How to discover and realise new ideas about value
A decade back GE created a platform for health, called healthymagination, and in 2011 made its first attempt at organising an ecosystem in the area of breast cancer research. The idea was to attract data scientists and analysts to crack the code on breast cancer diagnosis. It was an attempt, in fact, to identify the new ecosystem of cancer research, according to the senior marketer at GE responsible for Healthymagination, Beth Comstock.
Healthymagination still exists but you’d be hard pressed to see a platform and ecosystem play there today. Although it launched in 2009 with great fanfare, the site now looks moribund, with only five products listed among its achievements.
One diagnostics improvement ecosystem did emerge from those early days of ecosystem thinking – and still exists today (Diaceutics) – embracing 2500 labs globally. However, it was created by a small company rather than a behemoth.
So why is it that one of the world’s most successful and experienced companies struggles with the ecosystem model?
The answer is that value discovery and value distribution in ecosystem business models requires a sea change in corporate attitudes.
According to fellow ecosystem thinker Erich Joachimstaler, the big difference between established company strategy and startup ecosystem building lies in a genuine desire among the latter to change the world and also to let value flow freely to each participant. Profit is still good but value belongs to a much wider group than the beneficiary of capitalism’s conventional centripetal force.
If that’s true, that value distribution takes equal place with profit, then the economics of ecosystems changes how we discover, manage and deliver value.
Why should that matter to you? There are a couple of reasons. The first is that ecosystems reorganise industries. They are the organisational form that fills the void when system level changes take place (for example, the transition to a data driven agri-industry, the slow transformation of finance, the electrification of all infrastructure and mobility…).
The second reason is a bit more difficult to swallow. The management consultancy group McKinsey points out that in most industries ‘10 per cent of companies create 90 per cent of total economic profit (profit after subtracting the cost of capital), and …. only one in 12 companies moves from being an average performer to a top quintile performer over a ten-year period.’
Sorting out the stragglers
In other words 90 per cent of companies, at least, are not very good at creating value. And even fewer can create substantial new value. Mediocrity is an unfortunate norm and most companies regress to it over time.
So if you are not obsessing over value right now, if you are not thinking, how can I get my teams more focused on how to deliver value, then you’re not doing your job. If you are not puzzling over how ecosystems fit into the new pattern of wealth creation then you are likely to remain in the 90 per cent of stragglers.
And of course the job of management is changing. As The Economist put it recently, the ability of management to allocate capital to investment projects is becoming a less relevant part of the senior skill set.
More important is to understand data flows and what they are telling us about markets, customers, and the outcomes of our experimental forays into new areas of business.
These changes should sound a call to think differently. So how should we think differently about how we discover value?
Think value discovery, think differently
Value discovery is one of the most vexing issues in business. Ideas about what might be of value are abundant. We have no shortage of ways we think might create value and therefore profit. Companies and startups are evidence of the ideas’ avalanche.
That abundance is what has driven many modern business theories and toolkits such as Lean Startup and Business Model Canvas.
The first of these is a reiteration of the kinds of spiral iterations that would be familiar to R&D departments back in the 1950s. Build a prototype, bring customers in, test and iterate. The latter, Business Model Canvas, is all about checklist discipline, the tasks you need to check off on the way to being a good startup.
The first issue these business theories present is that they put the project at the heart of an economic activity. Success means being a magnet for profit rather than creating a broader movement. They are really tools for yesterday’s entrepreneurial mindset.
The reason for their popularity though is that most startups fail. Startup ecosystems are tremendously wasteful. Just as 90 per cent of profit is made by 10 per cent of companies, the attraction of startup life is sustained by a very small proportion of successes.
The second issue with Lean Startup and Business Model Canvas is that neither is telling you how to discover value. They are really guidelines for how to do the accounting (Lean Startup helps refine the entrepreneur’s understanding of potential ROI). Business Model Canvas is a coaching kit for entrepreneurs who want to cover all the bases on the way to funding.
However, for entrepreneurs, managers, leaders or anyone involved in innovation, there is a step before this.
One way or another, people come up with new ideas for how to supply value. It can sometimes happen when two fields intersect (computing and mobile phones) or when new technology infrastructure becomes available, allowing us to manage at a new kind of scale (booking.com).
It can happen, as is happening right now, when entrepreneurs realise that there is a new game in town, e.g. connectivity. Connecting drivers and passengers, restaurants with diners, people with family and friends, peers with a need for currency, or social search (or peer guidance) facilities like Spotify or asset optimising through data.
Entrepreneurs either dive deep into a segment to spin up a new business, they skim the surface by providing connections or they add value to existing offers out in the market. Either way, these days, they don’t need to convert raw materials to new products.
Platforms are transaction hubs
But do they need to rely on platforms? What if the idea of platforms as a focal point of value was in fact wrong? To answer that, we need to understand more about why companies would chase after the platform and ecosystem model.
Historic company performance metrics show most companies struggle to break out of mediocre performance. But they are not under a cloud because of all the transformation that’s taking place around us.
Transformation represents another layer of difficulty in business management, to be sure, but it also represents a liberation factor. If companies arrive at a place where more people have access to the data and insights to be creative about fulfilling customer needs, then a breakout is possible. We can break out from conventional value chains. The concept of value is freed up. We can seek it out more or less anywhere.
Ecosystems and value creation
For example, in my world digital cameras have value. It is my main hobby. But that value is enhanced immeasurably by the videos on YouTube that tell me how to achieve my goals with the camera. For better or worse, the camera manufacturer does not create this value. The ecosystem does. The manufacturer foregoes the opportunity to have a relationship with me and lets the value pass by.
Companies such as this camera manufacturer have an operating model. It’s one that can be drawn alongside the organisational model. It tells them what functions they need in order to stay in business. The broader view of value, however, is a scary proposition for them. Suddenly the pool of value is all around them, quite outside their models and their capacity to capture or control it.
Often they can coexist with the ecosystem but in some industries, like design, participants encroach on profitability and revenues. As an example, look at Canva providing value that Adobe either ignored or refused to give as the ecosystem expanded the demand and supply for easy designs. Many companies in transformation struggle with the very presence and existence of their ecosystems.
They talk about an As Is state, describing today’s operations, and a To Be state, representing their future operating environment. The whole pathway from As Is, through various layers of transformation, to a To Be can seem like a hideous mystery to them.
To reassure business leaders that they are not doing too badly in this suspenseful narrative, it is becoming increasingly common to refer to their decision environment as complex. In the past management was complicated but today it is complex. And complex means too many unknowns. If you are a poor performer it’s actually because you’re a victim of complexity. Poor you.
To replace a fear of the unknown leadership teams are encouraged by their consultants and gurus to choose a model – the Spotify Model, the ING model, Scaled Agile Framework, or a Platform and Ecosystem model. And that’s what’s happening. Companies opt for the model without exploring how value is changing in their own specific context. They opt for the model and then struggle for years to understand why it is not working.
The problem is that the essential elements of value, and its management and distribution, do not lie in the “platform”. The platform is essentially a transaction hub. No model can replicate your context and your context is likely to be the encroaching power of the ecosystem.
Value discovery as art
Models like platforms and ecosystems are very reassuring. Advocates of platform and ecosystem theory place a lot of emphasis on a pseudo scientific framework to prove that the platform not only works but its success can be predicted. In this framework setting the right price attracts members from two sides of a market and then network effects kick in and accelerate growth. Check the maths…
My own take on this is that those who try to replicate a model would be better off exploring the sociology of ecosystems rather than the economics of platforms.
Ecosystems are held together by information or content. The same is true of any market. The more transparent the information flow, the more economists think of it as perfect. If everybody had perfect information then we would have perfect competition free of market friction and asymmetries.
Information, or content, is what ecosystems provide in abundance. The nature of ecosystems is that they are so transparent and so porous that information is widely open to manipulation and false or fake content. However, that doesn’t change the fundamental position that modern economies are creative and dynamic because they are open. Information is created at most of the nodes in a network and is shared abundantly.
The age of information
As an example of this open information exchange, consider text messaging. By 2014 the average American sent 32 texts per day, excluding app to app messages like WhatsApp (with those aged 18-24 already texting over 100 times a day). By 2016 Apple was handling 200,000 texts per second on its iMessaging service. By 2018 WhatsApp was handling around 2 trillion messages a month. This is free, instant communication. How quickly we communicate has been transformed. Most texts are read within five seconds of being received.
Value lies in these abundant interactions. Every message, tweet, blog post or image holds a clue to where value is emerging or has emerged. The very existence of such abundant communications shows also that what humans value perhaps as much as food and shelter is communication.
Before it was enabled would we have even dreamt that people have a compulsive desire to be present when they are absent, to continue conversations asynchronously with their networks through the day and to raise the bar of information, education and learning as a reflex habit?
Communications fervour spills over into communications fever of course. But what enterprises need to be more conscious of is that people communicate not just to channel word of mouth marketing for them.
They communicate a small p politics, collective righteousness over issues like climate change, healthcare and diet, food supply, minimalism and risk mitigation. They communicate all the ways they see of changing the world.
That’s why one important strand of ecosystems is fundamentally about social and economic transformation. In the next article we’ll look at tools for identifying value and matching it with ecosystem partners.