How digitalization is changing markets, investments and products
What impact does digital technology actually have on our lives and the economy? And what exactly do they look like?
The article highlights three key factors that will permanently change our reality. The effects on companies, society and our individual lives are not yet foreseeable, but we can already learn to deal with them and be better prepared for the future. A macabre example from economic history teaches us what can happen if we ignore these developments.
Digitalization is on everyone’s lips. It’s hard to open social media, watch a news program or read a newspaper without coming across this word. Due to this omnipresence, digitalization has unfortunately also become a much-used buzzword. It is particularly popular when something is supposed to sound good, but nobody really understands the background. In this article, we shed light on what digitalization really means – for the economy, society and companies.
More on the impact for SMEs: Digitalization for SMEs
Would you invest your money?
The easiest way to explain the impact of digitalization is with an example. This is an almost accurate investment in a world-renowned company. The numbers and the project are real – make your decision whether you would want to be part of it and invest or not:
In the late 1980s, Motorola Inc, one of the world leaders in cell phones and related technology at the time, founded a subsidiary that would forever change the nascent cell phone market. Before any other technology company in the mobile phone market, Motorola realized that cell phone networks in large cities were comparatively easy to implement because the costs could be shared among a large number of users.
However, it also realized that there was no comparable solution for cell phone networks outside of large cities, especially in sparsely populated rural areas. In remote areas, there was simply not the necessary population density to cover the costs of a mobile network. A calculation based on a cost of $100,000 per tower (the cost per unit at the time) and the additional cost of the expensive cell phones themselves would make it unprofitable to ever cover the majority of the countryside with cellular coverage. A new, better solution was therefore sought to supply large parts of the world with cell phones. This was soon found.
In internal circles, it was hailed as a groundbreaking innovation that would change the world and communication on our planet forever. The project was named Iridium, after the 77th element in the periodic table. This new solution envisaged a network of 77 satellites circling the earth in low orbit and offering mobile telephony for a fixed price – anywhere in the world. This would ensure permanent communication even in the most remote areas of the world – from the Antarctic to the desert. Of course, the effort and costs of such a project were enormous. However, the following calculation showed that with just one million users around the world at a price of USD 3,000 per satellite phone (a standard price at the time) and a call charge of just USD 5 per minute, the project would quickly turn a profit. But that was not all: once in place, Iridium would generate permanent profits, possibly for decades to come. A precise business plan was drawn up, with a duration of twelve years from development to operational readiness of the system. The project was obviously a guaranteed profit. The board members at Motorola and the investors were delighted.
At this point, I would like to ask you for your opinion:
- What would you have thought of the project at the time?
- Would you have invested?
- If yes, why?
- If not, why not?
- What do you think happened to the project afterwards?
As some of you probably know at this point, Iridium was one of the most spectacular failures in recent economic history, with investors losing a total of over 5 billion dollars. There were a number of reasons for this.
On the one hand, from the moment the satellites for the network were developed, the cost of cell towers became lower and lower – and much lower. At the same time, existing network speeds and performance became stronger and cell phones became more compact and cheaper.
Although these changes only came about gradually, the existing business plan was maintained – because too much time and money had already been invested. At this point, there was no question of abandoning the project. It was a classic case of cognitive distortion of perception on the part of those involved and a perfect example of a sunk cost fallacy.
The business plan was originally a guaranteed profit in its figures. However, the exponentially increasing technological progress had not been taken into account. Put simply, the market had changed so much in the twelve years that Iridium was doomed to failure even before the first satellite had reached orbit.
Motorola was not alone in this. Competitors such as Globalstar or Odyssey had planned similar projects that lost billions more, despite seemingly accurate business plans.
How could this have happened? To understand this, we just need to understand 3 massive changes that digital technology brings. All 3 have happened in the case of Iridium.
First change: Exponential growth
Probably the most important change that digital technology brings us is also the one that is least understood by most people. This is not because most people are stupid, but simply because of the way we are taught to think in our society.
Our school system teaches us to think linearly. Linear thinking means: 1+1 = 2. This was also appropriate in our previous economic system. In the 1980s, if you had a factory with an output of 100 units per week and you wanted 200 units per week, you had to build a second factory. If there were 60 workers in a factory and you wanted to double the output, you increased the number to 120 workers and introduced a second shift. In times without the Internet and automation technology, this was the only logical way forward. For a long time, economic and social growth was determined by this way of working.
Today, however, a factory can not only increase output from 100 units to 200 units. Through efficient automation and digitalization, we can also produce 400 units, 500 units and many more in the same factory – without building a new factory.
When the first steam engines were used in factories, 1 worker operating a machine could suddenly do more than 10 workers combined. Digitalization amplifies this development many times over, with one robot line in manufacturing, for example, doing the work of 100 manual workers and often far more. Combined with CPQ-E systems for technical processing and digital marketing and sales models, the same factory can increase output from 100 units to 1,000, 3,000 or even 5,000 units. In our digital world, 1+1 no longer equals 2, but 50, 80, 134 or possibly even more. Efficient digitalization means doing more with what we have and conserving resources because we can achieve more with less effort.
This requires a fundamental change in the way we think and work. No amateurs were involved in Iridium. They were top managers with decades of experience. But what no one could have imagined was the exponential growth and subsequent development of mobile technology. Much better transmission masts and much better mobile devices with much higher network speeds came onto the market after just a few years, quickly destroying the previously guaranteed success of the project. The most difficult thing about exponential growth is that we often cannot imagine where new technological progress can take us. This is a very high risk, especially for multi-year projects, which is almost impossible to calculate.
With exponential growth, hardly any progress is recognizable for a long time at the beginning. If at all, there are hardly any milestones worth mentioning. In this phase, a new technology is often joked about or simply not taken seriously. After a few years, however, a dynamic develops that enables unimaginable progress to be made in a very short space of time. Due to our linear thinking, our imagination is often simply not designed to understand this form of growth. This is why even intelligent people are always surprised and caught off guard when a disruptive technology suddenly renders existing business models obsolete.
Second change: Sharply falling price curves
Do you remember the first flat-screen televisions? Anyone who had one of these science fiction devices in their living room in the early 2000s had to be very wealthy. The first reasonably sized models became the price of a small car. But how long was this the case?
Only a few years later, almost everyone with an average income had one of these devices in their living room. At the latest 5 years after the introduction of the first flat screen TVs, you would be almost ridiculous if you still had a tube TV in your home – after all, almost everyone had a modern, flat TV by now.
In fact, even today, the latest top models of high-tech televisions are still on display in prestigious department stores around the world with prices that you could easily buy a family-friendly car for. However, the bulk of devices with less ground-breaking technology are available at a very affordable price and within everyone’s reach. The same development took place with digital cameras, the first smartphones and many other technological products.
The development of new digital technology is time-consuming and cost-intensive. That is why the first models of new, digitally supported products will still be expensive. However, as soon as the technological barrier of a new level of performance is broken through, everything that has gone before will immediately become obsolete due to the new technological possibilities. This starts a rapid fall in prices, followed by mass production, mainly in Asian countries.
This was also one of the main reasons why Iridium failed. The exponentially growing technology progressed so quickly that the prices for transmission masts fell rapidly in the years following the start of the project. Similarly, call charges fell sharply and the cost of individual cell phones was soon low enough that almost everyone could afford one. The original calculation with the price for each cell phone and the call charge per minute were therefore no longer in line with the market.
Third change: Speed
As a logical consequence of exponential growth and sharply falling price curves, we must expect the speed at which technology develops to increase. This is because more and more people are gaining access to new technologies that are constantly improving and also becoming cheaper over time. Technical products such as tablets, smartphones and laptops are already being developed with an effective product life of around 6 months, during which they can be offered at a high price. This is already followed by a drop in price, as it is expected that more powerful models will have replaced the product after 6 months.
However, this is not only changing technical devices. It is changing the way we communicate, the way we do business, the way we obtain information or products and much more. There is hardly an area of life that will not be affected in the long term. The best example today is the ubiquitous use of smartphones for almost all matters and questions of daily life. This means that these devices are now a far cry from the original use of a cell phone. The increasing interconnectedness of the world, combined with exponential growth, falling price curves and the enormous speed at which technology is evolving, is creating a business and social reality in which constant change is the norm.
The only thing we can say with certainty today is that the world will be a different place in 10 years’ time than it is today. How different remains to be seen. Those who are unable or unwilling to adapt to the new trends will soon be overtaken. This applies in particular to financially strong but cumbersome and bureaucratic corporate structures. We can also currently observe a complete failure of politics in almost all Western countries – because they are far from being able to keep up with the permanent changes due to slow bureaucracy and centralized decision-making processes.
Exponential growth further reinforces this trend and can be a rude awakening for organizations ranging from small businesses to entire countries if they fail to adapt to these developments time and again. At the same time, however, it is probably one of the greatest opportunities in human history for all those who are prepared to constantly reinvent themselves and the way they work on a daily basis. Digitalization thus offers us a constantly new basis for innovative ideas, optimized solutions and thus a better future.