Doing Digital Transformation Right

To make the most of going digital, organizations must transform legacy operations and invest in new digital business, according to consulting firm McKinsey.

Jessica Davis, Senior Editor

September 17, 2019

3 Min Read
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Are you digital? Whether your definition of digital is about a new way of looking at technology, engaging with customers, or doing business, there's been a lot written and said about how traditional organizations must become digital if they want to ensure their future success.

But with competition from the digital natives on one side and the limited resources of corporate budgets on the other side, how do you decide how to allocate your efforts at digitalization?

Now a new report from McKinsey culls the results of a few different surveys by the consulting firm and breaks down some of the finer points about what matters when you take your company digital. For instance, do you know just how much you need to digitize to have it make a difference? Do you have to digitize your entire operation? What are the appropriate investment levels?

If you are one of the organizations asking these questions, chances are that you are what McKinsey refers to as a "digital incumbent," defined as an incumbent business competing substantially in new ways through digitization (more than 20% of your business is digital and you are launching new digital businesses while transforming the core).

If you fit into this category, you are already on the road to success.  McKinsey said that digital incumbents are twice as likely as traditional incumbents to experience organic revenue growth of 25% or higher.

McKinsey defines traditional incumbents as those that compete primarily in traditional, non-digital ways -- more than 80% of their business isn't digital.

Top performers are making three "bold moves," according to McKinsey, that position them for greater success than their less-digitized peers. Those bold moves are the following:

  1. Allocating digital capital. McKinsey says that the top economic performers divide capital equally between digitizing core businesses and developing new businesses while less successful companies put a greater percentage of money into digitizing legacy operations.

  2. Centering mergers and acquisitions around digital opportunities. McKinsey says that the top economic performers dedicate 63% -- most of their M&A investments -- to acquiring digital businesses and capabilities. By contrast, other companies focus their M&A on non-digital ventures.

  3. Emphasizing innovation when they develop digital product portfolios. How much of your digital portfolio is new? Top performers say that their new digital offerings account for nearly half of their digital products and services. At other companies, new digital offerings make up less than one-third of the total digital offering, according to the McKinsey report.

So if top performers are the ones who are dividing the efforts equally between digitizing core businesses and developing new digital businesses, does that mean putting an even greater percentage into digital businesses is a good idea? Not necessarily, according to the McKinsey findings.

"When companies digitize the core business, our research shows, strong IT capabilities help enormously," the report says. "According to respondents in a survey on the IT function's effectiveness, companies with top performance on core IT tasks have made more progress than other companies in becoming fully digital and mastering key digital activities."

Consider artificial intelligence, for instance. Among respondents at companies that have embedded or piloted AI in one or more functions or business units, 76% say that it has created significant or moderate value. But the maximum value from these technologies comes when companies integrate them into the day-to-day operations and processes, according to McKinsey. These kinds of efforts bring sustained improvements in performance, the consulting firm said in its report.

For more on digital transformation in the enterprise, check out these articles:

Enterprise Guide to Digital Transformation

11 Digital Transformation Hacks That Get Results

Is Lean IT Killing Your Digital Transformation Plans?

4 Steps to a Digital Transformation


About the Author(s)

Jessica Davis

Senior Editor

Jessica Davis is a Senior Editor at InformationWeek. She covers enterprise IT leadership, careers, artificial intelligence, data and analytics, and enterprise software. She has spent a career covering the intersection of business and technology. Follow her on twitter: @jessicadavis.

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