Leading a Digical transformation SM

The big change taking place in business today is the

combination of digital and physical elements to create
wholly new sources of value.

By Darrell K. Rigby and Suzanne Tager

Darrell K. Rigby is a partner in the Boston office of Bain & Company and
leads the firm’s Global Innovation and Global Retail practices. Suzanne Tager
is senior director of Bain’s Retail and Consumer Products practices and is
based in New York.

Copyright © 2014 Bain & Company, Inc. All rights reserved.

 Leading a Digical SM transformation

The digital revolutions we have experienced in the last The truth is that both the digital world and the physical
few decades are nothing short of miraculous. In fact, the one are indispensable parts of life and of business. The
changes have been so dramatic that some have predicted real transformation taking place today isn’t the replace-
the demise of physical commerce entirely. “The retail guys ment of the one by the other, it’s the marriage of the two
are going to go out of business, and e-commerce will into combinations that create wholly new sources of
become the place everyone buys,” declared Netscape value. This is a phenomenon we at Bain call DigicalSM,
cofounder and venture capitalist Marc Andreessen. Author and it is likely to reshape not only the way people live,
Brett King argues that branch banks are headed the way but the way companies operate.
of book and record stores: “By 2016, the average user
of banking services will be using digital services 300 The Digical world
times for every physical interaction with their bank.” One
can imagine similar arguments about entertainment Digital-physical innovations are already changing virtually
(who needs movie theaters or concerts?), about routine every part of the business world. The effects are dramatic
medical services (the doctor diagnoses your condition in some industries and modest in others, but they are
through remote sensing and sends the prescription hard to miss. Think for a moment about just a few of
to your e-pharmacy), and even about the production the combinations that are now reality:
and distribution of goods (“dark” factories and warehouses,
staffed entirely by robots). • Travelers still rely on airplanes to visit a distant
city. But the reservation, ticketing and payment
And yet, straight-line extrapolations of digital dominance system for the trip are all digital. So is the plane’s
miss some important insights. We humans are physical control system. Face- and iris-scanners may soon
and social beings. We like to go out, to interact in person supplement human security personnel at airport
with other people, to touch and handle and make things. checkpoints. Such technology may eventually allow
Besides, any straight-line extrapolation assumes that airlines to “eliminate the boarding pass completely,”
changes in the business ecosystem will continue pre- according to the chief information officer of Lon-
dictably in the direction of the current curve, when in don’s Gatwick Airport.
fact rapid evolution creates unexpected opportunities
and new competitive dynamics. Look at movie theaters: • Most healthcare today relies on physical interactions
People have been predicting their demise for nearly 70 combined with growing use of digital diagnostic
years. In principle, we could easily watch all of our movies equipment and records management. But medi-
at home, streamed digitally to a big-screen TV. In practice, cine is expanding its Digical innovations. Intuitive
theater owners and others in the business have devised a Surgical’s da Vinci machines enable a mentoring
variety of attractions—better seating, innovative projection surgeon in New York or London to monitor every-
and sound technologies, full-service theater-restaurants— thing a less experienced surgeon in Johannesburg
to lure us off our couches. US theater attendance has is doing and draw guiding incision lines on the
declined a little over the last decade, but it is still nearly surgical image from a remote interface. Local men-
three times as large as attendance at all theme parks and tors with dual digital consoles can even take over
major sporting events combined. Profitable theaters will robotic control at especially critical points.
almost certainly coexist with more home viewing in
the foreseeable future. You can’t watch an IMAX in • 3-D printing, a digitally controlled process currently
your living room or on your mobile device (yet). used mainly for rapid prototyping, is finding a
variety of new applications. General Electric plans

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Leading a Digical SM transformation

to use an advanced 3-D technique known as direct late 2013 its products were available in 80 Nordstrom
metal laser melting to produce fuel nozzles for its stores. Says Bonobos CEO Andy Dunn: “What we’ve
next-generation aircraft engine. Richard Van As, a learned recently is that the offline experience of touch-
South African carpenter, worked with partners to ing and feeling … isn’t going away.”
develop a mechanical “robohand” made from digitally
printed parts. One beneficiary of Van As’s design The key questions for today’s executives are how to
is a young man in Massachusetts who was born anticipate developments in this ongoing revolution and
without fingers on his left hand. His new prosthetic how to lead the inevitable transformation. We recently
cost about $150. The next-generation robohand, reviewed the experience of some 300 companies engaged
refined through crowdsourcing via social media, in Digical initiatives. Our sample covered a full range
snaps together like LEGO bricks; the materials of industries, from those that won’t soon see much
cost about $5. digital-physical transformation, such as construction, to
those that have already been dramatically (and traumati-
• “Smart” homes learn user preferences and auto- cally) transformed, such as media. We examined compa-
matically adjust utilities settings. Smart grocery nies at every stage of evolution within these industries,
carts detect nearby items and show videos of meal and we carried out longitudinal studies of their transi-
and recipe ideas in real time. Smart cars can detect tions over time to understand the changes and con-
obstacles in the road and can help you park. Driver- ditions that led to positive and negative results. We also
less cars are very much in the works. Audi’s robotic reviewed the relevant literature and conducted inter-
car has journeyed to the top of Pike’s Peak in Colo- views with executives in leading organizations.
rado; Volkswagen’s has traveled down Berlin streets.
Google has many prototypes that as a group have The findings point in one clear direction. Every industry
gone more than 600,000 miles without a seri- will undergo some degree of Digical transformation. Vir-
ous accident. tually every company will have to respond. The threat is
great, but so is the opportunity: A strategy that fuses
This trend toward a Digical world will only intensify. The the best of both digital and physical worlds is likely to
much-heralded “Internet of Things”—sensors attached generate the greatest value for the foreseeable future.
to everything from electrical turbines to railroad cars— Yet creating Digical products and developing Digical
will digitally monitor performance and environmental capabilities requires sustained focus and the right
conditions in the physical world, boosting efficiency investments. You can’t just add sensors to a product
and minimizing unplanned downtime. Live entertain- or tweak your e-commerce capabilities. And in most
ment from rock concerts to theme parks will incorporate cases you can’t simply “switch sides,” throwing away core
more digital effects. Disney World’s new MyMagic+ advantages while pouring resources into high-risk,
system, for example, provides visitors with a smartphone purely digital ventures with no clear competitive edge.
app and a radio-frequency-enabled wristband that acts
as ticket, room key and credit card, allowing them to book Let’s look at how to begin.
rides in advance and charge meals with a flick of the
wrist. Even companies built strictly on e-commerce are Diagnosing your industry
coming to see the value of the physical dimension. The
e-retailer Bonobos, one among the many that are re- Though Digical innovations will affect every industry,
thinking their priorities, has begun to open “Guideshops” they’ll hit some businesses much harder and faster than
where people can try on the company’s clothing, and in others. So a key first step is assessing your company’s

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 Leading a Digical SM transformation

environment. How much has the ongoing transformation Even today’s early movers, such as telecom and retail
already changed your industry’s offerings and competitive banking, are in for a lot more change in the future.
dynamics? How much is it likely to do so in the next
several years? Figure 1 captures Bain’s assessment of • Wild cards can affect the pace of change. Some
Digical transformation for 20 different industries. You industries—but only some—will be held back by
can see at a glance some of our key findings: external factors. Healthcare, in particular, won’t
evolve as quickly as it otherwise might; regulations,
• The impact ranges widely. Industries occupy remark- reimbursement practices and liability issues all
ably different points on the transformation curve. impede innovation.
Change has been more than three times as extensive
in media, technology and telecom industries as in The aggregate numbers, while telling, are only a start-
oil and gas, mining and construction. Other indus- ing point. The challenge for any company is to analyze
tries are spread out across the curve. each part of its industry’s value chain and determine
which points are best suited to Digical innovation. In
• The biggest change is yet to come. The next several construction, one such point may be site preparation.
years will bring far more innovation to most indus- (Caterpillar already produces earth-moving machinery
tries than they have seen in the past. Automotive, equipped with GPS and laser technology, allowing
insurance and many other businesses are poised on operators to excavate to precise depths and slopes.) In
the verge of far-reaching Digical transformations. healthcare, opportunities for innovation may lie in the

Figure 1: Projected Digical transformation by industry through 2020

Total Digical disruption through 2020

Fast-moving

Middle-of-the-road

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Today Incremental through 2020 Potential change limited by regulatory, legal, etc.
The rankings are based on examination of more than 300 companies engaged in Digical projects, plus additional industry interviews. We calculated relative levels of disruption
based on our review of value chain impact and importance both today and in the future—that is, which segments of the value chain are most important to success in that industry
and how much disruption has occurred and will occur in those segments.

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Leading a Digical SM transformation

delivery of chronic-care services. (Remote sensors and they are making big investments in innovations. The
monitors can help keep patients with chronic illnesses reason? Competitors are moving faster. Particularly in
at home and out of the hospital.) Look at the music busi- industries that are changing quickly, many companies
ness, which many people believe has somehow died. run as fast as they think they can, only to find that they
Recorded music is still a profitable business—but mostly are falling further behind.
for Apple, which transformed how music is sold. Licens-
ing is still profitable. Live concerts, augmented by dig- Responding to Digical innovation
ital technologies, are more profitable than ever. The
vulnerable part of the value chain was the conventional Most companies find it hard to respond successfully
method of producing and selling records. to innovations of all sorts. Our study of 300 companies
found that not a single one was completely surprised
The retail industry illustrates the scale of change that by the advent of Digical innovations, yet nearly 80% of
lies ahead and the corresponding areas of opportunity. those companies are still in the early stages of response.
Virtually every retailer has faced severe disruption from This probably shouldn’t be surprising. Digital expertise
pure-play online competitors, and many have already is still scarce in the senior ranks of many traditional
spent hundreds of millions on building up their digital companies, so executives often fail to understand both the
marketing and e-commerce capabilities. But a long list threats and the opportunities. Confronted by unfamiliar
of other potential investments awaits: digitally en- new technologies and competitive moves, some do their
hanced customer service, interactive displays in stores, best to ignore the threat; they convince themselves (and
advanced website improvements, supply-chain efficien- seek reassurance from the rest of their team) that it won’t
cies, rapid fulfillment, radio frequency identification last or doesn’t really mean much. Everything will be OK
(RFID) tagging in stores and warehouses, mobile apps, as long as they keep doing a good job in their traditional
new point-of-sale systems, employee training and devel- business. Others take the opposite tack, nervously over-
opment tools, mobile payment systems, advanced cus- reacting to the hype that greets the innovation and then
tomer relationship management analytics, IT systems placing outsized bets on strategies based on hunches.
integration and security, and so on. Most retailers have In both cases the companies involved are likely to wind
barely scratched the surface in these areas. Moreover, up in trouble.
the industry’s disruptors have not played their last hand.
Amazon CEO Jeff Bezos, for example, has expressed an The most successful companies understand the need
interest in building physical stores. Should the company to respond but recognize that the response will evolve
figure out ways to reinvent the store along Digical lines, along with their experience and capabilities (see the
that would represent one of the biggest threats yet to sidebar “NIKE embarks on a Digical future”). They
traditional retailers. acquire and nurture the necessary expertise, often going
where the talent is (Silicon Valley, for example) rather
What matters most to every company, of course, is how than expecting innovators to come to them. They keep
fast it is moving relative to others in its industry. The innovation units separate from the core business for a
research firm L2, which calls itself A Think Tank for while, so that those units can experiment and grow with-
Digital Innovation, calculates a “digital IQ” for compa- out the constraints of a large organization. But they
nies in a variety of industries based on assessments of also work at improving the core itself, understanding
hundreds of different variables. Some companies find that the core holds potential competitive advantages.
that their scores actually drop over time, even though Eventually they bring the core and the innovators to-

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 Leading a Digical SM transformation

NIKE embarks on a Digical future

What could be more firmly rooted in the physical dimension than the leading sports apparel company
in the world? Yet NIKE has begun to create a broad-based Digical business, to the point where Fast
Company named it the “No. 1 Most Innovative Company of 2013.”

An early initiative was the company’s NIKEiD customization program, launched in 1999. Buyers would
visit nike.com and customize certain NIKE shoes, choosing their own base and accent colors and
then adding a “personal I.D.” to the product. NIKE then began introducing Digical innovations at
other points in the value chain, creating links between company and consumers that went well beyond
the sale of a sweatshirt or a pair of shoes. In 2006, for instance, NIKE CEO Mark Parker and Apple’s
Steve Jobs unveiled the NIKE+ app, a product connecting the NIKE+ Air Zoom Moire, a shoe with
a built-in sensor and receiver, to an iPod Nano. Runners could see data about their time, distance,
calories burned and pace on the device’s screen or hear it reported orally over their headphones.
After the workout, they could sync the iPod with their computers and chart their progress.

Today, more than 20 million members spanning the globe use the NIKE+ platform, tracking and sharing
runs, workouts and fitness goals—and providing the company with invaluable data about who their
customers are and what they value most. NIKE’s NIKE+ FuelBand and NIKE+ FuelBand SE, two models
of an electronic bracelet, take the post-sale involvement one step further. The FuelBands measure all the
user’s movements throughout the day, recording indicators such as steps taken and calories burned.
As with the shoe sensors and NIKE+ Running app, users can capture this data, track and record their
level of activity, and share the information through social media.

The company has found creative ways to integrate the digital and the physical not only in its products
but also in its go-to-market system. Preparing to launch its new NIKE Free Run+ 3 shoe in 2012, for
instance, NIKE first offered it online to NIKEiD customizers, who responded by creating more than
a million designs in just two weeks. The resulting buzz created “enormous momentum and high sell-
through … when the NIKE Free Run+ 3 hit retail shelves,” said company executive Christiana Shi.
Another example: the company’s “women’s training club,” a special section of NIKE’s stores that
brings together products for women, services such as bra fitting and shoe trying-out, and training
classes—“all to make it easier for her to find, shop and buy the right product in a seamless way
across NIKE channels,” according to Shi.

An important step has been NIKE’s reorganization to foster these innovations, including establishing
a Digital Sport division in 2010 and creating a state-of-the-art e-commerce platform. The payoffs
include increased market share in key areas, a 32% growth in e-commerce sales from FY 2012 to
FY 2013 and a rising stock price, from below $40 in 2009 to nearly $80 in late 2013. “NIKE
has broken out of apparel and into tech, data and services, which is so hard for any company to do,”
one analyst told Fast Company.

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Leading a Digical SM transformation

gether, transforming the company and capitalizing Executives at Beginner companies, we have found, are
on those competitive advantages to create Digical inno- often most concerned with developing new growth
vations of their own. options even as they exude complete confidence in
their traditional core businesses.
The timing and balance are delicate. Get the process
right—as companies such as Disney, Audi and Common- Danone is one company that may qualify as a pioneer
wealth Bank of Australia seem to have done—and Beginner. Its industry—consumer packaged goods—
the revitalized core continues to generate growth and has generally been slow to create Digical products or
profits. Get it wrong and the organization stifles the embrace online channels, and in 2012 Danone’s director
innovations. Of course, some of the steps along the way of communications acknowledged that the company
will be way stations; history will view them as transition “was not really an early adopter” of digital innovations.
points, like the videocassette recorder. But from a com- At this writing, Danone has made initial moves into
pany’s perspective, it hardly matters. Even if a new prod- digital marketing and social media, and it has announced
uct, organizational structure or mobile strategy turns out (but not yet released) a Wi-Fi–equipped refrigerator magnet
to be transitional, it helps the company extend its core that lets users set their preferences for bottled-water
business, generates cash to fund further transition and delivery and then transmits the information wirelessly
builds capabilities that will be essential for future success. to the deliverer. Danone has also created the position
of vice president of connection, media and innova-
So the response typically plays out over a period of years. tion, responsible for integrating its online and offline
During that time, we have found, Digical innovators marketing efforts.
in virtually every industry pass through three quite
different stages of development. Knowing which stage Intermediates. Typically, companies in the Intermediate
you are in today can help you figure out the best rela- stage have already launched some Digical initiatives.
tionship between your traditional business and your Instead of merely responding to threats from rivals,
new one. It can also help guide the right moves from they are out to beat the competition. If that requires
your current stage to the next. making big investments in new technologies or seek-
ing out new customers, so be it. The future may be
Beginners. Most companies are just getting started. scary, but in an Intermediate’s view, it can’t be avoided.
They are still novices. But not all of these Beginners Though many Intermediates still have only average
are the same. Some are pioneers—they may be in a infrastructure capabilities, they are testing and learn-
slow-moving industry, but they’re hoping to lead their ing aggressively. Organizationally and culturally, they
peers into the Digical future. Others are laggards, late view Digical goals with enthusiasm, though individual
to the party and now well behind the competition. units may be protective of their unique skills in this
area. Executives of Intermediate organizations often
Despite their different situations, the two groups often create new performance metrics (such as loyalty or
have a similar look and feel. Beginners are still figuring market share of the most attractive Digical customers)
out how to experiment with new Digical fusions while to focus the organization’s efforts and build confidence
maintaining their core business. They are still trying to in the new direction.
identify their customers’ needs and frustrations. They
may be slow to innovate, and they are likely to have a lot Macy’s provides a good example of an Intermediate.
of money invested in older technologies. Their organi- As early as 2005 the retailing chain was investing heavily
zation is probably siloed and their culture conservative. in website and infrastructure capacity, and in 2010 it

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 Leading a Digical SM transformation

mapped out an “omnichannel” strategy designed to create discipline required by a project. As they work, the teams
a seamless experience for customers both online and in might rely on innovations such as the company’s Digital
stores. Recently, it has been pursuing a host of Digical Immersive Showroom, or DISH, which uses high-defi-
initiatives. It has integrated most of its online shopping nition display walls and high-precision motion capture
with its physical facilities, turning virtually all of its to simulate a ride or other attraction.
stores into multichannel fulfillment centers; customers
can order online and then pick up their items at a local Figure 2 offers some guidelines for each of the six ele-
store. Its iconic Herald Square store in New York City— ments that indicate whether a company is a Beginner,
one of the largest department stores in the world—is Intermediate or Expert. Reading through the elements
undergoing a $400 million remodeling; the renovated labeled on the left-hand side can help you determine
store will feature Digical innovations such as interactive which of the three category descriptions across the top
directories, digital product information, widespread best fits your organization. If you put more than three
use of RFID tagging and a new mobile app to guide elements in one category, that’s probably your best start-
customers as they shop. ing point for choosing the right course of action.

Experts. Companies that have reached the Expert stage

have usually been at it awhile. They perceive the pos-
sibilities of the Digical revolution, and they have moved Experts don’t rest on their laurels—they
from competitor benchmarking to customer pathbreaking.
They have the integrated systems and tools required
realize that their own innovations face
to enable change, and they invent new capabilities as they constant threats from newer ones, and
go. Organizationally, they are one team, with a unified
they constantly push the limits of what’s
culture and few skill gaps. Typically, experts don’t rest
on their laurels—they realize that their own innovations possible. Digical is no longer an add-on;
face constant threats from newer ones. As a result, they it is part of the way they do business.
constantly test new approaches and push the limits of
what’s possible. Digical is no longer an add-on; it is part
of the way they do business.
Determining where you want to go—and how fast
Consider Disney, whose Imagineering unit has been rede- you need to get there
fining theme-park entertainment for several decades.
Imagineering began combining digital and physical Most companies naturally aim to move into a more
experiences back when digital technology was clunky advanced stage of Digical development (see Figure 2).
and expensive—a computer-controlled thrill ride (Space They hope to outstrip competitors and eventually become
Mountain, introduced in 1975), Audio-Animatronics Expert. But the right moves for one company may be
attractions (talking robotic figures) and so on. Over the wrong for another. Determining your Digical objectives
years it introduced everything from new virtual reality and mapping out an appropriate pace of change depend
technology to figures capable of interacting with an greatly on your industry and situation (see Figure 3).
audience (“Turtle Talk with Crush,” the laid-back dude Consider how the very different experiences of Sears
from Finding Nemo). Imagineering’s 1,500 employees and Macy’s reflect the way that some moves succeed
typically work in teams that bring together architects, while others backfire.
engineers, software designers, artists and every other

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Leading a Digical SM transformation

Figure 2: Companies occupy different stages of Digical development

Beginner Intermediate Expert

• 1- to 2-year time horizons • 3-year time horizons • 5+ year time horizons

• Cautious approach to test viability • Accelerating market share gains and • Real expectations to redefine
Ambitions with minimal investments profit improvements the game

• Heavy reliance on • Reducing pain points and improving • Innovation centered on customer
competitor benchmarking integration in current customer pathways pathbreaking

• Low-risk, proven approaches with • Bolder testing and learning initiatives • Constant testing with greater secrecy;
more fanfare than action highly anticipated breakthroughs
Operating • Broader integration and innovation
strategies • Narrow focus on a few steps of the of cross-functional interactions • Encompass full customer journeys
value chain (often marketing, sales
or operating costs)

• Commitments to sunk costs and old • Growing networks of pipes and people • State-of-the-art assets
technologies impede progress enable greater change
Infrastructure • Integrated systems and tools improve
• Focus on efficiency • Complicated accountabilities quality, speed, efficiency and yield
of decisions

• Autonomous silos with separate metrics • Increasing coordination and more • Digical skills distributed throughout
matrixed relationships the company
• Building uncomfortable new
Organization
capabilities; frequent outsourcing • Traditional core managers seek • One team with unified culture and
greater control over Digical initiatives world-class centers of excellence;
insourcing of core capabilities

• Delegated to mavericks • Major strategy projects viewed as • Continuous strategy processes

Transformation add-ons to day jobs
management • Periodic inquisitions with • A balanced portfolio of incremental
senior management • Changes focused on integration and breakthrough innovations

• Customer frustrations • Fewer customer complaints • A loyal base of passionate advocates

• Innovation laggard; frequent • Occasional innovation breakthroughs • Widely admired performance

Results unexpected potholes
• Digical innovation increases both top- • Digical redefines the company’s
• Encouraging sales growth, and bottom-line momentum source of value creation
challenging profits

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 Leading a Digical SM transformation

Sears jumped on the digital bandwagon early. In 1984— Macy’s followed a different path, albeit with some bumps
well before the World Wide Web—the retailer and two of its own. The company launched Macys.com as part
partners created the online service provider that would of its Macy’s West division in 1996, and two years later
come to be known as Prodigy. As a company with a established the unit as a standalone subsidiary in Sili-
once-thriving catalog business, Sears seemed well posi- con Valley. The goal was to “take full advantage of the
tioned to migrate catalog orders online. But the next Internet’s continued emergence as a vehicle for con-
several years brought disappointment: Neither Prodigy sumers’ shopping needs.” Still, Macy’s was not an online
nor a subsequent partnership with AOL lived up to pioneer; Women’s Wear Daily referred to its strategy
expectations. As the e-commerce marketplace evolved, as “a relative ‘Johnny-come-lately.’” To accelerate its
Sears began losing market share to online sellers such efforts, the company paid $1.7 billion in 1999 for Finger-
as Amazon.com. hut, a direct marketer with several catalogs and e-com-
merce ventures. Analysts applauded the move, which
Sears tried again under the leadership of Edward S. gave Macy’s access to Fingerhut’s extensive database
(Eddie) Lampert, who bought a controlling interest in marketing and fulfillment skills. But by 2002 Macy’s
the company in 2005. Lampert divided the company was announcing the divestiture of Fingerhut, citing its
into more than 30 independent business units, each lack of “strategic value.”
with its own functional heads, board of directors, finan-
cial statements and strategy. He also invested heavily Macy’s then doubled down on innovation. In 2006 it
in Sears’s e-commerce business, creating what a Credit announced a $130 million investment in Macys.com,
Suisse analyst called a better website than “just about followed by $100 million more in 2007. In 2010 it
any other retailer I cover.” In 2012 Lampert created a announced a new omnichannel strategy. Finding that
vice president of customer experience and integrated customers who shopped both online and in stores
retail position in hopes of integrating its digital and generated five times the profit of those who shopped
physical businesses. only online, Macy’s aimed for greater integration. It
invested heavily in its physical outlets, not only the
In retrospect, however, the company appears to have Herald Square flagship but hundreds of other stores
made at least two miscalculations. Sears’s radically as well. It piloted the use of stores as distribution cen-
decentralized structure has been an obstacle to collab- ters, shipping items direct to online buyers and filling
oration. And the company chose to underinvest in one orders from stores when an item was out of stock in
part of that integration equation: its stores. In 2012, online warehouses. It also invested in new training
for instance, it spent an average of $1.46 per square and tools for sales associates as part of its “MAGIC
foot on its stores, compared with an average of $9.45 Selling” campaign, a program designed to encourage
per square foot that four of its chief competitors spent associates to “sell from the heart and to take the extra
on theirs, according to the New York Times. Reports in step to make every customer feel special.” In January
the mainstream media have referred to Sears’s “neglected” 2013, the company’s executive vice president for omni-
stores. Profits fell, putting pressure on Web invest- channel strategy assumed the newly created role of
ments. “I’d like to go faster. I’d like to go bigger,” chair- chief omnichannel officer, reporting to the CEO. The
man Lampert told the Times in 2013. “We’re just not executive in the new position not only oversees the
making money, which makes it much, much harder development of strategies to integrate the company’s
to fund the transformation.” stores, online and mobile activities; he is also respon-

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Leading a Digical SM transformation

Figure 3: Your next steps depend upon your company’s situation

Company-development stage
Industry-evolution
stage Beginner Intermediate Expert

Partner Hasten innovation Lead customer

Fast-moving
or perish and acquisitions pathbreaking

Draft the leader(s), Set breakout ambitions, Amaze customers,

Middle-of-the-road
seek to pass consider acquisitions dispirit competitors

Build foundational Scale capability successes Avoid

Slow-moving
capabilities to gain share outrunning customers

Laggard Parity Leader/pioneer

sible for the company’s systems and technology, logistics If you are a Beginner in a fast-moving industry, your
and related operating functions. Unlike that of Sears, best option may be finding a partner. If you are an Expert
the financial performance of Macy’s has improved sig- in a slow-moving industry, you are well positioned—
nificantly, and it has gained market share. Its stock rose but you have to be careful not to outrun your customers.
steadily between 2010 and 2013, increasing 43.1% in 2013 Companies in middle-of-the-road industries face perhaps
alone (compared with a gain in the S&P 500 of 28.5%). the most complex set of challenges and trade-offs (see
Figure 3). For example:
How to account for the difference between the two re-
tailers? Both companies started out as Beginners. But • A Beginner in a middling industry has to stay
Sears’s one-sided investments had the effect of prolonging within striking distance of the leaders even as it
its Beginner status, while the multifaceted approach of masters the basics. Like a trailing race car, it can
Macy’s moved it into the Intermediate ranks. Neither try to draft those leaders, following their path
company has yet moved into the Expert box, but Macy’s while keeping a sharp eye out for opportunities
currently has a better chance of arriving there sooner. to pass. Among the keys: bringing the right talent
on board, investing to wow high-priority customer
The two chains’ experiences underscore a key point of segments and partnering with expert third parties.
our analysis. Your current position presents you with Internally, the job is to raise the cultural speed
specific sets of challenges and opportunities, and you limit—and to make sure that every executive is on
ignore those challenges and opportunities at your peril. board for the journey.

10
 Leading a Digical SM transformation

• An Expert in a middling industry faces a different represent the company’s future. When you’re confronted
set of options and choices. Like Amazon, it needs with transformative innovations, it’s tough to be a
to develop and defend proprietary barriers, empha- “fast follower.” If the table-stakes investment to keep
sizing long-term market share over short-term up with competitors is $1 billion a year for three years
profits. It can build and exploit scale advantages, but you try to get by with $500 million a year, by the end
perhaps pursuing preemptive acquisitions. It should of the three-year period you are $1.5 billion behind—a
try to amaze its regular customers—and it should hole so deep that you can’t climb out of it.
challenge itself by targeting those who are most
valuable and hard to please. As for competitors, the To prosper, a company needs to move fast enough to
best strategy is often to keep them guessing. Who stay ahead of competitors and get into the next stage.
can forget Jeff Bezos’s promise in late 2013 that Ama- Trying to jump a stage rarely works, but staying in the
zon would someday deliver its products with drones? same stage too long will put you out of the running.

Knowing your industry’s rate of evolution and your Separation vs. integration. A second challenge is man-
company’s stage of development will also help you aging the balance between separation and integration.
navigate some of the central challenges that face any Separation of an innovative unit in the early phases of
organization as it confronts the Digical future. development enables a more flexible and entrepreneurial
culture, free to challenge the status quo and existing
Fast vs. slow. One of these challenges is the perennial business models. It helps a company attract and retain
question of how fast to move. Going too slow and going top technology talent and develop deep expertise. A sep-
too fast are equally dangerous. Sears’s huge investment arate unit eliminates fears of cannibalization and permits
in Prodigy was premature. So was the acquisition of the establishment of highly motivational goals and incen-
Fingerhut by Macy’s. Companies that move quickly tives. It increases a company’s operating speed and cre-
and jump out ahead of the others may not leave adequate ativity, and it generates more breakthrough innovations.
time for testing and learning. They may spend too heavily
in areas that don’t materially increase sales and profit- But in a Digical marketplace no company can keep
ability; they may hurt their profit margins and thus things separate forever. Customers expect a seamless
their return on capital. If they miss their targets, they integration of both digital and physical experiences—
may erode investors’ confidence in the business and the best of both worlds—rather than the disjointed
its managers. Few people now remember Amazon’s and frustrating interactions that often come from
precarious situation in 2001, when its stock price had autonomous silos. And if the first set of changes is suc-
plunged from $107 to $7. Were it not for a new CFO, cessful and the company moves into the next stage,
who raised $672 million in convertible bonds overseas then the independent units will either largely replace
just a month before the stock market crashed, Amazon the traditional units or will use their successful experi-
would likely have faced insolvency. ence to help transform the traditional business.

Yet waiting for others to break expensive new ground Integration brings a series of benefits, including effi-
holds equal dangers. Companies can lose leadership ciency and economies of scale, coordination and timely
and scale. Regaining market share usually costs more communication, and less conflict. It avoids redun-
than holding onto it. Slow movers lose talented people, dancy and enables a company to use existing assets to
and they risk sacrificing much of their equity with address problem areas. But a company usually has to
customers, particularly with the younger buyers who integrate slowly. First comes the “soft” integration—

11
Leading a Digical SM transformation

socializing, bringing executive teams together, appre- solar panels on the roof and so on. Airlines are getting
ciating what the other group can do. Then come the their toes wet as well. Delta, for example, offers a baggage
harder steps, with dotted-line accountabilities link- tracker via Wi-Fi. It has equipped flight attendants with
ing people in both units. Over time—once people are handheld devices, and it is in the process of equipping
comfortable with one another and their respective pilots with Surface 2 tablets as “electronic flight bags”
roles—those lines can get stronger. to take the place of papers and charts in the cockpit.
Delta also spent in the neighborhood of $140 million
Looking ahead to improve its website and mobile presence, leading
to a new iPad app that works as a travel guide. Among
The pace of change has been so rapid in recent decades the app’s features is “Glass Bottom Jet,” which allows
that many executives already feel left behind. This is a passengers in flight to see the city below them on
mistake. The Digical transformation, like the computer their device’s screen.
revolution itself, is a long race, and we are scarcely past
the starting line. Look at e-commerce. The Web has been Even the US Postal Service is getting into the act. Though
available for commercial use for about 20 years. Many email has decimated first-class letters, e-commerce
companies have built huge organizations around their has led to a boom in package delivery, and private car-
e-commerce capabilities and do billions of dollars’ worth riers lack capacity during peak periods. The USPS has
of business. But e-commerce still accounts for less developed its tracking and logistical capabilities to the
than 10% of retail sales. point where it could partner with Amazon in the 2013
holiday season to facilitate Sunday deliveries.
Look, too, at all the companies now testing the waters
of the Digical transformation. Not long ago the auto- Bottom line: It isn’t too late. Companies everywhere
mobile industry appeared to be stodgy and unimagi- are experimenting and innovating, but most are still
native, the quintessential old-economy business. Today, Beginners. The Digical transformation is under way,
companies such as Ford and Audi are developing sev- but it is still young. A company that climbs on board
eral Digical technologies: self-parking cars, wireless now will have the strategies and the assets it needs to
networks linking cars to one another, electric cars with compete in a Digical future.

DigicalSM is a trademark of Bain & Company, Inc.

12
Shared Ambition, True Results

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 Key contacts in Bain’s Retail and Consumer Products practices:

Americas: Darrell Rigby in Boston (darrell.rigby@bain.com)

Suzanne Tager in New York (suzanne.tager@bain.com)
Elizabeth Spaulding in San Francisco (elizabeth.spaulding@bain.com)
Mike Baxter in New York (mike.baxter@bain.com)

Asia-Pacific: Serge Hoffman in Hong Kong (serge.hoffman@bain.com)

Michael Woodbury in Melbourne (michael.woodbury@bain.com)

EMEA: Marc-André Kamel in Paris (marc-andre.kamel@bain.com)

Nick Greenspan in London (nick.greenspan@bain.com)
Dirk Vater in Frankfurt (dirk.vater@bain.com)

For more information, visit www.bain.com