Volume XV, Number 6, June 2015
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Jeanne W. Ross, Director & Principal Research ScienƟst
Ina SebasƟan, Research Associate
Nils O. Fonstad, Research ScienƟst
MIT Center for InformaƟon Systems Research
If your company was successful in the pre-digital economy, beware of two
potential pitfalls as you transition to the digital economy:
1. Developing and executing a strategy for every potentially useful new
and exciting technology
2. Thinking the digital economy is not a particularly big deal for your
company or industry
The first of these two approaches will waste precious resources creating
intriguing but ultimately non-strategic technology silos. The second will
carve a path toward increasingly low-margin businesses.
So how does a company
To prioritize investments, march into the digital
leaders must clarify whether economy with confidence,
purpose, and a high prob-
customer engagement or ability of success? Define
digitized solutions offers the more a digital strategy—now.
compelling value proposition. A digital strategy is
In this briefing we
describe early findings from MIT CISR research on digital strategies to
help you define and execute a digital strategy.
Recognize the Impact of SMACIT
Technologies like social, mobile, analytics, cloud, and the Internet of
Things—which together we refer to as SMACIT—are disrupting businesses.
It’s important to note, though, that it’s not any single technology that is
causing the disruption. Rather, it’s the confluence of these technologies,
compounded by the steady arrival of other powerful and readily accessible
technologies (e.g., voice recognition, artificial intelligence, biometrics). This
expanding array of technologies offers companies almost unlimited
opportunities to enhance their value proposition. To do so effectively,
companies must address two challenges: (1) choosing from all the
potential investment opportunities, and (2) synchronizing the activities of
the many business units, functions, and specialists involved in developing,
implementing, communicating, selling, and operating new technology-
based services. This briefing focuses on the first challenge, while a future
© 2015 MIT Sloan CISR, Ross, Sebastian, and Fonstad. CISR Research Briefings are published monthly to update MIT CISR patrons
and sponsors on current research projects.
briefing will introduce management practices
that address the synchronization challenge.
Investment Decisions
In considering the investment opportunities re-
lated to SMACIT and other powerful, readily
accessible technologies, recognizing in which
to—and not to—invest is critical to success. To
complicate investment decisions, all digital
strategies demand investments in three inter-
dependent components: customer engagement,
digitized solutions, and operational backbone
(see figure 1).1
To prioritize investments both in technology
and in the business changes the investments
engender, leaders must start by clarifying how
the company intends to compete in the digital
economy. This decision is driven by an under-
standing as to whether customer engagement or
digitized solutions offers the more compelling
value proposition.
Customer Engagement
Customer engagement focuses on interacting
with customers in more meaningful ways by pro-
viding ever-increasing personalized, convenient,
fun, hassle-free customer transactions, service,
and information. Companies with non-digital
histories are attempting to emulate the easy
online and mobile experiences that companies
like Amazon.com, Uber, and Airbnb have made
standard. For many companies this means creat-
ing seamless omnichannel experiences so that
customers can order, inquire, pay, and receive
support in a consistent way from any channel at
any time. These interactions build loyalty in
both B2C and B2B contexts.
1 Readers familiar with Treacy & Wiersema (“Cus-
tomer Intimacy and Other Value Disciplines,” Har-
vard Business Review, January–February 1993) will
recognize the related concepts of customer intima-
cy, product leadership, and operational excellence.
 CISR Research Briefing, Vol. XV, No. 6 Page 2
Customer engagement supports customers’ buying choices. Especially
when customers’ decisions are made difficult by the range of choices or the
implications of a choice, a digital strategy maps out a path of increasingly
helpful, desirable customer engagements that make choices easier and
acquisitions more convenient and pleasant (even exciting). Companies that
get a lead in providing exceptional customer service (think Nordstrom,
USAA, Apple, and Amazon) can then keep piling on new business and
technology capabilities that keep them ahead of competitors.
Digitized Solutions
Digitized solutions are products and services that are increasingly enhanced
with digital information and digital capabilities in order to help solve customer
problems. This digital enhancement—which typically involves packaging
products with real-time data—changes the value proposition for the cus-
tomer. Instead of acquiring a product, a customer may acquire a solution
that guarantees certain outcomes. Over time, digitized solutions often
change a business model by moving the revenue stream from the sale of an
asset to recurring revenue from the sale of a sophisticated service.
Digitized solu-
A company cannot invest only in the area tions support
customers in
that best defines its value proposition, be it
their use of a
customer engagement or digitized solutions. company’s
Any digital strategy comprises three product or ser-
vice. They pro-
interdependent components. vide flow of
information
and expertise to help customers
generate increasing value from a company’s
products and services over time. A digital strategy maintains competitive
advantage from the constant stream of innovative information and digital
capabilities that helps a company’s customers run and improve their busi-
nesses (or lives). This is how companies like Ferrovial, General Electric,
and Schneider Electric are approaching the digital economy.
Although the strategic choice to focus on customer engagement or digitized
solutions helps target investments, it is not possible only to invest in the area
that best defines where a company sees its value proposition. The second
investment component in each digital strategy is the other of these two
capabilities. In other words, companies that focus on customer engage-
ment eventually find that they create demand for digitized solutions. And com-
panies that focus on digitized solutions must make valuable information avail-
able to customers. Investments in the secondary customer-focused compo-
nent, however, can be constrained to those that follow directly from the
company’s stated value proposition. It is important not to confuse priorities.
Operational Backbone
The two customer-focused components do not fully define investment
requirements. Because management needs to focus on delivering digitized
solutions and extraordinary customer experience, leaders cannot afford to
allocate bandwidth to crises resulting from poorly designed or executed
core processes. Thus, every digital strategy depends on a strong operational
backbone. This backbone comprises a set of core transactions and highly
June 2015
automated back-office processes that are low
cost, high quality, secure, and reliable. The
operational backbone—which we typically refer
to as a digitized platform—constitutes table
stakes for companies hoping to compete in the
digital economy.
Despite being essential to digital strategy, the
operational backbone tends to generate little
excitement in most companies’ investment dis-
cussions. But most customer engagement initia-
tives and digitized solutions are powerful only if
they are integrated into a company’s core capa-
bilities. They often require transparency into data
or reuse of standard business processes. Thus,
management needs to have regular discussions
of the essential requirements for the operational
backbone—and then make the necessary
investments.
Customer Engagement‐Driven Digital
Strategy at Nordstrom, Inc.
The American upscale fashion retailer Nordstrom,
Inc. is an example of a company that is pursuing a
digital strategy focused on customer engagement.
Nordstrom has articulated its number one goal as
improving customer service.2 To meet this goal,
Nordstrom has introduced an increasingly rapid
series of innovations that enhance customer
engagement. These efforts commenced with
Nordstrom.com in 1998, but didn’t really take off
until Nordstrom introduced its mobile app in
2011. Over the next three years, the company
introduced technology-enabled services in rapid
succession, including mobile checkout at Nord-
strom Rack stores, enabled by POS device-bearing
employees; Twilio text messaging-based customer
enticement via Nordstrom’s NEXT app;
Like2Buy, Nordstrom’s Instagram shop; and in-
store merchandising of Nordstrom inventory that
is popular on Pinterest and Wanelo. Nordstrom’s
salespeople are empowered with detailed custom-
er and inventory information in order to learn
what individual customers want and find ways
to get it to them.
The success of Nordstrom’s customer engage-
ment initiatives has helped create a more het-
erogeneous clientele. These customers have
introduced demands for new styles and services,
which has forced Nordstrom to invest in digitized
2 Nordstrom, Inc., “Nordstrom Investor Presenta-
tion,” June 10, 2015.
June 2015
solutions that enable new partnerships. These
digitized solutions constitute a secondary, but
essential, requirement for Nordstrom’s success.
Nordstrom’s operating backbone is built
around the need for detailed customer buying
data and a transparent supply chain, which
allows employees and customers to order mer-
chandise from any store or warehouse. In addi-
tion, Nordstrom can introduce new customer
engagement capabilities rapidly, because the
data needed is readily available.
Figure 1: Two OpƟons for a Digital Business
Strategy
Page 3 CISR Research Briefing, Vol. XV, No. 6
Digi zed Solu ons‐Driven Digital Strategy at Ferrovial
Ferrovial, the Spanish infrastructure and municipal services company,
pursues a digital strategy focused on digitized solutions. With a goal of
developing sustainable solutions in four lines of business—infrastructure
services, toll roads, construction, and airports—the company has intro-
duced a series of innovations that embellishes its traditional products and
services with analytics.
Relying on the Internet of Things and sophisticated algorithms, Ferrovial is
building toll highways that dynamically set prices every five minutes based
on traffic volumes. The company has introduced the Energy Management
and Monitoring Operational System (EMMOS), a solution that among
other things provides customers with information on their usage of natural
resources and helps them identify energy savings opportunities. Future
solutions will help customers identify potential infrastructure improve-
ments to manage energy consumption.
Ferrovial’s digitized solutions dictate investment priorities, but those solu-
tions become more valuable as the company finds increasingly innovative
ways to enhance customer engagement. EMMOS, for example, comes
packaged with mobile delivery of data and alerts to customers. Ferrovial
also invests in an operational backbone that provides standard technology
services whose reuse accelerates delivery of new digitized solutions.
The Synchroniza on Challenge
As companies invest in new technologies, they are fundamentally changing
their relationships with customers. The impacts of these new and trans-
formed relationships with customers resonate throughout the company
and are most notable in the increased integration of the activities of its
employees who in some way touch customers or the services provided to
them. Leaders have observed that the pace of change makes it difficult to
synchronize all these decisions and activities.
The need to coordinate activities and synchronize business changes is
straining traditional organizational management and governance designs.
MIT CISR is studying how companies will design themselves to achieve
these objectives, but we already see evidence that those designs will flatten
organizational hierarchies, facilitate collaboration, empower frontline
employees, modularize business activities, and deliver transparently priced
IT services to innovative business leaders. In short, the execution of digital
strategies will radically change management practice.
Revving‐up for the Digital Economy
It’s easy to respond to the disruption from SMACIT by investing in a
series of “cool” applications that are easily mimicked. But such a strategy
will never raise the bar against competitors. Companies that are successful
in the digital economy choose a focal point—customer engagement or
digitized solutions—to guide investment decisions, recognizing that the
focus on the customer does not preclude the need to invest in an
operational backbone. Then these companies redesign management
practices to execute the digital strategy in a synchronized manner.