Executive Summary
Policy Document 79
April 2015
The Network Effect
We are living in a networked
society. People, devices, organisations and markets are increasingly interconnected through data
and digital technology. This leads
to a double network effect on the
environment in which organisations operate: a disrupted market
and an accelerating pace of
change. The disruptive effect is
illustrated by the unsettling impact
that network-driven innovators
such as AirBnB, Netflix and
Uber are having on the value of
incumbents, while the increasing
speed at which information and
innovations are distributed across
the world is evidence of the acceleration effect.
For many traditional industries,
the new competitive environment
is bringing about a culture shock.
It is in essence the disoriented
feeling one has when dealing
with a culture that has a different
language, unusual habits and a
distinct way of doing things. As
such, businesses will need to
change internally in order keep
up with what is happening externally. These businesses will in fact
have to implement the very thing
that threatens them: thinking as a
network.
The Network Effect:
Doing business in times of disruption
We are living in a networked society. People, user devices and organisations are increasingly interconnected via complex and continually changing networks.
This process of network formation has a profound effect on the functioning and the
success of businesses. Hyperconnectivity leads to hypercompetition. New, so-called
“disruptive” innovations are restructuring entire markets from the ground up and are
threatening the value built up over many years by traditional players. Where does this
trend originate? What can we learn from the way in which networks function? And
how can organisations rediscover themselves so that they may prosper in a network
economy?
1. Welcome to our network
We can date the tipping point at which we became a network society - in the West,
at least - to around the turn of the millennium. This was the point at which the internet went mainstream and began connecting ever greater numbers of households
and organisations with each other. With the arrival of mobile internet, our world was
expanded, accelerated and “compressed” into a hyperconnected society. People and
organisations became nodes in an “always-online” network.
1.1 Network of individuals
In addition to connecting us to a wealth of information (and disinformation), the internet
also connects us to each other. The heart of these connections is formed by digital
platforms and internet applications (apps) which organically route digital arteries between us and other people. Information is constantly flowing through these arteries,
especially via social media and digital forums. The statistics in Figure 1 show how
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widespread the success of these platforms has been. In Western Europe, close to half
the population (44%) is active on these platforms1, which have long since outgrown
their status as youth forums and now form an integral part of the social world of more
and more individuals.
1,184 M
FACEBOOK
400 M
WHATSAPP
Figure 1:
Largest social networks in the West as per 1
January 2014 (in millions)
Source: Global Digital Statistics, wearesocial.
net
GOOGLE+
LINKEDIN
300 M
259 M
TWITTER
232 M
TUMBLR
230 M
The average Facebook user has 300 friends, each of whom has an average of 300
friends of their own. This enables information to be spread very quickly from one network to another. In a traditional communication model, the flow of information is slower
because it is transmitted via a series of linear, one-to-one contacts. In a network, information is spread exponentially via countless connections. Popular content can “go
viral” and can even be distributed globally. In just a few mouse clicks, we can now
reach anyone in the world.
1.2 Network of objects
‘Beacons’ integrate online and
offline worlds
A striking example of how the internet of things is starting to become
part of our everyday social world
is found in beacons: sensors located in shopping streets or buildings that communicate with your
smartphone as soon as you are
in range. This makes it possible to
provide someone information - if so
desired - based on his or her needs
or situation. Examples include personalised flight information upon
your arrival at the airport and special product offers the moment you
enter a shop. This could mean the
end of billboards and information
announcements.
In addition to individuals, more and more devices are functioning as connection nodes.
The so-called “internet of things” is a network of physical objects that can receive information from their environment and/or transmit information about themselves via onboard sensors, cameras and data technology. Two-thirds of all new devices today are
connected to their environment. It is projected that, by 2020, about 30 billion devices
will be connected to the internet (McKinsey & Company, 2014). The line separating
online and offline is becoming razor-thin (see box).
The “network of things” also requires a (cross-sector) network of society. Let’s take selfdriving cars as an example. This innovation requires more than just proper coordination between the automotive industry and the IT sector. To make systems standardisation possible, proper cooperation among manufacturers is required as well, and
regulatory traffic authorities, legislative branches and the insurance sector also need to
cooperate with one another.
1.3 Mega networks
The lifeblood of the many networks that connect people, objects and sectors consists
of information: data transmitted by devices, commercial transactions, social media
content, etc. The vast majority of information exchanged on the network is done so via
1 Global digital statistics, www.wearesocial.net.
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a handful of mega networks. In 2015, these mega networks were lumped together under the acronym GAFAA: Google, Apple, Facebook, Amazon and Alibaba. They serve
as platforms along which billions of connections are routed.
Competition to become the dominant platform is fierce, for the commitment is great.
Indeed, new applications can scarcely afford to be incompatible with the major players,
so they implant themselves in these mega networks, which in turn become even larger
and more influential.
In this way, these large platforms are becoming the gatekeepers of the network society.
When you use a Facebook profile to register for an event, or even to make a doctor’s appointment, Facebook assumes the role of identity verifier - a role which at one
time was reserved for the government. This has ethical implications (both positive and
negative) that we are not going to address here2. We simply want to emphasise the farreaching influence of mega platforms and point out that the impact of digital networking reaches beyond the virtual world.
2. Double network effect
It should be clear that connectivity is permeating our social world at ever deeper levels,
and this comes with economic repercussions. We can illustrate this by means of the
double network effect: a disruptive market and an accelerated pace of change.
2.1 From destruction to disruption
The term “creative destruction” was popularised by Austrian economist Joseph
Schumpeter (1883-1950). Following on the work of Karl Marx, he pointed to the process of value destruction, which is an inherent part of capitalism and innovation. New
production methods, markets, organisational models and innovations trigger an economic transformation whereby the new destroys the value of the old. The typewriter
lost its value with the arrival of the personal computer, digital photography destroyed
the value of analogue photographic products, and popular websites and video sites
are today eroding the value of advert space in magazines. The process of creative destruction also eats away at the value of businesses themselves when these fail to keep
pace with new technologies and markets. Blackberry and Nokia are notable losers in
the wake of the creative destruction initiated by the smartphone, and in particular by
the “app market” that followed.
The industrial revolutions of the 18th and 19th centuries introduced creative destruction on a large scale for the first time. Mass production resulted in a decrease in the
demand for cottage industries. The invention of the combustion engine signalled the
beginning of the end for horse transport. Today, computerisation and network formation are the drivers behind a creative destruction 2.0: disruptive innovations.
In the late 1990s, Harvard Professor Clayton Christensen introduced us to the term
“disruption” in his book The Innovator’s Dilemma. He used this term to describe a
2 The VPRO report entitled Hoezo samen delen? (What do you mean, sharing?) of 30 November
2014 explores this in greater depth.
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Disruption in the automotive
sector
A fuel-efficient engine is an example of a “sustaining innovation”: cars
become more efficient and less expensive to use, but no new markets
are opened up and no existing ones
are destroyed. The self-driving car,
however, could very well turn out to
be a disruptive innovation for the automotive industry, and especially for
those sectors in which value is focused on human-driven cars: driving schools, insurance companies,
body shops, road sign manufacturers, etc. Should a fully self-driving
car become the norm, the value of
these sectors will be challenged, either directly or indirectly.
One man’s loss...
In 2011, the photographic icon
Kodak filed for bankruptcy. At one
time, Kodak was the market leader
in photographic products and employed more than 60,000 people.
In 1976, the company accounted
for 90% of all rolls of film and 85% of
all cameras sold in the United States
(Wikipedia). Remarkably, Kodak
was one of the first companies to
experiment with digital photography, yet it never fully pursued the
technology. Barely one year after
Kodak went bankrupt, Facebook
purchased the photo-sharing application Instagram for 1 billion dollars.
Instagram was two years old at the
time.
Figure 2:
Adoption accelerated by a disruptive market.
Source: Downes & Nunes 2013
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modern-day form of destruction caused by innovation. “Disruptive innovations” are
products or services that create new markets and value chains, thereby (unintentionally) making old markets disappear (Clayton Christensen Institute, www.christenseninstitute.org). This contrasts with “sustaining innovations”, which are aimed at improving
existing products and processes (see box, upper left). The disruptive power comes not
so much from the technologies themselves as from the accessibility of innovative products to the public at large. The first computer ever produced had no disruptive effect
on the market. But such was not the case with the personal computer from IBM, which
turned it into a general use product and in the process created an entirely new market.
Disruptive innovations ride the wave of the exponentially expanding capacities of (digital) technology and networks. With a computer, an internet connection, some opensource software and a $99 enrolment fee, you can now sell your own application via
the App Store of Apple. Not every application sold there revolutionises the market, but
the chance of this happening is greater now that millions of people around the globe
possess the means to both develop and distribute technology.
Due to this network of individual innovators, the pool of innovation is at least ten times
larger today than it was back when only established companies with large capital reserves were capable of launching innovative products. The innovation network moreover can develop at a fraction of the cost that was needed to develop new technologies
in the past. Via the combination of a larger innovation network and lower development
costs, the innovation potential is now 100 times greater than it used to be (McQuivey,
2011). Network formation thus has a disruptive effect because the competitive threat is
100 times greater. At times this effect can be quite apparent, as in the near simultaneous decline of Kodak and success of Instagram (see box, lower left).
2.2 Accelerated pace of change
Disruption is basically a network-driven process of accelerated innovation. The process itself is not new, but the speed and scale of its impact certainly are. Figure 2 illustrates the increasing speed with which disruptive innovations are being adopted by the
public today. In the traditional adoption curve introduced by Everett Rogers (Diffusion
of Innovations, 1962), innovations are adopted gradually via five market segments.
Disruptive market
Trial
Users
Everybody
Else
Innovators Early Adopters Early Majority
Traditional market segmentation (Rogers, 1962)
Late Majority
Laggards
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This bell curve has since given way to a more-than-symbolic shark’s fin that has just
two market segments: a limited group of early birds and everyone else (Downes &
Nunes, 2013).
One the one hand, this means that new players can very quickly capture markets. Established names must be on the lookout for competition - often from outside the sector
- that could threaten their value in an instant.
Yet this disruptive environment implies that new innovations have a much shorter lifecycle because the market becomes saturated more quickly. Businesses - including
newer, trendy players - that spend too much time milking the success of their bestselling products risk going under before too long. In their work on creative destruction,
Foster and Kaplan point to the declining life span of businesses. In the 1960s, the average life span of a company on the S&P 500 index was over 60 years. Today it is less
than 20. If this trend continues, the average life span of these companies will be just 10
years by the year 2020... (Foster & Kaplan, 2001; cf. figure 3).
The network effect is making it more difficult to remain successful over the long term.
One of the reasons for the declining life span of large companies is that “disruptive” innovations frequently originate outside the sector. Just take the effect that the computer
giant Apple has had on the music industry (iTunes) or the impact of the Google search
engine on publishers of encyclopaedias or road maps. This often involves brand-new
players who - cleverly capitalising on network formation - do damage to established
companies by means of an alternative business model. We list a few striking examples
of these new companies in the box to the right.
Disruptive network players
With 1 million reservations per day,
Airbnb (2008) is the world’s largest provider of lodging - and it
doesn’t own a single hotel. The
company’s value resides in a global
network of private individuals that
make rooms available to others.
Uber (2009) is a technology firm
offering passenger transport and
courier services via a network of
private drivers. In late 2014, the
Wall Street Journal estimated Uber’s
market value at USD 40 billion.
WhatsApp (2009) is an online messaging service with an estimated
500 million users. Facebook (that’s
right, Facebook again) acquired the
app in 2014 for no less than USD
19 billion.
The examples cited have the following in common: they are technology-driven, they
are less than 10 years-old and they have become fabulously wealthy by making smart
use of existing and new networks. And though we should not forget that the overwhelming success of these “small” American technology companies is exceptional,
this still demonstrates the impact and the risk posed by disruptive players. Moreover,
there exists a large number of smaller, local businesses that reap success on the basis
of this same network philosophy.
70
60
50
40
Projecties gebaseerd
op huidige gegevens
30
Figure 3:
Declining average life span of S&P 500 companies
20
10
0
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020
2025
Source: Foster & Kaplan (2001) & Duivestein,
Bloem et al. (2014)
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3. First aid for network organisations
The news anchor in all of us
For a long time, news broadcasters were the ones that determined
when there was news to report.
Citizens received updates on the
hour via the radio, and a few newscasts summarised the events of
the day at regular intervals. Today
the stream of news flows non-stop
(VRT, the largest news broadcaster
in Belgium, launched its online
news coverage in 2003), and determining what constitutes news
is no longer the sole domain of
journalists and news broadcasters. They must now share this
role with a network of interconnected citizens, NGOs, bloggers,
etc. A stream of “tweets”, “likes”
and “shares” in part determines
the speed and the nature of news
coverage. “Trending topics” on
social media become news items
themselves in newspapers and in
news broadcasts. To stay relevant,
news broadcasters can no longer
rely solely on their own newsgathering function. They must ride
the wave of coverage propelled by
so many individual news sources
along with everyone else.
3.1 Finger on the pulse
In our earlier description of the network society, we used the example of a heart as an
analogy. Networks are the beating heart of the network society, which branches off
into many smaller digital arteries. We characterised information and data as the blood
which flows through these arteries and gives life to these networks. Let’s take this analogy a step further. It just so happens that a network has a heartbeat, specifically the
interval between the flow of information and the manifestation of change.
In a network society, it is less and less the case that organisations own the information
they process. Increasingly, information is located in “the cloud” and within your network of stakeholders. Companies therefore have less control over their own heartbeat
in a network economy. Today, it’s the network that sets the tempo. One example that
illustrates this is the effect that hyperconnectivity has on news coverage (see box).
In the network economy, the task is to keep your finger on the pulse of the network so
as to monitor the network’s heartbeat at all times and accelerate the pace if needed.
Businesses must synchronise their internal clocks to the external clock of the market
and society, this according to Peter Hinssen in The Network Always Wins (2014). Hinssen is referring to the work of Charles Fine, who in 1998 studied the internal clock of
companies, and specifically the speed with which organisations make decisions and
implement changes.
In the opinion of Hinssen, the external world also has a heartbeat: the speed with
which environments change, markets evolve and the needs of consumers shift. We’ve
already seen that information is spread more quickly in a network. Networks are particle accelerators for the dissemination of information, the processing of knowledge and
the development of innovative processes (Hinssen, 2014). The network society has
an accelerating effect on the external clock of businesses. To survive in the network
society, a business must synchronise its internal clock to that of its environment. It must
succeed in emulating the heartbeat of the network of which it forms a part. For most
companies, this means shifting up a gear.
3.2 Rethink your organisation
Businesses that suddenly find themselves challenged by a quickly changing environment undergo a kind of culture shock: a feeling of disorientation experienced by
travellers when coming into contact with other cultures that maintain very different
customs and beliefs. The most common problems include a surplus of information, a
technology gap and language barriers3.
When talking about the development of a networked society that is driven by the flow
of information, by disruptive technologies and by the use of a digital “lingua franca”,
the comparison with culture shock is not far off - especially for organisations that have
3 Here we characterise culture shock along the same lines as knowledge network Wikipedia.
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a long history and which experienced linear growth based on many years of process
improvement and upscaling. They operated in a mainly linear ecosystem characterised by simplicity, a steady pace and - generally speaking - predictability. But networks
excel at complexity, speed, volatility and uncertainty. “Business as usual” is no longer
an option.
The first step in getting over a culture shock is to accept that the foreign culture is
fundamentally different. In the case of the network society, this means accepting the
fact that the environment which evolves in a steady and linear fashion is disappearing.
Changes and innovations no longer follow a set pattern; they can come from anywhere. The business environment is complex and insecure. Full stop.
The second step is the adjustment phase. Businesses must themselves become networks of creativity if they wish to be part of their networked environment. In the table below, we list a number of recommendations based on the previously cited work
of Peter Hinssen regarding ways in which organisations can increase their agility by
organising themselves internally as a network.
Old static paradigm
Nimble network organisation
Hierarchically organised
Dynamic project organisation
Command & control
Self-managing teams
Career
Individual life projects
Aristocracy (worth based on past accomplishments, e.g. a degree)
Meritocracy (worth based on current
performance)
Vertical mobility
Horizontal mobility
Information is power
To grow, information must be shared
Predefined job description
Open-ended job description
Figure 4:
Static organisations vs. network organisations
You are what you know
You are who you know
Source: Hinssen (2014) & VKW
Adapting to a network environment requires the elimination of as many barriers as
possible that stand in the way of initiative, decision-making and quick action. Organisations cannot be nimble when every action or procedure requires a meeting or approval. Network organisations maintain a kind of permanent “beta status” in which the
structure follows the initiative, and not the other way around. This allows self-managing
teams to make decisions more quickly than they could in a hierarchical structure. Ideally, these teams would decide how to operate themselves based on what works best
for the team members. You are accountable based on the results that you achieve
along with your team.
Whereas the adjustment phase involved learning how to adopt the new culture, the
final phase involves mastering the new culture within the company’s own (corporate)
culture. You cannot overcome culture shock by abandoning your own culture. You
must align it with a new reality. The transformation into a network organisation does
not have to mean an assault on everything that the organisation currently does, and
certainly not on its own values. Surviving in the network society does not mean total
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capitulation to the network. It involves rethinking your business practices from a holistic
point of view. How can we create value for and with the networks of which we form a
part?
To sum up, organisations must reinvent themselves into nimble network communities
in which self-managing teams can come together in support of a shared mission4. For
in a fast-changing, interconnected society where disruptive changes are constantly
lurking right around the corner, static organisations are doomed to failure.
4. Conclusion
Everything is connected to everything else: people, devices, organisations and markets. This is restructuring the environment in which businesses, governments and
non-profit organisations operate today, particularly given the disruptive and accelerating effect that is accompanying the networking of the globe. “Wait and see” is no longer
an option in a world in which information spreads faster than decisions are made. The
solution lies in embracing the new network reality and integrating a network mind-set
into the organisation. This also entails letting go of trusted working methods and certainties, which in turn can require a grieving process for companies that relied on these
trusted models for the successes they accumulated over many years. But as Darwin
demonstrated: it’s not the strongest that survives, but the one that is best able to adapt
to its environment.
References
CHRISTENSEN, C. The Innovator’s Dilemma. Boston: Harvard Business Review Press, 1997.
DOWNES, L. & NUNES, P. Big-Bang Disruption. Boston: Harvard Business Review, 2013.
DUIVESTEIN, BLOEM et al. Design to Disrupt. Sogeti Labs, http://labs.sogeti.com, 2014.
EYNIKEL, J. Megatrends & gamechangers: ondernemen in de samenleving van morgen (Megatrends
& Game Changers: Doing Business in the Society of Tomorrow). Wilrijk: VKW policy memorandum
73, 2014.
FOSTER, R. & KAPLAN, S. Creative Destruction, New York: Doubleday, 2001.
HINSSEN, P. The Network Always Wins. Sint-Martens-Latem: Mach Media, 2014.
Translation realised thanks to:
LALOUX, F. Reinventing Organizations. Brussels: Nelson Parker, 2014.
MCKINSEY & COMPANY. The Internet of Things: Sizing up the opportunity. www.mckinsey.com, 2014.
MCQUIVEY, J. Digital Disruption: Unleashing the Next Wave of Innovation. Las Vegas: Amazon Pub-
www.destiny.be
lishing, 2013.
VPRO TEGENLICHT (2014), Hoezo samen delen? (What do you mean, sharing?), report broadcast on
30 November 2014, http://tegenlicht.vpro.nl
WESSEL, M. & CHRISTENSEN, C. Surviving Disruption. Boston: Harvard Business Review, 2012.
4 An in-depth analysis of companies currently succeeding in doing this can be found in Reinventing Organizations (Laloux F., 2014).
Author: Jochanan Eynikel
Final draft: Isabelle Verlinden
Graphic design: Lieve Swiggers
Photo: nl.123rf.com/Tatiana Popova
Email: [email protected]
Twitter: @jochananTweets
Website: www.vkw.be
Publisher: VKW Ledenwerking vzw
Wettelijk depot D/2015/10.346/2
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