New Patterns of Power and Profit: A Strategist's Guide to Competitive Advantage in the Age of Digital Transformation

287 Pages·2019·3.3 MB·English

by  Eric K. Clemons

E R I C K . C L E M O N S
NEW PATTERNS OF
POWER AND PROFIT
A Strategist’s Guide to Competitive
Advantage in the Age of
Digital Transformation
New Patterns of Power and Proft
Eric K. Clemons
New Patterns of
Power and Proft
A Strategist’s Guide to Competitive
Advantage in the Age of Digital
Transformation
Eric K. Clemons
University of Pennsylvania
Philadelphia, PA, USA
ISBN 978-3-030-00442-2 ISBN 978-3-030-00443-9 (eBook)
https://doi.org/10.1007/978-3-030-00443-9
Library of Congress Control Number: 2018954967
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Preface
This is About How You Can Understand
the New Rules of the Information Age
Tis book could not have been written fve years ago. Too many of the pat-
terns that are emerging now, like the full economic power of Google, the
value of platforms like Uber and Airbnb, or the risks to our personal privacy
from social networks, were not yet fully clear. It was not yet clear that pri-
vacy violations could be used to determine the prices we are each charged,
or for outright manipulation of our elections. Te possible use of a plat-
form like Android for unfair and even illegal competition had not yet been
debated in the courts.
Additionally, this book could not have been written without the unique
access to corporate and military leaders that I enjoyed as a result of my posi-
tion as a senior faculty member at the Wharton School. For the past 40
years, I have served as a consulting paranoid, helping executives, politicians,
and entrepreneurs avoid dangers and seize opportunities in a world of unfa-
miliar information-based strategy, and this book is based on this access and
this experience.
Tis book is a guide to functioning, even prospering, in the twenty-frst
century. It’s about understanding the future of shopping, manufacturing,
social networks, employment, or investment. It’s about seeing the future of
almost any aspect of modern life that is being altered by information. Tat
is, it’s about the future of everything.
v
vi Preface
Tis book is almost about clairvoyance. It’s about seeing things frst, and
sometimes knowing things before others think it is possible to know them.
It’s about using new patterns and mental maps to show you what you will
want, rather than using old patterns and mental maps to guide you where
you previously wanted to go. To do that we need to explore new patterns,
with the necessary predictive power, and we need to understand how to use
them.
Tis book is for everyone who wants to understand our information age.
Tis book is written for CEOs and entrepreneurs considering online start-
ups, since both will need to understand how information changes competi-
tion and their prospects for commercial success. It’s for undergraduates and
MBAs still trying to pick a career, because they will need to understand the
future economy and need to anticipate what jobs will be in demand and
which will be personally and professionally rewarding. It’s for regulators,
lobbyists, lawmakers, and voters, trying to fgure out what it means to be
fair to everyone, when privacy, political power, and proftability are changed
by information. Fairness to citizen taxpayers, individuals paying for health
care, and giant corporations everywhere, will be changed. Te old implicit
social contract that holds society together is coming undone, everywhere.
So, this book is for anyone willing to take the time to understand how
information changes consumer behavior, corporate strategy, competition,
and law. It’s for everyone who knows that he or she is going to have to par-
ticipate in a workplace transformed by information. It’s for everyone who
knows that he or she needs to understand changes in education, shopping,
and life itself, and wants to know how to plan, to participate, and even to
lead the transformations that are going to continue for decades to come.
You don’t need to be an economics professor to read this book, or a com-
puter scientist.
To complete the book I had to get past two diferent sources of skepti-
cism, prevalent in two diferent populations. First, it’s easy to assume that
if you understand how to use an iPad to do everything you want online,
then you understand the net and its impact on business and society. Many
readers, especially young readers, can use an iPad to translate Chinese street
signs, and to order dinner online in Singapore or Toronto, or to hail an
Uber, send a text, or make a free Internet phone call. Tat does not ensure
that they understand the digital transformation of everything.
My students consider themselves digital natives because they know how
to use the net, would rather text than use e-mail, and carry smartphones
instead of cameras. Initially, trying to talk to my students about informa-
tion was like trying to talk to a fsh about water. Tey couldn’t imagine a
Preface vii
world without search, without smartphones, or without a net to connect
everything and everyone. Which means that they could not understand the
transformations that these devices were producing and would continue to
produce, because they couldn’t imagine things having been done diferently
in the past, or things being done diferently in the future. Tey couldn’t see
or anticipate the change, any more than those of us who grew up with auto-
mobiles and central heating could imagine that they were new, represented
change, and could afect the climate of the planet. Tis book is about infor-
mation, and about seeing the impacts of information, in ways that using
search, owning an iPad, and surfng the net do not make fully clear.
Paradoxically, there was a second group of readers that assumed that
full understanding was impossible to present in a book for masses of read-
ers with normal interests, no matter how intelligent they were. If the book
wasn’t going to be intensely technical, then they believed it was going to be
superfcial. Tis group of readers expected lots of buzzy stuf, like employ-
ment after the AI Singularity and immortality through a digital representation
of our essential souls. But there is so much to explain about the companies
around us. Why did Facebook win and why did MySpace lose? Capital One
was certainly a winner, leaping from new entrant to a position as a top-5
credit card issuer. But why did they succeed in entering a market in which
they faced dozens of existing competitors? New retailers of traditional prod-
ucts sometimes win, sure; think about Amazon. And sometimes new retail-
ers fail; think about Pets.com.
Tis book presents tested theories that explain a lot. You don’t need an
economics degree or a computer science degree to read this book. If you
have studied both economics and computer science this book won’t annoy
you, talk down to you, or introduce errors through oversimplifcation. It just
won’t use your professional jargon much, and won’t ever use jargon without
explanation.
Additionally, there is some really cool stuf that I left out. Will people
become immortal and be able to load their true essence into the cloud?
Will people become redundant after the Singularity, when computers rep-
resent greater intelligence than any single human mind, or, worse yet, more
intelligence than the entire human species? Will our life become paradise,
as depicted in the New York World’s Fair view of the future, as seen from
1964, with almost everything automated and almost everything done for us?
Will we be both immortal and redundant, as described by Arthur C. Clarke
in Te City and Te Stars in 1956? Tose are great questions, and they have
been handled better than I could, by people who write science fction and
speculative science better than I can.
viii Preface
The Role of Experience and Simplifying
Experience into Patterns
It’s Easier to Understand Something If You’ve Already Seen It Before!
Te modern world is a risky place, with unknown alternatives facing all of
us, every day. But these alternatives are not unknowable! For diferent clients,
at diferent times, my team has included anthropologists and marriage coun-
selors, historians and negotiators, computer scientists, and even poets and
historians.
• As consultants to the travel industry, we examined the impact of an act of
terrorism involving using a commercial aircraft as a suicide weapon, years
before 9/11.
• As consultants to 3-Star and 4-Star admirals, we studied the evolution of
social networks and their impacts for regime change in the Islamic World,
long before they had emerged as a problem for US diplomacy or for the
US military.
• As consultants to a major consumer packaged goods company, we dis-
cussed the implications of eCommerce. We focused on the increased
power of online retailers, relative to manufacturers. We concluded that
manufacturers would be unable to compete with these online retailers,
and that manufacturers would be unable to sell their own low margin
consumer goods directly to consumers. Producers of goods like canned
foods, paper products, or soft drinks would have to avoid ofending their
critical retailers.
• In contrast, when working with companies in the travel industry we con-
cluded that airlines would quickly be able to bypass traditional agencies.
Traditional agencies would quickly lose importance, and airline ticket
sales would quickly move online.
Each experience led to a strategic insight. More importantly, each experi-
ence led to a reusable insight, since each resulted in the team’s understanding
a pattern that could be used to develop strategy quickly and systematically in
similar settings.
We all need strategies, and to formulate strategies we need accurate men-
tal maps, or models, of the emerging world. Tese mental maps enable us to
make decisions and plan our actions. Te ocean of information has changed
our world. And our new world requires new mental models and new mental
maps to guide us.
Preface ix
Survival in a complex and competitive environment has always required
the right models of the world. Tese are templates, based on observation of
patterns that occur frequently. Te earliest humans developed patterns that
were strikingly simple:
1. I t’s best to eat ripe sweet fruit. You need to know where the fruit ripens frst
or something else will eat it before you do.
2. I f an animal is slow, or dead, it is safe to approach and see if it is food. If an
animal is big and fast, it is best to leave it alone, or even run away from it.
It is not food. It may even think you are food.
Te early humans who observed these patterns ate and did not get eaten.
Of course, the invention of language, society, and simple tools changed the
world and changed its patterns. Tese changes resulted in the need for new
patterns, which replaced the previous, simpler ones.
1. A griculture lets us grow the fruit we want. We can have a sequence of ripe
fruits and vegetables, each in their season.
2. A nything we want is food. Organized hunting lets us hunt even the largest
animals, like the woolly mammoth and American bufalo, as food. And
we are no longer food ourselves!
Te bands of humans that mastered these new patterns prospered and domi-
nated their environment and their neighbors.
But technology is changing the patterns we need to recognize. Indeed,
technology has always changed the patterns of life. Te most power-
ful men in Tombstone or Abilene in the 1870s looked very diferent from
their counterparts half a century earlier. Te fastest gun and the richest
banker might not have been very impressive physically, but every survivor
in Tombstone and Abilene knew when to bow, when to apologize, when to
step aside, and when to leave the saloon.
Tis book presents the six new patterns that we need to know, whether we
are voters or the candidates who want their votes, investors or entrepreneurs
who need their funds, brewers or their customers, retailers or consumer
packaged goods producers. As importantly, we don’t just need to know these
patterns, we need to know how to use them to gain control of our infor-
mation-based world. Tis book presents my three rules for seeing, selecting,
and using the appropriate pattern for every situation you need to master.
Surprisingly, there are indeed only six new patterns to learn, and only three
rules you need to master them.
x Preface
My First Rule—Learn to See the Patterns
Seeing Clearly Enables Recognition and Response
Information changes everything, from the behavior of your customers to the
actions of your competitors, from the behavior of your voters to the behav-
ior of competing candidates, and from the power of dominant brands to the
power of high-price high-margin new products. Perhaps most importantly, it
changes the balance between previously dominant organizations and nimble
new competitors, in everything from brewing, to banking, to political par-
ties.
Everything looks new, altered, and apparently unfamiliar. Your response
requires three steps to make the world look familiar again. Tese three steps
are easy to understand, easy to learn, and easy to apply. Tese three steps
enable you to master the patterns of information-based strategy and the pat-
terns of power that were created by changes in information-based strategy.
Reframe: I start by acknowledging that there are problems I cannot solve
as they are initially presented to me, and by acknowledging that I can often
transform the problem into a similar problem that I can solve. You can do
this too. Start by reframing the problem you face in diferent ways, until it
becomes something you know you can work with. If you don’t understand
the problem you are trying to solve and you can’t answer the questions you
are trying to answer, change them. Problems in digital strategy often appear
new and unfamiliar, but they are seldom unique or unprecedented. Google’s
business model was used by United Airlines and American Airlines in the
1980s to control other airlines’ access to customers. Controlling access, and
charging for access, was a proftable business model even two decades ago;
until regulators intervened, controlling other airlines’ access to passengers was
more proftable than operating an airline. Uber’s business model, targeting
the most proftable customers of existing taxi companies, is not so diferent
from the business model of Capital One, which was based on targeting the
most proftable customers of existing banks and credit card issuers. Rather
than trying to look at Uber as a company that provides rides to people in a
hurry, try thinking of Uber as a company that serves the most proftable cus-
tomers of an entire existing industry. Reframing takes a problem you’ve never
seen before and turns it into something you recognize, which allows you to
reframe your critical strategic questions in a form you can now answer. When
you do, the information-based world no longer seems so mysterious.
Recognize: Once I realize that I need to reframe a problem, I try diferent
patterns and diferent ways of looking at the problem, until I fnd one that I