Unveiling New Value Pools in the Platform Economy

Maximizing Impact of massive value migration during the crisis period

The economic shock of the coronavirus pandemic had accelerated several pre-existing  trends while also giving rise to entirely new ones. In the face of such rapid change, executives are piecing together the future landscape of value and the new rules of competitive advantage. New value shifts are being driven by shifting customer needs and behaviors on the demand side, increased value chain uncertainty on the supply side, and a reversal of many of the trends that have defined pre-pandemic globalization. Competitive positions, likewise, are more vulnerable during such shifts, spelling out both promise and peril for executives. Variously referred to as ‘the new normal’, ‘the big reset’, and with other such elaborate monikers, the emerging landscape will be characterized by the emergence of new value pools and the erosion of existing ones.

There is hope in the midst of such uncertainty. Migration of value to these new value  pools can be predicted, prepared for, and harnessed. Indeed, executives who ‘take the tide at the flood’ and anticipate these value shifts will be best positioned to seize tomorrow. This essay provides a framework for executives to identify potential new value pools and realign their business portfolio to these new positions.

NEW VALUE POOLS, SHIFTING CONTROL POINTS

The keys to transformation beyond a crisis may often lie in new value pools created through  the crisis. Times of crisis are accompanied by sudden changes in supply-side and demand-side dynamics. These changes lead to the migration of value from established business positions to new ones, enabling new players to emerge and new business models to be created. Such migration of value is also accompanied by a shift in value network control points. This value migration commoditizes some business positions and empowers others.

To understand this migration of value, we need to start by identifying key trends impacting a value space. These trends may be classified into demand-side and supply-side effects. A combination of demand-side and supply-side effects helps us determine the emergence of new value pools.

Next, we need to determine whether shifts in value will be accompanied by shifts in control points. Control points refer to control of key assets, relationships, and data flows in a value network. Firms that emerge stronger from a crisis are those that can respond swiftly to a shift in control points.

THE FOOD RETAIL  INDUSTRY

To illustrate this further with an example, consider the food retail industry. Compared to other retail  categories, food retail has been a relative laggard in moving to ecommerce. In emerging markets, in  particular, the online food retail model never took off pre-pandemic. Grocery deliveries typically involve  many more items per order than other ecommerce, leading to high costs of fulfilment. These models  become profitable only at scale when fulfillment can move from the store to automated fulfillment  centers. However, the convenience of informal neighborhood grocery stores, especially in emerging  markets, never drove demand scale in online grocery.

However, the pandemic has driven massive value migration, through a combination of supply side and  demand side effects, which is unlikely to be merely transitory.

Consider demand-side shifts in behavior. With many countries moving into lockdown during the  pandemic, there’s been a significant shift towards ecommerce in food retail. In the US, more than 40%  of grocery deliveries in the week ending March 13 were made to first-time customers. This is further  reinforced by the disruption of food supply chains during the pandemic, a supply-side effect.

A combination of these demand-side and supply-side effects is leading to value migration towards  online grocery retail.

In emerging markets, the situation is no different. Online grocery has accelerated at an unprecedented  pace since the start of the pandemic. Neighborhood grocers are feeling the squeeze as they struggle  with a lack of technology to take online orders and an over-reliance on informal supply chains that  have been disrupted because of the pandemic. Many of these stores are going out of business owing  to poor cash flow and high rents.

Control points over demand shift significantly in the midst of a crisis, leading to an aggregation of  demand with a few large players. Aggregated demand, when combined with a shift in supply,  allows these players to reconfigure the value network around their business. In this new value  network, neighborhood stores may be relegated to serving as logistics providers to the larger  players with relatively resilient supply chains. With centralized demand as a control point, large  online grocery firms will best orchestrate the entire value network and might even leverage third  party warehouses, delivery agents, and fulfilment centers to create strong network effects that  further strengthens their position. As we note with further examples below, firms that orchestrate  such ecosystems using digital platforms are the ones best positioned to harness value in these  new value pools.

Meanwhile, demand is increasingly getting centralized with a few large online grocery providers  who can use centralized demand data to better predict demand patterns, improve stocking of  fulfilment centers and better inform their supply chain. Greater centralization of demand data also  creates a machine learning advantage for large online grocery firms, further moving value away  from smaller stores. In addition, a post-Covid 19 world is likely to feature supply chain inspections  and quality control requirements that will also favor larger players. This combination of demand  and supply side effects will strengthen large grocery players.

As we note with this example, a combination of demand-side and supply-side effects reinforce  each other to move value away from small stores to large grocery retailers. This value migration  is further reinforced through a combination of machine learning on demand-side data and scale  advantages in a consolidated food supply chain. Smaller players, meanwhile, are increasingly  commoditized.