Most of the talk regarding the potential of digital technology for business has been centred around online sales, social networking and mobile applications. However, writing for McKinsey Insights & Publications, Tunde Olanrewaju and Paul Willmott insist that the biggest impact on the bottom line could come from cost savings and changes beyond the interface with customers.
Having conducted a year-long study, the authors reveal that across the industries they examined, the potential bottom-line impact from digital sales over the next five years averages at 20%, compared with 36% from cost reductions.
In order to capture the available value, organisations need to assess the value at stake, invest a suitable proportion of that value and align their business and operating models appropriately.
DIGITAL TRANSFORMATION AND BUSINESS VALUE
According to Olanrewaju and Willmott, there are four ways in which technology drives value in business: enhanced connectivity, automation of manual tasks, improved decision making, and product or service innovation.
The authors observe that tools with the potential to enable this value, such as big-data analytics, apps, workflow systems and cloud platforms, are often used too selectively in narrow pockets of an organisation – sales and marketing in particular. This means opportunities are missed for gaining maximum advantage from digital investments.
For example, insights from big data “can be used to enhance customer targeting and adjust pricing in real time, but they can also be used for better forecasting of operational-capacity needs to boost asset and resource utilisation”.
Similarly, while app technology is usually focused on improving customer interactions, it can also be used for a broad range of internal interactions, such as HR and procurement requests.
BOTTOM-LINE VARIATIONS
According to Olanrewaju and Willmott, there are three clusters of industries that face varying levels of disruption due to digital technology:
1) Long-term multichannel. Examples of these industries include grocery retailing and apparel. The authors report that in the medium term, it’s unlikely there will be a wholesale shift to a fully digital model. They predict that digital sales volumes will remain relatively low, despite innovations such as highly functional e-commerce services and digitally enabled store formats.
2) Eye of the digital storm. These are industries for which digital is likely to have a more transformative effect, such as retail banking, mobile telecommunications and property and casualty insurance.
Because they offer virtual rather than physical products, their cost base is largely focused on processing and servicing, making them more susceptible to digital transformation.
3) New digital normal. These industries, such as music retailing, consumer-electronics retailing, airlines and hotels, have already experienced severe digital disruption, with business and operating models permanently transformed. The authors believe there will be further price transparency and margin compression but also opportunities for real-time price changes and the targeting of offers.
PROPORTIONAL INVESTMENT
The authors believe the message from their research is that companies should “fully embrace digital but should do so in line with their own unique opportunity”.
In order to assess and act upon this opportunity, they recommend the following four steps:
1) Estimate the value at stake. Get a clear idea of the potential for digital sales and cost reduction.
2) Prioritise. The authors recommend taking a selective approach, since the majority of organisations don’t have the resources or capacity to execute more than two or three big opportunities at once. Assess which areas are capable of delivering the largest return on investment and the best customer outcomes.
3) Take an end-to-end view. Olanrewaju and Willmott cite the example of a financial services company that built a world-class digital channel but neglected to update the error-prone paper-based processes supporting it.
4) Align the business portfolio accordingly. Some business lines will be made obsolete by digital and there is no point in clinging on to them or tweaking them in an attempt to make them relevant.