More to digitalisation than meets the eye

We have only seen the first waves of digitalisation, and the next waves will be based on the less evident, but more fundamental, implications of digitalisation. Is your organisation ready? By Suvi Nenonen and Kaj Storbacka. 

We have all been exposed to the gospel of digitalisation. Amazon this, Apple that, and Airbnb something more. But what if you are managing a smaller domestic firm, for instance a concrete pipes business?

 It is quite evident that you cannot turn concrete pipes into a series of zeroes and ones, and the distribution of these pipes also has to take place in the real world instead of the virtual one. Are such businesses immune to digital disruption? Unfortunately the answer is no. We propose that we have only seen the first waves of digitalisation, and the next waves will be based on the less evident – but more fundamental – implications of digitalisation.

Small is increasingly beautiful
In the past we have built large organisations for two simple reasons. First, economies of scale means that a larger firm is able to achieve lower unit costs than its smaller competitors.

Second, organisations have historically been a more efficient way of coordinating activities, compared to the alternative: market exchange. 

However, digitalisation is changing these economic rules of thumb. The operational costs of production are coming down dramatically, and 3D printing and robotics will continue to do the same in the future. This means that the larger organisations no longer have cost advantages over their smaller competitors.

At the same time digitalisation has reduced the costs in coordinating activities across organisational boundaries. Just think how easy it is to google suitable business partners and to manage virtual teams these days compared to early 1990s. These two trends are likely signalling an end of an era: the transition from large, vertically integrated organisations to small specialist firms.

The end of intellectual property rights
Traditionally information and intellectual property rights have been perceived as the ultimate asset: everything else can be copied, but knowledge is rare. In 1984, the US writer Stewart Brand coined the phrase “information wants to be free”. He was referring to the fact the lowering costs of communication would make information more fluid.

Nowadays, the freedom of information is becoming a social norm. Especially the millennials find it difficult to wrap their brains around the fact that you should pay for information – and releasing sensitive information for the greater good is heralded as modern day heroism.

The final call for the freedom of information comes from big data. The world’s stock of data is growing exponentially and most of this data is connected to the internet via an IP address.

It is predicted that the future game changing innovations will come from using this big data to detect and utilise patterns of information visible only when you bring together previously unconnected data sets.

So, if your business model is built on proprietary information, then your competitive advantage is becoming increasingly fragile – just one Edward Snowden away. And building firewalls between your stock of information and the others’ means that you are willingly forgoing most of the business opportunities rendered by big data.

Great, but challenging news to New Zealand
All in all, these less evident implications of digitalisation hold a great promise to New Zealand firms. If the economics of the 20th Century was all about size and scale, it seems that in the 21st Century small truly is beautiful.

But grasping these opportunities requires completely novel business models. In building these we are forced to question the value of experience and redefine the nature of expertise.

So, have a look at your board of directors: how many of them have risen to their current position by mastering the economics of the 20th Century? How likely is it that they will truly understand that the economic fundamentals have changed – or is their wealth of experience and their expertise, accumulated in the analogue world, holding your company back? 

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