The Race to Digital: Leaders Pull Ahead, Laggards Fall Behind
Companies that have embraced technology to improve their productivity – and that of their customers – have a significant advantage over those companies that have stuck to their legacy business models and failed to innovate. Portfolio Manager Jeremiah Buckley explains why this differentiation between digital innovators and laggards creates opportunities for investors.
- Technology allows companies across all industries to boost productivity, lower costs, tap into new markets and pursue new customers.
- Companies that have invested successfully in digital technologies have gained market share and are rapidly outpacing those companies that have failed to adapt.
- This differentiation creates opportunities for investors who focus on companies that are using technology to reach and engage with customers.
Jeremiah Buckley: We have been having this discussion about the transition to digital and what it means to large companies for about four years now, and it has had a significant impact on a number of companies. Technology continues to allow companies to improve productivity substantially, which helps lower costs but also enables them to invest more in their business. But it has also opened up new markets, as it has enabled them to pursue new customers. It has also allowed them to specialize and customize products. So it has been extremely important for companies to be investing in technology and digital capabilities, investing in the cloud, to continue to improve their business.
It’s really an exciting time for investors, because the companies that have invested successfully in digital have really separated themselves and differentiated their growth rates versus companies that haven’t invested or haven’t invested successfully.
I think the first easy example is in the technology sector. I think Microsoft is a great example of a company that identified these changes early and created new markets and built advantages in these growing markets. They started Azure in 2010, they started Office 365 in 2011, investing in their capabilities to grow their markets, and they have really been able to accelerate their revenue growth relative to other legacy technology companies as a result of those investments that they have made.
Outside the technology sector, though, there are a number of other examples. So we have companies like McDonalds, which has invested in self-order kiosks, which has made service in their stores more convenient, and it has also allowed customers to easily customize their orders and has led to incremental sales for McDonalds. They have also invested a lot in their digital app, and so they’ve invested in getting to know their customer base and connecting directly with their customers and allowing them to order from their mobile device and pick up in stores.
I think another great example is Disney, who has substantial amounts of content assets, and they have used that to create the Disney Plus app, which will launch this fall, which we think will open up a new business for them, a direct-to-consumer business, where they will leverage their existing assets by the investments that they have made to be able to provide those streaming videos to customers.
I think a couple of different examples would be companies that are using digital to get better leverage out of their existing assets. One would be OUTFRONT Media, which historically had a static billboard business. And now they’re transitioning those static billboards to digital billboards, which allows more rich content for their customers and it allows them to generate more revenue from those existing assets. So that has been a big transition for them. They are using data analytics to give customers better information on the demographics within those market areas that they’re selling advertisement to.
A lot of the information now is real time versus historically companies would have to test initiatives, they would have to spend some marketing investment in this area and wait for months to see what the benefit of that was or they would invest in a new product and they wouldn’t have that connection, direct connection with the consumer to understand whether the demand for that product would be adequate enough to launch that business. And so now, given how connected consumers are with their companies, with a lot of these direct-to-consumer initiatives where we have membership programs or loyalty programs, the real-time feedback with companies, it really helps them with the visibility of their business, and they can make investments as they see appropriate as those rewards from those investments start to pay off.
We’ve learned that we need to focus on analyzing companies and making sure that that they have a presence in these new avenues to reach customers and new ways to engage with customers. And we need to make sure that companies are focusing on productivity not only in their own organization, but also productivity for their customer base as well. And a lot of these digital investments enable that over time.
And so, you know, we’ve seen a lot of companies that have stuck to their old legacy business models, who haven’t made this transition, and then once they realize that they’re losing market share, they’ve had to make this transition and it’s been very expensive, it has reduced their returns on invested capital and their margins. Whereas the companies who have been early on in leading this investment cycle continue to gain market share, and as they gain market share, they are getting even more leverage because of the scale that these investments provide once you get to a certain level, and it has enabled them to continue to gain market share and continue to widen their lead. And so that is why we think it is an exciting time, because there has been so much differentiation between the companies that have invested successfully and those that haven’t.
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