Rethinking Competition and Collaboration in Ecosystems: Who Should You Work With?

One of the themes that keeps emerging in the work of the Cambridge Service Alliance is the importance of the ecosystem. We define an ecosystem as the wider network of firms and organisations that can or could influence the way the focal firm creates and captures value through the provision of its products and services. Members of this wider network might include, but are not limited to: collaborators, regulators, clients, customers and consumers, their stakeholders, suppliers and competitors.

Why does an ecosystem perspective matter? The first reason is that thinking about ecosystems encourages executives to take a broader view on the opportunities they face. This argument was first made by Moore in his Harvard Business Review article - "Predators and Prey: A New Ecology of Competition". As the boundaries between traditional industrial sectors break down organisations change the way the create value for their customers. Take a simple example - airlines. Are they in the travel business? After all their primary function is to transport people from A to B? Are they in the entertainment and catering business - they feed and entertain people while on their planes. Are they in the holiday business? Witness the emergence of BA and Virgin holidays. Are they in the telecoms business - think about in flight telecoms and wireless services. Even more extreme examples are seen in electronics and telecommunications. Phone companies now double as internet service providers. They offer on demand TV and video services. They are debating what else they can do given the cables they have running into your house. Utilities companies in general are blurring - water companies will provide gas and electricity. Gas companies will reduce the price you pay if you buy electricity from them as well. An even more radical example is provided by electric vehicles - some are exploring how they might be used as energy storage devices when not being driven. Boundaries between sectors are blurring and disappearing. As they do new opportunities emerge. Being constrained by a logic which says "we are an automotive firm" or "we are a pharmaceutical firm" simply limits innovation and creativity.

This theme of innovation and creativity is a second reason why ecosystems thinking is so important. Firms define often themselves in terms of their markets, customers and competitors. Yet one thing we have seen in our work is the increasingly complex nature of inter-organisational relationships. It is common to see firms competing for some contracts, while collaborating on others. IBM, for example, competes with software vendors such as Oracle and SAP, yet also installs Oracle and SAP systems when their customers want them to. BAE Systems partners with Babcock to deliver services at Portsmouth Naval Base, yet competes with Babcock for other MoD contracts. This complex and nested set of relationships raises some interesting questions. If you define another organisation solely as your competitor there's a danger you miss opportunities for innovation and collaboration. The car industry provides an excellent example. Many car manufacturers have close relationships with (or in some cases own) Dealer networks. They see the Dealer as the primary route to market and the obvious choice for all after-sales service and support. Yet there are loads of small, independent garages that offer vehicle service and support. Often customers prefer these independent garages - they are cheaper, operate with lower overheads and only use genuine original equipment spares when needed. Traditionally the automotive manufacturers have seen these independent garages as the enemy. They take work from the Dealer network, build direct relationships with the end customer and generally disrupt the industry.

But if you draw a broader circle and include these "annoying independent garages" in your ecosystem, you could - as an original equipment manufacturer - start to ask how might we collaborate with these independent garages? Should we offer to manage their spare parts inventories through consignment stocks? Should we provide them specialist tooling and equipment, creating a larger market for proprietary technologies? As the use of telematics and remote monitoring increases, should we - the original equipment manufacturer - sell the engine diagnostic data to independent garages to help them provide better service to their customers? Perhaps the original equipment manufacturer can create a more seamless, integrated and lower cost service for their customers by collaborating with their traditional competitors.

Its only when you start to challenges the assumptions that you hold about how your industry operates and where the boundaries lie that you start to think creatively about the opportunities that are open to you. Taking an ecosystem perspective and broadening your horizon is a great way of thinking about how you might innovate your business model.

Business Model Innovation and the Evolving Market for Electric Vehicles

Much has been written in recent years - both about business model innovation and electric vehicles. One of the Cambridge Service Alliance PhD students, Claire Weiller, has been studying the evolving market for electric vehicles - looking at the business models adopted by Better Place in California, TEPCO in Japan, Autolib' in Paris and Move About in Norway. Claire's just finished her PhD thesis and I thought it was timely to create a short summary of her research insights. Of course if you want the full story you'll have to: (i) talk to Claire, (ii) read her thesis and/or (iii) have a look at the various reports available on the Cambridge Service Alliance website. For the sake of efficiency, however, here's a short summary of Claire's key findings...

There's no uniform business model for electric vehicles...

The first thing that the research shows is that there is no uniform business model for electric vehicles. The different firms studied adopted different models - ranging from battery swapping (Better Place), fast charging (TEPCO) through to mobility as a service (Autolib' and Move About). Clearly there are different pros and cons to each of these business models.

Battery swapping as a business model...

The battery swapping business model is based on the premise that the cost of the battery is a significant deterrent to customers buying electric vehicles. So Better Place experimented with a model where customers bought cars, but then leased batteries from Better Place. The idea was that when the battery was running out of charge you could call into a battery swapping station and replace the discharged battery with a fully charged one in less than five minutes. Customers pay a monthly fee for the privilege of using Better Place's services, as well as a charge "per mile".

Better Place filed for bankruptcy in May 2013 despite having raised $850 million investment. The fundamental flaw in the model was the failure to create a standard battery adopted by multiple auto manufacturers. Because the Better Place battery was not widely adopted it became impossible to efficiently manage the range of inventory - different batteries for different makes of vehicle. The battery swapping model could still work, but it requires coordination across the ecosystem, with the vehicle manufacturers agreeing a standard for batteries that would simplify the challenges of logistics and distribution.

Fast charging as a business model...

One of the barriers to consumer adoption of Electric Vehicles is the issue of range anxiety - the fear that the car won't go as far as you need it to. Couple with this is the time taken to refuel the car (or recharge the battery). If it takes too long and you have to recharge frequently then clearly Electric Vehicles offering significantly worse performance than regular cars. To address these concerns an alternative business model is fast charging - firms like TEPCO (Tokyo Electric Power Company) are investing in technologies to speed up the time taken to recharge batteries. Today's fast-charging technology allow a 100-mile electric vehicle with 24kWh of storage to fully charge in less than 30 minutes. Even 20 minutes gives an 80% recharge. TEPCO - through its CHAdeMO fast-charging connector - have been trying to shape an international standard for fast-charging technologies. They appeared to be making good progress, but were blown off course by the Fukushima tsunami that severly damaged four of TEPCO's six nuclear reactors. The subsequent clean up costs and the decision to shut down nuclear reactors in Japan have put an enormous financial burden on TEPCO and so their efforts recently have been diverted.

Mobility as a service...

The final business model studied concerned mobility as a service. Both Move About (Norway) and Autolib' (Paris) were examples of this. Under the mobility as a service business model customers do not take ownership of the product, but instead pay for the right to use the product - through a monthly subscription fee - supplemented by a time-based usage fee. The context for both Autolib' and Move About is interesting. Autolib' is heavily supported by the Marie de Paris and focuses its service on Paris and the surrounding 63 municipalities. Bolloré, an industrial conglomerate with activities in transport, infrastructure and logistics, won the contract to support Autolib' and provides the cars, as well as the charging infrastructure. The density of Paris - 105km² versus London with 1,570km² - means that a car with a 250 km range covers almost 100% of daily drivers needs. Move About, based in Norway, also benefit from natural resources that make electric vehicles more appealing. In Norway's case there is a significant over-capacity in hydro-electric power. This means that spare electricity is relatively cheap and so the costs of operating electric vehicles drop significantly.

Fit between business model, ecosystem and environment is the key to success...

One of my key take aways from this research is the importance of the fit between the business model, the ecosystem and the broader natural environment. Autolib' and Move About's relative success are a function of small and dense distances for travel - e.g. Paris and its immediate surroundings - coupled with cheap (or subsidised) and plentiful energy supply. Better Place failed because it didn't engage its ecosystem partners - it could not create the standard battery. TEPCO failed because of a natural disaster which diverted attention elsewhere. Without these interesting experiments and forays into new business models we'd never learn which worked best, but without alignment between the business model, the ecosystem and the broader environment, it’s clear that firms struggle to survive.

Innovating Your Service Business Model: The Capabilities to Succeed

One of the themes we have been exploring in the Cambridge Service Alliance is the question of how organisations best innovate their service business models. In some of our early work, Ivanka Visnjic and I, developed a framework of 12 capabilities that underpin successful service business model innovation. Since then we have been developing and iterating this framework, creating a maturity model that firms can used to assess the maturity of their capabilities for innovating their service business models. It seemed to me that it would a good idea to write a series of blogs on this framework and the twelve capabilities that underpin it - so here's the first one - explaining the framework.

In essence our research suggests there are four categories of capability that really matter when it comes to innovating the service business model. These are: (i) the ecosystem; (ii) the value proposition; (iii) the value delivery system and (iv) accountability spread. Let me explain these in turn.

The first set of capabilities are concerned with the ecosystem - increasingly competition is taking place at the level of the ecosystem, not the individual firm. In today's interconnected economy, what matters is the way the ecosystem is configured and how your firm is positioned to capture value from it. Apple and HP illustrate the point. If you ask the question - "of the $1,000 someone pays for an Apple or HP machine, who gets the money" - you find that Apple keep 60-70%, while HP keep only 30%. Why the difference? Because Apple use their own proprietary operating system (they don't cede money to Microsoft), they use their own chip (they don't cede money to Intel) and they have created their own distribution infrastructure (they don't cede money to the retailers).

So what can HP do? It is too late for them to develop their own operating system or get into chip manufacturing. Both technologies are too well established, with large incumbent players and high barriers to entry. The cost of establishing a retail infrastructure, certainly a high street retail infrastructure, is prohibitive. But what they can do is invest in Linux. If HP help Linux become a more dominant operating system then Linux reduces Microsoft's power in the marketplace and hence their ability to appropriate value, leaving more of the money on the table for HP. And in fact, it is in the interests of all of HP's traditional competitors to increase the power of Linux. So if HP collaborates with other laptop manufacturers, then collectively they can try to shape the ecosystem and their ability to capture value.

It is not just the ecosystem perspective that matters. The second theme that we saw in our research was the importance of innovating the value proposition - really understanding what the customer valued and the outcomes they were looking for. There's an old Theodore Levitt quote - "customers don't want quarter inch drills, they want quarter inch holes".  We don't think this is right. Customers don't even want quarter inch holes. When innovating your value proposition you have to understand why the customer wants the quarter inch hole. If it is to hang a picture, then how else might the picture be hung - you could glue it to the wall. You could invite an artist in to paint the picture on the wall. The key to innovating you value proposition is to understand deeply what your customers really value.

Beyond the value proposition, the third category of capabilities centred on the value delivery system. Here we are shifting into the question of how do we configure the resources and activities required to deliver the value proposition. What should we do? What should we ask others to do? Many of the services firms deliver today require networks of organisations to pool their capabilities. Understanding the right network structure and identifying the right partners is essential when innovating the service business model.

Finally, we shift to capabilities concerned with accountability spread. Here the idea is that by taking on responsibility for the outcomes your customers want - you increase your risk and exposure. By innovating the value delivery system - either through technology or partnering with others - you may decrease the control you have over the ecosystem. Hence you have increased your accountability, but potentially reduced your control - hence you may have increased your risk or accountability spread. Understanding the implications of this and how the risk will therefore be managed is paramount if the service business model is to be sustainable.

These four categories of capability - ecosystem, value proposition, value delivery system and accountability spread - form the highest level of our framework for understanding business model innovation. In future blogs I'll unpack each of these categories in turn and explain the capabilities that underpin them.

Professor Andy Neely

Director Cambridge Service Alliance 

How to Succeed and Make the Shift to Solutions in Today’s Fast Changing Business World

Operating in fast changing global business environments, presents real challenges even for the most successful corporate enterprises and as former market leaders like BlackBerry have learnt to their cost, competitors are always ready and waiting to step-in and take over your market share. What should “Corporates” do to maintain their competitive advantage, and plan for the future? Here Professor Andy Neely, Director of the Cambridge Service Alliance, discusses a concept that is helping to make sense of these many challenges and bear traps – it’s called “the shift to service solutions”. 



Listen to a Podcast with Andy Neely on the topic of this blog

This October like others, the Cambridge Service Alliance held its annual Cambridge Service Week Conference bringing together speakers representing the market leaders in their field, Caterpillar, Finning, IBM, Pearson, and even the Northern Arizona University - which is teaching completely online.  

We wanted to look at what we term “the big shifts” that are going on around the World as organisations look at selling solutions and services rather than products. As firms have sharpened up their business operations to become more competitive they are increasingly looking at selling the outcome that their clients want rather than merely the ownership of the product. 

All these business changes are taking place in a World where climate change, water shortages, demographic changes, and a scarcity of resources are putting huge pressures on decision makers in both the public and private sector.  

One of our Cambridge Service Alliance members with an interest in this shift to services is Caterpillar. Caterpillar machines and products might typically last for thirty years but if you sell a machine tool for one million dollars, it is probably worth about four times that if you include over the course of that products life time, the spares and support services that can be sold around it. The big challenge for Caterpillar in today’s fast changing business environment is not just how do they sell their machines and products, but how do they capture the relationship and then the support that they can then offer on the back of the sale of that product to make sure their customers get what they  want, which is the ability to move earth, or extract coal from the earth. The customer doesn’t necessarily want the machine itself, it wants the outcome the machine delivers!

Cameron Ferguson, Caterpillar

Cameron Ferguson, Manager of Global Dealer Capability in the Customer Services Support Division, Caterpillar, told me:  “Our customers make lots of choices about where they are going to get their services done, by themselves, by Caterpillar or by another party so we want to make sure that Caterpillar is at least being considered to being the preferred and primary service supplier. We can do that through solutions rather than just the traditional linear service, but a solution that says, “We can guarantee up time, we can guarantee costs per hour we can guarantee parts availability”, whatever it maybe that is tailored to that particular customers’ needs.”  

Surprisingly as the Caterpillar example shows, what we call “the vision” planning is relatively easy. You can understand the role that technology or data might play in enabling you to remotely monitor your equipment or in the education world to remotely monitor whether students are completing their course assignments and are therefore likely to graduate from the programmes they are taking.  However the planning process gets tougher when you want to put the right technological structure in place. You will need to get the right behaviour in your organisation and you will need to get your customers to accept these solutions and services! As you can imagine, that will involve a significant change process in any organisation – what we term “the shift to solutions”.

We have learnt that rarely does a single organisation have all of the capability to deliver the service solution or the outcome. Increasingly this shift requires networks of organisations to come together, to pool their resources and capabilities to create solutions for their customers.  So who are the players in these new networks and how do they emerge?

Increasingly, we are finding that these new networks involve firms who are traditionally competitors, who come together for the purpose of providing a better service for their customers. We find this work fascinating and revealing. There are some really interesting dynamics around the way firms collaborate, when they compete and how the ecosystems they are working in take shape.

Hold onto your seats, working towards these service solutions requires your business to be quick off the mark and ready for a white knuckle ride. It is clear that as your customers’ business model changes, and what they do changes, you will also need to evolve your business, but here comes the scary part, as you evolve your business, that in turn will allow further evolution in the customer’s business model too, which in turn demands further evolution in your own business plans! Responding to the challenges of business today will require a continuous process of evolving your capability.

We know that firms have thought about competition between firm A and firm B, but now people are worrying about competition between the ecosystems they have traditionally worked in together, and the roles each play in that system. You will need to think very carefully about where you want competition, and who you want to collaborate with! Maybe you should ask yourself if you want to encourage competition between some of your suppliers, and if perhaps you use multiple suppliers for different technologies or sub- assemblies, or data, which ones you might want to encourage competition in, and which part of the ecosystem that would impact on. At the same time you may want to plan for change simultaneously in another part of the ecosystem as well. This means that your boardroom strategic discussion is much more about the way the ecosystem works and your role within it, rather than the traditional model of: “we want to compete with firm A or firm B”.    

Certainly a business model that can react with speed and the ability to evolve your business model over time is very important for some industries. You will need to think about the clock speed of the industry you are in, so in some industries the pace of change will be incredibly fast while in some industries it will still be more measured, so therefore you can afford to be slightly slower in evolving the business model.

One of the things we have learnt in the Cambridge Service Alliance is that there are ten basic lessons that you need to get right if you are going to make a successful shift to solutions management. Let me give you three of these.; You will need to understand risk and the transfer of risk and if you offer solutions to your customers find out what risks you are being asked to take on and how that plays out over the longer term? The context really matters too, so you have to ask yourself – “Are we ready to make this transformation as an organisation, can we break away if we are a product or technology business from our technology heritage and worry more about service?” In terms of context, you are really asking- “Is the customer ready for our service?”

The third question to think about is: how do we design the customer service experience to create the right emotional response as well as delivering the pure technical service. Our Alliance partner, Finning have thought carefully about what their customers’ want and if they can support their customers. Finning know that their customers want equipment that works, they want no down time so they  have put processes and products in place that meet those needs,  but they have also built a centre that creates a great customer experience too. Customers walk in and have been known to say: ““Wow” are you really monitoring three-thousand pieces of equipment remotely, are you really watching what is happening, and looking after our equipment, you are like a safety blanket for us?” This is a valuable service so that emotional response from the customer is partly created from the design of the control centre in Finning’s case as well as the products and services it is selling.  

Lucy Courturier, Finning

Lucy Couturier, Finsight Manager,  Finning,  told me: “We have really become involved with the concept of Ecosystems since working with the Cambridge Service Alliance and we now ask ourselves: “who are all the players”? We take into account everybody that has an impact or that we impact in our day to day operations. We have customers, competitors, suppliers, and we need to understand how each of those interact to be able to provide the solutions that customers want. We can’t just look at one part of that puzzle, we need to understand that complex web of relationships to manage it effectively. The customer experience is as important to us now as the business side is. The customer experience and the relationships they have with us, is as critical in moving us forward.”

Mark Anderson, President, Schools & Higher Education Strategy & Business Development, Pearson, says the growth in those needing higher education in the World and the technology changes that are taking place, means the sector will need to adapt to change on both fronts on a huge scale in the future. He told me:  

Mark Anderson, Pearson

“There is an enormous growth in demand for higher education, at the moment there are about 180 million people in tertiary education, and in about thirty to forty years’ time that will rise to about  500 million people. Countries like China, Brazil, India and South Africa will expand their education systems and at the same time the development of technologies is pluralising access to and availability of education, so we will we have to bring these two changes together.  

“The ecosystem concept is one we have worked closely with through the Cambridge Service Alliance, we probably didn’t use it previously but if you are a company like Pearson where for hundreds of years you have essentially been selling books, you had a relatively simple ecosystem consisting of book producer, distributor or intermediary, book seller, and student, there was a linear progression. Now there is a far more complex diverse international mix of organisations who have a stake in education. Governments are now more activist in education too, so we need to track a world which is more complicated with a lot of new entrants who are having a rapid and an immediate impact. Our business environment is changing very quickly and an ecosystem model is a very good way of tracking that.”  

As these stories from Finning’s and Pearson show the experiences of others are really an important part of the business journey. Ecosystems are a really good way of thinking how you might innovate your business, how you might come up with services and solutions but remember just because you have come up with them, doesn’t mean to say that you can implement them. There is a lot of hard work to do to bring those visions, those ideas, those innovations, to reality.

I hope we can help our partners come up with the innovations and then help them execute them too, this is what we mean by the shift to service solutions. Hold tight, it could be a roller coaster ride, but we guarantee it will be full of excitement.

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