Lloyd Miller

N OV E M B E R 2 013

Finding your digital sweet spot

The potential impact of digital technology varies widely by industry, but most enterprise
leaders share an important challenge: how to get beyond the small share of the prize
they are capturing today by looking for impact across the whole value chain.

Tunde Olanrewaju
and Paul Willmott

While online sales, social networking, and

translate operational improvements across

mobile applications have received most of

the full value chain, combined with innovative

the buzz when it comes to digital, our recent

operating models, into better, cheaper, more

research finds that the greatest bottom-line

customized products, faster service, and an

impact may come where most companies

improved customer experience. For organi

arent lookingfrom cost savings and changes

zations that can step back and apply their

beyond the interface with customers. Our

digital investments in such a holistic way,

yearlong study shows that, across the indus-

the prize is significant.

tries we examined, the average bottom-line

impact that can be realized from digital

Of course, not all industries face the same

sales over the next five years is 20 percent:

opportunities or the same threats. Hotels and

a significant opportunity to be sure, but

airlines, for instance, are greatly exposed to the

much less than the bottom-line impact from

disruptive potential of digital, with our research

cost reductions, which average 36 percent.

showing that over the next five years their share

(See sidebar, Calculating the economic

of sales via digital channels will rise to 50 per-

impact of digital transformation.)

cent in mature markets. This will clearly disadvantage digital laggards. Large grocery chains,

A too-narrow focus on distribution channels

on the other hand, could be less affected. Their

means organizations are getting only a small

share of sales via digital channels is expected

share of the full value that digital transfor

to rise to just 10 percent. With an expense

mation can provide. That narrow focus may

base dominated by the cost of goods sold,

also be leaving organizations vulnerable to

the potential for digital to radically transform

new entrants and agile incumbents that can

their economics is somewhat constrained.

To capture the value available, organizations

enabling the automation of previously

will need to assess the value at stake, invest

labor-intensive fulfillment processes. When

proportionally to that value, and align their

used well, digital expands the improvements

business and operating models accordingly.

delivered in one part of an organization

across the whole value chain.

How digital transformation

drives business value

Digitals bottom-line value

varies by industry

Technology drives value in businesses in four

ways: enhanced connectivity, automation

Digital will be highly disruptive to some

of manual tasks, improved decision making,

industries, affecting not only revenue and

and product or service innovation (exhibit).

cost structures but also shaking up the core

Tools such as big-data analytics, apps, work-

business and operating models. The music-

flow systems, and cloud platformsall of

retailing industry has already been down

which enable this valueare too often applied

this path. Others are nosing into the eye

selectively by businesses in narrow pockets

of the storm. Some sectors may see less

of their organization, particularly in sales

dramatic but still important shifts. We see

and marketing.

three clusters of industries that will face

varying levels of change.

This creates missed opportunities to gain

maximum advantage from digital investments.

Long-term multichannel. For these indus-

Big-data insights, for example, can be used

tries, there is unlikely to be a wholesale

to enhance customer targeting and adjust

shift to a fully digital model in the medium

pricing in real time, but they can also be used

term. Examples include grocery retailing

for better forecasting of operational-capacity

and apparel. Despite innovations, such as

needs to boost asset and resource utilization.

new digitally enabled store formats, in-store

Likewise, app technology that is typically

digital kiosks, and highly functional e-com-

focused on improving customer interactions

merce offerings, digital-sales volumes will

can also be applied to a broad range of

likely remain relatively low. We project that

internal interactions, such as HR and procure-

10 percent of grocery and 24 percent of

ment requests. Smarter and more complete

apparel sales are likely to be online by 2018.

application of digital investments not only

(The average for sectors in this cluster is

delivers concrete improvements within a given

20 percent.) One reason for their modest

function but can also unlock trapped value

online-sales growth is that grocery retail

by improving information flows and reducing

and apparel both have persistent consumer

waste across the organization. For example,

behaviors and habits. In many categories,

one bank found that upgrading the digital

shopping is a highly social experience, and

channel drove a significant improvement

social-media networking to share purchases

in customer-data richness and quality, which

is not a sufficient substitute for in-person

increased marketing effectiveness and drove

interaction. Digital capabilities in the near

better lending decisions by reducing risk and

term can only go so far in simulating the

McKinsey On Business Technology 2013 Digital Value Insights

Exhibit 1 of 1

Exhibit
Digital can reshape every aspect of the modern enterprise.
Seamless multichannel experience
Customer
experience
Improved, real-time
management
information
systems and
Enhanced
decision
corporate
making
control
Seamless
integration
into third
parties

Improved
targeting with
customer
insights
Embedded/
automated
controls and
risk profiling

Whenever, wherever service propositions

Product
and service
innovation
Decision making
based on big data
and advanced
analytics

Connectivity
with customers,
colleagues,
and suppliers

Automation
of manual activity,
replacing labor
with technology

Innovation
of products,
business models,
and operating
models

Risk
optimization

Digital
fulfillment

New digital
products
and services
Cocreation of
new products

Digital
marketing with
higher return
Distribution
on investment
and marketing
Digital
and sales
augmentation
of traditional
channels

Full straight-through processing

and automatic provisioning
Virtual servicing and administration

Source: Expert interviews; McKinsey analysis

experience of trying on clothes or choosing

their traditional offerings to transform the

fruit and vegetables. In addition, these sectors

customer experience. Given the typically tight

have cost structures that are less amenable to

margins in these industries, digital leaders can

digitally driven transformation. For example,

significantly boost profitability and command

most of the costs of a large grocery retailer

a clear performance advantage.

are the goods it sells. However, this is only

half the story; we see a large opportunity

Eye of the digital storm. These industries

for savvy competitors to drive digitally influ-

are likely to see a more transformative effect

enced sales within their physical footprint by

from digital. Retail banking, property-and-

leveraging highly targeted promotions, mobile

casualty insurance, and mobile telecommu

apps with prebuilt shopping lists, and other

nications offer virtual rather than physical

conveniences that combine seamlessly with

products and, as such, have a cost base largely

focused on processing and servicing, making

fending off new digital entrants. The onus

them highly susceptible to digital transfor

will be on the companies to act decisively

mation. We project digital-channel use in

and quickly, streamlining and repurposing

these sectors to average 35 percent and total

their physical distribution and redirecting

cost-base potential reductions to average

the freed-up capital to build out their digital-

20 percent. Companies in these sectors have

channel capabilities. There will also need

their work cut out for them as they absorb the

to be a concerted focus on automating core

business-model changes taking place while

activities to boost self-service and straight

Calculating the economic impact of digital transformation

Digital transformation can make a big difference. To calculate just how big, we examined
ten industries: retail banking, mobile telecommunications, airlines, consumer-electronics
retailing, apparel, property-and-casualty
insurance, hotels, supermarkets, pay-TV
broadcasting, and newspaper publishing.
To get at costs, we recut the expense categories of these sectors on an apples-to-apples
basis and computed the difference that fuller
use of digital channels, greater automation,
better analytics, and innovative virtual
modelssuch as remote freelance call-center
workersmight yield, using metrics such as
reduced head count and improved productivity. On automation, for instance, we assessed
the typical distribution of human resources
across processes in a service-operations
function and identified which labor-intensive
activities could be done by technology. For
sales, we compared the sales outperformance
of selected digital leaders in each sector
against the industry average, forecasting the
likely digital advantage such companies could
build up over the next five years. Combining
this analysis with online-penetration growth
rates in each industry and average margins,
we were able to estimate bottom-line impact.

On average across the sectors we examined,

we found that digital transformation can
boost the bottom line by more than 50
percent over the next five years for com
panies that pull all levers. This ranged from
20 percent in pay-TV broadcasting to more
than 200 percent in music retailing, with
most sectors clustered in the 30 to 60
percent range. These headline figures are
underpinned by a few critical insights:
most sectors are expected to double their
share of sales coming from digital channels
over the next five years. Additionally, digital leaders are on average growing their
digital sales at 2.5 times that of their sector
peers, with as high as a 9 times multiple seen
in newspapers, for instance. Furthermore,
we found that companies can, on average,
cut the total cost base by 9 percent, resulting
in average bottom-line impact of 36 percent,
through shifting customer interactions to
digital channels and automating paper-heavy
processes. This ranged from 3 percent of
total costs in grocery retailing to 20 percent
in retail bankingsubstantial impact, which
passes directly to the bottom line and
reshapes the economics of competition
across these sectors.

different expense structures have emerged.

For example, iTunes has no physical distribution, and even asset-heavy industries such as
airlines are using automation to cut customerinteraction costs (for example, with e-check-in
and automated departure gates). These industries will need to pursue automation in new
areas; for instance, companies can leverage bigdata analytics to boost supply-chain efficiency
and improve asset utilization (through smarter
maintenance scheduling, for example).
Companies in this cluster that succeed will be
those that recognize the long-term trajectory
of their current model and make bold bets
through transaction processing. Such change

to reshape themselves accordingly. Given

may come with a stiff price tag, but these

the typically thin margins in these industries,

industries may have little choice but to step

even reducing costs by a few percent will

up in a sustained way since the trajectory

translate into significant bottom-line impact.

suggests they are headed toward greater

disruption from digital.

New digital normal. These are the industries

that are visibly going through or have com-

Investments should be
proportional to the value
at stake

pleted several rounds of digital disruption.

Sectors like music retailing, consumer-elec-

The clear message from our research is that

tronics retailing, airlines, and hotels have seen

companies need to fully embrace digital but

their business and operating models perma-

should do so in line with their own unique

nently changed. They have experienced the

opportunity. Why build a gleaming digital

double whammy of digital enabling very

different sales trajectories and altering cost

empire if more targeted improvements will

suffice? Conversely, why dabble with small-

structures. For instance, digital sales for music

ticket experiments when the value at stake

retailing and consumer-electronics retailing

can radically transform your bottom line? To

is expected to exceed two-thirds of these two

assess and act on the digital-transformation

industries total sales in five years time. This

opportunity, we recommend four steps.

will continue to radically reshape the distri

bution model for companies in this cluster.

1. Estimate the value at stake. Companies

Such companies can also expect further price

need to get a clear handle on the digital-sales

transparency and margin compression but

and cost-reduction opportunities available to

will have more opportunities for real-time

them. Digitaland digitally influencedsales

price changes and targeting of offers based on

potential should be assessed at the product

an increased ability to truly understand their

level and checked against observed internal

customers. On the cost side, fundamentally

trends, as well as competitor performance.

On the cost side, administrative and oper

ational processes should be assessed for
automation potential, and distribution should
be rightsized to reflect digital-sales growth.
The aggregate impact should be computed
and turned into a granular set of digital targets
to monitor progress and drive value capture.

2. Prioritize. Most organizations dont have

the ability, resources, or risk tolerance
to execute on more than two or three big
opportunities at any one time. Be selective.
Figure out what areas are likely to deliver the
greatest return on investment and the best
customer outcomes and start there. While

on and tweaking them is futile. Companies

digital requires some experimentation, too

need to act purposefully and divest where it

many ad hoc demos and showcases lead to

makes sense, identifying what holdings are

scattershot investments that fail to deliver

likely to be cannibalized or likely to under

sustained value. One retailer, for instance,

perform in the new environment and slough-

ended up with 25 subscale digital offerings

ing them off. Conversely, some areas will

by not culling in the right places.

clearly need new capabilities and assets, which

companies often do not have the luxury to

3. Take an end-to-end view. One financial-

build up organically over time. One retailer

services firm built a world-class digital chan-

used targeted acquisitions to rapidly build

nel but failed to update the paper-based

out its e-commerce capabilities, allowing it

processes that supported itprocesses that

to focus on defining strategy and aspirations

were prone to error. That false veneer of

rather than tinkering with the plumbing.

speed and efficiency eroded trust and turned

off customers. The moral? Although it may
seem counterintuitive, overinvestment in a

. . .

slick front end that is not matched with the

Capturing the value of digital transformation

corresponding high-quality fulfillment that

will be important in most industriesand

customers now expect may actually lead to

critical for survival in some. Business leaders

increased customer frustration.

must assess their own companys value at stake,

4. Align the business portfolio accordingly.

nities and risks, and keep in mind that the

In the long run, some lines of business will

greatest digital value may reside beyond their

simply be destroyed by digital. Hanging

customer-facing functions.

invest proportionally to address key opportu

Tunde Olanrewaju is a principal in McKinseys London office, where Paul Willmott is a director.
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