<i>Digital Disruption: Unleashing the Next Wave of Innovation</i> (EXCERPT)

If people + infrastructure = disruption, then digital innovators + digital infrastructure = digital disruption.digital disruption, at a scale and a pace most are simply not prepared for.
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Thomas Suarez is a typical twelve-year-old working his way through the sixth grade in the South Bay area of Los Angeles. He describes himself this way: "I've always had a fascination with computers and technology." Always for him goes all the way back to the fourth grade, when Thomas decided that he wanted to program something.

His first app, Earth Fortune, went live in 2010. It has been rated 127 times and earned a respectable three-star rating in the iTunes App Store. It's a fortune-teller that's kind of cute, a bit like the origami "cootie catcher" we used to play with when we were in grade school, that told arbitrary fortunes to those willing to believe them. But the story here is not the app, it is Thomas himself and the many Thomases yet to come. Young Thomas gave a talk at the Manhattan Beach TEDx conference in October 2011, during which he explained, "My favorite and most successful app is Bustin Jieber, which is a Justin Bieber Whac-A-Mole!" This app was posted just before the holidays in 2010, and while it hasn't earned as many reviews as Earth Fortune, it certainly garnered laughs from the TEDx audience.

Bustin Jieber won't change the world. The top review, last time I checked, gave it one star and called it "crap," adding that, "When u take money from me for crap, I'm upset no matter how old u r. Put down the programming books and read up on user experience and usability and then sell something for a dollar." The second review gave it five stars and said, "I just donated $99 cents [sic] for your future games ;-)." While they disagree, both reviewers are taking seriously the fact that Thomas is a twelve-year-old app developer.

If you just play his apps, you might be tempted to discount Thomas. You might conclude that the two million views his TEDx video has scored on YouTube or the write-up about Thomas in the Huffington Post are just hype. But the real story is best illustrated with a third review--another five-star rating--which read, "I had $1 left in my iTunes account and decided to spend it on this, just because I'm just like you. I'm 13 and trying to learn iOS/Cocoa development, and this is really encouraging. Thank you."

Why did Thomas's talk garner two million video views? Listen to what he says:

"A lot of kids these days like to play games. But now they want to make them. And it's difficult, because not many kids know where to go to find out how to make a program. I mean, for soccer, you could go to a soccer team, for violin, you could get lessons for a violin. But what if you want to make an app? Where do you go to find out how to make an app?"

Thomas explains how the iPhone SDK (the software development kit that Apple makes available for app developers) "opened up a whole new world of possibilities for me. And after playing with the software development kit a little bit, I made a couple apps, I made some test apps." One of them was Earth Fortune. When he was ready to put his new app up on the app store, he had one last hurdle to clear. "I persuaded my parents to pay the ninety-nine-dollar fee to be able to put my apps on the app store. They agreed, and now I have apps on the app store."

And this is the point. The distance between an idea and the digital realization of that idea is now so short--so cheap and so quick--that a bright twelve-year-old can do it.

Thomas and his thirteen-year-old reviewer on the App Store have access to the tools. And they have the right mindset, one that compels them to use these tools in disruptive ways. They are the next step in the evolution toward a digitally disruptive economy--a world in which everyone has the tools they need to bring their ideas to the market, test them, refine them, and eventually disrupt something.

What tools does Thomas need to pursue his digitally disruptive goals?

A computer? Check.

An internet connection? Check.

A programming language and SDK? Check.

A friction-free digital platform for distributing and making money from his innovations? Check.

The number of homes in the United States that have a computer with internet access is now better than 77 percent. App Store entry fee is $99. Thomas and a good portion of his generation have access to better tools than Bill Gates (or I) had. Just as millions of kids already grow up playing soccer or learning a musical instrument--comparisons Thomas invoked, very appropriately--millions of kids like Thomas will routinely learn how to engage in digital disruption.

And at almost no cost. The right mindset combined with the right tools, continuously adapting and disrupting. Multiply Thomas by millions and you get a sense of why digital disruption is so terrifying.

What has changed about invention is this: disruption was previously done to and through physical things, things like the assembly line, the commercial jetliner, the heart transplant, flat-panel LCD screens, and so on.

These physical disruptions are just as important as the digital disruptions this book focuses on. But because traditional disruption depended on changing how physical resources were manipulated or combined, the disruptions, though powerful, were rare. They cost a fortune to develop and distribute, a fortune that kids like Thomas Suarez simply would never have.

To put this in context, let's look at the seminal work of Harvard Business School's Clayton Christensen, the father of the concept of disruptive innovation. Beginning with his 1997 book The Innovator's Dilemma, Christensen brought the topic of disruptive innovation into the minds and mouths of business practitioners around the world.

Clay describes how a disruptive innovation is an advance that creates new market value, in the process disrupting and replacing an existing market. With illustrations from the disk-drive industry and the hydraulic excavator market--both very physical markets--he shows how disruption starts with cheaper or more convenient solutions that gradually move upmarket, eventually destroying stable industries.

Clay shows that the traditional disruptive innovations he studies typically take years or even decades to disrupt markets. As his case studies show, physical disruption requires the painstaking manipulation and alignment of physical resources. The resources themselves are often expensive, as is the factory that makes the new product. They can only become profitable by achieving scale, and scale requires massive initial investment to succeed at disruptive prices, and this holds whether you're making a mousetrap, a CD player, or an electric car.

This takes time. And it takes money--lots of it.

Digital disruption will change that. But not just in software or apps. In fact, the power of digital disruption is that it can disrupt any aspect of any product or service, including processes deep within companies focused on physical things, processes that govern partnerships, data collection, pricing, and the management of labor or capital resources. In fact, digital disruption's power multiplies precisely because it can apply to industries that are not even digital. In this way, digital disruption happens to and through digital things, which then accelerate the disruption of physical things. Take Guy Cramer, who uses digital tools to get better military camouflage designs to governments around the world, faster and way cheaper than other suppliers. Then there's Travis Bogard, head of product strategy at Jawbone, a company that pivoted rapidly from bluetooth headsets to mobile speakers, challenging accepted notions of what consumers want from an audio product and then creating a best-selling speaker in the category it redefined. Dave Dickinson, CEO of Zeo Inc., found a way to rethink expensive ($3,000) studies in sleep labs by offering a hundred-dollar product you can use to analyze your sleep every night, right at your bedside. These disruptors know that digital disruption is far more potent than old disruption, regardless of the industry.

These cases, and more like them, will show that digital disruption beats old disruption hands down, no matter the industry. It does this in a straightforward way. Under old disruption, only a very small number of innovative companies can amass the tremendous amount of capital necessary to develop and bring a small number of possible ideas to market. Capital is the first constraint. You can raise capital through bank loans or IPOs or private investment, but as long as you have to spend money to make money, the market can only fund so many innovations.

The second constraint is information. Because only a few ideas will make it to capitalization, people keep ideas secret, floating only those ideas that have immediately obvious economic merit. And the only innovators who get funded are those who have access to holders of capital and are willing to jump through whatever hoops investors deem necessary to prove their ideas have merit.

But what if it didn't take money to make money?

What's terrifying about the digitally disrupted future is that this rhetorical question is already being concretely answered. The mindset of the digital disruptor accelerates every possible process by exploiting digital toolsets that are free for tinkering. Economists talk about trends that reduce barriers to entry. The force of digital disruption doesn't just reduce these barriers, it obliterates them. This allows the disruptor to take new ideas of any size and potential impact and rapidly pursue target customers at almost no cost and in the space of a few days, rather than years.

That's the power of digital disruption, and it will happen to every industry on the planet, whether that company makes digital products or not. That's why the rise of millions of digital disruptors like Thomas Suarez, whether they go it alone or choose to disrupt on behalf of massively physical firms like Verizon and Unilever, matters so much. These disruptors will do what they do in whatever industry they find themselves planted, ultimately generating significantly more innovation power into the marketplace.

How much more innovation power? I'll make it as simple as possible.

Imagine that with all the free tools and platforms available to Thomas Suarez and millions of others like him, we get ten times as many people bringing innovative ideas to market--a highly conservative estimate. Then assume that the average cost to develop and test those ideas falls to one-tenth as much per idea as in the past (also conservative). The result would be one hundred times the innovation power.

That means you and your business are facing at least one hundred times the competitive threat. That's two orders of magnitude more innovation power than before. Digital disruption accelerates competing ideas even as it facilitates the entry of a previously impossible number and magnitude of ideas. The cumulative effect is devastating to any company operating under the rules of the prior century.

Consider an analogy: what China did to the manufacturing business. China is now poised to overtake the United States as the largest economy in the world. It has achieved this position principally by becoming a low-cost manufacturing center for goods the rest of the world desires. But China's success is not just a function of cheap manufacturing, the way Japan, and later Korea, rose to prominence in the twentieth century. China's success depends on a very fortuitous (for China, anyway) set of circumstances.

First, with its population of over 1.3 billion relatively impoverished people, China has a very motivated base of workers who are willing to work very hard for very low wages relative to other parts of the world. Add to that the fact that these workers can expend their efforts to produce and distribute goods using technologies, distribution partners, supply chains, and physical infrastructure, such as international shipping companies and container ships, that China didn't have to pay for because the rest of the world had already seen fit to create them.

Meanwhile, the American manufacturing companies that China was competing with had high labor costs and rigid structures that required them to keep working pretty much the way they always had. China leveraged its advantages and its competitors' inability to change. It came in and decimated its manufacturing rivals.

Let's condense this. The formula is: People willing to work for nearly nothing, plus a completely developed, relatively friction-free infrastructure for value delivery, equals competitive disruption. People + infrastructure = disruption. That two-step formula is sufficient to explain the rise of China and the subsequent destruction of much of American manufacturing.

What's happening now in digital is completely analogous and much faster. Worldwide, there are even more people like Thomas Suarez, willing to work for practically nothing. And like the Chinese, they can take advantage of a digital infrastructure--already built by some of the world's most powerful companies--to launch their work into the world and see what happens.

If you thought the impact of the rise of China was tremendous, the rise of digital disruptors--toiling away for free in any country, speaking any language, coding for whatever platform they deem worthy of their time--will be far more comprehensive across more industries at a more rapid pace, just like China's impact on US manufacturing, but across every industry.

The friction-free infrastructure that they will leverage includes the Apple App Store, which has already generated 650,000 apps and $5 billion in payments to thousands of developers. This friction-free infrastructure is spreading like a virus to many other domains. Facebook's developer platform is a similarly powerful global outlet for idea generation, generating more than 9 million Facebook apps. If your innovative idea is not one that can be developed in software alone, you have the emerging Kickstarter fundraising platform to pitch and refine your concept, as more than twenty-eight thousand people have done, receiving $274 million in pledges. If your powerful idea is not about a product as much as it is about how to market and communicate an existing idea, you can register as an individual to advertise your site, your app, or your eBook through Google AdSense or Facebook Ads. Want to set up your own shop to sell your own or others' products? You can join 1.3 million sellers on eBay or you can sign up as an Amazon-enabled merchant. These friction-free elements of the digital world are scaling up in every domain, drawing wannabe digital disruptors rapidly into the fold.

If people + infrastructure = disruption, then digital innovators + digital infrastructure = digital disruption. Massive digital disruption, at a scale and a pace most are simply not prepared for. Sometimes people make themselves feel better about their lack of preparation by pointing to specific failures along the way, such as the falling stock price of Facebook after its IPO or the inability of Groupon to figure out its business model. But behind them are thousands of others willing to take their places. It's all part of the process. Just as in China, where the occasional failure of a single factory or centrally planned community amounts to a minor glitch in the overall outcome. This will be true of digital disruptors as well.

Digital disruptors fail frequently. When I propose that there will be one hundred times the innovation power resulting from the rise of digital disruption, I realize that the majority of those additional ideas will come to naught. Some will fail spectacularly. But if ten times as many people can participate in bringing ten times as many ideas each to market, only one or two percent of those ideas need to succeed in order to completely disrupt your business. And what if their success rates are five times that high? That would be half the success rate of typical venture capital investments. But it would be five times the volume of successful idea generation that you currently experience.

That's innovation power defined. Because if you pick any single example of an idea generated through digital disruption, you may or may not be impressed. Thomas Suarez's Bustin Jieber app, for example, may not move society forward. But it does move Thomas Suarez forward--on to his next app, which will certainly be better than the one before. At the rate he's going, he may have twelve more apps under his belt by the time he graduates from high school, or he may have just one more app that is twelve times better. Again, multiply him by millions and you have some sense of what is coming and why it will generate innovation power that should motivate you, hopefully into joining the ranks of the digital disruptors.

Excerpted from Digital Disruption: Unleashing the Next Wave of Innovation by James McQuivey. ©2013 by Forrester Research, Inc. Published by Amazon Publishing.

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