Digital Megatrend 5: Value chain disintegration

fragmenting-cube

Digital allows the value chain to be economically unbundled. Retailers can outsource logistics, telcos can outsource the phone network. But more profoundly, digital allows activities to be split at a previously-unthinkable level of granularity. This means that whole business systems can now be assembled in the same way a child might assemble a Lego model. For example, digital (remote) passport authentication can be now sourced ‘as a service’, so financial services players can build a fully digital customer onboarding experience without major investment. Retailers can source internet payments solutions and embed them within their checkout flow.

As the value chain becomes dissected, fractal-like, at ever finer levels of granularity, the whole concept of a value chain becomes outmoded. In its place comes the ‘eco-system. Firms are creating complex webs of alliances from which they source many real-time services and integrate them into a customer offer. Importantly these ecosystems are ‘plug and play’. New and better products and services can be rapidly integrated. When combined with the enhanced economies of scale that digital drives, the formation of ecosystems will tend to drive increased specialization of companies. There is less value in owning the end-to-end chain and more value in being really distinctive at what you do.

Firms should ensure they are preparing for an eco-system future. Specifically they need to dedicate resource to understanding which services are available, as the landscape is evolving quickly. They need to create plug and play architectures, not just in a technical sense, but also in how they contract (e.g., shorter duration). And in some cases they may need to organize themselves into a set of discrete internal services to allow inter-operability with the external market. Most importantly of all, they need to decide what they are really distinctive at, and exit marginal activities.

Look out for further Digital Megatrends soon.

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