How not to suck at digital transformation

Published on the 02/03/2018 | Written by Jonathan Cotton

Why digital strategies fail

Why do the best laid digital plans of so many companies go awry? Research company McKinsey offers its two cents...

We live in a world where seemingly every company is desperately trying to reinvent itself – but few are succeeding. It turns out, according to McKinsey at least, that our sense of urgency doesn’t always match our level of competence when it comes to digitally transforming our businesses.

So how to match our transformation ambitions with the nuts and bolts of actually getting it done? McKinsey has offered a “wake up call to CEOs” entitled Why Digital Strategies Fail and it’s worth a read.

“We find that a surprisingly large number [of CEOs] underestimate the increasing momentum of digitisation, the behavioral changes and technology driving it, and, perhaps most of all, the scale of the disruption bearing down on them,” says the report, written by McKinsey partners Jacques Bughin, Tanguy Catlin, Martin Hirt, and Paul Willmott.

“Many companies are still locked into strategy-development processes that churn along on annual cycles. Only eight percent of companies we surveyed recently said their current business model would remain economically viable if their industry keeps digitising at its current course and speed.”

So why do so many digital strategies fail?

“The answer has to do with the magnitude of the disruptive economic force digital has become and its incompatibility with traditional economic, strategic, and operating models,” says the report.

CEOs need a better – read more holistic – understanding of exactly what digital means. It’s not sales and marketing, it’s not the internet and it’s definitely not a fancy word for your IT department, it’s the whole-shebang.

“We view digital as the nearly instant, free, and flawless ability to connect people, devices, and physical objects anywhere.”

With a predicted 20 billion devices connected by 2015, that equals a lot of data and therein lies opportunity. Mining that data leads to better analytics, which in turn leads to better automation. That, says McKinsey, is the game changer.

“Think about the opportunities that telematics have created for the insurance industry. Connected cars collect real-time information about a customer’s driving behavior. The data allows insurers to price the risk associated with a driver automatically and more accurately, creating an opportunity to offer direct, pay-as-you-go coverage and bypassing today’s agents.”

Simply put, understand digital and you have a better shot at understanding the future.

Currently it’s all about the Amazons and the Apples says McKinsey as scale and network effects dominate markets and economic value rises to the top.

“Our research on digital revenue growth…shows it turning sharply negative for the bottom three quartiles of companies, while increasing for the top quartile. The negative effects of digital competition on a company’s growth in earnings, meanwhile, are twice as large for the bottom three-quarters of companies as for those at the top.”

Again, it’s the data that makes the difference with the big players gaining much of their leverage from huge volumes of customer data drawn from scale and network advantages.

How on earth to compete with the megaliths then? First movers and the fastest followers can seize a foothold via their ‘learning advantage’, says the report.

Successful first movers “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,” says the report.

“They also scale up platforms and generate information networks powered by artificial intelligence at a pace that far outstrips the capabilities of lower-pulsed organisations.”

Industry boundaries are blurring as digital-platform and -ecosystem economics upend the fundamentals of supply and demand and improbable business models becoming the new reality.

“In this terrain, the best companies have the scale to reach a nearly limitless customer base, use artificial intelligence and other tools to engineer exquisite levels of service, and benefit from often frictionless supply lines.”

They are the groan examples but: “Facebook is now a major media player while (until recently) producing no content. Uber and Airbnb sell global mobility and lodging without owning cars or hotels.”

All this makes it far too easy to focus on the big name brands and miss the threat right behind you warns the report. It also makes it easy – given the the consumer orientation of the headline-grabbers – to overlook the growing importance of digital in B2B markets.

“Digitising B2B players are lowering costs and improving the reach and quality of their offerings,” says the report. ‘The Internet of Things’, combined with advanced analytics, enables leading-edge manufacturers to predict the maintenance needs of capital goods, extending their life and creating a new runway for industrial productivity.”

Add to that robotics, AI and AR, and the potential of blockchain and you’ve got a highly unstable digital landscape equal parts threat and opportunity.

So how to respond? Just how does a company digitise its existing business while still innovating?

“The fact is that strategy and execution can no longer be tackled separately or compartmentalised,” reads the report. “The pressures of digital mean that you need to adapt both simultaneously and iteratively to succeed.”

The answer, McKinsey offers, is twofold. You need to be bold and be highly adaptive, simultaneously.

“Our latest research shows that the boldest companies, those we call digital reinventors, play well beyond the margins. They invest at much higher levels in technology, are more likely to make digitally related acquisitions, and are much more aggressive at investing in business-model innovation. This inspired boldness also turns out to be a big performance differentiator.”

“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.”

Those two things offer a nuanced sensing of market direction, rapid reaction, and a better approach to implementation.

For more, read the full report, Why Digital Strategies Fail from the McKinsey Quarterly.

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