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5 Things Managers Should Know About The Big Data Economy

2014 February 12
by Greg Satell

At the beginning of the 20th century, most people lived as if it were the middle ages.  Almost half of the US population was employed in agriculture.  Life expectancy was less than 50 years. Indoor plumbing was rare, as was telephone use.  There were very few cars and no airplanes.

The rise of big organizations changed all that.  They enabled large concentrations of capital, which led to large scale transformations like the Interstate Highway System and the Hoover Dam. This was the environment in which modern corporations thrived.

The 21st century economy, however, will be dominated by bits and not atoms.  The change will be much larger in scope, but almost imperceptible in physical scale.  The result is that we can no longer manage our enterprises as we did in the industrial age and there is a widening gap between companies that perform in a data economy and those that don’t.

1. We Now Create Knowledge Without Expertise

The economy of atoms was a knowledge economy.  People strove to learn a trade because what you knew determined your worth.  A good mechanic, for example, could always expect to earn a living.  Armies, both military and corporate, could not run smoothly without skilled mechanics.

Today, physical capital itself is becoming intelligent.  UPS used to perform routine maintenance on its delivery trucks, whatever their condition, to avoid breakdowns on the road.  Now, however, the vehicles are equipped with sensors that monitor 200 key data points without a mechanic ever opening the hood.

But its not just blue collar tasks that are being automated.  Google flu trends uses an analysis of search terms to track outbreaks and outperforms the Center for Disease Control’s vast network of doctors.  Scanadu’s personal tricorder can monitor your vital signs and IBM’s Watson system can diagnose cancer better than a human can.

The bottom line is that many jobs that used to require a high level expertise can now be done by machines with data.  That’s scary and it’s going to require big changes in how we recruit, train and manage talent.

2. We Can Attain “Scale Without Mass”

The industrial era was driven not just by machines, but by processes.  Huge factories were like elaborately choreographed ballets, where thousands of workers coordinated with the physical plant to push out product with incredible efficiency.  In the later part of the 20th century, supply chains also became highly optimized.

However, creating efficiency isn’t the same as creating value.  Costs of retooling were high, stifling innovation and promoting rent seeking behavior.  Yet, retooling bits is far easier than retooling atoms.  Changes in data driven processes can be replicated throughout an organization instantaneously, with perfect fidelity.

As Erik Brynjolfsson and Andrew McAfee argue in a Harvard Working Paper, this allows organizations to innovate at “scale without mass.”  Their analysis suggests that more rapid innovation helps to create a “winner take all” environment, because now a valuable new idea can take off much more quickly.

But they also find that any advantage is also more transitory.  Now you truly are only as good as your last idea and your competitors can always come up with a new one that surpasses it.  The result, as Rita Gunther McGrath describes, is the end of competitive advantage.  Managers will have to learn to seek agility rather than stability.

3. Data Is The New Capital

Google makes a bundle on its search engine.  However, the company also provides a number of services seemingly unrelated to search, like Gmail, Google Docs and Google books.  To an outside observer, the company’s strategy can seem hopelessly muddled.  Yet, looks can be deceiving.

The Economist reports that Google uses those services to give its search business a leg up on would-be competitors.  When a word is misspelled in a document or e-mail, Google suggests a correction.  When the user chooses a correct spelling, that data can then be used to provide better results for typo-laden searches.

Technologists call this phenomenon data exhaust and its quickly becoming recognized as a valuable resource.  It’s one of the reasons why Amazon is happy to sell Kindles at a rock-bottom price (to better understand consumers’ reading habits) and Microsoft has created an entire marketplace for data sets.

In their book Big Data, authors Viktor Mayer-Schönberger and Kenneth Cukier argue that data is quickly becoming its own asset class and that ownership of it will become a key driver of value.  They point to entire services, such as that are wholly built on data collected for one reason that was repurposed for another.

4. Privacy Will Become A Brand Value

We are largely creatures of habit, meaning that our actions are rarely one-offs, but complexes of cues, actions and rewards.  The New York Times reports that firms are increasingly using data to correlate sets of seemingly unrelated behaviors to predict future actions.

In effect, big data allows organizations to predict our private lives by observing our very public actions.  For example, one father found out his teenage daughter was pregnant only when Target started sending her coupons for baby products.  In a similar vein, most people were startled that the NSA keeps records of normal phone calls to fight terrorism.

This is obviously a great opportunity, but also a great challenge.  Most consumers are delighted to receive offers based on previous purchases, but understandably freaked out when data is used to decipher their private lives and are positively enraged when they discover that these insights are sold on the open market as a commodity.

Obviously, people’s lives are very different than pork bellies or soybeans.  So it’s important to treat their data with respect, rather than just numbers on a screen.  With the power of big data comes the responsibility to use it wisely.  Brands that don’t will eventually be found out and there will be a price to pay.

5. The Semantic Economy

In the 20th century, business strategy was built on the edifice of two far reaching concepts:  Coase’s Nature of the Firm and Porter’s value chains.  Both assumed that scale had inherent informational advantages, which allowed you to cut costs by improving your negotiating position and increasing operational effectiveness.

However, digital technology has steadily increased permeability, not only within organizations and industries, but across them as well.  Big data is magnifying this trend and helping to create a truly semantic economy, where owning assets is not nearly as important as being able to access them.

And today, access is becoming universal.  Just about anyone can have an idea at breakfast, design it with online CAD software, produce a prototype on a 3D printer, receive financing and marketing analysis from a crowdfunding site, rent supercomputer time from Amazon, contract a manufacturer and be done by lunch without even leaving the table.

The era of big data will be one in which competitive advantage is not sustainable, but transient and value will not be something we will be able to extract, but something we will have to create.

– Greg

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