Why digital transformation is now on the CEO’s shoulders
February 13, 2019

Big data, the Internet of Things, and artificial intelligence hold such disruptive power that they have inverted the dynamics of technology leadership.

When science and technology meet social and economic systems, you tend to see something akin to what the late Stephen Jay Gould called “punctuated equilibrium” in his description of evolutionary biology. Something that has been stable for a long period is suddenly disrupted radically—and then settles into a new equilibrium.1Analogues across social and economic history include the discovery of fire, the domestication of dogs, the emergence of agricultural techniques, and, in more recent times, the Gutenberg printing press, the Jacquard loom, urban electrification, the automobile, the microprocessor, and the Internet. Each of these innovations collided with a society that had been in a period of relative stasis—followed by massive disruption.

Punctuated equilibrium is useful as a framework for thinking about disruption in today’s economy. US auto technology has been relatively static since the passage of the Federal interstate-highway act, in 1956. Now the synchronous arrival of Tesla, Uber, and autonomous vehicles is creating chaos. When it’s over, a new equilibrium will emerge. Landline operators were massively disrupted by cell phones, which in turn were upended by the introduction of the iPhone, in 2007—which, in the following decade, has settled into a new stasis, with handheld computing changing the very nature of interpersonal communication.

The evidence suggests that we are seeing a mass disruption in the corporate world like Gould’s recurring episodes of mass species extinction. Since 2000, over 50 percent of Fortune 500 companies have been acquired, merged, or declared bankruptcy, with no end in sight. In their wake, we are seeing a mass “speciation” of innovative corporate entities with largely new DNA, such as Amazon, Box, Facebook, Square, Twilio, Uber, WeWork, and Zappos.

Mass-extinction events don’t just happen for no reason. In the current extinction event, the causal factor is digital transformation.

Awash in information
Digital transformation is everywhere on the agendas of corporate boards and has risen to the top of CEOs’ strategic plans. Before the ubiquity of the personal computer or the Internet, the late Harvard sociologist Daniel Bell predicted the advent of the Information Age in his seminal work The Coming of Post-Industrial Society.2 The resulting structural change in the global economy, he wrote, would be on the order of the Industrial Revolution. In the subsequent four decades, the dynamics of Moore’s law and the associated technological advances of minicomputers, relational databases, computers, the Internet, and the smartphone have created a thriving $2 trillion information-technology industry—much as Bell foretold.

In the 21st century, Bell’s dynamic is accelerating, with the introduction of new disruptive technologies, including big data, artificial intelligence (AI), elastic cloud computing (the cloud), and the Internet of Things (IoT). The smart grid is a compelling example of these forces at work. Today’s electric-power grid—composed of billions of electric meters, transformers, capacitors, phasor measurement units, and power lines—is perhaps the largest and most complex machine ever developed.3 An estimated $2 trillion is being spent this decade to “sensor” that value chain by upgrading or replacing the multitude of devices in the grid infrastructure so that all of them are remotely machine addressable.4
When a power grid is fully connected, utilities can aggregate, evaluate, and correlate the interactions and relationships of vast quantities of data from all manner of devices—plus weather, load, and generation-capacity information—in near real time. They can then apply AI machine-learning algorithms to those data to optimize the operation of the grid, reduce the cost of operation, enhance resiliency, increase reliability, harden cybersecurity, enable a bidirectional power flow, and reduce greenhouse-gas emissions. The power of IoT, cloud computing, and AI spells the digital transformation of the utility industry.

A virtuous cycle is at work here. The network effects of interconnected and sensored customers, local power production, and storage (all ever cheaper) make more data available for analysis, rendering the deep-learning algorithms of AI more accurate and making for an increasingly efficient smart grid. Meanwhile, as big data sets become staggeringly large, they change the nature of business decisions. Historically, computation was performed on data samples, statistical methods were employed to draw inferences from those samples, and the inferences were in turn used to inform business decisions. Big data means we perform calculations on all the data; there is no sampling error. This enables AI—a previously unattainable class of computation that uses machine and deep learning to develop self-learning algorithms—to perform precise predictive and prescriptive analytics.

The benefits are breathtaking. All value chains will be disrupted: defense, education, financial services, government services, healthcare, manufacturing, oil and gas, retail, telecommunications, and more. To give some flavor to this:

Healthcare. Soon all medical devices will be sensored, as will patients. Healthcare records and genome sequences will be digitized. Sensors will remotely monitor pulse, blood chemistry, hormone levels, blood pressure, temperature, and brain waves. With AI, disease onset can be accurately predicted and prevented. AI-augmented best medical practices will be more uniformly applied.
Oil and gas. Operators will use predictive maintenance to monitor production assets and predict and prevent device failures, from submersible oil pumps to offshore oil rigs. The result will be a lower cost of production and a lower environmental impact.
Manufacturing. Companies are employing IoT-enabled inventory optimization to lower inventory carrying costs, predictive maintenance to lower the cost of production and increase product reliability, and supply-network risk mitigation to assure timely product delivery and manufacturing efficiency.