Harnessing the fourth Industrial Revolution

THE digital economy is bigger than you think. Much bigger. Some call it the Second Machine Age. The Germans refer to it as Industry 4.0. In Davos, the World Economic Forum has crowned it the 4th Industrial Revolution. No one is playing down the future impact of digital, but there is a danger that many are underestimating its prevalence today.

New research from Accenture Strategy released in Davos this week reveals that the digital economy represents one third of the US economy. That is equivalent to US$5.9 trillion. The proportion is similar in the UK and Australia, but falls to about one quarter in France and Germany. In China, the digital economy represents less than 15 per cent of its current GDP.

Such fresh data matter. Too many businesses and organisations assume that digital is something that will happen to them. They expect technology-driven startups to disrupt their traditional business models and threaten their competitive position. While that may be true, the breadth of digital assets and skills means that incumbent organisations may have a greater digital base to build on. It tells us they can be more aggressive and proactive in disrupting markets themselves.

Most estimates of the digital economy rely predominantly on expenditure on information and communications technology (ICT). Accenture's measure is more comprehensive; it looks at the proportion of occupations and employment that have digital skills that are important to those jobs.

Forty-three per cent of US employment can be considered digital, for example. It includes how software and hardware are delivering value in the entire economy. Accenture Strategy estimates that 26 per cent of US accumulated capital stock can be deemed digital.

None of this means that becoming a digital business will be any less effortless than we had thought. But it provides some confidence that the foundation is stronger in many countries than is presumed.

THREE MYTHS ABOUT THE DIGITAL ECONOMY

As investors and companies consider their next steps in digital transformation, it is important, however, to address three myths:

Myth 1: A bigger digital economy means greater economic growth

Just as the size of a country's manufacturing sector does not guarantee any particular rate of growth, this is also applicable to the digital economy. A larger digital slice of the pie does not automatically increase the size of the pie. It is the application of digital investments that matters and how they can generate greater productivity and growth.

Accenture Strategy explores how digital skills, technologies and other accelerator factors can be used to drive such growth. Should American organisations pull these three levers in an optimal combination, we suggest that they could collectively add another US$421 billion to the US GDP by 2020, equivalent to a 2.1 per cent boost. That is the difference between business as usual and smarter use of existing digital investments.

Myth 2 : All we need is greater technology investment

In order to convert existing digital investments into higher rates of growth, we must remember that organisations and economies are at different points of maturity. For the US to pull off its 2.1 per cent uplift to GDP, for instance, Accenture Strategy suggest that just 10 per cent of its extra effort should be devoted to digital technology. Instead, a good 60 per cent of improvements to the application of digital should be focused on skills.

The digital economy in Japan (19 per cent) and South Korea (17 per cent) is surprisingly small compared to other advanced economies. This is partly due to the heavy manufacturing focus of these economies, which are typically less digital than service sectors. It is also a result of a particularly low share of total capital stock invested in ICT. That is not to say that the volume of ICT capital stock is low in these economies, just that as a share of total stock, they are comparatively small. Similarly, the size of Japan's economy means their digital output is among the world's largest despite the share it represents.

Brazil's digital economy, in contrast, is rather larger as a share of total GDP, at 21 per cent. This is driven by a greater role for digitally skilled labour in key areas of the economy and a much higher share of total capital stock in digital assets.

In Brazil, we estimate the economy could enjoy a 6.6 per cent boost to 2020 GDP if it pulled the right digital levers. Seventy per cent of this extra effort should be directed at improving the digital capital stock. Brazil needs its enhanced skills, of course, but our analysis suggests that extra effort in skills would deliver far smaller economic returns by comparison.

Myth 3: The online giants will continue to dominate the digital economy

Amazon, Uber, Airbnb, Facebook. These brands have reshaped multiple markets. They have done so by mastering the so-called platform economy whereby they use the network effect of bringing suppliers, customers and partners together to deliver new forms of value. The top 15 of these platform players have a collective market cap of US$2.6 trillion. European policymakers have expressed concern at their dominance.

But we now see the opportunity for traditional analog companies to benefit from digital platforms in similar ways. By generating data from their network of products and partners, they can deliver rich new services themselves. Europe's strengths in engineering, health care and pharmaceuticals gives it the perfect chance to transform its traditional businesses into digital platform players with global clout.

Exposing these myths is important if we are to mobilise the many sectors that have yet to be disrupted by digital and to ensure policymakers support them by channelling investments the right way.

Optimising the use of digital skills and technologies could generate US$2 trillion of additional global economic output by 2020. The size of the underlying digital economy is significant and leaves no excuses to delay.