Business strategy has historically been based on the assumption that business sectors are clearly demarcated. However, due to the disruptive power of technology and the digitalization of the global marketplace, many sector border lines have become blurred, cross-sector competition has grown and the pace of sectoral transformation has increased exponentially. As this transformation creates large opportunities as well as risks for business, this article outlines some concepts of strategic thinking to help businesses face a new world of vanishing industry borders.
The Industrial Revolution and Business Strategy
While history has been in many ways the story of the constant discovery of new frontiers, throughout the ages a large amount of strategic thinking has been based on the assumption that the world was the sum of a set of relatively defined areas. Due to the influence of the medieval view of the world, these defined areas were believed and expected, both cosmologically and practically, to follow a rigid set of rules.
If we take military strategy as an example, throughout much of the past it was based on the view that battles were to be won or lost in a relatively defined space according to largely agreed rules of engagement. It was possible to move troops, weapons and provisions in and out of that space, and of course many different battlefield permutations were possible, but ultimately the side that won won by being better at maneuvering within a defined area. Wars, even those that extended over many years, were often not a fluid transformation of structures of engagement but rather repetitions of them.
In business, the same types of engagement dynamics were set in motion with the advent of the Industrial Revolution. With the transformation from hand to machine production methods, the use of energy sources such steam and water power and the development of factories, it became possible to dramatically increase industrial output. This output transformed not only economies but also the entire world order and was a major factor in creating the British Empire.
The Industrial Revolution and the economic opportunities and risks it presented of course had a significant impact on business strategy. Given that the economic engine of the new industrial economy was the factory, its key productive assets were by definition fixed in one place. Due to this reality, the core components of business strategy were largely based on making the factory as efficient as possible, securing the human and other resources that were needed to run it and developing markets to purchase new products.
Because of the very large amounts of capital that were required to put this economic infrastructure in place, build factories and set up and defend supply lines it was practically very difficult, and economically very costly, to sharply change strategic direction. Given this, strategy was largely the highly visible race to secure means of production and sales channels and then to defend them once they were in hand through diplomacy, military threats or war.
The Birth of the Digital Economy
The economic and strategic dynamics that were put in place by the Industrial Revolution were significantly altered by two forces. The first, the product of historically unprecedented economic growth, was the creation of wealth and the increasing distribution of that wealth to larger numbers of people. This was greatly facilitated over time by the growth of credit markets, which dramatically increased consumption potential. New spending power gave rise to demand for not only the bare necessities of life but also for many types of services that were not essential for life but could improve it.
The second force was the invention of the Internet. With the Internet, a digital platform was built which permitted the creation, shipment and even use of large amounts of products and services. People who are old enough may remember standing on lines to make deposits in banks and then having their bank books stamped with new balance. Today for most people the most powerful banks in the world are not massive physical structures but rather simply a web page where funds can immediately be transferred to every corner of the world.
Along the economic way the Internet became not only a conduit between markets but a market in and of itself with its own set of borderless buyers, sellers and demand and supply dynamics. These dynamics, part of the physical economic world, also were independent of it and permitted the creation of economic boundaries whose key defining characteristic was the absence of them.
The digital economy permitted the creation of economic boundaries whose key defining characteristic was the absence of them.
The trend towards digitalization, which had long become an unstoppable economic force, was no doubt accelerated by Covid-19 and massive restrictions on global personal and commercial mobility. This created the need to nearly overnight replace physical components of the economy with their digital avatars: in-person meetings were replaced with zoom conference calls, visits to doctors’ offices were replaced with tele-consulting and in-person trips to supermarkets were replaced by digital shopping. The fact that the digital economy was able to almost instantly absorb so many new economic functions is a testament to not only its speed, scope and elasticity but also its incredible economic strength. History will likely look back on the Covid-19 pandemic years as the point in time when the economic power of the digital world finally eclipsed the power of the physical one.
History will likely look back on the Covid-19 epidemic years as the point in time when the economic power of the digital world finally eclipsed the power of the physical one.
The digital economy has also taken aim at really one of the last vestiges of the Industrial Revolution: the factory itself. With the advent of three-dimensional printing the factory can be moved on wheels and assembled at will and it has become possible to create large-scale products, such as buildings, any place where a printer can be attached to the Internet.
The Age of Vanishing Sector Borders
The digitalization of the economy has had a major impact not only on economic growth but also on how entire sectors are structured and interrelated. One impact of digitalization has been flattening of barriers to one of the most vital components of any economy: resources. Rather than being restricted to resources that are physically close by, the Internet has given businesses access to resources located all around the world. Further, many of these resources can be obtained at a fraction of pre-economic digitalization costs.
Addition to resource availability, given the fact that many products and services have digital components with massive markets, it has became possible to cross industry lines and raid potentially profitable markets and sectors at comparatively low transaction and opportunity costs. This means that individuals or companies with a good idea but limited resources can create a business model, launch it and see if it gains traction. If it works, it can be rapidly scaled up. If it does not work, a new business model could be launched. The insight that the Internet has completely transformed business trial period cycles and has driven down the cost of business failure has been a key driver of the fail fast entrepreneurial movement.
One of the economic consequences of falling sector barriers was the powerful realization that the sum of sector admixtures could be greater than the sum of their parts: forms of marketing that worked in one sector could be migrated to industries with good products but antiquated business development approaches; new technology in one industry could be integrated with operations in others that were not performing optimally; sectors could simply be added together to create digital conglomerates with highly diversified business portfolios.
The accelerating discovery of cross-sector synergies led to yet another phenomenon: the creation of entire new sectors. Given that the digital economy permitted the ability to track and forecast consumer behavior on a simultaneously small and large scale, entire new sector compositions could simply be made up to maximize emerging demand trends. The consumer became the sector and the Internet thus become an incubator of not merely products but also of new industries.
Strategy in a World Without Industry Borders
Vanishing sector borders creates massive opportunities and risks for business. While the pace at which digitalization is transforming the economy creates significant uncertainty regarding what the world will look like tomorrow, one thing that is clear is that to thrive in this world new forms of strategic thinking will be required. Below are five points that should be kept in mind when developing a business strategy for the evolving economic world.
Rethinking Firm Assets. One key strategic consideration is rethinking what are considered firm assets. Historically, firm assets were considered to be what a firm owned and could be recorded on its balance sheet. In the digital economic world, however, a firm’s assets are not merely what a firm owns but what it has access to. This includes massive amounts of information, technology, labor and idea and business model feedback. These resources should be actively incorporated into a firm’s strategy plan.
Strategy Development. The access to massive amounts of resources at low cost and very deep markets means that available resources can be used not only to support firm strategy but further to define it. Because of the ability of firms to more quickly enter and exit markets and obtain many intellectual assets at lower costs, firms can become vehicles for matching demand with resources irrespective of sector boundaries rather than being forced to follow a single strategy defined by a fixed set of assets.
Business Plan Implementation. In the digital world, the costs of implementing many types of business plans has significantly fallen. This means that the implementation of a business plan does not need to represent an investment of all or the majority of a firm’s resources but rather an option on multiple types of business models. Firms can thus create a portfolio approach to business where a core business area is combined with several other types of potential business models where the economic upside far outweighs the potential downside.
In the new economic world, the implementation of a business plan does not need to represent an investment of all or the majority of a firm’s resources but rather constitute an option on multiple types of business models.
Value Proposition Creation. Another strategic opportunity in a world of sectors without clear boundaries is rather than create business models that are forced to assume the economic and financial inefficiencies of different sectors simply create new sector combinations that eliminate them. This applies to both the digital as well as the physical economy. For example, one inefficiency of the agricultural sector is that many farms only produce food for a certain part of the year which may not maximize the economic potential of the land. However, if a farm also includes renewable energy which can be sold during points of the year when the farm is not producing crops, it can increase overall project revenues, spread out the revenue and cost cycle, reduce asset risk and lower capital costs.
Cross-Sectoral Tie-Ups. Another strategic opportunity is to dramatically rethink potential business tie ups in the new economy ecosystem. Firms can quickly cross sector lines not only to compete but to join forces for mutual benefit. Rather than physically set up a new office, a firm with a good product can simply create a digital tie up with a company in a target market that may not have strong products but good sales capability. This strategy, which can be used for vertical as well as horizontal combinations, can generate shareholder value for both firms as well as create advantages for consumers.
Conclusion
When analyzing business opportunities, many companies focus on economic growth rates rather than consider the structural changes that are occurring within economies. One of the most significant economic phenomena of the 21st century has been the digitalization of the global economy and the increasing blurring of lines between sectors. This creates significant opportunities and risks for companies. Strategic thinking in this environment should consider rethinking what are available resources, the economics of business plan diversification and implementation, value creation and opportunities for cross-sector vertical and horizontal tie-ups.