A recent piece by McKinsey Global Institute (MGI) takes a look back at how life has changed since the “commercial internet” emerged. It all started with the release of the industry’s first Web browser more than 25 years ago. The piece offers executives a treasure trove of information on the impact of “digitization” since then, as well as guidance on how to thrive in this new world moving forward.
There’s a lot of great information to unpack here with implications being felt everywhere. The note also offers 10 new insights on digital transformation to help guide executives. Take a look:
1. Large economic potential is linked to digitization—and much of it has yet to be captured
MGI’s research points to a clear connection between digital technologies and increased productivity. In fact, industries that are benefiting the most tend to be those focused more on products in the digital realm versus physical ones. Companies gaining the most are in the retail, travel, finance, media, and automotive industries. According to the piece, the key to advancing digital technologies across all industries is building them into business processes and workflows. Only then will companies realize a “larger productivity dividend.” But it will take time. MGI estimates that companies in the U.S., Europe, and China have only reached 20 percent of the total potential digitization. It also estimates that worldwide adoption of artificial intelligence and automation will take at least until 2045.
2. Digital superstars are rising far beyond the US big four and China’s big three
According to MGI, the productivity leaders are built upon the “digital platforms that are fueling the creation of hyperscale businesses—including the US big four of Google, Amazon, Facebook and Apple, and China’s three digital giants Alibaba, Baidu, and Tencent.” But times are changing. Increasingly, there has been a rise of incumbent companies that are generating more digital cashflow. The U.S. is leading the charge with 50 percent more revenue coming from digital streams across companies compared to Europe. The winners, or so-called “superstars,” are the ones committed to both financial investment and creating a digital workforce. Executives can play a huge role here by ensuring a sound company data strategy, opening up the company to data-driven innovation, and continuously communicating the benefits of digital transformation to all employees.
3. Digital natives are calling the shots
Currently many investors are backing digital native start-ups, and it’s changing the competitive landscape. Smaller, more nimble companies are taking on larger, more established players in a range of industries. If you don’t think start-ups are a formidable force, consider this stat from MGI: “Digital startups generate more than half (54 percent) of the total digital revenue of their main industry—and more than 70 percent of digital revenue in sectors such as retail and pharmaceutical products.” In an increasingly data-driven, digital world of commerce, these figures cannot be ignored. Leaders among incumbent companies will be those that can “digitize” their revenue pool. This includes shifting your business to revenue through digital channels, offering services, and creating new digital products, according to MGI.
4. Digital changes everything—even industry boundaries
Companies that diversify do better. That’s the conclusion MGI came to when it researched those developing new digital products and revenue streams. In fact, incumbent companies that are open to data monetization or expanding into new businesses or industries are better positioned than ever before to succeed. The piece points to China’s PingAn Insurance, one of the first companies to go digital in its sector and today one of the world’s largest, most diversified insurers, as a perfect example. This shift is being driven by digital platforms and digital ecosystems—both external and internal—that enable companies to grow and expand at a more rapid pace by opening up businesses in new markets and between new players. In some cases, competitors are joining forces in areas like data sharing to advance their industries.
5. Agile is the new way to compete
According to MGI, digital native companies are doing more than adding to the current mix of competitors in a given industry. They’re further shaking up the landscape with their ability to quickly develop and scale businesses, either investing more in digital growth than incumbent players or being less reluctant to jump into adjacent markets. For incumbent companies, keeping up requires being bold. Bringing IT Ops and Product Development teams together using DevOps is one approach, enabling faster, better collaboration between business and IT departments and allowing for easy digital “rollbacks” that do not put the entire company at risk.
6. Playing the platform economy is an “in the money” option
Indeed, platforms are having a transformative effect on virtually all industries. According to MGI’s research, “Any type of platform play—whether company-owned or third-party, and cooperating or competing with a global platform—can boost earnings, compared with not doing so.”. Their advice for incumbent players is to leverage third-party and industry platforms at this stage in the digital game, instead of building one. While competition may increase, profits can be achieved more quickly and performance will improve in the long term as a result.
7. Self-cannibalization and innovation are a necessity for digital reinvention
MGI points out that some incumbents have been reluctant to move ahead with digitized products, fearing the new revenue would simply replace current non-digital channels instead of producing real growth. Indeed, revenue replacement is likely inevitable when shifting to digital. According to MGI, this is an important reason for companies to focus on new products and new markets when digitizing their businesses. For leading incumbents, 40 percent of digital revenue already comes from new digital products and services.
8. Going after the right M&A is key
According to MGI, 20 percent of growth comes from mergers and acquisitions (M&A) compared to 80 percent coming from markets where the company already competes. As part of going after “digital” acquisitions, MGI suggests a strategy that focuses on one M&A deal per year that results in delivering 10 percent of market capitalization over 10 years. If you’re an incumbent player mulling over M&A in today’s climate, consider the fact that digital natives and start-ups invest twice the amount into new and adjacent markets as incumbents.
9. Effective management of digital transformation is vital but challenging
When it comes to success in digital transformation, failure is part of the process. In fact, failure happens five times more often than success, according to MGI. The reason for this is often poor management, which leads to poor execution. Factors that impact digital transformation success include: clear ownership, strong commitment, the right resources, adequate investment, as well as enterprise flexibility and agility.
10. Leveraging, and transitioning from, digital to new frontier technologies is an imperative
Finally, technology is, of course, a major enabler of digital transformation. Specifically, MGI points to “blockchain, automation, and a large set of smart, artificial-intelligence (AI)-based technologies.” For most companies, there is still a long way to go. MGI’s research found that the adoption of AI ranges somewhere between 7 to 18 percent of all companies. The higher end being reserved for high-tech companies. The research also found that early adopters of AI perform better. For those that do not deploy AI in retail, for example, digital revenues can be 15-20 percent less. So, where does McKinsey see the most AI success? According to the piece, AI deployment in marketing and sales and supply chains are enjoying the most success among companies.
To learn more, including key digital transformation success factors, see the complete McKinsey Global Institute Briefing Note.