The (Uneven) Digitization of the US EconomyIrving Wladawsky-Berger |
Digital technologies are all around us, – increasingly ubiquitous and commoditized. But, are they a major source of competitive differentiation? Are they still a strategic value to business? Can digital innovation drive long term economic growth?
Several weeks ago, the McKinsey’s Global Institute (MGI) published a report addressing these questions. Digital America: A tale of the haves and have-mores aims to quantify the state of digitization of the US economy. The report introduces the MGI Industry Digitization Index, a methodology for exploring the various ways US companies are going about their digital journey—based on 27 indicators that measure how they’re building digital assets, expanding digital usage, and creating a digital workforce.
The report’s overriding finding is that the US economy is digitizing unevenly, with large disparities among sectors. Not surprisingly, information and communications technologies (ICT) is the most digitized economic sector, followed by media, professional services and financial services. On the other hand, health care, hospitality, construction and agriculture are the least digitized sectors.
A number of sectors are poised to significantly increase their digital capabilities over the next several years. The rapid growth of the Internet of Things should help industries like manufacturing, utilities and mining by enabling them to digitize and interconnect their physical assets. Smart devices and sensors of all sorts will also assist in the digitization of labor-intensive sectors like retail and health care.
“The gap between those on the frontier and the rest of the economy is about the sophistication of digital usage,” notes the report. “The gap between the digital haves and have-mores is growing as the most advanced users pull away from everyone else. They have moved beyond expanding access and adding users; now they are focused on deepening engagement and capabilities.”
A similar conclusion was reached by Erik Brynjolfsson and Adam Saunders in their 2009 book Wired for Innovation: How Information Technology is Reshaping the Economy. The authors suggest that the strategic value of technology to business is still increasing.
What about the impact of digitization on future economic growth? McKinsey estimates that digitization could increase the 2015 GDP by over $2 trillion based on its impact on three major areas of the economy:
- Labor markets: Online platforms could make labor markets more efficient and transparent, increasing labor force participation and helping to better match workers with employers.
- Capital efficiency: IoT can significantly improve the utilization of capital assets, leveraging preventive maintenance to reduce equipment downtime and operational costs.
- Multi factor productivity: Big data and analytics, IoT, mobile devices, cloud computing, AI and other technology advances could lead to major new innovations, faster product development, improved energy efficiency and smarter overall operations across just about all industry sectors.
But the report also warns that companies must adapt or risk being left behind in our rapidly advancing digital economy, and lists some of the most pressing issues that companies need to consider to keep up, including:
- Prepare for tougher, 360-degree competition. Sector boundaries mean little in a digital world where new competitors can become market leaders practically overnight.
- Build new assets and revenue streams. Digital competitors often embrace highly disruptive business models.
- Build – or buy – the capabilities of the future. Agility is essential. Companies cannot afford to fall behind in critical capabilities.
- Redefine customer engagement. Leverage data generated from digital interactions to fine-tune marketing and customer engagement.
- Take advantage of new innovation models. Embrace open, collaborative innovation across the whole organization, supply chain partners, research communities and customers.
- Emphasize agility and learning. In a fast changing marketplace, agility is more critical than long-term forecasting exercises.
- Think differently about your workforce. To keep up with fast-changing technologies, companies need to invest in talent and learning programs.
This is blog is an abridged version of another post. Go here to read the unabridged version.