Monthly Archives: June 2016

How to become digital disruptors

Digital disruption isn’t just for hip start-ups. Incumbents can not only compete but actually lead radical industry change if they pay attention to the way their business model is shifting and act boldly in response. In this episode of the McKinsey Podcast, McKinsey partner Chris Bradley and senior partner Angus Dawson talk to Cam MacKellar about the life cycle of digital disruption, what it means for incumbents, and how executives should react. An edited transcript of their conversation follows.

Podcast transcript

Hi, I’m Cam MacKellar, from McKinsey’s Sydney office, and I’m delighted to be speaking today with Angus Dawson, a senior partner of the firm’s Strategy Practice throughout Asia; and Chris Bradley, a partner here in Sydney.

Both Angus and Chris have recently published articles on digital strategy for McKinsey Quarterly. Chris, along with his colleague Clayton O’Toole, coauthored an article published in May called “An incumbent’s guide to digital disruption.” The article looks at how companies can avoid becoming victims of digital disruption by recognizing crucial thresholds and acting in time. Angus and Chris, thank you very much for spending time with us today.

Cam MacKellar: Chris, it’s clear that the champions of disruption are more often attackers than incumbents. Why is that? And why is it so difficult for incumbents to respond rapidly to disruption?

Chris Bradley: I think companies are well geared for running their business at current course and speed or responding to a very immediate and real crisis. But disruption is in between those two goalposts because it’s uncertain, and it plays out over a very, very long period of time, and we get the proverbial boiling-frog problem in a company where the pressures of the short term and what’s real and what’s in front of your face are so all encompassing that the disruption gets underplayed.

Angus Dawson: There’s nothing that a CFO dislikes more than a business case that’s based on preventing decline. When you put a business case up, if you’re going to get investment you’ve got to show how it’s going to add to growth and profitable growth, and disruption is actually saying we’ve got a different baseline and that’s one of decline, and that conversation often just gets shut down.

Chris Bradley: Psychologically accepting a declining baseline in a business that you’ve grown up in and that you love and that you’ve actually got to take as the status quo or as the default reality, the idea that this business will decline, other things being equal, inference being big investment and big effort to maintain today’s position, that’s a big bridge to climb, and that’s why often you won’t see the response until that baseline doesn’t become a counterfactual; it becomes the factual.

Cam MacKellar: For incumbents who may realize disruption is out there, it’s perhaps lurking on the horizon, and they know that it exists, how should they determine what’s a real trend and what’s just noise? How can they work out which digital trends are going to influence their business and which ones are simply hype?

Angus Dawson: We’ve got to have a bit of empathy here for executives who are being hammered every day with trends and reports of how the whole world is going to change, threats on the horizon both from people outside the organization as well as from people inside. To be honest, most of them aren’t going to eventuate. We’re starting from a position of trying to pick the few things that really matter and the approach that we advocate is to come back to the fundamentals of the industry and how money gets made. We’ve got all the economic essentials to understand and to unpack what will change and why it will change and what are the markers of that to try to get through all the noise.

Chris Bradley: When these disruptions affect some of the deep wiring in the industry, you know it’s real, but a lot of the trends operate at this surface level. The other point I would add is that it’s nonlinear, so the world changes slowly until it doesn’t. That’s why when I look back through my career, most of these big changes, we’ve underestimated the impact of them but overestimated how quickly they would happen. I started my career around the time of the first dot-com boom, and I don’t think anyone at the time realized how profound the real Internet revolution would be, but that it would be pretty well 20 years later that we’re talking about it, with real depth. It’s that nonlinearity that’s important and why we’ve made the S-curve one of the central analytical ideas in there, because it’s nonlinear and because at any point where you extrapolate on an S-curve linearly, you’re going to get it completely wrong because you get this everything goes slow until it happens really, really quickly.

Digital future construction

e construction industry is ripe for disruption. Large projects across asset classes typically take 20 percent longer to finish than scheduled and are up to 80 percent over budget (Exhibit 1). Construction productivity has actually declined in some markets since the 1990s (Exhibit 2); financial returns for contractors are often relatively low—and volatile.

While the construction sector has been slow to adopt process and technology innovations, there is also a continuing challenge when it comes to fixing the basics. Project planning, for example, remains uncoordinated between the office and the field and is often done on paper. Contracts do not include incentives for risk sharing and innovation; performance management is inadequate, and supply-chain practices are still unsophisticated. The industry has not yet embraced new digital technologies that need up-front investment, even if the long-term benefits are significant (Exhibit 3). R&D spending in construction runs well behind that of other industries: less than 1 percent of revenues, versus 3.5 to 4.5 percent for the auto and aerospace sectors. This is also true for spending on information technology, which accounts for less than 1 percent of revenues for construction, even though a number of new software solutions have been developed for the industry.

Technical challenges specific to the construction sector have a role in the slow pace of digitization. Rolling out solutions across construction sites for multiple sectors that are geographically dispersed—compare an oil pipeline, say, with an airport—is no easy task. And given the varying sophistication levels of smaller construction firms that often function as subcontractors, building new capabilities at scale is another challenge.

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However, none of this is going to get easier. Projects are ever more complex and larger in scale. The growing demand for environmentally sensitive construction means traditional practices must change. And the shortage of skilled labor and supervisory staff will only get worse. These are deep issues that require new ways of thinking and working. Traditionally, the sector has tended to focus on making incremental improvements, in part because many believe that each project is unique, that it is not possible to scale up new ideas, and that embracing new technologies is impractical.

The McKinsey Global Institute estimates that the world will need to spend $57 trillion on infrastructure by 2030 to keep up with global GDP growth.1This is a massive incentive for players in the construction industry to identify solutions to transform productivity and project delivery through new technologies and improved practices.

In this report, we consider five ways the industry can transform itself over the next five years.

How to Adapting your board

ftware is eating the world,” veteran digital entrepreneur Marc Andreessen quipped a few years back. Today’s boards are getting the message. They have seen how leading digital players are threatening incumbents, and among the directors we work with, roughly one in three say that their business model will be disrupted in the next five years.

In a 2015 McKinsey survey, though, only 17 percent of directors said their boards were sponsoring digital initiatives, and in earlier McKinsey research, just 16 percent said they fully understood how the industry dynamics of their companies were changing.1In our experience, common responses from boards to the shifting environment include hiring a digital director or chief digital officer, making pilgrimages to Silicon Valley, and launching subcommittees on digital.

Valuable as such moves can be, they often are insufficient to bridge the literacy gap facing boards—which has real consequences. There’s a new class of problems, where seasoned directors’ experiences managing and monetizing traditional assets just doesn’t translate. It is a daunting task to keep up with the growth of new competitors (who are as likely to come from adjacent sectors as they are from one’s own industry), rapid-fire funding cycles in Silicon Valley and other technology hotbeds, the fluidity of technology, the digital experiences customers demand, and the rise of nontraditional risks. Many boards are left feeling outmatched and overwhelmed.

To serve as effective thought partners, boards must move beyond an arms-length relationship with digital issues (exhibit). Board members need better knowledge about the technology environment, its potential impact on different parts of the company and its value chain, and thus about how digital can undermine existing strategies and stimulate the need for new ones. They also need faster, more effective ways to engage the organization and operate as a governing body and, critically, new means of attracting digital talent. Indeed, some CEOs and board members we know argue that the far-reaching nature of today’s digital disruptions—which can necessitate long-term business-model changes with large, short-term costs—means boards must view themselves as the ultimate catalysts for digital transformation efforts. Otherwise, CEOs may be tempted to pass on to their successors the tackling of digital challenges.

At the very least, top-management teams need their boards to serve as strong digital sparring partners when they consider difficult questions such as investments in experimental initiatives that could reshape markets, or even whether the company is in the right business for the digital age. Here are four guiding principles for boosting the odds that boards will provide the digital engagement companies so badly need.