The grocer’s data-mining operation processes this information in milliseconds and tells NordicTrack that I look a likely sucker to buy two thousand quid’s worth of exercise bike. Simultaneously, it notifies Zurich Insurance that I seem a much better bet for life insurance now I take my wellbeing seriously, so perhaps a salesperson should call with an offer of reduced premiums.
Alternatively, causality might run the other way. I buy the exercise bike, so NordicTrack’s data miners tell Sainsbury’s online to load up the offers for organic smoothies, wholebean soya and de-caff arabica coffee. It does not much matter. The point is not just that in cyber space something is watching me; rather, it’s that the algorithms are watching, processing data and trading it to such an extent that consumers no longer make disparate purchases. The whole process of spending money becomes joined up in a way that gives real meaning to the quip from Steve Jobs that “a lot of the time people don’t know what they want until we show it to them”.
True, this scenario is plausible because it sounds familiar; it’s Amazon (US:AMZN) on steroids (or Alibaba, if you’re reading this in China). Consumers go to a website – a ‘single-access gateway’, in the jargon. Through that they get access to pretty well all the goods they can imagine and, crucially, the services that follow on – the insurance policy for the road bike you’ve bought online, then the online booking to the physiotherapist who will treat the knee you damaged when you fell off it.
What’s innovative is the degree to which selling products and services is joined up. According to management consultant McKinsey, it means that soon industries will blur into ‘ecosystems’ where there is “the potential for virtually every sector with a distribution component to have its borders redrawn or redefined”.
That might include redefining the nature of companies since, in the classic explanation, firms should exist only up to the point where it is commercially sensible to keep functions in-house and/or where it is too difficult to frame workable contracts with suppliers. The ubiquity of digital data – and the ability to process it – draws in those boundaries since it cuts the transaction costs between companies and their suppliers, thus encouraging more firms to contract out more activities. That should be good because it will make these ecosystems more varied.
Tentatively, McKinsey suggests that within a decade 12 ecosystems may emerge, covering both business-to-business and business-to-consumers. What remains opaque is the extent to which readers of Investors Chronicle could benefit either as investors who hold shares in companies that will be ecosystem winners or as consumers who gain as new entrants fight for market share.
Certainly, the management consultant reckons that “customer ownership is becoming the ultimate prize”. Yet this cuts two ways. In the short term the widespread availability of data fosters price competition and makes switching between suppliers easier. That’s great for consumers. But in the long run the convenience of being locked into a few suppliers of many services is a trap from which it’s too much bother to escape. That’s when prized customers become prey and the winners make their excess profits. It’s the road that, in similar circumstances, Microsoft (US:MSFT) travelled and on which Alphabet (US:GOOGL), Facebook (US:FB) and Amazon now journey.
How IC readers can benefit as investors is even tougher to call. It’s all very well to say 'invest in the likely winners', but when the shape – even the existence – of some ecosystems can’t be known in advance, the identity of the winners must be even more obscure.
For example, McKinsey is enthusiastic about Hive, the digital hub for controlling homes from a mobile device offered by power utility Centrica (CNA). It’s an example, says the management consultant, “of how pivotal players can become embedded in the everyday life of consumers”. That’s great, but hardly a reason to buy shares in a group that’s almost as much a political football as a utilities supplier. Still less is it a recommendation to buy shares in auto maker Ford (US:F) just because it now calls itself “a mobility company”.
That said, McKinsey offers four priorities for companies that want to construct a game plan for the world of sectors without borders. You may want to ask whether each company in your portfolio is addressing them. Each needs to:
■ Adopt an ‘ecosystem mindset’, by broadening its view of competitors and opportunities;
■ Follow the data, by collecting and processing lots of it as well as buying in the stuff, all with a view to finding new business ideas;
■ Build closer ties with its customers, by asking “are we connecting emotionally with our customers?” – yes, really – or, more prosaically, “what else can we provide to strengthen our bond with customers?”
■ Change its partnership paradigm, by finding more – and different kinds of partners – to fill the gaps in the products, services or regions it supplies.
Looking in from the outside, as investors do, it’s really hard to judge if a company is meeting those aims. Still, whoever said investing in this brave new world without borders would be easy?
