HOW RAPID ADVANCES IN TECHNOLOGY ARE RESHAPING OUR ECONOMY AND SOCIETY
Everything that can be digital, will be digital, Physical products are transforming into digital products in three different ways:
First, there is a class of products which will be entirely digitized. Music and video are well known examples. In 2014 already, the world wide music industry collected more revenues from digital music than from traditional carriers like CD’s and DVD’s. The shift is not limited to these typical examples. Digital navigation, for example, has replaced physical maps in only a couple of years. Digital currency is replacing the use of cash money at a high pace too.
A side effect of this trend is the dematerialization of an array of physical devices to an app on the smartphone. Years ago, one needed separate devices for a video camera, photo camera, music player, navigation device, etc. Nowadays, these have become an app on a smartphone at a fraction of the costs of the physical devices.
Second, a much larger class of products becomes hybrid; part physical and part digital. The Tesla Model S is a good example. These hybrid products make it possible to change the product features by only updating the software in the products. In October 2015, the Tesla Model S received a software update which augmented the functionality of the car with an autopilot.
Third, products can be augmented with digital apps to provide digital services. For example, a smart scale can be used in conjunction with an app that analyses the results and gives the user personalized advice on weight control.
SHIFT TO SUBSCRIPTION BASED BUSINESS MODELS
Closely linked to the trend towards digital products or digital augmented products is the shift to subscription based revenue models. Suppliers of full digital products like Spotify and Netflix are already providing their services in a 100% subscription based model. But also suppliers of products that are not fully digital are looking for business models in which they provide value added services on a subscription basis. This generates new revenue streams in addition to the one-off revenues from the sale of the physical product.
SHORTER PRODUCT LIFE CYCLES
The impact of rapidly developing digital technology influences both adoption times and product life cycles. On one hand, the pace at which new products are adopted (number of years until x% penetration has been reached) increases. It took almost a century for landline telephones to reach market saturation. For smartphones and tablets, this took only a couple of years. At the same time, product life cycles are shortening. With technology products even to three or six months. In our current economy, a large part of company revenues is from products that were launched during the last year. Due to this shorter product life cycles, companies have a rather narrow window of opportunity to profit.
FROM POSSESSION TO USE
In the traditional economy, possession of a product was necessary to secure the use of it. The digital economy changes this in two ways. First, fully digital products – like streaming music – need not to be owned in order to be used. Consumers are moving from ownership rights to access rights, often in subscription based models. The second disruption relates to physical products, where digital technology lowers the barriers to shared use. Digital platforms are used to match demand and supply and organize sharing of products. Sensors can be used to track the location and status of shared products in real-time. Market disruption comes from new platforms who don’t have the assets themselves and are therefore very flexible.
In the traditional economy, the production paradigm was based on mass production of identical products. New digital technologies like 3D printing allow ultra personalization of products. Furthermore, digital enabled products can be configured to provide functionality and behaviour that match personal preferences. Finally, personalization not only applies to the product itself, but also to the delivery process which allows much more flexibility for the customer.
The Internet provides an unlimited source of (product) information to customers. Not only originating from the producer, but also from other consumers on e.g. online rating sites. The disruptive effect is in the market transparency it creates. It becomes possible for consumers to be even better informed than sales persons when they enter a shop. The downside of the development is an information overload. No single individual is able to keep up with information that is generated.
DIGITAL IS THE NEW NORMAL
In the digital economy, information, products and services are available through the online channel. However, customers expect more than just online, they expect the experience to be easy and interesting, with personalized and intelligent interfaces. There is zero tolerance for digital failure, every step in the process is a make or break moment for the relationship with the customer. This requires online channels to be completely redesigned with the customer journey in mind, instead of being just the digital version of the traditional physical process. TRUST AND REPUTATION
In the online world, trust and reputation are vital but are always at risk. Social media and online rating sites give each individual consumer a voice that can be heard by all. Protecting trust and reputation in the digital world has become a vital activity for large firms. Reputation is however not only relevant to big firms, but also for micro entrepreneurs on platforms like Airbnb, Peerby and Etsy. In the digital era, technology is used to build trust between strangers, resulting in a digital reputation which is the expression of how much a community trusts a person. Rachel Botsman summarizes this as: “The currency of the new economy is trust”.
In the digital economy, customers expect full flexibility in the time and place at which they consumer products and services. This causes a shift towards an on-demand model, threatening traditional models. An example is television broadcasting, which broadcasts contents to every subscriber alike, that are threatened by on-demand video providers.
In the traditional economy, intermediaries like travel agencies were necessary to connect demand and supply in an economically viable way. In the digital world, transaction costs have dropped dramatically and full information transparency exists. The online channel favours a direct-to-consumer strategy, eliminating intermediaries from the value chain.
MANUAL WORK IS AUTOMATED / ROBOTIZED
In the digital economy, every business activity that can be automated will eventually be automated due to its advantages: no human errors, 24*7 operation and lower costs. This trend started with automation of administrative routine work, but as technology advances other activities that require more complex skills are automated or robotized too. This requires a huge transition of the labour market as large parts of the existing jobs virtually disappear and new jobs with new skills and competences emerge. Employability of the work force has never been such important as it is now.
PROCESSES BECOME DATA–CENTRIC
In the digital economy, data has become a fundamental production factor next to capital, resources and labour. The power of data and analytics is in the ability to make evidence based decision making. The company that is best enabled to create insight from its data has the competitive advantage.
FROM ‘PUSH’ TO ‘PULL’
Traditionally, businesses created multi-year business plans and used this planning to bring the required workforce and assets at the right time in the right place. In the digital economy however, it becomes harder and harder to predict accurately and this ‘push’ approach is no longer successful. The digital economy requires a different ‘pull’ approach. In this new approach, companies organize themselves in such a way they are able to put the right people and assets in place with short lead times. They do so, for example, by replacing tapping into flows of assets provided by other companies and by replacing manpower by digital power.
Digitization of information and products, in combination with digital communication and collaboration tools make business processes independent of physical location. Mobile solutions cause information and processes to be available at the time and location they are needed. The disruptive effect of this is in the ability to make complex and time consuming processes simpler and faster.
FROM EFFICIENCY TO FAST LEARNING
Until recently, central coordination of activities in order to establish maximum efficiency was a successful strategy. Due to shorter product life cycles, however, this strategy has become less effective. In the digital economy it has become more important to be able to adapt products and services quickly in order to stay ahead of competition. Successful organizations are the ones that are able to learn fast and to implement this learning in new products with very short cycles. Clearly, this requires either completely digital or partially digital (hybrid) products. Tesla, for example, has been able to augment the functionality of their Model S through an automatic software update, in contrast with traditional car manufacturers that require years to redesign a car.
In the digital economy, a new economic landscape is emerging. This new landscape is characterized by two trends: concentration and fragmentation. Both are taking place at the same time and are reinforcing each other. Concentration is the trend towards relatively few, very large players that provide infrastructure, platforms and services supporting many fragmented
niche players. In the parts of the economy that are subject to concentration, companies can only compete with scale and scope. The value of concentrated players is being a clear leader in their market. A smaller size is always a disadvantage in this segment. Examples of segments where concentration is taking place are apps stores, cloud computing, social media, payment platforms, etc.
At the same time, other parts of the economy are subject to fragmentation. In these parts of the economy, each entity has a small addressable market, often focused on a niche. Together, all fragmented players address the full spectrum of customer needs. Due to its small scale and influence, no single entity controls the market. Exponential reduction in cost/performance of digital technologies, combined with the availability of on-demand cloud services, lower the up-front capital investment required to start a business. This is where concentrated players and fragmented players reinforce each other. In general, diseconomies of scale are in play. The extent to which industry will fragment depends on two elements. First, the degree to which customers are desiring more personalization and uniqueness of their products in terms of price, availability and design. Second, fragmentation is most likely to occur in those market segments where digital technology has lowered barriers to entry most.