IBM Global Business Services Strategy and Transformation

Executive Report

IBM Institute for Business Value

Digital transformation
Creating new business models where digital meets physical
IBM Institute for Business Value
IBM Global Business Services, through the IBM Institute for Business Value, develops
fact-based strategic insights for senior executives around critical public and private
sector issues. This executive report is based on an in-depth study by the Institute’s
research team. It is part of an ongoing commitment by IBM Global Business Services
to provide analysis and viewpoints that help companies realize business value.
You may contact the authors or send an e-mail to iibv@us.ibm.com for more information.
Additional studies from the IBM Institute for Business Value can be found at
ibm.com/iibv
Introduction

By Saul J. Berman and Ragna Bell

Individuals and businesses alike are embracing

the digital revolution. Social networks and digital devices are being used to engage
government, businesses and civil society, as well as friends and family. People are using
mobile, interactive tools to determine who to trust, where to go and what to buy. At the
same time, businesses are undertaking their own digital transformations, rethinking
what customers value most and creating operating models that take advantage of what’s
newly possible for competitive differentiation. The challenge for business is how fast
and how far to go on the path to digital transformation.

The new digital age Business leaders have long used information technology to
In every industry, business leaders realize customer expecta- improve productivity and efficiency, reach new markets and
tions have created tremendous pressure to change the way they optimize supply chains. What’s new is that customer expecta-
set their strategies and run their organizations. Yet, because tions have also changed. People everywhere are using social
they have to manage existing, often traditional, offerings and networks to find jobs and restaurants, lost friends and new
operations, new requirements to incorporate information and partners – and, as citizens, to achieve common political goals.
interactivity quickly drive up costs and complexity. They are using the Internet for entertainment, shopping,
socializing and household management.
The IBM 2010 Global CEO Study found complexity, in fact,
to be the biggest challenge facing CEOs today. However, in How can businesses best respond to this shift? How can they
that same study, the ability for technology to mitigate take advantage of the opportunity to innovate, differentiate and
complexity was also clear: technology was second only to grow? And how can they do all this cost efficiently, leveraging
market factors as a force for change.1 This digital transforma- and optimizing the newest information technologies as part of
tion study explores the opportunities and challenges arising their overall physical operations? In our analysis of leading
when business and operating models that leverage information, companies and our work with clients, we have found that
customer and partner interactivity need to be integrated into companies with a cohesive strategy for integrating digital and
existing organizational capabilities. physical elements can successfully transform their business
models – and set new directions for entire industries.
2 Digital transformation

These companies focus on two complementary activities: Forces for business change
reshaping customer value propositions and transforming Chief among forces for transformation are the surge in devices
operating models using digital technologies for greater for mobile connectivity, such as smart phones and tablets, and
customer interaction and collaboration. To do so, they are the creation of social networks, such as Facebook and Twitter.
building a new set of capabilities that allows them to progress Both of these developments are creating an exponential
along both dimensions. explosion in data, which, in turn, requires business analytics to
make sense of the information and take full advantage of it.

Shifting global connectivity and customer empowerment Evolution of digital transformation

drive digital transformation Digital
Pervasive
transformation of
The focus and impact of the Internet and global connectivity business models*
Degree of economic impact

have shifted (see Figure 1). In the 1990s, only organizations Digital distribution • Mobile revolution
• Social media
(functions, industries,

and web strategy

in select industries – such as music, entertainment and • Web strategy and • “Hyper
geographies)

digitization”
electronics – were exploring digital products and services. e-commerce (e.g.
Digital products and retail, electronics) • Power of
Infrastructure providers took the lead in building out the infrastructure • Creating efficiency analytics
• Digital products
information backbone to improve efficiency and productivity through web
(e.g., music, strategy (e.g.
across specific functions – finance, supply chain, human entertainment) government)
• Infrastructure (e.g.
resources. The Internet hype of the late 1990s ended with a telecommunications,
crash in 2000. Yet consumer demand for digital products and software, IT)
services continued to evolve. As customers became Limited
increasingly empowered based on pervasive access to Late 1990s 2000s 2010s
Time
online information, along with a multiplicity of choices and
channels, their expectations ratcheted skyward. As a result,
*Note: Digital transformation of business models impacts both public and private sector
customers have now become the primary force behind organizations.
Source: IBM Institute for Business Value.
digital transformation in all industries.
Figure 1: Digital transformation is becoming pervasive across
functions, industries and geographies.
 IBM Global Business Services 3

Businesses have always looked at new information and digital Social networking is growing up
technology in terms of what it can do for them, e.g., greater With 2 billion people connected to the Internet, social media is
profitability and expanded customer reach through online quickly becoming the primary means for communication and
shopping. Now, customers also have a range of new choices, collaboration.4 Young people may have spearheaded the
many of which are beyond the purview of business. Decisions changes, but people of all ages have joined the virtual revolu-
about what to focus on or buy are increasingly informed tion: 89 percent of the millennial generation uses social
through social networks, where personal and business contacts, networking sites, but so do 72 percent of baby boomers. And
product selections, home video clips, favorite news items, even the gap is closing.5
real-time location coordinates, are shared instantly and widely.
People who reach out to their personal networks for advice on The scale of social media impact can be staggering; real-time
the latest generation of washing machines are also likely to use information amplifies the network effect.6 For example, when
smart phones or other devices to check out their professional Michelle Obama makes a public appearance, her fashion
networks for views about business procurement choices. The choices are relayed instantaneously by fashion bloggers who
habits of consumers – such as seeking independent information compete to identify the sources of her shoes, dresses and
and advice before making a purchase – have become the habits accessories. These blogs include links to stores and designers
of business buyers. that sell those items. The First Lady’s economic impact on the
fashion industry has been calculated at 2 percent per day in
Mobility shifts time and location for customer engagement stock valuations of clothing companies associated with her.
By the end of 2011, smart phones and tablets will overtake PC Over a year, stock appreciation came to $2.7 billion for the 29
shipments.2 Downloads of mobile applications, or “apps,” are companies tracked, or $14 million for each of her 189 public
expected to surge from 11 billion in 2010 to 77 billion in appearances.7
2014.3 These applications use location sensors and cameras,
coupled with broadband connectivity, to enable activities For today’s digital native, waiting by a phone for a call is as
ranging from videoconferencing to real-time coupon delivery puzzling a concept as a rotary dialer. Conversely, a time
for nearby stores. People want more than music, movies and traveller from the 1970s would find it challenging to assimilate
books on the go; they want all information (including from today’s continuous flow of digital activity and data. As much
businesses) that way. information is now being generated every two days, according
to former Google CEO Eric Schmidt, as existed between the
Mobility has eliminated the boundaries of space and time. dawn of civilization and 2003.8 Demand for video, as well as
Customers are always connected, and companies can interact constant connectivity, is expected to double the amount of
with them at any time. The implications cannot be overstated. mobile data traffic every year through 2014.9
With information about products becoming as important as the
products themselves, almost every company is now in the
business of creating and delivering “content” – information
that is personal, relevant and timely when accessed by the
customer. In today’s digital age, almost every company is
in the business of creating “content.”
4 Digital transformation

Today’s world exhibits a fast-developing case of hyper-digitiza-

A music lesson: media and entertainment tion. Advanced mathematical analysis, powered by intensive
computing systems, provides unprecedented opportunity to
The music industry was one of the first to feel the brunt
unleash the value of interconnected data. Electronic tags on
of the digital revolution. With the standardized mp3
packages, pallets and transport vehicles can relay critical
format for digitized music and the availability of
broadband connections for Internet distribution, the
information about the location and quality of items ranging
reality of industry disruption became apparent to all. from pharmaceuticals to food. Sensors in electrical grids and
Traditional music companies are expected to lose more water systems, intelligent buildings and congested roadways
than 35 percent of value between 2003 and 2012, with can optimize the use of scarce resources. Predictions based on
total revenues for the period expected to drop from information relayed from security cameras, satellites and soil
US$12 billion to $8 billion. But at the same time, other can improve public health and safety.
parts of the music ecosystem – more closely attuned to
the customer – experienced significant growth. This From individuals to businesses to industries
includes consumer electronics companies that make The forces of mobility, social media and hyper-digitization
digital music players, concert promoters and producers ripple from the individual through entire industries, as
of other live events.10 connected customers and employees move past traditional
The lesson? Industry incumbents that avoid the hard boundaries. Whether they buy from them or work for them,
decisions about digital transformation are likely to people are letting businesses know just what they want and
suffer a fate similar to that of traditional music need. This disruption is pushing all industries toward the
companies. For companies that stay closer to their digital end of the physical-digital continuum (see Figure 2).
customers, digital transformation can create significant Even where offerings and points of engagement are primarily
new opportunities. physical, as in agriculture or consumer white goods, business
channels and customer relationships are being reshaped.

Degree of product and service digitization

Primarily physical Mixed digital and Primarily digital

physical
Industry examples: Industry examples: Industry examples:
Traditional/physical

• Agriculture • Aerospace and • Financial markets

• Consumer defense • Gaming
Digital

products • Automotive • Music

• Industrial products • Banking • Software,
• Metals and mining • Consumer electronics applications
• Services • Healthcare
• White goods • Medical devices
• Publishing, education
publishing
• Retail
• Telecommunications

Digital transformation drivers

Source: IBM Institute for Business Value analysis.

Figure 2: Digital transformation drivers are pushing industries

along the physical-digital continuum.
 IBM Global Business Services 5

Transforming the business

Elements of digital transformation
What do businesses need to do to get ahead of the widespread
forces for change in our digital age? Key areas include recon- Integrate
figuring the customer value proposition (what is being offered)

Reshaping the operating model

and reshaping the operating model (how it is delivered). Up to

Value delivery focus

now, most organizations have focused on one of these areas

The “how”
through a set of specific initiatives. Each has its own set of Leverage
challenges and opportunities:

• Products and services, information and customer engagement

can be reshaped using the new capabilities for mobility, Value proposition focus

interactivity and information access. The challenge then Create

becomes how to monetize these new customer value Enhance Extend Redefine
propositions. Reshaping the customer value proposition
• The operating model can be realigned so that customer The “what”
preferences and requirements inform every activity in the Source: IBM Institute for Business Value analysis.
buying and selling chain. Doing this requires integrating all
business activities and optimizing how data related to those Figure 3: Most companies focus on either creating digital value
activities is managed and tracked. What are the business propositions or operating models.
requirements for achieving the topmost level and full scale of
benefit? In today’s increasingly digital world, even companies in the
primarily physical industries will not start their digital
Both sets of issues are best addressed in progressive stages of transformation journey from “zero.” Instead, most organiza-
transformation, as seen in Figure 3. tions are already finding ways to use digital information by
providing interactive web sites, improved customer service or
Strategic paths to transformation enhanced customer experiences. Similarly, they are creating
We have found from our research and client experience that basic operating capabilities such as online channels or digital
the strategic routes to transformation can be summarized by supply chain tracking. From this starting point, a company’s
three basic approaches. One focuses on customer value strategic approach to transformation typically follows one of
propositions and another on transforming the operating the three paths shown in Figure 4.
model. Taking a more holistic and integrated approach, the
third combines those two approaches, simultaneously trans-
forming the customer value proposition and organizing
operations for delivery.
6 Digital transformation

Paths to digital transformation

Integrate
1 1 Path 1
Reshaping the operating model

Transformation
Create and integrate digital operations
first. Then address the customer value
proposition to achieve full transformation.
The “how”

Leverage 3 2 Path 2
Enhance, extend or reshape the customer
value proposition with digital content, insight
and engagement. Then focus on integrating
digital operations.
2
3 Path 3
Create Build a new set of capabilities around the
Enhance Extend Redefine transformed customer value proposition and
operating model in lock-step.
Reshaping the customer value proposition
The “what”

Source: IBM Institute for Business Value analysis.

Figure 4: Digital transformation requires strategic development of the value proposition and the operating model.

The best path for a particular company depends on its strategic However, many companies, indeed entire industries, need to
objectives, industry context, competitive pressures and redefine customer value propositions and operating models
customer expectations. In industries where the product is simultaneously, or in near tandem (Path 3), to succeed in
mostly physical and customer requirements for information are digital transformation. Organizations that are able and eager
not yet advanced, such as minerals and mining, companies may to do so are in a unique position to seize industry leadership.
want to begin digital transformation with operations (Path 1).
In others, such as financial services, where new revenue-based
services can be offered online and through mobile devices, an
initial focus on the customer value proposition will provide
immediate benefits (Path 2). Many companies find they need to focus on
both their customer value proposition and
operating model.
 IBM Global Business Services 7

Reshaping the customer value proposition detect activity in blind spots.11 The Danish toy manufacturer,
Using information and analytics, organizations can reshape the Lego, best known for its interlocking plastic blocks, has created
customer value proposition on three levels by enhancing, new robotics products with the help of virtual communities
extending or redefining the value of the customer experience that allow customers to compete in company design chal-
(see Figure 5). lenges.12 Macy’s, the U.S. department store, recently
showcased a fitting room with a mirror that digitally captures
Enhance products and services for a better customer experi- the reflection of a shopper trying on a new dress or other
ence. In all industries, companies augment traditional products clothing. Then, with a push of a button, the customer can add a
with features and services that differentiate their brands on the pair of shoes or a scarf to the image, “see” an accessorized
basis of new types of information and interaction. Automotive version of her outfit and send the digital image to her friends
companies like Volvo or BMW, for example, enhance their for real-time opinions.13
customers’ automotive experiences by providing digital media
access and enhanced security features, such as sensors that

Reshaping the customer value proposition

Enhance Extend Redefine

or augment physical products or the physical or traditional products and the value delivered to customers, replace
services with digital content, information, services through digital content, creating physical with digital or build fully integrated
insight and engagement new revenue streams digital/physical value and revenue

Key strategic moves Key strategic moves Key strategic moves

• Augment the customer experience with • Add new revenue streams to traditional • Design new revenue models in which
digital content or mostly physical offerings digital elements replaces physical ones
• Differentiate with digital community • Create new revenue streams from • Recombine or reassemble “information
stretching the brand elements” to create new or additional
• Enhance customer experience across
value
multiple touch-points • Integrate across touch-points to increase
sales and transactions • Transform the customer experience

Source: IBM Institute for Business Value analysis.

Figure 5: Three stages in reshaping the customer value proposition.

8 Digital transformation

Extend offerings for new revenue streams. The next step is to on PCs and mobile devices. The company created bundles
find new ways to monetize these features, adding new revenue across its portfolio of physical subscriptions, online platforms
streams by extending traditional products and services through and affiliated publications, providing a virtual package of news,
the use of digitally delivered services, content or information. information and events its customers would pay for.16 In the
In some industries, such as media and entertainment, healthcare industry, medical device manufacturers partner with
companies must entirely replace lost revenue streams (see medical providers and patients to create disease-monitoring
sidebar, Music Lesson, page 4). For others, supplementary devices that can also communicate critical information about a
revenue is the primary benefit. Telematics, for example, patient’s condition to remote caregivers. This communication
provides auto makers with revenue potential for everything service has become more valuable than the medical monitoring
from emergency response services and traffic and congestion device itself.
alerts to advanced diagnostics and in-car applications tailored
to the driving experience. Drivers who pay for “MyFord Redefining the operating model
Touch” can adjust volume on their mp3 files, take phone calls A focus on new customer value propositions is always
and adjust temperature more safely with integrated voice- dependent to some degree on a new operating model (see
control technology.14 Toy companies are seizing comparable Figure 6). In many cases, the extent to which one transforms
opportunities. For example, WebKinz provides the young the operating model is also correlated to the efficiency and
owners of its stuffed animals with a code for entering an online productivity gains that can be achieved.
world, where they can “feed” and accessorize computerized
versions of their pets. In addition to creating satisfying play for Create new digital capabilities. Typically, organizations first
kids, the toy company gains revenue by selling aggregated data create the basic structures to engage customers through online
to other marketers.15 channels. Burberry, for example, used its iconic plaid trench
coat design to become a high-fashion house. It then created an
Redefine core elements for a radically reshaped value proposi- innovative online channel, designed especially for young
tion. Seizing the full opportunity of the digital revolution, customers, and gained over 1 million followers on Facebook. It
some companies transform the entire customer value proposi- was a pacesetter in digitally streaming fashion shows, enabling
tion. Often this is a response to technologically innovative new customers to order online during the events. Shoppers can, at
entrants that spur traditional companies to radically reshape any time, easily click on the web site to engage a representative
their customer value propositions. For example, while paper- by phone or text chat. On the operational side of the business,
based publishers struggled to find sustainable business models supply chain investments have compressed order fulfillment
in an era of free content and citizen-journalists, The Wall Street time to weeks instead of the months typically required for
Journal established incremental charges for its online articles. high-end fashion.17
This strategy attracted new customers who preferred reading
 IBM Global Business Services 9

Reshaping the operating model

Create Leverage Integrate

the basic digital delivery capabilities by using information across channels and and fully optimize all elements of the value
required to improve operations and engage organizational structures, while optimizing delivery around customer touch-points and
customers across multiple touch-points capabilities within each element deliver efficiency/effectiveness

Source: IBM Institute for Business Value analysis.

Figure 6: Three stages in reconfiguring the operating model.

Leverage information to manage across the organization. At Integrated information also benefits Tesco customers who want
the next level of operating transformation, companies leverage mobile and interactive shopping. Customers can use their
information and relationships across channels, business units phones to scan barcodes of products they have right at home
and supply chain partners. This makes it possible to integrate – instead of sitting at their computers and scrolling through
digital and physical components that provide the most value product lists to make selections. The scanned items are added
– to improve speed to market, for example, or to equip to customers’ online shopping baskets for home delivery.
employees with information enabling them to surpass Within a month of its launch, this shopping phone app was
customer expectations. Meredith Corporation, best known for downloaded 400,000 times. Tesco also provides an app for
its special interest “shelter” magazines and local broadcast tracking loyalty points (customers don’t have to carry a plastic
stations, leveraged insights about its readers and viewers by card to the store), as well as apps for finding stores nearby.
creating full-service marketing capabilities for its advertisers Once inside, the app can provide aisle numbers for products on
and other business clients. The marketing unit has worked customers’ shopping lists.20
with leading organizations from consumer products to
financial services on social media and mobile campaigns, as
well as traditional publishing. 18

Integrate and optimize all digital and physical elements.

Fully reshaping the operating model requires
Companies focused on fully reshaping the operating model optimizing the value chain around points of
optimize all elements of the value chain around points of customer engagement.
customer engagement. Tesco, the third-largest retailer in the
world, has long been a leader in innovative uses of technology
– from self-service checkouts to the creation of its “Tesco in a
box” capability that enables new stores to be set up quickly
anywhere in the world with standardized business systems.19
10 Digital transformation

Choosing a transformation path

Determining the best path to transformation – whether an Is your organization ready for digital transformation?
extensive reshaping of the customer value proposition, a
transformation of the operating model, or a combination of Are you reshaping your customer value
both – requires a thorough understanding and evaluation of proposition?
several factors: • How are you engaging with customers to
understand their needs and expectations – and
• Where products and services are on the physical-to-digital how they are changing in the digital environment?
continuum in your industry
• How do mobile and online technologies change the
• Mobility and social networking adoption levels and
way you can engage with and create new value for
expectations of customers
your customers?
• Strategic moves by other industry players
• The degree of integration at every stage of the transformation • How will you drive the digital agenda in your
– between new digital processes and legacy, physical ones. industry rather than having it imposed on you by
competitors?
Transforming operations first, for example, builds customer
Are you optimizing your operations?
alignment and efficiency. But if competitors are interacting
with customers in new ways, operationally focused organiza- • How do you integrate online and social media
tions may lose revenue opportunities, customer loyalty and touch-points, customer information and insights
market share. across your entire enterprise?
• What are you doing to make sure you are putting
Conversely, moving too quickly to transform the value the customer at the center of your supply chain
proposition may raise cost challenges if the new offering planning and execution every time?
involves too much complexity or manual intervention. Too
• How are you realizing the benefits of open
narrow a focus on customer value is also very likely to result in
collaboration – within your enterprise, with
a one-time breakthrough rather than continuous innovation
customers and with partners?
for greater customer value.
• How are you optimizing your digital and physical
components across all aspects of your operating
model?
 IBM Global Business Services 11

Essential capabilities most disciplined approach to reassembling all the elements of

Businesses aiming to generate new customer value propositions business frequently, even continuously, will enable companies
or transform their operating models need to develop a new to keep up with customers and ahead of competitors.
portfolio of capabilities for flexibility and responsiveness to
fast-changing customer requirements (see Figure 7). Drive customer and community collaboration. Another key
competency is finding new ways to engage customers and
Deliver business model innovation. Foremost among capabili- communities. This requires interaction with customers across
ties for the digital age is the ability to design and deliver new every phase of business activities – not just sales, marketing and
business models. Companies must constantly explore the best service, but also product design, supply chain management,
new ways to capture revenue, structure enterprise activities and human resources, IT and finance. Engaging with customers at
stake a position in new or existing industries. Subscription or every point where value is created is what differentiates a
per-usage fees? Acquire new skills or outsource certain customer-centered business from one that simply targets
functions? Collaborate with competitors or break into an customers well. Customer interaction in these areas often leads
entirely new industry? Answers to these questions will help to open collaboration that accelerates innovation using online
determine flexible new business models suited to the fast- communities. Companies may create their own virtual commu-
changing era of digital transformation. And as quickly as each nities, or use groups already organized by customers.21
question is answered, it must be re-examined again. Only the

Digital transformation capabilities

Business model innovation Building customer value as a core competency across industry, revenue and
enterprise models

Customer and community Driving customer centricity into each part of the enterprise and using social
collaboration networking tools and capabilities to engage

Cross-channel integration Integrating all customer touch-points across digital and physical channels

Integrating information across all sources (internal, external) and taking full
Insights from analytics
advantage of the predictive power of advanced analytics

Digitally enabled supply chain Optimizing all supply chain elements, effectively integrating cross enterprise

Networked workforce Getting the right skills aligned around the right business opportunities

Source: IBM Institute for Business Value analysis.

Figure 7: Reshaping the business and operating model requires a new set of capabilities.
12 Digital transformation

Going beyond traditional partnerships with developers and promise and bolsters customer satisfaction. Continuity and
suppliers, some companies make their designers and engineers context provide seamless experiences across all points of
available to customers. Customers of Threadless, the online customer contact.
retailer, create t-shirt designs using templates provided on the
company’s web site.22 Novartis employees collaborate with Get insights from analytics. Creating and maintaining a
patient groups in online communities to develop new drugs.23 customer-centric enterprise changes the basis for decisions
To enable open innovation like this, companies need to meet within an organization and among its partners. Insight from
high expectations from customers, partners and suppliers for analytics brings predictive capabilities to all functions so that
information that is transparent and readily available. They also all channels can be aligned around customer needs and
need to demonstrate an authentic commitment to creating preferences. For example, electronics retailer Best Buy
value for all members of the collaboration – and that often leverages data and analytics to transform the way it manages its
requires significant cultural change. supply chain and engages with customers. Its sales people,
equipped with data analysis tools, are able to suggest add-on
Integrate cross-channel. The ability to integrate across all purchases based on past customer behavior.24
customer touch-points is essential for managing digital
operations. Online, customers switch back and forth between The computing power needed for analytics can be local and
e-mail and social networks. They change platforms and centralized, or accessible through shared services “in the
channels – comparing prices on a smart phone one minute, cloud.” Businesses of every size have the ability to develop
trying on shoes in a bricks-and-mortar shop the next, and later highly segmented and individualized information that meets
making a transaction on their PC. During all of these interac- individual customer expectations. Top-performing companies
tions, customers expect consistency and clarity. They want are formulating decisions based on facts rather than gut feeling
companies to be aware of their past purchases, service calls and or personal experience and are embedding analytics into all
inquiries. their operations to transform insights into action.25

Experiences in one channel raise expectations across all of Optimize the digitally enabled supply chain. Physical compo-
them. Customers want a toll-free phone number, but have little nents of the supply chain, such as trucks, pallets, warehouses,
patience for voice menus. They want a web site that gets them even individual packages, are being equipped and intercon-
to information as quickly and effectively as an iPad application nected with sensors and actuators that enable data and analysis
– one or two clicks at most. Consistency builds the brand for on-the-spot action. Companies that capture and integrate
that information gain the full benefits of a digitally enabled
supply chain – the ability to dynamically manage costs for
serving even the smallest segments of their markets and the
flexibility to determine the best inventory allotments based on
Businesses can develop the individualized supply and demand predictions. Using real-time data, these
information that meets customer expectations. companies can also find the best transport methods by
weighing predicted customer service outcomes against impact
on their carbon footprint.
 IBM Global Business Services 13

Too often, though, organizations are designing optimized instead of rigid rules. In companies where business leaders set
supply chains to satisfy partners’ and suppliers’ needs rather the example, employee participation in online communities
than the newly awakened expectations of customers. Only 53 can bring a variety of viewpoints into the organization and
percent of companies include customer input in their decisions, create fertile ground for innovation and business growth. And
compared to 63 percent who include that of suppliers.26 with workforces increasingly mobile and global, face-to-face
oversight of work teams is as obsolete as reports submitted on
Enable the networked workforce. All these capabilities require paper. Instead, collaboration, enabled by mobile and online
the right people and skills across the workforce. A workplace tools, is becoming an essential part of the communication mix
that fosters social networking among employees, as well as with within organizations and among companies, partners and
customers and partners, requires values-based guidelines customers.

How to get started

How do companies determine the best strategy for digital Design the optimized operating model that combines
transformation? A structured approach allows organizations organizational capabilities and technology requirements.
to engage customers, partners and employees at every step Thinking through the “how” of value delivery requires
along the transformation roadmap. understanding of current capabilities and opportunities.
Identify transformation opportunities based on a thorough Operational design should support customer interaction as
understanding of digital transformation in the industry. This part of cross-channel integration and supply chain
depends on the degree to which your products and services collaboration.
are – or could be – digitized and how competitors are To execute the strategy, redefine the operating model as
responding to new and rapidly changing customer needed to support the new value proposition. Optimize
expectations. And products and services are directly processes across online and physical interactions, building a
affected by new technologies, changing how customers new set of digital capabilities for customer engagement,
engage and collaborate. supply chain integration and a networked workforce.
Redefine the value proposition based on what existing and Continuously evolve using customer insight and advanced
prospective customers are likely to pay for going forward. analytics. Customer requirements and preferences change
This requires looking at new ways to use technology to as new markets are opened, as customers embrace new
differentiate offerings, reach existing customers with new technologies, such as location-based applications, and
digital offerings or relationships and, finally, redefining entire abandon older channels, such as e-mail. With the ability to
offerings for digital value. analyze customer interactions even at the micro-segment
level a fresh source of insights is always available for
innovation.
14 Digital transformation

Conclusion The path to digital transformation will vary by industry, as will

Businesses in every industry are under intense pressure to customer adoption and an organization’s legacy environment.
rethink their customer value propositions and operations. Yet However, every industry is under pressure to change, and every
few, if any, offerings and operations will ever be entirely organization needs to have a plan in place. Those that do not
digitized: buildings and servers, as well as customers and take advantage of the new digital age may drastically limit
employees, will always have physical requirements. Physical opportunities for future success. Those that are able to
and digital processes need to be managed together without overcome the challenge of optimizing both physical and digital
alienating customers and creating unnecessary levels of elements by implementing new business models based on
complexity. Integrating new and traditional operations will customer demand can win first choice of talent, partners and
require evaluating the impact on customers of every business resources. As industry leaders, they have the opportunity to
decision and every interaction. distance themselves from new and existing competitors.

Companies taking a proactive position in the digital revolution To learn more about this IBM Institute for Business Value
and leveraging the full potential of disruptive technologies are: study, please contact us at iibv@us.ibm.com. For a full catalog
of our research, visit:
1. Reshaping customer value propositions ibm.com/iibv
2. Remodeling their business operations to deliver new
customer value propositions effectively, efficiently and in Be among the first to receive the latest insights from the IBM
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All of these transformation paths require clear vision, the right
skills in the right place and tenacity to overcome cultural
resistance to analytically based decisions across the extended
enterprise.
 IBM Global Business Services 15

The right partner for a changing world Executive sponsors

At IBM Global Business Services, we collaborate with our Denis Brousseau, IBM Global Business Services, Global
clients, bringing together business insight, advanced research Leader for Organization and People consulting services
and technology to give them a distinct advantage in today’s Paul Papas, IBM Global Business Services, Global Leader,
rapidly changing environment. Through our integrated Smarter Commerce
approach to Strategy and Transformation, we help turn
strategies into action. And with expertise in 17 industries and
Contributors
global capabilities that span 170 countries, we can help clients
The study benefited from guidance and deep insights provided
globally anticipate change and profit from new opportunities.
by Matt English, Eric Lesser, Peter Korsten, Raj Mirchandani
and Rich Christner. We are especially indebted to the valuable
About the authors research and contributions from our project team members,
Saul J. Berman is a Vice President and Partner of IBM Global Sachin Agrawal, Brian House, Deborah Kasdan and Abhijeet
Business Services and the global leader for strategy consulting Shekhar. Furthermore, this study would not have been possible
and innovation and growth services. He has over 25 years without the substantial contributions of the global IBM
experience consulting with senior management, has published Strategy and Transformation community, providing their
extensively and is a frequent keynote speaker at major confer- insights and case studies.
ences. His most recent book is Not for Free, assessing revenue
models for the digital age. He was named one of the 25 most
influential consultants of 2005 by Consulting Magazine. Saul can
be contacted at saul.berman@us.ibm.com.

Ragna Bell is the Strategy lead for the IBM Institute for
Business Value within IBM Global Business Services. Ragna
has over ten years of consulting experience with leading clients
focused on mergers and acquisitions, strategy formulation and
corporate transformation. She has published several articles
and books on business model innovation and enterprise
transformation. Ragna can be reached at ragna.bell@us.ibm.com.
16 Digital transformation

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 IBM Global Business Services 17

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