How digital reinventors are
pulling away from the pack
As digitization progresses,
incumbents competing in new, digital ways are already outperforming those that
continue to operate traditionally, a new survey finds.
Digitization
is a long way from running out
of steam, since the bulk of company revenues in most industries still come from
traditional sources. Yet the results from the latest McKinsey Global Survey on
digital strategy suggest that a digital divide is already taking shape. Companies
competing in traditional ways (that is, without applying digital technologies
and strategies in their businesses) have seen lower rates of revenue and
earnings growth than have companies competing in digital ways—and those rates
are tightly correlated with the level of digitalization, or digitization, in
their respective sectors. But other players are seeing tremendous growth as
digitization advances. The companies making digital moves—digital natives,
industry incumbents competing in new and digital ways, and incumbents moving
into new sectors—are out-performing their traditional-incumbent counterparts.
We call these companies digital
reinventors. While most respondents say that their companies are making at
least marginal investments in digital, we found last year that few had achieved
top-quartile growth and high returns—not surprising, given the lukewarm
response to digitization the average respondent reports in this year’s survey.
Digital reinventors, in contrast, are embracing digital with both their
investments and their strategic decision making. Our results indicate that
companies in this group are not only investing more in digital but also
investing and executing differently. The reinventors are investing at scale in
technology, analytics, and digital talent—not just playing on the
margins—and investing much more aggressively in business-model innovations or
entirely new business models. They make more digital-related acquisitions and
divestitures than traditional incumbents do; they are likelier to accelerate changes in
their own businesses; and they are using more advanced, innovative
technologies. The results indicate that their efforts are paying off: the
reinventors are seeing larger gains in revenues and earnings than are
traditional incumbents that have yet to embrace digitization.
Growing pressure on incumbents
As digitization continues to
progress, its expected effects on revenues seem pronounced. When respondents
were asked how much of their companies’ revenues would be at risk in the next
three years if those companies took no further action to address digital
pressures, they estimated that almost one-third could be lost or cannibalized.
Consistent with our earlier researchshowing that increased levels of
digitization produce shrinking profit and revenue pools at the industry level,
the revenues at risk are even greater in the industries (high tech, as well as
media and entertainment) experiencing the highest levels of digitization.
But the level of digitization is
only part of the industry picture. Despite a common belief that digital natives
are the greatest threat to an industry’s existing market share, the results
indicate that incumbents competing in digital ways pose just as great a threat
to other companies, if not a greater one. The correlation between the market
share owned by digital natives and revenues at risk is on par with that of
incumbents playing digitally.4This finding is consistent with
other work suggesting that incumbents can have a strong effect on the market and on the pace of
digital disruption in a given
industry, and this effect is only magnified by the more powerful positioning of
these incumbents. Since those competing in digital ways already own a larger
market share than digital natives do, on average, they can also make larger
shifts in the economics of their respective markets.
To date, the loss of revenues as
digitization has expanded is already clear. Nearly 20 percent of all
respondents report negative revenue growth in the past three years. But some
companies can thrive in a more digitized landscape: specifically, those trying
to reinvent themselves by embedding digital technologies in the core of their
business models and by launching new digital businesses. Respondents at
incumbents playing digitally are twice as likely as traditional incumbents to
report exceptional financial growth (that is, an average compound annual growth
rate of more than 25 percent) during this same period.
The typical response to digital is underwhelming
With so much revenue at stake from
digitization, what have companies been doing in response? The results show that
while most have a plan in place, it is tentative at best. Most respondents say
their companies have invested only modestly in digitization. On average, the
share of both revenues and full-time employees that incumbents are investing in
digital initiatives is proportional to the revenues they are earning from
digital. But according to respondents, much of their net gain in revenue growth
has been cannibalized by their own digital versions of core products and
services, so many companies appear to be treading water rather than moving
forward. This suggests that companies may be underinvesting in
digital—especially in industries where the highest-returning digital
investments (for example, in the Internet of Things, automation, and predictive
maintenance) do not directly drive frontline sales.
These lackluster results are not
surprising when we look more closely at where the average company is investing.
Respondents say their companies tend to invest only in the most proven digital
technologies (big data, mobile, and traditional web technologies, for example).
At the same time, more than half have made no changes to their business
portfolios because of digitization, and less than 20 percent report either
acquiring businesses to supplement their long-term digital strategies or
divesting any of their current businesses. And only one-third say their
companies have launched new digital businesses, while just over half report
digitizing at least a few elements of their business models—an approach that
appears to play around the edges of the business rather than involving more
significant digital innovations or investments.
Of course, this changes when
respondents perceive a greater risk to their core businesses. Respondents who
believe that the greatest amount of these revenues may be at risk are far more
likely than average to say their companies will need to make significant
changes to their business models to remain economically viable. Most
respondents—on average and across industries—say their companies should take a
hybrid approach: transforming their core businesses while also creating new
digital business models.
This is true even for respondents
reporting the highest levels of revenues at risk, though tackling both the core
business and new business models often involves a more complicated strategy and
operating model than focusing on one or the other. Just 6 percent of all
respondents say their companies must move to new, fully digital business models
and leave the current ones behind. Only another 6 percent say their companies
have already made the required changes to their business models to stay viable.
Even among the most digitized industries, such as media and high tech, just one
in ten respondents describes the current business model as viable in the long
term.
What are digital reinventors doing differently?
But not every company is responding
tentatively. Some, and not just the digital natives, are embracing digital
change. To better understand how different companies—incumbent or otherwise—are
competing, we asked respondents to identify the current position of their own
companies (each in its primary industry): digital natives, incumbents competing
in new ways through digitization, incumbents competing in new industries
through digital moves and initiatives, and incumbents competing primarily in
traditional, nondigital ways. Responses from the first three groups—which we
call digital reinventors—indicate that these companies are all outperforming
their traditional-incumbent peers in revenues and earnings. Digital natives
have impressive growth rates but are starting from a much smaller market share;
respondents at the digital natives say they command a median of only 5 percent
of the markets of their industries. The incumbents competing digitally, by
contrast, grow from a much larger base. Respondents from these companies report
that they own a median of 20 percent of their core markets.
The practices of the reinventors
differ from those of traditional incumbents in three critical areas: the
approach to investments, the degree of innovation, and the application of
digital technologies. The digital reinventors appear to be using these
practices both to digitize their core businesses and to innovate through new
business models.
Innovating the business model.
Rather than just making minor
modifications to traditional business models, the digital reinventors are more
likely than other companies to have made significant changes to both their
strategies and the very nature of their core businesses (that is, by digitizing
the core more fully and innovating with completely new digital businesses).
Digital reinventors are at least twice as likely as traditional incumbents to
report modifying their long-term strategies in response to digital-related
changes. And when asked about specific actions taken to address digitization,
the reinventors are much more likely than their peers to have launched new
businesses and to have built new digital business models for their core
businesses. Most notably, they are almost seven times more likely than their
traditional counterparts to have fully digitized their core business models.
Embedding technology innovatively
and at scale.
Our results indicate that the
digital reinventors are more likely to use cutting-edge digital
technologies—and to use them at scale—than are their counterparts, which tend
to spread investments thinly across technologies, without scaling them up.
Forty-four percent of incumbents playing digitally say their companies
use design thinking at scale either across the
organization or within functions or business units, but the same percentage of
traditional incumbents haven’t even started to pilot it. Incumbents playing
digitally are twice as likely as their traditional-incumbent counterparts to be
using artificial-intelligence tools across the organization, a trend that is active
across several of the more advanced technologies we asked about.
Investing more decisively.
Responses show that the digital
reinventors are likelier to invest more—and to invest more decisively—in
digital than traditional incumbents are. The percentage of annual revenues
invested by incumbents playing digitally (which have the greatest market share)
is more than three times as high as that of traditional incumbents. But
successful digitization is not only about spending more; the digital
reinventors are making bolder investment moves, too. They are much more likely
to divest business lines being made obsolete by digital, sometimes even before
the full pain is felt. They are also more likely to make long-term digital
acquisitions. Just 15 percent of respondents at traditional incumbents say
their companies have, in the past three years, acquired new digital businesses
that would be strategically important to their longer-term digital strategies
even if these businesses did not contribute to short-term revenues. By
contrast, 26 percent of respondents at the digital incumbents and 28 percent at
incumbents moving into new sectors say they have made such acquisitions.
Digital reinventors don’t differ
from their peers only in their use of cutting-edge tools and techniques. They
also differ in how they deploy the basic digital technologies, such as big
data, cloud computing, and the mobile Internet. Respondents at digital
reinventors are more likely than those at traditional incumbents to report the
organization-wide adoption of these technologies rather than their use in a
single function or business unit or in a piloting stage.
And while investing in and scaling
new technologies might sound expensive, digital reinventors are also coming out
ahead on that front. The returns on their digital investments are double or
more than what the traditional incumbents see on theirs, according to
respondents.
Looking ahead
For the companies that are not yet
digital reinventors, the survey results suggest three starting points for
focusing digitization efforts:
·
Take
a dual approach to business-model innovation. To find success and sustain growth, incumbents
must do two things at once: digitize their core businesses while also
innovating with new digital ones. Making small changes to the edges of your
business model is insufficient in an increasingly digital world. To digitize
the core while developing new digital businesses, a company needs a strategy
much more complicated than it would need focusing on a single path. Digital
strategies must create a road map for continuing to invest in and energize the
core, while finding both the mind share and capital resources to innovate with
new business models. Success at this game requires a tight link between
strategies and the overall operating model (including IT’s operating model) to
ensure realistic investment projections and estimates of time to impact.
·
Be
bold in experimenting with new technologies. To make sure they get the most out of digital
investments, companies need to scale up their technology investments once they
have been tested. To keep pace with digital change, companies will also benefit
from being more proactive in seeking and evaluating new technologies and
digital advances for potential use. This requires a partnership with IT at a strategic level and continual efforts to educate
business-unit leaders on the fundamentals of the latest digital technologies,
so they understand how to embed those technologies at scale into their
businesses to capture the value of digital.
·
Make
decisive investments. Companies that
invest boldly and at scale do better than companies that are tentative.
Therefore, the more hesitant companies (more specifically, the traditional
incumbents) need to recraft their investment decision-making processes and
their overall cultures. To make more decisive—and effective—digital moves that
will drive the business forward and capture the benefits of digitization at
scale, they can take a venture-capitalist approach to investing. This means
moving faster to both fund and defund initiatives and being more comfortable
with changes to the overall business portfolio. Since the culture of many companies is risk averse and relatively siloed,5a bolder approach to investments
will prove to be a significant challenge if traditional incumbents don’t
address their culture directly. Incumbents must embrace a test-and-learn
mind-set to help drive innovation and appropriate risk taking at all levels of
the organization. Breaking down siloed mind-sets and behavior through more
integrated, cross-functional teams—as well as a unified view of customers and
what they need—can help foster a more agile culture, enabling companies to
learn from experiments at a pace fast enough to respond to their rapidly
changing markets.
·
OCTOBER 2017 SURVEY https://www.mckinsey.com/business-functions/digital-mckinsey/our-insights/how-digital-reinventors-are-pulling-away-from-the-pack?cid=other-eml-alt-mip-mck-oth-1710
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