Laura LaBerge

Many organizations have spent decades understanding how to make trade-offs in their businesses, where the profit pools are, and the structure of their value chains. Digital changes all that. First, on an overarching level, digital currently destroys more economic value for incumbents than it creates. There are two main drivers. The first one is that digital creates transparency that allows a much higher percentage of value to be transferred to customers than happened in the past. For example, digital marketplaces create price transparency, and bundling, which protects margins in many industries, is being undone by companies like Amazon and Tencent. They are also commoditizing products and services. This is a huge shift in the way value is distributed between companies and end users.

The second big mechanism for this value destruction is the consolidation of value pools. New digital offerings are often much more integrated. Think of smartphones: they not only replace the old phone but the camera, the navigation device, the music player, the video game console, or even TV in certain circumstances. If you add up the cost of all those devices, smartphones, expensive as some may be, are a lot cheaper than those individual items. The digital value pools are smaller than the original pools, and these transfers are sometimes quite abrupt.

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Over the past couple of years, digital has taken about half a point off GDP, but we do not expect that trend to continue because as these old value pools shrink, digital creates new ones. That’s why this mechanism we are discussing is so important: if you are still innovating around the edges of increasingly shrinking value pools, that’s a hard-to-win game, whereas if you move into the growing value pools being created, you have a much greater chance of remaining economically viable or even fast-growing. So, organizations need to understand how their overall value is changing and where it is going.

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