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Why Digital Strategies Fail – Part 3 of 3

This article first appeared on McKinsey&Company.

Most digital strategies don’t reflect how digital is changing economic fundamentals, industry dynamics, or what it means to compete. Companies should watch out for five pitfalls. Read part 2 here.

Pitfall 5: missing the duality of digital

The most common response to digital threats we encounter is the following: “If I’m going to be disrupted, then I need to create something completely new.” Understandably, that becomes the driving impetus for strategy. Yet for most companies, the pace of disruption is uneven, and they can’t just walk away from existing businesses. They need to digitize their current businesses and innovate new models.

Think of a basic two-by-two matrix such as the exhibit below, which shows the magnitude and pace of digital disruption. Where incumbents fall in the matrix determines how they calibrate their dual response. For those facing massive and rapid disruption, bold moves across the board are imperative to stay alive. Retail and media industries find themselves in this quadrant. Others are experiencing variations in the speed and scale of disruption; to respond to the ebbs and flows, those companies need to develop a better field of vision for threats and a capacity for more agile action. Keep in mind that transforming the core leads to much lower costs and greater customer satisfaction for existing products and services (for example, when digitization shrinks mortgage approvals from weeks to days), thus magnifying the impact of incumbents’ strategic advantages in people, brand, and existing customers and their scale over attackers.

The extent and speed of disruption varies; companies should calibrate their response.

Beyond this dual mission, companies face another set of choices that seems binary at first. As we have indicated, the competitive cost of moving too slowly puts a high priority on setting an aggressive digital agenda. Yet senior leaders tell us that their ability to execute their strategy—amid a welter of cultural cross-currents—is what they worry about most. So they struggle over where to place their energies—placing game-changing bets or remaking the place. The fact is that strategy and execution can no longer be tackled separately or compartmentalized. The pressures of digital mean that you need to adapt both simultaneously and iteratively to succeed.

Needless to say, the organizational implications are profound. Start with people. Our colleagues estimate that half the tasks performed by today’s full-time workforce may ultimately become obsolete as digital competition intensifies. New skills in analytics, design, and technology must be acquired to step up the speed and scale of change. Also needed are new roles such as a more diverse set of digital product owners and agile-implementation guides. And a central organizational question remains: whether to separate efforts to digitize core operations from the perhaps more creative realm of digital innovation.

While the details of getting this balance right will vary by company, two broad principles apply:

  • Bold aspiration. The first-mover and winner-takes-all dynamics we described earlier demand big investments in where to play and often major changes to business models. Our latest research shows that the boldest companies, those we call digital reinventors, play well beyond the margins. They invest at much higher levels in technology, are more likely to make digitally related acquisitions, and are much more aggressive at investing in business-model innovation. This inspired boldness also turns out to be a big performance differentiator.
  • Highly adaptive. Opportunities to move boldly often arise as a result of changing circumstances and require a willingness to pivot. The watchwords are failing fast and often and innovating even faster—in other words, learning from mistakes. Together they allow a nuanced sensing of market direction, rapid reaction, and a more unified approach to implementation. Adaptive players flesh out initial ideas through pilots. Minimum viable products trump overly polished, theoretical business cases. Many companies, however, have trouble freeing themselves from the mind-sets that take root in operational silos. This hinders risk taking and makes bold action difficult. It also diminishes the vital contextual awareness needed to gauge how close a market is to a competitive break point and what the disruption will mean to core businesses.

As digital disruption accelerates, we often hear a sense of urgency among executives—but it rarely reaches the level of specificity needed to address the disconnects we’ve described in the five aforementioned pitfalls. Leaders are far more likely to describe initiatives—“taking our business to the cloud” or “leveraging the Internet of Things”—than they are to face the new realities of digital competition head-on: “I need to develop a strategy to become number one, and I need to get there very quickly by creating enormous value to customers, redefining my role in an ecosystem, and offering new business-value propositions while driving significant improvement in my existing business.”

Such recognition of the challenge is a first step for leaders. The next one is to develop a digital strategy that responds. While that’s a topic for a separate article, we hope it’s clear, from our description of the reasons many digital strategies are struggling today, that the pillars of strategy (where and how to compete) remain the cornerstones in the digital era. Clearly, though, that’s just the starting point, so we will leave you with four elements that could help frame the strategy effort you will need to address the hard truths we have laid out here.

First there’s the who. The breadth of digital means that strategy exercises today need to involve the entire management team, not just the head of strategy. The pace of change requires new, hard thinking on when to set direction. Annual strategy reviews need to be compressed to a quarterly time frame, with real-time refinements and sprints to respond to triggering events. Ever more complex competitive, customer, and stakeholder environments mean that the what of strategy needs updating to include role playing, scenario-planning exercises, and war games. Traditional frameworks such as Porter’s Five Forces will no longer suffice. Finally, the importance of strategic agility means that, now more than ever, the “soft stuff” will determine the how of strategy. This will enable the organization to sense strategic opportunities in real time and to be prepared to pivot as it tests, learns, and adapts.

The Red Tree is the UK’s leading international beauty brand consultancy and a powerhouse of ideas, insight and inspiration. For an informal discussion on how we might help you, please contact us.

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