All networks are originally pitched on the efficiencies that their participants will receive. But when they achieve critical mass, network effects take off, and the real value is in data, information, and insight.
George Laurer, electrical engineer, died on December 5, 2019, at age 94. His invention is used 5 billion times a day and is one of the most widely reproduced works ever. Look at your desk. Turn over a book, a card, a package of coffee, and there it is: the humble UPC barcode.
Laurer faced the same challenge confronted by every potential network builder since Samuel Morse: how to achieve critical mass. Let me spell it out a bit more. Laurer had to persuade enough grocery manufacturers to change their packaging to add a series of monochromatic, unfamiliar lines. He had to persuade a brand such as a perfume manufacturer, which lives and dies by packaging, to add these ugly lines.
Yet at the same time, he had to persuade grocery stores to reconfigure their till operations with expensive equipment, retrain staff, and possibly confuse customers. And because he wanted an open system, Laurer did not patent his design.
As Samuel Morse discovered before him, and the credit card companies discovered after him, the early, pioneering days of network building are hard. Buyers wait for sellers, sellers wait for buyers, and in the middle, the network builder is selling a vision. The chosen technology does not have to be the best; just look at the QWERTY keyboard. But once adopted, it is almost impossible to displace.
Network effects are always disruptive
The breakthrough was made not in efficiency but in the power the information could yield. For the first time, grocers could track where the products were bought, how they were bought together, and at what time of day. With increasingly more powerful computers, new business models were developed such as the ability for stores to sell information back to manufacturers.
As was the case with the telegraph, the original technology is used in ways that its original inventor and early adopters could never have foreseen. Morse never conceived of wire transfers, stock tickers, news wire services, or the Sears Roebuck catalog. The barcode pioneers like Laurer did not imagine the Nielsen Company, targeted promotions, or loyalty cards.
When companies started to digitally connect to each other in the 1990s, the same story played out. The early technologies of cXML and PO-flip were never patented by their original inventors (Ariba, in this case). The original value propositions of these early networks were also based on efficiencies.
By digitally connecting to their customers and suppliers, enterprises were able to reduce re-keying, eliminate paper, and cut errors. This value proposition was enough to get participants to join. But as with the UPC code, the telegraph, and the credit card networks, once critical mass is achieved, the value proposition evolves from efficiency to intelligence.
The value of information on modern networks leads to rapid adoption
Joining a business network certainly has efficiencies, but it’s the value of the information available on modern networks that leads to such rapid adoption. All businesses are under pressure from ever more discriminating consumers to develop cheaper, more innovative products and services. Unlike Henry Ford, who could just reconfigure his own manufacturing plants for each new model, the modern outsourced supply chain needs coordination from hundreds of suppliers. Product designers need to find innovative suppliers or ask suppliers to come up with their own solutions to the market needs. And a modern business network is just the place to find them.
Reach down to any item on your desk, turn it over, and study George Laurer’s humble barcode: the building block of a network that started off delivering efficiency but ended up delivering information. Then consider your own participation in business networks. You may have joined for efficiency, but the real value of these connections is the intelligence they can yield.
For more information on business networks from SAP, click here. For more on this topic, please read “Toward 2020: Predictions For The Future Of Procurement.”