Pandemic Exposes Business Vulnerabilities

Most businesses fall far behind the digital curve, survey shows

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By Irving Wladawsky-Berger

The dramatic acceleration of tech adoption as a result of the COVID-19 pandemic has been widely reported. But a recent survey shows how much still needs to be done for most businesses to thrive and survive in the next decade.

A global survey on digital strategy conducted by McKinsey indicates not only that the pandemic has increased the pace of business, but that rapid and major rebuilding of technology capabilities will be “critical to companies’ COVID-19 exit strategies as well as to what comes next.” The report, The new digital edge: Rethinking strategy for the post-pandemic era is based on responses from over 1,100 C-level executives and senior managers from different industries, functions, company sizes and regions in January of 2021.

Some companies are already on the right track. “Their responses show that better overall technology capabilities, talent, leadership, and resources (a company’s technology endowment) are linked to better economic outcomes,” according to the report.

But the results also confirm that “many organizations could be missing opportunities to invest in the areas of their business models that are most at risk of digital disruption.”

A key finding is that across all industry sectors, survey respondents believe that several areas of their companies are very vulnerable to digital disruption, and they will need to build new digital businesses to stay economically viable.

“Only 11 percent believe their current business models will be economically viable through 2023, while another 64 percent say their companies need to build new digital businesses to help them get there …

Respondents in every sector say their companies have significant vulnerabilities, especially to their profit structures, ability to bundle products, and operations.”

The technology endowments of the top-decile economic performers include cloud adoption and infrastructure, both public and private; a common source of data across the organization; a modern architecture for technology elements; sufficient cybersecurity to mitigate current risks and threats; prioritization of tech resources to the most strategically important efforts; increased investment in talent; filling key technology roles with high-quality individuals; increased R&D spending, and creation of new partnerships. These assets must be adopted more aggressively across the board.

“With digital and technology-driven disruptions creating winner-takes-all dynamics in more and more industries, only a small subset of organizations is likely to thrive — and even these companies have much more room to strengthen their technology endowments,” the report concludes.

Let me summarize the other major findings:

• The pandemic has dramatically increased the pace of change in leading digital companies. A previous McKinsey survey conducted in July of 2020 showed that the pandemic had accelerated the overall adoption of digital technologies by three to seven years in just a few months. This included speeding up the digitization of customer and supply-chain interactions and of internal operation by three to four years, and the share of digitally enabled products in their portfolios by up to seven years. Advances that were considered best-in-class in 2018 would now be considered below average.
• Digital investments increased during the pandemic to meet new demands, despite decreasing elsewhere in the business. Funding of digital and technology initiatives increased; so did the numbers of full-time equivalents in digital and technology roles.
• Given the accelerated digital adoption, a majority of companies view technology capabilities as a strategic differentiator. Fully 51% of respondents said that they invest in digital technologies to differentiate their companies from competitors, and 7% said that they aspire to become a technology company, while the rest do so to keep up with the industry and to maintain current capabilities.

• The bolder investments made by top competitors have put them significantly ahead of their peers, making catching up a challenge. “When looking at the technology endowment’s individual capabilities (the survey asked about 13 in total), the top-decile economic performers are already significantly ahead of their peers on nearly every one. … At the same time, the results confirm that even the top performers have room to improve and strengthen their tech endowments.”
• Top performers are more likely than their peers to fill talent gaps through hiring. Training and outsourcing are out, new hires are in. The survey found that 46% of the top-decile economic performers plan to hire new talent to fill talent gaps, while 23% plan to do so by training existing talent. The equivalent figure for other performers is that 34% plan to hire new talent, and another 34% will rely on training existing talent.
• The top economic performers have been more likely to invest in new partnerships, talent and R&D than their peers. Compared to all other respondents, the top-decile economic performers have a 21% advantage in increased investment in talent; a 13% advantage in creating new partnerships; and a 12% advantage in increased R&D spending. “Catching up with the leaders (much less surpassing them) will be increasingly difficult, for the top economic performers have already taken more actions than peers to achieve their technology objectives.”
• Top economic performers were more innovative than their peers during the COVID-19 crisis. Twenty-one percent of products and services sold by the top-decile performers didn’t exist the previous year compared to 12% for all other respondents.
• Top economic performers are making more aggressive plans to differentiate themselves with technology and new business models. Two-thirds, or 67%, of top-decile economic performers have such differentiation plans and 15% are planning to become tech companies, compared to 50% and 7% respectively for all other respondents.
• Tech-savvy leadership has helped set top performers apart. For example, 52% of the highest-level tech leaders in top performing organization play a central role in shaping overall business strategy compared to 27% for all other respondents, and 50% of technology leaders in top performing companies play a central role in the company’s innovations compared to 27% for all others. Such tech-savvy leadership will be even more valuable in the future.
• The call to become more tech savvy is increasingly important across the overall business leadership team. Organizations with tech-savvy leadership teams significantly outperformed their peers in their ability to build top-performing tech endowments. “The importance of digital poses a challenge for company leaders: few are used to engaging with technology, even as it is transforming the requirements of nearly every role and becoming part of everyone’s job.” … Yet according to the survey, the majority of current leaders “lack the knowledge or experience to pioneer ways to apply new technologies or consistently identify how new technologies can transform their business.”
• “The corporate recovery from the COVID-19 crisis will involve permanent changes to many dimensions of an organization: the pace at which it conducts its business, the very nature of that business’s value proposition, and the talent, capabilities, and leadership that are necessary for success,” McKinsey concludes. The time is now for companies to make bold investments in technology and capabilities that will equip their businesses to outperform others.”

This blog first appeared October 2, here.