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Digital Transformation Changes the Nature of Companies

Digital transformation is not simply a transformation of information technology or rapid accessibility to the Internet, but a transformation of the way businesses operate. These violent transformations lead to work differently and establish new relationships within the company.

Is the end of the integrated business-based property? Do these transformations predict the rise of digital supply chains? What do we learn from Uber, Airbnb, Amazon and others about the transformations of business nature?

Economy of platform and new business models

It is the very nature of this “platform economy” that explains the particular characteristics of these actors. Uber, Airbnb, OTTs like Skype, WhatsApp and Viber are basically quite similar. Uber connects drivers with passengers (competition with taxis), Airbnb connects private hosts and tourists (competition with major hotel groups). After finding a desired rental, guests are advised to join to contact the host directly. Airbnb receives 3% of the transaction amount. For Uber it is 20% of the amount of the transaction.

As for the OTT, they allow to exchange free SMS, MMS, voice, videos, text and images, substituting in part or totally for the services of incumbent telecom operators, without giving them anything to them. These actors upset the organization of “traditional” firms and their value chains.

Economist Ronald Coase in “The Nature of the Firm” in 1937 sought to explain the existence of firms by inventing the notion of “transaction costs.” His demonstration is simple: the company exists because the market is not free. Market transactions have a cost (e.g., information gathering, coordination and contract negotiation). Using a hierarchical organization as a mode of coordination in place of the market would save these costs. Ronald Coase then suggests comparing transaction costs and organizational costs to understand the existence of businesses. In some cases, it is preferable to sign contracts of employment, to encourage cooperation internally than to go through the market, it is cheaper.

Several certainties seem to shatter with these new business models. The first is that the value of a business is no longer necessarily linked to that of its assets. The second is that the transaction costs on the market no longer justify the existence of companies. What then is the new nature of firms?

New intermediation and disappearance of physical distribution

Digital transformation removes the presence and role of intermediaries and distributors, reduces transaction costs and information asymmetry. The immediate consequences are the disappearance of wholesalers, brokers or retailers, and the emergence of new “prescribing” intermediaries such as TripAdvisor that fulfill evaluation functions and create new value-added. TripAdvisor welcomes over 250 million reviews and opinions per month on 5.2 million hotels, restaurants and attractions in 45 countries around the world. The gradual disappearance of physical outlets is also underway. The development of digital today allows the consumer to do otherwise, to subscribe to a telephone plan or to have a product delivered without moving from home.

The accumulation of capital is no longer necessarily a competitive advantage

Airbnb is an example that sums up this phenomenon by itself. This community platform for rental and reservation of private homes was created in 2008 in San Francisco. In just eight years, Airbnb has achieved immense success with nearly two million rental units in 34,000 cities in 191 countries and 60 million passengers.

At AirBnB and Uber, tangible assets are simply non-existent. Airbnb sells millions of nights without owning hotel rooms. Uber sells tens of thousands of trips a day without owning cars. In both cases, it is the linking of scattered small capital that creates the business.

Whatever the economists of industrial capitalism, the accumulation of capital is not synonymous with a competitive advantage. In traditional enterprises, built up by the accumulation of capital and born with the industrial revolution, the opposition between capital and labor fades and further destabilizes the integrated enterprise.

Does owning its own shops for a telecom operator always constitute a competitive advantage today? Is a system of franchises, alleviating assets in passing, more preferable? Are franchised boutiques in competition with the grill of customer satisfaction at TripAdvisor a promising route? The same reasoning can be held for bank or insurance agencies.

Working with new disturbers, adapting companies and employees to the advent of digital

Without addressing the non-adaptability of taxation and the modes of regulation to these new companies that still have to be invented, it must be recognized that they have imposed new business models, new uses, but also a new approach to risk and performance.

Large traditional enterprises, often of technical culture, have often favored the accumulation of capital to disseminate their products or services. This strategy is no longer compatible with the uses of the web. Their management, all of their businesses, are impacted, regardless of the sector of activity. Today, they have to mediate between the purchase of innovative solutions to stay in the race or surround themselves with start-up know-how.

Maintaining the performance of traditional businesses also depends on improving operational efficiency. Information technology improves productivity through the removal of non-value-added tasks.

Management therefore has a fundamental role to play in coaching, employee training and the creativity of new offers and solutions in the relationship with the customer. But above all, to get away from the managerial caricature, which is limited to replacing the old by young geeks trained in new technologies or to putting employees at the door because digital eliminates their activities!

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