Source: Yale Insights On:
In 1965, Intel CEO Gordon Moore wrote an article predicting that the number of components that could be “crammed” into an integrated circuit would double each year for the following 10 years, as it had since the invention of the technology. A decade later, he revised the prediction to a doubling every two years.
Despite the name, “Moore’s law” was not a natural law—it was a projection based on past performance, subject to technical and human limits. Nevertheless, it has described the reality of the last half century—despite periodic warnings that the technology was reaching its limits, the capacity of a microchip has steadily grown more or less at the rate that Moore predicted.
The exponential growth that results from such a steady doubling begins relatively gradually—and then it explodes. Anyone who is an adult in 2019 has experienced this phenomenon first-hand. In barely more than a decade, the smartphone, together with cloud computing, transformed the infrastructure of our daily lives, our economy, even our democracy. Companies that had dominated the economy for decades were pushed aside; industry after industry was disrupted or made entirely redundant (remember calculators? remember maps?).
After such dramatic change, human nature is to expect things to settle into a new equilibrium. But Moore’s law tells us that however unpredictable the last 10 years have been, the next 10 will be doubly so. “What has happened will pale in comparison to what will happen next,” writes Nasir Wajihuddin ’89, CEO of the strategy firm Anedom Mobile Group, in a recent white paper, “Strategy in the 54th Year of Moore’s Law.”
How can companies plan for an era of such rapid change? Wajihuddin argues that successful companies will be those that put rapid digital transformation at the center of their strategy, rather than treating it as an add-on to a legacy business. He proposes embracing uncertainty by taking a venture capital approach, placing multiple bets on new technologies.
Yale Insights talked to Wajihuddin about the meaning of Moore’s law and how companies need to change their strategic frameworks to thrive in an era of constant change.
Q: Let’s talk about Moore’s law. In your white paper you say that people have trouble conceptualizing exponential growth, and the difference between what it means to be in the 25th year of exponential growth versus the 40th year versus the 54th year. What does it mean to you to be in the 54th year of Moore’s law?
We don’t intuitively understand exponential growth, because life around us is not exponential. Economies grow a few percent a year. Companies too. In contrast, exponential growth accelerates massively in the outer years.
Let me illustrate. If you take a sheet of paper and you double it 42 times, the paper will reach the moon. Then if you double it another 9 times, it will reach the sun, which is 90 million miles away. That is stunning.
Now let’s think about the real world. In the 25th year of Moore’s law, which was 1990, you had technology that had improved, but even the internet hadn’t started. By the time you hit the 40th year, the iPhone hadn’t arrived, Netflix wasn’t there, nor Bitcoin nor Amazon AWS [Amazon Web Services, the company’s cloud computing platform]. And then if you come today to the 54th year, you have all those things, plus you have driverless cars and cashier-less stores. To be in the 54th year is to have the opportunity to use advanced technology that is improving dramatically.
From a strategy perspective, the context is dramatically different than it was just a few years ago. Many strategy tools are less useful than they were a decade ago. Take retailers who used cost analysis and did not enter e-commerce because cost analysis essentially said that the economics of home delivery and returns are horrible, so don’t do it. They looked at mobile apps and concluded the same thing: the economics don’t work, so don’t do it. Now, five years later, the market caps of many of these retailers is a fifth of what it was, and Amazon, their competitor, is five times what it was. If you use yesterday’s strategy tools in the 54th year of Moore’s law, you can get into trouble.
Secondly, today you have to rethink the business that you’re in. That’s a fundamental question. Industry definitions are not just blurring; they’re in fact collapsing. Take Amazon. What business is it really in? It’s not an online retailer, because it lets competitors sell on its site. It’s not an e-commerce platform, because it doesn’t make its real money there. I’m not sure it’s a media company like Netflix, even though it has Prime Video and Prime Music and Twitch, which even Netflix does not have. It is not a search engine like Google, although it’s the number one place now for product search. AWS, the biggest source of its profits—how does it fit into the definition of its business? What about Alexa?
Classical strategy would tell us to focus in an industry. But now in the 54th year, you may need to operate in multiple segments of multiple industries.
Q: It sounds like the transformations of the last 10 years—the emergence of the iPhone, Netflix, the whole app economy that is a big part of our lives—is not a coincidence. It was made possible by Moore’s law reaching a certain threshold.
Yes, you are correct. Technology hit a level of performance and enabled entrepreneurs to launch a host of innovative products—including iPhone, Amazon, and AWS. 3D printing starts becoming mainstream, Netflix is born, Kindle, Bitcoin. 3D movies are revolutionized with that special camera that, if you recall, the film Avatar used. And this was all happening despite a market crash around that time.
We then get a virtuous cycle. Some of these innovations enable others. The iPhone, for example, becomes an innovation platform. Without the iPhone, Uber wouldn’t exist. Ninety percent of Facebook’s revenues come from smartphones, so Facebook wouldn’t be viable.
We used to live in a world where things progressed on an incremental basis. There were things like experience curves being taught in business schools and practiced in the real world. Then, the world starts shifting to Moore’s law, which begins its domination of business. There was this article about software eating the world. All these things are happening roughly 10 years ago. You are absolutely right to see that as an inflection point.
Q: You work with a variety of big companies to develop digital strategies and create apps. How are companies thinking about technology today?
Everyone wants to innovate. Everyone understands the need for digital transformation.
If you look at the landscape, there is a spectrum of practice. There are fundamental innovators like Salesforce.com and Amazon. These companies innovate with products and also with their business models. The leader, of course, is Amazon. It identifies a customer problem or opportunity and sees if it can solve it using technology. It doesn’t care if the opportunity is in retail or some other industry. It is industry agnostic—it’s just going wherever its customer proposition and technology can take it.
Second, you see companies that are innovating but their competitors are doing the same things. They’re making the life of the customer easier but achieving little differentiation. Hotels, airlines, and banks have similar apps. Over 98% of the features they offer are virtually identical. What they are doing is necessary. But it is insufficient. That’s because it is really hard to achieve differentiation while operating within the strict definition of an existing industry and using the frameworks of that industry.
“You need to place many bets because uncertainty is increasing. We lived in a world where things were kind of stable, but now things are exploding.”
Finally, you have companies that want to innovate but they’re not comfortable with technology at the senior levels. They delegate digital to the CIO, or they hire millennials because presumably they are technology natives, and they let them do it. They are doing work—like running Facebook posts or integrating third-party platforms – but unfortunately, given the centrality of technology now, they are not thinking deeply enough about how technology will shape their future.
Q: Are incumbent companies at a disadvantage to companies that began in this era, when it comes to figuring out how to take advantage of technology?
Incumbents have huge advantages. The biggest advantage is customers and distribution. They have them and new companies don’t. The technology is finally there to do fundamentally new stuff for these customers. But you have to think about customer needs differently—existing ways of gaining insights often don’t work. In the white paper, we discuss how to think differently, and suggest half a dozen ways to think about customer opportunities.
Q: In the white paper, you recommend an internal venture capital approach for companies investing in technology. Do you think that companies are too risk averse in the way that they are placing their bets on technology? That they’re not willing to try a bunch of different things at once and accept that nobody really knows which ones are going to pay off?
There is clearly risk aversion. There is also a lack of knowledge on how to organize around technology. Many established companies don’t do the things that are done in Silicon Valley—one- or two-person teams that have complete autonomy.
You need to place many bets because uncertainty is increasing. We lived in a world where things were kind of stable, but now things are exploding. Not only is it Moore’s law, but also Metcalfe’s Law, which speaks to network effects and powers companies like Facebook. These nonlinear laws increase uncertainty.
Wall Street diversifies its portfolio because no one has a crystal ball. In the same way, you should diversify by placing multiple bets with agile teams; many will fail, but those that succeed, will succeed big.
The traditional way of managing uncertainty was with tools like scenario planning. That doesn’t work because the world is now changing so fast and in such dramatic ways. A portfolio of agile teams is a terrific way to manage uncertainty.
Q: You just said that it’s not possible to predict the future, but I’m still going to ask you: do you have any guess about which technologies will be transformative in 10 years, at the end of the 2020s?
Well, in 10 years we will be in the 64th year of Moore’s law. We don’t know the future of Moore’s law. Will its cadence slow? Will it die, as some predict? Will we see quantum computing, as some anticipate?
Let’s assume that Moore’s law continues. So, we may have four or five doubles of chip densities. Computing power and all related technologies would then become incredibly powerful. And by the way, even if Moore’s law fails, many technologies will still improve dramatically, because we have moved to a multi-factor world. We are seeing advances in things like software that are independent of improvements in chip density.
The core prediction, or maybe I should say the core speculation since it’s difficult to predict the future accurately, is that multiple technologies will become super-advanced. Already they are performing at high levels. Just take AI. The best AIs are achieving human-level performance in many areas—speech recognition and so on. What could they do in 10 years?
Let’s think of technology broadly— so not just as blockchain or cloud but applications as well—and speculate. Mobile could be even more transformative. Like today, it would offer a cluster of technologies like AI and machine learning and augmented reality, except they would be ultra-advanced. Businesses would deploy these technologies in their apps to innovate in ways that we haven’t imagined. Just as iPhones 3 and 4 enabled Uber and Facebook, what could an iPhone 22 enable?
Maybe the driverless car transforms the world, just as the highway system did. It could change the structure of multiple industries: hotels, airlines, entertainment, insurance. It could become a platform. What businesses might it enable?
Technologies that connect businesses—Application Programing Interfaces or APIs, Software Development Kits or SDKs, and so on—could transform companies. They could change the nature of the corporation. I am thinking of economic theory—the transaction cost theory of the firm. These connecting technologies could reduce transaction costs to the point that you may have to re-think what you do within a firm and what you do outside. That would be transformative.
Often, for a technology to be transformative, its performance and costs have to change dramatically. Since that will be happening with numerous technologies, it’s reasonable to say that multiple technologies will be transformative. That could change the world in explosive ways in a very short period.