The adoption of digital technology in business processes has a penetration of less than 40 per cent, according to a study by McKinsey, with most industries lagging behind the media, retail, and high tech sectors.
Financial impact of digital initiatives
But what is the financial impact of investing in new technology? Despite the idea that technology will have a democratising effect on societies, in the world of business the opposite scenario is currently playing out, with smaller companies seeing muted revenues and profit growth as a result of having to invest in new digital systems, while the bigger companies capture 'disproportionate gains'.
McKinsey's study – The case for digital reinvention – looked at how the financial performance of companies changed as they invested in digitisation of processes such as supply chain, marketing & distribution, services and business processes. It specifically looked at the impact on revenue growth, EBIT growth, and return on digital investment. Here are three of the report's main findings:
1. Average returns on digital investment are negative
Across all industries, investing in digital processes is costing the average company in terms of revenue and earnings. The study found that current levels of digitisation have meant an average reduction of up to six points of annual revenue and 4.5 points of growth in earnings before interest and taxes (EBIT).
2. But some companies are getting it right
McKinsey's study also shows a huge variation in the returns companies see when they invest in digital initiatives. The graph below shows that returns are distributed unequally: some businesses in every industry are earning outsized returns, while many others in the same industries are experiencing returns below the cost of capital. McKinsey's report states: “These findings suggest that some companies are investing in the wrong places or investing too much (or too little) in the right ones—or simply that their returns on digital investments are being competed away or transferred to consumers.”
The study also found that just 2 per cent of respondents said they are focusing their digital strategy on their supply chain, with almost half saying their focus is on marketing and distribution.
3. What the successful digital investors did right
The companies that achieved positive revenue growth, EBIT growth, and return on digital investment when they invested in their digital processes and strategy, made several strategic decisions that differentiated them from companies who did not see a return on their funding of digital initiatives. One of the keys to success was to align digital strategy with corporate strategy, while also ensuring a high level of strategic response within key business areas. Avoiding siloed business mindsets, ensuring a cohesive business culture and a common view of customers were all important to making the digital strategy a business success.
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