Philip Evans: How data will transform business

Philip Evans: How data will transform business


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

61 thoughts on “Philip Evans: How data will transform business

  1. The content is great for those with a business background. Perhaps the speaker overloads the audience with business jargon, but what he's basically saying is "we are now able to collect data from cross-horizontal industries to make more informed decisions. And it will change the world."

  2. I could only follow the genome part with full attention because the image and value of it was quite blatant and not something that seems directed towards upper business managers/planners.

  3. One thing, since we automatically own the copyright on our own data, can we have it back please? Or at least get paid for it? And if taking the data is payment in kind for free services like Google, can we stop calling them "free" and state clearly and in plain language that signing up to the service you're effectively giving away this stuff.

  4. Let me see if I can summarize:  Cooperation is the future because technology eliminates basic assumptions of business models.

  5. This is a fascinating talk if you are able to follow it. Unfortunate for many the auto response for unfamiliar jargon is "don't understand, must be bull shit!"

  6. I'm concerned that Evans' concluding take away point was "makes strategy interesting again", as though business were sitting around bored by the already incredibly difficult job of making money.

    I think I'd have found this talk more interesting if he'd compressed the introduction, and discussed more examples of precisely HOW businesses are supposed to interact, or for that matter how a business can dis-intermediate competitors at various points of the value chain.

    The talk was too fast, and too jargon laden for my taste.

  7. Basically, his point is that business strategy has to change because the internet offers a new environment in which business has to operate. I think that this is pretty obvious and his talk is jargony and pretty boring.

  8. This planet's every information in every living thing and non living things have to be digitized to create a future digital planet-only then when this can be accomplished can human species truly say ' data is transforming our human species.'

  9. The information age will continue to distrupt and destroy the archaic established business models of the past, just as it always has done.
    To everyone who has grown up in the information age – this is not news, it's like telling people the sky is blue. 

    Napster was 15 years ago, it's weird to have someone in our day and age giving a talk to teach people these lessons, i guess a lot of people live under rocks?

    edit: 12:55 Ah, most of these people look 40 years plus.  Ok then.

  10. He should make his talk less abstract by working out his examples a bit more and linking the abstract concepts to events that happened or will happen.

    Especially what the "transaction cost" are in businesses is something I don't understand. Wikipedia <-> Britannica is a great example but how does that translate to other businesses?

  11. In my opinion his initial assumption about transaction costs having decreased is fundamentally wrong. The abundance of data, computers and mobile devices has led to a situation where people get increasingly lost in these huge amounts of data, emails and information. Even intuitively we can comprehend this from everyday work situations: don't you feel that real (valid) communications and quick access to the necessary information has become more and more difficult within the last ten years? Managers have realized that they need to put away their "technology" and engage a lot more in face to face (not skype) communication in order to be good and effective leaders. He does make some valid point though that managers in the economy have to adapt to this new situation and include it in their decision making processes which at a large level is the business strategy. Businesses have to identify, analyze and adapt themselves to the new situation (where necessary) in order to survive in the market. Some big businesses did not do this as well as others and have thus vanished while others flourished. That does not mean that the theory of economies of scale are suddenly wrong. In concusion I think that Mr. Evans neither makes a valid point nor does he contribute to economic theory!

  12. an utter failure in communication, i am afraid. this is the hurdle that the analyst position in business, today, is about – learning to communicate. would of love to studied under Philip, certainly would have been an honor. but i've had to watch this a dozen times in order to be capable of relaying the message (often, a deliberate reaction by genius to TED time limitations). (FullDisc: involved in data). inbox me for a link to the summary or reply on here

  13. This explain why distribution corps. grow side by side with internet… and why so many industries have desappear. Like netflix VS Blockbuster

  14. This is Cryptocurrency in a nutshell… the future of networking starts with the connectivity of user's value of idea and information, Soon™. 

  15. Great talk!!! I would say the tool he says organizations are looking for points to holistic design and what it offers, in terms of developing empathy to drive emotion and experiences. On a grander scale design can also innovate supply chains by making abstract ideas into more tangible ones… Check out Tim Browns, 2009 TEDtalk to get a basic idea of what I am talking about…

  16. Brilliant. He articulated something I've been seeing for a long time now but never quite put my finger on

  17. The idea and concept is very vague as there are already on going process and modules. It's not new or rocket science. I have wasted that amount of time on complete rubbish words when it can be explained in 3 minutes. He could have simplify it down. He didn't even give solution to a problem, but rather how useful information are therefore useful for this etc etc

  18. Good speach, but a lot of statements need certain clarification/explanantion as they aren't dogma. Prima facie, nice to hear a new way of thinking, especially from BCG

  19. This speech was very unTED-like. The speech was a large amount of words with a very small amount of actual ideas and practical information conveyed to the audience. Seems like head-talk to me.

  20. I request another TEDxTalk do demystify the talk . I was overwhelmed by the circuitous speaking technique . Wasn't able to understand much of what was said .

  21. I want my 10 minutes back… TED has become such a joke… so a graph with some correlation can pass for insight….garbage….half of the people liking this video didn't get zip from it….self-congratulating posturing intellectuals with heads full of info and zero understanding….waste of time!

    P.S.A: Don't watch this crap.

  22. I believe in the first 3 minutes; Mr Evans talks about – Mr. Henderson who realised that business which scale have competitive advantages, and business can create more value by distributing the value chain and getting better at a single part of the chain?

    Is that correct?

  23. Beneath two topics Evans discusses a key element that is changing how businesses look at and form strategies to progress – DATA. We are in the land of Data. Everything we do is about collecting Data, forming strategies around that Data and making business decisions and conclusions around the Data.

  24. Увеличение шаблонов поведения, говорит о переходе бизнеса, на новые позиции, и уход из старых, а не о разнообразии. В данный момент инет бизнесс монополизируется.

  25. Excellent insights through a series of revolutions that happened throughout the human history. Lessons learned: Those companies who are stuck with an out-dated business model, need to change their business model to fit what is needed based on the changes that are happening. If they don't change, they will be left behind!! Uber, AirBnB, Amazon, Google..are some of the disruptive entities we see and amaze… This change will continue with AI and automation to compensate the labor shortage that is already happening!!

  26. The worst video ever, watched intial 3 mins 10 times, result: what the hack is he talking..science or military or business

  27. Unlike most TedTalks, this is not for a general audience. It is for executives, very educated entrepreneurs, and business scholars. For that audience, it is a brilliant talk. For everybody else, it is gobbledygook.

  28. Almost 14 minutes and there wasn't an ounce of how data can build strategy. We all know that data can help in strategizing, but I was hoping for interesting insights and methodologies, rather all he did was just restate that premise. Complete waste of time – 13 mins and 57 seconds to be exact.

  29. Учу бесплатно, каким образом легко делать каждый день до 50 долларов на свою банковскую карту. Посмотрите видео у меня кaналe

  30. My first thought was that this is a man who likes to hear himself talk, and judging from the comments I'm not the only person that thinks so.

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