As sectors converge strategy matters
Digitization is rapidly changing how people interact, shop, and consume information and entertainment, and how companies conduct operations and connect with their customers. Key to this transformation are the Builders of the digital ecosystem: The 2013 Strategy& global ICT 50 study—the information and communications technology (ICT) companies that are supplying the technical means to carry out this revolution. (Financial Times ‘The Connected Business’ guest column)
MONDAY DECEMBER 9 2013
As sectors converge strategy matters
By Olaf Acker, Florian Groene, and Germar Schroeder
he digital ecosystem has long been described in terms of several relatively narrowly defined sectors. Companies bought their computer networks and underlying infrastructure from one company, their computers from another, their enterprise and desktop software from a third. They turned to IT services companies – first large global firms, then, increasingly, offshore ones – to integrate the technology or outsource IT operations, and they chose yet another company to provide telecom services. As the results of Booz & Company’s second Information, Communications, and Technology 50 study made clear, that’s changing fast. Rapid advances in technology are rendering the traditional sector boundaries virtually meaningless, and the sectors are converging, in a variety of ways. Hardware companies such as IBM continue to expand into IT services and software; software companies such as Google and Microsoft buy hardware providers to build their own ecosystems around telecom services, and telecom operators such as AT&T are venturing into cloud computing. But as sectors converge, companies can no longer depend on the old sector definitions as a way of distinguishing themselves in the market. Instead, they must develop a distinct strategy and value proposition – a “way to play” – that is closely aligned with their most important capabilities, the products and services they offer, and the markets in which they operate. Most successful companies, including those in the ICT 50, tie their way to play tightly to their identity, thus
ensuring that it is unique to them. Nonetheless, these ways to play can be categorised into several groups that we call ‘pure tones,’ archetypes that describe how companies create value for their customers. ICT companies tend to fall into one of six of these value propositions, or some combination of them:network and infrastructure platform players, consolidators, innovators, next-generation digitisation players, solutions providers, and global sourcing value players. Microsoft, for example, is a network and infrastructure platform player, because its Windows and Office platforms are the basis of its profitability. From that strong base, the company has used its third-party consolidator strategy to begin moving past the boundaries of the software and Internet sector, coordinating technologies it acquires through the purchase of other firms in hopes of generating more value than it could create on its own; since its IPO in 1986, the company has bought almost 150 companies. Two deals in particular, the 2011 purchase of Skype and the 2013acquisition of the mobile device division of Nokia, indicate Microsoft’s determination to operate as a next-generation digitisation player by entering the mobile and OTT (over-the-top) services space. Amazon, on the other hand, has long been an innovator, focusing its efforts on developing new online retailing strategies such as ebooks and, more recently, same-day delivery. Its success through this way to play is clear, and it is now leveraging its innovation capabilities to become a next-generation digitisation player as well, having built a thriving cloud
computing service and, it is rumoured, working on its own smartphone. Thus Amazon, too, is taking part in the convergence movement, depending for its success not on the sector it has long operated in, but on combining these two pure tone ways to play in order to find opportunity in entirely new businesses. Why is it so important for the companies in the ICT 50 to think in terms of ways to play? Because as the boundaries between sectors continue to blur, all of these companies will need to find new routes to success. That doesn’t mean it will be easy. The moves that Microsoft and Amazon are making suggest that both companies are looking to concentrate on digitisation. Amazon has already built a very successful ebook ecosystem with the Kindle in its various forms; if it can transform this into an even more complete ecosystem with an Amazon cloud, video streaming, and – maybe – smartphones, it has a real chance of rivalling Apple and Google, the leaders in the field. Microsoft has a tougher row to hoe. It is behind in the effort to scale up its ecosystem as a true alternative to Apple or Google, and by maintaining its diverse ways to play, it runs the risk of remaining somewhat unfocused. Whether Microsoft can catch up will depend on its ability to regain its focus and concentrate on a way to play that will enable it to compete in the new world of digitisation. Other industries in the ICT sector face the same issues. Hardware companies that can’t break out of their sector, either by offering more business services or pursuing value-added software, face being
commoditised as companies from other sectors offer cloudbased enterprise infrastructure and software. Most of the IT services firms will continue to fight among themselves to offer profitable services at low cost, competing on price while finding it harder and harder to differentiate themselves, because they lack the unique technology assets that could serve as an “innovative core.” Many telecom operators face ongoing high investment costs to build their nextgeneration networks, making it difficult for them to find the money needed to innovate in new areas. Should these companies – or any other company facing rapid changes in its business environment – switch to another way to play in search of new growth? No. Companies would do better to build on the capabilities they already possess, and to deploy them with focus. Almost any strategy can succeed if the companies following it have the appropriate capabilities and a product and service portfolio that suits that strategy. Even the pure-play hardware companies dependent on a network and infrastructure platform strategy can succeed through scale, operational excellence, and a committed focus on costs. What matters is to determine the best way for your company to create value even as circumstances change – given its capabilities, product and services portfolio, and chosen markets – and then pursue it relentlessly.
Olaf Acker is partner, and Florian Groene and Germar Schroeder are principals, in the communications, media & technology practice at Booz & Company.
© THE FINANCIAL TIMES LIMITED 2013