Spanning Business Models One of the best strategy articles on firm-level economies of speed, scale and scope was "Unbundling the Corporation," by John Hagel & Marc Singer. The thrust of the article was that decreased transaction costs created by IT furthered the need for firms to specialize in their core competencies. They suggested three general areas of specialization:
- Innovation-focused companies that realize economies of speed (Apple)
- Infrastructure-focused companies that realize economies of scale (Level 3)
- Customer service-focused companies that realize economies of scope (Schwab)
However, companies like Cisco or Ebay do not fit neatly into the above categories. What was missing was consideration of economies of span. Economies of span are realized by efficient sequencing of stages of production. Traditionally, this is accomplished through vertical integration. But IT today enables virtual integration techniques through outsourcing, supply chain management and electronic marketplaces. Essentially virtual vertical integration can be accomplished through efficient use of technology assets and innovative underlying contracts. So lets add a fourth area of specialization:
4. Network-focused companies that realize economies of span
Cisco is a company known for innovation, but most of their innovation is not in internal R&D, but through innovative M&A. Their emphasis on outsourcing, their adoption of direct self service models and use of M&A (continued unabated during the down turn through new models like spin-ins) allows them to realize economies of span without vertical integration.
Ebay's marketplace model standardies market design, underlying contracts, credit and payment for buyers and sellers. Based upon this standard approach, they decentralize almost all commerce activties (most notably inventory and shipping) and tools into the hands of buyers and sellers. Aside from the technical architecture of the day, its an example of a decentralized business model at work (make you wonder about the scale economies they could realize with decentralized architecture). Ebay is the best example of how a network focused company can realize economies of span.
Its natural that an Ebay or Cisco would also optimize their systems to realize economies of span. Business models must be aligned with underlying business systems. Focusing on the economies of speed, scale, scope and span provides one framework for determining specialization of business models and technology assets for competitive advantage.
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