Article Synopsis :
Most digital strategies fail to reflect how digital is changing economic fundamentals, industry dynamics, or even what it means to compete. A surprisingly large number of corporate strategies underestimate the increasing momentum of digitization, the behavioral changes and technology driving it, and, perhaps most of all, the scale of the disruption bearing down on them. This article from McKinsey unpacks five issues that, in their experience, are particularly problematic.
PITFALL 1: FUZZY DEFINITIONS
Some leaders view digital as the upgraded term for what their IT function does. Others focus on digital marketing or sales. But very few have a broad, holistic view of what digital really means. McKinsey defines digital as: the nearly instant, free, and flawless ability to connect people, devices, and physical objects anywhere.
By 2025, some 20 billion devices will be connected, nearly three times the world population. Over the past two years, such devices have churned out 90% of the data ever produced. Mining this data greatly enhances the power of analytics, which leads directly to dramatically higher levels of automation—both of processes and, ultimately, decisions. All this gives birth to brand-new business models.
What’s happened with the smartphone over the past ten years should haunt you—and no industry will be immune.
PITFALL 2: MISUNDERSTANDING THE ECONOMICS OF DIGITAL
Digital is destroying economic rent:
Digital creates—on average—more value for customers than it does for firms, scary news for firms hoping to convert digital forces into economic advantage. Executives need to learn quickly how to compete, create value for customers, and keep some for themselves in a world of shrinking profit pools.
Digital is driving winner-take-all economics:
Just as sobering as the shift of profit pools to customers is the fact that when scale and network effects dominate markets, economic value rises to the top, no longer distributed among a large number of participants (think: Amazon in ecommerce and the iPhone). This means a company whose strategic goal is to maintain share relative to peers could be doomed—unless the company is already the market leader.
Digital rewards first movers and some super-fast followers:
In digital scrums, first movers and very fast followers gain a huge advantage over competitors. Why? First movers and the fastest followers develop a learning advantage. They relentlessly test and learn, launch early prototypes, and refine results in real time—cutting down the development time in some sectors from several months to a few days. They also scale up platforms and generate information networks powered by artificial intelligence at a pace that far outstrips the capabilities of lower-pulsed organizations. As a result, they are often pushing ahead on version 3.0 or 4.0 offerings before followers have launched their “me too” version 1.0 models.
PITFALL 3: OVERLOOKING ECOSYSTEMS
Digital means that strategies developed solely in the context of a firm’s industry are likely to face severe challenges. Traditional approaches such as tracking rivals’ moves closely and using that knowledge to fine-tune overall direction or optimize value chains are increasingly perilous.
Industries will soon be ecosystems. Platforms that allow digital players to move easily across industry and sector borders are destroying the traditional model with its familiar lines of sight.
CEOs need a wider lens when assessing would-be competitors—or partners. Indeed, in an ecosystem environment, today’s competitor may turn out to be a partner or “frenemy.” Failure to grasp this means that you will miss opportunities and underplay threats.
PITFALL 4: OVERINDEXING ON THE ‘USUAL SUSPECTS’
Most companies worry about the threats posed by digital natives, whose moves get most of the attention (with good reason). Excessive focus on the usual suspects is perilous, though, because incumbents, too, are digitizing and shaking up competitive dynamics. And the consumer orientation of many digital leaders makes it easy to overlook the growing importance of digital in business-to-business (B2B) markets.
Incumbents moving boldly command a 20% share, on average, of digitizing markets, compared with only 5% for digital natives on the prowl. Incumbents create as much risk to the revenues of traditional players as digital attackers do. And it’s often incumbents’ moves that push an industry to the tipping point. That’s when the ranks of slow movers get exposed to life-threatening competition.
The importance of B2B digitization, and its competitive implications, is easy to overlook because the digital shifts under way are less immediately obvious than those in B2C sectors and value chains. However, B2B companies can be just as disruptive. In fact, many B2B players are digitizing at a faster pace than B2Cs, lowering costs and improving the reach and quality of their offerings.
PITFALL 5: MISSING THE DUALITY OF DIGITAL
Since the extent and speed of disruption varies, companies need to calibrate their response:
While the details of getting this balance right will vary by company, two broad principles apply:
- Bold aspiration: The boldest companies—and the biggest winners—play well beyond the margins, investing at much higher levels in technology, making more digital-related acquisitions, and investing in business-model innovation.
- Highly adaptive: Opportunities to move boldly often arise as a result of changing circumstances and require a willingness to pivot. The watchwords are failing fast and often and innovating even faster—in other words, learning from mistakes.
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Digital Insurer's CommentsWe highly recommend the four-part framework suggested in the conclusion of this report:
- Who: Strategy exercises today need to involve the entire management team, not just the head of strategy.
- When: Annual strategy reviews need to be compressed to a quarterly time-frame.
- What: New methods of role playing, scenario-planning exercises, and war games must be introduced.
- How: More than ever, the ‘soft stuff’, e.g., people, will determine the how of strategy.
The goal is to enable the organization to sense strategic opportunities in real time and be prepared to pivot as it tests, learns, and adapts.
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