Why digital transformation is now on the CEO’s shoulders
Big
data, the Internet of Things, and artificial intelligence hold such disruptive
power that they have inverted the dynamics of technology leadership.
When science and technology meet social and economic systems, you tend to see
something akin to what the late Stephen Jay Gould called “punctuated
equilibrium” in his description of evolutionary biology. Something that has
been stable for a long period is suddenly disrupted radically—and then settles
into a new equilibrium. Analogues across social
and economic history include the discovery of fire, the domestication of dogs,
the emergence of agricultural techniques, and, in more recent times, the
Gutenberg printing press, the Jacquard loom, urban electrification, the
automobile, the microprocessor, and the Internet. Each of these innovations
collided with a society that had been in a period of relative stasis—followed
by massive disruption.
Punctuated equilibrium
is useful as a framework for thinking about disruption in today’s economy. US
auto technology has been relatively static since the passage of the Federal
interstate-highway act, in 1956. Now the synchronous arrival of Tesla, Uber,
and autonomous vehicles is creating chaos. When it’s over, a new equilibrium
will emerge. Landline operators were massively disrupted by cell phones, which
in turn were upended by the introduction of the iPhone, in 2007—which, in the
following decade, has settled into a new stasis, with handheld computing
changing the very nature of interpersonal communication.
The evidence suggests
that we are seeing a mass disruption in the corporate world like Gould’s
recurring episodes of mass species extinction. Since 2000, over 50 percent of
Fortune 500 companies have been acquired, merged, or declared bankruptcy, with
no end in sight. In their wake, we are seeing a mass “speciation” of innovative
corporate entities with largely new DNA, such as Amazon, Box, Facebook, Square,
Twilio, Uber, WeWork, and Zappos.
Mass-extinction events
don’t just happen for no reason. In the current extinction event, the causal
factor is digital transformation.
Awash in information
Digital transformation
is everywhere on the agendas of corporate boards and has risen to the top of
CEOs’ strategic plans. Before the ubiquity of the personal computer or the
Internet, the late Harvard sociologist Daniel Bell predicted the advent of the
Information Age in his seminal work The Coming of Post-Industrial
Society. The resulting
structural change in the global economy, he wrote, would be on the order of the
Industrial Revolution. In the subsequent four decades, the dynamics of Moore’s
law and the associated technological advances of minicomputers, relational
databases, computers, the Internet, and the smartphone have created a thriving
$2 trillion information-technology industry—much as Bell foretold.
In the 21st century,
Bell’s dynamic is accelerating, with the introduction of new disruptive
technologies, including big data, artificial intelligence (AI), elastic cloud
computing (the cloud), and the Internet of Things (IoT). The smart grid is a compelling
example of these forces at work. Today’s electric-power grid—composed of
billions of electric meters, transformers, capacitors, phasor measurement
units, and power lines—is perhaps the largest and most complex machine ever
developed. An estimated $2
trillion is being spent this decade to “sensor” that value chain by upgrading
or replacing the multitude of devices in the grid infrastructure so that all of
them are remotely machine addressable.
When a power grid is
fully connected, utilities can aggregate, evaluate, and correlate the
interactions and relationships of vast quantities of data from all manner of
devices—plus weather, load, and generation-capacity information—in near real
time. They can then apply AI machine-learning algorithms to those data to
optimize the operation of the grid, reduce the cost of operation, enhance
resiliency, increase reliability, harden cybersecurity, enable a bidirectional
power flow, and reduce greenhouse-gas emissions. The power of IoT,
cloud computing, and AI spells the digital transformation of
the utility industry.
A virtuous cycle is at
work here. The network effects of interconnected and sensored customers, local
power production, and storage (all ever cheaper) make more data available for
analysis, rendering the deep-learning algorithms of AI more accurate and making
for an increasingly efficient smart grid. Meanwhile, as big data sets become
staggeringly large, they change the nature of business decisions. Historically,
computation was performed on data samples, statistical methods were employed to
draw inferences from those samples, and the inferences were in turn used to
inform business decisions. Big data means we perform calculations on all the
data; there is no sampling error. This enables AI—a previously unattainable
class of computation that uses machine and deep learning to develop
self-learning algorithms—to perform precise predictive and prescriptive analytics.
The benefits are
breathtaking. All value chains will be disrupted: defense, education, financial services, government
services, healthcare, manufacturing, oil and gas, retail, telecommunications,
and more. To give some flavor to this:
·
Healthcare. Soon all medical devices will be
sensored, as will patients. Healthcare records and genome sequences will be digitized. Sensors will remotely monitor
pulse, blood chemistry, hormone levels, blood pressure, temperature, and brain
waves. With AI, disease onset can be accurately predicted and prevented.
AI-augmented best medical practices will be more uniformly applied.
·
Oil
and gas. Operators will use predictive maintenance to monitor production assets
and predict and prevent device failures, from submersible oil pumps to offshore
oil rigs. The result will be a lower cost of production and a lower
environmental impact.
·
Manufacturing. Companies are employing
IoT-enabled inventory optimization to lower inventory carrying costs, predictive
maintenance to lower the cost of production and increase product reliability,
and supply-network risk mitigation to assure timely product delivery and
manufacturing efficiency.
The new engine of change: CEOs
Perhaps the most unique
aspect of this technology trend is that digital transformation is being driven from the top, personally mandated
by the CEO. This is something new.
In the past 70 years of
computing, the world advanced from the vacuum tube to the transistor to the
semiconductor, from mainframe computing to minicomputing to personal computing
to the Internet. Software evolved from bespoke custom programming to
on-premises, packaged enterprise application software and then to software as a
service (SaaS)—cloud-resident solutions. Among the fruits: increased
productivity and profitability, a lower cost of operation, and economic growth.
I witnessed many of
these tech-adoption cycles over the past 30 years. With the promise of
performance improvements and productivity increases, such innovations were
introduced to industry through the IT organization. Over months or years, and
after multiple trials and evaluations, each gained the attention of the chief
information officer, who was responsible for technology adoption. The CEO was
periodically briefed on the cost and result.
With the 21st-century
digital transformation, the adoption cycle has inverted. What I’m seeing now is
that, almost invariably, global corporate transformations are initiated and
propelled by the CEO. Visionary CEOs, individually, are the engines of massive
change that is unprecedented in the history of information technology—possibly
unprecedented in the history of commerce.
Something fundamentally
important is happening, and it’s something that corporate leaders find highly
motivating—and urgent. Michael Porter of the Harvard Business School speculates
that the new world of smart, connected devices represents a sea change in the
fundamental dynamics of competition.5Porter suggests that
the Internet of Things isn’t simply a matter of competitive advantage; it is
existential. More darkly, John Chambers, of Cisco Systems, predicts that 40
percent of today’s businesses will fail in the next ten years; 70 percent will attempt to transform themselves digitally, but only 30 percent will succeed.
“If I am not making you sweat,” he told an executive audience, “I should be.”
The competitive effects are playing out in the marketplace. In autos, think of Tesla as
IoT on wheels. Tesla’s market capitalization is roughly equivalent to that of
General Motors even though its revenue is less than one-twentieth of GM’s.
Tesla collects terabytes of data from its vehicles and uses machine learning to
improve predictive maintenance, self-driving capabilities, and the driving
experience of its cars significantly and continuously. The more miles driven,
the more data Tesla collects, and the more it grows as a competitive force. A
consumer can configure and purchase a customized new Tesla from the company’s
website in eight minutes. In retail, Amazon is digitally transforming the
industry with data, AI, and network effects. Its share of the US e-commerce
market is 34 percent and could increase to 50 percent by 2021.
In response, some
farsighted CEOs are revamping their playbooks. Isabelle Kocher, CEO of Engie,
an integrated energy company based in Paris, has assembled a C-suite team to
step up the transformation of the company. Together they have updated its
strategy with new business targets that include specific expectations for
digital value creation. Other CEOs we work with are thinking through scenarios
to anticipate future disruption, asking questions like “what are our customers
really buying, do they really need us, or could a digital competitor provide a
better insight or product at a lower cost?” They’re using these “what if” cases
to break out of cloistered mind-sets and reallocate investments for future
digital efforts. One healthcare CEO used scenarios to craft a road map for
hundreds of next-generation application improvements across its businesses.
Where new talent is required to bolster C-level efforts, CEOs are recruiting
for roles such as chief digital officer with the authority and budget to make
things happen.
Other CEOs are seeking
inspiration by organizing visits to the headwaters of disruption, at companies
like Apple, Tesla, and Uber. They’re retooling executive perspectives with boot camps on
digital innovation. They’re also reaching across company and industry borders
to share and promulgate best practices. In Germany, leading industry CEOs
formed a working group, Industrie 4.0, to advise the federal government on
industrial policy needed for the “fourth industrial revolution,” grounded in
IoT and AI. Hundreds of leading companies have formed the Industrial Internet
Consortium to accelerate the adoption of “cyberphysical systems” in energy,
healthcare, manufacturing, smart cities, and transportation.
Digital transformation
is about sweeping change. It changes everything about how products are
designed, manufactured, sold, delivered, and serviced—and it forces CEOs to
rethink how companies execute, with new business processes, management
practices, and information systems, as well as everything about the nature of
customer relationships. I’m seeing leaders who get this. They’re all over it:
they want to launch five transformation initiatives right now; they’re talking
to me and every digital leader they know about where the technology threats are
coming from; and they’re hiring the best people to advise them. Yet I’m shocked
by—even fearful for—the many CEOs I know who seem to be asleep at the switch.
They just don’t see the massive disruption headed their way from digital
threats, seen or unseen, and they don’t seem to understand it will happen very
quickly.
So when I see CEOs who
may be experimenting here and there with AI or the cloud, I tell them that’s
not enough. It’s not about shiny objects. Tinkering is insufficient. My advice
is that they should be talking about this all the time, with their boards, in
the C-suite—and mobilizing the entire company. The threat is existential. For
boards, if this isn’t on your agenda, then you’ve got the wrong agenda. If your
CEO isn’t talking about how to ensure the survival of the enterprise amid
digital disruption, well, maybe you’ve got the wrong person in the job. This
may sound extreme, but it’s not.
It’s increasingly clear
that we’re entering a highly disruptive extinction event. Many enterprises that
fail to transform themselves will disappear. But as in evolutionary speciation,
many new and unanticipated enterprises will emerge, and existing ones will
be transformed with new business models. The existential threat is exceeded only by the
opportunity.
By Thomas M. Siebel December 2017
https://www.mckinsey.com/business-functions/digital-mckinsey/our-insights/why-digital-transformation-is-now-on-the-ceos-shoulders?cid=other-eml-alt-mkq-mck-oth-1712
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