Digital Business Ambition: Transform or

Optimize?
Refreshed 4 December 2018, Published 30 June 2017 - ID G00333254 - 16 min read
FoundationalThis research is reviewed periodically for accuracy.
By Analysts Hung LeHong, Graham Waller

When building and expanding a digital business, CIOs will benefit from being more
specific about the ambition of the digital business strategy. Is the goal to transform
the business model or to optimize the existing one? This document guides CIOs
through this decision.
Overview
Key Findings

 Digital business transformation is a type of digital journey that has the ambition
of pursuing net-new revenue streams, product/services and business models. It is
favored by enterprises that must adapt to an industry in disruption, or ones that want
to disrupt their industries.
 Digital business optimization is a type of digital journey that has the ambition of
significantly improving existing business models through improved productivity,
greater revenue generation of existing streams and improved customer experience. It
is favored by enterprises whose industries are not going through disruption in the near
term.
 Enterprises will tend to minimize the amount of change and risk by favoring
optimization over transformation. This can be a risky course, as there have been some
major misreads on industries being disrupted in recent years. Between the Internet of
Things, platform business models and blockchain, almost any industry has the
potential to be disrupted.

Recommendations
CIOs who are building or expanding a digital business:

 Determine your enterprise's mix of digital business optimization and

transformation by looking outside your enterprise first. If your industry (or an adjacent
industry) is going through disruptive changes, then you will have no choice but to set a
transformation course yourselves. If your industry is not undergoing a transformation,
then you have the option of pursuing a business optimization course — unless you
want to be the disruptor and force the industry to transform.
 Set a budget and planning horizon that reflects your chosen digital ambition.
This problem is especially pertinent to enterprises choosing a transformation course.
Many times we see enterprises claim that they are pursuing transformation, but then
rely on a small innovation team and budget to pursue these ends. If you are truly
pursuing digital business transformation, you should plan on starting new business
units, adding/shifting manufacturing capacity, adding new products to your pipeline
and/or making mergers and acquisitions.

Analysis
Digital transformation and digital business optimization — what do these terms mean
to your enterprise? Many CIOs and digital business leaders are at a stage where they
need to get more specific about how far their enterprise will pursue digital business.
Should the digital business journey aim to optimize the existing business model
and/or introduce new business models and revenue sources?
Said another way, what is the digital ambition of the enterprise? The answer to this
question fundamentally changes the scope of work and roadmap in becoming a digital
business.
The transformational aspects of digital business receive the most attention. Everyone
has heard about the phenomenal growth of Uber and the potential of the Internet of
Things (IoT). However, most companies do not aim at digital transformation, at least
for now. According to the 2017 Gartner CEO survey, 42% of enterprises plan to use
digital technology to optimize the current business, not for transformation, while 17%
have no ambition for digital business at all (see "2017 CEO Survey: CIOs Must Scale
Up Digital Business"). Both paths carry risks. If the enterprise goes for transformation
but the market or organization is not ready, the results are below expectations. Money
is made, but just not enough to satisfy the growth expectations of the investment. If
the enterprise focuses on optimization while the market and competitors are
transforming, it may never be able to catch up. CEOs and boards will often consult the
digital business leader about which direction their digital business strategy should
take.
CIOs and digital business leaders can formulate a recommendation by taking three
steps:

1. Consider the options for digital ambition: business optimization and/or

transformation?
2. Look at the timing of transformation in your industry and adjacent industries.
3. Consider your competitive stance when choosing a digital ambition.

Consider the Options for Digital Ambition: Business Optimization and/or

Transformation?
 Start by considering whether the enterprise should optimize the existing business
model or introduce new business models and revenue sources (see Figure 1). The
answer to this question determines the scope of work in becoming a digital business.
Each option in turn offers further choices to narrow the focus of the enterprise's digital
business strategy.
Figure 1. What Is Your Digital Ambition?
Source: Gartner (June 2017)

Digital Business Optimization

Digital business technologies and approaches can be used to improve the enterprise
without changing its business model (represented on the left side of Figure 1).
Specifically, an enterprise can:

 Improve productivity by removing cost, improving productivity of machines and

employees. The IoT can improve asset productivity. Robotic process automation can
improve employee productivity, and so can a digital workplace. These are all examples
of types of initiatives that lead to improved productivity without changing the business
model.
 Improve existing revenue by leveraging analytics and AI to better forecast
demand/supply and optimize prices and promotions. Digital marketing and sales
technologies and approaches will also increase spend by customers while customer
service initiatives can improve retention.
 Improve the customer experience: Digital channels often add both a self-serve
and improved experience. Using IoT to track the length of queues, ETA of vehicles and
inventory status of tanks or shelves also improves the customer experience, providing
more visibility to statuses they care about. AI in the form of virtual assistants can also
improve the customer experience. These are all examples of initiatives that don't
 change the business model, yet improve the enterprise's ability to serve its customers
and constituents.

The combination of these three goals lead to a type of digital ambition that is best
described as digital business optimization.
A more detailed perspective of the options of pursuing digital business optimization is
highlighted in Figure 2. Use this graphic to identify the possible areas of business
optimization.
Figure 2. Digital Business Optimization Adds Significant Value Without Changing
Business Model
Source: Gartner (June 2017)

Digital Business Transformation

In contrast to digital business optimization, there are digital business initiatives that
result in net-new revenue streams, products/services and even new business units
with a new business model:

 Launch net-new digitally enabled products and services: The IoT enables
manufacturers of products to sell a brand-new class of their product (e.g., a
connected lamp or a connected industrial dryer). Once connected, connected services
(e.g., monitoring services) can also generate new revenue. Even new revenue-
generating services can be borne out of digital approaches and technologies:
o New loan products are being created for individuals and small
businesses who don't have formal credit bureaus/scores. Fintechs (e.g., Kabbage) and
companies like Alibaba use new data sources coming from digital ecosystems (e.g.,
payment, reputation scores, social networks) and new risk algorithms to assess credit
 worthiness. The end result is a class of loan products that serve a market that has
never been served by formal financial services institutions.
 Pursue new business models: New business models that are made financially
viable and technically possible by digital technologies and approaches include
platform businesses such as:
o Multisided markets (e.g., Uber)
o New insurance models that leverage P2P approaches (e.g.,
Friendsurance)
o Metered and as-a-service models such as pay as you drive insurance
o Commerce-that-comes-to-you models such as Booster Fuels, which
delivers fuel to your vehicle instead you going to a gas station

 Large enterprises can create new business units or acquire startups to pursue
these new business models. Sometimes the new business models lead to ventures in
adjacent or new industries. For example, utility companies may get into battery
storage, car companies may get into public transportation or wealth management may
get into health insurance.

The combination of these two goals leads to a type of digital ambition that is best
described as digital business transformation. A more detailed perspective of the
options for pursuing Digital Business Transformation is highlighted in Figure 3. Use
this graphic to identify the possible areas of business transformation. You can also
reference "Six Ways to Earn New Digital Revenue" for detailed explanations and
examples.
Figure 3. Digital Business Transformation Leads to Net-New Revenue and Business
Models
Source: Gartner (June 2017)
 Look at the Timing of Transformation in Your Industry and Adjacent
Industries
Even CIOs and digital business leaders who recommend an optimization approach
should pay attention to digital transformation in their industry. Digital transformation
creates a new paradigm that makes the old business model obsolete. Consequently,
an optimization strategy leaves the enterprise in a weaker competitive position. In
other words, optimization works only for so long; then it becomes a liability.
Digital transformations come at the apex of an S-curve (see Figure 4). In the digital
world it's often a technology that emerges to make possible a new product or
business model. It grows until it dominates the industry. At the height of its
dominance, an even newer technology can appear, along with new products and
business models. This takes revenue from the old model and transforms the industry:

 During the growth period, along the rising slope of the S-curve, an optimization
strategy makes sense.
 When the industry nears the apex, a transformation strategy makes sense.

An industry can undergo a series of transformations. Take the example in Figure 4.

Physical a sold in record stores dominated the music industry well into the 1990s.
Then music pirate sites such as Napster changed listeners' habits. In the mid-2000s,
digital download services such as Apple's iTunes became popular. Streaming music
services such as Pandora and Spotify changed the industry again.
Figure 4. Technology-Driven Transformation in the Music Industry
Source: Gartner (June 2017)

The cadence of transformation will vary, depending on the nature of the industry and
technology developments. The music industry has undergone rapid transformations.
Other industries have resisted transformation for a long time. The hotel industry,
 dominated by global brands, looked the same for decades until Airbnb changed the
terms of competition. Thus, an optimization strategy can work for a long time, but
even the most stable industry is liable to transform at some point.
When Will Your Industry Hit Its Tipping Point?
The triple tipping point consists of three variables that determine the moment of
transformation:

 Culture— Technology tests our cultural and social boundaries. CIOs and digital
business leaders will have to make judgment calls about when cultural tipping points
will happen — there are no simple demographics or mathematical calculations for it.
The rate of cultural change is not the same across countries, communities and social
groups.
 Regulation— New regulations and tax changes can create new business
opportunities. More often, regulation will hold back digital business innovation;
however, the lack of regulatory certainty also can be an enabler. New technology can
be positioned in a way that circumvents existing regulation.
 Technology— Don't underestimate the nonlinear pace of change. Previously,
technology companies mainly had to wrestle with information technology tipping
points. Now, all companies do because the next generation of everyday products will
include digital capability. A digital business leader focused on internal systems and
ERP will quickly fall behind the curve.

When these variables align, transformation occurs rapidly.

CIOs and digital business leaders pursuing optimization can use the triple tipping
point to determine how long their strategy will remain valid. Those pursuing
transformation can use the triple tipping point to assess when is the right time to
move (see "Master the Triple Tipping Point to Time Investments in Digital Business
Strategy").
Enterprises also need to consider whether society is ready for the new paradigm, and
whether laws and regulations permit it. The variables will seldom mature at the same
rate and converge perfectly at the same time. Thus, CIOs and digital business leaders
will need to make judgment calls about when to urge the enterprise to invest.
Consider Your Competitive Stance When Choosing a Digital Ambition
Once CIOs, digital business leaders and their enterprises understand when/if their
industry will hit a tipping point, they are in a position to choose a digital ambition. At a
simplistic level, if the industry is about to tip, then the enterprise should pursue a
transformation path. If it is not about to tip, then they can choose a digital business
optimization path.
However, the industry dynamics are not the only determinant. The competitive or
enterprise culture profile also determines the chosen path. More aggressive
companies often choose to follow a digital transformation path no matter how far the
tipping point is — they want to be early adopters. Some even plan on being the
disruptor that will cause the rest of the industry to tip.
Combining the industry's tipping point with an enterprise's chosen competitive stance
or culture results in Figure 5. At a point in time (noted by the vertical line), a more
aggressive company may be pursuing a transformation path well before the tipping
point. An average company may pursue an optimization path. Late-adopter companies
may actually be pursuing neither of these paths. They may be implementing digital
technologies such as using more cloud or adding more digital channels (e.g., mobile)
— but the enterprise is not going any further to improve the business in the ways listed
in Figure 1. We call this state digital technology enablement. Often, a digital technology
enablement path is not one that is deliberately chosen by the enterprise. It is a
situation that can occur when IT wants to push digital technologies and concepts
forward, but the rest of the organization does not have the same aspirations to use
these to improve the business. What they end up with is a more digitally capable IT
(think cloud, SaaS, mobile, application programming interfaces [APIs], digital
channels), but not a digitally optimized or transformed business.
Figure 5. When to Transform, Optimize or Enable?
Source: Gartner (June 2017)

The Path to Becoming a Digital Business Is Nonsequential

A digital business leader can take their enterprise from digital technology enablement,
to digital business optimization, to digital business transformation. Yet, we have found
that this is usually not the chosen approach. Enterprises will tend to pursue a
combination of these paths in parallel (see Figure 6).
Figure 6. Planning Your Digital Journey
Source: Gartner (June 2017)
 Transformation class— These enterprises adopt emerging technologies and
approaches rapidly in order to gain a competitive advantage. They will invest early on
in digital business transformation. They also look for ways to accelerate it, such as by:

 Lobbying the government for favorable regulations

 Launching marketing campaigns to get people used to a new technology

Transformation-class enterprises see digital transformation occurring within their

planning horizon, meaning that they dedicate significant funding and head count to
transformation in the current (and future) fiscal year. They place the greatest strategic
importance on investments to exploit the coming transformation and less importance
on optimizing current business models. They give attention to digital technologies as
a foundation for their enablement of their transformation and optimization goals.
Optimization class— These enterprises view industry tipping points as occurring
beyond their planning horizon. Most of their funding and head count will go into
optimizing their core businesses. They believe that digital business can super-charge
their existing business model — even while they wait for the transformation stage.
Most current efforts go into areas such as:

 Productivity improvements
 Better customer and employee experiences
 Better utilization of assets and inventory
 Although they focus on optimization, these enterprises also have a modest effort in
exploring and monitoring upcoming transformative and disruptive opportunities
(represented by the thin blue line in Figure 6). For example, there may be a small
innovation group looking ahead and experimenting. They calculate that they will deal
with transformation when it actually occurs in future planning horizons.
Enablement class— CIOs and digital business leaders in these enterprises may not be
able to win support for either a digital business optimization or transformation
strategy. Instead, they can lay some of the groundwork by implementing cloud
services, mobile computing or other conventional IT projects that digital business
often uses. Enablement-class enterprises believe that digital transformation will occur
far in the future (or in different regions — not theirs). They put their current efforts into
enabling digital technologies and hold off on pursuing optimization or transformation-
class journeys.
Risks of Choosing the Wrong Digital Ambition
Enterprises can choose to pursue any mix of digital ambitions but choosing the wrong
ones will cause problems:

 Transformation-class enterprises can waste a lot of time and money on a

transformation that doesn't materialize. In some cases, they make "bet the enterprise"
commitments to digital transformation. If they succeed, though, they can set the
terms of competition for the whole industry. The best performers learn how to drive
transformation as standard practice.
 Optimization-class enterprises will not invest on digital transformation, but
they also deny themselves the chance to change the competitive dynamics in their
market. Enterprises choosing optimization should not allow the industry tipping point
to take them by surprise. This risk is pronounced in industries that have a fast pace of
change.
 Enablement-class enterprises bet that their market will endure and look the
same as it has always looked. If they are right, they will continue with minor
improvements. If a transformation does occur, they may be so far behind that they
cannot compete anymore.

Recommendations:
CIOs and digital business leaders:

 Determine your enterprise's mix of digital business optimization and

transformation by looking outside your enterprise first. If your industry (or an adjacent
industry) is going through disruptive changes, then you will have no choice but to set a
transformation course yourselves. If your industry is not undergoing a transformation,
you have the option of pursuing a business optimization course — unless you want to
be the disruptor and force the industry to transform.
 Set a budget and planning horizon that reflects your chosen digital ambition.
This problem is especially pertinent to enterprises choosing a transformation course.
Many times we see enterprises claim that they are pursuing transformation, but then
rely on a small innovation team and budget to pursue these ends. If truly pursuing
digital business transformation, you should plan on starting new business units,
adding/shifting manufacturing capacity, adding new products to your pipeline, and/or
making mergers and acquisitions.

Hung LeHongDistinguished VP Analyst

Graham WallerDistinguished VP Analyst

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