The Digital Paradigm Shift and the Belief in Magic

shutterstock_27629083_Blue_BallsIn 2007 the world started to feel the rumblings that its platelets were beginning to move. It had an experience like this 10 years before with the dot-com bubble starting to emerge. Fuelled by the expectation that an uncapped revenue source had just been discovered; the dot-com bubble begun to inflate affirmed by Metcalfe’s Law where the number of possible connections will continue to increase, and as the markets believed; translate to supernormal profits. This is when the belief in  ‘e-magic’ started to infiltrate the capital markets forgetting about the basics of business where profits, or the plan to make them, are actually what allows businesses to aspire to scale and grow with a sustainable goal. The e-business models of the time; or more realistically, ‘e-business ideas’ still hadn’t worked out how they could turn connections into a revenue flow where value could be sustained. However, to be fair, they didn’t need to while the market and its money people were high on ‘magic happening’.

Magic was still in the air in the American summer of 2000 led by the corporate giant Enron – the king of making magic happen.  This is when their share price was trading as high as US$90, but alas it didn’t sustain, as by December 2001, the magic-making king had fallen.  A company that had transformed from being a pipeline and power company with a focus on ‘hard assets’, had become an ‘asset light’ company (an e-energy magic type) that was previously worth US$75 billion, had filed for bankruptcy and its shares were worthless. The magic from the market had disappeared and reality briefly showed its face. But as much as people gasped and claimed to not believe in magic anymore, the world didn’t seem to learn. Magic was still lingering in the air.

The world didn’t need to wait long for the magic to swirl again. This magic was yet another ‘e-type’ that propelled its effects globally like an unsuspecting disease with the fall of the sub-prime mortgage market. All in the name of innovation, the magic making people were allowed to run wild, break rules (or have them dissolved) on the principle that housing prices will never fall. Once again magic replaced the laws governing the rise and fall of the market (something to do with supply and demand, plus a little emotion); and mortgages could be offered to everyone without having a reasonable capacity to pay. Based on the magic principles, loans could then be bundled and resold into the global financial streams connected by the new and magical digital threads that seem to make them go away and return spun gold threads in the guise of commissions and incentives based on the industrial age scale of volume and numbers.  And amazingly enough the magic was so strong that rating agencies believed that the securities were unlikely to default; but like all things that are too good to be true, the result was devastating for ‘real’ people and spread through the newly globally interconnected world. No longer could organisations and nations think that what happened within their walls would stay within their walls or that they would be shielded from the effects of the social and economic consequences of their actions.  Connectivity and transparency through the interconnected global network underpinned by the principles of Metcalfe’s Law had changed things. By July 2007, the platelets were moving and the world was shifting to the next step in its evolution. The industrial age and all that it entailed in its fragmented and siloed world was gone. The next paradigm dimension was beginning to emerge.

However, once again there is a sense that magic is still brewing somewhere. We are seeing glimpses of it when we consider the fundamentals behind the Australian housing price growth that just seems to go up based on the principle that housing prices will never fall regardless of the forces that are sitting behind it – history shows that they can change suddenly in a connected world with significant society and economic effects. We also need to think about the highs of the mining boom that saw an amazing spike in Australia’s fortunes when the rest of the world was reeling from the global interconnected financial effects. Behind the supernormal profits was an efficiency deficiency that contravened the digital and technology global effects that are now infiltrating business thinking where transaction costs should be falling and productivity rising and not the effect in reverse. And then we need to look to economies such as China to understand what the effects behind such a miraculous growth are and what beyond its manufacturing is based on lasting value without succumbing to a negative financial effect that will, like the GFC have significant ‘real’ effects in the now connected world. Something says that there is no magic to swirl here.

We then turn to some of the latest digital and technology tools, applications and materials such as: cloud computing; embedded devices; mobile and wearable technology; robotics; social media; 3-D printing (additive manufacturing); graphene R&D;  and, the growing analytical capability delivered by expanding data sources. We need to make sure that we don’t see any magic here. These tools, applications and materials can only be applied effectively with a ‘practical’ benefit gain to a customer (delivered through the value chain) that then in turn adds-value to a business proposition. Care needs to be taken to not dip into a big data ‘magic bag’ as there is no such data magic to be drawn.  The value of data (and its windows of opportunity) can only be attributed from knowing its origins and as we have seen from the lack of knowledge about the residential mortgage-backed securities (RMBS) that spurred the sickness of the GFC, data source knowledge is integral. Magic doesn’t have a role here; this is about rolling the facts, seeing the potential, then fitting the solution.

History is clearly showing us that there is no such thing as magic (unless of course you are Dynamo who appears to be creating magic). Managing through the digital paradigm shift is about hard work and will be demanding of intelligence and not just applying the digital and technology tools. The industrial age premise of volume and numbers is disappearing and not because magic was involved; but because of the access to new tools and knowledge that are driving the power of ‘connectivity’ and ‘transparency’.  In the end, there is no value in believing in magic and there won’t be in the future – but we may suffer more severe consequences if we think ‘magic happens’ (excluding your love life of course – that is a different story).