“Venkat’s book is super helpful to all of us working to drive change in an increasingly digital world.” MIKE WRIGHT Global CIO, McKinsey & Company “For any CXO executive, this book is a must-read. Professor Venkatraman brilliantly describes a practical step-by-step guide on how to transform a legacy company into a digital enterprise. An essential survival guide for today’s evolving digital economy.” ALEJANDRO MARTINEZ Senior VP and CIO, Quintiles “A refreshing read from a scholar who has been at the forefront of strategy and digital technology for over two decades.” RANJAY GULATI Professor, Harvard Business School, author, Reorganize for Resilience “No firm, no industry and no market is immune from the transformative forces that disrupt the practices of the past, and we may have no better guide through these forces than Professor Venkatraman. No enterprise leader should be without this useful guide.” BENN KONSYNSKI PhD, Professor, Emory University “This book is definitely the best I have read dealing with the digital challenges and how to address them.” JO GUEGAN Strategic IT Advisor, Former CTO and EVP of Canal+ Group, Former SVP, Capgemini Consulting “Venkat Venkatraman enthralls with a sense of urgency and offers a practical and composed approach to assess threats and devise winning and competitive strategies.” DON BULMER VP, Gartner; Former VP, Shell, SAP “This book contains invaluable insights and should be required reading for executives to step beyond their industry boundaries. I can’t wait to apply these ideas in practice.” GEORGES EDOURAD DIAS Co-founder and CSO, Quantstreams, Former CDO, L’Oreal Paris “The Digital Matrix captures the different challenges and opportunities of pursuing a disruptive digital strategy for a traditional business. All leaders must be aware of how digital can transform their organization if they want to thrive in this new era.” TIM THERIAULT Former Global CIO, Walgreens Boots Alliance, Former President of Corporate and Institutional Services, Northern Trust “The Digital Matrix provides a framework for participation, learning, and building relationships across all phases of transformation. No longer just in the realm of innovation, the practical application of this framework needs to be an active and present part of corporate planning processes.” JIM CIRIELLO AVP, IT Planning & Innovation, Merck “The Digital Matrix offers compelling insight into why traditional organizations should embrace digitization and stay vigilant to the signals at the periphery.” MAHESH AMALEAN Chair, Co-founder, MAS Holdings “To Venkatraman, Facebook and Tesla are not traditional companies bound by product boundaries or SIC codes; they adapt digital tools to solve problems. This book gives you a strategy roadmap to stand alongside such problem solvers, to anticipate their next move, to compete against them. Without it, you risk being wiped out by them.” BHASKAR CHAKRAVORTI Senior Associate Dean, International Business & Finance, The Fletcher School at Tufts University, author, The Slow Pace of Fast Change “The Digital Matrix is not just another descriptive or speculative account about future technologies and their predicted impacts—it is the definitive guide to becoming a proactive player in the new digitally meditated economy. This book will survive the passage of time.” BEN M. BENSAOU Professor, INSEAD, Fontainebleau “The Digital Matrix should be read as a clarion call to executives and board members. For the new wave of leaders, this book will be a go-to guide.” RICK CHAVEZ Partner, Digital Practice, Oliver Wyman “No silver bullets, no killer apps. Instead, Venkatraman provides a brilliant exposition on the perfect storm of digital technologies that will severely test the leaders of every organization, and a framework for analysis and action to help us survive and thrive in the coming decade.” BRINLEY N. PLATTS Chairman, CIO Development “Venkatraman is a brilliant thought leader in the area of digital business strategy. This book will definitely turbocharge your digital future!” OMAR EL SAWY Chaired Professor, USC Marshall School of Business “This is an important and timely book. With deep familiarity, clear examples and nuance, Professor Venkatraman offers a much-needed, sophisticated roadmap for incumbent firms to leverage digitization and thereby prosper in our new competitive era.” MEL HORWITCH University Professor and Former Dean, CEU Business Administration “The Digital Matrix is a wake-up call for any business intersecting with the digital world. Health care leaders need to heed this call and consider how they must lead in the increasingly digital world.” CHRIS NEWELL Psy.D, Director, Learning and Development, Boston Children’s Hospital “Understanding these insights is essential if we are to clearly see the challenges and opportunities created by the digital revolution. Venkat Venkatraman challenges our conventional thinking and encourages us to become transformational leaders in our own fields of endeavor.” MIKE LAWSON Professor Emeritus, Boston University Questrom School of Business “Venkatraman perfectly blends academic and consultant into one clear roadmap for leading change, enabling leaders to act immediately after putting the book down.” STEVE NEWMAN Former Director, Executive Programs at Ericsson “The Digital Matrix is a brilliant window into digital strategy, with practical insights that blend academic theory and the practice of management in a way that only Venkatraman can deliver.” JOHN C. HENDERSON Professor Emeritus, Boston University Questrom School of Business “This book is a powerful guide to the most important change to management of the last century—the digital transformation of every organization. It offers a practical vision of what it will take not only to adapt to the networked society, but to lead it. An enlightening book and a terrific read!” RICHARD LEIDER bestselling author, The Power of Purpose To my parents, who have always believed that I would do my best in whatever I chose to do. To my late in-laws, who treated me as the son they didn’t have. To my wife, Meera, who has always supported me in everything I have pursued and done. To my daughters, Tara and Uma, whose lives will be more digital than we can ever imagine today. CONTENTS Preface Introduction: Your Business . . . Handicapped by an Old Rulebook PART 1 YOUR BUSINESS IS ALREADY DIGITAL CHAPTER 1 The Nexus of Scale, Scope, Speed CHAPTER 2 The Digital Matrix PART 2 THREE PHASES OF TRANSFORMATION CHAPTER 3 Experimentation at the Edge CHAPTER 4 Collision at the Core CHAPTER 5 Reinvention at the Root PART 3 THREE WINNING MOVES CHAPTER 6 Orchestrate and Participate across Ecosystems CHAPTER 7 Collaborate to Co-Create New Capabilities CHAPTER 8 Amplify Your Human Talent with Powerful Machines PART 4 YOUR DIGITAL TRANSFORMATION CHAPTER 9 Your Theory of Digital Adaptation CHAPTER 10 Your Rules Matrix Acknowledgments Notes Index PREFACE I AM A STUDENT of business. For more than three decades, I have been studying organizations to understand how they work, what drives their success, and where their vulnerabilities are. I analyze companies in terms of what they are capable of doing and guide them to achieve new levels of efficiency and pursue new trajectories of growth. In that sense, I am not unique. Every business school professor, irrespective of functional focus (e.g., marketing, operations, strategy, accounting) or disciplinary orientation (e.g., economics, psychology, sociology, computer science) is interested in the questions of short-term efficiency and long-term effectiveness. Where I differ from others is in my interest in how management as we know it—as we teach, research, and practice it—is affected by digital technologies of different types and in different ways. When I began my academic career at the MIT Sloan School of Management, the business school of the Massachusetts Institute of Technology, in 1985, I was fortunate to be part of a collaborative research initiative called Management in the 1990s, led by Professor Michael Scott Morton and sponsored by many leading commercial organizations and government institutions. Our mandate was to answer the following question: “How can businesses transform themselves by taking advantage of the power of information technology, and what could it mean for the discipline of management as we know it?” At that time of IBM personal computers, Xerox Star workstations, and Digital Equipment mini computers, we talked about “information technology” (IT) or “information systems” (IS). IT-driven innovations included automatic teller machines (ATMS), emails, and industry-specific protocols and communications that linked firms via dial-up modems! And Nicholas Negroponte, the founder of Wired magazine, had just published his prescient bestseller Being Digital about digital technologies and their possible futures.1 As I looked into how companies such as General Motors (now GM), American Express, British Petroleum (today’s BP), the Internal Revenue Service (IRS), and the US Army were using some of those early innovations, I developed a framework that outlined five levels of IT-enabled transformation. My thesis at that time, which I published in the MIT Sloan Management Review in 1994, and which still stands as one of the journal’s bestselling reprints, was simple and straightforward: to realize benefits from IT applications requires corresponding changes in how firms are organized and how they interconnect with others in extended business networks. Moreover, whereas mid-level managers can deal with localized ways to take advantage of information systems, senior managers must understand how IT can change the very essence of their company’s strategy, namely its scope of business operations, its core capabilities (which differentiate one firm from another), and its make-buy-partner decisions. The prevailing wisdom at that time was that IT strategy should respond to business strategy, that IT strategy and organization must be set up to support the chosen business strategy. Based on our research, however, my colleague John C. Henderson and I developed a new business logic. We called upon managers to think systematically about the conditions in which IT strategy supported business strategy and those in which IT strategy shaped the business strategy itself. This logic, the supporting framework, and the management recommendations formed the basis of the Strategic Alignment Model, which was first published in the IBM Systems Journal in 1993 and again in 1999, when it was declared one of the key ideas, or “turning points,” for thinking about IT from the 1960s until the end of the twentieth century. First at MIT and now in the Questrom School of Business at Boston University, my research, teaching, and consulting work have continued to trace the intersection of business and IT strategies. I have looked at how firms interconnect across boundaries with information technology in settings such as the airline, insurance, automotive, and retailing sectors. With John Henderson, I have developed ideas about partnerships—especially to construe a corporation as a portfolio of capabilities assembled through networks of relationships. And I have also researched how these “ecosystems” begin, grow, and evolve in two areas—software and video games—and studied the emergence of social, mobile, and media webs. I see companies as interconnected, and the successful ones know when to be linked at the core to emerging ecosystems and when to pull back. I have refined and tested these ideas with L’Oréal, Canal+ in Paris, Nielsen, IBM (and its clients), Microsoft, British Telecom (BT), Swire, BP, Statoil, Sears Canada, Lucent, GM, Merck, the US Army, FedEx, Visa Europe, Ericsson, and many others, and come to understand how companies co-create their offerings and capture value working in these dynamic business networks. Today, digital technology is everywhere. Google and Facebook are global brands. Typing skills are being replaced by voice commands; printed road atlases, encyclopedias, and dictionaries have been supplanted by online