Look for value in your markets – not your customers – to build resilience to disruption
On my way home from a business trip and five minutes out from the railway station, I took the unusual step of booking a taxi. I say unusual because the station has a taxi rank inhabited by a long queue of eager drivers waiting for customers.
The problem for me is not the availability of a ride. It is that the need I have won’t be met by a regular taxi. The driver is unlikely to provide me with an electronic copy of the bill. Free Now, the fast-growing German mobility app, does and that’s why I order my ride with them. The app’s electronic invoice makes my own expensing easier – it also means I am never out of pocket while I wait for my company to pay me back.
This one taxi ride is just one of example of how value is changing in our everyday lives. The ride has become the commodity and the electronic invoice and cash flow are the services I crave.
In the previous article in this series we looked at how platforms and their advocates misconstrue value. It’s time now to look at value through fresh eyes.
In this one small example of a taxi ride, the platform theorist would argue that having a nationwide fleet of vehicles gives Free Now a network effect (it doesn’t) and that price (the amount of commission charged to the driver) is what makes the marketplace work for me and for the driver. Wrong and wrong again.
In the Irish market, I pay extra for Free Now and the driver gets hit with a 12.5 per cent commission charge. His or her income is no longer cash-based, which has tax implications. Price is not attracting either of us to use the app. Value is.
The value elements that I secure from the service are: a small amount of queue jumping, ease of expensing, personal cashflow management, some confidence that the driver can be held to account for the route he or she chooses, and pleasantness (I can rate the driver’s attitude). For the driver, expensing and reporting is also automated, there is a book of rides through the day, and they have an insight into my reliability if the pick up is some distance away.
Value today has become so multifaceted that even this simple, age old transaction is now replete with ten or more bundled value propositions.
We need to understand value through fresh eyes. Not only is the customer changing but the opportunities for expanding and deepening value are also growing.
One scoop or two?
The old idea that value is created in a linear way by people or companies adding value at different stages of production and distribution is no longer applicable.
In the old version of value discovery, the entrepreneur had to find a role on this linear journey.
Say you were in the ice cream selling business. You could be an agrichemical company supplying fertiliser to farmers, a farmer raising and milking cows, a cooperative collecting and bottling milk, an ice cream shop buying cream and other ingredients, or a customer looking to cool down. Every part of the chain adds essential, irreplaceable value to the journey from grass to cone.
Entrepreneurs looking to join the party had to find an intersection between their ideas and the journey – maybe the capacity to add a vitamin to the final mix, or customised branding for ice cream shopfronts, or a cold chain logistics advantage.
Today that linear journey looks more like an ensemble of apparently unrelated activity. Entrepreneurs can dive in at many more points than with linear value chains.
For example, the shop will have some kind of relationship with Google, to position it on Google Maps and to create a good description and reviews there. The value for the shop lies in being easily found.
With some meteorological data coupled to knowing the place (say a mountain resort) a data provider can offer to smooth out milk production for local farmers. It’s wet, it’s likely to be cold and it is out of vacation time. Store your milk!
This kind of added value through data already is happening in the Chinese fresh food chain where Alibaba’s ownership of urban fresh food groceries allows it to predict demand and relay this demand data to rural farmers and their logistics partners. The same data helps to optimise route planning for its logistics partners.
The diagram above shows some of the old and new, the linear value chain and the ecosystem. The central line is old, sequential value-adding activity.
The new elements (in purple) represent people who are changing the world in response to technological opportunities and new consumer demands. Those demands in turn are being fed by the availability of alternatives. When customers see alternatives some, at least, jump in.
Each of these new factors though is horizontal. They are services that apply to all industries. They skim the surface of the linear value chain. They are applicable across value chains. In a more representative diagram they would also intersect more.
The importance of the information layer
None of this happens without a free market in information (or content). For each of these elements there are separate and interconnecting sources of know-how.
That knowledge is not just specific to the topic, say, of data. It is also information about how to run a data business, how to gain competitive advantage, and how to secure a defensible position. The same information layer will have advice about the right data tools, data visualisation, data management and so on.
I have tried to represent the information layer in the diagram with the empty purple boxes. Not ideal I know! But it seems to me that information is often like a ghost. It is there but you have to believe in its importance and once you do then you can see that information is what creates and glues together the business ecosystem.
Information is what ties all of these elements together. Information is what connects different horizontal and vertical business activities. Information is the ecosystem
Take as an example, the grouping in the diagram around blockchain, electric vehicles and organic ingredients. Ostensibly these are disconnected economic activities. However, it is more than likely that a new ecosystem will emerge whereby an entrepreneur sees the value in recording the origins, methods and journeys of organic ingredients on a blockchain to show authenticity. That’s already happening. And before long the record will also show the carbon and carbon-free miles on that journey.
The intersection of know-how and need are recreating value. New horizontal value flows are layering onto old linear value chains. The mechanism of transmission is content and that’s what the wonderful World Wide Web brought us and why it is accelerating innovation all the time. Yet still the question is out there: how should we look for value?
Jobs to be done v Flow value discovery
A couple of years back I stood in front of a long row of different ice cream flavours at a shop in Chamonix. From Myrtille to Banana and Oreo this creamery had it covered. But I was more struck by the pricing mix. One scoop was €2. Two scoops €3.50. Three scoops €4.50, ten scoops….. Ten scoops? Who buys ten scoops of ice cream, I asked?
The answer was people who have been up in the mountains. The exertion leaves them short of calories, so when they come down they replace those lost calories with a ten scooper!
This brief description illustrates the idea of jobs-to-be-done. One product, ice-cream, does various jobs depending on the customers’ needs.
When we in Flow – the digital transformation strategy – talk about segmentation, the audience response is often, oh, you mean jobs-to-be-done. But no, that’s not what we mean. What we are trying to find out is not the purpose that a product serves right now but, instead, how a customer’s needs might be changing.
You cannot find that out using jobs-to-be-done and nor can you do it by asking customers.
Flow customer innovation walls
In Flow we like to say forget your customers and think of your market. Companies that obsess over customers are in danger of being disrupted. Obsessing on markets, on the other hand, builds disruption resilience.
What we also find is that many companies use only very crude segmentations anyway. They appear in marketing PowerPoints as personas. Maeve and John who live in a suburban semi-detached with their two children; or Lenny and Bob, a pride couple who got married after same sex marriages were legalised and live in a city centre apartment.
Personas and old segments have a place in marketing but in Flow our argument is we can flip that round and use segments as a mechanism for value discovery. Instead of asking ‘how can I sell to these segments?’, we ask: can we expand these segments to understand how markets are changing?
You do the maths
Here’s an example of how significant segmentation can be to innovation and disruption. Around 2014 we began to see significant new market entrants in finance. The first wave tended to be in lending and foreign exchange. In the lending space, it was a known fact that banks did not deal well with SME loan requests. It was perhaps no great surprise that new platforms began offering streamlined loan processing to small companies. But in foreign exchange it was a surprise to see a raft of new companies appearing.
Companies like TransferWise and Currency Fair were set up by small groups of entrepreneurs. Currency Fair for example was set up by three people who were fed up of high transfer fees at poor currency exchange rates.
Behind this movement was data that showed small companies were increasingly trading into countries across the world rather than being localised to their country or region.
Their new export capability was often facilitated by software as a service platforms. The trend increased the need for exotic currencies. “Exotic” simply means currencies outside the main trading ones: the Euro, Dollar, Sterling and Swiss Franc. These were particularly expensive to source from banks.
Startups jumped into these segments as well as those that were marked by high numbers of migrants – another big trend over the past decade.
An improved offering
Since then we have seen startups such as Revolut move into a fuller range of banking services. But one of Revolut’s main offerings is that it allows people to switch between currencies at the interbank rate (making it more attractive than currency exchange platforms).
Learning from the first wave of Fintechs, companies like this have simplified onboarding, know-your-customer (KYC), and regulatory compliance. People can now sign up to new bank accounts in minutes, yet still be fully within compliance rules.
This sequence is typically how disruption works. New services are created that begin with limited features – often not necessarily offering good or complete care – but which over time improve. In this case, through a second wave of market entrants.
What lies behind this transformation, taking place in banking but also in other areas, is an implicit and more detailed segmentation of the market for financial services. Entrepreneurs are great at seeking out segments. It’s in their blood to spot underserved markets.
In search of the segments
What is relatively new is the expansion in the value companies offer. In this case consumers get value from easy onboarding, a better exchange rate, easier transfer, more autonomy, no punitive charges, electronic records that are easily accessible and a financial management console. These benefit the companies too.
When it came to foreign exchange services, consumers, at first, were seeking better currency exchange rates and more autonomy over the transfer. But those people were still being hit with charges on the use of credit and debit cards when they were abroad, a problem that Revolut fixes (and it fixes a few others, which is why it is attracting a large following). But to get there Revolut needed a substantial body of knowledge about how to do things differently, a body of content in fact that the Fintech revolution has built more successfully than it has built new value!
In Flow, we go in search of value in the segments. We expand on the existing segments that companies already have and go in search of the challenges and changing needs of people within them. In place of the old way of thinking about segments in single figures we describe markets in terms of dozens of segments (Netflix has 1300 and we have spoken with firms that manage up to 5,000). And when you see markets in terms of segments that go over double figures you also start to see the ecosystem.
Identifying and building value within ecosystems is the topic for the next article.