Is Your Value Chain In Danger of Becoming Part of an Alternative Value Network?
October 20, 2014
As consumers get more empowered, businesses must reinvent their value chain to become a value network embracing collaboration and co-creation. If not, someone else will. Those who control the digital customer experience control the crucial asset: The data.
Adapt or Die
With new technology also comes the need for businesses to adapt to these technological advancements. In one particularly memorable piece of dotcom journalism, Wired Magazine in September 2000 described how new media superstars Jeff Dachis and Craig Kanarick of Razorfish fame were rammed by CBS’ 60 Minutes II correspondent Bob Simon when trying to explain what exactly was their $ 2 billion business of recontextualization.
Allegedly, the pair failed miserably in explaining to the American television audience how they helped businesses to recontextualize or adjust to the new technology world order. But off-screen, Craig Kanarick succeeded in explaining their vision to the Wired contributor:
“What I’m interested in doing is not building another channel, an Amazon channel or a Web-based channel for Simon & Schuster, but more in coaching Simon & Schuster – ‘You know what? You need to scrap all that other stuff, give away Palm VIIs to every student in the country, let them download books from your new information server. Now with every $30 they were paying at Barnes & Noble, Simon & Schuster makes $3 on. Instead, just charge the student $3.50. You’re making more profit on your digital download than you did through your old value chain, but your new value chain says that you’re giving away something free in exchange for multiple uses of something that doesn’t cost you anything to distribute!’ That’s a radical transformation, or a recontextualisation of the book business!” (Wired 8.09, September 2000).
This was back in the days of the Palm VII – the first web-enabled Location Based Services mobile platform. Despite the years, the bubble and the crash, Kanarick’s vision still holds true today. He simply suggested that the publishing house Simon & Schuster exploit the new technology to do a disintermediation or bypass of the retail component of their value chain.
Back then at the turn of the millennium, peer-to-peer, illegal downloads and Napster were showing the big 5 record companies the true powers of the internet. The record companies took too long to understand what was going on, and when they finally did, it was too late. By then they had ended up in the arms of Steve Jobs and Apple, agreeing to chop up their beloved album format and sell individual songs at $0.99, only to gloom later over Apple taking the lion’s share of the revenue, making iTunes the world’s largest music retailer in the process.
Back then at the turn of the millennium, peer-to-peer, illegal downloads and Napster were showing the big 5 record companies the true powers of the internet.
What the record companies got wrong is a story told many times. One way of putting it is that they failed to understand the ongoing transition of their business model. They didn’t see how this new technology was about to fracture and disrupt their value chain. Instead, they kept to their business models, controlling the input factors (contractually binding the artists and their music), owning the means of production and distribution, the marketing efforts and, in some cases, even the retailers. In that respect, the record industry is a textbook case of incumbent firms failing to properly address the threats (or promises) of a disruptive technology.
According to scholars, disruptive technologies introduce a set of attributes different from what mainstream customers typically value. They also often perform appallingly on key dimensions relevant to those same customers. On the other hand, these technologies carry other features that a new set of customers value.
In the words of Clayton Christensen, the products based on disruptive technologies will often be “cheaper, simpler, smaller and frequently, more convenient to use”. Both the MP3 file and the digital Palm e-book certainly fit that bill. Convenience and simplicity are key attributes of the digital music as well as the digital book. On the other hand, sound quality was an issue for many customers (probably the same people initially clinging onto LPs when the cd arrived), just as screen reading would be a showstopper for others.
In the past the main concern of organisations in a supply chain was how best to organise the making, distribution and selling of their products or services. However, with the internet this product-centric approach has failed and surrendered to a more customer-oriented mindset. The value chain has become dynamic and networked. Products and services are being digitised, and the flow is no longer linear.
“Value” is no longer something that is created incrementally and chronologically throughout the parts of the value chain until the product reaches the market. The days of designing products in the R&D ivory tower and bringing these to market through controlled production processes and sales channels with little or no interaction with customers are long gone. Value chains are becoming non-linear value networks with feedback loops and a whole new understanding of how value is being created.
Download Goes Streaming
The next logical step for music was to seek out new opportunity with new ownership models. Why purchase a song or an entire album when you could gain access to (practically) every song?
By late 2013 music downloads were in decline. They were being superseded by music streaming services and new players like Pandora, Rhapsody, Rdio, and Spotify. Realising this, Apple made a necessary move and launched iTunes Radio in September 2013, the same day as iOS 7. This move enabled Apple to enter and keep control of the point of consumption: the interface with the consumer.
Context is King!
Music is the core product, but it is what can be wrapped around the music-as-a-service that really matters. The music is a commodity – it’s how it is brought to the consumer that can be a differentiator – this is the free Palm VII in Kanarick’s example.
The battle for consumers is a battle for the position as the gatekeeper where you control the data. To own that position, it is crucial to provide superb customer experience, including 3rd party apps, communities and recommendations – the more user experience, the more interaction, and thus: the more data. Spotify announced its Apps Platform in December 2011, allowing 3rd party developers access to the desktop client, but closed it again in March 2014 to focus on ‘adding new features for partners in Spotify and expanding the features of the Web API, as well as releasing new mobile SDKs.’
What the press release did not mention was, that two weeks before the platform was closed, Spotify acquired Echo Nest – a recommendation service powering not only Spotify’s own services, but also competitors’ like Rdio and Rhapsody (who shortly after stopped their use of Echo Nest).
It is unlikely that Spotify will continue closing their Apps Platform, but both moves point to the growing importance of controlling the platform and controlling the data-driven context around consumption. By providing the right music at the right time for the right user, Spotify opts for owning the end-consumer (and her use data!) in the digital music value network.
Whose Platform Are You On?
To be the gatekeeper of the end-consumer, companies need to develop a platform for those consumers. Turning a product into a platform – evolving from one-time transactions and product-focus, to flexible consumption and as-a-service models – can work wonders for customer experience.
By listening to consumers’ feedback to products and services, listening to their explicit needs and wants, analyzing their data for patterns and latent needs, monitoring what competitors are offering, the business in control of the platform is in control. Like with the Google Maps app on the iPhone. But then Apple decided to enter the map business.
Digital has quite a few strategic high grounds. Now Apple has begun yet another “console war” – the battle for the car. Historically, the auto industry has operated within a walled garden, with little input from outsiders. This first changed when Ford and Microsoft teamed up around SYNC in 2009 – enabling synchronization with the driver’s smartphone, as well as offering traffic information.
With the iOS based CarPlay, Apple is introducing an in-car platform. Pandora, iTunes Radio’s main competitor, is left out, but streaming providers Spotify and (now Apple owned) Beats Music are both there. Moreover, CarPlay offers full-on automobile integration for Apple’s Maps and turn-by-turn navigation! Clearly, this is going to hurt navigation providers like Garmin and Tom-Tom, who btw have failed miserably to invest in any kind of enhanced user experience, let alone community powered!
CarPlay offers full-on automobile integration for Apple’s Maps and turn-by-turn navigation. The two incumbent navigation providers seem to have missed their window of opportunity. With CarPlay and the Android platform both rapidly entering the cabins (Google acquired the crowdsourced traffic app Waze in 2013), the days for old school bundled car navigation seem numbered. It is a direct attack – not only at the incumbents market, but their business models and value chains.
It’s a platform battle and that’s why getting rid of Google Maps was more important to Apple than delivering a flawed Apple Maps app with iOS 6.
Who’s About To Disrupt Your Value Chain?
Digital technology is the creative destruction storm that is replacing value chains’ chronological one-way mindset with a much more dynamic, non-hierarchical, value creation model – including co-creating a collaborative value network. The winners are the ones that control the platform and the user experience.
In digital value chains, viewership as well as other user data, is critical to control.
Analysts speculate that Apple may want to enter the TV market next. It would make sense, seeing that they already have a stake with the Apple TV. But, as noted by Harvard Business Review, the critical asset in that value chain is the viewer data provided by Nielsen. This is what sets the price for advertising and there’s no reason Nielsen should want to give that up. In digital value chains, viewership as well as other user data, is critical to control. Value networks must leverage the huge data feedback from the marketplace in order to provide that unsurpassed user experience.
So, take a look around your own value network or supply chain. Does information flow freely upstream as the goods flow downstream? Or is there someone controlling this critical asset?
Who Cares About Health?
That’s what they have done in the pharmaceutical and healthcare industry. They have seen patients, HCPs and payers engaging with digital health channels much more rapidly than the industry has been capable of, but are now taking measures to shift their focus away from a transactional model to delivering an outcome-based approach to add value beyond the pill. My Valtech colleagues Rasmus Rask and Mikkel Duckert recently published a white paper on how digital health will impact the pharma industry.
Adding value beyond the pill is precisely what Apple’s new HealthKit is aiming at. The iOS version 8 came with HealthKit, setting out to make a platform for consumers’ self-measurement. And with Apple’s smartwatch soon to be shipped, the time is ripe for a bold move into healthcare. Apple is rumoured to partner with medical clinics to monitor patients 24/7, so it would seem HealthKit will not only keep track of when to take drugs, but also collect loads of data to create disruptive ways to diagnose and deliver primary care and support therapeutic compliance in a new primary care value network.
Apple is rumoured to partner with medical clinics to monitor patients 24/7.
Google is also moving into wearable tech. They have partnered with Android Wear to extend the Android OS into wearables with voice commands and Google Now cards running the experience. Google is also upping its stake in the healthcare disruption, taking the next logical step laid out by our increased urge to search for whatever symptom we may have. As described in Wired, Google is testing out a new tool which could offer a direct online conversation to proper medical advice. Not least, a new platform, Google Fit, will centralize data, allowing third-party apps to feed off information and personalize the experience.
If you consider for a moment all the different kinds of data we keep inherent in our at-home activities, it’s no wonder that the big tech companies are looking at our private lives as the next frontier. The Connected or Automated Home is another emerging field of high interest for technology, with both Apple and Google jockeying for positions. When Google acquired Nest Labs – the manufacturer of Wi-Fi enabled thermostats and smoke alarms – it also entered the connected home game with a hardware component.
Apple has yet to explain in more detail what form its HomeKit will take. It has been said that Siri can be used to voice-control products like light bulbs, locks, fans, thermostats, power outlets, garage doors etc.
Judging by its beta versions, the forthcoming Apple TV software update will most likely include support for HomeKit. This may mean turning the Apple TV into a home automation hub, and allowing HomeKit devices to sync with Apple TV for users to control – even when not at home.
Whose value chains will Google and Apple disrupt with the automated home? If the lock makers, garage door ad-on producers, electrical switch makers, thermostat producers etc. are alert, they will have small problems adapting to the new order. If, however, they are not, they will most certainly be disintermediated by other players, better capable of providing hardware that works on and integrates with the winning platform(s). But rest assured that the gatekeeper will keep the insights gained from the vast amounts of data.
Sharing is the New Buying
Apple replaced the retail element of the old music value network, but kept most of the network and the chain logic intact: the artists, the producers, the manufacturers, the labels, the consumers. Now, with increasing maturity towards collaboration and sharing economy, much focus on access instead of ownership, the next frontier is the actual consumption of the digital product. This is where the personalized user experience is the key differentiator.
Content and services is the context that allow for platforms to win the strategic game of the end-consumer in the age of digital transformation. The key to riding the wave is the trust of the consumer. As the consumer gets more empowered, this position becomes increasingly necessary to own. Everything that can be done to increase consumers’ trust in your service must be done! Social media is enabling this empowerment, but so is the willingness and ability to share with peers.
Customer Experience Rules the Game
The value network is replacing the value chain as a network of vendors, competitors and consumers, co-creating the value. Those players that do not deliver value to the customer experience will quickly find them selves replaced by others who do. If supply chain participants are not truly considering ways to accommodate collaboration and joint value-creation in a dynamic network, they risk being put out of business – either by other vendors that are more adaptable or even bypassed by a direct bridge between consumers and manufacturers.
In fact, that is precisely what electric car company Tesla is doing: Disintermediating or disrupting the automotive value chain by bypassing the traditional retail. This manufacturer-to-consumer (M2C) trend is setting new requirements for the design and management of global logistics networks.
It’s about collaborative economics: Turning your product into a service, motivating a market, providing a platform – Uber, Airbnb, Zipcar, Kickstarter, MyWays and many more testify to this.
Sharing and swapping as peer-to-peer models saves costs and time, preserves the environment, and allows people access to products and services which are expensive to own or are being used infrequently.
These new intermediaries are disrupting existing value chains and replacing them with value networks that better integrate the end-user. This is also the reason this position in these new value networks is the most profitable: It’s all about “owning” the consumer’s user data. This data resides in the customer experience. This is one reason Monsanto has a huge competitive advantage: They have convinced farmers to share their data. In return, they give back insights to maximize the farmers’ yield.
When Apple announced Apple Pay, shares surged. Could this be the disruption of payments and credits analysts had foreseen? But as it became clear just how small a role Apple would play – it won’t even be collecting data about the transactions – the stock fell back below $100, closing at $97.99, down 0.4% on the day.
The proverbial what-business-are-you-in question that created a service, a market and a platform for Dachis and Kanarick two decades ago, should more appropriately be rephrased to whose business are you in? Whose value chain are you in? Whose platform are you on?
Inability to dynamically evaluate and re-position the firm in its value network can prove fatal for companies facing disruptive competition. So, you need to be able to consider that your business model is at least partly wrong.
Well, is it?