Dimension reduction attack: destructive innovation of supply chain service industry

"Destructive innovation" was created by Clayton, a professor at Harvard Business School. The concept elaborated by Christensen in the book The Innovator's Dilemma, in recent years, the theory of destructive innovation has been used to explain the changes in the industry competition pattern, and the leading enterprises have failed/been replaced in the competition, that is, the business phenomenon of "why good enterprises fail". Destructive innovation often comes from new entrants to the industry. They either provide products and services with lower performance (and thus cheaper) to low-end users in the existing market, or choose to cut into the "non-user" demand that is ignored by mainstream competitors because of different value attributes and small scale, open up new market space, and finally win because of the cost-effective advantage or the transfer of user value demands, replacing the market position of leading enterprises in the existing industry.

Figure 1 destructive innovation model

Different from the general concept of innovation we understand, destructive innovation is not an innovation in the direction of "continuous improvement" and "high quality and good price" It provides customers with higher-end products and service choices, which is exactly what big enterprises are good at, and it is also the "moat" of incumbent enterprises.

? On the contrary, disruptive innovation is a "dimensionality reduction attack" initiated by entrants, including two modes: low-end market entry (removing redundancy and high performance) and "non-user" market entry (meeting new needs of users). Both modes point to the marginal market that the dominant enterprises can't defend-due to the limitation of endowment ability, technological structure or economic rationality. The demise of Symbian system in the era of smart phones, the continuous decline of cross-border trade performance of Hong Kong Feng (HK.00494), the impact of social media and mobile payment on media and telecom banks, etc., have led to more and more destructive and innovative business events, which have changed the competitive ecology and pattern of many industries. Explaining the reasons for the failure of "good companies" like Nokia and Li & Fung is the logical starting point of destructive innovation theory.

Different from continuous innovation, destructive innovation is aimed at the value network formed by the long-term evolution of an industry.

In the analysis, Christensen 2 believes that the value network is a big environment for enterprises to determine customer needs, solve problems and strive for profit maximization. The value network maps the supply chain system of products and services, and through the economic value (shadow price) of each performance attribute, it drives enterprises to continuously innovate towards the optimal cost structure and higher gross profit margin of the existing customer value network, thus producing a "good enterprise" in an industry, that is, a few competitive winners with the best return on investment.

There is a natural connection and interaction between disruptive innovation and technological change in the industry, but only when technology is applied to product and service scenarios and the value network of the industry is reconstructed rather than improved will it bring disruptive innovation. However, large enterprises that are in the leading position in the existing value network either continue to improve product performance and gross profit to meet the strategic path dependence of high-end users' needs, or are limited by the economies of scale and special assets investment in the mainstream user market, and are often unwilling or unable to change the existing value network, so they are more vulnerable to dimensionality reduction attacks in the low-end market or the new small-scale market-until the demand of new users and the application of new technologies change the existing value network, thus promoting the growth of new markets.

The most expansive industries, such as power batteries, consumer e-commerce, in vitro diagnostic reagents (IVD), etc. It is often called the "runway" because of the convergence of value networks in the industry, and competition is the key performance indicator of existing customers-performance leaders win. In other industries, incumbents rely on technology accumulation and continuous innovation to meet the needs of existing customers with high quality, thus gaining a stable market position, and it is difficult for entrants to attack the leaders of incumbents directly. The strategic situation faced by such industries is often the transformation of runway and competition rules. Traditional trade and retail (supply chain service) should belong to the latter.

Supply chain service industry is an intermediate industry connecting product manufacturing and user delivery. Its original forms are trade, retail and logistics. With the in-depth development of supply chain management to the integration of logistics, business flow, capital flow and information flow, the supply chain service industry has gradually expanded to VMI, B2B, third-party logistics, supply chain finance, brand marketing, ODM/OEM, new retail and other professional fields, and there has been a trend of cross-border integration, agility and flexibility. The supply chain service industry also tends to diversify its value proposition. Supply chain participants invest in different value links such as customers, channels, logistics network, design, brand, data and financial services, seeking to become "chain owners" and obtain economic profits brought by value-added supply chain services.

Figure 2 Existing Value Network of Supply Chain Service Industry

Hongfeng Group was established in 1906. With its unique global supply chain management, it became the world's largest export trader in the 1990s, with a market value as high as HK$ 205 billion. It has been regarded as a benchmark enterprise case of global supply chain management and has been widely studied by industry and academia.

The evolution of Li & Fung model has gone through five stages: 1) trade middleman model. With the advantage of language, it occupies a place in the monopoly trade pattern of foreign banks with China, and the source of profit is trading commission. 2) Purchasing agent mode. Obtain orders with knowledge of Asian suppliers, trade policies and quotas of various countries. 3) Value-added agent mode. The customer provides Li & Fung with a preliminary product concept, and then Li & Fung customizes a complete production plan for the customer and delivers it in time with good quality and quantity. 4) Virtual manufacturer mode. Li & Fung changed from an agent to a supplier, signed contracts with customers, engaged in high value-added product design and development, and outsourced production links. 5) Supply chain management mode. Li & Fung has extended its business to both ends of the industrial chain, and opened all nodes through digital tools, becoming the planner and manager of the entire industrial chain. three

In the eyes of strategic observers in the supply chain service industry, the managers of "Centennial Mo Lifeng" can promote continuous innovation, make "reasonable and appropriate" strategic choices, focus on high-quality customers in the global supply chain, and constantly enrich services in design, procurement, logistics and virtual manufacturing. It is a typical "good enterprise" with three innovations and four modernizations.

However, since 20 13, Li & Fung's operating performance has been declining, with the turnover dropping from $20.7 billion in 20 13 to $201350 million in 20 17, and the operating profit (EBIT) dropping from $850 million to $270 million. Li & Fung (HK.00494) also spun off its brand management, health care products, furniture and beauty products, and its market value shrank by nearly 90%. In a sense, Li & Fung has also fallen into the "innovator's dilemma". Then, what kind of technological change and business model does the destructive innovation that impacts the leading enterprises in the supply chain service industry come from?

? Figure 3 Li & Fung (HK.00494) Share Price Trend

From the existing value network of supply chain service industry, we can see that distributors are in the middle layer of supply chain. Traditional trade middlemen mainly rely on the information asymmetry in the supply chain to profit from the price difference between wholesale and retail, warehousing and logistics, and financing. With the growth of brands and retailers and the rise of "chain owners", middle-level distributors will choose to focus on or extend the supply chain in order to maintain profit margins and market position.

Consumer goods supply chain has the value proposition of multi-variety, quick response and cost leadership, while Li & Fung has long served major customers such as Sears and Wal-Mart in clothing and toys. As an intermediate layer between major customers and a large number of scattered suppliers, it provides value-added services such as design, procurement and supply chain management, and assumes the role of a virtual manufacturer. Based on Li & Fung's customer demand and supplier network, this strategy has path feasibility and resource matching in the process of trade middlemen transforming supply chain management.

However, under the influence of globalization and financial crisis, Internet e-commerce, consumption trends and industrial transfer, the transformation of global consumption supply chain has been and is taking place: the destructive technology applied to business model transformation comes from the Internet. B2B and B2C e-commerce directly connect consumers, manufacturers and suppliers as never before. As a destructive innovation, "de-intermediation" launched a multi-dimensional "dimensionality reduction attack" on distribution and retail links, reshaped the value network of supply chain service industry, and OTT(over the top) improved the supply chain resource endowment and capability that Li & Fung has been proud of for a hundred years.

Of course, in recent years, Li & Fung has also taken actions such as acquiring distributors in overseas markets, entering brand management and licensing business, and building a digital platform for supply chain to cope with the changes. However, Li & Fung is fundamentally a customer-oriented and cost-leading supply chain service provider. It may be able to do a good job in continuous innovation (such as specialization, specialization, branding and internationalization), but it is not changing fast enough in the new generation of consumer demand, Internet and agile flexible supply chain. four

The main technical application of the above destructive innovation comes from the consumption scene in internet plus, and the realization of the new value proposition depends on the connection effect of the Internet on people: reducing the search cost of products and services, providing updated consumption experience and attracting new users. Therefore, Li & Fung's failure is not due to mistakes in customer strategy or management decision-making, but the incumbent's unwillingness or inability to cope with technological changes in organization and values, which is a kind of "failure of rational choice of organization". It is worth noting that as the next wave of disruptive technological changes after Internet technology, big data and artificial intelligence technologies may further expand the trend of "disintermediation" and bring deeper destructive innovations to the supply chain service industry, such as AI marketing algorithms, unmanned retail, intelligent manufacturing and smart supply chain. The existing leading enterprises based on Internet capabilities will also face the challenge of the next wave of destructive innovation, and dynamic and on-demand organization and processes are becoming the core capabilities of future enterprises.

As Christensen found in the book Innovator's Dilemma: 1, there are significant strategic differences between sustainable technology and destructive technology. 2) Continuous technological progress may exceed the actual demand of the market; 3) The customers and financial structure of mature enterprises are more inclined to continuous innovation than destructive innovation. Therefore, in response to the impact of destructive innovation, the incumbent enterprises need to establish an independent innovation business department, which is different from the existing core business in terms of resource allocation, organizational goals and values, even though the existing core business is in a leading position in technology and market. To a large extent, the strategic logic of organizational empowerment and collaboration does not apply to emerging business sectors that promote destructive innovation.

Tencent's strategic investment department keeps Tencent's ability to cope with subversive innovation by continuously acquiring companies that invest in subversive innovation (Huya, Yingke, Pinduoduo, etc.); Yonghui Supermarket has hatched innovative businesses such as super species and Yonghui Life through the independent platform Yonghui Yunchuang. In fact, the incumbent's organizational strategy to deal with destructive innovation is to cultivate "heterogeneous" and "catfish" in the system, and the core competence and strategic direction are different or even opposite to those of the mother. Although all incumbents will fail in the sense of business model evolution and change, dimension reduction attacks come from those low-end and small-scale market gaps.

In the process of strategic transformation from traditional trade to supply chain management, Huihong and Li & Fung have great similarities in supply chain value network and value proposition. As a benchmark enterprise of supply chain management in import and export trade, Li & Fung still has many business models and management experiences worth learning, such as customer-oriented small product department, effective management of supplier network, investment in R&D and marketing at both ends of smile curve. However, in the era of rapid changes in technology and business model, employees have to maintain a high degree of sensitivity to destructive innovation in the industry, and take countermeasures from organizational structure and process, cutting-edge technology application and innovative skills reserve, so as to actively drive destructive innovation and the resulting.

1 dimension reduction attack, from Liu's science fiction novel Three-body, reduces the spatial dimension of the target, making it impossible for the target to survive in the low-dimensional space, thus destroying the target. In the enterprise's competitive strategy, it can be understood as a business model of reducing product attributes and attacking opponents with low cost or differentiated advantages.

2 Clayton? Christensen, The Innovator's Dilemma, CITIC Publishing House, 2nd Edition, 20 14, 1.

Ping An Securities Research Institute: Supply Chain Research Series Report 1: Li & Fung Model, 201May 8.

4 Zhang Shaohua: "Li & Fung Crisis-A Hundred Years' Rise and Fall History of Top Trade and Purchasing Companies in China"