Three Questions to Ask About Your Digital Strategy

Leaders who are shaping digital strategy face a fundamental dilemma: Should they try to disrupt the market, using digital technologies to reshape both the value chain and performance expectations? Or should they try to adapt, using digital technologies to enhance the company’s existing value chain? This choice has critical implications for an organization’s performance, yet many leaders struggle to frame the decision.

It is tempting to think that a digital disruption strategy is always the best choice. Netflix famously redefined customer expectations in the movie rental market by making content accessible immediately and ended up rewiring the industry value chain by moving away from mail-order DVDs and toward platform streaming. But other examples illustrate the potential pitfalls of a disruption strategy, such as elusive or significantly delayed profits. For example, Peloton set out to disrupt the home fitness industry, but company performance plummeted as customers canceled subscriptions and logistics operations failed. And Uber — another poster child of digital disruption — had $32 billion in cumulative losses over 14 years before it finally turned a profit.

What about the companies that have succeeded with an adaptation digital strategy? Our research studied both adapters and disrupters. Consider Australia’s leading retailer, Woolworths: It adeptly incorporated digital technologies to bolster its logistics operations and enrich customers’ mobile shopping experience, but it also remained a classic brick-and-mortar retailer (one that is profitable to this day). Other established retailers, such as Carrefour, Tesco, and Walmart, also implemented successful digital strategies that focused on adapting instead of disrupting traditional retail operations. Yet one does not need to look far to see the risks of an inadequate adaptation strategy. Bed Bath & Beyond, Borders, Circuit City, Pier 1 Imports, and Toys R Us are all examples of retail companies that failed to adapt well enough.

The reality is that both disruption and adaptation can be successful digital strategies. While Woolworths succeeded with a digital adaptation strategy, Amazon’s digital disruption strategy wove digital technology into the very fabric of the retail value chain. Amazon not only enhanced but also revolutionized the retail experience and set new industry standards for product range, delivery, and return logistics. These divergent strategies by Woolworths and Amazon raise the question: Which digital strategy will perform best for your organization?

Our research shows that there is no silver bullet for choosing the optimal blend of digital strategy.1 (See “The Research.”) Instead, the effectiveness of a digital strategy depends on three key questions you must ask yourself:

• What are our performance goals in the short or long term?
• What digital strategies are our competitors pursuing?
• How receptive is our market to digital disruption?

The answers to these questions can point you to the most effective digital strategy for your organization.

Question 1: What are our performance goals in the short or long term?

To put this another way, do you want to make waves or sail better? When shaping a digital strategy, understanding your company’s performance goals and the time horizon for achieving them is crucial. Are you aiming to improve internally — or race past the competition?

Your organization’s primary objective may be to improve its absolute performance by boosting operational efficiency, expanding profits, or elevating customer satisfaction. The focus is on self-improvement and achieving higher levels of performance that are quantifiable and can be directly attributed to internal initiatives and innovations. One example is Toyota’s use of the internet of things and AI in production lines to enhance manufacturing precision and efficiency, with a goal of higher-quality output and reduced costs.

Absolute performance is not important to every company, however. Your goal might be to surpass competitors. That is, you are striving for relative performance, measured by how well you perform compared with your peers. Essentially, it’s about outpacing the competition. Netflix is a good example of the pursuit of relative performance goals: Netflix quickly gained ground on competitors such as Blockbuster by setting new industry standards instead of winning against established absolute performance metrics (such as the number of DVDs rented or number of stores owned). Netflix shifted from DVD rentals to streaming, which incurred higher setup costs but fundamentally changed how entertainment is consumed.

The key insight from our research is that digital disruption strategies yield superior relative performance for companies — but at the expense of absolute performance. You must deploy digital technologies in ways that align with your company’s specific goals.

Integrating digital tools to improve operational efficiencies and customer satisfaction will be more effective for businesses striving for absolute performance. For example, German appliance manufacturer Bosch has successfully integrated IoT solutions to enhance its established manufacturing processes, improving its internal benchmarks rather than introducing new competitive dynamics.

Conversely, for organizations targeting relative performance gains, adopting a disruptive digital strategy can provide the leverage they need to outperform competitors in the long term. This is exactly what celebrated digital disrupters like Uber and Airbnb have done: Both companies overhauled traditional market dynamics and redefined customer expectations for transportation and vacationing, respectively, but at the cost of a long struggle to generate profits.

The time dimension matters, as the case of Uber shows. The relative performance advantage of a digital disruption may, in the long run, translate into absolute performance advantages, provided the company drives competitors out of the market. Hence, your digital strategy must be based on your organization’s performance objectives.

Question 2: What digital strategies are our competitors pursuing?

When competitors launch a digital disruption, your company might feel like the game is over. However, you should remember that digital disruption is risky. It comes at the expense of absolute performance, especially in the short run. Disruptive companies may face resistance from consumers and regulators, as well as technological uncertainty.

When General Electric invested aggressively in IoT platforms by creating the GE Digital business unit and a dedicated cloud infrastructure to deploy the GE Predix platform in 2015, rival Siemens closely watched. A year later, Siemens responded with an adaptation strategy — digitizing operations and plant automation with its MindSphere platform, which it integrated into existing business units and scaled through existing cloud providers. Facing mounting losses, GE sold the Predix platform and the business unit.

Adopting a second-mover strategy in the face of digital disrupters can be advantageous. Instead of launching digital disruptions of your own (and putting your existing value chain and customers at risk), adapting means you can observe the disrupters and make appropriate amendments at the right time. Following an adaptation strategy does not mean ignoring competitors’ disruptions; rather, it means closely monitoring these disruptions and selectively implementing and perfecting proven innovations. As a second mover, you can learn from your rivals’ successes and failures.

This approach helps mitigate risks and leverages the insights gained from the disrupter’s experience, positioning your organization to capitalize on new market dynamics with a more informed and strategic implementation. Chinese automaker BYD’s responses to Tesla’s digital disruption of the electric vehicle (EV) market is a perfect example. BYD churns out EVs that have smarter software than Tesla’s do, in addition to producing a larger variety of models at a higher level of efficiency. To do so, BYD emulates well-known continuous improvement principles from the Toyota production system while using an EV value chain that is even more integrated than Tesla’s (stretching from batteries to semiconductors to seats). Hence, when competitors make waves, it might be better to stay the course but sail better.

Question 3: How receptive is our market to digital disruption?

Another risk: Not all marketplaces welcome digital disruptions with open arms. Customers, regulatory environments, and the surrounding ecosystems have varying levels of receptiveness to digital disruptions. Markets with low openness are characterized by customer resistance, rigid regulatory bodies, and a lack of complementary infrastructure — all of which make it tough for digital disruptions to take effect.

For instance, despite incorporating some innovative technology, Google Glass struggled to gain traction due to privacy concerns, social acceptance issues, and a lack of applications and services to complement the wearable device. Similarly, Uber faced stiff regulatory challenges and inadequate ride-sharing infrastructure in many cities worldwide, hindering its expansion and resulting in operational setbacks.

You must carefully gauge market openness before committing to a digital disruption strategy. This means analyzing markets and putting yourself in the shoes of a broad range of stakeholders. If a market shows low openness, you should evaluate a more cautious approach (and certainly avoid going all in on digital disruption).

An adaptation strategy helps align your plans with customer readiness, regulatory landscapes, and the maturity of the supporting ecosystem — all important factors in making digital initiatives not only innovative but also viable and sustainable over the long term.

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Crafting a successful digital strategy involves carefully considering your performance objectives, your competitors’ moves, and market openness.

Whether you aim to make waves with digital disruptions, sail better by enhancing existing capabilities with digital innovations, or even blend both strategies, your choice should be informed by a deep understanding of your goals and the competitive landscape. Despite the popular appeal of a digital disruption strategy, it might not be the solution. For a more careful approach to digital strategy, you should start by agreeing on a planning horizon, analyzing your rivals’ strategies, and setting your own performance goals.