A lot of noise and con­fu­sion sur­rounds trans­for­ma­tive tech­nolo­gies, with claims and coun­ter­claims that range from the utopian to the cat­a­strophic. Here three mem­bers of McKin­sey & Com­pany iden­tify four ar­eas that could chal­lenge the sta­tus quo – and tell

The Australian - The Deal - - First Up - Story by: RICHARD DOBBS, JAMES MANYIKA & JONATHAN WOET­ZEL

Chang­ing the build­ing blocks of things

To suc­cess­fully se­quence the first hu­man genome in 2003, it took 13 years, $3 bil­lion, and teams of sci­en­tists from all over the world. Rapid ad­vances in tech­nol­ogy mean that the speed of gene se­quenc­ing has ex­ceeded Moore’s law. Barely a decade later, in Jan­uary 2014, Il­lu­mina, the world’s lead­ing seller of gene se­quenc­ing ma­chines, un­veiled the HiSeq X, a su­per­com­puter that can se­quence 20,000 genomes a year at a cost of $1000 each. This is spurring stud­ies in how genes de­ter­mine traits or mu­tate to cause dis­ease. In­creas­ingly af­ford­able ge­netic se­quenc­ing com­bined with big data an­a­lyt­ics will al­low rapid di­ag­no­sis of med­i­cal con­di­tions, pin­point­ing of tar­geted cures, and po­ten­tially even the cre­ation of cus­tomised or­gan­isms through syn­thetic bi­o­log­i­cal meth­ods, with ap­pli­ca­tions in agri­cul­ture, food, and medicine.

Ad­vances in ma­te­ri­als science are another dis­rup­tive in­no­va­tion. The process of ma­nip­u­lat­ing ma­te­ri­als at the molec­u­lar level has made nano­ma­te­ri­als pos­si­ble. Such break­throughs have al­ready trans­formed or­di­nary ma­te­ri­als such as car­bon and clay to take on sur­pris­ing new prop­er­ties – greater re­ac­tiv­ity, un­usual elec­tri­cal prop­er­ties, and greater strength. Nano­ma­te­ri­als have al­ready been used in prod­ucts rang­ing from phar­ma­ceu­ti­cals to sun­screens to bi­cy­cle frames. New ma­te­ri­als are be­ing cre­ated with enor­mous strength and elas­tic­ity and re­mark­able ca­pa­bil­i­ties such as self-heal­ing and self-clean­ing. Smart ma­te­ri­als and mem­ory met­als (that can re­vert to their orig­i­nal shapes) are find­ing ap­pli­ca­tions in a range of in­dus­tries such as aerospace, phar­ma­ceu­ti­cals and elec­tron­ics.

Re­think­ing energy comes of age

In North Amer­ica, frack­ing has un­leashed a shale energy boom that few saw com­ing. In less than a decade, the price of nat­u­ral gas has fallen from more than $12 per unit (mil­lion Bri­tish ther­mal units) to around $4 to $5 per unit in the US. And as gas sup­ply out­strips de­mand and prices re­main low, pro­duc­ers are turn­ing to frack­ing for oil. Other un­con­ven­tional sources are also be­ing ex­plored, in­clud­ing coal-bed meth­ane and meth­ane clathrates.

Mean­while, the cost of re­new­able elec­tric­ity gen­er­a­tion con­tin­ues to fall rapidly. Since 1990, the cost of so­lar cells has dropped from al­most $8 per watt of ca­pac­ity to one-tenth that amount. Many coun­tries are work­ing on ag­gres­sive plans to

ac­cel­er­ate adop­tion of wind and so­lar in­stal­la­tions and in­crease the amount of energy they pro­duce. By 2025, so­lar and wind power could be­come a source of 15 to 16 per cent of global elec­tric­ity gen­er­a­tion, up from 2 per cent to­day, and re­duce emis­sions by up to 1.2 bil­lion tonnes of car­bon diox­ide an­nu­ally. Energy stor­age tech­nolo­gies are also see­ing dis­rup­tion. Tech­nolo­gies such as lithium-ion bat­ter­ies and fuel cells are al­ready pow­er­ing ve­hi­cles and por­ta­ble con­sumer elec­tron­ics. Prices for lithium-ion bat­tery packs for cars could fall from more than $500 per MWh to $160 per MWh by 2025, even as their life cy­cle in­creases. Such ad­vances could make bat­tery-pow­ered ve­hi­cles cost com­pet­i­tive.

Ma­chines work­ing for us

In­dus­trial au­to­ma­tion has been around for sev­eral decades, and the robots on the fac­tory floor are now chang­ing fast. Past gen­er­a­tions of robots were iso­lated from hu­mans. They cost hun­dreds of thou­sands of dol­lars and needed engi­neers to pro­gram in­struc­tions into them., a process that could take sev­eral days. To­day, a new gen­er­a­tion of in­creas­ingly ca­pa­ble robots with en­hanced per­cep­tion, dex­ter­ity, and in­tel­li­gence is be­ing de­vel­oped thanks to ad­vances in ma­chine vi­sion and com­mu­ni­ca­tion, sen­sors, and ar­ti­fi­cial in­tel­li­gence.

Au­ton­o­mous ve­hi­cles are another dis­rup­tive tech­nol­ogy that has made dra­matic ad­vances in a sin­gle decade. In 2004, DARPA (De­fence Ad­vanced Re­search Projects Agency) funded the Grand Chal­lenge, a com­pe­ti­tion that of­fered $1 mil­lion to the first driver­less car that could drive 240km across the Mo­jave Desert. No­body won the prize money; the best-per­form­ing car (from Carnegie Mel­lon) man­aged a lit­tle over 4.5km. Ten years later, Google’s fleet of self­driv­ing cars has al­ready logged 1,126,541km in city streets – with the only ac­ci­dent oc­cur­ring when a hu­man was op­er­at­ing one of the Toy­ota Prius cars.

Fi­nally, ad­di­tive man­u­fac­tur­ing tech­nolo­gies could be­come another dis­rup­tive force in pro­duc­tion. While they are not new, 3-D print­ers are be­com­ing more preva­lent be­cause of bet­ter tech­nol­ogy and per­for­mance, new ma­te­ri­als, and fall­ing prices. Their use in sim­ple con­sumer goods and pro­to­types is widely known. To­day, they are also used in med­i­cal and den­tal prod­ucts, such as hear­ing aids, den­tal braces, and pros­thetic limbs, and are start­ing to be used in other high-com­plex­ity, low-vol­ume ap­pli­ca­tions, such as aerospace com­po­nents and tur­bines. New ap­pli­ca­tions are pro­lif­er­at­ing. The world’s first 3-D printed car, the Strati (made by start-up Lo­cal Mo­tors), was as­sem­bled and driven in Chicago in Septem­ber 2014. Ar­ti­fi­cial hu­man or­gans have al­ready been 3-D printed, us­ing a sugar-based hy­dro­gel to cre­ate a scaf­fold­ing of a kid­ney or other body part and an inkjet-such as printer to spray onto it stem cells from the pa­tient’s own tis­sue.

IT and how we use it

We may think of the mo­bile In­ter­net as a fa­mil­iar tech­nol­ogy, but with more than one bil­lion peo­ple al­ready us­ing smart phones or tablets, it is dra­mat­i­cally chang­ing the way we per­ceive and in­ter­act with the world around us. Con­sider the rapid growth of the In­ter­net of Things – em­bed­ded sen­sors and ac­tu­a­tors in ma­chines and other phys­i­cal ob­jects that are be­ing adopted for data col­lec­tion, re­mote mon­i­tor­ing, de­ci­sion mak­ing, and process op­ti­mi­sa­tion in ev­ery­thing from man­u­fac­tur­ing to in­fra­struc­ture to health care. Sen­sors in lime kilns can tell op­er­a­tors how to op­ti­mise tem­per­a­ture set­tings; in con­sumer goods, they can in­form man­u­fac­tur­ers about how prod­ucts are be­ing used; and in bridges, they can warn city ad­min­is­tra­tors about main­te­nance needs. While there is no sil­ver bullet that is ef­fec­tive across dif­fer­ent sec­tors, func­tions, and mar­kets, busi­ness lead­ers who ad­here to five prin­ci­ples stand the best chance of stay­ing on top and rein­vent­ing them­selves to keep up with the “new nor­mal”.

Make the most of your dig­i­tal cap­i­tal

Many com­pa­nies are re­al­is­ing the im­por­tant role their un­struc­tured data can play: ev­ery­where we look, com­pa­nies are putting data to use – driv­ing mar­ket share, re­duc­ing costs, rais­ing pro­duc­tiv­ity, and im­prov­ing prod­ucts and ser­vices. Re­tail­ers are us­ing big data to op­ti­mise prices dy­nam­i­cally, forecast de­mand, gen­er­ate rec­om­men­da­tions, and im­prove stock man­age­ment. Man­u­fac­tur­ers are us­ing big data to cre­ate be­spoke prod­ucts.

Ex­ploit lower mar­ginal costs of dig­i­tal

Digi­ti­sa­tion sig­nif­i­cantly re­duces the costs as­so­ci­ated with the ac­cess, dis­cov­ery, and dis­tri­bu­tion of goods and ser­vices. Kiva, the world’s largest online plat­form for peer-to-peer mi­cro-lend­ing, has fa­cil­i­tated loans worth more than $630m, mostly in the emerg­ing world. Kick­starter, a crowd-fund­ing plat­form that con­nects en­trepreneurs to in­di­vid­u­als in­ter­ested in fund­ing cre­ative projects, has fa­cil­i­tated pledges of more than $1.4bn to fund 70,000 cre­ative projects since 2009. In mar­kets such as search, e-com­merce, so­cial media, and the shar­ing econ­omy, the low mar­ginal costs of dig­i­tal in­fra­struc­ture al­low up­starts to build busi­ness mod­els with near­lim­it­less scale. What­sApp, the mo­bile mes­sag­ing plat­form that Face­book re­cently snapped up for $19bn, reached 500 mil­lion monthly ac­tive users within five years of its launch. Snapchat sur­passed the photo-shar­ing ac­tiv­ity on both Face­book and In­sta­gram with 400 mil­lion users only two years af­ter its foun­da­tion.

Find new ways to mon­e­tise con­sumer sur­plus

There’s an in­ter­est­ing im­pli­ca­tion to the rise of big data and in­creas­ingly cheap dig­i­tal busi­ness tools. In the­ory, both trends should be im­mense boons to the com­pa­nies that can af­ford to gather, main­tain, and use data to their ad­van­tage. Con­sumers, how­ever, re­main king and queen in our age of ac­cel­er­at­ing tech­no­log­i­cal change. Con­sumers cap­ture as much as two-thirds of the value cre­ated by new in­ter­net of­fer­ings in what is known as con­sumer sur­plus – lower costs, bet­ter prod­ucts, and im­proved qual­ity of life. The chal­lenge for com­pa­nies is how to get con­sumers to pay for all of the great new stuff be­ing made avail­able to them. So far, only a few mon­eti­sa­tion mod­els have proven ef­fec­tive at shift­ing value back to com­pa­nies. One is advertising rev­enue, which has fu­elled the highly prof­itable growth of tech giants such as Face­book and Google. Di­rect pay­ments and sub­scrip­tions re­flect an in­creas­ing abil­ity to charge for online con­tent. Un­der this model, the use of “freemium” pric­ing strate­gies – of­fer­ing no-fee ba­sic ser­vices and charg­ing for en­hanced fea­tures such as the abil­ity to avoid advertising, vir­tual goods in games, or a higher level of ser­vice and ac­cess to valu­able fea­tures – is in­creas­ingly com­mon. A third model is mon­eti­sa­tion of big data, ei­ther through in­no­va­tive busi­ness-to-busi­ness of­fer­ings or through de­vel­op­ing more rel­e­vant prod­ucts, ser­vices, or con­tent for which con­sumers are will­ing to pay. LinkedIn, for ex­am­ple, makes 20 per cent of its rev­enue from sub­scrip­tions, 30 per cent from mar­ket­ing, and 50 per cent from tal­ent so­lu­tions, a core part of which is selling tar­geted tal­ent in­tel­li­gence and tools to re­cruiters.

Don’t wait for the dust to set­tle

The in­stinct, in the face of rapid tech­no­log­i­cal churn, can be to wait for the dust to set­tle be­fore plac­ing your bets on a new tech­nol­ogy. But time is the en­emy. To­day’s tech­nol­ogy could be out­dated to­mor­row, and a seem­ingly ir­rel­e­vant ac­qui­si­tion or strate­gic move may wind up shak­ing up the in­dus­try. Fig­ur­ing out which of the dozen types of 3-D print­ing tech­nolo­gies will be­come stan­dard is a time-con­sum­ing ef­fort with a low like­li­hood of suc­cess. Most com­pa­nies strug­gle to make such ef­forts an in­te­gral part of their busi­ness-as-usual pro­cesses. For many es­tab­lished com­pa­nies, plac­ing big bets on early tech­nolo­gies is sim­ply not an op­tion due to strictly de­fined risk ap­petite, high hur­dles for new in­vest­ments, and legacy IT sys­tems. Em­brac­ing in­no­va­tion could po­ten­tially re­de­fine the way com­pa­nies mon­i­tor cus­tomers’ ac­tions – and hence set prices and as­sess risk. Tech giants have stood out as an un­sur­pris­ing ex­cep­tion to the rule, us­ing their deep pock­ets and ea­gle eyes for the latest in­no­va­tions to place large bets on the next trans­for­ma­tive tech­nolo­gies. Google ac­quired An­droid in 2005 when the mo­bile In­ter­net was in its in­fancy. The fol­low­ing year, when online video advertising was in its in­fancy, it paid $1.6bn for YouTube. Both proved to be master­strokes, de­fy­ing the pre­vail­ing con­ven­tional wis­dom. Large com­pa­nies in other sec­tors have re­alised that es­tab­lish­ing sym­bi­otic re­la­tion­ships with vi­brant tech start-ups can be an in­creas­ingly ef­fec­tive way to place tech­nol­ogy bets. Do­ing so min­imises risk and dis­rup­tion to the core busi­ness, while po­ten­tially pro­vid­ing com­pa­nies with the op­tion to take own­er­ship of or de­ploy promis­ing new prod­ucts and ser­vices.

Think tech­nol­ogy

Some com­pa­nies have suc­cess­fully in­sti­tu­tion­alised the tech­nol­ogy mind­set by ap­point­ing a chief dig­i­tal of­fi­cer and el­e­vat­ing the role through­out the or­gan­i­sa­tion. In 2008, Sona Chawla joined Wal­greens, the large US phar­macy and re­tail chain, from Dell as se­nior vice pres­i­dent of e-com­merce. A cou­ple years later, she was pro­moted to pres­i­dent of e-com­merce, and in 2013 she be­came the pres­i­dent of dig­i­tal and chief mar­ket­ing of­fi­cer, re­port­ing di­rectly to the CEO. Un­der Chawla, Wal­greens ac­quired drug­ in 2011 and de­vel­oped one of the most pop­u­lar US mo­bile health apps, which al­lows cus­tomers to re­fill pre­scrip­tions by scan­ning bar codes and set per­sonal med­i­ca­tion re­minders. To­day, more than 40 per cent of the chain’s online re­fill re­quests come from the app, and mul­ti­chan­nel cus­tomers spend 3.5 times more than brick-and­mor­tar cus­tomers.

Other com­pa­nies have used the “ac­qui-hire” ap­proach – buy­ing a start-up in or­der to ac­quire the team that runs it – or es­tab­lished part­ner­ships to catch up on promis­ing trends and ac­cel­er­ate ac­cess to in­tel­lec­tual prop­erty, tal­ent, and tech­nol­ogy. Ya­hoo laid out $1bn for Tum­blr in part to bring wun­derkind founder David Karp into the fold. In May 2014, Wal­mart ac­quired Sil­i­con Val­ley–based ad soft­ware com­pany Ad­chemy for $300m and in­cor­po­rated Ad­chemy’s 60-per­son team into @Wal­mart Labs, the com­pany’s in-house tech shop. In 2013, Sephora, the cos­met­ics re­tailer with 1300 stores in 27 coun­tries, ac­quired Scentsa, a spe­cial­ist in dig­i­tal tech­nolo­gies, to im­prove the in-store shop­ping ex­pe­ri­ence and keep Scentsa’s tech­nol­ogy out of the reach of com­peti­tors.

Ex­cerpted from No Or­di­nary Dis­rup­tion: The Four Global Forces

Break­ing All the Trends by Richard Dobbs, James Manyika, and Jonathan Woet­zel. Avail­able from PublicAf­fairs, a mem­ber of The Perseus Books Group. Copy­right © 2015.

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