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Nearly 20 years ago McKinsey published an article on the potential impact of transformation they were seeing in the global marketplace. This week, I thought it interesting to summarise their findings and to stimulate a debate – has what they predicted come to pass?
The McKinsey research underpinning this post was part of a special initiative to deepen the understanding of the impact of global forces such as technology and deregulation. Drawing on their proprietary industry database, they measured how different types of workers in different industries spend their time at a microlevel. They estimated interaction costs for 24 worker categories and 23 industry types in the United States, and developed similar estimates for Germany and India.
Workers were classified into eight generic types—doers, caregivers, strategists, coordinators, analytic knowledge workers, interpersonal knowledge workers, data manipulators, and data harvesters and communicators—and a detailed ‘stereotypical’ activity profile was developed for each type. The activities were divided into interactive and non-interactive, and the costs associated with each group were isolated. McKinsey then used national statistics to gross up these calculations to the industry and economy level.
In addition, they conducted a series of experiments and simulations to gauge the potential impact of new technologies on the time and cost of routine economic interactions. The simulations were selected to provide surrogates for the 50 most commonly performed activities identified by McKinsey databases on worker activity.
Interactions were defined as the searching, coordinating, and monitoring that people and firms do when they exchange goods, services, or ideas and account for over a third of economic activity in the United States, exerting a potent influence on industries, firms, and customers.
So, let’s see what they found.
Individuals and organisations interact to exchange and monitor performance:
- At an economy level, interactions represent as much as 51% of labour activity in the United States, 49% in Germany and 36% in India.
- At an industry level, interactions account for 35-57% of all labour (including wholesale retail, person-to-person services, trucking, financial services, manufacturing, agriculture and more).
- At a firm level, interactions make up a large part of activities (i.e. 78% of customer solutions, 60% distribution, and 69% corporate centre).
- At an individual level, interaction activities vary. They peak at nearly 80% for managers and supervisors, and trough at 15% for workers in physical labour.
How interactions shape economic activity
They are important determinants of how industries are structured and customers behave. In detail, firms trade off the value of specialisation against interaction costs. Companies trade off the effectiveness of alternative organisational forms against the interaction costs in managing them while customers choose products and providers by trading off interaction costs of additional search against the marginal value expected.
In brief, vast improvements in connectivity multiply the interactive power of networks while a whole new section of the global economy will see its interactive capacity boosted. Indicatively, the number of installed PCs in low-income countries has increased by 171% between years 1992 and 1995, and by 114% in lower-middle-income countries. As for telephone density and cellular phone penetration, it’s almost 60 times more in high-income countries than 40 years ago and there are 38% more subscribers than 20 years ago respectively.
Also, the rate at which data can be transmitted over a line has increased dramatically (i.e. 56% less time to reorder an inventory item and 65% less time in updating an equity portfolio).
New ways to configure businesses will emerge. As for the rise in interactions, there are some points to note:
The most straightforward interpretation of the increase in interactive capability is that workers could do their jobs in less than half of the time.
At one level, technology will boost efficiency and cut jobs. However, in the long run there will be a net increase in employment, generated by a rise in the demand for interactions and the creation of new products and services that were previously uneconomic.
The rise of outsourcing and disaggregation
Vertical integration will become less valuable while the use of external markets, disaggregation, and outsourcing are bound to rise. In contrast, it is expected that cooperation and horizontal integration will become more attractive.
The strategic value of scale is likely to decline, although it will rise for networked businesses, who will most likely monopolise all attention and focus.
The lower cost of search and communication will force a move to more efficient market mechanisms and the role of intermediaries will disappear or be transformed into market making or synthesis.
Easier Customer Service
It will be far easier to reach customers anywhere in the world. Needless to say, direct sales and distribution will become the norm and tailoring products will be easier, faster, and cheaper.
Communication with customers will shift from broadcast to narrowcast and organisations will adopt structures that were not possible when interaction costs were significant.
With far greater interactive capability on the near horizon, every business leader needs to revisit and challenge the assumptions underlying existing strategy and organizational models. Here are some samples of questions you need to ask about your business. The questions may seem familiar, but the challenge is not to know the answers as they stand today, but to gauge how they will change over the coming years.
On ways to configure a business:
- What is the minimum and maximum level of scale in your business? How would this change if interactive capacity doubled or quadrupled? What would be the effect on your business configuration or strategy?
- Which non-core services and functions do you perform in house? What would you do differently if all functions – even those close to the core of the business – could be effectively outsourced?
- Where would you perform specific business activities if you could locate them anywhere in the world for little incremental management cost?
- What causes the biggest bottlenecks in your flow of business today? What would happen if you could increase the capacity of this bottleneck four-fold?
- In which business functions is your company’s performance truly world class? Can these internal services be standardised far enough to make them detachable to serve other businesses?
- Is it necessary to have intermediaries between your firm and its customers? Can you disintermediate the flow? Are there market mechanisms for performing the same functions more efficiently?
On ways to serve customers:
- Ignoring geography, how would you define your ideal customer base? How many of your customers have ready access to the Internet? How many will have access in five or 10 years? What stops you marketing to similar customers around the world?
- Which customers generate the biggest profits, and why? Will they have new opportunities to capture surplus from you? What imperfections do they face in the purchase and use of your products or services? How can these be eliminated?
- Are there customised products and services that compete with your standardised products and services today? What effect will it have on industry economics if the share of customised products quadruples over the next five years?
- What other products and services do your best customers purchase? How efficiently are these delivered to them? How could you deliver a wider selection or more customised versions of these products and services to your customers?
On ways to organise:
- How much time does your organization spend on interactions? Where are the biggest bottlenecks? What would you do differently if these bottlenecks could be eliminated?
- Why does your organisational structure look the way it does? What radical alternatives might be possible? What prevents you from experimenting with them?
- In which segments of your organisation is productivity in the top decile? What stops you transporting skills or knowledge across organisational boundaries? How can you transfer superior processes to other countries?
- How much capital does your company invest in controlling physical assets? If you owned no physical assets, what skills and competencies could you trade with those who owned the assets? What stops you doing this?
Expertise will become an increasingly valuable asset, leveraged across organisational and geographical boundaries.
Among the businesses likely to be most deeply transformed are:
- Interaction-intensive industries
- ‘Digitisable’ industries
- Intermediary industries
- Integrated firms
- Firms in regulated environments
- Multinational firms
It has become clear that success will require a deep understanding of the power of interactive capacity.
So, what do you think? Did McKinsey get it right?
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