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  • I'm going to talk a little bit about strategy

  • and its relationship with technology.

  • We tend to think of business strategy

  • as being a rather abstract body

  • of essentially economic thought,

  • perhaps rather timeless.

  • I'm going to argue that, in fact,

  • business strategy has always been premised

  • on assumptions about technology,

  • that those assumptions are changing,

  • and, in fact, changing quite dramatically,

  • and that therefore what that will drive us to

  • is a different concept of what we mean

  • by business strategy.

  • Let me start, if I may,

  • with a little bit of history.

  • The idea of strategy in business

  • owes its origins to two intellectual giants:

  • Bruce Henderson, the founder of BCG,

  • and Michael Porter, professor at the Harvard Business School.

  • Henderson's central idea was what you might call

  • the Napoleonic idea of concentrating mass

  • against weakness, of overwhelming the enemy.

  • What Henderson recognized was that,

  • in the business world,

  • there are many phenomena which are characterized

  • by what economists would call increasing returns --

  • scale, experience.

  • The more you do of something,

  • disproportionately the better you get.

  • And therefore he found a logic for investing

  • in such kinds of overwhelming mass

  • in order to achieve competitive advantage.

  • And that was the first introduction

  • of essentially a military concept of strategy

  • into the business world.

  • Porter agreed with that premise,

  • but he qualified it.

  • He pointed out, correctly, that that's all very well,

  • but businesses actually have multiple steps to them.

  • They have different components,

  • and each of those components might be driven

  • by a different kind of strategy.

  • A company or a business might actually be advantaged

  • in some activities but disadvantaged in others.

  • He formed the concept of the value chain,

  • essentially the sequence of steps with which

  • a, shall we say, raw material, becomes a component,

  • becomes assembled into a finished product,

  • and then is distributed, for example,

  • and he argued that advantage accrued

  • to each of those components,

  • and that the advantage of the whole

  • was in some sense the sum or the average

  • of that of its parts.

  • And this idea of the value chain was predicated

  • on the recognition that

  • what holds a business together is transaction costs,

  • that in essence you need to coordinate,

  • organizations are more efficient at coordination

  • than markets, very often,

  • and therefore the nature and role and boundaries

  • of the cooperation are defined by transaction costs.

  • It was on those two ideas,

  • Henderson's idea of increasing returns

  • to scale and experience,

  • and Porter's idea of the value chain,

  • encompassing heterogenous elements,

  • that the whole edifice of business strategy

  • was subsequently erected.

  • Now what I'm going to argue is

  • that those premises are, in fact, being invalidated.

  • First of all, let's think about transaction costs.

  • There are really two components to transaction costs.

  • One is about processing information, and the other is about communication.

  • These are the economics of processing and communicating

  • as they have evolved over a long period of time.

  • As we all know from so many contexts,

  • they have been radically transformed

  • since the days when Porter and Henderson

  • first formulated their theories.

  • In particular, since the mid-'90s,

  • communications costs have actually been falling

  • even faster than transaction costs,

  • which is why communication, the Internet,

  • has exploded in such a dramatic fashion.

  • Now, those falling transaction costs

  • have profound consequences,

  • because if transaction costs are the glue

  • that hold value chains together, and they are falling,

  • there is less to economize on.

  • There is less need for vertically integrated organization,

  • and value chains at least can break up.

  • They needn't necessarily, but they can.

  • In particular, it then becomes possible for

  • a competitor in one business

  • to use their position in one step of the value chain

  • in order to penetrate or attack

  • or disintermediate the competitor in another.

  • That is not just an abstract proposition.

  • There are many very specific stories

  • of how that actually happened.

  • A poster child example was the encyclopedia business.

  • The encyclopedia business

  • in the days of leatherbound books

  • was basically a distribution business.

  • Most of the cost was the commission to the salesmen.

  • The CD-ROM and then the Internet came along,

  • new technologies made the distribution of knowledge

  • many orders of magnitude cheaper,

  • and the encyclopedia industry collapsed.

  • It's now, of course, a very familiar story.

  • This, in fact, more generally was the story

  • of the first generation of the Internet economy.

  • It was about falling transaction costs

  • breaking up value chains

  • and therefore allowing disintermediation,

  • or what we call deconstruction.

  • One of the questions I was occasionally asked was,

  • well, what's going to replace the encyclopedia

  • when Britannica no longer has a business model?

  • And it was a while before the answer became manifest.

  • Now, of course, we know what it is: it's the Wikipedia.

  • Now what's special about the Wikipedia is not its distribution.

  • What's special about the Wikipedia is the way it's produced.

  • The Wikipedia, of course, is an encyclopedia

  • created by its users.

  • And this, in fact, defines what you might call

  • the second decade of the Internet economy,

  • the decade in which the Internet as a noun

  • became the Internet as a verb.

  • It became a set of conversations,

  • the era in which user-generated content and social networks

  • became the dominant phenomenon.

  • Now what that really meant

  • in terms of the Porter-Henderson framework

  • was the collapse of certain kinds of economies of scale.

  • It turned out that tens of thousands

  • of autonomous individuals writing an encyclopedia

  • could do just as good a job,

  • and certainly a much cheaper job,

  • than professionals in a hierarchical organization.

  • So basically what was happening was that one layer

  • of this value chain was becoming fragmented,

  • as individuals could take over

  • where organizations were no longer needed.

  • But there's another question that obviously this graph poses,

  • which is, okay, we've gone through two decades --

  • does anything distinguish the third?

  • And what I'm going to argue is that indeed

  • something does distinguish the third,

  • and it maps exactly on to the kind of

  • Porter-Henderson logic that we've been talking about.

  • And that is, about data.

  • If we go back to around 2000,

  • a lot of people were talking about the information revolution,

  • and it was indeed true that the world's stock of data

  • was growing, indeed growing quite fast.

  • but it was still at that point overwhelmingly analog.

  • We go forward to 2007,

  • not only had the world's stock of data exploded,

  • but there'd been this massive substitution

  • of digital for analog.

  • And more important even than that,

  • if you look more carefully at this graph,

  • what you will observe is that about a half

  • of that digital data

  • is information that has an I.P. address.

  • It's on a server or it's on a P.C.

  • But having an I.P. address means that it

  • can be connected to any other data

  • that has an I.P. address.

  • It means it becomes possible

  • to put together half of the world's knowledge

  • in order to see patterns,

  • an entirely new thing.

  • If we run the numbers forward to today,

  • it probably looks something like this.

  • We're not really sure.

  • If we run the numbers forward to 2020,

  • we of course have an exact number, courtesy of IDC.

  • It's curious that the future is so much more predictable than the present.

  • And what it implies is a hundredfold multiplication

  • in the stock of information that is connected

  • via an I.P. address.

  • Now, if the number of connections that we can make

  • is proportional to the number of pairs of data points,

  • a hundredfold multiplication in the quantity of data

  • is a ten-thousandfold multiplication

  • in the number of patterns

  • that we can see in that data,

  • this just in the last 10 or 11 years.

  • This, I would submit, is a sea change,

  • a profound change in the economics

  • of the world that we live in.

  • The first human genome,

  • that of James Watson,

  • was mapped as the culmination of the Human Genome Project in the year 2000,

  • and it took about 200 million dollars

  • and about 10 years of work to map

  • just one person's genomic makeup.

  • Since then, the costs of mapping the genome have come down.

  • In fact, they've come down in recent years

  • very dramatically indeed,

  • to the point where the cost is now below 1,000 dollars,

  • and it's confidently predicted that by the year 2015

  • it will be below 100 dollars --

  • a five or six order of magnitude drop

  • in the cost of genomic mapping

  • in just a 15-year period,

  • an extraordinary phenomenon.

  • Now, in the days when mapping a genome

  • cost millions, or even tens of thousands,

  • it was basically a research enterprise.

  • Scientists would gather some representative people,

  • and they would see patterns, and they would try

  • and make generalizations about human nature and disease

  • from the abstract patterns they find

  • from these particular selected individuals.

  • But when the genome can be mapped for 100 bucks,

  • 99 dollars while you wait,

  • then what happens is, it becomes retail.

  • It becomes above all clinical.

  • You go the doctor with a cold,

  • and if he or she hasn't done it already,

  • the first thing they do is map your genome,

  • at which point what they're now doing

  • is not starting from some abstract knowledge of genomic medicine

  • and trying to work out how it applies to you,

  • but they're starting from your particular genome.

  • Now think of the power of that.

  • Think of where that takes us

  • when we can combine genomic data

  • with clinical data

  • with data about drug interactions

  • with the kind of ambient data that devices

  • like our phone and medical sensors

  • will increasingly be collecting.

  • Think what happens when we collect all of that data

  • and we can put it together

  • in order to find patterns we wouldn't see before.

  • This, I would suggest, perhaps it will take a while,

  • but this will drive a revolution in medicine.

  • Fabulous, lots of people talk about this.

  • But there's one thing that doesn't get much attention.

  • How is that model of colossal sharing

  • across all of those kinds of databases

  • compatible with the business models

  • of institutions and organizations and corporations

  • that are involved in this business today?

  • If your business is based on proprietary data,

  • if your competitive advantage is defined by your data,

  • how on Earth is that company or is that society

  • in fact going to achieve the value

  • that's implicit in the technology? They can't.