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Companies: the Great Transformation

Closely integrated into the vast majority of economic activities, digital technology is disrupting habits, transforming the market approach and profoundly modifying industrial organization. This a microeconomic debate, since digital mastery allows new entrants to approach customers directly, a way of being that companies have rarely experienced: the new digital economy is thus giving rise to imaginative and adaptive companies that are breaking from the past. Entire sections of commercial activity like big hotel chains are, therefore, forced to question their own organization and their priorities in order to stem the losses suffered by their customers captured by digital platforms that are specifically built for the web.

Initially insidious and with a marginal effect, the disruption introduced by digital technology is now plainly noticeable; one may describe the disturbances that destabilize the previous trade balances as a disruption, particularly for these services that have long lived under a regulated regime such as transport, housing or distribution to the general public1. A real disruption is much more disturbing for our habits than was the “new economy” that was promised by records at the end of the 20th Century before being [wrongly!] forgetten after the Internet crisis, which befell the United States and the industrial countries around the year 20002! As a direct consequence of digital technology, a transformation is underway that must be clearly understood before the next steps are to be considered!

During 2014, three consultative reports [MCK 14, ROL 14, LEM 14] reflected the same antiphon, that of French companies falling behind in digital transformation. Although their perspective differed somewhat, their conclusions were fairly homogeneous: at that time, French companies had not yet grasped all the potential benefits of digital technology. As a result, this was and still is translated into missed opportunities, unrealized growth and job creation potential. Roland Berger put five conclusions forward, three of which are worth mentioning here:

  • – the most digitally advanced companies grew six times faster than those that were the furthest behind;
  • – employees from the former had a job satisfaction index 50% higher;
  • – by accelerating their digital transformation, French companies could double their growth rate.

In the same spirit, the McKinsey report assessed the value that digital technology would generate for economic operators (businesses or consumers). Thus, the use of online purchasing would release a surplus of 4 billion euros per year for consumers, thanks to lower prices than traditional purchases; more generally, this diagnosis anticipated a gain of 20 euros per Internet user per month thanks to digitalization. As for the free services accessible to Internet users, McKinsey estimated their [hidden] value at 15 billion euros per year and deplored France’s backlog compared to other European countries in terms of digital technology and its place in the economy3. This report also noted a clear gap between the use of digital techniques that were widely distributed among the population, and the low use of these techniques in French companies.

Going a step further and being even more analytical, the report on “The Digital Transformation of the French Economy”, which was commissioned by the French government [LEM 14], attempted to identify the processes by which digital technology influences business performance; it identified eight causes for change:

  1. 1) automation improves capital and labor productivity;
  2. 2) dematerialization makes agencies, counters and shops disappear, at least in part;
  3. 3) the cost curve is marked by high investment in innovation and prototyping, and low reproduction costs;
  4. 4) transaction costs are decreasing due to the great ease offered to each economic operator in finding a commercial counterpart and negotiating with them;
  5. 5) intermediation (or disintermediation) effects are significant;
  6. 6) a new role is played by the multitude of consumer-operators;
  7. 7) massive data processing is central.
  8. 8) in summary, the changes above induce the reinvention of trade practices and ecosystems.

Among these eight cases, the Lemoine report highlighted three key elements of digital transformation: automation (1), dematerialization of processes (2) and the obsolescence of traditional intermediaries (5), whose function was to be replaced by what is now called the platform economy. Four years on, these analyses are still relevant, even though we have somewhat forgotten about the amazing numbers from the consulting companies mentioned above4.

Information: the raw material of digital technology

Our analysis starts with what digital technology derives from its mainspring: information. For the post-industrial society (tertiary or even quaternary), information plays a role similar to that played by raw materials in industrial society, because it constitutes a source of value. It is through information that economic operators act, cooperate and create wealth. With digital technology, information has never been so abundant; this proliferation increases the potential for value creation tenfold.

Three successive pillars enable this digital transmutation: the Internet of Things, massive data and the platforms that structure the value chain. It is a profound break with the past that allows the emergence of a new technological paradigm [DOS 82] that results in digital disruption. However, each of these three pillars is based on specific elements that need to be clarified. It is these three combined pillars (the Internet of Things, big data and platforms5) that provide the conditions for such value creation. Let us take a brief look at them.

Internet of Things and sensors

We can continue the analogy with raw materials to explain the role of the Internet of Things; it is mainly the installation of data sensors, everywhere and for everything, that can carry the most varied data:

  • – in a physical environment (on the objects themselves, on the loads transported, on machine parts, etc.);
  • – in an intangible environment (in other words, in cyberspace), it is those famous cookies that are supposed to keep a “trace” of the Internet users’ actions;
  • – and, thanks to the miniaturization permitted by nanotechnologies, the sensor can be carried in or on the human body, either by intelligent clothing (Google Glass, Apple Watch) or integrated into the body itself, which could lead to the augmented human in the long run, which is the dream of some web thinkers6.

Thus data, the potential deposit of values, is extracted over time by a multitude of small (or large) sensors, which are also potential for deposits or mines to explore. However, unlike raw material deposits, there is no economy of scale in data extraction because they are so diverse that their sources must be multiplied. It is estimated that there will be several tens of billions of connected objects by 2020, together constituting a real population of connected things: the era of the Internet of Things is nearly upon us. Coupled with local processing, the multiplication of sensors inside objects will certainly lead to manual activities with physical content, but also to intellectual activities with high added value, so many professions could be affected in the long run. According to a widely publicized study7, a robot could soon perform many tasks that currently require expertise such as, for example, extracting case law from the mass of legal texts mobilized for a complex legal case, just as well as a professional lawyer! Of course, the robot could never plead to win the conviction of a jury, but it would bring a precious help to the lawyer to build his case. Thus, humans would mobilize themselves on tasks that the robot could never do. And in this race between human and machine, the latter could perform a fairly large number of routine and repetitive operations and develop a certain form of expertise [BRY 14]8.

However, the sensors need to communicate. The particular conditions in which they are located mean that the current Internet is not always suitable: sensors must be economical in bandwidth and have independent energy sources. They often have their own communication protocols that are less greedy than those of the Internet. All this could create problems of compatibility on the network and facilitate the dominance of proprietary solutions, in particular regarding the encouragement of sensor manufacturers (the forefront of which are major platforms such as Amazon, Apple, eBay, Facebook and Google) to not only develop their own sensors, but also their own standards for communication between objects and for the provision of services (structuring and data exchange formats).

Big data and algorithms

All sensors carry (or will carry) the data they collect to machines. Stored in data warehouses (data centers), these massive data are “searched” in order to extract meaning, therefore knowledge. Data mining relies upon algorithms based on deep learning, through which the mining analogy is pursued. Comparing a very large amount of data makes it possible to extract meaning from this digital chaos, that can be used for operational purposes. The machines assigned to this task thus accumulate a certain empirical knowledge (machine learning). Algorithmic processes then transform this digital raw material into usable information in order to reveal the potential value of metadata that has been accumulated over time. For this potential value to materialize, information must be accessible and also distributed for integration into new products or services. This is the role of platforms. Between its extraction and its distribution, the data gain significance as potential sources of wealth, crystallized by the platforms.

Massive data processing algorithms, the second pillar of digital disruption, are forcing companies to review their strategies. For them, it is a question of becoming sufficiently agile to make the most of the continuous flow from the sensors, in order to extract relevant information. While marketing is a field in which data is abundant and heterogeneous, after-sales services also benefit from it for preventive maintenance and product renewal; in the context of complex systems, production activities also need massive data; even finance is affected by this phenomenon, since market automata manage the flow of exchanges, a method qualified as high frequency trading. Globally speaking, companies must therefore make their organization permanently reactive to weak signals that algorithms extract from big data.

Platforms: a kind of disruption?

Platforms are, lastly, a third element of disruption; one that is most spectacular today. Collaborative consumer services like Airbnb, Uber and BlaBlaCar, and before them, Google, Apple, Facebook, Amazon and Microsoft9, are true leaders in the digital world. Their common characteristic is to play on what are known as indirect network effects in economics. For each service, it is a question of putting service, information, social link or object demanders in contact with suppliers; the intermediary is a digital tool that is only accessible via the Internet. The joint presence of many bidders attracts an increasing number of demanders and vice versa, so that bringing together a large number of suppliers and demanders on a successful platform is a self-enforcing mechanism10. This is why operators who manage successful platforms are rapidly conquering millions of customers or members. They drive this technical system, which they constantly improve because their survival depends on it [GAW 14]; all have an interest in multiplying interactions between their members or customers, by carefully observing behavior in order to sell targeted publicity to advertisers and to offer new services.

These platforms are undoubtedly commercial and organizational innovations, in addition to being technical (to a lesser degree); they take advantage of the algorithms they design. As such, they have to be set up very quickly and overturn the most established positions. The Internet of Things and big data are, on the other hand, rather technical innovations that fit into an already-structured environment that they can hardly force to evolve rapidly. Like any component of a technical paradigm, these innovations are likely to take time to assert themselves. However, this does not mean that they should be observed passively or reactively. The digital transformation of companies can specifically prepare for the integration of these new agents of change. The scale of technical time, longer than that of business time, should allow companies to master them (or to appropriate part of the advantages linked to innovation) before being overwhelmed by change themselves!

Therefore, in the short term, platforms are essentially responsible for the disruption, even if, in the long term, their potential for transformation is greater. From an organizational point of view, the platforms deeply question the very identity of many existing companies. We see it very clearly with the collaborative economy: for example, Airbnb could present itself as a hotel group without hotels or staff; aren’t BlaBlaCar and Uber transport companies lacking cars or drivers11?

The causes of disruption and their limits

Even in the event that a platform would not cause a deep disruption, it would still remain different from previous organizations. Until the mid-1970s, the ideal type of competitive company was a big, largely integrated company with a first- and second-tier subcontracting environment, active in many sectors, some of which would be very remote from the rest. At that time, for example, the English group EMI produced: military equipment (it participated in the production of the first radars in the 1940s), medical equipment (it invented the scanner in the 1960s), and, additionally, entertainment as a broadcaster for the Beatles, that is to say, recorded music. Are the large conglomerates that still exist today survivors of a bygone past? Not really, because they still hold a significant place in Asian countries like Japan (Mitsubishi, Hitachi, Fuji, etc.), especially in South Korea (LG, Samsung, Hyundai) and now in China. Some of the large Western companies are also maintaining themselves; they are trying to restructure themselves, but seem, as of yet, confined to certain sectors where there are still strong economies of scale12. However, these firms no longer seem to be the essential drivers of innovation and growth, contrary to what they may have been during the Thirty Glorious Years.

These large conglomerates went out of fashion in the early 1990s, when management gurus honored what was called the hollow company and the fabless company. Designed to focus on research and development, innovation and branding, this model transfers low-cost production and manufacturing care to subcontractors. Apple is still the worthy heir of this model of the 1990s in a very particular segment related to digital technology. Its phenomenal success since the early 2000s argues its relevance when implemented with talent, which is not available to everyone! But Apple is also seeking to position itself in the field of online service platforms (iTunes, iCloud), something that can retain the customer in a sustainable way and generate regular revenue, as the hollow company, which is piloting an ecosystem of subcontractors, also has its limits. Most of these limits refer to the affirmation of the brand: a company which seeks to control everything and impose its products in isolation, which refuses alliances, another credo of the management of 1980s–1990s, can have setbacks. Apple thus almost disappeared in the 1990s, during which time its main rival, Microsoft, spared it in order not to appear too hegemonic! Today, the Apple company maintains a dominant position in high-end sectors; but it will not be able to avoid taking summary of the advantages and disadvantages of its voluntary isolation in the long term, which imposes the obligation of remaining innovative, tying the customer and maintaining comfortable margins.

Can this permanent race be an indefinite winner? In 2016, iPhone sales declined: in number, they now only represent 15% of global phone sales, compared to 85% for other Android smartphones. This trend should continue, even if Apple’s products remain well positioned in the high-end market.

The business philosophy of digital technology

After the conglomerates of the 1980s, after the hollow companies, the frugal companies and the low cost which also emerged in the 1990s, current companies, confronted with digital change, are looking for a new frame of reference. Would the platform be an alternative model? Is it no longer a question of controlling and mastering everything in the name of preserving one’s own brand, but of sharing technical devices so that others can bring innovation and produce services?

Google, in addition to Facebook, practice (or once practiced) this philosophy of openness and partnership with other digital companies. Platforms of the collaborative economy are doing the same today with, as partners, anyone who considers themselves as drivers, hosts, tourist guides, and even as restaurateurs. In order to understand the reaction of traditional companies to this, it is necessary to first go back to what the essence of the company and of any structured organization is: it is the need to coordinate cooperation between individuals. In order to achieve effective coordination, the current organization puts forward a pyramidal structure, identified by a head13 and by a hierarchy, within which the power to act or to command is distributed. Although most platforms have a CEO, power is often widely distributed outside of traditional hierarchical control. BlaBlaCar or Uber, for example, cannot impose a driving mode on their drivers-carriers.

Another organizational cement that needs to be kept in mind when it comes to well-established companies is organizational routine14. This is a procedure, either written, tacit, or based on experience; these routines are shared by members of the organization; they dictate their behavior in a particular situation and facilitate effective coordination within the firm. These routines, especially those that are difficult to imitate, may explain some of the successes that could be attributed to a very effective organization. This is how the implementation of Kanban (just-in-time supply management) has helped make Toyota a world leader in the automotive industry, long before its competitors took over this same organizational routine.

In the face of disruption, in other words, the advent of production methods based on technological platforms, previous routines may become obsolete. The philosophy of entrepreneurial organization, coordination between people (even if it is based on a routine), is replaced by algorithmic coordination that is implemented by a platform. As a result, traditional businesses must react. Thus Michelin, whose competitive advantage has always been based on its ability to innovate in an absolute industrial secrecy and with a very present hierarchy, now realizes that a variety of open innovation that uses a platform can provide valuable additions to in-house expertise. Michelin facilities are thus returning to the old tradition of idea boxes: promoting innovation imagined by its own staff, encouraging them to submit proposals, highlighting promising projects, involving senior management in the assessment of grassroots ideas, etc. The company financially supports promising start-ups that would like to implement an innovation. In the same vein, the Accor group, which has so far focused on its own brands (Ibis, Formula 1, Mercure, Novotel, etc.), has decided to create its own platform opposite the Booking.com platform, which refers to independent, no-brand hotels. The question then is: how should companies respond to digital disruption?

Moving upmarket and buybacks

One way to evolve, in the face of platforms, could be to develop an enriched formula that would improve customer service. Such an attitude was chosen by Accor, which now relies on digital transformation to increase interaction with its customers15. Previously, the hotel chain’s customer meeting moments were limited to booking and staff contacts during the hotel stay; the digital operation strives to increase meeting opportunities during and outside the hotel stays, with the hope of generating new value. To this end, the Accor group is enhancing its website in order to offer its customers, or at least a very large majority of them, the same level of connection and services as they have at home: free access to the online press, a partnership with Deezer to distribute music, room service accessible via a smartphone application, menus from restaurants close to the hotel, special promotions at local retailers, etc. Accor hopes to discover the profile of its customers, aggregate opinions on the group’s establishments and interact with customers well beyond the reservation and the occasional stay.

Another interesting case of service enrichment, thanks to digital technology, is that of the French La Poste group which, going from the observation that individuals have a traditionally confident relationship with mailmen, is seeking to enrich that relationship thanks to digital technology. In addition to simple services such as the collection of parcels from a mailbox, the delivery of meals at home, or a watch on isolated ageing people, postmen equipped with smartphones should be able to offer other services at home. La Poste also aims to position itself as a trusted digital third party for individuals, providing them with a digital safe and a universal digital identity to interact with third parties, whether they be private or public. This would enable them to scan documents (pay slips, invoices, tax payments, etc.), deposit them in the digital safe and have a single interface with the administration, other public services and certain private services. La Poste is therefore seeking to capitalize on the trust of individuals; it is transposing this relationship into the digital world. In doing so, it is positioning itself as a platform of administrative and financial services that is open to the general public, hoping that its tradition of public service and the image associated with it can convince its customers to join the new services. However, this is a tough challenge.

While the enrichment of services opens up many possibilities, some companies still see digital technology as a simple extension of business computing, as a means of strengthening coordination between operators for greater efficiency and more added value. The ERP (Enterprise Resource Planning) software is used to continuously calculate the costs and profitability of the various components of the company. They are sometimes considered as management tools: should the company then harmonize itself with the operation of this computer program16?

Buy start-ups?

Three axes for the digital development of companies are thus emerging, in this context which is marked by platforms: 1) the search for low cost aims to make the company as frugal as possible; 2) the enrichment of service through digital technology hopes to develop new relationships with customers, and strengthen digitally assisted management. Each of these axes can be an agent of transformation; it is also possible to combine them in certain circumstances; and 3) an even more radical evolution would consist in injecting a start-up behavior into the large firm! For this, a natural step forward would be to buy an existing start-up; for example, to forge an alliance between an existing company and an emerging platform. This is what MAIF is trying to do, by multiplying investments in collaborative economy start-ups18 (€125 million of investment planned by 2020). This mutual insurance relies on such alliances in order to establish new relationships with its customers. The disruption is no longer considered as a threat, but as an opportunity. Besides its core business (the insurance of people and goods), MAIF’s share in Koolicar is symptomatic, because this start-up allows individuals to lease their vehicle when they do not use it: an electronic box, remotely controlled, gives access to the vehicle without the lessor or his client needing to meet. MAIF obviously intends to expand its customer base and offer insurance adapted to this occasional use of the vehicle. However, here again, the investment of the mutualist group remains a gamble, because no one yet really knows whether people are ready to entrust their car to anyone else!

Concluding reflections

The possibilities for companies to adapt to digital challenges seem quite varied; depending on the context and specific strategies. However, the common denominator in all these situations is the need for continuous evolution: the aim is to widen interactions with the customers. Platform organization offers this possibility, but requires profound internal transformations. Through the accumulation of data and information delivered by the Internet of Things and big data, by the disordering caused by platforms and other forms of disruption (globalization, for example), established enterprises face an increasingly rich and surprising environment; this leads them to constantly review the validity and viability of their actions and processes. They have to do this because their existence is at stake in an ever-changing environment. In summary, the massive influx of information and the rapid mobilization of digital resources are creating contexts where:

  • – opportunities to do business (or develop activities with relevant economic and social content) have never been greater. The additional information made available to everyone is a permanent and strong invitation to entrepreneurship, not only in the strict sense of start-ups, but also in the perspective of coordinating collective action in order to create wealth. The entrepreneur takes on a new dimension: it is no longer necessary or sufficient for him/her to be solely driven by the spirit of profit. He/she is also a discoverer of opportunities in the tradition of Austrian economists (Mises, Böhm-Bawerk and even Schumpeter); he/she also acts as the coordinator of collective action, in accordance with the vision of institutionalists (Marshall, Alchian and Demsetz, Williamson);
  • – coordinating activities using a technical tool, such as a platform, makes the contractor’s task easier, because this tool partially frees him from the constraints of time and space: its implementation, which is simple and fast, takes speed from institutional structures that had not yet had the time to adapt. Uber has taken taxi drivers by surprise; Airbnb has done the same with hotel chains; all of these activities, even (or especially?) the most regulated of them are, or will soon be, facing this challenge.

Firms established since the Industrial Revolution and during the 19th and 20th centuries were not only relying upon the talent of industry captains, whose contribution was demonstrated by Alfred Chandler [CHA 62, CHA 77], but also capable of adapting to a changing institutional environment, notably that of the state. The market economy system, thusly constructed, is based on the contractual freedom that is guaranteed by the public authorities on transferable individual and collective property rights (joint-stock companies, cooperatives); commercial law ensures fair contractual negotiation; social law guarantees collective action in a context of wage subordination; competition law preserves the freedom of choice of business counterparts; and intellectual property encourages innovation.

It has also been shown that this heavy institutional apparatus basically only has a single purpose [SEA 10]: to ensure that people who do not know each other actively and effectively cooperate. Establishing service or labor contracts and exchanging goods for monetary signs are the effects of this cooperation, which is articulated between two complementary polar structures: the enterprise and the market [WIL 75].

Human creativity has also given rise to numerous intermediary structures between the company and the market: subsidiaries, franchises, partnerships, joint ventures and long-term agreements help to organize economic cooperation in the most flexible and context-specific way. If digital technology is cracking this beautiful institutional edifice, it is because it invites us to undertake it on a scale that was unknown until now: in plain language, and to use Joseph Schumpeter’s terminology, the capacities of creative destruction are multiplied by digital technology. Moreover, digital instruments make companies more responsive: debates on platform taxation and the absence of employment contracts at Uber prove this.

Digital technology thus reveals the partial obsolescence of the institutional framework. It threatens the sustainability of the roles and status that men had established among themselves and certain forms of cooperation.

Also, what is at stake in digital transformation is the implementation of a renewed value creation system (in the last century, it would have been called a productive system) that would be much more heterogeneous than before. Various forms of organization and cooperation could therefore coexist: enterprises, partnerships of all kinds, collectives, platforms, commons19, etc. Agility, entrepreneurship or simple initiative and solidarity will be elements of success. Abundant information about people and network effects can proliferate mimetic behaviors; this can eventually create systemic hazards, whose effects spread rapidly from one geographic area or economic sector to another.

Public authorities should be facing such outcomes: adapting the institutional framework so that organizations, platforms and companies that do not seem to require the same rules or the same dynamics, but nevertheless meet on the same markets, do coexist! It would also mean preserving the individual’s place and role in the society, and protecting data concerning him or her, without restricting innovation or initiative. As Schumpeter also said: “Thanks to its brakes, a car can go fast”. In this respect, modern society is a somewhat comparable to a Formula One!

Bibliography

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[BER 14] BERGER R., Du rattrapage à la transformation : l’aventure numérique, une chance pour la France, available at: http://www.rolandberger.fr/media/pdf/Roland_Berger_Du_rattrapage_a_la_transformation_201409, 2014.

[BRY 14] BRYNJOLFSSON E., MCAFEE A., The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies, W.W. Norton & Company, New York, 2014.

[CHA 62] CHANDLER JR. A.D., Strategy and Structure: Chapters in the History of the American Industrial Enterprise, MIT Press, Cambridge, 1962.

[CHA 77] CHANDLER JR. A.D., The Visible Hand, Harvard University Press, Cambridge, 1977.

[DAN 01] DANG N’GUYEN G., L’entreprise numérique, Economica, Paris, 2001.

[DOS 82] DOSI G., “Technological paradigms and technological trajectories: a suggested interpretation of the determinants and directions of technical change”, Research policy, vol. 11, no. 3, pp. 147–162, 1982.

[FRE 17] FREY C.B., OSBORNE M.A., “The future of employment: how susceptible are jobs to computerisation?”, Technological Forecasting and Social Change, vol. 114, pp. 254–280, 2017.

[GAW 14] GAWER A., CUSUMANO M.A., “Industry platforms and ecosystem innovation”, Journal of Product Innovation Management, vol. 31, no. 3, pp. 417–433, 2014.

[LEM 14] LEMOINE P., La nouvelle grammaire du succès. La transformation numérique de l’économie française, Report to the French government, Ministère de l’économie, de l’industrie et du numérique, 2014.

[MCK 14] MCKINSEY FRANCE, Accélérer la mutation numérique des entreprises : un gisement de croissance, available at: https://www.mckinseycom/fr/our-insights/accelerer-la-mutation-numerique-des-entreprises, 2014.

[NEL 82] NELSON R.R., WINTER SIDNEY G., An Evolutionary Theory of Economic Change, Harvard Business School Press, Cambridge, 1982.

[SEA 11] SEABRIGHT P., La société des inconnus : histoire naturelle de la collectivité humaine, Éditions Markus Haller, Geneva, 2011.

[WIL 75] WILLIAMSON O.E., Markets and Hierarchies. Analysis and Antitrust Implications, Free Press, New York, 1975.

Chapter written by Godefroy DANG N’GUYEN.

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