Deloitte Report

Win the technology disruption game

Presenting the second part of the Deloitte Touche Tohmatsu (DTT) report, Be Prepared: Imperatives for TMT Executives 2005-10. It talks about how CEOs should capitalise on new technologies, and how these technologies have the ability to disrupt the market and industries

Technology disruption is one of the single most potent threats, and opportunities, for TMT (Technology, Media and Telecom) players. The Internet, wireless communication, digital broadcasting, cable distribution and other innovations have delivered both uncertainty and growth to the sector. Each new technology has the capacity to bring ruin as well as bestow riches. Technological advances will continue to disrupt TMT markets around the world through 2010. The never-ending march of technology will destabilise the sector in three principal ways.

• The introduction of entirely new technologies, such as broadband, fixed and mobile networks, file formats, devices and media is likely to further unsettle markets that are already highly dynamic and unpredictable.
• The transformation of technologies from niche to mainstream. Over the next five years, it is likely that technologies such as broadband, Global Positioning System (GPS) and Radio Frequency Identification (RFID) will undergo steady—and cumulatively steep—rises in adoption, with a significantly destabilising impact.
• The reinvention of existing technologies. Successful technologies are unlikely to ever stand still: they are under constant evolution. For example, the functionality and capability of call centres is currently being enhanced by the growing maturity of Voice over Internet Protocol (VoIP). Corporate e-mail systems are increasingly featuring a cellular mobile capability.

These three forms of technology disruption should create vast opportunities for value creation—or value destruction. TMT CEOs must therefore ensure that their companies have appropriate strategies and capabilities not only to capitalise on new technologies but also to profit from existing technologies to the full.

Outlook for technology disruption in the TMT sector

Spending on the development of new technologies is expected to continue to increase steadily over the next five years. Both governments and corporations will likely commit increasingly large sums of money to the science, research and development (R&D) that provides the raw material for much of the TMT sector. The trend will, of course, continue, with more countries committing ever-greater sums towards R&D as each nation seeks to earn its place at the table of the global knowledge economy.

For TMT CEOs, therefore, one of the key issues arising from these shifts will be the level of management attention given to the development of new technologies, the anticipation of competitors’ technology activities, and the overall route map for technology deployment within the TMT sector. TMT leaders should also be wary, however, of confusing gross spend on R&D with results; R&D must lead to profitable products, otherwise it could end up becoming an expensive hobby.

Many new technologies will fail

If recent history is any guide, the majority of ultimately disruptive technologies fail, at least the first time round. When disruptive technologies first appear, they almost always offer lower performance in terms of the attributes that mainstream customers care about. This is largely because disruptive innovation is discontinuous, and by implication has a much greater inherent risk of failure than the incremental innovation that typically characterises core TMT markets.

Innovation for the sake of innovation has plagued the consumer electronics industry for decades, but the practice may well spread across the TMT space, affecting not only consumer products and services, but also the broader, and indeed deeper, technology choices that TMT players have to make regarding infrastructure and technology standards.

The winners therefore will likely be those TMT companies that not only anticipate technology disruption but, to an increasing degree, control it. It has long been known that much of the disruptive power of a new technology derives from an entirely indirect source—the competitive response to it.

Winners in technology disruption will probably be the TMT companies that are able to avoid being repeatedly drawn into pointless tussles with companies promoting dead-end disruptors, and focus their efforts instead on backing technologies that are capable of delivering long-term value growth.

Established technologies can be the most disruptive

There is an additional reason for TMT companies to resist disruption. Over the next five years, some of the most profound technology disruptions will likely result from incremental improvements to existing technologies, or from increasing adoption of existing technologies, as opposed to entirely new, disruptive innovations.

Incremental advances in processing power, digital storage, bandwidth availability, miniaturisation and nanotechnology, digital displays, battery power, encryption and other technologies are likely to deliver significant value and revenue through 2010. Such incremental changes will build on existing experience and expertise, reflect customer behaviour’s ability to change only slowly, and deliver appreciable, understandable benefits, often in a sequential, logical fashion.

The portable games console is a good example. Incremental improvements in processor speed, battery performance, screen technology and digital storage have enabled the commercial launch of a new generation of portable games consoles. These new devices have driven much of the 180 percent growth in US electronic games hardware sales in the last 12 months.

Technological advances alone may not lead to revenue growth

Over the next five years, many other existing technologies are expected to undergo steady, sustained improvement across a range of parameters from performance to cost. But these improvements may not always produce a corresponding growth in revenues.

Consider the broadband access market. In five years’ time, Fibre to the Home (FTTH) technology will have been deployed by several telecom operators in many countries as a replacement for existing ADSL and cable provision.

Yet there is evidence that consumers and enterprise customers are not placing much value solely on bandwidth. Indeed, research has shown an average 25 percent fall in broadband prices across Europe in the last 12 months alone. So though FTTH delivers a quantum leap in terms of bandwidth and speed of connection, there is little reason to believe that customers will be prepared to pay a premium for it. But the cost of deploying FTTH is more than five times the cost of deploying DSL—a cost that needs to be recouped somehow.

Making the transition

It is entirely natural for TMT industries to move from one technology to the next, particularly as customers become more demanding and sophisticated, and as legacy technologies begin to show their age. Yet that transition from old to new is where trouble is most likely to arise. Ironically, technology disruption follows a very stable and predictable cycle. Established technologies typically undergo a sustained period of growth until the markets which they serve reach maturity (as perceived by the companies selling or operating the technology, and by the customers they serve). Once that point is reached, competitors race to find a new technology that will fuel the next period of growth. With each repetition of the cycle, the stakes get higher.

The winners should be those companies that can understand both which technology will be successful and when this will happen. Timing will become increasingly crucial as part of the management of transition. CEOs must know when to push the button, and more importantly, when to hold fire. It is a fine balancing act: knowing when the value of existing technology has been effectively exhausted, when competitors are likely to make their move, and when customers are ready for something new.