DIGITAL SPECIAL
Digital strategy: The four fights you have to win PART II
3. Fighting guesswork
Pursuing an aggressive
digital strategy involves leaps into the unknown: simultaneously, you are
likely to be moving into new areas and overhauling existing businesses with new
technologies. What’s more, in many digital markets, the premium of being a
first mover makes it necessary not only to shift direction but also to do so
faster than your peers. The combination of ambiguity and the need for speed
sometimes gives rise to guesswork and moves that are hasty or poorly thought
out—and to anxiety about whether a move isn’t going to work or just needs more
time.
Building the proof points as you go
One way to fight
guesswork is to anchor your strategy decisions to a thesis about the business
outcomes that different digital investments will produce. This is less about
elaborate business-school modeling and more about thinking that draws fast,
ground-level lessons from the data to determine whether your business logic is
correct. Put another way, it means figuring out if there is sufficient value to
make it worthwhile to invest something—as part of a process of
learning even more. This approach increases the odds of successful
implementation: a well-articulated view of the outcomes means that you can
track how well the strategy is working. It also makes it easier to assess
whether the new direction is worth it in terms of both financial capital and
organizational pain.
Those proof points must
be grounded in digital reality. Consider the experience of a global oil and gas
company investigating the potential impact of several advanced technologies on
its business. Rather than develop theoretical value-creation scenarios, the
company’s digital center of excellence got busy exploring: How might sensors,
robots, and artificial intelligence improve productivity and safety in unmanned
operations? What operating hurdles, such as skill gaps among managers and
frontline workers, would need to be overcome?
“Skunkworks” efforts
began to give the company sharper insights into the timetables and financial
profiles of different investments, so it avoided both the “finger in the air”
syndrome (which dooms some digital efforts) and excessive modeling (which bogs
down others). The end result was a value-thesis projection of a pretax
cash-flow improvement exceeding 20 percent by 2025. That built the confidence
of senior leaders and the board alike.
Pilots and stage gates
A second way to reduce
the need for guesswork is to take full advantage of real-time data and the
opportunities they provide for experimentation. Digital does amplify the
gut-wrenching uncertainty by multiplying the strategic choices leaders face
while reducing the time frame for making and implementing those decisions. But
it also contains a silver lining: the potential for gaining rapid, data-driven
insights into how things are going. Information on the progress of a product
launch, for example, is available in days rather than months. That makes rapid
course corrections possible and, ultimately, considerably improves the chances
of success.
The oil and gas company
mentioned earlier got a rapid bead on the impact that its digital initiatives
were having on its business performance when it automated the evaluation of
several business cases. Testing was more or less continuous, which reduced the
level of anxiety about the investments, because executives had hard data on how
things were performing rather than relying on guesses or intuition in realms
they didn’t know extremely well. It also gave them more confidence to push
cutting-edge solutions: they didn’t need to see how other oil and gas companies
did things when they could move first and see, in near real time, what worked
and what didn’t.
An important element of
this nimble approach was breaking up big bets into smaller, staged investments.
While the oil and gas company was ready to invest in digital, it was decidedly
uncomfortable with throwing money at a problem and hoping for the best. It
therefore developed a series of rigorous stage gates for investments managed by
a new, central digital-transformation office. The office was charged with
overseeing the portfolio of digital investments to ensure that the most
promising projects were funded and others defunded before they soaked up
valuable resources. In tandem, the head of the company’s digital efforts was
vested with the responsibility for approving which ideas would move to initial
development, basing these decisions on the organization’s overall vision for
digital.
The ideas, which
originated mostly with the business units, included clear requirements for
testing. The “fail fast” mind-set was embedded from the outset because it
allowed the company to learn quickly from mistakes and to minimize wasted
funding. Another payoff was that the central team could identify synergies,
which allowed the development costs of some investments to be shared rather
than borne by a single business. These processes helped temper some of the
risks of the bold investments the company was making, gave leaders the
confidence to venture ahead as first movers, and kept open the option to
correct course quickly when the data pointed in another direction.
4. Fighting diffusion
Effective strategy
requires focus, but responding to digital inevitably risks diffusion of effort,
or “spreading the peanut butter too thinly.” Most companies we know are trying, and struggling, to
do two things at once: to reinvent the core by digitizing and automating some
of its key elements, for example, and to create innovative new digital
businesses. The challenge is acute because of the dizzying pace of digital change
and the uncertainty surrounding the adoption of new technology. Even if the
technology for autonomous vehicles pans out, for instance, when will the
majority of people really begin to use them? Given the impossibility of
knowing, it’s easy to wind up with an unfocused hodgepodge of digital
initiatives—a far cry from a strategy.
Two concepts can help
you navigate. First, view your company as a portfolio of initiatives at different stages of seeding, nurturing,
growing, or pruning. Our colleague Lowell Bryan championed this view upward of
15 years ago, and it is more relevant than ever in our digital age because the
opportunities, time frames, and economics of core businesses can be very
different from those of new ones—so resources and efforts shouldn’t be applied
uniformly.
Second, embrace the necessity of “big moves,” such as the dramatic reallocation of resources,
sustained capital investment, radical productivity improvements, and
disciplined M&A. As our colleagues have shown, successful market-beating
strategies nearly always rest on such moves. Making them mutually
reinforcing, so that developments in the core help to support new digital
businesses and vice versa, is a critical part of managing the risks of
diffusion.
To understand what the
application of these ideas looks like in practice, consider the experience of a
global IT-services company wrestling with how much to invest in digital over
the next five years (rather than use standard R&D funding across all of the
company’s business lines). That meant scrutinizing which traditional businesses
faced obsolescence as a result of digital, whether digital could stretch any of
those lifetimes (or if immediate divestment was preferable), which new digital
businesses to invest in, and how much to invest.
A portfolio approach
As a first step, the
company went through its portfolio business by business, focusing on three
questions: Which emerging digital products and services were missing from the
portfolio? Which product offerings and elements of the existing operating model
should be digitized or fully digitally reengineered to improve customer
journeys? And what areas should be abandoned? The answers for the company’s
healthcare markets differed from those for banking, but the company became
comfortable with hard choices and more attuned to new opportunities by tying
all decisions to clear use cases.
As part of this
exercise, the company developed scenarios for how the value pools in each of
its industry verticals would probably shift across component customer value
chains. It wanted to get a sense of the types of services that clients and
potential clients were likely to demand and thus might try to obtain from new
suppliers or IT outsourcers. For businesses where more revenue would be likely
to shift, the company was comfortable placing bigger bets on new digital
offerings, in contrast with its approach to businesses where the revenue at
stake wasn’t changing as much.
Big, mutually reinforcing moves
This systematic
evaluation of value-pool opportunities across the portfolio generated a frank
discussion of how the organization’s risk appetite had to change. It also
catalyzed a greater willingness to invest in new digital businesses—which the
company did, to the tune of more than $1.5 billion. As part of this strategic
evolution, the company launched an aggressive program to better leverage
foundational digital capabilities, such as automation, advanced analytics, and
big data. These capabilities, to be sure, were key building blocks for the new
digital businesses. Just as important, however, by deploying the capabilities
at scale across existing businesses, the company was better able to stretch the
life of its core offerings.
The portfolio strategy
paid dividends both in revenue gains and cost reductions. For example,
investing in a balanced fashion between core and new businesses led to faster
than expected revenue streams from new offerings. The company estimated that 40
percent of its revenues would flow from them within two to three years. Moreover,
its digitally improved core businesses, with a sizable base of existing
customer revenues, provided additional funding for the new digital portfolio.
That increased the leadership’s commitment to the strategy, bolstering
confidence that the new portfolio offerings would provide growth more than
compensating for the eventual decline of core businesses.
Your best digital
competitors—the ones you really need to worry about—aren’t taking small steps.
Neither can you. This doesn’t mean that a digital strategy must be designed or
put to work with any less confidence than strategies were in the past, though.
Strategy has always required closing gaps in knowledge about complex markets,
inspiring executive teams (and employees) to go beyond their fears and
reluctance to act, and calibrating risks when you bet boldly.
The good news is that
the digital era, for all its stomach-churning speed and volatility, also serves
up more information about the competitive environment than yesterday’s
strategists could ever imagine. Simultaneously, analytically backed, rapid
test-and-learn approaches have opened up new avenues to help companies correct
course while staying true to their strategic goals. Today’s leaders need to
step up by persuading their organizations that digital strategies may be
tougher than other strategies but are potentially more rewarding—and well worth
the bolder bets and cultural reforms required, first, to survive and,
ultimately, to thrive.
By Tanguy Catlin, Laura LaBerge, and Shannon Varney
https://www.mckinsey.com/business-functions/digital-mckinsey/our-insights/digital-strategy-the-four-fights-you-have-to-win?cid=other-eml-alt-mkq-mck-oth-1811&hlkid=a84385c97db24a198a975f7cbdb7a394&hctky=1627601&hdpid=c5ec74a5-27f6-4b29-86b4-c236590e8ae0
No comments:
Post a Comment