Lecture on Strategy and Technology

Introduction

• Business strategy is often seen as abstract and timeless.
• Argument: Business strategy is based on assumptions about technology which are changing dramatically.

Historical Background

• Bruce Henderson: Founder of BCG, introduced military strategy concept into business, emphasizing concentration of mass against weakness.
  • Increasing returns to scale and experience.
• Michael Porter: Introduced the concept of the value chain.
  • Businesses have multiple steps; advantages vary across components.
  • Transaction costs are key in holding businesses together; organizations coordinate better than markets.

Changing Premises

• Falling transaction costs change strategy landscape.
  • Two components: processing information and communication.
  • Communications costs dropping, enabling the Internet boom.
  • Disintermediation due to breaking up of value chains.

The Internet Economy

• First Generation: Falling transaction costs led to disintermediation and value chain deconstruction.
  • Example: Encyclopedia industry shift from physical sales to digital (Wikipedia).
• Second Generation: Rise of user-generated content and social networks.
  • Collapse of certain economies of scale, e.g., Wikipedia vs. professional encyclopedias.

The Third Decade: Data

• Shift from analog to digital data by 2007.
• Explosion of connected digital data (data with IP addresses).
  • Enabling new patterns and connections.
• Example: Genomic data and mapping.
  • Cost reduction in genome mapping from millions to below $100.
  • Potential to revolutionize medicine with personalized genomic data.

Implications for Business Models

• Challenge for businesses relying on proprietary data for competitive advantage.
• Need for new institutional structures and business strategies.
  • Shift from vertical to horizontal structures due to falling transaction costs and polarized scale.
  • Examples: Telecommunications, pharmaceuticals, university research, energy sector.

Strategic Implications

• Strategy must adapt to horizontal industry structures.
• Strategy as curation of horizontal structures.
• Reconcile collaboration and competition, and large and small scales.
  • Need for industry structures accommodating diverse motivations and collaborative institutions.

Conclusion

• Traditional business strategy premises are becoming obsolete.
• Requires fundamental rethinking of business structures and strategy.
• These transformations make strategy engaging and relevant again.