2021 - 04 - 05 Digital Business ed 2.0.pdf

Dr. Brian Armstrong Dr. Gregory John Lee 2nd Edition Silk Route Press SRP ii Copyright © 2021 by Silk Route Press. This book is copyright under the Berne Convention. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means without the prior written permission of the author. The author and the publisher have taken all reasonable steps to ensure that this work does not contain any material that is subject of copyright held by another person. Alternatively, they believe that any protected pre-existing material that may be comprised in this work has been used under circumstances that make such use permissible under law. While the publisher and the author have exercised due diligence to ensure the accuracy of the contents of this work, they take no responsibility for any loss or damage suffered by any person as a result of relying on the information contained herein. First published in softcover in South Africa in 2021 by Silk Route Press ISBN 978-0-620-92250-0 iii Preface Welcome to Digital Business, a thrilling new text on the fourth industrial revolution and its intersections with business, organizational strategy, and digital transformation and change. It has become practically axiomatic that technology is a pervasive and accelerating influence on organizations, with wide-reaching impacts on every level of management and business function, from product design and customer experience to HRM, finance and all other areas of organizational functioning. However, there are so many unknowns and underdeveloped areas of knowledge within the arenas of digitalization and the fourth industrial revolution. What do these things refer to in the first place? What really are the implications for organizational strategy – does strategy change fundamentally, or rather adapt traditional thinking and models to new realities? How do organizations effectively and correctly transform themselves to these forces, in order to thrive in our new realities? Therefore, this book addresses these questions in five parts comprising eighteen chapters: Part I contains a chapter giving an introduction to digitalization and digital business. Part II then expands on some of the major technologies powering the fourth industrial revolution (4IR), in three chapters: Chapter 2 discusses three foundational 4IR technologies, namely cloud computing, robotic process automation, and cybersecurity. Chapter 3 discusses the ‘virtuous triangle’ of big data, the internet of things (IoT) and artificial intelligence (AI). Chapter 4 covers other 4IR technologies, including blockchain, additive manufacturing, virtual and augmented reality, and neurotech. Part III consists of four chapters focused on traditional perspectives of strategy and how the digital era affects these views, namely: Chapter 5 takes an in-depth look at the core concepts of organizational strategy. Chapter 6 turns its attention to market-based perspectives of strategy. Chapter 7 examines the resource-based perspective. Chapter 8 discusses other traditional perspectives of strategy. Part IV is a more directed section that unpacks specific topics on strategy in the digital age: Chapter 9 discusses disruption and strategy. iv Chapter 10 expands the discussion on exponentials, abundance, and convergence Chapter 11 discusses business models, including some new business model thinking in the fourth industrial revolution. Chapter 12 unpacks platform businesses in detail. Chapter 13 covers exponential organizations. Part V covers topics in digital transformation and change management. Chapter 14 discusses the process of digital transformation. Chapter 15 discusses the dimensions, factors and measurement of digital maturity. Chapter 16 discusses and displays the tool of organizational architecture, which provides a broad tool and canvas for transformation and change projects. Chapter 17 goes deeper into organizational structure and systems in the light of digital transformation and change. Chapter 18 provides a deep analysis of the critical topic of organizational culture, which is also a key component of organizational architecture and an inescapable determinant of transformation success or failure. Chapter 19 discusses lean innovation, focusing on practical techniques for rapid but well-validated design, busines model development, and scaling in the digital era. Chapter 20 discusses gamification as a special strategy for engaging stakeholders especially in the digital era context. There are several challenges with writing a book such as this. One of these is the sheer breadth of the ground that needs to be covered. We endeavor here to provide sufficient breadth and depth on the key topics of business in the digital era. However, it is clearly impossible to cover all of the material in great depth, and so we provide extensive references for readers interested in particular areas to explore further. Another challenge is the rate of change of most of the topics we address. Most of them are very ‘live’ areas of current research. The definitive body of knowledge has not been completed. Technology is evolving ever more rapidly, and organizational responses to that process of change are therefore always dynamic and accelerating. We acknowledge that many of the specifics covered herein will therefore date reasonably quickly. Nevertheless, we believe that the underlying principles will be more durable and provide a solid foundation for business leaders contemplating the transformation of their organizations for a digital future. This text is essential reading for our time. Intended Audience Digital Business has a wide potential audience. It seeks first and foremost to present an holistic view of the practice of organizational strategy and business in the digital and fourth industrial revolution era. When we say organizations, we mean a wide array of organizational forms ranging from for-profit businesses and firms to non-profit, government, and other public organizations (see Appendix A at the end of the book for some of these definitions). When we say ‘business’, too, we mean both for-profit business activities as well as others (the business of government, the business of philanthropy, and so forth). v Therefore, this book is appropriate and important for managers and members of all types of organizations, business owners, business students, consultants, 4IR experts, government leaders, and others who are affected by the ongoing technological revolution of our age. The text not intended to be a technical guide to digitalization, and, therefore, is not targeted at technical experts in any field. Although the book does seek to demystify the technological elements of our time and place them into a business and organizational context, these discussions are aimed at organizational leaders and others mentioned above for the purposes of equipping them to lead and manage the wide range of organizational projects that involve and are affected by digitalization. This edition of Digital Business makes extensive reference to this topic within the context of the South African economy and its organizations, while still employing a wide variety of developed world examples. These geographic specificities mean that this version will be especially relevant to South African readers, although the nature of the South African economy suggests strongly that these local elements could be extremely relevant to other emerging market contexts. An international edition of Digital Business will be forthcoming shortly for those wishing an greater emphasis on developed world contexts and illustrations. Acknowledgement and Thanks The authors have many people to thank for this book. We thank our students and valued colleagues, without whom we would not have developed our thinking to this stage. There were three additional contributors to specific sections whom we thank and acknowledge as co-authors of those sections. Prof Terence van Zyl and Dr Richard Klein provided much of the material for the AI section (in Chapter 3) through their lecture development for the Chair. Floris Buys was the primary contributor of the Lean Innovation chapter (Chapter 19). Jacqui Nortje was a primary contributor to the gamification chapter (Chapter 20). We’d like to thank our copy editors Wynand Steyn, Sayora Khakimova, and Nakuze Chalomba, acknowledging that none of them had responsibility for the whole text and extant editorial errors remain solely the authors’ responsibility. Finally, we would like to acknowledge our wonderful and patient spouses who sacrificed much to allow us to complete this work. vi About the Authors Professor Brian Armstrong is one of the foremost ICT industry leaders in South Africa, with over 30 years of top-level management experience in Telecommunications, IT, technology R&D and systems engineering, both in South Africa and abroad. He is widely regarded as a thought leader in digitalization, convergence and business strategy. Brian is currently Professor in the Chair of Digital Business at the Wits Business School. He consults widely to industry and government on technological disruption and digital business and is an acclaimed public speaker on digital transformation and its socio- economic impacts. He is a non-executive director of Old Mutual Limited, the Huge Group and the Tshimologong Innovation Precinct. Previously Brian spent seven years in the Telkom Group, as Group Chief Operating Officer and Group Chief Commercial Officer, where he was part of the leadership team which has been credited with turning Telkom around. In his time with Telkom he also revived the ailing Telkom Business unit, and conceived and led the acquisition of BCX and its integration into the group. He was also responsible for the group’s retail unit, as well as leading group strategy and transformation activities. Before joining Telkom in 2010 Brian was British Telekom’s Vice President for Middle East & Africa with responsibility to oversee and grow BT’s activities across the region. Before that his work experience includes South Africa’s CSIR, ultimately as the Director of the Division for Information and Communications Technology; and South African listed ICT services group AST (now Gijima), as Managing Director of AST Networks. Brian completed a BSc (Eng) and MSc (Eng) at the University of the Witwatersrand in 1982 and 1984 respectively, and obtained his PhD from University College London in 1992. Professor Gregory John Lee is a member of the Digital Business team at Wits Business School. He is a leading expert in digital transformation, with a specific focus on the transformation of work and workplaces through robotic process automation and analytics. He is a leading figure in analytics, including big data analytics, for HRM and talent functions. He has written seminal books on the topic of analytics in HRM (HR Metrics: Strategic and Quantitative Tools for People Management, Knowledge Resources), business analytics and data (Business Statistics Made Easy in SAS, SAS Institute & two others) organizational design, development and people management (Designing Organizations for People-Led Sustainable Competitiveness, Silk Route Press) and digital business (Armstrong, B. and Lee, G.J. 2021. Introduction to Digital Business. Silk Route Press). He has published in top journals such as Human Resource Management Journal, the European Journal of Operational Research, International Journal of HRM, Scientometrics, International Journal of Manpower, and many others. Greg has a Masters in business and obtained his PhD from University of the Witwatersrand in 2008. vii Glossary of Acronyms Acronym Term AARRR The ‘pirate metrics’: Acquisition, Activation, Retention, Revenue and Referrals 3IR The Third Industrial Revolution 4IR The Fourth Industrial Revolution, ‘Japanese Society 5.0’ 5G ‘5th Generation’ technology standard for broadband cellular networks AARRR Acquisition, Activation, Retention, Referral, Revenue ACE The three pervasive principles introduced in the book: Acceleration, Convergence, and Exponential Growth AI Artificial Intelligence API Application Processing Interface AR Augmented Reality AWS Amazon Web Services BCG Boston Consulting Group BCG Boston Consulting Group BHAGs Big, Hairy, Audacious Goals BPM Business Process Management BPR Business Process Redesign CAGR Compound Annual Growth Rate CD Compact Disc CDF Cumulative Distribution Function CEO Chief Executive Officer CEX Customer Experience CMM Capability Maturity Model COE Center of Excellence CPI Consumer Price Index CPU Central Processor Unit CRM Customer Relationship Management CSF Critical Success Factor CSR Corporate Social Responsibility CSV Creation of Shared Value DDOS attacks Distributed-Denial-of -Service attacks, a form of cybersecurity threat DMAIC Define, Measure, Analyze, Improve, Control EPL English Premier League ERP Enterprise Resource Planning platform (e.g. SAP, Oracle) EU European Union EV Electric Vehicle ExO Exponential Organization FaaS Function as a Service FMCG Fast-Moving Consumer Goods GAAP Generally Accepted Accounting Practice GAFs Global Advisory Firms GB Gigabyte GDP Gross Domestic Product viii GPT-3 (or -2) ‘Generative Pre-trained Transformer’, a powerful AI language model developed by OpenAI and used for things like translation, language analysis, & generating text. GPU Graphics Processor Unit GSM Global System for Mobile Communications HCM Human Capital Management HIPPO Highest Paid Person’s Opinion HITL Human in the Loop HHI Herfindahl-Hirschman Index HMW How Might We? IaaS Infrastructure as a Service ICE Internal Combustion Engine ICT Information and Communications Technology IFRS International Financial Reporting Standard IoT The Internet of Things IPTV Internet Protocol Television ISP Internet Service Provider JSON JavaScript Object Notation LCD Liquid Crystal Display LED Light-Emitting Diode LSM Life-Style Measure LSS Lean Six Sigma M&A Mergers & Acquisitions MBV Market-Based View MTP Massive Transformative Purpose MVP Minimum Viable Product NPS Net Present Value OCR Optical Character Recognition OEM Original Equipment Manufacturer OPEC Organization for Economic Co-operation and Development PA Public Address PaaS Platform as a Service PC Personal Computer PDF Probability Distribution Function PESTEL Political, Economic, Social, Technological, Environmental, Legal PLC Programmable Logic Controller PMF Product Market Fit PPI Producer Price Index RAM Random Access Memory RBV Resource-Based View RDA Robotic Desktop Automation RMS Relative Market Share RPA Robotic Process Automation SaaS Software as a Service SEO Search Engine Optimization SIC Standard Industry Classification SMAC Social, Mobile, Analytics, Cloud (technologies) SMED Single minute exchange of dies SMS Short Message Service SWOT Strengths, Weaknesses, Opportunities, Threats TPS Totota Production System TV Television UI User Interface UK United Kingdom US United States ix UTAUT Unified Theory of Adoption and Use of Technology UX User Experience VCR Video-Cassette Recorder VoIP Voice over Internet Protocol VR Virtual Reality VRIO Valuable, Rare, Inimitable, Organized (to capture value) VSM Value Stream Mapping VUCA Volatility, Uncertainty, Complexity, and Ambiguity x Table of Contents PART I: INTRODUCTION................................................................................................... 15 Chapter 1. Introduction to Digitalization & the Fourth Industrial Revolution................. 17 1.1 The Case of Eastman Kodak & Digital Cameras.......................................... 17 1.2 Introduction.................................................................................................. 18 1.3 What is Digitalization?................................................................................. 19 1.4 Why Engage in Technological Transformation?......................................... 29 1.5 When Technological Disruption Occurs..................................................... 32 1.6 How Technological Disruption Tends to Occur.......................................... 38 1.7 What does Digital Disruption Mean for Business?...................................... 52 1.8 Conclusion..................................................................................................... 55 PART II: MAJOR 4IR TECHNOLOGIES FOR ORGANIZATIONS..................................... 57 The Intention Behind Part II............................................................................................. 57 Not Forgetting 3IR Advancements.................................................................................... 57 Further Exploring the Aim of the Technology Revolutions.............................................. 58 Chapter 2. Foundational 4IR Technologies....................................................................... 61 2.1 A History of Amazon Web Services............................................................. 61 2.2 Cloud Computing.......................................................................................... 63 2.3 Robotic Process Automation........................................................................ 77 2.4 Cybersecurity................................................................................................ 90 2.5 Conclusion..................................................................................................... 97 Chapter 3. The Virtuous Triangle: Big Data, IoT & AI...................................................... 99 3.1 Port of Rotterdam Harnesses Digitalization to the Full.............................. 99 3.2 Introduction................................................................................................ 101 3.3 Big Data........................................................................................................ 101 3.4 The Internet of Things (IoT)...................................................................... 107 3.5 Artificial Intelligence.................................................................................. 130 3.6 The Virtuous Triangle: Bringing Big Data, AI, & IoT Together............... 155 3.7 Conclusion................................................................................................... 156 Chapter 4. Further 4IR Technologies.............................................................................. 157 4.1 Blockchain................................................................................................... 157 4.2 Additive Manufacturing............................................................................. 165 4.3 Virtual & Augmented Reality..................................................................... 170 4.4 Biotechnology with a Focus on Neurotechnology.................................... 179 xi PART III: TRADITIONAL STRATEGIC PERSPECTIVES IN THE DIGITAL AGE.......... 181 Introduction to & Intent Behind Part III......................................................................... 181 Chapter 5. Core Concepts of Organizational Strategy..................................................... 183 5.1 Introduction to Chapter 5........................................................................... 183 5.2 Foundations of Business Strategy............................................................... 184 5.3 The Elements of Digital Business Strategy................................................ 193 5.4 Strategy & Organizational Ideology........................................................... 198 5.5 Economic Roots of Strategy........................................................................ 202 5.6 Strategy & Growth...................................................................................... 206 5.7 Strategy as a Multi-Layered Concept......................................................... 220 5.8 Strategy & Leadership................................................................................. 224 5.9 Strategy, Governance & Boards of Directors............................................. 229 Chapter 6. Market-Based Perspectives of Strategy.......................................................... 235 6.1 Introduction to Chapter 6........................................................................... 235 6.2 Environmental Analysis............................................................................. 236 6.3 Defining Your Industry, Market, and Segments....................................... 246 6.4 Industry Analysis Using Porter’s 5-Forces Model..................................... 251 6.5 Other Perspectives on Market-Based Views of Strategy.......................... 266 Chapter 7. Resource-Based Perspectives of Strategy....................................................... 277 7.1 Introduction to Chapter 7........................................................................... 277 7.2 Sources of Competitive Advantage............................................................ 279 7.3 Resources & Capabilities............................................................................. 293 7.4 Dynamic Capabilities.................................................................................. 307 7.5 SWOT & TOWS.......................................................................................... 310 Chapter 8. Other Traditional Perspectives of Strategy.................................................... 313 8.1 Introduction to Chapter 8........................................................................... 313 8.2 Emergent Strategy....................................................................................... 313 8.3 The Learning Organization........................................................................ 321 8.4 Entrepreneurial Strategy............................................................................ 328 8.5 Conclusion to Part III................................................................................. 334 PART IV: STRATEGY FOR A DIGITAL WORLD - EMERGING CONCEPTS................. 337 Introduction to Part IV.................................................................................................... 337 Chapter 9. Disruption & Strategy.................................................................................... 339 9.1 A History & Review of Disruption............................................................. 339 9.2 A Model for Identifying Disruptive Threats & Opportunities................. 356 9.3 Conclusion................................................................................................... 370 Chapter 10. Exponentials, Abundance & Convergence................................................... 371 10.1 Exponentials................................................................................................ 371 10.2 Abundance & Scarcity................................................................................ 386 10.3 Convergence................................................................................................ 398 10.4 Digital Influence on Market Structure...................................................... 402 xii 10.5 Implications: Is Technological Disruption Making Strategy Obsolete?... 409 Chapter 11. Business Models........................................................................................... 415 11.1 What is a Business Model?.......................................................................... 415 11.2 The Business Model Canvas........................................................................ 419 11.3 Strategy, Business Models & Tactics.......................................................... 423 11.4 Entry Strategies for Disruptive Innovations.............................................. 425 11.5 Revenue Models.......................................................................................... 429 11.6 Alternative Financing and Business Models.............................................. 433 11.7 A Generalizable Typology for Business Models........................................ 434 11.8 Conclusion................................................................................................... 442 Chapter 12. Platform Businesses...................................................................................... 445 12.1 Introduction to Platform Businesses.......................................................... 445 12.2 Types of Platform........................................................................................ 460 12.3 Strategies for Building Platform Businesses............................................... 471 12.4 Launching a Platform Business................................................................... 478 12.5 Conclusion on Platform Businesses............................................................ 492 Chapter 13. Exponential Organizations........................................................................... 493 13.1 The Departure Point for ExOs.................................................................... 493 13.2 The Essence of ExOs................................................................................... 494 13.3 The Massive Transformative Purpose........................................................ 495 13.4 SCALE.......................................................................................................... 497 13.5 IDEAS.......................................................................................................... 498 13.6 Dynamics at Play in EXO Ecosystems........................................................ 500 13.7 How Large, Traditional Firms can Embrace ExO Principles.................... 505 13.8 Benefits of ExOs.......................................................................................... 507 13.9 ExOs and Traditional Strategy.................................................................... 509 13.10 Summary...................................................................................................... 510 PART V: DIGITAL TRANSFORMATION & DIGITAL MATURITY................................ 513 Introduction to Part 5...................................................................................................... 513 Chapter 14. Digital Transformation................................................................................. 517 14.1 Foundations of Digital Transformation...................................................... 517 14.2 Digital Transformation & the Absorptive Capacity of an Organization.. 525 14.3 The Process of Digital Transformation...................................................... 529 14.4 The Digital Transformation Compass........................................................ 538 14.5 The Difference Between Digital Transformation & Digital Maturity...... 540 Chapter 15. Digital Maturity........................................................................................... 543 15.1 Introduction to Chapter 15......................................................................... 543 15.2 Defining Digital Maturity........................................................................... 543 15.3 Digital Maturity Models & Frameworks.................................................... 545 15.4 The Dimensions & Factors of Digital Maturity......................................... 548 15.5 A Unified Model of Digital Maturity......................................................... 559 15.6 Measuring the Level of Maturity................................................................ 564 xiii Chapter 16. Organizational Architecture........................................................................ 575 16.1 Alphabet expand their AI Capabilities through DeepMind..................... 575 16.2 Introduction to Organizational Architecture............................................ 577 16.3 Details of Organizational Architecture Design......................................... 580 16.4 Conclusion on Organizational Architecture............................................. 590 Chapter 17. Structures & Systems.................................................................................... 591 17.1 Introduction to Structures & Systems........................................................ 591 17.2 The Big Decisions in Structures & Systems............................................... 591 17.3 Internal vs. External Structures & Systems............................................... 592 17.4 The ‘Core Three’ of Internal Structure & Systems.................................... 593 17.5 Using External Structures or Systems........................................................ 606 17.6 Combining Internal & External Systems & Structures............................. 609 17.7 More on Organizational Design in the Digital Age.................................. 609 17.8 Conclusion................................................................................................... 618 Chapter 18. Building & Changing Organizational Culture.............................................. 619 18.1 The Discovery Group: Innovation for Breakfast....................................... 619 18.2 Introduction to Culture.............................................................................. 620 18.3 What is Organizational Culture?............................................................... 620 18.4 Some Organizational Culture Frameworks & Models.............................. 629 18.5 Problems with Corporate Culture.............................................................. 635 18.6 Building & Changing Organizational Culture........................................... 635 18.7 Conclusion: Organizational Culture.......................................................... 645 Chapter 19. Lean Innovation........................................................................................... 647 19.1 The Background of Lean............................................................................. 647 19.2 Introduction to Lean Innovation............................................................... 658 19.3 Lean Innovation Area 1: Ideation.............................................................. 662 19.4 Lean Innovation Area 2: Business model development............................ 674 19.5 Lean Innovation Area 3: Scaling................................................................ 681 19.6 Conclusion on Lean Innovation................................................................. 686 Chapter 20. Gamification................................................................................................. 689 20.1 Introduction to Gamification..................................................................... 689 20.2 Continuing the Discovery Active Rewards Case....................................... 690 20.3 Common gamification Design Elements.................................................... 691 20.4 The Game Design Process........................................................................... 696 20.5 Gamification use Cases............................................................................... 696 20.6 Limitations of Gamification........................................................................ 698 20.7 A Critical Review of Gamification............................................................. 699 20.8 Conclusion on gamification........................................................................ 700 Appendix A Definitions of Types of Organizations......................................................... 701 Appendix B Digital Maturity Model Factors – Definition and Sources in Literature...... 702 References........................................................................................................................ 711 Index................................................................................................................................ 728 xiv 15 Part I: Introduction 16 17 Chapter 1. Introduction to Digitalization & the Fourth Industrial Revolution 1.1 THE CASE OF EASTMAN KODAK & DIGITAL CAMERAS Going into the mid-1990s, Eastman Kodak was a giant in the photography world. Founded in 1888, the company built up a dominant position in the camera and photographic film industries over the next century. Zhang (2018) notes that “by 1976, 85% of all film cameras and 90% of all film sold in the US was Kodak”. By 1997 they still controlled two thirds of the market, however, the subsequent fifteen years saw a dramatic decline. By mid-2011, Kodak was offering its remaining patents for sale, and in early 2012 the company had entered bankruptcy and was delisted. Although the company emerged from bankruptcy, it was a shadow of its former self. One major cause of this decline was digital photography, which became popularized in the late 1990s and early 2000s, and for which Eastman Kodak was seemingly poorly prepared. However, there is a well-known twist to this factor: it was Eastman Kodak themselves who invented the digital camera, as far back as 1975. Despite rapid internal improvements over the following years to the technology, which could have been commercialized, company executives refused to develop and market the project to its full potential, convinced that film would never decline substantially as the basis for photographic development and that “no one would ever want to look at their pictures on a television set” (Estrin, 2015). Although the company did patent and to some extent develop digital technology through the critical two decades following its invention, their early refusal to market it properly left them unable to catch up to the competition, who popularized digital cameras in the late 1990s and early 2000s and quickly flipped almost the entire photography market from film to digital. In perhaps a stark example of their lack of interest in the digital space, Kodak Chairman Kay Whitmore famously fell asleep during a meeting with Microsoft’s Bill Gates to talk about incorporating Kodak’s technology into Windows (Hiltzik, 2011), a partnership that surely could have helped project the company into a leading role in the new digital era. What Eastman Kodak initially missed was the potential of picture digitalization to radically simplify the processes of taking, storing, viewing, and sharing photographs. They were wrongly convinced that customers would continue to prefer film and would continue to require extensive assistance at photographic outlets, and they lost their revenue base quickly as a result. Their business model - which partly relied on the process of developing 18 film at photography studios – fell by the wayside quickly once digital photography removed the need for film development for most users. In general, digital cameras were a massive revolution for photography. Being digital, the technology and its use was able to spread exponentially. Notably, digitalization allowed customers to take exponentially more photographs than with film, which was expensive both to buy and to have developed. Film, therefore, could grow at best linearly. Although digital cameras decimated the revenue stream related to film, it allowed every person to take photographs cheaply and easily, and the rise of the internet – notably social media – enabled and incentivized people to share digital pictures at a rate never before imagined by the industry. Digital cameras rapidly reduced in price (demonetized), growing the customer market rapidly. Later, cellphones began to include cameras as an added feature, meaning that almost everyone began to acquire photography capabilities without the need to own a dedicated camera. Unless they partnered with cellphone manufacturers, this was bad news for camera manufacturers as their product had essentially disappeared (dematerialized) as a stand-alone device in many if not most households. Digital imaging ultimately democratized photography, which has changed society fundamentally since it has allowed people to share their lives, connect globally, and enabled social revolutions such as citizen journalism and the uncovering of police brutality. While traditional photography companies such as Eastman Kodak declined or fell, the digital revolution also created new business models for revenue streams in the area, such as the ways in which social media companies host user pictures or video for free in order to advertise to those users or sell their data, and internet giants use freely-supplied user photographs to train artificial intelligence algorithms. Photography itself has only increased in popularity. However, digitalization led to a major shift away from companies like Kodak which could not imagine the dramatic shift lying ahead to new and completely different business paradigms. Sources: Zhang (2018). Hudson (2018). Zhang (2018). Estrin (2015). Hiltzik (2011). 1.2 INTRODUCTION Technological disruption, particularly through digitalization, has become perhaps the world’s most pervasive long-term force for change. Technology and the digital revolution are penetrating every aspect of organizations1, from user-driven internet to robotic automation to algorithmic trading, automated logistics, the Internet of Things, big data and blockchain. The fourth industrial revolution (‘4IR’) is causing conventional processes, organizational forms, strategies, and jobs to disappear or change radically. Organizations of all types will increasingly have to grapple with these issues, either as key business opportunities or powerful contextual factors. This chapter touches on five major issues that help us to understand technological disruption and digitalization in general: 1 See Appendix A for different types of organizations and the associated terminology, reinforcing the point we make in the preface that this book applies not only to for-profit businesses but other types of organizations and activities ranging from the business of government. 19 What is digitalization, and what are its major driving forces? Why might an organization engage in technological transformation? When does technological disruption occur, and what are the forces that enable a technological disruption to occur? How do digital disruptions tend to unfold? Technological disruptions often display repeated patterns and trends that some lessons for the future of technological advancement can perhaps be inferred. What does digital disruption entail for businesses, strategy, and finance? An important additional topic is where disruption is occurring. Whilst it is true that almost all industries, business functions and occupations will be affected, the impact will not be the same for all of them. We address this in detail in Part IV of the book. 1.3 WHAT IS DIGITALIZATION? This section defines and discusses digitalization, beginning with root concepts such as what it means to be a digital thing, the differences between digitization and digitalization, and the major technologies that lie at the heart of digitalization including both the third and fourth industrial revolutions. 1.3.1 What is a Digital Thing? What does it mean to be a digital thing? This is the most foundational of all concepts in this book, and yet it is not always immediately apparent. It is worth concretizing the nature of digital things, as this concept drives many of the important discussions in this chapter. The digital world essentially refers to something built out of binary code, which forms data and programming code (ultimately, software is built from data, i.e. binary code, which uses 0’s and 1’s to build up logic). Digital things inherently have no tangible form, being composed of numbers and comprising only digital information. Let’s explore this further, looking especially at what we might contrast with digital things. An important first distinction we need to make is that between intangible, informational things and tangible, physical things: Digital vs. physical: Clearly, we live in a physical world, where we interact with physical objects; human beings are physical creatures. It is easy enough to note that digital things – being just programming code - are themselves not physical, although see below for the subtleties in this statement. Digital vs analogue: In addition, the way we perceive the world around us is through informational media – we see things through the information carried by the light waves; we hear things by sound waves in the air; we feel and taste through information created by nerve endings in our skin or tongues. The type of information referred to here is analogue information, which is information that occurs in natural form on a fine, continuous scale. Consider one aspect of sound: pitch (the how high or low a voice is). There is a continuous scale of how high or low a voice can be. Similarly, light waves can present a continuous array of colors (e.g., any given 20 combination of red, green and blue in the RGB scale) that we see with our eyes. This continuous scale feature is the defining characteristic of analogue information. Digital also stands in contrast to this: since digital things are composed of programming code (again, 0’s and 1’s), it is decidedly not continuous at its core. “Digital” plays in both the informational and physical domains. Digitization, ultimately, infers that we replace some part of a physical or analogue process or thing with a version that is composed of programming code: Digital for physical substitution: Physical things can be replaced by digital things. For instance, the physical hands of a clock can be replaced by digital clock hands on the display of a smart watch. Physical handwriting can be replaced by digital text on a screen. Digital for analogue substitution: Consider, also, the substitution of digital for analogue information. Whereas natural information is carried by continuously variable analogue signals, such as sound and images, digital information uses a string of samples, each of which is coded into 1’s and 0’s (binary code). For instance, a digital music file can be created that represents a song as an array of digital code that accurately captures all the aspects of the music. This has far reaching implications, which we will elaborate on shortly. This process of converting analogue information and/or physical things into digital form is termed digitization. Figure 1-1 shows a stylized example of this in the case of digital music. Old: New: Digitization Physical Some part of the straight to physical/analogue analogue process changed to data, programming Analogue information still 0s and 1s. In this case, ultimately produced: we hear the a digital music file. digitally-produced music, we see the device screen outputs Physical elements do not disappear, you always need some physical interface: Devices (PC/tablet/phone/watch) Robots VR/AR glasses Still crucial: design of remaining analogue bits. Co-design with digital components Human centeredness Figure 1-1: Example of digital substitution and physical/analogue retention Figure 1-1 shows a critical truth that can be lost in the hype of the digital era. Using the case of digital music displayed here, we see two things: 21 Digitization never entirely eliminates physical elements: The physical world and physical things remain relevant. All information, whether analogue or digital, is created, transmitted, received, and stored in physical objects or by physical mechanisms. Digital, binary-coded information is always generated, transmitted, received, stored, processed, and manipulated in and by physical objects and media, such as computers, smartphones, tablets, storage devices, networks, headsets, and so forth (in Figure 1-1 the smartphone, although this is only an example). In the 4IR world, there are many other types of physical interfaces and devices, including Internet of Things sensors and gateways, industrial and humanoid robots, virtual and augmented reality headsets, 3D printers, and many more. These physical interfaces are sometimes the weak link in digitalized processes and systems, however, in conjunction with the digitized elements they can also have considerable advantages over prior physical- analogue devices, as discussed below. With digital-physical interfaces, human-centered design remains critical, as people experience the digital process through these devices. Think of the attention a company like Apple pays to its device design. The exponential increase in the power of these digital devices, the exponential decrease in their cost, dramatic advances in their miniaturization, and their ubiquity and coverage, is one key driver of the digital age. Analogue elements also do not disappear: In a related point to the retention of physical elements, analogue elements do not disappear either. Importantly, in the case of processes or systems that include human beings (ultimately, most processes) there will also always be an analogue part of the process or system. Human beings are analogue creatures. We see, hear, touch, smell and taste in analogue. We think and feel in analogue. Hence any system which involves both digital information or processes and human beings will require a digital-to-analogue interface, and vice-versa. This can be as simple as the touchscreen on a smartphone or the operator text-entry screen in a call center, or as complex as a holographic display system. In Figure 1-1, the digital music file is, despite its digital nature, ultimately rendered into actual analogue musical sound played through speakers. Just looking at a computer or phone screen is an analogue action, as these are seen as light by users. Here, we note again the importance of human centered design: consider the importance of blue light filters for screen and the like. Even without human users, the physical interfaces of digital processes will always produce analogue signals such as sounds (e.g., a computer/server fan), touch (the physical presence of the device – consider that a completely autonomous ship not even seen by people while in some section of ocean still affects oceans and ocean life), sight (the view of the device, whether it is seen by people or not), and so forth. Therefore, it is important to understand that digitization never entirely supplants either physical or analogue. It would be far more accurate to state that: Digitalization always involves a combination of physical, digital, and analogue elements, all of which can be important to the final result. We build on these points in our discussion later in the book on digital convergence (Section 1.5.1 and Chapter 10). 22 The fact that physical and analogue elements are never supplanted by digitization does beg the question why we would go to the effort of converting something into a digital format? The answer vests in various considerable advantages of digital information over physical things or analogue information as summarized in Table 1-1. Table 1-1: Advantages of digital information Information Contrast to Physical & Digital Information Advantage Facet Analogue Non- Digital information can be stored without Physical things break & degradation degradation (the drives on which we store digital degrade. information can degrade or break, however, Analogue information also digital information itself doesn’t degrade). degrades often. Handwriting This means that code can be saved and built on in fades, analogue broadcasting a way that analogue cannot always achieve. The waves weaken. slow but steady exponential growth of AI partly came because of the ability of the field to build on prior code. Coding communities have developed traditions of curating code that forms foundational methods for the advancement of digitalization. Ability to copy Digital information can be infinitely copied at To copy a physical and share almost zero marginal cost. Consider how easy it is thing, you must to copy a digital song or movie compared to manufacture a new one. making another compact disc or DVD. Copies of analogue Code can, therefore, be scaled up more easily than information are often of physical or analogue things. Consider robotic poorer quality, especially process automation that replicates human copies of copies. Consider software tasks. A successful RPA robot doing photocopying. something like a booking task can be replicated within different parts of an organization very easily, in a way that a physical robot doing, say, automotive manufacture, could not. Ease of Digital information can be distributed almost To distribute a physical distribution instantly and at great distance (globally) without thing you must error, for instance through email, link sharing, physically transport it. messaging, and so forth. Again, this is achieved at Analogue information almost zero marginal cost. Consider the ease of can often be only be putting an application onto an online app store broadcast at great like Google Play or Apple Store, making it distance with difficulty instantly and globally available for most device and with loss of quality users. Should that app gain popularity, it can go (consider traditional viral on a worldwide basis very quickly. radio). Code and software culture lend themselves to The barriers to sharing of open-source development, which facilitates mass physical and analogue things development by communities of practice. A lot of facilitated a closed-ownership the most interesting developments in the 4IR mindset by owners and world, such as AI and big data, have proceeded on developers. the back of open-source, free platforms. 23 Information Contrast to Physical & Digital Information Advantage Facet Analogue Processing & Digital information can be processed & To change a physical manipulation manipulated with great precision & complexity. It thing you must re-craft is merely code and data, and so can be it. reprogrammed. Analogue is more difficult to change – consider the difference between editing digital and traditionally- recorded music. Repeatability Digital information can be processed & Physical things degrade manipulated with infinite & flawless repeatability with repetitive use. (e.g., once programmed correctly, a software robot So do analogue things – will usually continue to faithfully execute tasks). consider a music tape losing quality with frequent listening. Minimalization Code is increasingly stored on and deployed across Physical devices & analogue smaller and fewer devices. Miniaturization processes are more difficult to becomes possible (e.g., nanotech), and miniaturize. Records & tapes dematerialization of extensive physical could only get so small, but a requirements becomes more possible. small USB stick can store far more data. Two fundamental points derive from the distinction between digital, analogue and physical. As seen in Table 1-1, analogue information degrades with distribution, conversion, replication and storage, and cannot be easily miniaturized, whereas this is typically not true with digital information. Therefore, the more processing, storage, replication and distribution that can be done with digital information, as opposed to analogue information, the better. Secondly, physical things are held in physical space; they take effort and time to move; they need to be fabricated or assembled; they cannot be infinitely copied. Therefore, the more that we can represent the physical world in terms of digital information, the better. It is these foundational characteristics of digital information which underly the imperative to digitalize processes and systems, and many societal processes and systems. These characteristics lie at the heart of the digital revolution. Having stated the above, the advantages of digitization seen in Table 1-1 also create substantial weaknesses. For instance a) the ease of copying and distributing digital information facilitates rapid and hard-to-catch data theft (see the cybersecurity security section of Chapter 2), b) the ability to easily process and manipulate digital code facilitates insertion of unwelcome code such as worms, trojans, and malware (again, see Chapter 2 on Cybersecurity), c) the ease of digital replicability can lead to lack of proper governance on automated processes, leading to increasing process failures (as discussed in Chapter 3), and d) there can be downsides to minimalization such as the dangers of vesting too much of one’s personal data and processes in singular devices such as smartphones. 24 1.3.2 The Difference Between Digitization and Digitalization In the last section we introduced the term digitalization, as distinct from digitization. In this section we look deeper into the differences between these two concepts. This distinction is not universally accepted, and many people use the words interchangeably, however, it is useful to distinguish digitization from digitalization. We have already defined digitization as the translation of a physical or analogue things into digital form. Digitalization, in turn, refers notably to the bigger set of all transformations and changes that are required to make that digitization process work. Consultants or speakers in 4IR topics state something like “4IR is not about technology, it is about transformation and change”. Although overstated – technology provides the impetus for the transformation – the broader point is that the real problem in digitalization is to successfully transform and improve some process or product or system in the long-term using that technology, and that transformation itself is often the biggest challenge. So, whereas digitization refers to the technical process of translating something into digital form, digitalization refers to the reconceptualization and reconfiguration of processes and systems from analogue- and physical-centric forms into maximally digital- centric forms. To enact successful digitalization changes, a wide variety of interconnected issues must be addressed, potentially including organizational structures and systems, processes, skillsets of people, culture, the way we think about customer experience, and many more elements. It is the integrated attempt to successfully change all such elements together in the broader process of digitizing that we term digitalization. 1.3.3 Should we Conflate Modern Technological Change with “Digital”? The terms ‘technological disruption’ and ‘digital disruption’ are often used interchangeably, but are, strictly speaking, not the same thing. Digital technologies, as we discuss above, relate to those technologies specifically related to computation, data storage and networking. This would include embedded and real-time operational applications of IT. As we introduce below, this narrower interpretation includes AI, IoT, big data, blockchain, quantum computing, and the like. Technological disruption includes any emerging technology which profoundly changes the business, social, economic or political landscape. As we discuss further below, technological disruption is as old as society itself. Technological disruption, includes technologies such as 3-D printing, drones, robotics, transformation of energy and propulsion technologies, neuro-tech and bio-tech, genomics, and the like. Recently, ‘digital’, in common discourse, is often extended to include these other fields of technological innovation. In this sense it is used synonymously with technological innovation. This is not entirely inappropriate as the dramatic advances in all these non- digital fields are empowered by digital technologies (for instance robots and 3D printing are based on digital programming), and in many cases the demarcation between digital and non-digital technologies is not clear, for example with neuro-tech or genomics. For this text we adopt a broader definition of digital technologies, namely one which is largely synonymous with general transformative or disruptive technological change. It is important, however, that one needs to be clear which of the above definitions are used in formulation and execution of digital strategy, as we discuss later in the book. 25 1.3.4 What Technologies Underpin Digitalization? Digital technologies are unpacked in far more detail in Part II of the book; this section merely acts as a brief overview. First, we distinguish between two broad eras of digital technologies, namely the third industrial revolution (‘3IR’, also known as the information or computer age) and the more recent, ongoing 4IR. Both remain important and relevant: not only do we still rely on the 3IR technologies, but they also underpin 4IR technologies. So, what are the major 3IR technologies? Four major areas exist as seen in Figure 1-2. Computer processing and networking is, of course, at the heart of all digital advances, and continues to be a major driver. Without increasingly powerful computers that can be connected to each other and other systems, the rest of the digitalization world would not advance. Early computing allowed advances Computer processing & such as industrial robots and basic automation such as ATM machines. Computer networking processing & networking + the 1st generations of: Data storage & analysis The internet Digital Digitaland mobile & Mobile Data storage The internet communication communication & analysis Data storage and analysis The internet, of course, Digital communication (e.g., email, instant allows the world of digital originally brought the digital messaging, teleconferencing & online chat) information to be retained world to people and continues increased the volume and speed of and understood. to play a central role. interpersonal communication. Figure 1-2: Major third industrial revolution (3IR) digital technologies It is important to recognize that the boundary between 3IR and 4IR is not as distinct as some may suggest. Is the internet - conceived in the 1980s and properly born in the 1990s - a 3IR or 4IR foundational technology? It would be easy to argue for both, since early internet fulfilled a primary 3IR effect of widely collecting and disseminating information. However, later internet revolutions such as that of user-supplied information through social media and the like and the addition of ‘things’ through IoT would generally be identified with 4IR. A similar point can be made for digital and mobile communications. Most scholars would agree that early digital communication like email, SMS, and second- generation mobile telephony using GSM would probably be seen as a 3IR technology. However, the true mobile-data era enabled by 3G and heralded by the launch of the iPhone in 2007, which then gave rise to second-generation mobile communications protocols like social media and messaging apps, would widely be seen as a 4IR advancement. In reality, there have been progressive extensions of GSM standards bridging these two eras, illustrating that technology development is a continuum. The distinction between 3IR and 4IR is a simplified, artificial construct. Nevertheless, we accept the usefulness of the model in providing an accessible framework for discussing the broad impact of technological change on society, economy and business. 26 What additional technologies, then, lie at the heart of 4IR, other than later-generation 3IR technologies? The ten technologies in Figure 1-3 are probably the leading candidates. Robotics and The Internet of Big Data Cybersecurity Biotechnology: Biotechnology: Robotics & RPA Big Data RPA Things (IoT) Cybersecurity Esp.neurotech esp. neurotech BIG Robotic process IoT uses sensors to Data which, Cybersecurity has Technology automation (RPA) allow digital systems because of issues become crucial interfacing people uses tools – to gather data from like large volume, as computer & computers may software robots – the physical world, & velocity, or variety, networking has be the final frontier which replicate may use actuation to requires alternative led to increased of 4IR, notably human actions in control physical approaches. attacks on neurotech (direct software space. things. computer computer-brain systems. connection). Virtual and Cloud Artificial Additive Augmented Blockchain Computing Intelligence Manufacturing Reality Cloud Computing Cloud computing Artificial intelligence VR/AR involves the Additive Blockchain provides allows remote (AI) is, of course, a creation & viewing manufacturing / a digital record access to computer leading 4IR of digitally- 3D printing keeping system resources in public technology, allowing rendered 3D involves creation that has the ability or private for algorithms that images, either of physical things to make records datacenters. can learn & adapt. holograms or 3D based on digital more secure & film. designs. decentralized. Figure 1-3: 4IR technologies (above later-generational advances in 3IR technologies) What are the defining characteristics of 4IR, as an addition to prior technology revolutions? Firstly, 4IR technologies greatly extend the reach of the digital realm into the analogue and physical realms. One additional view is that 4IR technologies complete the journey of allowing digital systems to replicate human abilities, such as sensemaking, learning, creating, recording a wide set of stimuli, self-protection and so forth. The preface to Part II explores this concept further (see p. 58), and Chapters 2 to 4 go into more detail on each of the major 4IR technologies as well as these ideas. It is worth reflecting on a bigger picture of the major technological revolutions and associated societies throughout history. 27 1.3.5 Technological Revolutions & Societies Through History This section gives a brief overview of the major technology revolutions throughout history with a specific aim in mind. Although we are primarily focused on 4IR in this book, with due attention on 3IR, there are potent lessons to be drawn from a broader view. We draw on the Japanese view, which incorporates five ‘societies’, because this view digs deeper back into early technological revolutions as seen in Figure 1-4. Western 4th Industrial Revolution narrative The 1st Industrial Revolution The 3rd Industrial The 4th Industrial Revolution Revolution The 2nd Industrial Revolution Japanese Society 5.0 narrative Society 1.0 Society 2.0 Society 3.0 Society 4.0 Society 5.0 Hunting Agricultural Industrial Information “Cyber-physical” Society Society Society Society Society ~ 250 000 BC ~ 1 600 AD ~ 8 000 BC ~ 2020 ~ 1980 ± 240 000 years ± 10 000 years ± 400 years ± 40 years Figure 1-4: Progression of the major technological revolutions & societies As seen in Figure 1-4, the Japanese view incorporates five ‘Societies’: 1. Society 1.0 is the hunting era, a decided revolution involving technologies like spears and bows. These technologies emerged approximately around 250,000BC. 2. Society 2.0 involves farming; again, involving significant technologies such as plows and yokes which provided the ability to domesticate animals and cultivate crops. Such technology starts to surface roughly 8,000BC. 3. Society 3.0 is the Japanese industrial revolution. The Western view splits this into the 1st and 2nd Industrial Revolutions, the first involving mechanization, the second electricity and internal combustion (which, colloquially, put the first industrial revolution on metaphorical ‘steroids’ by allowing mechanization and distribution to scale up). We can arguably locate the genesis of the industrial society circa 1,600AD, when printing presses reached industrial scale allowing the wide spread of information. 4. Society 4.0 was termed the Information society and corresponds with the Western 3rd industrial revolution. Here, from around 1980, computing begins to be massified, the internet is born, computer networking really starts to blossom, and digital communications begins to take hold. 5. Japanese Society 5.0 corresponds to the Western 4IR, as described above. 28 Figure 1-4 illustrates the incredible pace with which these major human advances have sped up. As seen here, Japanese Society 1.0 unfolded over a quarter of a million years, Society 2.0 – over 10,000 years, Society 3.0 – over 400 years, Society 4.0 – 40 years to date, where we find ourselves in the early years of the latest advancements. This highlights one of three pervasive principles which we need to understand and adapt to when we contemplate organizational strategy in a digital era: acceleration. Technological change is accelerating, and this is not going to abate. The pace of organizational change needs to accelerate. The pace of social, individual and institutional change needs to accelerate. This is an immense leadership and personal challenge. It stretches the capabilities of even the most agile organizations; strains the cohesion of societies; and it will often increase the sense of alienation of individuals who feel left behind. But is cannot be ignored or wished away. Acceleration is also manifest within 3IR and 4IR technologies. Figure 1-5 illustrates the prevalence and adoption of some of the key technologies of the 3rd and 4th industrial revolution over the last century or so. 3rd Industrial Revolution 4th Industrial Revolution Adoption / Impact* e g igenc in y e h on mput on rnet ata h intell ics s elep lep ter ile d on ata PCs Inte 0 m Co te u 2. ctr ile t mp e icial Big d Th Web M ob Ele Th e Co IoT tu Mob Artif Quan 1940 1950 1960 1970 1980 1990 2000 2010 2020 2030 * Note: illustrative adoption levels Time Figure 1-5: Acceleration within some 3IR and 4IR technologies We see reinforced in this chart the two points made above, namely: a) there is no hard distinction between 3IR and 4IR technologies, and no precise boundary between the end of 3IR and the start of 4IR; and b) we see acceleration – not only are the new waves of technology at least as profound as those preceding them, but the time spacing between successive waves is diminishing, and the time to mass adoption is reducing. The important lesson, therefore, of this reflection is that technological revolution is persistent, pervasive and is surely speeding up even more: we cannot let our understanding, apprehension and adoption of 4IR languish if we are to survive and thrive in this era of profound and accelerating technological change. 29 1.3.6 Is Technological Change Exogenous or Endogenous? Here we ask a simple question. Is technological change largely exogenous for most organizations and industries – in other words, an external force that must be integrated and adapted to – or endogenous – in other words, in internally-generated capability and effect? From a supply perspective, the fact is roughly 95% of the global economy does not sell technology per se for a living. It sells professional business services (auditing and legal services, for example), retail transactional banking, insurance products, retail consumer goods or the wholesale and distribution thereof, automobiles, construction, raw minerals, or agricultural produce. The list goes on and on. Admittedly, such organizations and industries use technology, deeply woven into their capabilities and core competencies, as one of their factors of production, and, in many cases, as a source of competitive advantage. However, the technology which they use – concentrating on digital technologies here – is acquired from outside the firm, and outside the industry. Although their demand conceivably has some influence on the development of the technology they consume, it is overwhelmingly exogenous. A small minority of firms sell computers or networks, mobile devices or network services, systems integration or technology support, and so on. Depending on the definition of ICT and the geographic market, such ICT services account for anywhere between 2% to 10% of domestic economies. But even for most of these, they simply resell, adapt, integrate, commission and support digital technologies which are discovered, developed, and in many cases, manufactured elsewhere. In a narrow sense, digital technological change is exogenous, even for these ICT firms. It is only those firms that research new science or new applied science and translate this into technologies and develop new ICT materials, components, products, and new algorithms and data science techniques for whom digital technological change is primarily endogenous. Admittedly, it is not so clear cut. Is technological change endogenous to Airbnb or Uber or Netflix? We would argue digital technological change is indeed exogenous to them, but their new application of technologies into their industries is endogenous to them, and exogenous to the legacy industries they have disrupted. From a demand perspective, digital technological change significantly impacts customer demand, preferences, and the like. Although customers are part of the industry system, as discussed in Chapter 6, we argue that the technological change that influences their consumption behaviors do indeed come from outside that system, and is hence exogenous. Thus, we argue, digital technological change is exogenous for the overwhelming majority of organizations. Later, this impacts the way that we approach this issue from a strategic point of view. 1.4 WHY ENGAGE IN TECHNOLOGICAL TRANSFORMATION? Having discussed what digitalization entails, a key question is why an organization might engage in digital transformation, or indeed any technological change. Such changes – either large-scale organizational transformations or implementations of specific projects such as a chatbot development or IoT implementation – are difficult and expensive. There 30 needs to be robust reasons for making such investments in time, effort and cost. This section proposes the following four possible reasons for engaging in technological transformation as seen in Figure 1-6 (noting that the word ‘business’ here can also apply to the activities of government, non-profit, or other non-corporate organizations). How we do business: What business we do: Improve a process Create a new or enhanced product or service Where we create value: Why we do business: Create a new business Prioritizing model responsibility Figure 1-6: Four reasons to engage in technological transformation As seen in Figure 1-6, the following reasons exist: Improving a process: Digitalization can affect almost any organizational process, which can be summarized as how we do business. Organizational processes that can be improved using technological transformation include, among others, operational/production processes, customer service processes, management processes, and so forth. For instance, IoT might be used to reduce the breakdown rate of production or logistics equipment, chatbots might be deployed to materially improve processing of customer enquiries or employee-facing human resource management processes, and robotic process automation may be used to automate invoice processing in an accounts department. Creating a new or enhanced product or service, or accessing new markets: Here, the technological change is embedded directly in the product or service sold or produced by the organization, or in the channel that feeds into the market, thereby affecting the markets in which the firm competes, which we refer to as what business we do. For instance, some cellphone manufacturers have been attempting to differentiate their products through innovations like the AI-enhanced cameras. The IoT and AI have been embedded into electronic toothbrushes to enable better brushing, producing a highly priced elite product. Likewise, car manufacturers have long sought multiple ways to deploy technology to create desirable vehicles. 31 Establishing a new business model. It is also possible that new technologies create new business models, what we might term where we create value. There are at least two ways in which new business models may arise. First, organizations arise to fulfil the role of producing, supplying, or servicing the new technology. Apple, for instance, primarily arose from the birth of personal computing and thereafter grew dramatically on the creation of the new market for smartphones. Second, organizations arise where existing industries and markets fundamentally change the way that they create, capture and distribute value. For instance, in the opening vignette we discuss how the business model for value creation and capture in photography has shifted dramatically from camera companies to internet giants, with very different means of value creation. Prioritizing responsibility: Finally, organizations may embrace a digital change in order to advance their social responsibility agenda, recognizing that in the increasingly interconnected world the narrow pursuit of profit may not be in the best long-term interest of the firm, its shareholders, or society which ultimately affords the firm its legitimacy: in short, why we do business. For instance, an organization that commits itself to improving its environmental footprint may have this in mind when it automates to reduce paper use. Of course, a social imperative may work in conjunction with one or more of the other reasons given here. The essential proposition of this section is that at least one of these four reasons should be sufficiently strongly present for a designated initiative to be worth the cost, time, and difficulty of a given digital change. Knowing your ‘business case’ is critical. One of the dangers of technological advancement is that of hype, as we discuss later, and organizational managers can be especially prone to engaging in fads by seeking areas to which to apply new, popular technology rather than establishing legitimate reasons for such adoption. Illustration 1-1 gives an example of such a case. Illustration 1-1: Technological over-shoot at a toothpaste factory In a famous case of over-deploying technology, a fast-moving consumer goods (FMCG) organization had a toothpaste factory with a problem. Occasionally, an empty box of toothpaste would be packed into the pallets that went to wholesalers, with the result that the entire pallet would be returned. At this stage, this would cause a loss. The company therefore hired consultants to solve the issue. The consultants proposed and implemented an Internet of Things solution involving sensors that could identify empty boxes, at which point the production line would stop, an alarm would sound, and workers could replace the empty box with a full one. The consultants were reportedly paid $8 million for this solution. A year later, the consultants returned to find that the solution was no longer in use. Enquiring as to the reason, they were told that the factory management preferred not to stop production, as this caused various issues. Instead, the lead engineer had solved the problem by putting a $20 fan at the beginning of the production line that blew empty boxes off the line… Source: This story is widely disseminated, and the original source is unclear. Examples of citations are Friesen (2013) and Williams (nd). 32 1.5 WHEN TECHNOLOGICAL DISRUPTION OCCURS Digitalization efforts do not always work. In fact, quite the opposite: history tells us that the graveyard of technological failures is considerably larger than the podium of successes. Accordingly, this section discusses in broad terms the factors that must come together to enable a successful digitalization initiative, or, conversely, factors that – if ignored or poorly addressed – can cause failure of a digitalization project. 1.5.1 Convergences Make the Magic In Section 1.3.4, in our review of the history of the technology revolutions, we highlighted one of three pervasive principles which we need to understand and adapt to when we contemplate organizational strategy in a digital era: acceleration. Here we focus on the second of these pervasive principles, namely convergence, which is one of the major factors that can be observed in successful technology revolutions. Convergences involve the bringing together of things that did not used to be combined. In fact, convergence of things often creates something more than the sum of the parts, it is not unusual to find something new and different arising. The phenomenon of convergences creating innovation can be widely observed in the world. One of the earliest great human innovations was the convergence of fuel and heat to create fire (something very different from the constituent parts!). Many great artistic styles involve blending of previously separate styles, for instance, rock and roll blended rhythm and blues music with gospel. In the natural world we see innovation in botany arising from blends, for instance, rose hybrids, new vegetables such as KumatosTM or peppadewsTM, and the Pinotage wine grape. Technology lends itself to convergences since it is an enabler of something fundamental. An important factor in successful technological disruption is to come up with innovative convergences that will create widespread user acceptance, and even delight. In this regard, there are three types of convergences that can be achieved with technology: Technology + industry: Technology often or perhaps always penetrates specific industries, be it medicine, retail, logistics, education, manufacturing and so forth. Of course, there are industry-crossing technologies (think of Microsoft Windows and Office), but even these generally try to create industry-specific versions or niches to their products. Many of the great digital disruptions are foundationally about smart penetration of specific industries with technology. Netflix converged film and television with streaming technology. Uber converged ride hailing and technology, Airbnb converged accommodation seeking and technology, and Amazon retail and technology. The key in great convergences between technology and industry is a deep understanding of the dynamics and needs of the sector and its consumer base, with appropriate technology being applied. As discussed further below, Uber does not actually sport particularly impressive technology. However, their success to date lies in understanding that ‘ride hailers’ would prefer to a) use an app to “call” a taxi/ride rather than placing a phone call to arrange the same, and b) would rather use credit cards than cash; and then applying simple technologies to these preferences. Both of these factors 33 disrupted the usual taxi model, bringing convergence of technology and industry to that sector. What we often see when industry and technology converge is a new business model that can arise from this convergence, as we discuss later in this chapter and in Part III of the book. Digital & analogue & physical: As discussed in Section 1.3.1, even digital technology inevitably involves combining analogue and physical elements. Indeed, the quality of the interfaces between physical, analogue and digital can heavily influence the success of systems. Extending the location of that interface deeper into traditionally analogue or physical realms can transform performance of analogue-digital-physical systems. Therefore, smart convergences are also desirable between these elements: bringing together the right combination of digital and physical with elegant and functional design. Apple, for instance, has long leaned on the popularity of their device design as a cornerstone of their success in conjunction with their technological platforms. Sometimes, choice of the correct analogue element is the key to success, as seen in Illustration 1-2. Digital + digital: Sometimes, combining multiple digital technologies adds an innovative touch that sparks successful disruption. For instance, many apps now add some element of artificial intelligence to enhance the experience, such as voice-enabled searching and digital assistants in smartphone platforms. Illustration 1-2 gives an example. Illustration 1-2: Technological convergences: Google's AI/AR-enabled microscope The world of oncology (cancer diagnosis and treatment) relies on the field of pathology to diagnose cancerous tumors from biopsies of human tissue. Pathologists traditionally view such biopsy sam

2021 - 04 - 05 Digital Business ed 2.0.pdf

Document Details

Tags

Related

Full Transcript

Upgrade to continue