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BLOWN TO BITS How The New Economics of Information Transforms Strategy PHILIP EVANS and THOMAS WURSTER PHILIP EVANS is a Senior Vice President of the Boston Consulting Group and co-leader of the firm’s Media and Convergence Practice Group. He has co-authored three articles published in the Harvard Business Review and is a frequent speaker on the subject of the new economics of information. THOMAS WURSTER is a Vice President of the Boston Consulting Group who leads the firm’s Los Angeles office. He is also co-leader of the Media and Convergence Practice Group, and works with leading media, consumer product and e-commerce companies. SUMMARIES.COM is a concentrated business information service. Every week, subscribers are e-mailed a concise summary of a different business book. Each summary is about 8 pages long and contains the stripped-down essential ideas from the entire book in a time-saving format. By investing less than one hour per week in these summaries, subscribers gain a working knowledge of the top business titles. Subscriptions are available on a monthly or yearly basis. Further information is available at http://www.summaries.com. Blown To Bits - Page 1 MAIN IDEA Embedded implicitly within most traditional business models is a trade-off between richness and reach -- A business could either serve a small niche market providing a highly personalized product at a premium price (richness) or it could take a commodity style approach by attempting to deliver a value package to the broadest possible market at the lowest sustainable price (reach). The connectivity and standards of the Internet, however, removes that trade-off by making it feasible to deliver a ‘‘rich’’ product to the greater ‘‘reach’’ of the broader general market. As a result, the flow of information is altered within the marketplace. As that information flow varies, traditional business-to-business relationships, value chains, supply chains and other business elements are deconstructed and reconfigured in new and different ways. Importantly, however, the reconfigured business elements will each still respond to the same strategic principles they have always worked with. What will be required, however, will be a rebalancing of strategy to take into account that the objects those business elements are going to be working with will be different once the deconstruction process has occurred. Therefore, in the Internet era, what’s required is not so much a new set of strategic principles as a realignment of the existing principles. Section 1 -- Information, Richness and Reach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 2 Every business uses the access to information as the structural ‘‘glue’’ which holds value chains, supply chains and organizations together. The Internet is melting that glue and forcing radical changes to take place. In particular, the historical trade-off between richness and reach is being restructured as that glue melts. Section 2 -- Deconstruction and Disintermediation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 3 Deconstruction and disintermediation are the two processes by which the added value created by the unbundling of products and information will be taken from incumbents and delivered to consumers. A business really has only two choices: 1. Take the initiative and desconstruct customer relationships. 2. Stand back and let someone else benefit by doing it. Section 3 -- Emerging Competitive Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 4 The deconstruction of the supply chain linking consumers, retailers and suppliers provides an opportunity for a new entity to emerge -- the navigator. These are new generation intermediaries that provide one key benefit -- shortcuts through a vast sea of options to the best choice. Navigators compete in three dimensions: 1. On reach 2. On affiliations 3. On richness In most industries, navigators will ultimately end up securing the majority of the new added value created unless the incumbents can add richness at a faster rate than the navigators are.. Section 4 -- The Deconstruction of Industrial Supply Chains and Organizations . . . . . . . . . . . . . . . . . . . . . . . Page 6 The same principles which apply to the reshaping of the consumer supply chain apply with equal validity to industrial supply chains and business organizations. As the trade-off between richness and reach blows up, new organizational structures and new supply chains based around different standards will emerge. Section 5 -- 12 Guiding Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 8 12 principles which assist the process of rethinking strategy in an era of deconstruction and change: 1. Never assume current definitions will be valid in the future. 2. Deconstruction occurs where incumbents have most to lose. 3. There is always a significant first-mover advantage. 4. Deconstruction may be a hybrid mix of four approaches. 5. Business strategy will shape the outcome. 6. The value of applying the right strategy will increase. 7. Restructured business definitions will rarely align with the old. 8. Incumbents will find acting on new strategies difficult. 9. Existing structures automatically protect the status quo. 10. There must be a willingness to learn from mistakes. 11. New business processes will be required. 12. Incumbents are in the best position to become insurgents. Blown To Bits - Page 2 Section 1 Information, Richness and Reach Main Idea Every business uses the access to information as the structural ‘‘glue’’ which holds value chains, supply chains and organizations together. The Internet is melting that glue and forcing radical changes to take place. In particular, the historical trade-off between richness and reach is being restructured as that glue melts. Supporting Ideas A business exchanges information with its customers, suppliers, employees and partners. In fact, for most companies, their main source of competitive advantage is the proprietary information they possess and selectively share. Similarly, most business structures are developed around the functions of gathering and sharing information. With the explosion of connectivity brought about by the Internet: 1. Every business now has the capacity to communicate richly with its customers. 2. Communications capacity is rising at an extraordinary rate -bandwidth is tripling each year. Historically, physical products and information about those products have always been bundled together. The Internet, however, makes it possible for those two to be separated. That separation has the potential to create enormous added value, since the economics of information and the economics of physical products are entirely different. Many compromises can be eliminated. For example, consider shelf space in a shop: 1. From an information perspective, the bigger the amount of shelf space, the greater the choices available to consumers. 2. From an inventory perspective, the wider the choice the greater the amount of capital tied up in slow moving stock. Whereas in the past, a retailer would have to strike a compromise between the economics of information (choice) and the economics of products (inventory), the Internet removes the need for compromise. The amount of added value created by removing that compromise will vary from industry to industry, but it will be substantial and attractive. This can be represented graphically as: Richness Buyers are very familiar with this trade-off. When looking for a product, they will start with high-reach/low-richness sources like the Yellow Pages and then fine-tune their way towards high-richness/low-reach sources like a salesman offering a personalized product. (Brand names cut down on the search time, thereby adding value). So how does the Internet affect this trade-off? It uses two forces acting in parallel: 1. An explosion in connectivity -- for the first time in history, a common electronic communication network is available for access by everyone. Information is no longer linked to physical proximity and there is negligible cost in the delivery, customization or delay of information delivery. 2. Common communication standards -- as open networks using ‘‘good enough’’ technical standards are completely overwhelming proprietary systems with restricted groups of users. To look at the impact of the Internet graphically: Richness 1 2 3 Reach Whereas in the past, a company or organization may have positioned itself at points 1, 2 or 3, there is now another choice -- point 4 where an information rich product can be cost-effectively delivered to a large number of customers. The Internet is the enabling technology for the option of choosing point 4. In the history of business, whenever new standards have emerged -- railroad gauge, telephone dial tone, AC power, QWERTY keyboard -- the economic consequences have been dramatic in terms of the amount of added value created. The same thing is happening now as IP (Internet protocol), TCP/IP, HTML and HTTP have been established as digital standards. In short, we’re now at the stage where the trade-off between richness and reach blows up and disappears. Key Thoughts ‘‘As the trade-off between richness and reach blows up, economic relationships, in all their manifestations, will change radically. A sales force, a system of branches, a printing press, a chain of stores or a delivery fleet -- which once served as formidable barriers to entry because they took years and heavy investment to build -- will suddenly become expensive liabilities. New competitors will come from nowhere to steal customers. Similarly, the replacement of expensive, proprietary legacy systems with inexpensive, open extranets will make it easier for companies to bid for supply contracts, join a virtual factory or form a competing supply chain. Inside large corporations, the emergence of universal, open standards for exchanging information over intranets will foster cross-functional teams and will accelerate the demise of hierarchical structures and their proprietary information systems.’’ -- Philip Evans and Thomas Wurster 4 Historical Trade-Off Reach ‘‘Reach’’ is easy to define -- the number of people who participate in the sharing of information. ‘‘Richness’’, by contrast, will mean different things in different industries. It may mean timely information, information known by few people, information personalized to the specifics of your circumstances by an adviser, the ability to respond to the information and have it take into account your response, etc. Blown To Bits - Page 3 Section 2 Deconstruction and Disintermediation Main Idea Deconstruction and disintermediation are the two processes by which the added value created by the unbundling of products and information will be taken from incumbents and delivered to consumers. A business really has only two choices: 1. Take the initiative and deconstruct customer relationships. 2. Stand back and let someone else benefit by doing it. Supporting Ideas As the trade-off between richness and reach is blown up, a large amount of added value which was historically captured by companies will be liberated. Over the longer term, that added value will end up flowing to consumers through the two processes of deconstruction and disintermediation. 1. Deconstruction Deconstruction is the dismantling and reformulation of traditional business structures -- value chains, supply chains, organizations, franchises -- which will occur as the trade-off between richness and reach is eliminated. Deconstruction typically affects the most critical processes of a business because that’s where the greatest added value is created. It’s also the point at which incumbents can least afford to lose their share of the added value. Example of deconstruction: Classified advertising contributes 40-percent of a typical newspaper’s revenues in return for for 10-percent of its total costs. Therefore, if classified ads move away from print format to electronic format, that reduction in overall profitability could threaten the ongoing financial viability of the newspaper. Therefore, instead of asking whether or not an electronic version of a newspaper will replace the print version, the better question is to ask where are the areas of greatest profitability and what will happen if just those functions move to the Internet. The implications of deconstruction are: 1. Value chains will fragment into multiple businesses. 2. Each new business will have a unique competitive advantage. 3. Competition will increase for the new businesses. 4. Information businesses will increase in value dramatically. 5. New opportunities will arise for unbundled businesses. 6. Many roles will be eliminated -- wholesaler, distributor, etc. 7. Navigators who can guide choices will emerge. To benefit from an industry’s deconstruction: 1. Analyze how the richness/reach trade-off has traditionally been made in the industry. 2. Evaluate how the Internet and other technologies can transform those trade-offs. 3. Try and project how existing industry participants could create added value as a result of those changes. Where would a new competitive advantage lie -- and by what strategy could those opportunities be exploited? 4. Design and build a new business model which will specifically target those new economic opportunities. 2. Disintermediation Disintermediation is the elimination of the traditional intermediaries -- the parties who add no value but generate revenues from the trade-off between richness and reach. Disintermediation eliminates intermediaries by: 1. Sacrificing richness for greater reach. 2. Adding richness and greater reach simultaneously. Example of disintermediation: In the brokerage business, full-service brokers offered a rich service to a small number of customers. In 1975, Schwab introduced the first discount brokerage, offering telephone brokers who disintermediated the full-service brokers. Then, in 1989, Schwab introduced automated telephone ordering -effectively disintermediating the telephone brokers. Lately, Schwab has moved to Internet delivery of its services, adding greater richness in the form of personalized advice, portfolio tracking, greater financial data, better quotes and trade execution. Key points about disintermediation: 1. It will only occur where the richness/reach trade-off can be shifted and if compromises in the current business model will be eliminated. Both conditions are necessary. 2. It can attack just one part of a business and not another. In fact, the most valuable part of the business is the most likely to be disintermediated. 3. Customer needs and not business definitions are the main point of focus in differentiation. 4. Previous waves of disintermediation resegmented markets. The current Internet-driven wave destroys old business models entirely. 5. Any disintermediation initiative which does not attack compromises in existing business models will fail. Smart business managers are constantly looking for ways to deconstruct and disintermediate their own business models. In fact, for suppliers, this is a key opportunity to take the customer relationship away from retailers and capture more value. In practice, however, that will only occur if you can resolve the numerous in-house conflicts and vested interests this strategy will uncover. More than likely, deconstruction and disintermediation create opportunities for new players to come along. With a fresh perspective, they can focus on where the biggest compromises have traditionally been and target those opportunities specifically. By outsourcing all but their strategic systems, they will bring to bear impressive focus. Key Thoughts ‘‘Managers must put aside the presuppositions of the old competitive world and compete according to totally new rules of engagement. They must acquire totally new technical and entrepreneurial skills, quite different from what made their organization (and them) so successful. They must manage for maximal opportunity, not minimum risk. They must make decisions at a different speed, long before the numbers are in place and the plans formalized. They must devolve decision making, install different reward structures and perhaps even devise different ownership structures. They have little choice. If they don’t do it for their own business, somebody else will do it to them.’’ -- Philip Evans and Thomas Wurster Blown To Bits - Page 4 Section 3 Emerging Competitive Strategies Main Idea The deconstruction of the supply chain linking consumers, retailers and suppliers provides an opportunity for a new entity to emerge -- the navigator. These are new generation intermediaries that provide one key benefit -- shortcuts through a vast sea of options to the best choice. Navigators compete in three dimensions: 1. On reach 2. On affiliations 3. On richness In most industries, navigators will ultimately end up securing the majority of the new added value created unless the incumbents can add richness at a faster rate than the navigators are.. Supporting Ideas Since the deconstruction of value chains will dramatically increase consumer choices, there will be an opportunity for navigators to become established as a new and more logical type of intermediary. A navigator may take various forms: • A software program -- Quicken • An online database -- Auto Trader, Yellow Pages • An evaluator -- Consumer Reports, J.D. Power, film reviewers • An online search engine -- Yahoo! • Market makers, advisers, agents or stockbrokers In practice, navigators always cater to the exclusive interests of buyers. They enhance efficiency and productivity by providing shortcuts. In the world of Internet connectivity, navigators: • Can facilitate direct 2-way information flows. • Are ideally placed to promote industry standards. • Facilitate greater choice rather than act as choke points. • Are highly cost effective -- usually free. • Allow complete fluidity between participants. • Are free of any centralized control. • Are completely adaptable and constantly evolving. Navigators are unrestrained by reach -- they can offer every possible alternative to every searcher simultaneously. Similarly, navigators are unrestrained by richness -- they can provide as much or as little information as the searcher specifies. And navigators can seamlessly integrate with other navigators to present even greater amounts of comprehensive information. At present, it is still unclear what type of navigator will secure long-term competitive advantage in the Internet era. Current first-generation navigators are varied and include search engines, intelligent agents, software programs and electronic retailers. Presumably, navigation will stabilize within the next few years to whichever model best captures the added value created. What is already clear, however, is the fact navigators will compete in three dimensions: Affiliation Richness 1. Competing on Reach The key objective for navigators to compete on reach is to achieve critical mass in one information domain. Once that has been realized, the navigator can then attempt to migrate across to other categories as well to capture part of the added value that will be created when information and products are unbundled in those other categories. E-commerce has thus far been excellent in the generation of greater reach. The downside is that reach without meaningful navigation becomes clutter or background noise. No current generation navigators have managed to achieve critical mass in the Internet era. That may be due to several factors: 1. The economics of information is unique and may yet be misunderstood by most participants. 2. Product suppliers have not been willing to offend their existing retailers yet. 3. Retailers have been reluctant to cannibalize their own established operational base to pursue the navigator role. 4. The focus has thus far been more on getting electronic brochures online rather than where it will ultimately end up -on solving problems. The reluctance of existing businesses to reconfigure their business models and actively pursue the navigator role creates huge opportunities for outside parties to perform this function. This is paradoxical, since current incumbents are ideally placed to exploit the new economics of unbundled information. Again, the unwillingness to change business models until forced to do so could prove costly, and is at best only delaying the inevitable. Specifically, retailers should: • Avoid thinking historical victories guarantee future success. • Be attacking themselves before someone else does. • Combining local & electronic presence into a seamless whole. Product suppliers, on the other hand, should be: • Aggressively adding e-commerce skills. • Making it easy for navigators to find a path to them. • Developing products that are differentiated and better. At the same time, electronic retailers should be: • Avoiding any exclusive tie-ups at this stage of the game. • Reinventing their business models every year -- or sooner. • Focusing on the direct fulfillment business model. ‘‘First generation strategies of experimentation will give way to second-generation strategies of big bets.’’ -- Philip Evans and Thomas Wurster ‘‘As the sheer volume of information and commerce moving over the Web grows, as the limitations of first-generation strategies become more apparent, as the prospects of replicating the strategies of first-generation heroes dim and as the laws of competitive advantage become better understood, it is entirely predictable that reach will become the fulcrum of an altogether more intense competitive struggle, and that self-cannibalization will be accepted by incumbents as inevitable.’’ -- Philip Evans and Thomas Wurster Reach Blown To Bits - Page 5 2. Competing on Affiliation By being affiliated with as many suppliers as possible (and ideally all suppliers), the impartiality of the navigator is assured. There is a shift in the balance of power away from the seller’s interests towards the needs of the consumer. The litmus test for affiliation is passed when a navigator is prepared to provide a consumer gain that is an actual seller’s loss. For example, by: 1. Advising users why a premium feature offered by a seller is not worth the additional cost. 2. Disseminating unflattering information about product performance or negative customer satisfaction information. 3. Informing users of cheaper alternatives which are available from alternative sources. Historically, forerunners of navigators -- like trade magazines and newspapers -- have aligned with seller interests because that is where the bulk of advertising revenues have come from. In addition, consumers have been unwilling to pay for the early navigation services -- mainly because of worries about impartiality of the information provided by a service funded by a limited number of suppliers. However, as more products and information becomes unbundled, new generation navigators will emerge. As these new navigators will become affiliated with every supplier, retailers will be demoted to the role of distributors while suppliers will see their businesses commoditized. The value potential of the business will accrue to the navigators themselves. That’s not to say current market incumbents won’t fight the trend. They will, in many cases passionately and with loads of energy. But the Internet is here to stay -- which means than an explosion in reach is a permanent feature of the competitive landscape. Therefore, businesses must adapt to those changed circumstances if they are to survive in the longer term. 3. Competing on Richness The only way an existing business can stop (or at least forestall) the deconstruction of their existing value chains is to add richness to the consumer experience. By doing this, customer relationships will be deepened (lessening the effects of reach) and brand equity will be built (lessening the benefits of affiliation with a large number of unknown brands). There are two ways information (in a marketing context) can be made richer: 1. It can contain more information about the consumer and their preferences to allow customer specific marketing to take place. 2. It can contain more information about the product, the brand, the associated service and other product attributes. The central challenge then becomes to make good use of the consumer- or product-rich information. Ideally, this enhanced information should be used to: 1. Strengthen the relationship with the consumer. 2. Rise above the clutter created by greater reach. 3. Dull the potential impact of impartial navigators. Some examples of how business are enhancing the customer experience with consumer-rich information: 1. Provide reminders of upcoming events along with potential purchases based on earlier choices made. 2. Provide personalized interfaces to the business with huge configuration choices, each taking into account negotiated discounts and other detailed preferences. 3. Provide configurators which look at consumer needs and provide information about suitable product options. Offsetting the gains made available by an increase in richness provided by sellers will be the facts consumers will be worried about privacy issues and the fact navigators will be vigorously attempting to mimic the richness any supplier offers over a broader range of products. ‘‘The surprising thing is not that navigators will compete on the basis of consumer affiliation in the future; the surprising thing is that they did not do so in the past.’’ -- Philip Evans and Thomas Wurster ‘‘Instead of treating navigation as a marketing function for a supplier business, think of products as a sourcing strategy for a navigator business. This may sound extreme, but some of the smartest and most aggressive commercial banks, institutions with hundreds of billions in assets, see this as their long-term strategy.’’ -- Philip Evans and Thomas Wurster ‘‘The navigator business may be worth more than the supplier business; it is not obvious that the competitiveness of the former should be compromised for the benefit of the latter.’’ -- Philip Evans and Thomas Wurster ‘‘When all information sources can be accessed electronically, when any piece of information has to be collected only once, when standards spread through the self organizing logic of networks, and when navigators can navigate to and through each other, stunningly sophisticated searches become possible for fractions of a cent.’’ -- Philip Evans and Thomas Wurster ‘‘Remember that the consumer is your competitor: what are you doing for him that he cannot do for himself.?’’ -- Philip Evans and Thomas Wurster ‘‘Despite its disadvantage in reach and affiliation, rich navigational information from the product supplier can often be advantaged over that provided by a retailer or navigator. When the product is continuously evolving and the supplier provides state-of-the-art information about the latest breakthroughs, that can be of greater interest and utility to consumers than the comprehensive but dated offerings of a retailer or agency navigator.’’ -- Philip Evans and Thomas Wurster ‘‘Privacy is the Achilles’ heel of the information economy: the long-term winners will be players who make a firm, public and unambiguous commitment to a strong set of privacy standards and stick to them. Not only is that the right thing to do, it is also the competitively advantaged strategy.’’ -- Philip Evans and Thomas Wurster ‘‘The value of seller’s richness goes up as reach increases, since that is how they grab attention and rise above the clutter; the value of seller’s richness goes down as navigator’s richness catches up.’’ -- Philip Evans and Thomas Wurster Blown To Bits - Page 6 Section 4 The Deconstruction of Industrial Supply Chains and Organizations Main Idea The same principles which apply to the reshaping of the consumer supply chain apply with equal validity to industrial supply chains and business organizations. As the trade-off between richness and reach blows up, new organizational structures and new supply chains based around different standards will emerge. Supporting Ideas In industrial supply chains, the establishment of a connectivity network is not needed -- it’s already in place. Therefore, the main force that will drive changes in the competitive landscape for industrial supply chains will be the establishment of common standards. The evolution of new standards is highly unpredictable, and involves significant uncertainty over: Whether they will emerge. Where they will emerge. Who will ultimately control them. There is no systematic way to forecast these matters, other than to say new standards always follow the economics of information rather than the economics of the industry from which they have emerged. One thing, however, is certain. As the historical richness/reach trade-off evaporates within an industry, the basis of competitive advantage is always shifted. Specifically: Greater reach allows buyers to seek out worldwide suppliers who have the best products more efficiently. Greater richness allows buyers to obtain help from sellers with the requisite specialist skills -- irrespective of where they are located geographically. The direct consequences of that for industrial supply chains will be: 1. Outsourcing will flourish -- since it will be easier to find suitable partners and agreement on specifications can be reached very easily. 2. Market making will become more important -- with the efficiencies created by large volumes becoming available to small purchasers very rapidly and cost-effectively. 3. The decentralized business model will grow in power and stature -- since it will become easier for people at all levels of an organization to form collaborative teams that come together for a single project and then move on. In short, the increase in richness and reach will both intensify competition at each level of a supply chain and completely alter the basis on which a business builds its competitive advantage. The competitive landscape will be changed completely and permanently. These types of dramatic changes will rumble through one industry after another. The momentum for change will become so overwhelming that no industry will be able to withstand the force for change. For example, take the automotive industry supply chain: At the present time, the 5,000 companies in this worldwide chain fall into a hierarchical structure that looks like this: OEM Tier 1 Suppliers Tier 2 Suppliers Tier 3 Suppliers Tier 4 Suppliers Tier 1 suppliers provide systems to the automakers which integrate the components provided by the Tier 2, 3 and 4 suppliers. (At present, about 50% of the industry’s added value is created by Tier 2, 3 and 4 suppliers). Once the richness / reach trade-off has been blown up, the industry may be reconfigured along radically different lines: The availability of direct connectivity made possible by the Internet: Generates significant advantages for the small suppliers to compete on an even basis with larger entities. Allows collaborative efforts to flourish as required. Opens the supply chain to innovation and new ideas. Enhances flexibility, fluidity and self-organization throughout the industry. Allows better levels and quality of information to flow in all directions of the industry. Eliminates the barriers of geographic location and industry or corporate cultures. Allows efficient bidding processes to take place seamlessly. Provides a way for businesses to become aware of impending work exceptionally quickly. The blow-up of the richness / reach trade-off will completely change the automotive industry supply chain. Blown To Bits - Page 7 As the richness / reach trade-off blows up, the internal structure of organizations will also be altered. Economic activity has always been conducted by organizations with hierarchical structures until now because that has proven to be the most efficient way to control the flow of internal information. When those constraints are removed, a business can be restructured around the tasks it performs to create added value. In other words, hybrid business organizations will emerge. The three key characteristics of a deconstructed business organization are: 1. Fluidity In effect, the firm becomes a self-organized collection of competencies and competitive advantages. In fact, the organization can be continuously adapting itself as new data comes to hand. Long-term competitive advantage will be based not on what it is or what it does, but on an ability to learn and make changes faster than anyone else does. 2. Flatness Both the formal organization and the informal communication channels are shortened. That means managers -- who have the authority to set strategy -- can be more hands-on in the business and involved in a leadership role rather than allocating time to maintaining the hierarchy. Formal time-consuming processes will be replaced by ongoing communication. 3. Trust Employees will become more motivated to work productively because their results will be plain for everyone to see. Instead of extensive control systems being put in place, each employee will be provided an opportunity to build and strengthen their own reputation -- which will even transcend the company and be acknowledged throughout their own industry. Throughout the business organization, richness will fuel collaboration while reach will stimulate both internal and external competition bringing out the best in all concerned. Key Thoughts ‘‘The Silicon Valley model is not a model for all businesses, quite obviously, but a model for the skill and knowledge intensive parts where profits are made. If slivers of the business would compete more effectively under a Silicon Valley structure, then they in isolation will become objects for deconstruction. (Those slivers are quite likely, of course, to account for most of the value of the business). Drug companies may be huge brand- and distribution-driven companies, but if the research function could operate better under a different model, the fact that manufacturing and sales force management require hierarchy and control is quite irrelevant. It simply makes the case for managing the two parts of the business differently and possibly independently.’’ -- Philip Evans and Thomas Wurster ‘‘Organization within the firm and organization across firms are increasingly becoming variants on exactly the same thing. This makes the boundaries of the corporation fuzzy and indeterminate.’’ -- Philip Evans and Thomas Wurster ‘‘The explosion of richness and reach will change the bases of competitive advantage and intensify competition at all levels of the supply chain.’’ -- Philip Evans and Thomas Wurster ‘‘What parts of an organization are most susceptible to deconstruction? The high-skill, knowledge intensive parts. The pieces where individual skill matters most. The pieces that make a disproportionate contribution to the value of the business.’’ -- Philip Evans and Thomas Wurster Richness Silicon Valley Japanese Western Reach At the present time, Japanese corporations tend to follow a greater richness -- less reach strategy where long-term employees develop close personal associations (great richness) with other parts of the management hierarchy. By contrast, Western corporations have typically adopted a low richness -- high reach strategy, where networking with other people at similar levels of expertise is emphasized and encouraged within the hierarchy. As the richness / reach trade-off blows up, these organizational hierarchies become deconstructed. Not only that, labor and capital markets, and the concept of what constitutes employment also become deconstructed. In essence, the organization then moves towards the type of structure that currently exists in Silicon Valley. In a Silicon Valley style organization: Employment is deconstructed -- people get involved in projects where their know-how adds value, and the move quickly onto the next opportunity once their specific project is finished. (And they learn about upcoming projects through networks built up by after-hours social activities). Ownership is deconstructed -- as venture capitalists allocate and reallocate capital, labor and technology in sync with changing market conditions and the quality of alternative opportunities. There is an exceptional level of transparency -- as companies may be fierce competitors one day and close collaborators the next. Direct relationships exist between initiative, innovation and reward. The key unit of value creation becomes an individual -- who maximizes the amount of added value by bringing together a team of people with the specialist skills required on an as needed basis. Control of the organization becomes a matter of trust rather than line of authority. In essence, the Silicon Valley model captures all of the benefits that traditional organizational hierarchies have delivered in a high reach -- high richness environment. Blown To Bits - Page 8 Section 5 12 Guiding Principles Main Idea 12 principles which assist the process of rethinking strategy in an era of deconstruction and change: 1. Never assume current definitions will be valid in the future. 2. Deconstruction occurs where incumbents have most to lose. 3. There is always a significant first-mover advantage. 4. Deconstruction may be a hybrid mix of four approaches. 5. Business strategy will shape the outcome. 6. The value of applying the right strategy will increase. 7. Restructured business definitions will rarely align with the old. 8. Incumbents will find acting on new strategies difficult. 9. Existing structures automatically protect the status quo. 10. There must be a willingness to learn from mistakes. 11. New business processes will be required. 12. Incumbents are in the best position to become insurgents. Supporting Ideas Taking each of these principles in turn: 1. Never assume current definitions will be valid in the future. Under deconstruction, traditional business definitions become variables that must be adjusted as the process continues. Even arbitrary constructs like a ‘‘business’’ will be replaced by a focus on information flows, layers or physical functions. 2. Deconstruction occurs where incumbents have most to lose. Management is about creating rather than preserving value. The best opportunities to create value in an era of deconstruction will be in those areas where the greatest value is currently being created -- where the incumbents earn their current profits. 3. There is a significant first-mover advantage. Waiting for someone else to get it right hands them an enormous competitive advantage. It will be much more profitable in the Internet era to be a trail blazer than a fast follower -- even if the odd mistake or misstep is made along the way. 4. Deconstruction may be a hybrid mix of four approaches. The way deconstruction will occur in any industry will usually end up being a mix of four generic approaches: 1. A break-up of the value chain. 2. Deconstruction along vertical business links. 3. The segregation of information into a separate business. 4. Deconstruction of organizational structures. 5. Business strategy will shape the outcome. In short, strategy will create new economic realities. As businesses apply different strategies in the deconstruction era, the eventual outcome itself will be shaped and altered. Competitors will actively shape the eventual structure of their deconstructed industries. 6. The value of applying the right strategy will increase. Historically, a business could survive by minimizing its mistakes. In the era of deconstruction, the bulk of the rewards will flow to those that get it right first -- even to the point of making it unlikely other businesses will survive. 7. Restructured business definitions will rarely align with old. Many companies overestimate the value of their existing capabilities. In the new era, the ability to acquire new skills, alone or in alliance with others, becomes critical for future success. 8. Incumbents will find acting on new strategies difficult. There is always a natural bias in every organization towards maintaining the status quo. For that reason, incumbents will be less responsive to market changes brought about by deconstruction than new entrants. 9. Existing structures automatically protect the status quo. Therefore, the last thing that should be done with a new development which is the best hope for the future of the company is to place it under the direct control of the department it will be superseding. It will get buried. 10. There must be a willingness to learn from mistakes. Most corporate planning focuses on avoiding errors. In the era of high uncertainty created by deconstruction, however, an improvisational approach -- allowing for continuous fine-tuning, adjustment and a healthy tolerance for mistakes along the way -- will be far more beneficial. 11. New business processes will be required. Traditional business expertise in the areas of planning, marketing and product development may ultimately become detrimental rather than beneficial. It may, at some point, make more sense to abandon historical ways of running the business and start afresh with new processes that match the new demands set by the marketplace. 12. Incumbents are in the best position to become insurgents. But most will fail to seize the opportunity to exploit the new business realities until they have studied the subject to death. In the era of deconstruction, the benefits will flow disproportionately to those that act first. And invariably, incumbents are in the best position to act rapidly -- if they can get past all the internal barriers first. Key Thoughts ‘‘In a deconstructing world, the traditional hierarchically defined roles of leadership become obsolete. But there remain two things that leaders, and only leaders, can do. The first is creating a culture. Culture, not factories, brands, business definitions or patterns of ownership, defines the corporation. The second task of leadership is strategy. Deconstruction calls out for big moves. It is the leader’s skill in making those big moves, second only to her skill in building the right culture, that will make the difference between success and oblivion.’’ -- Philip Evans and Thomas Wurster ‘‘Theorists have variously seen the corporation as a set of physical assets, a set of proprietary rights, or a body of core competencies. Those can all be deconstructed. What resists deconstruction is the idea of the corporation as defined by its culture and strategy. The corporation as a purposeful community. And if all else fades, perhaps purposeful community becomes the essence of identity, of management, of leadership. In a world of impersonal technical change, that is a refreshingly human thought.’’ -- Philip Evans and Thomas Wurster © Copyright 2000 All Rights Reserved Summaries.Com