What Blockchain Means for Your Strategy

Intro

This article is about how the emergence of blockchain technology affects business strategy. If your business model is based on the network effects of data, you are primed for disruption - and this post is critical reading!

By Hakon Tillier May 7, 2018

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What is strategy?

I like a definition paraphrased from The lean startup; “Strategy is a theory about how you are going to win in the marketplace tomorrow”. In other words, “Strategy” implies there is a) a market, b) one or more competitors and c) a competitive advantage we can utilize.

Porter more or less created the discipline of Business Strategy by inverting the branch of Industrial Economics focused on limiting monopolies. Hence, what most strategies really seek to accomplish is to do the opposite, to create some form of monopoly in which the firm is protected from the forces of the free market.

It is assumed that user preferences for products and services are possible to cluster in a way that defines markets and segments. Within these, there are several suppliers, competitors and substitutes, who compete to give consumers what they want at the price they are willing to pay.

The strategy of a monopoly

A monopoly is being alone in having access to critical resources needed to serve the target market as defined by user preferences.

In markets where the critical resource is data, the monopoly takes on the shape of a database. Or rather, as described by Ben Thomson, the database with the best traction at some right point in time will take on the shape of a monopoly - or Aggregator - as he labels them;

Aggregation Theory describes how platforms (i.e. aggregators) come to dominate the industries in which they compete in a systematic and predictable way. Aggregation Theory should serve as … a primer for regulators addressing the inevitable antitrust concerns that are the endgame of Aggregation Theory.

(My emphasis)

From a consumer perspective, this is not inherently bad - a complete database is much more useful that one that is incomplete. Thomson goes on to underscore that “the Aggregator comes to dominate, precisely because it delivers superior value to both consumers and suppliers”.

In the market for generic search, an engine that covers 50% of the internet is more useful that one that covers 25%. If you consider a digital currency, an incomplete list of transactions is useless if you wish to know how much money one person has. In the market for personalized content recommendations, having access to the preferences of all consumers would enable you to provide the best recommendation service.

An Aggregator becomes a Monopolist in the true sense of the word, when they take a large portion of the value created for themselves. In the content recommendation case, this grab of value could be in the form of not showing you the content you really wish to consume, but rather content that is in the interest of the Monopolist that you consume. They can do this, because there are no other places with the same set of data needed to create the service you came for in the first place. In other words, the Monopolist is able to abuse the trust we give them without risk of losing their role or suffering penalties from the abuse of power

Whenever a Monopolist exploits their position they create a deadweight loss for society as a whole, this is the cost of having a Monopolist control a market. See Facebook and the cost of monopoly for more on this.

The logical path for strategists to pursue in this environment is to look for opportunities to win a marketplace tomorrow. A pitch will usually tell you that the pitcher has a strategy and that they see a future marketplace where they will be able to exploit a certain position by extracting value above the cost of serving the market. What an investor pitch usually boils down to is a small or partial monopoly wrapped in a business plan.

The capability for investors to look for in this situation, is the ability to build a monopoly and then to be able to extract value from its participants.

How Blockchains change this landscape

Blockchains have the potential to replace trust - technically speaking to replace the trusted 3rd parties we have built our society around or the 3rd parties we are forced to trust because they are the Aggregators of their domain.

Visa does not control information about what you bought if you paid with Bitcoin, but they do if you pay by Visa. It is only because we trust our government to keep tabs on Visa, that we feel safe in having them effectively control our money.  Unfortunately, this leaves us depending on government oversight - and furthermore, there are many markets governments don’t see as their job to police.

Blockchains enables us to create monopolies, but treat them like common resources. A blockchain is a shared record in which everyone can read and write information about events and entities. Any person with access to the internet can read and write transactions on the Bitcoin blockchain. All you need is a client or wallet, which are all open source and available to anyone.

The crucial difference between a public record and a private database is that no single entity controls access to the public record. For Bitcoin, this means that no one organisation can monopolize information about who sent money to whom or how much money someone has available. Using a Blockchain, we can create the ultimate data set about a domain where all participants in the ecosystem are incentivised to participate as producers of the data and nobody gets to exploit the shared resource at the cost of others.  

In other words, with Blockchains we potentially get the superior value proposition of an Aggregator, but not the associated cost of a monopolist. In a blockchain based ecosystem, bargaining power is distributed from the center of the system towards the edges, to its participants.

Any strategy seeking to establish a future monopoly based on information or data will find itself at a competitive disadvantage to distributed competitor. This is because a blockchain powered aggregator effectively will open source the monopoly. From a strategy perspective, this has the same effect as to commoditize the resource, and doing so will pass the Attractive profits on to other levels in the value chain - typically the entities that are best able to integrate the data in their offering to the market.  (See Christensen highly recommended Innovator's Solution, or look up the the law of Conservation of Attractive Profits)

In short, blockchains creates a problem for strategists and by extension investors; The viability of investing in future monopolies is greatly diminished.

As the critical resource is denied us as means to creating a monopoly, firms are left with competing on operational excellence (which according to Porter is not strategy) - or to find and utilize resources other than data.

The logical capability for strategists to look for in a venture in this situation is the ability to utilize the data in the distributed system to create value for its customers, not the ability to grab value by controlling it.

The questions for you, then, is what data in your business model is ripe for disruption by blockchain - and what capabilities will you need to utilize them?

I wrote a piece about how we apply this to Strossle's strategy that you can check out here

Håkon Tillier, Chief Expansion Officer at Strossle

 

Assorted reads:

 

A 2015 introduction to Blockchains from the Economist

https://www.economist.com/news/leaders/21677198-technology-behind-bitcoin-could-transform-how-economy-works-trust-machine

A 2016 introduction to tokens as a new way of financing ventures, Coinbase blog

https://blog.coinbase.com/app-coins-and-the-dawn-of-the-decentralized-business-model-8b8c951e734f

The Hyperledger Blockchain and supply chains for food - very potent use case for blockchain - Hackermoon 2017

https://hackernoon.com/how-hyperledger-blockchain-tracks-your-fish-from-ocean-to-plate-582bea781d55?source=linkShare-3d7c214dc8ff-1518678884

The incredibly interesting case of Crypto Kittens, a new class of games and assets, and also a must read for fans of Biomorphs

https://techcrunch.com/2017/12/03/people-have-spent-over-1m-buying-virtual-cats-on-the-ethereum-blockchain/amp/

Blockchain @ Media, a 2017 report from Deloitte (PDF)

https://www2.deloitte.com/content/dam/Deloitte/tr/Documents/technology-media-telecommunications/deloitte-PoV-blockchain-media.pdf

Tweetstorm by everyones favourite blockchain thinker, Naval Ravikant

https://twitter.com/naval/status/877467629308395521?lang=en

In the interest of balanced coverage, an argument for the uselessness of blockchains, Hackermoon 2017

https://hackernoon.com/ten-years-in-nobody-has-come-up-with-a-use-case-for-blockchain-ee98c180100

An insightful peek into the future of user data and related applications. Blog Post titled “Paradigm shifts for the decentralized Web”

https://ruben.verborgh.org/blog/2017/12/20/paradigm-shifts-for-the-decentralized-web/#users-become-owners

A reading list on one of the latest and hottest applications of blockchain, Token curated registries (it should itself of course have been one)

https://medium.com/@tokencuratedregistry/the-token-curated-registry-whitepaper-bd2fb29299d6

Hackermoon,2017. A dive into why we are always wrong about the future, coupled with what the future of blockchains looks like. Jefferies references Huxley, Gibson, Kurtzweil and Simpsons. If that doesn’t motivate you enough - you’re on your own.

https://hackernoon.com/what-will-bitcoin-look-like-in-twenty-years-7e75481a798c

 

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