McKinsey: Strategic principles for competing in the digital age

InsightaaS: McKinsey & Co. is a world-leading management consulting firm. Its flagship publication, McKinsey Quarterly, has been providing insight into key management issues for 50 years. In this article, experts from Taipei and London provide an ambitious view of digital competition. The post launches with a graphic tracing digital market evolution through five stages, and culminating at a ‘tipping point’ separating “the new normal” – “advanced incumbents” and successful start-ups – push laggard incumbents aside.

The authors use this concept to introduce the idea that “digitization will change industry landscapes as it gives life to new sets of competitors,” and then to introduce what they see as key issues in this changing market. One major section of the post walks through “seven trends that could redefine competition.” Several of these provide a great deal of grist for further examination, including “Winner-takes-all dynamics,” which identifies several industry sectors where digital competition is already acute – banking, insurance, media, telecommunications, and travel” as being ‘particularly vulnerable” to competitive shifts caused by digital options; “plug-and-play business models,” in which the flexibility and cost advantages offered by process-specific services can create scenarios where “it may not pay to build out those functions at competitive levels of performance, so [companies] simply plug an existing offering into their value chains;” and the (oft-raised) notion that “software replaces labor in digital businesses,” which could lead, in McKinsey’s view, to a future where replacement of human workers with software systems may create “significant social repercussions, elevating the opportunities and challenges associated with digital advances to a public-policy issue, not just a strategic-business one.”

The “seven forces” section is followed by a second extended analysis, “Managing the strategic challenges: Six big decisions,” which highlights options that management will need to evaluate as digital business reshapes their competitive environments. It then ends by observing that “Regardless of the organizational or leadership model a CEO and board choose, it’s important to keep in mind that digitization is a moving target.” Readers of the post will have a clearer sense as tho how and where their targets are shifting.

The board of a large European insurer was pressing management for answers. A company known mostly for its online channel had begun to undercut premiums in a number of markets and was doing so without agents, building on its dazzling brand reputation online and using new technologies to engage buyers. Some of the insurer’s senior managers were sure the threat would abate. Others pointed to serious downtrends in policy renewals among younger customers avidly using new web-based price-comparison tools. The board decided that the company needed to quicken its digital pace.

For many leaders, this story may sound familiar, harkening back to the scary days, 15 years ago, when they encountered the first wave of Internet competitors. Many incumbents responded effectively to these threats, some of which in any event dissipated with the dot-com crash. Today’s challenge is different. Robust attackers are scaling up with incredible speed, inserting themselves artfully between you and your customers and zeroing in on lucrative value-chain segments.

The digital technologies underlying these competitive thrusts may not be new, but they are being used to new effect. Staggering amounts of information are accessible as never before–from proprietary big data to new public sources of open data. Analytical and processing capabilities have made similar leaps with algorithms scattering intelligence across digital networks, themselves often lodged in the cloud. Smart mobile devices make that information and computing power accessible to users around the world.

As these technologies gain momentum, they are profoundly changing the strategic context: altering the structure of competition, the conduct of business, and, ultimately, performance across industries…

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