Innovating on Inputs or Outputs?

In the world of the Internet of Things, especially in the industrial realm, you find a lot of confusion around the terminology and definitions of different approaches to connecting things. You have the Industrial Internet, Industry 4.0, you have a Web of Things, the Internet of Things, or Machine to Machine Communication.

While the proponents of each of these different movements would have no problem in explaining the relative merits and distinction between these, at the core, all of those topics ponder the effects of increasing connectivity between “Things”, that is, machinery, computers, you-name-it. So while in terms of terminology, these approaches might be quite different, and they certainly are in their constituent organisational parts, for the uninitiated the differences can look like differences of degree, not of kind. And yet, there is one structural difference that I’d like to highlight. It’s the difference between Inputs-thinking and Outputs-Thinking, and it loops back to Carlota Perez’s work on Installation and Deployment phases of technological revolutions.

A quick primer

Perez’s theory on the diffusion of technological change identifies two distinct phases of adoption. The first is the Installation Phase, the second the Deployment Phase, and between them there usually happens to be some kind of crash. To put it in Fred Wilson’s words:

What she found was that there are two phases of every technological revolution, the installation phase when the technology comes into the market and the infrastructure is built (rails for the railroads, assembly lines for the cars, server and network infrastructure for the internet) and the deployment phase when the technology is broadly adopted by society (the development of the western part of the US in the railroad era, the creation of suburbs, shopping malls, and fast food in the auto era, and the adoption of iPhones, Facebook, and ridesharing in the internet/mobile era).

Now what’s interesting about those two distinct phases is the difference of motivations and effect. In the Installation Phase, you primarily have technological adoption driven by a desire for efficiency. You’re using new technology to do old jobs, but better, faster, and cheaper. It’s only once you reach the Deployment Phase — where this model assumes the underlying technology is widely adopted — that you start to experiment across new behaviours, new products, new processes. The Installation Phase is concerned with a change of Inputs, whereas the Deployment Phase is concerned with a change of Outputs. It’s what Ben Evans observes in Mobile 2.0:

The smartphone’s image sensor, in particular, is becoming a universal input, and a universal sensor. Talking about ‘cameras’ taking ‘photos’ misses the point here: the sensor can capture something that looks like the prints you got with a 35mm camera, but what else? Using a smartphone camera just to take and send photos is like printing out emails — you’re using a new tool to fit into old forms.

Thinking about industry

If you’re looking at the predominant projects that industrial players pursue in the Internet of Things, you’ll notice — with the lens of Perez — that the majority of them are happening in the Installation Phase. You’re looking at better supply chain management. You’re looking at better utilisation of factory floors. You’ll see a lot of predictive maintenance. And of course you’ll hear all about it on the conference circuit. And it’s understandable that especially established industrial players would focus on that. Increased efficiency is what they yearn for, and here’s a tool that provides it. But it still is inputs-driven thinking. Your mode of operation doesn’t really change by being better at servicing your machinery. It might save you quite a lot of money indeed, and that alone is no small feat, but it falls still far short of the potential that comes with connectivity.

That potential, however, can only be discovered once the players either start thinking about new use cases that build off of connectivity as a given, or they wait for new players to come along and redefine what their industry is about. The inputs-driven phase is quite friendly to incumbents, it turns out. The business models and processes are relatively well understood. It’s the Deployment Phase that’s challenging and fraught with risk.

The Internet’s Deployment Phase

If you’re looking at the effects the Internet had on various industries, you’ll find that most of the fundamental changes, those we associate with “Disruptive Innovation”, only happened in the Deployment Phase. It took sufficient broadband capacity for things like p2p music sharing, social networking, video streaming, or just plain old searching for information to have a material impact. While the Internet was a novelty, and connectivity was scarce, we were applying our old thinking to the new distribution mechanism. Web 2.0 could only happen once we weren’t all excited about the internet as such anymore, but could take it in many ways for granted, and see what we could actually use it for.

And so the real change happened not on the inputs, during the Installation Phase, but after. The music industry was one of the first victims of the internet, and it wasn’t because of their inputs. What changed was the outputs. The distribution completely changed, and that changed the market dynamics. The same goes for news media. If you look at any given news room today, they pretty much would be recognisable from a vantage point 20 years ago. But the whole business of making news has changed completely. That is because the business of news has hardly anything to do with ink and printing presses and newsstands anymore. The inputs are still roughly the same. The outputs are incomparable. And so it’ll go with almost anything the internet touches.

This is the underappreciated effect of technological roll-outs. Once you’re at a stage where you think you have your inputs under control, you’ve done all you can on efficiency, somebody comes along and redefines the outputs. But that’s exactly where world-changing advancements come from.

So what’s your play? Are you increasing your efficiency? Or are you redefining your industry?

For more on Carlota Perez, I recommend reading here standard work, Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages