Reaching Your Digital Full Potential

Transcription

1 Reaching Your Digital Full Potential It s not enough to predict the next big technology trend. Or run various digitization initiatives. You need to embrace the digital opportunities across all dimensions of your business to realize your digital full potential. Template: Paper Title Here 1

2 What Are We Doing in Digital? This question should be a familiar one to CEOs. You may have heard it first from an inquisitive board of directors and passed it along to your head of strategy, BU heads, or your chief digital officer if you have one, which is a topic of its own. If you ve not heard this question, then either your company does not yet recognize digital and its enormous capacity for disruption, or you might already have a large number of digital initiatives under way. Chances are these initiatives are keeping your people busy but you re not sure they will have a measurable impact on your business. We recently asked 450 C-level executives worldwide about the one threat that keeps them up at night, and more than half said digital. Then we asked them how soon digital will unfold its massive impact on their business. A solid 72 percent said by 2020 (less than five years from now) and 36 percent said within two years (it s happening now!). Most executives think digitization will have a high or even transformational impact on their business (see figure 1). Digital is already forcing them and a lot of well-known market leaders to add technology to their areas of expertise, or as one CEO sees it, we are all software companies now. Figure 1 Executives see the threat of digitization as significant and imminent Digital full potential: effective strategies for the digital age Digitization ranked the #1 potential disruptor shaping their industry ~50% of executives say digitization will have a high or even transformational impact on their business 72% believe full digital impact will unfold in the next five years Source: 2016 A.T. Kearney survey of 446 global executives In addition to the threats, the frontrunners are exploring and executing on the opportunities that digital represents, including more efficient operations and new digital platforms. They are engaging traditional suppliers and competitors to collaborate and to present new strategic positions inside, outside, and adjacent to their industry. By 2020, more than 50 percent of revenues will be funneled through digital channels and/or driven by digital products, services, or businesses. Yet, most leaders (53 percent) have not fully integrated digital into their corporate strategies. These findings have significance for every CEO of an established business with one foot on solid ground and the other on the digital playing field. 1 Findings are from a global survey as part of Digital Disruption and the Impact on Business, A.T. Kearney study,

3 Preparing for Digital Disruption In every industry you will find digital leaders and digital followers. How do you tell which is which? The leaders look prepared to take on whatever disruptive force comes their way. Your level of preparedness can mean the difference between being crushed or crushing a competitor with a superior digital presence. If you lose, it s probably because you went in ill-equipped, with just a handful of options and a few capabilities nowhere near what is needed to manage such a threat. If you go in prepared and gain advantage over your competitor, then you are among the 30+ percent of executives who consider their companies ready for whatever digital disruption comes their way (see figure 2). You make smart decisions faster than most of your fellow C-level executives and allocate capital appropriately. Figure 2 Seven challenges and attributes of digital preparation Greatest challenge (Rank 1 of 3) Preparedness 17% Quicker decisions 33% 67% 16% Capital requirements 30% 70% 15% Rethink classic business models 26% 74% 15% Capability or competency 26% 74% 14% Competitive threats 28% 72% 13% Consider more strategic options 24% 76% 10% Operate under uncertainty 24% 76% Strongly prepared (5 score) Not strongly prepared Source: Digital Disruption and the Impact on Business, A.T. Kearney study, 2016 Bosch is a good example of digital preparedness. This manufacturer of auto parts and electronics is angling for a top spot in the autonomous car industry investing in radar, sensors, antilock brakes, and chassis control systems. Bosch is also building an IoT presence, connecting the Internet to a host of consumer products, including home appliances, industrial tools, and monitoring systems. Always assume that your rivals have all the latest technologies and gadgets needed to make their mark on your industry. Preparation means regularly updating your legacy technologies and maybe even your IT staff, depending on how in-tune the staff is to the latest technologies. But hiring and firing is not the answer. A digital ecosystem with external partners is. Does your company have one? 2

4 When Digital Strategy Meets Business Strategy The structure of your digital organization has a lot to do with your ability to withstand a strong competitive force. You can build a stand-alone digital unit, nurture it along for a few years and when it s big enough, and ready enough, merge it into the legacy business. Or, in some cases, the legacy business will merge into the digital business. Germany-based retail giant OTTO Group is a good example. It was founded in 1949 as a family-owned mail-order business centered around its printed catalog and has since become one of the world s largest multichannel retailers with 123 companies selling products around the world. Last year, OTTO celebrated its 20th anniversary as an online retailer. The executives in our study who consider their companies most prepared to address digitization have combined their digital and corporate strategies into one business strategy (see figure 3). The least prepared companies are twice as likely to have separated their digital and corporate strategies. Overall, 44 to 58 percent of companies address digital in parallel, with some minor overlaps or fully independent of their core strategy. This basically means they haven t yet fully embraced the digital opportunity. Digital strategy needs to be embedded in your corporate and business strategies to deliver (or supercharge) value. Figure 3 CEOs who feel most prepared to address digitization incorporate digital and corporate strategy Digital strategy development processes (N=422 excluding blank values) Most prepared (quartile 1) 1 Least prepared (quartile 4) 1 55% 43% 35% 40% The least prepared are 2x more likely to have separate digital and corporate strategies (18% vs. 9%) 13% 6% 3% 5% As part of the corporate strategy process In parallel with the corporate strategy process There is some overlap with the corporate strategy process, but not much Independently Is the process of creating a digital strategy done as part of the corporate strategy process or independently? 1 Quartile 1 represents executives who responded strongly prepared to most of the threats presented; quartile 4 represents survey executives who responded least prepared across the threats presented. Source: Digital Disruption and the Impact on Business, A.T. Kearney study,

5 Tapping Your Digital Full Potential This might sound familiar. With great fanfare, you launch a large number of digital initiatives throughout the organization, and after months or even years of effort, you see very little value, and certainly not enough to defend against your most aggressive digital rivals. When you look back, you can see exactly why the approach failed: If you bury small pockets of digital expertise throughout the organization, you will get small pockets of value in return. Reaching your digital full potential begins with understanding how digital technologies can deliver real value in four strategic dimensions: customer interaction (including marketing and advertising), supply chains and operations, new products and services, and underlying business models (see figure 4). Today, most businesses have started to digitize their customer interaction. A few will have digitized their entire value chain including operations and supply chain, depending on where they are in launching new technologies from robotic process automation (RPA) and driverless IoT-based transportation, to just-in-time 3-D digital printing. But you ll be hard pressed to find digitized product and service development, or digitized business models. Eventually, once all four areas are digitized, you are in the position of realizing your digital full potential. The question is how do you maintain your current competitiveness while also exploring new digital opportunities? You can maintain current competitiveness by having a strong digital component in all four areas. To capture new opportunities, you will need a future-in perspective one that allows you to anticipate what impact technology trends will have on your business. The idea is to translate technology trends into business shifts (driven by digitization) and explore how these business shifts will impact the four strategic dimensions shown in figure 4. Figure 4 Leaders agree a robust digital strategy should address all four strategic levers Required strategic levers in digital strategy (N=422) 15% 17% 16% 13% Critical Important 43% 41% 44% 43% Moderately important Somewhat important Not important 30% 30% 27% 28% 10% 8% 10% 13% 2% 4% 2% 3% Underlying business models New products and services When formulating a strategy to address digital and digitization, what strategic levers does a robust "digital strategy" need to address? Marketing, advertising, and customer interaction Supply chain and operations Source: Digital Disruption and the Impact on Business, A.T. Kearney study,

6 The choices and decisions you make from here will determine how soon or if you reach your digital full potential. For example, if the technology trend is 3-D printing, every decision rests on the impact you predict 3-D printing will have on your operations, customers, product development, and business models. A future-in perspective has to be an integral part of the overall CEO agenda, and you should be able to quantify, or at least get a sense of, how digitization will increase your company s value. Obviously a future-in view should not be developed in isolation. You ll need to tap the collective knowledge of subject-matter experts. Of all the digital strategies that we ve developed, the best ones are conceived in open settings where people share ideas and build relationships within an ecosystem of partners we reach out to the best and brightest people from incubators, startups, academia, and think tanks. And because digital technology can have a short shelf life before new trends appear, you ll want to set up your strategy review and formulation as a permanent, open-innovation process so you can continually anticipate future trends and determine what kind of competitive advantage each offers. Essentially, you end up with a portfolio of current and future competitive opportunities. To capture new opportunities, you need a future-in perspective one that allows you to anticipate the impact of technology. A good example is Verizon s latest move on Yahoo!. Verizon is a company that invests in its core sources of competitive advantage for example, network infrastructure, customer experience in making calls, and browsing and surfing. But this past July, Verizon decided to pick up Yahoo! s operational web parts for a cool $4.8 billion and combine its traditional services with Yahoo! s new services. Verizon s intent is to gain access to digital reach and technology to better compete against Google and Facebook in online advertising and OTT services. But $4.8 billion can buy a lot of 5G network. How do Verizon s investments into its core business compare against its digital ventures? Can you put the IRRs in the same spreadsheet? And while the acquisition takes a big chunk out of Verizon s FCF (an amount shareholders may have preferred in dividends), it would have been little more than a rounding error for, say, Facebook, which could have bought Yahoo! using stock at a P/E ratio of 87 compared to 15 for Verizon. Instead, Verizon swallowed the remainder of what was once a $125 billion Internet star. Will it raise Verizon s stock to a similar P/E ratio? Probably not. The moral of the story is this: Established businesses and digital companies barely compete on equal terms in the digital M&A arena. A company that isn t all digital, or at least majority digital, will not enjoy similar valuations. And this is why you must understand your business s digital full potential and educate your stakeholders accordingly. Digital is not only about boosting profits through a leaner, digital value chain. It is also about creating value by venturing out into new digital businesses. 5

7 What Strategy Is All About The process to tap into your digital full potential doesn't have to be perfect. You simply want to establish a frame of reference for the characteristics of your business, determine the role(s) you want to play, and identify and prepare for the challenges and opportunities you will face. To execute your strategy, you need to have commitment at the top, put the right people in place, and ensure competence from inside and outside your organization. Granted, it is difficult to put digital and non-digital into the same equation. But by going through the process, you begin a dialogue that leads to identifying competitive advantages, propositions, and trade-offs and isn t that what strategy is all about? Authors Martin Fabel, partner, Berlin martin.fabel@atkearney.com Andres Mendoza-Pena, partner, Chicago andres.mendozapena@atkearney.com 6

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