Irving Wladawsky-Berger

The Long-Term Impact of Early-Career Setbacks

Fail fast, fail often is one of Silicon Valley’s best known mantras.  Is there something to this belief that if you’re not failing fast and often you may be stuck in a stagnating endeavor?  After all, social scientists have their own Matthew Effect, - i.e., the rich get richer and the famous get more famous, - as evidenced in our age of rising economic inequality and superstar dynamics.

In early March, - just before Covid-19 brought normal life to a screeching halt, - I attended a very interesting seminar by Northwestern professor Dashun Wang.  Over the past several years, professor Wang, along with various collaborators, has been investigating the impact of early-career setbacks on the future careers of scientists.

“Setbacks are an integral part of a scientific career, yet little is known about their long-term effects,” notes a recent article he co-authored in Nature Communications.  “Despite the ubiquitous nature of failures, it remains unclear if a setback in an early career may augment or hamper an individual’s future career impact.”  The Matthew Effect would suggest that early-career success is an important determinant of a successful scientific career.  On the other hand, early setbacks could well be a marker for future achievement, teaching young scientists, entrepreneurs, artists, etc, valuable lessons that they wouldn’t have otherwise learned, i.e., what doesn’t kill you makes you stronger.  Which is the most likely scenario?

Could AI Reshape the Global Balance of Power?

The National Security Commission on Artificial Intelligence (NSCAI) was established by the US Congress in Fiscal Year 2019 to “advance the development of artificial intelligence, machine learning, and associated technologies by the United States to comprehensively address the national security and defense needs of the United States.”  A few months ago, the 15 member Commission, - led by former Google CEO Eric Schmidt  and former deputy secretary of defense Robert Work, - released its interim report. The final report is due to be released in March, 2021.  It remains to be seen how the Covid-19 pandemic will impact the final report’s recommendations and release date.

“The convergence of the artificial intelligence revolution and the reemergence of great power competition… threaten the United States’ role as the world’s engine of innovation and American military superiority,” said the interim report in its opening statements.  “How the United States adopts AI will have profound ramifications for our immediate security, economic well-being, and position in the world…  We are concerned that America’s role as the world’s leading innovator is threatened… We know strategic competitors are investing in research and application.  It is only reasonable to conclude that AI-enabled capabilities could be used to threaten our critical infrastructure, amplify disinformation campaigns, and wage war.”

Like the Internet, - let’s remember that ARPANET was started in the late 1960s by the US Department of Defense, - AI is usable for military and civilian purposes.  But, - also like the Internet, - AI is a general purpose technology that can be used for a wide variety of applications, many of them beneficial, but others potentially threatening.

Scenario Planning - Formulating Strategy in the Face of High Uncertainty

“How can we formulate strategy in the face of uncertainty?,” asks Learning from the Future, a recent Harvard Business Review article by Peter Scoblic, in its opening sentence.  Answering this question has never felt more urgent as leaders prepare for the future.  “Even before the Covid-19 crisis, rapid technological change, growing economic interdependence, and mounting political instability had conspired to make the future increasingly murky.”  Uncertainty was already all-encompassing.

“And then the pandemic hit.”

When the present resembles the past, we can calculate the probability of future outcomes by analyzing past historical data.  That’s how insurance companies accurately predict the life expectancy of different people based on age, gender, general health, behavioral traits like smoking and drinking, etc.  But the situation is very different when the present doesn’t resemble the past.  “Uncertainty stems from our inability to compare the present to anything we’ve previously experienced.  When situations lack analogies to the past, we have trouble envisioning how they will play out in the future.”

Military strategists first developed scenario planning in the 1950s to help them envision the impact of a nuclear war between the US and the Soviet Union, - something that was clearly way beyond anyone’s experience.  The object of scenario planning is to assemble all known facts, trends, and other information and use them to create a number of alternative stories rich in detail, typically three or four, about plausible future outcomes along with the development paths and key events that led to such outcomes.  Altogether, the scenarios should span the scope of possible futures, although the actual future will likely include events from each scenario.

Remote Work is Surprisingly Productive, But For Many… Something Is Missing

What If Working From Home Goes on … Forever?, asks science and technology journalist Clive Thompson in the title of his June 9 NY Times Magazine article.  “The coronavirus crisis is forcing white-collar America to reconsider nearly every aspect of office life.  Some practices now seem to be wastes of time, happily discarded; others seem to be unexpectedly crucial, and impossible to replicate online.  For workers wondering right now if they’re ever going back to the office, the most honest answer is this: Even if they do, the office might never be the same.”

A recent survey found that of the 56% of respondents employed pre-Covid-19, half were working from home, - 35% having recently switched to working from home, while another 15% were already doing so pre-Covid; 37% continued to commute to work, and 10% had been recently laid-off or furloughed.  The survey was  based on two separate national samples of US data, - one which gathered 25,000 responses in early April, and the second another 25,000 responses in early May.

Thompson’s article cites the experience of Accenture, which has around 500,000 employees in more than 200 cities in 120 countries.  Before the pandemic, no more than 10% worked remotely on any given day.  But, by the middle of March, nearly all were asked to work from home.  Employees adapted quickly, said Accenture’s CTO.  The volume of video calls went up by a factor of six while those of audio calls tripled.  Despite having to switch from face-to-face to audio and video interactions, overall productivity actually went up as measured by several metrics.

It’s difficult to judge whether the surge in remote work will last.  “Home life in a lockdown is much harder than usual,” notes Thompson.  “Many workers who live alone are experiencing enforced isolation as an emotional grind… Nearly every parent I spoke to had their fingers crossed that schools and day care would reopen in the fall - at which point remote work might become an option they could choose, as opposed to one they were forced to endure.  Assuming that such a day does arrive, it’s possible that quite a few may elect to continue working outside the office.”

How Will Covid-19 Transform Urban Life?

In Why America’s Richest Cities Keep Getting Richer, a 2017 article in The Atlantic, urban studies professor and author Richard Florida wrote: “The most important and innovative industries and the most talented, most ambitious, and wealthiest people are converging as never before in a relative handful of leading superstar cities that are knowledge and tech hubs.  This small group of elite places forge ever forward, while most others struggle, stagnate, or fall behind…  They are not just the places where the most ambitious and most talented people want to be - they are where such people feel they need to be.”

Knowledge-intensive industries have long been centered in cities and surrounding metropolitan areas, where they’ve had the most access to a college educated, high skill workforce.  But, - from Milan to New York, - high density, globally connected urban areas have been ground zero for the spread of Covid-19.  Are cities now at risk of losing the superstar status they’ve enjoyed over the past several decades?

This is not the first time we’ve asked this question in the recent past.  In the mid-late 1990s, some predicted that the Internet would lead to the decline of cities, because it would enable people to work and shop from home, be in touch with their friends over e-mail, and get access to news and entertainment online.   But, instead of declining, megacities have continued to generate the greatest levels of innovation and good jobs, and thus attract a disproportionate share of the world’s talent.

Post-Pandemic, Is the World Likely to Become Significantly Less Flat?

“The golden age of globalisation, in 1990-2010, was something to behold,” wrote The Economist in a January, 2019 article.  “Commerce soared as the cost of shifting goods in ships and planes fell, phone calls got cheaper, tariffs were cut and the financial system liberalised.”

Thomas Friedman’s The World is Flat became an international best-seller in 2005 by nicely explaining what this new golden age of globalization was all about, including the key forces that contributed to flattening the world, - from the explosive growth of the Internet, open source software and related technologies; to the rise of outsourcing, offshoring and global supply chains.

In 2011 I attended a conference where Friedman was one of the speakers.  He said that we’ve transitioned from a connected to an increasingly hyperconnected global economy since he wrote The World is Flat in 2004.  Many of the companies and technologies that were part of every day conversations in 2011, - Facebook, Twitter, LinkedIn, smartphones, cloud computing, big data, broadband wireless Internet, - weren’t mentioned in his book because they had not yet been born or were still in their infancy.

The very nature of the global firm was transformed during these same decades.  In The Globally Integrated Enterprise, a 2006 Foreign Affairs article, then IBM CEO Sam Palmisano argued that the modern industrial corporation was now in its third stage of evolution in the way it conducted business around the world.

The Post-Pandemic Enterprise: What Will It Be Like?

In the near term, nations have been mostly focused on surviving the massive disruptions caused by Covid-19.  But, what about the longer term?  What will the post-pandemic new normal be like for societies and economies?  More specifically, how will the pandemic impact the world of business?  How can enterprises leverage the crisis to accelerate their journey toward what most everyone agrees will be an even faster changing future?  As Rahm Emanuel famously said in a 2008 WSJ interview: “You never want a serious crisis to go to waste.”

“The future is not what we thought it would be only a few short months ago,” said a recent McKinsey article, From thinking about the next normal to making it work.  “As businesses step into the post-coronavirus future, they need to find a balance between what worked before and what needs to happen to succeed in the next normal.”  The article offers 21 concrete recommendations for succeeding in the next normal, organized into seven major areas.  Let me summarize a few of these recommendations.

Building a More Resilient, Data-Driven Economy

“With each major crisis, be it war, pandemic, or major new technology, there has been a need to reinvent the relationships between individuals, businesses, and government,” wrote MIT professor Alex “Sandy Pentland in the first chapter of Building the New Economy.  Pentland cites two major historical examples.  In the early 20th century, the rise of mass manufacturing led to the creation of regulations governing working conditions and pay, health rules for mass-produced foods, and laws to prevent monopolies that stifled competition.  Then in mid-century, the decades following WWII saw greater access to higher education, racial and gender progress, and increased support for scientific research and medical advances.

“Today we face two simultaneous disruptions: one is the COVID-19 pandemic and resulting economic shock, and the second is the rise of pervasive digital data, crypto systems, and artificial intelligence (AI).”  The two disruptions are highly interrelated.  Digital technologies have been deployed to fight the global pandemic as well as helping us stay connected as we practice social distancing.

But, these same technologies are also increasing the already high levels of disinformation and fraud, threatening privacy rights with well-meaning public health technology measures, and likely to impact employment as institutions accelerate their embrace of digitization, AI and automation.  “These problems highlight the need to reinvent the ways data and AI are used in all of societies’ civic and government systems, both to guarantee that future pandemics can be handled better and to reinvigorate the economy but also to spread the economic benefits throughout society.”

High resilience in the face of an uncertain, changing environment is the essence of evolution and natural selection.  Building a new post-pandemic economy requires the creation of more agile, resilient systems and institutions to help us better adapt to an unpredictable future and withstand turbulent events like Covid-19.  In a resilient economy, power and decision-making should be distributed among a diverse set of stakeholders rather than concentrated in a few hands.

Even When Plans Are Useless, Planning Is Indispensable

“As scientists race to develop a cure for the coronavirus, businesses are trying to assess the impact of the outbreak on their own enterprises,” wrote MIT professor Yossi Sheffi in a February 18 article in the Wall Street Journal.  “Just as scientists are confronting an unknown enemy, corporate executives are largely working blind because the coronavirus could cause supply-chain disruptions that are unlike anything we have seen in the past 70 years.”

Sheffi is Director of the MIT Center for Transportation and Logistics.  He’s written extensively on the critical need for resilience in global enterprises and their supply chains, - including The Power of Resilience and The Resilient Enterprise, - so they can better react to major unexpected events.  Covid-19 is the kind of massively disruptive event he had in mind when he wrote those books.

While learning from historical precedents is always a good idea, recent supply chain disruptions - the 2003 outbreak of SARS in Asia, the 2011 Fukushima nuclear disaster, or the 2011 Thailand floods, - were very different from our current pandemic.  Those events were much more localized, lasted a relatively short time, and they mostly impacted supply, not demand.  The impact of Covid-19 is much bigger, affecting consumer demand as well as supply chains all over the world, and likely to last quite a bit longer.  “Today’s supply chains are global and more complex than they were in 2003,” with factories all over the world affected by lockdowns and quarantines.  Apple, for example, works with suppliers in 43 countries.

An Increasingly Digital “New Normal”

About a dozen years ago, I attended a conference where I was interviewed on stage by then WSJ technology columnist Walter Mossberg.  He started out by asking me about IBM’s near-death experience in the early 1990s, and the subsequent technical and cultural transformation that made it possible for IBM to reinvent itself and survive, while many other IT companies didn’t make it.  In particular, we discussed whether a successful company transformation must be preceded by the kind of major crisis IBM went through.  When it comes to humans, the ancient Greeks certainly thought so, as reflected in their tragedies.

Transformative change is very difficult for established companies.  Over the years, they’ve amassed valuable assets and extensive organizations.  Already consumed with managing their existing operations, they may look at transformative change as more of a threat or distraction than an opportunity, - unless they’re in dire straits and have no other choice, as was the case with IBM.

A serious crisis is an opportunity for companies to focus on the actions needed to survive in a fast changing environment.  As Rahm Emanuel famously said in a 2008 interview with the WSJ: “You never want a serious crisis to go to waste.”  In that spirit, how should companies take advantage of the Covid-19 crisis, - arguably the biggest shock the world has experienced since WWII, - to accelerate their journey toward what most everyone agrees will be an increasingly digital future?

The Urgent Need to Strengthen the Nation’s Resilience

Following World War II and the onset of the Cold War with the Soviet Union, the US undertook a series of measures to strengthen the resilience of the country.  These included a significant expansion of government support for scientific research in universities and R&D labs, leading to product innovations from the private sector and better weapons from the defense industry, which contributed to making the US the most prosperous and secure nation in the world.

Another important measure was the expansion of educational opportunities, like the GI Bill which offered the nation’s 16 million WWII veterans payments of tuition and living expenses to attend high school, college or vocational/technical schools.  By 1956, over 2.2 million had used the GI Bill to attend college or university, and 5.8 million had used it for some kind of job training program.

In the 1950s the government enacted the National Interstate and Defense Highways Act, which led to the construction of over 48,000 miles of the Interstate Highway System at a total price estimated at over $500 billion, - the largest public work in America .  The Act had a dual purpose: facilitating the economic growth of the country as well as supporting the country’s defense during a conventional or nuclear war should it be necessary.

And, last but far from least, in the late 1960s the government launched ARPANET, the digital infrastructure that eventually became the Internet.  ARPANET was supported by the Department of Defense to significantly enhance the resilience of the country following a nuclear attack by enabling computers to communicate with each other using a flexible packet-switching digital network.

But, this post-war focus on resilience has significantly waned over the past few decades.  Let me explain.

Blockchain and Public Health Solutions

The Blockchain Research Institute (BRI) is a global think tank dedicated to the strategic implications of blockchain technologies to business, government and society.  On March 26, I participated in a virtual roundtable convened by the BRI to discuss the potential use of blockchain technologies for public health solutions.  The roundtable’s findings and recommendations were released in early April in Blockchain Solutions in Pandemics: A Call for Innovation and Transformation in Public Health.

The report identified five key areas where blockchain could be deployed to fight Covid-19 as well as future pandemics: identity, health records and shared data; just-in-time supply chains; sustaining the economy; a rapid response registry for medical professionals; and incentives models to reward responsible behavior.  In each of these areas, the report presented uses cases where blockchain is already being deployed, and recommended a number of blockchain related public health measures that will help better prepare for future pandemics.  Given the broad scope of the report, I will focus my attention on one area in particular: identity, health records and shared data.

Getting Through Highly Uncertain Times - Some Lessons Learned

What does it take to get through highly uncertain times, like the ones we’re in the middle of as we confront the Covid-19 pandemic?  Like most of us, I’ve lived through times of high uncertainty in both my personal and professional lives.  On the personal front, my main observation is that most of us are much more resilient than we realize.  I leave it to psychologists and other experts to offer advice on what it takes to get through such times.

But, when it comes to getting through tough times in our professional life, I’d like to share some lessons learned based on my experiences when IBM, - the company I joined in 1970 after completing my university studies, - almost went out of business in the early 1990s.  Let me describe a few of those lessons.

Dealing with a Highly Unpredictable Future

The high degree of uncertainty surrounding the Covid-19 pandemic is one of its most frustrating qualities.  How long will the pandemic last?  When will normal life return?  When will a vaccine be available?  Not only don’t we have definitive answers, we don’t even know how to best frame these critical questions.  The answers we get from the most trusted of experts feel too vague, - their explanations full of caveats and probabilities, - as they should.  How can we start making sense of such an unpredictable future?

It wasn’t all that long ago that we didn’t have much use for probabilities in our daily life, - outside of weather reports, election predictions and baseball.  But that’s all been changing in our complex economy and society.   Probabilities have been playing an increasing role in our work and personal lives given our newfound ability to quantify just about anything.  In all kinds of everyday situations, - from medical diagnoses to financial decisions, - we’ve had to learn to live and make decisions in the messy, uncertain world of probabilities.

Probabilities are inherently hard to grasp, - especially for an individual event like the weather or an election.  “People understand that if they roll a die 100 times, they will get some 1’s,” wrote David Leonhardt in a 2017 NY Times column.  “But when they see a probability for one event, they tend to think: Is this going to happen or not?  They then effectively round to 0 or to 100 percent…  And when the unlikely happens, people scream: The probabilities were wrong!”

Measuring the Effectiveness of Social Distancing Policies

One of the most interesting projects in the MIT Connection Science group I’m affiliated with is The Atlas of Inequality.  The project, - led by visiting professor Esteban Moro and professor Alex ‘Sandy’ Pentland - uses aggregated anonymous geolocation data from digital devices to estimate where different groups of people in US cities spend their time.  Over time, the project will be expanded to cities around the world.  The data show the significant income inequality among people in those cities, not just by neighborhoods as you’d expect, but also in the restaurants, stores and other places beyond their neighborhoods which they visit every day.

A couple of weeks ago, the Atlas research group started to apply their geolocation data and methods to analyze the effectiveness of the social distancing policies adopted in the New York metropolitan area in response to the Covid-19 pandemic.  These policies include school closures, bans on non-essential gatherings, limiting restaurants to take-out orders, and strict stay-in-place measures.   There’s no way to empirically measure the impact of these social distancing measures in real time on the spread of Covid-19.  You can only measure their impact retrospectively, or simulate what might happen in the future based on past data.

However, you can empirically address a key set of important question: how have these social distancing policies changed mobility and social behavior?; how does social distancing behavior vary across the New York metropolitan area?; how does the behavior vary across the variety of demographic groups in the NY metro area?; and overall, how well are people following these social distance measures?

The Coming Era of Decision Machines

“Artificial intelligence (AI) is the pursuit of machines that are able to act purposefully to make decisions towards the pursuit of goals,” wrote Harvard professor David Parkes in A Responsibility to Judge Carefully in the Era of Prediction Decision Machines, an essay recently published as part of Harvard’s Digital Initiative.  “Machines need to be able to predict to decide, but decision making requires much more.  Decision making requires bringing together and reconciling multiple points of view.  Decision making requires leadership in advocating and explaining a path forward.  Decision making requires dialogue.”

In April, 2017 I attended a seminar by University of Toronto professor Avi Goldfarb 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 have dramatically decreased over the past several decades.  Over the years, we’ve learned to define all kinds of tasks in terms of digital operations, e.g., financial transactions, word processing, photography.  Similarly, the Internet has drastically reduced the cost of communications and of access to all kinds of information, - including text, pictures, music and videos.

Viewed through this lens, the AI revolution can be viewed as reducing the cost of predictions.  Prediction means anticipating what is likely to happen in the future.  Over the past decade, increasingly powerful and inexpensive computers, advanced machine learning algorithms, and the explosive growth of big data have enabled us to extract insights from all that data and turn them into valuable predictions.

Given the widespread role of predictions in business, government and everyday life, AI is already having a major impact on many human activities.  As was previously the case with arithmetic, communications and access to information, - we will be able to use predictions in all kinds of new applications.  Over time, we’ll discover that lots of tasks can be reframed as prediction problems.

The Long-Term Future of Work and Education: Three Potential Scenarios

“Experts differ widely in their predictions about how technological innovation will change the labor market, but they all see a need for changes in education,” write British professors Ewart Keep and Phillip Brown in  a recently published article, Rethinking the Race Between Education and Technology.  While experts don’t generally agree on much, they’re pretty much of one mind when it comes to the growing importance of skills and education in our 21st century digital economy.

Every past technological transformation ultimately led to more jobs, higher living standards and economic growth.  But, as a number of recent studies concluded, to ensure that this will indeed be the case, our emerging knowledge economy should be accompanied by the expansion of educational opportunities for everyone.

While noting that this is the most likely scenario for the next 10 - 15 years, Keep and Brown also consider two potential longer-term scenarios.  Perhaps AI will lead to even more pervasive and fundamental transformations in the nature of work, making it difficult for even those with a college or higher education to find a good job.  Beyond that, some have suggested that in the more distant future we might see an even more radical, science-fiction-like transformation: the end of work as we’ve long known it.

The authors argue that considering such a spectrum of possibilities will help us better prepare for what’s essentially an unpredictable future.  In that spirit, their paper discusses three different labor market scenarios: labor scarcity, job scarcity, and the end of work.

Honest Conversations - The Key to a Winning Transformational Strategy

“Nearly every organization - whether private, social, or governmental - is grappling with huge strategic challenges, often with a need to reimagine its very purpose, identity, strategy, business model, and structure,” writes Harvard emeritus professor Michael Beer in his recently published book Fit to Compete.  “Most of these efforts to transform will fail.  And in most cases, they miss the mark not because the new strategy is flawed, but because the organization can’t carry it out.”

For over three decades, professor Beer and his various collaborators have been analyzing the reasons why so many organizational transformations fail.  In general, the common root cause has been the failure to align the organization’s culture and management processes with the strategic directions they’re after.  The book argues that two interrelated reasons explain these failures.

First, “the whole system of organizing, managing, and leading has to be transformed if organizational behaviors and underlying mindsets are to be changed.”  A transformational strategy that aims to take advantage of new technology and market innovations must involve the whole organization.  But, we often forget that such transformations are truly disruptive, not only to the marketplace but also to your own organization.  You cannot transform a large complex organization through business-as-usual objectives, - e.g., growing revenue and profit, cutting expenses, improving quality, developing better products and services.

Any major company-wide initiative must have the strong and visible support of the CEO and other top executives in the company.  The initiative must be carefully nurtured and protected in its early phases until it’s strong enough to stand on its own.  In any organization, there’s a natural competition for resources between new ventures and the existing lines of business.  Human nature being what it is, managers in the existing units will often feel that any new investments are best given to them to grow their businesses, rather than invested in a new, unproven area. This is one of the many challenges that leaders of the new initiative must skillfully navigate, otherwise the inevitable cultural and political – that is, human – issues will slow them down and potentially kill the new venture.

Can Democracy and Free Markets Survive in the Coming Age of AI?

Can technology plan economies and destroy democracy? is the provocative title of an essay in the end-of-2019 issue of The Economist.  “The success of market- and semi-market-based economies… has made the notion of a planned economy seem like a thing of the past.”  But, given all the data that can now be gathered by billions of smartphones and 10s of billions of sensors, - with many more to come, - could our increasingly intelligent and powerful AI systems “replace the autonomous choices on which the market is based?… And if technology can outperform the invisible hand in the economy, might it be able to do the same at the ballot box when it comes to politics?” 

As we’ve already seen, AI applications “can provide not just data on what people want and will tolerate, but also the means to manipulate those desires.  When such means are available to actors within or outside a state the struggle to gain, or for that matter retain, a democracy which reflects a genuine popular will might become even harder than it is.”  Could this all mean that free-market economics and liberal democracy will become obsolete over the coming century?

These questions were often raised and repeatedly tested throughout the 20th century, as various governments attempted to redesign their economies and societies in accord with what were believed to be scientific laws.  But, most such schemes, especially those carried out by authoritarian states, ended up as complete failures.  And some went tragically awry, - like Stalin’s collectivization of agriculture in the Soviet Union and Mao’s Great Leap Forward in China, - both of which brought death and disruption to millions.

The State of AI Adoption - High Performers Show the Way

For the past few years, the McKinsey Global Institute has been conducting a yearly survey to assess the state of AI adoption.  Its 2017 survey of over 3,000 AI-aware executive found that outside the technology sector, AI adoption was at an early, often experimental stage.  Only 20% of respondents used any AI-related technology in a core part to their business.  A common theme throughout the report was that the same players who were leaders in the earlier waves of digitization and analytics were the early leaders in the AI wave.

The McKinsey 2018 survey garnered responses from over 2,000 participants from a wide range of company sizes across 10 industry sectors.  Overall, the 2018 survey found that while the business world had begun to adopt AI, few companies had in place the foundational building blocks that would help them to generate value from AI at scale.  30% were conducting AI pilots.  Nearly half, 47%, had embedded at least one AI capability in their standard business processes, but only 21% reported using AI across multiple business functions.  AI investments were still quite small, with almost 60% of respondents saying that less that one-tenth of their digital budgets went toward AI.

The most recent Global AI Survey was published in November of 2019.  McKinsey garnered responses from over 2,300 participants, nearly 80% of whose companies were using AI in some capacity.  Overall,  the survey showed that “Most companies report measurable benefits from AI where it has been deployed; however, much work remains to scale impact, manage risks, and retrain the workforce.”  AI is becoming more mainstream, with 58% of respondents using AI in at least one function, - a nearly 25% increase over the previous year; and 30% reported using AI across multiple business units, - a nearly 50% increase.

One of the survey’s major findings is that a small share of high performers, around 3% of companies using AI, are already achieving outsize business results.   High performing companies are much further along in scaling the use of AI in their organizations, with an average of 11 different use cases compared an average of 3 among the other companies.

Conceptualizing AI in Human Terms is Misleading and Potentially Harmful

“We speak of machines that think, learn, and infer.  The name of the discipline itself - artificial intelligence - practically dares us to compare our human modes of reasoning with the behavior of algorithms,” writes Oxford doctoral candidate David Watson in his recently published article The Rhetoric and Reality of Anthropomorphism in Artificial Intelligence.  “Despite the temptation to fall back on anthropomorphic tropes when discussing AI, however, I conclude that such rhetoric is at best misleading and at worst downright dangerous.  The impulse to humanize algorithms is an obstacle to properly conceptualizing the ethical challenges posed by emerging technologies.”

What do we mean by intelligence?  In 1994 the Wall Street Journal published a definition which reflected the consensus of 52 leading academic researchers in fields associated with intelligence: “Intelligence is a very general mental capability that, among other things, involves the ability to reason, plan, solve problems, think abstractly, comprehend complex ideas, learn quickly and learn from experience.  It is not merely book learning, a narrow academic skill, or test-taking smarts.  Rather, it reflects a broader and deeper capability for comprehending our surroundings - ‘catching on,’ ‘making sense’ of things, or ‘figuring out’ what to do.”  This is a very good definition of general intelligence, - the kind of intelligence that’s long been measured in IQ tests, and that, for the foreseeable future, only humans have.

On the other hand, specialized intelligence, - the ability to effectively address well-defined, specific goals in a given environment, - is the kind of task-oriented intelligence that’s part of many human jobs.  In the past several years, our increasingly smart machines have become quite proficient at handling a variety of such specialized intelligent tasks.  AI technologies are approaching or surpassing human levels of performance in vision, speech recognition, language translation, the early detection and diagnosis of various forms of cancer, and other capabilities that were once viewed as the exclusive domain of humans.

The Pace of Creative Destruction is Accelerating

“A gale force warning to leaders: at the current churn rate, about half of S&P 500 companies will be replaced over the next ten years,” is one of the key insights from the 2018 Corporate Longevity Forecast.  The forecast is conducted every two years by Innosight, the innovation consulting firm co-founded by renowned Harvard professor Clayton Christiansen (who sadly died from cancer on January 23).  “The 33-year average tenure of companies on the S&P 500 in 1964 narrowed to 24 years by 2016 and is forecast to shrink to just 12 years by 2027.”

Shrinking company lifespans in the S&P 500 is a useful indicator of marketplace turbulence, driven to a large extent by technology disruptions and business model changes.  Every year, companies drop off the list for a variety of reasons.  They may have run into hard times and their market cap size fell below a certain threshold, - currently around $6 billion; they may have been overtaken by faster growing firms; or they could have ceased to exist as an independent company due to a merger, acquisition or private equity deal.

According to the Innosight Forecast report, a few key megatrends are responsible for the market turbulence behind the changing makeup of the S&P 500.

Why Some AI Efforts Succeed While Many Fail

Winning with AI, - a 2019 report based on a survey jointly conducted by the MIT Sloan Management Review and the Boston Consulting Group, - found that 90% of respondents agree that AI represents a business opportunity for their company.  The global survey attracted over 2,500 respondents from 29 industries and 97 countries, and conducted interviews with 17 executives leaders of AI initiatives in large organizations.

The report classified the total survey population into four subgroups based on their understanding of AI tools and concepts and their levels of adoption of AI applications: Pioneers (20%) are leading-edge organizations that both understand and have widely adopted AI; Investigators (30%) understand AI but have not deployed applications beyond the pilot stage; Experimenters (18%) are learning by doing, conducting pilots without a deep understanding of AI; and Passives (32%) have not adopted AI and have little understanding of the technology.

“Many AI initiatives fail,” was the report’s overriding finding.  “Seven out of 10 companies surveyed report minimal or no impact from AI so far.  Among the 90% of companies that have made at least some investment in AI, fewer than 2 out of 5 report obtaining any business gains from AI in the past three years. This number improves to 3 out of 5 when we include companies that have made significant investments in AI.  Even so, this means 40% of organizations making significant investments do not report business gains from AI.”

Innovation and National Security in the 21st Century

“Countries that can harness the current wave of innovation, mitigate its potential disruptions, and capitalize on its transformative power will gain economic and military advantages over potential rivals,” was the top finding of the Innovation and National Security Task Force which was commissioned by the Council of Foreign Relations (CFR) to assess the current state of US technological innovation.  The Task Force noted that leadership in innovation, research and technology since World War II has made the US the most secure and economically prosperous nation on earth.

“Today, this leadership position is at risk,” the Task Force warned.  Federal support and funding for R&D has stagnated over the past two decades.  “Washington has failed to maintain adequate levels of public support and funding for basic science.  Federal investment in R&D as a percentage of GDP peaked at 1.86 percent in 1964 but has declined from a little over 1 percent in 1990 to 0.66 percent in 2016.”

The US has successfully responded to technological competition in the past.  Sputnik was a tipping point in the space race with the Soviet Union during the cold war, leading to, among other things, a significant increase in the number of graduate student fellowships in STEM disciplines, of which I was personally a beneficiary.  Another prominent example is the strong economic competition from Japan in the 1980s, which the US fended off a decade later with our leadership in the Internet and other major digital innovations.

The Internet of Things is Changing the World

“How the world will change as computers spread into everyday objects,” is the title of the lead article in a comprehensive review of the Internet of Things (IoT) in a recent issue of The Economist.  Like many technological advances, IoT has been long in coming.  Ubiquitous or Pervasive Computing dates back to the 1990s, when neither the necessary low-cost devices and wireless networks were anywhere near ready.  “But the transformation is about to go into overdrive, notes The Economist.  “One forecast is that by 2035 the world will have a trillion connected computers, built into everything from food packaging to bridges and clothes.”

IoT promises to bring many benefits, including a whole new generation of innovative products.  We’ve long thought 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.  IoT has been ushering a whole new class of smart connected products.  In addition to mechanical and electrical components, these new products use digital components like microprocessors, sensors, data storage, software, and connectivity in a wide variety of ways.

As the world’s digital and physical infrastructures converge, digital technologies are being designed right into all kinds of consumer and industrial products.  Internet-connected smart doorbells, for example, include motion sensors and video cameras that notify a home owner when someone arrives at the door.  Using a smartphone app, the home owner can watch and talk to the visitor, while a video of their interaction is saved for an added level of security.

“The magic of computers is that they provide in a machine an ability - to calculate, to process information, to decide - that used to be the sole preserve of biological brains,” writes The Economist.  “The IoT foresees a world in which this magic becomes ubiquitous.  Countless tiny chips will be woven into buildings, cities, clothes and human bodies, all linked by the internet… Over the past century electricity has allowed consumers and businesses at least in the rich world, access to a fundamental, universally useful good - energy - when and where they needed it.  The IoT aims to do for information what electricity did for energy.”

The Puzzling Economic Impact of Transformative Technologies

“General purpose technologies (GPTs) are engines for growth,…” wrote Erik Brynjolfsson, Daniel Rock, and Chad Syverson in The Productivity J-Curve, a working paper recently published by the National Bureau of Economic Research (NBER).  “These are the defining technologies of their times and can radically change the economic environment.  They have great potential from the outset, but realizing that potential requires larger intangible and often unmeasured investments and a fundamental rethinking of the organization of production itself.”

As we’ve learned over the past two centuries, there’s generally been a significant time lag between the broad acceptance of a major new transformative technology and its ensuing impact on companies, governments and other institutions.  Even after reaching a tipping point of market acceptance, it takes considerable time, - often decades, - for these new technologies and business models to be widely embraced across economies and societies, - and for their full benefits to be realized.

In her 2002 influential book, Technological Revolutions and Financial Capital, economic historian Carlota Perez wrote that since the advent of the Industrial Revolution, we’ve had a major technological revolution every 60 years or so.  First was the age of machines and factories in the latter part of the 18th century.  This was followed by the age of steam, coal and iron in the early to mid 19th century; electricity and steel around the 1870s-1880s; and automobiles, oil and mass production in the early decades of the 20th century.  Then came the computer and communications revolution in the latter part of the 20th century, ushering the transition from the industrial economy of the past two centuries to our present digital economy.

According to Perez, the economic transformations accompanying these technologies are composed of two distinct periods, each lasting roughly 20 to 30 years.  First comes the installation period when the new technologies emerge into the marketplace, entrepreneurs launch many new startups, and venture capitalists encourage experimentation with new business models. This is then followed by the deployment period, when the now well accepted technologies and business models become the norm, leading to long-term economic and productivity growth.

The State of Financial Health Around the World

The Gallup Global Financial Health Study was published in May of 2018.  The study is based on a survey of over 15,000 people in 10 different countries.  Conducted by Gallup in partnership with the MetLife Foundation and the Rockefeller Philanthropy Advisors, the study aimed to develop two key financial measures: how secure do people feel around the world, and how much control and influence they believe they have over their financial situations.

“The degree to which people perceive they are in control of and can influence their financial situation is an important and complementary dimension under the umbrella of financial health,” said the study.  While researchers have developed valuable measures of financial inclusion and financial literacy, data on financial security and control have never existed before.  Such financial measures should help organizations and countries around the world make evidence-based decisions on how to improve the ability of people to lead more financially healthy and secure lives.

The countries in the survey spanned the gamut from highly advanced to developing economies.  The ten countries, and their approximate GDP per capita in $1000s, are: the US ($58), UK ($43), Japan ($42), South Korea ($37), Greece ($37), Chile ($27), Colombia ($24), Vietnam ($14), Bangladesh ($6.3), and Kenya ($3.6).

The study defines financial control as “the extent to which people perceive they are in control of and can influence their financial situation - an important and complementary dimension within the umbrella of financial health.”  Financial control is composed of four key variables: locus of control -  having power over events in one’s life; resilience - ability to come up with solutions to small financial shocks; self-efficacy - extent of influence over future outcomes; and autonomy - having decision-making power.

Can AI Help Develop and Execute a Competitive Business Strategy?

Strategy For and With AI, a recent article in the MIT Sloan Management Review by David Kiron and Michael Schrage, argues that while formulating a comprehensive strategy for the use of AI technologies is absolutely necessary, it’s not sufficient.  “Creating strategy with AI matters as much - or even more - in terms of exploring and exploiting strategic opportunity.”  The article is based on a survey of over 3,000 executives, managers and analysts from companies in over 100 countries and 20 industries, as well as on interviews with executives and academics.

AI is expected to be the biggest commercial opportunity for companies and industries over the next couple of decades.  Two 2018 reports, one by PwC and one by McKinsey, estimated that AI has the potential to incrementally add around $13-$15 trillion to global economic output by 2030.  The growth will come from productivity gains, - e,g, the continuing automation of routine tasks, and AI-based tools to augment human capabilities, - and from increasingly sophisticated, AI-enhanced products, services, and system-wide applications.

Machine learning advances, like deep learning, have played a central role in AI’s recent achievements, giving computers the ability to be trained by ingesting and analyzing large amounts of data instead of being explicitly programmed.  Machine learning methods for solving problems, - subtle adjustments to the numerical weights that interconnect huge number of artificial neurons, - are radically different and complement the way humans solve problems.  But, while being a very powerful tool, machine learning, and AI in general, lack all-important human qualities like common sense and empathy, so their decisions and suggestions should be carefully reviewed by humans.  People and technology must closely collaborate, with each playing the particular role they are best at.

Every day we can read about the latest AI advances from research labs, startups and large companies.  AI technologies are approaching or surpassing human levels of performance in vision, speech recognition, language translation, playing championship-level Go, and the early detection and diagnosis of various forms of cancer.  But, can AI help address broad, open-ended and ambiguous problems like developing and executing a competitive business strategy?

How to Survive and Thrive in a World of Disruption

Looking back upon my long career, it’s frankly sobering how many once powerful IT companies are no longer around or are shadows of their former selves, e,g, Digital, Wang, Sun Microsystems, BlackBerry.  The forces of disruption might have been more powerful in the fast-changing IT industry, but no industry has been immune.  In less than two decades, the global recorded music industry has lost over half its revenues, while the drop in newspaper advertising revenue in the US has been even steeper.  Retail has undergone major changes with the rise of e-commerce, as has telecommunications with the transition to mobile phones.

Why have so many companies been done in by disruptive technological and market changes?  Is it that in spite of all their efforts in strategy formulation, their management was unable to anticipate them and were caught by surprise?  Or it is that, as if actors in a kind of Greek tragedy, they see the changes coming and understand what needs to be done, but are somehow unable to make the needed strategic and cultural transformations?

“Evolutionary fitness of organizations is determined by their ability to effectively respond to environmental changes,” write Leo Tilman and Charles Jacoby in their recently published book Agility: How to Navigate the Unknown and Seize Opportunity in a World of Disruption.  “Extinctions generally follow a familiar pattern.  Environmental signals - both positive and negative - are undetected or ignored.  Leaders fail to recognize the new reality and accept it for what it is.  No viable strategic vision for the new environment is developed.  Instead, a myriad of tactical activities is deployed, without amounting to a coherent strategy.  Existential risks remain hidden until it’s too late.”

The Increasing Demand for Hybrid, “T-Shaped” Workers

A recent article in The Atlantic used the USS Gabrielle Giffords to illustrate the important changes taking place in the US Navy, - and in the world of work in general.  After discussing various features of its advanced design, the article noted that the ship’s most futuristic aspect is its crew.  “It was designed to operate with a mere 40 souls on board - one-fifth the number aboard comparably sized legacy ships and a far cry from the 350 aboard a World War II destroyer.  The small size of the crew means that each sailor must be like the ship itself: a jack of many trades and not, as 240 years of tradition have prescribed, a master of just one,” noted the article.  Due to increasingly sophisticated technologies and the high cost of personnel, the USS Gabrielle Giffords is among a new class of Navy ships that’s turned away from specialists in favor of so-called hybrid sailors who are able to handle multiple tasks and rapidly acquire new skills.

The replacement of highly specialized workers with problem-solving generalists who are able to handle and quickly learn new tasks has been taking place across a wide variety of  occupations and industries.  Increased productivity and lower costs, i.e., doing more with less, are some of the reasons for this change.  But, the increased complexity of products, applications and systems, and the unanticipated problems that often follow are other important reasons.

The concept of hybrid or T-shaped workers was first introduced around 25 years ago as a metaphor to describe the kind of individuals that the Navy and many other organizations are looking for.  The vertical stroke in the letter T represents a depth of skills and expertise in one or more specific fields; the horizontal bar implies broad multidisciplinary and social skills, as well as the ability to collaborate with experts across disciplines to jointly solve complex problems.

Impact of AI on Government - Opportunities and Challenges

A few weeks ago I wrote about Leveraging AI to Transform Government based on a 2018 report by the Partnership for Public Service and the IBM Center for the Business of Government.  The report illustrates how government is using AI by describing four use cases being pursued by different agencies.  In 2019, the Partnership and IBM collaborated on two additional reports, Assessing the Impact of AI on the Work of Government, and Building Trust, Managing Risks.

This first report is focused on the impact of AI on the federal workforce, based on an analysis of the jobs and tasks most susceptible to automation, as well as on roundtables and interviews with over 40 AI experts.  The overriding conclusion is that, over time, AI will have a deep impact on how government works.  More than 80 different federal occupations, employing over 130,000 workers, are likely be significantly transformed, including 30,000 in the Treasury Department, 16,000 in Defense, and 5,000 in Transportation, as well as a variety of occupations in independent agencies like the Securities and Exchange Commission and the Government Publishing Office.

In particular, AI will have a major impact in three key areas: the transformation of the federal workday, the potential for personalized customer service and the increased importance of technical and data skills.  Let me summarize the findings and recommendations in each of these areas.

The World is Facing a Period of Digital Disorder

“Geopolitical competition and government regulations are poised to remake the digital economy,” notes the global consulting firm A.T Kearney in Competing in an Age of Digital Disorder, - a recent research report.  “The global technological landscape is currently being reconstructed, subjecting the once-free and unfettered transfer of data across borders to new and greater digital walls.  Terms such as the ‘splinternet’ and a ‘digital cold war’ are becoming ubiquitous, forcing companies everywhere to shift strategies on everything from procurement to customer engagement.”  Or, in a nutshell, the world is in a period of digital disorder.

According to the report, the first stage of the world’s digital transformation started in the early 1990s, with the advent of the commercial Internet and the World Wide Web.  Over the next 25 year, advances in digital technologies, big data and a wide variety of applications have led to sweeping economic and societal transitions.  Over 50% of the world’s population, almost 4 billion people, had Internet access by 2018, a nearly fourfold increase since 2001.

This initial period of explosive growth, light government regulation, and what the report calls digital order, was followed around 2016 by a period of digital disorder.  Governments are now intensifying their regulatory activities in an attempt to maximize the upsides of the digital economy while mitigating its downsides.  At the same time, governments are pursuing national policies and escalating global competition to take the lead in emerging digital technologies, particularly in AI and 5G wireless networks.  “As a result, a global battle for technological supremacy in the 21st-century digital economy is heating up, raising the risk of competing technological standards and creating the potential for an ‘islandized’ digital environment.  Altogether, these actions are creating a digital disorder that is becoming more difficult for companies to navigate.”

In particular, firms are now facing a growing backlash against the increasing digitalization of the economy and society.  In the past, the technology industry was largely seen as a positive societal force, enabling billions around the world to rise out of poverty and lead more productive lives.  Today, by contrast, Big Tech is being challenged on a host of issues, including the dissemination of false and damaging information, the rising inequality between the digital haves and have-nots, and the growing number of cyberattacks, theft of personal data and identity fraud.  “In the United States alone, identity fraud increased 8 percent in 2017, victimizing 16.7 million people and resulting in theft from consumers of $16.8 billion.”

Leveraging AI to Transform Government

“AI has the potential to help address many of our country’s pervasive problems and advance our safety, health and well-being,” said The Future Has Begun, a report on the impact of AI on government by the Partnership for Public Service and the IBM Center for the Business of Government.  “That promise has great potential to transform government.”

 “The most challenging problems AI may help us solve - from fighting terrorists to serving vulnerable populations - will involve government.  More immediately, though not less consequentially, AI will change the way public servants do their jobs.  Because of the impact AI could have on how governments ensure our safety and further our well-being, government leaders are likely to play a significant role in dictating future directions for AI.”

To illustrate how government is using AI, the report is focused on four concrete use cases being pursued by different agencies.  In-depth interviews were conducted with 14 people from 10 organizations, including the various government agencies involved, as well as their collaborators in non profits and universities.  Let me briefly summarize each of these four case studies.

The Blockchain Value Framework

In July, 2019, the World Economic Forum and Accenture released Building Value with Blockchain Technology, a white paper aimed at helping organizations evaluate blockchain’s benefits and build an effective business case.  The white paper is based on a global survey of 550 individuals across 13 industries, including automotive, banking, and retail; interviews with CEOs and public sector leaders; and a detailed analysis of 79 blockchain projects.

Survey participants were asked for the top reasons that led their organizations to invest in blockchain solutions.  Across all industries, the top three priorities were “full traceability of information on the blockchain”; “ability to ensure data has not been tampered with”; and “increased security”.  “New business products or services” ranked last among the options for investing in blockchain, suggesting that at this early stage, improving existing products and services is a higher priority than considering new business opportunities.

As is often the case, fear that the train is leaving the station is another powerful motivator for investing in a new, fast growing technology.  Worldwide spending on blockchains solutions is expected to reach almost $3 billion in 2019 and close to $12.5 billion in 2022.  51% of survey respondents mentioned “missing out on developing new products/services” as their top concern if they don’t invest in blockchain in the near future; 23% mentioned “missing out on efficiency gains”; and 15% were concerned with “missing out on cost savings.”

How We Learned to Prosper Using Fewer Resources

“We have finally learned how to tread more lightly on our planet.  It’s about time,” writes Andrew McAfee in the Introduction to his new book, More from Less: The Surprising Story of How We Learned to Prosper Using Fewer Resources - and What Happens Next.   McAfee is Co-Director of MIT’s Initiative on the Digital Economy and a Principal Research Scientist at the MIT Sloan School of Management, as well as a prolific writer of books and articles.

“For just about all of human history our prosperity has been tightly coupled to our ability to take resources from the earth,” he adds.  “So as we became more numerous and prosperous, we inevitably took more: more minerals, more fossil fuels, more land for crops, more trees, more water, and so on.  But not anymore.  In recent years we’ve seen a different pattern emerge: the pattern of more from less.”

What led to the emergence of a more-from-less pattern?  The book provides a provocative answer to this question.  The most important forces responsible for the change are technological progress and capitalism.

How to Support the Widespread Adoption of AI

“Artificial intelligence is reshaping business - though not at the blistering pace many assume,” notes Building the AI-Powered Organization, an article in Harvard Business Review by McKinsey partners Tim Fountaine, Brian McCarthy, and Tamim Saleh in its opening sentence.  A number of studies agree that AI is the biggest commercial opportunity for companies and industries over the next 10-15 years.  Two recent reports by McKinsey and PwC respectively concluded that AI has the potential to incrementally increase global economic output between now and 2030 by an additional $13 to $15 trillion.

“Yet, despite the promise of AI, many organizations’ efforts with it are falling short,” adds the HBR article.  Surveys with thousands of executives, showed that most firms are only using AI in ad hoc pilots or applying it to a single business process.  Only 8% of firms are engaged in practices that support widespread adoption.

Why the slow progress?  “At the highest level, it’s a reflection of a failure to rewire the organization.  In our surveys and our work with hundreds of clients, we’ve seen that AI initiatives face formidable cultural and organizational barriers…  at most businesses that aren’t born digital, traditional mindsets and ways of working run counter to those needed for AI.”

To support the widespread adoption of AI, companies must make three fundamental shifts.

Despite Their Huge Upside Potential, Why Do Most Platforms Fail?

“For anyone who follows the world of business, it is now common knowledge that the most valuable firms on the planet and the first companies to surpass the trillion-dollar mark in value (albeit temporarily) are platforms,” note Michael Cusumano, Annabelle Gawer, and David Yoffie in their recently published book The Business of Platforms: Strategy in the Age of Digital Competition, Innovation, and Power.  “Moreover, in a recent list of more than two hundred current and former ‘unicorns’ - startups with valuations of $1 billion or more - we estimated that platforms made up between 60 and 70 percent.”

What do we mean by platform?  The book offer a simple definition.  “Platforms, in general, connect individuals and organizations for a common purpose or to share a common resource.”  A platform strategy differs from a product strategy in that it relies on an external ecosystem to generate complementary innovations and/or business transactions.  The effect is much greater potential for innovation and growth than a single product-oriented firm can generate alone.

Platforms are all about network effects.  The more products or services a platform offers, the more users it will attract, helping it then attract more offerings, which in turn brings in more users, which then makes the platform even more valuable.  Moreover, the larger the network, the more data is available to customize offerings to user preferences and better match supply and demand, further increasing the platform’s value.

The State of AI in the Enterprise

A few months ago, Babson College professor Tom Davenport gave a talk on the state of AI in the enterprise at the annual conference of MIT’s Initiative on the Digital Economy.  His talk was based on two recent US surveys conducted by Deloitte, the first one in 2017 followed by a second in 2018.  Davenport was a co-author of both reports.

The 2017 survey was focused on the responses of 250 US executives who were leading the applications of AI in their companies.  The larger 2018 survey reached out to 1,100 IT (46%) and line-of-business (54%) executives from US-based companies (64% at the C-level) and 10 different industries.  All of these respondents were early AI adopters compared with their counterparts in an average company, - 90% were directly involved in their company’s AI projects, and 75% said that they had an excellent understanding of AI.

Davenport started his talk by summarizing the key findings in the Deloitte surveys:

• 20-30% of enterprises are early adopters, having implemented at least one AI prototype or production application;
  
• Many projects are in pilots but some are already in production;
• Relatively simple low hanging fruit projects prevail over more ambitious and complex moon shots;
  
• Only 24% cited “reducing headcount through automation” as one of their top AI priorities;
• The great majority of respondents believe that AI leads to moderate or substantial changes in job roles and skills;
• Implementation, integration, data issues and talent top the list of challenges faced by early adopters;
  
• Further AI growth is inevitable.

A Quarter Century into the Digital Age

The digital age was born around 25 years ago with the public release of the Netscape browser in 1994.  The browser made it much, much easier for the average person to access information over the Internet, sparking the explosive growth of users, websites and online applications.  This was a truly historical point, marking the transition from the industrial economy of the past couple of centuries to a new kind of digital economy.   Ever since those days, the digital age has continued to advance driven by a stream of new technologies, and business models, from smartphones and cloud to big data and machine learning.

A few months ago, the McKinsey Global Institute published Twenty-five Years of Digitization, a report offering ten insights to help business leaders navigate this still relatively new digital world.  Let me first list the ten insights, and then briefly comment on a few of them.

• Large economic potential is linked to digitization - and much of it is yet to be captured;
• Digital superstars are rising far beyond the US big four and China’s big three;
• Digital natives are calling the shots;
• Digital changes everything - even industry boundaries;
• Agile is the new way to compete;
• Playing the platform economy is an in-the-money option;
• Self-cannibalization and innovation are a necessity for digital reinvention;
• Going after the right M&A is key;
• Effective management of digital transformation is vital - but challenging; and
  
• Leveraging, and transitioning from, digital to new frontier technologies is an imperative.

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 if 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.

Is the Digital Revolution At Last Shaking Up Banking?

Digital transformations have generally followed three distinct stages.  First comes the use of IT to improve the productivity and quality of back- and front-end processes.  Distribution is next, leveraging the universal reach and connectivity of the Internet for online transactions and access to information. Finally, the transformation reaches a tipping point when technologies radically change the business model and user experience, leading to a fundamental disruption of the industry.

While such a digital journey is ultimately inevitable, the pace varies widely across industries.  The IT industry has been the most disrupted, - often by its own digital creations in a kind of sorcerer’s apprentice scenario.  Over my long career, I’ve seen many once powerful IT companies done in by technology and market changes, and either disappear altogether or become shadows of their former selves.

Beyond IT, few industries have felt the impact of digital forces like media.  In less than two decades, the global recorded music industry has lost over half its revenues, while the drop in newspaper advertising revenue in the US has been even steeper.  Retail has also undergone major changes with the rise of e-commerce, as has telecommunications with the transition to mobile phones.  How about banking, which has long been a leading user of information technologies?

The May 4 issue of The Economist addressed this question in a special report on Banking and Technology, with several articles on the subject.  “Over the past two decades people across the world have seen digital services transform the economy and their lives,” said its lead article.  “Taxis, films, novels, noodles, doctors and dog-walkers can all be summoned with a tap of a screen.  Giant firms in retailing, carmaking and the media have been humbled by new competitors.  Yet one industry has withstood the tumult: banking.”

But, adds The Economist, “technology is at last shaking up banking.”  Two major forces are driving this shake-up: the dramatic growth of digital payments in China and other Asian countries; and the rise of mobile banking in the West, especially among young digital natives.

The Economic Value of Digital Identity

Identity plays a major role in our everyday life.  It’s the key that determines the particular transactions in which we can rightfully participate as well as the information we’re entitled to access.  Think about going to an office, getting on a plane, logging on to a website or making an online purchase.  We generally don’t pay much attention to the management of our identity credentials unless something goes seriously wrong.

For much of history, our identity systems have been based on face-to-face interactions and on physical documents and processes.  But, the transition to a digital economy requires radically different identity systems.  In a world that’s increasingly governed by digital transactions and data, our existing methods for managing security and privacy are proving inadequate.  Data breaches, large-scale fraud, and identity theft have become more common.  In addition, a significant portion of the world’s population lacks the credentials needed to participate in the digital economy.  Our existing methods for managing digital identities are far from adequate.

A few weeks ago, the McKinsey Global Institute released Digital Identification: A key to inclusive growth, a comprehensive report at over 100 pages that examined the state of digital identities around the world.  The report analyzed the value creation potential of good digital IDs for individuals and institutions, as well as the potential risks and challenges.  McKinsey’s analysis was informed by nearly 100 concrete uses of digital IDs in seven countries: Brazil, China, Ethiopia, India, Nigeria, the UK and the US.

The Evolution of Work in Urban Labor Markets

A few weeks ago I heard a very interesting keynote by MIT economist David Autor at the annual conference of MIT’s Initiative on the Digital Economy.  The talk was based on his recently published paper Work of the Past, Work of the Future.

Professor Autor started his talk by noting that over the last four decades, the US and other industrial economies have seen a remarkable rise in wage inequality by educational attainment, with the earnings of the most-educated increasing, and the earnings of the least-educated falling in real terms.  Since the 1980s, the earnings of those with a four year college degree have risen by 40% to 60%, the earnings of those with a post-college education have risen 80% to 100%, and the earnings of those with a high school education or less have fallen among men and barely changed among women.

At the same time, the supply of educated workers in the US has vastly increased.  From the 1960s to the present, the share of the labor force with college or post-college degrees rose from 12% to 39%,  while the share of those with some college rose from 13% to 28%.  But the share of those with a high school degree or less fell from 75 to 33%.  Based on the law of supply-demand, one would expect that the wages of college-educated workers would have fallen in recent years because there are so many of them, while the wages of those with a high school education or less would have risen because they are a significantly smaller share of the labor force.  But, as we well know, this has been far from the case.

Autor addressed this seeming paradox in his keynote by analyzing a number of potential explanations.  Eroding union penetration, falling minimum wages, and the rise of China, India and other low labor-cost countries have certainly contributed to the wage erosion of non-college workers.  But his main focus was the changing structure of work in the US and other advanced economies, as well as how these changes have unfolded across different geographic regions, from low density rural areas to high density cities.

Blockchain - the Networked Ecosystem is the Business

A few weeks ago I attended two back-to-back blockchain events in Toronto, - the Blockchain Research Institute All-Member Summit followed by the inaugural Blockchain Revolution Global conference.  Both events included a number of excellent talks and panels.  One of the presentations I particularly enjoyed was Scaling Blockchain for the Enterprise: Emerging Business Models, by IBM’s Andrew Martin and Smitha Soman.  Their presentation was based on their recently published report Building your blockchain advantage.

Since it first came to light a decade ago as the public, distributed ledger for the Bitcoin cryptocurrency, people have struggled to understand what blockchain is all about and what it’s truly good for.  This is not unusual for potentially transformative technologies in their early stages, as was the case with the Internet, and is still the case with AI.  The key question is whether blockchain has the potential to become a truly transformative technology over time.  With few exceptions, the answer is positive.

The essence of blockchain, notes the report, is that the unit of competition is the networked ecosystem, no longer a single enterprise.  “As blockchain adoption continues to gather momentum, organizations must approach their blockchain strategies with the same rigor and commitment as any other new and transformative strategies.  They can’t just fall back on prototypes alone.  They need to build a robust business case for blockchain that includes a fair incentive model to attract all the partners required for the success of their networks.”

A Novel Method for Measuring the Value of Free Digital Services

Gross domestic product (GDP) is the basic measure of a country’s overall economic output, based on the market value of all the goods and services the country produces.  Most measures of economic performance used by government officials to inform their policies and decisions are based on GDP figures.  But, concerns have long been raised about the adequacy of GDP-based measurements given the major changes that’ve taken place in economies around the world over the past several decades.

GDP is essentially a measure of production.  While suitable when economies were dominated by the production of physical goods, GDP does not adequately capture the growing share of services and increasingly complex solutions that characterize advanced economies.  Nor does it reflect important economic activity beyond production, such as income, consumption and living standards.

In 2008, a Commission on the Measurement of Economic Performance and Social Progress led by Nobel-prize winning economists Joseph Stiglitz and Amartya Sen was convened to look at the limits of GDP as an indicator of economic performance and progress.  “What we measure affects what we do; and if our measurements are flawed, decisions may be distorted.” noted its report.  The Commission recommended complementing classical measures of GDP and economic production with additional measurements that captured people’s well being, as well as factoring in measurements to help reflect the evolution of the economy into the future.

Over the past decade, a new set of concerns have arisen with the rise of the Internet-based digital economy.  How do you measure the value of the increasing amounts of free information goods available over the Internet, including Wikipedia articles, Google maps, Facebook interactions, smartphone apps and You Tube videos?

AI and the Evolution of History

Several weeks ago, I wrote about the event I attended on February 28 to celebrate the launch of MIT’s new Schwarzman College of Computing, - MIT’s strategic response to the rise of artificial intelligence, - a technology that will reshape “geopolitics, our economy, our daily lives and the very definition of work” in the decades to come.  The all-day celebration featured talks and panels on a wide variety of topics, some focused on innovative applications of AI technologies, others on the challenging issues raised by these powerful technologies.

A few weeks later I wrote about one of these challenging issues, the impact of AI on our social interactions, based on the talk by MIT professor Sherry Turkle on Rethinking Friction in Digital Culture, and a related article by Yale professor Nicholas Christakis on How AI Will Rewire US.

I now want to discuss the interview conducted by NY Times columnist Thomas Friedman with former US Secretary of State Dr. Henry Kissinger at the February 28 event.  The interview, - which can be seen in this video, - was based on a June, 2018 article by Dr. Kissinger in The Atlantic, - How the Enlightenment Ends: “Philosophically, intellectually - in every way - human society is unprepared for the rise of artificial intelligence.”