WIRED FOR INNOVATION HOW IT IS TRANSFORMING COMPETITION

Transcription

1 WIRED FOR INNOVATION HOW IT IS TRANSFORMING COMPETITION Erik Brynjolfsson MIT Sloan School and MIT Center for Digital Business Copyright Erik Brynjolfsson. Reproduction prohibited Generous support for this research was provided by the National Science Foundation and the MIT Center for Digital Business.

2 Copyright (c) Erik Brynjolfsson 2

3 The Great Recession The Great Restructuring

4 IT and Productivity: The Data Speak Productivity (relative to industry average) IT Stock (relative to industry average) Copyright (c) Erik Brynjolfsson Source: Brynjolfsson and Hitt

5 Intra-Quartile Range Corporate Performance Spread 60 Performance Spread: Gross Profit Margin 50 High IT Industries Low IT Industries 10 0 Copyright (c) Erik Brynjolfsson 5

6 Digital Advantage survey overview 330 companies interviewed by team at MIT Respondents by category Percent Respondents by revenue group Count Manufacturing * * * * * Wholesale Trade Finance and Health Care and Insurance Social Assistance Transportation and Warehousing Utilities & Natural Resources * * * * * * SOURCE: Digital Advantage Survey 6

7 Research Questions 1. Do more data-driven decision-making practices make firms more productive? 2. Do more data-driven decision-making firms outcompete their rivals in profitability and market valuation? 7

8 Data Driven Decision-makers are Winning Greater Performance: 4% higher productivity and top line sales Source: Brynjolfsson and Kim (2011a) Competitive Advantage: 6% greater profitability, and higher total market value Source: Brynjolfsson and Kim (2011b) Copyright (c) Erik Brynjolfsson 8

9 IT Enables Four Drivers of Innovation Measure Experiment Share Replicate 9

10 Measure 10

11 New Tools Beget Revolutions

12 Nanodata and Now-casting Clickstream/Page views/web transactions Mobile phone/gps/location data messages RFID Web links/blog references/ssrn/facebook ERP/CRM/SCM transactions Real-time machinery diagnostics/engines/equipment Google/Bing/Yahoo Searches Bar code scanner data Stock market transactions Twitter feeds Wikipedia updates Etc. Copyright (c) Erik Brynjolfsson 12

13 The Internet of Things By 2015 there will be 1 trillion sensors linking the physical and digital worlds merging to become an Internet of Things Copyright (c) Erik Brynjolfsson 13

14 Data vs. HiPPOs Truck Routing Wine Chemistry Housing Sales 14

15 AL AR CT FL ID IA LA MA MS NE NJ NC OK RI TN VA WV Home Sales predicted Predicted Home vs Actual Sales Home 2009Q3 Sales predicted Predicted Actual In the September, 2009 draft of NBER paper (submitted for workshop), we used our model to estimate sales in Q We predicted the average home sales for the entire nation would increase by 6.4% The National Association of Realtors predicted an 8.1% increase. On Nov. 24, 2009, the housing sales for Q3 were announced as increasing 6.1%. Nanodata produced a 66% improvement over the baseline model 15

16 Experiment Copyright (c) Erik Brynjolfsson 16

17 Copyright (c) Erik Brynjolfsson 17

18 Results Experimentation at Harrah s Gary Loveman Zero executive experience Zero background in Casinos But, an MIT PhD who knows how to make numbers talk Transformed Harrah s from second tier to number one gaming company in the world Completed a $30.7 Billion LBO Introduced a culture of pervasive field experimentation There are two ways to get fired from Harrah s We have come out on top in the casino wars by mining our customer data deeply, running marketing experiments and using the results to develop and implement finely tuned marketing and services strategies that keep our customers coming back. Copyright (c) Erik Brynjolfsson -- Gary Loveman, CEO, Harrah s 18

19 Share 19

20 Cisco s Mac Wiki - Over 10,000 Macintosh users at Cisco, but no central IS support - A few users established a wiki, where users could post tips, tricks, files, links and other content - Example: tip for using the Linux printers which were ubiquitous at Cisco - Many users all over world got up to speed entirely via Mac Wiki - Thousands of small ideas from hundreds of users Copyright (c) Erik Brynjolfsson 20

21 Replicate Copyright (c) Erik Brynjolfsson 21

22 What Does IT Do? 1. Replicate Bits Copyright (c) Erik Brynjolfsson 22

23 Copyright (c) Erik Brynjolfsson 23

24 What Does IT Do? 1. Replicate Bits 2. Replicate Processes Copyright (c) Erik Brynjolfsson 24

25 Case Study: CVS Basic script fulfillment process: 1 hour before pick-up 1 st step = drug utilization review (DUR) 2 nd step = insurance check Drop -off Data Entry Production Quality Assurance Pick -up Drop -off Dr. call I N V E N T O R Y Data entry or RPh Production R P h C o n s u l t a r e a S h e l v e s P i -u c p k Q u a l i t y A s s u r a n c e Standard script path 27% of scripts encountered a problem 16% of customers disappointed at pick-up INVENTORY Copyright (c) Erik Brynjolfsson 25

26 CVS: Scale without Mass New fulfillment process: Drop-off Data Entry Insurance check Production DUR QA Pick-up While customer is present Short-term results: customer satisfaction scores Wait time satisfaction: Overall pharmacy satisfaction: New process embedded in Enterprise IT (EIT) 100% compliance Rapid roll-out to over 4000 retail pharmacies Copyright (c) Erik Brynjolfsson 26

27 IT Reduces the Costs of Measurement, Experimentation and Replication Copyright (c) Erik Brynjolfsson 27

28 Synergies Amplify The Benefits Replicate Experiment Share Measure A new kind of R&D 28

29 Three Implications for Executives 1. Recognize the heightened value of innovation Adjust recruiting, retention and incentives systems Innovations can be big or small` Change the culture: From analyze and plan to experiment and replicate 2. Invest in technologies and platforms that collect, aggregate, codify, share and/or propagate data and innovations - ERP/SCM/CRM etc. - BI, Cloud computing, Enterprise-strength Web 2.0 and Social networking 3. Apply the four step process Experiment, Measure, Share and Replicate 29

30 To learn more about my research, please visit my website:

31 Concentration is Increasing Low IT Industries Medium IT Industries High IT Industries Copyright (c) Erik Brynjolfsson 31

32 Sales Turbulence Has Also Increased High IT-using Industries Medium IT-using Industries Low IT-using Industries Copyright (c) Erik Brynjolfsson 32

33 The Information Gold Mine Digital Information is Doubling Every 1.2 years Over 5 Exabytes every two days; more than in all history through 2003 The size of the largest data warehouses is tripling every two years Exceeds processor growth predicted by Moore s law 33

34 Other Examples Google Page rank algorithm 2008 is very different from 1999 algorithm Advertising auctions are continuously fine tuned Even HR are you a record-holder in something? Netflix How do YOU pick your next movie? Tesco From #2 to #1 VA Hospitals Evidence based medicine Capital One Credit card offers tests Call Center Employee incentives and customer service Schools in Africa Poverty Action Lab: Digital cameras reduce teacher absenteeism Field Experiments with rapid feedback = R&D Copyright (c) Erik Brynjolfsson 34

35 Four Steps to the Future of Business 1. Design and field numerous experiments 2. Measure results in great detail 3. Share findings and identify winners 4. Rapidly and cheaply replicate winners Digital Darwinism: Accelerating Discovery and Competition 35