Here is a brief excerpt from an article written by Jacques Bughin, Laura LaBerge, and Anette Mellbye for the McKinsey Quarterly, published by McKinsey & Company. They explain how and why digital technology, despite its seeming ubiquity, has only begun to penetrate industries. As it continues its advance, the implications for revenues, profits, and opportunities will be dramatic. To read the complete article, check out other resources, learn more about the firm, obtain subscription information, and register to receive email alerts, please click here.
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As new markets emerge, profit pools shift, and digital technologies pervade more of everyday life, it’s easy to assume that the economy’s digitization is already far advanced. According to our latest research, however, the forces of digital have yet to become fully mainstream. On average, industries are less than 40 percent digitized, despite the relatively deep penetration of these technologies in media, retail, and high tech.
As digitization penetrates more fully, it will dampen revenue and profit growth for some, particularly the bottom quartile of companies, according to our research, while the top quartile captures disproportionate gains. Bold, tightly integrated digital strategies will be the biggest differentiator between companies that win and companies that don’t, and the biggest payouts will go to those that initiate digital disruptions. Fast-followers with operational excellence and superior organizational health won’t be far behind.
These findings emerged from a research effort to understand the nature, extent, and top-management implications of the progress of digitization. We tailored our efforts to examine its effects along multiple dimensions: products and services, marketing and distribution channels, business processes, supply chains, and new entrants at the ecosystem level (for details, see sidebar “About the research”). We sought to understand how economic performance will change as digitization continues its advance along these different dimensions. What are the best-performing companies doing in the face of rising pressure? Which approach is more important as digitization progresses: a great strategy with average execution or an average strategy with great execution?
The research-survey findings, taken together, amount to a clear mandate to act decisively, whether through the creation of new digital businesses or by reinventing the core of today’s strategic, operational, and organizational approaches.
More digitization — and performance pressure — ahead
According to our research, digitization has only begun to transform many industries (Exhibit 1). Its impact on the economic performance of companies, while already significant, is far from complete.
Exhibit 1 confirms what many executives may already suspect: by reducing economic friction, digitization enables competition that pressures revenue and profit growth. Current levels of digitization have already taken out, on average, up to six points of annual revenue and 4.5 points of growth in earnings before interest and taxes (EBIT). And there’s more pressure ahead, our research suggests, as digital penetration deepens (Exhibit 2).
While the prospect of declining growth rates is hardly encouraging, Exhibit 2 suggests why executives should bear in mind that these are average declines across all industries. Beyond the averages, we find that performance is distributed unequally, as digital further separates the high performers from the also-rans. This finding is consistent with a separate McKinsey research stream, which also shows that economic performance is extremely unequal. Strongly performing industries, according to that research, are three times more likely than others to generate market-beating economic profit. Poorly performing companies probably won’t thrive no matter which industry they compete in.
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Here is a direct link to the complete article.
Jacques Bughin is a director of the McKinsey Global Institute and a senior partner in McKinsey’s Brussels office; Laura LaBerge is a senior practice manager of Digital McKinsey and is based in the Stamford office; and Anette Mellbye is an associate partner in the London office.
The authors wish to thank Dan Lovallo, Soyoko Umeno, and Nicolas van Zeebroeck for their contributions to this article.