Tuesday, 9 September 2008

The core of a business

The core of a business:

1. All companies process information: Whether you are making bricks, operation systems for computers or tires. You are processing information in converting resources from one form to another.

2. Industries differ in the type of information they process.
a. Within industries, companies very in the efficiency with which they process information.
b. (In selecting core products/ service, keep in mind that market share and price premiums do not go hand in hand. There has been no known example of this.)

3. Finally, in a stable state (stalemate), all companies converge in terms of their offer. The returns to all companies converges to the minimum returns. Any higher or lower than this will destabilize the industry and cause the equilibrium to move back to the lowest value.

To avoid this, continuous differentiation is required. This depends on innovation.

Innovation secures above normal profits for companies.

Innovation is the application of the brain to deliver differentiation. It is always possible to innovate.

1. Innovation is possible across all frontiers:
Product/ Process/ Price/ Place (distribution) etc.

2. Innovation is necessary to avoid stalemates (Bruce Henderson) and consequent commoditization of industries.

3. The rate of successful innovations determines the vibrancy of an industry.

Innovation is either disruptive or evolutionary. But it is necessary.

Strategy then becomes a bet on which innovations to fund. This leads to the classical view of strategy that “Strategy is about how the future will unfold and taking in the resources today to handle this.”

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