Many executives don’t ‘get’ Digitization… here’s why

Before I can explain the essence of digitization, let me start by framing the way people in most corporations see business technology.

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If you count back to the 1970s, when Computer Systems began permeating corporate life, that’s 50 years that the relationship between businesses and technology has been predominantly in one form: the Business System. And business systems, by whatever name we call them – have one thing in common: they replicate the processing of information that humans used to do manually, in the brick and mortar world.

Think about that for a second: before there were banking systems, banks already processed high volumes of transactions: deposits, loans, mortgages, payments, etc. When banks started programming computer systems, they developed those systems along the same lines as they organized manual work. Hence, they developed deposit systems, loan systems, mortgage systems, etc.

When SAP started building it’s ERP, they started module by module. In the beginning, it was mostly a finance oriented system. Thus, they started with the finance module, FICO. Then, they developed Sales and Distribution; and so on. This modularization followed the way human enterprises were typically structured.

Essentially, for 50 years, the predominant business technology, i.e., the business system, resulted from a paradigm where computer systems were brought into the human world of brick and mortar. This is how most people in today’s enterprises relate to technology. There is a human world, the external world, organized in a specific way, which is conditioned by physical reality. Computer systems are brought into that reality as an accessory to the way humans organize things.

What is the biggest constraint of the ‘world of humans’? – Space and distance. If a company has a large Plant in a particular location making large quantities of a product, that company doesn’t sell that product in that one location – it sells it in many locations far away. How does it bring that product to those locations? The answer to that question lead to the Transportation and Distribution industry. Carriers and Distribution Centres exist because of this physical constraint.

Why is there a “Head Office” and “Branch Offices”? Same reason – distance. A company in the hospitality business has to have many hotels, at many locations, each hotel with many rooms. This entire infrastructure of properties providing services to thousands of customers needs to be funded, staffed and managed.

You can tour the entire Western Economy of the 20th century and you will see that the structure of businesses, the way corporations are organized, the constructs of human work life – are all conditioned by the physical reality of the external world.

And business systems exist within this space-constrained world. They were brought into that world, inserted into the ‘buckets’ of this world and didn’t change the pattern of 20th century industries and corporations – not a bit. They accessorized the human world, they enabled corporations to achieve immense scales by processing information and organizing information much faster and better than humans did when they only had paper, but they didn’t change the paradigm. If you compared a Corporation in 1930 and a Corporation in 1999, they would look the same, except the latter would be larger and faster than the former.

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Then, Digitization came. From 2000 on, things started emerging that didn’t fit the old pattern. Let’s think about this for a second.

Wikipedia destroyed the Encyclopedia industry. Why? And why didn’t Encyclopedia Britannica evolve to a Wikipedia?

Facebook was the first company ever to reach 2 billion concurrent customers with just one product. No other company ever did that – not Standard Oil, not AT&T, not Unilever, not P&G – not even close. But what did they do? They provided a network for people to talk to each other. Does that sound familiar? Of course. So… why didn’t AT&T do what Facebook did? Why didn’t Blockbusters or ABC or Warner Brothers do what Netflix did? How could Uber blow away the Taxi industry with an app based on Google Maps? How could AirBnB blow away the Hotel Chains of the hospitality industry? Why didn’t Hyatt do it? How is it that start-up Fin Techs are decimating the historically omnipresent and powerful Banking sector? Why didn’t Banks do what Fin Tech’s are doing?

The reason is actually as simple as it is hard to grasp for most people. What all these cases and many others like them have in common is this: they brought the human world into the computer world. They learned how to operate in Cyberspace. They reimagined well established businesses within Cyberspace and in doing so they came up with completely different forms for these businesses – and that’s how they blew away the incumbent paradigm.

So: to really understand Digitization, you need to understand Cyberspace and the fundamental differences between Cyberspace and the brick and mortar world.

First and foremost: the big constraint that conditioned how the world of brick and mortar evolved – i.e., space and distance – doesn’t exist in Cyberspace. Secondly: while the raw materials of the brick and mortar world are hard and rigid, the raw materials of Cyberspace are the most malleable and adaptable that ever existed: software and data.

What did Facebook do? They brought people into Cyberspace and provided them with unconstrained virtual spaces to reach other people. Once you’re in Cyberspace, it doesn’t matter wether you’re in Iraq and the other person is in Brazil: those distances disappear. In the brick and mortar world, teenagers developed clusters of friends numbering in the 20’s or 30’s, in the same city. In Cyberspace, teenagers commonly have circles of friends in the 400’s in multiple geographies.

How about Wikipedia? – same thing: they brought the world of knowledge and the industry of documenting that knowledge into Cyberspace. In this virtual world without space constraints, it’s easy to have 5,000 people monitoring and correcting content; and it’s just as easy to have millions of people create that content. Compare that with the controlled world of peer reviews used by Britannica. You couldn’t do what Wikipedia did in the brick and mortar world – simply impossible.

Uber, AirBnB, Fin Tech companies like Stripe and Braintree, Netflix – they all did the same as Facebook and Wikipedia – they brought industries from the brick and mortar world into Cyberspace – the rest is history.

Conversely, companies like Britannica, AT&T, Blockbusters, Hyatt, classical Banks, etc. – couldn’t do the same as their Digital competitors because they couldn’t grasp the significance and the opportunity of Cyberspace. It’s too much of a paradigm shift. They have all spent decades relating to computer systems as accessories, as toolboxes and so they couldn’t reimagine their business models in a world free of physical constraints.

This is the essence of Digitization. The word doesn’t mean that you are implementing Digital Technologies. What the word means is that you are bringing your business – your products and services, your organization and your customers – into Cyberspace and then you are reimagining the whole thing completely for the Digital world. Cyberspace is the Digital world, it is the world of the Internet and applications and data. You have to be able to understand this world and then start from scratch resetting how you see your business. Yes, from scratch!

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There is another element of Cyberspace that makes the proposition of Digital Business – i.e., business models re-imagined for the digital world – so compelling. Ray Kurzweil figured it out first: Digital Businesses grow exponentially. That’s how a start-up can destroy well established incumbents in a fraction of the time that took the latter to become what they are. If you examine the growth trajectory of businesses that developed in the digital world, you will notice an exponential curve. You see it in costs going down exponentially (e.g., solar energy) or volume going up exponentially (e.g., AirBnB) or market value going up exponentially (e.g., Tesla) but it happens every time.

This characteristic of Digital Business makes Digitization a devastating juggernaut. And here’s the trap: when a start-up Digitizes an industry, it starts very small and so, for a while, even though its growing exponentially, you can’t see it. Look at the growth of the new-car market share of EV’s and you will see this. At first, that market share is in the low decimals and so, even though it may be doubling every 18 months, you don’t notice it. By the time it gets to 1%, it becomes unstoppable. (If you double 1% 7 times you go over 100%)

Think of Tesla: in the beginning, everybody laughed at the idea of an automobile motored by packs of computer batteries. What’s happening now? Tesla is one of the top 10 most valuable companies in the world; their technology is 5 years ahead of any other competitor; do you think they are going to stop innovating for 5 years so that everybody catches up? No, they won’t. Unless they mess up their business model, it’s nearly impossible for the traditional car companies to catch up with them. Most likely, all those car companies will perish because the real competition will come from start-up Chinese companies that don’t have a legacy of brick-and-mortar thinking.

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So… where do Digital Technologies fit in this narrative? Naturally, if new business models emerged that were imagined for Cyberspace, the development of technologies followed that trend. Digital Technologies are very different from the business systems of the past 50 years. They are perfect for businesses operating in Cyberspace. Because Digital Businesses leverage the ‘laws’ of the Cyber-universe, Digital Technologies are not accessories; they are an integral and intimate part of business models. It is perhaps because of this intimacy of Digital Tech that Digital Businesses grow exponentially.

3D Printing, Cloud computing, nanotechnology, genetic engineering, mobile apps, social networks, RPA, Big Data Analytics, AI, digital twins, remote robotic surgeries, blockchain – these Digital Technologies all have this one thing in common: they are part of the cyber-universe; they were made for the virtual world of the internet and computers. They aren’t just tools; they are core constituents of industries and businesses. They’re at the centre, not at the periphery.

The scariest and most dangerous aspect of Digital Technologies, though, is in how inexpensive and how accessible they are. Starling, a digital bank in the UK, is an app with AWS as the backbone. Any small startup can access AI API’s from the open source domain and build amazing applications with very little investment. 3D Printing is extremely accessible. Complete businesses are able to operate with an iPad connected to AWS or Azure. Digital Tech is extremely accessible without the penalty of major investments that have traditionally been the ‘province’ of large IT departments of big corporations.

In Summary

Digitization means you move your business to Cyberspace. You completely re-imagine your business model – how you produce, what you offer, how you reach customers, who are your competitors, how you are organized, how people work – everything – to take advantage of the core characteristics of Cyberspace, i.e.:

1- There is no distance

2- The ‘building’ materials are software and data

3- Growth is exponential

4- Digital Tech is extremely accessible