How Corporations need more help than they think in dealing with disruptive technologies, and what they can do about it.
On March 30th 2017 I attended Tata Consultancy Services’ Innovation Forum in Sao Paulo. The event joined a select group of about one hundred executives from some of Latin America’s major business groups to talk about disruptive innovation. This article is my personal take on why organizations should listen to what the folks at TCS have to say. My next article will bring the event’s main takeaways.
“In capitalist reality… it is not the (price) competition that counts, but the competition from the new commodity, the new technology, the source of supply, the new type of organization … competition which … strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives.”
Joseph A. Schumpeter — Capitalism, Socialism and Democracy, 1942
Warren Buffet popularized the term economic moat to describe the protected or hard-to-reproduce advantages that give a business the ability to secure long term profits and market share. Not all moats have stood ground in face of digital disruption. Indeed we’ve witnessed quite a few cases where, without apparent notice, entire industries have been transferred almost entirely to new digital players, from media and advertising to much of commerce, services and almost all of literature, games, music and film distribution. Yet most of the others have held strong. Indeed a case could be made that, just as natural selection favours the most prepared organisms, incumbent organizations of today are still leaders precisely because their moats are deep and wide enough as to survive even the current tech revolution.
Here is the problem with that.
Moat shmoat — Disruptive technologies acquired their name precisely because of their ability to undermine the very foundations over which market moats are constructed. Take digitalization, one of the pillars of technical disruption. Once a product can be duplicated and distributed through the web instantly and at virtually no cost, it passes from a state physical “scarcity” to one of digital “abundance” where traditional market entry barriers simply cease to exist. Now the control of resources, of distribution, the very operational and production process have shifted into alternative solutions usually multiple orders of magnitude cheaper. Next generation competitors then leverage these resources to offer alternative solutions at 10X efficiency or offer entirely new solutions more in tune to current demands. Take as 10x example Waze , creating an alternative to Navteq’s 1 billion+ assets in road sensors and equipment using only user smartphone GPS and spontaneous report (and breaking Nokia, who had just purchased Navteq, in the process). Another example is Uptake Technologieswho delivers predictive insights to discern system failures and inefficiencies through sensors and data analytics instead of man power, with a “plug-in” SaaS business model offering low implementation costs and immediate results. Customers gladly follow.
When a disruptive technology finally matures to the point of threatening a given market moat, it doesn’t chip away at higher profit margins or brand awareness, its moves the playing field altogether. If many moats are still standing, it could be because they are resistant to technological disruption, but it could just as easily be because the technology (and respective solutions) that can disrupt them has not reached market maturity yet. This begs a question: what is set to reach maturity?
Down the digital rabbit hole — So much transformation has been fueled by the recent wave of information and communication technologies (ICT) that we often associate them with the tech industry itself. Yet, revolutionary as they may be, they are in truth the tip of a bigger tech-iceberg that has so far been incubating beneath the surface and out of sight. Imagine that the market changes of the last three decades have so far been propelled by essentially three base technologies: the PC (triggered by Apple in 1975) the internet (popularized by the web browser, 1991) and mobile (with smartphones, 2001). Now if the time lapse between the arrival of these technologies is ever decreasing, is it only a matter of time before we reach a threshold where new foundational technologies will reach their respective market maturity in overlap. This point, according to specialists like Gartnerand Singularity University, is scheduled to start right about yesterday. At present, an armada of foundational technologies are breaking out of of their gestation phase and are estimated to reach their market maturity within the next 2 to 5 years, including Artificial Intelligence, IoT, Blockchain, Virtual Reality, 3D printing, Nanotechnology and Synthetic Biology, amongst many others.
Different from ICT technologies which influence information, communication and distributions channels for digitized products — traits for the most part in the periphery of traditional manufacturing industries — these new technologies both radically expand the pervasiveness and impact of the digital realm and broaden technological disruption well beyond the boundaries of the digital world itself. Let’s cover each of these in further detail:
a) Broadening technological disruption beyond the digital world: This is the shift from a disruption in what are for most industries adjacent segments (market monitoring, communication, marketing, etc.) into the core underlying activities of almost any conceivable industry (say raw materials, production, distribution, etc). The next industrial revolution, that is, will not necessarily arrive on the wings of new apps, platforms and gadgets, but through new base technologies that affect the very foundations upon which these industries are based. These are new energy sources, new construction methods, new forms of diagnosis and new raw materials; Technologies that are coming to be known as Deep-Tech (a.k.a. Transformative Technologies or — in their gestation phase — “Frontier” Technologies). According to a report from BCG and Hello Tomorrow, Deep-Tech innovations are “built around unique, protected or hard-to-reproduce technological or scientific advances” that promise to reinvent industries. If you picked up a similarity with economic moats, you are spot on. Today, a line-up of bold startups and investors are bent on answering the biggest global demands with frontier technology and scientific breakthroughs, and in doing so are expanding technical disruption well into que borders of traditional industries.
b) Expanding the pervasiveness and impact of the digital realm: The next major shift is caused by the integration of physical and digital components into what are now known as Cyber-physical systems, and the imbedding of these components with automation and artificial intelligence — a process known as Cognification. As sensors become ever more integrated into physical objects and connected to artificial intelligence, physical processes will be both controlled and monitored by algorithms and will themselves feed and improve these systems… and software will truly eat the world.
To understand the potential impact of such a change, imagine that if even “a very tiny amount of useful intelligence embedded into an existing process boosts its effectiveness into a whole other level” as Kevin Kelly explains “the advantages gained by cognifying inner things would be hundreds of times more disruptive in our lives than the transformations gained by industrialization”. As IoT technologies connect tens of billions of new objects to the internet, Moore’s Law continues accelerating computational intelligence, and technologies like Blockchain streamline the process of validation and authentication, we are seeing the emergence of both autonomous cyber-physical systems and autonomous cyber systems, including smart contracts, decentralized autonomous organizations and autonomous investment management (cyber systems) and smart grids, autonomous transport systems, medical monitoring systems and robotics systems (cyber-physical systems), amongst many, many others. Though it is perhaps subject for another post, the extent to which such changes will jeopardise the employment of hundreds of thousands of junior lawyers, mid-managers, drivers and the likes, and the effect this will have on our society should not be take lightly.
Tech-smoothie, anyone? — Having mentioned the pervasiveness, speed, nature and sheer power of these innovations, we must then acknowledge what is perhaps the most intimidating trait yet of these new developments: their synergy. ICT Technologies have not only transformed traditional markets into what they are today but been mixed and matched to create entire new industries like social media, search engines and peer-to-peer platforms.
In much the same way, these new base technologies will both enhance information and communication technologies — to put it mildly — and be themselves infused to create as yet unimaginable solutions to current market demands, and unimaginable new markets. To give one example of change, if distributed ledger technologies like blockchain now allow for a radical reduction of overhead traditionally associated with risk and background checks and a potential for deep disruption in the banking, accounting and legal markets, its further integration with IoT and AI and the implementation of so-called smart contracts promises a revolution in supply chain, insurance, procurement and logistics markets, among others. As an example of new markets, imagine the possibilities opened up by the virtual world tourism, or the series of low-orbiting satellites (LOS) which will soon offer real time video streaming (and analytics) of the planet’s entire surface.
Many forward thinkers predicted the web, but Google, Facebook and Uber were not quite as evident. We usually have a hard time thinking just one step beyond the possibilities opened by new base technologies, so buckle up for the next 2 to 5 years; and the rate of technological evolution will only accelerate from there.
Wagging the dog — Finally, we must acknowledge the ripple effects of these new technologies and new solutions on the ecosystem itself. How do these innovations affect our social, governmental and organizational structures and our individual mindset? Already today peer to peer platforms are shifting sizable chunks of economic activity away from institutions and into organised cyber communities who now supply themselves with an array of services, from hospitality to transportation, from rental to banking services, not to mention direct information, reviews, products, promotion, freelance specialized services and funding; a movement prof Arun Sundararajan form Stern School of Business calls crowd-base capitalism. And institutions are themselves undergoing structural changes, with new communication channels, corporate horizontalization and hiring of outside talent. All this essential through peer-to-peer (and social media) which are in turn a mixture of internet, PC/mobile and cloud computing technology. Now imagine the new spectrum of possibilities opened by the growing list of aforementioned base technologies.
If it was once safe to steer clear of technological disruption and focus instead on business as usual, the next waves of innovation will be sure to bring down the castle walls, and to blur the boundaries between the digital world and “real” world. And since disruptive technology is set to invade traditional industries whether they are ready for it or not, organisations planning to survive and excel would do well to be prepared. One can either surf the wave, or be wipe out by it.
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Of course most big players have a lot going for them. Service contracts, strategic partnerships, access to capital, strong brands and even customer purchasing habits. These are all powerful buffers between their leading positions and this ocean of bold startups searching for a place in the sun, and serve for buying time if and when they need to readapt to a successful disruption in their niche. With a time buffer, with capital, and market know-how, these players should be able to readapt to the coming market changes.
That’s all well and good, except that breakthrough products based on disruptive technologies aren’t simple plug and play solutions, and corporate processes, values and resources are not always in line with what these new technologies demand. In fact they are very often diametrically opposed, and the time it takes to readjust these traits, to readapt corporate strategies and employee training accordingly, is counted in years — typically 5 years or more — by which time slots for market share leadership have long been filled up.
To take just one example, consider the effect of the market’s growing speed of change on process efficiency and economy of scale. When the creation of disruptive products happened in decades, it was secondary to process efficiency. This strategic focus in efficiency defined in tern a series of requirements (and massive investments) in the control of resources, massive workforce, channels, assets and property. Yet as technology accelerates market change and decreases product lifetime cycle, the role of creating new products, aligned to what clients want, becomes ever more important. Efficiency — “creating something the right way” — gradually begins to lose strategic importance in face of efficacy — “creating the right thing”. And as agility and adaptability gradually grow in importance, the size, scale, staff, training and processes that had always been strength begins to take its toll.
Once a market has been disrupted by exponential technology, operating in this new ecosystem often required profound shifts in both external and internal attributes of organizations who wish to keep-up with change. In order to compete with future full grown unicorns in their niche, they too must be able to leverage external resources, communities, consumers and partners in order to 10x their output capacity, to keep a “hand on the pulse” of their ecosystem and to foment the appropriate channels of creativity and growth in alignment with their own purpose. They must then develop the internal processes, control mechanisms and fluidity required to manage staff, data, new technologies, and to readapt their products accordingly.
There are today a multitude of organizational techniques and methodologies aimed at helping with both external and internal challenges. From agiledevelopment to purpose-driven learning, from design thinking to conscious innovation, not to mention a line of truly noteworthy methodologies, concepts and frameworks such as OKRs, Business Model Navigator, Hackaprothon, Holacracy and Theory U, amongst others, each bringing essential elements to the process of innovation and management in a high speed ecosystem.
The challenge of course for big organizations is that many of these techniques, as powerful as they may be, are hard to put in practice. For one the sheer scale and complexity of large operations, with politics, bureaucracy, silos thinking and biases, to name a few obstacles, means even the greatest innovation solutions may seldom find channels through which to gain wind. More challenging still, truly disruptive innovation, as mentioned, must in fact disrupt. That is, it must in many cases substitute a long standing and successful modus operandis with solutions that are many times completely alien to the organization.
Thus market leaders today may have much more infrastructure, know-how, strategic partnerships, customers and resources for innovation than startups, yet they have two challenges instead of one: first to break-free from existing organizational patterns to only then address new technologies and business models. To reinvent themselves and their market. To undertake both disruptive innovation and disruptive transformation. And if individual habits are hard to break, when solidified with collective large-scale processes, corporate values and workforce training, changing companies can be notoriously difficult.
This is perhaps where TCS’s Innovation Forum was most insightful: in bridging the gap between theory and practice for innovation in large organizations, through three main avenues.
First, by showcasing how several big corporations are successfully making the transition to the digital era. Granted, many of these still addressed initial internal attributes (such as process efficiency) inside specific departments. Others have promising cases of external consumer-centric development, yet for the most part in peripheral improvements (like new user interface apps) as opposed to core-innovation in products and services (say using distributed ledger technology, or Deep-Tech). Still, the corporate cases presented in the Sao Paulo’s innovation Forum were crucial first steps towards innovation in deeper processes and products, and what at least yours truly found as convincing evidence that big players can not only readapt to disruptive technologies and methodologies, but share their teachings and collaborate with the market’s collective development. Corporate legacy need not be an impediment to innovation.
Second, having joined a number of traditional market giants to talk about innovation, TCS then presented the other side of the spectrum with a full-on disruptive solution; Urban 3D is a Singularity University alumni startup that personifies the cutting edge principles of so called Exponential Organizations, born from the vision of fully leveraging on cutting edge technology — in this case in the housing industry — and mobilizing partners and customers alike with its so called Massive Transformative Purpose. The presentation by Urban 3D’s CEO, Ms. Anielle Guedes, added an important dimension to the event with a demonstration of how future market leaders can — or must — align profit with social and environmental benefits, disruptive technology, and a greater sense of purpose. The Forum then included a presentation by Ronaldo Lemos, an influential next-generation board member of several organizations (including Mozilla) who helps with the transition into the digital era. Lemos is a renowned academic, lawyer and commentator on civil rights, technology and culture, and added a helpful contextualization of the latest tech trends.
Finally, there was TCS itself and the insights presented by the heads of the the organizations departments — including the group CTO, Latin America CEO, Brazil Country Head, Principal Innovation Evangelist and Chief Innovation Evangelist — and their respective innovation projects. I am a fan of the company, so take this with a grain of salt, but when compared to other traditional players TCS seems to be on another league altogether (an important condition for an organization who champions innovation). As a quick example, head tech representatives of some of Latin America’s biggest corporations present in the event boasted — deservedly so — of having implemented agile programming teams of a hundred strong; TCS has perhaps over one hundred thousand programmers working mostly with agile and a network of partnerships that joins many of the who-is-who in innovation, including Andreessen Horowitz, MIT and Sequoia Capital, amongst others.
All in all, these three aspects of the Innovation Forum — traditional leaders, next generation leaders and TCS itself — brought a well balanced introduction on how to successfully transition into the digital era, and hopefully an idea of more to come with the groups’ Co-Innovation Network.
Up next: Let’s dive into the 7 key takeaways of guest participants.