Fernando Machado Píriz's Blog

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Archive for the ‘Digital Transformation’ Category

Disintermediation, business modularity and marketplaces

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Four out of the five last business executives I’ve spoken with as a Microsoft Digital Advisor, one way or another, care about the topics in the title of this post. They’re in different industries, from agribusiness, logistics, and of course, banking; they might have used different terms, but they all do have these concepts in mind, although not necessarily all the dots are clearly connected. Here I’m covering a personal viewpoint on how these concepts are interconnected.

Let’s start with disintermediation. Disintermediation is the elimination of intermediaries in a value chain. Netflix having it’s own production studios for exclusive series like House of Cards, and many others, it’s an example of disintermediation, because they don’t depend on Hollywood studios and films distributors in order to get prime time content.

Going back to the industries mentioned in the introduction, an example in agribusiness might be an organic farmer selling their fruits and vegetables direct to people like you and me, instead to a contract farmer, who sells it to an agricultural corporation, that sells it to the groceries stores where you and I usually buy them. Although disintermediation in this example is far from being widespread, it challenges the core businesses of the contract farmers, the agricultural corporations, and the groceries stores, because they’re no longer needed for us to get fruits and vegetables at least; and it’s good for providers, because they can probably sell their products for a better price, and is good for us because we know the exact sourcing of what we’re eating and probably paying less that in the groceries stores for the same products.

Another example, this time in the banking industry, might be peer to peer lending, where people and enterprises who has money uses an online service to lend directly to borrowers. Lenders in peer to peer lending have less infrastructure and lower compliance costs than traditional banks, so they can lend money at lower interest rates than traditional banks, which is good for the ones who borrow money; but is also good for the lenders, because often they earn higher returns compared with similar products offered by traditional banks.

The agribusiness example is complete disintermediation -there’s nothing between the provider and the consumer- while the later is partial disintermediation -there’s an online service between providers and consumers-. More on that later.

Although disintermediation becomes more common in more industries, and in more products and services inside industries as times goes by, it doesn’t happen in every aspect of every business at the same time; but the trend is irreversible. Then while some industries and companies with vertically integrated business models -one-stop shops for the variety of touch points along the value chain- are being seriously disrupted by disintermediation and fight against it, others are instead embracing disintermediation already, leveraging what this article from Oliver Wyman calls business modularity. While the article covers the financial services industry, business modularity is applicable to many, if not all, industries. The next couple of definitions are taken from there.

In one hand, modular demand is when “product or service providers no longer own the direct customer relationship”. It’s business as usual for most producers in the agribusiness industry, but isn’t as common at all in the banking industry, yet. Another example of modular demand is the hotel industry: even before the emergence of travel reservation sites like Expedia.com, TripAdvisor.com, and others, you used to book your hotel stays through a travel agency, it was rare to directly call to a hotel to make a reservation.

On the other hand, modular supply occurs when “the supply chain is not delivered in-house, when parts of production are performed by different firms”. Once again, it’s business as usual for most producers in the agribusiness industry, but isn’t common in the banking industry. Restaurants are a good example in a different industry: they don’t produce the raw materials they use for the menu they offer, nor the species and other ingredients; they don’t make the dinning tables, nor the tableware, not table clothes, and so on.

Both modular demand and supply comes in degrees, modularity goes from low to high and everything in between. When demand and supply modularity is low, you have the vertical integration we mentioned before. The interesting combination for this post comes when both demand and supply are highly modular. Why? That’s where the concept of marketplace comes into place.

A marketplace, also known as business platform in Platform Revolution by Geoffrey G. Parker et all, or digital  business technology platform accordingly to Gartner, it’s an enabler for interactions between consumers or users in the demand side and product or service providers in the supply side.

The marketplace is used to exchange “value units”, i.e. the products or services offered by the providers and consumed by the consumers or users. The market place has at least one “intelligent” component that matches the needs and interests of the consumers with the products or services offered by providers, in a way that satisfies those needs or matches those interests. The key in these marketplaces is that all transactions happen through and thanks to the marketplace. There is one way to monetize the interactions in the marketplace, as a per-transaction fee or as a percentage on the value units being exchanged, charged to providers, consumers, or both, but isn’t the only one. Producers can be charged an entry fee or on an ongoing basis as long as they are part of the marketplace; and the same is true for consumers or users.

Imagine you’re about to buy, let say, a car. A cars’ marketplace can offer you brand new or second-hand cars from multiple dealers and car manufacturers. The market place knows you well enough to propose appealing loans or leasing options, either from banks or peer-to-peer lending companies, as well as insurance from different insurers. The insurance policy can be calculated based on you driving habits, mileage, etc. by using a device offered by a third party that is connected to the car bus to gather telemetry data that’s sent to the insurer, and eventually to the marketplace too, lowering down the policy price if you drive carefully and defensively or don’t use your car too much, or raising it up if you drive imprudently. The marketplace can also offer you car maintenance or car washing services; those can be regular services, or the service provider can pick your car up and drop it back few hours later, so you so you don’t need to move from your house or your office, because the marketplace knows you’re very busy. And what’s even more interesting, if the marketplace knows you well enough and it’s “smart” enough, it can recommend you to don’t by a car at all, and instead suggests you to use a shared car service, a carpooling service, or simply rent a car whenever you need it. This cars’ marketplace can be used by individuals like you and me, but also by fleet owners, etc.

Once the marketplace has enough data about transactions, it knows a lot about both providers and consumers, and can answer questions like who, when, what, how much, etc. Here’s where the second “intelligent” component of the marketplace comes into place, because this data isn’t only useful to the marketplace itself, but can be very valuable to third parties that are willing to pay for it. Addressing privacy and compliance issues and regulations, e.g. by segmenting and anonymizing data, a whole new business model appears.

The marketplace can be viewed from three different, but complementary, points of view:

  • The business aspects, i.e. how to define and monetize the platform. Part of this blog post tries to address that particular aspect.
  • The technology aspects, i.e. the cloud services, API strategy and architecture, mobile platform and development tools, IoT and big data, containers, and so on. More on the technology aspects on my previous blog post.
  • The ecosystem aspects, i.e. how to run hackathons and discover and incubate startups to expand the services or products offered, how to engage with research and the academia, how to connect with government and non-government agencies, and so on.

Any serious attempt to build a new marketplace or participate in an existing one should consider all the aspects aforementioned at the same time, as well as the relationship of marketplaces with business modularity and disintermediation.

Written by fmachadopiriz

March 25, 2017 at 11:37 am

Digital Transformation Foundation: “Software Defined Everything” and “Everybody Codes”

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There seems to be an agreement on digital transformation being less about technology and more about business design and a customer centric culture. Obviously it’s not about digital technology: DVDs, as its own name implies, are digital movie containers as opposed to analog videotapes or photochemical films, but wasn’t until Netflix added video on demand via the Internet to the DVDs physical delivery business, that they became a reference on digital transformation.

As George Westerman et al. put clearly in this book -or in this article summary-, it’s the transformational management intensity, i.e. how much top managers are betting on digital transformation, what separates digiratis -digital literates- from the crowds. Nevertheless, companies still need to think on the foundation for their digital transformation, and precisely there is where digital platforms come into place; of the other way around, a digital platform won’t make your company to digitally transform, but can’t transform without one.

What’s that platform? It’s whatever makes frictionless to combine incumbents and partners into your business and for you to participate in others businesses “to execute [your organization’s] digital business strategy”, accordingly to Gartner.

A while ago hardware machines were a physical thing; now we have hardware virtualization by software and then we have virtual machines. Also a while ago we had physical arrays of spinning hard disk drives, and now we have software defined storage; we had physically connected cables, routers, switches, firewalls, etc. and now we have software defined networks; and the list goes on up to big things like software defined datacenters or down to small things like software defined chips, or more precisely field-programmable gate arrays.

Even the IoT devices very common in many digitally transforming businesses can change their behaviors based on the software they run; the dumbest the device, the longer their battery life, less their capability of running sophisticated software or even to run software at all; but put for example a field gateway behind it, connect it to the cloud, and then you have your software defined IoT too.

These platforms have another interesting characteristic: in order to achieve the agility and easiness of adaptation, they embrace change and make changing easier. The [business] rules that control the behavior of the applications running on these platforms can be changed in a declarative way -as opposed to imperative or algorithmic-, eventually through a graphical use interface managed by some business user, not a programmer. It’s declarative, but it’s still giving orders to a computer to do thing, so it’s still programming or coding.

The end user who does acceptance testing doesn’t necessarily use the application itself anymore to see if it works as expected. They won’t do that fast enough and won’t do it as much times as it takes to deliver changes on a daily basis -or even more frequently-. Then the only way is to ask them to declaratively specify how to do the tests instead of doing the testing by themselves. Once again, it’s declarative, but it’s still coding.

So we have end users coding, either by adapting applications running on platforms to do new or different things or by make sure the applications work as they want, we have also more people coding: operators.

Operators now do write scripts to do repetitive tasks. It’s faster, and most importantly, it’s less error pone: once scripts works, they don’t forget steps or make mistakes as human operators sometimes do if they’re tired or in a hurry, stressed by a deadline.

And programmers have always coded; so now everybody codes.

So that’s my personal viewpoint on what a platform implies for digital transformation: “software defined everything” and “everybody codes”. And again, this won’t make your organization to digitally transform, but it’s very unlikely that you can transform without one. I’m fortunate enough to have a computer science and software development background; it’s easier for me to understand and to explain to my customers as Microsoft Digital Advisor this foundation for digital transformation.

Written by fmachadopiriz

December 30, 2016 at 5:14 pm

Learning Digital Business Transformation through example… from my kids

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Yesterday I had a deep conversation with my eldest son about League of Legends. I must admit I am not fully comfortable with him spending countless hours playing this online game. What I did not understood until yesterday was the profound undergoing digital transformation that the entertainment industry is experiencing as we speak.

If you think League of Legends is just an online game and its creator Riot Games are just a game publishing company, you are as wrong as I was. Let me try to explain what wonder me most by doing an analogy with football (i.e. soccer for those few reading in the U.S.)

More than hundred years ago, all around the world there were the football players playing football matches in the football field, and there were also the supporters in the stadium’s bleachers attending the matches. Local leagues of football teams organized local championships, regional federations organized regional cups and, then less than hundred years ago, the worldwide federation, also known as FIFA, organized the worldwide cup in my home town. Bribery and scandals aside, football is a multibillion dollars business, isn’t it?

About seven years ago, Riot Games developed and published League of Legends, a multiplayer online battle arena, real-time strategy video game, very popular among teenagers from 12 to 19 years old. There were teams of five online gamers teams playing games against other teams eventually in opposites sides of the world in real time. These gamers are actually gamethletes, a skill-based ranked community of people all around the world, who love to play this online game. There are local championships, regional championships, and there is the worldwide championship. The topmost ranked gametheletes are actually professional players who get paid for playing. Amazing, uh? Well, not really. The Messis, the Suarezes, and the Neymars of the football are paid, and very well I must say, for playing the sport they love to play, aren’t them?

Who pays the League of Legend’s gametheltes? Riot Games does for most of them and teams participating in the Worldwide Championship are even sponsored by brands like Samsung or SK Telecom. How Riot Games makes money to pay them? Well, you can get almost everything, and go almost everywhere in the game without a penny, but money can make things go faster. Just by playing games you earn points, and then you use those points for stuff like costumes for creatures in the game. But you can also buy points. And before you ask, yes, my credit card number is somewhere inside Riot Games’ datacenters; somewhere deep inside, hopefully.

But here’s where things become even more interesting. The 2014 League of Legends Worldwide Championship final was played at the Sangam Stadium, also known as the Seoul World Cup Stadium, built for the FIFA’s World Cup in Korea in 2002. About 40 thousand people attended the 2014 League of Legends finals live and companies paid for advertising spaces on the stadium, yet another 27 million watched them live online via streaming served by 40 broadcasters who also paid for the content. I don’t know how much they paid, but winning teams raised about 2.13 million dollars in prizes, so there should be good business case, shouldn’t?

The game’s user interface layout used for broadcasting is similar but different to the game layout used to play against other teams: it needs to show the full battlefield, not just the portion your team controls, and needs to show both teams’ actions. But it also allows space for advertising, so that’s how the broadcasters makes money.

My analogy with football isn’t about the sport, it’s about the entertainment industry. And there’s this multi-million dollars business of online multiplayer gaming, of which League of Legends is just one of them, mainly for teenagers who don’t have money, run by relatively few people, that enables a huge ecosystem for others to make money too, including those content generator teenagers who record their games and publish them online on YouTube or broadcast them on Twitch and get paid for it because other teenager consumers do watch them.

Putting it simply, that’s pretty similar to the business model behind the entertainment industry, isn’t it? And it’s fully digital. And it took just seven years to get there.

Written by fmachadopiriz

July 14, 2016 at 2:29 am