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Summary and conclusions

9 September, 2015 - 10:49

In the future, firms may still need to consider 5 forces – but they will be a very different set of forces, if they are to uncover the opportunities that networks present in business to customer markets. There will be the technological effects of Moore’s and Metcalfe’s laws, hyper-accelerating change and spreading it like a deadly virus. There will be the contradictory effects of transaction cost economics, not only making firms smaller, but virtual too. There will be the societal effects of the flock-of-birds phenomenon bringing undreamed of democracy along with the threat of anarchy. And the fish-tank phenomenon brings access to all.

Michael Porter2 argues that his five forces determine the attractiveness of an industry, which in turn influences strongly the profitability of firms within that industry. The five new forces of the information age are more ethereal and impact on firms and industries in ways that are far less predictable or structured. To use the new five forces astutely the decision maker must depend on them not so much as guidelines and prescriptions, but as prods from behind to keep challenging oneself, one’s firm and one’s market. When this is done effectively, it is likely that many opportunities will raise their heads.

The technological forces of Moore’s Law and Metcalfe’s Law accelerate change not only within a firm, but also within industries and markets, and this acceleration tends to be exponential. The decision maker must consider what will happen when computer chips are not just in computers, but also in every device and product, and what will happen when these computers, like all computers, in their turn become part of an exponentially growing network.

Transaction cost economics, and technology’s effects on the efficiency of firms and markets means that the manager must constantly reflect on what will happen to the shape and size of the firm. The decision maker must continually evaluate what activities the technology will allow to be performed in the market, and what functions may indeed be brought back within the firm itself. In channels of distribution, managers will have to observe the constant tussle between disintermediation and reintermediation. In the case of the former, many traditional intermediaries will disappear from channels as their roles are either usurped by technologies, or performed more efficiently by other channel members. Already the internet is having a profound effect on institutions such as travel agents and financial brokers, and the long-term impact of online music on conventional record stores is obviously of great concern to those institutions. In example after example of reintermediation, we are seeing new intermediaries enter channels using technology to improve the channel’s efficiency while taking a share of the margins available in the channel for themselves. Online consolidators such as Priceline.com in the travel industry, and Autobytel.com in the channel for new and used cars are prime examples of this.

The social forces of the flock-of-birds phenomenon and the fish-tank phenomenon will require managers to work in a new environment where control and governance are not as structured and clear as they have been throughout most of our lives. Managing in a world where significant issues are not really within the control of a government or a government department, or under the remit of a large organization will be a new and often scary experience for most executives. Not knowing where competition may come from, because it may not be up-front and visible will also require a constant revisiting of strategy. When competition comes head on, or at least from the side or from behind, it can be seen, and dealt with, even if slowly. When competition has the potential to come from a computer in the bedroom of a seventeen year old in another country, life becomes less predictable.

Many managers may take cold comfort from an identification of the five new forces, and what they will do to the business environment. They are not neat and structured, like Porter’s Five Forces, nor do they seem to suggest much in terms of strategic direction, as do popular analysis tools such as the Boston Consulting Group grid. Much of the recent writing on strategy emphasizes the effects of these forces however, and suggests that conventional approaches to strategy will at least be insufficient, if not ineffective, for coping with corporate survival. A number of these authors (cf. 4; 9; 10; 11) offer perspectives that are worth considering. While, as would be expected, there is no absolute concurrence on their advice for strategy in the future, these authors do tend to agree on certain fundamentals.

In closing, it is worth summarizing some of these basics. First, change is too rapid for anyone anywhere to feel comfortable – success has an anesthetizing effect that becomes its own enemy. Second, it may be a good idea to continually seek ways of destroying one’s own firm’s value chain and putting oneself out of business – if one doesn’t, someone else will in any case. Third, resources are increasingly less about tangible assets and more about knowledge and the ability to constantly innovate. Fourth, firms should constantly find and exploit ways to give the customer as much of an opportunity to do as much of the work as possible. Technology offers great opportunities in this regard. Strangely (and as we pointed out in the first chapter), customers don’t want more service, they want less. They want control, and the power to solve their own problems, and victory will go to those players who find ways for them to do this well12. Finally, strategy is no longer long-term, as the half-life of ideas diminishes. The five-year plan or the long-term strategy is no longer viable, and the value of the annual strategic planning session is to be questioned. Strategy becomes incremental, rather than planned. It is revisited and revised not annually or even bi-annually, but monthly, probably weekly, and possibly, daily. It’s not that strategy should be thrown out with the bath water. Rather, perhaps, managers should consider that the strategy needed for the 21st century might indeed be a new baby, born of five new forces in an age of convergence. And in an age of opportunity.

For many years – indeed since Edison’s invention of the phonograph in 1877 – the music recoding industry didn’t change that much. While technological changes did come to the market for recorded music over the years, in the form of improved recording techniques, hi-fidelity stereo, and the advent of the compact disk (CD), essentially the industry remained stable, with its structure largely unaffected by technological developments. Recording companies found and recorded talent and marketed it, and the products of the industry – essentially disks and cassette tapes – were distributed through record stores. Artists were remunerated in the form of royalties, retailers in the form of margins, and the record companies kept the rest.

The fundamental distribution issue of assortment was (and in many ways still is) perhaps the most significant dilemma in the market for recorded music. The structure of the industry and the way the product was produced held an inherent problem for both the retailer and the consumer. The retailer’s predicament is that of inventory – the need to hold very large stocks of records, in order to provide a selection to customers, and to be able to make available to the customer the one that they will choose when they want it. This means that a lot of capital is tied up in stock, much of which moves slowly and often needs to be discounted in order to meet working capital requirements. The consumer is also in a quandary: Will the particular retailer stock the one album that they are looking for? And, will they be able to find it among the thousands of other items? Even once found, the consumer’s problems aren’t over – there may be 12 songs on the album, and they may only really want three or four. But they are forced to purchase the entire album, with all 12 songs.

Players wishing to have a wager on a football game, or a flutter on a horse race, or to back up their opinions on a political election or the outcome of the Oscars, have until recently had few alternatives. In a majority of European countries, Canada, and most states in the USA their only option would have been to place a bet on a pari-mutuel or totalizator system, while in countries such as the United Kingdom and Australia, and in U.S. states such as Nevada, they would also have access to licensed bookmakers. Both of these systems place the player at a significant disadvantage, not least of which is the fact that the “rake-off” or house percentage is considerable. This means that winners get paid well below the “true” odds against their choice. Furthermore, neither of the two systems allows a player to pick a “loser” – the player can only stake on a winning outcome. In simple terms a player can’t back team to lose – they can only back the other team to win or on a draw. A specific disadvantage of pari-mutuel systems is that subsequent weight of money for a player’s choice will reduce the payoff, so that there is no opportunity to exercise any skill in the timing of a bet. Both systems profit not from the losers (as most inexpert gamblers believe) but from winners, by paying them out at less than true odds. In the case of pari-mutuels the house percentage is around 20%, and even the most generous bookmakers make books that have an edge of around 14% in their favor.

Betfair which commenced trading in 2002 is the world’s largest betting exchange. As a business, Betfair has no interest in the outcome of any event it makes available to gamblers. It simply provides a market for opinions and for trades to take place. It re-quires players to make and/or take fixed odds and all income is derived from a small percentage commission (ranging between 2 and 5 percent, depending on a player’s turnover) on a player’s net winnings on an event. In general terms, the greater an event’s turnover, the more revenue and profit Betfair generates, although Betfair’s income is strictly a function of the total net winnings on an event, not turnover.