Volume XV, Number 6, June 2015

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Jeanne W. Ross, Director & Principal Research ScienƟst briefing will introduce management practices
Ina SebasƟan, Research Associate that address the synchronization challenge.
Nils O. Fonstad, Research ScienƟst
Investment Decisions
MIT Center for InformaƟon Systems Research
In considering the investment opportunities re-
If your company was successful in the pre-digital economy, beware of two lated to SMACIT and other powerful, readily
potential pitfalls as you transition to the digital economy: accessible technologies, recognizing in which
1. Developing and executing a strategy for every potentially useful new to—and not to—invest is critical to success. To
and exciting technology complicate investment decisions, all digital
2. Thinking the digital economy is not a particularly big deal for your strategies demand investments in three inter-
company or industry dependent components: customer engagement,
digitized solutions, and operational backbone
The first of these two approaches will waste precious resources creating (see figure 1).1
intriguing but ultimately non-strategic technology silos. The second will
carve a path toward increasingly low-margin businesses. To prioritize investments both in technology
and in the business changes the investments
So how does a company engender, leaders must start by clarifying how
To prioritize investments, march into the digital the company intends to compete in the digital
leaders must clarify whether economy with confidence, economy. This decision is driven by an under-
purpose, and a high prob- standing as to whether customer engagement or
customer engagement or ability of success? Define digitized solutions offers the more compelling
digitized solutions offers the more a digital strategy—now. value proposition.
compelling value proposition. A digital strategy is Customer Engagement
Customer engagement focuses on interacting
In this briefing we with customers in more meaningful ways by pro-
describe early findings from MIT CISR research on digital strategies to viding ever-increasing personalized, convenient,
help you define and execute a digital strategy. fun, hassle-free customer transactions, service,
and information. Companies with non-digital
Recognize the Impact of SMACIT histories are attempting to emulate the easy
Technologies like social, mobile, analytics, cloud, and the Internet of online and mobile experiences that companies
Things—which together we refer to as SMACIT—are disrupting businesses. like Amazon.com, Uber, and Airbnb have made
It’s important to note, though, that it’s not any single technology that is standard. For many companies this means creat-
causing the disruption. Rather, it’s the confluence of these technologies, ing seamless omnichannel experiences so that
compounded by the steady arrival of other powerful and readily accessible customers can order, inquire, pay, and receive
technologies (e.g., voice recognition, artificial intelligence, biometrics). This support in a consistent way from any channel at
expanding array of technologies offers companies almost unlimited any time. These interactions build loyalty in
opportunities to enhance their value proposition. To do so effectively, both B2C and B2B contexts.
companies must address two challenges: (1) choosing from all the
potential investment opportunities, and (2) synchronizing the activities of 1 Readers familiar with Treacy & Wiersema (“Cus-
the many business units, functions, and specialists involved in developing, tomer Intimacy and Other Value Disciplines,” Har-
implementing, communicating, selling, and operating new technology- vard Business Review, January–February 1993) will
based services. This briefing focuses on the first challenge, while a future recognize the related concepts of customer intima-
cy, product leadership, and operational excellence.

© 2015 MIT Sloan CISR, Ross, Sebastian, and Fonstad. CISR Research Briefings are published monthly to update MIT CISR patrons
and sponsors on current research projects.
 CISR Research Briefing, Vol. XV, No. 6 Page 2 June 2015

Customer engagement supports customers’ buying choices. Especially automated back-office processes that are low
when customers’ decisions are made difficult by the range of choices or the cost, high quality, secure, and reliable. The
implications of a choice, a digital strategy maps out a path of increasingly operational backbone—which we typically refer
helpful, desirable customer engagements that make choices easier and to as a digitized platform—constitutes table
acquisitions more convenient and pleasant (even exciting). Companies that stakes for companies hoping to compete in the
get a lead in providing exceptional customer service (think Nordstrom, digital economy.
USAA, Apple, and Amazon) can then keep piling on new business and
technology capabilities that keep them ahead of competitors. Despite being essential to digital strategy, the
operational backbone tends to generate little
Digitized Solutions excitement in most companies’ investment dis-
cussions. But most customer engagement initia-
Digitized solutions are products and services that are increasingly enhanced
tives and digitized solutions are powerful only if
with digital information and digital capabilities in order to help solve customer
they are integrated into a company’s core capa-
problems. This digital enhancement—which typically involves packaging
bilities. They often require transparency into data
products with real-time data—changes the value proposition for the cus-
or reuse of standard business processes. Thus,
tomer. Instead of acquiring a product, a customer may acquire a solution
management needs to have regular discussions
that guarantees certain outcomes. Over time, digitized solutions often
of the essential requirements for the operational
change a business model by moving the revenue stream from the sale of an
backbone—and then make the necessary
asset to recurring revenue from the sale of a sophisticated service.
investments.
Digitized solu-
A company cannot invest only in the area tions support Customer Engagement‐Driven Digital
customers in Strategy at Nordstrom, Inc.
that best defines its value proposition, be it
their use of a The American upscale fashion retailer Nordstrom,
customer engagement or digitized solutions. company’s Inc. is an example of a company that is pursuing a
Any digital strategy comprises three product or ser- digital strategy focused on customer engagement.
vice. They pro- Nordstrom has articulated its number one goal as
interdependent components. vide flow of improving customer service.2 To meet this goal,
information Nordstrom has introduced an increasingly rapid
and expertise to help customers series of innovations that enhance customer
generate increasing value from a company’s engagement. These efforts commenced with
products and services over time. A digital strategy maintains competitive Nordstrom.com in 1998, but didn’t really take off
advantage from the constant stream of innovative information and digital until Nordstrom introduced its mobile app in
capabilities that helps a company’s customers run and improve their busi- 2011. Over the next three years, the company
nesses (or lives). This is how companies like Ferrovial, General Electric, introduced technology-enabled services in rapid
and Schneider Electric are approaching the digital economy. succession, including mobile checkout at Nord-
strom Rack stores, enabled by POS device-bearing
Although the strategic choice to focus on customer engagement or digitized
employees; Twilio text messaging-based customer
solutions helps target investments, it is not possible only to invest in the area
enticement via Nordstrom’s NEXT app;
that best defines where a company sees its value proposition. The second
Like2Buy, Nordstrom’s Instagram shop; and in-
investment component in each digital strategy is the other of these two
store merchandising of Nordstrom inventory that
capabilities. In other words, companies that focus on customer engage-
is popular on Pinterest and Wanelo. Nordstrom’s
ment eventually find that they create demand for digitized solutions. And com-
salespeople are empowered with detailed custom-
panies that focus on digitized solutions must make valuable information avail-
er and inventory information in order to learn
able to customers. Investments in the secondary customer-focused compo-
what individual customers want and find ways
nent, however, can be constrained to those that follow directly from the
to get it to them.
company’s stated value proposition. It is important not to confuse priorities.
The success of Nordstrom’s customer engage-
Operational Backbone
ment initiatives has helped create a more het-
The two customer-focused components do not fully define investment erogeneous clientele. These customers have
requirements. Because management needs to focus on delivering digitized introduced demands for new styles and services,
solutions and extraordinary customer experience, leaders cannot afford to which has forced Nordstrom to invest in digitized
allocate bandwidth to crises resulting from poorly designed or executed
core processes. Thus, every digital strategy depends on a strong operational 2 Nordstrom, Inc., “Nordstrom Investor Presenta-
backbone. This backbone comprises a set of core transactions and highly tion,” June 10, 2015.
June 2015 Page 3 CISR Research Briefing, Vol. XV, No. 6

solutions that enable new partnerships. These Digi zed Solu ons‐Driven Digital Strategy at Ferrovial
digitized solutions constitute a secondary, but
essential, requirement for Nordstrom’s success. Ferrovial, the Spanish infrastructure and municipal services company,
pursues a digital strategy focused on digitized solutions. With a goal of
Nordstrom’s operating backbone is built developing sustainable solutions in four lines of business—infrastructure
around the need for detailed customer buying services, toll roads, construction, and airports—the company has intro-
data and a transparent supply chain, which duced a series of innovations that embellishes its traditional products and
allows employees and customers to order mer- services with analytics.
chandise from any store or warehouse. In addi-
tion, Nordstrom can introduce new customer Relying on the Internet of Things and sophisticated algorithms, Ferrovial is
engagement capabilities rapidly, because the building toll highways that dynamically set prices every five minutes based
data needed is readily available. on traffic volumes. The company has introduced the Energy Management
and Monitoring Operational System (EMMOS), a solution that among
other things provides customers with information on their usage of natural
resources and helps them identify energy savings opportunities. Future
Figure 1: Two OpƟons for a Digital Business
solutions will help customers identify potential infrastructure improve-
Strategy ments to manage energy consumption.
Ferrovial’s digitized solutions dictate investment priorities, but those solu-
tions become more valuable as the company finds increasingly innovative
ways to enhance customer engagement. EMMOS, for example, comes
packaged with mobile delivery of data and alerts to customers. Ferrovial
also invests in an operational backbone that provides standard technology
services whose reuse accelerates delivery of new digitized solutions.
The Synchroniza on Challenge
As companies invest in new technologies, they are fundamentally changing
their relationships with customers. The impacts of these new and trans-
formed relationships with customers resonate throughout the company
and are most notable in the increased integration of the activities of its
employees who in some way touch customers or the services provided to
them. Leaders have observed that the pace of change makes it difficult to
synchronize all these decisions and activities.
The need to coordinate activities and synchronize business changes is
straining traditional organizational management and governance designs.
MIT CISR is studying how companies will design themselves to achieve
these objectives, but we already see evidence that those designs will flatten
organizational hierarchies, facilitate collaboration, empower frontline
employees, modularize business activities, and deliver transparently priced
IT services to innovative business leaders. In short, the execution of digital
strategies will radically change management practice.
Revving‐up for the Digital Economy
It’s easy to respond to the disruption from SMACIT by investing in a
series of “cool” applications that are easily mimicked. But such a strategy
will never raise the bar against competitors. Companies that are successful
in the digital economy choose a focal point—customer engagement or
digitized solutions—to guide investment decisions, recognizing that the
focus on the customer does not preclude the need to invest in an
operational backbone. Then these companies redesign management
practices to execute the digital strategy in a synchronized manner.