Digital @ Scale. Swaminathan Anand

customer value propositions, value-added processes, and people’s working methods.

      It has radically changed consumer behavior and expectations, destroyed traditional business models, and redefined industries. It revolutionizes production – think Industry 4.0 – and rocks entire business sectors. Retail faces challenges from digital competitors like Amazon and Alibaba, the banking industry is threatened by lucrative fintech segments, travel portals like Expedia and Priceline are shaking up the tourism industry, and the traditional business models of the advertising industry are being rocked by a variety of digital channels. Digitization is even creating new markets, for example the so-called sharing economy where urban hipsters dispense with owning a car in favor of Uber or Zipcar.

      Companies operating in the analog world must not let it get too late before they join the digital mix. Start-ups that tap into a customer need sometimes experience explosive growth. In China, for example, Tencent, whose WhatsApp-equivalent QQ is used by 900 million Chinese customers, saw its revenues increase a hundredfold in 10 years to around €14 billion in 2015. Tencent states that one in two employees works in research and development. And Chinese Uber rival Didi Chuxing, which dominates the taxi and limousine market in the country, more than tripled its company value in 18 months from around $6 billion in 2015 to some $20 billion.

New Business Models Follow a Classic Pattern

      The business ideas triggered by digitization can be grouped across two dimensions depending on whether they are driven by the supply side or the demand side and whether they lead to extended or improved or even completely new business models. An example of a new offering leading to an extended business model is Kayak. The company has digitized the classic travel agency business, allowing users to search for flights, hotels, and rental cars online. The business model itself is still based on a classic system where providers pay a commission to Kayak.

      Other digital companies’ offerings tap into a demand that it was previously not possible to service. One example of this is Spotify, whose streaming service provides customers with access to its entire library of music. Rather than paying to listen to individual songs, users pay a subscription. This completely new business model revolutionized the music market and fundamentally turned the industry on its head. By comparison, Apple’s iTunes music store appears conventional.

      An example of a demand-driven revolution is the Dollar Shave Club. The company, which was recently bought by Unilever for $1 billion, offers razors and shaving accessories for men in return for a membership fee. By subscribing, members receive a monthly package containing the necessary blades and shaving foam, which saves a trip to the drugstore.

      Nike iD is a demand-driven extension of a business model. Customers can individually design their sports shoes online, customizing the shape, material, and color, and even add a monogram.

Consumer Behavior Has Dramatically Changed in Recent Years

      The McKinsey long-term study “TMT Digital Insights” tracks changes in consumer behavior in the most important global markets and segments, and has revealed dramatic changes in US consumer behavior. Here are two examples:

      Consumers want everything, anywhere, anytime: In 2016, 83 percent of consumers possessed a smartphone – the same number as those who own a home PC. Even tablets, which first became a mass phenomenon in 2010 with Apple’s iPad, are now owned by two-thirds of consumers. This has key consequences for user behavior: US consumers now spend more time on their smartphones and tablets than they do on the PC. Mobile consumers expect answers immediately when researching products and prices on the move or when they want to order something. Smartphones and tablets have become personal command centers. Companies that do not adjust their online presence to service the mobile “anytime, anywhere” mentality may lose ground to their competitors.

      Increasing relevance of visual media: The medium of video has become significantly more important. Consumers now spend more time watching videos than before – often at the same time as other (often also digital) activities. So-called over-the-top (OTT) video content published directly online is threatening traditional linear TV and pay-per-view models. To remain attractive to customers, companies need to supplement their traditional text-intensive communications with videos. For a long time now, consumer fascination with the virtual world has impacted the real world economy: advertising budgets have shifted dramatically – from TV and print to mobile providers. And now video content is conquering the small screen: series are now optimized for smartphone screens in terms of time and image composition.

      Retailers, service providers, and consumer goods companies are also feeling the pressure to digitize their processes and offerings, driven by customers whose research and buying behavior has drastically changed in the past decade. Consumers browse online forums to find out about a product’s quality, they check value for money on comparison sites, and they use Twitter, Instagram, and the like to post their opinions. And even when shopping in a store, they’re happy to check their smartphones to see if a product they like is available for a lower price from an online retailer or a local rival.

      1.2 ESTABLISHED MARKET DEFINITIONS DON’T APPLY ANYMORE

      At the same time, managers find that the established definitions of their markets no longer apply – new challenges lurk everywhere. The networking of previously unconnected devices with online data sources – the Internet of Things – has dissolved traditional industry boundaries. Take the health care sector as an example: suddenly, technology firms with their apps and fitness bands have entered their industry, using the data leveraged from their customers to develop completely new business models. Even the old classification of companies that sell to business customers (B2B), and those that deliver to end customers (B2C) is becoming blurred – suddenly we see the term B2B2C. Even an industrial company like Alcoa might now like to know what the end customer does with its aluminum.

      Naturally, as digital pushes through, the frequency of channel conflicts that need to be managed increases. The accumulated data needs to be professionally analyzed, which requires new talent in the company. The result of all these factors is increased pressure on management.

Innovations Arise at Industry Boundaries

      Previously, the business world was transparent: everyone knew who their competitors were, and surprises from outside the industry were rare. This fine sense of certainty has gone; digitization has made transgressions easy. For example, Amazon with its Amazon Web Services (AWS) is now the world’s leading provider of cloud services. Microsoft and IBM, which might have been expected to occupy this position as the top dogs in the IT industry, are positioned on the next rung down by some distance – they never reckoned with this competitor. Originally, Amazon had only intended to better utilize the capacities of its huge data centers. In the meantime, IT companies yet again find themselves wrangling with another intruder: General Electric (GE), whose subsidiary Predix offers a cloud-based platform for analyzing data sent from industrial machines – a cornerstone of Industry 4.0 applications.

      Even traditional machinery manufacturers are now crossing industrial boundaries. John Deere, for example, one of the giants in agricultural machinery and tractor manufacturing, offers software and data-based services. These services process highly detailed weather forecasts with data on soil conditions, the specific properties of the seed used, and a wide range of additional information to provide recommendations to farmers to help them increase their yields. It also helps save fuel, reduce repair cycles, and ensure optimum use of the vehicle fleet. Sensors installed in the vehicles send on-site data to the Deere data center, and farmers can access their information via the MyJohnDeere.com platform or view it on their smartphone or tablet via the Mobile Farm Manager app.

      The chemicals group Monsanto is pushing into the agricultural world from a different direction. In 2012, the seed specialist bought Precision Planting, a manufacturer of hardware and software, whose products help farmers during sowing to optimize seed depth, distances, and conditions to ensure the best roots. It’s the same customer base as Monsanto’s core business and the same value proposition – more yield in the field – and yet a completely different technical approach.