The (Uneven) Digitization of the US Economy

Digital technologies are all around us, - increasingly ubiquitous and commoditized.  But, are they a major source of competitive differentiation?  Are they still a strategic value to business?  Can digital innovation drive long term economic growth?

Several weeks ago, the McKinsey’s Global Institute (MGI) published a report addressing these questions.  Digital America: A tale of the haves and have-mores aims to quantify the state of digitization of the US economy.  The report introduces the MGI Industry Digitization Index, a methodology for exploring the various ways US companies are going about their digital journey, - based on 27 indicators that measure how they’re building digital assets, expanding digital usage, and creating a digital workforce.

“Digital innovation, adoption, and usage are evolving at a supercharged pace across the US economy,” notes the report in its opening paragraph. “As successive waves of innovation expand the definition of what is possible, the most sophisticated users have pulled far ahead of everyone else in the race to keep up with technology and devise the most effective business uses for it.”

Let me discuss a few of the findings in this extensive report.

The ICT (information and communications technologies) sector is the engine of digitization for the broader economy.  ICT made up approximately 5% of the US GDP in 2014.  But, unlike the prices of goods and services in most other industries, ICT prices have declined 63% between 1983 and 2010, driven by the dramatic advances in digital technologies over that time span.  Accounting for this price decline and adjusting for its impact on other sectors, MGI estimates that the ICT sector represents around 10% of the 2014 US GDP.

Digitization, like electricity a century ago, is a general-purpose technology that underpins a very large share of economic activity.  Digital technologies now touch the economy in myriads of ways.  64% of adults use smartphones and 84% use the Internet.  Usage has been steadily going  up in digital applications like e-commerce, social media, digital payments, video streaming, e-filed tax returns and online freelance workers.

The 27 metrics of the Industry Digitization Index are organized into three major categories: digital assets - a measure of the digital share of a company’s total spending and assets; digital usage, - e.g., digital transactions, external communications, customer service, back- and front-office processes; and digital labor, - e.g., digital expenditures and assets per worker, share of tasks and jobs that are digital.  The Index is then used to quantify the extent of digitization in 22 industry sectors.

The report’s overriding finding is that the US economy is digitizing unevenly, with large disparities among sectors.  Not surprisingly, ICT is the most digitized economic sector, followed by media, professional services and financial services.  On the other hand, health care, hospitality, construction and agriculture are the least digitized sectors.

A number of sectors are poised to significantly increase their digital capabilities over the next several years.  The rapid growth of the Internet of Things should help industries like manufacturing, utilities and mining by enabling them to digitize and interconnect their physical assets.  Smart devices and sensors of all sorts will also assist in the digitization of labor-intensive sectors like retail and health care.

“The gap between those on the frontier and the rest of the economy is about the sophistication of digital usage,” notes the report.  “Much has been written over the years about the digital divide and the Americans who remain offline, but now a new and more pervasive dynamic appears to be at work.  The gap between the digital haves and have-mores is growing as the most advanced users pull away from everyone else.  They have moved beyond expanding access and adding users; now they are focused on deepening engagement and capabilities.”

The Index quantifies this growing gap between the most digitized sectors, - the have-mores, and the rest, - the haves.  In 1997, the haves’ overall Index was only 8% of the of the have-mores’ Index.  By 2005, the have-mores Index had increased by a factor of 1.7, and by 2013 it was over 4 times its 1997 value.  The Index of the haves also increased in 2005 and 2013, but still comprised a fraction of the have-more’ Index at 12% and 14% respectively.

“The have-mores continue to push the boundaries of digitization, particularly in terms of augmenting what their workers do, while everyone else scrambles to keep up with them.  This gap points to substantial room for much of the economy to boost productivity.  In fact, since some of the lagging sectors are the largest in terms of GDP contribution and employment, we find that the US economy as a whole is reaching only 18 percent of its digital potential (defined as the upper bounds of digitization in the leading sectors).”

A similar conclusion was reached by Erik Brynjolfsson and Adam Saunders in their 2009 book Wired for Innovation: How Information Technology is Reshaping the Economy.  “Although some say that technology has matured and become commoditized in business, we see the technological revolution as just beginning.  Our reading of the evidence suggests that the strategic value of technology to business is still increasing.  For example, since the mid 1990s there has been a dramatic widening in the disparity in profits between the leading and lagging firms in industries that use technology intensively (as opposed to producing technology).  Non-IT intensive industries have not seen a comparable widening of the performance gap - an indication that deployment of technology can be an important differentiator of firms’ strategies and their degree of success…”

“The companies with the highest returns on their technology investments did more than just buy technology; they invested in organizational capital to become digital organizations.  Productivity studies at both the firm level and the establishment (or plant) level during the period 1995-2008 reveal that the firms that saw high returns on their technology investments were the same firms that adopted certain productivity-enhancing business practices.”

What about the impact of digitization on future economic growth?  McKinsey estimates that digitization could increase the 2015 GDP by over $2 trillion based on its impact on three major areas of the economy:

• Labor markets: Online platforms could make labor markets more efficient and transparent, increasing labor force participation and helping to better match workers with employers.

• Capital efficiency: IoT can significantly improve the utilization of capital assets, leveraging preventive maintenance to reduce equipment downtime and operational costs.

• Multi factor productivity: Big data and analytics, IoT, mobile devices, cloud computing, AI and other technology advances could lead to major new innovations, faster product development, improved energy efficiency and smarter overall operations across just about all industry sectors.

But the report also warns that companies must adapt or risk being left behind in our rapidly advancing digital economy, and lists some of the most pressing issues that companies need to consider to keep up, including:

• Prepare for tougher, 360-degree competition.  Sector boundaries mean little in a digital world where new competitors can become market leaders practically overnight.

• Build new assets and revenue streams.  Digital competitors often embrace highly disruptive business models.
  

• Build - or buy - the capabilities of the future.  Agility is essential.  Companies cannot afford to fall behind in critical capabilities.
  

• Redefine customer engagement.  Leverage data generated from digital interactions to fine-tune marketing and customer engagement.

• Take advantage of new innovation models.  Embrace open, collaborative innovation across the whole organization, supply chain partners, research communities and customers.
  

• Emphasize agility and learning.  In a fast changing marketplace, agility is more critical than long-term forecasting exercises.

• Think differently about your workforce.  To keep up with fast-changing technologies, companies need to invest in talent and learning programs.

“Keeping up with the relentless pace of digital innovation is both a sprint and a marathon… There is no room for inertia on the digital frontier.  It takes investment, agility, and relentless focus to stay ahead, but the organizations and individuals that can establish themselves as digital leaders can find outsized opportunities.”

Comments

[John Charles Thomas]

All good advice at the end. I would say that other non-IT strategies need to be integrated in order for the overall impact. For example, if you really want your organization to do a good job with customer engagement, obviously insights derived from big data can help. But you also need to make sure that systems and processes are in place to train and reward people throughout the organization for really caring about customers.

[Pete Elliot]

Great discussion on the impact of the digital haves & have mores-And the future

[Dennis Fletcher]

This both encouraging and a strong endorsement of the work We've been doing at The Elliot Group to bring a deeper wareness of the promise of Digital Marketing to U.S.-based IT products and services providers. Getting out of the familiar box defined by the basics (FB/Twitter/LIn) and looking at advanced digital techniques embraced by the 'more haves' will help the rest of America to stay competitive.