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Three Business Rules to Forget in the Digital Era

Feature Article | December 5, 2017 by Robin Meyerhoff Hot Story

When it comes to digital business, Andrew McAfee knows a thing or two. A principal research scientist at MIT, prolific writer, and management expert, McAfee is a leader in understanding and explaining how digital technologies are changing business, the economy, and society.

At the recent SAP Leonardo Live event in Chicago that focused on digital transformation, McAfee urged his audience to throw out the business playbook they’ve been using for the past 30 years.

“The right way to run a factory in the steam era became a really, really bad way to run it in the era of electrical power,” he said. “Similarly, during a technology transition — and afterwards — the advice you used to follow becomes bad advice.”

McAfee explained that fast, profound shifts are occurring in three key areas: process, company, and industry. And he provided a new playbook to help companies navigate those changes and succeed.

Process: From People to Machines

The traditional wisdom about process, which McAfee defines as “getting stuff done,” is to let machines handle the routine work like accounting or record keeping, and have people use their accumulated wisdom to make the judgements calls. This is the playbook of yesterday.

Profound shifts are occurring in three key areas: process, company, industry

McAfee explains that in most companies, decisions have typically been based on the highest-paid person’s opinion, or “HiPPOs.” They follow their gut, past experiences, and education, but they are being threatened by what McAfee calls “the Geek” — people who use data to make decisions.

“When the Geek needs to make a tough call, they gather evidence, do the best analysis they can, then they follow the evidence — even if it doesn’t go along with their gut or their experience,” McAfee explains.

“But here is where things get interesting,” he says. “In 136 studies of decision making by HiPPOs versus Geeks, 48 percent of the time HiPPOs added nothing over Geeks’ approach. Furthermore, 46 percent of the time HiPPOs provided an inferior decision. HiPPOs were only clearly better in eight percent of the cases. We need to make HiPPOs an endangered species.”

McAfee believes that with artificial intelligence (AI) and machine learning, “Now we have a new toolkit to help us sift through these crazy amounts data, see patterns, and make very sophisticated, accurate judgements in extremely complicated situations.”

He explained that AI and machine learning technologies have leapfrogged much further ahead today than anyone could have anticipated, and are ready to take over making judgement calls.

“Go is 3,000 year old Asian strategy game. Computers have been laughably bad at Go. Until last year, when the world’s best Go player became a computer,” said McAfee.

Analyzing the game played by AlphGo, a Google AI company, experts focused on one particular move — move 37 — that made no sense to human players but ultimately helped the machine win. The lesson learned? AlphGo doesn’t just play the game better than we do, it plays differently than we do.

McAfee is optimistic: “Together with machines, we’re going to make progress in some very difficult areas. And when we rewrite the business playbook, remember: machines are demonstrating excellent judgement.”

Company: From Core to Crowd

“For about 25 years we’ve been telling business that to succeed they need to strengthen their core — ‘core competency, core strength, core capabilities,’” said McAfee. “The idea of the core is a small number of things that differentiate you from competitors, realize value for customer, help you succeed in your markets.”

But, he explains, now there are millions of interconnected adults on the internet and if you can activate the energy of the crowd, amazing things can happen.

McAfee provided an example where a Harvard Business School expert on crowd sourcing and innovation Karim Lakhani worked with the National Institute of Health (NIH) and Harvard Medical School to try and improve the ability to sequence human white-blood cell genomes. They got good results.

But when Lakhani opened up an online competition to the crowd as an algorithmic challenge they got amazing results in both accuracy and speed. McAfee says the top results, “showed an improvement that was three orders of magnitude faster, without sacrificing accuracy,” compared to the NIH and Harvard Medical School results.

“We’re seeing companies that don’t focus on growing their core. They embrace the crowd from the start,” said McAfee. “We will see how this plays out. But when we rewrite the business playbook, we need to remind ourselves: the crowd is surprisingly wise.”

Industries: From Industry to Platform

“I grew up in McKinsey understanding the playbook rule: There is no substitute for knowing an industry inside and out. For the past 30 years, the business playbook has said industry structure determines successful business models,” said McAfee.

But in three very different industries McAfee argues that platform is making the difference when it comes to disruptive innovation.

Take the smart phone industry: The defining moment was when Apple opened up the App Store as a platform for outside developers. For urban transportation, it was Uber and now group fitness is being transformed with ClassPass, a platform that allows people to take classes at gyms by subscribing as members to ClassPass, not the gym.

McAfee explains: “ClassPass says, ‘Don’t join a gym. Sign up with us. You can pick whatever classes you want and get variety.’ To gyms they sayY ‘you have some empty spaces. We can fill them. You won’t get the full price but some revenue is better than none.’”

Like with Apple and Uber, the platform for ClassPass brings together products, services, sellers, and consumers.

If platforms work, McAfee believes there are many advantages: You get the network effects of increased demand, companies can control the rules of engagement. With an open platform, you can crowd-source innovation and get additional information, which is used to create better pricing and matching of services.

This blows apart the distinct industry-sector differences people used to assume fueled growth and replaces it with the mandate to find the right platform for your business.

McAfee concludes, “I am pretty confident that the successful businesses of tomorrow are going to have a lot more machines, platforms, and crowds in them than today. I am really confident that following the industrial-age business playbook is a really good recipe for failure.”

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