DIGITAL/MCKINSEY: INSIGHTS - WINNING IN DIGITAL ECOSYSTEMS
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Digital/McKinsey: Insights
Winning in digital ecosystems
January 2018
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January 2018
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73
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.
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
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
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
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
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
(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 2018Many 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 9China 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 2018Large 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 11core. 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 2018EXHIBIT 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 13To 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 2018ecosystems 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 15production 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 2018if 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
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.
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 17Photo 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 2018concentration 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 19EXHIBIT 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 2018EXHIBIT 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 21EXHIBIT 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 2018Increasingly, 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 23EXHIBIT 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 2018EXHIBIT 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 25For 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
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 2018unexpected gusts. As digital technologies are increasingly relevant beyond the blurring and business models reshape more and more boundaries of TMT. 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 2018The 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 29You can also read
