TED@BCG San Francisco
Philip Evans: How data will transform business
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What does the future of business look like? In an informative talk, Philip Evans gives a quick primer on two long-standing theories in strategy -- and explains why he thinks they are essentially invalid.
Philip Evans - Consultant
BCG's Philip Evans has a bold prediction for the future of business strategy -- and it starts with Big Data. Full bio
BCG's Philip Evans has a bold prediction for the future of business strategy -- and it starts with Big Data. Full bio
Double-click the English transcript below to play the video.
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I'm going to talk a little bit about strategy
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and its relationship with technology.
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We tend to think of business strategy
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as being a rather abstract body
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of essentially economic thought,
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perhaps rather timeless.
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I'm going to argue that, in fact,
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business strategy has always been premised
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on assumptions about technology,
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that those assumptions are changing,
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and, in fact, changing quite dramatically,
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and that therefore what that will drive us to
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is a different concept of what we mean
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by business strategy.
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Let me start, if I may,
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with a little bit of history.
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The idea of strategy in business
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owes its origins to two intellectual giants:
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Bruce Henderson, the founder of BCG,
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and Michael Porter, professor
at the Harvard Business School.
at the Harvard Business School.
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Henderson's central idea was what you might call
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the Napoleonic idea of concentrating mass
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against weakness, of overwhelming the enemy.
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What Henderson recognized was that,
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in the business world,
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there are many phenomena which are characterized
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by what economists would call increasing returns --
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scale, experience.
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The more you do of something,
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disproportionately the better you get.
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And therefore he found a logic for investing
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in such kinds of overwhelming mass
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in order to achieve competitive advantage.
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And that was the first introduction
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of essentially a military concept of strategy
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into the business world.
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Porter agreed with that premise,
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but he qualified it.
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He pointed out, correctly, that that's all very well,
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but businesses actually have multiple steps to them.
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They have different components,
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and each of those components might be driven
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by a different kind of strategy.
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A company or a business
might actually be advantaged
might actually be advantaged
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in some activities but disadvantaged in others.
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He formed the concept of the value chain,
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essentially the sequence of steps with which
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a, shall we say, raw material, becomes a component,
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becomes assembled into a finished product,
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and then is distributed, for example,
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and he argued that advantage accrued
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to each of those components,
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and that the advantage of the whole
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was in some sense the sum or the average
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of that of its parts.
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And this idea of the value chain was predicated
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on the recognition that
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what holds a business together is transaction costs,
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that in essence you need to coordinate,
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organizations are more efficient at coordination
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than markets, very often,
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and therefore the nature and role and boundaries
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of the cooperation are defined by transaction costs.
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It was on those two ideas,
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Henderson's idea of increasing returns
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to scale and experience,
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and Porter's idea of the value chain,
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encompassing heterogenous elements,
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that the whole edifice of business strategy
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was subsequently erected.
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Now what I'm going to argue is
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that those premises are, in fact, being invalidated.
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First of all, let's think about transaction costs.
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There are really two components
to transaction costs.
to transaction costs.
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One is about processing information,
and the other is about communication.
and the other is about communication.
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These are the economics of
processing and communicating
processing and communicating
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as they have evolved over a long period of time.
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As we all know from so many contexts,
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they have been radically transformed
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since the days when Porter and Henderson
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first formulated their theories.
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In particular, since the mid-'90s,
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communications costs have actually been falling
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even faster than transaction costs,
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which is why communication, the Internet,
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has exploded in such a dramatic fashion.
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Now, those falling transaction costs
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have profound consequences,
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because if transaction costs are the glue
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that hold value chains together, and they are falling,
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there is less to economize on.
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There is less need for vertically
integrated organization,
integrated organization,
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and value chains at least can break up.
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They needn't necessarily, but they can.
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In particular, it then becomes possible for
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a competitor in one business
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to use their position in one step of the value chain
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in order to penetrate or attack
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or disintermediate the competitor in another.
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That is not just an abstract proposition.
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There are many very specific stories
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of how that actually happened.
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A poster child example was
the encyclopedia business.
the encyclopedia business.
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The encyclopedia business
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in the days of leatherbound books
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was basically a distribution business.
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Most of the cost was the
commission to the salesmen.
commission to the salesmen.
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The CD-ROM and then the Internet came along,
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new technologies made the distribution of knowledge
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many orders of magnitude cheaper,
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and the encyclopedia industry collapsed.
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It's now, of course, a very familiar story.
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This, in fact, more generally was the story
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of the first generation of the Internet economy.
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It was about falling transaction costs
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breaking up value chains
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and therefore allowing disintermediation,
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or what we call deconstruction.
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One of the questions I was occasionally asked was,
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well, what's going to replace the encyclopedia
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when Britannica no longer has a business model?
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And it was a while before
the answer became manifest.
the answer became manifest.
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Now, of course, we know
what it is: it's the Wikipedia.
what it is: it's the Wikipedia.
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Now what's special about the
Wikipedia is not its distribution.
Wikipedia is not its distribution.
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What's special about the Wikipedia
is the way it's produced.
is the way it's produced.
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The Wikipedia, of course, is an encyclopedia
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created by its users.
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And this, in fact, defines what you might call
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the second decade of the Internet economy,
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the decade in which the Internet as a noun
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became the Internet as a verb.
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It became a set of conversations,
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the era in which user-generated
content and social networks
content and social networks
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became the dominant phenomenon.
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Now what that really meant
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in terms of the Porter-Henderson framework
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was the collapse of certain
kinds of economies of scale.
kinds of economies of scale.
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It turned out that tens of thousands
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of autonomous individuals writing an encyclopedia
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could do just as good a job,
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and certainly a much cheaper job,
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than professionals in a hierarchical organization.
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So basically what was happening was that one layer
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of this value chain was becoming fragmented,
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as individuals could take over
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where organizations were no longer needed.
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But there's another question
that obviously this graph poses,
that obviously this graph poses,
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which is, okay, we've
gone through two decades --
gone through two decades --
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does anything distinguish the third?
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And what I'm going to argue is that indeed
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something does distinguish the third,
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and it maps exactly on to the kind of
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Porter-Henderson logic that
we've been talking about.
we've been talking about.
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And that is, about data.
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If we go back to around 2000,
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a lot of people were talking
about the information revolution,
about the information revolution,
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and it was indeed true that the world's stock of data
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was growing, indeed growing quite fast.
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but it was still at that point overwhelmingly analog.
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We go forward to 2007,
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not only had the world's stock of data exploded,
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but there'd been this massive substitution
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of digital for analog.
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And more important even than that,
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if you look more carefully at this graph,
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what you will observe is that about a half
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of that digital data
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is information that has an I.P. address.
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It's on a server or it's on a P.C.
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But having an I.P. address means that it
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can be connected to any other data
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that has an I.P. address.
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It means it becomes possible
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to put together half of the world's knowledge
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in order to see patterns,
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an entirely new thing.
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If we run the numbers forward to today,
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it probably looks something like this.
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We're not really sure.
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If we run the numbers forward to 2020,
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we of course have an exact number, courtesy of IDC.
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It's curious that the future is so much
more predictable than the present.
more predictable than the present.
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And what it implies is a hundredfold multiplication
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in the stock of information that is connected
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via an I.P. address.
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Now, if the number of connections that we can make
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is proportional to the number of pairs of data points,
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a hundredfold multiplication in the quantity of data
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is a ten-thousandfold multiplication
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in the number of patterns
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that we can see in that data,
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this just in the last 10 or 11 years.
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This, I would submit, is a sea change,
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a profound change in the economics
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of the world that we live in.
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The first human genome,
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that of James Watson,
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was mapped as the culmination of the
Human Genome Project in the year 2000,
Human Genome Project in the year 2000,
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and it took about 200 million dollars
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and about 10 years of work to map
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just one person's genomic makeup.
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Since then, the costs of mapping
the genome have come down.
the genome have come down.
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In fact, they've come down in recent years
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very dramatically indeed,
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to the point where the cost
is now below 1,000 dollars,
is now below 1,000 dollars,
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and it's confidently predicted that by the year 2015
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it will be below 100 dollars --
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a five or six order of magnitude drop
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in the cost of genomic mapping
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in just a 15-year period,
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an extraordinary phenomenon.
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Now, in the days when mapping a genome
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cost millions, or even tens of thousands,
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it was basically a research enterprise.
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Scientists would gather some representative people,
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and they would see patterns, and they would try
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and make generalizations about
human nature and disease
human nature and disease
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from the abstract patterns they find
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from these particular selected individuals.
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But when the genome can
be mapped for 100 bucks,
be mapped for 100 bucks,
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99 dollars while you wait,
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then what happens is, it becomes retail.
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It becomes above all clinical.
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You go the doctor with a cold,
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and if he or she hasn't done it already,
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the first thing they do is map your genome,
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at which point what they're now doing
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is not starting from some abstract
knowledge of genomic medicine
knowledge of genomic medicine
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and trying to work out how it applies to you,
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but they're starting from your particular genome.
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Now think of the power of that.
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Think of where that takes us
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when we can combine genomic data
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with clinical data
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with data about drug interactions
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with the kind of ambient data that devices
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like our phone and medical sensors
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will increasingly be collecting.
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Think what happens when we collect all of that data
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and we can put it together
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in order to find patterns we wouldn't see before.
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This, I would suggest, perhaps it will take a while,
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but this will drive a revolution in medicine.
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Fabulous, lots of people talk about this.
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But there's one thing that
doesn't get much attention.
doesn't get much attention.
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How is that model of colossal sharing
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across all of those kinds of databases
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compatible with the business models
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of institutions and organizations and corporations
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that are involved in this business today?
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If your business is based on proprietary data,
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if your competitive advantage
is defined by your data,
is defined by your data,
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how on Earth is that company or is that society
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in fact going to achieve the value
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that's implicit in the technology? They can't.
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So essentially what's happening here,
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and genomics is merely one example of this,
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is that technology is driving
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the natural scaling of the activity
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beyond the institutional boundaries within which
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we have been used to thinking about it,
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and in particular beyond the institutional boundaries
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in terms of which business strategy
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as a discipline is formulated.
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The basic story here is that what used to be
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vertically integrated, oligopolistic competition
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among essentially similar kinds of competitors
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is evolving, by one means or another,
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from a vertical structure to a horizontal one.
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Why is that happening?
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It's happening because
transaction costs are plummeting
transaction costs are plummeting
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and because scale is polarizing.
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The plummeting of transaction costs
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weakens the glue that holds value chains together,
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and allows them to separate.
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The polarization of scale economies
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towards the very small -- small is beautiful --
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allows for scalable communities
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to substitute for conventional corporate production.
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The scaling in the opposite direction,
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towards things like big data,
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drive the structure of business
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towards the creation of new kinds of institutions
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that can achieve that scale.
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But either way, the typically vertical structure
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gets driven to becoming more horizontal.
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The logic isn't just about big data.
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If we were to look, for example,
at the telecommunications industry,
at the telecommunications industry,
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you can tell the same story about fiber optics.
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If we look at the pharmaceutical industry,
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or, for that matter, university research,
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you can say exactly the same story
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about so-called "big science."
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And in the opposite direction,
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if we look, say, at the energy sector,
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where all the talk is about how households
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will be efficient producers of green energy
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and efficient conservers of energy,
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that is, in fact, the reverse phenomenon.
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That is the fragmentation of scale
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because the very small can substitute
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for the traditional corporate scale.
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Either way, what we are driven to
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is this horizontalization of the structure of industries,
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and that implies fundamental changes
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in how we think about strategy.
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It means, for example, that we need to think
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about strategy as the curation
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of these kinds of horizontal structure,
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where things like business definition
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and even industry definition
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are actually the outcomes of strategy,
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not something that the strategy presupposes.
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It means, for example, we need to work out
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how to accommodate collaboration
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and competition simultaneously.
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Think about the genome.
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We need to accommodate the very large
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and the very small simultaneously.
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And we need industry structures
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that will accommodate very,
very different motivations,
very different motivations,
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from the amateur motivations
of people in communities
of people in communities
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to maybe the social motivations
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of infrastructure built by governments,
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or, for that matter, cooperative institutions
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built by companies that are otherwise competing,
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because that is the only way
that they can get to scale.
that they can get to scale.
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These kinds of transformations
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render the traditional premises
of business strategy obsolete.
of business strategy obsolete.
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They drive us into a completely new world.
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They require us, whether we are
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in the public sector or the private sector,
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to think very fundamentally differently
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about the structure of business,
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and, at last, it makes strategy interesting again.
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Thank you.
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(Applause)
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ABOUT THE SPEAKER
Philip Evans - ConsultantBCG's Philip Evans has a bold prediction for the future of business strategy -- and it starts with Big Data.
Why you should listen
Since the 1970s, business strategy has been dominated by two major theories: Bruce Henderson's idea of increasing returns to scale and experience and Michael Porter's value chain. But now decades later, in the wake of web 2.0, Philip Evans argues that a new force will rule business strategy in the future -- the massive amount of data shared by competing groups.
Evans, a senior partner and managing director at the Boston Consulting Group, is the co-author of Blown to Bits, about how the information economy is bringing the trade-off between "richness and reach" to the forefront of business. Evans is based in Boston.
Philip Evans | Speaker | TED.com