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Surfing The Wave: How Technology Affects Strategy

The convergence of technology and globalisation is changing the world.  This blog provides a short description of how it is changing value creation.  Back in the days before the internet, strategy was about securing value creation within business processes, products and brands.  However, writing in 1990 Prahalad recognised that technological change requires a focus upon core competence to be able to adapt a business to markets evolution.  As the internet started to take hold Hammer realised that global connectivity would wipe whole layers of processes and people from organisations. To prove his point he cited how Ford sales people now entered purchase data such that they could reduce accounts payable staff by 75%!  This led to a noisy fad for so-called business process re-engineering (BPR). 

By the mid 1990s Arthur provided a prescient insight into the key characteristics which were re-shaping not just strategy, but economics itself.  He argued that wherever technology disrupts markets the law of diminishing returns no longer applies.  In fact  it becomes the law of increasing returns where those that are ahead move further ahead and those that are behind are left behind.  So-called network effects, or feedback loops lead to market equilibrium at a monopolistic state of competition (with 1-3 major players), rather than closer to perfect competition (many players within a market).  This takes place, he says, because of 'groove-in', which can be technological or social.   Technologically it captures the idea that to collaborate with technology we need to agree a technological standard and whomever controls that standard captures market lock in.  Controlling the VHS standard Sony dominated the video recorder market, or control of the .doc format continues to give Microsoft a monopolistic share of the office software market.  Social groove-in refers to the idea that it is hard to learn to use new technology and we are resistant to learning to use multiple technologies to do the same things.  This is why Facebook is so successful and MySpace and Friends Reunited were not.  Arthur argues that where this takes place management shifts from a search for order and optimisation to become a search to catch the next big wave.  In this world adaptability and critical thinking are what define success.

Evans and Wurster showed how technological change and forces of globalisation were converging to enable companies to achieve richness and reach.  Historically companies had to choose to sell in mass markets; competing for high volume and low margins, or go for niches where volumes were lower, but margins higher.  However, in the digital economy companies could have both.  As Amazon and eBay enabled global access the tiniest niches became viable and the days when companies could simply provide a limited range of mass market products ended.  This has opened up the whole world to smaller companies and simultaneously a world of choice has made the idea of simply marketing at consumers in specific geographic or sectoral markets redundant.

Wenger and Snyder showed how technology was blurring the boundaries of the firm with the development of communities of practice to source the power of global crowds and communities.  Mason then showed how such disruption is driving the marginal cost of distribution (and in some cases even production) close to zero.  Think how much it costs Apple to send you a track from iTunes. He then revealed how the Wiki model provides a template to use collaboration to remove capitalist logic from markets entirely.

Where this process is heading we can only guess at.  However, to survive in such a world requires a quite different approach to management than most companies are prepared for, or training their staff for.  Furthermore it requires a much deeper understanding of network dynamics and complexity than ever before.  The once strategic work of BPR based optimisation and search for order now offers, at best, tactical gains and may well be a strategic error is some businesses.

With colleagues from Europe and the North America I am now working to both capture the drivers behind the development of new markets and advise clients how to thrive in this emerging environment.

All references to writers are from Harvard Business Review, with the exception of Mason P. Postcapitalism: A Guide to Our Future London: Allen Lane, 2015

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