The Case for Digital Reinvention

In this report, McKinsey identifies five dimensions of Digitization that are affecting businesses today:

  1. Digitization of products and services – putting intelligence into the things you offer your customers
  2. Digitization of marketing and distribution – gaining insight into individual customer behaviors, motivations, needs and desires
  3. Digitization of ecosystems – the rise of platforms and their use as the foundation for new offerings
  4. Digitization of business processes – making internal operations more intelligent from manufacturing to legal, HR and R&D
  5. Digitization of supply chains – Increased control, efficiency, security and performance of globally connected, multi-node supply chains.

Currently, about 49% of companies are focusing on digitizing their markets and distribution, 21% on digitizing their products and services, 14% on their business processes, 13% on their ecosystems and only 2% their supply chains.

The digitization that is happening in these five areas is putting downward pressure on companies’ revenues and profits, respectively estimated by McKinsey to be on average -12% and -10%. In other words, if a company just keeps executing the way it is now, it can expect that its revenue and profits will decrease by double digits over time. This is due to the increasing capability of competitors and the increasing efficiency (or decreasing ‘friction’) of business in general.

Companies can, and have, responded to this by undertaking digitization efforts themselves – with mixed results. A very few companies can be leading disruptors and reap great rewards. A larger number of companies can be fast followers and get ahead of the negative revenue and earnings pressure. The remaining companies will struggle to keep up and fall further behind.

Some of the other conclusions of this report are:

  • The forces of digitization have yet to become fully mainstream.
  • Bold, tightly integrated digital strategies will be the biggest differentiator between companies that win and companies that don’t.
  • The biggest payouts will go to those who initiate digital disruptions.

Performance is distributed unequally, as digital further separates the high-performers from the also-rans.

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