The digital age was born around 25 years ago with the public release of the Netscape browser in 1994. The browser made it much, much easier for the average person to access information over the Internet, sparking the explosive growth of users, websites and online applications. This was a truly historical point, marking the transition from the industrial economy of the past couple of centuries to a new kind of digital economy. Ever since those days, the digital age has continued to advance driven by a stream of new technologies, and business models, from smartphones and cloud to big data and machine learning.
A few months ago, the McKinsey Global Institute published Twenty-five Years of Digitization, a report offering ten insights to help business leaders navigate this still relatively new digital world. Let me first list the ten insights, and then briefly comment on a few of them.
- Large economic potential is linked to digitization – and much of it is yet to be captured;
- Digital superstars are rising far beyond the US big four and China’s big three;
- Digital natives are calling the shots;
- Digital changes everything – even industry boundaries;
- Agile is the new way to compete;
- Playing the platform economy is an in-the-money option;
- Self-cannibalization and innovation are a necessity for digital reinvention;
- Going after the right M&A is key;
- Effective management of digital transformation is vital – but challenging; and
- Leveraging, and transitioning from, digital to new frontier technologies is an imperative.
Large economic potential is linked to digitization
A previous McKinsey report estimated that digitization, automation and AI have the potential to incrementally add around $13 trillion by 2030 to global GDP, as their productivity gains are reinvested to create major new business opportunities.
McKinsey quantified the pace of digitization in the US, Europe and China, and found that, on average, all three economies have only achieved around 20% of their total digital potential. Adoption of complex digital technologies, and, in particular, of the organizational practices needed to achieve their potential value remain slow. The data showed that only 26% of worldwide sales were made through digital channels, 30% of internal operations have been digitally automated, and 25% of supply chains interactions have been digitized.
Sectors with a high level of digitization have achieved the largest productivity growth, but all sectors still have a ways to go. Not surprisingly, services-oriented industries, as well as those whose products are more immaterial than physical are ahead in digitization. Media and finance are among the most advanced industries, while pharmaceuticals and large potions of manufacturing are laggards.
Digital changes everything – even industry boundaries
McKinsey’s survey found that only about 10% of incumbents are leveraging digital technologies to diversity beyond their main industry, with media significantly higher and retail banking lower. “Among incumbents in our 2018 survey that are diversifying beyond their sector, digital revenue is 25 percent higher than that of the average incumbent. The revenue those diversifying firms generate already account for about 10 percent of total revenue of a sector (on average), and close to 25 percent of the same sector’s digital revenue.”
Digital platforms are a crucial force for diversification. Strategy and competition are quite different in a platform-based business compared to a classic product business. Instead of sticking to sharply defined product categories, platforms are focused on developing digital ecosystems. In a platform business, industry boundaries can shift rapidly because of shifting dynamics within their ecosystem, turning competitors into complementary partners that now offer their products or services on the platform.
Amazon and Alibaba, for example, both started as e-commerce platforms. Amazon’s AWS has since become the largest provider of cloud computing services, while Alibaba’s Ant Financial is now one of the world’s biggest financial and digital payments firms. They both offer a wide variety of additional services through their platforms.
The emergence of a new class of smart connect products is another major force that’s reshaping industry boundaries, exposing companies to new competitive opportunities and threats. Driven by advances in the Internet of Things , Big Data, AI and other major innovations, the world’s digital and physical infrastructures are essentially converging, with IT now becoming an integral part of the products themselves. As smart connect products continue to expand industry boundaries, competition is shifting from individual physical products to increasingly comprehensive systems that encompass a number of related products and services.
Effective management of digital transformation is vital – but challenging
“Even when the right digital strategy is in place, execution is vital. Unfortunately, the evidence suggests that failure to be effective happens five times more often than success.” Such a high incidence of failure can be found across industries and countries regardless of the objectives of the digital transformation, including customer experience, the most common type of transformation.
The report recommends five key actions to improve the odds of a successful digital transformation: shared responsibility and accountability; clarity of objectives and commitment; sufficient resources; investments in digital talent; and flexibility and agility. “Companies need to hit all these aspects to increase their odds of exceeding the intention and ambition of the digital transformation to above 50 percent. Yet today barely 10 percent of incumbents are delivering on all five”
Leveraging, and transitioning from, digital to new frontier technologies is an imperative
The next waves of frontier technologies, – e.g., IoT, AI, blockchain, – are all dependent on a strong digital backbone.
For example, a recent McKinsey online survey on the state of AI adoption found that a critical success factor for AI deployment is a company’s progress along its digitization journey. The same players who’ve been leaders in earlier waves of digitization are now leading the AI wave. 67% of respondents from the most digitized firms say that their organizations have embedded AI into standard business processes, compared with 43% for all other companies. 39% of the most digitized companies have adopted machine learning capabilities and another 31% are conducting machine learning pilots, compared to 16% and 24% respectively for all companies. And 37% of the most digitized companies are already using virtual agents while another 31% are conducting pilots, compared to 15% and 26% respectively for all companies.
“AI may be today’s buzzword, but this is a new area to master if companies, sectors, and economies are to thrive in the future. The journey to digitization started a quarter of a century ago, but remains an ever-present challenge that needs to be met for success.”