Where are you with digitization in your organisation?
A surprisingly large number underestimate the increasing momentum of digitization, the behavioural changes and technology driving it, and, perhaps most of all, the scale of the disruption bearing down on them. Many companies are still locked into strategy-development processes that churn along on annual cycles. Only 8 percent of companies according to McKinsey said their current business model would remain economically viable if their industry keeps digitizing at its current course and speed.
Are you in that 8% or the 92% who need a redefined business model to remain economically viable?
When virtually every company in the world is worried about its digital future. Why are so many digital strategies failing? The answer has to do with the magnitude of the disruptive economic force digital has become and its incompatibility with traditional economic, strategic, and operating models. Five issues that are particularly problematic are outlined below. I hope they will point you toward how to do better digital strategy development.
Pitfall 1: Fuzzy Definitions
Very few have a broad, holistic view of what digital really means. View digital as the nearly instant, free, and flawless ability to connect people, devices, and physical objects anywhere.
Lacking a clear definition of digital, means companies struggle to connect digital strategy to their business, leaving them adrift in the fast-churning waters of digital adoption and change. What’s happened with the smartphone over the past ten years should haunt you—and no industry will be immune.
Pitfall 2: Misunderstanding the Economics of Digital
Many of us learned a set of core economic principles years ago and saw the power of their application early and often in our careers. This built intuition—which often clashes with the new economic realities of digital competition.
One of the first concepts learned in microeconomics was economic rent—profit earned in excess of a company’s cost of capital. Digital is confounding the best-laid plans to capture surplus by creating—on average—more value for customers than for firms. This is big and scary news for companies and industries hoping to convert digital forces into economic advantage. Instead, they find digital unbundling profitable product and service offerings, freeing customers to buy only what they need. Digital also renders distribution intermediaries obsolete with limitless choice and price transparency – How healthy is your nearest big-box retail store?
Digital offerings can be reproduced almost freely, instantly, and perfectly. Shifting value to hyperscale players while driving marginal costs to zero and compressing prices.
Competition of this nature has already siphoned off 40 percent of incumbents’ revenue growth and 25 percent of their growth in earnings before interest and taxes (EBIT), as they cut prices to defend what they still have or redouble their innovation investment in a scramble to catch up.
There are myriad examples where these dynamics have already played out. In the travel industry, airlines and other providers once paid travel agents to source customers. That all changed with the Internet, and consumers now get the same free services that they once received from travel agents anytime, anyplace, at the swipe of a finger—not to mention recommendations for hotels and destinations that bubble up from the “crowd” rather than experts.
Do you like having greater choice and freedom over your holiday booking options?
In enterprise hardware, companies once maintained servers, storage, application services, and databases at physical data centers. Cloud service offerings from Amazon, Google, and Microsoft, among others, have made it possible to forgo those capital investments. Corporate buyers, especially smaller ones, won because the scale economies enjoyed by these giants in the cloud mean that the all-in costs of buying storage and computing power from them can be less than those incurred running a data center. Some hardware makers lost.
In the Digital world customers are the biggest winners. Compete by creating value for customers, and identify how your organisation can profit from this in today’s world of shrinking profit pools. Marshalling huge volumes of customer data will help identify looming threats and the best partners in defending value chains under digital pressure.
Pitfall 3: Overlooking Ecosystems
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. Platforms that allow digital players to move easily across industry and sector borders are destroying the traditional model.
Ecosystem definition: Any system or network of interconnecting and interacting parts, as in a business: The success of Apple’s ecosystem depends on hardware/software integration. Manufacturers, retailers, and customers are all part of the automotive industry’s ecosystem. Source: http://www.dictionary.com
For example: Grocery stores now need to aim their strategies toward the moves of Amazon’s platform, not just the chain down the street. Apple Pay and other platform-cum-banks are entering the competitive set of financial institutions.
Can you imagine a competitor that offers the largest level of inventory, fastest delivery time, greatest customer experience, and lower cost, all at once? Digital-platform and -ecosystem economics upend the fundamentals of supply and demand. Research from McKinsey 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. A wider lens is needed when assessing would-be competitors/or partners.
Pitfall 4: Missing 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 McKinsey 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 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. What B2B digitization opportunities could you shift to?
Pitfall 5: Missing the Duality of Digital
The most common response to digital threats is: “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.
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.
The pressures of digital means that you need to adapt both simultaneously and iteratively to succeed.
Needless to say, the organizational implications are profound. Start with people. It is estimated 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 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 demand big investments in where to play and often major changes to business models. Invest at much higher levels in technology, make digitally related acquisitions, and be 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.
How will you balance digitizing your core operations with creative digital innovation of your organisation?
- Recognition of the challenge is the first step.
- The next is to develop a digital strategy. The pillars of that strategy of where and how to compete remain the cornerstones.
- Then there is 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.
- 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.
Above is an abridged extract from the Mckinsey Why Digital Strategies fail – link to original article below.