Understanding digital disruption according to McKinsey
McKinsey’s digital-strategy framework has been provided to the world to help Corporates understand the challenges they are facing in the new digital era. To be blunt, that framework is over-engineering the reality. So let’s try to simplify that framework to help traditional companies, either large corporate groups or SMBs, understand where the threats are coming from and how much they would be challenged. And as a bonus, let’s try to identify opportunities to compete with digital native companies.
McKinsey’s framework is a 6-part diagram that highlights 6 challenges, from demand to supply and from modest degree of change to extreme degree of change. The video explanation is quite misleading with examples (not enough room here to challenge their examples) that are not on spot so I would provide alternative examples.
Modest degree of change:
- Undistorting demand: unbundling to facilitate the purchase (iTunes store to pay for 1 selected song vs. a full album)
- New market making: speed of delivery (Deliveroo with faster last mile delivery)
- Unconstraining supply: lowering the purchase price of a product (Airbnb flooding the hospitality business)
Extreme degree of change:
- Reimagining business systems: new business model based on a better pricing and management of costs (subscription based models vs licensing)
- Hyperscaling platforms: automating a key process to lower costs (Uber GPS technology to facilitate driving and booking)
- New value propositions: from a product to an experience purchase (Nike running community and tech tools to sell more running equipment)
Now that we have been through McKinsey’s framework, let’s move to a more straightforward one. Let’s forget about demand and supply and focus on the degree of changes. What digital has truly challenged is (1) cost and (2) business models, both thanks to the technological evolution. That evolution, and the related complexity, has created ladders of change that any company needs to accept and embrace to become competitive anew. I would, as the Consulting firm did, put aside the production line changes that would occur with the new digital capabilities (IoT for example) and only focus on the strategic dimension. I have defined levels of complexity (from 0 to 6) vis-à-vis its potential disruption for your business: the higher your competition is on the levels, the more you are facing a potential “instant death”. You will see that with some digital native basics, you can already be a high level performer.
Modest degree of change for the business:
- Level 0 – Customer management/ convenience: new sets of tools have enabled a flawless management of the customers, a topic that can easily be implemented with low frictions from all stakeholders
- Level 1 – Data driven decision making: tracking any actions and its impacts on the business (both company-side and customer-side) to understand changes in behaviors and leverage them, a topic that requires changes in the process and a light change management program
- Level 2 – Cost structure optimization: you need to master both Level 0 and Level 1 to identify where you can cut costs and invest budgets to increase your value generation, a topic that requires first a large change management program plus a large scale update of your internal process
Extreme degree of change:
- Level 3 – Automation: hard to implement in a traditional company since it requires a different mindset and also to let go some of your resources that are either (1) not willing to automate for political reasons or (2) don’t get it because of the technological dimension
- Level 4 – New market: even harder to implement since you would have to let go of some of your customer base to focus on the new business (don’t try to chase both markets, you have competitors on both of them already and you know the end of such a story)
- Level 5 – New offering: basically impossible you would need to bet your business on it, which you don’t want to – would you bet your company by creating an iPod or an iPhone at the time of their release?
Position of digital native companies (let’s say “startups” to be hype) in that ladder:
- Level 0: all startups since it is a key pillar for them to acquire your market shares
- Level 1: any accelerating startup that needs to focus more on CLTV than aggressively growing its customer base
- Level 2: grown-up startups that are in the operating profit focus, quite easy for them since they “own” the previous 2 levels
- Level 3: all startups since they are willing to outplay your company by acquiring your customers faster than you can get in touch with them
- Level 4: some startups leverage existing industry expertise to target another market with, some have made multi million dollar bets on them, but all are expecting to have found one and only a few have made it and become kings of new hills
- Level 5: only a handful have made it that far and you don’t need to bother watching for one in your market, the time you understand you have a competitor that is successful with it you are already out of business