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THEDIGITAL TRANSFORMATIONOF SUPPLYCHAIN MANAGEMENT
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THEDIGITAL TRANSFORMATIONOF SUPPLYCHAIN MANAGEMENT
MICHELAPELLICELLI
DepartmentofEconomicsandManagement,Universityof Pavia,Italy
Elsevier
Radarweg29,POBox211,1000AEAmsterdam,Netherlands TheBoulevard,LangfordLane,Kidlington,OxfordOX51GB,UnitedKingdom 50HampshireStreet,5thFloor,Cambridge,MA02139,UnitedStates
Copyright 2023ElsevierInc.Allrightsreserved.
Nopartofthispublicationmaybereproducedortransmittedinanyformorbyany means,electronicormechanical,includingphotocopying,recording,oranyinformation storageandretrievalsystem,withoutpermissioninwritingfromthepublisher.Detailson howtoseekpermission,furtherinformationaboutthePublisher’spermissionspolicies andourarrangementswithorganizationssuchastheCopyrightClearanceCenterandthe CopyrightLicensingAgency,canbefoundatourwebsite: www.elsevier.com/permissions . Thisbookandtheindividualcontributionscontainedinitareprotectedundercopyright bythePublisher(otherthanasmaybenotedherein).
Notices
Knowledgeandbestpracticeinthis fieldareconstantlychanging.Asnewresearchand experiencebroadenourunderstanding,changesinresearchmethods,professional practices,ormedicaltreatmentmaybecomenecessary.
Practitionersandresearchersmustalwaysrelyontheirownexperienceandknowledgein evaluatingandusinganyinformation,methods,compounds,orexperimentsdescribed herein.Inusingsuchinformationormethodstheyshouldbemindfuloftheirownsafety andthesafetyofothers,includingpartiesforwhomtheyhaveaprofessional responsibility.
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ISBN:978-0-323-85532-7
ForinformationonallElsevierpublicationsvisitour websiteat https://www.elsevier.com/books-and-journals
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AcquisitionsEditor: KathrynEryilmaz
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CoverDesigner: VickyPearsonEsser
TypesetbyTNQTechnologies
4.Theneedforadifferentapproach
5.Managingthesupplychain:technologiesfor
5.1
5.10
PART3Globalsupplychainandglobalstrategies
6.1 The firstwavesofglobalization:1980’sand1990’ s
6.2 Offshoringhasbecomeavitalpartofglobalstrategies
6.3 Thegreatvarietyofmodels
6.4 ‘Old’ providersemergingasnewcompetitors
6.5 Themaintechnologicaldisruptors
6.6 Managingasupplychainunderuncertainty
6.7 HasCOVID-19andRussia’sinvasionofUkrainebrought downglobalization?
6.8 Russia’sinvasion:atippingpointinglobalization
PART4TheEffectsontheSupplyChainsof COVID-19andtheRussia’sInvasionofUkraine
7.Neversomuchattentiontothedigitaltransformationof supplychains
7.4
8.WarinEurope:anotherblowtotheglobalsupplychains
8.1
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Introduction
Whythisbooknow
Forsometimenow,myresearchhasfocusedontheprogressmadeby SupplyChainManagement(SCM),thankstodigitaltechnologiesandthe ongoingevolutioninglobalsupplychains.Iwaspreparingapublication when,in2020,aphaseofverystrongchangebeganthatbroadenedmyinterests.TheFukushimanucleardisasteralmost10yearsearlierhadalready highlightedthevulnerabilityofsupplychainstounforeseenevents,but theexplosionofthecoronaviruspandemicandRussia’ssubsequentinvasion ofUkrainehavechangedthescenefarmoredeeply.
Whilewhatsupplychainmanagershadlearntduringthecoronavirus pandemicwasbecomingthe ‘newnormal’ andweweremovingtowarda humanitarianandeconomiccrisis,anewmindsethademerged.Globalsupplychainshadbeenstrained,whichmadeiturgentforpoliciesthatwould lessendisruptionsandintensifyresilience.Intheeconomicliterature,new expressionshavebeenusedmoreandmorefrequently,suchasreshoring vs.onshoring,inshoringvs.outsourcing,resiliencevs.robustness,preparing for ‘just-in-case’ vs. ‘just-in-time’ delivery,andnewwordssuchasdeglobalizationhaveappeared.Companieshavehadtorethinkmostoftheirbusinessesandtodevelopnewcompetencies.Oldrulesarenotcompletely obsolete,butusedontheirowntheyareinappropriateforsurvivingand prosperinginafast-changingenvironment.
Startingfromthesepremises,IdecidedtoreviewwhatIhadalready writtenandexploretheimpactofneweventsonthechallengesandpolicies posedbySCM.
Whatthisbookisabout?
ThepurposeofthisbookistoreviewthefoundationofSCMand discusshowitcandealwiththerecentwavesofchangebyusingdigitaltechnologiesformoreefficiency,profitability,andresilience.Thebookprovides anunderstandingofthebreathtakingshiftintraditionalindustriesandthe resultingsignificantimplicationsforSCM.Thebasicmessageisthatthe newsocialandeconomicenvironmentrequiresatotallynewstrategicmanagementmindset.
Keydefinitionsandevents
1. Digitaltransformationistheprocessofusingdigitaltechnologiesto reinventabusinesstobemoreresponsivetomarketdemands. Withdigitaltransformation,thecompany “startswithablanksheet” , andbyintegratingnewtechnologiesitredesignsitsactivities,products,andservices.Itrepresentsapath,ajourney,withdifferentobjectivesthatdependontheindustrytowhichthecompanybelongs.The pathmustbeaccompaniedbyaprocessofchangemanagementboth toovercomethenormalresistanceoftheorganizationandadaptthis tothetransition.
2. “Supplychainmanagement(SCM)isthehandlingoftheentireproduction flowofagoodorservicetomaximizequality,delivery, customerexperienceandprofitability” (IBM,2022). “Bymanaging thesupplychain,companiescancutexcesscostsanddeliverproducts totheconsumerfaster” (Fernando,2022).SCMhasgreatlybenefited fromdigitaltransformation.
3. DigitaltransformationinSCM:Itisnotonlytheuseofmoderntechnologytoincreaseefficiencyandproductivity,reducerisks,and leveragenewopportunities;itisalsoaprofoundlynewwaytodrive thecompany. “Digitaltransformationsarealonggame” “The pointofdigitaltransformationisn’ttobecomedigital.It’sactually togeneratevalueforthebusiness” (Smaje,Zemmel,2022).
4. Inrecentyears,someeventshaveacceleratedthedigitaltransformationinSCM,whichhastakencenterstageinbusinessstrategies.The Fukushimanucleardisaster(theearthquakeandsubsequenttsunami onthewestcoastofJapan),thecoronaviruspandemic,andthewar inUkrainehavehadacommondenominatorinthedisruptionof supplychains,promptingtheneedtorestoretheirresilience.A newageofSCMhasbeguninwhichalongjourneytowardresilience needstocontinuouslyreconfigurebusinessprocessesinafastchangingenvironment.
5. Digitaltransformationhasbeenongoingfordecades,butitgota boostwhenthecoronaviruspandemicbrokeoutandalotofpeople aroundtheworldmovedonline.WithInternetaccess,studentsand employeesforcedtostayhomeinisolationcarriedouttheirnormal activitiesremotely.Atthesametime,manycompaniesadopteddigitalbusinessmodelstomanageallstagesofthevaluechain.Fastand
reliableconnectivityfacilitatedinteractionsbetweenmachines,people,andorganizations,promptingadaptationtothedisruptionof supplychains.
6. Justwhentheglobaleconomywassupposedtocompleteitsrecovery fromCOVID-19,thelargestwaronEuropeansoilforalmost80years hasunderminedglobaleconomicprospects.Russia’sinvasionof Ukrainehascontributedfurthertodisruptglobalsupplychainsina moregeographicallylimitedwaybutwithstrongerconsequencesand aslowerrecoveryofresiliencethanwasthecaseattheendofthemost acutephaseofCOVID-19,therebyacceleratingtheshiftfromglobal toregional,andevenlocal,sourcing.
7. Globalizationreferstotheincreaseinthe flowsoftrade,money,people,andideasamongcountriesbeginningwiththeendofWorldWar II.Globalizationofsupplychainsmeansinsteadthat,thankstothe easeofexchangesbetweencountries,aproductsoldinonecountry canbethesumofcomponents,modules,andservicesproducedin variouspartsoftheworld,evenwhenthereisagreatdistancebetweenthecountriesinvolved.Theformerisapowerfultrendofinternationaltrade,whilethelatteristhe “bloodvesselsystem” that makesitpossible.Globalizationandsupplychainarethereforestrictly connected.Sincethelastdecade,morefrequentandintensesupply chaindisruptionshaveunderminedglobalization,leadingtothe widespreadbeliefthatglobalizationwillsufferadecline,although theforcesthatsupportitwillnotbedefeated.
Thestructureofthebook
Thebookisorganizedinto fivekeypartsandninechapters.
PartOne(Chapter1)isaboutthedriversofdigitaltransformationand theireffectsonthesupplychains;PartTwo(Chapters2to5)isaboutthe digitaltechnologysolutionsformanagingthesupplychains;PartThree (Chapter6)dealswiththeevolutionoftheglobalsupplychainandglobal strategies;PartFour(Chapters7and8)discussestheeffectsonthesupply chainoftherecentwaveofdisruptions;andPartFive(Chapter9)discusses howbusinesseshavereactedtodisruptionsofsupplychains.
Somechapters(suchas Chapter6)canbereadasastand-alonecomplete setofconcepts,whileothersarecloselyconnectedwitheachother(suchas
Chapters2to5).Eachchapterleads,onestepatatime,towardabetterunderstandingofthenewtoolsavailabletodayandtheneedforanew approach.
Chapter1 givesspecialattentiontoDigitaltransformation(DT)asan everlastingchangingstrategy.Amazon,Airbus,Dell,andWalmarthave rewrittentherulesofcompetitionintheirindustries,demonstratingthat thesupplychaincanbeastrategicdifferentiator.Foritspart,theacademic literaturehasidentifiedfourtiersofDTand fivedomainsofstrategythat DTischanging.Tohighlighttheconceptsintroduced,thechapterrecalls howNetflix’soriginalDVDservicedefeatedtheleadingpositionofBlockbuster.Facinganabsolutedominatorintheretaildistributionofmovie rentals,NetflixdecidedtoattackBlockbusterbyofferingcustomersa completelynewvaluepropositionbasedontheintroductionofnewtechnologies,amongwhichDTwasthemostimportant.
Chapter2 focusesontheimpactsofdigitaltechnologysolutionsandis dividedintothreeparts.The firstdealswiththeprogressbroughtbythe DigitalSupplyNetwork(DSN)anddiscussesitsmaincapabilities.ThesecondgivesevidenceofprogressmadepossiblebytheriseofIndustry4.0, whichinvolvesaradicalshiftinhowproductioncurrentlyoperatesand hasmanyimpactsonthesupplychain.Theprocessisdrivenbytechnologies suchasCloudcomputing,BigData,theInternetofThings,Blockchain, Robotics,AdditiveManufacturingand3Dprinting,AutonomousVehicles andIntelligentTransportSystems,ArtificialIntelligence(AI),Co-Creation, andtheDigitalValueChain(DVC).Thethirdpartwarnsthatthereisstilla lotofhurdlestoovercomeinfullydeployingautomationinthesupply chain.Industry4.0isstillfarfrombeingfullyrealized.Infact,manycompaniesarestillattheearlystagesofexploringitspossibilitiesandimplementingtheinformationsharingnecessarytoachievesharp-wittedSCM.
Chapter3 examineshowSupplyChain4.0technologiesarerewriting therulesofSCM.Oneofthemainadvantagesisovercomingthelackof transparency,inwhichasegmentedsupplychainisfoundinindependent silosthatdonotcommunicatewitheachother.WithIndustry4.0technologies,theboundariesbetweensilosdisappear,andeverylinkbetweenthem becomesvisibletoallplayersinthesupplychain.Othermainbenefitsof transitioningtoadigitized,automated,andfullyinterconnectedsupply chainareidentified.Theadoptionofdigitaltechnologiesallowscompanies toobtainandanalyzedatainrealtime,providingrelevantinformationtothe productionsystems,whichleadsthewaytoadvancedmanufacturing, knownasSmartmanufacturingandSmartfactory.UnderSmartfactory
management,thetraditionaldistinctionbetweenproductionplanningand productionmanagementdisappearssincethemachinesconstantlyexchange informationabouttheproductionprocess.Anessentialrequirementto competeinthedigitalageisclosecooperationamongthevariousfunctions oftheenterpriseandcommunicationamongthevariouspartsofthesupply chain.
Chapter4 surveystheevolutionoftransportation,warehousing,logistics, andprocurementunderSupplyChain4.0technologies,whichbringmany advantages.Forinstance,newtechnologiesappliedtotruckinghelpin choosingthebestroutestoreachadestination,whichisnotasimpleprocess asvariouselementsneedtobeconsidered:speedlimitsthataredifferent fromoneroadsectiontoanother,therisksoftrafficcongestion,weather conditions,temporaryroadclosures,andfuelcosts.Warehousetransformationbenefitsfromawaveoftechnologicalinnovationthatincludes Robotics,AugmentedReality,AutonomousVehicles,sensortechnology, andtheInternetofThings.Inrecentyears,duetotheintroductionofSmart technologies,whichare ‘intelligent’ systemscapableofcontrollingprocesses autonomously,withouthumanintervention,logisticshasundergoneaprofoundevolutionfromasimpleoperationalfunctionofthecompanytoa meansofcarryingoutadvancedplanningprocesses.Digitaltechnologies havealsobroughtsignificantadvancesinprocurementmadepossible,thanks tothegreatertransparencyofsupplier/buyertransactionsaffordedbyconnectingthephysicalanddigitalworlds.Thankstonewtechnologies,strong advanceshavebeenmadeinthetwopartsoftheprocurementprocess: sourcingandpurchasing.
Chapter5 notesthattheintroductionofdigitaltechnologiesinSCMhas forcedcompaniestoreviewandreconsideralltheiroperations.Theamount ofinformationaboutinternalandexternalprocesseshasgrowndramatically, increasingtheefficiencyinallmanagementareas,especiallyinSCM.Using thelatestdigitaltechnologies fromCloudcomputingtotheInternetof Things,fromBlockchaintoArtificialIntelligence toincreasecosteffectivenesshasbecomeamust.Thischapterexaminesthemainfeatures of,andthemainadvantagesfrom,theuseofdigitaltechnologiestomanage thesupplychainsandmakingthemacompetitiveweapon.
Chapter6 providesahistoricalperspectiveonoutsourcingandoffshoring andonrecentwavesofdisruptions.Overthepast30years,globalizationhas beenatthecenterofinterestofmanycompaniesattractedbytherapid developmentofdemandinsomecountries,especiallyChinaandIndia. Thankstothelowcostoflaborindevelopingcountries,thesecompanies
havemadesignificantprofits.Offshoringhasquicklybecomeavitalpartof globalstrategies.However,startingfromthe financialcrisisof2008-2009, thescenehaschanged.Risingprotectionism,thetradewarbetweenChina andtheUnitedStates,andrecentradicalchangestoindustriesandmarkets haveslowedthepaceofgrowth.Reshoringhasbecomeabuzzwordandthe natureofglobalizationhaschanged,requiringmanagerstochangetheir entireapproachtothedesignandmanagementofsupplychains.
Chapter7 explorestheroleofthecoronaviruspandemiconthemanagementofsupplychains.Therapidspreadoftheepidemicthroughoutthe worldhasbeenanunprecedentedphenomenon,whichhasrapidlycreated amismatchbetweensupplyanddemandchallengingthemanagementof supplychains.Factoryclosureshavestoppedproductionbycreatingbottlenecksandshortagesatvariouspointsinthesupplychains,andthetransport crisishasexacerbatedthesituation.Many firmshaveshiftedtheirproduction closertohomeandraisedprices.
Chapter8 addressesthekeychallengesthatRussia’sinvasionofUkraine posestotheglobalsupplychains.Thischapterwaswrittenwhenthe Russia-Ukraineconflicthadbeengoingonforaboutthreemonths.It wasdifficulttopredicthowtheconflictwouldevolve,butsomeeffects onsupplychainswerealreadyevidentanddestinedtolast.Manycompanies havebeenforcedtorethinktheirsupplychainsbuiltoverdecades.Thewar hasbroughttothesurfacethevulnerabilityofsupplychainsandaccelerated theshiftofthecriticalphasesoftheiractivitiesfromglobaltoregional,and eventolocal.Globalsupplychainsinsomesectorsarecloselyintertwined andfeedproductionthathasdifficult-to-replacecomponents.Theinvasion addedfurtherpressuretothegloballogisticsandtransportationnetwork,also creatingaspillovereffect.
Chapter9 looksathowbusinesseshavereactedtovarioustypesofsupply chaindisruptions.Theprocessisnodifferentforanyonefacingriskanduncertainty: first,identifythevulnerability,andsecond,bemoreresilient. Therearemanykeystrategiestomakesupplychainsmoreresilientwithout weakeningtheircompetitiveness,suchasbuildinginventoriesfasterthan buildingfactories,reshoringoronshoring,diversifyingsupplybases,devising anewbusinessmodel,acceleratingtechnologicalinnovation,andrethinking thetrade-offbetweenproductvarietyand flexibleproductioncapacity.This chapterdistinguishesbetween ‘resilience’ and ‘robustness’.Resiliencerefers totheabilitytoreturntonormaloperationsafteradisruption,whilerobustnessreferstotheabilitytomaintainoperationsduringacrisis.Italsodistinguishesbetween ‘justintime’ and ‘justincase’,theformerbeingmore
appropriateintimesofintensesupplychaindisruptions.Attheend,aquestionisasked:whydodisastersoften findtheMNCsunprepared?Psychologistshaveananswer.Theproblemisoftennottheinabilitytopredict buttheinabilitytoreacttotheperceptionofarisk.Thismayexplain whyorganizations,thathaveconsiderablemeanstoscrutinizethehorizon andprotectthemselvesfromlargerisks,havebeenslowtoreacttotheeffects ofthepandemic,therebyworseningtheeffectsofsupplychaindisruptions.
References Fernando,J.(2022). SupplyChainManagement(SCM),Investopedia,January29. https://www. investopedia.com/terms/s/scm.asp#:w:text ¼of%20a%20product.-,By%20managing %20the%20supply%20chain%2C%20companies%20can%20cut%20excess%20costs,the %20inventories%20of%20company%20vendors . IBM.(2022). Whatissupplychainmanagement? https://www.ibm.com/topics/supply-chainmanagement
Smaje,K.,&Zemmel,R.(2022). DigitalTransformationontheCEOagenda,May12. https://www.mckinsey.com/business-functions/mckinsey-digital/our-insights/digitaltransformation-on-the-ceo-agenda.
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Driversandeffectsof digitaltransformation onthesupplychain
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Towardanewwayofthinking
1.1Platformsandnetworkeffects
WhatisthesecrettothesuccessofUber,Airbnb,Amazon,andApple?
Allthesecompaniesdisruptedtheirmarketswhentheyenteredthemand startedtheirpathtobecomingindustryleaders.Thesepioneeringbusinesses arebuiltonplatforms.Whateachofthemhasincommonisthatthevalue theyprovidetocustomersincreasesastheytakeoffandbringinmoreusers. Theconceptoftheplatformhasbecomeafundamentalonefortheinnovationofbusinessprocesses,havingaradicalimpactonthewayproductdevelopmentaswellastheentireinnovationprocessisconceived,including relationshipswithsuppliersandcustomers(Clark&Fujimoto,1991).
1.1.1Definitionofplatform
Theplatformconceptisconsideredanessentialfoundationtoimprovenewproduction opportunitiesthroughnewautomationformsandneworganizationalstructures;toincreasemarketorientationandinnovation;andtoachieveadditionalqualityimprovements (Wilhelm,1997).
Researchers(Robertson&Ulrich,1998)defineaplatformasacollection ofassets,components,processes,knowledge,peopleandrelationshipsshared byasetofproducts.1
1 Theplatformconcepthasbeenwidelydiscussedintheliterature,leadingtomanydefinitionswith onlysmallvariations.AccordingtoSchenkletal.(2011), “Aplatformisdefinedasasetofcorporate valuesofthecategory’scomponents(parts,productiontools,electriccircuitsandsoftware),processes (developmentprocessesandproductionprocesses,supply-chain),knowledge(developmentalknowhowandproductiontechnologies)aswellashumansandnetworks.Aplatformcanbeusedinseveral generationsofproducts”.Astheauthorsargue,itcanbeconsideredas “atechnicalsystemforstanda rdizationincludingbothtechnicalandorganizationalaspects.Itisamodulethatcanbeusedinawide rangeofproducts.Theplatformhasdegreesoffreedomtobeadaptedtoapplicationspecificrequ irements”.MeyerandLehnerd(1997)defineaproductplatformas “asetofsubsystemsandinterfaces thatformacommonstructurefromwhichastreamofderivativeproductscanbeefficientlydevelo pedandproduced” . “Aplatformisagroupoftechnologiesthatareusedasabaseuponwhichother applications,processesortechnologiesaredeveloped.Inpersonalcomputing,aplatformisthebasic hardware(computer)andsoftware(operatingsystem)onwhichsoftwareapplicationscanberun” (Techopedia,2020).
TheDigitalTransformationofSupplyChainManagement ISBN:978-0-323-85532-7
https://doi.org/10.1016/B978-0-323-85532-7.00006-2
InIT,aplatformisanyhardwareorsoftwareusedtohostanapplication orservice.Anapplicationplatform,forexample,consistsofhardware,an operatingsystem,andcoordinatingprogramsthatusetheinstructionset foraparticularprocessorormicroprocessor.Inthiscase,theplatformcreates afoundationthatensurestheobjectcodewillexecutesuccessfully(Bigelow &Rouse,2021).
Aplatformstrategyprovidesadvantagesfortheglobalizationprocess, suchasgreater flexibilitybetweenplants,costreductionachievedbyusing resourcesonaglobalscale,increaseduseofplants,andareductioninthe numberofplatformsonaworld-widebasis(Muffatto,1999).Theability togetproductstomarketfasterisakeycompetitiveadvantage. “Aneffective methodforgainingthisadvantageistodevelopproductplatformarchitectures” (MartinandIshii,2000).
Thedevelopmentofproductsbasedontheplatformapproachisconsideredanimportantsuccessfactorinmanymarkets. “Bysharingcomponents andproductionprocessesacrossaplatformofproducts,companiescan developdifferentiatedproductsefficiently,increasethe flexibilityand responsivenessoftheirmanufacturingprocesses,andtakemarketshare awayfromcompetitorsthatdeveloponlyoneproductatatime” (Robertson &Ulrich,1998). “Thebenefitsincludeincreasedengineeringefficiency, highersolutionreliabilityandreduceddirectcosts” (Karandikar&Nidamarthi,2007).
Someotherresearchers(Cusumanoetal.,2019),afterstatingthataplatform “connect[s]individualsandorganizationsforacommonpurposeorto shareacommonresource”,distinguishthreetypesofplatforms.
• ‘Ideologicalplatforms’ : “ideasorpoliciesthatbringpeopletogetherfora commongoal”
• ‘Physicalplatforms’ : “onwhichpeoplecatchtrains,designatedareasthat bringpeopletogethertoaccessasharedmodeoftransportation” .
• ‘Productplatforms’:thatcompaniescreatewith “commoncomponents andsubsystemsthatdifferentengineeringgroupswithinthe firmandits supplychain(suchasautomakersoraircraftmanufacturers)canuseto build ‘families’ ofrelatedproductsmoreefficientlythanbuildingeach productfromscratch”.Theusefulnessofanindustryplatformcan growthroughthepower-of-networkeffect.
Atleastthreefactorsaredrivingtheindustry’smovetoplatforms:new infrastructureandtechnology,richerandmorevisiblelogisticsdata,and relentlesspressuretoreducecosts.
1.1.2Whatisthenetworkeffect?
“Thenetworkeffectisaphenomenonwherebyincreasednumbersofpeopleor participantsimprovethevalueofagoodorservice” (Banton,2021).
Thestandarddefinitionrefersto “anincreaseinconsumerbenefitsdueto anincreaseinthenumberofothersconsumingthenetworkgood” (Spulber, 2008).
TheInternetisanexampleofthenetworkeffect.Initially,therewere fewusersontheInternetsinceitwasoflittlevaluetoanyoneoutsideof themilitaryandsomeresearchscientists.Asmorepeoplestartedusingthe Internet,thecontentoftheinformationandservicesexchangedincreased, andthisattractedmoreusers.Themoretheirnumbergrew,themorethe valueoftheexchangesincreased.
E-commercesitessuchaseBayhavegraduallygrowninimportanceby accessingonlinenetworksandattractingconsumerstotheirproductsand services.ThewillingnesstopayforaserviceofferedbyeBayincreasedas thenumberofbuyersorsellersforthebusinessrose.
Accordingtothe “EconomicsofManagers” courseat HarvardBusiness School,thetermnetworkeffectreferstoanysituationinwhichthevalue ofaproduct,service,orplatformdependsonthenumberofbuyers,sellers, oruserswholeverageit.Typically,thegreaterthenumberofbuyers,sellers, orusers,thegreaterthenetworkeffect,andthegreaterthevaluecreatedby theoffering. “Inotherwords,thewillingnesstopay,forabuyer,increasesas thenumberofbuyersorsellersforthebusinessgrows” ,says HarvardBusiness School ProfessorBharatAnand.
Manyoftoday’smostprominentcompaniesandstartupsarepowerfully backedbynetworkeffects,suchaseBay,Amazon,Alibaba(e-commerce); Uber,andLyft(ride-sharing);andFacebook,Twitter,Instagram,LinkedIn (socialmedia).Whateachofthesecompanieshasincommonisthatthe valuetheyprovidetocustomersincreasesastheyscaleandacquiremore users.eBayoffersmuchmorevaluetousersasmoresellersusetheirplatforms.UberandLyftprovidemanymorebenefitstoriderswhenmore driversjointheirplatforms.Asforsocialmedia,users findtheservicesignificantlymoreattractiveasmorepeoplesignup.
Therearetwotypesofnetworkeffects:(1)directand(2)indirect. (1) ‘Directnetworkeffects’ takeplacewhenthevalueofaplatformincreasesbecausetheservice’svaluegrowsasaresultofattractingmore users.Thisisthecasewithsocialmediaplatforms.
(2) Conversely, ‘indirectnetworkeffects’ takeplacewhenthevalueofa platformdependsontwoormoreusergroups,suchasbuyersandsellers. Whentheuseofaplatformbyonegroupincreasesso,too,dotheadvantagesforothergroups.Withridesharing(arrangedbymeansofa websiteorapp),ifthereisanincreaseinthenumberofpassengers thatwanttotravelwithaprivatevehicledrivenbyitsownerfora fee,thenumberofthosewhooffertotransportotherswiththeir ownvehicleswillalsoincrease.Parkeretal.definethisruleasthe ‘two-sidednetworkeffect’,andunderscoringthat “theimportanceof theseeffectsforstimulatingnetworkgrowthissogreatthatplatform businessesoftenspendmoneytoattractparticipantstoonesideofthe market” . “Theyknowthat,iftheygetonesidetojointheplatform, theothersidewillfollow” (Parkeretal.,2017).
Tobetterexplainthislatterconcept,theAuthorsremindusthathumanityhasknownformillenniatheadvantagesofbringingtogether inthesameplacebothproducersandconsumers,therebycreatingvalue forboth. “Afterall,whatisthetraditionalopen-airmarketplacefound invillagesandcitiesfromAfricatoEuropeifnotaplatforminwhich farmersandcraftspeopleexchangesellthewarestolocalconsumers?” . Thefundamentaldifferencebetweenthetraditionalplatformbusiness andmodernplatformsisthebreakinginofdigitaltechnology,which hasgreatlyincreasedboththespeedofexecutionandefficiency.
Accordingtothe HarvardBusinessSchool course,theunderlyingprinciples ofnetworkeffectsimplythatthebusiness,Website,orplatformwiththe highestmarketsharewillbemoresuccessfulinthelongrun.Thismeans thatitsmarketshareislikelytogrowmoresubstantially.Forthisreason, itiscustomarytosaythatwhennetworkeffectstakeonsignificantweight inamarket,thebestperformersacquiredominantpositionsattheexpense ofthealso-rans.
1.1.3Howplatformschangecompetition
Thedevelopmentofplatformshaschangedthenatureofcompetition.For example,publishersusedtocompeteagainstotherpublishersinthemarket, butnowtheyhaveaformidableopponentinAmazon.Netflixhasforced Blockbuster,onceadominantplayer,toabandonthemarket. “Theresult isaseriesofseismicupheavalsthataremakingonebusinesslandscapeafter anotheralmostunrecognizable”,observesParkeretal.citingAlibaba’ srecordIPOasproof(Parkeretal.,2017).
HowwasitpossiblefortheChinesegianttosuddenlybecomethe first majorthreattoU.S.Internetdominance,defeateBayinChina,successfully bringChineseproductstoworldmarkets,andopenuptheChineseconsumermarkettoglobalcompaniessuchasNikeandApple?Variousfactors havecontributedtothis.InadditiontothestrategicprowessofCEOJack Ma,theexplosionofdemandfromtheChinesemiddleclass,andtheChinesegovernmentprotectionfromforeigncompetitionforAlibabathat allowedittogrowwhileshelteredfromtheforeigncompetitionhaveall contributed.However,thespeedandsizeofgrowthwereingreatparta functionofthenewrealityofplatformcompetition.
Alibaba’sdizzyinggrowthininternationalmarketsisdueto fierce networkeffectsandeconomiesofscale.Companiesfromallovertheworld havebeenabletosourcegoods,products,andpartsfromChinesemanufacturersthroughAlibaba.
Anotheradvantageofplatformsisthattheycanquicklyincorporatethe resourcesandconnectionsofoutsidepartnersandoflogistics,warehousing, andshippingcompanies.Inpreviousdecades,successinretailrequired stronginvestmentsandyearsofcompetition,withtimingandresultsnot evenremotelycomparabletothespeedwithwhichAlibabahasgainedpositionsinthemarket.
TheAuthorsconsiderthedevelopmentofplatforms(thankstoadvances intechnology)asaradicalchangeincompetition.Foryears,theyargue, Porter’ s ‘fiveforces’ modelhasdominatedtheworldofstrategicthinking. Accordingtothemodel,thegoalofcorporatestrategyistocontrol five forcesaboveall:(1)thethreatofnewentrantstothemarket,(2)thethreat ofsubstituteproductsorservices,(3)thebargainingpowerofcustomers, (4)thebargainingpowerofsuppliers,and(5)theintensityofcompetitive rivalryintheindustry.Fordecades,businesseshaveusedthismodelto decideandsupporttheirstrategies.However,overtheyears,competition hasbecomemuchmorecomplicatedthanthePortermodelshows.
AccordingtotheAuthors,manyoftheforcesremainvalid, “buttwo newrealitiesarenowshakinguptheworldofstrategy” (Parkeretal.,2017).
(1) Firstofall,companiesthatcanactthroughplatformscanmanipulate networkeffectstorecreatemarkets,notjustrespondtothem.Itisno longeraquestionofdevisingstrategiestodivideacakeofroughlythe samesizeamongcompetitors(asinthePortermodel),butoftenof dividingalargercake.TheactionontheAirbnbandUbermarketplaces isproofofthis:becauseoftheuseofplatforms,thesetwomarkets,hospitality,andcarriding,havegrowninsize.
Box1.1Lego
TheDanishtoymakerhasannouncedithasovercometheeffectsofthecoronaviruspandemiconitsglobalsupplychainandtohavestrengtheneditsposition asaleaderintheindustry. “InvestmentsinLego’sdigitalplatformsandtheopeningofhundredsofnewphysicalstoresarebehindtheimprovementincompany performances”,saidCEOChiefExecutiveNielsChristiansen. “Thoseinvestments overrecentyearshavepreparedthecompanyforboththepandemicandthe subsequentreturnofshopperstomallsandhighstreets”,headded(Moss, 2021).Theswitchindigitaltechnologyhascausedfar-reachingdisruptions acrossmanyindustries,includingthetoyindustry.
(2) Secondly,theplatformstransformcompaniesinternallybyshifting managerialinfluencefrominsidetooutsidethe firm ’sboundaries. Theplatformistheecosysteminwhichacompanyseizesthebestopportunitieswhileatthesametimesharingwithpartnersthevaluethey havecreatedtogether.Competitioninthissphereismuchmorecomplex,takingplaceonthreelevels:platformagainsttheplatform,platformagainstpartner,andpartneragainstapartner.
AsignificantexampleisLego(Box1.1).
Theeffectivenessofplatformsgrowswiththegrowthintheapplications ofnewtechnologies,suchastheintroductionofBlockchain(Box1.2).
Box1.2TradeLens:platforminaction
TradeLensisaBlockchain-basedplatformformanagingglobalshipmentsarising fromanalliancebetweenMaerskandIBMinvolvingmultiplestakeholders.Inthe platform,thedocumentationregardingeventsiswrittenontheBlockchain, whichcreatesasinglesourceoftruththatallcanobserve.Contractsigning, arrivalattheport,creditchecks,payment,andothereventsalongtheshipping lifecyclecanberecordedpublicly.Whenagiveneventisrecorded,thecorrespondingcontractsencodedintheBlockchainareputintooperationautomatically,thusavoidingpossibleerrors. “LogisticsplatformslikeTradeLensscale throughacombinationofnetworkeffects,learningeffects,andcoordinationeffects.Asmore fleets,ports,warehouses,andcontainersbecomeinstrumented, thevalueoftheseplatformsincreasesvianetworkeffectsaspartnerscreate valueforoneanother” (Choudaryetal.,2019).
1.2.1Athree-stageprocess
Whatisthedifferencebetween(1) ‘digitization’,(2) ‘digitalization’ , and(3) ‘digitaltransformation’?
(1) ‘Digitization’ istheprocessofconvertinginformationfromanalogto digital.Whenweareconvertingapaperreporttoadigital file,suchasa PDF,thedataitselfisnotchangedbutsimplyencodedinadigital format.Digitizationcanreapefficiencybenefitsbutdoesnotseekto optimizetheprocessesordata. “Digitisationwillhavetheimpacton supplychainsthatsteamandelectricityhadonmanufacturing”,declared amanageratBain. “Companiesinmanyindustriesareexperimenting withavarietyofnewtechnologiesandmethodsthatpromiseto improvehowtheyplan,source,makeanddeliver.Theseinnovations aremakingsupplychainssmarterbyincreasingtheirpredictability, transparencyandspeedofdelivery” . “Digitisationishelpingto delivergoodsfaster” (TheEconomist,2019).
(2) ‘Digitalization’ usesdigitizedinformationtosimplifyhowwework andmakeitmoreefficient,suchasbyusingdigitaltechnologytotransformreportingprocessingandthecollectionandanalysesofdata.Digitalizationdoesnotchangehowwedobusinessorcreatenewtypesof businesses.Rather,itdealswithmakingourworkfasterandbetter.It isatransformationthatmovesbeyonddigitization.Whiledigitization isaconversionofdataandprocesses,digitalizationisatransformation.
(3) ‘Digitaltransformation’ (DT) “ischangingthewaybusinessgets doneand,insomecases,creatingentirelynewclassesofbusinesses. Withdigitaltransformation,companiesaretakingastepbackandrevisitingeverythingtheydo,frominternalsystemstocustomerinteractions bothonlineandinperson” (GEP,2021).Inoneofitsarticles,McKinsey definesdigitaltransformationas “anefforttoenableexistingbusiness modelsbyintegratingadvancedtechnologies” (Bughinetal.,2019). Digitaltransformationinvolvestheredesignofprocesses,theintroductionofautomationandothertechnologies,andthedevelopmentof newproductsandservices.Itmustbeaccompaniedbyachangemanagementprocessbothtoovercomethenormalresistanceoftheorganizationandadaptthistothetransition.
Netflixisfrequentlyusedtoshowtheadvantagesofdigitaltransformation.Afterhavingstartedasamail-orderservice,itsuccessfullydisrupted
