Rudy MOENAERT

Blogs

Digital Fluidity

posted by Prof. dr. Rudy Moenaert on 25/01/2017

No Line on the Horizon

Our world is in a state of constant disarray. Let's not blame it on Trump, Putin or Farage. It is the incessant influx of digital innovations that leaves us flabbergasted each time we view the technology section of The Financial Times.

The weekly flood of digital gimmicks makes us believe we are living in a gadget economy. Robert Gordon argues in The Rise and Fall of American Growth  that the multitude of innovations we are witnessing today do not measure up against the breakthrough innovations of the past. That discussion misses the point entirely, however. It is irrelevant how contemporary innovations such as Oculus Rift and Amazon Echo stack up against the discovery of antibiotics, CT-scanning and the steam engine. For these are riveting times, where industries are disrupted as never before.

The state of the economy is fluid: the dominant business concept in many industries is under attack, while the configuration of the new dominant business recipe remains elusive, fuzzy and often completely undefined. The New York Times described it as follows in its own innovation report a couple of years ago: "Transformation can be a dangerous word in our current environment because it suggests a shift from one solid state to another; it implies there is an end point."  In the words of U2, there's no line on the horizon.

Mind you, whenever we coin the term digital business, it may refer to (1) digital media (e.g., websites, blogs, content marketing, social media, crowdsourcing), (2) digitally enabled markets (e.g., e-commerce, EDI, auctions, crowdfunding), (3) digital products (e.g., digital radio, games using augmented reality, online streaming, cloud services) and (4) digital business processes (e.g., CRM,  ERP, 3D-printing, data mining, precision agriculture).  Thus, digital business advances on four fronts simultaneously: media and markets, products and processes (M2P2).

The Forces that Shape Digital Fluidity

First and foremost, the consumer is a formidable force in digital transformation.  

  1. Savvy consumers are eager to test out novel offerings. New pricing strategies such as freemium pricing enable the swift adoption of innovative propositions. Consumption patterns change drastically. We nowadays consume music, movie series and journalism completely different as compared to 10 years ago.
  2. The world has become a village. Consumers connect globally through loosely coupled and highly diverse networks. The brawl between supporters and critics of Trump has taken on a global dimension. Provided people are on social media, there are only four degrees of separation between two randomly chosen persons on this planet. "When considering another person in the world, a friend of your friend knows a friend of their friend, on average" (Backstrom et al., Proceedings of the 4th Annual ACM Web Science Conference,  2012).
  3. There is no stopping to the rise of user-generated content. The social media have given each and everyone willing to participate in the global discussion a versatile tool to express themselves.
  4. Transparency and trust have become constituents of the modern consumer communities. Unfortunately, group cohesiveness within ideological communities has also given rise to fake news, and triggered some of the biggest political upsets in recent times (Brexit & Trump).

The second force concerns the creators, i.e., the organisations, institutions and people that build or enable the technologies:

  1. What makes the current era of application so peculiar is, as was powerfully synthesized by General McChrystal in Team of Teams,  the combination of speed and interdependence of innovation.  Artificial intelligence and big data, mobile and Internet of Things, they evolve frantically, continously reinforcing each other.
  2. Because of network externalities, marginal costs approaching zero, and lock-in effects, digital innovations create the perfect breeding ground for winner-takes-all outcomes. In Sapiens, the magnificent story of humankind by Yuval Noah Harari, the author states that empires "rule over a significant number of people" and are "characterized by flexible borders and a potentially unlimited appetite." By all means, Facebook, Amazon, Google have truly become digital empires.
  3. Notwithstanding the incredible scale that some companies have realized, they still offer hyper-individualized information. A Facebook-account can give you a much more fine-grained insight into the issues a person found important right before he or she died than a well-informed undertaker. Hyper-scale and hyper-targeting are no longer mutually exclusive.
  4. It is impossible to overstate the impact of the catalysts: regional heritage (Silicon Valley!), enabling consultants and digital evangelists. Concerning the latter: I have been studying innovation for over three decades now, but I cannot recall ever having witnessed such an unstoppable flood of unsubstantiated advice by self-proclaimed thought-leaders. Digital has become a religion, we believe the future before we have assessed the evidence.

The gladiators are the third force, they are the competitors and complementors in your markets.  

  1. You and your competitors are constantly assessing how digitization may improve efficiency or differentiation, offer possibilities for disintermediation or even diversification. Disintermediation and reconfiguration of channels and market structures is a constant theme.
  2. Digital innovation turns often markets into arenas, where the roles of the participants are fundamentally redefined as the game moves on. Former Intel CEO Andy Grove wrote Only the paranoid survive, only to discover that Qualcomm has now conquered the mobile chip market. Industry participants have become gladiators in the arena. Much like Russell Crowe in Gladiator, gladiators can compete or cooperate, leave the arena, or return, be a spectator or engage. Tell me, does Tesla compete in the car industry, the battery industry or the information industry?
  3. The quintessential question in the digital arena seems to be: who owns the end customer? Uber and Airbnb have shown the way: Look Mom, No Assets!  Digital empires are built with amazingly few physical assets but an incredibly strong emotional asset: ownership of the virtual interface with the end customer!
  4. Many entrepreneurs dream to become the new unicorn, overthrowing existing industries. The new kids on the block morph into powerhouses and rattle the foundations of the industries they are disrupting. Entrenched companies must constantly re-invent the core of their business recipes and the culture of their organization.

Finally, there are the regulators, i.e., the institutions that design the policies and legal framework governing digital business. They face tough times.

  1. Technological evolution outpaces the speed of the legal system. The loopholes in legislation enable the start-up of new business models such as Uber and Airbnb, who build massive scale rapidly. The entrenched competitors such as taxi services and hotel operators must continue to operate within the strict confines of the law. This offers opportunities for shrewd companies – poacher turned gamekeeper.  
  2. Governments try to capture the rewards of digitization without the pains of technological substition. In The Second Machine Age, MIT scholars Brynjolfsson and McAfee refer to this as the bounty and the spread, respectively. Governments must exercise a difficult regulatory dance, continuously tweaking and blending moderation and stimulation.
  3. There is a strong concern about privacy and ethics. Evidence suggests, however, that the very concept of privacy itself has been redefined. For a couple of pennies, people are willing to sacrifice their privacy in order to obtain a cheaper car insurance.
  4. The souvereignty of the nation states is being challenged by digital players. Tim Cook openly stated to a US Senate committee that Apple "complies with the spirit of the law." Try that lame excuse next time you have been handed an speeding ticket.

Chapter 1, Page 1

Trying to predict the future seems to be a futile exercise. Twenty years ago, Wired Magazine offered 101 advices to save Apple. Number 1 on the list? "Get out of the hardware business". Ten years ago, the equally respectable New York Times stated categorically that the iPhone would not be a BlackBerry killer. "The uncertainty that shrouds the future is not so much a veil as an iron curtain. In the current state of scientific knowledge, it cannot be penetrated. There is ample opportunity at any point in time for any firm, no matter how large, to fail" (Paul Ormerod in Why Most Things Fail)

The closest most of us will get to predict or create the future is most likely to create predictions about the future. That sounds like an dangerous raindance. However, in the words of Alec Ross in The Industries of the Future we are still in Chapter 1, Page 1. Digitisation has merely started.  We must prepare for the future. That is the subject of my next column: "Coping with Digital Fluidity".