Mar 11 2020

Q&A: Digital Transformation Leads to Improved Valuations, Performance

For tech leaders who need to sell executive teams on the digital tools that drive business success, Harvard Business School professor Suraj Srinivasan has some important news.

Tech leaders know the benefits of adopting emerging technologies. But boards of directors and chief executives, who control the purse strings, often take some convincing. A recent study led by Harvard Business School professor Suraj Srinivasan found that non-tech businesses that undergo transformative tech projects see immediate advantages in their valuations and performance. In a conversation with BizTech, Srinivasan says that businesses should view digital transformation as a long-term process — one their management teams must be suited to lead.

BIZTECH: What were you trying to achieve with your research?

I study digital transformation, and I try to understand the factors that drive success, as well the friction and challenges. One anecdotally hears and reads about companies that are doing various aspects of it — some successfully, others not. And we’re in a world today with new technology like artificial intelligence and the cloud that offer the potential to fundamentally transform how business is done.

I wanted to answer a few questions. First, how extensive is the eruption of digital technology within non-technology companies? Second, what are the benefits of digital transformation? We hear about an example here and an example there, but the way to quantify it is with financial metrics — stock prices, company valuation and performance — because eventually, strategic advantages have to translate into financial performance. So how are companies faring in their performance as they are disrupting themselves with digital technologies? And third, what are some things that seem to help the better performers — the ones that are able to successfully adopt digital technologies?

BIZTECH: Let’s answer those questions in turn. First, how extensive is the adoption of digital transformation technologies right now?

In 2010, only 4 percent of non-tech companies in the U.S. were talking about these kinds of transformative technologies. That’s up to 22 percent today. So, roughly a fourth to a fifth of companies are at a point where they’re publicly talking about it, and I’ll bet there are a lot of other companies that are in earlier stages of it where they’re starting to adopt but not yet talking about it. The trend is a sharp upward trajectory of companies that are adopting these technologies. So, it’s here and here to stay. And the question is no longer “Should I?” but “How should I?”

The other question is who are these companies that are adopting digital transformation? They are somewhat younger companies, they typically actually spend less than their peers on capital expenditures, and many actually have had weaker financial performance. They’re going digital sooner, perhaps, as a response to competitive pressure, as a way of mitigating the weaker performance.

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BIZTECH: How are companies benefiting from digital transformation?

The basic finding is that investors love it. The extent of the valuation benefit that comes from talking about and doing digital transformation is greater than most other things companies can do. We’ve found that the valuation of firms is on the order of 7 percent to 21 percent higher than peers for companies that go digital. 

So, what that suggests is that investors see digital transformation as a sustainable source of advantage. They think that as you improve your performance, you’re going to sustain it for a long time in the future. And just as a benchmark, it’s very hard to make these kinds of dramatic improvements to your valuation typically. Digital transformation seems to be one place where it works.Another way of thinking about this is that in the immediate term, companies that adopt these technologies do see performance benefits in very specific ways. One is that there’s an improvement in the efficient use of assets. And that’s somewhat intuitive: You would expect that if you have a factory or a plant or a fleet of trucks, any asset you’re using, if you deploy digital technology into that, it’s going to make those assets more efficient. We see an increase of almost 9 percent in the productivity of assets.

Suraj Srinivasan
The trend is a sharp upward trajectory of companies that are adopting these technologies. So, it’s here and here to stay. And the question is no longer ‘Should I?’ but ‘How should I?’”

Suraj Srinivasan Professor at Harvard Business School

BIZTECH: Are there any downsides to digital transformation that companies should look out for?

There are a couple of important takeaways for companies as they think about their digital strategy. One, overall profitability is actually weaker on average for digitally transforming companies in the short term. It takes time for these digital technologies to start bearing fruit.

The second thing for companies to consider is how quickly competitive forces might erode the benefits of going digital. As an example, think about how we order food. Virtually everyone in the restaurant industry now offers digital ordering. At first it was just early adopters, but now everyone does it. So, to some extent, digital transformation can become a thing you just have to do because that’s how business is done today, rather than being a strategic advantage.

BIZTECH: What is the most important factor that leads companies to successful transformations?

Leadership. Some firms may not have the right management team in place to go digital. We found that the non-tech firms that go digital with a strong tech-oriented executive among the top five senior people in the firm perform better than companies that don’t have a tech-savvy leader. We see it in the data: For example, 60 percent better in terms of productivity. It’s clear that digital adoption starts at the top.

In fact, of all the findings we have, I really think that one is the most critical in terms what’s going to drive success. It’s not just about having the right managers, but having those managers in the right place, high up. What that signals is that you are pushing this throughout the organization. The question with digital transformation is, how do you bring these technologies throughout the entire organization? And some companies are good at doing that and some companies aren’t. What have learned is that transformation cannot be done in silos. It has to be done in a comprehensive way.

Photography by Shawn G. Henry/BizTech Magazine