The rapid advancement of technology in recent years is blurring the lines between previously separate sectors. Against a backdrop of increasing digitalisation, a wide range of industries are converging as they seek to ride out the impact of disruptive technological shifts.

This convergence has been playing out for many years in media and telecommunications, where consumers have long subscribed to television content through their telcos or purchased novels and music albums through online platforms. The trend is now spreading to other sectors, such as manufacturing, health care and financial services.

To navigate the disruption, which has been accelerated by the COVID-19 pandemic, companies are investing heavily in digital innovation that can help them explore beyond their core sector and find new ways to deliver their products and services to customers.

The need to undergo digital transformation in the current uncertain environment is clear. In the EY-Parthenon Digital Investment Index, it was found that nearly two-thirds of executives agree that organisations must radically transform their operations over the next two years.

To do that, they are turning to emerging technologies such as Internet of Things, artificial intelligence and cloud computing, which are considered table stakes or minimum requirements for businesses today. Executives surveyed also predict large spikes in investments in automation and digital collaboration tools.

Digitalisation is also linked to sustainability - and these two trends should shape strategic decision-making.

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"We are on the cusp of a large systemic change that will fundamentally change the shape of industries. This will play out over the next 50 years, and we will see the winners emerging in the next 10 years. To succeed, firms will need to win on two fronts: digitalisation and ESG (environmental, social and governance)," said Vikram Chakravarty, EY Global Strategy Leader, also EY Asean Strategy and Transactions Leader.

While not always the case, the two trends can mutually reinforce each other. Adopting the correct digital strategy can boost a company's ESG efforts. For example, electric car makers leverage digital innovation to design and develop cars with lower or zero carbon emissions, thereby enhancing their ESG credentials, and helping them overtake traditional leaders in the automotive industry.

A business imperative

Importantly, whether companies can realize their ESG ambitions, achieve business goals or generate superior returns from their digital investments will depend on their digital strategy. The abovementioned survey found that firms that achieved higher returns from their digital investments demonstrate a clear digital strategy. These leading firms have also shifted their focus from developing digital solutions in-house to M&As and partnerships to accelerate digital initiatives.

"There is a clear correlation between companies that underwent proper digital transformation and their ability to truly disrupt existing business models and change their business portfolio. This will have an impact on how these businesses are valued," said Joongshik Wang, EY-Parthenon Asean and Singapore Strategy Leader.

He noted the potential pitfall of equating buying an IT solution with a digital strategy. "Companies must be more proactive when it comes to adopting digital to enhance the sustainability of their organisations. Digital transformation will allow companies to create new value chains. And when value chains converge, they establish new ecosystems."

A focused and holistic approach

Digital transformation can be expensive and making changes to incumbent operating models may be painful. Indeed, many firms grapple with failures in the initial digital efforts and find it hard to link with value.

To begin with, a successful digital transformation strategy requires an innovative culture and clear vision from the top, which can then be translated into a concrete business strategy that is far-sighted and resilient. This path is difficult as it may lead to lower margins and cannibalisation of historical cash cows. But if the vision is clear, then the positive outcomes in the long run are certain.

"Too often, firms tinker with digital adoption and back away at the first signs of discord. One way to break this impasse is to bring digitalisation changes into the core of the business. Companies also must be prepared to infuse digital capabilities throughout the business and make it part of their organisational DNA. While companies recognise the urgency of investing in digital, many fail to scale up these efforts," said Chakravarty.

This is because many organisations do not take a strategic and focused approach toward digital transformation. In such cases, different groups and functions within the organisation undertake digitalisation efforts in silos.

Shaurya Ahuja, EY-Parthenon Partner, Consumer and Digital, Ernst & Young Solutions LLP added: "Successfully executing large-scale digital transformation across an entire company can be challenging from a change management standpoint. Companies may wish to take a minimum viable product approach to test, learn and adapt fast, and drive wider confidence on the benefits of digitalisation. As long as digitalisation is seen as a means to meet and exceed core business goals, there will be greater collaboration and emphasis."

Importantly, companies should view digitalisation in terms of how it solves real user needs, and in doing so, how they can differentiate themselves with a distinct technology platform, monetise data and create customer stickiness.

Scaling up through M&As

Companies can choose to speed up their digital efforts by either building internal capabilities or acquiring them.

"We believe that the optimal approach is in pursuing a balance of both organic and inorganic strategies to capture both value and speed. However, there is evidence to suggest that scaling up through investment vehicles such as M&As is more likely to result in performance that exceeds expectations," noted Wang.

Indeed, nearly three-quarters of the executives surveyed in the aforementioned study are shifting to M&As and partnerships to accelerate digital initiatives. The research also found that digital leaders are shifting an average of five percentage points of their investment mix from building internally to acquisitions.

There are numerous benefits from pursuing the M&A route. It is an effective strategy for acquiring both the technology and talent needed to fuel digital transformation, as well as a quicker and more flexible way to capture emerging opportunities ahead of the competition.

However, there are challenges that come with acquisitions, including the risk of failure in post-merger integration. Furthermore, if the acquisition target is a start-up, it may be difficult to estimate the value of the firm's technology and arrive at the correct price.

Wang added: "In Southeast Asia, many corporates know the benefits of going digital but have yet to leverage opportunities in M&A to acquire technology and talent. As companies look to pursue more deals to advance their digital strategy, they are also considering divestment as an attractive option to fund these investments."

Leveraging ecosystems

It takes time for companies to develop and scale up their own technology platforms. Forging partnerships and participating in digital ecosystems is another strategy that companies can pursue to facilitate transformation.

Ecosystems have become more relevant today as the world moves towards platform-based business models that may eventually evolve into one-stop solution platforms. Driving this trend is the convergence of industries and increasingly borderless markets.

Being part of an ecosystem allows firms to access new opportunities to deliver products or services, and potentially leads to the creation of new assets that can be monetised. In pursuing this route, however, companies may face difficulties in identifying the right ecosystem partner, balancing valuable insights with customer data privacy, managing overlaps in operations, and determining ownership of the end-user relationship.

Furthermore, companies will need to determine if they wish to become the platform where other firms connect to, or join an existing ecosystem or platform led by another player.

The future is here now

The pandemic has highlighted the urgent need for companies to accelerate their digital journeys to create long term value. Yet, merely implementing digital technology in business processes on a piecemeal basis will not suffice to ensure success.

For digital transformation to work, companies need to critically review their business strategy and determine how gaps can be plugged with digital solutions through organic investments, strategic alliances, or tapping into the broader digital ecosystem.

"To survive and thrive, firms need to overcome the twin disruptions of digital and ESG," said Chakravarty. "While these efforts can be expensive, painful and may result in lowering of financial projections, it is imperative to make these investments. A focused approach of adopting digital at the core and allowing for these investments to reinforce one another is key. This will result in a calibrated path where investments will lead to growth, and costs will be offset by growing multiples in the capital markets."