Technology has fundamentally changed business practices and upended industries over the past quarter century. It’s empowered Uber and similar companies to disrupt long-established business models and render obsolete the decades-old ways of doing business.
Now, 25 years into the global business and economic digitisation process the McKinsey Global Institute has issued a research paper highlighting that while “the rewards for success – and the penalties for failure – are greater” than they have ever been, there are a number of ways to play digitisation right.
Research shows that many firms are keeping an eye on digital as a way forward for their business, but many are yet to take the plunge.
McKinsey says there is large economic potential linked to digitisation and “much of it is yet to be captured”. They estimate “an additional $13 trillion could be added to global GDP by 2030 from today through digitisation, automation and AI, as these technologies create major new business opportunities”.
While this is a major opportunity for policymakers to enable businesses to take advantage of this untapped potential, it is also a major opportunity for firms to increase their productivity and grow. McKinsey says productivity will flow once “companies absorb digital technologies in business workflow practices”.
Unlocking the true digital potential of a business will take time — to the year 2045 in some cases, according to McKinsey — but they should not believe Amazon or Alibaba are the only ones who can achieve great digital success.
McKinsey says there are many digital stars rising up past the US big four — Google, Amazon, Facebook, and Apple — and China’s big three — Baidu, Alibaba and Tencent — and the potential growth for companies that are only at the beginning of their digital journey is immense.
But digitisation is not an option, it’s a requirement, because the rules of the game are changing as “digital natives” call the shots. Digitisation has empowered a wide band of startups which are attracting capital and building the capability to upend many industries, according to McKinsey. This means a digital tipping point has been reached in most industries now. The key to movement along this journey for other companies, McKinsey says, is the ” ability of incumbents to digitise their revenue pool”.
McKinsey says successful firms go beyond their own sphere and scope of operation. The research highlights that while only about 10% of “incumbents are using digital technology,” those that have made the successful transition and diversified beyond their sector are seeing “digital revenue is 25 per cent higher” than that of their average peer.
It’s another signal that digitisation can empower a business to break boundaries and grow beyond what the owners and managers may have thought were the traditional limits.
To do that, McKinsey says companies need to be agile and prepared to fail fast. The payoff however appears to be worth it with the research saying, “agile incumbents have higher profits growth than those that are not”. But it is easier said than done sometimes because of a common issue that is holding back firms from going digital: cannibalisation.
That is, the “digital versions of many products may have lower prices, reducing the profit generated by nondigital sales. This cannibalisation may be material at up to 30 percent of their revenue due to digitisation”.
That’s going to be hard to swallow for many firms but it is a necessary pathway to break the firm’s boundaries, to develop new products and processes, and ultimately to grow and become more profitable, McKinsey says.
Doing it right also allows firms to utilise other company’s infrastructure and platforms as well. That’s a strategy that McKinsey likens to an “in-the-money-option,” where the firm is winning from the outset by leveraging another firm’s infrastructure or platform to get access to markets and global reach that has been impossible up until now.
That in itself sounds like a no-brainer. But McKinsey’s research highlights a core insight that runs through most of the case studies and research on successful digitisation: ensure there is effective management and people to implement the changes and transformation a company needs to be competitive. To do that, McKinsey suggests five aspects which are “simultaneously and jointly critical” to the transition and management of digital transformation.
- Mobilisation, which needs shared ownership, accountability, and responsibility;
- Clarity of commitment on the digital transformation;
- Sufficient resources devoted to it as a core organisational priority;
- The right investment in the technical talent needed in data analytics and digital, with chief analytic and digital officers playing a supervisory role;
- Anchoring all this in flexibility and agility.
In implementing these steps, companies can increase their chance of success by 45% and reduce the risk of failure by 11%, McKinsey says.
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