McKinsey Quarterly-The Rise of the Networked Enterprise-Web 2.0

McKinsey on
Business Technology

2011
The rise of the networked enterprise: Web 2.0 finds its payday

McKinsey’s new survey research finds that companies using the Web intensively gain greater market share and higher margins.
1 Robert M. Solow, “We’d better watch out,” New York Times, July 12, 1987.
2 See “How businesses are using Web 2.0: A McKinsey Global Survey,” mckinseyquarterly.com, March 2007; “Building the Web 2.0 Enterprise: McKinsey Global Survey Results,” mckinseyquarterly.com, July 2008; “How companies
are benefiting from Web 2.0: McKinsey Global Survey Results,” mckinseyquarterly
.com, September 2009;
and Michael Chui, Andy Miller, and Roger P. Roberts, “Six ways to make Web 2.0 work,” mckinseyquarterly.com, February 2009.
3
Facebook. Recently, the technologies have been migrating into the enterprise, with the promise of creating new gains to augment those generated
by the earlier wave of IT adoptions.3 The patterns of adoption and diffusion for the social Web’s enterprise applications appear to resemble those of earlier eras: a classic S-curve, in which early adopters learn to use a new technology, and adop-
tion then picks up rapidly as others begin to recognize its value. The implications are far reach-
ing: in many industries, new competitive battle lines may form between companies that use the Web in sophisticated ways and companies that feel uncomfortable with new Web-inspired manage-ment styles or simply can’t execute at a sufficiently high level (see sidebar, “Managing the Web-
based organization”).
The findings
Our annual surveys of Web 2.0 use in the enterprise provided the basis for the findings in this article. The present survey, our fourth, garnered responses from 3,249 executives across a range of regions, industries, and functional areas. Two-thirds of the respondents reported using Web 2.0 in their organizations. As in past surveys, we asked respon-
dents about their patterns of Web 2.0 use, the measurable business benefits they derived from it, and the organizational impact of Web technol-ogies. We also inquired about the market position of the respondents’ companies, whether
their market share had changed, and how their operating margins compared with those of competitors in the same industries.
Web 2.0 technologies are now more
widely used
The share of companies where respondents report using Web 2.0 technologies continues to grow. Our research, for instance, shows significant increases in the percentage of companies using social networking (40 percent) and blogs (38 percent). Furthermore, our surveys show that the number of employees using the dozen Web 2.0 technologies continues to increase.4 Respondents at nearly half of the companies that use social networking
say, for example, that at least 51 percent of their employees use it. And in 2010, nearly two-
thirds of respondents at companies using Web 2.0 say they will increase future investments in
these technologies, compared with just over half
in 2009. The healthy spending plans during
both of these difficult years underscore the value companies expect to gain.
Among respondents at companies using Web 2.0,
a large majority continue to report that they
are receiving measurable business benefits—with nearly nine out of ten reporting at least one.
These benefits ranged from more effective market-ing to faster access to knowledge (Exhibit 1).
Toward the networked enterprise
We analyzed the shared characteristics of groups
of organizations in our survey and clustered
them according to the magnitude of the business benefits respondents reported from the use
of Web 2.0 tools and technologies. Our analysis revealed striking differences.
Among respondents who say their companies are using Web 2.0, most (79 percent) achieved
a mean improvement of 5 percent or less across a range of business benefit metrics (Exhibit 2). Respondents at the companies in this group report the lowest percentages of usage among their employees, customers, and business partners;
say that Web 2.0 is less integrated into their employees’ day-to-day work than respondents at other companies do; and are least likely to
Takeaways
A new class of company is emerging that uses collaborative Web 2.0 tech-nologies to connect
its employees and to forge close networks with cus-tomers, business partners, and suppliers.
These networked enter-prises are becoming more competitive, showing improved performance in three areas: market
share gains, market leader-ship, and higher margins.
Intensive use of social technologies is central. But even more important, companies must adopt man-
agement innovations to realize a truly transforma-tional impact.
At leading companies, information flows are less likely to be hierarchical, allowing employees at lower levels to make decisions.
3 Andrew McAfee, Enterprise 2.0: New Collaborative Tools for Your Organization’s Toughest Challenges, Boston, MA: Harvard Business
School Press, 2009.
4 For more details, see “Business and Web 2.0: An interactive feature,” mckinseyquarterly.com, December 2010.
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McKinsey on Business Technology Number 22, Spring 2011
% of respondents whose companies are achieving specified benefits from their use of Web 2.0 technologies1A majority of respondents say their companies enjoy measurable business benefits from using Web 2.0.MoBT 2010Web 2.0Exhibit 1 of 31 Includes respondents who are using at least 1 Web 2.0 technology.Internal purposes, n = 1,598Customer-related purposes, n = 1,708Median improvement, %Working with external partners/suppliers, n = 1,088Increasing speed of access to knowledgeIncreasing speed of access to knowledge77Reducing communication costsReducing communication costs60Increasing employee satisfaction41Reducing time to market for products/services29Increasing number of successful innovations for new products or services28Decreasing travel costs44Reducing operational costs40Increasing revenue18Increasing speed of access to internal experts52301020202020101530Increasing effective-ness of marketing63AwarenessConsiderationConversionLoyaltyIncreasing customer satisfaction50Reducing travel costs2924Increasing number of successful innovations for new products/servicesReducing support costs35Reducing time to market for products/services2624Increasing revenueIncreasing revenueReducing marketing costs45201510101820151020101557Increasing speed of access to external experts53Increasing satisfaction of suppliers, partners, external experts38Reducing time to market for products/ services22Reducing supply chain costsReducing product- development costs22Reducing travel costs4028Increasing number of successful innovations for new products/services20164520152010152520151120
Exhibit 1
A majority of respondents say their companies enjoy measurable business benefits from using Web 2.0.
Respondents at half of the internally networked
organizations reported that Web 2.0 is integrated tightly
into their work flows.
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The rise of the networked enterprise: Web 2.0 finds its payday
report high levels of collaboration or information sharing across the organization. We call these companies, still learning the ropes of Web 2.0,
the “developing” group.
Three types of organizations, however, seem to have learned how to realize a much higher level of business benefits from their use of Web 2.0.
Internally networked organizations. Some companies are achieving benefits from using Web 2.0 primarily within their own corporate walls. The survey results indicate that companies in this group—13 percent of those using Web 2.0—derive substantial benefits from deploying these technologies in employee interactions. Respon-dents at such organizations report a higher percentage of employees using Web 2.0 than respondents at developing organizations do. Respondents at half of the internally networked organizations reported that Web 2.0 is inte-
grated tightly into their work flows, for example, compared with only 21 percent of respondents
at developing organizations. Web 2.0 also seems
to promote significantly more flexible processes
at internally networked organizations: respondents say that information is shared more readily and less hierarchically, collaboration across organiza-tional silos is more common, and tasks are
more often tackled in a project-based fashion.
Externally networked organizations. Other companies (5 percent of those deploying Web 2.0) achieved substantial benefits from interactions
that spread beyond corporate borders by using Web 2.0 technologies to interact with cus-
tomers and business partners, according to survey results. Executives at these organizations
reported larger percentages of their employees, customers, and partners using Web 2.0 than respondents at internally networked organizations did. But the responses suggest that the internal organizational processes of externally networked organizations are less fluid than those of
internally networked ones.
Fully networked enterprises. Finally, some companies use Web 2.0 in revolutionary ways. This elite group of organizations—3 percent of those
in our survey—derives very high levels of benefits from Web 2.0’s widespread use, involving employees, customers, and business partners, according to the survey. Respondents at these organizations reported higher levels of employee benefits than internally networked organiza-
tions did, as well as higher levels of customer and partner benefits than did externally networked organizations. In applying Web 2.0 technologies, fully networked enterprises seem to have
moved much further along the learning curve than other organizations have. The integration of
Web 2.0 into day-to-day activities is high, executives say, and they report that these technologies are promoting higher levels of collaboration by helping to break down organizational barriers that impede information flows.
Capturing competitive advantage
Executives at the more highly networked companies in our survey reported that they captured
a broad set of benefits from their Web investments.
A key question remained, however: do these benefits translate into fundamental performance improvements, measured by self-reported market share gains and higher profits?
We performed a series of statistical analyses to better understand the relationship between
our categories of networked organizations and three core self-reported performance metrics: market share gains, operating profits, and market leadership. Exhibit 3 shows the results.
6 McKinsey on Business Technology Number 22, Spring 2011
Market share gains reported by respondents were significantly correlated with fully networked
and externally networked organizations. This, we believe, is statistically significant evidence that technology-enabled collaboration with external stakeholders helps organizations gain market share from the competition. They do this, in our experience, by forging closer marketing relationships with customers and by involving them in customer support and product-development efforts. Respondents at companies
Managing the Web-based organization
Respondents report that a variety of organizational structures
and units manage Web 2.0. This year’s results show that
the IT department is most likely to oversee internal Web initiatives
(61 percent of respondents). For customer-facing initiatives,
74 percent of respondents say that oversight falls to the marketing department. For Web 2.0 initiatives involving external suppliers
and partners, roughly equal numbers of respondents cite the IT, marketing, and business-development functions. Financing
comes from a variety of places, including the IT function, central corporate sources, and discretionary funds at the business
unit level.
The social nature of most Web technologies, of course, opens companies to greater interaction with the outside world. To manage this change, a slim majority of respondents (51 percent) say
their companies have adopted formal social-media policies; com-
panies with higher levels of Web 2.0 adoption are likelier to have them. In most cases, only a few employees are authorized to speak on behalf of the company.that used Web 2.0 to collaborate across organizational silos and to share information more broadly also reported improved market shares.
The attainment of higher operating margins (again, self-reported) than competitors correlated
with a different set of factors: the ability to make decisions lower in the corporate hierarchy and
a willingness to allow the formation of working teams comprising both in-house employees
and individuals outside the organization. These findings suggest that Web technologies can underwrite a more agile organization where front-
line staff members make local decisions and companies are better at leveraging outside resources to raise productivity and to create more valuable products and services. The result, the survey suggests, is higher profits.
Market leadership, which we ascribed to those organizations where respondents reported a top ranking in industry market share, correlated positively with internally networked organizations that have high levels of organizational collab-oration. Self-reported market leadership
also, however, correlated negatively with externally networked organizations. We believe it is unlikely that better interactions with external stakeholders lead to a decline in market position. A more
likely explanation for the data is that market leaders use Web 2.0 to strengthen internal collaboration, seeking to enhance the organiza-tional resiliency required to maintain their leadership positions. Market challengers, by contrast, may be more focused on external
uses of Web 2.0 to win customers from
industry leaders.
Overall, we found that respondents at 27 percent
of the companies in our survey reported having both market share gains against their competitors
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The rise of the networked enterprise: Web 2.0 finds its payday
Different types of networked organizations achieve different benefits.MoBT 2010Web 2.0Exhibit 2 of 31 Specifically, respondents who reported Web 2.0 being very or extremely integrated into employees’ day-to-day work activities.2Specifically, respondents who strongly agreed that these characteristics applied to their companies.Less networked, n = 1,711Organization type Internally networked, n = 287Externally networked, n = 100Fully networked, n = 76 Benefits, mean % improvementDegree of usageIntegration, % of respondents1Organizational impact, % of respondents2Employee benefit metricsCustomer benefit metricsPartner benefit metrics% of employees using Web 2.0% of customers using Web 2.0% of partners using Web 2.0Web 2.0 integrated into day-to-day workIncreased information sharingLess hierarchical information flowsCollaboration across organizational silosTasks tackled in project-based wayDecisions made lower in corporate hierarchyWork performed by mix of internal and external people854312121334217951051985049524253402414312110919595343475925151914151731246270554766493925412927
Exhibit 2
Different types of networked organizations achieve different benefits.
and higher profit margins. That kind of perfor-mance clearly makes these companies profit consolidators in their industries, with earnings growing faster than the rest. Highly net-
worked enterprises were 50 percent more likely
to fall in this high-performance group than
other organizations were. This finding suggests that the fully networked enterprise could
become the benchmark for more vigorous compe-tition in many industries.
Moreover, the benefits from the use of collaborative technologies at fully networked organizations appear to be multiplicative in nature: these enter-
prises seem to be “learning organizations,”
in which lessons from interacting with one set
8 McKinsey on Business Technology Number 22, Spring 2011
• Integrate the use of Web 2.0 into employees’ day-to-day work activities. This practice is the key success factor in all of our analyses, as
well as other research we have done. What’s in the work flow is what gets used by employees and what leads to benefits.
• Continue to drive adoption and usage. Benefits appear to be limited without a base level of adoption and usage. Respondents who reported the lowest levels of both also reported the lowest levels of benefits.
• Break down the barriers to organizational change. Fully networked organizations appear to have more fluid information flows, deploy
of stakeholders in turn improve the ability
to realize value in interactions with others. If this hypothesis is correct, competitive advantage at these companies will accelerate as network effects kick in, network connections become richer,
and learning cycles speed up.
Going forward
The imperative for business leaders is clear: falling behind in creating internal and external net-
works could be a critical mistake. Executives need to push their organizations toward becoming
fully networked enterprises. Our research suggests some specific steps:
Statistical analyses offer insight into the relationship between use of Web 2.0 tools and three core self-reported corporate- performance metrics.MoBT 2010Web 2.0Exhibit 3 of 3Web 2.0–related factors significantly correlated with corporate-performance metricsCorrelation coefficient(higher = greater correlation)P-value (less than 0.05 = statistically significant)1. Market share gains2. Operating margins compared with those of competitors3. Market leadership— ie, first in industry market shareExternally networked organizationFully networked organizationOrganizational collaboration: cooperation across organizational silos, more project-based handling of tasks, less hierarchical information flows, and increased information sharingExternally networked organizationInternally networked organizationOrganizational collaboration (see explanation above)Distributed decision making and work: decision-making power situated lower in corporate hierarchy, more working teams composed of employees and people outside organization .427.344.182–.362.075.077.065.001.019.011.038.008.029.026
Exhibit 3
Statistical analyses offer insight into the relationship between use of Web 2.0 tools and three core self-reported corporate-performance metrics.
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The rise of the networked enterprise: Web 2.0 finds its payday
The authors would like to acknowledge the important contributions of Angela Hung Byers and Martin Rouse.
Jacques Bughin (Jacques_Bughin@McKinsey.com) is a director in McKinsey’s Brussels office; Michael Chui (Michael_Chui@McKinsey.com), based in the San Francisco office, is a senior fellow of the McKinsey Global Institute. Copyright © 2011 McKinsey & Company. All rights reserved.
talent more flexibly to deal with problems, and allow employees lower in the corporate hierarchy to make decisions. Organizational collaboration is correlated with self-
reported market share gains; distributed decision making and work, with increased self-reported profitability.
• Apply Web 2.0 technologies to interactions with customers, business partners, and employees. External interactions are correlated with self-reported market share gains. So are internal organizational collaboration and flexibility,
and the benefits appear to be multiplicative. Fully networked organizations can achieve the
highest levels of self-reported benefits in all types of interactions.
Executive perspectives
We asked two executives about their views on the networked enterprise
and what comes next.
Jim Smith, Wells Fargo
Jim Smith is executive vice president and managing head of Internet Services Group at Wells Fargo, which began its online strategy 16 years ago. Today, the bank is moving forward using many elements of the networked enterprise—launching banking via mobile devices and deploying social technologies such as Twitter and blogs to forge broader relationships with its customers. Better data on consumers’ needs are helping the bank create higher-value services, and over time, Smith says, the goal is to involve a greater numbers of bankers in Web interactions. Visit “The rise of the networked enterprise: Web 2.0 finds its payday,” on mckinseyquarterly.com, to listen to a podcast in which Smith discusses Wells Fargo’s Web strategy and the cultural changes it has wrought.
Robert Stephens, Best Buy
Robert Stephens is chief technology officer of the electronics retailer Best Buy and founder of Geek Squad, the company’s technical-services business. Stephens envisions social and mobile technologies as key tools to helping Best Buy become a vast knowledge network where customers would have access to employees worldwide, both to inform themselves about products and to find answers to problems. Creating a networked enterprise, Stephens believes, means that all employees—from the executive suite down to the store level—need to be committed users of emerging technologies. Above all, those who interact directly with customers need to be curious about what consumers really want. Visit “The rise of the networked enterprise: Web 2.0 finds its payday,” on mckinseyquarterly.com, to listen to a podcast in which Stephens discusses Best Buy’s initiatives and how the networked enterprise creates competitive advantage.