How digital leaders outperform their peers

One of the big global technology stories this year is the expanding divide between the digital haves and have-nots. As the World Economic Forum’s new Global Information Technology Report 2015 highlights, the full benefits of technology are only available in countries that have embraced digital technology for the vast majority of their citizens. There’s a similar digital dichotomy playing out in the corporate world too. The companies that are viewed as digital leaders are outperforming their peers in terms of growth, profits, and market valuation. It’s increasingly clear that digital has become core to driving growth and transformation. You no longer have a choice. To lead in your industry you must be a leader in digital. And if you don’t lead, you lose.

If everyone can appreciate the transformational power of digital, why do some companies get it right while others get it so terribly wrong? Why do so many companies cling to an outmoded technology or fumble with outdated processes and products, while others capitalize on the opportunities of the digital era? It’s usually not because of one major event or one big decision. Eighty percent of corporate value destruction comes from bad strategy decisions. The trick is to improve your hit rate so that time after time you make the right strategic choices to drive both technology-enabled growth and business model transformation. We studied some of the world’s most successful companies and uncovered five critical ways to get it right.

1. In digital, as in everything, stay true to who you are. Every truly great strategy tackles the question “Who are we going to be?” As digital becomes central to your strategy, answering this question is as important as ever. The most capable companies have a clear answer; they understand the job they are uniquely qualified to do in the market. And they use this identity to drive growth over the long term. They resist the temptation to follow new technological approaches that don’t fit their identity. Every choice about digital technology, business model, or product experience is aligned with who they are.

Apple remained true to its vaunted human-centered design capability, applying it to personal computers, smartphones, tablets, and, most recently, the watch. A decade ago, LEGO had expanded rapidly into theme parks, clothing, books, and video games and got into trouble —losing almost US$1 million a day. In a remarkable turnaround, they are now the biggest toy company in the world. They achieved this by streamlining and refocusing on the building system that is the core of LEGO’s unique identity. Its recent efforts in digitally enabled offerings like Mindstorms and Dimensions are further examples of staying true to that “brick by brick” identity and extending it “click by click.”

2. Build capabilities, not IT functionality. The most successful companies don’t focus only on functional excellence. That’s a trap. You will end up in the same place as your competitors, following the same benchmarks to create similar products and services. Instead, focus on building a handful of distinctive capabilities — things your company can do better than anyone else. These are usually complex and highly cross-functional combinations of people, processes, tools, and expertise that make your strategy executable.

For example, the most successful “sharing economy” companies, such as Airbnb, Lending Club, TaskRabbit, and Uber, don’t just rely on their business models. They invest significant effort into developing the capabilities required to support a simple, real-time, user-friendly mobile service that seamlessly brings together both buyers and sellers. The retailer Nordstrom is investing $1.2 billion this year — largely aimed at extending its capabilities to deliver a personal, seamless customer experience into digital channels. The company already gets a much higher-than-average 18 percent of its sales digitally, fueled in part by innovative online acquisitions like flash sales site HauteLook and personalized men’s clothing service Trunk Club, and is clearly building for more.

3. Cut costs and invest in reimagination. In digital investments, cycle times are short. You need to manage costs with great agility and flexibility, so you can redirect resources rapidly to the initiatives that further your strategy and lead to growth. You don’t always know in advance which investments will fit best, so be prepared to pivot quickly and to ruthlessly sunset the initiatives that turn out to be distractions. In other words, run your digital efforts and investments like the startups you compete against — even if you’re inside a big company. This will help unlock the entrepreneurial mind-set you need.

“How Digital Leaders Outperform Their Peers” is reprinted with permission from the strategy+business website, published by PwC Strategy& LLC. © 2015 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details. Publication does not imply endorsement of views by the World Economic Forum.

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Authors: Cesare Mainardi is the CEO of Strategy&. Christopher A.H. Vollmer is managing director of digital services at Strategy&.

Image: A man types on a computer keyboard in Warsaw in this February 28, 2013 illustration file picture. REUTERS/Kacper Pempel/Files.