Incumbents that have been able to reinvent themselves in the digital age are in a position to own a bigger slice of the market they operate in than digital insurgents.
While digital natives are often singled out as the disruptors threatening market share, incumbents embracing digital potentially pose a greater threat to existing organisations, according to a new report from McKinsey and company.
“The correlation between the market share owned by digital natives and revenues at risk is on par with that of incumbents playing digitally… Since those competing in digital ways already own a larger market share than digital natives do, on average, they can also make larger shifts in the economics of their respective markets,” the authors said.
According to a McKinsey Global Survey on digital strategy, incumbents embracing digital are outperforming their more traditional counterparts, and a digital divide has begun to form between the two groups.
For those that fail to address digital pressures almost one third of revenue “could be lost or cannibalised” according to the authors.
“The companies making digital moves—digital natives, industry incumbents competing in new and digital ways, and incumbents moving into new sectors—are out-performing their traditional-incumbent counterparts.”
According to the authors, the average response to digitisation had been “lukewarm” and produced limited gains. In contrast, bolder investments and strategy from the “digital reinventors” were paying off and creating a “digital divide.”
“The reinventors are investing at scale in technology, analytics, and digital talent—not just playing on the margins—and investing much more aggressively in business-model innovations or entirely new business models,” the authors said.
“The reinventors are seeing larger gains in revenues and earnings than are traditional incumbents that have yet to embrace digitisation.”
A poor digital response
According to the authors, incumbents’ plans for digitisation have been “tentative at best” with most only investing modestly in digitisation. Of that modest investment, the majority is proportional to revenue earned from digital. It suggests organisations are investing mainly in digital areas that drive frontline sales while areas like IoT and automation go untapped, the authors said.
“Respondents say their companies tend to invest only in the most proven digital technologies (big data, mobile, and traditional web technologies, for example). At the same time, more than half have made no changes to their business portfolios because of digitisation, and less than 20 per cent report either acquiring businesses to supplement their long-term digital strategies or divesting any of their current businesses.”
Few organisations see digital as a need for total reinvention, according to the survey. “Just 6 per cent of all respondents say their companies must move to new, fully digital business models and leave the current ones behind. Only another 6 per cent say their companies have already made the required changes to their business models to stay viable.”
What leaders are doing differently
According to the authors, the digital reinventors differ from traditional incumbents in three key areas. “The digital reinventors appear to be using these practices both to digitise their core businesses and to innovate through new business models.”
Innovating the business model
Digital reinventors are more likely to have made bold moves like “digitising the core more fully and innovating with completely new digital businesses.” In fact they are seven times more likely to have fully digitised their core business models and twice as likely to have modified long-term digital related strategies, the authors said.
Embedding technology innovatively and at scale
The reinventors are also more likely to use “cutting edge digital technology” at scale, compared to traditionally operating incumbents.
“Forty-four per cent of incumbents playing digitally say their companies use design thinking at scale either across the organisation or within functions or business units, but the same percentage of traditional incumbents haven’t even started to pilot it,” the authors said.
Investing more decisively
The more digitally bold incumbents are also putting their money where their mouth is. According to the authors, they are investing more and more decisively.
“The percentage of annual revenues invested by incumbents playing digitally (which have the greatest market share) is more than three times as high as that of traditional incumbents,” the authors said.
Bigger bolder investments in digital are paying off for incumbents too, the authors said. “The returns on their digital investments are double or more than what the traditional incumbents see on theirs, according to respondents.”