Digital Transformation: The Transformative CEO – Part 5/5

Perhaps the most unique aspect of the Digital Transformation technology trend is that it is being driven from the top. The Digital Transformation mandate is being driven personally by the CEO. This is something new.

In the past 70 years of computing‚ the world has advanced from the vacuum tube to the transistor‚ to the semiconductor; from mainframe computing to minicomputing‚ to personal computing‚ and the Internet. Software evolved from bespoke custom programming to on-premise packaged enterprise application software‚ and then to software-as-a-service (SaaS) cloud-resident solutions. Each became a complete replacement market for its predecessor. The results included increased productivity‚ lower cost of operation‚ increased profitability‚ and economic growth.

The technology cycle for each of these innovations began in a university or research lab‚ and then was commercialized in the private sector. Promising lower cost‚ increased efficiencies‚ increased productivity‚ or greater customer satisfaction‚ each of these innovations was introduced to industry through the IT organization. Over months or years‚ and after multiple trials and evaluations‚ each gained the attention of the Chief Information Officer (CIO)‚ responsible for technology adoption. The CEO was periodically briefed on the cost and result.

CEO Action Plan: The opportunity is exceeded only by the existential threat

With 21st century Digital Transformation‚ the adoption cycle has inverted. Almost invariably‚ global corporate Digital Transformations are being initiated and mandated by the CEO. Examples abound: Heinrich Hiesinger at ThyssenKrupp; Volkmar Denner at Bosch; Isabelle Kocher at Engie; Darius Adamczyk at Honeywell; Samuel Allen at John Deere; Fabrice Brégier at Airbus; Larry Renfro at Optum/United HealthCare; Michael Burke at Louis Vuitton; Li Yue at China Mobile…the list goes on and on.

Enel’s published three-year digitalization plan projects over €1 billion in incremental earnings mostly from digital operational efficiency across power generation and distribution.1 Engie is targeting a 50% increase in earnings worth over €1 billion supported by its digitalization plans to increase operational efficiency and provide new energy products and services to its customers.2 Visionary CEOs are personally driving massive-scale Digital Transformations unprecedented in the history of information technology – possibly unprecedented in the history of commerce.

Something fundamentally important is happening. Something that corporate leaders find highly motivating. Even urgent. Michael Porter‚ of the Harvard Business School‚ speculates that IoT – or‚ as he calls it‚ a new world of smart connected devices – represents a sea change in the fundamental dynamics of competition.3 Porter suggests that IoT is not a matter of competitive advantage; it is existential. 52% of Fortune 500 companies have been acquired‚ merged‚ or have declared bankruptcy since 2000.4 John Chambers of Cisco Systems predicts that 40% of today’s businesses will fail in the next ten years; 70% will attempt to digitally transform‚ but only 30% will succeed.“If I am not making you sweat‚” he continued‚“I should be.”5

This competitive disruption is playing out today in the marketplace…

Tesla is digitally transforming the automobile industry. You can think of Tesla as IoT on wheels. Tesla’s market capitalization exceeds General Motors’ even though its revenue is less than 1/20th of GM’s. Tesla collects terabytes of data from its vehicles and uses machine learning to significantly and continuously improve predictive maintenance‚ self-driving capabilities‚ and the driving experience of its cars.6 The more data it collects the more the potential to outpace traditional car companies. A consumer can configure and purchase a customized new Tesla from the company’s website in eight minutes.7

Amazon is digitally transforming retailing. Its share of the U.S. e-commerce market is 33% and could increase to 50% by 2021.8 Its buyer and seller data and network effect create a virtuous cycle for the company and the consumer. Amazon’s market cap as I write is twice that of Walmart with 1/4th the revenue. By contrast‚ Sears‚ Gymboree‚ RadioShack‚ J.C. Penney‚ Macy’s‚ Kmart‚ Guess – more than 8‚600 brick-and-mortar stores will close their doors in 2017.9

Uber and Lyft are digitally transforming transportation. They have created an entirely new mode of transportation‚ the sharing economy‚ using IoT and the Cloud. These companies have a combined value of more than $60 billion‚ and between them have disintermediated the traditional taxi and limo industries. San Francisco’s largest taxicab company declared bankruptcy in 2016.10 In Los Angeles‚ the number of taxicab rides declined by nearly 30% between 2013 and 2015‚ resulting in a net loss of 2.4 million trips per year.11 Airbnb is similarly transforming the hospitality industry.

There is a hurricane of corporate and government activity in response to this disruptive threat.“Industrie 4.0” refers to a fourth Industrial Revolution driven by IoT and AI‚ sometimes called cyberphysical systems (CPS)‚ to distinguish an acceleration of the next evolutionary leap in the industrial era. Industrie 4.0 is a working group of leading German industrialist CEOs and research institutes‚ formed to advise the German Federal Government on industrial policy to assure that Germany establishes a leadership position to exploit“the ability of machines‚ devices‚ sensors‚ and people to connect and communicate with each other via the Internet of Things (IoT) or the Internet of People (IoP).”12

In 2015‚ the European Commission initiated the Horizon 2020 project to assure that the EU is well positioned in the next IoT economy.13 Cincinnati Mayor John Cranley has formally proclaimed Cincinnati to be an Industry 4.0 Demonstration City.14 Hundreds of leading companies have formed the Industrial Internet Consortium (ICC) to accelerate CPS adoption in energy‚ healthcare‚ manufacturing‚ smart cities‚ and transportation.15 In China‚ The Third Industrial Revolution‚ The Internet of Things‚ and The Internet Plus are concepts central to the mandates of the 13th Five-Year Plan.16

Digital Transformation‚ with IoT and AI‚ changes the way products are designed‚ manufactured‚ sold‚ delivered‚ and serviced. It ushers in new economic models like the“sharing economy.” It changes business processes‚ management practices‚ and information systems. As shown by Amazon and Uber‚ it changes everything about the nature of customer relationships‚ customer expectations‚ the supply chain‚ pricing models‚ and customer service. And it changes the nature of work. McKinsey estimates that this change is happening 10 times faster than that of the Industrial Revolution at 300 times the scale. That’s 3000 greater impact!17

Like evolutionary speciation‚ Digital Transformation portends highly disruptive punctuated equilibrium.18 Many new and unanticipated enterprises will emerge; new business models will be created; enterprises will be transformed; and the majority that fail to transform will cease to exist. The existential threat is exceeded only by the opportunity.