Six Digital Decisions A CEO Must Take
Digitization is drastically changing the enterprise landscape, bringing huge opportunities to thrive, while at the same time posing unique challenges when not addressed will leave companies at risk of being left behind. A new McKinsey report highlights the six critical decisions CEOs must make to address the strategic challenge posed by the digital revolution.
Decision 1: Buy or sell businesses in your portfolio?
The growth and profitability of some businesses become less attractive in a digital world, and the capabilities needed to compete change as well. Consequently, the portfolio of businesses within a company may have to be altered if it is to achieve its desired financial profile or to assemble needed talent and systems.
Companies that lack sufficient scale or expect a significant digital downside should consider divesting businesses. Tesco, for example has made a number of significant digital acquisitions over a two-year span to take on digital competition in consumer electronics. Some insurers, for instance, may find themselves outmatched by digital players that can fine-tune risks. A leading media house in the US doubled down on an investment in their digital consumer businesses, while making tough structural decisions on their legacy print assets, including the divestment of local publications and increases in their national cover price.
Decision 2: Lead your customers or follow them?
Incumbents too have opportunities for launching disruptive strategies. One European real-estate brokerage group, with a large, exclusively controlled share of the listings market, decided to act before digital rivals moved into its space. It set up a web-based platform open to all brokers and has now become the leading national marketplace, with a growing share. In other situations, the right decision may be to forego digital moves - particularly in industries with high barriers to entry, regulatory complexities, and patents that protect profit streams.
Between these extremes lies the all-too-common reality that digital efforts risk cannibalizing products and services and could erode margins. Yet inaction is equally risky. In-house data on existing buyers can help incumbents with large customer bases develop insights (for example, in pricing and channel management) that are keener than those of small attackers. Brand advantages too can help traditional players outflank digital newbies.
Decision 3: Cooperate or compete with new attackers?
A large incumbent in an industry that’s undergoing digital disruption can feel like a whale attacked by piranhas. While in the past, there may have been one or two new entrants entering the space, it is increasingly getting crowded. PayPal, for example, is taking slices of payment businesses, and Amazon is eating into small-business lending. Companies can neutralize attacks by rapidly building copycat propositions or even acquiring attackers. However, it’s not feasible to defend all fronts simultaneously, so cooperation with some attackers can make more sense than competing.
Digital technologies themselves are opening pathways to collaborative forms of innovation. Capital One launched Capital One Labs, opening its software interfaces to multiple third parties, which can defend a range of spaces along their value chains by accessing Capital One’s risk- and credit-assessment capabilities without expending their own capital, says the report.
Decision 4: Diversify or double down on digital initiatives?
As digital opportunities and challenges proliferate, deciding where to place new bets is a growing headache for leaders. One answer is to think like a private-equity fund, seeding multiple initiatives but being disciplined enough to kill off those that don’t quickly gain momentum and to bankroll those with genuinely disruptive potential. Companies, such as BMW and Deutsche Telekom, have set up units to finance digital start-ups.
The alternative is to double down in one area, which may be the right strategy in industries with massive value at stake. A leading global pharmaceutical company has made significant investments in digital initiatives, pooling data with health insurers to improve rates of adherence to drug regimes. It is also using data to identify the right patients for clinical trials to develop drugs more quickly, while investing in programs that encourage patients to use monitors and wearable devices to track treatment outcomes. many other companies also invest heavily to offer multichannel experiences, such as mobile-shopping apps, kiosks, and capabilities for managing customer relationships across channels.
Decision 5: Keep digital businesses separate or integrate them with current nondigital ones?
Integrating digital operations directly into physical businesses can create additional value—for example, by providing multichannel capabilities for customers or by helping companies share infrastructure, such as supply-chain networks. However, it can be hard to attract and retain digital talent in a traditional culture, and turf wars between the leaders of the digital and the main business are commonplace. Moreover, different businesses may have clashing views on, say, how to design and implement a multichannel strategy.
Wal-Mart Stores, for example, established its digital business away from corporate headquarters to allow a new culture and new skills to grow. Hybrid approaches involving both stand-alone and well-integrated digital organizations are possible, of course, for companies with diverse business portfolios.
Decision 6: Delegate or own the digital agenda?
While digital agenda takes lots of senior-management time and attention, customer behavior and an effective digital strategy calls for extensive cross-functional orchestration that may require CEO involvement. Faced with the need to sort through functional and regional issues related to digitization, some companies are creating a new role: chief digital officer (or the equivalent), a common way to introduce outside talent with a digital mind-set to provide a focus for the digital agenda. some however agree, relying on chief digital officers to drive the digital agenda carries some risk if he or she fails to see the bigger picture.
Alternatively, CEOs can choose to “own” and direct the digital agenda personally, top down. That may be necessary if digitization is a top-three agenda item for a company or group, if digital businesses need substantial resources from the organization as a whole, or if pursuing new digital priorities requires navigating political minefields in business units or functions.
Regardless of the organizational or leadership model a CEO and board choose, it’s important to keep in mind that digitization is a moving target, says the report.
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