11 Jan, 2018
Today, and on a regular basis, you see and read about new business models that can potentially disrupt businesses in various sectors. We see a select number of technologies and business models take off overnight (iPhone, Airbnb, Twitter, Dollar Shave Club, Uber), while others take a long time to substitute old technology (cloud computing, HDTV, etc.). The biggest fear for companies is not knowing which of these new technologies need to be adopted quickly so they have a competitive advantage over others and create a new business model. When the rate of mobile phone adoption grew, companies that took advantage of bringing their business value onto the mobile device gained a competitive advantage. This past year, more than 65% of Target online shoppers used their mobile device. I have done all my research and purchases on Thanksgiving sales through the mobile device and from Amazon Echo, which is a part of the internet of things (IoT), and is a voice-activated personal assistant. Companies also fear the timing of their response. Are they too early in the transition to new technology and cannot sustain by the time market is ready for their technology, or are they too late and miss the revolutions like companies such as Blockbuster, Kodak, Borders, Blackberry etc. to name to name a few? Now, we see how the Internet of Things (IoT) is shaping up and is pretty much promised to deliver a great value to every line of business, companies need to understand how to evaluate or what innovations they can create to be competitive and to respond to new players in the business.
To understand why some technologies take off and quickly replace their predecessors and others struggle and take time, we must look beyond the technology and understand the whole ecosystem that supports it. Understanding what kind of competition exists between new and old ecosystems, and comparisons between the two technologies can help determine how long it will take for new technology to transition.
What is an ecosystem?
Every technology has interdependency with complementary elements like technologies, services, and standards, to deliver their value proposition. The level of interdependency, maturity, and ability to scale each of these elements plays a key role in the success of the new technology, or how long the old technology will stay relevant. For example, the success of Uber is not just because of the technology platform they have created, but also because of the maturity of the cloud infrastructure and adoption of mobile devices; the connectivity speeds all are mature enough to support Uber’s platform. If any of those were not mature, or if mobile phone and connectivity were too expensive, Uber would not have grown at the accelerated pace as they are doing today. The traditional taxi service ecosystem is not scalable to compete with Uber’s ecosystem because it lacks the technology, rules, and regulations from local, state and federal.
The new technology ecosystem vs old technology ecosystem
If new technology can deliver the value proposition that was promised, the dependency on other innovations of its ecosystem is low, or if it can fit in the existing ecosystem, then the speed in adoption will be at a very fast pace. For example, Nest thermostat (which learns the behavior and used contextual clues to keep the temperature right) not only uses the existing ecosystem, but does not require a professional to install it and is both energy and financially efficient. For example, energy-efficient light bulbs fit right in the existing socket and deliver the value right out of the box. If the technology can deliver the value but the ecosystems it is dependent on are not yet ready to deliver that value, then the full value of the technology cannot be exploited until the elements in the ecosystem are ready.
Take into consideration the HDTV, which as a technology delivers great value, but it could not be adopted and value could not be realized until the ecosystem was dependent on technologies like cameras, broadcast standards, and production methods. After the ecosystem was fully developed, the value of HDTV was recognized.
When the new technology is not a simple plug-and-play substitution and requires changes in the ecosystem in order to deliver the full value, companies have time to respond and get ready for the new technology by the time the new ecosystem is ready. If they see the old technology and/or the ecosystem has opportunities to enhance, there will a race between the new and old technology ecosystems. The winner is based on the pace of substitution of the new technology. At some point, the old technology opportunities to enhance and compete will exhaust and then the new technology adoption will accelerate, like in the case of HDTV. Companies need to plan carefully so they are not left behind, or too early in adopting new technology.
Harvard Business Review created a framework for analyzing the Pace of the Technology Substitution by new technologies based on this framework. Every technology falls into one of the four scenarios; creative destruction, robust resilience, robust coexistence, and an illusion of resilience as seen in Figure 1.
When new technology dependence on an ecosystem is low and old technology ecosystem scalability and response to the threat is also low, new technology will dominate in a shorter period if it delivers the value as it promised. In Quadrant 1 (creative destruction, Figure 1), with the old technology stagnant and the new technology unhampered, innovators should aggressively invest in the new technology. Incumbents should follow the familiar prescriptions for embracing change to withstand the winds of creative destruction. Part of that is looking for niche positions where they can survive in the long term with the old technology. For example, pagers were largely replaced by cell phones, but they are still used by emergency-service providers.
When the new technology ecosystem is not mature enough to deliver the value and the old technology ecosystem has great opportunity to improve and scale, then old technology being substituted by new technology will be very slow, which will extend the dominance of the old technology for a longer period of time. For example, bar codes and RFID chips. Even though RFID chips hold richer data than bar codes ever could, their adoption has been as slow as the ecosystem changes to support it and is not fast enough compared to the barcode ecosystem, which is extending and make barcode technology more usable. When substitution is slow, the new technology needs to keep innovating and raise the performance level so that at some point, the old technology and its ecosystem cannot compete, and at which point substitution will speed up. Until that happens, the old technology will keep the new technology at bay. The incumbent firms can continue to invest in the old technology and aggressively invest in improvements to the ecosystem, knowing that the new and old technologies will coexist for an extended period. The incumbents have less urgency to seek niche positions than incumbents in Creative Destruction. The new technology firms should be more aggressive in perfecting the technology and ecosystem to cut down the time for a substitution.
When the new technology and its ecosystem barrier is low, but the old technology can improve and its ecosystem extension opportunity is high, then there will be a fierce competition between both the technologies and a prolonged time of coexistence. An example we are seeing is between electric vehicles and hybrid/gas vehicles. The performance of electric vehicles technology is in competition with older technology, but the ecosystem, like charging stations, are not fully in place and on top, it hybrid/gas vehicles are getting more efficient and adding more features. Consumers will have an attractive choice for long period of time. In this phase, the new technology firms should focus on resolving the ecosystem and their elements instead of focusing on further development of the technology itself. Incumbents even though still keeping the competition at bay should look to pivot like Britannica Encyclopedia did or slowing embrace for sunset.
When the elements in a new technology ecosystem are not completely ready to deliver the value of the new technology and the old technology and its ecosystem do not have the opportunity to scale a lot, the old technology is still dominant until the new technology and its ecosystem fulfills its value. Once that value is fulfilled, the new technology will replace the old technology at a rapid pace. In this phase, the incumbent firms should invest aggressively in upgrading their offerings and actively raise the bar that challengers need to cross. Obviously, new-technology innovators should be clear-eyed about working to resolve the ecosystem constraints they face. But at the same time, they must recognize the performance threshold for their core technology is rising. That necessitates both a significant level of resource investment and considerable patience regarding investment returns. Innovators are not likely to transform the sector in the foreseeable future, and therefore they will want to think through the economics of serving those customers they can succeed with.
Every innovator wants to be in Quadrant 1 so they can be creative destructor. The path to get there, if you are in other quadrants, means to focus on different aspects of new technology and also on the ecosystem it supports. Identify where you are and what route would it take to be in Q1. Figure 2 shows how to analyze your old and existing technologies and their ecosystems to give a better picture of the direction you need to take. You can download Figure 2 here.
Copyright: illustratorovich / 123RF Stock Photo
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