This New Digital Divide Is Leaving Most Companies Behind
What digital divide? Among one of the world’s most innovative nations, the United States is globally known for its cutting-edge digital capabilities.
Yet according to a recent McKinsey report, the U.S. economy is realizing only 18% of its digital potential. The productivity gains digital technologies should be enabling are not being seen in the economy due to a new digital divide in the US.
The Birth Of “Have-Mores”
Almost all individuals, companies and sectors in the U.S. today have access to digital technologies. According to this Harvard Business Review article, there are hardly any “have nots” when it comes to all things digital. But increasingly there is a wide and persistent gap between the “haves” and a group of “have-mores” – companies and sectors that are leveraging and using their digital capabilities more than their peers to transform and innovate their operations.
The 18% figure is determined by how the U.S. economy as a whole performs against the have-mores, through an analysis of where and how companies are building their digital capabilities, increasing usage and developing a more digital workforce. At the sector level, McKinsey Global Institute found that the have-mores have increased their level of investment in technology-enabled initiatives four-fold since 1997, with greatest gains realized in the past decade. Other sectors are barely keeping up with the have-mores.
The technology sector as well as media, professional and financial services sectors rank themselves with the have-mores, and are leading on the digital front compared to other sectors of the U.S. economy. However, this does not mean every technology or media company is leading. There are many companies within those sectors that are falling behind as well.
The laggard sectors are generally government, health care, construction, local services and hospitality, but again there are exceptions within each sector that are innovating and disrupting on the digital front.
Economic Implications Of The New Digital Divide
The HBR article states that this digital gap has broader economic implications. The digitally advanced has boosted their productivity and profit margins by two to three times the average rate of their peers in the last twenty years. The laggard sectors also reported lower productivity and performance.
Since many of the laggard sectors contribute and represent a significant portion of U.S. GDP and employment, this inevitably slows down the broader economy. It is estimated that, if the U.S. operates at its full digital potential, this could add at least $2 trillion to the economy.
Digital Usage Drives Business Growth
It should be noted that this digital divide is not a result of reluctance to invest in digital technologies, as most companies now spend heavily on IT regardless of their sectors. According to the HBR article, this gap is created by the degree of digital usage. For leading sectors, the level of digital engagement with customers and suppliers is five times larger than others – digital engagement includes everything from digital payments to advertising and interactions on social media.
The gap is even more substantial when it comes to developing digital workforces. For leading sectors, digital and mobile increase worker efficiency and automate routine tasks, while creating new digital jobs.
On the company-level, the have-mores are disrupting their sectors (and others) and are leading on the product/service, business model innovation and revenue growth front. Digitally enabled innovations tend to have network effects associated with them, leading to “winner take most” outcomes. Top performing companies experience much higher profit margins and are leaving everyone else behind.
Based on another McKinsey research of 150 large companies, it found that many firms are struggling to keep up with digitization to deliver products and services more quickly and cost-efficiently. However, not all of the digital leaders were born digital. Companies like Nike and GE have successfully transformed their strategies and operations to become top digital leaders.
Since digitization is closely connected to innovation, productivity and growth, closing this digital disparity between the haves and have-mores should be a top agenda item for both public and private-sector leaders. The digital growth and productivity advances of the haves could be an important stimulant for the U.S. and global economy.
What do you think? Do you agree with McKinsey that this digital catch-up growth will lead into a broader economic transformation? Please share your thoughts below!
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