How to Evolve into a Smart Business

In his speech and interaction with Kaihan Krippendorff, Ming Zeng explains how AI gives companies an operational and performance advantage and the tools to transform into a smart business.

We are moving into a different world, which may look very different from how we live today. Instead of talking about what might happen in the next year or two, we need to understand the long term structural changes that have been going on for at least the last 20 years since the commercialization of the internet and dramatic changes with regards to big data, cloud computing, artificial intelligence, and other technologies.

An important trend we are experiencing right now is, more and more experiences are moving online. Evidently, Zoom has become very popular over the last six months, and we have also been using Amazon, Netflix, Alibaba, and Tencent much more extensively. All these online service companies have seen tremendous growth over the last three or four months. But moving online is just the beginning. It is more than Facebook ads and selling on Amazon. Digitalizing business requires a complete transformation of how business is done.

In the future, more and more businesses may become automated through the powerful engine of artificial intelligence, and then all businesses and their operations will be improving extremely fast, and will get better over time. In this sense, business is becoming smarter to smarter, and whoever becomes smarter faster will be the business of the future.  

In the future, more and more businesses may become automated through the powerful engine of artificial intelligence, and then all businesses and their operations will be improving extremely fast, and will get better over time.

There are many advantages of becoming smarter, of moving online. First, by moving online through the technology infrastructure of today, businesses can access and interact with millions, if not hundreds of millions of customers directly, which means they can target their offerings to each individual with very reasonable costs, and customers can get tailor-made offerings that match their needs. This is tremendous value creation for customers, and more importantly, if businesses can interact with customers at a relatively low cost, they can even explore and discover the potential needs of customers much more effectively than before.

The second important advantage is getting quick customer feedback because of direct access to customers. By getting quick feedback, businesses can learn fast and adjust their offerings accordingly with each round of feedback. Google search is the most powerful example of that. If you search something in the Google search bar, the result could be very different if you do it again after five minutes, because Google has already updated all the search that has happened over the last five minutes to suit the preference of the customers. With this fast feedback loop, Google is able to improve the search results very quickly and the customer experience becomes much better just as quickly.

The third advantage of the smart business is that it is like a frame where the business and the company can become better and better in the whole process. This is extremely difficult for a traditional business to catch on because there is a huge learning barrier if you are not operating in a smart way compared to these leaders of the future business. 

It should be understood as a paradigm shift, and not business as usual.

Hence, the next question that arises is, how to transform a traditional business into a smart one? There are four steps in the transformation process, namely, digitalization, software-ing your business, datafication, and algorithm. The most difficult part of digital transformation is to transform the physical environment or physical offering to a digital environment. For example, cars can become autonomous only if they have sensors to process information and perceive the environment when the car is moving, and to make the product capable of perceiving the physical environment and translate that into digital data, innovation in things like the Internet of Things, sensors, and new chips is essential. The first step is then digitalization. Bike sharing, which has become a very popular service in China over the last four years, could not have been possible without digitalization that enabled the provision of smart lock and online payment systems.

The second important step is using developing software to replace human interface. If a traditional business wants to automate the process, they will need to develop a software that can make machines do the work. This is a tremendous productivity gain in moving move from a physical product to a software product. Tesla, for example, can do an upgrade of the vehicles remotely through their central cloud system because the operating system is mostly software. On the other hand, for a traditional car, one has to go to a car dealer, a service shop to do an upgrade. By being able to remotely upgrade their software, Tesla can improve their customer experience much faster through a much shorter cycle.

The third step is datafication. The cost of data storage and computing has dropped dramatically because of cloud computing. Also, businesses can move online now because of digitalization and software service, and interaction with customers can be recorded as data conveniently and at a very low cost. For example, Amazon records the consumers’ shopping behaviours and purchasing history as big data, which they analyze to improve their service. For smart businesses, data is recorded as a natural by-product of online operation at a very low cost. Companies do not go out to collect data of customers through physical interactions, as is done repeatedly in traditional business at a very high cost.

The last step is the algorithm. Once the business has its own brain, in the form of artificial intelligence, it is the algorithm that uses big data to give new insights in order to help machines make a decision on how to act. The algorithm is the essence of artificial intelligence, and it is very similar to how a brain works, so without that, a business is not smart. 

These are the four steps that businesses can follow to transform into smart businesses. In the future, this is how a business will be working in an online world. It should be understood as a paradigm shift, and not business as usual. We are entering a completely different competitive arena than before. This is why companies like Alibaba Group, Amazon, Facebook, Google have been growing so fast over the last 20 years, and we are enjoying tremendous growth over the last four or five months during the pandemic crisis.

There are key differences that make it qualify to be called a paradigm shift. First, traditional business in the so-called Industrial Age operated with a mindset of B2C. They were basically business-driven, wherein companies made decisions. In the future, a business will become more and more like C2B, that is, customer-driven. Customers will become the centre of the operation. They will be the drivers of every step of business operation because an online business can give direct access to the customer. They can engage with customers directly online, so customers should be the focus and the starting point of business operation.

On one hand, there is tremendous value creation through platform companies through data sharing or AI development, but we also see more and more challenges in privacy, including questions around who should share the economic benefit of AI.

The second important change is that traditional business is run by a closed, integrated, linear supply chain, but the future of business is more and more like network coordination. In the future, many main planners will interact simultaneously online without a direct order from somebody. A close supply chain dominated by one brand only is giving more and more way to an ecosystem that runs through network coordination. It is illustrated by the fact that the most important business organizations of the future are ecosystems. Alibaba, Facebook, Amazon, Google are platform companies that create huge ecosystems with millions of partners. This is not like traditional companies centred around themselves with a close supply chain. The ecosystem approach with a platform company in the centre has very different operating principles.

The paradigm shift happens not only on the business side but also on the organization side, so smart businesses have organizational implications as well. Firstly, more and more jobs will be taken up by machines, by artificial intelligence, and so in principle, if any knowledge can be structured and codified, the job will be taken by AI. Now the question becomes, if so many jobs will be done better by AI, what should be left for humans? The most important job for humans for the future is arguably creativity. Peter Drucker has been emphasizing, in the last 30 years, economic growth has been powered by knowledge work, and now we are entering an age of creative economy. Knowledge workers are being replaced by creative talent because traditional codifiable knowledge, like a lot of legal work, accounting work, even some of the medical work will be replaced by AI, and humans will be left with jobs that require much more creativity. Therefore, due to this paradigm shift, organizations are entering an age of creativity. The ultimate goal of the organization is to ensure continuous creativity and innovation of an organization.

The second implication on organizations will be the change in the organizing principle in the future. The traditional hierarchical bureaucratic organization has a very clear top-down structure. In the future organizations, the main principle is not about management but about enabling, providing the most productive environment for creative people who flourish to become more productive and to become more productive together, so that the whole organization can become more creative. So, the mandate of an organization is enabling and providing a fostering environment for creative talent. This has huge implications for almost every aspect of traditional management. For example, organizations may need different incentive tool or different incentive structure to motivate people, because the sought-after creative talents have no trouble getting the most competitive package in the market. Organizations need to have something more to attract them and to keep them.

Kaihan Krippendorff in Conversation with Ming Zeng

Kaihan Krippendorff: I think of this flywheel of rapid-learning as being something that can very rapidly optimize for small changes and what we are experiencing now is some kind of Black Swan type of event. Can this type of rapid cycle learning react to something as dramatic as what we are experiencing now?

Ming Zeng: Yes. Infrastructure and fundamental principles are being tied to more and more industries, especially drug delivery companies, drug discovery companies and pharmaceutical companies. So, our biggest hope for fighting the virus is that we can have drugs or anti-virus much faster than before and that more and more drug delivery processes are powered by AI now. The other major area for transformation, for business innovation, is how healthcare should be delivered, and there is going to be tremendous benefit from this market. 

Kaihan Krippendorff: Can these four steps to grow a business or to evolve a business be applied to service businesses as well as product businesses? 

Ming Zeng: Actually, service area is the area that has the greatest potential for the future, because service in nature requires personalization or customization. Now, the service business has a relatively slow start in mapping the transformation. It is because the first two steps are not easy. For example, taking care of elderly people is mostly physical contact. It requires people. But there are a few startups that are trying to develop innovative machines that can sense the movement of people, and so if one person falls down, for instance, the machine can send an alarm right away to the nurse to notify them that somebody needs immediate attention. We are now in the first stage of smart device development to digitalize a lot of interaction of service elements, and when that happens, the whole process will become much quicker.

Kaihan Krippendorff: Do you think large platforms are good for society, and why? 

Ming Zeng: There is a tremendous debate around this. On one hand, there is tremendous value creation through platform companies through data sharing or AI development, but we also see more and more challenges in privacy, including questions around who should share the economic benefit of AI. We do see new technology developing that might help us to solve these types of issues. For example, we are seeing the development of something called privacy computing. Today, all the data has to be put into a central place to be processed, but in the future, data can be in different places, and the algorithm can run data together without knowing the actual data. This is called privacy computing. This will allow us to have our own data that is crypt, that we don’t need to reveal. People cannot decode our data, but we can still pool the data into an algorithm and then the algorithm can develop new insights and generate exciting business.

Kaihan Krippendorff: What is your view of digitization by pharma companies in China? 

Ming Zeng: The leading company in this area has been struggling for the last four or five years, but we are getting to the stage where we will see very fast development over the next three or four years. The transformation of traditional business always takes time in the beginning, and the reason can be explained with an example. There is one company working on cancer treatment trying to use this datafication AI, but they found out that all the medical records of major hospitals have different formats, and so a symptom can be called by 100 different terms depending on who you learn from in a college. They had to then hire medical students to recode all the medical records and then put that into the new standard for everybody to follow, and this process itself took pretty long.

Kaihan Krippendorff: How difficult will it be to acquire the necessary leadership mindset to seize the opportunity to become the fastest smarter organization? Is the leadership mindset a barrier?

Ming Zeng: It is a barrier because the outside world has been changing so fast, it puts tremendous pressure on the organization to transform almost every five years. At Alibaba, we have been very conscious of developing the next generation of leaders. Almost every five years, we know we need to have a backup team, somebody who is ready to take up more challenges. One useful trick or one useful tactic we have been using is to put your most promising young man to run an innovating new business. This will not only increase the chance of your innovation to be successful, but it will also give you a great young leader who grows up within the business.

Kaihan Krippendorff: Can you elaborate on the shift from B2C, or B2B to C2B, and what are the three changes that need to happen for an individual or an organization? Also, how can traditional B2B businesses derive value from the C2B approach?

Ming Zeng: By C2B, I mean customers, not consumers per se. If you are in B2B business, you need to treat your business customer as a customer online. You have to build an interactive product with them and engage them. This also requires a different mindset. For B2B business, there is one more tricky part, and that is, it’s becoming more and more important to understand who is a customer of your customer, that is, the ultimate consumer who is driving the whole value chain, which will gradually turn the value chain to a value network. So, if you are just using digital transformation to increase your efficiency, it is not enough. You have to be an essential part of that final C2B network. That is the only way to ensure your survival.

Kaihan Krippendorff: What does a small business do to compete with a big platform? Also, how can small businesses collaborate without losing out to large platform businesses? 

Ming Zeng: A fundamental change of this paradigm shift is actually to put more emphasis on collaboration rather than competition. Small businesses do not need to worry about competing with the big companies because the mandate of big companies is to help small business succeed. That is the only way that they can compete. The way to grow exponentially is therefore to jump on the flywheels of a big ecosystem.

Kaihan Krippendorff: Does that mean you win through the creativity that you bring? 

Ming Zeng: Yes, because in the ecosystem, the big company always drives the growth through partners. As long as you are one of their partners, you will be growing very fast. There are millions of partners, both big and small, because what matters is that they have something unique to contribute. Now the challenge here is, you will become obsolete very quickly if you are all for traditional service, most likely traditional value. You need to become creative and try to offer something unique in that ecosystem, because there is always a position to fill.

Kaihan Krippendorff: Would you mind sharing what your final thoughts are for us?

Ming Zeng: My endeavour is to provide a framework, so you get a feeling that all these changes are actually interconnected. Some fundamental common themes run through all these words you are hearing; digitalization, moving online, algorithm, AI, and so. They are all talking about similar things. Understanding that is the only way you can change your mindset and move into a new world.

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