The Best Response to Digital Disruption
Companies that adopt bold strategies in the face of industry digitization improve their odds of coming out winners.
The imperative of digital transformation is an insistent buzz in the ears of managers in many industries, even the most unexpected.
Consider the business of funeral homes. Few industries are more sensitive, more personal, and more in need of a human touch than the business of arranging funeral services for a loved one. But a study of funeral providers in Berlin, Germany, describes what happened when impersonal yet less expensive options crept up on this market.1 Aggressive digital entrants unleashed an unprecedented wave of competition in the late 1990s. Discount online providers used search engine optimization to build dominant market positions, leaving incumbents with little choice but to respond by going online themselves to compete against both digital entrants and each other on pricing — rather than on reputation and relationships.
Few executives would dispute that digitization’s disruptive influence is growing — and growing rapidly. But surprisingly little empirical evidence has captured either the magnitude of digital disruption or how incumbents are reacting on a broad scale. Leaders know they have a problem — and know they must react to that problem — but they have little guidance to determine the right course of action.
In a bid to help address the gap, McKinsey & Co. undertook a global survey of C-suite executives to capture how digitization unfolds across industries and how incumbents are responding. (See “About the Research.”) With some notable and important exceptions, the answer is: “Not well.”
1. M. Wenzel, D. Wagner, H.-T. Wagner, and J. Koch, “Digitization and Path Disruption: An Examination in the Funeral Industry,” European Conference on Information Systems 2015 completed research papers, Paper 199, http://aisel.aisnet.org/ecis2015_cr/199/.
2. L. Downes and P. Nunes, “Big Bang Disruption: Strategy in the Age of Devastating Innovation” (New York: Portfolio, 2014), pp. 16-18.
3. W. Busch and J.P. Moreno, “Banks’ New Competitors: Starbucks, Google, and Alibaba,” Harvard Business Review, Feb. 20, 2014, www.hbr.org.
4. S. O’Hear, “Facebook Just Secured an E-Money License in Ireland, Paving the Way for Messenger Payments in Europe,” TechCrunch, Dec. 7, 2016, www.techcrunch.com.
5. The negative impact on incumbents increases as digitization spreads and deepens. This digital intensity factor was identified by Andrew McAfee and Erik Brynjolfsson of MIT in 2008. See A. McAfee and E. Brynjolfsson, “Investing in the IT That Makes a Competitive Difference,” Harvard Business Review 86, no. 7 (July-August 2008): 98-107.
6. A similarly named scientific hypothesis (“the Red Queen hypothesis”) was put forth in 1973 by Leigh Van Valen to propose an explanation for biological evolution and extinction of species. See L. Van Valen, “A New Evolutionary Law,” Evolutionary Theory 1 (1973): 1-30. The Red Queen concept was subsequently applied to organizational strategy by William P. Barnett and Morten T. Hansen. See W.P. Barnett and M.T. Hansen, “The Red Queen in Organizational Evolution,” Strategic Management Journal 17, issue S1 (summer 1996): 139-157.
7. A. Dutta, H. Lee, and M. Yasai-Ardekani, “Digital Systems and Competitive Responsiveness: The Dynamics of IT Business Value,” Information & Management 51, no. 6 (September 2014): 762-773.
8. D. Guilford, “BMW’s DriveNow Is Profitable Now,” Automotive News, Oct. 3, 2016, autonews.com.
9. “Daimler, BMW Aim to Merge Their Carsharing Services: Manager Magazin,” Reuters, Dec. 15, 2016, www.reuters.com.
10. C. Bradley and C. O’Toole, “An Incumbent’s Guide to Digital Disruption,” McKinsey Quarterly, May 2016, www.mckinsey.com.
11. B. Connolly, “CBA to Shake Up Payments With ‘Albert’ Launch,” CIO, March 31, 2015, www.cio.com.au.
i. J. Bughin, L. LaBerge, and A. Mellbye, “The Case for Digital Reinvention,” McKinsey Quarterly, February 2017, www.mckinsey.com.
ii. J. Bughin and N. van Zeebroeck, “The Case for Offensive Strategies in Response to Digital Disruption,” Université libre de Bruxelles, iCite working paper number WP021-2017, www.solvay.edu/sites/upload/files/WP021-2017.pdf.