Booz Co Next Wave Of Digitization

Perspective Roman Friedrich Matthew Le Merle Michael Peterson Alex KosterThe Next Waveof DigitizationSetting Your Direction,Building Your Capabilities

Contact InformationDelhi New York ShanghaiAshish Sharma Philip Minasian Andrew CaineyPrincipal Principal Partner+91-124-4998705 +1-212-551-6098 +86-21-2327-9800ashish.sharma2@booz.com philip.minasian@booz.com andrew.cainey@booz.comDubai Paris SydneyKarim Sabbagh Pierre Péladeau Vanessa WallaceSenior Partner Partner Partner+971-4-390-0260 +33-1-44-34-3074 +61-2-9321-1906karim.sabbagh@booz.com pierre.peladeau@booz.com vanessa.wallace@booz.comDüsseldorf/Stockholm San Francisco ZurichRoman Friedrich Matthew Le Merle Alex KosterPartner Partner Principal+49-211-3890-165 +1-415-994-4320 +41-43-268-2133roman.friedrich@booz.com matthew.lemerle@booz.com alex.koster@booz.comLondon/Düsseldorf São PauloDr. Michael Peterson Ivan de SouzaPartner Senior Partner+44-20-7393-3310 +55-11-5501-6368michael.peterson@booz.com ivan.desouza@booz.com Booz & Company

EXECUTIVE For more than a decade, powerful new digital approaches to business, and life in general, have come on the scene, yet weSUMMARY are now entering an even more rapid and dramatic period of change. The phenomenon of digitization is reaching an inflection point. Three powerful forces are driving the shift: consumer demand, the push for new technologies, and the prospect of even greater economic benefits. Every company in every industry will be dramatically affected, and it will be the responsibility of CEOs to lead the charge by building the right capabilities for their companies to remain relevant in the digitized environment, achieve growth, and fend off competitive threats. New technology deployments and related investments will add up to more than even the largest 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 the 1990s and 2000s, this time around the basis of competition will be set by the companies that embrace and deploy digitization in the right places at the right time. This Perspective provides guidance to CEOs and their management teams about the relevance of digitization in their respective industries, and the factors most likely to accelerate or decelerate the digitization phenomenon. The judgments that companies make now will largely determine their relative competitive position for the foreseeable future.Booz & Company 1

THE Fans of Disney movies can now buy cinema tickets right on Facebook and at Thames Water Utilities in London have installed thousands of sensorsINFLECTION invite their friends to join them at to monitor its water pipe network,POINT the show. Groupon customers receive coupons for deep discounts from all reducing leakage by 25 percent. Further afield, ZMQ, a mobile kinds of local retailers and service solutions company in India, recently businesses. Shoppers at Best Buy can launched an SMS service to deliver ask Facebook friends their opinions prenatal advice and reminders to about specific items they see on the pregnant women, for 1 rupee per shelf, in real time, right in the store. text. ClickDiagnostics, based in the U.S., lets people in rural areas of Elsewhere, ranchers are embedding Bangladesh and Egypt use cellphones into their cattle sensors that send to transmit pictures of their eyes back data on location and health for and skin for diagnosis of cataracts analysis—each cow generates about and skin cancers. On a larger scale, 200 megabits of data a year. Engineers Australia is building a US$40 billion The effects of an increasingly digitized world are now reaching into every corner of our lives.2 Booz & Company

next-generation broadband network The push to build a fully digitized we knew just 20 years ago, the comingto serve as the basis for a future world continues. The amount of data wave will remake our world all over“smart” economy. generated annually is approaching 35 again. Our research into the behavior of trillion gigabytes. In the next decade, Generation C—people born after 1990The effects of an increasingly digitized 350 million Chinese are expected who are just now reaching adulthoodworld are now reaching into every to move to newly built cities, each and entering the workforce—showscorner of our lives. Already, 4.6 billion of which will require as much as that the trend to global digitizationphones continually send information $35 billion in investment for smart will only accelerate, shaping in earneston the location of their users to infrastructure. It is estimated that the the ways in which technology invadescarriers. Cisco predicts that connected CO2 equivalent of 53 million cars every aspect of our lives. PervasiveInternet devices will outnumber could be eliminated if the U.S. were to broadband, ubiquitous connectivity,people by two to one in 2015. Upward invest in a smart electric grid, while cloud computing, social networking,of 10 billion applications have been smart traffic management could save “the Internet of Things”—all aredownloaded from Apple’s App Store. an estimated 4.2 billion work hours coalescing to transform how we work,Every day, people generate 100 million lost and 10.6 billion liters of gasoline play, communicate, socialize, and dotweets on Twitter. Fully 79 percent of burned annually as cars idle in traffic. business. The digitization phenomenonworkers in Western nations currently Eventually, 1 trillion sensors will has reached an inflection point.depend on the Internet. The upheavals be deployed globally in the form oftaking place throughout the Middle “smart dust,” gathering and digitizing That leaves CEOs with a stark choice:East and North Africa owe much trillions of gigabytes of information Begin to invest now in the internalof their power to the digital devices from the analog world, and sending and external digital capabilities theirconnecting people there. And 32 it wirelessly to a growing number of companies will need to differentiatesurveillance cameras now monitor “big data” machines for storage and themselves from the competition. Orall activity within 200 yards of the analysis. sit back, watch the digital revolutionformer house of George Orwell, unfold, and run the risk of beingauthor of 1984 and coiner of the In short, though the current degree outflanked by more forward-thinking,term “Big Brother.” of digitization has already given us a faster-moving rivals. world that’s very different from the oneBooz & Company 3

THREE The outlines of the fully digitized world have long been sketched. These changes are forcing companies to rethink how to manage theirDRIVING So why are we reaching this critical employees, who are already becomingFORCES inflection point now? The reason is that three driving forces, acting in less emotionally attached to their company’s wider purpose and goals, concert, are powerfully reinforcing and who expect to be able to live one another. their digital lives at work as well as at home. These trends are spreading Consumer Pull outward from the developed world, as Consumers, and particularly new middle-class populations in every Generation C, are already fully emerging market are being connected adapted to the digital environment. to the global information flow. The They expect to be connected every typical Generation C consumer now moment of their lives, through spends a large portion of his or her virtually every device, whether they are day online, always connected, always consuming news and entertainment, communicating (see Exhibit 1). reaching out to their friends through social media such as Facebook and Technology Push Twitter, or mixing work with play Digital technology continues to make as they go through the working inroads into every aspect of our day. Their insistence on the right to lives. The infrastructure backbone of stay connected is transforming their the digital world is expanding into personal lives, and their willingness to every corner of the globe, bringing share everything is changing long-held affordable wired and wireless attitudes about privacy. Their trust broadband to billions of consumers is shifting from well-known brands in developed and developing markets to referrals from their closest friends. alike. Three-quarters of the world’s They are advocates of many causes population is now connected through and at the same time deeply embedded mobile phones, while digital cloud- in their social environments. In their based services gather more and more world, knowledge isn’t just power. It’s data on consumers in every segment social and commercial currency—and (see Exhibit 2). In parallel with access to it is vital. the “Internet of People,” low-cost connected sensors and devices are The infrastructure backbone of the digital world is bringing affordable wired and wireless broadband to billions of consumers.4 Booz & Company

Exhibit 1A Day in the Life of a Generation C Consumer22-YEAR-OLD JONAS K.’S DAY: APRIL 12, 2020 7:00 - Reading news on personal digital 13:30 - Navigation-supported drive to doctor device (PDD) - Real-time smart routing to avoid - Twittering plans for the day traffic congestion 15:30 - Unlock clinical record for doctor; 7:30 - Checking e-health tool: first medication sent to home symptoms of sinusitis; message on PDD for doctor’s appointment 18:00 - Shopping downtown: online price check with PDD, friend recommendations on intended 8:00 - E-vote on “ban of motor vehicles couch purchase in Berlin governmental area” - Shopping tour picture sharing referendum via “digital ID” on profile 19:30 - Downtown walk: friends 9:00 - Interactive video e-learning session join for location-based 30% with professor discount promotion for dinner at small restaurant - M-payment for food 11:30 - Short video chat with grandmother - Sharing tasks via cloud project tool 22:30 - Retiring: e-book and simultaneous streamed video - Automated reminder via PDD to take sinusitis medication before 23:00Source: Booz & Company analysisExhibit 2New and Old Technologies Are Driving the Push to Digitization TECHNOLOGY: IT INVESTMENTS AND SMART INFRASTRUCTURES GLOBAL SHIPMENTS OF SMARTPHONES AND PCS U.S. Government and Business Spending on Global Smartphone and PC Shipments IT Equipment and Software Global Unit Shipments (in millions) Spending (in US$ billions) 700 800 600 600 500 400 400 300 200 200 100 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 2009 2010E 2011E 2012E 2013E 2012E: Inflection Point (Smartphones > Total PCs) Smart-computing solutions, platforms, applications All PCs Current-generation technology SmartphonesNote: PCs include Netbooks. Data and estimates as of November 2010.Source: Forrester Research; Morgan Stanley ResearchBooz & Company 5

being deployed in every industry. The bubble. An increasing portion of the around the world is forcing companiesdevelopment of cloud computing, $22 billion and the $20 billion that in every industry to contend withand the vast information processing U.S. venture capital firms and U.S. increased cost pressures, transformingmachinery it requires, is well under angel investors, respectively, invest their traditional value chains,way. As a result, the demand for each year appears to be going into spawning new formats and newpowerful real-time analytics engines these digitization technologies. Recent business models, blurring industryto allow companies to gather and transactions in the secondary financial boundaries, and even creating entiremake sense of hitherto “undigested” markets have suggested that Facebook new industries. In response, companiesinformation flows is rising fast, and is worth more than $80 billion, while are turning to digitization to provide acompanies around the world are LinkedIn recently went public at a competitive advantage and to generateresponding with new technologies valuation of more than $3.3 billion, a growth.such as in-memory analytics devices to high multiple over its 2010 revenuesmeet that need. of $243 million. On a national scale, At the sovereign level, too, countries the benefits of digitization created and regions are acting to accelerateEconomic Benefits through investments in broadband the digitization phenomenon. ChinaThe third force driving the digitization infrastructure have been amply has written cloud, connectivity, andphenomenon is the realization on the demonstrated (see Exhibit 3). digitization goals into its 12th five-part of executives in every industry year plan, which will include stimulusthat the economic benefits to be Meanwhile, the economic cycle measures estimated at more than $1.7captured are real. Though it is too and globalization have exposed trillion. The European Union hasearly to quantify those benefits, a the weaknesses of large enterprises agreed on an energy upgrade plan ofwave of capital has poured into the that have so far failed to embrace more than $200 billion, and the U.K.’snew digitization technologies and digitization. They have also sharpened national infrastructure plan earmarkscompanies, and the public markets the minds of CEOs regarding the need more than $200 billion (see “The Ageare beginning to reward early movers to further cut costs and monetize of the Dragon”).with valuations reminiscent of the existing capabilities more effectively.years leading up to the dot-com Finally, increased competition fromExhibit 3Nationwide Broadband Infrastructure Can Boost GDP by More Than One Percentage Point GDP CHANGE AS A RESULT OF A 10 PERCENTAGE POINT INCREASE IN PENETRATION 1.38% 1.21% 1.12% 0.81% 0.77% 0.73% High-income countries 0.60% Low-income countries 0.43% Fixed Telephony Mobile Telephony Internet BroadbandSource: World Bank, 20106 Booz & Company

The Age of the Dragon Despite the many virtues of digitization, its effects will not be spread evenly across the globe; indeed, different regions will experience the transformation at different speeds. Developed countries are likely to gain the most from the process, although emerging markets will adopt many of the accompanying features more quickly. Yet every region and market will have to overcome its own specific major hurdles going forward. Developed Markets The most developed economies of Europe and North America already possess some singular advantages, most notably their thorough mastery of high technology, a highly developed high-tech industry—Silicon Valley the most notable example—a history of sophisticated engineering, entrepreneurship and innovation, plenty of experienced MBAs, and broad computer literacy on the part of consumers. All of these markets, however, are burdened with huge sunk investments in legacy infrastructure that will be difficult to replace, especially given the sovereign debt situations many of these countries face in the aftermath of the financial crisis. And fragmented decision-making bodies, complex regulation, and intense competition, particularly in Europe, will make it much harder to achieve the transformation these markets will require. As such, we expect that companies in the infrastructure domain will struggle to make the changes needed to remain competitive, and that much of the true innovation will take place in industries and companies with shorter product cycles and lower barriers to entry, as we have already seen in the music, film, and video game sectors of the entertainment industry. As a consequence, governments and regulators, particularly in Europe, will need to rethink their current reactive, “non-shaping” philosophy in order to catch up with more dynamic regions. China China is determined to confirm 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 than 400 million Internet users, China is also the largest regional online market, governed by distinct players, preferences, and ethical and moral standards—although an executive of one global Internet player highlights “the monetization challenge of digital information in China. Returns are 10 times lower than in the U.S.” (see Exhibit A, page 8). Still, China has both the influence and the scale to impose its technological standards far outside its own borders, as well as a centralized structure that streamlines the making of decisions about infrastructure and industrial policy. Over the next decade, 350 million more Chinese will move to cities, which will require the construction of widespread smart infrastructure. It is no surprise that China’s 12th five-year plan emphasizes cloud computing, connectivity, and digitization. We expect China to be a strong shaper of global digitization. India India is likely to leapfrog in technological strength as its buoyant mobile industry creates the basis for a vastly increased online population. But it must overcome several challenges concerning the quality of its broader infrastructure. A senior U.S. technology executive has also voiced concern that “the pay-as-you-go model prevalent in this region may not support the development of infrastructure data investments well.” Others haveBooz & Company 7

mentioned that India and other economies with high human-capital intensity may find it difficult to justify the potentially large-scale loss of jobs to automated processes and new business models. The Middle East These markets remain heavily dependent on their oil and gas resources, a situation that continues to limit local economic diversification and innovation. Moreover, many still require help from international corporations to provide the know-how needed to make real technological gains. In recent years, a number of countries in the region have begun to set a more progressive course, using ambitious central planning programs and large amounts of uninvested cash to promote greater economic diversity. The recent upheavals in several countries in the region, driven by their typically young and tech-savvy populations, suggest just how powerful this trend is becoming there. Emerging Markets Many of these countries—including much of Africa, Latin America outside Brazil, and Southeast Asia—do not yet possess the technological know- how, economic sophistication, and complex political decision-making mechanisms needed to make large-scale investments in a truly digital economy. Yet several emerging markets have already demonstrated that substantial economic gains can be made even with relatively simple technologies. The rapid spread of SMS-based healthcare services around the world is a case in point. We expect to see more of these kinds of very specifically focused innovations come to these markets as they develop further. Exhibit A Valuations of Chinese Internet Companies TOP-LISTED CHINESE INTERNET COMPANY VALUATIONS Net Profit Margin Q1 2011 80% Baidu Tencent NetEase Ctrip 50 50 40% Sohu 168 Google Qihoo 360 Alibaba 0% Renren Dangdang -40% Youku -80% Sina-120% 0.01 0.10 1.00 10.00 100.00 Revenue Q1 2011 (in US$ billions) Market Cap 5/2011 Source: The Economist; Booz & Company analysis8 Booz & Company

DRAMATIC Many of the ideas and technologies underlying the digitization phenomenon The specific effects of digitization on the world of business will be many andEFFECTS are not new; indeed, some have been far-reaching, but every industry will be around for a long time. Taken together, dramatically affected (see Exhibit 4). however, they will create a degree of change comparable in scope to the great Business and Customer Insights industrial revolutions of the past. Every industry will be the beneficiary Exhibit 4 Digitization Will Affect Industries in Three Ways CUSTOMER INSIGHT/REACH PRODUCTIVITY NEW VALUE POOLS / BUSINESS MODELS Manufacturing - Patient health record statistics, - Data analytics-driven - Made-to-order (Oil, Gas, Chemicals, virtual trials exploration/drilling - Digital prototyping and testing Pharmaceuticals, High-Tech, - Crowdsourcing and customer labs - Digital real-time supply chain and - On-demand cloud Consumer, Automotive) production lines Trade/Retail - Store optimization/segmentation - Automatic stock deployment - Virtual goods (e.g., in-game) - Augmented reality - Track and trace - Virtual stores (e.g., prêt-à-porter) - Social shopping - Made-to-order Business Services/ - Digital commerce/marketing, digital - Congestion charging, self-guided - Digital cloud-based design/ Construction ticketing, digital maps cars prototyping (Transport, Construction, - Smart buildings, bridges - Digitization consulting Professional Services) Media/Entertainment - Personalized content - Automated news - User-generated content - Digital distribution - Digital production - Digital aggregation (e.g., Hulu) - Long-tail monetization - Content management Infrastructure - Up - and cross-selling, over-the-top - Demand response, smart grids - Smart cities, sensor-signal (Utilities, Telecoms) services, digital/social marketing - Self-healing networks/zero processing intervention Financial Services & - Multichannel, including m-payments - Virtual branch/self-service - High-speed trading Insurance - Individualized insurance - End-to-end process digitization - Analytics-driven forecasting (trading, claims management, - Digital wallets/savings/credit offer processing) Public Sector & Healthcare - Health card and national patient - (Hospital) asset management, - Peer-to-peer services, online health records, patient portals chronic medication assurance health services - E-polling/e-voting - E-government - Digital identitySource: Booz & Company analysisBooz & Company 9

of real-time, high-resolution business call records, analyzing call date, time, the digital world through embeddedinsights combined with the ability to and position, and can now forecast wireless devices, and better investmentreach out to customers more effectively. someone’s future whereabouts with decisions through deeper analysis ofInformation on shopping habits, 93.6 percent accuracy. Johan Bollen increasing amounts of data.location, finances, social activities, of Indiana University has analyzedsearch history, securities trading, millions of Twitter messages to detect New Value Pools and Value Shiftstravel, medical history, voting, and national mood swings that presage As a result of gains in both productiv-advocacy, among others, is already changes in the Dow Jones Industrial ity and business insight, new valueroutinely captured, processed, and Average up to six days in advance. pools will emerge in most industries,stored at one or more of the 7.5 together with opportunities for majormillion data centers now in operation Productivity shifts in value as the competitiveworldwide. As consumers digitize The impact on productivity will dynamics within and among industriestheir lifestyles and are surrounded by be profound. Labor productivity will are altered. Three primary types ofmore sensors and other devices for rise as a result of more targeted man- value shifts will occur:gathering information, companies will agement of workforces andgain unprecedented new insight—but even more extensive automation • Most of the shifts will takeonly if they have built the capabilities of business processes. Manufacturing place within industries, thanksto do so. Retailers, for example, will has already been transformed in several to changes in market share orbe able to adjust their in-store SKUs industries, testing now takes place industry structure, clearly separat-to accommodate ultra-local tastes and using virtual prototypes rather than ing the digital winners from thepreferences virtually in real time. real ones, and teams from various firms losers. Laggards will be acquired collaborate in the cloud on complex or merged.Another result will be the growing use virtual designs of large-scale develop-of critical business techniques such as ments, seamlessly tapping into global • Consumers will gain substantially,social marketing, crowd sensing, and talent pools. The productivity of physi- not just through reduced pricescrowdsourcing. Researchers from the cal assets will be drastically improved and more attractive offerings butMassachusetts Institute of Technology through the use of smart infrastructure, also because of greater choice andhave pored over 16 million telecom the integration of physical goods into convenience, and even longer life10 Booz & Company

expectancy, driven by developments professional services companies, or increasingly cannibalized by the rise in e-health and other technologies. disruptive new players. of new, virtual services and business models, serve as a case in point. Still,• Digitization will also create the It is quite likely that a great many despite widespread concerns that new next wave of growth in capital “old” businesses will see their revenues technologies would destroy the overall investment, which will flow to come under pressure as they are economic value of the sector, that value all kinds of companies, includ- forced to pass on to consumers much has actually risen (see Exhibit 5). But ing suppliers, whether high-tech of the efficiency gains attributable to the challenges faced by the publishing hardware and software companies, digitization. Publishers and “old media” industry remain a cautionary note to lower-tech construction companies, companies, whose revenues have been other industries that have so far been G 11Exhibit 5The Impact of Digitization on the Media Industry in the U.S. and Western Europe aö 32 U.S. AND WESTERN EUROPE MEDIA INDUSTRY REVENUES (IN US$ BILLIONS) 3 734 +4% 38 0% 66 Video games 609 623 T 30 Internet advertising 19 67 23 45 Filmed entertainment CAGR A4 56 ’05-’10: -w 56 74 Book publishing +3% -w 69 Television advertising 69 115 Le TV subscription/license fees 96 -w 95 Out-of-home advertising -w Recorded music CAGR 108 178 140 Radio ’05-’10: Li 13 -5% Li 23 Consumer magazines 34 12 15 14 14 Newspapers 55 31 36 N 47 48 Pl ot 114 fil 82 83 Th 2005 2010 2014 ASource: PricewaterhouseCoopers 2010 industry data for U.S. and western Europe; Booz & Company analysisBooz & Company 11

affected only moderately by digitization and a total nominal global revenue base house gases that contribute to globaland the value shifts that can occur as across all industry sectors of roughly warming will be reduced, and scarcea result. $240 trillion in 2020. Though this natural resources will be consumed value is by nature highly speculative more sparingly. People will cut back onAltogether, we expect that the ongo- today, the estimate is in line with the unnecessary air travel, data centers willing digitization of every industry will effects of previous major technological use energy more efficiently, and newerimpact global economic value by $12 transformations. machines will make wiser use of watertrillion to $15 trillion in 2020, includ- and other commodities. The benefitsing market share shifts, cost improve- But the virtuous impact of digitization of digitization will be broadly felt andments, price decreases, and new value won’t be felt solely in the economic will extend to all parts of the humanpools; this figure needs to be compared realm. As people depend increasingly footprint.to a global purchasing power parity– on the virtual world, the effect on theadjusted GDP of roughly $100 trillion environment will be real: The green-The ongoing digitization ofevery industry will impactglobal economic value by $12trillion to $15 trillion in 2020.12 Booz & Company

INEVITABLE Digitizing a company does not come cheaply, and the larger the legacy aspect the executive team makes will require a deep understanding of how andTRADE-OFFS of the business, the more disruptive where digitization will add value to the the process of digitization is likely to businesses or disrupt the status quo. be. Furthermore, in most industries, even the largest enterprises will not The key questions all CEOs and their be able to afford to invest in every executive teams must answer center on aspect of digitization all at once. four themes: The CEO and the executive team will have to make difficult choices • How will digitization impact about building and acquiring critical my current business model and capabilities in order to capture the positioning within my industry’s coming opportunities. And they will value chain? be confronted by requests for capital and resources across almost every part • How can I best identify and of the company. R&D, innovators, enter areas where value is being and new business owners within the created, both inside and outside my company will demand capital and industry? resources for new digitization initiatives. Managers of established business units • What areas of my business offer will want to make much larger capital new entrants clear opportunities to investments to transform their existing disrupt my current business model, businesses through new, digitized and how can I best fight back? business models and approaches. The executive team itself will want to make • Which capabilities do I need to bold investments, including acquisitions build to be a leader in the field? and partnerships with promising or rapidly growing businesses. And every The answers to these questions will function in the company will be asking guide CEOs and their executive teams for the resources needed to enable new to decisions about where and how to business processes and labor practices prioritize their digitization investments with new technologies. The choices among the many competing options.Booz & Company 13

A QUESTION speed of digitization will naturally vary from market to market, and will be affected first. In general, we expect to see digitization move fastestOF TIMING its adoption—and the level of in industries where barriers to entry investment required to respond are low, those where information fully—will vary from sector to sector in some form or another is the within each market. Thus, executives primary product or a key success must gauge their response according factor in downstream activities, and to their industry, sector, markets, and those whose upstream activities areTo gauge which investments are most current competitive positioning in the most information- or capital-critical and in what sequence they those markets. intensive, providing dramaticshould be made, top executives must opportunities for digitization tofirst judge where in their industry We have developed a methodology reduce capital intensity and increasethe earliest impacts will be felt. The for determining which industries returns to capital (see Exhibit 6).Exhibit 6Which Industries Will Be Affected First, and Where? Drivers - Industry Barriers to Entry - Information Intensity - Information Intensity (Downstream/Market-Facing) (Upstream/Operations) - End Consumer Exposure - Human/Physical Capital Intensity Speed Market-facing impact Operational impact Type of Impact Expected speed of digitization Expected intensity of digitization Expected intensity of digitization impact in this industry impact on products/services/ impact on production and internal go-to-market in this industry enterprise productivity Manufacturing Medium Medium Medium Trade/Retail Fast Medium Medium Business Services/ Medium Low Medium Construction Media/Entertainment Fast High Medium Infrastructure Slow Low High Financial Services & Medium High High Insurance Public Sector & Healthcare Medium Medium HighSource: Booz & Company analysis14 Booz & Company

Consider the case of the media On the other hand, some areas new capabilities, and many will simplysector. Since its wares are essentially of manufacturing are particularly not be prepared with the leadership,information goods, distribution via information-intensive, especially culture, organization, and talentonline channels has already become upstream. In the oil and gas business, necessary to respond.mainstream—from CDs and DVDs for instance, exploration analysisto MP3s and streaming music and uses massive computing and smart Regulators in many Westernvideo, and from newspapers and sensor capabilities to determine the economies are forcing the utilitiesmagazines to websites and apps right investment (and “digging”) sector, for example, to deploy smartfor smartphones and iPads. That choices. And in the case of large- meters in hopes of improving thehas lowered the barriers to entry scale construction, global teams of efficiency of power grids, which willeven more, as evidenced by the architects, scientists, and engineers also draw them closer to customers,constant stream of startups looking already work together virtually in enabling them to monitor demandto profit from the aggregation and the cloud to ensure the seamless and bill in real time. Yet many utilitydistribution of content. And though completion of their design activities. players will struggle to embrace thisthe sector is not especially capital- “Every single one of our teams shift. And pharmaceutical companiesintensive, the intensity of its use of is working in the cloud,” says an will discover the power of gettinghuman capital is very high. That executive at a global software vendor closer to their end customers,makes the sector ripe for cost cutting active in the field of large-scale especially in Europe, where they arethrough the digitization of human infrastructure design. “Manufacturing currently barred from advertisingbusiness processes—a trend that has issues can now be solved in a matter or direct selling. Digitization alsoalready happened in the automated of weeks, as opposed to months in promises to enable them to buildaggregation of news content through a traditional model.” The Chinese virtual customer labs, generating morecrowd approaches. government, for example, is currently information about their products and leading the construction of a national superior customer insight. Here, too,Then consider the manufacturing high-speed rail network—in effect, few companies are fully prepared toand infrastructure sectors. The the world’s largest digitization face the digital future.barriers to entry are typically project—which will have digitallyhigh, and few companies in either connected tracks, axles, in-carriage The range of possibilities is seeminglysector will be able to virtualize entertainment, on-screen advertising, endless, but the key to success willthe goods they make and sell. ticketing, and infrastructure be to understand how digitizationFurthermore, given their long- management systems. will affect each industry first andstanding investments in plants and with the greatest impact. Only byequipment, these companies will As these examples demonstrate, doing so can companies accuratelyclearly have lower adoption rates no industry will remain free of the determine which capabilities to buildfor digital technologies. But all effects of digitization. Even those and prioritize which digitizationthose assets also make these sectors industries that at first glance seem less investments to make, and when.very intensive in their demand “digitizable,” such as manufacturing Absent an assessment of this sort,for financial capital. As a result, and utilities, will generate significant companies are likely to be faced withdigitization is likely to be used digitization benefits due to their making more investments than theyprimarily to maximize return on sheer size. Thus, companies in these can afford, and making them in thethat capital. industries, too, will be forced to build wrong order.Booz & Company 15

THE SPEED OF Digitization has indeed reached a point of inflection around the world, We find it helpful to divide the forces affecting the speed ofDIGITIZATION but that does not mean that the digitization into four key factors: phenomenon will occur at the same society and culture, economics rate everywhere, or that external events and risks, regulation and legal won’t speed it up or slow it down in considerations, and technology. different industries and geographies. Based on interviews with European To quote novelist William Gibson, and U.S. players in the information “The future is already here—it’s just and communications industries, not evenly distributed.” Top executives we have assessed the potential must decide what stance to take on the accelerators and decelerators in digitization of their sector and whether each of these four categories. We to be a force driving the transition to a expect this assessment to be globally fully digitized industry. For those who relevant, although the relative weight decide to forge ahead, the key question of each factor will vary by regional is where to focus their attention. The market (see Exhibit 7). answer rests on a consideration of the accelerators and decelerators that Society and Culture contribute to the rate of change in The push to digitization is being driven their industry and geography. Defining most powerfully by the new generation both the engines of digitization and of end-users—both consumers and the potential stumbling blocks is business users—demanding its essential to this task. benefits, including ever-widening socialExhibit 7Factors Affecting the Speed of Digitization SoCIETy anD CulTuRE EConoMICS anD RISKS REGulaTIon anD lEGal TECHnoloGy - Privacy - Conflicting stakeholder - Privacy - Closed, proprietary - Job substitution economic interests - Net neutrality solutions - Loss of human control - Insufficient infrastructure - Internet regulation - Complexity issues - New digital divide investment - Legal uncertainty - Government abuse - “Black Swan” - Spectrum and Decelerators - Technology fear malfunctioning of infrastructure - TEP (turf, ego, and critical infrastructure power) (Fukushima, Wall - NIH (not invented here) Street, Amazon cloud) - Technology innovation - Hacking - Application innovation - Global talent market and - Supportive spectrum competition and Internet use - Decline of unit costs/ regulation Moore’s Law - Government - Supportive health/ - End-to-end solutions for infrastructure safety regulation industries investment - Standards - Generation C - Bandwidth build-out - Industry partnerships - Supportive and - Democratic change - Cloud adoption - Robust digital standard privacy laws based on social nets - Industry standards Accelerators infrastructure - Legal certainty - Startup successes - Insurance and hedging - Environmental benefits innovation - Globalization of talentSource: Booz & Company analysis16 Booz & Company

networks, ubiquitous connectivity, much of it without the bandwidth of computing and communicationsand constant access to news, and speed needed to support full equipment and devices keepsentertainment, and information. digitization. And recent major dropping. Meanwhile, the globalAlready we can see the power of malfunctions and incidents of theft of implementation of high-speed fixeddigitization in the role it has played critical personal and corporate data and mobile networks continues apace,in the upheavals in the Arab world. continue to raise questions about the creating a geometric Metcalfe’s LawAnd the entrepreneurial spirit is alive risks involved in placing too much effect as the value of the world’sand well, and contributing greatly to faith in the reliability of the complex telecommunications networks grows innew digital technologies and business digital environment. proportion to the square of the numbermodels; the globalization of talent will of connected users of the system,only boost this activity. Regulation and Legal Considerations dramatically increasing the value of There is already considerable the Internet economy. And despiteAt the same time, however, both governmental and institutional occasional setbacks, more and moresocial and cultural concerns remain. support for digitization, including users are adopting cloud services, aFears of loss of privacy and the regulations concerning health move that is also promoting the fasterpotential for government abuse of information and privacy issues, and creation and adoption of highly user-the array of technologies being made laws involving liability risks as they friendly applications and processes.available will likely increase as the relate to information and networking, The globalization of innovationdigital world is built out. The growing at least in some jurisdictions. Many hotbeds—including the creation ofsense of a digital divide between the governments have also helped Silicon Valley–like communities outsidetechnological “haves” and “have- promote consistency in the creation the U.S., in Russia, India, China,nots,” and the accompanying fears and use of technological standards, and Singapore, to name but a few—of job loss, could also stall the push, and exerted a great deal of influence supports this process. Much still needsespecially in less developed markets. over the fair allocation of spectrum, to be invented: Most of the world’sPolitical issues, too, must be watched, for the most part. infrastructure information is not yetgiven the likelihood of regional digital, but scanning technologiesbattles over turf and power, and Uncertainty lingers over several as well as “digital wraparounds for“not-invented-here” reactions to of these areas, however. Spectrum analog things” will drive furthernew technologies. is becoming scarcer, and its gains (see “Digitizing the High-Tech allocation will likely generate Sector,” page 18).Economics and Risks fiercer fights in coming years.A relatively robust infrastructure The debate on the regulation of Knowing the accelerators andis already in place to support infrastructure, its construction, and decelerators affecting the rate ofdigitization. But the amount of fair use continues in many markets. digitization in each industry andinvestment required to fully realize it And various legal issues regarding geography is critical as CEOs and theiris daunting, both for the additional liability—in the case of injuries executive teams decide how toinfrastructure needed and for the caused by automated systems, for go about taking advantage of theseservices and applications to be built instance—and ownership of content trends. And while we would noton top of it. Governments around rights remain largely unresolved. recommend standing in the way ofthe world are contributing billions of digitization, it goes without sayingdollars to the effort. Technology that anyone seeking to retard the rate A number of trends in technology of change will also want to beginYet problems remain: Conflicting are coalescing to promote the coming by making sure they understand theeconomic interests have the potential transformation to digitization. We factors driving digitization.to slow down further investments have not yet reached the limits ofin infrastructure, potentially leaving Moore’s Law, and the cost of all kindsBooz & Company 17

Digitizing the High-Tech Sector The speed with which digitization will transform the global economy is likely to surprise many players, not least of them the suppliers of the very technologies needed to enable other industries and make the transition happen. So it is critical that these companies begin now to shift their focus beyond simply selling and maintaining their products and services within the current IT and telecom ecosystem. Instead, they must rethink everything from their operations to their sales and marketing processes to their cultures if they are to stay relevant in the digital future. Many large technology vendors understand the need for change. For example, IBM—whose current advertising slogan, “Smarter Planet,” suggests its commitment to digitization—has been actively buying companies to support a digitized future. In 2010 alone, it bought data warehouse maker Netezza for $1.7 billion, business integration software maker Sterling Commerce for $1.4 billion, and Unica, a maker of marketing technology, for $500 million. The names of other large vendors’ initiatives suggest their similar visions for the future: Smart+Connected Communities (Cisco Systems); Central Nervous System for the Earth (HP Labs); Intelligent Networks (Deutsche Telekom). Fully 50 percent of all IT spending in 2017 is expected to be devoted to smart computing solutions, 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 for the digital future—or, worse, have already been outmaneuvered. This situation is putting their business models at serious risk as they try to compete against their more forward-looking rivals. There is no doubt that the promised value of digitization can only be captured by companies in these fields that understand the fundamental changes ahead. These changes include the following: • A shift from moving boxes to software-based, cloud-centric business models supplying services on demand • A true multichannel sales approach where the traditional distribution mechanisms of physical products have no meaning anymore, and where the direct online channel becomes primary • Significantly more complex ecosystems that will demand much higher- quality products and services that can provide truly value-creating propositions—and rely on a much deeper understanding of industry- specific requirements and processes • More companies coming to grips with the need for external and open innovation—few 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 service providers and enterprises Our interviews with leading ICT industry executives also presage substantial shifts in the nature and future of their industry (see Exhibit B). It is worth noting that ICT executives are generally bullish about their industry’s growth prospects: Six of 10 subsegments will significantly outperform the market, they believe, while just two will underperform. Several common themes also stand out: Cloud computing and security18 Booz & Company

are universally seen as leading industry areas, followed closely by the growing importance of professional services and industry-specific applications. At the other end of the curve, respondents expect that device operating systems will be gradually commoditized as the current market share wars subside. Telecom carriers are seen as important, but they will not shape the industry’s future, and they will not extract substantial value from the upcoming transformation. It is also quite likely that entirely new players will emerge and quickly grab much of the value on the table—many ICT industry executives are waiting for the “Apple” moment for smart infrastructures or big data analytics. In response, the valuations of such companies are already soaring.Exhibit BNot All ICT Industry Sectors Will Benefit Equally HOW WILL DIFFERENT SEGMENTS OF THE ICT INDUSTRY PERFORM IN THE CONTEXT OF DIGITIZATION? Evolve with Strongly Commoditize market outperform Cloud-Based Applications Security Products and Services - Consistent outperformers Professional Services - Reflect need to “verticalize” Industry-Specific Applications Horizontal Applications Sensors/Connected Devices - Strong volume Consumer Devices growth expectation - Value growth limited Networking Equipment as prices drop Device Operating Systems - Important, but not extracting Telecom Services superior value from digitizationSource: Booz & Company industry leader interviews (n=15) 3 columns widthBooz & Company 2 columns width 19

METHoDoloGy This investigation of the global impact of digitization follows up on the analysis we conducted concerning the rise of Generation C. In preparing this Perspective, the authors interviewed top executives at companies representing three groups: established players that will drive the emergence of new enabling technologies; emerging players that are working at the frontier ofCONCLUSION We expect, indeed hope, that a key conclusion of our study—that the digitization; and leaders in other sectors of the economy digitization phenomenon has reached that will be affected by the a point of inflection and the rate of forces of digitization as they roll change is accelerating—will not come out across every industry. as a surprise to the CEOs and executive teams of most of the largest companies The authors would like to in the world. They have read about thank the executives from and seen the changes already taking the following companies place in any number of industries, and organizations who were most likely including their own. But particularly generous with their what this implies for the decisions they time in discussing the impact need to make and the capability gaps of digitization: Alcatel-Lucent, they need to fill, given scarce capital Autodesk, Daimler, Ericsson, and resources, is only now becoming Gap, Google, Hewlett-Packard, clear. The work we do across the globe Huawei, Intel, Microsoft, reinforces in our minds the impor- Orange, Symantec, and the tance of first assessing your industry, angel investing organizations geography, and competitive position, Band of Angels and Keiretsu and then deciding on the trade-offs Forum. regarding where to place emphasis and The report also incorporates where to hold off. Understanding the third-party economic and accelerators and decelerators of change analyst research, as well as is the best way to determine how to research into the creation and shape the trend to digitization to your adoption of new technologies. company’s advantage.20 Booz & Company

Endnotes 9 “In-Memory Analytics: Strategies for Real-Time CRM,” by Olaf Acker, Florian Gröne, Adrian Blockus, and Carsten Bange (Booz & Company,1 Apple press information. 2010). www.booz.com/media/uploads/In-Memory_Analytics.pdf2 Twitter press communication, October 2010. 10 “Another Digital Gold Rush,” Economist, May 12, 2011.3 Deutsche Telekom “iLife Study,” 2010. 11 “Standing Up a Cloud-Enabled Marketing Capability,” by4 “A Special Report on Smart Systems,” Economist, November 4, Matthew Le Merle and Philip Minasian (Booz & Company, 2011).2010. www.booz.com/global/home/what_we_think/reports_and_white_ papers/ic-results? of_40585687=Standing+up+a+Cloud-5 IBM 2010 estimate; press research. Enabled+Marketing+Capability&of_qid=403087336 “A Special Report on Smart Systems,” Economist, November 4, 2010. 12 “Social CRM: How Companies Can Link into the Social Web of7 HP Labs 2010 estimate; “A Special Report on Smart Systems,” Consumers,” by Olaf Acker, Florian Gröne, Rami Yazbek, and FaresEconomist, November 4, 2010. Akkad (Booz & Company, 2010). www.booz.com/media/uploads/ BoozCo-Social-CRM.pdf8 “The Rise of Generation C: Implications for the World of 2020,” byRoman Friedrich, Matthew Le Merle, Michael Peterson, and Alex 13 Compact News information to subscribers, May 2011.Koster (Booz & Company, 2010). www.booz.com/media/uploads/ 14 Booz & Company executive interviews, May 2011.Rise_Of_Generation_C.pdf 15 Forrester 2010 forecast (Economist, January 2011).About the AuthorsRoman Friedrich is a partner Michael Peterson is a partnerwith Booz & Company with Booz & Company basedbased in Düsseldorf and in London and Düsseldorf. HeStockholm. He leads the firm’s works with global telecom andcommunications, media, media companies, focusingand technology practice in on marketing and commercialEurope, and specializes in strategies, as well as on newthe strategic transformation of opportunities from the emer-these industries in the context gence of digitization.of digitization.Matthew Le Merle is a partner Alex Koster is a principalwith Booz & Company based with Booz & Company basedin San Francisco. He works in Zurich. He focuses onwith leading technology, media, strategy, revenue growth,and consumer companies, and business modelfocusing on strategy, corporate transformation opportunitiesdevelopment, marketing and across technology, telecom,sales, organization, operations, and Internet companies, andand innovation. advises these companies on their route toward a digitized world.Booz & Company 21

The most recent Worldwide Officeslist of our officesand affiliates, with Asia Middle Eastaddresses and Beijing Brisbane Helsinki Abu Dhabi Detroittelephone numbers, Delhi Canberra Istanbul Beirut Florham Parkcan be found on Hong Kong Jakarta London Cairo Houstonour website, Mumbai Kuala Lumpur Madrid Doha Los Angelesbooz.com. Seoul Melbourne Milan Dubai Mexico City Shanghai Sydney Moscow Riyadh New York City Taipei Munich Parsippany Tokyo Europe Paris North America San Francisco Amsterdam Rome Atlanta Australia, Berlin Stockholm Boston South America New Zealand & Copenhagen Stuttgart Chicago Buenos Aires Southeast Asia Dublin Vienna Cleveland Rio de Janeiro Auckland Düsseldorf Warsaw Dallas Santiago Bangkok Frankfurt Zurich DC São PauloBooz & Company is a leading global managementconsulting firm, helping the world’s top businesses,governments, and organizations. Our founder,Edwin Booz, defined the profession when he estab-lished the first management consulting firm in 1914.Today, with more than 3,300 people in 60 officesaround the world, we bring foresight and knowledge,deep functional expertise, and a practical approachto building capabilities and delivering real impact.We work closely with our clients to create and deliveressential advantage. The independent White Spacereport ranked Booz & Company #1 among consult-ing firms for “the best thought leadership” in 2010.For our management magazine strategy+business,visit strategy-business.com.Visit booz.com to learn more aboutBooz & Company.©2011 Booz & Company Inc.

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