Do not get “blitzkrieged” by emerging technology insertion
Innovate your business model to successfully exploit the rapid rate of technological change.
“The rate of change today is the slowest it is going to be for the rest of your life” -unattributed quote
The increasing rate of technological change holds no industry sacrosanct. It churns and disrupts industries without bias. In its wake, it creates blue oceans of opportunity for underdogs and sets perilous traps for legacy enterprises. The traditional response from commercial and governmental entities is to ramp up efforts to scout, procure, and insert the latest technology into their enterprises. You hear executives and managers wanting to A.I. this or Blockchain that. This is a misguided and incomplete strategy. Technology insertion without business model innovation is a perilous trap. It lulls enterprises into a false sense of competitive parity that temporarily prolongs their eventual irrelevance and demise.
The affordability, accessibility, and integration of digital systems into everyday life lead people and groups to use them in unpredictable and unexpected ways (1). Such unpredictability creates premiums for enterprises that can continuously adapt their business models to emerging behaviors and needs (2)(3). Apple adeptly took advantage of peer-to-peer music sharing in the early 2000s by launching iTunes. Police departments had to respond to the proliferation of smartphone video cameras and the viral nature of social media postings. The Department of Defense contended with terrorist groups who took advantage of the impenetrable security of Whats App. This app emerged out of the increasing desire for free SMS messaging and the availability of internet connection via smartphones in developing countries.
The fallacy of technology insertion is not a new phenomenon.
In a matter of six weeks from 10 May 1940, the German Army defeated and occupied France, Belgium, Luxembourg, and the Netherlands leaving British forces struggling to survive on the shores of Dunkirk. They accomplished this feat notwithstanding the technological inferiority of the German Armor and the fifteen-year head start in armored and motorized warfare development afforded to the Allies by the Treaty of Versailles. Williamson Murray in “Military Innovation in the Interwar Period” states:
“German doctrinal conceptions by emphasizing exploitation, speed, leadership from the front, and combined arms provided a solid framework for thinking through not only how the German army, if it possessed tanks, might employ them against an enemy, but how a potential opponent might utilize armor against German forces(4).”
Military doctrine is the framework of assumptions (principles, activities, and common definitions) that military organizations rely upon to create, deliver, and capture military advantage in pursuit of national objectives. It is akin to a commercial enterprise’s business model which is the chosen framework for creating, delivering, and capturing value from the market (5).
Experimentation and the evolution of doctrine (business model) played a bigger role than technological superiority in enabling a swift German victory. According to Williamson Murray, “the development of Panzer divisions took place within the broad framework of the German Doctrine(6).” The German Army experimented with new technology to test doctrinal assumptions of the future battle. They relied on iterative experimentation and learning feedback loops, to discover the doctrine of combined arms which proved to extract the most “value” out of a motorized, aerial, and radio-enabled battlefield (business model).
In contrast, the British and French armies used outdated defensive doctrine ill-suited for exploiting the speed, maneuverability, and decentralization afforded to the battlefield by motorization, aircraft, and radio communications. By the time the US entered the war, they had learned the lessons from the German blitzkrieg and further evolved the doctrine of combined arms to address the untested logistical assumptions that brought the Germans to defeat the USSR.
Such examples are not limited to the military.
In the retail industry, brick-and-mortar retailers like Sears and Walmart responded to the threat from Amazon, by making investments in e-commerce platforms without fully addressing their core business models. In contrast, Amazon did not stay stuck with its original e-commerce business model. It states in its 10K report, that its “business model is an evolving one.” Amazon rapidly experimented with new business models, leveraging the technologies emerging from an expanding e-commerce ecosystem to create new value propositions in the form of cloud business-to-business offerings. They turned the emerging technology into profit generators, while competitors continued to be burdened with technology cost centers.
Amazon turned the retail value chain on its head! Its retail operation became a cost center used to generate data from a vast customer and supplier base. This fueled profitable business-to-business technology services that have in turn created new consumer services. Cloud development led to streaming video and artificial intelligence development which led to Alexa. They leveraged continuous experimentation to discover value from the newly emerging online consumer behaviors.
Google did the same thing by launching Gmail which yielded troves of data and captured customers for new offerings. This story is repeated across industries: Netflix in Video Rental, Uber in the Taxi Industry, Apple in music and app development, AB&B in the hospitality industry, and SalesForce in Business IT, to name a few. While the incumbent focuses on inserting the new technology to defend its position, the disruptor experiments with new business models to exploit new opportunities from the emerging technology.
Prolonging business model innovation further complicates the ability to fend off new entrants, stay on par, and finally the ability to catch up.
In his blog post “Organizational Debt is like Technical Debt but Worst” Steve Blank argues that startups that enter the build stage often neglect maturing organizational activities needed to run a growing company. Over time this creates organizational debt, a backlog of non-functioning organizational activities for the startup to mature (7). Ignoring or a delayed response to the impact of the emerging technology on the key elements of the business model creates a form of organizational debt for large and incumbent enterprises as well. They will need to restructure organizational activities that no longer apply under a business model that better fits the emergent technology.
Addressing organizational debt becomes more complicated as the rate of technological change increases. In the 1920s and 30s, the German Army had 20 years to work out the needed changes brought about by motorization. Today, 20 years is several technological lifetimes. In 2001, Ray Kurzweil wrote about the law of accelerating returns.
“The paradigm shift rate (i.e., the overall rate of technical progress) is currently doubling (approximately) every decade; that is, paradigm shift times are halving every decade (and the rate of acceleration is itself growing exponentially). So, the technological progress in the twenty-first century will be equivalent to what would require (in the linear view) on the order of 200 centuries. In contrast, the twentieth century saw only about 25 years of progress (again at today’s rate of progress) since we have been speeding up to current rates. The twenty-first century will see almost a thousand times greater technological change than its predecessor (8).”
The iPhone is 15 years old, self-driving car prototypes drive around our cities, and we can seamlessly zoom conference each other on the go. This means that enterprises must be ready to evolve their business models and militaries their doctrines at faster rates than ever. Otherwise, they will continue to grow their organizational debt falling several technological iterations of change behind.
Why is the rate of change so fast? According to Brynjolfsson and McAfee in the Second Machine Age:
“The digital innovation is recombinant innovation in its purest form. Each development becomes a building block for future innovations. Progress accumulates in the digital world (9).”
Enterprise cloud migration: greatest generator of organizational debt in the past decade.
Many governments and legacy commercial enterprises continued to muddle through cloud migration through 2020, yet they remain years behind the tech sector. According to Accenture’s Cloud Outcomes Survey of 2020, two-thirds of companies that started cloud migration report they have not achieved the expected benefits (10). a16z reports that enterprises as a collective are spending about 100B annually on public cloud services (11). They have invested insane amounts of taxpayer money and shareholder value, without yet completing their cloud transition much less fulfilling the promise of digital transformation. Worst yet, many are still unaware of the organizational and business model changes required to realize new value creation in a digital paradigm. Their focus remains on using the cloud to do business activities the same way they were done before the cloud. The digital ecosystems enabled by the could require new skills (e.g. designers, product managers, data scientists, developers), and new forms of competition (platforms) that legacy enterprises still struggle to comprehend. Some legacy enterprises do not employ a single mobile developer much less a mobile user experience designer, yet according to Gallup 97% of adults under 30 own smartphones.
The Real Danger: Falling Several Technological Changes Behind
As artificial intelligence and quantum computing continue to emerge in the next several years, enterprises not positioned to experiment with their business models will continue to fall several technological changes behind. They may still be stumbling around with digital transformation when the movement to quantum arrives and biotech explodes. Organizational debt at this point could become too great to overcome.
Given the rate of change (if Ray Kurzweil is right: two centuries for every year that passes in the 21st century), it will be like asking the commanders of the first crusades to command an armored army brigade today or asking an early money changer in an early Italian city-state to manage a hedge fund today. While this might be exaggerated, the point is that each technological change brings the need for new skill sets, new organizational models, new customer interactions, etc.
Therefore, robust, continuous, and iterative business model experimentation becomes paramount for continuously uncovering new competitive advantages (12). Enterprises must develop the capacity to learn at the speed of technological change. Learning through continuous business model experimentation must become a core competency.
We are in a period where the rapid rate of technological change is ever-increasing uncertainty across commercial and public sectors. Over-reliance on technology insertion and ignoring business model innovation misleads many incumbent enterprises into a vicious cycle of playing catchup while never really exploiting the opportunities availed by technological change. A play-to-win strategy must combine technology insertion with relentless iterative business model experimentation in search of new value created by emergent behaviors and problems arising from technological change.
Take as an example ISIS’s effective use of WhatsApp for communications and social media for conducting recruiting, indoctrination, and decentralized attacks.
For a more thorough discussion and history of the definition of a business model, I recommend: https://hbr.org/2015/01/what-is-a-business-model.
Derived from Jeff Gothelf and Josh Seiden, Sense and Response (Boston: HBR Press, 2017).
Williamson Murray and Allan R. Millet, Military Innovation in the Interwar Period (Cambridge: Cambridge University Press, 1998) p. 39.
I deliberately do not use the term making money or profit and focus on value. All organizations whether they are profit-generating or public create value for someone, otherwise, they would not exist.
Williamson Murray and Allan R. Millet, p. 42.
https://steveblank.com/2015/05/19/organizational-debt-is-like-technical-debt-but-worse/
Ray Kurzweil, The Law of Accelerating Returns, http://www.kurzweilai.net/the-law-of-accelerating-returns
Brynjolfsson, Erik and McAfee, Andrew, The Second Machine, MIT Publishing, Boston, MA
https://www.accenture.com/us-en/insights/cloud/cloud-outcomes-perspective
For a full discussion on the end of competitive advantage read Rita Gunther McGrath, Transient Advantage, Harvard Business Review, June 2013 Issue