensive digitalized jam session over a 48-hour period, assigning 120 participants to ten cross-functional teams and tasking these teams, via a friendly competition, to redesign how

customers processed their healthcare claims. The final outcome produced went far beyond the initiative’s original scope – effectively eliminating the

need for processing customers’ claims.

 A telecom company wanted to both shorten its product-development time (six months, on average, from start to active-trial) and include employee

training and internal pilots within this shortened time period. A mixed team of product managers, digital technology professionals and engagement-

experience experts tore apart the company’s old process and laid out a simpler, automated approach that allowed customers of its fiber, mobile, and TV services to access service in three quick steps. They conceived,

tested, and built the new process in less than twelve weeks.

Rather than attempting to define the elements that come together to form a

digitalization culture, we illustrate a digitalization culture in practice through the

efforts taken by Valve Corporation’s leadership team to transform the firm’s

organization culture.68

Beginning as a video game company, Valve has evolved into a digital

distribution platform, known for products such as Steam and SourceForge. Valve’s

self-reported revenues per employee and profit per employee metrics exceed those

of Facebook and Google, signaling quite vividly that Valve is succeeding in a fast-

67 T. Catlin, L. Harrison, C.L. Plotkin and J. Stanley, “How B2B Digital Leaders Drive

Five Times More Revenue Growth Than Their Peers, McKinsey Quarterly, October 2016.

http://www.mckinsey.com/business-functions/marketing-and-sales/our-insights/how-b2b-

digital-leaders-drive-five-times-more-revenue-growth-than-their-peers 68 The discussion of the Valve Corporation has been adapted from materials in: T. Felin

and T.C Powell, “Designing Organizations for Dynamic Capabilities,” California Management

Review, Summer 2016, pp.78-96.

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moving environment requiring constant agility, strategic innovation, and market

adaptation.

A key factor behind this success is Valve’s culture, which emphasizes the firm’s

dependence on employees’ capabilities and judgements (as reflected in the Valve

new employee handbook). Employees are expected to:

 Steer, without asking for approval, the firm toward opportunities and away from risks.

 Constantly be looking for more valuable ways to spend their time.

 Allocate up to 100% of their time to self-directed projects.

Why such a dependence on the initiative of individual employees? In environments

demanding that competitive opportunities and threats are quickly sensed and

responded to, the immediate challenge for organizations’ leadership teams is to

effectively leverage the information, knowledge and capabilities held by the

organizations’ members and applying these in collective decision-making. Thus, a

paramount task of the leadership teams of organizations seeking digitalization

success is to ensure:

 Employees are in constant contact with relevant elements of the competitive

environment and with other individuals (both inside and outside the organization) holding relevant information, knowledge and capabilities.

 Employees are provided the motivation, time and resources to learn from, share with, and collaborate with these other individuals.

Valve’s leadership team has gone beyond traditional decentralization toward radical

decentralization by giving talented specialists in product research, design and

engineering full autonomy to propose projects, recruit project teams, establish

budgets, set timelines, and ship products to customers.

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Nonetheless, it is important to recognize that radical decentralization has

advantages and disadvantages. As a guiding principle, radical decentralization gives

authority to those who operate closest to the action – that is, to individuals, groups

and units holding specialized knowledge and operating at an organization’s edges,

thereby facilitating local creativity and experimentation while minimizing bureaucratic

roadblocks. What radical decentralization lacks is the assurance that taken-decisions

and taken-actions are vetted by affected-others (individuals, groups and units) and,

if needed, adjusted. Allowing for such assurance, however, takes time. In an era of

digital disruption, it does not take much of a delay to significantly reduce the benefits

actually realized from a competitive action.

To address this quandary, Valve employs mechanisms referred to as social

proofs – a social influence mechanism aimed at producing coordinated behavior

among individuals. As Valve’s leadership team sees it, a purposeful system of social

proofs provides an effective counterweight to the chaotic tendencies of radical

decentralization.

The primary behavioral mechanism driving Valve’s social proofs is self-

selection; that is, employees vote with their feet. They assess markets for new

opportunities, gather information about existing projects and teams, and decide by

themselves whether to join an existing team or to form a new project. Obviously,

not all the decisions made by employees are optimal, for the employee or for Valve.

However, experience at Valve suggests that, in the aggregate, the choices made by

talented, empowered individuals provide insightful, reliable and low-cost predictions

of where and how fast the market is moving.

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While self-selection empowers the right people to make decisions, it does not

by itself overcome the disadvantages of radical decentralization. Not wanting to

impair employees’ initiative by putting in place multiple approval layers, Valve’s

leadership team conceived a method of social convergence referred to as the rule of

three. Learning from experience, Valve’s leadership team recognized that it was a

rare occurrence for one or two individuals, regardless of reputation or capability, to

command enough information or resources to sense, shape and seize a sizeable

market opportunity. Under the rule of three, new projects are only considered for

approval when at least three individuals come together to propose a project. The

rule of three, thus, provides a light-touch intervention that allows Valve to stimulate

innovation and to limit the chaos that can otherwise debilitate radical

decentralization.

A Recap

It is important to recognize that the six mandates just described are neither

silver bullets nor readily implemented. The policies and practices put in place in one

organization may or may not work when applied within another organization.

Instead, in approaching each of the mandates, an organization’s leadership team

needs to interpret the mandate through a lens that reflects the organization’s in-

place culture, human talent, digitalization history and competitive environment. Such

an assessment should suggest how the spirit of the mandate is best applied as well

as the steps to be taken to implement the refashioned mandate.

As an organization’s leadership team begins to achieve progress in diffusing

these six mandates across their organization, a number of things should begin to

occur, including:

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 Existing policies and practices will increasingly be questioned.

 Employees will increase the amount of time they spend interacting with

others outside their areas of immediate responsibility.

 Decisions will increasingly be expected to be justified through facts, e.g.,

analyzed data.

 The volume of innovative ideas bubbling up across the organization should increase.

While a surge in such behaviors might be unnerving to some of an organization’s

managers and executives (at least in the near term), it is precisely these type of

behaviors that will enable an organization’s digital strategists to engage in the

dialogues and debates that ultimately generate timely and successful digital

strategies.

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PART 2. DIGITAL INVESTMENT

Chapter 10 The Digital Investment Enigma

Chapter 11 Strategic Focus

Chapter 12 Value Pathways

Chapter 13 Building a Persuasive Business Case

Chapter 14 Monetizing Benefits Flows

Chapter 15 Implementation Planning

Chapter 16 Project Management Planning

Chapter 17 Executive Mandates: Digital Investment

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Chapter 10. The Digital Investment Enigma

Organizations of all types are exposed to unprecedented demands to digitalize

– both imitatively and innovatively – their products, services and processes to survive

and to thrive in the face of digital disruption. Relentless technological progress and

the astonishing creativity being observed – especially that rendered through the

Internet, social media and Big Data analytics – are creating new avenues for gaining

and sustaining competitive advantages. Given such an environment, then, it is not

at all surprising that organizations’ executives and managers regularly find

themselves developing, championing and/or approving digital investments – many of

which are transformational, risky and expensive!

Making decisions about digital investments is certainly not new. Business

investments enabled through or supported by digital technologies have been a core

element of many organizations’ strategies since the mid-1990s. Many of these

investments have paid off well: operational and managerial processes are improved;

costs are reduced; interactions with customers and suppliers occur more quickly,

more securely and more conveniently; the launching of new products and new

services occurs more quickly and more often; and so on.

Still, many managers – particularly organizations’ most senior executives –

remain skeptical about the value of any digital investment, let alone a large-scale

digitalization initiative. When you think about it, this skepticism is quite

understandable. Achieving success with digital investments can be very challenging,

especially when an investment: depends on new technologies; introduces new

products or services; requires people to change their perspectives and behaviors;

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disrupts established procedures; is directed toward an immature market space; etc.

Under-performing – and failing – digital investments are not rare events, and any

manager burned in the past by an underperforming digital investment is likely to view

new digital investments with considerable skepticism. Competitively, the logic behind

a new digitalization initiative may seem clear; pragmatically, however, digital

investments are too often seen as risky, bottomless money pits likely to produce

meager, if any, long-term financial returns.

Unfulfilled expectations regarding past digital investments produce three

negative outcomes. First, when anticipated benefits do not materialize, the

competitive positions sought are not attained. Second, most decisions to fund a

specific investment proposal invariably means that one or more other investment

proposals will not be funded. The higher a proposal’s cost, the higher are these

opportunity costs. Third, any manager disenchanted by past digital-related

investments is less inclined to believe the business cases offered in support of new

digital investments. Over time, it becomes increasingly difficult for proponents of

digitization or digitalization proposals to develop persuasive business cases.

In an ideal world, the realized financial returns from a funded investment

proposal exceed, not just achieve, the proposal’s promise. Realizing a proposal’s

promised benefits demands attention to two related activities: building a persuasive

business case, and mindfully overseeing the implementation of the funded proposal

such that the proposal’s promised benefits are realized. Our objective is to enable

readers to excel in both of these activities. To begin this journey, we describe the

three most common reasons why digital investments do not realize their promised

benefits:

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 The benefits were never there.

 The benefits were overstated.

 Inadequate efforts were taken to achieve the benefits.

As each reason is introduced, avoidance actions are presented and linked to the ideas

being presented in this part of our book.

The Benefits Were Never There

Sometimes, a proposed digital investment is ill-conceived from the start. In

other cases, an idea has considerable merit, but is inadequately thought through.

Problems arise for numerous reasons. The competitive action might be ill-conceived

because of flawed understanding of the market space or of participant preferences,

an ill-conceived profit model, insufficient or absent capabilities, etc. Alternatively,

the problem might lay with the enabling digital technologies: critical technologies

might not yet work as promised, the requisite internal technology capabilities might

be lacking, a poor understanding of a provider’s offered services or capabilities may

exist, etc. And, while a proposal’s strategy and enabling-technology might look fine

when initially considered, key assumptions and predictions built into the proposal can

turn out to be dead wrong.

A well-conceived investment proposal possesses a clearly articulated strategic

focus, is supported by a business case that describes how these aims will be achieved,

and is based on realistic assumptions and predictions. These issues are addressed

through discussions of the strategic focuses commonly applied in framing digital

investments, six value pathways through which digitization and digitalization

investments most often achieve their strategic aims, and the critical assumptions and

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techniques involved in fashioning and monetizing an investment proposal’s business

case.

The Benefits Were Overstated

Even when proponents of a digital investment proposal have identified

meaningful strategic aims and articulated how these aims will be achieved, they can

then err by overstating benefits, understating costs, or both. The psychology behind

such behaviors is pretty straightforward: “Our calculation of a $250,000 net benefit

might not be high enough. Why don’t we fudge the numbers a bit in order to bump

up to a $400,000 net benefit? If the project unfolds as we think it should, this higher

target is certainly achievable. Let’s just be really confident when selling our ideas to

senior management.” The problem, obviously, is that it might be very difficult to

achieve a $400,000 net benefit – an outcome that senior management now not only

expects to see but considers achievable.

How do you go about building a compelling, yet realistic, business case? What

should you be looking for in assessing a business case that has been proposed to

you? We will be describing how persuasive business cases are built and how the

benefits flows and costs flows associated with these business cases are monetized.

Inadequate Efforts Were Taken to Attain the Benefits

Perhaps the most common mistake finds the managers charged with

implementing a funded proposal failing to effectively carry out all the activities

necessary for promised benefits to be fully realized. Seemingly, the implementation

of almost every funded digitalization proposal turns out, after-the-fact, to be much

more challenging than originally thought. If critical implementation activities are

executed poorly, inadequately resourced or ignored altogether, you can be assured

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that some promised benefits will not be realized, that some specified costs will be

understated, and/or that some unspecified costs will emerge.

We provide discussions regarding the activities that need to be taken in order

to increase the likelihood that a digital investment’s promised benefits will be

realized. Specifically, management-oriented discussion of implementation planning

and project management planning are provided.

A Recap and Look Ahead

Today, an ever-increasing portion of organizations’ activities have been or are

in the process of being digitalized. Consequently, it is difficult to identify an executive

or manager in an organization that has not had to develop the business case for,

champion or approve a digital investment. The chapters comprising this part of our

book should enable you to build a persuasive business case for a digital investment

proposal, to know what to look for in assessing someone else’s investment proposal,

and to understand what is involved in implementing a funded proposal. We conclude

this part of the book by offering senior executives a set of high-level principles to be

implanted across their organizations to increase the likelihoods that well-reasoned

digital investments will be funded and that the promised benefits from these

investments will be realized.

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Chapter 11. Strategic Focus

The abilities to recognize valuable digital opportunities and to explain to others

the rationales that underlay these opportunities are important skills for all managers.

Twenty-five years ago, relatively few senior managers found themselves involved

with digital investment decisions as such decisions, to a large extent, were handled

by organizations’ technology executives and managers. But, things have

dramatically changed.69 In 1987, for example, U.S. corporations’ investment in

digital technologies per employee averaged around $1,500. By 2004, that amount

had more than tripled to over $5,000 per employee. Today, U.S. corporations spend

more on digital technologies each year as they do on offices, warehouses and

equipment.

Why this increased spending on digital technologies? There are two rather

obvious answers. First, the traditional form of industrial economies, the pipeline

ecosystem, has been extensively digitized and digitalized. Digitization refers to the

purely technical processes associated with converting sensed and captured data into

binary digits, storing and transmitting these data, and both performing operations on

these data and storing/transmitting the outcomes of these operations; and,

digitalization refers to the application of digitization within organizations and the

social and economic contexts within which these organizations are embedded. As

depicted in Figure 11-1, a pipeline ecosystem finds a producer (actually, many

competing producers) offering products and services to a consumer community

69 A. McAfee, “Mastering the Three Worlds of Information Technology,” Harvard

Business Review, November/December 2006, p. 141.

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(typically comprised of multiple consumer segments) and fashioning a linear value

stream involving numerous upstream (e.g., raw material suppliers, component

suppliers, etc.) and downstream (e.g., distributors, retailers, etc.) participants.

Increasingly, the operational and managerial processes being executed across this

value stream are digitalized and hosted on business platforms, which in turn are

enabled through technology services provided through digital platforms.

Figure 11-1 The Pipeline Ecosystem

ConsumersProducer IntermediariesIntermediaries

Markets

Material & Component Suppliers

Markets

Upstream Midstream Downstream

Second, digitization and digitalization are spawning new forms of economic

organization, the most significant of which is the network ecosystem. As depicted in

Figure 11-2, a network ecosystem finds an organization – referred to as the

network orchestrator – designing, operating and evolving a market platform

(comprised of digital platforms and business platforms) that brings together multiple

communities to exchange information, products and services. Within a network

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ecosystem, the vast majority of market-related, participant interactions (within a

community and between communities) occur through this market platform.

Figure 11-2 The Network Ecosystem

Producer Network

Consumer Network

Market

Network Orchestrator

Markets

Intermediaries

Material & Component Suppliers

Markets

Upstream Midstream Downstream

The extensive digitalization of pipeline ecosystems and of network ecosystems

has resulted in exceptional competitive successes being enjoyed by organizations

possessing finely-tuned digitalization capabilities. However, spending on

digitalization has reached heights where it cannot be ignored by organizations’ most

senior executives. Unrestrained spending on digitalization is most certainly a thing

of the past, if it ever existed at all.

Two researchers, Andrew McAfee and Erik Brynjolfsson, after analyzing data

about digitalization investment and organization performance, have made two

particularly striking observations useful in grasping how and when digital investments

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produce significant value for the investing organization.70 First, more-digitalized

firms tend to operate in more-turbulent business environments. When you think

about it, this is quite intuitive as organizations facing turbulent environments are

likely to stand the most to gain from the speed and response advantages of

digitalization. Second, McAfee and Brynjolfsson found:

 With more-digitalized organizations, higher-performing organizations achieved about a 50% higher average gross margin than lower-performing

organizations.

 With less-digitalized organizations, higher-performing organizations achieved

about a 20% higher average gross margin than lower-performing organizations.

Clearly, the performance implications from making the right digitalization investment

decisions at the right time are much more important for more-digitalized

organizations than for less-digitalized organizations.

What should you take away from these observations? First, not all of today’s

organizations need to invest in risky digitalization projects. If your competitive

environment is relatively stable (i.e., products, services, processes, facilities and

equipment, and market participants change rather slowly), you are generally better

off delaying a digital investment until other organizations have convincingly

demonstrated the value of the investment. Second, while digitalization can deliver

significant performance gains, the majority of these gains flow to those organizations

that have invested most heavily in digitalization. Importantly, the organizations

investing most heavily in digitalization are likely to have developed strong digitization

capabilities and, perhaps more important, strong digitalization capabilities.

70 A. McAfee and E. Brynjolfsson, “Investing in the IT that Makes a Competitive

Difference,” Harvard Business Review, July/August 2008, pp. 98-107.

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Digitization capabilities refer to an organization’s readiness to: apply digital

technologies, digitized content and technology services; manage digital platforms;

and, attract, manage and retain highly-skilled technology professionals.

Digitalization capabilities refer to an organization’s readiness to attract, manage

and retain individuals highly skilled in: identifying digitalization opportunities,

building and assessing business cases for digitalization investments, implementing

funded digitalization investments, managing business platforms, and achieving the

strategic aims sought through digitization.

This chapter covers what might be considered the most crucial of these

digitalization capabilities – conceptualizing and articulating the strategic focus of a

digital investment. If the proponents of a digitalization investment idea are unable

to clearly describe both their intentions and the target of these intentions, then it is

unlikely that others will be able to contribute in significant ways to the co-creation of

a digitalization proposal. Organizations lacking individuals possessing this capability

are likely to experience significant difficulties in beginning, let alone successfully

completing, digitalization initiatives. The topics covered include:

 The IT Productivity Paradox

 Strategic Focus

 Impacting Overall Financial Performance

The IT Productivity Paradox

Despite organizations’ ever-increasing investment in digitalization, consistent

evidence of positive returns from these investments has not always been apparent.

In fact, quite mixed evidence existed until the mid-1990s, which led economists to

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coin the term IT productivity paradox after Robert Solow observed, “We see

evidence of the computer age everywhere except in the productivity statistics.”71

A productivity gain occurs when it becomes possible to carry out a given

amount of work with fewer resources. Evidence of economy-wide productivity gains

from digitization are all around us. Think of your favorite airline, bank or grocer:

 Airlines offer online reservations and have built business processes for ticketless travel with self-service check-in.

 Retail banks have used their investments in ATMs and online banking to drive down the unit cost of operations in customer-facing activities.

 Retail groceries have negotiated electronic replenishment processes with their suppliers to dramatically reduce stock-outs and the cost of moving stock from the supplier through distribution centers to the retail store.

Most of these productivity gains have greatly benefited the consumer. Examples of

improvements in consumer welfare include: 24x7 product/service availability,

lower prices, less chance of a desired product being out-of-stock when you attempt

to purchase it, more product/service choice, more information (prices, availability,

reviews, etc.) about products and services, and a greater tailoring of products and

services to your specific needs.

But, many, if not most, of these gains in consumer welfare occurred without

corresponding profitability gains by the organizations investing in digitalization.

Consider, for example, the first firm in an industry to introduce a 24x7 online

customer support capability. The innovating firm may initially observe improvements

in customer satisfaction, sales growth and market share. However, if competitors

quickly take imitative actions, then a competitive equilibrium soon returns: customer

71 R. Solow, “We'd Better Watch Out,” New York Times Book Review, July 12, 1987, p.

36.

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satisfaction, sales growth and market share all return to where they were before the

innovating firm transformed the market space by providing the 24x7 online customer

support capability. Long-term, the only clear winner seems to be the consumer.

Since the mid-1990s, however, the accumulating body of economic evidence

has shown that superior decisions about when, where and how to invest in

digitalization can improve an organization’s performance across areas as diverse as

cost structures, sales growth, profit margins and stock prices. While numerous

factors are involved in explaining organization-specific performance gains, two

factors stand out above all.

First, organizations making superior digitalization decisions have invested

heavily to build and interconnect large stores of digitized content and an increasing

number of digitalized operational and managerial processes. With more content

being digitized and accessed by digitalized processes, a tipping point is reached where

new sources of business value, heretofore unavailable, arise. For example, by

bringing diverse sets of data and analytic tools to a decision-making situation, the

decision situation can be more comprehensively assessed – producing significantly

enhanced outcomes. And, by seamlessly interconnecting digitalized processes (e.g.,

interconnecting new product development processes, market research processes,

and manufacturing design processes), not only are each of the processes enhanced

but the combined effects can produce outcomes which previously were unattainable

or even unimagined. Each additional digital investment unveils a string of new

possibilities.

Second, organizations making superior decisions about digitalization have

invested heavily to increase their digitalization capabilities. As digitalization

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capabilities develop broadly and deeply across an organization, the organization’s

managers and professionals are increasingly able to combine their abilities and

experiences to identify and assess digital investments, to make savvy decisions about

which of these investments to fund, and to successfully implement the funded

investments such that anticipated benefits are realized. These digitalization

capabilities largely hinge on individuals’ abilities to envision the strategic aims sought

by a proposed digitalization investment. We examine these strategic aims next.

Strategic Focus

Adapting and extending a framework introduced initially by researchers Jeanne

Ross and Cynthia Beath, Table 11-1 identifies the four strategic focuses that are the

targets of most digitalization investments, the value drivers of each of these strategic

foci, and associated performance metrics. We begin by providing brief overviews of

the key concepts used in this table:

 A business model reflects an organization’s value-creating strategy.

 The digitized content and digitalized functionalities enabling business models are hosted on business platforms.

 Business platforms are enabled through the technology services provided by digital platforms.

 A value driver refers to a core factor underlying anticipated performance gains.

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Table 11-1 Digitalization Strategic Aims

Strategic Focus Value Drivers Performance Metrics

Digital Platform Operations & Technology

Services

• Digital technology performance-price ratios

• Digitization capabilities • Digitalization capabilities

• Costs of operations • Quality of services (security,

responsiveness, reliability, availability, scalability)

Business Platform Efficiency

• Digitization capabilities • Digitalization capabilities • Business platform first-order learning

• Transaction cycle times • Sales & general administrative costs • Inventory costs & ratios • Customer/participant support costs

Business Platform

Effectiveness

• Digitization capabilities • Digitalization capabilities • Business platform first-order learning • Market ecosystem first-order learning

• Sales revenue & market share • Customer/participant loyalty & share

of wallet

Business Model

Innovation

• Digitization capabilities • Digitalization capabilities • Business platform first-order learning • Market ecosystem first-order learning • Business platform second-order

learning • Market ecosystem second-order

learning

• Rate of new product/service introductions

• New product/services sales growth & gross margin

• Rate at which new communities are engaged

Digital Platform Operations and Technology Services

Digital investments are almost always, to some extent at least, aimed at

improving digital platform operations and services. Digital platform operations

refers to activities involved in planning, designing, running, managing and evolving

the technology services required to enable and support an organizations’ business

platforms, that in turn host organizations’ operational and managerial processes.

Examples of digital platform operational activities include: managing and operating

hundreds or thousands of servers, managing data storage devices, managing and

operating local area networks, etc. Technology services refer to the digitized

functionalities and the technical support provided to an organization’s employees

and, increasingly, to its customers and suppliers. Basic examples of such services

include: electronic mail, document copying and printing, help desks, website design,

establishing network interconnections, Internet-enabled messaging and chatting, etc.

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The incessant advances occurring with digital technologies are relentlessly

increasing these technologies’ performance-price ratios: processor speeds and

memory sizes increase, while prices decrease; storage device capacity increases,

while access times and prices decrease; communications bandwidth and speed

increase, while prices decrease, etc. As a result, organizations have found it

advantageous to regularly upgrade or replace their installed digital platforms. In

addition to upgrading and replacing digital platforms, digitalization leaders also invest

to improve the knowledge and skills of their technology professionals and,

consequently, their digitization and digitalization capabilities – enabling future

improvements aimed at digital platforms, business platforms and business models.

The distinction between investing in new digital technologies and investing to

improve digitization/digitalization capabilities is critical as it makes clear the

distinction between the value to be derived directly from installing a new digital

technology (such as new storage devices or more sophisticated data management

software) and the value obtained from deploying the digital technology in smarter

and more creative ways. Saying that you have developed a particular capability

implies that you are now able to bring together and apply a particular set of resources

to achieve a desired outcome. Most organizations are more or less equal in their

ability to acquire and install digital technologies. However, organizations are not

equally blessed with the abilities to apply these technologies in a superior manner

and, in doing so, dramatically improve an organization’s business platforms and

business models.

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Business Platform Efficiency

A second target of digitalization investments is business platform

efficiency, e.g., improving the cycle times and costs associated with one or more of

the business processes being hosted on a business platform. A specific investment

initiative might be targeted at the platform itself (affecting all of the platform’s hosted

business processes) or at a limited set of these hosted business processes.

A business process refers to a sequence of work tasks that converts inputs

into outputs, and these work-task sequences can involve operational activities,

managerial activities, or both. Business process inputs and outputs can be digital in

nature, non-digital in nature, or some combination of both. Generally, business

platform efficiency is increased as more of these inputs and outputs are digitized.

Business processes consist of operating procedures and business rules.

Operating procedures specify each of the tasks that comprise a business process

(e.g., obtaining required inputs, producing specified outputs, the nature of the

decisions and actions to be taken in transforming inputs into outputs, whom is

involved with these decisions and actions, etc.), as well as the relationships among

these tasks (e.g., which tasks must occur before other tasks can be started, how a

task’s outputs serve as inputs to other tasks, etc.). Business rules describe the

conditions that must be met when taking actions or making decisions. For example,

the creation of a purchase requisition might involve the following business rules:

 If the purchase amount is less than $500, then the requisition does not need

to be approved by a department head.

 If the purchase amount is greater than $500, but less than $5,000, then the requisition needs the approval of a department head.

 If the purchase amount is greater than $5,000, then it must be approved by

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both a department head and a divisional finance director.

Business process efficiency gains are achieved by automating (i.e., replacing

humans with digitalized solutions) and rationalizing (i.e., eliminating processing

steps, waste, errors, delays, etc.) operating procedures and business rules. Table

11-2 describes a business platform critical to the core business models of FedEx, Dell,

Walmart and Southwest Airlines. Exploiting their exceptional digitization capabilities

and digitalization capabilities, all four of these organizations fine-tuned the efficiency

of these business platforms and, as a consequence, obtained industry-leading

positions.

Table 11-2 Business Platform Efficiency Enhancement Examples

Company Business Platform Description

FedEx Package Tracking

Placing a digitized identifier on each package, installing readers throughout the logistics network, capturing the identifier & a time stamp for package movements, and maintaining these data in an accessible database.

Dell Customer Order

Scheduling

Specifying component delivery & assembly timings for a customer order and communicating these timings to suppliers & logistics partners.

Walmart Retail Store Shelf

Replenishment

Capturing & archiving product purchase activity at the retail-store level, and analyzing these purchase data to determine the replenishment cycles for restocking products at specific retail stores.

Southwest Airlines

Aircraft Ground- Handling

(Turnaround)

Maintaining accurate & timely data on aircraft arrival/departure times & passenger loads, and then scheduling (and rescheduling) aircraft servicing requirements based on these data.

Initiatives that apply digitalization to improve business platform efficiency

most often engage participants in first-order learning with regard to the targeted

business platform. First-order learning engages participants in refining their

understandings – and, as a result, the collective understanding – of a business

process, but does not substantially change the assumptions and foundational

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reasoning on which these understandings are based. Consider, for example, a

customer support business platform. First-order learning takes an organization’s

existing approach to customer support and strives to incrementally improve this

current approach as knowledge is gained about what is working well and what is not

working well. It is only natural in a well-run customer support operation to expect

customer support staff to identify problems, find solutions for these problems, and

then embed these solutions within ongoing customer support work activities. Such

incremental knowledge accumulation represents the learning curve often observed

with repetitive work activities.

Business Platform Effectiveness

A third target of digitalization investments is business platform

effectiveness, or improving the quality of the platform (e.g., convenience,

availability, security, etc.) or the quality of one or more of the hosted business

processes (e.g., ease-of-use, accuracy, responsiveness, comprehensiveness,

reliability, etc.). The value drivers for business platform effectiveness tend to be

similar to those affecting business platform efficiency, with the addition of first-order

learning about the market ecosystem within which a business operates. Learning

about a market ecosystem involves better understanding the natures of the products

and services being exchanged within the ecosystem and better understanding both

the natures of each of the communities (e.g., consumers, producers, suppliers,

intermediaries, competitors, etc.) participating in the ecosystem and the motivations

that underlie community members’ decisions to participate. Referring back to Table

11-2, FedEx, Dell, Walmart, and Southwest Airlines have each proven to be

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exceptional in their abilities to apply digitalization to improve the effectiveness of the

identified business platforms.

Business Model Innovation

The fourth target of digitalization investments involves organizations’ business

models – more precisely, initiatives focused on disrupting one or more market spaces

through business model innovation. A business model is a simplified and

aggregated conceptualization of the value-creating, profitability-sustaining activities

of an organization. Regardless of whether an organization is one of many producers

competing in the same market ecosystem or a network orchestrator that has

fashioned its own market ecosystem (typically within a market space populated by

competing market ecosystems), the organization’s business model consists of four

distinct elements:

 A value proposition defines how an organization will distinguish itself within the markets that it has chosen to participate through its ability to

attract consumers (for organizations competing in pipeline ecosystems) or the members of participating communities (for organizations competing in network ecosystems).

 A profit model consists of revenue and cost models. Revenue models describe where, when and how revenue streams materialize. Cost models

describe the costs to be borne in producing the revenue streams associated with the value proposition and how these costs will be controlled to provide requisite levels of profitability.

 Core capabilities refer to the tangible resources (e.g., facilities, machinery, digital devices, etc.) and intangible resources (e.g., people, knowledge,

operational and managerial processes, patents, architectures, etc.) needed to successfully implement the value proposition and profit model.

 Dynamic capabilities refer to the intangible resources (e.g., people,

knowledge, relationships, managerial processes, architectures, etc.) needed to (1) sense and assess opportunities for business model innovation and (2)

successfully implement these innovations.

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Figures 11-3 and 11-4, respectively, depict a business model applied by Apple and

by Walmart (both of which are pipeline organizations); and, Tables 11-3 and 11-4

depict business models applied by TopCoder and Metropia (both of which are network

organizations).

Figure 11-3

Apple’s Business Model for the Consumer Smart Device Market

Value Proposition Profit Model

Core Capabilities

Dynamic Capabilities

• Value-unit: Consumer smart digital devices • Consumer: Technically-receptive &

technically-savvy segments of the personal smart device market

• Innovative & trend-setting products • Seamless access to content across all digital

media

• High product prices driven by stimulating demand and by limiting supply

• Moderate manufacturing & marketing costs • High margins

• Brand management • Technology patents • Product design & product architecture design • Tightly-directed sales & marketing • Tightly-controlled manufacturing & logistics,

performed by third-parties • Relationships with content providers and

with manufacturing & logistics partners

• Knowledge of new digital technologies • Knowledge of evolving desires of first-

adopter consumers • Knowledge of new digital media and of new

means for accessing digital media • Knowledge of product designers & architects • Knowledge of content management

architects

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Figure 11-4 Walmart’s Business Model for the Household Goods Retail Market

Value Proposition

Profit Model

Core Capabilities

Dynamic Capabilities

• Value-unit: Household groceries & products

• Consumer: Cost-sensitive segment of the mass market

• ‘Everyday Low Prices’ • Retail store availability of a broad range

of products, enabling one-stop shopping

• Low prices, low costs • Moderate margin • High volume, high product

turnover

• Store site selection & store layout design • Tailor local inventory to local market • Shelf-space optimization (merchandizing &

replenishment) • Logistics optimization • Supplier relationships

• Knowledge of new digital technologies • Knowledge of evolving shopping-experience

desires of mass-market consumers • Knowledge of digitalization trends &

innovations in retail-store operations and in logistics

• Logistics designers & technologists • Retail store designers & technologists

Table 11-3

TopCoder’s Business Model

Business Model Element

Description

Client Community Value Proposition

Obtain quality code (e.g., tested against specifications, secure, etc.) within agreed-on schedule and budget.

Client Community Profit Model

 Clients pay subscription fee.  Clients provide contest incentives (payments to winning

developers).

Developer Community Value Proposition

Earn income, acquire new skills, demonstrate skills and interact with forward-looking technologists.

Developer Community Profit Model

No associated revenue stream (the developer community is the subsidy-side of this network ecosystem).

Core Capabilities

Dynamic Capabilities  Sensing & identifying software development trends &

innovations.  Sensing & identifying new participant sources.

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Table 11-4 Metropia’s Business Model

Business Model Element Description

Commuter Value Proposition  Provide optimal mobility solutions for going from point A to point B.  Provide reward points for contributing to the common good .

Commuter Profit Model  Subscription fees & transaction fees.

Provider Value Proposition  Gain exposure with the commuter community.  Gain revenue from servicing the commuter community.

Provider Profit Model  Negotiated mobility services costs.

Merchant Value Proposition  Build reputation with commuter community.

Merchant Profit Model  Exchange goods/services for reward points.

Government Agency Value Proposition

 Enhance commuting common good.  Obtain mobility-related data.  Obtain knowledge from Big Data analytics.

Government Agency Profit Model

 Revenue (from developing, launching & enhancing local market platforms).

 Licenses fees (from (Big Data/analytics products & services).

Core Capabilities  Traffic optimization & Big Data analytics.  Interconnect market platform with government/provider processes.  Relationship management (all communities).

Dynamic Capabilities  Sensing and identifying new mobility services and providers.  Sensing and identifying new government regulations.

Devising innovative twists to an existing business model (e.g., Amazon’s one-

click purchase feature) or conceiving of a truly innovative business model (e.g.,

Google’s search platform) requires a special kind of thinking – popularly termed out-

of-the-box thinking – about digital platforms, about business platforms, about market

ecosystems, and about how digitalization can be creatively applied to disrupt the

nature of competition within a market ecosystem. This type of learning is referred

to as second-order learning, where pre-existing ideas and assumptions are up-

ended and looked at with a fresh and open mind. Well-known and very successful

outcomes of inspirational second-order learning within pipeline ecosystems can be

observed with FedEx’s overnight delivery business model, Dell’s build-to-order

business model, Walmart’s Everyday Low Prices business model, and Southwest

Airline’s no-frills, short-haul, have-fun business model. Table 11-5 describes these

four business model innovations. And, just about every early entrant into a network

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ecosystem market space – think Airbnb, Kickstarter, Uber, TaskRabbit, Groupon, etc.

– has applied an innovative business model.

Table 11-5 Four Pipeline Organization Business Model Innovations

Company

Business Model Elements

Customer Value Proposition

Profit Model Enabling Capabilities

FedEx • Overnight delivery • Guaranteed

delivery

• High margins • Controlled logistic

costs • Customer self-service

• Package visibility • Logistical coordination • Data management

Dell

• Customer- configured products

• Low-cost products

• Competitive prices • Minimal inventories • Industry-leading

cash management

• Product design • Supply chain coordination • Supplier/partner

collaboration

Walmart • Everyday low prices • Product availability

• Industry-leading cost structures

• Sales volume

• Local store merchandising • Supply chain coordination • Supplier/partner

collaboration

Southwest Airlines

• Low fares • Satisfying customer

experience

• Competitive fares • Industry-leading cost

structures • Customer self-service

• Aircraft/terminal operations • Route portfolio

management • Employee relations

Impacting Overall Financial Performance

The end-game objective sought from all organization investments is to improve

the organization’s bottom line: a larger profit for a for-profit organization and a

balanced budget (along with a larger rainy-day fund) for a non-profit organization.

The potential for realizing significant financial gains from digitalization investments

will generally be greater with initiatives that are larger in size and in scope.

Realistically, though, just how much overall financial improvement might be expected

from digitalization investments having differing strategic foci?

Figure 11-5 offers general guidelines about the likelihood of an organization

experiencing an overall financial performance impact from digital investments. In

Figure 11-5, the thicker the arrow going towards Overall Financial Performance, the

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greater is the likelihood that an impact will be realized. The successful

implementation of a new, innovative business model is likely to have a direct and a

sizable impact on an organization’s overall financial performance. On the other hand,

investments targeted at improving digital platforms most likely will have little direct

impact on overall financial performance – but, improvements in digital platforms

often indirectly impact an overall financial performance via effected business platform

enhancements and/or business model innovations. An example of such an indirect

impact would be an investment to upgrade the servers supporting all of an

organization’s customer-facing websites. While these server upgrades would have

very little immediate financial performance impact, the upgrades should improve the

responsiveness of the customer-facing websites and, in doing so, improve customer

ease-of-use and satisfaction, both of which are likely to spur increased revenues.

Figure 11-5 Impact of Digitalization Investments on Overall Financial Performance

Digital Platform Operations &

Technology Services

Business Platform Efficiency

Overall Financial

Performance

 Value  Risk

D ig

it a

l I n

v e

s tm

e n

Business Platform Effectiveness

Business Model Innovation

Note also that two aspects of overall financial performance are depicted in

Figure 11-5: value and risk. Value refers to the size of an anticipated financial gain

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and risk refers to the likelihood that this anticipated financial gain will be realized.

The thickness of the horizontal arrows in Figure 11-5 reflects the potential impact of

digitalization investments on value and on risk. Digitalization investments targeted

at digital platforms generally have little direct impact on an organization’s financial

performance, but relatively little risk is involved. On the other hand, digital

investments targeted at improving business platform effectiveness generally have

sizable direct impacts on an organization’s financial performance, but considerable

risk is present. This risk might arise, for example, because the changes to a business

platform may have been ill-conceived or because the employees expected to engage

with the new business platform revert back to their old ways of doing things. In

either case, some promised benefits may never be realized.

The point just made in the prior paragraph underscores the reality that the

outcomes anticipated from digital investments often require that affected employees

and ecosystem participants must often change their behaviors if anticipated financial

gains are to be realized. Operational personnel are expected to carry out new work

practices, managers are expected to apply better decision processes and/or to act in

a timely fashion, customers are expected to react favorably to product improvements

and to engage with service improvements, and suppliers, intermediaries and strategic

partners are expected to take advantage of newly-exposed content or improved

interorganizational data flows. Such behavioral changes tend to be much more

difficult to put into place than are technology changes.

A Recap and Look Ahead

For better or worse, digitalization has become the dominant enabler of

organizations’ competitive actions – with organizations possessing greater

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digitalization capabilities outpacing competitors possessing lesser digitalization

capabilities. All competitive actions (be they proactive or reactive in nature) start as

someone’s idea that is fleshed out and then bounced off others. Normally, the greater

the number and variety of contributors, the better the final product. And, the clearer

is a digitalization investment’s strategic focus, the more likely it is that others’

contributions will be on-target and value-adding.

Still, far too many executives, managers and professionals lack an adequate

appreciation of how digital investments are affecting, or might affect, their

organizations’ competitive success and, subsequently, their organizations’ financial

outcomes. This chapter has identified the four targets – digital platform operations

and technology services, business platform efficiency, business platform

effectiveness, and business model innovation – that most often serve as the strategic

focus of digitalization investments. By making clear both an investment’s strategic

focus and the importance of the investment to the organization’s bottom line,

proponents of an investment opportunity are more likely to attract the attention and

interest of others. The next chapter drills deeper into the relationship between a

proposed investment and financial performance outcomes by identifying six value

pathways by which digital investments most commonly affect performance outcomes.

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Chapter 12. Value Pathways

Invariably, or so it seems, the proponents of a newly-conceived digital

investment believe that the best way to gain support for this investment is to claim

that it will provide their organization with a competitive advantage. In reality, few

digital investments provide the investing organization with a competitive advantage.

Instead, most digital investments are aimed at improving – usually in an incremental

rather than radical fashion – the functionalities already present on digital platforms

or on business platforms.

Consider, for example, a bank’s mobile personal banking solution, or a retail

store’s self-checkout system, or an airline’s mobile check-in application. The very

first introduction of such functionalities provided the investing organization with a

(typically short-lived) competitive advantage. But, once a novel digitalized

functionality is found to be well-received by market participants, imitative

investments by competitors return the market ecosystem to a competitive parity and

are not considered as initiatives taken to gain a competitive advantage. Further,

ensuing investments taken to improve the efficiency or effectiveness of either this

functionality or of the platform hosting the functionality typically have slight, if any,

competitive impact. Of course, a stream of incremental improvements taken over a

period of time may accumulate into a significant competitive advantage, especially

as these investments build on one another – but any one of these investments by

itself is unlikely to produce a competitive advantage.

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As a rule, justifying any type of investment on unsound grounds just does not

work. Or, worse, the pitch seemingly does work, but only to set expectations that

can never be met.

Organizations undertake digital investments for a variety of reasons. Building

off of the strategic focus concept, each of the topics of this chapter describes one of

six value pathways that collectively reflect how value is created through digitization

and/or digitalization:

 Mandate Value Pathway

 Digital Platform Renewal Value Pathway

 Business Platform Enhancement Value Pathway

 Competitive Necessity Value Pathway

 Competitive Advantage Value Pathway

 Options Generator Value Pathway

Mandate Value Pathway

Organizations regularly make digital investments in response to mandates, or

directives, by external parties. Table 12-1 lists the sources (along with examples) of

many of the mandates imposed on U.S. organizations. Some of these mandates

reflect the requirement to regularly modify installed digital platforms and business

platforms (e.g., accounting system revisions emanating from annual state and federal

tax law changes, the seemingly weekly Microsoft Windows security updates, etc.).

Other mandates occur infrequently, such as changes required in publicly-owned

organizations’ financial reporting systems in response to new governmental

legislation, such as the Sarbanes-Oxley Act of 2002, or the demand imposed on a

producer by a powerful consumer (e.g., a big box retailer) to modify the producer’s

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downstream-facing business processes. The digital investments associated with the

mandate value pathway are directed toward reducing an organization’s risk

exposure. In other words, by complying with the mandate, the organization reduces

its susceptibility to non-compliance penalties, to possible lawsuits or to lost revenues.

Table 12-1

Sources of Digitalization Mandates

Mandate Source Examples

Federal & State Regulators

• SEC Sarbanes-Oxley requirements • EPA requirements • Privacy requirements

Federal & State Agencies

• Tax agency rules and regulations • Social Security Administration rules

& regulations

External Auditors • Internal control requirements • Business continuity requirements

Technology Vendors • Software upgrades • Hardware upgrades

Strategic Partners • Interorganizational data flows • Interfacing business platform • Interfacing digital platform

Figure 12-1 illustrates this mandate value pathway. There are two primary

(but often intertwined) ways by which digital investments address external

mandates. First, digital investments can remove deficiencies in the business

platforms or specific business processes affected by a mandate. An example of such

a deficiency would be efforts taken to bolster the internal controls built into

accounting or financial information systems in response to Sarbanes-Oxley

regulations. Second, the digital platforms (or the technical services being executed)

enabling these business platforms can be enhanced. For example, another aspect of

the Sarbanes-Oxley regulations involves the necessity of building operational

redundancies into the digital platforms hosting accounting and financial systems to

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ensure that these systems continue to operate if and when hardware devices,

software systems or networks fail or are crippled.

Figure 12-1 Mandate Value Pathway

Business Processes

Digital Platform(s)

Compliance with

Mandates

Reduced Risk

Exposure

Investment

Business Platform(s)

Digital Platform Renewal Value Pathway

The digital platform renewal value pathway refers to the regular

refreshing of hardware and software technologies that leverage the performance-

price advances experienced with digital technologies and that broaden and deepen

an organization’s digitization/digitalization capabilities. Two avenues typify how the

digital platform renewal value pathway contributes to organizations’ financial

performance improvement (see Figure 12-2). First, upgrading the technology

services used in enabling or supporting business platforms can translate into

operational efficiencies. A common example might involve upgrading the dedicated

servers supporting an Internet sales platform, thereby reducing the per-transaction-

cost of handling an Internet sale. Second, if a digital platform overhaul is broad and

deep, then associated meaningful overall cost-structure improvements may result.

For example, externally sourcing the operation and ownership of an organization’s

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data centers may reduce the organization’s asset base (e.g., installed digital

technologies, technology professional staff engaged in operating and maintaining

these technologies, etc.) such that a meaningful improvement in the organization’s

return-on-assets metric is observed.

Figure 12-2

Digital Platform Renewal Value Pathway

Business Processes

Digital Platform(s)

Enhanced Business Platforms

Improved Financial

Performance

Investment

Business Platform Enhancement Value Pathway

The business platform enhancement value pathway (the most common

of the value pathways) involves investments aimed at producing significant (most-

often, incremental) improvements to existing business platforms. As depicted in

Figure 12-3, these business platform enhancements are directed at automating

operational and managerial processes, at improving the efficiency and effectiveness

of these processes, and at more fully tapping into the innate talents of the humans

engaged with these processes. Examples might include: providing customers with a

greater variety of ordering or payment options, providing managers with more timely

and accurate data on work-in-process statuses, making it easier for patients at a

medical clinic to update their personal data and medical histories, etc.

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Figure 12-3 Business Platform Enhancement Value Pathway

Business Processes

Digital Platform(s)

Business Platform

Enhancement

Improved Financial

Performance

Investment

Business Platform(s)

Human Capital

Competitive Necessity Value Pathway

The competitive necessity value pathway reflects organizations’ digital

investments taken in response to competitors’ actions. These responses are most

commonly undertaken for one of two reasons. The first reason refers to an

organization formulating and implementing a competitive action after a key

competitor has struck an action that meaningfully diminishes the organization’s

executing business model. In the absence of a responsive action to enhance – or

replace – this executing business model, some degradation of the organization’s

market position, i.e., market share, reputation, etc., is sure to occur.

The second reason refers to an organization enhancing the business processes

executing on its business platform such that these business processes meet or exceed

what are now recognized as best practices within a market ecosystem within which

the organization participates. Best practices represent the operational and

managerial processes that need to be executed if an organization is to maintain its

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competitiveness within a market ecosystem. In the absence of best-practice business

processes, some degradation of an organization’s market position is sure to occur.

While a competitive necessity digital investment might have produced short-

term financial performance gains for first-movers, the value of the investment for

most market-ecosystem participants is derived from reducing the competitive risk

exposure that would otherwise arise (see Figure 12-4).

Figure 12-4 Competitive Necessity Value Pathway

Business Processes

Digital Platform(s)

Business Model Enhancement

or Business Platform

Enhancement

Reduced Risk

Exposure

Investment

Business Platform(s)

Human Capital

Competitive Advantage Value Pathway

Some organizations, typically market ecosystem leaders aggressive in their

use of digital technologies and with a high level of digitalization capabilities,

undertake investments aimed at creating business models that will dramatically

differentiate themselves from rivals. While the risks (lowered likelihoods of success

along with high implementation costs) of being a first-mover dissuade many

organizations from such strategies, successful competitive-advantage investments

can provide an organization with significant short-term financial returns and, if the

gained-advantage is sustained, significant long-term financial returns.

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There are two major tactics followed in applying the competitive advantage

value pathway (see Figure 12-5): building sets of distinctive information capabilities

(most frequently for controlling work activities and/or empowering employees or

customers), and building sets of distinctive business processes. Innovative

information capabilities and innovative business processes, when well-targeted and

well-executed, can enable business models whose value propositions and profit

models go well beyond those being executed by their competitors.

Figure 12-5 Competitive Advantage Value Pathway

Distinctive Business Processes

Digital Platform(s)

Business Model Enhancement

or Business Model

Innovation

Financial Performance Improvement

Investment

Business Platform(s)

Distinctive Human Capital

Distinctive Information Capabilities

Progressive Insurance serves as a vivid example of how enhancing information

capabilities can empower market ecosystem participants and, in turn, dramatically

disrupt the ecosystem. Traditionally in the automobile insurance industry, customers

were given a phone number to call to report an accident involving their insured

automobile. During this call, the customer was assigned a claim number and asked

to visit the insurer’s claim center at a pre-appointed time. At that date and time, the

insurer’s claims adjuster examined the damaged vehicle, determined the extent to

which damages would be covered, and approved a certain payment to the customer.

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Customers experienced a variety of delays with this business model, the most

important of which were delays in gaining repair approval and receiving payment

from the insurance company.

Progressive Insurance innovatively used digitalization to execute a very

different business model. Roving claims adjusters are able to quickly arrive at an

accident site (usually within fifteen minutes) and, once at the site, use mobile

technologies to register the claim and look up data about the customer, the policy,

and repair histories for the damaged automobile. Finally, while still at the accident

site, the claims adjuster is able to arrange for the automobile to be repaired or to

provide immediate payment to the customer. Progressive Insurance has aggressively

sought ways to empower their employees and, in the process of doing so, distinguish

themselves from other automobile insurance companies.

The other primary tactic for using digitalization to differentiate an organization

competitively involves executing distinctive business processes that fundamentally

change the nature of competition within a market ecosystem. To a large extent, the

business model put into play by Progressive Insurance has done just this. Another

vivid example comes from what might be seen as an unexpected market ecosystem

– the cement industry.

In the mid-1990s, Cemex, a Mexican cement manufacturer, realized that it

was stuck in a commodity business in which price was the primary basis of

competition and where prevailing best practices found cement manufacturers

guaranteeing building-site cement deliveries within a three-hour time window. In

the process of devising a strategy for growing both sales and margins, Cemex realized

that their larger customers would be willing to pay a higher price for ready-to-pour

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concrete if guarantees were provided that the concrete would be delivered

consistently and reliably within a twenty-minute time window.

Sensing their ability to move into a previously nonexistent market niche,

Cemex built three distinctive business processes for their large customers:

 A convenient, responsive and changeable ordering process through which

contractors provide project details, including dates and times when specific mixes of ready-to-pour concrete are needed.

 A coordinated manufacturing/delivery planning process enabling Cemex to

schedule when trucks should leave a manufacturing facility loaded with the appropriate mixes of ready-to-pour concrete in order to meet the delivery

guarantee.

 A dynamic operational delivery process able to automatically adjust delivery schedules and routes based on weather and traffic conditions, as well as

developments occurring at a building-site.

These new business processes required numerous digitalization investments.

Internet portals were used to provide customers a convenient, easy-to-use means of

placing orders. Delivery trucks were equipped with two-way radios so that a dispatch

center could continually re-route trucks to destinations, if necessary. Satellite space

was leased to facilitate communication and coordination between manufacturing

facilities and trucks across wide geographic areas. Automated decision systems were

implemented that used continually-updated weather and traffic conditions to adjust

manufacturing and delivery schedules. As a result, Cemex has changed the basis of

competition in the cement industry, becoming a leading global competitor.

Options Generator Value Pathway

The options generator value pathway finds an organization investing in

new digitization and/or digitalization capabilities and recognizing up-front that:

although the anticipated near-term benefits will not cover investment costs, the

newly-acquired capabilities will provide the means for obtaining future benefits.

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Importantly, while some of these future benefits might be clearly envisioned at the

time of the investment, most are not. Typically, then, while the options generator

value pathway provides some immediate financial performance improvements, the

primary investment motivation is to create options for taking yet-to-be-determined

competitive actions – thereby reducing the investing organization’s long-term

competitive risk exposure (see Figure 12-6).

Figure 12-6 Options Generator Value Pathway

Future Digitalization Capabilities

Digital Platform(s)

Future Business

Platforms

Reduced Risk Exposure

Investment

Business Platform(s)

Future Digitization Capabilities

Financial Performance Improvement

Consider, for example, a full-service financial services organization such as

Bank of America. In deciding to offer its customers a suite of mobile personal banking

services, two approaches might be taken. With the first approach, the bank might

introduce the needed digital platforms and business platforms via a piece-by-piece

basis, fully justifying associated investments as each new set of new mobile banking

services is introduced. Following such a strategy, the first banking service

implemented might enable customers to check the status of checking and savings

accounts from a smartphone or tablet. This might be followed, in turn, by

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implementing services enabling customers to: transfer funds between accounts,

deposit checks, pay a bill, send money to someone else, or link to an investment

account, etc. The advantage of such a piece-by-piece approach is that the

investment required to offer each new mobile banking service is relatively small. The

disadvantage is that fundamental changes might be required for already-installed

digital and business platforms with each subsequent step, resulting in high overall

investment costs.

With the second approach, the bank makes a larger initial digitalization

investment to build a robust (scalable, adaptable, secure, etc.) mobile banking

platform from which just about any type of mobile banking service could be launched.

Building this robust banking platform generates many future options (i.e., the

capability to launch a variety of services, flexibility in deciding when to launch a

specific service, flexibility regarding the nature of each launched service, the ability

to easily change the nature of an already-launched service, etc.). The advantage of

this second approach is two-fold: the strategic flexibility provided, and the likelihood

that the total cost of launching a complete set of mobile banking services will be

lower than that experienced through the step-by-step approach. The primary

disadvantages include the much larger initial investment (an investment that might

never be fully recovered if only a few mobile banking services are actually launched

from the platform) and the delay experienced in launching an initial set of banking

services.

A Recap and Look Ahead

Awareness of the six value pathways described in this chapter should make it

easier for you to both explain to others the justification for a digital investment that

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you support and understand the justifications made by others for the investments

that they support. You may find that a single value pathway captures the essence of

a proposed investment. Or, as more often is the case, you may find that multiple

value pathways need to be combined in order to paint a complete picture of a

proposed investment’s bottom-line impact:

 An initiative proposed to meet the requirements of an external mandate might also upgrade certain digital platform components and incrementally

enhance the affected business processes.

 An initiative proposed to meet the demands of a powerful customer might

introduce new digitization capabilities likely to prove invaluable, both now and in the future, in enhancing numerous other business platforms.

Tracing through the distinct value pathways involved in such proposals are sure to

suggest ways to embellish a storyline, with each of these embellishments appealing

to different stakeholders.

Generally, however, convincing others to support an investment proposal

requires more than providing an understandable storyline. Organizations’ investment

funds tend to be a scarce resource, with numerous proposals competing for a limited

resource pool. An effective investment proposal must be both understandable and

persuasive. What is involved in building a persuasive business case for a digital

investment is covered next.

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Chapter 13. Building a Persuasive Business Case

Fresh thoughts about exploiting digitization and digitalization for competitive

purposes can, and do, originate from just about anywhere inside (technology or

business professionals, technology or business managers, front-office or back-office

employees, etc.) or outside (ecosystem participants, consultancies, news media,

etc.) of an organization. While the spark leading to a proposed digital investment

might have materialized out of thin air, a persuasive business case justifying the

investment does not. Developing a compelling, yet believable, business case requires

a good bit of science (the structure and content of a strong business case), but even

more art (packaging the business case so that it resonates with an audience).

This chapter focuses on the science of business case development. In

accomplishing this aim, the following topics are covered:

 The Innovation Cycle

 Financial Business Cases and Strategic Business Cases

 Building Strategic Business Cases

 Building Financial Business Cases

The Innovation Cycle

Before any newly-conceived idea for enhancing an organization’s performance

can become a reality, individuals from across the organization need to be convinced

of the idea’s worth. It is especially important that a broad collection of executives

and senior managers are supportive: those having authority over investment funds,

those having authority over the resources required to implement the idea, and those

likely to be affected, directly or indirectly, by the idea’s implementation. All

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investment opportunities require resources, and access to these resources is always

hotly contested.

Many, if not most, digitalization initiatives involve innovative aspects, and

transforming an innovative idea into a funded project is especially challenging. By

definition, an innovative idea involves doing new things. Managers hearing pitches

for an innovative idea are almost always going to experience difficulties in grasping

the essence of and the implications of the idea, leading to considerable uncertainty

regarding the idea’s worth. With digitalization initiatives, uncertainty is likely to exist

regarding, among other factors: the amount of resources required; the nature of the

anticipated benefits and the likelihood that these benefits will actually be realized;

the validity of vendor or consultant claims; the technology challenges that might

arise; the natures of the capabilities needed; and, the likely reactions of employees

and of ecosystem participants.

Figure 13-1 depicts the typical flow observed in transforming an innovative

idea into a funded project. This flow is referred to as the innovation cycle because

it applies to all types of ideas for improving an organization’s competitiveness, not

just the ideas involving digitalization.

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Figure 13-1 The Innovation Cycle

Envision an Innovative

Idea

Mobilize Support

Build the Business

Case

Funding Approval

Implement the Idea

Broaden & Deepen Support

Refine the Business

Case

Yes

The innovation cycle begins with someone envisioning how an organization’s

performance might be dramatically improved. While one person may initially come

up with an idea, a core group of proponents typically forms around the idea, and this

group works together to promote the idea’s merits and to identify (and resolve)

potential problems or limitations before others point these out.

Next, this core group of proponents engages in actions aimed at mobilizing

support for their idea. This mobilization of support typically involves:

 Expanding the core group by attracting others willing to attach their reputations to the idea and to contribute to efforts to improve the idea.

 Identifying within this core group a set of champions, or individuals highly skilled at influencing others to grasp an innovative idea’s worth. Champions are especially good at figuring out what is important to someone else and

then framing the benefits of an idea such that these benefits are grasped and understood.

 Identifying and recruiting a small but influential group of senior executives able to effectively interact with their peers in arguing for and politically defending the idea. These individuals are the idea’s executive sponsors.

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Then, these proponents develop a business case that identifies the value to

be created if the innovative idea is funded and successfully implemented. A

persuasive business case convincingly argues how the idea will achieve specific

benefits and demonstrates that these benefits outweigh invested resources.

Persuasive business cases for digitalization investments achieve this objective in two

ways. First, a persuasive business case is expressed in business terms, not technical

terms. Second, in building and selling a persuasive business case, proponents

engage affected-others early, often and meaningfully. Achieving broad and deep

support for an innovative idea is a communication-intensive activity aimed both at

identifying and attracting new supporters and at identifying and overcoming the

concerns of detractors. As this activity unfolds, the business case is regularly

reexamined, reframed and revised.

The innovation cycle comes to a close with the funding decision, or the actions

of the responsible authority – with the number of and hierarchical-level of involved-

individuals depending on the amount of investment funds requested and the

implementation scope – to release (or not release) the resources required for the

idea’s implementation. Positive funding decisions are most likely when proponents

have attracted an extensive, politically-powerful base of supporters. If a positive

funding decision does not occur, proponents often work to, first, improve the business

case and, then, to broaden and deepen support – such that the idea might be

favorably assessed at some future time.

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Strategic Business Cases and Financial Business Cases

Persuasive business cases are comprised of two components: a strategic

business case and a financial business case. These two types of business cases

complement and strengthen one another.

A strategic business case creates a narrative that places a proposed

investment within its competitive context in order to accentuate the investment’s

strategic importance. This is usually accomplished by applying one or more value

pathways: the mandate pathway, the digital platform renewal value pathway, the

business platform enhancement value pathway, the competitive necessity value

pathway, the competitive advantage value pathway, and the options generator value

pathway.

A financial business case examines an investment proposal from a

quantitative, benefits-costs perspective. In other words, do an investment’s benefits

flows exceed its costs flows and, if so, by how much? Typically, financial valuation

metrics, such as net present value (NPV) or internal rate of return (IRR), are used to

compare an investment’s valuation against a set target (a specified hurdle rate) or

against competing proposals.

Not surprisingly, digital investment proposals that obtain funding usually

possess a strong strategic business case and a strong financial business case. The

financial business case provides a depiction of anticipated financial performance

outcomes, and the strategic business case richly describes the why, where, when,

and how of these financial outcomes. But, strong business cases are rarely

constructed quickly. As suggested by Figure 13-2, a first-draft strategic business

case is applied in seeding the analyses leading to a first-draft financial business case.

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However, in putting together this first-draft financial business case, the logic

underlying the strategic business case is likely to be questioned, debated and

improved – resulting in a more compelling and a more realistic second-draft strategic

business case. This refined strategic business case is used to produce a second-draft

financial business case, and so on.

Figure 13-2 Synergistic Relationship Between Strategic and Financial Business Cases

Strategic Business Case

Financial Business Case

Version 1

Strategic Business Case

Financial Business Case

Version 2

Are investment proposals with less-than-persuasive financial business cases

ever approved? It certainly happens, but generally only after a very persuasive

strategic business case (that effectively leverages supporters’ experiences, insights

and intuitions) has been put together.

Building Strategic Business Cases

Developing a convincing strategic business case is especially critical when an

investment proposal is difficult to monetize – which refers to attaching realistic dollar

values to benefits flows in the financial business case. Consider, for example, a

proposal that exploits the capture of digitalized transactional events to introduce a

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loyalty program. Such a program might reward customers/clients for repeat sales,

community members for contributing content, community members for furthering a

collective goal, etc. If the loyalty program being considered is truly innovative, it

might be very difficult to identify comparable (operating in similar market

ecosystems) and implemented (providing the potential to obtain performance

outcome data) programs. In such a situation, it would be critical to include attention-

grabbing talking points in the strategic business case, such as:

 How and why digitalization is essential for implementing the loyalty program.

 How and why the implemented loyalty program would enhance the

organization’s competitiveness.

 How and why this enhanced competitiveness would produce, directly or

indirectly, financial performance improvements.

 How this enhanced competitiveness could be sustained over time.

Building Financial Business Cases

The task of building a persuasive financial business case for a proposed digital

investment may initially seem to be a rather straightforward exercise: accumulating

the anticipated benefits and costs in order to produce a net benefits figure. In all but

the simplest cases, however, this exercise proves to be quite challenging for three

reasons. First, the logic applied to arrive at a proposal’s financial impact is typically

influenced by a far greater number of factors than initially thought. Second, the

realization of many, if not most, of a proposal’s financial benefits is delayed, often

for a considerable period of time. Third, the monetization of a proposal’s financial

impacts typically can be difficult. The ideas provided in this section should enable

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you to deal successfully with the first and second of these reasons, with the discussion

of benefits monetization covered in the next chapter.

Costs Flows Associated with Digital Investment Proposals

Table 13-1 lists the major types of costs associated with digital investment

proposals. A persuasive financial business case needs to account for all such costs.

The most surefire way for a proposal’s proponents to lose personal credibility is for

them to provide costs estimates that end up being significantly less than the costs

actually experienced.

Table 13-1

Costs Categories for Digital Investment Proposals

One-Time Costs Recurring Costs

Purchases of digital assets required for digital platforms and/or business platforms.

Costs (utilities, digital asset license fees, technology services, salaries of employees, fees paid to service providers, etc.) involved in operating & maintaining installed digital platforms and/or business platforms.

Salaries of employees (technology and business professionals) involved in implementing the (digitization and/or digitalization) initiative.

Salaries of employees (technology and business professionals) involved with and the fees paid to consultancies & service providers for implementing planned enhancements to the installed digital platforms and/or business platforms.

Fees paid to consultancies and/or service providers contracted for implementing the (digitization and/or digitalization) initiative.

Site preparation costs. Work disruptions associated with: • Maintenance of digital platforms and/or

business platforms. • Implementation of planned enhancements

to the installed digital platforms and/or business platforms.

Work disruptions during the implementation of the (digitization and/or digitalization) initiative.

Four aspects of Table 13-1 are especially important. First, costs can be one-

time costs or recurring costs. One-time costs refer to costs that are felt prior to

the operation of a proposal’s installed digital platforms and business platforms (see

Figure 13-3). Recurring costs come into play once the new digital platforms and

business platforms begin to be used and are borne repeatedly over the life of these

platforms.

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Figure 13-3 One-Time Costs versus Recurring Costs

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

Initial Implementation

Ongoing Operations and Planned Enhancements

One-Time Costs

Recurring Costs

I n

s ta

ll a

ti o

Second, monetizing a proposal’s costs flows does tend to be straightforward,

given that these costs are relatively easy to research and estimate. Costs that are

easily monetized are referred to as tangible and those that are difficult to monetize

are referred to as intangible. While most of these costs tend to be tangible,

intangible costs do arise. For example, changing to a new set of digitalized business

processes is certain to disrupt, to some extent, day-to-day work activities. Such

work disruptions can produce a variety of unfavorable consequences, e.g., fewer

transactions are handled in a given amount of time, an increase in errors is

experienced, a decline in employee morale is observed, etc. While it may be easy to

predict that such disruptions are likely to occur, it can be very difficult to estimate in

advance their extent and the associated dollar values. Proponents of a digital

investment must recognize that some intangible costs are likely to be present and

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subsequently apply their experience, insight and intuition to identify these costs and

to arrive at credible dollar costs estimates.

Third, it is becoming increasingly common with both digitization and

digitalization proposals that costs are attributed to global and local components. In

other words, the digitization or digitalization capabilities being developed are

intended to be used by multiple work units – with global costs attributed to platform

functionalities applicable to all affected work units and local costs attributed to

platform functionalities applicable to just one, or a few, of the affected work units.

While global costs typically represent the vast majority of a proposal’s overall costs,

the unique needs of work units can require specialized digital assets or enhanced

employee training. Generally, the greater the extent of work-unit specialization, the

greater a proposal’s overall costs.

Finally, a majority of the costs associated with digital investment proposals

take the form of easily-monetized, one-time costs incurred early in a project’s time

horizon. In contrast, as discussed next, a majority of the benefits associated with

digital investment proposals tend to be difficult to monetize and to accumulate

gradually over time, with peak benefits flows occurring late in a project’s time

horizon.

Benefits Flows Associated with Digital Investment Proposals

Table 13-2 provides examples for each of the three primary ways that digital

investments contribute to an organization’s financial performance:

 Cost-Reducing benefit: existing cost structures are lowered.

 Cost-Avoiding benefit: planned but yet-to-be-experienced costs are

avoided.

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 Value-Enhancing benefit: revenues and/or margins are increased.

A digital investment might be characterized by benefit flows reflecting one, two or all

three of these benefit types. Consider how a digitalization proposal targeted at

improving an organization’s customer support capability might include all three of the

benefit types. If each customer support representative is able to handle 20% more

customers during a work shift, then the cost of a customer engagement decreases,

lowering the cost structures of the products being supported. This productivity

increase may also enable the organization to postpone for three years an already-

budgeted 25% increase in the number of customer support personnel. Finally, by

improving the quality of the customer engagements (as perceived by the customer),

along with improving staff productivity, a 0.5% increase in product sales over the

next year is anticipated.

Table 13-2

Benefit Types for Digital Investment Proposals

Benefit Type Examples

Cost-Reducing

• Lower staffing levels. • Lower cost-of-goods-sold. • Lower inventory costs. • Lower cost of storing a gigabyte of data. • Lower lost sales due to stockouts.

Cost-Avoiding

• No need to hire the additional staff (whose funding has already been approved) to handle expected increases in work volume.

• No need to build a planned distribution center.

Value- Enhancing

• Higher gross margin (with stable cost structures). • Higher rate of sales growth. • Higher rate of repeat sales. • Higher rate of new product introduction. • Higher rate of product/service improvement.

Four aspects of the benefit types listed in Table 13-2 are especially

noteworthy. First, as with costs, benefits can be categorized as being tangible and

intangible. In the customer support example just described, the cost-reduction and

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cost-avoidance benefits are fairly tangible, while the value-enhancement benefit is

quite intangible. Estimates of monetized cost-reducing and cost-avoiding benefits

are usually readily available from organizations’ archived accounting data/reports.

On the other hand, deriving estimates for value-enhancing benefits is typically much

more challenging as these benefits often arise from new, possibly innovative, market-

focused activities. Most often these benefits reflect either revenues from selling or

licensing goods and services (transaction-based or subscription-based) or revenues

from fees paid by advertisers and third-party producers (again, transaction-based or

subscription-based). The more intangible are these benefits, the more difficult it is

to monetize the benefits and convince others of the projected financial impacts.

Consider the case of an auditing firm that is thinking about investing in a

collaboration platform to be used by its community of staff auditors to post and access

practical knowledge (e.g., new techniques, best practices, client-issue resolution

tactics, etc.) and to interact with one another in resolving client-related issues as

these issues arise. The costs of such an investment are quite clear: the salaries of

platform designers and programmers, the cost of servers to host the interaction

platform and the knowledge platform, auditor training costs, and the expected costs

of ongoing platform operations and maintenance. What is the business value

expected to be gained from this investment? While some reduced costs (less rework

and auditor-hours) and avoided costs (reduced need to hire new audit staff) may be

realized, the primary benefits are associated with enhancing audit-engagement

effectiveness by improving auditors’ capabilities to better meet clients’ expectations

and satisfaction, leading to increased audit revenues. But, project proponents may

experience difficulty convincing others of the validity of these value-enhancing

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benefits. One approach for convincing others is to point to other auditing firms that

have already experienced and publicized gains from collaboration platforms. We will

cover another way of doing this in the next chapter.

Second, similar to the notions of global and local costs, the benefits flows of

digital investments possess global and local components. Here, the overall benefits

flow is a composite of the benefits flows realized by each involved work unit, as well

as the benefits flows arising from the coordinated actions of these work units.

Viewing things realistically, it is unreasonable to expect that the local benefits flows

will be uniform across all these work units. Adoption and usage rates will vary (often

considerably), as will the extent to which installed functionalities align with the needs

of each work unit. It would not be uncommon, say, for a new set of functionalities

to be implemented at five work units, with two of these units expected to use it

heavily and three units expected to, at best, use it moderately. Expected benefits

flows must realistically anticipate and account for such variations in functionality-

uptake across work units.

Third, it is important to recognize that most benefits flows are fully realized

only with the passage of time. There are two reasons for this. First, since new

functionalities are typically phased-in over time (by work unit, by geographic location,

by functionality, etc.), realized benefits flows tend to grow incrementally and

unevenly. Second, it takes time for employees to learn about, adapt to and apply

new functionalities. Consider, for instance, a digitalization proposal aimed at

reducing HR costs by providing the employees of a global manufacturing organization

(comprised of eight work units) with self-service HR capabilities. A phased-

deployment is being followed, with two operating units being switched over to the

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new HR environment every six months. Few employees will immediately begin to

use all of the provided capabilities, with most employees transitioning to the new HR

environment over time and at varying rates of speed. Rather than assuming that

100% of the projected benefits would accrue immediately after installation, it might

be more reasonable to expect that a five-year benefits flow would capture, say, 15%

of full benefits after the first six months, 35% of full benefits at the end of Year 1,

60% of full benefits after eighteen months, 85% of full benefits at the end of Year 2,

90% of full benefits after 30 months, 95% of full benefits at the end of Year 4, and

100% of full benefits at the end of Year 5. Of course, the specific percentages to

apply in such a situation would depend on a variety of factors.

Finally, a very common benefit associated with digital investments relates to

empowering affected employees to work smarter and quicker and by relieving them

from routine work activities that have been fully automated. If the resulting

productivity benefits result in lower staffing levels (i.e., fewer employees are needed

and unneeded employees are terminated), the associated benefits flow becomes

quite tangible as the organization’s payroll is directly and immediately reduced.

Often, however, no employees are actually terminated. Instead, the argument is

made that employees will now be able to spend more time on more-valuable work

activities – a benefits flow that is highly intangible and fraught with a looming

credibility peril. A mistake frequently made in building a financial business case is to

assume that the value of such an intangible benefit is calculated by multiplying the

time saved (e.g., hours on an annual basis) by these employees’ pay (e.g., hourly or

monthly pay rate). In reality, only a portion of this time saved is likely to be

converted into new, value-adding work activities and the value of these new work

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activities may or may not produce a real value greater than these employees’

salaries. In estimating such intangible benefits, the focus needs to shift to

convincingly translating this time saved into actual performance outcomes (e.g.,

lower cost structures, higher revenue flows, greater margins) likely to be realized by

enabling the employees to focus their attentions to higher value-adding work

activities.

Summary

Table 13-3 summarizes the above discussions of digital investment costs and

benefits by providing a checklist of issues to consider when building a financial

business case for a digital investment proposal.

Table 13-3

Checklist for Building a Financial Business Case

Costs Flows

One-Time Costs Tangible (most) & Intangible (some).

Recurring Costs Tangible (most) & Intangible (some).

Global Costs Affecting all involved work units.

Local Costs Affecting only individual involved work units and/or specific groups of involved work units.

Timing Front-ended (most).

Benefits Flows

Cost-Reducing Tangible (most) & Intangible (some).

Cost-Avoiding Tangible (most) & Intangible (some).

Value-Enhancing Tangible (some) & Intangible (most).

Global Benefits Produced by coordinated actions of all involved work units.

Local Benefits Produced only by the actions of individual involved work units and/or specific groups of involved work units.

Timing Back-ended (most).

Employee Productivity Attribute to employees’ incremental, direct contributions to overall financial performance improvement.

A Recap and Look Ahead

Proponents of digital investment proposals face a daunting challenge.

Invariably, the number of competing investment opportunities being assessed far

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outstrips the investment funds that are available. Recognizing that contending

investment proposals compete against one another, it becomes critical for a

proposal’s proponents to clearly describe how their proposal contributes to financial

performance improvement. For this to occur, a proposal must be easily understood

by the targeted audience, must appeal to this audience, and must be believed by this

audience. Without a doubt, the largest hurdle facing most proponents of digital

investment proposals involves monetizing the benefits flows within financial business

cases such that these numbers are both appealing and believable. This is the topic

of the next chapter.

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Chapter 14. Monetizing Benefits Flows

Invariably, the benefits flows serving as the core line of reasoning justifying a

digital investment proposal tend to be intangible rather than tangible. If the logic

behind these numbers is perceived as being somewhat sketchy (or, as more often is

the case, simply inadequate), the benefits-side of the financial business case is likely

to be discounted by those assessing a proposal. While this discounting might not be

overt, be assured that it happens.

The only way proponents can combat such discounting is to carefully navigate

a tightrope of aggressiveness (covering all of a proposal’s anticipated benefits flows)

and cautiousness (being realistic and conservative in monetizing a proposal’s benefits

flows). This chapter provides techniques for and examples of how to monetize the

set of benefits flows associated with a digital investment proposal. Similar tactics

can be followed in monetizing a proposal’s costs fialslows. The topics covered

include:

 Touch Point Analysis

 Financial Analysis Techniques and Sensitivity Analysis

 Monetization in Practice: Digital Platform Renewal at BioGen

 Monetization in Practice: Intel’s Value Dials Methodology

Touch Point Analysis

Touch point analysis is a technique for monetizing a digital investment

proposal’s benefits flows by specifying where and how to-be-implemented capabilities

impact an organization’s financial performance by tracing through the manner by

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which organization and/or market ecosystem activities are being touched by

digitization, by digitalization or by both.

Touch point analysis begins by assessing how a proposed digital investment

might be expected to enhance each of the three domains of digitalization (see

Table 14-1 for definitions and examples of each domain). More specifically, the

question to ask is: How might the proposed investment improve …

 Transaction handling and coordination within operational domains as key events are sensed and responded to. Digital investments are often aimed

at: increasing transaction speed, volume, accuracy and timeliness; increasing the breadth of events, transactions, documents and situations that are handled digitally; and, increasing the end-to-end

comprehensiveness by which sensed events are responded to, regardless of where an event occurs or whom is involved.

 Decision formulation and execution within analytical domains as choices are made (by humans or by digitalized solutions) regarding: what can be

done, what needs to be done, what should be done, how it is done, and when it is done; and, as the outcomes associated with executed decisions are assessed. Digital investments are often aimed at: improving decision

accuracy, speed, comprehensiveness, consistency, etc.; and, at increasing the extent to which all knowledgeable and affected individuals are

meaningfully involved with a decision, regardless of an individual’s physical location.

 Human interaction leveraging within collaborative domains as efforts are

made to optimize the local/global outcomes associated with work activities. Digital investments are often aimed at better integrating the knowledge,

perspectives and beliefs held by the individuals associated with a work activity.

A proposal’s strategic business case, as it exists when touch point analysis

commences, is likely to guide the identification of specific improvements within each

of the digitalization domains. Collectively, then, these identified improvements

provide a digital investment’s initiating set of touch points.

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Table 14-1 Digitalization Domains

Digitalization Domains

Definition Examples of Realized Benefits

Operational

•Enhanced task effectiveness (accuracy, comprehensiveness, timeliness, convenience, etc.) •Enhanced task efficiency (productivity, cost, error, rework, etc.)

Analytical

•Enhanced decision effectiveness (accuracy, comprehensiveness, timeliness, convenience, etc.) •Enhanced decision efficiency (productivity, cost, error, rework, etc.)

Collaborative

•Enhanced task effectiveness •Enhanced task efficiency •Enhanced decision effectiveness •Enhanced decision efficiency

Once a proposal’s touch points have been identified, the analysis proceeds by

tracing out the paths through which each touch point is expected to affect bottom-

line outcomes. Two sets of ideas should prove especially useful in describing these

paths. First, a proposal’s strategic focus (or strategic focuses) should identify the

specific digital platforms, business platforms and/or business models being impacted.

Second, four engines of digitalization (see Table 14-2 for definitions and benefits

examples) should be invaluable in helping you to explain how a proposed digital

investment will affect one or more of the targeted digital platforms, business

platforms and/or business models. More precisely, we suggest that you determine:

 How will a digital platform’s operations or the services being hosted by the

digital platform be enhanced (or be created) through automation, control, empowerment or interaction?

 How will a business platform’s operations or the business processes being hosted by the business platform be enhanced (or be created) through automation, control, empowerment or interaction?

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 How will a business model’s value propositions, profit models and capabilities be enhanced (or created) through automation, control,

empowerment and interaction?

 How do these digital platform, business platform and/or business model

enhancements affect the organization’s competitiveness within the market ecosystems with which it participates?

 How does this enhanced competitiveness translate into specific financial

performance outcomes?

Table 14-2

Engines of Digitalization

Digitalization Engine

Definition Examples of Realized Benefits

Automation

Simplifying & digitalizing complex tasks & task-sequences, eliminating unneeded tasks, and, as appropriate, performing tasks via digitalization rather than via humans.

•Cost reduction. •Transaction cycle-time improvement. •Responsiveness improvement. •Productivity improvement.

Control

Embedding digitalized rules to identify out-of-control events/situations, such that out-of-control events/situations either do not occur or, if they do occur, are quickly addressed.

•Real-time event/situation monitoring. •Real-time event/situation visibility. •Minimizing the occurrence of inferior decisions & inferior actions.

Empowerment

Providing humans facing decisions with timely, accurate & comprehensive information and with easy-to-use, relevant decision aids & business intelligence tools.

•Broad distribution of and access to data, information & knowledge. •Broad availability of & access to decision aids & business intelligence tools.

Interaction

Enabling humans, digitalized solutions or both to engage in timely, meaningful dialogues (overcoming barriers of space and time).

•Complex & nonroutine business activities handled quicker & better. •Problems & opportunities handled quicker & better. •Innovative activities handled quicker & better.

A key element of touch point analysis involves visually portraying the path of

a touch point’s effects via an impact path diagram. Visually portraying a touch

point’s effects has two important benefits. First, the impact path diagram enables a

target audience to more easily grasp the logical reasoning being voiced. Second, and

more important, the impact path diagram – rather than the proponents of a digital

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investment proposal – is critiqued, debated and improved, ultimately producing more

appealing and believable benefits flows.

Consider a digital investment proposal to implement an online sales platform

(for Internet sales), an online platform containing rich product information (that

supports both the Internet and traditional sales channels), and that applies the digital

platforms built to enable the online sales platform to improve the traditional sales

platform. As pictured in Figure 14-1, there are four touch points leading to four

competitiveness effects. A first competitiveness effect creates a new customer

segment – individuals whom had never used the traditional sales channel, but would

be attracted to an Internet sales channel. This new customer segment becomes the

source of new sales revenues. A second competitiveness effect is an improvement

in existing-customers’ satisfaction, attributed to the online sales platform, the online

product information platform, and an empowered sales staff. These existing-

customers might use either or both the online and traditional sales channels. These

more-satisfied customers are expected to increase their rates of repeat sales, thereby

increasing sales revenues. A third competitiveness effect involves improvements to

the productivity of the traditional sales staff, which would be more empowered and

would benefit from using the new platform capabilities introduced as a result of the

digital investment. By improving the productivity of the traditional sales staff,

planned staff additions would no longer be needed – thus reducing overall sales cost

structures. The fourth and final competitiveness effect reflects digitalization

enhancements to the traditional sales platform, again reducing sales cost structures.

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Figure 14-1 Impact Path Diagram: An Online Sales Platform

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Margin IncreaseLess Need

For Planned

Additions to the

Sales Staff

More Repeat Sales

New Customers Greater

Sales Revenues

More-Satisfied Existing

Customers

Touch Points Competitiveness

Effects Financial Impacts

Lowered Sales Processing Cost

Structure

Digital Investments

Customer Convenience

Customer Empowerment

Sales Staff Empowerment

Sales Transaction Efficiency

Improvement

Greater Sales Staff Productivity

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Identifying a proposal’s touch points and developing an associated impact path

is only a first step in the development of a financial business case. The critical activity

that follows involves estimating the dollar-values for each of the financial impacts.

In the case of the online sales platform (Figure 14-1), these dollar-value estimates

would require answers to a number of questions, including:

 How many new customers would be attracted by and use the new Internet

sales channel? What is the average order amount for such a customer? What are the rate of and the average order amount of repeat orders?

 How many of these new customers would also begin to use the traditional sales channel? What is the average order amount for such a customer? What are the rate of and the average order amount of repeat orders?

 How many existing customers would begin to use the Internet sales channel? How many would switch over completely to the Internet sales

channel?

 For existing customers continuing to use the traditional sales channel, how will the average order amount, customer satisfaction, and rate and amount

of repeat orders change?

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 What is the relationship between customer satisfaction and the size/rate of repeat orders?

 For the sales representatives staffing the traditional sales channel, what level of productivity improvement is likely to be observed?

 For the improved traditional sales platform, how much will the processing cost of a transaction decrease?

Who is best positioned to provide believable answers to such questions? Most likely,

the individuals building this financial business case would find themselves talking to

sales managers, marketing managers, sales representatives and accountants, as well

as consultants, technology vendors and contacts in other retail organizations.

Figure 14-2 provides another example. Here, an auditing firm is considering

a digital investment proposal targeted at building two business platforms: an audit

knowledge platform to be used by the firms’ community of staff auditors to post and

access knowledge about new techniques, best practices and client-issue resolution

tactics, and an auditor community interaction platform enabling the firm’s staff

auditors to interact with one another and with clients in resolving client-issues as

these issues arise. Figure 14-2 depicts two touch points and four competitiveness

effects. A first competitiveness effect is an expected increase in client satisfaction,

which should lead to the auditing firm experiencing increased client revenues and a

higher rate of repeat engagements. A second and a third competitiveness effect find,

respectively, higher satisfaction levels and higher productivity levels associated with

the firm’s staff auditors, both of which can be attributed to these individuals’

heightened learning opportunities and higher performance levels. As staff auditor

satisfaction increases, turnover rates should fall and the recruitment of new auditors

should be easier – both of which contribute to lowered auditor recruitment costs. A

final competitiveness effect finds the increases in auditor effectiveness and efficiency

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resulting in a lowered client-engagement cost structure, with this lowered client-

engagement cost structure expected to increase the firm’s margin.

Figure 14-2 Impact Path Diagram: Auditor Collaboration Platforms

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Margin Increase

Lowered Auditor

Recruitment Costs

More Repeat Engagements

Client Satisfaction

Greater Sales

Revenues

Greater Audit- Engagement Productivity

Touch Points Competitiveness

Effects Financial Impacts Digital

Investments

Auditor Effectiveness

Auditor Efficiency

Auditor Satisfaction

Lowered Audit- Engagement

Cost Structure

For a third and final example, consider an investment by a social networking

site (e.g., Facebook, LinkedIn, etc.) to deploy a messaging functionality within its

platform. Clearly, the individuals engaging with others through the social networking

site would already be using other messaging applications, such as those on these

individuals’ smartphones. Why, then, would the social networking site introduce a

proprietary messaging functionality? As seen with the impact path diagram portrayed

in Figure 14-3, the answer is very straightforward. Two competitiveness effects are

expected to arise as the site’s members switch to the proprietary messaging

functionality. First, members finding it convenient to use the messaging functionality

will spend more time on the site as (1) it is likely that members’ messaging-partners

will also be members of the site, and (2) members will not have to leave the site

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(physically or cognitively) to send an outgoing message or receive an incoming

message. Once an individual leaves a site, they may not immediately return to the

site. The more time spent by members on the site, the greater the opportunities for

advertisers and for producers of complementary goods and services. Second,

members finding it convenient to use the messaging functionality will be motivated

to encourage any messaging-partners whom are not members to become members,

thus increasing the membership growth rate. More members directly translates into

more opportunities for both advertisers and producers of complementary goods and

services.

Figure 14-3

Impact Path Diagram: Social Networking Messaging Functionality

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Greater Fees from Producers of Complementary

Goods & Services

Increased Time Members Spend

on Platform

Greater Fees from

Advertisers

Touch Points Competitiveness

Effects Financial Impacts Digital

Investments

Member Convenience

Increased Membership Growth Rate

(from Members Recruiting New

Members)

Financial Analysis Techniques and Sensitivity Analysis

Once a digitization proposal’s benefits and costs flows have been monetized,

financial analysis techniques are applied in assessing the attractiveness of the

investment. Typical financial analysis techniques used include:

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 Net Present Value (NPV): calculates the expected monetary gain or loss from an investment by discounting benefits and costs flows, using a required

rate of return.

 Internal Rate of Return (IRR): calculates the discount rate at which the

present value of expected cash inflows balances with the present value of expected cash outflows.

 Payback Period: calculates the length of time for an investment’s benefits

flows to balance out its costs flows. In other words, it is the point-in-time when accumulated cash inflows begin to exceed accumulated cash outflows.

Each of the above (as well as other) financial analysis techniques possess specific

advantages and disadvantages, and organizations and individuals have preferences

regarding which is most informative in certain situations. Experience suggests that

it is best to view these financial analysis techniques as complements rather than as

substitutes. Demonstrating that a digitization proposal promises to produce

significant financial performance gains through the lenses of multiple, meaningful

financial analysis techniques usually increases a proposal’s appeal and believability.

In their most-often used forms, most financial analysis techniques assume that

projected benefits and costs flows will occur with certainty. However, there are many

reasons why the assumptions used in monetizing benefits and costs flows may prove

erroneous:

 Key assumptions are too optimistic, too pessimistic or just flat wrong.

 Important factors may have been omitted (intentionally or unintentionally).

 The organization or the competitive environment may change from when an

analysis was performed, thus fitting poorly with the investment context that exists when a funding decision is being made.

Consequently, it is always desirable to demonstrate the robustness of a proposal’s

anticipated financial performance impacts through a sensitivity analysis. In a

sensitivity analysis, the numbers inserted into a financial analysis are

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systematically varied so as to account for differing assumptions and varying

competitive conditions. Analyses with subsequently consistent results over a wide

range of assumptions and environmental conditions are said to be robust, and more

robust analyses are always more believable than are less robust analyses.

Monetization in Practice: Business Platform Renewal at BioGen72

We now illustrate the monetization of benefits flows through two examples.

The first example (presented below) describes the efforts taken to renew digital

platforms and business platforms at a biogenetics firm. The second example

(presented in the next section) describes a benefits monetization methodology

developed and used by Intel.

BioGen is a biogenetics firm whose scientists are dependent on being able to

digitally log samples, gather data automatically from analytical instruments, perform

mathematical calculations, track sample progress, produce data reports for

customers, and provide a database of raw data for archival retrieval. The business

platform that enables most of the BioGen R&D laboratory’s digitalized business

processes is the laboratory network system (LNS) – a highly-customized platform

installed eight years ago. No longer supported by the vendor, LNS is suffering an

increasing number of (mostly minor, but occasionally major) software and hardware

breakdowns. Over the last three years, budgetary requests for upgrading or

replacing the current LNS have been denied. Finally, senior management has

expressed a willingness to consider a proposal to both replace the current system

72 This case example is adapted from: “Biogenetica: San Jose ITSA Replacement,”

developed by B.C. Wheeler and G.M. Marakas, Kelley School of Business, Indiana University,

1999.

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and resolve some of its deficiencies, the most important of which is the significant

amount of time R&D laboratory managers currently spend monitoring day-to-day

operations. The proponents of the LNS proposal have developed what they believe

to be a strong financial business case.

When the existing LNS was initially justified, the business case that was built

focused on efficiency and productivity improvements to enable the BioGen R&D

laboratory to meet increasing workloads without hiring additional staff. As a by-

product of removing operator involvement in data collection and transcription, data

quality was improved. The objective of meeting operational workloads without hiring

new staff was not only achieved, but surpassed: the current workload is estimated

at 160,000 tests per year against the maximal target of 120,000 tests per year used

with the earlier business case – without any new staff being hired and staff in some

areas, such as quality control, being reduced. It is generally accepted by BioGen’s

executives that the existing LNS has produced at least $200,000 in annual staff

savings, the equivalent of five full-time employees (FTEs). In addition, the

capabilities of the existing LNS in enhancing R&D laboratory operation, audit trailing,

and data validation proved critical in the laboratory’s success in gaining accreditation.

If the existing LNS is not replaced and subsequently fails in a dramatic manner,

the BioGen R&D laboratory would:

 Not be able to meet its current workload without increasing staff resources.

 Be forced to revert to manual operations with a subsequent loss in productivity (i.e., the need to increase the laboratory staff by 5 FTEs) and

the possible introduction of data transcription and manipulation errors.

 Not be able to provide the timely data needed to fulfill regulatory obligations, placing laboratory accreditation in jeopardy and requiring that

most procedures and audit mechanisms be redesigned and rewritten.

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 Not be able to produce the data and support currently being provided to senior management and to other departments such as marketing.

The proposal to replace and enhance the LNS involves three phases. Phase 1

involves the selection of a vendor. Phase 2 involves the design, installation and

deployment of the new LNS. Phase 3 involves ongoing maintenance and support of

the new LNS. Table 14-3 summarizes the cost estimates associated with each phase.

Table 14-3 Estimated Costs for the BioGen LNS Renewal Proposal

Project Phase

Activity Estimated

Costs Explanations

1 Project planning $ 8,000

Network Software Acquisition $ 150,000 Maximum of 30 Network Users

Network Software Customization

$ 80,000 1 FTE (IT Professional)

Network Hardware Acquisition $ 20,000

Interface Software Acquisition $ 20,000

Software Implementation and Testing

$ 160,000 2 FTEs (IT Professionals)

Other Hardware Acquisition $ 90,000 Personal Computers, Printers, etc.

Pre-Installation User Training $ 10,000

Project Management $ 62,000 ½ FTE (IT Manager)

TOTAL $ 592,000

3 Network Maintenance and Trouble-Shooting

$ 60,000 Annually

A number of tangible and intangible benefits have been identified that could

be included within the LNS renewal financial business case. It was decided, however,

to build a very conservative financial business case – one that restricted the benefits

to those that were applied in justifying the current LNS. These benefits flows are:

 Continued avoidance of any need to hire additional laboratory staff (five FTE for a total of $200K annually).

 Increased productivity (+33%), without an increase in headcount, allowing

the laboratory staff to be reduced by an additional FTE ($40K annually).

Anticipated benefits that are not being monetized include:

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 Opportunities for a further productivity increase (at least 10%) with the existing headcount (e.g., by faster system response times and additional

automation of equipment interfaces).

 Reduced management time on laboratory operational activities (repairing

obsolete hardware, resolving system problems).

 Improved management control and reporting.

 Improved ease of use, particularly for temporary/replacement staff.

 Retaining laboratory accreditation.

Using a system life of seven years after installation, the resulting financial analysis

produced positive outcomes (shown as Table 14-4). A sensitivity analysis increasing

costs by 20% still produced positive financial outcomes (NPV = $ 91,000; IRR =

18%; Payback = 4 years).

Table 14-4

Conservative Financial Business Case for the LNS Renewal Proposal

Years

1998 1999 2000 2001 2002 2003 2004 2005

Benefits Flows ($1000)

240 240 240 240 240 240 240

Costs Flows ($1000)

-600 -60 -60 -60 -60 -60 -60 -60

Net Benefits ($1000)

-600 180 180 180 180 180 180 180

Cumulative Net Benefits ($1000)

-600 -420 -240 -60 120 300 480 660

Discount Rate = 12%

Net Present Value (NPV) -=$198,000

Internal Rate of Return (IRR) = 23%

Payback Period = 3.3 Years

Just How Persuasive is this Business Case?

If you were BioGen’s senior management, would you find this financial

business case to be persuasive? Have all costs been appropriately considered? Have

all the potential risks been considered? For example, costs might very well be

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expected in resolving problems that arise in migrating users from the old LNS to the

new LNS, in dealing with post-installation user training and support, or in assuring

that accreditation requirements are being met with the newly-implemented LNS.

Do the monetized benefits seem reasonable? If the existing LNS were to

disappear with the laboratory reverting to manual operations, is it reasonable to

assume that the workload would require the rehiring of five full-time employees?

Might not laboratory work process and equipment improvements have occurred over

the past decade, reducing some of these historical staffing needs?

Should an effort have been made to monetize the intangible benefits? What

is the risk exposure from losing accreditation (e.g., having to use third-party,

accredited laboratories for many testing procedures)? What would it cost to maintain

accreditation were the existing LNS to fail? Is it more reasonable to expect the

existing LNS to fail completely or to only partially fail? Could sensitivity analyses be

used to examine a range of failure scenarios? How much management time is likely

to be saved, and how much of this ‘saved’ management time would actually be

productively applied (and how would it be productively applied)?

In building a financial business case, it is often difficult to know how

comprehensive and detailed the business case should be. A point will always be

reached where the value gained from additional analysis is less than the incremental

cost. The key in determining when to stop involves understanding your target

audience and what this audience expects to see. Just how conservative are they?

Will they be receptive to the monetizing of intangible benefits? Do they expect to

see robust sensitivity analyses? Are they more likely to approach the funding decision

with a bias for or against the proposal? Ideally, your own experiences, as well as

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your organization’s existing proposal evaluation policies, guidelines, procedures, and

templates should provide you with insight as to the depth of analysis expected in a

financial business case.

Monetization in Practice: Intel’s Value Dials Methodology73

Intel, a leading semiconductor firm, uses a very pragmatic approach in

directing and facilitating the development of financial business cases for proposed

digital investments. With Intel’s Value Dials Methodology, a set of key performance

indicators (see Table 14-5) are used in framing all digital investment proposals.74

When executed well, the Value Dials Methodology results in the building of financial

business cases that fit extremely well with Intel’s business strategies. Hence, these

financial business cases are likely to be understood and appreciated by executives

across the organization.

73 M. Curley, Managing Information Technology for Business Value, Intel Press, 2004. 74 Adapted from M. Curley and R. Lansford, “Using an IT Business Value Program to

Measure Benefits to the Enterprise,” White Paper, Intel Information Technology, 2009.

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Table 14-5 Value Dials Methodology: Key Performance Indicators

Key Performance Indicators

Equation

Days of Inventory (Value of One Day) x (Days of Inventory Removed) x 15% (Weighted Average Cost of Capital)

Days of Receivables (Dollar Value of Receivables) x (Days of Receivables Removed) x 15% (Weighted Average Cost of Capital)

Days of Payables (Dollar Value of Payables) x (Days of Payables Added) x 15% (Weighted Average Cost of Capital)

Headcount Reduction or Avoidance

(Number of Headcount Reduced or Avoided) x (Average Burden Rate for Region and Job Type)

Employee Productivity (Number of Employees Affected) x (Time) x (Average Burden Rate) x (50%)

Employee Turnover (33% of Annual Burden Rate and Region and Job Type) x (Number of Headcount Turnover Avoided)

Removing Unneeded Technology Solutions or

Business Solutions

Cost of Operating and Maintaining the Technology Solutions and/or Business Solutions

Materials Discount (Prior Materials Pricing) – (Current Materials Pricing)

Hardware and Software Purchase Avoidance

Total Cost of the Hardware and/or Software Avoided

Table 14-5 (Cont.)

Value Dials Methodology: Key Performance Indicators

Key Performance Indicators

Equation

Other Cost Avoidance (Actual Unit Cost Reduction) and/or (Quantified Increase in Margin) and/or (Total of Actual Costs Avoided)

Factory Uptime Increase (Value of Product) x (Volume Increase)

Scrap Reduction (Total Value of Scrap Reduced and/or Avoided)

Business Process, Business Continuity and Security Risk Avoidance

(Value of Risk) x (Probability of Occurrence)

Time-to-Market (Value of Increased Market Segment Share) x (Number Weeks Accelerated to Market)

Open New Markets (Increased Volume) x (Average Selling Price)

Optimize Existing Markets (Increased Volume) x (Average Selling Price)

Cross-Selling (Increased Volume) x (Average Selling Price)

Solidifying Intel’s Being Selected as a

Vendor of Choice Increased Value of Intel’s Stock Price

Direct Income Total Amount of Income Generated by the Sale to External Companies of an Internally Developed Product or Service

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Consider, for example, a proposed digital investment targeted at increasing

employee productivity and the quality of customer interaction associated with the

customer order-handling processes within one of Intel’s manufacturing operating

units. After working the numbers, proponents arrive at performance gain estimates

for four key performance indicators (see Table 14-6): days of inventory, volume of

daily orders handled, employee head count reduction, and market segment share

increase.75 By applying the Value Dials Methodology, what initially may have seemed

to be a set of quite intangible benefits have been transformed into financial outcomes

that have high likelihoods of being understood by the executives responsible for the

funding the digital investment proposal.

Table 14-6

Anticipated Financial Outcomes for Four Key Performance Indicators

Key Performance

Indicator

Current State of the

Indicator

Anticipated State of the

Indicator

Value (Annual)

Days of Inventory

30 28.5 $ 3,000,000

Daily Orders Handled

20 35 $ 500,000

Head Count 900 850 $ 5,000,000

Market Segment

Share 55% 56% $ 33,000,000

A Recap and Look Ahead

The ideas presented so far should enable you to contribute in meaningful ways

when fashioning a proposal for a digital investment. Meaningfully monetizing the

business case is especially important, as the result should be a proposal that is more

persuasive, more easily defended against critics, and more likely to be funded.

75 Adapted from M. Curley, Managing IT for Business Value, Intel Press, 2004, p. 93.

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Once a digital investment proposal has been funded, the likelihood that

promised benefits are realized becomes dependent on the effectiveness of the

funded-proposal’s implementation. Two related-but-distinct planning tasks must be

accomplished. First, implementation planning is performed to accurately specify all

the activities to be carried out when implementing the digital investment. Second,

project management planning orchestrates the execution of these implementation

activities. In fact, a rough, first-cut effort at specifying a proposed investment’s

implementation plans and project management plans needs to occur when building

the investment’s financial business case. It is only by anticipating what will be

involved in successfully implementing a digital investment that all needed activities

and resources will be included in the financial business case.

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Chapter 15. Implementation Planning

Successfully implementing a funded digital investment proposal involves

numerous activities, even when the investment is seen as being relatively

straightforward. As the digital platforms and business platforms associated with an

investment’s implementation increase in number, sophistication and/or

innovativeness, the number and complexity of these implementation activities

increase as well, but at an exponential rather than linear rate. If critical

implementation activities are overlooked (or worse, intentionally skipped to reduce

costs to speed up an implementation), the most likely outcomes are either that an

investment’s actual implementation costs end up far exceeding those specified in the

proposal’s financial business case or that the proposal’s promised benefits are only

partly, if at all, realized.

Implementation planning involves identifying all the activities likely to be

required in successfully deploying a digital investment. Successful deployment

usually requires two types of activities: those undertaken to acquire (and, if needed,

to build) and install digital platforms and business platforms; and, those undertaken

to motivate and train the individuals who will be using, operating and managing the

newly-installed digital platforms and business platforms. This second set of activities

is especially important because, increasingly, digital investments require affected-

individuals to acquire new skills and to change their behaviors, often in dramatic

ways. This chapter thus covers two topics:

 The Implementation Process

 Organizational Change

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The Implementation Process

Figure 15-1 portrays the implementation process, depicted as a five-stage

process.76 The implementation process involves the activities required in moving

an idea for a digital investment forward and obtaining funding, for designing and

installing digital and business platforms, and for taking steps to ensure that the

investment’s promised benefits are attained. Tables 15-1 and 15-2 describe the work

activities, beneficial outcomes, and potential problem areas associated with each of

the five implementation process stages.

Figure 15-1

The Implementation Process

Approval &

Funding Configuration

Installation &

Shakedown Inertia

Onward &

Upward

Pre-Installation

Installation & Beyond

76 The names of the stages of the implementation process are taken from: M.L. Markus

and C. Tanis, “The Enterprise System Experience – From Adoption to Success,” in R.W. Zmud

(Ed.), Framing the Domain of IT Management, Cincinnati: Pinnaflex Education Resources,

2000, pp. 173-207.

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Table 15-1 Pre-Installation Implementation Process Stage

Stage Activities Beneficial Outcomes

Potential Problem Areas

Approval &

Funding

• Develop/evolve strategic business case

• Develop/evolve implementation plan

• Develop/evolve financial business case

• Recruit champions & executive sponsors

• Communicate funding outcome to affected parties

• Understood competitive context

• Understood implementation context

• Vision of the desired future

• Galvanized support • Obtained funding

• Inadequate, unrealistic strategic and/or financial business cases

• Oversold business cases • Inadequate, unrealistic

implementation plan. • Excessive or insufficient

funding

Configuration

• Select & train implementation participants

• Finalize designs of digital & business platforms

• Carry out pre-installation change management

• Finalize implementation plan • Build digital & business

platforms • Test system interconnections

• Preparedness & involvement of all affected parties

• Mindful analyses and designs

• Comprehensive planning

• Thoroughly tested digital & business platforms.

• Insufficient involvement of affected parties

• Inadequate participant training

• Inadequate vendor and/or service provider contracts

• Insufficient resources • Inadequate testing

Table 15-2 Post-Installation Implementation Process Stages

Stage Activities Beneficial Outcomes Potential Problem Areas

Installation &

Shakedown

• Perform data cleanup & data conversions

• Perform change management activities

• Build & implement a user support capability

• Design and implement platform operations & maintenance procedures

• Competent users • Well-performing

digital & business platforms

• Harvested low- hanging fruit

• Operational problems • Disrupted business operations • Poorly trained, disinterested

and/or resistant users

Inertia • Engage in fire-fighting

• Inadequately-prepared users • Underutilized digital & business

platforms • Unrealized benefits • Disenchanted users/executives

Onward &

Upward

• Re-envision & optimize digital/business platforms

• Enhance user capabilities • Redesign authority and

incentive structures

• Innovating users • Effective/efficient

digital & business platforms

• Realized anticipated & unanticipated financial outcomes

• Insufficient executive attention

• Insufficient resources • Inadequate user training

and/or support

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While the first three implementation process stages can be complex, costly

and time-consuming to carry out, the activities comprising each should be fairly easy

to grasp. An implementation project begins with the approval & funding stage,

where a business case is developed to gain funding approval and, hence, access to

the resources needed for implementation. Typically, the costs flows associated with

this stage are not included in an investment’s business case. Once funding is

obtained, the project moves into the configuration stage, where (1) digital

platforms and business platforms are designed, acquired and/or built, assembled,

and tested, and (2) pre-installation change management activities are carried out.

The configuration stage is followed by the installation & shakedown stage. Here,

the completed digital platforms and business platforms are installed and platform

users, operators and managers are provided the support necessary for carrying out

their platform-related work activities.

What often follows next is an unintended inertia stage. All too often, once a

technology or business solution has been installed, the personnel assigned to handle

implementation activities are assigned to other duties, and platform users, operators

and managers focus their attentions back to their primary work duties. Unless

otherwise incentivized or inspired, these platform users, operators and managers

tend to adopt a do-just-what-is-required attitude toward the newly-installed

platforms. When an implementation effort terminates with this inertia stage, many

– if not most – promised benefits never materialize.

Not all implementation efforts move into or remain in an inertia stage, but

instead transition to an onward & upward stage. In the onward & upward stage,

additional funding is released, which re-energizes all implementation participants. As

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a result, new learning occurs regarding the nature of the installed platforms, how

these platforms can enhance work practices, and how these work-related

enhancements can positively impact the performance of individuals, work units, the

investing-organization, and the market ecosystem(s) within which the investing-

organization participates. This re-energizing of an implementation’s participants

increases not only the likelihood that promised benefits will be fully realized, but also

increases the likelihood that unanticipated benefits will as well be realized.

Understanding how the net benefits flow associated with a proposal’s financial

business case play out over the five implementation stages is useful in grasping the

full implications of not moving into the onward & upward stage. The point-in-time

net benefits flow reflects the difference between accumulated benefits and

accumulated costs. Figure 15-2 traces out this net benefits flow, with the dotted line

representing an equilibrium point where benefits are fully offset by costs.

Figure 15-2 Net Benefits Flow for a Hypothetical Digital Investment

Time

Zero Net Benefit Flow

A p

p ro

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& F

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d in

C o

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O n

w a

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Pathway 1

Pathway 2

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Benefits begin to be realized once digital platforms and business platforms

have become operational. This realization of benefits is likely to be slow at first, but

then accelerates once most shakedown activities (work disruptions, software bug

resolutions, employee skill-building, fine-tuning of new work practices, etc.) subside.

Many, if not most, of the benefits realized during this installation and shakedown

stage involve what are referred to as a project’s low-hanging fruit, or benefits that

materialize without much effort being exerted. Examples of low-hanging fruit

include: replacing costly, inefficient hardware with less expensive, more efficient

hardware; elimination of unneeded software licenses; business process

enhancements gained by eliminating human labor and by reducing transaction error

rates; etc.

While some low-hanging fruit is almost always present, the portion of the

promised benefits from digitization proposals that can be characterized as low-

hanging fruit seems to be shrinking with time. Today, digitalization usually involves

sophisticated uses of technology combined with new ways of working and thinking

about work (e.g., synchronizing task and work flows; enriching decision making

through collaboration and predictive modeling; resolving operational problems by

accumulating and applying new knowledge about the root causes of the problem;

recognizing competitive opportunities, in a timely fashion, within redefined product-

markets; etc.). Importantly, these more-sophisticated digitalization applications

provide higher, but riskier, levels of financial performance gain.

While an implementation effort remains in the inertia stage, few benefits

beyond those associated with low-hanging fruit tend to be realized. Instead,

operating and maintenance costs associated with the newly-installed digital and

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business platforms accumulate, eroding the gains obtained by picking the low-

hanging-fruit (see Pathway 1 in Figure 15-2).

However, a very different storyline is possible. Pathway 2 in Figure 15-2

indicates an implementation effort that has moved into the onward & upward stage.

(A third pathway is also possible where an implementation effort never enters an

inertia stage, but instead moves immediately into the onward and upward stage.)

With this new storyline, the implementation effort is re-energized after the new digital

and business platforms have been installed, experienced and experimented with.

What has to happen for an implementation effort to be re-energized after the

installation & shakedown stage? Heightened, rather than dissipated, attention needs

to be focused on implementation participants and on platform users, operators and

managers in order to sustain these individuals’ learning about the newly-installed

platforms and about their changed work practices. As depicted by Pathway 2 in

Figure 15-2, additional costs (e.g., salaries of implementation participants, new

digital technologies, lengthier periods of work disruption, etc.) are likely to

accompany this re-energization of the implementation effort. But, more often than

not, this additional investment soon pays for itself with accelerating benefits flows.

While the value of such a late-stage influx of energy and resources might seem

obvious in hindsight, it tends to be difficult to anticipate and to justify within a

financial business case. When implementation planning does not explicitly account

for this second burst of investment, the implementation effort is either very slow in

moving into the onward & upward stage or never enters into it at all.

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Organizational Change

As introduced in this chapter’s introduction, the promised benefits from digital

investments increasingly require that affected individuals (employees, value-stream

participants and/or market ecosystem participants) learn about and adapt to new

digital platforms, new business platforms, new behavioral contexts and/or new

behaviors. Organizational change, broadly, refers to such requirements to adapt.

The extent of adaptation required – and, hence, the extent of anticipated

organizational change – may be minor, substantial or anywhere in between, and, is

likely to vary considerably across the affected-individuals. Stated in another way,

organizational change occurs when previously-accepted rules of the game no longer

apply.

The greater the extent of organizational change, the greater the effort (that

is, additional implementation activities and associated resources) required for

change-related activities – thus increasing the time and the cost to implement a

funded digital investment. Analyses of the expected extent of organizational change

should always be a part of the processes followed in fashioning strategic business

cases, implementation plans and financial business cases.

A method for assessing the extent of anticipated organizational change

involves estimating the effect of a digital investment on the five design elements

described in Table 15-3: strategies, structures, prescribed routines and

practices, members’ competencies and digitalized solutions. These five design

elements, when considered as a group, constitute the basic nature of a social

organization: why it exists (strategies), how it accomplishes its purpose (structures,

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routines and practices), and the capabilities (member competences and digitalized

solutions) applied in accomplishing this purpose.

Table 15-3 Social Organization Design Elements

Design Element Description

Strategies The objectives sought by the members of a social organization.

Structures

The authority, accountability, planning, control, coordination, incentive and relationship systems established to guide & direct the behaviors of the members of a social organization such that sought objectives are achieved.

Prescribed Routines & Practices

Sequences of operational & managerial activities (action and decision tasks) that are executed either by the members of a social organization or by digitalized solutions. If prescribed routines and practices are followed, the likelihood is increased that sought objectives are achieved.

Members’ Competencies

The capabilities (acquired through education, experience and training) required of the members of a social organization in achieving sought objectives.

Digitalized Solutions

The digitally-enabled functionalities (hosted on digital platforms & business platforms) that are directly applied toward achieving sought objectives or that otherwise support/enable the members of a social organization.

These five elements of organization design are characterized by

interdependence; that is, each design element has the potential to influence the

other design elements and to be influenced by these other design elements. When

two design elements influence one another, reciprocal interdependence is said to

exist. The questions posed in Table 15-4 provide a starting point for assessing the

amount of organizational change likely associated with implementing a digital

investment.

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Table 15-4 Questions Useful in Assessing the Extent of Organizational Change

Question Reasoning

How many of the design elements are expected to be affected?

The greater the number of design elements affected, the greater the assessment effort and the greater the amount of change to be managed.

Do changes in certain design elements induce changes in other design elements?

Interdependencies between design elements usually requires more sophisticated assessments.

If change in one design element induces change in another element, is this change reciprocal?

Reciprocal interdependence between design elements usually requires more sophisticated assessments and lengthens the time required to stabilize the social organization after associated digital platforms & business platforms have been installed.

How many installation sites are involved?

Increasing the number of installation sites usually requires a greater assessment effort and a greater amount of change to be managed.

How consistent is the nature of the expected change across installation sites of a multi-site implementation?

Inconsistency across installation sites usually requires more sophisticated assessments.

In order to better grasp the significance of these questions, consider the

following examples:

 An investment upgrading the standard tablet used across all of an

organization’s work units that does not affect work routines or practices would require a minimal effort in managing organizational change, as the

only change-inducing design elements would be a digitalized solution (the new tablet) and employee competencies (how to use the new tablet).

 An investment digitalizing previously non-digitalized work routines in order

to increase the efficiencies of these work routines; however, this digitalization project would have no effect on the organization’s strategies or

structures, and the installed-functionality would be consistent across all installation sites. This digital investment would require a greater change-

management effort than would the prior investment (the tablet refresh) because three design elements are affected: digitalized solutions, employee competencies, and work routines. Further, certain of these changes are

likely to be reciprocal: in the process of learning new skills, the employees involved may request that changes be made to the digital interfaces (i.e.,

the desktops, tablets, smartphones, etc.) used to access the digitalized functionality hosted on installed business platforms – and possibly to the digitalized work routines.

 An investment similar to that just described, but now the functionality of the newly-digitalized work routines would vary across each of multiple

installation sites. This increases the effort of managing organizational

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change since the training and support to be provided to the installation sites must be tailored to the digitalized functionality to be experienced at each

site.

 An investment exploiting a variety of digital technologies to introduce

innovative digitalization capabilities aimed at dramatically modifying the currently-executing business model is likely to require a very significant change management effort as reciprocal changes are likely to be felt across

all five of the design elements.

Assessing the Extent of Organizational Change: The Wentworth Projects77

Healthcare services in the Australian State of New South Wales (NSW) are

carried out by ten Area Health Services (AHSs), which operate under the

administrative oversight of the NSW Department of Health (DOH). Each AHS

operates its own network of hospitals, clinics and associated facilities.

The DOH provided most of the business platforms used by the AHSs since each

individual AHS lacked the resources or funding to develop their own information

systems, i.e., digitalized operational and managerial processes. Because clinical

information systems were given priority over administrative information systems, a

large backlog of digital investment requests existed for administrative information

systems.

In response to this backlog, the finance director for the Wentworth AHS came

up with an idea: if the AHSs pooled their resources, they could form business platform

development consortiums to develop the needed administrative information systems.

After a favorable response was received from the other AHSs, a steering committee

was formed to identify high-priority business platforms. Then, voluntary consortiums

77 The material in this section is abridged from: R. Sharma, P. Yetton and R. Zmud,

“Implementation Costs of IS-enabled Organizational Change,” Information and Organization,

April 2008, pp. 73–100.

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were formed, on a case-by-case basis, to develop each high-priority platform. Once

a platform had been developed, each of the consortia AHSs then decided whether or

not to adopt and implement the platform.

Three of these platforms are described in Table 15-5: Datapower, Vmoney and

Mimate. Importantly, note from Table 15-5 that: Datapower and Vmoney

experienced full adoption, but Mimate did not; and, the relative implementation cost

and effort was lowest for Datapower, moderate for Vmoney, and highest for Mimate.

Table 15-5 The Wentworth Business Platforms

Business Platform

Size of Consortium

Adopting AHSs

Effort & Cost

Description

Datapower 8 AHSs 8 Low Enable online, real-time access to query data from a DOH human resources business platform.

Vmoney 4 AHSs 4 Moderate

Design and automate operational & managerial processes for paying medical specialists for services provided. These payments were negotiated centrally by DOH. While the same digitalized processes were used across the AHS sites, these processes worked through digital technologies available at each site.

Mimate 3 AHSs 1 High

Enable online, real-time access to query data from existing DOH financial & budgeting business platforms. Implementing Mimate required renegotiating a number of accounting practices affecting cost-allocations between DOH & the AHSs.

By providing answers for the questions posed in Table 15-4, Table 15-6

provides a summary explanation of why these particular implementation efforts and

costs were observed. The only organization design elements changed in

implementing Datapower involved a digitalized solution (enabling an online, real-time

query capability) and the competencies (being able to apply this query capability) of

a few HR staff employees at each adopting AHS. While these changes were

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interdependent (i.e., the installed query capability led to the training), they were not

reciprocal (i.e., the training did not affect the query capability). Further, these

changes were consistent across the adopting AHSs.

Table 15-6

Assessing Organizational Change for the Wentworth Projects

Questions Applications

Datapower Vmoney Mimate

Organization Design Elements?

Digitalized Solutions

Routines & Practices

Employee Competencies

Structures

Strategies

Elements’ Interdependence?

Elements’ Change-Reciprocity?

Number of Sites 8 4 1

Site Change Consistency? High Moderate Low

Three organization design elements were changed in implementing Vmoney:

the digitalized solution (enabling the business platform), routines and practices (the

digitalized medical specialist payment processes), and the competencies (being able

to carry out the new payment routines via the installed business platform) of AHS

administrative staff involved with paying medical specialists. As with Datapower,

these changes were interdependent, but not reciprocal: adopting AHSs conformed to

a uniform digitalized payment process. However, as existing digital technologies

varied across the installation sites, some installation and training customization was

required for each site.

All five of the organization design elements were likely to be affected for any

AHS desiring to gain Mimate’s online, real-time capability to access data available on

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DOH’s financial and budgeting business platforms. Changes would be required

regarding the digitalized solution (an online, real-time query capability), routines and

practices (a variety of accounting, budgeting and financial processes would be

affected), the competencies (learning how to carry out the new processes via new

business platforms) of numerous employees at an adopting AHS site, structures (a

new global chart of accounts; some loss of local budgetary autonomy), and strategies

(modifications in the relative power balances between DOH and each AHS). Not only

are these change elements interdependent, but they are highly reciprocal given the

very open-ended ways in which DOH and AHS administrators could choose to apply

the new digitalized capabilities. It should not be surprising that only three AHSs

opted to join the Mimate consortium with only a single AHS deciding to adopt the

Mimate business platform (experiencing high implementation efforts and costs).

Change Management Principles and Tactics

Changing people’s attitudes and behaviors occurs much more slowly than

changing the digital technologies that people use. Many implementation efforts fall

into the trap of carefully considering all the activities involved in designing and

building new digital platforms and business platforms, but then are careless (or,

worse, choose to ignore) all the activities involved in, first, understanding and, then,

changing the mindsets and behaviors of the people who will be using the new

platforms. Finely-targeted and finely-tuned digital solutions will not produce

anticipated outcomes if they are not used and used well. By applying two key

principles, individuals directing change-intensive implementation efforts are more

likely to anticipate, plan for, prepare for, and accommodate the ensuing

organizational change.

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Principle 1: Organizations are Messy Living Systems, not Machines.

Absolute control is possible with a machine, but not with a person. While a

manager might be able to force an employee to engage in some work activity, the

manager cannot force the employee to persistently apply her talents to the work

activity to the best of her ability or to be creative or to work collaboratively with

others. And, while a manager can motivate and otherwise prepare an employee for

a change-event, it ultimately remains the employee’s choice whether or not to resist,

accept or embrace change. Unless the individuals whose behaviors are to change

willingly accept ownership of and responsibility for these behaviors, it is unlikely that

meaningful change will occur. Managers tend to be much more effective when they

act like gardeners rather than mechanics -- that is, when they see themselves as

growing things rather than changing things.

Principle 2 The Limiting Factor in Organizational Change is the Individual’s Desire and Ability to Accept and Adapt to a Planned Change-Event.

Passion is the key energizer of organizational change. People generally strive

to work toward what they see as the best possible outcome for themselves when

placed in uncertain situations. If the individual (or individuals) orchestrating an

organizational change episode and the individuals being targeted perceive the

change-situation differently or apply very different decision criteria, it is unlikely that

those orchestrating the organizational change episode will be able to piece together

a set of change-management tactics that results in the targeted individuals behaving

as desired. However, if those initiating change and those having to adapt to change

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come to view the change-situation through compatible lenses, then it becomes much

more likely that effective change-management tactics will be devised and applied.

Inducing individuals to move away from their current comfort zones to a new

set of behaviors will likely prove more successful if the following change-management

tactics are emphasized:

 Develop within the targeted individuals an understanding of why the new behaviors are being introduced and how these behaviors will benefit the

individuals and the social organization as a whole.

 Provide more-than-adequate training about the new behaviors before and

after any new digital platforms and business platforms are installed.

 Provide more-than-adequate support as the targeted individuals begin to apply and experiment the new functionality provided through newly-installed

digital platforms and business platforms. Especially important is just-in-time support – that is, providing individuals with help at the precise time that

help is needed.

 Ensure that the situational context reinforces the value of the new

behaviors: visible, active direction and encouragement; visible, active platform engagement by peers; and, positive feedback and incentives.

 Provide opportunities for the targeted individuals to contribute to the design,

installation, and evolution of the installed digital platforms and business platforms.

A Recap and Look Ahead

Implementing a funded digital investment, especially one that introduces

significant organizational change, is not a job for the faint-hearted. But, while the

challenges are many, so are the rewards. If a proposal’s implementation plan is

comprehensive and is realistically reflected in the investment’s strategic and financial

business cases, then the likelihood that benefits articulated in these business cases

will be realized is substantially increased.

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But, having a solid implementation plan and effectively executing this plan are

two very different things. The next chapter covers tactics for transitioning a funded

digital investment into one or more projects, and then fashioning an effective plan

for managing the project(s).

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Chapter 16. Project Management Planning

Funded digital investments are typically implemented by organizing the

activities identified in an implementation plan as a project and by typically assigning

responsibility for this project to a single individual. This individual is referred to as a

project manager. With a project, a group of talented individuals is temporarily

brought together to carry out an assignment because, collectively, the individuals are

believed to possess the perspectives, knowledge and skills necessary to successfully

complete the assignment.

Projects associated with digital investments differ from many other types of

projects in two primary ways. First, more often than not, digital investment projects

require project participants to undertake some task assignments that neither they

nor their colleagues have previously encountered. Second, again more often than

not, digital investment projects require project participants to closely interact with

some, or possibly many, individuals with whom limited (if any) prior collaborative

experience exists. It is these two attributes – the novelty of assigned tasks and

limited prior participant relationships – that can cause the management of a digital

investment project to be both challenging and risky.

Project management planning involves translating a funded investment’s

implementation plan into a set of work activities that, when completed, will produce

the investment’s anticipated benefits flows. An ineffective project manager can

seriously erode a digital investment’s promised benefits, even when a comprehensive

and realistic implementation plan exists, for a variety of reasons:

 The tasks comprising a project can be incompletely or ambiguously defined

or can be intentionally left open-ended.

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 The wrong people are assigned to project teams.

 The wrong people can be assigned to work on specific project tasks.

 Project tasks can be under-resourced or over-resourced.

 Project tasks can be incorrectly sequenced.

 Project tasks might start too early or too late.

 Project tasks may never be fully completed or may be completed but still produce faulty outcomes.

Such a list could go on and on. This chapter’s four sections address how effective

project management planning can reduce the frequency by which such problems

occur as well as the extent of a problem when it does occur:

 The Nature of Projects

 Project Success and Failure

 The Nature of Digital Investment Projects

 Proven Project Management Practices

The Nature of Projects

While the term project is one that we all use, most of us have not thought

about the term very deeply. A project involves a set of interrelated work activities

that is undertaken to achieve a specific outcome and that terminates once this

outcome is achieved. Because projects are temporary in nature, resources (e.g.,

budgets, people, equipment, facilities, etc.) are not permanently attached to them.

This creates five serious management challenges:

 Acquiring the resources to successfully complete a project.

 Working around the practical reality that many of these needed resources may be available only at certain times and then only for short bursts of time.

 Breaking up the project into subprojects that fit the knowledge, skills and time-availability of the individuals assigned to the project.

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 Motivating the individuals participating in project activities to perform at high levels when engaged in project-related tasks even when these

individuals might have other, usually more permanent, work assignments.

 Getting a project team’s members to work together effectively and

efficiently, especially when some (or many) of these individuals may not have previously worked together.

In grasping why these challenges exist, it is critical to understand what each

project team member does individually and what the project team does as a whole

(see Figure 16-1). Specific individuals are assigned to project-related activities

based, among other factors, on an individual’s knowledge, skills and availability.

After considering the nature of the assignment given a project team and the

knowledge/skills held by team members, a project plan is put into place that assigns

each member – or, more commonly, subgroups of members – a subproject to

accomplish. If subgroups are assigned appropriate subprojects and if these

subprojects are appropriately defined, resourced, sequenced and coordinated, then

the project team’s assignment should be successfully completed. Project

management is all about engaging in practices aimed at defining subprojects,

sequencing subtasks, assigning subprojects to project subgroups (and possibly to

individuals), and coordinating and tracking the execution of these subprojects as a

project unfolds.

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Figure 16-1 How Project Teams Work

Subproject Execution

Subproject Accomplishment

Project Accomplishment

Project & Subproject Definitions

Project Team Members’ Knowledge, Skills &

Availabilities

Project Plan • Subproject Sequencing • Subproject-Subgroup

Assignments

Subgroups (& Individuals)

Subproject Coordination

Projects typically involve participants (i.e., the individuals involved with project

activities) and stakeholders (i.e., individuals or entities either having significant

influences on project outcomes or likely to be significantly affected by project

outcomes) holding very different, often conflicting, interests and perspectives. Figure

16-2 portrays a general project environment, and Table 16-1 describes the

participants and stakeholders typically associated with a project. It is not uncommon

for a project team (say, of ten or so members) to contend with hundreds of

participants and stakeholders – some powerful and others inconsequential; some

actively involved with the project and others passively involved; and, some acting as

project proponents, others as project opponents, and yet others indifferent as to

whether the project succeeds or fails.

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Figure 16-2 Project Environment

Senior Executives & Senior Managers

Internal Users

Project Manager(s)

Project Proponents

Co-Workers

Team Members

Regulatory Bodies

External Users

Subcontractors

Strategic Partners

Vendors & Technology

Service Providers

Project Sponsors

External to the Investing Organization(s)

Internal to the Investing Organization(s)

Internal to the Project

Project Opponents

Peers of Project Participants & Stakeholders

Table 16-1

Project Participants and Stakeholders

Participants & Stakeholders Project-Related Roles

Regulatory Bodies Influence project outcomes.

Strategic Partners Influence project outcomes & engage in activities that complement project outcomes.

External Users Value stream & market ecosystem participants who will use project- targeted digital platforms & business platforms.

Peers Provide project-related expertise & perspectives.

Vendors, Service Providers & Subcontractors

Supply project resources and/or carry out project activities.

Senior Executives & Senior Managers

Allocate project resources & influence project outcomes.

Project Sponsors Provide funding & political support, and approve project objectives & outcome.

Project Proponents/Opponents Influence project activities & outcomes.

Internal Users Members of the investing organization(s) who will use project-targeted digital platforms & business platforms.

Co-Workers Provide project-related expertise & perspectives.

Project Manager(s) Responsible for achieving project outcomes, and for planning, organizing & controlling project activities.

Team Members Responsible for achieving subproject outcomes.

Project Success and Failure

The success or failure of a project is judged on the basis of three criteria:

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 Project Outcome Success: Whether project objectives agreed on by project sponsors have been achieved.

 Project Budget Success: Whether project spending is below or above the project’s agreed-on level of funding.

 Project Schedule Success: Whether project deliverables are completed before or after agreed-on delivery dates. A project deliverable refers to significant and perceptible project output that is fundamental to achieving

agreed-on project objectives.

These criteria may sound pretty straightforward. But, like most things about project

management, they usually are not. A project that met all three of these criteria

would certainly be considered a success. But, what if a project was on time and

within budget, but its primary sponsor was dissatisfied with project outcomes? Or,

what if a project far exceeded its primary sponsor’s expectations, but was 25% over

budget and missed its promised delivery date by three months? Or, what if a

project’s primary sponsor had (in reaction to a major competitor’s actions) made

radical changes to the project’s primary deliverable four months into the project (with

an original nine-month delivery date), requiring substantial design rework that

ultimately doubled the budget and induced a five-month delay in project completion

time, but eventually produced outcomes that the sponsor valued highly?

It is difficult to attach labels like success and failure to projects without

understanding their contexts, histories and trajectories. But, one project success

metric is universally applied. If a project is understood by its key stakeholders to

have created substantial competitive value, then the project is a success. However,

if a project is viewed as having created little competitive value (e.g., project

objectives went largely unmet, higher-than-expected costs eroded most of the

benefits flows, project outcomes were delivered too late to have a meaningful

competitive impact, etc.), then the project is most likely to be seen as a failure.

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Achieving successful project outcomes is all about negotiating outcomes and

resources, communicating the nature of each subproject and relating this nature back

to the project-as-a-whole, planning (and re-planning) subprojects, making sure that

subtasks are carried out as planned, and, most important, being smart and politically

adept enough to keep a project moving forward when the project’s plans begin to fall

apart. The project manager’s mantra must be ‘No surprises’! If a plan component

needs to change, it should change – but only after letting stakeholders know what is

to be changed and why. If a planned deliverable date will be missed because of an

unforeseeable event, so be it - but, immediately inform stakeholders of the new

delivery date and explain why the delay will occur. If key project resources have just

been pulled from the project by a powerful executive, revise the project plan

accordingly – but make sure that stakeholders are aware of the revised plan and why

the revision took place.

The Nature of Digital Investment Projects

Digital investment projects often involve high levels of risk relative to many

other types of projects.78 Investment risk is not necessarily bad, as higher risk

typically offers the promise of higher, but more variable, financial returns. The key

to managing a digital investment project well involves: understanding the risks

involved in a project as well as the root cause of these risks; and, demonstrating

sound project management practices that, if executed well, enable a project’s

managers to surface and address risks as these risks arise. The remainder of this

78 S. Dewan, C. Shi and V. Gurbaxani, “Investigating the Risk-Return Relationship of

Information Technology Investment: Firm-Level Empirical Analysis,” Management Science,

December 2007, pp. 1,829-1,842.

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section focuses on three risk areas often found to derail the success of digital

investment projects:

 Heightened Project Deliverables Specifications Uncertainty

 Depressed Benefits Flows

 Heightened Costs Flows

Heightened Project Deliverables Specifications Uncertainty

A distinguishing aspect of many digital investment projects is the high level of

uncertainty that can exist regarding project deliverables specifications: the

descriptions that accompany each of a project’s digitized/digitalized functions or

components (e.g., a digitalized operational or managerial process, a technology

service, the content and format of a management report, the data to be hosted on a

platform, a platform’s user interface, etc.). Remember, many, if not most, of a

project’s deliverables are tied to novel or significantly-enhanced actions that have

not before been taken or experienced by targeted humans or by targeted digital

solutions. But, these deliverables need to be specified if a project’s stakeholders are

to reach consensus on expected outcomes, if project managers are to develop a

sound project plan, and if project participants are to fashion tactics for carrying out

assignments.

If a project’s deliverables are clearly and comprehensively specified early in

the project’s life, many project-related difficulties can be either eliminated or

substantially reduced. By making clear to all project participants what is to be

accomplished, a number of good things happen, including:

 Associated benefits and costs flows are easier to envision, determine and communicate.

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 The extent of organizational change is more accurately estimated.

 The to-be-delivered digital platforms and business platforms are more

readily designed, procured and engineered.

 Subprojects are more readily defined, sequenced and assigned to project

team members.

 The training needed by project team members and by platform users is more readily designed and delivered.

On the other hand, if a project’s deliverables are left uncertain (i.e., as to-be-defined-

later), a project’s management challenges intensify.

The specification of a digital investment project’s deliverables tends to be

characterized by greater uncertainty under two conditions. The first is rather obvious

– the lack of clear, comprehensive initial descriptions of a project’s deliverables. The

second, and not as obvious, condition involves the number, diversity and power of a

project’s stakeholders. The greater the number or diversity of stakeholders, the more

difficult it will be for these stakeholders to reach and maintain a consensus regarding

deliverables. The more powerful the stakeholders are, the more obstinate they are

likely to be about maintaining their individual positions regarding deliverables. Figure

16-3 depicts these determinants of a project’s deliverables specifications uncertainty.

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Figure 16-3 Determinants of Project Deliverables Specifications Uncertainty

Number/Diversity/Power of Stakeholders

Many/Much/HighFew/Little/Low

P ro

je c t

D e

li v e

ra b

le s

S p

e c if

ic a

ti o

n s U

n c e

rt a

in ty

Clear

Ambiguous

Low Moderate

High Very High

Consider a project to modify a payroll/benefits business platform in response

to a newly-renegotiated union contract. This is an example of a digital investment

project likely characterized by a low level of specifications uncertainty. The new

payroll and benefits functionality is clearly described in the new union contract, and

while there may be many stakeholders, their diversity is low given that their views

are likely to be consistently represented by a few management and union

representatives.

On the other hand, a project targeted at dramatically overhauling an

organization’s sales force automation business platform is likely to have a high level

of specifications uncertainty. While some of the desired functionality can probably

be clearly stated (e.g., the documents and business processes associated with

acquiring and fulfilling sales orders), much of the desired functionality (e.g., how

should a sales team plan for and coordinate customer engagements, how should a

sales team interact with customers and with other sales teams, how should a sales

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team engage in continual learning to improve their sales capabilities, etc.) is likely to

be quite vague at the beginning of the project. In addition, there is a large, diverse

group of stakeholders (e.g., sales executives, sales managers, account managers,

sales representatives, sales support personnel, administrative staff, clerical staff,

etc.), each of whom is likely to hold unique and distinctive views of how the new sales

force automation business platform should function.

Depressed Benefit Flows

In order for a digital investment project’s anticipated benefits flows to be

fully realized, many things have to go right. Table 16-2 identifies many of the risk

factors that possess the potential to depress the benefits flows actually realized

from a funded digital investment.

Table 16-2 Risk Factors Leading to Depressed Benefits Flows

Risk Factor Vulnerabilities

Project Objectives • Unspecified or ambiguous deliverables. • Lack of stakeholder consensus regarding deliverables.

Project Manager • Lack of competencies (knowledge, skill, experience); turnover.

Project Team Members • Lack of competencies or motivation; turnover.

Executive & Senior Management

• Lack of commitment, involvement or support; turnover.

Market Ecosystem • Competitors’, suppliers’, customers’ or strategic partners’ actions. • Economic events/trends.

Social Organization & Internal Environment

• Changes in strategic intent or in executing business models. • Changes in number & importance of competing investment projects.

Complementary Capabilities • Necessary complementary capabilities not recognized. • Necessary complementary capabilities inadequately provisioned.

Platform Users • Lack of competencies or motivation; turnover.

Digital Technology

• Use of unproven technologies. • Inadequate architectural design. • Insufficient flexibility or adaptability built into technology. • Necessity to integrate multiple technologies.

Vendors, Service Providers & Subcontractors

• Poor quality of delivered products or services.

These risk factors are best illustrated through an example. Consider an

organization that produces and sells complex manufacturing machinery. As a

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means of differentiating themselves from their competitors, the organization has

decided to engineer into its products a digitalized, networked, self-monitoring and

self-diagnosing capability that can inform its technical service representatives that a

particular machine at a customer site may be about to experience problems and

then support these service representatives as they maintain, troubleshoot and

repair (ideally virtually, but physically if needed) an identified machine. This

enhanced after-sales product support capability is expected to lower the cost of

providing technical service and, more importantly, to reduce equipment downtime

and increase equipment cost-efficiency and reliability for the customer. Expected

benefits could include cost savings, greater sales and higher margins.

What could go wrong with this investment? Here is just a short list:

 The rationales behind the investment’s strategic business case and/or financial business case may be flawed.

 The project manager may have never before dealt with a similar project and, as a result, fails to recognize – let alone address – critical project issues.

 The Vice President of Sales, who served as one of the project’s two executive sponsors, takes a position at another firm.

 A major competitor introduces its own line of self-diagnosing, self-repairing

machinery and quickly enlarges its market share.

 The new Vice President of Sales radically reshapes how customer

relationships are built and maintained.

 The complementary effort to redesign product support business processes is underfunded and, as a consequence, is never fully completed.

 The technical service representatives’ incentive system is not revised, for example, to replace bonuses for customer-site visitations with bonuses for

increasing the uptime of customer-installed machinery.

 The digitalized solution being designed to diagnose machinery malfunctions produces a high rate of faulty diagnoses.

 A third-party satellite-based communications network leased to capture real-

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time diagnostic data from customer-installed machinery inserts random errors into these data streams.

Consequently, the manager(s) of a digital investment project must understand their

project’s anticipated benefits flows, be aware of likely risk factors, be vigilant to the

surfacing of these risks, take steps to reduce the negative consequences of a risk if

and when it arises, and communicate this risk and the steps taken to project

stakeholders.

Heightened Cost Flows

If the costs of a digital investment project begin to spiral upward, the

investment’s promise of positive financial outcomes can turn into a reality of

meager, perhaps negative, financial outcomes. A listing of the risk factors that

commonly threaten to increase a project’s costs flows is provided in Table 16-3.

Large, complex projects can be very difficult to plan, coordinate and control –

leading to escalating costs flows. Such project management challenges are only

exacerbated with inexperienced project managers or the loss of executive support.

If some project participants (team members or platform users) are unwilling or

unable to competently carry out assigned tasks, then rework or additional work is

necessitated – again increasing project costs. Likewise, uncertain deliverables

specifications, unexpected technical problems and unexpected social organizational

changes inevitably result in both rework and additional work. Again, effective

project management is all about being aware of potential risks, being vigilant with

regard to the surfacing of risks, taking steps to reduce the negative consequences

of a risk if and when it arises, and communicating this risk and the taken-steps to

project stakeholders.

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Table 16-3 Risk Factors Leading to Heightened Costs Flows

Risk Factor Vulnerabilities

Project • Size, complexity.

Project Objectives • Ambiguous or unrealistic specification of deliverables. • Lack of stakeholder consensus regarding deliverables. • Changes to or additions of deliverables.

Project Manager • Lack of competencies (knowledge, skill, experience).

Project Team • Lack of competencies, motivation or cohesion; turnover.

Executive & Senior Management

• Lack of commitment, involvement or support; turnover.

Social Organization & Internal Environment

• Change in strategic intent or executing business models. • Changes in & number of competing investment projects.

Platform Users • Lack of competencies, motivation or involvement; turnover.

Digital Technology

• Use of unproven technology. • Inadequate architectural design. • Insufficient flexibility or adaptability built into technology. • Necessity to integrate multiple technologies.

Vendors, Service Providers & Subcontractors

• Lack of capabilities. • Inadequate contract or inadequate contract management.

Proven Project Management Practices

Project management has been practiced, informally, for as long as mankind

has been engaged with accomplishing large, complex tasks. How could the Egyptian

pyramids or Roman roadways have been built without someone applying basic project

management concepts? It would have been impossible. That said, the era of modern

project management is generally believed to have begun in the 1950s. Since then,

a large number of formal project management practices (i.e., concepts, techniques,

methods and tools) have been developed and refined.

Here, we focus on just six of these project management practices. These six

practices were selected for three reasons. First, these practices can be applied to

any project with which you might be involved. You will learn how to apply each

practice and, perhaps more important, be motivated to question the management of

projects where these practices are not applied. Second, these practices are

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generally-effective management practices and learning about them is likely to prove

useful to you beyond the project management context. Third, successfully carrying

out each of these practices should increase the likelihood that a digital investment

project’s expected outcomes will be achieved and, consequently, the likelihood that

promised benefits flows will be realized. These six practices, as well as the objectives

sought through each, are summarized in Table 16-4.

Table 16-4 Six Proven Project Management Practices

Practice Objectives

Project Scoping

• Break up a large, complex project into a set of smaller, more easily- managed subprojects.

• Specify the deliverables associated with each subproject. • Realize some project benefits earlier than would otherwise be the case.

Project Planning

• Define subprojects and each subproject’s tasks & needed resources. • Sequence the subprojects and assign subprojects to project participants. • Produce a project schedule and a project budget.

Project Organization

• Establish accountabilities & oversight responsibilities for the overall project & subprojects.

Project Stage-Gating

• Detect errors of commission (incorrect or unsatisfactory actions) and errors of omission (actions that should occur but do not).

• Reduce rework & delays. • Identify & terminate a failing project as soon as possible.

Project Control • Increase visibility into executing subprojects. • Increase visibility of project/subproject progress.

Post-Project Review

• Determine a project’s realized (i.e., actual) benefits/costs flows. • Determine what went particularly well & particularly poorly, and ensure

that these learnings are applied to future projects.

Project Scoping

A disproportionate number of failed projects tend to be large and complex

endeavors. Invariably, these large, complex failures tend to have considerable

similarity:

 A large number of tasks which were, to a large extent, proved to be

relatively independent of other tasks and, hence, could have been managed as a series of subprojects.

 A large number of tasks whose deliverables were characterized by

considerable specification uncertainty for considerable periods of time.

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 A lengthy delivery schedule, leaving the project susceptible to a variety of unforeseen events for a considerable period of time.

Effective project managers do not take on large, complex projects. Instead, they

engage in project scoping, or breaking large projects into sets of smaller, more-

manageable subprojects – where later-scheduled subprojects build onto the

deliverables of earlier-scheduled subprojects. Three beneficial byproducts of project

scoping are:

 Some project deliverables are delivered sooner, thereby pushing up benefits flows.

 Some subprojects are started later, thereby pushing back costs flows.

 Stakeholders and platform users are able to experience and learn from the deliverables of completed subprojects and, as a consequence, clarify the

deliverables specifications of future subprojects.

Particularly effective project managers evolve the practice of project scoping

further by treating their subprojects as not being set in stone but instead as involving

constantly changing options, such as those described in Table 16-5. This taking-

options approach to project management recognizes that risk-reducing

information always accumulates as a project progresses and that fully considering

this accumulating information before aggressively moving ahead with an established

project plan is the only way to ensure the best possible project outcome.

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Table 16-5 Taking-Options Approach to Project Management

Option Description

Defer Subprojects

Indefinitely pause a subproject (i.e., put it on hold until new information is acquired).

Explore a Deliverable

Prior to going forward with a full-scale deliverable, undertake a pilot project aimed at acquiring new information about the deliverable’s specifications.

Expand a Deliverable

Increase the functionality of a deliverable by looking for opportunities to share risk across a greater number of stakeholders or to generate higher financial returns without increasing risk.

Scale Back a Deliverable

Reduce the complexity of a deliverable by looking for opportunities to reduce project risk without compromising benefits flows.

Externalize a Deliverable

Look for opportunities to externalize all or some of a deliverable’s functionality, thereby exploiting opportunities to increase financial returns by reducing costs flows and/or risks.

Abandon a Subproject or an

Entire Project

Recognize the wisdom of terminating a subproject or the entire project when risk escalates to a point where realizing positive financial returns has become unlikely.

Once a project’s scope has initially been established, it is good practice to

negotiate a formal project charter with the project’s sponsors. A project charter

describes the objectives sought through a project, the project’s deliverables, the

timing of these deliverables, and significant project constraints. Essentially, the

project charter serves as a contract between the project team and the project’s

sponsors. That said, effective project managers know that, as with any aspects of a

project, the project charter is always open to renegotiation.

Project Planning

Effective project managers do a thorough job of project planning. Once a

project’s scope is established, it should be possible to identify:

 Subprojects and the tasks to be accomplished within these subprojects.

 The relationships between subprojects and between tasks within subprojects

(e.g., identifying which activities cannot be started until others have been completed and which activities can be done in parallel).

 The resources (facility, equipment, expertise and staffing requirements) and

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time required to accomplish these subprojects and tasks.

Some project planning most surely occurred when building the financial business case

used to secure a digital investment project’s funding. However, the project planning

undertaken in putting together a financial business case typically involves very rough

approximations that lack the detail needed in an effective project plan. Once a

project manager has taken charge of a funded digital investment, the implementation

plan used in preparing the proposal’s financial business case is revisited, but now in

much greater depth and detail. If the project’s finalized budget and schedule differ

substantially from the estimates used in building the earlier financial business case,

this financial business case should be redone and provided to the project’s sponsors

prior to the start of the project – remember, no surprises.

Staffing a project can produce additional complications when preparing a

project plan. Can the very best people be brought onto the project? Are these people

available now or will some subprojects need to be delayed in order for these specific

individuals to be brought onto the project? Or, should the project keep to the agreed-

on schedule by using other, perhaps less experienced, personnel? Can the project

be fully staffed with internal employees or will contracted employees be used? If

contracted employees are needed, how might this affect the project’s budget,

schedule and risks?

Another staffing issue that has derailed more than a few projects involves

deciding on the number of project team members. It seems intuitive that adding

more staff to a project should shorten the time it takes to complete the project. If it

takes four weeks for two people to complete a subproject, then it would seem that it

would only take two weeks for four people to complete the subproject. Right?

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Actually, it rarely works out this way. Adding more people to a subproject or to a

task always adds more management complexity (breaking up the work to be done

into smaller pieces, assigning responsibility for these pieces, and coordinating these

work assignments). So, it might take three weeks rather than two weeks, or perhaps

four or five weeks! Experienced project managers understand this and develop an

intuitive feel for when and how to adjust staffing levels in order to meet or beat

project deadlines while maintaining project budgets.

Finally, it is particularly important in project planning to estimate the extent of

organizational change likely to accompany the installation of a project’s deliverables.

It may seem non-intuitive, but experience has shown that projects involving

extensive organizational change often benefit from faster implementation cycles. An

employee’s (spoken or unspoken) hesitance to accept an imposed organizational

change is less likely to take root when the employee is given little time to organize

resistance or to figure out how to retain current work practices (rather than adopt

the new work practices) yet still acceptably complete all work assignments. Such

reasoning is important in determining how a project might be broken up into

subprojects (some of which involve extensive organizational change and some which

involve only minor, if any, organizational change) and how these subprojects are to

be sequenced.

Project Organization

Figure 16-4 depicts a very typical project organization, i.e., a project’s

authority and accountability assignments. One or more project managers comprise

a project management team that has direct responsibility for the project’s success

and that manages the project on a day-to-day basis. Many projects only have a

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single project manager. However, large projects or projects involving extensive

organizational change often have co-project managers. With co-managed digital

investment projects, one manager (typically a technology professional) focuses on

the project’s technology aspects and the other manager (typically a business

professional) focuses on the project’s business aspects.

Figure 16-4 Typical Project Organization Structure

Steering Committee

Project Management

Subproject D Subproject E Subproject F Subproject G… …

Most major projects have a formal project steering committee, comprised

of two to five executives/managers having project oversight responsibility. The size

of a project steering committee and the organizational rank of steering committee

members generally reflect a project’s importance, budget, and the number of affected

work units. A strategically critical digital investment project whose deliverables are

to be used in numerous work units and that requires a substantial financial

investment would likely have a steering committee comprised of senior executives.

On the other hand, the steering committee for a project upgrading an existing

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business platform hosting critical operational processes used by a single work unit

would likely be comprised of mid-level managers from this work unit. A senior

executive’s time is much too valuable to be spent overseeing a project that could just

as effectively be handled by a lower-level manager. Digital investment project

steering committees typically include representation from: the business-side (the

sponsoring unit or units, as well as other units significantly affected by a project’s

deliverables); the technology-side (assuring compliance with global technology

standards); and, especially for projects representing a substantial monetary

investment, the finance-side.

The project steering committee meets regularly for project status reviews and

is convened when critical issues surface that need to be resolved by someone with

more authority than that held by the project manager. Examples of such issues

might involve: requests to significantly expand or contract a project’s scope, budget

or delivery schedule; significant delays in critical project deliverables; significant

problems with vendors, providers, and subcontractors; and, unexpected technology

problems.

Project Stage-Gating

A variety of errors (traced, among other things, to inexperience, poor

assumptions, misunderstandings, errors in judgment, poor technology choices, etc.)

can arise in designing, acquiring, developing and configuring project deliverables.

The earlier such errors are detected and resolved, the less rework must be done and

the more likely it will be that a project will stay on-budget and on-schedule. For

example, one of the deliverables likely included within a sales automation business

platform would be a set of performance metrics to be used by regional sales

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managers in assessing sales teams’ effectiveness. If the specifications for these

performance metrics are not examined and approved (signed off) by the regional

sales managers, then these regional sales managers may end up complaining about

having to work with metrics once the sales automation platform is installed.

Redefining these metrics, possibly capturing new data and then recoding and

retesting the software that produces the metrics is sure to add to the project’s overall

cost and to delay the delivery of a satisfactory set of metrics. By setting up an early

stage-gate requiring that the regional sales managers examine and approve the to-

be-delivered metrics, such rework would likely be avoided.

Effective project managers make use of project stage-gating at points in a

project where it makes sense to assess what has been accomplished so far and to

decide whether or not to (see Figure 16-5): proceed to the project’s next stage;

continue working on the current stage; or, if a detected problem seems unresolvable,

to reassess the project’s overall viability, rethink through the project’s deliverables

and, possibly, terminate the project. For example, it would be very reasonable for a

project manager to establish stage-gates that address the following issues:

 Has the project charter been signed by the project’s sponsors?

 Have the specifications regarding all key deliverables been examined and

approved by the responsible stakeholders?

 Have the designs of the business processes to be hosted on to-be-installed

business platforms been examined and approved by the owners of these business processes?

 Has all the testing associated with a to-be-installed platform been

satisfactorily completed?

 Has all pre-installation user training been satisfactorily completed?

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Figure 16-5 A Project Stage-Gate

Subproject F Gate Subproject HSubproject G

Reassess Project Viability

Repeat Prior Stage

… …

Designing a stage-gate involves defining the decision to be made, specifying

the criteria to apply in making this decision, and identifying the individuals to

participate in this decision. Depending on the nature of a stage-gate decision, the

individuals involved with the decision might represent the project’s steering

committee, other project stakeholders, the project manager, or project team

members. In selecting stage-gate participants, it is important to involve both the

individual or individuals accountable for the stage-gate decision and other individuals

holding the data, information and knowledge required in assessing the stage-gate

situation.

Project Control

Effective project managers apply project control tools and methods that

provide visibility (e.g., amount of work completed, the quality of this work, actual

costs compared to budgeted costs, how much time has elapsed and how much time

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it will now take to complete the work that remains, etc.) into subprojects and into

the tasks that comprise these subprojects. By combining data about active and

already-completed subprojects and by reassessing projections regarding yet-to-be-

started subprojects, it should be possible to determine (on an almost continuous

basis) whether or not the overall project is on track. If not, adjustments should be

made and brought forward to the project steering committee for approval (remember

… no surprises).

Very effective project management tools and methods are available today to

provide visibility of a subproject’s progress. These tools and methods, however, are

dependent on the ability to capture, store and analyze data about the work done and

this can be quite challenging. How convenient is it for project team members to

regularly and accurately report on their work efforts and accomplishments (or, lack

of accomplishments)? For example, it is often very difficult to determine if software

design, coding or testing is, say, 50%, 75% or 90% complete. To complicate matters

further, computer programmers seem to stay at a 95% completion point for days or

weeks at a time (optimistically believing that the next set of test runs will prove

successful). Why should the person in charge of a task that is getting further and

further behind report this fact (and, hence, bear the brunt of a project manager’s

attention) when this individual is truly confident that a needed breakthrough will

occur tomorrow or, most surely, by next week? Why should any subordinate pass

on bad news to their supervisor when it is difficult for the supervisor to accurately

assess the substance of the subordinate’s reported work progress?

Effective project control requires not only effective tools and methods, but also

a project culture where team members are honest about and timely in reporting their

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work progress. Visibility into a subproject’s status is unlikely to occur if team

members believe they will be penalized or harangued for reporting delays, mistakes

or unforeseen difficulties. Projects that are falling behind schedule or behind budget

only get back on schedule or back on budget when problems are recognized and

resolved as early as possible. Effective project managers realize the futility of

berating team members for reporting bad news. It is much more beneficial to figure

out why things have gone wrong and resolve the problems. Assigning blame, if it

occurs at all, should wait until a project has been successfully completed and

celebrated.

Post-Project Review

Once a project’s deliverables have been implemented and their operation and

use has stabilized, effective project managers conduct post-project reviews. The

purpose of a post-project review is two-fold. First, a project’s realized benefits flows

and actual costs flows are determined and compared to those stated in the project’s

financial business case. Such an analysis provides two important benefits:

 The project’s sponsors and other major stakeholders learn the extent to

which promised benefits were, in fact, realized.

 The individuals who put together the financial business case can see how realistic their projections were, and thus identify and learn from any

mistakes that might have been made.

Second, the project manager and team members can assess what went right with

the project (and why) and what when wrong with the project (and why). The learning

potential of such project debriefings is invaluable in improving both individual and

organizational project management capabilities.

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Project Scoping with Coors’ Point-of-Sales (POS) Application Suite79

Coors does not sell its products to targeted consumers directly, but instead

does so through distributors and retailers. An important element of Coors’ marketing

strategy involves having retailers place eye-catching point-of-sales (POS) displays in

their stores. Coors works with third-party marketing partners and third-party

producers to obtain POS display materials (e.g., banners, placards, pictures, etc.),

with Coors owning the business processes by which wholesalers and retailers order

these materials. To motivate orders, Coors provides distributors and retailers with

funds that can only be used to purchase POS display materials. Coors anticipates

that at least some of these distributors and retailers will find the materials so valuable

in increasing sales that the Coors-provided funding is exceeded.

There are three types of POS display materials: general promotional materials,

licensed promotional materials (e.g., sports franchise-related), and customized

materials (tailored to the retailer or the retailer’s locale). General promotion

materials are the least expensive and have a fairly straightforward ordering process;

licensed promotional materials are more expensive and have a more complex

ordering process due to licensee contractual issues; and, customized materials are

the most expensive and have an even more complex ordering process.

The pre-existing manual operational processes for, first, designing, producing

and distributing a paper-based materials catalog and, second, fulfilling distributors’

and retailers’ orders had a number of problems. These problems resulted in the

79 The material in this section is based, in part, on: J. Buffington and D. McCubbery,

“Coors Brewing Company Point of Sales Application Suite: Winning Mindshare with Customers,

Retailers, and Distributors”, Communications of the AIS, Volume 13, 2004, pp. 81-96.

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ordering processes being slow, error-prone and anything but convenient,

discouraging many distributors and retailers from taking advantage of their

promotional funds – let alone exceeding the established funding levels.

Coors’ marketing management approved a proposal to move to a digitalized

catalog and digitalized ordering processes. In addition to improving operational

processes, new technologies were introduced to make it easier and less expensive to

customize POS display materials and to provide retailers with a digitalized design

capability for optimizing the placement of Coors’ POS display materials and Coors’

products in a retail store.

Considered as a whole, implementing the funded digital investment would be

a very complex project that would take a long time to complete (delaying the receipt

of benefits). Especially troublesome was the fact that certain deliverables (e.g., the

content and functionality of an Internet portal serving as a communication interface

with the distributors and retailers, the POS display material customization process,

and the digitalized design capability) were not yet fleshed out and, hence, were

ambiguously specified.

A nice job of project scoping resolved these concerns. Instead of implementing

the POS Applications Suite as a single project, it was implemented as the five

subprojects described in Table 16-6. Note that this scoping strategy enabled the

Internet communication portal and the digitized operational processes for ordering

general POS display materials to be delivered quite early. And, by delaying the start

of the subprojects aimed at customizing POS display materials and at the digitalized

design capability, more time was made available for clarifying the specifications of

these subprojects’ deliverables.

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Table 16-6 Project Scoping for Coors’ POS Application Suite

Subproject Description Subproject Sequencing Rationale

1 Internet

Portal • Build communication interface. • Build foundation for full POS Suite.

• Quickly implement the communication interface.

General Materials Ordering

• Build & populate digitalized catalog.

• Build digitalized ordering & fulfillment processes.

• Simplest operational processes to implement.

• Software bugs & operational problems can be found & resolved prior to implementing more complex operational processes.

Licensed Materials Ordering

• Add content to digitalized catalog. • Enhance the digitalized ordering &

fulfillment processes.

• More complex operational processes than those for general materials.

Customized Materials Ordering

• Add content to digitalized catalog. • Enhance the digitalized ordering &

fulfillment processes.

• New operational processes. • New digital technologies. • Distributors and retailers possess a

wide range in uptake capabilities.

Digitalized Design

Capability

• Build digitalized tools for retailers to use in optimizing the placement of Coors’ displays & products within a retail store.

• New managerial tools and processes. • New, sophisticated digital technologies. • Distributors and retailers possess a

broad range in uptake capabilities.

A Recap and Look Ahead

Three things, minimally, need to be in place for the promised benefits from a

funded digital investment project to be fully realized: a compelling and realistic

(strategic and financial) business case that sets the stage for implementation

planning; a comprehensive and realistic implementation plan that sets the stage for

project management planning; and, a manager – or better yet, managers – skilled

in the art and science of project management. As has been described in this chapter,

many things can go wrong even when both a strong business case and a strong

implementation plan exist. By following a well-conceived project plan, good project

managers are able to direct and coordinate a project’s various activities such that the

project’s specified outcomes are delivered on time and within budget. Exceptional

project managers are able to achieve these same outcomes even when the project

plan falls apart.

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Building a strong project management capability is increasingly important for

all organizations today. That said, almost every organization recognizes that it does

not have a sufficient number of exceptional project managers. As a consequence,

executives of most organizations today are actively investing in this critical

management capability.

Investing in a strong project management capability is not the only thing that

executives are doing to ensure that formulated digital strategies are effectively

implemented and that the benefits attached to these formulated digital strategies are

fully realized. In the next, and final, chapter to Part 2, we suggest further actions

that executives can take to ensure that formulated digital strategies are successfully

implemented.

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Chapter 17. Executive Mandates: Digital Investment

Part 2 of our book has focused on a practical set of concepts and tools aimed

at enhancing individuals’ capabilities to:

 Build compelling and realistic financial and strategic business cases in support of digital investment proposals.

 Insightfully critique others’ business cases.

 Build more comprehensive and realistic implementation and project

management plans for funded digital investments.

 Insightfully critique others’ implementation plans and project management plans.

The crafting of effective business cases, implementation plans and project plans is

significantly enhanced if everyone in an organization approaches these tasks in a

consistent manner. Establishing high-level principles related to digital investments

and then ensuring that an organization’s members comply with these principles is a

key executive responsibility.

In this final chapter, we offer as executive mandates five high-level principles

for crafting effective business cases, implementation plans and project management

plans:

 Accentuate Bottom-Line Impacts

 Argue Comprehensively, but Conservatively

 Pepper Arguments with Soft Facts

 Invest Early and Late

 Assign Accountability for Bottom-Line Impacts.

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Accentuate Bottom-Line Impacts

The proponents of a digital investment proposal are often hesitant to describe

the variety of ways by which the investment will produce bottom-line impacts, i.e.,

financial performance outcomes. A number of explanations as to why this occurs can

be given, including:

 The individuals may lack the knowledge and skill to do so.

 The individuals may not appreciate the overriding importance of bottom-line

impacts.

 The individuals may feel that any offered bottom-line impacts would be seen

as too intangible – hence, too imprecise and seemingly just pulled out of the air – and would quickly be picked apart. Thus, only easily-defended projections, if any, are provided.

 Individuals may feel that most bottom-line impacts would soon change, often dramatically, as the investment context naturally evolves.

It’s easy to come up with what seem to be very good excuses for not providing a rich

depiction of a digital investment’s bottom-line impacts.

However, the executives and senior managers charged with providing the

funding for proposed investments do look for – and often emphasize – an investment

proposal’s bottom-line impacts. Just as significant, if not more so, other investments

(e.g., expanding the sales force, building new manufacturing capacity, introducing

an innovative product or service, growing a new community, etc.) competing for

available investment funds are invariably framed through their bottom-line

implications. As a consequence, it is critically important for the proponents of a digital

investment to trace through, estimate and formally present a rich financial business

case. If done well, the process of projecting a rich financial business case will produce

a more compelling strategic business case.

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Argue Comprehensively, but Conservatively

Proponents of digital investment proposals tend to focus on a single impact

path in developing their strategic and financial business cases. Further, all too often,

the elements comprising this impact path tend to emphasize technical functionalities

and tangible outcomes. It actually makes sense to simplify the arguments being

presented, as too much complexity can easily overwhelm a listener. But, placing

most of your bets on a single line of argument, especially one that stresses technical

details, is highly risky.

How should a proposal’s core arguments be expanded without introducing too

much complexity? We suggest the following:

 Use touch point analysis to identify multiple impact paths, ensuring that

each of these paths both resonates with stakeholders and produces bottom- line impacts.

 In tracing through each impact path, emphasize how the to-be-implemented

digital platforms and business platforms enhance business models, competitive positions and financial performance outcomes.

 Be conservative in describing financial performance outcomes. Being conservative does not imply that intangible impacts are not used. Instead, both tangible and intangible impacts are used, along with strong-but-

realistic arguments. What being conservative does imply is using mid-range values, rather than extreme values, when producing estimates.

 Present impact paths in layered-form. Here, a top layer (comprised of only a few, easily-understood elements) is initially depicted and described. However, more detailed views of each impact path are kept in reserve to be

used, if needed, in answering specific questions about a business case.

Pepper Arguments with Soft Facts

Most decision makers like facts - things that are verifiable. Fact-based

decision making introduces a sense of objectivity into decision processes,

facilitating both consensus and confidence in stakeholders’ perceptions of decision

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outcomes. Tangible benefits and costs, by their natures, are arrived at through the

use of facts. All too often, this is not the case with intangible benefits and costs.

How can a similar sense of objectivity be fashioned when monetizing intangible

benefits and costs? We suggest that arguments be peppered densely with soft facts.

A soft fact is not something that is definitively verifiable, but rather is something

that is supported through commentaries and data provided by sources familiar to and

trusted by stakeholders. Say, for example, that a key benefits flow associated with

a digital investment proposal involves the percentage by which outbound logistics

costs are likely to be reduced. Good sources to use in arriving at an estimate of this

projected reduction in outbound logistics costs would include: key players from the

investing organization’s logistics management unit and internal audit unit; logistics

specialists from consultancies known for their logistics expertise; and, logistics

specialists from other organizations that have successfully implemented similar

digitalized solutions. By using the commentaries and data obtained from these

sources (the soft facts), a highly-believable estimate should be obtained.

Invest Early and Late

While it might seem non-intuitive, the largest marginal returns from

implemented digital investments are likely to be linked to implementation activities

that occur early and late. The challenge for most observers, however, is that the

accounting practices used with implementation projects do not portray benefits flows

and costs flows in ways that make it easy to detect such patterns.

What kind of implementation activities are we talking about? The early

investments are those incurred in developing a proposal’s financial and strategic

business cases, implementation plan, and project management plan. As addressed

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throughout this book, the most surefire way to guarantee that a digital investment’s

promised benefits will fail to be realized is to develop and apply poor business cases,

implementation plans and project plans. The late investments are those incurred in

re-energizing an implementation project after the installation and shake-down stage.

A surge of new investment at this time reengages platform users in learning about

and thinking about installed digital platforms, business platforms, and how the new

capabilities provisioned through these platforms can enhance work practices,

business models and competitiveness.

Assign Accountability for Realizing Bottom-Line Impacts

Few of the performance gains anticipated from implementing a funded digital

investment occur automatically. This is especially true of the intangible benefits flows

associated with dramatic improvements to operational processes, collaboration

processes, decision-making processes, coordination and control processes, and

planning processes. Four related sets of accountabilities need to be established if an

investment’s anticipated benefits are to be realized.

First, all affected parties must understand the nature of the organizational

changes that need to occur and why these changes need to occur. Such

understandings serve as maps of the many, varied journeys that need to be taken if

a proposal’s promised benefits are to be realized. Absent such roadmaps, individuals

engaging with newly-installed digital platforms and business platforms have little to

fall back on as they attempt to integrate these solutions into their day-to-day

experiences. Explicit accountabilities must be established for ensuring that all

affected parties are provided with such understandings.

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Second, one thing you can be assured about is that some, if not many,

operational and managerial processes will change. Some of these changes will be

minor, others of these changes are likely to be dramatic, and some completely new

processes may be designed and implemented. Explicit accountabilities need to be

established for each of the process changes that are linked directly or indirectly to a

digital investment’s promised benefits. If these accountabilities are absent, the

likelihood of the required process changes being put in place is significantly reduced.

Third, most digital investment projects involve multiple benefits, and often

these benefits are felt across multiple work units. Metrics must be devised that allow

for consistent benefits measurement across affected work units, and data reflecting

the progress achieved (or not achieved) in realizing promised benefits must be

gathered from each affected work unit in order to produce these metrics. Explicit

accountabilities must be established to ensure that these benefits and costs flows are

accurately and validly measured and reported.

Finally, and perhaps most important, explicit accountabilities must be

established for ensuring the realization of each promised benefits flow and for

minimizing (to the extent possible given the nature of the promised benefits) each

expected costs flow.

A Recap

It takes a lot of effort, and often a good deal of pain, to fully extract (or better

yet, to exceed) a funded digital investment’s promised benefits. All too often, the

individuals involved with proposing and implementing a digital investment lack the

skills required in this effort or are simply unwilling to invest the effort (and to live

through the pain), resulting in promised benefits not being realized. But, what needs

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to be done is known and can be learned; and, thankfully, doing what needs to be

done becomes easier with experience.

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PART 3. PLATFORM MANAGEMENT

Chapter 18 A Perpetual Balancing Act

Chapter 19 Business Processes

Chapter 20 Business Platforms

Chapter 21 Enterprise Resource Planning Systems

Chapter 22 Digital Platforms

Chapter 23 Platform Management Challenges

Chapter 24 Enterprise Architecture Design

Chapter 25 Digitalization Governance Design

Chapter 26 Digitalization Organization Design

Chapter 27 Executive Mandates: Platform Management

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Chapter 18. A Perpetual Balancing Act

Increasingly, organizations’ digital strategies involve digital innovations. A

digital innovation refers to conceiving a new form of digitization, of digitalization,

or of both. Digitization refers to the purely technical processes associated with

converting sensed and captured data into binary form; storing and transmitting these

binary data; manipulating these data; and, storing/transmitting the outcomes of

these data manipulations. Digitalization, on the other hand, refers to more complex

processes where digitization is applied within organizations and within the social and

economic contexts within which organizations are embedded. Typically, innovative

digitalized solutions directly affect competitiveness by enabling the execution of new

or radically-changed business models, while innovative digitized solutions indirectly

affect competitiveness by enabling new or radically-changed digitalization

capabilities.

As an illustration of a digital innovation, consider GUESS?, INC.’s

implementation of GMobile, a game-changing business analytics iPad initiative.80

GUESS?, INC. stays ahead of its competition by identifying and stocking the products

most likely to be purchased by consumers at each of its retail locations. By combining

visual product images with real-time sales trends in a flexible and intuitive manner,

GMobile has significantly enhanced the ability and willingness of employees to exploit

the rich information being made available through GUESS?, INC.’s business analytics

capability, consequently better ensuring the availability of products to consumers.

80 B.H. Wixom, B. Yen, and M. Relich, “Maximizing Value from Business Analytics,” MIS

Quarterly Executive, Volume 12, Issue 2, June 2013, pp. 111-123.

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Innovative digitalization solutions entail two critical elements. The first is the

capability to establish, use and evolve global business platforms. Global business

platforms refer to standardized configurations of digitized data and digitalized

business processes, both of which are enabled through global digital platforms. A

global digital platform provides a collection of standardized technology services.

As used here, the term global refers to a platform being used by many (perhaps all)

of an organization’s work units (another term frequently used is enterprise-wide).

Global (business and digital) platforms provide many, if not most, of the assets and

capabilities applied in launching digital innovations.

The second critical element is the capability to exploit emergent opportunities

best met through local business platforms – customized configurations of digitized

business data and digitalized business processes unique to a specific work unit (or to

a few, closely-aligned work units) and enabled though technology services executed

from both global and local digital platforms. A local digital platform provides a

collection of customized technology services. As used here, the term local refers to

a platform being used by a single work unit (or a few work units).

Global business platforms, once established, are available to each of an

organization’s work units. Relative to corresponding local platforms, global platforms

are secure, stable, and cost-effective to build, maintain and support. However, there

are times when it is simply impossible to effectively meet an emergent need (i.e., an

opportunity or a problem) through the functionalities provided by installed global

platforms. In such situations, fashioning and implementing a local platform targeted

at the emergent need can be both timely and effective. That said, an organization’s

over-dependence on local platforms leads inevitably to delayed and costly

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digitalization projects as well as to excessive overall digitalization costs. A central

challenge in guiding and sustaining organizations’ digitalization efforts thus involves

managing the tensions that regularly arise between an organization’s global and local

platforms (Figure 18-1) so as to maintain an appropriate global/local balance.

Table 18-1

Global vs. Local Platforms

G lo

b a

l P

la tf

o rm

L o

c a

l P la

tfo rm

• Tailored Solutions • Innovative Solutions • More-Easily Implemented

Solutions

• Lower-Cost Solutions • Leveraged Solutions • More-Easily Maintained &

Supported Solutions

This third part of our book focuses on the challenges involved in maintaining

an appropriate balance in organizations’ global and local platforms. This chapter

introduces these challenges by covering the following topics:

 Navigating the Balancing Act

 Background

 The Increasing Difficulty of Maintaining an Appropriate Balance

Navigating the Balancing Act

A critical driver of GUESS?, INC.’s ongoing business success has been the

clothing retailer’s achievement in building a global business analytics capability. In

configuring this global digitalization capability, GUESS?, INC. has placed constraints

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on the types of business data readily available for analysis, as well as the types of

analytic techniques that can readily be undertaken. Such constraints undoubtedly

delay, and possibly discourage, some innovative ideas for exploiting business

analytics for competitive purposes. Nonetheless – precisely because of these

constraints - a robust and well-supported global business analytics platform is

available for use throughout the company.

What happens at GUESS?, INC. when a work unit wishes to undertake a

business analytic initiative that requires data or analytic techniques distinct from

those provided through the global business analytics platform? One of three

alternatives is most likely:

 The business analytic initiative is abandoned.

 The business analytic initiative is implemented outside of sanctioned channels, usually by contracting with a third-party business analytics consultancy.

 A local business analytics platform is established by both fashioning customized functionalities and by leveraging functionalities available from

the global business analytics platform – using internal expertise and, very possibly, the expertise of a third-party business analytics consultancy.

Neither of the first two alternatives is desirable, as the first results in a lost

opportunity, and the second results in an investment in business analytics capabilities

that are unlikely to be leveraged by others. The third alternative, while carrying a

good deal of managerial complexity, is preferred as it holds the promise of both

meeting a local work unit’s immediate need and expanding the global business

analytics platform in the future to include the novel functionalities provisioned by this

local analytics platform. This third pathway also deftly illustrates the balancing act

constantly being navigated as organizations commission, build, modify and

decommission their global and local platforms.

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Background

This desire to achieve an optimal balance in global and local platforms is not

new. During the 1960s, 1970s and 1980s, most organizations had established global

digital platforms (e.g., data centers) to house, operate and manage most

(mainframe-based) computational and communications processes. Yet, these global

data centers were primarily used to provision and operate local business platforms in

meeting the needs of individual work units. While work unit performance was

improved, this use of global digital platforms and local business platforms proved

very inefficient.

Two major developments during the early 1980s allowed organizations to

move away from the prevailing bias toward global digital platforms and local business

platforms: software vendors began offering global business platforms (e.g.,

manufacturing planning and control applications packages; supply chain

management applications packages; customer relationship management applications

packages; finance and accounting applications packages; human resources

applications packages; etc.), and hardware vendors began offering local digital

platforms (personal computers and mini-computers). The availability of packaged

global business platforms that could be tweaked to meet the distinctive needs of

individual work units began to wean organizations’ digital strategists away from a

dependence on local business platforms. The availability of affordable local digital

platforms likewise weaned these digital strategists away from a dependence on global

digital platforms.

Since the 1990s, a seemingly never-ending series of digital innovations have

appeared: the Internet, the World Wide Web, ERP systems, applications-as-a-service,

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service-oriented architectures, cloud computing, smart appliances, social

technologies, etc. Not surprisingly, certain of these digital innovations favor global

platforms, certain others favor local platforms, but most can be configured to operate

as either global or local platforms.

The Increasing Difficulty of Maintaining an Appropriate Balance

Today, an abundance of digital technologies is available for provisioning robust

global platforms and pliant local platforms – this wealth in enabling technologies can

only be expected to increase with time. This holds positive and negative aspects

regarding the nature of the tensions that arise as organizations’ digital strategists

negotiate an effective balance in global and local platforms. On the positive side, the

costs and time incurred while fashioning well-designed global platforms and well-

designed local platforms can be expected to decrease. On the negative side, the

pressures work units are likely to place on moving away from the current global/local

platform balance can be expected to increase. There are four primary reasons for

these intensifying pressures.

First, organizations are facing increasingly competitive environments. As a

consequence, organizations’ digital strategies are evolving, sometimes dramatically,

at an accelerated pace. And, this pace is likely to vary across organizations’ work

units. As a result, work units’ evolving digital strategies may not fit well, if at all,

with their organizations’ installed global platforms - intensifying pressures to move

toward local platforms. On the other hand, robust, easily-adapted global platforms

can reduce the time and cost of implementing a new digital strategy, intensifying

pressures to move toward global platforms.

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Second, today’s digital strategies are increasingly being formulated and

implemented by a network of collaborating organizations rather than by a single

organization. Through such collaboration networks, each participant is able to

contribute uniquely-held capabilities in providing exceptional value propositions to

targeted consumers/communities. But, in doing so, each participant also agrees to

deploy a common set of global platforms. Increasingly, however, organizations are

simultaneously participating in multiple networks and competing outside of any

established network – significantly increasing the number and variety of global/local

platforms to be built, used, evolved and managed.

Third, few convincing technology constraints exist to deter pressures

directed at the in-place global/local balance. In the past, a convincing argument for

maintaining the current global/local balance has been that it would be too costly or

take too long to do otherwise. Today, such simplistic arguments are unlikely to carry

much weight.

Fourth, organizations’ business professionals are becoming increasingly

technologically-savvy and organizations’ technology professionals are becoming

increasingly business-savvy. In fact, some business professionals, given their

distance from day-to-day digital platform management challenges, are often ahead

of their technology-colleagues in identifying and applying digital innovations; and,

some technology professionals, given their distance from day-to-day business

platform management challenges, are often better positioned than their business-

colleagues in anticipating their organization’s next generation of digital strategies.

However, ever-accumulating stocks of knowledge and insight can also produce

chaotic patterns of digital investment. In such a context, not maintaining an

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appropriate balance between global and local platforms is sure to produce a never-

ending stream of ever-changing, hotly-contested clashes that find organizations

simultaneously spiking a growth of investments in both global platforms and local

platforms - a very inefficient approach toward digitalization.

A Recap and Look Ahead

An ever-increasing portion of all organizations’ work activities is either enabled

or supported by digital platforms and business platforms. As a consequence, issues

related to the design, building, evolving and management of these platforms have

become important concerns of all employees, not just technology professionals. Of

these platform-related concerns, the most critical is related to decisions regarding

the nature of the capabilities to be provided through a specific platform and regarding

whether this platform should be deployed globally or locally.

This third part of our book begins with more-detailed discussions of business

platforms and digital platforms. Then, we describe the tactics being taken by leading

organizations in addressing the management challenges that arise as organizations’

leadership teams grapple with the complexities of maintaining an appropriate

global/local platform balance. Finally, we conclude Part 3 by offering executives a

set of high-level principles aimed at establishing a management culture more likely

to produce an optimal global/local platform balance.

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Chapter 19. Business Processes

Managers in successful organizations expect their employees to be effective

and efficient as they carry out work assignments. An employee is effective when

she does the right thing. Ideally, an employee would always take the best action

available given the situation being faced. An employee is efficient when she does

the thing right. Ideally, an employee’s taken-actions would always be carried out

with minimal, if any, waste or error. Successful organizations increase the likelihood

that employees (at all levels) perform effectively and efficiently by prescribing well-

designed business processes (i.e., operational and managerial task sequences) to be

followed as these employees carry out their work roles and assignments.

As a means of illustrating how this occurs, consider TaskRabbit

(www.taskrabbit.com). TaskRabbit’s business model, which is a good example of

crowd-based capitalism, is quite simple: to make it easy and (relatively) risk-free for

a member of the consumer community to hire someone from the producer community

to carry out a task. For example, a person may want to hire someone to load a

rented moving van, to walk your dog or to paint your kitchen. In other words,

TaskRabbit is a network organization that has created a market ecosystem that brings

together consumers with tasks to be done and producers able to perform these tasks.

In executing this business model, TaskRabbit’s employees engage in a variety

of work activities, including but not limited to: deciding on the breadth of tasks to be

handled, recruiting and vetting producers willing and able to handle these tasks,

marketing the task-handling service so that potential consumers are aware of the

service, matching producers with consumers, responding to consumer or producer

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concerns, handling payment processes, etc. By fabricating business processes that

specify how such work activities are to be handled, TaskRabbit is able to automate

many of these activities, to empower employees engaged with activities that are not

fully-automated, and to train new hires so that they quickly come up to speed in

carrying out work roles and assignments.

Professor Michael Porter uses the term value chain to describe an

organization’s business processes because these business processes are comprised

of the work activities through which the organization creates ecosystem value by

transforming inputs (supplies, materials, components, etc.) into outputs

(intermediate products and services, delivered products and services, etc.).81 Figure

19-1 depicts a typical value chain for a manufacturing firm, and Figure 19-2 modifies

this value chain to represent some of TaskRabbit’s business processes. Note that

there are two categories of work activities: primary processes refer to work

activities directly involved in providing products/services to customers/clients, and

support processes refer to work activities that either provide direction/oversight

for the primary processes or that provide resources (financial, information, human,

equipment, etc.) needed to configure, execute and evolve the primary processes.

81 M. E. Porter, Competitive Advantage: Creating and Sustaining Superior

Performance, Free Press, New York, 1998.

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Figure 19-1 Typical Value Chain for a Manufacturing Firm

Indirect Materials & Supplies Procurement

Human Resource Recruitment & Development; Benefits Management

Financial Services; Accounting Services

Business/Digital Strategizing; Administrative Services

Manufacturing

Work-in- Process

Inventory

Quality Control

Direct Materials

and Supplies Procurement

Inbound Logistics

Order Fulfillment

Finished- Goods

Inventory

Outbound Logistics

Sales

Marketing

Merchandising

Customer Support

Reverse Logistics

S u

p p

o rt

P ro

c e

s s e

s P

ri m

a ry

P ro

c e

s s e

R&D; New Product Development; New Product Rollout

Digital Technology Services & Management

Figure 19-2

TaskRabbit’s Value Chain

Indirect Materials & Supplies Procurement

Human Resource Recruitment & Development; Benefits Management

Financial Services; Accounting Services; Payment Services

Strategic Planning; Administrative Services

Taking Task

Requests from

Consumers

Matching Producers

with Consumers

Producer Recruitment

Producer Vetting

Arranging Producer

Assignments for Handling

Consumer Requests

Marketing

Consumer Support

Producer Support

Producer Quality Control

S u

p p

o rt

P ro

c e

s s e

s P

ri m

a ry

P ro

c e

s s e

New Services Development; New Services Rollout

Regardless of the conceptual superiority of an organization’s business model,

the success of these strategies ultimately depends on the effectiveness and efficiency

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of the business processes applied in executing the business model. This chapter

examines the nature of business processes by covering the following topics:

 Specifying End-to-End Business Processes

 Rationalizing Business Processes

 Business Process Modeling and Business Process Digitalization

Specifying End-to-End Business Processes

Historically, most organizations designed their work activities around the

assumption that the handling of most business processes takes place within a single

functional unit (see Figure 19-3). With this functional approach for organizing

work, each functional unit is assigned the responsibility for performing a set of

business processes. If all of an organization’s units successfully accomplish their

work activities and if the work activities handled within each unit mesh well with the

work activities handled within other units, then the organization’s objectives should

be achieved. The logic behind this functional approach for organizing work is:

 By having employees within a work unit specialize in a limited set of work

activities, the employees will focus their collective attention on figuring out the best way to carry out these work activities.

 A unit manager can be held accountable for a work unit’s effectiveness and

efficiency.

 The senior manager holding authority over a set of unit managers can be

held accountable for coordinating work activities across the work units.

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Figure 19-3 Functional Approach to Organizing Work

Functional Units

R&D Marketing

& Sales Operations Customer

Support Finance &

Accounting

Human Resources

This functional approach to organizing work performs well as long as

employees within each functional unit are able to accomplish their work assignments

without needing to interact inordinately with employees in other functional units.

Consider a firm that: manufactures products, stores finished products in a

warehouse, sells the stored products to retailers through a direct sales force, ships

ordered products from the warehouse to retailers as orders are taken, and then bills

retailers on a monthly basis. If each of these activities is handled by a separate

functional unit, and if the organization’s managers are able to resolve any minor

coordination problems that arise, then this functional approach to organizing work

would operate smoothly.

However, this functional approach to organizing work does not fit well at all

with today’s highly competitive market ecosystems. Let’s look at what might happen

if TaskRabbit organized its work in a functional manner - with, say, the nine business

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processes identified in the bottom row of Figure 19-2 each fully handled by separate

work units. Let’s further assume that on Friday a producer named Tom has been

assigned to load up a rental truck for a consumer named Sue and that Tom agreed

to be at Sue’s apartment at 3pm the following Wednesday. But, Tom comes down

with the flu on Monday and calls up the producer recruitment unit to cancel his

assignment. Now, the operational work processes involved in assigning a producer

to handle Sue’s task assignment needs to be executed again, requiring a good deal

of interaction between TaskRabbit work units for Sue to have a van-loader show up

at the arranged time. If messages get lost or operational processes get delayed, the

likelihood increases that Sue will end up loading the truck by herself – and will think

twice before using TaskRabbit again.

The likelihood of work-related disturbances occurring increases significantly

when data/information must move from one functional unit to another in a rapid,

error-free manner. For another example, consider the problems that might arise

when a consumer of a make-to-order laptop computer from a manufacturer (e.g.,

Dell) uses the manufacturer’s website to configure and purchase the laptop. What

follows next is a very sophisticated, digitalized dance that coordinates the activities

of a network of collaborating organizations (material and component suppliers,

product assemblers, logistics providers, etc.) so that the ordered laptop is delivered

to the consumer in just a few days. A functional approach to organizing work would

surely prove disastrous in such a highly-collaborative, messaging-intensive context.

In order for data and information to flow rapidly and error-free across work

unit and organization boundaries, interrelated work activities must be interconnected.

Ideally, this interconnection should be seamless - that is, the work activities being

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connected are largely automated, flows of data/information occur essentially

instantaneously, and any data/information sent from a work activity is perfectly

understood by a receiving work activity. Automating and interconnecting work

activities can prove very daunting when functional units each fully controls the work

activities being performed. Control, here, means things like deciding what data is to

be used, defining the meaning of these data, and deciding on the nature of the

business processes being executed.

Consider, for example, the types of data-related difficulties that can arise when

a large, national retail organization (which has organized work functionally) must

decide where to locate a new distribution center. More specifically, think about the

first time the organization makes such a decision. Alternative locations for the new

distribution center must be identified and then compared across a number of criteria,

such as: expected shipping costs to current and future retail locations, expected

shipping costs from current and future suppliers, land acquisition costs, state taxes,

state incentives, facility construction costs, facility operating costs, and so on. While

some new data would most likely need to be acquired, most of the needed data has

already been captured and is available for use. These existing data, however, have

been defined, captured and stored by different work units – invariably to suit the

unique needs of each unit. Considerable effort will surely be involved in locating

these existing data, in understanding the form and meaning of these data, in digitally

accessing these data, and in modifying these data for use in making this distribution

center location decision.

Because of the problems inherent with the functional approach for organizing

work, most organizations today have moved to (or are in the process of moving

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toward) organizing their work activities as end-to-end business processes that cut

across functional – and, increasingly, organization – boundaries. With the end-to-

end business process approach for organizing work, all the work activities

associated with accomplishing a critical work outcome are designed as a seamlessly-

connected work flow, regardless of the physical location of where specific work tasks

are performed.

Figure 19-4 illustrates a set of end-to-end business processes for a

hypothetical organization. Note in particular:

 Order handling requires the involvement of human resources (tracking the

employees involved with each order), sales (taking an order), production/operations (pulling ordered products from finished goods

inventory and handling the outbound logistics associated with an order), and accounting (tracking revenue inflows and cost outflows).

 Customer service requires the involvement of marketing (capturing customer

feedback/experiences), sales (order taking), customer support (dealing with

customers requesting information about their orders or complaining about received shipments), and accounting (tracking cost outflows).

By organizing work as end-to-end business processes, responsibility for all of the

work activities can be assigned to a single individual, referred to as the owner of the

business process, rather than being dispersed across multiple individuals, housed in

multiple work units (each of whom, quite naturally, is likely to point a finger at one

or more of the other individuals if and when things go wrong).

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Figure 19-4 Organizing Work as End-to-End Business Processes

Order Handling

Product Development

Customer Service

Financial Reporting

R&D Marketing

& Sales Operations Customer Support

Finance & Accounting

Business Processes

Human Resources

Functional Units

Rationalizing End-to-End Business Processes

Once responsibility for managing an end-to-end business process has been

assigned to a business process owner (typically, a mid-level or higher manager),

the business process is rationalized through an iterative cycle of process

specification, process measurement and process improvement (see Figure 19-5).

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Figure 19-5 Business Process Rationalization

Define Operating

Procedures

Define Business

Rules

Track Process

Performance

Set Goals for Performance Improvement

Analyze Process

Performance

Design/Implement Process

Improvements

Process Specification

Process Improvement

Define Data

Elements

Define Performance

Metrics

Process Measurement

Process Specification

A business process is a sequence of work tasks that converts inputs into

outputs. Process specification defines the purposes of the work tasks comprising

a business process, describes what is involved in executing each work task, and

indicates the existence and natures of relationships amongst the work tasks (e.g.,

which tasks must be complete prior to the start of a given task, which of a task’s

outputs serve as inputs to other tasks, etc.). Business process inputs can be digital

in nature (e.g., a digitized order form, digitized data, etc.), non-digital in nature (e.g.,

a paper order form, data taken from some document, etc.), or some combination of

both. Business process outputs, likewise, can be digital in nature (e.g., a digitized

log of all sales transactions at a retail store), non-digital in nature (e.g., a paper

invoice packaged with an ordered product), or some combination of both. Figure 19-

6 portrays the main work tasks involved with a generic purchasing process. Each of

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the work tasks in this purchasing process can be further specified as subprocesses,

providing a finer description of the procurement process.

Figure 19-6 A Generic Purchasing Process

Determine Requirements

Select Vendor

Create Purchase Requisition

Complete Order Form

Send Order Form to Vendor

Order Follow-Up

Goods Received

Invoice Verification

Vendor Payment

Business processes consist of operating procedures, business rules and data.

Operating procedures describe what must be done (e.g., accessing inputs,

producing outputs, the actions and decisions taken in producing outputs, the actors

expected to engage in these actions and decisions, etc.) in order for a work task to

accomplish its purpose.

Business rules describe the conditions that must be met when taking actions

or making decisions within a work task. For example, the creation of a purchase

requisition might involve the following business rules:

 If the purchase amount is less than $500, then the requisition does not need to be approved by a department head.

 If the purchase amount is greater than $500 but less than $5,000, then the requisition needs the approval of a department head.

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 If the purchase amount is greater than $5,000, then the requisition must be approved by both a department head and a divisional finance director.

Operating procedures and business rules both operate on data (serving as

process inputs, process outputs or intermediate outputs within a process). Data

reflect attributes of the objects and events associated with a business process. The

data elements used with a business process must be defined, with a data definition

including, but certainly not limited to: the name of the data element, the type of data

(e.g., numeric, text, etc.), the range of viable data values, the meaning of the data,

and the location where the data is stored (prior to and after processing). Data are

assigned to data owners responsible for data definitions and for ensuring the

integrity (data accuracy, correctness, timeliness, security, etc.) of these data.

Process Measurement

Once a business process has been specified and is being executed, it is the

responsibility of the business process owner to ensure that the business process

operates effectively and efficiently. With process measurement, performance

goals and performance metrics are defined for a business process, and then

performance metrics are computed and compared against process performance

goals. A good performance metric indicates the extent to which one or more

performance goals are being achieved. Often, multiple metrics are used for a

performance goal, with each of these metrics providing evidence regarding a distinct

aspect of the goal.

One of TaskRabbit’s key business processes is that of matching producers to

consumer task requests. For this process, an effectiveness goal might be to satisfy

all customer requests and an efficiency goal might be to minimize the time TaskRabbit

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staff spend in making a match. Table 19-1 illustrates possible metrics for these two

performance goals. An effective way of presenting performance metrics to business

process owners (and to the managers of work units executing business processes)

involves using dashboards that present process metrics in an easy-to-understand

manner. Generally, the set of dashboards associated with a business process present

a multi-dimensional view of the business process’s performance. Figure 19-7

illustrates some of the ways performance metrics might be displayed via dashboards.

Don’t forget that once a performance metric for a business process has been devised,

the data to be used in producing this metric must be defined, captured, stored and

processed. Computing and reporting business process performance metrics, thus,

must be included within a business process’s specification.

Table 19-1 Performance Goals & Metrics for TaskRabbit’s Matching Business Process

Performance Goal

Performance Metric #1

Performance Metric #2

Satisfy Customer Task Requests

Percentage of customer requests that have been matched within specified time windows.

Percentage of matches that were rated ‘highly satisfied’ or ‘very highly satisfied’ by the customer.

Minimize Staff Time

Average number of match attempts to obtain a successful match.

Total average staff time (minutes) for successful matches.

Total average staff time (minutes) for unsuccessful matches.

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Figure 19-7 Dashboard Examples

Process Improvement

A primary responsibility of a business process owner is process

improvement: ensuring that the business process is executed as specified, that

process-specific performance goals are achieved, and that these performance goals

increase over time.

Inconsistencies in process execution tend to occur for one of two reasons:

employees do not understand their process-related roles, or employees believe

certain aspects (perhaps most or all of the aspects) of the process specification to be

faulty and choose not to follow these thought-to-be–faulty aspects. With the latter

reason, employees carry out their work tasks by working around the business process

specification. The first reason is addressed through training, support and hand-

holding. Resolving the second reason is more complicated, as the process owner

needs to first grasp the employees’ logic as to why the process specification is

believed faulty and then either revise the process specification (i.e., the employees’

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logic makes sense) or change the employees’ critical view of the business process.

Understanding an employee’s view of a business process specification can be very

challenging as a broad array of explanations (including, among many others, work-

related stress, job dissatisfaction, personal animosity toward co-workers or toward

the process owner, unwillingness to change work-related behaviors, and insufficient

or inappropriate incentives) might serve as the basis for the employee’s rejection of

a business process specification.

Even with consistency in process execution, an executing business process

may not achieve its targeted goals. When targeted goals are not being achieved, the

business process owner needs to, first, understand why the goals are not being met

(e.g., existence of recurrent problems, presence of hard obstacles, too-stringent

goals, etc.) and, second, introduce appropriate changes. Table 19-2 provides a list

of common problems that arise with business processes along with examples of the

corrective actions that could be taken.

Table 19-2

Common Business Process Problems

Problems Corrective Actions • Unsatisfied consumers or

community members. • Frustrated employees. • Excessive finger-pointing. • Subprocesses take too much time. • Too many reviews & sign-offs. • Expensive or in-demand assets sit

idle. • Too many errors and/or too much

scrap/rework. • Process specifications work-

arounds regularly occur. • Exceptions & special cases are

common and require an excessive amount of resources.

• Simplify and/or refine subprocesses (work tasks, actions and decisions to be taken, data, business rules, employee roles & responsibilities, etc.).

• Remove and/or combine one or more work tasks or subprocesses.

• Re-sequence some subprocesses. • Execute some subprocesses in

parallel. • Improve employee access to data &

information as well as to expertise for handling exceptions.

• Add missing process controls and eliminate unneeded or redundant process controls.

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When an executing business process consistently achieves its targeted goals,

the possibility of raising these performance targets should always be considered.

When performance goals are increased, it is advisable to anticipate what might

constrain the planned performance improvement and simultaneously introduce

business process or organizational changes aimed at overcoming these constraints.

Finally, whenever significant changes are implemented in order to improve a business

process, it becomes the business process owner’s responsibility to:

 Ensure that employees affected by the changes understand what changes were made, why these changes were made, and how their work roles are affected.

 Assess the extent to which the anticipated performance improvements have been achieved (and, if not, why not).

Business Process Modeling and Business Process Digitalization

Business process modeling is an important skill to be acquired by a business

process owner or any other individual likely to be involved with business process

rationalization activities. With business process modeling, the work tasks and

flows involved with a business process are visually depicted, making it easier for the

involved-individuals to understand and recognize ways to improve the business

process.

A business process common to most organizations, including TaskRabbit, is

reimbursing employees for out-of-the-pocket expenses associated with approved

travel. Consider a travel claim reimbursement process that unfolds as follows:

 An employee with out-of-the-pocket expenses for approved travel expenses completes a travel claim form and sends this form, along with supporting

receipts, to the clerk assigned to process reimbursement claims.

 The clerk examines the completed travel claims form to make sure that the employee followed appropriate business rules in completing the form. By

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using these same business rules, the clerk can identify errors. If errors are found, the form is returned back to the employee for correction and

resubmission. If no errors are found, the data on the travel claims form is entered into a business platform hosting the digitalized reimbursement

business process.

 Once the data for the travel claim has been entered into this business platform, the amount of money to be reimbursed to the employee is

determined through another set of business rules. Then, a message is sent to the manager of the travel reimbursement office letting the manager know

that the travel claim is ready for her approval.

 Once this manager receives the message, she accesses the business platform to retrieve claims data and the calculated reimbursement amount.

After examining these, she either approves the reimbursement claim or sends the travel clerk a message indicating any issues that need to be

resolved.

 Once the manager approves the reimbursement claim, the digitalized business process concludes by doing one of the following: print and mail the

employee a reimbursement check, initiate an automatic deposit into the employee’s designated checking account, or direct the travel clerk to

reimburse the employee with cash.

 Then, at the end of the month, a report is generated for the manager that

summarizes travel expenses on a year-to-date basis.

Figure 19-8 depicts this business process.

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Figure 19-8 Travel Reimbursement Business Process

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Complete Travel Form

Audit Travel Form

Errors ?

Yes

Enter Data into System

Calculate Reimbursement

Approve ?

Funds Disbursement

Reimbursement

Yes

Cash Electronic

Monthly Report

Diagrams such as Figure 19-8 are referred to as swim-lane diagrams. With a

swim lane diagram, the roles served and work activities carried out by each actor

involved with a business process is separately depicted (in a swim lane). For the

travel reimbursement business process depicted in Figure 19-8, the actors include

three humans (the employee traveler, the travel clerk and the travel manager) and

one digitalized solution (the digitalized elements of the business process). Such

visual depictions of business processes have benefits that extend beyond easing the

effort involved in rationalizing a business process, such as:

 Educating a department’s new employees (transfers or new hires) about their

work roles.

 Explaining to employees in other departments or in other organizations how a department handles its assigned work, such that all involved will be better able to coordinate any work activities that flow across departmental or

organizational boundaries.

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Most organizational leaders today recognize that digitalization can be a very

effective means for improving a business process’s performance. Digitalization can

be applied to enhance a business process via four engines of digitalization:

 Automation: automating work tasks (replacing humans with digitalized solutions).

 Control: controlling work tasks (monitoring work-related events and then identifying and correcting surfaced issues).

 Empowerment: empowering the humans involved with work tasks

(providing information and suggesting actions).

 Interaction: facilitating interactions among the actors (humans and

digitalized solutions) involved with work tasks so as to optimally leverage the collective capabilities held by these actors.

How might digitalization improve the travel reimbursement business process

shown in Figure 19-8? Here are four such enhancements. First, the human

intermediary (i.e., the travel clerk) might be removed from the process by enabling

employees to directly enter (via a smart phone, tablet, or laptop/desktop computer)

travel-related data and receipts into the business platform. Second, if effective

controls are used with data/document entry processes, errors can be brought to the

attention of the employee traveler and immediately corrected. Third, knowledge

regarding data definitions and business rules associated with the travel

reimbursement business process can be provided to the employee traveler on an as-

needed basis via a digitalized help function or via digitalized communications with a

human expert (via email, interactive chatting, telephone, etc.). Finally, the role of

the travel manager in the process can be substantially reduced by crafting new

business rules for automatically approving most travel reimbursements (while

maintaining a digitized audit trail). Now, the travel manager role involves two

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primary responsibilities: to approve exceptional travel claims (i.e., those not covered

by business rules), and to periodically examine the business rules to ensure their

continued validity and comprehensiveness.

The four business process enhancements described in the prior paragraph

involved instances of automation, control, empowerment and interaction. Can you

identify the digitalization mechanisms applied in accomplishing each enhancement?

A Recap and Look Ahead

Organizations gain numerous benefits from rationalizing and digitalizing work

activities as end-to-end business processes. The most obvious of these benefits is

that work activities are handled more effectively and more efficiently – resulting in

more satisfied market ecosystem participants and enhanced competitive positions.

Still, it must be remembered that these benefits will only be observed if the business

model enabled through these business processes remains viable given its ever-

evolving market ecosystem context.

Two less obvious, but no less important, benefits can be traced to business

process digitalization. First, digitalized business processes represent a rich archive

of knowledge regarding how work is organized and accomplished. Employees come

and go, but secured digitalized solutions remain. As long as business process owners

ensure the continued validity of these digitalized solutions and technology specialists

are available to extract their contents, this mass of knowledge of what we are doing

and how we are doing it remains available to future generations of employees.

Second, digitalized business processes represent a valuable, highly-

leverageable organization resource. As more and more of an organization’s business

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processes are digitalized, this accumulating investment is available to serve as a

powerful enabler of future competitive actions, since:

 The time required to modify currently-executing business processes or to fabricate new business processes can be significantly reduced.

 Discrete business processes can be seamlessly interconnected, enabling more-timely, more-comprehensive and more-sophisticated competitive

actions.

 Executives, managers and digital strategists are better able to sense the

need for and then direct competitive responses to portending events within their organization, within the market ecosystems within which their

organization participates, and within national and world economies.

But, should these digitalized business processes be hosted on global or local business

platforms? We examine this and associated issues in the next chapter.

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Chapter 20. Business Platforms

A business platform hosts a collection of digitized data and digitalized

business processes, and is enabled through digital platforms. Ideally, these

digitalized business processes are seamlessly interconnected and operate with a

common collection of shared, digitized data. Importantly, the shared data is the

primary mechanism enabling the set of digitalized business processes to be

seamlessly interconnected. Consider, for example, a digitalized order process

maintained in a business platform that captures the details of customers’ sales orders

and stores the digitized data characterizing these sale events (e.g., date and time of

sale, customer ID, products purchased, purchase quantities, deliver date, discounts

to apply, etc.) within the platform’s collection of shared data. The platform’s other

digitalized business processes (e.g., a packing process, a shipping process, an

invoicing process, etc.) are now able to quickly and reliably access these sales-event

data, as needed, in fulfilling customers’ orders.

Today, business platforms are present in all types and all sizes of organizations

– from large, global firms (e.g., Wal-Mart, Proctor & Gamble, etc.) to small

entrepreneurial startups. Take Warby Parker (www.warbyparker.com) as an

example of an entrepreneurial startup. Founded in 2010, the pipeline organization’s

founders sought to disrupt the designer eyewear market while advancing a social

mission of bringing designer eyewear to people who otherwise couldn’t afford

designer eyewear. Warby Parker sells its eyewear for a single price, $95, and

donates, for every pair that is sold, a pair to someone in need. How do they do this?

By bypassing the middleman! The firm designs their own products, works directly

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with suppliers, and sells their eyewear through their website. And, important for our

purposes, Warby Parker’s business platforms serve as the primary vehicles through

which most work activities are executed.

Warby Parker quickly realized that, given the nature of their product, a pure

digital presence was not enough. Right from the company’s launch, consumers

wanted to physically try on the eyewear. It was not uncommon for a consumer, after

having looked at a pair of glasses on the company’s website, to show up at one of

the founders’ apartments and ask if they could try on pairs of glasses. As a

consequence, Warby Parker – similar to other boutique-like e-commerce firms – has

opened retail locations. Not traditional retail stores, but experience spaces where

consumers can view and try on frames (and, among other things, take photos of

themselves with different frames to be immediately uploaded to their social

networking presences). While at the retail location, the consumer can also use kiosks

to access the firm’s business platform to order eyewear or to check the status of an

existing order. Some of the work activities carried out at retail locations (e.g.,

displaying eyewear, promoting eyewear, socially engaging with consumers, digitally

tracking a consumer’s movement through and actions at a location, creating and

orchestrating in-store events, etc.) are distinct from those handled by Warby Parker’s

e-commerce business platform; and, as will be explained later in this chapter, there

are advantages to be gained from executing these retail-location business processes

similarly at all retail locations. Conceptually, then, Warby Parker can be thought of

as operating two global business platforms: an e-commerce platform (e.g., a digital

storefront, product content, consumer content, eyeglass ordering and fulfillment

processes, etc.), and a retail-location platform.

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The aim of this chapter is to provide a more detailed understanding of

organizations’ business platforms. In accomplishing this objective, three topics are

covered:

 The Benefits of Hosting Business Processes on a Business Platform

 Applying Standardized and Integrated Business Processes

 Managing Global Business Platforms

The Benefits of Hosting Business Processes on a Business Platform

As described earlier, a business platform consists of a set of seamlessly-

interconnected, digitalized business processes and a common collection of shared,

digitized data. This common collection of shared data is commonly referred to as a

database. Viewed simply, a business platform’s digitalized business processes:

 Capture data describing value-chain events, possibly manipulate these data, and then store these data (in original and/or manipulated form) in the

platform’s database.

 Access data stored within the databases of other business platforms, possibly manipulate these data to create new data, and then store these

data (in original and/or manipulated form) in the platform’s database.

 Carry out work tasks by accessing data stored within the platform’s

database, possibly manipulating these data, and then storing any newly- created data in the platform’s database.

Essentially, then, the seamless-interconnection of two business processes hosted on

a business platform occurs through the platform’s database: data output by one of

these business processes are placed in the platform’s database, from where the data

can be accessed by the second business process.

Business platform design involves three main issues:

 Determining the data elements with which to populate a platform’s

database.

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 Deciding whether or not to standardize the business processes being hosted on a platform.

 Deciding whether or not to integrate two or more of the business processes being hosted on a platform.

We now describe the benefits to be derived from shared databases, standardized

business processes, and integrated business processes.

Benefits of Shared Databases

Database design involves defining the data elements to be stored and

organizing these data such that the data elements can be easily and quickly accessed.

Typically, the most difficult task in establishing a business platform’s database

involves reaching consensus amongst the platform’s stakeholders on which data

elements to include, on how each data item is to be defined, and on the relationships

amongst these data.

All business platforms contain an operational database holding the digitized

data used in carrying out the day-to-day work activities handled through a business

platform. Increasingly, however, a second database is also present. This second

database, referred to as a data mart or a data warehouse, holds less current, more

aggregate, but cleaner data used for in-depth information reporting and for business

analytics. Cleaning data refers to the extra steps taken to identify and correct data

errors. A data mart typically contains data limited to a single functional domain

(e.g., marketing, logistics, manufacturing, etc.) while a data warehouse contains a

much broader collection of data and is used by multiple functional domains. Figure

20-1 points out that much of the data populating a data mart/warehouse are

originally captured by transaction-handling business processes and stored within a

business platform’s operational database.

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Figure 20-1 Operational Database and Data Mart/Warehouse

Operational Database

Data Mart/Warehouse

Data Extraction, Transformation, Cleansing and Loading

Transaction- Handling Business Processes

Transaction Summary Reports

Operating Reports

In-Depth Reporting

Business Analytics

Data from Other Internal and External

Sources

Why have both an operational database and a data mart/warehouse within a

business platform? Operational databases are designed to efficiently handle huge

volumes of transactions (e.g., sales transactions, purchasing transactions, inventory

movements, fulfillment movements, HR transactions, etc.). If the database-access

operations required in transaction-handling were slowed down by time-consuming,

database-access operations associated with sophisticated information reporting

and/or business analytics, an organization’s day-to-day operations could be

disrupted. Disrupted transactional processing, in turn, poses a direct (or indirect)

threat to the functioning of an organization’s revenue-producing activities.

A well-designed business platform database provides four significant benefits.

First, agreed-on data definitions make available to all employees a common business

language to be used in communicating with one another. For example, when one

manager refers to a 3% increase in sales, others know exactly what is meant by a

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sale. Second, the availability of current, shared data about a set of work activities

greatly facilitates work task coordination/synchronization. Third, the availability of a

consistent, comprehensive collection of data about a set of work activities greatly

facilitates operational, tactical and strategic decision making. Finally, the existence

of an already implemented database reduces the time and expense associated with

future digitalization projects. Column 1 of Table 20-1 summarizes these benefits.

Table 20-1 Benefits of a Business Platform

Shared Database Business Process Standardization

Business Process Integration

• Common business language

• Enhanced work task coordination & synchronization

• Enhanced operational, tactical & strategic decision making

• Quicker, less expensive digitalization projects

• Reduced digitalization costs

• Fewer serious operating problems

• Leveraging of business process improvements

• Reduced employee training & support costs

• Reduced time & cost to start up a new work location

• Increased work flow efficiency

• Increased work flow effectiveness

• Leveraging of work units’ capabilities via enhanced coordination

• Leveraging of employees’ capabilities via enhanced collaboration

Benefits from Standardized Business Processes

With business process standardization, multiple work units execute a

single instance of the digitalized business process. When two or more installations

of a business process are configured exactly the same, these installations represent

an instance of the business process. In other words, when a single instance exists

across all work units executing a business process, these work units are applying the

same business process specification. When two instances of a business process exist,

two distinct versions of the business process are executed – one version by one group

of work units, the other version by another group of work units. Business process

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specification differences across these two instances could be minor, moderate or

substantial.

For a standardized business process to prove effective, it has to satisfy the

work-related needs of each affected work unit. Here, the term satisfy should be

interpreted as follows: while the switch to a standardized business process may find

employees’ having to change how they carry out certain of their work-related tasks,

these works tasks should now be carried out more effectively and more efficiently

than previously was the case. If this is not the case, then either aspects of the

business process rationalization effort were faulty or some of the affected work units

should not be required to apply the standardized business process.

Well-designed, standardized business processes provide five important

benefits. First, digitalization costs are reduced as only one digitalized version of each

business process needs to be designed, built, maintained and supported. Second,

the likelihood of work units experiencing serious operating problems is reduced as

such problems, when they arise, tend to be promptly designed out of standardized

business processes. Third, business process improvements made at one work unit

can be incorporated into the standardized business process such that these

improvements are replicated across all work units deploying the standardized

business process. Fourth, employee training and support costs are reduced as only

a single business process configuration needs to be accounted for in training and

support activities. This has the added benefit of easing the transition costs for

employees transferring from one work unit to another. Finally, new work locations

can be established more quickly and less expensively, given the availability of well-

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honed standardized business processes. Column 2 of Table 20-1 summarizes these

benefits.

Benefits of Business Process Integration

With business process integration, configured interconnections allow

digitized data to flow seamlessly across executing digitalized business processes

hosted on the same business platform or on different business platforms. For

example, employees at one work location involved with a task associated with a

client’s project may need to access task-related data produced by employees at a

different work location involved with the same project. If both groups of employees

are working through the same business platform and the digitalized business

processes hosted on this platform are integrated, then data designated as shareable

within the platform’s database specification would be instantaneously available to

employees at both locations.

Well-designed, integrated business processes provide four primary benefits.

First, work flow efficiency (e.g., lower cost, greater speed, etc.) is increased by

eliminating the need for human involvement in moving data and documents from one

task to another task or from one business process to another business process.

Humans are not only a costly resource for handling routine and repetitive tasks, but

they can introduce delays and errors into these tasks. Second, work flow

effectiveness (e.g., fewer errors being made, errors that are made are quickly

detected and corrected, fewer missed deadlines due to processing delays, etc.) is

also likely to increase. Third and fourth, work unit capabilities (via coordination and

synchronization) and employee capabilities (via collaboration), respectively, can be

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more readily leveraged through a heightened ability to access and share data.

Column 3 of Table 20-1 summarizes these benefits.

Applying Standardized and Integrated Business Processes

It would be natural, after hearing about the benefits of standardization and

integration, for you to think: “If we are building a business platform, why not go

ahead and standardize/integrate all of the business processes maintained on a

platform and then require all work units to make use of this single instance of

business processes?” In reality, not all organizations – or better said, not all of an

organization’s work units – stand to benefit from being required to use standardized,

integrated business processes. A standardized business process may not meet the

needs of one or more of the work units, and (as will be explained in later chapters)

standardization typically requires substantial political and monitoring costs. Business

process integration may not be needed (e.g., when two business processes never

exchange data or documents), and (as will be explained later) integration typically

requires substantial technology costs.

Decisions to apply standardization and integration within a business platform

hinge on two key questions. The first of these questions is: “Should a business

process be executed similarly across all work units, or should a work unit be allowed

to execute its own version of the business process?” Consider the three scenarios

depicted in Figure 20-2. With the left-most scenario, all six work units use a business

platform (Platform A) hosting a single instance of a set of standardized business

processes. With the middle scenario, four work units use Platform A because these

units perform very similar work activities, and two other work units use Platform B

(these two work units perform similar work that is quite different from the work

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performed by the four units using Platform A). Now, there are two instances of the

standardized business processes. With the right-most scenario, four work units use

Platform A (the units perform very similar work), but the other two units use locally-

tailored business platforms (Platform C and Platform D) because each of these work

units engages in a unique set of work activities.

Figure 19-2 Business Process Standardization Scenarios

Platform A

Platform B

Platform C

Platform D

Platform A

The second question is: “Do any of the business processes being hosted on the

business platform need to share data or documents with other of the business

processes being hosted on the platform?” If the answer is Yes, then business process

integration is desirable, with the extent of integration (e.g., minimal, moderate,

extensive) reflecting the extent to which data/document flows are to be

interconnected across the hosted business processes. If the answer is No, then there

is no need to undergo the effort and cost required to implement an integrated set of

business processes.

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Thus, the desirability of standardizing and integrating the business processes

being hosted on a business platform is directly linked to the nature of the work

activities being performed by the work units that will be using these business

processes. In other words, how similar are the work units’ work activities and to

what extent would the work units benefit collectively from executing business

processes that are able to easily share data and documents? Thinking along these

lines, certain conditions favor four different business platform designs (see Figure

20-3).82 Each of these business platform variants is now discussed.

Figure 20-3

Business Platform Variants

Globally- Integrated

Work Units Execute Distinct, Tightly

Synchronized Business Processes

Work Units Execute Standardized, Tightly Synchronized Business

Processes

Locally- Isolated

Work Units Execute Distinct, Mostly

Unconnected Business Processes

Work Units Execute Standardized, Mostly Unconnected Business

Processes

Locally-Unique Globally-Standardized

Business Process Standardization

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A Globally-Integrated, Locally-Unique Business Platform

With a globally-integrated, locally-unique business platform, an

organization’s work units engage in different work activities (forestalling

standardization), but would benefit from certain of the hosted business processes

82 Figure 19-3 has been adapted from Figure 2-2 in: J.W. Ross, P. Weill and D.C.

Robertson, Enterprise Architecture as Strategy: Creating a Foundation for Business Execution,

Harvard Business School Press, Boston, MA, 2006, p. 32.

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being able to share data and documents (advancing integration). As an example,

consider the high-level work units (i.e., the business units) of a comprehensive

financial services firm like USAA. USAA’s business units (auto insurance, life

insurance, home insurance, personal banking, personal investing, etc.) operate

within different competitive markets requiring, for the most part, distinctive business

processes. While it might be advantageous to use standardized, integrated global

business platforms for most support value chain activities (i.e., accounting, finance,

human resources, procurement of office supplies, etc.), most primary value chain

activities would benefit from local business platforms unique to each business unit.

However, because the business units tend to serve a common customer base,

business opportunities (e.g., the cross-selling of financial products and services

within customer segments) would arise from interconnecting (i.e., integrating)

business process data/document flows both within and across these local business

platforms.

A Globally-Integrated, Globally-Standardized Business Platform

With a globally-integrated, globally-standardized business platform,

the organization operates in a single competitive market with most of its work

activities having considerable direct influence on one another. While the work units

may each carry out some distinct work activities, all of the work units involved with

the same work activities would benefit from carrying out these work activities

similarly (advancing standardization); and, given the dependence of most work

activities on other work activities, work unit coordination and collaboration would

benefit from sharing data and documents (advancing integration).

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Consider an airline, such as Delta. In order for flights to operate efficiently

(minimal waste regarding fuel, customer refreshments, aircraft crew hours, aircraft

service crew hours, aircraft maintenance crew hours, boarding gate crew hours, etc.)

and effectively (profitably, on schedule, safely, etc.), business processes need to be

tightly choreographed. This can best occur through global business platforms

characterized by high levels of standardization and integration.

A Locally-Isolated, Globally-Standardized Business Platform

With a locally-isolated, globally-standardized business platform, the

organization operates in a single competitive market with most of its work activities

having little direct influence on one another. While work units may carry out some

unique work activities, all of the work units involved with the same work activity

would benefit from carrying out these work activities similarly (advancing

standardization); but, as little coordination or collaboration is required across work

units, little need exists for these work units to share data or documents (forestalling

integration).

Consider, as an example, certain of the property-specific business processes

(catering, special events, guest room cleaning, facility maintenance, etc.) executed

at a hotel chain such as Marriot’s Courtyard. In order to achieve high levels of

business process efficiency and effectiveness and to maintain a consistent image

(customer service, amenities, etc.) across these properties in the eyes of the

consumer, it would make sense to standardize many of the business processes

executed at the chain’s properties, executing these business processes from a global

business platform where within-property business process integration was enabled

across the platform’s business processes. But, as there is little need to share data

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and documents across properties, integration of business processes across properties

would not be a high priority. That said, as certain hotel chain business processes

(reservations, customer relationship management and accounting) do benefit from

standardization and integration across properties, these business processes are

typically executed from globally-integrated, globally-standardized business

platforms.

A Locally-Isolated, Locally-Unique Business Platform

With a locally-isolated, locally-unique business platform, an

organization’s work units engage in very different work activities (forestalling

standardization) and stand to benefit little from sharing data and documents

(forestalling integration). Business conglomerates, such as GE, provide good

examples. At a high-level of organization structuring, a conglomerate is comprised

of independent business units that tend to compete in different industries

characterized by very different competitive markets. As a result, little is to be gained

from standardizing or integrating business processes across the business units. Each

business unit, thus, typically applies localized business platforms. Even here,

however, there are advantages that arise from standardizing and integrating a few

business processes (e.g., financial reporting) important for managing the

conglomerate as a whole; these select business processes would be hosted on

globally-integrated, globally-standardized business platforms.

Business Process Standardization and Integration at Warby Parker

Earlier, two of Warby Parker’s business platforms were described: an e-

commerce business platform and a retail-location business platform. With the e-

commerce platform, business process standardization exists by default (a single

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platform exists) and business process integration would be extensive (to coordinate

and synchronize consumer ordering and fulfillment). With the retail-location

platform, business process standardization would be extensive (to maintain a single

instance of retail-site business processes across all retail locations), but business

process integration would likely be less extensive (only applied where it would be

beneficial for certain of the hosted business processes).

Managing Global Business Platforms

With a global business platform, the hosted business processes are

standardized, each business process works with data maintained in the platform’s

database, and each work unit subscribing to the global platform executes the same

set of business processes. For example, a global office supply procurement platform

finds the same set of procurement-related business processes (many of which would

benefit from being integrated) being executed at each of an organization’s

administrative offices - those at headquarters, sales offices, client service or support

sites, manufacturing sites, distribution centers, retail sites, etc.). If each site instead

applied its own local business platform (hosting a unique set of procurement

processes), considerable variance would exist in how each office carried out

procurement tasks - presenting considerable challenges regarding coordinating or

synchronizing tasks across offices, assessing procurement effectiveness and

efficiency, and ensuring accounting and financial consistency. Figure 20-4 portrays,

at a high level of organization structuring, three global business platforms commonly

observed with manufacturing firms.

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Figure 20-4 Global Manufacturing Business Platforms

Market Research

New Product Creation

New Product Development

New Product Launch

R&D Platforms

Develop Product Demand

Obtain Product Orders

Maintain Consumer Relations

Sales & Marketing Platforms

Process Product Orders

Fill Product Orders

Ship Product Orders

Support Products/Consumers

Product Fulfillment Platforms

Global business platforms require a number of managerial roles (see Table 20-

2) aimed at ensuring that these platforms are effectively designed, operated and

evolved. As global business platforms are implemented, a number of new managerial

roles are typically established (e.g., a VP for global business processes, a platform

manager role, a business processor owner role, and a data owner role). In addition,

the responsibilities of some existing roles (e.g., work unit managers) are extended.

The VP, global business processes is typically a senior management position; and,

business platform managers, business process owners and data owners tend to hold

mid-level management positions. In addition to putting these managerial roles in

place, organizations’ leadership teams also implement appropriate changes to their

planning systems, control systems and incentive systems.

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Table 20-2 Business Platform Managerial Roles

Managerial Role Business Process Responsibilities

Data Responsibilities

VP, Global Business Processes

• Overall planning and control • Manage business platform managers • Coordinate with business process owners • Coordinate with business data owners

Business Platform Owner

• Platform design • Platform availability • Platform integrity • Platform security

Business Process Owner

• Process specification • Process measurement • Process improvement

Data Owner

• Data definition • Data capture integrity • Data storage integrity • Data security

Work Unit Manager • Process execution integrity • Data usage integrity

A Recap and Look Ahead

Most organizations today do not have the greenfield luxury of being a startup

(e.g., Warby Parker) and thus tend to find themselves dealing with collections of local

business platforms, single-instance global business platforms, and multiple-instance

global business platforms – with the nature of an organization’s unique collection of

installed business platforms determined by its history of digital investment and the

digital savviness of its executives and managers.

Of course, the ideal situation would be to only use single-instance global

business platforms, as single-instance global business platforms create the potential

for maximally exploiting the benefits of shared databases, standardized business

processes and integrated business processes. As a consequence, most organizations

today are in the process of, where appropriate, moving their digitalized business

processes onto single-instance, global business platforms.

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Designing and implementing a global business platform, even under ideal

conditions, can be a difficult, lengthy and expensive endeavor. The next chapter

explains how many of today’s organizations have successfully overcome these

challenges by acquiring and implementing enterprise resource planning (ERP)

systems.

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Chapter 21. Enterprise Resource Planning Systems

Given the benefits of global business platforms, you may ponder:

 “Why did most organizations wait until the mid- to late-1990s to move

toward implementing global business platforms?”

 “Why are projects aimed at implementing global business platforms so costly and why do they take so long?”

 “Why do some of these implementation projects seem to go on forever?”

The answers to such questions hinge on two observations. First, implementing global

business platforms can be very challenging – technically and politically. Second,

organizations constantly change, usually incrementally but occasionally radically, in

response to internal events (e.g., a new chief executive officer (CEO) is hired, a new

chief financial officer (CFO) is hired, a product line is dropped, three product lines are

introduced to international markets, etc.) and to external events (e.g., a new

competitor appears, a new generation of manufacturing technology appears, a key

supplier goes out of business, etc.). As organizations change, so do their business

models and the business processes that enable these business models. As a

consequence, it often seems very rational to put off starting a project (or to continue

a project that is underway) until an organization’s business processes have stabilized.

The problem? This anticipated stability never materializes!

Quite understandably, projects undertaken to implement digitalized business

processes have historically been driven by an overriding goal of meeting the business

needs of the work unit(s) initiating and/or funding the projects. Generally, little, if

any, thought is given by project leaders as to how a to-be-digitalized business process

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might benefit or constrain other work units or whether another work unit has recently

digitalized the same (or a similar) business process.

By the early 1990s, this situation had reached a breaking point as many

organizations were operating a mélange of redundant digitalized business processes,

each of which worked with somewhat unique sets of data and was regularly being

modified (e.g., process enhancements, responses to internal/external changes, etc.).

Two all-too-common outcomes were increasingly observed. First, organizations’

leadership teams perceived that digitization costs were out-of-control. Second, the

complexities that arose when working with or around installed digitalized business

processes significantly increased the costs and time required to either enhance

existing business processes or build new business processes. Digitalization projects

associated with competitive moves proved especially troublesome as, all too often, a

taken-move cost more than was planned, lacked key features and/or was delayed.

As a consequence, the competitive impacts of these projects tended to be far less

than anticipated.

Organizations’ leadership teams realized that things needed to change. But,

a proven, cost-effective approach for implementing well-designed global business

platforms was lacking.

This chapter addresses two related issues. First, we begin by providing deeper

explanations of the challenges associated with efforts to implement global business

platforms. Second, we then describe the technology that emerged in the 1990s for

implementing global business platforms: enterprise resource planning (ERP)

systems. The topics covered are:

 The Challenge of Implementing Global Business Platforms

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 The Arrival of Enterprise Resource Planning (ERP) Systems

 The Nature of ERP Systems

 Celenese’s OneSAP Project

 Alternatives to ERP Systems

The Challenge of Implementing Global Business Platforms

Two sets of challenges arose as project teams engaged in efforts to implement

global business platforms: one set associated with standardizing the business

processes to be hosted on the platform, and the other associated with integrating

these business processes. Each of these sets of challenges are now described.

Challenge: Standardizing Global Business Processes

Because of the political maneuvering that typically occurs, standardizing a

business process generally proves to be anything but a straightforward task. Each

of the work units expected to execute a common business process is likely to desire

that its version of the business process becomes the standardized business process.

A work unit required to change one of its executing business processes will have to

redo many, if not most, of its data definitions, business rules, operating procedures,

work roles, performance metrics, etc. All of this takes time, costs money, disrupts

operations and unsettles employees – when the unit’s currently executing business

process, for the most part, seems to be working fine. Why fix something that is not

broken? Most of the work units involved in the decision to standardize a business

process are thus motivated to argue either that their business process should serve

as the standardized business process or that they should be exempt from having to

use the standardized business process.

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Different, but still significant, challenges can then surface once these political

challenges are resolved. Business platforms typically host not one but many business

processes. Moving from a large number of locally-tailored business processes to a

suite of standardized business processes is a huge undertaking involving numerous,

interrelated work/technology redesigns. Putting together a convincing business case

and obtaining the needed funding are anything but straightforward.83 And, while this

huge business process redesign effort is underway, what happens to current

operations and to work unit desires to enhance or modify executing business models?

Challenge: Integrating Global Business Processes

Three tactics for integrating a set of digitalized business processes were

followed, over time, by most organizations prior to the availability of ERP systems.

The earliest of these integration tactics (see Figure 21-1) used system-to-system

interfaces to link together digitalized business processes (each of which makes use

of uniquely-defined data). With this system-to-system interface tactic, each pair

of digitalized business processes to be integrated are modified so that each business

process can accept, interpret and work with data coming from the other business

process. This can be an effective and efficient integration tactic – but only when a

limited number of digitalized business processes are involved. As the number of

digitalized business processes being integrated increases, the building of system-to-

system interfaces to interconnect pairs of business processes results in a complex

web of interconnections that, over time, becomes error-prone, operationally

inefficient, and costly to maintain and support.

83 For coverage of these issues, refer to Part 2 of this book.

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Figure 21-1 The System-to-System Interface Tactic

Business Process 1

System-to-System Interface

Data Data Data

Business Process 2

Business Process 3

A second integration tactic, the global database tactic, interconnects

digitalized business processes through a global database interface (see Figure 21-2),

and required two distinct activities:

 Designing and implementing a global database.

 Modifying all the installed digitalized business processes to be interconnected such that data captured by, used by and produced by a business process would be placed in and accessed from this global database.

While such a tactic seems quite intuitive, achieving each of these activities proved

extremely challenging. For example, many organizations literally spent millions of

dollars, with limited success, in efforts to implement global databases.

Two principal challenges arose. First, getting all of the work units that would

be using the business platform to agree on a single set of global data definitions

proved to be a daunting political task. Consider, for example, the differing definitions

that might be used across work units regarding a sale: the sales unit may consider a

sale to occur when an order is taken; the manufacturing unit may consider a sale to

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occur when the order leaves the finished goods inventory; the accounting unit may

consider a sale to occur when the order is received by the customer; and, the finance

unit may consider a sale to occur when the customer’s payment is received. More

troublesome, as with standardized business processes, each work unit desires that

its local data definitions will ultimately serve as the global data definitions, thus

eliminating the need for work unit members to change mindsets and operating

procedures. Second, even when the political challenges were overcome, the technical

work involved in modifying each work unit’s digitalized business processes (so that

these business processes could work with the global database) was complex, time-

consuming and costly – providing ample opportunities for political dissonance to re-

surface and intensify.

Figure 21-2 The Global Database Tactic

Business Process 1

Business Process 2

Business Process 3

Global Database

Global Database Interface

A third tactic (see Figure 21-3), that gained momentum in the late 1980s and

throughout the 1990s was the middleware tactic, that applied a set of technologies

collectively referred to as middleware. While many different types of middleware

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exist, the basic idea is fairly simple. Middleware makes the data or programming

logic contained in one digital solution (e.g., a digitalized business process, a

database, etc.) transparent to other digital solutions. Thus, instead of having to

modify a digital solution each time it is to be interconnected to another digital

solution, the digital solution only needs to be modified once to connect with the

middleware technology being used - significantly reducing, for example, the cost of

interconnecting a large set of digitalized business processes. Table 21-1, which

describes three frequently-used middleware technologies, should provide a better

understanding of middleware technology and how it works.

Figure 21-3

The Middleware Tactic

Business Process 1

Business Process 2

Business Process 3

Global Data

Warehouse

Global Operational

Database Middleware

Middleware Interface

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Table 21-1 Three Common Middleware Technologies

Middleware Description

Remote Procedure

Calls

An Application Program Interface (API) is built into software program A that exposes certain of program A’s data and/or computational features. A function call is defined, enabling other software programs executing on or remote from the platform executing program A to gain access to the API (gaining access to program A’s data or computational results).

Message Broker

(or Adapter)

An intelligent (software and hardware) digital artifact that holds: a list of subscribers (i.e., programs B, C & D) for specific messages (data and documents) transmitted by program A, & message translation rules for each message-subscriber pair. All the translation involved to enable programs B, C & D to interpret program A’s data/documents is done by the message broker. No changes need to be made to programs A, B, C & D. However, considerable work is necessary to specify and code the message broker’s translation rules.

Distributed Objects

A distributed object infrastructure is used to build: a distributed object (data and/or computational procedures) hosted on platform A, a corresponding procedure call for use by other programs running on platform A or on other platforms (B, C & D) networked to platform A, & a network directory listing & describing the distributed object and its procedure call. Now, any program running on platforms A, B, C or D can use this procedure call to access the distributed object.

In practice, the middleware tactic can be quite challenging technically, as the

various middleware technologies are fairly different from one another and, typically,

a mix of middleware solutions is used in achieving business process integration

objectives. Additionally, few organizations in the 1990s possessed the in-house

technical expertise to build and maintain global business platforms applying the

middleware tactic.

The Arrival of Enterprise Resource Planning (ERP) Systems

Two significant events occurred in the mid-1990s to create both the funding

opportunity and the solution for resolving the challenges of implementing global

business platforms. First, the Year 2000 (Y2K) problem found organizations

needing to overhaul their huge base of installed digitalized business processes prior

to the year 2000. Why? Because most programmers - first to save (at the time,

scarce) computer memory and then from habit - only used the last two digits of a

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year to signify dates in logical programming rules and in data formats. For example,

‘1983’ was represented as ‘83’. This tactic worked fine during the 1950s, 1960s,

1970s, 1980s and 1990s. But, depending on how each program was actually coded,

no one knew exactly what might happen in the year 2000 and beyond. Would these

digitized business processes work as expected? Would they crash? Or, worse, would

they continue operating, but produce erroneous but undetected outputs (data,

documents, decisions, etc.)?

As the risk of doing nothing was extremely high, most organizations realized

an impending necessity to fund a redesign of all installed digitalized business

processes. While each of these software redesigns might only require that a few lines

of code be changed, the correct lines of code needed to be located across hundreds

(if not thousands or tens of thousands) of installed software programs. For large

organizations, the overall cost of locating the changes to be made, making these

changes and testing the changed programs (to make sure that the software programs

worked correctly alone and in interaction with other programs) was expected to easily

run into the millions of dollars.

But, if such massive change needed to be done, why return to the status quo

of local business platforms? Why not use this as an opportunity to implement global

business platforms?

Second, software vendors (e.g., SAP, Baan, PeopleSoft, Oracle, etc.) began

marketing in the early 1990s a new type of technology referred to as an enterprise

resource planning (ERP) system – in essence, a pre-defined global business

platform (a global database along with a set of standardized, integrated digitalized

business processes). The concept was revolutionary. Instead of building a set of

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business platforms to accommodate an organization’s unique needs, the organization

acquired a pre-packaged global business platform reflecting industry best practices

and then changed its work practices to conform (as much as possible) to the data

definitions and business processes hosted on the acquired global business platform.

Today, a variety of vendors offer ERP systems for all types and sizes of organizations;

and, most of these ERP systems have versions reflecting best practices for a variety

of industries. Table 21-2 lists some of today’s more popular ERP systems, applying

a common categorization scheme (Tier 1, Tier 2 and Tier 3).

Table 21-2

Examples of ERP Systems and Vendors

Tier 1 Tier 2 Tier 3

Description

• Used by large, global organizations

• Extensive variety & depth in functionality

• Extensive configuration options

• Highly-scalable • Highest cost

• Used by mid-size organizations

• Handles international locations

• Less-extensive functionality

• Less-extensive configuration options

• Medium cost

• Used by small organizations

• Limited functionality

• Limited configuration options

• Lowest cost

Vendors • SAP • Oracle • Microsoft Dynamics

• Epicor • Infor • QAD • Microsoft Navisan

• Netsuite • Exact • Syspro • Microsoft Great

Books • SAP Business

One

Acquiring and implementing an ERP system can still be a lengthy, expensive

and disruptive undertaking. Technical and political challenges abound. What sets an

ERP system apart from the earlier approaches for implementing global business

platforms is that the end-goal is clear, change happens relatively quickly, and once

you begin the process of change it is difficult, if not impossible, to revert back to prior

ways of working. So, what exactly is an ERP system and what are an ERP system’s

advantages and disadvantages?

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The Nature of ERP Systems

Figure 21-4 provides a very simplified depiction of an ERP system. ERP

systems have three primary components: a global database; a set of global

(standardized, integrated and functionally modularized) digitalized business

processes; and, ERP system interfaces used to interconnect the ERP system to

digitalized business processes not handled through the ERP system and to bolt-ons

(i.e., tailored extensions to the ERP system’s functional modules built using tools

provided as part of the ERP system) in order to align the ERP system with unique,

competitively-important aspects of a work unit’s business practices. The global

database provides the data (delineated through definitions and relationships) used

by the software modules as well as reporting/analytic tools that can be applied to

these data. It is commonplace today for an ERP system to provide both an

operational database and a data warehouse. Each functional module is designed by

the ERP vendor to represent industry best practices, covering a broad spectrum of

work activities including (but certainly not limited to):

 Planning activities: Supply chain planning, manufacturing/operations

planning, sales planning, budget planning, overall business strategic planning, etc.

 Operational activities: Production/operations, logistics, procurement, order

processing, general ledger, human resources, cash management, etc.

 Analytical activities: Product costing, manufacturing costing, investment

analyses, sales forecasting, logistics analysis, inventory optimization, etc.

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Figure 21-4 ERP System Schematic

Global Database

Reporting & Analytic Tools

Human Resources Modules

Inventory & Manufacturing

Modules

Sales & Distribution

Modules

Financial & Accounting

Modules

Bolt-ons

Other Digitalized Business ProcessesS

y s te

I n

te rf

a c e

S y s te

I n

te rf

a c e

ERP System

While ERP system functional modules are pre-specified, they are configurable

- with the extent of configurability depending on whether the ERP system is a Tier 1,

Tier 2 or Tier 3 product. In other words, an accounting module does not necessarily

provide set-in-stone cost-accounting business processes. Instead, some (perhaps

considerable) flexibility is provided (though hard constraints inevitably exist) in how

the module can be configured to an installing organization’s existing cost-accounting

policies, procedures and practices.

If an organization’s pre-ERP work policies, procedures and practices do not

reflect industry/functional best practices and if there is nothing exceptional about the

organization’s strategies or operations, it generally is advantageous for the

organization’s leadership team to require that most of its work units adopt the

digitalized business processes made available through the ERP system. But, if

specific work units make strong business cases for maintaining some, or most, of

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their currently-executing business processes, then ERP system interfaces can be used

to interconnect the ERP system to both bolt-ons and external (to the ERP system)

digitalized business processes. It is important to recognize, however, that the

extensive use of ERP system interfaces has a disadvantage in addition to the cost

and time spent building bolt-ons, modifying the to-be-connected digitalized business

processes, and configuring the system interfaces: future migrations to new versions

of an installed ERP system almost always require that modifications be made to

system interfaces, bolt-ons and connected digitalized business processes.

Table 21-3 summarizes the key properties of an ERP system. First, ERP

systems are multi-functional in scope. An organization installing all of an ERP

system’s functional modules can have most of its business processes handled through

the ERP system.

Table 21-3 Key Properties of an ERP System

Property Explanation

Multi-functional ERP systems provide a range of functional capabilities, with an adopting organization deciding which of an ERP system’s functional modules are to be installed.

Modular

Modularity means that it is easy to add or delete functional modules when installing or reconfiguring an ERP system. Additionally, the number & configuration of installed functional modules can vary across an organization’s work units.

Industry Verticals

ERP vendors offer different versions of their systems, with each version applying what are considered to be best practice business processes for a specific industry.

Extensible Tools are available to build system interfaces & bolt-ons, thereby enabling an adopted ERP system to handle work policies, procedures & practices not reflected within provided modules.

Integrated All functional modules operate out of a global database. Data captured or updated in one module is stored in this global database & is immediately available for use by other modules.

Second, ERP systems are modular in design. When installing an ERP system,

organizations have considerable leeway in selecting which modules to install,

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selecting when a selected module will be installed (i.e., a limited set of modules can

be initially installed, with other modules being installed later), and in configuring the

modules being installed. Importantly, this flexibility extends to decisions about if and

how selected modules will be installed across various work units. In fact, many

organizations choose to operate multiple ERP configurations, referred to as ERP

system instances, as a means of reducing initial implementation and political

challenges. Differences can exist across instances regarding data definitions,

database scope, which functional modules are installed, and how a functional module

is configured for differing work units. Much is gained, however, by operating an ERP

system as a single instance. These advantages will be covered in more depth later

in this chapter in describing a project undertaken by Celanese to reduce its number

of ERP system instances.

Third, the digitized business processes embedded within an ERP system’s

software modules are designed and built to reflect industry best practices. Generally,

ERP systems are designed as industry verticals. That is, vendors make different

versions of their ERP system to reflect the distinctive natures of the business

processes used within targeted industries. In designing an industry-specific ERP

system, the ERP vendors partner with industry leaders (typically, organizations that

already use the vendor’s ERP system). Note, here, that best practices are not the

same as industry-leading practices. Organizations that consider their business

processes to be world-class are understandably reluctant to share these world-class

business processes with others. This does not mean, however, that organizations

building world-class digitized business processes do not use ERP systems - they are

just very selective in deciding which modules to install. Walmart, for example, is

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well-recognized as having a number of world-class digitized business processes

targeted at logistics, inventory-handling, merchandizing and retail store operations.

While Walmart does not use an ERP system for these primary value chain activities,

Walmart does use an ERP system for many of its support value chain activities (e.g.,

accounting, finance and human resources).

Fourth, ERP systems are extensible. As described earlier, needed business

process functionality not designed into an ERP system can be connected to the ERP

system through system interfaces and bolt-ons. While such extensions are

accompanied by complexities and additional costs, they significantly increase the

attractiveness and feasibility of the ERP approach.

Finally, implementing an ERP system as a single instance does produce a global

business platform whose digitized business processes are, to a large extent,

standardized and integrated. Here, integration is achieved by storing data captured

by one functional module in the global database, where these data are immediately

available for use by other functional modules, by bolt-ons and by connected (via a

system interface) digitalized business processes. However, when multiple instances

of an ERP system have been implemented, business process standardization and

integration can be significantly impaired - with the extent of impairment largely

determined by differences in how data are defined, processed and stored across these

instances.

It is precisely the properties of an ERP system (listed in Table 21-3) that

produce its advantages (listed in the first column of Table 21-4). Most of these

advantages have been covered earlier in this part of our book when describing the

benefits of global business platforms. However, the last advantage listed in the first

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column of Table 21-4 is new: over time, an organization’s overall digitalization costs

are likely to be lowered. We will explain why this is the case later in this chapter

when discussing Celanese’s project to reduce its number of ERP system instances.

Table 21-4

Advantages and Disadvantages of an ERP System

Advantages Disadvantages

Global Database High Acquisition & High Installation Costs

Standardized & Integrated Business Processes

Lengthy Implementation Period & the Potential for Work-Related Disruptions

More Timely & More Comprehensive Data Challenges in Fully Realizing the Expected

Benefits from Implementing an ERP System

More Effective & More Efficient Business Processes

Potential Negative Effects from Using Industry-Best-Practice Business

Processes

Quicker & Less Expensive Implementations of New Digitalized

Business Processes Dependence on the ERP System Vendor

Lower Overall

Digitalization Costs

Frequent, Costly & Disruptive Releases of New Versions of an Installed ERP System

Adopting an ERP system also has a number of potential disadvantages (see

the second column of Table 21-4). A first and rather obvious disadvantage of an ERP

system is the high cost of implementation – costs associated with acquiring the

software, with engaging consultants holding expertise in managing ERP system

implementations, with digital platform upgrades needed to operate the ERP system,

with the time spent by employees engaged in ERP system acquisition and

implementation activities (listed in Table 21-5), and with the organizational

disruptions that inevitably occur.

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Table 21-5 Examples of ERP System Implementation Activities

Decide on the business processes to be handled via the installed ERP system.

Select an ERP system vendor & an ERP implementation consultant.

Analyze work unit business process requirements & determine the ERP system modules to adopt & the extent each work unit will be expected to use the implemented modules.

Specify the ERP configuration or configurations (modules & instances).

Put together the implementation project team, lay out the project plan, & finalize the project schedule & budget.

Upgrade all affected digital platforms.

Design & populate the global database.

Configure the ERP instances.

Build system interfaces & bolt-ons.

Modify managers’ authorities & responsibilities & employees’ work roles, as well as affected planning, control & reward systems, to align with new configuration of business processes.

Train affected employees to ensure that each is able to able to effectively carry out their work activities through the new configuration of business processes.

Install the ERP instances.

A second disadvantage reflects the reality that the implementation activities

shown in Table 21-5 can each take a good deal of time. Importantly, the political

maneuvering involved with ERP implementations (i.e., reaching consensus on data

definitions and business process standards; resolving managers’ desires that their

work units be allowed to opt-out of the entire ERP implementation or to opt-out of

selected ERP system modules; reaching consensus on the number of instances to run

and the configuration of each instance; reaching acceptance regarding new authority

and responsibility structures and regarding changes to planning, control, and reward

systems; etc.) is likely to monopolize the work lives of many of an organization’s

most-valued employees.

Third, the benefits expected to be derived from implementing an ERP system

are based on many assumptions. Fundamental questions that regularly arise are:84

84 For coverage of these and related questions, refer to Part 2 of this book.

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 How realistic and how reasonable are the implementation’s benefits and costs projections?

 How realistic and reasonable is the implementation schedule?

 Will the ERP system’s functionalities work as promised by the vendor?

 Will affected employees understand their new work roles and how to carry out their work activities with the new configuration of business processes?

 Will affected employees use the ERP system as planned or will they instead

fall back on their pre-implementation work procedures by devising work- arounds?

 How long will the current configurations of implemented ERP system interfaces be compatible with each work unit’s internal and external environments?

The above questions need to be regularly and persistently raised and resolved

throughout an ERP implementation project – resulting in as-needed adjustments to

project activities, schedules, benefits projections and costs projections, as well as to

the instance and module specifications.

Fourth, if most of the organizations in an industry adopt the same ERP system

and, consequently, execute a similar configuration of digitalized business processes,

then an organization’s ERP-provisioned business processes are unlikely to serve as

the basis for gaining a competitive advantage. The rationale should be clear - if all

competitors execute the same business processes, then competitive parity is likely

to result. What is the take-away here? A seemingly straightforward rule to follow

would be to identify those business processes likely to serve as the basis of future

competitive advantages and fully/partially exclude these business processes from the

ERP system implementation. Then, use system interfaces to connect these

strategically-critical business processes with the implemented ERP system. But, like

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many things, this rule is not as straightforward as it might seem – raising questions

such as:85

 “How do we identify our strategic business processes?”

 “Will today’s strategic business processes be tomorrow’s strategic business

processes?”

 “Don’t most strategic business processes involve subprocesses which are not strategic? Which, if any, of these subprocesses should be included within the implemented ERP system?”

Fifth, installing an ERP system invariably results in an organization becoming

dependent on the ERP system vendor. What happens if the vendor goes out of

business or is acquired by another firm? Will the ERP vendor continue to evolve

future versions of the ERP system? If not, how long will it be before a move must be

made to a different ERP system? How long will the ERP vendor continue to support

the currently-installed version of the ERP system? Once vendor support ceases, the

installed global business platform – and, hence, the organization itself – is at risk.

Finally, the promise of new ERP system version releases has positive and

negative aspects. On the positive side, each new release promises functionality

enhancements that can be applied to improve executing business models and in

formulating new digital strategies. On the negative side, each new release involves

another ERP system implementation project (usually incremental but sometimes

substantial) that requires managerial attention and new funding and that will disrupt

(to varying extents) work activities. Whenever a new ERP system version is released,

a number of decisions must be addressed, such as:

 “Should we adopt the new release now?”

85 For coverage of these and related questions, refer to Part 1 of this book.

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 “If so, all of it or just part of it?”

 “If so, do we adopt for all installed instances or for just some of these instances?”

 “If so, when should we schedule the implementations to minimize the impact

of work disruptions?”

 “If not, how long can we wait until we have to adopt it?”

Celanese’s OneSAP Project86,87

Most large organizations adopted their first ERP systems during the mid-1990s

through mid-2000s time period. Very few of these initial implementations involved

organization-wide, single-instance implementations. While progress was made in

standardizing and integrating these organizations’ digitalized business processes, the

business platforms fashioned were not global. Instead, these business platforms

might best be thought of as loosely-connected islands, where each island served as

a business platform for one or more work units. While a mélange of island-like

business platforms can improve business process effectiveness and efficiency for the

affected work units, the organization as a whole receives little benefit and

experiences higher digitalization costs (among other things: licensing, implementing,

operating and evolving multiple ERP system instances).

Celanese’s ERP journey, begun in the 1990s, followed just such a path.

Celanese is a large, complex multinational organization operating five business units

in different segments of the chemical industry. Headquartered in Dallas, Texas,

86 S. Berinato, “A Day in the Life of Celanese’s Big ERP Rollup,” CIO Magazine, January

15, 2003 (http://www.cio.com/article/2440272/enterprise-resource-planning/a-day-in-the-

life-of-celanese-s-big-erp-rollup.html#social). 87 U. Schultze, “Finding the Process Edge: ITIL at Celanese,” Journal of Information

Technology Teaching Cases, Vol. 1, 2011, pp. 22-39.

http://www.cio.com/article/2440272/enterprise-resource-planning/a-day-in-the-life-of-celanese-s-big-erp-rollup.html#social

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Celanese operates across the globe (primarily North America, Europe and Asia) with

a majority of sales generated outside of North America. Celanese’s management

culture favors decentralized decision making, with its business units essentially

operating as independent businesses.

It should not come as a surprise, given a culture favoring decentralized

decision making, that Celanese’s business units would implement their own ERP

systems. The situation was complicated further in that the business units had used

acquisitions as a major growth strategy, and many of the acquired firms had retained

their own ERP systems. By 2000, Celanese was operating thirteen distinct ERP

systems. The good news was that the thirteen ERP systems were all from a single

vendor, SAP. Most chemical firms had selected SAP as their ERP system vendor,

easing the technical work involved in interconnecting suppliers’, producers’, and

consumers’ digitalized business processes. The bad news was that the thirteen ERP

systems were configured differently and represented differing ERP system releases

(from version 3.1 to version 4.6).

In mid-summer of 2001, Celanese started an initiative, named OneSAP, aimed

at operating their ERP system as a single instance, i.e., a stretch goal of having all

work units operate out of a single global business platform. If achieved, how would

this benefit Celanese? One objective was to significantly reduce Celanese’s overall

digitalization costs. Each installed ERP system had its own licensing fees and its own

technical support staff. Operating a single instance ERP system would result in a

single set of licensing fees and a much smaller technical support staff. Other key

objectives were focused on strategic, rather than cost-related, benefits. For example,

with all work units using a truly global database, many operational activities (e.g.,

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financial consolidations, procurement transactions, cross-selling, etc.) and most

managerial activities could be handled more effectively and more efficiently.

Importantly, it was believed that all of the costs associated with the OneSAP project

would be recovered within the two years following installation of the single-instance

ERP system through the savings in digitalization costs.

The OneSAP project did make substantial progress in moving Celanese toward

a single-instance ERP system. While Celanese’s leadership team eventually

exempted three instances from the OneSAP project, the single-instance ERP system

implementation accounted for roughly 90% of Celanese’s digitalized business

processes. And, by 2005, follow-up projects had produced the sought single-instance

ERP system implementation. Among other realized business benefits, Celanese was

achieving a three-day global close in its transaction systems, a two-day global

financial consolidation, and had reduced its overall digitalization costs by 30 to 40

percent.

Alternatives to ERP Systems

Implementing an ERP system is not the only way organizations today assemble

global business platforms. For example, Walmart (business platforms for business

logistics, retail store and distribution center operations, and inventory replenishment)

and Dell (a direct-to-customer, build-to-order digitized sales platform extending to

supplier-partners and to logistics-partners) are industry leaders who have been very

selective (in terms of installed modules) adopters of ERP systems precisely because

of their use of innovative, industry-leading business practices.

Two tactics for implementing global business platforms without going the full-

blown ERP system route exist: (1) building much of the global business platforms

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from scratch, and (2) assembling their global business platforms by interconnecting

best-of-breed business platforms built and sold (or licensed) by software vendors.

Both of these tactics require that an organization’s technology professionals are

highly-skilled and its managers are digitally-savvy. These two tactics are not for the

faint of heart!

The build-your-own tactic is applied by organizations basing their

competitive strategies on industry-leading, digitally-enabled business practices (e.g.,

Walmart, Dell, FedEx, UPS, etc.). Here, global business platforms are fashioned by

devising never-before-implemented digitalized business processes and then

interconnecting these business processes to one another and to a global database

through middleware solutions.

The best-of-breed tactic is applied by organization leadership teams not

satisfied with the industry best practices built into ERP systems. Organizations

following this tactic acquire business platforms (e.g., manufacturing, order

processing and fulfillment, supply chain management, energy accounting, human

resources, etc.) whose advanced or specialized functionality is crucial to the

organizations’ competitive strategies, and then use middleware to interconnect the

acquired platforms to one another and to an organizations’ other digital solutions.

These two tactics are not necessarily substitutes for implementing an ERP

system. Increasingly, organizations are finding it advantageous to fashion a global

business platform by interconnecting (via middleware) select modules from an ERP

system, home-grown business platforms and/or acquired best-of-breed business

platforms. Both ERP system vendors and business platform software vendors have

made it increasingly straightforward to interconnect such collections of global

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business platforms by improving the functionality and ease-of-use of pre-built system

interfaces as well as the tools used to configure these system interfaces.

A Recap and Look Ahead

Today’s sophisticated ERP systems, along with the availability of more

specialized global business platforms, provide very pliable pathways for just about

any organization striving to implement global business platforms. But, all business

platforms are enabled and supported through the technologies and services provided

by digital platforms. We discuss digital platforms in the next chapter.

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Chapter 22. Digital Platforms

Standalone digitalized business processes, local business platforms and global

business platforms are enabled and supported by the digital technologies and

technology services provided through digital platforms – some of which operate as

local platforms and others as global platforms; and, some of which are built in-house,

and others are externally sourced (either as internally-operated platforms or digitally-

accessed platforms). Figure 22-1 depicts such a mélange of business and digital

platforms for a hypothetical organization.

Figure 22-1 A Collection of Business Platforms and Digital Platforms

Standalone Digitalized Business Process

Local Business Platform

Local Digital Platform

Global Business Platform

Global Digital Platform

Externally-Sourced Business Platforms and Digital Platforms

Organization

The relative sizes of the ovals depicted in Figure 22-1 are reflective of a typical

organization’s investment in digital assets. As can be seen, a majority of these

investments involve digital platforms – even though the benefits that organizations

gain through digitalization are largely derived from business platforms.

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In order to get a sense of why organizations invest more in digital platforms

than in business platforms, consider a proposed project by a retail chain to provide

each retail store manager with a daily report comparing her store’s sales (products,

volumes, margins) against those of comparable stores across the chain. Proponents

of this digitalization project would most likely take for granted the availability of

numerous digital technologies and technology services (e.g., point-of-sales data

capture devices, data storage devices, database services, networking devices and

services, communications devices and services, technology training services, help-

desk services, etc.). If these enabling technologies and services were not already

installed, then these digital assets would need to be included as part of the project

proposal. As a consequence, the proposal’s projected costs would increase

dramatically, possibly making the digitalization project cost-prohibitive.

Today, the implications of absent, enabling digital assets can often be

affordably addressed. When a valuable idea surfaces for which enabling digital assets

are absent, contractual relationships can be established with service providers able

to provide these digital assets at very appealing price points. Figure 22-2 depicts

just such a situation. Here, a digitalized market research capability has been

configured, relatively quickly and relatively inexpensively, by acquiring needed

digitalized business services (providing access to market research data and to

modeling/analytic tools) and needed technology services (providing access to servers

and to a virtual collaboration space) from external service providers. Later in this

chapter, we will discuss how, today, cloud-based services make available a huge

variety of digital assets, technology services and business services.

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Figure 22-2 Accessing Cloud-Based Services

Global Market Research Platform

• Acquire New Customers

• Accelerate Sales Growth

• Increase Market Share

Local Sales Forecasting

Business Platform

Local Sales Prospect Analysis System

Global Digital Platforms

Data

Modeling and

Analytic Tools

Servers Cloud- Based

Services

Collaboration Space

Technology Services

B u

s in

e s s S

e rv

ic e

This chapter examines digital platforms, addressing what digital platforms are

and how they are evolving. To accomplish this, the following topics are covered:

 The Nature of Digital Platforms

 The Benefits of Standardized Digital Platforms

 Standardizing the Desktop Environment at ABN Amro

 Cloud-Based Services

The Nature of Digital Platforms

Digital platforms apply configurations of digital assets to deliver technology

services that, in turn, are applied in building, operating, maintaining and evolving

digital platforms, business platforms and standalone digitalized business processes.

The technology services delivered through digital platforms vary markedly in their

scope and complexity, and can be largely comprised of digitized solutions (e.g.,

messaging services), humans (e.g., strategic digital consulting services), or, most

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commonly, digitalized solutions (mixes of digitized solutions and humans, such as

help desk services).

Organizations use two broad categories of digital platforms: internal digital

platforms acquired/built, operated, managed and owned by the organization; and,

external digital platforms built, operated, managed and owned by other organizations

(most commonly, a technology service provider). The most familiar of these external

digital platforms is the Internet. A vast number of organizations, both for-profit and

not-for-profit, cooperate in providing the vast resources and capabilities of the

Internet. All organizations, by interconnecting their own digital platforms and

business platforms to the Internet, are able to greatly expand the reach (across

organization and geographic boundaries) and range (across types of digitized

content) of their digitization/digitalization capabilities.

Five core types of digital assets are applied in configuring digital platforms (see

Table 22-1 for definitions): hardware assets, design assets, data assets, human

assets and social assets. These digital assets serve as the constitutive elements

of the technology services provisioned through digital platforms.

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Table 22-1 Core Types of Digital Assets

Asset Definition Examples

Hardware Electronic and electro- mechanical devices & associated equipment

Laptops, servers, mobile devices, cabling, routers, devices, printers, etc.

Design Software, architectures, policies, standards procedures, etc.

Computer programs, system interfaces, database management system, operating system, data architecture, server architecture, Internet usage policies, etc.

Data Attributes of objects and events

Device serial number, network login password, service request time stamp, Internet Protocol (IP) address, etc.

Human Managerial, staff & operations employees (skills, knowledge & experience)

Programmer, systems analyst, database designer, technology strategist, project manager, network administrator, etc.

Social

Relationships (familiarity, interaction, trust, shared understanding, etc.) between humans

Relationships between: digital strategists & the members of an organization’s leadership team, systems analysts & work unit managers, work unit managers & an external service provider’s managers, etc.

Returning to the global market research platform example shown earlier as

Figure 22-2, the digitalized capabilities being provisioned include:

 A global market research capability applied by market research analysts and

sales strategists across the organization’s work units to better understand sales trends, sales potential and sales performance.

 A local sales forecasting capability applied by sales managers to predict product/market supply and demand.

 A local sales prospect solution applied by sales teams to prioritize their

targeting of sales leads.

These digitalized capabilities are enabled through numerous digital assets, including:

 Storage devices (hardware): Cost-efficient, responsive data storage repositories.

 Database management systems (design): Systems software enabling the secure and timely organizing, archiving, and accessing of stored data.

 IP addresses (data): Every device connected to the Internet is assigned a unique number known as an Internet Protocol (IP) address; IP addresses

consist of four numbers separated by periods and look something like: 153.0.0.1. IP addresses are then used in transmitting messages to and

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from market researchers by indicating the specific devices to which messages are sent.

 Database analyst (human): An expert in organizing data within a database such that digitized data can be electronically stored and accessed efficiently

and flexibly. Here, a database designer organizes the collection of digitized data to be used in market research analyses.

 Relationships between the database analyst and market researchers (social):

Close working relationships between the database analyst (whom understands the structure of the data being maintained in the market

research database) and market researchers (whom will be accessing these data) enables the timely and effective completion of market research projects.

The Benefits of Standardized Digital Platforms

As indicated in Figure 22-1, digital platforms can be implemented as global

platforms and as local platforms. A global digital platform is a standardized digital

platform used across many, if not most, of an organization’s work units. A local

digital platform is a tailored digital platform used by a few work units (often, a single

work unit).

Because of the benefits to be derived from standardization (see Table 22-2),

digital platforms are increasingly being configured as global platforms. The first

column of Table 22-2 lists four drivers of these benefits. The first two drivers accrue

from the role that standardization plays in reducing the number of and variety of

digital assets deployed across an organization’s digital platforms. The latter two

drivers accrue from assuring high levels of compatibility and consistency across these

digital assets.

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Table 22-2 Digital Platform Standardization Benefits

Benefit Driver Benefit

Preferred Vendor/Provider

Relationships

• Quantity discounts • Preferential ordering and fulfillment processes • Tailored configuration services • Tailored installation and customer support services

Fewer Digital Assets

Technology trainers & technology support staffs have fewer digital assets for which training/support processes/materials need to be developed.

Ease of Implementing Global/Local

Business Platforms

Global & local business platform functionalities enabled by global digital platforms will interconnect & execute more smoothly & more efficiently.

Ease of Employee Movements

Employees experience a consistent digitalized work environment when moving (temporary assignments, transfers, promotions, etc.) across work units making use of global digital platforms.

By reducing the number and variety of deployed digital assets, the number of

vendors from whom these assets are acquired is reduced. Typically, this results in

preferred vendor relationships being established and nurtured. Early in the

development of such relationships, benefits such as quantity discounts and

preferential ordering and fulfillment processes can be realized. As these relationships

deepen, vendor-partners become increasingly willing to work with customers in

developing future versions of commodity products/services and in investing in

customer-specific products/services, as well as in customer-specific installation and

support processes.

By reducing the variety of technology assets being acquired and deployed, the

resources spent on delivering training and support services can be significantly

reduced. Why? Because there are fewer technology products/services for training

and support staffs to learn about and to be accounted for in training and support

services.

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By assuring component compatibility and consistency across an organization’s

global digital platforms, the complexities associated with implementing global

business platforms are significantly reduced. As a result, the interconnection of and

execution of the business processes being hosted on business platforms should occur

more smoothly and more efficiently.

Finally, establishing compatibility and consistency across a global digital

platform results in employees experiencing a consistent digitalized work environment

when moving from one work unit to another (e.g., as a result of temporary work

assignments, of work unit transfers, of promotions, etc.). As a consequence,

transferred employees are likely to experience little, if any, drops in productivity while

adjusting to their new work contexts.

Standardizing the Desktop Environment at ABN Amro88

ABN Amro serves retail, private and commercial banking customers (in its

home country of the Netherlands and across the globe) with a comprehensive range

of financial products and services. In 2002, the company’s desktop environment (a

collection of digital platforms) was comprised of a broad variety of digital assets.

Managing this complex desktop environment proved costly and difficult, and these

complexities added considerable time and expense when the company enhanced

installed business platforms or implemented new business platforms.

In order to resolve this situation, a two-year desktop environment

standardization project was carried out, affecting 10,000 employees at one of the

88 This section is adapted from materials in Chapter 5 of: R. van Wessel, Realizing

Business Benefits from Company IT Standardization, Doctoral Dissertation, Tilburg University,

2008.

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company’s largest business units. The project’s two main objectives were to reduce

the total cost of ownership (acquisition, installation costs, maintenance and

support costs) of the desktop environment and to increase the company’s flexibility

by enabling changes in business models and/or business platforms to occur more

quickly, less expensively and less painfully.

Desktop environment standards have a broad reach and range. Here, the

reach of these standards was the entire business unit, as well as a few small work

groups in other parts of the company that worked with or through the business unit’s

installed business platforms; and, the range of these standards included all of the

digital technologies, technology services and business services (from desktop

productivity tools to the enablement of business platforms handling complex financial

transactions) accessed by employees through desktop devices.

The technology products specified in the new set of technology standards were

determined jointly by executives representing the business unit and the

organization’s corporate technology group. Most important, it was the business unit

leadership team that set cost-saving targets and defined the functional requirements

to be met by the new desktop environment.

The standardized desktop environment that was installed involved server-

based computing with thin-clients. The technology platform consisted of three tiers

of components:

 Thin-clients hosting a minimal set of local applications (the tier actually

touched by employees).

 Web servers and terminal servers hosting global applications.

 Data servers hosting the global database (individual and work group data

were stored on terminal servers and replicated daily to data servers).

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Thin-clients are terminal devices able to handle graphical interfaces and basic data

processing tasks. Web servers, terminal servers and data servers are small,

powerful, specialized computer systems that are easily configured into sophisticated,

but adaptable, networks. A primary benefit of this architecture is that it minimizes

dependencies across the three tiers. That is, changing a device located on one tier

introduces few, if any, changes to devices on the other two tiers.

The new desktop environment consisted of 10,000 thin-client workstations,

1,000 laptops, 1,000 terminal servers, a couple of web servers and 300 back-end

data servers. It was expected that laptop use would decline fairly quickly as

employees grew comfortable with the new desktop environment and with a new

work-at-home networking capability implemented in parallel with the new desktop

environment.

Prior to the standardization project, business unit employees were executing

over 6,000 different applications from their desktop devices. After a rationalization

process that eliminated redundant applications and stressed the use of commercially-

available, off-the-shelf software products, the number of different applications being

executed on the new desktop environment dropped to 265. In theory, this final list

of 265 standard applications could have been even smaller. However, internal

company politics resulted in some allegedly vital applications being added to the list

of available applications. These exceptions, however, were only executed locally on

a few desktop devices and were not supported by a newly-created technology support

work group.

In principle, once the new desktop environment had been installed, work units

were restricted to the list of approved hardware and software products. In practice,

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an exception process existed that provided a sanctioned pathway for violating the

desktop standards. Anyone requesting nonstandard hardware or software products

was first required to try out an approved product. Then, after demonstrating

limitations with approved products and developing a sound business rationale (e.g.,

explaining the added value to be derived from the exception, the number of affected

employees, total extra costs, willingness to cover all or part of these costs, etc.), an

exception allowed. When an exception request was granted, the requested product

was either added, after a vetting process, to the list of standard products (the

preferred option) or was maintained as a temporary exception (to be reversed at any

time if and when it became advantageous or necessary to do so).

Table 22-3 summarizes the outcomes from ABN Amro’s desktop environment

standardization project. The payback period for the €32 million project was 1.45

years, and the project yielded a positive cash flow of €56 million in the fourth year

after the investment had been made. Just as important, if not more so, were the

reactions of business unit employees. Initially, their collective attitude was not

positive as they feared the standardized desktop environment would result in a loss

of personal flexibility. However, after having adjusted to the new work environment,

more than half considered the change to be an improvement, 30 percent were

indifferent, and only about 10 percent were less satisfied than before – with a

majority of these dissatisfied employees being housed in the corporate technology

group!

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Table 22-3 Results from ABN Amro’s Desktop Environment Standardization Project

Cost-Related Outcomes Flexibility-Related Outcomes

• The per desktop yearly costs dropped from €4,600 to €2,392 (48% of pre- project cost).

• As all desktops had the same configuration, there was no need to reconfigure desktop configurations with staff movements.

• The number of corporate technology group employees dropped from 383 FTE to 130 FTE (34% of pre-project level).

• Costs to enhance/develop new business platforms dropped as these new platforms could be designed for the standardized desktop environment, requiring less technical expertise.

• Employees could move across the business unit without productivity loss. As a result, employees could work anywhere, enabling business expertise to be spread across the business unit.

• The desktop platform – because of its adaptability, scalability & robustness – became far less a constraint on initiatives to develop new business platforms.

• New projects demonstrated completion times up to 75% less than pre-project completion times.

Cloud-Based Services

As mentioned earlier in this chapter, organizations are increasingly acquiring

the functionalities hosted on business platforms and digital platforms as cloud-

based services or, more precisely, as proprietary services delivered to consumers

either via the Internet or via Internet-like technologies. Today’s cloud-based services

can trace their roots to two earlier technologies:

 1960s-era mainframe-based utility computing, also referred to as time- sharing services, that offered customers access, via telecommunications, to

digitalized services executed on high-powered computer systems.

 1990s-era application service providers (ASPs) that offered consumers

access, via the Internet, to a variety of digitalized services.

The advances that have occurred with digital technologies differentiate today’s cloud-

based services from these earlier technologies: heightened ease-of-use, ease-of-

deployment, transmission speed, transmission bandwidth, service availability,

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service reliability, service interoperability, service security, etc. Just as important,

these cloud-bases services are very affordable.

Just about any type of digitized/digitalized service is available from the cloud

today. As illustrated in Figure 22-3, one can access (moving upwards from the

bottom of the figure) hardware assets, technology services and business services

(including business platforms). Note, in particular, two things regarding Figure 22-

3. First, cloud-based business services are available for, essentially, any of an

organization’s work units. Second, it is not uncommon for organizations to contract

with multiple technology service providers to create a comprehensive cloud-based

solution. For example, a financial services company like ABN Amro could use cloud-

based services to assemble much, if not all, of their standardized desktop

environment (indicated in Figure 22-3 by the services in green boxes).

Figure 22-3 Examples of Cloud-Based Services

Hardware Assets

Servers Network Devices Data Storage

Devices

Technology Services

Connectivity Services

Messaging

Storage Management

Virtual Desktop

Disaster Recovery

Content Management

Business Services & Business Platforms

Software Development

Platform

Project Management

Platform

Accounting Services

Self-Service Human Resources

Platform

CRM Platform ERP Platform Logistics

ServicesPayroll Services

Desktop Productivity

Tools

Market Research Data

Credit Score Checking

Shipment Tracking

Currency Trading Platform

Collaboration Platform

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Three deployment options exist by which organizations gain access to cloud-

based services: private clouds, community clouds and public clouds. Private clouds

are designed, developed and operated by (on-premises) or for (off-premises via a

third-party) an organization, with access to the cloud-based services confined (via

authentication processes) to authenticated members of the organization and

authenticated members of select-other organizations (strategic partners, consumers,

suppliers, etc.). Private clouds offer the greatest control over a cloud-based service,

including the abilities to customize the service and to apply especially-stringent

security protocols. Community clouds, essentially, are private clouds managed and

accessed by a consortium of organizations. Public clouds, not surprisingly, are

made available to anyone. A public-cloud provider takes on the responsibilities of

building, operating, maintaining, evolving, and managing the services being offered,

with consumers of these services only charged for the services actually used.

However, this convenience does come at a cost. Public cloud-based services tend to

be offered as commodities that only accommodate the most common sets of

consumer requirements (i.e., configuration options tend to be limited), and

consumers are reliant on the public-cloud provider operating, securing and enhancing

the cloud-based services.

Table 22-4 lists the advantages to be gained from using cloud-based services,

and Table 22-5 lists the disadvantages. All of these advantages and disadvantages

are applicable to consumers of a public cloud-based service, and most apply to

consumers of a community cloud-based service. For organizations using a private

cloud-based service, some subset of these advantages and disadvantages will apply,

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depending on the situation. Any organization contemplating deploying a private cloud

should possess strong digitization capabilities and strong digitalization capabilities.

Table 22-4 Advantages of Cloud-Based Services

Advantage Description

Minimal Up-Front

Investment

• Acquire a service rather than an asset (few capital/operating costs). • Cost to initialize a service ranges from zero (no customization) to

moderate (extensive customization).

Consumption- Based Pricing

• Pay for services actually used. • Pay to gain guaranteed access to higher service levels.

Ubiquitous Access

• Access services from any physical location at any time.

Guaranteed Quality of

Service

• Established via negotiated service level agreement (SLA). • Tiered service-level pricing.

Minimal Technology

Management

• Cloud management (strategy, planning, control, operations, maintenance, enhancement, etc.) transparent to the consumer.

Strategic & Operational Flexibility

• Adaptable to the needs of a broad range of consumers. • Scalable across service volumes & locations. • Relatively low costs borne by consumers when switching cloud

vendors.

Table 22-5 Disadvantages of Cloud-Based Services

Disadvantage Description

Validity of Services Delivered

• Dependent on providers’ capabilities & oversight. • Providers’ use of other third-party providers.

Security & Privacy • Dependent on providers’ capabilities & oversight. • Providers’ use of other third-party providers. • Applicable laws depend on vendors’ geographic locations.

Availability, Fault- Tolerance &

Disaster Recovery

• Dependent on providers’ capabilities & oversight. • Providers’ use of third-party providers. • Providers’ escalated commitments to other consumers.

Data Transfer & Data Lock-In

• Bottlenecks (speed, volume) in transmitting data. • Lack of system interfaces for accessing data from sophisticated

consumer platforms. • Lack of portability in moving a consumer’s data from one provider

to another provider.

Transaction Auditability

• Inability to audit transactions. • Difficulties in auditing transactions.

Provider Instability • Financial insolvency. • Inability to maintain competitiveness. • Inability to hire & retain highly-capable employees.

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The pervasive availability of cloud-based services today has significantly

reduced the complexities and costs of deploying both global and local platforms.

However, this ease of deploying business platforms and digital platforms that are

heavily dependent on cloud-based services does have a downside – a susceptibility

of becoming locked into a platform, for technical and/or contractual reasons. Then,

when competitive realities demand the partial dismantling of a global platform or the

folding of a local platform into a global platform, significant challenges can surface

that increase the time and cost, sometimes prohibitively so, of moving forward with

the desired platform change.

A Recap and Look Ahead

Digital platforms form the foundation on which business platforms are built,

operated, managed and evolved. As is the case with business platforms, digital

platforms can be implemented as global platforms and as local platforms. Although

most organizations today are moving toward provisioning an increasing portion of

their technology services through global digital platforms, these same organizations

are likely to have installed elaborate collections of global and local digital platforms

– attributed to organizations’ unique digitalization histories and the reality that

organizations’ work units confront differentiated, ever-evolving environments. In the

next chapter, we discuss the managerial challenges that arise as organizations’

leadership teams strive to maintain an optimal global/local balance with their digital

platforms and their business platforms.

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Chapter 23. Platform Management Challenges

In today’s highly competitive market ecosystems, one of the few digitally-

related realities that can be stated with confidence is that organizations’ abilities to

enhance or sustain their competitive positions are largely dependent on the extent

to which installed platforms:

 Operate efficiently and effectively.

 Adapt – timely and cost-effectively – as an organization’s digital strategies evolve.

 Facilitate, rather than obstruct, the taking of innovative competitive moves and timely, well-targeted competitive responses.

As a consequence, leadership teams and digital strategists within organizations

recognized as digitalization exemplars focus increasing amounts of attention on:

overseeing regular assessments of the continued viability of their organizations’

installed platforms; identifying if, when and where platform enhancements and/or

renewals are needed; and, viewing the ongoing funding of platform

enhancement/renewal initiatives as a necessary tactic in ensuring their organizations’

competitive success.

As illustrated in Figure 23-1, the ideas and the funding for enhancing and/or

renewing organizations’ business platforms and digital platforms can reflect business

and/or technology objectives, each of which might be global or local in nature. In

the absence of careful and sustained planning, investments directed toward sought

business (technology) objectives might undermine sought technology (business)

strategies, and investments directed toward sought global (local) objectives may

undermine local (global) objectives. As a consequence, an organization’s installed

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and to-be-installed platforms need to be built, operated, managed and evolved in a

synergistic, rather than a one-off, manner.

Figure 23-1 Sources of Platform Enhancement/Renewal Initiatives

Business Platforms

Digital Platforms

Corporate Leadership Teams & Digital Strategists

Work Unit Leadership Teams & Digital Strategists

Corporate Technology Leadership Teams &

Strategists

Work Unit Technology Leadership Teams &

Strategists

GlobalGlobal

Local Local

These varied sources of platform enhancement/renewal initiatives are the root

causes of many, if not most, of the serious challenges that arise in leadership teams’

efforts to maintain an optimal global/local platform balance. We cover these

challenges in this chapter through the following two topics:

 Platform Challenges at Charles Schwab Corporation

 Effective Platform Management

Platform Challenges at Charles Schwab Corporation89

Charles Schwab Corporation, the discount brokerage firm, is widely recognized

as an organization that has repeatedly introduced digital innovations as a primary

89 This section is based on material adapted from: D. Shpilberg, S. Berez, R. Puryear

and S. Shah, "Avoiding the Alignment Trap in Information Technology," Sloan Management

Review, Fall 2007, pp. 51-58.

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means for driving a business model based largely on offering customers superior

services and low prices. As an example, consider Schwab’s digital innovations

targeted at customer-facing business processes:

 1989 - Customer trading via a fully-automated telephone system.

 1993 - Customer trading via the customer’s personal computer.

 1996 - Customer trading via Schwab’s website.

By 1998, Schwab had become a full-service, online broker; and, in 2003, the

company launched Charles Schwab Bank. Clearly, Schwab has figured out, over time,

how to formulate and implement a consistent stream of digital strategies in support

of this business model.

By the early 2000s, a number of competitors had introduced business models

similar to Schwab’s. Schwab’s installed platforms were (in too many instances)

preventing the company from responding to these competitors in a timely and

effective manner: business process enhancement projects had become lengthy and

expensive, and roll-outs of the customer-facing innovations being hosted on the

company’s platforms were delayed and buggy.

What had happened? Poor performing competitive actions can often be traced

to overly-complex business platforms and/or overly complex digital platforms, and

Schwab’s massive collection of interconnected platforms had grown much too messy.

Where did this messiness come from? The company’s work units were each

aggressively devising and implementing sophisticated local business platforms,

enabled largely through local digital platforms, and then interconnecting these

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platforms to other platforms both within and across work units. While creative

middleware solutions enabled this interconnectivity, these same middleware

solutions only added to the geometrically-increasing complexity of Schwab’s

assemblage of platforms. With the passage of time, it became increasingly difficult

to enhance or extend installed platforms and to introduce new platforms. Worse,

Schwab’s mélange of platforms was becoming increasingly brittle, triggering an ever-

increasing number of faults and errors.

The problem that Schwab faced in the early 2000s was not tied to inappropriate

digital strategies but instead could be traced back to not effectively managing, from

a global perspective, its collection of business platforms and digital platforms.

Effective Platform Management

Effective platform management begins with establishing meaningful, sound

policies and standards regarding business platforms and digital platforms. Table 23-

1 lists areas for which policies and standards should be developed.

Table 23-1

Common Platform Policies and Standards

Policies Standards

• Approval procedures for establishing & modifying platform policies & standards.

• Business/digital platform distinctions and global/local platform distinctions.

• Criteria to be met for implementing new local standalone digitalized business processes, new local business platforms, and new local digital platforms.

• Criteria to be met for implementing new global business/digital platforms.

• Approval procedure for enhancing or extending a local business/digital platform.

• Approval procedure for enhancing or extending a global business/digital platform.

• Hardware/software specifications for standalone digitalized business processes, local business/digital platforms, and global business/digital platforms.

• Data specifications for standalone digitalized business processes, local business/digital platforms, and global business/digital platforms.

• Middleware specification for interconnectivity solutions.

• Local/global business process specifications (operating procedures & business rules).

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Like most things in life, politics and money invariably intrude on platform

management activities. This is certainly the case with decisions taken in establishing

and then conforming to platform policies and standards such as those listed in Table

23-1. To avoid dysfunctional squabbles (ultimately leading to policy/standard

avoidance or rejection), it is advantageous to anticipate the drivers of platform-

related dissonance and to account for these drivers within the processes used in

establishing platform policies and standards.

A sample of some of the questions likely serving as dissonance drivers is

provided in Table 23-2. The overall intent of an organization’s leadership team

addressing such questions should be clear – putting in place sound and accepted

platform-related policies and standards aimed at achieving and maintaining an

optimal global/local platform balance. Establishing a sound and accepted set of

platform policies and standards is the only way of ensuring that an organization’s

stream of digital investments complement, rather than hinder (or worse, obstruct),

one another.

Table 23-2

A Sample of Platform-Related Political/Financial Questions

Political Questions Financial Questions

Who should participate in the activities aimed at establishing or modifying platform policies & standards?

When & to what extent should work unit leadership teams contribute to the funding of a global platform?

Who should be responsible for monitoring conformance to platform policies & standards?

When & to what extent should the corporate leadership team contribute to the funding of a local platform?

How should conformance to platform policies & standards be enforced?

Often, a local digitalized business process requires that enhancements be made to local/global platforms. How should such platform investments be funded?

How should requests for exceptions to platform policies & standards be handled?

Should the costs associated with building, operating, managing and evolving global platforms be reflected in work unit operating budgets? If so, when & to what extent?

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The potential for platform-related conflicts to surface increases significantly

when an organization’s work units largely operate within differing market ecosystems

(differing consumers, producers, suppliers, etc.), as these work units are unlikely to

obtain uniform benefits from installed global platforms. In order to better grasp this

issue, consider the hypothetical organization shown in Figure 23-2, where:

 Work units 1, 2 and 3 are similar regarding their use of global digital platforms.

 Work units 2 and 3 are fairly similar regarding their use of global business platforms.

 Work units 1 and 4 have invested heavily in local business platforms and local digital platforms.

 Work unit 3 has invested very little in local digital platforms.

 Work unit 4 makes little use of global platforms (business or digital).

Figure 23-2 A Not-Uncommon Platform Situation

Work Units

Global Digital Platforms

Global Business Platforms

Local Digital Platforms

Local Business Platforms

1 2 3 4

Would the management teams of these four work units feel they should

contribute equally to funding the organization’s global platforms? Would the work

unit management teams react similarly to an executive leadership edict requiring

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that all future digitalized business processes must operate from a global business

platform? The answer to both questions is most surely No. Should all the work unit

leadership teams be involved in establishing, reviewing and approving new platform

policies and standards? Of course!

A few more-nuanced examples may help to illustrate the challenges that can

arise in platform management. First, consider the decision to install a global business

platform, such as an ERP system. Because of the huge expense involved and the

disruption likely to be felt by affected work units, the capital investment required for

ERP implementation is likely to be directed and funded by the corporate leadership

team (with active involvement of the leadership teams of affected work units). Even

with full corporate-level funding, however, all work unit leadership teams will be

financially impacted as the amount of corporate-level investment funding available

for other capital investment initiatives will be significantly reduced.

Or, consider the decision by a work unit to implement an organization’s first

customer relationship management (CRM) business platform. Should this be built as

a local business platform or a prototype of a global business platform? This is a very

critical decision, as it affects who would be involved in the design of the business

platform and how the investment would be funded. But, even if the decision was to

implement the CRM platform as a local platform, some corporate-level involvement

would occur to ensure conformance to global digital platform standards. How might

the dynamics of this digitalization project change if this local CRM platform required

that enhancements be made to an installed global business analytic platform? With

this latter situation, the corporate leadership team might very well agree to provide

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some of the funding to enhance the global business analytic platform in order to

ensure the integrity of this global platform.

Finally, consider the question of who should pay for the costs of operating and

maintaining an organization’s global platforms, such as a global business analytic

platform or a global communications services (email, messaging, videoconferencing,

etc.) platform. If all global platform costs are fully covered through corporate-level

funding, then some work units might view the hosted functionalities as free goods

and misuse them. But, if work units are expected to contribute to the funding of

global platforms, how much funding should these work units contribute individually

and collectively? Should the contributions of each local work unit be based on an

arbitrary measure (i.e., number of employees, number of desktops/laptops, etc.) or

on each work unit’s expected (a fixed cost) or actual (a variable cost) use of a global

platform? Finally, would your answer vary for specialized platforms (e.g., a global

business analytics platform) versus general-purpose platforms (e.g., a global

communications services platform)?

A Recap and Look Ahead

Having recognized and resolved its platform management problems, Schwab

has resumed its very successful digitalization journey. Effective platform

management is inextricably tied to the ability of an organization’s leadership team to

ensure that:

 The right platform-related policies and standards are established.

 The right people are brought together to establish, evolve and monitor conformance to these policies and standards.

 The installed platforms simultaneously influence and are influenced by the

organization’s evolving digital strategies and digitalization capabilities.

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The next three chapters, respectively, introduce three complementary tactics for

effective platform management (see Figure 23-3): a platform design tactic focused

on implementing modular enterprise architectures, a digitalization governance

design tactic focused on establishing managerial accountabilities for platform-related

decisions, and a digitalization organization design tactic focused on positioning

the work units most influential in formulating digital strategies and in provisioning

digitalization capabilities.

Figure 23-3 Tactics for Effective Platform Management

Effective Platform Management

Modular Enterprise

Architectures

Digital Strategizing

Digitalization Capability

Hosting

Digitalization Managerial

Accountabilities

Platform Architecture

Design

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Chapter 24. Enterprise Architecture Design

Enterprise architectures, at their core, are idealized blueprints of the

global/local balance across an organization’s business platforms and digital platforms.

Do not skip over the word idealized here. Generally, whenever a new enterprise

architecture is devised and signed-off by an organization’s leadership team, installed

business platforms and installed digital platforms already exist - many of which are

inconsistent (to varying extents) with the newly-specified enterprise architecture.

Further, once a newly-devised enterprise architecture has been approved, internal

and external environmental forces immediately begin to induce perturbations that

accumulate over time – chipping away (usually slowly, but sometimes rapidly) at the

integrity of the newly-specified enterprise architecture. Enterprise architectures are

perhaps best thought of as works-in-progress never intended to be set-in-stone.

Despite their impermanence, enterprise architectures serve two critical roles

in maintaining a global/local balance in organizations’ platforms. First, and perhaps

most important, enterprise architectures influence how an organization’s digital

strategies and technology strategies evolve. (Stated simply, a technology strategy

is a mapping of how an organization’s investment in technology services is expected

to evolve over time.) It is often difficult for leadership teams to grasp the strategic

and tactical implications of an installed platform. However, participating actively in

discussions related to the appropriateness of alternative enterprise architectures will

profoundly affect most individuals’ understandings of the strengths and weaknesses

of installed and planned platforms. Second, from a more pragmatic perspective, an

organization’s current enterprise architecture will undoubtedly influence the natures

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of new digital investment proposals as well as the outcomes of associated digital

investment funding decisions.

In describing the nature and design of enterprise architectures, the following

topics are covered:

 The Nature of Enterprise Architectures

 Enterprise Architecture Implementation

 Modular Services Architectures

The Nature of Enterprise Architectures

Jeanne Ross and her colleagues90 describe an enterprise architecture as “…the

organizing logic for … an organization’s integration and standardization

requirements.” We refine this definition of an enterprise architecture as the

organizing logic for core business processes (those provisioned through global

business platforms), core business data (that provisioned through global databases),

and core digital technologies and technology services (those provisioned through

global digital platforms). Here, the term core refers to the digital resources seen as

being fundamental to the success of an organization’s executing and planned

business models.

Figure 24-1 depicts the determinants of an enterprise architecture. As can be

seen from the relative sizes of the two arrows leading toward the enterprise

architecture in this figure, the primary driver of an organization’s enterprise

90 J.W. Ross, P. Weill and D.C. Robertson, Enterprise Architecture as Strategy: Creating

a Foundation for Business Execution, Harvard Business School Press, Boston, MA, 2006, p.

47.

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architecture is what Ross and her colleagues term the operating model91: “… the

necessary level of business process integration and standardization for delivering

goods and services to customers.” In other words, the operating model specifies

the business processes and business data that should be provisioned through global

business platforms in order to effectively and efficiently implement formulated digital

strategies. These global business platforms, in turn, are enabled through technology

services hosted, largely, on global digital platforms. These global digital platforms

are designed, built and evolved as a consequence of organizations’ technology

strategies. To complete this picture, Figure 24-1 reinforces the primal notion that

organizations’ digital strategies and technology strategies are devised to enable them

to survive and prosper within their competitive environments.

91 J.W. Ross, P. Weill and D.C. Robertson, Enterprise Architecture as Strategy: Creating

a Foundation for Business Execution, Harvard Business School Press, Boston, MA, 2006, p.

25.

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Figure 24-1 Enterprise Architecture Components and Determinants

Digital Strategies Planned Business Models

Executing Business Models

OPERATING MODEL

Business Process Standardization

Business Process Integration

ENTERPRISE ARCHITECTURE

Business Platforms Core Business Processes

Core Business Data

Digital Platforms Core Technology Services Core Technology Assets

Technology Strategies Planned Technology Services Installed Technology Services

C o

m p

e ti

ti v e

n v ir

o n

m e

n t

Organizations’ unique histories of digital strategies and technology strategies

combine to produce somewhat distinctive operating models (though organizations

competing within similar market ecosystems often exhibit a considerable similarity in

their operating models). Accordingly, organizations’ enterprise architectures tend to

be idiosyncratic. Still, it is useful to describe commonly-observed enterprise

architecture patterns. Earlier in this part of our book, we described four prototypical

business platform patterns. These same prototypical patterns also apply to

enterprise architectures.

Globally-Integrated, Locally-Unique Enterprise Architectures

Organizations likely to employ globally-integrated, locally-unique enterprise

architectures are those whose business strategies focus on a single consumer base,

but a range of differentiated products/services. Since the full product/service

portfolio is likely to be attractive to many, if not most, consumers, ripe opportunities

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for cross-selling and up-selling exist. Examples of industries possessing such

attributes include financial services and health services.

As seen in Figure 24-2, the differentiated products/services benefit are offered

to consumers through distinct work units applying local platforms customized to each

set of products/services. However, a large number of global digital platforms are

likely to be utilized across the work units and a few global business platforms are also

likely to be applied – specifically, business platforms hosting a few primary processes,

e.g., those targeted at attracting and managing the consumer community,

product/service cross-selling and up-selling, and a number of support processes.

Figure 24-2

Globally-Integrated, Locally-Unique Enterprise Architecture

Global Business Platforms

Local Business

Platforms 1

Local Digital Platforms 1

Local Business

Platforms 2

Local Digital Platforms 2

Local Business

Platforms 3

Local Digital Platforms 3

Local Business

Platforms 4

Local Digital Platforms 4

Local Business

Platforms 5

Local Digital Platforms 5

Local Business

Platforms 6

Local Digital Platforms 6

Global Digital Platform

Globally-Integrated, Globally-Standardized Enterprise Architectures

Organizations likely to employ globally-integrated, globally-standardized

enterprise architectures are those whose business models are aimed at offering

consumers a cohesive set of products and services via a cohesive set of operational

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work activities. Examples of such organizations include those offering transportation-

related services (airlines, package delivery firms, etc.) and consulting-related

services, and those manufacturing and/or selling a homogenous product-line. Such

organizations operate most effectively and most efficiently by deploying a single set

of highly-rationalized, seamlessly-interconnected business processes, enabled by

standardized technology services. As can be seen in Figure 24-3, this implies a

relatively simple enterprise architecture consisting of a set of global business

platforms, enabled through a set of global digital platforms.

Figure 24-3

Globally-Integrated, Globally-Standardized Enterprise Architecture

Global Business Platforms

Global Digital Platforms

Locally-Isolated, Globally-Standardized Enterprise Architectures

Organizations likely to employ locally-isolated, globally-standardized

enterprise architectures are those whose business models focus on offering

consumers a similar set of products/services from many, possibly hundreds or

thousands, of work locations. Examples of such organizations can be found in

numerous industries such as: hospitality (e.g., restaurant or lodging chains),

groceries and pharmacies (with replicated distribution centers and retail stores),

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manufacturing (with replicated manufacturing and distribution centers), etc. Such

organizations generally strive to apply a common set of rationalized business

processes at each of the work locations in order to operate as effectively and as

efficiently as possible and to provide consumers with similar product/service

experiences regardless of the location where a product was produced or a service

was provided.

We illustrate this enterprise architecture pattern in Figure 24-4 via a

hypothetical situation involving two replicated business platforms (each of which is

supported by a global digital platform and a global business platform). With this

example, the first set of replicated platforms might be for distribution centers and

the second set of replicated platforms might be for retail stores. The primary role

served by the global business platform would be to host support processes (e.g.,

accounting processes, financial processes, HR processes, etc).

Figure 24-4 Locally-Isolated, Globally-Standardized Enterprise Architecture

Global Business Platforms

Global Digital Platforms

Replications of Local Business

Platform 1

Replications of Local Digital Platform 1

Replications of Local Business

Platform 2

Replications of Local Digital Platform 2

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Locally-Isolated, Locally-Unique Enterprise Architectures

Organizations likely to employ locally-isolated, locally-unique enterprise

architectures are diversified organizations, e.g., a holding company, whose work

units operate fully independent of one another. While such organizations might have

two or more work units offering similar products/services to similar customers, it may

be advantageous to maintain the independence of the work units (detracting to some

extent from these units’ efficiency and effectiveness) in order to make it as easy as

possible to divest a work unit.

Each work unit’s primary processes and many of its support processes are

hosted on local platforms (see Figure 24-5). Still, in order to manage the entire

enterprise, a very small set of financial processes (tracking enterprise profitability,

handling enterprise taxes, managing enterprise-held funds, etc.) are likely hosted on

a global business platform.

Figure 24-5 Locally-Isolated, Locally-Unique Enterprise Architecture

Global Business Platform

Local Business

Platforms 1

Local Digital Platforms 1

Local Business

Platforms 2

Local Digital Platforms 2

Local Business

Platforms 3

Local Digital Platforms 3

Global Digital Platforms

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Enterprise Architecture: Levels of Analysis

The preceding discussions of prototypical enterprise architectures applied an

enterprise-wide level of analysis. Such analyses are likely to suffice for globally-

integrated, globally-standardized organizations. For most other organizations, it is

desirable for enterprise architectures to be established for second-tier work units,

such as business units, operating units and functional units. If these second-tier

enterprise architectures exist, architecture exception-handling generally becomes

more straightforward than otherwise would be the case.

Enterprise Architecture Implementation92

Specifying an enterprise architecture is only a first step of what often proves

to be a lengthy series of projects aimed at modifying existing platforms, fashioning

new platforms and, as needed, interconnecting platforms. In order to lessen

implementation complications, enterprise architectures tend to be built in two stages,

as shown in Figure 24-6.

92 Many of the ideas (visual and textual) in this section are based on material in: J.W.

Ross, P. Weill and D.C. Robertson, Enterprise Architecture as Strategy: Creating a Foundation

for Business Execution, Harvard Business School Press, Boston, MA, 2006.

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Figure 24-6 Enterprise Architecture Implementation Stages

Global Digital Platforms

Global Business Platforms

Standalone Digitalized Business Processes

Local Business Platforms

Local Digital Platforms

Stage 2 Business Process

Optimization

Standalone Digitalized Business Processes

Local Business Platforms

Local Digital Platforms

Stage 1 Technology

Standardization

Because it is usually less difficult to convince an organization’s leadership team

to standardize technologies rather than to standardize business processes, and

because many of the benefits from standardizing digital platforms are quickly

realized, a first stage typically involves projects aimed at technology standardization

– that is, the implementation of global digital platforms. It is only after benefits from

technology standardization have borne fruit that more challenging projects aimed at

business process optimization are undertaken. With business process

optimization, global business platforms are identified, negotiated, rationalized and

implemented.

Figure 24-6 also makes it clear that organizations’ investments in global

platforms sit aside these organizations’ investments in standalone digitalized

processes and local platforms. The objective is not to eliminate localized digital

investment, but instead to maintain an optimal global/local platform balance.

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The benefits derived from technology standardization and business process

optimization are summarized in the first four columns of Table 24-1 (the fifth column

addressing the benefits derived from a third implementation stage, i.e., services

modularization, will be discussed later in the chapter). While these benefits can be

significant, a potential negative consequence can arise whenever an organization

installs global platforms: an erosion in work unit (i.e., local) flexibility and, hence, in

a work unit’s ability to respond in a timely and effective manner to competitors’

moves (see Figure 24-7).

Table 24-1

Benefits from Implementing an Enterprise Architecture

Stage 1 Technology

Standardization

Stage 2 Business Process Optimization

Stage 3 Services

ModularizationGlobal Database Standardization Integration

• Lower procurement, configuration, installation, support & training costs

• Ease of employee movement

• Common business language

• Enhanced work task coordination & synchronization

• Enhanced operational, tactical & strategic decision making

• Develop new digitalized solutions quickly & less expensively

• Fewer operational problems

• Lower support & training costs

• Fewer digitalized business processes to develop & maintain

• Digital investment leveragability

• Establish new work locations quickly & less expensively

• More efficient work flows

• More effective work flows

• Increased work-related coordination

• Increased work-related collaboration

• Replace, modify and implement digitized solutions & digitalized solutions quickly & inexpensively

• Lower support costs

• Digital investment leveragability

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Figure 24-7 Potential Impacts of Global Business Platforms on Flexibility

Stage 1 Technology

Standardization

Stage 2 Business Process

Optimization

Local Flexibility

Global Flexibility

Why does this potential erosion in work unit flexibility arise? Because

digitalization projects inconsistent with installed global platforms:

 Are less likely to be proposed - as business and technology strategists’ thinking regarding new digital investments is likely to gravitate toward initiatives consistent with these installed global platforms.

 Are more difficult to justify - as the mindsets of executives holding project-

approving authority are likely to be biased toward these installed global platforms.

 Are more difficult and costly to implement – as to-be-built digital solutions must be designed and engineered, in part, to operate with these installed

global platforms.

To some extent, then, there is likely to be a loss in digital strategists’ flexibility to

implement (or, perhaps even envision) a digitalized solution that best meets an

emerging competitive situation. If not resolved, this erosion in flexibility can, over

time, result in an organization losing much, if not most, of its competitiveness.

As is often the case, new technologies have emerged to not only dampen this

potential for local inflexibility but, when effectively applied, to reverse it (see Figure

24-8). These new technologies (described in the next section) enable modularized

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enterprise architectures to be implemented. With the services modularization

stage, business processes (business platforms) and technology services (digital

platforms) are conceptualized, decomposed and constructed as self-contained

modules (as a module that fully performs by itself a well-defined task or service),

and each modularized service is loosely-coupled (through the passing of data) to

other modularized services. Modular enterprise architectures (see Figure 24-9) apply

modularized business services and data objects within global business platforms,

apply modularized technology services within global digital platforms, and, to as great

an extent as possible, build their standalone digitalized business processes, local

business platforms and local digital platforms from modularized services components.

When an enterprise architecture is implemented with modularized services, it

becomes relatively easy and relatively inexpensive to modify an existing module (as

no other modules are affected) and to add/remove modules (as only the data being

passed to and from modules are affected).

Figure 24-8

Impact of Services Modularity on Flexibility

Standardized

Technical

Platforms

Standardized

Technical

Platforms

Data Marts

Enterprise

Database

Process

Standardization

Process

Integration

Stage 1 Technology

Standardization

Stage 2 Business Process

Optimization

Local Flexibility

Global Flexibility

Stage 3 Services

Modularization

Standardized

Technical

Platforms

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Figure 24-9 Adding the Services Modularization Implementation Stage

Modularized Technology ServicesGlobal Digital

Platforms

Global Digital Platforms

Global Business Platforms

Standalone Digitalized Business Processes

Local Business Platforms

Local Digital Platforms

Stage 2 Business Process

Optimization

Standalone Digitalized Business Processes

Local Business Platforms

Local Digital Platforms

Stage 1 Technology

Standardization

Modularized Business Services

Data Objects

(Modularized)

Standalone Digitalized Business Processes

Local Business Platforms

Local Digital Platforms

Stage 3 Services

Modularization

The benefits to be obtained from modularization are provided in the right-most

column of Table 24-1 (shown earlier in this chapter). First, as already-installed

modules can be repaired or modified without having to touch other modules, it

becomes relatively easy and inexpensive to change, as necessary, installed digital

solutions. Second, once a new digital solution has been built or otherwise acquired,

interconnecting the new module to existing modules only requires modifications to

the data flowing between these modules. As long as implemented data objects

conform to global data standards, these interconnections can be established relatively

quickly and relatively inexpensively. Together, then, these first two benefits provide

the capacity to incorporate, relatively quickly and inexpensively, digital innovations,

digitalized competitive moves and digitalized competitive responses into

organizations’ portfolios of installed business platforms and digital platforms. The

third and fourth benefits from services modularity are a reduction in platform support

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costs and an inherent leveragability of the prior digital investments targeted at

producing digital solutions comprised of modularized services.

Modular Services Architectures93,94

Modular services architectures are built via configuring together many different

technologies, dominated by server technologies (that host modularized services) and

middleware technologies (that interconnect modularized services). However, even

more important are services architectural standards, or rules, that define how

modularized services are to be designed and that direct how modularized components

operate and interconnect. By configuring business platforms and digital platforms as

modularized services that conform to established standards, the configured services

are able to seamlessly interconnect and interact. A large number of public and private

organizations are working to develop and extend the standards (see Table 24-2 for

examples) used in implementing modular services architectures.

93 O.A. El Saway and P.A. Pavlou, “IT-Enabled Business Capabilities for Turbulent

Environments,” MIS Quarterly Executive, September 2008, pp. 139-150. 94 R. Hirschheim, R. Welke, R. and A. Schwarz, “Service-Oriented Architecture: Myths,

Realities, and a Maturity Model,” MIS Quarterly Executive, March 2010, pp. 37-48.

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Table 24-2 Services Architectural Standards

Standards Domain Example Standards

Application/Industry Business Process Standards

UBL, XCBL, HRSML, RossetaNet

Business Process Execution ebXML, WSCL, WSFL, Biztalk

Services Publishing & Discovery

UDDI

Services Description WSDL, BPML, BPEL

Messaging SOAP

Universal Data Language XML, XSLT

Network Transport Protocols TCP/IP, HTTP, FTP

Three architectural concepts are critical to the implementation of modular

services architectures: service-oriented architectures, self-learning architectures and

event-based architectures. Table 24-3 lists the major principles associated with each

of these architectural concepts.

Table 24-3

Three Key Modular Services Architectural Concepts

Concept Key Principles

Service- Oriented

Architectures

• Standalone digitalized business processes, business platforms & digital platforms are built from modularized services.

• Each service by itself fully performs a specified task (or tasks). • Services are loosely-coupled (interconnected through data flows). • Services are hardware independent.

Self-Learning Architectures

• Information is provided within the architecture enabling services to locate, establish connections with, and interact with other services.

• Services remember how to locate, establish connections with, and interact with other services.

• Services learn, over time, how to best interact with other services.

Event-Based Architectures

• Services can subscribe to other services’ communications regarding the detection of & reaction to specific events; a service detecting and/or reacting to an event publishes messages (describing the event & event-processing outcomes) that are transmitted to subscribing services.

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With service-oriented architectures, processing logic and data are

implemented as self-contained services, with only a service’s input and output data

exposed to other services. What differentiates service-oriented architectures from

their predecessors are the ever-growing sets of standards (refer back to Table 24-2)

describing what a service is, what a service does, how a service is to be accessed,

how to communicate with a service, etc. Figure 24-10 provides a depiction of the

execution dynamics associated with locating, connecting with and executing a

service.

Figure 24-10

Locating, Connecting With and Executing a Service

Service Discovery

Service A

Services Directory

Service B location and access information.

I need a service.

Service Connection

Service connection protocols.

I need to establish a connection.

Connection established.

Service request fulfilled; deliverables.

Service request; needed data.Service A

Service A

Service B

Service Execution

Self-learning architectures exhibit three primary characteristics. First,

these architectures contain (either within a global information repository or within

the individual services) all the information that is needed for services to locate,

connect with and execute other services. Second, each service possesses the

functionality needed to interpret and apply this information. Third, each service

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possesses the functionality to learn (from provided information and from repetitive

interaction episodes) how to best interact with other services. As a consequence,

self-learning architectures can, over time, perform more efficiently and more

effectively.

Event-based architectures utilize the attributes of service-oriented

architectures and self-learning architectures to automatically detect and react to

specified events. After detecting and interpreting an event, services within an event-

based architecture can distribute data describing the event as well as reactions taken

by the service in responding to the event to all other services that have subscribed

to receive notifications regarding the event. For example, assume an inventory

management service is built to detect the event of any item in a finished goods

inventory dropping below its replenishment point. Two services, among others, that

would benefit from immediately being informed of this event are a product availability

service and a product reordering service.

Table 24-4 describes the three most common ways that modular services

architectures are applied: within an organization, between organizations, and within

an industry. The first row of Table 24-4 describes how an organization can make use

of a modular services architecture for internal use. Here, most of the organization’s

standalone digitalized business processes, business platforms and digital platforms

are configured as modular services conforming to agreed-on standards.

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Table 24-4 Applying Modular Services Architectures

Context Description

Within an Organization

• An organization implements a modular services architecture using specific standards defining how to locate a service, connect with a service, and interact with a service.

• Most of the organization’s standalone digitalized business processes, business platforms & digital platforms are provisioned as services, each of which conforms to the agreed-on standards.

Between Organizations

• An organization implements one or more services that are made available (along with information about how to locate, connect with, and interact with the services) to anyone.

• An organization implements one or more services that are made available (along with information about how to locate, connect with, and interact with the services) to favored customers and suppliers.

Within an Industry

• An industry association develops industry-specific standards that define a set of services and how to locate, connect with. and interact with the services.

• Industry members can implement these services, as well as gain access to association-approved services implemented by industry members or by third-parties.

Figure 24-11 illustrates the layers of a prototypical modular services

architecture. The bottom (Layer 1) consists of technology assets. In Layer 2, these

technology assets are virtualized for increased flexibility and efficiency. When

technology assets are virtualized, the real-time commitment of specific technology

assets in executing services depends on the point-in-time demands on these assets.

Layer 3 consists of the modular technology services that make use of the virtualized

technology assets, Layer 4 consists of data objects used in constructing business

services, and Layer 5 consists of the modular business services. Layer 6 represents

the global information repositories holding information about configured technology

services, data objects and business services. Finally, Layer 7 consists of configured

digital platforms (built largely from modular technology services), and Layer 8

consists of configured standalone digitalized business processes and business

platforms (built largely from data objects and modular business services).

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Figure 24-11 Layers of a Prototypical Modular Services Architecture

Standalone Digitalized Business Processes & Business Platforms

Modular Business Services

Data Objects

Modular Technology Services

Technology Assets [Clients, Servers, Networks, Storage, …]

Technology Virtualization

Services Directories

L a

y e

rs 8

Digital Platforms7

The second row of Table 24-4 describes two ways of using modular services

architectures to facilitate organization-to-organization interaction. The first of these

refers to organizations that develop a service conforming to a specific set of standards

and then make this service available to anyone who might wish to use the service.

Popular examples of such services include, among others: weather-related services

(e.g., forecasts, alerts, etc.), transportation-related services (e.g., schedules, ticket

prices, departure/arrival status, etc.), calendar-related services, mapping-related

services, etc. The second type of organization-to-organization situation refers to an

organization offering a service conforming to a specific set of standards to be used

by favored value stream participants (e.g., consumers, suppliers, strategic partners,

etc.). Popular examples of these services include, among others: logistical tracking,

funds availability, product availability, etc.

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The third row of Table 24-4 refers to how modular services architectures can

be used to facilitate industry-wide interactions. Here, an industry group or

association has developed sets of standards for data, documents, events, and

business transactions (as well as enabling technology services) specific to the

industry, and these standards are made available to industry participants, technology

vendors, external service providers, cloud services providers, etc. Applying these

standards, the industry association itself, industry participants, and third-parties

implement specific services (that are vetted by the industry association) for use by

industry participants.

Delivery Corp’s Transition to a Modular Enterprise Architecture95

Delivery Corp is a large subsidiary of a global leader in logistics and

transportation. While its revenues (derived from its offerings in supply chain

services) in 2006 were about $10 billion, its market was becoming increasingly

competitive - driven largely by an influx of low-cost competitors.

Delivery Corp’s history of digitalization followed a not uncommon pattern. The

firm had grown rapidly by aggressively acquiring smaller, specialized logistics firms.

Typically, these acquired units continued to operate through their already-installed

business platforms and digital platforms. In the 1990s, initiatives were undertaken

to standardize technology (hardware, software, architecture, security, etc.) and to

interconnect the local business platforms by building system interfaces (on an as-

needed basis) to share data and otherwise link together the business processes

95 Much of the material in this section is adapted from: A. Rai, V. Venkatesh, H. Bala,

and M. Lewis, “Transitioning to a Modular Enterprise Architecture: Drivers, Constraints, and

Actions,” MIS Quarterly Executive, June 2010, pp. 83-94.

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housed on these local business platforms. In the early 2000s, further initiatives were

pursued that moved Delivery Corp to established global business platforms (i.e., end-

to-end business processes to be executed by all operating units). A key element in

this movement toward global business platforms involved the creation of a global

data warehouse containing data extracted from the local databases operated by the

operating units.

Although data standardization and business process rationalization improved

operational efficiencies, Delivery Corp became concerned with its ability to meet its

growth and profitability objectives. In particular, Delivery Corp recognized that its

fastest-growing, most-lucrative customer segment involved customers requiring

complex, but unique, digitalized logistics solutions. Servicing these customers was

currently unprofitable for Delivery Corp, as building these largely unleverageable

digitalized logistic solutions required long lead times and high costs - both of which

were understandably a significant concern for potential customers. What Delivery

Corp needed was a capability to efficiently and profitably combine a broad portfolio

of standardized logistic services and technology services when creating complex,

customized and innovative logistic solutions.

To provide this capability, Delivery Corp implemented a modular enterprise

architecture using modular services architecture technologies. This decision was

justified on three primary grounds. First, standardizing business services, technology

services and the interfaces needed to interconnect these services would enable

Delivery Corp to better leverage its existing arsenal of digitalized logistic services

(e.g., brokerage services, freight-forwarding services, warehousing services, etc.).

Second, the availability of standardized interfaces and robust collections of

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modularized business services and modularized technology services would enable

Delivery Corp to enrich its collaborative relationships with customers as Delivery Corp

logistics specialists would be working closely with clients in configuring customized

solutions. Third, the modular enterprise architecture would enable Delivery Corp to

survive, and thrive, in a turbulent business environment distinguished by an

increasing number of low-cost competitors.

A Recap and Look Ahead

Specifying and implementing enterprise architectures – and then regularly

assessing the appropriateness of these architectures – provides an effective means

by which an organization can manage the balance among its global and local digital

platforms. For organizations facing especially demanding business environments

(that is, environments requiring innovation and frequent, rapid responses to

competitors’ actions), moving toward implementing modularized enterprise

architectures is highly advised.

Organizations’ enterprise architectures, however, are not of equal quality!

Designing, implementing and evolving an enterprise architecture (thereby giving rise

to evolving collections of business platforms and digital platforms) that remain in

alignment with an organizations’ digital strategies and technology strategies does not

occur by happenstance. For any organization, an innumerable number of decisions

are deliberated and taken as its digitalization-related activities unfold – with the

outcomes produced by these decisions ultimately determined by the appropriateness

of involved-individuals and the quality of the decision processes these individuals

follow. In order that these decision processes are suitably populated, directed and

constrained, complex webs of policies, guidelines, rules and procedures need to be

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established. The next chapter explains how this is accomplished through

digitalization governance systems.

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Chapter 25. Digitalization Governance Design

With the intent of improving work unit performance, managers of all

organizations are finding themselves contributing to, critiquing, making, and

approving countless decisions about acquiring, configuring, and deploying standalone

digitalized business processes, business platforms and digital platforms. For

example, a supply chain manager might wish to enhance a demand forecasting

system; a marketing manager might be exploring the acquisition of a business

analytics platform to be used to increase sales force productivity; a mayor’s chief of

staff might be examining social networking platforms to be used to increase citizen

participation; and, a technology manager might be considering installing a more

advanced firewall in order to better protect databases from outside intrusion.

Increasingly, the issues being considered with digitalization decisions involve

global/local platform considerations, e.g., “Do the incremental benefits my work unit

would realize from a customized solution outweigh the losses to be suffered by my

organization from not being able to leverage this digital investment?”. The supply

chain manager, the marketing manager, the chief of staff, and the technology

manager noted above might be advised, respectively, to raise questions such as:

 Is there a forecasting system already installed on a business platform that

would meet our needs? If not, would other work units be able to make use of the forecasting system we are thinking of acquiring?

 What other business analytics tools are already being used across our organization? Can we acquire tools that integrate seamlessly with these already-installed tools and with our global databases?

 Does our city government already have a presence on popular social networks? If so, how can we establish a presence and engage our city

residents to participate? If not, should we establish such a presence and make its existence known to all city departments?

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 What security solutions are already installed? How would the new security solutions we are most excited about accommodate our enterprise

architecture? Would these new security systems meet the requirements of all our global and local databases?

Ideally, a digitalization-related decision would be taken only after a manager has

looked at the decision from a variety of perspectives: local, global and points in

between. In practice, however, a manager’s local perspective often takes

precedence, with other perspectives slipping through the cracks. Two explanations

suggest why this occurs.

First, when making decisions, humans tend to give emphasis to their personal

interests, personal experience and personal knowledge. It is simply unreasonable to

expect a person … on her own … to be equally comfortable with and capable of fully

incorporating other people’s perspectives into her decision-making processes. Thus,

supply chain managers focus primarily on supply chain issues, marketing managers

on marketing issues, city chiefs-of-staff focus on mayoral or city council issues, and

technology managers on technology issues.

Second, once underway, digitalization projects take on a life of their own.

Well-conceived projects often start with a balanced set of local and global objectives.

With the passage of time, however, project team members immersed within day-to-

day project activities spend much of their time interacting with one another and with

the members of the work unit (or units) where the digitalized solution is to be

installed. In turn, these interactions introduce pressures on project team members

to make adjustments to the solution being implemented. Most often, a majority of

these adjustments tend to favor either local or global objectives – given that

successive adjustments tend to directly build on one another. If there were only a

few of these pressure points, a solution’s objectives would largely remain consistent

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with the local-global balance conceived and approved at the project’s start. With

most projects, however, there are literally hundreds or thousands of such pressure

points that, if not countered, can result in an installed solution whose local-global

balance differs significantly from that initially conceived and approved.

How are day-to-day decisions made by managers across an organization

influenced such that the collective outcome of these decisions maintains the

organization leadership team’s agreed-on global/local platform balance? To a large

extent, the answer lies in the design and implementation of an effective digitalization

governance system. Digitalization governance systems introduce, into the fabric

of an organization’s life, decision structures and decision processes aimed at

increasing the likelihood that the right people apply the right criteria at the right time

in making digitalization decisions. We examine digitalization governance systems

through the following topics:

 Three Domains of Digitalization Decisions

 Digitalization Governance System Objectives

 Digitalization Governance System Postures

 Digitalization Governance System Mechanisms

 Project-Level Digitalization Governance

 Information Governance at Intel

Three Domains of Digitalization Decisions

Digitalization governance systems are directed at three domains of

digitalization decisions: a global domain, a demand-side domain and a supply-side

domain. Table 25-1 provides definitions of these three decision domains, along with

illustrative examples.

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Table 25-1 Domains of Digitalization Decisions

Definition Examples Global Decisions

Positioning, directing & overseeing global digital strategies & policies.

• What should be the organization’s overarching digitalization strategic intent?

• What should be the spending on digitalization? • Should corporate pay a portion of the cost of local digital innovations? • Under what conditions can local business platforms be deployed? • Which global business platforms should not be externally hosted?

Demand-Side Decisions

Stimulating, prioritizing & constraining work unit digitalization requirements.

• What should be a work unit’s overarching digitalization strategic intent? • How should digitalization projects be prioritized within a work unit? • What criteria should be used in approving digital investment proposals

within a work unit? • Which of a work unit’s business platforms should not be externally hosted?

Supply-Side Decisions

• Delivering, operating & maintaining digitalized business processes & business platforms.

• Designing, delivering, operating, maintaining & evolving digital platforms.

• How should a business platform be enabled through digital platforms? • Which digital platforms should be global? • Which digital platforms should not be externally hosted? • How should technology professionals be hired & developed? • How should the risks of digitalization be monitored and mitigated?

Global digitalization decisions focus on global digital strategies and policies.

These decisions are characterized by three overarching objectives: leveraging digital

investments, spurring digital innovation, and minimizing digitalization risks that, if

not curtailed, can significantly impair an organization’s competitiveness. The

outcomes arising from global digitalization decisions are most effective when the

individuals involved with associated decision processes represent an organization’s

most powerful and most influential leaders. When such individuals fail to actively

involve themselves in these decision processes, tensions traced to inter-unit

disagreements regarding digitalization are likely to arise; such tensions can become

crippling if not resolved.

Demand-side digitalization decisions focus on stimulating, prioritizing and

constraining work units’ digitalization requirements. These requirements reference

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already-made, in-progress, and to-be-made digital investments. While demand-side

decisions generally originate within a specific work unit, it is not uncommon for

multiple work units to put together a digital investment proposal that meets their

collective needs. The outcomes arising from demand-side digitalization decisions are

most effective when the individuals involved with associated decision processes

include the work units’ most powerful and influential leaders. When such individuals

fail to actively involve themselves in these decision processes, intra-unit tensions that

arise in establishing a work unit’s digital strategies and policies are unlikely to be

resolved, especially in the face of limited resources.

Supply-side digitalization decisions focus on (1) delivering, operating and

maintaining an organization’s digitalized business processes and business platforms,

and (2) designing, delivering, operating, maintaining and evolving an organization’s

digital platforms. While these responsibilities can be carried out internally (via a

global or local technical group) or externally (via service providers and

consultancies), concerns regarding platform robustness (operating performance,

interconnectivity, interoperability, security, etc.) and platform cost (implementation

costs, operating costs, lifetime costs of ownership, etc.) are moving most

organizations toward global platforms. The outcomes arising from supply-side

digitalization decisions are most effective when the individuals involved with

associated decision processes include the organization’s most powerful and most

important technology leaders (including key vendors, service providers and

consultancies).

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Digitalization Governance System Objectives

Digitalization decisions spill into all aspects of business platforms and digital

platforms. As a consequence, effectively-designed digitalization governance systems

influence, on any specific day, the outcomes of literally hundreds, if not thousands,

of decisions: some associated with digital strategies and others primarily with

technology strategies; some broad in their scopes and others narrow in their scopes;

some affecting ongoing work activities and others affecting future work activities, etc.

At their core, however, organizations’ digitalization governance systems aim to

achieve the six objectives summarized in Table 25-2.

Table 25-2

Digitalization Governance System Objectives

Objective Focus

Alignment of Digital Strategies & Technology

Strategies

• Ensure that digital strategies enhance or maintain competitiveness. • Ensure that installed platforms facilitate, rather than obstruct,

competitiveness.

Leverage Digital Investments

• Eliminate redundant digital assets & digital investment proposals.

Organization & Work Unit Leadership Teams’

Awareness of Digitalization

Opportunities & Risks

• Ensure organization & work unit leadership teams are aware of digitalization opportunities & risks.

• Ensure organization & work unit leadership teams are aware of the extent to which competitiveness is dependent on digitalization.

Technology Leadership Teams’ Awareness of

Competitive Opportunities & Risks

• Ensure technology leadership teams are aware of competitive opportunities & risks.

• Ensure technology leadership teams aggressively manage digitalization risks.

Leverage Other Organizations’

Digital Capabilities

• Ensure external sources of digital capabilities are appropriately & fully exploited.

• Ensure internal digital capabilities are targeted at high-value activities.

Evaluate Performance of the Technology Group

• Ensure installed platforms operate as intended and are available, reliable, secure & cost-effective.

• Ensure funded digital investments are successfully implemented.

The first two objectives strive to optimize and achieve synergies among global,

demand-side and supply-side digitalization decisions. Global, demand-side, and

supply-side digitalization decisions often impact one another. Consequently, it is

necessary to ensure: that supply-side leaders and demand-side leaders are involved,

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as appropriate, within global decision processes; that global leaders and supply-side

leaders are involved, as appropriate, within demand-side decision processes; and,

that global leaders and demand-side leaders are involved, as appropriate, within

supply-side decision processes. Effective digitalization governance systems account

for these interdependencies.

The third and fourth objectives recognize that involving individuals within

digitalization structures and decision processes not only enriches these individuals’

understanding of the specific decisions being addressed, but also exposes them to

the expertise, experiences and insights of others with whom they interact. Given

real constraints on people’s time and attention, it is unrealistic to expect most

individuals, on their own, to gain meaningful understandings of issues and concerns

outside of their immediate work responsibilities.

The fifth objective focuses on today’s dynamic technology products and

services industries as well as organizations’ increasingly digitally-savvy strategic

partners. Such external sources of digitized business services and technology

services offer both opportunities and risks, and effective digitalization governance

systems can ensure that these opportunities and risks are appropriately considered,

thereby allowing organizations to target their (typically limited) internal digital

capabilities at high-value activities.

The sixth objective recognizes that effective digitalization governance systems

provide means for formally (i.e., establishing goals and measuring goal achievement)

and informally (i.e., prompting and interpreting explanations about successes and

failures) evaluating the performance of an organization’s corporate technology group.

Organizations recognized as digitalization industry leaders seem to have one thing in

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common – a highly capable corporate technology group. How would you recognize

a highly-capable technology group if you saw one? Highly-capable technology groups

are populated by technologists whom:

 Are able to get digital technologies, digital platforms and business platforms

to work and to work well.

 Understand their organization’s competitive environment, operational and

managerial processes, digitalization opportunities, and digitalization risks.

 Trust and are trusted by their organizational peers.

Effective digitalization governance systems direct and, when necessary, redirect the

perspectives and priorities of leadership teams toward building just such a profile

within their corporate technology groups.

Digitalization Governance System Postures

Given an organization’s specified enterprise architecture, digitalization decision

processes are likely to reflect systematic biases in favor of global objectives, local

objectives, or some mix of both. Accordingly, digitalization governance systems are

designed to reflect an intentional bias, or posture, toward accommodating:

 Global objectives – the centralized posture.

 Local objectives – the decentralized posture.

 To varying degrees, both global and local objectives – the federal posture.

Figure 25-1 visually depicts how an organization’s enterprise architecture influences

the digitalization governance system’s posture, and Table 25-3 characterizes the

natures of centralized, decentralized and federal postures.

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Figure 25-1 Governance System Posture and Prototypical Enterprise Architectures

Decentralized Posture

Federal Posture

Centralized Posture

Locally- Isolated

Globally- Integrated

Locally-Unique Globally-Standardized

Table 25-3 Digitalization Governance System Posture

Centralized Federal Decentralized

Systematic Bias

Global Objectives Global & Local Objectives Local Objectives

Digital Investment Leverage Digital Investment Leverage &

Digital Innovation Digital Innovation

Primary Responsibility for Global Digitalization Decisions

Corporate Leadership Team Corporate Leadership Team & Work

Unit Leadership Teams Work Unit Leadership Teams

Primary Responsibility for Demand-Side Digitalization Decisions

Corporate Functional Leadership Teams

Corporate & Work Unit Functional Leadership Teams

Work Unit Functional Leadership Teams

Primary Responsibility for Supply-Side Digitalization Decisions

Corporate Technology Leadership Team

Corporate Technology Leadership Team & Work Unit Technology

Leadership Teams

Work Unit Technology Leadership Teams

Most Appropriate For …

Homogeneous Work Unit Competitive Environments

Moderately Heterogeneous Work Unit Competitive Environments

Highly Heterogeneous Work Unit Competitive Environments

Organizations applying globally-integrated, globally-standardized enterprise

architectures are apt to exhibit centralized digitalization governance systems in order

to achieve global objectives and to maximally leverage digital investments (by

implementing global platforms). The corporate leadership team serves prominent

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and influential roles in these governance systems. A weakness of centralized

governance is that pressing local digitalization needs either may be unmet or met

unsatisfactorily.

Organizations applying locally-isolated, locally-unique enterprise architectures

are apt to exhibit decentralized digitalization governance systems in order to achieve

local objectives and to increase the ease by which work units are able to implement

digital innovations. Work unit leadership teams serve prominent and influential roles

in these governance systems. Two weaknesses of decentralized governance include:

a tendency to over-spend on digitalization, as work units accumulate redundant

digital assets; and, an inability to leverage other work units’ digital investments,

because of a lack of awareness or because of platform incompatibilities.

Organizations applying more nuanced enterprise architectures are apt to

exhibit variants of federal digitalization governance systems. In fact, most

organizations today deploy federal governance systems for two reasons. First,

although they can be difficult to design and implement, federal digitalization

governance systems can overcome the inherent weaknesses of purely centralized or

purely decentralized digitalization governance systems. Second, because

organizations’ internal and external environments are seemingly in constant flux,

centralized governance systems feel pressures to be less centralized, and

decentralized governance systems feel pressures to be less decentralized. Federal

governance systems, by definition, are designed to cope with just such pressures.

Given the forces moving all organizations today toward global platforms,

federal digitalization governance systems in practice tend to reflect an increasingly

common pattern of bias regarding the three domains of digitalization decisions:

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 A centralized bias, where appropriate, with global digitalization decisions so as to leverage digital investments through global platforms.

 A decentralized bias, where appropriate, with demand-side digitalization decisions so as to facilitate work unit digital innovation and timely

competitive responses.

 A centralized bias with supply-side decisions so as to achieve technology standardization and to facilitate innovation with regard to technology

services.

Digitalization Governance System Mechanisms

Governance systems do not make decisions. Instead, governance

mechanisms are designed and implemented to create arenas within which decisions

are negotiated and taken by participants. Three types of governance mechanisms

are brought together within digitalization governance systems: managerial roles,

governance structures and governance processes.

A well-designed collection of governance mechanisms should increase the

likelihoods of the right people being brought together to apply the right criteria at the

right time to produce the right outcomes. Governance mechanisms that are effective

today, however, might not be effective tomorrow. Like all other courses of action

designed to enhance an organization’s competitiveness and performance,

governance mechanisms need to evolve over time to sustain their effectiveness.

As intimated earlier in this chapter, the individuals actively involved with an

organization’s digitalization governance system can include just about any of the

organization’s executives, managers, staff specialists and functional specialists.

Generally, these individuals’ digitalization governance responsibilities are appended

to their primary organization responsibilities. It is especially important to note the

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necessity for the corporate leadership team and for work unit leadership teams to

actively involve themselves in digitalization governance.96

In addition, most organizations have established governance managerial

roles – characterized by specific zones of authority and accountability – that focus

solely on digitalization activities (see Table 25-4). The majority of these managerial

roles are associated with supply-side digitalization decisions, with most emerging

early in organizations’ digitalization histories (and, hence, are not described further).

Two of the roles described in Table 25-4, however, do require further description.

Table 25-4

Digitalization Governance Managerial Roles

Roles Typical Responsibilities

Global, Demand-Side & Supply-Side Digitalization Decisions

Chief Digital Officer (CDO) • Digital investments

Chief Information Officer (CIO) • Global & supply-side digitalization decisions

Divisional Information Officer (DIO) • Local demand-side/supply-side digitalization decisions

Supply-Side Digitalization Decisions

Chief Technology Officer (CTO) • Technology strategy, architecture & standards

Director of Program Management • Implementation of Digital Solutions

Director of Finance • Technology investment/budgeting

Director of Software Development • Building & maintaining standalone digitalized solutions,

business platforms & digital platforms. • Implementation of software development methods & tools.

Director of Vendor Management • Establishing, managing & evolving relationships with

technology vendors and external service providers. • Procurement of digital technologies & technology services.

Director of Risk & Audit • Digitalization risk management & quality assurance Director of Security • Digital security & disaster recovery

Director of Human Resources • Acquire & develop digital human assets.

96 A. Masli, V. Richardson, M.W. Watson and R.W. Zmud, “Senior Executives’ IT

Management Responsibilities: Serious IT-Related Deficiencies and CEO/CFO Turnover,

Management Information Systems Quarterly, September 2016, pp. 687-708.

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The emergence of the chief digital officer (CDO) is a quite recent

phenomenon.97,98 The CDO role, which can be established at the corporate-level and

within work units, is aimed at nurturing, envisioning, orchestrating and overseeing

digitalization and digital innovation. As a consequence, CDOs are becoming key

members of organizational and work unit leadership teams.

Most organizations have long established a lead executive holding overall

responsibility for an organization’s digitalization activities. Most often, the title given

to this executive is that of chief information officer (CIO). Historically, the CIO

role has been implemented quite differently across organizations, with the CIO most

often observed to report to either the CEO or the CFO and assigned responsibility for

an organization’s global and supply-side digitalization decisions, with responsibilities

for the local demand-side and local supply-side digitalization decisions assigned to

work unit divisional information officers (DIO). DIOs generally report to work

units’ most senior executive.

With the emergence of the CDO role, most organizations’ digitalization

leadership structures are somewhat unsettled. For example, a random sample of

organizations within the same industry might very well produce the following within

different organizations:

 A corporate CDO orchestrating the global digitalization domain, work unit CDOs orchestrating the demand-side digitalization domain, and a corporate

97 T. Catlin, L. Harrison, C.L. Plotkin and J. Stanley, “How B2B Digital Leaders Drive

Five Times More Revenue Growth than Their Peers,” McKinsey Quarterly, October 2016,

http://www.mckinsey.com/business-functions/marketing-and-sales/our-insights/how-b2b-

digital-leaders-drive-five-times-more-revenue-growth-than-their-peers 98 O.A. El Sawy, P. Kraemmergaard, H. Amsinck and A.L. Vinther., “How LEGO Built

the Foundations and Enterprise Capabilities for Digital Leadership,” MIS Quarterly Executive,

June 2016, pp. 53-64.

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CIO orchestrating the supply-side digitalization domain.

 A corporate CDO orchestrating the global digitalization domain, work unit

CDOs orchestrating the demand-side digitalization domain, a corporate CIO orchestrating the global supply-side digitalization domain, and DIOs

orchestrating the local supply-side digitalization domain.

 A corporate CIO orchestrating all three digitalization domains, with the CIO serving as the corporate CDO and DIOs serving as work unit CDOs.

What might explain these differences? Most likely, key explanatory factors would

include: an organization’s digitalization history, executing business models, and the

relative power of the corporate leadership team and the work unit leadership teams;

and, the experience, mindset, personality and held-relationships of the involved-

executives.

Governance structures convene participants to interact in addressing

circumscribed sets of digitization-related decisions, often applying prescribed

governance processes. A governance process moves participants through a

sequence of tasks to ensure that pertinent policies, guidelines and rules are followed

and that pertinent objectives, constraints and criteria are considered. Tables 25-5

and 25-6, respectively, describe commonly-observed digitalization governance

system structures and processes. While Tables 25-5 and 25-6 illustrate global

governance structures and processes, large work units (e.g., a strategic business

unit, a global function, etc.) often implement corresponding structures and processes.

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Table 25-5 Global Digitalization Governance Structures

Structure Issues Addressed Typical Participants

Digitalization Council

• Digital strategy • Technology strategy • Enterprise architecture • Global platforms • Digital investment

prioritization

• Corporate leadership team & CDO • Work unit leadership teams &

CDOs • CIO, CTO, DIOs

Digital Investment

Board

• Digital investment policies • Corporate technology and

work unit technology group budgetary policies

• Corporate leadership team & CDO • Powerful work unit leadership

teams & CDOs • CIO, CTO, Director of Finance

Global Architecture

Board

• Platform policies and standards

• Architecture exception policies & procedures

• Corporate CDO • Powerful work unit CDOs and

DIOs • CIO, CTO, Directors: Software

Development, Digital Risk & Audit, Digital Security

Table 25-6 Global Digitalization Governance Processes

Process Typical Participants Global

Strategic Planning

• Corporate leadership team & CDO • Work unit leadership teams & CDOs • CIO, CTO

Global Technology

Planning

• Corporate CDO & powerful work unit CDOs • CIO, CTO • Directors: Program Management, Finance, Software

Development, Vendor Management, Risk & Audit, Digital Security, Human Resources

Global Digital Investment

Approval

• Corporate CFO & CDO • Affected work unit CDOs • CIO, CTO • Directors: Finance, Program Management

Global Architecture

Exception Approval

• CTO • Affected work unit CDOs and DIOs • Directors: Vendor Management, Program Management,

Digital Risk & Audit, Digital Security

Designing a collection of digitalization governance mechanisms that fits well

with an organization’s competitive situation and with the organization’s culture is

likely to require a good bit of experimentation and trial-and-error experience. What

works for one organization may not work for other organizations; what had worked

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for one organization may not continue to work as the organization’s competitive

environment changes; and, what has worked well for a group of participants may not

continue to work well as the group changes membership.

Project-Level Digitalization Governance99

It was pointed out earlier in this chapter that digitalization projects often take

on lives of their own as project participants are caught up in resolving day-to-day,

project popups. Project popups are unanticipated problems or stakeholder

demands that arise as projects unfold. As the outcomes from the actions taken to

resolve popups accumulate, project deliverables often move away from what was

initially agreed. While such redirections can increase a project’s success,

unquestioned redirections can produce serious negative impacts. To counteract

potentially harmful redirections, project-level governance mechanisms need to be

implemented to account for three types of alignment:

 Objectives Alignment: Assures that a project stays on track to achieve sought global objectives and sought local objectives.

 Deliverables Alignment: Assures that a project stays on track to deliver

sought digitalization capabilities and sought technology capabilities.

 Architectural Alignment: Assures that a project’s installed platforms

conform, unless a formal exception is granted, to global architectural standards.

99 Material in this section is adapted from: N. Fondstat and D. Robinson, “Transforming

a Company, Project by Project: The IT Engagement Model,” MIS Quarterly Executive, March

2006, pp. 1-14.

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Fonstad and Robinson100 illustrate how BT (formerly British Telecom) and Toyota

Motor Marketing Europe apply project-focused governance mechanisms. A sample

of these mechanisms are described in Table 25-7.

Table 25-7

Project-Level Governance System Mechanisms

Mechanism Description Alignment Focus

Managerial Roles

DIO Senior technology managers housed in local work units. • Objectives

Project Sponsor All projects required to have a senior business sponsor. • Deliverables

Project Architect System architects assigned to project teams. • Architectural

Governance Processes

Project Portfolio Management

Project features compared against installed platforms to eliminate redundancies & incompatibilities.

• Objectives

Project Appraisal All stakeholders examine & sign off, early in a project’s life, on the project’s objectives & deliverables.

• Objectives • Deliverables • Architectural

Architectural Exceptions

Consider requests for global policies/standards exemptions. • Architectural

Post-Project Review

Assessing a project’s realized outcomes & learning what went especially right and wrong with the project.

• Objectives • Deliverables • Architectural

Governance Structures

Project Approval and Continuance

Committee

Ongoing project funding & participant evaluations linked to achieving global objectives, delivering digitalization capabilities & conforming to global policies/standards.

• Objectives • Deliverables • Architectural

The governance mechanisms described in Table 25-7 reveal two insights

regarding the design of digitalization governance systems. First, effective systems

of digitalization governance make use of overlapping mechanisms to direct and

constrain participants’ behaviors. Note, for example, how the project architect role,

an architectural exception-handling process, and a project approval/continuance

committee complement one another in ensuring that projects conform to global

architectural standards. Second, individual governance mechanisms often address

100 N. Fonstad and D. Robinson, “Transforming a Company, Project by Project: The IT

Engagement Model,” MIS Quarterly Executive, March 2006, pp. 1- 14.

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multiple governance aims. For example, the project appraisal process and the post-

project review process target all three types of alignment.

Information Governance at Intel101

Most organizations today are experiencing exponential growth in both the

volume of data being captured (via transaction processing, email and chat traffic,

social technologies, etc.) and associated information management costs (for storing,

protecting, accessing and analyzing these data). Three primary information

management challenges typically arise in the face of such growth:

 How do we protect this expanding mass of data against digitalization risks?

 How do we enable our employees to use these data, especially for new

purposes?

 How do we contain our information management costs?

Here, we describe how Intel is addressing these rather conflicting challenges through

information governance. More specifically, you will see how Intel has evolved its

information governance strategy from a protect approach that tightly locked down

data to a protect-and-enable approach that permits potentially risky, but value-

creating, uses of these data.

Intel’s massive collections of data have been growing at a rate of 30 to 40

percent per year over the last decade. During this same timeframe, Intel’s overall

spending on digitalization had been in a planned decline (from 3.5% of sales in 2004

to 2.4% of sales in 2011), largely as a result of a technology consolidation begun in

2004 that brought all digitalization activities under a single corporate technology

101 The material in this section has been adapted from: P.P. Tallon, J.E. Short and M.W.

Harkens, “The Evolution of Information Governance at Intel,” MISQ Executive, December

2013, pp. 189-198.

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function. Given the absence of a strong information governance program, Intel’s

trending decrease in overall digitalization spending would soon reverse.

Three events spurred Intel to systematically address its information

management challenges. First, as mentioned in the previous paragraph, Intel

consolidated all digitalization activities (across all business units and all geographic

locations) under a corporate-level CIO in 2004. As part of this consolidation effort,

Intel’s Information Management (IIM) group initiated a Master Data Management

(MDM) program to create a set of global data management policies to be applied

across the organization. A key governance mechanism associated with this MDM

program was establishing information governance boards for each of six core data

domains: customer, supplier, location, item, worker, and finance. Second, the

Sarbanes-Oxley Act of 2002 had compelled Intel to better protect its transaction-

level financial data. Third, in early 2003, Intel had been seriously impacted by the

SQL Slammer virus, resulting in a corporate officer leading a security task force drawn

from every major business unit and every significant corporate support function (e.g.,

finance, technology, legal, corporate security, etc.). This task force was charged with

establishing new global continuity, risk and security policies.

Taken together, these three events triggered Intel’s protect era of information

governance, characterized by the primary objective of locking down access to Intel’s

digitized data. The information governance policies that were established tightly

restricted unnecessary access to critical data assets. Over time, however, two

significant drawbacks of this very restrictive governance system became apparent.

First, this heavy-handed approach led to an epidemic of engineers and other business

professionals devising workarounds (within the letter, but certainly not the spirit, of

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the global governance policies) to complete work assignments. Not surprising, these

workarounds served to increase Intel’s technical, organizational, reputational and

financial risks. Second, these very restrictive governance policies found most data

being kept within highly-expensive data management environments. As data volume

continued to grow, data-related costs escalated.

By 2009, Intel’s senior technology leadership recognized the protect era

governance policies to be excessive, expensive, risk-inducing and detrimental to

Intel’s long-term commitment to digital innovation. This led to a reworking of the

firm’s information governance systems, resulting in a protect-to-enable approach

aimed at increasing business value through a greater use of digitized data but within

defined, quantifiable and tolerable risk limits. Because innovation had been and

continued to be a central element of Intel’s competitive success, a key governance

effectiveness criterion for this protect-to-enable era involved assessing the effect of

governance policies on innovation and time-to-market.

A central governance mechanism introduced in this protect-to-enable era was

a review process within which all data owners were required to classify their data

according to its value-potential. Based on its classification, data was then stored

within an appropriate data management environment. By provisioning a variety of

data management environments (each providing a distinct level of security, cost and

ease-of-access), this governance process simultaneously addressed all three of

Intel’s information management challenges.

The protect-to-enable era involved three layers of information governance: a

policy-setting layer, a tactical-planning layer and an operational layer.

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Information governance policy setting is vested in an Ethics and Compliance

Oversight Committee within Intel’s Risk and Compliance function. Given this

committee’s strategic role, its membership is drawn from support functions

(technology, HR, legal, business development, internal audit, etc.) and line functions

(sales and marketing, manufacturing, product design, etc.) across the company. This

committee meets on a quarterly basis to review and, where necessary, propose and

establish information governance policies for business units and for country locations.

Responsibility for information governance tactical planning is assigned to

Intel’s Corporate Risk and Security Group (CRSG), whose purview covers digital and

paper records across all (domestic and international) work units. The CRSG took

over many of the activities of the information governance boards (established in 2004

with the MDM program), with these information governance boards now focused on

technical concerns (such as establishing data standards for business process

integration). Because of its expanded information governance responsibilities, the

CRSG introduced new work roles, such as data architects (knowledgeable of the

complexities of capturing and retaining massive amounts of data) and business leads

(knowledgeable of how data might be applied in new ways).

Day-to-day operational activities, e.g., data backups, maintaining data

dictionaries, etc., are handled by Intel’s corporate technology function.102 In addition,

the corporate technology function also regularly conducts audits to check compliance

with Intel’s information governance rules and with external (domestic and

international) regulations, and regularly conducts security-related scenario planning

102 Intel’s internal audit function and its Security and Privacy Office monitor the firm’s internal and

external landscapes for threats and other signals indicative of increased information risk.

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exercises. Analyses of outcomes from these audits and scenario planning exercises

then become the basis of information management policy recommendations.

In 2010, Intel created a business intelligence (BI) data management group for

the purpose of coordinating the data being used for business analytics. The desire

by business analytics professionals for self-service BI capabilities, such as easily

gaining access to broad collections of data owned by work units from across the

company, found Intel again reassessing its information governance policies. The BI

data management group, serving largely as a broker between business analytics

professionals and data owners, championed the further loosening of data access

restrictions and the involvement within the data classification review process of not

only data owners, but also business leads able to envision how to generate value

from data by using it in new ways.

A Recap and Look Ahead

The managerial roles, structures and processes established in implementing a

digitalization governance system create formalized arenas within which organizations

are able to direct and constrain the actions of individuals involved with digitalization

decisions. Of course, the interactions occurring within these formalized arenas do

spill over into other aspects of the involved-individuals’ work lives: conversations

continue outside these arenas; personal relationships are formed, strengthened and

damaged; mindsets are changed, etc. Still, the key in designing an effective system

of digitalization governance is to ensure that most, if not all, critical decisions are

addressed and resolved in these formalized arenas.

In all likelihood, nonetheless, a far greater number of digitalization decisions

are acted on outside of, rather than within, these formalized arenas. For example,

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digitalization issues are often raised as powerful leaders convene for other purposes;

and, as mentioned earlier in this chapter, project team members make countless

decisions as they interact among themselves and with project stakeholders. Usually,

each of the decisions made outside of formalized governance arenas would seem to

have little impact beyond their immediate scope. However, when considered

collectively, the outcomes from a series of minor decisions can produce significant,

unintended consequences.

The next chapter describes the third tactic for platform management – how

organizations organize their digital capabilities. What actually transpires, day-to-

day, in organizations is largely determined by individuals’ personal relationships, and

these personal relationships are inordinately influenced by where individuals are

physically located and with whom they usually work. By appropriately positioning

digital capabilities such that these capabilities are optimally aligned with work

activities associated with formulating and implementing digital strategies, the

likelihood is increased that the right people apply the right criteria at the right time

in making digitalization decisions.

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Chapter 26. Digitalization Organization Design

Above all else, the quality of digitalization-related work activities depends on

the quality of the informal working relationships that exist amongst the individuals

engaged in these activities. Successful digitalization invariably requires that a broad

range of information and knowledge be combined. It is a rare occurrence that an

individual assigned a task possesses all the information/knowledge needed to

complete the task. Needed information must be sought from others, tough problems

are often best resolved with the help of others, and seemingly chance conversations

often turn out to be the sources of the insights leading to a task’s accomplishment.

Now, think about your own sources of work-related information and

knowledge. Who are your most valued sources of help and support? Invariably, they

are people with whom you regularly interact and have developed a personal

relationship – in other words, people with whom you feel comfortable discussing

important, challenging and sensitive issues.

This chapter describes differing designs for locating the human assets engaged

in an organization’s digitalization-related work activities. The primary aim in devising

a particular digitalization organization design is to establish mutually-benefitting

working relationships among the individuals involved with digitalization-related work

activities, such that robust webs of knowledge, information, insight and authority are

established to direct and facilitate these activities.

A digitalization organization design specifies where digital strategies are

formulated, where digital capabilities are located, where digitalization activities are

performed, and whom has authority over these activities. An effective organization

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design directs employees’ work behavior through formal influences and informal

influences. Formal influences follow from superiors’ explication of the policies,

goals, priorities, plans, procedures, rules, guidelines, etc., to be followed as

employees carry out work assignments. These formal influences are reinforced

through governance systems. Informal influences follow from the personal

relationships employees build with co-workers. In many situations, these informal

influences prove just as important to task performance, if not more so, than do the

formal influences. We cover digitalization organization design through the following

topics:

 Three Key Interaction Networks

 Prototypical Digitalization Organization Designs

 Promoting Digital Innovation at the YCH Group

Three Key Interaction Networks

A central concern in digitalization organization design involves ensuring that

the right people are being brought together to form three key interaction networks.

An interaction network refers to a web of interpersonal relationships within which

individuals exchange facts, information, knowledge, experiences, perspectives and

beliefs.

Table 26-1 summarizes the individuals typically involved with and the primary

focus of a visioning network, a value discovery network, and a sourcing network.

Visioning networks involve the individuals and groups charged with shaping and

directing the global digitalization decision domain. Value discovery networks

involve the individuals and groups charged with shaping and directing the demand-

side digitalization decision domain. Sourcing networks involve the individuals and

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groups charged with shaping and directing the supply-side digitalization decision

domain.

Table 26-1 Three Key Interaction Networks

Network Participants Strategy/Policy Focus

Visioning • Corporate leadership team • Work unit leadership teams

• Market-ecosystem participation • Business model evolution • Digital strategies & policies • Technology strategies & policies • Global/local platform balance

Value Discovery

• Corporate CDO & work unit CDOs • Work unit leadership teams • Corporate technology leadership

team & work unit technology leadership teams

• Vendor, provider & partner digital strategists

• Competitive positioning • Executing business models • Digital innovation • Digitally-enabled competitive actions • Global/local platform balance

Sourcing

• Corporate technology leadership team

• Work unit technology leadership teams

• Vendor, provider & partner account teams

• Technology strategies, policies, architectures & standards

• Internal/external provisioning/hosting of technology assets, technology services & digitalization solutions

• Global/local platform balance

Two objectives are paramount in establishing robust visioning, value discovery

and sourcing networks. First, at any given point-in-time, an interaction network’s

active, influential members must include participants representing the work units

whose value-adding contributions most significantly affect an organization’s current

and near-future competitive success. Intentionally or unintentionally excluding a

critical work unit or having a critical work unit represented by a passive participant

can have disastrous, long-term consequences. Second, at any given point-in-time,

an interaction network’s active, influential members must include those holding the

authority to release the resources required in undertaking networked-sanctioned

actions. In the absence of such individuals, network-sanctioned actions might never

be initiated or, if initiated, are likely to be either underresourced or poorly resourced.

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Prototypical Digitalization Organization Designs

In practice, the active, influential participants within visioning, value discovery

and sourcing networks are largely determined by how an organization has structurally

positioned its digitalization-related capabilities and digitalization-related work

activities. While the structural positioning of an organization’s digitalization-related

capabilities/activities is always somewhat unique, two prototypical organization

designs exist: the partner model and the platform model. Table 26-2 provides an

overview of each of these designs.

Table 26-2

Contrasting the Partner Model and the Platform Model

Partner Model Platform Model

Location of Technology

Professionals

• Most housed within work unit technology groups.

• Most housed within the corporate technology group.

Work Unit Digitalization

Activities

• Formulate digital strategy & seed ideas for digital innovations.

• Implement, operate & evolve local digital solutions.

• Formulate digital strategy. • Envision and evolve digital solutions.

Corporate Technology

Group’s Digitalization

Activities

• Seed ideas for global digital strategy & policies.

• Envision and implement global technology strategy.

• Implement innovative digitalized solutions.

• Envision & implement innovative digitized solutions.

• Support the corporate office. • Implement, operate and evolve

global digital solutions.

• Seed ideas for the global digital strategy • Formulate & implement the global

technology strategy. • Seed ideas for and implement innovative

digitalized solutions. • Envision and implement innovative

digitized solutions. • Implement, operate & maintain digitalized

solutions. • Envision, implement, operate, maintain &

evolve digitized solutions.

Best For • Organization engaged with a variety

of market ecosystems or highly- segmented consumer communities.

• Organizations engaged with a single market ecosystem and a (relatively) homogeneous consumer community.

Partner Model

With the partner model (see Figure 26-1), the corporate technology group is

largely overshadowed by an organization’s work unit technology groups. Work units

are supported by their own technology groups, with these work unit technology

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groups working closely with their work unit peers to design, implement and evolve

local digital solutions. In fact, many of these work unit technology groups are likely

to be larger (budget, staffing, etc.) than the corporate technology group. Typically,

the leader of a work unit technology group (often a DIO) reports directly to the leader

of the work unit, but maintains a dotted line relationship to the CIO. As a

consequence, the primary allegiance of a work unit technology group is to the work

unit, not to the corporate technology group.

Figure 26-1 The Partner Model

CEO

CIO

Corporate Leadership

Visioning Network

Work Unit Leadership

DIO

Solution Delivery

Digital Strategies

Technology Strategy

Platform Operations

Solutions Delivery

Digital Strategies

Corporate Offices

Work Unit

Corporate Technology Group

External to the Organization

Platform Operations

Corporate Office

Support

Solution Delivery

Platform Operations

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CDO

Four aspects of the partner model warrant special mention. First, as the

technologists assigned to a work unit’s technology group are physically located with

their work unit peers, opportunities abound for establishing strong personal

relationships. Second, work unit CDOs and DIOs typically participate regularly in a

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technology management council along with the corporate technology group’s

leadership team. This council provides a forum where:

 Work unit CDOs and DIOs can communicate their units’ needs, priorities and concerns.

 The corporate technology group leadership team can take a lead in

articulating global digital strategies, policies and priorities.

 Council participants can be kept aware of, contribute to and debate planned

digital innovations, significant digital investments and major digitalization initiatives.

Third, to facilitate digitalization across the organization, a digital strategy consulting

group is commonly directed by a corporate-level CDO. Fourth, under the direction

of the CIO, the corporate technology group seeds ideas for, implements, operates

and evolves a limited number of global platforms.

For the partner model to function effectively, the funding of digitalization is

usually carried out differently for business platforms, for global platforms, and for the

corporate technology group. Business platform funding largely occurs within work

units and generally includes costs associated with: a work unit technology group’s

administrative and personnel costs; envisioning, implementing, enhancing and

radically overhauling the work unit’s local digital solutions; and, carrying out local

strategic experiments. With a strategic experiment, a trial-version of a digital

innovation is implemented within a real, but tightly-bounded, work context. The

objective of strategic experimentation is to limit investment and risk, but still gain

insights (via analysis of collected data) on the viability of the digital innovation. While

most work unit digitalization spending is vested within work unit operating budgets,

some funding is provided by the corporate leadership team – most often with an aim

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of encouraging work units to engage in digital innovation and as an incentive to

collaborate with other work units in developing and using global platforms.

Global platform funding covers spending and investment associated with

enhancing or radically overhauling installed global (business and digital) platforms,

implementing new global platforms, and experimenting with innovative digitized

solutions. The funding for global business platforms comes from some combination

of the work units’ operating budgets and the corporate leadership team.

Increasingly, today, it is not unusual for organizations following the partner model to

apply global digital platforms. Typically, the costs of these global platforms are

apportioned back to the work units’ operating budgets via negotiated chargeback

(internal transfer prices) budgeting processes.

Corporate technology group funding covers: the administrative and personnel

costs attributed to the corporate IT group; the costs of meeting the digitalization

needs of the corporate leadership team; the costs of implementing, operating, and

evolving global platforms; and, the costs of seeding ideas for digital strategy and

digital solutions across an organization. Generally, some portion of these costs

(often, a very large portion) is treated as corporate overhead, with the remainder

charged back to the work units.

Platform Model

With the platform model (see Figure 26-2), the principal responsibility of the

corporate technology function is to seed demand for, implement, operate and evolve

global digital solutions (i.e., global business platforms and global digital platforms).

Typically, the corporate technology function also implements and operates most of

the work units’ local digital solutions. By locating most technologists under the CIO

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and physically close to one another, strong personal relationships can be built within

and across the corporate technology group’s platform-focused work units. As a

consequence, it is anticipated that installed platforms and available digital capabilities

will follow best-practices and, where competitively desirable, exhibit leading-

practices. Because of the corporate technology group’s expertise and global-

perspective, the corporate technology group – with sanctioned exceptions – handles

the vast majority of the work units’ digitalization-related work activities. Essentially,

the corporate technology group operates as a business within a business to provision

and operate most of an organization’s digitalization solutions.

Figure 26-2

The Platform Model

Technology Strategies

CEO

CIO Work Unit Leadership

Account Managers

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CDO Digital Strategies

Platform Managers

CDO

Digital Strategies

A key managerial role associated with the platform model is that of the account

manager. Account managers serve as the corporate technology group’s primary

line of contact with the work units. Typically, account managers have solid-line

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reporting relationships up to the CIO and dotted-line reporting relationships with the

heads of the business work units for which they coordinate digitization-related work

activities. Account managers - and their staffs - are expected to develop personal

relationships with the work unit’s leadership team, especially the work unit’s CDO.

Ideally, these personal relationships also enable the work unit leadership teams to

influence the natures of installed global platforms, such that most of the work units’

digitalization needs are met by these global platforms. Account managers work with

work unit CDOs in resolving the work units’ digitalization problems.

A second critical managerial role is that of the platform manager. Platform

managers, who report up to the CIO, are responsible for designing, implementing,

operating and evolving global platforms. Ideas for enhancing a global platform can

come from internal sources (e.g., account managers, work unit CDOs, internal

digitalization consultants, etc.) and external sources (e.g., technology service

providers, consultancies, peers in other organizations, etc.). If platform managers

perform their responsibilities well, the corporate technology group should be able to

confidently project itself as the organization’s predominant digitalization provider.

Implicit here is the option for work units to have a choice in determining how and by

whom their digitalization needs are met. Most often, the option to go outside the

corporate technology group requires a strong business case, given that going outside

the corporate technology group can seriously hamper an organization’s ability to

leverage its digital investments.

Generally, account managers (and their staffs) are physically located with the

platform managers (and their staffs) so that strong working relationships are

developed and maintained. It is through these strong relationships that:

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 Account managers (and their staffs) are able to develop deep understandings of global platform capabilities and the planned trajectories of

these platforms.

 Platform managers (and their staffs) can develop deep understandings of

the work units’ digitalization needs and how these needs are expected to evolve.

For the platform model to function effectively, digitalization funding differs

from that described earlier regarding the partner model. The vast majority of

digitalization spending and investment occurs within the corporate technology group.

Typically, the direct digitalization spending by a work unit involves the administrative

and personnel costs associated with a work unit CDO, customized services

provisioned by the corporate technology group, and any digitalization activities done

independent of the corporate technology group (i.e., a work unit contracts directly

with a technology service provider). However, work units’ operating budgets usually

account (via chargeback processes) for much of the expenses associated with

staffing, administering and operating the corporate technology group.

Variations on the Partner and Platform Models

Very few organizations make use of a pure partner model or a pure platform

model. Three reasons explain why this tends to be the case. First, few organizations

are good candidates for the pure forms of either of these positioning models (refer

back to the last row of Table 26-2). Second, it takes considerable time and political

effort to fully implement any organization design. Even if an organization was seen

as a good candidate for a pure partner or pure platform model, at the conclusion of

a lengthy implementation period it is highly likely that the just-implemented design

would no longer be optimal. Third, organizations’ (and their work units’) internal and

external environments are always in flux, most often incrementally but occasionally

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radically, and organizations’ (and their work units’) responses to such changes will

influence what is seen as an optimal digitalization organization design.

Common variations to the partner and platform models are observed and these

are described in Table 26-3. In this table, primary business processes are directly

involved in making available products/services to consumers/clients and in fulfilling

customers’/clients’ requests, and support business processes are involved with the

administrative and staff work activities necessary for carrying out primary business

processes.

Table 26-3

Alternatives to the Partner Model and Platform Model

Digitalization Organization Design Model

Business Platforms Digital Platforms

Primary Business Processes

Support Business Processes

Enabling Primary Business Processes

Enabling Support Business Platforms

Pure Organization Design Models

Partner Partner Partner Partner Partner

Platform Platform Platform Platform Platform

Organization Design Model Variations

Global Digital Platform

Partner Partner Platform Platform

Global Support Platform

Partner Platform Partner Platform

Local Primary Platform

Partner Platform Platform Platform

Table 26-3 begins by characterizing the pure forms of the partner and platform

models. With the global digital platform model, an effort is made to exploit

technology standardization wherever possible and appropriate, while recognizing that

most work units vary considerably regarding their digitalization needs (and, hence,

stand to benefit from local business platforms). Here, a platform model is applied

for most digital platforms, but a partner model is applied for most business platforms.

With the global support platform model, an effort is made to exploit technology

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standardization and business process optimization for support business processes,

while recognizing that work units vary considerably regarding the natures of their

primary business processes. Here, a platform model would be applied for most

support business processes, but a partner model would be applied for primary

business processes. With the local primary platform model, an effort is made to

exploit technology standardization to as great an extent as is possible and to exploit

business process optimization for support business processes, while recognizing that

most work units vary considerably regarding their primary business processes. Here,

a platform model would be applied for most digital platforms and for most support

business processes, but a partner model would be applied for most primary business

processes.

It should be noted that the global digital platform, global support platform and

local primary platform models again represent pure forms of digitalization

organization design. In practice, any pure design model should be seen as a starting

point to be tweaked as necessary to account for an organization’s unique contextual

situation.

Energizing Digital Innovation at the YCH Group103

Founded in 1955, the YCH Group is a logistics and supply chain management

company serving clients in the Asia-Pacific region. By 1988, YCH was providing

manufacturing clients across the world with integrated logistics solutions and services

through a variety of global business and technical platforms. A core element of YCH’s

103 The material in this section is adapted from: T.S.H. Teo, C. Ranganathan, S.C.

Srirastava, and J.W.K. Loo, “Fostering IT-Enabled Business Innovation at YCH Group,” MIS

Quarterly Executive, December 2007, 211-223.

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business strategy has involved and continues to involve aggressive digitalization of

the logistics solutions/services offered to and delivered to clients.

As a relatively small player in the world-wide logistics services industry, YCH

must compete with much larger competitors, some of which have very deep pockets.

As a consequence, the company decided to focus its supply chain and logistics

solutions and services to meet the demands of a limited set of world-class

manufacturing clients. Why this particular niche? The companies populating the

niche have extremely complex operational flows requiring customized, sophisticated

logistics solutions. Having developed unique capabilities to design, build and apply

the innovative logistics solutions demanded by such clients, YCH has become a

dominant player within the market niche. YCH designs and builds all of its digitalized

logistics solutions from scratch; three of the company’s global business platforms

delivering logistics services are described in Table 26-4. The company’s executive

leadership works hard to cultivate a corporate mindset and culture that places

digitalization at the forefront of the organization’s operational and managerial

practices.

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Table 26-4 Examples of the YCH Group’s Global Business Platforms

Global Business Platform

Functionality

Inbound Logistics

• Comprehensive, just-in-time hub for a manufacturing client’s global suppliers.

• Tracks multiple suppliers, multiple orders & multiple items (raw materials & components).

• Material, information & financial transactions. • Vendor-managed inventory.

Outbound Logistics

• Comprehensive hub for finished goods fulfillment. • Manufacturer’s finished goods are dispatched to YCH, where

they are sent on to specific client end-points (distribution centers, retail stores, end-customers, etc.).

• Auto-replenishment, route optimization, load optimization, etc.

Reverse Logistics

• After-sales logistics services: goods that need to be repaired, serviced, returned, exchanged, etc.

• Warranty-related services.

In the early 2000s, YCH spun off its corporate technology function as a

separate subsidiary charged with:

 Developing, operating and enhancing the digitalized business solutions (and enabling technology services) offered to clients.

 Marketing and selling YCH digitalized business solutions as software products (standalone digitalized business processes and business platforms) offered

to other firms (including YCH competitors).

 Leading the company’s R&D and strategic experimentation efforts driving the development of innovative, digitalized logistics solutions.

There were two primary goals in spinning off YCH’s corporate technology function: to

generate an additional stream of revenue (i.e., the sale of software products); and,

to create a more entrepreneurial corporate technology function that was focused on

developing innovative logistics solutions/services, especially those having appeal

beyond YCH’s existing clients). YCH strategists believed strongly that

selling/licensing these software products to competitors would not cannibalize the

company’s primary revenue streams for two reasons. First, any competitor

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purchasing a YCH software product would always be at least one-step behind YCH’s

current logistics services offerings. Second, YCH would not be sharing with other

logistics service providers the company’s rich expertise on how to best apply a given

software product to meet a client’s needs.

In addition to creating a more entrepreneurial corporate technology function,

YCH senior executives introduced a number of other management practices aimed at

energizing digital innovation. Table 26-5 describes five of these practices.

Importantly, these five practices, if applied well, can be effective in promoting digital

innovation for any type of organization, regardless of the organization’s digitalization

organization design.

Table 26-5

YCH Group Management Practices Aimed at Facilitating Digital Innovation

An Innovation Culture

• Visible, aggressive encouragement & rewarding of innovative outcomes. • Free flow of ideas across sales, operations & technology groups. • Open office concept for the corporate technology group (e.g., glass cubicles) where everyone

can see what everyone else is doing and everyone else’s availability.

Cross-Functional Project Teams

• Projects staffed by teams of sales, operations & technology professionals. • Project teams meet monthly with senior managers to discuss project status & direction.

Project Justifications Based on Strategic Value

• Project proposals assessed by potential strategic value for YCH & for YCH’s clients. • Funding made available for high-risk projects with high potential strategic value.

Client-Centric Alliances

• Strategic partnerships to generate, nurture & develop innovative logistic solutions. • Deepen & leverage relationships with strategic partners to grow new revenue streams.

Continuing Development of Professional Staffs

• Sales and operations professionals are regularly exposed to new digital technologies and to new digitalized logistics solutions.

• Technology professionals are regularly exposed to logistics best practices across industry segments to spur & direct innovative digitalized solutions.

A Recap and Look Ahead

It is useful to reflect on how enterprise architectures, digitalization governance

systems and digitalization organization designs complement one another. Once

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specified, enterprise architectures serve as a template for both establishing

digitalization governance system postures and for organizing digital capabilities and

digitalization-related work activities. Once implemented, governance system

mechanisms bring the right people together to consider the right issues when

specifying and evolving enterprise architectures and when deciding on the location of

digital capabilities and digitalization-related work activities. Finally, it is the personal

relationships that develop as a result of a digitalization organization design that

engender the collaborative and committed interactions amongst the members of an

organization’s various leadership teams that is necessary for specifying and evolving

meaningful enterprise architectures and for designing effective systems of

digitalization governance.

Mindfully attending to the design of enterprise architectures, digitalization

governance systems and digitalization organization designs should enable

organizations’ leadership teams to maintain appropriate balances among their global

and local platforms. As a consequence, these organizations are more likely to host

their executing business models on robust platforms, to optimally leverage their

digital investments, and to sustain levels of digital innovation necessary for their

continued competitive success. Our concluding chapter to this final part of the book

describes five mandates for action aimed at focusing organizations’ leadership teams

as they engage in such design activities.

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Chapter 27. Executive Mandates: Platform Management

Business platforms and digital platforms increasingly serve as the primary

means through which today’s organizations carry out their most critical operations

and launch their competitive moves. Global platforms enable coordinated actions

involving multiple work units, whereas local platforms enable individual work units to

move nimbly while taking finely-honed competitive actions. However, if an

organization’s global and local platforms are not designed and managed well, they

can present dark sides:

 Institutionalized global platforms can become iron cages that constrain forward-looking thought and action.

 Proliferating local platforms can preclude the interconnectivity increasingly

necessary for implementing multi-unit and multi-organization digital strategies.

 Strong biases favoring global platforms over local platforms can discourage, if

not suppress, digital innovation.

In this final chapter, we provide five mandates for executives striving to better

design, manage and evolve their organizations’ collections of business platforms and

digital platforms:

 Combat Complacency

 Crystallize the Competitive Value of Global Platforms

 Expose Digital Innovation Sweet Spots

 Instill a Forward-Looking Bias into Platform Design

 Configure Systems of Participant Interlocks

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Combat Complacency

The individuals engaged within digitalization interaction networks and affected

by digitalization governance mechanisms must include an organization’s most

powerful, influential and talented leaders. With few exceptions, such individuals have

very little slack in their work schedules and, for many of these individuals,

digitalization-related concerns are seen as a subset (sometimes a small subset) of

their responsibilities. Given real constraints on such individuals’ attentions, many

are likely to perceive their involvement with digitalization interaction networks and

governance mechanisms, at best, as a distraction or, at worse, as something to be

avoided. Such perceptions are especially likely to exist when few, if any, serious

operational problems or imminent competitive threats exist. When a sense of

digitalization ennui develops, affected leaders are likely to disengage (that is, become

passive or absent participants) from digitalization interaction networks and override

digitalization governance mechanisms.

What are the symptoms of complacency across an organization’s leaders?

There are many signals, with the most striking being:

 Executives and senior managers are directly engaged with very few, if any, digitalization decisions.

 Executives and senior managers seldom interact with members of their organization’s corporate technology groups or work unit technology group

leadership teams.

 The preponderance of changes being made to an organization’s digital strategies and technology strategies are incremental in nature.

 Few digital innovations are launched.

 The spending on global platforms steadily increases and the spending on

local platforms steadily increases.

 The corporate technology group’s budget steadily increases.

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How can such complacency be prevented or, once identified, overcome? The key lies

in enriching executives’ and senior managers’ understandings of:

 The significant influence of digitalization and of global/local platforms on an organization’s competitiveness.

 The roles served by digitalization interaction networks as the wellsprings from which most competitive moves flow.

 The roles served by digitalization governance mechanisms in keeping digital strategies on track, in ensuring digitization policies are mindfully followed, and in questioning the appropriateness of in-place digital strategies/policies

and technology strategies/policies.

The remaining four mandates are directed at instilling these understandings.

Crystallize the Competitive Value of Global Platforms

The digital capabilities provisioned through installed global platforms

represent, when mapped against organizations’ competitive environments, the

means for maintaining and, ideally, for enhancing competitive positions. Too often,

however, these embedded digital capabilities are either not recognized or not

understood by those participating in digitalization interaction networks and

digitalization governance mechanisms.

When applied well, the economies of scale and scope provisioned by global

platforms enable organizations to marshal their digital capabilities to:

 Drive down cost structures.

 Increase the volume and speed of transaction-handling.

 Expand the breadth and depth of products offerings and services offerings.

 Implement and operate complex, sometimes novel, internal operating environments from which to plan, conduct and control the sale and delivery of products and services.

 Implement and orchestrate, increasingly in conjunction with strategic

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partners (suppliers, service providers, distributors, retailers, etc.), complex, sometimes novel, business platforms and market platforms from which to

plan, conduct and control the sale and delivery of products and services.

It is essential for an organization’s (overall and work unit) leadership teams to fashion

and disseminate, on a regular basis, communication programs describing the

competitive significance of digital capabilities and of global platforms.

Expose Digital Innovation Sweet Spots

While digital innovation tends to be a costly endeavor (e.g., business

assumptions can prove faulty, technologies might not work as expected, software

development can prove challenging, associated work practices need to be designed

and implemented, etc.), the benefits to be realized from gaining and then sustaining

a novel competitive advantage can be huge. Organizations that thrive through digital

innovation do not engage in a shotgun approach, but instead are systematic in

choosing where and when to innovate.

Successful innovation is anything but a trial-and-error process (though it often

may appear so). Instead, successful innovation occurs in well-understood market

ecosystem spaces and applies thoughtfully-configured, thoughtfully-targeted assets

and capabilities that result in novel products and/or novel services unlikely to be

quickly imitated by competitors, because the assets, capabilities and associated

configuration processes and implementation processes are either rare or would

require competitors considerable time, effort and expense to acquire.

Where are an organization’s digital innovation sweet spots? It varies

depending on whether an innovation predominately involves market-focused

innovation or technology-focused innovation. Market-focused innovation, which

emphasizes innovative digitalized solutions, directly targets competitive spaces

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characterized by significant revenue growth and/or by high-profitability market-niche

potentials and for which the organization holds proprietary access to requisite digital

assets, digital capabilities and/or configuration processes. Technology-focused

innovation, which emphasizes innovative digitized solutions, indirectly targets

competitive spaces by delivering proprietarily-held technology capabilities promising

magnitude increases in technology efficiency/effectiveness and high potentials of

being competitively applied. Compiling, on an ongoing basis, an embellished listing

of the most-promising digital innovation sweet spots and then distributing this listing

to digitalization interaction network participants and to digitalization governance

mechanism participants should increase the likelihoods that these participants will be

motivated to collaborate with other participants and that ideas for digital innovation

will appear more frequently within participant deliberations.

Instill a Forward-Looking Bias into Platform Design

Organizations’ business platforms and digital platforms serve as the engines

driving current work activities and as the superstructures enabling planned and yet-

to-be-planned competitive moves. However, given the immediacy of day-to-day

operating pressures, a natural tendency exists to emphasize today’s realities within

enterprise architectures, within digitalization governance systems and within

digitalization organization designs. Such a bias only serves to reinforce the dark

sides of digital platforms and, as a consequence, can result in digitalization ennui

settling in across organizations’ most powerful, influential and talented leaders.

Instead of basing enterprise architectures, digitalization governance systems

and digitalization organization designs on where an organization is today, these

designs should reflect – to an equal, if not greater, extent - where an organization is

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heading. To do this well is itself a delicate balancing act. But, if these designs are

not meaningfully directed toward the future, the deliberations unfolding within

digitalization interaction networks and orchestrated through digitalization governance

mechanisms are likely to deteriorate toward the mundane, providing little motivation

to sustain the involvement of powerful, influential and talented leaders.

Configure Systems of Participant Interlocks

Digitalization interaction networks and digitalization governance mechanisms

engage participants in defining, negotiating and resolving digitalization decisions.

However, the decisions being addressed by a specific group at a particular point-in-

time do not occur as isolated events. The decisions being negotiated by a group

today have been framed (e.g., assumptions, objectives, constraints, criteria, etc.) by

the group’s past negotiations and are influenced - sometimes directly but more often

indirectly - by the concurrent deliberations of other groups addressing related issues.

The absence of a robust decision framing (that is, decision framing missing salient

assumptions, objectives, constraints, criteria, etc.) is likely to result in a group’s

deliberations being dominated by a few participants, to be unsatisfying for most

participants, and to lead to ill-formed actions. Over time, such decision dynamics

only lead to both inferior outcomes and participant disengagement.

In order to enrich the context-space within which decisions are negotiated and

taken, participant interlocks should be designed into digitalization interaction

networks and digitalization governance mechanisms. With a participant interlock,

the same individual serves as a participant within two or more associated decision-

making groups. Two types of participant interlocks exist: temporal interlocks and

topical interlocks. With a temporal interlock, one or more individuals mindful of a

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group’s history are included as group participants. With a topical interlock,

individuals mindful of the deliberations of tightly-related groups are included as group

participants.

Given the highly-situational processes used in selecting participants of

digitalization interaction networks and governance mechanisms, it is impossible to

state specific guidelines regarding the extent to which participant interlocks should

be used. Stating the obvious might be best:

 For temporal interlocks, some is better than none – but not too many, as groupthink or ennui can arise.

 For topical interlocks, more is better than none or some. However, group

size needs to be limited or else associated dysfunctional group dynamics arise (e.g., a few members dominate, cliques form, etc.).

A Recap

It takes a great deal of effort by an organization’s leadership teams to design,

manage and evolve the organization’s collection of business platforms and digital

platforms. If done well, these efforts should maintain an appropriate balance in

global and local platforms, thereby enabling the organization to optimally leverage

its digital investments, sustain a strong digital innovation capability, and, thus,

maintain its competitiveness. All too often, however, an organization’s powerful,

influential and talented leaders are reluctant to invest the effort to actively engage

with digitalization interaction networks and digitalization governance mechanisms.

And, again all too often, when such leaders do choose to become active participants,

they offer insufficient or, worse, distracting guidance for ensuing deliberations.

In this third part of our book, we have described three tactics – enterprise

architecture design, digitalization governance design and digitalization organization

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design – that collectively promise to provide apt direction and guidance for the

individuals engaged with digitalization decisions. In this chapter, we have offered

five executive mandates for sustaining the attention and motivation of these same

individuals. But, be advised – none of these strategies and tactics represent quick-

fixes. Instead, they collectively represent the means by which organizations’

leadership teams orchestrate a never-ending digitalization journey. Bon voyage!

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APPENDIX: Basic Concepts

This appendix provides definitions and descriptions of many of the basic

concepts used in this text and in other materials covering digital strategy,

digitalization and digitalization management. The specific topics covered are:

 What is an Information System?

 Distinctions between Data, Information and Knowledge

 Basic Types of Information Systems

 Data, Information and Knowledge Use within Information Systems

 Information Systems in Practice

What is an Information System?

An information system is a computer-based system designed to accomplish

a set of sought objectives. An information system is comprised of seven elements:

sought objectives, business processes, data, people, computer hardware, systems

software and applications software (see Figure A-1).

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Figure A-1 Elements of an Information System

Computer Hardware

Applications Software

Sought Objectives

Business Processes

People

Data

Inputs

Outputs

Digital Technologies

Information System

Systems Software

Sought objectives refer to the purpose or purposes to be accomplished

through the information system. Organizations use information systems for a variety

of purposes: to automate routine operational activities such as payroll or fulfilling a

customer order; to provide employees with comprehensive, timely and accurate data

to be used in carrying out work assignments; to enable a customer to search through

an online product catalog; to aid product managers in developing ideas for the new

generation of products; etc.

Business processes refer to sequences of actions undertaken by one or more

employees in carrying out a recurring work activity. The actions that comprise

business processes can vary in the extent to which they are predefined through

policies, rules and procedures, and the extent employees are allowed to deviate from

these predefined policies, rules and procedures.

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Data are attributes of objects and events. Table A-1 provides examples of

common objects and events, along with their attributes. Typically, data are captured

and digitally stored for future processing by an information system because the

objects and events being described are either necessary or useful in carrying out

work activities. For example, a captured sales event is likely to be used immediately

(to remove the sold product from available inventory), to be accessed for future use

(in compiling weekly, monthly, quarterly and annual sales reports), and to be

accessed for yet-to-be-thought uses (e.g., a daily-sales forecast). Attributes of

events not captured at the time the event occurs are lost forever.

Table A-1

Data: Attributes of Objects and Events

Attributes

Objects

Employee Employee ID, name, job position, salary, home address, spouse, education, etc.

Product Product ID, product description, substitute products, stock-on-hand, etc.

Product Defect Defect ID, defect type, defect description, likely defect causes, etc.

Events

An Employee is Terminated

Employee ID, date, supervisor ID, reason for termination, etc.

A Customer Order is Placed

Order ID, date, customer ID, salesperson ID, product IDs, number of products, discount rate, etc.

A Product Defect is Found

Defect ID, date, employee ID, product ID, cause, etc.

People refer to an organization’s employees, employees of other organizations

(suppliers, vendors, service providers, strategic partners, etc.) and to the consumers

of an organization’s products and services. People directly use information systems

when they actively interact with a digitalized business process. People indirectly use

information systems when they do not actually interact with an information system,

but instead make use of an information systems’ outputs (e.g., reports, lists, memos,

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etc.) or supervise or interact with others directly or indirectly using an information

system.

Information systems are built from digital technologies. Digital technologies

deliver commodity-like digital capabilities. Two general types of digital technologies

exist: computer hardware and computer software.

Computer hardware refers to the devices that provide basic data processing

capabilities, data communication capabilities, data capture capabilities, data display

capabilities, and data storage capabilities. Typical hardware components include

processing units (servers, PCs, iPads, etc.), communication devices (routers,

modems, etc.), input devices (keypads, mice, touchpads, touchscreens, etc.), display

devices (LCD screens, printers, smart phones, etc.), and storage devices (hard

drives, optical drives, flash drives, etc.).

Computer software manipulates and transmits data and/or directs the

functioning of computer hardware. Two general categories of software exist:

systems software operates computer systems and coordinates across interacting

computer systems, and applications software executes digitalized business

processes that enable and support the accomplishment of sought objectives.

Distinctions between Data, Information and Knowledge

At their most basic level, information systems provide capabilities for cost-

effectively capturing, processing, storing and distributing data. It is important to

realize that what is being captured, processed, stored and distributed is just that –

data. And, data is very different from information, which in turn is very different

from knowledge, although these three terms are often used interchangeably.

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Data was defined earlier as the attributes of objects and events. Information

refers to sets of data that are interpreted for a specific purpose by a person facing a

specific decision situation. As is depicted in Figure A-2, data are manipulated (using

predefined rules) to produce a set of information to the person (or persons) facing a

decision situation.

Figure A-2 Data, Information and Knowledge

Data Filter

Summarize Manipulate

Data Act On

L e

a rn

in g

ro c e

s s e

Knowledge

Interpret Information Outcomes

R u

le s

R u

le s

R u

le s

Information arises when a person applies her understanding of the decision

situation (and of similar decision situations), along with an organization’s existing

norms and expectations, to interpret available data and to produce fresh insight

(trends, patterns, forecasts, etc.) regarding the decision situation. If this information

is meaningful, the person is normally able to reduce the uncertainty associated with

the decision situation, thus increasing the likelihood that a better decision outcome

will occur. The same set of data is likely to produce different information when

applied by a person coping with different decision situations or when applied by

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different people facing a similar decision situation. Information use eventually

culminates in a taken action and the outcomes experienced from this action. These

outcomes are then used (implicitly or explicitly) to confirm, reject or refine this

interpretation of the data.

Knowledge refers to the current state of understanding that exists about

some work-related activity (e.g., selecting a substitute product for an out-of-stock

product, resolving a recurring problem with a manufacturing process, deciding on an

optimal amount to spend on advertising for a certain class of products, etc.).

Knowledge exists within the minds of people, across groups of people (where

knowledge is referred to as shared understanding) and within organization

structures (e.g., policies, rules and procedures). As is depicted in Figure A-2,

knowledge accumulates and evolves over time as individuals learn from their

experiences and share knowledge with one another. As knowledge about a specific

work activity improves, existing rules associated with the work activity (i.e., the data

to be collected and reported, how to transform the data so that it can be more

meaningfully interpreted as information, how to apply sets of data and information

in making decisions, etc.) are modified and new rules are created.

Table A-2 summarizes distinctions in how data, information and knowledge are

created, stored and exchanged. First, consider how each is created. Data items are

formally defined so that these data are used consistently by all the individuals aware

of the definitions. However, the information created as individuals interpret these

data will vary depending on who is doing the interpretation and the situation in which

the interpretation is done. Knowledge is created through individual and group

learning processes. In order for knowledge to become an organization (rather than

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individual) resource, it must be codified (clearly expressed in written form) and

validated (shown to hold across time and situations) by knowledge experts.

Table A-2 Distinctions Among Data, Information and Knowledge

Issue Data Information Knowledge

How Created

Formally defined Individuals’ interpretations

• Individuals’ & groups’ learning processes

• Codification • Validation

Where Stored

• Digitized files & databases (primarily)

• Individuals’ personal files (lesser extent)

• Individuals’ minds (primarily)

• Reports & documents (lesser extent)

• Digitized files & databases (even lesser extent)

• Individual’s minds (primarily)

• Business rules (lesser extent)

• Digitized files & databases (even lesser extent)

How Exchanged

• Explicitly (primarily)

• Tacitly (lesser extent)

• Tacitly (primarily) • Explicitly (lesser

extent)

• Tacitly (primarily) • Explicitly (lesser extent)

Second, consider how each is stored. Data is primarily stored in formal

archives (files and databases), increasingly in digitized form. Some data, however,

will always be kept private by people (and, for the most part, unavailable to others).

Most of the information created as employees engage in work activities is either lost

once these activities are completed or maintained only in these employees’ minds.

Using interpreted information within reports or documents does preserve the

information, as long as the reports or documents are preserved. But, information

contained in reports and documents can be difficult to locate. If these reports and

documents are digitized and organized as digitized files or databases, then finding

specific information contained in a report or document becomes much easier. Most

of the knowledge that exists across an organization is stored in employees’ minds

and remains an individual rather than an organization resource. However, steadily

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increasing portions of this knowledge is stored both within the business rules

(digitalized and non-digitalized) used in directing business processes, and within

digitalized knowledge archives, such as a ‘best practices’ repository or a knowledge

management system.

Third, consider how each is exchanged. As it is formally defined, most data

are exchanged in an explicit (clearly expressed, usually written) manner. On the

other hand, most information is exchanged in a tacit (ambiguously expressed, usually

verbal) manner. Exchange ambiguity arises because interpretations of exchanged

information depend largely on senders’ and receivers’ experiences and current work

situations. Most knowledge is exchanged tacitly. However, once knowledge is made

available as an organization resource (i.e., it has been codified and validated),

exchange can occur in a largely explicit manner.

Basic Types of Information Systems

Organizations install large numbers of information systems that enable or

support operational and managerial processes. For the most part, these installed

information systems represent the features of one or more of five basic information

system types: transaction processing systems, information reporting systems,

decision support systems, automated decision systems, and messaging and

collaboration systems (see Table A-3). Figure A-3 illustrates the relationships among

these types of information systems. Below, we discuss how these types of basic

information systems could be used in a hypothetical manufacturing company.

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Table A-3 Types of Information Systems

Type Definition

Transaction Processing

Systems

Capture data regarding important objects & events, store these data and use the data in the execution of business processes and in the production of associated messages & documents.

Information Reporting Systems

Retrieve stored data to produce pre-specified reports regarding operational processes & managerial processes.

Decision Support Systems

Retrieve stored data and enable the manipulation of these data by individuals in creating ad hoc queries, analyses & reports regarding operational processes & managerial processes.

Automated Decision Systems

Embed decision rules into transaction processing systems, information reporting systems & decision support systems so that decisions are made directly by an information system rather than by a human.

Messaging & Collaboration

Systems

Digital communication channels that support, enable & augment person-to-person, person-to-group, and group-to-group message flows.

Figure A-3 Relationships Among the Types of Information Systems

Managerial Processes

Automated Decision Systems Transaction Processing Systems

Databases

Operational Processes

Information Reporting Systems Decision Support Systems

M e

s s a

g in

g &

C o

ll a

b o

ra ti

o n

y s te

m s

M e

s s a

g in

g &

C o

lla b

o ra

tio n

y s te

m s

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Operational Processes

Transaction processing systems capture data regarding important objects

and events, store these data, and use these data in the execution of operational work

processes and in the production of messages and business documents. This stored

data can then be used by the other types of information systems. Transaction

processing systems dominate a manufacturing firm’s operational work activities by

enabling or supporting much of what occurs within purchasing, receiving, inventory,

manufacturing, selling, order processing, order fulfillment and customer/product

support operational processes. Transaction processing systems are heavily involved

in carrying out day-to-day work and in populating databases (e.g., customer

database, product database, parts database, supplier database, employee database,

order database, etc.).

As knowledge is accumulated over time about operational activities, about the

products and services offered to customers, and about customers and suppliers,

many of the transaction processing tasks that previously were carried out by

employees are fully automated via automated decision systems. Automated

decision systems make use of business rules (i.e., policies and procedures for

executing actions and decisions) embedded within computer software such that when

specific conditions are detected (from analyzing captured and stored data), specific

actions and decisions are taken without human intervention. Below are some

examples of a few manufacturing operational work activities that are typically fully

automated:

 Purchase orders for parts are automatically sent to suppliers when inventory levels dip below pre-specified levels.

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 Sales orders from established customers with excellent credit ratings and for which all ordered products are in-stock are automatically accepted and

fulfilled.

 The next week’s work assignments and staffing schedules are automatically

developed and distributed to supervisors and employees on Friday afternoon.

Table A-4 provides a more general listing of the automated decision systems installed

by organizations today.

Table A-4 Examples of Automated Decision Systems

Work Activity Example

Product/Service Configuration

Identify the components required in providing a customer with a complex product/service that is tailored to the customer’s needs.

Route Determination Identify the appropriate path for servicing a client, an order, a complaint, a request, etc.

Policy Compliance Ensure that specified policies & procedures (rules, regulations, etc.) are followed in handling a customer, a client, an order, a complaint, a request, etc.

Fraud Detection Apply specified policies & procedures (rules, regulations, etc.) to identify a fraud event.

Yield Optimization Adjust prices in real-time in order to reflect current supply/demand conditions.

Dynamic Forecasting Adjust forecast targets (production, sales, purchasing, inventory, etc.) in real-time in order to reflect current supply- demand conditions.

Operational Control Adjust schedules, production levels, inventory levels, order amounts, staffing, etc., in order to reflect current work flow conditions.

It is important to recognize that the business rules embedded in automated

decision systems must regularly be examined to assess their continuing relevance.

Change is a constant for all organizations and a rule that was effective yesterday may

prove ineffective today.

Messaging and collaboration systems (email, instant messaging, virtual

conferencing, virtual work spaces, etc.) are used to provide directions, raise and

answer questions, brainstorm ideas, and resolve the problems that regularly arise as

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employees deal with suppliers, customers, unexpected events (e.g., a delayed

delivery) and anything else that happens to fall through the cracks.

Managerial Processes

Information reporting systems support the work activities of managers

responsible for the manufacturing firm’s operational, tactical and strategic activities.

Information reporting systems make use of the databases populated by transaction

processing systems; these databases are also supplemented by data obtained from

external sources (e.g., marketing research companies) or produced by staff

specialists (e.g., a data set describing the physical assets owned by the firm).

Information reporting systems use these data to generate information used by

managers when they are facing a decision situation. Typically, the reports being

produced are found useful for many different decision situations. The distinguishing

feature of information reporting systems is that these reports are pre-specified. It

would not be unusual for hundreds, if not thousands, of pre-specified reports (hard

copy or digital) to be produced in a typical manufacturing firm. Examples of such

reports include: weekly, monthly and quarterly sales reports; weekly, monthly and

quarterly budget reports; weekly, monthly and quarterly financial performance

reports; weekly, monthly and quarterly production problem (defects, delays, returns)

reports; and so on. Ideally, information reporting systems provide managers (as well

as other employees) with an overall view of what is going right, as well as what is

going wrong, within their areas of work responsibility.

As knowledge accumulates about business processes, business rules can be

embedded (i.e., another form of automated decision systems) into information

reporting systems to produce another type of pre-specified report – the exception

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report. An exception report is provided only when an exceptional condition (defined

through an embedded business rule) is detected. For example, the only time a

manufacturing manager overseeing a particular manufacturing operation might

receive a defect report is when the trend line tracing the proportion of defective

components approaches a pre-established level, say 0.001.

Decision support systems exist to meet a very different need: that of

providing managers, staff professionals and executives with the capability to address

ad hoc decision situations. Ad hoc decision situations refer to decision situations

that have not previously arisen or for which generally accepted ways of dealing with

the situation are lacking. Decision support systems allow decision makers to vary

the data being analyzed, as well as the criteria, conditions or objectives associated

with a decision process. Decision support systems provide much more flexibility than

do information reporting systems. But, this flexibility comes at a cost: a need to

invest in more sophisticated digital technologies and a greater effort on the part of

decision makers to learn how to use the various features of the decision support

system. Examples of decisions often supported through decision support systems in

a manufacturing firm include:

 Determining the need for and location of a new distribution facility.

 Determining whether or not to expand sales operations into new

international markets.

 Revising an organization’s preferred suppliers, given past experiences and growth opportunities.

 Determining the profitability and growth prospects of different customer segments.

 Reexamining employee cost-sharing levels regarding the firm’s benefit packages.

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Messaging & collaboration systems have fundamentally changed how

managers interact with others in carrying out their responsibilities. Communicating

and collaborating with peers, superiors, subordinates, suppliers, customers,

consultants and business partners (among others) represents a substantial portion –

seemingly an ever-increasing portion – of the typical manager’s day-to-day life.

Data, Information and Knowledge Use within Information Systems

Table A-5 examines data, information and knowledge within the context of the

basic types of information systems. Even a quick glance at Table A-5 should

underscore the importance of capturing and storing data about important objects and

events, as well as the necessity for these data to be comprehensive, accurate and

current. Subtler, but of no lesser importance, is the significant role served by

knowledge in creating the many business rules (digitized and non-digitized) that

dictate how data and information is filtered and processed.

Table A-5 Data, Information and Knowledge Use: Types of Information Systems

Information System Type

Data Information Knowledge

(Business Rules)

Transaction Processing Systems

• Captured by • Input into • Created by • Stored by • Output by

• Business rules direct transaction processing

Automated Decision Systems

• Input into • Created by • Stored by • Output by

• Business rules direct decision making

Information Reporting Systems

• Input into • Output by

• Business rules direct report production

• Users’ held-knowledge guides data interpretation

Decision Support Systems

• Input into • Created by • Stored by • Output by

• Input into • Stored by • Output by

• Business rules direct data analysis

• Users’ held-knowledge guides decision making

Messaging & Collaboration

Systems • Message content • Message content

• Message content • Business rules direct message

filtering

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Information Systems in Practice

While the five types of information systems have been separately described,

the information systems being implemented within organizations invariably have

aspects of two, three, four or all five of these basic types. Consider, for example, an

order fulfillment system installed within a manufacturing organization. The objective

of such an application is to determine how best to fill a customer order from the

finished goods inventories held at the manufacturing firm’s distribution centers. To

accomplish this objective, the order fulfillment system generates a listing of current

finished goods availabilities (across all distribution centers; accounting for already-

committed items, near-term production outputs and forecast orders), determines

shipping priorities (given sales commitments and customer importance) and costs,

and initiates the shipment once the decision is made as to which distribution center

(or centers) will physically fill the order.

Such an application could have parts that resemble a transaction processing

system (e.g., initiate a shipment), an information reporting system (e.g., listing

available inventories at each of the distribution centers), an automated decision

system or a decision support system (selecting the distribution center to use for an

order), and a messaging and collaboration system (alerting distribution center

employees of the need to pack the order for shipment). This work activity is

comprised of many different types of tasks and decisions (some large and some

small, some simple and some complex, some well understood and some less

understood). Some of these tasks and decisions might be fully automated, others

might involve substantial interplay between humans and digitalized solutions, and

still others might be handled solely by humans. Deciding just how an order fulfillment

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system should be designed, implemented and operated involves a complex set of

issues associated with aligning available technological resources and available human

talent, while accounting for both profitability expectations and customer

expectations. In a nut shell, this is exactly what digitalization is all about!

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GLOSSARY

CHAPTER 1: Digital Innovation and Disruption

Analytical domain – one of the three domains of digitalization; organizational

activities involved in improving understandings of what things should be done, what things need to be done, what things can be done, how things are done, and how what has been done is assessed.

Architecture – an overarching design framework specified to maintain established policies and to enable component interoperability.

Automation – one of the four engines of digitalization; simplifying and digitizing complex tasks and task-sequences, eliminating unneeded tasks and, as appropriate, performing tasks via digital technologies rather than via humans.

Blended organization – an organization that operates, to varying extents, as both a pipeline organization and a network organization.

Business-to-business (B2B) – when market exchanges occur between two organizations.

Business-to-consumer (B2C) – when market exchanges occur between an

organization and a person.

Business disruptions – 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.

Business model – a simplified and aggregated conceptualization of the value- creating, profitability-sustaining activities of an organization.

Collaborative domain – one of the three domains of digitalization; organizational activities involved in enabling digital technologies, humans and organizational entities

to share data, information and/or knowledge in making decisions and in getting things done.

Consumer-to-consumer (C2C) – when market exchanges occur between two

people.

Control – one of the four engines of digitalization; embedding rules within digital

solutions to identify out-of-control events/situations, such that out-of-control events/situations do not occur or, if they do occur, are quickly corrected.

Data – attributes of objects or events represented in digital (discrete sets of ones

and zeroes) form.

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Digital disruption – when the innovative uses of digital technologies and globalization are the primary factors leading to incumbents within existing industries

facing overwhelming competitive challenges and to entirely new industries being created.

Digital giants – firms that have mastered digitalization and are able to harness their business models and digitalization expertise to disrupt a wide range of industries.

Digital technologies – the technologies (involving hardware, software and, most

often, sophisticated combinations of hardware and software) involved in specifying, capturing, processing, storing and transmitting data.

Digitalization – applying digitization within organizations and within the social and economic contexts within which organizations are embedded.

Digitization – the purely technical processes associated with converting sensed and

captured data into binary form, storing and transmitting these binary data, manipulating these data, and storing/transmitting the outcomes of these data

manipulations.

Domains of digitalization – the three fundamental spheres of organization activity within which digitalization occurs: operational, analytical and collaborative.

Early-adopters – organizations whose leadership teams are regularly among the first to apply new forms of digitalization.

Efficient market – a market that provides maximal opportunities to producers and consumers to effect transactions with minimal transaction costs.

Empowerment – one of the four engines of digitalization; providing humans facing decisions with timely, accurate and comprehensive information and with easy-to-use, relevant decision aids and business intelligence tools.

Engines of digitalization – the four fundamental mechanisms through which digital technologies effect changes within organizations and their broader social/economic

contexts: automation, control, empowerment and interaction.

Firm – one of the two primary mechanisms (along with the market) for organizing economic activities; economic exchanges in a firm mainly occur through hierarchical

structures and control structures. Also referred to as an organization.

Globalization – the ongoing process of interaction and integration among the

people, companies and governments of different nations.

Incumbents – firms having operated in an industry for a long time and holding well- established business models, organization structures and resource control structures.

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Interaction – one of the four engines of digitalization; enabling entities (human or digital) to engage in timely, meaningful dialogues with one another (overcoming

barriers of space and time).

Interoperability – when two or more digital solutions are able to seamlessly

exchange data and able to apply these exchanged data.

Linear value stream – sequence of value-adding steps within a pipeline ecosystem in which raw materials are assembled into components and then into finished value-

units that are delivered to consumers, either through a complex downstream process facilitated by intermediaries or through a simpler, direct-to-consumer downstream

process.

Market – one of the two primary mechanisms (along with the firm) for organizing economic activities; economic exchanges in a market mainly occur through pricing

mechanisms and contractual mechanisms.

Moore’s law – a characteristic of digital technologies, whereby their capability per

dollar essentially doubles each year.

Network ecosystem – a market-focused ecosystem in which a network of value- unit producers and a network of value-unit consumers are brought together by a

network orchestrator.

Network orchestrator – creates and manages the market environment and the

transaction environment within which value-unit exchanges occur within a network ecosystem.

Organization – one of the two primary mechanisms (along with the market) for organizing economic activities; economic exchanges in an organization mainly occur through hierarchical structures and control structures. Also referred to as a firm.

Open – a technology that is available for use (and modification) by anyone, though some form of payment may be required to gain access to the technology.

Operational domain – one of the three domains of digitalization; organizational activities involved in getting things done.

Pipeline ecosystem – a market-focused ecosystem in which a producer

organization targets a collection of value-units at one or more consumer segments and fashions a linear value stream involving numerous upstream, midstream and

downstream organizations to deliver the value-units to consumers.

Proprietary – a technology that is tightly controlled by its developer.

Technology entrepreneurs – firms (often young and small) that bring specialized

digitalization expertise to innovate, transform or disrupt certain aspects of an industry’s value stream or value-units.

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Value-unit – the entities (information, a good or a service) being exchanged within a market-focused ecosystem.

Vertically-integrated – when a producer in a pipeline ecosystem performs many, if not most, of the activities involved with upstream and downstream linear value

stream processes.

CHAPTER 2: Digital Strategy Fundamentals

Adaptive agility – the ability of a firm to aggressively introduce incremental

enhancements into currently-executing business models.

Agility – the ability of a firm, first, to detect potentially disruptive threats and opportunities and, then, to marshal the resources and managerial insights required

to subdue threats and/or exploit opportunities.

Business model – a simplified and aggregated conceptualization of the value-

creating, profitability-sustaining activities of an organization.

Collision at the core – directing managerial attention and resources toward building relationships with digitalization leaders in order to understand and recognize business

model innovations aimed at reinventing currently-executing business models.

Core capabilities – an element of a business model that describes the tangible and

intangible resources needed to successfully implement a business model’s value proposition and profit model.

Cost model – describes the nature of the costs borne in producing revenue streams from an executing business model and how these costs will be controlled to provide requisite levels of profitability.

Customer intimacy – a value discipline by which organizations tailor and shape products and services to fit increasingly segmented consumer needs and wants.

Dynamic capabilities – an element of a business model that describes the intangible resources needed to (1) sense and assess opportunities for business model enhancement, replication and innovation, and (2) successfully implement these

enhancements, replications and innovations.

Dynamism – the ability of a firm to innovate, transform and disrupt by

demonstrating strategic adaptability, speed and entrepreneurism.

Entrepreneurial agility – the ability of a firm to aggressively introduce radical enhancements into currently-executing business models or to introduce new business

models.

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Experimentation at the edge – directing managerial attention and resources toward understanding and recognizing business model innovations within adjacent

industries and within emerging industries.

Operational excellence – the value discipline by which organizations provide

consumers with very reliable products and/or services at very competitive prices delivered with minimum difficulty or inconvenience for consumers.

Product leadership – a value discipline by which organizations produce a

continuous stream of new, innovative and stylish products/services.

Profit model – an element of a business model that defines how an organization

expects to be profitable; consists of revenue models and cost models.

Reinvention at the root – directing managerial attention and resources toward understanding and recognizing the necessity to cannibalize existing core capabilities

and dynamic capabilities by investing significantly in digitization and digitalization capabilities.

Revenue model – an element of a profit model that describes where, when and how sustainable revenue streams will materialize when executing a business model.

Stability – the ability of a firm to withstand disruptions by maintaining operational

reliability and efficiency.

Strategic experiment – a small-scale, tightly-contained competitive move taken to

learn about a potential digital innovation or potential digital disruption.

Strategic intent – a statement of competitive direction and purpose that directs

digital strategists’ thought processes.

Value disciplines – three sets of activities that are crucial in differentiating an organization from its competitors; an organization’s dominant value discipline

strongly influences its executing business models.

Value proposition – an element of a business model that defines how an

organization will distinguish itself within the market(s) that it has chosen to participate. Pipeline organizations distinguish themselves by creating value for consumers. Network organizations distinguish themselves by creating value for

participating communities.

CHAPTER 3: Digitalized Business Models for Pipeline Ecosystems

Big Data – high-volume streams of digitized data that are captured and organized

for use.

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Big Data analytics – applying statistical and mathematical models to organized collections of Big Data.

Data/document standards – policies and rules that allow data and documents to be accessed and used by value stream participants.

Disintermediation – an intermediary is bypassed, thus shortening and narrowing a value stream.

Economies of scale – the advantages that arise with increased volume of output.

Economies of scope – the advantages that arise when a family of related goods are produced rather than a single good.

Electronic Data Interchange (EDI) – an Era 1 form of industry-based sets of data/document standards.

Intermediary – an organization whose capabilities are used to reach suppliers or

end consumers.

Intermediary transformation – an existing intermediary vertically integrates, thus

becoming a producer.

Intermediation – choosing to reach suppliers or end consumers through another organization.

Long-tail phenomenon – the ability of digital markets to offer a far broader variety of value-units than could be offered in comparable physical markets.

Make-versus-buy decision – a firm (or individual) decides between making an item or performing an activity itself (themselves) or having another firm (or individual)

make the item or perform the activity.

Pervasive connectivity – when smart devices across an ecosystem are interconnected, thus creating opportunities for anywhere, anytime interaction.

Platform – assemblage of digital technologies that hosts digital and digitally-enabled resources.

Primary processes – work activities directly involved in delivering value-units to customers.

Production costs – direct costs to produce an activity or perform an activity.

Reintermediation – a new intermediary is added to a value steam, thus lengthening and broadening the value stream.

Self-regulation – an organization captures data associated with critical market- related transactions, monitors this data for problems, reacts responsively and

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responsibly if and when problems arise, and keeps regulators and value-stream participants aware of these activities.

Smart device – an assembled piece of digital technology containing the digital capability to sense, analyze and act on environmental signals.

Social media complements – the opportunities made available to value-unit consumers to engage with the value-unit’s producer and/or retailer and with other consumers via social media.

Stock holding – building up various kinds of inventories, thus providing buffers that soften the effects of poor demand forecasts.

Support processes – work activities that provide direction, resources and oversight for primary processes.

Transaction costs – additional costs involved (beyond production costs) when an

item or activity is acquired from someone else.

Value stream platform – a platform, hosting digitized data and documents as well

as digitalized managerial and operational processes, that can be accessed and used by a value stream’s participants.

Vertical integration – when a producer in a pipeline ecosystem performs many, if

not most, of the activities involved with upstream and downstream linear value stream processes.

World Wide Web (WWW) – an Era 2 one-to-many connectivity mechanism enabling organizations (and individuals) to access and use content stored across the

Internet.

CHAPTER 4. Digital Strategy Formulation for Pipeline Organizations

Barriers to competitive retaliation – tactics taken to prevent competitors from

eroding an organization’s gained competitive advantages.

Business model enhancement – incremental changes are made to one or more of the four elements of business models.

Business model innovation – radical changes are made to one or more of the four elements of business models or a novel configuration of these elements is fashioned.

Business model replication – a business model proven successful in one market is applied within an adjacent market.

Business platform – a platform hosting digitalized operational and managerial

processes.

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Channel multiplicity – ensuring that a sufficient mix of interconnection channels are available to handle the data, messages and documents flowing to and from

individuals and digital solutions so that a preferred channel is available for use.

Complementary resources barrier – based on requirements for unique or rare

non-digital resources in establishing a digitalized competitive advantage.

Customer switching costs – the costs borne by a consumer choosing to move to a competing product/service.

Data mart – an archive of organized data focused on a specific sphere of work.

Data warehouse – a single, comprehensive archive of organized data.

Digital platform – a platform hosting technology services.

Digital resources barrier – based on an organization’s investment in unique or rare digital/digitalized assets and capabilities.

Event visibility - making key events (as well as key non-events) known to the individuals and the digital solutions taking action so that actions can be taken.

Global – a digital solution designed and built to be used by most of an organization’s work units.

Local – a digital solution designed and built to be used by one or only a few of an

organization’s work units.

Loose-coupling – neither of the interconnected platforms needs to be modified in

order that the data, messages and/or documents being exchanged are consistently interpreted across both platforms.

Mission statement – answers the question: “What must we do to achieve our strategic vision?”.

Modularity – each of a platform’s major functionalities, or modules, operates

independent of other functionalities and obtains needed information or resources from a common coordinating module.

Preemption barrier – based on an organization’s investments that limit competitors’ opportunities and incentives to undertake retaliatory action.

Pricing mechanism – the means by which a value-stream participant captures its

share of the value being created by the value stream.

Project management capabilities barrier – based on an organization’s

investment in needed project management capabilities.

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Strategic vision – answers the question: “What kind of organization do we wish to become?”.

Tight-coupling – one or both of the interconnected platforms need to be modified so that the data, messages and/or documents being exchanged are consistently

interpreted across both platforms.

Well-architected platform – exhibits an appropriate balance in (1) the stability and agility of the hosted functionality, and (2) the costs of building, enhancing and

extending platforms across functional, unit and organization boundaries.

CHAPTER 5. Digital Strategy and the External Sourcing of Capabilities

Cloud computing – provisioning a pool of digital assets and digitally-enabled

services such that these services can, on demand, be accessed and applied by clients via the Internet.

Collaboration-based crowdsourcing – the crowdsourcing community collectively generates ideas, selects the most promising of these ideas, and refines these selected ideas into the single task outcome.

Commodity capabilities – the capabilities that are required or are otherwise beneficial for an organization to operate, that do not contribute to competitive

positions (aside from their absence), and that are readily available from external sources.

Crowdsourcing – externalizing a capability to a community of individual agents.

Externalization of a capability – transferring ownership and decision rights regarding a capability, the assets used in executing the capability, and/or the

management of the capability from inside an organization’s boundary to outside this boundary.

Loose-governance – increased discretion is given to the provider with the increased risk exposure managed through the client-provider relationship and by regularly assessing whether or not an engagement continues to prove beneficial for both the

client and the provider.

Multisourcing – contracting with multiple providers rather than a single provider.

Offshore – the external provider of a capability is located in a different country than is the client.

Onshore – the external provider of a capability is located in the same country as is

the client.

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Outsourcing a capability – transferring ownership and decision rights regarding a capability, the assets used in executing the capability, and/or the management of the

capability from inside an organization’s boundary to outside this boundary.

Peripheral core capabilities – the capabilities that are necessary for an

organization to gain and maintain its competitive positions, but that are not a source of competitive advantage.

Prediction market – targets broad, diverse communities to predict events or

outcomes.

Social information – information formed through exposure to the contributions of

other community members and these members’ expressed confidence in their contributions.

Strategic core capabilities – capabilities that lie at the heart of an organization’s

competitive advantage.

Tight-governance – characterized by a constant, detailed and deep visibility into

how a work activity is being carried out and the extent to which a comprehensive set of negotiated obligations is being met.

Tournament-based crowdsourcing – the crowdsourcing community (working

individually or in teams) submits finalized, independent task solutions; the crowdsourcer/client then selects one of these contributed solutions, or perhaps a few

solutions, in exchange for financial or non-financial compensation.

CHAPTER 6. Digitalized Business Models for Network Ecosystems

Blended organization – an organization that operates, to varying extents, as both

a pipeline organization and a network organization.

Complement – an entity that increases the perceived worth of a value-unit.

Core transaction – the primary market exchange activity driving both producers and consumers to an ecosystem’s market platform.

Critical mass – the point at which the number of product/service-adopters results

in the product/service becoming dominant within its market space.

Cross-side effect – existence of positive (or negative) effects felt by a community

associated with a network ecosystem as the number of members increases with another of the ecosystem’s communities.

Crowd-based capitalism – a two-sided market that brings together two crowds, or

communities, of individuals: one community possessing an under-used asset or skill

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(the value-unit) and the other possessing a short-term need for such an asset or skill.

Market platform – the organized collection of digital and business platforms that hosts the content and functionalities that establish, operate and govern the

ecosystem’s market.

Money-side – a revenue-generating community associated with a network ecosystem.

Multi-sided market – a network ecosystem with more than two actively participating communities.

Network effects – where the worth of or demand for a value-unit grows as an exponential function of the number of current consumers of a value-unit and/or the number of complements available to these consumers.

Network externality – where the worth of or demand for a value-unit grows as an exponential function of the number of current consumers of a value-unit and/or the

number of complements available to these consumers.

Same-side effect – existence of positive (or negative) effects within a community associated with a network ecosystem.

Subsidy-side – an incentivized community associated with a network ecosystem.

The sharing economy – an economy driven by crowd-based capitalism.

Two-sided market – a network ecosystem in which a producer community and a consumer community are brought together to engage in value-unit exchanges.

Winner-take-all-market – a market where the potential exists that a critical mass of consumers will adopt one producer’s products/services.

CHAPTER 7. Digital Strategy Formulation for Network Organizations

Ancillary transactions – transactions associated with a network organization’s value propositions that bring communities other than producers and consumers to the platform.

Market congestion – ensuring the ease by which producers and consumers are able to consider a sufficient number of alternatives in arriving at a satisfactory match.

Market design – a network organization’s competitive moves aimed at enhancing the efficiency of its constituted market.

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Market platform design – a network organization’s competitive moves aimed at building market platform content/functionality in order to enhance community

participants’ satisfaction with offered value propositions.

Market safety – ensuring that market transactions are sufficiently safe such that

producers and consumers are willing to reveal or act on confidential information and are willing to keep the transactions inside the market.

Market thickness – ensuring sufficiently large numbers of producers and consumers

such that a strong likelihood exists that satisfactory producer-consumer matching will occur.

Side-switching – existing producers become consumers and/or existing consumers become producers.

Spillover – when a taken action targeted at one purpose affects other purposes.

CHAPTER 8. Grappling with the Risks of Digitalization

Authentication – techniques aimed at proving a person’s or a digital entity’s identity.

Business platform operations – the execution of an organization’s digitalized operational and managerial processes that are hosted on business platforms (and on

market platforms).

Cybercriminal – uses hacking techniques and tools in order to take illegal actions

for financial gain or to take over digital assets in order to launch a series of illegal actions.

Data privacy – concerns that arise wherever personally-identifiable or other

sensitive information is captured, collected, stored and used.

Detection – putting in place software and manual scanning processes that identify

problematic behaviors transpiring within digital platforms and business platforms.

Digital assets – digital technologies (hardware and software), digitized data, and digitization/digitalization capabilities applied in configuring digital platforms and

business platforms.

Digitalization risk – the likely occurrence of digitalization-related incidents that

have the potential to negatively impact an organization’s operational performance and/or competitive position.

Financial loss – theft; fraud; extortion; destruction of uninsured facilities,

equipment and materials; drops in stock valuations; regulatory fines; legal fees, court awards and out-of-court settlements; etc.

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Graceful degradation – operations affected by a natural disaster do not immediately shut down, but instead gradually slow down, allowing time for affected

operations to be shifted to other physical locations prior to a complete shutdown.

Hactavist – uses hacking techniques and tools for the purpose of bringing attention

to a social or political issue.

Hardening a platform – installation of hardware, software and physical impediments that increase the effort required by a perpetrator such that all but the

most determined perpetrators either bypass the platform (moving on to easier targets) or are so hindered that they quickly give up.

Intellectual property loss – theft of digitized ideas, innovations and other forms of creative expression (e.g., trade secrets; blueprints; digitalized processes; proprietary digital content; the underpinnings of strategies and business models;

etc.).

Internal controls – the processing logic and rules embedded within digitalized

financial reporting systems to ensure the correct handling of financial transactions and the accuracy of produced financial reports.

Legal and regulatory requirements – digitalization-related statutory policies and

rules requiring protective actions, most often aimed at preventing harm to others.

Malicious intrusion – a perpetrator’s success in getting through an organization’s

security-related defenses.

Natural disaster – tornadoes, hurricanes, earthquakes, tsunamis, nuclear

emergencies, collapsed dams, broken gas or water pipes, etc.

Ongoing risk control – monitoring a risk area such that the incident occurrences are detected and resolved before excessive losses occur.

Reputation loss – depreciation of an organization’s image or of its brands that undermines the trust and goodwill held by participants in the various market-focused

ecosystems with which the organization participates.

Revenue loss – short-falls in revenue streams or lost revenue streams traced to operational disruptions, reputation loss, the inability to respond effectively to

competitors’ actions, etc.

Risk assessment – estimating the risk exposure associated with a risk area.

Risk assumption – accepting that losses are likely to arise if and when an incident occurs in a risk area, covering these losses through internal funds and third-party insurance.

Risk deterrence – taking action to reduce the likelihood that an incident will occur in a risk area.

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Risk exposure – the probability of a risk occurring multiplied by the expected loss to be borne if the risk occurs.

Risk management – creating awareness and a common understanding across an organization’s members about the existence and nature of a risk domain; and, putting

in place risk management policies, procedures and programs to ensure that critical risks in the domain are appropriately addressed by the appropriate individuals.

Risk mitigation – tempering (as much as possible) the consequences of a risk

incident by taking corrective actions.

Risk planning – establishes the contexts within which risk management activities

are carried out.

Terrorist – uses hacking techniques and tools for the purpose of causing harm and havoc within an established geo-political order.

CHAPTER 9. Executive Mandates: Digital Strategy

Chief digital officer (CDO) – senior executive/manager having approval authority for digitalization-related investments.

Data monetization – bundling together well-defined sets of data and analytic models such that the intangible value of data is transformed into something of

tangible value.

Digitalization culture – an organization culture where competitive success largely

relies on the capabilities and judgements of employees – working alone and in small groups – holding local knowledge and unencumbered by bureaucratic or overly- burdensome hierarchical constraints.

Digitalized ecosystem mindset – a view of competitive spaces as markets characterized by high rates of business model evolution/innovation, high levels of

information sharing and value co-creation by market participants, and high rates of participant entry/exit.

Intangible digital assets – market, product, services and platform designs that

attract, engage and retain large numbers of ecosystem participants; operational and analytical processes that capture, organize and exploit data regarding market events,

about operational and managerial activities, and about participant beliefs, expectations, behaviors and perspectives; knowledge and skills held by an organization’s employees as well as its partners’ employees; digitalization reputation

acquired by an organization; etc.

Organization culture – the assumptions, values and norms of behavior collectively

held by an organization’s members.

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Social proof – a social influence mechanism aimed at producing coordinated behavior among individuals.

Tangible digital assets – the commodity technologies (e.g., servers, routers, messaging services, Internet standards and software, etc.) that serve as the building

blocks of digital platforms and of business platforms.

CHAPTER 10. The Digital Investment Enigma

None.

CHAPTER 11. Strategic Focus

Business model – a simplified and aggregated conceptualization of the value- creating, profitability-sustaining activities of an organization.

Business platform effectiveness – improving the quality of the platform or the quality of one or more of the business processes being hosted on the platform.

Business platform efficiency – improving the cycle times and costs associated with

one or more of the business processes being hosted on a business platform.

Business process – a sequence of work tasks that converts inputs into outputs, and

these work-task sequences can involve operational activities, managerial activities, or both.

Business rules - the conditions that must be met when taking actions or making decisions.

Capability – the ability to achieve a desired outcome by bringing together and

applying a particular set of resources.

Consumer welfare – the benefits received from consumers (rather than producers)

from productivity increases in an economy.

Core capabilities – an element of a business model that describes the tangible and intangible resources needed to successfully implement a business model’s value

proposition and profit model.

Digital platform operations – activities involved in planning, designing, running,

managing and evolving the technology services required to enable and support an organization’s business platforms.

Digitalization – applying digitization within organizations and within the social and

economic contexts within which organizations are embedded.

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Digitalization capabilities – an organization’s readiness to attract, manage and retain individuals highly skilled in: identifying digitalization opportunities, building

and assessing business cases for digitalization investments, implementing funded digitalization investments, managing business platforms, and achieving the strategic

aims sought through digitization.

Digitization – the purely technical processes associated with converting sensed and captured data into binary form, storing and transmitting these binary data,

manipulating these data, and storing/transmitting the outcomes of these data manipulations.

Digitization capabilities – an organization’s readiness to: apply digital technologies, digitized content and technology services; manage digital platforms; and, attract, manage and retain highly-skilled technology professionals.

Dynamic capabilities – an element of a business model that describes the intangible resources needed to (1) sense and assess opportunities for business model

enhancement, replication and innovation, and (2) successfully implement these enhancements, replications and innovations.

First-order learning - engages participants in refining their understandings of a

business process, but does not substantially change the assumptions and foundational reasoning on which these understandings are based.

IT productivity paradox – the recognition (prior to the mid-1990s) that the ever- increasing investments in digital technologies produced mixed evidence regarding

productivity improvement across the US economy.

Network ecosystem – a market-focused ecosystem in which a network of value- unit producers and a network of value-unit consumers are brought together by a

network orchestrator.

Operating procedures – the sequenced tasks that comprise a business process as

well as the relationships among these tasks.

Performance-price ratio – the capabilities of a digital technology relative to the technology’s cost.

Pipeline ecosystem – a market-focused ecosystem in which a producer organization targets a collection of value-units at one or more consumer segments

and fashions a linear value stream involving numerous upstream, midstream and downstream organizations to deliver the value-units to consumers.

Profit model – an element of a business model that defines how an organization

expects to be profitable; consists of revenue models and cost models.

Risk – the likelihood that an anticipated financial gain will be realized.

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Second-order learning – pre-existing ideas and assumptions are up-ended and looked at with a fresh and open mind.

Strategic focus – a conceptualization and articulation of a digitization/digitalization intention and the target(s) of this intention.

Technical services – the digitized functionalities and technical support provided to an organization’s employees and, increasingly, to its customers and suppliers.

Value – the size of an anticipated financial performance gain.

Value driver – a core factor underlying performance gains.

Value proposition – an element of a business model that defines how an

participating communities.

CHAPTER 12. Value Pathways

Business platform enhancement value pathway – digital investments are

directed toward making significant improvements to the operational and managerial processes being hosted on existing business platforms.

Competitive advantage value pathway – digital investments are directed toward creating business models aimed at dramatically differentiating themselves from

rivals.

Competitive necessity value pathway – digital investments are directed toward either enabling an organization to respond to a competitor’s actions or enabling an

organization to meet or exceed what are considered to be best practices within a market ecosystem in which the organization participates.

Digital platform renewal value pathway – digital investments are directed toward refreshing the hardware and software technologies that comprise a digital platform as a means of broadening and deepening an organization’s digitization and

digitalization capabilities.

Mandate value pathway – digital investments are directed toward reducing an

organization’s risk exposure associated with not complying with a statutory requirement.

Options generator value pathway – digital investments are directed toward

providing the means for obtaining future benefits (which may or may not be clearly envisioned at the time of the investment), recognizing the anticipated near-term

benefits will not cover investment costs.

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Value pathway – a common way by which value is created through digitization and through digitalization.

CHAPTER 13. Building a Persuasive Business Case

Business case – the rationale for the value to be created if an innovative idea is funded and successfully implemented.

Champions – individuals highly skilled at influencing others to grasp an innovative idea’s worth.

Cost-avoiding benefit – planned but yet-to-be-experienced costs are avoided.

Cost-reducing benefit – existing cost structures are lowered.

Executive sponsors – an influential group of senior executives able to effectively

interact with their peers in arguing for and politically defending an innovative idea.

Financial business case – a narrative that examines a proposed investment from

a quantitative, benefits-costs perspective.

Global costs – costs attributed to platform functionalities applicable to all affected work units.

Innovation cycle – the flow of activities involved in transforming an innovative idea into a funded project.

Innovative idea – an idea that involves doing new things.

Intangible costs – costs that are difficult to monetize.

Local costs – costs attributed to platform functionalities applicable to just one, or a few, of the affected work units.

One-time costs – costs that are felt prior to the operation of a proposal’s installed

digital platforms and business platforms.

Recurring costs – cost that are borne repeatedly once a proposal’s installed digital

platforms and business platforms have begun to be used.

Strategic business case – a narrative that places a proposed investment within its competitive context in order to accentuate the investment’s strategic importance.

Tangible costs – costs that are easily monetized.

Value-enhancing benefit – revenues and/or margins are increased.

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CHAPTER 14. Monetizing Benefits Flows

Analytical domain – one of the three domains of digitalization; organizational activities involved in improving understandings of what things should be done, what

things need to be done, what things can be done, how things are done, and how what has been done is assessed.

Automation – one of the four engines of digitalization; simplifying and digitizing

complex tasks and task-sequences, eliminating unneeded tasks and, as appropriate, performing tasks via digital solutions rather than via humans.

Collaborative domain – one of the three domains of digitalization; organizational activities involved in enabling digital technologies, humans and organizational entities to share data, information and/or knowledge in making decisions and in getting

things done.

Control – one of the four engines of digitalization; embedding rules within digital

solutions to identify out-of-control events/situations, such that out-of-control events/situations do not occur or, if they do occur, are quickly corrected.

Domains of digitalization – the three fundamental spheres of organization activity

within which digitalization occurs: operational, analytical and collaborative.

Empowerment – one of the four engines of digitalization; providing humans facing

decisions with timely, accurate and comprehensive information and with easy-to-use, relevant decision aids and business intelligence tools.

Engines of digitalization – the four fundamental mechanisms through which digital technologies effect changes within organizations and their broader social/economic contexts: automation, control, empowerment and interaction.

Impact path diagram – a visual portrayal of the beneficial effects of a proposed digital investment.

Interaction – one of the four engines of digitalization; enabling entities (human or digital) to engage in timely, meaningful dialogues with one another (overcoming barriers of space and time).

Internal rate of return (IRR) – calculates the discount rate at which the present value of expected cash inflows balances with the present value of expected cash

outflows.

Net present value (NPV) – calculates the expected monetary gain or loss from an investment by discounting benefits and costs flows, using a required rate of return.

Operational domain – one of the three domains of digitalization; organizational activities involved in getting things done.

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Payback period – calculates the length of time for an investment’s benefits flows to balance out its costs flows.

Sensitivity analysis – the numbers inserted into a financial analysis are systematically varied so as to account for differing assumptions and varying

competitive conditions.

Touch point analysis – a technique for monetizing a digital investment proposal’s benefits flows by specifying where and how to-be-implemented capabilities impact

an organization’s financial performance by tracing through the manner by which organization and/or market ecosystem activities are being touched by digitization, by

digitalization or by both.

CHAPTER 15. Implementation Planning

Approval and funding stage – an implementation process stage that involves:

putting together the business case to gain funding approval for a proposed digital investment.

Configuration stage – an implementation process stage in which digital platforms

and business platforms are designed, acquired and/or built, assembled and tested; and, pre-installation change management activities are carried out.

Digitalized solutions – one of the five social organization design elements: digitally-enabled functionalities (hosted on digital platforms and business platforms)

that are directly applied toward achieving sought objectives or that otherwise support/enable the members of the social organization.

Implementation planning – identifying all the activities likely to be required in

successfully deploying a digital investment.

Implementation process – the activities required in moving an idea for a digital

investment forward, obtaining the necessary funding for the design and installation of digital and business platforms, and for taking steps to ensure that the investment’s promised benefits are attained.

Inertia stage – an implementation process stage (that often occurs after the installation and shakedown stage) where implementation-related momentum wanes

and may be lost altogether.

Installation and shakedown stage – the implementation process stage that involves: installing digital platforms and business platforms; and, providing platform

users, operators and managers the support needed in carrying out platform-related work activities.

Interdependence – when a social organization design element influences and is influenced by one or more of the other social organization design elements.

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Low-hanging fruit – benefits that materialize without much effort being exerted.

Members’ competencies – one of the five social organization design elements:

capabilities required of the members of a social organization in achieving sought objectives.

Net benefits flow – a point-in-time difference between accumulated benefits and accumulated costs.

Onward and upward stage – an implementation stage (that may follow either the

installation and shakedown stage or the inertia stage) when implementation-related momentum is reenergized.

Organizational change – the requirement for affected individuals (employees, value-stream participants and/or market ecosystem participants) to learn about and adapt to new digital platforms, new business platforms, new behavioral contexts

and/or new behaviors.

Prescribed routines and practices – one of the five social organization design

elements: sequences of operational and managerial activities that are executed by the members of a social organization or by digitalized solutions.

Reciprocal interdependence – two social organization design elements that

influence one another.

Strategies – one of the five social organization design elements: the objectives

sought by the members of a social organization.

Structures – one of the five social organization design elements: the authority,

accountability, planning, control, coordination, incentive and relationship systems established to guide and direct the behaviors of the members of a social organization such that sought objectives are achieved.

CHAPTER 16. Project Management Planning

Post-project reviews – an assessment at a project’s completion of whether or not promised benefits were realized, whether these anticipated benefits were realistic

and what can be learned to produce more realistic benefits forecasts, and, overall, what went right and wrong with the project.

Project – a set of interrelated work activities that is undertaken to achieve a specific outcome and that terminates when this outcome is achieved.

Project budget success – whether project spending is below or above the project’s

agreed-on level of funding.

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Project charter – a formal agreement between a project’s sponsors and the project manager that describes the objectives sought through a project, the project’s

deliverables, the timing of these deliverables, and significant project constraints.

Project control – providing visibility into subprojects and into the tasks that

comprise these subprojects.

Project deliverables – significant and perceptible project outputs that are fundamental to achieving agreed-on project objectives.

Project deliverables specifications – descriptions that accompany each of a project’s digitized/digitalized functions or components.

Project management planning – the activities involved in translating a funded digital investment implementation plan into a set of work activities that, when completed, will produce the investment’s anticipated benefits flows.

Project manager – an individual assigned the responsibility for implementing a funded digital investment.

Project organization – a project’s authority and accountability assignments.

Project outcome success – whether project objectives agreed on by project sponsors have been achieved.

Project planning – defining a project’s subprojects and the tasks to be accomplished within these subprojects, the relationships between subprojects and between tasks

within subprojects, and the resources and time required to accomplish these subprojects and tasks.

Project schedule success – whether project deliverables are completed before or after agreed-on delivery dates.

Project scoping – breaking large projects into sets of smaller, more-manageable

subprojects.

Project stage-gating – inserting decision points into a project where it makes sense

to assess what has been accomplished so far and to decide whether or not to proceed as scheduled.

Project steering committee – the group of executives/managers having project

oversight responsibility.

Stakeholders – individuals or entities either having significant influences on project

outcomes or likely to be significantly affected by project outcomes.

Taking options approach to project management – treating subprojects as not being set in stone but instead as involving constantly changing options as risk-

reducing information about the subprojects accumulates.

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CHAPTER 17. Executive Mandates: Digital Investment

Facts – things that are verifiable.

Fact-based decision making – when decision makers base their arguments and

rationales on facts, thus introducing a sense of objectivity into decision processes.

Soft fact – not definitively verifiable, but rather supported through commentaries and data provided by sources familiar to and trusted by stakeholders.

CHAPTER 18. A Perpetual Balancing Act

Digital innovation - a new form of digitization, of digitalization, or of both.

Digitalization – applying digitization within organizations and within the social and economic contexts within which organizations are embedded.

Digitization – the purely technical processes associated with converting sensed and captured data into binary form, storing and transmitting these binary data, manipulating these data, and storing/transmitting the outcomes of these data

manipulations.

Global – a digital solution designed and built to be used by most of an organization’s

work units.

Global business platform – standardized configurations of digitized data and

digitalized business processes, both of which are enabled through global digital platforms.

Global digital platform – a collection of standardized technology services.

Local – a digital solution designed and built to be used by one or only a few of an organization’s work units.

Local business platform – customized configurations of digitized data and digitalized business processes unique to a specific work unit (or to a few, closely- aligned work units) and enabled though technology services executed from both

global and local digital platforms.

Local digital platform – a collection of customized technology services.

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CHAPTER 19. Business Processes

Automation – one of the four engines of digitalization; simplifying and digitizing complex tasks and task-sequences, eliminating unneeded tasks and, as appropriate,

performing tasks via digital technologies rather than via humans.

Business process – a sequence of work tasks that converts inputs into outputs, and these work-task sequences can involve operational activities, managerial activities,

or both.

Business process modeling – the work tasks and flows involved with a business

process are visually depicted, making it easier for the involved-individuals to understand and recognize ways to improve the business process.

Business process owner – an individual assigned responsibility for rationalizing a

business process.

Business rules – the conditions that must be met when taking actions or making

decisions.

Control – one of the four engines of digitalization; embedding rules within digital solutions to identify out-of-control events/situations, such that out-of-control

events/situations do not occur or, if they do occur, are quickly corrected.

Data – reflect attributes of the objects and events associated with a business process.

Data definition – specifying the name of a data element, the type of data (e.g., numeric, text, etc.), the range of viable data values, the meaning of the data, and

the location where the data is stored (prior to and after processing).

Data integrity – the accuracy, correctness, timeliness, security, etc., of data.

Data owner – an individual assigned responsibility for defining a set of data and for

ensuring the integrity of these data.

Dashboard – visual means for presenting process metrics in an easy-to-understand

manner.

Effective – doing the right thing.

Efficient – doing the thing right.

Empowerment – one of the four engines of digitalization; providing humans facing decisions with timely, accurate and comprehensive information and with easy-to-use,

relevant decision aids and business intelligence tools.

End-to-end business process approach for organizing work – all the work activities associated with accomplishing a critical work outcome are designed as a

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seamlessly-connected work flow, regardless of the physical location of where specific work tasks are performed.

Engines of digitalization – the four fundamental mechanisms through which digital technologies effect changes within organizations and their broader social/economic

contexts: automation, control, empowerment and interaction.

Functional approach for organizing work – each of an organization’s functional work units is assigned the responsibility for performing a set of business processes.

Interaction – one of the four engines of digitalization; enabling entities (human or digital) to engage in timely, meaningful dialogues with one another (overcoming

barriers of space and time).

Primary processes – work activities directly involved in delivering value-units to customers.

Process improvement – ensuring that a business process is executed as specified, that process performance goals are achieved, and that these performance goals

increase over time.

Process measurement – defining performance goals and performance metrics for a business process, computing these metrics, and comparing these metrics against

performance goals.

Process specification – defines the purposes of the work tasks comprising a

business process, describes what is involved in executing each work task, and indicates the existence and natures of relationships amongst the work tasks.

Operating procedures – the sequenced tasks that comprise a business process as well as the relationships among these tasks.

Rationalize a business process – engage in an iterative cycle of process

specification, process measurement and process improvement.

Seamless – when data/information flows instantly from a sending work activity to a

receiving work activity, and this data/information is perfectly understood by the receiving work activity.

Support processes – work activities that provide direction, resources and oversight

for primary processes.

Swim lane diagram – a means of depicting the roles served and the work activities

carried out by each actor involved with a business process.

Value chain – the totality of an organization’s business processes; these processes, directly and indirectly, create ecosystem value by transforming inputs into outputs.

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CHAPTER 20. Business Platforms

Business platform – configurations of digitized data and digitalized business processes, enabled through digital platforms.

Business platform/process instance – two or more work-unit installations of a business platform/process that are configured exactly the same.

Business process integration – when configured interconnections exist that allow

digitized data to flow seamlessly across executing business processes hosted on the same business platform or on different business platforms.

Business process standardization – when a single version of a business process is executed across multiple work units.

Cleaning data – identifying and correcting data errors.

Database – a common collection of shared, digitized data.

Database design – defining the data elements to be stored, and organizing these

data such that the data elements can be easily and quickly accessed.

Data mart – an archive of organized data focused on a specific sphere of work.

Data warehouse – a single, comprehensive archive of organized data.

Globally-integrated, globally-standardized business platform – while an organization’s work units may each carry out some distinct work activities, all of the

work units involved with the same work activities would benefit from carrying out these work activities similarly (advancing standardization); and, given the

dependence of most work activities on other work activities, work unit coordination and collaboration would benefit from sharing data and documents (advancing integration).

Globally-integrated, locally-unique business platform – an organization’s work units engage in different work activities (forestalling standardization), but would

benefit from certain of the hosted business processes being able to share data and documents (advancing integration).

Locally-isolated, globally standardized business platform – while an

organization’s work units may carry out some unique work activities, all of the work units involved with the same work activity would benefit from carrying out these work

activities similarly (advancing standardization); but, as little coordination or collaboration is required across work units, little need exists for these work units to share data or documents (forestalling integration).

Locally-isolated, locally-unique business platform – an organization’s work units engage in very different work activities (forestalling standardization) and stand

to benefit little from sharing data and documents (forestalling integration).

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Operational database – an archive of the digitized data used in carrying out an organization’s day-to-day work activities.

CHAPTER 21. Enterprise Resource Planning Systems

Best-of-breed ERP system alternative – acquire business platforms (e.g., manufacturing, order processing and fulfillment, supply chain management, energy

accounting, human resources, etc.) whose advanced or specialized functionality is crucial to an organizations’ competitive strategies, and then use middleware to

interconnect the acquired platforms to one another and to an organizations’ other digital solutions.

Bolt-on – a tailored (built using tools provided as part of the ERP system) extension

to an ERP system’s functional module in order to better align the module to unique aspects of a work unit’s business practices.

Build-your-own ERP system alternative – global business platforms are fashioned by devising never-before-implemented digitalized business processes and then interconnecting these business processes to one another and to a global

database through middleware solutions.

Enterprise resource planning (ERP) system – a pre-defined global business

platform (a global database along with a set of standardized, integrated digitalized business processes).

ERP system extensibility – needed business process functionality not designed into an ERP system can be connected to the ERP system through system interfaces and bolt-ons.

ERP system instance – a single ERP system configuration.

ERP system integration – data captured by one functional module is stored in the

global database, where these data are immediately available for use by other functional modules, by bolt-ons and by connected (via a system interface) digitalized business processes.

ERP system interface – interconnects an ERP system to digitalized business processes not handled through the ERP system and to bolt-ons.

ERP system modularity – an organization installing an ERP system has considerable leeway in selecting which modules to install, deciding when a selected module will be installed (i.e., a limited set of modules can be initially installed, with

other modules being installed later), and in configuring the modules being installed.

ERP system multi-functionality – an organization installing all of an ERP system’s

functional modules can have most of its business processes handled through the ERP system.

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Global database integration tactic – each pair of digitalized business processes to be integrated are connected to a global database interface.

Industry vertical – a version of a vendor’s ERP system that reflects the distinctive natures of the business processes used within a specific industry.

Middleware – makes the data or programming logic contained in one digital solution (e.g., a digitalized business process, a database, etc.) transparent to other digital solutions.

Middleware integration tactic – each pair of digitalized business processes to be integrated are connected to a middleware interface.

System-to-system interface tactic – each pair of digitalized business processes to be integrated are modified so that each business process can accept, interpret and work with data coming from the other business process.

Year 2000 (Y2K) problem – the necessity for an organization, prior to the year 2000, to overhaul its digitalized business processes in order to correct how dates

were handled in the software enabling these business processes.

CHAPTER 22. Digital Platforms

Cloud-based services – proprietary services delivered to consumers either via the

Internet or via Internet-like technologies.

Community cloud – cloud-based services managed and accessed by a consortium

of organizations.

Digital platform – a configuration of digital assets that delivers technology services.

Data digital assets – attributes of objects and events.

Design digital assets – software, architectures, policies, standards, procedures, etc.

Hardware digital assets – electronic and electro-mechanical devices and associated equipment.

Human digital assets – managerial, staff and operational employees (skills,

knowledge and experience).

Private cloud – cloud-based services designed, developed and operated by an

organization, with access to the cloud-based services confined to authenticated members of the organization and authenticated members of select-other organizations.

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Public cloud – cloud-based services made available to anyone.

Social digital assets – relationships (familiarity, interactions, trust, shared

understanding, etc.) between humans.

Total cost of ownership – the totality of a digital asset’s costs, including the costs

of acquiring, installing, maintaining and supporting the asset.

CHAPTER 23. Platform Management Challenges

Digitalization governance design tactic – establishing managerial

accountabilities for platform-related decisions.

Digitalization organization design tactic – positioning the work units most influential in formulating digital strategies and in provisioning digitalization

capabilities.

Platform design tactic – implementing modular enterprise architectures.

CHAPTER 24. Enterprise Architecture Design

Business process optimization – global business platforms are identified, negotiated, rationalized and implemented.

Enterprise architecture – the organizing logic for core business processes (those provisioned through global business platforms), core business data (that provisioned

through global databases), and core digital technologies and technology services (those provisioned through global digital platforms).

Event-based architecture – utilizes the attributes of service-oriented architectures

and self-learning architectures to automatically detect and react to specified events.

Operating model – a specification of the business processes and business data that

should be provisioned through global business platforms in order to effectively and efficiently implement formulated digital strategies.

Self-contained module – a module that fully performs by itself a well-defined task

or service.

Self-learning architecture – contains (either within a global information repository

or within the individual services) all the information that is needed for services to locate, connect with and execute other services; each service possesses the functionality needed to interpret and apply this information; and, each service

possesses the functionality to learn (from provided information and from repetitive interaction episodes) how to best interact with other services.

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Service-oriented architecture – processing logic and data are implemented as self-contained services, with only a service’s input and output data exposed to other

services.

Services architectural standards – rules that define how modularized services are

to be designed and that direct how modularized components operate and interconnect.

Services modularization – business services and their enabling technology services

are designed and built from modularized components.

Technology strategy – a mapping of how an organization’s investments in

technology services are expected to evolve over time.

Virtualization – the real-time commitment of specific technology assets in executing services depends on the point-in-time demands on these assets.

CHAPTER 25. Digitalization Governance Design

Architectural alignment – assures that a project’s installed platforms conform, unless a formal exception is granted, to global architectural standards.

Centralized governance posture – a bias toward global objectives.

Chief digital officer (CDO) – senior executive/manager having approval authority

for digitalization-related investments.

Chief information officer (CIO) – senior executive historically holding overall

responsibility for an organization’s digitalization activities; today, CIOs often are given responsibility for an organization’s global and supply-side digitalization decisions.

Decentralized governance posture – a bias toward local objectives.

Deliverables alignment – assures that a project stays on track to deliver sought

digitalization capabilities and sought technology capabilities.

Demand-side digitalization decisions – stimulating, prioritizing and constraining work unit digitalization requirements.

Digitalization governance systems – decision structures and decision processes aimed at increasing the likelihood that the right people apply the right criteria at the

right time in making digitalization decisions.

Divisional information officer (DIO) – senior executive/manager often assigned responsibility for a work unit’s local demand-side and local supply-side digitalization

decisions.

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Federal governance posture – accommodates both global and local objectives.

Global digitalization decisions – positioning, directing and overseeing global

digital strategies and policies.

Governance managerial roles – managerial positions/assignments characterized

by specific zones of authority and accountability for digitalization-related decisions.

Governance mechanisms – managerial roles, governance structures and governance processes that create arenas within which decisions are negotiated and

taken by participants.

Governance processes – move participants through a sequence of tasks to ensure

that pertinent policies, guidelines and rules are followed and that pertinent objectives, constraints and criteria are considered.

Governance structures – convene participants to interact in addressing

circumscribed sets of digitization-related decisions, often applying prescribed governance processes.

Governance posture – an intentional bias toward global or local objectives.

Objectives alignment – assures that a project stays on track to achieve sought global objectives and sought local objectives.

Project popups – unanticipated problems or stakeholder demands that arise as a project unfolds.

Supply-side digitalization decisions – delivering, operating and maintaining digitalized business processes and platforms; and, designing, delivering, operating,

maintaining and evolving digital platforms.

CHAPTER 26. Digitalization Organization Design

Account managers – the corporate technology group’s primary line of contact with

the work units; account managers have solid-line reporting relationships up to the CIO and dotted-line reporting relationships with the heads of the business work units for which they coordinate digitization-related activities.

Digitalization organization design – specifies where digital strategies are formulated, where digital capabilities are located, where digitalization-related work

activities are performed, and whom has authority over these activities.

Formal influences – follow from superiors’ explication of the policies, goals, priorities, plans, procedures, rules, guidelines, etc., to be followed as employees carry

out work assignments.

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Global digital platform model – an effort is made to exploit technology standardization wherever possible and appropriate, while recognizing that most work

units vary considerably regarding their digitalization needs (and, hence, stand to benefit from local business platforms).

Global support platform model – an effort is made to exploit technology standardization and business process optimization for support business processes, while recognizing that work units vary considerably regarding the natures of their

primary business processes.

Informal influences – follow from the personal relationships employees build with

co-workers.

Interaction network – a web of interpersonal relationships within which individuals exchange facts, information, knowledge, experiences, perspectives and beliefs.

Local primary platform model – an effort is made to exploit technology standardization to as great an extent as is possible and to exploit business process

optimization for support business processes, while recognizing that most work units vary considerably regarding their primary business processes.

Partner model – local digital strategies emphasized; most digitization capabilities

are housed in work units and most digitization activities are carried out in work units.

Platform model – global digital strategies emphasized; most digitization capabilities

are housed in the corporate technology group and most digitization activities are carried out in the corporate technology group.

Platform managers – responsible for designing, implementing, operating and evolving global platforms; platform managers have upward, solid-line reporting relationships to the CIO.

Sourcing networks – involve the individuals and groups charged with shaping and directing the supply-side digitalization decision domain.

Strategic experiment – a small-scale, tightly-contained competitive move taken to learn about a potential digital innovation or potential digital disruption.

Technology management council – a digitalization governance structure aimed at

ensuring that global and local digitalization leadership teams’ objectives, investments and activities complement one another.

Value discovery networks – involve the individuals and groups charged with shaping and directing the demand-side digitalization decision domain.

Visioning networks – involve the individuals and groups charged with shaping and

directing the global digitalization decision domain.

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CHAPTER 27. Executive Mandates: Platform Management

Market-focused innovation – directly targets competitive spaces characterized by significant revenue growth and/or by high-profitability market-niche potentials and

for which the organization holds proprietary access to requisite digital assets, digital capabilities and/or configuration processes.

Participant interlock – having the same individual serve as a participant within two

or more associated decision-taking groups.

Temporal interlock – having one or more individuals mindful of a group’s history

included as group participants.

Topical interlock – having individuals mindful of the deliberations of tightly-related groups included as group participants.

Technology-focused innovation – indirectly targets competitive spaces by delivering proprietarily-held technology capabilities promising magnitude increases

in technology efficiency/effectiveness and high potentials of being competitively applied.

APPENDIX: Basic Concepts

Ad hoc decision situation – a decision situation that has not previously arisen or for which generally accepted ways of dealing with the situation are lacking.

Applications software – executes digitalized business processes that enable and support the accomplishment of sought objectives.

Automated decision system – a basic type of information system that makes use

of business rules embedded within computer software such that when specific conditions are detected (from analyzing captured and stored data), specific actions

and decisions are taken without human intervention.

Business process – a sequence of work tasks that converts inputs into outputs, and these work-task sequences can involve operational activities, managerial activities,

or both.

Business rules – the conditions that must be met when taking actions or making

decisions.

Computer hardware – electronic and electro-mechanical devices providing data processing capabilities, communication capabilities, data capture capabilities, data

display capabilities and data storage capabilities.

Computer software – manipulates and transmits data and/or directs the

functioning of computer hardware.

570

Data – attributes of objects and events.

Decision support system – a basic type of information system that provides

managers, staff professionals and executives with the capability to address ad hoc decision situations; decision makers can vary the data being analyzed as well as the

criteria, conditions or objectives associated with a decision process.

Digital technologies – the technologies (involving hardware, software and, most often, sophisticated combinations of hardware and software) involved in specifying,

capturing, processing, storing and transmitting data.

Exception report – a pre-specified report created by an information reporting

system that is generated only when an exceptional condition (defined through an embedded business rule) is detected.

Information – sets of data that are interpreted for a specific purpose by a person

facing a specific decision situation

Information reporting system – a basic type of information system that generates

pre-specified reports that support the work activities of managers responsible for an organization’s operational, tactical and strategic activities; makes use of the databases populated by transaction processing systems, often supplemented by data

obtained from external sources (e.g., marketing research companies) or produced by staff specialists (e.g., a data set describing the physical assets owned by the firm).

Information system – a computer-based system designed to accomplish a set of sought objectives.

Knowledge – the current state of understanding that exists about some work- related activity (e.g., selecting a substitute product for an out-of-stock product, resolving a recurring problem with a manufacturing process, deciding on an optimal

amount to spend on advertising for a certain class of products, etc.).

Knowledge management system – a digitized knowledge archive that

accumulates, archives and distributes knowledge.

Messaging and collaboration system – a basic type of information system that is used by pairs or groups of individuals to provide directions, raise and answer

questions, and resolve the problems that regularly arise as employees deal with suppliers, customers, unexpected events (e.g., a delayed delivery) and anything that

happens to fall through the cracks; examples include email, instant messaging, collaboration tools, etc.

People – an organization’s employees, employees of other organizations (suppliers,

vendors, partners, etc.), and the consumers of an organization’s products and services.

Shared understanding – knowledge that exists in a consistent fashion across a group of people.

571

Sought objectives – the purpose, or purposes, to be accomplished through an information system.

Systems software – operates computer systems and coordinates across interacting computer systems.

Transaction processing system – a basic type of information system that captures data regarding important objects and events, stores these data, and uses these data in the execution of business processes and in the production of messages and

business documents.

PART 1. DIGITAL STRATEGY
Chapter 1. Digital Innovation and Disruption

The Evolving Nature of Markets and Firms
Three Eras of Digital Disruption
Revisiting Fortune’s Most Admired Companies
The Evolving Landscapes of Industries
A Recap and Look Ahead

Chapter 2. Digital Strategy Fundamentals

The Goal of Digital Strategy: Agility
The Grammar of Digital Strategy: Business Models

General Electric (GE): Operational Excellence in Action
Kraft Foods: Customer Intimacy in Action
Apple: Product Leadership in Action
Final Thoughts about Business Models

The Logic of Digital Strategy: Competitive Moves

Experimentation at the Edge
Collision at the Core
Reinvention at the Root
The Logic of Digital Strategy Formulation and Evolution

A Recap and Look Ahead

Chapter 3. Digitalized Business Models for Pipeline Ecosystems

Why Pipeline Ecosystems Exist

Economies of Scale and Scope
Transaction Costs
Intermediation

Digitalizing Pipeline Ecosystems

Era 1
Era 2

Purely-Digital Value-Units
Platforms
Omni-Channel Promotion, Ordering and Delivery
Payment and Trust Systems

Era 3
The Promise of Car Data

Disintermediation, Reintermediation and Intermediary Transformation
A Recap and Look Ahead

Chapter 4. Digital Strategy Formulation for Pipeline Organizations

Digitalization and the Value Disciplines
Platform Design

Modularity
Tight-Coupling and Loose-Coupling
Global and Local
Platforms: Best Practices

Platforms and the Domains of Digitalization

The Operational Domain
The Analytical Domain
The Collaborative Domain

Digital Strategy Formulation

Strategic Intent
Business Model Enhancement, Replication and Innovation

Digital Strategy Formulation in Practice

Finnair
UPS-SCS

Sustaining Competitive Positions
A Recap and Look Ahead

Chapter 5. Digital Strategy and the External Sourcing of Capabilities

Externalizing Organizations’ Capabilities
Tactics for Lessening Clients’ Dependence on Sourcing Providers

Multisourcing
Crowdsourcing

Governing the External Sourcing of Capabilities
External Sourcing and Digital Strategy Formulation

Digital Strategy Formulation
Business Model Adaptations

Achieving External-Sourcing Agility at Commonwealth Bank of Australia
A Recap and Look Ahead

Chapter 6. Digitalized Business Models for Network Ecosystems

Why Network Ecosystems Exist

Network Effects
Two-Sided Markets
Multi-Sided Markets
Winner-Take-All Markets

Crowd-Based Capitalism
Digitalizing Network Ecosystems

Era 1
Era 2
Era 3

Blended Organizations
A Recap and Look Ahead

Chapter 7. Digital Strategy Formulation for Network Organizations

Business Models for Network Organizations
Strategic Intent for Network Organizations
Market Design and Market Platform Design

Market Design
Market Platform Design: Digitalizing the Operational Domain
Market Platform Design: Digitalizing the Analytical Domain
Market Platform Design: Digitalizing the Collaborative Domain

Digital Strategy Formulation

How Fast Should each Community Grow?
What Pricing Mechanisms Should Be Applied to each Community?
Should a New Feature Be Added?
Should Transactions and Participant Behaviors Be Regulated?
How Many Communities Should Connect to the Market Platform?
Evolving Network Organizations’ Business Models

Sustaining a Network Organization’s Competitive Position
A Recap and Look Ahead

Chapter 8. Grappling with the Risks of Digitalization

Nature of Digitalization Risks

Malicious Intrusions
Natural Disasters
Legal and Regulatory Requirements
New Digital Technologies
Actions of Competitors
External Sourcing
Inability to Respond

Risk Management: A General Overview

Risk Planning
Risk Assessment
Ongoing Risk Control
An Exercise in Digitalization Risk Assessment

Digitalization Risk Management Practices

Securing Digital and Business Platforms Against Malicious Intrusions
Intra-Organizational Information Sharing Regarding Malicious Intrusions
Extra-Organizational Information Sharing about Malicious Intrusions

The Board of Directors and Digitalization Risk Management
Accounting for Digitalization Risks in Digital Strategy Formulation
A Recap and Look Ahead

Chapter 9. Executive Mandates: Digital Strategy

Embrace a Digitalized Ecosystem Mindset
Innovate and Iterate
Invest in Data and Analytics
Evolve Processes and Platforms at Multiple Speeds
Track and Evaluate Intangible Digital Assets
Cultivate a Digitalization Culture
A Recap

PART 2. DIGITAL INVESTMENT
Chapter 10. The Digital Investment Enigma

The Benefits Were Never There
The Benefits Were Overstated
Inadequate Efforts Were Taken to Attain the Benefits
A Recap and Look Ahead

Chapter 11. Strategic Focus

The IT Productivity Paradox
Strategic Focus

Digital Platform Operations and Technology Services
Business Platform Efficiency
Business Platform Effectiveness
Business Model Innovation

Impacting Overall Financial Performance
A Recap and Look Ahead

Chapter 12. Value Pathways

Mandate Value Pathway
Digital Platform Renewal Value Pathway
Business Platform Enhancement Value Pathway
Competitive Necessity Value Pathway
Competitive Advantage Value Pathway
Options Generator Value Pathway
A Recap and Look Ahead

Chapter 13. Building a Persuasive Business Case

The Innovation Cycle
Strategic Business Cases and Financial Business Cases
Building Strategic Business Cases
Building Financial Business Cases

Costs Flows Associated with Digital Investment Proposals
Benefits Flows Associated with Digital Investment Proposals
Summary

A Recap and Look Ahead

Chapter 14. Monetizing Benefits Flows

Touch Point Analysis
Financial Analysis Techniques and Sensitivity Analysis
Monetization in Practice: Business Platform Renewal at BioGen

Just How Persuasive is this Business Case?

Monetization in Practice: Intel’s Value Dials Methodology
A Recap and Look Ahead

Chapter 15. Implementation Planning

The Implementation Process
Organizational Change

Assessing the Extent of Organizational Change: The Wentworth Projects
Change Management Principles and Tactics

A Recap and Look Ahead

Chapter 16. Project Management Planning

The Nature of Projects
Project Success and Failure
The Nature of Digital Investment Projects

Heightened Project Deliverables Specifications Uncertainty
Depressed Benefit Flows
Heightened Cost Flows

Proven Project Management Practices

Project Scoping
Project Planning
Project Organization
Project Stage-Gating
Project Control
Post-Project Review
Project Scoping with Coors’ Point-of-Sales (POS) Application Suite

A Recap and Look Ahead

Chapter 17. Executive Mandates: Digital Investment

Accentuate Bottom-Line Impacts
Argue Comprehensively, but Conservatively
Pepper Arguments with Soft Facts
Invest Early and Late
Assign Accountability for Realizing Bottom-Line Impacts
A Recap

PART 3. PLATFORM MANAGEMENT
Chapter 18. A Perpetual Balancing Act

Navigating the Balancing Act
Background
The Increasing Difficulty of Maintaining an Appropriate Balance
A Recap and Look Ahead

Chapter 19. Business Processes

Specifying End-to-End Business Processes
Rationalizing End-to-End Business Processes

Process Specification
Process Measurement
Process Improvement

Business Process Modeling and Business Process Digitalization
A Recap and Look Ahead

Chapter 20. Business Platforms

The Benefits of Hosting Business Processes on a Business Platform

Benefits of Shared Databases
Benefits from Standardized Business Processes
Benefits of Business Process Integration

Applying Standardized and Integrated Business Processes

A Globally-Integrated, Locally-Unique Business Platform
A Globally-Integrated, Globally-Standardized Business Platform
A Locally-Isolated, Globally-Standardized Business Platform
A Locally-Isolated, Locally-Unique Business Platform
Business Process Standardization and Integration at Warby Parker

Managing Global Business Platforms
A Recap and Look Ahead

Chapter 21. Enterprise Resource Planning Systems

The Challenge of Implementing Global Business Platforms

Challenge: Standardizing Global Business Processes
Challenge: Integrating Global Business Processes

The Arrival of Enterprise Resource Planning (ERP) Systems
The Nature of ERP Systems
Celanese’s OneSAP Project ,
Alternatives to ERP Systems
A Recap and Look Ahead

Chapter 22. Digital Platforms

The Nature of Digital Platforms
The Benefits of Standardized Digital Platforms
Standardizing the Desktop Environment at ABN Amro
Cloud-Based Services
A Recap and Look Ahead

Chapter 23. Platform Management Challenges

Platform Challenges at Charles Schwab Corporation
Effective Platform Management
A Recap and Look Ahead

Chapter 24. Enterprise Architecture Design

The Nature of Enterprise Architectures

Globally-Integrated, Locally-Unique Enterprise Architectures
Globally-Integrated, Globally-Standardized Enterprise Architectures
Locally-Isolated, Globally-Standardized Enterprise Architectures
Locally-Isolated, Locally-Unique Enterprise Architectures
Enterprise Architecture: Levels of Analysis

Enterprise Architecture Implementation
Modular Services Architectures ,

Delivery Corp’s Transition to a Modular Enterprise Architecture

A Recap and Look Ahead

Chapter 25. Digitalization Governance Design

Three Domains of Digitalization Decisions
Digitalization Governance System Objectives
Digitalization Governance System Postures
Digitalization Governance System Mechanisms
Project-Level Digitalization Governance
Information Governance at Intel
A Recap and Look Ahead

Chapter 26. Digitalization Organization Design

Three Key Interaction Networks
Prototypical Digitalization Organization Designs

Partner Model
Platform Model
Variations on the Partner and Platform Models

Energizing Digital Innovation at the YCH Group
A Recap and Look Ahead

Chapter 27. Executive Mandates: Platform Management

Combat Complacency
Crystallize the Competitive Value of Global Platforms
Expose Digital Innovation Sweet Spots
Instill a Forward-Looking Bias into Platform Design
Configure Systems of Participant Interlocks
A Recap

APPENDIX: Basic Concepts

What is an Information System?
Distinctions between Data, Information and Knowledge
Basic Types of Information Systems

Operational Processes
Managerial Processes

Data, Information and Knowledge Use within Information Systems
Information Systems in Practice

GLOSSARY

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
CHAPTER 10. The Digital Investment Enigma
CHAPTER 11. Strategic Focus
CHAPTER 12. Value Pathways
CHAPTER 13. Building a Persuasive Business Case
CHAPTER 14. Monetizing Benefits Flows
CHAPTER 15. Implementation Planning
CHAPTER 16. Project Management Planning
CHAPTER 17. Executive Mandates: Digital Investment
CHAPTER 18. A Perpetual Balancing Act
CHAPTER 19. Business Processes
CHAPTER 20. Business Platforms
CHAPTER 21. Enterprise Resource Planning Systems
CHAPTER 22. Digital Platforms
CHAPTER 23. Platform Management Challenges
CHAPTER 24. Enterprise Architecture Design
CHAPTER 25. Digitalization Governance Design
CHAPTER 26. Digitalization Organization Design
CHAPTER 27. Executive Mandates: Platform Management
APPENDIX: Basic Concepts

Coding Theory

Author: Kenneth H. Rosen, AT&T Laboratories.

Prerequisites: The prerequisites for this chapter are the basics of logic, set theory, number theory, matrices, and probability. See Sections 1.1, 2.1, 2.2, 3.4–3.7, and 6.1 of Discrete Mathematics and Its Applications.

Introduction The usual way to represent, manipulate, and transmit information is to use bit strings, that is, sequences of zeros and ones. It is extremely difficult, and often impossible, to prevent errors when data are stored, retrieved, operated on, or transmitted. Errors may occur from noisy communication channels, electrical interference, human error, or equipment error. Similarly, errors are introduced into data stored over a long period of time on magnetic tape as the tape deteriorates.

It is particularly important to ensure reliable transmission when large com- puter files are rapidly transmitted or when data are sent over long distances, such as data transmitted from space probes billions of miles away. Similarly, it is often important to recover data that have degraded while stored on a tape. To guarantee reliable transmission or to recover degraded data, techniques from coding theory are used. Messages, in the form of bit strings, are encoded by translating them into longer bit strings, called codewords. A set of codewords

74 Applications of Discrete Mathematics

is called a code. As we will see, we can detect errors when we use certain codes. That is, as long as not too many errors have been made, we can de- termine whether one or more errors have been introduced when a bit string was transmitted. Furthermore, when codes with more redundancy are used, we can correct errors. That is, as long as not too many errors were introduced in transmission, we can recover the codeword from the bit string received when this codeword was sent.

Coding theory, the study of codes, including error detecting and error correcting codes, has been studied extensively for the past forty years. It has become increasingly important with the development of new technologies for data communications and data storage. In this chapter we will study both error detecting and error correcting codes. We will introduce an important family of error correcting codes. To go beyond the coverage in this chapter and to learn about the latest applications of coding theory and the latest technical developments, the reader is referred to the references listed at the end of the chapter.

Error Detecting Codes A simple way to detect errors when a bit string is transmitted is to add a parity check bit at the end of the string. If the bit string contains an even number of 1s we put a 0 at the end of the string. If the bit string contains an odd number of 1s we put a 1 at the end of the string. In other words, we encode the message x1x2 . . . xn as x1x2 . . . xnxn+1, where the parity check bit xn+1 is given by

xn+1 = (x1 + x2 + . . . + xn) mod 2.

Adding the parity check bit guarantees that the number of 1s in the extended string must be even. It is easy to see that the codewords in this code are bit strings with an even number of 1s.

Note that when a parity check bit is added to a bit string, if a single error is made in the transmission of a codeword, the total number of 1s will be odd. Consequently, this error can be detected. However, if two errors are made, these errors cannot be detected, since the total number of 1s in the extended string with two errors will still be even. In general, any odd number of errors can be detected, while an even number of errors cannot be detected.

Example 1 Suppose that a parity check bit is added to a bit string before it is transmitted. What can you conclude if you receive the bit strings 1110011 and 10111101 as messages?

Solution: Since the string 1110011 contains an odd number of 1s, it cannot be a valid codeword (and must, therefore, contain an odd number of errors).

Chapter 5 Coding Theory 75

On the other hand, the string 10111101 contains an even number of 1s. Hence it is either a valid codeword or contains an even number of errors.

Another simple way to detect errors is to repeat each bit in a message twice, as is done in the following example.

Example 2 Encode the bit string 011001 by repeating each bit twice.

Solution: Repeating each bit twice produces the codeword 001111000011.

What errors can be detected when we repeat each bit of a codeword twice? Since the codewords are those bit strings that contain pairs of matching bits, that is, where the first two bits agree, the third and fourth bits agree, and so on, we can detect errors that change no more than one bit of each pair of these matching bits. For example, we can detect errors in the second bit, the third bit, and the eighth bit of when codewords have eight bits (such as detecting that 01101110, received when the codeword 00001111 was sent, has errors). On the other hand, we cannot detect an error when the third and fourth bit are both changed (such as detecting that 00111111, received when the codeword 00001111 was sent, has errors).

So far we have discussed codes that can be used to detect errors. When errors are detected, all we can do to obtain the correct codeword is to ask for retransmission and hope that no errors will occur when this is done. However, there are more powerful codes that can not only detect but can also correct errors. We now turn our attention to these codes, called error correcting codes.

Error Correcting Codes We have seen that when redundancy is included in codewords, such as when a parity check bit is added to a bit string, we can detect transmission errors. We can do even better if we include more redundancy. We will not only be able to detect errors, but we will also be able to correct errors. More precisely, if sufficiently few errors have been made in the transmission of a codeword, we can determine which codeword was sent. This is illustrated by the following example.

Example 3 To encode a message we can use the triple repetition code. We repeat a message three times. That is, if the message is x1x2x3, we encode it as x1x2x3x4x5x6x7x8x9 where x1 = x4 = x7, x2 = x5 = x8, and x3 = x6 = x9. The valid codewords are 000000000, 001001001, 010010010, 011011011, 100100100, 101101101, 110110110, and 111111111.

76 Applications of Discrete Mathematics

We decode a bit string, which may contain errors, using the simple majority rule. For example, to determine x1, we look at x1, x4, and x7. If two or three of these bits are 1, we conclude that x1 = 1. Otherwise, if two or three of these bits are 0, we conclude that x1 = 0. In general, we look at the three bits corresponding to each bit in the original message. We decide that a bit in the message is 1 if a majority of bits in the string received in positions corresponding to this bit are 1s and we decide this bit is a 0 otherwise. Using this procedure, we correctly decode the message as long as at most one error has been made in the bits corresponding to each bit of the original message.

For example, when a triple repetition code is used, if we receive 011111010, we conclude that the message sent was 011. (For instance, we decided that the first bit of the message was 0 since the first bit is 0, the fourth bit is 1, and the seventh bit is 0, leading us to conclude that the fourth bit is wrong.)

To make the ideas introduced by the triple repetition code more precise we need to introduce some ideas about the distance between codewords and the probability of errors. We will develop several important concepts before returning to error correcting codes.

Hamming Distance There is a simple way to measure the distance between two bit strings. We look at the number of positions in which these bit strings differ. This approach was used by Richard Hamming* in his fundamental work in coding theory.

Definition 1 The Hamming distance d(x, y) between the bit strings x = x1x2 . . . xn and y = y1y2 . . . yn is the number of positions in which these strings differ, that is, the number of i (i = 1, 2, . . . , n) for which xi �= yi.

Note that the Hamming distance between two bit strings equals the number of changes in individual bits needed to change one of the strings into the other.

* Richard Hamming (1915–1998) was one of the founders of modern coding theory. He was born in Chicago and received his B.S. from the University of Chicago, his M.A.

from the University of Nebraska, and his Ph.D. from the University of Illinois in 1942.

He was employed by the University of Illinois from 1942 to 1944 and the University

of Louisville from 1944 to 1945. From 1945 until 1946 he was on the staff of the

Manhattan Project in Los Alamos. He joined Bell Telephone Laboratories in 1946,

where he worked until 1976. His research included work in the areas of coding theory,

numerical methods, statistics, and digital filtering. Hamming joined the faculty of the

Naval Postgraduate School in 1976. Among the awards he won are the Turing Prize

from the ACM and the IEEE Hamming Medal (named after him).

Chapter 5 Coding Theory 77

We will find this observation useful later.

Example 4 Find the Hamming distance between the bit strings 01110 and 11011 and the Hamming distance between the bit strings 00000 and 11111.

Solution: Since 01110 and 11011 differ in their first, third, and fifth bits, d(01110, 11011) = 3. Since 00000 and 11111 differ in all five bits, we conclude that d(00000, 11111) = 5.

The Hamming distance satisfies all the properties of a distance function (or metric), as the following theorem demonstrates.

Theorem 1 Let d(x, y) represent the Hamming distance between the bit strings x and y of length n. Then

(i) d(x, y) ≥ 0 for all x, y (ii) d(x, y) = 0 if and only if x = y

(iii) d(x, y) = d(y, x) for all x, y

(iv) d(x, y) ≤ d(x, z) + d(z, y) for all x, y, z. Proof: Properties (i), (ii), and (iii) follow immediately from the definition of the Hamming distance. To prove (iv), we use the fact that d(x, y) is the number of changes of bits required to change x into y. Note that for every string z of length n the number of changes needed to change x into y does not exceed the number of changes required to change x into z and to then change z into y.

How can the Hamming distance be used in decoding? In particular, sup- pose that when a codeword x from a code C is sent, the bit string y is received. If the transmission was error-free, then y would be the same as x. But if errors were introduced by the transmission, for instance by a noisy line, then y is not the same as x. How can we correct errors, that is, how can we recover x?

One approach would be to compute the Hamming distance between y and each of the codewords in C. Then to decode y, we take the codeword of minimum Hamming distance from y, if such a codeword is unique. If the distance between the closest codewords in C is large enough and if sufficiently few errors were made in transmission, this codeword should be x, the codeword sent. This type of decoding is called nearest neighbor decoding.

Example 5 Use nearest neighbor decoding to determine which code word

78 Applications of Discrete Mathematics

was sent from the code C = {0000, 1110, 1011} if 0110 is received. Solution: We first find the distance between 0110 and each of the codewords. We find that

d(0000, 0110) = 2,

d(1110, 0110) = 1,

d(1011, 0110) = 3.

Since the closest codeword to 0110 is 1110, we conclude that 1110 was the codeword sent.

Will nearest neighbor decoding produce the most likely codeword that was sent from a binary string that was received? It is not hard to see that it will if each bit sent has the same probability p of being received incorrectly and p < 1/2. We call a transmission channel with this property a binary symmetric channel. Such a channel is displayed in Figure 1.

Figure 1. A binary symmetric channel.

Example6 Suppose that when a bit is sent over a binary symmetric channel the probability it is received incorrectly is 0.01. What is the probability that the bit string 100010 is received when the bit string 000000 is sent?

Solution: Since the probability a bit is received incorrectly is 0.01, the prob- ability that a bit is received correctly is 1 − 0.01 = 0.99. For 100010 to be received, when 000000 is sent, it is necessary for the first and fifth bits to be received incorrectly and the other four bits to be received correctly. The prob- ability that this occurs is

(0.99)4(0.01)2 = 0.000096059601.

We will now show that nearest neighbor decoding gives us the most likely codeword sent, so that it is also maximum likelihood decoding.

Chapter 5 Coding Theory 79

Theorem 2 Suppose codewords of a binary code C are transmitted using a binary symmetric channel. Then, nearest neighbor decoding of a bit string received produces the most likely codeword sent.

Proof: To prove this theorem we first need to find the probability that when a codeword of length n is sent, a bit string with k errors in specified positions is received. Since the probability each bit is received correctly is 1 − p and the probability each bit is received in error is p, it follows that the probability of k errors in specified positions is pk(1 − p)n−k. Since p < 1/2 and 1 − p > 1/2, it follows that

pi(1 − p)n−i > pj (1 − p)n−j

whenever i < j. Hence, if i < j, the probability that a bit string with i specified errors is received is greater than the probability that a bit string with j specified errors is received. Since is more likely that errors were made in fewer specified positions when a codeword was transmitted, nearest neighbor decoding produces the most likely codeword.

The Hamming distance between codewords in a binary code determines its ability to detect and/or correct errors. We need to make the following definition before introducing two key theorems relating to this ability.

Definition 2 The minimum distance of a binary code C is the smallest distance between two distinct codewords, that is,

d(C) = min{d(x, y)|x, y ∈ C, x �= y}.

Example 7 Find the minimum distance of the code

C = {00000, 01110, 10011, 11111}.

Solution: To compute the minimum distance of this code we will find the distance between each pair of codewords and then find the smallest such dis- tance. We have d(00000, 01110) = 3, d(00000, 10011) = 3, d(00000, 11111) = 5, d(01110, 10011) = 4, d(01110, 11111) = 2, and d(10011, 11111) = 2. We see that the minimum distance of C is 2.

Example 8 Find the minimum distance of the code

C = {000000, 111111}.

80 Applications of Discrete Mathematics

Solution: Since there are only two codewords and d(000000, 111111) = 6, the minimum distance of this code is 6.

The minimum distance of a code tells us how many errors it can detect and how many errors it can correct, as the following two theorems show.

Theorem 3 A binary code C can detect up to k errors in any codeword if and only if d(C) ≥ k + 1. Proof: Suppose that C is a binary code with d(C) ≥ k + 1. Suppose that a codeword x is transmitted and is received with k or fewer errors. Since the minimum distance between codewords is at least k + 1, the bit string received cannot be another codeword. Hence, the receiver can detect these errors.

Now suppose that C can detect up to k errors and that d(C) ≤ k. Then there are two codewords in C that differ in no more than k bits. It is then possible for k errors to be introduced when one of these codewords is transmitted so that the other codeword is received, contradicting the fact that C can detect up to k errors.

Theorem 4 A binary code C can correct up to k errors in any codeword if and only if d(C) ≥ 2k + 1. Proof: Suppose that C is a binary code with d(C) ≥ 2k + 1. Suppose that a codeword x is transmitted and received with k or fewer errors as the bit string z, so that d(x, z) ≤ k. To see that C can correct these errors, note that if y is a codeword other than x, then d(z, y) ≥ k + 1. To see this note that if d(z, y) ≤ k, then by the triangle inequality d(x, y) ≤ d(x, z) + d(z, y) ≤ k + k = 2k, contradicting the assumption that d(C) ≥ 2k + 1.

Conversely, suppose that C can correct up to k errors. If d(C) ≤ 2k, then there are two codewords that differ in 2k bits. Changing k of the bits in one of these codewords produces a bit string that differs from each of these two codewords in exactly k positions, thus making it impossible to correct these k errors.

Example 9 Let C be the code {00000000, 11111000, 01010111, 10101111}. How many errors can C detect and how many can it correct?

Solution: Computing the distance between codewords shows that the min- imum distance of C is 5. By Theorem 3, it follows that C can detect up to 5 − 1 = 4 errors. For example, when we use C to detect errors, we can de- tect the four errors made in transmission when we receive 11110000 when the codeword 00000000 was sent.

Chapter 5 Coding Theory 81

By Theorem 4, it follows that C can correct up to �(5 − 1)/2� = 2 errors. For example, when we use C to correct errors, we can correct the two er- rors introduced in transmission when we receive 11100000 when the codeword 11111000 was sent.

Perfect Codes To allow error correction we want to make the minimum distance between codewords large. But doing so limits how many codewords are available. Here we will develop a bound on the number of codewords in a binary code with a given minimum distance.

Lemma 1 Suppose x is a bit string of length n and that k is a nonnegative integer not exceeding n. Then there are

C(n, 0) + C(n, 1) + · · · + C(n, k). bit strings y of length n such that d(x, y) ≤ k (where d is the Hamming dis- tance).

Proof: Let i be a nonnegative integer. The number of bit strings y with d(x, y) = i equals the number of ways to select the i locations where x and y differ. This can be done in C(n, i) ways. It follows that there are

C(n, 0) + C(n, 1) + · · · + C(n, k) bit strings such that d(x, y) ≤ k.

We can describe the statement in Lemma 1 in geometric terms. By the sphere of radius k centered at x we mean the set of all bit strings y such that d(x, y) ≤ k. Lemma 1 says that there are exactly ∑ki=0 C(n, i) bit stings in the sphere of radius k centered at x.

Lemma 2 Let C be a binary code containing codewords of length n and let d(C) = 2k + 1. Then given a bit string y of length n, there is at most one codeword x such that y is in the sphere of radius k centered at x.

Proof: Suppose that y is in the sphere of radius k centered at two different codewords x1 and x2. Then d(x1, y) ≤ k and d(x2, y) ≤ k. By the triangle inequality for the Hamming distance this implies that

d(x1, x2) ≤ d(x1, y) + d(x2, y) ≤ k + k = 2k,

82 Applications of Discrete Mathematics

contradicting the fact that the minimum distance between codewords is 2k + 1.

We can now give a useful bound on how many codewords can be in a code consisting of n-tuples that can correct a specified number of errors.

Theorem 5 The Sphere Packing or (Hamming) Bound Suppose that C is a code of bit strings of length n with d(C) = 2k + 1. Then |C|, the number of codewords in C, cannot exceed

C(n, 0) + C(n, 1) + · · · + C(n, k).

Proof: There are 2n bit strings of length n. By Lemma 1 the sphere of radius k centered at a codeword x contains

C(n, 0) + C(n, 1) + · · · + C(n, k)

bit strings. Since no bit string can be in two such spheres (by Lemma 2), it follows that the number of bit strings of length n is at least as large as the number of codewords times the number of bit strings in each such sphere. Hence,

2n ≥ |C|[C(n, 0) + C(n, 1) + · · · + C(n, k)]. We obtain the inequality we want by dividing by the second factor on the right- hand side of this inequality (and writing the inequality with the smaller term first).

Example 10 Find an upper bound for the number of codewords in a code C where codewords are bit strings of length seven and the minimum distance between codewords is three.

Solution: The minimum distance between codewords is 3 = 2k + 1, so that k = 1. Hence the sphere packing bound shows that there are no more than

27/[C(7, 0) + C(7, 1)] = 128/8 = 16

codewords in such a code.

The sphere packing bound gives us an upper bound for the number of codewords in a binary code with a given minimum distance where codewords are bit strings of length n. The codes that actually achieve this upper bound,

Chapter 5 Coding Theory 83

that is, that have the most codewords possible, are of special interest because they are the most efficient error correcting codes. Such codes are known as perfect codes.

Example 11 Show that the code consisting of just two codewords 00000 and 11111 is a perfect binary code.

Solution: The minimum distance between codewords in this code is 5. The sphere packing bound states that there are at most

25/[C(5, 0) + C(5, 1) + C(5, 2)] = 32/16 = 2

codewords in a code consisting of 5-tuples with minimum distance 5. Since there are 2 codewords in this code, it is a perfect binary code.

The code in Example 11 is called a trivial perfect code since it only consists of the two codewords, one containing only 0s and the other containing only 1s. As Exercise 8 demonstrates, when n is an odd positive integer there are trivial perfect codes consisting of the two codewords which are bit strings of length n consisting of all 0s and of all 1s. Finding perfect binary codes different from the trivial codes has been one of the most important problems in coding theory. In the next section we will introduce a class of perfect binary codes known as Hamming codes.

Generator Matrices Before describing Hamming codes, we need to generalize the concept of a parity check bit. When we use a parity check bit, we encode a message x1x2 . . . xk as x1x2 . . . xkxk+1 where xk+1 = (x1 + x2 + · · · + xk) mod 2. To generalize this notion, we add more than one check bit. More precisely, we encode a message x1x2 . . . xk as x1x2 . . . xkxk+1 . . . xn, where the last n − k bits xk+1,...,xn, are parity check bits, obtained from the k bits in the message. We will describe how these parity check bits are specified.

Consider a k-bit message x1x2 · · · xk as a 1 × k matrix x. Let G be a k × n matrix that begins with the k × k identity matrix Ik. That is, G = (Ik|A), where A is a k × (n − k) matrix, known as a generator matrix. We encode x as E(x) = xG, where we do arithmetic modulo 2. Coding using a parity check bit and using the triple repetition code are special cases of this technique, as illustrated in Examples 12 and 13.

Example 12 We can represent encoding by adding a parity check bit to a

84 Applications of Discrete Mathematics

three-bit message as E(x) = xG, where

G =

⎛ ⎝1 0 0 10 1 0 1

0 0 1 1

⎞ ⎠ .

Note that to obtain G we add a column of 1s to I3, the 3 × 3 identity matrix. That is, G = (I3|A), where

A =

⎛ ⎝11

⎞ ⎠ .

Example 13 We can represent encoding using the triple repetition code for three-bit messages as E(x) = xG, where

G =

⎛ ⎝1 0 0 1 0 0 1 0 00 1 0 0 1 0 0 1 0

0 0 1 0 0 1 0 0 1

⎞ ⎠ .

Note that G is formed by repeating the identity matrix of order three, I3, three times, that is,

G = (I3|I3|I3).

We now consider an example which we will use to develop some important ideas.

Example 14 Suppose that

G =

⎛ ⎝1 0 0 1 1 10 1 0 1 1 0

0 0 1 1 0 1

⎞ ⎠ ,

that is, G = (I3|A), where

A =

⎛ ⎝1 1 11 1 0

1 0 1

⎞ ⎠ .

What are the codewords in the code generated by this generator matrix?

Chapter 5 Coding Theory 85

Solution: We encode each of the eight three-bit messages x = x1x2x3 as E(x) = xG. This produces the codewords 000000, 001101, 010110, 011011, 100111, 101010, 110001, and 111100. For example, we get the third of these by computing

E(010) = (0 1 0)G = (0 1 0)

⎛ ⎝1 0 0 1 1 10 1 0 1 1 0

0 0 1 1 0 1

⎞ ⎠ = (0 1 0 1 1 0).

It is easy to see that we can find the codewords in a binary code generated by a generator matrix G by taking all possible linear combinations of the rows of G (since arithmetic is modulo 2, this means all sums of subsets of the set of rows of G). The reader should verify this for codewords in the code in Example 14.

It is easy to see that the binary codes formed using generator matrices have the property that the sum of any two codewords is again a codeword. That is, they are linear codes. To see this, suppose that y1 and y2 are codewords generated by the generator matrix G. Then there are bit strings x1 and x2 such that E(x1) = y1 and E(x2) = y2, where E(x) = xG. It follows that y1 + y2 is also a codeword since E(x1 + x2) = y1 + y2. (Here we add bit strings by adding their components in the same positions using arithmetic modulo 2.)

We will see that there is an easy way to find the minimum distance of a linear code. Before we see this, we need to make the following definition.

Definition 3 The weight of a codeword x, denoted by w(x), in a binary code is the number of 1s in this codeword.

Example 15 Find the weights of the codewords 00000, 10111, and 11111.

Solution: Counting the number of 1s in each of these codewords we find that w(00000) = 0, w(10111) = 4, and w(11111) = 5.

Lemma 3 Suppose that x and y are codewords in a linear code C. Then d(x, y) = w(x + y).

Proof: The positions with 1s in them in x + y are the positions where x and y differ. Hence d(x, y) = w(x + y).

We also will need the fact that 0, the bit string with all 0s, belongs to a linear code.

86 Applications of Discrete Mathematics

Lemma 4 Suppose that C is a nonempty linear code. Then 0 is a codeword in C.

Proof: Let x be a codeword in C. Since C is linear x + x = 0 belongs to C.

Theorem 6 The minimum distance of a linear code C equals the minimum weight of a nonzero codeword in C.

Proof: Suppose that the minimum distance of C is d. Then there are code- words x and y such that d(x, y) = d. By Lemma 3 it follows that w(x + y) = d. Hence w, the minimum weight of a codeword, is no larger than d.

Conversely, suppose that the codeword x is a nonzero codeword of min- imum weight. Then using Lemma 4 we see that w = w(x) = w(x + 0) = d(x, 0) ≥ d. It follows that w = d, establishing the theorem.

Parity Check Matrices Note that in Example 14 the bit string x1x2x3 is encoded as x1x2x3x4x5x6 where x4 = x1 + x2 + x3, x5 = x1 + x2, and x6 = x1 + x3 (here, arithmetic is carried out modulo 2). Because we are doing arithmetic modulo 2, we see that

x1 + x2 + x3 + x4 = 0 x1 + x2 + x5 = 0 x1 + x3 + x6 = 0.

Furthermore, it is easy to see that x1x2x3x4x5x6 is a codeword if and only if it satisfies this system of equations.

We can express this system of equations as

⎛ ⎝1 1 1 1 0 01 1 0 0 1 0

1 0 1 0 0 1

⎞ ⎠ ⎛ ⎜⎜⎜⎜⎜⎝

x1 x2 x3 x4 x5 x6

⎞ ⎟⎟⎟⎟⎟⎠ =

⎛ ⎝00

⎞ ⎠ ,

that is, HE(x)t = 0,

where E(x)t is the transpose of E(x) and H, the parity check matrix, is given by

H =

⎛ ⎝1 1 1 1 0 01 1 0 0 1 0

1 0 1 0 0 1

⎞ ⎠ .

Chapter 5 Coding Theory 87

Note that H = (At|In−k). With this notation we see that x = x1x2x3x4x5x6 is a codeword if and only if Hxt = 0, since checking this equation is the same as checking whether the parity check equations hold.

In general, suppose that G is a k × n generator matrix with G = (Ik|A),

where A is a k × (n − k) matrix. To G we associate the parity check matrix H, where

H = (At|In−k). Then x is a codeword if and only if Hxt = 0. Note that from a generator matrix G we can find the associated parity check matrix H, and conversely, given a parity check matrix H, we can find the associated generator matrix G. More precisely, note that if H = (B|Ir ), then G = (In−r|Bt).

We have seen that the parity check matrix can be used to detect errors. That is, to determine whether x is a codeword we check whether

Hxt = 0.

Not only can the parity check matrix be used to detect errors, but when the columns of this matrix are distinct and are all nonzero, it also can be used to correct errors. Under these assumptions, suppose that the codeword x is sent and that y is received, which may or may not be the same as x. Write y = x + e, where e is an error string. (We have e = 0 if no errors arose in the transmission). In general, the error string e has 1s in the positions where y differs from x and 0s in all other positions. Now suppose that only one error has been introduced when x was transmitted. Then e is a bit string that has only one nonzero bit which is in the position where x and y differ, say position j. Since Hxt = 0, it follows that

Hyt = H(xt + e)

= Hxt + et

= et

= cj

where cj is the jth column of H. Hence, if we receive y and assume that no more than one error is present,

we can find the codeword x that was sent by computing Hyt. If this is zero, we know that y is the codeword sent. Otherwise, it will equal the jth column of H for some integer j. This means that the jth bit of y should be changed to produce x.

Example16 Use the parity check matrix to determine which codeword from the code in Example 14 was sent if 001111 was received. Assume that at most one error was made.

88 Applications of Discrete Mathematics

Solution: We find that

Hyt =

⎛ ⎝1 1 1 1 0 01 1 0 0 1 0

1 0 1 0 0 1

⎞ ⎠ ⎛ ⎜⎜⎜⎜⎜⎝

0 0 1 1 1 1

⎞ ⎟⎟⎟⎟⎟⎠ =

⎛ ⎝01

⎞ ⎠ .

This is the fifth column of H. If follows that the fifth bit of 001111 is incorrect. Hence the code word sent was 001101.

Hamming Codes We can now define the Hamming codes. We define them using parity check matrices.

Definition 4 A Hamming code of order r where r is a positive integer, is a code generated when we take as parity check matrix H an r × (2r − 1) matrix with columns that are all the 2r − 1 nonzero bit strings of length r in any order such that the last r columns form the identity matrix.

Interchanging the order of the columns leads to what is known as an equiv- alent code. For details on equivalence of codes the reader is referred to the references at the end of this chapter.

Example 17 Find the codewords in a Hamming code of order 2.

Solution: The parity check matrix of this code is

H = (

1 1 0 1 0 1

) .

We have H = (B|I2) where B = (

1 1

) . Hence, the generator matrix G of

this code equals G = (I3−2|Bt) = (1 1 1). Since the codewords are linear combinations of the rows of G, we see that this code has two codewords, 000 and 111. This is the linear repetition code of order 3.

Example 18 Find the codewords in a Hamming code of order 3.

Chapter 5 Coding Theory 89

Solution: For the parity check matrix of this code we use

H =

⎛ ⎝0 1 1 1 1 0 01 0 1 1 0 1 0

1 1 0 1 0 0 1

⎞ ⎠ .

We have H = (B|I3) where

B =

⎛ ⎝0 1 1 11 0 1 1

1 1 0 1

⎞ ⎠ .

Hence the generator matrix G of this code equals

G = (I7−3|Bt) =

⎛ ⎜⎝

1 0 0 0 0 1 1 0 1 0 0 1 0 1 0 0 1 0 1 1 0 0 0 0 1 1 1 1

⎞ ⎟⎠ .

The 16 codewords in this code C can be found by taking all possible sums of the rows of G. We leave this as an exercise at the end of the chapter.

To show that the Hamming codes are perfect codes we first need to establish two lemmas.

Lemma 5 A Hamming code of order r contains 2n−r codewords where n = 2r − 1. Proof: The parity check matrix of the Hamming code is an r × n matrix. It follows that the generator matrix for this code is a (n − r) × n matrix. Recall that the codewords are the linear combinations of the rows. As the reader can show, no two linear combinations of the rows are the same. Since there are 2n−r different linear combinations of row, there are 2n−r different codewords in a Hamming code of order r.

Lemma 6 The minimum distance of a Hamming code of order r is 3 when- ever r is a positive integer.

Proof: The parity check matrix Hr has columns which are all nonzero and no two of which are the same. Hence, from our earlier discussion, a Hamming code of order r can correct single errors. By Theorem 3 we conclude that the minimum distance of this code is at least 3. Among the columns of Hr are the

90 Applications of Discrete Mathematics

following three columns:

c1 =

⎛ ⎜⎜⎜⎜⎝

1 1 0 ... 0

⎞ ⎟⎟⎟⎟⎠ , c2 =

⎛ ⎜⎜⎜⎜⎝

1 0 0 ... 0

⎞ ⎟⎟⎟⎟⎠ , c3 =

⎛ ⎜⎜⎜⎜⎝

0 1 0 ... 0

⎞ ⎟⎟⎟⎟⎠ .

Note that c1 + c2 + c3 = 0. Let x be the bit string with 1 in the positions of these columns and zero elsewhere. Then Hxt = 0, since it is c1 + c2 + c3. It follows that x is a codeword. Since w(x) = 3, by Theorem 6 it follows that the minimum distance is no more than 3. We conclude that the minimum distance of a Hamming code of order r is 3.

Theorem 7 The Hamming code of order r is a perfect code.

Proof: Let n = 2r − 1. By Lemma 5 a Hamming code of order r contains 2n−r codewords, each of which is an n-tuple. By Lemma 6 the minimum distance of the Hamming code of order r is 3. We see that this code achieves the maximum number of codewords allowed by the sphere packing bound. To see this, note that

2n−r(1 + C(n, 1)) = 2n−r(1 + n) = 2n−r(1 + 2r − 1) = 2n. This is the upper bound of the sphere-packing bound. hence a Hamming code of order r is perfect.

By Theorem 7 we see that the Hamming codes are examples of perfect codes. The study of perfect codes has been one of the most important areas of research in coding theory and has lead to the development of many important results. See the references at the end of the chapter to learn about what is known about perfect codes.

Summary In this chapter we have studied how codes can be used for error detection and error correction. We have introduced an important class of codes known as the Hamming codes. However, we have only touched the surface of a fascinating and important subject that has become extremely important for modern computing and communications. The interested reader can consult the references listed at the end of this chapter to learn about many other classes of codes that have practical applications.

Chapter 5 Coding Theory 91

For example, pictures of the planets taken by space probes have been en- coded using powerful codes, such as a code known as the Reed-Muller code (see [5] for details). This code has been used to encode the bit string of length 6 representing the brightness of each pixel of an image by a bit string of length 32. This Reed-Muller code consists of 64 codewords, each a bit string of length 32, with minimum distance 16. Another interesting example is the use of a family of codes known as Reed-Solomon codes used in digital audio recording (see [5] for details). Finally, many concepts and techniques from both linear algebra and abstract algebra are used in coding theory. Studying coding theory may con- vince the skeptical reader about the applicability of some of the more abstract areas of mathematics.

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