Category Archives: Relational Strategy

A strategy aimed at creating sustainable competitive advantage from asymmetric demand.

Evaluating platform architectures within ecosystems: modeling the supplier’s relation to indirect value

by Philip Boxer, PhD

I have completed a PhD by publication at Middlesex University’s School of Engineering and Information Science under the supervision of Professor Martin Loomes.  Here is its abstract:

This thesis establishes a framework for understanding the role of a supplier within the context of a business ecosystem. Suppliers typically define their business in terms of capturing value by meeting the demands of direct customers. However, the framework recognises the importance of understanding how a supplier captures indirect value by meeting the demands of indirect customers. These indirect customers increasingly use a supplier’s products and services over time in combination with those of other suppliers . This type of indirect demand is difficult for the supplier to anticipate because it is asymmetric to their own definition of demand.

Customers pay the costs of aligning products and services to their particular needs by expending time and effort, for example, to link disparate social technologies or to coordinate healthcare services to address their particular condition. The accelerating tempo of variation in individual needs increases the costs of aligning products and services for customers. A supplier’s ability to reduce its indirect customers’ costs of alignment represents an opportunity to capture indirect value.

The hypothesis is that modelling the supplier’s relationship to indirect demands improves the supplier’s ability to identify opportunities for capturing indirect value. The framework supports the construction and analysis of such models. It enables the description of the distinct forms of competitive advantage that satisfy a given variety of indirect demands, and of the agility of business platforms supporting that variety of indirect demands.

Models constructed using this framework are ‘triply-articulated’ in that they articulate the relationships among three sub-models: (i) the technical behaviours generating products and services, (ii) the social entities managing their supply, and (iii) the organisation of value defined by indirect customers’ demands. The framework enables the derivation from such a model of a layered analysis of the risks to which the capture of indirect value exposes the supplier, and provides the basis for an economic valuation of the agility of the supporting platform architectures.

The interdisciplinary research underlying the thesis is based on the use of tools and methods developed by the author in support of his consulting practice within large and complex organisations. The hypothesis is tested by an implementation of the modeling approach applied to suppliers within their ecosystems in three cases: (a) UK Unmanned Airborne Systems, (b) NATO Airborne Warning and Control Systems, both within their respective theatres of operation, and (c) Orthotics Services within the UK’s National Health Service. These cases use this implementation of the modeling approach to analyse the value of platforms, their architectural design choices, and the risks suppliers face in their use.

The thesis has implications for the forms of leadership involved in managing such platform-based strategies, and for the economic impact such strategies can have on their larger ecosystem. It informs the design of suppliers’ platforms as system-of-system infrastructures supporting collaborations within larger ecosystems. And the ‘triple-articulation’ of the modelling approach makes new demands on the mathematics of systems modeling.

The following summarises the argument in terms of Value for Defence:

Value for Defence

View more presentations from Philip Boxer

The madness of movie advertising

by Richard Veryard

Just reading something by Alex Bosworth on Google and advertising led me to an article in Slate Magazine by Edward Jay Epstein – The madness of movie advertising

Epstein comments on the fact that the big movie studios typically make a loss on the initial theatrical release (the advertising alone costs more than the box office receipts) which they hope to recoup from the overseas release and video sales.

On the old business model, the video sales (mostly to video rental chains) were pegged to the initial box office. So the higher the initial box office, the higher the subsequent (more profitable) sales.

But this kind of cross-subsidy is only possible if the movie studios are powerful enough to maintain a positional strategy. Changing patterns of demand – synchronous overseas release, collapse of the video rental market, increasing domination of DVD retail by mass retailers such as Wal-Mart and Tesco – have undermined this positional strategy.

There are increasing problems with cross-subsidy in many industries, as the once predictable linkages between the loss-making elements and the profitable elements are eroded. This in turn calls into question the integration logic (“North-South”) on which many large firms are (have been) based. To support a relational strategy instead of a positional strategy, such firms must develop a new kind of integration logic (“East-West”).

Two-Sided Markets

by Richard Veryard

There has been a lot of buzz around two-sided and multi-sided markets lately.

In his HBS March interview, Andrei Hagiu identifies Wal-Mart as an example of an organization that is transforming from a traditional merchant into a two-sided platform. Let’s look at the (asymmetric) structure of this transformation.

The traditional retailer acts as a hub in the food supply chain, aggregating food supply from fields and factories, and distributing food to workshops and private kitchens. This is essentially a positional strategy: the retailer seeks to establish and maintain a strategic position within a value chain, as the bottleneck/hinge point between upstream and downstream. Within the positional strategy, the business drivers are understood in terms of the economics of scale and the economics of scope.

2sidepositional.gif

But if we shift from a value-chain perspective to a service-oriented perspective (value-ladder), we can see that the retailer is providing a service (=delivering value) downwards as well as upwards – it is a food distribution platform for farmers and manufacturers as well as a food supply platform for consumers and catering companies.

So instead of drawing the merchant in the middle, we can draw the merchant as a new kind of platform providing various kinds of market interaction.
2siderelational.gif
This takes us from a positional strategy to a relational strategy. No longer just focused on the economies of scale and scope, the relational strategy emphasizes how economies of governance are generated in relation to two kinds of demand context. The big question for a company such as Wal-Mart is how to balance the exploitation of each of these forms of asymmetric advantage.

Disney, Pixar, Apple and Jobs

by Richard Veryard
John Hagel posts some interesting comments about Disney, Pixar and Jobs. He is sceptical about the strategic contribution that Steve Jobs may be able to make to Disney.

  • large media companies need to figure out how to become relationship companies
  • media products need to become platforms
  • the future of large media companies hinges upon the mindset and skills required to build loosely coupled products
  • (and focusing on) creating networks to get better faster
  • This is essentially an argument for a relational strategy in response to asymmetric demand. Hagel argues that “scale and scope economies in the media business are migrating away from products”. This may be true for most media companies, but many people may wonder whether it really applies to Disney/Pixar? How asymmetric is the demand for the latest cartoon film? Surely these cartoons are always going to remain mass market products, long after other media products and services have been fragmented and customized?

    Of course it’s not as simple as that. Consider the increasing complexity of the cartoon whole-product. Besides the film itself, we are urged to consume the music, the computer games, the ringtones, the toys, even the books. Cartoon characters are printed on breakfast cereal packets, and given away by fast food outlets. Thus there is a considerable ecosystem of commercial exploitation. One of the strategic issues for Disney/Pixar is the delicate balance between narrow control of the brand (ultimately how the cartoon characters are experienced around the world) and broad encouragement of creativity and innovation within the brand.

    This is perhaps not so very different from the challenges that Steve Jobs faced at Apple. John Hagel is critical of Apple, and attributes Apple’s commercial failure to Jobs’ thinking of the computer as a product rather than as a platform. So how do we interpret Apple’s recent success with iPod and iTunes? Surely these are successful platforms, not just products. Look at the explosion of new practices (such as podcasting) that these platforms support.

    But there is a critical difference between the product/platform shift (which is a response to the second asymmetry) and the positional/relational shift (which is a response to the third asymmetry). Can Disney / Pixar / Apple ignore the third asymmetry – and for how long?