assessing digital transformation capabilities

Assessing Digital Transformation Capabilities

by

Bahubali ShahMBA, University of Georgia at Athens, 2008

Bachelor of Engineering (Mechanical), University of Pune, 2003

SUBMITTED TO THE SYSTEM DESIGN AND MANAGEMENT PROGRAMIN PARTIAL FUFILLMENT OF THE REQURIEMENTS

FOR DEGREE IN

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MASSACHUSETTS INSTITUTE OF TECHNOLOGY

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2

Assessing Digital Transformation Capabilities

byBahubali Shah

Submitted to the System Design and Management Program on January 31, 2019 inPartial Fulfilment of the Requirements for the

Degree of Master of Science in Engineering and Management

ABSTRACT

It is widely believed that we are currently living in the digital age. Advances intechnologies enabling connectivity, data aggregation and analysis, and aritificialintelligence/ machine learning are making it possible to obtain insights into human andmachine behaviour like never before. Companies are rushing to take advantage of thisnew resource called data for competitive advantage. Yet, while many are aiming topursue a Digital Transformation strategy within their organization, there appears to be arange of different opinions that professionals/ experts carry when it comes to identifyingcapabilities required to become a Digital Enterprise. This thesis is aimed at helpingprofessionals in two ways. First, it identifies required capabilities at functional level fromfirst principles. Second, it defines maturity levels for key generic capabilities at thecompany level for professionals to measure and guide their organization's progresstowards becoming a Digital Enterprise.

Thesis Supervisor: Dr. Eric Rebentisch

Title: Research Associate, Sociotechnical Systems Research CenterLecturer, System Design and Management

3

Acknowledgements

I would like to express my gratitude to my thesis supervisor, Dr. Eric Rebentisch, for his

time and continuous guidance since I began working on this thesis. Many of the

thoughts, ideas and questions that I deliberated upon during the process germinated

from my experience of working with him as a Research Assistant for the Brightline

Initiative during the Spring of 2018. Thanks are thus also due to the team at the

Brightline Initiative for being contributors to the origins of this work.

My time at MIT was one of continuous learning. It has beyond any doubt exceeded my

expectations of what I could learn coming into an institute after working for nearly a

decade. It would only be appropriate that I acknowledge the SDM team for accepting

me into the program and expanding my knowledge base all through the journey.

Finally, I would like to thank my family for their love, care and patience while I spent

time studying and being away from them. This thesis is dedicated to you.

4

Table of Contents

1. INTRO DUCTIO N.................................................................................................... 6

1.1 Background and Motivation................................................................................ 6

1.2 Thesis Structure ................................................................................................. 8

2. FUNDAM ENTALS AND DEFINITIONS................................................................. 9

2.1 W hat is Digital Transformation? ..................................... . .. ... .. ... .. .. .. .. ... .. ... .. .. .. . . . 9

2.2. W hy do com panies want to pursue Digital Transform ation?............................ 14

2.3 Assessing the status-quo: Where do companies stand today?.........................17

2.4 W hy is Digital Transformation challenging? ..................................................... 20

3. CAPABILITIES O F A DIGITAL ENTERPRISE.................................................... 24

3.1 Literature Review ............................................................................................. 24

3.2 Identifying Capabilities from First Principles ...................................................... 29

3.3 Results of the research .................................................................................... 36

4. MATURITY LEVELS FOR KEY CAPABILITIES ................................................. 42

4.1 Defining a Maturity Model................................................................................ 42

4.2 Defining M aturity Levels for key capabilities.................................................... 45

4.2.1 Approach and methodology ....................................................................... 45

4 .2 .2 R e s u lts ........................................................................................................... 4 6

4.2.3 Using Maturity Level descriptions............................................................... 76

5 . S U M M A R Y .............................................................................................................. 7 7

6. BIBLIOG RAPHY ................................................................................................. 79

5

1. INTRODUCTION

1.1 Background and Motivation

Many companies today claim to be in the middle of a Digital Transformation of some

sort. Whether it is a start-up that is out to disrupt traditional industries outright, or a

large, established company wanting to defend its market position at the least, increasing

adoption of technology seems to be a strategic move of choice. Several well-known

companies are even repositioning themselves as Digital Enterprises. The term "Digital

Transformation" is often cited by companies and its executives in their media

interactions or annual reports as being on the top of their agenda. However, there

seems to be little consistency in how these terms are used or what exactly they intend

to mean.

On another front, outcomes from Digital Transformation appear to be mixed as well.

While some start-ups have made it really big, there are many that have failed. Likewise,

many established companies that have been investing in Digital Transformation in

anticipation are not witnessing the returns they would like to see on their investments.

The motivation for my thesis originates from a simple question: why do companies fail at

implementing their Digital Transformation strategy? During my previous stints at

consulting companies, I had opportunities to work with organizations on engagements

that included strategic planning and transformations. We did extensive analysis, utilizing

many well-known frameworks and extensive data sources to come up with a plan that

seemed logical to us. I assume this must also be true of the companies I never worked

with; they would have employed "skilled" professionals to perform this task regardless of

whether they were company employees or outside consultants. So, if many companies

applied rigor in their strategic planning process, why did they not recognize the benefits

envisaged?

Part of the answer became clear to me when I took up a role in the industry. It was here

that I had first-hand experience in strategy execution. I gained insights on many things

that did not go to plan - both internal and external. It occurred to me that there were two

6

things that were of paramount importance if a company has to come close to realizing

its strategic objectives. First, it needed a sound process that could ensure that both

formulation and deployment of strategy takes place in a fool-proof manner (to the extent

possible). This implies understanding and developing capabilities desired to move from

the current state to a desired future state. Second, it needed to have mechanisms to

learn and periodically adapt as future unfolded. Uncertainty is a given and any

execution plan that "sticks" to the original without accommodating the discoveries along

the way is very likely to be deficient.

However, the question is whether the above can also be said about Digital

Transformation. Or is Digital Transformation different in any way that entails building

specific capabilities and adopting different approaches? It is with the above background

that I mention my key research questions below.

* What is a Digital Enterprise?

" What is Digital Transformation and how is it different from other transformations?

" What challenges are associated with effective implementation of Digital

Transformation strategies?

* What capabilities do organizations need to build to become a Digital Enterprise?

" How do companies know where they are in their journey to acquiring the

capabilities to become a Digital Enterprise?

7

1.2 Thesis Structure

The thesis is structured in the following manner:

Chapter 2 is dedicated to understanding the meaning of the term "Digital

Transformation" (DT). It clarifies the distinction between several related terms and

outlines the reasons why companies are drawn to DT. Evidences in the form of survey

results and research reports are included to assess the status quo with respect to DT

and note key reasons why companies find it challenging to implement DT in their

organizations.

Chapter 3 introduces the meaning of the word capability. It describes the approach

taken to identify key capabilities of a Digital Enterprise from first principles. Results of

research are presented.

Chapter 4 presents maturity levels for key capabilities identified in Chapter 3. It begins

with an explanation of a maturity model and subsequently explains the approach taken

to defining the maturity levels for key capabilities.

Chapter 5 concludes the thesis by noting additional work required in this field.

8

2. FUNDAMENTALS AND DEFINITIONS

2.1 What is Digital Transformation?

As alluded to earlier, the term "Digital Transformation" (DT) appears to be loosely used

by professionals. Several words that sound similar but have subtle differences in

meanings are often confused with DT. These include digital, digitization, and

digitalization among others. It is important to understand the meaning of these words

before we proceed to understanding the meaning of DT.

Digital

Gartner defines the word "digital" as "the representation of physical items or activities

through binary code". Merriam-Webster defines "digital" as "electronic" or something

"composed of data in the form of especially binary digits". The word "digital" is thus an

opposite of analog, which is often used to describe a device that has a continually

varying output proportional to the input.

Digitization

Digitization, on the other hand, refers to the process of conversion. It is defined as

"changing from analog to digital form, also known as digital enablement" by Gartner. An

example of digitization in this sense would be the conversion of old records from

physical (paper) to electronic form. A broader definition is offered by Cisco, a leading

technology company. It defines digitization as "the connection of people, process[s],

data and things to provide intelligence and actionable insights enabling business

outcomes" (Surber, 2016). In both cases, digitization (of anything) implies it being

available in electronic form.

Digitalization

The word "Digitalization" is somewhat similar to DT and is often used interchangeably.(i-

Scoop, 2018) Gartner defines Digitalization as "the use of digital technologies to change

a business model and provide new revenue and value-producing opportunities; it is the

process of moving to a digital business". Digitalization represents a more radical change

9

that could bring advantages beyond efficiency to an organization. This will become

more clear as we explore DT in the following sections.

Digital Transformation

Several consulting companies and research organizations have attempted to provide a

clear definition of DT. A study conducted jointly by MIT and Capgemini Consulting

defined DT as "the use of technology to radically improve performance or reach of

enterprises"(MIT & Capgemini, 2011). This definition does well to underpin the

importance of technology for improving performance in a significant way. However, it

does not talk about the different facets of transformation or the components that make

up the transformation as such.

As per McKinsey, "digital is less about any one process and more about how companies

run their business"(Schallmo & Williams, 2018). This definition appears to emphasise

operations and outcomes while viewing technology as an enabler. It breaks down DT

into the following three attributes (Dbrner & Edelman, 2015):

" Creating value at the new frontiers of the business world: This includes either

developing new businesses or identifying and chasing new value pools in

existing sectors

" Creating value in the processes that execute a vision of customer experiences:

This refers to leveraging new capabilities for improving how customers are

served

* Building foundational capabilities that support the entire structure: This refers to

technological and organizational processes that allow an enterprise to be agile

and fast

Gartner's CIO Agenda report takes a historical perspective in explaining how role of

enterprise IT has emerged and is contributing to digitalization. Its definition of

digitalization is similar to those offered by McKinsey and MIT-Capgemini above. It states

that the Y2K and the dot-com bust brought the first era of enterprise IT to a close and

ushered it in the second "industrialization" era of processes, services, standards, smart

sourcing, IT transparency, etc. It claims that we are now entering the third "digitalization"

10

era that is characterised by "moving away from running IT like a business within

business into a period characterized by innovation beyond process optimization,

exploitation of a broader universe of digital technology and information, more-integrated

business and IT innovation, and a need for much faster and more agile capability"

We are here

Focus

Capabilities

Engagement

Outputs andoutcomes

Business models

Digitalization

Digital leadership

Treat colleaguesas partners; engaged

with external customers

Digital business innovation;new types of value

Emerging role of enterprise IT and its contribution to digitalization. Source: (Gartner,

2014)

In summary, DT is broad in scope and goes beyond the limited changes implied by

digitization. The MIT-Capgemini Consulting report lists three building blocks of DT.

These are captured in the below graphic. These encompass strategies and initiatives to

improve customer experience, operational processes and business models. The

transformation is enabled by digital capabilities that include unified data & processes,

analytics, business & IT integration and solution delivery.

11

IT craftsmanship

Technology

Programming,systems management[Isolated; disengaged 1

internally and externally

Sporadic automation andinnovation; frequent issues

IT industrialization

Processes

l[T management,service management

Treat colleagues ascustomers; unengagedwith external customers

Services and solutions;efficiency and effectiveness

___1k

I I

Building blocks of digital transformation. Source: (MIT & Capgemini, 2011)

Digital Business Transformation

The words "Digital Business Transformation" and "Digital Transformation" seem to be

synonymous. Gartner defines Digital Business Transformation as "the process of

exploiting digital technologies and supporting capabilities to create a robust new digital

business model" ("Gartner IT Glossary," 2018). Its view of Digital Business

Transformation is thus similar to McKinsey's in that both imply broad and radical

change.

Digital Transformation vs Business Process Reenqineerinq

The word "transformation" in DT could lead some to think that it is similar to Business

Process Reengineering (BPR) (Schallmo & Williams, 2018). According to Hammer and

Champy, "BPR is the rethinking and reengineering of business-related processes to

reduce costs and improve products and services". Authors Schallmo and Williams state

in their book that while BPR's focus is mainly on automating rule-based processes, the

objectives of DT are are obtaining new data and using this data to reimagine these old,

12

rule-based processes (Schallmo & Williams, 2018). They cite the example of how

Airbnb leveraged data to disrupt the rule-based processes in the hotel industry.

Digital Enterprise

Given all the definitions thus far, how do we then define a Digital Enterprise? Would it

be a company that uses digital technology in any form to conduct its operations? If so, it

will be difficult to imagine a company that is not a Digital Enterprise today. One would

believe that a majority of companies use digital technology for communications (e.g.

websites, email, etc) at the least. Companies with complex operations often also use an

Enterprise Resource Planning software for managing their operations (e.g. SAP). More

sophisticated ones' leverage technology for innovating new products or services (e.g.

Facebook, Microsoft, etc). While one could argue that companies adopting digital

technology for any of the above use cases can potentially call themselves as a Digital

Enterprise, the below definition by Jun Xu offers a more comprehensive description.

"..digital enterprise is defined as 'using digital technologies and networks in the

activities of buying and selling goods and services, servicing customers,

collaborating with business partners, conducting communications and

transactions within the organization" (Xu, 2014)

This definition is useful because it clearly specifies the extent to which technology is

embedded in a Digital Enterprise. It implies that a Digital Enterprise is one that is not

limited in its use of technology, but it finds many applications for technology across

different functions instead. It can also be inferred that a company, if beginning at a state

of modest technology adoption, needs to pursue Digital Transformation in order to

become a Digital Enterprise.

13

2.2. Why do companies want to pursue Digital Transformation?

Having discussed key terms and claimed that many companies are pursuing DT, a key

question that arises is - why do companies want to pursue DT? In order words, what

are the benefits of being a Digital Enterprise?

In general, companies feel the need to transform when they perceive business as usual

not to be good enough. Companies make profit by offering a product or a service that

customers need. They compete among each other on various dimensions such as cost,

quality and customer service in order to survive. The companies that perform better on

these dimensions tend to lead the market. The challenge that all companies face,

however, is that their internal and external environment is always changing. Customer

needs, competitive behaviour, regulations, and political situations are uncertain and

always in a state of flux. Likewise, the status of important internal resources such as

equipment, technology and labour could become unfavourable for various reasons.

These uncertainties are hard to predict. As such companies tend to focus more on

meeting short-term needs. However, to succeed at the marketplace in the long term,

companies need to constantly redefine (transform) themselves to stay relevant to

prevailing market conditions (Weil & White, 1994).

In the current times, factors driving the digital revolution - such as connectivity among

devices, abundance of data, low costs of computing, and evolution of key technologies

such as Artificial Intelligence and Machine Learning - are making it possible to access

and analyse huge amounts of data that was erstwhile considered impractical. The

trends are secular across industry sectors and seem to be irreversible, thereby causing

user-specific data to emerge as a vital resource that can be tapped for competitive

advantage by companies. While the technology savvy leaders are moving fast to grab

the first mover advantage, the followers are playing catch up not to be left too behind in

the race.

14

There have been ample publications, especially from research and consulting

companies, that have estimated benefits that DT stands to offer. Some of these are

presented below.

* Companies that become digital enterprises can look forward to a 26% increase in

profitability, 12% increase in valuation, 9% increase in revenue to asset ratio -

The Digital Advantage, Capgernini Consulting, 2015

" The top three reasons for embarking on a digital initiative are: 49% improved

customer satisfaction, 44% better workforce productivity, 41% improved

customer experience - Exploiting Software Advantage, Freeform Dynamics, 2015

" Cloud computing alone can lead to IT cost savings of 25 to 50 percent - Digital

Transformation of Industries White Paper, World Economic Forum, 2016

" Annually, big data will reduce computing costs for companies by 33%, storage

costs by 38%, and bandwidth costs by 27% - Internet Trends Report, KPCB,

2015

" Companies that make extensive use of customer analytics see a 126% profit

improvement over competitors - McKinsey, 2015

" The average initial increase in profits from big data investments was 6%,

increasing to 9% for investments spanning five years - Big Data Is Getting a

Better Read, McKinsey, 2016

The motivation for pursuing DT is not just the upside. Companies that do not transform

themselves as per changing times face an existential threat. Some noteworthy quotes

that highlight the level of ongoing disruption are included below.

0 Since 2000, 52% of companies in the Fortune 500 have either gone bankrupt,

been acquired or ceased to exist - Forbes, Cloud Is The Foundation For Digital

Transformation, 2014

0 75% of S&P 500 will be replaced by 2027 - Symposium India, Gartner, 2014

0 25% of businesses will lose competitive ranking due to digital incompetence - IT

Workforce Trends Survey, Gartner, 2013

15

* 84% believe big data analytics will "shift the competitive landscape for [their]

industry" within a year and 87% believe so in three years. In addition, 89%

believe a lack of big data adoption will create a risk of losing market share, and

75% cite growth as the key value of analytics - Industrial Internet Insights Report,

Accenture, 2014

Companies are experiencing the pressure to transform not just from customers or

competitors, but also from their own employees who are demanding modern

approaches or increasing levels of technology adoption (refer chart below).

U High 0 Medium

72%

32%

Customers Competitors Employees

Pressures for change. Source: (MIT & Capgemini, 2011)

16

2.3 Assessing the status-quo: Where do companies stand today?

Many of the research and consulting companies that have made predictions about DT

have also conducted surveys to understand how companies are faring with respect to

DT. The surveys have attempted to gauge participation levels as well as outcomes of

DT efforts. Some relevant survey findings and related observations are captured below.

1. A wide range of industries are pursuing DT: The digital revolution has touched

almost all sectors and companies. As per Forbes, virtually every Forbes Global

2000 company is on some sort of digital transformation journey (B. Rogers,

2016). A survey of DT efforts across industries in European Union was

conducted by Strategy& in 2011. Their survey found that while a range of

industries are pursuing DT, Financial Services & Insurance and Computers &

Electronics are leading the pack whereas Construction and Hotels & Restaurants

were lagging. Similar results were also found by a global survey conducted by

MIT-Deloitte in 2014.

0 5 10 15 20 25 30 35 40 -45 50 55

Financial services & insuranceComputers & electronics

Media & telecommunicationsAutomotive

Equipment & macinery

Trade & retail

Cwenicals

Basic manufacturing

Utiliies

Business & administrative services

Transportation & logistics

Consumer goods R -R

Real estate, rental & Ieaslng

Construction .

Hotels & restaurants A43.3

Index average

*Liading5Midfld

Lagy ng

The industry digitization index (2011). Source: (Strategy&, 2011)

17

2. Organizations are in the early to middle stages of DT: A survey conducted by

MIT-Deloitte in 2014 of more than 4,800 business executives across 27

industries and 129 countries worldwide found that -70% of participants believed

their companies were either in the early or developing stages of becoming a

Digital Enterprise. It is also noteworthy that these participants believed lack of

strategy and insufficient technical skills as being top barriers to their companies

becoming a Digital Enterprise.

tekspodents to tale their ccempay aa*ns a ln d organzlnea -f-f uansfomed by ds9na $ and Ca0 6t*e - Ca a .C 1LA I to 10 Three grouvs emerged: ~earhy" ' 1 "develowng' U-

arid raat.Lmriq U-10),

MM~g

Survey feedback on

While a k of strategy hinders earty anddevelopng =-rpams. secunty mses becme a greater

awcrn "O nwunrq diquta cc~p -gs

ft S- ia OA 3, Lw oft *WMg too $.wty&S1. mai 3 ulia 5af 6R 3 1~td 1 1 0OW~k

digital transformation - status and barriers. Source: (Kane et al.,

2015)

3. Many DT efforts fail: As per McKinsey's 2018 Global Survey on Digital

Transformations, only 16% of the total -1,800 respondents said their

organizations' digital transformations have successfully improved performance

and also equipped them to sustain changes in the long term. An additional 7%

said that performance improved but that those improvements were not sustained.

These participants represented a wide range of regions, industries, company

sizes, functional specialties, and tenure. The results of this survey were also

significant in that they reported poorer results of DT when compared to the 30%

success rate of organizational transformations in general. There have been

similar other studies that found companies reporting that their outcomes of DT

efforts were short of expectations.

18

Going by the above, we can conclude that while most companies are pursuing DT,

many have not experienced the returns on DT efforts that they would have liked. The

fact that the success rate of DT efforts seem to be inferior than other organizational

transformations is a cause of concern. A relevant question would then be - what is it

about DT that makes it so challenging?

19

2.4 Why is Digital Transformation challenging?

Many studies attribute the challenge of DT to its complexity and its nature of being a

simultaneous multi-dimensional change. For example, Ismail et al suggest that the

degree of complexity of a DT exceeds that of previous IT-enabled transformations

(Ismail, Khater, & Zaki, 2017). They conclude that DT needs to address the strategic

roles of new digital technologies and capabilities for successful digital innovation in the

digital world. They define DT as the process through which companies converge

multiple new digital technologies, enhanced with ubiquitous connectivity, with the

intention of reaching superior performance and sustained competitive advantage, by

transforming multiple business dimensions, including the business model, the customer

experience (comprising digitally enabled products and services) and operations

(comprising processes and decision-making), and simultaneously impacting people

(including skills talent and culture) and networks (including the entire value system).

Ismail et al also cite several other reasons that make DT difficult. These include lack of

clarity about the different available options and elements that managers need to

consider in their transformation approach, leadership challenges such as lack of

urgency, vision and direction, and institutional ones related to the attitudes of older

workers, legacy technology, innovation fatigue and politics.

A similar view is shared by David Rogers in his book on DT. He suggests that digital

technologies are transforming not just one aspect of business management but virtually

every aspect. They are rewriting the rules of five key domains of strategy - customers,

competition, data, innovation, and value. Companies that were established before the

Internet need to realize that many of their fundamental assumptions must now be

updated. Responding to these changes requires more than a piecemeal approach; it

calls for a total integrated effort (D. Rogers, 2016).

Hess et al note that DT is a complex issue that affects many or all segments within a

company. Managers have to simultaneously balance the exploration and exploitation of

their firms' resources to achieve organizational agility -a necessary condition for the

20

successful transformation of their businesses. They believe that at present, managers

often lack clarity about the different options and elements they need to consider in their

digital transformation endeavours. As a consequence, they risk failing to consider

important elements of digital transformation or disregarding solutions that are more

favourable to their firms' specific situations, which could have unintended adverse

consequences (Hess, Benlian, Matt, & Wiesbock, 2016).

Bilgeri et al conducted in-depth expert interviews across 11 companies with companies

across the Internet of Things (loT) ecosystem and identified six main issues regarding

how DT will affect large manufacturing companies' overall organizational structure.

According to their analysis, the core of the problem lies with the uncertainty executives

face of where and how to allocate and align digital capabilities within their organizational

structures (Bilgeri, Wortmann, & Fleisch, 2017).

Authors Oswald et al share a summary of two studies that identified major hurdles that

companies are facing in realizing the benefits of DT. The summary is shared below. It

can be inferred that while the hurdles are of various nature, those pertaining to People

and Organization seem to be among the dominant ones. This emphasises a need to

also look at the problem as one that relates to general business transformation and

change management. Indeed, as MIT-Capgemini Consulting study concluded "Whether

using new or traditional technologies, the key to digital transformation is re-envisioning

and driving change in how the company operates. That's a management and people

challenge, not just a technology one." (MIT & Capgemini, 2011).

21

The biggest challenges for digital tran4ormation programs.

Study 1: MIT Sloan Management Review and Study 2: McKinsey & Company (BughinCapgemini Consulting (Fitzgerald et at 2013) et al 2015)I. No sense if urgency 39% 1. Lac f internal leadership or iaL- 31%

entfor digital projects

2. Not enough funding 33% 2. Lack of data and understanding of 125%how digital trends affect [ Icompetitiveness

3. Limitations of IT systems 30% 3. Inability to keep pace with faster i25 %speed if business under digital

4. Roles and respomnibilities are not 28 % 4. Inability to adopt an experimenia 15 %Clear dton mindset thai is key for best

pray. iles5. Lack of vision 28% 5. Lack of dedicated funding for dig 24 %

ital initiatives6. Unclear business case 27% 6. Misaligned or competing interests 23 %

between digital projects and tradi-tional businesses

7. Business units implementing 24% 7. Lack qf senirvnwnagenenr 121 %independently in silos involvement or desire to change cur-

rent practices8. Culture not amenable to change 19% 8. Lack of technology infrastructure 21 %

oand insufficient IT systems I9. Lack of leadership shills 16% 9. Organ tadonal structure not 120%

designed appropriately fir digital

10. Regulatory concerns 9% 10. Busines pmceses too inflexible 19%to take advantage of newopportunities

Perent of respondents Study 1: N= 159 executives and managers. Study 2: N =987 C-levelexecutivesItalic text indicates People and organizational related challenges

Major hurdles to realize benefits of digitization. Source: (Oswald & Kleinemeier, 2017)

Oswald et al also believe that the widespread deployment and adoption of digital

technologies has major organizational implications. They present the following six

theses with respect to organizational implications of DT:

a. Digitization changes the way of working

b. Digitization increases the dynamic of change

c. Digitization requires new skills and competencies

d. Digitization requires new forms of leadership

e. Digitization requires new organizational capabilities

f. Digitization changes the organizational culture

22

Finally, Nadeem et al note that business digital strategy, digital capabilities and

implementation of right set of organizational capabilities are critical requirements for an

effective and efficient enterprise transformation towards creating superior electronic-

commerce customer-centric services in the digital era (Nadeem, Abedin, Cerpa, &

Chew, 2018).

Considering the discussion above, one can conclude that DT, although distinct in

certain ways, is fundamentally a business transformation which in turn is described as

the orchestrated redesign of the genetic architecture of a corporation (Morgan & Page,

2008). Gouillart and Kelly in their book "Transforming the Organization" mention that a

business transformation initiative achieves fundamental changes simultaneously in four

respects:

1) changes in the company's view of itself and perceptions of the business situation

2) changes in the internal configuration and capabilities of the organization

3) changes throughout the value chain via improved alignment with marketplace

opportunity

4) changes in people-based matters such as behavioural factors and skill-sets

Overall, we conclude that DT is a complex multi-dimensional change that companies

find challenging for several reasons, one of which is not having a good understanding of

the capabilities required for transformation. In the next section, we attempt to identify

important capabilities a company needs to focus on in pursuit of its DT journey.

23

3. CAPABILITIES OF A DIGITAL ENTERPRISE

3.1 Literature Review

So far, we have introduced DT and explained some of the reasons why companies are

finding it difficult to execute it in their companies. The focus of the first part of this thesis,

as mentioned before, is to explore and understand the capabilities required to become a

Digital Enterprise. Knowing specific capabilities that a company needs to develop in

order to become a DE would be useful to its managers in managing the transformation.

In this section, we begin with an attempt to understanding the meaning of the word

"capability" and follow up with a review of capabilities required to become a Digital

Enterprise as suggested by different authors and experts.

The term capability is widely used and is assumed to have been understood. However,

business capabilities are often confused with business processes and resources

(Michell, 2014). Michell conducted an extensive literature search to review and

categorize existing definitions of the term "capability". A summary of his findings are

presented below.

Ref C: Defnition of Capability Xey Factors Xey Component Source

1 what a businessfmction does and what its what a function does a nd its Capability is related to workfunctions and lomann,-externally visible behaviour is behaviour behaviour 2006

2 itsfundamental purpose in terms ofthe outcomes purpose, outcome, activity Capability relates to activity outcomes Merrifield etof the activity al, 2008

3 ofrm's capacity to deploy Resources, usually in capacity to deploy Capability is a capacityto use resources Makadok,combination, using organizational processes, to resources using 2001effect a desired end. organisational processes

4 operations strategy involves exploiting exploiting resources Capabilities are functions of resources Slacket al,capabilitiesofoperations resources' capabilities 2004

5 an organiation' abiliry to ssemble. Integrate, ability to assemble and Capability as an ability to do coordinate Sharadwa,and deploy valued resources integrate resources resources for action 2000

6 process capability describes therange oferpected results of a process Capability relates to the result of a process Paul eta 1,results that can be achieved byfollowing a 1993software process

7 theability that an organisation, person or systems ability of a person or system Capability depends on resource Josey et al,

possesses 20099 abilities withina firm which can be linked abilities, process, outcome Capability as ability related to the specific Beimborn et

together asbusiness processes in order to enablea outcomeof a business process al, 2005specift purpose or outcome'

9 capability is the capacity of a team ofresources to capacity of resources to capability relates togroups of resources Grant, 1991perform some task oractivity' perform tasks

10 capabllities are'formed through the coordination coordination of activities capabilities depend on process l'afeez et al,and integration of activities and processes and processes integration/coordination 2002

Content comparison of Capability definitions. Source: (Michell, 2014)

24

Michell observed the following key themes about business capabilities from the

comparison of various definitions:

* Capabilities relate to work activities

* Resources possess capability

" Capabilities are the potential for action

" Capabilities relate to outcome/ value

He further notes that capabilities must provide the ability to deliver an outcome or a

change adding value to the customer.

McGee notes that capabilities are firm specific. They are developed internally against

the specific needs and ambitions of each company. They often depend on tacit

knowledge, are path dependent in that they emerge and develop over time, and are not

in the form of assets that can be traded (McGee, 2016).

Following a resource based view, Henkel et al. define a capability as the ability of an

organization to manage its resources to accomplish a task. They imply that the

organization must have resources as well as the right capacity of those resources to

perform the tasks. They use the notion of resource types (e.g. people, infrastructure,

etc) and tasks in the form of execution templates (e.g. a documented manufacturing

process). Further, they categorize capabilities as main capabilities and sub-capabilities.

They consider a main capability of an enterprise to be the one that produces value to

the enterprise's external stakeholders for which they are willing to pay (Henkel, Bider, &

Perjons, 2014).

On comparing the definitions and views of different authors, we can conclude that

capabilities are a firm's ability to manage its resources to create outcomes of value. We

now review the different capabilities required by a firm to become a Digital Enterprise as

suggested by experts.

25

1. As per the MIT - Capgemini study, digital capabilities are a fundamental building

block for transformation in customer experience, operational processes, and

business models. The study identifies the following key capabilities:

a. Unified Data & Processes: This refers to a digital platform of integrated

data and processes which would enable generation of a common view of

customers or products and overcome functioning in silos. This would do

away with disparate systems, data definitions, and processes that exist

within a company

b. Solution Delivery: This refers to the capabilities needed to modify

processes or build new methods onto the data and process platform.

Solution delivery requires effective methods and strong skills in IT,

especially those pertaining to the use of emerging digital technologies and

practices. This could entail partnerships with external vendors as well

c. Analytics: This refers to combining integrated data with powerful analysis

tools for gaining strategic advantage over competitors

d. Business and IT integration: This refers to strong integration between

technology and business executives. The emphasis is on trust and shared

understanding between the two while pursuing DT

While these are a good list of capabilities, they seem to be IT-focused.

2. Oswald et al suggest the following list of capabilities from a talent/ organization

perspective (Oswald & Kleinemeier, 2017)

a. Digital skills & competencies in employees, built either by hiring or training

b. A formal organization with new roles/ titles (e.g. Chief Digital Officer)

c. Aligned KPIs and incentive systems

d. A system to monitor adoption process

e. Change management

3. IBM Institute for Business Value suggests the following six capabilities of DT

a. Business model innovation: building customer value as a core

competency

26

b. Customer and community collaboration: engaging with customers fully via

various channels and touch points

c. Cross-channel integration: integrating digital and non-digital channels

d. Insights from analytics: taking advantage of predictive power of Big Data

and advanced analytics

e. Digitally enabled supply chain: optimizing and integrating all components

of supply chain

f. Networked workforce: getting the right skills around the right business

opportunities

4. As per McKinsey, certain capabilities-especially those that build foundations for

other key processes and activities-are more important than others for digital

success. Foremost among them are the modular IT platforms and agile

technology-delivery skills needed to keep pace with customers in a fast-moving,

mobile world. They believe that companies having a higher digital quotient than

others have an ability to engage customers digitally and to improve their cost

performance in four areas: data-empowered decision making, connectivity,

process automation, two-speed IT (i.e. companies can operate both a

specialized, high-speed IT capability designed to deliver rapid results and a

legacy capability optimized to support traditional business operations) (Catlin,

Scanlan, & Willmott, 2015)

5. Nadeem et al believe that currently there is an inconsistent understanding of

what constitutes organizational capabilities and a digital business strategy in a

digital transformation process. They conduct a systematic literature review on a

selected set of journals to explore what entails organizational capabilities and

digital business strategy. They conclude that dimensions of organizational

capabilities include digital leadership, agile & scalable operations, digitally

enabled CEX, digital artefacts, flexible and scalable digital platforms, internal and

managerial capabilities, external collaboration of ecosystem of digital platforms,

27

dynamic capabilities, plug & play capabilities and operational capabilities

(Nadeem et al., 2018)

On reviewing the definitions and views shared by different authors, we observe that

some approaches identify required capabilities from a functional perspective (e.g. IT-

centric, HR-centric), others take a practical approach deriving observations from

industry surveys or consulting assignments, while the rest seem to conclude basis

literature review. A list of required capabilities derived from first principles seems to be

missing. The first part of this thesis aims to undertake an endeavour to fill that specific

gap. Over the next couple of sections, we describe the approach taken and the

outcomes derived.

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3.2 Identifying Capabilities from First Principles

Approach and Methodology

We adapt a method proposed by Michell in his paper aimed at bringing clarity in

defining capabilities within an enterprise in general (Michell, 2014). The method, in

summary, is as under -

1. Identify key business processes that create value in a company

2. Identify resources consumed or transformed in each of the processes

3. Then, identify and list capabilities required by the driving resource to coordinate

other resources and execute the processes creating value

He illustrates the method using a simple example of a pie serving restaurant. The

capability template and its application to the example are presented below:

Capability Template (above) and Example (below). Source: (Michell, 2014)

Capability f(P, Rt, Ri) to: serve customised pies to order

Driving Resource: Maitre de

Value: hand crafted country pies

Process (P) Tangible Resources (It) Intangible Resources (R)Pie Maki ng master chef, pastry chef, knowledge of pies, cooking s kills

cookRes tarant serv ice waiter service skills

Bill ng front of house, order knowl edge of order value,..... .... ... .. ... system, till ... simple mat he matic s

We use this approach to arrive at a list of important business capabilities that a

company must consider building while aiming to execute a digital transformation

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Capability (P, Rt, R)to: action/deliveroble/conditions

Driving Resource. process owner

Value: related to customer need and business objectives and identifiable

productsservices

Process (P) Tangible Resources (Rt) Intangible Resources (Ri)

description from driving, passive, activeprocess architecture

strategy. Before we do that, however, it is necessary to explain the concepts that

underpin the approach taken by Michell in his paper and by us in our endeavour.

Value

As per Michell, value can be simply a statement of the benefit. However, value should

relate to customer needs and expectations and also to the business objectives. He

suggests that value should be linked to identifiable products and services to enable a

meaningful inventory of capability to be established that can help a business understand

how value is developed by combinations of different resources and processes.

As per Valentina et al., sources and the contents of value creation may vary according

to the different "targets or users for whom value can be created" Therefore, the concept

of value regards not only financial performance but also market competitiveness, human

resources involvement and commitment (talents' advantages and loyalty) and reputation

(brand and image) (Della Corte & Del Gaudio, 2014)

For our endeavour, we take value as an expression of benefit to the internal or external

stakeholders of an organization

Resources

Michell defines a resource as something having a capability for interaction with the

environment to create value. He categorizes resources as tangible and intangible and

summarizes their properties as under:

30

Tangible/ Intangible Resources. Source: (Michell, 2014)

Jay Barney's views on resources provide us greater depth and clarity. He mentions in

his paper titled "Firm resources and sustained competitive advantage" that (Barney,

1991):

* Firm resources include all assets, capabilities, organizational processes, firm

attributes, information, knowledge, etc. controlled by a firm that enable a firm to

conceive of and implement strategies that improve its efficiency and

effectiveness

" Firm resources can be conveniently classified into three categories:

o Physical capital resources: these include physical technology used in a

firm, firm's plant and equipment, its geographic location and access to raw

materials

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Tangible ResourcesPeopleMaterialsMachines (passive/ICT enabled)ArtefactsToolsCodified information and Knowledge

Documents/forms/drawingsPropertiesCan be physically touchedObservably transformedObservable capability of physicalaction/useIntangible ResourcesSoftwareKnowledgeEncoded information/dataIntellectual propertyCulture/valuesSkillsBehaviourPropertiesCannot be physically touchedNot observably transformedNon observable capability for action/use

o Human capital resources: these include training, experience, intelligence,

judgement, relationships, insight of individual managers and workers in a

firm

o Organizational capital resources: these include formal reporting structure,

formal and informal planning, controlling and coordinating systems as well

as informal relationships within the firm and between the firm and its

environment.

Henkel et al proposed an alternative definition of resources of an organization as "the

products an organization owns, its personnel skills, its processes, and the information it

controls" (Henkel et al., 2014)

Grant proposes to use "resources" to describe inputs that can, in general, be purchased

on open markets and customized for use by the purchasers (McGee, 2016)

It is interesting to note how different authors look at resources differently. We observe

that some of them consider capabilities and processes as resources too. However, for

the purpose of our endeavour, we proceed with Michell's view of resources. He

differentiates between resources and capabilities by suggesting that capabilities are the

potential for action whereas resources have capabilities for interaction with the

environment to create value. Michell also categorizes resources on another dimension

based on their role as driving resource, utilized resource and consumed resource.

Driving resources are very often intelligent resources that actively drive the process and

coordinate the value added transformation. Examples of driving resources would thus

include people and intelligent machines. Utilized resources are those which are utilised

to transform the inputs e.g. a tool. Finally, consumed resources are those (usually) input

resources that get consumed as part of the conversion process, e.g. the solder used in

soldering an electrical component.

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Capability

Michell notes that capabilities provide the ability to deliver an outcome or a change

adding value to the business/ customer. They are thus required by the driving resource

to transform/ consume other resources while undertaking activities/ processes that add

value. He suggests that capabilities are realized by interaction between resources and

are inextricably linked to the processes and that the capabilities can be named using a

verb. For example, a production line has the capability to manufacture by consuming/

transforming a set of resources and following certain activities/ processes.

As per Offerman et al., skills differ from capabilities in that skills refer to the abilities of

persons, while capabilities, processes, and resources refer to organizational

components. They agree with Homann's and Wigotzki's definitions of business

capability as "a particular ability that a business may possess or exchange to achieve a

specific corporate goal" (Offerman, Stettina, & Plaat, 2017).

Brits et al compile the following capability types that aim to fulfil organizational goals:

1. Functional capabilities: they deepen functional knowledge (e.g. research and

development, manufacturing knowledge and marketing expertise) gained through

trial and error and experiments.

2. Integral capabilities: Integral capabilities bind together different functional

capabilities and also absorb knowledge from external resources and use them

productively

3. Strategic capabilities: Strategic capabilities, above and beyond basic capabilities

that enable the organizations to run as businesses, have three distinctive

characteristics:

o Of value to the customer (externally focused);

o Better than that of the majority of other competitors; and

o Difficult to imitate or replicate

4. Dynamic capabilities: these are organizational routines of strategic nature

through which firms obtain new configurations of resources when markets

emerge, collide, divide, evolve and die (Brits, Botha, & Herselman, 2007)

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Leonard (Leonard, 1998) analyses the nature of a capability and concludes that core

capabilities "comprise at least four interdependent dimensions" as follows:

o Physical technical systems - machinery, databases, software systems etc.

o Managerial systems - systems for the management of operations, including

operation of technical systems

o Skills and Knowledge (systems) - systems for the maintenance of personal

and team skills and knowledge

o Values and Norms - systems for the regulation of behaviours and objectives

in organizations

The above perspectives are useful in thinking about different capabilities when we set

out to develop a capabilities list for Digital Enterprises from first principles. We begin by

identifying capabilities for DT at functional level and then generate a list of generic but

important capabilities a company needs to focus on. The steps followed are mentioned

below:

1. First, we define the value the company expects to derive out of a given digital

transformation initiative at the functional level. Several management consulting

companies have described the value DT offers to different business functions in

publications posted on their websites. We review these publications and articulate

the value in a concise manner for each function. The value identified could be to the

external stakeholders (i.e. customers) or internal stakeholders (e.g. employers) and

is largely generic to a business organization (i.e. not necessarily specific to an

industry or a company)

2. Once the value is identified, the next step is to list the sequential operational steps

involved in process of creating the said value using general understanding of

business. Any business process in practice is likely to involve a lot of sub-processes.

We choose to focus on only those high-level processes/ steps that contribute

reasonable fraction of the total value expected to be delivered to the stakeholder.

The process/ steps we work with are generic and not specific to a company

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3. Next, a list of different resources required by the processes is listed. These

resources could be physical, people, or organizational and need to be categorized

as driving resources, tangible resources and/ or intangible resources

4. We then list the capabilities required by the driving resource to transform/ consume

other resources while undertaking the specific processes that add value. Key

capability themes are noted alongside for each of the processes for all the functions

5. Finally, we aggregate all capability themes to note generic company-level

capabilities important to become a Digital Enterprise

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3.3 Results of the research

We present the outcomes of the method for each function below. These business

functions together represent the typical business value chain of a company as identified

and defined by renown academic, Michael Porter.

1. Procurement

Overall value: collaborative relationships with suppliers leading to efficient sourcing and

innovation

Driving Resource: Procurement Manager

Major Tangible Resources: suppliers (vendors), servers, connected equipment,

procurement team, R&D/ business/ IT team, data scientists

Major Intangible Resources: strategies (R&D, crowdsourcing, etc), ERP software,

external databases, optimization software, data visualization software, connections with

IT systems of suppliers, collaborative behaviour, cybersecurity software

Capabilities and Key Themes: These are identified basis the process explained in

Section 3.2 above. The list of capabilities is a representative sample; a more

comprehensive list can be generated by further detailing the process/ sub-processes

involved in creating value for the respective business function

Process StepsUnderstand business needs

Develop sourcing strategy

Understand supplier baseSelect suppliersSiqn contracts/ agreements

Manage paperwork/ process

Manage performance

Exchange ideas

Sample Capabilities of Digital Enterprise: ToLink R&D, Business and Procurement strategyAutomate demand recognitionForecast raw material price trendsDevelop optimal sourcing plans across suppliersAutomate cost comparisonsAutomate Purchase Requisitions/ Purchase OrdersAutomate purchase-to-pay processAutomate claim managementEnable dynamic dashboards/ scorecardsPredict supply side risksTrack shipment real-timeCrowdsource innovation

Key ThemeInnovation cultureAutomation of processesData-driven decision-makingData-driven decision-makingAutomation of processesAutomation of processesAutomation of processesAutomation of processesUser-centered designData-driven decision-makingScalable IT infrastructureInnovation focus

2. Manufacturing

Overall value: defect-free production made with optimal amount of resources

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Driving Resource: Manufacturing Manager

Major Tangible Resources: sensors, actuators, embedded things/ devices, network

connections, 3D printers, data servers (local/ cloud), control systems (e.g. SCADA),

smart devices, production team, IT team, UI/ UX designers, data scientists

Major Intangible Resources: design/ modelling skills, dynamic adaption abilities, big

data tools for aggregation/ processing, Artificial Intelligence (Al)/ Machine Learning (ML)

algorithms, production standards, cybersecurity software





Procesa Steps Sample Capabilties of Digital Enterpriis: To Key T hemaCreate virtual production models/ digital twinsRun what-if scenariosEnable rapid experimentation/ simulationEnable in-production optimizationAutomate machine checksPredict avoidable downtimeProduce (Print) on demand/ near customerAuto-regulate energy consumptionAutomate process controlReceive production system alerts on personal devicesAutomate quality checks of raw materialAutomate deviation detectionAutomate defects detectionPredict maintenance needsEnable condition monitoring of equipmentEnable remote monitoring & control of equipmentAutomate maintenance ticket generation

Design/ Modelling, Scalable r infrastructureData-driven decision-makingData-driven decision-makingAutomation of processesAutomation of processesData-driven decision-makingScalable r infrastructure, FlexibilityAutomation of processesAutomation of processesUser-centered designAutomation of processesAutomation of processesAutomation of processesData-driven decision-makingAutomation of processes, Scalable rT infrastructureAutomation of processesScalable IT infrastructure

3. Lociistics & Distribution

Overall value: right quantity of stock available at the right location using optimal amount

of resources in a dynamically changing scenario

Driving Resource: Logistics & Distribution Manager

Major Tangible Resources: robots, GPS systems, sensors, data servers (local/ cloud),

drones/ trucks, smart tags, team (L&D/ IT/ UI/ UX etc), data scientists

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Develop produtionplan / schedule

Produce goods

Test goods

Maintain equipment

Major Intangible Resources: Tools for data aggregation/ processing, Al/ ML algorithms,

inventory standards, Sales & Operations Planning/ Integrated Business Planning

methods, cybersecurity software





Process Steps Sampie Capabilities of Digital Enterprise: To Key Theme

Plan inventory Optimize inventory at multiple levels Data-driven decision-makingCreate real-time demand signals Data-driven decision-making

Ship goods Enable flexible routing of fleet Data-driven decision-making, Scalable IT infrastructureDeploy drones for delivery Scalable F infrastructure, Flexibility

Store goods Deploy robots for packaging/ picking/ loading, etc Automation of processesReal-time multi-level inventory monitoring Data-driven decision-making, Scalable Fr infrastructure

Monitor performance create dynamic dashboards User-centered designReceive alerts on personal devices User-centered design

4. Marketinq

Overall value: acquire, convert and retain digitally connected customers in a cost-

effective manner

Driving Resource: Digital Marketing Manager

Major Tangible Resources: servers (local/ cloud), marketing team, IT team, UI / UX

team, data scientists

Major Intangible Resources: consumer datasets, Al/ ML algorithms, Search Engine

Optimization tools, digital platforms for advertising, cybersecurity software





38

Process Steps Sample Capabilities of Digital Enterprise: To Key Theme

Idlentify targets Aggregate diverse customer data sources Scalable IT infrastructureConduct customer micro-segmentation Data-driven decision-makingPerform search engine optimization Data-driven decision-making

Deploy targeted ad campaigns leveraging social media Data-driven decision-makingReach targets Deploy sales force as per micro-market data Data-driven decision-making

Deploy chatbots for quick response to inquiries User-centered designAuto-recommend products Automation of processesEnable product feature comparison User-centered design

Convert targets i Enable price comparison User-centered designconers Enable cashless payment Scalable IT infrastructure, Partnershicustomers Provide transparency in transaction User-centered design

Provide secure transactions Scalable IT infrastructureExecute real-time price optimization Data-driven decision-making

Retain customers Predict future needs of customers Data-driven decision-makingMonitor/ measure customer joumey User-centered design

Analyze performance Assimilate multi-channel customer feedback User-centered designConduct A/B testing Data-driven decision-making

5. Finance & Accounts

Overall value: acquire and utilize financial resources in an efficient and legally compliant

manner

Driving Resource: Finance & Accounts Manager

Major Tangible Resources: servers, data scientists, finance team, IT team, UI team

Major Intangible Resources: RPA software, Al/ ML algorithms, compliance standards,

ERP software





39

Process Steps Sample Capabilities of Digital Enterprise: ToPre-fill planning & budgeting templates

Plan & Budget Automate scenario analysisPredict training needsAutomate payables process

Manage/ Control Generate auto compliance alertsAutomate reconciliation process

Measure Deploy dynamic performance dashboardsAuto detect risky transactions

Key ThemeAutomation of processesAutomation of processesData-driven decision-makingAutomation of processesAutomation of processesAutomation of processesUser-centered designAutomation of processes

6. Human Resources

Overall value: maximize productivity of an organization by enhancing effectiveness of its

employees

Driving Resource: Human Resources Manager

Major Tangible Resources: HR team, employees across the organization

Major Intangible Resources: RPA software, Al/ ML algorithms, ERP software, Internal

guidelines/ standards





Process Steps LSample Capab!ilitlesof Digital E4iterpiseTe . Key ThemeRecruitOnboard

Train & Develop

Manage performanceManage payrollManage culture

Auto-screen candidatesDeploy bots to onboard new recruitsDevelop apps for trainingDeploy e-leaming platformsAuto-suggest improvement areasAutomate routine processesDeploy collaboration tools, hackathons

Automation of processesUser-centered designUser-centered designUser-centered designData-driven decision-makingAutomation of processesInnovation culture

7. Information Technology

Overall value: technological readiness to support transformation journeys of various

functions of the company in a cost-effective manner

40

Driving Resource: Information Technology Manager

Major Tangible Resources: IT team, other functions/ teams

Major Intangible Resources: collaborative behaviour, servers & connectivity (local/ cloud

computing), cybersecurity and other software





Process Steps Sample Capabilities of Digital Enterprise: TGo Key ThemePlan Develop integration roadmaps (e.g. Mr/ OT convergence) Innovation cultureNetwork Scale using cloud technologies Scalable IT infrastructureData Management Deploy Big Data analybcs tools Scalable F infrastructureSoftware Development Adopt DevOps Innovation cultureSecurity Guard against cyberattacks Scalable rT infrastructureSupport Automate routine processes Automation of processes

We note the following common capability themes (i.e. Key Themes mentioned in each

of the capability tables above) across different functions. We believe that a company

should consider building these common capabilities in order to become a Digital

Enterprise.

" Automation of Processes

* Innovation Culture

" Scalable IT Infrastructure

" Data-driven Decision-making

" User-centered Design

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4. MATURITY LEVELS FOR KEY CAPABILITIES

4.1 Defining a Maturity Model

Once we have identified required business capabilities, the next natural question is -

how should companies acquire these capabilities? Is there a way for companies to

measure their progress and guide themselves? While the specific approaches

companies might take to developing these capabilities may vary a lot and are beyond

the scope of this thesis, a tool that will help them measure their development is the

focus of the second part of this thesis. Specifically, we attempt to develop a tool like

Capability Maturity Model that can be conveniently used by organizations for self-

assessment. We begin with a discussion of the Capability Maturity Model before

proceeding to introduce our tool.

The origins of Capability Maturity Model (CMM) date back to 1987 when the Software

Engineering Institute (SEI) at Carnegie Mellon University (CMU) was contracted by the

U.S. Department of Defense (DoD) to develop a model to evaluate the capabilities of

their software contractors. The SEI released the first version of the model in 1991. Over

the next two decades, the CMM model expanded into other areas such as Services,

Acquisition, and People and became integrated, to be known as Capability Maturity

Model Integration (CMMI). In 2012, CMU founded the CMMI Institute in order to extend

the benefits of CMMI beyond software and systems engineering to any product or

service company regardless of size or industry. As per CMMI website, over 10,000

organizations in 106 countries around the world have used CMMI Institute models to

improve their organization's capabilities and performance(CMMI, 2018)

The CMM is a reference model of mature practices in a specified discipline, used to

assess a group's capability to perform that discipline. It describes an evolutionary

improvement path for process maturity, and classifies the maturity of the processes

across multiple levels. SEI believed that processes have a major impact on the quality

and productivity delivered by an organization. Thus, the capability maturity model it

developed was a framework that focused on improvement of processes. The CMM

became an effective tool for companies in developing large and complex products to

42

assess their current practices and improve their organizational capabilities in processes

(Liu, 2003).

The CMMI Institute believes that that organizations do their best when they focus their

process improvement efforts on a prioritized and manageable number of practice areas

at a time. Maturity levels represent a staged path for an organization's performance and

process improvement efforts based on predefined sets of practice areas (PAs). Within

each maturity level, the predefined set of PA's also provide a path to performance

improvement. Each maturity level builds on the previous maturity levels by adding new

functionality or rigor. A generic description of the five maturity levels sourced from the

CMMI Institute website are mentioned below. These maturity levels provide a way to

characterize an organization's capability and performance.

* Maturity Level 0 (Incomplete): Ad hoc and unknown. Work may or may not get

completed.

" Maturity Level 1 (Initial): Unpredictable and reactive. Work gets completed but is

often delayed and over budget.

" Maturity Level 2 (Managed): Managed on the project level. Projects are planned,

performed, measured, and controlled.

* Maturity Level 3 (Defined): Proactive, rather than reactive. Organization-wide

standards provide guidance across projects, programs, and portfolios.

" Maturity Level 4 (Quantitatively Managed): Measured and controlled.

Organization is data-driven with quantitative performance improvement

objectives that are predictable and align to meet the needs of internal and

external stakeholders.

" Maturity Level 5 (Optimizing): Stable and flexible. Organization is focused on

continuous improvement and is built to pivot and respond to opportunity and

change. The organization's stability provides a platform for agility and innovation

43

In 2003, MIT's Lean Aerospace Initiative developed a self-assessment tool (LESAT) to

help companies measure the leanness of their organizations. It leveraged the CMM to

arrive at definitions of its maturity levels. The generic LESAT Capability Maturity Matrix

level definitions are included below for reference.

Cpabiliy..............,.. -. ............. ___

....r... .... .. ..... ...

Level I Some awareness of this practice; sporadic improvementactivities may exist

Level 2 General awareness; informal approach deployed in a few areaswith varying degrees of effectiveness and sustainment

Level 3 A systematic approach/methodology deployed in varying stagesacross most areas; facilitated with metrics; good sustainment

Level 4 On-going refinement and continuous improvement across theenterprise; improvement gains are sustained

Level 5 Exceptional, well-defined, innovative approach is fully deployedacross the extended enterprise (across internal and external valuestreams); recognized as best practice.

Generic LESAT Capability Maturity Matrix level definitions. Source:(Hallam, 2003)

It can be inferred from the above discussion that a maturity model classifies a process

with respect to the degree of its sophistication and integration across the organization. It

has several levels that present a graduated scale to a user for self-assessment. We

attempt to use this framework to develop our tool. Also, while the CMM focuses on

measuring capability levels of a process, our aim is to develop a tool meant for

measuring development of business capabilities within an organization.

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4.2 Defining Maturity Levels for key capabilities

4.2.1 Approach and methodology

We adopt the following approach to define the maturity levels for each of the common

capabilities we identified in Section 3 earlier.

1. First, we identify a company that represents "high performance" for a given

capability. The company is identified basis secondary research. Newspaper articles

or publications by academic journals or consulting companies are relied upon. Third

party survey results identifying top ranking companies for the given capability are

leveraged where available.

2. We then study the company and its high level of capability or its journey to achieve

high level of capability using secondary resources as much as possible. We use this

information to arrive at a definition of maturity level 5 (i.e. best performance) for that

specific capability.

3. Next, we refer the generic CMM level definitions described earlier and work

backwards from the level 5 definition to define the lower levels of maturity for the

concerned capability along similar lines.

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4.2.2 Results

The results of our method for each of the capabilities are presented below.

A. Generic Capability: Automation of Processes

Description: This capability refers to the ability of an organization to automate its

processes. In the manufacturing world, this could be in the form of physical robots

that substitute humans for labour. Alternatively, these could be intelligent machines

that take corrective action based on the ongoing performance of the production

process. In the services world, process automation often means automating

repeatable tasks or processes carried out by people. These processes are rule-

based (i.e. they do not involve human decision making), stable (i.e. processes are

not broken), usually voluminous (i.e. high volume activities) and are entirely in the

digital world for bots (i.e. software programs) to perform the tasks on their own. This

automation of computer-based tasks/ processes by software programs is often

referred to as Robotic Process Automation (RPA). RPA market is currently

experiencing a boom finding applications across several industries. As such, it has

attracted the attention of many IT and management consulting companies that

provide solutions that equip companies with the capabilities required to leverage this

opportunity.

High Performance Company: We study the positive results achieved by New York

Life Insurance Company by automating their processes using RPA technology. New

York Life Insurance Company is the third-largest life insurance company in the US,

the largest mutual life insurance company in the US and is ranked #69 on the 2018

Fortune 500 list of the largest United States corporations by total revenue (source:

Wikipedia). It achieved the following outcomes within 12 months of initiating the

process of deploying process automation and was hailed as a success story by EXL

Service, a leading provider of RPA solutions to the insurance industry in the US

(EXL Service, 2018):

0 $2.2 MM cost savings over 5 years

0 85% reduction in tax withholding processing time

46

0 25% capacity gained in investment accounting reconciliation

Salient features of the company's transformation efforts included the following (EXL

Service, 2018):

" Goals were clearly stated (i.e. eliminate manual repetitive tasks, re-

engineer processes, and re-align human capital on strategic activities)

" Established and enabled RPA Office / Center of Excellence suited for

ongoing innovation in three steps:

o Established basic infrastructure and selected RPA platform

o Defined rules and governance structure

o Enabled supporting processes

The RPA office was equipped with a broad base of reusable generic

utilities

* Generated heat maps of RPA opportunities to immediately impact

outcomes. Identified opportunities to run pilot automations basis ROl

promise, connect with different parts of the organization (i.e. including

multiple stakeholders) and feasibility of execution

" Established "Bot Factory" for continuous improvement and maintenance

for all bots along with change management and continued governance

* Maintained consistency in language with respect to anticipated benefits

while communicating with different stakeholders

The company intends to take its RPA efforts to the next level with company-wide use

cases of increasing complexity (e.g. optimization of processes)

Maturity Levels: Basis the learnings from the case study and the generic CMM level

definitions discussed earlier, we define maturity levels for "Automation of Processes"

capability for a service organization as under:

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Maturity Level Description

Level 1(Low)

Level 2(Low-Medium)

Level 3(Medium)

* Minimal or no automation. Processes are largely manual with

significant dependence on human resources for laborious,

rule-based tasks

* Leadership or functional leaders unaware of automation

technologies such as RPA

* Low level of automation at individual level or systems (e.g.

Excel Macros)

* Management skeptical of technology and is generally not

focused on operational efficiencies

* Low level of organizational awareness about automation

technologies; knowledge restricted to a few functions

" Automation restricted to experimental projects in isolated

pockets in the company; efforts largely driven by personal

initiative

" Management open to leveraging technology for low-hanging

fruits but not willing to commit to change efforts that might be

inconvenient

" Absence of a vision or a company-wide roadmap to utilize

technologies for increasing efficiencies

" Enterprise-wide awareness about automation technologies

" High level of planning among a few functions with automation

metrics/ targets defined

" Higher automation-related expertise among staff, may even

have SMEs

" Automation roadmap clearly defined

" Efforts spread beyond one team or project

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Level 4(Medium-High)

Level 5(High)

* Automation goals are set across functions and clearly

communicated and understood by various stakeholders

" Adequate staff - from various functions - is trained in the

technologies involved

* Efforts are scaled across the enterprise

* Presence of supporting processes as required

* A variety of automation tools and platforms are available;

maintenance could be need-based/ reactive

* Value of automation well-appreciated by management and

employees in general; automation is a strategic goal

" Presence of an Automation Center of Excellence to govern

efforts

" Candidate (processes) from across the organization are

systematically and strategically screened for prioritization;

Standard Operating Procedures well defined and understood

by all involved

" Additional technologies layered on top of those used for basic

automation to derive next level benefits (e.g. Al/ ML for

cognitive bots)

* Systems and plans exist for pro-active maintenance of

infrastructure

B. Generic Capability: Innovation Culture

Description: This capability refers to the ability of an organization to create a culture

that fosters unorthodox thinking in a collaborative environment. It not only helps a

company come up with path-breaking products or solutions, but also allows

organizational transformations to happen in a smooth manner. Collaboration in an

innovation culture happens internally as well as externally; ideas are constantly

generated, tested and iterated on a large scale among employees and with third

49

parties. An innovation culture thus helps companies compete in markets defined by

rapid change, which is a characteristic of many industries in the digital age we live in.

As per MIT (Rao & Weintraub, 2013), an innovative culture rests on a foundation of

six building blocks: resources, processes, values, behaviour, climate and success as

described in brief below:

" Values: Values drive priorities and decisions, which are reflected in how a

company spends its time and money. Truly innovative enterprises spend

generously on being entrepreneurial, promoting creativity and encouraging

continuous learning. Values manifest themselves in how people behave

and spend, more than in how they speak.

" Behaviours: Behaviours describe how people act in the cause of

innovation. For leaders, those acts include a willingness to kill existing

products with new and better ones, to energize employees with a vivid

description of the future and to cut through red tape. For employees,

actions in support of innovation include doggedness in overcoming

technical roadblocks, "scrounging" resources when budgets are thin and

listening to customers.

" Climate: Climate is the tenor of workplace life. An innovative climate

cultivates engagement and enthusiasm, challenges people to take risks

within a safe environment, fosters learning and encourages independent

thinking.

" Resources: Resources comprise three main factors: people, systems and

projects. Of these, people - especially "innovation champions" - are the

most critical, because they have a powerful impact on the organization's

values and climate.

* Processes: Processes are the route that innovations follow as they are

developed. These may include the familiar "innovation funnel" used to

capture and sift through ideas or stage-gate systems for reviewing and

prioritizing projects and prototyping.

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* Success: The success of an innovation can be captured at three levels:

external, enterprise and personal. In particular, external recognition shows

how well a company is regarded as being innovative by its customers and

competitors, and whether an innovation has paid off financially. More

generally, success reinforces the enterprise's values, behaviours and

processes, which in turn drive many subsequent actions and decisions

such as who will be rewarded, which people will be hired and which

projects will get the green light.

High Performance Company: Cisco is considered to be one of the most innovative

companies of the world. Founded in 1984, the company develops, manufactures and

sells networking hardware, telecommunications equipment and other high-

technology services and products. Cisco's revenue crossed USD 49 billion and

employee count exceed 74,000 in 2018 (source: company website). Some of the

achievements and recognitions of the company that are relevant to innovation

include the following:

0 #25 on BCG's Most Innovative Companies List in 2015

* #43 on Fortune's list of businesses that Changed the World in 2018

* #12 on Fortune's 30 Best Workplaces in Technology List in 2017

Below are some of the features of company's capability with respect to an innovation

culture:

* Forward-looking mission and vision statements that embrace change

o Mission Statement: Shape the future of the internet by creating

unprecedented value and opportunity for our customers,

employees, investors, and ecosystem partners.

o Vision Statement: Changing the Way We Work, Live, Play, and

Learn.

" Infrastructure

o Hyper-Innovation Living Labs: CHILL (Cisco Hyper-Innovation

Living Labs) takes a vertical and creates an environment where a

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handful of Cisco's biggest (non-competing) customers (e.g. Nike,

Visa, etc) come together, collaborate and build prototypes to drive

rapid results -within months, days, or mere hours (Cisco, 2018a).

o Innovation Centers (ICs): ICs are placed around the world, each

serving as a hub to showcase what is possible with digital

transformation and loT, building solutions with partners, engaging

in rapid prototyping, investing and partnering with startups,

accelerators, and universities. The ICs accelerate opportunities,

deepen relationships, and foster innovation (Cisco, 2018e).

Employee and community engagement

o Innovation Grand Challenge: This global competition recognizes

technologies, products or business models that best leverage the

Internet of Things (loT) across a variety of categories. Submissions

are encouraged from startups, entrepreneurs, developers and

anyone else who has an early-stage business, prototype or solution

in customer trials (Cisco, 2018b).

o Hackathons: Cisco organizes hackathons which are sprint-like

events where participants tackle complex problems and emerge,

after a specific time frame, with innovative ideas and ways to better

change the world (Cisco, 2017a).

o Collaboration tools: Cisco deploys technologies / tools pertaining to

communication (IP phones, web, mobile, desktop clients, etc),

conferencing & messaging and physical and virtual workspaces to

drive collaboration among employees (Cisco, 2018d).

* Partnerships

o Investment in start-ups: Cisco Investments annually invests $250-

$300 million, both directly in startups and indirectly through venture

capital funds. Some of the investments may ultimately result in the

company's acquisition by Cisco or others, while some might last

years as the startup develops into a mature company (Cisco,

2018f).

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o Co-Innovation: The company works with customers, partners, start-

ups, academia and government to turn bright ideas into

transformative solutions (Cisco, 2018c).

o Cisco Tech Fund (Incubation): This is a multi-million dollar

innovation fund designed to nurture disruptive ideas inside Cisco

that are currently not on the company's radar (Cisco, 2012a).

Training & Development

o Cisco Innovation Academy: This is a website that provides

information about entrepreneurship and developing new ideas. It

helps leaders generate brilliant ideas from their teams.

o Cisco Pioneer Awards: These awards congratulate engineering for

the work that it does. Engineers select among themselves who to

nominate-who they consider to be the top candidates in the

development organization from the preceding 12 months. Winners

stand out not only in innovation and industry impact but how much

they had to be pioneers, how much they had to travel a road that

hadn't been built yet (Cisco, 2017b).

* Processes

o Cisco Technology Radar: Cisco has a self-nominated team of

employee enthusiasts unaffiliated with any particular function or

business unit that take up the challenge of identifying technology

developments worldwide. That team and the process that unearths

those emerging innovations is called as the Technology Radar. The

Technology Radar is based on the insights of 70+ globally-

positioned 'scouts' who have become fundamental to Cisco's

intelligence gathering initiatives. By channelling their passion for

emerging technologies, Cisco is identifying opportunities and

threats that could impact their business in five, ten or even twenty-

five years' time (Cisco, 2012b).

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Maturity Levels: Basis the learnings from Cisco and the generic CMM level definitions

discussed earlier, we define maturity levels for "Innovation Culture" capability as under:

Maturity Level

Level 1(Low)

Level 2(Low-Medium)

Description

" Minimal or no focus of the company on innovation. Company

is content relying upon existing products for future revenues

" Absence of or a poorly equipped R&D department. No cross-

functional approach to driving innovation/ development;

product development is largely performed in silos with low

level of trust among employees

" Aversion to risk causes employees not to attempt anything

that is different from what they are accustomed to doing

" Very limited tools for communication / exchanging ideas

among employees (e.g. emails only)

" Product-related decisions primarily made by top management

" Absence of documented or structured product development

processes

" Low focus on innovation. Company content following I copying

competitors

* R&D function exists, but limited focus on product development

" Need-based cross-functional interaction. Over-documentation

of communication records indicating low trust/ risk tolerance

levels

" Employees attempt new initiatives, but only as directed by top

management

" Limited tools for communication among employees (e.g.

emails, chat platforms, etc)

" Product-related decisions primarily made by top and middle

management

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I

Level 3(Medium)


* SOP for product development exists but is not mature enough

or not adhered to

* Moderate focus on innovation. Company comes out with new

products, but the change is incremental

* R&D function exists but with adequate resources. Focuses on

product development exists but works largely by itself

* Other functions provide inputs to the product development

process in a reactive manner; ownership still lies with R&D

" Employees attempt incremental improvement initiatives

" Tools for collaboration (e.g. idea sharing) among employees

available but not used much by employees due to lack of

awareness or skills

" Product-related decisions led by middle management

" A well-defined SOP for product development exists and is

systematically adhered to although more as compliance than

in spirit

" Innovation a strategic priority for the company. Company

attempts to lead the industry with offerings although change

not disruptive

" Innovation function exists. Integrates cross-functional inputs in

developing a product road-map

* Employees attempt radical improvement initiatives. Failures

are accepted

" Tools for collaboration (e.g. idea sharing) among employees

available and are widely used

" Product-related decisions led by middle management although

ideas form lower-level employees leveraged

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* A well-defined SOP for product development exists and is

systematically adhered to in spirit

Level 5 * Clear focus on innovation made explicit through mission and(High) vision statements or strategic goals. Company not afraid to

introduce disruptive changes in the market

* Innovation function collaborates with internal as well as

external stakeholders in jointly developing solutions (e.g.

suppliers, competitors, customers, etc)

* Company not hesitant to invest money to acquire innovation

(e.g. acquire start-ups)

* Dedicated buildings/ workplace facilities available for

innovation with adequate resource backing

* Employees across functions and hierarchical levels are able to

come up with radical ideas. Events such as hackathons

leverage this ability of the workforce

" Lower-level employees are encouraged and empowered to

champion new product development. Trainings are offered to

develop innovation skills of employees

" Presence of advanced tools that allow employees to manage

innovation projects as well as collaborate well

" Systems leverage data from multiple sources to allow

analytical thinking

C. Generic Capability: Scalable IT Infrastructure

Description: This capability refers to the ability of an organization to scale up (or

down) its IT capacity to meet dynamically changing business needs. Large storage

capacities as well as advanced computing abilities are essential resources to

leverage big data for business advantage. Technology is not just a supporting

function in this context; it is rather an enabler of important processes that often

56

contribute significantly to the core competencies of a Digital Enterprise. Companies

without scalable IT infrastructure may find the volume and velocity of big data too

much to handle. The most common solution to achieving a scalable IT infrastructure

is cloud computing. Maenhaut et al define cloud computing as "a technology that

enables elastic, on-demand resource provisioning, allowing application developers

to build highly scalable systems"(Maenhaut, Moens, Ongenae, & Turck, 2015). A

popular definition of cloud computing comes from the National Institute of Standards

and Technology (NIST), that says "cloud computing is a model for enabling

convenient, on-demand network access to a shared pool of configurable computing

resources (e.g., networks, servers, storage, applications, and services) that can be

rapidly provisioned and released with minimal management effort or service provider

interaction". It allows end users to utilize parts of bulk resources that can be acquired

quickly and easily.

High Performance Company: Nefflix, world's leading entertainment service company

offering online streaming of films and television programs, is widely recognized for its

cloud-migration initiative. The company started in 1997 with a business model

focused on renting DVDs. It began streaming media in 2007, and over the next

decade or so, grew several fold to have 130 million paid memberships in over 190

countries. These customers enjoy TV series, documentaries and feature films across

a wide variety of genres and languages on Netflix. As the company's user base

grew, the data they were generating increased exponentially. The company

recognized the need to move to a cloud based solution early in its journey for the

benefits it offered with respect to reliability, horizontal scalability, and distribution. It

chose Amazon Web Services (AWS) as its cloud provider. Below are some of the

salient features of its migration as described by the Yury, VP - Cloud and Platform

Engineering for Netflix (Yury lzrailevsky, Stevan Vlaovic, & Ruslan Meshenberg,

2016)

* Majority of systems, including all customer-facing services, migrated to the

cloud prior to 2015

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" Figured out a secure and durable cloud path for its billing infrastructure as

well as all aspects of its customer and employee data management

" In early January, 2016, after seven years of diligent effort, Netflix completed

its cloud migration and shut down the last remaining data center bits used by

its streaming service. As such, Netflix became one of the largest companies

to operate entirely in the public cloud (Angus Loten, 2016)

" The company relies on cloud for all of its scalable computing and storage

needs - business logic, distributed databases and big data processing/

analytics, recommendations, transcoding, and hundreds of other functions

that make up the Netflix application

" They did not just forklift all of their systems, unchanged, out of the data

center and dropped them in AWS. The company believed that in doing so,

they would have ended up moving all the problems and limitations of the data

center along with it

" Netflix chose the cloud-native approach, rebuilding virtually all of their

technology and fundamentally changing the way they operate the company.

" Architecturally, they migrated from a monolithic app to hundreds of micro-

services, and denormalized data model, using NoSQL databases

" Budget approvals, centralized release coordination and multi-week hardware

provisioning cycles made way for continuous delivery; engineering teams

making independent decisions using self-service tools in a loosely coupled

DevOps environment. This helped accelerate innovation

" The company had to build many new systems and learn new skills in the

journey

Moving to the cloud has brought Netflix a number of benefits as mentioned below

(Yury lzrailevsky et al., 2016):

* Eight times as many streaming members in 2016 than they did in 2008. The

company today consumes 15% of the total downstream volume of internet

traffic globally. In the US, that figure is 19.1% of total traffic (Morris, 2018).

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" Ability to add thousands of virtual servers and petabytes of storage within

minutes, if required.

* Significant increase in service availability, near its goal of 99.99% uptime.

" Cloud costs per streaming start ended up being a fraction of those in the data

center.

Maturity Levels: Leveraging the learnings from Netflix, the generic CMM level definitions

discussed earlier, cloud related Maturity Models created by professionals (Joshi

Maneesh, 2018), (Atchison Lee, 2018), (Schmid Alexander, 2017) and AWS (Amazon,

2016) we define maturity levels for "Scalable IT Infrastructure" capability as under:

Maturity Level

Level 1(Low)

Level 2(Low-Medium)

Description

* Limited or no awareness about cloud technology among

employees

" Lack of vision for IT; seen by most as a support function

" Skepticism about hosting data outside the company; all IT,

including hardware, software and data is internal to the

company

" Long development/ implementation timeframe that often

begins with procurement of hardware and/ or software and

involves several layers of approval process

" Dev and IT organizations work in a siloed fashion

" Data analytics non-existent

* Cloud technologies perceived to be a cost-reduction initiative.

Awareness of cloud benefits limited to "lift-and-shift", thus

cloud usage limited to storage or a few safe applications

mainly as an experiment

" Initiatives leveraging cloud largely driven by a few teams

" Absence of company-wide knowledge about cloud; cloud not a

part of company's IT strategy

59

i

* Dev and IT interact as needed but implementation timelines

long

0 Basic in-house analytics abilities used by the company

Level 3 0 IT function well versed with cloud technologies, capabilities(Medium) and benefits

0 A vision for cloud exists within the company, including a

roadmap for migration

0 Cross-functional policies pertaining to cloud usage exist

0 Cloud replaces some of the on-premise servers and other

back end resources. Cloud used under the laaS or SaaS

models

0 Analytics services offered by cloud service providers

leveraged

0 Application visibility and monitoring strategies being used in

data centers get extended to the cloud

Level 4 0 Value-added services offered by cloud service providers(Medium-High) leveraged

* Cloud used under the PaaS model. Applications re-architected

and developed using cloud-native features with the intent to

take advantage of features, scale or performance otherwise

not available in the existing environment

* High confidence among management in cloud; management

believes in increasing cloud adoption to release internal

resources for more value adding work

Level 5 0 Cloud is an important part of business strategy(High) 0 Almost all of the company's IT (hardware, software, data)

operates in the cloud

0 A large fraction of company's data centers shut down

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Generic Capability: Data-driven decision-making

Description: This capability refers to the ability of an organization to leverage data

analytics for decision making. There are three aspects to this capability - a) having

the IT infrastructure to run advanced analytics algorithms, b) having the ability to

understand algorithms and their outcomes, and c) adopting the cultural change to

make decision basis evidence as opposed to intuition.

High Performance Company: German-headquartered Audi AG is among the most

successful and well-known automobile companies in the world. As per Wikipedia, the

company's revenue and operating income stood at E60 billion and E4.7 billion in

2017. Its production output was 1.9 million units. The company was originally

established in 1909 and was acquired by Volkswagen (VW) in 1966. Consistent with

the slogan of Vorsprung durch Technik, meaning "Being Ahead through

Technology", the company aims at further extending its market leadership by

leveraging digital technology to provide superior products and services to its

customers.

Audi's digital transformation journey focused on establishing big data analytics

capability within the company. The initiative began in 2013 and was spread out

across three phases over a five-year period. In 2016, Audi won the "Best Practice

Award for Business Intelligence and Analytics" from BARC Congress for BI and Data

61

" Applications built on microservices

" DevOps teams are nimble, bringing new features to market in

less time

" Focus on exploiting cloud for innovation related benefits (as

opposed to looking from only a cost reduction perspective)

" Utilization of advanced analytics capabilities leveraging cloud

infrastructure

Management (BARC, 2018). Salient features of Audi's transformation journey

include the following (Dremel, Herterich, Wulf, Waizmann, & Brenner, 2017):

Phase I - Advancing

* Created an inter-disciplinary innovation hub called the Audi Business

Innovation GmbH (ABI) with an aim to extend capabilities of existing

departments to develop and implement digital business innovations in 2013.

ABI's teams embraced various disciplines, including software development,

big data architecture, data science and user experience

* External parties (consultancies) were used for acquiring analytics

competencies (knowledge and methodological input for data analytics); IT

department played a passive, coordination role

* Consultancies played IT department's traditional technology tasks (data

integration, conceptualization, selection of technology infrastructure, etc)

* Analytics demands of business units were met one at a time through pilot

cases. Topics regarding analytics were discussed only infrequently in existing

committees

* The ABI primarily delivered reporting and descriptive analytics services using

marketing data (data flowing from Audi's web portals) as the main data

source

" Sales & Marketing department initiated analytics projects and was held

accountable for their success. Costs of the projects were not passed on to

internal customers

* Insights from analytics services were used in daily decision making

processes in sales & marketing department only as on-top information.

Decision making not driven by data-based insights

Phase II - Enabling

* IT department began to provide technology support for data analytics,

enabling the exploitation of big data. Thus, analytics competencies began to

be built up in the IT department

62

* IT department began to take up the tasks previously carried out by external

consultancies

" A unit specifically responsible for general technology infrastructure for big

data use cases was established as an internal IT competence center for

synchronizing all existing Audi big data projects

" More advanced technology infrastructure deployed to develop analytics

services (e.g. Hadoop cluster).

* Advanced descriptive analytics services were developed by the ABI using

methods such as neural networks and marketing data

" Program steering board was established to create holistic analytics

capabilities. This board included managers and professionals from Sales &

Marketing as well as IT departments to push big data analytics forward. The

board reviewed collaboration model, assesses strategy and projects, goals

and challenges, etc on a bi-weekly basis

" Analytics services still operated largely as a cost-center. However, any

shortfalls in budgets were filled by service-oriented payments from internal

customers

" Decision makers gained better understanding of the value of data analytics;

supplemented intuitive and experience based decision making with data

based insights

* Decision making processes were now characterised by recurrent patterns

enriched by data. For instance, data driven insights were used to forecast

orders with a three-month time horizon and to optimize media spending

Phase Ill - Leveraging

* This is the current, final state in its journey

* Focussed on providing analytics-as-a-service with advanced analytics

methods (i.e. predictive and advanced descriptive analytics). A committee of

senior executives from different departments established to oversee the

analytics-as-a-service initiative

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" Operational car data being used in the design of digital services for drivers of

Audi cars (thus, expansion of use cases)

" IT department fully responsible for all technology tasks and is becoming a

consulting partner for the other big data analytics stakeholders

" Development team adopted the agile software development method (Scrum)

" A digital business department was formed within the sales and marketing

department. This department is responsible for enabling digital topics and

initiatives through analysis of different data sources (beyond sales and car

operations data). "Digital Factbook" created to document rules and guidelines

for the department

" Roles and responsibilities for team to drive analytics-as-a-service established

* Analytics unit operates as a profit center aiming for 10% ROI on analytics

services to internal customers.

" Chief Digital Officer role reporting to the CEO established

" Workshops about digital culture, agile work, new processes, etc conducted

" Decision makers rely on data-based insights for decision making

Maturity Levels: Leveraging the learnings from Audi's case study and the generic CMM

level definitions discussed earlier, we define maturity levels for "Data-driven decision-

making" capability as under:


Level 1 0 Limited or no awareness about data analytics in the company(Low) 0 Perception of analytics limited to elementary analysis using

basic tools such as Microsoft Excel; absence of manpower

skilled in data analytics

0 Decision-making is based on intuition and experience

0 Lack of knowledge about how to set up data-based

experiments for innovation

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Level 2(Low-Medium)

Level 3(Medium)

e Lack of awareness about cloud technologies or features

" Knowledge of analytics limited to a few individuals or teams

" Analytics not a strategic priority; company unwilling to commit

resources beyond utilizing external agencies for occasional

data analytics assignments

" Legacy IT architecture that does not leverage cloud

technologies

* Management appreciates analytics but decisions still taken

based on experience and intuition

" Limited manpower that is able to understand the advantages

of data analytics, but not supported by the environment/

culture to deploy methods and derive benefits

" Analytics services seen as a cost head

" Awareness about data analytics among leadership of multiple

functions within the company

" Analytics based projects run by a few departments regularly

* Some of the legacy systems migrated to cloud for leveraging

big data analytics

" Reliance on data analytics for decision making by some

functions

" A pipeline of analytics based projects exist for a few functions

" Limited pool of skilled resources that is stretched across

several assignments that it may or may not be able to deliver

upon all by itself

" Projects mainly restricted to descriptive analytics

Level 4 * A full-fledged analytics department exists within the company(Medium-High) Collaboration between IT and other departments in developing

and executing a vision for data analytics within the company.

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Steering committee comprising of company's leadership

oversees progress

" Value-added analytics services offered by cloud service

providers leveraged

" High confidence of management in analytics which is

ingrained in company's strategic decisions

" Presence of trained manpower in the company to run analytics

assignments

* Data analytics department seen as an asset / profit center by

company's leadership who is willing to provide resources to

build functionality in the company

" A culture welcoming of experimentation and learning being

developed. SOP documents/ trainings/ workshops being

executed in the company to increase awareness

Level 5 0 Value-add of data analytics is widely recognized across(H igh) different functions of the company

" Pipeline of projects (e.g. use cases) across multiple functions

maintained and worked upon

" IT infrastructure completely developed to enable big data

analytics (e.g. cloud computing)

" Presence of skilled professionals in the company to run and

understand advanced analytics assignments (e.g. data

scientists, statisticians, computer scientists, etc). Importantly,

the team members can interpret the outcomes to business

users to inform decision making

" Analytics Center of Excellence exists for different teams to

approach and seek help while developing their analytics use

cases

" Leadership relies significantly on outcome of analytics projects

for daily and strategic decisions

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D. Generic Capability: User-Centered Design

Description: This capability refers to the ability of an organization to create products

or solutions with a deep focus on user experience. In today's digital age, a large

amount of user data is being continuously generated and made available to

companies thanks to connected devices. Companies are leveraging this data in

designing and developing products aimed at delighting the customer not just before

or during the purchase stage but throughout the usage journey and lifecycle of the

product. There are some related terms that could be confused with user-centered

design. We clarify them as below:

* Human-centered design: As per the definition sourced from Kent State

University, human-centered design is an approach that focuses on fully

understanding the perspectives of the people the design is for in each step of

the process. Human-centered design requires a large amount of ideation,

testing, learning and adjusting based on the feedback from a sample of the

intended audience. On the other hand, they define user-centered design as

an approach that is complementary to the user's inherent way of doing things.

Rather than having people adjust to the technology and design, the design

and technology attempts to account for their tendencies and preferences in

the very way they are built. While the terms human-centered design and user-

centered design can be used interchangeably at times, there could be a

subtle difference in meaning. User-centric design could be taken as a less

emotionally empathetic approach, focused primarily on the tangible,

physiological ways users interact with a product, whereas human-centric

design incorporates their emotional or psychological preferences as well

(KSU, 2018).

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0 A culture of rapid testing/ experimentation exists. IT and other

functional teams are aligned to deliver on this approach to

innovation

* Design-thinking: It is an approach that asserts that a hands-on, user-centric

approach to problem solving can lead to innovation, and innovation can lead

to differentiation and a competitive advantage. This approach comprises of 6

distinct phases: empathize, define, ideate, prototype, test, implement

(Gibbons, 2018)

* User experience: As per Nielsen Norman Group, user experience

encompasses all aspects of the end-user's interaction with the company, its

services, and its products. The requirements for an exemplary user

experience are meeting the exact needs of the customer without fuss or

bother, and making products that are a joy to own and use. Providing high-

quality user experience in a company's offerings needs a seamless merging

of the services of multiple disciplines, including engineering, marketing,

graphical and industrial design, and interface design (Norman & Nielsen,

2018)

* User interface: As per Every Interaction (a London-based UX Design agency),

a user interface (UI) is a conduit between human and computer interaction -

the space where a user will interact with a computer or machine to complete

tasks. The purpose of a Ul is to enable a user to effectively control a

computer or machine they are interacting with, and for feedback to be

received in order to communicate effective completion of tasks. They list the

criteria for a sound user interface as: should be intuitive (not require training

to operate), efficient (not create additional or unnecessary friction) and user-

friendly (be enjoyable to use) (El, 2018).

* Customer journey: As per the definition offered by Forrester, the customer

journey is the series of interactions between a customer and a company that

occur as the customer pursues a specific goal. The journey may not conform

to the company's intentions (Forrester, 2018).

High Performance Company: Apple is one of the most successful consumer

electronics product companies in the world. The company has had a long history of

bringing innovative products to market. These products have revolutionized as well

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as disrupted entire industries. Examples of such products include the iPod, iPhone,

iPad, Mac personal computer, Apple Watch etc. Apple was also the first public U.S.

company to be valued at over US$1 trillion. The success of the company is often

attributed to its founder, Steve Jobs, whose distinct views on design influenced the

creation of its many popular products.

Apple is widely perceived to have a secretive culture that is intended to guard the

company's innovation / ideas from being stolen (Willis, 2012). We thus rely on

quotes of people who have either worked in Apple or have had first-hand

experiences of working with Apple employees to gain an understanding of how the

company maintains its focus on user-centered design. We also include some of

Steve's famous quotes that give us an insight into his perspectives on design.

" "Whenever there's a question about whether we should do something or not,"

Tran (who worked in Apple's social and content team) told me, "we always

come back to the question of, 'How would this impact the customer

experience?' The answer to that question determines how they should

proceed. "If it's going to improve the customer experience even marginally,

the answer is yes, we should be doing that - even if it takes us hours or days

or weeks," Tran said (Lebowitz, 2018)

" Our goal has always been to create products that our customers love - Tim

Cook, CEO (Haselton & Lipton, 2018)

* "From the beginning to the end, the same recruiter stayed in touch via email

with me and answered my questions in time. I did not get a single system-

generated email. My recruiter works with applicants for design roles

specifically. What this means is that your recruiter will at least know

something about your industry and will first screen the applicants before their

resumes reach the department they apply for" - Darren Chang on his Product

Design Internship Interview at Apple (Chang, 2018)

" "There was this culture of working hard, dedicating yourself to the work and

trying to imagine (the user's experience). The idea of empathy is something

that maybe you don't think about from the outside world as being a big part of

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technology development and software development, but it was this culture of

thinking about people and trying to empathize with them and their future

experiences that they would be having with the work that we are developing

in the labs. ... There are so many elements that go into making these

experiences actually happen, so we had to imagine what it would be like for

someone who doesn't care about the gadget for the sake of the gadget but

simply wants the experiences and then wants to get on with the rest of their

lives. This empathy, this notion of putting ourselves in somebody else's

shoes, was a big part of how we thought about it, how we approached our

design and development work" - Ken Kocienda former Principal Engineer at

Apple

* "The critical thing for me is that the company has always had a strong sense

of its connection with the end user-the person who was actually going to be

using the product. For this reason, we even had someone whose job was to

do "unboxings," helping us get a clear impression of what the user experience

was like from the customer's point of view before the packaging tape was

severed... In my time at the company, Apple was never a structural company.

It was never defined by the numbers or the mechanics. It was always a

cultural company, defined by its mission-that is, its connection with the end

user. And everybody who worked for the company knew it" - Michael

Hageloh, Sales at Apple (Hageloh, 2018)

* "Apple employs what is known as a "unitary organizational form" - U-form for

short - which is also known as a "functional organization." In broad strokes,

a U-form organization is organized around expertise, not products: in the case

of Apple, that means design is one group (under Ive), product marketing is

another (under Schiller), and operations a third (under Williams, who is also

Chief Operating Officer)... What is most striking about that list is what it does

not include: the words iPhone, iPad, Mac, or Watch. Apple's products instead

cut across the organization in a way that enforces coordination amongst the

various teams" (Thompson, 2016)

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* "Jony Ive - the British designer that is the Chief Design Officer (CDO) at

Apple- and his design team lead the company and they do not report to

finance, manufacturing, etc. They are given free rein to set their own budgets

and are given the ability to ignore manufacturing practicalities... When a

design team works on a new product they are then cut off from the rest of the

Apple business. They may even implement physical controls to prevent the

team from interacting with other Apple employees during the day... The team

is also removed from the traditional Apple hierarchy at this point. They create

their own reporting structures and report directly to the executive team. This

leaves them free to focus on design rather than day-to-day minutiae.... The

Apple New Product Process (ANPP) information is given to a product

development team when they begin work. It details every stage of the design

process and it goes into elaborate detail. The idea is to define what stages

the product creation team will go through, who will be responsible for

delivering the final product, who works on which stage and where they work

and also when the product is expected to be completed... The Apple

Executive Team holds a regular Monday meeting to examine every single

product that the company has in design phase at that point in time... Like any

good design company, the design process at Apple is not over when

manufacturing begins. In fact, Apple iterates the design throughout

manufacturing. The product is built, it's tested and reviewed, then the design

team improves on it and it's built all over again. These cycles take 4-6 weeks

at a time and may be run many times over a product's development

lifecycle... When production is complete the EPM will take possession of

some or all of the test devices and then take them back to Apple's

headquarters at Cupertino.... It must be a nerve-wracking experience to be

privy to the "Rules of the Road" (commercial launch details) because if you

lose it or leak it... you're immediately fired. This is explained in the document

itself" ("Apple's Product Development Process - Inside the World's Greatest

Design Organization," 2018)

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Famous quotes related to design by Steve Jobs:

. "You've got to start with the customer experience and work backwards to the

technology. You can't start with the technology and try to figure out where can

I sell it"

* "Design is a funny word. Some people think design means how it looks. But of

course, if you dig deeper, it's really how it works. The design of the Mac

wasn't what it looked like, although that was part of it. Primarily, it was how it

worked. To design something really well, you have to get it. You have to really

grok what it's all about"

* "Pointing is a metaphor we all know. We've done a lot of studies and tests on

that, and it's much faster to do all kinds of functions, such as cutting and

pasting, with a mouse, so it's not only easier to use but more efficient."

* "'Sometimes when you innovate, you make mistakes. It is best to admit them

quickly, and get on with improving your other innovations."

* "Our DNA is as a consumer company for that individual customer who's

voting thumbs up or thumbs down. That's who we think about. And we think

that our job is to take responsibility for the complete user experience. And if

it's not up to par, it's our fault, plain and simply"

* "It's not about pop culture, and it's not about fooling people, and it's not about

convincing people that they want something they don't. We figure out what we

want. And I think we're pretty good at having the right discipline to think

through whether a lot of other people are going to want it, too. That's what we

get paid to do. So you can't go out and ask people, you know, what's the next

big [thing.] There's a great quote by Henry Ford, right? He said, 'If I'd have

asked my customers what they wanted, they would have told me 'A faster

horse."

An important inference that can be drawn from the above quotes is that Apple lays a lot

more emphasis on user research as compared to market research.

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Maturity Levels: Leveraging the learnings from Apple and the generic CMM level

definitions discussed earlier, we define maturity levels for "User-centered Design"

capability as under:

Maturity Level

Level 1(Low)

Level 2(Low-Medium)

Description

* Limited or no awareness about design thinking in the company

" Products are designed considering manufacturing

convenience; user experience is not factored in

* R&D team has little exposure to or interaction with customers

" Design team has little inclination to innovate; product

improvements are safe, incremental changes

" Products tested at the end of manufacturing during

development; company hesitant to make iterative changes

" Absence of tools to measure customer satisfaction or capture

feedback

* Low customer satisfaction; they could even serve as

detractors advocating against the company's products

* Knowledge of user-centered design restricted to a few

individuals or teams

" User-centered design not a strategic priority; company

unwilling to commit resources beyond utilizing external

agencies for occasional assignments on a piece-meal basis

* Elementary tools available for creating user-centered designs;

design team knowledgeable about using them

* Management appreciates user-centered design but design

related decisions still taken based on convenience

" Lack of full-time manpower dedicated to understanding user

experience; it is a part of the job for design team

" Product development process led mainly by the R&D team

with occasional exposure to customers or product usage

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i

i

Level 3(Medium)


* Creative ideas screened through a lens of manufacturing /

implementation feasibility

" Awareness about user-centered design exists among

leadership of multiple functions within the company

" Products or services are designed including user experience

as a factor, yet final designs are an outcome of a mix of

manufacturing constraints and customer needs

" Advanced tools available for creating user centered designs;

design team somewhat limited in skills to leverage full utility

" Dedicated resources for tracking customer satisfaction /

journey; inputs feed into the product development process

" Product development process driven mainly by the R&D team;

involvement of other functions limited to a certain extent

" Creative ideas from design employees are entertained by the

leadership team

" Company's leadership believes user-centered design provides

a strategic advantage

" Products or services are designed including user experience

as an important consideration

" Design team skilled in using sophisticated tools and methods

for creating user-centered designs made accessible by the

company

" Dedicated resources for tracking customer satisfaction /

journey; inputs feed into the end-to-end product lifecycle

management process

* Product development process driven by a dedicated design

team that is empowered to generate new ideas and test them

on their own with limited management interventions

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Level 5 j Company's leadership and employees across different levels(High) and functions believe user-centered design provides

meaningful competitive advantage

" Design thinking is ingrained in the company's culture and

approach to product development; a well-documented process

involves multi-functional internal and external collaboration

and iterative development in phases

" Products are designed keeping user experience in mind;

manufacturing or production constraints do not compromise

design. Company happy to shelve projects in the advanced

stage if desired customer experience not achieved

" Design team has not afraid to innovate or introduce new

ideas; failure is accepted or even celebrated

" Company invests in tools and resources skilled in measuring

customer satisfaction, and understanding customer journey

and feedback. Employees provided constant trainings to

elevate skill levels to match industry best practices

" Company's management includes a Chief Design Officer who

has deep background in user-centered design

" Customers are so deeply engaged with the company that they

act as strong advocates of its products

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4.2.3 Using Maturity Level descriptions

The maturity levels described for various capabilities above could be useful to

organizations in the following ways:

" Companies could use the descriptions to make an assessment of their progress

along the DT journey. By comparing the existing status of their capabilities along

the attributes (bullet points) mentioned in each of the levels, companies can aim

to get a fair sense of where they stand when compared to a high performance

company with respect to a given capability. Interviews of key personnel or

employee surveys could be among the options a company could exploit to obtain

data/ information necessary for assessing current state with respect to an

attribute/ capability

" Companies can refer the maturity level descriptions to take measures to move

from one maturity level to another. They can prioritize development initiatives

along those specific attributes where they perceive themselves to be particularly

lagging. Depending on the context (e.g. industry, size, strategy, etc), the

initiatives and the prioritization could differ from one company to another

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5. SUMMARY

This thesis delved into the topic of Digital Transformation (DT). We observed that DT is

essentially a business transformation that is enabled and led by technology. The scope

of DT is broad to not only include leveraging technology for the creation of more efficient

processes but also for enhancement of customer experiences and development of new

business models altogether. However, DT is also a complex multi-dimensional change

that is challenging because of several reasons including lack of an understanding of

technology, a clear strategic vision and a certain culture/ way of working among others.

These factors contribute to poor outcomes of DT efforts by companies.

We observed that there were specific capabilities required for business functions to take

advantage of the value that DT offers. This thesis identified those capabilities from first

principles. We also noted that while these required capabilities varied from function to

function, there were a few common themes that ran across them. These themes were

Innovation Culture, Data-driven decision-making, Automation of Processes, User-

centered Design and Scalable IT Infrastructure. A company aiming to pursue DT must

consider working on developing these generic capabilities within the organization,

irrespective of the sector or industry it belongs to.

Next, maturity levels were defined for common/ generic capabilities in order to help

managers of a company measure and guide the progress of their organization. We

noted several well-known companies (such as Apple, Cisco, Netflix etc) from different

industries that have achieved "high performance" status with respect to capabilities

required for DT. We observed that these high performance companies not only

introduced technologies but also managed change effectively. The maturity levels

described in this thesis can help companies benchmark their capability levels (including

change management practices) with those of the high performance companies.

While the list of capabilities and the maturity levels are useful, there are certain

limitations of the approach taken and results achieved. Firstly, the list of processes

included and resources used in identifying capabilities at the functional level is kept

limited for practical purposes. DT is an emerging field with new tools and technologies

77

evolving on a continuous basis. It is possible that there could be additional resources

available/ used by companies which are not mentioned in this thesis. Likewise, the

processes mentioned could be further broken down into sub-processes for additional

insights. These measures could help enlist additional capabilities. Secondly, maturity

levels are developed referring to the success/ status of one high performing company.

Better results could be achieved by examining a number of companies that share

certain characteristics such as size or industry. Structured surveys could be used to

define consistent measures of progress across the maturity levels. Maturity levels

defined in such a manner could be more representative and useful to a practitioner from

a company that belongs to the concerned industry or size category. Thirdly, descriptions

of maturity levels in this thesis are influenced by the industry of the high performance

company. For instance, maturity levels for "Automation of Processes" capability are

developed considering an insurance company (New York Life Insurance Company) as a

benchmark. The level descriptions may not translate well for a company from the

manufacturing industry. However, the approach taken in defining the maturity levels

should extend to other industries/ sectors. Finally, the methods and results included in

this thesis could be made more robust by validating them against a sample of

companies. In other words, data could systematically be gathered from a collection of

comparable companies (sample set) to define maturity levels that could be tested and

improved upon by applying them on a company with characteristics matching that of the

sample set.

Despite the limitations, we believe that this thesis helps clarify DT and demonstrates a

useful method for identifying and developing capabilities required for DT. Further

research in developing functional capabilities in additional detail as well as identifying

maturity levels specific to different contexts (industries, sizes, etc) as described earlier is

recommended.

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