Internet Matters Internet Essays in Digital Transformation Internet Matters Essays in Digital Transformation McKinsey & Company McKinsey & Company is an international management consulting firm that helps leading corporations and organizations make distinctive, lasting, and substantial improvements in their performance. Over the past eight decades, the Firm’s primary objective has remained constant—to serve as an organization’s most trusted external adviser on critical issues facing senior management. With about 8,000 consultants deployed from over 90 offices in more than 50 countries, McKinsey advises companies on strategic, operational, organizational, and technological issues. The Firm has extensive experience in all major industry sectors and primary functional areas, as well as in-depth expertise in high-priority areas for today’s business leaders. 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Internet Matters Essays in Digital Transformation Dr. Jacques Bughin and Dr. James Manyika March 2012 Preface This compendium is organized around a collection of essays by experts from the McKinsey Global Institute, McKinsey’s High Tech Practice, and McKinsey’s Business Technology Office that tackle the theme of digital transformation as part of our continuing major research program on the economic impact of information technology. This volume also explores how Web standards are evolving, how the Internet is infiltrating all enterprises, and how the Internet is creating new playing fields with “Big Data”, “nowcasting”, and innovative models of competitive intelligence. The essays are organized into four sections. The first section—The Internet at scale— drills into how Internet technologies at large (that is, the Web, social technologies, cloud computing, etc.) enhance competitive stance, translating into significant macro-economic performance in both mature and developing economies. The essays also consider how those companies that are morphing their organizations to networked-based structures are reaping the largest benefits of this Internet revolution. The second section—The “Big Data” revolution—looks at how the flurry of data materializing from digitization creates major economic surplus, on top of Internet technologies. This data, provided it is used wisely and with the consent of its “owners”, can be used to build new and real time competitive insights. It has also inspired the creation of new sciences, such as nowcasting. The third section—Impact on TMT—translates all of the above into case studies from the telecom, media, and high-tech industries. The last section—Outside voices—features interviews with Internet leaders that were originally published in The McKinsey Quarterly. We have had the privilege to present this research in various forums and outlets, including the e-G8 Forum, the B20 Business Summit, the World Economic Forum in Davos, the Aspen Institute, Techonomy, the Economist Ideas Economy: Information Conference, the London Conference on Cyberspace, the White House Open Innovation Event, The McKinsey Quarterly, the SSRN network, and the Journal of Direct, Data, and Digital Marketing Practice. Distinguished experts outside McKinsey reviewed the research on which these essays are based and provided invaluable insights and advice. We should particularly thank our advisers Martin N. Baily, Schwartz Chair and senior fellow of the Brookings Institution and former chair of the US President’s Council of Economic Advisers; Hal R. Varian, emeritus professor in the School of Information, the Haas School of Business, and the Department of Economics at the University of California at Berkeley, and chief economist at Google; Christian Saint-Etienne, professor of business economics at the Conservatoire National des Arts et Métiers in Paris and member of the Conseil d’Analyse Economique, reporting to the French Prime Minister; Bill Dutton, a professor of Internet studies at the University of Oxford; and Nahed Azab, an assistant professor at American University in Cairo and an expert in e-government. We are also grateful for the input provided by Andrew McAfee, principal research scientist at the MIT Center for Digital Business. We also appreciate the contribution to our Big Data research made by our academic research collaboration with the Global Information Industry Center (GIIC) at the University of California, San Diego, which aimed to reach a better understanding of data generation in health care and the public sector, as well as in the area of personal location data. We are grateful to Roger E. Bohn, professor of management and director at the GIIC, and James E. Short, the Center’s research director, the principal investigators, as well as to graduate students Coralie Bordes, Kylie Canaday, and John Petrequin. We are also grateful to the experts we feature in the Outside Voices section, who took the time to speak with us about the implications of the digital transformation: Eric Schmidt, executive chairman, Google; W. Brian Arthur, visiting researcher, Intelligence System Lab, Palo Alto Research Center, and external professor, Santa Fe Institute; Erik Brynjolfsson, Schussel Family Professor at the MIT Sloan School of Management and director of the MIT Center for Digital Business; Jeff Hammerbacher, cofounder, Cloudera; Brad Stevens, men’s basketball coach, Butler University; and Robert McDonald, CEO, Procter & Gamble. The full reports on which these essays are based and other related research are available at: http://www.mckinsey.com/Insights/MGI/Research/Technology_and_Innovation http://www.mckinsey.com/Client_Service/High_Tech/Latest_thinking Jacques Bughin and James Manyika Internet Matters Essays in Digital Transformation Contents The Internet at scale 1 The macroeconomic impact of the Internet 2 Online and upcoming: The Internet’s impact on aspiring countries 37 Case example: The impact of Internet technologies—Search 59 The networked enterprise holds steady 111 The big data revolution 119 Big data: The next frontier for innovation, competition, and productivity 120 Are you ready for the era of “big data”? 133 Seizing the potential of “big data” 141 Listening to digital voices 147 Digital user segmentation and privacy concerns 151 “Nowcasting” the Belgian economy 161 Impact of TMT 175 Winning the Web standards battle 176 The wisdom of the Web: How good is your telecom brand? 179 Expecting the unexpected: Ten twists to shape your TMT strategy 190 Outside voices 199 Eric Schmidt on business culture, technology, and social issues 200 The second economy 206 Competing through data: Three experts offer their game plans 212 Inside P&G’s digital revolution 219 Internet Matters Essays in Digital Transformation 1 The Internet at scale Articles in this section The macroeconomic impact of the Internet 2 Online and upcoming: The Internet’s impact on aspiring countries 37 Case example: The impact of Internet technologies—Search 59 The networked enterprise holds steady 111 2 The macroeconomic impact of the Internet This white paper was written for the keynote speech at the first Global e-G8 Summit, France, May 2011. All rights reserved. In two decades the Internet has shifted from a network for