CEO's from across all industry segments are declaring themselves technology companies. Banks are now technology companies in the financial services industry and automotive companies are information companies in the transportation business and so on. These corporate mandates provide the impetus for corporate wide digital transformation strategies and will translate to huge investments in information technology. CEO's see these strategies as the next big opportunity for growth, but it also begs the question – where is this growth coming from?
In our work at IDC we use a number of economic inputs and forecasts to inform our own projections for technology markets. It has been my observation that we have been, at least since the recession of 2008, in a "treadmill" economy. We cycle through peaks for consumer spending, capital goods, and commodities but never in synch and with very little overall economic growth; especially with the recent slowing of emerging markets.
Companies have become very adept at managing the treadmill. Investments in enterprise systems of record have been a large part of this competency as corporate wide reporting has enabled firms to make adjustments more quickly. These second platform based systems, most notably ERP, have helped companies maintain profitability through the cycles and generate a lot of cash. In fact, the companies that make up the S&P 500 sit on over $1 trillion in cash or equivalents.
Organizations have found non-growth outlets for that cash – increased dividends, stock buy backs, or acquisitions – that have helped to keep stock prices relatively high but haven't generated much new economic growth. And this brings us back to our original question, how will digital generate new economic growth.
To frame the answer, I will quote the Oracle of Omaha, Warren Buffet. Mr. Buffet recently said that information was the new oil. What he meant was that economic prosperity in twentieth century was driven by the petrol economy and this century will be defined by the digital economy. I believe this conclusion is apt, but the similarities and differences need to be explored.
The impact of oil on society, politics, and business is well documented. The discovery of vast deposits of fossil fuels allowed for the industrialization of nations, created unprecedented social mobility, and raised the living standards of billions of people. Productivity globally has risen steadily from the end of World War II creating long term economic growth. Wages in the mature economies of the United States, Japan, and Western Europe rose in synch with productivity through the mid 1980's and have been flat since. This flattening has been largely due to the benefits of the petrol economy spreading to emerging economies, particularly China.
To Mr. Buffet's point, this century's economic success will be tied to the collection, refinement, and innovative uses of information. The productivity gains of the petrol economy can be defined by tremendous increases in the output side of the productivity equation (productivity = output divided by input), a "scale dividend". The digital economy will be defined largely by tremendous reductions on the input side, an "efficiency dividend".
Take healthcare as an example. According to the World Bank, 17.1% of the US GDP of 16.77T was consumed by healthcare (2013, the latest data available). Consider the potential of connected patients and evidence based medicine to eliminate waste in the system and cut that in half – that is nearly $1.5T in value. Or energy, where it is estimated (by Clean Technica) that 61% of the power generated in the US is wasted. Smarter grids will allow generation to more closely synchronize with demand and have the potential to eliminate another $600B of waste (energy represents 8% of GDP).
There are many other areas where third platform technology investment can deliver huge gains – food (60% of all food produced is never consumed), education delivery, government services, and financial transaction costs come to mind. Couple this with more effective manufacturing and retail supply chains and there is the potential to take $4T of waste out of the US economy and $20T worldwide or nearly 25% of global GDP.
The priority for governments in assuring economic security will pivot on cheap, fast, and pervasive connectivity. Just as President Eisenhower promoted the interstate highway system to complement the economic advantages of the petrol economy in the US in the 1950's, leaders would be wise to make zero cost high speed connectivity available to all of its citizens. For an example, one can look at South Korea which has the fastest speeds and highest levels of connectivity in the world.
There should also be a consideration of the unintended consequences. The petrol economy contributed to global climate change, ongoing conflicts, and, at least ultimately, a large wealth inequality. The digital economy will have a huge effect on how individuals think about their privacy, will be a key component of warfare, and may make many professions obsolete. Going back to South Korea, the country has a serious issue with video game addiction; obviously an unintended consequence.
The scale dividend of the petrol economy produced higher wages and more disposable income which created healthy long term economic growth. The social efficiency dividend will deliver lower costs of basic needs and increase disposable income. Couple this with the post-recession reduction in household debt and increase in savings and it is fair to say that we are on the cusp of a consumer led stretch of economic growth. And this is what the CEOs are, perhaps only intuitively, anticipating with the underlying premise that, along with the change in the underlying principles of macroeconomics of the digital economy, there needs to be a rethinking of how the firm operates, the microeconomics.This "theory of the digital firm" brings us back to digital transformation strategies. Where petrol economy firms were aligned with scale by organizing around functional competencies, digital firms will be more fluid and organized around customer experiences and operational capabilities. Innovation will be less about breakthroughs in the research labs and more related to an inherent ability to learn. Making this happen will be the mark of leadership in this economy.