Blockchain and distributed ledgers as innovative platforms

It had to come to this eventually.  The emergence of Blockchain and distributed ledger systems illustrates how innovation is moving from focus on products and services, which are interesting but don’t provide a long-lasting competitive advantage, to a focus on platforms and ecosystems.

Over the last few weeks this need for a lasting competitive shift in focus was emphasized as Ford pushed out its CEO because he wasn’t changing the company fast enough. As discussed in this blog previously, the automotive sector must rethink its competitive position.  Increasingly, people want flexible transportation – from cabs, Uber, public transportation and/or their cars.

The automotive manufacturers (Ford, GM, Fiat, Mercedes, etc) must shift their focus from building physical cars to providing transportation – a shift in thinking and strategy.

In a very similar manner we can see that banking and financial services are moving from offering discrete services (mortgages, loans, checking/savings accounts, etc) and are considering how to either own or integrate with larger platforms and ecosystems, because the older conventions are less attractive to emerging customers and technology is advancing so quickly that soon many different companies and industries can offer banking-like services.

Distributed ledgers and Blockchain may point out a new competitive platform that some firm is going to capitalize on.  For example, we can imagine a time in the not too distant future where a large company that supports and relies on an extended supply chain – the automotive industry for example – could dictate that all of its supply chain participants must interact using Blockchain.  Then we’d have a company spanning, industry wide ERP like platform.  If this sounds crazy, don’t laugh.  The government of Dubai just announced that within five years every entity that interacts with the government must do so using Blockchain.

The merger of two ideas

Blockchain and distributed ledgers are really the merger of two ideas.  In the past, those who wanted to control a platform (say Apple with iTunes) did so to encourage an ecosystem to flourish, to control transactions and to manage the monetary flow on the platform and between the ecosystem and customers.  However, in platforms like iTunes, the actual financial transaction was handled by some other mechanism – a credit card, PayPal or other payment means.  Even if Apple controlled the “platform”, it had to surrender control of the payment mechanism to someone else.

With the emergence of Blockchain and/or distributed ledgers, we can see the combination of these activities – the platform exists for the purpose of moving and recording transactions and controlling the financial flows.  To some extent the platform (Blockchain or distributed ledgers) is specifically about the monetary and transactional information.  Bitcoin and other protocurrencies become part of the ecosystem that rides on top of Blockchain.  But as important, Blockchain and distributed ledgers can become more than just a payment mechanism.

Blockchain, along with Bitcoin or other forms of real or imaginary currency, suddenly becomes a viable alternative payments and transactional mechanism – and more importantly, a more transparent, scalable and open platform that could create great competition for existing payment mechanisms and the banks and financial services that have grown rich building and supporting them.

Both a promise and a threat to ecosystems

Blockchain offers tremendous flexibility and promise to the participants in an ecosystem.  It is automated, transparent and very flexible, and can do more than simply manage and record transactions. Further, Blockchain and distributed ledgers aren’t necessarily owned or controlled by one company or consortia.  This means that any industry or integrated supply chain could create its own fulfillment and payment mechanisms, outside of any bank or financial institution.  What’s more, Blockchain and distributed ledgers can do more than simply manage payments. With insertion of the right code, Blockchain and distributed ledgers can automate supply chains, complete smart contracts and much more.

Within this capability lies its danger, however.  Blockchain can be augmented to analyze and create transactions, even to complete transactions and initiate workflow, creating smart, self-fulfilling contracts as an example.  Theoretically, Blockchain enabled solutions could operate and manage supply chains.  This means that the more Blockchain can do, the less it will need or rely on third parties to create a full and vibrant ecosystem.

Thus it remains to be seen if Blockchain will spawn an ecosystem only to eventually consume the ecosystem in a few short months or years as its developers learn how to automate entire workflows and provide data and services within the Blockchain architecture.  It’s entirely possible that many of the offerings and capabilities normally provided by adjacent third parties resting on the platform are subsumed into the platform itself.

A benefit or a downfall?

In the past, ownership of a platform meant also fostering symbiotic relationships.  Many platform providers develop solutions that drive some competitors out of existence while allowing complementary competitors to survive. Amazon for example provides services for many of its partners who sell products that Amazon chooses not to stock or sell, but Amazon also drove many smaller providers out of business by choosing to stock and sell certain types of merchandise.

While there will be a lot of interest in Blockchain and distributed ledgers, one wonders if organizations that deploy these platforms will have the same purposes in mind.  Can smaller firms afford to ride on the back of the Blockchain tiger?  As platforms integrate payments and intelligence to actually operate the supply chain or perform other, higher complexity tasks, do intelligent platforms obviate the need for ecosystem partners?

As we look forward we could imagine a combination of ERP and back office like applications such as SAP with Blockchain and/or distributed ledgers, which could manage an entire supply chain’s operations and financial processing.  Rather than unique instances of software per company, we could see integrated software (the platform) spanning multiple companies in a fulfillment chain.  This would provide enormous processing benefits, faster financial closings and increased efficiency as well as visibility across a supply chain.  Further it would lock in, and lock out, competitors or new entrants who did not choose to participate or who weren’t allowed to participate.

Mindsets not technologies

The opportunity for such broad applications exists, but will confront soft, not “hard” barriers.  By that I mean that the technology will work, the “hard science” of software and integration and cryptography that will be required for distributed ledgers and automated workflow.  If the extended Blockchain reality I describe above doesn’t come to pass, it won’t be a failure of the technology.  It will fail for one of a handful of reasons:  1) the participants simply couldn’t wrap their thinking around distributed ledgers and the shift in validation and/or trust or 2) the companies and industries most threatened by distributed ledgers (payment systems, banks, financial services) hijacked the rollout.

The mindset issue is a powerful one, because distributed ledgers require that we shift how we think about validity, financial record keeping, monetary and value transactions and especially security of the data.  Will managers and executives be able to overcome their traditional thinking and doubts about the power and capability of a new way of interacting?  What’s more, those whose businesses are most at risk are moving quickly to understand and co-opt the concept of distributed ledgers. Banks, financial systems and even governmental central banks are trying to understand and determine how to manage or regulate distributed ledgers.  In some circumstances, if they have their way, distributed ledgers will simply become a channel of interactions that they manage, rather than a truly new platform.

The battle is on

Throughout our combined blog posts on this blog we’ve tried to illustrate the importance of looking beyond simple product or service innovation to consider the impact of innovation at the platform or ecosystem level.  With the advancement of concepts like Blockchain and distributed ledgers, there emerges a technology and capability that can form an entirely new platform, one that spans industry and even geographic boundaries.

This is just one of several potential new platforms (IoT is another and they may combine) and the innovation opportunities will change dramatically as these platforms are demonstrated to be valuable or they collapse.  You cannot simply sit on the sidelines, you must be experimenting and engaging with these emerging platforms to understand their viability and your potential role in the platform or within the ecosystem that it may spawn.

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