Commoditization and Turtles

In short, as industries become information enabled (for more about "information enabled industries", see Salim Ismail's "Exponential Organizations" and Ray Kurzweil's LOAR) they go into an accelerated stage of commoditization. ICT and other technologies are moving very fast and are lowering costs for most of the lower levels of the value-chain (materials, manufacturing, and production in the case of more traditional industries. Software and algorithm development in case of software). It's true that in industries that are more material-centric, such as CPG, food and beverages, automotive, Oil and Gas, and construction, even though they are affected by and harness ICT, are experiencing a slower rate of commoditization of the material-based parts of their value-chain. Nevertheless, material science and production innovation are also accelerating (hyper-connectivity allows for more brains to collaborate and work on more problems, delivering faster progress, even in these traditionally slow-moving fields). Moreover, these industries are affected by ICT-driven process innovation and collaborative platforms - all reducing the cost of manufacturing and production.
Commoditization means that nominal costs and entry barriers are lower and competition becomes fiercer. This means a decline in margins (over and above other margin-affecting factors, such as costs of materials et., that are more "local" in time. think about it like this - changes in BOMs are like fluctuations on the general underlying declining margin trend.
[Do read, if you haven't already, The Zero Marginal Cost Society by Jeremy Rifkin.] Most industries going through this potentially cataclysmic change, are climbing up the value-chain in search for higher margins. (This phenomenon has been covered by many sources - Clayton Christiansen uses it when describing disruptive innovation that emanates from low-price competition driving incumbents to look for "greener margin pastures" in the more expensive goods.)

This reminds me of that wonderful story about the scholar explaining cosmology to some people when an old lady challenges him by proclaiming that the earth is sitting on top of a giant turtle. As the story goes, when he responds: "but, what is under that turtle?" She says: "It's turtles all the way down" (this story is attributed to the linguist John Ross. however, since the almost identical story has been published many times before and dates back, in print to 1938, my guess is that he stole it.) Where was I? Ah yes, so if the value-chain is being commoditized and it becomes harder to capture value, the only thing you can do is climb up. How much "up" is there?
At the top of the value-chain sits the user. A new find that is exciting many. The user is a contentious source of value - because she uses... That is why OEMs in the auto industry are looking to interact directly with the buyers and drivers through systems like onStar for GM, direct sales by Volvo, direct leasing by BMW and more. That is why Tesla does not have dealerships (they sell direct and own their sales floors) and why Apple owns (most of) its retail stores. That is why Amazon bought wholefoods and created Alexa. It's becoming about moving from "sell and forget" to "always there". The only renewable source of value remaining is a continuous engagement with the user. It means a deep change to the business model.

Imagine a day in which the building of the house will no longer be the issue. A day in which the only thing that matters will be the using of the house - living. Traditional real-esatete and construction incumbents have the least to gain in the current state of affairs and the most to lose in the future scenario. They should be first in line - not because it will line their pockets now - but because it will give them a fighting chance in a changing world. It will allow them to acquire their future clients - the ones they have very little or no interaction with today.
Imagine a day in which generating or even distributing energy will no longer be the main source of value. Oil and gas (and coal) exploration, more specifically finding and extracting hydrocarbons to be used as a source of stored energy that we can ship, and use when needed, is both expensive and very profitable. But what happens when we have better ways of extracting and storing energy from our environment. What happens when we have cheaper more efficient batteries, PV technology, wind and air-pressure, geo-thermic, even excess energy from using energy, that today dissipates into the atmosphere. When every person will be able to generate, collect and store her energy needs, when industrial complexes will be able to locally manufacture the entire oil and gas value chain, the only source of value will be us - the users. When will this day come? I don't know. I do know this: It will come sooner than we expect. That has always been the case.

If I have learned one thing from Taleb's seminal book, I've learned this - when things are volatile and visibility is low, it makes sense to invest some resources in preparing for (/betting on) the "seemingly highly unlikely, yet potentially massive" change. As industries commoditize, the user will become more significant - and those who will have the relationship with the users will be the ones holding all the cards. Tech-centric industries understand this already. Traditional industries are too fat and too deep in, to seriously consider this possible scenario. [Last anecdote - a few years ago I was involved in a multi-billion dollar project with a major "traditional industry" company. During the project, we developed a process that would solve a major problem they had. That new process would have also generated massive amounts of a byproduct. Potentially they could use this byproduct to deliver huge value - but it required moving to or adding another completely different business. In my naive eyes, it was a no-brainer. It solves your problem and produces something that has value in a different sector - let's do it. The concept was rejected (not even seriously explored). The reasoning was - that is not our business - it's a different sector. Without a strong incentive to change, traditional industries tend to ignore alarm bells or potential opportunities. Oh well.]

till next time

Shahar