The economics of innovation

It is true that each new wave of digitalization speeds up business opportunities, bringing in new competitors and hordes of startups that individually or as a pack rip out juicy pieces of long-defended business models. The first wave of change came with the dot.com boom at the turn of the century. Mass adoption of technology by consumers, combined with the digital-native generation growing up into consumers with discretionary spending capacity and a different set of expectations, along with with global capital to invest have created an environment requiring nearly every business to transform or wither on the vine.
Heinrich Arnold, Chief Executive Officer of Detecon, the Deutsche Telekom Group’s management consultancy explained that the rapid advancement of the Digital Age, the confluence of social media, smart devices, Big Data and Cloud Computing, represents a massive opportunity for businesses. Data is at the heart of this opportunity. But as digital matures, we will also see new opportunities emerging for consumers to gain advantage from their data.
Heinrich Arnold noted that with digitalization, the world is currently undergoing a technology shock. This radical technological change is redefining the parameters of economic activity and transforming companies everywhere. This change is being triggered by the significant advances in the computing power of end devices, as well as by data centers and the surge in broadband connections. According to Heinrich Arnold this is leading to an increase, by orders of magnitude, in the capacities of browsers and operating systems and in the availability of data. In addition, the technological developments of the past two decades with regard to physical infrastructure, IT/cloud systems and web applications have led to a greater decoupling from each other. This also extends to the technical complexity that lies behind interfaces.
This encapsulation of technical complexity has boosted productivity and led to the creation of new systems and applications, besides making it much simpler to interconnect systems. It has thus become significantly simpler from a technological perspective to create large systems and platforms, and to achieve the performance of large systems and interconnect them across entire value chains via internet applications. This has direct consequences for trade and industry. The connectivity of IT systems across organizational boundaries has been simplified throughout the value chain. Technological feasibility accelerates the establishment of global platforms. The fact that large systems can be networked enables partnerships and ecosystems to be built.
Roman Friedrich from Booz & co. stated that ecosystems are a decisive factor in creating global reach. But for all the global attention paid to Silicon Valley, we must also note that it is far from being the only technologically relevant global ecosystem. Throughout the world, due to the linkages between players and their systems that have become possible, new centers of ecosystem innovation have sprung up. They reach from Berlin in Germany to Beersheba in Israel and Pudong in China.
Carlo Gagliardi, Senior Trainer at MCA Consulting in London strongly argued that in order to categorize this radical technological change and classify it based on its significance, a look at the technology shocks of the past is instructive. This reveals that Europe has already experienced significant technology shocks in the recent past that have redefined the parameters of competition. Consider the manufacturing industry in the 1980s, when computer technology made inroads into the field of mechanical engineering. Carlo Gagliardi noted that all of a sudden, low-priced manufacturers from Japan could compensate for mechanical precision with electronic means and achieve the quality levels of high-quality manufacturers at a fraction of the cost.
According to Carlo Gagliardi, the impact was serious and turned the entire sector worldwide, led at the time by machine builders from Switzerland and Germany, on its head. Many national economies that could not muster the required skills lost their machine tools industry. And even Swiss manufacturers could retain their hold only in niche areas such as specialized machine tools.
By contrast, a number of manufacturers in Germany were able to make the transition to computer-controlled machines, thanks not least to the competence of Siemens as a supplier of electronic control technology. Suppliers who were able to expand their portfolios in time to include digital techniques using machines relying on digital instead of mechanical controls survived the technology shock and could even expand their relative market share.
The technology shock of today is the Industrial Internet. Affected are all areas and sectors where technical feasibility gives birth to advances in performance that are measured in orders of magnitude. This requires many businesses to make fundamental changes in their processes, products, business models and value chains. While the first wave of digitalization unleashed in-house effects, triggered by the efficiency-enhancing potential of ERP ( enterprise resource planning) systems, the second wave of digitalization spans businesses via the Industrial Internet.
Roman Friedrich from Booz & co. asserted that the first digitalization project in Germany that spanned the entire value chain was a pioneering project for intelligent city logistics around the harbor of the city of Hamburg, started in 2011 by SAP, T-Systems and T-Labs, and the businesses operating in and around the port ecosystem. Besides logistics, another forerunner in the use of the Industrial Internet is the manufacturing industry, with projects for preventive maintenance and remote support. Incidentally, these are the applications most frequently displayed as examples at the Hannover Messe.
However, it is not just large industrial projects that stand out. The venerable brand Vorwerk showed with its Thermomix how a physical product can be successfully extended using digital techniques. As Roman Friedrich noted these examples confirm a fundamental hypothesis: It is entirely possible to expand existing business models digitally without having to invent new ones from scratch.
One of the biggest risks any business faces today, however, is complacency when it comes to the digital revolution. Business leaders need to recognise what is happening and react. It is increasingly said that organisations need to “innovate or die”. Leaders must think about how they can embrace the opportunities which emerging technologies present. Failure to do so will leave businesses very exposed to competitors or new start-ups disrupting the status quo.

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