Many CEOs are yet to grasp the full impact of digital and are asleep at the wheel, according to a new article from McKinsey and company, which outlined five common digital pitfalls.
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“We find that a surprisingly large number underestimate the increasing momentum of digitisation, the behavioural changes and technology driving it, and, perhaps most of all, the scale of the disruption bearing down on them,” the authors write.
Just 8 per cent of organisations McKinsey recently surveyed said they would remain economically viable with current strategies if digitisation continues at its current rate, according to the article.
“Going forward, digital strategy needs to be a heck of a lot different from what they have today, or they’re not going to make it.”
A good place to start, according to the authors, is to understand five especially problematic digital issues, outlined in the McKinsey article, Why digital strategies fail.
Pitfall 1 – Fuzzy Definitions
Organisations still lack a clear understanding of what digital means, according to the authors. Some still see it as only an extension of IT or marketing, but rarely do organisations take the holistic approach digital success requires.
The correct digital definition, according to the authors is “the nearly instant, free, and flawless ability to connect people, devices, and physical objects anywhere,” the authors wrote.
The fundamental misunderstanding of digital is preventing many companies from connecting digital strategies to their core business and promoted this warning;
“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
According to the authors, digital is destroying economic rent, creating winner take all economies and rewarding fast movers.
A digital economy shifts value from firms to customers. It’s the inverse of traditional economic thinking about economic rent – profit earned in excess of a company’s cost of capital.
“[Firms] find digital unbundling profitable product and service offerings, freeing customers to buy only what they need. Digital also renders distribution intermediaries obsolete (how healthy is your nearest big-box store?), with limitless choice and price transparency,” the authors wrote.
The trend has hit incumbents hard, removing 40 per cent of their revenue growth and a quarter of their growth in earnings before interest and taxes, according to the article.
Digital is also steepening the power curve – with big winners at the top and big losers at the bottom, without much room in between. “Our research on digital revenue growth, meanwhile, shows it turning sharply negative for the bottom three quartiles of companies, while increasing for the top quartile,” according to the authors.
Most of those big winners have been first movers or “superfast followers,” according to the article. “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.”
Pitfall 3 – Overlooking ecosystems
With digital blurring the boundaries of industry, traditional strategies that ignore outside influence “are likely to face severe challenges,” the authors write.
The reach of digital leaders means more competition from unexpected places, facilitated by ecosystems. Grocery stores must now consider Amazon, while financial institutions now have to think about the impact of companies like Apple. In China the influence of tech giants like Alibaba and Tencent are now felt by millions.
The other side of the digital coin, these platforms potentially aggregate millions of new customers, the authors said. Regardless, digital is changing the location of business.
“Our research shows that an emerging set of digital ecosystems could account for more than $60 trillion in revenues by 2025, or more than 30 per cent of global corporate revenues. In a world of ecosystems, as industry boundaries blur, strategy needs a much broader frame of reference.”
Pitfall 4 – Overindexing on the ‘usual suspects’
Digital natives garner most of the headlines with their innovation and disruptive potential. And while that attention is often deserved, it makes it easy to overlook the threat of transformative incumbents, according to the authors.
“When [incumbents] begin moving with an offensive, innovative strategy, they tip the balance. Digitisation goes from being an incremental affair to a headlong rush as incumbents disrupt multiple reaches of the value chain.”
Another overlooked aspect of digital is the B2B opportunity, according to the article. The B2C possibilities of digital are often obvious, but the B2B prospects can be revolutionary too.
Pitfall 5 – Missing the duality of digital
Many organisations recognise the threat of digital and try to reinvent the wheel in response, often at their peril, according to the article. There is no silver bullet response and organisations must consider both the degree of change and the pace of change digital is ushering in.
“For those facing massive and rapid disruption, bold moves across the board are imperative to stay alive,” the authors write.
“Others are experiencing variations in the speed and scale of disruption; to respond to the ebbs and flows, those companies need to develop a better field of vision for threats and a capacity for more agile action.”
There are two universal principles though, according to the article. Hold bold aspirations and remain highly adaptive.