Pedagogical and technical specifications

This section starts off with a description of the context in which today’s enterprises operate. First, social, technical, economic, and political forces surrounding existing enterprises are analyzed. Second, to become more specific, an example industry—

the financial industry—is analyzed to illustrate how an industry can be impacted by

“the technology-driven storm.”

The following analysis focuses more on consumer-based businesses (for exam-ple, retail or private banking) and less on non-consumer-based businesses (for example, re-insurance or investment banking). However, it should be noted that results of the following analysis are partially applicable also to non-consumer-based industries.

8.2.1 Social, Technical, Economic, and Political Changes

The main social challenges companies face today result from technology-based social networks. In the past, enterprises could take central control of their branding,

marketing, and communication initiatives. Today, information in social networks is no longer controlled centrally but it is distributed across the graph of network participants. By linking together different social networks, information can be spread across the world at an unprecedented speed. In addition, the communication sender no longer has to have a multi-million dollar budget for global communica-tion; it is enough to have Internet-connected devices and an understanding of how social marketing works. For today’s enterprises this means the following:

1. Enterprises are no longer in full control of their communication. In the past, enterprises could control centrally which target group receives which message.

However, today’s social networks give their members the means to communi-cate as effectively as enterprises with globally distributed target groups.

Enterprises have lost their ability to control which information about themselves is distributed in social networks.

2. New entrants can use social networks for viral marketing (social marketing which crosses different social subgroups) and build their customer base in days from zero to millions of users. If the communicated message resonates with members of the social network and is subsequently transmitted from one social group to another, then brands can be built in days instead of decades.

3. Fortunately, social networks are not simply a threat. Existing enterprises can use social networks for sentiment analysis and adjust their products and services accordingly.

Cloud-based service offerings are having a dramatic impact—increasing the speed at which companies can scale, and significantly lowering the capital expen-diture to enter the market. Today it is possible to build up a multimillion users company with only a small budget. This has never been possible before. Fifteen years ago, when the World Wide Web technology started to be adopted, building up a multimillion users company needed financing in the order of millions of dollars.

Today’s cloud technology combined with social network-based marketing has made setting up a new business more straightforward than ever before. And it is not only about the cost of setting up a new business but also about scaling the business. Cloud technology allows fast and cheap scaling-up for capital-constrained startups.

Two economic forces shaping today’s world are globalization and the emer-gence of free information facilitated by the Internet. The labor market has become substantially global (due to outsourcing options). Enterprises can profit from global labor arbitrage. Value creation activities that cannot be automated with algorithms can be assigned to cheap labor force all around the world. Another side effect of the Internet has been the emergence of free information. Business-relevant information (market researches, customer contacts, prices, addresses, service ratings, product comparisons, CAD blueprints, geographical information systems, financial infor-mation, etc.) is freely available on the Internet. The combined effect of globaliza-tion and the emergence of free informaglobaliza-tion is that entry barriers for new businesses become even lower than before.

A political force could be the wish to control the Internet. In the past, the main target of political control were natural resources like oil or gas. Currently, the intention of control in the world has extended from real assets to the virtual assets—

i.e., to the Internet. Highly scalable technologies for analyzing information in the Internet have been created for control purposes. But these technologies (big data analytics and machine learning) can be applied not only for surveillance but also for customer analytics. For enterprises it represents an opportunity; they can learn to know their customers better than the customers themselves.

8.2.2 Impact of Technology-Driven Changes on the Financial Industry

To become more specific as to how changes in the environment impact existing enterprises, this section continues by analyzing an example industry, i.e., the financial industry, with the main focus on retail and private banking. Porter’s

“Five Forces Framework” (Porter2008) identifies industry profitability or, say, attractiveness as an interplay of the bargaining power of suppliers, the bargaining power of buyers, the threat of new entrants, the threat of substitute products, and that of industry rivalry.

Suppliers of the financial industry are employees and various service providers.

As the supply of qualified commoditized labor grows globally, the bargaining power of the labor force should drop. Also, as the number of service providers grows, their bargaining power drops. In combination, these two effects positively influence the profitability of the financial industry.

Particular attention should be given to the bargaining power of buyers. As information becomes free, buyers are better informed than ever before; if they need a bank for transactional retail banking rather than for long-term private banking, it is easy for buyers to find cheaper alternatives. Also lock-in barriers of customers are continuously reduced by regulators, who demand the possibility of an easy transfer of bank accounts from one bank to another.

Concerning substitute products, financial industry products themselves remain what they were; however, there are changes in the delivery channels (for example, mobile channels replace “old” online channels), in content (for example, more specific reports are offered to the customer), or in the speed of execution of payments.

Main forces of change for the financial industry come from new entrants. New technologies have reduced the entry barriers for new entrants massively. To build up a multimillion user business, only a few thousand dollars are needed. It has never ever before been possible to set up companies as “easy” as today. And we see new entrants in nearly every sectors of the financial industry, such as currency exchange, payments, swaps, asset valuation, customer relationship management, or risk cal-culation services.

What does it mean for the profitability of the financial industry? In the short term, the cheaper supply should have a positive effect and increased customer

power a negative effect on profitability. Probably these two effects will cancel each other out in the short term. However, from a mid- or long-term perspective, new entrants, who use cloud technology, mobile technology, and viral social marketing, could lead to an erosion of profitability.

Business opportunities for new entrants are restricted by regulations, in particu-lar by banking license and capital requirements. In fact, it is expensive to get and maintain a banking license. Increased regulation makes the maintenance of a banking license even more expensive and forces many banks to exit the business as they don’t have the capability to fulfill various regulations.

What it means for the area of the financial industry that is protected by the need for a banking license is that its profitability grows as there will be fewer players.

Another implication is that existing banks will remain account holders of customers, as new entrants are financially not capable to obtain a banking license.

However, as new entrants take over financial industry business lines that are not protected by banking licenses, the profitability of the financial industry will erode substantially in the middle and long term.