What’s your digital strategy? That simple question often throws the CEOs of traditional companies into a panic. They believe that digital technologies and business models pose an existential threat to their way of doing business—and of course they’re right. But the pressure they feel often leads them to make big bet-the-farm moves—and that’s usually wrong.

Veon, a large multinational provider of telecommunications services, is a case in point. Its new digital platform, introduced in 2017, was a huge project, involving 100 staff members in Amsterdam and another hundred or so in its London office. The idea was to create a mobile app that would offer users rich localized experiences and serve as a sales channel for Veon’s commercial partners (such as Mastercard). Management considered the project its top priority. But after being launched with much fanfare, the app got a lukewarm response from customers, and the effort to build a new ecosystem around it was scrapped. The failure led to a management exodus, layoffs, and a back-to-basics strategy with digital efforts sidelined to pilot-project stage.

Veon still needs a new business model, though, and clearly can’t afford to make many more large investments in searching for one.

It doesn’t have to. Just because a threat is huge doesn’t mean that a response has to be. To the contrary, companies like Veon would actually be much better off taking a more incremental approach to transformation over time. While they should always have a vision of where they want to go, they should work their way toward it by continually finding opportunities to digitize problematic processes in their core operations. When they tackle those projects, they’ll learn what metrics to use, which assumptions to revise, where they can introduce new business models, and who their new competitors might be. And as they absorb those lessons, their understanding of their competitive landscape—and the long-term goals they set for themselves—will inevitably change.

There’s already a process for this kind of ongoing learning approach to strategy: discovery-driven planning (DDP). One of us, Rita, and Ian MacMillan developed it in the 1990s as a product innovation methodology, and it was later incorporated into the popular “lean start-up” tool kit for launching businesses in an environment of high uncertainty. At its center is a low-cost process for quickly testing assumptions about what works, obtaining new information, and minimizing risks.

In the following pages we’ll describe how an adapted form of DDP can help incumbent firms confront digital challenges and learn their way toward a new business model. Let’s begin by looking in more detail at why a step-by-step transformation works better for traditional firms than the all-or-nothing approach that characterizes a start-up’s pivot.

The Incremental Advantage of Incumbent Firms

Economists have long puzzled over why firms exist at all and, at a more granular level, which tasks belong within the boundaries of a given firm. One line of thought, begun by Ronald Coase in the 1930s, suggests that under certain conditions, market transactions often are not satisfactory for individuals: when it is difficult or expensive to get information about what you want to buy, when bargains are hard to strike because information is asymmetrical, and when it’s costly or challenging to enforce agreements. If any of those conditions apply, it makes sense to keep the activities involved within a firm.

Until fairly recently, the boundaries between firms and markets were well understood and relatively fixed. But digital technologies have changed all that by making it possible to use markets for a lot of work that once was done more efficiently within firms. Platforms such as Alibaba and Amazon have made it easy to outsource functions like selecting suppliers, negotiating prices, enforcing contracts, managing payments, and more.

As a result, executives in companies that were born digital have assumptions about how transactions should be structured that are completely different from those of executives in legacy companies. What’s more, because digital firms’ structures are evolving all the time, their managers revisit those assumptions frequently. Direct-to-consumer businesses (think Casper in mattresses, Harry’s in shaving, and Warby Parker in eyeglasses) are constantly experimenting with and adjusting features like free shipping, product bundles, bonuses for adding items, and so on. Those tactics simply aren’t available to an incumbent selling through distributors. And because the digital businesses cut out intermediaries, they can be profitable at a much lower scale.

A key consequence of all this is that digital start-ups can change direction, or pivot, without destroying much value. They usually aren’t that capital-intensive and don’t have big payrolls. The founders of Rooted, for instance, initially sold plants out of their apartment directly to consumers, only later moving to a separate space and hiring employees. For such companies, failure is relatively cheap—unless it happens late in the day (or investors succumb to the growth-at-all-costs mantra that is unraveling the fortunes of many so-called unicorns).

The employees, managers, and shareholders of traditional companies, however, cannot pivot without destroying value. If their digital gambles fail, workers lose their jobs, and physical assets have to be unloaded at fire-sale prices. And unlike the venture capitalists who back start-ups, the investors in what was once a safe company may not have the buffer of high-return investments to offset their losses.

But although incumbent firms can’t pivot easily, the good news is that they don’t need to. Think about what big companies can do that start-ups can’t. Entrepreneurial ventures nearly always exploit a single idea. They usually can’t try out multiple versions of the same idea at the same time, let alone multiple ideas. A big firm, in contrast, has the resources to explore a variety of ideas and can more easily experiment with different processes and operations, which makes it more likely to discover a dominant model than a start-up is. This also gives a large firm a better chance of responding effectively to a digital challenge.