What Makes a Revolution? Disruptive Technology and Social Change

BT Technol J Vol 19 No 4 October 2001

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What makes a revolution? Disruptive technology and social change

P M Hughes and G Cosier

Never before? Every age tends to think it is special, facing problems that have never occurred before the arrogance of thepresent. Disruption has occurred before, yet this generation (or the last, or the next) might well be facing unique problems.There is good evidence that special times are here or hereabouts. Globalisation is new mankind has always totally remadeor devastated small areas of the planet, but now we have the capacity to affect everywhere at once. The Max Plank Institutepredicts demographic trends. One such prediction says that around 2070 the human population will start to decline forreasons other than disaster or disease that will be the first time in history that material success has led to fewer people onEarth. So maybe there are some truly new effects to be considered. What might be new about disruption this time are itsspeed, strength of impact, and the global compass of its effect.

1. Introduction

This reaction is a salutary reminder that businesses facereal and practical day-to-day problems. It is too easy tocharacterise relief as complacency in truth mostbusinesses already understand that something serious isgoing on, and that there is no going back. The difficulty, andthis is probably true of all disruptive change, is that it is notobvious what is going on; indeed, if it were clear, thedisruptive effects would be considerably reduced. Perhapswe are finally getting away from the clich that the onlycertainty is change and not before time. With peopleturning once again to old wisdom, it is clear that not evenchange is certain.

So, is it possible to get any kind of perspective on whatit is that we are going through? Perhaps such perspective isthe real benefit of things calming down a little. In thiscontext it is interesting to take a longer term view, drawingon the visible relationship between innovation andstructural change over the last few hundred years.

Before the full reach of the dotcom fallout was apparent,Lester Thurow [1] was insisting that it was wrong to think

about the ongoing upheaval only in terms of informationor Internet revolution. He argued instead that it was a thirdindustrial revolution, marking both a continuity anddiscontinuity. The continuity lies in the fact that technologydrives the societal change. The first industrial revolutionwas driven by steam, the second by electricity, and this thirdperhaps by information, though only if you construe thatconcept broadly enough, i.e. to include new knowledge andthinking about genetics. The discontinuity is simply the factthat with a third revolution things are changing again. But isthis truly a revolution or not? What is it that actually makesa revolution, and do recent and ongoing upheavals reallyqualify?

2. What does a revolution look like?

It did not look like a revolution at the time. The firstlight bulb was sold in 1883 for what today would be $1450.It was used in a wooden ship where reducing fire riskmattered. The electric lamp did not start by competing withnatural gas lamps, but, like many other disrupters beforeand since, it found a niche.

The financial meltdown in the dotcom world raisessome obvious questions about the real significance ofthe Internet. Traditional businesses have breathed a sigh ofrelief as accepted concepts of how to assess corporate valuere-asserted themselves. Suddenly it seems as though the Netis just another channel to market, and can be managed withall the skills already well established within corporations.The Internet it seems, is not so disruptive after all.

Technology has its place as a promoter of revolutionarychange, but there is a clear difference between aninvention and a revolution. After all, the internalcombustion engine was a vital invention, but ultimately wecould do without it. We can imagine a world of steamvehicles or maybe we would have developed better powersources. But can we imagine our world without electricity?Electricity brought truly revolutionary change, a changebigger than anything in business itself.

WHAT MAKES A REVOLUTION?


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In similar vein, while the Internet is being hailed as thelatter-day revolution, in practice this may well turn out notto be the case. Eye glasses, for example, are one of ouroldest technologies and yet in 30 years, the chances are thatthey will be gone. If one looks at the contents of a modernoperating theatre, it is apparent that, in recent decades,everything has changed (it is interesting to compare thiswith a school classroom which in essence has changed littleover the same period). The biggest shift of all, however, hasto be in the field of microbiology we are developingcomputers that are based on molecular models, we arelooking at using DNA itself as a way of performingcomputations, and designing specific therapeutic drugsbased on a new understanding of microbiological processes.There is a fundamental change going on in how we look atthe world scientifically, ultimately characterised by theHuman Genome project.

3. Signs of change

In 1983 there were 13 billionaires in the USA. Nowthere are 500. How many were created in the previousdecades of the 20th century? Just Henry Ford. Yet in the19th century there were dozens. This is another sign ofrevolution.

Retailing in ancient Egypt looked much the same as itdoes now. Today it is the biggest employment sector in theUSA, but after 5000 years it could all be about to change.Conventional economics suggest that the price advantagesof trading on-line might move 80 per cent of retailing to theInternet. What would cities look like then?

On the other hand, catalogue sales peaked as apercentage of consumption in 1913, and now stand at 1 percent, despite the economic advantages. Sociology tells usthat we like the fun, the experience of live shopping soperhaps this will be a 10 rather than an 80 per centrevolution.

We probably shall not know for 30 years, but certainlythe change can happen within a generation. Are telephonesor e-mails more acceptable for social contact? Differentgenerations have different views.

There are other factors. Walmart has stated that if asupplier starts selling direct on the Internet it will no longersell through Walmart. Who would be brave enough toabandon all current sales for a transition period that couldlast months or maybe years? On the other hand, agriculture

once dominated the US economy in the way retailing doesnow. Retailing could go the same way within 30 years.

The thesis here is that, if you are in a revolution,everything changes. If you are in the music industry, whatdo you do about Napster? The law courts might have settledits immediate future, but this will not determine consumerbehaviour. The CD is already finished, though it may takesome time to dwindle into oblivion; maybe the same is trueof the whole music industry. The Hong Kong movieindustry was, after all, destroyed by piracy.

The relationship between manufacturing and provisionof services is also changing leasing cars is now fourtimes more profitable than making them. The economicpoints have moved as the technology has moved. Oncemoney could be made assembling computers, rather thanmaking components. If one looks at Intel today, it is clearthings have reversed.

Similarly, the distinction between old and new economyis false, because new technologies are changing the realitiesof the old. It used to cost, on average, $33 to get a barrel ofoil to Rotterdam. Improvements in field detection andextraction have cut that figure to $9. What do you do if youare an oil business and can produce for 75 cents a barrel, butyou want to sell for $33? You pulse prices down, forcecompetitors out of the market on the $9 dollar barrel, thenpulse the price up again.

Technology changes the rules. In warfare we now havethe notion of Ultrapower, the USA with a satellite systemthat can see, hear and shut down everyone else. Israeliplanes were grounded in the Gulf War simply because theUSA would not release the friendly codes they needed totake off and stay free from attack by automated US systems.

4. The life and death of government?

What are the biggest financial markets? New York,Tokyo, London, Frankfurt, and then Grand Cayman,because the latter is free from regulation. Ultimately onecan question, in a truly global market where a single playercan re-write the rules, whether the concept of regulation isviable.

In the last 50 years during the Cold War, borders didnot move and that was unusual. Since the end of the USSR,

There are many ways of seeking to understand an epoch.For example, one can look at the wealthiest citizens, bethey Rockefeller or Gates. What does Bill Gates own?Microsoft is a knowledge process based upon a new kind ofwealth creation.

In 1900, by any measure the world was more globalisedthan it is today, but the new globalisation is led by thebusiness community while government appears to beresisting the change. The role of government may indeed bechanging. For example, increasingly we have a world wheregovernments pay taxes to companies (in the form oflocation support) and compete with each other for theprivilege, and not the other way around.



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we have seen a lot of movement and resurgent nationalism;but then borders do not make any sense in places like Africaand, as a result, they will move. Similarly one can speculatethat Indonesia, for example, will melt down back to itsconstituent 30 000 islands simply because they have nocompelling reason to be together as a single entity.

In amongst all this change, confusion and paradox, wetend to forget that there are only four countries in the worldwith a long continuous history Japan, China, France andBritain. Countries come and go. Governments are going tohave to rethink what they do. They no longer do the airtraffic control, says Thurow [1]. They are more likeplatform builders for education, skills, and, at the highestlevel, R&D.

5. The entrepreneurial hot house

The USA is good at that. This is the easiest countryin the world to fire someone. In the 1990s evenprofitable corporations in the USA laid off hugenumbers. If youre in the middle of industrialrevolution, you have to have destructive creation.AT&T may have laid off huge numbers, but the sectoras a whole is still employing more than ever. [1]

A high tolerance of failure is also needed. In Japan thesuicide rate has trebled, partly due to business collapse. InFrance, if your business fails, you are unlikely to getanother big company job. In Silicon Valley, you wouldprobably have been seen as an interesting guy.

That heady climate may now be behind us, or not.Certainly it is important to understand what actually burstwith the dotcom bubble, and what will endure. As CarlosGrande observed [2]:

Whether generated by VCs or public markets,overheated dotcom valuations were the anabolicsteroids of the dotcom boom. They allowed startups toact like corporates expand quickly, hire top talentand spend heavily on marketing without any sweator preparation.

Such insight comes with the benefit of hindsight, even ifthat makes them no less true slack management dis-ciplines were never likely to be a viable recipe for success.But the point about easy access to capital suggests some-thing more interesting, and fundamental. In an extendedessay on the changing shape of the US economy, MichaelMandel links access to capital with inventiveness [3]:

The USA is no longer a country of factories, wherethe key objective is to keep the assembly lineshumming at full speed and Americans fullyemployed, without letting inflation spiral out ofcontrol... Instead, the microprocessor and the Internetrule, and policymakers face a very different problem:how to maintain the flow of innovations andproductivity gains that are driving the New Economyforward.

Mandel argues that, in the past, technology innovationproved a steadying influence on stock market fluctuation,providing a base for recovery. This is no longer the case.The real shift in Americas economy, he suggests, has littleto do with new business models, and everything to do with amuch closer alignment of the financial markets andinnovation. In the present climate, the slowing of innovationsets up a vicious circle:

... as the wave of innovation slows, existingcompanies will lose their fear of being overrun bynew competitors. With less pressure from rivals, andfacing slower productivity growth and a squeeze onprofit margins, any increase in wages willimmediately translate into higher prices. Inflation willjump back in every sector of the economy. [3]

6. Looking for winners

The process of identifying innovative ideas thatactually work is like drilling for oil it may benecessary to dig a lot of holes before finding a gusher.A study of venture capital investments made between1969 and 1985 showed that more than one-thirdended in a loss; only 7% had pay-offs greater than 10times the original cost.

The challenge is not to lose faith, to carry on investingin innovation, on the basis that this process will create itsown momentum. In a simplistic way, the inflated dotcomvaluations were driven by this same desire to back a winner,when no one was quite sure what a winner might look like.Investors are being more circumspect now, but ease ofaccess to venture capital remains a critical feature of the USeconomy, and maybe any economy, since it is the necessarycorollary of the concept of iterative capital developed byMichael Schrage and discussed elsewhere in this issue [4].As Mandel notes [3]:

Easier funding means that more ideas andinnovations can be tested in the market, which meansthat the ones which work can be identified sooner andadopted faster.

In 1990, every economist had to talk about why Japan wasdoing so well and the USA so badly. Then it was aboutwho could push mature technologies forward, but now it isabout shutting down the old and starting the new. Thurowargues:

The problem is not that venture capitalists have got theirfingers burnt. Investment in innovation has always beenlike this. As Mandel says [3]:



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7. Can business models give competitive edge?

The misguided approach to competition thatcharacterizes business on the Internet has even beenembedded in the language used to discuss it. Insteadof talking in terms of strategy and competitiveadvantage, dot-coms and other Internet players talkabout business models. This seemingly innocuousshift in terminology speaks volumes. The definition ofa business model is murky at best. Most often, itseems to refer to a loose conception of how acompany does business and generates revenue. Yetsimply having a business model is an exceedingly lowbar to set for building a company. Generating revenueis a far cry from creating economic value, and nobusiness model can be evaluated independently ofindustry structure. The business model approach tomanagement becomes an invitation for faulty thinkingand self-delusion.

Porter is surely right to insist on grounding corporatedirection in realistic market analysis, and he may well beright that loose talk of business models has blindedmanagers to the hard challenges they face. Porters realtarget is sloppy thinking about what might have changedwith the coming of the Internet:

... companies today define competition involving theInternet almost entirely in terms of operationaleffectiveness. Believing that no sustainable advan-tages exist, they seek speed and agility, hoping to stayone step ahead of the competition. Of course, such anapproach to competition becomes a self-fulfillingprophecy. Without a distinctive strategic direction,speed and flexibility lead nowhere. Either no uniquecompetitive advantages are created, or improvementsare generic and cannot be sustained.

8. Speed, values and the rise of biology

It certainly seems apparent that the Internet itself has notchanged the laws of business gravity, and Porter is

convincingly sceptical about the chances even for survivingInternet-only models.

The great paradox of the Internet is that its verybenefits making information widely available;reducing the difficulty of purchasing, marketing, anddistribution; allowing buyers and sellers to find andtransact business with one another more easily alsomake it more difficult for companies to capture thosebenefits as profits. [5]

All the same, if Mandel is right, a fundamental shift inthe economy has happened and nothing will be the sameagain inventiveness is not so much the starting point forthe next revolution, as the ground condition for somethinglike permanent revolution. What this really means is thatneither technology, nor economics can be viewed inisolation, so maybe there is indeed a bigger perspective,which may have nothing to do with the Internet. To quoteLester Thurow:

What do we know about the years 950-1050? Itdoesnt look like much happened, but a thousandyears from now our epoch will look more striking.Well be noted as the guys who inventedbiotechnology and that changed everything. [1]

That is a challenging thought, and will only bevindicated by longer perspectives than are available to us. Inthe short term, bearing in mind Michael Porters scepticismabout crude attempts to match business models to Internetcharacteristics, maybe the most important thing for businessto understand is that the bigger societal shifts apparent inour times have a direct bearing on what can or cannot bedone.

As a recent paper from the UK-based MillenniumGroup put it:

The network may be technologically enabled, butnetwork society is not merely virtual. It is a synthesisof the physical and the virtual, the real and the on-line. Society decides and will continue to decide whatappropriate mix and balance it wants. This is the keydifference to the industrial era, when commerce andbusiness played a greater role than society in theformation of the industrial societys norms andstandards... In place of large full serviceorganisations, the network encourages groups ofsmaller, independent, yet linked organisations with acommon focus on a set of value-creating activities.The Internet realigns market forces in favour ofcustomers. [6]

Here then is the real paradox strategic direction andvalues matter more than ever because business is no longer

This does not mean that all conventional business wis-dom has to go out of the window. Writing recently inthe Harvard Business Review [5], Michael Porter suggestedthat while the Internet had brought irrevocable change tobusiness, it had only emphasised the importance oftraditional disciplines like strategy. More than this, he castdoubt on the value of thinking about business models at all:

Speed and flexibility may not be sustainable ends inthemselves, but they may still be important organi-sational characteristics. Schrage [4] himself emphasises theimportance of being steered by your values (conceivedstrategically) while building a culture of rapid prototypingand experiment.



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in the driving seat. In this sense the third industrialrevolution may be quite different from its predecessors.

This dissipation of control may be yet a further reasonwhy we need to look to biology to understand what is goingon, though, if Thurow is right, this will also be the agewhere we began to take biology in hand.

Acknowledgement

References

1 Thurow L C: Building Wealth: New Rules for Individuals, Companiesand Countries in a Knowledge-Based Economy, Harper Collins(2001).

2 Grande C: Article in Connectis magazine, Pearson Group (April 2001).

3 Mandel M: The Coming Internet Depression, Financial Times/Prentice Hall, p 51 (2001).

4 Hughes P M and Cosier G: Prototyping, people and a culture ofinnovation, BT Technol J, 19, No 4, pp 2934 (October 2001).

5 Porter M: Strategy and the Internet, Harvard Business Review, p 73(March 2001).

6 Millennium Group: Now You See It, Now You Dont, Briefing paper(2001).

This paper is based on a presentation by Dr L C Thurowat the opening of the BT Disruptive Lab at MIT. LesterThurow is the MIT Lemelson Professor of Management andEconomics and is a Fellow of the American Academy ofArts and Sciences.

Pat Hughes career in BT has spannedresearch, product design and developmentand latterly R&D management. He joined BTsome 15 years ago when digital signalprocessing was in its infancy, working onanalysis and synthesis of speech and modemdesign. From there he migrated into thedesign and development of industrial strengthautomated voice response platforms, leadingthe development of the platform and servicesurround for a major network-based callanswering service. In 1995 he received theBT Gold Medal for his work in this area. Hethen moved into R&D management co-

ordinating BTs programme of university-based research. He is a VisitingProfessor in Electronic Engineering at the University of Liverpool and hasacted as advisor to a number of government bodies including a period spenton secondment to the Cabinet Office of the UK Government.

Graham Cosier is currently working with theCambridge MIT Institute (CMI) and withover 30 years of BT service under his belt, heis certainly no stranger to change. In a wide-ranging career, he has worked closely withleading industries and academics around theworld, exploiting the best of technology. It isthis diversity that has seen him deliver worldfirsts in satellite optimisation, avatartechnology, virtual conference and inhabitedtelevision where his team won a covetedtelevision Oscar. He regularly consults on theemerging and disruptive technology themeto a broad range of international companies

and is a creative thinker who lives the future rather than trying to predict it,forming comprehensive views of 21st century society.

Documents

What Makes a Revolution? Disruptive Technology and Social Change