Navigating a world of digital disruption.

Author:Evans, Philip

Digital disruption is not a new phenomenon. But the opportunities and risks it presents shift over time. We are entering the third, and most consequential wave of digital disruption. It has profound implications not only for strategy but also for the structures of companies and industries.

First came the wave of the commercial Internet, the dot-com era, followed by the second wave, Web 2.0, where the important strategic insight was that economies of mass had evaporated for many activities. Now we are on the cusp of the third wave: hyperscaling. Big--really big--is becoming beautiful. At its extreme--where competitive mass is beyond the reach of the individual business unit or company--hyperscaling demands a bold, new architecture for businesses.

These waves of innovation have come one after another, but they have also overlapped and, in many cases, amplified each other. The exemplar of this is Amazon: Jeff Bezos's initial idea was to exploit the Web to deconstruct traditional bookselling.

But that was not a sustainable advantage, so Amazon went on to exploit the emerging economics of community. The Amazon Associates program extracted insights from the behavior of its community of customers and became an early adopter of collaborative filtering algorithms. All these strategies benefited from the network effect the more participants, the more choices; the more reviews, the richer the experience.

Well ahead of others, Amazon also embraced what became the third wave of digital disruption, exploiting opportunities to hyperscale. It built a global network of 80 fulfillment centers and offered fulfillment services as an option for small merchants. In parallel, it built impressive scale into its data centers and brought world-class skill in operating them. It then re-conceptualized its own computing infrastructure as a product in its own right.

From deconstruction, to community curation, to hyperscaling, at no point did Amazon sit back and wait for trends to emerge. Rather, it seized the strategic opportunities presented by each successive wave of disruption, ruthlessly cannibalizing its own business where necessary. Bezos saw business architecture as a strategic variable, not a given. He did not harness technology to the imperatives of his business model; he adapted his business model to the possibilities--and the imperatives--of technology.

The number of Internet-connected devices hit 8.7 billion in 2012. Mobile broadband subscriptions reached...

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