Irving Wladawsky-Berger

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 2019 Artificial Intelligence Index

AI has emerged as the defining technology of our era, as transformative over time as the steam engine, electricity, and the Internet.  While still in its early stages, AI is already reshaping the economy, society, our personal lives and the very nature of work, with much more to come as the technology and applications mature, including the scientific research necessary to anticipate and fight future pandemics.  But, what’s the current state of AI and where is it heading?

To help address these important questions, the annual Artificial Intelligence Index was created under the auspices of the Stanford Institute for Human-Centered Artificial Intelligence, - guided by a Steering Committee of experts from academia and industry, and in collaboration with a number of sponsoring partners and data contributors.  The AI Index aims to “provide unbiased, rigorous, and comprehensive data for policymakers, researchers, journalists, executives, and the general public to develop a deeper understanding of the complex field of AI.”

Now in its third year, the 2019 AI Index Report was released this past December.  So was the associated 2019 AI Index Data, which includes three times as many data sets as the 2018 edition.  The report  comprises nine chapters.  Let me summarize a few of its highlights.

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 Current State of Open Innovation

In January, UC Berkeley professor Henry Chesbrough published Open Innovation Results: Going Beyond the Hype and Getting Down to Business, his fourth book on innovation in the last two decades.  Chesbrough is adjunct professor and faculty director of the Garwood Center for Corporate Innovation at UC Berkeley’s Haas School of Business.  He’s credited with coining the term open innovation in his 2003 book of the same title.

Open innovation is the antithesis of the vertically integrated, closed innovation approach followed by industrial R&D labs through much of the 20th century.  As the rate and pace of technological advances accelerated, - most prominently in the IT industry, - the closed innovation model started to fall apart.  The elapsed times to take an invention from lab to market were no longer competitive, especially against a new generation of startups that significantly decreased the time-to-market for new products and services.  Companies realized that they could no longer rely on their own R&D as the only source of innovative ideas.

Moreover, as innovation was now being applied to broader and more complex problems, external collaborations with clients, business partners, universities, open source communities and others became increasingly important.  Given the fast moving, highly competitive environment, firms recognized that there were a lot more capabilities for innovation in the marketplace than they could possibly create on their own, no matter how big and powerful the company.  The dramatic success of the Internet, World Wide Web, Linux and similar initiatives in the 1990s ushered this new era of open, collaborative innovation.

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.

The Evolution of the Social Contract in the 21st Century

“Life has changed substantially for individuals in advanced economies in the first two decades of the 21st century,” notes The social contract in the 21st century, a new report by the McKinsey Global Institute (MGI).  “In many ways, changes for individuals have been for the better, including new opportunities and overall economic growth…  Yet, the relatively positive perspective on the state of the economy, based on GDP and job growth indicators, needs to be complemented with a fuller assessment of the economic outcomes for individuals as workers, consumers, and savers.”

The report takes an in-depth look at the changing economic outcomes for individuals between 2000 and 2018 in 22 advanced countries, - 16 European ones, Japan and South Korea, Australia and New Zealand, and Canada and the US.  In aggregate, these countries constitute 57% of global GDP. 

The report closely examines the evolution of the social contract, that is, “the arrangements and expectations, often implicit, that govern the exchanges between individuals and institutions.”  Its overriding finding is that the social contract has changed considerably in the 21st century, with individuals having to assume greater responsibility for their economic outcomes.  Opportunities for work and employment rates have risen significantly, but outcomes vary considerably across socioeconomic groups and geographies.  While many have benefited from this evolution, those in the bottom 60% of the income distribution are facing significant economic challenges, leading to an uncertain future and a general loss of trust in institutions.

The report analyzes the evolution of the social contract by looking at the changing outcomes for individuals as workers, as consumers, and as savers.  Let me summarize the findings in each of these three categories.

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.

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.”

How to Transform a “Big, Old” Company into an Agile Digital Business

“As consumers, we take digital technologies for granted…  We don’t wonder why these things are possible; we simply expect them,” said Designed for Digital a recently published book by Jeanne Ross, Cynthia Beath, and Martin Mocker in its Preface.  But, “the adoption of digital technologies in business doesn’t come as naturally,” - especially if you’re working in a big, old company.  “Inserting digital technologies to enhance operations and create new value propositions has proven extremely challenging.”

Previous research has uncovered this puzzling digital adoption discrepancy between individuals and organizations.  While in our personal lives we’ve enthusiastically embraced digital technology advances, many corporations and institutions still struggle to do so.  At a conference several years ago I learned about a so-called Sunday-night/Monday-morning syndrome, the name given to the frustration of  employees of large companies who, at home on Sunday night, have access to the latest devices and applications, but at work on Monday morning, have to use the more primitive devices and applications that their IT departments support.

A quarter century into the digital age, - as a recent McKinsey study found, - the digital maturity of traditional incumbent firms is still relatively low, - under 25% of their overall potential.  Big, established companies, in particular, have been slow to embrace digital organizational practices, - only 26% of worldwide sales are made through digital channels, 30% of internal operations have been digitally automated, and 25% of supply chains interactions have been digitized.

“If digital technologies are consistently making our consumer lives easier, why aren’t they making it easier to succeed in business?,” asks Designed for Digital.  “Why are business leaders anxious about digital disruption rather than marveling about how quickly they can provide new, exciting, and ever-improving digital solutions to their customers?”  Based on five years of research at nearly 200 large companies, - including executive interviews, surveys of business leaders, and in-depth case studies, - the authors overriding conclusion is that “Big, old companies are simply not designed for digital.”

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 MIT Work of the Future Report

“The world now stands on the cusp of a technological revolution in artificial intelligence and robotics that may prove as transformative for economic growth and human potential as were electrification, mass production, and electronic telecommunications in their eras,” said the MIT Task Force on the Work of the Future in its recently released interim report.  The final report will be issued after conducting additional research over the next year.

The Task Force was convened in the spring of 2018 by MIT President Rafael Reif to address what may well be the most critical question of the digital economy: as emerging technologies raise aggregate economic output and the wealth of nations, will they also enable people to attain higher living standards, better working conditions, greater economic security, and improved health and longevity?

The report’s overriding conclusion is that the likelihood that AI and automation will wipe out major workforce sectors in the near future is exaggerated.  However, we’ve already seen important reasons for concern, especially the rising polarization of employment and wage distribution over the past few decades, which has disproportionately benefited high-skilled professionals while reducing opportunities for mid- and low-skilled workers.

“[A] critical challenge is not necessarily a lack of jobs, but the low quality of many jobs and the resulting lack of viable careers for many people, particularly workers without college degrees.  With this in mind, the work of the future can be shaped beneficially by new policies, renewed support for labor, and reformed institutions, not just new technologies. Broadly, the task force concludes, capitalism in the U.S. must address the interests of workers as well as shareholders.”

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 Future of Work in the US: A Tale of Multiple Americas

The US economy looks good by almost any measure.  Unemployment is at historical low levels, forcing employers to raise wages and become more aggressive about hiring and training workers.  There are more job openings than unemployed people to fill them.  Inflation remains low.  A number of recent studies have concluded that over the next decade, our technology-based economy will create a significant number of new occupations which will more than offset declines in occupations displaced by automation.  Not only is the US economy doing well in the present, but despite our increasingly smart machines, automation fears appear to be unfounded.

Why then are so many Americans so anxious about the future?  Why do they feel left behind despite our growing economy?  Why is the country so polarized?

A recent McKinsey report, The Future of Work in America: People and place, today and tomorrow, sheds light on these very important questions.  For the past several years, McKinsey has been conducting research on the impact of automation technologies on the future of work at a national level.  This new report is radically different, based on a detail analysis of more than 3,000 US counties and over 300 cities.

Overall, the study found that while in aggregate the country is doing well, there are actually multiple Americas, each with widely different economic patterns and on sharply different trajectories, some of which are doing quite well and face an exciting future, while others are not in good shape and risk falling further behind.

The report is organized into five main sections, and includes a number of tables, graphs and maps.  Let me summarize the key findings of each of the sections.

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.

The Digitalization of the American Workforce

“Over the past half century, wave after wave of digital innovation has ensured that digitalization - the diffusion of digital technologies into nearly every business and workplace and pocket - has been remaking the U.S. economy and the world of work,” said the Brookings Institution in Digitalization and the American Workforce.  The digitalization of everything has both increased the potential of individuals and societies while contributing to widespread anxiety about its impact on jobs and economic inequalities.  “And yet, for all of the evidence that big changes are underway, surprisingly little data exists to track the spread of digital adoption.”

The Brookings report quantified the spread of digitalization by analyzing the changes in the digital content of 545 occupations between 2002 and 2016 based on O*NET, the most comprehensive data on US occupations sponsored by the US Department of Labor.  O*NET includes highly detailed, task-level information on hundreds of occupations, and includes quantitative measures of knowledge requirements, skills, tools, education, training and work activities. In addition, the report collected information on the occupations’ particular industries, pay, growth rates, geographical locations and distribution across educational and demographic groups.

Each of the 545 occupations, - which encompassed 90% of the US workforce, - was assigned a digital score between 0 and 100 based on the required digital skills.  High digital occupations are those with scores over 60.  They include software developers - with a score of 91; computer system analysts - 79; and financial managers, - 61.  Medium digital occupations scored between 33 and 60, and include lawyers - 58; automative service technicians - 55; office clerks - 55; and registered nurses - 55.  Low digital occupations have a score below 33, and include security guards - 31; restaurant cooks, - 18; construction laborers - 17; and personal care aides - 14.

The (Updated) Purpose of the US Corporation

In September of 1997, the Business Roundtable (BRT), - an association of CEOs of major US companies, - issued a Statement on Corporate Governance which argued that “the paramount duty of management and of boards of directors is to the corporation’s stockholders; the interests of other stakeholders are relevant as a derivative of the duty to stockholders.”

Last week, the BRT released an updated statement on the Purpose of a Corporation which moves away from it’s previous commitment to shareholder primacy to now emphasize a “Commitment to All Stakeholders” and to “An Economy that Serves All Americans.”  This new statement, which was signed by almost 200 CEOs, now places shareholder interests on the same level as the interests of all its other stakeholders, including customers, employees, suppliers, and communities.

The recent BRT statement has received mostly positive coverage. “Top CEOs Say Companies Have Obligations to Society.  Business Roundtable urges firms to take into account employees, customers and community,” said the WSJ in its article’s headline.  Speaking of the change, Fortune noted that over the past decade “Capitalism, at least the kind practiced by large global corporations, was under assault from all sides, and CEOs were getting the message loud and clear…  Capitalism, it seemed, was desperately in need of a modifier.”  The only note of discord I came across was the response of the Council of Institutional Investors, which expressed concerns that the BRT statement “undercuts notions of managerial accountability to shareholders.”

I applaud the BRT statement.  “This is great,” I thought when first reading it, followed by “what took you so long?”  Given the suffering brought upon so many Americans by the 2008 global financial crisis, - the worst since the Great Depression, - restoring trust in business and in our capitalist economic system should have been a top priority for corporate leaders.  To help appreciate why it’s taken the BRT over a decade to affirm that companies have obligations to society, let’s take a look at the prevalent economic and political context of the past 50 years.

Using Agile Processes to Develop AI-Based Solutions

In the waterfall development model, a project is broken down into a set of sequential phases, - e.g., conception, analysis, design, construction, testing, deployment, maintenance, - each dependent on the completion of the previous phase.  Such a model is most appropriate for complex engineering projects, like bridges, airplanes and computer hardware.  It’s also quite applicable for mission critical software and infrastructure projects where security, availability, scalability and other ilities are paramount.

But, a serial, orderly approach isn’t appropriate for projects where time-to-market, usability, and flexibility are the highest priorities.  For such projects, an agile development approach is much more suitable.  Key to the agile approach is the involvement of the product’s target end-users early in the process to make sure that the product under development is responsive to their requirements. 

Agile development is evolutionary in nature, based on the early availability of experimental prototypes, user feedback, continuous improvements, and rapid responses to technology, market and user requirements.  It’s not surprising that agile software development took off in the 1990s, when the explosive rise of the Internet brought millions and millions of users online, lots of new user-oriented applications, and short time-to-market cycles in response to fierce competition.

Our increasingly sophisticated smart machines bring with them a whole new set of development challenges.  These AI-based systems are generally software-intensive, user-centric, and data-driven.  Their complexity goes way up the smarter we want the systems to be.  The behavior of an AI system based on machine learning depends on the information we use to train its algorithms rather than on the precise set of software instructions that tell the computer what to do.

AI systems are designed to sense, respond and adapt to a changing environment.  Their development feels sort of like bringing up and sending a teen-ager into the world.  Given that we want them to be able to handle unanticipated situations, they must have a fair degree of flexibility and autonomy.  But, it’s hard to be sure that the system (or the teen-ager) will always behave the way we’d like them to.

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 Challenges of Automation in a Fast Changing Economy

“Technological innovation should be embraced,” notes Automation and a Changing Economy, a recently published report by The Aspen Institute.  “Automation has been a largely positive economic and social force, and looking forward,   automation will be necessary to feed, house, and raise the living standards of a growing and aging population.” 

But, “While it is important to note that automation’s overall, long-run effect on the economy has been positive - more jobs, more growth, higher living standards - this does not negate the disruptive impact of automation on individuals and communities, which results from displacements, changing skill needs, and income inequality.”

The report is divided into two sections: The Case for Action, which explores how automation impacts the economic security and opportunity of American workers, and Policies for Shared Prosperity, which outlines a policy agenda for addressing automation’s challenges and opportunities.  Let me summarize the key conclusions and recommendations in each of the report’s two sections.

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%, while the earnings of those with a post-college education have risen 80% to 100%.  At the same time, 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.

The Puzzling Personal Productivity Paradox

The past 10-15 years have seen a number of technology advances, from smartphones to machine learning.  Yet, despite these impressive advances, for most of this period economies around the world have been stuck in an era of slow productivity growth.  Opinions abound, but in the end, there’s no consensus on the causes of this apparent productivity paradox, on how long the slowdown will likely last, or on what to do about it.

Some economists have argued that secular stagnation is the reason behind this unusual situation, caused primarily by a reluctance of companies to invest and of consumers to spend.  Others feel that aging populations around the world, accompanied by slow or declining labor forces are major factors.  A few contend that there’s been a fundamental decline in innovation and productivity over the past few decades, compared to the period between 1870 and 1970.

Yet others argue that there have always been time lags between technology advances and their impact on economic growth.  While technologies may advance rapidly, humans and institutions change slowly.  And, the more transformative the technologies, - as is currently the case, - the longer it takes for their impact to be felt across economies and societies.

But, companies and industries are not the only ones trying to adjust to our fast changing digital economy.  Individuals are also experiencing their own version of the productivity paradox.  Personal computers, along with applications like word processing and spreadsheets introduced a whole new category of personal productivity tools in the 1980s. A decade later, the Internet and World Wide Web enabled people to easily communicate with each other, and gave them access to all kinds of information and applications.

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?

Once Lumbering, Now Innovative Incumbents Hit Their Stride

Last year, IBM’s Institute for Business Value published Incumbents Strike Back, a global C-suite study based on survey data from over 12,800 executives from 112 countries,  including CEOs, CFOs, CMOs, COOs, CIOs, and CHROs.

“Two decades after the Internet became a platform for transformation, we’re still wondering how it all might turn out,” notes the report.  “The signals aren’t always clear.  Today, winner-take-all organizations are on the rise, but collaborative ecosystems are flourishing as well.  Even in industries where competitive concentration is increasing, innovation hasn’t – as would be expected – flatlined.”

Overall, respondents were evenly divided on whether the key to the future are established markets or new ones.  But they stand in close agreement on two areas:  68% of executives said that their organizations will emphasize customer experience over products, and 63% said that they will continue to expand their networks of business partners.

There was also general agreement on the top external forces that will have the greatest impact in the 2-3 year timeframe: 69% said market factors such as increased competition and changing customer preferences; 63% said technological factors; and 61% said people skills, reflecting the increased importance of talent and ideas.