Category Archives: Digital Transformation

Digital Transformation – The Bullish Case

This post follows the Bearish Case of Digital Transformation. The bullish case of Digital Transformation is a scenario where productivity growth in many industries approaches 3% or higher for a sustained period (2020+) and the product/service quality is continuously improving.

There is a good chance that the bullish case comes true, especially if advances in foundational components of Digital Transformation feed each other and geo-political conditions return to a tranquil state.

Let’s revisit the foundational components of Digital Transformation listed below.

  • Mobile and Cloud Computing
  • Internet of Things (Sensors, Intelligent Machines, etc.)
  • Robotics
  • Artificial Intelligence
  • Genomics and Synthetic Biology
  • New Energy Sources

In the benign scenario, Moore’s law continues to hold true for computing, ubiquitous communications (mobile and fixed broadband) become dirt cheap, mobile phones are miniature super computers with unlimited intelligence and computing power aided by Cloud Computing, Artificial Intelligence endows robots to become reasonably autonomous and intelligent to eliminate human drudgery, clean energy is ubiquitous and cheaper than the cheapest fossil fuel and genomics/synthetic biology eliminate disease and ensure sustainable and plentiful food supply. Sounds like Utopia? This is the type of future many techno-utopians imagine to be coming.

Digital Transformation – The Bearish Case

We can see that a broad discussion on boom or gloom scenarios for the world economy is taking place across the political and economic spectrum based on this New York Times article. How technological innovation increases productivity is at the center of this debate. It aligns nicely with the raging debate and marketing hype around digital transformation.

The marketing hype unleashed by the technology-consulting-analyst industrial complex would lead us to believe that we are at the onset of unprecedented age of growth based on intelligent machines, robotics, cloud computing, big data, new materials, 3D printing, synthetic biology, hyper connectivity, etc. A timely illumination on this topic comes from Dr. Robert J. Gordon in the form of very impressive, “The Rise and Fall of American Growth.” Dr. Gordon’s contention is that advances in technology of the last 3 decades have not been as transformational to the human kind as the ones that happened between 1870 and 1970. He argues the following (from the book)

Economic growth since 1970 has been simultaneously dazzling and disappointing. This paradox is resolved when we recognize that advances since 1970 have tended to be channeled into a narrow sphere of human activity having to do with entertainment, communications, and the collection and processing of information. For the rest of what humans care about—food, clothing, shelter, transportation, health, and working conditions both inside and outside the home—progress slowed down after 1970, both qualitatively and quantitatively.

One way to forecast (bullish or bearish) impact of Digital Transformation over the next few decades (20-30 years) is to see how various elements of Digital Transformation influence different industries.

We can arrive at a bullish case for Digital Transformation if the element(s) of Digital Transformation have a beneficial impact on the productivity and product/service quality in different industries. The bears will triumph if the impact is minimal and/or major headwinds persist for broad adoption of elements of Digital Transformation.

The following elements are generally seen as the foundation for Digital Transformation.

  • Mobile and Cloud Computing
  • Internet of Things (Sensors, Intelligent Machines, etc.)
  • Robotics
  • Artificial Intelligence
  • Genomics and Synthetic Biology
  • New Energy Sources

We will first test the (bullish and bearish) thesis by creating a prognosis of the beneficial impact of the above on various industries from the NAICS industry classification in the table below.

 

As we can see from the table above digital transformation has a beneficial impact mostly on information rich industries. Large parts of the real economy, like construction, agriculture, retail, trade and government may not see much in terms of positive impact on productivity and product/service quality. In addition, major headwinds listed below can act as obstacles to widespread adoption of elements of digital transformation or lead to failure in realization of significant productivity gains, positive outcomes and/or improvement in product/service quality.

  • Adoption of mobile computing is closing on saturation levels globally and no more productivity gains are to be realized due to lack of original iPhone (in 2007) level innovation
  • Adoption of Internet of Things in various industries does not take off due to lack of interoperability, limited user adoption, regulatory hurdles, security issues and limited marginal utility for end customers
  • Artificial Intelligence hits major roadblocks again due to low trust and reliability
  • Robotics fails to achieve dexterity and intelligence of a 5 year old
  • Bio-ethics, regulatory hurdles and consumer aversion for genetic modification stalls progress in Genomics and Synthetic Biology
  • Cost reductions in solar and wind power flatten out and oil prices remain low. Progress in battery technology does not materialize.

A Contrarian View on Digital Transformation

Not a day goes by that I don’t get a message extolling the virtues and promise of Digital Transformation. Most of the numbers related to Digital Transformation are in the Trillions.

  • WEF, with a little help from Accenture, thinks that Digital Transformation can create 100 Trillion dollars in value
  • Cisco posits that Internet of Everything, a core element of Digital Transformation, is a 19 Trillion dollar opportunity
  • GE in a very elaborate report outlines that Industrial Internet of Things could add between 10 to 15 Trillion dollars to world GDP

Large numbers are thrown by very respectable firms with abandon. There is nothing wrong in being optimistic about technology’s potential to improve and add value. But optimism that borders on wishful thinking can lead to disappointment.

But, firstly, let’s look at Bill Gates’s quote below

The first rule of any technology used in a business is that automation applied to an efficient operation will magnify the efficiency. The second is that automation applied to an inefficient operation will magnify the inefficiency.

When it comes to Digital Transformation the second sentence is what should worry people the most.

The world is awash with examples of unwarranted waste and misdirected investment. Many organizations approach technology as a panacea that can overcome poor strategy, processes and practices.

No amount of Digital Transformation is going to help K-mart if it does not have a coherent strategy on how it wants to the play the Retail game.

Similarly, much can be learnt from the contrast between approaches taken by GM and Toyota with respect to automation. Toyota Production System (TPS) strongly embraces simplicity and autonomation (automation with a human touch). From A3 report to Visual Management, simple approaches, tools and processes have always been central to TPS. GM/Cadillac on the other hand opened a costly and heavily automated plant in the 80s. It was bedeviled by glitches. The plant won many awards after unnecessary automation was taken out.

The cautionary tale here is that organizations should first look at core strategy and how well the processes are designed and implemented to support the core strategy. The next step is to fully adopt and practice consistently a management system or operating philosophy such as Toyota Production System if they haven’t already done so. The final step is to integrate technologies related to Digital Transformation as a means to sharpen the saw and continuously improve.