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Should you digitize your core business, or build new digital ventures?

Successful digital strategies find ways to bring their current operations into the digital age as well as innovate new models
Should you digitize your core business, or build new digital ventures?

By Paul Willmott

“If I’m going to be disrupted, then I need to create something completely new.”

This is one of the most common responses to digital threats I encounter in discussions with clients. That view then becomes the driving impetus for the strategy. Yet, for most companies, the pace of disruption is uneven, and they can’t just walk away from their existing businesses. They need to find ways to bring their current operations into the digital age as well as innovate new models. In other words, they need to develop a dual response. Failure to do so, as my colleagues and I recently wrote, is one of the five most common pitfalls that derail digital strategies.

Think of a basic two-by-two matrix such as the graphic below, which shows the magnitude and pace of digital disruption.

Should you digitize your core business, or build new digital ventures?

Where your company falls in this matrix should determine how you approach your digital strategy. If you are facing massive and rapid disruption, bold moves across the board are imperative to stay alive. Retail and media industries find themselves in this quadrant.

Others, however, are experiencing variations in the speed and scale of disruption. To respond to these ebbs and flows, you need to put in place mechanisms that enable you to quickly spot threats and build the capability for agile action.

Keep in mind that transforming the core business leads to much lower costs and greater customer satisfaction for existing products and services (for example, when digitization shrinks the mortgage approval process from weeks to days). This, in turn, magnifies an established player’s strategic advantages over digital newcomers in terms of people, brand, existing customers, and scale.

Telefónica is just one example of an incumbent that used its existing strengths to craft a digital response. After a wide-ranging strategic review, the company saw that it was vulnerable to digital players offering mobile customers lower-cost and more flexible plans. So it launched an independent “brownfield” start-up, giffgaff, which uses innovative community-based digital forums to resolve customer queries. Incumbency offered Telefónica an important advantage: One of its assets was its O2 digital network, which provided resources and technical capabilities in support of giffgaff’s business model.

Transforming the core business can magnify an incumbent’s strategic advantages over digital newcomers in terms of people, brand, existing customers and scale

Beyond developing a dual mission, companies face another set of choices that seems binary at first. The competitive cost of moving too slowly, as my colleague Tanguy Catlin recently explained in his blog, puts a high priority on setting an aggressive digital agenda. Yet senior leaders tell us that a welter of cultural crosscurrents in their organizations are the biggest obstacle to their ability to execute digital strategies. So they struggle to decide where to devote their energies—whether to place game-changing bets or reinvent the organization. The fact is that strategy and execution no longer can be tackled separately or compartmentalized. The pressures of digital mean that you need to adapt both simultaneously and iteratively to succeed.

Needless to say, the organizational implications are profound. Start with people. Our colleagues estimate that, even at the current pace of advances in artificial intelligence, about half the tasks performed by today’s full-time workforce ultimately may be automated as digital competition intensifies. Workers need new skills in analytics, design, and technology to step up the speed and scale of change. Also needed are new roles such as a more diverse set of digital product owners and agile-implementation guides. And a central organizational question remains: whether to separate efforts to digitize core operations from the perhaps more creative realm of digital innovation.

While the details of getting this balance right will vary by company, two broad principles apply:

Bold aspiration.The first-mover and winner-takes-all dynamics that the digital era has introduced often demand major changes to business models. Our research shows that the boldest companies—those we call digital reinventors—play well beyond the margins. They invest at much higher levels in technology, are more likely to make digitally related acquisitions, and are much more aggressive at investing in business-model innovation. This inspired boldness also turns out to be a big performance differentiator.

High adaptability. Opportunities to move boldly often arise as a result of changing circumstances and require a willingness to pivot. The watchwords are failing fast and often, and innovating even faster—in other words, learning from mistakes. Adaptive players flesh out initial ideas through pilots. Minimum viable products trump overly polished, theoretical business cases.

Many companies, however, have trouble freeing themselves from the mindsets that take root in operational silos. This hinders risk-taking and makes bold action difficult. It also diminishes your ability to gauge how close a market is to a competitive break point and what the disruption will mean to the core business.

Ultimately, companies have to take a holistic approach to addressing the challenge of digital. Instead of committing to “take our business to the cloud” or “leverage the Internet of Things,” leaders need to understand the duality of the challenge: “I need to develop a strategy to become No. 1, and I need to get there very quickly by creating enormous value to customers, redefining my role in an ecosystem, and offering new business-value propositions while driving significant improvement in my existing business.”

Now that’s a recipe for success.

Paul Willmott is a Senior Partner in our London office.

This article originally appeared on LinkedIn.