Close Cookie Notice

Welcome to the MIT CISR website!

This site uses cookies. Review our Privacy Statement.

Red briefing graphic
Research Briefing

Both Radical and Incremental Digitally Enabled Change Work Well

Using digital tech, is incremental improvement or radical transformation better? See results from 4,000+ companies.
By Stephanie L. Woerner, Peter Weill, and Aman Shah
Abstract

Two years ago, when MIT CISR asked companies whether they were on a digitally enabled journey to become “Future Ready,” nearly all—93 percent of companies—said they were. In 2019, working with Harvey Nash, we studied results from more than four thousand companies to assess which of two approaches to business change using digital technologies—incremental improvement or radical transformation—was associated with better financial performance. We found that the top performers taking each approach achieved significant benefits from their change efforts, strongly outperforming their peers in revenue growth and net margin. Counterintuitively, there was no difference between the two approaches in regards to the risk of financial underperformance. In this briefing, we look at the differences between the incremental improvement and radical transformation approaches to business change and what it takes in dollars and digital savvy to succeed.

Access More Research!

Any visitor to the website can read many MIT CISR Research Briefings in the webpage. But site users who have signed up on the site and are logged in can download all available briefings, plus get access to additional content. Even more content is available to members of MIT CISR Patron and Sponsor organizations.

Two years ago, when MIT CISR asked companies whether they were on a digitally enabled journey to become “Future Ready,” nearly all—93 percent of companies—said they were.[foot]P. Weill and S. L. Woerner, “Future Ready? Pick Your Pathway for Digital Business Transformation,” MIT Sloan CISR Research Briefing, Vol. XVII, No. 9, September 2017. https://cisr.mit.edu/publication/2017_0901_DigitalPathways_WeillWoerner [/foot] In 2019, working with Harvey Nash, we studied results from more than four thousand companies to assess which of two approaches to business change using digital technologies—incremental improvement or radical transformation—was associated with better financial performance.[foot]Harvey Nash/KPMG CIO Survey 2019 including some MIT CISR questions (N=4047); MIT CISR obtained publically reported financial data for 288 of the responding companies. The correlation between perceived and published financial performance relative to industry was significant (p<0.01 level). We used the actual performance variable for the firm performance analysis and the perceived performance variable for all other analyses. All differences reported were statistically significant.[/foot] We found that the top performers taking each approach achieved significant benefits from their change efforts, strongly outperforming their peers in revenue growth and net margin. Counterintuitively, there was no difference between the two approaches in regards to the risk of financial underperformance. In this briefing, we look at the differences between the incremental improvement and radical transformation approaches to business change and what it takes in dollars and digital savvy to succeed.

BUSINESS CHANGE APPROACHES AND THEIR COST

In their approach to becoming Future Ready, 56 percent of the companies in our research were pursuing incremental improvement and 44 percent radical transformation. The approaches differ in their scope and speed. The companies taking an incremental approach were using digital technologies to steadily enhance existing products, services, and customer engagement, and were gradually introducing new offerings. The companies taking the radical approach were focused on developing digitally enabled products and services and experimenting with new revenue models. The chosen approach varied widely by industry (see Table 1); for example, 68 percent of companies in Advertising/PR were taking a radical approach versus 30 percent of companies in Manufacturing/Automotive. The differences across industries likely reflected the disparate views of senior executives and boards on the degree of threat from digital disruption to their current business models.

When looking at the top performers on a combination of growth and margin,[foot]A “top performer” (top-performing company)/“bottom performer” (bottom-performing company) was a company in the top/bottom quartile on a combination of perceived profitability and revenue growth, compared to industry.[/foot] the goals of the management board (CEO and direct reports) drove a company to take one or the other approach. Management boards of companies taking an incremental approach looked to digital technologies to deliver stable and consistent performance and improved business processes, while boards of companies taking a radical approach were looking to digital technologies to drive revenue growth and develop innovative products and services and/or integrate those from other organizations.

These very different goals resulted in significantly different levels of spending on technology as a percent of revenues (see Table 1). Companies taking a radical approach spent 2.8 percentage points more on technology than their industry average, while companies following an incremental approach spent 1.8 percentage points less than their industry average. And in some industries the differences were much higher—for example, technology companies following a radical approach spent 26.8 percent of revenues on digital technologies, while technology companies following an incremental approach spent 16.6 percent.

ATTRIBUTES OF DIGITAL SAVVY

Improving the performance of the company by means of digital technologies requires an enterprise-wide digital savviness: a combination of mindset, clever use of data and technologies, and new ways of working that improves customer service and efficiency. We define digital savvy as an understanding, tested by experience, of how digital technologies will impact how companies will succeed in the next decade. We evaluated the digital savviness of companies on the following attributes to arrive at an overall percentage of Digital Savvy for each company:

  • Collaboration that delivers business change
  • A long-term mindset on technology implementation and platforms
  • A portfolio of digital technologies that advances business strategy
  • Effective leverage of cloud technologies
  • Maximized data use throughout the enterprise
  • Customer trust built through superior service and customer knowledge

The average company following an incremental/radical approach had a Digital Savvy score of 52 percent/59 percent, while top performers scored 57 percent/66 percent (see Table 2)—it took 16 percent higher digital savviness to be a top performer on the radical approach than the incremental approach.

While many companies are buying into radical transformation, an incremental approach to improving performance does much better on margin and nearly as well on revenue growth.

Achieving that much more digital savviness takes a multiyear effort; while typically led by the CIO and the IT unit, this must become an enterprise-wide pursuit. Even top-performing companies can have potential to significantly increase their digital savvy: our analysis shows that whether following an incremental or radical approach, the higher the financial performance a company has, the higher the company’s digital savvy.

INCREMENTAL CHANGE—A SAFE BET

Both the incremental improvement and radical transformation approaches have yielded great results for top performers. Among top performers on combined growth and margin (relative to industry), the results are impressive: companies following an incremental approach did much better on margin, while companies following a radical approach did better on revenue growth (see Table 3). In our exploration two years ago into digital enabled business change, companies estimated they were 37 percent complete on their journey to Future Ready. Assuming these top-performing companies are now into their third or fourth year of change, the financial results are very encouraging for either the incremental or radical approach. But the key takeaway is that while many companies are buying into radical transformation, an incremental approach to improving performance does much better on margin and nearly as well on revenue growth.The financial risk of underperforming—the percentage of all companies that perform better than the average company following each strategy—is virtually the same for both approaches. For the average company pursuing an incremental approach, the risk of underperforming was 49 percent; for the average company following a radical approach, the risk was 51 percent. However, the sources of risk are quite different. For companies following a radical approach, the risks of underperformance are around new revenue models and changing the culture and skills. In contrast, the risks of underperformance for companies pursuing an incremental approach are about digital disruption happening more quickly than expected, leaving the company behind.

MECHANISMS PER CHANGE APPROACH

Let’s look at what it takes lead the changes. Using a measure of CIO effectiveness,[foot]We created a measure of CIO effectiveness by assessing a company’s ability to implement end-to-end solutions, be strategic, ensure that IT staff have key skills, use cross-functional teams, and help implement new
ways of working.[/foot] we found no difference in CIO effectiveness across top-performing companies following an incremental or radical approach. But there was a difference in the key mechanisms senior executives used to implement change. For companies using a radical approach, effective use of data was the key differentiator, coupled with a significant decentralization of the IT/digital budget, and with more technology-related spending and initiatives outside of that budget. For companies following the incremental approach, there was more spending within the IT/digital budget (likely associated with a stronger architecture) and significantly more focus on talent retention (keeping people motivated to stick with the incremental approach), plus scaling of experiments and using robotics for automation.

THE BEST APPROACH FOR YOUR COMPANY

Contrary to much popular opinion that most digitally enabled business change is radical, companies are fairly evenly split between taking incremental and radical approaches to becoming Future Ready, and the very impressive results achieved by top performers are similar for each approach. But companies should typically only pursue a radical transformation approach if their threat of digital disruption is high and they are willing to both spend significantly more on technology and drive culture change.

Following either approach, an effective CIO is pivotal to a successful outcome. As higher digital savvy is associated with higher performance, a top task of all CIOs is to build digital savviness enterprise wide.

Table 1a: Incremental Improvement Approach
  Incremental Improvement Approach
Industry Percentage of Companies Technology Spend: Percentage of Revenue
Advertising/PR 32% 9.3%
Broadcast/Media 43% 10.9%
Telecommunications 43% 16.0%
Technology 44% 16.6%
Insurance 48% 6.5%
Pharmaceuticals 49% 9.5%
Banking 51% 18.0%
Business/Professional Services 52% 10.1%
Leisure 54% 5.8%
Retails/Consumer Goods 56% 5.0%
Transport/Logistics 57% 5.6%
Oil and Gas 58% 3.8%
Healthcare 60% 7.2%
Power and Utilities 63% 7.1%
Investment Management 64% 9.6%
Construction/Engineering 66% 6.2%
Manufacturing/Automotive 70% 4.3%
AVERAGE*
56%
8.5%
*Average includes three industries excluded from the table
Table 1b: Radical Transformation Approach
  Radical Transformation Approach
Industry Percentage of Companies Technology Spend: Percentage of Revenue
Advertising/PR 68% 13.1%
Broadcast/Media 57% 13.7%
Telecommunications 57% 15.8%
Technology 56% 26.8%
Insurance 52% 7.9%
Pharmaceuticals 51% 10.5%
Banking 49% 21.0%
Business/Professional Services 48% 13.9%
Leisure 46% 10.4%
Retails/Consumer Goods 44% 4.5%
Transport/Logistics 43% 8.5%
Oil and Gas 42% 9.3%
Healthcare 40% 10.0%
Power and Utilities 37% 17.1%
Investment Management 36% 11.2%
Construction/Engineering 34% 6.5%
Manufacturing/Automotive 30% 6.2%
AVERAGE*
44%
14.5%
*Average includes three industries excluded from the table
Table 2: Differences in Digital Savviness
  Bottom Performers Average TOp Performers
Digital Savvy, Incremental Improvement 42% 52% 57%
Digital Savvy, Radical Transformation 50% 59% 60%

 

Source, Tables 1 and 2: Harvey Nash/KPMG CIO Survey 2019 including some MIT CISR questions (N=4047). Technology spend=combined technology and IT spending for the enterprise. Table 2: Top/Bottom Performers=Top/bottom quartile companies on a combination of 2018-published profitability and revenue growth, compared to industry.

Digital Savviness: Digital Savvy is an understanding, tested by experience, of how digital technologies will impact how companies will succeed in the next decade. We evaluated the digital savviness of companies on the following attributes to arrive at an overall percentage of Digital Savvy for each company: effective collaboration, longterm mindset, strategic digital technology adoption, leverage of cloud technologies, maximized data use, and customer trust. All measures were transformed to a 0%–100% scale. Digital Savvy was significantly different across companies following incremental improvement and radical transformation approaches.

Table 3a: Difference in Performance - Net Margin
  iNCREMENTAL iMPROVEMENT rADICAL tRANSFORMATION
Net Margin,
Average
+1.4 -1.4
Net Margin,
Top Performer
+19 +9
Table 3B: Difference in Performance - Revenue Growth
  iNCREMENTAL iMPROVEMENT rADICAL tRANSFORMATION
Revenue Growth,
Average
+0.4 -0.4

Revenue Growth,
Top Performer

+15 +17

Source, Table 3: Harvey Nash/KPMG 2019 CIO Survey including some MIT CISR questions (N=4047). Published financial results from 288 companies used for this analysis.

© 2019 MIT Sloan Center for Information Systems Research, Woerner, Weill, and Shah. MIT CISR Research Briefings are published monthly to update the center's patrons and sponsors on current research projects.

About the Authors

Profile picture for user woerner@mit.edu

Stephanie L. Woerner, Research Scientist, MIT Sloan Center for Information Systems Research (CISR)

E94-1557
(617) 452-3222
Profile picture for user amanshah@mit.edu

Aman Shah, Senior Research Support Associate, MIT Sloan Center for Information Systems Research (CISR)

MIT SLOAN CENTER FOR INFORMATION SYSTEMS RESEARCH 

Founded in 1974 and grounded in the MIT tradition of rigorous field-based research, MIT CISR helps executives meet the challenge of leading dynamic, global, and information-intensive organizations. Through research, teaching, and events, the center stimulates interaction among scholars, students, and practitioners. More than seventy-five firms sponsor our work and participate in our consortium. 

MIT CISR Patrons
AlixPartners
Avanade
Axway, Inc.
Collibra
Pegasystems Inc.
PricewaterhouseCoopers
Standard Bank Group (South Africa)
The Ogilvy Group
MIT CISR Sponsors
Allstate Insurance Company
Amcor
ANZ Banking Group (Australia)
AustralianSuper
Banco Bradesco S.A. (Brazil)
Banco do Brasil S.A.
Bank of Queensland (Australia)
BlueScope Steel (Australia)
BNP Paribas (France)
Bristol-Myers Squibb
Cabot Corporation
CarMax
Caterpillar, Inc.
CEMEX (Mexico)
Charles River Laboratories, Inc.
CIBC (Canada)
Cochlear Limited (Australia)
Commonwealth Superannuation Corp. (Australia)
Credit Suisse (Switzerland)
Cuscal Limited (Australia)
CVS Health
DBS Bank Ltd. (Singapore)
Doosan Corporation (Korea)
Fidelity Investments
Fomento Economico Mexicano, S.A.B., de C.V.
Fortum (Finland)
General Mills, Inc.
General Motors Corporation
Henkel AG & Co. (Germany)
Hitachi, Ltd. (Japan)
HSBC Technology & Services (USA) Inc.
Johnson & Johnson (J&J)
Kaiser Permanente
King & Wood Mallesons (Australia)
Koç Holding (Turkey)
Mercer
National Australia Bank Ltd.
Nomura Holdings, Inc. (Japan)
Nomura Research Institute, Ltd. Systems Consulting Division (Japan)
OECD
Pacific Life Insurance Company
Pioneer Natural Resources USA Inc.
Posten Norge AS (Norway)
Principal Financial Group
Procter & Gamble
QBE
Raytheon Technologies
Reserve Bank of Australia
Santander UK/Grupo Santander
SC Global Tubular Solutions
Scentre Group Limited (Australia)
Schneider Electric Industries SAS (France)
State Street Corp.
Stockland (Australia)
Suncorp Group (Australia)
Teck Resources Limited (Canada)
Tetra Pak (Sweden)
Trinity Health
Truist Financial Corporation
UniSuper Management Pty Ltd (Australia)
USAA
Webster Bank, N.A.
Westpac Banking Corporation (Australia)
WestRock Company
Wolters Kluwer
Zoetis Services LLC
Find Us
Center for Information Systems Research
Massachusetts Institute of Technology
Sloan School of Management
245 First Street, E94-15th Floor
Cambridge, MA 02142
 
617-253-2348