Recently, there was an interesting article in the Harvard Business Review, Does Hardware Even Matter Anymore by Willy C. Shih, that shows the key to success in the future is launching and updating products rather than focusing on the hardware functionality. As Shih points out, “We are in the midst of a technological revolution that is every bit as profound as the impact of cheap computing power, but it’s subtler and harder to notice. It will ease the way for companies launching and updating digital products, but it presents steep new learning curves that companies will have to master if they are to be successful. What I’m referring to is the migration of functionality from hardware to software. In more and more businesses, physical objects are no longer the primary basis for innovation and differentiation. They come second to innovations in computer code.”
While everyone knows and understands Moore’s law about the exponentially decreasing cost of computer hardware, a similar phenomenon with software is driving the creation of billions of dollars of value and challenging traditional business. It is software that allows cars to park (or drive) themselves, it is software that gets you a ride to dinner (Uber), it is software that allows you to rent a stranger’s house in a city while on holiday (Airbnb), it is software that connects you to friends across the world through messages for free (WhatsApp), etc. Software is both revolutionizing traditional industries (like automobiles) and creating new industries (i.e. messaging).
The challenged is controlling all of this power – computing, GPS, machine learning, motion control, sensors, etc. – and creating applications that serve customers. Shih shows that “abstraction” is providing the tools to leverage this situation, with abstraction defined as “the isolation of something’s essential properties so that it can be generalized and reused for wider application.”
Abstraction provides the building blocks for creating and deploying unique uses of technology. An iPad can be such a building block, giving you Internet connectivity with a camera and computer. Uber then uses this building block to create an entirely new business, car-ridesharing. The connectivity allows people to access the service, the camera allows them scan their credit card for seamless payment and the computer works with the cloud based computing to find the nearest car and update the customer on time of arrival. Cloud computing is another abstraction (such as the iPad), as it removed the issue of provisioning computer services.
Why it is important
First, the software-replaces-hardware trend is critical to business strategy as it lowers the barriers to entry to many businesses. This trend represents an opportunity; you can now approach new markets for lower cost/risk. It is also a threat, as smaller competitors can now compromise your once defendable position.
Second, it means more of your product’s differentiation is in the software. Automobiles are a great example, as one of the big selling points Tesla is its powerful and sublime on board computing, not simply the size of the wheels. For television makers, it is the embedded apps rather than the size of the screen.
Third, a much higher proportion of the value of a product will be in the electronics. As As Shih points out, “The Boston Consulting Group estimates that the cost of the electronic parts will rise from 20% of the value in a typical automobile in 2004 to 40% this year. That means a major shift in the supplier network, with consequences that many are not prepared for.”
Fourth, connectivity will be an increasingly important feature in all products, one that helps differentiate them. With the television example, seamlessly connecting to Netflix or Amazon Prime will be a key selling point. A related connectivity issue is security, where security strategy will be core to product design.
Finally, software development is more complex now than ever and becoming increasingly so. It is no longer about creating a great program, but you need to incorporate connectivity, AI, etc., into all applications.
- Although everyone understands how computing power increases by orders of magnitude, what is now driving billions of dollars of value is software improvements and the ability to leverage them.
- Abstraction is using different technologies as building blocks so you can make unique offerings quickly and cheaply without having to create the foundations.
- Success will be based on revising your development strategy to focus on the importance of software, using software to differentiate your product, managing the cost of the underlying electronics, understanding and leveraging connectivity, and managing the increasing complexity of software development.