New Business Environment
The global economy has increased the pace of change within factors external to each firm to the point that a new business environment has replaced/altered traditional dynamics present in the mid-1980s. The closeness of these elements defined a new balance in forces that govern the organizations.
The corporate governance structure responsible for delivering shareholder value on the one side and stakeholder expectations on the other includes some of the following mechanisms: the board of directors, board committees, the chief executive officer, executive committees, management committee, and independent auditors. The traditional business environment usually offer a clear imbalance between the relative influence of shareholders and stakeholders in favor of the stakeholders.
A dramatic change in these relative forces is one of the most perceivable effects of the creation of fluid and complex supply networks. This is a consequence of the deep business environment transformation that destroyed the fundamentals of the traditional value chain management and the very basic principles that supported previous strategic thinking. The resulting balance will be presented later in this section but before that some explanation is required.
Several academics and practitioners have debated the impact that technology inflicts on modern economy. The authors believe that technology omnipresence is the underlying mechanism that has enabled this transformation which has altered both the supply and demand sides of the economy. By transforming the dynamics of both supply-side economy and demand-side economy, it has altered the dynamism of the business environment and shrunk both the economic and industry cycles.
Figure 1.13 Governance relative forces
Barriers to entering new markets have reduced, new entrants have multiplied, and substitution of products and service is customers’ expectation in most industries. This has reduced the importance of the direct rivalry among existing competitors as these have developed external alliances in order to survive. Companies no longer compete; supply chains do. In fact, as will be presented to the readers of this book, the supply chains’ networks compete with each other. This scenario has distanced the Five Forces Model from applicability as it reduces the effects of each of the forces.
The network effect is a phenomenon, as explained in the economy, that has intensified as the proportion of technology has become accessible to families. The basic mechanism suggests that the more people one potential buyer perceives using a product or service, the more likely this potential buyer is to acquire that item. Although the network effect was presented in the early 1900s,10 new economy dynamics with the Internet and massification of social media interactions have enforced its importance and influence.
Figure 1.14 New business environment, supply side
The network effect has some significant influence on the supply side of the economy, providing technology enabled solutions for sharing R&D best practices and tools. Nonproprietary technologies made public in collective practitioners’ communities have speeded the pace of change and accelerated the new alternatives’ (products and services) introduction rates in different industries.
Technological expansion and diversification have reduced development costs and cycle times, which has enabled the multiplication of offers. Recent technological influence has also reduced product and service introduction cycle times, making them available almost immediately to clients without geographical barriers.
This phenomenon brings us back to the discussion about another economic approach which became very influential as the new business environment substituted the traditional value chain. The creative destruction concept “derived from Marxist economic theory, where it refers to the linked processes of the accumulation and annihilation of wealth under capitalism”11 but was popularized by Austrian-American economist Joseph Schumpeter who adapted the theory to economic innovation and the business cycle driven by technological innovation (Schumpeter 1994 ).
This new environment faces numerous shorter industry cycles and creates an equally new economic order. Microeconomics models that observe market dynamics are under deep debate as the real side of the economy is under transformation. This affects the demand-supply balance, demand elasticity patterns, competition models, market structure theories, and cost and production theories.
Despite the effect on the supply side of the economy, the network effect has usually been assigned to influencing the demand side of the economy as it reflects the influence one individual can have on the purchasing behavior of other people.
From the demand side of the economy, the network effect alters people’s awareness about new offers (new products and new service). This transformation occurs in four complementary dimensions:
- The awareness is faster.
- The awareness is intense.
- The awareness is global.
- The awareness is supported by efficient responsiveness mechanisms.
It means that the cycle from new product or service launch to customer experience has shrunk, that too many people become aware, that there are very limited geographical barriers to this awareness, and that users can converse with each other about their experiences and provide feedback to the supplier almost instantaneously. Usually applied to the positive network effect, technology has now enabled an equally influential negative network effect.
Another significant change opportunity in the global economy is the impact of government regulations. Global organizations now influence markets on a multinational scale and national policies can leverage competitive differentiation to be applied overseas, impacting on competition in other countries.
Because external variables (see Figure 1.3) have now shortened the length of balanced business periods, the need to review a certain existing strategy has become more frequent and intense. The effort to move constantly from a strategy designed to last to a new allegedly long-lasting strategy is prohibitively costly to the organization.
The ability to design businesses capable of elasticity, resilience, and responsiveness requires an environment triggered by constantly updated market knowledge. The only asset that matters is people. The only strategy that delivers long-lasting shareholder value is the innovation-enabled knowledge leadership. The only business model that enables a truly innovative environment is the management of supply chains’ networks.
Figure 1.15 New business environment
These changes in the supply and demand sides of economy have destabilized the business environment. The definition of long-term business cycle has reduced and now strategies become obsolete much sooner. This eliminates the possibility of long-lasting strategies, as presented in Figure 1.9, due to the devastating impact of the disruption valleys. The alternative is to adapt strategic thinking to these shorter business cycles. Accumulated knowledge enables the ability to perceive market changes as driver to anticipate the new strategy. Therefore, the wise competitors—a conglomerate of complementary business that work together—can deliver value to shareholders and stakeholders.
Figure 1.16 Value network strategy lifecycle
The challenge is then to identify the mechanisms that enable market changes’ responsive strategies for fluid and complex supply networks. This new business environment has no longer the premises that sustained the arguments for the traditional value chain. A new paradigm exists. Previous dynamism and volatility has been intensified by market fluidity, complexity, and unpredictability. Forecasting as a single planning strategy is unacceptable as business resource planning must create a resilient environment capable of sensing every recently networked-market trend. The only relevant long-term strategy capable of creating and sustaining shareholder and stakeholder value is knowledge management.
Whereas the traditional value chain approach prepares for competitiveness, the value network prepares for innovation, as detailed in the previous section called “New Business Environment.” Innovativeness is the consequence of the wise application of knowledge accumulated over the time. The ability to change and simultaneously add value represents the ultimate competitive leadership dimension.
In addition, there is no room for choice. The organization must be able to concurrently deliver a ground-breaking cost-benefit environment to shareholders and stakeholders. Some firms that previously used to be ignored during strategic thinking are now influential stakeholders. The governance structures that balance shareholder value and stakeholder interest need to review their policies as their relative importance is now very similar.
Once the single firm no longer has the resources to compete in its industry sector and given that only through alliances will this firm shape high performance supply networks capable of beating other equally designed supply networks, it is possible to understand the power these elements external to the firm have.
Figure 1.17 From value chain to value network
Figure 1.18 Value network knowledge management
Figure 1.19 New governance balance
The quality of being able to sense is known as wisdom. Excellence in managing supply networks creates wise competitors; wise competitors are those companies that form a conglomerate of complementary business environments that work in a coordinated way and cooperatively to win in the market and deliver value to all their respective shareholders and stakeholders.