steven spittaels june...

Digital transformation – separating myths from reality

Steven Spittaels

June 2017

REINVENTING YOUR BUSINESS TOGETHER

| BIG DATA | ANALYTICS | INNOVATION |

2 McKinsey & Company

Digital transformation is hard

The goalposts keep moving, forcing questions on

strategy and business models.

It is unclear who should own the digital agenda.

Acquiring and releasing talent is painful.

The business case does not add up.

The risks are hard to assess.

Transformation takes longer than the time available.


Executives at incumbents are seeking advice from Silicon Valley


Here are some of the things you might hear in Silicon Valley... but which to believe

1

2

3

4

5

6

7

Digital is disrupting every sector

Disruptors have the upper hand

Winning requires bold

investment in transformation

Agility is the best strategy Culture change is

critical

CEOs must lead the digital

agenda

Building new businesses is

better than reshaping old

ones


Myth 1 Digital is disrupting every sector.


Every sector is being disrupted

RETAIL

LEISURE

SHIPPING

MANUFACTURING

TRANSPORT

INCUMBENT ATTACKER


Digital is even disrupting sectors that are traditionally immune to attackers

Market capitalisation1 $ Billions

SOURCE: Capital IQ, Skift Research

30

35

25

20

10

0

15

5

2014 15 2016

1 Valuation insteaed of Market capitalization for Airbnb


Myth #1 Digital is disrupting every sector.

• Digital disruption is affecting every sector

• An understanding of your sector’s pace

and scale of disruption will determine

appropriate action


Myth #2 Disrupters have the upper hand.


Estimated market share of new digital entrants/adjacencies Percent

8

8

13

14

15

16

17

18

25

26

Consumer packaged goods

Automotive and assembly

Transportation

Finance and Insurance

Retail

Professional services

Telecom

Information Technology

Healthcare

Media

SOURCE: 2016 McKinsey Digital Survey

Disruptors are taking share in most sectors


What they did

Shifted from commoditized manufacturing to customized

services

Deployed next generation technology to help customer

develop agronomic insights

But incumbents have also had significant digital success

Making

tractors

Online services

for farmers

Old business model New verticals

SOURCE: Operator website; Annual report; Press search


Myth #2 Disrupters have the upper hand.

• There is much incumbents can learn

from disruptors

• Incumbents have many capabilities that

can be deployed to win


Myth #3 Winning requires bold investment in transformation.


4

7%

11%

6 5 3 1 2

There is a clear return on digital investment


Level of digital investment

Significant digital

investment1

Little digital

investment

EBIT growth

Revenue growth

1 Assumes that investment is digital is proportional to level of disruption achieved

Impact of digital boldness on Revenue and EBIT

% growth


But investment needs to be selective – only half the firms are making a clear return on capital invested in digital

1 Assumes average cost of capital of 10%


51

24

25

Negative ROI

ROI is more than

cost of capital

ROI is less than

cost of capital1

Digital initiatives ROI

Percent of companies


Myth #3 Winning requires bold investment in transformation.

• Prioritise digital and make bold

strategic investments to win

• Be selective on investments to ensure

healthy return on capital


Myth #4 Agility is the best strategy.


Many firms are starting to consider the Spotify agile model

Agile model Traditional model

DevOps

Design

Mortgage

origination

CEO CEO

• Siloed teams with management

overhead struggle to react

quickly to changes in the

market

• Cross-functional teams with end-

to-end ownership, closer to

customer and adapt quickly

Current

accounts

19 McKinsey & Company SOURCE: Operator website; Annual report; Press search

% of digital revenues

14 13

46% 47%

2015

30%

12 11 2010

42% 35% 32%

Example acquisitions

Why strategy was important

• Extreme pace of market

disruption would have made a

purely organic agile response

ineffective

• Strategy allowed identification

of high potential segments,

e.g., B2B & services

What they did

Divested 4 physical

businesses & acquired 22

digital ones

DMGT/Daily Mail predicted the acceleration of physical media disruption


Myth #4 Agility is the best strategy. • A clear digital strategy is critical to set

direction, agility is important in

realising goals


Myth #5 Building new businesses is better than reshaping old ones.


There are multiple options

Approach Description Example

Brownfield

start-up

Create independent

start-up

Acquire and

integrate Acquire new digital

capabilities and

integrate into existing

operations

Transform the

core

Internal

organisational

change

Rebalance

portfolio

Rebalance from

declining to growing

segments

Why this approach was ideal…

Allow truly disruptive behaviour

while benefiting from parent

company resources

Enable rapid scale up of digital

capabilities and targeting on non-

traditional demographics

Leverage key assets such as

existing customer base and core

banking systems

Change strategic direction of

entire company and exit

underperforming businesses


Myth #5 Building new businesses is better than reshaping old ones. • Choose the right transformation

approach


Myth #6 CEOs must lead the digital agenda.

25 McKinsey & Company SOURCE: Operator website; Annual report; Press search

Schibsted was

competing in a

shrinking market…

But there are many successful cases where the CEO is not leading

• Industry-wide newspaper

print ad revenues

decreased by 36% or

$16bn (2009-14)

…when their Digital

Transformation EVP led

a major initiative…

• Invested ~EUR 2.5 bn into online

business

• Acquired mature digital

companies to enter new markets

…to transform them

into a global digital

media & advertising

player

• Grew online classified revenue to

EUR 543m

• Increased presence across 44+

countries


Evidence suggests that non-CEO support may be even more critical to program success

0.51 0.49 0.480.44

0.40

0.510.55

CIO CDO CFO BU head Board of

Directors

CEO CMO

Correlation of executive support and digital success1


1 Success defined as top quartile based on digital ROI, Revenue and EBIT


Myth #6 CEOs must lead the digital agenda. • Digital needs a clear leader, but

does not always have to be CEO

• Digital is always a team effort –

top team must be fully aligned


Myth #7 Culture change is critical.


Different culture styles – Core vs new business

Customer acceptance unclear

"Trial and error"

"Learning by doing"

Experimenting

Flexibility

Creative approaches

Developing new businesses

Customer usage/segments known

Proven processes

Scale effects and experience

Efficiency

Focus

Established approaches

Growing the core

Foundations – Organizing for Digital

2 different leadership styles

and different KPIs required


Myth #7 Culture change is critical. • Culture is one of the biggest barriers to

digital transformation

• Culture change starts with senior leaders


7 Myths - Proven or Disproved?

Digital is disrupting every sector 1

3 Winning requires bold investment in

transformation

7 Culture change is critical

2 Disruptors have the upper hand

4 Agility is the best strategy

5 Building new businesses is better

than reshaping old ones

6 CEOs must lead the digital agenda


Marketing & Sales 4.0

Digital frontend

processes

Integrated physical

and digital experience

Digital marketing and

social media

Omni-channel

Customer relationship and

lifecycle management

…

Advanced commercial

model

Operations 4.0

Digital support

functions, e.g., HR

Digital and Open

Innovation

Product Design

Predictive

maintenance

End-to-end digitization

Digital procurement

Digital manufacturing

…

Automation

SOURCE: Digital McKinsey

What you can take away – if you have a photographic memory

Data security

Big data and advanced

analytics

System and data archi-

tecture (2-speed IT)

Devices

Technology Organization and culture

2-speed org: agility

and waterfall

Culture: cross-functional

and flat hierarchies

Digital talent

Partner management

Connectivity

Thinsk about step-outs - examples

Digital agriculture

Distributed energy

Connected

home/building

Digital commerce

Connected car and

autonomous driving

E-government and

e-education Industry 4.0

Digital logistics Digital media and

entertainment

Digital banking/FinTech and Digital insurance

Digital patient and

e-health

Smart city/

infrastructure Build new

ecosystems

Develop

business

architecture

Strengthen

foundation


What can you take away – for people like me


You need to

take action on

digital

immediately

1

Get the

strategy and

organisational

structure right

before you

start spending

2

Make sure you

get wide C-

level support

(including the

CEO)

3

Culture

change is non-

negotiable

4

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