The Rise of the Networked Enterprise (from McKinsey Quarterly)

One of my colleagues today asked me how asked me social media is changing corporations.  Of course, I’m fascinated with this subject and see radical changes on the horizon.  So I did a little digging today and found a few things I thought were worth sharing.

First:  Harvard Business Review – says that traditionally up to 90% of budgets are spent on promotions and advertising.  However, advertising does little to influence people’s purchased decision.  People’s recommendations matter most.  Case in point:  eBag and Yelp!  Two great case studies!

Second: Forrester – says that 500 BILLION impressions regarding products and services are shared online, with 60% being share on Facebook.  And 16% of users generate 80% of mess ages.

After discovering these two nuggets, I kept digging and came across “The Rise of the Networked Enterprise” from the McKinsey Quarterly (www.mckinseyquarterly.com).  Here’s that article.  Enjoy!

McKinsey’s new survey research finds that companies using the Web intensively gain greater market share and higher margins.

December 2010 • Jacques Bughin and Michael Chui

Source: McKinsey Global Institute

Every new technology has its skeptics. In the 1980s, many observers doubted that the broad use of information technologies such as enterprise resource planning (ERP) to remake processes would pay off in productivity improvements—indeed, the economist Robert Solow famously remarked, “You can see the computer age everywhere but in the productivity statistics.”1 Today, that sentiment has gravitated to Web 2.0 technologies. Management is trying to understand if they are a passing fad or an enduring trend that will underwrite a new era of better corporate performance.

New McKinsey research shows that a payday could be arriving faster than expected. A new class of company is emerging—one that uses collaborative Web 2.0 technologies intensively to connect the internal efforts of employees and to extend the organization’s reach to customers, partners, and suppliers. We call this new kind of company the networked enterprise. Results from our analysis of proprietary survey data show that the Web 2.0 use of these companies is significantly improving their reported performance. In fact, our data show that fully networked enterprises are not only more likely to be market leaders or to be gaining market share but also use management practices that lead to margins higher than those of companies using the Web in more limited ways.

Managing the Web-based organization

Respondents report that a variety of organizational structures and units manage Web 2.0. This year’s results show that the IT department is most likely to oversee internal Web initiatives (61 percent of respondents). For customer-facing initiatives, 74 percent of respondents say that oversight falls to the marketing department. For Web 2.0 initiatives involving external suppliers and partners, roughly equal numbers of respondents cite the IT, marketing, and business-development functions. Financing comes from a variety of places, including the IT function, central corporate sources, and discretionary funds at the business unit level.

The social nature of most Web technologies, of course, opens companies to greater interaction with the outside world. To manage this change, a slim majority of respondents (51 percent) say their companies have adopted formal social-media policies; companies with higher levels of Web 2.0 adoption are likelier to have them. In most cases, only a few employees are authorized to speak on behalf of the company.

Over the past four years, McKinsey has studied how enterprises use these social technologies,2 which first took hold in business-to-consumer models that gave rise to Web companies such as YouTube and Facebook. Recently, the technologies have been migrating into the enterprise, with the promise of creating new gains to augment those generated by the earlier wave of IT adoptions.3 The patterns of adoption and diffusion for the social Web’s enterprise applications appear to resemble those of earlier eras: a classic S curve, in which early adopters learn to use a new technology, and adoption then picks up rapidly as others begin to recognize its value. The implications are far reaching: in many industries, new competitive battle lines may form between companies that use the Web in sophisticated ways and companies that feel uncomfortable with new Web-inspired management styles or simply can’t execute at a sufficiently high level (see sidebar, “Managing the Web-based organization”).

Notes

1 Robert M. Solow, “We’d better watch out,” New York Times, July 12, 1987.

2 See “How businesses are using Web 2.0: A McKinsey Global Survey,” mckinseyquarterly.com, March 2007; “Building the Web 2.0 Enterprise: McKinsey Global Survey Results,” mckinseyquarterly.com, July 2008; “How companies are benefiting from Web 2.0: McKinsey Global Survey Results,” mckinseyquarterly.com, September 2009; and Michael Chui, Andy Miller, and Roger P. Roberts, “Six ways to make Web 2.0 work,” mckinseyquarterly.com, February 2009.

3 Andrew McAfee, Enterprise 2.0: New Collaborative Tools for Your Organization’s Toughest Challenges, Boston, MA: Harvard Business School Press, 2009.

The findings

Our annual surveys of Web 2.0 use in the enterprise provided the basis for the findings in this article. The present survey, our fourth, garnered responses from 3,249 executives across a range of regions, industries, and functional areas. Two-thirds of the respondents reported using Web 2.0 in their organizations. As in past surveys, we asked respondents about their patterns of Web 2.0 use, the measurable business benefits they derived from it, and the organizational impact of Web technologies. We also inquired about the market position of the respondents’ companies, whether their market share had changed, and how their operating margins compared with those of competitors in the same industries.

Web 2.0 technologies are now more widely used

The share of companies where respondents report using Web 2.0 technologies continues to grow. Our research, for instance, shows significant increases in the percentage of companies using social networking (40 percent) and blogs (38 percent). Furthermore, our surveys show that the number of employees using the dozen Web 2.0 technologies continues to increase.4 Respondents at nearly half of the companies that use social networking say, for example, that at least 51 percent of their employees use it. And in 2010, nearly two-thirds of respondents at companies using Web 2.0 say they will increase future investments in these technologies, compared with just over half in 2009. The healthy spending plans during both of these difficult years underscore the value companies expect to gain.

Among respondents at companies using Web 2.0, a large majority continue to report that they are receiving measurable business benefits—with nearly nine out of ten reporting at least one. These benefits ranged from more effective marketing to faster access to knowledge (Exhibit 1).

To view enlarged exhibits, please install the Adobe Flash Player plugin version 7 or greater. 

Your javascript is turned off. Javascript is required to view exhibits.

Toward the networked enterprise

We analyzed the shared characteristics of groups of organizations in our survey and clustered them according to the magnitude of the business benefits respondents reported from the use of Web 2.0 tools and technologies. Our analysis revealed striking differences.

Among respondents who say their companies are using Web 2.0, most (79 percent) achieved a mean improvement of 5 percent or less across a range of business benefit metrics (Exhibit 2). Respondents at the companies in this group report the lowest percentages of usage among their employees, customers, and business partners; say that Web 2.0 is less integrated into their employees’ day-to-day work than respondents at other companies do; and are least likely to report high levels of collaboration or information sharing across the organization. We call these companies, still learning the ropes of Web 2.0, the “developing” group.

Three types of organizations, however, seem to have learned how to realize a much higher level of business benefits from their use of Web 2.0.

Internally networked organizations. Some companies are achieving benefits from using Web 2.0 primarily within their own corporate walls. The survey results indicate that companies in this group—13 percent of those using Web 2.0—derive substantial benefits from deploying these technologies in employee interactions. Respondents at such organizations report a higher percentage of employees using Web 2.0 than respondents at developing organizations do. Respondents at half of the internally networked organizations reported that Web 2.0 is integrated tightly into their work flows, for example, compared with only 21 percent of respondents at developing organizations. Web 2.0 also seems to promote significantly more flexible processes at internally networked organizations: respondents say that information is shared more readily and less hierarchically, collaboration across organizational silos is more common, and tasks are more often tackled in a project-based fashion.

Externally networked organizations. Other companies (5 percent of those deploying Web 2.0) achieved substantial benefits from interactions that spread beyond corporate borders by using Web 2.0 technologies to interact with customers and business partners, according to survey results. Executives at these organizations reported larger percentages of their employees, customers, and partners using Web 2.0 than respondents at internally networked organizations did. But the responses suggest that the internal organizational processes of externally networked organizations are less fluid than those of internally networked ones.

Fully networked enterprises. Finally, some companies use Web 2.0 in revolutionary ways. This elite group of organizations—3 percent of those in our survey—derives very high levels of benefits from Web 2.0’s widespread use, involving employees, customers, and business partners, according to the survey. Respondents at these organizations reported higher levels of employee benefits than internally networked organizations did and higher levels of customer and partner benefits than did externally networked organizations. In applying Web 2.0 technologies, fully networked enterprises seem to have moved much further along the learning curve than other organizations have. The integration of Web 2.0 into day-to-day activities is high, executives say, and they report that these technologies are promoting higher levels of collaboration by helping to break down organizational barriers that impede information flows.

4 For more details, see “Business and Web 2.0: An interactive feature,” mckinseyquarterly.com, December, 2010.

Capturing competitive advantage

Executives at the more highly networked companies in our survey reported that they captured a broad set of benefits from their Web investments. A key question remained, however: do these benefits translate into fundamental performance improvements, measured by self-reported market share gains and higher profits?

We performed a series of statistical analyses to better understand the relationship between our categories of networked organizations and three core self-reported performance metrics: market share gains, operating profits, and market leadership. Exhibit 3 shows the results.

Market share gains reported by respondents were significantly correlated with fully networked and externally networked organizations. This, we believe, is statistically significant evidence that technology-enabled collaboration with external stakeholders helps organizations gain market share from the competition. They do this, in our experience, by forging closer marketing relationships with customers and by involving them in customer support and product-development efforts. Respondents at companies that used Web 2.0 to collaborate across organizational silos and to share information more broadly also reported improved market shares.

The attainment of higher operating margins (again, self-reported) than competitors correlated with a different set of factors: the ability to make decisions lower in the corporate hierarchy and a willingness to allow the formation of working teams comprising both in-house employees and individuals outside the organization. These findings suggest that Web technologies can underwrite a more agile organization where frontline staff members make local decisions and companies are better at leveraging outside resources to raise productivity and to create more valuable products and services. The result, the survey suggests, is higher profits.

Market leadership, which we ascribed to those organizations where respondents reported a top ranking in industry market share, correlated positively with internally networked organizations that have high levels of organizational collaboration. Self-reported market leadership also, however, correlated negatively with externally networked organizations. We believe it is unlikely that better interactions with external stakeholders lead to a decline in market position. A more likely explanation for the data is that market leaders use Web 2.0 to strengthen internal collaboration, seeking to enhance the organizational resiliency required to maintain their leadership positions. Market challengers, by contrast, may be more focused on external uses of Web 2.0 to win customers from industry leaders.

Overall, we found that respondents at 27 percent of the companies in our survey reported having both market share gains against their competitors and higher profit margins. That kind of performance clearly makes these companies profit consolidators in their industries, with earnings growing faster than the rest. Highly networked enterprises were 50 percent more likely to fall in this high-performance group than other organizations were. This finding suggests that the fully networked enterprise could become the benchmark for more vigorous competition in many industries.

Moreover, the benefits from the use of collaborative technologies at fully networked organizations appear to be multiplicative in nature: these enterprises seem to be “learning organizations” in which lessons from interacting with one set of stakeholders in turn improve the ability to realize value in interactions with others. If this hypothesis is correct, competitive advantage at these companies will accelerate as network effects kick in, network connections become richer, and learning cycles speed up.

Going forward

The imperative for business leaders is clear: falling behind in creating internal and external networks could be a critical mistake. Executives need to push their organizations toward becoming fully networked enterprises. Our research suggests some specific steps:

  • Integrate the use of Web 2.0 into employees’ day-to-day work activities. This practice is the key success factor in all of our analyses, as well as other research we have done. What’s in the work flow is what gets used by employees and what leads to benefits.
  • Continue to drive adoption and usage. Benefits appear to be limited without a base level of adoption and usage. Respondents who reported the lowest levels of both also reported the lowest levels of benefits.
  • Break down the barriers to organizational change. Fully networked organizations appear to have more fluid information flows, deploy talent more flexibly to deal with problems, and allow employees lower in the corporate hierarchy to make decisions. Organizational collaboration is correlated with self-reported market share gains; distributed decision making and work, with increased self-reported profitability.
  • Apply Web 2.0 technologies to interactions with customers, business partners, and employees. External interactions are correlated with self-reported market share gains. So are internal organizational collaboration and flexibility, and the benefits appear to be multiplicative. Fully networked organizations can achieve the highest levels of self-reported benefits in all types of interactions.

About the Authors

Jacques Bughin is a director in McKinsey’s Brussels office; Michael Chui, based in the San Francisco office, is a senior fellow of the McKinsey Global Institute.
The authors would like to acknowledge the important contributions of Angela Hung Byers and Martin Rouse.

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3 thoughts on “The Rise of the Networked Enterprise (from McKinsey Quarterly)

  1. Hi Keith, I agree that this research is a bit of a nugget. I think this research is very powerful (esp. because of the McKinsey brand) in helping to make the case, like I do a lot for the benefits of social media! See my blog post “Have McKinsey proven the ROI of social media” http://www.adamlewis.info.

    Adam

  2. In our customer conversations the number one question is: “Can I safely manage collaboration and its related sensitive information with colleagues and partners in one workspace?” It seems that companies have come to realize that the only way to implement innovation is by actively engaging customers/partners and sharing information openly. Access to the right people and knowledge at the right time is therefore crucial and those companies that really understand the business value of collaborating and innovating are the ones that are the most competitive.

    Bart Schrooten
    http://lumoresearch.wordpress.com/

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