The Internet economy has been growing since the 1990s with the proliferation of the Internet. Over the past decade, the emergence of smartphones has created an environment where people are connected to the Internet anytime, anywhere, fueling the Internet economy’s exponential growth with economic activities shifting significantly toward digital. The winners of the initial shift are the iconic GAFA (Google, Amazon, Facebook, and Apple). The digital revolution has, however, already entered its next revolution—the fully-fledged integration of the real and the digital. Consequently, companies are facing major strategy shifts. In this article, we consider how to tackle this major digital transformation.
Digital Transformation (DX) is the preliminary theatre before the main battle
The first theatre of the digital revolution was the transformation of supply chains and business models, with digital as the main battlefield. It was not a change from analog records to CDs, but a change from CDs (things) to digitally downloadable distribution. Digitally native companies emerged, including businesses trading exclusively over the Internet, offering digital content distribution and social games. The main battleground of the second act is Real x Digital. Feasibly, no industry will remain unaffected, including primary industries such as agriculture and fishery, as well as manufacturing and energy industries, medical and healthcare, and all kinds of trading services including food and shopping. In addition to digital and Internet technologies, technologies such as AI, robotics, blockchain, genome editing, and even quantum computers are evolving faster than ever before. We have entered an era where advanced technologies are deeply connected to real industries.
Going forward, 5th generation mobile communication system (5G) services will continue to grow with the steady evolution of the communication environment. High-speed, high-capacity communications enable virtual reality (VR) and augmented reality (AR) to enable enhanced experiences in conjunction with real-world contexts. The low latency of 5G will make telemedicine easier to perform. Over the past year, the threat of COVID-19 has accelerated this move to online services. Novel online healthcare, medication, and education, among others, are all advancing at a rapid pace and impacting our lives.
The second theatre of the digital revolution—from the perspective of traditional companies in real industries—is digital transformation (DX). The digitalization of real industries will be conducted by collecting and preparing information on facilities and stores. The key here is to collect voluminous data—using installed sensors or devices—analyze it and take appropriate actions from the resultant highly accurate predictions to optimize processes through automation. This is where AI comes to the fore. Companies can realize cost savings by reviewing their entire process and reduce risks by detecting and predicting abnormalities. Moreover, AI leads to increased sales by discovering novel information.
DX has become a prerequisite for the survival of companies, going beyond being a mere requirement—it is now imperative to break out from the preliminary theatre into the novel era of Real x Digital to reach the main battleground. Competitors in this war are not only traditional rivals—digitally native companies, led by GAFA, will also be powerful rivals.
The second theatre of the digital revolution—from the perspective of digitally native companies— is entry into the real world. Digitally native companies will expand beyond software to include hardware, thus enabling their entry into the market with a set of services. They are powerful because they utilize digital technologies to develop cutting-edge AI. Major investments have already been made to accelerate technological development, including AI speakers (such as Google Home and Amazon Echo), wearable devices (such as the Apple Watch), Amazon’s drone delivery, and Google’s self-driving cars. In this situation, the type of value that can be provided to users, and the content of the main battle will be the key to success.
Toyota Motor Corporation, one of Japan’s leading manufacturing companies, has launched a software-first initiative. Toyota’s rivals are now Google (parent company Alphabet) in both automated driving and smart cities, and companies like Tesla in electronic vehicles (EVs). Software-first means that the product concept, development process, and life cycle will be reviewed from the ground up, with a focus on software. This is valid for all hardware products, not just automobiles.
For companies in traditional industries, competing in the second theatre of the digital revolution, requires more than the DX of conventional products and services, by extending this to novel product and business developments through software-first. Developing hardware is very time-consuming, whereas the pace of software evolution is rapid. Thus, the key to the software-first approach is managing this gap with maximum software flexibility, and by placing software at the center of design the following becomes possible:
• Accelerate product development through software simulation
• Software updates to add or improve functionality
• Software personalization for each user
• Data collection from devices
This replicates what has been done with PCs and smartphones in the first theatre of the digital revolution. Tesla has commercialized EVs designed around software, frequently upgrading the software and releasing it to EVs already sold. It is difficult for a company that has been in the manufacturing business to do this. At the design stage, it is necessary to shift from a traditional hardware-centric way of thinking by separating hardware and software and implementing modularization.
Hardware products will become platforms through the power of software, allowing new applications and services to be added. Companies in the manufacturing industry can break away from the mere business of selling products and realize a stock-based business by continuously providing new experiences and value to users. It is also possible to develop other businesses by applying the data collected from devices. To take advantage of Japan’s manufacturing strengths, a software-first mindset will be essential in the future.
Open strategy to drive innovation
Companies, such as GAFA, which have a huge user base for their online services, are in a perfect position to store big data and apply AI. They have the means to directly monetize the results of AI, through matching advertisements, product and recommendations. They don’t have to lock in the AI technology. Whether someone imitates the AI model or algorithm is not be a problem for their businesses; rather, there is merit in opening up AI technology and involving talented engineers and researchers globally to drive further enhancements. This is the beginning of a battle of strategies to determine what to open up and where to place the value of the company.
Many open technologies are evolving daily on a global scale, ranging from cutting-edge AI technologies and robotic operating systems to automated driving software and genome editing. As the range of required technologies has expanded, it has even become more difficult for large companies to achieve significant results on their own; they are increasingly considering the greater benefits of opening- up and gathering many people together to speed up the development of technologies rather than guarding them within their own companies. This is open technology. As the evolution of open technology continues to accelerate, it becomes necessary to adopt an open strategy and combine it with the strengths of the company.
Open strategies are not limited to technology. There are strategies to open up the data that companies possess as a means to collect ideas for creating new businesses or to connect seemingly disparate businesses. By collecting and linking many pieces of data, the whole can be optimized. Data-driven collaboration is important in the fields of medicine and healthcare where costs are increasing due to an aging society. The risks posed by diseases can be predicted and actions taken quickly. It is often more beneficial for companies to open up their data instead of guarding it—this results in a larger market and is the business strategy for the new era.
In this Internet age, you can’t compete with a single, isolated product. Providing more convenient value by connecting to the Internet, linking to smartphones, and working with other products of the company and products of other companies are the reasons driving users’ choices. Thus, when developing products and services, it has become imperative to collaborate with other companies to create large, scalable solutions.
Going forward, the target of innovation will extend beyond the framework of single products or solutions to large social systems. For example, the mandatory elements for realizing smart cities—such as optimizing energy, eliminating traffic congestion, improving the efficiency of delivery, building infrastructure for automated driving, and air traffic control systems for drones—can only be achieved through the cooperation of many companies. However, an open stance is a prerequisite for cooperation. It is necessary to switch from the mindset of self-reliance, and before competing, we need to think about the future from the perspective of improving society.
[Tomihisa Kamada: President of TomyK / Co-founder of ACCESS Corporation / Entrepreneur / Investor].
PhD. in Information Science from the Graduate School of Science at the University of Tokyo. Doctor of Science. Founded ACCESS, a software venture company, while still a student. In 2001, ACCESS was listed on the Tokyo Stock Exchange’s Mothers section (currently within the First Section) and expanded its business globally. In 2011, Kamada retired from the company and founded TomyK, a firm providing support to startups, and is currently launching a number of technology startups in the areas of robotics, AI, human augmentation, space, genomics, and medicine. Kamada is the author of the book “Technology Startups Create the Future: Aiming to Become a Tech Entrepreneur” (University of Tokyo Press), which explicates the entrepreneurial mindset.