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CHAPTER I - From Innovation to Disruptions: The Big Shift Revisited

Digital currencies. The cloud. 3D printing. Wearables. MOOCs. E-books. E-commerce. E-health. Wireless broadband. Social networks. Immersive media. Augmented reality. Big data analytics. Natural language processing. Cognitive computing. Quantum computing. Drones. Robots. Self-driving cars. Crowdsourcing. Smart phones. Smart cities. Enchanted objects. The Internet of Everything.

The list of potentially disruptive technologies keeps getting longer. Each one, by itself, is likely to have a substantial impact on many different aspects of society. Taken together, they are creating an environment that is dramatically different and far more volatile than the world that came before—an environment filled with novel challenges and opportunities.

A notable characteristic of this period is the accelerating rate at which novel technologies keep appearing and evolving. We are witnessing the results of what Google Chief Economist Hal Varian has called “combinatorial innovation,”i the ready availability of component parts (each of which is evolving) that can be assembled in different ways to create new products and services. Virtually all of these technologies are digitally-based: they exist either as software or as combinations of hardware and software that take advantage of powerful, widely available, low-cost resources like the cloud and open source development tools. They leverage the power of digital computing and the global reach of the Internet to accelerate their development and speed their adoption.

In addition, the traditional development cycle has been compressed through a process of “lightweight innovation.” Instead of spending long periods of time to create, test and refine a product, the new approach involves fast prototyping, quick release, then a continuous iterative process of product improvement based on user feedback that leads to scale and builds reliability. The first version of Gmail was written in one day, and the prototype of Twitter was developed in two weeks. (The first commercial version of Twitter was launched in 2006; a year later, it was generating 4 million tweets per day; by 2013, more than 200 million users were sending over 400 million tweets daily.)

These new products and services—even entirely new categories of products and services—are coming from a wide range of sources: academic research groups, small start-ups, even individual entrepreneurs. Barriers to entry keep falling. As documented in last year’s Roundtable report, even as the new digital environment is seeing greater concentration in providers of infrastructure (e.g., cloud computing, Internet access and transport), it is witnessing ongoing fragmentation in many other aspects of business.ii Innovation, which has historically been seen as the domain of large corporate and academic R&D labs, is now coming from much smaller entities. In fact, the gating factor on progress is no longer the technology but rather our imagination in figuring out how to make use of it.

From Innovation to Disruption: The Big Shift Revisited

In light of all these developments, it is not surprising that the notion of disruption is “in the air.”1 In fact, the idea that we are living in an age of disruption has become almost a cliché. But what, exactly, do we mean by “disruption?” According to the dictionary, it is an event, often unexpected, that interrupts the normal, course of events or challenges the unity of something. In the context of business, the term has come to refer to a new offering, a new business model or a new value proposition that challenges the dominance of an incumbent leader in a particular arena and has the potential to lead to its demise.

According to John Hagel, the co-chair of the Deloitte Center for the Edge, we have entered an age of continual disruption, which can be manifested in any of three different ways by which a new business approach can disrupt an incumbent leader: first, by rendering obsolete a significant part of an incumbent’s existing assets or installed resource base; second, by requiring an incumbent to significantly cannibalize its existing revenue or profit stream to respond to the new approach; or, third, by offering a new set of assumptions regarding the drivers of value creation and capture relative to the assumptions that have been the basis for the success of current incumbents. What makes disruptions so disruptive is that they “turn the assets of incumbents into potentially life-threatening liabilities.”

In all three instances, reacting effectively to a disruption can be challenging because it “requires incumbents to radically change their view of the world and embark on a very painful transition that will significantly erode performance in the short-term”iv —a prospect that can be particularly problematic for publicly traded companies that feel compelled to keep investors happy on a quarter-to-quarter basis. In fact, Hagel noted, incumbents have an “almost infinite” capacity to rationalize why responding to disruptive challenges is not necessary. This makes it more likely that devising and implementing an effective response will be put off, sometimes until it is too late. New York University’s Clay Shirky summarized this process of rationalization as follows:

First, the people running the old system don’t notice the change. When they do, they assume it’s minor. Then that it’s a niche. Then a fad. And by the time they understand that their world has actually changed, they’ve squandered most of the time they had to adapt.v

John Hagel noted that a new or dramatically improved technology alone cannot disrupt an existing business. Disruption occurs when someone uses the technology to develop a fundamentally different approach to the market: digital currencies are creating opportunities for payment mechanisms and funds transfers that completely bypass banks and other traditional financial services institutions. 3D printing seems poised to stimulate the growth of entirely new production and distribution channels in which the manufacture of goods takes place much closer to the end user and the time of use. Telemedicine applications are challenging traditional assumptions about how health care is delivered. Self-driving cars and pilotless aircraft (drones) have the potential to reshape entire sectors of the transportation industry.

How disruption plays out will vary from sector to sector—much of the 2014 Roundtable was devoted to exploring likely scenarios for several of these sectors. But all of these specific disruptions are being amplified and accelerated by a set of “foundational disruptions” that John Hagel and his colleague John Seely Brown have characterized as “the Big Shift” that is playing out over multiple markets and social arenas.

Four key dimensions of this shift, which have been explored in previous reports in this series, include:

  • Stocks to flows. In the past, the source of value creation for business involved development of proprietary knowledge stocks, which businesses were able to exploit over time. In a world that is constantly changing, knowledge stocks depreciate at an accelerating rate. The result is that the winners in the future will be those who find ways to more effectively participate in a broad range of diverse knowledge flows that refresh their knowledge stocks faster than they are depleted.
  • Push to pull. In the past, the most efficient way to deliver value to the market was based on making accurate forecasts of demand and then ensuring that the right people and resources are pushed to the right place at the right time to meet that demand. In a world of increasing uncertainty, making reliable forecasts becomes more challenging. If the forecasts are inaccurate, push approaches become hugely inefficient. The alternative is to adopt a more agile approach based on scalable pull platforms where people and resources can be mobilized where needed and as needed.
  • Consumption to creation. Individual status and identity used to be determined by the size of one’s house, the model of one’s car and the clothes one wore. The Big Shift is altering the source of status and identity from consumption to creation. Meaning will come from what one has created and how others have adopted and built upon it, not by what one’s possessions.
  • Financial capital to social capital. In the past, the primary source of wealth was financial capital—either having money or having access to money. In the Big Shift, financial capital recedes in significance while social capital becomes more important. Wealth and well-being will increasingly be a function of the breadth and diversity of the social ties and the reputation accumulated from collaborating with others.

Taken together, these foundational shifts define a fundamentally new and different environment in which businesses must operate—an era of continual change and disruption. The purpose of this report is to identify the challenges and the opportunities presented by this new environment.


1 The day after the 2014 Roundtable concluded, the Aspen Disruption Summit took place. Although the event was held just a few blocks away from the Aspen Institute campus, it had no connection to the Roundtable. Speakers focused on disruptive developments in biology, physics, engineering and anthropology. www.aspendisruptionsummit.com.

ENDNOTES
i Hal R. Varian, “Computer Mediated Transactions,” American Economic Review: Papers & Proceedings 100, May 2010, http://people.ischool.berkeley.edu/~hal/Papers/2010/cmt.pdf.

ii Richard Adler, Fragmentation and Concentration in the New Digital Environment, Report on the 2013 Aspen Institute Roundtable on Institutional Innovation, Aspen Institute, 2014, http://csreports.aspeninstitute.org/Roundtable-on-Institutional Innovation/2013/library/details/47/Innovation-13-Full-Report.

iii John Hagel and John Seely Brown, “Preliminary Explorations into Patterns of Disruption,” Working Paper, July 9, 2014.

iv Clay Shirky, “Napster, Udacity and the Academy,” blog post, November 17, 2012, www.shirky.com/weblog/2012/11/napster-udacity-and-the-academy.

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