- July 30, 2012:
Today, online technologies such as broadband connectivity, wireless mobility, cloud computing, e-commerce, social media and sensors are quickly transforming the world–creating new and innovative ways to work, play, consume, interact and communicate. These activities comprise the‘digitization’ process – identified as the pervasive adoption of a wide variety of digital, real-time, and networked technologies, products, and services that enable people, companies, governments, and even machines to stay connected with one another. In truth, while the benefits for companies on the leading edge of the digitization trend include greater customer insight and reach, higher productivity, and new business models, the fact remains that these gains arenot evenly reaped among nations, markets or industries. To that end,Management consulting firmBooz & Company have created the ‘Industry Digitization Index’ – providing in-depth analysis into the industries that are leading the pack in digitizing themselves as well asthearray of factors driving such effort.
SPEED IS OF THE ESSENCE
The process of digitalization is sweeping nations worldwide and, as a result, people from across the globe can now find a vast wealth of information, and exchange, rate, and review it for all to see. In turn, companies are collecting detailed dataon consumers and their behavior and using that knowledge to better target marketing efforts as well as effectively design products and services. In fact, with digitization, governments too can gather and disseminate information quicker, making their operation – in the best cases –increasingly transparent and their dealings with their populations more efficient.
Indeed, the benefits of digitization are certainlybeing realized, with the speed at which the process is taking place varying according to industry. “These differences can be felt in how quickly certain sectors are capturing value as digitization grows in importance,” explained Bahjat El-Darwiche,a Partner with Booz & Company.
In light of these inconsistencies,it is vital to study the supply, demand, and industry-level aspects of digitization that are driving both industry leadership and differentiation. “This can be achieved using Booz & Company’s Industry Digitization Index – a core component of a body of global research conducted to understand the digitization trend and its effecton national economies, industry sectors, and society at large,” added El-Darwiche.
ASSESSING DIGITAL CAPABILITIES
The primary goal of the index is to measure which markets and industries are adopting and benefiting from digitization, and which are lagging. “A further goal is to gain insight into the specific technological factors that are enabling someto move forward more quickly than others. In order to do this, it is important to obtain a complete picture of how these markets and industries use technology,”said Milind Singh, a Principal with Booz & Company.
As part of this initiative, four separate but tightly-interconnected dimensions need to be considered:
1. The way in which transactions into an industry are enabled by digitization.
2. The digital platforms and tools that companies in a particular industry use to orchestrate their internal value chain as well as interactions within their industry ecosystems.
3. The industry outputs for which digitization enables more efficient delivery of products and services, including distribution, electronic commerce, and the like.
4. The foundational infrastructure that underpins it all.
The most complete and reliable source of data found for this study stems from Eurostat, the E.U.’s central statistics agency. As a result – and because currently no other country or region has a comparable public source of such data – Booz & Company have restricted the scope of the index to the European Union.
The information provided by Eurostat includes data on the relative sophistication of the digital infrastructures to be found in companies across the 27 national markets of the E.U., as well as data on digital inputs, internal processes, and outputs.Compiling and weighing these four dimensions led to the creation of the overall index of digitization, by market and industry. Thus, the financial services and insurance sector has an index of 53, which means that, on a scale of 1 to 100, the sector scored an average of 53 for the four factors contributing to digitization.
FROM TOP TO BOTTOM
According to the analysis, the three leading sectors in terms of industry digitization are:
• Financial services and insurance:This sector has long been the highest-spending industry in terms of information and communica¬tions technology (ICT) investments, first digitizing key transaction processes such as electronic transfer of funds, securities trading and clearing, and interbank settlement.
• Computers and electronics:The various elements of this sector have evolved complex ecosystems with supply chains that have been divided among multiple specialized players. Digital process¬ing is essential to orchestrate and control these complex value chains, from electronic procurement to paperless supply chains and trans¬port logistics to digital factories.
• Media and telecommunications:This sector, which includes IT ser¬vices firms, telecom operators, and Internet companies, both supplies and uses the means of digitization.
At the bottom of the list are the labor-intensive, old-economy sectors such as hospitality, construction, and real estate. “These industries’ characteristics ultimately reduce their appeal to digital suppliers, but by the same token suggest that digitization offers the potential for these sectors to make great strides in pushing efficiency and customer convenience,” said Singh.
A WIDENING GAP
While the leaders in digiti¬zation are moving ahead quickly, progress for many of thelaggards remains relatively slow. In fact, financial services and insur¬ance is also the most dynamic sector and its digitization index grew by more than five points between 2009 and 2011. In parallel, industries in the middle of the pack are also gaining momen-tum – a clear sign that technolo¬gies such as smart tags, M2M communications, and remote metering have reached sufficient levels of technical maturity and cost-efficiency.
Meanwhile, the real estate, business and administrative services, as well as hospitality, are making little head¬way in their efforts to digitize – despite their direct connection to the consumer. In reality, fragmented demand and an inherent lack of digital skills have kept suppliers from aggressively pursuing these sectors.
“These results suggest that as digitization progresses, a profound shift of importance, and ultimately value, will occur among these leading industries and they will be the ones to achieve the highest growth rates,” said El-Darwiche.
Thisstudy of industries also allowed Booz & Company experts to examine where compa-nies in particular industries are pushing the digitization envelope in each of the four elements of digitization – input, processing, output, and infrastructure – and where they still have work to do.
Although results show that strides have been made in digital infrastructures across all industries, even the most forward-looking companies have not yet reached the stage of true digitally-enabled, real-time, connected design, supply, build, sell, and service capabil¬ities.
Different Results At Every Stage
At the input level, companies in many industries are beginning to put together paperless supply chains to accelerate the acquisition of raw materials, although insular digital environments in diverse industries slow down this process.At the processing dimension, however, the results are less encouraging as they indicate a gap between the base infrastructure needed for standard office communication and daily office work and actually putting thatinfrastructure to work in the form of differentiated digital processing capabilities for driving business process efficiency and effectiveness.
Perhaps the most surprising finding is that companies in every industrystruggle in the output level. The data suggests that, in most cases, bricks and mortar may still be far more important than clicks. Moreover, there is a great deal of variance between the leaders and the laggards in this area:this may bedue to the fact that large corporations engage in e-commerce activities and small and medium-sized enterprises use more tradi¬tional sales channels.
In actuality, companies in most industries tend to be more digitized, the closer they are to the actual customer; while manystill oper¬ate in an essentially analog mode in working with suppliers, those in information and services have digitized their output contact with their customers.
The Sector Level
In comparing sectors, the dissimilarities among the four dimensions stand out even more vividly. For instance, financial services and insur¬ance is particularly strong with respect to underlying infrastructure, transaction processing both internally and with external partners, and the digitization of output processes, whereas the computers and electronics industry faces challenges on the output level.
THE GEOGRAPHICAL DIVIDE
In addition to sector particularities, the process of digitization is also differ¬entiated along geographic lines: in general, the farther north and west a country is located, the more advanced its digitization.On an industry basis, the gaps among regions tend to be largest in the old-economy non-service sectors, as these industries require higher levels of investment in order to digitize than service sectors, and the digitiza¬tion process itself is more difficult.
“These distinctions come as no surprise, given the well-established link between a country’s extent of digitiza¬tion and its per capita gross domestic product. The fact that this relationship also holds true on the sector level only confirms the effect that country-level characteris¬tics have on promoting digitization,”commentedSingh. “After all, it is a cycle: the availability of investment funds enables digitiza¬tion, and more digitization supports higher levels of GDP growth, making more money available for invest¬ment.”
As the future is set to become increasingly digitalized, the real value of theIndustry Digitization Index lies in its ability to shed light on the risks and rewards for digital leaders and laggards – on both the sector and the country levels. Indeed, pioneering sectors have the opportunity to build sustainably-advantaged positions, whereas industries that are behind may become less relevant to consumers.The truth is, it is pivotal that all companies understand the direction that digitization will take in the future and while ICT companies should support the industries that are digitizing fast, governments also need to fully recognize the potency of this on-going revolution.