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32 MIT SLOAN MANAGEMENT REVIEW FALL 2018 SLOANREVIEW.MIT.EDU
WHAT’S NEXT WITH BLOCKCHAIN: STRATEGY
WHAT PROBLEMS
WILL YOU
SOLVE WITH
BLOCKCHAIN?
Before jumping on the bandwagon, companies need to carefully consider
how ledger technologies fit into their overall strategy.
BY TEPPO FELIN AND KARIM LAKHANI
DISTRIBUTED LEDGER TECHNOLOGIES — collectively known as
blockchain — have burst onto the business scene, accompanied by a
significant amount of hype.1 They are widely expected to disrupt exist-
ing industries and lead to the creation of new types of companies.
Some of the excitement may indeed be warranted, but only if orga-
nizations focus on how these technologies can be used to support their
strategy. Without that lens, companies risk making large investments in
initiatives that don’t create meaningful value.
However, with careful planning, businesses can use blockchain to
gain an edge over rivals in a number of ways. It can provide a founda-
tion for powerful applications that will streamline core operations. Distributed ledger technologies can
lower transaction costs and make intellectual property ownership and payments more transparent, seam-
less, and automated. But companies should resist jumping on the bandwagon until they first understand
34 MIT SLOAN MANAGEMENT REVIEW FALL 2018 SLOANREVIEW.MIT.EDU
WHAT’S NEXT WITH BLOCKCHAIN: STRATEGY
what specific problems they can solve with block-
chain — and for whom. How will it help them
reach new customers? How can it improve effi-
ciency or transparency in their supply chains? And
most important, what will blockchain enable them
to do that competitors and new entrants can’t do?
Answering these sorts of practical, targeted ques-
tions will allow businesses to cut through the hype
and create a blockchain strategy that makes sense
for them.
To begin, it’s critical to understand the basic
uses and functionalities of blockchains, which tend
to get lost in the buzz. So we will provide a quick
primer on digital ledgers before discussing how
companies should build powerful problem-solving
applications that are uniquely configured to their
own strategies.
The Power of a Ledger
The first known ledgers date back some 5,000 to
10,000 years to Mesopotamia, where simple clay
tokens and stone tablets were used as markers of
transactions.2 They were a centralized form of re-
cord keeping that helped people keep track of things
like the price of barley, who bought the barley from
whom, or who owned or purchased a piece of land.3
Over time, such ledgers formed the basis of
wide-scale economic development and activity.
They allowed people to gauge who could be trusted,
leading to the emergence of reputation, credit, and
long-distance trade. Moreover, they helped resolve
disputes about goods sold and money owed.
In their simplest form, blockchains are the digital
equivalent of the old stone ledgers. They are mem-
ory devices — a kind of database — for recording
and verifying transactions and terms of engagement.
Just like their ancient counterparts, they can record
information about any number of things: who owns
a specific asset, who bought a particular product
from whom, or who has the right to make a certain
type of decision. And all of this information can be
aggregated to develop insights about, say, the reputa-
tions of parties involved or the origins of the supply
chain of a particular commodity.
What makes blockchains so powerful, however,
is the fact that they are distributed and digital.
Rather than having to physically record transac-
tions in one place, any authorized party can be
given access to either the entire ledger or specified
portions. As transactions take place between par-
ties, the distributed digital copies of the ledger are
instantly and simultaneously updated, and the re-
cord of each transaction is indelibly recorded
through advanced computational algorithms and
cryptographic locks. Depending upon the rules of
the particular blockchain, participating parties can
be either identified or anonymous. The decentral-
ized nature of the ledger means that parties can
more easily interact with each other — and have
confidence that the record of the interactions will
be fully memorialized.
Problems That Blockchain
Can Address
In creating a blockchain, organizations need to de-
fine the specific problem they are trying to solve.
Then they must determine which transactions or in-
teractions the blockchain should capture and who
should have access to which portions. (See “Key
Questions for Companies Designing Blockchains,”
p. 36.) Blockchains can be scaled and used to interact
with any number of different stakeholders, whether
customers, employees, suppliers, or other compa-
nies. Verification is a key benefit.
Take the seemingly simple task of verifying
someone’s educational or employment credentials.
A frequent problem employers face is that anyone
can claim on a LinkedIn profile or on a CV that he
or she completed a degree at a particular university
or worked for a particular company. A blockchain
identity solution could automatically verify an in-
dividual’s credentials for relevant third parties.
The types of problems that blockchains can
solve are far-ranging, spanning many industries
and contexts. Here we will explore just a few com-
mon examples.
Paying for contributions to intellectual prop-
er ty. The video game industry offers a useful
window into what’s possible when you define a
problem that a particular set of stakeholders face —
and then design a blockchain to solve the problem.
In this case, the stakeholders were the people con-
tributing their creativity and smarts to developing
games. And the problem was the cumbersome, ar-
chaic way in which royalties and rights were
managed across the industry.
THE
LEADING
QUESTION
How can
companies
strategically
benefit from
blockchain?
FINDINGS
*
For both startups
and incumbents,
distributed ledger
technologies can
enable new business
and operating
models.
*
They can also help
companies disrupt
existing industries.
*
To create value,
companies need
to systematically
link blockchain
technology with
their strategy and
capabilities.
SLOANREVIEW.MIT.EDU FALL 2018 MIT SLOAN MANAGEMENT REVIEW 35
ABOUT THE RESEARCH
This article builds directly on the authors’ respective research and teaching in the areas of strategy and digital
innovation, which are fundamental to thinking about blockchain. Teppo Felin has researched and written
about problem-solving and open versus closed innovation for several years, while Karim Lakhani has been
studying and writing about the challenges and opportunities of innovation contests, digital transformation,
and open innovation. The basic framework and examples of this article emerged as the authors developed
course materials related to blockchain. They have recently taught courses on blockchain strategy at Oxford’s
Saïd Business School and on digital innovation and transformation at Harvard Business School.
Developing a video game typically involves pro-
duction companies and game-publishing houses
(such as Sony Interactive Entertainment, Tencent
Games, Microsoft Studios, and Electronic Arts),
development companies, video game console mak-
ers, computer manufacturers, and mobile phone
makers, as well as contractors — writers, voice ac-
tors, composers, musicians, and so on.
For instance, development of the multibillion-
dollar hit Grand Theft Auto V (which has grossed
$6 billion in revenues between 2013 and 2018), while
credited to Rockstar North, a small company based
in Scotland, was actually the work of more than a
thousand people from many different companies
and corporate sub-entities, as well as scores of con-
tractors. To orchestrate all of this, companies have
traditionally relied on idiosyncratic agreements and
cumbersome one-off payments to compensate their
myriad partners. The use of royalties — and the
intricacies of how to manage and distribute these
payments — has further complicated the picture.
Until recently, developers, actors, and other contrib-
utors have had little sense of the size of the royalty
they might be entitled to. Moreover, the payments
often took months or longer to arrive.
Microsoft and Ernst & Young (EY) studied these
inefficiencies and designed a blockchain to address
the problems and provide transparency.4 The intel-
lectual property blockchain they created enables
companies and individuals to clearly specify, ac-
count for, and track the attribution of digital content
throughout the network of stakeholders involved
in the development and release of a video game.
Using the blockchain, authorized participants can
see a breakdown of royalty payments — as well as
data about sales and distribution — on a real-time
basis. The blockchain also allows for the easy cre-
ation of “smart contracts,” which can specify and
enforce rates of payment and other terms. This
automates processes that previously were extremely
labor-intensive, opaque, and costly. Legal and roy-
alty negotiations can now be simplified with a
menu of licensing and revenue-sharing options,
and agreements can be implemented quickly and
transparently.
Of course, the long-term success of this venture will
depend on many factors, such as the incentives for oth-
ers in the industry to adopt this particular blockchain.
(If adoption isn’t widespread, the blockchain be-
comes less powerful.) Still, Microsoft is likely to reap
some benefits, as it now can interact more efficiently
with the large ecosystem of developers, particularly
those who develop games for its Xbox platform.
To be sure, Microsoft and EY aren’t the only
ones tackling problems related to the management
of intellectual property, digital rights, and knowl-
edge work. A plethora of companies have been
looking at this area from one perspective or an-
other. In music, for example, Mycelia, a blockchain
initiative launched by British musician and record
producer Imogen Heap, is attempting to become a
digital management platform for musicians, help-
ing them manage contracts, allocate payments, and
track their creative works.5 (For similar examples,
see “Blockchain Is Changing How Media and
Entertainment Companies Compete,” p. 39.)
Establishing history of ownership. In addition
to addressing problems related to intellectual prop-
erty and licensing, blockchain is being used to
establish origins and ownership. Consider the dia-
mond industry, which has long been subject to
corrupt activity. In western and central Africa, for
example, rebel groups have used “blood diamonds”
to finance armed conflicts against governments. In
response, the diamond industry has attempted to
create provenance certification programs. The
proper tracking of diamonds could bring much-
needed transparency to the industry, ensuring that
blood diamonds do not support insurgents’ efforts
by preventing the gems from entering the supply
36 MIT SLOAN MANAGEMENT REVIEW FALL 2018 SLOANREVIEW.MIT.EDU
WHAT’S NEXT WITH BLOCKCHAIN: STRATEGY
chain in the first place. However, these efforts
haven’t been easy, as paper-based certification sys-
tems are prone to fraud and corruption.
London-based Everledger is one company at-
tempting to address this type of problem using
blockchain. Everledger offers provenance tracking
and verification for a variety of luxury goods, pro-
viding new value to industry players and reassuring
customers concerned about the source and quality
of their goods. It claims to have added more than
1 million diamonds to its blockchain, allowing it to
track not only their origination but also the entire
chain of custody up to present ownership. Through
blockchains, Everledger seeks to reduce the more
than $2 billion cost of annual jewelry fraud and
bring transparency and authenticity to the dia-
mond trade. Various jewelry companies, including
De Beers and Hong Kong-based Chai Tai Fook,
have launched similar efforts.
Making supply chains more efficient and
transparent. The ability to track provenance can
address another type of problem: reducing the
amount of inefficiency and lack of clarity in supply
chains. In early 2018, the Danish shipping giant
Maersk and IBM announced a joint venture to
create a real-time digital ledger for global shipping.
The cargo, transport, and shipping industry has
long suffered from a lack of transparency with re-
gard to the sourcing and timing of shipments,
which public ledgers might be able to solve.
Other companies are developing their own dis-
tributed ledgers to cover their entire supply chains.
Walmart provides a good example. For decades, a
critical aspect of Walmart’s competitive advantage
has been its point-of-sale inventory system, which
allows the company to track information about sales
in real time so it can quickly adapt its product mix to
local needs and trends. However, a distributed ledger
will extend this advantage by recording the origins of
raw materials and products in the supply chain. This
will also allow for more transparent consumer label-
ing and answer questions about sustainability in a
more timely and detailed fashion.
Walmart has already started to use blockchain
WHAT VALUE DO YOU
WANT TO CAPTURE?
• Information and knowledge
• Attribution and responsibility
• Access or permission
• Decision rights or votes
• Ownership or incentives
• Reputation and trust
• Contracts
• Transactions
WHAT ARE YOU
TRYING TO DO?
• Record
• Track
• Verify
• Aggregate
FOR WHOM?
• Customers
• Employees
• Suppliers
• Producers or makers
• Creditors or investors
• Governments
• Citizens
KEY QUESTIONS FOR COMPANIES DESIGNING BLOCKCHAINS
By examining what they are trying to do with blockchain, what value they want to capture
with it, and which stakeholders they hope to serve, companies can use the technologies to
solve strategic problems in a more targeted way.
SLOANREVIEW.MIT.EDU FALL 2018 MIT SLOAN MANAGEMENT REVIEW 37
Unfortunately, there’s no easy answer for how
any particular company should utilize or imple-
ment blockchain — if there were, everyone would
be doing it. So, where should managers begin? In
our view, companies can go a long way toward
developing the right approach to blockchain by
carefully considering three aspects of uniqueness:
their strategy, the capabilities they bring, and the
problems they can solve for stakeholders. These
three aspects are mutually reinforcing, and it’s in
the interactions between them that companies can
create significant value above and beyond what
competitors might be doing.
A company’s strategy is its distinctive point of
view about how to create and capture value — it’s the
one thing that can’t be outsourced.11 For starters,
then, companies need to think their strategy through
to ensure it embodies their beliefs and hypotheses
about the emergence of new markets and the possi-
bility of new products that have yet to be imagined.
Although companies can create value by cooper-
ating and interacting with others, such interactions
should be organized in unique ways. And it’s here,
at the nexus of uniqueness and cooperation, that
blockchains have the potential to generate signifi-
cant value. For example, partnerships such as the
Microsoft and EY blockchain initiative discussed
earlier can be seen as a targeted form of “open inno-
vation” that enables different organizations and
individuals to take advantage of their respective
strengths in conjunction with others.12 Microsoft
brings a vast mix of resources and past gaming indus-
try experience to this collaboration, and EY brings
its own set of resources. A joint effort thus can create
significant value beyond what either company might
be able to do alone. But such partnerships need to be
carefully crafted to suit the particular circumstances.
Companies must determine what they bring to the
table and how blockchains can support their strategy
in ways that are not foreseen by others, and then de-
sign and use blockchains accordingly — whether
working alone or in collaboration with others.
Next, the strategy needs to be linked to the
company’s unique capabilities and resources.
Established businesses often develop capabilities
over time as they interact with their suppliers, cus-
tomers, and stakeholders. Small companies and
startups often have difficulty replicating these
to track the provenance of mangoes as they are
shipped from Mexico to the United States and to
track its pork supply chain in China. The company
says its distributed ledger has shortened the time to
track produce from six days to two seconds, which
helps solve several problems having to do with food
safety, customs and regulatory filings, and auto-
mated payments.6 For example, the ability to
automatically and systematically track food origins
will allow Walmart to quickly identify the source of,
say, an E. coli outbreak — thereby reducing the po-
tential for a major crisis.7
In a similar vein, Chinese online retailer JD.com
has begun to pilot the use of blockchain to track
its beef supply chain from Australia to China and
address the problems of food contamination, mis-
representation, brand erosion, and product theft.
More generally, logistics and package delivery com-
panies such as UPS, FedEx, and DHL are actively
using distributed ledgers to optimize and create
transparency in supply chains and delivery systems
so that they can better serve both their business cus-
tomers and consumers with full origin tracking.
Blockchain and Your Strategy:
Three Aspects of Uniqueness
As excitement over blockchain spreads, established
players and new entrants across many industries
are actively searching for ways to utilize the tech-
nologies.8 But it’s worth noting that any new
technology — even one that might seem like a radi-
cal breakthrough — is a recombination of old
solutions and insights. Take Bitcoin. Many of its
basic applications (for example, time stamping and
cryptography) existed years before its founding in
2008.9 However, Bitcoin has reconfigured existing
technologies and insights in novel ways, thus en-
abling new forms of problem-solving.
Companies likewise need to understand how to
configure, design, and use blockchain technologies in
unique ways. Some may be tempted to adopt a wait-
and-see attitude regarding blockchain and become
late adopters. Understandably, many managers will
worry that large investments in the technologies will
outpace the gains.10 That’s a valid concern. But block-
chains promise to be as fundamental as the internet in
shaping how future business will be conducted.
Therefore, a wait-and-see attitude could be costly.
38 MIT SLOAN MANAGEMENT REVIEW FALL 2018 SLOANREVIEW.MIT.EDU
WHAT’S NEXT WITH BLOCKCHAIN: STRATEGY
capabilities (particularly in areas such as marketing,
human resources, and finance). Rather than being
caught off guard by new entrants, companies should
review their existing resources and look for ways to
leverage them with blockchain. Understanding
one’s capabilities is essential to the implementation
of blockchain solutions. Again, companies need to
bring something distinctive to the table beyond
simply “buying” the technology and skills.
Finally, uniqueness relates to the problems that
the company is attempting to solve for its custom-
ers and other stakeholders. That’s where there tends
to be a lot of low-hanging fruit and where block-
chain technology can potentially be operationalized
relatively quickly. Companies should consider how
the technology can enable faster, more efficient
interaction or increased transparency for their cus-
tomers or suppliers.
A simple exercise for managers is to carefully list
the problems that the company is currently solving
or grappling with as they relate to different stake-
holders. For each problem, managers can explore
in parallel how the previously discussed uses of
blockchain (for recording, tracking, verifying, and
aggregating) might improve existing practices.
Thinking about how various activities can help
solve problems — for customers, employees, and
suppliers — and carefully unpacking those activi-
ties, step by step, will help managers identify
blockchain solutions that can generate real value.
The buzz around blockchain probably won’t
subside any time soon. But companies can get be-
yond it by taking the time to understand what the
technologies are capable of doing and then system-
atically configuring blockchains in ways that align
with their unique strategy, their existing capabili-
ties, and the problems they can solve.
Teppo Felin (@teppofelin) is a professor of strategy
at the University of Oxford’s Saïd Business School.
Karim Lakhani (@klakhani) is the Charles E. Wilson
Professor of Business Administration at Harvard
Business School and cofounder of its Digital Initia-
tive. Comment on this article at http://sloanreview
.mit.edu/x/60115.
REFERENCES
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Reprint 60115.
Copyright © Massachusetts Institute of Technology, 2018.
All rights reserv ed.
