August marks the 11th anniversary of Marc Andreessen’s famous article – Why Software Is Eating The World, published in The Wall Street Journal. Everything the Internet has done to the newspaper and music industries is now happening to all other industries. Concurrently.
I teach the subjects of strategy and online business models at the Faculty of Business Administration with foreign language teaching (FABIZ) in the Master of Business Administration (IMBA) and Master of Digital Business and Innovation (MDBI) programmes respectively. Books, case studies, debates, projects etc are all necessary but never sufficient when discussing strategy and online business models.
The pulse is always taken at the grass roots, and from discussions with managers and specialists from partner companies many of the students understood how complex and dynamic the world we live in is, realizing practically that “nothing is as it used to be” and that the only constant is indeed change.
The entry of new players into almost all markets is getting easier and easier as new business models emerge. As a result, new winners are on the horizon. Pandemic has meant an acceleration of digitization and a series of forced experiments.
Small fish become big fish and vice versa
In this system of continuous disruptions we identify four types of companies:
- Yesterday’s winners, today’s losers – these are companies that were once admired and intensely sought after in a bygone era, and today are no more (R.I.P., Kodak!).
- Successful companies yesterday, but also today – Facebook started in 2004 in a PC-only world and today is a leader in the mobile world (with intentions to dominate the next stage, the metaverse)
- Companies that are successful today but have pivoted in their business to get where they are today. They are growing in an environment referred to simply as the digital economy.
- Companies of the future – those that emerged 100% on mobile and whose business model has changed the world we live in forever (ie. ByteDance, Snap etc)
In the lines below I will focus on a few examples of type 4 companies.
Algorithms are better than the first mover advantage in a market
We now know that sharing content created by anyone is a much better idea than content created by our own circle of friends, acquaintances, and followers. TikTok (owned by the company ByteDance) has 1.2 billion monthly active users, representing the user equivalent of three other key platforms (i.e. Twitter, Snapchat and Pinterest), as shown in Figure 1.
Figure 1: Monthly active users, Q1 2022
Source: author’s analysis based on company data
Under the pressure of the stock market and beyond, companies of types three and four mentioned above have the ability to choose the markets they enter. Thus, Amazon made more revenue in 2021 from advertising sold on their marketplace than from the rest of the business (i.e. online store, cloud services, etc.), but even compared to other “traditional” companies in this industry, as shown in Figure 2.
Figure 2: Annual advertising revenues in 2021
Shein, an ultra-fast-fashion company with no stores, shortened the cycle from production to delivery from 14 to 7 days (!). The company uses information collected from users directly from the app and together with Google Trends searches and search (not purchase) behavior of young people promotes 10,000 new SKUs daily.
No wonder they are “top of mind” among US teens and are now preparing for an eventual $100 billion listing and valuation.
Figure 3: Online search comparison Shein (blue) vs. Zara (yellow) vs. H&M (red)
Source: Google trends
Piper Sandler’s annual survey shows that Shein is now the fourth most popular clothing brand in the US.
One of the important findings of Shein’s success is also related to data-driven short-term predictive manufacturing. Their ERP system is integrated with the manufacturers’, so they know in real time what raw materials are available from suppliers. As a result, they only order 100-500 units per item based on search (not purchase!) behaviour, all in a TikTok-like experience.
Ultimately, customers continue to purchase the company’s products because of (1) the very competitive price, (2) the ease of buying, and especially because of (3) the promotion and activation budget. The latter is massive because the company has no physical stores, hence no rentals.
The art industry couldn’t miss it either, especially now that we are experiencing the highest inflation in four decades in the world’s most developed economy. Masterworks.io is a web 3.0 company, the first platform for buying and selling shares in iconic works of art. Individuals can create a diversified portfolio of peer-reviewed works curated by a research team and sell their shares on a secondary market, that is if they don’t choose to keep them until they mature (ie. 3-10 years).
Figure 4: The investment process on masterworks.io
Ultra-specialization of providers
Congratulations to Apple for reaching two incredible thresholds for the first time – valuation at $1 trillion and $2 trillion respectively. What was the situation in the phone market 20 years ago? Nokia considered phone manufacturing a core competence and a competitive advantage. Back then, 75% of the company’s phones were made in eight factories. Fast forward to 2022 and Apple has more than 200 suppliers with factories in 800 locations, none owned by the company.
What can companies, especially traditional ones, do in this context?
Here are some proposals published three months after the pandemic began:
- Rethink all products and services in a strictly customer-oriented digital manner. If a process can be made simpler then customers will want it or will migrate to other companies (g. How many clicks does it take to open a bank account; why call the call center when I can chat to a robot?)
- Using Artificial Intelligence to improve operations – in many traditional companies the main battles are not for customer and product, but political infighting. Vague words like digital transformation no longer inspire anyone. I would encourage leadership to choose a (sub-) department where they experiment with different technologies and experiments.
- Selective modernization of technology capabilities – Gartner identifies in a survey of 464 CEOs that the main strategic direction for 2021 – 2022 is to grow the business, followed by implementing new technologies to increase productivity. Creating a two axis (urgency and benefit) chart like the image below (Figure 5) can realistically show what the priorities are:
Figure 5: Model for analyzing the impact of certain technologies on the company
Source: Course material “Online Business Models” taught by the author in the International Master of Business Administration programme at FABIZ)
4. Rethinking the organization’s organizational chart – eliminating intermediate levels, implementing remote working, working with freelancers, and identifying the company’s competitive advantages are some of the recommendations. Do you deliver products with your fleet or work with distributors? Do you outsource departments that don’t bring you competitive advantages or do you internalize the creative process? Simple questions at first glance, but a lot of headaches in the medium and long term.
5. A new kind of leadership – the days of the isolated CEO in an A-class office are long gone.
Generation Z is aware and present in the metaverse, yet realistic, communicative, interested in access and oriented towards ethical consumption.
What will be the next industry to undergo a radical transformation? Maybe even the one we work in.