The Fourth Industrial Revolution

by Klaus Schwab

  The Forum’s Future of Jobs study also showed that less than 50% of chief human resources officers are at least reasonably confident in their organization’s workforce strategy to prepare for these shifts. The main barriers to a more decisive approach include companies’ lack of understanding of the nature of disruptive changes, little or no alignment between workforce strategies and firms’ innovation strategies, resource constraints and short-term profitability pressures. As a consequence, there is a mismatch between the magnitude of the upcoming changes and the relatively marginal actions being taken by companies to address these challenges. Organizations require a new mindset to meet their own talent needs and to mitigate undesirable societal outcomes.

  Impact on developing economies

  It is important to reflect upon what this might mean for developing countries. Given that even the past phases of the industrial revolution have not yet reached many of the world’s citizens (who still do not have access to electricity, water, tractors and other machinery), many aspects of the fourth industrial revolution characterize transformations in advanced, and to a certain extent middle-income economies, however, this does not mean that the fourth industrial revolution will inevitably impact developing economies.

  As yet, the precise impact of the fourth industrial revolution remains to be seen. In recent decades, although there has been a rise in inequality within countries, the disparity across countries has decreased significantly. Does the fourth industrial revolution risk reversing the narrowing of the gaps between economies that we have seen to date in terms of income, skills, infrastructure, finance and other areas? Or will technologies and rapid changes be harnessed for development and hasten leapfrogging?

  These difficult questions must be given the attention they require, even at a time when the most advanced economies are preoccupied with their own challenges. Ensuring that swathes of the globe are not left behind is not a moral imperative; it is a critical goal that would mitigate the risk of global instability due to geopolitical and security challenges such as migration flows.

  One challenging scenario for low-income countries is if the fourth industrial revolution leads to significant “re-shoring” of global manufacturing to advanced economies, something very possible if access to low-cost labour no longer drives the competitiveness of firms. The ability to develop strong manufacturing sectors serving the global economy based on cost advantages is a well-worn development pathway, allowing countries to accumulate capital, transfer technology and raise incomes. If this pathway closes, many countries will have to rethink their models and strategies of industrialization. Whether and how developing economies can leverage the opportunities of the fourth industrial revolution is a matter of profound importance to the world; it is essential that further research and thinking be undertaken to understand, develop and adapt the strategies required.

  The danger is that the fourth industrial revolution would mean that a winner-takes-all dynamic plays out between countries as well as within them. This would further increase social tensions and conflicts, and create a less cohesive, more volatile world, particularly given that people are today much more aware of and sensitive to social injustices and the discrepancies in living conditions between different countries. Unless public- and private-sector leaders assure citizens that they are executing credible strategies to improve peoples’ lives, social unrest, mass migration, and violent extremism could intensify, thus creating risks for countries at all stages of development. It is crucial that people are secure in the belief that they can engage in meaningful work to support themselves and their families, but what happens if there is insufficient demand for labour, or if the skills available no longer match the demand?

  3.1.3 The Nature of Work

  The emergence of a world where the dominant work paradigm is a series of transactions between a worker and a company more than an enduring relationship was described by Daniel Pink 15 years ago in his book Free Agent Nation.26 This trend has been greatly accelerated by technological innovation.

  Today, the on-demand economy is fundamentally altering our relationship with work and the social fabric in which it is embedded. More employers are using the “human cloud” to get things done. Professional activities are dissected into precise assignments and discrete projects and then thrown into a virtual cloud of aspiring workers located anywhere in the world. This is the new on-demand economy, where providers of labour are no longer employees in the traditional sense but rather independent workers who perform specific tasks. As Arun Sundararajan, professor at the Stern School of Business at New York University (NYU), put it in a New York Times column by journalist Farhad Manjoo: “We may end up with a future in which a fraction of the workforce will do a portfolio of things to generate an income – you could be an Uber driver, an Instacart shopper, an Airbnb host and a Taskrabbit”.27

  The advantages for companies and particularly fast-growing start-ups in the digital economy are clear. As human cloud platforms classify workers as self-employed, they are – for the moment – free of the requirement to pay minimum wages, employer taxes and social benefits. As explained by Daniel Callaghan, chief executive of MBA & Company in the UK, in a Financial Times article: “You can now get whoever you want, whenever you want, exactly how you want it. And because they’re not employees you don’t have to deal with employment hassles and regulations.”28

  For the people who are in the cloud, the main advantages reside in the freedom (to work or not) and the unrivalled mobility that they enjoy by belonging to a global virtual network. Some independent workers see this as offering the ideal combination of a lot of freedom, less stress and greater job satisfaction. Although the human cloud is in its infancy, there is already substantial anecdotal evidence that it entails silent offshoring (silent because human cloud platforms are not listed and do not have to disclose their data).

  Is this the beginning of a new and flexible work revolution that will empower any individual who has an internet connection and that will eliminate the shortage of skills? Or will it trigger the onset of an inexorable race to the bottom in a world of unregulated virtual sweatshops? If the result is the latter – a world of the precariat, a social class of workers who move from task to task to make ends meet while suffering a loss of labour rights, bargaining rights and job security – would this create a potent source of social unrest and political instability? Finally, could the development of the human cloud merely accelerate the automation of human jobs?

  The challenge we face is to come up with new forms of social and employment contracts that suit the changing workforce and the evolving nature of work. We must limit the downside of the human cloud in terms of possible exploitation, while neither curtailing the growth of the labour market nor preventing people from working in the manner they choose. If we are unable to do this, the fourth industrial revolution could lead to the dark side of the future of work, which Lynda Gratton, a professor of management practice at London Business School describes in her book The Shift: The Future of Work is Already Here - increasing levels of fragmentation, isolation and exclusion across societies.29

  As I state throughout this book, the choice is ours. It entirely depends on the policy and institutional decisions we make. One has to be aware, however, that a regulatory backlash could happen, thereby reasserting the power of policymakers in the process and straining the adaptive forces of a complex system.

  The importance of purpose

  We must also keep in mind that it is not only about talent and skills. Technology enables greater efficiency, which most people want. Yet they also wish to feel that they are not merely part of a process but of something bigger than themselves. Karl Marx expressed his concern that the process of specialization would reduce the sense of purpose that we all seek from work, while Buckminster Fuller cautioned that the risks of over-specialization tend “to shut off the wide-band tuning searches and thus to preclude further discovery of the all-powerful generalized principles.”30

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sp; Now, faced with a combination of increased complexity and hyper-specialization, we are at a point where the desire for purposeful engagement is becoming a major issue. This is particularly the case for the younger generation who often feel that corporate jobs constrain their ability to find meaning and purpose in life. In a world where boundaries are disappearing and aspirations are changing, people want not only work-life balance but also harmonious work-life integration. I am concerned that the future of work will only allow a minority of individuals to achieve such fulfilment.

  3.2 Business

  Beyond the changes in growth patterns, labour markets and the future of work that will naturally influence all organisations, there is evidence that the technologies that underpin the fourth industrial revolution are having a major impact on how businesses are led, organized and resourced. One particular symptom of this phenomenon is that the historical reduction in the average lifespan of a corporation listed on the S&P 500 has dropped from around 60 to approximately 18.31 Another is the shift in the time it takes new entrants to dominate markets and hit significant revenue milestones. Facebook took six years to reach revenue of $1 billion a year, and Google just five years. There is no doubt that emerging technologies, almost always powered and enabled by digital capabilities, are increasing the speed and scale of change for businesses.

  This also reinforces an underlying theme in my conversations with global CEOs and senior business executives; namely, that the deluge of information available today, the velocity of disruption and the acceleration of innovation are hard to comprehend or anticipate. They constitute a source of constant surprise. In such a context, it is a leader’s ability to continually learn, adapt and challenge his or her own conceptual and operating models of success that will distinguish the next generation of successful business leaders.

  Therefore, the first imperative of the business impact made by the fourth industrial revolution is the urgent need to look at oneself as a business leader and at one’s own organization. Is there evidence of the organization and leadership capacity to learn and change? Is there a track record of prototyping and investment decision-making at a fast pace? Does the culture accept innovation and failure? Everything I see indicates that the ride will only get faster, the changes will be fundamental, and the journey will therefore require a hard and honest look at the ability of organizations to operate with speed and agility.

  Sources of disruption

  Multiple sources of disruption trigger different forms of business impact. On the supply side, many industries are seeing the introduction of new technologies that create entirely new ways of serving existing needs and significantly disrupt existing value chains. Examples abound. New storage and grid technologies in energy will accelerate the shift towards more decentralized sources. The widespread adoption of 3D printing will make distributed manufacturing and spare-part maintenance easier and cheaper. Real-time information and intelligence will provide unique insights on customers and asset performance that will amplify other technological trends.

  Disruption also flows from agile, innovative competitors who, by accessing global digital platforms for research, development, marketing, sales and distribution, can overtake well established incumbents faster than ever by improving the quality, speed or price at which they deliver value. This is the reason why many business leaders consider their biggest threat to be competitors that are not yet regarded as such. It would be a mistake, however, to think that competitive disruption will come only through start-ups. Digitization also enables large incumbents to cross industry boundaries by leveraging their customer base, infrastructure or technology. The move of telecommunications companies into healthcare and automotive segments are examples. Size can still be a competitive advantage if smartly leveraged.

  Major shifts on the demand side are also disrupting business: Increasing transparency, consumer engagement and new patterns of consumer behaviour (increasingly built upon access to mobile networks and data) force companies to adapt the way they design, market and deliver existing and new products and services.

  Overall, I see the impact of the fourth industrial revolution on business as an inexorable shift from the simple digitization that characterized the third industrial revolution to a much more complex form of innovation based on the combination of multiple technologies in novel ways. This is forcing all companies to re-examine the way they do business and takes different forms. For some companies, capturing new frontiers of value may consist of developing new businesses in adjacent segments, while for others, it is about identifying shifting pockets of value in existing sectors.

  The bottom line, however, remains the same. Business leaders and senior executives need to understand that disruption affects both the demand and supply sides of their business. This, in turn, must compel them to challenge the assumptions of their operating teams and find new ways of doing things. In short, they have to innovate continuously.

  Four major impacts

  The fourth industrial revolution has four main effects on business across industries:

  – customer expectations are shifting

  – products are being enhanced by data, which improves asset productivity

  – new partnerships are being formed as companies learn the importance of new forms of collaboration, and

  – operating models are being transformed into new digital models.

  3.2.1 Customer Expectations

  Customers, whether as individuals (B2C) or businesses (B2B), are increasingly at the centre of the digital economy, which is all about how they are served. Customer expectations are being redefined into experiences. The Apple experience, for example, is not just about how we use the product but also about the packaging, the brand, the shopping and the customer service. Apple is thus redefining expectations to include product experience.

  Traditional approaches to demographic segmentation are shifting to targeting through digital criteria, where potential customers can be identified based on their willingness to share data and interact. As the shift from ownership to shared access accelerates (particularly in cities), data sharing will be a necessary part of the value proposition. For example, car-sharing schemes will require the integration of personal and financial information across multiple companies in the automotive, utility, communications and banking sectors.

  Most companies profess to be customer-centric, but their claims will be tested as real-time data and analytics are applied to the way they target and serve their customers. The digital age is about accessing and using data, refining the products and experiences, and moving to a world of continual adjustment and refinement while ensuring that the human dimension of the interaction remains at the heart of the process.

  It is the ability to tap into multiple sources of data – from personal to industrial, from lifestyle to behavioural – that offers granular insights into the customer’s purchasing journey that would have been inconceivable until recently. Today, data and metrics deliver in quasi-real time critical insights into customer needs and behaviours that drive marketing and sales decisions.

  This trend of digitization is currently towards more transparency, meaning more data in the supply chain, more data at the fingertips of consumers and hence more peer-to-peer comparisons on the performance of products that shift power to consumers. As an example, price-comparison websites make it easy to compare prices, the quality of service, and the performance of the product. In a mouse click or finger swipe, consumers instantaneously move away from one brand, service or digital retailer to the next. Companies are no longer able to shirk accountability for poor performance. Brand equity is a prize hard won and easily lost. This will only be amplified in a more transparent world.

  To a large extent, the millennial generation is setting consumer trends. We now live in an on-demand world where 30 billion WhatsApp messages are sent every day32 and where 87% of young people in the US say their smart phone never leaves their side and 44% use their camera function daily.33 This is a w
orld which is much more about peer-to-peer sharing and user-generated content. It is a world of the now: a real-time world where traffic directions are instantly provided and groceries are delivered directly to your door. This “now world” requires companies to respond in real time wherever they are or their customers or clients may be.

  It would be a mistake to assume that this is confined to high-income economies. Take online shopping in China. On 11 November 2015, dubbed Singles Day by the Alibaba Group, the e-commerce service handled more than $14 billion of online transactions, with 68% of sales through mobile devices.34 Another example is sub-Saharan Africa, which is the fastest-growing region in terms of mobile-phone subscriptions, demonstrating how mobile internet is leapfrogging fixed-line access. GSM Association expects an additional 240 million mobile internet users in sub-Saharan Africa over the next five years.35 And while advanced economies have the highest penetration rates of social media, East Asia, South-East Asia and Central America are above the global average of 30% and growing fast. WeChat (Weixin), a China-based mobile text and voice messaging service, gained around 150 million users in just 12 months to the end of 2015, year-on-year growth of at least 39%.36

  3.2.2 Data-Enhanced Products

  New technologies are transforming how organizations perceive and manage their assets, as products and services are enhanced with digital capabilities that increase their value. Tesla, for example, shows how over-the-air software updates and connectivity can be used to enhance a product (a car) after purchase, rather than let it depreciate over time.

  Not only are new materials making assets more durable and resilient but data and analytics are also transforming the role of maintenance. Analysis provided by sensors placed on assets enables their constant monitoring and proactive maintenance and, in doing so, maximizes their utilization. It is no longer about finding specific faults but rather about using performance benchmarks (based on data supplied by sensors and monitored through algorithms) that can highlight when a piece of equipment is moving outside its normal operating window. On aircrafts, for example, the airline control centres know before the pilots do if an engine is developing a fault on a particular plane. They can therefore instruct the pilot on what to do and mobilize the maintenance crew in advance at the flight destination.