Software is changing the way traditional business operate. People now have smartphones in their pockets - a supercomputer that is 25,000 times more powerful and the minicomputers of the 1960s. This is changing people's behaviour and how people shop and use services. The organisational structure created in the 20th century cannot survive when new digital solution are being offered. Software is changing the way traditional business operate. People now have smartphones in their pockets - a supercomputer that is 25,000 times more powerful and the minicomputers of the 1960s. This is changing people's behaviour and how people shop and use services. The organisational structure created in the 20th century cannot survive when new digital solution are being offered. The hierarchical structure of these established companies assumes high coordination cost due to human activity. But when the coordination cost drops The organisational structure that companies in the 20th century established was based on the fact that employees needed to do all the work. The coordination cost was high due to the effort and cost of employees, housing etc. Now we have software that can do this for use and the coordination cost drops to close-to-zero. Another thing is that things become free. Consider Flickr. Anybody can sign up and use the service for free. Only a fraction of the users get pro account and pay. How can Flickr make money on that? It turns out that services like this can. Many businesses make money by giving things away. How can that possibly work? The music business has suffered severely with digital distribution of content. Should musicians put all their songs on YouTube? What is the future business model for music?

1. LECTURE L12
DIGITAL TRANSFORMATION

2. Second half of the Chess board

3. MIT's Principal Research Scientist, Andy McAfee

4. MIT's Principal Research Scientist, Andy McAfee

5. In about 2006 we entered the second half of
the chess board

6. On the Second half of the Chess board
Tech Giants
Companies and services we have never in the
history of the world seen before
2005 2006 2007 2008 2009 2010 2011 2012

7. The Unicorn Club
Unlisted companies that are worth over 1 billion USD

8. Digital World

9. MUSIC
PICTURES
COMMUNICATION
SMARTPHONES
TV SHOWS
MOVIES
Digital Decade
BOOKS
2000 2010

10. Social Media
2010 2020

11. Internet – 3+ billion online

12. Software and data in the cloud

13. Intelligent real-time software

14. Computer, phones,
cars, home appliances
and everything else is
a gateway to the
cloud services
Smart Devices

15. Web browser is used to get a page from a web server
Web Service
HTTP is a communication protocol
HTML is markup language for formatting text
Web Server
Data Center
Web
Page
HTTP Request for data
HTML response with data
Web Browser

16. App (computer, phone, washing machine etc.) send requests
over the internet (the cloud) to a software service that is stored
on a server in data centre
Software Service
HTTP is a communication protocol
json is a standard for data
Software Service
Data Center
App
HTTP Request for data
Json response with data

17. When a client calls cloud based software service and gets data,
it calls using an API — Application Programming Interface
APIs is a definition of rules for communication and consists of
commands and parameters that are sent with requests, and the
response and data that is sent back to the client
The world is defined by API today
APIs

18. API based software services in the cloud is the foundation for
the digital transformation
Facebook, Airbnb and Uber work using APIs
Internet of things work using APIs
APIs
Software Service
Data Center
App
Request
Response
API

19. Communications
Everyday, people are using APIs

20. Cloud Services

21. Cloud Architectures
Software and data belongs to data centers
Cloud software solutions open up new types of architectures that
were previously not possible — microservice architecture
Agile teams work to build services with APIs
Continuous delivery and A/B testing
SERVICE
implementation
Service API
Service
uses
other service

22. Monolith Microservices
Instead of one giant solution and single deployment
that takes years in development, multiple small
services with API are created — microservices
Microservices

23. Software
Server in server room, backup,
security issues, unreliable
uptime, disk space problems
BEFORE
Cloud, more security, automatic
backup, reliable uptime, software
problem not hardware problem
NOW

24. Client software
Windows application
BEFORE
Browser, PC/Mac apps, iOS/
Andriod apps
NOW

25. Customisation
Accounting Software
API
Programming accounting
software — companies are
stuck with „business logic“
in obsolete systems
BEFORE
Many standard systems
connected with APIs and
smartbots
NOW
Accounting Software

26. From Hierarchies to Networks

27. Broadcasting

28. Media in the 20th Century
Print Radio TV CD/DVDs
1900 2000
Analog, Broadcast, One-2-many, copies to sell

29. Communication in the 20th Century
Phone call Postal Letter Talk with Clerk
Analog, slow and expensive - coordination cost is high
1900 2000
Fax

30. Travelling in the 20th Century
How would you organise a
vacation at a beach resort
in the Mediterranean in
1971?
How many people would
need to become involved?

31. Coordination
To solve coordination,
hierarchical structures
must be formed
Institutional coordination
Coordination cost is high
and involves many people
Expensive and slow
Hierarchy

32. Clay Shirky: Institutions vs. collaboration
TED Talk 2005

34. All of the financial cost and institutional difficulties
arranging group output
In institutional coordination formats the cost is
manual, people intensive, and unscalable —
therefore it is high
Coordination Cost

35. Institutional Coordination
Form an institution - get resources together
1. Management Problem
2. Structure - economic, legal, physical etc.
3. Inherently exclusionary
4. Professional class

36. Put the cooperation into the infrastructure
Design a system that coordinates the output of the
system as a byproduct of operating the system
without regard to institutional models
The coordination cost tends to be low, automatic, and
highly scaleable
Cooperative Coordination

37. New Solutions
Napster in 1999
Music Industry goes
crazy
New solutions get built on the Internet infrastructure

38. BitTorrent in 2001
Music Industry goes
even more crazy
New Solutions
New solutions get built on the Internet infrastructure

39. New solutions get built on the Internet infrastructure
Youtube 2005
Content creators go crazy
New Solutions

44. Airbnb
Airbnb is bigger than Hilton
Has more than 2 millions listing
Does not own any rooms or apartments

45. Airbnb nightmares

47. Uber
Uber has over 3 million drivers
15 million Uber trips are completed each day
Don’t own a single car

48. Uber Protests

49. The Transformation Decade
2010 2020
BUSINESS
MODELS OF THE
20TH CENTURY
BUSINESS
MODELS OF THE
21TH CENTURY

50. HIERARCHAL NETWORK
20th Century 21th Century

51. THE
DIGITAL DECADE
THE CONTENT
ESCAPES
THE FORM
INTERNET
DISRUPTION
BEGINS
1900 2000
From hierarchical structure to networks
From broadcasting to streaming - long tail
From Read-only culture to read-write culture
The Move to Networks
THE
TRANSFORMATION
DECADE
BUSINESS MODELS
CHANGE
SMARTPHONES
REAL TIME SOFTWARE
CLOUD AND AI
2010

52. Defined Industry Boundaries
Single-purpose Products
Producers and Consumers
Buying Economy
Hierarchical Structure
Platforms, ecosystems
Connected Smart Products
User as producer, co-creation
Sharing economy
Network Structure
The Transformation Decade
Broadcasting Streaming
Gatekeepers Algorithms
2010 2020

53. What is happening to traditional businesses is
that they are getting challenged by digital real-
time software base network companies
It the transformation of old established physical
way of doing business into new ways that are
optimized around real-time software systems
This is called Digital Transformation
Digital Transformation

54. Software is becoming the change agent of all
business
If the internet has not disrupted a business, it will
Traditional industries like retail, shipping,
banking, insurance, law firms, health and the list
goes on…
Digital Transformation

55. Any business that is built around a
hierarchy with high coordination
cost, will be crushed by a
networked software solution with
low coordination cost
Digital Transformation

56. Finance Healthcare Retail
Transportation Education
?
Any industry

57. Digital Masters

58. How can traditional businesses transform
into digital masters?

59. Digital Masters
What do these companies do differently?
They use digital technology as a base for everything they do and
have the leadership skills to use it

60. To become successful in digital transformation and become
„digital master“ companies need two things:
Digital
Capacity
Leadership
Capacity
Digital Masters

61. Digital technology is a tool to
get to customers, encourage
employees and transform
work processes
Digital Capacity
Digital Masters

62. Management of digital transformation
begins at the top with strong leaders
that set direction, motivate
employees, trust them and follow up
Create the vision and environment so
other can thrive
Leadership Capacity
Digital Masters

63. DigitalCapacity
Leadership Capability
Beginners
Fashionistas Digital Masters
Conservative
Digital Masters

64. DigitalCapability
Leadership Capability
Beginners
Fashionistas Digital Masters
Conservatives
Is the Company ready to become Digital?
• Many advanced digital features (e.g.
social, mobile) in silos
• No overarching vision
• Underdeveloped coordination
• Digital culture may exist in silos
• Strong overarching digital vision
• Excellent governance across silos
• Many digital initiative generating
business value in measurable way
• Strong digital culture
• Management sceptical of the
business value of advanced digital
technologies
• May be carrying out some
experiments
• Immature digital culture
• Overarching digital vision, but may be
underdeveloped
• Few advanced digital features, though
traditional digital capabilities may be mature
• Strong digital governance across silos
• Active steps to build digital skills and culture
Heimild: Digital Transformation: A Roadmap for Billion-Dollar Organisations

65. DigitalCapability
Leadership Capability
Beginners
Fashionistas Digital Masters
Conservatives
Digital Masters — Revenues
+6% +9%
-4% -10%

66. DigitalCapability
Leadership Capability
+11% +26%
-24% +9%
Beginners
Fashionistas Digital Masters
Conservatives
Digital Masters — Profit

67. Banking and finance
Healthcare payer
Insurance
Retail
9.8%REVENUE INCREASE
8.1%COST SAVINGS
8.2%REVENUE INCREASE
5.5%COST SAVINGS
11.6%REVENUE INCREASE
10%COST SAVINGS
9.6%REVENUE INCREASE
8.2%COST SAVINGS

68. Digital Transformation
Transforming a company from traditional company to a
digital company
All work processes are rethought
Software and automation take out coordination cost
Customers help themselves
Data used to make decisions

69. What does Digital mean?
In traditional companies employees do multiple of tasks
Answer the phone, print out papers, meet, create reports
and read reports etc.
In digital companies this is not needed
Customers use app or web, reports are in apps, digital
signatures and AI to process data

70. Banking

71. Can banks survive 20% drop in revenues?
Banking

72. Traditional Banking
Highly established and
structured organisations
Conservative and
secretive
Slow and expensive
Not very transparent with
endless “hidden fees”

73. Retail

74. Is retail dying…?

75. The evidence suggests its just a matter of time

76. Sales at US retail stores on Black Friday fell to
$10.4 billion this year, down from $11.6 billion in
2014
rce: ShopperTrak
uffington Post Canada

77. On-line sales are growing
Source: BI Intelligence

78. IBM said spending was
up 17.8% from Cyber
Monday 2014, and more
customers than ever
opted to browse deals
on their mobile devices

79. According to Amazon’s
holiday period stats, there
were 10 times as many
same-day deliveries this
year in comparison to two
years ago.

80. And delivery services are exploding…

81. “Retail guys are going to go out of business
and ecommerce will become the place
everyone buys. You are not going to have a
choice. We’re still pre-death of retail, and
we’re already seeing a huge wave of growth.
The best in class are going to get better and
better. We view this as a long term
opportunity.”
— Mark Andreessen

82. Retail is fundamentally implausible economic structure
You combine the fixed cost of real estate with inventory
Every retailer is put in a highly leveraged position
Few can survive a decline of 20 to 30 percent in revenues
There is fundamentally a better model

83. Music Industry

85. A) People that just steals, they will never pay
B) People that want to try before buy - if they like they pay
C) People that want something but it is not available
D) Copyright laws don’t apply anymore - its not piracy
Reasons for Piracy

87. Content Creation in the 20th Century
Image from Jyrki J.J. Kasvi

88. Image from Jyrki J.J. Kasvi
Content Creation in the 21st Century

89. Can this delivery method compete?

90. Music Subscription
Subscription to vast repository of music
Very accessible and relevant

91. In the LP/CD era, the industry was based in scarcity
model of economics
Only few artists became popstarts - professionalised
and limited
Today, consumers don’t want to pay as much as they
did for music
Add to that, the fact that anybody can be a musician
and be on Soundcloud or Spotify
World of Music

95. Monty Payton goes to War

98. YouTube Monty Python
Videos Boost
DVD Sales 23,000%

99. “Every industry that becomes digital
becomes free”
- Chris Anderson, Editor WIRED

100. Source: Free! Why $0.00 Is the Future of Business
Subsidising Products is well known
Cross-subsidy
Now, a different sort of free has emerged
The new model is based on the fact that the cost of
products themselves is falling fast
The Economy of the Free

101. The
Economy
of
the free

102. Free web software and services, some content
Free to the users of the basic version
Varying tiers of content, from free to
expensive, or a premium "pro" version
The 1% Rule - 1% of a community
does all the work
F2P in the video games industry
Freemium

103. Free content, services, software, and more
Examples
Yahoo's pay-per-pageview banners
Google's pay-per-click text ads
Amazon's pay-per-transaction "affiliate ads"
Paid inclusion in search results
Paid listing in information services
Lead generation
Advertising

105. Things that can be distributed
without an appreciable cost to
anyone
Digital reproduction and peer-to-
peer distribution, the real cost of
distributing music has truly hit
bottom
Zero Marginal Cost

106. Things that are fee, be it open source software or
user-generated content
Wikipedia
Zero-cost distribution has turned
sharing into an industry
Gift Economy

107. Traditional products exist in the economy of scarcity
When the cost of copying and distributing becomes
close to nothing, the economy shifts
You can’t sell copies – their worthless
It’s not only about money - time and respect are also
important
So is your digital footprint
Economy of Abundance

108. they’re worthless
copies
You can’t sell

109. 25
BEFORE NOW
Change in Consumer Behaviour
Videostores, DVD,
late fees, clutter
Everything, anywhere,
anytime (almost)

110. Printed books, magazines
BEFORE NOW
Change in Consumer Behaviour
Digital, automatically
delivered, interactive

111. Own, store, clutter Rent, subscribe, stream
Ownerless Lifestyle
BEFORE NOW

112. Oliver Lukket, theAudience

114. sell?
and make money?
What can you

115. Accessibility

116. Immediacy

117. Personalisation

118. Authenticity

119. Patronage

120. Interpretation

121. Embodiment

122. Findability

123. How can you
marketyour Products?

124. Traditional Marketing

125. "1984"
Traditional Production of Content

126. Traditional Production of Content

127. Benchmark:
Production budget: $900,000
Audience: ~ 50,000,000
Traditional Production of Content

128. USER
GENERATED
CONTENT

129. User Generated Production of Content

130. Benchmark:
Production budget: $0
Audience: 858.647.407
User Generated Production of Content

132. Use the medium people use
From marketing to conversation

133. The Thank You Economy: How Business Must Adapt to Social Media
Gary Vaynerchuk, Wine Library TV, 2011

135. Marketing becomes a real-time improvisation

136. Conversation in real-time

137. Conversation

138. Discoverability
Online web sites and
product reviews
Social media, Facebook,
Pinterest, Twitter etc
Youtube, Vimeo etc
Buying
Buying online
Show rooming and buying
online
Buying in-store has to be an
experience - shareable
Rating
Social media, Facebook,
Pinterest, Twitter etc
If it is not shareable, it did
not happen
Use the medium people use

139. $3,500 Taylor Guitar

140. UNITED BREAKS GUITARS

142. http://en.wikipedia.org/wiki/United_Breaks_Guitars
The YouTube video was posted on July 6, 2009
It amassed 150,000 views within one day, prompting United to
contact Carroll saying it hoped to right the wrong
13.3 million by September 2013

143. Within 4 days of the video being posted online,
United Airlines' stock price fell 10%, costing
stockholders about $180 million in value

145. Starbucks knows the Conversation

148. Conversation in real-time

149. NEXT
Rise of the machine