Physical and Virtual Aren’t Always Substitutes

Lynne Kiesling

Whether the topic is retail sales or higher education (or some other application), the role of digital technology raises the question of how, if at all, online activity substitutes for physical, face-to-face activity. That relationship differs case-to-case; you wouldn’t expect the effects of online shopping on bricks-and-mortar shops to have the same patterns as the effects of digital technology on learning. But digital innovation is having effects on the relationships, outcome patterns, and models that we use regularly. I know, earth-shattering insight …

Analyzing the question of substitutability between online and physical is an important application of the economic way of thinking. One reason why digital technology has different effects in different cases is its varying degrees of substitutability for a face-to-face physical experience. Sometimes, actually a lot of the time, online shopping is a close substitute for going to the store, with that substitutability enhanced by online vendor offers of free returns (thank you Zappo’s for being the innovator on that front!). In education, though, the degree of and pattern of substitutability is different, and I would argue substantially lower in most cases than that in online shopping.

The next step in thinking analytically about the effects of digital innovation is complementarity — does the change prompted by the technological change enhance the product offering, the learning experience, etc.? Here’s my simple hypothesis/model: it’s the differing patterns of substitutability and complementarity of digital technology that leads to differing patterns of outcomes and models across industries and across different applications of digital technology.

If I wanted to add another dimension to that model, the next step I’d take is to acknowledge that many of our actions in these different cases take place within networks, and that digital technology can both extend and deepen the networks in which individuals act and make choices. Whether it’s sending a tweet of those cute boots while shopping (either online shopping or in a store) to get your friends’ reactions, or using discussion forums or video chats to enable collaborative learning and problem-solving, no one acts in isolation. In essence, I could analyze the effects on our social networks of digital technology using this same simple substitutability/complementarity model. But is there a deeper factor that can affect the extent of virtual substitutability and complementarity with an individual activity?

Two things I’m currently reading provoke these simple musings. The first is this insightful article from John Hagel and John Seely Brown arguing that virtual interactions have limits, and that stores and conferences won’t go away (I’d add books to that list). Their argument tackles this substitute/complement question head on, and identifies what I think is one of these deeper factors in determining substitutability and complementarity — trust:

Are we just stubborn creatures of habit who are slow to adopt a better solution? Or, is there a fundamental value to the brick-and-mortar, flesh-and-bone world that cannot be replaced?

There is nothing as compelling as direct human interaction. It strengthens trust, creates serendipity, and fosters community in an irreplaceable way. And although technology is progressing, there will always be a premium placed on meeting in person.

Face to face interactions provide us with a much richer context that helps to build deeper trust. There is a richness and depth of information that comes from physical cues, such as the firmness of a handshake or the sweatiness of someone’s palm, that are invaluable. Even subtle details, such as the state of someone’s office or how stressed their administrative assistant looks, provide context and clues that help us decide how to act, and are impossible to convey virtually.

Then there is also an authenticity that comes from the “off-camera moments” that accompany face-to-face interactions. Small talk before meetings start, coffee breaks, and running into people into the halls all provide a litany of unscripted, unorchestrated interactions that make it difficult for people to package themselves. The resulting mutual transparency inspires a confidence and trust that is much more difficult and time-consuming to develop through other means. Trust-based relationships are fundamental to effectively participating in the knowledge flows that accelerate learning and performance improvement, something that is becoming more and more essential in a world of mounting performance pressure.

They also identify the extent to which serendipity can lead to new value creation more in face-to-face interaction than in virtual interaction, and make a pointed observation that even those who start virtual communities around a shared interest usually strive to find ways to meet in person (this is my experience too).

The second thing I’ve been (re)reading is Clay Shirky’s Here Comes Everybody, which we’ve been discussing over the past two weeks in my freshman seminar. Shirky expands on many of the issues of generating trust and serendipity in physical and virtual networks, and how we use digital technology to broaden and deepen our networks and to organize and coordinate our actions without formal, hierarchical organizations. The fundamental economic question of the substitutability and/or complementarity of digital technology with other aims, goals, products, etc. is at the core of Shirky’s argument.