Irving Wladawsky-Berger

The Rise of Global, Superstar Firms, Sectors and Cities

In the 1990s, the Internet was supposed to usher a much more open, decentralized, democratic economy and society.  Startups with innovative business models where now able to reach customers anywhere, anytime.  Companies, from the largest to the smallest, could now transact with anyone around the world.  Vertically integrated firms became virtual enterprises, increasingly relying on supply chain partners for many of the functions once done in-house.  Experts noted that large firms were no longer necessary and would in fact be at a disadvantage in the emerging digital economy when competing against agile, innovative smaller companies.

Some even predicted that the Internet would lead to the decline of cities.  People could now work and shop from home; be in touch with their friends over e-mail, video calls, and text messaging; and get access to all kinds of information and entertainment online.  Why would anyone choose to live in a crowded, expensive, crime-prone urban area when they could lead a more relaxing, affordable life in an outer suburb or small town?

But, as we well know, it hasn’t quite worked out as expected.  Instead, we’ve seen the rise of the global superstar company, the unicorn startup, and the winner-take-all city.  As it’s turned out, the Internet’s universal reach and connectivity has led to increasingly powerful network effects and to the rise of platform economies.

The World Bank’s Human Capital Index

Last week I wrote about a recently published World Bank report, The Changing Nature of Work.  The report highlights the increasing importance of investing in human capital by both the public and private sectors.  All around the world, the demand for workers who are good at complex problem-solving, interactions with clients and colleagues, and able to adapt to new tools and technologies is rising, while the demand for less advanced skills that can be replaced by technology is declining.  Neglecting investments in human capital, it warned, can dramatically weaken a country’s competitiveness.

“The world is healthier and more educated than ever…,” notes the World Bank in a companion report, The Human Capital Project.  “But a large and unfinished agenda remains.  Life expectancy in the developing world still lags far behind that of rich countries…  Worldwide, more than 260 million children and youth are not in school. Meanwhile, nearly 60 percent of primary school children in developing countries fail to achieve minimum proficiency in learning.”

Why should countries invest in human capital?  Can early health care and education prepare children to succeed and prosper as adults in a rapidly changing world?  What are the barriers to nurturing human capital and how can countries overcome them?  To address these important questions, the World Bank introduced the Human Capital Index (HCI).  The HCI is designed to quantify the amount of human capital that a child born today can expect to attain by age 18 given the prevailing health and education conditions in the country where the child lives.  It will be updated periodically and refined as data measures improve.  This video nicely explains the HCI and what it measures. 

Human Capital and the Changing Nature of Work

People have long feared that machines are coming for our jobs.  Throughout the Industrial Revolution there were periodic panics about the impact of automation on work, going back to the so-called Luddites, - textile workers who in the 1810s smashed the new machines that were threatening their jobs.

Automation anxieties have understandably accelerated in recent years, as our increasingly smart machines are now being applied to activities requiring intelligence and cognitive capabilities that not long ago were viewed as the exclusive domain of humans.  But on balance, such fears appear to be unfounded, noted the World Bank in a comprehensive recent report on The Changing Nature of Work.  Our problem is not that there won’t be enough work in the future.  Our key problem is that, in many countries, the workforce isn’t prepared for our fast unfolding future.

In a recent article in Foreign Affairs, World Bank Group President Jim Yong Kim warned that the world is facing a Human Capital Gap.  “Governments in pursuit of economic growth love to invest in physical capital - new roads, beautiful bridges, gleaming airports, and other infrastructure.  But they are typically far less interested in investing in human capital, which is the sum total of a population’s health, skills, knowledge, experience, and habits.  That’s a mistake, because neglecting investments in human capital can dramatically weaken a country’s competitiveness in a rapidly changing world, one in which economies need ever-increasing amounts of talent to sustain growth.” 

Blockchain Beyond the Hype

A recent issue of The Economist included a special report on cryptocurrencies and blockchains.  The Economist’s overall conclusion was that “Bitcoin has been a failure as a means of payment, but thrilling for speculators.”  Its assessment of blockchain was somewhat more positive.  “For blockchains, the jury is still out,… For all the technology’s potential, though, most attempts to use it remain tentative,…  The advantages of blockchains are often oversold.” 

In 2016, blockchain made the list of the World Economic Forum’s Top Ten Emerging Technologies.  That same year, blockchain also made its first appearance in Gartner’s yearly hype cycles.  Even The Economist has been guilty of overselling when it featured blockchain in the cover of its October 31, 2015 issue with the tag line “The Trust Machine: How the technology behind Bitcoin could change the world.” 

Is there too much hype surrounding blockchain?  Absolutely,… but not surprising.  All potentially transformative technologies are oversold in their early stages.  Remember the dot-com bubble of the late 1990s.  Blockchain is still in its early phases of experimentation and adoption.  Much work remains to be done on standards, platforms, interoperability, applications and governance. 

But, does blockchain have the potential to become a truly transformative technology over time?  Yes, said McKinsey in a recent article on the strategic value of blockchain beyond the hype.  The article starts out by acknowledging that all the hype around blockchain makes it difficult to nail down not just blockchain's long term strategic value, but also what it actually is and what it isn’t in the present. To make sure everyone is on the same page, the article first recaps what it calls “the nuts and bolts of blockchain.”  Let me start by summarizing blockchain’s nuts and bolts.

Redefining Work - Leveraging Human Capabilities in a Future of Expanding Automation

How will labor markets evolve in our 21st century digital economy?  What’s the likely future of jobs, given that our increasingly smart machines are now being applied to activities requiring intelligence and cognitive capabilities that not long ago were viewed as the exclusive domain of humans?  How will AI, robotics and other advanced technologies transform the very nature of work?

Over the past few years, a number of papers, reports and books have addressed these very important questions.  They generally conclude that AI will have a major impact on jobs and the very nature of work.  For the most part,  they view AI as mostly augmenting rather than replacing human capabilities, automating the more routine parts of a job and increasing the productivity and quality of workers, so they can focus on those aspect of the job that most require human attention.  Overall, few jobs will be entirely automated, but automation will likely transform the vast majority of occupations. 

A recent McKinsey report noted while there will likely be enough work to maintain full employment by 2030, the transition will be very challenging, “on a scale not seen since the transition of the labor force out of agriculture in the early 1900s in the United States and Europe, and more recently in in China.”  The report estimated that “up to 375 million workers, or 14 percent of the global workforce, may need to change occupations - and virtually all workers may need to adapt to work alongside machines in new ways.”

Given these predictions about the changing nature of work, what should companies do?  How should firms prepare for a brave new world where we can expect major economic dislocations along with the creation of new jobs, new business models and whole new industries, and where many people will be working alongside smart machines in whole new ways?

The Jobs Outlook for 2022

A few weeks ago, the World Economic Forum (WEF) released The Future of Jobs Report 2018.  The report takes an in-depth look at the world of work in what the WEF calls the Fourth Industrial Revolution. The report is based on a survey of over 300 chief human resource officers and top strategy executives from large global companies across 12 industry sectors.  These companies collectively represent more than 15 million employees, and conduct business in 20 developed and emerging economies which collectively account for about 70% of global GDP.

First introduced at its 2016 annual Davos Forum, the WEF positions the Fourth Industrial Revolution within the historical context of three previous industrial revolutions.  The First, - in the last third of the 18th century, - ushered the transition from hand-made goods to mechanized, machine-based production based on based on steam and water power.  The Second, - a century later, - revolved around steel, railroads, cars, chemicals, petroleum, electricity, the telephone and radio, leading to the age of mass production.  The Third, - starting in the 1960s, - saw the advent of digital technologies, computers, the IT industry, and the automation of process in just about all industries.

“Now a Fourth Industrial Revolution is building on the Third…” wrote WEF founder and chairman Klaus Schwab in a December, 2015 Foreign Affairs article.  “The possibilities of billions of people connected by mobile devices, with unprecedented processing power, storage capacity, and access to knowledge, are unlimited.  And these possibilities will be multiplied by emerging technology breakthroughs in fields such as artificial intelligence, robotics, the Internet of Things, autonomous vehicles, 3-D printing, nanotechnology, biotechnology, materials science, energy storage, and quantum computing.”

The Future of Jobs 2018 examines the potential of these advanced technologies to eliminate and create new jobs, as well as to improve the current workplace and prepare people for emerging jobs. Rather than looking at the future of work over the longer term, the report chose to examine the 2018-2022 period, which is within the planning horizon of the companies and executives that participated in the survey.

Blockchain’s Potential for Environmental Applications

In mid-September, the World Economic Forum (WEF) released Building Block(chain)s for a Better Planet, a report that examined how blockchain technologies could be harnessed to address serious environmental issues, better manage our shared global environment and help drive sustainable growth and value creation.  The report outlines some of the world’s most-pressing environmental challenges and highlights eight blockchain-based game changers that could lead to transformative solutions to these pressing problems.

The WEF report includes a short blockchain tutorial.  Blockchain is essentially “a new, decentralized and global computational infrastructure that could transform many existing processes in business, governance and society.”  Blockchain technologies promise to significantly improve the efficiency and security of business transactions and data sharing among participants in a global ecosystem, such as supply chains, financial services, and similar complex applications involving multiple institutions.

But, the hype surrounding blockchain, can tempt solution designers to try to use it for applications that it’s not suitable for.  The report recommends that designers first consider three key questions:

• Will blockchain solve your actual problem; is a distributed architecture vital to your solution?
• Have you built the right ecosystem of stakeholders; do they understand and trust how blockchain is being used?
• Can you acceptably manage the downside risks or unintended consequences, e.g., scalability, performance, implementation risks?

The 2018 MIT Inclusive Innovation Challenge

In 2016, MIT’s Initiative on the Digital Economy launched its first annual Inclusive Innovation Challenge (IIC).  The key objective of the IIC is to help create greater shared prosperity around the world by awarding over one million dollars in prizes each year to to entrepreneurs that are leveraging technology advances to reinvent the future of work.

“The IIC believes that Inclusive Innovation is an economic and moral imperative, and that the key question of our era isn’t what technology is going to do to our economy and society, but what we will do with technology.  By identifying and promoting the powerful global community of future of work visionaries, the IIC proactively accelerates the technology-driven solutions enabling greater economic opportunity for working people around the world facing the challenge of rapidly advancing digital progress.”

Entrepreneurs from around the globe compete for awards in four categories: income growth and job creation, skills development and opportunity matching, technology access, and financial inclusion. Approximately 1,500 organizations registered to compete this year, and 500 judges reviewed their applications.   

In 2018, rather than having one global competition as in the previous two years, there were five separate regional competitions, - North America, Latin America, Europe, Africa, and Asia, - each region selecting its own category winners.  A Grand Prize winner was then selected in each category from among the regional winners and each awarded $250,000.  The winners were announced at a gala event that took place in MIT on November 8.

The Impact of AI on the World Economy

A few weeks ago I wrote about the economic value of AI based on a recently published report by PwC.  The report’s overriding finding was that AI technologies and applications will increase global GDP by up to 14% between now and 2030, the equivalent of an additional $15.7 trillion contribution to the world’s economy.  According to PwC, AI is the biggest economic opportunity over the next 10-15 years.

I now want to discuss a September, 2018 report by the McKinsey Global Institute on the impact of AI on the world economy.

The McKinsey report is based on simulation models of the impact of AI at the country, sector, company and worker levels.  It looked at their adoption of five broad categories of AI technologies: computer vision, natural language, virtual assistants, robotic process automation, and advanced machine learning.  Its data sources included survey data from approximately 3,000 firms in 14 different sectors; around 400 potential AI use cases across a variety of industries and functions; AI’s potential to automate and transform 800 existing occupations in 46 countries; and economic data from a number of organizations including the United Nations, the World Bank, the Organization for Economic Co-operation and Development (OECD), and the World Economic Forum.

Below is a summary of the report’s key findings. 

A Biological Approach to Management

Darwinian principles seem to apply in business almost as much as in biology.  After analyzing the longevity of more than 30,000 public US firms over a 50-year span, Martin Reeves, Simon Levin, and Daichi Ueda noted in a 2016 HBR article, The Biology of Corporate Survival, that companies are disappearing faster than ever before.  “Public companies have a one in three chance of being delisted in the next five years, whether because of bankruptcy, liquidation, M&A, or other causes.  That’s six times the delisting rate of companies 40 years ago… Neither scale nor experience guards against an early demise.”

Biological systems have long been an inspiration in the study of complex systems.  In their HBR article, the authors argued that companies are not just like biological species, but in some important respects they’re actually identical to biological species.  Companies and biological systems are both what’s known as complex adaptive systems, that is, systems in which a perfect understanding of their individual components does not automatically lead to a perfect understanding of their overall system behavior.

Companies are an example of sociotechnical systems, that is, systems that have to deal with  complex technologies and infrastructures, and the even more complex issues associated with human and organizational behaviors.  Other examples include cities, government agencies, industries and economies.  The dynamic nature of their technology and human components, as well as their intricate interrelationships renders such systems increasingly unpredictable and accounts for their emergent behavior and unintended consequences.

It's All About the Business Model, - Not the Technology

In Reinvent Your Business Model, his recently published book, Mark Johnson argues that digital transformation and business model innovation are not the same thing.  New technology alone, - no matter how transformative, - is not enough to propel a business into the future.  The business model wrapped around the technology is the key to its success or failure.  Johnson is Senior Partner in Innosight, the strategy consulting firm he cofounded with Harvard Business School professor Clayton Christensen in 2000.  He’s been conducting research on business model innovation for over a decade, and in 2010 published Seizing the White Space.

Business model innovation has long been the domain of disruptive startups looking to compete against established companies by changing the rules of the game, - and, hopefully, creating new markets and reshaping entire industries.  But, it’s no longer enough for established companies to just roll out improved products and services based on their once-reliable business models.

“Building a great business and operating it well no longer guarantees you’ll be around in a hundred years, or even twenty,” notes Johnson.  “In 1965, the average length of time a company remained on the S&P 500 was thirty-three years.  By 1990, it had dropped to twenty years; in 2012, it was just eighteen.  Based on the 2017 churn rate, it is forecast that half of the S&P 500 will be replaced over the next ten years.”

Examples abound.  In the 1970s, Xerox PARC famously developed, - but didn’t commercialize, - some of the key innovations of the PC era, including the graphical user interface, the mouse and local area networks.  In 2010, Blockbuster filed for bankruptcy, a victim of Netflix’s new business models.  Done in by Apple’s iPhone and Android-based smartphones, the Blackberry, - once the undisputed leader in its market, - fell into a death spiral from which it never recovered. 

The Economic Value of Artificial Intelligence

 PwC recently released a report on the potential economic value of AI to different regions and industry sectors around the world.  The report defined AI, “as a collective term for computer systems that can sense their environment, think, learn, and take action in response to what they’re sensing and their objectives.”  By this broad definition, AI includes the automation of physical and cognitive tasks; assisting people to perform tasks better and faster; helping humans make better decisions; and automating decision making with no human intervention.

The report’s overriding finding is that AI is the biggest commercial opportunity for companies, industries and nations over the next few decades.  PwC estimates that AI advances will increase global GDP by up to 14% between now and 2030, the equivalent of an additional $15.7 trillion contribution to the world’s economy.

Around $6.6 trillion of the expected GDP growth will come from productivity gains, especially in the near term.  These include the continued automation of routine tasks, and the development of increasingly sophisticated tools to augment human capabilities.  Companies that are slow to adopt these AI-based productivity improvements will find themselves at a serious competitive disadvantage.

But, over time, increased consumer demand for AI-enhanced offerings will overtake productivity gains and result in an additional $9.1 trillion of GDP growth by 2030.  Moreover,  network effects, - that is, the more data and better insights companies are able to gather, the more appealing the products and services they’ll be able to develop, - will further increase consumer demand.  AI front-runners will gain an enormous competitive advantage through their ability to leverage this rich supply of customer data to shape product developments and business models, making it harder for slower moving competitors to catch up. 

Automation and the Changing Demand for Workforce Skills

In 2015, the McKinsey Global Institute launched a multi-year study to explore the potential impact of automation technologies on jobs, organizations and the future of work.  In the intervening three years, the study has published a number of report on the subject.

The first report, published in November, 2015, explored whether we can look forward to vast improvements in productivity and quality of life, or whether automation will mostly threaten jobs, disrupt organizations, and strain the social fabric.  Based on an analysis of around 2,000 work activities across 800 different occupations, the report concluded that “fewer than 5 percent of occupations can be entirely automated using current technology.  However, about 60 percent of occupations could have 30 percent or more of their constituent activities automated.”  In other words, relatively few jobs will be entirely automated, but automation will likely transform the vast majority of occupations.

McKinsey’s December, 2017 report analyzed whether there will be enough work in the future.  The overall conclusion was that a growing technology-based economy will create a significant number of new occupations, - as has been the case in the past, - which will more than offset declines in occupations displaced by automation.  However, “while there may be enough work to maintain full employment to 2030 under most scenarios, the transitions will be very challenging - matching or even exceeding the scale of shifts out of agriculture and manufacturing we have seen in the past.”

Let me now discuss the more recent report published earlier this year, which examined the changes in skills required of human workers over the next 10-15 years.  To do so, the study analyzed how the total number of hours worked in 25 different skill areas has changed between 2002 and 2016 and estimated the expected change in hours worked by 2030.  This was done for the US and 5 Western European countries.  I’ll focus my discussion on the US skill changes, as the European changes were similar.

Social Physics and Cybercrime Detection

A few weeks ago I wrote about social physics, a new discipline that aims to help us better understand and predict the behavior of human groups.  Social physics is based on the premise that all event-data representing human activity, - e,g,, phone call records, credit card purchases, taxi rides, web activity, - contain a special set of group behavior patterns.  As long as the data involves human activity, - regardless of the type of data, the demographic of the users or the size of the data sets, - similar behavioral dynamics apply.  These patterns can be used to detect emerging behavioral trends before they can be observed by other data analytics techniques.

Physics, biology and other natural sciences have long relied on universal patterns or principles to detect a faint signal within a large data set, - i.e., the proverbial needle in a haystack.  It’s what has enabled the discovery of very short lived elementary particles in physics, - like the Higgs boson  in 2013, - amidst the huge amounts of data generated by high energy particle accelerators.  In biology, it’s given rise to DNA sequencing and its growing list of applications in medicine, biotechnology and other disciplines. 

It’s not surprising that evolutionary biology and natural selection have led to similar universal patterns in the behavior of human crowds.  Humans and our ancestors have evolved with the drive to learn from each other because it’s been a major part of our survival over millions of years.  And if a new behavior, - whether the result of an innovative idea like the discovery of tools, or a mutation like a larger brain size, - helps a human group better adapt to a changing environment, natural selection will favor the survival of that group over others.

Social physics originated in MIT’s Human Dynamics Lab based on research by professor Alex (Sandy) Pentland, his then postdoctoral associate Yaniv Altshuler and their various collaborators.  In 2014, Pentland and Altshuler co-founded Endor, an Israeli-based startup that leverages social physics methods to make fast accurate predictions by analyzing data derived from human behavior. 

Cryptocurrencies and Blockchains - How Are They Doing After 10 Years?

Bitcoin was created about a decade ago, with the release of the original design paper, Bitcoin: A Peer-to-Peer Electronic Cash System, under the pen name of Satoshi Nakamoto.  Bitcoin aimed to become a decentralized cryptocurrency and digital payment system that would enable the secure exchange of digital money without the need for central government authorities or financial intermediaries.  It introduced the blockchain, - which most everyone agrees is a truly brilliant architecture built on decades-old fundamental research in cryptography, distributed data, distributed computing, game theory and other advanced technologies.

How are they doing after 10 years?  The September 1 issue of The Economist includes a special report on cryptocurrencies and blockchains, with nine articles on the subject. The report’s overview article doesn’t mince words in articulating its overall assessment: “Bitcoin and other cryptocurrencies are useless.  For blockchains, the jury is still out.”

“Bitcoin has been a failure as a means of payment, but thrilling for speculators,” it further added.  Its price has been subject to wild fluctuations over the past two years.  It rose from around $600 in September, 2016, to $6,000 in September, 2017, reaching a peak of over $19,000 in December, 2017, before falling to around $7,000 earlier this year.  It’s been hovering between $6,500 and $7,500 for the past few months.  Other cryptocurrencies have experienced similar price fluctuations.  “That has made a few people very rich (just 100 accounts own 19% of all existing bitcoin), encouraged others to play for quick gains and left some nursing substantial losses.”

Solow Paradox 2.0: The Lagging Impact of Technology Advances on Productivity Growth

Fewer workers is one of the key reasons for our stagnant economic growth.  Over the coming decades, the labor force is expected to shrink in most parts of the world as fertility rates continue to decline, especially in advanced and emerging economies.  The US labor force is growing very slowly while fertility rates keep hitting record lows.

Our aging economies are thus dependent on productivity gains to drive long-term economic growth, future prosperity and higher standards of living.  Which is why few topics have generated as much concern among economists and policy makers as the sharp decline in productivity growth in the US and other advanced economies over the past decade, - despite accelerating technology advances.

“Labor productivity growth is near historic lows in the United States and much of Western Europe,” noted Solving the Productivity Puzzle, a report published earlier this year by the McKinsey Global Institute (MGI).  The report analyzed the productivity-growth declines across a sample of seven countries, - France, Germany, Italy, Spain, Sweden, the United Kingdom, and the United States, - which represent about 65% of the GDP of advanced economies.  Their average productivity growth in the 5 years between 2000 and 2004 was 2.4%.  A decade later, - in the 5 year period between 2010 and 2014, - their average productivity growth had declined to .5%.  While starting to pick up recently, productivity growth remains at or below 1 percent in many of the countries in the study, still quite low relative to historical levels.

Social Physics - Reinventing Analytics to Better Predict Human Behaviors

Social physics first emerged over 200 years ago as an attempt to understand society and human behavior using laws similar to those of the physical sciences.  But, it wasn’t until the past two decades that we finally had enough data, powerful computers and sophisticated mathematical algorithms to develop quantitative theories of human social interactions.  We were now able to reliably predict how large groups of people make decisions by analyzing how information and ideas flow from person to person.

“The engine that drives social physics is big data: the newly ubiquitous digital data now available about all aspects of human life,” wrote MIT professor Alex (Sandy) Pentland in his 2014 book Social Physics: How Good Ideas Spread - The Lessons from a New Science.  “Social physics functions by analyzing patterns of human experience and idea exchange within the digital bread crumbs we all leave behind as we move through the world, - call records, credit card transactions, and GPS location fixes, among others.  These data tell the story of everyday life by recording what each of us has chosen to do… Who we actually are is more accurately determined by where we spend our time and which things we buy, not just by what we say we do.”

The book was the result of over a decade’s worth of research in the Human Dynamics group at MIT’s Media Lab.  Pentland, along with his graduate students and research associates, partnered with a variety of companies to obtain and analyze real-world data, properly anonymized to protect the privacy of the individuals whose behavior was reflected in the data.  They eventually discovered that all event-data representing human activity contain a special set of social activity patterns regardless of what the data is about.  These patterns are common across all human activities and demographics, and can be used to detect emerging behavioral trends before they can be observed by any other technique. 

The Myth of the Washed-Up, Middle-Age Entrepreneur

Steve Jobs, Bill Gates, and Mark Zuckerberg were in their early 20s; Sergei Brin and Larry Page were 25; and Jeff Bezos was just 30 when they founded their world leading high-tech companies.  Their companies are truly in a class by themselves, even having their own, somewhat frightful acronym - FAMGA.  Their founders’ ages are not only evidence that young people can be highly successful entrepreneurs, but it’s led to the belief that they’re uniquely capable of coming up with big, transformational ideas.

“Young people are just smarter,” Zuckerberg told the audience of a 2007 VC conference, adding that successful start-ups should only employ young people with technical expertise.  In 2010, PayPal’s co-founder Peter Thiel created the Thiel Fellowships, a program that provides $100,000 over two years to would-be entrepreneurs 23 and under so they can drop out of school to work on their ideas.  “The stereotype of an entrepreneur is a college drop-out,” said a recent Economist article.

“Silicon Valley has become one of the most ageist places in America,” noted a 2014 New Republic article on The Brutal Ageism of Tech, where years of experience are considered obsolete.  “People under 35 are the people who make change happen,” said VC Vinod Khosla at a 2011 conference.  “People over 45 basically die in terms of new ideas” because they “keep falling back on old habits.”  Entrepreneur and VC Paul Graham said in a 2013 interview that investors tend to be biased against older founders.  “The cutoff in investors’ heads is 32… after 32, they start to be a little skeptical.”

These various statements remind me of the 1960s counterculture saying don’t trust anyone over 30.  But, are they justified?  Are young entrepreneurs more likely to produce high-growth firms?  Can middle-age founders in their 40s be successful? 

AI - the Creation of a Human-Centric Engineering Discipline

AI is rapidly becoming one of the most important technologies of our era.  Every day we can read about the latest AI advances from startups and large companies, including applications that not long ago were viewed as the exclusive domain of humans.  Over the past few years, the necessary ingredients have finally come together to propel AI beyond the research labs into the marketplace: powerful, inexpensive computer technologies; huge amounts of data; and advanced algorithms.

Machine learning  and related algorithms like deep learning, have played a major role in AI’s recent achievements.  Machine learning gives computers the ability to learn by ingesting and analyzing large amounts of data instead of being explicitly programmed.  It’s enabled the construction of AI algorithms that can be trained with lots and lots of sample inputs, which are subsequently applied to difficult AI problems like language translation, natural language processing, and playing championship-level Go.

Over the past several decades, AI has been besieged by rounds of hype which over-promised, under-delivered, and nearly killed the field.  Once more, a recent Gartner article positioned machine and deep learning at the top of their hype cycle, - when all the excitement, publicity and promising potential often leads to a peak of inflated expectations, risking falling into the trough of disillusionment if the technology fails to deliver.  Now that AI is finally reaching a tipping point of market acceptance, it’s particularly important to be cautious and not repeat past mistakes.

In Artificial Intelligence - The Revolution Hasn’t Happened Yet, UC Berkeley professor Michael I. Jordan aims to inject such a note of caution.  “AI has now become the mantra of our current era…  The idea that our era is somehow seeing the emergence of an intelligence in silicon that rivals our own entertains all of us  -  enthralling us and frightening us in equal measure.  And, unfortunately, it distracts us…  Whether or not we come to understand intelligence any time soon, we do have a major challenge on our hands in bringing together computers and humans in ways that enhance human life.”

The Identity Challenge: On the Internet, Nobody Knows You're a Dog

I recently read Better Identity in America, a report by the Better Identity Coalition, an organization launched earlier this year to focus on promoting the development and adoption of solutions for identity verification and authentication.  The report outlines a policy agenda for improving the privacy and security of digital systems and help combat identity fraud.

How bad is the problem?  Data breaches, large-scale fraud, and identity theft are becoming more common.  In 2017, there were 16.7 million victims of identity fraud in the US, causing a loss of $16.8 billion; there was a 44.7% increase in US data breaches between 2016 and 2017 and a 30% rise in online shopping fraud; 179 million personal information records were exposed to data breaches, 69% of which were identity theft incidents.

The report notes that “the ability to offer high-value transactions and services online is being tested more than ever, due in large part to the challenges of proving identity online. The lack of an easy, secure, reliable way for entities to verify identities or attributes of people they are dealing with online creates friction in commerce, leads to increased fraud and theft, degrades privacy, and hinders the availability of many services online.”

As the report reminds us, the extent of this challenge was famously captured back in 1993 by Peter Steiner’s New Yorker cartoon with the caption On the Internet, nobody knows you’re a dog.  25 year later, the cartoon still perfectly describes the identity challenge.  If anything, the challenge is even more serious in 2018, given that the volume and variety of online transaction services are greater than ever before.

An Agile, Incremental Approach to Business Process Automation

I’ve long believed that customer self-service was key to the success of e-business, - the IBM Internet strategy I was closely involved with in the mid-late 1990s.  It was quite revolutionary how easy it was to now do for yourself so many ordinary activities that previously required a phone call during office hours or a trip to a store or office.

Moreover, such e-business applications were relatively easy to develop.  By integrating their existing transaction and data base applications with a web front-end, - a strategy we succinctly described as Web + IT, - any business could now be in touch with its customers, employees, suppliers and partners at any time of the day or night, no matter where they were.  Companies were able to engage in their core activities in a more productive way by web-enabling their back-end systems, that is, linking their web front-ends to the presentation services of their back-end applications.

I was reminded of IBM’s e-business strategy when recently reading about Robotic Process Automation (RPA), a technology for automating business processes based on emulating the manual actions of a human at a keyboard.  RPA aims to improve the operational efficiency of office and service workers by automating tedious, repetitive, tasks, such as those associated with widely used horizontal processes in HR, Finance & Accounting and IT services.

RPA enables process automation at a fraction of the cost and time of classic software development.  Rather than automating a process by redesigning the overall back-end application, RPA interfaces with the back-end system by performing the same actions that a human does via the application’s user interface.  RPAs thus creates kind of software robots, or bots for short, that work alongside the humans.

The Emergence of a Blockchain-Based Token Economy

Blockchain Revolution, published in May of 2016 by Don Tapscott and Alex Tapscott, was one of the first books that explained the promise of blockchain technologies to the general public.  Its central argument is that for nearly four decades, the Internet has been great for reducing the costs of searching, collaborating, and exchanging information.  But, it has serious limitations for business and economic activity.  “Doing business on the Internet requires a leap of faith,” the book noted.  The Internet was designed to move information, but it’s lacked the necessary trust, security and privacy safeguards to move assets of value.  With blockchain, we’re now seeing the emergence of such an Internet of value.  “Now for the first time ever we have a native digital medium for value, through which we can manage, store, and transfer any asset.”

An updated edition of Blockchain Revolution was published this past June.  A lot has happened with blockchain in the intervening two years.  The updated edition explains some of these recent developments in a new preface, including cryptoassets, permissioned networks, identity and supply chains.  I’ll focus my comments on the emergence of a blockchain-based token economy, driven by the explosive growth in the value and variety of cryptoassets.

When the original book was published, the entire cryptoasset market had a value of $9 billion, - mostly dominated by the value of Bitcoin at $7 billions, while Ether, the Ethereum cryptocurreny, had reached around $1 billion.  The new edition estimates that as of March, 2018, the cryptoasset market was around $400 billion in size, a value subject to rapid fluctuations.  In addition, a wide variety of cryptoassets have been developed over the past two years. 

What Machine Learning Can and Cannot Do

Artificial intelligence is rapidly becoming one of the most important technologies of our era.  Every day we can read about the latest AI advances from startups and large companies.  Over the past few years, the necessary ingredients have come together to take AI across the threshold: powerful, inexpensive computer technologies; huge amounts of data; and advanced algorithms, especially machine learning.  Machine learning has enabled AI to get around one of its biggest obstacles, - the so-called Polanyi’s paradox.

Explicit knowledge is formal, codified, and can be readily explained to people and captured in a computer program.  But, tacit knowledge, a concept first introduced in the 1950s by scientist and philosopher Michael Polanyi, is the kind of knowledge we’re often not aware we have, and is therefore difficult to transfer to another person, let alone capture in a computer program.

“We can know more than we can tell,” said Polanyi in what’s become known as Polanyi’s paradox.  This common sense phrase succinctly captures the fact that we tacitly know a lot about the way the world works, yet aren’t able to explicitly describe this knowledge.  Tacit knowledge is best transmitted through personal interactions and practical experiences.  Everyday examples include speaking a language, riding a bike, and easily recognizing many different people, animals and objects.

Machine learning, and related advances like deep learning, have enabled computers to acquire tacit knowledge by being trained with lots and lots of sample inputs, thus learning by analyzing large amounts of data instead of being explicitly programmed.  Machine learning methods are now being applied to vision, speech recognition, language translation, and other capabilities that not long ago seemed impossible but are now approaching or surpassing human levels of performance in a number of domains.

The Transformative Power of Analytics - The Houston Astros: a Case Study

In 2013, the Houston Astros finished the season with a 51-111 record, - the worst record in the history of the franchise, having also lost over 100 games in the previous two years.  In 2017, the Astros won 101 games, finished first in the American League West Division, and went on to win their first ever World Series.  How did the Astros go from worst team record to first World Series victory in only four years?

The answer, in a nutshell, is analytics.  In December, 2011 the Astros hired Jeff Luhnow from the St Louis Cardinals as their General Manager.  As VP of scouting and player development in St Louis, Luhnow built a strong analytics department and enjoyed great success as one of the top talent producers in baseball, helping the Cardinals win the 2011 World Series as well as reach the playoffs from 2012 to 2015.  Luhnow then brought his analytics and management skills to Houston and proceeded to transform the team into a top contender in a short few years.

Today, just every major sports team makes extensive use of sports analytics, but none more so than Major League Baseball (MLB) teams.  Baseball has long been a game of statistics, collecting and analyzing vast amounts of data going back to the founding of the MLB in the years following the Civil War. 

Top MLB players are constantly compared not just to other contemporaneous players, but to other top players across the long history of the game, - a history that was very nicely depicted in Baseball, Ken Burns excellent documentary miniseries. Babe Ruth, Willie Mays, Mickey Mantle, Hank Aaron and countless other players are never forgotten in the world of baseball statistics.  For those of us who are fans, - as I am, not surprisingly given my Cuban roots, - baseball’s rich history is a major part of our enjoyment of the game. 

Are Innovation and R&D Yielding Decreasing Returns?

Given the pace of technological change, we tend to think of our age as the most innovative ever.  But over the past several years, a number of economists have argued that increasing R&D efforts are yielding decreasing returns.

Has the ideas machine broken down?, asked The Economist  in a January, 2012 article that examined the growing concerns that we may be in a long-term period of slow innovation despite our rapidly advancing technologies.  “With the pace of technological change making heads spin, we tend to think of our age as the most innovative ever,” said The Economist.  “We have smartphones and supercomputers, big data and nanotechnologies, gene therapy and stem-cell transplants. Governments, universities and firms together spend around $1.4 trillion a year on R&D, more than ever before.”  But, perhaps these don’t quite compare with modern sanitation, electricity, cars, planes, the telephone, and antibiotics.  These innovations, first developed in the late 19th and early 20th century, have long been transforming the lives of billions.

In a September, 2012 paper, Northwestern University economist Robert Gordon questioned the generally accepted assumption that economic growth is a continuous process that will persist forever.  He wrote that the slow growth we’ve been experiencing in the US and other advanced economies isn’t cyclical, but rather evidence that long-term economic growth may be grinding to a halt.

The rapid growth and rising per-capita incomes we experienced at the height of the Industrial Revolution, - between 1870 and 1970, - may have been a unique episode in human history.  Since the 1970s, US productivity and income growth have dipped sharply except for an Internet-driven productivity boost between1996 and 2004.  Innovation may be hitting a wall of diminishing returns.  There was little growth before 1800, and there might conceivable be little growth in the future.

A similar pessimistic view was expressed by George Mason University economist Tyler Cowen in his 2011 book The Great Stagnation.  According to Cowen, over the past two centuries the US economy has enjoyed lots of low-hanging fruit, including a vast, resource rich land, waves of immigrant labor, access to education and the technological advances of the Industrial Revolution.  But, Cowen believes that we are at a technological plateau, and wonders whether long term growth is still possible because the supply of low-hanging economic fruit is nearly exhausted.

Getting on the AI Learning Curve: A Pragmatic, Incremental Approach

After decades of promise and hype, AI is now seemingly everywhere.  Over the past several years, the necessary ingredients have come together to propel AI beyond the research labs into the marketplace: powerful, inexpensive computer technologies; huge amounts of data; and advanced algorithms including machine learning.

While AI is likely to become one of the most important technologies of our era, we’re still in the early stages of deployment, especially outside leading-edge technology companies.  But, as AI continues its rapid progress, it’s not too early to ask a few important questions: What is AI’s overall value to the economy? What are the biggest application opportunities?; and, what are AI’s most serious challenges and limitations?

To address these questions, McKinsey recently published a discussion paper on the marketplace potential of AI.  The paper is particularly focused on machine learning and related technologies, and is based on a detail analysis of more that 400 use cases across 19 industries and 9 business functions.

“Two-thirds of the opportunities to use AI are in improving the performance of existing analytical use cases,” is the paper’s overriding finding.  This is a very interesting insight.  AI is now being successfully applied to tasks that not long ago were viewed as the exclusive domain of humans, - machine translation, natural language processing, defeating the world’s top Go players, - but only 16% of the use cases studied by McKinsey are greenfield cases, where only machine learning techniques can be used.  For the vast majority of the use cases, 69%, the key value of machine learning is to improve performance beyond that provided by traditional analytic techniques.  And, in the remaining 15% of cases, machine learning provided limited additional performance over existing analytical methods. 

Education, Work and US Leadership in the 21st Century

A few weeks ago, the Council on Foreign Relations (CFR) released The Work Ahead - Machines, Skills, and U.S. Leadership in the Twenty-First Century, a report by a CFR-sponsored Task Force to assess the future of work and its implications for the US economy and national security.  The Task Force was led by Penny Pritzker, - former Secretary of Commerce and founder and chair of PSP Partners, and by John Engler, - former Governor of Michigan and interim President of Michigan State University.

Their comprehensive report, - over 150 pages and 276 citations, - explored in great depth the changing nature of work as global competition and advanced technologies like AI, robotics, and smart IoT devices transform jobs and careers.  It states right up front that “The most important challenge facing the United States - given the seismic forces of innovation, automation, and globalization that are changing the nature of work - is to create better pathways for all Americans to adapt and thrive.  The country’s future as a stable, strong nation willing and able to devote the necessary resources and attention to meeting international challenges depends on rebuilding the links among work, opportunity, and economic security.”

For much of the 20th century, technology and globalization helped lead America to its leadership position in the world stage.  Underpinning this US leadership was the American Dream, - the promise that anyone can get ahead and achieve success and prosperity through talent and hard work.  But this promise has been eroding for decades.  For many of its citizens, the American Dream has been steadily disappearing.

Technology advances have led to massive innovations and efficiencies, enabling companies to get the same work done with significantly fewer people.  At the same time, many US-headquartered companies are truly global, doing business all over the world.  Beyond outsourcing jobs to countries with lower labor costs they’ve been investing and adding jobs where the demand is highest, - which has often been in faster growing emerging markets.

The US thus faces two major challenges: “creating new work opportunities, better career paths, and higher incomes for its people, while developing a workforce that will ensure U.S. competitive success in a global economy that will continue to be reshaped by technology and trade.” 

The 2018 Inclusive Internet Index

Earlier this year, the Economist Intelligence Unit (EIU) published the Inclusive Internet Index 2018.  Now in its second year, the Index analyzes and compares the current state of the Internet across 86 countries, ranging from advanced to developing economies and covering 91% of the world’s population.  Its key objective is to help policymakers understand the key factors necessary for the wide, inclusive use of the Internet in their respective countries.

Countries are evaluated based on 54 indicators organized around four major categories:

• Availability,  which captures the quality of breadth of the infrastructure available for Internet access, including network availability, access points for landline and mobile connections, and the basic electricity infrastructure needed to support Internet connectivity in urban and rural areas.
• Affordability, which measures the cost of Internet access relative to income, the competitive environment for wireless and broadband operators and the measures taken to decrease costs and promote access.
• Relevance, which looks at the availability of Internet content in the local language(s) and the value of being connected to get access to relevant services like news, entertainment, health advice and business and financial information.
• Readiness, which examines the capacity to take advantage of accessing the Internet, including level of literacy, educational attainment, cultural acceptance, privacy and security, and trust in the sources of online information.

Each country is assigned a score for each of the four categories, as well as an overall index score. 

The Impact of AI on R&D and Innovation

For the past couple of centuries, general-purpose technologies (GPTs) have been the key drivers of productivity and economic growth, - thanks to their rapid improvements in price and performance, pervasive applications, and ability to spur complementary innovations across a wide variety of industries.  The steam engine, electricity and the internal combustion engine are prominent examples of GPTs in the 18th and 19th century.  More recently, semiconductors, computers and the Internet have led to the digital revolution of the past several decades.

Beyond innovations in existing sectors, the rapidly improving price/performance of GPTs have led over time to the creation of whole new applications and industries.  For example, the steady declines in the price of electricity-generated power and the improvement in the efficiency of electric motors led to the radical transformation of manufacturing in the early part of the 20th century with the advent of the assembly line.  It also led to the creation of the consumer appliance industry, e.g., refrigerators, dishwashers, washing machines.  Similarly, as the semiconductor industry took off, it led to the historical transition from the industrial economy of the past two centuries to our ongoing digital economy.

How about artificial intelligence?  Beyond its use by leading edge technology companies, we’re still in the early stages of AI deployment.  It’s only been in the last few years that major advances in machine learning have taken AI from the lab to early adopters in the marketplace.  While considerable innovations and investments are required for its wider deployment, AI is likely to become one of the most important GPTs in the 21st century. 

Harnessing the Collective Intelligence of Humans and Machines

For over a decade, MIT professor Thomas Malone has been conducting pioneering research on the collective intelligence of groups.  Malone is the founding director of the MIT Center for Collective Intelligence, and has authored and co-authored a number of seminal articles on the subject.  A few weeks ago, Malone published Superminds: The Surprising Power of People and Computers Thinking Together, - a book that nicely explains the concept of collective intelligence and how our increasingly capable machines are now complementing the intelligence of groups of people.  The book illustrates these concepts with a wide variety of examples and case studies.

He defines a supermind as “a group of individuals acting in ways that seem intelligent.”  A supermind has measurable properties just as individual do.  It can have a life of its own beyond those of its individuals constituents.  And, as Malone points out, throughout history, groups of people working together as superminds have been responsible for the vast majority of human achievements. 

From Horseless Carriages to Driverless Vehicles

Autonomous vehicles (AVs) may well be the quintessential symbol of our AI/robotics age.  Cars are a major part of our daily lives.  A self-driven car is a concept that requires little explanation, something we can all quickly grasp.  It wasn’t that long ago that the notion on an AV driving us around while we read or sleep would have felt like the stuff of science fiction.  Having experimental AVs coursing through public roads in Silicon Valley, Pittsburgh and Phoenix is concrete evidence that our smart machines are achieving human-like intelligence, raising a number of important questions:  how long before AVs are all around us?; how will they impact our lives?; what unintended consequences might we have to deal with?; and what should be done to ensure that they arrive as safely and smoothly as possible?

These are among the questions addressed in the March 1 issue of The Economist, which includes a comprehensive special report on autonomous vehicles with seven articles on the subject.  The special report starts out with the assumption that whatever technological hurdles lie in their way will be eventually overcome.  But there are wider economic, social and public policy issues to be explored, starting with: what can we learn from the transition to horseless carriages in the 20th century that can now be applied to the transition to driverless cars?

Human-Machine Work Teams

Will there be enough work in the future?  What’s the likely impact of our continuing technology advances on jobs?  How will they impact productivity?  These are all-important questions to reflect on as our increasingly smart technologies are now being applied to activities that not long ago were viewed as the exclusive domain of humans.

While no one really knows the answer to these questions, most studies of the subject have concluded that relatively few occupations, 10% or less, will be entirely automated and disappear over the next 10 - 15 years.  Instead, a growing percentage of occupations will significantly change as technologies automate the more routines tasks within those occupations.  People will still be involved, but their jobs will be transformed by the advanced tools they now have to master.  Moreover, a growing technology-based economy will likely create all kinds of new occupations, which will more than offset declines in occupations displaced by automation, - as has been the case over the past couple of centuries.

One would also expect that technology advances will increase the productivity of the workers involved in these new or transformed occupations.  But, if we look at the past 10-15 for guidance, we’ll find that productivity growth has significantly declined over this timeframe, notwithstanding huge technology advances like smartphones, cloud computing, big data and artificial intelligence.  Economist have proposed competing explanations for the declining productivity growth, but have so far failed to reach consensus.  Understanding this productivity puzzle may well hold the key to future productivity improvements and long-term economic growth.

Improving the Odds of Success for Corporate Transformations

Looking back upon my long career, one of the major factors shaping my views of strategy and innovation are the powerful transformational forces that I saw buffeting the IT industry over much of that time.  It’s frankly sobering how many once powerful IT companies are no longer around or are shadows of their former selves.  The carnage might be more pronounced in the fast-changing IT industry, but no industry has been immune.  It’s all part of what Joseph Schumpeter called creative destruction over 75 years ago, - “the process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.”

For a startup a transformative innovation is all upside, an opportunity to take-on established companies with new products that offer significantly better capabilities and/or lower costs.  Startups hope that their compelling new offerings will help them establish a foothold in the marketplace and, over time, become leaders in their industry.

But change is often difficult for established companies.  Over the years, they’ve amassed a number of valuable assets and extensive organizations.  Already consumed with managing their existing operations, - e.g., products and services; supply chain and channel partners; sales and marketing; revenues, profits and cash; -  they may see a transformative innovation as more of a threat or distraction than an opportunity. 

The Promise and Current State of Blockchain

I recently participated in a blockchain panel at a conference of senior supply chain executives from a variety of companies.  I welcomed the opportunity to learn how these real-world executives feel about blockchain, as well as how to best communicate the promise and current state of this emerging and potentially transformative technology.  Let me share a few of my observations.

Before our panel started, the executives were asked how they viewed blockchain.  In general, they felt that there was too much hype surrounding blockchain, were skeptical about its value to supply chain systems, but expressed a wait-and-see attitude.  They were then asked how many were conducting blockchain prototypes in their companies.  The majority raised their hands. 

I thought that their views and subsequent questions and comments during the panel succinctly captures the current state of blockchain in the business world: skeptical, turned off by the hype, but hedging their bets by getting on the learning curve with prototypes and experimentation.

The moderator first asked each panelist to address the audience’s skepticism about blockchain.  What, in our opinion, is the key value of blockchain?  I said that I look at the value of blockchain through two complementary lenses: enhancing the security of the Internet, and reducing the inefficiencies and overheads in applications, like supply chains, involving multiple institutions.

The Growing Importance of Resilience in an Increasinsgly Turbulent World

In March of 2017, Northeastern University launched a new interdisciplinary initiative, the Global Resilience Institute (GRI).  GRI is a university-wide research and educational effort to advance the resilience of individuals, communities, economies and societies around the world by strengthening their capacity to adapt to an increasingly turbulent world.  Its key mission is to develop and deploy practical tools, applications and skills to help effectively respond to human-made and naturally-occurring disruptions and disasters.

GRI’s Founding Director is Northeastern professor Stephen Flynn.  In his Director’s Welcome web page, Flynn writes that “Building resilience within and across multiple levels, from individual to societal, requires a comprehensive effort that matches the complexity of the increasingly interdependent systems and networks we all rely on… Our aim is to serve as both a channel and a catalyst for experts in industry, academia, and government to collaborate on solving the world’s most pressing resilience challenges.  These include both slowly emerging disruptions as well as shocks and sudden disasters.”

Most everyone agrees that dealing with our increasingly turbulent, complex world us requires significant enhancements to the resilience of our societies and systems.  But, five critical barriers stand in the way:

• Widespread risk illiteracy and a limited understanding of the new dependencies and interdependencies that pervade our more connected lives;
• Inadequate designs for embedding resilience into systems, networks, and infrastructure at multiple levels;
• Pervasive economic disincentives for investing in proven resilience measures;
• Inadequate governance frameworks and policy guidance to foster resilience; and
• A lack of adequate training and education to support the development and implementation of comprehensive capabilities for advancing resilience.

A Framework for the Safe Management of Digital Identities and Data

Identity plays a major role in everyday life.  Think about going to an office, getting on a plane, logging to a website or making an online purchase.  Identity is the key that determines the particular transactions in which we can rightfully participate as well as the information we’re entitled to access.   But, 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 are becoming 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.

As explained in A Blueprint for Digital Identity, - a 2016 report by the World Economic Forum, - identity is essentially a collection of information or attributes associated with a specific individual.  These attributes fall into three main categories:  inherent - attributes intrinsic to an individual, - e.g., age, height, date of birth, fingerprints, color of eyes, retinal scans;  assigned - attributes attached to but not intrinsic to the individual - e.g., e-mail address, telephone numbers, social security, drivers license, passport number; and accumulated - attributes gathered or developed over time - e.g., health records, job history, home addresses, schools attended.

While mostly associated with individuals, identities can also be assigned to legal entities like corporations, partnerships and trusts; to physical entities like cars, buildings, smartphones and IoT devices; and to digital entities like patents, software programs and data sets.

Data attributes are generally siloed within different private and public sector institutions, each using its data for its own purposes.  But to reach a higher level of privacy and security, we need to establish trusted data ecosystems, which requires the exchange and sharing of data across a variety of institutions.  The more data sources a trusted ecosystem has access to, the higher the probability of detecting fraud and identity theft while reducing false positives.  In addition, an ecosystem with a variety of data sources can help foster economic inclusiveness by certifying the identities and credit worthiness of poor people with no banking affiliation.

However, safeguarding the data used to validate identities creates security and privacy issues of its own.  It’s unsafe to gather all the needed attributes within one institution or central data location, making it a target for data breaches.  But, it’s also highly unfeasible, as few institutions will let their critical data out of their premises.

Customer Experience - the Key Competitive Differentiator in the Digital Age

About five years ago, McKinsey conducted an online survey of over 850 CEOs and other senior executives to find out how their companies were faring in their implementation of digital technologies and strategies.  The data showed that executives were generally optimistic, but they still had much to do to achieve their digital business objectives.  Organizational alignment and leadership were the critical factors in the success or failure of their digital strategies.

More specifically, the survey asked them about their progress in embracing five major digital trends: big data and advanced analytics, digital engagement of customers, digital engagement of employees and external partners, automation, and digital innovation.  While all five trends were important, executives said that digital customer engagements was their most important competitive differentiator and where they were expecting the largest financial returns.

This is not surprising, even more now than at the time of the survey.  A company can differentiate itself from competitors in one of two key ways: by providing a superior customers experience or by offering the lowest prices.  For companies that prefer the former, digital channels are, far and away, the most cost-effective way of reaching out to their clients.  The explosive growth of mobile devices means that you can be engaged with your customers whether they are at home, at work, in your store or anywhere else.

But, digital customers can be fickle and hard to satisfy.  It’s quite difficult to keep up with their fast changing behaviors and expectations.  New products and services are hitting the market faster than ever, brand loyalty keeps decreasing, and the increased competition continues to shift power from institutions to individuals.

Human + Machine: The Impact of AI on Business Transformation

Last week I wrote about the impact of blockchain technologies on business transformation.  I now want to turn my attention to the more immediate impact of AI on business, based on Human + Machine: Reimagining Work in the Age of AI, a recently published book by Accenture executives Paul Daugherty and Jim Wilson.

The book reminds us that technology has long been transforming business.  Electricity and standardized processes ushered the first wave of business transformations about 100 years ago.  Manufacturing was decomposed into a set of processes and reassembled into the assembly line, leading to the age of mass production.

Several decades later, IT and process automation brought us the second wave of business transformation.  Mainframes and data processing software enabled the automation of back-office processes in the 1960s and 1970s.  Front-office automation followed in the 1980s with the advent of PCs and client-server systems.  A decade later, advances in networking and ERP software led to  business process reengineering and management. 

“Now, the third wave involves adaptive processes,” write Daugherty and Wilson.  “This third era, which builds on the previous two, will be more dramatic than the earlier revolutions enabled by assembly lines and digital computers, and will usher in entirely new, innovative ways of doing business… This adaptive capability is being driven by real-time data rather than by an a priori sequence of steps.   The paradox is that although these processes are not standardized or routine, they can repeatedly deliver better outcomes.”

Blockchain and Business Process Transformation

One can look at the transformational impact of IT on companies and industries through a variety of lenses, - e.g., products and services, revenue and profit, sales and support, market strategy.  One of the most important such lenses is the impact of IT on business processes, that is, on how work is actually done across the various functions of an organization. 

Examining the impact of IT over the past several decades through a process point of view, one can identify three distinct phases: first came process automation in the early years of IT, followed around the 1990s by enterprise-wide process reengineering and management.  The third phase, is now starting, focused on the processes and transactions that determine how institutions interact with each other around the world.  Let me discuss each of these phases. 

The MIT Intelligence Quest

How does human intelligence work, in biological as well as in engineering terms? And how can we use such an understanding of human intelligence to build wiser and more useful machines?  On February 1, MIT launched the Intelligence Quest (MIT IQ), - an initiative aimed at addressing these big questions by advancing the science and engineering of both human and machine intelligence.  MIT IQ aims “to discover the foundations of human intelligence and drive the development of technological tools that can positively influence virtually every aspect of society.”

MIT has been deeply involved in artificial intelligence since the field’s inception in the 1950s.  MIT professors  John McCarthy and Marvin Minsky were among the founders and most prominent leaders of the new discipline.  AI was one of the most exciting areas in computer sciences in the 1960s and 1970s.  Many of the AI leaders in those days were convinced that a machine as intelligent as a human being would be developed within a couple of decades.  They were trying to do so by somehow programming the machines to exhibit intelligent behavior, even though to this day we have little idea what intelligence is about, let alone how to translate intelligence into a set of instructions to be executed by a machine.  Eventually, all these early AI approaches met with disappointment and were abandoned in the 1980s.  After years of unfulfilled promises, a so called AI winter of reduced interest and funding set in that nearly killed the field.

AI was reborn in the 1990s when it adopted a more applied, engineering-oriented paradigm.  The new AI paradigm enabled computers to acquire intelligent capabilities by ingesting and analyzing large amounts of data using powerful computers and sophisticated algorithms.  Instead of trying to explicitly program intelligence, this new approach was based on feeding lots and lots of data to the machine, and then letting the algorithms discover patterns and extract insights from all that data.

Such a data-driven, machine learning approach produced something akin to intelligence or knowledge.  Moreover, unlike the explicit programming-based approaches, the statistical-based ones scaled very nicely.  The more data you had, the more powerful the supercomputers, the more sophisticated the algorithms, the better the results.  Machine learning and related advances like deep learning, have played a major role in AI’s recent achievements. 

The Vital Role of Culture in Business

The January-February issue of the Harvard Business Review spotlights The Culture Factor, with five articles on the subject.  “Culture is the tacit social order of an organization: It shapes attitudes and behaviors in wide-ranging and durable ways,” notes the issue’s lead article.  “Cultural norms define what is encouraged, discouraged, accepted, or rejected within a group.  When properly aligned with personal values, drives, and needs, culture can unleash tremendous amounts of energy toward a shared purpose and foster an organization’s capacity to thrive.”

In Who Says Elephants Can't Dance?, - his excellent chronicle of the IBM transformation he led as Chairman and CEO from 1993 to 2002, - Lou Gerstner wrote: “I came to see in my time at IBM that culture isn’t just one aspect of the game - it is the game.  In the end, an organization is nothing more than the collective capacity of its people to create value.  Vision, strategy, marketing, financial management - any management system, in fact - can set you on the right path and can carry you for a while.  But no enterprise - whether in business, government, education, health care or any area of human endeavor - will succeed over the long haul if those elements aren't part of its DNA.” 

Blockchain Killer-Apps

A killer app is an IT application whose value is simple to explain, its use is fairly intuitive, and the application turns out to be so useful that it helps propel the success of a product or service.  Spreadsheets and word processing were major factors in the 1980s adoption of personal computers, for example.  A decade later, e-mail, and the World Wide Web played crucial roles in the mainstream success of the Internet.  While there are a number of strong candidates for smartphone killer-apps, navigation and music are among the most widely used.

Blockchain has been in the news lately, but beyond knowing that it has something to do with payments and digital currencies, most people don’t know what blockchain is or why they should care.  A major part of the reason is that we still don’t have the kind of easy-to-explain blockchain killer-apps that propelled the Internet forward.

Blockchain has yet to cross the chasm from technology enthusiasts and visionaries to the wider marketplace that’s more interested in business value and applications.  There’s considerable research on blockchain technologies, platforms and applications as well as market experimentation in a number of industries - roughly where the Internet was in the mid-late 1980s: full of promise but still confined to a niche audience.

In addition, outside of digital currencies, -a somewhat exotic topic of interest to a relatively small audience, - blockchain applications are primarily aimed at institutions.  And, given that blockchain is all about the creation, exchange and management of valuable assets, its applications are significantly more complex to understand and explain than Internet applications.

The management of information is quite different from the management of transactions.  The latter, especially for transactions dealing with valuable or sensitive assets, requires deep contractual negotiations among companies and jurisdictional negotiations among governments.  Moreover, since blockchain is inherently multi-institutional in nature, its applications involve close collaboration among companies, governments and other entities.

Blockchain and the Promise of an Open, Decentralized Internet

The January 21 issue of the NY Times Magazine included a very good article, Beyond the Bitcoin Bubble, by science writer Steven Johnson.  His article aims to explain what blockchain, cryptocurrencies and related technologies are all about as well as their potential impact on the economy and society.  These are not only complex but esoteric subjects, as nicely illustrated in this funny video.  While blockchain and Bitcoin have been frequently in the news lately, beyond knowing that they have something to do with money, most people don’t really know what they are or why they should care.

This is not surprising.  In their early years, it’s hard for most people to appreciate the potential of a transformative technology.  There’s generally a considerable time-lag between the time we start reading articles about their exciting potential and their adoption by companies and industries across the marketplace.  This is particularly the case for general purpose technologies, like electricity, the Internet and blockchain, which are the most potentially transformative due to their widespread use.   Their deployment time-lags are longer because attaining their full benefits requires a number of complementary co-inventions and investments, including additional technologies, applications, processes, business models, and regulatory policies.

Will There Be Enough Work in the Future?

Will there be enough work in the future?  Opinions are fairly divided between those who believe that technology advances will reduce human jobs, and those who believe that technology advances will produce as many jobs as they displace.  It’s easier to predict the jobs that will be automated away by technology, but much more difficult to predict the new jobs that these same technologies will create.  In the end, we don’t really know.

In December of 2017, the McKinsey Global Institute published Jobs Lost, Jobs Gained: Workforce Transition in a Time of Automation, a report that directly addresses this question.  The McKinsey study examined in great detail the work that’s likely to be displaced by automation through 2030, as well as the jobs that are likely to be created over the same period.  It analyzed data from 46 countries comprising almost 90 percent of global GDP, focusing particularly on six countries: China, Germany, India, Japan, Mexico and the US.  For each of this six countries, the study modeled the potential for employment changes in more than 800 occupations based on different scenarios for the pace of automation adoption and for future labor demand.

The report’s overall conclusion is that a growing technology-based economy will create a significant number of new occupations, - as has been the case in the past, - which will more than offset declines in occupations displaced by automation.  However, “while there may be enough work to maintain full employment to 2030 under most scenarios, the transitions will be very challenging - matching or even exceeding the scale of shifts out of agriculture and manufacturing we have seen in the past.”

The Challenges of Executing a Transformational Strategy

The 2018 MIT CIO Symposium will take place on May 23.  This year’s Symposium will be focused on the challenges of executing a digital transformation strategy.   It’s no longer enough to have formulated a digital strategy for the business.  As a number of recent reports have indicated, leading edge companies are pulling ahead of everyone else by pushing the boundaries of digitization.  And, having a strong digital foundation gives those companies a leg up in embracing data analytics, AI, blockchain, and other advanced technologies, further widening their advantage.  “The time for merely thinking digital has passed; the future belongs to the doers,” notes the Symposium’s website.

Why do so many organizations struggle to implement their well formulated strategies, especially transformational strategies like the transition to digital, that encompass new technologies, business models and management practices?  This is a question I’ve long been thinking about, having lived through IBM’s near-death experience in the early1990s.

Is it that in spite of all their efforts in strategy formulation, their management was unable to anticipate the new technology and market changes and were caught by surprise?  Or it is that, as if actors in a kind of Greek tragedy, they saw the changes coming and understood what had to be done, but were somehow unable to execute their strategies?

MIT’s Donald Sull has been exploring these questions for over 20 years.  As this 2015 HBR article notes, we know a lot more about strategy than about translating strategy into results.  “Books and articles on strategy outnumber those on execution by an order of magnitude…  A recent survey of more than 400 global CEOs found that executional excellence was the number one challenge facing corporate leaders in Asia, Europe, and the United States, heading a list of some 80 issues, including innovation, geopolitical instability, and top-line growth.  We also know that execution is difficult.  Studies have found that two-thirds to three-quarters of large organizations struggle to implement their strategies.” 

The Impact of Automation on Everyday Life

This past October, the Pew Research Center released Automation in Everyday Life, a report on what Americans think about advanced technologies like artificial intelligence and robotics, and the impact they expect them to have on their everyday lives.  The report is based on a national survey of 4,135 randomly selected American adults.  To help gauge their opinion on such complex topics, the survey questions were framed around four specific scenarios related to these advanced technologies: driverless cars, workplace automation, robot caregivers, and computer algorithms that evaluate and hire job applicants.

“Americans anticipate significant impacts from various automation technologies in the course of their lifetime,” noted the report.  “Although they expect certain positive outcomes from these developments, their attitudes more frequently reflect worry and concern over the implications of these technologies for society as a whole.”

Let me discuss some of the report’s key findings.

Cloud Computing and the Supply Chain of Services

In 2008 I gave a talk at a conference on The Promise and Reality of Cloud Computing.  In his closing remarks, the conference organizer noted that most everyone had agreed that something big and profound was going on, but they weren’t quite sure what it was they were excited about.  “There is a clear consensus that there is no real consensus on what cloud computing is,” he said.

At the time, most people associated cloud with utility computing and IT-as-a-Service.  Technology writer Nicholas Carr was also a speaker at the conference.  In his talk, based on his then recently published book The Big Switch, Carr nicely framed the historical shift to cloud computing, comparing the evolution of IT to that of power plants.  In the early days, companies usually generated their own power with steam engines and dynamos.  But with the rise of highly sophisticated, professionally run electric utilities, companies stopped generating their own power and plugged into the newly built electric grid. 

IT was then undergoing a similar transformation, as cloud service providers were starting to offer IT-as-a-Service with near unlimited scalability at very attractive prices, based on a flexible pay-as-you-go delivery model.  Early cloud adopters were mostly focused on improving the economics of IT, giving them the ability to launch new offerings or expand their current ones without major investments in additional IT infrastructure while paying for whatever cloud resources they actually used.

Cloud continued to evolve and advance over the ensuing years.  As an article noted about a 2013 cloud conference: “There wasn’t a single speaker who started off a session by saying, ‘Let's define cloud computing.’  That gets tiresome when seen in session after session, year after year, so its absence is gratefully received. This is a clear indication that the industry has moved beyond elementary knowledge-gathering and onto the practicalities associated with cloud implementation and rollout.”  Still, debates continued on the true definition of cloud computing.  Do private and hybrid clouds qualify or only public ones? 

AI and the Productivity Paradox

AI is being successfully applied to tasks that not long ago were viewed as the exclusive domain of humans, matching or surpassing human level performance in more and more domains.  But, at the same time, productivity growth has significantly declined over the past decade, and income has continued to stagnate for the majority of Americans.  This puzzling contradiction is addressed in Artificial Intelligences and the Modern Productivity Paradox, a working paper recently published  by the National Bureau of Economic Research (NBER).

The paper’s authors, - MIT professor Erik Brynjolfsson, MIT PhD candidate Daniel Rock, and University of Chicago professor Chad Syverson, - note that “aggregate labor productivity growth in the U.S. averaged only 1.3% per year from 2005 to 2016, less than half of the 2.8% annual growth rate sustained from 1995 to 2004…  What’s more, real median income has stagnated since the late 1990s and non-economic measures of well-being, like life expectancy, have fallen for some groups.”

This productivity puzzle isn’t confined to AI.  “Few topics in economics today in most large economies generate as much debate as the productivity puzzle,” said McKinsey in a March, 2017 report.  “In  the United States, productivity growth has declined sharply since 2004 yet digital technology has been widely apparent during this period…  The answer to this puzzle holds the key to future prosperity because now more than ever our economy depends on productivity improvements for long-term economic growth.  Economists have proposed competing explanations for declining productivity growth and so far have failed to reach a consensus.” 

Blockchain and the Music Industry: Turning Pennies into Dollars

Just about every industry has been significantly transformed in the past few decades.  But few have been as disrupted as the music industry.  Everything seems to be changing at once, from the way content is produced and delivered, to the sources of revenue and profits.  Digital technologies, - the Internet, smartphones, cloud computing, … - have literally turned dollars into pennies.  Now, blockchain and related technologies may once more play a major role in the music industry, - this time helping to turn those pennies back into dollars.

We’re truly surrounded by music as never before, - in a wide variety of styles; in physical and digital formats; over the Internet, satellite, and broadcasts; in mobile devices and home music systems.  But, the shift from physical to digital, and then from downloads to streaming have wreaked havoc on the business of music.  US retail revenues of recorded music were close to $14 billion in 1998 before starting their decline.  According to the Recording Industry Association of America (RIAA), revenues fell from roughly $12 billion in 2006 to around $7 billion in 2010.  They stayed flat at $7 billion though 2015, starting to increase in 2016 mostly due to a growth in paid streaming music subscriptions.  Revenues are expected to be around $8 billion in 2017.

Turning dollars into pennies succinctly captures the music industry’s precipitous revenue declines.  As this article noted, “During the heyday of the 80s, the music industry was rolling in so much money it could afford to leave some on the table… which it often did…  There were so many dollars coming in, they didn’t bother paying attention to the pennies.  Well, as we all know those days are gone.  And after a decade of losses from its traditional revenue stream (sales), we’ve seen the music industry forced to look for revenue in new places and in different ways.  In the absence of dollars, the pennies now matter.”

As a result, the music industry now finds itself trying to figure out how to keep track of all those pennies in the hope of turning them back into dollars.  In the first half of 2017, streaming services accounted for 62% of the total market, with digital downloads and physical sales accounting for 19% and 16% respectively, said the RIAA.  But streaming pays royalties in fractions of pennies, so legislation, new business models and technological innovations are needed to make sure that all the necessary data are efficiently collected so the various artists involved in a song are paid.

The Rise of Winner-Take-All Urbanism

Earlier this year, Richard Florida published Why America’s Richest Cities Keep Getting Richer in The Atlantic.  Florida is a leading urban studies author and researcher, professor at the University of Toronto and Director of Cities at its Martin Prosperity Institute.

“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,” wrote Florida.  “This small group of elite places forge ever forward, while most others struggle, stagnate, or fall behind.  This process is one I like to call winner-take-all urbanism.”

Winner-take-all urbanism is another manifestation of the winner-take-all economics of the past few decades, in which a relatively small number of players reap a very large share of the rewards, upending whole industries with their outsized returns.