29 June 2016

Software is eating your lunch

By Dr Loke Kar Seng

Polaroid was founded in 1937. It invented the business for instant photographs and held the monopoly for decades. In the 1990s, Polaroid was a top seller of digital cameras. However in 2001, they filed for bankruptcy. Kodak had an earlier and equally illustrious history, having been founded in 1888. In fact, it also developed the first digital camera in 1975 but that did not stop Kodak from filing for bankruptcy in 2012. In its heyday, Kodak commanded 85 per cent of film and camera sales in the US. But what happened? Both companies were not unaware of the impending digitalization of the world, but they failed to correctly judge the swiftness of the digital adoption and consequently failed to re-orient themselves in time. Right up to the 1990s, the number of all photos, about 57 billion, was print. But in 2011 only four billion out of 380 billion of all photos taken were print, a mere one per cent of all total photos taken. They were decimated by the digital disruption.

The world’s largest vehicle-for-hire, i.e. taxi, company does not own any vehicles. Uber, founded in 2009, has been valued at US$66 billion in 2016. It owns no factories or physical inventory yet its valuation is greater than Honda or Nissan. Its business is based on its software, matching drivers and passengers in real-time. Airbnb, a shared-accommodation company, is valued at US$25.5 billion. Again, it owns no properties; its business model is its software. It is worth more than hotel giants Marriott (US$21 billion), Starwood (US$14 billion), and Wyndham (US$10 billion). The world’s largest bookseller, Amazon, owns no retail stores. It has a market capitalization of US$338 billion. Borders Group, one of the largest book retailers, had 511 superstores in the US but filed for bankruptcy in 2011. Coursera and Udacity provide online courses that range from free to US$99 without any physical campuses. Coursera is valued at US$500 million while Udacity is valued at US$1 billion. Is there a trend forming?

In 2011, Marc Andreessen, co-founder of Netscape and co-creator of the first widely used web browser, wrote that software is eating the world. What he meant is that more and more businesses are being run on software and as online services, including a whole swath of industries as diverse as movies to agriculture to national defence. Not only is it still true today, the pace is accelerating. He foresees that many industries will be disrupted by software because all of the technology required to transform industries through software finally works. That is because software is eating into the value chain of most industries. Parts that were thought to be physical can now be replaced by software, or requires software to manage. It is no longer possible for industries to remain in the old ways of physical inventory, distribution and marketing. Companies need to invert their thinking. A shipping company like FedEx is not a forwarding company but a software network of hubs and planes. Airasia, the world’s best low
cost airline, have declared itself to be an internet company. It just so happens that they own planes.

Are the companies and their workforce being readied? Accenture wrote that in 2020 the digital economy will be 25 per cent of the global economy valued at US$24 trillion. Countries must prioritize digital investments and create the right environment for digital transformations. The workforce must be ready and proactive in acquiring digital skills and toolsets. Accenture Strategy research indicates the workforce is sanguine about job prospects in the digital business, with 71 per cent of them actively learning new digital skills. Udacity founder and former Stanford professor Sebastion Thrun has said, “Demand for employees with IT skills and digital expertise is on the rise at companies around the world.”

Deloitte wrote in its seminal report warning the Australian economy would experience significant digital disruption in the next five years. CA Technologies have released a report stating that digital transformation is no longer an option but an imperative. A survey by the company of 200 senior business and technology executives show that for companies to gain competitive advantage they must transform themselves into software-driven enterprises. They will all have impact of competitive strategy, financial performance, internal operations, time to market and development of products and services including interaction with and marketing to customers. It added that digital disruptors in Asia Pacific are 4.3 times more likely to recognise the importance of being software driven business. Companies must be software-driven to survive, and it must do so with urgency.

The signs are clear. For companies with ambition to surpass the decade they must innovate by leveraging on the power of software to complete their digital transformation. These digital disruptors must understand the multiplicative power of software and use it to drive its core business. For traditional companies making this transformation to a software company it is a massive undertaking, and it requires the competent and skilful workforce with relevant software and digital skillsets. No one should expect it to be easy. But that is the stuff of revolution. In the beginning it is impossible, in the end, it is inevitable. The only question is, will you be part of it?

Dr Loke Kar Seng is a senior lecturer with the Faculty of Engineering, Computing and Science at Swinburne University of Technology Sarawak Campus. He is contactable at ksloke@swinburne.edu.my