What Makes Tech Companies Different

European Straights, 2020-01-22

Facts and opinions

  • Digitization happens in many steps. Startups multiply —> … —> commoditisation of everything. At every step incumbents are in denial.

  • Bias: most people while analysing something focus on the commonalities, not differences [as they should]. Hence the false analogies and benchmarks.

  • Many traditional businesses have diminishing return to scale —> become oligopolies —> their infrastructure becomes vulnerable

  • Every of such businesses hopes for Amazon’s reversal in returns to scale.

Completely ignore the network-effect advantage

And its supplementary businesses: ads, AWS, etc.

  • While opening warehouses is a less profitable activity, the operation of them [faster delivery, higher volumes, network effect, more data, etc.] is highly profitable.

  • DEF: Northern side: diminishing returns; Southern side: increasing returns to scale.

  • As long as the southern side returns are higher than the northern side  keep scaling

  • Amazon enables participation of users (incl. observing their behaviour) and tries to act on it.

Things to reflect on

  • Can you map out all the components of your value chain and assess their contribution?

  • What about the contribution to the overall returns to scale?

  • Are there ways to increase the weight of the Southern side [i.e. invest into a scalable component] to maximize increasing returns to scale, and at what cost?

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