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Network orchestrators are the new path to profit

Historically, successful companies made and sold things by building large manufacturing plants and other assets. In the past half-century, providing services also flourished, and then tech companies found a path to profits through developing and selling intellectual property, such as software.

Angel investor Barry Libert, a senior fellow at the SEI Center for Advanced Studies in Management at the University of Pennsylvania's Wharton School, says those approaches are being superseded by a fourth business model: Network orchestrators. These companies deliver value through connectivity, creating a platform that participants use to interact with the many other members of the network.

Etsy and eBay are network orchestrators, providing access to physical stuff you can buy. TaskRabbit and Upwork provide access to people – services – in the form of freelancers and errand runners. InnoCentive and Yelp provide access to intellectual capital, such as innovative ideas or restaurant reviews. Facebook, LinkedIn and Match.com provide access to network capita – social and professional relationships.

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Network orchestrators are thus not totally separate from traditional fields – asset builders, service providers, and technology creators – but leverage a digital platform for connectivity to poke into that newfangled territory.

Every company, according to Mr. Libert, can adapt such a digital guise. And they ought to, if they want to leap ahead. He says his research with colleagues Megan Beck and Jerry Wind – co-authors of The Network Imperative found that "network orchestrators were eight times more valuable than asset builders, four times more valuable than service providers, and two times more profitable than tech providers. That shouldn't surprise anybody. If you have to produce something from scratch and market it, that's expensive. Or you can create a platform that people use."

These days, as we talk of scaling up – the ability to grow very quickly – network orchestration is very attractive, as the participants provide the products and content, with favourable profit margins following. As well, the network usually has an incentive to grow, since everyone participating gains from a larger scale.

Mr. Libert and his co-authors provide 10 principles for success in network orchestrating, all involving a change from our traditional management approach in areas such as these:

Technology

Shift from physical to digital. You must develop a digitally enabled platform around which people can congregate. "You won't get very far without being digital but most firms, particularly the biggest ones, are starting with a long legacy of physical assets and thousands of processes, teams, and strategies carefully tuned to the management of those assets," they write.

Assets

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Shift from tangible to intangible assets. Physical assets are becoming a liability. Pay attention to your brand, a key intangible asset, and also view people as an asset, not an expense. Customers, as they promote your brand and network, can be huge assets as well.

Strategy

Move from operator to allocator. As a strategist, Mr. Libert has spent many years working with leaders to figure out what products to sell to what market. But these days, leaders should be active allocators of capital, like portfolio managers. A leader who mimics last year's budget is forsaking that role. Shareholder activists who raid companies understand that role. He points to Carl Icahn, who prodded Xerox to split in two: a documentary technology company and a business process outsourcing company focused on services. "The CEO and board didn't see their role as active capital allocators," Mr. Libert said in the interview.

Leadership

The shift here is from commander – in charge of a highly structured, hierarchical, top-down organization – to co-creator, who knows how to motivate, inspire and work alongside others to develop the network.

Boards

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His favourite shift, because it is the most difficult, is the switch from governance to representation. It's not enough any more to have a group of ex-CEOs, primarily male, providing oversight. Just as boards expect staff to have modern skills, directors must find diverse skills to design and support new digital strategies. This is a second level of diversity, of competencies and openness, to add to the first level of diversity we have heard much about, reaching out to women, minorities and others not commonly on boards.

Finally, the mindset must change to thinking less rigidly about roles, processes, products and industries. Uber came out of nowhere, for instance, to challenge existing companies.

"You need to be open to a world that is entirely different," he says. That involves recognizing that of the four business models, the oldest ones are the least valuable, and today's bountiful network approach is available to you.

Harvey Schachter is a Kingston, Ont.-based writer specializing in management issues. He writes Monday Morning Manager and management book reviews for the print edition of Report on Business and an online column, Power Points. E-mail Harvey Schachter

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About the Author
Management columnist

Harvey Schachter is a Kingston, Ont.-based writer specializing in management issues. He writes Monday Morning Manager and management book reviews for the print edition of Report on Business and an online column, Power Points. More

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