Competing in a Networked Economy
March 10, 2014
The Process of Creative Destruction
Level of complexities
1960
1970
Creative Destruction
1980
1990
2000
2010
Source: Adapted fromCreative Destruction
Time for a Model Change
Industrial Model
Make and Sell Mass Production Channel Focused Processes are Internally Focused Financial Measures Information Model
Sense Mass
and Respond Focused
Customization
Customer
Processes
are
Externally Focused
Customer
Measures
Managerial Change
Mass Production Product
Mass Customization
Control
Order
Coordination
Multi-National
Market Scope
Global
Production
Orientation
Customer
Formal Plan
Planning
Visioning
1960
1970
1980
1990
2000
2010
Technological Change
Inherent Connectivity Technology Focused
Applications
Consequential Interoperability Business Strategy Focused Extended Enterprise
Management
Departmental
Scope
Support
Role
Strategic Partnershis
1960
1970
1980
1990
2000
2010
Organizational Change
Large
Size
Flexible
Mergers & Acquisitions
Economic Relationships
Strategic Alliances
Paper
Communications
Electronic
Functional Hierarchy
Structure
Networked
1960
1970
1980
1990
2000
2010
Thus exploiting the Value of Information
Supply Chain for the Physical Marketplace
Inbound Logistics Production Processes Outbound Logistics Marketing Sales and Distribution Service
Supply Chain for the Information-based Marketspace
Gather
Organize
Select
Synthesize
Distribute
Metal Junction; Ariba (original format)
Leading to changes in organizational design
The Physical Marketplace
Content
The Information-based Marketspace
Disaggregation of organisation Airtel
Context
Infrastructure
The Net connects
People
Communities Auctions Chat
Businesses
Supply Chain Customer Care Human Resources
Things
GPS Terminals Net Appliances Smart Homes Internet of Things
The Net Separates
Retail Banks
[Link]
Insurance Firms Mortgage Firms Investment Firms Credit-card Firms
[Link] aggregates financial service offerings Retail banks left with a reduced scope of offerings
Consumers
The Metamediary!
Evaluating Staying informed Reselling Servicing Negotiating Used car dealers New car dealers
Insurance companies
Cognitive space
Buying
Metamediary
[Link] AutoIndia
Financing Insuring
Repairing
Marketplace Auto Spares manufacturers dealers Newspaper classified Financing Warranty firms firms Mechanics
Metamediaries operate in the marketspace to align the marketplace with cognitive space. Eg Wedding Planner,
iVillage.
In Search for a Competitive Advantage
Optimizing Value Chain Relationships Differentiate or create new products/services Improve cost position
New rules in the networked workd
Wealth in this new regime flows directly from innovation, not optimization - wealth is not gained by perfecting what is known. But by imperfectly seizing what is unknown. (MS vs. Apple; Social Media, Online
industry)
The ideal environment for cultivating the unknown is to nurture the agility and nimbleness of networks. Abandoning the highly successful known - undoing what was perfected The cycle of "find, nurture, destroy" happens faster and more intensely than ever before.
Creative Destruction
Applying Universal Value Chain
Underlies all businesses
Making something
Design Raw material Manufacturing Service delivery Finding and reaching customers Transaction Distribution Post sales relationship
Selling something
Some Successful Businesses to learn from
eBay Dell Amex Bronner Slosberg Humphery
The Facebook syndrome
New research Application of Basss curve
Demographic depletion Fatigue Loss of initial value Innovation trigger
Thus, where does it leave the true spirit of management of strategy?
Some questions about Technology and Competition
How stupendous has been the impact of the Internet
technology on the industry?
Which industries have been affected the most? What do some leading researches and academia like Porter
have to says about the onslaught of the Internet
What should we really do as business decision makers?
Confidential
The situation as of today
Key Assumption - the Internet changes everything, rendering
all the old rules about competition and companies obsolete Many companies esp. the Internet companies create biz models on untested assumptions Tend to erode the attractiveness of their industries and undermined their own competitiveness
Using Internet to shift the basis of competition away from
quality, features and service to price Making it harder to turn profits.
Confidential
Thus new challenges
Who will capture the end economic benefits?
Will all the value go to consumers or will the companies be
able to reap any benefits? eCom Will the Internet help or erode the ability of the companies to gain sustainable competitive advantage?
Confidential
The Impact of Internet
Alters overall industry structure in a way that dampens
profitability of the firms
Has a levelling effect on the business (SAP? Same channel) Reduces the ability of firms to establish sustainable
operational advantage (Processes of online companies tend to be similar)
Success on the net will call for complementing the traditional
ways of competing
Confidential
Why?
New technologies signals can be unreliable (first wave of e-
com companies)
They trigger rampant experimentation which can be
economically unsustainable (Social media orkut; facebook)
Market behaviour can be distorted giving rise to wrong
interpretation (Online advertising, GMs and Nolkias experince on FB)
Confidential
They can Distort Revenue figures
Subsidized products and services to gain customer traction not
sustainable.
Buyer pay reduced costs not reflecting true value of the product; When prices are artificially low, unit demand becomes artificially high (Flipkart)
Curiosity; not many genuine reason to go to the net
Thus do not have longevity. Tend to go back to their original mode of buying after the subsidy ends
Confidential
Distorted Revenue figures
Some revenues in the form of stocks and options rather than
cash, not reflecting true cash value.
Stock has dubious value. Much of Amazon revenue in 2008 of $ 450 Mn came from stocks given to their partners.
Inability to monetize in an acceptable time frame drives
unethical behavior to satisfy the investors
Confidential
Costs can be equally distorted
Subsidized inputs not sustainable
Eager new suppliers ready to oblige initially
Many content providers work for free Agreement to pay later when the company turns corner may
put huge burden on future cash flows This artificially depresses the costs Stock values decoupled from the fundamental has disastrous effects on the overall industry Have conveniently downplayed the traditional measures of profitability
Confidential
Giving rise to new measures loosely connected to the true economic value
Click thru rates
Eyeballs Site visitors Likes on the face book Tweets Reach Face book way of calculating future value of its 900 Mn users
Confidential
A return to fundamentals
Industry structures Sustainable competitive advantage
Confidential
Giving rise to some challenges
Reduces companies / brands to parity, low differentiation, low
avenues to build value, leaving little choice but to compete on price Far too many undifferentiated products putting pressure on pricing destructive pricing Undifferentiated methods of ecommerce PayPals e-wallet allows you to shop without sharing card or personal data. However this money reduces switching costs making the industry vulnerable. No personal contact hence low brand affinity. One page allows you to draw all information from various site;
Confidential
Conclusion
The Internet based models are largely untested It has thus brought imbalances in the industry structure,
making differentiation difficult to sustain and leads to unnecessary pressures.
It leads to unwanted price wars and discounting
Leads to unhealthy business practices
Confidential
So how do we deal with it
Some successful examples
Ingram Micro vendor and partner relationship Metal Junction Auto Industry and the Internet Traditional Retail and the Internet (?) Express companies - FedEx Embedded process in the brick and mortar companies Information based transaction value to customer for deciding brand choice
Confidential
Six Principles of Strategic Positioning on the Internet
Confidential
1. Right Goal
Superior long term returns;
Creation of economic value;
Confidential
2. Must deliver a value proposition
Set of benefits different from those of competition
Must define a way of competing that delivers unique value
in a particular set of users
Confidential
3. Reflected in distinctive value chain
Define your value chain wrt manufacturing, logistics, service
delivery, marketing, HR and environment handling
Avoid best practices and be different
Confidential
4. Trade offs
Must forgo some features, ideas, practices or activities in order
to be unique
Important to build your plan that reflects choices and what you
are willing to accept or let go.
Confidential
5. The Fit
Do all the elements fit in well with each other? Do they
synergize with each other?
All the elements of the value chain are interdependent, hence
they must fit in well and strengthen each other. Identify the weak link
Confidential
6. Continuity and direction
Unique skill and assets take long time to build Continuity is a prerequisite to build a strong reputation with
the customers.
Avoid frequent corporate reinventions
Confidential
Internet Value Chain
Firm Infrastructure web based ERP, financials HR self service personnel, web based training,
Technology development collaborated product design, global
campaign development (Bacardi) Procurement real-time info, online RFPs Inbound logistics scheduling, shipping, (Zara) Operations Wal-Mart's cross docking Outbound logistics collaborative integration with customer forecasting system Marketing & sales online acquisition, product catalogues, automated Pricing, Customer profiling After sales service online bots, CRM, sales automation
Confidential
On the Internet Be different Be unique Be meaningful
Confidential