Deloitte’s latest report Unleashing value from digital transformation: Paths and pitfalls finds that the connection between strategy and action is the determining factor in deriving value from digital transformation efforts. According to the analysis, the right combination of digital transformation actions can unlock as much as US$1.25 trillion in additional market capitalisation across Fortune 500 companies. Alternatively, the wrong combinations can erode market value, putting more than US$1.5 trillion at risk across Fortune 500 companies – demonstrating the importance of strategically approaching digital transformation.
“Digital transformation is continuous – however, the scale and stakes are ever increasing. For organisations, finding the inherent value of technology innovations, and not letting it slip away, is crucial to a company’s long-term growth,” says Tim Smith, principal, Deloitte Consulting LLP, and head of Technology Strategy & Business Transformation, Deloitte US. “What’s make-or-break for leaders is understanding which moves can bolster and which can erode enterprise value. Connecting digital strategy and action is a proven way for leaders to generate a tremendous return for their stakeholders.”
Deloitte’s analysis focused on the individual and collective impacts of three core factors:
• Digital strategy, or the enterprise impacts that arise from digital transformation;
• Technology aligned to strategy, or the technology domains that come with digital transformation; and
• Digital change capability, or an organisation’s ability to adapt to and adopt new processes, resources, and ways of working in light of digital transformation.
How the core factors drive value individually
Deloitte found a significant positive impact on valuation when a company shared its digital strategy in its financial disclosures. While digital strategy is where many organisations begin their journey, only 44% have a high maturity related to digital strategy. The market understands the impact of “digital” and gives credit to management for prioritising the modernisation of the business. When technology is aligned to strategy it can also dramatically impact its valuation, evidenced by two times higher valuations when companies mentioned it in financial disclosures. This allows stakeholders to see where the enterprise invests its capital as many of these technologies are leading-edge, suggesting a forward-looking approach.
If an organisation can only focus on one of the three aforementioned core factors at a time, Deloitte’s analysis demonstrates that aligning technology investments with the enterprise strategy is most beneficial. Conversely, when analysing disclosures that articulated a digital change capability related to operations, processes, and workforce strategies in general terms or without reference to specific digital actions, Deloitte found that market capitalisation eroded.
“We believe that this occurs for two reasons. Firstly, change for change’s sake, without purpose or any ties to a broader strategy, is insufficient. It lacks the specificity to mobilise stakeholders and rally them around shared interests,” comments Mohit Mehrotra, Monitor Deloitte Leader, Deloitte Asia Pacific. “Secondly, when management fails to demonstrate sufficient courage in the conversation on their considerations and choices, stakeholders discount their ability to move the organisation forward. Confidence is lost, momentum is impaired, and leadership could be viewed as chasing the latest management fad.”
How the core factors shape value collectively
Deloitte analysed combinations of these same three core factors that could most positively or negatively impact an organisation’s market value. The most positive combination is the “digital trifecta,” which includes all three core factors: digital strategy, technology aligned to strategy, and digital change. Organisations that demonstrate all three of these traits saw a 5% lift in market relative to their peers, all other things being held equal.
The worst possible outcome stemmed from a lack of digital change capability despite an emphasis on the other two factors. Digital strategy and technology aligned to strategy without digital change capability results in a significant erosion of enterprise value. The losses are 10 times greater than those seen with the other value destroyer: digital change on its own. The most negative combination poses a 9% value erosion risk that could cost Fortune 500 firms US$1.5 trillion in value. This revealed the dual nature of digital change capability as both a value risk and enabler that is best employed in the service of the digital strategy and technology investments aligned to strategy.
“Ultimately, digital transformation is a continuous effort that requires assembling the right pieces in a multivariate puzzle,” continues Mohit. “Getting it right requires an ability and willingness to transform continuously and advantageously in the face of change and disruption. The lessons that we have learnt from companies in Asia Pacific are clear: The institutional narrative on strategy needs to be centred around a journey beyond fear, and there needs to be a clear pathway towards the continuous modernisation of capabilities.”
Deloitte applied natural language processing to more than three million pages of financial disclosures from 4,651 US and global firms listed on the New York Stock Exchange to uncover new insights on how to ensure that digital transformation investments pay off. Specifically, Deloitte looked at how organisations talked about their digital strategy; existing or planned technology investments aligned with their larger business strategy; and the preparedness of their people and processes to undergo such a change. Deloitte then applied a financial model to determine correlations between these factors and the companies’ market capitalisation.
