Blockchain: Strategic Thinking and Sustaining Competitive Advantage

Blockchain, as a technology, was written by Satoshi Nakamoto specifically for bitcoin, though the seemingly conjoined nature of the two is a misnomer or at least somewhat misleading. So, I will focus my address on how blockchain, as technology separate from Bitcoin may contribute to sustainable competitive advantage for the organisation or the firm. You’ll notice that I haven’t necessarily specified which kind of organisation. This is because it is not only the commercial enterprise that will be disrupted and enhanced by blockchain technology in equal measure but all organisations; corporate, commercial, government and non-government.

Turning to the question of how blockchain might be used and is being used to innovatively create new markets, products, and operating environments, I will look at the legal industry briefly and second, I will examine the basic capabilities and opportunities created by the incipient Dutch blockchain business called “Stocastic”. I acknowledge the founder of Stocastic, Dutch entrepreneur Dr. Rudy Snippe, for allowing me access and the rights to discuss his idea and business model at this early stage of development, as the operating model and technology will enter Beta testing in the coming weeks. Before I look at these case studies it is important to discuss several ideas that are central to the blockchain revolution. In my view, it is paramount to understand and respond to the advent of blockchain as a utility platform for business, the response to which will become a hygiene factor rather than an innovation and further may facilitate sustainable competitive advantage resulting from deliberately directing creative energy and learnings derived from prosponsive thinking. To do this I will locate blockchain in the context of organisational strategy before applying the ideas in discussing my case examples.

The Strategic Context

The backbone – Blockchain – upon which cryptocurrencies operate, as with the currencies themselves, is here to stay. Given my long-standing interest in, and being a student of, strategy the advent of blockchain, related to but distinct from its seminal use in driving decentralised, trusted exchanges of digital currency, brings with it a raft of challenges and possibilities for entrepreneurs, innovators, industries, and organisations.

More and more, we move away from an environment in which strategy can be managed by producing a static, 3 to 5-year strategic plan and then executing on that plan, even in ways that have been extremely effective, efficient and most of all have delivered success in the past. Organisations must evermore rapidly learn, adapt, respond to market forces, develop existing capabilities and create new ones, in order to maintain their market position… But more importantly, they must identify and execute upon new and as yet unknown opportunities.

The quicker an organisation can respond to changes in internal requirements, to foster, develop and build capabilities, as well as to meet the demands of competitive dynamics from the market, the more robust its position in its market will be.

The question becomes, how then can it do this? Arguably, as digital disruption and the rapidity of change increases exponentially, how quickly an organisation learns is at the heart of the answer. The quicker an organisation can respond to changes in internal requirements, to foster, develop and build capabilities, as well as to meet the demands of competitive dynamics from the market, the more robust its position in its market will be. However, the ability to respond is becoming a hygiene factor as discussed by Paul Hunter in his 2015 work on business strategy. Response to changes is a baseline from which an organisation may create a platform for success. However, organisational longevity and competitiveness will likely result from new mental models that escape second and third wave thinking, enabling the organisation to innovate by ‘prosponding’.

Prosponsive versus Responsive Thinking

So, what is prosponsive thinking? The answer may seem obvious, in that it is thinking beyond responding, but it is also thinking that is aligned to constant organisational renewal through learning. My premise here, which is more relevant today than when first enunciated in 1990 by Peter Senge, is that perhaps the only form of sustainable competitive advantage now and in the future will be an organisation that learns. This was added to by Flood in 1999, and again by Paul Hunter in 2015 and is more significant today than ever before. For the organisation to create new markets and indeed new industries, it must both learn and utilise those learnings in an integrated coherent responsive as well as prosponsive way because adaptation, or response, is only half of the equation.

To define these terms, it is useful to look at what has been said about them, especially, ‘prosponse.’ As a living, dynamic complex system a business organisation naturally possesses a capacity to adapt to change, but unlike a natural ecosystem, it also has the capacity to invent change. Most organisations are arguably more content to limit their capacity for change to that of adaptation alone, in the form of a response that is either reactive or proactive in nature. It has been proposed that “dynamically oriented organisations could better position themselves to compete for the future by actively orchestrating opportunities to provoke prosponsive change, under this regime a firm develops a capacity to take control of its own future, by literally inventing it.” Prosponse, of course, is not a recognised word in any language and was first used by Paul Hunter of the strategic management Institute in 2015. Before using the term, it is important to understand the nuances of both responsive and prosponsive thinking. A response may be defined as an adaptation made by an organisation provoked into change by an external or internal stimulus: an action taken to accommodate fate; and a prosponse is an invented change invoked by an organisation as a result of a deliberate intent to redirect a living organism’s trajectory: an act of invention designed to direct aspiration or desired outcome.

I’ll use two cases to exemplify how responsive and prosponsive thinking may advance the organisation and that at a minimum response is required to manage and survive the Blockchain revolution while prosponse is the only way to thrive in the already-existing blockchain world. I will look at two case studies in summary. One disrupted industry I will examine is the law, as reflected in the law firm, and second case study is an entrepreneurial start-up from the Netherlands. These provide examples of the issues and opportunities arising from blockchain and underscore the revolutionary change that is upon us and how blockchain is the driver of ‘Internet value’.

What does this mean for the law?

Based on the above premise it is imperative that all organisations in all industries learn to use, implement and leverage blockchain technology appropriately. This is adaptation, or per the definition above, is a response to the advent of the technology, the technology being blockchain. As argued by Dan Tapscott author of Blockchain Revolution: How the Technology Behind Bitcoin Is Changing Money, Business, and the World “Blockchain technology represents a quantum shift in technology transformation, bringing us the so-called Internet of value: a new platform to reshape the world of business and transform the old order of human affairs for the better.

“Blockchain is a vast, global distributed ledger or database running on millions of devices and open to anyone, where not just information but anything of value, for example, money, but also contracts, titles, deeds, identities, even votes can be negotiated, moved, stored and managed securely and privately. Trust is established through mass collaboration and clever code rather than by powerful intermediaries like governments and banks.”

Given that blockchain creates a real-time digital record verifying that a transaction containing certain data happened at a certain time and in a certain order, it has far greater ramifications, consequences, and applications than for cryptocurrencies alone. Further, the integrity of the transaction can be trusted due to two of blockchain’s fundamental characteristics: it is immutable and highly hack-resistant. This translates into a very high level of data integrity — once data enters the blockchain, it is resistant to alteration, hacking, or deletion.

If we look at the Law firm, we see a raft of applications and new requirements necessitating response to its blockchain-disrupted business landscape in order to maintain competitive parity in the near future. How will the legal industry be disrupted by blockchain? The future of blockchain and law is at once eminently disruptive and ripe with opportunity. Because of this, it is likely that law firms that do not engage with the types of changes born of blockchain run the risk that they will become an anachronism and fail, largely because they do not recognise that what made them successful in the past will lead to failure in the future, a phenomenon derived from and facilitated by outmoded mental models and strategic drift – Those familiar with Deming will recognise the trap.

This pitfall and opportunity are not limited to the law and it is used as just one example. This could apply to almost every industry, firm or organisation, from government to mining to banking to music and beyond. Although still too nascent to predict its full impact with great certainty, consider the following implications of blockchain for legal professionals:

How will blockchain impact the “traditional” practice of law?

If you represent clients in blockchain-affected industries (and I’m hard-pressed to name an industry that isn’t), you become an even greater resource as a trusted advisor by understanding blockchain within the context of your client’s business.

Being so nascent, blockchain presents an incredible (potentially unique) opportunity for lawyers to position themselves as trusted strategic advisors to clients navigating the myriad legal, regulatory, and logistical webs surrounding the technology and its applications. I suggest that a lawyer serving the music industry, for example, make themselves an invaluable part of a client’s core team if they understand blockchain, how it affects their client, and how their client can capitalize on the technology.

Why? Because the lawyer as a trusted advisor is situated differently than others most likely to have blockchain savvy (e.g. IT advisors). Yes, IT will know the technology. But only the lawyer can extrapolate from the technological understanding of what this really means for a client operating in a law- and regulation-bound environment.

Here are a couple of examples of how lawyers can become trusted blockchain advisors to clients, within the context of an existing practice: Let’s look at,

Finance

The shift to blockchain supported applications is happening fastest in the financial industry, which operates as a de facto proof of concept for blockchain in business generally. Blockchain has many finance use cases, including transforming regulatory oversight of transactions by giving regulators constant and real-time access to audit and monitor industry participants. Another use already happening and likely to proliferate: stock trading on blockchain platforms.

With so many possible applications in development, finance industry clients are scrambling now to understand (a) how blockchain will impact the very structure of their businesses and (b) how to capitalize on it. Enter the blockchain-savvy lawyer, who is best situated to help clients answer these questions.

Those who are prepared for this transformation will be invaluable trusted advisors to these clients.

The Smart Contract Firm

The smart contract firm represents not only a new practice model but also a new business model. We all know the billable hour is (almost) dead, but what comes next? Lawyers will have to figure out payment models for the smart contract firm — taking into account not only the value of legal expertise but the technical value as well as related services such as hosting of dynamic transactions on a blockchain platform.

It is worthy of note that contracts on a blockchain look very different than contracts on paper. There is ongoing discussion as to whether they are contracts at all and some prefer terms like “dynamic transaction,” which may, in fact, be better descriptors. A blockchain-supported transaction may start from a series of clauses drafted according to traditional contract doctrine, but as these clauses move onto a blockchain platform and become self-executing, doctrine becomes obscured (e.g. how to terminate a self-executing smart contract transaction on the grounds of unconscionability?). Expect smart contract (or dynamic transaction) doctrine to evolve and look (potentially) very different from the doctrine we now know. This all the more poignant and potentially consequential as we consider integrating AI, robotics, 3D printing and other incipient technologies with blockchain solutions, such as, but by not limited to smart contracts or the law firm.

In the interest of time and space, I limit my discussion of the law firm to smart contracts but other areas ready for blockchain disruption include Smart Contract Mediation, Smart Titles management, Conveyancing, Smart Deeds, Smart Policy Advisory, Smart Corporation’s management and Smart Taxation to name only some of the more obvious ones. Obvious because they are characterised by 4 conducive elements, that is they are:

1. Mass transaction based
2. Multiparty
3. Decentralised
4. Secure exchanges of data.

The Smart Contract Mediator

Credit goes to Don Tapscott, author of Blockchain Revolution, for coining the phrase “smart contract mediator” (“SCM”). Due to the self-enforcing nature of smart contracts, the nexus of disputes in transactions potentially will shift to the stage of dynamic execution. Lawyers with deep blockchain knowledge can act as mediators in this process, helping parties to navigate the smart contract process.

The SCM practice niche exists independently from the smart contract law firm described above. While the SCM may participate in creating smart contracts (in a smart contract firm), the role can focus more on resolving disputes and general legal management of the transaction during the contract execution phase rather than the front-end work of drafting.

A smart contract looks and acts very different from a “static” contract and understanding distributed ledger technology is critical to managing this process for clients. This is the smart contract mediator’s unique value proposition.

Conclusion: The Future of Blockchain Is Now

The above discussion blockchain’s impact on existing and new practice areas is cursory at best and Corporate lawyers should be learning about blockchain-based decentralized autonomous organizations, and how these may replace traditional business structures. Those with a criminal law practice should be thinking about how “evidence” located in a blockchain impacts a case — for example, what does this mean for application of the third-party and other evidential doctrines? These are but a few of the areas of impact and they demonstrate that almost every area of law will be affected by blockchain as it rolls out.

It is likely, that if a law firm has not started thinking about how to redefine its value proposition in the age of blockchain, it is well past time to do so! The law firm that ignores this business imperative does so at the risk of becoming an anachronism at best, and, at worst, potentially irrelevant. But, this still only constitutes responsive thinking and requirement.

Entrepreneurial Prosponse to Blockchain

A Dutch example of prosponsive thinking, creating a new blockchain business and potentially a new industry is seen in a real-time example that is shared publicly for the first time here. A colleague of mine in the Netherlands has recently become a blockchain entrepreneur having established a company that exemplifies and is built on prosponsive thinking.

Interestingly, the enterprise fills a perceived gap in decision-making and problem-solving and by implication learning for larger corporations. The gap that was recognised by the founder was that ‘no longer do experts want to be employed by companies on a full-time basis’, certainly much less so than in previous generations. They desire more flexibility and greater freedom and independence than is often provided when working inside a corporation. Working outside the bounded rationality and limits of the corporation affords them the ability to set their own direction and pursue their own interests, setting their own agenda, rather than being directed by the corporation with its drawbacks such as an already set agenda, hierarchy, and bureaucracy.

A second gap recognised was that corporations operating in the rapidly changing and uncertain environment of today and the future require quick and timely solutions to more and more complex and numerous problems. The founder of Stocastic envisaged that blockchain could provide a potential solution to both the above problem-sets, satisfying the desires and requirements of the two different groups – the Experts and the Organisations requiring solutions to complex problems.

As Albert Einstein said, “you can’t truly solve a problem in the same context as that in which problem arose”. So, you need different perspectives from which to view the problem that also comes from a different context. However, it is naturally difficult to find such a perspective in the context of the organization in which the problem exists. That’s why Stocastic uses the internet, more specifically blockchain, as a platform for aggregating expertise from a wide cross-section of potentially interested experts rather than sourcing solutions from within, using consultancies who may access only approach the problem from within their own context and may use only a finite number of experts who may or may not deliver the best problem and solution definitions.

In process terms, client organizations proffer complex problems confronting them. Experts access the problems via the internet and bring numerous perspective to bear on the issue. They may then write proposals (problem definitions from different perspectives) related to this problem; and the client-organization may use one, or more, of these problem definition proposals. When a proposal is used the expert is paid related to the impact this proposal had. Through further rounds of definition, problems are refined, solution concepts are built and ultimately operationalized. Participant-experts will be paid related to the impact that their contribution delivered. The personal profile, knowledge-contributions, impact, ethical behavior, the way they cooperate, the money they earn, all is secured and (partly, see the latest law on privacy in Europe) transparent in the blockchain.

This model demonstrates quintessentially the way in which thinking prosponsively about blockchain may create a new business, a new service and potentially a new industry thereby developing sustainable competitive advantage for itself and its clients via learnings driven by Blockchain. This is not the only avenue for prosponsivity with respect to blockchain by any means, but it exemplifies the myriad ways in which block chain may be harnessed to create change and add value well beyond the mere replacement of traditional functions by the decentralised ledger.

From the two case studies described, the benefits of, and requirement to adapt to, Blockchain are clear, as are the risks of ignoring blockchain, but, arguably more importantly we see the differences and benefits of both responsive and prosponsive thinking when it comes to this revolutionary technology.

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