The golden age of big business is over. Now that they are no longer bursting their value chains with profit, but digital start-ups coming from nowhere who devour their margins. Quite a challenge.
Panic? Probably not, or not yet. But a strange wind blowing through the world’s largest companies, symbols of capitalism and globalization. BMW boss Harald Krüger, collapses open car show in Frankfurt. Another German, Gerhard Cromme, explained last May that he did not know where his group would be in five years. Yet he chairs the Siemens supervisory board, a champion high tech founded back nearly two centuries. Japan, the United States, France, multinationals who appeared there for eternity are attacked by competitors came from nowhere. With the digital revolution, the economic power base changes.
Little background. In the past three decades, large companies have experienced a golden age. According to calculations by the McKinsey consulting firm, American and European giants have advanced their profits faster than one third of world production. They took advantage of a wave of deregulation. And most successfully surfed two waves. The first came from the opening of the communist world in the 1980s Huge markets opened. And according to Professor Richard Freeman of Harvard, the global workforce then doubled from 1.5 billion to 3 billion. Employers were able to open factories with workers paid a pittance. Well equipped, already accustomed to international, large groups have reorganized their production circuits, relocating operations to lower costs, forging “global value chains”. The Apple iPhone symbolizes this fragmentation, with a design and marketing made in the USA, in China and an assembly of components from Japan, Germany, Korea.
The second wave has strengthened the first: it is the rise of internet from 1990s Information flows both quickly, massively and free or almost. Companies can instantly transmit construction drawings, purchase orders, repair instructions. Advances in information technology have facilitated the globalization of value chains, and often permitted.
Exchanges “intra-company” made within the same firm, are now half of global trade! But this trade is now down. Exports now progressing at the same pace as production, as they were twice as fast as before the crisis. Now companies have excellent reasons not to burst joyously as their value chains. They have already picked the low-hanging fruit. They discovered the fragility caused by the lengthening of the value chain, for example with supply disruptions caused by the tsunami in Japan in 2011. And they have to pay higher wages. According to calculations the firm BCG, the cost of production in China’s Yangtze River Delta is not very different from the cost in the southern United States.
Value chains are far from being fixed. Except that now it is no longer large companies that lead the game but start-ups that did not exist for most a decade ago. If the venerable giants had granted to subcontractors minors of their business links, like cleaning their offices or managing their accounts, young whippersnappers aim instead the most profitable links. The purest example is probably Booking.com, a start that sprouted in the Netherlands before being rounded up by American Priceline. This accommodation booking site is embedded in the heart of the value chain of major hotel chains such as Accor or Hilton, bought in the rank of bedrooms providers. He eats their margins. In another sector, the bank start-ups go to the assault of payment, loans to SMEs, the fund management.
The leaders of major groups have long ignored the young shoots, they trampled without even realizing it. They are likely to have changed, now aware that digital power can break the most beautiful fortresses in a few clicks. So, what is the rush. The giant monitor the tiniest micro-enterprise founded deep in Arkansas or Yunnan like milk on the fire. They buy startups hoping to recover their knowledge and insights. They create incubators, lab fab – sorry, the “digital manufacturing workshops.”
McKinsey experts summed up the challenge: “Companies need to want to shake [” disrupt “in English] before others do so.” Not easy ! Required to maintain high profitability by their shareholders, obsessed with control, large companies work with lists of procedures and indicators able to nip in the bud any innovation a bit radical. And have trouble imagining the very different value chains, for example with links … free. Engoncées in their silos, they no longer know how to attract and retain the raw material of their future: young talents. Students are more likely to make the entrepreneurial leap out of business schools. Banks are struggling to recruit polytechniciens they did come from a snap ten years ago. In the survey published earlier this year by the audit firm PwC, the main risk cited by 77% of the 1,300 CEOs from 77 countries was the “availability of key skills,” just after overregulation eternal. It would be excessive compared with the multinational Soviet Union. They have an unknown effectiveness of communist regimes. But like the USSR of the 1970s, they will have to face a great challenge in the coming years. Indeed, consumers are still buying more online, with 57 billion euros spent on the internet in 2014, a figure growth of around 11%, with an increase of transactions reaches 15%.
However, the pure players must satisfy the impatience of users who do not want to wait for their products, even though they would have paid less than retail.
Meanwhile, develops a safety-related problem. Indeed, the datas are the new black gold trade, interest and hackers, as well as data from bank cards. But if e-merchant is stolen data, customer confidence is broken, with a strong impact on sales. It should thus deploy barriers to limit fraud without brake purchasing pulses. A delicate exercise.