Improving Your Digital Intelligence

Today, virtually all companies are aware of the necessity to engage in digital transformation — and the few companies that have not done so are suffering heavily. New digital entrants, and aggressive plays by traditional competitors in reaction to those entrants, are destabilizing many industries, on average cutting by half the revenue and profit growth of standstill companies.1

However, some established companies have fully embraced digital as core to their overall corporate strategies and successfully transformed to reestablish profitable growth. Among the companies that are responding through digital initiatives, the fundamental question is whether they have the right intelligence to succeed in their digital transformation.

We have found that a company’s prospects for success can be diagnosed early in its transformation journey. A shared understanding of a company’s current digital intelligence, its desired future state, and critical gaps to overcome is a necessary precondition for success. Without this, the transformation will predictably hit major roadblocks. Having an objective, empirical, detailed assessment of digital capabilities is essential, enabling managers to speak a shared language across business units, functions, and geographies and to ensure alignment on priorities.

This article discusses tried-and-true approaches companies are taking to improve their digital intelligence and, in doing so, successfully execute digital transformations. Our findings are based both on insights and on recurring themes from our analyses of more than 250 companies globally, across industries, as well as on statistical results confirming the link between those companies’ revenue trajectory and their digital intelligence.

Further, we invite you to conduct your own initial assessment of your company’s digital intelligence (see “Test Your Digital Intelligence”), and then provide a guided tour of best practices and specific steps others have taken on their successful digital transformation journeys.

Measuring Digital Intelligence: The Concept Explained

Over two years, we interviewed more than 100 thought leaders across leading digital companies worldwide — including digital natives such as Google Inc., Amazon.com Inc., and eBay Inc., as well as legacy companies that have become digital leaders such as Burberry Group plc and Capital One Financial Corp. — to identify the characteristics that distinguish these organizations. The research suggests that a company’s digital intelligence is informed by four dimensions: strategy, culture, organization, and capabilities. Within these dimensions, our research identified a set of 18 management practices that contribute the most to digital leaders’ financial and market success:

• The strategy dimension assesses management practices that include to what extent a company’s digital strategy is centered on customer needs, how closely linked it is to the company’s overall corporate strategy, how well it anticipates digital disruption, and whether it sets a bold, long-term vision.
• The culture section diagnoses management practices that increase a company’s ability to change, including speed and agility, risk aversion, test-and-learn methodologies, internal collaboration, and the ability to form external partnerships to develop market-leading solutions.
• The organization dimension evaluates the clarity of digital roles and responsibilities, presence of digital talent and leadership skills, governance and key performance indicators, and prioritization of digital investments.
• The capabilities section assesses integrated customer experience across touch points, data-driven decision-making, IT architecture, automation, content creation, and personalization.

Combined, these four dimensions and 18 management practices encompass what we call a company’s Digital Quotient (DQ). This DQ digital intelligence assessment creates a composite score based on a 100-point scale and tabulates individual scores for each dimension and management practice. Specifically, respondents across the company answer questions within each management practice on a 1 to 5 scale, based on clear definitions of what 1 (lagging), 3 (baseline or average), and 5 (best practice) look like. Values from each question add up to a score for each management practice. Values from each management practice add up into scores for each dimension, which then comprise the overall score. (See “Overall Average Digital Intelligence Results by Management Practice.”)

In aggregate, the assessment lets corporate leaders know where they stand relative to their industry peers and leading companies across sectors — and informs what they need to do to improve their own digital and financial performance. Based on our subsequent analyses from running this assessment with 250 companies globally, focusing on increasing digital intelligence pays off. Collecting revenue and profit data of these companies from external financial sources, we found that this digital intelligence score is statistically significant and positively correlated with subsequent financial indicators collected from audited sources, such as revenue, earnings before interest and taxes (EBIT), and company growth, controlling for factors such as industry mix, company size, or location. (See “About the Research.”)

What Score Will Increase Your Chance of Success?

Having determined that the digital intelligence score is strongly predictive, the practical question is: What minimum threshold is needed to maximize the chance of success?

Among our sample of companies, we found a wide distribution of overall scores. The scores tend to vary by sector, with consumer-facing industries including travel and hospitality, retail, and telecommunications among the most digitally mature, and pharmaceuticals, transportation, and logistics among the least-mature sectors. (See “Digital Intelligence Varies Significantly by Sector.”) Quite powerfully, among the sectors with the highest scores, we see intense competition and disruption (witness the current tectonic shifts in the retail sector) and are also starting to see many cases of successful digital transformation.

One example, The Home Depot Inc., has invested heavily in “interconnected” initiatives designed to meet changing customer needs, focusing heavily on integrating digital and in-store experience, including equipping associates with digital tools and developing user-friendly web and mobile interfaces. Today, more than 40% of online purchases are picked up in stores. These digital innovations have contributed to Home Depot’s significant growth in revenue and net income,2 even though the company has not opened a new big-box store in the United States over the past three years. Another example, Hasbro Inc., has had similar success with its mission to transform into a digital toy manufacturer and entertainment company with a stronger customer focus. For Hasbro, this involved initiatives such as leveraging ad technologies to integrate online and in-store advertising with key partners and developing social media campaigns including YouTube series, Facebook campaigns, and a Snapchat branded game.3 Collectively, these have contributed to incremental sales of $1 billion since 2013.

While the average company scores only 34 out of 100, we found that companies fall in three “clusters.” (See “Company Clusters Based on Digital Intelligence.”) The first cluster comprises the bottom 20% of companies, or those unable to achieve a score above 25; companies in this cluster typically have low scores on each of the four dimensions; low performance in one dimension is strongly predictive of low performance in other dimensions as well. The second cluster includes 60% of companies, whose score falls between 25 and 40. Among this cluster, performance across dimensions varies but is typically average across each of the four dimensions. Finally, the top 20% includes leading companies whose score is above 40. Across all three clusters, and even even among digital leaders, companies tend to score lowest on capabilities.

One striking finding from our regression analysis is that being in the top 20% is highly correlated with higher revenue and margin growth. That is, companies in this cluster are not only able to fight the pressure of digital disruption, they are also able to reinvent themselves and achieve a higher growth profile. Being in the middle cluster does not put companies in a position to achieve positive growth. Companies in this cluster are able to avoid the worst effect of digital disruption, but they do not capture the financial opportunities from digitization. Companies in the lowest cluster are not able to cope with digital disruption — their net growth profile is negative.

We thus conclude that having a score below 25 indicates the greatest risk of shrinking profit and revenue. Companies with a score above 40, however, are reinventing their businesses profitably — having a score of 40 is a minimum threshold for positive odds of a successful digital transformation.

Getting Started: How to Rate Your Own Digital Intelligence

How do you know where you stand currently? The digital intelligence score is relatively easy and quick to measure, both as an initial assessment and as an ongoing measure. It is typically collected through an online survey of managers across the company, across business units, functions, and geographies, as needed to provide insights across these areas.

Whether you are beginning your digital journey or are looking to assess your progress, we have created an eight-question “pulse check” as an initial indicator of a company’s digital intelligence. This sample assessment includes two of the most important management practices for each dimension: strategy, culture, organization, and capabilities.

At the end, you’ll see your individual scores compared to digital leaders and global averages and receive an estimated overall digital intelligence score. This assessment will give you a sense of where your company falls along the spectrum of digital intelligence, and where your company has strengths and critical gaps. Then, we’ll focus on how to use these results to drive transformational change.

Best Practices to Improve Digital Intelligence Quickly

Now that you know roughly where you stand, how do you engage in improving your digital intelligence where it matters most? Based on our experience working with digital natives and legacy companies at various stages of their digital journey, several recurring best practices have emerged.

First, for lagging companies with gaps across the board, don’t try to focus on everything at once; strategy matters most. Although our analyses imply that a company must be above average on all dimensions, not all digital leaders are great at all 18 management practices. Start by focusing on your overall digital strategy — one that anticipates disruption in your industry, meets your customers’ needs, and is closely linked to your overall corporate strategy. This typically involves a series of immersive sessions with key stakeholders across the organization to identify potential areas of digital disruption to the current business model, clearly articulate customer needs, evaluate the competitive landscape and market trends, assess current core competencies, and then develop and prioritize potential options to create value for customers.

To be clear, this is hard work. And there is no work-around. Companies that try to skip this step tend to find themselves adrift, struggling to execute on misaligned digital initiatives and dangerously vulnerable to digital attackers. In our experience, all successful digital transformations begin with a clearly articulated digital strategy, laser-focused on customer needs, and so fully integrated into their overall corporate strategy as to be one and the same.

We find interesting, sometimes surprising examples of this across industries. For one, John Deere, what a previous generation may have thought of as a “tractor company,” shifted its business model to provide sticky “farm management platforms,” including integrated onboard data systems and infrastructure to manage irrigation, fertilizer inputs, and ultimately increase farm yield. Another example, General Electric, an industrial manufacturing powerhouse previously associated with everything from light bulbs to dishwashers, has morphed into a “digital industrial company.” GE of today provides data management systems to improve the performance and fundamentally change the value proposition of their products, including wind turbines, aircraft engines, power plants, MRI systems, and locomotives.

Second, evolve your culture to accelerate the rate of change, push hard on legacy cultures that hold others back, and create an environment that makes it easier to attract top digital talent. Establish iterative and agile test-and-learn processes and methodologies. The digital landscape is evolving too quickly for the traditional approach and timelines. Companies that can take a digital initiative from idea to implementation quickly (in six to 10 weeks) will continue to adapt and lead — and have success attracting digital talent. Those that can’t will continue to find themselves vulnerable.

Even companies starting further along the intelligence curve, such as Capital One or Telefónica S.A., have invested in transforming their culture. Both of these companies have formed innovation labs to create new products in 24-hour sprints. Teams from different functions and business units collaborate using agile design thinking and test-and-learn methodologies more commonly associated with startups. These changes pay dividends in multiple ways. For example, innovations reach the market in two to six weeks instead of six to 12 months. User testing in early stages of development ensures new products actually meet customer needs; and these lean, startup ways of working create a compelling environment for other top digital talent.

Third, evaluate potential use cases based on customer experience and potential value, and then prioritize just a few initially. While most companies struggle with data and analytics, the most successful ones manage to develop an integrated view of their customers. These companies then use that integrated customer view to improve high-value customer use cases, demonstrate relatively quick wins, and use them to generate momentum for broader transformations. Lloyds Bank plc followed this approach as part of its digital transformation, focusing initially on the most common customer journeys, and redefining them in a digital and mobile environment. Today, the bank has 12 million active digital customers, and fully 85% of account servicing is via digital channels. In 2016, the bank was rated the No. 1 bank on mobile by Forrester Research Inc.

Fourth, and most important, look past your traditional peer set and focus instead on the broader digital landscape for opportunities to innovate and provide additional value to your customers. Customer expectations are rising quickly based on new digital experiences across industries. Customers quickly become accustomed to new features, service, and personalization from companies including Amazon and Uber Technologies Inc., and then expect the same from other companies as well.

This essential truth is relevant for leaders across sectors. For example, leading airlines are focusing on opportunities to meet customer expectations across their “user journeys,” from searching for travel options, to confirmations, changes, and updates and services during their actual journey, to opportunities to provide adjacent services and increase loyalty during every interaction. For example, Air New Zealand Ltd., once a company posting large losses, has consistently reported high profit margins after it transformed itself using digital technology for better onboarding experience and improved yield management of its routes. The question for airline executives is not whether these increased customer expectations are transforming their industry, but whether their companies will lead now or be forced to play catch-up later.

Incorporating these four best practices together, companies can develop an integrated digital road map including specific, essential initiatives needed to deliver on their digital strategy. Depending on the digital strategy and scope of the transformation, the road map can include specific initiatives focused on new product development, mobile strategy, and underlying capabilities (for example, IT architecture, and data and analytics) that need to be in place. Successful digital transformation road maps also include initiatives to foster a digital culture, establishing agile test-and-learn methodologies in teams focused on redefining user journeys or developing new digital features for customers.

We have found that companies have the most success by establishing smaller teams initially, and then scaling the changes across the company over time. Lloyds Bank used this approach, starting with smaller teams to identify use cases and redefining them one at a time. Today, the company has trained 12,000 digital champions company-wide.

Another global financial institution decided to deploy a small cross-functional team empowered with greater decision-making authority in one of its core product lines. Within a matter of weeks, the team developed and launched an app that radically simplified the process of opening a new account. That innovation was quickly deemed best practice, and the team was asked to partner with colleagues in larger domestic markets to replicate and roll out similar apps.

The same scaling approach is useful for talent. Successful leaders create opportunities for digital talent to move across the organization, transferring skills and experience to others. That allows the business to grow digital talent organically and multiply the number of complementary digital initiatives it can support.

Although fundamentally transforming your business to become fully digital isn’t easy, this approach allows you to break down the challenge into the most important components. Focusing these initiatives on increasing your digital intelligence in specific areas significantly increases the chances your digital transformation will succeed.