Here is an excerpt from an article that provides results of an important research study shared in the McKinsey Quarterly, published by McKinsey & Company. To read the complete article, check out others, learn more about the firm, and sign up for email alerts, please click here.
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McKinsey research shows that established companies win by addressing digital strategy’s dual imperatives: building new digital businesses while digitizing legacy operations.
For established companie in an increasingly digital world, making incremental changes to long-standing business models isn’t enough to succeed. To sustain growth in the face of disruptive threats from digital challengers, incumbent companies must overcome two challenges at the same time: innovating with new digital businesses while also digitizing core holdings. The findings of multiple McKinsey Global Surveys on digitization show the defining elements of strategies and operating models that are built for this duality of digital.
It pays to master the duality of digital
Balancing the dual imperatives of digital can be difficult but exceptionally rewarding. According to respondents to a McKinsey survey on digital strategy, digitized incumbents—companies that are more than 20 percent digital and are launching new digital businesses while transforming the core—are twice as likely as traditional incumbents to experience organic-revenue growth of 25 percent or higher (see sidebar, “The digital landscape”).
What’s more, respondents at digitized incumbents say that their organizations have a strong position in terms of market share. Digitized incumbents command a 20 percent share, on average, of their core markets. That is five percentage points more than what respondents at traditional incumbents report, and four times what respondents at digital natives do.
As appealing as these advantages appear, the typical response to digital is underwhelming.
Three bold moves help winners create digital businesses
The best economic performers—that is, companies with organic revenue growth of 25 percent or higher during the past three years—are more likely than other companies to work on creating new digital businesses, according to a separate survey. While not all digitized incumbents are top economic performers, they are much more likely to be in that elite group than traditional incumbents are.
Three bold strategic moves, all geared to building digital businesses, distinguish the top economic performers from all other companies.
From a financial standpoint, putting extra effort and expense into business and product innovation makes sense. Other McKinsey analysis shows that investments in these digital plays yield twice the returns of investments in digitizing core businesses.
Digitizing the core means transforming processes as well as technology
But make no mistake: digitizing the core business is crucial, even though the direct financial returns are comparatively modest. Most companies can’t simply walk away from a core business. They need to digitize it even as they innovate with new models.
When companies digitize the core business, our research shows, strong IT capabilities help enormously. According to respondents in a survey on the IT function’s effectiveness, companies with top performance on core IT tasks have made more progress than other companies in becoming fully digital and mastering key digital activities.
Respondents at digitized incumbents are also more likely than their counterparts at traditional companies to report using basic and advanced digital technologies across the enterprise.
Survey results on the use of artificial intelligence (AI) further illustrate what businesses can achieve by deploying advanced technologies. Among respondents at companies that have embedded or piloted AI in one or more functions or business units, 78 percent say that it has created significant or moderate value.
To capture the benefit of digital technologies, companies must integrate them into day-to-day processes. In a survey on success factors for digital transformations, some respondents reported that their companies made the use of digital tools a new organizational norm during the transformation. These respondents were more likely than others to say that the transformation had been a success: in other words, that it had brought about sustained improvements in performance.
The pace and degree of disruption can vary greatly from one established company to another, and even among the businesses in a company’s portfolio. To respond to these conditions, incumbents must mount a well-calibrated, dual effort to create new models and digitize current businesses. Executives can begin plotting a course forward by assessing where their companies fall along the digital spectrum.