The world of Metacapitalism - part 1

It isn''t a question of if your company will transform to an e-business model - it is a question of when." The co-author of "Metacapitalism" talks to FinanceAsia in a 2-part interview on how the change will take place.

Grady E. Means is the global leader of strategic change consulting for PricewaterhouseCoopers and is the co-author of a recently published book entitled "Metacapitalism". In a two part interview with he talks about the radical changes to life brought about by the internet. From changes in business models, and the advantages of owning no capital, to global sweatshops and cheap higher education.

Q:What is Metacapitalism all about?

A: I didn't want to write about just business. On the one hand, it is about new business models, the prophecies, the key performance indicators, and dissecting the different business structures that go into B2B (business to business). But the real point is that we are on the edge of apocalyptic change. We are seeing some interesting applications of technology, which, with any evolution, is only now coming up with an answer. And B2B is that answer. It is an entirely new economic model. It is not unlike the changes you get culturally, like it was when we moved from hunting to farming.

Q: And the apocalyptic change is?

A: It is a change in classical economics. For the past thousand years, the thing that has been short has been capital. So people have created large capital empires, it has all been about large factories and large buildings full of people, and improving efficiencies out of that, and now that is all changing. The whole point of exchanges is that you can bid to get people to make things for you. And you don't have to own or build the factories. You simply put an options price out on them to reserve that capacity.

The whole point now is to innovate quickly, to see how the markets are changing, to figure out at what price you are going to reserve the market to use exchanges to assemble the external capacity in the supply chain. The skill set is not in managing the factory, but in alliance developments, in how to play trade exchanges, to have extremely good strategies so that you can add customers to your supply chain, and also how to control your brand so that your suppliers can send the product straight to your suppliers so that you may not even have to touch the product.

Q: That implies that smaller companies can be successful in the B2B space. Essentially, the playing field is leveling. But today, the most successful players are still the big names.

A: Yes and no. Think about AOL, Cisco, these are real models, decapitalized, grabbing market caps of about a trillion dollars. The questions now is how to take the big brand owing companies and flip them so that they are less capital extensive and can manage their name through trade exchanges.

There is a lot of evidence that with a little bit of capital, with a tremendous amount of management discipline, you can create interesting and powerful companies. This is the age that that is possible and that is what makes the game so exciting.

Q: How does this compare to, for example, the keiretsu structures of the Japanese, where they had a lot of micro relationships that they managed?

A: It is a contrast in that they [keiretsu] directed capital. This is the opposite. It allows capital to flow in a very flexible way. The problem with keiretsu is that you end up with a very dedicated group of suppliers. In this model, you practice Metcalfe's law. Metcalfe's law says that you build that exchange where everyone is suppose to play. The value of the exchange is that people can auction and bid. So it is the opposite of a vertical capital structure like the keiretsu.

The whole point is to have a more efficient distribution of capacity. If you can open that capital up to a trade exchange, people can access that capacity to make a car, or to create a new insurance product. The effect is, you improve the margins, that is your drive down your costs, and drive up you operational measures like reliability, quality, and it also eliminates inefficient suppliers very quickly. The keiretsu system protects them; this eliminates them. Those who do survive on the supply side are capable of accessing bigger markets, so it actually destroys cartel economics

Q: Doesn't the very transparency itself get into the heart of our social market system, that is, if the world gets so transparent and the margin keeps dropping for everyone, that would make life very difficult for people. We could become a global sweatshop.

A: I don't think that margins are going to get squeezed. I think that we are talking about a dramatic increase in capital market value and earnings. This is not a zero sum game. We are creating value, so from a social equity value this is good, not bad. What you are getting at is a distribution towards the efficient. That is good. That is lean, clean, green and mean. It is the inefficient models that burn up the rain forests. Inefficient models lead to inefficient distribution of capital that pollute Chernobyl and everything around it. The more efficiently capital is allocated, there is no need for sweatshops. I think that Clinton was wrong; the digital divide is not an issue. I think we are closing the digital divide. It opens things up so that people can play where they have never played before.

Q: If there was transparency on every part of the production line, coming down to the consumers themselves and if you could buy, say, your Sony player from a number of suppliers on an exchange, surely everyone's margins will be compressed.

A: Certainly companies will be more efficient and they will have to continue to lower cost and improve reliability. But I'm not sure that it will compress their margins. I give you the metaphor of Korea and Taiwan. Korea is your brand owning country. Taiwan? You may be hard pressed to name one brand out of Taiwan. Taiwan has the compressed margin that you are talking about, it has your chemical factories, and it's your manufacturer. It has a viciously competitive market. It has to keep its cost down, but at the end of the day, from a financial reserve point of view, which would you rather be? You would want to be Taiwan more than Korea; it has far more foreign reserves, a much better current account balance. They have managed to reduce costs and improve operating efficiency without reducing their margins.

Q: Are there any Ciscos in Asia?

A: On a large scale, both Singapore and Hong Kong are Ciscos, because they leverage off and stretch capital. They know how to play trade and networks. In terms of particular companies, I'm looking at ones like Lippo that get a tremendous amount of leverage out of their assets. In terms of visible players like Cisco and AOL, I can't think of one right now but this is a very fertile ground, once the idea sinks in they will emerge.

My biggest concern is, and I may be wrong, that it is a case of "see how it works in the States and Europe first". I think that that is extremely dangerous. This is capitalism of rapid change. You can see the forces, the leverage and dynamics and the growth and value creation, but to define the winners, I would be hard pressed.

Q: In the book you suggest that the exchange that creates the most liquidity, the most strategic alliances, the ones that are able to band together all the different players in the supply chain to create a "meta-market" will be the one that is successful. You also suggested that the "landlord" who will pull this all together could be an independent third party. Who do you see holding that role?

A: This is difficult to answer. If you look at large manufacturing companies, they are decapitalizing now and becoming service companies. Ford, for example, is spinning off a lot of its manufacturing assets right now, and becoming much more an innovation design company, and getting other people to make its cars. As they were doing this it dawned on them that as a service company, they might be in a position to run a network.

On the other hand, we helped to design and build Covisint, the market for automotive exchange. We were asked about a temporary CEO to run it, and we asked to take up positions, but it was difficult because of our current corporate structure. But this is a question for consulting firms that are building and running exchanges and are offered to be paid in equity, as well as fees.

Q: Will consulting firms then end up being business managers?

A: Perhaps. Banks are another good example of an industry that may play that role. Right now, exchanges only make money on a slice of the transaction fees, and you can imagine that banks are pretty creative about how to make money as an exchange manager. Banks like Citigroup have defined themselves not just as a financial institution, but as an information institution. But I think that it is unclear, there will be several people trying, brand owners will try, and entirely new players like vertical net players and suppliers will take a shot at it.

Q: In Asia, we have gone from feast to famine in terms of funding for hi-tech and dotcom companies and also the B2B exchanges that have been brought to market in Asia have not been working. What are your views on how Asia will take to these B2B exchanges? 

A: If you examine B2B exchanges in the US, none of them have gone public. I don't think that B2B exchanges have matured very much at all. In the Harvard Business Review this week, they are saying, "Covisint – Failure!". But exchanges have barely got started. It is remarkable that conclusions like that can be drawn.

I think a lot of exchanges have been brought to market prematurely and for most part, these exchanges have been built as a utility for the industry. A lot of them also try to make money from the transaction cost on procurement, which is a very narrow idea. So it doesn't surprise me that we have had some early failures.

Q: Is that a worry?

A: It doesn't bother me at all. I think we are in the third generation of trade exchange concepts this year. We are now seeing that we only have to change the economic model of these things to make them work. We also have to find more vibrant ways of making revenue than just taking a slice of the transaction cost. It is a matter of maturity. I don't think that the model has settled yet

Share our publication on social media
Share our publication on social media