The case for digital reinvention 5

Structuring your digital reinvention

Leading companies invest more boldly in digital than their less well-performing counterparts do, according to McKinsey’s 2016 digital survey. They also invest more broadly by targeting each dimension in which digitization is rapidly advancing: products and distribution, business processes, supply chains, and ecosystems. As executives look to deepen and broaden the digital reinvention of their own companies, they may benefit from a structured process grouped around discovering, designing, delivering, and de-risking their digital investments (exhibit). Let’s look at each of these in turn.

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Since industry effects account for two-thirds of a company’s variation from average economic profit, according to McKinsey analysis, executives must discover the industry-level insights needed to identify sources of disruption as markets evolve. By grounding their insights in supply-and-demand shifts, they can more clearly recognize the vectors where disruption originates.¹ 1. Angus Dawson, Martin Hirt, and Jay Scanlan, “The economic essentials of digital strategy,” McKinsey Quarterly, March 2016. This reinvention phase also requires companies to assess the capabilities they must have to realize their strategic aspirations so that they can identify critical needs: cloud-based solutions, personalization and analytics, agile techniques, performance optimization, or something else.

Given the broad scope of the investment required, digital reinventions mandate an end-to-end design of business processes, with close attention to customer use cases, IT requirements, and organizational elements (such as structure, talent, incentives, and culture). The output of this work is a digital blueprint to address capability gaps and to recruit, develop, provide incentives for, and retain the necessary talent. The resulting implementation plan prioritizes the initiatives that generate the greatest economic value.

With these essentials in place, a digital reinvention must now deliver the capabilities needed to meet a company’s strategic goals. No organization will have all the capabilities it needs within its own walls. Executives must therefore develop an ecosystem of external teams, partners, suppliers, and customers, including a mix of platform players, delivery specialists, and niche outfits with specific industry expertise and capabilities. The reinvention team must not only play “air traffic controller” for the project’s numerous moving parts but also have the credibility and skill to solve problems along the many facets of the business.

Across all of these stages, executives can structure the process to minimize risk. Cybersecurity is one obvious area of focus. Companies can further de-risk their reinventions by embracing DevOps, in which teams learn to automate tests for software, establish systems that roll back failures in seconds, and make fixes without putting significant parts of the business at risk. 


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About the research

To go beyond the descriptive statistics that limit the relevance of so much survey research, we built a causal model of digital performance. The model’s first input, from the survey itself, conveyed the current level of digitization (as reported by companies) in each of five dimensions: products and services, marketing and distribution channels, business processes, supply chains, and new entrants at the ecosystem level. The second input from the survey was the level of response companies had taken, and planned to take, on those dimensions, as well as their core enabling strategic and organizational capabilities.

We then modeled average growth in revenue and earnings before interest and taxes (EBIT) for all companies in the sample at current and full digitization, based on survey respondents’ perceptions of their companies’ responses to digitization, postulating causal links, and calculating their magnitude through both linear- and probit-regression techniques, controlling for industry, company size, geography, and type of customer segment (B2B or B2C).

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Reproduced from Digital Mckinsey

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