Connecting Commerce Innovative industries and the digital environment Written by
Telstra Connecting Commerce About the research 2 Executive summary 4 Introduction: companies and industries 8 Digital transformation and the industry environment 10 The digital cities barometer for industry 11 Nobody left behind 11 Emerging technologies drive industry disruption 14 The promise of emerging technologies meets regulatory hurdles 16 All about the data 20 Industry insights 22 Open government data as a supporting tool for businesses 23 People first: leadership and digital talent 26 New technologies, new skills gaps 28 Conclusion 30 Five lessons to prepare for industry digital transformation 31 Appendix 1: the digital cities barometer for industry 33 The Economist Intelligence Unit Limited 2018
About the research Connecting commerce: innovative industries and the digital environment is a report from The Economist Intelligence Unit, commissioned by Telstra. Kim Andreasson was the author and Charles Ross was the editor. The analysis in this report is based on a survey of 2,620 executives in 45 cities and was conducted in June and July 2017. The list of cities includes 23 in Asia-Pacific, 19 in EMEA and three in North America. Eleven industries are represented, with the largest numbers of respondents coming from professional services, financial services, manufacturing, retail and education. (No respondents were included from the telecommunications or technology sectors.) C-level respondents account for 42% of the survey sample, with the balance being other senior executives. Additional insights were obtained from in-depth interviews with senior executives, government officials and other experts. Our thanks are due to the following individuals (listed alphabetically by surname): Semuel Abrijani, director general of information applications, Indonesia Danielle Dumerer, chief Information officer and commissioner, City of Chicago Thomas Kautzsch, partner and global head, automotive and manufacturing industries, Oliver Wyman Paul Papas, global leader, digital strategy and ix, IBM Sandra Peter, director, Sydney business insights, the University of Sydney Yossi Sheffi, Elisha Gray II professor of engineering at MIT and director of the MIT Peter Zemsky, The Eli Lilly Chaired professor of strategy and innovation and dean of innovation at INSEAD We bear sole responsibility for the editorial content of this report. The findings do not necessarily reflect the views of the sponsor. 2 Telstra Connecting Commerce The Economist Intelligence Unit Limited 2018 3
Executive summary Digital transformation can enable companies to improve operational efficiency and optimise costs. It can also disrupt existing industries. But the opportunities and challenges also vary across industries. One reason is new and emerging business models, often driven by technology-savvy start-ups that can disrupt traditional industries, such as transport. Large companies in mining and financial services are also under pressure to reinvent themselves to stay competitive. Hence they often have large-scale digital transformation initiatives under way. Other industries, such as utilities, appear more shielded from new competition at the moment. This report finds that executives are relatively confident that their companies and industries are digitally transforming, although their opinion also varies across the 11 industries researched. At the same time, they also face significant challenges. For example, some industries struggle more than others with the adoption of emerging technologies, and the advancement of digitisation. This is in part due to government regulations, but also due to a shortage of talent that can combine technology know-how with business strategy. This study is based on a survey The Economist Intelligence Unit conducted of over 2,600 executives in 11 industries around the world, as well as one-toone interviews with seven business leaders, city officials and other experts. These are its major findings: There are differences in confidence levels across industries. Mining, manufacturing and financial services lead the digital cities barometer ranking when it comes to overall confidence in the environment for digital transformation across industry sectors. This does not mean, however, that they are more advanced in their journey than other industries. Despite being last in the digital cities barometer, for example, the utility industry is undergoing tremendous digital transformation in many countries. There are two types of digital transformation. The most common type of digital transformation is using technology to improve efficiency. In the survey, cost efficiency is also cited as the primary motivation among executives, mentioned by about half (48%), followed by operational efficiencies (47%). The other type of digital transformation is seen as using technology to create new business models that can disrupt industries and help enter new markets. In the survey, almost half (44%) say that expansion is a key objective. Emerging technologies give rise to more efficient digital transformation. Artificial intelligence (AI) in particular is seen as a potentially disruptive technology due to its wide applicability across industries and because it can be combined with other technologies, such as cloud computing and the Internet of Things (IoT). Autonomous vehicles and drones, meanwhile, hold great promise for disruption but are held back by regulations. Data: a competitive advantage. Underpinning technologies of digital transformation is the creation, use and analysis of data. Across industries, data are emerging as the difference between companies that succeed in digital transformation and those that do not. Governments can promote business use of data through open government data initiatives that publish information and allow anyone to use and re-use those data, including for commercial purposes. A need for digital skills at all levels. To successfully implement digital transformation programmes, companies need a leadership group that understands both business strategy and technology, often resulting in the creation of roles such as chief data officers. Digital skills among employees are fast becoming a prerequisite, and those who possess these skills can also find opportunities across industries as the competition heats up. 4 Telstra Connecting Commerce The Economist Intelligence Unit Limited 2018 5
Introduction: companies and industries 6 Telstra Connecting Commerce The Economist Intelligence Unit Limited 2018 7
Introduction: companies and industries A key obstacle to digital transformation is the failure of established companies to recognise potential disruption, says Paul Papas, global leader, digital strategy and ix, IBM global business services. Another is adapting to the speed of change and the recognition that every company must adapt. All industries will be disrupted, says Sandra Peter, director, Sydney business insights, the University of Sydney. Executives are taking notice. In the survey conducted for this report, digital transformation is important to 86% of the executives, and is a priority for almost half (47%). There are two types of digital transformation. The first uses digital technologies to improve existing business models. Reflecting this, cost efficiency is the primary motivation for digital transformation among executives in the survey conducted for this report, cited by about half (48%), followed by operational efficiencies (47%). Second, there are new business models using digital technologies to disrupt existing industries. New business models are difficult for incumbents, explains Thomas Kautzsch, partner in the global automotive and manufacturing industries practice at Oliver Wyman. Start-ups such as car sharing companies, for example, can quickly outspend incumbents who focus on using digital transformation to achieve cost and operational efficiencies. In the survey, almost half (44%) of executives also say that expansion into new markets is a key objective for their digital efforts. All industries will be disrupted - Sandra Peter, director, Sydney business insights, the University of Sydney 8 Telstra Connecting Commerce The Economist Intelligence Unit Limited 2018 9
Digital transformation and the industry environment The digital cities barometer for industry Ms Peter believes business-to-business (B2B) industries will be less affected as the speed of change, competition, drivers and visibility move slower than in the business-to-consumer (B2C) space. For instance, Maersk, a Danish shipping company, is simply too big (it is the world s largest container shipping company) and the industry barriers to entry are too high to be easily disrupted. As a result, Peter Zemsky, the Eli Lilly chaired professor of strategy and innovation anddean of innovation at INSEAD, predicts that digital transformation will be slower in such B2B industries because incumbent firms will have more time to adapt. The logistics and transport industry is around the global average in the digital cities barometer, which measures business confidence in the overall environment for digital transformation. Technology companies (which were not part of the industries covered in the digital cities barometer), meanwhile, are forging ahead with confidence. Digital transformation has created a golden age for entrepreneurship, says Mr Zemsky. Technology companies have size and brands and were born digitally but still found a way to keep innovating, he says. Digital entrants such as Skype, WhatsApp, WeChat and Zalo, among others, make evident the opportunities in the telecommunications industry, which means incumbents have to move faster. The same logic can be applied to the financial services industry, in which the rise of cryptocurrencies and the fintech industry more broadly have led to incumbents making massive investments in digital transformation. This is potentially one reason why the financial services industry ranks third of the 11 industries included in the digital cities barometer. Mining, manufacturing and financial services lead the digital cities barometer ranking when it comes to the confidence that executives have in the overall digital transformation environment for their industry. (For the full set of barometer readings, see appendix 1.) This statement of confidence is also reflected in other survey questions. Mining executives, for example, are more likely (73%) to agree that their organisation has so far met all or most of its digital transformation objectives compared with all industries (59%). There is a major digital transformation with potential for disruption in mining, says Ms Peter. In manufacturing, technologies such as advanced robotics, cloud computing, the IoT, and artificial intelligence are being combined into smart manufacturing, in which factories are increasingly automated. Siemens, a German engineering firm, is one of the pioneers in this field and has developed a factory in which 1,000 manufacturing units communicate with each other through a network without human interference. Such digital transformation can enable manufacturers to move production and transform the industry on a global scale. The view I have is that digital transformation will lead manufacturers to move back to industrial countries, says Mr Kautzsch, who suggests time to market is a key reason to relocate once the cost differences are minimised due to digital transformation in manufacturing. The primary cost will be associated with specialists [to operate the system] but they can sit anywhere and location won t matter anymore. Figure 1: Confidence in the environment Overall digital transformation environment of 11 industries (Score out of 10) Mining Manufacturing Financial services Education Logistics and transport GLOBAL AVERAGE Retail Oil and gas Media and broadcasting Agribusinss Professional services Utilities 6.94 6.86 6.72 6.64 6.62 6.61 6.61 6.58 6.55 6.49 6.37 6.31 Nobody left behind Business confidence is a highly subjective measure of a state of affairs, based on attitudes, and is not necessarily an indication of an industry s actual level of digital development. Despite being last in the digital cities barometer, for example, the utility industry is undergoing tremendous digital transformation in many countries. The rise of smart city initiatives across the globe has given a boost to smart grids and smart meters. For example, a 2015 briefing for the European Parliament expected majority of EU member states to proceed with large-scale smart electricity metering by 2020. 1 https://www.wsj.com/articles/germany-bets-on-smart-factories-to-keep-its-manufacturing-edge-1414355745 2 http://www.europarl.europa.eu/regdata/etudes/brie/2015/568318/eprs_bri%282015%29568318_en.pdf 10 Telstra Connecting Commerce The Economist Intelligence Unit Limited 2018 11
Emerging technologies drive industry distruption 12 Telstra Connecting Commerce The Economist Intelligence Unit Limited 2018 13
Emerging technologies drive industry distruption Figure 2: Top ten strategic technology trends for 2018 4 Trend Strategic Technology 1 AI foundation A classic example of digital transformation that led to disruption happened in 1975, when the digital camera was invented by Kodak, a leading industry company. Instead of pursuing their own invention, however, the company focused on its higher-margin business, which was traditional cameras and equipment. 3 Other industry players, such as Fujifilm, a Japanese competitor, seized on digital camera technology. In 2012, Kodak filed for bankruptcy protection while Fujifilm remains among the market leaders. Today a plethora of emerging technologies can be used for disruption across industries. AI is number one, says Mr Papas. Due to the adoption of related technologies such as the IoT and blockchain, it is estimated that a billion people will use Watson, IBM s AI platform for businesses, in 2018. Gartner, a technology research and advisory firm, has also identified AI as the top strategic technology trend for 2018 (see figure 2). 2 Intelligent apps and analytics 3 Intelligent things 4 Digital twins 5 Cloud to the edge 6 Conversational platforms 7 Immersive experience 8 Blockchain 9 Event-driven, relying on the ability to seize new digital business events 10 Continuous adaptive risk and trust One reason behind the rise of AI is that computing is getting cheaper in terms of processing large amounts of data. The question is how to monetise data and use machines to find insights, says Mr Zemsky. What does it mean for insurance and banking? he asks rhetorically. There is a lot of work to be done at the industry level. Moreover, 60% of respondents in financial services say that over the next three years digital transformation will be very important to their organisation (compared with 47% in all industries). 3 https://www.economist.com/node/21542796 4 https://www.gartner.com/smarterwithgartner/gartner-top-10-strategic-technology-trends-for-2018/ 14 Telstra Connecting Commerce The Economist Intelligence Unit Limited 2018 15
The promise of emerging technologies meets regulatory hurdles Although AI is already here, other digital transformation trends, such as drones and autonomous vehicles, which will potentially disrupt the logistics and transport industry, are seen as being a few years away from widespread commercial application, primarily due to regulatory constraints rather than technical issues. The role of government is difficult, as they struggle to regulate the application of new technologies such as drones in urban areas and sensors on people, says Yossi Sheffi, the Elisha Gray II professor of engineering at MIT and director of the MIT Center for Transportation and Logistics. For example, autonomous vehicles have made considerable technical progress; however, regulatory approval is expected to be years away in most countries. 5 Similarly, drones are increasingly sophisticated, yet regulations remain restrictive. Ms Peter poses an important question: It is hard to strike the right balance. If you relax regulations, then businesses will continue to come but how well are we prepared for this very rapidly growing industry? Ms Peter asks rhetorically. Both Australia and New Zealand have so far been attractive to entrepreneurs in this space given their relatively flexible regulatory frameworks. For example, Queensland (and in particular Brisbane), has emerged as a leader in drone technology, in part due to government investment and legal acceptance. 6 5 www.ericsson.com/res/docs/2014/ict-and-the-future-of-transport.pdf; http://www.economist.com/news/leaders/21635489- drones-have-immense-commercial-potentialso-long-regulators-dont-try-tether-them 6 https://www.tiq.qld.gov.au/queensland-focus-drone-industry/ 16 Telstra Connecting Commerce The Economist Intelligence Unit Limited 2018 17
All about the data 18 Telstra Connecting Commerce The Economist Intelligence Unit Limited 2018 19
All about the data The importance of data can be seen in national digital strategies, such as in the UK, where data is one (out of seven) focus areas. This is underpinned by the increasing amounts of available data: 90% of all data have been created in the past two years alone. One reason for its growth is the use of sensors, which are becoming cheaper and more powerful. Today the cost associated with data has become many magnitudes cheaper, leaving lots of room for innovation and a fundamental shift in using technology for business innovation, observes Mr Zemsky. Sensors are especially powerful when linked to cloud computing and the IoT, generating ever more data to be collected and analysed. It s not any one technology but all these data points combined which point to the importance of processing huge amounts of data and the ability to analyse it, says Mr Sheffi. Jack Ma, the executive chairman of Alibaba, a Chinese e-commerce giant, has labelled data as the new natural resource. 9 In the corporate world, the importance of data has given rise to a new function: chief data officers, whose responsibilities blend business strategy and an understanding of the importance of data (and, by extension, technologies). Today the cost associated with data has become many magnitudes cheaper - Peter Zemsky, the Eli Lilly chaired professor of strategy and innovation and dean of innovation at INSEAD 7 https://www.gov.uk/government/publications/uk-digital-strategy 8 https://public.dhe.ibm.com/common/ssi/ecm/wr/en/wrl12345usen/watson-customer-engagement-watson-marketing-wr-other-papers-and-reportswrl12345usen-20170719.pdf 9 http://fortune.com/2016/10/13/alibaba-jack-ma-company-future-retail-transform/ 20 Telstra Connecting Commerce The Economist Intelligence Unit Limited 2018 21
Industry insights If you look at other industries, B2C tends to be more advanced than B2B because they have more customers and need to digitally transform faster [to meet competition], says Mr Kautzsch. Clearly at this moment everyone is being impacted but two industries in particular are retail and automotive due to the use of multiple technologies and breadth of impact, says Mr Zemsky. In the retail industry, Amazon is often mentioned as a leader. For example, the company uses smart robots to bring goods out of storage. The Kiva automated storing system cost Amazon US$775m to implement in 2012 and has since expanded to include 15,000 robots to enable more efficient transport to customers. Gartner predicts that transport, manufacturing and utilities will be the top three IoT industries by 2025. Manufacturing is frequently considered one of the leading industries in digital transformation (it is also second in the digital cities barometer). One reason is initiatives such as Industry 4.0 in Germany. Considered vital to maintaining the country s competitive edge, the government initially invested 200m for the development of Industry 4.0. 12 A report in April 2013 entitled Securing the future of the German manufacturing industry: Recommendations for implementing the strategic initiative suggested a dual strategy: First, to maintain Germany s manufacturing industry advantage by integrating ICT into its traditional processes and, Second, to also become a leading exporter of smart manufacturing products. Governments can also promote digital transformation across industries by sharing their own data, in particular through datagenerating sensors that are used in smart city developments. These can benefit a wide variety of businesses and industries, such as utilities. Smart city initiatives involving the IoT, among other technologies, are considered important to almost half (48%) of executives in the survey. Manufacturing is frequently considered one of the leading industries in digital transformation - Gartner Newsroom Open government data as a supporting tool for businesses Open government data (OGD), which is public-sector information made available for free that can be re-used for any purpose, can lead to new business opportunities across a variety of sectors. The European Data Portal, an EU-funded initiative, estimated the direct market value of open data to be 325bn between 2016 and 2020. 14 Finding or tapping new business opportunities are the chief benefits for firms (cited by 37% of respondents) when using open government data provided locally. To meet industry demands, cities are rolling out OGD initiatives. In Chicago, the data.cityofchicago.org portal contains over 600 datasets and launched a redesigned version in 2017 for better ease of use. We receive occasional requests from businesses about adding specific datasets but it s hard to tell how companies actually use the data, says Danielle Dumerer, CIO and Commissioner of the City of Chicago. In the survey, open data provided by city governments are important for over two-thirds (69%) of executives and very important for almost one-third (30%). We do know that some companies take our datasets and repackage and resell the information to enable better decisions, adds Ms Dumerer, citing both local and national technology companies such as Google, HERE and ConstructionMonitor.com that use the city s open data to improve their products. Recognising the value of open data, Indonesia s capital, Jakarta, has also embarked on the maximum utilisation of open government data. The government apparatus must be flexible and innovative to follow the needs of society and the market in support of the digital transformation process, says Semuel Abrijani, director general of information applications in the Ministry of Communications and Information Technology in Indonesia. In addition to the vision and willingness of the local government of Jakarta as a whole, the technical capacity aspects of the middle and lower juniors from the local government also need to be improved to better utilise the components of the digital ecosystem, he says. 10 http://www.newsweek.com/amazon-reveals-robot-army-its-warehouses-288124 11 http://www.gartner.com/newsroom/id/2905717 12 http://www.gtai.de/gtai/navigation/en/invest/industries/smarter-business/smart-solutions-changing-world,did=575914.html 13 Umsetzungsempfehlungen für das Zukunftsprojekt Industrie 4.0, Deutschlands Zukunft als Produktionsstandort sichern, Abschlussbericht des Arbeitskreises Industrie 4.0 14 https://www.europeandataportal.eu/en/using-data/benefits-of-open-data 22 Telstra Connecting Commerce The Economist Intelligence Unit Limited 2018 23
People first: leadership and digital talent 24 Telstra Connecting Commerce The Economist Intelligence Unit Limited 2018 25
People first: leadership and digital talent Across every industry there is a need to reinvent ourselves, and the human side of digital is the biggest challenge, says Mr Papas. Talent and skills shortages facing companies in digital transformation is cited as the second-toughest challenge in the survey of executives conducted for this report (at 27%, behind only limited funding for investment at 28%). Digital transformation requires investment and leadership, explains Mr Sheffi. Most boards don t have an IT professional represented, continues Mr Sheffi. Boards are not as worried about digital transformation as they should be. As a consequence, there is not enough pressure from boards on senior management, which tend to focus on day-to-day activities. Digital transformation affects the way companies operate and it will affect every job in the company and the types of skills needed, elaborates Mr Kautzsch. Digital transformation requires investment and leadership - Yossi Sheffi, Elisha Gray II professor of engineering at MIT and director of the MIT Center for Transportation and Logistics 26 Telstra Connecting Commerce The Economist Intelligence Unit Limited 2018 27
New technologies, new skills gaps The opportunities associated with emerging technologies also contribute to new gaps between the supply and demand of talent. There is a gap between college graduates with the level of expertise required by large digital companies, summarises Mr Abrijani. In the survey conducted for this report, cyber-security (cited by 30%) and big data analytics (24%) were the most soughtafter skills by executives to support digital transformation initiatives. There is a huge amount of competition for top talent, says Mr Zemsky. In the digital cities barometer, utilities, and logistics and transport had the lowest confidence in the environment for people and skills (see appendix 1). One reason for this may well be the emergence of automation, machine learning and associated technologies that can replace manual labour, leaving employment in such industries requiring far greater digital skills than is generally available at the moment. Certain people and certain skills are particularly affected [by emerging technologies], says Mr Kautzsch. Higherend jobs will be created but this time a lot of mid-level jobs will be affected in the automotive and manufacturing workforce over the next 10-15 years. A recent report from the World Bank also suggested that worker skills must adapt to the new economy. 15 The impact of digital transformation on jobs, perhaps particularly imminent in manufacturing, could be significant. Telenor, a Norwegian telecommunications company, recently surveyed 4,200 people between the ages of 15 and 25 in six Asian countries (Singapore, Malaysia, India, Myanmar, Bangladesh and Pakistan) and found that all respondents (100%) agreed that robots will replace humans in many future professions. 16 15 http://www.worldbank.org/en/publication/wdr2016 16 https://www.telenor.com/telenor-group-survey-asias-millennials-assess-future-careers-digital-technology-impact-and-robotic-replacement-risk/ 28 Telstra Connecting Commerce The Economist Intelligence Unit Limited 2018 29
Conclusion Since the 1975 Kodak moment, digital transformation has proliferated across industries. New entrants in the ride share industry (such as Uber and Grab) are making headlines globally, and there is a quieter disruption across other industries using AI, big data analytics, drones and other technologies reliant on the collection and analysis of data. You don t notice AI, adds Mr Sheffi. But it makes existing machines and processes faster and better. This quiet revolution also cuts across industries. Digital strategy is business strategy in a digital world, explains Mr Papas. In the survey conducted for this report, digital transformation is important to 86% of executives. Anticipating the opportunities and challenges for digital transformation is naturally difficult. But one lesson is to recognise that every industry is ripe for potential disruption. You have to innovate to stay in business, says Mr Sheffi. Meanwhile, the data revolution marches on. Not only is the amount of data growing at an exponential pace, so too is the value of data. Increasingly, decision-making is based on the analysis of data, and sometimes the value of the data a company holds can exceed other assets. Ms Peter points out that Qantas, Australia s national airline carrier, has a market capitalisation of about A$9bn (US$6.7bn), out of which A$5bn (US$3.7bn) can be attributed to its loyalty rewards programme of 11m customers. How to anticipate digital trends and seize the value of data is likely to be a key differentiator for companies to succeed across industries in the future. Five lessons to prepare for industry digital transformation 1. Disruption Recognise that all industries are ripe for disruption and that current organisational business models are at risk due to emerging technologies and innovative new entrants. 2. Leadership Identify technologically savvy people who also understand the business. Create a chief data officer or promote people to the board who can advise on the intersection of technology and business. 3. Skills Digital skills are increasingly important in the data-driven economy generally and individual companies specifically. Anticipate competition for talent across industries and geographic locations. 4. Emerging technologies Identify the potential application of newer technologies and anticipate their impact on the industry while recognising potential regulatory hurdles. 5. Data Realise that data are the new competitive advantage, regardless of industry. 30 Telstra Connecting Commerce The Economist Intelligence Unit Limited 2018 31
Appendix 1 The digital cities barometer 32 Telstra Connecting Commerce The Economist Intelligence Unit Limited 2018 33
Rank Overall environment Innovation and entrepreneurship Financial environment People and skills Development of new technologies ICT infrastructure Rank 1 Mining 6.94 Mining 7.08 Mining 7.20 Mining 7.48 Mining 7.13 Mining 7.20 1 2 Manufacturing 6.86 Oil and gas 6.85 Oil and gas 6.82 Oil and gas 6.87 Oil and gas 6.85 Oil and gas 6.87 2 3 Financial services 6.72 Agribusiness 6.83 Manufacturing 6.80 Education 6.84 Media and broadcasting 6.81 Manufacturing 6.74 3 4 Education 6.64 Manufacturing 6.80 Financial services 6.77 Media and broadcasting 6.81 Manufacturing 6.79 Financial services 6.73 4 5 Logistics and transport 6.62 Financial services 6.79 Agribusiness 6.76 Agribusiness 6.76 Financial services 6.79 Agribusiness 6.72 5 6 Retail 6.61 Education 6.57 Logistics and transport 6.60 Financial services 6.71 Agribusiness 6.76 Education 6.53 6 7 Oil and gas 6.58 Logistics and transport 6.46 Media and broadcasting 6.57 Manufacturing 6.59 Education 6.69 Utilities 6.51 7 8 Media and broadcasting 6.55 Media and broadcasting 6.41 Retail 6.46 Retail 6.59 Logistics and transport 6.68 Logistics and transport 6.48 8 9 Agribusiness 6.49 Professional services 6.41 Utilities 6.42 Professional services 6.54 Retail 6.45 Media and broadcasting 6.48 9 10 Professional services 6.37 Utilities 6.38 Education 6.40 Logistics and transport 6.52 Professional services 6.45 Professional services 6.42 10 11 Utilities 6.31 Retail 6.31 Professional services 6.31 Utilities 6.41 Utilities 6.43 Retail 6.37 11 34 Telstra Connecting Commerce The Economist Intelligence Unit Limited 2018 35
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