‘Plug-and-play’ business model

As digital forces reduce transaction costs, value chains disaggregate. Third-party products and services — digital ‘Lego blocks’, in effect — can be quickly integrated into the gaps. Amazon, for instance, offers businesses logistics, online retail “storefronts,” and IT services. For many businesses, it may not pay to build out those functions at competitive levels of performance, so they simply plug an existing offering into their value chains. For example, in the United States, Registered Investment Advisers (RIA’s) have been the fastest-growing segment of the investment-advisory business. They are expanding so fast largely because they “insource” turnkey systems (including record keeping and operating infrastructure) purchased from Charles Schwab, Fidelity, and others that give them all the capabilities they need. With a license, individuals or small groups can be up and running their own firms.

In the travel industry, new portals are assembling entire trips: flights, hotels, and car rentals. The stand-alone offerings of third parties, sometimes from small companies or even individuals, plug into such portals. These packages are put together in real time, with dynamic pricing that depends on supply and demand. As more niche providers gain access to the new platforms, competition is intensifying.

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