Hardware becomes software and products become networks

What is the digital economy, digitization and digital transformation? 

In her article The Age of Distributed Capitalism (2010) Shoshana Zuboff argues that the next chapter of capitalism will be controlled by the companies that own the means of distribution; of assets, information, social and management systems.

And for many goods and services, new business frameworks are emerging: federations of enterprises—from a variety of sectors—that share collaborative values and goals are increasingly capable of distributing valued assets directly to individuals, enabling them to determine exactly what they will consume, as well as when and how. This shift not only changes the basis of competition for companies but also blurs—and even removes—the boundaries between entire industries, along with those that have existed between producers and consumers.

Steve Denning extends on Zuboff’s idea and suggests that the companies that own the distribution hubs will be the central players in the new economy.

In CES: A Users Guide to the New Economy (2015) Denning argues that intelligent things are just a precursor to the real shift – when those objects start to communicate with each other. The networks become the product and products become software – controlling the hubs means owning where capital and control will concentrate (look at Amazon, Apple, Google or Netflix – all owning distribution hubs).

But the key to the Internet of Things is the interaction of software and hardware, not some electronic gadget of the kind that the made the Consumer Electronics Show famous. It’s an array of Apps on a platform that can link together a grab bag of pieces of hardware that are essentially in themselves mundane and boring. The excitement lies in the interconnections and the interaction, and what the interconnections and interaction can do for the user, not the devices per se.

What’s happened is that now we only need one electronic gadget to meet all the needs of those different physical things

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. The smartphone provides a hardware platform which in turn provides the basis for the software platform, which in turn enables ecosystems of employees and partners to interact and generate a vast array of solutions for diverse human needs.

Looking directly at the product itself Michael E

. Porter and James E. Heppelmann argue in their article How Smart, Connected Products Are Transforming Competition, that waves of technology have improved business three times over the last fifty years

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. The difference this time around is that it is now the nature of the product itself – not the value chain supporting it – that is being rethought and redesigned.

“The first wave of IT, during the 1960s and 1970s, automated individual activities in the value chain, from order processing and bill paying to computer-aided design and manufacturing resource planning.” … the second wave of IT-driven transformation, in the 1980s and 1990s … enabled coordination and integration across individual activities; with outside suppliers, channels, and customers; and across geography
. “

The first two waves gave rise to huge productivity gains and growth across the economy. While the value chain was transformed, however, products themselves were largely unaffected. Now, in the third wave, IT is becoming an integral part of the product itself.

What makes smart, connected products fundamentally different is not the internet, but the changing nature of the “things.”

A good visualization of this thinking is given by Deloitte University Press, in The rise of safety innovations in intelligent mobility by Lei Zhou, PhD, Jeffrey W. Watts & Takuma Nakamoto. The image (below) demonstrates how traditional security infrastructure in cars are very efficient at the moment of truth – but that they don’t do anything to prevent an accident from happening – it is a passive product. In the next generation of technology the car is given a brain with the ability to sense and an opportunity to think. It starts collaborating with the driver to avoid accidents from ever happening – the product becomes active. In the third generation the car doesn’t work on its own anymore – it is a part of a connected network of cars, objects, traffic lights, infrastructure etc. The network itself becomes the product and the car becomes a software component in the mesh of traffic and mobility.

Most industries are still at the generational shift between passive and active value creation – collaborating with their customers on Facebook, but not in the delivery of the product itself. Active, collaborative delivery is where the technology is taking us, and then even further…

These changes will create the potential for new products and growth writes Bruno Berthon, Managing Director of Digital Strategy at Accenture, presenting their latest finding in their Industrial Internet Insights report 2015. Berthon introduces a new term to the Discourse; The Outcome Economy, and explains it like this:

“At the core of this change is the way workers will be freed from volume activity to address individual exceptions revealed by data. In this way, they can resolve challenges faced by particular customers and design more tailored solutions for them. This shift in focus from delivering mass products to delivering outcomes for customers places greater emphasis on talent.”

(Note how the first quote by Shoshana Zuboff aligns perfectly with Berthon – this is technology enabling individualization)

We are at the beginning of the third wave of technology; changing products into networks and hardware into software. Power and capital will concentrate into the hubs, and companies will have to rethink their business models and products to fit the distribution channels. The result for employees and customers are less focus on mass – and more focus on producing valuable outcomes for individual customers. Hopefully the dreary desolate age of soulless, meaningless and dumb products are behind us. 

That is the digital economy (as I see it today), but who knows…

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