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Digital strategies fail over five fundamentals, warn consultants McKinsey

Most organisations’ digital strategies are doomed to fail because they don’t reflect how ‘digital’ is changing economic fundamentals.

That is the warning of consultancy McKinsey, which claims that there are five main pitfalls that organisations typically fall into when devising a digital transformation strategy.

“Many [organisations] think that having a few digital initiatives in the air constitutes a digital strategy—it does not. 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,” warned the company in a recently published paper.

It continued: “We find that a surprisingly large number underestimate the increasing momentum of digitization, the behavioural changes and technology driving it, and, perhaps most of all, the scale of the disruption bearing down on them. Many companies are still locked into strategy-development processes that churn along on annual cycles.”

The problem, the organisation warns, is that businesses are failing to comprehend the magnitude of the economic transformation that is about to hit them.

McKinsey claims that it sees five main pitfalls in companies’ digital transformation strategies.

1. Unclear definitions;
2. Misunderstanding the changing economics that digital is driving;
3. Overlooking eco-systems;
4. Focusing on familiar competitive threats, rather than emerging ones;
5. Failing to understand that it’s not just existing business that needs to be digitised – and not discarded – but that new businesses need to be invented, too.

Understanding that connected devices are generating vast amounts of data is one thing, but appreciating how this can be applied to existing businesses in order to transform them is another. For example, the telematics data generated by connected cars will fundamentally change the insurance industry, but insurers need to know exactly how to apply it, and built projects accordingly.

At the same time, McKinsey warns, while digital could drive new business opportunities, it doesn’t necessarily mean that old business models should be casually discarded.

Although companies like Facebook and Google clearly benefit from generating ‘economic rent’ – enjoying strong, easy to defend niches that enable them to make very big profits – that won’t be the case for most businesses, McKinsey warns.

“In the travel industry, airlines and other providers once paid travel agents to source customers. That all changed with the Internet, and consumers now get the same free services that they once received from travel agents anytime, any place, at the swipe of a finger—not to mention recommendations for hotels and destinations that bubble up from the “crowd” rather than experts,” McKinsey notes.

Yet, while McKinsey claims that digital will destroy economic rent, it also warns that digital will drive “winner takes all economics”, with a handful of companies (such as Amazon) dominating retail, internet advertising carved up between Google and Facebook and so on.

“At the highest level, our colleagues’ research on economic profit distribution highlights the existence of a power curve that has been getting steeper over the past decade or so and is characterized by big winners and losers at the top and bottom, respectively.

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,” warns McKinsey.

A small number of winners will do excessively well, while the rest will need to be ultra-efficient and nimble to hang on. “This phenomenon of major industry shakeouts isn’t new, of course.

“Well before digital, we saw industry disruptions in automobiles, PC manufacturing, tires, televisions, and penicillin. The number of producers typically peaked, and then fell by 70 to 97 per cent. The issue now is that digital is causing such disruptions to happen faster and more frequently.”

To shift to new digital business, organisations should think in terms of a two-by-two matrix, which also takes into account existing business so that organisations don’t get caught out in the shift from old to new.

Computing’s IT Leaders Summit will be exploring the various themes behind digital transformation next Wednesday 31 January. If you’re an IT leader, sign-up now – attendance is free to qualifying senior IT pros.

Can’t make it to London for the IT Leaders Summit? Computing will be holding the Cloud Infrastructure Summit in Manchester in April.

For more information on all of Computing’s events, take a look at our events schedule.

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