Raising your Digital Quotient (DQ)

Following the leader is a dangerous game. It’s better to focus on building an organization and culture that can realize the strategy that’s right for you.

With the pace of change in the world accelerating around us, it can be hard to remember that the digital revolution is still in its early days. Massive changes have come about since the packet-switch network and the microprocessor were invented, nearly 50 years ago. A look at the rising rate of discovery in fundamental R&D and in practical engineering leaves little doubt that more upheaval is on the way.

For incumbent companies, the stakes continue to rise. From 1965 to 2012, the “topple rate,” at which they lose their leadership positions, increased by almost 40 percent as digital technology ramped up competition, disrupted industries, and forced businesses to clarify their strategies, develop new capabilities, and transform their cultures. Yet the opportunity is also plain. The companies have lofty ambitions: they expect digital initiatives to deliver annual growth and cost efficiencies of 5 to 10 percent or more in the next three to five years.

To gain a more precise understanding of the digitization challenge facing business today, by evaluating 18 practices related to digital strategy, capabilities, and culture, we have developed a single, simple metric for the digital maturity of a company—what might be called its Digital Quotient, or DQ. This survey reveals a wide range of digital performance in today’s big corporations

The examination of the digital performance of major corporations points to four lessons in which we have increasing confidence:

• First, incumbents must think carefully about the strategy available to them. The number of companies that can operate as pure-play disrupters at global scale—such as Spotify, Square, and Uber—are few in number. Rarer still are the ecosystem shapers that set de facto standards and gain command of the universal control points created by hyperscaling digital platforms. Ninety-five to 99 percent of incumbent companies must choose a different path, not by “doing digital” on the margin of their established businesses but by wholeheartedly committing themselves to a clear strategy.
• Second, success depends on the ability to invest in relevant digital capabilities that are well aligned with strategy—and to do so at scale. The right capabilities help you keep pace with your customers as digitization transforms the way they research and consider products and services, interact, and make purchases on the digital consumer decision journey.
• Third, while technical capabilities—such as big data analytics, digital content management, and search-engine optimization—are crucial, a strong and adaptive culture can help make up for a lack of them.
• Fourth, companies need to align their organizational structures, talent development, funding mechanisms, and key performance indicators (KPIs) with the digital strategy they’ve chosen.

Collectively, these lessons represent a high-level road map for the executive teams of established companies seeking to keep pace in the digital age. Much else is required, of course. But without the right road map and the management mind-set needed to follow it, there’s a real danger of traveling in the wrong direction, traveling too slowly in the right one, or not moving forward at all.

1. Getting the strategy right

Executives must arrive at a common vernacular for what “digital” means for them.3 Then, the starting point for success is developing a clearly defined, coherent digital strategy that’s fully integrated with the overall corporate one. Without this deep alignment, any subsequent intervention is bound to fall short. Yet companies struggle to get their digital strategy right.

Companies get their digital strategy right by answering three important questions. First, where will the most interesting digital opportunities and threats open up? Second, how quickly and on what scale is the digital disruption likely to occur? Third, what are the best responses to embrace these opportunities proactively and to reallocate resources away from the biggest threats?

Fast-following to ride the wave and capture some of the value created by an industry’s evolution.

Aggressively reallocating resources from digitally threatened assets to more digitally interesting ones

Boosting the effectiveness of existing business models through digital approaches and tools.

Clearly defining the best-fitting digital strategies is important, in part, because successful ones give rise to differentiated management practices: if you get the strategy right, the managerial interventions become clearer and vice versa.

2. Capabilities at scale

For digital success, certain capabilities—especially those that build foundations for other key processes and activities—are more important than others. Foremost among them are the modular IT platforms and agile technology-delivery skills needed to keep pace with customers in a fast-moving, mobile world. The IT platforms of most companies we surveyed have major gaps, reflecting (and reinforced by) a widespread failure to prioritize digital initiatives within broader IT and capital-expenditure investments.

What further separates high performers in our survey is their ability to engage customers digitally and to improve their cost performance in four areas.

Data-empowered decision making

High-performing digital companies distinguish themselves by keeping pace as their customers undertake the digital consumer decision journey.5 For example, they anticipate emerging patterns in the behavior of customers and tailor relevant interactions with them by quickly and dynamically integrating structured data, such as demographics and purchase history, with unstructured data, such as social media and voice analytics. These companies skillfully assess the available resources, inside and outside the business, and bring them to bear on issues that matter to their markets.

Connectivity

A closely related skill is connectivity. Digital leaders embrace technologies (such as apps, personalization, and social media) that help companies establish deeper connections between a brand and its customers—and thus give them more rewarding experiences. Such connections can also deeply inform product development.

Process automation

Top-performing digital players focus their automation efforts on well-defined processes, which they iterate in a series of test-and-optimize releases. Successful process-automation efforts start by designing the future state for each process, without regard for current constraints—say, shortening turnaround time from days to minutes. Once that future state has been described, relevant constraints (such as legal protocols) can be reintroduced.

Two-speed IT

Today’s consumer expectations put a new set of pressures on the IT organization as legacy IT architectures struggle with the rapid testing, failing, learning, adapting, and iterating that digital product innovations require. Our diagnostic shows that leading companies can operate both a specialized, high-speed IT capability designed to deliver rapid results and a legacy capability optimized to support traditional business operations.

3. A fast, agile culture

While strong skills are crucial, companies can to some degree compensate for missing ones by infusing their traditional cultures with velocity, flexibility, an external orientation, and the ability to learn. While there is more than one way to build such a culture, many companies with high scores on the DQ diagnostic have succeeded by adopting test-and-learn approaches drawn from software-development movements such as DevOps, continuous delivery, and agile. Once, these were confined to the periphery of the business environment. Now they bring a cooperative, collaborative disposition to interactions between talented workers at its core. Previously siloed functions, departments, and business units can learn a new spirit of cohesiveness. These test-and-learn approaches incorporate automation, monitoring, community sharing, and collaboration to unify previously isolated functions and processes into a fast-moving, product-oriented culture. By promoting shared ownership of technology initiatives and products, such environments democratize data, minimize complexity, facilitate the rapid reallocation of resources, and enable reusable, modular, and interoperable IT systems.10 To set this kind of culture in motion, executives can focus their efforts on four key areas.

External orientation

As companies develop their collaborative cultures, they position themselves to participate more meaningfully in broader networks of collaboration, learning, and innovation. The shaping role in these networks, or ecosystems, may be beyond the reach of most incumbent companies. But they can play other value-creating roles by performing specific modules of activity, such as production or logistics, within a more broadly orchestrated ecosystem.

Appetite for risk

Digital leaders have a high tolerance for bold initiatives but that executives at laggards say their cultures are risk averse. Although established companies may not be likely to shape or orchestrate broad ecosystems, they must still face up to the implications of disruptive forces in their markets and industries—and the risks that arise in dealing with them. In a world of more data and less certainty, companies have to make decisions and respond to disrupters all the earlier and the more decisively.

Test and learn—at scale!

At the heart of agile cultures is the test-and-learn mind-set and product-development method, which can usefully be applied, or translated, to nearly any project or process that incumbents undertake. Instead of awaiting perfect conditions for a big-bang product launch or deferring market feedback until then, digital leaders learn, track, and react by putting something into the market quickly. Then they gauge interest, collect consumer reactions, and pursue constant improvements. Rigorous data monitoring helps teams quickly refine or jettison new initiatives, so that such companies fail often and succeed early.

Internal collaboration

Teamwork and collaboration are important in any context, digital or otherwise. Wharton’s Adam Grant says the single strongest predictor of a group’s effectiveness is the amount of help colleagues extend to each other in their reciprocal working arrangements.12 But collaborative cultures take on even greater importance as companies look to boost their DQ, since many lack the established digital backbone needed to unify traditionally siloed parts of the organization, from customer service to fulfillment to supply-chain management to financial reporting.

4. Organization and talent

Beyond strategy, capabilities, and culture, leading digital companies use a wide set of coherent practices in talent, processes, and structure.

Talent connections

High-DQ companies sometimes feel the need for a digital leader on the executive team who combines business and marketing savvy with technological expertise. But while executive leadership is important, the most critical thing is midlevel talent: the “boots on the ground” who can make or break digital initiatives and are ultimately responsible for bringing products, services, and offers to market.

Real-time monitoring

Leading digital companies track and communicate digital key performance indicators frequently—in some cases in real time. They measure those KPIs against digital priorities and make sure senior management reviews and manages their performance.

When Starbucks rolled out a new point-of-sale system, for example, managers videotaped transactions and interviewed employees to fine-tune the checkout process. That feedback allowed the company to trim ten seconds off any mobile or card-based transaction, allowing employees to process sales more quickly and saving customers 900,000 hours of time in line each year.

Nontraditional structures

While no one answer works for all companies, high-DQ businesses carefully and deliberately build organizational structures that reflect where they are in the digital transformation. Some acknowledge that the core business cannot transform itself fast enough to capture new digital growth. For example, many successful traditional media organizations have carved out their digital businesses from more mature content operations.

The journey to digital maturity requires a whole-hearted commitment from a company’s leadership and a sustained investment in people, capabilities, technology, and cultural change. To get started, an organization must be honest about its DQ, clear about its long-term strategic opportunity, and open to iterating and refining solutions along the way.

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Excerpts borrowed from Mckinsey research