PAUL CARLILE: To see the impact of digital technologies

on business and the power of developing an experimental capability it's

important to think about what makes up a business.
This exercise is also important as we compare
how a traditional business differs from a digitally born
business in terms of experimentation.
To make this comparison meaningful we can think about three levels
of a typical business enterprise.
At the bottom is the technical level.
This can be the product itself or the technologies
used to produce the product.
The middle is the people or where and how they are organized.
We call this the organizational level.
At the top is the strategic level.
We call all three levels the business stack.
In a traditional business, product and process technologies
were developed to maintain by a few experts,
and they change very slowly because experiments were expensive.
This was the domain of engineers, R&D, and operations.
The top level was also maintained by a few experts
and this also changes very slowly.
For example, we had 5 to 10 year strategic plans.
This is the domain of the C-Suite in the McKenzie consultants.
Here the goal was creating favorable economics of scale
for the products produced.
At the organizational level, people and their work
was organized around functional areas for example, finance, marketing,
human resources, and engineering, and, therefore, were often heavily
siloed with their own cultures as well.
Cross-functional teams were important, but their primary existence
was to integrate the tasks assigned to the silos.
Overall, the flow of information and knowledge
stayed primarily within the silos and within levels,
with only limited flows across layers, given that products
and strategies change very slowly.
In a digitally born company such as Facebook,
it is built almost entirely out of digital technologies, databases,
mobile devices, analytics, and machine learning.
Much of this was primarily focused on connecting or oriented to the end user.
Today we call this service-based business models as opposed to only
being focused on the product.
The experimental capacity at the technical level
means that agile teams can drive advertising experiments
with different samples of users and within days can modify
a key initiative of Facebook strategy.
In this case, the flow of information knowledge moves up and down
the business stack to reap the benefits of data and user interactions
in order to drive effectiveness and the speed of strategic decision-making.
However, understanding the business context of the data
from these experiments and its potential impact on the company's strategy
needs to be organized very differently than it
was done in traditional businesses.
What we see naturally in a digitally born business,
again, is that rapid flow of information and knowledge
across the levels of the stack.
And since this didn't happen very naturally in traditional businesses,
this issue needs to be addressed very clearly.
What we now see is this is achieved in digital businesses
by multidisciplinary agile teams that focus on the flow of user information
rather than being dominated by flow shaped by the functional
demands of entrenched silos.
Traditional businesses are finding that new investments in digital technologies
and data scientists alone is not generating success.
What is also required are agile approaches
that can meaningfully and pragmatically connect the consequences of the data
to the creation and transformation of the firm's strategy in near real time.
Given the complexity of today's business ecosystems,
a capability for experimentation must exist
and be integrated across all three layers of what
we call the digital business stack.
This full capability is required to create a coherent strategic pathway
given the amount of digital disruption and unpredictability
that now exist in many business environments.
As traditional businesses have become increasingly
impacted by digital technologies and easier connections to customers,
this picture has begun to change.
For example, GE's wind turbines are no longer just standalone products
or technologies as they once were.
They are now interconnected via Internet of Things
and now new efficiencies and value can be
created through the use of their analytics service called predicts.
This lowers the cost and increases the speed and scale
at which they can drive experiments with customers, partners, employees
to drive product changes and strategic business model shift.
One of the challenges that GE still faces
is, despite this investment in digital technologies and data scientists,
moving that information and knowledge up and down the stack
is still very challenging, given the fact that many
of their functional silos remain the dominant force
within the organizational level.