DIGITAL SPECIAL.... Why digital strategies fail PART II

Why digital strategies fail PART II

Pitfall 3: Overlooking ecosystems

Understanding the new economic rules will move you ahead, but only so far. Digital means that strategies developed solely in the context of a company’s industry are likely to face severe challenges. Traditional approaches such as tracking rivals’ moves closely and using that knowledge to fine-tune overall direction or optimize value chains are increasingly perilous.

Industries will soon be ecosystems

Platforms that allow digital players to move easily across industry and sector borders are destroying the traditional model with its familiar lines of sight. Grocery stores in the United States, for example, now need to aim their strategies toward the moves of Amazon’s platform, not just the chain down the street, thanks to the Whole Foods acquisition. Apple Pay and other platform-cum-banks are entering the competitive set of financial institutions. In China, Tencent and Alibaba are expanding their ecosystems. They are now platform enterprises that link traditional and digital companies (and their suppliers) in the insurance, healthcare, real-estate, and other industries. A big benefit: they can also aggregate millions of customers across these industries.

How ecosystems enable improbable combinations of attributes

Can you imagine a competitor that offers the largest level of inventory, fastest delivery time, greatest customer experience, and lower cost, all at once? If you think back to your MBA strategy class, the answer would probably be no. In the textbook case, the choice was between costlier products with high-quality service and higher inventory levels or cheaper products with lower service levels and thinner inventories. Digital-platform and -ecosystem economics upend the fundamentals of supply and demand. In this terrain, the best companies have the scale to reach a nearly limitless customer base, use artificial intelligence and other tools to engineer exquisite levels of service, and benefit from often frictionless supply lines. Improbable business models become a reality. Facebook is now a major media player while (until recently) producing no content. Uber and Airbnb sell global mobility and lodging without owning cars or hotels.

This will all accelerate. Our research shows that an emerging set of digital ecosystems could account for more than $60 trillion in revenues by 2025, or more than 30 percent of global corporate revenues. In a world of ecosystems, as industry boundaries blur, strategy needs a much broader frame of reference. CEOs need a wider lens when assessing would-be competitors—or partners. Indeed, in an ecosystem environment, today’s competitor may turn out to be a partner or “frenemy.” Failure to grasp this means that you will miss opportunities and underplay threats.

While it’s true that not all businesses are able to operate in nearly frictionless digital form, platforms are fast rewiring even physical markets, thus redefining how traditional companies need to respond. Look around and you will see the new digital structures collapsing industry barriers, opening avenues for cross-functional products and services, and mashing up previously segregated markets and value pools. With vast scale from placing customers at the center of their digital activity, ecosystem leaders have captured value that was difficult to imagine a decade ago. Seven of the top 12 largest companies by market capitalization—Alibaba, Alphabet (Google), Amazon, Apple, Facebook, Microsoft, and Tencent—are ecosystem players. What’s not encouraging is how far incumbents need to travel: our research shows that only 3 percent of them have adopted an offensive platform strategy.

Pitfall 4: Overindexing on the ‘usual suspects’

Most companies worry about the threats posed by digital natives, whose moves get most of the attention—and the disruptive nature of their innovative business models certainly merits some anxiety. Excessive focus on the usual suspects is perilous, though, because incumbents, too, are digitizing and shaking up competitive dynamics. And the consumer orientation of many digital leaders makes it easy to overlook the growing importance of digital in business-to-business (B2B) markets.

Digitizing incumbents are very dangerous

Incumbents are quite capable of self-cannibalizing and disrupting the status quo. In many industries, especially regulated ones such as banking or insurance, once an incumbent (really) gets going, that’s when the wheels come off. After all, incumbents control the lion’s share of most markets at the outset and have brand recognition across a large customer base. When they begin moving with an offensive, innovative strategy, they tip the balance. Digitization goes from being an incremental affair to a headlong rush as incumbents disrupt multiple reaches of the value chain. Digital natives generally zero in on one segment.

Our research confirms this. Incumbents moving boldly command a 20 percent share, on average, of digitizing markets. That compares with only 5 percent for digital natives on the prowl. Using another measure, we found that revved-up incumbents create as much risk to the revenues of traditional players as digital attackers do. And it’s often incumbents’ moves that push an industry to the tipping point. That’s when the ranks of slow movers get exposed to life-threatening competition.

The B2B opportunity

The importance of B2B digitization, and its competitive implications, is easy to overlook because the digital shifts under way are less immediately obvious than those in B2C sectors and value chains. However, B2B companies can be just as disruptive. In the industries we studied, more B2B companies had digitized their core offerings and operations over the past three years than had B2C players. Digitizing B2B players are lowering costs and improving the reach and quality of their offerings. The Internet of Things, combined with advanced analytics, enables leading-edge manufacturers to predict the maintenance needs of capital goods, extending their life and creating a new runway for industrial productivity. Robotic process automation (RPA) has quietly digitized 50 to 80 percent of back-office operations in some industries. Artificial intelligence and augmented reality are beginning to raise manufacturing yields and quality. Meanwhile, blockchain’s digitized verification of transactions promises to revolutionize complex and paper-intensive processes, with successful applications already cropping up in smart grids and financial trading. Should the opportunities associated with shifts like these be inspirational for incumbents? Threatening? The answer is both.

Pitfall 5: Missing the duality of digital

The most common response to digital threats we encounter is the following: “If I’m going to be disrupted, then I need to create something completely new.” Understandably, that becomes the driving impetus for strategy. Yet for most companies, the pace of disruption is uneven, and they can’t just walk away from existing businesses. They need to digitize their current businesses and innovate new models.

Think of a basic two-by-two matrix such as the exhibit below, which shows the magnitude and pace of digital disruption. Where incumbents fall in the matrix determines how they calibrate their dual response. For those facing massive and rapid disruption, bold moves across the board are imperative to stay alive. Retail and media industries find themselves in this quadrant. Others are experiencing variations in the speed and scale of disruption; to respond to the ebbs and flows, those companies need to develop a better field of vision for threats and a capacity for more agile action. Keep in mind that transforming the core leads to much lower costs and greater customer satisfaction for existing products and services (for example, when digitization shrinks mortgage approvals from weeks to days), thus magnifying the impact of incumbents’ strategic advantages in people, brand, and existing customers and their scale over attackers.

Beyond this dual mission, companies face another set of choices that seems binary at first. As we have indicated, the competitive cost of moving too slowly puts a high priority on setting an aggressive digital agenda. Yet senior leaders tell us that their ability to execute their strategy—amid a welter of cultural cross-currents—is what they worry about most. So they struggle over where to place their energies—placing game-changing bets or remaking the place. The fact is that strategy and execution can no longer be tackled separately or compartmentalized. The pressures of digital mean that you need to adapt both simultaneously and iteratively to succeed.

Needless to say, the organizational implications are profound. Start with people. Our colleagues estimate that half the tasks performed by today’s full-time workforce may ultimately become obsolete as digital competition intensifies. New skills in analytics, design, and technology must be acquired to step up the speed and scale of change. Also needed are new roles such as a more diverse set of digital product owners and agile-implementation guides. And a central organizational question remains: whether to separate efforts to digitize core operations from the perhaps more creative realm of digital innovation.

While the details of getting this balance right will vary by company, two broad principles apply:

·         Bold aspiration. The first-mover and winner-takes-all dynamics we described earlier demand big investments in where to play and often major changes to business models. Our latest research shows that the boldest companies, those we call digital reinventors, play well beyond the margins. They invest at much higher levels in technology, are more likely to make digitally related acquisitions, and are much more aggressive at investing in business-model innovation. This inspired boldness also turns out to be a big performance differentiator.

·         Highly adaptive. Opportunities to move boldly often arise as a result of changing circumstances and require a willingness to pivot. The watchwords are failing fast and often and innovating even faster—in other words, learning from mistakes. Together they allow a nuanced sensing of market direction, rapid reaction, and a more unified approach to implementation. Adaptive players flesh out initial ideas through pilots. Minimum viable products trump overly polished, theoretical business cases. Many companies, however, have trouble freeing themselves from the mind-sets that take root in operational silos. This hinders risk taking and makes bold action difficult. It also diminishes the vital contextual awareness needed to gauge how close a market is to a competitive break point and what the disruption will mean to core businesses.

As digital disruption accelerates, we often hear a sense of urgency among executives—but it rarely reaches the level of specificity needed to address the disconnects we’ve described in the five aforementioned pitfalls. Leaders are far more likely to describe initiatives—“taking our business to the cloud” or “leveraging the Internet of Things”—than they are to face the new realities of digital competition head-on: “I need to develop a strategy to become number one, and I need to get there very quickly by creating enormous value to customers, redefining my role in an ecosystem, and offering new business-value propositions while driving significant improvement in my existing business.”

Such recognition of the challenge is a first step for leaders. The next one is to develop a digital strategy that responds. While that’s a topic for a separate article, we hope it’s clear, from our description of the reasons many digital strategies are struggling today, that the pillars of strategy (where and how to compete) remain the cornerstones in the digital era. Clearly, though, that’s just the starting point, so we will leave you with four elements that could help frame the strategy effort you will need to address the hard truths we have laid out here.

First there’s the who. The breadth of digital means that strategy exercises today need to involve the entire management team, not just the head of strategy. The pace of change requires new, hard thinking on when to set direction. Annual strategy reviews need to be compressed to a quarterly time frame, with real-time refinements and sprints to respond to triggering events. Ever more complex competitive, customer, and stakeholder environments mean that the what of strategy needs updating to include role playing, scenario-planning exercises, and war games. Traditional frameworks such as Porter’s Five Forces will no longer suffice. Finally, the importance of strategic agility means that, now more than ever, the “soft stuff” will determine the how of strategy. This will enable the organization to sense strategic opportunities in real time and to be prepared to pivot as it tests, learns, and adapts.

By Jacques Bughin, Tanguy Catlin, Martin Hirt, and Paul Willmott

https://www.mckinsey.com/business-functions/digital-mckinsey/our-insights/why-digital-strategies-fail