“A winning digital strategy requires new twists to familiar moves,” said a recent McKinsey article, Strategy for a digital world. “Competitive differentiation, now more than ever, emerges from superior digital capabilities and technology endowment, more agile delivery, and a progressively more tech-savvy C-suite.”
According to the latest McKinsey Global Survey on digital strategy, the pandemic has sped up the adoption of digital technologies by several years. While the imperative for a strategic approach to technology is universal, the survey found that some companies are already leading the pack because they have better overall technology capabilities, talent, leadership, and resources, and their superior technology endowment is linked to better economic outcomes.
The pandemic has accelerated the pace of change of the leading technology companies as well as the industry leaders who’ve been investing heavily in new digital-enabled strategies and business models, widening the gap between these top economic performers and all other companies. At the same time, the survey showed that many of the organizations that are being left behind could be missing opportunities to catch up by investing in the areas of their business most at risk of digital advances.
Traditional legacy companies should revisit the classic strategies that may have worked well for them in decades past but that must now be updated given the accelerated pace of digital disruption. The McKinsey article offers a road map for so doing based on five major changes.
Drive differentiation with technology and digital
- Classic strategy: A company’s average gross margin must exceed that of its industry by 30% over a decade.
- Digital disruption: Companies must deliver new digital products, services, and experiences faster than competitors to achieve winner-takes-most dynamics.
“As digital technology becomes ever more important, the sources of these innovations and advantages are now shifting from traditional sweet spots into less familiar terrain, such as using digital technology to innovate products, services, and business models.”
The article cites the example of carmakers, who previously competed based on the quality of their engines, brakes, suspension and other classic mechanical attributes. However, as cars continue to morph into "computers on wheels," software has become a key area for differentiation. The articles notes that automakers are looking to quadruple hiring for automotive-software developers.
Drive digital productivity from both inputs and outputs
- Classic strategy: SG&A productivity relative to industry in top 20% of companies and labor productivity in top 30%.
- Digital disruption: Industry comparisons are no longer against the most efficient legacy peers but against innovative, lean, greenfield attackers.
“Digital disruption - for example, the ability of smaller players to leverage the public cloud and access large-scale data sets - is now changing the math on productivity in many industries. … Across the board, executive teams should now assume the productivity bar has shifted from the leanest of their incumbent peers to that of greenfield, digital-native attackers boasting a high degree of digitization, straight-through processing, and largely variable cost bases.”
The Covid crisis has ushered a new normal in which digital is increasingly central to every interaction, forcing individuals and institutions further up the adoption curve almost overnight. For years, companies found all kinds of reasons for not embracing work from home, virtual meetings, telemedicine and other digital applications. But, not only did these digital applications work remarkably well, but they offer a number of important benefits, like not having to travel for hours to participate in a one hour meeting. These abrupt shifts are sparking new arenas for innovation to improve the experience of remote working, virtual conference, collaboration and learning, and new kinds of contactless and appointment-based retailing. And, the transition may finally help transform health, education, government services, and other fields that have long been digital laggards.
Invest smart in the tech that sets you apart
- Classic strategy: Maintain a ratio in excess of 1.7 times the industry median for at least 10 years.
- Digital disruption: Companies are either investing big in differentiating digital assets or going “capital light.”
“Effective capital spending is another of the classic strategies companies have used to jump up (or remain at the top of) the power curve of economic profit. … As technology and digital become increasingly important enablers for business-model innovation and productivity improvement, companies that outperform their peers are focusing more of their capital investment on technology and digital assets.”
These top economic performers entered the crisis ahead of their peers in a number of key areas, including cloud adoption and infrastructure, common sources of data across the organization, sufficient cybersecurity to mitigate risks and threats; prioritization of tech resources to the most strategically important efforts, increased investment in talent, increased R&D spending; and creation of new partnerships.
Reallocate resources at digital speed
- Classic strategy: Shift more than 50% of capital spending across business units over 10 years.
- Digital disruption: Since digital is shifting value pools more rapidly, companies must reallocate resources at a faster pace to ensure they’re aligned with tailwinds and growth.
“McKinsey research has shown that companies shifting more than 50 percent of their capital spending across their businesses over ten years created 50 percent more value than counterparts that moved resources at a slower clip. … But now companies need to reallocate resources at an even faster pace. What was considered best-in-class speed for most business practices in 2018 is now slower than average - thanks to the massive technology acceleration that has occurred since early 2020.”
Companies are embracing and scaling the changes they were forced to make to help them cope with the crisis. A recent IDC study on the key trends that will shape the IT industry over the next five years predicted that 65%, of global GDP will be digitalized by 2022, driving $6.8 trillion of IT spending from 2020 to 2023; 80% of enterprises will accelerate their shift to cloud-centric infrastructures, applications and data services by the end of 2021,- twice as fast as pre-pandemic; an increasing number of organizations will deploy AI-based technologies in a variety of offerings, including customer service, fraud prevention, and business process automation; and by 2023, one-quarter of G2000 companies will acquire at least one AI software start-up to get access to skills and IP.”
Get digital M&A right
- Classic strategy: A series of market deals amounting to more tha 30% of market capitalization over 10 years; no deal bigger than 30%.
- Digital disruption: Companies are counting on a single large digital acquisition to leapfrog their digital capabilities and culture before embarking on programmatic M&A.
“Differentiating through digital technology requires having the right capabilities, culture, and infrastructure. But companies can struggle to build these organically at sufficient scale and speed. That’s one reason many companies instead look to acquire digital assets, skills, and talent through digital M&A (defined as the acquisition of a company with predominantly digital capabilities and revenue streams). … Our research indicates that the early acquisition of a ‘digital unicorn’ (defined as a single deal worth at least $1 billion) has been a significant differentiator for total returns to shareholders (TRS) for big incumbent companies in the past ten years, even though this runs counter to what traditional programmatic M&A approaches would suggest.”
“Many companies, stunned by how quickly digital technology moved center stage during the pandemic, have scrambled toward rapid digital transformations,” said the article in conclusion. “We’d be the last to discourage this urgency. But companies should also step back to reassess their strategies thoroughly and carefully in the light of digital disruption and digital opportunities. The fundamental strategic principles still apply - as do the bold moves proven to boost corporate performance - provided you keep a close eye on how digital is reshaping them.
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