McKinsey Quarterly

Responding to digital threats

| Article

Digital business models disrupt the economic and operating principles that have guided companies across industries. What follows are snapshots of how six players are responding: Four are navigating a world of shrinking value pools, winner-takes-all markets, and first-mover dominance. Two others are moving proactively to get a footing in the new ecosystem competition and capitalizing on the benefits of incumbency. These diverse responses to the new competitive environment may be thought provoking to a wide variety of companies, many of whom are struggling to adjust, for reasons described in our companion article, “Why digital strategies fail.”

Insurance: Getting a better grip on consumer surplus

If you set a digital strategy without focusing squarely on the potential for customers to reap massive gains, you are likely to be blindsided. Consider the insurance sector, where digital competitors are poised to disintermediate agents and, at the same time, intensify competition with lower prices and higher levels of service. One major insurer is fighting back by writing and marketing its own digital policies. This entails risks, starting with the alienation of agencies that have traditionally distributed its products. But the insurer strongly believes that smart digital approaches will enable better pricing and superior customer experience compared with that currently received from agents, and it sees no reason to cede this battlefield to someone else.

John Deere: Staying ahead of the digital threats

Farming-equipment manufacturer John Deere is responding to the potential for digital entrants to sweep up value as sensors, data analytics, and artificial intelligence boost farming productivity beyond what has been feasible previously. That could commoditize farming “hardware” such as tractors and harvesting equipment. John Deere is trying to stay ahead of this shift by creating a data-driven service business that collects soil samples and analyzes weather patterns to help farmers optimize crop yields. Sensors in tractors and other machinery provide data for predictive maintenance; automated sprinkler systems sync up with weather data; and an open-software platform lets third parties build new service apps. As the company’s chairman and chief executive officer, Samuel R. Allen, told shareholders recently, “Precision agriculture may evolve to a point that farmers will be able to monitor, manage, and measure the status of virtually every plant in the field.”

Although still in the early days, the company’s moves position it to lead in the new business of data-enabled agriculture while differentiating its traditional products and services.

BMW and Qantas: Meeting the need for speed

In an industry where long product life cycles have been the norm, BMW has moved from an annual model cycle to one with continual improvements throughout the year. This has helped it to learn and apply digital and other technology advances at a faster pace than that of some competitors that have stayed with traditional cycle times. “All aspects of our products—whether design, handling, or everyday usage—will be modeled more closely than ever before on the customer’s needs,” Klaus Fröhlich, BMW’s board of management member responsible for development, noted recently.

Moving fast sometimes necessitates competing with oneself. Anticipating increased cost pressures and a faster competitive landscape as the pace of digitization in travel and tourism progressed, Qantas Airways launched its stand-alone lower-fare Jetstar. Intensive use of digital technology in booking, app-based loyalty programs, automated check-in, and baggage service, as well as digitization in other service and operations arenas, prompted the creation of the Jetstar brand, which is differentiated by lower fares and a better customer experience.

To speed up its response time and disrupt (rather than follow) the industry, Qantas was open to cannibalizing its flagship brand. Today, Jetstar’s margins on its earnings before interest and taxes (EBIT) exceed those of the Qantas brand.

Intuit: Building an ecosystem by acquisition

Intuit began taking an ecosystem view of its markets when a strategic review showed that fintech start-ups had the potential to target its customers with digital products. The review also showed ways the company could flex its financial power and scale. Leadership decided to acquire new digital assets to expand beyond its existing small-business and tax products, in an effort to reach digitally adept consumers who were happy to use software apps to help manage their money as well as to get a reading on their overall financial health.

Three offerings—Mint (for consumers), QuickBooks (for small businesses), and TurboTax (for both)—have been integrated with one login, and the company offers banks the ability to integrate customer accounts with its products, allowing customers easier access to online bill paying.

Telefónica: Leveraging incumbency

After a wide-ranging strategic review, Telefónica saw that it was vulnerable to digital players that were offering mobile customers lower-cost plans and more flexible models. In an effort to meet the challenges, the company launched an independent “brownfield” start-up, giffgaff. Its hallmark was an online-first model for customer support that uses community-based digital forums to resolve customer queries. Incumbency offered an important advantage: one of the company’s key assets was its O2 digital network, which provided resources and technical capabilities in support of giffgaff’s innovative business model.

For an in-depth look at why digital strategies so often fall short and how companies can better compete, see “Why digital strategies fail.”