Hyperconnected organisations how businesses are adapting to the hyperconnected age

Hyperconnectivity is defined as the sharp increase in the interconnectedness of people, organisations and objects that has resulted from three consecutive waves of technology innovation:

HYPERCONNECTED ORGANISATIONS

HOW BUSINESSES ARE ADAPTING

TO THE HYPERCONNECTED AGE

About this study 2

The hyperconnected economy is a multi-phase research programme conducted by The Economist Intelligence Unit (EIU) and sponsored by SAP

Hyperconnectivity is defined as the sharp increase in the interconnectedness of people, organisations and objects that has resulted from three consecutive waves of technology innovation:

the Internet, mobile technology and the Internet

of Things (IoT) This report investigates its impact

at an organisational level and draws on the following two research methods

1 A global survey of 561 executives Survey

respondents were drawn from a range of industries, including 16% from financial services, 13% from manufacturing and 11% from IT and technology

One-third of respondents are of C-level seniority or higher; one-third are senior vice-presidents, heads

of department or of equivalent seniority; and the remaining one-third are other senior managers representing a range of industries Just over half of respondents (58%) work for companies with annual revenues of up to US$5bn; the remaining

42% have annual revenues above US$5bn The geographical split is as follows: 30% North America, 30% Europe, 30% Asia-Pacific, and the remainder from the rest of the world

2 A series of expert and executive interviews

The EIU interviewed the following experts and executives for this report (listed alphabetically):

l Phil Abram, chief infotainment officer, GM

l Andrew Brem, chief digital officer, Aviva

l Jim Buczkowski, director of electronics and electrical systems engineering, Ford

l David McCorquodale, UK head of retail, KPMG

l Mark Curtis, chief client officer, Fjord

l Davide Strusani, assistant director, economic consulting, Deloitte

The Economist Intelligence Unit would like to thank these interviewees for their time and insights

The report was written by Michael Kapoor and edited by Pete Swabey

About this study

Hyperconnectivity is high on the corporate agenda

The majority of executives believe that failure to adapt to hyperconnectivity—the growing interconnectedness of people, organisations and machines that results from the Internet, mobile technology and the Internet of Things—is the biggest risk their organisation faces

Executives generally feel positive about hyperconnectivity—most say it presents more opportunities than threats, and they believe they are doing a good job of adapting to it

But while experts warn of the need for substantial change to meet the challenges of hyperconnectivity, only about one in five survey respondents expect to restructure “radically” as it intensifies in future These are the findings of a study by The Economist Intelligence Unit, sponsored by SAP The study, which is based on a global survey of 561 executives, examines their views on hyperconnectivity and its impact on their organisation

The key findings are as follows:

Adapting to hyperconnectivity is a matter of survival, most executives agree Six out of ten

survey respondents agree that failing to adapt to hyperconnectivity is the biggest challenge their company faces This view was especially common

Hyperconnectivity is nevertheless viewed positively, and organisations believe they are adapting well Eight out of ten respondents

believe that hyperconnectivity has been beneficial for their organisation, and only one-third say it presents more threats than opportunities This may reflect the fact that its impact within organisations has been broadly positive by boosting

collaboration, for example

However, the extent to which organisations have adapted is limited Under half of respondents

have introduced digital skills training, and while experts predict that it calls for deep organisational change, just under one in five (19%) expect to reshape their business “radically” in response to hyperconnectivity

The Internet is still seen as having more potential to be revolutionary than mobile technology and the Internet of Things (IoT) This

is true even among industries such as manufacturing, in which embedded IoT connectivity is expected to have far-ranging implications This suggests that companies expect the future impact of hyperconnectivity to be a continuation of historical trends, rather than introducing new and unprecedented changes

Executive summary

Executives see digital offerings from established competitors—not start-ups—as their biggest source of competitive pressure The threat of

disruption by a Silicon Valley start-up is one of the most widely discussed challenges businesses face today, but in fact more respondents say they have felt severe or moderate competitive pressure from the digital strategies of their established

competitors

Hyperconnectivity is seen as important, but there are signs of inertia or complacency Experts

interviewed for this report warn of the need for

“deep” and “fundamental” organisational change, and the risk of “irrelevance” While they

acknowledge hyperconnectivity’s significance, most respondents give few signs of this kind of radical action Time will tell if their confidence is merited

It is not yet known how many smart watches—a recent high-profile extension of hyperconnectivity—

Apple has sold since they were introduced in April

2015 Market watcher Slice Intelligence, which analyses US consumer spending, believes the number to be around 2.5m worldwide, which suggests that annual sales will be around 11m units

This is not a bad start for a new product, but it’s

a drop in the ocean compared with the 60m-plus iPhones sold in the first quarter of 2015 alone

Observers are eagerly watching for clues whether the Apple Watch will be a short-lived toy, with limited functionality and a fierce price tag, or whether it will follow the lead of earlier Apple products, from the iPod to the iPad, and create a new market segment

Mark Curtis, chief client officer at service-design consultancy Fjord, is among the believers Sales will be big, he expects, “because you don’t have to take them out of your pocket” It’s the sort of simple advantage that has the potential to change consumer behaviour—and in so doing change the face of business

In October 2014 The Economist Intelligence Unit

(EIU) published The hyperconnected economy, an

examination of how the rapid increase in the interconnectedness of people, organisations and

objects seen in the last 30 years is affecting the global economy It found that from a global perspective, this hyperconnectivity is a tide that raises all boats—in fact, hyperconnectedness is expected to be especially valuable for developing economies

But for organisations, it poses challenges as well as opportunities Look no further than the industries disrupted by online media delivery or mobile apps, such as publishing or camera manufacturing, to see how high the stakes are

In the second phase of the hyperconnected economy programme, therefore, we investigate the organisational impact in more detail through a survey of executives and a series of expert interviews (see “About this study”)

This reveals that businesses are well aware of the significance of hyperconnectivity—indeed, the majority believe that adapting to it is the key challenge their organisation faces

But there are also signs of a degree of complacency The majority of companies believe they are doing a good job of adapting to hyperconnectivity Yet while experts warn of the need for substantial changes, there is little evidence in our survey sample that radical measures are under way

Introduction

Organisations are well aware of how significant hyperconnectivity is for their future, this study reveals Nearly six out of ten (59%) respondents agree that failing to adapt to hyperconnectivity is the biggest danger faced by their company

Predictably, its importance is most keenly felt in those industries that have been most acutely affected by the Internet so far More than two-thirds (68%) of retailers say that the need to adapt

to hyperconnectivity is their company’s biggest challenge, for example, with a well above-average 44% saying that it “presents more threats than opportunities” (compared with one-third of all respondents) This is not surprising given the disruption caused to their industry over the past

decade or more

A wave of retailers, from the bookseller Borders

to the video chain Blockbusters, has been driven out of business as sales have migrated to the net More recently, retailers have been struggling to get

to grips with omnichannel retail, linking different sales platforms such as physical stores, the Internet and smartphones These have often been launched as separate divisions and profit centres, leading to unfortunate outcomes, such as the refusal by a retailer, for example, to accept at a physical store returned items that had been bought online

Addressing this situation requires “fundamental change”, says David McCorquodale, head of retail

Understanding the challenge

1

Agree Disagree Don’t know Consumer goods

Financial services Healthcare, pharmaceuticals and biotechnology

IT and technology Manufacturing Retailing

Chart 1. The majority of firms believe that failure to adapt to hyperconnectivity is their organisation’s biggest risk

Failure to adapt to hyperconnectivity is the biggest risk that our organisation faces

at KPMG Sometimes, even established retailers are

at a surprisingly early stage here UK retailer Marks

& Spencer only took control of its own website last year; previously its online sales had been

outsourced to Amazon Now, it has relaunched some of its stores to offer omnichannel services, with iPad-wielding sales assistants and Internet kiosks allowing customers to buy items online if they are not available in-store

Retail remains one of the starkest examples of the upheaval that can be wrought by rapidly changing consumer behaviour enabled by new connectivity, but the same argument applies to many other sectors Some of these sectors may be underestimating hyperconnectivity’s disruptive potential, the survey suggests

Only 45% of consumer goods companies, for example, consider hyperconnectivity to be their greatest threat (see chart 1) In fact, these companies are arguably among the most exposed

Hyperconnectivity is disrupting the retail channels through which they reach customers It is also assisting the globalisation of manufacturing, which affects the goods they sell, and it is empowering customers to provide feedback over the Internet and social media, which affects everything from branding to marketing

Nike, for example, has transformed itself from a sportswear maker to a fitness and lifestyle brand, using social media to foster communities and driving customer engagement through mobile fitness apps Car companies are integrating digital connectivity both into their production and into the products themselves, thereby improving component design and mechanical reliability

Most companies have acknowledged the scale of the challenge posed by hyperconnectivity, the survey reveals However, it also suggests that they have not acknowledged how much they will need to change

The three components of hyperconnectivity, as defined in this study, are the Internet, mobile technology and the Internet of Things It is not surprising that for the majority of respondents the first of these—the Internet—has had a

revolutionary or significant effect on their organisation so far (84%, versus 71% for mobile and 71% for the IoT)

It is surprising, however, that respondents are most likely to say that the Internet will have such

an effect in the next three years (80%, versus 75%

for mobile and just 57% for the IoT)

Even among manufacturers, only 61% believe the IoT will have a revolutionary or significant effect This is especially surprising given the transformational impact that the embedded systems are expected to have both on the manufacturing process and on the resulting products This suggests that respondents might be more focused on the hyperconnectivity trends they know and understand than the ones that are still emerging

This helps to explain why respondents are remarkably confident about their progress in adapting to hyperconnectivity Overall, a significant majority (69%) say they are doing a decent job of adapting to hyperconnectivity—even

in the least confident sector (healthcare), around two-thirds of respondents reckon they are adapting well

This confidence may also reflect the fact that for many respondents, hyperconnectivity has had a

positive organisational impact so far For example, 45% believe that collaboration, both within and between divisions, has improved as a result of hyperconnectivity

The most commonly cited organisational impact

of hyperconnectivity is that business processes have accelerated, as identified by 47% of respondents Companies appear to be reacting to this acceleration of pace through automation: the most common organisational response to

hyperconnectivity is to have automated business processes (46% of respondents)

Nonetheless, respondents’ bullishness masks fairly limited progress For example, only 39% have introduced digital skills training With companies from banks to shops saying that their offerings need to span web and physical stores and manufacturers talking of the importance of digitalisation to improving efficiency, digital skills might be expected to be standard across industries

by now

Many respondents believe that the continued growth of hyperconnectivity will change power dynamics in the organisation, with 45% saying the control of central management will be reduced This is a positive indication, given the

recommendation of Fjord’s Mr Curtis that companies need to become more agile, with less rigid hierarchies, if they are to evolve at the pace of hyperconnectivity

Mr Curtis likens the process to the different states of matter Many companies are still in a solid

Organisational adaptation

2

On autopilot

“Infotainment has become a core source of competitive advantage for the auto industry,”

according to Phil Abram, chief infotainment officer

at US car manufacturer General Motors Now that engine and component design are increasingly standardised and fuel economy is regulated, in-car information and entertainment systems are among the few ways in which carmakers can differentiate their products these days

GM is currently rolling out 4G connectivity across its vehicle range worldwide, offering its customers more rapid Internet access on the move Mr Abram says that “the essential elements

of an infotainment system do not vary by [geographical] market, although the detail components might”

Another iconic US car maker, Ford, gained a competitive edge by launching an effective infotainment system back in 2007, ahead of many

of its rivals However, it damaged its reputation with a glitch-ridden upgrade some time later, which is now being replaced by a simpler, more reliable system

In reality, both companies are largely outsourcing the work for these infotainment systems to companies like Microsoft, which have developed software that allows people to link their smartphones to the car’s own systems The carmakers themselves are concentrating many of their own resources on the information side, feeding car-performance information to drivers

and dealers to allow for timely maintenance, and

to their own development teams so that real information continuously informs product development and production

According to Jim Buczkowski, Ford’s director of electronics and electrical systems engineering, one challenge is the need to sieve the mass of information now available from in-car sensors to extract that which is usable Ford hired in a chief data and analytics officer at the end of last year to co-ordinate these efforts in what Mr Buczkowski describes as a “company reorganisation”

In other words, these companies are putting some “meat on the bones” of theories of smart production and product development as they start to get to grips with analysing the wealth of data they can now generate They are also keeping a keen eye on developments from tech competitors such as the search engine Google, which has a project to develop a driverless car

GM has worked with Google (and Apple) on bringing phone integration to its vehicles Phone integration allows users to interact with select applications from their smartphones through the vehicle systems (steering wheel controls, touch screen, etc.)

“We make sure that we can change with the market by building platforms,” he says, adding that driverless cars could completely change the market for everything from commuter cars to taxis Rather than fighting to protect its existing customer base, GM plans to ensure that it has the products to sell to the new type of customer

state, stable and predictable but slow to react to change More advanced firms have become fluid, with adaptable structures that can flow into new areas as they emerge The real need, he says, is for companies to become like gas—formless beasts that exist to cater for constantly changing

they will have to restructure “radically”

The same proportion (19%) has introduced a chief digital officer (CDO) There is some evidence

to suggest that appointing an executive to lead digital activities is a growing trend: the CDO Club (a global network of chief digital officers) says that

hired Phil Abram as its chief infotainment officer last year to advance the information and entertainment systems built into its cars

Previously, Mr Abram had worked for electronics firms such as Japan’s Sony as the carmaker recognised that shifting consumer tastes meant looking beyond its traditional expertise Similarly, Aviva, the international insurer, hired Andrew Brem as its chief digital officer in August last year

to overhaul its digital interaction with customers

His background was with utility and mobile-phone

companies, rather than in insurance

It is debatable whether a new executive role is the best way for every company to adapt to hyperconnectivity, so the low base of CDOs in our sample is not necessarily evidence of inertia Nevertheless, there are signs in the survey data that on an organisational level, companies are overly confident of their ability to weather the hyperconnectivity storm When asked about how it has affected their competitive stance, the story is quite different

Revolutionary impact Significant impact Limited impact No impact Don’t know / not applicable Internet

Mobile IoT

Chart 2. More respondents believe the Internet will have a more significant or revolutionary impact in the next three years than the Internet of Things

What impact do you expect the following technologies to have in the next three years?

Much has been written about the disruptive potential of digital companies, from big retailers such as Amazon and eBay to person-to-person platforms such as Airbnb, a site allowing people to rent out their houses to people who might otherwise choose a hotel The impact of these companies has been strong, driving scores of shops, magazines and indeed hotels to the wall as they lose sales to online competitors.

Nonetheless, our survey finds that executives are more concerned with competition from existing companies than with being wiped out by a wave of new-tech upstarts: some 57% say that they have faced notable competitive pressure from digital products launched by established companies, compared with less than half who feel pressure from digital start-ups Respondents expect competition on both fronts to grow in future

This is not as surprising as it might seem at first glance While the likes of Amazon and Airbnb are highly visible owing to their novelty, in many industries established players remain dominant In these sectors, the main contribution of digital start-ups has been to force companies to adopt digital practices

Supermarkets offer an example In many countries, online groceries were first launched by Internet-only brands, such as Ocado in the UK As

Carrefour in France and Asia to Walmart in the US, are spending heavily on their own online offerings These operate in parallel with services such as Click

& Collect, which exploit their big store networks and provide an advantage over Internet-only retailers such as Amazon

The strategic significance of such moves online

is evident in the fact that supermarkets appear to

be underpricing this service According to HSBC’s retail analyst Dave McCarthy, the true cost of a home delivery is around £20 (about US$30), whereas supermarkets typically charge £3-4 In the

UK alone, he estimates that this underpricing costs the major supermarket chains £100m a year Clearly, though, supermarket retailers consider this burden to be preferable to the losses suffered by rivals which are only now struggling to break into the online market

It is a similar story in other sectors

International banks, from HSBC to Citibank, have started to offer smartphone apps allowing people

to make payments and complete other transactions from mobile devices

Other sectors of the financial services industry are following suit Insurance, for example, has lagged behind banking to date, but that is beginning to change as the sector is waking up to the competitive consequences of hyperconnectivity

Market disruption

3

Will create severe competitive pressure

Will create moderate competitive pressure

Will create limited competitive pressure

Will create no competitive pressure

Don’t know / not applicable

Start-ups driven by digital technology Digital offerings from our traditional competitors Established companies that are using digital technology to enter our market(s) for the first time

Chart 3. Respondents are more likely to see digital offerings from traditional competitors as sources of severe or moderate competitive pressure than start-ups

How do you expect the following to affect competition in the next three years?

service Uber “With Uber, it’s one click and your car

is on its way You can see it approach on a map You know who your driver is No cash, no hassle People will start to resent firms that do not offer this [kind of] convenience.”

He points out that digital has already transformed many areas of finance, from payments

to lending and investing, but that insurance has yet to embrace the change Customers now expect

a choice of ways to interact with their insurer or broker, in person, over the phone, online or through chat rooms That means insurers must join

up their services in the same way as omnichannel retailers

Mr Brem adds that “we have a mass of data allowing us to personalise offerings to customers”

Motorists can use data from their cars to show that

they are safe drivers, reducing premiums, while homeowners and people buying health insurance can be monitored to show their risk levels, allowing them to take out cover tailored to their needs and lifestyles “It’s a great opportunity—and we will become irrelevant if we don’t take it.”

Fortunately, just as hyperconnectivity exposes companies to new sources of competition, it also allows them to exert some pressure of their own Nearly half of respondents (47%) say their organisations have reacted to the competitive pressure resulting from hyperconnectivity by entering new markets—far more than those who have lowered prices (28%) or exited the market (18%), for example Meanwhile, 41% say hyperconnectivity has allowed them to identify new markets that are suitable for them to enter