1 Competing in an Age of Digital Disorder Council Perspective Competing in an Age of Digital Disorder Geopolitical competition and government regulations are poised to remake the digital economy. To manage this complexity and uncertainty today and remain competitive in the future, companies must engage in strategic end-to-end digital transformations. June 2019Executive Summary The global technological landscape is currently being reconstructed, subjecting the once-free and unfettered transfer of data across borders to new and greater digital walls. Terms such as the “splinternet” and a “digital cold war” are becoming ubiquitous, forcing companies everywhere to shift strategies on everything from procurement to customer engagement. We are descending into a period of digital disorder. It wasnt always this way. Almost three decades have passed since the World Wide Web ushered in a period of unprecedented growth in the global exchange of data. The initial digital order was characterized by rapid growth in the use of the Internet and a corresponding massive increase in devices that enabled users to connect to the network. The digital revolution has since accelerated incessantly, with advances in the design and application of digital technologies that continue to reshape how people go about their daily lives, how companies conduct business, and how entire industries are structured. But even as digital technologies continue to evolve, the global environment for digital is shifting dramatically for both technology companies and the individuals and companies that rely on their services. These shifts are the result of governments around the world becoming more active in the digital environment, through both intensifying regulatory activity and escalating global competition. Much attention is now focused on the “techlash” nature of new policies and regulations on digital, but many governments are in fact seeking to strike a balance in policies that both maximize digital s upsides and mitigate its downsides. Whether those governments are able to successfully and deftly strike such a balance will influence the ability of companies to use digital technologies effectively in the coming years. The competition to maintain relevance and international competitiveness in the 21st-century digital economy is intensifying across a variety of technologies, but two in particular stand out: 5G wireless networks and artificial intelligence. And although many countries are engaged in this competition, the United States and China have emerged as the two leading players in terms of the current level of domestic digital technologies and investments for the future. International agreement on how to regulate digital remains elusive, so companies are increasingly having to manage a complicated set of conflicting rules in key markets. Furthermore, there is a growing risk that the competition for dominance in important technologies will fragment the global digital economy into smaller “islandized” segments, complicating global supply chains and the operations of international companies. We are just at the beginning of this period of digital disorder. And there is a high level of uncertainty about the digital order that will emerge from the current phase. Our scenario analysis of the range of future global operating environments for digital technologies suggests that companies should be prepared for radical changes in how the digital economy will operate over the next decade. Companies cannot be passive observers of the ongoing digital revolution. They should be actively adapting to the current digital disorder while also preparing for the future digital order by embarking on strategic end-to-end digital transformation. Although the appropriate actions will vary based on the exact contours of the emerging digital order, the consistent conclusion across the four scenarios is that this transformation must take place in strategy, customer experience, operations, risk management and compliance, and employees and cultureour SCORE framework. 1 Competing in an Age of Digital Disorder View online: bit.ly/2019-Digital-DisorderIntroduction Digital technologies are now prevalent in all aspects of business operations. In fact, one would be hard-pressed to find a company, from large multinational manufacturers to traditional mom-and-pop retailers, that does not leverage digital technologies in some meaningful way. Yet the rapidly shifting technological landscapefrom quick innovation and product cycles to growing digital walls between countrieshas fundamentally reshaped the process for investing in and upgrading a business technological capabilities. It is now not only a crucial procurement decision, but a process that must also account for previously unrelated external factors, including the trajectory of geopolitical tensions. This is in large part because technology is now a significant front in the growing tensions between the United States and China, with the two countries moving into what may become a digital “cold war. ” This may be accelerating the transition to what some observers have described as the “splinternet, ” where the digital ecosystems of China on the one hand and the West, led by the United States, on the other become more independent and isolated from one another. Additionally, many countries are trying to align their regulatory environments with both these new geopolitical realities and domestic priorities. This means that the rules are changing in different ways across different countries and affecting everything from personal privacy to data localization laws and sector-specific standards. As a result, a patchwork of new and sometimes conflicting rules affecting all aspects of the economy is growing in complexity and in real time. This period of digital disorder adds new layers of complexity to normal business operations. The nationality of your customers matters for how you can communicate with them. The national origin of hardware, software, and data matters for cross-border interoperability and, in some cases, for national security. Companies today therefore cannot be passive observers of the ongoing digital revolution, but rather must actively manage the complexity and uncertainty by engaging in strategic end-to-end digital transformations. 2 Competing in an Age of Digital Disorder View online: bit.ly/2019-Digital-Disorder3 Competing in an Age of Digital Disorder View online: bit.ly/2019-Digital-Disorder The Digital Transformation Journey There is an axiomatic reason for businesses widespread adoption of digital technologies: they introduce new value propositions and generate new sources of value for companies. Dataincluding both the creation of novel sources of data and the analysis of that data to generate fresh insightsis at the heart of this fundamental change in where economic value resides. In the 21st-century digital economy, data has become one of the defining sources of differentiation for companies. And because data has a natural networking effect, it has enabled some companies to become dominant players in their industries very rapidly disrupting entire industries in the process. dig·i·tal The computer or Internet-based products and platforms that generate, store, process, leverage, and connect immense amounts of data. Digital, then, includes traditional computer processing and smart-device applications as well as emerging technologies, such as artificial intelligence (AI) and quantum computing. A. T . Kearney Despite the ubiquity of digital technologies, we still see companies at all stages of the digital journey. Digital-native companies tend to infuse digital in all aspects of their operations, but there is a wide range of digital adoption among companies that were not “born digital. ” Some of these legacy companies are just discovering that the digitalization of their business operations can safeguard their core business by improving productivity and efficiency. Others are exploring or accelerating the use of digital to extend their core business and increase revenue through improved customer experiences. And a select few are much further along in their digital transformation journeys, leveraging digital to transform their business by developing new revenue streams. One such example is Nike, one of the first legacy companies to create a large-scale digital platform of goods and services. Users of the Nike running app spend almost three times as much on Nike products as the companys other customers. And Nike recently launched a smart basketball shoe that promises to improve athlete performance while also providing the company with an additional data stream about their consumers. How can other legacy companies embark on their own digital transformations to drive business growth? A complicating factor in answering that question is that digital is not a static concept. Digital technologies began proliferating in the 1990s and advanced rapidly with the increas - ingly widespread use of the Internet. Current digital technologies continue to evolve even as other new technologies are emerging. Much attention has been paid, for instance, to the technologies underpinning the Fourth Industrial Revolution (4IR)AI, 3D printing , advanced robotics, the Internet of Things (IoT), and augmented realitythat are reshaping production processes and therefore redefining global value chains. Digital growth and disruption, then, will increase exponentially in the coming decades. As a result, companies cannot simply “do digital” as a one-off initiative. Rather, they need to stay abreast of new digital innovations and use cases, incorporating them into their business models and operations as appropriate on a timely basis. The environment in which digital technologies are used has also become more dynamic as a result of the digital revolution entering its second phase, which is being characterized 4 Competing in an Age of Digital Disorder View online: bit.ly/2019-Digital-Disorder by rising action and confrontation. During the 1990s and 2000s, digital technologies evolved, proliferated, and generated sweeping societal transitions. The implications of digital for societies, economies, and political systems were, and continue to be, pervasivein both positive and negative ways. Throughout this period, however, governments did not regulate digital in any meaningful way. Beginning around 2016, the digital revolution entered its second phase, in which governments are taking steps on two fronts to address the growing social consequences of these technol- ogies. First, they are designing regulations to maximize digitals upsides while mitigating its downsides. And second, they are pursuing national policies and channeling investments to take the lead in emerging digital technologies. As a result, a global battle for technological supremacy in the 21st-century digital economy is heating up, raising the risk of competing technological standards and creating the potential for an “islandized” digital environment. Altogether, these actions are creating a digital disorder that is becoming more difficult for companies to navigate. These two forces of change will shape the future digital order, which will emerge around 2030. Its contours, however, remain an open question (see figure 1). There are various ways in which evolving digital policies and regulations and the national technological competition could play out during the digital disorder phase, creating multiple alternative futures for the global digital environment. Technology companies are already dealing with these shorter-term forces of change, but many companies in other industries have not yet taken notice. That must change. The uncertainties associated with digital disorder and its eventual resolution will affect not only technology companies, but all companies that rely on or use digital goods and services. Digital Transforms the World The effects of digital technologies have become pervasive across economies, societies, and political systems. Certainly, the effects on business have been no less important. From shopping for consumer goods to connecting with loved ones and from managing supply chains to personalizing customer relations, digital has changed the way the world works. Most often, these changes have had positive effects, including improved efficiency, reduced information asymmetry, and greater connectivity. But the downsides of the digital revolution have also become clear, including disinformation, violations of privacy, and reduced competition. Three stages in the digital revolution The world is in a period of digital disorder Digital disorderA future digital order emerges Digital transforms the world hhR DCkw kNwD C Dh , , w 5 Competing in an Age of Digital Disorder View online: bit.ly/2019-Digital-Disorder Internet users worldwide Billions; percent of total population Internet use has exploded over the past two decades % % % % % % % .% .% Some result from digital technologies merely exacerbating or accelerating underlying human tendencies, while others are more novel phenomena associated with the digital age. Redefining information dissemination Global use of the Internet continues to grow dramatically. An estimated 3.9 billion people had Internet access as of 2018 , a nearly 400 percent increase since 2001 (see figure 2). This trend is likely to accelerate as emerging and frontier markets with comparatively low levels of Internet penetration move closer to the global average. As Internet access proliferates, so too does information disseminationposing simultaneous opportunities and challenges for society. On the positive side, greater access to the Internet has led to a proliferation of educational opportunities. For instance, enrollment in massive open online courses (MOOCs) more than doubled between 2015 and 2017, with more than 78 million people across the world taking these classes in 2017. This spread of information through digital courses has been complemented by vast troves of knowledge available on crowd-sourced knowledge repositories, such as Wikipedia. The increase in the availability of smart phones and Internet connectivity in emerging markets