rticle - February 2017

Digital revolution:
What it means for
Indonesian business
By Phillia Wibowo
Digital revolution: What it means for Indonesian business
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The hardest part of a digital transformation is building the right institutional

culture.

Around the world, digital technologies are delivering economic growth through
productivity gains, bringing people into the formal economy, and aiding product and
service innovation that create new markets.

Beyond that, digital technologies are changing the rules of the game. We once believed
that firms needed to own assets to maximize their value but enterprises such as Amazon
Web Services, the cloud-computing unit of the Internet giant, has shown otherwise. We
once believed that a company’s core services had to be delivered by its own employees—
the success of the ride-sharing businesses, Indonesia’s GO-JEK and Uber, suggest other
approaches are viable.

We once believed it would take years for a competitor to equal and overtake an
established business but companies like AirBnB have demonstrated how fast a digital
enterprise can scale up.

The digital revolution has come to Indonesia. In recent years, we’ve seen rapid growth in
the number of people gaining access to the Internet through mobile devices, an explosion
in the use of cloud computing, and greatly increased take-up of the Internet of Things and
big data and advanced analytics.

Our research also shows that harnessing digitization at scale can bring marked increase in
labor productivity. We have defined a relative scoring mechanism to benchmark countries
on the degree of digitization, based on the level of digital infrastructure, consumer usage,
business usage and government usage. We found that Indonesia stands at the beginning of
an S-curve in productivity growth. (Exhibit)

Exhibit
If Indonesia can harness the power of new digital technologies to increase labor
productivity and bring more people into active employment, the country could add more
than $150 billion to its yearly economic output within a decade, roughly 10 percent of its
GDP. This productivity improvement could come from three areas; operation
optimization, human health and human productivity improvement, and product
development and sales improvement.

To realize this potential, pursuing “digital initiatives” alone is insufficient. Indonesia’s

public and corporate leaders must move aggressively to embrace a broader strategy that
incorporate risks and opportunities coming from digitization of consumers and businesses.
What digitization means for Indonesian
companies

Indonesian companies have a big role to play in the digitization of the economy through
modernizing their offerings, capturing efficiencies, and enticing customers. In other
markets, customers have pulled companies into digitization. In Indonesia, however,
enterprises must take the lead by providing customer-centric business models, customer
experiences that span multiple channels, big data analytics, cybersecurity, and digital
capabilities.

How should companies think about digitization efforts? Let’s look at the three attributes of
“being digital.”

Creating value at new frontiers

Being digital requires being open to reexamining your way of doing business and
understanding where the new frontiers of value are. For some companies, capturing new
frontiers may be about developing businesses in adjacent categories; for others, it may be
about identifying and going after value pools in existing sectors.

Unlocking value from emerging growth sectors requires a commitment to understanding

the implications of developments in the marketplace and evaluating how they may present
opportunities or threats. The Internet of Things, for example, is allowing disrupters to use
unprecedented levels of data precision to identify opportunities in existing value chains. In
the automotive industry, cars connected to the outside world have enabled self-navigation
and in-car entertainment. In the logistics industry, the use of sensors, big data, and
analytics has permitted companies to make supply-chain operations more efficient.
Fintech could revolutionize banking.
At the same time, being digital means paying close attention to how customer decision
journeys are evolving. That means understanding how customer behavior and
expectations are developing inside and outside your business, as well as outside your
sector.

Creating value in core businesses

The next element is rethinking how to use new capabilities to improve customer service.
Try to ground this approach in an understanding of each step of a customer’s purchasing
journey—regardless of channel—and thinking about how digital capabilities can design
and offer the best possible experience. For example, the supply chain is critical to
developing the flexibility, efficiency, and speed to deliver the right product efficiently in a
way the customer wants. Similarly, data and metrics can provide insights about customers
that in turn inform marketing and sales decisions.

Building foundational digital capabilities

Finally, there are technological and organizational processes that allow an enterprise to be
agile and fast. Two elements underpin these processes:

Mind-sets. Being digital is about using data to make better and faster decisions, devolving
decision making to smaller teams, and developing much more iterative and rapid ways of
doing things. Thinking in this way should incorporate the full range of a company’s
operations, not just a handful of functions, including partnerships with other companies. A
digital mind-set institutionalizes cross-functional collaboration, flattens hierarchies, and
builds environments to encourage the generation of new ideas. Managers should develop
incentives and metrics to support such decision-making agility.
System and data architecture. Digital in the context of IT is focused on creating a two-
part environment that decouples legacy systems—which support critical functions and run
at a slower pace—from those that support fast-moving, often customer-facing interactions.
An important feature of digitized IT is the commitment to building networks that connect
devices, objects, and people. The approach embodies a continuous-delivery model where
cross-functional IT teams automate systems and optimize processes to be able to release
and iterate on software quickly.

Five ways to win in the digital age

Many Indonesian businesses are undertaking digital initiatives without aligning them to
their strategy. To unlock their digital potential, Indonesian companies should reflect on the
following ways that they could reinvent themselves.

Define customer-centric experiences

Consumers are looking for the next-generation user experience—personalized,

interconnected, fun, fast, and seamless. Such an experience depends on excellent design
and agile development, exemplified by digital companies such as Facebook, Google, and
LinkedIn and more traditional enterprises such as Disney, Starbucks, and Starwood
Hotels.

A customer-centric experience is not limited to business-to-consumer (B2C) companies.

Several business-to-business (B2B) customer-centric champions such as 3M, IBM, and
Xerox are pioneering new, tailored customer experiences.
Develop omnichannel engagement

Nowadays, customers not only interact with companies across several different channels
along the customer decision journey—for example, a physical store, a kiosk, an online
website, a call center, e-mail, social media, and a mobile phone application—but also
demand seamless engagement across the touchpoints. Many companies are improving
their O2O (online-to-offline and offline-to-online) offerings to offer coherence across
online and offline channels.

Use big data to spur real-time decisions

The amount of data in the world is growing exponentially. Companies use only a fraction
of data generated for insights and decision-making. By harnessing the superior
computational power now available, companies can tap the power of big data and
advanced analytics to inform real-time decisions across the value chain. The data can
promote better decisions across the board, from performance management, forecasting,
customer segmentation, and tailored offerings to product development.

Double down on cybersecurity

Managers should treat intellectual property and business data as assets in the digital age,
given their growing volume and importance. More data, interconnected processes, and
digitally enabled decisions coupled with a build-up in malevolent elements of increasing
sophistication means that institutions must invest in cybersecurity to protect their
information capital and ensure resilience. Indonesian hackers are quickly gaining in skill
and reach; the country is subject to one medium to major cyberattack a day.
Build relevant digital capabilities

The hardest part of a digital transformation is building the right institutional culture.
Indonesian companies must evolve to embed digital in their DNA. Organizational
essentials include leadership, an organization structure, and the right mind-set and
capabilities. Will corporate leaders be part of the solution or part of the problem?

On leadership, companies could appoint a chief digital officer to promote the company's
digital agenda. On organizational structure, companies could deploy a center of excellence
to integrate new-age digital competencies across the enterprise. On mind-set and
capabilities, companies could blur the boundaries between internal and external talent
sources to meet rapidly evolving needs.

Indonesia is poised to benefit greatly from the digital revolution. To accelerate progress,
the country’s public and private sectors must focus investments in digital technologies to
enhance infrastructure, increase penetration, and boost productivity. The resulting
economic impact— $150 billion annually by 2025—is too large a prize to ignore.
Implementing a comprehensive digital strategy will enable Indonesian companies to win
in the digital age and lift Indonesia’s economic growth to the next level.

About the author(s)

Phillia Wibowo is a Partner in McKinsey & Company and the President Director of PT.
McKinsey Indonesia