Digital Strategy and Transformation

Digital Strategy for a B2B World

It’s easy to see why so many view companies like Uber, Amazon and Google as the business models of the future. They’ve redefined their industries. They’ve rewired the customer experience. They’re not afraid to fail fast, learn from mistakes and make the changes necessary to stay well ahead of the market.

None of this is news to leaders of industrial and other business-to-business (B2B) companies. But these executives also know full well that what works in the consumer realm doesn’t always translate in a B2B context. Failing fast? That’s problematic in industries such as chemical processing or offshore drilling, where the smallest mistake can trigger epic disaster. Moving quickly? We’ll get back to you when our channel partners get back to us.

Redefining the industry? Easier said than done in a business like aviation, where many stakeholders operate in a complex, interdependent ecosystem. The truth is B2B is different than business-to-consumer (B2C) when it comes to digital strategy, and it requires a different approach. There are many lessons to be learned from digital innovators like Amazon, and the opportunities are very real. But simple comparisons to what works for these digital standouts aren’t always useful in an industrial setting and often come off as naive or impractical, feeding the notion that digital is more hype than reality. This gets in the way of deciding how digital can, in fact, transform important parts of a business and makes it hard to create alignment around the right path forward.

Digital Destination

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Digitalization in Insurance: The Multibillion Dollar Opportunity

The business of property and casualty insurance— assessing risk, collecting premiums and paying claims— hasn’t changed much since 1861, when a group of underwriters sold the first policies to protect London homeowners against losses from fire. Recently, though, the insurance industry has embarked on a radical transformation, one spurred by a series of digital innovations whose widespread adoption is just a few years away. Bain & Company and Google have identified seven key technologies—namely,

  • infrastructure and productivity,
  • online sales technologies,
  • advanced analytics,
  • machine learning,
  • the Internet of Things,
  • distributed ledger
  • and virtual reality

—that have already begun to disrupt the industry and whose impact will accelerate in the next three to five years. These new technologies are likely to be a boon for consumers, bringing more choice, better service and lower prices.

For those insurers ready to seize the initiative, digitalization presents an immense opportunity. The companies that stand to benefit the most are those that use the impetus of digitalization to rethink all their operations, from underwriting to customer service to claims management. The impact on both revenues and costs can be enormous. An analysis by Bain and Google shows that a prototypical P&C insurer in Germany that implemented these technologies could increase its revenues by up to 28% within five years, reduce claims payouts by as much 19% and cut policy administration costs by as much as 72%.

These pioneers in digital technology can gain an edge over their rivals by becoming more effective and efficient. They’ll be able to trim costs and pass on those savings to their customers, thereby winning new business and gaining market share. The digital laggards, by contrast, will find themselves fighting an intensified price war and scrambling to protect their competitive positions.

Digital P&C

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Six IT Design Rules for Digital Transformation

Superior performance in the digital age calls for an adaptable technology infrastructure that manages the complexities of a multicloud environment, embedded security and compliance policies, and deep business alignment. Best-in-class IT operations and the software vendors that support them are adopting a playbook based on six core rules for IT design.

  1. Break boundaries across IT stacks. Given that companies are unlikely to achieve complete migration to the public cloud anytime soon, CIOs need monitoring, discovery and confi guration tools that function in hybrid, multicloud environments as well as up and down the stack, from legacy systems to consumer-facing apps.
  2. Embrace DevOps. As firms increase the cadence of their digital offerings, they have no choice but to integrate software development and IT operations. Already, as many as 60% of enterprises are using or planning to use a DevOps approach to building and installing software, according to a survey by Gartner. Modern IT organizations require software that works across the production chain and that’s designed for rapid testing and validation.
  3. Be open. No modern solution can be an island. As designers produce focused, best-in-class solutions instead of massive monolithic systems, openness becomes critical. Companies need modular, opensource and application-program-interface–friendly software that is designed for easy extensibility and integration with other apps. CIOs expect to be able to combine the capabilities of their disparate systems to serve new needs.
  4. Incorporate policy engines. Cost pressures have driven CIOs to seek to automate their IT operations. They want to escape the massive manual efforts that they currently rely on to monitor policies, including compliance, data governance and security rules. They need solutions that have builtin logic to identify and remediate against rules in order to enable policy management across a hybrid infrastructure.
  5. Induce insights. As digital apps proliferate, companies are becoming fl ooded with an abundance of data—some of it useful, some of it not. CIOs need analytical tools that use techniques such as machine learning to glean insights from disparate sources.
  6. Insist on user-friendly experiences and tools. In a complex world, IT professionals are demanding intuitive, easy-to-use software. They are no longer satisfied with hard-to-master, second-rate applications; they want a consumer-level user experience. They need solutions that are software-as-a-service (SaaS) capable, simple to install and have immediate, out-of-the-box functionality.

IT Transformation

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How digital reinventors are pulling away from the pack

Digitization is a long way from running out of steam, since the bulk of company revenues in most industries still come from traditional sources. Yet the results from McKinsey’s latest survey on digital strategy suggest that a digital divide is already taking shape. Companies competing in traditional ways (that is, without applying digital technologies and strategies in their businesses) have seen lower rates of revenue and earnings growth than have companies competing in digital ways—and those rates are tightly correlated with the level of digitalization, or digitization, in their respective sectors. But other players are seeing tremendous growth as digitization advances. The companies making digital moves—digital natives, industry incumbents competing in new and digital ways, and incumbents moving into new sectors—are out-performing their traditional-incumbent counterparts.

We call these companies digital reinventors. While most respondents say that their companies are making at least marginal investments in digital, we found last year that few had achieved top-quartile growth and high returns—not surprising, given the lukewarm response to digitization the average respondent reports in this year’s survey. Digital reinventors, in contrast, are embracing digital with both their investments and their strategic decision making. Our results indicate that companies in this group are not only investing more in digital but also investing and executing differently. The reinventors are investing at scale in

  • technology,
  • analytics,
  • and digital talent

—not just playing on the margins—and investing much more aggressively in business-model innovations or entirely new business models. They make more digital-related acquisitions and divestitures than traditional incumbents do; they are likelier to accelerate changes in their own businesses; and they are using more advanced, innovative technologies. The results indicate that their efforts are paying off: the reinventors are seeing larger gains in revenues and earnings than are traditional incumbents that have yet to embrace digitization.

Growing pressure on incumbents

As digitization continues to progress, its expected effects on revenues seem pronounced. When respondents were asked how much of their companies’ revenues would be at risk in the next three years if those companies took no further action to address digital pressures, they estimated that almost one-third could be lost or cannibalized. Consistent with our earlier research showing that increased levels of digitization produce shrinking profit and revenue pools at the industry level, the revenues at risk are even greater in the industries (high tech, as well as media and entertainment) experiencing the highest levels of digitization.

But the level of digitization is only part of the industry picture. Despite a common belief that digital natives are the greatest threat to an industry’s existing market share, the results indicate that incumbents competing in digital ways pose just as great a threat to other companies, if not a greater one.

The correlation between the market share owned by digital natives and revenues at risk is on par with that of incumbents playing digitally. This finding is consistent with other work suggesting that incumbents can have a strong effect on the market and on the pace of digital disruption in a given industry, and this effect is only magnified by the more powerful positioning of these incumbents. Since those competing in digital ways already own a larger market share than digital natives do, on average, they can also make larger shifts in the economics of their respective markets.

To date, the loss of revenues as digitization has expanded is already clear. Nearly 20 percent of all respondents report negative revenue growth in the past three years. But some companies can thrive in a more digitized landscape: specifically, those trying to reinvent themselves by embedding digital technologies in the core of their business models and by launching new digital businesses. Respondents at incumbents playing digitally are twice as likely as traditional incumbents to report exceptional financial growth (that is, an average compound annual growth rate of more than 25 percent) during this same period.

Digital Reinventors

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