Category Archives: The Firm

Your next future: Capitalising on disruptive change

I and a coauthor have a new report out on DU Press: Your next future: Capitalising on disruptive change.1)Evans-Greenwood, P & Leibowitz, D 2017, Your next future: Capitalising on disruptive change, Deloitte University Press, <https://dupress.deloitte.com/dup-us-en/focus/disruptive-strategy-patterns-case-studies/capitalising-on-disruptive-change.html>. Disruption is something we’d been puzzling for some time as it’s a fuzzy and poorly defined concept despite all the noise it generates. It’s also concerning that few, if any, of the theories have much predictive power.

Our contribution is fairly straight forward.

First we make that point that disruption, as the term is commonly used, covers a broad range of phenomena. This creates tension between our desire for a comprehensive definition, one encompassing this broad scope, and the need for a precise definition, so that we are all clear on what we’re talking about.  Many academic theories (such as Clayton Christensen’s) come unstuck when it’s pointed out that the theory might refer to some disruptive phenomenon, but they don’t account for many other phenomena that can also be considered disruptive.

Consequently we must acknowledge that disruption operates are at least three different levels of abstraction:

  • At the highest level are long-term whole-of-economy shifts that disrupt all of us. The shift from stocks to flows – which we try and measure in the Shift Index2)Evans-Greenwood, P & Williams, P 2014, Setting aside the burdens of the past: The possibilities of technology-driven change in Australia, Deloitte Australia, viewed 26 October 2017, <https://www2.deloitte.com/au/en/pages/technology/articles/shift-index-key-findings.html>. – is one of these.
  • At the mid-level are disruptions focused on a sector or industry. Our colleagues in the US have be cataloging these in the Patterns of Disruption series.3)Hagel, ,J, Seely Brown, J, Wooll, M, & de Maar, A 2015, Patterns of disruption: Anticipating disruptive strategies in a world of unicorns, black swans, and exponentials, Deloitte University Press, <http://dupress.com/articles/ anticipating-disruptive-strategy-of-market-entrants/>.
  • At the lowest level are the things that disrupt us, our firm.

It was the observation that value used to be objective and defined relative to the market, in terms of product feature-function, but now value is more commonly defined subjectively, relative to the firm and the firm-customer relationship, that prompted us to look at disruption with a wider lens and make this subjective disruption the subject of a our essay.

Next we wanted to create a model of disruption that was predictive, which could be fed into a strategy-formation process to enable a firm to identify concrete actions that would enable a firm to prepare for a (potential) disruption and either capitalise on it or defuse it (i.e. neuter the disruption). The resulting model relies on three observations.

  • Disruption is degenerate. A single outcome, a disruption, might be triggered by a large number of different processes. This means that will be impossible to understand disruption by identifying and analysing individual contributors without considering the complex relationships between them.
  • Disruption is constructive. While technology is important to a disruption, technology alone is not enough and we need to also consider social and commercial forces as well that come together to trigger a disruption.
  • Disruption is subjective. A new technology might disrupt our sector or industry, but it may not disrupt us. The reverse is also true. Our concern is disruption to our business, not markets (via patterns of disruption), the economy (via the Big Shift) or disruption in general.

The result a model that shows us why we we cannot predict disruption by identifying ‘disruptive technologies’, but which does enable us to do something about shaping how we approach disruption.

We’re pretty happy with the result, which you can find at DU Press.

References   [ + ]

1. Evans-Greenwood, P & Leibowitz, D 2017, Your next future: Capitalising on disruptive change, Deloitte University Press, <https://dupress.deloitte.com/dup-us-en/focus/disruptive-strategy-patterns-case-studies/capitalising-on-disruptive-change.html>.
2. Evans-Greenwood, P & Williams, P 2014, Setting aside the burdens of the past: The possibilities of technology-driven change in Australia, Deloitte Australia, viewed 26 October 2017, <https://www2.deloitte.com/au/en/pages/technology/articles/shift-index-key-findings.html>.
3. Hagel, ,J, Seely Brown, J, Wooll, M, & de Maar, A 2015, Patterns of disruption: Anticipating disruptive strategies in a world of unicorns, black swans, and exponentials, Deloitte University Press, <http://dupress.com/articles/ anticipating-disruptive-strategy-of-market-entrants/>.

Digital is the new ERP

We seem to have forgotten that the development of Enterprise Resource Planning (ERP) was more a response to regulatory pressure than a child of technical innovation. This is why many executives and board members are unsure why their firm needs an ERP (and the massive investment implied), as ERP’s primary purpose was to improve governance (and, consequently, reduced operational risk and cost) rather than to provide the firm with some new value-creating capability.

Just prior to ERP, a confluence of technical and non-technical factors had created a situation where a firm’s executives and board had little idea of the goings on beneath them. Important details were buried in spreadsheets, squirrelled away on desktop PCs, with only summary reports passed to the general ledger and data warehouses.

Without the compliance guide rails provided by Finance and IT it’s easy for lines of business to go astray. Not long after spreadsheet use became widespread, it was clear that the information in the general ledger which the executive and board were relying on to direct the company could not be trusted. While the firm appeared to be making money, how this profit was being generated was less certain. Nor was it clear what operational risks a firm might be implicitly accepting, unable to manage them.

At which point the regulator stepped in demanding improvements in governance and operations. Industry’s response was ERP: an integrated set of business processes that synchronise (in real time) departmental solutions with the general ledger, supported (and enforced) by information technology.

We seem to be approaching a similar situation with digital. Firms are finding that important details are buried in SaaS and online solutions outside the purview of the Finance or IT departments and which are only loosely integrated to core systems, and their systems of records are, well, no longer ‘systems of record’.

This state of affairs could be accidental. The business wants to do the right thing but finds it difficult to know what the right thing to do is. They’re operating in a complex and rapidly changing business environment with demanding customers, many (previously core) functions are outsourced to specialist partners and suppliers, and they don’t have complete visibility into everything that is done on their behalf. It’s also an environment where regulators are constantly tweaking the rules to try and shape firm behavior, making a firm’s ability to absorb constant regulatory change a skill in and of itself.

Less ethical groups see this disconnect between the general ledger and lines of business as an opportunity to shape the story reaching head office. Cosmetic accounting techniques might be used to temporarily remove liabilities from a balance sheet, or to inflate revenue or market capitalisation by, for example, abusing special-purpose entities via techniques such as round-tripping (where an unused asset is sold with the understanding that same or similar assets will be bought back at the same or a similar price), all hidden under the veil of a summary report periodically passed between the department and the general ledger. These are the types of behaviours that brought Enron and Lehman Brothers down.

The information silos of departmental computing, the paradigm before today’s ERP-enabled enterprise computing, drove business efficiency by enabling firms to manage larger volumes of data. LEO (the Lyon’s Electronic Office),1)Land, F n.d., The story of LEO – the World’s First Business Computer, <https://warwick.ac.uk/services/library/mrc/explorefurther/digital/leo/story/>. an example of an early (and possibly the first) general-purpose business computer in the world, elaborated orders phoned into head office by Lyon’s tea shops every afternoon, calculating production requirements, assembly instructions, delivery schedules, invoices, costings, and management reports. These departmental applications, however, didn’t enable managers to find or exploit opportunities between departmental silos.

Spreadsheets and desktop PCs changed this. A desktop PC on a line manager’s desk enabled the manager to download data from multiple departmental applications and smash the data together in a spreadsheet. The resulting insights enabled production to be streamlined, or identified opportunities for new products and services, reducing costs and creating new value for the firm. Success begets success, and more data was downloaded and spreadsheets created. Soon these spreadsheets became integral parts of business processes and morphed into operational tools, outside the purview of the departmental applications that drove the firm’s compliance and reporting processes. Often the only connection between these new business processes and the general ledger was a summary report uploaded periodically.

The solution, then, was to integrate these cross-department spreadsheets, and the new business processes they enabled, into the firm’s departmental applications. The result is what we know today as ERP.

Something similar is happening with ‘digital’.

Cloud and SaaS solutions’ low barriers to adoption, and a customer empowered to demand what they want at the price they want from a global pool of suppliers, is driving line of business managers to go outside the enterprise to meet their needs. It’s not that the required business processes don’t exist; it just takes too long to modify the business processes to support new products, supply chains, suppliers and partners. Managers find it easier to put a credit card into a SaaS solution than wait for the IT department to respond with a plan, cost and timeline.

Departments are building entire value chains outside the purview of Finance and IT, as they believe that this is the only way that they can effectively respond to market opportunities and threats. Often the only connection to the general ledger is a summary spreadsheet, capturing details from cloud solutions, uploaded every few weeks or so. While the firm might be making money, it’s not clear to the executive or board just how this money is being made. Nor the risks this creates. We’ve been here before.

If the regulators don’t see this as a problem today, they soon will, as there is clearly a risk that good actors will unintentionally do the wrong thing, and for bad actors to intentionally do the wrong thing. There’s also the emerging problem of third parties hiding in the shadows using your legitimate business to wash funds (just as Amazon and Airbnb have become a target for money launderers).2)Shah, S 2017, ‘Airbnb is reportedly being used to launder money’, Engadget, <https://www.engadget.com/2017/11/27/airbnb-russian-money-laundering-scam/>. Operational risk is escalating as firms transform themselves from asset managers into integrators of services and information. The networked environment firms these firms inhabit creates unique challenges, has all the asymmetrical risks of an online environment, and the lack of visibility is compounding associated risks.

The problem digital is creating is clearly similar in effect to that the one created by the introduction of spreadsheets and the desktop PC. The cause, however, is different. Rather than creating new business processes that span existing (departmental) ones, digital is resulting in duplicated business processes that run in parallel and which support particular products or initiatives within the firm. They are also combining internal and external services, reducing the control a firm has on the end-to-end process.

These processes are intended to be short lived, thrown together quickly and torn down just as quickly. A process might be required, for example, to support a new supply chain for a burger of the month, thrown up at the start of the month to bring in new suppliers and partners, and torn down at the end. The duplicated processes are to support short-lived business exceptions, not to span business silos.

It’s assumed that more precise and tightly defined processes, backed by teams focused on maintaining and updating these processes to make them ‘agile’, will bring the firm back into compliance. This is not working though.

So while the problem digital is creating is similar to that due to spreadsheets, the cause if different and consequently our solution must also be different. Indeed, one might see business processes as part of the problem rather than as part of the solution.

References   [ + ]

1. Land, F n.d., The story of LEO – the World’s First Business Computer, <https://warwick.ac.uk/services/library/mrc/explorefurther/digital/leo/story/>.
2. Shah, S 2017, ‘Airbnb is reportedly being used to launder money’, Engadget, <https://www.engadget.com/2017/11/27/airbnb-russian-money-laundering-scam/>.

The future of retail: The need for a new trust architecture

Deloitte ran a series of breakfasts recently for the retail community, and they kindly asked C4tE to participate. My contribution, which you can find at Scribd or embedded below, sprang out of our recent report The Future of Exchanging Value: Cryptocurrencies and the trust economy(FoEV) when, during a chance conversation, Robbie (the left-brained person who leads the Spatial team) pointed out that that we were arguing for a new trust architecture in retail.

The nutshell explanation of the idea is:

  • The current retail model is a constructed environment and shopping a learnt experience. This model is a response to the creation of mass market products and supply chains.
  • The model is build on there pillars: customers identifying a need, searching for a solution to the need, and then transacting with a merchant that they may not know or trust. Money – cash – facilitates this, as it enables us to transact with someone we don’t know and may never meet again.
  • However, a number of trends we saw in FoEV suggest that this model might be breaking down. The mid-market dies, consumers seized control of the customer-merchant relationship, peers replaced brands, value is now defined by the consumer rather than the producer, payments are moving away from the till, and shopping is becoming increasingly impulse driven.
  • What will retail look like in a world where need is never fully formed, search is irrelevant, and transactions are seen as distasteful? What is the new trust architecture?

See what you think of the presentation and feel free ping us if you have any thoughts.

The two reports mentioned in the presentation are:

Future of Retail – a New Trust Architecture by Peter Evans-Greenwood

The Future of Exchanging Value: Cryptocurrencies and the trust economy

FoEV2_coverOur latest piece at Centre for the Edge is out: The Future of Exchanging Value.

This report started life as a followup to a report we published in 2012. As we say in the current report:

Our findings in that report centred on the realisation that we were reaching the end of the initial build-out
of a digital payments infrastructure. The task of provisioning the infrastructure merchants require to accept real-time digital payments, or for two individuals to settle a debt, was largely complete. Consequently, our focus had shifted to streamlining the buying journey – from the pieces and parts to the whole.

Our key point then was that the future of exchanging value would be shaped by social forces – how payments fit into the end-to-end consumer experience – rather than the technological challenge of deploying yet-another generation of payments solutions.

This new report, which was intended to be a short update, when in an entirely different and much more interesting direction.

Our key insight this time is that we’re all thinking about money the wrong way.

It’s common to assume that we use money (cash, currency…) to build trust relationships. This assumes that our adoption of money stems from the coincidence of wants. I need shoes. You have shoes. You want a fish. I have a chicken. We use money to bridge the gap.

The problem is that this assumption is incorrect. As David Graeber points out in Debt: The First 5,000 Years, debt came before barter and the coincidence of wants. Most folk in antiquity didn’t need money. They knew everyone they interacted with, and could rely on the community to enforce the collection of a debt if need be. Money’s first use was as a measure of value, typically to help calculate damages in a criminal or civil manner. Communities had carefully drawn up lists to capture exactly what you owed, in a convenient currency, someone if you destroyed their house, stole their food. In Somalia, for example, they use camels (commodity money). The other uses of money – as a medium of exchange and store of value – came later.

This is a fascinating fact, is it points out that we have the consumer-merchant relationship backward. We’re focusing on the transaction when we should be focusing on the relationship. The future of payments is not micropayments and tap-and-go. Indeed, the future of payments might be to use a loyalty scheme (a complimentary currency) to anchor the relationship and then move the transactions from the centre of the relationship to the edge. This ties is cultural preferences that we have, and which equate money and transactions as “dirty”. The future of payments might be not to have payments at all.

Bitcoin and the whole cryptocurrency thing is influenced by this too. There’s a huge amount of noise in this area at the moment, and everyone one is waiting for the killer app that will drive Bitcoin (or another cryptocurrency) into mass adoption. If, however, you view Bitcoin adoption as a cultural problem, rather than the search for a killer app, then you end up at the conclusion that no cryptocurrency will become much more than a large niche. The best equivalent in the current environment that we’re all familiar with would be a large frequent flyer scheme. It’s hard to scale trust, even with technology support, and these frequent flyer schemes seem to up near a nature limit.

There is one use case for currencies growing larger, though: when a sovereign nation mandates that you pay taxes in a specific currency. This trick is behind all the major currencies, and was used by the colonial powers to pull conquered land into their monetary system. Acquire currency to pay tax, or we send the bruisers around.

We conclude in the report that the best analogy for cryptocurrencies is rum and cigarettes. Rum was used in Australia’s early days when there wasn’t enough government issued currency to go around. Cigarettes were used by prisoners or war as they had few other options.

We can expect cryptocurrencies to see some adoption in countries where the population doesn’t trust – or can’t access – the national currency. Argentina springs to mind. Cryptocurrencies are mush less useful in other countries with mature and stable economies.

A similar argument can be made against cryptocurrencies as internal reserve currencies. (And that argument is in the report.)

There’s a lot more in the report, and I’ve been told that it’s a bit of a ripping yard. Go grab a copy and read it.

The problem with platforms in the sharing economy

Platform_compressed-750x300

I have a new post up on the Deloitte Strategy blog.It’s the result of a chat I was having the other day with an economist colleague who opined that “platforms are an essential part of the sharing economy”.

As I point out in the post:

These platforms might be sufficient to kick-start the sharing economy, but they’re not necessary for its long term survival. There are alternative approaches to creating sharing economy solutions that do not rely on a centralised platform.

Platforms solve what we might call the discovery problem. When we’re creating a market it needs a mechanism for buyers and sellers to discover each other.

Rendezvous – where buyers and sellers meet at a common location – is probably the most common solution to discover. It’s also the one that firms prefer as it’s the easiest to monetise.

As I point out later in the post:

The recent emergence of blockchain – a distributed ledger solution – from the shadow of Bitcoin might be a sign that something has changed in the environment, something that is tipping the advantage away from centralised solutions and toward distributed ones.

This could be a big deal, as it blows a rather large hole in the business models of the sharing economy firms.

Check out the post and see the whole story.

Platforms are the new fool’s gold

Fools-Gold-750x300

I have a new post up on the Deloitte Strategy blog, which I wrote with Richard Millar.

Platforms are all the rage. In the modern digital economy many organisations are looking to create platforms, rather than simply building a traditional value-chain driven company (otherwise known as a ‘pipe’).

In this context, a platform is a business model designed to facilitate exchanges between interdependent groups; as opposed to a pipe, which is centred on the sourcing, production and distribution process. The successful companies of the past focused on controlling distribution (something which is increasingly difficulty in our highly-interconnected digital world), while it’s thought that successful companies in the future will focus on controlling access to customers (which they can do by creating a platform that attracts the best customers).

Platforms are where the smart money is going (particularly if your platform is seen as scalable). There’s even a Platform Strategy Summit where you can learn the tricks that will make your platform successful.

This recent obsession with platforms raises some concerns though, as it seems to confuse cause and effect.

You can find the entire text over at the Strategy blog.

The happy accident of profitable creativity

Fast Company has started a series on “profitable creativity” and the first article – How to achieve profitable creativity, the secret of exceptional companies1)Charles Day (11 May 2015), How to achieve profitable creativity, the secret of exceptional companies, Fast Company – is out now.

While interesting, the article – and the F.O.R.M. methodology behind it (named for Focus, Organisation, Resources and Measurements, the four principles behind the method) – follow the pattern of “if you implement these best practices then you too will dominate your chosen industry” that’s so common in business writing. Unfortunately life, and business, isn’t so simple.

Everyone is after the silver bullet, and there’s a long history of business writers and academics who pander to this. Some of the most revered business books – such as Good to Great2)Jim Collins (2001), Good to Great, Harper Business – are subject to these failings. Indeed, I’ve written about this before.3)The myth of sustainable competitive advantage @ PEG.

In this case it’s claimed that a particular type of creativity (represented by the best practices that the authors have uncovered) that is the secret to success. Creativity is all the rage at the moment. The article even leads with a quote on the importance of creativity from a captain of industry.

Capital is being superseded by creativity and the ability to innovate.
—Klaus Schwab, Founder of the World Economic Forum

Rather than pull apart the limited information the article provides on F.O.R.M. I thought it would be more productive to point out the questions that you need to ask to determine if what you’re seeing is snake oil or solid research whenever you come across yet-another claim for a silver bullet.

First you need to look for disconfirming research. It’s not enough to show that companies using these practices were successful. We need to see evidence that these practices are more strongly associated with successful companies than unsuccessful. Were these practices used by a significant number of companies that did fail? Or were they limited to successful companies? Can, therefore, we conclude that these practices were necessary for success? Or are just they just more noise in the crowded thought leadership marketplace and uncorrelated with success?

Consider, for example, if the CEOs of the successful companies we considered wore red socks on Tuesdays. We might conclude that wearing red socks on a Tuesday will give us the edge we need. Humans have a natural confirmation bias so when you reach a conclusion you need to ask yourself ‘What would it take to prove this conclusion false?’ Can you find a significant number of firms where the CEO religiously wears red socks on Tuesday and which were not successful? Did the CEOs of failed firms also wear reds socks? How do we know that the correlation they you’ve found isn’t just a happy accident, and that we’re reading a lot more into it than we should?

Next we have to consider survivorship bias. Someone has to win, but coming out on top does not imply that you were more skilful. There’s a lot of dumb luck in business; it’s not enough to be good at what you do, you need to be at the right place in the right time with the right product(s) and you still need a healthy does of luck.

Did the successful companies survive because they were good at what they do? Or is their success the result of happy accidents that took down their competition, or lucky coincidences that enabled them to leap ahead? Were they in the right places at the right time, moving into Asia when their competitors moved into South America, for example? Where they part of a rapidly growing industry were a rising tide raised all boats? Someone must survive, but there’s no rule that says that their skill was the only determinant of their survival.

Next we have the unknown unknowns. How do we know that the practices identified are the right practices?

Perhaps the successful companies that we’re looking at were more financially savvy and managed their cash flows more effectively, something which is hard at the best of times and even more challenging in the current turbulent environment, but which is inherently boring. Or perhaps they made a couple of astute (or just plain lucky) bets on which sectors to play in, nudging them past their competition. How do we know the survey or practices was complete? What was the framework used to identify these practices, and link them to changes in the environment. Correlations don’t cut it.

Ultimately, identifying a common set of practices for a group of companies that performed well over a given time period does little more than confirm that over the last time period these companies did well. That was already obvious.

What we, as practitioners, need to know is which practices can make a difference, and which are just fashions peddled by thought leaders who need to sell another book, who are trying to build an audience for the conference circuit, or are looking for consulting work.

Image: Split Shire.

References   [ + ]

1. Charles Day (11 May 2015), How to achieve profitable creativity, the secret of exceptional companies, Fast Company
2. Jim Collins (2001), Good to Great, Harper Business
3. The myth of sustainable competitive advantage @ PEG

The benefits of being big are shrinking

Pumpkin-750x300Centre for the Edge AU is looking at how long-term trends are changing the composition of the business landscape: the change in the mix of large verses small firms, and how they relate to each other.

The work is developing nicely, but we’re still a long way from putting something formal out. However, one conversation (between Richard Miller and myself) was worth blogging about, which is the dynamic between a long-term trends for consolidation (markets becoming increasingly dominated by a smaller number of larger firms) and one of fragmentation (large markets breaking into many smaller, niche, markets). The result is over on the Deloitte Strategy blog as Market trends: The benefits of being big are shrinking. I even managed to coin a nice visual image that I think sums the post up nicely:

It’s as if our efforts to rip operational costs out of business have incrementally worked their way from left to right across the value chain – from sourcing through to marketing and distribution – only to bounce off the customer and start working their way back, from right to left, fragmenting the business landscape in the process.

The car you just bought is the last car you will ever own

How long until it doesn’t make any sense to own a car? What if you considered a car an accessory for your phone, rather the considering a phone something you plug into your car? With decent smart phone integration (via CarPlay from Apple, and Android Auto) and for-profit car clubs (from ZipCar, FlexCar through Daimler’s Car2Go and BMW’s DriveNow to Hertz on Demand and Avis On Location by Avis) allowing you to only pay for the hours you use, that time might not be too far away.

Cars are status symbols. They’re expensive, typically the single most expensive item that most folk will buy other after a house. Since the around the 1930s your car has also been something of a fashion statement.

The car we buy is an extension of our personality. Agreeable individuals seem to prefer brands like Toyota or Nissan while Peugeot owners are extroverts and Volvo is associated with safety.1)Press release (2013), What Your Car Says About Your Personality, Veryday. Black is the colour of luxury and status, while the owner of a silver or grey car driver doesn’t want to stand out; owner of blue cars want stability, truthfulness and serenity; a brown-car buyer wants value and a long life in their purchase, and doesn’t care about trends or fads; while yellow car owners exude joy and a positive attitude.2)Lora Shinn (2014), What Your Car Color Says About You, Fox Business.

If a car is a status and fashion symbol then why don’t we change our cars when we change our moods? The zippy little commuter (or perhaps the impressive black executive conveyance) for the commute to the office, something fun and red for the weekend, or reliable blue people-mover for ferrying the kids to weekend sport.

The main problem for many folk is that we can only afford to own one (or perhaps two). Having a car for every occasion is just not financially viable. For-profit car clubs are changing that though. At the moment you can pay by the hour for something reliable but boring to get you from point A to point B and back again. What’s to stop the same services from offering something more exiting, or something with a little more room?

Then there’s the problem of carrying your preferences – the selection of radio stations, GPS settings, seat hight and so on that we’re dialled in – from car-to-car. If, however, we think of cars as smartphone (or even smartwatch) accessories, rather than the other way around, then it’s not hard to imagine hopping into the car club car you’ve just picked up and dropping your phone into the dock, only to find the seat hight adjusted, radio stations tuned and a route to your mother’s house out in the suburbs plotted by the time you mange to get the car started.

At this point the only thing tying you to owning a car is the golf clubs that you store in the boot (trunk), and the strange iconic role that buying your first car has in your formative years.

While the baby boomers have a strong attachment to owning a car, this is not true for Gen Y, who are ambivalent about car ownership. Studies have shown that fewer young adults have driver’s licenses, that they hate the traditional car-buying process, and that they prefer urban living and socialising online and consequentially have less need for cars.

Why invest a large chunk of your personal wealth in a single asset that is worth nothing when you finally sell it, when you can access cars on on-demand, picking the car that fits your mood and needs at that particular time, and have the car magically become “yours” when you drop your smartphone into the dock?

This creates an interesting dilemma for the car manufacturers. On one side that have younger cohorts coming through who don’t automatically assume that they need to own a car, and who are consequentially harder to market to. On another side they have the emergence of fractional car ownership: what’s happened to private jets3)NetJets has provided a fractional ownership service for private jets since 1986. and handbags4)You can fractionally own, or rent, depending on your point of view, a designer handbag from services such as Bag Borrow or Steal. is now happening to automobiles. And finally, on the last side, they have new approaches to manufacturing such as iStream5)iStream is a new approach to car manufacturing that reducing the cost of tooling by around 80%, enabling new car models to be profitable in much shorter production runs. that slash the investment required to design and manufacture a car, potentially making all your expensive factories irrelevant overnight.

It’s not hard to imaging a time in the near future where you can have the car you want, when you want, without owning it. While it’s not an option at the moment, it doesn’t look like it’s to far in the future. The car you just bought could well be the last car you ever own.

Image source: Alden Jewell

References   [ + ]

1. Press release (2013), What Your Car Says About Your Personality, Veryday.
2. Lora Shinn (2014), What Your Car Color Says About You, Fox Business.
3. NetJets has provided a fractional ownership service for private jets since 1986.
4. You can fractionally own, or rent, depending on your point of view, a designer handbag from services such as Bag Borrow or Steal.
5. iStream is a new approach to car manufacturing that reducing the cost of tooling by around 80%, enabling new car models to be profitable in much shorter production runs.

90% of sales are in bricks-n-mortar stores, but many are dying anyway

The stats are in and the rush to declare bricks-n-mortar retail dead appear to be a bit premature. While online commerce appears to be growing at a fairly impressive rate (of somewhere around 15% to 20%1)NAB Online Retail Sales Index, depending on where you are) that growth rate is on a very low base. This means that somewhere are 90% of retail sales still occur in a bricks-n-mortar store, and that figure floats up to 95% if you include bricks-n-mortar stores with an online presence.2)Chris Lund (April 2014), “Reports of bricks and mortar’s demise have been greatly exaggerated”, Strategy.

The problem with this point of view is that it ignores that fact that while the future might be here, it’s still unevenly distributed.

At a whole of economy level retail might be growing, and most purchases still occur in a bricks-n-mortar store, but when you dig into the details a different story emerges.3)Winners and losers in retail @ PEG What we’re witnessing is the incremental destruction of small (and some not-so-small) areas of the retail market as consumer behaviour changes and makes them irrelevant.

The first wave of online retail – Web 1.0 as it’s called these days – was moving catalogues online. This enabled consumers, for the first time, to search for what they wanted from the comfort of their own home, rather than need to head out on a shopping mission. This created a distinct change in what consumers purchased, as they could now use the power of Google to find the best product at the best price, or the cheapest product at the lowest price, and make their purchase directly with the retailer (local or online) who offered precisely what they wanted.

This had two interesting effects. The first was the destruction of mid-market brands.

Historically consumers were forced to compromise, their choice limited to what the merchant around the corner chose to stock. Confronted with three options – a cheap option, a middle quality option, and a good option – the consumer was forced to compromise. They would pick the best that they could afford or the cheapest that the merchant chose to offer. Web 1.0 meant that if they they could find something better, possibly at a lower price in another country, then they could would avoid the middle quality option and go directly to the best. Many mid-market brands collapsed as a result.

The second effect was the destruction of many local retailers. Most of these local retailers – the small clothing shop on the high street, or the department store in town – were little more than the end point of someone else’s supply chain. Their value lay in the fact that they were convenient, being close to home. Web 1.0 enabled consumers to reach around these local retailers and source the products themselves. Unable to compete on price, quality or convenience, many local retailers collapsed (or are collapsing).

So while retail might be growing overall, some roles in the retail market are no longer sustainable. Typically this means firms that trade in easily transportable, durable goods, such as books, CDs, video games, clothing, jewellery and the like and offered little more than convenience shopping.

More recently the emergence of social media and smart phones (the information comes to us, rather than us going to the information) means that we no longer rely on brands or firms for the information that drives a buying decision. The tangible effect of this is a dramatic decrease in brand loyalty. Fast food chains have already seen this effect, as everyone from travellers to teens started using recommendation services (Urbanspoon, Yelp, etc.) rather than trusting the brand, and were heading to local bistros rather than the outline of some national or global chain.

This effect is causing consumer facing parts of the market to fragment. This is a second knife in the back for many retailers – such as department stores – as their “sell to everyone” model doesn’t work in a market that’s fragmenting into a range of niches. The firms that are successful in this space are those that use a range of media (face-to-face stores, pop-up stores, social media, mobile apps, web sites…) to build a relationship with the consumer, and/or which are focusing on niches. The balance of power has tipping into the hands of firms that are agile enough to address these niches, “sell to niche” rather than “sell to all”.

So, taking all that together, we can see that 90% of purchases are through physical stores is not surprising. The problem is that:

  1. retail sectors that are moving online will be seeing more the 10% of transaction leaving bricks-n-mortar (let’s assume 20%), which is enough to drive many firms out of business
  2. spend in many sectors is moving to the cheapest and the best, eliminating many local businesses and mid market brands
  3. mobile and social means that many niche firms are now successfully competing with larger firms, causing significant problems for the larger firms

While the top line number might seem quite benign, the terror for many firms is in the details.

Image source: Chris Talbot

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