Business

Why the market leaders of tomorrow are software companies – A business professional’s guide

March 7, 2018

Read time 7 min

It’s been seven years since Marc Andreessen’s famous remark that software is eating the world. Unlike most tech-y trends, this one’s showing no signs of dying out – in fact, software’s insatiable appetite only keeps growing.  

As more and more industries are exposed to the brutal dynamics of the digital domain, more and more business professionals begin to seek answers to two fundamental questions: how is digital technology changing our business environment, and how should we engage in the digital game.

My job as a digital business designer is to help find those answers, clear and simple. When you first start dealing with the disruptive forces of the tech world, it can be hard to see beyond the hype and the buzzwords. In this post, I’ll help you look under the visible layer of current digital applications, dig a little deeper into the underlying drivers of change.

Next, I’ll take a moment to spell out some of the mechanisms that make software an ever more powerful enabler of change. What have software-induced changes meant for industries far along in becoming digitized, such as media, professional services and finance & insurance – and what could they possibly mean to industries on the verge of potential digital disruption?

1. Exponential technology development is a deep driver of disruption

The continuous advancement of core technologies – such as computing, communication, and storage – enable the creation of faster, smaller, and cheaper applications. After reaching critical adoption and, eventually, commoditization, these applications form platforms for new waves of innovation.

A great example of this is the rise of the GPS chip. After GPS became available to the general public in 2000, GPS receiver technology quickly started getting much smaller and cheaper. The first wave of consumer applications using the chips were GPS navigators, running on dedicated hardware. As the technology developed, GPS chips became small and cheap enough to become a standard component in smartphones.

Basically, this lead to the mass adoption of location-aware devices, available to developers through app ecosystems. As a result, today’s smartphones form a powerful platform for innovation around real-time location data.

“Here’s the thing: this new value is created entirely in the software layer”

Location data enables new value creation around everything from traffic flow optimization to health tracking. Here’s the thing: this new value is created entirely in the software layer. In essence, building value on top of GPS data has become a software play. Smartphones have now all but destroyed the GPS navigator device business.

2. Falling entry barriers invite new forms of competition

The speed of technological development can be a disrupting force in more ways than one.

Exponentially advancing technology has also lead to an exponential drop in input unit cost for its applications. Dropping unit costs, in turn, drive exponential growth in two things: first, the number of players able to build on the new technology, and second, the variety of novel applications the technology enables.

Drones and 3D printing serve as good examples of how technology initially only available for large corporations becomes available for SMEs as well as consumers. In less than a decade, this democratization of technology has opened new opportunities for a vast amount of players in all sorts of domains, from agricultural crop monitoring to air delivery.

Attempting to commercialize innovations is also considerably less risky than before. Most fixed costs – e.g. computing and office space – can now be turned variable, thanks to services like Amazon Web Services and WeWork. Starting, growing, and expanding a business implies much lower barriers than it used to. Established companies see their protective moats of economies of scale diminish, and smaller and faster technology companies enter their turf.

They are the digital challengers, and they’re out to carve out parts of established companies’ business.

3. Modularization enables reconfiguration of value creation

These digital challengers have an easier time entering existing value networks. Let me explain how.

Open APIs, as well as easy integration across products and services, make modularization possible. In this case, modularization means that the digital components required to create and deliver customer value are interchangeable. This enables companies to really focus on their core, and deliver on their value proposition by using the most efficient constellation of specialized, yet mostly interchangeable third party building blocks.

One example of this are cloud services. They have rapidly expanded from low-level computing and storage capacity into high-level applications, making it easier and cheaper to develop scalable digital services.

“The digital (or digitizable) component is freed from the constraints of the physical world and thus, it becomes massively scalable.”

Modularization also enables unbundling existing offerings: breaking up conventional products or services, and providing consumers with one or more of their components (at a scale and cost unmatchable in the conventional way). Spotify and Amazon Kindle unbundled content and medium, and BuzzFeed unbundled content and channel. Coursera unbundled content and auditorium delivery, and digital-only banks unbundled bank services and branch offices.

Such unbundling may have enormous business implications. The digital (or digitizable) component is freed from the constraints of the physical world and thus, it becomes massively scalable. In essence, unbundling may enable parts of conventional businesses to be turned into software plays, which implies a fundamental reconfiguration of value creation.

4. Creative destruction optimizes the existing

Perhaps one of the most brutal mechanisms of value reconfiguration is using existing assets in novel ways that optimize the whole. Let me elaborate. Typically, this process includes getting rid of costs in unconventional ways: outsourcing work to customers, piggybacking on existing assets, or circumventing the need for costly functions altogether.

Skype, and what one of its co-founders Jonas Kjellberg calls “innovating in zeros”, is a good example of this. Skype did not build its own telecommunications infrastructure, it used the internet connections users already paid for. Nor did Skype build its own routing, it used customer’s computers for it.

A much-hyped business model in the digital domain is the platform. Platforms facilitate the exchange of value, without assets or inventory. We may distinguish between two types of platforms: exchange platforms and maker platforms.

Exchange platforms essentially reduce search and transaction costs. Examples include Uber, Airbnb, Dropbox, PayPal and Skype.

Maker platforms provide basic infrastructure to innovate on top of. Examples include Facebook, YouTube, iOS, Android, Medium and Twitch.

In both cases, the platform connects supply and demand in a very efficient – and massively scalable – way. This extreme scalability tends to lead to winner-takes-all dynamics and to a situation in which there would be little reason for anyone to use that second best option.

In essence, these types of value reconfiguration can be seen as optimizing the existing world through either removing the unvalued, or through optimizing the valued. Again, this new value can be enabled and created purely in the software domain.

A different game calls for a different approach

So what does all this mean in terms of changing business environments? Well, the key takeaway here is this: new value is increasingly generated by software. Different industries are in different stages of the transition, but most are progressing somewhere on this trajectory.

“New value is increasingly generated by software”

Once in the software domain, new value creation is likely to break out of conventional industry logic, becoming subject to the radically different dynamics of the digital world. This, in turn, means organizations that seek to play and stay ahead in the digital game need to adopt the mindset, approach, and capabilities required in the digital world, the realm of software companies.

Staying competitive is very likely to require digital capabilities in the core of the company. Not as an add-on, not as an unpleasant necessity. Why? Because as software continues munching on the world, it is better to be the one with the fork.

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