Boldly Going Digital

Companies worldwide spent US$1 trillion on digital technology in 2016, according to IDC Research. That’s nearly the size of the Mexican economy, which is the 15th largest in the world. Unfortunately, for many businesses, this investment is not corresponding with financial returns. While the companies might excel at adopting innovative digital technologies, many are, at best, achieving incremental business improvements.

The reality that digital commitments don’t themselves guarantee financial success can be perplexing to any organization. Digital newcomers and digitally advanced businesses alike are making big bets on digital, but fail to use the new capabilities to spur both business growth and profitability.

The solution? Organizations need to radically rethink their approaches and develop bold digital strategies to harness technologies and unlock new sources of growth.

TOO MUCH AND NOT ENOUGH: DIGITAL VERSUS FINANCIAL PERFORMANCE

IDC predicts that the digital technology market will double in size, reaching US$2.1 trillion by 2019. Without question, digital technologies have excited the imaginations of business leaders across many industries. Digital brings enormous opportunities to tap into new profit pools by fostering innovation, acquiring and retaining customers, radically improving operations, and gaining competitive advantage. But recent research conducted by Accenture (see the appendix following this article) shows that these investments are not always paying off. Sixty per cent of the 343 leading global companies we assessed have survived in the past without building up digital capabilities. Only 6 per cent of companies that invested in digital managed to translate those investments into sustained financial gains. We identified these as Digital High Performers (see Figure 1).

Figure 1: Digital versus Financial Performance

Source: Omar Abbosh and Paul Nunes, Achieving Digital Performance: Time to Rotate to the New (Accenture, 2016), 3.

One group of companies particularly intrigued us. This group of 63 companies (18 per cent of our assessment group) showed strong development of digital capabilities but much weaker financial performance. Indeed, their overall financial performance score was 43 per cent lower than that of the Digital High Performers (see Figure 2). We identified these companies as Digital Leaders and examined what was blocking their progress.

Figure 2: Digital Leaders’ Financial Performance Challenge

Source: Accenture analysis.

ETHOS OF DIGITAL LEADERSHIP

Digital Leaders get stuck on the fringe of high financial performance because they fail to focus their allocation of digital investments on both growth and transformation. They perform well on metrics related to efficiency and profitability and are proficient at using digital to streamline and transform their current businesses. But this is only the price of entry for creating a solid position in the new economy.

To become high performers, Digital Leaders must master using digital to drive revenue growth and increase investor confidence. Their overemphasis on efficiency and profitability indicates that Digital Leaders might be making trade-offs they cannot afford, putting their future growth potential at risk. For instance, we estimate that the future value of Digital Leaders is already 48 per cent lower than the Digital High Performers, who are more adept at identifying new growth opportunities.

A COMMON PROBLEM

This ethos we observed in Digital Leaders is not uncommon among other leading businesses, especially those incumbent in their industries. In an Accenture survey of more than 1,000 C-level executives in 20 countries, 59 per cent described their company’s approach to digital investment as primarily focused on process efficiencies and cost reduction. This represents a lost opportunity for companies aspiring to become Digital High Performers.

We believe that the future success of Digital Leaders depends on their commitment and ability to mobilize their existing digital capabilities to deliver revenue growth and strengthen investor confidence. How? They must design and implement new strategies that aim to constantly extract value from digital technologies and achieve profitable growth. Many of the Digital High Performers in our study already deploy such business strategies.

Consider Singtel, the largest telecommunications company in Singapore, and the largest in Southeast Asia by market capitalization. Singtel has transformed its core business by putting data at its centre, making network, technology, and spectrum investments as well as offering differentiated content. At the same time, Singtel has uncovered new revenue streams, both in the telecom industry and beyond, by leveraging its telecom assets. For example, the company earns revenue from digital marketing, geoanalytics, and video streaming, thanks to anonymized and aggregated telecom data and billing relationships. Singtel also offers mobile payment services through Singtel Dash, which allows consumers to make fast and secure transit payments and top-ups, in-store and online retail payments, and local and overseas money transfers. Digital High Performers like Singtel are not the typical corporate digital natives, but rather incumbent players who have managed to accentuate new strategies that lead to sustainable financial results.

THE WAY FORWARD: FOUR LESSONS FOR DIGITAL LEADERS

By examining the strengths of Digital High Performers, we have found that four strategies are critical to organizations that want to get the most out of their digital investments.

  1. Get completely immersed in new ecosystems.

It is easy to think that digital ecosystems are reserved for the giants of technology. What many executives might not realize, however, is that today, every company needs the collective ingenuity and collaboration of ecosystems.

Consider the home improvement industry. A company like Home Depot is constantly searching for digital partners that can help it stay on top of what is far from a sleepy business. Since 2014, the company has collaborated with Quirky, a New York-based platform for idea crowdsourcing, to launch more than 60 networked home devices such as thermostats and smart lighting, all controlled by an integrated app called Wink. In 2015, Home Depot further partnered with the Georgia Institute of Technology to leverage innovations in virtual reality and 3D printing and scanning, as well as to tap into a network of more than 40 start-ups housed at the campus. Investors are clearly rewarding these initiatives: Home Depot’s stock price more than tripled over the past five years.

The takeaway: Digital Leaders in other non-tech industries should recognize that building valuable new connections is a powerful way to access new ecosystems. Transcendence to Digital High Performance requires a strong ability to cast a network with collaborative partners, including start-ups, universities, and even competitors.

  1. Unlock opportunities to commercialize innovative ideas.

Many Digital Leaders excel at using digital to design new products and services. Where they fall short is in their ability to commercialize their ideas and open up new revenue streams. As many Digital High Performers have demonstrated, even incumbents can unlock new revenue streams through digital capabilities. Australian telecom firm Telstra, for example, is betting on opportunities in eHealth. In 2015, Telstra Health introduced ReadyCare, a telemedicine service that connects Australians by phone or video with registered doctors (general practitioners), 24 hours a day. To create this service, Telstra worked with Medgate Technologies, which had successfully introduced ReadyCare in Europe. Telstra Health seeks to hit AU$1 billion in annual revenues (US$800 million) by 2020.

To reach high performance, Digital Leaders must think in broader terms and explore new ways of using existing digital assets—be they customer data, proprietary algorithms, cyber security features, or experience working with robotics on the factory floor—as a launching pad to create new product–service hybrids and routes to new contestable markets. In other words, they must begin the process of “rotating to the new” by deliberately focusing on growth in new markets.

  1. Move beyond purely transactional customer relationships.

Most Digital Leaders have become proficient in building a visible online presence to aid selling efforts, using sleek websites, mobile apps, and online advertising. What they have not mastered is the art of customer engagement through multiple channels. Many still view customer engagement by digital means as an added activity; most complete their transactions in physical stores or consider themselves to be distant from the final customer.

The cosmetics industry is a case in point. Most brands have wholesale relationships with drugstores and salons, and 90 per cent of the shopping is still done at brick-and-mortar stores. But changes are happening behind the scenes. For example, research shows nearly half (45 per cent) of American consumers now prefer to use their smartphones to check on product information while shopping in the store, rather than asking the salesperson.

L’Oréal spotted the trend early and built several interactive “beauty knowledge repositories” to inform and engage customers. In 2014, the company  launched an interactive app called Makeup Genius, which uses virtual reality technology to convert cameras on mobile devices into mirrors to “test drive” over 300 L’Oréal cosmetics and try on makeup looks seen in fashion magazines and on the red carpet. In the same year, the company created its own website, hairstyle.com, designed to answer the four billion beauty searches a year while gathering customer insights.

As with the beauty industry, incumbent companies in other industries, even those operating in a business-to-business environment, are unlikely to remain immune to change brought by digital technology. To get the most out of digital in customer engagement, Digital Leaders need to look beyond digitizing customer touchpoints (e.g., adopting mobile payment) and more toward using analytics to anticipate customer needs, along with using interactive marketing to win and retain target customers.

  1. Embrace cultural and structural shifts.

Many Digital Leaders are committed to digitizing internal operations and uplifting the digital skills of their employees. But they have not yet reached deeply enough into the cultural and structural DNA of their organizations. By far, Digital Leaders lag behind the Digital High Performers when it comes to the ability to assess and foster cultural and structural fit with a digital agenda. Some incumbents demonstrate that by fearlessly pushing ahead with cultural and structural adjustments, success is indeed within reach.

For instance, Nike created a new division in 2010: Nike Digital Sport. Central to that division was a piece of wearable tech called the FuelBand. While a pioneer, Nike’s venture into wearable tech did not turn out to be a business success and was soon crowded out by smartwatches and smartphones with similar capabilities. Nike closed its business in wearable tech and reoriented its digital focus to become a health and fitness software developer. The company connected with existing technology providers to promote the Nike apps as a way to encourage customers to train more, for which Nike sportswear is pitched as an indispensable resource. The upshot: Nike is positioning itself as a data, tech, and services company, as evidenced by the appointment of a chief digital officer (CDO) in February 2016. Digital is now at the centre of Nike’s strategy of becoming a US$50 billion revenue company by the end of 2020.

Commitment to digital alone does not guarantee financial success, which is why bold strategies that leverage digital technology both as an enabler and a driver of change in a legacy organization are vital. To move beyond the verge of high performance, Digital Leaders must continuously assess the effectiveness of their investments and pursue major overhauls (e.g., in underperforming technology infrastructure) and organizational design, even if the initial efforts prove to be risky and prone to potential failure.

In other words, Digital Leaders don’t need greater investment; they need greater follow-through and the courage to lead the transformation within their organizations with tenacity. The future belongs to the bold.

APPENDIX: The Research

Measuring Digital Performance: The Digital Performance Index (DPI)

Returns on digital investment are notoriously difficult to identify. To help companies better understand the interplay between digital and financial performance, Accenture created the Digital Performance Index (DPI), based on the study of 343 leading global companies across eight industries (see Figure 3).

Figure 3: Digital Performance Index (DPI)

Source: Omar Abbosh and Paul Nunes, Achieving Digital Performance: Time to Rotate to the New (Accenture, 2016), 7.

The DPI quantitatively assesses companies’ digital investment and progress across 117 detailed metrics. At the highest level, the DPI framework has four pillars covering key business functions from strategy to operations, each broken down to three key action points along the value chain:

  • Plan looks into how digital trends are reflected in strategic plans and implementation. It assesses whether companies see digital as a key trend for their business and industry, whether they plan strategies and budgets for digitization and digitalization, and whether they act to enhance digital within and outside of the organization.
  • Make assesses the use of digital technology in innovation, production, and delivery. It looks at whether companies integrate digital into the design and manufacture of their products and services, and how digital streamlines activities across the supply network.
  • Sell evaluates customer experience management across digital channels. It looks at how digital is used to engage customers, sell through multiple channels, and serve customers after the transaction has been completed.
  • Manage examines the presence of digital technology and mind-sets in corporate culture and internal operations. It evaluates how companies assess their own digital culture and infrastructure, improve their operating efficiency, and renew their resources with the aid of digital.

The overall structure is supported by a further 42 specific business activities (such as “Business enhances digital capabilities through collaboration”), and 117 detailed metrics capturing evidence about companies’ behaviour. All evidence for scoring was gathered from public sources, mimicking the perspectives of investors and customers.

Both the level of implementation of digital technology and the quality of its integration were assessed. Scores, on a scale of 1 to 4, reflect a company’s relative position against its industry peer set. A score of 1 indicates that the company is significantly below its peer average, whereas a 4 indicates that it is significantly above its peer average. Leadership in digital performance, as exhibited by Digital High Performers and Digital Leaders, corresponds with a DPI score in the top quartile of a company’s industry peer set.

Measuring Financial Performance: High Performance Business (HPB)

To provide a comprehensive view of relative competitiveness, companies were graded based on their position within their industry peer set, along a normal distribution. The HPB framework comprises five components, each measured with a further set of equally weighted metrics (see Figure 4). Financial high performance corresponds with an HPB grading of B and above, suggesting that the company’s overall financial performance score is above 0.33 standard deviation from the industry peer set average.

Figure 4: High Performance Business (HPB)

Source: Omar Abbosh and Paul Nunes, Achieving Digital Performance: Time to Rotate to the New (Accenture, 2016), 7.

  • Profitability is measured by return on invested capital (ROIC) for one-, three-, and five-year average spreads.
  • Growth is measured using the one-, three-, and five-year revenue compound annual growth rates (CAGR).
  • Positioning for the future is measured by the level and change of future value (FV) over five years.
  • Longevity is measured using the CAGR of the total return to shareholders (TRS) over one, three, and five years.
  • Consistency is a measure of consistency in growth, profitability, and positioning for the future over five-year periods.

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