How to avoid digital-strategy pitfalls

How to avoid digital-strategy pitfalls

Most digital strategies don’t reflect how digital is changing economic fundamentals, industry dynamics, or what it means to compete.

In this podcast episode, McKinsey’s Sean Brown interviews senior partners Tanguy Catlin and Paul Willmott on common digital-strategy pitfalls and how to avoid them.

Podcast transcript

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How to avoid digital-strategy pitfalls

Sean Brown: Today we’ll be talking to the authors of one of our most highly read articles, “Why digital strategies fail.” Tanguy Catlin is a senior partner in McKinsey’s Boston office. He’s a leader of the Digital Strategy Practice and helps guide McKinsey’s Digital Quotient initiative, working with clients around the world to deliver rapid and sustained growth by identifying their digital strengths and weaknesses. Paul Willmott is a senior partner in McKinsey’s London office and the global leader of Digital McKinsey. He works with clients on digital strategy and organization, process automation, and customer-experience design.

Let’s start with a question about the general premise of your article “Why digital strategies fail.” What prompted you to write the article?

Paul Willmott: We were prompted by conversations with many clients. What we’re seeing is that clients in every sector and geography are having to adapt to a very fast-changing context, as digital technology, analytics, and AI [artificial intelligence] change the operating environment. Some of those clients are super successful with their new strategies. But many, unfortunately, are finding themselves making less progress than they’d like. So we thought it might be helpful to capture the reasons why those that are struggling are struggling and to try to tease out what really makes the difference.

Sean Brown: You recently said that one of the questions you often discuss with clients highlights the difference between digital disruption and some of the previous disruptions. Could you talk a little bit more about that?

Paul Willmott: Well, disruption is not new, and arguably technology-driven disruption is not new, either. Previous businesses have had to adapt to new technologies, in transport, in communications, and so on. What’s different this time is simply the pace of change. One measure we sometimes look at is how fast new technologies are rolled out across the global population. If you took a technology like radio, it took many decades for it to be distributed across the population globally, whereas technologies like social media, for example, are finding themselves globally deployed within just a few years. Pokémon GO was one of the fastest-uptake technologies we’ve ever seen. But more seriously, the technologies that are impacting business are coming along in fast waves and rapid succession, and this is forcing a much faster pace for change.

Tanguy Catlin: To me there are three elements that are different. Paul talked about the most important one, which is the pace is so dramatically faster. There are two other differences, which are the reach and the scope. This is the first time that we see a level of disruption that happens on a global basis. The rise of the mobile phone, the rise of connectivity—these affect pretty much every country in the world at the same time, and therefore they lead to the emergence of global players and global solutions.

And beyond the reach, which is global in scope, it is also the first time we see the disruption happen to pretty much all industries, or most industries, which leads to the very redefinition of ecosystems. And that combination of incredibly fast-paced, global reach and multi-industry scope is leading to fundamental changes in the way companies need to think about their strategy posture.

Sean Brown: What sectors, if any, are seeing the biggest impact of digital disruption? Have you seen any sectors that have been immune, in your opinion? And which ones that have been affected have typically responded most favorably to digital disruption?

Paul Willmott: Well, we’re seeing that every sector is experiencing a level of digital disruption. But each sector is experiencing it in a slightly different way and at a slightly different pace. For example, if you’re in the media industry—notably music or film—you’ve already seen a fundamental shift in the business models in that sector driven by new technologies and new customer behaviors. To Tanguy’s point, that’s been a global shift. Other industries—largely those with a higher asset base and stickier customers, like those in B2B—are seeing a disruption that is playing out more slowly but, nonetheless, may be equally significant in the long run.

Sean Brown: When you talk to clients about the types of returns they’re seeing, oftentimes addressing digital can be quite expensive. What kind of returns are your clients seeing in their digital investments? Could you comment more broadly on the impact of digital on profitability?

Paul Willmott: We have done research work to estimate what digital is doing to profitability and to growth. What we’re seeing is, those industries that are going through more rapid disruption—like media and telecommunications—are seeing a very material impact, unfortunately detrimental.

What tends to happen is, digitization is creating great transparency on prices, and with that some price compression, tending to lead to both slower growth and lower profitability. The good news is that for those companies that grasp the nettle and are proactive and take a leadership stance with digital, they’re able to more than compensate for that overall market disruption and in fact gain both share and profitability.

Tanguy Catlin: What digital is fundamentally doing, and the reason it creates a nominal value for the customer to the detriment of the incumbents in the industries, is not only the price transparency but also often disintermediation. There are many goods and services that you can go and purchase directly from the provider.

Unbundling, for example: if you think about the way we used to buy newspapers, there would the sports section, the weather section, the political section, the entertainment section. Now you can go to different media outlets to consume exactly the content you want, and the same applies to most offerings. Then there is a push for greater commoditization. Very few of the executives we work with realize or assume that digital will be a source of value destruction for their industries and therefore are not taking the commensurate actions in their strategy plans.

Paul Willmott: You asked about the returns people are seeing on their digital investments. I think we’re seeing a very mixed range of returns, so some firms are actually seeing extremely good returns. I would say, in the best cases, they’re seeing sub-one-year payback for some substantial investments, and a high IRR [internal rate of return], NPV [net present value], or however else you choose to measure the investment.

What is common in those cases is that they are being extremely focused on the investments that are going to move the financial performance of the company. It’s easy to spread digital investment around and have hundreds or thousands of different experiments running. It’s also easy to get sidetracked with new innovation builds when sometimes the financial return is to be found elsewhere—automating SG&A [selling, general, and administrative] processes, for example.

The second point I’d like to make, though, is that on average most clients that we’re working for are not investing the requisite amount in digital. Because of the effects that Tanguy and I were just talking about, there is quite some downside risk for not acting at pace here. That calls for unprecedented levels of investment. Of course, that’s only possible if you are able to find a way of accelerating returns so that you can manage the overall economic profile.

Sean Brown: So what happens if you can’t do that? Is that when the other disrupters come in and make the investment? Also, it can lead to some scary results in the incumbent industry.

Paul Willmott: The reality is that there are some businesses that fundamentally will become more difficult going forward. You’ve seen that with certain aspects of the music industry, for example. Without getting into too many examples, you can see that in most sectors there are parts of the business that are fundamentally threatened. The good news is that, at the same time, there are many, many new opportunities arising. So, as Tanguy mentioned earlier, digital is allowing firms to explore new sectors, and to cross sector boundaries, which historically were impermeable. And that can provide some significant upside. We’re seeing that, for example, with telcos going into financial services.

Tanguy Catlin: More generally, I would say that when you look at different industries, and you map against the magnitude of disruption and the pace of the disruption, you find that the strategic posture you need to take to respond will be different. So the answer to your question, Sean, requires some nuance.

But if you are in a place where the magnitude of the disruption is high and the pace is sufficient, three things become true. The first one is that the market will reward according to who is the first mover. There’s a high premium in being able to engage, move, and test and learn faster and sooner. It’s not only about the magnitude of investment but also about the timing—if you’re one of the first ones to be committed to digital.

The second thing is that it leads to a winner-take-all type of economy. Which means that you need to invest at the scale that allows you to become the market leader. Trying to move from number seven to number six in the marketplace is no longer a wise strategy.

The third thing is that you need to be able to assess both the upside of your winning strategy as well as the downside of not taking action. One of the biggest mistakes that we find companies make is underestimating the downside. We’ve seen in many industries the league table change dramatically quickly. The biggest predictor of success is actually not once an attacker is center in your space but when the leading incumbent has become religious about digital and is undertaking the size of the investment and the commitment to digital—at that point, the race is on, and we see changes happening extremely rapidly.

Sean Brown: You spoke earlier, Tanguy, about this notion of disintermediation, and also disaggregation. One of the questions that we wanted to cover was this notion of B2B versus B2C, and how impacted each area is. A lot of the examples that you’ve talked about have been more of the B2C variety. How do you see the rate of digital disruption in the B2B space going as compared with B2C?

Tanguy Catlin: If you think that the impact of digital can affect the experience of your customer, the distribution channels, your cost structure, and your ability to expand beyond industries, most people talk about the first two and therefore lead with B2C examples. But you’re right to call out that B2B is equally affected, when you look at supply-chain management, when you look at the automation of processes, when you look at the use of data to drive predictive maintenance.

The economics impacting the ability to drive the cost down and the margins up have proved to be equal in the B2B and the B2C companies. The front end of the disintermediation and the rise of the market leaders in terms of direct to consumer are less prevalent in B2B, but the nature and the size of the economic opportunity are pretty much equal.

Sean Brown: In your article, you both talk a lot about ecosystems—the importance of ecosystems, the rise of ecosystems—and Amazon is a big example. Can you comment on the impact of ecosystems in more of a B2B construct rather than B2C?

Tanguy Catlin: Digital is creating opportunities for companies to expand their reach beyond the boundaries of their industry. The classic example is, your cell phone is no longer a cell phone, it’s also your way of doing banking, and it provides payment options. The leading examples that you’ve observed have been in the B2C front because you start to have a player that creates a platform to connect many consumers to providers of goods and services. If you go to Asia, the social network can be used to provide insurance, banking, and other services.

The second way we see it play out, and it’s beginning to happen, is that you are able to now gather and collect enormous amounts of information and data that allow you to provide solutions in B2B. GE has been known for making significant investments in similar platforms. You can imagine a number of companies being linked together to optimize an entire value chain. Think about the whole element of servicing large aircraft and being able to collect data about the way the engines have been used and therefore predicting when certain parts need to be replaced and incorporating that into the flight schedules of planes. Those are information-database ecosystems that you can apply across a number of industries within certain types of transportation ecosystems, for instance. And those are the next generation that we see on the rise in B2B environments. But they’re probably more to be seen than what we already observe with the rise of Amazon, Alibaba, and Tencent in the B2C area.

Sean Brown: For a company that’s looking at making a transition to digital, how important is it that the company can also be a good digital consumer and not just be a good digital provider? What I mean is, how savvy do they need to be about how to take advantage of digital services that are available to them in order to better serve their own customers?

Paul Willmott: I think this is critical. It obviously is dependent on where you play in the value chain, but for most companies, they will see a symmetric effect of their customers wanting to interact with them digitally. So certainly the sales and service interactions become more digitized and richer as data are used to provide a more personalized, more customized product or service.

But the same is true for the other side of their business, in terms of their providers. It’s also true on another level, though: the technologies and tooling that are available to companies now on which to run their operations are improving extremely rapidly. So for a new business to buy all of the software and configure it historically might have taken years. New businesses or business units could be set up now on the cloud in a matter of months or even weeks.

Sean Brown: Thank you, Paul. Tanguy, is there anything you’d like to add to that?

Tanguy Catlin: I think one of the big hindrances to the adoption of digital solutions that may already exist is executive leadership’s knowledge about technology and digital. We find that in a number of areas, the executives have not been growing up in the digital age, and therefore their ability to think through how they can fully power their businesses with digital and provide the services that their customers are expecting is often limited by their lack of knowledge.

Leading organizations are much more externally oriented, continuously on the lookout for what new solutions might be available. They typically have a digital presence on their board; they have digital advisory committees. So I would just add to Paul’s answer the fact that in this age, investing significantly in the education of your top executives around the role of technology, analytics, and digital is critical to being able to achieve what we are talking about here.

Sean Brown: How much of that, in terms of getting smart on digital, is a change of people versus taking the people that you’ve got and training them up? In your experience, of the companies that do this really well, how do they strike that balance?

Tanguy Catlin: I think it will vary based on the competencies that are needed to drive a digital transformation. My experiences in many of the organizations we are dealing with suggest that the notion of listening to the voice of the customer and problem solving through empathy rather than through analytics is a muscle that doesn’t exist. The rise of design thinking is a competency that you’re better off addressing by acquiring the skill set externally. We as a firm had to go on that journey with acquisitions of companies such as Lunar and others, and a few banks and financial institutions are now discovering that.

You then have a certain set of roles that require skill sets that are different than what companies believe they are. You talk about the rise of analytics—well, data scientists require skill sets and experiences that oftentimes benefit from coming a little bit from the other side, so you’ll have a mix. Then there are some skill sets that we think you can and should train your organization on. How to operate in an agile matter using the agile processes—you can train a part of your organization to operate that way. But I would say that more often than not, there’s a significant need to inject new talent from the outside to be able to catalyze a sufficient level of momentum early on in the journey. Paul, what do you think?

Paul Willmott: Yeah, I would agree. I think that most of the successful digital transformations that we’ve witnessed have had a significant proportion of resources, and I mean at least a quarter, come externally: either new hires or on a contract basis, at least during the initial phases, to rapidly scale the capability. Long term, most firms are seeing that these new capabilities are actually a core competency, so they are trying to ensure that they become really core to the fabric of the organization and are aggressively building these competencies.

The good news is, we’re finding that folks can be trained at all levels. There are good examples of chief executives taking themselves off to night school and learning all about these new technologies, and equally down at the front line, we’re finding good success with retraining.

Sean Brown: So, following up: according to your article, 80 percent of companies are typically getting displaced by digital disruption. Can you talk a little bit more about the happy 20 percent that “made it through to the other side” and some of the other things that they did to both survive and thrive?

Tanguy Catlin: What the research suggests are five elements. The first one is, very early on, they are able to take a long-term view of their strategy versus your traditional budgeting exercise for minimum resource allocation year over year. And in the long-term view of the strategy, they have a good sense of the value added and a good sense of where they’re going to differentiate themselves in the marketplace in terms of value creation for the customer.

The second thing is, typically they are willing to look at a broad set of scenarios, some of which are favorable for them, some of which are unfavorable for them, and they develop a portfolio that can be resistant to change and shocks and volatility.

The third thing is that what they are willing to do in the early days of the transformation is radical: large levels of investment, significant commitment to a different way of working that typically entails much greater external orientation and partnerships, an agile operating model, experimentations with new technologies. So it’s a redesign from a blank sheet of end-to-end customer journeys.

The fourth element that you tend to see is, over the course of the transformation, they tend to invest more in technology and get more out of operations. They are managing their technology and operations budgets together, realizing that to drive operational efficiencies, they need to invest more in technology. Similarly, in analytics. They have a way of managing their budgets that tends to be quite different.

And the fifth one is what Paul was describing earlier: they make bold moves in terms of talent. That means acquisition of external talent and certain skill sets that are critical but also not being afraid to ask people who are not committed to the change to leave the organization.

About the author(s)

Sean Brown is the global director of communications for strategy and corporate finance and is based in McKinsey’s Boston office, where Tanguy Catlin is a senior partner; Paul Willmott is a senior partner in the London office.

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