CHAPTER 1

WHAT IS DIGITAL MASTERY?

If people knew how hard I worked to get my mastery, it wouldn’t seem so wonderful at all.

—MICHELANGELO

Sporting goods company Nike has built its business on innovation. According to CEO Mark Parker, “We’re an innovation company … Innovation and design is at the epicenter of all we do.”¹ That innovation focus goes beyond Nike’s products to include the way it engages with customers and even the way it manages internal operations. And digital technology is making new kinds of innovation possible.²

Online customers can order personalized shoes in hundreds of color combinations. Digital tools have made product design and manufacturing faster and more efficient than ever before. Additional digital capabilities have helped Nike to improve visibility and performance in its operations, increasing efficiency, reducing waste, and enhancing corporate social responsibility in the company’ global supply chain.

Social media enable Nike to be an integral part of the conversation around major sports, sporting events, and sporting apparel. And Nike’s digital products, such as the FuelBand, allow athletes to track their workouts, share their performance online, and even receive advice from digital “coaches.” Meanwhile, both social media and digital products provide Nike with rich data on customers, their activities, and their preferences.

These innovations arise in different parts of the company as managers constantly seek new ways to improve. According to CEO Parker, “I always like to say that we focus on our potential and the distance between where we are and our potential, not the distance between us and our competition. That’s where a leader should be. And as you focus on that space, you’re gonna create some incredible things.”³

Yet in 2010, Nike executives decided to invest in something different. They created a new business unit, called Nike Digital Sport, to build new digital products and reimagine how Nike could engage with customers across its categories. Marketers, designers, and engineers work together to develop and launch products under the Nike+ banner. The unit also helps other parts of Nike develop their digital efforts. Its “innovation kitchen” produces new designs and techniques ranging from marketing to manufacturing. Its accelerator program is building the firm’s digital ecosystem. Analysts mine mountains of data, gathered from Nike’s digital products and marketing efforts, to get ever closer to customers around the world.

According to Nike’s global digital brand and innovation director, Jesse Stolak, “The goal hasn’t changed since the beginning of Nike—we want to connect with athletes to inspire and enable them to be better.”⁴ No longer just a seller of products, Nike is becoming part of its customers’ lives.

Nike’s story is not unique. Asian Paints is India’s largest paint company and Asia’s third-largest paint company, with revenue of $1.8 billion.⁵ It has been able to globalize and maintain fast growth, more than 15 percent annually for a decade, while increasing efficiency, transforming customer experience, and reducing its environmental impact.⁶ Having built a digital advantage serving India’s billion-person economy, Asian Paints has expanded to seventeen countries around the world. None of this would have been possible without successive waves of digital transformation over the past decade.

According to CIO and head of strategy Manish Choksi, a challenge of the company has been “to drive efficiency and growth in a business spread over 120 locations, which deals directly with twenty thousand to thirty thousand retailers.”⁷ After first unifying the company through strong IT systems for manufacturing, order processing, and supply chain, the company was on a good foundation for growth. This set the stage for a series of transformations. Centralizing the routine customer order-taking process into a single corporate call center increased efficiency and customer service. The firm’s salespeople then transformed from clipboard-carrying order takers to always-connected relationship managers. New automated plants produced higher product quality and environmental safety than labor-intensive plants did. Expanding into services—selling painted walls instead of cans of paint—provided benefits beyond new revenues. Providing the service ensured that high-end products were applied properly, thereby improving customer satisfaction, and helped the firm get closer to end consumers that it didn’t typically meet.⁸ As Asian Paints’ website affirms, digital transformation will continue into the future: “The road ahead is to integrate all our stakeholders including suppliers, employees and customers and create an extended enterprise.”⁹

Nike and Asian Paints are in very different industries. The companies have very different products, customers, and histories. But they have something in common: the way they use digital technologies to drive their businesses forward. As two examples of Digital Masters, Nike and Asian Paints are using digital technologies to transform the way they do business. Digital Masters use technology better than their competitors do and gain huge benefits. The benefits occur not only in visible customer interactions, but also in less visible internal operations. The advantages are apparent in the financials; Digital Masters are substantially more profitable than their peers.¹⁰

But what do Digital Masters do differently? How can you become a Digital Master? Nike and Asian Paints did not start as Digital Masters. They built their digital advantage over time. And they did it through different paths. But both came to realize what our research has shown: Digital Masters do more than just invest in digital capabilities. They create the leadership capabilities to get the most from their digital activities. We’ll show you how.

THE DNA OF DIGITAL MASTERS

We started our research with a simple but broad question: how are large companies around the world using fast-evolving new digital technologies in their businesses? When we started our research, we didn’t have specific dimensions or practices in mind. We just knew that big companies were doing far more than we were hearing in the media. And we were intrigued by the juxtaposition of speeds between the digital technology industries and the slower, more deliberative cultures of large firms in many other industries.

We’ve learned over the years that when we are faced with a big question that doesn’t have clear answers, the best thing to do is see how executives are actually answering the question for themselves. So, we talked with executives in large companies—150 executives in fifty companies around the world—to understand how these leaders were thinking about new digital challenges, and what they were doing with new technologies.

We found that most of the companies were already investing in technologies such as social media, mobility, analytics, and embedded devices. But some—the firms we call Digital Masters—were making far better progress than others. Comparing these companies and the rest of the pack helped us identify differences in how the masters conceptualized and managed their digital activities. We found that it’s not just what they invest in, but it’s how they lead change that makes these companies Digital Masters.¹¹ After testing our theory in a global survey of nearly four hundred companies, we became even more convinced.

Digital Masters excel in two critical dimensions: the what of technology (which we call digital capabilities) and the how of leading change (which we call leadership capabilities). These are two very distinct dimensions of digital mastery, and each plays its own role. What you invest in matters, to a point. How you use those investments to transform your company is a key to success. Neither dimension is enough on its own. Each is associated with different types of financial performance, and each provides only partial advantage.¹² Taken together, they combine to give Digital Masters a clear advantage over their competitors.

Digital Capabilities

Digital Masters know where and how to invest in the digital opportunity. The size of the investment is not as important as the reason—and the impact. Digital Masters see technology as a way to change the way they do business—their customer engagements, internal operations, and even business models. To these companies, new technologies such as social media, mobility, and analytics are not goals to attain or signals to send their customers and investors. These technologies are tools to get closer to customers, empower their employees, and transform their internal business processes.

But more than technology is needed. While the changes possible through smart digital investment are impressive, they are not enough. Companies that invest in the right areas have higher revenue for each unit of their existing physical capacity (such as people and facilities) than their competitors, but they are no more profitable. Gaining the true digital advantage also requires leadership.

Leadership Capabilities

For Digital Masters, committed leadership is more than just a buzzword. It is the lever that turns technology into transformation. Despite the advice of many gurus to “let a thousand flowers bloom” in your company, we saw no examples of successful transformation happening bottom-up. Instead, executives in every Digital Master steered the transformation through strong top-down leadership: setting direction, building momentum, and ensuring that the company follows through.

Top-down leadership does not mean that you need to plan out the transformation in complete detail from the start. Nor does it mean that you can just energize the company and wait for great things to happen. In the Digital Masters we studied, leaders created a clear and broad vision of the future, started some critical initiatives, and then engaged their employees to build out the vision over time. The leaders stayed involved throughout the transformation to make the case for change, to drive the change forward, and to redirect activities and behaviors that went against the vision. And they continually looked for ways to extend the vision and move the company to the next level of digital advantage. As Asian Paints, Nike, and others have learned, every step on the road to transformation opens up new possibilities to exploit and extend the company’s digital advantage.

Top-down leadership does mean strong governance and coordination. It is very difficult to ensure that all parts of a complex company move in the right direction at the right pace. People in different units often do their own thing or wait before committing to a new way of action. The true advantage comes from linking different digital activities, and that can only happen if people are on the same page. Nike built Nike Digital Sport in 2010 to provide coordination, innovation, and some shared resources for the company’s many digital efforts.¹³ Coffee powerhouse Starbucks created the position of chief digital officer in 2012 for the same reason.¹⁴ Asian Paints extended the role of the chief information officer (CIO) to cover strategy as well as IT. Other firms find that digital steering committees are enough. The roles are less important than the results. All Digital Masters find ways to build a clear vision of a radically different future, engage their employees in the goal, foster strong bonds between technical and businesspeople, and steer the course through strong governance.

FOUR LEVELS OF DIGITAL MASTERY

If Digital Masters like Nike and Asian Paints represent excellence on both digital and leadership dimensions, what about other firms? Each dimension is different, and each is important for different reasons. Putting the two dimensions together yields four levels of digital mastery (figure 1-1). Digital Masters excel at both dimensions, but most companies do not. Some companies are strong on digital capabilities but weak on leadership capabilities. Some are the reverse. Still others are weak on both dimensions; they have not yet begun the digital journey.

FIGURE 1.1

Four levels of digital mastery

Source: Adapted from George Westerman, Maël Tannou, Didier Bonnet, Patrick Ferraris, and Andrew McAfee, “The Digital Advantage: How Digital Leaders OutperformTheir Peers in Every Industry,” Capgemini Consulting and MIT Center for Digital Business, November 2012.

Beginners are just at the start of the digital journey. Many of them adopt a wait-and-see strategy, trying to gain certainty before they act. Some believe the digital opportunity is right for other industries, but not for theirs. Others lack the leadership to make something happen. As a result, Beginners have only basic digital capabilities. And they lag behind their competitors on multiple measures of financial performance.

Many Beginners use regulation or privacy as an excuse for inaction. Meanwhile, their competitors are not waiting to act. Many insurance companies have been slow to adopt social media because of regulatory challenges in allowing their agents to use blogs and social media messages. But Northwestern Mutual found a safe way to put its agents on LinkedIn so the financial representatives can build and maintain relationships.¹⁵ Similarly, many medical and pharmaceutical companies are wary of regulatory and privacy concerns in using social media. But a medical device company used social media to inform medical providers about a game-changing new device far faster than traditional media could have done.¹⁶

Fashionistas are not waiting to act. They buy every new digital bauble. They flaunt their technological trendiness but don’t change what’s behind the veneer. However, because they lack strong digital leadership and governance, they waste much of what they spend. Or they find that they need to reverse what they’ve done so that they can integrate and scale their capabilities. One company we studied built employee collaboration platforms in different parts of the business using different (and incompatible) technologies. Employees could collaborate within their silos, but couldn’t share knowledge across the company. Another company had three mobile marketing initiatives, in different parts of the company, addressing overlapping markets. The mobile solutions used different vendors and different technology sets, so they could not build on each other.

Although there is nothing wrong with trying experiments to find the best solution, neither of these Fashionistas had mechanisms to coordinate their activities or build synergies across their investments. Building a wide variety of incompatible processes and systems may seem like progress, but it limits bigger opportunities. This incompatibility impedes a coordinated approach to customer engagement and a unified view of operations.

Conservatives have a capability profile that is the opposite of Fashionistas. Although Conservatives have useful digital leadership capabilities, excess prudence prevents these firms from building strong digital capabilities. Unconcerned about technology fashion, the companies focus on ensuring that every digital investment is carefully considered and strongly coordinated. Leaders in these companies don’t want to make mistakes that would waste their scarce time, effort, and money. This caution can be useful, especially in highly regulated industries such as health care and financial services. But it can also create a governance trap that focuses more on controls and rules than making progress. By focusing on control and certainty, Conservatives find it hard to mobilize top management—and the rest of the organization—to see the bigger prize that digital transformation can bring. In trying to prevent failure, these companies fail to make much progress at all.

DIGITAL MASTERY MATTERS

Digital Masters have overcome the difficulties that challenge their competitors. They know how and where to invest, and their leaders are committed to guiding the company powerfully into the digital future. They are already exploiting their digital advantage to build superior competitive positions in their industries.

To quantify the digital advantage, we conducted a survey of 391 companies in thirty countries.¹⁷ We limited the survey to large companies only—those with revenues of $500 million or higher. We used statistical methods on specific questions in the survey to construct factors representing subcomponents of the two dimensions of digital mastery, to cluster the component factors, and then to make the two dimensions as statistically independent of each other as possible. Then, we split the sample at the median on each dimension to place each company into one of the four categories, with each category containing approximately 25 percent of the firms.

Next, we analyzed the financials of the 184 publicly traded firms in our sample. We mean-adjusted the performance of each firm by subtracting the average performance of all firms in its industry that were larger than $500 million in annual revenue. Then we compared the average mean-adjusted performance of companies in each quadrant.

We found a striking performance difference for Digital Masters (figure 1.2). The two critical elements of digital mastery—digital capabilities and leadership capabilities—are associated with different types of performance; companies that excel in a particular dimension outstrip industry competitors in some performance measures while lagging in others. Meanwhile, Digital Masters—companies that excel in both dimensions—have the highest performance, far outstripping other firms on multiple financial measures. Digital Masters are 26 percent more profitable than their industry peers and generate 9 percent higher revenue from their physical assets.¹⁸

FIGURE 1.2

Digital Masters outperform their peers

Note: Average performance difference for firms in each quadrant versus the average performance of all large firms in the same industry for the 184 publicly traded companies in our sample. EBIT: earnings before interest and taxes.

Source: Adapted from George Westerman, Maël Tannou, Didier Bonnet, Patrick Ferraris, and Andrew McAfee, “The Digital Advantage: How Digital Leaders Outperform Their Peers in Every Industry,” Capgemini Consulting and MIT Center for Digital Business, November 2012.

Digital Capability and Revenue Generation

Companies with stronger digital capabilities are better at driving revenue with their physical assets. On a basket of measures including revenue per employee and fixed-asset turnover, Fashionistas and Digital Masters outperform average industry performance by 6 and 9 percent, respectively. Meanwhile, Beginners and Conservatives, both of which lag in their digital capabilities, trail their industry competitors by 4 and 10 percent, respectively.

These differences between high and low digital capability make sense; digital activities can improve and extend the reach of physical ones. With e-commerce, companies big and small now have access to a global marketplace for their goods and services. Digital business can help companies to manage more volume with a unit of existing physical capacity. And digital capabilities can also help companies grow revenue by reaching out to new customers or engaging with existing customers in new ways. Nike’s ability to generate buzz through social media, or Asian Paint’s use of call centers and mobile devices to leverage its salespeople, helps these companies grow revenue without investing in more employees or facilities.

The revenue-generation difference is substantial. For example, Fashionistas—strong on digital investment but not on leadership—gain 16 percent more revenue per unit of human and physical assets than Conservatives do, and 10 percent more than Beginners. Conservatives, being weak on digital investment, have lower revenue leverage, but they excel in other ways.

Leadership Capability and Profitability

Moving in the other dimension, companies that excel in leadership capability are significantly more profitable than their peers. On average, Conservatives and Digital Masters are, respectively, 9 and 26 percent more profitable than their average industry competitors on a basket of measures including EBIT (earnings before interest and taxes) margin and net profit margin. Meanwhile, Beginners and Fashionistas, with their weaker leadership capabilities, trail their average competitors by 11 and 24 percent, respectively, on these profitability measures.

For companies that excel at leadership capability, strong vision and disciplined governance help drive digital investments in a common direction. These firms weed out activities that run counter to the future vision of the transformed firm. They scale successful investments enterprise-wide. And they engage their employees in identifying valuable new opportunities.

Asian Paints built on efficiencies it gained through strong governance and IT–business relationships to launch new digital capabilities that moved the company into the Digital Master category. Nike’s digital unit develops digital products and capabilities, helps other units, and manages digital activities that cut across organizational silos. Each firm found that strong digital leadership created efficiency and scalability in its digital efforts.

THE PERFORMANCE ADVANTAGE OF DIGITAL MASTERS

Firms that excel in either dimension outperform their competitors in specific and different ways. Digital Masters—firms that excel in both dimensions—far outperform the others. On average, Digital Masters are 26 percent more profitable than their industry competitors. They generate 9 percent more revenue with their employees and physical assets. For the large, traditional companies we studied—with revenues of $500 million or larger—the difference can be many millions of dollars on the bottom line.

Digital Masters combine digital capabilities and leadership capabilities to achieve performance that is greater than either dimension can deliver on its own. Strong digital capabilities make new digital initiatives easier and less risky, while providing revenue leverage that can generate new cash. Meanwhile, strong leadership creates synergies that free up money for investment, while also engaging employees to identify new opportunities. Together, the two capabilities spiral in a virtuous cycle of ever-increasing digital advantage.

Our analysis shows correlation, not causality. Excelling in digital capability and leadership capability may lead to higher financial performance for the firm. On the other hand, we may be seeing that companies that outperform their peers financially tend to excel in the two dimensions of digital mastery. The direction of causality is important from an academic research standpoint. But from a management standpoint, either direction of causality leads to the same advice.

So, let’s say it this way: the best-managed companies in the world—those that significantly outperform their peers in both revenue generation and profitability—tend to manage their digital activities in a common way. They build both digital capabilities and leadership capabilities that are better than other companies. If the best-managed companies in the world do digital this way, then it’s a good idea to manage your digital activities this way too.

DO YOU HAVE TIME TO WAIT?

Digital transformation is moving much more rapidly in some industries than in others. If you are in the travel or publishing industries, you have been dealing with digital competitors and digital sales for years. But what if you are in an industry like pharmaceuticals or utilities, where strong digital threats have yet to materialize? Can you afford to wait?

Figure 1.3 shows digital mastery, by industry, for our survey. Each dot represents the average mastery of companies in each industry for which we have twenty or more data points. Some industries are already squarely in the Digital Masters quadrant, while others still lag. Many firms in the high-tech industry are already Digital Masters, while digital mastery in pharmaceuticals is far lower. Other industries, such as telecom or consumer packaged goods, are on the cusp of digital mastery, but need more digital or leadership capabilities, or both, to get there.

FIGURE 1.3

Digital mastery by industry

*Average digital mastery of industries for which we received at least twenty survey responses.

Source: George Westerman, Maël Tannou, Didier Bonnet, Patrick Ferraris, and Andrew McAfee, “The Digital Advantage: How Digital Leaders Outperform Their Peers in Every Industry,” Capgemini Consulting and MIT Center for Digital Business, November 2012.

If your company is trailing your industry’s average digital mastery, then you need to get moving fast. But what if you are not behind in your industry? If you are an executive in a Beginner industry, such as consumer packaged goods, pharmaceuticals, or manufacturing, you might be tempted to believe you can wait. After all, why invest the cost and effort to become a Digital Master if your whole industry is lagging? This kind of thinking is sensible. And it’s wrong.

You might think that if your industry is not in the Digital Master quadrant, then you have an opportunity to grab digital advantage before anybody else does. Such thinking is a bit more accurate, but still wrong.

You might even think that you can watch your competitors and be a fast follower. This attitude, too, is not quite right. It’s too late to beat all of your peers to the punch, and you can’t be a fast follower in digital mastery unless you are already there.

If you are not a Digital Master, figure 1.4 has bad news. It shows, for each industry, the percentage of firms in each quadrant. In most industries, more than one-fourth of all large firms are already Digital Masters. Even more important is this: every industry already hosts at least one Digital Master. In other words, in every industry—from pharma to manufacturing to high-tech—some company is already reaping the benefits of the digital advantage. Every other company is behind.

FIGURE 1.4

Digital mastery by industry

Note: Distribution of digital mastery for all industries with more than twenty respondents in our survey. Note that there are Digital Masters in every industry studied.

Source: George Westerman, Maël Tannou, Didier Bonnet, Patrick Ferraris, and Andrew McAfee, “The Digital Advantage: How Digital Leaders Outperform Their Peers in Every Industry,” Capgemini Consulting and MIT Center for Digital Business, November 2012.

This situation should be a call to action. Think about it. Even if it only takes you three or four years to become a Digital Master, some firms in your industry are already enjoying a digital advantage. Even worse, while you start to build the capabilities you need, the masters can exploit the capabilities they already have. These companies can accelerate ahead of you even as you try to catch up.

HOW TO GET STARTED NOW

Digital mastery matters. It matters in every industry. We’ve found that the DNA of Digital Masters is clear, and any company can adopt it. But it takes time to become a Digital Master, and time is a fast-diminishing commodity for many firms.

How will you become a Digital Master? Companies take different paths to get there. Nike was a Fashionista before it became a Digital Master. Initially, it developed digital capabilities in silos. Then, through its Nike Digital Sport unit, it added new leadership capabilities to link the silos and launch new digital capabilities.

Asian Paints went the other way; it was a Conservative before it became a Digital Master. Executives in Asian Paints created the vision to become a more unified company and then built governance and IT capabilities to help it get there. Then they repeatedly built on the company’s capabilities to transform its customer engagement, internal operations, and business models. Both Asian Paints and Nike are reaping huge benefits from their digital mastery.

Although it is less common, some companies have made the leap directly from Beginner to Digital Master. They did not stop in between. Burberry, which we’ll discuss in chapter 2, did it. And while making a direct leap is difficult and risky, sometimes it is the only way forward. This is especially true if you have a crisis situation—a “burning platform” such as in media, entertainment, or information services; in this case making the leap may be the best way out.

Figure 1.5 shows the four quadrants of digital mastery in more detail, including challenges that each quadrant can face. Take a minute to think about it. What quadrant is your company in? Decide for yourself, and then ask some colleagues. Are your digital efforts creating real change in your company, or are they just shiny baubles? Are you being too careful and thus missing the digital opportunity? The self-assessment in the appendix can help you identify your position in the matrix.

FIGURE 1.5

What is your level of digital mastery?

Source: George Westerman, Claire Calméjane, Didier Bonnet, Patrick Ferraris, and Andrew McAfee, “Digital Transformation: A Roadmap for Billion-Dollar Organizations,” Capgemini Consulting and MIT Center for Digital Business, November 2011.

If your firm is a Fashionista, you should start to build leadership capabilities and gain synergies across your digital efforts. Find a unifying vision, and invest in governance to coordinate across your company. You may want to hire a chief digital officer like Starbucks did or create a digital unit like Nike did. Moving from Fashionista to Digital Master may require some investment as you refocus disconnected digital initiatives and technologies into a unified and coherent digital program. This kind of refocusing and rework, however painful in the short term, will pay off later in terms of lower costs, lower risk, and greater agility.

If your firm is a Conservative, you can take advantage of your digital leadership strengths to build new digital capabilities in a smart way. Every company has areas that executives know they can improve, whether in customer engagement or internal operations. Try some experiments to address these issues. Then scale the successful trials to enterprise level. Like the executives at Asian Paints, you can continually think about how to expand your digital vision. What else can you do with your new digital capabilities? Engage your employees, through meetings or innovation contests, to identify new digital opportunities. Then implement.

If your firm is a Beginner, you can try some experiments to test the digital waters, either with customers or in your internal operations. Then build a vision of your digital future and start to create the capabilities to make it happen. Often the best course is to start with the capability that is most natural for your company. Then you can move in the more challenging direction once you are ready. Insurers and banks could leverage their conservative cultures to build committed leadership capabilities first, and then expand their digital investments. Fast-moving, customer-focused industries such as fashion or media could start by innovating new digital capabilities and then building strong leadership capabilities.

WHAT’S NEXT

You’ve seen the benefits of being a Digital Master. You’ve started to think about your level of digital mastery. Now it’s time to plot your digital transformation strategy. In the rest of the book, we’ll show you how.

Part I shows, in depth, what it means to build your digital capabilities. Our research has identified three broad areas in which companies are building new digital capabilities—customer experience, operational processes, and business models. We thus devote a chapter to each area, including examples from many companies around the world such as Air France, Burberry, Caesars Entertainment, and Codelco. Part II shows how to build your leadership capabilities. We’ve identified four elements: shared transformative vision, strong governance, deep engagement, and solid technology leadership. We devote a chapter to each element, including examples of how companies such as Caesars, Codelco, P&G, Pages Jaunes, and Starbucks are making it happen. Then, part III helps you build your roadmap. We provide concrete management guidance—plus self-assessments you can complete with your colleagues—to help you create your own digital advantage.