Pervasive Disruption? – Silicon Valley’s Unbounded Ambitions

The pattern in the figure below couldn’t be more clear. Each major phase of information technology industry progress has been led by a new generation of firms. Although a few companies – especially IBM, HP and Apple – have played important roles in multiple IT eras, the value of starting with a clean sheet of paper has consistently outweighed the advantages of established company size and resources. The history of IT innovation has been one of serial technology disruptions.

Pervasive Disruption? – Silicon Valley’s Unbounded Ambitions

Figure 1 – Generational shifts in IT leadership are the norm

Figure 1 – Generational shifts in IT leadership are the norm

The figure reveals two other noteworthy patterns. Over the last ten years, the number of market-leading firms whose headquarters are in Silicon Valley has spiked upward. While Silicon Valley (‘the Valley’) has been a vital source of IT industry innovation for more than 60 years, its influence and dynamism have never been greater than they are today. It now dominates much of the San Francisco Bay area – to the growing consternation of many residents who are not part of the IT community.

The figure also shows that the nature of disruptive change has shifted. During previous IT eras, new firms succeeded by providing ever better but less expensive horizontal technologies used by customers across every industry segment. In contrast, many of the most important internet companies have targeted a specific industry sector – books, movies, music, lending, media, retail, taxis, lodging, recruitment, etc. Before the internet, this type of vertical disruption was almost unheard of.

Importantly, these vertical disruptions are resulting in increasingly concentrated, winner takes all marketplaces. While previous IT eras have each had their dominant suppliers – IBM, Digital, Intel, Microsoft, Google, Apple, Facebook and so on – traditional internet leaders such as Amazon, Netflix, LinkedIn and Wikipedia, as well as emerging shared economy pioneers such as Airbnb, Uber and Kickstarter, are extending this quasi-monopoly power to particular vertical industry sectors.

These broad patterns – ongoing generational change, an increasingly powerful Silicon Valley, the shift from horizontal to vertical disruptions, and rising industry concentration – are the main focus of this paper. Will these forces continue to strengthen, or is the rate of change being over-hyped? There are few bigger questions facing new and established firms alike.

Figure 2 – ‘Disruptive innovation’ best explains this pattern

Figure 2 – ‘Disruptive innovation’ best explains this pattern

"Much like ‘innovation’, ‘change management’, ‘core competency’ and other management buzzwords, ‘disruption’ is an often loosely defined term. For the purpose of this paper, we define disruption as the sudden demise – or at least substantial diminishment – of the incumbents in a particular market. This demise is typically brought about by one or more players adopting a radically different technology or approach. True disruptions turn the assets of incumbents –
size, customers, know-how, business models, best practices – into potentially life-threatening liabilities."

"This definition of disruption was first promoted by Clayton Christensen in his seminal 1997 book, The Innovator’s Dilemma. As shown in the figure, Christensen made the important distinction between disruptive and sustaining innovations: the latter fit well into incumbent market leader strategies, while the former do not. While the rigour of Christensen’s initial research has recently come under sharp attack1, in our view his model of disruptive change simply and effectively explains a great deal of the IT industry’s history, and remains a fundamental IT industry dynamic."

"Disruptive change works as follows. When a new capability emerges, it is typically immature, and is thus seen by incumbents as a ‘toy’ that can be safely ignored, even ridiculed. But as the technology improves, the new approach becomes an increasingly serious ‘threat’ that must be resisted or co-opted, often resulting in awkward hybrid strategies. In the final stage, the technology becomes accepted as the ‘obvious’ solution. But by then, it is usually much too late. (If the ‘joke’, ‘threat’, ‘obvious’ cadence sounds familiar, it may be because of its resemblance to Gandhi’s view of non-violent protest: ‘first they ignore you; then they laugh at you; then they fight you; then you win.’)"

"There are many famous examples of disruptive IT change – digital cameras wiping out Kodak, personal computers replacing minicomputers, Amazon bankrupting Borders, Netflix destroying Blockbuster. The cloud computing and Software-as-
a-Service movements are causing similar disruption today. The big question is to what extent these disruptive patterns will spread into new sectors that so far have
been ‘safe’?"

1. See Jill Lepore, ‘The Disruption Machine - What the gospel of innovation gets wrong’, The New Yorker, June 23, 2014


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