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In last year’s hit film “Arrival,” there was a fundamental misunderstanding between aliens and humans over the words “weapon” and “tool,” with the fate of the world balancing precariously upon semantics.
Out here in the real world, the fate of enterprises big and small hang on understanding the power of technology: For some — those with difficulty adapting — technology is a dangerous weapon, a persistent and evolving threat that ultimately disrupts a company’s future. For others — the ones with vision, nimbleness and adaptability — technology is the tool that unlocks new opportunities for growth and value creation.
Understanding these nuances has never been more important than right now: A company’s life cycle today is dramatically compressed. According to Innosight, in the 1920s, companies lasted an average of 67 years on the S&P 500; by 1965, the average lifespan was 33 years; by 1990, 20 years; and now, the forecast is by 2026, 14 years.
Taking this to the extreme: Imagine for a moment the incredible headlines disruptive companies like Snap, Uber and Facebook are generating today. Flash-forward just 10 short years from now, and these brands — and others like them — could be relics of the past. Crazy, right?
The implications of this are tectonic. Even as the human race has relied on technology, innovation and research to achieve major strides in longevity, companies have suffered dramatic declines in durability. At a macro level, this means greater volatility as market leadership changes hands more frequently. At a micro level, this means companies will need to revisit how they think about everything from strategic planning to investment horizons to executive tenure. Reinvention, it seems, will be just as important as invention.
Companies that sustain will need to be able to harness seven forces that have come to dominate the new physics of business. These forces are:
- Network effects: The more people who adopt a solution, the more powerful that solution becomes. We saw this with the Windows Operating System, then with Google Search and AdWords, and more recently with iOS and Android. Facebook, too. Critical mass drives adoption, and adoption drives critical mass. Understanding network effects and embracing the power of platforms is key. Small companies may leverage existing platforms as they incubate and establish and then develop their own: Think Zynga, GoFundMe and others. Snap exploited an unmet need in Facebook’s platform, and while the jury is still out on its long-term influence, today it’s worth about $21 billion.
- Audience: Audience is a more valuable asset today than ever before. Once you’ve accumulated a large audience, you become a channel for other goods and services. Netflix has done this remarkably well. It originally aggregated other providers’ content, developed an audience, understood what they wanted, and now offers original content for them. Over the next few years, Netflix expects that as much as 50 percent of its content will be original programming. Similar dynamics are at play in business-to-business, where “account control” is a precious asset. IBM, for example, has created tremendous value for shareholders and customers by acquiring small software companies and distributing their innovations through their enterprise license agreements.
- Software: As Marc Andreessen predicted, software is eating the world. Software has become a kind of connective tissue enabling new levels of automation and business flexibility not previously possible in a hard-coded world. It requires no real distribution infrastructure, while maximizing innovation at minimal cost. Digital goods become extremely high-value, as a product or a service, from fast food, such as McDonald’s new mobile ordering and payment app, to Airbnb’s disruption of hospitality, to Tesla’s reimagining of the automobile.
- “As-a-Service”: Fill-in-the-blank “_aaS” is arguably the hottest trend in business, as companies rush to adapt products and distribution to a consumption-based model. In a world in which reinvention is key to survival, the flexibility that comes with consuming goods as services is highly sought after. This isn’t just about software, either. Cable and satellite providers are doing the same thing with hardware. The same goes for mobile providers like Verizon, AT&T and T-Mobile. Uber and Lyft are transforming the auto industry from an owned model to consumption-based, TaaS, or transportation-as-a-service.
- Data: If software is the connective tissue, then data is the lifeblood of a company. And with the advent of artificial intelligence and machine learning, the value of data, how to collect it, track it, analyze it and monetize it, cannot be overstated. Simply, the more data you own or have access to, the more power you have. Google pioneered this value proposition, and if you were going to connect the dots between all of Google’s seemingly disparate businesses, data is the one consistency. Amazon’s AWS and Microsoft’s Azure are also predicated on data access. In the industrial world, you could say the same thing about GE and its Predix platform-as-a-service. This may also be a sub-narrative behind Intel’s $15 billion acquisition of Mobileye. After all, the company says, the car will soon become a valuable datacenter on wheels.
- Mobility: Ten years after the launch of the iPhone, the ubiquity and speed of connectivity and the ever-increasing compute capacity in smaller and smaller forms is changing the ways consumers and businesses operate. Typical consumer behavior is now “mobile first”: 80 percent of all U.S. mobile phone users own a smartphone, and smartphone consumption in the U.S. has doubled from three years ago, according to comScore. In China, Tencent’s WeChat app has attracted 800 million users for messaging, social networking, payments, gaming and more. Such behavior extends to the enterprise, where mobile apps for business-to-business customers are now common. What’s more, the ever-shrinking and pervasiveness of technology, from basic sensors to sophisticated computational devices, is behind the explosive growth of the Internet of Things.
- Cyber security: None of this matters without security. As networks expand, software takes over more core functionality, business models transition to as-a-Service and the value of data is better understood, threats proliferate. We would argue that while all of this innovation seems to be occurring at breakneck speed, these disruptions would occur even faster absent the friction of deep and well-founded concerns over security. Companies that invest, innovate and excel here have the edge. Ask Amazon or Salesforce.com, companies that don’t run the risk of slow customer adoption, a tarnished reputation and potentially huge costs.
So what to do, in this brave new world, to strengthen your brand, maintain relevance, grow your business and extend your longevity?
- Embed these seven forces into your strategy to stay ahead of the innovation curve.
- Regularly review market structure and industry dynamics with a wide aperture; look in every corner to see where disruption may come from next.
- Reallocate resources to technology, infrastructure improvement, innovation and re-skilling (e.g., software capabilities).
- Emphasize reinvention, adaptability and embracing change as tenants of corporate culture
- Implement a modular enterprise structure where you can swap out parts, when necessary, to address new opportunities and improve efficiencies.
These are the forces governing business today, for good and for bad. How they affect your business might just come down to understanding the difference between “weapon” and “tool.”
Eric Kutcher is a senior partner in McKinsey’s Silicon Valley office where he leads the firm’s global High Tech, Media and Telecom practice. Kara Sprague is a partner in McKinsey’s San Francisco office.
This article originally appeared on Recode.net.
