Strategy for a digital world

Drive differentiation with technology and digital.

The first of these classic moves describes the business-model innovations and pricing advantages that improve a company’s gross margin. To jump into the top quintile of performance on the power curve of economic profit, your gross margin needs to reach the top 30 percent in your industry over a ten-year period. As digital technology becomes ever more important, the sources of these innovations and advantages are now shifting from traditional sweet spots into less familiar terrain, such as using digital technology to innovate products, services, and business models.

The second classic move relates to productivity. Digital disruption—for example, the ability of smaller players to leverage the public cloud and access large-scale data sets—is now changing the math on productivity in many industries. Consider how the data-driven automation of insurance-claim filing has, in some instances, reduced costs by as much as 70 percent in that industry. Across the board, executive teams should now assume the productivity bar has shifted from the leanest of their incumbent peers to that of greenfield, digital-native attackers boasting a high degree of digitization, straight-through processing, and largely variable cost bases.

As they look to meet this new bar, legacy companies may find that remote working and the mass migration to digital channels has helped them discover unexpected savings from cheaper customer interactions and—in some cases—the ability to let go of real estate as they shift toward hybrid working. Companies have also accelerated their tech enablement by moving toward agile operating models across the organization; by automating the cloud-based provisioning of infrastructure and delivery of applications;  and by using AI to optimize retail footprints and sales forces, among other examples.

Automation, for example, is becoming increasingly prevalent, with rapid advances since the early days of industrial applications and robotic process automation. For instance, several US grocery stores took advantage of the pandemic-driven surge in sales and the need to decrease the number of people in store at a given time to invest in robots that helped clean floors and shelve inventory—investments that could provide these grocers longer-term cost savings. We see this happening in B2B as well, for example, with Schneider Electric’s acquisition of industrial-automation provider ProLeit, and Microsoft’s acquisition of a software robotic-automation platform.

Of course, productivity gains aren’t all about cutting costs. Productivity improvements from technology investments also arise through innovation. High average productivity, after all, comes about through some combination of producing the same or more output for less input, or higher output from the same or fewer inputs. Digital winners typically rely on hype scalable software-based business models that can rapidly scale up the number of users and revenue with only minimal changes to the underlying cost structure.

Further reading: https://www.mckinsey.com/business-functions/mckinsey-digital/our-insights/strategy-for-a-digital-world?cid=other-eml-nsl-mip-mck&hlkid=3db5004210ba4882940dfdb41ff1a565&hctky=11705927&hdpid=a58951a2-02de-4c23-8307-7431f1f1c021