Can Blockchains Give You Competitive Advantage?

Blockchain executives call the tech a team sport. They speak about industries joining together to build blockchain platforms that drive value for all participants. But, put bluntly, what’s the point? Both the tech and our understanding of how to use it is raw—making this an expensive, uncharted sport to play. Why invest if your competitors will benefit?

I’ve been asking execs working at the front edge of the technology this question: if competitors all have access to the same platform, then what new competitive advantage can come from blockchains? Here’s what they shared:

Smart Companies Understand There Are Multiple Angles

Two themes emerged from these conversations. First, while the main investment trigger right now is solving high-pressure problems that plague everyone in an industry, there was a belief that once a blockchain platform is in place, smart companies could discover ways to use it that could deliver competitive advantage. Secondly, executives observed that the new functionality blockchains make possible could arm blockchain-natives with new tools to attack long-standing value chains. In this case, investment is preventative, employed to stay ahead of disruption.

Think In Layers: Step One Is Foundation; Step Two Is Differentiation

The first challenge for executives is to wrap their head around the idea of investing in a platform that will also benefit competitors. This initial foundational layer is not about competitive advantage at all—it’s about ecosystem-wide evolution. To get there, basic infrastructure needs to be put in place—but then, you could drive new advantage by how well you use it.

“It’s like the electrical grid,” says Dale Chrystie, Business Fellow and Blockchain Strategist, FedEx. “It would be insanely expensive and complex for any one company to build it out. However, once the electrical grid is in place, and you have a consistent format, you can put an outlet on your wall, and you could figure out a way to monetize that—you could build a business model on top of that outlet.” Dale continues, “In a sense, blockchains will be similar—we think there will be a open, and non-competitive foundation that will allow a number of business models to sit on top of it.”

Thomas Olsen, a partner at Bain & Company explains, “Once blockchain platforms are widely implemented in an industry, cost structures will change, pricing will change, and there will be a new, more efficient equilibrium. At that point, competitive advantage will not be that blockchain platform, it will be who uses it faster or better—your ability to add value to it, or distribute it, or make it easier for your clients to use.”

Advantage could be derived from integration, applications, or even the skill with which you use shared data. Nadia Hewett, project lead for blockchain and distributed ledger technology for the World Economic Forum says, “If you are using blockchains to tackle a shared problem, the data that you share with the platform will ultimately become commoditized. But you can still build applications on top of this shared platform that can differentiate you.” Kim Harrington, who heads the Blockchain Center of Excellence for Bayer explains, “Over the last few decades the cost of data has gone way down, and now with blockchains we have a technology platform that allows us to very easily share and operate on that shared data. The competitive advantage shifts from having the data to how you use the data.”

Frank Yiannas, the Deputy Commissioner for Food Policy and Response at the FDA explains it in this way: “In college everyone has the same curriculum and the same books, but some people leverage it differently than others. I think there is a way to compete on how you leverage the learnings from collaborative blockchain ecosystems and apply them in a way that benefits your customers.” But he emphasizes the benefit of solving important industry problems, even if everyone enjoys that same upside: “The gains that you get by working together offset the potential losses of others getting a little bit better. Take supply chain: you can’t gain supply chain efficiency or sustainability unless you bring the ecosystem along—you have to get comfortable with everyone getting better and smarter with you.”

Getting To Step One Takes A Shift In Mindset

Chrystie also emphasizes the importance of patience in answering the question of competitive advantage. “I think a lot of people are treating this like the internet, and want to immediately monetize it. But when you see the world like we do—we go to more than 200 countries—you see at global scale. We think there’s a need to build a non-competitive, open, foundational technology first, and it is going to take a big, open, global village to build it. It is an alliance technology, which takes us down a different path, a path of coopetition. This is not taught in business school or the first day of employee orientation. For blockchain to be transformative, it has to be bigger than us.”

Early Push Back Against A Future Arms Race?

Yet these are uncharted waters, and there is nothing clear about plunging into the unknown. Bain & Company found in a collaborative study with Broadridge that some organizations that benefit from preserving the status quo are “deliberately trying to slow some things down, not just for themselves, but for the whole industry.” One senior executive Bain interviewed who represented his firm on a blockchain consortium working group said, “Half of the people in the group are looking for a solution; the other half are there uniquely to obstruct progress.” The uncertainty is compounded by a question of whether gains will actually increase margins, or whether firms will face competitive pressure to pass efficiency savings on to their customers.

Weighing First Mover vs. Second Mover Advantage

Executives are faced with difficult decisions about when to time their blockchain moves. “No one wants to be first,” said one executive Bain interviewed, “but no one wants to be last either.” Blockchains are an ecosystem-shaping technology, introducing the risk that the future could be shaped without your participation. But waiting to develop blockchain acumen could also put you irreparably behind on future waves of blockchain-driven innovation.

Even though long term advantage may not come from the platform itself, staying ahead of the curve in making use of it could drive advantage, for a period of time. Olsen elaborates, “It takes most institutions a long time to actually implement blockchains and deliver it to customers. If you are able to offer a blockchain solution, but it will take your competitor another year or two to integrate it, that’s an advantage. You could lower your cost structure faster, you could launch features faster than competitors, you could gain market share. Eventually competitors will catch up, but by that time you could have further integrated it to introduce new features and services on top, such as links to payments and settlements, adding analytics and sanctions checking, or offering new pricing.”

As organizations start to gain traction with leveraging blockchains for business gain, it could set off a new arms race—with leaders working to stay a step ahead to use it to deliver new features, find novel ways to commercialize it, and continue to reduce cost structures through blockchain-driven automation. We may find that an industry starts to fall into cohorts—sets of organizations that were early adopters may be able to sustain that lead over time because of the arduous learning curve that blockchains present. Laggards may always struggle to catch up.

Blockchains Depend On Network effects, But They Could Come Faster Than You Might Think

But what about the fact that blockchains need to achieve network effects to deliver benefits? Doesn’t much of an ecosystem need to adopt the platform to yield returns for its participants? Olsen points out that in some instances you can gain advantage quickly with just a few participants. “You can get value even if you are gradually building out a network—it doesn’t need to start huge. For example, in trade finance you don’t need a very big network to get some big benefits. We estimate you can get about 60 percent of the benefit if you just have two banks representing both sides of the transaction and their clients on the network.”

Understand How Disruptors Could Chip Away At Your Value Chain

The smart enterprise will also proactively study how this technology could fuel shifts in the value chain. “We think peer to peer technology will have a disruptive effect on many business models. Many companies sit between supply and demand in some part of their business. If blockchain helps supply and demand to find each other in a trusted environment, that both creates and disrupts business models,” explains Chrystie. “But the fact is that today blockchains are not yet very fast, very scalable, or mature. Many people stop right there and say, ‘I’ll just wait a few years’. But what it does, it does really well, almost with superpowers. Where authenticity matters, we think it is going to be transformative. This is why you want to deeply understand this technology sooner rather than later.”