We have explored how technology impact business strategy. We are now fortunate to have with us Philip Evans. Philip is a senior adviser to BCG and BCG fellows. He's ex senior partner of BCG. Philip has done many conferences convened by people like Bill Gates, World Economic Forum, and Code Conference. Philip also has a tech talk online that you can check it out. Philip has co-authored a book called Blown to Bits that basically explore how the economies of information impact strategy. Phillip is also known as one of the lord of strategy, by Walter Kiechel. Philip, welcome. Thank you. We have already introduced the three fundamental laws of technologies. Can you describe a bit how does this impact our business strategy? Absolutely. The most fundamental impact which information technology has is to radically transform our ability to transact. Specifically, it massively lowers transaction costs. This has enormous implications for strategy because economic organization is fundamentally around economizing on transaction costs. So, therefore, if transaction costs become lower, there is less to economize on, and therefore, in some fundamental sense, there is a lesser need for economic organization. Fundamentally, markets substitute for traditional organizational structures. What that means, therefore, is that businesses which have been defined by a traditional value chain discover that because of transformations need in internet technology, that that value chain can be broken up. To use the phrase that we coined, it can be deconstructed Just on the point of deconstruction, in the earlier video, we are shown a deconstruction that affected the telecommunication industry, but I'm sure is applicable across all industry. Can you describe another industry that is affected by this deconstruction? Yes, absolutely. I think a very good contemporary example is the media industry. The media industry was traditionally defined by a set of vertically integrated value chains, for example, a newspaper or magazine or a television station. And each of those value chains had components which would include the creation of content, the encoding of that content, for example, by a reporter or by a television camera, the distribution of that content through printing presses or through television broadcasting stations, the consumption or decoding of the content, for example, by a TV set, and then ultimately, of course, the consumption of that content by the viewer. Those value chains were similar but they were separate, and these were largely separate businesses. Today, of course, thanks to technology, that view of the world is entirely obsolete. Multiple kinds of content can be included in many different ways, but ultimately, end up in a format that can be distributed over the internet. The internet is then itself distributed via wire or via wireless. It is decoded on devices such as computers or cell phones and thus consumed by the end user. In that world, there is really no difference between video, audio, reporting, fiction, entertainment. They are just different types of content distributed through the same channel. So what had been a set of separate vertically integrated parallel media industries, instead becomes a horizontally layered multimedia industry in which all kinds of content are distributed in essentially interoperable ways. When you talk about horizontally, I guess we can call it the stack. And if you look within the stack, there's this layer which is the platform they use. These days, we see a lot of values being captured by players that are very strong in the platform. To take a few examples, like Amazon, Airbnb, Uber. Can you describe this phenomena? Well, a corollary of the logic that we just discussed is that each of these newly emergent layers can have their own economics, and those economics can be very different. Some might be scale-intensive manufacturing businesses, which therefore, will evolve in accordance with those kinds of economics. Perhaps, for example, nationally dominant players providing services to their region. Another layer might actually fragment, for example, the production of content on YouTube is something which millions and millions of people are economically able to produce. And therefore, that industry, instead of being concentrated in a few television studios, gets fragmented. The layer that you are talking about is a really critical one because whenever you have a large population consuming and/or producing, they need some kind of a platform on which to find each other on which to interact. And that is the role of Google, the role Facebook, the role of YouTube, the role of Airbnb, and so forth. Those businesses are characterized by two things. First, they have very strong network effects which means that everybody prefers to be on the larger network, and therefore, the larger network gets larger. And secondly, they have essentially zero marginal costs. Once you've set the system up, you can add customers and you can add producers at essentially zero cost. The result is those businesses have a tendency to become monopolies not just locally but globally. And those global monopolies are, of course, extraordinarily profitable. The result is, compared with the old vertically integrated industry, a pattern where you have some parts of the business becoming a lot more profitable, some parts becoming a lot less profitable, some parts become extremely expensive, some parts actually become free. The economics of the layers separate because of their interoperability. Okay. So, if we play this forward, in your opinion, what will it look like 5-10 years from now? Well, I think that we're going to see a different pattern in different businesses. There's no reason to believe that every industry will evolve the same way. So, therefore, what we are seeing is the evolution of the stacked architecture in many different businesses. We're seeing some evolutions driven by things like deregulation or reregulation forcing various kinds of stacked architecture. We are seeing local champions striving hard to protect their local position against global players. So, I don't believe there's any single simple generalization about how these structures will evolve. And I do believe that the strategy pursued by individual companies or groups of companies can have a huge effect in shaping the way the world is evolving. That, of course, is why strategy is such an interesting topic. Great. Philip, thank you very much for being here today to share with us how technology impacts the business strategy moving forward. Thank you. Thank you very much.
