Dr. Jürgen Meffert is a Senior Partner in the McKinsey Düsseldorf office. He is both the Director of Digital McKinsey in the area of B2B, and founder of McKinsey's initiative for SME growth companies. He advises several leading global firms in the telecommunications, high-tech, and media industries, and has overseen extensive transformation programs in various fields, from growth and innovation strategies, marketing, and sales through to processes and organization.
Anand Swaminathan is a Senior Partner in the McKinsey San Francisco office. He is a leader at the intersection of Digital McKinsey and McKinsey New Ventures and focuses on helping organizations across industries leverage technology and digital capabilities to evolve their operating models, transform their businesses to effectively serve their customers, and scale operations efficiently. For over 20 years he has focused on serving clients in the financial services, technology, retail, and industrial sectors. In 2015 Anand was named to Fortune magazine's 40 under 40 most influential young people in business.
DIGITIZATION REQUIRES FUNDAMENTAL RENEWAL: DIGITAL@SCALE
WHY? WHAT? HOW? The concept for a successful transformation into a digital company is based on the answers to these three questions.
For a hundred years, Henry Ford defined our image of business: highly specialized assembly line production with a clear division of labor producing mass scale products ("You can have the Ford Model T in any color as long as it's black"). The Taylorist system that focuses entirely on specialization and efficiency has given us affordable cars, washing machines, and holiday travel.
And it is this very model of success from the twentieth century that has now become the obstacle to the successful digital transformation of companies. Indeed, organizations that are built for efficiency fear that change brings disorder, and instead tend toward incremental adoption of innovation in tightly defined niche projects so as not to halt the well-oiled corporate machine. All economists know the S curve concept that defines the performance of a technology as a function of the funds invested for research and development. As such, the transition to a new superior technology-the leap to the next S curve-is initially always met with a loss in efficiency.
Unfortunately, those who hesitate to take this leap will lose in the long term. Although efficiency increases only slowly in the lower curve of the new S, the curve suddenly rises very sharply and is ultimately catapulted far beyond the level of the old technology. But this doesn't help us: those who want to successfully lead their companies into the new digital age need to rethink all structures, processes, and products at scale across the board-that is, Digital@Scale.
It's easy to build an app. A digital transformation is a much harder task. To ensure that the transformation doesn't founder on good intentions and unfinished business, digitization needs to follow a clearly defined concept. To start, we need to leave aside catchphrases like Industry 4.0 in order to prepare for fundamental renewal. Three simple questions point the way forward: Why? What? How?
2.1 WHY? THINGS ARE GOING WELL, SO WHY DO WE NEED TO CHANGE?
Companies that are doing good business find it very difficult to suddenly reinvent themselves in order to ensure sales and profit tomorrow. Early indicators of change are often overlooked or seen as unimportant. Even today we still see experiences with the digital revolution like that of Blockbuster, Inc.
In 2004, Blockbuster was the largest video rental company in the United States with 8,000 stores and revenues of $6 billion. No one on the board of the powerful market leader took Netflix seriously, the rival company formed just a few years before where customers could rent DVDs online and receive them in the mail, with attractive subscription models. With no sense of urgency, the Blockbuster engineers worked on a system for online orders. In 2007, Netflix took a huge leap forward by offering video on demand-movies that could be streamed directly via the Internet. The DVD was obsolete. Customers swarmed to Netflix in droves thanks to its attractive offering: no waiting times for mail delivery, no returns to mail, immediate enjoyment.
Only then did Blockbuster react, and developed its own video-on-demand system, but it was too late and of poor quality. Netflix had already gained significant market share, and Blockbuster did not offer any innovative new features that might have won customers back-and to top it all, Blockbuster's level of service and delivery was worse than that of Netflix. Netflix had immediately won over the Internet-savvy, mostly young customer base. And in just a few years, the vast majority of movie fans discovered just how easy it was to enjoy a pleasant evening with Netflix. Today, Netflix is the market leader, while Blockbuster filed for bankruptcy in 2010.
The lesson from this example is clear: regardless of how well positioned a company is, if the management underestimates the potential for change that digitization poses to its business model, it runs the ultimate risk. And those who see the change but delay their response so as not to jeopardize their current revenues are taking a virtually suicidal stance.
Creating a Sense of Urgency: The Key Challenge
Fundamental renewal demands strength, conviction, and, in most cases, a trigger. A little fear-even existential fear-is a good thing. Fear spurs you on. In established companies, it creates the pressure to act and the willingness to embrace innovation-crucial for digitization. After all, it's about developing new products, services, and processes that enable attractive prices-in short, a completely new value proposition. Those who fail to implement the transformation across the board (@Scale) will fall behind. It is simply fatal to underestimate the extent of the impending change.
Bosch CEO Volkmar Denner put it like this: "There are many things that just make it easier to order a pizza or call a taxi. But don't underestimate the influence of such solutions on society; people are changing their consumer behavior. Suddenly others are earning the money." Without a sense of urgency, nothing is possible; we are only too happy to look the other way.
Determining the Nature of the Change Requirements
We've already discovered that digitization affects everyone, just not necessarily to the same degree. The question that CEOs should ask themselves is: is our current business model obsolete, or will targeted changes suffice?
Usually, if the change requirements are high, the business model will look completely different post-transformation. As Jeffrey Immelt, CEO of industry giant General Electric, put it in the summer of 2016: "We need to become a software company in all divisions of GE." In addition to selling machines and equipment as well as maintaining them, software for the networked world of the Internet of Things (IoT) is to become a new business area for the company.
Radical change is also underway. For example, the Chinese iron and steel giant Baosteel has established an open online marketplace called Ouyeel. While initial versions of the e-commerce website allowed Baosteel to offer its products on a new channel, it has since expanded significantly to include competitor products and adjacent offerings such as financing, logistics, data, and technical services. Ouyeel is also supported by a massive analytics engine that provides pricing and analytics insights. Between 2013 and 2015, revenue from digital activities for Baosteel grew at more than 300 percent per annum. By the end of 2015, Baosteel's digital activities contributed more than $800 million to the top line.1
Digitization has also reached manual trades. For example, at elevator maker Schindler, over 50 percent of the staff work in field services. This staff performs activities that are largely manual and heavily reliant on expertise. In the past, the time to resolve an issue was often impacted by the fact that the field service staff had limited information on the issue prior to the site visit, and therefore might not have the required tools and/or parts on hand. Finally, part reorders created extra costs and revisits. Schindler was able to simplify this whole process by automating diagnostics, applying predictive analytics to preemptively address issues and order parts in advance, and the company enabled field services staff with iPhones and supporting apps to help simplify in-field activities. All this has helped significantly improve service efficiency, as well as customer and employee satisfaction.2
Identifying Barriers to Change Early
Traditional organizations have high levels of inertia. When business is going well, managers and employees generally only pay lip service to change requirements. Any manager who still wants the company to change therefore needs to analyze and eliminate the barriers.
Efficient organizations in particular tend to prove especially resistant to change. They follow their own logic: any change to the existing system would create efficiency costs and must therefore be avoided. The most successful managers often slow down transformation efforts behind the scenes. They calculate that they have little to win personally, but much to lose. They are often the opinion leaders and belong to the inner circle-making change twice as difficult. After all, doesn't the team still need these managers? Perhaps not.
Identifying Relevant Assets and Setting the Aspiration Level
Those who want to propel their company from the analog present to the digital future should first focus on the strengths: What sets the company apart from the competition? The technology in the product or service? The strong customer loyalty? The attractiveness of the brand? All of these strengths also count in the digital world. And while they may count differently, whoever retains them will have an advantage.
Without a clearly defined objective, the journey into the digital world can easily become an odyssey. The company management should therefore formulate its quantitative or qualitative objective, and communicate this to the employees. Interim goals-depending on whether and how they are achieved-are also helpful in determining whether the project is on...