Competing in a world of sectors without borders
Digitization
is causing a radical reordering of traditional industry boundaries. What will
it take to play offense and defense in tomorrow’s ecosystems?
Rakuten Ichiba is Japan’s single
largest online retail marketplace. It also provides loyalty points and e-money
usable at hundreds of thousands of stores, virtual and real. It issues credit
cards to tens of millions of members. It offers financial products and services
that range from mortgages to securities brokerage. And the company runs one of
Japan’s largest online travel portals—plus an instant-messaging app, Viber,
which has some 800 million users worldwide. Retailer? Financial company?
Rakuten Ichiba is all that and more—just as Amazon and China’s Tencent are
tough to categorize as the former engages in e-commerce, cloud-computing,
logistics, and consumer electronics, while the latter provides services ranging
from social media to gaming to finance and beyond.
Organizations such as
these—digital natives that are not defined or constrained by any one
industry—may seem like outliers. How applicable to traditional industries is
the notion of simultaneously competing in multiple sectors, let alone
reimagining sector boundaries? We would be the first to acknowledge that
opportunities to attack and to win across sectors vary considerably and that
industry definitions have always been fluid: technological developments cause
sectors to appear, disappear, and merge. Banking, for example, was born from
the merger of money exchange, merchant banking, savings banking, and
safety-deposit services, among others. Supermarkets unified previously separate
retail subsectors into one big “grocery” category. Changes such as these created
new competitors, shifted vast amounts of wealth, and reshaped significant parts
of the economy. Before the term was in vogue, one could even say the shifts
were “disruptive.”
Yet there does appear
to be something new happening here. The ongoing digital revolution, which has
been reducing frictional, transactional costs for years, has accelerated
recently with tremendous increases in electronic data, the ubiquity of mobile
interfaces, and the growing power of artificial intelligence. Together, these
forces are reshaping customer expectations and creating the potential for
virtually every sector with a distribution component to have its borders
redrawn or redefined, at a more rapid pace than we have previously experienced.
Consider first how
customer expectations are shifting. As Steve Jobs famously observed, “A lot of
times, people don’t know what they want until you show it to them.” By creating
a customer-centric, unified value proposition that extends beyond what end
users could previously obtain (or, at least, could obtain almost instantly from
one interface), digital pioneers are bridging the openings along the value
chain, reducing customers’ costs, providing them with new experiences, and
whetting their appetites for more.
We’ve all experienced
businesses that once seemed disconnected fitting together seamlessly and
unleashing surprising synergies: look no farther than the phone in your pocket,
your music and video in the cloud, the smart watch on your wrist, and the TV in
your living room. Or consider the 89 million customers now accessing Ping An
Good Doctor, where on a single platform run by the trusted Ping An insurance
company they can connect with doctors not only for online bookings but to
receive diagnoses and suggested treatments, often by exchanging pictures and
videos. What used to take many weeks and multiple providers can now be done in
minutes on one app.
Now nondigital natives
are starting to think seriously about their cross-sector opportunities and
existential threats that may lurk across boundaries. One example: We recently
interviewed 300 CEOs worldwide, across 37 sectors, about advanced data
analytics. Fully one-third of them had cross-sector dynamics at top of mind.
Many worried, for instance, that “companies from other industries have clearer
insight into my customers than I do.” We’ve also seen conglomerates that until
recently had thought of themselves as little more than holding companies taking
the first steps to set up enterprise-wide consumer data lakes, integrate
databases, and optimize the products, services, and insights they provide to
their customers. Although these companies must of course abide by privacy
laws—and even more, meet their users’ expectations of trust—data sets and
sources are becoming great unifiers and creating new, cross-sectoral
competitive dynamics.
Do these dynamics
portend a sea change for every company? Of course not. People will still stroll
impromptu into neighborhood stores, heavy industry (with the benefit of
technological advances, to be sure) will go on extracting and processing the
materials essential to our daily lives, and countless other enterprises beyond
the digital space will continue to channel the ingenuity of their founders and
employees to serve a world of incredibly varied preferences and needs. It’s
obvious that digital will not—and cannot—change everything.
But it’s just as
apparent that its effects on the competitive landscape are already profound and
that the stakes are getting higher. As boundaries between industry sectors
continue to blur, CEOs—many of whose companies have long commanded large
revenue pools within traditional industry lines—will face off against companies
and industries they never previously viewed as competitors. This new
environment will play out by new rules, require different capabilities, and
rely to an extraordinary extent upon data. Defending your position will be
mission critical, but so too will be attacking and capturing the opportunities
across sectors before others get there first. To put it another way: within a
decade, companies will define their business models not by how they play
against traditional industry peers but by how effective they are in competing
within rapidly emerging “ecosystems,” comprising a variety of businesses from
dimensionally different sectors.
A world of digital ecosystems
As the approaching
contest plays out, we believe an increasing number of industries will converge
under newer, broader, and more dynamic alignments: digital ecosystems. A world
of ecosystems will be a highly customer-centric model, where users can enjoy an
end-to-end experience for a wide range of products and services through a
single access gateway, without leaving the ecosystem. Ecosystems will comprise
diverse players who provide digitally accessed, multi-industry solutions. The
relationship among these participants will be commercial and contractual, and
the contracts (whether written, digital, or both) will formally regulate the
payments or other considerations trading hands, the services provided, and the
rules governing the provision of and access to ecosystem data.
Beyond just defining
relationships among ecosystem participants, the digitization of many such
arrangements is changing the boundaries of the company by reducing frictional
costs associated with activities such as trading, measurement, and maintaining
trust. More than 80 years ago, Nobel laureate Ronald Coase argued that
companies establish their boundaries on the basis of transaction costs like
these: when the cost of transacting for a product or service on the open market
exceeds the cost of managing and coordinating the incremental activity needed
to create that product or service internally, the company will perform the
activity in-house. As digitization reduces transaction costs, it becomes economic
for companies to contract out more activities, and a richer set of more
specialized ecosystem relationships is facilitated.
Rising expectations
Those ecosystem
relationships, in turn, are making it possible to better meet rising customer expectations.
The mobile Internet, the data-crunching power of advanced analytics, and the
maturation of artificial intelligence (AI) have led consumers to expect fully
personalized solutions, delivered in milliseconds. Ecosystem orchestrators use
data to connect the dots—by, for example, linking all possible producers with
all possible customers, and, increasingly, by predicting the needs of customers
before they are articulated. The more a company knows about its customers, the
better able it is to offer a truly integrated, end-to-end digital experience
and the more services in its ecosystem it can connect to those customers,
learning ever more in the process. Amazon, among digital natives, and Centrica,
the British utility whose Hive offering seeks to become a digital hub for
controlling the home from any device, are early examples of how pivotal players
can become embedded in the everyday life of customers.
For all of the speed
with which sector boundaries will shift and even disappear, courting deep customer
relationships is not a one-step dance. Becoming part of an individual’s
day-to-day experience takes time and, because digitization lowers switching
costs and heightens price transparency, sustaining trust takes even longer.
Over that time frame, significant surplus may shift to consumers—a phenomenon
already underway, as digital players are destroying billions to create millions. It’s also a process that will require deploying newer
tools and technologies, such as using bots in multidevice environments and
exploiting AI to build machine-to-machine capabilities. Paradoxically,
sustaining customer relationships will depend as well on factors that defy
analytical formulae: the power of a brand, the tone of one’s message, and the
emotions your products and services can inspire.
Strategic moves
The growing importance
of customer-centricity and the appreciation that consumers will expect a more
seamless user experience are reflected in the flurry of recent strategic moves
of leading companies across the world. Witness Apple Pay; Tencent’s and
Alibaba’s service expansions; Amazon’s decisions to (among other things) launch
Amazon Go, acquire Whole Foods, and provide online vehicle searches in Europe;
and the wave of announcements from other digital leaders heralding service
expansion across emerging ecosystems. Innovative financial players such as CBA
(housing and B2B services), mBank (B2C marketplace), and Ping An (for health,
housing, and autos) are mobilizing. So are telcos, including Telstra and Telus
(each playing in the health ecosystem), and retailers such as Starbucks (with
digital content, as well as seamless mobile payments and pre-ordering). Not to
be left out are industrial companies such as GE (seeking to make analytics the
new “core to the company”)
and Ford (which has started to redefine itself as “a mobility company and
not just as a car and truck manufacturer”). We’ve also seen ecosystem-minded
combinations such as Google’s acquisition of Waze and Microsoft’s purchase of
LinkedIn. Many of these initiatives will seem like baby steps when we look back
a decade from now, but they reveal the significance placed by corporate
strategists on the emergence of a new world.
While it might be
tempting to conclude as a governing principle that aggressively buying your way
into new sectors is the secret spice for ecosystem success, massive
combinations can also be recipes for massive value destruction. To keep your
bearings in this new world, focus on what matters most—your core value
propositions, your distinct competitive advantages, fundamental human and
organizational needs, and the data and technologies available to tie them all
together. That calls for thinking strategically about what you can provide your
customers within a logically connected network of goods and services: critical
building blocks of an ecosystem, as we’ve noted above.
Value at stake
Based on current
trends, observable economic trajectories, and existing regulatory frameworks,
we expect that within about a decade 12 large ecosystems will emerge in retail
and institutional spaces.
The actual shape and
composition of these ecosystems will vary by country and region, both because
of the effects of regulations and as a result of more subtle, cultural customs
and tastes. We already see in China, for example, how a large base of young,
tech-savvy consumers, a wide amalgam of low-efficiency traditional industries,
and, not least, a powerful regulator have converged to give rise to leviathans
such as Alibaba and Tencent—ideal for the Chinese market but not (at least, not
yet) able to capture significant share in other geographies.
The value at stake is
enormous. The World Bank projects the combined revenue of global businesses
will be more than $190 trillion within a decade. If digital distribution
(combining B2B and B2C commerce) represents about one-half of the nonproduction
portion of the global economy by that time, the revenues that could,
theoretically, be redistributed across traditional sectoral borders in 2025
would exceed $60 trillion—about 30 percent of world revenue pools that year.
Under standard margin assumptions, this would translate to some $11 trillion in
global profits, which, once we subtract approximately $10 trillion for cost of
equity, amounts to $1 trillion in total economic profit.
Snapshots of the future
Again, it’s uncertain
how much of this value will be reapportioned between businesses and consumers,
let alone among industries, sectors, and individual companies, or whether and
to what extent governments will take steps to weigh in. To a significant
degree, many of the steps that companies are taking and contemplating are
defensive in nature—fending off newer entrants, by using data and customer
relationships to shore up their core. As incumbents and digital natives alike
seek to secure their positions while building new ones, ecosystems are sure to
evolve in ways that surprise us. Here is a quick look at developments underway
in three of them.
Consumer marketplaces
By now, purchasing and
selling on sites such as Alibaba, Amazon, and eBay is almost instinctive;
retail has already been changed forever. But we expect that the very concept of
a clearly demarcated retail sector will be radically altered within a decade.
Three critical, related factors are at work.
First, the frame of
reference: what we think of now as one-off purchases will more properly be
understood as part of a consumer’s passage through time—the accumulation of
purchases made from day to day, month to month, year to year, and ultimately
the way those interact over a lifetime. Income and wealth certainly have
predictive value for future purchases, but behavior matters even more. Choices
to eat more healthily, for example, correlate to a likelihood for higher
consumption of physical fitness gear and services, and also to a more
attractive profile for health and life insurers, which should result in more
affordable coverage.
The second major
factor, reinforcing the first, is the growing ability of data and analytics to
transform disparate pieces of information about a consumer’s immediate desires
and behavior into insight about the consumer’s broader needs. That requires a
combination of capturing innumerable data points and turning them, within
milliseconds, into predictive, actionable opportunities for both sellers and
buyers. Advances in big data analytics, processing power, and AI are already
making such connections possible.
This all generates a
highly robust “network factor”—the third major force behind emerging consumer
marketplaces. In a world of digital networks, consumer lenders, food and
beverage providers, and telecom players will simultaneously coexist, actively
partner, and aggressively move to capture share from one another. And while
digitization may offer the sizzle, traditional industries still have their
share of the steak. These businesses not only provide the core goods and
services that end users demand, but often also have developed relationships
with other businesses along the value chain and, most important, with the end
users themselves. Succeeding in digital marketplaces will require these
companies to stretch beyond their core capabilities, to be sure, but if they
understand the essentials of what’s happening and take the right steps to
secure and expand their relationships, nondigital businesses can still hold
high ground when the waves of change arrive.
B2B services
The administrative
burdens of medium, small, and microsize companies are both cumbersome and
costly. In addition to managing their own products and services, these
businesses (like their larger peers) must navigate a slew of necessary
functions including human resources, tax planning, legal services, accounting,
finance, and insurance.
Today, each of these
fields exists as an independent sector, but it’s easy to imagine them
converging within a decade on shared, cloud-based platforms that will serve as
one-stop shops. With so many service providers available at the ease of a
click, all with greater transparency on price, performance, and reputation,
competition will ramp up and established players can anticipate more
challengers from different directions. At the same time, it’s likely that
something approaching a genuine community will develop, with businesses being
able to create partnerships and tap far more sophisticated services than they
can at present—including cash-planning tools, instant credit lines, and
tailored insurance.
Already, we can glimpse
such innovations starting to flourish in a range of creative solutions. Idea
Bank in Poland, for example, offers “idea hubs” and applications such as
e-invoicing and online factoring. ING’s commercial platform stretches beyond
traditional banking services to include (among other things) a digital loyalty
program and crowdfunding. And Lloyds Bank’s Business Toolbox includes legal
assistance, online backup, and email hosting. As other businesses join in, we
expect the scope and utility of this space to grow dramatically.
Mobility
Finally, consider
personal mobility, which encompasses vehicle purchase and maintenance
management, ridesharing, carpooling, traffic management, vehicle connectivity,
and much more. The individual pieces of the mobility puzzle are starting to
become familiar, but it’s their cumulative impact that truly shows the degree
to which industry borders are blurring.
Emerging priorities for the borderless economy
These glimpses of the
future are rooted in the here and now, and they are emblematic of shifts
underway in most sectors of the economy—including, more likely than not, yours.
We hope this article is a useful starting point for identifying potential
industry shifts that could be coming your way. Recognition is the first step,
and then you need a game plan for a world of sectors without borders. The following four priorities are critical:
·
Adopt an ecosystem mind-set. The landscape described in this article differs
significantly from the one that still dominates most companies’ business
planning and operating approaches. Job one for many companies is to broaden
their view of competitors and opportunities so that it is truly multisectoral,
defines the ecosystems and industries where change will be fastest, and
identifies the critical new sources of value most meaningful for an expanding
consumer base. In essence, you must refine your “self vision” by asking
yourself, and your top team, questions such as: “What surprising, disruptive
boundary shifts can we imagine—and try to get ahead of?” and “How can we turn
our physical assets and long-established customer relationships into genuine
consumer insights to secure what we have and stake out an advantage over our
competitors—including the digital giants?” That shift will necessarily involve
an important organizational component, and leaders should expect some measure
of internal resistance, particularly when existing business goals, incentives,
and performance-management principles do not accord with new strategic
priorities. It will also, of course, require competitive targeting beyond the
four walls of your company. But resist the impulse to just open up your
acquisition checkbook. The combinations that make good sense will be part of a
rational answer to perennial strategic questions about where and how your
company needs to compete—playing out on an expanding field.
·
Follow the data. In our borderless world, data are the coins of the
realm. Competing effectively means both collecting large amounts of data, and
developing capabilities for storing, processing, and translating the data into
actionable business insights. A critical goal for most companies is data
diversity—achieved, in part, through partnerships—which will enable you to
pursue ever-finer microsegmentation and create more value in more ecosystems.
Information from telecommunications-services players, for example, can help
banks to engage their customers and make a variety of commercial decisions more
effectively. Deeper data insights are finally beginning to take ideas that had
always seemed good but too often fell short of their potential to turn into
winning models. Consider loyalty cards: by understanding customers better, card
providers such as Nectar, the largest loyalty program in the United Kingdom,
and Plenti, a rewards programs introduced by American Express, can connect
hundreds of companies of all sizes and across multiple industries to provide
significant savings for consumers and new growth opportunities for the
businesses that serve them. Meanwhile, the cost of sharing data is falling as
cloud-based data stores proliferate and AI makes it easier to link data sets to
individual customers or segments. Better data can also support analytically
driven scenario planning to inform how ecosystems will evolve, at which points
along the value chain your data can create value, and whether or where you can
identify potential “Holy Grail” data assets. What data points and sources are
critical to your business? How many do you have? What can you do to acquire or
gain access to the rest? You should be asking your organization questions like
these regularly.
·
Build emotional ties to customers. If
blurring sector boundaries are turning data into currency, customer ownership
is becoming the ultimate prize. Companies that lack strong customer connections
run the risk of disintermediation and perhaps of becoming “white-label back
offices” (or production centers), with limited headroom to create or retain
economic surplus. Data (to customize offerings), content (to capture the
attention of customers), and digital engagement models (to create seamless
customer journeys that solve customer pain points) can all help you build emotional
connections with customers and occupy attractive roles in critical ecosystems.
You should continually be asking your organization, “What’s our plan for using
data, content, and digital-engagement tools to connect emotionally with
customers?” and “What else can we provide, with simplicity and speed, to
strengthen our consumer bond?” After all, Google’s launch of initiatives such
as Chrome and Gmail, and Alibaba’s introduction of enterprises such as Alipay
and the financial platform Yu’E Bao, weren’t executed merely because they
already had a huge customer base and wanted to capture new sources of revenue
(although they did succeed in doing so). They took action to help ensure they
would keep—and expand—that huge customer base.
·
Change your partnership paradigm. Given the opportunities for specialization created
by an ecosystem economy, companies need more and different kinds of partners.
In at least a dozen markets worldwide—including Brazil, Turkey, and several
countries in Asia, where in many respects data are currently less robust than
they are in other regions—we’re seeing a new wave of partnership energy aimed
at making the whole greater than the sum of its parts. Regardless of your base
geography, core industry, and state of data readiness, start by asking what
white spaces you need to fill, what partners can best help with those gaps, and
what “gives” and “gets” might be mutually beneficial. You’ll also need to think
about how to create an infrastructural and operational framework that invites a
steady exchange with outside entities of data, ideas, and services to fuel
innovation. Don’t forget about the implications for your information
architecture, including the application programming interfaces (APIs) that will
enable critical external linkages, and don’t neglect the possibility that you
may need to enlist a more natural integrator from across your partnerships,
which could include a company more appropriate for the role, such as a telco,
or a third-party provider that can more effectively connect nondigital natives.
And don’t assume that if you were to acquire a potential partner, you’d
necessarily be adding and sustaining their revenues on a dollar-for-dollar
basis over the long term.
No one can precisely
peg the future. But when we study the details already available to us and think
more expansively about how fundamental human needs and powerful technologies
are likely to converge going forward, it is difficult to conclude that
tomorrow’s industries and sector borders will look like today’s. Massive,
multi-industry ecosystems are on the rise, and enormous amounts of value will
be on the move. Companies that have long operated with relative insularity in
traditional industries may be most open to cross-boundary attack. Yet with the
right strategy and approach, leaders can exploit new openings to go on offense,
as well. Now is the time to take stock and to start shaping nascent
opportunities.
By Venkat Atluri, Miklos Dietz, and Nicolaus
Henke
McKinsey
QuarterlyJuly
2017
http://www.mckinsey.com/business-functions/mckinsey-analytics/our-insights/competing-in-a-world-of-sectors-without-borders?cid=other-eml-alt-mkq-mck-oth-1708&hlkid=6c9c3934034240f69e193e7066396cf1&hctky=1627601&hdpid=13e87ec9-3ff3-4e33-a336-59de865e359e
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