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Mind the Gap: The Haves and Have-Nots of Digital Business Transformation

A new research paper points to a growing "digital divide" between digital leaders and laggards, finding that digital leaders outperform digital laggards even among similar firms.

A new research paper points to a growing "digital divide" between digital leaders and laggards.

It also finds that digital leaders outperform digital laggards -- even among similar firms.

Researchers Survey Decision Makers, Define "Digital Leaders"

In "The Digital Business Divide: Analyzing the Operating Impact of Digital Transformation," coauthors Marco Iansiti and Karim Lakhani argue that digital leaders have positioned themselves for success, investing time and money to make critical technological, operational, and cultural changes. Digital laggards, by contrast, have not.

The result, Iansiti and Lakhani write, is that "a substantial performance gap is opening between leaders and laggards."

Iansiti's and Lakhani's report was published under the imprint of Keystone Strategy, a technology strategy consultancy. It was funded in part by Microsoft. Both men are highly respected in their fields: Iansiti is the David Sarnoff Professor of Business Administration; Lakhani is also a professor of business administration -- both are with Harvard Business School.

The survey sample is based on 344 hour-long telephone interviews with "senior business and technology decision makers," representing companies with a median size of 6,000 employees and $3.4 billion in revenue.

Digital Leaders Also Lead in Other Metrics

The paper claims that investment in digital transformation "appears to pay." The top 25 percent of companies in the sample typically outscored the bottom 25 percent in a number of important metrics.

"Organizations that scored in the top quartile of our digital transformation index obtained much better gross margins as well as better earnings and net income than organizations in the bottom digital quartile," Iansiti and Lakhani write.

Digital leaders boast, on average, superior three-year gross margins, three-year earnings before taxes, and three-year net income. Fantastic, you say: I'll write the check tomorrow.

Not so fast.

Mindset More Crucial than Spending

Oddly, digital leaders spend only slightly more (3.5 percent of revenue) on IT than do digital laggards (3.2 percent). What gives? The simple fact is you don't just buy digital transformation. You have to retrofit -- adjusting processes and driving cultural changes -- to take advantage of it.

"Our research indicates that the leaders approach the digital opportunity with a different strategic mindset and execute on the opportunity with a different operating model," the authors write.

They note that leaders and laggards tend to have very different perspectives on the use of technology to process, store, and analyze data. "Leading organizations are more likely to ... have a comprehensive data acquisition strategy and differentiate themselves from competitors based on their data platform," they write.

"This difference in strategy means that business users are more likely to have access to a consistent set of up-to-date metrics for decision making and the organization is able to generate predictions about [the] business from data they collect."

Imaginative Analytics Characterizes Leaders

If it sounds like Iansiti and Lakhani are describing the equivalent of data warehouse architecture, it's because they are. One notable takeaway is that leaders tend to make imaginative use of data and analytics; laggards do not.

For example, Iansiti and Lakhani argue that a digital business is supported by four "pillars" -- customer interaction and relationship management; manufacturing, product, and service delivery; product and service development; and employee productivity and human capital management. Data management and analytics loom large in all four of these.

Accordingly, digital leaders are 2.5 times more likely than laggards to use real-time analytics to custom-tailor the customer experience and 1.7 times more likely to use analytics to predict equipment downtime. Leaders are also 2.3 times more likely to use predictive modeling to respond more effectively to customer support requests and 2.3 times more likely to capture data on how their products are used -- and analyze that data to improve product design.

There's also this: digital leaders are 1.4 times more likely than laggards to equip employees with self-service business intelligence and data visualization technologies, too.

Digital Transformation Is Here to Stay

"The time for investing in digital transformation is now. Digital technology has been spawning networks for several decades, but the rate of transformation is increasing," the authors urge.

"The very foundation of business value in our economy is shifting and is going to continue to shift," they conclude. "The changes are here to stay. Digital transformation has become the new normal."

Their white paper is available for download from Microsoft here.

About the Author

Stephen Swoyer is a technology writer with 20 years of experience. His writing has focused on business intelligence, data warehousing, and analytics for almost 15 years. Swoyer has an abiding interest in tech, but he’s particularly intrigued by the thorny people and process problems technology vendors never, ever want to talk about. You can contact him at [email protected].

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