With digitization 1.0, companies create products and services that allow manufacturers to collect data on how their products are being used by customers in different settings and learn to modify them for future use. Digitization 2.0 is about the exchange of “in-context” data on how consumers and enterprises use different interconnected products and services across industry boundaries. This exchange will result in the adaptation of products and services across organizational boundaries to meet customer needs.
Many managers think of digitization 1.0 as the endgame, but the real disruption and value shifts occur at the frontier of digitization 2.0. Here are two examples that illustrate the differences.
Cars in the cloud
Traditional automobiles were designed and differentiated based on physical attributes like size, horsepower, seating capacity, and looks. GM, Ford, Toyota, and others designed, manufactured, sold, and serviced their automobiles through dealers. Since the automakers did not have direct access to data from their cars on the road, they relied on dealers to get feedback on the performance of their cars. They could only learn by extrapolating from sample data collected during maintenance checks and repairs and developing insights on various sub-components.
Digitization 1.0: smart cars. Over the last decade, the automobile has changed, with more digitization injected by software and connectivity to the cloud. Automobiles have their own proprietary operating system (e.g., Ford Sync and GM OnStar). With cars increasingly connected to the cloud through 4G LTE from telecom operators (e.g., AT&T and Verizon), automakers have direct access to data on their cars in use through onboard diagnostics. Every major automaker today has telematics systems for customer service (navigation, communication, and entertainment) as well as a conduit to collect data for faster feedback and product modifications akin to software updates. Tesla recently made a product update by using connectivity and a software download to improve driving performance.
Digitization 2.0: mobility ecosystems. Going beyond individual telematics systems, automakers have opened up their operating system (e.g., Ford OpenXC) to third-party developers to write apps. Now automobiles and mobile phones are able to interconnect without conflicts. At the same time, Google and Apple have announced their intent to be drivers of digital transformation in the automotive sector. Android Auto and Apple CarPlay are in the initial stages of pulling together the different automakers into their ecosystems with many apps for navigation, communication, and entertainment.
As the automotive sector digitizes with electric drivetrains (e.g., Tesla and GM Chevy Bolt), cloud connectivity, and self-driving functionality (e.g., Google and Uber), digital features may override physical differentiators. The digitization of the automotive ecosystem invites participation from companies across different industries (car manufacturers, telecom providers, software companies, app developers, service providers, etc.) and value creation and capture are more likely to make use of context-aware information insights. It remains to be seen whether Google, Apple, Tesla, and Uber will define the winning rules and whether automakers maintain their control over the way people and goods move.
Homes as digital hubs
Early thermostats simply set the temperature to a particular value to help maintain room temperature, with minimal information sent back to the grid. Fixed telephone lines and early generations of cable TV boxes also provided limited two-way interactions and minimal personalization. With the arrival of the high speed internet, Wi-Fi networks, and smart devices, homes are entering the digital age.
Digitization 1.0: smart gadgets. Digital telephony, smart meters, smarter cable, and satellite-television boxes as well as home-automation consoles have ushered in some efficiency and convenience in modern homes. Take the case of the learning thermostat from Nest (now part of Google). Unlike analog thermostats, Nest thermostats “learn” a home dweller’s living habits and provide optimum home convenience like a smart digital butler. These thermostats know when people are home and when they are away and is able to adjust temperatures accordingly.
Digitization 2.0: connected home. Homes have had an early start for being nodes on networks—starting with heating and air-conditioning (thermostats), communication (telephones) and entertainment (televisions). By looking at the digital home through a tool like Nest’s eyes, we see homes not as islands of automation but as a network of smart devices. With the Works with Nest initiative and the new Brillo platform, Google has opened up its interfaces to connect and communicate with other devices both inside and outside the home. This can be seen in action with the Protect smoke detector. When this device senses smoke in the room, it switches on a camera to take pictures for insurance purposes and switches off the heating system. In short, Google’s seeking to understand the context and take sensible actions. This approach can help create the digital home hub with Android as the software OS and Nest as the lead device.
Many platforms are positioning themselves to dominate in this market. These include Amazon with its Amazon Echo; Apple, whose iOS is embedded in Apple TV, Apple HomeKit, iPhones, and iPads (for now); Google with its Android operating system; and Microsoft with its Windows devices, including Xbox. As these companies structure and evolve their ecosystems, they also become custodians of valuable customer data. Data from multiple devices can help companies understand the customer context better. Firms that learn to collect, interpret, and adapt to this data will occupy leadership positions. Important questions remain to be answered. Whom will homeowners trust with their data? What value do they get in return? Although we are just getting started with digital home, one thing is clear: The traditional demarcation of industries is eroding and ecosystems will enable companies to have multiple threads of interconnections and interdependency.
Here’s how your company can prepare to win in the digitization 2.0 world.
Architect your products for context-awareness. Your company’s product architecture may be analog today but ask yourself: What happens when products become digital and your company can observe, analyze, and correct your products while in use? Similarly, how can you facilitate product adaptation across companies that are collaborating to deliver on a customer value proposition?
Map your digital ecosystem beyond your core industry’s boundaries. Companies are now part of digital ecosystems with connections based on data and interoperability (APIs). Competing and collaborating simultaneously with the same companies will be the norm as rules evolve with different monetization models and cross-subsidization (e.g., value for data). Senior leadership should not only map their own company’s ecosystem. They should also track others, which may help them identify potential entrants that could pose a threat or opportunity.
Develop capability for context-aware insights. Digitization, sensors, and connectivity lead to the generation of large volumes of data. Understanding products and services in use require significant capabilities to capture, store, and analyze data at unprecedented scale. New technologies like Hadoop for storage, tools like R and SAS for analysis, and visualization techniques are starting points for managing in the digital age.
Digitization is the single biggest trend affecting every company. It challenges every company to think about the drivers of value creation and capture as well as modes of differentiation beyond familiar dimensions of cost and quality.
Our message is simple: Think first about how your products and services become smart as you observe them in use. Then, understand the context-aware continuous refinements that could significantly enhance the value of your products and services as part of dynamic digital ecosystems. Make sure that your business is designed to move from digitization 1.0 to 2.0.
Authors: Bala Iyer is a professor and chair of the Technology, Operations, and Information Management Division at Babson College in Wellesley, Mass. N. Venkat Venkatraman is a professor at Boston University’s Questrom School of Business, where he is a member of both the information systems and strategy and innovation departments.
