Competing in a Networked Economy

March 10, 2014

The Process of Creative Destruction

1960 1990 20101970 1980 2000Source: Adapted from”Creative Destruction”Creative Destruction

Leve

l of c

ompl

exiti

es

Time for a Model Change

Industrial ModelMake and SellMass ProductionChannel FocusedProcesses areInternally FocusedFinancial Measures

Information ModelSense and RespondMass CustomizationCustomer FocusedProcesses are

Externally FocusedCustomer Measures

1960 1990 20101970 1980 2000

Multi-National

Formal Plan

Production

Control

Mass Production

Market Scope

Planning

Orientation

Order

Product

Managerial Change

Global

Visioning

Customer

Coordination

Mass Customization

1960 1990 20101970 1980 2000

Strategic Partnershis

ExtendedEnterprise

ConsequentialInteroperability

Business StrategyFocused

Support

Departmental

InherentConnectivity

TechnologyFocused

Role

Scope

Applications

Management

Technological Change

1960 1990 20101970 1980 2000

Organizational Change

Networked

Electronic

Flexible

Strategic Alliances

Functional Hierarchy

Paper

Large

Mergers & Acquisitions

Structure

Communications

Size

Economic Relationships

Thus exploiting the Value of Information

Supply Chain for the Information-based Marketspace

DistributeGather Organize Select Synthesize

Supply Chain for the Physical Marketplace

InboundLogistics

ProductionProcesses

OutboundLogistics Marketing

SalesandDistribution

Service

Metal Junction; Ariba (original format)

The Information-based Marketspace

Infrastructure

Context

Content

Disaggregation of organisation - Airtel

The Physical Marketplace

Leading to changes in organizational design

People

Businesses Things

CommunitiesAuctionsChat

GPS TerminalsNet AppliancesSmart HomesInternet of Things

Supply ChainCustomer CareHuman Resources

The Net connects

The Net SeparatesRe

tail

Bank

s

Cons

umer

s

• Quicken.com aggregates financial service offerings• Retail banks left with a reduced scope of offerings

InsuranceFirmsMortgageFirms

Credit-cardFirms Qu

icken

.com

InvestmentFirms

The Metamediary!

Evaluating

Buying

Stayinginformed

FinancingRepairing

Insuring

Servicing

Reselling

Negotiating

Cognitivespace

New car dealers

Sparesdealers

Used cardealers

FinancingfirmsWarranty

firms Mechanics

Newspaperclassified

Automanufacturers

Insurancecompanies

MarketplaceMetamediary

Metamediaries operate in the marketspace to align the marketplace with cognitive space. Eg Wedding Planner, iVillage.

Carwala.comAutoIndia

Optimizing Value Chain Relationships

Differentiate or create new products/services

Improve cost position

In Search for a Competitive Advantage

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

Selling something Finding and reaching customers Transaction Distribution Post sales relationship

Some Successful Businesses to learn from

eBay

Dell

Amex

Bronner Slosberg Humphery

The Facebook syndrome

New research

Application of Bass’s 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?

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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.

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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?

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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

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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, GM’s and Nolkia’s experince on FB)

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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

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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

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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

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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

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A return to fundamentals

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Industry structures

Sustainable competitive advantage

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 – PayPal’s 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;

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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

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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

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Six Principles of Strategic Positioning on the Internet

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1. Right Goal

Superior long term returns; Creation of economic value;

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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

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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

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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.

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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

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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”

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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 automationConfidential

On the InternetBe differentBe unique

Be meaningful

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