Tag: Digitalization

Consumer Tech and the Small Business Boost or Digitalization and the Large Corporate Leap?

    Jim D

Occasionally, a few events cluster in daily life that make you sit back and realize: “Wow, things have really changed.” This spring, as a typical homeowner, I had the local heating and AC service company come out and inspect and tune up the A/C. I registered the appointment over the internet and did not think anything was really different (though the web appointment was much better than previous experiences of calling and being put on hold). Yet on the day of the appointment, I received a call from the service technician while en route, telling me he would be there in 30 minutes. That was nice, and even better when he arrived right on time (this is a feat in itself in America, not in Denmark 🙂 ). As the technician inspected the units, took care of the issues (faulty thermostat) I noticed more changes. He had checked out what the proper replacement thermostat was from a modified iPhone  and then gone and pulled it from his truck. Throughout, he did everything on his phone,  making notes, compiling the invoice, getting my signature on it, emailing it to me, taking a picture of my check (or he could have swiped my credit card). He topped it off by setting up the fall tuneup. Fully intrigued, I asked about the impact of the new device and capabilities to his service day. As it turns out, all of his appointments for the day were on the iPhone as well as the driving instructions. His company had transitioned everything the field service techs did to the iPhones and ‘pretty much eliminated all paper’. His view? Things were a lot easier, he spent more time doing real work and no lost paperwork. My view? Wow!

To see a small enterprise make such a dramatic impact with IT on the everyday tasks and productivity of a small business like AC or furnace repair is remarkable. And the potential of impact by consumer technologies on small businesses was driven home when I went to the local barbecue restaurant for lunch. When the attendant took my order with an iPad and then explained they no longer had regular cash registers, I was wondering if I had been in a time warp and somehow missed these changes. She further explained that the iPads were also a huge convenience when they set up their booths at festivals and fairs.  Another win for consumer tech in small businesses.

I still remember being slightly surprised when I walked into the first Apple stores back before 2010 and instead of walking back to a register line with my purchase, the Apple salesperson processed it right where I stood with a slightly modified iPhone. Pretty cool. But now the barbecue place also? And the furnace repair guy? And workflow and invoice and payment software to match? The consumer tech and accompanying software are becoming serious business tools of choice for small businesses. They are not just being used to improve payments and act as cash registers (and of course, there are other good tools that have been introduced like Square or Stripe or many others), but handle appointments, customer communications, inventory, workflow, delivery routing, ordering, invoicing, and accounting. These vertical apps on consumer devices allow small businesses to minimize the administration overhead and focus far more on their true services to their customer.

What is also compelling about the adoption of the new mobile technologies by small businesses is the level of positive impact they are having on the businesses themselves. Eliminating paper? That has been a lofty goal of many large businesses for decades. Looks like small businesses are actually getting it done. Provide much better customer service through all-electronic customer interactions? Also being done. This enables to small business to compete much more effectively for that customer. Enable employees to be more productive from anywhere?  Check. And all while leveraging consumer-based and cloud technologies at a fraction of the small business IT costs and complexity from just 5 or 10 years ago.

And yet, as compelling as these small business examples are, recent articles (here, the WSJ) suggest that the largest enterprises are grabbing the biggest gains from technology implementations. As noted in the article, “economists have discovered an unsettling phenomenon: While top companies are getting much more productive, gains are stalling for everyone else. And the gap between the two is widening, with globalization and new technology delivering outsize rewards to the titans of the global economy.” Thus, gains in productivity from apply technology appear to be extremely uneven across the enterprise landscape. The larger firms, or the ones most adept at applying technology, are reaping most of the rewards.

The gap becomes even larger when gains are achieved through proprietary solutions that then allow outsized productivity gains. One example provided was PWC building lead analysis software that enabled 30x productivity gains in scanning contracts. PWC built the software itself, and even though there is commercial software now available for smaller firms, the cost of the software reduces the gains. Of course, if the software becomes not just a productivity gain but a industry or sector platform – like Amazon’s marketplace software – then the gains become enormous and far beyond just productivity.

As the scope of digitalization expands and the possibilities of doing ever more functions and capabilities increase with technology’s advances, it appears that the leading companies who have scale can craft custom software solutions to greatly streamline and reduce costs and enable them to win the lion’s share of the gains – particularly in productivity. Or even win the lion’s share of the market with a compelling platform (like Amazon’s marketplace). And by having the scale, when you do hit the mark with your digitalization, your gains are much larger.

Of course, making the right investments and successfully optimizing the processes of a large and complex business requires enormous vision, skill, persistence, collaboration, and leadership. It’s not about buying the latest tech (e.g. AI engine), but instead it is about having a strong vision of your place in your market, an even stronger understanding of your customers and what they want, and the willingness to work long and hard together to deliver the new capabilities. Thus, instead of a ‘new’ way to success, digitalization and technology just increase the rewards for the largest companies that focus on their customers and deliver these solutions better.

And the small businesses that are truly gaining advantage from becoming digitalized? Maybe they will grow faster and emerge as large enterprise winners in the future.

What has the impact of consumer tech been on your enterprise? Are you seeing the same changes in your local small businesses? And for large enterprises, are you seeing productivity gains from digitalization? And if you are one of the biggest, should you be expecting more from your digitalization investments?

I look forward to your comments.

Best, Jim Ditmore

Digitalization and Its Broader Impacts

    Jim D

We have discussed several times in the past few years the impacts of digitalization on the corporate landscape with a particular focus on the technology industry. We have also explored the key constraints of organizations to keep pace and to innovate. But the recent pace of digitalization is causing rapid change in corporations and has implications for broader and more radical change at a societal level. These are certainly important topics for the IT leader, and there are more significant implications for the broader society.

It is perhaps relatively easy to consider the latest technology innovations as additional steps or an extension of what we have seen since the internet era began in the mid-90s. And it was nearly 20 years ago when Deep Blue beat Gary Kasparov in chess, so the advances in machine intelligence could be viewed as incremental and measured in decades. But the cumulative effect of technology advances in multiple realms over the past 40 years has now turned into not just a quantative acceleration but a qualitative leap as well. This leap is well explained in The Second Machine Age by Erik Brynjolfsson where he discusses the cumulative effects of exponential growth over time even from a small base. This is the essence of the power of digitalization. But where Erik portrays ‘a brilliant’ future with man and advanced machine working together, Martin Ford in his book, The Rise of Robots, sees a very troubled world with massive unemployment and inequality.

As an IT leader in a corporation, you must ensure the competitiveness of your firm by leveraging the new technologies available at a pace that keeps you abreast or better, ahead of your competitors. It is a relentless pace across industries, driven not only by traditional competition but also by new digital competitors that did not even exist a few years prior. And every old line firm is driven by the fear of becoming another Kodak, while firms on top of their industry worry they will be another Nokia. For those firms able to keep pace and leverage the technologies, they are seeing substantially reduced costs of production, with significant qualitative advances. These advantages will occur across industries as digitalization is revolutionizing even ‘physical’ industries like logging and sawmills. But where does this leave communities and society in general? Is it a brilliant or troubled future?

Let’s explore some digitalization scenarios in different industries to shed light on the longer term. Shipping and logistics is an excellent example where near term there continue to be significant improvements due to digitalization in shipment tracking, route management, navigation, and optimization of loads. Leveraging sensors and interconnected planning, scheduling and communication software can result in greatly improved shipment fill rates while increasing shipment visibility. In the next 5 years, the most advanced shipping firms will completely eliminate paper from the shipment chain and have integrated end-to-end digital processes. These fully digital processes will enable more timely shipment and distribution while reducing errors and enabling greater knowledge and thus flexibility to meet emerging demands. They will also reduce the manual labor of administration – and with embedded sensors, reduce the need for intermediate checkpoints. The introduction of robotics in distribution warehouses (such as Amazon’s) currently greatly extends the productivity of the workers by having the robots run the floor and pick the product, bringing it back to the worker. The current generation of robots provide a 30% productivity gain. The next one – within 5 years, could expect perhaps a further 30% or even 50%? Amazon certainly made the investment by buying it’s own robotics company (Kiva) not just for its warehouses, but perhaps to build a relentlessly productive distribution chain able to deliver for everything (and not very dissimilar to their cloud foray). While the distribution center is being automated with robot assistants, within 15 years we will see commercial trucking move to highly autonomous trucks. Not unlike how commercial pilots today work with the autopilot. This could be good news as in the US alone, trucks are involved in over 300,000 accidents and cause more than 4500 deaths each year. It would be a tremendous benefit to society to dramatically reduce such negative impacts through autonomous or mostly autonomous trucks. Robots do not fall asleep at the wheel and do not drive aggressively in rush hour traffic. Drivers will become mostly escorts and guardians for their shipments while robots will handle nearly all of the monotonous driving chores. Convoying and 24 hour driving will become possible, all the while enabling greater efficiency and safety. And within 10 years, expect the shipment from the warehouse to the customer for small package goods to change dramatically as well. Amazon unveiled it’s latest delivery drone and while it will take another 2 generations of work to make it fully viable (and of course FAA approval), when ready it will make a huge impact on how goods are delivered to customers and enable Amazon to compete fully with retail stores, fulfilling same day if not same hour delivery. In the US, the trucking industry overall employs about 8 million, with 3.5 million of those being truck drivers. So whether a scheduler, distribution clerk or truck driver, it is likely these positions will be both greatly changed and fewer in 10 to 12 years. Just these impacts alone would likely reduce labor requirements by 20 or 30% in 10 years and possibly 50% in 15 years. But there is the increasing volume effect where digitalization is causing more rapid and smaller shipments as customers order goods online that are then rapidly delivered to their home, thus potential increasing demand (and required labor) over the longer term. Yet these effects will not overcome the reductions — expect a reduction of 20% of shipping and logistics labor where humans partner with robot assistants and autonomous vehicles as the normal operating mode. And increased demand in direct to customer shipments will come at a cost to the retail industry. Already online sales have begun to exceed in-store sales. This trend will continue resulting much lower retail employment as more and more commerce moves online and stores that do not offer an ‘experience’ lose out. It is reasonable to expect retail employment to peak around 5.3M (from the current 4.8M)  in the next 5 years and then slowly decline over the following 10 years.

Manufacturing, which has leveraged the use of robotics for four decades or more, is seeing ever greater investments in machines, even in lower wage countries like China and India. Once only the domain of large companies and precisely designed assembly lines, the relentless reduction of the cost of robotics with each generation, and their increasing ease of use, is making it economical for smaller firms to leverage such technology in more flexible ways. The pace of progress in robotics has become remarkable. In another two generations of robotics, it will be unthinkable to be a manufacturer and NOT leverage robotics. And if you combine robotics with the capabilities of 3D printing, the changes become even greater. So the familiar patterns of moving plants to where there are lower wages will no longer occur. Indeed, this pattern which has repeated since the first industrial revolution started in Britain is already being broken. Factories in China and India are being automated, not expanded or moved to lower cost countries or regions. And some manufacturing is being greatly automated and moved back to high cost regions to be closer to demand to enable greater flexibility, better time to market, and control. The low cost manufacturing ladder, which has lifted so much of society out of poverty in the past two centuries is being pulled away, with great implications for those countries either not yet on the developing curve, or just starting. This ‘premature de-industrialization’ may forever remove the manufacturing ladder to prosperity for much of India and for many African and Asian countries still in great poverty.  And while these trends will require drive more designers and better creative services, the overall manufacturing employment will continue its long term decline. Perhaps it will be partly offset with an explosion of small, creative firms able to compete against larger, traditional firms. But this will occur only the most developed regions of the globe. For the 12 million manufacturing jobs in the US, expect to see a very slight uptick even as factories are brought back due to re-shoring in an automated format and the growth of smaller, highly automated factories leveraging 3D printing. But globally, one should expect to see a major decline in manufacturing jobs as robots take over the factories of the developing world.

And whither the restaurant business? McDonald’s is experimenting with self-service kiosks and robots making hamburgers, and new chains from Paris to San Francisco are re-inventing the automat – staple of the mid-1900s. While per store labor has declined by 30 to 50% in the past 50 years, there is potential for acceleration given the new skills of robots and the increasing demand for higher wages for low level employees. These moves, combined with easy-to-use mobile apps to order your food ahead of time likely means fewer jobs in 10 years, even with more meals and sales. One should expect the return of the 1950s ‘automat’ in the next 5 or 10 years as restaurants leverage a new generation of robots that are far more capable than their 1950s predecessors.

Just a quick review of a handful of major employment industries shows at best a mixed forecast of jobs and possibly a stronger negative picture. For developed nations, it will be more mixed, with new jobs also appearing in robotics and technology as well as the return of some manufacturing work and perhaps volume increases in other areas. But globally, one can expect a significant downward trend over the next 10 to 15 years. And the spread between the nations that have industrialized and those that haven’t will surely widen.

What jobs will increase? Obviously, technology-related jobs will continue to increase but these are a very small portion of the total pool. More significantly, any profession that produces content, from football players to musicians to filmmakers will see continued demand for their products as digitalization drives greater consumption through ever more channels. But we have also seen for content producers that this is a ‘winner take all’ world, where only the very best reap most of the rewards and the rest have very low wages.

Certainly as IT leaders, we must leverage technology wherever possible to enable our firms to compete effectively in this digital race. As leaders, we are all familiar with the challenges of rapid change. Especially at this pace, change is hard — for individuals and for organizations. We will also need to be advocates for smarter change, by helping our communities understand the coming impacts, enabling our staff to upscale to better compete and achieve a better livelihood, and advising for better government and legislature. If all taxes and social structures make the employee far more expensive than the robot, than shouldn’t we logically expect the use of robots to accelerate? Increasing the costs of labor (e.g., the ‘living wage’ movement in the US) is actually more likely to hasten the demise of jobs!  Perhaps it would be far better to tax the robots. Or even better, in twenty years, every citizen will get their own robot – or perhaps two: one to send in to do work and one to help out at home. The future is coming quickly, let’s strive to adjust fast enough for it.

What is your view of the trends in robotics? What do you see as the challenges ahead for you? for your company? for your community?

Best, Jim Ditmore

 

The Recent Quarter Results Confirm Tech Industry Trends

    Jim D

Some surprising and not so surprising results for the tech industry this past quarter (2Q15) confirm both longer term industry trends and also high volatility for mismatches in expectations and performance.

First, Apple delivered strong growth in revenue and profits again (38% growth in profits to $10.8B), and yet, because it was slightly below expectations, lost $60 Billion in value. While Apple sold a record 47.5 million iPhones and saw Mac sales of 4.8 million units (up 9%), investors were apparently disappointed in both the number of iPhones sold and the lack of clear information on the iWatch. Even though it appears the iWatch is more successful at this point in the sales cycle than the iPad or iPhone, investors were apparently expecting a leadoff home run and sent the stock down 7% on the results.

And the reverse occurred for both Google and Amazon. Google delivered solid growth with 11% increase in revenue to $17.7B with net income of $3.9B which sent shares up 12%. Investors were surprised with the breadth of growth, particularly in mobile, and that managers showed some cost control. Amazon actually delivered some profit, $214M on revenue of $29.33B, and showed continued robust growth of 15%. Investors sent Amazon’s stock up on the profit results, a rarity given Amazon’s typical long term vision focus and  willingness to spend for reach and scale even in areas well beyond its core.

What the quarterly results also reveal is that the tech platform companies (Amazon, Apple, Google) are continuing to be viewed as dominant but investors are uneasy about the long term stability of their platforms and thus have a quick trigger finger if they see any cracks in their future dominance. So, with Apple’s potential over-reliance on the iPhone, when there are fewer shipments than expected, or there is not clear evidence of a new platform extension (e.g. iWatch) then investors react sharply. On the reverse, when Google appears to be overcoming the mobile threat to its core search platform, it is well-rewarded by investors.

What do the quarter’s results say about the tech product companies? Unless they have strong portfolio of winning products, it appears they will continue to struggle to regain form. IBM, AMD, HP and others all posted disappointing results as they grapple with the technology revolutions in each of their industry sectors. AMD saw a 35% loss in revenue, dipping below $1B in quarterly revenue for the first time in years to $942M with a loss of $181M. Of course, the slow to declining PC sales worldwide is the primary cause and only console sales were healthy for AMD. Expect further difficult quarters as AMD adapts to the changing component industry (driven by impacts from the platform companies). HP continues a listless journey, its 2nd quarter reflecting a 7% slide in revenue from $27.3B to $25.5B, a 50% drop in operating margin, and a 10% drop in PC market shipments. While HP will split into two entities in November later this year which has some analysts upbeat, prospects look tough across all product segments with slow or declining growth except possibly enterprise software and 3D printing. IBM had mixed results, with better than expected profit on $20.81B in sales, yet saw continued revenue decline, which left investors nervous, sending the stock down. IBM did see strong growth in cloud services and analytics, but lackluster products and results in other core segments (e.g., hardware) which make up the vast bulk of IBM revenue yielded disappointing revenue and profit showings. IBM recently sold off its low end server business as it views that sector becoming increasingly commoditized. Yet, IBM will continue to find that selling services when you have limited ‘winning’ products is a tough lower margin business. And cloud services are far lower margin business than its traditional hardware business – and one where Amazon and Google are first-comers with volume edges. IBM can certainly leverage its enterprise relationships and experience, but that is far easier to do when you have products that provide real advantage to the customer. Other than analytics (Watson) and some software areas, IBM lacks these winning products, having neglected their product pipeline (instead focusing on services) for many years. While the alliance with Apple provides some possibility of developing modern, vertical industry applications that will be compelling, there is far more IBM must do to get back on track and part of that innovation must be in hardware.

EMC and Oracle are the exceptional large technology product companies that have been able to navigate the turbulent waters of their industry the past few years. Oracle did have weaker results this quarter, primarily due to currency fluctuations but also slowing software sales. Only EMC beat expectations and had new products overcome slowing demand for core areas.  Winning products for EMC like VMware and Pivotal as well as high demand for services and products in its information security division (RSA) and analytics more than overcame issues in the core storage division (which showed some recovery from 1Q). One could argue that with the VMWare franchise and leading engineered systems, EMC has established the strongest cloud platform, thus it has a more assured place with growth and margin in this rapidly changing sector.

The bottom line? Product companies will continue to struggle with revenue growth and margin pressure as technology advances undercut volumes and platform companies offer lower cost alternatives (e.g. public cloud options instead of proprietary server hardware and services, or smartphones instead of PCs) Unless technology product companies stay on the leading edge of innovating (or acquiring) compelling products, generating additional high margin revenues through services or software will be tough sledding. As we have mentioned here before, digitalization and the emergence of platform companies will result in more casualties in product companies – both in the tech space and outside it.

And of course, there is Microsoft. Microsoft is in a unique spot where it still has a strong productivity platform (e.g. Office, Exchange) but a diminishing OS platform. And with only low margin business that are growing rapidly (e.g. cloud), the road back to dominance looks very tough. Further, their forays into other tech sectors have been middling at best and disastrous at worst. The second quarter results included an $8B write down of the Nokia acquisition, which was made two years ago. The ‘devices and services’ strategy has shown to be a ‘phenomenal error’ by some accounts. PC sales continue to decline, and Microsoft was unable to effectively crack the smartphone market. The past quarter revealed declining revenue volume for phones even with 10% more volume as the only market segment MS gained traction was phone models at lower cost points. And it is hard to see that Samsung or other handset makers will add Windows OS to their product mix. Further, traditional Windows OS revenue (from OEMs) dropped 22%. The bright spots for MS were gaming (Xbox) and of course enterprise software and cloud services. There remain major concerns for the enterprise area where the rapidly growing cloud services has far lower margin than their traditional software business. Microsoft should continue to worry that increasing import of dominance in the consumer space often translates later into winning business space – thus,  the Google and Apple productivity platforms could be the long term trojan horses that blow up the enterprise cash cow for Microsoft. Microsoft may lose the war by trying to maintain its OS platform by limiting the reach of its productivity platform to consumers on their device of choice. Already, Google and Apple have changed the game by offering such software on the platforms for free, with free upgrades. Some assessments already show Microsoft lagging in feature without even considering its far higher cost. Windows 10 should be a solid hit for Microsoft, reversing some of the ground lost with Windows 8, but it will not dent the momentum of the Apple and Android platforms – especially when Microsoft introduces such new ways to monetize as the formerly free Solitaire’s lengthy advertisements or $9.99 annual subscription fee. They continue to misread the consumer market. Despite these continual missteps, or as recently called out in a New York Times article, their ‘feet of clay’, Microsoft has a strong enterprise business, a well-positioned productivity platform, and plenty of money. Can they figure out how to win in the consumer world while growing their productivity ecosystem with compelling extensions?

There remain multiple gaps that Microsoft, IBM, HP or even Oracle could exploit to win the next platform or obtain strong enterprise market share. While Apple and Android are pursuing the future car and the home platforms, the internet of things is still an open race. And there is opportunity given that most of the gazillion apps in the Android and Apple space are games or other rudimentary (1st generation) apps oriented for consumers. But there could be tremendous demand for myriad vertical industry applications that can easily link to a company’s legacy systems. IBM has started down this road with Apple, but plenty of opportunity remains for enterprise software players to truly leverage the dominant platforms for their own gain. Let’s hope the tech product companies can rekindle their growth by bringing out great products again.

Best, Jim Ditmore