Where Scale Comes From

Scale used to be driven by control of the distribution channel. When this was the case, it made sense to own your own assets to push through these channels. Owning the distribution channel was a critical, competitive barrier to entry: owning a medallion (for taxis), the brand of trust (for hotels), the underlying connectivity (for telecommunication carriers), or studios (for films) became the pipes through which content had to flow and customer experience was mediated. It was similar, in a way, to Henry Ford’s decision to provide everyone with a car, a black one—because that was what he produced. Those who controlled the distribution channel and the asset would deliver to profitable customers whereby profitability was determined by the control of distribution and the underlying assets of the company.

First: Where High-Margin Scale Will Come From

Scale is now driven by delivering exceptional customer experience and the insight gained from aggregating those experiences into what matters to customers—what they want to do, what they are willing to spend, and their behavioral patterns in how they use the products and services, which provides yet more insight and thereby more fuel for delivering even greater experience. Quite the virtuous cycle. (supposedly)

Given this model, the customer now has nearly infinite access to products necessary to support what it is they need or want. So it’s logical that the new firms, and their underlying models, don’t own many if any of the assets they aggregate to deliver to customers. Reflecting what? A dramatic unbundling and rebundling of one’s value chain, typically (always?) pulling capabilities from other industries.

Second: Why the Economics of Customer Experience Has Changed

Integrating forward from distribution, or orchestrating different products and services, with a crisp focus on delivering exceptional customer experience captures new sources of value. Particularly in a world where the marginal costs of customer acquisition and distribution are (nearly) zero. The new competitive barrier or control point, then, becomes the delivery of exceptional customer experience, from the perspective of the jobs customers want to do and the ecosystems in which they spend their time, money, and energy.

This explains why a number of companies are expanding to deliver the types of services their customers want them to—irrespective of the SIC code they (were once) in. A car is a vehicle to get from point A to point B. Previously the driving experience from point A to point B is what separated the great from the good-enough car company. From the perspective of a customer and their “jobs to be done” perspective, enhancing the experience to include data services (to support communications and work activities) and voice-activated concierge services (to support activities to be done) are simple examples of what moving from a car to a mobility company—where nearly all (formerly known as) automobile companies are repositioning themselves—makes sense. And is an inevitable foreshadowing of what will happen to other industries around the globe.

Third: What the Implications Are for New Business Models

The blunt reality is that explosive value is driven by business ecosystems that orchestrate a bundling of products, services, and experiences in new ways. This orchestration is a reflection of a structural economic change within many of today’s value chains and helps explain why experience becomes today’s new competitive moat or control point. With digital capabilities making both distribution and transaction costs effectively free, it becomes possible to build certain businesses where every incremental customer has both zero marginal costs and zero opportunity costs. This has profound implications: instead of some companies servicing the high end of a market and others the so-called lower end, with good enough capabilities and experience everyone can be delivered an extraordinary experience.

If only…