boozco next wave of digitization

7/31/2019 BoozCo Next Wave of Digitization

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Perspective Roman FriedrichMatthew Le MerleMichael Peterson

Alex Koster

The Next Waveo Digitization

Setting Your Direction,Building Your Capabilities


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Booz & Company

Contact Information

DelhiAshish [email protected]

DubaiKarim SabbaghSenior [email protected]

Dsseldorf/StockholmRoman Friedrich

[email protected]

London/Dsseldorf Dr. Michael [email protected]

New York Philip [email protected]

ParisPierre [email protected]

San FranciscoMatthew Le Merle

[email protected]

So PauloIvan de SouzaSenior [email protected]

ShanghaiAndrew [email protected]

Sydney Vanessa [email protected]

ZurichAlex Koster

[email protected]


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EXECUTIVE

SUMMARY

For more than a decade, powerful new digital approaches tobusiness, and life in general, have come on the scene, yet weare now entering an even more rapid and dramatic period of change. The phenomenon of digitization is reaching anin ection point. Three powerful forces are driving the shift:consumer demand, the push for new technologies, and the

prospect of even greater economic bene ts.

Every company in every industry will be dramatically affected,and it will be the responsibility of CEOs to lead the charge bybuilding the right capabilities for their companies to remainrelevant in the digitized environment, achieve growth, and fend off competitive threats. New technology deploymentsand related investments will add up to more than even thelargest and most resource-endowed enterprises can afford.Trade-offs will be required, and the risks of making the wrong choices will be high. Unlike the technology revolutions of the1990s and 2000s, this time around the basis of competitionwill be set by the companies that embrace and deploy digitiza-tion in the right places at the right time.

This Perspective provides guidance to CEOs and their man-agement teams about the relevance of digitization in theirrespective industries, and the factors most likely to accelerateor decelerate the digitization phenomenon. The judgmentsthat companies make now will largely determine their relativecompetitive position for the foreseeable future.


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Fans o Disney movies can now buycinema tickets right on Facebook and

invite their riends to join them atthe show. Groupon customers receivecoupons or deep discounts rom allkinds o local retailers and servicebusinesses. Shoppers at Best Buy canask Facebook riends their opinionsabout speci c items they see on theshel , in real time, right in the store.

Elsewhere, ranchers are embeddinginto their cattle sensors that sendback data on location and health or

analysiseach cow generates about200 megabits o data a year. Engineers

at Thames Water Utilities in Londonhave installed thousands o sensors

to monitor its water pipe network,reducing leakage by 25 percent.Further a eld, ZMQ, a mobilesolutions company in India, recentlylaunched an SMS service to deliverprenatal advice and reminders topregnant women, or 1 rupee pertext. ClickDiagnostics, based in theU.S., lets people in rural areas o Bangladesh and Egypt use cellphonesto transmit pictures o their eyesand skin or diagnosis o cataracts

and skin cancers. On a larger scale,Australia is building a US$40 billion

THE

INFLECTIONPOINT

The effects of an increasinglydigitized world are now reaching into every corner of our lives.


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next-generation broadband networkto serve as the basis or a uture

smart economy.

The e ects o an increasingly digitizedworld are now reaching into everycorner o our lives. Already, 4.6 billionphones continually send in ormationon the location o their users tocarriers. Cisco predicts that connectedInternet devices will outnumberpeople by two to one in 2015. Upwardo 10 billion applications have beendownloaded rom Apples App Store.

Every day, people generate 100 milliontweets on Twitter. Fully 79 percent o workers in Western nations currentlydepend on the Internet. The upheavalstaking place throughout the MiddleEast and North A rica owe mucho their power to the digital devicesconnecting people there. And 32surveillance cameras now monitorall activity within 200 yards o theormer house o George Orwell,author o 1984 and coiner o theterm Big Brother.

The push to build a ully digitizedworld continues. The amount o data

generated annually is approaching 35trillion gigabytes. In the next decade,350 million Chinese are expectedto move to newly built cities, eacho which will require as much as$35 billion in investment or smartin rastructure. It is estimated that theCO 2 equivalent o 53 million carscould be eliminated i the U.S. were toinvest in a smart electric grid, whilesmart tra c management could savean estimated 4.2 billion work hours

lost and 10.6 billion liters o gasolineburned annually as cars idle in tra c.Eventually, 1 trillion sensors willbe deployed globally in the orm o smart dust, gathering and digitizingtrillions o gigabytes o in ormationrom the analog world, and sendingit wirelessly to a growing number o big data machines or storage andanalysis.

In short, though the current degreeo digitization has already given us aworld thats very di erent rom the one

we knew just 20 years ago, the comingwave will remake our world all over

again. Our research into the behavior o Generation Cpeople born a ter 1990who are just now reaching adulthoodand entering the work orceshowsthat the trend to global digitizationwill only accelerate, shaping in earnestthe ways in which technology invadesevery aspect o our lives. Pervasivebroadband, ubiquitous connectivity,cloud computing, social networking,the Internet o Thingsall arecoalescing to trans orm how we work,

play, communicate, socialize, and dobusiness. The digitization phenomenonhas reached an infection point.

That leaves CEOs with a stark choice:Begin to invest now in the internaland external digital capabilities theircompanies will need to di erentiatethemselves rom the competition. Orsit back, watch the digital revolutionun old, and run the risk o beingoutfanked by more orward-thinking,aster-moving rivals.


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Note: PCs include Netbooks. Data and estimates as of November 2010.Source: Forrester Research; Morgan Stanley Research

Exhibit 2 New and Old Technologies Are Driving the Push to Digitization

700

600

500

400

300

200

100

02008 2009 2010E 2011E 2012E 2013E2012E: Inflection Point (Smartphones > Total PCs)

800

600

400

200

02008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Smart- computing solutions, platforms, applications

Current- generation technology

All PCs

Smartphones

U.S. Government and Business Spending onIT Equipment and Software

Spending (in US$ billions)

Global Smartphone and PC Shipments

Global Unit Shipments (in millions)

TECHNOLOGY: IT INVESTMENTS AND SMART INFRASTRUCTURES GLOBAL SHIPMENTS OF SMARTPHONES AND PC S

Exhibit 1 A Day in the Li e o a Generation C Consumer

Source: Booz & Company analysis

7:00 Reading news on personal digital-device (PDD)

Twittering plans for the day-

7:30 Checking e-health tool: rst-symptoms of sinusitis; message onPDD for doctors appointment

15:30 Unlock clinical record for doctor;-medication sent to home

8:00 E-vote on ban of motor vehicles-in Berlin governmental areareferendum via digital ID

9:00 Interactive video e-learning session-with professor

11:30 Short video chat with grandmother-Sharing tasks via cloud project tool-

13:30 Navigation-supported drive to doctor-Real-time smart routing to avoid-

traf c congestion

18:00 Shopping downtown: online-price check with PDD, friendrecommendations on intendedcouch purchaseShopping tour picture sharing-on pro le

19:30 Downtown walk: friends-join for location-based 30%discount promotion for dinner atsmall restaurantM-payment for food-

22:30 Retiring: e-book and simultaneous-streamed video

Automated reminder via PDD to take-sinusitis medication before 23:00

22-YEAR-OLD JONAS K.S DAY: APRIL 12, 2020


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Source: World Bank, 2010

GDP CHANGE AS A RESULT OF A 10 PERCENTAGEPOINT INCREASE IN PENETRATION

1.21%

0.77%

1.38%

1.12%

0.60%

0.43%

0.81%0.73%

Fixed Telephony InternetMobile Telephony Broadband

High-income countries

Low-income countries

Exhibit 3 Nationwide Broadband In rastructure Can Boost GDP by More Than One Percentage Point

being deployed in every industry. Thedevelopment o cloud computing,and the vast in ormation processingmachinery it requires, is well underway. As a result, the demand orpower ul real-time analytics enginesto allow companies to gather andmake sense o hitherto undigestedin ormation fows is rising ast, andcompanies around the world areresponding with new technologiessuch as in-memory analytics devices tomeet that need.

Economic BeneftsThe third orce driving the digitizationphenomenon is the realization on thepart o executives in every industrythat the economic bene ts to be

captured are real. Though it is tooearly to quanti y those bene ts, awave o capital has poured into thenew digitization technologies andcompanies, and the public marketsare beginning to reward early moverswith valuations reminiscent o theyears leading up to the dot-com

bubble. An increasing portion o the$22 billion and the $20 billion thatU.S. venture capital rms and U.S.angel investors, respectively, investeach year appears to be going intothese digitization technologies. Recenttransactions in the secondary nancialmarkets have suggested that Facebookis worth more than $80 billion, whileLinkedIn recently went public at avaluation o more than $3.3 billion, ahigh multiple over its 2010 revenueso $243 million. On a national scale,the bene ts o digitization createdthrough investments in broadbandin rastructure have been amplydemonstrated ( see Exhibit 3 ).

Meanwhile, the economic cycle

and globalization have exposedthe weaknesses o large enterprisesthat have so ar ailed to embracedigitization. They have also sharpenedthe minds o CEOs regarding the needto urther cut costs and monetizeexisting capabilities more e ectively.Finally, increased competition rom

around the world is orcing companiesin every industry to contend withincreased cost pressures, trans ormingtheir traditional value chains,spawning new ormats and newbusiness models, blurring industryboundaries, and even creating entirenew industries. In response, companiesare turning to digitization to provide acompetitive advantage and to generategrowth.

At the sovereign level, too, countriesand regions are acting to acceleratethe digitization phenomenon. Chinahas written cloud, connectivity, anddigitization goals into its 12th ve-year plan, which will include stimulusmeasures estimated at more than $1.7

trillion. The European Union hasagreed on an energy upgrade plan o more than $200 billion, and the U.K.snational in rastructure plan earmarksmore than $200 billion ( see The Ageof the Dragon ).


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The Age of the Dragon

Despite the many virtues of digitization, its effects will not be spreadevenly across the globe; indeed, different regions will experience thetransformation at different speeds. Developed countries are likely to gainthe most from the process, although emerging markets will adopt many of

the accompanying features more quickly. Yet every region and market willhave to overcome its own speci c major hurdles going forward.

Deve ped MarketsThe most developed economies of Europe and North America alreadypossess some singular advantages, most notably their thorough masteryof high technology, a highly developed high-tech industrySilicon Valleythe most notable examplea history of sophisticated engineering,entrepreneurship and innovation, plenty of experienced MBAs, and broadcomputer literacy on the part of consumers.

All of these markets, however, are burdened with huge sunk investments

in legacy infrastructure that will be dif cult to replace, especially given thesovereign debt situations many of these countries face in the aftermathof the nancial crisis. And fragmented decision-making bodies, complexregulation, and intense competition, particularly in Europe, will make itmuch harder to achieve the transformation these markets will require. Assuch, we expect that companies in the infrastructure domain will struggleto make the changes needed to remain competitive, and that much of thetrue innovation will take place in industries and companies with shorterproduct cycles and lower barriers to entry, as we have already seen inthe music, lm, and video game sectors of the entertainment industry. Asa consequence, governments and regulators, particularly in Europe, willneed to rethink their current reactive, non-shaping philosophy in order tocatch up with more dynamic regions.

ChinaChina is determined to con rm its growing clout in global high technology,and companies there, such as equipment makers Huawei and ZTE,are already demonstrating real technological prowess. With more than400 million Internet users, China is also the largest regional onlinemarket, governed by distinct players, preferences, and ethical and moralstandardsalthough an executive of one global Internet player highlightsthe monetization challenge of digital information in China. Returns are10 times lower than in the U.S. ( see Exhibit A, page 8 ). Still, China hasboth the in uence and the scale to impose its technological standards faroutside its own borders, as well as a centralized structure that streamlinesthe making of decisions about infrastructure and industrial policy. Over thenext decade, 350 million more Chinese will move to cities, which will requirethe construction of widespread smart infrastructure. It is no surprise thatChinas 12th ve-year plan emphasizes cloud computing, connectivity, anddigitization. We expect China to be a strong shaper of global digitization.

IndiaIndia is likely to leapfrog in technological strength as its buoyant mobileindustry creates the basis for a vastly increased online population. But itmust overcome several challenges concerning the quality of its broaderinfrastructure. A senior U.S. technology executive has also voiced concernthat the pay-as-you-go model prevalent in this region may not support

the development of infrastructure data investments well. Others have


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mentioned that India and other economies with high human-capitalintensity may nd it dif cult to justify the potentially large-scale loss of jobsto automated processes and new business models.

The Midd e EastThese markets remain heavily dependent on their oil and gas resources,a situation that continues to limit local economic diversi cation andinnovation. Moreover, many still require help from international corporationsto provide the know-how needed to make real technological gains. Inrecent years, a number of countries in the region have begun to set a moreprogressive course, using ambitious central planning programs and largeamounts of uninvested cash to promote greater economic diversity. Therecent upheavals in several countries in the region, driven by their typicallyyoung and tech-savvy populations, suggest just how powerful this trend isbecoming there.

Emerging MarketsMany of these countriesincluding much of Africa, Latin America outside

Brazil, and Southeast Asiado not yet possess the technological know-how, economic sophistication, and complex political decision-makingmechanisms needed to make large-scale investments in a truly digitaleconomy. Yet several emerging markets have already demonstratedthat substantial economic gains can be made even with relatively simpletechnologies. The rapid spread of SMS-based healthcare services aroundthe world is a case in point. We expect to see more of these kinds ofvery speci cally focused innovations come to these markets as theydevelop further.

Exhibit AValuations o Chinese Internet Companies

Source: The Economist; Booz & Company analysis

-120%

-80%

-40%

0%

40%

80%

0.01 0.10 1.00 10.00 100.00

Net Profit MarginQ1 2011

Revenue Q1 2011(in US$ billions)

168 Google

Dangdang

Qihoo 360

Sohu

Renren

Youku

NetEaseCtrip

Sina

Alibaba

50

TencentBaidu

Market Cap 5/2011

TOP-LISTED CHINESE INTERNET COMPANY VALUATIONS

50


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Many of the ideas and technologiesunderlying the digitization phenomenon

are not new; indeed, some have beenaround for a long time. Taken together,however, they will create a degree of change comparable in scope to the greatindustrial revolutions of the past.

The speci c effects of digitization onthe world of business will be many and

far-reaching, but every industry will bedramatically affected ( see Exhibit 4 ).

Business and Customer InsightsEvery industry will be the bene ciary

DRAMATIC

EFFECTS

Exhibit 4 Digitizat ion Will A ect Industries in Three Ways

CUSTOMER INSIGHT/REACH PRODUCTIVITY NEW VALUE POOLS /BUSINESS MODELS

Manufacturing(Oil, Gas, Chemicals,Pharmaceuticals, High-Tech,Consumer, Automotive)

Patient health record statistics,-virtual trialsCrowdsourcing and customer labs-

Data analytics-driven-exploration/drillingDigital real-time supply chain and-production lines

Made-to-order-Digital prototyping and testing-On-demand cloud-

Trade/Retai Store optimization/segmentation- Augmented reality-Social shopping-

Automatic stock deployment-Track and trace-

Virtual goods (e.g., in-game)-Virtual stores (e.g., prt--porter)-Made-to-order-

Business Services/C nstructi n(Transport, Construction,Professional Services)

Digital commerce/marketing, digital-ticketing, digital maps

Congestion charging, self-guided-carsSmart buildings, bridges-

Digital cloud-based design/ -prototypingDigitization consulting-

Media/Entertainment Personalized content-Digital distribution-Long-tail monetization-

Automated news-Digital production-Content management-

User-generated content-Digital aggregation (e.g., Hulu)-

Infrastructure(Utilities, Telecoms)

Up - and cross-selling, over-the-top-services, digital/social marketing

Demand response, smart grids-Self-healing networks/zero-intervention

Smart cities, sensor-signal-processing

Financia Services &Insurance

Multichannel, including m-payments-Individualized insurance-

Virtual branch/self-service-End-to-end process digitization-(trading, claims management,offer processing)

High-speed trading- Analytics-driven forecasting-Digital wallets/savings/credit-

Pub ic Sect r & Hea thcare Health card and national patient-health records, patient portalsE-polling/e-voting-

(Hospital) asset management,-chronic medication assuranceE-government-

Peer-to-peer services, online-health servicesDigital identity-



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expectancy, driven by developmentsin e-health and other technologies.

Digitization will also create thenext wave of growth in capitalinvestment, which will fow toall kinds of companies, includ-ing suppliers, whether high-techhardware and software companies,lower-tech construction companies,

professional services companies, ordisruptive new players.

It is quite likely that a great manyold businesses will see their revenuescome under pressure as they areforced to pass on to consumers muchof the ef ciency gains attributable todigitization. Publishers and old mediacompanies, whose revenues have been

increasingly cannibalized by the riseof new, virtual services and business

models, serve as a case in point. Still,despite widespread concerns that newtechnologies would destroy the overalleconomic value of the sector, that valuehas actually risen ( see Exhibit 5 ). Butthe challenges faced by the publishingindustry remain a cautionary note toother industries that have so far been

Exhibit 5The Impact o Digitization on the Media Industry in the U.S. and Western Europe

96

5623

19

108

67

66

38

623

4731

14 12

69

140

95

56

4530

609

5534

23 13

69

+4%

0%

20102005 2014

734

48

3614

15

74

178

115

U.S. AND WESTERN EUROPE MEDIA INDUSTRY REVENUES (IN US$ BILLIONS)

CAGR05-10:

+3%

CAGR05-10:

-5%

Video games

Internet advertising

Filmed entertainment

Television advertising

TV subscription/license fees

Book publishing

Out-of-home advertising

Recorded music

Radio

Consumer magazines

Newspapers

82114 83

Source: PricewaterhouseCoopers 2010 industry data for U.S. and western Europe; Booz & Company analysis


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affected only moderately by digitizationand the value shifts that can occur as

a result.

Altogether, we expect that the ongo-ing digitization of every industry willimpact global economic value by $12trillion to $15 trillion in 2020, includ-ing market share shifts, cost improve-ments, price decreases, and new valuepools; this gure needs to be comparedto a global purchasing power parityadjusted GDP of roughly $100 trillion

and a total nominal global revenue baseacross all industry sectors of roughly

$240 trillion in 2020. Though thisvalue is by nature highly speculativetoday, the estimate is in line with theeffects of previous major technologicaltransformations.

But the virtuous impact of digitizationwont be felt solely in the economicrealm. As people depend increasinglyon the virtual world, the effect on theenvironment will be real: The green-

house gases that contribute to globalwarming will be reduced, and scarce

natural resources will be consumedmore sparingly. People will cut back onunnecessary air travel, data centers willuse energy more ef ciently, and newermachines will make wiser use of waterand other commodities. The bene tsof digitization will be broadly felt andwill extend to all parts of the humanfootprint.

The ongoing digitization of every industry will impact

global economic value by $12trillion to $15 trillion in 2020.


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Digitizing a company does not comecheaply, and the larger the legacy aspecto the business, the more disruptivethe process o digitization is likely tobe. Furthermore, in most industries,even the largest enterprises will notbe able to a ord to invest in everyaspect o digitization all at once.The CEO and the executive teamwill have to make di cult choicesabout building and acquiring criticalcapabilities in order to capture thecoming opportunities. And they willbe con ronted by requests or capitaland resources across almost every parto the company. R&D, innovators,and new business owners within thecompany will demand capital andresources or new digitization initiatives.

Managers o established business unitswill want to make much larger capitalinvestments to trans orm their existingbusinesses through new, digitizedbusiness models and approaches. Theexecutive team itsel will want to makebold investments, including acquisitionsand partnerships with promising orrapidly growing businesses. And everyunction in the company will be askingor the resources needed to enable newbusiness processes and labor practices

with new technologies. The choices

the executive team makes will requirea deep understanding o how andwhere digitization will add value to thebusinesses or disrupt the status quo.

The key questions all CEOs and theirexecutive teams must answer center onour themes:

How will digitization impactmy current business model andpositioning within my industrysvalue chain?

How can I best identi y andenter areas where value is beingcreated, both inside and outside myindustry?

What areas o my business o ernew entrants clear opportunities todisrupt my current business model,and how can I best ght back?

Which capabilities do I need tobuild to be a leader in the eld?

The answers to these questions willguide CEOs and their executive teamsto decisions about where and how toprioritize their digitization investments

among the many competing options.

INEVITABLETRADE-OFFS


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To gauge which investments are mostcritical and in what sequence theyshould be made, top executives mustfrst judge where in their industrythe earliest impacts will be elt. The

speed o digitization will naturallyvary rom market to market, and

its adoptionand the level o investment required to respondullywill vary rom sector to sectorwithin each market. Thus, executivesmust gauge their response accordingto their industry, sector, markets, andcurrent competitive positioning inthose markets.

We have developed a methodologyor determining which industries

will be a ected frst. In general, weexpect to see digitization move astest

in industries where barriers to entryare low, those where in ormationin some orm or another is theprimary product or a key successactor in downstream activities, andthose whose upstream activities arethe most in ormation- or capital-intensive, providing dramaticopportunities or digitization toreduce capital intensity and increasereturns to capital ( see Exhibit 6 ).


A QUESTION

OF TIMING

Exhibit 6Which Industries Will Be A ected First, and Where?


Type of Impact

Speed

Expected speed of digitizationimpact in this industry

Market-facing impact

Expected intensity of digitizationimpact on products/services/ go-to-market in this industry

Operational impact

Expected intensity of digitizationimpact on production and internalenterprise productivity

Manufacturing Medium Medium Medium

Trade/Retail Fast Medium Medium

Business Services/ Construction Medium Low Medium

Media/Entertainment Fast High Medium

Infrastructure Slow Low High

Financial Services &Insurance Medium High High

Public Sector & Healthcare Medium Medium High

Industry Barriers to Entry- Information Intensity-(Downstream/Market-Facing)End Consumer Exposure-

Information Intensity-(Upstream/Operations)Human/Physical Capital Intensity-

Drivers


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Consider the case o the mediasector. Since its wares are essentially

in ormation goods, distribution viaonline channels has already becomemainstream rom CDs and DVDsto MP3s and streaming music andvideo, and rom newspapers andmagazines to websites and appsor smartphones and iPads. Thathas lowered the barriers to entryeven more, as evidenced by theconstant stream o startups lookingto proft rom the aggregation anddistribution o content. And though

the sector is not especially capital-intensive, the intensity o its use o human capital is very high. Thatmakes the sector ripe or cost cuttingthrough the digitization o humanbusiness processesa trend that hasalready happened in the automatedaggregation o news content throughcrowd approaches.

Then consider the manu acturingand in rastructure sectors. Thebarriers to entry are typicallyhigh, and ew companies in eithersector will be able to virtualizethe goods they make and sell.Furthermore, given their long-standing investments in plants andequipment, these companies willclearly have lower adoption ratesor digital technologies. But allthose assets also make these sectorsvery intensive in their demandor fnancial capital. As a result,digitization is likely to be used

primarily to maximize return onthat capital.

On the other hand, some areaso manu acturing are particularly

in ormation-intensive, especiallyupstream. In the oil and gas business,or instance, exploration analysisuses massive computing and smartsensor capabilities to determine theright investment (and digging)choices. And in the case o large-scale construction, global teams o architects, scientists, and engineersalready work together virtually inthe cloud to ensure the seamlesscompletion o their design activities.

Every single one o our teamsis working in the cloud, says anexecutive at a global so tware vendoractive in the eld o large-scalein rastructure design. Manu acturingissues can now be solved in a mattero weeks, as opposed to months ina traditional model. The Chinesegovernment, or example, is currentlyleading the construction o a nationalhigh-speed rail networkin e ect,the worlds largest digitizationprojectwhich will have digitallyconnected tracks, axles, in-carriageentertainment, on-screen advertising,ticketing, and in rastructuremanagement systems.

As these examples demonstrate,no industry will remain ree o thee ects o digitization. Even thoseindustries that at rst glance seem lessdigitizable, such as manu acturingand utilities, will generate signi cantdigitization bene ts due to their

sheer size. Thus, companies in theseindustries, too, will be orced to build

new capabilities, and many will simplynot be prepared with the leadership,

culture, organization, and talentnecessary to respond.

Regulators in many Westerneconomies are orcing the utilitiessector, or example, to deploy smartmeters in hopes o improving thee ciency o power grids, which willalso draw them closer to customers,enabling them to monitor demandand bill in real time. Yet many utilityplayers will struggle to embrace this

shi t. And pharmaceutical companieswill discover the power o gettingcloser to their end customers,especially in Europe, where they arecurrently barred rom advertisingor direct selling. Digitization alsopromises to enable them to buildvirtual customer labs, generating morein ormation about their products andsuperior customer insight. Here, too,ew companies are ully prepared toace the digital uture.

The range o possibilities is seeminglyendless, but the key to success willbe to understand how digitizationwill a ect each industry rst andwith the greatest impact. Only bydoing so can companies accuratelydetermine which capabilities to buildand prioritize which digitizationinvestments to make, and when.Absent an assessment o this sort,companies are likely to be aced withmaking more investments than they

can a ord, and making them in thewrong order.


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Exhibit 7 Factors A ecting the Speed o Digit ization


Privacy-Job substitution-Loss of human control-New digital divide-Government abuse-Technology fear-TEP (turf, ego, and-power)

NIH (not invented here)-

Con icting stakeholder-economic interestsInsuf cient infrastructure-investmentBlack Swan-malfunctioning ofcritical infrastructure(Fukushima, Wall

Street, Amazon cloud)Hacking-

Privacy-Net neutrality-Internet regulation-Legal uncertainty-Spectrum and-infrastructure

Closed, proprietary-solutionsComplexity issues-

Decelerators

Accelerators

SoCIETy anD CulTuRE EConoMICS anD RISKS REGulaTIon anD lEGal TECHnoloGy

THE SPEED OFDIGITIZATION

Digitization has indeed reached apoint o infection around the world,but that does not mean that thephenomenon will occur at the samerate everywhere, or that external eventswont speed it up or slow it down indi erent industries and geographies.To quote novelist William Gibson,The uture is already hereits justnot evenly distributed. Top executivesmust decide what stance to take on thedigitization o their sector and whetherto be a orce driving the transition to aully digitized industry. For those whodecide to orge ahead, the key questionis where to ocus their attention. Theanswer rests on a consideration o the accelerators and decelerators thatcontribute to the rate o change in

their industry and geography. Defningboth the engines o digitization andthe potential stumbling blocks isessential to this task.

We fnd it help ul to divide theorces a ecting the speed o digitization into our key actors:society and culture, economicsand risks, regulation and legalconsiderations, and technology.Based on interviews with Europeanand U.S. players in the in ormationand communications industries,we have assessed the potentialaccelerators and decelerators ineach o these our categories. Weexpect this assessment to be globallyrelevant, although the relative weighto each actor will vary by regionalmarket ( see Exhibit 7 ).

Society and CultureThe push to digitization is being driven

most power ully by the new generationo end-usersboth consumers andbusiness usersdemanding itsbene ts, including ever-widening social

- Technology innovation- Application innovation- Global talent market and

competition- Decline of unit costs/

Moores Law- End-to-end solutions for

industries- Bandwidth build-out- Cloud adoption- Industry standards

- Supportive spectrumand Internet useregulation

- Supportive health/ safety regulation

- Standards- Supportive and

standard privacy laws- Legal certainty

- Governmentinfrastructureinvestment

- Industry partnerships- Robust digital

infrastructure- Insurance and hedging

innovation

- Generation C- Democratic change

based on social nets- Startup successes- Environmental bene ts- Globalization of talent


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networks, ubiquitous connectivity,and constant access to news,entertainment, and in ormation.Already we can see the power o digitization in the role it has playedin the upheavals in the Arab world.And the entrepreneurial spirit is aliveand well, and contributing greatly tonew digital technologies and businessmodels; the globalization o talent willonly boost this activity.

At the same time, however, bothsocial and cultural concerns remain.Fears o loss o privacy and thepotential or government abuse o the array o technologies being madeavailable will likely increase as thedigital world is built out. The growing

sense o a digital divide between thetechnological haves and have-nots, and the accompanying earso job loss, could also stall the push,especially in less developed markets.Political issues, too, must be watched,given the likelihood o regionalbattles over tur and power, andnot-invented-here reactions tonew technologies.

Economics and Risks

A relatively robust in rastructureis already in place to supportdigitization. But the amount o investment required to ully realize itis daunting, both or the additionalin rastructure needed and or theservices and applications to be builton top o it. Governments aroundthe world are contributing billions o dollars to the e ort.

Yet problems remain: Confictingeconomic interests have the potentialto slow down urther investmentsin in rastructure, potentially leaving

much o it without the bandwidthand speed needed to support ulldigitization. And recent majormal unctions and incidents o the t o critical personal and corporate datacontinue to raise questions about therisks involved in placing too muchaith in the reliability o the complexdigital environment.

Regulation and Legal ConsiderationsThere is already considerablegovernmental and institutionalsupport or digitization, includingregulations concerning healthin ormation and privacy issues, andlaws involving liability risks as theyrelate to in ormation and networking,at least in some jurisdictions. Many

governments have also helpedpromote consistency in the creationand use o technological standards,and exerted a great deal o infuenceover the air allocation o spectrum,or the most part.

Uncertainty lingers over severalo these areas, however. Spectrumis becoming scarcer, and itsallocation will likely generatefercer fghts in coming years.

The debate on the regulation o in rastructure, its construction, andair use continues in many markets.And various legal issues regardingliabilityin the case o injuriescaused by automated systems, orinstanceand ownership o contentrights remain largely unresolved.

TechnologyA number o trends in technologyare coalescing to promote the comingtrans ormation to digitization. Wehave not yet reached the limits o Moores Law, and the cost o all kinds

o computing and communicationsequipment and devices keepsdropping. Meanwhile, the globalimplementation o high-speed xedand mobile networks continues apace,creating a geometric Metcal es Lawe ect as the value o the worldstelecommunications networks grows inproportion to the square o the numbero connected users o the system,dramatically increasing the value o the Internet economy. And despiteoccasional setbacks, more and moreusers are adopting cloud services, amove that is also promoting the astercreation and adoption o highly user-riendly applications and processes.The globalization o innovationhotbedsincluding the creation o

Silicon Valleylike communities outsidethe U.S., in Russia, India, China,and Singapore, to name but a ewsupports this process. Much still needsto be invented: Most o the worldsin rastructure in ormation is not yetdigital, but scanning technologiesas well as digital wraparounds oranalog things will drive urthergains (see Digitizing the High-TechSector, page 18 ).

Knowing the accelerators anddecelerators a ecting the rate o digitization in each industry and geography is critical as CEOs and theirexecutive teams decide how togo about taking advantage o thesetrends. And while we would notrecommend standing in the way o digitization, it goes without sayingthat anyone seeking to retard the rateo change will also want to beginby making sure they understand theactors driving digitization.


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Digitizing the High-Tech Sector

The speed with which digitization will transform the global economy islikely to surprise many players, not least of them the suppliers of the verytechnologies needed to enable other industries and make the transitionhappen. So it is critical that these companies begin now to shift their

focus beyond simply selling and maintaining their products and serviceswithin the current IT and telecom ecosystem. Instead, they must rethinkeverything from their operations to their sales and marketing processesto their cultures if they are to stay relevant in the digital future.

Many large technology vendors understand the need for change. Forexample, IBMwhose current advertising slogan, Smarter Planet,suggests its commitment to digitizationhas been actively buyingcompanies to support a digitized future. In 2010 alone, it bought datawarehouse maker Netezza for $1.7 billion, business integration softwaremaker Sterling Commerce for $1.4 billion, and Unica, a maker ofmarketing technology, for $500 million. The names of other large vendorsinitiatives suggest their similar visions for the future: Smart+ConnectedCommunities (Cisco Systems); Central Nervous System for the Earth(HP Labs); Intelligent Networks (Deutsche Telekom). Fully 50 percent ofall IT spending in 2017 is expected to be devoted to smart computingsolutions, platforms, and processes.

Meanwhile, most large suppliers of high-tech hardware and software,as well as telecom operators, have made little or no effort to prepare forthe digital futureor, worse, have already been outmaneuvered. Thissituation is putting their business models at serious risk as they try tocompete against their more forward-looking rivals. There is no doubt thatthe promised value of digitization can only be captured by companiesin these elds that understand the fundamental changes ahead. Thesechanges include the following:

A shift from moving boxes to software-based, cloud-centric businessmodels supplying services on demand

A true multichannel sales approach where the traditional distributionmechanisms of physical products have no meaning anymore, andwhere the direct online channel becomes primary

Signi cantly more complex ecosystems that will demand much higher-quality products and services that can provide truly value-creatingpropositionsand rely on a much deeper understanding of industry-speci c requirements and processes

More companies coming to grips with the need for external and openinnovationfew companies will be able to go it alone

The need for telecom operators to learn a new role, shifting from direct,end-to-end providers of services to end consumers into business-to-business-to-consumer providers of infrastructure to other serviceproviders and enterprises

Our interviews with leading ICT industry executives also presagesubstantial shifts in the nature and future of their industry ( see Exhibit B). It is worth noting that ICT executives are generally bullish about theirindustrys growth prospects: Six of 10 subsegments will signi cantlyoutperform the market, they believe, while just two will underperform.Several common themes also stand out: Cloud computing and security


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Exhibit B Not All ICT Industry Sectors Will Beneft Equally

Source: Booz & Company industry leader interviews (n=15)

Cloud-Based Applications

CommoditizeEvolve with

marketStrongly

outperform

Security Products and Services

Professional Services

Industry-Specific Applications

Horizontal Applications

Sensors/Connected Devices

Consumer Devices

Networking Equipment

Device Operating Systems

Telecom Services

HOW WILL DIFFERENT SEGMENTS OF THE ICT I NDUSTRY PERFORM IN THE CONTEXT OF DIGITIZ ATION?

- Consistentoutperformers

- Reflect needto verticalize

- Strong volumegrowth expectation

- Value growth limitedas prices drop

- Important, butnot extractingsuperior valuefrom digitization

are universally seen as leading industry areas, followed closely bythe growing importance of professional services and industry-speci capplications.

At the other end of the curve, respondents expect that device operatingsystems will be gradually commoditized as the current market share

wars subside. Telecom carriers are seen as important, but they will notshape the industrys future, and they will not extract substantial valuefrom the upcoming transformation.

It is also quite likely that entirely new players will emerge and quicklygrab much of the value on the tablemany ICT industry executivesare waiting for the Apple moment for smart infrastructures or big dataanalytics. In response, the valuations of such companies are alreadysoaring.


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METHoDoloGy

This investigation of theglobal impact of digitizationfollows up on the analysis weconducted concerning the rise

of Generation C.

In preparing this Perspective,the authors interviewed topexecutives at companiesrepresenting three groups:established players thatwill drive the emergence ofnew enabling technologies;emerging players that areworking at the frontier ofdigitization; and leaders inother sectors of the economythat will be affected by theforces of digitization as they rollout across every industry.

The authors would like tothank the executives fromthe following companiesand organizations who wereparticularly generous with theirtime in discussing the impactof digitization: Alcatel-Lucent,

Autodesk, Daimler, Ericsson,Gap, Google, Hewlett-Packard,Huawei, Intel, Microsoft,Orange, Symantec, and theangel investing organizationsBand of Angels and KeiretsuForum.

The report also incorporatesthird-party economic andanalyst research, as well asresearch into the creation andadoption of new technologies.

We expect, indeed hope, that a keyconclusion o our studythat the

digitization phenomenon has reacheda point o infection and the rate o change is acceleratingwill not comeas a surprise to the CEOs and executiveteams o most o the largest companiesin the world. They have read aboutand seen the changes already takingplace in any number o industries,most likely including their own. Butwhat this implies or the decisions theyneed to make and the capability gapsthey need to ll, given scarce capital

and resources, is only now becomingclear. The work we do across the globerein orces in our minds the impor-tance o rst assessing your industry,geography, and competitive position,and then deciding on the trade-o sregarding where to place emphasis andwhere to hold o . Understanding theaccelerators and decelerators o changeis the best way to determine how toshape the trend to digitization to yourcompanys advantage.

CONCLUSION


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21Booz & Company

About the Authors

Roman Friedrich is a partnerwith Booz & Companybased in Dsseldorf andStockholm. He leads the rmscommunications, media,and technology practice inEurope, and specializes inthe strategic transformation ofthese industries in the contextof digitization.

Matthew Le Merle is a partnerwith Booz & Company basedin San Francisco. He works

with leading technology, media,and consumer companies,focusing on strategy, corporatedevelopment, marketing andsales, organization, operations,and innovation.

Michael Peterson is a partnerwith Booz & Company basedin London and Dsseldorf. Heworks with global telecom andmedia companies, focusingon marketing and commercialstrategies, as well as on newopportunities from the emer-gence of digitization.

Alex Koster is a principalwith Booz & Company basedin Zurich. He focuses on

strategy, revenue growth,and business modeltransformation opportunitiesacross technology, telecom,and Internet companies, andadvises these companieson their route toward adigitized world.

Endnotes1 Apple press information.2 Twitter press communication, October 2010.3 Deutsche Telekom iLife Study, 2010.4 A Special Report on Smart Systems, Economist, November 4,2010.5 IBM 2010 estimate; press research.6

A Special Report on Smart Systems, Economist, November 4, 2010.7 HP Labs 2010 estimate; A Special Report on Smart Systems,Economist, November 4, 2010.8 The Rise of Generation C: Implications for the World of 2020, byRoman Friedrich, Matthew Le Merle, Michael Peterson, and AlexKoster (Booz & Company, 2010). www.booz.com/media/uploads/ Rise_Of_Generation_C.pdf

9 In-Memory Analytics: Strategies for Real-Time CRM, by Olaf Acker,Florian Grne, Adrian Blockus, and Carsten Bange (Booz & Company,2010). www.booz.com/media/uploads/In-Memory_Analytics.pdf10 Another Digital Gold Rush, Economist, May 12, 2011.11 Standing Up a Cloud-Enabled Marketing Capability, byMatthew Le Merle and Philip Minasian (Booz & Company, 2011).www.booz.com/global/home/what_we_think/reports_and_white_papers/ic-results? of_40585687=Standing+up+a+Cloud-Enabled+Marketing+Capability&of_qid=40308733

12 Social CRM: How Companies Can Link into the Social Web ofConsumers, by Olaf Acker, Florian Grne, Rami Yazbek, and Fares Akkad (Booz & Company, 2010). www.booz.com/media/uploads/ BoozCo-Social-CRM.pdf13 Compact News information to subscribers, May 2011.14 Booz & Company executive interviews, May 2011.15 Forrester 2010 forecast (Economist, January 2011).


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2011 Booz & Company Inc

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