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.

Amazon, Netflix and Independent Film Making

Netflix and Amazon are shaking up Sundance hierarchy. It looks like Amazon and Netflix are providing a major boost to the independent film production. I see a dichotomy appearing with major studies focusing on franchises (Avengers…) and streaming services more or less dominating independent film making. Where art thou, Apple and Youtube?

Why Apple Should Buy Mazda And Not Tesla

Despite the click bait title of the Business Insider article on Tesla it contains an essential challenge Tesla continues to face in the automotive industry, which is to get to meaningful scale. I believe that number is between 1 and 2 million units in the automotive industry. Sergio Marchionne of Fiat-Chrysler believes it is 6-8 million units because he wants to be a mover and a shaker like Toyota, GM and VW are in the automotive world. It took Hyundai upwards of 3 decades to be included alongside Honda and Nissan. Aston Martin and Ferrari are hobbies relying on the goodwill, parts bins and bank accounts of major auto manufacturers.

Apple, according to the social media universe, wants to be the new kid on the block in the automotive world. Given enough money every individual wants to own an F1 team, Basketball team and/or Soccer team. Since Apple is not an individual it is inclined to design, build and sell its own automobile(s). Apple certainly has enough cash to try the plan many times over. I am afraid that the Apple team will agree with this astute observation by Horace Dediu about the automotive industry. In the meantime, every Apple observer worth his/her Apple insight keeps imploring Apple to buy Tesla. I think it is not the most aggressive move Apple can make, if it intends to compete in the automotive industry. The biggest challenge in automotive industry is not one of design and engineering. It is rather the time it takes to set up and master production and supply chain operations at scale. At scale we mean more than a million units per year. It will be another 10 years before Tesla can get to that scale of production.

The competitive advantage of Tesla’s innovative electric drive train does not look as imposing in light of GM’s introduction of Chevy Bolt. In addition, there are many large players, including Panasonic and LG among others, that would be more than happy to establish battery supply chain at scale. Once we take the electric drive train and battery supply chain out of equation we are left with design, engineering, production and distribution aspects that are real obstacles to becoming a meaningful competitor in the auto industry. Apple can in one swift move become a meaningful competitor by buying an existing auto manufacturer that is operating at scale. The question is which auto manufacturer.

The candidates that come to mind are BMW, Mercedes Benz, Mazda and Subaru. BWM and Mercedes Benz are true luxury brands with sales of 2-3 million units per year each. They are truly global and have the brand strength comparable to and in some places exceeding that of Apple. The only problem is that they are very large organizations, well established and are based in Germany. Taking over companies from Germany is non-trivial. Subaru is a niche auto manufacturer with less than a million in sales and not known for its design sense. That leaves us with Mazda.

Mazda is one of the most distinctive brands in the automotive industry. It’s iconic models, including Miata and RX-7, are beloved by auto enthusiasts. It punches way above its weight when it comes to design. They are affordable to a wide swath of customers and the company managed to sell 1.5 million units globally. Mazda is also not foreign to foreign ownership as it was once majority owned by Ford Motor Company. Apple can buy Mazda for less than $15 billion dollars, which happens be less than the latest quarterly profit. My 2 cents to Apple ends here.

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.

The Abridged Version of WEF’s Future of Jobs Report

In the age of social media it’s hard to pay attention to more than 2 paragraphs of text at a time. It’s highly unlikely that you will find the time, interest and initiative to read 167 pages of the ominous sounding “Future of Jobs” report from World Economic Forum (WEF). So we did for you, subtracted all the fluff and abridged the report into this lucid post. First a few bullet points.

  • Advances in genetics, artificial intelligence, robotics, nanotechnology, 3D printing and biotechnology are laying a foundation for a revolution.
  • Most occupations are undergoing fundamental transformation. Some jobs are threatened by redundancy, other growing rapidly and existing jobs require change in skill sets.
  • The worst case scenario could be talent shortages coupled with mass unemployment and growing inequality,
  • 65% of children entering primary school today will end up doing job types that do not exist today

The top 5 drivers of change are

  • Changing nature of work and flexible work
  • Mobile, Internet and Cloud technologies
  • Increasing processing power and big data
  • Middle class in emerging markets
  • Climate change

Most of the drivers support job growth. A few, including geopolitical volatility, artificial intelligence, could lead to job losses.

Computing, mathematical and engineering job types will see the highest growth prospects, while office/administrative and manufacturing/production job types will see contraction.

The authors of the report themselves admit that the report does not offer any prognosis for the largest segment of job type in the world, especially in developing economies; Farming, Fishing and Forestry.

Two new job types that were most frequently mentioned are data analysts and specialized sales representatives.

The report highlights core work-related skills (Figure 9 – Page 21) that seemed to have come out of a Common Core evaluation form.

future-job-skills

It was surprising to see that women make between 30-40% less than men in many industries. The top 3 barriers to gender parity are

  • Unconscious bias among managers
  • Lack of work-life balance
  • Lack of role models

The report has a lot more information on above topics, different regions of the world and industries. It is a worthy effort to understand how HR departments in large companies perceive the jobs conundrum. The report would be lot more comprehensive if it had covered the crystal ball for the vast majority of people that work in the informal sector in the developing world and emerging economies.