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Show me the digital value

October 15, 2022
Sustainability

When large companies overinvest in digital capabilities, they dramatically widen the value gap with their more cautious peers, generating an average of 30% more EBIT over three years. What are these outperformers doing right?

Of all the companies that have embarked on digital transformations, relatively few have generated the value they sought to build. Our recent research confirms that only the most digitally advanced companies produce substantial returns. The companies that trail face a widening value gap going forward.

Many companies’ digital transformation efforts are now sufficiently mature that we can separate the value builders from the rest of the pack. When we compare performance over the last three years, a clear digital value gap becomes apparent. This gap is expected to expand as some companies build on their success, while those that have failed to transform find themselves trapped in a vicious cycle of underinvestment and lower value generation that causes them to fall further behind.

The Digital Value Gap
Our latest analysis of corporate investment in digital capabilities and the resulting performance shows that digitally advanced companies (the top 25% in our sample) continually outperform those that have transformed less successfully (the bottom 25%) on key financial metrics such as revenue growth and profitability. (See Exhibit 1 and the sidebar, “About Our Research.”)

ABOUT OUR RESEARCH
The top companies achieve higher revenue growth from digital initiatives and higher EBIT. Since 2019, the compounding effect of the spread between top and bottom performers has resulted in a value advantage of 22 percentage points for digitally advanced companies. (Value is defined as revenue growth factored with average annual EBIT.) The future looks bleak for those that trail: if current trends continue, the cumulative value gap will triple to a 66-point margin for digitally advanced companies by 2025.

The latest findings are consistent with our earlier research into digital transformation, which revealed that a new class of incumbent companies is making significant value gains: traditional businesses that have successfully executed a digital transformation and are showing progress in systematically building digital capabilities. These companies operate more like digital natives than their less digitally advanced peers, and they generate more value as a result. Their strength does not come only from tech and data—they have also rewired their operating models. They work in new ways, leveraging different incentives, overhauling their risk and security policies, and establishing new partnerships and alliances. They use agile cross-functional (business and tech) teams and organize their processes and teams to achieve defined outcomes, such as faster innovation, quicker speed to market, and lower costs through automation.

Because digitally advanced companies grow revenues more quickly, they have more funds available for investment each year. The higher-value-creating companies in our latest study continually increased the share of revenue invested in digital transformation, from an average of 9% in 2020 to 14% in 2021. Trailing companies invested as well but at lower levels, from 7% (2020) to 11% (2021). For a company with annual revenues of $40 billion, the difference in investment is $1.2 billion a year.

Digitally advanced companies also invest a bigger percentage of revenues in their digital programs. Since 2019, digital value creators have put 15 percentage points more funding to work in digital programs, creating an investment gap that will increase going forward. They have also set a flywheel spinning, as greater investment fuels the expanding value gap described above.

Bridging the Gap
How can companies reduce the digital value and investment gaps? We previously described how putting the right success factors in place flips the odds of mounting a successful digital transformation from 30% to 80%, while accelerating financial performance and innovation.

Our latest research puts the spotlight on three factors that characterize the companies now creating digital value: alignment of the C-suite around purpose, strategy, and a single transformation roadmap, a digitally enabled organization, and modern approaches to technology through digital and data platforms.

ALIGNMENT OF THE C-SUITE
Leading companies integrate technical and human capabilities to work in new ways. The active involvement of both global and local business leaders, tech leaders, and human resources is pivotal. The full team must define and execute a shared digital vision and agenda. More than 90% of the digitally advanced companies in our latest study get high scores for C-suite alignment and collaboration, meaning that C-suite members, globally and locally, collaborate consistently on defining and executing the digital agenda. Only about a quarter of companies at the lower end demonstrate this kind of alignment and collaboration. READ MORE

By Vladimir Lukic, Karalee Close, Michael Grebe, Romain de Laubier, Marc Roman Franke, Michael Leyh, Tauseef Charanya, and Clemens Nopp

Source: bcg.com

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