The significance of the fourth industrial revolution
The world has been through multiple industrial revolutions. The first one was about mechanizing manufacturing, the second about scaling manufacturing, and the third about automating manufacturing and harnessing the power of information technology. Each of these revolutions has taken the world to the next level of prosperity. The impact of these revolutions on enterprises has also been significant. However, for the most part, enterprises have evolved quite well to become attuned to changes in the business environment.
According to the World Economic Forum, we are now entering the fourth industrial revolution:
"We stand on the brink of a technological revolution that will fundamentally alter the way we live, work, and relate to one another. In its scale, scope, and complexity, the transformation will be unlike anything humankind has experienced before." [i]
Klaus Schwab, the founder and chairman of the World Economic Forum says:
"The new age is differentiated by the speed of technological breakthroughs, the pervasiveness of scope and the tremendous impact of new systems." [ii]
The fourth industrial revolution is distinctly different from the earlier three in that the pace of change in the business environment, primarily led by technology, is exponential.
The impact of fast-paced change
Until not too long ago, enterprises were built to remain stable, consistent, and predictable. Tectonic shifts in the external environment happened only once every few decades, which meant that enterprises could take stability in customer expectations and competitive forces largely for granted. This scenario has seen a drastic change in recent years, starting with the onset of the information age, and continuing with the onset of the fourth industrial revolution. [iii]
David Burstein, author of Fast Future: How the Millennial Generation is Shaping Our World, argues:
"The future is coming at us faster and faster; the rate of change is increasing and the amount of change that takes place in a given year is skyrocketing as well. So much change has taken place so fast that our governments, businesses, and other large institutions haven't always had enough time to fully catch up." [iv]
The biggest challenge which enterprises are facing today is how to evolve at the speed at which change, largely originating from technological innovations, is taking place. Enterprises that have been modelled for incremental evolution are struggling to evolve at an exponential rate. This fast rate of change is resulting in the following far-reaching impacts:
Disruptive innovations
Disruptive innovation is a term in the field of business administration which refers to an innovation that creates a new market and value network and eventually disrupts an existing market and value network, displacing established market leading firms, products, and alliances [v]. The disruptions that have taken place, due to technological innovations, have been unprecedented and have had a huge impact on almost every enterprise.
Digital cameras have led to the demise of film-based cameras and related businesses. Smartphones have impacted all B2C businesses (including traditional businesses like banking), and self-driving and electric cars are starting to completely change the nature of automobile businesses. We have seen how platforms that facilitate exchange between consumers and producers/providers have led to the emergence of companies such as Uber and Airbnb, which have caused turmoil in their respective domains. Online stores are providing a holistic buying experience and are posing a serious threat to retail enterprises that are still relying primarily on physical stores.
By definition, these disruptions and their impacts are unpredictable and hence it is impossible to have a plan to deal with them. The key lies in the ability to spot newer technology trends and predict the resulting disruptions. As seen from the aforementioned examples, a disruption can appear suddenly and can be powerful enough to threaten the survival of an industry itself.
The key implication of this for enterprises is that they need to be integrated more closely with the environment and customers, have short feedback loops, and encourage experimentation and innovation. In short, enterprises need to have greater agility. The concept of agility is examined in detail in the next chapter.
Breakdown of traditional entry barriers
Until not too long ago, most businesses were "brick and mortar" businesses. By definition of being "brick and mortar," these businesses had significant entry barriers, especially related to capital, for example, investment in fiber optic networks in the telecommunications industry. However, innovations in technology are changing this rapidly. Entry barriers are collapsing in many industries. Here are a few examples of new age enterprises that broke entry barriers in their respective industries:
Netflix: The company has very quickly gained immense popularity globally for online video and television streaming. It has nearly eliminated the DVD renting industry. Blockbuster, a DVD renting company that had outlets all across the USA, and whose revenue was $6 billion in 2004 and $4 billion in 2009, filed for bankruptcy in 2010. Netflix does not have any "brick and mortar" as part of its business, and by delivering its services online, it has eliminated the physical entry barriers in its industry. It has now created a different type of barrier for competitors by building strong relationships with movie and television studios.
WhatsApp: With a team of just 55 engineers, and no "brick and mortar" infrastructure, WhatsApp has revolutionized the telecommunications industry. With WhatsApp providing free messaging, as well as voice and video calling, the traditional telecom companies are revisiting their customer engagement models. These companies are now beginning to focus on creating direct lines of communication with customers and offering services based on individual customer needs.
N26: The bank, which is based in Germany, offers mobile-only banking, thereby having no need for physical branches. The bank arranges for video-based verification of its customers. It has purportedly developed its own core banking platform for a fraction of the cost of a platform for a "brick and mortar" bank.
Platform-based businesses: Uber, Airbnb, and Alibaba are all platform-based businesses. They are very large-scale businesses but don't own traditional assets like cars, property, and retail inventory respectively. These platform-based businesses have clearly demonstrated that businesses in these industries can be started with minimal entry barriers.
The implication of the breakdown of entry barriers is that enterprises cannot take their survival for granted and need to have a strong sensing mechanism to spot opportunities, and threats, as early as possible. A start-up can come up with a product that can pose a sudden and unexpected threat to supposedly well-established enterprises (for example, Paytm [vi], a digital payments platform (acronym of payment through mobile) is fast gaining widespread acceptance across India, to the extent that it has posed a serious threat to debit and credit cards products).
According to the CEO of NITI Aayog, the premier policy think tank of the Government of India, credit and debit cards, and ATMs, will become redundant in three to four years due to the usage of mobile phones for conducting financial transactions. [vii]
Intersection of domains
Technology is enabling enterprises to break the shackles and extend their business into seemingly unrelated domains, for example, retailers are offering credit on purchases, telecom companies are offering basic payment services through mobile e-wallets and, travel portals are offering insurance.
Consumers have now begun to appreciate the availability of a wide range of connected products and services under a single roof, which is a huge tailwind for such convergences. These convergences can become a "win-win" opportunity for enterprises, depending on how well the bundled offering is received by customers.
For example, Netflix provides an option to buy broadband services along with a subscription to its service. Assuming that this offering is well received by Netflix's customers, Netflix and the broadband service provider will both benefit. Another example of a partnership across domains, and one that is enabled by technology, is between Nike and Apple. They created an offering that tracks fitness activity, while connecting people to their tunes.
The implication for enterprises is that they need to relentlessly and continuously pursue better-value propositions, through innovative ideas and create a better experience for their customers. They also need to be open to outside-of-the-box partnerships. An example of an unconventional partnership, which is based on an innovative idea, is between Uber and Spotify, which have very different products but a common goal: to add more users. The offering allows users to become the "DJ of their trip." [viii]
No place to hide
Due to the widespread prevalence of social media and hashtag-driven searches, the news of any slip up, or mistake, made at any level of an enterprise, can become globally viral within no time at all. A passenger dragged off a United Airlines flight [ix] or something more serious like Samsung batteries catching fire and exploding [x], are examples of events which the entire world came to know about very fast.
The challenge for enterprises is that they need to have the ability to recognize the occurrence of such failures early enough, and, more importantly, be able to recover from a failure quickly through engaging directly and swiftly with aggrieved customers.
Demanding customers
Today's customers are, among other things, tech savvy and demanding. They are ready to switch loyalties if they believe that there is an alternative product or service that offers better value, for example, a customer may choose to use Uber for travel, not necessarily because it is a cheaper option, but because it offers a superior end-to-end user experience that includes self-booking, vehicle tracking, automatic direct payment, and getting the receipt via email.
According to Senion, an indoor positioning systems and services company, the following factors are the ways in which 21st century customers are different:
"Experiential instead of transactional
Social instead of individual
Customization instead of conformity
Speed instead of price
Omnichannel instead of single channel." [xi]
The impact of this for enterprises is far-reaching. Specifically, businesses must do the following:
Put the customer first
Offer an experience, not just a product or service
Shorten feedback loops
Increase responsiveness to changing customer needs
Innovate, with the goal of satisfying customers
Demanding employees
Today's employees are very different from their predecessors in that they are knowledge workers, rather than machine workers. What drives and motivates knowledge workers is very different from what previously drove and motivated workers who believed they were, and who were treated as, "faceless bodies." Moreover, the proportion of millennials in the workforce is rising very fast and they are expected to form 75% of the workforce by 2030. This generation is visibly different from their ancestors, as they do not want to work for enterprises, but work with enterprises.
According to Jeff Fromm, the president of FutureCast, a millennial marketing consultancy:
"Millennials embrace a strong entrepreneurial mindset and they are often on the lookout for opportunities that can continue to move them up the ladder, even if that means up and out of their current position. As digital natives, millennials have grown up in an era where the number of resources they have is almost infinite, making them more efficient problem solvers and critical thinkers." [xii]
What this means for enterprises is that they will need a culture that enables learning, fosters collaboration, builds meaningful engagement drivers, and empowers its people. In short, a culture that values and nurtures knowledge workers.
Plentiful and cheap information
With the advent of the internet, the widespread adoption of smartphones and a drastic drop in the cost of data storage, there has been an "information explosion" across the globe. It is estimated that 90% of the data in the world has been created in the past two years, and that currently 2.5 quintillion (1 followed by 18 zeros) bytes of data is produced every day. A lot of that information is available freely or at very little cost.
Enterprises are grappling with the problem of "information overload." Due to the amount of information available, customers are getting distracted, becoming confused, and falling prey to the "analysis paralysis" syndrome, leading to delayed decisions. The problem is made worse as fake news and information is pervasive, thereby causing a need to validate the genuineness of information, especially if it is critical for decision-making.
This is in contrast to times when information was limited and leaders had to focus a lot of time and energy on acquiring information. Moreover, as the business environment was largely stable, information remained valid for longer periods and could be used as a source of power.
Taking all of this into account, decision-making needs to be decentralized, as the people who are closest to the customers are in the best position to filter out the clutter and focus on the most relevant information. Moreover, in a fast-changing environment, where information obsolescence is very high, enterprises no longer have the luxury of "pushing" ground level information up the layers of the hierarchy, losing valuable time and quality of information in the process.
Intuitive decision-making, based on "just enough" information, will become important, rather than waiting for "perfect information" [xiii] and a detailed analysis. Making decisions based on imperfect, but valid, information, and taking timely actions based on these decisions will provide early feedback.
What has worked in the past is unlikely to work now
For many decades, the focus of enterprises was more inward, such as maximizing efficiencies and, return on capital and shareholder wealth. Maintaining stability and predictability were considered hallmarks of successful leadership. The fundamental approach to running enterprises was to treat them as mechanistic, or closed-ended, systems. This would control the extent to which the enterprise could be kept isolated from changes in the environment, which were mostly linear and largely predictable.
According to Richard Schutte, director at the National Australia Bank:
"The interplay between rapidly emerging technologies such as ubiquitous internet, artificial intelligence, genetics, automation, changing social and community expectations and shifts in our economy are disrupting and redefining every industry, organization and our society at large." [xiv]
According to the World Economic Forum:
"The inexorable shift from simple digitization (the third industrial revolution) to innovation based on combinations of technologies (the fourth industrial revolution) is forcing companies to re-examine the way they do business. The bottom line, however, is the same: business leaders and senior executives need to understand their changing environment, challenge the assumptions of their operating teams, and relentlessly and continuously innovate." [xv]
Enterprises that do not accept the reality of change, and are continuing with traditional methods, are struggling for survival. Kodak and Nokia are examples of enterprises that did not respond fast enough to a changing environment and therefore become irrelevant. Stephen Elop, Nokia CEO, said, "We didn't do anything wrong, but somehow, we lost" in his speech during the handover of Nokia to Microsoft in July 2013 [xvi]. While there may not have been anything "wrong" about not responding to change in the past, it can be extremely perilous in today's era, as the Nokia case study so starkly demonstrates.
Elop's words have a lot hidden under the surface. According to management trainer Ziyad Jawabra:
"They (Nokia) missed out on learning, they missed out on changing, and thus they lost the opportunity at hand to make it big. Not only did they miss the opportunity to earn big money, they lost their chance of survival." [xvii]
There are many enterprises that are meeting a similar fate as Nokia. According to a study by Professor Richard Foster, from the Yale School of Management, the average lifespan of a company in the S&P 500 index decreased from 61 years in 1958 to just 15 years in 2012. His estimation is that at this churn rate, by 2027 more than three-quarters of the S&P 500 will be companies that we have not yet heard of. [xviii]
Given this tectonic shift in not only the way that change is happening but also the impact of change not being controllable, it is evident that what has worked for enterprises in the past, with respect to survivability and meeting the expectations of both internal and external stakeholders, is unlikely to work going forward.
