DIGITAL/MCKINSEY: INSIGHTS - WINNING IN DIGITAL ECOSYSTEMS

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Digital/McKinsey: Insights

                                                 Winning in digital ecosystems

January 2018
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DIGITAL/MCKINSEY: INSIGHTS - WINNING IN DIGITAL ECOSYSTEMS
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DIGITAL/MCKINSEY: INSIGHTS - WINNING IN DIGITAL ECOSYSTEMS
Features
                            3                                  4                                18

Introduction:                     Competing in a world of            How tech giants deliver
Winning in digital ecosystems     sectors without borders            outsize returns—and what
                                  Digitization is causing a radi-    it means for the rest of us
                                  cal reordering of traditional      Networks and platforms
                                  industry boundaries. What          reign within high tech, media,
                                  will it take to play offense       and telecom. Understand-
                                  and defense in tomorrow’s          ing the sector’s dynamics
                                  ecosystems?                        is increasingly important for
                                                                     executives in all industries.

                           28                                   36                              46

Management’s next                  Adopting an ecosystem             How the convergence of
frontier: Making the most          view of business technology       automotive and tech will
of the ecosystem economy           To fully benefit from new busi-    create a new ecosystem
Engaging in digital ecosys-        ness technology, CIOs need        As the high-tech and automo-
tems requires a new set of         to adapt their traditional IT     tive worlds merge—with four
managerial skills and capabili-    functions to the opportunities    disruptive technology trends
ties. How quickly companies        and challenges of emerging        driving change—a complex
develop them will determine if     technology ecosystems.            ecosystem is creating new
they succeed in the ecosys-        Here’s how it’s done.             rules for success.
tem economy.

                           54                                  58                               66

Using data and                    What it really takes to            Making sense of Internet
technology to improve             capture the value of APIs          of Things platforms
healthcare ecosystems             APIs are the connective tissue     The Internet of Things platform
A Verily Life Sciences execu-     in today’s ecosystems. For         space is important, but also
tive explains how the com-        companies that know how to         crowded and confusing. How
pany targets better patient       implement them, they can cut       do you go about finding the
outcomes by harnessing            costs, improve efficiency, and      platform that’s right for your
analytics, machine learning,      help the bottom line.              business?
and other digital tools.
DIGITAL/MCKINSEY: INSIGHTS - WINNING IN DIGITAL ECOSYSTEMS
DIGITAL/MCKINSEY: INSIGHTS - WINNING IN DIGITAL ECOSYSTEMS
Winning in digital ecosystems
To meet customers’ rising expectations,               Not every company will succeed by
companies are extending their range of                orchestrating ecosystems. For many, joining
products and services as never before.                existing ecosystems will be more effective.
They are also making alliances with other             Whichever approach they choose, companies
companies, even competitors, to create                will need to start developing new capabilities,
complementary networks of offerings and               from “ecosystem IT” systems that link
services. The resulting ecosystems of                 enterprises to platforms and innovative third-
businesses may come to define the global              party services to new management skills
economy. In this issue of Digital McKinsey            that can handle the scale and complexity of
Insights, we look at how companies can adapt.         ecosystem relationships. To explore what this
                                                      kind of cooperation actually means, we take
Staking out a position in ecosystems is               a deeper look at what is happening in the
important, because enormous value could be            automotive and healthcare sectors, where
up for grabs. McKinsey experts believe that by        incumbents and digital natives are sharing
2025, some $60 trillion in annual revenue could       data and merging solutions.
be redistributed across the economy—one-
third of that year’s total. This dynamic is playing   The industry landscape is going through an
out in the high tech, media, and telecom              upheaval as digital ecosystems take shape.
sector, where tech giants have built platforms        To win, companies will need to embrace new
on which entire ecosystems run.                       relationships and ways of collaborating.

                                                                                                        3
DIGITAL/MCKINSEY: INSIGHTS - WINNING IN DIGITAL ECOSYSTEMS
Competing in a world of sectors
    without borders
    Venkat Atluri, Miklós Dietz, and Nicolaus Henke

    Digitization is causing a radical reordering of traditional industry
    boundaries. What will it take to play offense and defense in
    tomorrow’s ecosystems?

    Rakuten Ichiba is Japan’s single largest              company? Rakuten Ichiba is all that and more—
    online retail marketplace. It also provides loyalty   just as Amazon and China’s Tencent are
    points and e-money usable at hundreds of              tough to categorize as the former engages in
    thousands of stores, virtual and real. It issues      e-commerce, cloud computing, logistics, and
    credit cards to tens of millions of members.          consumer electronics, while the latter provides
    It offers financial products and services that        services ranging from social media to gaming
    range from mortgages to securities brokerage.         to finance and beyond.
    And the company runs one of Japan’s
    largest online travel portals—plus an instant-        Organizations such as these—digital natives
    messaging app, Viber, which has some 800              that are not defined or constrained by
    million users worldwide. Retailer? Financial          any one industry—may seem like outliers.

4   Digital/McKinsey: Insights January 2018
DIGITAL/MCKINSEY: INSIGHTS - WINNING IN DIGITAL ECOSYSTEMS
How applicable to traditional industries is          pioneers are bridging the openings along
the notion of simultaneously competing               the value chain, reducing customers’ costs,
in multiple sectors, let alone reimagining           providing them with new experiences, and
sector boundaries? We would be the first to          whetting their appetites for more.
acknowledge that opportunities to attack and
to win across sectors vary considerably and          We’ve all experienced businesses that
that industry definitions have always been fluid:    once seemed disconnected fitting together
technological developments cause sectors to          seamlessly and unleashing surprising
appear, disappear, and merge. Banking, for           synergies: look no further than the phone in
example, was born from the merger of money           your pocket, your music and video in the cloud,
exchange, merchant banking, savings banking,         the smart watch on your wrist, and the TV in
and safety-deposit services, among others.           your living room. Or consider the 89 million
Supermarkets unified previously separate             customers now accessing Ping An Good
retail subsectors into one big “grocery”             Doctor, where on a single platform run by
category. Changes such as these created new          the trusted Ping An insurance company they
competitors, shifted vast amounts of wealth,         can connect with doctors not only for online
and reshaped significant parts of the economy.       bookings but to receive diagnoses and
Before the term was in vogue, one could even         suggested treatments, often by exchanging
say the shifts were “disruptive.”                    pictures and videos. What used to take many
                                                     weeks and multiple providers can now be done
Yet there does appear to be something                in minutes on one app.
new happening here. The ongoing digital
revolution, which has been reducing                  Now nondigital natives are starting to
frictional, transactional costs for years, has       think seriously about their cross-sector
accelerated recently with tremendous                 opportunities and existential threats that
increases in electronic data, the ubiquity           may lurk across boundaries. One example:
of mobile interfaces, and the growing power          We recently interviewed 300 CEOs world-
of artificial intelligence. Together, these forces   wide, across 37 sectors, about advanced
are reshaping customer expectations and              data analytics. Fully one-third of them had
creating the potential for virtually every sector    cross-sector dynamics at top of mind.
with a distribution component to have its            Many worried, for instance, that “companies
borders redrawn or redefined, at a more rapid        from other industries have clearer insight
pace than we have previously experienced.            into my customers than I do.” We’ve also
                                                     seen conglomerates that until recently had
 Consider first how customer expectations are        thought of themselves as little more than
 shifting. As Steve Jobs famously observed,          holding companies taking the first steps
“A lot of times, people don’t know what they         to set up enterprise-wide consumer data
 want until you show it to them.” By creating        lakes, integrate databases, and optimize the
 a customer-centric, unified value proposition       products, services, and insights they provide
 that extends beyond what end users could            to their customers. Although these companies
 previously obtain (or, at least, could obtain       must of course abide by privacy laws—and
 almost instantly from one interface), digital       even more, meet their users’ expectations of

Competing in a world of sectors without borders                                                    5
DIGITAL/MCKINSEY: INSIGHTS - WINNING IN DIGITAL ECOSYSTEMS
trust—data sets and sources are becoming             believe an increasing number of industries will
    great unifiers and creating new, cross-sectoral      converge under newer, broader, and more
    competitive dynamics.                                dynamic alignments: digital ecosystems. A
                                                         world of ecosystems will be a highly customer-
    Do these dynamics portend a sea change               centric model, where users can enjoy an end-
    for every company? Of course not. People             to-end experience for a wide range of products
    will still stroll impromptu into neighborhood        and services through a single access gateway,
    stores, heavy industry (with the benefit of          without leaving the ecosystem. Ecosystems
    technological advances, to be sure) will go          will comprise diverse players that provide
    on extracting and processing the materials           digitally accessed, multi-industry solutions.
    essential to our daily lives, and countless          The relationship among these participants
    other enterprises beyond the digital space           will be commercial and contractual, and the
    will continue to channel the ingenuity of their      contracts (whether written, digital, or both)
    founders and employees to serve a world of           will formally regulate the payments or other
    incredibly varied preferences and needs. It’s        considerations trading hands, the services
    obvious that digital will not—and cannot—            provided, and the rules governing the provision
    change everything.                                   of and access to ecosystem data.

    But it’s just as apparent that its effects on the    Beyond just defining relationships among
    competitive landscape are already profound           ecosystem participants, the digitization of
    and that the stakes are getting higher. As           many such arrangements is changing the
    boundaries between industry sectors continue         boundaries of the company by reducing
    to blur, CEOs—many of whose companies                frictional costs associated with activities such
    have long commanded large revenue pools              as trading, measurement, and maintaining
    within traditional industry lines—will face          trust. More than 80 years ago, Nobel laureate
    off against companies and industries they            Ronald Coase argued that companies
    never previously viewed as competitors. This         establish their boundaries on the basis of
    new environment will play out by new rules,          transaction costs like these: when the cost
    require different capabilities, and rely to an       of transacting for a product or service on the
    extraordinary extent upon data. Defending your       open market exceeds the cost of managing
    position will be mission critical, but so too will   and coordinating the incremental activity
    be attacking and capturing the opportunities         needed to create that product or service
    across sectors before others get there first. To     internally, the company will perform the activity
    put it another way: within a decade, companies       in-house. As digitization reduces transaction
    will define their business models not by how         costs, it becomes economical for companies
    they play against traditional industry peers but     to contract out more activities, and a richer set
    by how effective they are in competing within        of more specialized ecosystem relationships
    rapidly emerging “ecosystems” that comprise          is facilitated.
    a variety of businesses from dimensionally
    different sectors.                                   Rising expectations
                                                         Those ecosystem relationships, in turn, are
    A world of digital ecosystems                        making it possible to better meet rising
    As the approaching contest plays out, we             customer expectations. The mobile Internet,

6   Digital/McKinsey: Insights January 2018
DIGITAL/MCKINSEY: INSIGHTS - WINNING IN DIGITAL ECOSYSTEMS
As boundaries between industry sectors continue to blur,
CEOs will face off against companies and industries they
never previously viewed as competitors.

the data-crunching power of advanced               time frame, significant surplus may shift
analytics, and the maturation of artificial        to consumers—a phenomenon already
intelligence (AI) have led consumers to expect     underway, as digital players are destroying
fully personalized solutions, delivered in         billions to create millions. It’s also a process
milliseconds. Ecosystem orchestrators use          that will require deploying newer tools and
data to connect the dots—by, for example,          technologies, such as using bots in multidevice
linking all possible producers with all possible   environments and exploiting AI to build
customers, and, increasingly, by predicting        machine-to-machine capabilities. Paradoxically,
the needs of customers before they are             sustaining customer relationships will depend
articulated. The more a company knows about        as well on factors that defy analytical formulas:
its customers, the better able it is to offer a    the power of a brand, the tone of one’s
truly integrated, end-to-end digital experience    message, and the emotions your products and
and the more services in its ecosystem it can      services can inspire.
connect to those customers, learning ever
more in the process. Amazon, among digital         Strategic moves
natives, and Centrica, the British utility whose   The growing importance of customer-centricity
Hive offering seeks to become a digital hub for    and the appreciation that consumers will
controlling the home from any device, are early    expect a more seamless user experience
examples of how pivotal players can become         are reflected in the flurry of recent strategic
embedded in the everyday life of customers.        moves of leading companies across the world.
                                                   Witness Apple Pay; Tencent’s and Alibaba’s
For all of the speed with which sector             service expansions; Amazon’s decisions
boundaries will shift and even disappear,          to (among other things) launch Amazon Go,
courting deep customer relationships is            acquire Whole Foods, and provide online
not a one-step dance. Becoming part of an          vehicle searches in Europe; and the wave of
individual’s day-to-day experience takes time      announcements from other digital leaders
and, because digitization lowers switching         heralding service expansion across emerging
costs and heightens price transparency,            ecosystems. Innovative financial players such
sustaining trust takes even longer. Over that      as CBA (housing and B2B services), mBank

Competing in a world of sectors without borders                                                   7
DIGITAL/MCKINSEY: INSIGHTS - WINNING IN DIGITAL ECOSYSTEMS
(B2C marketplace), and Ping An (for health,                              such as GE (seeking to make analytics the new
                housing, and autos) are mobilizing. So are                              “core to the company”) and Ford (which has
                telcos, including Telstra and Telus (each playing                        started to redefine itself as “a mobility company
                in the health ecosystem), and retailers such                             and not just as a car and truck manufacturer”).1
                as Starbucks (with digital content, as well as                           We’ve also seen ecosystem-minded
                seamless mobile payments and preordering).                               combinations such as Google’s acquisition of
                Not to be left out are industrial companies                              Waze and Microsoft’s purchase of LinkedIn.

                1
                    See Nicolaus Henke, Ari Libarikian, and Bill Wiseman, “Straight talk about big data,” McKinsey Quarterly, October 2016;
                    and “Bill Ford charts a course for the future,” McKinsey Quarterly, October 2014, both available on McKinsey.com.

EXHIBIT 1       New ecosystems are likely to emerge in place of many traditional
                industries by 2025.

                Ecosystem illustration, estimated total sales in 2025,1 $ trillion

                                                                                  Housing          Digital
                                                                    Education       5.0            content
                                                       Mobility        0.6                           3.3              Health
                                                        2.0                                                            6.0
                                   Travel
                                and hospitality      Auto and
                                                  gasoline sales                                                                       Public
                                     3.6                                                         Telecom
                                          Restaurants                                                                                 services
                                                                                                 services
                                                  Hotels                                                      Private and               4.4
                                                                                 Mortgage                     digital health
                                               Clothing
                                                                                                              Recreation
                                                                                                              and culture   Wealth
                   B2C                                                            Retail
                marketplace                                                                                     Mutual        and
                                        Logistics                                                                          protection
                    8.3                                                Institutional                             funds
                                  Corporate                                       Accounting            Transport-            1.1
                                   banking                                                                support
                                                                                                         activities
                                                                                             Management
                                                                Machinery                    of companies
                                                                                Legal
                                                              and equipment                                        Global
                                                                                                                corporate
                                                                                                                  services
                                                                                                                    2.9
                                                          B2B
                                                                                        B2B
                                                       marketplace
                                                                                       services
                                                           9.4
                                                                                         9.6

            1
                Circle sizes show approximate revenue-pool sizes. Additional ecosystems are expected to emerge in addition to the those depicted; not all
                industries or subcategories are shown.

                Source: IHS World Industry Service; Panorama by McKinsey; McKinsey analysis

8               Digital/McKinsey: Insights January 2018
Many of these initiatives will seem like baby                      example, how a large base of young, tech-
steps when we look back a decade from now,                         savvy consumers, a wide amalgam of low-
but they reveal the significance placed by                         efficiency traditional industries, and, not least,
corporate strategists on the emergence of a                        a powerful regulator have converged to
new world.                                                         give rise to leviathans such as Alibaba and
                                                                   Tencent—ideal for the Chinese market but not
While it might be tempting to conclude as a                        (at least, not yet) able to capture significant
governing principle that aggressively buying                       share in other geographies (see sidebar, “China
your way into new sectors is the secret                            by the numbers”).
spice for ecosystem success, massive
combinations can also be recipes for massive                       The value at stake is enormous. The World
value destruction. To keep your bearings                           Bank projects the combined revenue of global
in this new world, focus on what matters                           businesses will be more than $190 trillion within
most—your core value propositions, your                            a decade. If digital distribution (combining
distinct competitive advantages, fundamental                       B2B and B2C commerce) represents about
human and organizational needs, and the                            one-half of the nonproduction portion of the
data and technologies available to tie them all                    global economy by that time, the revenues that
together. That calls for thinking strategically                    could, theoretically, be redistributed across
about what you can provide your customers                          traditional sectoral borders in 2025 would
within a logically connected network of goods                      exceed $60 trillion—about 30 percent of world
and services: critical building blocks of an                       revenue pools that year. Under standard
ecosystem, as we’ve noted above.                                   margin assumptions, this would translate to
                                                                   some $11 trillion in global profits, which, once
Value at stake                                                     we subtract approximately $10 trillion for
Based on current trends, observable                                cost of equity, amounts to $1 trillion in total
economic trajectories, and existing regulatory                     economic profit.2
frameworks, we expect that within about a
decade, 12 large ecosystems will emerge in                         Snapshots of the future
retail and institutional spaces. Their final                       Again, it’s uncertain how much of this value
shape is far from certain, but we suspect they                     will be reapportioned between businesses
could take something like the form presented                       and consumers, let alone among industries,
in the sidebar.                                                    sectors, and individual companies, or whether
                                                                   and to what extent governments will take
The actual shape and composition of these                          steps to weigh in. To a significant degree,
ecosystems will vary by country and region,                        many of the steps that companies are taking
both because of the effects of regulations and                     and contemplating are defensive in nature—
as a result of more subtle, cultural customs                       fending off newer entrants, by using data
and tastes. We already see in China, for                           and customer relationships to shore up their

2
    Our conclusions, which we arrived at by analyzing 2025 profit pools from a number of different perspectives, are based
    upon several base expectations about the coming integrated network economy, including average profit margin and return
    on equity (for each, we used the world’s top 800 businesses today, excluding manufacturing initiatives), as well as the cost
    of equity (which we derived from more than 35,000 global companies based upon their costs of equity in January 2017).

Competing in a world of sectors without borders                                                                                9
China by the numbers

      China has unique regulatory, demographic, and developmental features—particularly the simultaneity with
      which its economy has modernized and digitized—that are accelerating the blurring of sector borders. Still,
      the numbers speak for themselves and help suggest both the scale that digital ecosystems can quickly reach
      and the patterns likely to take hold elsewhere as ecosystem orchestrators in other countries stretch into roles
      approximating those played by Alibaba, Baidu, Ping An, and Tencent.

           Alibaba

                  120 billion                     175 million                          44%
                  assets under                       total Alipay                      of global mobile-wallet
                  management by                      transactions in                   spending, achieved
                  Yu’E Bao1                          one day2                          by Alipay3

           Baidu

                  346 million                     130 million                          25 million
                  online users                       users of Ping An                  unique visitors daily
                                                     Good Doctor 4                     to autohome.com.cn

           Tencent

                  889 million                        70 minutes                        61%
                                     5
                  WeChat users                       spent every day                   of users open
                                                     by average                        WeChat more than
                                                     WeChat user 6                     10 times every day7

                  46 billion
                 “red packets” sent
                  via WeChat for the
                  Lunar New Year8

       1                                         4                                 8
         As of September 2016.                     As of March 2017.                   For Lunar New Year falling in
       2                                         5
         As of August 2016.                        As of Q4 2016.                      2017; see “WeChat users send
       3                                         6
         In 2016; see Global Payments              As of March 2016.                   46 billion digital red packets
                                                 7
         Report 2016, Worldpay,                    As of June 2016.                    over Lunar New Year—Xinhua,”
         November 8, 2016, worldpay.com.                                               Reuters, February 6, 2017,
                                                                                       reuters.com.

10   Digital/McKinsey: Insights January 2018
Large Chinese players have expanded their digital presence by ‘land grabbing.’

    Selected examples                                                                     Alibaba            Baidu            Tencent

     2000
       Market, consumption                            Search                                      Messaging

     2017
       Market, consumption                            Search                                      Messaging

               Alibaba.com,                                  Baidu Map,                                    QQ,
               Taobao, Tmall                                 Baidu Search                                  WeChat

               Baidu Wei Gou, Wanda                          Sogou
               e-commerce

               We Store, Xi
               Yuan

       Dining                                         Entertainment, gaming                       Finance

               Ele.me                                       Alibaba Games, Alibaba                         Ant Financial
                                                            Music, Alibaba Picture                         Services Group

               Baidu Nuomi, Baidu                           Baidu Games,                                   Baidu Consumer Credit,
               Takeout Delivery                             Baidu Music,                                   Baidu Wallet, Baidu Wealth
                                                            Baidu Video, iQIYI                             Management

               Meituan-Dianping                             QQ Music, Tencent                              Caifutong, Tenpay, WeBank
                                                            Games, Tencent Video

       Healthcare                                     News, encyclopedia                          Transportation

               Alihealth                                    Baidu Baike, Baidu
                                                            News

               Ding Xiang Yuan
                                                                                                                Didi Chuxing¹

1
    Formed by merger of Didi Dache (backed by Tencent) and Kuaidi Dache (backed by Alibaba) and acquisition of Uber (backed by Baidu).

    Source: Company websites

    Competing in a world of sectors without borders                                                                                      11
core. As incumbents and digital natives alike        This all generates a highly robust “network
     seek to secure their positions while building        factor”—the third major force behind emerging
     new ones, ecosystems are sure to evolve in           consumer marketplaces. In a world of digital
     ways that surprise us. Here is a quick look at       networks, consumer lenders, food and
     developments underway in three of them.              beverage providers, and telecom players will
                                                          simultaneously coexist, actively partner, and
     Consumer marketplaces                                aggressively move to capture share from
     By now, purchasing and selling on sites such         one another. And while digitization may offer
     as Alibaba, Amazon, and eBay are almost              the sizzle, traditional industries still have their
     instinctive; retail has already been changed         share of the steak. These businesses not only
     forever. But we expect that the very concept         provide the core goods and services that end
     of a clearly demarcated retail sector will be        users demand, but also often have developed
     radically altered within a decade. Three critical,   relationships with other businesses along the
     related factors are at work.                         value chain and, most important, with the
                                                          end users themselves. Succeeding in digital
     First, the frame of reference: what we think of      marketplaces will require these companies
     now as one-off purchases will more properly          to stretch beyond their core capabilities, to
     be understood as part of a consumer’s                be sure, but if they understand the essentials
     passage through time—the accumulation of             of what’s happening and take the right steps
     purchases made from day to day, month to             to secure and expand their relationships,
     month, year to year, and ultimately the way          nondigital businesses can still hold high
     those interact over a lifetime. Income and           ground when the waves of change arrive.
     wealth certainly have predictive value for future
     purchases, but behavior matters even more.           B2B services
     Choices to eat more healthily, for example,          The administrative burdens of medium,
     correlate to a likelihood for higher consumption     small, and microsize companies are both
     of physical fitness gear and services, and           cumbersome and costly. In addition to
     also to a more attractive profile for health         managing their own products and services,
     and life insurers, which should result in more       these businesses (like their larger peers)
     affordable coverage.                                 must navigate a slew of necessary functions
                                                          including human resources, tax planning, legal
     The second major factor, reinforcing the first,      services, accounting, finance, and insurance.
     is the growing ability of data and analytics
     to transform disparate pieces of information         Today, each of these fields exists as an
     about a consumer’s immediate desires and             independent sector, but it’s easy to imagine
     behavior into insight about the consumer’s           them converging within a decade on shared,
     broader needs. That requires a combination of        cloud-based platforms that will serve as
     capturing innumerable data points and turning        one-stop shops. With so many service
     them, within milliseconds, into predictive,          providers available at the ease of a click,
     actionable opportunities for both sellers            all with greater transparency on price,
     and buyers. Advances in big data analytics,          performance, and reputation, competition
     processing power, and AI are already making          will ramp up and established players can
     such connections possible.                           anticipate more challengers from different

12   Digital/McKinsey: Insights January 2018
EXHIBIT   Different sectors come into play at every stage of the mobility ecosystem.

                                    Finance                       Government               Retail marketplace
                                    Service marketplace           Insurance                Information marketplace

                           Search                                               Acquire

                             Search
                           and receive            Research                 Obtain                 Obtain             Purchase
                             finance               vehicles                financing              insurance             or lease
                              terms                                                                                   vehicle

                                                                           Calculate
                                                                                                Calculate            Purchase
                             Search               Test drive            registration fee
                                                                                                  and                 service
                             dealers              at dealer               and register
                                                                                                pay taxes              terms
                                                                            vehicle

                            Maintain                                             Use

                              Adjust                                                              Adjust
                            insurance                                       Adjust
                                                 Purchase                                       insurance
                                                                        finance terms                                   Use
                           dynamically          accessories                                    dynamically
                                                                         dynamically                                 mapping
                              based              and auto                                         based
                                                                            based                                    or GPS
                            on vehicle             parts                                        on driving
                             condition                                    on market
                                                                                                  history

                                                                                                                  Schedule
                                                                           Gain or
                                                                                                Purchase         inspections
                                                                         use rewards
                                                                                                  gas            and update
                                                                            points
                                                                                                                 registration

                                                                                                 Purchase        Automatically
                                                                         Purchase              or schedule       trackk vehicle
                                                                        maintenance            car washing      and component
                                                                         services                 (pick
                                                                                                      k up         condition,
                                                                                              car and deliver     to schedule
                                                                                                it cleaned)          service

                            Collaborate                                          Sell

                                                                            Benefit              Transition         List car for
                                                    Adjust
                            Purchase                                                                                 sale on
                                                 licensing if             from new              insurance
                           accessories                                                                           platforms that
                                                  using car              purchaser’s           coverage to
                            and auto                                                                                connect
                                                as rideshare               ability to              next
                              parts                                                                             potential buyers
                                                    driver                  finance                vehicle
                                                                                                                   and sellers

                                                                                                                 Research car
                             Use app              Use app                                                        value (based
                          to participate        to monetize                                      Register        on condition,
                                                                              Sell car
                              in car               vehicle                                        sale          mileage, model,
                             sharing          (eg, ridesharing)                                                   geography,
                                                                                                                 similar cars)

          Source: Panorama by McKinsey

          Competing in a world of sectors without borders                                                                          13
To keep your bearings in this new world, focus on what
     matters most—core value propositions, competitive
     advantages, human and organizational needs, and the
     data and technologies to tie them together.

     directions. At the same time, it’s likely that   connectivity, and much more. The individual
     something approaching a genuine community        pieces of the mobility puzzle are starting
     will develop, with businesses being able         to become familiar, but it’s their cumulative
     to create partnerships and tap far more          impact that truly shows the degree to which
     sophisticated services than they can at          industry borders are blurring (exhibit).
     present—including cash-planning tools, instant
     credit lines, and tailored insurance.            Emerging priorities for the
                                                      borderless economy
     Already, we can glimpse such innovations         These glimpses of the future are rooted in
     starting to flourish in a range of creative      the here and now, and they are emblematic
     solutions. Idea Bank in Poland, for example,     of shifts underway in most sectors of the
     offers “idea hubs” and applications such         economy—including, more likely than not,
     as e-invoicing and online factoring. ING’s       yours. We hope this article is a useful starting
     commercial platform stretches beyond             point for identifying potential industry shifts that
     traditional banking services to include          could be coming your way. Recognition is the
     (among other things) a digital loyalty program   first step, and then you need a game plan for a
     and crowdfunding. And Lloyds Bank’s              world of sectors without borders. The following
     Business Toolbox includes legal assistance,      four priorities are critical:
     online backup, and email hosting. As other
     businesses join in, we expect the scope and      •   Adopt an ecosystem mind-set. The
     utility of this space to grow dramatically.          landscape described in this article
                                                          differs significantly from the one that still
     Mobility                                             dominates most companies’ business
     Finally, consider personal mobility, which           planning and operating approaches. Job
     encompasses vehicle purchase and                     one for many companies is to broaden
     maintenance management, ridesharing,                 their view of competitors and opportunities
     carpooling, traffic management, vehicle              so that it is truly multisectoral, defines the

14   Digital/McKinsey: Insights January 2018
ecosystems and industries where change            in more ecosystems. Information from
     will be fastest, and identifies the critical      telecommunications-services players,
     new sources of value most meaningful for          for example, can help banks to engage
     an expanding consumer base. In essence,           their customers and make a variety of
     you must refine your “self vision” by asking      commercial decisions more effectively.
     yourself, and your top team, questions            Deeper data insights are finally beginning
     such as: “What surprising, disruptive             to take ideas that had always seemed good
     boundary shifts can we imagine—and try            but too often fell short of their potential
     to get ahead of?” and “How can we turn            to turn into winning models. Consider
     our physical assets and long-established          loyalty cards: by understanding customers
     customer relationships into genuine               better, card providers such as Nectar,
     consumer insights to secure what we               the largest loyalty program in the United
     have and stake out an advantage over              Kingdom, and Plenti, a rewards programs
     our competitors—including the digital             introduced by American Express, can
     giants?” That shift will necessarily involve      connect hundreds of companies of all sizes
     an important organizational component,            and across multiple industries to provide
     and leaders should expect some measure            significant savings for consumers and new
     of internal resistance, particularly when         growth opportunities for the businesses
     existing business goals, incentives, and          that serve them. Meanwhile, the cost of
     performance-management principles do              sharing data is falling as cloud-based data
     not accord with new strategic priorities. It      stores proliferate and AI makes it easier to
     will also, of course, require competitive         link data sets to individual customers or
     targeting beyond the four walls of your           segments. Better data can also support
     company. But resist the impulse to just           analytically driven scenario planning to
     open up your acquisition checkbook. The           inform how ecosystems will evolve, at
     combinations that make good sense will            which points along the value chain your
     be part of a rational answer to perennial         data can create value, and whether or
     strategic questions about where and how           where you can identify potential “Holy Grail”
     your company needs to compete—playing             data assets. What data points and sources
     out on an expanding field.                        are critical to your business? How many
                                                       do you have? What can you do to acquire
•    Follow the data. In our borderless world,         or gain access to the rest? You should be
     data are the coins of the realm. Competing        asking your organization questions like
     effectively means both collecting                 these regularly.
     large amounts of data and developing
     capabilities for storing, processing, and      • Build emotional ties to customers. If
     translating the data into actionable             blurring sector boundaries are turning
     business insights. A critical goal for most      data into currency, customer ownership is
     companies is data diversity—achieved,            becoming the ultimate prize. Companies
     in part, through partnerships—which              that lack strong customer connections run
     will enable you to pursue ever-finer             the risk of disintermediation and perhaps
     microsegmentation and create more value          of becoming “white-label back offices” (or

Competing in a world of sectors without borders                                                    15
production centers), with limited headroom         companies need more and different kinds
          to create or retain economic surplus. Data         of partners. In at least a dozen markets
          (to customize offerings), content (to capture      worldwide—including Brazil, Turkey, and
          the attention of customers), and digital           several countries in Asia, where in many
          engagement models (to create seamless              respects data are currently less robust
          customer journeys that solve customer              than they are in other regions—we’re
          pain points) can all help you build emotional      seeing a new wave of partnership energy
          connections with customers and occupy              aimed at making the whole greater than
          attractive roles in critical ecosystems.           the sum of its parts. Regardless of your
          You should continually be asking your              base geography, core industry, and state of
          organization, “What’s our plan for using data,     data readiness, start by asking what white
          content, and digital-engagement tools to           spaces you need to fill, what partners can
          connect emotionally with customers?” and           best help with those gaps, and what “gives”
         “What else can we provide, with simplicity          and “gets” might be mutually beneficial.
          and speed, to strengthen our consumer              You’ll also need to think about how to
          bond?” After all, Google’s launch of initiatives   create an infrastructural and operational
          such as Chrome and Gmail, and Alibaba’s            framework that invites a steady exchange
          introduction of enterprises such as Alipay         with outside entities of data, ideas, and
          and the financial platform Yu’E Bao, weren’t       services to fuel innovation. Don’t forget
          executed merely because they already had a         about the implications for your information
          huge customer base and wanted to capture           architecture, including the APIs that will
          new sources of revenue (although they did          enable critical external linkages, and don’t
          succeed in doing so). They took action to          neglect the possibility that you may need
          help ensure they would keep—and expand—            to enlist a more natural integrator from
          that huge customer base.                           across your partnerships, which could
                                                             include a company more appropriate for
     •    Change your partnership paradigm.                  the role, such as a telco, or a third-party
          Given the opportunities for specialization         provider that can more effectively connect
          created by an ecosystem economy,                   nondigital natives. And don’t assume that

16   Digital/McKinsey: Insights January 2018
if you were to acquire a potential partner,         to conclude that tomorrow’s industries and
     you’d necessarily be adding and sustaining          sector borders will look like today’s. Massive,
     their revenues on a dollar-for-dollar basis         multi-industry ecosystems are on the rise, and
     over the long term.                                 enormous amounts of value will be on the
                                                         move. Companies that have long operated
                              ŠŠŠ                        with relative insularity in traditional industries
                                                         may be most open to cross-boundary attack.
No one can precisely peg the future. But when            Yet with the right strategy and approach,
we study the details already available to us and         leaders can exploit new openings to go on
think more expansively about how fundamental             offense, as well. Now is the time to take stock
human needs and powerful technologies are                and to start shaping nascent opportunities. Š
likely to converge going forward, it is difficult

Venkat Atluri is a senior partner in McKinsey’s Chicago office, Miklós Dietz is a senior partner in the
Vancouver office, and Nicolaus Henke is a senior partner in the London office.

The authors wish to thank Miklos Radnai, global head of McKinsey’s Ecosystems Working Group, and Tamas
Kabay, Somesh Khanna, and Istvan Rab for their contributions to this article.

Copyright © 2017 McKinsey & Company. All rights reserved.

Competing in a world of sectors without borders                                                           17
Photo credit/Getty Images

     How tech giants deliver outsize
     returns—and what it means for
     the rest of us
     Tushar Bhatia, Mohsin Imtiaz, Eric Kutcher, and Dilip Wagle

     Networks and platforms reign within high tech, media, and
     telecom. Understanding the sector’s dynamics is increasingly
     important for executives in all industries.

     The ability of technology, media, and             What makes TMT so profitable is a combination
     telecommunications (TMT) companies to             of unique factors, notably continuing advances
     create value is extraordinary. TMT companies      in digital technology that open new markets,
     generate more economic profit (net operating      stimulate growth, and provide opportunities for
     profit less the cost of capital) than any other   companies that seize leadership positions to
     sector of the global economy—more than            capture enormous value.
     the combined economic profit of companies
     in aerospace and defense, automotive              Yet a closer look at value creation across TMT
     components, and food products (Exhibit 1).        also reveals a distinctive pattern: significant

18   Digital/McKinsey: Insights January 2018
concentration of economic profit at the top,                             While it is too early to say for sure, the way
            a rapidly rising middle tier of value-creating                           value is created in TMT, as well as how digital
            companies, and considerable turnover among                               technologies shape value pools, is increasingly
            top players.                                                             relevant to leaders across the global economy.

            As more industries adopt digitally enabled                               An astounding record of
            business models—consider, for example,                                   value creation
            the impact of Amazon in retail, Uber in                                  Based on our research of more than
            transportation, and Airbnb in lodging—will                               2,400 publicly traded companies around
            this pattern be repeated in other sectors?                               the world, we estimate that the economic

EXHIBIT 1   TMT is unique in its value creation.

            Average economic profit by industry,
            2010–14, $ billion

                                                                                     Tech, media, and telecom (TMT) industries
             2                                                                                                                            2
                                                                                     Software

                                                                                     Consumer electronics

                                                                                     Tech infrastructure
                                                                                     and services
             1                                                                                                                            1
                                                                                     Telecom and
                                                                                     cable operators

                                                                                     Media

                                Average economic profit

             0                                                                                                                            0

                                      Road and rail                      Food products                           Automobiles

                 Electric utilities             Construction and engineering                 Machinery                 Pharmaceuticals

            –1                                                                                                                           –1

            Source: McKinsey analysis of 2,414 public companies across 59 industries from 2000–14

            How tech giants deliver outsize returns—and what it means for the rest of us                                                 19
EXHIBIT 2   TMT economic profit has grown exponentially, increasing more than
            100-fold from 2000 to 2014.

            Net economic profit for tech, media, and telecom (TMT) companies, $ billion

                                                                                                               2010–14

                                                                                                      258           –44

                                                                                                                          214

                                                                     2005–09

                                                           157         –43

                                                                                  114
                            2000–04

                   73         –71

                                            2

                Positive     Negative      Net           Positive     Negative      Net             Positive   Negative   Net

            TMT companies creating value, %

                            45                                       60                                        70

                            2000–04                                  2005–09                                   2010–14

            Source: McKinsey analysis of 2,414 public companies across 59 industries from 2000–14

            profit generated by TMT companies grew                               media, telecom and cable operators, and
            100-fold, or by $200 billion, from 2000 to                           technology infrastructure and services
            2014. Some 70 percent of the companies                               providers) was among the most profitable of
            in our sample generated economic profits                             the 59 industries analyzed (Exhibit 3).
            in the 2010–14 period, up from 45 percent in
            the 2000–04 period (Exhibit 2).                                      The fastest profit growth was among software
                                                                                 companies and companies with software-
            Moreover, each of the five subsectors that                           enabled business models, such as Amazon,
            make up TMT (software, consumer electronics,                         Tencent, and other “platform” enterprises.

20          Digital/McKinsey: Insights January 2018
EXHIBIT 3   Every subsegment of TMT is filled with success stories, most prominently within
            the software industry.

            Companies with positive economic profit in tech, media, and telecom (TMT), 2010–14, %

                      Consumer                  Telecom and                   Media                  Tech                  Software
                      electronics              cable operators                                  infrastructure
                                                                                                and services

                      64                         68                        69                       77                     81

            Average annual economic profit in software, 2010–14, $ billion

                 0%                       20                        40                     60                         80              100%

            25                                                                                                                           25

                           Bottom                                            Middle                                         Top
            20             quintile                                          quintile                                      quintile      20

            15                                                                                                                           15

            10                                                                                                                           10

             5                                                                                                                               5

             0                                                                                                                               0

            –5                                                                                                                           –5

                                                                                            15%
                  Average annual positive
                  economic profit in software,
                  2010–14, %

                                                            10             25                                    65

                                                        ~90% of the positive economic profit comes           ~65% comes from the top
                                                         from the top 20% of software companies              5% of software companies

            Source: McKinsey analysis of 2,414 public companies across 59 industries from 2000–14

            How tech giants deliver outsize returns—and what it means for the rest of us                                                     21
EXHIBIT 4       Economic profit in TMT is highly concentrated in the upper regions of the
                top quintile.

                Average annual economic profit in tech, media, and telecom (TMT),1
                2010–14, $ billion

                      0%                        20                        40                         60                    80                     100%
                35                                                                                                                                   35

                30                                                                                                                                   30

                              Bottom                                                Middle                                            Top
                25            quintile                                              quintile                                         quintile        25

                20                                                                                                                                   20

                15                                                                                                                                   15
                                                                    70% of companies in TMT create value
                10                                                                                                                                   10

                  5                                                                                                                                      5

                  0                                                                                                                                      0

                –5                                                                                                                                   –5

                                                                                                        15%
                       Average annual positive
                       economic profit in TMT,                                                                                            Most of
                       2010–14, %                                                                                                     TMT’s profit
                                                                                                                            is from a few winners

                                                                    15                 25                                  60

                                                               ~85% of the positive economic profit comes                     ~60% comes from the
                                                                from the top 20% of TMT companies                        top 5% of TMT companies

                       Cumulative economic profit in TMT, $ billion                              Average economic profit in TMT, $ million

                                                                         148                                                              7,042

                                                          67
                                           42
                                                                                                                   159
                                                                                                                             1,140

                           –43                                                                       –683

            1
                Bottom-quintile upper limit = –$53 million; middle-quintile upper limit = $672 million; n = 417.

                Source: McKinsey analysis of 2,414 public companies across 59 industries from 2000–14

22              Digital/McKinsey: Insights January 2018
Increasingly, the ranks of top players in TMT are populated
by companies that have managed to create and scale
successful platforms that benefit from network effects.

The economic profit of value-creating software                           for instance, the more your friends will use
companies grew nearly sixfold from the                                   it. There are also indirect network effects,
2000–04 period to the 2010–14 period (rising                             which involve the creation of complementary
from $5.8 billion to $33.7 billion).                                     products or services—the app markets that
                                                                         have grown up around smartphones and
Winners take most                                                        tablets, for example, or social gaming that is
Economic profit across TMT is concentrated,                              enabled by social networks.
reflecting greater benefits of scale than in other
sectors. This is seen in a range of TMT products                         Network effects contribute to concentration by
and services, from smartphones to social media.                          creating barriers to entry and tying customers
In the 2010–14 period, the top 20 percent of                             to the largest players: it’s much harder to
companies captured 85 percent of the economic                            switch to a different smartphone if doing so
profit in TMT industries. The top 5 percent of                           means you have to give up all your apps, for
companies—including tech giants such as Apple,                           example. However, it should also be noted
Microsoft, and Alphabet (Google’s parent)—                               that scale and network effects do not confer
generated 60 percent (Exhibit 4).                                        permanent advantages, and large companies
                                                                         can lose their leads if they don’t keep up with
Increasingly, the ranks of top players in                                technological shifts and innovation.
TMT are populated by companies that have
managed to create and scale successful                                  The rising middle tier
platforms that benefit from network effects.                             While the largest companies in TMT capture
These can be technology platforms (for                                   the majority of the economic profit, they
example, Apple’s iOS), marketplaces (for                                 also nurture a middle tier of companies that
example, Apple’s app store), or platforms of                             benefit from their networks. A growing group
another type—but in each case these winning                              of middle-tier companies (in the 20th to 80th
platforms increasingly exploit “network effects,”                        percentiles in terms of economic profit) is
which means the value of the product, service,                           leading the sector in profit growth. Middle-tier
or underlying technology increases when more                             companies’ economic profits grew by a factor
people use it. The more you use Facebook,                                of ten between the 2000–04 period and the

How tech giants deliver outsize returns—and what it means for the rest of us                                              23
EXHIBIT 5   TMT’s middle tier creates significant value.

            Distribution of positive economic profit in tech, media, and telecom (TMT),
            $ billion
                                                                                                                                  258

                                                                                                    157
                                                                                                                       Top tier
                                                                                                                        216
                                                             73                      Top tier
                                                                                      133
                                                 Top tier
                                                   69                                                     Middle
                                                                      Middle
                                                                                                          tier 42
                                                                      tier 24
                              Middle tier   4

                                                2000–04                      2005–09                                2010–14

            Value created by
            middle tier, %                            5                         15                                    16

            Middle-tier companies
            with positive economic                57                            57                                    72
            profit, %

                                                2000–04                      2005–09                                2010–14

            Source: McKinsey analysis of 2,414 public companies across 59 industries from 2000–14

            2010–14 period, or more than three times the                         latched onto existing platforms and designed
            growth rate of technology giants (Exhibit 5).                        business models that scale rapidly. Others are
                                                                                 disrupting non-TMT profit pools, such as retail.
            The rising middle tier includes software and                         Many are using programmatic M&A to move
            cloud services companies, as well as many                            into adjacent industries.
            players with software-enabled business
            models. Middle-tier players include Box, Baidu,                      Success can be fleeting: More profits,
            Netflix, and WeChat. We see the growth of                            but also more flux and less stability
            these and other middle-tier companies as                             When a new technology appears or technology
            fueled by a number of factors. Some have                             enables a new business model—using Uber

24          Digital/McKinsey: Insights January 2018
EXHIBIT 6       A far smaller percentage of TMT top-quintile companies from 2000 remain in the
                top quintile in 2014 compared with other industries.

                All industry historic distribution, %                                    Tech, media, and telecom (TMT) historic distribution,1 %

                                   Bottom          Middle           Top                                 Bottom        Middle         Top
                                   20% in          60% in          20% in                               20% in        60% in        20% in
                                    2014            2014            2014                                 2014          2014          2014

                Top                                                                      Top
                20% in               14               27              59                 20% in            10           45            45
                2000                                                                     2000

                Middle                                                                   Middle
                60% in               14               78               8                 60% in            19           70            11
                2000                                                                     2000

                Bottom                                                                   Bottom
                20% in               43               41              16                 20% in            36           43            20
                2000                                                                     2000

            1
                Figures may not sum to 100%, because of rounding.

                Source: McKinsey analysis of 2,414 public companies across 59 industries from 2000–14

                to order a ride from your smartphone, for                                In TMT industries, though, only 45 percent
                example—new profit pools open up. But old                                of top players from 2000 remained in the top
                ones also come under attack. While the top                               quintile in 2014. The flip side is that over the
                20 percent of TMT companies consistently                                 same period, the percentage of companies
                capture an outsized share of profits, life at the                        that started in the bottom quintile and ended
                top can be short.                                                        up in the top quintile was greater for TMT
                                                                                         industries (20 percent) than for all industries
            Taking our data set as a whole, across all                                   (16 percent) (Exhibit 6).
            industries, nearly 60 percent of companies that
            were in the top quintile in economic profit in                              This churn is explained in part by rapidly
            2000 were still in the top quintile 15 years later.                         changing dynamics within TMT profit pools.

                How tech giants deliver outsize returns—and what it means for the rest of us                                                   25
For example, within telecommunications, value     those generating outstanding levels of
     capture shifted decisively from fixed line to     economic profit.
     mobile connectivity. In media, print and TV
     advertising evaporated, while mobile and online   In particular, we believe TMT companies need
     advertising soared. In consumer electronics,      to build capabilities in four areas:
     virtually all the economic profit shifted to
     two smartphone companies—Apple and                •   establishing a strong position in one or
     Samsung—although the smartphone segment               more software or services platforms and
     now could be showing signs of vulnerability.          building ecosystems around platform
                                                           offerings to ensure access to the fastest-
     Today some of the biggest value shifts are            growing profit pools
     occurring in software and in software and
     Internet-enabled services. Traditional software   •   continuously evolving business models to
     players, such as Adobe, Symantec, and SAP,            avoid being disrupted by well-funded start-
     have high profit but low market-cap growth.           ups or existing TMT leaders expanding to
     Compare this with the medium growth in                new markets
     market cap of software-as-a-service players,
     such as Box, Salesforce, Slack, and Splunk,       •   replicating successful platforms in
     or with the more than 100 percent market-cap          underpenetrated or ring-fenced areas
     growth from 2012 to 2015 of companies such            (markets or white spaces), taking
     as Alibaba and Amazon that are providing              proven business models to markets with
     digital services beyond TMT. Additionally,            greater headroom
     we see value shifting from the infrastructure
     layer to applications providers as software       •   using programmatic M&A to develop
     applications increasingly enable and mone-            capabilities to quickly attack new, rapidly
     tize the unique functionality demanded                growing profit pools or cannibalize profit
     by customers.                                         pools in other industries; companies will
                                                           need to continually reinforce and broaden
     Implications for tech, media, and                     their capabilities and have limited runway to
     telecommunications companies                          develop such talent organically, particularly
     Against a background of rapid innovation in           in areas such as cloud and analytics, where
     digital technologies, ranging from artificial         competition for talent is intense.
     intelligence and automation to the Internet
     of Things, we remain convinced that the                                  ŠŠŠ
     TMT sector will, in the aggregate, continue to
     outperform other sectors. The digitalization of   It’s no secret that the gales of creative
     the global economy has only just begun.           destruction blow with singular strength in
                                                       technology, media, and telecom. Our analysis
     Yet our research underlines that TMT leaders      sheds light on how this relentless turbulence
     need to monitor carefully how profit pools        shapes the sector, how companies can
     are shifting. And they must be willing to act     harness its energy, and what leaders must
     decisively if they want to remain among           do to avoid being knocked off course by

26   Digital/McKinsey: Insights January 2018
unexpected gusts. As digital technologies                                are increasingly relevant beyond the blurring
and business models reshape more and more                                boundaries of TMT. Š
sectors of the global economy, the lessons

Tushar Bhatia is a consultant in McKinsey’s Seattle office, where Dilip Wagle is a senior partner; Mohsin
Imtiaz is a partner in the Houston office; and Eric Kutcher is a senior partner in the Silicon Valley office.

The authors wish to thank Jackie Roche and Saurabh Sanghvi for their contributions to this article.

Copyright © 2017 McKinsey & Company. All rights reserved.

How tech giants deliver outsize returns—and what it means for the rest of us                                             27
Photo credit/Getty Images

     Management’s next frontier:
     Making the most of the
     ecosystem economy
     Jürgen Meffert and Anand Swaminathan

     Engaging in digital ecosystems requires a new set of managerial
     skills and capabilities. How quickly companies develop them will
     determine if they succeed in the ecosystem economy.

     Apple knows how. With its HealthKit open                         leading ecosystem players such as Alibaba,
     platform, it brings together participants from                   Tencent, and Ping An are already shaping
     across the world of medicine—physicians,                         markets in China. For instance, 89 million
     researchers, hospitals, patients, and developers                 customers use Ping An Good Doctor, a platform
     of healthcare and fitness apps—to join forces                    that connects doctors and patients for bookings,
     in a digital ecosystem.1 And Apple is not alone:                 online diagnoses, and suggested treatments.2

     1
         See Jürgen Meffert and Anand Swaminathan, Digital @ Scale: The Playbook You Need to Transform Your Company, first
         edition, Hoboken, NJ: John Wiley & Sons, 2017.
     2
         See Venkat Atluri, Miklós Dietz, and Nicolaus Henke, “Competing in a world of sectors without borders,” McKinsey
         Quarterly, July 2017, McKinsey.com.

28   Digital/McKinsey: Insights January 2018
The emergence of ecosystems marks a shift                              are evolving so quickly, traditional manage-
in the landscape as unexpected alliances                               ment approaches are no longer fit for pur-
are forged, sector boundaries blur, and long-                          pose. Successful companies are finding new
standing strengths count for less. It also                             ways to choose and manage partners and
marks a shift in how business leaders manage                           make deals.
relationships within an ecosystem.
                                                                       Choosing partners
‘Entangling alliances’                                                 Any effective ecosystem strategy depends on
Relationships in an ecosystem take many                                understanding where the value is. That comes
forms. Some are transactional and informal,                            from calculating the value of your assets, such
like those based on the APIs that allow systems                        as customer relationships and proprietary
to talk to one another to execute simple tasks.                        data, and your existing capabilities and where
                                                                       market opportunities are emerging.
 Other relationships are more formal and
 complex, with contracts and service-level                             Equipped with that baseline, you can evaluate
 agreements in place to cover governance,                              collaboration opportunities with an eye to
 escalation paths, and so on. Some of these                            finding capabilities, markets, and technologies
 relationships may be with companies that                              that complement and support your company’s
 in other respects are rivals (see sidebar,                            strategic ambitions.
“Coopetition: When competitors collaborate,”
 for an example).                                                      Any temptation to narrow your search
                                                                       to organizations in your sector or region
These relationships are built on myriad                                should be resisted. A better approach is to
structures, from joint ventures to mergers,                            systematically map ecosystem partners across
exclusive and nonexclusive partnerships, and                           industries, identify key criteria (such as access
other arrangements. As businesses scramble                             to new customers or capabilities), and consider
to find the right combination of complementary                         likely trade-offs (such as language and market
partners and allies, many are running into a                           potential). Banks and retailers can make good
thicket of “entangling alliances”—interlocking                         partners, for example, because they often
relationships that create complex competitive                          target similar customer segments but don’t
dynamics and lock players into platforms,                              compete with each other for them.
technologies, and systems from which it may
be difficult to extricate themselves. Graphics                         We suggest companies follow a simple four-
chipmaker Nvidia, for example, is working                              step process to assess potential partners:
with eight different automakers to build
embeddable computers for self-driving cars.3                       1. Evaluate the market in which your potential
                                                                      partner operates and its level of competition.
Companies have always forged partnerships                             The most promising ecosystems involve
and alliances, but because relationships in                           market leaders with complementary skill
ecosystems are on such a large scale and                              sets and value propositions.

3
    See Dave Gershgorn and Keith Collins, “The entangling alliances of the self-driving car world, visualized,” Quartz, July 26,
    2017, qz.com.

Management’s next frontier: Making the most of the ecosystem economy                                                           29
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