By Mauro Macchi
European countries have long lagged behind other developed economies in productivity and innovation, even prior to the impact of the Eurozone crisis. Below, Mauro Macchi argues that embracing disruptive digital technologies is key to Europe’s ability to both recover and compete, and whilst policymakers can help nurture the right environment for digital growth, the real power lies in the hands of businesses themselves.
While many parts of Europe’s economy continue to experience a weak recovery, there is more confidence among business leaders that the intense period of crisis has passed. Nevertheless, the downturn and the debt crisis have hindered the EU’s efforts to improve its competitiveness, and while Europe has been repairing its economy, the rest of the world has been investing in infrastructure, technology and skills. The digital technologies disrupting many industrial sectors in Europe can help it recapture its lost competitiveness and drive growth. However, do Europe’s businesses recognise the opportunity, do they know how to seize it, and is the environment in place to support them?
Targets for Growth
Notwithstanding the Eurozone crisis, the EU has lagged behind many competitors in other parts of the world in both productivity and innovation for a considerable time. Policies such as the Digital Agenda for Europe are designed to address this challenge, and the European Commission has set itself the goal of lifting industry’s contribution to Europe’s GDP by 20 percent by 2020 – a tough target.1 At 0.5 percent, European labour productivity growth was almost half that of the US in 2013.2 Meanwhile, while there are pockets of excellence, the EU 28 invest 30 to 40 percent less in relation to their GDP in innovation and research and development (R&D) compared to the US and other developed economies.
Despite these facts, a recent survey of European business leaders by Accenture in collaboration with BUSINESS-EUROPE found that 61 percent of respondents believe that Europe is globally competitive today. This perhaps surprising finding may have been borne of the conflation between hopes for long-term competitiveness and renewed optimism about short-term economic recovery. And while nearly all respondents (96 percent) believe that digital technology will be important to Europe’s competitiveness, many fear that the EU will struggle to compete with other major economies that are making greater progress in using digital effectively.
The Digital Revolution
Digital technologies are important because in the search for improved competitiveness, they have the potential to tackle both Europe’s productivity and innovation challenges. In doing so, they can accelerate the speed and scale of economic growth. Nearly two-thirds of the business leaders we spoke to believe that digital will result in major changes to, or a complete transformation of, their industry’s business model in the next 12 months.
Digital technologies are maturing and converging, allowing entirely new business and operating models to be created using analytics, cloud, mobility and other innovations. And analysis indicates the application of these new technologies can deliver rates of growth higher than those currently enjoyed in traditional industry sectors.
For example, the UK’s core financial services sector is expected to grow at two percent per year between 2012 and 2018. However, the digitally driven payments market is set to grow at closer to three percent annually, thanks to developments including crowd funding, peer-to-peer lending services, and virtual wallets. In Germany, the traditional retail sector anticipates growth of 1.6 percent per year over the same period. But we calculate that the wider digital ‘shopping’ market could enjoy growth of 2.6 percent per year through real-time pricing, e-commerce, or online sharing and bartering services.
What Does Digital Mean?
Let’s just be clear about what we mean by digital. Consider three misconceptions about the digital revolution: Digital is not merely about consumer products and services. Certainly, there are good examples of how European brands are breaking new ground in consumer markets. BNP Paribas Fortis recently teamed up with Belgacom to create Belgium’s first mobile wallet, allowing consumers to make purchases using their mobile devices, redeem coupons or enjoy loyalty benefits. But, more importantly, digital can transform Europe’s industrial and manufacturing productivity. For example, Trumpf, a German producer of intelligent machine tools and industrial laser systems is going beyond efficiently manufacturing its machines to mining the information provided by those machines to gain deeper, actionable insights. Smart machines autonomously exchange information, trigger actions and control each other, improving productivity and speed and reducing costs. This also improves the quality of the products and customer service.
Secondly, digital is not confined to start-ups. That may have been the case in past years but the maturity of digital technologies means that established industry leaders can exploit data within their organisations or supply chains to create new value added services. Michelin, the French tyre manufacturer, is not just using technology to improve shop floor productivity but has disrupted the tyre market by offering entirely new services via the newly established Michelin Solutions. This new business uses networked smart devices, backed up by cloud and analytics technologies, to utilise data from its fleet clients’ vehicles. Putting this data at the heart of its business enables Michelin to offer new services that improve the safety and fuel efficiency of those fleets. Michelin’s service extends to training drivers to support these aims. Offering customer value well beyond the production of tyres, Michelin Solutions has enabled the tyre maker to reshape the boundaries of its industry and create an entirely new market.
Recognising the Potential of Digital
Our analysis demonstrates that business leaders do appreciate the value creating potential of digital. However, two thirds of businesses prioritise their technology investments on improving efficiencies, rather than on seeking new market opportunities. That balance must shift.
Business leaders should consider; what sectors can we work with to create new product or service categories? Are we capable of managing the joint ventures or partnerships necessary to underpin these new categories? Given that new disruptive offerings from new players could render existing product lines obsolete, which markets should we enter and which should we have the courage to leave? By looking beyond driving efficiencies and recognising the growth potential of digital, new markets can be opened up and entirely new customer experiences created. Businesses must ensure that they digitise not only the front end of their business but learn how to embed digitally-enabled business processes throughout their supply chains. This will enhance the degree of efficiencies that can be derived.
Tackling the ‘digital skills issue’ is also critical. According to the European Commission, there was a shortfall of 300,000 digitally skilled people in the EU in 2011. That figure is estimated to reach 900,000 by 2015. This issue must be tackled by addressing both the shortage of digital skilled people and also the reskilling of workers displaced by automation. Digital platforms are increasingly relevant tools for securing and upskilling scarce talent. Tapping into online labour markets, using analytics to better identify the right skills in existing labour pools, and establishing massively open online courses (MOOCs) are all ways to win the battle for skills in a tight market. In order to accelerate the skills building process, Europe needs greater investment in relevant technical and vocational training in digital skills as well as greater labour market mobility both within and into Europe.
Policymakers also have a role to play as key enablers of the change process in Europe. A strong and less fragmented regulatory environment for investment in technology, innovation, and digital infrastructure is needed. More is required to harmonise EU rules, particularly around data privacy and security, to drive a true digital single market that encourages investment and the creation of innovative digitally-enabled products and services across the EU.
And much of Europe’s success in digital goes beyond technology. A more conducive environment for risk-taking and enterprise is required, which means new tax incentives, greater tolerance of failure for start-ups, and a digital ecosystem in which small and large companies can work together more effectively.
Europe has strong foundations to build on. It has almost universal broadband penetration and almost 60 percent mobile broadband take-up. Nearly half the population regularly purchases goods and services online, and more than 40 percent have access to government services online.3 But there is only so much that governments can do.
Ultimately, success in becoming digital comes down to businesses themselves. In a world in which digital is driving the change in so many markets, business leaders must bring their technology and business strategies together more effectively. Digital must be seen as a platform for new business models and opportunities, not just a route to greater efficiency. Business leaders must be prepared to make profound and radical changes, not simply reconsidering how they do business but what business they are in.
About the Author
Mauro Macchi is senior managing director for Europe, Africa and Latin America within Accenture Strategy. His role focuses on enabling organisations across all industries to improve their competitive advantage in markets that are being transformed by digital technologies. Mr. Macchi has more than 25 years of experience working for Accenture. Mr. Macchi has a Bachelor of Science in economics and a Master of Business Administration from the Graduate School of Management at the University of California. He is based in Milan, Italy.
2. EU Eurostat Economic Forecast, February 2014
3. European Commission Digital Agenda Scoreboard 2013 http://ec.europa.eu/consumers/consumer_research/editions/docs/9th_edition_scoreboard_en.pdf And GSMA, “Mobile Economy Europe, 2013.” See: http://gsmamobileeconomyeurope.com/GSMA_Mobile%20Economy%20Europe_v9_WEB.pdf