Making sense of ‘Digital Disruption’
Part 1: What is a disruption? How digital is disrupting? What is the role of the entrepreneur? How quickly is digital disruption happening? How is collaboration shaping in this era?
Every few years we hear that the launch of a new digital product is going to change the world and/or disrupt an industry. But disruption is way more than just a new product or the market frenzy over a new feature.
Disruption can indeed be irritating at times, but we’ll have to get used to it. Disruption is the symptom of a historical period where, at least in theory, all established industries can effectively be disrupted.
Digital: a disruptive innovation
In theory, once a radical innovation is launched, such as the computer in the 1950s or the Internet in the 1990s, markets stabilize for several decades, customers gradually become familiar with the innovation, and then start wanting it once there are enough demand-side network effects. Gradually companies improve associated products and their manufacturing process and the industry slowly converges towards a “dominant design”, where all offers look relatively the same. This process is coined as “Disruptive Innovation” in academia.
The mechanism of Disruptive Innovation is quite simple. A seemingly harmless competitor enters a stabilized market. It starts to gamble on new attributes valued by some customers and sacrifices other attributes that the market deems as vital. If it manages to massively change buyer preferences with a shift towards the new attributes, it may turn a whole market around.
For example, in the 1980s hard drive manufacturers were confronted with the limits of storage capacity technology, and with the breakthrough of laptops, they gradually shifted priorities to new attributes of the product such as lightweight, compactness, or silence. This change in consumer preferences made it possible to bet on other attributes with a much poor performance in storage capacity. While some companies were successful, others failed to adapt to these changes.
Another example is the introduction of the iPhone in the 2000s. Back then, the main criteria for buying a mobile phone was “battery autonomy”, yet the iPhone came with less than 24 hours of battery life when the norm was five days. Today, no one would sacrifice the ergonomics of a touchscreen to save a few days of battery. Therefore the iPhone is considered a disruptive innovation.
For many managers, the ability to move fast and arrive first in a new market is a prized competitive ability. This…
The power of digital disruption
In action, the digital world offers all the conditions needed to break away from dominant designs and there are several reasons for this:
- With the benefits offered by digitalization and dematerialization, customers easily forget about some of the luxuries they had become accustomed to. For example, the MP3 disrupted the CD industry despite its poor audio quality but opened up the possibility of infinite choice from the palm of the user’s hand (e.g. the iPod). 3D printers will soon enable consumers to build more robust objects at home than what would have been found in-store with unprecedented possibilities of choice and customization.
- A disruptive digital product spreads only if consumers can easily test it before buying it, experience the value added by the new attributes, and make peace with losing the attributes that have been foregone, and digital products easily enable this. Digital business models are largely based on free offers or “freemium”s, which enable massive trial campaigns, at a low cost. Digital innovation allows the gathering of mass-scale data points from customers at a very low cost.
- Digital innovation diffuses by digital forms of prescription and recommendation systems in social networks which are far more efficient than mass marketing to overcome the fear of trying and adopting anything new. The operational size of global platforms such as Facebook makes it possible to quickly reach critical market mass beyond which innovation becomes known and credible (i.e. known as crossing the chasm) for the most conservative customers.
We can’t say for sure what digital innovation will lead to, and whether it will stabilize again. All we can say is that there is a period of disruption, such as that during the industrial revolution at the beginning of the 20th century where inventions and technology combine and enrich one another endlessly, revolutionizing established industries. This is called “Creative Destruction” or rebirth.
During the Industrial Revolution, scientific discoveries that led to the thermal engine, chemistry, and/or electricity were combined to revolutionize transport, medicine, agriculture, etc. With the same parallel, we can say that with the infinite possibilities of combining Informatics, Electronics, Biotechnology, Artificial Intelligence, etc., we may still have a lot more innovation and industry disruptions ahead.
Disruptive innovations have ripple effects that can disrupt capitalistic mechanisms and economic systems. For example, in the 1910s, the industrial company emerged as we know it today where the limited company status was invented, along with investment control methods, Taylorism (i.e. scientific management), and the Chief Executive Officer role. Today, digital technology is changing the rules of the game once again, so that our definitions of management suit the 21st-century digital company.
The role of the ‘Entrepreneur’
Schumpeter identifies the Entrepreneur as the key player of a disruptive transformation. Entrepreneurs are engineer industry shifts through their desire to exploit technology to revolutionize existing solutions to problems. These individuals and teams such as Elon Musk, Bill Gates, and ‘Satoshi Nakomoto’, are in the public eye, revered as heroes of disruption.
Advancing at speeds
Since the invention of the first microprocessor in November 1971 by Intel, its performance has doubled, regularly, every two years. Today, the explosion of networks validating transactions on bitcoin has a power expressed in Zetaflops (i.e. 10²¹ flops) and our micro-computers such as those in our smartphones have the power of a supercomputer of the early 2000s.
The progress in techniques used to process information has become so fast in the last 50 years that it has given birth to an industrial revolution that is occurring at a much faster pace than the one in the 19th century where we saw the domestication of energy.
The world has seen successive technological revolutions before, but before the digital revolution, their progress was measured on an arithmetic scale, reflecting a constant factor of improvement every year. For the past 50 years, the performance of digital technology has followed geometrical laws where we multiply the existing performance by a constant rather than adding to it.
Moore’s law, named after one of the founders of Intel, illustrates the effects of digital disruption and technical progress on microprocessors. For more than forty years, the number of transistors per silicon chip has doubled every two years. Moore’s law is not a physical law of nature, but a goal that the semiconductor industry has met for more than 40 years. Moore’s law will eventually meet its limits, but still, the semiconductor industry is finding solutions around possible physical limitations. Similar to the silicon industry, other digital technologies have experienced similar developments.
Doubling the capacity of a system every year is to say that we will have progressed as much as the original system within the coming year. Interestingly, these evolutionary enhancements do not lead to price increases but rather a decline in price no matter what the technical operating system (e.g. a computer, a smartphone, memory, processors, etc.).
The challenges of speed in a digital economy
The accelerating velocity of digital progress gives rise to three paradoxical effects:
- Technological advancements are not progressing at the same speed, giving rise to gaps. This lack of homogeneity in technical progress leads to frequent substitution techniques in complex computational systems, explaining why modularity is needed to allow substitutions of technical building blocks within these complex systems
- Results from breakthrough innovations will need to present themselves incrementally to control environmental conditions and consumer expectations before creating too strong of a gap in competition or use
- Digital projects must anticipate the digital world — meaning that nothing will remain the same and ‘the only constant is change’. In 2025, our smartphones will have the power of the largest supercomputers of today; if organizations don’t anticipate this level of change, they will lose their market positions
Collaboration in the digital era
While we associate the digital era with virtual and online migration, FabLabs, Hacker-Spaces, and Co-Working-Spaces are growing in demand. These new locations of collaboration are called the “third places” of the digital society where people can share ideas and skills around innovation projects and create prototypes.
“Third places” refer to places distinct from our homes and the usual professional workspace, to which people don’t have to go due to necessity, and where the norms governing private and professional lives don’t apply.
In digital third places, individuals share knowledge and know-how and use digital machines to innovate through an inspired open-source digital culture. These digital third places are promoting learning by doing and face-to-face discussions with the growing access to codified knowledge on the web. These digital third places are either self-managed/self-funded or supported by large companies and governments.
Shared digital commons
Digital third places are enabled through the development of digital commons such as open-source software such as the OpenStreetMap mapping data under a copyleft license, or the Arduino electronic circuit under Creative Commons licenses.
Today, the notion of open-source is well-known in the software world which applies to material with a license that respects the possibilities of access to the source code, free redistribution, and creation of derivative work. Such open-source software is termed “digital commons” because they are produced, managed, shared, and stored by peers. Digital common goods are non-rival and as their usage scales, they create exponential value. Digital commons are governed by regulations outside the controls of the market or State. Digital commons promote individual empowerment and open innovation for companies across the globe, in both developed and emerging countries.
An agile business model
Digital third places foster agile innovation models by providing laboratories for ideas, creativity, and quick prototyping. They aim to turn an innovation into a movement that is applicable, commercial, high-tech, and low-cost. They promote a frugal innovation model and democratize investment access through crowdfunding.
An era of local manufacturing ahead
Today, factories are offering on-demand manufacturing through the web to anyone with a digital model and a credit card which will lead to a post-industrial production system, in which goods are produced locally, while knowledge is exchanged on a global scale, at little cost.
While online retail (e.g. Amazon, eBay, Alibaba) has proved the relevance of long-tail strategies whereby one maximizes turnover by selling a wide variety of products in small quantities, open-source and democratized production tools are paving the way for long-tail strategies in manufacturing.