Is ICT becoming an old economy? How to innovate then?

Old economies exhibit properties that have been studied for many years. There is little product and process innovation; instead there is room for strategic innovation that can lead to transformation of the economy. If we study the factors of old economies we can develop a framework of business modelling concepts that allows policy and regulation to establish the right rules to encourage new entrants and allow transformation of incumbents at the same time.

What is changing?

Today we can see that many large telecom operators and information technology providers are struggling to redefine their position in the value chain and to innovate (again). This trend is apparent for the telecom operators since many of them, especially in Europe, were forced to redefine their business model and position in the value chain due to deregulation and liberalisation of the market. This trend is not so obvious for companies like SAP, Microsoft or Nokia, but if you look for the signs you can easily find many.

SAP for example failed to date to offer compelling solutions for SMEs, Microsoft is struggling for many years to successfully enter the mobile market with very moderate success to date and has been accused 10-15 years ago that it missed the Internet bandwagon. Nokia’s domination in the mobile devices market is under heavy attack from all sides and one can basically say that they lost the battle. Digital Equipment Corporation (DEC) reached a leading role in the industry and vanished in only 30 years. Even Apple, one of the lead innovators today is under pressure by the Android ecosystem.

My provocative claim thus is that ICT as we know it today is a mature industry in 2020 and will be in decline. In support of this claim I list key factors in mature industries, which exhibit a number of properties that one can easily identify in established ICT stakeholders. The opportunities for sustainable competitive advantage are limited. There is limited potential for differentiation (xDSL, GSM, word processors), the technology is stable and well diffused (TCP/IP, browsers, GSM), it is easy to enter the market due to well developed industry infrastructures (Virtual network operators), and there is high international competition making the domestic cost advantage vulnerable (all European telecom operators). The sources of cost advantage are economies of scale, low-cost inputs and low overheads; trends that can be observed at all big ICT stakeholders. The source of differentiation advantage puts emphasis on image/brand (Apple, Nokia) and through complementary services (ISPs bundle virus scanners, Nokia gives away maps and navigation software, Microsoft offers additional functions to registered users). Concerning the sources of innovation there is limited opportunity for product and process innovation but considerable opportunity for strategic innovation. Finally a strong trend for consolidation and alliances can be observed.

The sources of strategic innovation are reconfiguration of the value chain, redefinition of markets and products, and new approaches to differentiation. However strategic innovators are often new market entrants (CNN in news broadcasting), existing firms on the periphery (Google starting network services) or firms from adjacent industries (Apple in consumer electronics).

What are the challenges?

The leading incumbents are constrained by “industry recipes”, relationships with existing customers, investments in resources and capabilities linked to past strategies. There is little understanding of how value chains work and how business models can be agreeably defined in order for the different stakeholders to better asses the benefits and drawbacks of assuming certain roles in the value chain based on their core competencies. In particular the integration of multiple functions in one firm creates an administrative cost in that firm. The larger the firm the higher the administrative cost, leading to inflexibility for change and adaptation to evolving market conditions.

Splitting the market in a fine granular multitude of functions creates a transaction cost of the integration of the final customer product or service. At well defined boundaries standard contracts can lower the transaction cost, implying that the “specifications” at the boundaries are clear both from a business and economic perspective as well as from a technical feasibility.

The challenge is to identify the balance between the administrative and the transaction cost, or in other words to identify the balance between integration and segmentation of functions and to identify the corresponding business roles that are performed by stakeholders.

Agreeably defined business modelling concepts have also an important impact on how policy and regulation can be applied in the markets (not only ICT), for fostering innovation by encouraging new entrants and still allow easier transformation of incumbents.

So, we need to better understand how value chains work and what are the cross-sector effects that trigger innovation on the periphery and adjacent industries, in order to enable strategic innovation at large.

Is there an easy solution?

Certainly not, but business models have been studied extensively in the past and many good approaches are available. This could be the starting point for an attempt to agree upon a common abstract set of business modelling concepts that can not only describe a current economy and market, but is also flexible with respect to evolving economies and markets.

Since strategic innovations come from the periphery and from adjacent industries we must put a focus on the reciprocal effects of innovations in sectors that are directly impacting ICT or are directly impacted by ICT.

One example is the current PPP on Future Internet that puts emphasis on the sectors, called usage areas, effectively on industries that are impacted by ICT. The reverse direction is missing, meaning a PPP that puts emphasis on innovations in other industries that impact ICT. Such industries exist and are identified, e.g. nanotechnologies, bio molecular technologies, medicine or neurosciences.

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