Business Ecosystems and the ‘Whole Product’ (Part 2)

June 11, 2008

In my last post I discussed three forces that I think will drive the consumer push for ‘whole products’, thus forcing businesses to change to a business ecosystem. In this post, I’ll explain the implications for businesses.

The three forces I discussed in the previous post are:

  • Perfect information
  • Commoditization of products
  • Time poor consumers

So why do I think that these three things will force businesses into a business ecosystem model of operating? In a nutshell: consumers want more for less. Of course, consumers have ALWAYS wanted more for less, so what’s changed?

1. The definition of ‘Whole Product’ is constantly changing.
Thanks to the Internet, there is almost perfect information in the market. As I’ve mentioned before, mainstream consumers buy “whole products” and thanks to the Internet they now know exactly what the whole product actually is. As consumers get more sophisticated, proving the whole products will require an increasingly elaborate business ecosystem. Businesses not capable of providing whole products (as defined by the consumer) will lose market share to businesses than can.

For example, travel agents used to book flights. But now consumers expect to be able to book entire holidays: flights, cars, transfers, tours, train tickets, accommodation and more. And the ecosystem will continue to expand as consumers demand more.

2. There will be a blurring of the “price” and “differentiation” business strategies.
Traditionally, businesses compete either on “price” or on “differentiation”. It all comes down to cost. If you compete on price then you need to make sure your costs are low. If you compete on differentiation then your costs will be higher but you can charge a premium for your value-add. At the high end I don’t think anything will change – the business that focus on differentiation are typically innovators (to differentiate themselves they need to do what no one else is doing). But I think technology changes the equation at the bottom end. Businesses competing on price will be forced by consumers to offer better service. Generally, consumers don’t expect a lot of value add from low cost providers – but consumers WILL demand additional services if they know it won’t add to the cost. And thanks to technology, the cost of providing additional services need not add to costs.

For example, when you want to buy a new dishwasher you pick your model and then shop around. You go with the cheapest price so whitegoods retailers generally compete on price. But even though you went with the cheapest retailer you still expect someone to deliver it and install it. You don’t mind paying for delivery and installation – but you want the retailer to organise it for you. These services require an ecosystem and technology should make the provision of these services low cost.

3. Time poor consumers are realising that disintermediation is not always ideal.
The Internet ushered in an era of disintermediation – we could finally cut out the middle man. This has proved to be a double edged sword. In cases where the middle man was ‘Mr 10%’ and provided no value-add, this was a good thing. But in some cases we’ve realised that the middle man actually earned his 10%. Most people are time-poor and are increasingly looking for “one stop shops”.

Again travel sites are an excellent example. We could book out flights, cars and hotels separately but we don’t want to. We want to do it all in one place, deal with one company and pay with one bill. What’s more consumers are willing to pay a small premium for this. If the business charges too much for this, consumers will go directly to the provider. Technology means that you can provide one-stop-shops cost effectively.

So that’s it. The reasons why I think we will have to move from linear supply chains to complex business ecosystems. This change is a challenges to businesses – but it’s also an opportunity for IT. There’s never been a better time to realise the true promise of IT – a source of competitive advantage.

Business Ecosystems and the ‘Whole Product’ (Part 1)

June 10, 2008

In my last post I said that “businesses will be forced to move from the traditional (linear) supply chain to a business ecosystem”. I’ve had a couple of questions about this statement so I thought I’d post an explanation of my reasoning.

The reason I think businesses will be “forced” to move to ecosystems is based around the concept of “whole product”. This is a marketing term and it essentially means “the core product PLUS anything needed to give customers a compelling reason to buy.” The core product might be a computer but the whole product may be the computer plus installation, support, pre-installed software, warranty and training. Mainstream consumers buy ‘whole products’ not ‘core products’.

In order to supply a ‘whole product’ businesses will have to move to an ecosystem model because no single business that can efficiently supply all the ancillary products and services needed to create a whole product.

It’s true that consumers have always demanded whole products – and business have been able to provide them – but I think this demand will increase markedly in the coming years. Three forces in particular will exert pressure on businesses to move to ecosystems:

I’ll explain each one in turn.

1. Perfect Information
“Perfect Information” is an economic term which basically means that all market participants know everything about the market. Thanks to the Internet information is easy to get. With a bit of effort anyone can find out what products are available in the market and where to get the cheapest price.

2. Commoditization of Products
Commoditization is the process where the sales strategy of a product changes from ‘competition through differentiation’ to ‘competition on price’.

Where products are competing on price there is a “race to the bottom” – each market participant looks for ways to lower the price of their product – usually through cheaper manufacturing (e.g. China).

But even high-end, branded products will eventually become commoditized because of the “race to the top”. It works like this. Everyone is trying to outdo their competitors by producing the latest and greatest product but it’s not long before competitors respond with an even better product. The cycle continues as products get better and better. But eventually the market will reach a situation of “performance oversupply”. Consumers will no longer be prepared to pay a premium for all of the bells and whistles if they have no use for them – and the market will begin competing on price at the level of product performance that the mainstream market demands.

3. Time-Poor Consumers
This one doesn’t need any explanation. The one thing every consumer (rich or poor) has in common is that there aren’t enough hours in the day to do everything.

That’s the theory out of the way. In my next post I will explain how I think the increasing demand for whole products will affect businesses.

From Supply Chain to Business Ecosystem via SOA

June 8, 2008

Most of the discussions surrounding SOA focus on the individual organisation. It appears that people are looking to service-orient their own business before looking outside. There’s certainly nothing wrong with this. However, it seems that focussing internally is the ‘default’ position, rather than a considered decision.

Supply chains are complex things and they are the lifeblood of any business. While there’s always room for improvement most organisations have a pretty good handle on them (if they didn’t they’d be out of business).

A traditional supply chain looks like this (simplified):

simple supply chain

But things are changing.

Technology is improving at a rapid rate and we’re living in an increasingly connected world. Consequently, businesses will come under increasing pressure to connect to the outside world. Businesses will be forced to move from the traditional (linear) supply chain to a business ecosystem:

business ecosystem

A linear supply chain is relatively easy to manage. You have two touch points with the outside world. The procurement/logistics functions deal with suppliers and the sales/accounts receivable functions deal with customers. Businesses have been doing this for a long time.

Business ecosystems, on the other hand, have a complex array of relationships and each relationship has to be managed. This can’t be done without the help of technology. Notice I didn’t say it can’t be done efficiently. I said it can’t be done at all.

Service oriented architectures are ideally suited to providing the technical foundation for a business ecosystem. The ROI of outward looking projects may far exceed the ROI of any internal project. There’s no rule that says you must ALWAYS start internally.

Something to think about.

Benefit of the Benefit

April 27, 2008

Every good salesman knows that when you’re selling you don’t sell features – you sell benefits. But that’s not enough. Weak proposals that are based on generic benefits (e.g. copied from a vendor whitepaper) are unlikely to be convincing. Luckily, there is very simple brain storming exercise you can use to come up with benefits specific to your organisation – thus making your proposal far more compelling.

The technique involves taking a benefit and then refining it by asking “what is the benefit of that benefit.” You basically keep going until you find something that resonates with the prospective client or customer.

For example, lets assume you’re trying to sell a car which has excellent fuel economy. The fuel economy is the feature. The obvious benefit is: you’ll save money on fuel. Benefit of that benefit: you’ll be able to spend more money saved on things important to you.

That’s a simple example, but you should keep drilling down until you find a benefit that appeals most to the prospect. Here’s an example. Another benefit of low fuel consumption is: you won’t have to fill up the car as often. Benefit of that benefit: you’ll spend less time in petrol station queues. Benefit of that benefit: when you go on family holidays you’ll be able to maximise the quality time you spend together. Benefit of that benefit: the memories you’ll have from the quality time you spend together will last a lifetime.

The slightly cynical readers will be thinking “that sort of stuff is for shady used car salesmen”. If that’s what you’re thinking then remember that all buying decisions have significant emotional element. And this includes IT proposals. A proposal is essentially a sales tool – you’re trying to sell the reader on your idea. So you have to press the right buttons. And this technique will help you find those buttons.

It’s hard to do a genetic SOA example because every organisation has different “hot buttons”. This example is somewhat contrived but it will give you some idea of the power of this technique (especially when you have a few people brainstorming).

I’ve seen mediocre SOA proposals that have a bulleted list of benefits and maybe a definition of what each one means. Definitions don’t sell. Here’s an example of how to do it better: Take the benefit of “reduced integration costs”:

  • Benefit of the benefit: because the cost is less, you will be able to integrate more applications.
  • Benefit of the benefit: you will no longer be tied to delivering additional functionality through enhancing existing applications built in-house
  • Benefit of the benefit: IT will be able to devote more time to evaluating best of breed solutions that meet business requirements.
  • Benefit of the benefit: best of breed solutions are typically higher quality and provide richer functionality that bespoke applications written in house
  • Benefit of the benefit: the richer functionality means that staff will be more productive and the higher quality will mean less downtime due to computer issues

The person reading your proposal is not being called on to think or to make these connections themselves. Instead, you’re walking the reader through your thought process. This is all pretty simple stuff, And it works.

SOA Business Proposals

April 25, 2008

Recently I’ve been preoccupied with the issue of poor proposals from internal IT departments to the business. Unlike external service providers, internal IT departments don’t have as much practice at writing proposals and they don’t access to sales people to polish them up. So I thought I’d devote a few blog posts to business proposals and share my experiences about what works and what doesn’t.

I’ve got university degrees in both IT and accounting/finance (both ‘hard sciences’), so not surprisingly my proposals are focussed on hard science – facts, dollars and cents. Of course my proposals include non-financial benefits (as all proposals should) but those aspects are secondary. But it seems that my proposals have been missing something.

Yesterday I had a chat with former boss and we were discussing my previous post. He cautioned me not to get too hung up on black and white facts in proposals. He suggested that good proposals should sell a vision. He’s a very smart guy and has been around a lot longer than me so I had a think about what he said. And here’s what I came up with.

Typically when the business has a problem they go to the IT Department and the IT Department comes up with a solution and tells the business how much it’s going to cost and how long it will take. More often than not, the two sides then begin a dance around the project triangle as they negotiate tradeoffs between cost, time and scope. Eventually both sides come to an agreement and the project begins.

This approach has been around for a long time and it works well when everyone is “project focussed.” The process of producing a proposal for one particular project is largely a management exercise – you’re concerned with project management concepts such as resources, scope, quality and time. However, when we shift to an “enterprise focus” (as in the case of SOA) the proposal should contain elements of leadership.

In my mind the distinction between management and leadership is simple: managers manage tasks and leaders lead people. This is an important distinction because the single most important success factor for any SOA initiative is understanding people issues. Technology and the mechanics of managing a project are secondary.

Experience tells us that when it comes to “people issues” taking a management approach won’t work. If you’re relying on management structures, policies, procedures and the like, then most enterprise wide initiatives will fail. Rather than managing, you need to lead.

And leadership starts with the very first proposal. If your proposal is focussed purely on numbers and only tries to sell a solution then SOA will never get up – in almost all cases there are far less risky, cheaper, less disruptive and quicker ways of delivering a solution to a single problem than SOA.

So of course your proposal needs to sell a solution – but it also needs to sell a vision. Thanks Adam.