Digital era brings hyperscale challenges

By James Manyika and Michael Chui

Big companies that process billions of daily transactions pose problems for leaders and competitors, write James Manyika and Michael Chui in Financial Times.

What are the chances of being hit by lightning in any given year? It’s about one in a million, rare enough to think that it is near impossibility. But there are businesses that deal with one-in-a-million occurrences every day: hyperscale companies. As a business leader, you will have to think very differently if you are going to run one of these hyperscale businesses or compete against them.

Even if these businesses use “six sigma” processes, described as being 99.9966 per cent defect-free, they will generate more than 3,000 problems from every billion transactions or processes they undertake. Such scale and complexity is almost unimaginable for most executives, but these are businesses that can sweep away old business models. If you face competition from a hyperscale business, be prepared for disruption.

The internet and digitisation are clearly the main catalysts of the early hyperscale companies. Google processes 4bn searches per day. Twitter users tweet more than 500m times per day. Facebook has more than 1bn users, approaching the second-largest nation of earth. China’s e-commerce giant Alibaba conducts 200m transactions per week in the world’s fastest-growing e-commerce market.

But even some traditional businesses fully enabled by digital technology are hitting hyperscale. China Mobile has more than 760m subscribers. Global payments networks run by Visa, MasterCard and Amex already process billions of consumer transactions per year. And as connected digital sensors and devices are embedded in the physical world—a trend described as “the internet of things”—even companies in traditional industries could face hyperscale challenges. GE and other large industrial companies are moving in this direction.

Whether you are an entrepreneur, an investor, or a business leader, you must recognise the dawning of a new age of hyperscale businesses, and try to understand the unique management challenges and opportunities associated with them.

We do not yet have a set of best practices about how to create and operate such a business. We are, nevertheless, starting to see some patterns in how they operate and the unique requirements for managing these businesses:

Firstly, hyperscale businesses exhibit hypergrowth, at least at some stage of their development. WeChat, the mobile text and voice messaging communication service developed by China’s Tencent, added 300m users in two years, more than the entire adult population of the US. To sustain hypergrowth, you must offer value propositions that will resonate worldwide, invest ahead of the exponential adoption—focusing on capital rather than operating expenditure—and hire people who are vastly overqualified and therefore ready for each rapid wave of change.

Secondly, hyperscale businesses achieve tremendous operating leverage, largely through process automation. Automation means that you do not have to suffer from diminishing returns to scale. Compare Detroit in 1990 and Silicon Valley in 2014. The three top companies in Detroit produced revenues of $250bn with 1.2m employees and a combined market capitalisation of $36bn. The top three companies in Silicon Valley in 2014 had revenues of $247bn, only 137,000 employees, but a market capitalisation of $1.09tn

Thirdly, hyperscale businesses exploit digital marginal cost economics. You can scale up hyperscale companies quickly because information goods have almost zero storage, transportation and replication costs. It took Buzzfeed, the online media organisation, only six years to attain 130m unique readers per month. In contrast, the New York Times has a monthly readership of 54m—despite the fact that the newspaper has existed since 1851.

Fourth, if you run a hyperscale businesses, you will place yourself at the heart of rich ecologies of players (large and small). Social networks such as Facebook and Twitter are embedded in the digital lives of their users and know how to generate value for advertisers and app developers. In turn, online hyperscale businesses provide rich—global—opportunities for many smaller businesses and service providers. On eBay, 97 per cent of commercial sellers export goods to customers in foreign countries, compared with less than 10 per cent in the case of traditional small businesses in most countries.

Fifth, every hyperscale business is a big-data business. Online companies with large numbers of users can determine a great deal from their clickstreams and then monetise that information. Payment networks such as Visa, MasterCard, Amex and other players such as Square know a great deal about customers’ spending, and have created business lines based on mining this data. You must learn how to collect, integrate, manage, experiment and derive insight from big data to compete as a hyperscale business.

Finally, hyperscale businesses create new business models that can quickly threaten incumbents. The characteristics that made Amazon successful in selling books armed the company for its assault on many other retail categories, its move into ecommerce and virtual-storefront services and eventually Amazon Web Services for cloud computing. As a business leader, you must consider what hyperscale businesses, existing and potentially emerging, could threaten your business model and how, and indeed whether you could grow a hyperscale businesses out of your existing company.

Hyperscale businesses are already remoulding daily lives, and reshaping the ecology of business. Now is the time to get to know how to run them, or be ready to compete again them.

This article originally ran in Financial Times.

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