MIT’s Andrew McAfee, Part 2: Three Key Questions For Directors In The Digital Age

Spotting that hole when you are part of the market when you're the incumbent, then it's really hard to do, says MIT's Andrew McAfee. "I would always ask the Andy Grove question: 'If only the paranoid survive, what are we likely to miss here?'

Andrew McAfee will be the keynote speaker at Corporate Board Member’s boot camp for new business models in Cambridge, Mass., May 7-8, 2020.

In a time of incredible technological change, dislocation—and pessimism—there are few more original or contrarian thinkers than Andrew McAfee.

Co-Founder and Co-Director of the Initiative on the Digital Economy and a Principal Research Scientist at the MIT Sloan School of Management, McAfee has done as much as anyone over the past decade to reshape the way business people think about technology and its impact on the future. In now-classic business books such as The Second Machine Age and Machine, Platform, Crowd, he outlined— with uncanny accuracy—the way new technologies would come to dominate and reshape business, while offering practical advice about how to take advantage of the opportunity.

This May 7&8, McAfee will keynote our 2nd annual Disruptive Technology Bootcamp in Cambridge, Mass, an intense, interactive 2-day workshop—featuring some of the top minds at MIT—that’s been specifically crafted for directors looking to master the new business models that are reshaping the global economy (See agenda).

In part two of this special, extended-length conversation (Part 1 is here), McAfee dives into the the key factors that separate truly digital companies and also rans, and offers practical advice for directors on helping their organizations make the leap:

There’s a huge amount of conversation these days about the idea of digital transformation. It’s a conversation that’s finding real new urgency lately. But what is it? What are the tool marks of a company that has been truly digitally transformed and one that’s just using technology to do more stuff?

The analogy I always use here is a factory 100 years ago could electrify by ripping out the one big steam engine in the basement and replacing it with one big electric engine. That’s an electrified factory because it is 100% powered by electricity. But that factory is not going to be in business very much longer because their competitors are going to come along, and they’re going to use that same electric technology to put a motor on every machine in the factory to install overhead cranes and conveyor belts and assembly lines and to rethink what a factory could be.

When I hear companies talk about digital transformation, sometimes I get the sense that they are ripping out the one big steam engine, replacing it with one big electric motor, but that’s just not gonna get the job done. So your question is the right one, which is what does it need to more fundamentally embrace this digital transformation that we’re living in?

Erik Brynjolfsson [Director of the MIT Initiative on the Digital Economy] and I wrote a book about this that came out a couple years ago. I think there are three fundamental things that need to change. The first one is companies need to really think hard about how they divvy up all the work that needs to be done between minds and machines. So that study that I mentioned earlier about medical diagnosis is a great way to do this. It’s not saying to the human doctor, “You have no more role in diagnosis,” but it is saying, “Do we want to have an AI engine assisting you, and does it maybe get to take the driver’s seat for a lot of these things?” I would say yes.

Rethinking how we divide up all the work between minds and machines is fundamental. Most of us are way too fond of our minds. We’re way too fond of human intuition, judgment, experience, expertise, gut, insight, all these things. Those are real things, but we overvalue them like crazy, especially in an era of very, very powerful artificial intelligence and machine learning.

The second thing is that a lot of companies still have a product mindset. I think a lot of very successful upstarts these days have a platform mindset. What I mean by that is they say, “Look, we’re gonna build a digital environment that draws participants in. It’s really compelling. It offers them value.” One of my favorite examples is the difference between running a really good gym and building ClassPass, which is a platform that lets people sign up and take classes in all kinds of different gyms, and lets gyms sign up and offer their currently vacant spaces in their classes to ClassPass members.

This is really good idea. I’m not saying it’s gonna make the gym obsolete, or the brand of the gym obsolete at all. But it’s changing an industry, and I think that’s really really interesting.

Then the last thing that I would say is most companies are still too fond to their core, their core capabilities, their core competence, this set of things that they’ve built up over years that they think they’re really really good. Insurance companies tend to think they’re really good at assessing risk, and they are.

The weird part is, over and over, if you can invite the crowd in, you will find some weirdo out there who you’ve never heard of, or some small group of weirdos, who will take a fresh approach to your long-standing problem, and they will find a better way to, for example, assess risk than you will despite the fact that you’ve been doing it and doing it well for decades and decades.

So when Eric and I wrote our book, we called it Machine, Platform, Crowd to emphasize that the balance between minds and machines, between products and platforms, and between the core and the crowd, all those balances need to shift, and most companies, I think, are still being too conservative.

How does a corporate director begin to make that case to the CEO? How should the company begin to make these changes? They are awash in new business models and a changing world. Where do they start?

I would start to ask questions like, “what are the five most important decisions”— I’m making up the number five—”that get made in this company on a daily basis, on a strategic basis, or a tactical basis. And how are we reevaluating or making those decisions in a different way? Or are we still relying on our humans to do all the diagnosis inside this company?” I would ask, “which platform upstarts, startup companies, or which potential kinds of platform business would be really bad news?”

And that’s a tough question to answer, because I really doubt that anyone in the global payments industry years ago would say, “What we are terrified of our two Irish brothers, one of them 21 and one of them 19 starting a company that’s gonna disrupt the global payments industry.”

But that’s what Stripe is doing. Because those guys started with the insight that, as they put it, if you are a new online merchant, you wanted to try something, you could set up every aspect of the business that you wanted to test, they said, as quickly as you could type, with one exception. As soon as you want to take a credit card from a customer, you entered, you know, 1962, and you dealt with payment and banks and credit card companies and paper forms. And they said, “First of all, we have to be missing something. This utility has to exist.” And they said, “It actually doesn’t. We have to build it up.” And they spotted this big hole in the market.

Spotting that hole when you are part of the market when you’re the incumbent, then it’s really hard to do. But I would always ask the Andy Grove question: “If only the paranoid survive, what are we likely to miss here?”

And then finally, I would ask: “what are the ways that we’re trying to involve more viewpoints, more sources of knowledge, more people in some of the important activities at this company?”

Have you found examples of incumbents being able to beat back born-digital companies? Born-digital companies have a tremendous advantage in that they haven’t had to put all their chips anywhere yet. They can come up with that singular insight, find that one weak spot.

I think that’s right, but their advantage is not typically a financial advantage. A lot of the successful incumbents that I deal with have huge war chests. Their balance sheets, after a long economic expansion, are in very good shape. And it’s not that the upstarts have the customer relationships. They absolutely don’t. They’re starting from nothing. What they have is a very different worldview. They are not constrained by their successes and the environment that they’ve been brought up in. This is easy to say. It’s really really hard to do, which is why I don’t have this great set of examples of successful incumbent businesses who have pivoted successfully to this new way of doing things.

A couple things I can point to, I hear a lot of my colleagues and friends who work in finance saying that investing is changing pretty quickly. Some of the heavyweights of the incumbent investment world are leading this charge. I think part of the reason for that is you can’t convince yourself that you’re still a good investor if your returns are eroding pretty steadily.

I’m a big baseball fan. I look at what some of the oldest and richest teams in baseball have been doing. The Red Sox are one of my favorite examples, a very team that runs itself very differently than it did 20 years ago. Again, I think that’s because it is hard to convince yourself that you’re a great baseball team if you’re losing games, if you’re not making the playoffs, if you see a team with one quarter your budget that has a better record than you do year after year. That tells you something. So in the areas where we see relatively rapid, relatively clear feedback about how you’re doing, that’s where I see a lot of the incumbents really picking up on these new approaches.

What are some of the plays you can make in order to not get overtaken?

Obviously, you can acquire brains, you can acquire technology, but the tougher part is listening to them once you bring them in. As you know, culture is incredibly strong. Success feeds on itself. Organizational routines can get really really deeply ingrained. Shaking those things up is difficult.

I really do think that it deserves the label of leadership. What visionary leaders and their boards need to be doing is to say: “Maybe it’s not as clear as it is in the game of baseball that we’re slipping behind some of the new competitors, some of the different approaches out there, but have we Moneyballed ourselves? Are we clearly doing things very differently than we were 20 years ago in the face of all this technology and all this new kind of evidence out there? And if not, why not?”

END PART 2 / GO TO PART 3 >