Youngjin Yoo
"In short, software is eating the world... Companies in every industry need to assume that a software revolution is coming. This includes even industries that are software-based today... Over the next 10 years, the battles between incumbents and software-powered insurgents will be epic. Joseph Schumpeter, the economist who coined the term "creative destruction," would be proud." - Marc Andreessen, August 20, 2011
It has been more than 10 years since Marc Andreessen declared software is eating the world. In retrospect, his prescient remark seems not only correct but almost too timid. Since he published this prescient essay in the Wall Street Journal, a lot has changed. Skype is no longer the future. It is the past. We have a full-blown streaming war between Netflix, Disney Plus, Amazon Prime, Apple TV, HBO Max, Hulu, Paramount Plus, and Peacock. Apple iTunes does not exist anymore as no one downloads digital music. They stream. Google's dominance in digital marketing was challenged by a startup that was not mentioned by Andreessen, Facebook. Of course, Facebook is no longer Facebook. It is Meta. Another startup that was not mentioned in the essay, Tesla, is the most valuable automaker. It is more valuable than the next five automakers combined with a market capitalization of around $1 trillion. Paypal and Square (now called Block) are no longer leading digital transformations in the financial sector. Of course, as I am writing this, we don't know who will be the owner of Twitter, the global agora. Startups in DeFi (i.e., decentralized finance), fueled by cryptocurrencies, are now the disruptors. So, yes, his prediction sounds outdated. And, we see no sign of things slowing down. On the contrary, it appears that digital innovations seem to be only accelerating.
Over the last several years, I have worked with many business leaders who are trying to figure out what this means for their own businesses. One frequently asked question is: "How is a digital organization different from an industrial organization?" To wit, is the world swollen by software fundamentally different from before it was swollen? If so, how is it different? Is digital transformation actually different from its close cousin, IT-enabled transformation, for which many companies have invested heavily over the last several decades? Aren't they all the same? After all, ever since ENIAC, the first modern computer, organizations have been using computers.
Many firms are building smart connected products, with the goal of transforming their value chains. Instead of home appliances, firms started making smart appliances. Machines in factories are being connected to the Industrial Internet of Things. With the ever-growing set of digital trace data, firms can now optimize their value chains and gain new sustainable competitive advantages. Not only do firms have smart connected products, but they are also creating digital platform ecosystems or being a part of larger ecosystems. These platform ecosystems can harness the generative power of digital technology and create powerful network externalities.
While these earlier investments in smart connected products and platforms are necessary and critical, many firms are still struggling to find concrete ways to capture the values that are created with all these investments. What companies need is not just to transform their value chain, they need to create a digital value loop.
A digital value loop consists of a recurring set of interrelated discrete activities that firms perform to transform data into valuable digital offerings through ongoing and dynamic engagement with customers as users. With a digital value loop, digital native firms like Netflix and Amazon and a small but growing number of traditional firms like Disney and Walmart sense and shape the experience of customers-as-users by deliberately using a set of digital tools. These experiences are not limited to pure digital experiences, but computationally augmented experiences.
Just as commodities and raw materials are transformed into marketable goods and services through a value chain, digital data are transformed into digital market offerings through a value loop. Each time a value chain is executed, a new value is created. Similarly, each time a value loop is executed, a new value is created. While a value chain is a linear irreversible process that ends with the sales of goods and services with customers as buyers, a value loop is a recurring, non-linear, reversible process that begins with the sales of goods and services with an ongoing dynamic engagement with customers as users.
At the heart of the digital transformation, then, are those who have figured out how to build a digital value loop and those who have not. The concept of a digital value loop is deceptively simple. Yet, it is difficult to build and execute. It requires careful design and effective execution. It needs to be supported with a new generation of IT infrastructure and development tools. IT leaders in companies are busy adopting agile methods and DevOps. But unless these new methods are connected to a carefully designed and strategically meaningful digital value loop, they are unlikely to deliver the desired business value.
We will continue examining what is a digital value loop, what activities underpin it, and what capabilities a firm needs to support it.