Merging the best of digital and physical worlds
Print Edition
THE real business transformation taking place today isn’t the replacement of the physical world by the digital one, it’s the marriage of the two into combinations that create wholly new sources of value.
This is a phenomenon we at Bain call DigicalSM, and it is likely to reshape not only the way people live, but also the way companies operate.
Digital-physical innovations are already changing virtually every part of business. Healthcare checkups rely on physical interactions combined with digital diagnostic equipment and records management. In retailing, brick-and-mortar stores now serve as pickup centers for products purchased online.
Disney provides visitors to its Disney World theme park with a radio-frequency-enabled wristband that acts as ticket, room key and credit card, allowing them to book rides in advance and charge meals with a flick of the wrist.
We reviewed the experience of some 300 companies engaged in Digical initiatives and the findings are clear: Every industry will undergo some degree of transformation and a strategy that fuses the best of both digital and physical worlds is likely to generate the greatest value for the forseeable future.
Consider how the very different experiences of two US retailers reflect the way that some moves succeed while others backfire.
Sears jumped on the digital bandwagon early but made some fundamental miscalculations.
Among the biggest missteps: It reorganized into a radically decentralized structure that inhibited collaboration between new digital initiatives and the core business. The retailer also invested heavily in e-commerce at the expense of its physical stores.
Competitor Macy’s took a different approach. Finding that customers who shopped both online and in stores generated five times the profit of those who shopped only online, Macy’s aimed for greater integration. It made major investments in its physical outlets, piloted the use of stores as distribution centers, shipping items direct to online buyers and filling orders from stores when an item was out of stock in online warehouses. Sears’ profits fell, making it harder to fund the right digital investments. Meanwhile, the approach helped boost Macy’s financial performance and stock price.
The way to respond
Because innovations will hit some businesses much faster than others, a key first step is assessing your company’s environment.How much has the transformation already changed your industry’s offerings and competitive dynamics? How much is it likely to do so in the next several years?
Analyze each part of your industry’s value chain and determine which points Analyze each part of your industry’s value chain and determine which points are best suited to innovation. For example, in construction, one such point may be site preparation. Caterpillar already produces earth-moving machinery equipped with GPS and laser technology, allowing operators
to excavate to precise depths and slopes.
Determine how to best respond to innovations in your industry. Our study of 300 companies found that not a single one was completely surprised by the advent of innovations, yet nearly 80 percent of those companies are still in the early stages of response. Among the obstacles: lacking digital expertise, many executives either ignore the threat or overreact by placing
outsized bets on strategies based on hunches.
The most successful companies recognize that the response will evolve along with their experience and capabilities.
They acquire and nurture the necessary expertise, often going where the talent is rather than expecting innovators to come to them.
They keep innovation units separate from the core business for a while, so that those units can experiment and grow without the constraints of a large organization. But they also work at improving the core itself, understanding that the core holds potential competitive advantages.
In our view, eventually they bring the core and the innovators together, transforming the company and capitalizing on those competitive advantages to create innovations of their own.
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