David Brennan: Hello and welcome to this special edition podcast on the impact of digitalisation on business transformation. Today, as part of our wider look into how some of the bigger tech forces are reshaping all industries, we are honoured to be speaking with Dr Carsten Sørensen from the London School of Economics.
We will explore some of the potential future business models and industries that Dr Sørensen has identified in our report Tides of Disruption: How to Navigate Business Transformation. We'll also look at how CEOs need to adapt in this brave new world of digitalisation, the potential structure of companies within these models and the moves that the c-suite should make now in order to navigate this period of profound transformation within industries of all shapes and sizes. Dr Sørensen has been studying digitalisation and its impact since the 1980s and since joining the LSE in 1999 has studied the business and consumer impact of mobile and ubiquitous information technology innovations. Dr Sørensen a very, very warm welcome.
Dr Carsten Sørensen: Thank you.
David Brennan: I'd like to start by exploring the impact of digitalisation on future business models and in particular the current work on 5G telecoms networks and with it the Internet of Things, both of which will arguably underpin many of the other technologies that will drive business digitalisation. Is it correct to say that 5G and the Internet of Things have the potential to create new ecosystems?
Dr Carsten Sørensen: Yes, so the easiest way of explaining what might happen is to look at what we have now. We have an architecture that basically combines very user-friendly devices that are in our pockets. They all tend to look the same, they are just a square of glass and metal and silicone with a touchscreen whether they are Android or Apple or Microsoft. The point is they are all connected through various kinds of telecommunications and broadband networks to cloud services that help us, so when I say "hey Siri" it is really a sound file that goes to the cloud via the internet and then Apple servers try and work out what you are talking about and give you back the results it thinks your search is about.
Now the point is, what is different with Internet of Things and 5G is that 5G technology, and perhaps even 6G when we get to that, will basically give us much more bandwidth, so it allows things to happen much faster, but that could for example allow us to do what's called edge computing, so that could allow us to not send the sound file to the cloud. It might send the sound file to your laptop or to your handset if you have spare capacity, so this idea is that we can have the same as we do now but not have this centralisation of computing power. The other thing of course it could do is allow us to have all sorts of different devices and we already have the home automation devices, automatic thermostat, self-driving cars; all of these things are really about trying to understand how we can have devices that are not only touchscreen devices that stay in our pockets or handbags. It's really trying to see how many more aspects of life can produce data that will help us optimise various kinds of business relationships.
David Brennan: What I'm hearing is that there's going to be a big impact to the way that businesses interact with each other going forward and also with consumers and how they add and capture value. Can you give me some indication or insight into how you think that might play out?
Dr Carsten Sørensen: You could argue that what we have now is demand driven markets. So when Twitter arrived it seemed like a terrible idea, and I'm still not sure whether it is a good idea, but lots of people are on Twitter. The point is this idea of whether something is a good innovation or not is really up to how we shape it through our use. The important thing with things like 5G networks and the Internet of Things is they will create new combinations of services that will help transform how we create value between firms. I think one of the key things we looked at in the report is exactly how it might be a different configuration of value extraction compared to what we have now, where it is largely either traditional large firms or new digital platforms; the Facebook, Apple, Amazon, Netflix and Google, the FAANGs of the world or the BATs of the world. The point here is that by trying to recombine things in a new way we don't have, but we will need, some notion of flexible digital markets that will allow people to exchange things of value with each other without having to do it automatically through one of the big global platforms.
David Brennan: So change is coming. How do you see these changes altering and impacting a company's current structure as it is today?
Dr Carsten Sørensen: Well if I'm allowed to be a bit cheeky here, one way of explaining is that for large companies with thousands and tens of thousands or hundreds of thousands of people, you can sort of look at individuals there as inhabitants of the Soviet Union waiting for Gorbachev to instigate Glasnost and Perestroika. The way of having large functional silos in large companies, it was really good for one particular set of purposes and still is good for some purposes, but with these new technological advancements just in the digital platformisation that we've seen in the last decade or so have shown that companies can basically export risk out of the corporation. Apple is entirely exporting risk for app development to people in ecosystems developing apps and trying to make a living off that. It's not Apple's risk, and the point there is as a result Apple needs less people to do this kind of work. The biggest problem is how to understand changes in value chains that mean that when you establish a platform the associated problem is how to organise these companies, how to transform existing companies to be much more flexibly organised, and this is a clear case of if you want to go there you shouldn't start here.
David Brennan: OK. So is it correct to say then that there's potential for companies to become fragmented, meaning that their agreements, contracts, geography and supply chains will actually look entirely different in the future?
Dr Carsten Sørensen: I don't know whether they're going to look entirely different but you can already say that companies are fragmented. Most companies compared to 30 or 40 years ago will have a large proportion of their staff as itinerant workers. Many years ago, I did some work with Microsoft in Reading and they would have a few thousand on staff, but then they would have the same amount that were people who worked on contracts in projects. If you have companies like Apple saying we want to be really good at making phones but we don't want to actually make them ourselves, this is where fragmentation has already happened.
I think we're going to see an acceleration of that and the problem will be to try to understand where it is going to happen. Because you can imagine clever ways of using digital technologies and 3D printers and all sorts of things. Adidas is opening a sneaker printing factory in America, so you can imagine that things that were once done in India and China could be done in Europe or in the US, whereas other things might be outsourced to Africa and the whole problem is for us to understand supply driven markets. It's really about the ability to understand and empathise with whoever is paying.
David Brennan: There's going to be an awful lot for the boards of companies to think about, I mean this technological change that's clearly coming is causing, I would say even at the moment, a lot of CEOs and the Chief Technology Officers to be sat there really trying to get their heads around what's coming down the track. What might a CEO need around him or her in order to navigate these potential changes and what structure do you think needs to be in place to enable them?
Dr Carsten Sørensen: I think one of the fundamental problems is the preconception of what an executive does, and so the idea of making decisive decisions and running ahead of everybody else and really knowing, I would argue that increasingly already now CEOs are gardeners that try and cultivate processes that they're not in control of. I think this is the key thing. To be a good leader is to be able to deliver on operational goals and to understand the strategic direction, but it is really just to be a gardener of innovation talent and be able to dare to experiment.
When you want to launch something like Twitter and you have no idea whether it's going to work or not, well you have to try. You don't find out by not doing it. You cannot will it to work. You cannot market it to work. All the dynamics are really based on you experimenting, trying to find out what is really going to work, and I think increasingly if we look at the future work in this scenario it will be more and more difficult to have very clear value propositions that do not change over time. This is constantly trying to understand your value proposition and to protect your strategic interest through what in the report we talk about as control points that you need to be open. If you're just closed and don't want anybody else to play with your toys then you're going to play on your own in the corner. The effect you're going to have is the effect of sharing with others and that will require you to be able to be open without giving away the fun. This is really difficult because traditional organisations are used to thinking about all assets as strategic and increasingly in the last 20 years the assets that are not considered strategic are outsourced. The point is, you really have to think creatively about main competencies and control points where we can engage with others in a reasonable manner without losing in these tussles.
David Brennan: That's a very good point when it comes to the concept of collaboration and it's often said whether it's blockchain, Internet of Things or other technologies, the only way we're going to see a real shift forward is when companies actually start to share and, as you say it's very difficult to get that into the mindsets of boards, especially when you think about some of the legal angles around it. Intellectual property, competition law – there's all sorts of issues that could arise and clearly the law itself has to also adapt and change with the technological advancements that we're seeing, which is as we know often difficult.
Dr Carsten Sørensen: If we look at Apple as a very good example, where the board is responsible for Apple being the world's largest company at some point, because when Steve Jobs and his fellow mates at Apple had built the iPhone, he was very adamant that it continued to be as in the first instalment that nobody was allowed to build for it. It had to be web services or it was Apple's own apps and it was actually his own board that forced his hand to open up to share his Lego bricks with others so they could build new apps to put on the shelf of the app store, and because of that he could leverage a massive distributed innovation arrangement at almost no risk.
David Brennan: We talk a lot in the report about business models of the future. In order to whet the appetite of our listeners, are you able to perhaps give us a bit of a brief snapshot of some of the business models of the future that we have identified in our report? So decentralisation, platformisation and elasticity models, would you like to talk perhaps a little bit about that?
Dr Carsten Sørensen: I think it's important to be aware that what we've done is based on my 30 odd years trying to understand what happens when you digitise organisational processes, we can just try and guess and even if it's wrong it's my hope that we can have a foundation for readers to have a discussion amongst themselves. It's in three highly interdependent kinds of streams of business arrangements.The idea of decentralisation is really to acknowledge that for a lot of reasons if we only end up having the FAANGs and BATs and Spotify and eBay, this will be a very poor world because this is not going to be good enough in terms of innovation. The whole idea of blockchain based technologies is this ability to decentralise and distribute decision rights so think of blockchain as an internet of rights, an internet of value, and that can enable us to engage in more distributed value arrangements without a centralised large platform that controls this and secures it. So the idea of decentralisation is very interesting because actually you could say that the digital platforms now are so successful exactly because of decentralisation. Facebook says we don't know what people want to read so we decentralise the production of content to all its users.
The second one is mass platformisation, so this is the notion that if a platform is very good at competing with a traditional organisational arrangement by simply leveraging that risk somewhere else and the core control points are remained at the platform, this allows the platform to take a platform tax, to leverage a tax on, for example, apps or content. So we are thinking why can't we not have platforms in many other ways? You can imagine you push a button and a platform will come up and you have a platform for one activity, like a garden activity where you take money for people to participate and share their home craft, or all sorts of ways where you say now platforms are not commodified.
The third one is also related to these two and this is the idea of elasticity as a business model. So we have now seen how elasticity of storage and computing power in cloud computing works fantastically, so Microsoft they completely missed the boat of really becoming a big platform on app stores for mobile phones, but they have really grown and are now one of the world's largest providers of cloud services. It turns out it's really smart not having your own IT infrastructure, you can just not have generators anymore, we have electricity in the walls because it's much smarter. In the same way, why can't we have all sorts of others services on tap? So management on tap, when I need a bit of middle management I just buy it, there's a platform for that, and there are technologies that make sure we can exchange value and pay for the services. So these three things we think can describe a lot of different phenomenon across many different new technologies.
David Brennan: Dr Sørensen we've clearly identified quite a number of advantages to this new dawn that's coming and the digitalisation. However, what are some of the trade-offs? What are the things that we perhaps should be thinking about or the negatives coming out of this as well?
Dr Carsten Sørensen: I think there are many things to discuss here and I think we have touched upon quite a few of them in the report. I think one I wanted to draw out in particular is the trade-off between privacy and communications. So in the same way as if you go to have a haircut as I did this morning, if the person cutting my hair says how do you want your hair, and I fold my arms and say I'm not telling you, I will get the haircut I deserve. I had to share in order to get a service, so in these highly personalised, highly valuable services that we can extract and engage in what we can call digital marriages with various service providers, you can only be married if you have trust in each other and if you can exchange deeply intimate information. I think the problem we have right now is that the newcomers on the block, namely all the digital platforms, particularly the ones that extensively use data and extract value from data, they have the problem that they have been able to do so because they have not really assumed that the demand side markets have an issue with it. It's my strong belief that as we move towards some of the future trends that we have discussed in the report, this will come to the fore because already now we can see that Facebook users are not sharing as private data as they used to simply because they are aware that this has got consequences and this is shared. So with legislation coming in about privacy with all sorts of increased heightened interest in what is my data worth, there will be massive business opportunities to really help cater for the demand side's need for privacy, and so the whole idea is the more private information you are willing to share, the better the service will fit you, but you have to trust that relationship. Trust is going to be a main issue and I think right now we are in this wild West where it's not quite clear how this is going, but it seems obvious to me that more informed consumers and more informed businesses will make this much more interesting. Just look at open banking – so open banking is a huge opportunity for businesses to do very interesting things and help consumers understand their own financial affairs better. You can think of all sorts of innovations, but it is based on an orchestrated and legislated way of doing this, and again that's why executive action is really about cultivating and really taking care of what people want. So the person who gave me a haircut this morning, she was very good, she empathised with me. She wanted to give me a good haircut but she didn't run off and tell it to 500 others, so I can be guaranteed I don't have a stream of street salesmen with scissors following me down the street saying can I sell you a haircut, because I've just had one.
David Brennan: What I would say just exploring that topic in terms of data protection, what's interesting is we talk about blockchain in our report and clearly there we have the concept of an immutable ledger within GDPR which is the right to be forgotten. That is a very interesting concept in itself and I'm not quite convinced that in terms of the law we're clearly not there yet in terms of how that works, but that's something that surely has to be overcome going forward because the law will have to change to be able to deal with the platformisation, the digitalisation and whatever changes are coming down the track.
Dr Carsten Sørensen: Yes so the point is if anybody dares tell you that there's a simple technological solution to an intrinsic social technical problem or social problem or business challenge, then you should just tell them there isn't. Blockchain doesn’t solve anything in itself. Actually most technologies they just shuffle problems from behind the door to the middle of the floor and then you think of new ways of instituting processes around it that may provide some solutions, but the problem is of course you can use blockchain technology as a way of making your data users accountable for where have they used your data, but it also will create other associated problems exactly because of its immutability. And it's clear that this constant negotiation between innovation and legislation is extremely important because it's about finding exactly right now this is the negotiated order, this is the compromise we are willing to make, and I think watch this space. But unless we have an internet of value then it at least is not possible for us to reclaim some of the value from our own data.
David Brennan: We've covered some rather broad topics rather quickly today, but there's clearly an awful lot more to discuss and explore. For more information please do download a copy of our report Tides of Disruption: How to Navigate Business Transformation. Dr Sørensen thank you very much for taking the time to speak to me today and for your invaluable insight.