Disruption is Closer Than You Think (ft.  Vijay Gurbaxani)
Disruption is Closer Than You Think (ft. Vijay Gurbaxani)

Thank you Andy. He didn’t mention my golf game, fortunately. I’ll take all the other accolades. Thank you Andy. That was a very, very kind welcome. Badger Meter, you can imagine when that company
was launched, right? That was when Andy was dean of the business
school of the University of Wisconsin. But it’s a great story of digital transformation. You know it’s about as older technology
as it gets and we are revamping that technology with digital. But, let’s get started. Last year, I told you we were facing a digital
tsunami. This year I’m here to tell you that the
digital tsunami is already here. So, let me give you a couple of examples. First example, Tesla’s autopilot. $2,500 a downloadable option of self-driving
features. Think about that. We don’t even raise out eyebrows when somebody
says $2,500 downloadable over the air option to take your car from non-self-driving to
autonomous. While we were all watching Google and their
self-driving car, all of a sudden we see Tesla. That was a shot across the bow of a whole
bunch of automobile companies and now they are investing furiously to catch up. Toyota just put a billion dollars into an
R&D facility in Silicon Valley. And since we’re talking about Google. What do they do? They just restructured themselves as a holding
company alphabet, with Google just being a single search to a single division within
it. They are investing. They have a car business. They have, obviously, the search business. They have a cloud computing business and they
have a healthcare business. They have appointed world-class talent to
run those divisions. They are very, very serious about attacking
those industries. Disruption is closer than we think. Let’s talk about their other invention – Alpha
Girl. You heard about Alpha Girl? This is their artificial intelligence program
that beat the world’s best grand master at the game of Go, which is undoubtedly the
most complex board game ever. Experts in computer science predicted that
this defeat, this victory in fact, was more than 10 years away. It’s already here . This is the technology
that companies are using already to disrupt us. We’re fortunate here today to have experienced
innovators, like GE and Disney, to smaller companies who will be talking to us about
their digital transformation journeys. We’re going to be focusing both on the big
picture and on the details of digital transformation. How do we foster innovation? How do we make the organizational change necessary? So, at the end of the day, I hope you walk
away with a roadmap for what you can do back at your company. Let’s start with Netflix. Imagine you’re the CEO of Comcast. You’re Brian Roberts. You’ve got a lot of expensive assets on
your balance sheet. You’ve got Motion Pictures Studios. You’ve got a TV network. You’ve got cable networks. You’ve got broadband infrastructure. Lots and lots of expensive assets on your
balance sheet. Are you worried enough about Netflix if you
were Brian Roberts? I think you should be. Let’s think about Netflix for a second. We all subscribe to Netflix and don’t think
very much about what that might imply. They expanded from sixty countries to a 190
countries in one single day. Who does that? Does your business do that? That’s unheard of. Now, put yourself in the shoes of the people
who are at the receiving end. The people running television companies and
cable companies in these hundred and thirty countries that they expanded to. Overnight, they have a major challenger attacking
their businesses. They have 75 million subscribers. Five million of those were added in the last
couple of months from the international expansion. This is a global television network. In my household we have given up subscriptions
to cable television. We survive off Netflix. Actually, I shouldn’t say we survive off
Netflix. We thrive off Netflix and Amazon Prime. That says volumes about what they are doing. They believe in what we call the flywheel
effect. More customers drives more money and more
data, which they used to predict the movies that we will like and target us with. But also to commission movies, they spend
by the way 6 billion dollars on content every single year to the commission content that
they know we will like. So, more subscribers means more money, more
data, which means better content, which means more subscribers, which means more money. And that cycle continues and the wheel spins
faster and faster. That, my friends, is the power of digital
economics. Netflix epitomizes the success of digital
economics. Let’s take a different company . Isn’t
that a car and a gorgeous building? That’s a Norman foster building. I love that building. They make the most beautiful cars. Now, we all know McLaren is, right? It’s a formula 1 car company. By the way, they do sell a few thousand cars,
literally a couple of thousand cars to people who are sports car enthusiasts and can pay
the $200,000 that it takes. What if I told you that they were a pharmaceutical
company? Would you believe me? Does it look like a drug developer to you? Well, it is. So let’s walk through how this works. When you’re in the Formula One business,
you’re in it to win. This is a very expensive business and you
win by seconds in a 200 mile race. So you might think that their competence is
great design and great engineering, which in fact it is. But you know what else it is? When you raise the hood of that car you will
find two hundred sensors and those two hundred sensors generate one billion data points every
racing weekend, which by the way is precisely three races. So who is their pit crew? We’ve all seen these racing movies or been
to the races. It’s not the guys who changed the tires, well
it is them, too. It is a whole bunch of engineers and data
scientists who are their pit crew today because they are making strategic and operational
decisions in real time. Now you’re gonna say what does that have
to do with former drug development? Well, the same skills that allow you to interpret
huge volumes of data in real time are extraordinarily useful in the drug discovery process and pharmaceutical
research. And they have partnered with GlaxoSmithKline
GSK to work on precisely that set of problems. So think about it. How many of our companies can actually interpret
huge volumes of data in real-time and my suspicion is very few of us. So, this is extraordinarily valuable to know-how
that where they’re finding that the domains in which that applies far exceed the original
demand. And now let’s look at CVS. This is an industry that begs disruption I
don’t think there’s another industry where people say please disrupt it. Because customer satisfaction is low it costs
way too much and we don’t get the health care outcomes that we want. And say here’s CVS. They started life as a plain vanilla retail
pharmacy. Nothing fancy about them at all. Today they are a one stop health shop. What do I mean by that? Well first they bought recently if you might
have seen targets in store from Z’s for two billion dollars. So they’ve expanded their footprint. Two, they went out and invested in MinuteClinic
so they have a thousand mini clinics, which are mini sort of doctors’ offices embedded
in their pharmacies. So you go in there for a medical visit and
if they can’t handle it with the nurse practitioner who’s in there they have partnered with three
telemedicine providers to handle more complex cases so now they are providing more complex
healthcare in addition to more health care as well. So then you look at this and say, what else
they could be doing. One of the single biggest problems that we
have in in in medical care is non-adherence to the prescriptions that you’ve been assigned. So what are they doing there? So they have invested billions of dollars
in a digital Innovation lab in Boston. And you might have seen the G’s moved its
headquarters to Boston as well for very much the same reason that’s where the talent pool
is. And they’re investing in all kinds of digital
applications that will reduce the adherence problem so we will comply better with the
prescriptions. So how do you reduce the friction in the prescription
process? You can scan the barcode on your prescription. You can scan the barcode on your driver’s
license that will automatically fill out the forms, the 10 fields, on the form that you
need to order a prescription. They will remind you when to take the pill
if you need that kind of assistance and if that doesn’t work for you they will remind
your care giver to remind you to take the pill or give you your pill. They continue to invest. The other great invention that they’re currently
working on is a partnership with IBM Watson. Well they will predict the patients who are
most in need of a health care intervention, otherwise they might be facing a health care
crisis. I want you think about that for a moment. So it’s not your primary care physician who’s
worried about whether you’re gonna have a health crisis. It’s not your health plan that is worried
about whether you’re going to have a health crisis. It is your pharmacy that is going to worry
about whether you have or are about to have a health crisis. This is disruption in action. Disruption is closer than we think. If you are one of the competitors you had
better watch out. John Chambers said it best. Forty percent of businesses will not be around
in 10 years. In my words disruption is closer than we think. So we all learned this phrase: “Give me
a lever long enough and I shall move the world.” In junior high we learned that Archimedes
said this, that he was talking about his lever. The top three companies in the world by market
capitalization are Apple, Alphabet, and Microsoft. That is no accident. They are the top three companies in the world
because they are software companies and they used today’s lever to scale. That lever is digital platforms. We should all be like them. We should all be leveraging digital platforms
to scale profitably and increase our market. Mark Andreessen noted Venture Capitalists
is extraordinarily well known for having said software is eating the world. What he meant was that companies that compete
with software will win every single industry, and industry after industry will be disrupted. I’m not just about a company attacking our
company. Disruption… digital transformation also
has macroeconomic effects and it is showing up in the macroeconomic indicators. Growth, which we got used to three and four
percent growth, is now at 1-2 percent. For the last ten years our GDP has not grown
faster than 2%. That is half of where it used to be. Productivity growth… similar story 1.2 percent
over the last eight or nine years. Half of what it used to be before that. Noted economist Larry Summers calls this secular
stagnation and the question we have to ask ourselves is: “Is this permanent?” There’s a lot of believers out there who think
this is the new normal. We are not going to be growing at the rate
we used to grow at. So the question that confronts all of us as
business executives is: Is rapid growth in a museum and how do we adjust to a world? I hope it’s not, but we have to adjust to
a world where in fact we may be facing slow growth. So let’s think about all of this a little
bit further. So this is Whatsapp. Whatsapp was bought by Facebook . Everybody
knows what Whatsapp is, right? It’s a texting application. You don’t pay any charges. It’s cross-platform so it doesn’t matter
whether you’re an Apple or Google or whatever . You can even now make phone calls. 22 billion dollar purchase price by Facebook’s
70 employees. Think about that. How many employees does your company have? What’s your market capitalization? Seventy employees 22 billion. That is completely crazy for that number of
employees to be able to create that kind of value. Let’s give you another example. This is a company that GM literally just bought,
Cruise Automation. They make the software that goes into self-driving
cars. Purchase price little over a billion dollars. 40 employees. Here is an interesting story. GM actually approached them for a partnership
and said we think we need your technology in our cars. They found the technology to be so valuable,
the know-how to be so valuable, that they actually bought the company because a) they
wanted the technology for themselves and b) because they want to make sure that none of
the competitors had access to this technology. We live in an ideas driven world. We live in a know -how driven world. This is what makes or breaks companies. Let’s contrast that with the not so old
economy. So CBS… it’s a media company. It’s has been around for a while, but they’ve
been adjusting to the times. Twenty five billion dollars, 25,000 employees. So you begin to see how these ratios are very
different. Now I understand that the first two examples
I gave you are pure digital place in these companies are not. But we have to think about these impacts. And then Hewlett-Packard Enterprise, which
is one of the two remnants of HP. HP is a very personal story for me because
I paid my way through grad school being the night operator for a mini computer center
and we ran HP mini computers. And that was the job that MBAs who liked tech
dreamed of. Everybody wanted to work for Hewlett-Packard. So when I see what’s happened at companies
… it hurts and it’s very personal. But similar story thirty billion dollars 240,000employees. So they have thirty percent or higher market
value than Facebook than Whatsapp and three thousand times more employees. So you see a huge difference between that
of the old economy and the new economy. What we’re basically saying is that in software
driven world your human capital requirements change in very fundamental ways. As more and
more of the economy moves towards being software driven we are going to see a decrease in human
capital broadly, but we are gonna see an increase in the demand for highly valued, highly appropriate
human capital. Let’s take a different point of view. Let’s talk about physical capital – property,
plants, equipment. Here’s Amazon. We all know what Amazon did to Borders. That story’s been too long and often told
in business schools and been long and often in the press. Well who else are they impacting? They’re impacting other retailers as well. What else? Malls. Malls are dying because Amazon, and online
shopping more broadly, is as successful as it is. If you came to our house five years ago, we
had no clue who the postman was and who the UPS delivery guy was. Now we’re on a first name basis with both
because they are there every single day and we shake their hands and we need them to deliver
packages Literally every single day UPS is at our house. Airbnb is not just disrupting hotels. It is disrupting the construction business
of new hotels. We are demanding less and less property in
in this interest. Let me give you a little sort of side note. We just saw that President Obama went to Cuba. So guess who’s got offerings in Cuba already,
which American firms offerings in Cuba? Airbnb. 4,000 offerings with 2700 of them in Havana
alone. Now let me ask you about this. If you were Marriott who just bought Starwood,
how long is it going to take you to get to Cuba? Well, Starwood actually signed a deal with
the Cuban government. They have got the right contract. It sort of refurbished 3 run-down hotels in
Havana. It has a couple of hundred rooms at most. It’s gonna take many years to get up to
speed to their standards. This is what a digital economy allows you
to do. A few years ago we would have to explain what
Uber is. Now everybody knows. Half of you probably came here via Uber. Let’s not worry about the taxi cabs that it
has disrupted. It certainly has because San Francisco Yellow
Cab filed for bankruptcy. We know that the price of taxi medallions
in New York City is $500,000 down from 1.3 million dollars. But here’s what’s important. It is disrupting the demand for cars. Robert Thrun, noted Google computer scientist
and Stanford professor, predicts a seventy percent drop in the demand for cars. They ‘re already worried about it right? Now here’s one other thing that’s going to
go out of business. Parking garages. This is another personal example because this
is my parking garage and nobody around here like to UCI parking. In 20 years this building is going to be used
to generate electricity because they have solar panels on the roof. It is going to be a barely used as a parking
garage. That’s my prediction. Okay, so what’s the message here? A software economy is extraordinarily capital
efficient. We have seen how it reduces the demand for
human capital. We have seen how it reduces the demand for
physical capital, like buildings. Let me give you one quick other example. It also reduces the demand or the money we
spend or invest in technology because we all got used to spending lots and lots of money
on technology. But now with Moore’s Law dropping the price
of computing and if you take a look at the extraordinarily efficient infrastructure is
of the cloud providers like Amazon and Google is working really hard to catch up. That has reduced the amount of money we need
to invest in even capital equipment. Put together there’s a tremendous decrease
in the demand. There will be a tremendous decrease in the
demand for capital. This my friends is the other phase of disruption. It’s not just about your company being challenged
by a competitor. There are macroeconomic effects that we have
to take into account. That is the other face of disruption, like
I said. So we’re all competing on a software playing
field. There is no going back. We have to move forward. We have to find a way forward. If you were competing on a software playing
field there is only one way to compete. You have to be a software company. So, when I said to be a software company I
don’t mean that you drop everything that you’re doing and emulate Microsoft, right? What I mean is you have to recognize that
the value creation opportunities and the competitive advantage that you’re going to get are increasingly
derived from software. And in that sense you have to become a software
company. What do I mean by software? It’s worth clarifying that software simply
put is codified know-how. So it’s know-how that we possess. Think of know- how as a set of instructions
to put resources in more valuable configurations than before. So it’s basically something that you can program
to do something that results in a more valuable outcome. So it’s the know-how that McLaren has to analyze
race car performance and its can be leveraged elsewhere. It’s the know-how that Netflix has about you
and us as customers. So how do you actually become a software company? Through our research we have studied lots
and lots of companies. We have identified four steps that you have
to engage. Step number one: re-imagine your offerings. You have to push the boundaries of what is
possible. What you are doing today in all likelihood
it’s not going to be enough. How many of you read the book Built to Last? Many of us, right? What I will tell you that none of us are built
to last because the digital economy is changing everything. We have to continually reinvent ourselves. So you have to ask yourself what can I do
now that I wasn’t able to do before? What assumptions was I making about the past
that gave me the business that I I’m in today? Are my products and services good enough? So let me give you a couple of examples. If you’re a drug developer or a pharmaceutical
company making expensive cancer treatments but you can’t predict which of your patients
it’s going to work on… so you were spending and demanding that a health plan spend a couple
of hundred thousand dollars on a treatment that may or may not work, then wouldn’t it
be better to precision target the patients for it might work. If you’re a university, like us, you have
to ask the question is my instructional delivery model good enough for the future. I’ll let you in on a little secret. It absolutely isn’t. It’s actually not even a secret. If you’re a car company then you have to ask
yourself whether current products that you have are good enough for the future and is
my business model going to work in the future. Again, my answer is going to say no. We’ll talk about this in a few more minutes. So Step 1: reimagine your offerings. So let me give you another example of that. GE now calls itself the premier digital industrial
company. So they were an industrial company. That’s not industrial + digital, it is digital
industrial. We’ll hear much more about that from Bill
Rue. We’re fortunate to have him here today. He’s the CEO of GE Digital and the seat Chief
Digital Officer of GE worldwide. What they’re doing is fascinating. They’re an old-line company that was founded
by Thomas Edison. Lots and lots of different industrial divisions
with big heavy equipment. but they have been putting sensors in all
of their machines, sort of like McLaren, but at a much bigger scale thereby generating
huge volumes of data that they had been analyzed on an analytics platform which makes their
products that much more efficient. So, their redefined value proposition is we’re
selling you a machine that is optimized but you can also purchase based on outcomes. So, you’re not buying equipment anymore
in all cases you can even buy aircraft engines and pay by the flying time. This is an extraordinarily important story
that we will explore about how GE recast its value proposition. Step 2: Codify Your Know-How in Software Platforms. This bears some explanation so let me give
you a few examples. Weight Watchers … yes, even Weight Watchers. This is about when it was founded as old a
business model as it comes. Right, you went to a meeting you paid $3 a
meeting and they gave you a plan and they gave you points and hopefully you lost weight. Well, it’s actually is one of the most successful
weight loss programs there is. I don’t know if you know this but their
know-how is actually patented so this is valuable know-how to them. This is their formula for how we can lose
weight. What have they done? They have codified this into a software platform
and I’m making it available in this case at least through my pictures on your mobile platform. So you can scan barcodes. You can join online support groups, as opposed
to going to an in-person meeting. You can track your points. It links to your Fitbit or your Apple watch
in the future. It’s interesting. The Fitbit points that you accumulate that
give you a few more things that you can eat are automatically tracked. This is Weight Watchers adapting to a digital
age and it’s great example of product know-how. Sometimes we think about what know how do
we actually have, but everyone operates with unique know-how. Delta airlines is winning in an airline industry
where the competition isn’t even that strong. Their on time performance metrics, baggage
handling, cancellation ratios… all of those customer satisfaction are among the best in
the United States carriers. The story is very interesting because CEO
Richard Anderson recognized that all of them or most of the airlines in the US were using
a system offered by Travelport. It’s a common platform that they were all
using which hosted their reservation system and hosted their customer reservation system
and their operational data. They thought about it and said: How can we
innovate? How can we out-compete our competitors if
we’re on the same platform they are where the platform provider is basically focused
on the lowest common denominator? How can I services my clients? They recognized that software for Delta was
a core competence and they brought back the reservation system and the operational systems
onto their platforms. They now own the systems and the data, which
allows them to intimate that much faster. They are now pushing out the renovations to
their customers and driving better and better performance. They are the only US airline to own their
own reservation system and the operational systems and they are winning. Then there’s Nordstrom’s. We all know Nordstrom’s for having excellent
customer service, but they have doubled down on digital customer service. So they have done simple things. For example, they now have a customer book. A CRM system in retail is very impressive
so every time you use the point of sales system that sales person actually knows what you’ve
done in the past and what you look for so that in itself is very impressive. They work with Pinterest so they actually
in the store will label Pinterest items things that are popular on Pinterest with tags that
say that this is what people like on our community page. But, what they’ve done now that I find it
really interesting is they just bought this company called Trunk Club, which is a Chicago-based
company. You know how we men don’t like to shop very
often particularly because the busier you get. This is incredible. You go online and you pick the clothes you
like. You tell it how you like to dress for work,
how you like to dress casual, and how you like to dress to go out. It remembers all that. It introduces you to a life person as a consultant
over the phone and you go through your taste and then they create a trunk for you. It arrives like that and you get the chance
to say which of those things you want or don’t want on-line from the ones you pick. If you try them on for 10 days and don’t like
them you send them back shipping free in both directions. Think about what they know about you now. That is customer know-how. Step3: Redesign your business model and think
about partnerships. So let me give you an example. We talked about the auto industry today. So, other than the car itself, which everybody’s
working on a connected car, GM has placed two big bets. So, obviously, they’ve got their car business. But, they’re too big bets are the following. Number one: Maven, a car-sharing service,
that they have just launched with it as their own internal operation. It’s like Zipcar with the one big difference
it’s personal. Because if they are now able to recognize
you and they can customize that car for you by which I mean the music channels and other
things that you might like are set to your taste. That part is Maven. The other more interesting thing I find is
their partnership with Lyft. They just put five hundred million dollars
into Lyft. Think about this. When we move into a world of autonomous cars
and ride sharing and we assume that the number of cars being sold in the USA are going to
fall. What is the business model for a car company? Would you buy a self-driving car or would
you prefer to rent one if I told you that the self-driving car was sitting in a hub
somewhere? Maybe a parking structure could be used for
self-driving cars. You can sort of summon one through an app
in a couple of minutes. Maybe that’s good enough. So how many of us will buy self-driving cars
and how many of us will prefer to rent them. Nobody knows. So what GM is doing is making very astute
investments in trying to understand consumer behavior. Lyft is a ride sharing platform. They’re currently putting GM’s cars in these
hubs where the Lyft driver does not have to drive his or her own car but can take the
GM and drive it to you. In the future, they will be used for self-driving
cars. It is all about understanding the future through
experimentation. Finally, you have to build an adaptive organization. This is a painter that we like. His name is Andrea del Sarto. The painting is the Holy Family. We saw it at the Getty. Andrea del Sarto was a 16th century painter
in Florence, considered to be very, very inventive. So that painting is Madonna and Child. What’s really interesting about this is we
now have infrared techniques that allow us to see what goes on behind the scenes, behind
the painting and the thing we learn is that the painting actually does not match the line
drawings. So what I mean by that is you find that Christ’s
leg has moved. You find that the Madonna’s hands have moved
because as he was coloring he noticed they didn’t look as good as he wanted. Now there’s a parallel here for business models,
which is you’re never going to get it completely right. Start with the line drawing, start painting
it in and as you do that you will figure it out and you adapt as you go. The second secret that they learned was very
interesting. They actually found that the head and the
drapery of Madonna were actually cannibalized from two previous paintings. It turned out to be the most productive workshop
in the 16th century in Florence. Guess what he was doing? It’s something anybody here who has worked
with software well understands. Reuse, right? So he was reusing drawings. Here’s the message. As you adapt your business model it does not
mean that you have to discard everything that you’ve built over the years that is extremely
valuable. What it does mean is keep the pieces that
work. You know, sketch out a future for the parts
you’re not sure about, experiment, figure it out, and paint it in as you go along. Let me close with a really good example of
who gets this right and it’s Netflix. Sheryl Sandberg, COO of Facebook, called their
culture… theyhave a document that describes the culture called the most important document
to come out of Silicon Valley, which says a lot. So, here’s the thing. So, when businesses start they all start as
creative because all business is built on somebody’s good idea and then we scale and
as we scale we get bigger and bigger and we build more and more rules that we can manage
the scale and we become sort of managed by process. Now, all that makes sense in an industrial
age, but when you move those models to an information age, then they become far less
sensible because we are we need to be far more agile. We need to move far more often. We need to adjust to market transitions. So, how do you do that? How do you scale without giving up innovation? So, managing by process doesn’t work anymore. Managing the bureaucracies that we’re all
used to will not work. In a word, it’s talent. You have to a higher high performance because
of the degree that we need to be democratized, to the degree we need people to be innovative,
and to the degree we need many people to be creative. So you want to hire the right people because
what you want is people to be creative, but disciplined. What you also want is to give them the freedom
to innovate, but they need to be responsible to the goals of the entire organization. That’s a great example to think about. Most of us don’t have the kind of HR practices
that we need. Let me close this off with Jeff Immelt, the
CEO of GE. I thought it was an incredibly powerful statement. Digitization is going to be the most important
thing that CEOs are going to work on at least in this era. You give up your latitude at your own peril. What this says is that you need to invest
now. You need to move now. If you don’t move now, your competitors will
move and they will reduce the degrees of freedom that you have and you will be responding rather
than innovating. So act now fast. Thank you so much for your attention.

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