Why ecosystems blur the traditional industry lines?
How to transition to more resilient and sticky business models?
What we can learn from SAP partner ecosystem?
Should you follow the crowd in your industry or go your way?
Five steps to reimagine or transform your business model in 2021
In part 2 of our conversation with Dr. Carsten Linz, one of thought leaders in World Economic Forum’s ‘Digital Platforms and Ecosystems’ project and the author of “Radical Business Model Transformation” book.
How ecosystem blur the traditional industry lines
A lot of companies nowadays are thinking about the ecosystem business model as a concept and they hear a lot about partnerships and collaboration. Carsten, from your opinion, what is really changing in the business model world?
It really goes back to the blurring of traditional industry lines, that's one of the root causes. I mean, we have always been trained and socialized that you are in an industry. These days if you say “you know, this is my industry, these are the boundaries of my industries”, you potentially will not be future proofing your business with that approach. Because traditional industry boundaries are blurring and all the new competitors enter in the edges of your traditional industry definition. Basically, it's not about looking and staring at the center place in your industry, it's about looking at the edges. And if we look from an end-to-end customer experience, you will always see that the customer experience, the end-to-end customer journey is cutting across various industries.
These days if you say “this is my industry, these are the boundaries of my industries”, you potentially will not be future proofing your business with that approach. Because traditional industry boundaries are blurring and all the new competitors enter in the edges of your traditional industry definition.
For example if you sit in your car, you drive through Switzerland you decide on the fly I want to go skiing for holiday. Through your smartphone basically you're buying a pass for you to go skiing, potentially you’re adding insurance for the day, and so on. But what you see is that you're touching various industries throughout that customer journey. And you will see that over and over again. We've seen that also with insurance and banking. Ping An is a nice example who built many ecosystems also from a medical perspective in new areas. But you see that the customer journey is the driver.
But the other side, it's not only about the customer, it's also about the ability to deliver.
The more holistic your offering gets, which the customer is looking for, the more difficult it gets for you as an organization to deliver that just out of one hand. And this leads immediately to the question "which compliments do you need to add on to really bring it together?"
The magic is not bringing that together in bits and pieces, but really about integrating and building your holistically integrated offering. And I think this is why it comes pretty naturally, that it's not only the level one, the old partnerships, but really about building communities and the ecosystem, which is the bigger one. But also reaching out to even your competitors, as we have seen in the Microsoft example, which I mentioned before. So that would be my explanation both from a customer experience journey perspective, but also, from the questions, you know, what do you have to bring to the table to deliver a holistic solution to a customer problem?
You're saying that not only it's actually customer driven, but also it's also technology driven. in a way that companies nowadays can tie all the pieces together in a reasonably simple and customer centric way, so they can give the customers the entire journey.
Transition to more resilient and sticky business models
Because we are living in a COVID time, a lot of businesses think about resilience. And from the first glance, this new ecosystem business models are less resilient because they are more complex, collaborative with more players. As we know, the chain is as strong as the strength of the weakest link. But the reality seems to be the opposite. Why do you think this is the case?
Let's look at COVID-19 pandemic, many businesses were hit quite hard and I would say there are two dimensions on which we have a substantial impact. The first one is definitely the industry sectors, now I said okay, the industry is not as it was defined before, but putting it out simplistically there, winning sectors are like healthcare and pharmaceuticals, ecommerce, logistics as a consequence of that, and so on and so forth. They're also losing sectors evidently - travel related industries, airlines, cruise ships. Even Airbnb was hit quite hard and had to basically lay off nearly 2000 people, Hertz had to file Chapter 11, Vapiano went into bankruptcy, and so on. One factor is the industry so you can be in a winning or losing sector. And then fundamentally, that's one part of the impact. The second one is the one you can actually actively decide on the short or the mid-term at least. It's a question on which business model you are acting on. And they are business models, which are basically more resilient and others are less resilient. So let me quickly talk about that one.
There are four business models
product business model
platform business model
solution business model.
And these four business model types are the foundation of making business model decisions. And now you have to ask yourself:
Are you getting more customers, adding more services and really being customer specific and co-creating the offering together with their customer?
The other question is, are you making your business model more inclusive?
The inclusiveness has two aspects:
One aspect is the offering becomes more comprehensive, more holistic.
And the other aspect it becomes more sticky, actually, the probability that the next transaction will once again happen with your company is increasing.
And that inclusiveness access is a driver for resilience as you ask the question, because platform business models and solution business models are substantially more resilient, because there is a baked-in recurrence, baked-in stickiness in these types of business models. There's also an impact on the customization access, because typically, the more you create customer intimacy, the more you have a long standing partnership, and co-creating something together with your customer, the more domain specific knowledge you are accumulating.
the more you move into a platform business model, the more you move into holistic solution provider models, really managing end-to-end processes on behalf of your client, even against service level agreements, the more resilient you become.
And that's also an effect, which helps many consulting companies these days. No one would have thought that we were able to basically deliver all consulting services remotely, virtually. It's really surprising, which by the way has a nice margin uplift effect, because all the travel expenses are gone. If you can keep your rate, it's not not a bad deal. But it's really interesting. If you deliver remotely it requires, this is the prerequisite what you've done before, is a great consulting company, you built up domain specific knowledge in certain areas by working very closely together with your client. So at first, it's a bit counterintuitive.
But definitely, the more you move into a platform business model, the more you move into holistic solution provider models, really managing end-to-end processes on behalf of your client, even against service level agreements, the more resilient you become.
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What we can learn from SAP partner ecosystem?
You mentioned stickiness, building a really strong domain knowledge - I think these are very important things. You've had an amazing track record while working in SAP. We spoke with Marshall Van Alstyne [co-author of Platform Revolution] a few months ago, and he mentioned SAP, which has done a great job in engaging developers, incentivizing developers to be in the ecosystem. But also sharing knowledge with each other, which is again counter-intuitive, because they are in a coopetition with each other. I think this is a great ecosystem example. What do you think companies could learn from companies like SAP in terms of working with partners and building their ecosystem and collaboration around them?
It's a striking example, and we also have a case study, by the way, in our book. SAP has gone through a substantial business model transformation, really driving the HANA platform into massive adoption, and allowing others to build complements on top of that. This is the fundamental idea and the prerequisite.
By the way, it's a substantial shift, of course, from perpetual upfront license payment schemes in the old on-premises world towards now recurring revenue schemes, be it subscription or be it consumption based models in the cloud world. This is a substantial shift, and it's evidently also something you have to be able to explain to capital markets, because short term your margin decreases, because you have higher operational costs, still higher cost of sales. But at the same time, you're really building up a sustainable recurring revenue stream for your business, which you only had in the maintenance part of your licensed business model. This is why ecosystem play is really pivotal for a company like SAP.
The interesting thing in the history of SAP, it has always been pivotal. I think it was a very wise decision of the five founders of SAP at a very early point in time to decide intentionally and consciously to leave the majority of the software implementations with system integrators. So not to try to do everything alone, but to scale out your business with the help of SIs. The funny thing is that I think it was not by intention at the beginning, they of course also became a sales force for the company. Because you know, if you want to do the implementation, by the way you're also our good promoter for the products, in that case, the software.
Now moving up the ladder and making that platform play with the HANA platform underneath, I think it's not only about value added resellers, system integrators, general partners any longer, it's really about the developer communities building complements on top of the platform.
So I think it's a great case and SAP has many means to that end:
Community Network, which was formerly known as the SAP Developer Network;
SAP Startup program;
HANA Marketplace; the digital store where you can bring in your products.
But also partnerships, and this is interesting as we're seeing especially in the software industry, many partnerships.
I still can remember when one was signed with Apple. Having an SAP SDK for Apple, I think was quite a nice move, because of course, you can reach many users with the help of that SDK. But also at the same time, you're building exactly what you ask for - a large and vibrant developer community and ecosystem.
Should you follow the crowd in your industry or go your way?
Before we move into thinking about the future I would love to ask you a small question. But I hope they make sense. First of all, I noticed that you are lecturing in Stanford Graduate School of Business. What are the most interesting questions or like one of the most interesting questions that students from Stanford GSB have asked you?
In all fairness, I have to say I'm teaching at a couple of business schools, I have to be honest, a Stanford GSB is definitely one, greetings to Yossi Feinberg. Second one is ESMT in Berlin, a great business school, Mannheim Business School and, of course, the executive school at the University of St. Gallen. Now pointing out one question, which was the ultimate question is a difficult one, let me think about that. I recently had one, which just from a mental model perspective I really find interesting. It was a discussion about, you need risk changing or transforming, but in the same discussion, someone also said, "you really need courage to also hold your course".
And I found that very striking, because it goes back to the discussion, which we had with Knorr-Bremse, which is one of the companies we worked with for our book. And they were really a very much commodity business in components, braking components are very much commoditized, very high price pressure. And they basically escaped from that by moving into that end-to-end holistic provider, offering these end-to-end maintenance services. And the interesting thing is, it comes back to a question “Do I follow the crowd in my industry? Or do I go my own way?”
it comes back to a question “Do I follow the crowd in my industry? Or do I go my own way?”
And that led to a really interesting discussion, which also was for me eye opening, because it's really an important question.
If you just hear about the noise out there, immediately do a platform business model. Because everyone tells you, nothing is better than a platform business model, and you have to build an ecosystem. And so many companies are failing these days,
I can name you hundreds of failed efforts to build a leading platform, because it requires gravity on the platform, need some traction, but it also requires a vibrant ecosystem, as we have discussed before. So fundamentally, I think it's really important. That was one of the good things if you are the lecturer, you learn most, this is always the gift that is given to me. So that was a moment, which was really also eye opening for me to make the wise decision: do I follow the crowd or do I go my own way?
Very profound thing you just mentioned. Your advice on this specific question would be to keep an eye on the crowds, but try to figure out what's your way, right?
Knorr-Bremse example of escaping the crowd
My advice in that case for Knorr-Bremse, I think they made the decision, but they escaped the crowd. Everyone did lower prices and said it's a commodity game, which has lower prices as part of that game. And they said NO, we don't want to play that game, we escape from that game, we move into a holistic solution provider with a premium service end-to-end, very difficult, very difficult to compete with, and very difficult for the others to catch up, that was quite striking. So that was my point here.
And the second learning I would see here, every business model at the end of the day has its pros and cons. There is no such thing like a silver bullet. There are very good reasons to stay in a product business model. By the way, there's also a very good reason to stay in a project business model, there's a good reason to stay in a holistic solution provider business model, but one example which just comes to mind.
ARRI example of escaping the crowd
There's a very famous example, I'm not sure if you know ARRI the German company that was providing cameras for large movies. Basically, whenever you've seen something on Netflix or in the cinema, it's typically a film with an ARRI camera. They're a leading camera provider for professional use worldwide, they had been the leading provider for analog cameras. Then something happened, which was very hard for them. So the digital world came into play, and actually, they got substituted by digital cameras, much cheaper, poorer quality, but definitely a good price performance ratio. Then they stepped back and said, okay, we want to be the best camera maker in the world for professional usage. And actually they stick to their course, because what they did is they partnered with the Fraunhofer Institute and actually developed their own camera sensor. And today ARRI is once again the leading provider, the number one camera provider in the world for professional film cameras but in the digital world. Why I'm telling the story, the interesting thing is they still have decided to be and remain in the product business model, they have not moved to a platform. So there's a difference between digital transformation and business model transformation. That's learning from the ARRI case.
Five steps to reimagine or transform your business model in 2021
Many leaders are currently thinking about 2021 and beyond on how they should transform their businesses. And you have published the second edition of your book, thinking about this. What is your key advice on how they should think about transforming or reimagining their business model?
COVID-19 is widening the gap between the winners and the losers, and this is really important to understand. We don't have only a digital divide in society, we'll see substantial digital divide in the corporate world. Reactionary management is not strategic leadership, this is really important. And I hope it's not a business model.
We don't have only a digital divide in society, we'll see substantial digital divide in the corporate world. Reactionary management is not strategic leadership, this is really important. And I hope it's not a business model.
What it takes companies I will advise to:
Take a step back and say, what is really the root cause, what is really the customer problem that I want to resolve? You also work for a startup, startups have the big advantage, just take a step back and say, what is really the root cause? Ask why, why is it like that? Why are customers not using it? What is the problem I'm resolving? So not only treating the symptoms, but really going back to the root cause. I think many large established companies have lost that notion. And it's also now a B2B2C to end use game. Who is your customer? That would be my advice number one, really resolve fundamental problems and know your customer. Really ask the question, who is your customer?
Then for a successful transformation you require a sound leadership foundation. You really need the right leadership in place, or more transformational intrapreneur leaders.
And then of course, transformation is about creating a movement. So many people have to join you on this journey. You need a strong desired end state, despite the fact that you know that the transformation will always go on. But you need a North Star, you need a place where the grass is greener, which is attractive to move there, so that people start dreaming the dream of the future. And then basically, more people are following you on your journey towards the future.
And then the hard work comes, because it's about managing systematic data. So a transformation strategy is different from business strategy. This is why many strategy departments sometimes struggle with being successful in leading a transformation. It's really about the systematic data. So you don't need only the North Star, you also have to make sure what is the systematic data. And in our model, it's really a systematic data in the front end and the back end, and the monetization mechanics. On the front end how you deliver the value, in the backend how you create the value, and then the monetization mechanics how you capture the value. And only if the transformation is well orchestrated across these three dimensions, then you enter in a target business model, which is consistent, and you avoid the flipping back to the original state, which unfortunately, still happens too much.
And then it's about empowering and learning the organization, because you don't need a central transformation office, but everyone is becoming part of the transformation. And everyone is becoming the driver of his or her transformation in the respective area.
As you were speaking, an example of Volkswagen came to mind, they just recently announced an upcoming battery day. They are transforming themselves and their shares jumped, because they seem to be on the path of re-imagining themselves.
Thank you so much. It's been extremely dense with many brilliant nuggets interview, and thank you for outlining your view on how companies should transform themselves. I would encourage everyone to read your book Radical Business Model Transformation, and also check your contribution at The World Economic Forum and elsewhere. I personally look forward to following you. What are the ways people should connect with you?
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