THE MAJOR DISRUPTIVE FORCE OF THE DIGITAL TRANSFORMATION AND THE DIGITAL ECONOMY
Today, even the pace of innovation seems to be on its edge, with technology and society evolving at a faster pace than businesses can adjust to. This is challenging any leadership to ‘adapt or die.’
Smart phones, apps, digital media, photos and maps, social web, video games, the cloud, drones and robotics, accurate weather forecasts: these are just a few examples of life-changing things made possible by the exponential growth in the power of computer chips over the past five decades – Moore’s Law, named after Intel co-founder Gordon Moore.
In 1965, Gordon Moore observed that transistors were shrinking so fast that every year, twice as many could fit onto a chip without increasing costs, and in 1975, adjusted the pace to a doubling every two years. Although it was originally not expected to remain valid till today, no one really knows when the theory will no longer apply. This constant doubling for nearly all digital electronics is strongly linked to Moore's law: quality-adjusted microprocessor prices, memory capacity, sensors and even the number and size of pixels in digital cameras, the speed of data transmission and its result into an avalanche of data generation. Eron Kelly from Microsoft predicted: "In the next five years, we’ll generate more data as humankind than we generated in the previous 5,000 years."
Referring to part 1 in this series, in which I spoke about the progress and results of constant doubling (where 30 exponential footsteps take you not just 30 meters but 26 trips around the world), we are – according to MIT’s professor Andrew McAfee, using 1958 as starting point where information technology was first noted by the U.S. BEA – at exponential footstep number 39. That would take us 13,750 times around the world – just to illustrate the staggering and exponential speed of development of this major disruptive force. We have certainly arrived at the digital age and its digital economy, with a vast and exponentially growing number of use-cases.
What we can learn from anthropologist Ian Morris’s research is that nothing has bent the curve of human history more than the first industrial revolution. For thousands of years, humanity experienced an incremental upward trajectory. It was steam power in the 18th century that started it all, followed by other technological innovations including mechanical engineering, chemistry, metallurgy, electricity and the combustion engine. Within 200 years, it had bent the curve of human history — of population and social development — nearly vertically. According to Morris, the ability to generate massive amounts of mechanical power was so important that it “made mockery of all the drama of the world’s earlier history.”
Prof. McAfee’s lesson is clear: computers and other digital advances are doing for mental power (the ability to use our brains to understand and shape our environments) what the steam engine and its descendants did for muscle power.
2015 was the year where digital business found its way into the enterprise. The digital transformation is disrupting industries, economies, jobs and lives faster than most people realise. This is not just about digital start-ups, it’s everyone in every industry! Global digital commerce now amounts to over a trillion euro annually, and in the private sector, nearly 25 per cent of revenue comes from digital – in five years it should be 40-45 per cent! As most analogue revenues flatten or even decline in many industries, businesses are shifting to a new source of growth: digital revenue from digital business, including the digitalisation of things.
Digital business is the creation of new business designs by blurring the digital and physical worlds, making it possible for a variety of industries to participate seamlessly within the same value stream process composed of people, businesses and things.
There is another speciality, a unique economic property of digital information: such information is non-rival, and it has close to zero marginal cost of reproduction. That means that digital information is not ‘used up’ when it gets used, and is often extremely cheap to create another copy of a digitised resource (such as ebooks and music), while only one person or thing can consume rival goods at a time.
Digital business will break down traditional barriers between industry segments, creating completely new value chains and new business opportunities that may not be filled by incumbent players. It will also challenge existing industry boundaries and the dominance of leading players, causing them to rethink their business. As the famous Canadian author and influential management thinker Don Tapscott states, “Digital Business is a new paradigm. Paradigm shifts involve dislocation, conflict, confusion and uncertainty. New paradigms are nearly always received with coolness, even mockery or hostility. Those with vested interests fight the change. The shift demands such a different view of things that established leaders are often last to be won over, if at all.”
To compete in a digital world, enterprises must digitalise their models, in which products, services, markets, channels and processes are transformed through digital technologies. Gartner Inc., the world's leading information technology research and advisory company, believes, “digital business is the essence of digitalisation as it disrupts existing business models — even those that were born of the Internet and e-business eras. Why? As the presence of the IoT (Internet of Things) grows, the things’ ability to generate new types of real-time information and to actively participate in an industry’s value stream will also grow.”
Practically everything (device/object) that can be instrumented (digitised/connected) will be. Every piece of equipment, anything of any value will have embedded sensors and be connected to the Internet. The Internet of Things (IoT) will happen without human users!
Cisco’s executive chairman and former CEO John Chambers said that 500 billion devices will be connected to the Internet by 2025. He sees a global $19-trillion ‘Internet of Everything (IoE)’ opportunity (that's the entire US economy plus some) – the networked connection of people, process, data and things — which is opening up new opportunities in both public and private sectors. Chambers is picking the next 10 years to be a period of ‘explosive growth’ not seen since the '90s glory days of the Internet. “This new digital age will have five to ten times the impact of the Internet today,” he says.
In 2016, investments in IoT hardware will exceed 2.3 million euros per minute. Within five years, one million new devices will come online every hour, leading to approximately 50 billion connected things in 2020.
Samsung’s Co-CEO BK Yoon made a strong statement: “the IoT is a huge game changer. The most important topic for our industry right now, something that will revolutionise our lives and unlock infinite possibilities. By 2020 every single piece of Samsung hardware will be an IoT device, whether it is an air purifier or an oven.”
And it isn’t just their competitors that will follow suit. The manufacturing industry is where the future of Industry 4.0 facilitates the vision and execution of a Smart Factory, where modular, structured, cyber-physical systems will monitor IoT physical processes, creating a virtual copy of the physical world and making decentralised decisions.
3D-printing as new additive manufacturing and Industry 4.0 will widely change the way production and logistics are carried out. 3D-printers which create high-value innovation opportunities using advanced materials will soon be able to simultaneously print multiple materials such as plastics, calcium phosphate, graphene, conductive ink, glass, advance nickel alloys, electronics, food, bio-inks, pharmaceuticals, carbon fibre, kevlar and fiberglass. This will offer you a personal factory at your office or home, and a wide new era of inventions.
But we should also consider – although this might sound like science fiction to many – that as ‘things’ become more intelligent, they will become independent and autonomous businesses that buy and sell as people — with rights and responsibilities — just as corporate entities are today. Things that can receive information, negotiate, buy and request service represent new customer opportunities for all industries. When things become ‘people’ and customers, they’d have the greatest impact on supply chain, distribution networks and existing sales models.
That’s a lot of interconnections – creating billions of new relationships not driven solely by data but by algorithms. The Algorithmic Business is already here: interconnections, relationships and algorithms are defining the future of business. The Internet of Things will be the catalyst for a new age of algorithms. The arising algorithmic economy will include businesses that are key for creating highly beneficial data products.
But it’s vital to understand that the real value is not in big data, as Peter Sondergaard, Senior VP and head of research at Gartner Inc. puts it: “Data is inherently dumb, it doesn't actually do anything unless you know how to use it, and how to act with it. The real value is not in big data but in algorithms, as they define action.”
Dynamic algorithms are at the core of new customer interactions. In the future, algorithms – all encoded in software – will define the way most of our world will work. Using a set of rules to follow in making ‘computations’ is how today's leading websites and services work their magic. Agents and virtual personal assistants are becoming real: Apple’s Siri, Microsoft’s Cortana, Amazon’s Alexa and Google’s new virtual assistant tool Google Assistant are just the early prototypes. So, the post-app era is coming!
Agents enabled by algorithms define the post-app era. A market for algorithms will soon emerge. By 2020, smart agents will facilitate 40 per cent of interactions, so many users will even have forgotten about apps. Instead, they will rely on virtual assistants – algorithms in the cloud – that they trust.
The furious pace of technological adoption and innovation is shortening the life cycle of companies and forcing executives to make decisions and commit resources much more quickly. Leaders in business, politics and society should adjust to this new reality.
But there is another interesting ‘thing’ one should have on their radar in this infinite array of new technologies and innovations: Blockchains. It’s the outstanding technology most likely to change the next decade of business. Today, Blockchain is the technology underpinning the cryptocurrency Bitcoin.
The Blockchain technology is itself complex, and another example of the unexpected fruits of cryptography, but based on a simple idea. At its most basic, Blockchain is a gigantic, worldwide distributed ledger or database running on millions of devices and open to anyone, where not just information but – and that is its new nature – anything of value, like money, titles, deeds, music, art, scientific discoveries, intellectual property, and even votes, can be moved and stored privately and securely. That means Blockchain is a trust machine, a trust protocol – the second wave of the Internet!
Blockchain is at its core powerful for one reason: it solves the problem of proving that when someone sends you a digital ‘something’, they didn’t keep a copy for themselves, or send it to 20 other people. Their respective computers regularly agree on how to update the database using a consensus mechanism, after which the modifications they have settled on are rendered unchangeable with the help of complex cryptography. Once information has been immortalised in this way, it can be used as proof of ownership. Maintaining this type of ledger of goods and services is a remarkably important aspect of global economics.
Blockchain could for instance even help to cut electricity bills, research suggests. A Blockchain-based smart plug that can adjust power consumption minute-by-minute has been created by technologists at Accenture. In the future, ownerless companies could be based and run on the Blockchain.
On the Blockchain, trust is established not by powerful intermediaries like banks, corporations or governments, but through mass collaboration and a clever code. Blockchains ensure integrity and trust between strangers. The Blockchain can also serve as the underpinning for ‘smart contracts’ – algorithms that, for example, automatically execute the promises embedded in a bond.
As Harvard Business Review quotes, “it’s the first native digital medium for value, just as the Internet was the first native digital medium for information. And this has big implications for business and the corporation.”
It is easy to see why bankers get excited about distributed ledgers. Instead of having to keep track of their assets in separate databases, as financial firms do now, they can share one. Trades can be settled almost instantly, without the need for lots of intermediaries. As a result, less capital is tied up during a transaction, the risk will be reduced immensely and the cost of transactions will become negligible. More than 40 leading banks already have a stake in R3 CEV, a start-up meant to come up with shared standards. Similarly, firms including IBM and Digital Asset Holdings have started the Open Ledger Project to develop open-source Blockchain software.
Like the Internet democratised the exchange of information, transforming entire industries in the process, the Blockchain could democratise the exchange of value – a concept with staggering possibilities.
However, one can keep writing about this major disruptive force, going into the implications of autonomous cars, digital healthcare, and the next phase of mobility whereby most of us will use a mesh of mobile devices and wearables on our bodies and so on. So I’d like to refer to one last – but important – topic, from an unusual or perhaps unpopular perspective: robots, drones, smart machines and artificial intelligence.
As long as these technologies are supporting us in a fruitful way, we should be fine. But as we enter into a ‘conflict of interest’ zone between humans and machines, we should think twice, decide and regulate it in a wise way. We need to get this right, it’s unlikely that we’ll get a second chance without massive collateral damage – if any at all – if we get it wrong.
A worrying development is that by 2025, computers could do the work of 140 million knowledge workers, and robots could do the work of another 75 million people. There will still be high demand for skilled positions and many totally new professions will be created, yet we’ll eradicate much more jobs than create new ones.
And the aim can’t be to either expect or everybody to acquire an IQ of over 120, to make up nations of poets, thinkers and Einsteins, or for everyone to be a manager or top-qualified scientist, or to create a ‘useless class of humans’ who are paid a basic income and are allowed to ‘enjoy’ fun and leisure. This would be dead wrong and off track. We all have countless talents, and not everyone will, should or could become an academic. But to have a decent and rewarding job, the freedom and opportunity to enjoy an interesting career and be respected regardless of talent or position is key for us all, for our personal development and a peaceful coexistence – now and for many generations and centuries to come!
In the next parts of this series, Reinhold Karner will tackle the other three disruptive forces, and conclusions and recommendations will follow.