The case for digital reinvention 2

This finding 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).

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While the prospect of declining growth rates is hardly encouraging, 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.

At the current level of digitization, median companies, which secure three additional points of revenue and EBIT growth, do better than average ones, presumably because the long tail of companies hit hard by digitization pulls down the mean. But our survey results suggest that as digital increases economic pressure, all companies, no matter what their position on the performance curve may be, will be affected.

Uneven returns on investment

That economic pressure will make it increasingly critical for executives to pay careful heed to where—and not just how—they compete and to monitor closely the return on their digital investments. So far, the results are uneven. Exhibit 3 shows returns distributed unequally: some players in every industry are earning outsized returns, while many others in the same industries are experiencing returns below the cost of capital. 

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These findings suggest that some companies are investing in the wrong places or investing too much (or too little) in the right ones—or simply that their returns on digital investments are being competed away or transferred to consumers. On the other hand, the fact that high performers exist in every industry (as we’ll discuss further in a moment) indicates that some companies are getting it right—benefiting, for example, from cross-industry transfers, as when technology companies capture value in the media sector.

Where to make your digital investments

Improving the ROI of digital investments requires precise targeting along the dimensions where digitization is proceeding. Digital has widely expanded the number of available investment options, and simply spreading the same amount of resources across them is a losing proposition. In our research, we measured five separate dimensions of digitization’s advance into industries: products and services, marketing and distribution channels, business processes, supply chains, and new entrants acting in ecosystems.

How fully each of these dimensions has advanced, and the actions companies are taking in response, differ according to the dimension in question. And there appear to be mismatches between opportunities and investments. Those mismatches reflect advancing digitization’s uneven effect on revenue and profit growth, because of differences among dimensions as well as among industries. Exhibit 4 describes the rate of change in revenue and EBIT growth that appears to be occurring as industries progress toward full digitization. This picture, combining the data for all of the industries we studied, reveals that today’s average level of digitization, shown by the dotted vertical line, differs for each dimension. Products and services are more digitized, supply chains less so. 

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To model the potential effects of full digitization on economic performance, we linked the revenue and EBIT growth of companies to a given dimension’s digitization rate, leaving everything else equal. The results confirm that digitization’s effects depend on where you look. Some dimensions take a bigger bite out of revenue and profit growth, while others are digitizing faster. This makes intuitive sense. As platforms transform industry ecosystems, for example, revenues grow—even as platform-based competitors put pressure on profits. As companies digitize business processes, profits increase, even though little momentum in top-line growth accompanies them.

The biggest future impact on revenue and EBIT growth, as Exhibit 4 shows, is set to occur through the digitization of supply chains. In this dimension, full digitization contributes two-thirds (6.8 percentage points of 10.2 percent) of the total projected hit to annual revenue growth and more than 75 percent (9.4 out of 12 percent) to annual EBIT growth.

Despite the supply chain’s potential impact on the growth of revenues and profits, survey respondents say that their companies aren’t yet investing heavily in this dimension. Only 2 percent, in fact, report that supply chains are the focus of their forward-looking digital strategies (Exhibit 5), though headlining examples such as Airbnb and Uber demonstrate the power of tapping previously inaccessible sources of supply (sharing rides or rooms, respectively) and bringing them to market. Similarly, there is little investment in the ecosystems dimension, where hyperscale businesses such as Alibaba, Amazon, Google, and Tencent are pushing digitization most radically, often entering one industry and leveraging platforms to create collateral damage in others. 

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