TCS 2021 Global Financial Leadership Study

Pandemic Realities

One of the numerous stark realities of the pandemic is that plotting a sound business strategy has never been harder, or more important.

That’s what TCS research last fall on nearly 300 large companies told us, and it’s a sentiment that TCS leaders hear in their daily dealings with executives at major global enterprises. We’re all in a massive reset—our global company included—and all businesses must become far more digital to come out strong.

But the core strategic questions, of course, are what should we “reset” our companies to be, and how? I offer our take on them from our work with clients worldwide, and our own internal discussions about where to guide the TCS ship in the months and years ahead.

One thing is for certain: The last decade’s race to be a highly digital business is now in overdrive. The pandemic has forced everyone to move down the digital path from 100 mph to 1,000 mph. But to what ultimate end? That is, what purely digital products and services, or digitally enabled offerings, should a company provide? To what customers and in which geographies? And through what means? In other words, what business model should companies adopt to become superior in a digital world at creating demand and generating supply for its chosen products and services?

What’s reassuring to many leaders we speak with is that these aren’t totally new questions, as the trends of the last 20 years give us some hints at the answers. Long before the pandemic hit, the fault lines of the global economy had been fracturing for years. Rapid advancements in digital technologies, and fast-moving and inventive practices to put them to highly productive use, had begun to reshape age-old industry structures and create new sectors.

Whole new industries have popped up from this rocky terrain—for example, a $1.3 trillion-a-year search engine market¹ and a $4.1 trillion retail e-commerce market.² New companies such as Google, Facebook, Amazon, Alibaba and Expedia emerged to become multibillion-dollar global enterprises. They and other companies have rearranged the pecking order of established sectors such as media, retailing, travel and others. But because these relatively new sectors and new companies have been with us for 20 years or more, it’s easy to forget they didn’t exist before the World Wide Web emerged in the early 1990s.

And then the health-devastating COVID-19 outbreak ruptured things even more. It forced both old- and new-economy global corporations and their customers to do business online from their employees’ homes. The tectonic plates of global business shifted abruptly and loudly.

The pandemic has forced everyone to move down the digital path from 100 mph to 1,000 mph.

Just ask leaders of retail companies how different things are since last March. In the U.S., e-commerce was predicted to be 15% of retail sales in 2020, up from 11% the year before.³ But even when most consumers feel it’s safe to shop in stores again, that percentage is not likely to recede. Indeed, industry watchers like UBS predict online retailing will be 25% of retail sales by 2025.⁴

This is not a U.S.-only phenomenon. Chinese consumers are even bigger proponents of buying merchandise from their homes. In fact, in 2020 Chinese consumers’ e-commerce purchases were predicted to constitute 41% of total Chinese retail sales—nearly three times the percentage in the U.S.⁵ The digital upheaval has hit many retail suppliers as well. Take sports shoes and apparel maker Nike Inc., a $37 billion global company. Its e-commerce as a percent of total revenue has tripled in the last five years, from 5% to 15%.⁶

The digital fault lines are harder to detect outside of retail, travel and hospitality, where the impacts are easy to see. Amazon, UPS and FedEx trucks are seemingly everywhere; airports devoid of crowds; and hotels with more employees than guests. But the signs are nonetheless there. All in all, it amounts to a profound altering of the global business landscape, one that had been playing out steadily since the rise of the web. The pandemic abruptly shifted the tectonic plates. And we’ve seen earthquakes emerge in sector after sector. It is nothing less than a massive reset of business everywhere.

The question for large companies everywhere is this: What’s our course? We have more than a few thoughts on this, from dozens of discussions with leaders in our clients, our research and our own strategic planning exercises.

We believe it must begin with company strategists shifting their thinking from a vertical industry to a horizontal, digital ecosystems frame.

Navigating a Sound Digital Path Through the Reset

If leaders of some big companies hadn’t learned this fundamental lesson over the last decade, they are learning it now.

The industry “label” that their company has used for decades to understand its opportunities and threats has lost most of its utility. “We’re in the newspaper industry” has blinded publishers for years from responding to the syphoning of ads and readers by Facebook, Google, Craigslist and many others. An attitude of “We’re a key player in the hotel industry” hasn’t prevented Airbnb, Vrbo and other companies that rent out people’s homes from grabbing 12% of the U.S. supply of lodging units in 2020, up from less than 1% in 2014.⁷

Indeed, the “vertical” industry lens  that has framed the way many leaders think about who their companies compete against, customer needs and opportunities, the supply chain and the channel partners to bring products and services to customers is much too restrictive. The vertical lens is tangible. Governments for decades have been issuing deep statistical reports on them—the number of establishments, collective revenue and annual growth rates, company sizes and other data.

Take health care. The pharmaceuticals, medical devices, hospital and other health care services, drugstore and medical insurance sectors have all been seen as separate (but, of course, related) vertical industries for decades. Each is a huge industry globally, and all have seen their businesses disrupted by digital technologies. Doctors and hospitals, for example, are increasingly using digital sensors in medical devices to monitor the condition of their patients at home. They and medical insurers (with consumer permission) can understand whether patients are getting better to reduce the chances the patient needs to go back to a hospital.

In this health care example, each of these industries—and others— represents a piece of the puzzle to keep the public healthy and the infirm patient on the mend. But if the insurers, medical suppliers, health care services and other entities stay within their vertical industry lanes, it’s harder to see the cross-industry opportunities they all have to provide far more customer value.

This requires a horizontal lens that crosses vertical industries. It increasingly is being called a “digital ecosystem” lens, with each ecosystem based around a major consumer or enterprise need or “purpose”—i.e., staying healthy; buying a home; taking a vacation; establishing and succeeding in a career; and even more pedestrian pursuits such as getting from Point A to Point B every day for work.

An economy of digital ecosystems,  in fact, is the way a South African company called Discovery sees the health care world. It started out as a medical insurer in 1992. But over the years, the firm realized it had to think in terms of digital ecosystems. Today it calls itself an orchestrator of wellness. Its UK unit, VitalityHealth, has nearly 11% of the UK private health insurance market.⁸ The company’s goal is to get 100 million people 20% more active by 2025.⁹ Its earnings per share increased 25% CAGR over the last 25 years.¹⁰

Looking at the needs of end customers requires thinking about prospects through a “horizontal” lens—not just the vertical industry framework.

Other companies in other sectors are thinking in horizontal ecosystem ways as well. Thomson Reuters sees itself now as a provider of “answers” to law firms and other companies—not just a supplier of data. Long-time shipbuilder Damen Shipyards defines itself as a maritime solutions provider.

Finding a Company’s Place in its Digital Ecosystem

Once leaders agree on which digital ecosystems their companies are part of, they then need to determine exactly where in those ecosystems they need to play.

The first part of this is to identify the company’s core purpose for its customers—how it will help its target audience in their journey. The second part is understanding whether digital data collected in one part of the customer journey can help that company better serve customers in another part of the journey.

For example, in the personal wellness ecosystem in the U.S., two companies loom large in the private health insurance business (CVS Health and United Healthcare), two dominate the retail pharmacy (Walgreens and CVS Health) and several are big in pharmacy benefits management businesses (i.e., CVS Health and United Healthcare’s OptumRx unit). All to say, they anchor several highly interrelated parts of the wellness ecosystem: the health insurance and distribution of medical products to consumers. CVS Health believes digital data and technology are crucial to fulfilling its corporate purpose of “helping people on their path to better health.”¹¹

But none of these firms has decided to become big players in health care services (managing hospital systems or medical groups) or in the product R&D and manufacturing ends of the ecosystem (pharmaceuticals, medical products and medical equipment).

CVS Health, United Healthcare and Walgreens, thus, aren’t focused on just one piece of the wellness ecosystem (as they were in the past). They’re focused on several pieces, including those pieces that can be optimized by sharing digital data and applying immense computing power to analyze them (for pricing, product efficacy and more). And, yes, the companies work with pharmaceutical, medical equipment and medical products companies. But they don’t anchor that part of the wellness ecosystem.

Determining which needs in a customer journey-defined ecosystem a firm can satisfy requires that it clearly articulate its purpose. Can it be a key player—even an anchor—as companies like AWS, Microsoft and Google are in the cloud computing ecosystem, or as CVS Health, Walgreens and United Healthcare are in the wellness ecosystem? Or does it need to take more of a modular solution provider role?

That, in turn, requires company leaders to sharply define their organization’s core purpose. It will require company leaders to look deeply and introspectively about their firm’s true sources of value. (See Figure 2.)

To sum up, a company’s strategy—nowadays, for all intents and purposes its digital strategy—must be seen as “What needs can we fill that will help customers solve their larger problem for which there are many players in the digital ecosystem that will also be key players?”