If you are a C-level executive, how do you steer your organisation through a voyage of digital transformation? If you are an investor, how do you identify the right company in which to invest?Why did IBM, a thoroughly transformed digital company, layoff over 50% of its Watson health division in 2018? How did Philip Morris International (PMI) achieve a market monopoly in Japan in less than two years? How did Cambridge Analytica affect the 2016 US election? Which industry is the next ‘Google’ going to emerge from?
This article provides a framework that renders the nature of digital transformation transparent, along with the principles that lie behind the technological transformation of business.
From the digital perspective, there are two types of companies: traditional companies and companies that were ‘born digital’. According to Gartner, enterprises that were ‘born digital’ are: “a generation of organisations founded after 1995, whose operating models and capabilities are based on exploiting internet-era information and digital technologies as a core competency.” How have these two types of companies performed during the last 10 years?
The world that was once dominated by companies from industries such as finance, manufacturing and energy no longer exists. Technology firms are now firmly in charge of the world as it is today. For example, seven out of the ten largest companies are tech firms, and nearly five of them are ‘born-digital’ enterprises, based on Gartner’s definition. Data speaks for itself, and this explains why ‘digital transformation’ is currently one of the most pressing boardroom subjects. So, what has made ‘born-digital’ companies so successful?
Human-digital (HD) index.
This index rates the digital competency and transformation viability of companies by using two criteria.
Completeness of digital intelligence—This is a criterion that measures how digitally-intelligent a company is. There are five progressive stages of digital intelligence, and each stage is defined by several key technologies that have been commercialised during that period, i.e. general-purpose technology. These progressive stages are: the industrial age, the information age, the digital age, the intelligence age and the general intelligence age.
Ability to meet human motivations — companies’ ability to address and fulfil both human needs and motivation based on Maslow’s hierarchy of needs.
The four rules of the HD index — 4"D” Rules
Rule 1: [Rule of digital progression]. Almost all industries go through five stages of digital intelligence, and will eventually reach the general intelligence age. The progress of digital intelligence is sequential, and business will be exposed to significant risk if this is breached. I will explain this Rule with examples later on in this article.
Rule 2: [Rule of digital dominance]. The progression of digital intelligence is a race to become a part of the intelligence age, and the early achiever will have a strong advantage over others in both competition and in achieving a market monopoly. This is because the only criterion for success in the intelligence age is the ability to manage and distribute data intelligently. This means that whoever has the most data will have the greatest advantage in competition. Once this company has an effective algorithm to manage and distribute data, it will create a positive loop of ‘the more the merit, and the merit the more.’ That’s why governments are so concerned about the likes of Google and Facebook achieving such strong digital capabilities, as they have the potential to use it to create digital dominance.
Rule 3: [Rule of digital humanity] A company is more competitive when its digital intelligence is able to meet a higher level of human motivation, i.e. social and esteem needs. Better customer experience is being cited as the core of every organisation’s business/digital strategy. It is ultimately about providing a tailored and unique experience for your customer that connects with them at a more human level. Human motivation applies to both the customers and employees of any business.
Rule 4: [Rule of digital singularity]. The success of any company’s digital transformation depends on the manner in which it integrates digital intelligence with human motivation and reaches the point of digital singularity.
Digital singularity describes a state of balance in which human experience meets technological omnipresence.
There are four types of companies that depend on the level of integration. Level 1: the traditional company, Level 2: the digital company, Level 3: the digital native company, Level 4: the digital supreme company. The closer the integration, the more competitive and productive a company will be.
IBM lay off over 50% — 70% of its Watson health division — what happens when rule 1 is broken?
In June 2018, IBM verified that its recent round of layoffs affected its Watson Health unit, which focuses on applying artificial intelligence in the sphere of healthcare. Four months later, IBM announced that its Watson Health chief, Deborah DiSanzo, had stepped down from running the tech giant’s artificial intelligence division. Big Blue had been counting on Watson for growth, as its legacy businesses continued to shrink. Instead, however, its once-hyped AI business has been scaled back with layoffs and eventually a leadership change.
It is no surprise that IBM is accelerating towards stage 4 — the intelligence age in which AI plays an imperative role. All tech firms do. What IBM Heath missed, was that the healthcare industry hadn’t followed in its footsteps, and healthcare service providers are still somewhere between stage 2 and stage 3.
Medical Imaging, i.e. X-ray, CT, MRI, is one of the most matured areas of digitisation in the healthcare industry. It is an area that usage of AI (deep learning) proliferates by recognising image patterns. However, digitising medical records in other areas has not progressed as quickly. Sharing digital medical information is still a challenge, and most healthcare data is still kept in the manner of ‘data islands’ and at individual organisation level due to reasons relating to privacy. Moving from stage 3 (digitisation) to stage 4 (AI) requires a large volume of fluid data to be shared between healthcare organisations. This is one of the root causes behind the layoff, as IBM skipped stage 3 and moved straight to stage 4, where the healthcare industry is not ready and in-sync with IBM digital intelligence progression.
How Cambridge Analytica created a weapons-grade communication tool and affected the 2016 US presidential election — the profound impact of rule 2.
like so much else in 2019, it can be hard to watch the Netflix documentary The Great Hack without nudging yourself into the future and feeling the power of what digital technology and data can do to this world. It can literally change the course of history. This sobering documentary records the rise and fall of Cambridge Analytica — the now-defunct political consultancy that offered ground-breaking data analysis and modelling. It was supported by 8.9Tb of data gathered across multiple data sources, i.e. Facebook, and effectively created an intelligent digital communications platform — a platform that is classified as weapons-grade by the UK government. This profoundly affected Brexit and the Trump presidential campaign, and both are extreme cases of how the rule of digital dominance can make an impact on the world.
iQOS — The iPhone of the Tobacco industry — what happens when rule 3 is exploited — the perfect mesh of tech and humanity?
Philip Morris International is a 172-year-old company known for its best-selling product, Marlboro cigarettes. In 2014, It launched a new product globally — iQOS, ‘heat-not-burn’ (HNB) products, which emit less smoke and generate less odour than conventional cigarettes.
In 2016, PMI officially launched iQOS in Japan and swooped into the market, achieving almost 10% of the market share in the first 15 months — an epic record in the company’s history and, most likely, the entire industry too. Undoubtedly, PMI invented the ‘iPhone’ of the Tobacco industry. Today, Japan accounts for 85% of the $6.3 billion HNB market globally, which also means that iQOS products have not been as successful in the other 43 countries, why should that be?
One of the unique character traits of Japanese people is thinking about others, i.e. ‘am I causing trouble to others?’. So, when a cigarette is less smoky and virtually odourless, the worry about troubling other people evaporates. This intrinsically connects iQOS with Japanese character traits. PMI saw that and created a love story: a mom who once felt isolated by being a smoker was reunited with her family after changing to iQOS. The perfect mesh of technology and humanity — a point of digital singularity. It is a crucial factor in the success of iQOS in Japan.
Which industry is the next google going to emerge from? Rule 4 — the Rule of digital singularity.
It may be exaggerating to say that all lines of business want to transform into a tech company, but it won’t be far off. “If you went to bed last night as an industrial company, you’re going to wake up this morning as a software and analytics company.’: GE Chairman and CEO Jeff Immelt.
“Allstate is not an insurance company, we are a data company — a customer-centric data company.”: CEO Tom Wilson of Allstate — one of the largest insurance providers in the United States.
We are now living in a digital world, and the world will only go further and faster in this direction. Exposition of data, development of quantum computing, the adoption of AI and blockchain technology will ultimately push us into the age of general intelligence: a world powered by artificial general intelligence and built on a trust mechanism that requires no human intervention; a world in which technology becomes embedded in the human experience in such a way that it will be impossible to tell the difference between what’s human and what’s a machine. Will this be the world of the matrix? That’s certainly a very real possibility, albeit a very remote one.
I, however, believe that such advances will make us ‘free’ instead of being ‘enslaved’ by technologies such as AI. Inevitably there will be significant social and financial disruption and an impact on the world in this time of revolution. We witnessed that during the industrial revolution, but that also created new industries, such as the automotive sector and ultimately
new types of company/business models, such as digital natives like google. Technology advancement will free us from repetitive tasks and mechanical jobs, which will allow us to focus on the higher purpose of humanity: to love, to create and to progress in every way possible.
Digital singularity is not about being digital; instead, it is about embracing humanity with the help of digital technologies.
Companies such as digital natives and digital supreme that can excel in this sphere will thrive and rapidly outperform others. As an investor, I look for signs of digital singularity across all industries, looking for companies that are fulfilling the advancement of humanity while surging forward to achieve digital competence: they are likely to be the next google and worthwhile betting on.