Digital Transformation • March 19, 2018

Getting Real About Digital Strategy in Manufacturing

Naveen Poonian Naveen Poonian

A recent article by McKinsey exposes the inadequacies of corporate strategy for digitization. Most digital strategies, according to the report, do not reflect how technology is changing economic fundamentals, industry dynamics and the competitive landscape. Instead, companies are latching onto the term “digital” as a buzzword. After launching a couple of digital initiatives, companies think they have executed a digital strategy.

This is akin to Web epidemic of the late nineties. Many traditional brick and mortar organizations hurriedly created websites that did little or nothing to boost their business. Similarly, the current decade has seen executives boldly tell their companies to immediately get into the Cloud. In some cases, this may waste money and assets by quickly ripping out in-house systems that perform perfectly fine. What is missing in both cases is a comprehensive strategy for how to harness technology properly and gain market share or how to break into new markets.

Enhancing Digital Strategy Concepts

How can executives avoid making the same mistakes of the past with this new technology bandwagon? How can they formulate digital strategies that will serve them well in the years ahead?

Thinking outside of the box of current industry boundaries is the first thing to consider. McKinsey notes that strategies must be developed beyond the context of a specific industry. Paying close attention to what rivals are doing to set future direction is a doom to failure. Companies are emerging with ecosystems that encompass far more than one industry or one rigid product line.

Competitive Digital Strategies Already in Play

Amazon not only sells books. This e-commerce company offers just about anything, including tablets, video content, cloud services, computing platforms, and now groceries (courtesy of its acquisition of Whole Foods). Amazon’s strategy, designed to disrupt multiple industries in parallel, is built upon a strong digital foundation. Grocery stores may now consider Amazon a serious rival, drawing their focus from competitors across the street. With so many recent retail bankruptcies, it is important for companies hoping to survive to understand that there are now invaders outside the scope of the traditional industries.

Apple Pay and PayPal, both owned by eBay, have disrupted the financial sector. McKinsey calls companies like Apple, eBay and Amazon, “ecosystem providers.” Their evolved platforms facilitate businesses across vertical boundaries. When entering a new field, they leverage millions of existing customers across a diverse range of industries. Such developments are turning accepted business patterns on their heads. Students are taught that there is a trade-off among price, quality and speed of delivery, and that not all three attributes can be acquired simultaneously. Ecosystem giants are challenging this view. Amazon, for instance, claims to have the largest inventory, fastest delivery, greatest customer experience and lowest cost in ecommerce. They are able to achieve this, due to the economies of scale offered by their massive customer base, by developing a digital platform for service delivery and by deploying artificial intelligence and analytics tools to upgrade service levels, streamline efficiency, and eke out more value than the competition.

Manufacturing Digitization Forecast

McKinsey’s research predicts that, by 2025, digital ecosystems will account for more than $60 trillion in revenues. This will add up to more than 30% of global corporate revenues, gobbling up market share from existing incumbents and abandoning the already established giants.

Several established market giants may appear sluggish and outgunned by more nimble technology rivals, however, many incumbents controlling the lion’s share of various markets already have brand recognition across large customer bases. Some will be smart enough to form partnerships to enable rapid digitization. Just as Google, Uber, Amazon and Airbnb are turning industries on their head, expect a few slumbering giants to suddenly wake up to the potential of digitization with some bold moves of their own.

Survivors must adopt a broader frame of reference, and evolve strategies to counter invasion by ecosystem players such as Alibaba, Alphabet (Google), Amazon, Apple, Facebook, Microsoft, and Tencent. Each of these businesses fall within the top 12 largest companies in the world by market capitalization, yet corporate strategies fail to take them into account.  

Unfortunately, many companies have only devised shallow attempts at digitization strategy or manufactured potential defenses to stave off heavy competition. Only 3% of executives have adopted a strong and effective offensive platform strategy to counteract the potential of future business catastrophe.

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