Convergence is re-shaping the technology, telecommunications and media industries. Paradoxically, though, divergence may actually be a more powerful theme in determining who creates value and who destroys value.
Read the business press and convergence is everywhere. Devices are becoming more versatile, embedding functionality that cuts across computing, communications and consumer electronics. Internet companies are bidding for wireless spectrum. Network service providers are introducing devices. Device makers are backward integrating into Internet services.
Boundaries are not just blurring; they seem to be disappearing. As everyone seeks to get into everyone else’s business, it is easy to fall prey to a belief that all distinctions will fall by the wayside and we will confront an undifferentiated mass of competition. My own personal view is that this is a transitional phenomenon. New boundaries are forming and some of the emerging patterns are already discernable.
Where Convergence Matters
Stepping back from events over the past fifteen years, convergence has been most significant at the network platform layer – here we have seen a growing convergence of voice, data and video networks shaped by a shared set of technology standards.
The convergence of network platforms directly contributes to two other forms of convergence – convergence of market power at the customer level and greater collaboration among enterprises to deliver value to customers.
Converged networks systematically eliminate shelf space constraints, making it easier for customers to access a broader range of products and providers on a global scale. (As an aside, these converged networks paradoxically generate much greater diversity and fragmentation of markets into the myriad niches that populate the Long Tail). These converged networks also provide customers with much greater information about product/service offerings and vendors, including the ability of customers to connect with each other and compare their experiences with products and vendors.
As relative scarcity shifts from shelf space to attention, customers gain greater power and vendors experience increasing margin squeeze. The natural reaction is to cut costs but many companies lose sight of the fact that cutting costs alone is a losing game. In increasingly competitive markets, cost savings are rapidly competed away and captured by customers. The result is a steadily shrinking business. The only way to continue to create value in this kind of environment is to find major new growth platforms.
Fortunately, converged network platforms also create an opportunity – they enhance the ability to collaborate across institutional and geographic boundaries. By providing an opportunity to access and mobilize complementary resources, they offer powerful platforms for leveraged growth (purchase required) – delivering greater value to customers by bringing together third party resources.
Where Divergence Matters
So, power is converging at the customer levels and providers have an opportunity to collaborate more effectively to deliver even more value to customers – these two forces of convergence are accelerating and intensifying a broad trend towards divergence in business models.
For those following my writings, you know what is coming next – my personal belief that most companies today are an unnatural bundle (purchase required) of three very different kinds of businesses.
- Infrastructure management businesses (IMB) - high volume, routine processing businesses - think of contract manufacturers, logistics providers and call center operators as relatively pure play examples of these businesses
- Customer relationship businesses (CRB) – businesses that get to know individual customers extremely well and, based on that understanding, help to access relevant resources for these customers – relatively pure play examples of these businesses include large advisory firms that help large enterprise customers decide what form of IT outsourcing to pursue and help these large enterprises to evaluate and negotiate with the right mix of outsourcing service providers.
- Product innovation and commercialization businesses (PIC) – businesses that focus on developing innovative new products and services, getting them into market quickly and accelerating adoption of the products - think of semiconductor firms operating without their own fab facilities as relatively pure play examples of these businesses.
The Performance Penalty
While there are some pure play examples of these businesses as indicated above, they are exceptions. Most companies tightly bundle these three businesses together despite very different economics, skill sets and even cultures – leading to significant underperformance across all three:
- IMB – economies of scale, standardized operations skill sets and cost conscious cultures
- CRB – economies of scope, direct marketing skill sets and customer service oriented cultures
- PIC – economies of speed, product innovation skill sets and creative cultures
While economics differ radically across all three business types, each business type has the potential to be very profitable, provided management understands what is required for success and manages the business in a focused manner. Two of the business types – infrastructure management and customer relationship – are driven by economics that favor large scale or scope based operations, so there will be accelerating concentration and consolidation in these two business types. In these arenas, unbundling will be prelude to a much more focused process of rebundling, driving significant growth. The third business type – production innovation and commercialization – is more likely to fragment over time given the importance of attracting and retaining the most creative talent and the importance of agility in the economics of speed.
Sound historical reasons explain why these businesses came to be bundled in the first place. But today’s converged network platforms now create the opportunity to unbundle them.
The process is well underway, although proceeding at different paces in each industry and geography. For example, the broad trend towards outsourcing and offshoring over the past decades can be understood as a systematic stripping out of IMBs from larger companies.
The next wave of opportunity comes from a systematic splitting of PICs and CRBs – a process already underway in certain industries, for example the rise of Original Design Manufacturers (ODMs) in high tech or the unbundling of research in the pharma industry.
Broader forces will accelerate this divergence of business models. As markets fragment, product companies will be under increasing pressure to broaden product reach as far as possible and not be constrained by their own distribution capabilities. As attention becomes scarcer, customer relationship businesses will need to be more helpful to customers by providing them with a broader array of options and not be constrained by their own product offers.
Implications for Specific Industries
That’s the broader trend towards divergence that paradoxically emerges from convergence. While I can’t develop here the full implications of this perspective for companies in industries like media, technology and telecommunications, let me be provocative and assert my personal view that companies in these three industries will face the following sets of choices:
Media industry – Most media companies today in their core genetics are product innovation businesses, even though they have the other two business types within their companies as well. Here’s the strategic challenge: long tail dynamics make product innovation businesses increasingly challenging in terms of building and sustaining scale. As niches proliferate and a growing array of media options competes for audience attention, it will be harder and harder to find the blockbusters that drove scale in most traditional media companies. For those who want to build large and scalable companies in the media industry, the key opportunity will be to focus on customer relationship businesses. There’s a growing unmet need for pure play versions of this business type as content proliferates and customers seek to improve their return on attention. Infrastructure management businesses like running large scale printing operations and server farms will be increasingly farmed out to pure play providers that are likely to come from outside the traditional media industry.
Tech industry – Most tech companies today in their core genetics are product innovation businesses – run by engineers who get status and success by coming out with the latest and greatest product. Long tail dynamics again make building and sustaining scale in the tech industry as a product innovation business very challenging. On the other hand, as more and more tech products evolve into remotely delivered shared services, there are significant opportunities to build focused IMBs. Also, as customers continue to wrestle with the complexities of rapidly evolving shared services, there are increasing opportunities to build focused CRBs with a deep understanding of customer needs and the ability to evaluate and mobilize appropriate services for individual customers.
Telecommunications industry – Most telecom companies today in their core genetics are IMB’s running large scale, routine processing operations. These companies have two primary options:
- Learn to love commodity pipe businesses and recognize that there is an opportunity for substantial profitability as consolidation and concentration plays out in the classic IMB business.
- Leapfrog to becoming a CRB by developing a deep understanding of end users and becoming more helpful to them in sourcing appropriate telecom (and other) services. Extreme examples include a major wireless provider in India that outsourced its entire network infrastructure and the Mobile Virtual Network Operators (MVNOs) that have emerged in the wireless market in the US and other developed economies.
The Customer Focus Test
As I suggested in a previous blog, from my experience very few companies are truly customer focused in the sense of a CRB. To test the degree of customer focus, I offer three questions:
- Who in the organization holds real decision-making power? Is it the organization that manages relationships with the customer or is it some other group?
- What are the primary measures of performance for the firm? Are the primary measures customer centric or product centric?
- What is the primary focus of the brand promise of the company? Is it a customer-centric promise or a product/vendor-centric promise?
When confronted with these three customer focus questions, most executives begin to realize the enormous distance they would need to travel to become a true customer relationship business. The companies that really succeed in the customer relationship business will have no trouble meeting this test. All the rest had better decide which of the other two businesses they really want to focus on.
Are We Compromising on Performance?
In wrestling with the divergence of business models that inevitably follows the convergence of network platforms, executives would do well to focus on three questions:
- Where do we have distinctive and world-class capabilities today and where do we generate the most significant economic returns?
- Are we compromising those capabilities and returns by participating in the other two business types?
- Are we doing everything we can to access and leverage world-class capabilities in the other two business types?
Implications for Industry Boundaries
Will industry boundaries across technology, telecommunications and media still matter in this brave new world? Well, it depends on what business type we are talking about. Here’s my guess: industry boundaries will disappear first in the IMB arena, they will more gradually erode in the CRB arena and they will morph in interesting and unpredictable ways in the PIC arena as we move from a product to a service world.
The Bottom Line
As we wrestle with the challenges and opportunities of convergence and divergence, let’s not get too focused on the technology or product level, or even the industry level, and instead let’s invest the time required to sort through the implications for business types and business models. At the end of the day, this is where the most value will be created and the most value destroyed. And here we may find that divergence matters more than convergence.