Great piece. An added dimension is the geopolitical one. Countries and their industrial policies will attempt to crown “winners” among the vertical integrators just as some mega VC funds. The US Government has built such enduring prosperity partially due to its ability to foster the vertical integrators of the past, and along with market penetration, set global technology standards locking in continued growth.
Now the ground has shifted underneath us with the rise of China, the extent of its integration in the global economy, and its tech ambitions tied to its territorial ones. Certainly there are weaknesses inherent in the CCP's system, not the least given its attitude towards key Chinese entrepreneurs that brought such prosperity to China, but it remains quite the force in shaping outcomes of this cycle in my view.
Great series. I love the fact that "capital accumulators" have arrived just as SAAS is dipping in its return that money needs a home. We need to build towards the next horizon! Keep the good pieces coming!
This piece is so enlightening that I almost _don't_ want others to read it. Looking forward to predictions! I'd very much enjoy wild speculations about the potential companies, solutions, and opportunities we can see in this next TEP (perhaps on Twitter, if not in the main article)
That article is an important piece of data which should be considered: Disruption theory, and what was misunderstood about it.
Christensen claimed that in a novel tech paradigm products start out as integrated solutions (because novelty and learning, so needs to be done by one company) but over time transition to a modular, distributed approach (think the PC and disk drive companies). An example: Once MS established DOS/Windows as the abstraction layer standard, hardware components (hdd, CD-ROM) got commoditized. And once a modular component reaches a critical performance/price performance point, low end disruption becomes possible and the lower-market dynamics kicks in - because in a B2B context, companies care about lower prices if performance is "good enough". Almost all the disruption examples were B2B cases.
But: Disruption theory turned out to be wrong for consumer businesses (Apple being the case to drive the point home - the iPhone never got disrupted because its integrated ecosystem and great CX provides a lot of value for customers). All successful integrators like Tesla, Apple, Anduril or SpaceX are "consumer" companies. Even though the government is the consumer for some of them. But they all sell the "final" product or service to their customers. The thing is: Nobody in the DoD asked for novel AI-driven tech or reusable rockets as part of a value adding business model that they pursue. Those companies just pushed ahead and built the stuff their are building. Same thing for Tesla: Nobody asked for EVs around the year 2000. Nobody sent Tesla the product specs.
Those products were insanely ambitious (because Elon) - and simply so ambitious that his companies needed to have a high degree of integration, out of necessity. There was simply no supply chain available that was competitive in any shape or form.
But since they all control the eventual consumer product design, they control the full value they can push into the market and deliver to customers. This pretty much determines the degree of integration they require - and can afford.
Hadrian for example does B2B. Their customers are cost-sensitive businesses. Hadrian has no control over the final consumer product its customers build and sell. But it's fair to assume that it's a less ambitious product than a Falcon 9, and hence can capture less value, which translates into more cost-sensitivity along the value chain. That is the limiting factor for the degree of vertical integration, as far as I can tell.
Insanely ambitious products require innovation along the entire value stream. This leads to integration. But that requires "end consumer relations", which is necessary to realize a premium price (through innovation).
After globalisation and offshoring production to China. You suggest. We should produce our own goods by having vertically integrated manufacturing companies again..?
We don't have the supply chains anymore to compete with China, and never will. I think this ship has sailed. The reason is that you need to start at the ground, and dig up material and refine that material, we've shipped all of that to China too. If we don't do that, we'll not have a refining industry as competitive as China, and get outcompeted on global markets (everything ex west ex china is about 33% of global GDP).
As you see happening now with EV's, expect this to happen with everything. China is a different beast from anything we've ever seen in the entire history of mankind. Remember when the USA was scared about Japan taking over the USA economically? Now take Japan, and multiply the population by 13
I found myself thinking about the Theory of Constraints (TOC), popularized by the book "The Goal" by Eliyahu M. Goldratt, and how it might apply to TEP. Couldn't help but ask Claude. Sharing in case you find interesting:
Now, let's delve deeper into how TEP and TOC work together:
Technological Disruption and Constraint Shifting:
When a new Techno-Economic Paradigm emerges, it often shifts the nature of constraints in an industry or economy. For example, the shift to digital technologies changed the constraints from physical production capacity to data processing and network bandwidth. TOC can help identify these new constraints and guide organizations in adapting their processes accordingly.
Innovation Cycles:
TEP describes long waves of innovation and economic development. Within these waves, TOC can be applied to manage shorter innovation cycles. As companies adopt new technologies, they can use TOC to iteratively identify and address constraints, driving continuous innovation within the broader paradigm shift.
Organizational Learning:
As organizations navigate a new TEP, they must learn new skills and ways of operating. TOC's focus on continuous improvement aligns well with this need for organizational learning. It provides a structured approach to identifying what needs to be learned (i.e., what knowledge or skills are constraining performance) and prioritizing learning efforts.
Supply Chain Transformation:
New TEPs often revolutionize supply chains. For instance, the current digital paradigm has enabled global, highly responsive supply networks. TOC's concepts, particularly the "Theory of Constraints Supply Chain Solution," can guide the optimization of these new supply chain structures, ensuring they fully leverage the capabilities of new technologies.
Financial Decision Making:
TEPs often change the economics of businesses, altering which investments deliver the best returns. TOC's "Throughput Accounting" principles can help companies adapt their financial decision-making processes to the new paradigm, focusing on investments that alleviate key constraints and maximize overall system performance.
Managing Paradigm Transitions:
During the transition between TEPs, companies often need to operate in two paradigms simultaneously (e.g., traditional and digital business models). TOC can help manage this complexity by providing a framework for identifying and managing constraints across both old and new operational models.
Socio-Technical Systems:
TEPs affect not just technology but also social and institutional structures. TOC, while often applied to technical systems, can also be used to identify and address constraints in social systems. This holistic approach can help organizations and societies better adapt to the full spectrum of changes brought by a new TEP.
Policy and Regulation:
As new TEPs emerge, policy and regulatory frameworks often lag behind. TOC thinking can be applied at a macro level to identify regulatory constraints that are hindering the development of the new paradigm, guiding policymakers in updating frameworks to support innovation and economic growth.
By combining the broad, long-term perspective of TEP with the practical, system-optimization approach of TOC, organizations and policymakers can more effectively navigate technological revolutions. This combination provides both a strategic vision of where technology and the economy are heading, and a tactical approach to optimizing performance and driving innovation within that broader context.
Great piece. An added dimension is the geopolitical one. Countries and their industrial policies will attempt to crown “winners” among the vertical integrators just as some mega VC funds. The US Government has built such enduring prosperity partially due to its ability to foster the vertical integrators of the past, and along with market penetration, set global technology standards locking in continued growth.
Now the ground has shifted underneath us with the rise of China, the extent of its integration in the global economy, and its tech ambitions tied to its territorial ones. Certainly there are weaknesses inherent in the CCP's system, not the least given its attitude towards key Chinese entrepreneurs that brought such prosperity to China, but it remains quite the force in shaping outcomes of this cycle in my view.
Great series. I love the fact that "capital accumulators" have arrived just as SAAS is dipping in its return that money needs a home. We need to build towards the next horizon! Keep the good pieces coming!
This piece is so enlightening that I almost _don't_ want others to read it. Looking forward to predictions! I'd very much enjoy wild speculations about the potential companies, solutions, and opportunities we can see in this next TEP (perhaps on Twitter, if not in the main article)
Long, but informational. Thanks for sharing, Packy!
Highly enlightening. Well done.
Love this. Somehow I missed Part 1, so went back. Part 2, a masterclass. Followed a lot of links. A good morning, NOT wasted.
Happy to hear it, Chris!
REALLY BORING!!!
https://stratechery.com/2013/clayton-christensen-got-wrong/
That article is an important piece of data which should be considered: Disruption theory, and what was misunderstood about it.
Christensen claimed that in a novel tech paradigm products start out as integrated solutions (because novelty and learning, so needs to be done by one company) but over time transition to a modular, distributed approach (think the PC and disk drive companies). An example: Once MS established DOS/Windows as the abstraction layer standard, hardware components (hdd, CD-ROM) got commoditized. And once a modular component reaches a critical performance/price performance point, low end disruption becomes possible and the lower-market dynamics kicks in - because in a B2B context, companies care about lower prices if performance is "good enough". Almost all the disruption examples were B2B cases.
But: Disruption theory turned out to be wrong for consumer businesses (Apple being the case to drive the point home - the iPhone never got disrupted because its integrated ecosystem and great CX provides a lot of value for customers). All successful integrators like Tesla, Apple, Anduril or SpaceX are "consumer" companies. Even though the government is the consumer for some of them. But they all sell the "final" product or service to their customers. The thing is: Nobody in the DoD asked for novel AI-driven tech or reusable rockets as part of a value adding business model that they pursue. Those companies just pushed ahead and built the stuff their are building. Same thing for Tesla: Nobody asked for EVs around the year 2000. Nobody sent Tesla the product specs.
Those products were insanely ambitious (because Elon) - and simply so ambitious that his companies needed to have a high degree of integration, out of necessity. There was simply no supply chain available that was competitive in any shape or form.
But since they all control the eventual consumer product design, they control the full value they can push into the market and deliver to customers. This pretty much determines the degree of integration they require - and can afford.
Hadrian for example does B2B. Their customers are cost-sensitive businesses. Hadrian has no control over the final consumer product its customers build and sell. But it's fair to assume that it's a less ambitious product than a Falcon 9, and hence can capture less value, which translates into more cost-sensitivity along the value chain. That is the limiting factor for the degree of vertical integration, as far as I can tell.
Insanely ambitious products require innovation along the entire value stream. This leads to integration. But that requires "end consumer relations", which is necessary to realize a premium price (through innovation).
After globalisation and offshoring production to China. You suggest. We should produce our own goods by having vertically integrated manufacturing companies again..?
We don't have the supply chains anymore to compete with China, and never will. I think this ship has sailed. The reason is that you need to start at the ground, and dig up material and refine that material, we've shipped all of that to China too. If we don't do that, we'll not have a refining industry as competitive as China, and get outcompeted on global markets (everything ex west ex china is about 33% of global GDP).
As you see happening now with EV's, expect this to happen with everything. China is a different beast from anything we've ever seen in the entire history of mankind. Remember when the USA was scared about Japan taking over the USA economically? Now take Japan, and multiply the population by 13
Excellent.
I found myself thinking about the Theory of Constraints (TOC), popularized by the book "The Goal" by Eliyahu M. Goldratt, and how it might apply to TEP. Couldn't help but ask Claude. Sharing in case you find interesting:
Now, let's delve deeper into how TEP and TOC work together:
Technological Disruption and Constraint Shifting:
When a new Techno-Economic Paradigm emerges, it often shifts the nature of constraints in an industry or economy. For example, the shift to digital technologies changed the constraints from physical production capacity to data processing and network bandwidth. TOC can help identify these new constraints and guide organizations in adapting their processes accordingly.
Innovation Cycles:
TEP describes long waves of innovation and economic development. Within these waves, TOC can be applied to manage shorter innovation cycles. As companies adopt new technologies, they can use TOC to iteratively identify and address constraints, driving continuous innovation within the broader paradigm shift.
Organizational Learning:
As organizations navigate a new TEP, they must learn new skills and ways of operating. TOC's focus on continuous improvement aligns well with this need for organizational learning. It provides a structured approach to identifying what needs to be learned (i.e., what knowledge or skills are constraining performance) and prioritizing learning efforts.
Supply Chain Transformation:
New TEPs often revolutionize supply chains. For instance, the current digital paradigm has enabled global, highly responsive supply networks. TOC's concepts, particularly the "Theory of Constraints Supply Chain Solution," can guide the optimization of these new supply chain structures, ensuring they fully leverage the capabilities of new technologies.
Financial Decision Making:
TEPs often change the economics of businesses, altering which investments deliver the best returns. TOC's "Throughput Accounting" principles can help companies adapt their financial decision-making processes to the new paradigm, focusing on investments that alleviate key constraints and maximize overall system performance.
Managing Paradigm Transitions:
During the transition between TEPs, companies often need to operate in two paradigms simultaneously (e.g., traditional and digital business models). TOC can help manage this complexity by providing a framework for identifying and managing constraints across both old and new operational models.
Socio-Technical Systems:
TEPs affect not just technology but also social and institutional structures. TOC, while often applied to technical systems, can also be used to identify and address constraints in social systems. This holistic approach can help organizations and societies better adapt to the full spectrum of changes brought by a new TEP.
Policy and Regulation:
As new TEPs emerge, policy and regulatory frameworks often lag behind. TOC thinking can be applied at a macro level to identify regulatory constraints that are hindering the development of the new paradigm, guiding policymakers in updating frameworks to support innovation and economic growth.
By combining the broad, long-term perspective of TEP with the practical, system-optimization approach of TOC, organizations and policymakers can more effectively navigate technological revolutions. This combination provides both a strategic vision of where technology and the economy are heading, and a tactical approach to optimizing performance and driving innovation within that broader context.
many great points.....incumbents forget, all costs are sunk costs
https://open.substack.com/pub/emilyalexandraguglielmo/p/meaning-of-god-part2?r=2mtps5&utm_medium=ios
Love this post! You are always enlightening.
FYI, the link to "A dynamic model of process and product innovation" is broken
Shouldn’t this article be in Wired magazine…. Or something more technical? I have NO IDEA what you were talking about! Yikes!!!