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
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.
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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
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
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
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
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
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
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.
Why digital strategies fail
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
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
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
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:
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