Here is a brief excerpt from an article co-authored by ‘Tunde Olanrewaju and Paul Willmott for the McKinsey Quarterly, published by McKinsey & Company. In it, they discuss the potential impact of digital technology varies widely by industry, but most enterprise leaders share an important challenge: how to get beyond the small share of the prize they are capturing today by looking for impact across the whole value chain. To read the complete article, check out other resources, learn more about the firm, and register to receive email updates and direct access to free resources, please click here.

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While online sales, social networking, and mobile applications have received most of the buzz when it comes to digital, our recent research finds that the greatest bottom-line impact may come where most companies aren’t looking—from cost savings and changes beyond the interface with customers. Our yearlong study shows that, across the industries we examined, the average bottom-line impact that can be realized from digital sales over the next five years is 20 percent: a significant opportunity to be sure, but much less than the bottom-line impact from cost reductions, which average 36 percent.

A too-narrow focus on distribution channels means organizations are getting only a small share of the full value that digital transformation can provide. That narrow focus may also be leaving organizations vulnerable to new entrants and agile incumbents that can translate operational improvements across the full value chain, combined with innovative operating models, into better, cheaper, more customized products, faster service, and an improved customer experience. For organizations that can step back and apply their digital investments in such a holistic way, the prize is significant.

Of course, not all industries face the same opportunities or the same threats. Hotels and airlines, for instance, are greatly exposed to the disruptive potential of digital, with our research showing that over the next five years their share of sales via digital channels will rise to 50 percent in mature markets. This will clearly disadvantage digital laggards. Large grocery chains, on the other hand, could be less affected. Their share of sales via digital channels is expected to rise to just 10 percent. With an expense base dominated by the cost of goods sold, the potential for digital to radically transform their economics is somewhat constrained. To capture the value available, organizations will need to assess the value at stake, invest proportionally to that value, and align their business and operating models accordingly.

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Investments should be proportional to the value at stake.

The clear message from our research is that companies need to fully embrace digital but should do so in line with their own unique opportunity. Why build a gleaming digital empire if more targeted improvements will suffice? Conversely, why dabble with small-ticket experiments when the value at stake can radically transform your bottom line? To assess and act on the digital-transformation opportunity, we recommend four steps.

o Estimate the value at stake. Companies need to get a clear handle on the digital-sales and cost-reduction opportunities available to them. Digital—and digitally influenced—sales potential should be assessed at the product level and checked against observed internal trends, as well as competitor performance. On the cost side, administrative and operational processes should be assessed for automation potential, and distribution should be rightsized to reflect digital-sales growth. The aggregate impact should be computed and turned into a granular set of digital targets to monitor progress and drive value capture.

o Prioritize. Most organizations don’t have the ability, resources, or risk tolerance to execute on more than two or three big opportunities at any one time. Be selective. Figure out what areas are likely to deliver the greatest return on investment and the best customer outcomes and start there. While digital requires some experimentation, too many ad hoc demos and showcases lead to scattershot investments that fail to deliver sustained value. One retailer, for instance, ended up with 25 subscale digital offerings by not culling in the right places.

o Take an end-to-end view. One financial-services firm built a world-class digital channel but failed to update the paper-based processes that supported it—processes that were prone to error. That false veneer of speed and efficiency eroded trust and turned off customers. The moral? Although it may seem counterintuitive, overinvestment in a slick front end that is not matched with the corresponding high-quality fulfillment that customers now expect may actually lead to increased customer frustration.

o Align the business portfolio accordingly. In the long run, some lines of business will simply be destroyed by digital. Hanging on and tweaking them is futile. Companies need to act purposefully and divest where it makes sense, identifying what holdings are likely to be cannibalized or likely to underperform in the new environment and sloughing them off. Conversely, some areas will clearly need new capabilities and assets, which companies often do not have the luxury to build up organically over time. One retailer used targeted acquisitions to rapidly build out its e-commerce capabilities, allowing it to focus on defining strategy and aspirations rather than tinkering with the “plumbing.”

Capturing the value of digital transformation will be important in most industries—and critical for survival in some. Business leaders must assess their own company’s value at stake, invest proportionally to address key opportunities and risks, and keep in mind that the greatest digital value may reside beyond their customer-facing functions.

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To read the complete article, please click here.

’Tunde Olanrewaju is a principal in McKinsey’s London office, where Paul Willmott is a director.