There is a remarkable image in an early chapter of Modern Monopolies, a book by Applico founder Alex Moazed and his head of platform Nicholas L Johnson, that will be poignant for every wholesale leader.
“In the early stages of the Industrial Revolution, the economy was powered by steam and water. As a result, factories had to be built near rivers. The mass availability of electricity did away with that need. But nevertheless, decades later, companies still built their factories next to water.”
The thrust of Moazed and Johnson’s book is that the successful linear corporations of the 20th century are at risk of being overtaken by the network businesses of the 21st century. In its early chapters, it provides a useful history of the battle that took place in the 20th century between market-based and centrally-planned economies.
The market system won, but only because local information worked better and faster than any centrally-gathered information could.
Moazed and Johnson argue that the power of big data combined with the power of the ubiquitous data-creating and transmitting device, the smartphone, will reverse this.
The 20th century corporations were effective “because they vastly improved how we organised work”. They organised whole supply chains around their products and could defend their route to market because their scale allowed them to keep their transaction costs lower than their competitors’. They could also invest profits in superior know-how and marketing.
These corporations were constrained only by legislators acting to prevent control potentially detrimental to consumers, and by reaching a point at which the complexity of communication made internal transaction costs too high.
Yet by the late 20th century, cheaper computing power and telecommunications meant that some value chains started to break up. “A smaller competitor could attack one piece of an incumbent’s value chain and disintermediate it, or provide the same quality offering at a much lower price.”
The arrival of the smartphone exponentially increased the ability of the smaller, more agile rivals, and has resulted in the rise of Alibaba, eBay, Uber, Facebook and Google – centrally-planned monopolies that dominate markets, and corporations that can defend their position because of the strength of their networks of users, transactions or data. Network effects are the strongest economic moat of all.
Wholesalers may know this because their local customer networks have always been their moats and the key to their economic value. And that’s why reading this book may give you sleepless nights. If your moat is physical, it’s vulnerable to a competitor focusing on facilitating connections between producers and retailers; a competitor that may be a “zero-marginal-cost information business” that can scale cheaply and easily.
In the 20th century, chain stores and franchises created economies of scale and externalised much of the upfront cost of creating a new store. It is a linear business model, so a perfect target for disruption, the authors argue: “Platforms become dominant not because of what they own, but rather because of the value they create by connecting their users. They don’t own the means of production as industrial monopolies did. Instead they own the means of connection.”
Platform businesses still face many hurdles, not least from a legal system designed to protect linear business models. There are three things to look for in spotting platform opportunities:
• Technology that cuts transaction costs and removes gatekeepers.
• Implicit or underserved networks.
• Large, fragmented sources of supply.
Modern Monopolies is a must-read book that will teach you what to focus on in building your successful business future.
