Thursday, January 17, 2013

Revolution

I’ve used the word “revolution” a couple of times so far, both “scientific” and “industrial”. However, what do I mean by revolution? To understand what is a “revolution” we need to examine the interplay of change, competition and inertia.

Figure 26 illustrates an example of an activity that is evolving to ultimately become a component of higher order activities. I’ve marked onto the map an inertia barrier to change for suppliers of products and three separate stages of competition.

Figure 26 – Change, Competition and Inertia


Now, let us examine these three separate stages of competition. 

In stage 1, competition is between suppliers of products with constant feature improvement. Whilst disruptive change and new entrants do occur (e.g. a new component of the value chain appears and former products are substituted), the majority of change is gradual and sustaining of those competing companies. It is a time of high margin, increasing understanding of customer needs, the introduction of rental services and relative competition i.e. a jostle for position between giant competitors. 

Because of success, inertia to change builds up within those giants whilst the activity itself continues to evolve becoming more widespread, better understood and declining in differential value. In the latter stages customers can even start to question whether they are getting a fair benefit for what they are paying but overall, this is a time of Peace in that industrial ecosystem.

In stage 2, the successful activity has now become commonplace and well understood. It is now suitable for more commodity or utility provision. However, the existing giants have inertia to this change and so it is new entrants that are not encumbered by pre-existing business models that introduce the more commodity form. These new entrants may include former consumers who have gained enough experience to know that this activity should be provided in a different way along with the skills to do it. 

This more commodity form (especially utility services) is often dismissed by most existing customers and suppliers of products who have their own inertia to change. Customers see it as lacking what they need and not fitting in with their norms of operating. However, new customers appear and fairly rapidly the benefits of high rates of agility, innovation (as in genesis of new higher order activities) and efficiency spread. Novel practices and norms of operating also co-evolve and spread. 

Customers who were once dismissive start to trial out the services, pressure mounts for adoption. A trickle rapidly becomes a flood. Past giants who have been lulled into a sense of gradual change by the previous peaceful stage of competition see an exodus. Those same customers who were only recently telling these past giants that they wouldn’t adopt these services, that it didn’t fit their needs and that they needed more tailored offerings like the old products have adapted to the new world.

The new entrants are rapidly becoming the new titans. The former giants have old models that are dying and little stake in this future world. There is little time left to act. The cost to build equivalent services at scale to compete against the new titans is rapidly becoming prohibitive. Many past giants now face disruption and failure. Unable to invest, they often seek to reduce costs in order to return profitability to the former levels they experienced in the peace stage of competition. Their decline accelerates.

This stage of competition is where disruptive change exceeds sustaining, it has become a fight for survival and it is a time of War with many corporate casualties. This period of rapid change is know as a punctuated equilibrium.

In stage 3, the activity that is now provided by commodity components has enabled new higher order activities and things that were economically unfeasible a short while before now spread rapidly. Nuts and bolt beget machines. Electricity beget Television.

These new activities are by definition novel and uncertain. Whilst they are a gamble and we can’t predict what will happen, they are also potential sources of future wealth. Capital rapidly flows into these new activities. An explosion of growth in new activities and new sources of data occurs. The rate of genesis appears breathtaking. For an average gas lamp lighter there is suddenly electric lights, radio, television, teletyping, telephones, fridges and all manner of wondrous devices in a short time span. 

There’s also disruption as past ways of operating are substituted – gas lamps to electric lights. These changes are often indirect and difficult to predict, for example those that are caused by reduced barriers to entry. The fear that the changes in the previous stage of war (where past giants fail) will cause mass unemployment often lessens because the new industries (built upon the new activities we could not have predicted) will form. 

Despite the maelstrom it is generally a time of marvel and of amazement at new technological progress. Within this smorgasbord of technological delights, the new giants are being established. They will take these new activities into the peace phase of competition. It is a time of Wonder, growth and of bountiful creation of the novel and new.

This pattern of peace, war and wonder repeats throughout history whenever activities evolve to become commodity components of other higher order systems. 

Sometimes these changes are localized and the impacts are only felt by those industries that contain the activity as part of their value chains. In other cases the change is much broader impacting the entire economy because the activity is common to many value chains e.g. nuts and bolt, electricity, computing resources.

Since organizations consist of many value chains each with a multitude of evolving components then most large organisations can find themselves simultaneously in all three states. Hence, on one hand the provision of some activities will be relatively peaceful with known suppliers in a state of fierce but relative competition of continual improvement e.g. competition around tablet devices, Samsung vs Apple.

Whilst at the same time, other activities will be in a state of war with disruption, changing practices and a fight for survival against new entrants e.g. competition around computing infrastructure with new entrants such as Amazon EC2. Further still, other activities will be in a state of wonder, with rapid creation, uncertainty and potentially new sources of future value e.g. big data systems.

In many cases these activities are linked through value chains for example the explosion of big data systems is a direct result of commoditization of aspects of IT through systems such as Amazon EC2.

As with the changing in characteristics as activities evolve from chaotic to linear, the strategic games a company should play change with the state of competition. 

The macro economic pattern - Ages
These states of war, wonder and peace can be seen at a macro economic scale depending upon how widespread the activity or groups of activities that are undergoing transformation are. We commonly call these macro economic cycles Ages.

These ages are not initiated by the genesis of some new activity but always the commoditization of a pre-existing activity to components of higher order systems. For example, the Age of Electricity was not caused by the introduction of electrical power which occurred with the Parthian Battery (sometime before 400 AD) but instead utility provision of A/C electricity with Westinghouse, almost 1500 years later.

The Mechanical Age was not caused by the introduction of the screw by Archimedes but by the commoditization of standard mechanical components through systems such as Maudslay’s screw cutting lathe. The Age of the Internet did not involve the introduction of the first means of mass communication such as the Town Crier but instead the commoditization of the means of mass communication.

Whilst born out of commoditisation, each of these Ages is centered on a major cluster of "innovations" (i.e. genesis of new activities) that are built in the time of Wonder from the components delivered in the last War. Each “innovation” then undergoes a cycle of incremental improvement until reaching a plateau of diminishing returns with widespread diffusion of the new paradigms (the time of peace).  Inertia to change builds up, the next War is started and the next Age begins

The existence of these ages or super cycles of economic development was first proposed in 1925 by Nikolai Kondratiev and are given the name Kondratiev or K-Waves. More recently Carlotta Perez has characterized these K-Waves in around technological and economic paradigm shifts. For example the Industrial Revolution included factory production, mechanization, transportation and development of local networks whereas the Age of Oil and Mass Production included standardization of products, economies of scale, synthetic materials, centralization and national power systems. 

In figure 27, I’ve annotated onto Carlotta Perez’s graph of technology transformation the stages of war, wonder and peace. 

Figure 27 – War, Wonder, Peace and Technology Waves


The same transformation is occurring today with cloud computing. The “cloud” represents the shift of a range of IT activities that are widespread in many value chains from products to utility services. As such those effected industries have moved from a stage of peace to war and these utility services have enabled a rapid growth of new higher order systems.  Cloud computing is the beginning of a new time of wonder, and as an economy we are entering a new age. 

Before leaving this section, a final few comments are worth mentioning.

On Evolution and Organisations
As each age follows a war and the commoditization of pre-existing activities, each age is also associated with a new set of practices that have co-evolved with those activities.

This often appears in the form of new organisations. For example the Mechanical Age involved the appearance of the American System of Engineering. The Age of Electricity involved the appearance of Fordism. The Age of the Internet led to the Web 2.0 and Cloud Computing is itself creating new forms of organization. In later sections we will examine these new forms, however for the time being it’s enough to note the association.

On Evolution and Time
The path of evolution can be graphed over ubiquity and certainty and it is not a time-based sequence i.e. the speed at which things evolve is not constant. For example, the nut and bolt took 2000 years to evolve to a commodity, electricity about 1500 years whereas computing infrastructure took about 65 years.

Whilst each age has a time of wonder where we see an explosion in the genesis of activities (the novel and new), it is often asked whether we are becoming more innovative as a species? Certainly the systems we build today are higher order than the past and certainly each age appears wondrous and magical to previous ages but I’ve yet to find any evidence that the rate of genesis has varied i.e. is the current day any more magical than the time of wonder associated with the Age of Electricity?

However, what is clearly happening is the speed of evolution i.e. the time taken for a novel activity to become a commodity has accelerated and this appears mainly to do with increased communication especially as means of communication become more commoditized. This is not a new phenomenon.

For example, on the 1st May 1840 a revolution in communication was started by the introduction of the Penny Black. This simple postage stamp caused a dramatic explosion in written communication from 76 million letters sent in 1839 to 350 million by 1850. It wasn't a case that postal services didn't exist before but the Penny Black turned the act of posting a letter into a more standard, well-defined and ultimately ubiquitous activity.

The introduction caused a spate of copycat services throughout the world, with the US introducing their first stamps in 1847. The 125 million pieces of post sent through their system in that year mushroomed to 4 billion by 1890. From stamps to street letter boxes (1858) to the pony express, railway deliveries (1862), money order and even international money orders by 1869. A vast array of new activities were created that quickly spread.

However, the lasting effect appears to have been that as the speed of communication accelerated the rate of evolution of other activities correspondingly accelerated. The printing press, postage stamps, telephony and the Internet have all accelerated the general rate of evolution of all other activities by increasing communication and participation.

So whilst, we as a species may not have become more “innovative”, the speed at which new activities evolve and new ages begin certainly appears to be accelerating.

On Evolution, Energy, Entropy and Vulnerability
The constant snake like progress of our economy through those Kondratiev waves of the industrial age, the age of steam, the age of electricity each with its own time of wonder, peace and war is driving us further up the value chain with higher order systems continuously evolving from chaotic to linear (see figure 28).

Figure 28 – Evolution and Entropy


We are continuously moving away from a disordered, primitive and information poor position to a highly ordered, sophisticated and information rich position. Now ignoring the fact that we waste energy in abundance, the shift to a more highly ordered position means decreasing entropy and hence always requires more energy than the previous position. Even if we could eliminate waste, our economic progress would continually demand more energy.

However, there is another consequence. As we move to a higher order environment, we are not only dependent upon the lower order systems but they become increasingly less visible. This exposes us to all forms of new vulnerabilities. For example, the solar storm of 1859 known as the Carrington event had fairly minimal impacts on the society of its day. A similar storm today would impact many of those invisible, taken for granted, lower order subsystems that our society relies upon for its supply chains, production and computing. It would have a far greater impact.

However, this dependency and potential doom also walks hand in hand with our salvation. It is those very same higher order systems that are exposed to these vulnerabilities that enable us to identify and potentially negate threats whether it’s the Apophis asteroid, detection of solar storms or exceeding the carrying capacity of world agriculture etc.

Evolution is the constant progress towards higher ordered systems that create new capabilities, consume more energy, exposes new vulnerabilities and protects against threats.

On Prediction and Disruption
The final comment I wish to add is on the commonly perceived random nature of “innovation” and disruption. The genesis of novel activities is chaotic and uncertain. These can’t be predicted with any degree of accuracy, any more than the gas lamp lighter could have foreseen the creation of television and the broadcast industry. Since the activity is new we generally don’t describe this as disruption as there is nothing to disrupt.

The substitution of one product with another product because of some changed characteristic is also extremely difficult (though not impossible) to predict. An example of this would be the substitution of gas lamps with electric lights or one format of hard drives with another. In this case, pre-existing suppliers are often dismissive of the change that will subsequently disrupt them. They are caught flat-footed by the change in the market because they focus too much on existing needs. This is what is commonly known as the Innovator’s dilemma.

However, the evolution of an activity from product to commodity and utility services is entirely predictable. For example, the changes as a result of cloud computing were first described forty years ago in Douglas Parkhill’s book on the challenge of the computer utility. Key to identifying when this will happen is how commonplace and well defined the activity is.

Nevertheless existing suppliers are still disrupted by this change despite it being entirely predictable because of the inertia they have due to past success. It is important to understand that unlike the classic case of disruptive change (Christensen) where the market moves in an unexpected way, this form of disruption because it is entirely visible should be prevented. In the case of cloud computing this has been clearly signposted for over a decade.

Whilst people claim this is an example of the innovator’s dilemma, this is not the same precisely because the change is not unexpected. The role of the CEO is to see this clearly visible storms coming and move the organization out of its path. Disruption in this instance is simply a matter of failure in corporate strategy and is entirely preventable.

In the next section, we will revisit that first Fotango map and we will use all we have covered to explain its meanings.

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Post 12 of 200

Next post in series ... Revisiting that First Map.

Previous post in series ... Inertia

Beginning of series ... There must be some way out of here


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