Assessing digital transformation capabilities

(1)

Assessing Digital Transformation Capabilities

by

Bahubali Shah

MBA, University of Georgia at Athens, 2008

Bachelor of Engineering (Mechanical), University of Pune, 2003

SUBMITTED TO THE SYSTEM DESIGN AND MANAGEMENT PROGRAM IN PARTIAL FUFILLMENT OF THE REQURIEMENTS

FOR DEGREE IN

MASTERS OF SCIENCE IN ENGINEERING AND MANAGEMENT

AT THE

MASSACHUSETTS INSTITUTE OF TECHNOLOGY

February 2019

The author herby grants to MIT permission to reproduce and to distribute publicly paper and electronic copies of this thesis document in whole or in part in any medium now or

known hereafter created

Signature redacted

Signature of Author:

System Design and Management Program January 31, 2019

Signature redacted

Certified by:

Dir. Eric Rebentisch Research Associate, Sociotechnical Systems Research Center Lecturer, System Design and Management

Signature redacted

Accepted by:

-MASSACHUSETTS INSTITUTE Joan S. Rubin

OF TECHNOLOGY _{Executive Director, System Design & Management Program}

MAR 14 20191

(2)

MITLibraries

77 Massachusetts Avenue

Cambridge, MA 02139

http://Iibraries.mit.edu/ask

DISCLAIMER NOTICE

Due to the condition of the original material, there are unavoidable flaws in this reproduction. We have made every effort possible to

provide you with the best copy available.

Thank you.

The images contained in this document are of the best quality available.

(3)

(4)

Assessing Digital Transformation Capabilities

by

Bahubali Shah

Submitted to the System Design and Management Program on January 31, 2019 in Partial Fulfilment of the Requirements for the

Degree of Master of Science in Engineering and Management

ABSTRACT

It is widely believed that we are currently living in the digital age. Advances in technologies enabling connectivity, data aggregation and analysis, and aritificial

intelligence/ machine learning are making it possible to obtain insights into human and machine behaviour like never before. Companies are rushing to take advantage of this new resource called data for competitive advantage. Yet, while many are aiming to pursue a Digital Transformation strategy within their organization, there appears to be a range of different opinions that professionals/ experts carry when it comes to identifying capabilities required to become a Digital Enterprise. This thesis is aimed at helping professionals in two ways. First, it identifies required capabilities at functional level from first principles. Second, it defines maturity levels for key generic capabilities at the company level for professionals to measure and guide their organization's progress towards becoming a Digital Enterprise.

Thesis Supervisor: Dr. Eric Rebentisch

Title: Research Associate, Sociotechnical Systems Research Center Lecturer, System Design and Management

(5)

Acknowledgements

I would like to express my gratitude to my thesis supervisor, Dr. Eric Rebentisch, for his

time and continuous guidance since I began working on this thesis. Many of the thoughts, ideas and questions that I deliberated upon during the process germinated from my experience of working with him as a Research Assistant for the Brightline Initiative during the Spring of 2018. Thanks are thus also due to the team at the Brightline Initiative for being contributors to the origins of this work.

My time at MIT was one of continuous learning. It has beyond any doubt exceeded my

expectations of what I could learn coming into an institute after working for nearly a decade. It would only be appropriate that I acknowledge the SDM team for accepting me into the program and expanding my knowledge base all through the journey.

Finally, I would like to thank my family for their love, care and patience while I spent time studying and being away from them. This thesis is dedicated to you.

(6)

Table of Contents

1. INTRO DUCTIO N... 6

1.1 Background and Motivation... 6

1.2 Thesis Structure ... 8

2. FUNDAM ENTALS AND DEFINITIONS... 9

2.1 W hat is Digital Transformation? ... . .. ... .. ... .. .. .. .. ... .. ... .. .. .. . . . 9

2.2. W hy do com panies want to pursue Digital Transform ation?... 14

2.3 Assessing the status-quo: Where do companies stand today?...17

2.4 W hy is Digital Transformation challenging? ... 20

3. CAPABILITIES O F A DIGITAL ENTERPRISE... 24

3.1 Literature Review ... 24

3.2 Identifying Capabilities from First Principles ... 29

3.3 Results of the research ... 36

4. MATURITY LEVELS FOR KEY CAPABILITIES ... 42

4.1 Defining a Maturity Model... 42

4.2 Defining M aturity Levels for key capabilities... 45

4.2.1 Approach and methodology ... 45

4 .2 .2 R e s u lts ... 4 6 4.2.3 Using Maturity Level descriptions... 76

5 . S U M M A R Y ... 7 7 6. BIBLIOG RAPHY ... 79

(7)

1. INTRODUCTION

1.1 Background and Motivation

Many companies today claim to be in the middle of a Digital Transformation of some sort. Whether it is a start-up that is out to disrupt traditional industries outright, or a large, established company wanting to defend its market position at the least, increasing adoption of technology seems to be a strategic move of choice. Several well-known companies are even repositioning themselves as Digital Enterprises. The term "Digital Transformation" is often cited by companies and its executives in their media

interactions or annual reports as being on the top of their agenda. However, there seems to be little consistency in how these terms are used or what exactly they intend to mean.

On another front, outcomes from Digital Transformation appear to be mixed as well. While some start-ups have made it really big, there are many that have failed. Likewise, many established companies that have been investing in Digital Transformation in anticipation are not witnessing the returns they would like to see on their investments.

The motivation for my thesis originates from a simple question: why do companies fail at implementing their Digital Transformation strategy? During my previous stints at

consulting companies, I had opportunities to work with organizations on engagements that included strategic planning and transformations. We did extensive analysis, utilizing many well-known frameworks and extensive data sources to come up with a plan that seemed logical to us. I assume this must also be true of the companies I never worked with; they would have employed "skilled" professionals to perform this task regardless of whether they were company employees or outside consultants. So, if many companies applied rigor in their strategic planning process, why did they not recognize the benefits envisaged?

Part of the answer became clear to me when I took up a role in the industry. It was here that I had first-hand experience in strategy execution. I gained insights on many things that did not go to plan - both internal and external. It occurred to me that there were two

(8)

things that were of paramount importance if a company has to come close to realizing its strategic objectives. First, it needed a sound process that could ensure that both formulation and deployment of strategy takes place in a fool-proof manner (to the extent possible). This implies understanding and developing capabilities desired to move from the current state to a desired future state. Second, it needed to have mechanisms to

learn and periodically adapt as future unfolded. Uncertainty is a given and any

execution plan that "sticks" to the original without accommodating the discoveries along the way is very likely to be deficient.

However, the question is whether the above can also be said about Digital

Transformation. Or is Digital Transformation different in any way that entails building specific capabilities and adopting different approaches? It is with the above background that I mention my key research questions below.

* What is a Digital Enterprise?

" What is Digital Transformation and how is it different from other transformations? " What challenges are associated with effective implementation of Digital

Transformation strategies?

* What capabilities do organizations need to build to become a Digital Enterprise? " How do companies know where they are in their journey to acquiring the

(9)

1.2 Thesis Structure

The thesis is structured in the following manner:

Chapter 2 is dedicated to understanding the meaning of the term "Digital

Transformation" (DT). It clarifies the distinction between several related terms and outlines the reasons why companies are drawn to DT. Evidences in the form of survey results and research reports are included to assess the status quo with respect to DT and note key reasons why companies find it challenging to implement DT in their organizations.

Chapter 3 introduces the meaning of the word capability. It describes the approach taken to identify key capabilities of a Digital Enterprise from first principles. Results of research are presented.

Chapter 4 presents maturity levels for key capabilities identified in Chapter 3. It begins with an explanation of a maturity model and subsequently explains the approach taken to defining the maturity levels for key capabilities.

(10)

2. FUNDAMENTALS AND DEFINITIONS 2.1 What is Digital Transformation?

As alluded to earlier, the term "Digital Transformation" (DT) appears to be loosely used

by professionals. Several words that sound similar but have subtle differences in

meanings are often confused with DT. These include digital, digitization, and

digitalization among others. It is important to understand the meaning of these words before we proceed to understanding the meaning of DT.

Digital

Gartner defines the word "digital" as "the representation of physical items or activities through binary code". Merriam-Webster defines "digital" as "electronic" or something "composed of data in the form of especially binary digits". The word "digital" is thus an opposite of analog, which is often used to describe a device that has a continually varying output proportional to the input.

Digitization

Digitization, on the other hand, refers to the process of conversion. It is defined as "changing from analog to digital form, also known as digital enablement" by Gartner. An example of digitization in this sense would be the conversion of old records from

physical (paper) to electronic form. A broader definition is offered by Cisco, a leading technology company. It defines digitization as "the connection of people, process[s], data and things to provide intelligence and actionable insights enabling business outcomes" (Surber, 2016). In both cases, digitization (of anything) implies it being available in electronic form.

Digitalization

The word "Digitalization" is somewhat similar to DT and is often used interchangeably.(i-Scoop, 2018) Gartner defines Digitalization as "the use of digital technologies to change a business model and provide new revenue and value-producing opportunities; it is the process of moving to a digital business". Digitalization represents a more radical change

(11)

that could bring advantages beyond efficiency to an organization. This will become more clear as we explore DT in the following sections.

Digital Transformation

Several consulting companies and research organizations have attempted to provide a clear definition of DT. A study conducted jointly by MIT and Capgemini Consulting defined DT as "the use of technology to radically improve performance or reach of enterprises"(MIT & Capgemini, 2011). This definition does well to underpin the importance of technology for improving performance in a significant way. However, it does not talk about the different facets of transformation or the components that make up the transformation as such.

As per McKinsey, "digital is less about any one process and more about how companies run their business"(Schallmo & Williams, 2018). This definition appears to emphasise operations and outcomes while viewing technology as an enabler. It breaks down DT into the following three attributes (Dbrner & Edelman, 2015):

" _{Creating value at the new frontiers of the business world: This includes either} developing new businesses or identifying and chasing new value pools in existing sectors

" Creating value in the processes that execute a vision of customer experiences: This refers to leveraging new capabilities for improving how customers are

served

* Building foundational capabilities that support the entire structure: This refers to technological and organizational processes that allow an enterprise to be agile

and fast

Gartner's CIO Agenda report takes a historical perspective in explaining how role of enterprise IT has emerged and is contributing to digitalization. Its definition of

digitalization is similar to those offered by McKinsey and MIT-Capgemini above. It states that the Y2K and the dot-com bust brought the first era of enterprise IT to a close and ushered it in the second "industrialization" era of processes, services, standards, smart sourcing, IT transparency, etc. It claims that we are now entering the third "digitalization"

(12)

era that is characterised by "moving away from running IT like a business within business into a period characterized by innovation beyond process optimization,

exploitation of a broader universe of digital technology and information, more-integrated business and IT innovation, and a need for much faster and more agile capability"

We are here Focus Capabilities Engagement Outputs and outcomes Business models Digitalization Digital leadership Treat colleagues as partners; engaged with external customers Digital business innovation;

new types of value

Emerging role of enterprise IT and its contribution to digitalization. Source: (Gartner,

2014)

In summary, DT is broad in scope and goes beyond the limited changes implied by digitization. The MIT-Capgemini Consulting report lists three building blocks of DT. These are captured in the below graphic. These encompass strategies and initiatives to

improve customer experience, operational processes and business models. The transformation is enabled by digital capabilities that include unified data & processes, analytics, business & IT integration and solution delivery.

IT craftsmanship

Technology Programming, systems management

[Isolated;

disengaged

1

internally and externally

Sporadic automation and

innovation; frequent issues

IT industrialization Processes l[T management, service management Treat colleagues as customers; unengaged with external customers

Services and solutions; efficiency and effectiveness

___1k

(13)

Building blocks of digital transformation. Source: (MIT & Capgemini, 2011)

Digital Business Transformation

The words "Digital Business Transformation" and "Digital Transformation" seem to be synonymous. Gartner defines Digital Business Transformation as "the process of exploiting digital technologies and supporting capabilities to create a robust new digital business model" ("Gartner IT Glossary," 2018). Its view of Digital Business

Transformation is thus similar to McKinsey's in that both imply broad and radical change.

Digital Transformation vs Business Process Reenqineerinq

The word "transformation" in DT could lead some to think that it is similar to Business Process Reengineering (BPR) (Schallmo & Williams, 2018). According to Hammer and Champy, "BPR is the rethinking and reengineering of business-related processes to reduce costs and improve products and services". Authors Schallmo and Williams state in their book that while BPR's focus is mainly on automating rule-based processes, the objectives of DT are are obtaining new data and using this data to reimagine these old,

(14)

rule-based processes (Schallmo & Williams, 2018). They cite the example of how Airbnb leveraged data to disrupt the rule-based processes in the hotel industry.

Digital Enterprise

Given all the definitions thus far, how do we then define a Digital Enterprise? Would it be a company that uses digital technology in any form to conduct its operations? If so, it will be difficult to imagine a company that is not a Digital Enterprise today. One would believe that a majority of companies use digital technology for communications (e.g. websites, email, etc) at the least. Companies with complex operations often also use an Enterprise Resource Planning software for managing their operations (e.g. SAP). More sophisticated ones' leverage technology for innovating new products or services (e.g. Facebook, Microsoft, etc). While one could argue that companies adopting digital technology for any of the above use cases can potentially call themselves as a Digital Enterprise, the below definition by Jun Xu offers a more comprehensive description.

"..digital enterprise is defined as 'using digital technologies and networks in the activities of buying and selling goods and services, servicing customers,

collaborating with business partners, conducting communications and transactions within the organization" (Xu, 2014)

This definition is useful because it clearly specifies the extent to which technology is embedded in a Digital Enterprise. It implies that a Digital Enterprise is one that is not limited in its use of technology, but it finds many applications for technology across different functions instead. It can also be inferred that a company, if beginning at a state of modest technology adoption, needs to pursue Digital Transformation in order to become a Digital Enterprise.

(15)

2.2. Why do companies want to pursue Digital Transformation?

Having discussed key terms and claimed that many companies are pursuing DT, a key question that arises is - why do companies want to pursue DT? In order words, what are the benefits of being a Digital Enterprise?

In general, companies feel the need to transform when they perceive business as usual not to be good enough. Companies make profit by offering a product or a service that customers need. They compete among each other on various dimensions such as cost, quality and customer service in order to survive. The companies that perform better on these dimensions tend to lead the market. The challenge that all companies face, however, is that their internal and external environment is always changing. Customer needs, competitive behaviour, regulations, and political situations are uncertain and always in a state of flux. Likewise, the status of important internal resources such as equipment, technology and labour could become unfavourable for various reasons. These uncertainties are hard to predict. As such companies tend to focus more on meeting short-term needs. However, to succeed at the marketplace in the long term, companies need to constantly redefine (transform) themselves to stay relevant to prevailing market conditions (Weil & White, 1994).

In the current times, factors driving the digital revolution - such as connectivity among devices, abundance of data, low costs of computing, and evolution of key technologies such as Artificial Intelligence and Machine Learning - are making it possible to access and analyse huge amounts of data that was erstwhile considered impractical. The trends are secular across industry sectors and seem to be irreversible, thereby causing

user-specific data to emerge as a vital resource that can be tapped for competitive advantage by companies. While the technology savvy leaders are moving fast to grab the first mover advantage, the followers are playing catch up not to be left too behind in the race.

(16)

There have been ample publications, especially from research and consulting companies, that have estimated benefits that DT stands to offer. Some of these are presented below.

* Companies that become digital enterprises can look forward to a 26% increase in profitability, 12% increase in valuation, 9% increase in revenue to asset ratio -The Digital Advantage, Capgernini Consulting, 2015

" The top three reasons for embarking on a digital initiative are: 49% improved customer satisfaction, 44% better workforce productivity, 41% improved

customer experience - Exploiting Software Advantage, Freeform Dynamics, 2015 " Cloud computing alone can lead to IT cost savings of 25 to 50 percent - Digital

Transformation of Industries White Paper, World Economic Forum, 2016 " Annually, big data will reduce computing costs for companies by 33%, storage

costs by 38%, and bandwidth costs by 27% - Internet Trends Report, KPCB,

2015

" Companies that make extensive use of customer analytics see a 126% profit improvement over competitors - McKinsey, 2015

" _{The average initial increase in profits from big data investments was 6%,} increasing to 9% for investments spanning five years - Big Data Is Getting a Better Read, McKinsey, 2016

The motivation for pursuing DT is not just the upside. Companies that do not transform themselves as per changing times face an existential threat. Some noteworthy quotes that highlight the level of ongoing disruption are included below.

0 _{Since 2000, 52% of companies in the Fortune 500 have either gone bankrupt,} been acquired or ceased to exist - Forbes, Cloud Is The Foundation For Digital Transformation, 2014

0 75% of S&P 500 will be replaced by 2027 - Symposium India, Gartner, 2014

0 25% of businesses will lose competitive ranking due to digital incompetence - IT

(17)

* 84% believe big data analytics will "shift the competitive landscape for [their] industry" within a year and 87% believe so in three years. In addition, 89% believe a lack of big data adoption will create a risk of losing market share, and

75% cite growth as the key value of analytics - Industrial Internet Insights Report,

Accenture, 2014

Companies are experiencing the pressure to transform not just from customers or competitors, but also from their own employees who are demanding modern approaches or increasing levels of technology adoption (refer chart below).

U High 0 Medium

72%

32%

Customers Competitors Employees

(18)

2.3 Assessing the status-quo: Where do companies stand today?

Many of the research and consulting companies that have made predictions about DT have also conducted surveys to understand how companies are faring with respect to DT. The surveys have attempted to gauge participation levels as well as outcomes of DT efforts. Some relevant survey findings and related observations are captured below.

1. A wide range of industries are pursuing DT: The digital revolution has touched

almost all sectors and companies. As per Forbes, virtually every Forbes Global 2000 company is on some sort of digital transformation journey (B. Rogers,

2016). A survey of DT efforts across industries in European Union was

conducted by Strategy& in 2011. Their survey found that while a range of industries are pursuing DT, Financial Services & Insurance and Computers & Electronics are leading the pack whereas Construction and Hotels & Restaurants were lagging. Similar results were also found by a global survey conducted by MIT-Deloitte in 2014.

0 5 10 15 20 25 30 35 40 -45 50 55

Financial services & insurance

Computers & electronics

Media & telecommunications Automotive Equipment & macinery

Trade & retail Cwenicals Basic manufacturing Utiliies

Business & administrative services

Transportation & logistics

Consumer goods R -R

Real estate, rental & Ieaslng

Construction .

Hotels & restaurants A

43.3

Index average *Liading

5Midfld

Lagy ng

(19)

2. Organizations are in the early to middle stages of DT: A survey conducted by MIT-Deloitte in 2014 of more than 4,800 business executives across 27

industries and 129 countries worldwide found that -70% of participants believed their companies were either in the early or developing stages of becoming a

Digital Enterprise. It is also noteworthy that these participants believed lack of strategy and insufficient technical skills as being top barriers to their companies

becoming a Digital Enterprise.

tekspodents to tale their ccempay aa*ns d a ln organzlnea

-f-f uansfomed by ds9na $ and Ca0 6t*e - Ca a .C 1

LA I to 10 Three grouvs emerged: ~earhy" '

1 "develowng'

U-arid raat.Lmriq U-10),

MM~g

Survey feedback on

While a k of strategy hinders earty and developng =-rpams. secunty mses becme a greater

awcrn "O nwunrq diquta cc~p -gs

ft S- ia OA 3, Lw oft *WMg too $.wty&S

1. mai 3 ulia 5af 6R 3 1~td 1 1 0OW~k

digital transformation

-

status and barriers. Source: (Kane et al.,

2015)

3. Many DT efforts fail: As per McKinsey's 2018 Global Survey on Digital

Transformations, only 16% of the total -1,800 respondents said their

organizations' digital transformations have successfully improved performance and also equipped them to sustain changes in the long term. An additional 7% said that performance improved but that those improvements were not sustained. These participants represented a wide range of regions, industries, company sizes, functional specialties, and tenure. The results of this survey were also

significant in that they reported poorer results of DT when compared to the 30% success rate of organizational transformations in general. There have been similar other studies that found companies reporting that their outcomes of DT efforts were short of expectations.

(20)

Going by the above, we can conclude that while most companies are pursuing DT, many have not experienced the returns on DT efforts that they would have liked. The fact that the success rate of DT efforts seem to be inferior than other organizational transformations is a cause of concern. A relevant question would then be - what is it about DT that makes it so challenging?

(21)

2.4 Why is Digital Transformation challenging?

Many studies attribute the challenge of DT to its complexity and its nature of being a simultaneous multi-dimensional change. For example, Ismail et al suggest that the degree of complexity of a DT exceeds that of previous IT-enabled transformations

(Ismail, Khater, & Zaki, 2017). They conclude that DT needs to address the strategic roles of new digital technologies and capabilities for successful digital innovation in the digital world. They define DT as the process through which companies converge multiple new digital technologies, enhanced with ubiquitous connectivity, with the intention of reaching superior performance and sustained competitive advantage, by transforming multiple business dimensions, including the business model, the customer experience (comprising digitally enabled products and services) and operations

(comprising processes and decision-making), and simultaneously impacting people (including skills talent and culture) and networks (including the entire value system).

Ismail et al also cite several other reasons that make DT difficult. These include lack of clarity about the different available options and elements that managers need to

consider in their transformation approach, leadership challenges such as lack of urgency, vision and direction, and institutional ones related to the attitudes of older workers, legacy technology, innovation fatigue and politics.

A similar view is shared by David Rogers in his book on DT. He suggests that digital

technologies are transforming not just one aspect of business management but virtually every aspect. They are rewriting the rules of five key domains of strategy - customers, competition, data, innovation, and value. Companies that were established before the Internet need to realize that many of their fundamental assumptions must now be updated. Responding to these changes requires more than a piecemeal approach; it calls for a total integrated effort (D. Rogers, 2016).

Hess et al note that DT is a complex issue that affects many or all segments within a company. Managers have to simultaneously balance the exploration and exploitation of their firms' resources to achieve organizational agility -a necessary condition for the

(22)

successful transformation of their businesses. They believe that at present, managers often lack clarity about the different options and elements they need to consider in their digital transformation endeavours. As a consequence, they risk failing to consider important elements of digital transformation or disregarding solutions that are more favourable to their firms' specific situations, which could have unintended adverse consequences (Hess, Benlian, Matt, & Wiesbock, 2016).

Bilgeri et al conducted in-depth expert interviews across 11 companies with companies across the Internet of Things (loT) ecosystem and identified six main issues regarding how DT will affect large manufacturing companies' overall organizational structure. According to their analysis, the core of the problem lies with the uncertainty executives face of where and how to allocate and align digital capabilities within their organizational structures (Bilgeri, Wortmann, & Fleisch, 2017).

Authors Oswald et al share a summary of two studies that identified major hurdles that companies are facing in realizing the benefits of DT. The summary is shared below. It can be inferred that while the hurdles are of various nature, those pertaining to People and Organization seem to be among the dominant ones. This emphasises a need to also look at the problem as one that relates to general business transformation and change management. Indeed, as MIT-Capgemini Consulting study concluded "Whether using new or traditional technologies, the key to digital transformation is re-envisioning and driving change in how the company operates. That's a management and people challenge, not just a technology one." (MIT & Capgemini, 2011).

(23)

The biggest challenges for digital tran4ormation programs.

Study 1: MIT Sloan Management Review and Study 2: McKinsey & Company (Bughin Capgemini Consulting (Fitzgerald et at 2013) et al 2015)

I. No sense if urgency 39% 1. Lac f internal leadership or iaL- 31%

entfor digital projects

2. Not enough funding 33% 2. Lack of data and understanding of 125% how digital trends affect [ I

competitiveness

3. Limitations of IT systems 30% 3. Inability to keep pace with faster i25 %

speed

if

business under digital

4. Roles and respomnibilities are not 28 % 4. Inability to adopt an experimenia 15 %

Clear dton mindset thai is key for best

pray. iles

5. Lack of vision 28% 5. Lack of dedicated funding for dig 24 %

ital initiatives

6. Unclear business case 27% 6. Misaligned or competing interests 23 % between digital projects and

tradi-tional businesses

7. Business units implementing 24% 7. Lack qf senirvnwnagenenr 121 % independently in silos involvement or desire to change

cur-rent practices

8. Culture not amenable to change 19% 8. Lack of technology infrastructure 21 % oand insufficient IT systems I

9. Lack of leadership shills 16% 9. Organ tadonal structure not 120% designed appropriately

fir

digital

10. Regulatory concerns 9% 10. Busines pmceses too inflexible 19% to take advantage of new

opportunities

Perent of respondents Study 1: N= 159 executives and managers. Study 2: N =987 C-level executives

Italic text indicates People and organizational related challenges

Major hurdles to realize benefits of digitization. Source: (Oswald & Kleinemeier, 2017) Oswald et al also believe that the widespread deployment and adoption of digital

technologies has major organizational implications. They present the following six theses with respect to organizational implications of DT:

a. Digitization changes the way of working

b. Digitization increases the dynamic of change

c. Digitization requires new skills and competencies

d. Digitization requires new forms of leadership

e. Digitization requires new organizational capabilities

(24)

Finally, Nadeem et al note that business digital strategy, digital capabilities and

implementation of right set of organizational capabilities are critical requirements for an effective and efficient enterprise transformation towards creating superior electronic-commerce customer-centric services in the digital era (Nadeem, Abedin, Cerpa, & Chew, 2018).

Considering the discussion above, one can conclude that DT, although distinct in certain ways, is fundamentally a business transformation which in turn is described as the orchestrated redesign of the genetic architecture of a corporation (Morgan & Page,

2008). Gouillart and Kelly in their book "Transforming the Organization" mention that a

business transformation initiative achieves fundamental changes simultaneously in four respects:

1) changes in the company's view of itself and perceptions of the business situation 2) changes in the internal configuration and capabilities of the organization

3) changes throughout the value chain via improved alignment with marketplace

opportunity

4) changes in people-based matters such as behavioural factors and skill-sets

Overall, we conclude that DT is a complex multi-dimensional change that companies find challenging for several reasons, one of which is not having a good understanding of the capabilities required for transformation. In the next section, we attempt to identify

(25)

3. CAPABILITIES OF A DIGITAL ENTERPRISE 3.1 Literature Review

So far, we have introduced DT and explained some of the reasons why companies are finding it difficult to execute it in their companies. The focus of the first part of this thesis, as mentioned before, is to explore and understand the capabilities required to become a Digital Enterprise. Knowing specific capabilities that a company needs to develop in order to become a DE would be useful to its managers in managing the transformation. In this section, we begin with an attempt to understanding the meaning of the word "capability" and follow up with a review of capabilities required to become a Digital Enterprise as suggested by different authors and experts.

The term capability is widely used and is assumed to have been understood. However,

business capabilities are often confused with business processes and resources

(Michell, 2014). Michell conducted an extensive literature search to review and categorize existing definitions of the term "capability". A summary of his findings are

presented below.

Ref C: Defnition of Capability Xey Factors Xey Component Source

1 what a businessfmction does and what its what a function does a nd its Capability is related to workfunctions and lomann,

-externally visible behaviour is behaviour behaviour 2006

2 itsfundamental purpose in terms ofthe outcomes purpose, outcome, activity Capability relates to activity outcomes Merrifield et

of the activity al, 2008

3 ofrm's capacity to deploy Resources, usually in capacity to deploy Capability is a capacityto use resources Makadok,

combination, using organizational processes, to resources using 2001

effect a desired end. organisational processes

4 operations strategy involves exploiting exploiting resources Capabilities are functions of resources Slacket al,

capabilitiesofoperations resources' capabilities 2004

5 an organiation' abiliry to ssemble. Integrate, ability to assemble and Capability as an ability to do coordinate Sharadwa,

and deploy valued resources integrate resources resources for action 2000

6 process capability describes therange oferpected results of a process Capability relates to the result of a process Paul eta 1,

results that can be achieved byfollowing a 1993

software process

7 theability that an organisation, person or systems ability of a person or system Capability depends on resource Josey et al,

possesses 2009

9 abilities withina firm which can be linked abilities, process, outcome Capability as ability related to the specific Beimborn et

together asbusiness processes in order to enablea outcomeof a business process al, 2005

specift purpose or outcome'

9 capability is the capacity of a team ofresources to capacity of resources to capability relates togroups of resources Grant, 1991

perform some task oractivity' perform tasks

10 capabllities are'formed through the coordination coordination of activities capabilities depend on process l'afeez et al,

and integration of activities and processes and processes integration/coordination 2002

(26)

Michell observed the following key themes about business capabilities from the comparison of various definitions:

* Capabilities relate to work activities * Resources possess capability

" Capabilities are the potential for action " Capabilities relate to outcome/ value

He further notes that capabilities must provide the ability to deliver an outcome or a change adding value to the customer.

McGee notes that capabilities are firm specific. They are developed internally against the specific needs and ambitions of each company. They often depend on tacit

knowledge, are path dependent in that they emerge and develop over time, and are not in the form of assets that can be traded (McGee, 2016).

Following a resource based view, Henkel et al. define a capability as the ability of an organization to manage its resources to accomplish a task. They imply that the organization must have resources as well as the right capacity of those resources to perform the tasks. They use the notion of resource types (e.g. people, infrastructure, etc) and tasks in the form of execution templates (e.g. a documented manufacturing process). Further, they categorize capabilities as main capabilities and sub-capabilities. They consider a main capability of an enterprise to be the one that produces value to the enterprise's external stakeholders for which they are willing to pay (Henkel, Bider, &

Perjons, 2014).

On comparing the definitions and views of different authors, we can conclude that capabilities are a firm's ability to manage its resources to create outcomes of value. We now review the different capabilities required by a firm to become a Digital Enterprise as suggested by experts.

(27)

1. As per the MIT - Capgemini study, digital capabilities are a fundamental building block for transformation in customer experience, operational processes, and business models. The study identifies the following key capabilities:

a. Unified Data & Processes: This refers to a digital platform of integrated data and processes which would enable generation of a common view of

customers or products and overcome functioning in silos. This would do away with disparate systems, data definitions, and processes that exist within a company

b. Solution Delivery: This refers to the capabilities needed to modify

processes or build new methods onto the data and process platform. Solution delivery requires effective methods and strong skills in IT,

especially those pertaining to the use of emerging digital technologies and practices. This could entail partnerships with external vendors as well c. Analytics: This refers to combining integrated data with powerful analysis

tools for gaining strategic advantage over competitors

d. Business and IT integration: This refers to strong integration between

technology and business executives. The emphasis is on trust and shared understanding between the two while pursuing DT

While these are a good list of capabilities, they seem to be IT-focused.

2. Oswald et al suggest the following list of capabilities from a talent/ organization perspective (Oswald & Kleinemeier, 2017)

a. Digital skills & competencies in employees, built either by hiring or training

b. A formal organization with new roles/ titles (e.g. Chief Digital Officer)

c. Aligned KPIs and incentive systems

d. A system to monitor adoption process

e. Change management

3. IBM Institute for Business Value suggests the following six capabilities of DT

a. Business model innovation: building customer value as a core competency

(28)

b. Customer and community collaboration: engaging with customers fully via

various channels and touch points

c. Cross-channel integration: integrating digital and non-digital channels

d. Insights from analytics: taking advantage of predictive power of Big Data

and advanced analytics

e. Digitally enabled supply chain: optimizing and integrating all components of supply chain

f. Networked workforce: getting the right skills around the right business

opportunities

4. As per McKinsey, certain capabilities-especially those that build foundations for other key processes and activities-are more important than others for digital success. 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. They believe that companies having a higher digital quotient than others have an ability to engage customers digitally and to improve their cost performance in four areas: data-empowered decision making, connectivity, process automation, two-speed IT (i.e. 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) (Catlin, Scanlan, & Willmott, 2015)

5. Nadeem et al believe that currently there is an inconsistent understanding of

what constitutes organizational capabilities and a digital business strategy in a digital transformation process. They conduct a systematic literature review on a selected set of journals to explore what entails organizational capabilities and digital business strategy. They conclude that dimensions of organizational capabilities include digital leadership, agile & scalable operations, digitally

enabled CEX, digital artefacts, flexible and scalable digital platforms, internal and managerial capabilities, external collaboration of ecosystem of digital platforms,

(29)

dynamic capabilities, plug & play capabilities and operational capabilities (Nadeem et al., 2018)

On reviewing the definitions and views shared by different authors, we observe that some approaches identify required capabilities from a functional perspective (e.g. IT-centric, HR-centric), others take a practical approach deriving observations from industry surveys or consulting assignments, while the rest seem to conclude basis literature review. A list of required capabilities derived from first principles seems to be missing. The first part of this thesis aims to undertake an endeavour to fill that specific gap. Over the next couple of sections, we describe the approach taken and the

(30)

3.2 Identifying Capabilities from First Principles

Approach and Methodology

We adapt a method proposed by Michell in his paper aimed at bringing clarity in defining capabilities within an enterprise in general (Michell, 2014). The method, in summary, is as under

-1. Identify key business processes that create value in a company

2. Identify resources consumed or transformed in each of the processes

3. Then, identify and list capabilities required by the driving resource to coordinate

other resources and execute the processes creating value

He illustrates the method using a simple example of a pie serving restaurant. The capability template and its application to the example are presented below:

Capability Template (above) and Example (below). Source: (Michell, 2014)

Capability f(P, Rt, Ri) to: serve customised pies to order Driving Resource: Maitre de

Value: hand crafted country pies

Process (P) Tangible Resources (It) Intangible Resources (R) Pie Maki ng master chef, pastry chef, knowledge of pies, cooking s kills

cook

Res tarant serv ice waiter service skills

Bill ng front of house, order knowl edge of order value,

... .... ... .. ... system, till ...simple mat he matic s

We use this approach to arrive at a list of important business capabilities that a

Capability (P, Rt, R)to: action/deliveroble/conditions

Driving Resource. process owner

Value: related to customer need and business objectives and identifiable productsservices

Process (P) Tangible Resources (Rt) Intangible Resources (Ri)

description from driving, passive, active

(31)

strategy. Before we do that, however, it is necessary to explain the concepts that underpin the approach taken by Michell in his paper and by us in our endeavour.

Value

As per Michell, value can be simply a statement of the benefit. However, value should relate to customer needs and expectations and also to the business objectives. He suggests that value should be linked to identifiable products and services to enable a meaningful inventory of capability to be established that can help a business understand how value is developed by combinations of different resources and processes.

As per Valentina et al., sources and the contents of value creation may vary according to the different "targets or users for whom value can be created" Therefore, the concept of value regards not only financial performance but also market competitiveness, human resources involvement and commitment (talents' advantages and loyalty) and reputation (brand and image) (Della Corte & Del Gaudio, 2014)

For our endeavour, we take value as an expression of benefit to the internal or external stakeholders of an organization

Resources

Michell defines a resource as something having a capability for interaction with the environment to create value. He categorizes resources as tangible and intangible and summarizes their properties as under:

(32)

Tangible/ Intangible Resources. Source: (Michell, 2014)

Jay Barney's views on resources provide us greater depth and clarity. He mentions in his paper titled "Firm resources and sustained competitive advantage" that (Barney, 1991):

* Firm resources include all assets, capabilities, organizational processes, firm attributes, information, knowledge, etc. controlled by a firm that enable a firm to conceive of and implement strategies that improve its efficiency and

effectiveness

" Firm resources can be conveniently classified into three categories:

o Physical capital resources: these include physical technology used in a firm, firm's plant and equipment, its geographic location and access to raw materials

Tangible Resources People

Materials

Machines (passive/ICT enabled) Artefacts

Tools

Codified information and Knowledge Documents/forms/drawings

Properties

Can be physically touched Observably transformed

Observable capability of physicalaction/use Intangible Resources Software Knowledge Encoded information/data Intellectual property Culture/values Skills Behaviour Properties

Cannot be physically touched

Not observably transformed

(33)

o Human capital resources: these include training, experience, intelligence, judgement, relationships, insight of individual managers and workers in a

firm

o Organizational capital resources: these include formal reporting structure, formal and informal planning, controlling and coordinating systems as well as informal relationships within the firm and between the firm and its environment.

Henkel et al proposed an alternative definition of resources of an organization as "the products an organization owns, its personnel skills, its processes, and the information it controls" (Henkel et al., 2014)

Grant proposes to use "resources" to describe inputs that can, in general, be purchased on open markets and customized for use by the purchasers (McGee, 2016)

It is interesting to note how different authors look at resources differently. We observe that some of them consider capabilities and processes as resources too. However, for the purpose of our endeavour, we proceed with Michell's view of resources. He

differentiates between resources and capabilities by suggesting that capabilities are the potential for action whereas resources have capabilities for interaction with the

environment to create value. Michell also categorizes resources on another dimension based on their role as driving resource, utilized resource and consumed resource. Driving resources are very often intelligent resources that actively drive the process and coordinate the value added transformation. Examples of driving resources would thus include people and intelligent machines. Utilized resources are those which are utilised to transform the inputs e.g. a tool. Finally, consumed resources are those (usually) input

resources that get consumed as part of the conversion process, e.g. the solder used in soldering an electrical component.

(34)

Capability

Michell notes that capabilities provide the ability to deliver an outcome or a change adding value to the business/ customer. They are thus required by the driving resource to transform/ consume other resources while undertaking activities/ processes that add value. He suggests that capabilities are realized by interaction between resources and are inextricably linked to the processes and that the capabilities can be named using a verb. For example, a production line has the capability to manufacture by consuming/ transforming a set of resources and following certain activities/ processes.

As per Offerman et al., skills differ from capabilities in that skills refer to the abilities of persons, while capabilities, processes, and resources refer to organizational

components. They agree with Homann's and Wigotzki's definitions of business

capability as "a particular ability that a business may possess or exchange to achieve a specific corporate goal" (Offerman, Stettina, & Plaat, 2017).

Brits et al compile the following capability types that aim to fulfil organizational goals:

1. Functional capabilities: they deepen functional knowledge (e.g. research and

development, manufacturing knowledge and marketing expertise) gained through trial and error and experiments.

2. Integral capabilities: Integral capabilities bind together different functional capabilities and also absorb knowledge from external resources and use them productively

3. Strategic capabilities: Strategic capabilities, above and beyond basic capabilities

that enable the organizations to run as businesses, have three distinctive characteristics:

o Of value to the customer (externally focused);

o Better than that of the majority of other competitors; and o Difficult to imitate or replicate

(35)

Leonard (Leonard, 1998) analyses the nature of a capability and concludes that core capabilities "comprise at least four interdependent dimensions" as follows:

o Physical technical systems - machinery, databases, software systems etc. o Managerial systems - systems for the management of operations, including

operation of technical systems

o Skills and Knowledge (systems) - systems for the maintenance of personal and team skills and knowledge

o Values and Norms - systems for the regulation of behaviours and objectives in organizations

The above perspectives are useful in thinking about different capabilities when we set out to develop a capabilities list for Digital Enterprises from first principles. We begin by identifying capabilities for DT at functional level and then generate a list of generic but important capabilities a company needs to focus on. The steps followed are mentioned below:

1. First, we define the value the company expects to derive out of a given digital

transformation initiative at the functional level. Several management consulting companies have described the value DT offers to different business functions in

publications posted on their websites. We review these publications and articulate the value in a concise manner for each function. The value identified could be to the

external stakeholders (i.e. customers) or internal stakeholders (e.g. employers) and is largely generic to a business organization (i.e. not necessarily specific to an industry or a company)

2. Once the value is identified, the next step is to list the sequential operational steps involved in process of creating the said value using general understanding of

business. Any business process in practice is likely to involve a lot of sub-processes. We choose to focus on only those high-level processes/ steps that contribute

reasonable fraction of the total value expected to be delivered to the stakeholder. The process/ steps we work with are generic and not specific to a company

(36)

3. Next, a list of different resources required by the processes is listed. These

resources could be physical, people, or organizational and need to be categorized as driving resources, tangible resources and/ or intangible resources

4. We then list the capabilities required by the driving resource to transform/ consume other resources while undertaking the specific processes that add value. Key

capability themes are noted alongside for each of the processes for all the functions

5. Finally, we aggregate all capability themes to note generic company-level

(37)

3.3 Results of the research

We present the outcomes of the method for each function below. These business

functions together represent the typical business value chain of a company as identified and defined by renown academic, Michael Porter.

1. Procurement

Overall value: collaborative relationships with suppliers leading to efficient sourcing and innovation

Driving Resource: Procurement Manager

Major Tangible Resources: suppliers (vendors), servers, connected equipment, procurement team, R&D/ business/ IT team, data scientists

Major Intangible Resources: strategies (R&D, crowdsourcing, etc), ERP software, external databases, optimization software, data visualization software, connections with IT systems of suppliers, collaborative behaviour, cybersecurity software

Capabilities and Key Themes: These are identified basis the process explained in Section 3.2 above. The list of capabilities is a representative sample; a more

comprehensive list can be generated by further detailing the process/ sub-processes involved in creating value for the respective business function

Process Steps

Understand business needs Develop sourcing strategy Understand supplier base Select suppliers

Siqn contracts/ agreements Manage paperwork/ process Manage performance Exchange ideas

Sample Capabilities of Digital Enterprise: To

Link R&D, Business and Procurement strategy Automate demand recognition

Forecast raw material price trends

Develop optimal sourcing plans across suppliers Automate cost comparisons

Automate Purchase Requisitions/ Purchase Orders Automate purchase-to-pay process

Automate claim management

Enable dynamic dashboards/ scorecards Predict supply side risks

Track shipment real-time Crowdsource innovation Key Theme Innovation culture Automation of processes Data-driven decision-making Data-driven decision-making Automation of processes Automation of processes Automation of processes Automation of processes User-centered design Data-driven decision-making Scalable IT infrastructure Innovation focus 2. Manufacturing

(38)

Driving Resource: Manufacturing Manager

Major Tangible Resources: sensors, actuators, embedded things/ devices, network connections, 3D printers, data servers (local/ cloud), control systems (e.g. SCADA), smart devices, production team, IT team, UI/ UX designers, data scientists

Major Intangible Resources: design/ modelling skills, dynamic adaption abilities, big data tools for aggregation/ processing, Artificial Intelligence (Al)/ Machine Learning (ML) algorithms, production standards, cybersecurity software

Procesa Steps Sample Capabilties of Digital Enterpriis: To Key T hema

Create virtual production models/ digital twins Run what-if scenarios

Enable rapid experimentation/ simulation Enable in-production optimization Automate machine checks Predict avoidable downtime

Produce (Print) on demand/ near customer Auto-regulate energy consumption Automate process control

Receive production system alerts on personal devices Automate quality checks of raw material

Automate deviation detection Automate defects detection

Predict maintenance needs

Enable condition monitoring of equipment Enable remote monitoring & control of equipment Automate maintenance ticket generation

Design/ Modelling, Scalable r infrastructure Data-driven decision-making

Data-driven decision-making Automation of processes Automation of processes Data-driven decision-making Scalable r infrastructure, Flexibility Automation of processes Automation of processes User-centered design Automation of processes Automation of processes Automation of processes Data-driven decision-making

Automation of processes, Scalable rT infrastructure Automation of processes

Scalable IT infrastructure

3. Lociistics & Distribution

Overall value: right quantity of stock available at the right location using optimal amount of resources in a dynamically changing scenario

Driving Resource: Logistics & Distribution Manager

Major Tangible Resources: robots, GPS systems, sensors, data servers (local/ cloud), Develop prodution

plan / schedule

Produce goods

Test goods

(39)

Major Intangible Resources: Tools for data aggregation/ processing, Al/ ML algorithms, inventory standards, Sales & Operations Planning/ Integrated Business Planning methods, cybersecurity software

Process Steps Sampie Capabilities of Digital Enterprise: To Key Theme

Plan inventory Optimize inventory at multiple levels Data-driven decision-making Create real-time demand signals Data-driven decision-making

Ship goods Enable flexible routing of fleet Data-driven decision-making, Scalable IT infrastructure Deploy drones for delivery Scalable F infrastructure, Flexibility

Store goods Deploy robots for packaging/ picking/ loading, etc Automation of processes

Real-time multi-level inventory monitoring Data-driven decision-making, Scalable Fr infrastructure Monitor performance create dynamic dashboards User-centered design

Receive alerts on personal devices User-centered design

4. Marketinq

Overall value: acquire, convert and retain digitally connected customers in a cost-effective manner

Driving Resource: Digital Marketing Manager

Major Tangible Resources: servers (local/ cloud), marketing team, IT team, UI / UX

team, data scientists

Major Intangible Resources: consumer datasets, Al/ ML algorithms, Search Engine Optimization tools, digital platforms for advertising, cybersecurity software

(40)

Process Steps Sample Capabilities of Digital Enterprise: To Key Theme

Idlentify targets Aggregate diverse customer data sources Scalable IT infrastructure Conduct customer micro-segmentation Data-driven decision-making Perform search engine optimization Data-driven decision-making Deploy targeted ad campaigns leveraging social media Data-driven decision-making Reach targets Deploy sales force as per micro-market data Data-driven decision-making

Deploy chatbots for quick response to inquiries User-centered design Auto-recommend products Automation of processes Enable product feature comparison User-centered design Convert targets i Enable price comparison User-centered design

coners Enable cashless payment Scalable IT infrastructure, Partnershi customers _{Provide transparency in transaction} _{User-centered design}

Provide secure transactions Scalable IT infrastructure Execute real-time price optimization Data-driven decision-making Retain customers Predict future needs of customers Data-driven decision-making

Monitor/ measure customer joumey User-centered design Analyze performance Assimilate multi-channel customer feedback User-centered design

Conduct A/B testing Data-driven decision-making

5. Finance & Accounts

Overall value: acquire and utilize financial resources in an efficient and legally compliant manner

Driving Resource: Finance & Accounts Manager

Major Tangible Resources: servers, data scientists, finance team, IT team, UI team

Major Intangible Resources: RPA software, Al/ ML algorithms, compliance standards, ERP software

(41)

Process Steps Sample Capabilities of Digital Enterprise: To Pre-fill planning & budgeting templates

Plan & Budget Automate scenario analysis Predict training needs Automate payables process Manage/ Control Generate auto compliance alerts

Automate reconciliation process

Measure Deploy dynamic performance dashboards Auto detect risky transactions

Key Theme Automation of processes Automation of processes Data-driven decision-making Automation of processes Automation of processes Automation of processes User-centered design Automation of processes 6. Human Resources

Overall value: maximize productivity of an organization by enhancing effectiveness of its employees

Driving Resource: Human Resources Manager

Major Tangible Resources: HR team, employees across the organization

Major Intangible Resources: RPA software, Al/ ML algorithms, ERP software, Internal guidelines/ standards

Process Steps LSample Capab!ilitlesof Digital E4iterpiseTe . Key Theme Recruit

Onboard Train & Develop Manage performance Manage payroll

Manage culture

Auto-screen candidates

Deploy bots to onboard new recruits Develop apps for training

Deploy e-leaming platforms Auto-suggest improvement areas

Automate routine processes

Deploy collaboration tools, hackathons

Automation of processes User-centered design User-centered design User-centered design Data-driven decision-making Automation of processes Innovation culture 7. Information Technology

Overall value: technological readiness to support transformation journeys of various functions of the company in a cost-effective manner