In the age of digital disruption, a measured approach needs calibration
The rise of tech start-ups designing new services and digital consumers demanding hyper-personalized, better experiences have driven the infusion of advanced digital technologies in consumer-facing industries. In some instances, consumer demand has been supported further by regulatory changes, leading to technology-led business model innovation.
The growth of digital banking is a case in point. Traditional, asset-heavy industries that form the core of the economy, on the other hand, are yet to witness similar transformative changes. They are taking a slow and steady approach, piloting digital initiatives in a piecemeal manner, and investing in digitalization at the edges, while keeping their core business model or processes unchanged.
While taking a measured approach has its merits, in the age of digital disruption it needs constant calibration, failing which it could lead to billions of dollars in lost opportunities. Research done by the World Economic Forum and Accenture finds that the metals and mining industry could unlock $400 billion in value with the use of digital, and the oil and gas sector could unlock $4.5 trillion. Similar financial gains are in store for other industries.
Contrary to the widely-held perception, asset-heavy industries are not always protected from disruption despite significant barriers to entry. While they may not face big-bang disruptions common to consumer businesses, they do face the threat of compressive disruption, reflected in declining profitability with the slow and prolonged erosion of revenue and operating profits. Our research reveals that from 2007 to 2015, globally, companies in slow-moving industries saw operating margins fall from 12.9% to 9.5%.
Closer home, the textiles and apparel industry is a reference point. Even though the industry has grown at a compound annual growth rate (CAGR) of 13.5% between 2009 and 2017, growth in production volumes have stagnated since FY14. Textile exports have experienced similar stagnation, shrinking by 1.1% CAGR in the three years since FY14. The textiles and apparel industry is losing out not only to Chinese large-scale manufacturing, but also to competition from much smaller Asian peers such as Bangladesh and Vietnam. Competitive advantages are fast eroding as Indian manufacturers are unable to keep pace with their peers when it comes to digitally-enabled process automation.
It is not that asset-heavy firms are not investing in digital. Ninety-six percent of more than 900 companies that Accenture spoke to in 21 markets in 2017 said they view digitalization as a strategic tool and are investing in it. However, only 13% admitted to getting the desired results. Further analysis showed that a part of the problem is too much of a focus on trying out new technologies and experimenting with new areas of impact in a fragmented manner. In India, there was a disproportionate focus of firms using technology to drive new growth, ignoring profitability gains through operational efficiency.
That’s where the gap is. In asset-heavy sectors, much of the value is trapped around core processes; making them state-of-the-art could have a significant impact on companies’ bottom lines.
Another research, based on a study of 343 leading global companies across eight industries, showed that only 6% are able to couple broad levels of digital investment with commensurate business success, or are what we call “digital high performers”. The ones that succeed are worth noting: they achieve this by having a clear and meticulous focus on the transformation of the core business and growth in the new. They overcome the innovator’s dilemma and the fear of cannibalizing profits to launch new business models. Thus, they achieve 44% higher revenue growth and 34% higher profitability, even when compared to companies that are embracing digital in fairly advanced ways.
The convergence of maturity curves for major technologies such as artificial intelligence, quantum computing and blockchain presents an exceptional opportunity to businesses. The right combination of these technologies could lead to financial gains far greater than what each technology would deliver on its own. The time to act is now.