March 4, 2012

The Next Wave of Digitization - Setting Your Direction, Building Your Capabilities

Booz & Company explores the phenomenon of digitization and the forces driving it.

For more than a decade, powerful new digital approaches have influenced life, yet we are now entering an even more rapid and dramatic period of change. The phenomenon of digitization is reaching an inflection point. Booz & Company identifies the forces driving the shift, and explores strategies to ease the potential impact.

The Inflection Point
“The coming wave will remake our world all over again. Our research into the behavior of Generation C—people born after 1990 who are just now reaching adulthood and entering the workforce—shows that the trend to global digitization will only accelerate,” said Bahjat El-Darwiche, a partner with Booz & Company. “Pervasive broadband, ubiquitous connectivity, cloud computing, social networking, ‘the Internet of Things’—all are coalescing to transform how we work, play, communicate, socialize, and do business. The digitization phenomenon has reached an inflection point.”

Three Driving Forces
The outlines of the fully digitized world have long been sketched. So why are we reaching this critical inflection point now? The reason is that three driving forces, acting in concert, are powerfully reinforcing one another.

Consumer Pull
Consumers are already fully adapted to the digital environment. They expect to be connected every moment of their lives, through virtually every device. Their insistence on the right to stay connected is transforming their personal lives, and their willingness to share everything is changing long-held attitudes about privacy. Their trust is shifting from well-known brands to referrals from their closest friends. They are advocates of many causes and at the same time deeply embedded in their social environments. In their world, knowledge isn’t just power. It’s social and commercial currency—and access to it is vital.

Technology Push
The infrastructure backbone of the digital world is expanding into every corner of the globe, bringing affordable wired and wireless broadband to billions of consumers in developed and developing markets alike. The demand for powerful real-time analytics engines to allow companies to gather and make sense of hitherto ‘undigested’ information flows is rising fast, and companies around the world are responding with new technologies such as in-memory analytics devices to meet that need.

Economic Benefits
The third force driving the digitization phenomenon is the realization on the part of executives in every industry that the economic benefits to be captured are real. Though it is too early to quantify those benefits, a wave of capital has poured into the new digitization technologies and companies, and the public markets are beginning to reward early movers with valuations reminiscent of the years leading up to the dot-com bubble.

“The economic cycle and globalization have exposed the weaknesses of large enterprises that have so far failed to embrace digitization. They have also sharpened the minds of CEOs regarding the need to further cut costs and monetize existing capabilities more effectively,” commented Ramez Shehadi, a partner with Booz & Company.  “Increased competition from around the world is forcing companies in every industry to contend with increased cost pressures, transforming their traditional value chains, spawning new formats and new business models, blurring industry boundaries, and even creating entire new industries.”

Dramatic Effects
Many of the ideas and technologies underlying the digitization phenomenon are not new. Taken together, however, they will create a degree of change comparable in scope to the great industrial revolutions of the past. The specific effects of digitization on the world of business will be many and far-reaching, but every industry will be dramatically affected.

Business and Customer Insights
Every industry will be the beneficiary of real-time, high-resolution business insights combined with the ability to reach out to customers more effectively. Information on shopping habits, location, finances, social activities, search history, securities trading, travel, medical history, and advocacy, among others, is already routinely captured, processed, and stored at one or more of the 7.5 million data centers now in operation worldwide.

Another result will be the growing use of critical business techniques such as social marketing, crowd sensing, and crowdsourcing.

Labor productivity will rise as a result of more targeted management of workforces and even more extensive automation of business processes. Manufacturing has already been transformed in several industries. The productivity of physical assets will be drastically improved through the use of smart infrastructure, the integration of physical goods into the digital world through embedded wireless devices, and better investment decisions through deeper analysis of increasing amounts of data.

New Value Pools and Value Shifts
As a result of gains in both productivity and business insight, three primary types of value shifts will occur:
  • Most of the shifts will take place within industries, thanks to changes in market share or industry structure, clearly separating the digital winners from the losers. Laggards will be acquired or merged.
  • Consumers will gain substantially, not just through reduced prices and more attractive offerings but also because of greater choice and convenience, and even longer life expectancy, driven by developments in e-health and other technologies.
  • Digitization will also create the next wave of growth in capital investment, which will flow to all kinds of companies, including suppliers, whether high-tech hardware and software companies, lower-tech construction companies, professional services companies, or disruptive new players.
“It is quite likely that a great many ‘old’ businesses will see their revenues come under pressure as they are forced to pass on to consumers much of the efficiency gains attributable to digitization. Publishers and ‘old media’ companies, whose revenues have been increasingly cannibalized by the rise of new, virtual services and business models, serve as a case in point,” said El-Darwiche.  “Despite widespread concerns that new technologies would destroy the overall economic value of the sector, that value has actually risen. But the challenges faced by the publishing industry remain a cautionary note to other industries that have so far been affected only moderately by digitization.”

Inevitable Trade-Offs
Digitizing a company does not come cheaply, and the larger the legacy aspect of the business, the more disruptive the process of digitization is likely to be.

The key questions all CEOs and their executive teams must answer center on four themes:
  • How will digitization impact my current business model and positioning within my industry’s value chain?
  • How can I best identify and enter areas where value is being created, both inside and outside my industry?
  • What areas of my business offer new entrants clear opportunities to disrupt my current business model, and how can I best fight back?
  • Which capabilities do I need to build to be a leader in the field?
The answers to these questions will guide CEOs and their executive teams to decisions about where and how to prioritize their digitization investments among the many competing options.

A Question of Timing
The speed of digitization will naturally vary from market to market, and its adoption will vary from sector to sector within each market. Thus, executives must gauge their response according to their industry, sector, markets, and current competitive positioning in those markets.

“We have developed a methodology for determining which industries will be affected first,” said Shehadi. “In general, we expect to see digitization move fastest in industries where barriers to entry are low, those where information in some form or another is the primary product or a key success factor in downstream activities, and those whose upstream activities are the most information- or capital-intensive, providing dramatic opportunities for digitization to reduce capital intensity and increase returns to capital.”

No industry will remain free of the effects of digitization. The key to success will be to understand how digitization will affect each industry first and with the greatest impact. Only by doing so can companies accurately determine which capabilities to build and prioritize which digitization investments to make, and when. Absent an assessment of this sort, companies are likely to be faced with making more investments than they can afford, and making them in the wrong order.

The Speed of Digitization
Digitization has indeed reached a point of inflection around the world, but that does not mean that the phenomenon will occur at the same rate everywhere or that external events won’t speed it up or slow it down in different industries and geographies.

We find it helpful to divide the forces affecting the speed of digitization into four key factors: society and culture, economics and risks, regulation and legal considerations, and technology.

Society and Culture
The push to digitization is being driven most powerfully by the new generation of end-users—both consumers and business users—demanding its benefits, including ever-widening social networks, ubiquitous connectivity, and constant access to news, entertainment, and information. At the same time, however, both social and cultural concerns remain. Fears of loss of privacy and the potential for government abuse of the array of technologies being made available will likely increase as the digital world is built out.

Economics and Risks
A relatively robust infrastructure is already in place to support digitization, but the amount of investment required to fully realize it is daunting, both for the additional infrastructure needed and for the services and applications to be built on top of it. Conflicting economic interests have the potential to slow down further investments in infrastructure, and recent major malfunctions and incidents of theft of critical personal and corporate data continue to raise questions about the risks involved in placing too much faith in the reliability of the complex digital environment.

Regulation and Legal Considerations
There is already considerable governmental and institutional support for digitization, including regulations concerning health information and privacy issues, and laws involving liability risks as they relate to information and networking, at least in some jurisdictions. Many governments have also helped promote consistency in the creation and use of technological standards, and exerted a great deal of influence over the fair allocation of spectrum, for the most part.

A number of trends in technology are coalescing to promote the coming transformation to digitization. The cost of all kinds of computing and communications equipment and devices keeps dropping, the global implementation of high-speed fixed and mobile networks continues apace. Despite occasional setbacks, more and more users are adopting cloud services, a move that is also promoting the faster creation and adoption of highly user-friendly applications and processes.

Knowing the accelerators and decelerators affecting the rate of digitization in each industry and geography is critical, as CEOs and their executive teams decide how to go about taking advantage of these trends, concluded El-Darwiche. And while we would not recommend standing in the way of digitization, it goes without saying that anyone seeking to retard the rate of change will also want to begin by making sure they understand the factors driving digitization.

Click here to download the pdf report by Booz & Company.