Due to Brexit, I recently became a Dutch citizen, a move I’d never expected to make. I was therefore rather surprised to feel very proud of my new passport and I’ve come to use it almost exclusively on my travels, not least because I get a kick out of strangers complementing me on my excellent English.
The Netherlands is a great country and I very much enjoy living here. One of the greatest things about it is its burgeoning tech industry. We have so many things going for us, from high tech multinationals to leading universities to a rapidly growing spirit of entrepreneurialism and a government that’s set on building a knowledge economy. It’s a very exciting time and place to be alive. And yet, in spite of all the positives, we have the capacity to do better. In fact, we need to do better because we’re a small country competing on the global stage against fierce rivals with far greater resources.
The source of my concern is the lack of appreciation for the strategic importance of digitalization amongst executive and senior management in our industrial base. Without a doubt, the success of our region is also built upon our world-class software engineering skills. So how can it be that our top management fails to understand the strategic significance of software and digitalization?
The answer lies in the fact that for the last 30 years, innovation has been driven by advances in hardware and physical technologies, with software being seen as merely the glue that holds everything together. Today’s senior management were the pioneers of hardware-driven innovation and, therefore, they can be forgiven for their perspective. But times are changing very quickly. More than half of the technologies listed on the Gartner Hype Cycle are software intensive. Digitalization is already a force majeure in business and consumer markets and has brought about radical change, including the emergence of software-centric companies such as Uber, Airbnb and Alibaba, and the destruction of companies such as Kodak and Nokia. It will be in industry, too. History tells us that from 1900 to 1930, fully 40 percent of US manufacturers that existed at the turn of the century got wiped out because they failed to adapt quickly enough to the force majeure of electrification.
Executives who think they have time to take a wait-and-see approach to digitalization are making a big mistake. The fact is that it’s absolutely possible to be too late to the digitalization game. A recent report from McKinsey and the Global Lighthouse Network details the benefits that 4IR adopters are getting from digitalization. The numbers are ridiculous: 40 percent increase in manufacturing efficiency, 63 percent increase in workforce efficiency, 30 percent reduction in throughput time, and so on. These are market-disrupting benefits, without a doubt.
Imagine that your competitor increased their efficiency by 8 percent and reinvested those gains in further digitalization. Their advantage over your business would compound rapidly and by the time you noticed, it would be impossible for you to catch up. Your existing margins wouldn’t support the massive level of investment required. And even if they could, it’s unlikely that your organization could move quickly enough. After all, you were slow to catch on to the significance of digitalization in the first place, so your organization is probably laggardly by nature.
Fortunately, the reverse is also true. Imagine if you started investing in digitalization immediately. Now, you have the advantage of rapidly compounding gains. By the time your competitors notice, you’ll have an unassailable lead. So, consider: if you act now on digitalization, the worst case is that you remain on par with your competitors. The best case is that you get an unassailable lead over them. If you don’t act on digitalization, the worst case is that you’ll become irretrievably uncompetitive and slowly bleed business to your competitors. There’s no best case for not acting since 4IR disruption is already a fact.
The good news is that we’re still in the early days of 4IR and, as McKinsey put it, “Leadership in digital manufacturing is open to anyone willing to commit to it.” But this will change quickly. The compound gains to be had from digitalization will rapidly create a widening gap between the smart and the slow. There’s really only one way to address the challenge of digitalization: act now, act fast.