How to equip organisations for the digital era

In a single lifetime, digital has changed the face of markets and economies.

From social media to big data, the digital revolution has had three overarching effects on businesses – so far. First, it has created mega companies like Baidu, Facebook, Google, and Tencent. The market value of the world’s largest 20 internet companies, most of which are no more than 15 years old, is already a quarter of the value of the world’s biggest 20 companies by revenue, some of which have been in business for a century or more. Second, digital has disrupted many sectors, from music to automotive. Finally, it has given consumers enormous power. In developed countries in Asia, for example, more than a third of financial-services customers said online research had influenced their decisions across a range of banking products.

For all the change that’s already happened, the next wave of disruption is already bearing down. The use of big data has facilitated the refinement of machine-learning algorithms that help manage energy usage, make ever more relevant recommendations to consumers, and automate a massive array of processes. And the effects of the Internet of Things and digital artificial intelligence are just beginning.

Asia is at the forefront of many of these digital developments, as shown by the World Economic Forum’s Global Information Technology Report 2015. Chinese businesses, Tencent and Baidu, for instance, are among the world’s leading internet companies. Among other innovators, GrabTaxi offers automated location-based smartphone booking of taxis in South-East Asia, Codapay is a digital-payment service that can be used throughout South-East Asia, and Samsung Smart Driving from South Korea provides a suite of automotive diagnostic and maintenance utilities.

Nevertheless, many companies in Asia and elsewhere are struggling to adapt to the changes. When companies invest in digital, they tend to treat it as a mere experiment or still a simple add-on to their traditional business models without addressing how digitization is fundamentally changing their enterprises. The time to experiment with digital or to consider it peripheral is ending; companies should take the big leap and make digital the core capability to create their shareholder value today and in the future.

To help companies understand how to make that change, McKinsey has developed the Digital Quotient (DQ), a benchmarking capability that assesses an organization’s digital strengths and weaknesses. Based on extensive research, DQ has identified the 18 management practices across four areas – culture, strategy, capabilities, and organization – that have the greatest impact on the future financial performance of a company undergoing digital transformation.

According to an analysis of a large sample of publicly traded companies, the average three-year annual total return to shareholders for companies with top DQ scores is about three times that of companies with low DQ scores. Five-year average compounded annual growth rates for revenue are almost five times greater.

The best-performing companies often score high on all four aspects of DQ, even if they rarely excel at every DQ management practice. Given this reality, we identified three archetypes among the top scorers: superstars, which did well across the board; digital souls, whose outstanding culture overcame weak capabilities; and digital hands, whose outstanding capabilities overcame cultural shortfalls, such as inadequate external orientation.

Among the crucial characteristics shared by the best companies – making digital integral to corporate strategy and having a culture that accepts and encourages risk taking. Many companies with high DQ scores, for example, express a high tolerance for bold initiatives. In addition, many of these companies actively use prototypes and limited releases to test ideas with real customers.

Other qualities associated with high-scoring companies are related to capabilities. Executives at these companies have the necessary resources and capabilities to produce, share, and update digital content at scale. Their companies are also effective at investing in digital infrastructure. In addition, many of the top companies have clear metrics centered on digital performance and earmark funds to scale promising initiatives.

For all the positive attributes of digital leaders, there are some common challenges. Many continue to struggle, for example, with connectivity in delivering a consistent, high-quality customer experience across channels. Even at high-DQ organizations, finding digital talent outside the company is difficult, roles and responsibilities within the company are often unclear, and measuring return on digital investment is challenging.

Companies struggling to become digital winners may find the breadth of the challenge daunting. But our analysis also identified three steps to build momentum and deliver early benefits: reach an internal consensus on the company’s digital status and objectives, identify a few initiatives with the greatest value potential, and focus on scaling the most promising initiatives quickly. Without that kind of focus and commitment, we find that companies may be left with a series of pilot programs that do not deliver the impact they should.

McKinsey research has shown distinctive characteristics across companies that are thriving in the new digital era. By building up their Digital Quotient, companies can begin to take advantage of digital’s growth potential.

Authors: Jacques Bughin is a director in McKinsey’s Brussels office, and Michael Gryseels is the leader of McKinsey’s Telecom, Media, and Technology Practice for South-East Asia and a director in the Singapore office.

Image: Employees work in front of their computers at the Vente-Privee.com company’s headquarters in Saint-Denis near Paris October 24, 2013. REUTERS/Charles Platiau