We offer you this glimpse into the major trends in the technology industry, and an overview of the capabilities needed to succeed as those trends gather speed in the years ahead.

Past Is Prologue

The technology industry has long been characterized by change, but 2011 stands out as a year of shocks and surprises — and we expect more in 2012. Former industry leaders have been stumbling in the face of missed trends, while others have made enormous gains in creating new value. Asian players like Samsung, Huawei, and HTC are rising fast, even as service disasters humble several established providers. And many of the largest global companies have faced unprecedented leadership challenges.

Against this backdrop of crisis and chaos, the main trends that we observed at this time last year continued unabated throughout 2011, and we expect they will continue to be important throughout 2012.

Digitization — the pervasive adoption of connected, cloud, and mobile technologies across industries — is transforming every company’s interactions with its customers, its suppliers, and its global talent. This is playing out in several ways. Consumerization has penetrated further into the enterprise technology ecosystem, with Apple and Android-based smartphones and tablets gaining traction and eating into corporate sales of PCs. The use of social media is increasing both within the enterprise and as a tool for marketing and sales, even as e-commerce offerings are built out further. And no such offerings can thrive anymore without a workable mobile component.

In tandem, the movement toward cloud computing is forcing the technology industry and its customers to rethink established ways of doing business, although most have yet to fully tackle the practical challenge of operating hybrid solutions and handling the transition from their legacy systems to new cloud models, with all the complexity that entails. According to a recent Booz & Company study, 60 percent of small and medium-sized businesses in the U.S. and Europe remain cautious about moving to the cloud. Yet despite concerns about security in the cloud, and the security risks associated with software-based ecosystems, the shift from hardware- to software-based business models is accelerating.

Large players are scrambling to take advantage of these new areas of opportunity quickly by acquiring newer, smaller players — though rapidly rising valuations have slowed this activity somewhat. And the patent wars, particularly over control of critical mobile technologies, have led to renewed large-scale mergers and acquisitions (M&A) — witness Google’s US$12.5 billion acquisition of Motorola Mobility--and fierce legal struggles such as Apple’s successful suit to stop Samsung from selling devices in Germany and Australia. Meanwhile, legislators and regulators have spent much of the year trying to determine what their role in the industry’s evolution should be. Their approach to the industry — whether shaping it, managing it, or leaving it alone — will be a matter of critical concern for information and communications technology (ICT) companies.

Facing an Uncertain Future

These broad industry trends are stimulating a further round of globalization and consolidation as the largest players seek new pastures for growth and a variety of underlying technologies make it possible for them to reach parts of the world previously unconnected. The nature of innovation is changing, with talent, venture capital, and government spending increasingly moving to China, India, and other rapidly emerging economies; indeed, the level of VC investment in China in recent years has reached new highs. Furthermore, innovation is now more likely to happen in the context of ecosystems that cannot be controlled by any single player. The long-heralded era of open innovation and the extended enterprise is clearly upon us; in response, technology companies are redefining themselves in a more extended way, relying on broader ecosystems of partners and collaborators, and adjusting their global supply chains and operations in light of these shifts.

The results, however, have not been entirely positive: To take just one example, the tragic 2011 earthquake and tsunami in Japan provided a stark illustration of the interconnectedness and vulnerability of the global technology supply chain. The resulting production problems cut off delivery of many popular products. In the coming year, large technology companies will be looking to mitigate the effect of these improbable “black swan” events on their operations.

Overall, executives remain bullish about their industry’s growth prospects. Recent Booz & Company interviews with industry leaders worldwide suggest several avenues of growth: Cloud computing and security technologies will be leading drivers, followed closely by the increasing impact of digitization on other industries. Technology companies must develop a wide variety of innovative, industry-specific applications if they are to benefit from these large and untapped profit pools.

At the same time, there is some concern that the ICT industry may not be the primary beneficiary of this trend, but that entirely new players will emerge to grab much of the value now on the table. Will another “Apple moment” occur, perhaps in the field of smart-grid infrastructure or big-data analytics, enabling an unexpected competitor to abscond with much of that new value? Even now, valuations are soaring for several promising new companies in these and other areas.

Urgent: Build Capabilities Now

As these trends gain momentum in 2012, a common theme is beginning to emerge. Established ICT players are discovering that the capabilities that made them leaders in the past will not ensure their success in the future — despite the strong prospects for even greater growth. A shift is taking place, and every company in the industry will need to rethink the importance of the capabilities that defined success in the past, build entirely new ones, and manage this transition in real time while their ongoing businesses are under intense and increasing competitive pressure. The ability to do so will be what separates the future winners from the also-rans. We believe that the following capabilities will be critical for all players in the industry — though their relative importance will vary depending on the sector each company operates in, and its position on the industry value chain. And every company must keep an eye open for additional new capabilities that will emerge as the process of digitization moves forward.

Deep customer insights
The first of these new capabilities is proximity to and insight into the digital consumer — especially Generation C, that cohort of the global population that will begin entering the workforce over the next decade. Already constantly connected through broadband and wireless, and at ease with shopping, consuming, and sharing personal data online, this generation will be the early adopters of new ways of doing things as yet unimagined. Generation C could also stand for China, where the number of Internet users in 2011 was larger than the entire U.S. population. The geographic and cultural diversity of the next generation of consumers will be an important consideration for tech companies. They must have a thorough understanding of demand-side consumer dynamics, which will lead to improvements in innovation and competitiveness — but only if companies are light on their feet in meeting the needs of this generation. A further benefit of this insight is a better understanding of the next generation of talent, how to manage those employees, and the kinds of mobile, connected workplaces and cultures that will let them mix work and life.

Ability to leverage the ecosystem
Technology companies will also need to understand how digitization is transforming the ICT industry ecosystem itself, to reimagine how one’s company fits into it, and to take advantage of the changes. As delivery mechanisms change, companies will have to reassess their interactions with upstream suppliers, downstream sales channels, go-to-market partners, customers, and the extended supply chains that connect it all. The ability to manage the ecosystem is also key to enabling an end-to-end customer experience.

Flexible product portfolios: These emerging capabilities, however, will not bear fruit if high-tech firms cannot bring outstanding products and services to market quickly. The classic technology development cycle on which large companies have long depended is increasingly being outpaced and outsmarted by smaller, more agile firms. Few players can claim that they still provide their customers with workable end-to-end solutions — and their customers increasingly don’t want them anyway. The third critical capability, therefore, will be to operate within a context of increasingly global partnerships, joint ventures, and M&A activity, and to act fast when opportunities to improve the product portfolio arise. This will become especially important as more customers demand open, flexible platforms on which to develop their increasingly digitized businesses.

Compelling vertical strategies
All of these capabilities will be relevant as whole industries are transformed by ubiquitous broadband, mobility, and new platforms, services, and applications. Massive amounts of customer data are becoming available to financial services institutions and retailers; automakers and manufacturers will soon be performing digital prototyping; and every industry will come to rely on entirely paperless supply chains. Thus, a further, equally essential capability for technology companies will be to understand the process by which industry verticals will themselves be digitized, to devise specific strategies for developing the products and services that will serve these vertical needs, and to take action, aligning and mobilizing people and the organization with respect to each vertical the company plans to serve.

This exercise will involve answering potentially far-reaching questions: What does this imply for the ICT industry as it serves each of these verticals? And how will the transition take place? A device manufacturer might, for example, decide to carry out a specific strategy to serve the financial services industry with products and services such as e-wallets and identity and authentication systems. Vertical strategies will be essential if companies are to capture a share of the value that will be created as more and more industries go digital.

Redesigned internal operations: Technology companies would also be wise to shine the light of digitization on themselves, developing a capability that would enable them to look at their own various corporate functions, from IT to human resources to finance, and see how digitization might transform them as well. Business technology at the enterprise level has been dominated over the past two decades by offshoring, outsourcing, and shared services; now it is time for technology companies themselves to apply new technologies to dramatically change how they go about their business. This in turn will help them make the transformation to the extended virtual enterprise. And ultimately, it will give them the experience necessary to sell internal digitization as a service to their own customers as well.

Effective governmental interaction: Finally, given how quickly digitization is taking place — not just in technology but in every industry — it is no surprise that governmental efforts to affect the process are gaining momentum. The Internet is a case in point: The possibility of stronger regulation of both privacy and copyright protection has the potential to affect how personal data is collected and content is created and distributed. And this in turn could have a serious impact on the Internet’s primary economic engine — paid advertising. Similarly, issues involving content, patents, and other forms of intellectual property are affecting not just how companies earn revenues but the M&A landscape as well; Google’s recent purchase of Motorola Mobility, as noted, is widely viewed as a move primarily to control the company’s many valuable mobile telephony patents. In light of such impacts, a final, crucial capability every technology company will need involves ensuring a clear understanding of the policy and legal environment in which it operates, and developing an effective voice for influencing the future course of that environment.

As the trends discussed above become more firmly embedded throughout the technology industry, we are confident that the theme of capability transformation is the right one for ICT industry leaders and their executive teams to ponder over the holiday break. Technology companies must demonstrate a true appreciation of the complex ecosystems, the industry-specific requirements, and the real benefits of digital innovation, and then translate these into the new capabilities that they will need to build (and the old capabilities that will need to be scaled back). Those that successfully take on this task will be the best positioned to capture the value being created in the brave new world of digitization.

We hope this letter has encouraged you to think about the many opportunities opening up in the high-tech sector, and provided some clarity as to what needs to be done next in terms of transforming your firm’s capabilities. We would welcome the opportunity to discuss these exciting trends and their implications for your business with you in greater detail. Meanwhile, we are also providing some links to further reading below should you want to explore these themes in greater detail.

download Technology Industry Perspectives for 2012 (111kb, PDF) >