Featuring research from

Issue 1

Creating a competitive advantage with Digital Systems Integration

HCL’s Proposition for the First Digital Decade

2 2

Digitalization as the 6th force shaping an industry

2Digitalization as the 6th force shaping an industry

4Reborn DigitalTM

5Find out whether you are a digital enterprise

7How to be reborn digital?

8Digital Systems Integration from HCL

10HCL’s long term strategic move with DSI

11HCL Customer Stories

12How to start on the journey of digitalization

13From the Gartner Files:Three Fundamental Ways Strategy Is Changing in the First Digital Decade, and How CIOs Should Respond

19About HCL

Creating a competitive advantage with Digital Systems Integration is published by HCL. Editorial supplied by HCL is independent of Gartner analysis. All Gartner research is © 2014 by Gartner, Inc. All rights reserved. All Gartner materials are used with Gartner’s permission. The use or publication of Gartner research does not indicate Gartner’s endorsement of HCL’s products and/or strategies. Reproduction or distribution of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The opinions expressed herein are subject to change without notice. Although Gartner research may include a discussion of related legal issues, Gartner does not provide legal advice or services and its research should not be construed or used as such. Gartner is a public company, and its shareholders may include firms and funds that have financial interests in entities covered in Gartner research. Gartner’s Board of Directors may include senior managers of these firms or funds. Gartner research is produced independently by its research organization without input or influence from these firms, funds or their managers. For further information on the independence and integrity of Gartner research, see “Guiding Principles on Independence and Objectivity” on its website, http://www.gartner.com/technology/about/ombudsman/omb_guide2.jsp.

For the past few decades, organizations have been using information technology as a tool to run an efficient and agile business. These capabilities called the ‘systems of records’ have since become commoditized and impact only IT cost.

The next step in the evolution of IT capabilities was ‘systems of differentiation’ which helped organizations optimize business cost. This was achieved by integrating the enterprise and extending the integration to its partners, thereby reducing the barriers to conduct business.

More recently, several disruptive technologies such as Mobility, Social Media led technologies, Cloud and Big Data, have been utilized by visionary organizations for creating ‘systems of innovation’. A major component of this is the Digitalization of business models aimed at impacting the profitability of an organization. A few organizations have already started their journey of embracing Digitalization to create a competitive advantage.

What is Digitalization?

“First, it’s not digitization. That is about zeros and ones. Digitalization is about something altogether bigger and fundamentally more important. It’s about the transformation of your business. Digital business applies unprecedented combinations of new technologies to generate revenue and value. It starts with digital assets and capabilities. For business, it means digital products, services and customer experiences conducted through digital channels from the front office all the way through the value chain.”

- Gartner, The Digital Industrial Economy blog by Peter Sondergard, October 31, 2013

Fledgling technologies such as 3D printing and Internet of Things (IoT) are forecasted to lead the new industrial revolution. According to Gartner - The next ten years are set to become the first truly “digital decade,” when digital technology will move to the forefront of finding new sources of value and creating new threats for the enterprise. [Three Fundamental Ways Strategy Is Changing in the First Digital Decade and How CIOs Should Respond]

This evolution of such transformational capabilities of IT is forcing organizations to think about digitalization as a crucial factor in charting their corporate strategy (See: Impact of Digitalization as the Notional 6th Force). According to Gartner- the “First Digital Decade” requires a new mindset towards how strategy is created and where it is focused. [Three Fundamental Ways Strategy Is Changing in the First Digital Decade and How CIOs Should Respond]

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Digitalization as the 6th force shaping an industry

Impact of Digitalization as the Notional 6th Force:

Michael E. Porter’s 5 forces model is used by organizations to determine their corporate strategy. The potential impact of digitalization on some industries is large enough to be considered as the notional 6th force impacting profitability and thus being crucial enough to be considered at par with the other forces.

Industry Rivalry

Potential Entrants Suppliers

Buyers Substitutes

Impact of Digitalization

Source: HCL

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During any big change within an ecosystem, there are winners and losers. As we study the business disruptions caused by the winners in digitalization, we see successful adoption of transformative technologies, unconstrained by legacy technologies and business processes. The winners seem to be born digital. These organizations use digitalization to disrupt current business processes and create competitive advantage.

The incumbent or traditional organizations have existing advantages in the form of vast resources accumulated over many years: human, intellectual, financial, physical assets, technology, relationships and their brand. Despite these advantages, by not being able to take advantage of the intertwined technological, cultural, and legal changes, they may not be equipped to compete against companies that are born digital.

Reborn DigitalTM

1 http://blogs.wsj.com/cio/2013/01/02/big-oils-big-data-push-changing-the-future-of-energy/ 2 http://www.internetretailer.com/2013/01/29/ww-grainger-boosts-web-sales-23-2012 3 shttps://www.sap.com/bin/sapcom/downloadasset.deutsche-postbank--building-a-payments-processing-business-pdf.html 4 http://mobihealthnews.com/7247/bayer-nintendo-bring-meter-integration-to-us/ 4 http://www.tedmag.com/rooms.aspx?id=17596 5 http://supplychainminded.com/are-you-ready-for-the-digital-value-chain/

Terminologies like the “Kodak Moment” that signifies the implosion of an amazing brand or the phenomenon of traditional retailers like Best Buy or book sellers like Barns & Nobel being “Amazoned” point to the losses sustained by those competing against companies that are born digital.

To successfully compete against the “born digital” these traditional organizations need to become “reborn digitalTM”. They will need to break the shackles of legacy systems and effectively embrace transformative technologies to create the same degree of flexibility and agility in addressing the changing market place.

This rebirth cannot happen in a discreet manner and has to be integrated with the existing IT landscape as well as corporate strategy.

Industry Company Traditional Business Model

Innovation Digital Business Model Impact

Oil & Gas1 Shell Lack of automation and analytics leading to deep water reserves being difficult to find

Built-in GPS, wind sensors, motion sensors and compasses, allows Shell to drill wells with new precision

Predictive analytics making it possible for Shell to exploit previously uncharted oil and gas fields

40% fewer workers required on drilling ships also reducing the time to build an oil rig by 50%

Retail & Logistics2 WW Grainger Traditional fixed price facilities management

Expanding service delivery through e-commerce platform, cross service delivery

Multi-level, multi-channel facilities delivery

30% revenue through e-commerce

BFSI3 Deutsche Bank 18 different Kordoba-based legacy systems to run payments operations in each of its operating centers

Partnered with SAP to create a single platform with standardized processes for all payment types

High-volume payment processing for 14 million customers. Secure straight-through processing of more than 7.4 billion payment transactions a year

80% reduction in time to market of new payments products; 40% reduction in time to respond to mandatory regulatory requirements

Life Sciences4 Bayer Pharmaceutical manufacturing, research and distribution

Tie-up with Nintendo for delivering blood glucose monitoring system - DIDGET

Better, enhanced and superior drug delivery

10% faster drug delivery and better control over production

Manufacturing5 BMW Traditional manufacturing of automobiles through LEAN processes

BMW eKanban – LEAN process monitoring with mobility apps

Better, enhanced production control

Savings of $82mn in the first year

Source: HCL

There are many examples of companies across industries being reborn digital:

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Find out whether you are a digital enterprise

Strongly Disagree

Disagree Neutral Agree Strongly Agree

1 2 3 4 5

1. Has your enterprise automated existing manual processes?

2. Does automation of processes in your organization have built-in optimization using data from external sources?

3.Does your enterprise have systems that support creative and innovative processes as well?

4. Does your IT support modern collaborations, including social interactions, between internal users? Also, does it create external user communities to increase loyalty and crowd-source ideas?

5. Do your users see a unified system irrespective of how and where they access the system, including mobile?

6. Does your digital investment happen in an integrated manner, extracting the maximum possible ROI for the organization

7. Does your IT engage in building innovative systems aligning to the vision of the organization instead of merely the stated requirements?

8. Does your IT decentralize its innovation? Is it easy to build innovative solutions, quickly and economically?

9. Does your IT collect the data from every customer touch point and event? Including, available external data?

10. Does your IT harness the data in real-time? Do the decisions from data drive standard systems and processes?

Agility and flexibility have always been the goals of any business. Most enterprises are focused on standardizing and automating existing manual processes. They even incorporate optimization of workforce through organizational changes, shared services, and outsourcing for greater efficiency.

Enterprises that are reborn digital go beyond automation and optimization. They systematically automate optimization with the help of data-driven decisions (for instance, manufacturing processes, customer care systems, point of sales promotions, and payment processing – can all be optimized on-the-fly using the data from various sources, including the process itself, and increasingly from other internal and external systems).

In addition to automating the optimization of processes, digital enterprises support non-standard processes as well. While automation addresses traditional processes, creative and human experience driven processes elude automation. For instance, insurance underwriting is considered a complex process that cannot be automated. Digital enterprises bring technologies such as social collaborations, data driven decisions, and Mobility to increase the quality and reduce the cost of the process without completely automating it.

Digital enterprises go beyond the process centricity by re-visualizing the systems from a customer perspective, both internal and external. By using Mobility and Analytics, they are able to offer a personalized experience to the user. In case of internal users, it increases productivity and reduces costs; in case of external users, it increases customer satisfaction and revenue and stickiness of the users.

Traditional enterprises are unable to build these innovative systems for two reasons: cost and time. The cost of innovation is frequent failures, which is expensive. In contrast, digital enterprises are able to experiment without any constraints. This is because, they leverage the cloud infrastructure to reduce capital expenses and improve SLAs. In addition, they make use of API’s from different services to drastically reduce the time to market.

In summary, digital enterprises are able optimize the existing processes better and create new processes to suit modern challenges and opportunities, by using disruptive technologies.

Source: HCL

Take this quick 5 minutes test to find out whether you are a digital enterprise or not.

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HCL’s Strategic Intelligence Wing undertook a research across industries (Financial Services, Manufacturing, Retail & Logistics, Life Sciences and Media & Publishing) to find the current benchmarks of digitalization across these industries.

Source: HCL’s Strategic Intelligence Wing

Media and Publishing

Wholesale & Logistics

Financial Life Sciences Manufacturing

50

30

20

10

0

40

Maximum Minimum Threshold to be Reborn Digital

Source: HCL’s Strategic Intelligence Wing

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How to be reborn digital?

For an organization to be reborn digital it must understand the potential and expected cost of digitalization. Therefore, the first step is a structured exercise that yields the current state of the enterprise and the potential target state, along with the expected ROI of this transformation. This exercise provides the following details:

Justification: Organizations need to assess their portfolio of businesses and understand the impact of investing in digitalization on its valuations. This will also help them address gaps and focus on building the right capabilities to infuse digitalization into their portfolio.

Prioritization: Most organizations are currently using digitalization primarily for sales and marketing. However, the automation potential of digitalization across the value chain suggests a huge potential for value creation. By understanding where the value of digital really lies, they can prioritize investment to generate quick wins.

This must happen keeping in mind the vision and future plans of the organization.

Optimization: Before beginning the journey towards digitalization, organizations must optimize existing systems. This has to be executed with a digital master plan in mind which will bring them on a level footing with the organizations that are born digital.

Integration: Many organizations operate in silos around different functions or geographies. In order to meet the digital customers’ (internal and external) expectation of consistent and unified experience, organizations will have to integrate point solutions into a digital master plan. This requires an end-to-end view to ensure that all functions across the organization work together seamlessly.

Source: HCL

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Digital Systems Integration from HCL

Digital Systems Integration (DSI) developed by HCL is designed to support organizations to start the process and succeed in their journey of rebirth into a digital enterprise. It is a three-step process that includes (a) application modernization, (b) data fabric, and (c) digital transformation.

The Reborn Digital Process

DSI is designed to allow organizations to start the reborn digital journey with any one of the above steps. In addition, a Digital Assessment Tool (DAT) allows for a gradual adoption of DSI.

The DAT will define the entry and exit points in the DSI process which consists of the following three steps:

Step 1: Application Modernization

A successful digital strategy rests on the ability to reduce costs and time to market and increase the ability to innovate. This is made possible through the following:

• Creating platforms on cloud infrastructure: Cloud based platforms enable rapid development of applications using API’s and SaaS applications such as SFDC. This allows organizations to easily innovate with low capital expenses.

• Modernizing and migrating applications to cloud platforms: Migrating existing applications to cloud platforms can offer several advantages including cost. By judiciously combining private and public clouds, organizations can satisfy the security and compliance requirements and also provide scalable infrastructure for cost effective growth.

Application Modernization

Data Fabric

Digital Transformation

EDF

DAT

Enterprise Discovery

Framework

Digital Assessment Tool

Digital Discovery Tool

Set

Proposition

Components

Benefits

Data Fabric

Data model Integration

Single data dictionary, single data flow

Minimum Viable Model

SVOC Seamless flow of

Data

2 Digital Transformation

Omni Channel BI & Analytics

Mobile, Web, Ecommerce, Content,

Multichannel

BI, Analytics, Big Data

3

Collaboration Disruptive Technology

Social and Enterprise

Collaboration

M2M, 3D Printing,

Industrial Internet

Revenue Impact Decision Impact Human Integration

Future Ready

Systems Integration Approach

Proposition

Components

Benefits

Application Modernization

Legacy Modernization

Rewrite, re-code, Translate, Implement, Upgrade, Re-

implement, SaaS

1

Cloud Enablement

Commercial Enablement

Public & Private cloud

Cost/consumption model

Agile applications Future Ready Infrastructure Flexible Engagement

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• Integrating the cloud platforms with legacy assets: Due to technical, legal, and business constraints, it may not be possible to move all legacy applications to cloud infrastructure or platforms. In such cases, integrating those applications into cloud becomes a critical factor in creating an agile IT environment.

• Flexible commercial constructs: In a volatile environment where organizations compete with each other through technology, an outsourcing partner who remains flexible with the existing and future needs of the organization can make a huge difference. This requires flexible commercial constructs for current contracts and the ability to go “Beyond the Contract” when required.

Historically, application landscape modernization focused on standardization, legacy migration, and cost reduction. In the context of digitalization, this transformation is geared towards platforms that are ready for the cloud, integration, and the future.

Step 2: Data Fabric

Automating process improvements, supporting creative and innovative processes, and re-imagining business models requires data driven decisions. While traditionally, the focus was on data integration, reporting, and master data management, the digitalization requirements are going to be around the following:

• Ability to integrate data from existing sources within the enterprise

• Ability to integrate new sources of data in the enterprise: this includes operational and event data, and data from multiple channels

• Ability to integrate data from external sources, including curated public and private data sources (e.g.: weather and census data), and non-curated sources such as social and internet data

• Ability to add new sources of data in the form of ‘internet of things’ (IoT), wherever applicable (for instance, in manufacturing and design)

The addition of these data sources creates tremendous optimization and innovation opportunities for organizations. This opportunity can only be leveraged by transforming the data model to integrate the various sources and create a single data flow. These additional requirements from data are challenging for traditional organizations since existing technologies are unsuitable for creating such a data fabric. Born digital enterprises are using the following technologies to create a data fabric:

• Big Data technologies for handling data characterized by large volume, variety and velocity

• NoSQL data to handle data with fast changing structures

• API’s to seamlessly access data from different sources, including social data

• Integration of security and auditing into the data access layer

Such technologies make it possible for organizations to harness data for automated decision making.

Step 3: Digital Transformation

After the application modernization and creation of a data fabric the organization is closer to becoming a digital enterprise. As we are able to gather insights from the data, unless we integrate that capability into applications to serve the customers better or enable internal processes, we cannot reap the benefits of digitalization.

Similarly, business process disruption is possible only if the organization takes full advantage of the transformed application landscape to create new applications on enterprise assets that are locked in ERP systems.

In the last step digitalization provides the following benefits through technology interventions:

• Providing unified customer experience on multiple channels

• Enhancing existing applications for ubiquitous access to information from various devices such as mobiles, tablets and kiosks

• Adding capabilities to integrate data decisions to improve customer experience

• Adding these capabilities to applications to improve internal processes and employee experience

• Adding social elements to existing applications to enhance collaboration among employees

• Supporting platforms for decentralized innovation on applications

• Being ready for the next wave of technology like IoT and 3D printing

The 3 steps in DSI allow a digital enterprise to experiment, innovate, and offer new services with new business models.

Source: HCL

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HCL’s long term strategic move with DSI

With respect to digitalization, HCL is taking a long term strategic view with DSI. While ALT ASMTM (HCL’s proposition for the Application Support and Maintenance market) is our offering in the Run-the-Business space, DSI addresses change the business/transform the business objectives for organizations.

While helping incumbent organizations to start their “Reborn Digital” journey, we also become Reborn digital with them. Backed by application modernization, data fabric and digital transformation, DSI is pivotal to HCL’s three year strategy to make organizations digital leaders in 2017.

HCL is already investing in core technical capabilities. Centers of Excellence will help build several vertically aligned, modern propositions around these technical capabilities. By partnering with market leaders, forward-looking organizations, and research oriented organizations HCL plans to address the future goals and objectives of organizations. In addition, by acquiring niche technical and business capabilities HCL plans to strengthen its DSI proposition for digitalization of enterprises.

HCL has already implemented the core technical elements of DSI for several customers, generating combined annual revenue of more than one billion dollar.

Source: HCL

• Legacy Modernization

• Cloud Enablement

• Commercial Enablement

• Data Model

• Integration

• Omni Channel • BI/Analytics

• Collaboration/Social • Disruptive Technology

Application Modernization

Digital Transformation

Data Fabric

SI

MARKET SIZE $96 B

MARKET SIZE $10 B

MARKET SIZE $103 B

SI

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HCL Customer Stories

One of the top 5 logistics & global supply chain management solutions company in the U.S.

Customer Challenges/Objectives

• $100M transformation program for global consolidation of freight forwarding processes, migrating from 8 different apps to a modern global single app instance.

• Focus on increasing digital footprint through automation of manual steps and increasing transparency. The key metrics targeted are on productivity improvement and customer satisfaction.

The Solution

• Created a new real-time freight forwarding processes to enable interactions using a single app instance. This was achieved through API enabled architecture transformation

• Transforming a solution comprising multiple business processes and combination of business event triggers towards a simplified business process accessible as single app instance

• Application landscape migration to flexible private cloud to provide a highly scalable infrastructure that accommodates current needs and possible future growth based on the OpEX model. This led to extreme cost efficiencies in the operating app landscape

• Single instance global deployment on fully virtualized infrastructure, with near real time data replication. Also included, transformation of the data landscape to a single instance of global deployment with seamless and near real-time data mirroring and replication

• Transformed user experience for both internal and external consumption of applications / functionalities with responsive, consistent, platform agnostic Web and mobile user interactions

• Phased global rollout in 90+ countries

Business Benefits

• 60% reduction in customer on-boarding time

• 30% faster deployment of transformation program

• 25% more effective transformation by extending maintenance and support engagement

• Single global system with unified processes, data and measurement metrics

• 100% decommissioning of legacy systems

One of the top 3 national providers of wireless voice, messaging, and data services in U.S.

Customer Challenges/Objectives

• Increase business agility by introducing new business functionalities faster

• Improve store experience, partner integration/adding a new partner

• Reduce fragmentation of product catalog scattered across multiple applications

The Solution

• HCL created a platform to operate the business that supports automation of processes, event based data collection, and analytics dashboard to identify the business, operational, and technical issues

• RSP will be a set of re-usable services to primarily support the activations and account management business functionalities within the customer’s retail business

• RSP will replace the “backend” functions of the current legacy retail applications

• RSP can be integrated with any front end application or system via message transfers and protocol (request/response)

Business Benefits

• 80% reduction in the in-store activation time

• 75% reduction in time taken to on-board new channel partners

• Developed over 50 common re-usable services as API layer, (primarily Backend as a Service) thereby decoupling the backend from partner needs

• Increased availability of application from 99.9% to 99.99%

• Creation of platform verification test suites resulting in 70% reduction in time taken to certify changes to the platform

Source: HCL

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How to start on the journey of digitalization

The start of the digitalization journey crafted by HCL is a structured exercise that first assesses the current state of the organization and suggests the right steps to take it to its potential target state while maximizing ROI.

HCL’s Enterprise Discovery Framework (EDF) – Pathfinder – is used to capture the as-is state of the enterprise. Built on industry standard Enterprise Assessment tools, this framework provides the current status of processes, applications, data, and infrastructure and their inter-relationships.

After the discovery, application portfolio optimization (APO) opportunities are identified using the APO+ subset of our Digital Assessment Tool (DAT). The output of this tool is the potential target state for the enterprise, which is derived using industry benchmarks.

APO+ is built on a proven set of HCL APO tools such as PRIZMTM that help reduce the complexity of the application landscape. APO+ extends this approach to set the stage for creating a set of platforms, both technical and business, built for cloud ready infrastructure.

As outlined earlier, HCL will create a data fabric to complete the foundational aspects of digitalization.

To create the digital roadmap to the target state, the next step is a gap analysis. In this step, HCL assesses the current maturity and the organization readiness for digitalization. This assessment is also a part of DAT.

The ‘Build’ layer of DSI will take the roadmap outputs from the ‘Rationalize’ layer and convert them into a Design and Development Program. Here there are two paths to realize the ‘Digital Outcome’:

1. Process Transformation

a. Integration Focused

b. Business Focused

2. Architecture Transformation

The Process Transformation journey will (a) re-engineer the process to meet the business goals using Business Outcomes defined via HCL Business Benefits Value Framework or (b) use Process Integration to streamline existing process and improve cycle time. The Process Transformation primarily drives functional enrichment existing systems. Architecture Transformation will be achieved by leveraging capabilities via application or platform reengineering, multichannel expansion, Analytics/BI and by improving technical aspects via API Enablement, Data Lakes, and Programmable Infrastructure etc.

Once the DSI outcomes are delivered as part of the program, HCL adds a ‘Watch’ layer which provides a Digital Operational Index scorecard using the HCL Operational Intelligence Framework. This provides feedback that helps adjust the IT landscape to achieve continuous delivery, critical to the digital enterprise.

Source: HCL

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Strategy in the First Digital Decade must account for a constant flow of opportunities and threats arising from new sources of value and business models enabled by digital technologies. New strategy creation and implementation rules are needed for an enterprise to keep playing this new game.

Key Findings

• The next 10 years are set to become the first truly “digital decade,” when digital technology will move to the forefront of finding new sources of value and creating new threats for the enterprise.

• The dynamic, diverse, consumer-driven, inclusive and combinatorial nature of the “First Digital Decade” requires a new mindset toward how strategy is created and where it is focused.

• CIOs will have an important role to play in challenging the business strategy to ensure that it stays relevant in response to the new characteristics of the First Digital Decade.

Recommendations

• Continuously explore new opportunities that extend beyond your current strengths, and create a pipeline of potential new competitive advantages.

• Create a clear, consistent vision and a shared sense of purpose to guide strategy creation and implementation.

• Involve your ecosystem of customers, partners and suppliers to engage their creativity and innovative insights in developing and maintaining your strategy.

• Be proactive and uncover questions, issues, and potential digital opportunities and threats to inform and guide both the business and IT strategies.

Analysis

Introduction“I think we’ve lost a lot of faith in the traditional analytics of strategy. The last truly effective analytical models from the past were the BCG Matrix and Porter’s Five Forces, but today people are losing faith in them, so strategy is in somewhat of a muddle.

We just haven’t come up with anything that’s really new or compelling. We’re still using models from 20 or even 30 years ago, and people are increasingly dissatisfied with those.”

Rita Gunther McGrath, professor at Columbia Business School and author of “The End of Competitive Advantage: How to Keep Your Strategy Moving as Fast as Your Business” (2013 Harvard Business Review Press)

Business and IT leaders are facing an explosion of opportunities and threats confronting their enterprises. A new wave of technology and business innovation, the first since the e-commerce boom of the late 1990s, looks set to excite and confound business decision makers across the globe for the foreseeable future. For private-sector enterprises, faced with a complicated mix of innovative business models, industry convergence, low barriers to entry, and exponential technology evolution, the ability to identify the subtle differences between opportunity and threat can seem more art than science. In the public sector, the increasing pressure from citizens expecting a rapidly evolving, consumer-grade experience from every interaction with government and nonprofit organizations requires an unprecedented degree of agility and creativity in planning new solutions. These changing dynamics in competition, customer expectation and access to sustainable value streams are forcing enterprises to rethink their traditional approach to strategy.

By understanding the unique characteristics of this First Digital Decade, we can start to see the profound impact it will have on the mindset we adopt toward creating and managing our enterprise and IT strategy.

As part of our research into the First Digital Decade, we met with four influential strategic thinkers to gain a better understanding of the implications this new decade will have on the way enterprises develop strategy.

• Peter Hinssen, entrepreneur, lecturer and author of “The New Normal” and “Business/IT Fusion”

• Rita Gunther McGrath, professor at Columbia Business School and author of “The End of Competitive Advantage: How to Keep Your Strategy Moving as Fast as Your Business”

• Dave Aron, vice president and Gartner fellow, CIO Research

• Andy Lees, former vice president of strategy and planning, Microsoft

Here, we present an analysis of their combined insights to provide a picture of the key areas where strategy is changing as we enter the First Digital Decade.

First Digital Decade Implications for Strategy“The rumors that strategy is dead are wildly exaggerated. Digital means more choice, and more choice means more need for strategy, since strategy is about making high-level choices. It is however true that we need more experimentation and broader involvement in strategy.

Digital changes time frames, and makes us rethink the capabilities needed and our sources of advantage, but it doesn’t change the fundamental need to make choices in line with a high-level direction. That is not to say that direction is fixed forever, but during the period that it is fixed, decisions should be made in alignment with the agreed direction.”

Dave Aron, vice president and Gartner fellow, CIO Research

As the characteristics of the First Digital Decade begin to take shape, it becomes clear that digital technologies have collapsed time and distance, and in doing so, have rendered 20th-century approaches to strategy ineffective. Table 1 summarizes the key characteristics of this new decade and the implications they will have for strategy.

These changes require CIOs and other business leaders to take a different approach and mindset toward strategy.

From the Gartner Files:

Three Fundamental Ways Strategy Is Changing in the First Digital Decade, and How CIOs Should Respond

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Characteristics of the First Digital Decade Implications for Strategy

Dynamic: Rapid disruptive technology innovation, coupled with customer involvement in the definition, creation and viability of offerings, sets a dynamic undercurrent in the enterprise.

Rigid and heavy annual strategy processes that seek to commit the enterprise’s resources to long-term programs are no longer viable, as they prevent the enterprise from responding and adapting to frequent changes in customer expectations, industry dynamics, technology innovation and new competitive threats.

Diverse: Variance is the source of continuous value in the First Digital Decade. It is a breeding ground for new ideas and future value. This is in stark contrast to the past decade, where variance was seen as increasing costs — a factor needing management control.

A strategy of creating and sustaining a single competitive advantage will quickly fall by the wayside as consumers flock to ever newer products and services created from the steady, rich flow of new ideas and technology.

Driven by Consumers: Consumers’ engagement determines value. They are willing to pay a premium for products and services that help them meet their needs, realize their ambitions, accomplish their tasks or satisfy their desire for variety.

Strategy can no longer be exclusive, relying solely on the insights of a small number of decision makers within the enterprise, and excluding inputs from the wider business ecosystem of employees, customers, partners and suppliers.

Collaborative: Consumers, designers, fabricators and others — an entire ecosystem of resources — form around value opportunities for fluid and dynamic co-creation.

Strategy that only outlines a set of objectives will be hard-pressed to keep up with the rate of change unleashed by wave after wave of innovation.

Additionally, the siloed view of treating people, processes, and technology separately in the strategy is no longer valid, as value is created from the combination of human capacity, information resources and digital capabilities.

Combinatorial: Technology innovation and uptake are increasing at an exponential rate. A key contributor to this trend is the way in which technologies are combined to form platforms that enable new waves of innovation. For example, a teenager can create a simple app today that is used by hundreds of millions within a few weeks, but only because it is built on a social platform such as Facebook, which itself is built on a platform (the Web), which is also built on a platform (the Internet), and so on.

Additionally, this new wave of creative energy is being driven by the combination of technology with:

• An explosion in accessible information from the Internet of Things

• Significant innovation in business models

• A fundamental new mindset toward the application of technology to augment and

Source: Gartner (December 2013)

Table 1. First Digital Decade Implications for Strategy

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Three Fundamental Changes to StrategyThe characteristics of the First Digital Decade are impacting the focus of an enterprise’s strategy, how the resulting plans are developed, and who is involved in the process. Figure 1 highlights three fundamental changes taking place across the “what,” “how” and “who” of strategy.

From Sustainable to Transient AdvantageWhat Is Changing

In the First Digital Decade, every enterprise is a digital enterprise. Whether it is readily apparent or not, digital capabilities and information resources are increasingly at the heart of everything we do. As the frequency of waves of innovation increases leading up to and through the First Digital Decade, the new opportunities and threats raised will require all enterprises to think differently about how they focus their strategy. It is no longer enough for business leaders to consider the industry they are in, and the known players in their industry, when shaping their strategy. As a result, enterprises will need to evaluate and adapt

their strategy (how they will win), their portfolio (where they will play), and their business model (how they will be structured and operate), more frequently than ever before.

Recent history has provided us with several examples of traditional industries that have gone through rapid and radical change caused by a wave of innovation — traditional camera manufactures, physical book retailers, video rental stores, travel agents and mobile phone manufacturers, to name a few. Inevitably, some of the leading players failed to notice the sudden shift in technology and industry business models and discovered all too late that their strategy was designed to win a game that was no longer being played. While their focus was on competing with the familiar players following the familiar rules of their familiar industry, the rules of the game changed underneath them, and left them scrambling to catch up at best and out of the game at worst.

The transient characteristics of the First Digital Decade entail a shift in focus to competing in a fluid and uncertain environment. The mindset toward differentiation and competitive advantage must therefore

become more fluid. Being competitive means adopting an outside-in focus and involving and adjusting to ever-shifting consumers whose “voice and choice” determine what survives and what does not.

As Rita Gunther McGrath explains, this new dynamic makes the concept of a sustainable competitive advantage obsolete:

“For years, we’ve talked about sustainable competitive advantage as the Holy Grail — what strategy is all about. But in more and more cases, that’s just not feasible. The collapse of barriers to entry enables very rapid imitations of any kind of novelty introduced to the market. And changes in regulatory frameworks make entrants from other countries more competitive.

So you have a situation where you can create an advantage and seize an opportunity, but then competition comes in, or there’s some major technology or regulatory change, and your advantage all goes away.

You therefore need to think about developing an ongoing pipeline of new competitive advantages. A lot of organizations today are set up to exploit an advantage, not to

Source: Gartner (December 2013)

FIGURE 1Three Fundamental Changes to Strategy in the First Digital Decade

From Sustainable to Transient Advantage

Strategiesin the First

Digital Decade

From Exclusive to Inclusive Contribution From Fixed to Fluid Plans

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manage cycles of competitive advantage over and over. They want to create a big business and ride it forever, but that just doesn’t work anymore. You need to think about waves of competitive advantage and being able to move from one to the next.

What it means is you need to have new advantages that are being created, and you need to have a whole bunch of them, because not everything you try is going to work out. So you need to have a bunch of options you’re investing in. These are small investments you make today that buy you the right, but not necessarily the obligation, to make a bigger investment later on.

If you are experimenting with a large number of these options, then you need to be able to take the ones that are working and ramp them up to scale quickly, before your competition realizes what you’re up to. Then you need to exploit them effectively. Finally, when they start to lose their competitiveness, you need to be able to pull resources out and put those resources to the service of inventing the next one.”

(For more information, see “Transient Advantage” by Rita Gunther McGrath, Harvard Business Review, June 2013.)

How to Respond

Broaden the scope of analysis in your strategy. Look beyond your industry and traditional competition to consider opportunities and threats that might come from different business models, new ways of interacting with existing customers, or ways of reaching new customers. Then, consider their impact on how you realize your strategy in terms of where you will play, how you will win and how you need to be structured and operate to enable success.

Continuously explore new opportunities that extend beyond your current strengths and create a pipeline of potential new competitive advantages.

From Fixed to Fluid PlansWhat Is Changing

The First Digital Decade thrives on uncertainty. Because variance is a key source of value, creativity and innovation are highly prized and sought after, providing enterprises with a seemingly limitless set of new ideas from which their strategy must be shaped. While some enterprises are already leading the way toward embracing this new dynamic with a passionate focus on business model innovation, most enterprises are only just starting to feel a sense of unease as it becomes clear that the rules of the game are changing in their industry, and the strategies that brought them success in the past are no longer enough.

As headline after headline describe businesses that have struggled or collapsed due to an inability to adapt quickly enough to changes in their industry brought about by new, agile competition, waves of technology innovation, creative new business models, or convergence with another industry, the message is clear: “Be prepared to embrace change, no matter how disruptive, or risk becoming rapidly obsolete.”

But change and uncertainty do not have to equal anarchy. Enterprises that are leading the way into the First Digital Decade are doing so with a strategy that is driven by a clear vision and sense of purpose. This clarity in direction provides the guardrails for the enterprise, allowing it to make short-term, tactical adjustments in response to the uncertainty, while staying aligned to a longer-term vision.

As Peter Hinssen explains, to be successful in the First Digital Decade, enterprises must blend a mix of clarity into their long-term vision, while allowing for frequently adaptive tactics in the short term:

“If a company is clear in expressing where they want to go in the long term, they will

be rewarded. The fluidity that you see happening in markets will have an impact on a company’s short-term tactics, but the long-term goal of what they want to achieve should be even clearer, and that’s a very difficult thing to do.

Take the example of Disney, a fascinating company because it’s an old company. Their long-term vision of telling stories and providing value from characters and storylines is very strong and powerful. If you look at their recent acquisitions, LucasArts being the most recent one, it is obvious that they’re working on a long-term strategy that is very clear for everyone to see. Their core message is storytelling and they want to monetize storytelling.

Their short-term tactics are extremely volatile; they’ve been acquiring companies in Silicon Valley left and right. They’ve been buying social and mobile gaming companies and they’re turning them into a very dynamic, very agile fabric, which supports their long-term vision. If you look at Disney, they now have some of the most lucrative smartphone games — ‘Where’s My Water?’ for example, which is created around a character that is really part of the Disney tradition and heritage. Those are the core fundamentals of Disney, but at the same time, how they monetize them is something that is bound to change now in quarters, or months, instead of the long term.

This is something companies really have to prepare for, to maintain their long-term vision. Companies that really can’t explain what they want to do in the long term will be shot down by the markets. But at the same time, the companies that are not capable of implementing short-term, agile tactics, will be shot down by the reality of the market. This is a challenge that many companies will have to go through.”

This mix of long-term clarity and short-term volatility requires a different approach to implementing strategy compared to what

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most enterprises are familiar with. The mindset of creating prescriptive execution plans that tie up resources in multiyear programs is giving way to flexible, tactical decisions made by empowered managers who operate closer to the front line of the business, as long as these decisions fall within the guardrails set up by the strategy.

How to Respond

Enterprises must rework their existing strategy to establish a clear and consistent vision and a shared sense of purpose, supported by creative and agile tactics that allow the enterprise to continually hunt for, validate, learn from and calibrate the steps required to achieve the vision.

Create a set of strategic principles for driving strategic thinking and decision making to help ensure strategy adaptability and fluidity. Create a strategic perimeter setting the vision boundaries within which the strategy needs to focus.

From Exclusive to Inclusive ContributionWhat Is Changing

The First Digital Decade is collaborative as enterprises increasingly look outside their borders for inputs on potential new value streams, and then look to co-create the resulting value with customers, partners and suppliers. As a result, strategy itself is becoming increasingly collaborative compared with its more systematic and analytical past. While solid analytics are still highly valuable when used to diagnose business challenges and to identify a range of potential opportunities to pursue, they are not enough to provide a robust and creative response to the rapidly changing and diverse characteristics of the First Digital Decade. A wider range of inputs, drawn from human creativity and innovation, are crucial in developing the necessary insight and foresight to make the right strategic choices.

While the increasing power of artificial intelligence and machine learning has enhanced our ability to use technology as part of the strategy process, it is the combination of this technology with our human capacity that drives successful strategy in the First Digital Decade.

As Dave Aron explains:

“In the early days of artificial intelligence, we always used to imagine building human knowledge into computers and making them so smart that human intervention was not required. That vision has come true in some limited areas, but when you pass the lexical and syntactic and move to the semantic (meaning) and pragmatic (real-world contextual) layers, things get tough. Instead, using the Internet to reach all humans and utilize their knowledge — through social networks and crowdsourced business models — that gets really exciting and powerful really quickly.”

The new mindset toward strategy in the First Digital Decade is to be more open and inclusive in the collection of inputs, analysis, thoughts and ideas. More and more enterprises are relying on social networks to interactively engage a wide range of contributors in a deeper discussion about the opportunities and threats faced by the business.

This leads to a change in the role and focus of the strategist as well. Rather than the traditional focus on the moves to be made in response to industry changes and competitive pressure, the strategist must also ask the questions, “What is next?” “Where will we get our insights from and who should we listen to?” “What innovations and emerging trends are relevant and within our vision?” “How do we distribute information and knowledge quickly to make informed decisions?”

How to Respond

Enterprises will need to extend the scope of inputs to their strategy and focus equally on human creativity and data-driven analytics. Moreover, they should adopt an outside-in perspective and use social media and other means to engage a wider range of views on the challenges and opportunities faced by the enterprise. Consider crowdsourcing or other forms of engaging potential consumers in developing ideas. Begin creating an information exchange both internally and with external participation to discuss, explore and critique ideas and responses to challenges and threats.

Implications for CIOsExpectations on the role of the CIO are changing in the First Digital Decade, and a new breed of CIO is emerging. Far from being relegated to back-office IT support, many CIOs are embracing new opportunities to engage in strategic business conversations driven by the interest in exploring digital business opportunities.

However, for the CIO to be an effective contributor as a strategic business leader, it is essential that he or she take a different role in the strategy discussion compared with the traditional CIO role of the past decade. For many CIOs, their expected contribution to past discussions on business strategy was as a supplier of services that could be used to enable strategic choices. This meant that most strategic business decisions were made before the CIO was involved, and the question CIOs most often answered was, “How can you contribute to business strategy success through the use of IT?” While this is still a valid question, it assumes that technology and information are not instrumental in shaping the business strategy itself.

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In the First Digital Decade, technology has moved to the forefront of creating significant new increases in measurable value from commercial activities. As a result, CIOs must also be proactive in engaging other business leaders early and often in the strategy process, to help identify technology-enabled opportunities and expose potential threats. In fact, one of the most powerful questions that a CIO can regularly ask and try to answer is, “How will we be beaten by a digital disrupter entering our industry?” This mindset challenges enterprise leaders to think beyond the status quo and focus on the next wave of innovation that will keep them fresh and relevant in their industry.

Andy Lees provides an example from the financial services industry of this new mindset toward the role of the CIO in business strategy:

“Different industries are facing disruption at different speeds, and this requires a different type of response. For example, if I was in banking right now, I would be running lots of off-sites about what we think will happen with payments. I would look to places like the Third World, where people don’t have bank accounts, and explore whether the world might change to be like that. What would be the impact if the new model for my country became one where currency is some kind of stored value controlled by the phone —your ‘bank account’ — and people just move money around?

The CIO needs to bring that possibility to the table in a very creative way that changes the horizon of the business strategists and makes them think about new business models, new ways of doing business, new ways in which they reach their customers, and new possibilities. Banking is just an example where you can see that there will be change but, I cannot accurately predict exactly which model will work and when. That is the joy of being in the banking business.”

How CIOs Should Respond

Take a proactive role in ensuring that technology and information are considered early and often in the strategy process. Explore and suggest new ways of using digital technology to address challenges and provide new opportunities.

Apply a digital lens to your business strategy, and continuously ask, “How would digital effect this?” when faced with new strategic challenges or opportunities. Reshape the IT strategy so that it provides a foundation for a digital business strategy.

Continuously seek an answer to the question, “How will we be beaten by a digital disrupter entering our industry?” Reserve a small amount of funding to explore and experiment with the innovations that might transform your industry in the coming days, weeks, months and years.

Conclusion

The First Digital Decade requires enterprises to answer the question, “How will we survive and thrive in an increasingly digital world.” Some enterprises are already well on their way to answering this question, while most are just starting down the path. Regardless of where you are today, this is an issue that will affect all industries and enterprises in the near future and one that will require an effective strategy to ensure success.

As we’ve seen, a fundamental change is required in the mindset and approach to strategy as a result of the First Digital Decade. In this research, we have explored the initial impact of this change and the response required. As the First Digital Decade unfolds, we will continue to explore the changing mindset and emerging best practices for developing strategy. In the meantime, CIOs are encouraged to embrace the three fundamental changes that are already taking place, and take a proactive role in challenging and shaping their enterprise strategy to ensure it stays relevant in response to the new characteristics of the First Digital Decade.

Source: Gartner Research G00257873, Lee Weldon, Jeffrey Cole, 16 December 2013

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