The second digital revolution is coming, are you ready?

Author: Jean-François Caillard, NUMA

By 2017, all major organisations have understood that this transition, and the transformation it requires, is a condition of their survival. Several studies show that the current dynamics will cause almost half of the world’s top 500 companies to disappear within the next ten years, at least from this ranking - a Darwinism of astounding speed.

However, this development is not taking place at the same speed in all industries. Even Kodak had ten years to see the approaching wave of the digital camera that ultimately engulfed them. And Kodak has also demonstrated that you can deliberately ignore an iceberg lying straight in your path.

In the nineteenth century, there was the first industrial revolution which created productivity gains without challenging the structure of Society, followed by a second industrial revolution, from 1870, which deeply affected this structure by upsetting the cities and the very foundation of social organisations in all Western countries.

In the same way, we have had a first digital revolution - a spectacular one, but one which did not challenge the structure of society. Here is the second.

The first digital revolution is ending
All organisations are equipped with e-mail, web, mobile, and information systems (ERP …) which have become standards: this is no longer an issue.

All advertisers have understood that no marketing campaign could ever be conceived without a digital dimension, and indeed the paradigm has become reversed: many advertisers now merely provide digital marketing. This has profoundly changed the relationship with the consumer.

All retailers have understood that consumers get information on the Internet before they come to the store to buy, and vice versa: they come to 'touch' in-store but will make their purchase online, and not necessarily on the store’s own website. They have also realised that faced with giants like Amazon, there is no choice but to excel in the customer experience.

Digital has also become a main vector of activity in highly visible sectors such as mobility, recruitment, hospitality, but also in the less visible such as supply chain (reverse auction platforms, transport capacities, and more) or maintenance and industrial operations with increasingly sophisticated 'System Control and Data Acquisition'. The famous Internet of Things ('IoT') is also in the process of creating considerable productivity gains.

The vast majority of players have adapted and completed this first step (or if not completed, are rushing to catch up), but this is not enough to differentiate them or protect them from emerging players. This first stage destroyed some jobs, created others, and changed some hierarchies, but it did not cause a significant social upset.

The second digital revolution has already started
What if this first step was only the tip of the iceberg? What is now at hand is much more significant for the economy:

1. A revolution made possible by digital tools that have considerably opened the field of technological innovation

• An exponential increase in the rate of data production, the vast majority of which is unused. Those organisations whose data scientists will manage to make a difference will make considerable progress.
• Increased capabilities of artificial intelligence systems, which become 'self-learning' (deep learning)
• Strong growth in robotics, extending from industry to service
• Decentralisation of systems made possible by Blockchains
• In the not too far future, the impact on humanity – as anticipated well by Yuval Harari in his recent work 'Homo Deus'

2. In reality, this second revolution is also an 'Entrepreneurial Revolution'.

• Millions of young entrepreneurs are launching startups with very low costs and lofty ambitions. They have a bible, 'The Lean Startup', with its proven methodology: identify a problem to solve in a large target market; source user needs and 'insights'; prototype, test, and launch a 'minimum viable product'; then scale it up as fast as possible. They move very quickly because they have resources for only a limited time and are often de facto subjected to a race against their competitors.
• They trust collective intelligence by sharing their data and issues with their entire team in order to increase their involvement and contribution to their resolution, and decentralising their organisations, often inspired by Holacracy.
• Statistically, some succeed by shattering value chains and powerfully shaking the established actors: Uber for taxis, Blablacar for intercity transport, Airbnb and Booking for hotels, Netflix for TV... and of course this is only the because this trend is accelerating and becoming more industrialised. At this rate, they will probably be 20 times more numerous in 2020.

Ultimately, successful entrepreneurs will either use a technological axis (or use an existing technology in a new field), or look for an axis of differentiation based on observation of the expectations of their target (thanks to the famous 'design thinking' methodology).

All in all, we’re facing considerable acceleration in the pace of innovation. To remain competitive, established players also have no choice but to match the speed of these new entrants. And there are startups born in virtually every field of activity, because almost all value propositions can be revisited.

How can large companies address this second revolution?
Large companies have considerable resources and know-how. They also have tens or hundreds of thousands of employees to accompany them in this indispensable transformation.

The GAFA (and other large companies in Silicon Valley) show that one can be big and still retain startup forces. This is the recipe for their success: speed, attractiveness and commitment of talent, growth, and more:

• An open, motivating, relaxed, and strong work environment
• Organisation: flat organisation charts and strong empowerment of employees, who are often trained in small and multidisciplinary teams and highly involved in decision-making. Transparency of management and objectives of everyone (OKR)
• Massive consideration of user behavior (via methods such as design thinking). Ultimately, this involves many collaborations with customers
• Very short development cycles, fast project pivots
• Openness to innovation through strong collaborations with startups and other innovative organisations, numerous ventures (through Corporate Venture Capital) and acquisitions

Obviously, these five key success factors are essential. And yet...

A majority of organisations are still working exactly the way they did 20 years ago
Offices often remain closed, with pyramid structures and agendas overloaded with long meetings. It often takes three weeks to organise a meeting with the right people, and three months to get a decision or budget - even on a strategic project - assuming you don’t have to wait until the next budget year. It takes another three months to do what a startup does in three days, and some large IT projects take three years to complete. Meanwhile, there is not much collaboration with startups.

'The challenge of this new transformation is therefore not so much digital as it is organisational'.

The second digital revolution is about the massification and industrialisation of creating startups, but also about a major transformation of large organisations, one that often impacts their DNA:

• Massive change in the work environment, as seen in the US at IBM and Microsoft
• The gradual evolution of management and transparency
• Deployment of agile development modes, Hackathons, intrapreneurship, and startup studios to develop projects quickly
• A rise in the power of customer-centric innovation (Design Thinking)
• Open Innovation: structures for sourcing and supporting projects with startups (Pilot deployment, investment via Corporate Venture Capital, startup accelerators, and more)

Even though statistics show that large groups are much more likely to succeed than startups when they launch new projects, it can be difficult to measure return on investment and overcome the obstacles, and we are still in the early days of these approaches:

• Most organisations are risk-averse… even though the riskiest strategy is not to take risks. In particular, there is a reluctance to invest in projects that are out of their core business and less likely to succeed, but which could be game-changers
• It’s not always easy to replicate the 'sense of urgency' of startups because their resources are limited, which create a threat: “If the rythm of change on the outside exceeds the rate of change in the inside, the end is near” according to Jack Welch
• It’s even less easy to change management patterns, as well as to establish empowerment and transparency
• It can be challenging to make data more open and collaborate externally

As we have seen, the field of technological innovation is becoming ever more extensive: no company has the means to develop everything by itself. Every organisation has to open up to startups, but also to other major organisations, which will allow them to leverage their own efforts.

We are realising that an 'ecosystem' is needed to succeed: no large organization can succeed alone. To be accepted by this ecosystem, one must take the right approach and bring it value, because it is silently ruthless for non-contributing players. Large groups have tremendous value to bring to their respective ecosystems, and they have begun to do so, but very inconsistently.

Acquisitions remain insufficient in Europe
Acquisitions of startups are far rarer in Europe than they are in the US, where GAFA completes dozens of acquisitions each year, strengthening their execution capacity. This also creates an unparalleled and virtuous attractiveness for the Silicon Valley ecosystem. Each year Google invests more in startups than all of the 20 leading European digital companies combined, ultimately buying a large number of them. This allows them not only to acquire technologies and agility, but also talent.

The takeover of a startup is unlikely to work if the culture of the group that buys it is too far removed from that of the startup. Either the leaders will leave very quickly, or the startup will remain independent and fail to produce all the expected value. Yet a fast-paced group will need to integrate startup talents in order to evolve in its way of working: it must initiate collaborations with startups, who will irrigate it and bring new blood to this transformation. While it remains in the early stages today, this transition seems to be picking up momentum.

The great unknown is what this will produce in the economy overall throughout the next 20 years
There is little doubt that GAFA, BAT and other major players in the information society will continue to grow, but they will certainly change, and they will be challenged more or less powerfully by new entrants and existing players. Some large groups will succeed better than others - and it is a safe bet that they will benefit greatly. Will the work in these successful companies resemble that of startups?

Many large groups (and many jobs) will disappear, entire sectors will experience the fate of the steel industry, while others will emerge; millions of startups will be created in the world, freelance work will continue to grow. But overall, will the economy provide enough jobs?

Other revolutions are connected to this so-called digital revolution, which multiplies its potential: those of mobility (electric and autonomous vehicles, drones, space, etc.), medicine, energy (which is growing cleaner and more decentralised), and more. Important risks - particularly those affecting the environment - are creating strong uncertainties. Above all, we need to identify our levers in this new revolution full of entropy. For sure, there is no brake pedal.

We are only at the very beginning - and yet without a doubt, this young 21st century looks incredibly exciting.

Source: NUMA