Degrees of Freedom

I love my job. I get to see how technology impacts entire industries from the front lines. The companies we work with all have one thing in common, they have increasingly more degrees of freedom in which to operate. By this I mean that they have dramatically more strategic options available mainly due to software. It boils down to two underlying forces; increasing customer expectations to have a good experience and the ease of coordinating on a large scale. The ripple effects of these two forces are only just beginning which makes for a fascinating dynamic. I will attempt to describe an incredibly complex subject so apologies for any over simplifications.

Where does this matter for a business

At a high level, there are three axes that are important to evaluate technology’s impact:

  • Operations
  • Infrastructure
  • Business model

Operations is the simplest bucket. Here you switch from paper to email & Slack (or crappy Teams). You start using more collaboration tools. As a business leader, it’s an important area but not life threatening. You simply need to adapt the day to day operations of your company.  

Infrastructure is bigger and requires more capital expenditure. Think of the shift to electric vehicles for instance. If you are a tour bus operator, this will require a significant capital expenditure. The shift to the cloud is another area. You have to switch from on prem servers to the cloud. Again your business is not a risk. Planning and proper capital allocation are needed to upgrade your technology. 

The most fascinating and important bucket is of course, the business model. It’s how you make money. The first word that comes to mind in this bucket is (takes a deep breath) disruption! The word is overused yet accurately portrays part of the phenomenon. This is when an upstart uses an attack vector that gives it a structural advantage over an incumbent. Think AirBnb competing with hotels without having real estate on its balance sheet. Or Netflix with its direct to consumer streaming model. 

There isn’t only disruptive innovation in the Clayton Christensen sense of the term. These tend to get a lot of press but there are other dynamics at play as well.

Looking at the value chain

An area that is interesting to examine is an industry’s value chain. In the traditional, linear pipeline model, margin flows through the value chain. Each player takes their cut, and the end customer pays the full amount.

Software is breaking the boundaries of this traditional model. It’s allowing organizations to be at different positions in the value chain and interface with everyone which goes back to the about point of ease of coordination on a large scale. 

This phenomenon was brilliantly explained by Adrien Nussenbaum, Co-founder and CEO of Mirakl in a recent interview

Everything organizations do is always defined by how they view themselves in the value chain. So, if you’re a manufacturer, you are at the beginning of the value chain. So, you don’t really traditionally operate thinking about the people or the companies that are all the way at the end of the value chain. Your sales, your marketing is mostly centered around the next person in your value chain; your distributors, your resellers, your — And similarly, if you’re a distributor, you’re in between buyers and manufacturers. So, you see yourself from where you are within your value chain. And this has created inertia over the years.

And what digital is allowing to do and we go back to the boundaryless, breaking those boundaries. Digital is now allowing organizations to be at different positions in the value chain. Because instead of being linear, those value chains are becoming more circular. And you can interface with everyone in your value chain, unlike what you could do before. And for me, this is really the most interesting change to apprehend. Because if organizations are able to understand that, they now start to ask themselves different questions. In specific markets, do I want to be directly in contact with the end-users? In others, do I want to be going with my partners? In others, do I want to be going — partnering with other services to complement my products? You now live in a world where through platforms, everything is possible. You can be everything in the value chain.

This a brillant summary of how boundaries are increasingly vanishing. The real world is not a simple linear diagram. The lines and arrows of previous value chains are blurring.

Capital flows to new areas of value

Platforms are at the heart of this shift. They have enabled large scale coordination while increasing the overall customer experience. What these companies have realized is that once you have a platform, you can easily create new value by enabling the creation of marketplaces as well.

Amazon is the OG innovator in this space. They leveraged their ecommerce platform into a third party marketplace. Build infrastructure and then make it available externally. They are now doing the same with their physical shipping infrastructure.

There have been a few recent Canadian examples as well. Shopify launched a competitor to Faire with its own marketplace Handshake. With Shopify’s ecommerce platform becoming more standardized, they are now investing in ways to add differentiated value. Handshake is one, their fulfillment network is another.

Lightspeed also announced an online marketplace for its retail customers to look for new and popular product suppliers.

The previously mentioned Mirakl is leading in this space as well – they recently raised $300 million to enable any company to build their own marketplace.

These companies build infrastructure, turn it into a commodity and then sell it externally. These capital investments are unlocking entirely new areas of value for their customers.

Freedom isn’t free 

We’ll continue to see previously unimagined possibilities for people to innovate. The degrees of freedom available to move up and down the value chain will continue to increase. All this freedom comes with a cost and with tradeoffs. Just because you can do more doesn’t always mean you should. This is the part of the chess game that’s the most fun.

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