Bigger Than Bitcoin
Business faculty shed light on blockchain’s unrealized potential
Business leaders seeking a competitive advantage may be writing off a major opportunity to redefine their firms’ capabilities if they ignore blockchain’s potential, according to research recently published in the Journal of the British Blockchain Association co-authored by CSU College of Business faculty.
The management department’s Asad Aziz and Yolanda Sarason, along with Kristi Yuthas of Portland State University, lay out a framework for gaining strategic value by using enterprise blockchain. Their research aims to establish a shared understanding between two distinct groups: academics and business strategists unfamiliar with blockchain and blockchain enthusiasts unfamiliar with strategic management tools.
The Origins of Blockchain
The story of blockchain begins with a mystery. It was created by the enigmatic and unidentified “Satoshi Nakamoto” to serve as the database facilitating Bitcoin’s decentralized structure. Although Bitcoin has brought cryptocurrencies into the mainstream after its skyrocketing growth drew widespread attention, blockchain could end up being the more revolutionary force.
For years, early adopters have hailed blockchain as a disruptor on the cusp of reshaping the global economy by accelerating the obsolescence of traditional banking, eliminating the need for certain middlemen and even providing more accountability in governments. However, blockchain needs to surmount numerous hurdles if it is ever to achieve widespread adoption, including many people’s lack of basic familiarity with what blockchain is and what it can be used for.
At its heart, blockchain is an encrypted, distributed database that can store virtually limitless types of digital information while being continually updated and verified by its collection of users.
“It’s essentially a real-time, secure ledger,” said Aziz, who worked in the semiconductor industry for more than two decades before becoming a business educator and researcher.
How Enterprise Blockchain Stands Out
Enterprise blockchain is differentiated by introducing a permissions structure to a blockchain, regulating who can access what data.
“Only in the last maybe four or five years have people started really looking at blockchain for its ability to do things like linking supply chains together and creating strategic value,” Aziz said. “You can track goods or money or information. You can be sure that recorded transactions are immutable and transparent.”
The research points to enterprise blockchain as a force that can foster symbiotic partnerships – or blockchain consortia – between organizations by improving “data transparency, efficiency and collaboration.”
“Our ‘aha!’ moment was realizing that we can look at these relationships as types of strategic alliances, which have really clear guidelines for when you engage in them and what the potential risks and benefits are.” said Sarason. “Once we did that our framework came together.”
“[Enterprise blockchain] allows firms to think beyond a binary view of competition and cooperation…”
– Strategic Value Creation Through Enterprise Blockchain, The Journal of The British Blockchain Association
The Blockchain Consortium Capabilities Framework
Increase Operational Efficiency
Increase efficiency and reduce costs with unalterable transactions, smart/self-executing contracts and secure asset/value transfer
Much of the current conversation around enterprise blockchain explores how to increase operating efficiencies, as significant gains can be achieved by addressing existing operational problems and pain points. Although important, the research highlights how critical it is that organizations expand their focus beyond this key benefit to create more strategic value.
IBM and Maersk sent a test shipment of flowers from Kenya to the Port of Rotterdam in the Netherlands to benchmark the efficiency of traditional logistics as part of a joint blockchain effort. The shipment generated nearly 200 separate documents, racking up administrative costs that accounted for around 20% of the physical transportation expenses.
The World Economic Forum estimates that use of blockchain could boost trade by more than $1.1 trillion, with the greatest benefits falling to small- and medium-sized businesses.
Create Strategic Value
Strategic Value: Strengthen core value propositions, expand network reach, access new markets
Through stronger data and information verification methods, organizations can substantiate claims they make to customers and stakeholders about their core value propositions. Additionally, firms can increase the number of partners they do business with by creating more trusting relationships based on verifiable information, in turn expanding access to new markets through those connections.
The diamond industry is under intense pressure to guarantee its supply chains are conflict free and sustainable. Two international diamond producers – Shairu and Atit Diamond – partnered with the blockchain supply chain company Everledger to launch a platform that allows the firms to track a diamond’s origin, its carbon footprint and quality certifications.
Strategic Value: Strengthen relationships, share risk, better access data and resources
When members of a blockchain consortia share their unique capabilities with one another they begin accomplishing more as a group than any of the individual members could alone.
“Strategic alliances really allow you to access resources that are too expensive for you to develop yourself,” said Aziz, who previously worked as the director of strategy and alliances for a global manufacturing company.
“You also have access to partners’ up-to-date information and combining that with what you know can open up new business opportunities, or new ways for you to create competitive advantage,” said Aziz.
The Port of Rotterdam partnered with shipping companies to create an information sharing blockchain consortia. In a pilot program, shippers provided the port access to their logistics insights and route planning algorithms, which allowed the port to improve service times by dynamically allocating the personnel and equipment needed to move cargo and resupply vessels.
Using a blockchain-based system, logistics organizations can also connect disparate administrative systems through better data management, even utilizing smart contracts that self-execute if certain conditions are met, such as an RFID-tagged shipment arriving at the port.
Strategic Value: Develop smart contract expertise, increase ability to identify strategic blockchain uses, create new consortia
Yuthas, Sarason and Aziz argue that new blockchain-specific capabilities “are the most overlooked potential sources of competitive advantage” for firms assessing enterprise blockchain adoption. The researchers break down how firms can gain this advantage into two categories: developing smart contract expertise and gaining general capabilities around blockchain implementation.
Smart contracts are programs that operate within a blockchain, and are able to verify contract obligations, execute next steps when certain conditions are met and respond in near real time to triggering events.
Blockchain implementation skills center around consortium-related managerial expertise. Although blockchain partnerships can be uniquely suited to the needs of those involved, these new relationships could prove challenging to create from the ground up. Firms that develop skills in this space – such as understanding when it makes sense to create a consortia, how to develop governance structures, what the best practices are for building relationships and onboarding new partners, etc. – will be well-positioned to take advantage of blockchain’s strategic value.
GrainChain is an agriculture technology company that has expertise in creating and managing smart contracts. GrainChain combines data on the weight and quality of harvests with near real-time logistics information to ensure quick payment to farmers, monitor transportation providers and reduce administrative overhead by having contracts self-execute when certain conditions are met.
The Impact of Transparency
“Farmers are at the mercy of whoever they’re selling to,” said Allie Stauss, a corporate sustainability student in the College of Business’s Impact MBA program, when contacted to discuss the implications of blockchain for the coffee industry. Stauss previously worked as a manager for coffee sustainability programs at TechnoServe, a non-profit focused on reducing poverty by connecting farmers and business owners to market information and capital.
This lack of insight into market conditions is just one disadvantage farmers face when selling their products into a series of up to a dozen intermediaries who resell, process, transport, export, import and ultimately roast the beans. At the end of the line, the pound of raw coffee that the farmer sold for less than a dollar lands on a grocery store shelf processed and priced closer to $9.
Estimates point to only 5-10% of the profits from the $200 billion industry remaining in producing countries, with farmers earning the same commodity prices they were seeing in the 1970s, not adjusted for inflation.
“If the farmer has up-to-date information about market prices that’s directly authenticated and available through blockchain, they are in a stronger negotiating position and may not need to deal with as many intermediaries.” said Aziz.
By implementing blockchain throughout the coffee industry, transparent information sharing could increase efficiencies, support supply chain systems that better incentivize farmers producing the highest quality beans, while providing new opportunities to shift profits to growers.
“Enterprise blockchain solutions can facilitate the development of trust, cooperation and risk sharing among firms that otherwise may only consider each other as competitors,” write the researchers. “This allows firms to think beyond a binary view of competition and cooperation and embrace ‘coopetition.’”
This reimagining of the relationships between companies could create more symbiotic relationships and break down traditional barriers between businesses.
What’s Next for Blockchain?
“The expertise to work with blockchain and understand it is relatively new, so you usually find that more junior people and more technical people have the expertise to understand blockchain and its potential,” said Aziz. “Many senior strategic managers lack knowledge, experience and understanding of the potential of blockchain.”
The researchers conclude: “Your organization or industry cannot sit on the sidelines for three to five years waiting for the technology to mature. If the blockchain solutions are relevant to your business, you should start preparing a non-technical and technical foundation progressively for the eventual mainstream operations.”