9/2016 – Learning the new rules of strategy

by Tan Thiam Hock

Saturday, 2 July 2016

AS I watched the BBC news from my hospital bed in London, I am bemused by the political show that is unraveling in the United Kingdom. Former close friends, David Cameron, Michael Gore and Boris Johnson of the Conservative Party have all gone separate ways. First the split when voting on Brexit where Gore and Johnson led the “leave” movement against Cameron’s “remain” stance. Then Cameron resigns when Brexit “leave” won the referendum votes.

Just when Johnson looks like becoming the next leader of the Conservative Party and effectively the next Prime Minister, he was gored/stabbed in the back by Gore who ditched Johnson to throw in his own hat to fight for the job that he earlier said that he did not want.

Except for the back stabbing of comrades in arms, we have the complete opposite back home where the incumbents fight like crazy to stay in the job. Politicians all over the world seems to share similar traits. They twist and turn like ballerinas depending on the stage they are in. They have reasonable arguments for back tracking their earlier convictions or they blame it on memory lapse. The only consistent traits amongst politicians are self preservation and self ambition. Power is everything. It is all consuming and it brings out the beast in them. And these are the kindest words that I can use to describe them.

To be fair, politicians nowadays have to deal with different issues compared with 50 years ago. Back then it was all about rebuilding the nation from war or after gaining independence, uniting the people and building a great economy. Nowadays, it is all about immigration, racial undertones hidden under religious crusades, trade barriers hidden under single markets and trade agreements. Complex issues made even more unbearably complicated by politicians and bureaucrats. All in the name of self-preservation, either for race or for the nation.

The business world is also getting more complicated compared with 20 years ago. According to an article that I read in the Harvard Business Review, what I studied as value chain, the authors now described it as a “pipeline”. In an article headlined asPipelines, Platforms and the New Rules of Strategy, the three authors argued that scale now trumps differentiation. Huh? No they are not referring to Donald, the politician who quacks like a whacko duck.

Pipeline or value chain is actually a linear activity of a firm organising its internal labour and resources to create value by optimising an entire chain of product activities, from material sourcing to sales and service with the customer acting as the consumer of products and services sitting at the end of the linear process. Huh? These management gurus speak and write like politicians.

Basically what I learned 30 years ago is that we produce what the customer wants. Understand their needs and preferences and help them fulfill their needs thus creating a value chain. And we build strategies based on competitive forces of new entrants, substitute products or services, bargaining power of customers and suppliers and the intensity of competition.

Now the management gurus tell us that we are old school if we do not incorporate platforms after the pipelines. In the old days, platforms means market place where you bring sellers and buyers together. Like a shopping mall or a wet market. Like a newspaper that connects subscribers with advertisers.

Back in 2007, five major mobile phone manufacturers – Nokia, Samsung, Motorola, Sony Ericson and LG controlled 90% of the industry’s global profits. That year Apple iPhone burst onto the scene and began gobbling up market share. By 2015, Apple single-handedly generated 92% of global profits. From the five brands, only Samsung survived and made money from hand phones.

How did that happen? Apple’s production of hand phones was a classic pipeline even though manufacturing was outsourced to Foxconn. From design to manufacturing to distribution to sales and service, Apple was competing like the other five brands who was firmly entrenched then.

The difference was Apple created a business platform that brings together producers and consumers in high value exchanges, e.g. connecting app developers on one side and app users on the other – generating information and interaction values for both groups. As the number of participants on each side grew, the value increased – a phenomenon called “network effects” which is central to platform strategy. By January 2015 the company’s app store had generated US$25bil revenue for app developers.

Apple’s success in building a platform business (App Store) within a conventional product firm holds critical lessons for companies across industries. The management gurus further claims that firms that fail to create platforms and don’t learn the new rules of strategy will be unable to compete for long.

Platform businesses that bring together producers and consumers, as Uber and Airbnb do, are gobbling up market share and transforming the competition in the taxi and hotel accommodation business.

As Apple demonstrates, firms needn’t be only a pipeline, they can be both. While plenty of pure pipeline businesses are still highly competitive, when platforms enter the same market-place, the platforms virtually always win.

Just like Alibaba with its e-commerce platform and then creating additional value through its incorporation of third party online payment platform – Alipay creating higher network effects. Alipay is now part of the financial technology platform that is already taking market share from traditional banks that is stuck in their traditional pipeline business.

Just like old businesses that must transform to keep up with the new economy, the politicians and bureaucrats must realised that they too they must keep up with the new demands of the enlightened voters and citizens.

The social media platform has created the network effects of trust deficit syndrome that has taken the legitimacy to rule from the politicians. Even worse when you add justice and security trust deficit syndrome into the national market-place.

Hopefully the new political platform will bring in more engagements from concerned citizens thus creating sufficient network effects to create real change by bringing in the new to replace the old and hopeless.

Nah. That won’t happen anytime soon.

Published: http://www.thestar.com.my/business/business-news/2016/07/02/learning-the-new-rules-of-strategy/

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