Winning in the Decentralized Economy
Most blockchain strategies don’t reflect how the underlying technology is changing economic fundamentals and industry dynamics. Companies are finding it hard to understand what it means to compete in a decentralized world.
Trust is the cornerstone of the new digital economy and blockchains are central to creating trust with consumers, in marketplaces and when working with enterprise partners.
From our experience, we find that a surprisingly large number of C-suite executives underestimate the increasing momentum of blockchains, the underlying technology and most importantly, the scale of the disruption that this may cause. Many companies are locked into operational processes that defined by annual cycles. This is far too long in the world of decentralized applications (DApps) and many businesses face the threat of not being economically viable.
Also surprising is the fact that financial services firms have taken a lead and become early adopters of the technology. While there are bound to be winners and losers in this early adoption cycle, there are also emerging rules that can help evaluate potential pitfalls along the way to strategic implementation.
While each industry and each blockchain implementation is different, below we identify some rules to help think through the business while building specific prototypes and/or investing in startups.
CXOs need to proceed in a deliberate fashion. Not all existing businesses can be or should be reimagined as a blockchain. Rather, it pays to seed a few investments with clear definitions of a win. For example, insurance executives should choose the value proposition of deploying blockchain for underwriting, administration or fraud management carefully and build it into their product in order to gain an edge over their competitors. Improvements in speed, convenience and transparency of transactions can be early indicators of a winning recipe.
When it comes to their competitive advantage, companies need to choose carefully where and how they play and on what terms. In a decentralized world, where intermediaries add little value, rent-seeking opportunities are almost non-existent. Business models that can run and scale at little to no marginal costs and can put pressure on pricing are in the best position to take advantage of the blockchain platform.
With scale come network effects that channel the economics in a manner where the winner takes all. This is not a new phenomenon, however, the disruptions of this sort will be more and happen more frequently than at any time in the past. Hence first mover advantage and digital scrums can be a competitive edge for companies seeking to thrive in the blockchain world. For example, early on, companies have a lot of flexibility to clearly define their objectives, test their business model and embed critical information from R&D, marketing, sales, supply chain, partners etc. into a permissioned blockchain structure, giving themselves a robust platform to scale.
The inherent nature of blockchain platforms allows the participants to move across traditional industries, sectors, and functions. This is disruptive to how businesses have been run within a specific industry vertical. Sooner or later platform enterprises will emerge that will link traditional and new businesses, along with their vendors and customers, across disparate verticals. Big data solutions to make sense of customer information and track value movements across the ecosystem will flourish.
For CEOs and top executives, this is a radical shift in the mindset when charting a sustainability and growth strategy. Not only do they have to now worry about incumbents leaping ahead technologically, but also about new regulations and compliance issues that stem from blockchain adoption. Hence an ecosystem of partners who understand the objectives and economics of the business becomes critical.
For both startups as well as established companies wanting to jump on to the blockchain bandwagon, it is essential for them to be agile. No matter how strong the value proposition of a startup in disrupting an industry vertical, the threat always comes from an offensive strategy from established players. Similarly, if the incumbents are not forward thinking and fast in execution, they risk being disrupted by the innovative startups.
The biggest opportunities may still lie in the space of enterprise solutions making it easier for businesses to work with each other, simplify processes, manage and track the transfer of value along the value chains. Advanced analytics when built into the blockchain enables businesses to predict a variety of operational needs such as maintenance requirements for equipment, manufacturing yields and quality. Conservative financial institutions (FIs) have embraced the blockchain ecosystem. With Know Your Customers (KYC) and Anti Money Laundering (AML) operations are but a few applications where verified transactional information is reducing compliance costs. With such clearly defined objectives and economic incentives, most industries can take inspiration from FI’s adoption of blockchain solutions.