Digital substitution or digital combination?

Digital technologies like mobile, social, analytics and big data are an increasingly important part of formulating business strategy. Incorporating digital technology into strategic decisions raises a fundamental question – how do we use technology to grow the business?

Substitution or combination

Executives face two basic choices in responding to that question. They can apply digital technology as a substitute for current operations or they can seek to create new capabilities by combining digital technology with existing analog resources.

 This choice is fundamental to digital strategy, and establishing the principles for digitising the business. It is choice that too many organisations assume to answer without considering the alternative. Executives assume digital substitution is the way to go. In that process, executives exchange near term automation for longer-term digital innovation, without considering the alternatives.

Digital substitution – replacing atoms with bits

Digital substitution replaces current analog/IT business capabilities with new digital/technology capabilities. It is a strategy based on copying and replacing paper clipboards with iPads, automating previously manual processes, putting information online are all part of a strategy targeting technology to drive cost and operational productivity.

As strategy, digital substitution concentrates on upgrading the performance of current business models, operations and practices. Companies assume that applying digital resources as a substitute for current operations is the best choice. Their prior experience with eCommerce provides an example of the power and potential of replacing atoms with bits.  After all isn't a digital strategy just an extension of that eCommerce strategy from the PC to the smartphone, from the wallet to ePayments?

That's an enticing view for the following reasons:

• Substitution is easy to understand – where there was a store, now there is an eStore, a paper catalogue now an online catalogue.
• It is a familiar strategy. Companies collaborate and exchange transactions in ecosystems all via digital technology. Organisations have substituted digital technology for analogue or physical atoms for more than 15 years. So this is just doubling down online and spreading it out to tablets and mobile phones, right?
• It represents an extension of current strategies and practices.  We market, sell and serve online today so there really is no deep change to what we do, just with the tools we use.
• It is obviously more efficient as physical operations and people are expensive, capital intensive and require management.
• It reaches more people because more people are connected to the Internet than ever before.
• While digital substitution is appealing and has little apparent cost, it does carry some consequences.

Consequences and limitations

Every choice creates consequences and limitations. The decision to substitute digital for analogue resources can be counterproductive to the flexibility, responsiveness and scale benefits associated with digital strategy.

• The success of digital substitution rests on the success of the underlying business model.  If your current model works and the company expect it to work well into the future, then creating a digital image of today's model represents a viable strategy. However, mimicking current practices in new technology is akin to ‘paving the cow path' a term popular in re-engineering that basically says same old stuff, just faster and with the same old problems just faster and cheaper, but not necessarily better.                                                                                                                                                                             
• Substitution supports an incremental approach, phasing digital substitution creates channel and operational conflict with some parts of the business digitised and others remaining analogue based. This may make digitalisation less threatening, but it raises complexity, creates near term business cases and reduces the degree of enterprise transformation. Look at the diversity of current sales, service and operating channels. The existence of multiple channels supported by different systems and operations provides an example of the long-term cost of incremental substitution.                                                                                                                                                                                                                              
• Creating discretely digital parts of the organisation was a popular approach to eCommerce and one that did not last. Digital substitution tends to require these approaches in the belief that a digital business is incompatible or disruptive to current operations. Substitution leads to duplication, strategic confusion and competition. It brands the majority of the business as ‘legacy', old and slow and in competition to the ‘new hotness' of digital business. Problem is that is the part of the business delivering results while digital comes up to speed.                                                                                                                                                                                                                                                                 
• Executing a substitution strategy requires making the organisation ‘safe' for digital strategies by ring fencing digital channels, products, services and operations. Strategies that require making exceptions for digital technologies or separate digital operations represent a limited form of digitalisation concentrating on force fitting the rest of the world to the digital strategy – rarely a recipe for long term success.                                                                                                                                                                                                                                                                                                                          
• Good strategy consists of decisions based on the critical factors facing an organisation and a design for the focused actions required to deal with those factors and enact those decisions. Richard Rumelt's book Good Strategy Bad Strategy is the basis for that description. Not every decision within a strategy is conscious and deliberate, rather assumptions, history, culture, etc. shape many strategic decisions. Substituting digital for physical resources is one of these assumptions. It is not the only approach to digitalising the business.

The combination equation

Digital technology encompasses more than the internet. Digital strategy should think beyond the internet and its ability to substitute digital and physical channels. Digital technology represents an ‘Internet of Everything' whose value rests on recombining to form new solutions rather than replacing physical resources.

A combinatorial strategy answers the question ‘how can technology grow the business?'

The emphasis should be on creating new outcomes, customer value, results and revenue through blending digital and physical resources. That will need companies avoiding walking down the path to digital commoditisation as it's easy to digitally automate competitive value into easily copied services.

Digital capabilities based on such a blend, build on each other making physical resources ‘smarter', connected and contextually aware as well as raising the relevance of digital resources in realising value, results and revenue. Digital combinations provide a strategy for generating growth that is feasible for firms with existing operations, investments in property, plan and equipment and facing competitive margins. Combining these resources rather than cutting out the physical provides the framework for setting digital strategy for the rest of us.

• Combination represents a digital strategy that amplifies a company's current strengths rather than requiring replacement by digital surrogates. The combination creates the opportunities that are not available with a pure digital or pure physical solution. Take the combination of urban transportation where the combination of location based sensing, digital signage and mobile communications change the transportation experience from one based on the bus hitting a prescribed schedule to knowing when the next bus is coming.                                                                                                                   
• A combination strategy builds on itself. It is recursive – in the sense that existing combinations lead to new combinations that expand and deepen digitalisation capabilities, capacity and value. Unlike substitution that builds point solutions – digital islands – a combination strategy takes digital resources and applies them to other digital capabilities.  This accelerates rather than increments the introduction of digital technology into the organisation.                                                                                                                                                                                                                                                                                          
• Combination values the entire enterprise rather than splitting the business into digital and physical business models. Creating a strategy valuing so called legacy resources brings the entire organisation into the digital space and creates financial, operational and information leverage for the organisation.                                                                                                                                                                                             
• A strategy calling for combining digital and physical resources recognises and works within the reality rather than requiring reality to work within the limitations of digital technology. Consider the difference in approach by comparing Google's autonomous car, which is built to work with the reality of the road and autonomous industrial equipment that requires a highly controlled environment. Combination seeks to identify how to combine digital technology with the physical. Substitution seeks to segregate the digital from the rest of the world.

Everything digital eventually becomes physical. Executives need that observation to understand the difference between digital strategies based on combination rather than substitution.

Mark McDonald, Ph.D., is a group vice president and head of research in Gartner Executive Programs.