We have moved in the past decade from a rather simple understanding of IT to a nuanced evolution of a networked economy. How do you see this transformation from your vantage point at SRITNE?
Deepa Mani: Over the past decade, there have been two fundamental shifts with respect to IT. First, within the firm, IT has evolved from a cost centre that is peripheral to business strategy to a key competitive asset integrated with business strategy. This nuanced view of technology drives innovation and transformation. Second, it’s not just about integrating IT with traditional business functions, but rather a fundamental transformation in products and services. Once composed of primarily electrical and mechanical parts, products today are complex ecosystems of sensors, storage, software and connectivity. That is, products today are technology.
Think about your cars. They used to be bundles of mechanical components. But today, your car is software. Software drives you, navigates you, entertains you, and protects you from crashes. This shift in products and services has led to the second fundamental shift in industries, notably the entry of a new class of players– technology companies. These could take the form of start-ups as well as large technology companies– Google, Apple, Facebook, Amazon – the GAFA mafia as they are called.
Industry incumbents know how to compete with their traditional counterparts– that is, a General Motors knows how to compete with a Ford. But they don’t quite know how to respond to this new class of competition founded on data, analytics, etc. And that’s why you see fundamentally different competitive dynamics in IT intensive industries. So, never before has it been so important to integrate the principles of the digital economy in business strategy and to be nimble, adaptive, and experimental. I see all of this in the classroom, while leading an executive education program called Leading Digital Business Transformation and Innovation. And as I say it to my senior executive participants, the objective is to make technology your friend who opens up possibilities that never existed, and not to treat it as a foe who will gas you and your company out of the water.
What are some main considerations for companies looking to invest in the technology of the future?
Deepa Mani: There are a couple of considerations. First, whatever the emerging technology, it has to create new products, new processes, and new means of creating and extracting value for your firm. Otherwise, it is just a technology unto itself. Many people credit Apple’s success in digital music to great products– e.g., the iPod. A technology marvel, they say. Some even say iTunes. But the thing to remember is that Apple makes nothing off iTunes. 70 cents go to the recording company, 20 cents for credit card processing, plus indirect costs. Apple is left with practically nothing. But at the quarter beginning the launch of the iTunes, it was selling 150,000 iPods a quarter and the end of the quarter it was selling 750,000 iPods. It created a razor and blade model in reverse where the variable good, the iTunes, was the loss leader that drove the sales of the profitable durable good, the iPod. Apple’s innovation was that it wrapped the cool technology in a super cool business model that worked for the recording industry and the consumer. In turn, Apple changed the face of digital music. So, the first consideration is to reflect on how value creation and extraction are altered because of technology.
The second is more to do with constraints to digital transformation. The most persistent trend in business is the inability of incumbents to respond when technology and markets change. If this was the year 1857 and your boss came to you with a deceptively simple question: Alexander Graham Bell has invented a way to transmit voice over wire– what shall we do? Well, at the time, Western Union dismissed Bell’s innovation as a toy. And they were not the last company to dismiss a technology that was potentially disruptive to them. An acute focus on existing customers leads companies to sidestep new markets that are not consistent with their performance goals. However, these markets quickly change to intersect with the company’s existing markets and performance goals, disrupting them. So, do not be held captive to your existing markets, customers, resources, and processes. Be nimble and agile.
Finally, don’t be held captive to your investors. My research in this space shows that there is asymmetry between markets and investors with regards to technology investments, and investors often value incumbents for current period profits versus future growth. Tesla’s market capitalisation (EUR 59.8 billion) exceeds that of BMW (EUR 52.4 billion) as of this conversation. Despite BMW’s comparable production levels and deliveries of electric cars and significantly higher profits, investors hailed Tesla’s technological innovation efforts, and expressed far greater optimism regarding Tesla’s future growth. CEOs have to be aware of factors that constrain digital transformation, and plan for strategies to ignite investor enthusiasm.
Elon Musk recently admitted that excessive automation at Tesla was a mistake, saying “Humans are underrated.” What should we expect from Artificial Intelligence (AI), Machine Learning (ML), and robotics in the workplace of the future?
Deepa Mani: First, machines and machine intelligence will be increasingly fundamental to business. We have to welcome machines into the fold of work. They will enable businesses to scale while allowing managers and business leaders to focus on core competencies. However, human judgment is a critical complement to machine intelligence. Managers have to understand the abilities and limits of machines and create new work models that allow human and machine intelligence to work together optimally. Therefore, over the next decade, I don’t think AI will replace managers, but managers who use AI will definitely replace those who don’t.
AI based workflow automation also opens up exciting possibilities like the productisation of services and the integration of the gig economy with mainstream work. I do believe AI-based work models will influence the strength and nature of the non-employment workforce. It will shift labour force participation and the distribution of employment. A lot of this is unknown to firms. Therefore, it is important that they be willing to experiment, learn quickly, and craft these trajectories for the future.
Popular media is raising the alarm that India lags far behind China in the race for technology. How do you view this race and the innovation landscape in India?
Deepa Mani: In contrast to China’s gross domestic expenditure on R&D, which rose from 1.1 percent of gross domestic product in 2000 to nearly two percent in 2011, India’s equivalent expenditure has stayed constant at around 0.9 percent for nearly a decade, the lowest amongst the BRIC economies. Similarly, the density of scientific workforce in India at one researcher per 10,000 labour force is also the lowest amongst the BRIC economies. Our patenting output offers another wake-up call. Most Indian patents are held by assignees of foreign origin. About 86 percent of all Indian patents granted in the 12 major science and technology classes between 1974 and 2008 were held by a foreign assignee, which includes the MNCs, foreign universities, and foreign individuals.
Foreign patenting in India is consequential- it contributes to knowledge spillovers, indigenous innovation, and the economic growth of the country. One implication for this is that when we legislate the new economy and multinationals, for instance with intellectual property rights, we need to be aware of their contribution to economic development and innovation in this country.
When we say we lag behind China, we need to make sure that we are measuring innovation appropriately and in a manner that reflects the capabilities of this country. New business models and processes are not often captured in this data when we measure innovation and it needs to be calibrated appropriately. This applies to companies and the economy at large. It is important to understand what are the types of innovation that we are churning out. Where do we lag, and what capabilities must we build in this country to close these gaps?
My last recommendation is my favourite: investing in the right kind of education. Innovators are iconoclasts, people who don’t colour within the lines. At best our educational system needs to be producing them, and at the very least, we need to be tolerant of them and figure out how we can create great creative minds. Universities need more autonomy, they need to invest in research cultures. Research needs to drive our education. By continually assessing, benchmarking, and learning, we will drive the innovation-friendly environment of tomorrow.
In what ways is SRITNE working across some of the areas you have touched upon?
Deepa Mani: SRITNE works closely with both industry and government to understand the business value of technology as well as how technology alters behaviours in firms and society. Some of our projects include benchmarking innovation efforts at a large pharmaceutical firm to suggest interventions moving forward, identifying transformation models and related capabilities for industry incumbents across sectors. We enabled a large consulting firm’s global in-house centres to mature from being cost centres to innovation centres by designing a capability maturity model and articulating capability development pathways. Our engagement with Google has been around implications of digital marketing for small and medium enterprises (SMEs) and with Uber, it has been around the future of work and implications of the sharing economy. Most of these research efforts have also translated into custom educational programmes for the companies.
SRITNE also works closely with governments and government agencies to drive evidence-based policy making. For example, we have worked with the Telangana government to understand the effects of technology on education and healthcare, with the Andhra Pradesh government to understand the implications of emerging technologies like blockchain, and with NITI Aayog on impact assessment for regulatory guidance.
Industry and academia bring complementary skills to the table and we must collaborate to understand the digital economy. I would like to invite your audience to reach out to us for collaborative efforts and enquiries. We would love to work with them to further our collective understanding of the impacts of digital on organization, behaviour, and society.
About the Interviewer:
Yogini Joglekar is a Consultant at ISB’s Centre for Learning and Management Practice.