Fwd: Every aspect of your business is about to change - Geoff Colvin
Sandy Shensun
Imagine an economy without friction—a new world in which labor, information, and money move easily, cheaply, and almost instantly. Psst—it’s here. Is your company ready?
Using software and the mobile-phone network, Tesla avoided any need for a recall. It doesn’t have any dealerships; customers can configure and order a car online, and they can test-drive cars at company-owned showrooms. Tesla’s advanced electric technology is simpler than gas or diesel technology, so cars can be built with fewer employees and less capital. Combine those factors and here’s what happens: General Motors creates about $1.85 of market value per dollar of physical assets, while Tesla creates about $11. GM creates $240,000 of market value per employee, while Tesla creates $2.9 million. You don’t get differences like that just by being more efficient. Tesla, though in the same business as GM, is a fundamentally different idea.
Nike is a 21st-century corporation, aggressively reinventing manufacturing with 3D printing and cannily using social media for marketing. General Electric is becoming one, if partly as a result of shareholder frustration and outside pressure. Every company needs to be one.
The new realities begin at capitalism’s foundation, capital. In a friction-free economy, a company doesn’t need nearly as much as it used to. Consider the world’s most valuable company,. Unlike Google and Microsoft , the second and third most valuable firms, Apple gets most of its revenue from selling physical products. Yet the company says “substantially all” of its products are made by others. Because it can coordinate vastly complex global supply chains, it can pay those firms, mostly Foxconn, to make its products and get them where they need to be on time. Apple has even rented other companies’ servers to host its iCloud service so that it can add or remove capacity easily, paying only for what it needs.
The U.S. government classifies Apple as a manufacturer, and with some 500 brick-and-mortar stores worldwide, its total capital—$172 billion of it, according to the EVA Dimensions consulting firm—is immense. But in traditional models it would need much more. Its achievement is using that capital to stunning effect, creating a market value of $639 billion. By comparison, Exxon Mobil uses far more capital, $304 billion, to create a market value, $330 billion, that’s barely half as much as Apple’s.
The trend is as old as the Internet’s early days, when a slew of web insurance upstarts forced term-life premiums to plunge 50% or more—and when user-friendly hotel- and airline-booking sites put some 18,000 travel agents out of business almost overnight.
Warby Parker sells high-quality eyeglasses for a small fraction of what traditional retailers charge by using a low-friction online model; private investors recently valued the firm at $1.2 billion
Harry’s and Dollar Shave Club, which make and sell men’s grooming products online, are forcing Gillette (owned by Procter & Gamble) to promote its wares on value, not just quality, for the first time.
The 21st-century corporation will increasingly be an idea-based business, operating not just in infotech but also in media, finance, pharmaceuticals, and other industries that consume lots of brainpower. McKinsey finds that while “asset-light, idea-intensive sectors” generated 17% of Western companies’ profits in 1999, they generate 31% today.
Global corporate profits recently totaled about 10% of world GDP, says MGI, a number we may someday recall with envy; the profit share could shrink to 8% by 2025, MGI predicts, barely more than it was in 1980. Result: “As profit growth slows, there will be more companies fighting for a smaller slice of the pie.”
Google possesses better real-time knowledge of what’s going on in the world than any government does; research shows it can predict disease outbreaks, stock market movements, and much else, and could influence elections if it wanted to
With 1.5 billion users, Facebook has a bigger population than China does and can accurately describe its users’ personalities and predict their success in work and romance.
On any given day, Apple probably has more cash on hand than the U.S. Treasury
Bharti Airtel, an Indian telecom company, has about as many customers as the U.S. has residents.
With 2.2 million workers, Walmart employs more people than any other organization on earth except the U.S. and Chinese defense departments
Corporations, even as some achieve colossal stature, will on average live shorter lives than they used to. The trend is striking: The average life span of companies in the S&P 500 has declined from 61 years in 1958 to about 20 years now, says Yale’s Richard Foster, who predicts further steady declines. Well before the 21st century’s end, the concept of companies as continuing institutions could even cease to be the norm.
there are transaction costs—friction—and consolidating transactions inside companies is the most efficient way of handling them. Now, as technology shrinks those costs, many companies are unbundling themselves, outsourcing functions to others, crowd sourcing R&D, and exchanging employees for contractors.
The good news is that accelerating change, creative destruction, and new business models are all opportunities for the venturesome. A unifying theme as the economy transforms is that in almost every business, barriers to entry are coming down. Opportunity is more widely available than ever. Every person and every organization can possess the 21st century’s most valuable assets: openness to new ideas, ingenuity, and imagination.
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Smita
Regards,
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