Digital Disruption
Digital technology has broken markets and disrupting companies for more than two decades, but despite that history, incumbents are still struggling to enact and deliver digital transformations.
The first challenge is disruption; digitization is enabling new, disruptive models that aggressively compete with legacy models, putting material pressure on incumbents' revenue and profit growth. As incumbents fight back with their own digital strategies, our research shows that they often trigger a second wave of competition, closer to the notion of Schumpeterian imitation where incumbents start to innovate, sometimes aggressively, against the threat of slashing yet more revenue and profit growth . We estimate that on average, both waves of digital competition have to do half of the annual growth and growth of earnings from incumbents.
The second challenge is that when companies do launch transformations in response to competition, the results are often underwhelming. Based on our recent worldwide survey of 2,000 incumbent companies across all major industries and countries, we estimate that the average return on incumbent digital initiatives is below 10% - barely above the cost of capital. Besides the average, however, we also witness in each sector a large group of companies in terms of their ability to sustain and generate a return of their digital investments. The top-performing decile of companies achieves revenue growth that is eight percentage points higher than the industry average and that is 10 times that of the bottom decile companies.
