Press Release by EY – As the world goes digital, developing innovation in-house is no longer enough, according to a new study from EY. Instead, with constraints around time and capital, non-tech firms are turning to mergers and acquisitions (M&A), joint ventures and alliances to acquire the innovation they need.

The first ever EY Digital Deal Economy study into the views of 600 corporate executives from large companies globally, found that 90% of them face increased competition from businesses that have already embraced digital technology.

Responding to heightened competition and a disruptive environment, more than two-thirds (67%) of global executives now plan to use M&A to upgrade their digital capabilities.

Steve Krouskos, EY Global Vice Chair – Transaction Advisory Services, says:

“Executives recognize that digital transformation is impacting all aspects of their business – from the front end to the back office. The critical question is: can companies build the capabilities required to succeed in the brave new world – or do they need to buy them in?

“Technological advances continue to drive sector convergence and are speeding up the pace of change in consumer behaviors. This is compelling companies to adopt forward-looking, deal-centric strategies to ensure they future-proof themselves for a digital world.”

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Joongshik Wang, Partner, Corporate Finance at Ernst & Young Corporate Finance Pte Ltd, observes that companies in Southeast Asia are also moving toward digitalization. “However, the speed of digital transformation of companies in this region appears to be much slower than that of global players, as they are still exploring the returns of investment for digital before taking the plunge. For instance, we see brick-and-mortar companies in the consumer and retail sector frequently talking about e-commerce opportunities, but very few of them take real action to transform or buy out capabilities as they are still concerned about cannibalization,” he adds.

Strategic capital allocation is at the heart of digital strategies

Although the majority (85%) of survey respondents have an established digital-transformation function in place, more than half (59%) of companies say they do not possess the in-house capabilities required to keep pace with the speed at which technology is evolving. In addition, only 55% of businesses have sophisticated processes in place to quantify the capital needed to pursue digital transformation.

Tony Qui, EY Chief Digital Officer – Transaction Advisory Services, says:

“Digital is not an IT strategy or one-off investment. The scale of transformation needed requires a long-term digital capital strategy. The key challenge for many companies will be a lack of sufficient capital to meet their digital ambitions. Businesses need to take a holistic view and incorporate their digital strategy into their “capital agenda” – an enterprise’s strategy for capital allocation – and confirm that leadership is committed in the long term to creating a digital mindset and a culture of agile innovation.”

Dealing in digital: the challenges

While 87% of survey respondents say that they are explicitly considering digital transformation needs in their capital allocation planning for the next two or three years, only 55% have a sophisticated method in place to quantify the capital needed to pursue digital transformation.  

A significant proportion of companies are using analytics and seeking advice to improve effective inorganic growth. Seventy-six percent conduct front-end strategic pre-deal analysis of industry and market trends. More than three quarters (79%) have employed analytics and fully leveraged big data to achieve digital transformation objectives, while a similar number (77%) of respondents have turned to third party advisors for pre-deal analysis.

“Innovative technology is often a key driver in building digital capabilities, so it is important to understand the value of intellectual property (IP) you are buying,” Qui says. Technology can also be used to support and accelerate deal success. “The smart use of digitally enabled analytics will help companies make the right investment choices, whether it is acquisitions, alliances or joint ventures, alongside organic routes.”

Where does the digital buck stop?

Effective digital transformation — to accelerate growth and create new opportunities — requires a business model supported by an adaptable and agile capital and digital strategy, the study finds. Three-quarters (76%) of companies surveyed said strategic vision mapped to digital needs is the most important element of digital transformation. More than half of respondents (59%) said digital is embedded in the major decisions they make.

However, 44% of respondents say they do not have clarity when it comes to accountability around digital transformation, which can negatively impact funding and create leadership-related issues.

Qui says: “Today’s fast-moving and increasingly disruptive technologies are adding to the pressure companies face, resulting in competitive advantage for those that are quickest to adapt, blurring the lines between sectors and allowing new entrants to introduce collaborative business models that break all the rules. Aligning the capital strategy to support the digital strategy is fundamental to success, as is accountability at the board level around decisions to future-proof your business model.”