I studied physics in college, but I’ve never particularly used it other than for the occasional IKEA project.
When you think about it though, physics can be used to describe certain business and market trends. For example, classical mechanics provides a unique perspective when analyzing the lifecycle of technological innovations, particularly those from established companies.
Let’s borrow three physics concepts for the purposes of this article: potential energy, defined here as the value of the innovation based on its position in the ecosystem; kinetic energy, as the value of the innovation based on its use; and work, as the productivity when potential energy is converted to kinetic energy.
When viewed through this lens successful innovations follow a fairly typical pattern in their early phases:
- The company wants the maximum potential energy at announcement time. In other words, roll the biggest possible boulder off the largest possible cliff. While startups pitch their ideas, established companies work in deep secrecy right up to the announcement.
- As the boulder rolls down the cliff and the initial potential energy is converted to kinetic, the company has a window of high profitability. Customers experience productivity gains as the potential of the innovation is converted to kinetic energy.
- Competition begins chase and uses the advantage of drafting to catch and possibly even slingshot past the original innovator.
- The innovator will attempt to reclaim some potential energy to push the boulder back up the hill with a series of incremental enhancements. These will be met with diminishing returns.
- The public will lose interest. Nature abhors a vacuum — and realized potential bores the street.
A clear recent example is the iPhone. Let’s follow its early phase:
- It all starts with Steve Jobs’ announcement of the iPhone. The room is crackling with potential energy!
- The iPhone becomes ubiquitous and Apple reaps record profits.
- Android swoops in and, arguably, surpasses the iPhone both technically and in raw sales numbers.
- Each new iPhone release is met with less fanfare and less revenue. The iPhone 5 is particularly disappointing.
- Apple’s stock price drops 300 points in the last twelve months.
Now, this pattern may feel discouraging, but does that mean Apple regrets the iPhone? Hardly. It’s been proven to be one of the most significant innovations of the early 21st century, providing incredible productivity for its users and tremendous benefits to Apple.
Most technological innovations follow this same rough pattern. What’s changed dramatically, however, is the length of an innovation’s lifespan. Just compare the lifecycle of the telegraph to that of the CD. The telegraph came out in 1837 and was still in use during WWII, while the CD came out in 1982 and began to lose its appeal as early as 2001 when the iPod was introduced.
What about when an innovation goes kinetic and its worth is predominately based on what it currently does rather than what it may do in the future? In a subsequent blog, we’ll take a look at this late phase of innovation, concentrating on the IBM mainframe as our example.