The rise of Digital Challengers How digitization can become the next growth engine for Central and Eastern Europe The rise of Digital Challengers 1 The rise of Digital Challengers How digitization can become the next growth engine for Central and Eastern Europe Jurica Novak Marcin Purta Tomasz Marciniak Karol Ignatowicz Kacper Rozenbaum Kasper Yearwood About McKinsey & Company We are a global management consulting firm that serves a broad mix of private, public, and social sector institutions. We help our clients About McKinsey make significant and lasting improvements to their performance and realize their most important goals. We have built on nearly in Central Europe a century of experience and added a wide range of new skills and capabilities to create a firm that is uniquely equipped McKinsey & Company opened its first to this task. For example, our colleagues in McKinsey offices in Central and Eastern Europe in Digital & Analytics work together with clients to drive the early 1990s, soon after the momentous technology-enabled transformations. By combining democratic changes in the region. McKinsey the latest innovations with deep industry, functional, played an active role in the region’s economic and technological expertise, we help clients cap- rebirth, working with leading business organiza- ture value from data and succeed in the digital tions, governments, and nonprofits. With offices in age. We are home to thousands of the world’s Belgrade, Bucharest, Budapest, Kyiv, Prague, Warsaw, most talented professionals across the fields and Zagreb, we serve clients across a wide range of of digital, analytics, and design. Our cross- industries, including banking and insurance, retail, heavy functional teams enable clients to rein- industry, and high tech, media, and telecom. vent themselves through technology. From optimizing core technology and In addition, McKinsey’s Central European Office provides automating operations to building advanced capabilities built around a Digital Lab and an Agile Hub, entirely new digital businesses, hosted in Warsaw and Budapest, respectively. Those capabilities are we work side-by-side with our geared not only toward client counseling but also toward building and clients to prepare them to transferring capabilities into client organizations. Our Digital and Agile survive and thrive in a rap- squads are involved in all areas of digital transformation – including organi- idly changing world. zational and cultural change, user experience, business applications, big data solutions and analysis, the Internet of Things, artificial-intelligence (AI) solutions, For more information, and blockchain technology. visit mckinsey.com. For more information, visit www.mckinsey.com/locations. About the Digital Challengers research This report is part of a wider research into the potential of the digital economy in Central and Eastern Europe. In our November 2018 report, “The rise of Digital Challengers: How digitization can become the next growth engine for Cen- tral and Eastern Europe” we cover the regional perspective, joined by additional country reports for the Czech Republic, Hungary, Poland, Romania, and Slovakia. Czech Republic Hungary Poland Romania Slovakia The rise of Digital Challengers 1 Contents Preface EXECUTIVE Our objective in writing this report was to analyze In the final chapters of our study, we look at the the opportunities presented by the digital economy vital role of collaboration in CEE, emphasizing the SUMMARY INTRODUCTION in Central and Eastern Europe (CEE). Using new importance of capturing regional scale effects, research of our own and an examination of pub- tackling common challengers and sharing best PAGE 4 PAGE 10 lished sources, we define the economic potential practices (Chapter 4), and examine the implica- from accelerated digitization in ten countries in tions for policy makers, companies, and individu- the region: Bulgaria, Croatia, the Czech Republic, als (Chapter 5). This final section contains a list of Hungary, Latvia, Lithuania, Poland, Romania, actions for these stakeholders to capture the digital CHAPTER 1 CHAPTER 2 Slovakia, and Slovenia. We consider these coun- opportunity. tries “Digital Challengers,” as they demonstrate Digitizing the Impact on the labor strong potential for growth in the “digital economy,” The ideas we present build on those outlined in emulating the group of relatively small countries the previous reports Digital Europe: Pushing the economy market with very high digitization rates that we call “Digital frontier, capturing the benefits; A future that works: Frontrunners,” namely Belgium, Denmark, Estonia, Automation, employment, and productivity; as well PAGE 12 PAGE 22 Finland, Ireland, Luxembourg, the Netherlands, as A new dawn: Reigniting growth in Central and Norway, and Sweden. Eastern Europe. We would like to take this oppor- tunity to thank the McKinsey Global Institute, as Discussion about the opportunities and challenges well as the authors of the above publications – CHAPTER 3 CHAPTER 4 of digitization has been ongoing for many years. in particular Jacques Bughin, Senior Partner in We aim to provide a fresh and unique perspec- Brussels, and James Manyika, Senior Partner in Key enablers of Collaboration across tive: a comprehensive, fact-based analysis that San Francisco, for their expertise, insights, inspira- digitization CEE is key attempts to quantify the size and growth rates of tion and guidance. digital economies on a national and regional level PAGE 34 PAGE 56 in CEE and provides realistic scenarios for the eco- The work on this report was led by Jurica Novak, nomic impact of digitization through 2025. McKinsey’s Managing Partner in Central Europe, Marcin Purta, Managing Partner in Poland, CLOSING Also for the first time in this report, we offer a com- Tomasz Marciniak, Partner, and Karol Ignatowicz, CHAPTER 5 REMARKS bined perspective, looking at both individual coun- Local Partner, with significant contributions by tries and the CEE region as a whole from a digital McKinsey Partners across CEE: Dan Svoboda, Implications for policy PAGE 88 economy perspective. This approach enables us to Tomas Karakolev and Michal Skalsky in the makers, business understand in a quantifiable and comparable way Czech Republic and Slovakia, Levente Janoskuti how the digital economy is evolving across coun- and Andras Havas in Hungary, Daniel Spiridon in leaders. and individuals tries and compared to the most relevant bench- Romania and Tomislav Brezinscak in Croatia. marks. Furthermore, we provide primary insights on PAGE 62 the level of digitization in individual sectors across These individuals worked together with a team all ten CEE countries (Chapter 1). A core part of comprising Consultants Kacper Rozenbaum, the study is our investigation of the impact of digi- Kasper Yearwood and Arkadiusz Żarowski, tal transformation on the labor market (Chapter 2). Communications Experts Joanna Iszkowska and APPENDIX Our discussion here covers both the shifts in society Milena Tkaczyk, Graphic Designer Małgorzata caused by the new technology and the increasingly Leśniewska and many others. Methodology accessible nature of the labor market as a result of PAGE 90 the digital transformation. Following this, we turn to At the same time, we would also like to thank the consider a comprehensive yet prioritized list of digi- many area experts from the public, private, and tization enablers, including the relative strengths of social sectors who provided insights, source data the region and key areas on which the region should and helped advance our thinking. In particular, we focus going forward (Chapter 3). Our insights in this would like to acknowledge the collaboration with chapter are based on quantitative analysis and dis- Google on this research, including contribution of cussions with numerous market experts. analytical inputs and insights leveraged in this report. 2 Digital Challengers The rise of Digital Challengers 3 1 THE CURRENT GROWTH ENGINE OF decades to come. Our analysis shows that devel- CENTRAL AND EASTERN EUROPE IS oping the region’s digital economy across all sectors Executive LOSING MOMENTUM would bring significant economic benefits, primarily Since the transition to a market economy almost due to the resulting productivity gains. By closing three decades ago, CEE has enjoyed a golden age the digital gap to Western and Northern Europe, of growth. The ten CEE countries examined in this CEE could earn up to €200 billion in additional GDP Summary report – Bulgaria, Croatia, the Czech Republic, by 2025 – a gain almost the size of Portugal’s entire Hungary, Latvia, Lithuania, Poland, Romania, economy in 2017.7 In this aspirational scenario, the Slovakia, and Slovenia – recorded on average a region’s digital economy would grow to represent 114 percent increase in GDP per capita between 16 percent of GDP by 2025. That would mean up to 1996 and 2017, compared to an increase of just 30 percent additional GDP growth, the equivalent 27 percent in the European Union’s “Big 5” econo- of one extra percentage point on GDP growth each mies: France, Germany, Italy, Spain, and the United year over the period. Kingdom.1 The CEE region has become one of the most attractive places to invest in globally.2 This How would digitization secure this ambitious fact has enabled CEE countries to partially close goal for CEE? Primarily by improving the region’s the economic gap to Western Europe, and their productivity through a digital transformation of populations