This book is for everyone who wants to understand our information age. This book is written for CEOs, entrepreneurs considering online start-ups, and undergraduates still trying to pick a career. This book is for regulators, lobbyists, lawmakers, and voters who need to make informed decisions about the future direction of our society. This book is for anyone willing to take the time to understand how information changes consumer behavior, corporate strategy, competition, and law. This book is for everyone who knows that he or she is going to have to participate in the digital transformation of work, education , shopping, and life itself and wants to know how to plan, to participate, even to lead the transformation.
We are immersed in a sea of information, provided by cheap and powerful information technology. For the first time in human history, most of us no longer think of information as an asset or a liability, or think of information as a source of power or of weakness. Instead, we think of iPads and smartphones , Google and Apple and Amazon . Mostly, we no longer think about information at all, any more than fish think about the water that surrounds them. But information tides, information currents, and information tsunami affect us in our information oceans as profoundly as tides, currents, and tsunami affect the fish in their oceans.
We need to understand our information oceans, not just understand how to operate our devices.
This book describes the digital transformation of everything . It describes the new patterns of power in this transformed world and provides a survivor’s guide to the information age .
We’re going to start by learning about all of the changes produced by information. These are the individual pieces that, when taken together, create the digital transformation of everything. We’re going to see how information changes the behavior of individuals, the strategy of firms, and the structure of organizations. We’re going to learn to see new patterns as they start to emerge, before their impact on behavior, strategy, or structure is readily visible. This will not only enable us to understand the changes that have occurred, early, before others see them. It will also enable us to predict the changes that are going to occur, even before it is possible to see them. It will give us competitive advantage .
This book is about patterns, developing a set of patterns by observing history, and using those patterns to make predictions. A pattern is just a shortcut that we use over and over again for solving problems.
Patterns are essential when trying to understand and solve complex problems. You focus on the elements that occur over and over, that truly matter, and ignore everything else. You look for a set of general principles that apply to large collections of problems like the one you have just tried to solve. The more problems a pattern lets you solve, the more you trust the pattern, the more you value it, and the more you use it. Physicists, engineers, and economists use patterns all the time. The field of business strategy is starting to develop its own patterns.
However, information changes everything in our modern world. Changing business strategy changes everything, from the goods and services available in the market to how and where we shop, what we wear and what we eat, how we learn, and how we vote. This book reviews a set of patterns that have proved their worth in explaining our modern world, in a wide range of industries, over the past decade. For executives, the book is about rapidly recognizing a pattern, rapidly diagnosing a problem, and rapidly finding the best ways to reach a solution. But for all of us, it is intended to be a field guide to understanding and prospering in the information age . Fortunately, there are only six patterns that we need to learn.
As importantly, this book is about how to solve complex problems by turning them into related problems that are easier to understand. This book is about learning to think in the information age. It’s conversational and informal, because I want you to enjoy it. It was written to sound like my favorite conversations with my students, my clients, and my colleagues.
The book could be shorter, if all I wanted was for you to remember a few critical patterns . But I want more, because you need more. I want you to understand how we found the patterns, and how and when to use them. I want you to know how to develop your own patterns in the future, when none of the existing patterns precisely fit the problem you are trying to solve. And I want you to trust this book, and sometimes, for some readers, trust requires proof. I want you to remember more than the results. When absolutely necessary, I have provided the supporting mathematics, but always hidden in footnotes and in appendices. Feel free to skip anything that sounds less like learning to surf in the information ocean and more like learning to study the physics of how waves form, travel, and crash ashore.
This chapter introduces the book’s first pattern, Newly Vulnerable Markets .
Newly Vulnerable Markets:
Newly vulnerable markets are markets that appear mature, with all potential customers served, and which appear to be dominated by a set of powerful firms. There appears to be no need for new entrants and little possibility for new entrants to succeed. And yet, newly vulnerable markets are characterized by a combination of factors that shift competitive advantage away from apparently dominant existing companies, and towards new entrants, which places these previously dominant firms at risk . All newly vulnerable markets share the same three elements, which together create an advantage for new entrants: (1) They are Newly Easy to Enter , (2) They are Attractive to Attack , and (3) The established firms in the industry find it Difficult to Defend their current dominant positions against the new strategies of their attackers.
Firms that attack newly vulnerable markets can weaken or even destroy the advantage of established firms, even established firms that enjoy larger market share, better brand recognition, and lower operating expenses. Newly vulnerable markets offer the competitive advantage of new entrants. This is not because new entrants are more nimble or more creative, although they may be. This is because new entrants are following a digital strategy that was not available to the established firms when they entered the market years or even decades earlier.
1.1 The Structure of This Book
This book is based on my decades of experience with computing, communications, and strategic consulting around the globe, in industries ranging from Wall Street to the E-Ring of the Pentagon, and from craft brewing at a small start-up to detergent marketing at one of the world’s largest consumer packaged goods companies. It’s based on an understanding of historical patterns . This way the complexity of the information ocean can be understood in terms of familiar patterns , rather than seen as incomprehensible and unpredictable because of the overwhelming number of constantly changing small details.
The book has three parts. Part I, consisting of this chapters through 5, is about understanding problems. It’s about recognizing if the problem is something you have seen before. It is about transforming an unfamiliar or difficult problem into something easier to solve. It is about diagnosing a problem, setting up a problem, and solving it. It’s about economics, and strategy, but it’s about more than that. It’s about learning to solve almost any problem, if the problem can be solved at all. In Part I, we introduce four patterns , all of which provide advantages to both businesses and consumers by making businesses more efficient. These patterns are not about the form of efficiency that most of us have experienced as a result of automation, which involve making things faster, or making them cost less, or allowing them to use less energy. Rather, these patterns involve changing the firms’ basic business model . Pricing more efficiently gives the firm an advantage over competitors following outdated pricing strategies. Providing goods and services to customers who are easiest to serve and offering them lower prices will allow the firm to capture customers that their competitors do not want to lose; this represents price efficiency . Similarly, when goods are in scarce supply, allocative efficiency gives a firm competitive advantage . Taxis try to serve all customers equally, while Uber’s surge pricing allows them to allocate cars to those who most value a ride immediately. In general, efficiency is a good thing. These patterns, which encourage efficiency, are widely deployed in information-based strategies.
Part II, consisting of Chapters 6 through 9, is about a very different set of patterns in information-based strategy . These patterns are less about producing gains through efficiency. They are more about gaining and exploiting power in information-based businesses. These patterns are less benign. Sometimes they do create value for their users. Often they confer so much power to the companies that deploy them that we can consider these companies in the business of harvesting value, or taking wealth away from others, more than in the business of creating value for anyone else. These patterns, which can make some companies very, very profitable, are frequently seen in online gateway businesses like Google , Hotels .com , and a limited number of others.
Part III, containing Chapters 10 through 12, explores some of the implications of the strategic changes described in this chapter through Chapter 9. It explores working with the patterns to manage strategic uncertainty about the firm’s operating environment. It explores making the decisions regarding which information-based strategies to implement, based on the uncertainty of the firm’s future competitive environment. It explores how information-based strategy can change the structure of the firm and the options available to regulators. The last chapter puts all of the pieces together and provides a terse summary of the process of digital transformation .
All of the chapters in this book contain several short, related sections. The structure of this chapter illustrates the structure that will be followed throughout the book. Section 1.2 introduces the important role of patterns , models, and model-based learning in rapidly diagnosing the problems that you face; it’s about thinking about thinking about our new online world. That is, it is more about how to think about our new world than about analyzing any specific problem, issue, or transformation that has already occurred. Section 1.3 motivates our first pattern, the Theory of Newly Vulnerable Markets, and describes how the pattern was actually developed. Section 1.4 presents the complete theory of newly vulnerable markets and describes its applications.
I have two reasons for carefully laying out how I developed the theory of newly vulnerable markets in Sect. 1.3, instead of simply stating it as I...