BCG Henderson Institute

The Pathway to Digital Transformation

Digital transformation is a top strategic priority for business leaders today. IDC estimates that firms will invest around $6.8 trillion between 2020–2023 for this objective.

Digital transformation is a top strategic priority for business leaders today. IDC estimates that firms will invest around $6.8 trillion between 2020–2023 for this objective. My research reveals three key strategies that can expand the scope of a firm’s digital transformation initiatives.

One: Use Interactive Data

Most firms rely on episodic data to run their businesses. This is data that stems from discrete events such as the shipment of a component or the sale of a product. Interactive data on the other hand is streamed continuously through user interactions, such as when posting likes on Facebook, searching on Google, or browsing Amazon’s websites. Indeed, it is this kind of data that has powered the exponential growth of these digital platforms. Facebook, Google, and Amazon control over 60% of the $200 billion digital advertising business using this kind of data. Today, with the help of sensors and IoT, all firms can use interactive data to drive value creation.

Sensors in furnaces that track and maintain temperature levels in the right range while superheating molten steel for example, dramatically improve quality and yield. Beyond such productivity improvements, interactive data from products and customers can also drive revolutionary user experiences to expand a firm’s business scope. Sleep Number, a mattress company, uses sensors to track sleep patterns that can predict health risks for individual users, such as sleep apnea or restless leg syndrome. Partnering with the Mayo Clinic they aim to go beyond selling mattresses to become a wellness company. Allstate Insurance’s app-based sensors help users adopt safer driving habits, to go beyond delivering accident compensation to offering accident prevention services.

Two: Turn Value Chains into New Digital Ecosystems

To leverage the value of interactive data, a firm needs digital ecosystems. Digital ecosystems are networks of data generators and recipients, most evident in platforms like Uber and Airbnb. Also notable is how their digital ecosystems amplify the power of their interactive data as they expand their networks of drivers/riders or landlords/renters. Firms that are not digital platforms, however, can turn their value chains into digital ecosystems.

One way is to use existing value chain infrastructures to create data generating and sharing networks with the help of sensors and IoT. These are production ecosystems or digital networks that can improve how firms produce and sell goods. Think of “lights out factories” where hundreds of connected assets intelligently communicate to operate with little human intervention. Consider Caterpillar, which tracks data on the wear and tear of their equipment to predict likely component failures and offers predictive maintenance services for new revenue streams. Or GE’s smart value chains, which track sensor data from its jet engines to generate new data-driven services such as providing real-time guidance to pilots to fly in ways that improve fuel efficiencies. Operations, R&D, product development, marketing, sales, and after-sales service units — if digitally connected to receive, analyze, generate, share, and react to sensor and IoT data — can deliver such added value.

A second way is to go beyond a firm’s value chain infrastructure and harness the power of connected third-party assets and entities that complement a product’s use. These are consumption ecosystems or digital networks that expand the ways a firm’s products are consumed. Imagine smart toothbrushes connected to a network of dentists that track users’ dental health to predict and prevent cavities. Think of smart mattresses that shut off lights, music, or televisions just when a user falls asleep. Or smart inhalers (used to manage asthma) that track environmental allergens and warn a user before they trigger an asthmatic attack.

To harness value from such consumption ecosystems, however, firms must envision their business scope beyond what is defined by their traditional value chains. It requires noticing new ways by which smart products and customers could be connected to a growing set of complementary third-party entities. Operating in consumption ecosystems also entails firms to extend their value chains into digital platforms and facilitate exchanges among product users and these third-party entities, just as how Uber does with drivers and riders.

Three: Build a Network Effect Advantage

Interactive data when shared within digital ecosystems can generate a network effect advantage. This is because network size can make a product more valuable to each individual user. When a smart toothbrush expands its network of users and dentists, it becomes more valuable to each user. Larger customer bases provide more data for better assessments of each individual’s dental health; larger networks of dentists provide each customer with more choices.

This advantage is different from that generated by economies of scale, wherein higher production or marketing investments accompanied by dominant market shares reduce unit costs. Economies of scale can build formidable entry barriers within industries and give product firms substantial competitive clout. But data and digital ecosystems and their associated network effects provide firms with added advantages beyond that offered by scale. And such advantages can even grow exponentially to bestow winner-take-all opportunities.

Building a network effect advantage requires firms to generate and use interactive data by constructing vibrant digital ecosystems. This is not easy to achieve. But with thoughtful approaches, a firm can expand its digital transformation scope and improve returns from their investments.

To sum up, if your firm is engaged in digital transformation, ask the following three questions:

  1. How expansive is the role of interactive data in our business models?
  2. How extensively have we turned our value chains into digital ecosystems?
  3. How much of a network effect advantage does our firm have?
Sources & Notes