All in One & One in All: Technology Convergence / Divergence and Disappearing Industry Borders

October 15, 2016

The conception of "industry" that we are used to in business lingua franca is fast becoming a noumenon (a non-perceivable reality). 

 

What we are witnessing across many industries is that product and manufacturing technologies are experiencing tumultuous transformations. These transformations can be visualized on two major dimensions: Convergence and Divergence. The end result of these transformations is the disappearance of the notion of industry familiar to us in the past few centuries - grouping of companies based on similarity and substitutability of products and their utility. 

 

At one plane, multiple technologies which independently served as the foundation for many different industries and markets are now getting integrated into single product/machine/service center resulting in creation of altogether new markets. Take for instance, convergence of more than a dozen independent technologies from Information Technology, Telecommunication, Consumer Electronics, and Entertainment are converging on to few digital products such as mobile phone and tablets and home security devices. Of which the modern smart phone is the embodiment of convergence enabling phone calls, text messages, email, surfing the internet, watching digital videos, paying bills online, operating home appliances, and healthcare device and so on. Another good example is the convergence of separate service technologies such as VoIP, IPTV, Smart TV, and others replacing the older devices and and thus can create new markets and product usage. 

 

The other dimension is the divergence of a technology from its original design and market intent into finding new variety of uses and applications resulting in creation of new technologies and markets. For instance, from wifi-driven hand held devices, new technologies and applications for traffic systems, automotive transport and logistics, security devices, medical automation, remote healthcare, ATM and vending machine infra-structure are being built. 

Both convergence and divergence causing one major paradigm and structural shift in national and global economy: Disappearance of Industries. Given these changes, now it has become almost impossible to define the borders of an industry. Thus, firms cannot have unequivocal specification of their markets and segments. Firms may simultaneously belong to many industries and markets. We cannot convincingly map the product domain, nor can we clearly define the market segments. The idea of industry competition would not make much sense in several industries, given that firms will face rivalry from the unrelated quarters of the global economy. Such a complex business environment demands a radical redefinition of what is a firm? That is the size and scope of the firm: Because the traditional logic of economies of scale will be defunct in this context. And even the economies of scope will have limitations, given the dynamic shift and combination and recombination of technologies required to better serve the markets. Scaling of a business, for instance ought to be a multi-firm configuration. 

 

The convergence and divergence of technologies, and the resulting disappearance of industry borders also demand a new conception of the financial model of corporation. As firms' technologies and markets shifting dynamically, the long term return on assets, and long-term return on equities will be seriously challenged given the unrealistic size of large public corporations that have been built in the last five decades. Horizontal & vertical integration and even diversification through mergers, acquisitions, and continual scaling up of investments will be dysfunctional from the point of view of long-term investor returns. Take for instance, the year 2000 Time Warner - AOL merger which was one of the biggest corporate mergers around $ 150 billion in value. It was expected that AOL would be the information and media highway for Time Warner group at the time of merger. However, within 3 years of such a large scale merger, technologies and applications from other industries converging through the internet -challenged the AOL, eventually replacing its dominant modem technology with several options to consumers. 

 

Right from marketing, and production to distribution, a new optimal size of the firm needs to be conceived to make rational investment allocation. No one firm can do serve the markets effectively or operate profitably, doing big and all. Firms need to band together to effectively serve the markets and recover their investments. Strategic alliances, franchises, scale reduction, dispersed manufacturing on a global scale will be the "de-rigueur strategy" in the coming years. Some implications for organization design and investments are presented in the following charts.

 

 

 

 

 

 

 

 

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