A recent Harvard Business School study documented that “leading digital companies generate better gross margins, better earnings and better net income than organizations that have not adopted a digital-first business growth strategy. Early digital technology adopters delivered a three-year average gross margin 55 percent compared to 37 percent for digital technology laggards.”
What is driving this improved value creation performance is the emergence of new, more profitable business models that deploy new digital technologies like social, mobile, cloud, analytics and IoT.
As a recent Forbes analysis shows, the market assigns different valuations to companies based on their underlying business model as shown below:
- Asset Builders who produce and sell physical things are usually priced at .5 – 2x revenues
- Service Providers who offer professional services are usually priced at 1 – 3x revenues
- Technology Creators who develop new technologies are usually priced at 3 – 7x revenues
- Network Orchestrators who manage social, business and transactional networks are usually priced at 4 – 11x revenues
As these statistics validate, adopting and deploying digital technologies results in market differentiating value creation.
A great majority of companies are still behind the digital technology adoption curve
A Harvey Nash/KPMG survey of 4500 technology leaders found that only 18 percent said their company was effectively using digital technologies to advance their business strategy.
A report from Deloitte found that only 5 percent of companies they surveyed said they have strong digital leadership development programs.
In light of the statistical evidence above, every company now needs to significantly up its ability to utilize digital technology as a value creation driver.
Using the 4 Zones Model as a value creation driver
Start the 4 Zones Model value creation process by asking some core foundational questions:
- How does our company create value today?
- What could dilute or disrupt that value?
- How can our company use digital technology to drive new value creation?
The 4 Zones Model enables senior business leaders to segment value creation by zone which ultimately results in the development of a portfolio of value creation priorities.
Like a business investment portfolio where risk and return are spread across multiple investment options, the 4 Zones value creation portfolio is designed to create and deliver new value in four different categories.
Productivity Zone Value Creation: The productivity zone provides multiple opportunities to drive value creation. The first is to recover trapped value from legacy systems of record by consolidating, replacing or eliminating systems of record that no longer create value for the company. The second is to significantly reduce technical debt. The third is to outsource SOR maintenance to a managed services provider.
Use Case: AIG deployed five “virtual engineers” inside its infrastructure to collect and analyze system performance data. A typical network outage would go into a queue and take engineers 3.5 hours to address. Using virtual assistants most outages were fixed in ten minutes and over the first year returned 23,000 hours of trapped value back to the company.
Performance Zone Value Creation: Active value creation in this zone is achieved by developing and deploying systems of engagement and systems of intelligence that increase customer experience value. SOEs and SOIs drive value through new revenue growth from new products, new customer acquisitions, current customer retention and upsell, channel expansion and pricing strategy.
Use Case: Intel used new systems of intelligence to forecast the right product mix and customer demand to drive $265 million in revenue uplift over the previous two years. They deployed new systems of engagement to customize their reseller customer engagement process to deliver 2500 new customers and $200 million in incremental revenue.
Incubation Zone Value Creation: Value is created in this zone through identifying, testing and validating next generation product, service and business ideas and leveraging digital technology enabled innovation to deploy them. Utilizing Agile, Lean and DevOps processes can significantly increase speed to market and time to value for all technology projects.
- Use Case: A large state government launched a $650 million innovation project which returned $4.5 billon in additional tax revenue, a 7x ROI, by using digital technology to enable self-service access on the web and becoming more adept at using tax payer data.
Transformation Zone Value Creation: Value is created in this zone by developing and deploying digital technologies that enable a company to launch and scale a material net new line of business. It also allows companies to use digital technologies to leverage under utilized assets to gain entry to adjacent markets at minimal marginal costs.
Use Case: Union Pacific railroad created and launched PS Technology, a separate commercial technology business, to sell the digital technology apps the company originally developed for its own use to partners and competitors. As a result, they are now one of the largest providers of locomotive simulation systems which has generated $50 million in new revenues.
The 4 Zones technology value creation portfolio approach provides a framework, vocabulary and decision-making process that enables senior leadership teams to discuss, segment and prioritize multiple value creation options. It also enables them to justify specific value creation recommendations by their ability to effectively adopt and utilize digital technology tools and resources.
The use cases above provide very compelling evidence that those companies who are successfully deploying digital technologies as a primary source of value creation are generating market differentiating results.
As always, I am interested in your comments, feedback and perspectives on the ideas put forth in this blog. Please e-mail them to me here. And, if this content could be useful to someone you know please share it here: