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Why Atoms Are The New Bits

2014 April 13

Has digital technology really made us better off?  While there are lots of impressive gadgets, the impact on our actual well-being has been surprisingly mild.  In fact, by many measures, we’ve become worse off since personal computing took hold.

Productivity growth since 1980 has been significantly lower than the post-war period of 1947-1980.  GDP growth and income inequality show similar trends. In many ways, it seems like we had it better in the old economy of unionized manufacturing.

Yet there is some hope.  If you take a closer look, you’ll find that almost all of the gains have come from sectors that use IT extensively.   So the real problem is not that digital technology doesn’t increase productivity, but that its impact hasn’t spread far enough.  As the world of bits begins to invade the world of atoms, that will change in a big way.

The New Industrial Revolution

One of the things you hear a lot about is the decline in manufacturing.  We used to make things, so the story goes, but now we flip hamburgers and tweet in 140 characters.  Yet the truth is that even as manufacturing employment has gone down (even in China), industrial output has steadily increased.

In fact, we seem to be entering a new industrial revolution.  New methods such as computer aided design and 3D printing are transforming the way we make things while robots like Baxter are advanced enough to work alongside humans and can be trained to do new tasks in under an hour.  Lights out facilities operate without any humans at all.

The result is that manufacturing is coming back to the US.  A survey by the Boston Consulting Group found that 37% of firms with over $1 billion in sales and 48% of firms with over $10 billion in sales plan to return at least some production to the US.  With the cost of automation falling fast and quality going up, we can expect those numbers to grow.

So what will China do to compete?  Well, they’re hiring robots too.

The Digitization of Retail

One of the most salient aspects of the digital revolution is e-commerce, which grew by 400% between 1999 and 2009.  New economy brands like eBay and Amazon have become household names and rival the sales of even some of the largest retail businesses.  A recent study found that 27% of global consumers made their last purchase online.

Yet look a little closer and the story is not so clear-cut.  The US Census reports that e-commerce accounts for just 5.8% of retail sales.  So, in reality, we buy most of our stuff the way we always did—at a local store—and it works pretty much the same way it always did.  In reality, the impact of digital in retail has been fairly modest so far.

But that’s beginning to change as retailers embrace the omnichannel and are revamping everything from purchasing to distribution to the in-store experience.  A recent report by McKinsey found that data initiatives could retail increase operating margins by as much as 60% in retail, more than any other industry.

Digital commerce is cool and convenient, but soon the efficiencies of online bits will pervade the brick and mortar world of atoms too.

A New Age of Medicine

Another area where digital technology is just beginning to have an impact is medicine.  Healthcare makes up almost 10% of the GDP of most advanced countries and nearly twice as much in the US.  So even a small improvement in efficiency will have a major impact.

One area where digital technology has played a leading role is genomic medicine, where new algorithmic techniques have lowered the cost of sequencing a genome at an exponential pace.  True gene therapies are still a long way off, but the field of pharmacogenetics is already making current approaches far more effective by catering treatments to body chemistry.

Another area of great promise is electronic health records, which Intermountain is using to produce better outcomes at lower cost.  MD Anderson has also teamed up with IBM’s Watson to help propel the most advanced cancer treatments even further.

Much like retail, we’ve barely scratched the surface in healthcare.  As digital technology takes hold, we can bend the cost curve and reap enormous economic benefits.

Energy By Algorithm

Energy makes up about 8% of US GDP and 10% of global GDP.  Historically, we’ve dug most of our energy out of the ground, meaning that efficiencies were hard to find, which is why for last century fossil fuels have been a major source of tension in world affairs.

Yet here too information technology is beginning to take hold as we learn to use algorithms to produce energy, by utilizing nanotechnology and computer-aided manufacturing techniques to build better solar and wind technology.  The price of solar is falling 20% for every doubling of manufacturing capacity and will be cheaper than coal after 2020.

Even liquid fuels are being reimagined.  Craig Venter, who pioneered many of the computer driven techniques that decoded the human genome, is working to make genetically engineered algae that can produce oil based fuel.  There are many other efforts underway as well.  By 2022, algae based fuels will replace 17% of US oil imports.

And the energy we get from algorithms has a lot of advantages over energy we dig out of the ground.  It doesn’t get depleted, but follows the law of accelerating returns, meaning it gets cheaper all the time.  Perhaps even more importantly, it depends on innovation rather than geography, so favors political and economic stability.

Rewiring The Software In Our Organizations

For the first 20 years or so, electricity was a dud.  It brought some convenience, but didn’t have a big impact because hooking up a factory designed for steam didn’t really do much good.  It was cleaner and quieter, but beyond that the advantages were relatively meager.

It wasn’t until a new generation of managers took over that things really started to get going.  Rather than organize operations around the power source, which was how you had to do it in the age of steam, they designed factories for workflow and productivity surged.

It doesn’t take much imagination to see that we’re at a similar point now.  Today’s enterprises were designed for a world of scarcity.  Barriers to entry, long and expensive retooling processes and limited access to resources drove strategy.  But now, low barriers to entry and permeability between industries favor speed and agility over size and scale.

The result is that we need to change the software in our organizations to adapt to a world where the concrete world of atoms is increasingly driven by the abstract world of digital bits.  Just like electricity necessitated a shift in how factories were laid out, the new age of algorithms requires a new, more networked organization.

Ironically, as automation takes over, the most valuable resource is human capital.  As Jaron Lanier put it, “in a virtual world of infinite abundance, only creativity could ever be in short supply.”

– Greg

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