A Kind of Digital “Perfect Storm”

Every day brings new stories about the impact of digital technologies on every aspect of the world around us, including their transformative impact on companies in just about every industry.  Some of the articles are about the creation of innovative new technologies and applications, while others are about the creative destruction such innovations leave in their wake.  Lately, the latter kind of stories seem to predominate.

For a while now, companies have been racing to try to keep with the relentless advances of digital technologies.  But, the race keeps getting tougher every year.  We seem to be heading toward a kind of digital perfect storm, where four major IT trends are each gathering speed while interacting with and amplifying each other: mobile devices, cloud computing, social networks and big data and analytics.

These widely discussed technologies are still in the early stages of deployment to a greater or lesser degree. Mobile is furthest along while cloud adoption is taking off.  Data science applications are starting to get deployed, although we are just beginning to appreciate their profound implications.  And while consumer social networks have been thriving for years, their use in business has been slower than expected. 

The disruptive impact of this digital perfect storm is already being felt by technology companies as well as by those in industries whose transformation is already underway.  And perhaps most important, we know that even greater disruptions are in store in the not too distant future.  The resulting creative destruction makes for interesting stories about the changing fortunes of companies as well as their leaders.

People have been writing stories about the rise and fall of the rich and powerful at least as far back as ancient Greece.  A common theme in Greek tragedy was the actions of leaders who out hubris, that is, arrogance and overconfidence, disregarded the gods and their laws, which eventually led to their downfall.  Our human nature and organizational cultures have not changed all that much in the intervening millennia.

Each company is different, as are its reactions to major disruptive innovations.  Yet, their stories have certain patterns in common, not only with present companies but with others that are no longer with us.  For example, in How Not to Stay on Top, NY Times columnist Joe Nocera writes about BlackBerry, which until just a few years ago was the undisputed leader in the early days of the smartphone market.  

“In its heyday, the BlackBerry was so popular that it was nicknamed the CrackBerry,” he writes.  “Chief technology officers loved its emphasis on security.  Corporate employees loved its compact keyboard, which they mastered with their thumbs.  As recently as 2009, the BlackBerry had about 22 percent of the smartphone market.”  But, this was before the iPhone and Android-based devices totally redefined the smartphone by introducing apps, app stores, touch screens and other functions that appealed to consumers.  Blackberry was not able to keep up, and today it has less than a 3 percent share of the smartphone market.  

Nocera compares the decline of Blackberry to that of Wang, which in the late 1970s and early 1980s was the leader in office systems.  “At Wang’s peak, some 80 percent of the top 2,000 corporations used the company’s word processors, according to Bloomberg Businessweek.”  But then came the IBM PC, which in addition to word processing could run many other different kinds of applications.  Wang tried to protect its market and was thus late in trying to reinvent itself as a software company by moving its word processing applications to PCs.

“By 1992, Wang Laboratories was bankrupt, done in by competitors that understood that people wanted their computers to be more than glorified typewriters. . .  Just like Wang Laboratories - and thousands of other once-dominant companies that stubbornly clung to what they thought they were instead of what they needed to be - the maker of the BlackBerry has become an object lesson in the vagaries of capitalism.”

Why do once-dominant companies have so much trouble embracing disruptive innovations?  This important question has been best explained by Harvard professor Clay Christensen in his 1997 classic, The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail.  

Like in Greek tragedy, the stories seem to follow a similar arc.  Initially, the new technology or product is nowhere near as good as the older ones it will ultimately displace.  But, since the new offering is significantly less expensive and/or offers attractive new functions, it starts getting traction in good enough marketplace segments that don’t require the highest quality and performance. 

After a while, the emerging innovation, - having significantly improved as it made its way through the learning curve that all technologies go through, - can now be used in more demanding applications, where it competes head-on against the entrenched players.  It then starts winning away those customers of the older technology who are happy to now have a product that is less expensive and generally more useful and simpler to use. 

Soon, a new low-cost innovative business model begins to develop around the new technology, which the older companies have trouble competing against.  Their business models are hard to change because they are based on a different set of more expensive assumptions.  In addition, instead of focusing on their critical need to change, they may well be spending their energies trying to protect their declining markets.  Eventually, an entirely new eco-system and value chain is built around the new technology, which now has essentially displaced, - and often finished off, - the older technology in the marketplace.  

Examples abound, from mini-mills in the steel industry, to digital photography and music.  The Innovator’s Dilemma explains how PCs and client-server computing displaced the word processing systems from Wang, caused the demise of minicomputers, including industry leaders like DEC, and brought mainframes and supercomputers to their knees.  IBM barely survived. 

It’s interesting to note that some of the IT industry’s leading disruptors of the 1980s and 1990s are themselves being disrupted today.  “If there is a common thread among these older outfits, long considered bellwethers for their industry, it is that they are all struggling to adapt to a computing world where people use the Internet on mobile devices like smartphones and tablets,” writes Quentin Hardy in an August 21 NY Times article.  “. . . On a very personal level for employees of these companies, it’s an odd time.  Many, particularly early employees, were there when their innovations and more-affordable products displaced the last generation of big tech companies.  Now they’re on the downside of that cycle.”  What goes around, comes around.

A few days later, Hardy wrote about Microsoft’s upcoming CEO transition.  After reminding us that years ago Microsoft helped topple slower-moving technology giants like DEC and Wang he added:

“These days, it is Microsoft’s turn to fend off the upstarts as it struggles to compete in a computing world that is increasingly mobile and based in a cloud of Internet-connected computers to which many customers gain access at the same time.  It’s all part of the inevitable life cycle for technology companies. . . The rare tech company manages to thrive from one generation of technology to the next.  Only a few of the big ones - I.B.M., Intel and Apple - have done it.”

I think of cloud as the next model of computing, following the centralized model that prevailed from the early days of the IT industry through the mid-1980s, and the client-server model of the past few decades.  A new computing model affects every single aspect of our increasingly digital economy.  Over the next few years, cloud-based infrastructures and applications will likely disrupt the business models of companies in IT as well as across a variety of industries.      

This point is made by Richard Waters in an August 21 Financial Times article Tech executives facing up to hard realities of the cloud, with the tag line “Staying ahead of this storm front is challenging even industry giants.”  He goes on to say:

“Technology revolutions have a habit of devouring their own children.  There has never been a clearer case in point than the coming of the cloud, the great deflationary force of modern business computing.  The centralised infrastructure of cloud computing threatens to turn the once high-value hardware and software components of IT systems into standardised commodities.  Staying ahead of this wave is a challenge, even for the industry’s giants.” 

Cloud is a classic disruptive innovation.  But, it should also be viewed as a major step forward in the world of complex IT-based systems, not unlike the engineering advances of the 20th century which have enabled us to design and build highly sophisticated bridges, skyscrapers, cars and airplanes.  Cloud is now driving a much needed industrialization of IT data centers and IT infrastructures in general, the vast majority of which are nowhere near ready to support the increasingly smart mobile devices that billions around the world use every day, or the huge number of smart sensors that are being embedded in just about every thing in the physical world around us. 

Over time, I expect that cloud will help standardize many of the components of the growing IT stacks, as has been been the case for decades with complex engineering products and systems across the industrial sector of the economy.  This standardization is enabling many new companies to become part of the growing IT ecosystem, which will undoubtedly lead to lower prices and increased innovation. 

But, along with progress comes pain.  While opening up new opportunities for startups, the new cloud infrastructure and applications are directly challenging the business models of the established IT companies.  In an earlier FT article, Richard Waters wrote: 

“The impact of the cloud on enterprise technology is being felt in two main ways. The main components of IT systems – storage, networking and processing – along with the management and security software needed to run and secure the new clouds, are being transformed, . . . [creating] a need for new technologies that can handle far higher volumes at much lower costs,. . .” 

“The second beneficiaries of the shift to the cloud are so-called software-as-a-service companies that supply the applications that ride on top of the new infrastructure. . . The next wave of upcoming companies in this field have more in common with the consumer internet than just their high valuations and profitless growth.  Many have also adopted a consumer-led business approach to get around conservative corporate IT departments and appeal directly to users. . . They also copy the more intuitive and accessible design style of consumer internet companies to appeal to a broader range of workers than have previously used business software applications.” 

This is what creative destruction is all about, - rewarding innovative startups, as well as those established companies that are willing to reinvent their business models and move forward.  

The commoditization of proprietary technologies and the standardization of layers of the stack is very painful to those companies who previously controlled and profited handsomely from them.  But, as was the case with the explosive growth of microprocessors in the 1980s, the Internet in the 1990s, Linux in the 2000s and mobile devices in the last few years, all kinds of new innovations and growth possibilities are now possible.  Life goes on, leaving some species behind while others adapt and thrive, co-existing with the many new ones that will become part of the changing landscape.

Comments

[Howard Richmond]

Thought provoking analysis of technology.market dynamics. Two thought provoking books are The Death of Distance on telecom revolution and The Long View on Shell's use of scenario building to identify major disruptions at their incipient stage.

[Alec Wilder]

Irving, good to see this blog. I tried to subscribe but the link did not work.

Not sure if you would remember, but we met in my ISG days about the time of good old "fort Knox" system. I think you were in research at the time.

I am not really wanting to post this comment on the article, which i really like, but would like to include the analogy of comparing SAAS to the old time sharing days of IBM.
Talk about holding on to old technologies while watching a new one sweep you away (wang), how about IBM losing the communications battle by holding on to SNA while tcp/ip ran off with the gold meadal.
Anyway, i look forward to reading more of your observations.
Regards
Alec