A lot of books have been written about digital disruption and the ensuing need for digital transformation. Several have done the important work of laying out what success looks like and what is required to be digitally oriented. However, none so far have defined the swim lanes for digital transformation and the benefits and risks for each path forward. Future Ready: The Four Pathways to Capturing Digital Value, written by MIT researchers Stephanie Woerner, Peter Weill, and Ina Sebastian, shines a light on the path forward and the conscious choices for success. This Advisor provides a snapshot of this research-driven book and explores why it should be on every business leader’s bookshelf.

Without question, the future of businesses is digital. The book’s authors claim that a key part of this is executives becoming “digitally savvy.” This is similar to Paul Leonardi and Tsedal Neeley, who argue in their book that business leaders need a “digital mindset” and 30% mastery of the technologies enabling the digital era. The research in Future Ready shows that firms whose leadership are digitally savvy are significantly further ahead in digital transformation. But, as the authors suggest, the goal is to be future ready. Firms that achieve this state have the adaptability and agility to succeed in almost any environment. More importantly, they outperform competitors in growth and margin.

Creating Digital Value

Smart organizations today are racing to create new business value from digital to their financial bottom lines. Their goal is to develop digital capabilities that enable them to become top performers in the digital economy. Simply stated, their goal is to be future ready. The reason for acting now versus later is the viability of existing business models are at risk. For those that succeed, digital creates opportunities to erect barriers for those that cannot adapt as fast. Without question, the world has moved on from the barriers to entry suggested in my dusty copy of Michael Porter’s Competitive Advantage.

The Playbook for Capturing Value from Digital

To succeed, Woerner, Weill, and Sebastian say that the digital economy requires vision and a playbook. In fact, it is critical that leaders establish a digital vision, motivate their employees, communicate with markets, and keep everyone focused on a common goal as they work to create new value in an increasingly digital world.

The authors suggest firms undertaking transformation should have five goals in mind:

1. Using digital technology to innovate, create new offers, and new services

2. Identifying new ways of engaging customers

3. Developing new business models and revenue streams

4. Using digital technology and practices to speed up the pace of business

5. Wringing out costs by standardizing, automating processes, and creating data reuse

In contrast to Competitive Advantage, future-ready firms simultaneously improve customer experience (CX) and become more efficient. It has been true for a long time that the percentage spent on IT in mature versus less mature firms is lower. At the same time, future-ready firms use digital tools and approaches to aid their decision making. They make decisions faster because their trustworthy data can be self-served to decision makers up and down the organization. Additionally, they use digital tools including reusable platforms, Agile methods, partnering, and dashboards to actively measure their progress.

Steps Along the Journey

The journey to future ready has many steps. Executive leadership must motivate and articulate the reason for this change. With this, they must, with their CIO, commit to a pathway. It is important to support the teams that will implement the vision by anticipating challenges. Today, organizations need to create digital capabilities. With these, they can accumulate value from operations, customers, and ecosystems.

Mapping Where You Are and Where You Are Going

For the purpose of the study featured in the book, the MIT Center for Information Systems Research (MIT CISR) constructed a quadrant with two dimensions that firms improve on — operational efficiency and CX — creating a 2x2 framework that describes four types of firms: (1) silos and spaghetti, (2) industrialized, (3) integrated experiences, and (4) future ready. Unless your firm is a digital native or you have made the investment in maturing your enterprise backbone or CX, it is likely you are operating in silos and spaghetti. Clearly, many of the case studies in the book moved from a silos and spaghetti as a starting point.

Silos and Spaghetti

MIT CISR research shows silos and spaghetti to be the case for 51% of organizations. These firms have silos of technology that are incompatible and not integrated with other systems. They are filled with disconnected point solutions. This makes for complex business processes, systems, and data products. Even worse, it results in fragmented, labor-intensive, and frustrating experiences for customers and employees. Here, customer experiences depend on employee heroics. Coming out of COVID-19, this is a losing place for firms trying to retain customers and employees. For this reason, it comes as no surprise that these organizations have revenue growth and net profit margins that are 10.5% and 6.5% lower compared to industry average.

Industrialized

Organizations that achieve this level of maturity have engineered best practices for automating their operations. They have modular and standardized digitized services. They also have plug-and-play modules that meet customer needs quickly and inexpensively. Finally, they are able to combine data collected from customer interactions and create a single source of truth for anyone with permission to use in decision making.

Integrated Experiences

These firms have invested in better-than-industry-average CX. To do this, they have developed attractive websites, mobile apps, and relationship managers to improve customer experience. The issue here is you really need the data capabilities of industrialized to gain competitive advantage.

Future Ready

Twenty-two percent of firms have made it all the way to future ready. They innovate to engage and satisfy customers at the same time as they reduce cost. Their goal is to meet customer’s needs versus push products. These firms are modular and agile and importantly, they treat data as a strategic asset that is shared and accessible in the firm to those who need it. For this reason, they have revenue growth 17.3% and net margin 14% higher compared to industry average.

Swim Lanes to Future Ready

Now that you know the reasons for being future ready, the authors provide four pathways forward. Each has their business risk. Let’s take a look at each of them.

Path #1: Industrialize to Future Ready

Twenty-five percent of firms choose this path. These firms have “good enough” CX. For this reason, they start by radically simplifying operations and by focusing on what they are best at. Often, their focus is fixing a corporate crown jewel such as onboarding a new customer or processing an insurance claim. Once digital services and data have been created, innovation becomes easier and faster with reusable and modular digitized business services. These organizations instill a platform mindset of silo integration, automation, clean data, and efficiency. This relies on building API-enabled business services that can be accessed across the enterprise and externally; in other words, cleaning up legacy systems and data. By doing this, legacy processes, and systems (tech debt) are eliminated. Firms that have succeeded on this path include Kaiser Permanente and Tetra Pak.

Path #2: Delight Customers First to Future Ready

Eighteen percent of firms choose this path. This path works on customer experience before fixing the silos and spaghetti. These firms are focused on changing customer expectations toward integrated digital experiences. It is their urgent goal to improve CX because they are facing significant pressure from competitors. This approach leads to improved CX, customer satisfaction scores, and increased sales. The problem is this path can add complexity and makes the next step more complex. This includes data and processes. Examples of firms choosing this path are CarMax and CEMEX. CEMEX was a surprise to me, but CEO Fernando Gonzalez says, “Our customers are increasingly expecting to have the same kind of experiences in working with businesses that they have in the consumer space.” They are fixing processes including becoming a customer, placing an order, receiving products, receiving invoices, and receiving support.

Path #3: Alternate the Focus, Like Stair Steps to Future Ready

Twenty-six percent of firms pursue this path. They aim to improve CX a bit and then operations a bit and then back again. Typically, they start by fixing a few legacy processes. The challenges needing to be overcome for this approach to work are governance, inertia, and communication. Examples are DBS and KPN. For firms taking this approach, leaders need to engage everyone in what the future looks like and engage everyone in improving CX and operational efficiency.

Path #4: Create a New Business Unit

Seven percent of firms pursue this model. For them, speed of transition is the focus. Typically, they have to defend a serious digital threat or pursue a new ecosystem model. Leadership, in this case, has determined that they will not get to the future with current organization and people. It will take too long. This path involves creating a digital subsidiary. A good guide for this path is the book The Unicorn Within. The issue, as author Kathy Yates discusses, is integrating the digital startup back into the organization

Four Explosions

Becoming digital is not easy. Firms have to deal with difficult organizational changes. The authors call these “explosions.” First is decision rights. This deals with who is accountable for decision making including visioning, provisioning, and use of digital technologies. Second is new ways of working. This is about the fact that creating operational efficiency requires rethinking and redesigning the way employees work. This is an opportunity to empower and excite employees with new challenges and successes. This includes the ability to cocreate products and services with customers, developing new partnerships, experimentation, and cross-functional teams. Third is a platform mindset. A platform mindset is about recognizing how reusable digital services enable a firm to innovate and scale its operations faster. And fourth is organizational surgery. Firms have to organize for new ways of operating. This involves reworking business projects to better customer journeys, integrate silos, flatten hierarchies, etc.

Future-Ready Capabilities

With the direction clear, what do future-ready organizations do differently? They start by recognizing they cannot simply rely on existing strengths. For this reason, they need to create new capabilities as the environment changes. Firms must create different kinds of value from customers, from operations, and from ecosystems. Firms that get here have reduced cost and increased speed; increased revenue per customer; increased revenue from ecosystem; and increased trust, brand value, market capitalization.

According to Woerner, Weill, and Sebastian, future-ready firms have 10 business capabilities:

1. Modular, open, agile

2. Ambidexterity: pull costs out and innovate

3. Great multiproduct CX

4. Purpose-driven

5. Lead or participate in ecosystems

6. Dynamic digital partnerships

7. Treat data as a strategic asset

8. Develop and retain the right talent

9. Link individual team behaviors to firm goals

10. Facilitate rapid learning throughout the team

These 10 capabilities are how companies will capture and accumulate value from operations, customers, and ecosystems.

Role of Leadership

Leaders are pivotal to success. They set the goal, communicate the message, and give employees, customers, investors, and regulators confidence their firm will make it and prosper. The authors suggest executives need to personally take on digital transformation. As well, boards need to be part of the equation, and boards need digitally savvy members. This way, they can help with strategy, oversight, and defense. And finally, management needs to commit to a pathway, anticipate explosions, and build digital capabilities.

Parting Words

Future Ready should be in every CIO’s library because it lays forth the issues and risks of each path forward. The CIOs that I know clearly are beyond the starting gate of silos and spaghetti, but the book provides great guidance for the steps that follow as well as the endpoint and how to engage business stakeholders in the transformation conversation.

[Future Ready: The Four Pathways to Capturing Digital Value is published by Harvard Business Review Press and will be released on 18 October 2022.]