Successful digital strategies adapt traditional moves for the digital era, says McKinsey

Digital strategies that drive outperformance and competitive differentiation are ones that adapt classic strategic moves for the digital era, says McKinsey and Company.

McKinsey’s quarterly article, ‘Strategy for a digital world’, by authors Simon Blackburn, Jeff Galvin, Laura LaBerge and Evin Williams, breaks down the key ways that business leaders can transform strategic choices that worked in the past decade, to succeed in today’s market.

• Subscribe to Digital Nation Australia's twice-weekly newsletter

The report analyses five key moves: 

• Differentiation improvement
• Productivity improvement
• Capital expenditure
• Resource allocation
• Mergers, acquisitions and divestments

Before the digital era, differentiation improvement meant that a company’s average gross margin exceeded its industry by over 30 per cent in a decade says McKinsey. With the rise of digital technologies, there are a range of new sources for innovation and advantage.

Software, digital platforms and digitally enabled ecosystems for instance are tools that businesses can invest in to transform their business models and go-to-market approaches.

According to the authors, “These new sources of differentiation are not lost on executives, most of whom realise that digital technology is a strategically vital competitive differentiator, not just for business-model innovation but for productivity, cost excellence, and other objectives.”

Leveraging large scale data sets available on public cloud to automate selling, general and administrative (SG&A) activity is a productivity improvement method born out of digital.
According to McKinsey, an example of this is automation in insurance-claim filing which has reduced costs in the industry by up to 70 per cent.

Software-based business models that are hyperscalable are often utilised by digital winners, says the authors as they allow the business to rapidly scale with minimal changes required to the cost structure.

Capital expenditure when done effectively is a key strategy for businesses looking to maintain or grow strong profits. But according to McKinsey, it’s only done effectively with strong foundations in place and demand for capacity that the programs will generate.

“Absent these, companies risk accelerating projects that destroy value rather than create it,” the authors say.

In the digital era this means investments in technology and digital assets.

“Top economic performers entered the crisis ahead of their peers on technology spending, and out-invested them during the course of the pandemic — particularly with regard to talent, building new partnerships, and investing in R&D.”

Resource allocation, may it be shifts in money, talent, or management attention has always been well established as a value creation tool, but according to McKinsey, in the digital era this has to happen faster.

“What was considered best-in-class speed for most business practices in 2018 is now slower than average — thanks to the massive technology acceleration that has occurred since early 2020. Companies with the strongest technology endowments are moving at an even faster pace.”

While the speed of transformation that the pandemic demanded is unlikely to maintain, it is also unlikely to drop to pre-COVID levels.

According to the report, “Fortunately, you don’t need to predict the future when shifting resources. You just need to read the present moment better than your competitors and respond dynamically.’’

Finally acquiring digital assets, skills and talent through digital M&A is a strategy that can expose businesses to digital tailwinds. But unlike traditional programmatic M&A, which McKinsey defines as “the steady acquisition of multiple smaller targets in a focused fashion over an extended time horizon,” for digital M&A the early acquisition of a digital unicorn may be the most effective strategy.

“Our research indicates that the early acquisition of a “digital unicorn” (defined as a single deal worth at least $1 billion) has been a significant differentiator for total returns to shareholders (TRS) for big incumbent companies in the past ten years, even though this runs counter to what traditional programmatic M&A approaches would suggest.”