Chapter 1

How to Survive an Industrial Revolution

“I hate shopping!” I muttered to myself as I stood gazing with horror at the shuttered Macy’s store in downtown Cincinnati, my hometown. To be clear, I dislike shopping even at the best of times. However, this event was a thousand times worse. Perhaps you recall Indiana Jones’s expression in Raiders of the Lost Ark when he throws his torch into the Well of Souls in anticipation of climbing down, only to find that the floor is moving because it is covered with thousands of snakes. “Snakes,” he says. “Why’d it have to be snakes?” I suspect my face wore that exact same stricken expression that day. In the movie, Sallah, Indiana’s sidekick, adds unhelpfully, “Asps. Very dangerous. You go first.” That’s usually my approach to shopping when I nudge my wife forward, who equally dislikes the chore.

I couldn’t use the “I’m right behind you” approach that day. I was on a mission to buy her a gift for a major anniversary, which was on that day. For a change I had the whole gift-buying stuff under control, or so I thought. We had come across the gift I had in mind during a previous expedition to the downtown Cincinnati Macy’s. I knew she liked it. To make matters worse, I had even dropped some hints that this would be the anniversary gift. Today was D-day, and I had planned to pick it up on my way home.

Except that when I reached the store, it was closed. As in, closed forever. I faintly recalled the announcement a few months earlier that the Cincinnati downtown location would be among the hundred-plus stores Macy’s planned to shut down in the US. Now, hoping that other retailers would have the gift I needed, I frantically searched online. It was available, except that in today’s omnichannel world, it was not stocked in the physical stores. I would have to order it online and then visit the store to pick it up, but not for five business days. “Guaranteed on-time delivery” the website promised. As if that helped me with my last-minute shopping!

As I drove home with the printout of the order representing the anniversary gift, I pondered the irony of the “retail apocalypse,”¹ a term coined by the media to describe the mass closing of brick-and-mortar retail stores in North America, coming back to bite one of the few people who had hitherto been totally indifferent to it.

Retail Apocalypse: A Symptom of the Fourth Industrial Revolution

The real estate firm Cushman & Wakefield has estimated that twelve thousand retail stores will have closed in 2018 in the US, up from nine thousand in 2017. That includes several iconic chains that filed for bankruptcy, including Sears, Mattress Factory, Brookstone, Rockport, Southeastern Grocers, Nine West, and Bon-Ton in 2018.² That’s on top of names such as Toys “R” Us, Payless ShoeSource, hhgregg, the Limited, Aéropostale, Sports Authority, and Radio Shack in the previous two years. The retail sector continues to be among the top of the list of bankruptcies in the US along with the energy sector. Investopedia has called 2018 the year of retail bankruptcies.³

The retail sector is one of several industries being disrupted in the US and around the world. As we all know, media, telecom, hospitality, automotive, financial, health care, consumer products, education, manufacturing, and logistics are being affected, and they are not the only ones either. Zoom out further and you see a broader trend altering how we live, work, and communicate. That’s the Fourth Industrial Revolution.

The Fourth Industrial Revolution has digital technology transforming and fusing together the physical, biological, chemical, and information worlds. It’s a force for massive new opportunity in every area valued by society—everything from convenience (e.g., online shopping) and improved health (e.g., biotech) to personal security (e.g., digital homes), food security (e.g., agrotech), and so on. Digital technology frees workers from tedious tasks, allowing them the opportunity to migrate to higher value-added responsibilities. As with any new powerful technology, there is indeed the potential for destructive applications (e.g., weaponry, designer babies, loss of privacy, playing to humanity’s worst impulses on social media). To what degree the good prevails over the bad is up to us, and it is currently unknown. However, one thing is guaranteed: it will bring about dramatic change. As with the prior three industrial revolutions, individuals and societies will be affected significantly, and companies will either transform or die. That’s where this book comes in.

How to Thrive in an Industrial Revolution

This book is about understanding why digital transformations fail as a means to a more important end, which is how to thrive in an industrial revolution. It builds upon five major foundations to do this:

  Companies either transform or die in industrial revolutions.

  Digital transformation is our current generation’s attempt to transform in the face of the Fourth Industrial Revolution.

  As many as 70 percent of all digital transformations fail.

  The surprising answer to why digital transformations fail is a lack of discipline in defining and executing the right steps for digital transformations to take off and stay ahead.

  It is possible to apply the proven checklist methodology from the airline and medical fields to improve the 70 percent failure rate.

The battle to thrive in the Fourth Industrial Revolution isn’t going to be easy, but it is possible. We can certainly do much better than the current 70 percent failure rate,⁴,⁵ as I have learned from my Procter & Gamble experience. The goal is worth it. At stake is not just the existential threat to individual companies and their employees but the power to shape products, influence employee and consumer self-worth, uplift societies, and leave the world in a much better place than when we started. To get going, let’s elaborate on the foundations mentioned above.

Industry Turbulence Happens during All Industrial Revolutions

The current turbulence in retail and other industries is a classic trend during an industrial revolution. It has happened in prior industrial revolutions, although the technology drivers of change were different. Companies die during industrial revolutions. Obviously, they don’t die without a fight. Their demise often occurs despite the best efforts of reputable, visionary, and innovative leaders to transform their companies. This has been true of prior industrial revolutions as well, as we will see later in this chapter. A few are successful, but unfortunately most are not.

70 Percent of All Digital Transformations Fail

As mentioned earlier, digital transformation is the modern-day fight to survive the existential threat of digital disruption caused by the Fourth Industrial Revolution. Half the companies on the Fortune 500 list will turn over in the next decade. The disruption is here, it’s massive, and it’s urgent. Per Credit Suisse,⁶ the average life span of an S&P 500 company today is twenty years, down from sixty years in the 1950s, and falling fast. Entrepreneurs, boards, executives, and public organizations are actively consumed by this issue. However, the sad truth is that 70 percent of all digital transformations still fail today. Some have put that number as high as 84 percent.⁷ That’s a shocking number, given the extremely high stakes. We must do better!

Why Language Gets in the Way of Successful Digital Transformation

This explosive mix of a highly disruptive era and low transformation success rates in today’s world is fascinating. Part of the issue is terminology. Most people don’t realize that digital disruption is the Fourth Industrial Revolution. The term “digital” is very broad. We wore digital watches in the 1970s, and we have had digital telephones and thermometers for a few decades. Isn’t digital transformation old news?

To bring stronger definition to the term “digital transformation,” we need to frame it in the context of the broader change affecting our lives via the concept of industrial revolutions.

  First Industrial Revolution: The evolution of society in the eighteenth and nineteenth centuries from mostly agrarian to industrial and urban, which was mostly driven by mechanical innovations such as the steam engine.

  Second Industrial Revolution: The explosive growth of industries from the late 1800s to the First World War. This was driven by mass-production techniques, electric power, and the internal combustion engine.

  Third Industrial Revolution: The widespread change beginning in the 1980s with PCs and the internet, due to new electronic technologies.

  Fourth Industrial Revolution: The melding of the physical, digital, and biological worlds today. The major driver is the availability of massive computing capacity at negligible and further plummeting costs. Thus, what used to be physical (e.g., retail stores) can be digital (e.g., online shopping), or what used to be purely biological (e.g., traditional medicine) can be biotech (e.g., personalized genetic medication).

Within this context, the terms “digital disruption” and “digital transformation” become easy to define.

  Digital disruption: The effect of the Fourth Industrial Revolution in the corporate and public sector landscapes. Increasingly pervasive and inexpensive digital technology is causing widespread industrial, economic, and social change. This explosive change has occurred only in the past decade or two.

  Digital transformation: The migration of enterprises and societies from the Third to the Fourth Industrial Revolution era. For companies, this means having digital technology become the backbone of new products and services, new ways of operation, and new business models.

Armed with this definition of digital transformation, we can now go back to previous industrial revolutions for lessons on why transformations fail in general.

The Inability of the John Stephenson Company to Take Off on Its Transformation

The venerable John Stephenson Company was a leading player in the carriage industry that died in the Second Industrial Revolution. It wasn’t alone; very few carriage companies survived that era. The metamorphosis of the transportation industry from carriages to automobiles is one of the best-documented case studies of the Second Industrial Revolution and therefore serves up several fascinating insights.

The horse and carriage industry wasn’t just the personal transportation sector in the 1800s; it was the underpinning of industrial transportation (i.e., goods), information communication (e.g., moving newspapers and mail), and ancillary industries (e.g., horse feed). In 1880, Brooklyn and Manhattan alone had 249 carriage makers.⁸ Its disruption would be a major event.

In the 1890s, Times Square in New York was the place for carriage sale and repair. Blacksmiths vied for your attention, right next to carriage stores. In 1914 there were an estimated 4,600 carriage companies in the United States. In the next eleven years, that number had plunged to only 150!⁹ Unfortunately, the John Stephenson Company wasn’t among the survivors.

John G. Stephenson had started his business in 1831. Over the next several decades, his business rapidly expanded to make carriages, omnibuses (multiseated carriage buses drawn by horses), wagons, streetcars (carriages run on rail lines), and even gun carriages and pontoons during the Civil War. His carriages were sold in the UK, Mexico, Cuba, South America, Europe, Eastern Russia, Japan, and the East Indies. As with any enterprise, the John Stephenson Company’s business ebbed and flowed with the economy, but under Stephenson’s determined leadership it maintained a stronghold in the carriage market—that is, until the end of the century, when the transportation industry itself entered a turbulent era during the Second Industrial Revolution. The company went into voluntary bankruptcy. It was acquired in 1904 by the J. G. Brill Company of Philadelphia. That didn’t last either. Finally, in August of 1919, the Stephenson plant was sold and the company liquidated.

There are several lessons served up by the efforts of companies like the John Stephenson Company to stave off disruption during an industrial revolution. Their demise may have been caused by a different technology (i.e., piston engines, not digital), but failed transformations during any industrial revolution have several things in common.

For instance, the death of the John Stephenson Company helps us distinguish between successful innovators within current business models, and transformations to new models during industrial revolutions. Stephenson was very innovative within the carriage industry. He built the first streetcar that ran on rails in the US. There are at least eighteen patents attributed to him. His company innovated successfully in its operations and its products several times, from horse-drawn omnibuses, to horse-drawn carriages that ran on rails, to electric streetcars. Ultimately, the issue wasn’t the John Stephenson Company’s ability to innovate within the carriage industry era; it was its inability to transform to the internal combustion engine era. There was never a disciplined transformational effort to evolve from the carriage industry to the automobile industry.

For an industrial revolution–driven transformation to take off, you need a different, disciplined, new business model game plan. This was a recurring issue in the failure of most carriage companies. Having said that, creating a new game plan for a different business model is just the price of entry. The disciplined execution of this new game plan is equally important, as I illustrate with the next story.

Studebaker’s Inability to Sustain Its Transformation

For most collectors of classic cars, Studebaker holds a very special place. Studebaker cars were the Apple products of their era—distinctive in their designs, excellent in their quality, and perhaps even more valuable for the money than Apple is today. The 1950s Studebaker cars are still considered to be among the best automobiles in history!

Studebaker was also the only large carriage company that directly transitioned successfully from carriage making into automobiles.

The Studebaker Corporation had an engineer working on an automobile as early as 1897. It is known to have manufactured both automobiles and wagons in the early 1900s. The company experimented with both electric- and gas-powered cars and eventually settled on the latter. Wagon production ended in 1920,¹⁰ and the Studebaker Corporation focused on automobiles alone after that.

But as we know, Studebaker doesn’t make any cars today. Although Studebaker had clearly transformed into the automobile era and arguably had the best products, it never mastered the business model for scale and sustainable profit margins. Studebaker continued to build cars until the 1960s. Its plant in Hamilton, Ontario, Canada, closed in 1966, finally ending a 114-year history of Studebaker vehicles.

Studebaker was able to move into the automobile industry but not win within it. There wasn’t a long-term plan for scaling to provide ongoing viable value propositions to its customers. For instance, its board consistently chose to pay big dividends to shareholders instead of reinvesting in modernizing its factories.¹¹ Their competitors at GM and Ford were much more aggressive in both operational efficiencies as well as pricing and therefore prevailed.¹²

Successful transformation during an industrial revolution is good, but sustainable market leaders need to go a step further. They need to sustain the business model. The transformation is incomplete if the new business model cannot be built with an eye toward perpetual evolution.

How to Take Off and Stay Ahead During an Industrial Revolution

The John Stephenson Company’s transformation failed to take off, while the Studebaker Corporation failed to stay ahead. In the long run, it’s only the ability of an enterprise to reach a Zen-like state of perpetual innovation leadership, which I call “Stage 5” digital transformation, that matters. The five-stage digital transformation model will be developed further in the coming chapters, and it is the organizing structure of this book itself, along with the disciplines to deliver successful transformations. For the moment, it’s sufficient to emphasize the importance of deliberate goal setting for Stage 5 transformation or perpetual winning as the most desirable outcome of any transformation. A one-time successful transformation is insufficient to weather the repeated disruptions that occur within each industrial revolution. Distinguishing between transformation takeoff and staying ahead is key.

  Transformation takeoff: This is the tipping point for successful operation of the enterprise from one generation of the industrial revolution to the next. Using an airplane analogy, the operating model of the enterprise takes off from one state (on the ground) to another (flight). The John Stephenson Company failed at this stage.

  Staying ahead: Building on the flight analogy, a successful takeoff must be followed by sustained flight. Studebaker failed to achieve the state of staying ahead. Achieving this penultimate stage of success is fine for a short while, but it does not guarantee ongoing survival during times of rapid change. The issue is that you are one technology or one product or one business-environmental change away from being disrupted.

There are two ways in which digital transformations fail. The lack of discipline causes them to first, fail to take off, and second, to maintain momentum, and they end up crashing.

Both challenges were uppermost in my mind in 2015 when I took on the challenge of deliberately disrupting Procter & Gamble’s best-in-class Global Business Services unit.

Applying Successful Transformation to Procter & Gamble’s Global Business Services

It was early 2015, and I had been with the iconic Procter & Gamble Company for twenty-four years. As a vice president in the multibillion-dollar Global Business Services (GBS) organization, I had been fortunate to participate over the years in the formation of P&G’s industry-leading GBS. A GBS organization provides scaled operations ranging from human resources, finance, manufacturing systems, marketing and sales systems, and information technologies to all business units globally. P&G’s GBS was significantly ahead of most peer organizations, and we had influenced the formation of the global business services industry itself, but that was no guarantee of winning in the Fourth Industrial Revolution. The next chapter will cover the circumstances that led to the decision to proactively disrupt ourselves and our approach toward it. That experience led to the insights on how to execute successful digital transformation.

From the outset, the biggest question in my mind was how to execute a transformation that would be ongoing or perpetual. There had been a couple of prior attempts at driving disruptive innovation in GBS. These had resulted in some great innovations, but never at a level that drove perpetual scaled transformation of the entire unit. Our attempt had to be successful in both taking off as well as staying ahead.

The Surprising Answer on How to Take Off and Stay Ahead on Digital Transformations

That challenge to scale innovations with excellence led me to a fascinating insight. I happen to be fascinated by airplanes; OK, I’m an airplane geek, truth be told. I noticed that the planned stages for successful digital transformation of P&G’s Global Business Services division would be like the steps needed to complete a successful aircraft takeoff.

Much as I’d like to think that this is a unique, brilliant insight, reality suggests otherwise. A few months ago, I was introduced to Dr. Atul Gawande’s seminal book The Checklist Manifesto: How to Get Things Right. His work has helped the health-care industry reduce errors significantly. Dr. Gawande’s premise was spot-on—a checklist drives repeatable success in complex endeavors. I realized that the disciplined approach to reducing failures by applying the airline checklist model to another field wasn’t a novel idea. On the other hand, this was strong validation that it could be done in the digital transformation area.

In the three years that followed the launch of the GBS change initiative, it became crystal clear that the answer to the issue of perpetual digital transformation would be disciplined execution. The solution for solving the reliability issues in the airline and more recently medical industries also held true for reducing the failure rates of digital transformation.

This makes logical sense. According to The Economist magazine, 99.999999 percent¹³ of aircraft takeoffs are successful, while only 30 percent of digital transformations can claim success. Are digital transformation efforts inherently more complex in the sense that they involve more judgment? Absolutely! On the other hand, the 99.999999 percent success rate on takeoffs was a mere pipe dream when the aviation industry was in its infancy. A ton of hard work went in over the decades to structure what were judgment-based tasks into simpler routines. Various technologies were applied to automate many of those tasks. And what was not automated has been check-listed to deliver predictable execution.

In Closing

There is little doubt that the Fourth Industrial Revolution will dramatically shift the landscape of industry, just as previous industrial revolutions did. History has proved that the organizations that get disrupted aren’t necessarily caught unawares. As with the John Stephenson Company and Studebaker, organizations often see it coming. They are perhaps even successful at transforming themselves once or twice. But they eventually fail to have their transformations either take off or stay ahead. The underlying cause of why 70 percent of digital transformations fail is a lack of sufficient discipline. There’s insufficient rigor in both digital transformation takeoff as well as in staying ahead.

This can be addressed by a disciplined checklist approach—influenced by the same methodology that’s been successfully applied in the airline industry and the medical field. To execute the checklist approach, the book will lay out a five-stage road map for success in digital transformation, which is defined as the ability to win in the Fourth Industrial Revolution.