Digitization: Opportunities, Threats and Company Models

The MIT Center for Information Systems Research (CISR) has recently published another Research Briefing [i] with partial disclosures of results of the ambitious research project on next-generation businesses, directed by Prof. Weill [ii],[iii]. 

The project is “trying to understand what the next generation enterprise will be like in five to seven years.” Its “key insight” is that “businesses have the opportunity to move from value chains to ecosystems”, thus replacing the old seminal Porter’s paradigm [iv]. A business ecosystems being “a coordinated network of enterprises, devices, and consumers that creates value”. 

This concept of ‘business ecosystem’ is an update or generalization, from a digital perspective, of the ‘extended enterprise’ concept [v]. Ecosystems are companies that are “e.g., more networked, with more shared information and feedback loops”. “Ecosystems typically have two kinds of players: drivers, who set the rules; and participants…” .

The project maps in a 2x2 grid (Fig. 1) the variety of business models of the 30 (large) companies studied. Its horizontal axis is the continuum of business designs ranging from ‘value chain’ to ‘ecosystem’. Its vertical axis is the depth of knowledge the company has of its end consumer, continually growing from none, little and partial to complete.

  (The quotations [“ “] above are from Weill 2013, those following are from Weill    2014 ).

Digitization offers important opportunities to enterprises and entails risks. The most significant opportunity is probably that “it can leverage a strong customer relationship and increase cross-selling opportunities”. “… the threats are often real and immediate … in this newly digital multichannel world … enterprises in other industries that had relationships with their customers and were able to offer competing products and services.” More about this, below. 

The project has identified the critical issues that characterize the impact of digitization in a company. They are presented as a 7 questions questionnaire, all questions weighing the same. They refer initially to the company’s “bestselling product or service” but should be further applied to the remaining products / services. 

Five of the questions are about the current or future ‘digital nature’ of the product / service: can it be digitally specified, searched, ordered, delivered, improved, or made more valuable? A sixth one is whether it can be replaced with an alternative digital offering. And the seventh is about the risk of other industries -having access to your own customers- deciding to offer it.

Fifty-five percent (55%) within a group of over one hundred executives scored over 70%: “… significant [“red-zone”] impact from digitization. … 67% of respondents said they were experiencing a red-zone level of threat from enterprises in other industries that had relationships with their customers and were able to offer competing products or services…” (e.g.: financial services provided by other sector’s vast networks). 

The project has identified “two very interesting trends”. The first one is a “movement [first] up and [then] to the right” (Fig. 1). It is expected that there will be one Ecosystem Driver per sector (retail, financial services, healthcare, etc.) [vi]. The second trend is “around Modular Producers … “[Where] we expect to see the top one to three players dominate in each niche…”.

Each of the four next-generation enterprise models shows different relative performances (as measured along 3 indicators: time to market, profitability and revenue growth). 

Ecosystem Drivers are the best performers on time to market and revenue growth. Omnichannels are the leaders on profitability. 

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[i] (Weill 2014). Weill, P. and Woerner, S. L.  Digitization: Threat or Opportunity? MIT Sloan CISR Research Briefing, Vol. XIII, No. 4, April 2013. Retrieved 20140815. May require registration. 

[ii] How Digitization is Driving the Next-Generation Enterprise. Retrieved 20140815.

[iii] (Weill 2013). Weill, P. and Woerner, S. L. The Next-Generation Enterprise: Thriving in an Increasingly Digital Ecosystem, MIT Sloan CISR Research Briefing, Vol. XIII, No. 4, April 2013. Retrieved 20140815. May require registration.

[iv] Porter, M. E. (1985). Competitive Advantage: Creating and Sustaining Superior Performance. New York.: Simon and Schuster. Retrieved 20140815.

[v] Extended enterprise. Retrieved 20140815. 

[vi] The Weill 2014 briefing comments on the Spanish-based bank BBVA (a CISR Sponsor) efforts to become an Ecosystem Driver.