Commentary

Digital Strategy Pitfalls

According to an article in the McKinsey Quarterly in 2018, By Jacques Bughin, Tanguy Catlin, Martin Hirt, and Paul Willmott, most digital strategies don’t reflect how digital is changing economic fundamentals, industry dynamics, or what it means to compete. The processing power of today’s smartphones are several thousand times greater than that of the computers that landed a man on the moon in 1969. These devices connect the majority of the human population, and they’re only ten years old.

According to the report, there are the five common digital strategy pitfalls companies companies must avoid.


Pitfall 1: Fuzzy definitions
When we talk with leaders about what they mean by digital, some view it as the upgraded term for what their IT function does. Others focus on digital marketing or sales. But very few have a broad, holistic view of what digital really means. We view digital as the nearly instant, free, and flawless ability to connect people, devices, and physical objects anywhere. Lacking a clear definition of digital, companies struggle to connect digital strategy to their business, leaving them adrift in the fast-churning waters of digital adoption and change. What’s happened with the smartphone over the past ten years should haunt you, and no industry will be immune.
 
Pitfall 2: Misunderstanding the economics of digital
Consider these three: Just as sobering as the shift of profit pools to customers is the fact that when scale and network effects dominate markets, economic value rises to the top. At the highest level, our colleagues’ research on economic profit distribution highlights the existence of a power curve that has been getting steeper over the past decade, and is characterized by big winners and losers at the top and bottom, respectively. Our research on digital revenue growth, meanwhile, shows it turning sharply negative for the bottom three quartiles of companies, while increasing for the top quartile.

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Pitfall 3: Overlooking ecosystems
Understanding the new economic rules will move you ahead, but only so far. Digital means that strategies developed solely in the context of a company’s industry are likely to face severe challenges. Traditional approaches such as tracking rivals’ moves closely, and using that knowledge to fine-tune overall direction or optimize value chains are increasingly perilous.

Pitfall 4: Overindexing on the ‘usual suspects’
Most companies worry about the threats posed by digital natives, whose moves get most of the attention, and the disruptive nature of their innovative business models certainly merits some anxiety. Excessive focus on the usual suspects is perilous, though, because incumbents, too, are digitizing and shaking up competitive dynamics.

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.

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