The case for digital reinvention

Digitalization

2017-02-21 / www.mckinsey.com




Digital technology, despite its seeming ubiquity, has only begun to penetrate industries. As it continues its advance, the implications for revenues, profits, and opportunities will be dramatic.

 As new markets emerge, profit pools shift, and digital technologies pervade more of everyday life, it’s easy to assume that the economy’s digitization is already far advanced. According to our latest research, however, the forces of digital have yet to become fully mainstream. On average, industries are less than 40 percent digitized, despite the relatively deep penetration of these technologies in media, retail, and high tech.

  As digitization penetrates more fully, it will dampen revenue and profit growth for some, particularly the bottom quartile of companies, according to our research, while the top quartile captures disproportionate gains. Bold, tightly integrated digital strategies will be the biggest differentiator between companies that win and companies that don’t, and the biggest payouts will go to those that initiate digital disruptions. Fast-followers with operational excellence and superior organizational health won’t be far behind.

 About the research

 To go beyond the descriptive statistics that limit the relevance of so much survey research, we built a causal model of digital performance. The model’s first input, from the survey itself, conveyed the current level of digitization (as reported by companies) in each of five dimensions: products and services, marketing and distribution channels, business processes, supply chains, and new entrants at the ecosystem level. The second input from the survey was the level of response companies had taken, and planned to take, on those dimensions, as well as their core enabling strategic and organizational capabilities.

We then modeled average growth in revenue and earnings before interest and taxes (EBIT) for all companies in the sample at current and full digitization, based on survey respondents’ perceptions of their companies’ responses to digitization, postulating causal links, and calculating their magnitude through both linear- and probit-regression techniques, controlling for industry, company size, geography, and type of customer segment (B2B or B2C).

 

These findings emerged from a research effort to understand the nature, extent, and top-management implications of the progress of digitization. We tailored our efforts to examine its effects along multiple dimensions: products and services, marketing and distribution channels, business processes, supply chains, and new entrants at the ecosystem level. We sought to understand how economic performance will change as digitization continues its advance along these different dimensions. What are the best-performing companies doing in the face of rising pressure? Which approach is more important as digitization progresses: a great strategy with average execution or an average strategy with great execution?

The research-survey findings, taken together, amount to a clear mandate to act decisively, whether through the creation of new digital businesses or by reinventing the core of today’s strategic, operational, and organizational approaches.

 

More digitization—and performance pressure—ahead

 

According to our research, digitization has only begun to transform many industries (Exhibit 1). Its impact on the economic performance of companies, while already significant, is far from complete.

Exhibit 1

 

 

This finding confirms what many executives may already suspect: by reducing economic friction, digitization enables competition that pressures revenue and profit growth. Current levels of digitization have already taken out, on average, up to six points of annual revenue and 4.5 points of growth in earnings before interest and taxes (EBIT). And there’s more pressure ahead, our research suggests, as digital penetration deepens (Exhibit 2).

 

Exhibit 2

 

 

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