How to win the digital race by coming in second, and other (often surprising)
ways to reinvent for the digital world
A new data-driven study on
digitization identifies which digital strategies work, and quantifies how well
they work.
Companies tend to treat digital strategy
as more an art than a science. They know they need to do something but
aren’t sure what actions will produce the most, or the right, impact. New
insights my McKinsey colleagues and I recently gleaned from a major study of digitization for the first time identify what approaches actually work, and quantify how well they
work.
Our findings suggest that digital
disruption hits incumbent companies hard, on average cutting 45% of their
revenue growth and 35% of their earnings. The reason for this dramatic effect
is that digital entrants tend to pursue business models which directly undermine
those of traditional players, and often offer better value for customers’
money.
Consider Netflix: Its offering of TV
series and movies consumers could watch at their leisure for a few dollars a
month with no contractual commitment easily trumped traditional cable and
satellite, which came with higher cost and lower convenience. Such disruptive
models enable digital attackers to quickly gain market share at the expense of
incumbents. In a rush to defend their turf, traditional players often turn to
measures that intensify competition among themselves — think how traditional TV
providers now offer subscribers streaming services at no additional cost or run
aggressive promotions to win subscribers away from existing competitors —
further eroding their industry’s profitability.
Our research also found that while all industries
are at risk of digital disruption — even those yet to be significantly affected
— the impact on individual incumbents is unequal. Companies in the top quartile
of revenue growth see only a 20% drop-off in their growth trajectory, as
opposed to a 70% plunge for those in the lowest quartile. Clearly, the high
performers are doing something that makes them more resistant of attack from
digital entrants.
Companies
that strategically go on a digital offensive generate 3 times more revenue and
profit growth than their more defensive counterparts
So what are the winners doing right? When
we looked how companies approach digitization, we found that most do so without
changing their overall corporate strategy — i.e., they develop a digital plan
without radically transforming their capabilities, portfolio of activities or
allocation of resources. Their strategies are essentially defensive.
About 30% of companies, however, approach
the digital challenge more comprehensively, revising their entire corporate
strategy by going after new market segments and taking more risk. The companies
that go aggressively on the offensive, we found, manage to generate three times
as much revenue and profit as their more defensive counterparts.
The upshot is that
companies that go on the digital offensive are the ones less affected by
digital disruption. These companies also tend to score high on the “digital maturity” scale: they out-invest their peers in shifting their
portfolios, they ensure that leadership and culture are aligned to help drive
the changes digitization requires, and they rewire their organizations to
replace siloed mindsets with the agility needed to keep pace
with digital evolution.
2 ways
to win the digital game
Our next challenge was to see if some
digital strategies not only succeed better than others, but actually make
companies better off with digitization than without it.
Consider Netflix again. You may remember that this company originally rented
DVDs by mail, a model on which Netflix built a profitable billion-dollar
business in its first decade. However, realizing this model would soon be
disrupted by streaming technologies, CEO Reed Hastings decided to pre-empt the
entrants and disrupt his own business by launching a streaming service. It was
a gutsy move. The change initially spawned a user backlash and slashed the
company’s income, but Netflix rapidly made up those losses and exceeded its
past revenues within a few years.
Netflix isn’t the only company that
managed to rebuild its growth momentum. We found, in fact, that there are two
promising ways to successfully reinvent for the digital world.
First
mover: the Netflix way
Those who adopt this approach see where
the industry is going and aim to get there first. By developing new digital
businesses — with sufficient investments to gain a secure footing — they can
actually win more revenue and profit from their markets than they had before
digitization. Netflix didn’t try to defend its existing franchise; by pursuing
a new business model, it managed to extend its original marketplace, going from
a regional player to a global streaming service. In fact, most of its
subscribers add Netflix to their existing cable or satellite subscriptions,
which expands the broader industry’s revenue pie.
We find that roughly 10% of companies
apply a similar strategy: they invest up front and dare to cannibalize their
own legacy businesses. Now, assume a future that is fully digitized. A company
that takes the first mover approach and pairs it with even average performance
in such areas as operations, culture and talent yields a 30% increase in
revenue growth over what it would have otherwise, or 4.3% of extra revenue a
year.
Fast
follower: the digitally astute organization
Initiating disruption isn’t the only way
to maintain growth, we discovered. The alternative is to take the fast follower
route. Under this approach, the company retains the existing corporate
strategy, continuing to focus on its existing products and market segments, but
aggressively moves to build more digital revenue through cutting-edge
organizational agility. In other words, instead of investing heavily in digital
businesses, it invests in digital organizational capabilities. It reorganizes
to adopt end-to-end digital processes; it taps digital tools and big data to
improve efficiency; and it makes sure that management, from the CEO down to
front-line managers, is aligned fully on building a digital organization.
Roughly 20% of companies adopt this approach.
Assuming again a world of full digitization, we can see that the win for fast
followers is smaller than for first movers, but it’s still a win, at 0.4% in
annual revenue growth.
Most of the companies ranked in the top
25% of revenue growth are using one of these two approaches. So why are they
more immune to digital disruption than others? First, agile organizations tend
to better anticipate shocks, are more resilient and react quickly with new
plans. Second, companies that exploit digital technologies to reinvent
themselves tend to be more focused on growth than average.
http://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-strategy-and-corporate-finance-blog/how-to-win-the-digital-race-by-coming-in-second?cid=reinventing-eml-alt-mip-mck-oth-1704&hlkid=2419be92e50746859ce9ac6f68912927&hctky=1627601&hdpid=08fcf9d6-8466-444c-bd58-8609402719b9
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