Last week we introduced new disruptive business models resulting from fragmented value chains and enabled by availability of data and increased connectivity. As a result, organisations need to make strategic choices on how and which parts of the value chain they will compete in.

This choice implies organisations decide where they won’t compete, thus the second order question becomes: how do we engage with others in the value chain in order to win in our chosen markets?

Introducing the Value Exchange

Leaders in the Digital-era think in terms of partnerships, alliances and ecosystems: co-ordinated networks of partners, suppliers, intermediaries, customers and competitors that engage and collaborate digitally to unlock more value than they could have created in isolation.

At the core of any ecosystem is both the explicit and implicit value exchange between parties – no longer limited to the financial exchange for goods and services – this value exchange now includes access to customers, increased traffic, brand association, additional offerings, scale, data (with permission), behavioural nudges (such as rewards), exclusivity and capability.

It is no surprise that seven of the 10 largest organisations globally are ecosystem players and continue to upend traditional demand and supply economics and MBA strategy case studies!

Choosing roles on the playing fields

Ecosystems are inherently nebulous and fluid – an organisation can find itself playing multiple roles across different ecosystems – so codifying them can become somewhat a fool’s errand. However, as a starting point, we suggest considering the various roles in each of the business model layers introduced previously:

  1. Distribution layer: Hosts of the distribution layer leverage their customer intimacy and the strength of their brand and channel offering. They recognise the strategic importance of providing a broad range of offerings to meet the customer need and maintain their relationships. Xero, initially focused on providing “beautiful accounting software”, now hosts a marketplace with over 500 apps for small businesses from inventory management to payroll.

Participants in the distribution layer see value in gaining access to more customers or by reaching them closest to their point of need. As such, we see retail banks now looking to provide peer-to-peer payments through existing messenger platforms.

  1. Manufacturing layer: Hosts of the manufacturing layer have superior innovation systems and often adopt venture capital-like characteristics – to the extent that many incumbent organisations have established dedicated investment or venturing arms.

Participants in the manufacturing layer are also skilled in product innovation and recognise the value of integrated solutions in order to meet a wider set of customer needs. The Internet of Things is amplifying this space with examples such as Google Nest and Mercedes collaborating to enable remote control of a home thermostat and lighting from the car.

  1. Information layer: Hosts of the information layer leverage strengths in data manipulation and advanced analytics to create meaning and value for customers. Furthermore, they recognise the greater potential by combining data sources from external and open sources. Sainsbury’s and Nectar collaborated to create an ‘Insight 2 Communication’ marketing solution which allowed Sainsbury’s to better understand buyer behaviour and Nectar to leverage Sainsbury’s brand level performance data to optimise in store campaigns. 

Participants of the information layer recognise the value of the data they hold, often exposing open or private APIs to selected data consumers from which to create additional products and services. For example, John Deere provides access to its machinery data to enable digital farming and construction solutions built by third party software providers.

  1. Infrastructure layer: Hosting at the infrastructure layer leverages superior [business and technical] integration and orchestration of best-in-class capabilities, providing a business platform for organisations. They recognise the limited value in building and running non-differentiating capabilities. Adidas and Siemens successfully collaborated to create an intelligent manufacturing plant which leverages Siemens’ decades worth of expertise in automated and digitalised production through Adidas sportswear.

And finally, participants in the infrastructure layer are those that realise the value of their intellectual property, platforms, superior capabilities or existing investment to underpin entire businesses. The development of Ocado’s Smart Platform sees it provide a world-class suite of solutions for operating online grocery businesses; likewise, mobile virtual network operators (MVNOs) utilise existing network capacity.

Aligning the operating model

To shift an organisation to compete in an ecosystem world, we believe there are three critical success factors:

  1. Ecosystem strategy: Managing an organisation’s role in ecosystems can be akin to The Prisoner’s Dilemma. Collaborators can turn to competitors, and what was once a mutually beneficial value exchange can turn (such was the relationship between Starling Bank and Transferwise). The capability to define where to play and establish (and monitor) the rules of engagement needs to be strategically developed and elevated within organisations.
  2. Third party proposition design: Once strategic choices have been made, organisations can apply design-thinking to the attraction, on-boarding and in-life servicing to build a compelling partner-facing proposition. The strength and longevity of an ecosystem is a function of how well an organisation can attract and retain a deep bench of partners.
  3. Support function alignment: And finally, an organisation needs to understand the impact of these propositions on the core support functions. Too often outdated risk policies, procurement expectations, cloud policies, cultural norms or internal governance processes are not compatible with many third parties (especially digitally native ones). Aligning the whole organisation to the strategic ambition is key to a successful value exchange.

As customer expectations continue to heighten and new forms of competition emerge along the value chain, organisations will increasingly struggle to succeed in isolation. Those that win in the Digital-era will be strategic about how they engage with others to create value for customers.

Join us next week as we delve into how digital organisations are designing their offerings and their businesses around a deep understanding of, and obsession with, customers.

Please feel free to reach out to Robert Ward or James Beckett to find out more about how our Twelve Shifts can underpin your digital strategy or transformation journey.

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