Disruptive Technologies, Part VI - Internet of Things

The Disruptive Technologies MGI paper is quite optimistic on the "Internet of Things." In essence, more sensors, more communication, and more data to connect the world. However, for most areas it is difficult to be convinced that the rapidly growing areas will produce increasing and disruptive returns to the market. Most of the examples given appeared to be areas with diminishing returns. The authors do place a number of caveats, "[T]he cost of sensors and actuators must fall to levels that will spark widespread use." "Progress is also needed in creating software that can aggregate and analyze data and convey complex findings in ways that make them useful for human decision makers or for use by automated systems." "Few organizations are ready to deal with this sheer amount of data and have personnel who are able to do so." In most areas, I believe the internet of things requires a longer time frame as chip costs fall, the heavy lifting on data-based actions is performed, and incremental and new applications are discovered.

However, one area appears ripe for the internet of things: public infrastructure and services. Traffic, water, electricity, and waste management are all areas for significant potential improvements by the internet of things because of a) significant existing physical investment and b) large potential savings. These areas are also likely low-hanging fruit because of a lack of competitive pressures to implement improvements over the last decade. Many governments at all levels have waited out implementation for a variety of reasons, from waiting for risks to decrease as technology improves further to corruption. This is one of the prime areas—if not the prime area—for improvements from the internet of things to be achieved in the near term.

Disruptive Technologies, Part V - Automation of Knowledge Work

The Disruptive Technologies MGI paper is very bullish on the automation of knowledge work. Some of the areas mentioned appear quite optimistic. However, the emphasis on the introduction of technology in education seems spot on. From page 45, "The economic impact of such tools in education would come from improving instructional quality and enabling teachers to provide more one-on-one attention and coaching. New self-teaching tools could also enable fundamental changes in scheduling: courses could be tied to subject mastery, rather than semesters or quarters, allowing students to progress at their own pace."

The primary elements of a basic education consist of
- Information: The knowledge must be first obtained held by the person or machine that is considered the source.
- Presentation: The information is effectively communicated to the recipient. In previous posts it has been mentioned that this is a large weakness in many developing countries.
- Motivation: The structure, instructor, or self motivates the pupil to learn the information.
- Retention: The pupil retains the information for later use.
- Accreditation: The pupil has signalling power to demonstrate the initiative taken and knowledge received.

Tyler Cowen argues in his book Average is Over that Information, Presentation, and Retention have developed significantly with technology. Accreditation is likely not far off. However, Motivation will be the primary distinguishing characteristic of future workers. There will be workers that have unfaltering motivation and will tirelessly work through seemingly dull or repetitive tasks to perfection. There will also be workers with varying motivation that tend to advance in short spurts of time. Finally, some workers will not be motivated, and will focus on obtaining just sufficient information to achieve near-term goals. In effect, those that are motivated, especially those in the developing world, will have access to become the new knowledge employees of the future. This is only possible because of the incredible recent advancements and advancements to come in the automation of education. The potential worldwide disruptive effects will be significant, as the world becomes more flat because of more equalized educational opportunities, with the caveat that this would be most true for basic and technical education, while leaving the most advanced and theoretical fields mostly intact.

Disruptive Technologies, Part IV - Impact of Mobile Technology

Further comments on the Disruptive Technologies MGI paper. Today's focus is the impact of mobile technology/smart phones in the developing and developed worlds.

Some time ago, I listened to a podcast that had a panel of Silicon Valley venture capital investors. One of them made a passing comment that has stuck with me on smart phones. The comment was to the effect, "The impact of smart phones on the developing world is an order of magnitude difference than the impact on the developed world in people's day-to-day lives."

The MGI paper forecasts the breakdown of benefits for the developed and developing world (Exhibit E4, pg 17). The forecast for mobile internet going forward is 50% developed and 50% developing. Over time, I've come to appreciate more the venture capital investor solution and appreciate less those around me hyping the latest iPhone. Take a few examples,
- Price - In the developed world, the smart phone is like a computer in your pocket. However, computers are still relatively expensive, while smart phones (in the developing world) are not. Accordingly, the ever cheaper smart phone (see pg 33) is at a price point that can connect billions of the world's poorest to the internet for the very first time.
- Education: The developed world has apps to help memorize subjects to supplement current education opportunities. For many in the developing world, the smart phone is or can become the primary source of education because schools are too far from home or that instructors are absent, drunk, lack knowledge, or otherwise ineffective.
- Finance: In the developed world, we don't need to go to the bank to deposit a check. For many in the developing world, they now have access to modern banking for the first time.
- Purchasing: In the developed world, we can purchase more during previously idle time. In the developed world, large groups of vendors and customers are meeting together for the first time.

The proper comparison for the developing world is to benchmark the smart phone to limited or no access, while in the developed world we can generally benchmark to the computer or telephone. Uber makes car services more convenient, adds some suppliers, and upsets taxi regulation distortions. Airbnb does the same for its industry. However, on a marginal basis, are these companies that revolutionary? The solutions that these companies provide are solutions to what many would consider "first world problems." Unquestionably there is value created by these companies as they shake up the mobility and hotel industries, but the developed world shakeup is not comparable to cars taking the place of horse-drawn buggies. However, for the developing world, there is the potential to make this comparison.

MGI's own "the future could be" example (page 31) demonstrates this phenomenon of the difference between the developed and developing world. Compare the impacts in the two scenarios presented.
Developed world impact:
- Alarm to remember train's departure time
- Targeted advertising
- Product information accessed more quickly
- Account balances accessed more quickly

Developing world impact:
- Online instruction in irrigation techniques lead to increased farm productivity
- Purchasing of seed, fertilizer, and equipment.
- Pooling resources with other farms to minimize costs
- Optimized timing to sell agricultural products
- Bank payments and receipts

Mobile technology has the potential to make an order of magnitude impact in just one of these scenarios. As long as increases continue in processing power, the data pipe, and to some degree energy cost and storage, the potential for mobile technologies in the developing world is the most significant technological change listed in the report.

Disruptive Technologies, Part III - Generation-Transmission-Storage Framework

I would reference the source if I could find the first time someone used the "generation, transmission, storage" framework, as I am sure that I am not the first to approach problems and development in this way. This framework is incredibly useful, especially while analyzing the Disruptive Technologies MGI paper.

The essence of the framework is that as technology progresses we see a changes in volume, speed, and origin in the steps of generation, transmission, storage. Take IT processing and your smart phone. The phone processes some information on its own (generation), it sends and receives information (transmission), and it or the cloud saves information (storage). As processing speed improves, it changes the equation of what should be going where and creates new possibilities outside of the IT space. The same can be said for transmission and storage.

A simple way to conceptualize this is to recognize that as the scale, cost, and power at each stage changes, the origin of the generation, the direction of the transmission, and the amount and location of storage changes.

Take the example of solar energy. First, where does the generation of energy occur? A far away solar plant or on top of a house? Is large scale needed for cost effectiveness? Second, does transmission of energy go from the central power plant to the grid, or can the house provide for its own energy needs and transmit the rest to the grid? Third, can the house or power plant save excess energy in a cost-effective manner? Walking through these steps illuminates the potential technological disruption in many of these industries, whether in IT, energy, water, or many other industries.

Dramatically improving one step of this process can disrupt the status quo and provide a leapfrog moment to technological progress. To take the IT example above further, if transmission of information were nearly costless and could be done at current fiber optics speeds or higher, nearly all processing could shift onto the cloud and the cost of a smart phone would plummet. As the cost plummets and the processing power increases (servers are faster than phones), developing countries like India would connect into the global economy at a much accelerated rate. This development would alter the markets in these countries, mostly for the better. One can then start playing through scenarios of these changes in agriculture, banking, etc.

Disruptive Technologies, Part II - Healthcare

A small detour before kicking off the commentary on the disruptive technologies paper.

While some disruptive technologies have healthcare benefits, many wonder why there isn't more commentary on the coming healthcare-specific revolutionary and disruptive technologies. From what I've gathered from those who study breakthroughs in healthcare, there are two primary reasons: rarity and predictability.

Although there are always ubiquitous predictions of dramatic potential benefits of healthcare advancements, rarely do medical breakthroughs actually have far-reaching significant effects in the short-to-medium term. Medical breakthroughs rarely occur and are difficult to foresee. While there have been a few breakthroughs in medicine that dramatically improved human health, the majority of the benefits from these discoveries occurred slowly. For example, benefits from vaccines took over 100 years to make a significant global impact. Many only consider one health advancement to fall into the "high broad based impact in the near-term" category: penicillin.

Penicillin's direct impact was miraculous and significant. It had an immediate impact on infection mortality rates, and was one of the three critical elements (together with water and vaccines) that took down the three leading causes of death and led to falling infant and childbirth mortality rates. Surgery in the modern sense suddenly became possible. This opened a new world of transplants, cancer treatments, and heart disease mitigation. Antibiotics truly were one of those advances that "changed everything."

I prefer to look at the future on a marginal basis. What is the current path of events, and how can one push that path in a different direction? In the current path, antibiotic resistance appears likely and with grave consequences. (See this excellent post which links to another excellent post which links to other posts which link to an excellent book which...) A disruption to our current path would be finding a way to contain antibiotic resistance or discovering an antibiotic in which few resistances would develop. However, the probability of this at the moment is, sadly, remote. That leaves us to hoping that antibiotic resistance either a) develops very slowly, or b) the resistant genes are more aggressively selected against in the bacteria universe when not in full-blown infection mode. Nonetheless, even though I have my critical hat on right now, I'd never be so much a fool as to completely short humanity. As the severity of the problem increases, more human ingenuity will be dedicated to fight against it with a race to the finish. In the long game, the smart money is on mankind.

Disruptive Technologies, Part I - The Technology that Truly Matters

Upon reviewing McKinsey Quarterly's top ten articles of 2013, I was not surprised that what topped the list was the 130-page comprehensive study on the disruptive technologies that will change the world between 2014 and 2025. For those not willing to invest the time, the executive summary is very well done. In the next few posts we will walk through some key sections of the report, discuss impacts and likelihood, and reassess some areas left out by the authors. Although I believe existing data and probabilities of breakthroughs point us in another direction than the authors suggest, the framework used to identify these disruptive technologies is very solid. The authors define a technology that truly matters is one that has:
- a high rate of technological change
- broad scope of impact
- large economic value
- and substantial disruption potential

The framework is simple and complete. However, I often see those in technology circles short-change the second item listed. A broad scope of impact technological change has the potential to impact changes of an order of magnitude in the lives of those impacted and the overall economy. For example, take the printing press. Gutenberg did not "invent" the printing press or even movable type, but what he did do was invent the mass production of interchangeable movable type. Suddenly, anyone could learn to print, and they could do so at a relatively low cost. This breakthrough, coupled with other advancements in raw paper materials, resulted in the cost of a book dropping by an order of magnitude. Inexpensive books meant cheaper distribution of knowledge, mass distribution of religious texts, and the ability for individuals to publish facts and opinions. Drastically decreasing the per unit cost of this one form of communication had an order of magnitude impact across the economies and societies of Europe and eventually the rest of the world. Forecasting economic value and disruption can be difficult when assessing a technology. Many at the time underestimated the disruption and value of mass production of movable type because the printing element of the economy was relatively small. However, it was arguably one of the greatest small steps of mankind. The same can be argued regarding the initial developments in steam power, the agronomy revolution, semiconductors, and the internet. I will argue, at the end of this series of posts, that the same can be said for autonomous vehicles, inexpensive water desalinization, energy storage, bio/chemical terrorism, and customized education. Most of these areas overlap in some aspects of the McKinsey Global Initiative (MGI) report, but I'll add a few more details as to why they could be emphasized differently or viewed in a different light than that presented.

Historic disruptive technologies have impacted most if not all of the following areas: transportation, communication, water and sewage, agriculture, energy, and manufacturing productivity. Inexpensive movable type, steam power, the agronomy revolution, semiconductors, and the internet can put a check next to most if not all those categories. Many of the technologies listed in the MGI report meet this criteria, but the potential scope of the different technologies presented vary significantly.

We are, however, talking about the future, and it does tend to have its own agenda. Although we might not have fusion to power our flying cars, we can still assess these likely impacts, and the MGI report is a perfect starting point kicking off an analysis.

Operating in a Country with an Adverse Business Climate? Remember that Nimble is Relative!

Non-value added activities are a part of every company, especially large ones. As lean six-sigma has become a part of nearly every major company, “master black belts” have begun a seek-and-destroy mission against non-value added activities. Unfortunately, many non-value added activities are still required to continue operations. However, what many do not realize is that non-value added activities can differ significantly depending on the region, country, culture, industry, etc.

 Tax code complexity and legal compliance vary greatly by nation. Security concerns make non-value added activities in one country a significant value-added activity in another. Selective government enforcement of contracts and laws rewards otherwise overly cautious behaviors. Facilitation payments may be tempting to keep processes from getting bogged down. Labor laws or work rules can restrict what employees would otherwise be willing and capable of doing, coerce a company into using unskilled labor, and consume management’s time with proper forms and filings. Once these different areas start stacking on top of the other, the non-value added elements of “normal” processes can reach staggering proportions.

There are three “successful” outcomes for a firm in this extra burdensome situation described above. 1) Remain small enough that non-compliance is not an issue. 2) Perform the best you can given the constraints in place. 3) Regulatory capture of those responsible for compliance. Assuming that you want to keep growing, option 1 is not viable. Also, either for moral or Foreign Corrupt Practices Act reasons, let’s assume option 3 is not viable. However, knowing of these two different options is important because it gives you an idea of the competition you will be up against.

“Doing the best you can” does not sound appealing. However, the one-eyed man, the tallest pygmy, and the sprinting sloth can all be champions given the right environment. “Nimble and dexterous” is a relative description, not an absolute one. Additionally, doing the best you can is the best strategy of the three options above because small players can never reach economies of scale and large players engaging in unethical practices encourage a stagnant and corrupt culture.

From my experience, I have learned three key lessons on how to succeed in this situation: Start Now, Recognize Reality, and Be Positive.

1) Recognize Reality – Before you build, sit down to count the cost. Recognizing “critical paths” of implementation is an essential consideration in the creation of a successful strategy. Beginning with the end in mind is essential, but the complex process of tracing it to action today means your dreams must be based in reality. Do not assume that the pieces will automatically fall into place, even if you have an excellent team put together. Is doubling your footprint in the country in 18 months a key part of your strategy? Know exactly what resources will be required, such as government applications, the average speed of negotiations, inspections, public infrastructure evaluation, etc. Once the critical paths are identified, then the route can be traced between the vision and the present.

2) Start Now – The easiest way to turn a boat is to start early and make adjustments along the way. Although counterintuitive, being nimble in a difficult environment requires far more advanced planning and accountability than many would initially believe or are accustomed to. Strategy cannot be made up on the fly or simply copied and pasted from a different environment. Once a successful strategy is identified and committed to, successfully implementing this strategy will have many more moving parts than you may think. A combination of execution and control by a very limited number of people, with buy-in and input from a much larger range of individuals is usually the best combination.

3) Be Positive – Yes, I know that sounds like utter feel goodery, but it works. Let yourself laugh at the insanity, then take a breath and get to work. Many managers are unable to get past this and remain eternal pessimists. Unless these people are your lawyers, drop them. Do not fall in the trap. Watch yourself and watch your team. Proactivity can heal a thousand cuts, but reactivity and negativity will put your company into a coma. The rule with my team is, “Always have at least one potential solution when presenting .” This one rule has preserved all of our sanity, as we never go to someone else exasperated. The bleeding stops, and we can move forward.

Yes, there will be deadweight you may not be accustomed to and every day may seem like a slow motion 100 meter dash, but everyone else is racing with moon shoes too and victory tastes just as sweet.