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06.11.18


Survival of the (Digitally) Fittest


   


    One the first American industrial magnates was also one of our first self-made entrepreneurs. He was a ruthless businessman, eliminating his competition by drastically reducing costs and cutting shrewd deals. His greatest talent? His ability to see emerging technologies, recognize demand, and take action - even if it meant the disruption of his own business.

Cornelius Vanderbilt began working in the shipping industry as a young man when he recognized the potential of a new technology, the steamboat. Throughout his career he amassed over 100 steamboats and a massive fortune, eventually known as the Commodore. He retired from shipping in his 70s, yet he wasn’t finished innovating. Vanderbilt realized there was another emerging technology that would dramatically change transportation and logistics across the country -- the railroad.

It’s always worth studying history. Technology has been disrupting industries for centuries, creating new products and revenue streams while destroying incumbents who don’t adapt. This isn’t new. However, even with 20/20 hindsight, business leaders today are again ignoring the buildup of existential risk. 

Since 2000, more than half of the Fortune 500 companies have fallen off the list, gone bankrupt, been acquired or simply ceased to exist. Companies rise and fall for many reasons, but many of these cautionary tales are due to digital disruption.

The stories are telling: Toys“R”Us replaced by Amazon, Blockbuster replaced by Netflix. Netflix went from almost zero to 30% of the home entertainment market in just 10 years; it is now one of the most valuable media companies in the world, worth more than Comcast and even for a brief moment recently, Disney. At this rate of churn, researchers estimate that three-quarters of today’s S&P 500 will be replaced by 2027.

While the sirens of digital disruption seem hard to ignore, the incessant whispers of human irrationality beg leaders to avoid doing things that are hard. And digital transformation is hard. So CEOs and boards procrastinate, demonstrating their wonderful humanity and dangerous irrationality.

Daniel Kahneman, the grandfather of behavioral economics and keen observer of human irrationality, says that a general “law of least effort” applies to our behavior. If there are several ways to achieve the same goal, people will take the easiest path, as laziness is built deep into our nature. In other words, we unconsciously over-index to easy and slow versus difficult yet expedient. This might be at the core of Fortune 500 existential risk.

Laziness, fear and inaction are how humans avoid acknowledging the rising temperature of risk.

Two years ago, an increase in global oil production led to a glut, driving down the price per barrel at an alarming rate. The pressure was rising on U.S. shale companies to decrease costs or go bankrupt. Instead of maintaining the status quo, some forward-thinking leaders focused on technological innovation. This led to unprecedented efficiency, dramatically lowering costs and boosting productivity as operators became more efficient in the U.S. Today, the Permian Basin alone is producing three times as much crude as it was back in 2011, and that is without adding any additional active drilling rigs. In other words, the frog hopped out of the boiling pot of water.

That success aside, many oil and gas companies didn’t adapt fast enough and went bankrupt, while more than 200,000 Americans working in the oil and gas industry have lost their jobs.  The pain did not need to be so severe.

CEOs have notoriously limited time. While often heroes, they are human, with limitations in their ability to intentionally focus. What grabs their attention is the issue of the day and what their shareholders find important: whether it’s price-per-barrel, quarterly earnings, annual energy production, revenue growth, supply chain efficiency or net promoter scores.

Important priorities to be sure, yet what’s overlooked is that each of these key metrics can be improved with a long-term focus on, and commitment to, digital transformation. If today’s leaders aren’t active in digital transformation, they create vulnerability, as their competitors leverage AI and machine learning to turn up the heat.

In my role at Uptake, I’ve met with many global business leaders who are vulnerable. Yet they are self-aware: ARC Advisory Group research shows that just 5 to 8 percent of industrial organizations consider themselves ready for a digital transformation program. They aren’t focused on digital - even though they know they should be - and they don’t know how or where to start.

If that is the case, why aren’t they preparing? Why do they ignore the dire consequences and potential opportunities? Another leading behavioral psychologist, Dan Ariely, helps to explain this phenomenon, stating that we make decisions driven by our desire for immediate gratification which overrides what we know is better for tomorrow. This applies to everything from the chocolate we’re trying to avoid eating to the decisions a CEO makes about business priorities.

Digital transformation is no longer just a buzzword. It is the dynamic new operating model of the 21st century, driven by the convergence of technologies -- IoT and sensor-generated data, artificial intelligence, cloud computing and mobile connectivity. There are clear business needs, as McKinsey recently published a report of more than 400 pragmatic use cases in which artificial intelligence can immediately begin to optimize business processes.

CEOs and boards must set a vision, identify the highest-value place to start, allocate the time and energy, recruit and train the right digital capabilities, and be prepared to both commit and adapt. We’re talking about a wholesale change to the foundation of the modern enterprise: Digitalization starting with outcomes and expanding across infrastructure and internal systems. This will mean changes to the skills needed, jobs available and the very nature of work.

It’s easy to be convinced that there are other, easier paths. There aren’t easier paths. This will be hard.

The good news is that the potential value at stake is enormous. The World Economic Forum predicts that digital transformation will create an estimated $10.3T in value in consumer industries, and almost $18T in value across some of the world’s largest traditional industries. That is value created for both industry and society, and that is worth the hard work.

It’s why today’s corporate leaders should be thinking about digital transformation every day -- the opportunities and risks have risen to a level that warrants keeping them up at night. It’s their job to protect not only the near-term business, but also the long-term franchise. In fact, Peter Drucker once wrote the job description, observing that the CEO is the link between the Inside -- “the organization” -- and the Outside -- society, the economy, technology, markets, customers, the media, public opinion.

To ensure competitive excellence, leaders must jump now. Digital leadership must come from the top. The CEO has taken on an additional title -- Chief Digital Transformation Officer. And unless leaders realize that the water is starting to boil, their employees will follow them to irrelevance and perhaps gradual extinction.






Brad Keywell, ©2020
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