After more than five years of sluggish growth, U.S. companies are finally starting to feel a bit more optimistic. The Federal Reserve is projecting GDP growth of 2.8 to 3 percent in 2014 (U.S. Economic Outlook for 2014 and Beyond, January 13, 2014, About.com), and our own research, “CEO Briefing 2014 –The Global Agenda: Competing in a Digital World,” found widespread optimism in the C-Suite about companies’ growth prospects.
What we are not seeing, however, are many signs of truly ambitious growth strategies which could result in companies putting newly restored balance sheets to work. For example, despite all the froth about how companies need to accelerate growth in emerging markets, three-quarters of the U.S. executives surveyed said they will continue to invest heavily in their home market, which is a largely mature and slow-growing economy. These executives said they are pinning their hopes for growth in the U.S. on gaining a greater share of customers’ wallets, not necessarily on expanding their base of new customers or opening up new export markets.
That leads to two interesting questions. If emerging markets are attractive, why is so much investment capital flowing to mature markets? And, if growth is mostly about gaining market share and developing new products, why is a substantial focus on investment to retain existing customers and make existing products and services more efficient?
On the efficiency topic, 87 percent of companies represented in the study plan to increase their investments in research and development – with a significant portion of this investment devoted to digital technologies such as mobile, cloud computing, analytics, social media, ecommerce, and machine-to-machine communication. Sounds good; “New investment in innovative technologies” makes a great headline for the next earnings call or annual report. But what’s underneath such headlines is fascinating: Most of the U.S. companies in the study generally view digital technologies as a way to streamline existing operations and improve customer relationships — not as an engine for growth.
In fact, 68 percent said that their investments in digital technologies are primarily focused on process efficiencies and cost reduction, while just 25 percent said such investments were geared toward helping the company reach customers. The emphasis is on greater operational efficiency – and on improving the experience for existing customers – rather than on growing sales, opening new sales channels, or creating new products or services.
U.S. companies are great at improving existing operations and thinking of new ways to apply technology to drive productivity. In a sense, this is the basis for the story of U.S. economic performance over the last 200 years. Much can be gained from increasing employees’ efficiency and keeping existing customers happy. But these investments are not the avenues to the robust growth that innovative technology offers.
Enthusiasm for digital technologies is not lacking. Indeed, U.S. executives were more likely than their global counterparts to believe cloud computing, data analytics, ecommerce, and machine-to-machine communication will be important to their businesses in the next year. And U.S. companies appear to be further ahead of their non-U.S. counterparts in applying digital technologies to their operations: 45 percent of the former and 36 percent of the latter said such technologies support at least half of their major business processes.
The real power of digital innovation, however, is in helping create and serve new markets with entirely new offerings, and that’s where U.S. companies are still waking up to the possibilities. We see two principles that U.S. business leaders should keep in mind as they contemplate investments in innovative technologies:
Don’t bring your old business model to the new digital party. Too many companies appear to be overlaying digital technologies on their existing infrastructure and business model. Banks, for example, may be increasing their volume of mobile transactions, but many do so while maintaining a costly system of branches and ATMs. “Going digital” for many companies means creating too many channels and fragmentation, at a higher cost structure, because the new costs of digital (such as new infrastructure, customer service, technology, and management) are simply layered on top of the old business model. The result is that too many businesses are making their operations more complex in order to offer convenience to customers who are paying no more than they were before. More costs, less profit, more complexity.
Look at what’s profitable, not at what’s possible. For all the talk about customer-centricity and improving the customer experience, the primary objective for most businesses is profitable growth. Giving existing customers new and delightful digital experiences makes the most sense when it is done in the context of a) lower costs; b) new cross-selling opportunities; or c) the opening up new channels to attract previously underserved markets.
As U.S. companies invest in digital technologies, the art of the possible is often the first discussion. Moving beyond productivity, efficiency, and customer satisfaction – table stakes for business operations today – they may want to consider whether digital represents an opportunity to sell new products or services, potentially reaching new markets. Some would say that is the big payout for companies as they harness what’s possible in a digital world. Let’s think carefully about rebalancing investments in digital to support growth that reaches beyond incremental efficiency gains.
source: American Firms Dream of Growth but Invest in Efficiency April 04, 2014 at 03:00PM