Changes in technology over the last 200 years have drastically transformed the business landscape. Research carried out by Mckinsey has shown that digitisation is having the same drastic effect. Research carried out by Bughin and Catlin shows that digitisation can have a significantly negative impact on incumbent firms in a variety of industries depleting one third of earnings (before interest and tax) growth and almost as much as half the revenue growth, of companies that don’t embrace digital innovation.
There is still time for incumbents to make a new more profitable growth path if they can invest more in digital than their competitors and shake up their activity portfolios and strengthen other activities with new business models. Even though the benefits of ‘digital reinvention’ can be seen, only a small number of business have fully embraced it. Based on data from 2016, Bughin and Catlin found that only 16% of companies had taken action in relation to reinvention, meaning they had invested more money in a forceful digital strategy which was based on new platform business models and they also restructured their portfolios. Similar data from 2017 found that there was still less than 20% of companies working towards “digital reinvention”. It seems that even though incumbent firms are being warned about the importance of adapting, the majority are still failing to adjust to the digital era.
New research carried out by Mckinsey focuses on how to encourage digital reinvention. In their research they found six important factors which predict the probability of an incumbent choosing the path of reinventor. We will briefly outline each one in order of importance.
1-Obsess about instability on the horizon. Generally, incumbents are disrupted because either don’t notice or ignore signs of turbulence. However, businesses that understand the digital turbulence are the ones who are the keenest in going on the offensive. In their survey Bughin and Catlin found that one-fourth of high-tech organisations are on the offensive almost 3 times more than across all firms and sectors. Differences within industries where the understanding of risk guides action, are even more interesting. Bughin and Catlin found that when companies in the High-Tech industry determine that the model they are using at the moment is not viable and needs to be totally adapted, they digitally reinvent themselves 40% more frequently than the industry average. The catalyst for action varies by industry, for example high tech companies tend to make the change when cannibalisation hits 25% of their traditional revenue whilst in banking it is about 35%.
2- Understand all risks, not just the ones coming from start-ups. A significant mistake often made by incumbents is that they look at turbulence signals coming from digital entrants alone. However, in a given industry for each digital start-up it is very likely that there is also an incumbent reinventor. Organisations usually face a mix of traditional competitors, new entrants in their industry and entrants from other industries. As a result, the company is facing offensive attacks from three digital players as opposed to just one, and one of these attackers is a known competitor who had decided to break away from the established industry conduct.
Moreover, the more digitised the industry is, the more often incumbent companies have launched into digital reinvention. They average of three offensive players grows to 5.5 in high tech industries which are highly digitised, according to Buglin and Catlin. For a company to become a reinventor, they would be smart to track not only new digital entrants, but also traditional competitors who could become digital reinventors and should also watch out for established companies crossing into their industry.
3- Deliver a dual offensive (core & diversification). A lot of companies today are in the mindset of defend core business first and diversify second. A typical incumbent will usually only focus approximately 30% of resources on activities outside of its core business. One the other hand true digital reinventors allocate an equal amount of resources to outside core business and revising core business models. Buglin and Catlin found that focusing only on non-core activities could actually be a mistake.
Firstly, revenue tends to be diluted through diversification as it takes organisations time to create a presence in new fields. Second as we have already mentioned core businesses are still the main source of revenue for most companies, digital reinvention here could still result in an improved growth path. Buglin and Catlin found that when offensive actions are increased in both core and digital, revenue as well as profit growth is improved. It is not a huge effect as statistically it in only in the range of 0.5% to 1% of yearly revenue growth on top of base line. However, the effect is three times greater on profit, which would build up over the years.
4- First, correct leadership skills. A lot of incumbents still come across significant roadblocks during digitisation. This is to be expected as incumbents have become successful as a result of creating routines and competencies throughout the years. In their statistical analysis, Buglin and Catlin found that businesses are more likely to go down the road of digital reinvention when it’s leaders are fully committed to taking action for example, appointing specific managers to be in charge of the transformation
5- Make demand-centered business play a priority. Incumbents tend to see higher returns when they move business models to a platform play. This effect is even more significant for incumbents who show other signs of digital reinvention. A survey by Buglin and Catlin confirms this, but it also finds two new subtleties. Firstly, digital attackers choose the platform play as their main priority 2.5 times more often as incumbents, this is one of the reasons why digital attackers are frequently more successful than incumbents. Second is that a platform model which is re-centered on the demand side improves the chance of being a digital reinventor.
6 – Experiment with frontier technologies. Digital reinvention can only work if organisations master the correct digital technology architecture. Digital reinventors make sure that they have adopted the total range of digital technologies, and spread them across their company. Moreover they are already looking into emerging AI technologies such as investing in new generation smart robotics. Buglin and Catlin were surprised to find that there was no evidence of leapfrogging in their research data. Companies that kickstart AI without commanding the first wave of digital technologies such as social media are incredibly rare and do not get full return on their investments. Organisations need to have control over each generation of technology if they are to become digital reinventors.
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Bughin, J. Catlin, T. (2017) What Successful Digital Transformations Have in Common [Online] https://hbr.org/2017/12/what-successful-digital-transformations-have-in-common
LaBerge, L. Bughin, J. Mellbye,A. (2017) The case for digital reinvention [online] https://www.mckinsey.com/business-functions/digital-mckinsey/our-insights/the-case-for-digital-reinvention
McKinsey (2017) How digital reinventors are pulling away from the pack [Online] https://www.mckinsey.com/business-functions/digital-mckinsey/our-insights/how-digital-reinventors-are-pulling-away-from-the-pack
McKinsey (2017) How artificial intelligence can deliver real value to companies [Online] https://www.mckinsey.com/business-functions/mckinsey-analytics/our-insights/how-artificial-intelligence-can-deliver-real-value-to-companies