Evolution of Digital Technology and its Impact on Consumer Preferences and Industry Value Chains
Though the impact of digital technologies on business and, indeed society, is well recognised, we are still in the early stages of understanding its nature and outcomes. This is an understandable challenge as the term digital technology is used very broadly and includes a range of technologies in varying stages of development with different applications and value propositions. Though industry and management professionals speak about the future technological changes significantly outsizing the current technology, both in quantitative and qualitative terms, it can be argued that existing technologies have already produced changes that have outpaced the ability of businesses, economies, and societies to understand it fully. Examples include the discontinuities caused by rise of platforms, such as Airbnb in the hotel and Uber in the local transport industry. Their trajectory and implications are still in the process of being understood.
Thomas Friedman, a noted commentator, argues that in five years, Airbnb may become “one of the world’s biggest job platforms” (pg. 263) 1. Uber2 is being in media for various reasons including how its technology has had unintended consequences. Debates around the evolution of digital technologies tend to be rich, as they involve not only the technologies themselves, but also various ideological positions, social outcomes, and increasingly, the role of ethical values in the use of technology.
The purpose of this paper is to present a perspective on the evolution of digital technologies and their impact on consumers and business. Since the evolution of digital technologies and their impact is a vast area encompassing various areas of management and other social sciences, the scope of current paper is limited to impact on consumers and business. The first section of the paper provides a summary of our current understanding of digital (technology) landscape. The second section looks at the consumer perspective and seeks to develop an understanding of the changes in their preferences, expectations and thought processes, particularly in the context of evolution of digital technology. The third, and final, section covers organizational implications, as they navigate the challenges in the dynamic environment of digital technology and consumer/customer choices.
1.0 Evolution of Digital Technology: A Positive Self-reinforcing Cycle with Potential to Deliver Transformative Value
Digital technologies have a long ancestry depending on the definition used and context in which the term is used. From the perspective of businesses and customers, internet is generally understood as the “killer app” of digital technologies, which upended the information and e-commerce choices existing in the economy in 1990s. Since then, digital technologies evolved continuously as improvements – and innovations – worked in a self-reinforcing positive cycle involving various elements of technology. Thomas Friedman referred to these elements (such as processing chips, software, storage chips, networking, and sensors) as platform, and suggested that, “As step changes in technology go, though, the platform birthed around the year 2007 surely contributed one of the greatest leaps forward in history” (pg. 25).
As Friedman argues, iPhone, Kindle and Android were released during 2007; there was a breakthrough progress in cloud computing and explosion in storage capacity for computing making Big Data – and later machine learning – possible; software writing received a big boost with GitHub – an open source platform – during 2008, and; the concept of Bitcoin was mooted during 2008. This platform not only made possible mobile internet & mobile commerce, social networking platforms, broader and efficient customer reach, and new business models, but also provided foundation for the next stage of breakthrough technologies, such as Artificial Intelligence (AI), Machine Learning, Big data and Analytics, and Robotics. The list of new technologies, and existing ones with significantly enhanced capabilities, continues to grow, and offers choices, challenges and also risks to the consumers and businesses alike.
Potential for Exponential Growth
The short history of digital technology offers few insights into the nature of its progress, and how, in general terms it has exerted influence in the business and market environments. The evolution of digital technologies as well as the products and consumer offerings based on them do not follow a linear and predictable trajectory. Digital technologies, and the products and services based on them, scale-up very fast once they are adopted by the users. Management researchers prefer to term it as exponential growth, where the growth curve has a steeper upward slope than predicted by a normal distribution curve. The growth in Facebook users illustrates the concept.
Digital Technology is Transformative by Design
Perhaps the main characteristics of digital technologies relate to their transformative impact, from the early stages of internet, on communication and data processing. The possibilities offered by digital technologies reduce the costs and increase the speed of communication, allow faster and complex data processing, and significantly enhance the reach, access and empowerment to customers in a way, which was not previously considered possible. Following the early days of internet, as computing power grew and also became cheaper, it enabled same communication advantages to small and niche firms to leverage on information and data that were previously available to large firms. This enabled the growth of new business models, niche (and nimble) competitors, reduction in entry barriers (particularly for service and knowledge-based industries), new industries and occupations, and blurring of traditional boundaries between industries. Because of possibilities offered by faster, cheaper and powerful computing power, digital technologies also impact other technologies/industries, such as manufacturing, services, and traditional professions (such as legal and medicine) in significant ways. This is primarily because nearly all industries now have a data, communication or service component to it, and therefore digital technologies have the potential to confer competitive advantage to the firm. Courier services offer a good example of the transformation caused by the digital technologies. Aside from the back-end work in terms of optimising the logistics and distribution routes, the information component allows users to track the parcels and have choices, during the transit time, as to where and when they want to receive their parcels. It is expected that in future the industry will be further transformed by use of drones and mechanical devices/robots for distribution.
Digital needs an Eco-system for delivering to its Potential
Another salient aspect of the industry is that technologies are introduced in terms of the maximum impact or potential (some would use the term hype) they can have on businesses and other stakeholders; in practice few technologies become disruptive immediately, and most of them take longer than initially expected though the disruption is still fast compared to traditional industries. There are exceptions, particularly in the platforms and some products (such as mobile phones Kindle, a reading device); however, in these cases the underlying technologies were being finessed over few years before a firm develops a platform or product based on them. This is understandable given that digital technologies and consumer products based on them, more often than not, require an eco-system of supportive technologies and related infrastructure, before reaching a tipping point for the mass adoption. If the related infrastructure and/or the market are not ready, it could also lead to a product failure for being too early or not able to fit in existing product categories.
Fast Changing Cycles
In the digital industry itself, the technology cycles are fast changing, and technological obsolescence is the norm. This has implications in terms of products and platforms that are based on them. In a competitive market, there is a need for the underlying technology to be current, compatible with legacy technology, and able to scale. This leads to an on-going challenge for the businesses to be able to create better experiences for the customer, not to risk any excessive dependency on one technology, and also to maintain customer experience with not too many changes in technological aspects of the offerings.
Pervasiveness implies Multiplicity of Stakeholders
Another salient aspect of digital technologies is that they influence various stakeholders in different ways. This is true for most conventional technologies as well but given the pervasive and all-encompassing nature of digital technologies, it is difficult to identify a stakeholder group, or sector of economy, which is not significantly impacted by them. The tools provided by digital technologies however have increasingly started providing a secondary role of connecting various stakeholders over organizational issues (mostly socio media) in ways that was not possible previously. This has the impact of increasing the salience of stakeholders, which firms previously might have seen as “marginal” or with low impact to business. Few examples of such “marginal” or low impact stakeholders include environmentalists, human rights groups, and community/local services. Given that consumers/customers, as a stakeholder group, are key to organizational success, and also sometimes lead to broader stakeholder engagement, it is important to assess the impact of digital technologies on customers. The next section below seeks to offer few perspectives on the impact on consumers/customers.
2.0 Impact on Consumers
Traditional economics looks at consumer/customer as a “rational” economic agent engaged in “utility maximisation” while making choices in a given economic “market structure”, such as monopolistic competition, oligopoly and “perfect” competition. While the assumption of “rationality” is increasingly under challenge, particularly in the new field of behavioural economics, in a general sense, it can be suggested that evolution of digital technologies have influenced the “rational” behaviour of consumers in both expected and unexpected ways, and have also influenced the market structures by reducing transaction costs, information asymmetries, and the limits on bounded rationality.
One of the salient aspects of digital technologies relate to its’ impact in terms of development of new products, services, or new ways of meeting customer needs. While the direct impact is more visible through new products leading to novel experiences (such as smart phones and virtual reality headsets), the indirect impact of technology is also significant and likely to rise in importance, as newer technologies are used to add efficiency and value to the entire value chain of the organization potentially resulting in benefits to the consumers. The impact can be assessed using different approaches, such as cost/benefit (or, as some will opine Balance Sheet) analysis of consumer’s choices, and analysis of changing customer preferences, experiences and expectations.
Transformation of Consumer Experiences in reconfigured Value-Chains
The advent of digital technologies softened – and in some cases, redefined – the market boundaries and market-place for a range of reasons. By reducing the costs and increasing the speed of communication and information processing, digital age made it possible for both firms and consumers to expand their reach and choices. Efficiencies in information search/communication costs reduced the informational asymmetry and allowed consumers to maximise the marginal value of their budget through comparative research. The rise of e-commerce, and later mobile commerce, has made it possible for consumers to explore more choices in a time and cost-efficient manner. Cheaper costs of communication, and commonly available internet tools, also encouraged web-platforms, which enable aggregation of niche demand and micro-level supplies of products and services (as in case of platforms, such as Airbnb and Ebay) allowing higher market participation by suppliers and more choices for the consumers. Digital technologies have also enabled existence of efficient secondary markets for various goods, in some cases internationally. Cheaper and faster communication also enabled consumers to engage with firms and other stakeholders to highlight customer and product issues that require attention. These characteristics empowered consumers to explore broader choices, and the existence of these choices acts as a counter veiling “power” on firms to dis-regard consumers. They also give rise to customer’s expectations to have the option to know and, if needed, to interact with the organization, and this increasingly has become a base-line expectation. The above anecdotal analysis directionally supports the view that digital technologies have made markets more efficient and also empowered customers.
Digital technologies also impact the consumers in indirect, but significant ways. They enable, in some product categories, the evolution of physical products (such as books and music records) to digital equivalents expanding the choices for consumers. In many product categories, digital technologies also enable the uncoupling of elements of value chain, which allows customers to access separate elements, such as servicing and delivery, in ways that maximise their value and flexibility.
Segmentation and Enhanced Effectiveness of Product, Services and Solutions
Advances in digital technologies, including machine learning, allow firms to process large amounts of data to identify niche markets and formulate plans to serve them better. Data analysis and modelling techniques also enable firms, particularly in areas of medicine and heavy engineering, to model proto-types and bring them to market faster, and in a cost-efficient manner benefitting users (consumers) even though the background work done through digital technologies may not be known to them. In many cases, the innovations coming out of digital technologies have also resulted in products that allow better need satisfaction (as in improved medical diagnostics; customised education methodologies) and addressing previously unmet needs (as in case of personalised medicines), which were beyond the realm of conventional technology.
The overall impact of digital technologies can be summarised as providing customers with empowerment and choices, so that they are able to obtain better value for their budget. Viewed from this perspective, digital technologies have seemingly made markets more efficient, allowed more participation, and while doing so altered the relationships between consumers/customers and businesses in significant ways.
3.0 Context for Business Decision Making
The disruptive nature of digital technologies gives rise to new institutional and strategic challenges, which redefine the context of strategic decision making for the firm. These challenges manifest themselves in various forms at different point in time in an organizational life, and an informed sense-making could enable organizations to anticipate and act upon them for organizational long term success3. Digital technologies also influence various organizational building choices, including organizational design and learning, employee retention and reward, and building a culture, where employees feel comfortable with ambiguity, uncertainty and failure, and able to learn and improvise faster.
Organisation Purpose and the Scope of Business
While assessing the impact of digital technologies on their organizations, perhaps a useful place for leaders to start – and occasionally come back to – is to assess its’ implications in terms of organizational purpose/mission and character. Organizational purpose/mission largely answers the question, as to what does an organization exist for, and whether it will be missed by stakeholders, if it fails to fulfil its mission? Some of the important questions, in this regard, are:
- the extent organization prefers to see itself as a digital – as opposed to normal product/services – firm;
- the extent to which firm likes to lead – or follow- digital technologies in pursuit of its purpose;
- the extent to which it imposes its’ digital solutions and choices on various stakeholders including customers and suppliers, and;
- how the organization makes decisions on which technologies to pursue/bet on, and which technologies will be considered disruptive?
Telecommunication firms faced some of the above-mentioned dilemmas at different points in their trajectory with regards to whether they are in information or computing or communication business. Similarly, various computer companies in the early stage of industry growth struggled with regards to whether they are in hardware or software business. The significance of some of the above dilemmas is illustrated through an analysis of Kodak’s experience. Kodak was an industry leader in the area of photography, but did not interpret and appreciate the advances in digital imaging technologies in terms of their impact on its’ traditional imaging business. While this case-study can be analysed from variety of perspectives, a common denominator is Kodak’s failure to see digital tail-winds in its industry. Kodak had a well-established business-model and value-chain based on the traditional photography. It did not, however, seems to have an institutional framework in which to analyse the digital shifts taking place in the market place, and therefore did not actively respond to the digital disruption in its’ market. As a result, its customers moved over to digital options when they were available. Above examples, and overarching framework that covers them, provide an enduring benchmark for organizations to assess the impact of constantly evolving digital technologies.
Organisation Character & Strategic Choices
Organizational character involves answering questions, such as what it is that organization will – and will not – do in pursuit of its purpose/mission, and therefore what the boundaries/limits of its decision making are. This is an important area, as digital technologies, in addition to giving opportunities to organizations to serve customers better, also raise ethical and character defining issues, such as data privacy and its use, openness and transparency with customers, and use of algorithms with implicit biases against race, gender or any other similar criteria. Additional questions may relate the extent to which an organization may limit choices for the consumers based on digital lock in, bundling of services, or optimisation of products and services, based on organization’s preferred digital choices. These are new areas for digital organizations, consumers and society. Few notable instances of decisions in this area are from regulators in Europe, where fines and requirements were imposed on the industry. In July 2018, European Union imposed a fine of £3.8 billion on Google for its practices to secure the dominant position of its search engine and apps on mobile phones3. Similarly, it is becoming an area of concern for society and regulators as to what and how data obtained through digital means is being protected and used by firms. In May 2018, European Union implemented a regulation called “GDPR” (Global Data Protection Rights) on data protection and privacy for EU individuals. While regulation presents one approach to encourage right digital behaviours from firm, reputation and trust also play a role albeit with some lag effect. The recent record loss of $ 119 bn in market value of Facebook illustrates the role that trust, and credibility factors have for the organization. This was a single largest fall in the market value of a firm in a single day4.
The above examples, which relate to external actions, highlight that leaders need to invest their visions on how the processes and standards used in their use of digital technology are determined, and how will accountability be established This will not only build credibility, but also mitigate any unfavourable commercial impact resulting from unintended consequences of decision making.
Potential for Disruptive Innovation, as Barriers to Entry Collapse
Digital technologies influence the strategy and decisions of organizations in different ways, depending on their industry, size of firm, and level of legacy investments in technologies. In the early days of digital technology, strategy largely implied gaining cost advantage (through optimisation of distribution channels, targeted advertising, and using efficient supply chains) and differentiation of product offerings. As new and more innovative/disruptive technologies developed, and existing technologies evolved, the strategic challenges upended to addressing the risk of business model or industry disruption. Since its early days, digital technologies have caused disruptions in the areas of business models as well as how markets/customer’s need segments are defined, as examples in music, travel bookings and internet shopping show. However, the ever-increasing computing power, sophisticated software, higher memory and cheaper storage have led to many new technologies (such as Virtual Reality, Block chain, crypto currencies, internet of things, and 3D computing), which have made disruption an existential threat to organizations for many reasons. Firstly, since there are higher numbers of technologies – including specialised ones – available at a low cost to a large number of niche firms, it makes disruption more likely. Secondly, advances in technologies now allow exploration of intersection of different industries (such as drone delivery of parcels, which combines retail and postal mail industries) in cost effective ways. Thirdly, the availability of higher computing power with sophisticated software increasingly allows “machine read” of different types of data (such as picture, text and voice) and its’ integration with context to offer interpretation and solutions in a given solution (such as satellite pictures of crops at various point in time during the season to predict the output). Finally, new technologies, such as Artificial Intelligence, Machine Learning, Robotics, and Big Data, themselves aid the development of next wave of new technologies, which make disruption an ongoing strategic issue.
Organisation Culture, increasing Need for Openness
The existential threat of disruption is made more urgent by a common anecdotal observation that in a digital age, organizations have little time to respond to disruption. Digital age accelerates success and failure of market leadership positions. Early research identified few signature concepts in the context of competing in a digital age. These concepts, such as network effect, increasing returns, blue ocean strategy, and winner takes all (due to negligible marginal cost) in digital goods draw attention to the implications of being a market leader. The concept of market and industry disruption draws attention to the fact that market leadership positions can be attained – and lost – in short periods of time. This risk exists because digital age, by its very definition, increases information overload, complexity, uncertainty, and number of variables that influence decisions. This makes it important for the leadership to assign strategic importance to organization design, capability building and employee practices that discourage tunnel vision and organizational blind-spots to marginal trends and developments. Building a resilient organization requires integration of many diverse capabilities which need to be in dynamic equilibrium with internal and external challenges and uncertainties.
Summary
Building a sustainable and effective organization in digital age requires understanding the nature and implications of the technology in terms of organization purpose and relevance to stakeholders. In general, digital technologies have led to an increase in the speed of communication, and also significant reduction in communication and computing costs through faster and new digital tools. This has broadened the reach and choices for the businesses and consumers through efficient information search and cheaper communication. Digital technologies have also increased the pace of change as newer technologies give a head start to small organizations and facilitate creation of new business models and niche offerings to consumers. Another important implication is the rise in the uncertainty and complexity that business leaders have to manage and leverage on to create value for the customers.
The above implications have led to organizational challenges that vary in scope and scale of their potential impact. They involve understanding the impact of current and new technologies on consumers, supply chain and value-chain. They also include understanding the evolving field of regulation, emerging business models, and new skill-sets and jobs needed. This has additional implications for organizational leaders, as their strategic and organizational choices need to reflect organizational flexibility and resilience. These implications include, but not limited to, dealing with higher levels of speed of change, complexity, uncertainty, and information over-load. While organizational leaders use different approaches, in general, effective organizations place multiple bets on different technologies and experiment more frequently in a thoughtful manner to maximise their choice-set and opportunities.
Few organizations, such as amazon and Apple, have generally dealt with uncertainty and fast pace of change by being innovative and leading the change, as opposed to responding to it. The implications of digital technologies also extend to the organizational culture, design and processes. Organizational cultures which are open, allow for experimentation and failure, and empower employees confer an advantage as employees are able to adapt to new developments and offer diverse interpretations to facilitate sense-making. Organizational design and processes that facilitate faster and open communication, broader roles, tolerance for ambiguity and efficient resource allocation enable organizations to be flexible and resilient.
References
- Friedman, Thomas L. 2017. Thank You for Being Late: An Optimist’s Guide to Thriving in The Age of Accelerations. United Kingdom: Penguin Random House, UK.
- Uber has been in news for different reasons including some that relate to its use of technology and the impact it had on local cab drivers in London. A sample of such issues are provided in the link https://www.theguardian.com/technology/uber (accessed on 1 Aug 2018) and https://www.theguardian.com/technology/2018/jun/25/uber-appeal-london-licence-ban (accessed on 1 Aug 2018)
- Rankin, Jennifer, “Google fined £3.8 bn by EU over Android antitrust violations”, 18 July 2018 <https://www.theguardian.com/business/2018/jul/18/google-faces-record-multibillion-fine-from-eu-over-android> (accessed on 1 Aug 2018)
- Neate, Rupert, “Over $119 bn wiped off Facebook’s market cap after growth shock”, 26 July 2018 <https://www.theguardian.com/technology/2018/jul/26/facebook-market-cap-falls-109bn-dollars-after-growth-shock> (accessed on 1 Aug 2018)
