Irving Wladawsky-Berger

The Transformative Power of Blockchain

“Blockchain matters because no business operates in isolation,” says Blockchain for Business, a recently published book by Jai Arun, Jerry Cuomo, and Nitin Gaur.  “Multiple institutions can achieve more together than any single institution can alone.  By implementing business processes that leverage the collective knowledge of the group, processes can be orders of magnitude more cost-efficient.  New processes that were not possible before blockchain, can be created.  This opens new opportunities and creates competitive advantage for many businesses.”

Since it fist came to light over a decade ago as the public, distributed ledger for the Bitcoin cryptocurrency, people have struggled to understand what blockchain is about and what it’s good for.  This is not unusual for potentially transformative technologies in their early stages, as was the case with the Internet in the early-mid 1990s.  The key question is whether blockchain has the potential to become a truly transformative technology over time.  Most everyone agrees.  According to Gartner, the business value-add of blockchain will be more than $176 billion by 2025, and will exceed $3.1 trillion by 2030.

There are two fairly distinct blockchains camps, - one primarily focused on blockchain as the underlying platform for cryptocurrencies, the other on the use of blockchain in the business world.  The cryptocurrency camp, - best characterized by Bitcoin, - is mostly based on public permissionless blockchains, which operate anonymously and require some kind of proof-of-work or proof-of-stake systems.  The second camp, - best characterized by Hyperledger, - is mostly interested in business applications, and is based on the use of private or public permissioned blockchains networks to handle interactions between institutions that are known each other.

Free-Market, Free-Trade Capitalism at a Crossroads

The global economy has undergone considerable change over the past few decades.  Results have been mixed.  On the positive side, the digital revolution has significantly improved the quality of life of billions around the world.  Technology advances like the smartphone and wireless Internet, and the economic development brought about by globalization have led to the dramatic decline of extreme poverty around the world.  However, these benefits have been accompanied by major dislocations in labor markets, benefiting workers in low-cost developing nations while severely impacting workers in advanced economies.

The promise of technological progress and globalization as drivers of growth and prosperity has been a reality for many, but it’s also created winners and losers within nations, leading to rising economic inequality and fueling the rise of populism in countries around the world.  What’s going on?  I believe that part of the answer to this very important question can be found by exploring the evolution of free-market, free-trade capitalism over the past couple of centuries.

Adam Smith, the 18th century Scottish economist and philosopher, is the father of free market, free trade capitalism, and one of the major figures of The Enlightenment.  In the The Wealth of Nations, considered the first modern work of economics, he explained that in a free market, an individual pursuing his own self-interests tends to also promote the good of his community as a whole, and that the free market, while appearing chaotic and unrestrained, is actually guided to produce the right results by a so-called invisible hand.

The past 200 years have seen many variants of capitalism.  They’re all generally based on the private ownership of the means of production, their operation for profit, and the accumulation of capital.  Neoclassical economics, first formulated in the 19th century, led to a laissez-faire model of capitalism, based on the premise that given all relevant information people will make rational decisions, markets on their own will achieve the right results, and government interventions, - e.g., regulations, subsidies, tariffs, - are almost always a bad idea.

Faith in neoclassical economies was shattered in the 1930s by the Great Depression, giving rise to Keynesian economics, named for British economist John Maynard Keynes.  His pragmatic, mixed model of capitalism, based on a predominantly private sector economy but with an appropriate role for the public sector, dominated economic thinking for the next four decades.

From “Buy What We Have” to “Connected Customer Strategies”

Adapting to the ongoing digitization of the economy is one of the key challenges faced by just about every company around the world.  While there are many ways a company can leverage digital technologies to differentiate itself from competitors, two are particularly prominent: streamline operations to develop higher quality products at competitive prices, and provide a superior, cost-effective customer experience through digital channels

The explosive growth of mobile devices means that a company can be engaged with its customers whether they are at home, at work, or shopping in a store.  But, digital customers can be fickle and hard to satisfy.  A successful business will try to make each of its clients feel special by understanding and addressing their unique requirements, and by providing excellent customer service and quickly resolving problems when they come up.  This is hard, which is also why it may very well be the most important way for a business to stand out from its competitors.

“Thanks to new technologies that enable frequent, low-friction, customized digital interactions, companies today are building much deeper ties with customers than ever before,” said a recent Harvard Business Review (HBR) article, The Age of Continuous Connection by Nicolaj Siggelkow and Christian Terwiesch, in its opening paragraph.  “Instead of waiting for customers to come to them, firms are addressing customers’ needs the moment they arise - and sometimes even earlier.  It’s a win-win: Through what we call connected strategies, customers get a dramatically improved experience, and companies boost operational efficiencies and lower costs.”

Most companies engage with their customer fleetingly, using what the authors call the buy what we have model.  In it, companies provide high-quality offerings at competitive prices, but it’s up to customers to identify their needs and seek out the appropriate products or services to meet them.  The key problem with the traditional buy what we have journey is that company and customer are poorly connected throughout.

Decision Making in Our Increasingly Complex Organizations

A couple of years ago I attended a seminar by University of Toronto professor Avi Goldfarb, who along with UoT colleagues has been conducting research on the economic value of AI.  Goldfarb explained that the best way to assess the impact of a new radical technology is to look at how the technology reduces the cost of a widely used function.  For example, computers are essentially powerful calculators whose cost of digital operations has been dramatically going down over the past several decades thanks to Moore’s Law.  Over the years, we’ve learned to define all kinds of tasks in terms of such digital operations, e.g., inventory management, financial transactions, word processing, photography.  Similarly, the economic value of the Internet can be described as reducing the cost of communications and of search, enabling us to find and access all kinds of information, - including text, pictures music and videos.

Viewed through this lens, our AI revolution can be viewed as reducing the cost of predictions.  The explosive growth of big data and advanced algorithms like machine learning have enabled us to analyze and extract insights from all that data.  Prediction means anticipating what will happen in the future, and given the widespread role of predictions in business, government and our everyday life, AI is already having a major impact on all kinds of human activities.  Decision making, the process of identifying and choosing alternatives, will be particularly impacted by advances in AI.

Decisions typically involve two main tasks: predictions and judgement.  Judgement is the part of decision making that, unlike prediction, cannot be explicitly described to and performed by a machine and is based on human factors like expertise, intuition, and unconscious feelings.  As machine predictions become inexpensive and commonplace, the human judgement that leverages and complements prediction will become more valuable, especially given the increasing complexity of the decisions our institutions are called upon to make.

“It’s the best and worst of times for decision makers,” said McKinsey in a recent article, Untangling your Organization’s Decision Making.  “Swelling stockpiles of data, advanced analytics, and intelligent algorithms are providing organizations with powerful new inputs and methods for making all manner of decisions.”  On the other hand, “Corporate leaders also are much more aware today than they were 20 years ago of the cognitive biases - anchoring, loss aversion, confirmation bias, and many more - that undermine decision making without our knowing it.”

The Business Value of Augmented Reality

I recently heard a very interesting presentation at the 2019 MIT CIO Symposium, - Why Companies Need an Augmented Reality Strategy, - by Harvard professor Michael Porter and James Heppelmann, CEO of PTC, an industrial software company.  The talk was based on their HBR article A Manager’s Guide to Augmented Reality.

We generally think of products as physical entities built with a combination of mechanical and electrical components, - e.g., appliances, cars, agricultural machines, industrial equipment, - some quite simple and some highly complex.  But, in a 2014 HBR article, Porter and Heppelmann introduced the notion of smart connected products (SCPs), a whole new class of products that, in addition to mechanical and electrical components, use digital components like microprocessors, sensors, data storage, software, and connectivity in a wide variety of ways.  Smart connected products are radically reshaping companies and exposing them to new competitive opportunities and threats, while altering industry boundaries and creating entirely new industries.

Through its first five decades, IT helped companies become significantly more productive, by automating many of their processes, reengineering their overall operations, and reaching out beyond the boundaries of the enterprise.  But, their actual products were largely unaffected.  This is all now changing with the rise of the Internet of Things (IoT), cloud computing, Big Data, AI, and other innovations whose combined impact is driving the new era of smart connected products.

As the world’s digital and physical infrastructures converge, IT is now an integral part of the products themselves. Digital technologies are designed right into the products.  Massive amounts of product-usage data can now be gathered, stored and analyzed by a variety of applications in the product’s cloud counterpart.  The cloud might also include a digital twin of each specific physical product, that is, a highly realistic 3-D digital model that monitors the real-time status of the digital twin’s physical counterpart, - e.g., a jet engine, elevator or turbine, - and helps make important decisions such as the need for preventive maintenance to prevent a product failure.