From process to information-driven business

Both alchemists and investors have long searched for the elusive formula to create gold from base materials. In recent decades the base has been silicon and the hunt for gold has used the Internet as its cauldron.

The dotcom crash of the turn of the century taught academics and investors that just putting a business on the Internet did not make for a sure-fire success. The search was on to find the ingredients to survive and thrive in the digital economy. The answer they found was that the future belongs to “platforms”, that is those businesses on which others in turn build their commercial activities.

Seven of the ten most valuable companies in the world have been called platform businesses: Microsoft, Apple, Amazon, Alphabet, Facebook, Alibaba and Tencent.

Early digital economists focused on “two-sided platforms” to differentiate them from businesses that just sold to a customer, but increasingly interest has moved to “multi-sided platforms” as business models and supply chains have become more sophisticated.

Today, however, the platform metaphor is looking overly simplistic. Many platform businesses have failed and there are a large number of non-platform business success stories. Even the attribution of the platform moniker is starting to look forced, and the definition malleable, when applied to companies such as Apple and Microsoft who were born as traditional businesses and have adapted more recently to earn substantial subscription and cloud revenue.

Owning a platform (or market) isn’t the only path to success but arguably having the information assets to frame the markets you operate in is. The common thread for the seven most valuable so-called platform businesses is that they hold asymmetric information about the sectors in which they operate.

Businesses born before the information revolution were largely process-centric, whereas those created in the digital era are inherently engineered around data. In fact, last century data was largely about measuring the effectiveness of processes whereas in the digital era data is even more important than the processes themselves.

Walmart is perhaps the iconic retailer of the last century. Founded in 1962 by Sam Walton with the simple principle of working to “help people to save money so they could live better”. The best way in the twentieth century to do this was to reduce the cost of making and moving goods: the supply chain processes.

In comparison, Amazon is the quintessential post-information revolution retailer. Jeff Bezos grew the business to prominence in the early noughties to emerge as a worthy challenger to Walmart’s dominance. Being born digital, Amazon has always put data first, with Bezos focusing on experimentation: “If you double the number of experiments you do per year, you’re going to double your inventiveness.”

The key to a successful information-driven business, like Amazon, is this use of data to inform and rapidly tailor market offerings while building recurrent revenue. This means that these businesses use their digital-enabled agility to constantly reinvent themselves, often to the needs of each individual customer. This tailoring would have been unimaginable to industrial pioneers like Henry Ford.

Ford virtually invented production line processes, standardising everything. Today, Tesla is successful despite the critics who see it as competing against more than a century of car making process expertise. However, despite the brilliance of Tesla’s cars, the data cloud that surrounds them could well be the secret to the resilience of Elon Musk’s challenge to the automotive establishment. Each car is learning from the environment around it. Musk has said “When one vehicle learns something, they all learn it.” Tesla doesn’t own a market, but it is framing the driving environment in new ways.

It is, perhaps, ironic that Apple, founded at the end of the process era, is competing with the likes of Google established in the information era. It is particularly ironic given that the CEO, Tim Cook, made his name establishing Apple’s incredible supply chain processes! Apple’s continued success, though, has seen it pivot to be a data company making an increasing proportion of revenue from subscriptions. Interestingly, they are looking to not only use data to be better but also differentiate in the way they treat personal data.

Regardless of whether the business is in retail, motor vehicles or devices, the basics of business stay the same. Recurrent revenue through subscriptions lowers the cost of sale, provides higher margins and delivers customer insights. Information-driven subscription models are increasingly associated with many of the most today’s most successful companies.

For example, Netflix is competing with its twentieth century studio and network predecessors by focusing on constant testing of viewer preferences and using the data they glean to frame the entertainment market. As one of the best subscription services in the market, they know that they are competing to make sure you maximise the value you receive from the “all you can eat” monthly subscription.

Like all great information businesses, Netflix is framing their market and redefining the competition. Netflix CEO, Reed Hastings has highlighted that they care more about your other distractions than they do about competitors for your subscription dollar.

“You know, think about it, when you watch a show from Netflix and you get addicted to it, you stay up late at night. We’re competing with sleep, on the margin.”

Perhaps that is the ultimate success of information-driven businesses, they redefine the competition battleground to places where they know they can win.

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