The third industrial revolution

Graham Burdis explains why directors need to adopt a “single screen” strategy and prepare their organisations for the third industrial revolution.

In a recent re-reading of The Fatal Shore, it struck me how Robert Hughes spends considerable time explaining why a supposed criminal class existed in Great Britain during the 18th century. He argues that this group created the main source of convicts transported to Australia. And, he explains, its emergence was due to the disruptive technologies of the first industrial revolution and the resulting displacement of workers – initially caused by new steam-powered cotton mills and weaving machines. These workers were forced, as a last resort, to turn to capital crimes to provide for themselves and their families.

The second industrial revolution of the late 19th century is often recognised with the introduction of the production line in manufacturing. Its disruptive technologies included the introduction of electricity, the internal combustion engine, the telegraph and radio. Prices deflated as productivity rapidly increased. Many businesses failed, but overall demand for workers increased as consumers slowly evolved the desire for more material products.

Both these industrial revolutions started with the coming together of highly disruptive new technologies, followed by new industries rising from the creative use of these technologies. Old industries adapted or failed. As always, the smaller, nimble companies were quick to adapt, while often the larger ones failed to recognise the danger or simply moved too slowly.

So what of the third industrial revolution?

History shows us that before an industrial revolution occurs, disruptive new technologies exist and smaller companies rise rapidly to exploit these technologies in new ways.

The computer has been one of the most disruptive technologies in history. Productivity rose rapidly and despite promises to the contrary, many workers were displaced by computer systems.

Roles within organisations rapidly changed. First clerks with ledgers were replaced with far fewer data-input operators. And now, customers input their own data via transactional websites.

Facilitated by the rise in computing power and the dramatic fall in computing costs, the introduction of the internet has transformed everything. Interconnectedness has exploded.

Looking back, it is clear to see how computing power and the internet have changed business so emphatically. And, they continue to do so. The pace of change is growing ever more rapid.

Is this the third industrial revolution? Well, perhaps not quite yet. There is a third factor that is as disruptive as computers and the internet.

For many years, I regaled (read annoyed) my business partner with the theory of Emergence and how slime mould and ant colonies had demonstrable lessons for the broadcast television industry, among many. Imagine my delight when, at Company Directors’ annual conference some years back, we heard the featured speaker, Ian Pearson, the futurist for BT in the UK, tell all the delegates that slime-mould interactions were providing information on how future networks and systems would operate.

Scientists were predicting new management systems based on Emergence Theory and that these would fundamentally change how business was structured in the future. At that time, scientists, futurists and a few interested souls could see how this change was the result of computers and internet, but not what the catalyst would be to bring about the change.

A few short years ago, the catalyst was created. The iPad. Released in April 2010, there have been well over 100 million iPads sold and subsequently many other tablet computers.

The tablet computer and even smartphones have brought together the elements of computing power and the internet to transform them into a combined technology so disruptive that we are only now beginning to understand the possible effects.

This can be described as the "single screen" phenomenon.

Less than three years ago, our main interaction with the internet was at a work computer or on a single home computer.

Certainly there were laptops and netbooks, but the experience was clunky and less than satisfying.

Today, most people can, and do, interact via the internet while at work, travelling and at home. It is not unusual for users to watch television while at the same time multitasking via their own tablet.

This "single screen" is definitely the third industrial revolution. It has started.

Large established industries are being hollowed out by small, nimble businesses that rapidly evolve into large businesses themselves. With the arrival of "single screen" this change will rapidly accelerate.

Not even the small, nimble companies can be completely safe from the effects either.

Consider the humble printed street directory that resides (or used to) in your car’s glove box. A very useful, cheap item that generally is at hand when needed – it is convenient and relatively easy to use. The rise of computing power and the fall in the cost of screens, when combined with satellite location services, resulted in the rapid rise of "satnav" systems that were initially stand-alone devices. Then small, innovative companies quickly built valuable businesses by providing a better service (turn-by-turn instructions), despite the relative cost being higher than the printed version. Even though these companies were nimble and at the forefront of technology, they did not immediately foresee the effects of the rise of the "single screen".

As smartphones incorporated satellite navigation technologies (some even developed by the satnav companies) and navigation software within their handsets, the sales of stand-alone satnav units slumped. Users could simply use their phones and the catch cry was "why have another screen?" And the service was essentially free. The satnav companies are now trying to sell their mapping services and software to phone companies and tablet manufacturers. And the "single screen" users now use their iPads or smartphones for in-car navigation, boat navigation and even on the golf course.

Among the long-established industries, the stories are eerily similar.

Some notable recent examples are the rise of Seek, carsales.com.au and realestate.com.au. These businesses have grown rapidly into multibillion dollar enterprises by doing precisely what Henry Ford did. They have produced a much cheaper, better product and made it available to a much larger group of customers. They have achieved a far lower cost of production from enormous productivity gains. And the losers in this revolution are the large, established, slow adopters. Here, read Fairfax and News.

This occurred just before "single screen" started, but the effects will be become more rapid as customers utilise the services on their phone or tablet.

A possible outcome is that a totally new type of news service arises to provide "single screen" apps. And this is an outcome predicted years earlier by those "slime-mould" interactions.

The media companies have reacted by developing their own solutions, but have not yet solved the business model quandary.

Perversely, some have decided to reduce the amount and quality of news reporting they do, which, on the face of it, is their basic reason to exist. Like the 18th century cotton mills of North England, they may well be forcing their former workers to become their competitors in a new "single screen" world.

The same effects are being felt in industries such as retail, finance, insurance, education, energy, agriculture, transport, communications, entertainment, media and many more.

Is it that boards and the executives of companies fail to see the risks and opportunities?

They probably see the risks, but fail to gauge the size and speed of the change. The board of Fairfax must have seen the writing on the wall, but failed to move decisively or quickly enough. News successfully invested in non-newspaper products such as TV and film. But that may not be enough.

This may be the real issue. Large organisations are unable to move their bureaucratic processes anywhere as quickly as required. The executive ranks are effectively blocked by self-interest, as is senior management.

It would be a courageous CEO that suggested a total re-structuring of the business that cut out layers of management and bureaucracy. And it would be an equally courageous board that adopted such a strategy.

This is seen in the current changes affecting the insurance industry. Newcomers are establishing operations in cheaper regional areas and effectively, their company consists of a computer system and a call centre. The overheads and bureaucracy are low and the productivity is high.

Compare that with a traditional insurance company with a city office building, bulging executive ranks, floors of marketing teams and actuaries. Not productivity central.

The new players have switched from capex (capital expenditure) to opex (operating expenditure).

The usual, long-tried solution of the large firm to this dilemma is to purchase the small newcomers, with the result that the new players acquire capital to repeat their entrepreneurial attacks, albeit in a new industry due to restraint clauses in sales agreements.

For boards, it provides challenges the like of which appear to have been faced only every 100 years or so.

For large companies, how do you de-risk the effects of the third industrial revolution?

Even identifying the risks may be difficult given the filtering of information that occurs as it slowly flows upwards into board papers.

For small companies, the challenge would appear to be in how the opportunity is identified. But beware the satnav effect.

The third industrial revolution is with us. It is happening rapidly, and like the satnav experience above, may actually be felt as waves of change.

We have probably seen the first wave, which was the rise in computing power when combined with the internet. The second wave is "single screen" and will ultimately create the greatest disruption to industry that we have ever seen.

The third wave looks to be 3D printing. And there will be further waves.

Directors need to adopt a "single screen" strategy and ensure their organisations are as ready as they can be.

Preparations need to be made. Action needs to be taken. Speed to market rapidly improved. Identify the components that can be rolled out now. Start simply and ensure the organisation is positioned to participate rather than lumber on as a follower later.