Every Company Is a Technology Company

But Henry Schein (HSIC) has managed to place itself at the center of a technological revolution. It has turned its dull-as-mouthwash catalogue business into the leading platform for digital dentistry, and increasingly for other medical practices. In doing so, it has made big money for shareholders. Since its IPO in 1995, it has provided an annualized return to shareholders of 16%—one of the best long-term performances on the list and far above Berkshire Hathaway’s (BRKA) 10.1% over the same period.

Herein, as you’ll see, lies a lesson (or several). In today’s economy almost every big company, even one selling dental drills, is on a journey of digital transformation. Cloud and mobile computing, ubiquitous sensors producing endless streams of data, and ever more intelligent algorithms have created the potential to transform nearly every aspect of nearly every business. Getting ahead in the digital journey can lead to outsize success, as the Henry Schein story illustrates. Falling behind, in a race with winner-take-most dynamics, can cause fatal disruption.

Today’s savviest executives recognize that. In a survey of For­tune 500 CEOs we conducted for this issue, the rapid pace of technological change was cited most often as the single biggest challenge facing their companies. Three-quarters of the CEOs said a transformative trio of technologies—cloud computing, mobile computing, and the Internet of things—will be either “very important” or “extremely important” to their businesses in the future. More than 50% added artificial intelligence and machine learning to the list.

Asked whether they now consider their company to be a technology company, 67% of the CEOs said yes. Whether they pump liquids, make machines, mine minerals, or print magazines, digitization has become their destiny. But, hey, no reason to ask corporate chieftains. Four out of five dentists can tell you that—or at least those who shop at Henry Schein.

Have you ever had a crown put on your teeth?

Here’s the standard process at most dental offices around the country. The dentist puts you in a chair and inserts gag-inducing goop into your mouth to make an impression of your teeth. The goop is then shipped to a lab, where it’s turned into a mold used to make your crown. Artisans apply a white enamel powder to the crown in an attempt to match the color of your teeth. The whole process is very labor-intensive—and hasn’t changed much in a century (except, perhaps, for the recent “innovation” of moving some of the lab work to China).

At the charity-run dental clinic adjacent to Henry Schein’s offices south of Salt Lake City, however, the experience is dramati­cally different. There is no goop. The dental assistant uses an imaging rod that can quickly make a 3D computer image of the affected teeth. The assistant then designs the crown on the same screen and sends it to a nearby drilling machine that’s about the size of a large toaster oven. Thirty minutes later the crown is done. The entire design and manufacturing process takes less than an hour—and the dental chair provides a back rub while you’re waiting.

“The paradigm shift going on in dentis­try is the most major and significant in my long career,” says Dr. Gordon Christensen, a leading provider of continuing education to dentists. And Henry Schein, whose main presence in the dental office used to be a 1,000 page catalogue, is at the center of it.

For that, Stanley Bergman, the company’s CEO for 26 years, deserves the credit.

Bergman is neither a dentist nor a technologist. He was born in South Africa but left in objection to apartheid and came to New York in 1976. He worked as an accountant and then as a consultant for BDO, where he helped other companies adopt new spreadsheet applications. “I never really understood computing,” Bergman says. Indeed, in the late 1970s a group of his BDO colleagues left to join a new computer company called Apple and asked Bergman to go with them. He declined. Instead, in 1980 he took a job with one of his clients, Henry Schein.

The young accountant clearly impressed his employers. Before dying from cancer in 1989, then-CEO Jay Schein named Bergman—only 39 years old at the time—his successor. The company’s sales were then $200 million. Last year they were $10.6 billion.

Given that extraordinary success—which rivals that of, say, Oracle’s (ORCL) Larry ­Ellison—Bergman is a remarkably humble and unassuming man. He attributes the transformation of Henry Schein from catalogue to digital platform as much to serendipity as to smart strategy. (Would Ellison say the same?) In the early 1990s a number of small companies sprang up offering DOS-based software packages to help dentists handle basic accounting. A Henry Schein marketing man tried selling it but found that the main barrier to software sales was credibility: Dentists weren’t convinced the startups would still be around years later to provide product support. So as an experiment, Henry Schein agreed to put its name on the product and service the customers. The software began to sell.

One day a couple of years later, Bergman recalls, “I was at a dental convention, and the software maker came up and said, ‘You guys are doing such a great job selling my product, I plan on selling the business.’ ” In order to keep his commitment to his customers, Bergman bought the company.

Just like that, Henry Schein found itself in the software business. And as Bergman freely confesses, “We didn’t know how to run a software business.” When software moved from DOS to Windows, Henry Schein bought another company, called Dentrix, which did both scheduling as well as accounting and offered a crude sort of electronic medical record. Larry Gibson, founder of Dentrix, became the company’s chief technology officer, a position in which he served until 2007.

As a provider of software, Bergman found he was no longer merely a wholesaler, but a service provider too. That, in turn, required a complete retraining of the sales force, turning them “from order takers into people who brought advice to the customer.”

The resulting combination—software manufacturer plus consultant plus wholesaler of equipment and supplies—turned Henry Schein into a one-stop platform for dentists and put it in a position where it could ultimately drive the digital transformation of the dental office.

Bergman says that even today, when he employs 120 computer coders in Utah’s “Silicon Slopes” and 400 globally, he thinks of the company as primarily a service provider—not a tech company. Rarely is Henry Schein the first to introduce new technology, he says. “But when the price becomes such that 80% of the bell curve can afford to adopt it, you will find us there.” Success comes from building platforms users trust, Bergman says: “We didn’t bring much to Dentrix. What we did bring is trust. When the phone rings, you make sure you answer it.”

In recent years the company has expanded to other areas of practice, including veterinary medicine. For now, its software services remain relatively simple, providing scheduling services and text reminders to owners to bring in their pets or buy heartworm medicine. But it is investigating new electronic collars that will allow vets to monitor animals’ health from afar. Inactivity could provide an early signal of an illness. Head shaking may mean an ear infection. Too much drinking could be an early sign of diabetes. The digital vet is not too far in the future.

While Henry Schein began its digital transformation two decades ago, GE (GE) has been at the job for just five years. But the giant industrial company—No. 11 on the Fortune 500 list—has gone at it with prodigious determination, attempting to meld the world of digital analytics with the world of jet engines, steam turbines, and locomotives.

Lorenzo Simonelli runs the company’s oil and gas business. He sees data as driving “the next generation of productivity” for its customers. GE is now installing sensors on all its equipment and gathering vast amounts of data as a result. In its liquid-­natural-gas business, for instance, 740 gas turbines are ­connected to what the company calls iCenters. “We collect as much data in a day as all of Facebook,” Simonelli says.

In many cases, applications are straightforward. Product engineers can increase the productivity of their wells by 2% to 5%, Simonelli says, by monitoring activity at the pump. Blowout suppressors can be gauged from afar, preventing “unplanned pulls,” which can cost up to $3 million. Sensors on pipelines can alert to leaks, corrosion, and broken valves, saving huge sums on maintenance.

GE is now moving beyond such applications to more sophisticated analysis. It’s in the process of creating “digital twins” for much of its equipment—ones that can be used to run computer-simulated experiments that not only maximize productivity but also provide invaluable information for product improvements. “We are on a journey,” says Simonelli. “The journey is moving very quickly. We are at the cutting edge of it, and plan to stay that way.”

Trail guide for this journey is a man named Bill Ruh, the company’s chief digital officer and the CEO of GE Digital. His first encounter with the term “Internet of things” (IoT) came back in the 1990s, when he was running a startup that used RFIDs—an early version of sensors—to track objects remotely. “It was a bust,” he says. “We couldn’t get the economics right.”

Still, Ruh continued to believe that the IoT had legs. And he believed that existing firms would have an advantage over software startups for two reasons. First, they had data, and “data is water rights to the valley.” And second, they had domain knowledge. If a big company could get itself strategically aligned around it, this was going to be really big, Ruh understood.

When he met GE CEO Jeff Immelt in 2011, he knew he had found a partner with whom to test out that thesis. “Jeff was the antithesis of the innovator’s dilemma,” says Ruh. “He didn’t understand technology. But he understood in a visceral way what was going to happen to data and technology and how it was going to transform his business.”

Ruh joined the company and quickly built up its digital operation, which now employs 1,500 people in San Ramon, Calif., and 30,000 around the world. In all eight of the company’s operating divisions he placed chief digital officers who report to him as well as to the division CEOs.

As with Stan Bergman, Ruh has his own rules for success—three of them, actually.

First is that leadership has to come from the top. “I’m the chief digital officer,” he says, “but Jeff is really the chief digital officer. He owns the strategy. He is holding people accountable. If the senior-most executive doesn’t have this as one of his two, three, or four top initiatives, you can’t even start.”

Second is that speed matters. “You have to take in the Silicon Valley mind-set,” Ruh says. “Get something out quickly. Learn and pivot. Fail and move on. This was one of the harder things to learn at this company. It’s not a good way to build a jet engine—but you have to do it for software.”

Third, decide where to start. Immelt’s instruction was to begin with GE’s services business. “That way,” says Ruh, “we could test it out on ourselves before taking it to customers.” That’s what Amazon did with Amazon Web Services. It became its own first, best customer.

For GE, the crucial leap into the unknown came in February, when it opened up its own cloud platform for the Industrial Internet, called Predix, to other businesses and to software developers—a decision that came only after a huge debate among GE executives and ultimately its board of directors.

Immelt didn’t want to wait for either certainty or consensus. He had seen the painful lessons that digitization had imposed on other industries. “If you think about it,” he tells Fortune, “15%, almost 20%, of the S&P 500 are consumer Internet companies that didn’t exist 15 or 20 years ago, and the existing consumer companies in those areas—media, retail, consumer banking—got none of that.” Immelt had already lived through that reckoning once at GE, which formerly owned NBCUniversal. “I was able to see that,” he says. “And I passionately believe that if you are an industrial company, you can’t allow that to happen.”

While the jury is out on Predix’s success, GE has one key advantage in its deep knowledge of devices. “The killer app in the Industrial Internet is the combination of physics and analytics. It’s a different skill set than the consumer Internet,” Immelt says.

If GE succeeds in becoming, in effect, the Microsoft (MSFT) or Google of digital transformation, that business could end up dwarfing its other efforts. “I try not to get ahead of myself,” says Immelt. “The way we have tried to describe it to investors is this: We can fund this investment with the amount of productivity we generate internally as a company. Then we can leverage the investment by increasing our services to customers.

“But if we are as successful as we think we could be,” he says, “this is the new GE.”

Is this a new industrial revolution? Are the changes that cloud-based data and analytics are bringing to the economy the equivalent of, say, what happened when the economy moved from steam power to electricity a century ago?

That’s a debate that, as yet, has no clear answer. Economist Robert Gordon, a leading authority on the subject, says he believes digitization is unlikely to be as economically important as the colossal forces that drove the first (steam) and second (electricity) revolutions. Others see much bigger changes underway, as data technology moves from the consumer space deeper into companies and industries. A report out of McKinsey last year said the Internet of things could create as much as $11 trillion of value a year by 2025—primarily from its business and industrial applications.

In our survey of Fortune 500 CEOs, we asked whether they agreed with the statement that these new technologies “will cause a profound change in my business, on a par with the Industrial Revolution.” Four in 10 said yes. Stanley Bergman is one of them. Interoperable digital technology, he says, “will propel advances in productivity” and “profoundly change how we live in ways that we probably haven’t even imagined.”

Jeff Immelt, if anything, is even more optimistic: “I’m not hyperbolic by nature,” he says, “but I don’t think [the Industrial Revolution comparison] is an exaggeration. This is big.”