Beyond the digitization paradox: micro...Alibaba Twitter Amazon PayPal Ebay 50% of the global...

May 28th, 2018; “Industry 4.0: Challenges for productivity, employment, and

inclusion”; Panel on “Productivity and competitiveness in the digital era”

Beyond the digitization paradox: micro

disruptions, macro implications… and

some open questions

Nicolás Grosman, Head of Economic Research for Latin America

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Rated #1 Think Tank 2016 (private sector category) by

the Global Think Tank Index, University of Pennsylvania

1McKinsey & Company

Digital technologies are disrupting the global economy, with significant

potential across multiple sectors and use cases

What do we mean by digital?

Blockchain

Digital platforms

Business models

(new ways of operating) Internet of Things

Mobile technologies

Cloud

Connection

(engage in real time)

Machine learning

Probabilistic models and other

advanced analytics techniques1 Analytics

(improved decision

making)

Smart robots

Service and industry robots

3D & 4D printing

VR & AR

Processes

(automate and

streamline)

2McKinsey & Company

Back-office

Digital technologies are leading to end to end transformation of business

models and operations

Marketing Sales

Manufacturing

and supply chainProcurementR&D&I

InnovationProcurement

processes

Price optimization

and

commercialization

Personalized

attentionStorage

Consumer

sentimentPromotions

Talent

management

Other (e.g.

collaboration)Finance

LogisticsManufacturing

Sales &

Operations

Planning

Delivery in store

Sales force & KAM In store executionSorting

In light blue, areas where digital has potential to create value for firms…

Consumer

experience

3McKinsey & CompanyFUENTE: Statista; McKinsey Global Institute analysis

Digital platforms are connecting billions of people across the globe

Number of users/accounts in selected digital platforms, 1Q18 or latest available, Millions

Global data flows

increased 3,500X

between 1996 and

2016

By 2020, we

expect nearly

1 billion

consumers

spending

1T USD on

cross-border

e-commerce

2,200 1,500 1,500 980 810 780

Facebook QQWhatsAppYouTube InstagramWeChat

510 330 300 210 171

EbayAmazon PayPalTwitterAlibaba

50% of the global

population is

online

260

LinkedIn

4McKinsey & Company

AI has the potential to create annual value across sectors totaling

$3.5 trillion to $5.8 trillion across a wide variety of sectors

NOTE: Artificial Intelligence here includes neural networks only. Numbers may not sum due to rounding.

SOURCE: McKinsey Global Institute analysis

400

60400

5535 4530250 20

700

300

50

500

100

200

600

Al impact$ billion

Al impact as % of total impact derived from analytics

Transport

and logistics

Telecommunications

Public and

social sector

Pharmaceuticals

and medical products

Basic materials

Media and

entertainment

Insurance

Health-care systems

and services

High tech

Consumer

packaged goods Automotive

and assembly

Advanced electronics/

semiconductors

Banking

Chemicals

Agriculture

Travel

Aerospace

and defense

Retail

Oil and gas

5McKinsey & Company

0.8

0.3

0.6

0.40.3

IT

(1995 - 2005)

Robots

(1993 - 2007)

Steam engine

(1850 - 1910)

1.4

2.2

Automation

(2015 - 65)

Automation

(2015 - 30)

SOURCE: Nicholas Crafts, “Steam as a general purpose technology: A growth accounting perspective,” Economic Journal, volume 114, issue 495, April

2004; Mary O’Mahony and Marcel P. Timmer, “Output, input, and productivity measures at the industry level: The EU KLEMS database,” Economic

Journal, volume 119, issue 538, June 2009; Georg Graetz and Guy Michaels, Robots at work, Centre for Economic Performance discussion paper

1335, March 2015; McKinsey Global Institute analysis

Automation of existing activities could increase productivity at

magnitudes similar to other major technologies

NOTE: We include multiple technologies in our analysis of “automation,” so these technologies are not entirely comparable, but meant to provide an order of magnitude comparison.

Latest scenarioSeries Earliest scenario

Productivity

growth,

Compound

annual growth

rate%

6McKinsey & Company

But apparently GDP hasn’t been invited to the party (at least, not yet!)

961994 1406 100298 04 082000 201612

People online

Productivity

Microprocessor

clock speed

GDP

Transistors per

microprocessor

Data flows

Floating-Point

Operations

per Second

Evolution of digitization & GDP, 1995=1, log scale

Mind the scale! Transistors per

microprocessor increased near

2,000X during that period (Moore’s

law!)… and FLOPS ~550,000X!

SOURCE: Our World in Data; Conference Board Total Economy Database 2018

7McKinsey & Company

2.25.6

1.1 0.2

-2.6

2.2

Productivity has actually been decreasing recently in most advanced (and

digitized) economies… even in the tech sector!

4.84.91.5 0.1

4.8

-2.2

4.23.50.6 0.71.61.7

SOURCE:BLS Multifactor Productivity database (2016 release), Eurostat (June 2017 release), EU KLEMS (2016 release), WTTC; McKinsey

Global Institute analysis 1

1 US data are for the private business sector only for all sectors except tourism; Europe and tourism data are for the total economy 2 Automotive defined as “Transport equipment” for EU

countries and “Transportation equipment” for the United States; 3 Technology defined as “Electrical and optical equipment” and “IT and information services” for EU countries and

“Computer and electronic products,” “Data processing, internet publishing, and other information services,” “Computer systems design and related services,” and “Publishing industries,

excluding internet (includes software)” for the United States; 4 Number of jobs used in lieu of hours worked due to data availability; 4 Utilities defined as “Electricity, gas, steam, and A/C

supply” for EU countries and “Utilities” for the United States.

Labor productivity growth

Compound annual growth rate ,%

Automotive2

Finance

and

insurance

Retail and

wholesale

trade

14.7

4.74.11.0

-0.9

1.4

2.60.51.4 2.00.61.0

6.84.4

6.5

0.8

-5.3

2.3

2010 - 142000 - 04

France

United

Kingdom

United

States1France

United

Kingdom

United

States1

Technology3

Tourism4

Utilities5

8McKinsey & Company

4

56

77

10

12

15

171818

1 Global digital frontier: ICT sector in the US

1

Perhaps part of the explanation is that diffusion still remains low…

SOURCE: IDC; Eurostat;; IHS Global Insights; McKinsey Global Institute

Digitization index: digital intensity relative to frontier

% of frontier (ICT sector in US = 100)

9McKinsey & Company

Digitization Index, United States vs. European nations1

Select sectors2

…and concentrated among a few sectors

1 Index is based only on asset and labour components and thus may not align with heat maps displayed elsewhere.

2 Due to accounting differences between the United States and Europe, not all sectors can be fairly compared.

Relatively low

digitisation

Relatively high

digitisation


Sector Germany France Italy Sweden

ICT

Professional services

Media

Finance and insurance

Wholesale trade

Advanced manufacturing

Real estate

Government

Retail trade

Basic goods manufacturing

Health care

Construction

United

States

United

Kingdom Netherlands

10McKinsey & Company

But perhaps we may also need to take a closer look: what is going on at a

more micro level? (some) Footprints of digital transformation…

Firms Individuals as consumers Individuals as workers

Potential gains for some

& major disruption on

competition dynamics

▪ Productivity gains (for some

players)

▪ Winner-takes-all dynamics

▪ Transformation of value chains

▪ Disruptive competitive

dynamics

▪ Reinvention of business &

operating models

Increased consumer

surplus, not reflected in

traditional statistics

▪ Improved product offering

(increased portfolio,

increased quality)

▪ Increased transparency

▪ Lower search and transition

costs

▪ Lower prices (sometimes zero

or near-zero)

Major disruption on

occupations, mixed

(positive?) effects on wages

▪ Significant change in activities

and jobs displacement

▪ Appearance of new (more

sophisticated?) occupations

▪ Signs of “super-star” effects

▪ Improved access to learning

and job opportunities through

digital platforms


Value added per hour worked by sector, constant prices, 2000–10

CAGR, %

0.45

4

10

16

14

12

8

6

2

0

-2

-40.900.10 0.500.30 0.600.20 0.70 0.800.40 0.750.650.55 0.85 0.950.05 0.15 0.25 0.35

EXAMPLE: EUROPASectors with higher levels of digitization are associated to

larger productivity gains, with large variability

Digitization index

(1 = digitization frontier)

NeatherlandsFrance

Italy

SwedenGermany


1.2

4.0

5.1

6.3

6.7

7.1

8.2

9.8

Healthcare

Advanced tech

Automotive & assembly

Retail

Financial services

16.9

Average 9.9

Consumer goods

TTL

Media

Business services

SOURCE: MGI; McKinsey Digital Global Survey

Winner takes all: only a small fraction of companies is able to win in the

digital era (with large variability across sectors)

Firms with above average performance across: revenue growth, EBIT growth, Digital ROI; by industry

% of firms

Impact of digital on

three year growth in

our Digital Survey

was -6pp (from

baseline); firms in

top 25% achieved

+0.8pp impact on

revenue growth

1/3 od top 25% firms

in terms of revenues

growth are not top

quartile on EBIT,

further tightening

down the range of

sustainable

“winners”


Who is winning in the digital era (at the firm level)?

SOURCE: MGI; McKinsey Digital Global Survey

Some features from digital winners…

2x more likely to have an integrated digital strategy that goes together

with the corporate strategy

4x-8x more likely to act in digital by changing corporate strategy in

face of competition, operations, supply chain, etc.

Rethink strategy

1 every 3 firms identify culture as #1 barrier for promoting digitization

6x more likely to nurture a culture of trust and mutual accountabilityTransform culture

8x more likely to execute strategy through experimentation

4x more likely to take bold risks to transform their customer experienceExperiment

2x more likely to have cannibalized their own products and services by

launching a digital version

3x more likely to have developed a digital model from scratch for its

core business

Only 36% of winners are digital natives

Evolve

4x more likely to use AI at scale in at least one business unit

7x more likely to use design thinking throughout the entire organization

5x higher share of revenues invested in digital

Innovate

Traditional organizations are not fast and flexible enough to become

leaders in a digital world, many digital winners are either already Agile or

evolving to Agile

Go agile


Digitization also leads to value chain restructuring, which in many cases

leads to value reallocation from producers to consumers… and to disruptors!


Value chain restructuring Characteristics of vulnerable industries

Disintermediation examples

Shorten the distance between

suppliers and customers

E-commerce

platform

Online travel

agency

▪ High channel margin

▪ Lack of transparency due to multiple

layers between customers and suppliers

▪ Fragmented industry structure

Disaggregation examples

Turn large assets into services

and match supply and demand

Car sharing

Shared workspace/

apartment

▪ High value, high durability, but

fluctuating utilization

▪ Technically feasible to divide asset into

disaggregated offerings

▪ Fragmented industry structure

Dematerialization examples

Virtualize and unbundle

products and processes

e-books

Music streaming

▪ Technically feasible to convert

products/services into digital format

▪ Unbundle offerings to meet diverse

demand


How do these disruptive dynamics look like?

11

12

3

2

8

1

10

6

5

0

7

4

9

0501 0803 04 070602

Revenues comparison: Blockbuster vs. Netflix

Billion USD

1615 20171311 1210 1409

1 S&P Global Market Intelligence; 2 Certify.com (URL accessed September 2017: certify.com/Infograph-SpendSmart-Full-Year-2015.aspx?zzz=1)

Blockbuster

launched

a similar online

service in 2008, but

too late and not

good enough (first

mover matters…

early adaptation

too!)

Total revenues

increased, but… will

traditional metrics

(GDP) reflect either

increased or value

or even capacity to

produce movie

rentals?

Focuses on Video-on-

demand, no physical

medium required

Market leader

in DVD rentals,

with 10k stores

Available on

iPhone and iPad

Declares

bankruptcy


How much do consumers value…?

USD

Individuals as consumers are seeing large and increasing surpluses…

140

135

205

634

991

322

168

155

842

All maps

All messaging

All e-commerce

All search engines

All music

1.173

All social media

All video

3.648

2.693

All email8.414

6.139

17.530

14.760

20172016

SOURCE: “Using massive online choice experiments to measure changes in well-being”, Bryjolfsoon, Eggers, and Gannamaneni (April 2018); “Schumpeterian

Profits and the Alchemist Fallacy”, Nordhaus (2005); “What the GDP gets wrong”, Brynjolfsson and Saunders (2009);

Between 1948 and

2001, 96% of return

of technological

advances from

corporations went to

consumers

Between 2004 and

2008, consumer

listened to 50%

more (and possibly

better) music, yet

industry’s revenues

declined by 40%


… yet may face significant pressure as workers! Potential displacement of 5-

30% by 2030 (depends on wages, industry structure, demographics,…)

Color = Average age

(projected), 2030

14

8

6

28

0

26

100,00010,000

12

1,000

18

24

10

20

22

16

Percentage of current work activities displaced by automation, 2016–30, midpoint adoption scenario

GermanySwitzerland

China

United States

United

Kingdom

Indonesia

Norway

Japan

Kenya

IndiaNigeria

30–35

45–50

40–45

35–4025–30

<2525

Size = FTEs potentially

displaced, 2030 (million)

Log of GDP per capita, 2030

2010 real $

SOURCE: World Bank; Oxford Economics; McKinsey Global Institute analysis


SOURCE: Stanley Lebergott, “Labor force and employment 1800–1960,” in Output, employment, and productivity in the United States after 1800, Dorothy S.

Brady, ed., NBER, 1966; World Data Bank, World Bank Group; FRED: Economic Research, Federal Reserve Bank of St. Louis; Mack Ott, “The

growing share of services in the US economy—degeneration or evolution?” Federal Reserve Bank of St. Louis Review, June/July 1987

Perhaps the true challenge is not around the number of jobs, but rather

around helping workers transition to more sophisticated occupations

2 millions

1.5

1.0

0.5

0

1972 ‘80 ‘90 2000 ‘10

1979

Launch of

VisiCalc

1983

Launch of

Lotus 1-2-3

1987

Launch of Microsoft

Excel for Windows

Management analysts

& finance managers

Accountants &

auditors

Bookkeepers &

accounting and

auditor clerks

Accounting and auditing jobs in the US, 1972-2015

Number of jobs


2 sides of inclusiveness in the digital era: Which shall prevail?

SOURCE: Facebook; Amazon; WSJ; McKinsey Global Institute analysis

Leapfrogging

1 The MGI Digitization Index is GDP weighted average of Europe and United States. See Appendix for full list of metrics and explanation of methodology.

50million

10million

2million

Number of SMEs on select platforms

Widening the gap

Automotive and assembly

Financial services

Resources and utilities

Media and entertainment

Consumer packaged goods

Transportation and logistics

Retail

Education

Professional services

Health care

Travel and tourism

High tech and

telecommunications

Building materials and

construction

AI

index

Digitization

Index1

Darker = higher intensity

Similar for workers too! Coexistence of: 1)

Accessible “well-paid” jobs (coding) and better

access to learning & jobs through digital platforms

; 2) Superstar effects for scarce advanced talent

(AI designers) and higher displacement rates for

low-skilled workers


Some reflections and open questions…

Size of the pie (value) increasing (most likely), yet

traditional “industrial era” metrics not reflecting it (yet)

Is the digital era reshuffling cards or giving winners get

an extra card (or both)? Which prevails?

Is this a messy transition, the very beginning of

disruption, or the new normal? Where one or the other?

Are we taking the right steps to head to the “good

equilibria” resulting from automation & future of work?

What are the macro implications of lack of value creation

(and destruction) for many firms? Should we worry?

Significant value shifts: firms to consumers, “traditional

firms” to “digital disruptors”, etc.

Is it worth investing in digital? Of course, either to win…

or to survive. But it´s hard to get it right!

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