HOW YOUR VALUE CHAIN IS BEING DISRUPTED AND WHY YOU SHOULD FOCUS AND GO GLOBAL
This paper describes 3 of the most important disruptive forces and their impact on current value chains for small and medium sized enterprises. It asks the question if a global virtual community for SME-managers should be established aiming to provide a platform where ideas and examples can be shared and questions can be answered on how best to develop SME-businesses in future.
Think of Kodak, Blackberry and Blockbuster — classic examples of a component manufacturer, a finished good manufacturer and a retail business that were once dominating their industry but now have been massively diminished in size and importance, transformed and/or acquired by others. Digitalization of print, touch screens over key boards and video streaming versus hard copy were some of the disruptive forces that Kodak, Blackberry and Blockbuster did not embrace or only to late.
But Kodak, Blackberry and Blockbuster were all giants and perhaps they had very inflexible organizations — what if you are a manager of a small or medium sized company, what and how will disruptive forces influence your business in the coming years?
E-Commerce has already shown itself as a major disruptive force not only to global brands but also to small local retailers like clothing and book stores. Physical location is rapidly becoming less important.
3D-manufacturing is rapidly moving from small scale development projects to on-site, just-in-time component manufacturing for OEM-equipment and may in future have major disruptive effects not only to sub-suppliers of components but also to the shipping industry, which to a lesser and lesser degree will be transporting components and finished products between continents and increasingly will be transporting 3D-manufacturing bulk raw materials. Product standardization is rapidly becoming less important.
The Internet of Things however may in future disrupt not only companies and entire value chains but IoT may also decide who gets to become centers or integrators of the future value hubs and who are left to the role of spokes or sub suppliers.
FOCUS AND GO GLOBAL.
Getting closer to your customers is key if you want to keep as well as get new customers.
Getting closer to the customers has traditionally meant establishing sales offices, legal companies or entire production facilities in the countries or regions where customers are concentrated.
This has traditionally been a barrier for small and medium sized companies but not so anymore according to a February 2015, McKinsey Quarterly article, “Harnessing the power of shifting global flows”:
“Smaller enterprises add a new dimension to global competition as they begin expanding across borders. Internet platforms are empowering these “micromultinationals,” enabling them to find customers, suppliers, funding, and talent around the world at lower cost…. digital platforms can cut the cost of exporting by 83 percent as compared with traditional export channels.
And global flows of goods, services and finance are rapidly increasing:
The same McKinsey article shows that global flows are rising rapidly in value — and will grow further in all economic scenarios over the coming decade.
If you are a manager of a small or medium sized business digitization thus opens new possibilities, but it works both ways — foreign small and midsize competitors can also reduce their contact costs towards your customers.
If you want to stay competitive you need to continuously develop and market goods or services that fulfil important customer needs better than competition — unless you want to end up in pure price competition.
Thus getting closer to your customer is going to be key to be one of the future winners — not so much in order to sell products that you currently produce but rather to get deep and profound insight into your customer needs and behaviors, collect (big) data from many sources and thereby deduct (by use of algorithms) how to develop and market the new solutions that fulfil customer needs better than competition
Therefore, segmenting and focusing your business on few customer segments each sharing similar needs is important if you want to be able to use your resources efficiently and increase in profitability.
Focusing on fewer customer segments reduces the available market close to you thus in order to grow and be profitable you need to think about going global — this brings you back to digitization be it in the form of internet marketing, strategic alliances, supplier sourcing or perhaps even 3D-Manufacturing.
YOUR VALUE CHAIN IS BEING DISRUPTED.
If your business is focused on physical products, then your traditional value chain is threatened to be crushed or disrupted by at least 3 megatrends sweeping through businesses all over the world: 3Dmanufacturing and E-Commerce as described above but also and perhaps more disruptive: The Internet of Things.
Traditionally raw material producers supplied materials to component manufacturers who in turn supplied components to finished goods manufacturers. Finished goods were sold through wholesale to retail and finally bought by consumers.
3D-Manufacturing threatens component manufacturers as finished goods manufacturers, wholesale, retail and even consumers may be able to produce the products they require “on-demand” at the right quality, quantity and cost. E-Commerce threatens wholesale and retail as consumers may be able to buy the products they require direct from the finished goods manufacturers “where they are and when they want”.
The Internet of Things however may be the biggest threat to your value chain if you are a finished product manufacturer and if your product collects or can collect valuable digital information.
In a recent article by Michael E. Porter et al.: “How Smart, Connected Products Are Transforming Competition” it is described how The Internet of Things threatens finished goods manufacturers by enabling “Smart Connected Products”:
The Internet of Things may reshape whole industries:
“The powerful capabilities of smart, connected products not only reshape competition within an industry, but they can expand the very definition of the industry itself. The competitive boundaries of an industry widen to encompass a set of related products that together meet a broader underlying need. The function of one product is optimized with other related products. For example, integrating smart, connected farm equipment — such as tractors, tillers, and planters — can enable better overall equipment performance.
The basis of competition thus shifts from the functionality of a discrete product to the performance of the broader product system, in which the firm is just one actor. The manufacturer can now offer a package of connected equipment and related services that optimize overall results. Thus in the farm example, the industry expands from tractor manufacturing to farm equipment optimization. ……
Increasingly, however, industry boundaries are expanding even beyond product systems to systems of systems — that is, a set of disparate product systems as well as related external information that can be coordinated and optimized…….
John Deere and AGCO, for example, are beginning to connect not only farm machinery but irrigation systems and soil and nutrient sources with information on weather, crop prices, and commodity futures to optimize overall farm performance…….
Companies whose products and designs have the greatest impact on total system performance will be in the best position to drive this process and capture disproportionate value.
Some companies — like John Deere, AGCO, and Joy Global — are intentionally seeking to broaden and redefine their industries. Others may find themselves threatened by this development, which creates new competitors, new bases for competition, and the need for entirely new and broader capabilities.
Companies that fail to adapt may find their traditional products becoming commoditized or may themselves be relegated to the role of OEM supplier, with system integrators in control.”
So how are you as manager of a small or medium sized business going take advantage of the disruptive forces of E-Commerce, 3D-Manufacturing, The Internet of Things, etc., so that you may surf the wave of disruptive transformation rather than being crushed by the breakers when these technologies hit the shores of mass markets?
Surely you are not alone, there are millions of managers of small or medium sized business out there facing the same disruptive forces. Some of you compete but many of you don’t, and on your own you may find it difficult to navigate these waters.
Could the solution be to establish a global virtual community for SME-managers aiming to provide a platform where ideas and examples can be shared and questions can be answered on how best to take advantage of present and coming disruptive technologies?
About the author
Peter Sørensen is an internationally experienced strategy consultant, business manager, board member and business broker. Peter helps BtB managers and/or owners increase the profitability or realize the value of their business.
Peter would like to thank Claus Amann for valuable support and input to this paper.