The digital revolution:  hype and reality?

There seems to be a lot of excitement right now over changes in the business landscape, and even more broadly.  Many commentators are suggesting that we are in the middle of another major ‘industrial’ revolution, in this case the impact of the digital world.  This one is compared to the Industrial Revolution at the beginning of the 19th century with the harnessing of power and mass production; and the ‘Energy Revolution’ at the beginning of the 20th century as electricity and the internal combustion engine changed our world once again.  Now we are seeing information digitised, available everywhere instantly, driving yet another round of changes everywhere.  I agree there is a big ‘disruption’ taking place, much as I dislike that word, and it looks as though its profound changes have repercussions in most areas of our lives.

However, when commentators go further, as The Economist did in a supplement in the 17th-23rd September 2016 issue, and envision a future dominated by a few corporate giants, I think we might be in danger of getting just a little too excited.

Is there a revolution taking place that is having a major impact?  Of course.  We can start with the example I often use.  Rolls Royce used to make jet engines and sell them to aircraft manufacturers, and then charge for maintenance, or license out maintenance to accredited engineers.  Then they decided to change their business model.  We can illustrate this with the Boeing Dreamliner (787) and the Rolls Royce Trent XWB engine:  the cost of a Dreamliner is said to be somewhere in the range of $220m or more (before deals and discounts), and the engines cost around $44m each (in fact, neither company will release actual figures, and deals are complex, secretive, and often have big discounts!!).  However, while Rolls Royce still makes jet engines, rather than buying them Boeing leases them. Rolls Royce provides so many hours of ‘thrust’, combined with a ‘Total Care’ engine support service.

To pay for this, an airline buying (or leasing) a 787 has to estimate the total cost of flying the aircraft.  They have to look at the total number of flights it will make, and distance covered, maintenance costs, crew costs, etc., etc.  All this then gets factored into load calculations, and they work out what a passenger will pay, per seat, according to class, for the routes involved, and for the cargo they plan to carry.

Now, as an airline customer I pay a single amount for each flight I take.  From my viewpoint it is a simple transaction.  I will pay this much to get to this particular destination, and nothing much has changed in forty years (except the cost and size of a seat!).  Of course, part of what I pay is a contribution to cover the direct costs of the actual journey, and part is to cover the amortization of the aircraft.  However, today part of what I pay is to meet the costs of the sophisticated analytics examining engine performance, identifying improvements, and anticipating requirements.  While most passengers are not aware of this component of the costs, I am sure they would be happy to know this is the case.

Why do I use this example?  Because the analytics part of business is becoming more and more important.  It drives Amazon’s marketplace, as increasingly sophisticated analysis of customer trends and preferences helps inventory management, and targeting future selling opportunities.  It is the core of ABC’s Google, learning from search which advertisements and web preferences will best meet user needs.  Slowly but surely, analytics is creeping into every area of business, and it looks unstoppable.  The game for business today is quite simple:  how can I monetize the information I have, or could collect?

One of the companies I see from time to time is Cisco.  For a long time, Cisco has been in the ‘selling jet engines’ era.  They sell routers, switches and other clever data transmission devices, increasingly loaded with smart software.  Like Rolls Royce, they also get income through ‘maintenance deals’.  Their challenge in recent years has been to get continuing income, offering a service, and ideally monetizing the information generated by complex networks.  Analytics can help them predict possible equipment failures, anticipate security threats, and improve and enhance design.  Cisco is moving to become more and more like Rolls Royce.  It is one example from thousands as manufacturers come to grips with the new source of value in their businesses.

That’s the digital story, in very simple terms.  I could have talked about car manufacturers, or farmers, grocery stores or marketing services companies.  For every sector in the economy, data and analytics are becoming the key source of competitive advantage and market attractiveness.  Yes, there is a major change taking place.  Indeed, I would go as far as to say that the process of change has yet to work its way through the way we live.  I suspect we are in for at least another couple of decades before the ‘digitisation’ of our world had settled down.

So, what am I questioning?  Not what is happening, but the idea that one of the consequences is that we might end up with a few corporate giants running the world.

My reason for hesitation is quite simple.  History shows that companies always go through the same cycle.  In a period of change, giants start to emerge.  They grow.  They snap up competitors, suppliers, distributors, retailers.  Look back to the world of car manufacturers in the middle of the 20th century: they were giants that emerged then, accompanied in a symbiotic relationship by the big oil companies.  That’s the first phase.  These big rich companies then start to buy up other areas of business, shopping malls and food services, apparel.  Somewhere in that cycle hubris sets in.  They fail to see that some companies, ‘fleas’ as Charles Handy calls them, are starting to nibble away at little areas of their business.

If you don’t know about elephants and fleas, read about the steel industry, and how the big two companies in the US ignored the little start-ups like Nucor.  Small companies began attacking the low profit, uninteresting areas of the steel business, and the giants didn’t care.  Low margins and unimportant, as they saw it.  Well, you can read for yourself, as the story is beautifully told by Christensen and Raynor in ‘The Innovators’s Solution’, in a section on ‘disruption at work’ (pp. 35-41).  Now one of the giants, Bethlehem Steel, has gone, and the other, US Steel, has survived, largely because of energy businesses it had acquired, its steel production down to the levels it had at the beginning of the 20th century.  The fleas have grown into decent sized enterprises: Nucor is the biggest steel company in the US, in the S&P 500, while US Steel has been downgraded to the second tier 400.

What’s going on here?  Size attracts smart entrepreneurs seeing small but interesting interstitial niches, places where a nimble start-up can make inroads into a giant’s business.  Nibble a bit here, nibble a bit there.  More technically, we can say that large and complex value chains always have points at which an outside can make inroads, offering a product or a service that is more effective, cheaper, smarter than the one that sustains the giant.  In the end, size becomes a recipe for bureaucracy, arteriosclerosis hardening the once vibrant operations.

Is there any reason to expect it will be different this time around?