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
Quicken.com
Insurance Firms Mortgage Firms Investment Firms Credit-card Firms

Quicken.com 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
Carwala.com 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?

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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, GMs and Nolkias 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
Industry structures Sustainable competitive advantage

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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;

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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 automation

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On the Internet Be different Be unique Be meaningful

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