Tag: technology

The United States takes pride in being on the cutting edge of all things digital, and rightly so: American innovations and innovators have led the way. Yet according to recent research from the McKinsey Global Institute, the U.S. economy operates at only 18% of its digital potential, and the sort of productivity gains that digital technologies should be enabling are not showing up in the broader economy. Why is that?

The answer is that a new digital divide has opened up in America. Just about every individual, company and sector of the economy now has access to digital technologies — there are hardly any “have nots” anymore. But a widening gap exists between the “haves” and a group we call the “have-mores”: companies and sectors that are using their digital capabilities far more than the rest to innovate and transform how they operate.

We compiled a digitization index using dozens of indicators to show where and how companies are building digital assets, expanding digital usage, and creating a more digital workforce. The 18% figure is based on comparing how the economy as a whole stacks up against the performance of the have-mores. The latter are not just coming out on top; they are maintaining a wide and persistent gap. At the sector level, the index shows that the leading sectors have increased their digital intensity four-fold since 1997, with the greatest gains coming in the past decade. Other sectors are barely keeping pace.

At the sector level, the technology sector itself ranks with the have-mores, of course, as do media, financial services, and professional services, which are surging ahead of the rest of the economy. This does not mean every technology company is leading; there are plenty of tech companies falling behind, too. Laggard sectors in general include government, health care, local services, hospitality, and construction — but again, even within each of these sectors, there are bright-spark companies that are innovating and in some cases disrupting others.

These sector- and company-level divides have a broader economic significance because the most digitally advanced parts of the economy have increased their productivity and boosted profit margins by two to three times the average rate in other sectors over the past 20 years. Sectors that lag in measures of digitization also post lower productivity performance, and since this group includes some of the heavyweights in terms of GDP contribution and employment, this creates a drag on the broader economy. We calculate that if the U.S. were to capture the full potential of digitization, rather than just 18% of it, this could be worth at least $2 trillion to the economy.

The digital disparity is not the only reason productivity gains are not showing up in the broader economy; the full reasons are hotly debated by economists. But because digital capabilities are closely linked to innovation, growth, productivity, and even business model disruption, addressing this digital gap should be high on the agenda for both public- and private-sector leaders.

To be clear, the new digital divide isn’t about a reluctance to invest in equipment and systems; most sectors and companies now spend heavily on IT. The gap is in the degree of digital usage. Digital engagement between companies and their suppliers and customers is five times larger in the leading sectors than in others. This engagement can range from digital payments and advertising to interactions on social media and in virtual marketplaces. The gap is even wider when it comes to digitizing the workplace. In leading sectors, digital and mobile aids help workers do their jobs more efficiently, and routine tasks are digitized at the same time as new digital jobs are created.

At the company level, the have-mores lead in terms of product, services, business model innovation, and revenue growth — and they are often the ones disrupting their own and other sectors. Digitally enabled innovations often have network effects associated with them, which in turn leads to “winner take most” outcomes; the top-performing companies enjoy far higher profit margins than the rest, and a handful of frontier firms are leaving everyone else in the dust. Our colleagues last year surveyed 150 large companies to measure their digital strategy, capabilities and culture, and found a large gap separating the digital leaders—the top 10% or so—from the rest. Big incumbent firms in particular are struggling to keep up as more agile digital challengers deliver products and services in faster and cheaper ways. But it’s worth noting that not all of the have-mores are young firms that were born digital. Some long-established companies including GE and Nike have successfully revamped their operations and strategies to become digital leaders.

For the economy as a whole, encouraging the digital haves to close the gap with the have-mores is an issue that belongs on the policy agenda. Their catch-up growth could be an important source of momentum at a time when the global economy lacks dynamism.

There is reason to be optimistic. Digital innovation has been largely focused on consumers in recent years, but now big data and the Internet of Things are beginning to change the way things are actually produced. Companies in manufacturing, energy, and other traditional industries have been investing to digitize their physical assets, bringing us closer to the era of connected cars, smart buildings, and intelligent oil fields.

So…

Innovations launched in the U.S. are rapidly adopted around the world, and the winner-take-most dynamics associated with digitization are appearing in other countries as well. Now the rest of the world will be watching to see if the United States can channel its technology prowess into the next wave of productivity advances, turning its digital lead into a broader economic transformation.