In my last post I said that “businesses will be forced to move from the traditional (linear) supply chain to a business ecosystem”. I’ve had a couple of questions about this statement so I thought I’d post an explanation of my reasoning.
The reason I think businesses will be “forced” to move to ecosystems is based around the concept of “whole product”. This is a marketing term and it essentially means “the core product PLUS anything needed to give customers a compelling reason to buy.” The core product might be a computer but the whole product may be the computer plus installation, support, pre-installed software, warranty and training. Mainstream consumers buy ‘whole products’ not ‘core products’.
In order to supply a ‘whole product’ businesses will have to move to an ecosystem model because no single business that can efficiently supply all the ancillary products and services needed to create a whole product.
It’s true that consumers have always demanded whole products – and business have been able to provide them – but I think this demand will increase markedly in the coming years. Three forces in particular will exert pressure on businesses to move to ecosystems:
I’ll explain each one in turn.
1. Perfect Information
“Perfect Information” is an economic term which basically means that all market participants know everything about the market. Thanks to the Internet information is easy to get. With a bit of effort anyone can find out what products are available in the market and where to get the cheapest price.
2. Commoditization of Products
Commoditization is the process where the sales strategy of a product changes from ‘competition through differentiation’ to ‘competition on price’.
Where products are competing on price there is a “race to the bottom” – each market participant looks for ways to lower the price of their product – usually through cheaper manufacturing (e.g. China).
But even high-end, branded products will eventually become commoditized because of the “race to the top”. It works like this. Everyone is trying to outdo their competitors by producing the latest and greatest product but it’s not long before competitors respond with an even better product. The cycle continues as products get better and better. But eventually the market will reach a situation of “performance oversupply”. Consumers will no longer be prepared to pay a premium for all of the bells and whistles if they have no use for them – and the market will begin competing on price at the level of product performance that the mainstream market demands.
3. Time-Poor Consumers
This one doesn’t need any explanation. The one thing every consumer (rich or poor) has in common is that there aren’t enough hours in the day to do everything.
That’s the theory out of the way. In my next post I will explain how I think the increasing demand for whole products will affect businesses.