Covid redefined connectivity and immersed us in an accelerated process of digitalisation. We may ask ourselves if this process will be reversed or if it has put our organisations on the path to an increasingly digital society.
The change has been profound and we need some perspective on the pre-covid world. Believe it or not, the official definition of broadband in the USA is still 25Mbps download and 3Mbps upload. You may believe that telecom lobbies are largely responsible for this conservatism and you are probably right. However, for the average citizen, connectivity before covid mostly meant surfing the net, buying online, participating on social networks, and of course, watching movies.
Covid changed this dramatically – starting with pupils and students who could not attend classrooms and had to make online learning the new normal. Similarly, work moved to homes sweepingly fast. Only this first step redefined what connectivity meant for all of us by smashing the 30Mbps standard in many places.
Remote working gave birth to big new tech giants such as Zoom and redefined the location of work and how it is performed, coordinated, and measured
Remote working gave birth to big new tech giants such as Zoom and redefined the location of work and how it is performed, coordinated, and measured. 'Being there' became obsolete and remote working entered the checklist for new jobs. Organisations that for decades relied on physical presence and 'eye contact' to manage their teams needed to transform their KPIs to capture the incentives and motivations of remote workers in the new normal. Teamwork and meetings became virtual and skills transformed radically.
All this was an earthquake for companies. New companies appeared – such as Peloton, Zoom, and Apple Fitness – who could quickly adapt and thrive in this environment. This was the case of Amazon, Netflix, Glovo, JustEat, and many others. This adaptation had an unexpected characteristic – it was fast. Companies competed to gain territory in this new land of opportunity, and they competed with innovation. We can find this characteristic in any organisation, but the war of conference apps showed what fast means in this new environment and fast meant blazingly fast!
The economics behind the disruption
The mechanism that enabled this disruption is very well-known: task decomposition through modularisation followed by digitalisation. Let’s use the example of Uber.
Uber decomposed the customer taxi journey into its primary elements: find a taxi; call a taxi; ride; and pay. Uber then digitalised as many of these modules as possible and only one non-digital task remained: the ride.
Covid brought this process one step further and enabled the complete digitalisation of all the journey, including aspects that nobody thought possible before covid. Let’s compare Peloton with a traditional gym. You may find a gym using digital tools but joining a gym and the subsequent workouts are done on the premises (although followed by a digital payment). Peloton changed this by digitalising the whole process and placing a connected bike in your home.
Why is this so important? First, a digitalised process enjoys almost zero marginal costs, the cost of serving one additional client is negligible once the application is running in a cloud platform. Secondly, a digital process enjoys infinite scalability and complete agility, adapting its resources to the users using the system. This happens because processes executed in cloud platforms adjust to customer needs almost instantly. Finally, there are no diminishing returns on scale. Once created the code does not need to be upgraded as users increase and cloud platforms do not have bottlenecks or increasing prices for scale – quite the contrary. Therefore, returns on scale increase rather than decrease.
The magnitude of this disruption can only be grasped if we compare before and after business and operating models. In traditional business models, value creation comes from a cost strategy and a differentiation strategy or niche strategy; and value capture is achieved through pricing, marketing, or licensing goods.
The operating model is defined by three factors: economies of scale; scope; and how companies learn. Economies of scale have been traditionally defined by how volume and integration are managed (inside the company, or outsourced, and more recently using the web to scale). Scope is about the range, variety, and complexity that a company chooses to handle. And learning has traditionally been the territory of R&D projects with continuous learning through methodologies (such as Kanban and intellectual property management).
These two areas change radically in native or transformed digital companies.
Value is created through innovation and personalisation that engages customers and captures their imagination. Value is captured through two mechanisms: firstly, growth with network effects and data products; and secondly, by capturing the attention of users through behavioural strategies.
The operating model is completely transformed because of digitalisation and cloud platforms. The economies of scale mean achieving maximum possible growth because there are no decreasing returns. Scope is also as large as needed, and is either created internally or with platform strategies or user-generated and managed through personalisation and recommendation engines.
Learning is now done through a process of continuous experimentation and validation in what is called fast incrementalism
Learning is again an aspect of major change. Learning is now done through a process of continuous experimentation and validation in what is called fast incrementalism (a process that reduces risk, and most importantly, increases speed).
Changes in the market
We portray markets as normal distributions where most participants concentrate around the mean and only a few are in the extremes. Bottlenecks, locality, and decreasing returns on investments create this result.
In these markets, competition is restricted to be around the best. Nothing better can be achieved because returns decrease with scale, and it is extremely difficult to lessen this effect. In general, our brain and our intuition are built around the normal distribution.
However, the operating model and the growth model of modern companies does not create markets around the normal distribution, but in the form of power-laws where the winner takes almost all the market, and other participants decrease exponentially. Although much of our world is built around power-laws (for example, the size of cities, university rankings, military might, or research capacity) we tend to believe that the market where we compete follows a normal distribution with all its consequences.
One of the most important consequences is related to our understanding of competition. If we believe that we are competing in a market with the shape of a normal distribution, our objective is then to be around the mean or a bit above the mean. This is our best option in terms of cost/reward.
However, if the market has a power-law shape and we follow this strategy we will be among the losers, because most of market wealth is concentrated in a few hands well above the mean.
Once this is understood, the fight for market share and growth at any cost and beyond profits is easy to grasp. Covid accelerated this process tremendously by transforming markets that used to have the shape of a normal distribution to power-law markets by digitalising them and moving business routines to software models in the cloud.
Digitally transformed organisations
In this process, organisations endured significant changes. By digitalising every process, the AI disruption moved organisational functions to software and models in the cloud.
This changed the balance between exploitation and exploration. Exploitation was progressively made by software with little human intervention or none. Therefore, the focus and the action inside the organisation is focused on exploration, in competing with innovation, and moving even more organisational functions to models in the cloud.
This change in balance powers the AI disruption by creating more demand for tools and talent, and companies increase this process by powering a feedback loop that results in very technical organisations with small headcounts that are immersed in intense competition driven by internal and external innovation.
What has been the role of covid in this disruption? It has accelerated the process and widened it to areas where digitalisation was unthinkable. Markets with the shape of a power-law are increasingly driven by innovation. Many of these processes are here to stay – and so the question that you face as an organisation, country, or a society is how to position, compete, thrive, and maybe survive in this new market.
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