The economic shock of the Coronavirus pandemic has accelerated several pre-existing trends, while also giving rise to entirely new ones. In the face of such rapid change, executives are piecing together the future landscape of value and the new rules of competitive advantage.
New ‘value shifts’ are being driven by shifting customer needs and behaviours on the demand side, increased value chain uncertainty on the supply side and a reversal of many of the trends that have defined pre-pandemic globalization. Competitive positions, likewise, are more vulnerable during such shifts, spelling out both promise and peril for executives. Variously referred to as the new normal, the big reset and other elaborate monikers, the emerging landscape will be characterized by the emergence of new value pools and the erosion of existing ones.
There is hope in the midst of such uncertainty. Migration of value to these new value pools can be predicted, prepared for and harnessed. Indeed, executives who anticipate these value shifts will be best positioned to seize tomorrow. In this article I will provide a framework for identifying new value pools and realigning your business portfolio to reflect these new positions.
Shifting Control Points
Times of crisis are accompanied by sudden changes in supply-side and demand-side dynamics — as has been the case with COVID-19. These changes lead to the migration of value from established business positions to new ones, enabling new players to emerge and new business models to be created. Such migration of value is also accompanied by a shift in value network ‘control points.’ This value migration commoditizes some business positions and empowers others.
To understand this migration of value, we need to start by identifying key trends impacting a value space. These trends may be classified into demand-side and supply-side effects. A combination of demand- and supply-side effects helps us determine the emergence of new value pools.
The pandemic has driven massive value migration through
a combination of supply-side and demand-side effects.
Next, we need to determine whether shifts in value will be accompanied by shifts in ‘control points.’ Control points refer to the control of key assets, relationships and data flows in a value network. Firms that emerge stronger from a crisis are those that can respond swiftly to a shift in control points.
To illustrate this with an example, consider the food retail industry. Compared to other retail categories, food retail has been a relative laggard in moving to e-commerce. In emerging markets, in particular, the online food retail model never took off pre-pandemic. Grocery deliveries typically involve many more items per order than other e-commerce categories, leading to high costs of fulfilment. These models become profitable only at scale when fulfilment can move from the store to automated fulfilment centres, but the convenience of informal neighbourhood grocery stores — especially in emerging markets — never drove demand scale in online grocery. However, as indicated, the pandemic has driven massive value migration through a combination of supply-side and demand-side effects, which is unlikely to be merely transitory.
Consider demand-side shifts in behaviour. With many countries moving into lockdown during the pandemic, there has been a significant shift towards e-commerce in food retail. In the U.S., more than 40 per cent of grocery deliveries in the week ending March 13, 2020 were made to first-time customers. This was further reinforced by the disruption of food supply chains during the pandemic, a supply-side effect. A combination of these demand-side and supply-side effects is leading to value migration towards online grocery retail.
In emerging markets, the situation is no different. Online grocery has accelerated at an unprecedented pace since the start of the pandemic. Neighbourhood grocers are feeling the squeeze as they struggle with a lack of technology to take online orders and an over-reliance on informal supply chains that have been disrupted because of the pandemic. Many of these stores are going out of business owing to poor cash flow and high rents.
Meanwhile, demand is increasingly getting centralized with a few large online grocery providers who can use centralized demand data to better predict demand patterns, improve stocking of fulfilment centres, and better inform their supply chain. Greater centralization of demand data also creates a machine learning advantage for large online grocery firms, further moving value away from smaller stores. In addition, a post-COVID-19 world is likely to feature supply chain inspections and quality control requirements that will also favour larger players. This combination of demand- and supply-side effects will strengthen large grocery players.
As in this example, a combination of demand-side and supply-side effects reinforces each to move value away from small stores to large grocery retailers. This value migration is further reinforced through a combination of machine learning on demand-side data and scale advantages in a consolidated food supply chain. Smaller players, meanwhile, are increasingly commoditized. Control points over demand shift significantly in the midst of a crisis, leading to an aggregation of demand with a few large players. Aggregated demand, when combined with a shift in supply, allows these players to reconfigure the value network around their business. In this new value network, neighbourhood stores may be relegated to serving as logistics providers to the larger players with relatively resilient supply chains. With centralized demand as a control point, large online grocery firms will best orchestrate the entire value network and might even leverage third-party warehouses, delivery agents and fulfilment centres to create strong network effects that further strengthen their position. Firms that orchestrate such ecosystems using digital platforms are the ones best positioned to harness value in these new value pools.
But... This Time is Different?
Value migration has happened during other periods of crisis in the past. The SARS crisis of 2003 forced consumption behaviour to move online across China, enabling Alibaba to move into B2C e-commerce. Alibaba launched the Taobao website in May 2003, in response to a self-imposed quarantine prompted by SARS. Consumers across China were staying home from work out of fear of contracting SARS — much like the lockdowns during COVID-19. Chinese consumers, stuck at home, took to ecommerce in droves.
Duncan Clark, the author of Alibaba: The House That Jack Ma Built, notes that the SARS outbreak “came to represent the turning point when the Internet emerged as a truly mass medium in China.” Firms like Alibaba benefited from this period of intense change, building demand-side control points by aggregating online consumer demand, and strengthening this with a network effect by opening out the supply side to third-party merchants. As more merchants came on board, the demand-side control point became even stronger.
As evidenced by the grocery example, we are seeing similar shifts in value pools during the coronavirus pandemic. However, these shifts are not specific to pandemics. In fact, they are not even specific only to times of crises. Shifts in control points and the creation of new value pools can result from any combination of technological, market or regulatory shifts.
How much value is created in these new value pools depends on two factors. The first is the duration of value migration: The longer these shifts persist, the greater the value creation. The second, often less visible, factor is the shift of control points. In fact, seemingly transient shifts may result in permanent effects when accompanied by the shift of an important control point.
Since the start of the pandemic, we have seen such a phenomenon play out in the movie distribution industry. Streaming platforms like Netflix and Amazon Prime have witnessed a surge in engagement during lockdowns. However, this seemingly transient shift in demand-side behaviour is reinforcing a much more permanent supply-side shift: The closure of major cinema chains, owing to the pandemic, has driven studios to break what is known in the industry as the ‘window’ — the three-month period between when a movie hits the big screen and when it’s offered for video-on-demand purchase or rental, and then on streaming devices. This window has long served as a moat protecting theatre revenues.
Since the start of the pandemic, studios have been launching directly on streaming channels, thereby eroding the window. Universal was the first studio to take these steps, announcing that it would make movies available at home on the same day as their global theatrical release, starting with Trolls World Tour, which had been scheduled to open April 10, 2020 in the U.S. In India, Amazon Prime secured rights to premiere several Bollywood movies on Prime Video. These movies were originally scheduled for a theatrical release.
We’re likely going to see new revenue models emerge, as well. In China, Huanxi Media has partnered with Douyin, a streaming platform, to launch direct-to-streaming on a new business model. Under this agreement, Douyin’s parent Byte-Dance would pay Huanxi at least ¥630 million (US$90.8 million) for new content to stream first on its streaming video platforms. With this deal, ByteDance gets exclusive access to a portfolio of Huanxi movies and TV shows, while Huanxi gets a licensing deal and a share of the advertising revenues. Within two days of the deal, Lost in Russia — one of Huanxi’s movies — was released on ByteDance and gathered 600 million views. Studios will get to test the success of movie releases on streaming platforms and use that to negotiate post-lockdown. Though theatres won’t go away, their negotiating power may decrease, leading to a shift in value. The longer the lockdown, and the more movies are released away from the theatres, the more likely we are to see this shift.
Within the first three months of the World Health Organization declaring COVID-19 a global pandemic, we saw several permanent shifts. For one, after Universal went directto-streaming, AMC Studios blocked off its movies from ever launching in their theatres. With AMC Theatres struggling post-pandemic, Amazon is looking to acquire its assets, further driving the consolidation we see during such periods of value migration. In India, Amazon was already increasing its negotiating power against movie theatres pre-pandemic by getting into the online sales of movie tickets. If it gains enough control over ticket sales, it can negotiate ‘windowing’ with movie theatres, leading to more fresh content launching first on Amazon Prime. With the pandemic, this balance has further tilted in Amazon’s favour.
This example shows how a relatively transient demand-side shift can reconfigure bargaining power in the value network because of a massive shift in control points. A transient demand-side shift may lead to a permanent supply-side shift by changing bargaining power of players in the value network.
Rearchitecting Your Value Network
In traditional value chains, value migration largely manifests as a shift in bargaining power between the supply side and demand side. In platform-mediated ecosystems, value shifts can rearchitect the entire value network. Migration of a demand-side control point can lead to a re-framing of the value network on the supply side. In certain instances, as with the rise of Taobao during the SARS crisis, this migration may result in a more open value network mediated by a platform and allowing for participation of third parties. In other instances, players in an open and distributed ecosystem may get rapidly commoditized leading to greater consolidation of value around a few players.
We are seeing such consolidation play out in the restaurant and food delivery space in the aftermath of the pandemic. During the first three months of the pandemic, China’s Meituan hit a $10 billion valuation. In the West, we have seen increasing consolidation among players, with Amazon buying Deliveroo and Uber making an offer to Grubhub, which eventually merged with Just Eat Takeaway.
The creation of new value pools can result from any
combination of technological, market or regulatory shifts.
While these valuation and acquisition plays are important, the pandemic has accelerated deeper value shifts in this industry. Again, let’s start by looking for demand-side and supply-side effects. On the demand side, social distancing regulations and lockdowns have led to falling demand for in-restaurant dining and a corresponding increase in demand for in-home food delivery. A combination of rising delivery fees paid to aggregators, high rents and falling demand for dine-in is squeezing restaurant profits, leading to important supply-side shifts. As more and more restaurants go out of business, delivery businesses are integrating with cooking and food processing operations and setting up ‘dark kitchens’ exclusively for delivery, without offering any dine-in experience.
Food delivery platforms have the advantage of a demand-side network effect where more consumers attract more restaurants onto the platform and vice versa. This demand-side network effect reinforces supply-side scale in kitchen operations as more dark kitchens are set up.
Dark kitchens benefit from a more profitable operating model: They are typically located closer to residential areas, leading to lower real estate costs and lower delivery costs as kitchens and delivery hubs can be located closer to demand, enabling superior route optimization. Using superior demand data from their delivery business, delivery platforms can also apportion cooking and sourcing across different kitchen locations based on demand patterns near those locations. These dark kitchens also leverage market-wide demand patterns to better predict sourcing and preparation, leading to lower food waste costs.
As such, dark kitchens consolidate value away from restaurants towards a few central food delivery platforms. These platforms, now, own the demand-side control point with their delivery business and the supply-side control point with their dark kitchen business.
A Blueprint for the Future
As indicated in this article, significant value shifts have resulted from the pandemic, but there are many other equally important macro shifts that present opportunities for new value pools. Technological shifts continue to accelerate and artificial intelligence is rapidly advancing across sectors. More importantly, traditional industry boundaries are disappearing, often leading to creation of new value pools and business models where none existed in the past.
Geopolitically, the rise of China is reshaping the global economic order and the rise of stakeholder capitalism will further create new value pools as business priorities shift to embrace larger societal and environmental value. Finally, investor activism and regulatory shifts will also play an important role in determining future value pools.
The ability of executives to benefit from such shifts is dependent on three factors: How early they spot the shift; their ability to innovate and reconfigure their business model portfolio to position themselves in the new value pool; and the strength of the control point that consolidates their position in this new value pool.
Going forward, firms that develop a strong sense of market shifts and an ability to harness their value network towards these shifts will be best positioned to win. The importance of harnessing your value network makes agility and digitization ever-more important priorities for executives. More importantly, firms that compete through ecosystems will be best positioned to rearchitect their value network. Ecosystems are fluid and dynamic, and the most successful orchestrators govern them through digital platforms. Businesses that orchestrate ecosystems can leverage external assets and benefit from demand-side economies of scale. They may also selectively capture supply-side control points by owning important assets of their own.
The post-pandemic world will witness many important shifts. Executives who ‘take the tide at the flood’ and anticipate value shifts early, reorganize their business model portfolio and consolidate their control points will be best positioned to seize tomorrow’s opportunities.
Sangeet Paul Choudary is the founder of Platformation Labs and the co-author of Platform Revolution: How Networked Markets Are Transforming the Economy (W.W.Norton, 2016) and author of Platform Scale: How an Emerging Business Model Helps Start-Ups Build Large Empires with Minimum Investment. (Platform Thinking Labs, 2015). He advises Fortune 500 firms and is a World Economic Forum Young Global Leader. This article appeared in Transforming Beyond the Crisis: What Organizations Need to Do Now to Seize Tomorrow (Brightline Initiaive/Thinkers50, 2022).
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