The Long Game is Winning in Digital Ecosystems, and Other Global Tech Trends

I’ve traveled nearly 70,000 miles all over the world since the beginning of the year, talking with digital practitioners in the trenches. Most often these are passionate but often frustrated change agents, IT managers grappling with tech evolution, and corporate leaders on both the technology and business side looking towards their futures and feeling uncertain.

Where to best focus digital enablement efforts in their organization, while coming from behind, with scarce time and resources is question that is top of mind right now. Worse, leaders at the very top often don’t seem motivated to make the necessary moves.

From these conversations and many observations at conferences and events so far in 2016, it’s obvious to me at this point that we appear to be entering a new inflection point with digital: Those who began early, made the right decisions, and stuck to their Internet identity in terms of rethinking the future — as opposed to chasing traditional firms back into their own industries — are seeing outsized rewards in an increasingly winner-takes-all online marketplace. The rest of us are watching them pull away.

In short, the early entrants to the global digital business competition that were either a) lucky enough to discover the digital rules of success from the outset, or b) followed a positive market feedback loop to the same place are quite clearly sucking the air out of the room. Perhaps most importantly, they also had the ability to execute without the many constraints of our legacy organizations.

Of course, I’m talking about Amazon, Google, Facebook, and Apple — sometimes referred to as the Four Horsemen of the Digital Apocalypse, for good reason — on the consumer side as well as Salesforce, and now surprisingly Microsoft, on the enterprise side, the latter two which are making major new inroads to enterprises I speak to. Microsoft in particular seems to be suddenly winning a lot of enterprise-wide “Microsoft company” deals as their digital/cloud vision matures. As a whole, these technology companies are increasingly seizing broad swaths of digital territory as they move at near light speed compared to their non-digital native brethren, breaking into new category after category with with relatively high levels of repeatable success. Certainly, their track record is head and shoulders better and much more rapid than most Internet startups, or most traditional enterprises that is.

Using the Inherent Power of Networks and Sustained Tech Investment

Why this is has been the subject of endless analysis, scrutiny, and speculation about this very small cohort of tech companies eating the world, but I propose that the core reasons are actually fairly basic. To restate the above: There are certain fundamental rules to digital ecosystems and the businesses built on top of them. While it helped enormously to be early, organizations that understand these rules and can also execute and invest for a sustained period of time can still dominate if they understand a few crucial pivot points.

Networks effects, one of the most basic measures of a successful digital ecosystem, quickly become exponential yet look relatively minor at the beginning, fostering complacency in competitors at the worst time, when a new digital market seems small and uninteresting. It’s not until critical mass has been reached a little later on, that a digital platform grows very swiftly into a market dominating and self-sustaining force. Then it’s relatively easy to crush lessor players that aren’t utterly focused on k-factor and other measures of these effects.

Simultaneously, and harder to prevent, is the tendency of make basic subsequent design changes to online products that then impede the carefully built channels that have created the initial growth and scale. I’d argue that many digital contenders frequently make this last mistake, making simple but disastrous changes — often when turning over the product from the 1.0 team to the maintenance team — by not staying true to the inherent power laws of digital systems that got them there (patterns such as “enabling networks effects by default” or “anyone can participate.”)

Needless to say, the aforementioned tech leaders managed to navigate past all these obstacles, including shooting themselves in the foot later on as they had to bring on fresh talent to grow the company. The critical design parameters that enabled growth stayed in place, and long enough to provide returns. This also highlights the big difference between most of these organizations and traditional companies: They had venture backing that isolated them from the quarterly financial cycle of immediate and continuous returns. Some would argue that Amazon has been doing this anyway, despite being a public company, and reaping enormous rewards in the long game of digital, where increasingly it’s apparent the winners reside. As BCG has noted, “even sharp minds can fail to grasp the power of sustained exponential forces.”

The primary lesson here: Deeply understand the rules of digital ecosystems and build one that solves a real pain point for a lot of people. Optimize the results relentlessly and pour the returns back into growth. Don’t stumble along the way.
This is a playbook that is simple enough to understand, but that most industrial era organizations fully embrace in a meaningful way, despite all the marketing talk — and I’m guilty as many of us in this regard — about digital transformation.

What does this have to do with the conversations I’ve been having? To person, almost everyone thinks their organization is moving too slowly, tentatively, and uncertainly towards becoming effective digital organizations that can compete, what I’ve called a next-generation enterprise. As SAP’s excellent Sameer Patel — and fellow Enterprise Irregular — once famously said, businesses have digitized quite a bit, but they haven’t really transformed.

Getting Past the Digital Innovator’s Dilemma

The real obstacle is one which I’ve been exploring in various forms over the last several years: Most organizations have accumulated and/or designed in enormous amounts of legacy culture, process, mindset, and infrastructure that got them where they are, but now has to be undone to a large extent to be fully realized and effective digital organizations. The world of agile, lean startup, OKRs, open APIs, devops, relentless A/B testing, and growth hacking are all words or phrases sometimes heard in the halls of the average classical business, but they just don’t lie at the heart of them, and won’t any time soon.

Worse, we’ve greatly over-centralized technology enablement so that it’s become a profound chokepoint in many organizations. CIOs and CMOs feel this acutely when this is the case, and yet a few are now reaping the benefits of going in the opposite direction. There are indeed solutions, but they require more ideas that traditional organizations aren’t good at: Open innovation, Kickstarter-style ideation programs, app stores, customer co-creation, change agent programs, hackathons, employee incubators, BYOT, enterprise architecture that’s designed for loss of control, and more.

The second big observation from my travels this year is that the technology world is maturing in some interesting ways. These trends too tend to favor those that invested early or invested big, or both. One is the realization that digital success stories aren’t coming from very many places. The United States and Asia dominate the top of the list, arguably having an unfair advantage through better investment policies for startups and very large markets that make it easy to take advantage of power laws. Larger markets, even ones relatively undeveloped, seem better to attract both talent and the numbers required to build market presence that can’t be ignored.

So what are organizations to do? I’ve suggested some digital transformation blueprints for both boards of directors as well as for the C-Suite that can help develop and grow true digital native lines of business in a sustainable way. But I also think that there is now a very steep curve to climb to respond to the network effects that Internet startups have created in many new and existing industries.

Become a Network Orchestrator and Harness the Market

The reality is that there is really only two ways for companies behind the digital maturity curve — which is still almost all of them right now — to catch up: a) Invent new industries that are irresistible in terms of the value and utility they offer b) employ the latest lessons learned on how to play to the strengths of the digital marketplace and turn the knob all the way to the right, beating the existing players at their own game by more purely and deeply plumbing the inherent factors that make digital ecosystems such an uneven playing board. Most digital contenders fail to understand even the most basic concepts of digital, such as the network itself is the single biggest resource you can and must use to digitally fuel your ecosystem to transform. It will do almost all the work, as long as you have a vision, a value proposition, and a platform which truly embodies and orchestrates both. Network orchestrators, in fact, are at the top of the Internet food chain. Organizations must live there, or become fodder for those that are. As Forrester’s Dan Bieler noted recently:

Digital ecosystems empower the CIO [Dion: and other internal tech leaders, official and unofficial] to become a critical business enabler by providing a technology platform to redefine approaches toward innovation, knowledge management, supply chain optimization, product development, and sales and marketing. In particular, traditional firms put survival at risk due to slow innovation cycles. CIOs who define a clear strategy to exploit the possibilities that digital ecosystems offer for their organizations position themselves as powerful change agents.

I’d only add that it’s not just about defining a strategy, but leading and executing on it sustainably. I’ll be exploring more about my travels and lessons learned on the emerging edge of digital shortly. In the meantime, your insights on this challenge are very welcome in comments below.

Additional Reading

Going Beyond ‘Bolt-On’ Digital Transformation

Is it IT’s last chance to lead digital transformation?