Gavin Potter

The Law of Increasing Returns

We will be examining in subsequent chapters how you can exploit information to give you a competitive advantage – using information to exploit the complexity of your business; making best use of the infosphere of your products or knowledge capital; moving away from the physical aspects of your business. Each of these approaches is capable of improving business performance significantly in isolation; applied together, the benefits they can generate are even greater. However, before going on to look in detail at these, it is important that we understand the basis on which these benefits are produced, and that we understand how and why the virtual business is capable of out-performing conventional physical businesses. We need to look at the ‘law of increasing returns’.

The Virtual Value Chain

There cannot be a business in the developed world that is not familiar with the idea of a value chain. Whether you are a massive retailer concerned, like Wal-Mart, to distribute goods to your outlets as efficiently as possible, or a specialist supplier negotiating delivery through a third party to a small number of customer, you are managing your value chain. And your attention has almost certainly paid off: distribution costs in your business have probably fallen, delivery times have almost certainly shrunk, just as the value that you add to your customers has risen. But is this where you should focus all your attention? Is this the only way in which your organisation can add value?

Computer Modelling and Complexity

‘Chaos’ and ‘complexity theory’ are some of the key business buzzwords of the 1990s, reflecting not just the emergence of a ‘new’ science but also a more general shift in our culture away from simple certainties. However, it is a change to which business has come comparatively late. Much of what we do is still based on comparatively simple assumptions, some of which we have already discussed in this book, such as the dichotomies between strategy and detail, and between information and knowledge. We keep things simple because this is how we get things done. Tell someone to do one or two tasks and there’s no problem; tell them to do 20 and, all too often, nothing ends up being completed. Like economists, we all know that the real worlds of our businesses are rarely as clear and logical as our planning models; we all know that things do not always turn out as we expected. We simplify to survive: it is a necessary part of management.

A New Way of Managing

While the number of companies experimenting with the kinds of idea we have discussed in the previous section is growing, there are many more companies who still think only about physical business. However, if we think the writing is on the wall, how is it that these organisations do not seem to be able to read it?

Information and the Virtual Business

When Galileo first looked up at the night sky through a telescope, he saw that the universe was made of many more stars than anyone had realised:

Zero-based Physical Budgeting

Throughout this book, we have given examples of organisations that have changed the rules of an industry by moving processes from the physical domain to the virtual domain, by converting a physical process into information. We believe that all industries (see below) will be subject to this type of revolutionary change, and that those organisations that embrace these changes will prosper and those that do not will fail. The subject of this chapter is how to identify when and where such changes might occur and how you can be first to exploit them.

Virtual Marketing: the Economics of Difference

Throughout the 1970s and 80s, companies were told to slim down the differences in their organisation: reduce the number of different products for sale, reduce the number of different customers, reduce the number of different markets in which the products were sold. Although this undoubtedly helped companies to increase their short-term profitability, this reduction in difference, and therefore reduction in customer choice, has turned out to be something of a blind alley.

The Technological Foundations

This is book is about building a virtual business, not about the technology that enables you to do so. In fact, we hope we mention computers, the Internet and the other bits and pieces of technological plumbing that you need to process information rather less often than other books of this sort. However, at the same time, we have to recognise that without technology none of this would be possible. Building the virtual business, therefore, inevitably involves understanding something about the technological trends that have underpinned the information revolution, and which are now driving our ability to process and share information ever more quickly, and to see where those trends might lead in the future.

Getting the Foundations Right

The information technology revolution is, literally, revolutionising the way in which we do business. Hardware costs continue to halve every 18 months; software applications are continuing to make our existing hardware obsolete (as we write this book, continuous speech recognition is rapidly appearing as the next hardware-killing application); accommodating new users and responding to new competitors demand new technological changes; new methods of collecting information continue to generate vast quantities of data that can be ignored only at your peril.

The Raw Material of the Future

The implications of the information revolution have been and will continue to be vast. However, they have also – at least so far – been primarily technological. It is true that our lives have changed considerably since the widespread introduction of computers, but there has been little that has been really revolutionary in the true sense of the word. We have used computer hardware and software to automate what we already do – to speed up processes, reduce error rates and minimise costs – but not to change our lives in a profound sense. Our cars may have on-board computers, but we still use them to get around; our fridges have circuit boards, but they still keep food cold; our factories may have robots, but they still weld metal. We should, perhaps, be less amazed at what we have achieved than what we have not even begun to attempt.