The big problem with companies slow to adopt new technologies

In my recent interview with Google Chief Economist Hal Varian, we discussed the productivity paradox. This is the idea that we seem to be witnessing all sorts of marvelous tech advances — such as the ability to find all manner of information via a bit of glass in our pockets — yet the official productivity numbers are terrible.

One factor at play might be the difficulty that traditional measures have in dealing with the digital economy, something Varian has written a lot about. (Me, too.) But Varian also believes the supposed paradox reflects the gap between companies who have successfully adopted new technologies and those who haven’t. Varian:

A good place to look is to look at the leaders and laggards. If you look at the leading companies that are doing the best, that are the most advanced at using these new technologies, they’re doing pretty well in terms of productivity, where we think of output per worker, output per hour worked. But then there are still a lot of laggards who aren’t really adopting the new technologies and aren’t as productive as the leading firms in their industry. And there, I think, what we rely on or we hope for is diffusion of this knowledge through the different indices, and we need to take advantage of the potential productivity gains that are there.

The data seem to give some support to this view (see the stats highlighted in a recent Bank of England analysis). And the recent paper “Artificial Intelligence and the Modern Productivity Paradox: A Clash of Expectations and Statistics” by Erik Brynjolfsson, Daniel Rock, and Chad Syverson also addresses the diffusion issue: “The most impressive capabilities of AI, particularly those based on machine learning, have not yet diffused widely.”

The good news here is that we might have an innovation distribution problem rather than an innovation generation problem. The former problem would seem easier to solve. Well, not that easy, as a new McKinsey report indicates (at least regarding artificial intelligence): “AI’s challenges and limitations are creating a ‘moving target’ problem for leaders: It is hard to reach a leading edge that’s always advancing . . . there’s a yawning divide between leaders and laggards in the application of AI both across and within sectors.” Indeed, as this chart indicates, the leaders in AI adoption also intend to invest more in AI in coming years.

For more on this topic, I would highly recommend checking out my Q&A with Andrew McAfee about his new book, co-authored with Brynjolfsson, “Machine, Platform, Crowd: Harnessing Our Digital Future.” Here is a relevant exchange from our chat:

So, this is a book meant to enlighten and make aware big incumbent companies of these changes. But can they adapt to them? I mean, hasn’t the story been that the big companies are just unable to be nimble enough, to change their corporate culture, to adapt to these new technologies? Do you have any confidence that even if a CEO reads your book and takes it to heart that they’ll be able to adapt?

Incumbent organizations, over and over again, miss disruptive change. And they find their margins eroding, they find their customers going elsewhere. They kind of sit around and go “what the heck happened here.”

The grounds for optimism that I have are essentially that smart organizations are aware of that phenomenon. And because of the work of Clay Christensen and a lot of other people, I think that executives and companies today are more keenly aware of the possibility of disruption, and they are watching it happen in front them in lots of different industries. So, they do have awareness, and they have got fire in their bellies.

The huge open question is even with that awareness at the top, which I think is a necessary but not a sufficient condition, can big successful incumbent companies change themselves? Like you point out, these are large organizations, they’ve got their norms, they’ve got their culture; they are hard to change. And the image that people use, which I really like, is of a tugboat trying to change the direction of an ocean liner. I don’t know how quickly some of these ocean liners are going to be able to turn, and it’s not like the disruptors are giving them a lot of slack.

And so, we’ve got a really interesting competitive battleground going forward in industry after industry. Both the industries that you and I would already know about — everything from music to journalism — to groceries now, to giving rides across town in a car. This disruption of the technology surge are manifesting themselves in pretty weird corners of the business world. Ones that I would have expected, and ones that have caught a lot of people by surprise.

Is there a classic recent example of a company making this adjustment to the new digital economy? Like an older company, at least at this point, that seems to be getting it right?

One of my favorite recent examples — and this is the stuff that Clay Christensen did for his dissertation when he looked at companies in one specific industry — is the disk drive industry. He noticed that the leaders kept on missing the transitions from one kind of disk drive to another. He found a couple of exceptions to that rule, and if I am remembering right, the only thing that he could identify that they were doing differently was that their leaders were aware they were appropriately frightened about missing out and they pulled their organization into a new direction.

Let me give you a couple of examples where we have seen things like this playing out more recently. I am a big fan of Gary Loveman as a CEO of Harrah’s. Now that company recently had some trouble because of the Great Recession and because of big changes in the gaming industry. But for a long time before that, Gary came in and looked around at this kind of old-fashioned company in an old-fashioned industry, where you have got high-rollers and pit bosses and comping meals and stuff like that, and he said “No, what this actually is is an analytical engine, and we are getting huge amounts of data about the activities and preferences of all these people who walk into our door. Why are we not using that to give them very customized offers, to treat them with a great personalization, to segregate our customers to do kind of marketing 101, to segment your customers and treat them differently and try to get them to upgrade to the next level?” And so, he turned this company into an analytically-driven organization.

I think it’s a great example of, at least for a period of time, a successful transition to a more digital, more data-heavy future. More recently, I’m impressed by how one of the stalwarts of the industrial age, General Electric, is at least aware of the opportunities and the challenges facing that really successful organization. And I know what the leadership of the company has been doing a bit; they are enthusiastic and keenly aware. It remains to be seen how they are going to do against competitors, both old and new, in the different areas where they do business.