BCG Henderson Institute

How Digital Natives are Building Optionality for an Uncertain Future

Drawing lessons from digital-first companies, incumbent firms should embrace their clients’ desire to explore and experiment, treat them as partners in the creative process, and close the gap between innovation and execution.

The triumph of Everything Everywhere All at Once at the 95th Academy Awards was a victory for a new paradigm of storytelling, in which characters are not pawns in the hands of fate or gods. Instead, the movie’s protagonist has the power to tap into infinite versions of herself, each specialized in a skill that helps her overcome an unexpected obstacle. Given the unprecedented uncertainty and volatility of our reality, it is no surprise that audiences and critics find such a story engaging.

Businesses, too, are confronted with this new reality. For executives today, sticking to historical sources of competitive advantage—like scale of operations, based on physical assets—is no longer enough. Rather, as we argue in a recent article, they must be able to develop a portfolio of options that can engender success in any future state of the world, and they need to change how they think about strategy.

Embracing a new business model built around optionality seems counterintuitive because options seem to provide a poor return on investment: The search for ideas is expensive—particularly with increased costs of capital. And their yield is low, as few options are turned into real products, and if they are, bringing them to market takes a long time.

However, we believe this is an outdated notion. The economics of optionality can be vastly improved—and many digital native companies are showing which tactics are key to doing so. In this article, we explore these companies’ approaches and show how they can be implemented at any firm.

Approach #1: Co-creating with clients

Traditionally, the game of designing products or services was largely about guessing what the clients want, ideally supported by some market research. This process made development processes costly, as well as risky. Today, digital technologies have made it possible to identify customers’ desires much more efficiently and accurately through co-creation.

The simplest way to do this is to offer customizable products. For example, Indochino took the traditional business of made-to-measure suits and updated it for the digital age: Their online store allows users to design suits and shirts, choosing cut and fabrics that will be fitted to their measurements. With this model, users are offered a broad selection of products, but Indochino does not have to invest upfront into designs that will not sell—meaning this approach to optionality enhances efficiency.

Taking co-creation one step further, companies like Roblox give their platform users the tools to build the products they desire themselves. Instead of guessing which experiences will be most engaging, the platform focuses on maximizing ease of development for users, so they can realize their dream creation, as well as inspire (and be inspired by) the creations of others. As a result, new ideas for games and other experiences spread and implementations become more refined over time, leading to more engaging entertainment and broad choice. This virtuous circle has helped Roblox reach enormous scale; in 2020, more than half of U.S. children below age of 16 had played on the platform. In the first quarter of 2023, the company reported 22% year-on-year growth to 66 million daily users, disproving forecast that the platform’s success was owed to lack of alternative entertainment options during the pandemic.

While this platform approach is powerful, its potential in generating options is still limited, as customers are invited for co-creation only within a pre-defined sandbox. An even broader expansion of this model is embraced in open-source software development, which is founded on the rule that anyone can inspect, modify, and enhance the code. For example, Datadog, a provider of a cloud-based monitoring and analytics platform, welcomes contributions from its user community. These contributions are integrated into the core product, extending the service’s functionality for all customers. This model also informs Datadog of the kinds of problems their customers need to address, which inspires the firm’s own development efforts.

While co-creation can be enhanced by digital tools, it is not limited to digital native companies. Incumbents can also leverage the customer’s creativity in shaping their products and expanding their potential use cases. Take Intel’s breakthrough design of a programmable microprocessor as an example: Before the introduction of this product, chips were custom designed for a specific purpose, which made it costly and time-consuming for Intel to engage with any new client. With the introduction of their 4004 general-purpose programmable microprocessor, Intel gave users the power to tailor the chip to their applications—rather than the other way around—thus multiplying the use cases for Intel’s products. This was a major step toward the current ubiquity of chips in products such as computers, phones, cars, and washing machines.

Approach #2: Facilitating, shaping, and monetizing the client’s exploration process

Another approach to enhancing the efficiency and effectiveness of your company’s development of options is to leverage the customer’s own exploration processes.

First, companies can observe what their clients are looking for, thereby gaining insight into their unmet needs, which can spark innovation. For example, Spotify realized that the value proposition of a music streaming service would not only be the ability to instantly access songs people already know they want to listen to, but also the ability to discover new artists and albums they may enjoy. It developed “Discover Weekly,” a personalized playlist of recommended new music, which uses data collected from millions of users exploring Spotify’s catalogue to predict which songs an individual might find appealing. By focusing on facilitating such customer exploration, Spotify has created a source of competitive advantage that depends on the power of its algorithms, and which is more difficult to imitate than the breadth of its catalogue or the reliability and sound quality of its app.

Second, companies can shape and influence customers’ exploration processes. Most e-commerce platforms shape exploration by providing recommendations—think of “wear it with” or “other buyers liked” tabs—which expose more of their products to clients. This, in turn, increases the potential yield on each of their options. For example, it has been reported that about half of all products sold by Amazon are first presented to customers by a personalized recommendation engine.

Finally, companies can directly monetize their clients’ exploration processes. Pinterest has placed this at the core of its business model: Their platform is the tool of choice for anyone wanting to collect inspiration (called “pins”) in categories such as fashion, vacations, event planning, and cooking, thanks to effective algorithms suggesting relevant content and offerings. The digital exploration platform monetizes search in two ways: indirectly, by selling personalized advertisements that are served to customers during exploration, and directly, by turning the exploration platform into a marketplace where pins are shoppable.

Non-digital companies can similarly embrace the exploratory needs of clients to inspire their innovation processes. Vince, a fashion brand that traditionally sold its clothing through department stores like Nordstrom’s, is now experimenting with clothing rental subscriptions: For a fixed monthly fee, clients receive a set of garments from a pre-selected list to wear for as long as they like and then swap for the next batch of items, with the option to buy each piece. Through this service, clients enjoy more frequent updates to their wardrobe at a lower cost without compromising on quality, while Vince creates a new revenue stream and learns more about its clients’ preferences.

Approach #3: Blurring the lines between innovation and daily business

Besides finding new avenues for identifying ideas, improving the economics of optionality also requires changing the process by which they are transformed into offerings. This entails eliminating the common separation between innovation and daily business—a separation that impedes the flow of information across the organization and introduces time delays from ideation to market.

The easiest place to start is to feed the learnings from daily operations back into innovation. A tight feedback loop between developing and using a product is at the core of the success of Slack, the business communication and productivity software. Originally, the tool that became Slack was created as a side project for a team of developers working on a video game called Glitch, who were looking to improve communication in their team. As both users and creators of the tool, the team could quickly see which features worked best and what could make the tool even better. When Glitch failed to take off, the company realized that in Slack they had built something valuable that could help other teams be more productive. Slack became an instant success thanks to how well it catered to teams’ collaboration needs.

Another strategy is to test ideas with customers early and frequently. In software development, releasing often and early has already become the standard. Besides major version upgrades that introduce new functionalities or visual overhauls, users frequently receive minor releases, in which features are added for testing or bugs are fixed. Frequently, software is now released as a beta, inviting users to test it and identify issues for developers to fix. Consider the successful launch of ChatGPT, which was made available for free to spark interest but also to improve the technology based on user interactions.

Key to this iterative approach is that it is not run in parallel to execution—for example, with focus groups or in test markets—but as a part of execution. Embedding components of search into execution can take the form of experimentation. For example, A/B testing changes to the design of webpages to identify what will yield the highest level of engagement, pioneered by platforms such as Netflix or, is now a standard practice in development of online platforms.

Firms like online marketplace Etsy have built sophisticated infrastructure to enable this experimentation, making it possible for every department to autonomously test new features—from a change in color of the logo or a different welcome message, to different sizes of product pictures. On top of individual tests, Etsy is running higher-level persistent experiments to understand the joint impact of changes on the bottom line, as individual upgrades come from departments that may be maximizing different success metrics.

Another way to integrate search and execution processes more tightly is to follow an approach of “civic innovation.” Here, the search for new solutions is not reserved for an isolated R&D department, but instead is the responsibility of all employees. For example, Google has long had its “20% rule,” which allowed each employee to devote a significant portion of their worktime to passion projects. Many popular Google products, like Gmail or Google News, were created by employees who used this time to build services that they would like to use.

Non-digital incumbents can also bring execution and exploration closer together. For example, many brick-and-mortar retailers conduct elaborate experiments to determine the optimal positioning of products on their shelves. They try out alternative layouts in some stores and compare the sales outcomes to the baseline. Sometimes these experiments are targeted at answering concrete questions, like when Kroger tried to determine whether plant-based meat should be placed close to conventional meat or in a separate section.

Other incumbents are diversifying into complimentary software to decrease the distance between their design and sales processes. For example, Enphase Energy, a developer and manufacturer of solar micro-inventers, is developing software for panel installers that simplifies the sales process by helping installers navigate the different options in Enphase’s product portfolio. This enables Enphase to learn about consumer preferences at the stage when they are selecting the best product for their needs, rather than relying on backward-looking sales data.

In a world of radical uncertainty, there is no longer a limited set of scenarios business can plan for. Rather, they face a near-infinite set of potential future states of the world—and need to develop options that could enable them to thrive in each of these settings.

Many digital natives are using clever tactics to multiply their options quickly and at low costs. These same tactics are relevant to legacy firms. While technology is a crucial enabler, optionality is, first and foremost, about the three approaches detailed above: Seeing clients as partners in the creative process, recognizing that clients care as much about exploring options as about satisfying their needs, and understanding that the traditional division between firm’s innovation and execution efforts is arbitrary, and can be overcome.

The final frontier in optionality for digital natives and legacy firms alike will be combining these tactics into a holistic approach that can unlock further potential.

Sources & Notes