How the individual actions drive value
Each of these actions was correlated to market capitalization. We examined the impacts of each individually and in various combinations to understand which combinations could yield the greatest value—and which could yield the least. Several distinct patterns emerged:
When a company articulated its digital strategy in its financial disclosures, we observed a significant positive impact on valuation. This is where many organizations start their digital transformation value journey, though only 44% have a high maturity related to this action.4 We hypothesize that the market understands the impact of “digital” on all companies regardless of industry and gives management credit for taking action to modernize the business in support of a broader strategy. Perhaps evidence of action, no matter how general, demonstrates an organization’s prioritization of digital goals.
Technology aligned to strategy
When we found evidence of technology aligned to strategy in companies’ financial disclosures, the valuation impact was two times higher than that of digital strategy. We believe the higher valuation is due to the specificity of technologies mentioned (figure 1). This likely gives stakeholders a more tangible sense of strategies employed, and a way to keep closer tabs on where the enterprise is placing its capital bets—which, for many, can be massive. Many of these technologies are also viewed as emerging or leading-edge and can reflect a forward-looking approach to improved performance.
Despite the positive news around the previous two actions, our research uncovered a cautionary tale for digital change. When analyzing disclosures that articulated change programs in general terms or without reference to specific digital actions, we found that market capitalization eroded. When observed on its own, digital change was nearly three times less impactful than digital strategy and put existing market cap at risk of erosion.
We believe this occurs for two reasons. First, change for change’s sake, without purpose or any ties to a broader strategy, is insufficient. It lacks the specificity to mobilize stakeholders and rally them around shared interests. Second, many stakeholders understand that change can yield a high degree of uncertainty. Without a specific plan, stakeholders discount management’s ability to move the organization forward. Confidence is lost, momentum is impaired, and leadership could be viewed as chasing the latest management fad.
Consider Agile adoption over the years. Solving for a scaled Agile organization and achieving enterprise agility5 is certainly complex. It involves upskilling talent, building the right product teams, and instilling a new organizational mindset. But it goes well beyond that. To realize the value of Agile—the products enabled, the velocity expected, and the customer experience impacted—it all has to tie back to the enterprise strategy. If an Agile enterprise is built without these in mind, the enterprise is simply adopting a management trend and not taking full advantage of Agile as a solution. Our research suggests this is a path to value destruction.
Individual actions: The upshot
According to our analysis, if you can only do one thing, focus your efforts on technologies aligned to strategy because it drives superior market value. And the more specific you can be with stakeholders, the more you’re rewarded in the market. There’s power in being vocal about your actions with investors and other stakeholders. Think about investor relations as a possibly overlooked tool in your arsenal—a way to signal your confidence in the plans you have made and the actions you intend to take, and to demonstrate how strongly digital transformation figures into the enterprise’s plans.
How combined actions shape value
After we analyzed each of the actions individually, we looked for combinations that could unlock (or destroy) even more value. The results are compelling: Specific combinations of actions can yield up to a 5% increase in market capitalization, while other combinations can lead to significant value erosion risks of as much as 9%.
Transformers rejoice: Value is there if you execute with intention
The most positive combination is the digital trifecta: the presence of an articulated digital strategy, where specific technology investments are aligned and set, and the organization is mobilized and ready to manage the change. This equates to a value impact 1.2 times that of digital strategy applied individually, and nearly 3.5 times that of change capability on its own.
While it would be easy to dismiss the trifecta catalyst as conventional wisdom, the evidence shows otherwise.6 Only 34% of Fortune 500 companies we analyzed showed signs of being strategic about their technology investments in their financial disclosures. It’s possible that the remainder are making important investments but have lost the plot line, are reluctant to disclose “too much” to competitors, or don’t know how best to convey the impact of those investments.
Transformers beware: Where you have the will, make sure you have the way
Our analysis revealed that change capability is the wild card: Its presence can make or break value for the enterprise. On its own, it’s a value eroder. As part of the trifecta, it’s a value catalyst. But when it’s entirely absent, we observed the worst outcome of all.
We found evidence that the combination of digital strategy and technology-aligned investments without 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. In fact, it’s the most negative combination, posing a 9% value erosion risk that could cost Fortune 500 firms US$1.5 trillion in value.7
But how can that be? How can the same actions that create an outsized return also destroy value? Digital transformations require buy-in at the onset, commitment to sustain, and organizational incentives to match. If you lack the capability to adopt and use those technologies or to bring the organization along on the change, you’ve wasted significant time, attention, and capital. Digital transformation, in this instance, becomes a distraction for management and top talent. Stakeholders are savvy enough to understand how hard transformational change can be and, as a result, significantly discount the value of the enterprise.
To combat the risks, how and when the organization directs its change capability can be a difference-maker. While it has a negative relationship to market cap on its own, when combined with one or two of the other actions, it’s an essential value catalyst. It turns the most negative scenario into the most positive one.