New Technology

Indonesian companies have head start in digital economy, but need to accelerate

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Around the world, digital technology is forcing businesses to change how they operate. While Indonesian companies have kept pace in some areas, McKinsey research suggests greater investment is needed throughout organizations to achieve the best results. The study also shows that managers in Indonesia understand the importance of the digital economy, but many are struggling to craft an appropriate strategy.

The emerging findings are part of an extensive ongoing study into the Digital Quotients (DQ) of about 100 Asian companies. Rating national practices using the DQ is a metric developed by McKinsey to assess a company’s strengths and weaknesses in four areas: culture, strategy, capabilities, and organization. High DQ scores correlate with improved corporate performance. From a large sample of publicly traded companies, analysis showed the average three-year annual total return to shareholders for companies with top DQ scores was about three times that of companies with low scores. In addition, the five-year average compounded annual growth rates for revenue were nearly five times greater.

Understanding a company’s DQ is particularly important during this era, when the digital revolution has already disrupted many businesses and continues to inject a highly fluid and fast-changing dynamic into the marketplace. It has paved the way for the creation of mega-companies like Facebook, Baidu, and Tencent to challenge established businesses; upended a broad range of industries, from entertainment to automotive; and empowered customers with powerful tools to help make more informed choices.

The trend shows no signs of letting up. Just looking at the financial services industry, about one third of Indonesian respondents to a recent McKinsey survey said they had tried banking using their smartphones and almost two thirds said they would consider opening an account with an online-only bank. Also, about a third of the respondents in Indonesia said they research products from credit cards to insurance policies online before making a purchase.

McKinsey’s study of the digital economy in Asia shows that Indonesian businesses appreciate the impact of these technologies, and have already reacted quickly. Indonesian businesses, in fact, have embraced digital capabilities to connect with customers as well as – if not better in some as cases – their peers in Hong Kong and Singapore. Indonesia is already at the forefront of the social media revolution; Jakarta, is the world’s most active city in terms of Twitter posts.

But Indonesian businesses have not tapped much of the significant potential of the digital economy, which requires a much more pervasive integration of digital throughout an organization rather than isolating its implementation to a few functions.

That starts with a comprehensive upgrade of technology to upgrade efficiency, agility, speed, and responsiveness. Indonesian businesses, however, spend a paltry amount on IT, about $14 billion in 2014. That’s about 1.8 percent of the country’s GDP, compared to 3 percent spent in neighboring Malaysia and 3.6 percent in Singapore, the region’s leader. The Asian average for IT investment is 2.7 percent of GDP.

The financial sector offers a clear example of this shortfall. In terms of operating expenses to assets, Indonesian banks have the highest ratios in Southeast Asia. Compared to banks in Malaysia, for example, they are more than twice as high. The low investment rate in Indonesia, particularly in automation, contributes to poor overall corporate efficiency and hampers innovation.

Part of the issue lies in the fact that leaders and managers have yet to create a comprehensive strategy to address the necessary changes or to establish a unit dedicated to the transformation.

McKinsey analysis has shown that the top DQ companies made digital technology integral to corporate strategy. They also cultivated a culture that accepts and encourages taking risks, for example, using prototypes and limited releases to test ideas with real customers. Top managers had a clear vision of digital opportunities, while their companies made appropriate investments and developed clear performance metrics around digital initiatives.

At the same time, even the top-scorers were struggling to deliver consistent, high-quality customer experiences across channels and to find digital talent outside the company. Further, roles and responsibilities are still evolving and measuring return on digital investment has been challenging, making it difficult for businesses to know where to invest their resources.

Indonesian companies have the momentum to help them succeed in the digital economy. But building up their DQ requires businesses to embrace the transformation, identify a few of the most promising initiatives, and be ready to expand the successful ones rapidly.

Michael Gryseels is a Director in McKinsey & Company and Leader of the McKinsey Digital Campus, based in Singapore. Sumit Popli is an Associate Principal, based in Jakarta.

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