What do we mean by 4th industrial revolution?

Concepts, consequences and impact on industrial and non-industrial enterprises

You may have heard, in many different circumstances and forums, the term “4.0 industry” or 4th industrial revolution. Although it is a fashion nowadays, the concept may raise some questions. Being this the fourth revolution, which are the previous three? Is it only related to industry? How may it shape the market overall? What to expect in my specific sector and context?

These few questions represent a broad spectrum of uncertainty that can only be solved for specific players through specific market analysis. However, in this article I will present some hypotheses on the broad impacts of the fourth revolution in the general market, considering the lessons learnt from the previous three. I want to beforehand highlight that these are my personal conclusions extracted from the analyzed data, rather than an official point of view of IBM.

What is an industrial revolution?

The term industrial revolution was popularized by the British economic historian Arnold Toynbee (1852–1883) to refer to the economic transition from an economy mainly based on human labor to the inclusion of fossil fuels to accelerate the productive process. Hence, we can summarize an Industrial Revolution as a process through which the bases of production shift from a leading force (human labor) to another (fossil fuels). This does not mean that the previous pillars do not remain within the economic activity, although to a smaller comparative extent. Therefore, these are the main characteristics of an Industrial Revolution:

• The transition from a resource upon which the productive model is based to a new source of productivity.
• Such evolution leads to a decrease in the marginal productive costs (understood as the cost associated to the production of a specific item).
• Historically, an Industrial Revolution implies a shift on what we could call the “Global Value Chain” through its effect on different industries as exposed in figure 2.
• An Industrial Revolution leads to an exponential increase on Global Per Capital GDP compared to that of a previous period. Hereby, it acts as an accelerator for global wealth growth. The only situation where this rule did not apply relates to the period after World War II, due to the impact of Globalization.
• Industrial Revolutions tend to generate more volatility within the market, open to higher increases and drops on global GDP as observed in figure 1.

Industrial revolutions so far.

Considering the previous characteristics, it is assumed that our society has so far experienced three notable industrial revolutions. It is important to highlight that, due to the non-existence of data recording as the present system, there are deep controversies within economic historians regarding their duration and impact. Here I share the most common visions:

1. First Industrial Revolution: Between 1800 and 1830, coal and steam power engines replaced the animal/human traction as the key base of productivity. This transition, first studied by Arnold Toynbee, generated an unprecedented raise of global GDP per capita of about 67%.

2. Second Industrial Revolution: with the increasing mastery of steam engines and the development of electricity, this last would finally replace coal as the major source of power, although not to the same extent as steam engines had replaced animal traction. Hence, there is a debate around whether this period lasted until the mid-fifties.

3. Third Industrial Revolution: the latest revolution is based on the evolution of the internet and other technologies. In this case, a specific power source is not replaced, but rather better managed, increasing its efficiency. However, considering its actual theoretical state, many have identified the internet and the intelligent management systems as the core source of, not production per se, but productivity. The third revolution bases were widely exposed by Jeremy Rifkin, who renamed this third wave as the “Digital Revolution”.

What is the impact of an industrial revolution on businesses?

It is important to make a difference, at this point, between industries working with physical materials and those based on the provision of services. This main differentiation sees its origins in the widely known three-sector model. However, I’d like to highlight that some specific activities within the second and third sectors, such as logistics and transportation, lay on a confusing border. Considering this, I tried to summarize the major impacts on each sector in figure 2.

As presented in figure 1, we may assume that the major impact is registered on those industries with a direct involvement with power sources, either because they are producers and providers, or because they employ these sources extensively and as a major asset in their economic activity. However, we could affirm that this was mostly true during the second and third industrial revolution, when the main change was related to pure productivity means. For example, we may agree that the shift from coal to electricity may have a way bigger impact on an automotive plant rather than a bank branch. However, to what extent does this hypothesis hold true during the third and fourth industrial revolutions?

What is the fourth industrial revolution and how does it differ from the previous ones?

It is important to highlight that the fourth revolution is, as of today, a major theoretical trend, and it is difficult to state whether it represents an event per se or a twist on the screw of the previous revolution. According to the World Economic Forum:

“The First Industrial Revolution used water and steam power to mechanize production. The Second used electric power to create mass production. The Third used electronics and information technology to automate production. Now a Fourth Industrial Revolution is building on the Third, the digital revolution that has been occurring since the middle of the last century. It is characterized by a fusion of technologies that is blurring the lines between the physical, digital, and biological spheres.”

The fourth industrial revolution is widely understood as the proliferation of “machine to machine” technology. Indeed, in accordance to C-suite Series: The 2021 CEO Study, IOT ranks among the top five market trends in the opinion of 3,000 CEOs.

We may highlight that, at least, it has notable similarities with the previous one. Therefore, what characterizes the third and fourth revolution? We may agree that their impact on short, mid and long term are similar, but with an extra complexity: if we previously highlighted that the first and second revolution did not impact service industries as much as capital-intensive ones, this has now changed. Information technologies have the same capability of shifting the productive model of both a bank branch and an automotive plant. More than this, information technologies led to a similar amount of firms’ aggregation among banks or newspapers, as electricity did among railways operators at the end of the nineteenth century.

Although hard to find reliable data for the period 1870–1913, it is remarkable that railway operators in USA decreased from 364 to 275 (-30%) even when the rail usage kept increasing in accordance to the Public Broadcasting Corporation. Hence, competition increased. On the period between 1998 and 2006, the number of credit institutions operating in Spain shifted from 397 to 344 (-13%), considering the number of operations on the same period increased, in accordance to the European Central Bank.

Overall, since information management lays at the bases of all productive models, from pure physical to pure services industries, the impact of digitalization (the third revolution) has been felt all over the market. We are all accustomed to major examples such as “The largest hospitality firm owns no hotel” or “the largest retailer owns no shop”. Similarly, automation, virtual reality etc. have the same capability of disrupting productive models all across the market. According to this analysis, these last revolutions are broader than the previous two, and their impact can be noticed on all kinds of firms.

How may I react?

Unfortunately, there is no specific magic formula. Probably you guessed this. In any case, we could summarize all the possibilities on three major movements, previously mentioned on figure two:

• Lateral expansion: expand your business cashflows into other more profitable steps within your industries value chain.
• Specialization: focus on becoming the best in class within your particular activity by improving efficiency rates, customer recognition, etc.
• Reinvent: similar to what Olivetti did moving into the telecom industry. Move your core business to another more productive industry or activity. Similar to “Lateral expansion” search for new cashflows, but within other industries that go beyond your present core business.

What is the best option?

It’d be hard to define the best option. Probably, it differs not only at a company level, but even at a department level. Indeed, most companies within the telecommunications industry have taken actions on all three lines displayed in Figure 3, defining a diversified strategic portfolio in accordance to existing assets, capabilities, risks and market development expectations, among others.

At IBM Enterprise Strategy we have assumed the mission of supporting our customers on their path towards identifying, defining and building their new role within the changing market. Our own history, together with our business experts teamed with technology masters is an example of not only adapting to new market scenarios but leading them.