02 Oct How Digital is Your Industry?
How Digital is Your Industry?
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A recent report from McKinsey highlights the "Haves" and "Have-Mores" by industry when it comes to digitization. See where your industry falls on the road to digitization.
Earlier this year the Super Bowl turned 50, and took place at Levi Stadium in Santa Clara which is known as the most technologically advanced sports venue in the world. I remember attending a game a few years ago and using a cell phone was about as advanced as it got. Levi Stadium was built to provide 70,000 plus fans access to Wi-Fi at bandwidths that are 40 times greater than almost all other stadiums. They provide an app that uses this infrastructure to improve the customer experience outside of the 15 minutes of actual play time. The app guides them from the parking lot to the nearest entrance to their seats, it provides the location of the bathrooms with wait time information, 4 different replay views on every play and food and drink delivered to any seat.
People like me, as old as the Super Bowl, may wonder if we really need the 2 1/2 hours that we don't watch the actual play to be so occupied. Times have changed. When I was a kid if I missed my favorite show on TV I would have to wait until summer reruns to try to catch it. If some song, movie or book was in my head but I couldn't remember it I would just move on with life not knowing. Research papers for school meant spending hours at the library finding and then having to skim through books, magazines and microfiche, only to perhaps, find what I need. For my kids there are very few questions that cannot be answered in minutes or less. They watch what they want, when they want, where they want and as many times as they want. Research papers can be done with Google to find exactly what they need or at least narrow down the resources they need. For me this is amazing progress. For my kids, the minutes are too long, they can't find anything to watch, and they wonder why it take 2 days to get what they order online. Expectations are never met - they just move further out. As a consumer, I'm with my kids, and have no desire to go back to the way it was.
Consumers Drive Digitization
McKinsey Global institute's (MGI) report, Digital America: A Tale of the Haves and Have-Mores, measures the ongoing digitization of the overall US economy at the industry/sector level. The driving force behind this is the quick adaptation we as consumers are taking to digitization as highlighted in the graph from MGI below.
MGI doesn't look at digitization in industry as purely the investment in digital assets. That's only one of the three criteria they measured for each industry. The first one is a starting point but how well a company does in the second and third are really the measure of true digitization.
1. The digital assets - spending and stock
2. The usage of the assets - transactions, interactions between customers, firms and suppliers, internal business processes.
3. Worker usage - usage for work tasks
The Haves and the Have-Mores
ICT - Information and Communications Technology industry leads in digitization. Not surprising, considering it's the industry that develops and provides the hardware, technology and services related to digitization. The other leaders also make sense, Media and Finance, as they are consumer driven.
The chart below lists the other industries and the level of digitization measured by MGI for the three criteria.
Based on the study MGI found the US economy as a whole is reaching only 18 % of it's digital potential as some of the lagging industries are the largest in terms of GDP and employment. It's also easy to see the correlation between productivity growth and digitization as the leaders have the highest productivity growth. Some companies and industries are pulling away from the others not so much due to how much digital assets they have but more so how they are using ingenuity to deepen engagement with customers/suppliers and capabilities of their workers.
Why the Disparity?
MGI found four factors that contribute to how soon industries went digital:
1. Firm size - large firms are more likely to adopt digital tools than small firms outside the start ups that are based on digital technologies.
2. Complexity of operations - firms with long supply chains and many establishments are more likely to be more digital. Large retailers are leaders but the far many more mom and pop retailers are just getting started.
3. Knowledge intensity - where large percentage are highly educated or involve specialized workers.
4. Threat of competition - not necessarily the actual degree of competition but the prospect of competition giving rise to digital leaders.
Why Go Digital?
Going digital is allowing companies to increase operational efficiency, innovation, customer engagement and productivity. It helps them reinvent core processes, create new business models and put the customer at the center of the business. Some of the impacts highlighted by MGI:
- Digital assets determine competitive advantage - some sectors are moving from physical to digital products where massive data stores are prized assets such as those created by Facebook, iTunes, Amazon and LinkedIn. Traditional companies such as automotive are shifting from the product being defined by the car to the experience the car provides.
- Information availability and transparency - consumers want to research and make their own decisions quickly. Companies like Expedia and Priceline have disrupted and replaced traditional travel agencies.
- Low marginal costs and network effects - Digital companies like Facebook can grow in 10 years to a size that traditionally took 50 years enjoying gross margins as much as 80%.
- Industry boundaries get blurred - Amazon started out selling books but now competes with Walmart, Netflix, Google, Microsoft and even SpaceX within each very distinct industry.
The Benefits are Enormous
MGI looked at the future economic growth focusing on three areas: labor market, capital efficiency and multifactor productivity. The potential for growth by 2025 is shown in the chart below:
Companies that become more digital in terms of assets, business usage and worker usage are separating themselves from their competition. Consumers are driving this forward so the industries that are initially leading the trend are the ones that directly serve consumers - ICT, media and finance. From the US economy perspective, we have just begun, as only 18% of it's digital potential has been achieved. The benefits to the economy may be as much as $ 2.2 trillion annually by 2025. At the micro level, the benefits to companies are increased revenue, profit and survival. In the short term, digitization can mean disruption for both companies and workers but, in the long run, those that are able to make the transition will see higher revenue, profit for the company and higher wages for their workers.
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