During the course of the two grants mentioned in my introductory post, our project team convened numerous “stakeholder sessions” across Northeast Ohio in an effort to encourage participants to generate business ideas and use the tools we offered to build them into business cases. In a pattern that repeated itself several times, attendees would have exciting ideas for businesses that played into their skills and captivated their interest in the session, but died along with the conversations after the meetings were over.
A likely reason for the high drop-off is the result of having given thoughtful consideration to the question, “How can I make a profit with my idea?” Or another way to ask the question is “How can I sell the value I deliver for a price that covers the expense I incur for delivering that value and have extra left over as a reward for me taking the risk and succeeding? The answer to that question is a business model. And if I can’t come up with a business model that fits with my idea, then I can’t make a case for it. Simple.
How could so many innovative and compelling ideas raised during the stakeholder sessions not find compatible business models to see them through to start-up? No doubt, there are several contributing factors to this outcome, not the least, of which, is that many of the ideas, which sounded good when first given voice, just didn’t pass muster under closer scrutiny. But what we also found is that how wide the net a person casts to vet an idea with others defines in large degree whether the idea continues toward fruition or dies on the vine.
In effect, almost any idea has the potential to connect with a social network of the countless, nameless many who represent all walks of life and all manner of means, and garner sufficient support to forge the idea into a full-fledged business. It is an application of Barry Commoner’s First Law of Ecology— “Everything is connected to everything else”— to commerce. The result is a business ecosystem.
From this perspective, a business ecosystem encompasses and interconnects all resources and assets as well as all participants be they customers, owners, employees, investors, suppliers, advocates, etc. Given this, how one draws the boundaries for a business ecosystem, defines who participates, and then positions an idea into it, influences the development of viable business models. The more expansive and inclusive the business ecosystem, the more options there are for a serviceable business model to ensue.
This raises the question, “Why do the qualities of expansiveness and inclusiveness contribute to more clarity rather than more chaos?” We found that, as in a natural ecosystem, the business counterpart thrives on an abundance of flows. Only instead of water, air, nutrients, etc., the flows in commerce consist of inputs, outputs, information, and know-how. And when these flows converge at specific points in time and space, an exchange of value, or transaction, occurs using an agreed to medium of exchange.
A business model organizes transactions so that “I sell the value I deliver for a price that covers the expense I incur for delivering that value and have extra left over as a reward for me taking the risk and succeeding.” More participants, more flows, more mediums of exchange, more value generated in a business ecosystem drive more transactions and, with them, greater odds that a business model will surface that develops a worthy idea into a successful business.
With these three terms as tags, look for future postings related to them that appeal to our grant experiences…
A business model illustrates how an organization or combination of interdependent organizations sustains itself based on certain output metrics.
Furthermore, a business model addresses the basic question of concern by anyone starting or expanding an organization: Is the amount people will pay for the perceived value of the products and services delivered by this organization sufficient to cover its operational expenses and sustain it?
Consideration of this question begins with the posting, Business Models for a Local Economy, which outlined five key characteristics of business models for a local economy. In summary, these are as follows:
Integration across all value-added steps from the point of consumption back to the points of production
Utilization of community assets and resources without reliance on outside funding
Application of performance metrics that deepen the resolve to establish a fully functioning local economy, spur creativity and innovation to find business solutions, increase the rate and degree of adaptiveness, and significantly improve the odds of long-term sustainability
The first two have links to previous postings that offer more detail. This post focuses on the two in bolded italics.
Are any community members hungry; homeless; living in unhealthy and unsafe conditions; or are they confronted with no paid work; illness; limited healthcare, and inadequate life skills to influence their circumstances?
How do you and your community keep score on needs met?
What are you and other community members doing to impact the scorecard?
The results of this survey assist community members to focus their creative energy on conditions and circumstances that warrant their collective attention. Such an overview enables them to quickly define those opportunity spaces wherein the community has the most to gain. This quickly leads to the development of robust and dynamic business models that undergird the development of business cases for clusters of interdependent businesses and community-based organizations. Those clusters have the potential for significant impact according to the scorecard metrics of the community. Furthermore, when loaded into a portfolio they offer opportunities for members to reinvest in their community and manage the launch and expansion of clusters.
In effect, community members take ownership for their sustainability. To do so entails the development and application of business models that increase community asset utilization while prioritizing the introduction of essential work modules.
The following diagram builds on a basic framework introduced in the previous posting. Both illustrate the flows of work functions and assets required to prepare infrastructure projects and business clusters for launch, provide the means to carry them out, and track results through a system of output metrics. However, the one below describes each flow in more detail and establishes the relationships between them.
In order to add value, an organization solves a problem or meets a need or frequently, does both. As mentioned at the outset, a business model shows how the organization does that and sustains itself.
The problem to solve in a local economy is how to conduct efficient, affordable distribution of needs to the points of consumption or use. The term “last mile” as a descriptor originated in the telecommunications industry during the 1990’s to describe a situation where, despite the relatively short distance (the “last mile”) between mainline fiber optic cables and subscriber homes and businesses, the installation costs prevented connections. In other words, the efficiency of the global economy did not reach into the communities, neighborhoods, and rural areas that lacked the infrastructure to make the connection given the prevailing state of technology. It required the development of another solution, wireless, for instance, to solve the last mile problem.
An infrastructure of integrated work modules itemized above solves the last mile problem. It also inspires the development of a long list of potential business and non-profit organizations required to fill the gaps. This is where the assets and resources of the community are brought to bear on interdependent business and support organization clusters so they take shape and continue along their paths to successful start-up and build-up.
The development of a business model or number of interrelated business models guides the association of assets / resources to work modules as they deliver across the last mile to consumers. The purpose of the model is to show how to execute the work functions required to meet needs and keep the organization sustainable. The steps in business model development include the following:
Identifying where assets and resources are located in the community (Maps)
Aligning the assets and resources so they support the mission of the business cluster in the most efficient and least costly manner (Models)
Monitoring what happens during operations of the newly aligned cluster in order to anticipate issues and opportunities before they become crises or target them quickly if they surface unexpectedly (Information)
Applying practical experience, theories in practice, and action frameworks through human engagement and embedded intelligence to resolve problems, improve operations, and course correct if appropriate (Know-how)
Loading a cluster of interdependent businesses and support organizations required to meet needs, add value, generate revenue, manage costs, and assure sustainability of operations for all involved into a community investment instrument (Portfolio)
The bottom line is that for a business model within a local economy to be effective and sustainable the consumers’ needs must be met; businesses and support organizations must collaborate to contain costs; and the value-added steps from consumption to production must be integrated to conquer the last mile. And there’s one more… The final key characteristic, application of a common set of performance metrics to help community members keep their investments on track, will be addressed in an upcoming post.
Whether you want to go into business within the global economy to satisfy customer wants in markets around the world or a local economy to meet the needs of community members close to home, an effective business model is essential. However, a business model that applies in the global economy is different than one in a local economy. Why?
The global economy is driven by people’s insatiable desire to have more than what is required to sustain their lives. In contrast, a local economy is focused on meeting the basic physiological (food, water, energy, housing, and clothing) and safety (security, education, and health) needs of its immediate members. In the former, I can live without it, whereas in the latter, I can’t.
In a global economy, customers have two choices: first, do they want something, in general—a car, for instance; and second, do they want a particular item within that general category—a specific car by make, model, year, and other specifications. Any number of factors influence customers in their decisions to buy at all and, if so, which ones. As a result, in the global economy, customers rule.
In a local economy, the market is automatically defined as all who live in the immediate area. The common factor is that everyone must have food to eat, water to drink, air to breathe, shelter as protection from the elements, energy to heat and cool the home, and clothing to wear outside. In addition, everyone must have a reasonable measure of security, means to manage their health, and access to education opportunities so they can better care for themselves and contribute to the sustainability of their local community. The capacity of a local economy to sustain community members predicts how well and for how long those members can participate in the global economy. As a result, in a local economy, the community rules.
Two Business Models:
Given the emphasis on customer choice, a successful business model in the global economy is one that:
Anticipates customer readiness for proposed products and services
Strengthens company readiness to deliver to customers
Adapts quickly to customer reaction and responses to what’s delivered
The net result is to establish and maintain a competitive edge among countless others who want the same outcome for their companies.
For further insights on the development and use of adaptive business models in the global economy, consider Steve Blank (@sgblank) an excellent resource. Steve brings his extensive firsthand experience in building early stage businesses to bear through informative posts about entrepreneurship, start-ups, and applied business principles on his website. Business models is one topic he treats particularly well. In his posting, “What’s a Startup? First Principles,” he describes what is a business model and how to apply it. He also contrasts it to business plans, an analysis he carries forward in a later posting, “No Plan Survives First Contact with Customers – Business Plans versus Business Models.”
In a local economy, community members can choose to source their needs from suppliers far afield from their community. However, to do so puts at risk long-term sustainability due to interrupted supply lines. As a consequence, business models for a local economy offer attractive choices to members so they can meet their needs from local sources.
Key characteristics of business models for a local economy include the following:
Universal participation by community members
Initial focus on meeting the needs of community members without fail
Integration across all value-added steps from the point of consumption back to the points of production
Utilization of community assets and resources without reliance on outside funding
Application of performance metrics that deepen the resolve to establish a fully functioning local economy, spur creativity and innovation to find business solutions, increase the rate and degree of adaptiveness, and significantly improve the odds of long-term sustainability
As indicated by these qualities, business models that deliver the basic needs of community members within a sustainable local economy are quite different than those that satisfy wants of customers throughout the global economy. Given the importance of these local economy business models, they warrant further attention. Look for more details in future postings.
This is the first in a series of postings to the Ohio Local Food Systems Collaborative (OLFSC) about starting and sustaining a business in local food systems. These postings have several not so ordinary characteristics:
They are about real business opportunities in real neighborhoods
The process of developing these opportunities and the resulting content are shared openly on the OLFSC website
They invite OLFSC readers to comment, critique, and challenge assumptions and extrapolations posted in order to make the outcome better for all
They encourage OLFSC readers to generate ideas and develop plans for businesses they eventually setup in their local areas
Before heading into the business opportunities, clarification of business concepts and terminology is in order…
A Firm Foundation and Ongoing Adaptation
The purpose of any business is to deliver value to the customer. The primary objective of a business is to make profit. In terms of value, this means the amount the customer pays for value delivered (revenue) surpasses the amount invested by the business to provide that value (capital and operating expenses). The ultimate goal of a business is sustainability over the long-term. Again, from a value standpoint, a business is sustained when a sufficient percentage of the profit is reinvested to continue to develop and deliver what is deemed of value by customers so that they continue to pay for it.
What is of value to the customer (idea generation)? How does one deliver that value profitably and in a sustainable manner (business planning)? These are the primary questions addressed at the outset of an entrepreneurial effort. Idea generation and business planning combine vision of a preferred future with a framework for action that brings that vision into reality. These two, working in concert with one another, provide the firm foundation upon which all successful businesses are launched.
Delivery of demonstrated value to the customer requires taking action according to the business plan (business plan execution). Of course, changes in conditions and unforeseen circumstances during the delivery cycle warrant a certain degree of flexibility in executing the plan as it is put into play (adaptation). The capacity to sense and respond, learn and adapt is the hallmark of a business that survives start-up and embarks on sustainability.
The main points outlined above equate to key steps in establishing a successful business:
Develop a business plan
Execute the plan
Adapt plan to “lessons learned” during execution
These four link vision with problem-solving to deliver demonstrated value to the customer. Because of the significance of the dialectic between vision and problem-solving in business success, future postings in this series will delve more deeply into the working relationship between the two. And in keeping with the commitment made in the opening statement of this posting, the focus of the upcoming OLFSC postings will be “real business opportunities in real neighborhoods”.
Originally posted to Local Food Systems by Steve Bosserman on Wednesday, May 28, 2008 10:30
One responsibility that comes from communicating with readers through media such as blogs is to define terms as they are going to be used in various postings and follow-up by consistent usage of those terms according to their stated definitions. In this instance, three terms are offered for consideration in this and related postings about business opportunities: business case, business model, and business plan.
Wikipedia defines “business case” in the context of an existing business wherein certain changes are being considered. While this is certainly a useful construct in project management practices, it need not be limited solely to that purview. It is also a valuable tool for entrepreneurs to draw upon when determining start-up possibilities or expanding an existing business far beyond the boundaries and scope of its original charter.
Business cases lead to “business models.” A business model is the approach a business intends follow in order to generate revenue, control expenditures, and make a profit. More than one business model is possible in response to strong business cases. The challenge is crafting and adopting an appropriate business model that leads to a successful business within a given set of circumstances. It is a bit like playing chess and determining the opening one is going to use based on personality and temperament as much as intellect, skill, and experience. Determining and applying business models in response to business cases spawns creative experimentation that typifies entrepreneurial efforts.
A “business plan” covers comprehensive information, in-depth analysis, and detailed description about how practical application of the business model is accomplished successfully over time. Putting a business plan together demands that one think past overly optimistic assumptions about revenues and underestimates of capitalization costs and operating expenses. This exercise brings a critical level of discipline to choosing a business model. And if support from others is required to get the business going, a business plan is an excellent communication medium through which one’s attention to detail and exercise of due diligence is documented.
An earlier posting, “Addicted to Oil,” points out that such a level of dependence drives concern for quantity and quality of the addictive agent and consequences of use for the addict and the social systems that support the addict. It also turns up the heat in the addict’s thinking to consider the possibility of not succumbing to the powers of the addictive agent and choosing an alternative path of recovery. The foundation for an addict’s travels to a clean and sober life is a totally different structure and behavior than the basis for the one that supported the addiction. It requires significant sustained commitment to move from the addictive structure to the clean and sober structure. And there are many bumps in the road that test commitment and resolve. This is an act not to be taken lightly.
Recovery from oil addiction entails securing energy from renewable sources rather than fossil fuels. This is a costly route to take since the current global system is setup to generate, deliver, and consume energy from fossil fuels, not renewable sources. To make the switch requires a considerable investment of time, money, and talent to develop and apply the technologies that will make renewable energy system feasible. Such investment will not happen without the assurance that there is a business case for doing so.
Making the shift from fossil fuels to renewable energy sources requires a business case based on irrefutable evidence that not doing so will result in highly undesirable consequences. In recovery, the addict must “reach bottom” before beginning the long ascent out of the dark pit. With oil addiction that point is reached when the realization that to continue unchecked is simply an untenable position. In other words a “tipping point” is reached from which there is no turning back.
We reached a tipping point this year — where living, acting, designing, investing and manufacturing green came to be understood by a critical mass of citizens, entrepreneurs and officials as the most patriotic, capitalistic, geopolitical, healthy and competitive thing they could do. Hence my own motto: ‘Green is the new red, white and blue.’
It appears that in the minds of some the point of no return from black to green has passed. Regardless of how far beyond this point we are, it is safe to conclude that business opportunities in the renewable energy sector and the proliferation of business models and plans they spawn are nigh. We are taking first, but strong steps out of the black hole of addiction along the green path of recovery. And this growth in business possibilities will not remain within the realm of the energy sector alone. Due to the tightly woven interconnections among them, the fuel, food, feed, floriculture, and fiber industries as a whole will be transformed. A budding renaissance for agriculture is in the making. Stay tuned for more!
In my previous posting about Mukesh Ambani’s ambitious plans for Reliance Retail, Ltd., he intends to “revolutionize” two sectors: farming and retail in the process of establishing this new business. His plan to “invest more than $5 billion by 2011 to put both the farms and the stores on the road to modernity, connect them through a distribution system guided by the latest logistics technology, and create enough of a surplus to generate $20 billion in agricultural exports annually” is a bold statement of the speed, scope, and degree to which he will attack the prevailing system. No doubt this will have an impact – revolution does that, although there are often unintended consequences!
Usually, “revolutionize” in the context of agriculture means introducing labor-saving, automated, integrated mechanical and biological systems that eliminate the need for human participation. This accomplishes three things: reduces the cost of the operation by taking people out of the equation; displaces people who are no longer needed in support of agriculture so that they are compelled to do something else; and lengthens the distance between the point of agricultural production and the point of consumption of food, feed, fiber, or fuel. This approach was effective during the last century in those areas of the world where human labor was needed to power the growth of the industrial sector. In fact, the mechanization of agriculture and the subsequent displacement of people from farming and rural areas was a perfect complement to the growth of industries in the urban centers. Is the world ready for more of that?
The last thing countries with the most populous cities in the world need is more people migrating from the less populated rural areas to the urban areas. Further overcrowding of already overwhelmed infrastructures helps no one and contributes further to decline in the quality and even sustainability of life. Still, with nowhere else to go and no hope where they are, relocation to the cities is often the only recourse people have in these circumstances.
The question is: how can technology be applied in the farming sector such that the people whose welfare is dependent on agriculture are able to have sufficient quality of life centered around the principles and values they hold dear at their local community level yet be able to scale their output to meet the demand of more distant communities in need of what they produce?
One way to begin to answer this is through the e-Choupal system introduced by ITC, Ltd. to farmers throughout rural India.
…leverages Information Technology to virtually cluster all the value chain participants, delivering the same benefits as vertical integration does in mature agricultural economies like the USA.
‘e-Choupal’ makes use of the physical transmission capabilities of current intermediaries – aggregation, logistics, counter-party risk and bridge financing – while disintermediating them from the chain of information flow and market signals.
With a judicious blend of click & mortar capabilities, village internet kiosks managed by farmers – called sanchalaks – themselves, enable the agricultural community access ready information in their local language on the weather & market prices, disseminate knowledge on scientific farm practices & risk management, facilitate the sale of farm inputs (now with embedded knowledge) and purchase farm produce from the farmers’ doorsteps (decision making is now information-based).
Real-time information and customised knowledge provided by ‘e-Choupal’ enhance the ability of farmers to take decisions and align their farm output with market demand and secure quality & productivity. The aggregation of the demand for farm inputs from individual farmers gives them access to high quality inputs from established and reputed manufacturers at fair prices. As a direct marketing channel, virtually linked to the ‘mandi’ system for price discovery, ‘e-Choupal’ eliminates wasteful intermediation and multiple handling. Thereby it significantly reduces transaction costs.
‘e-Choupal’ ensures world-class quality in delivering all these goods & services through several product / service specific partnerships with the leaders in the respective fields, in addition to ITC’s own expertise.
While the farmers benefit through enhanced farm productivity and higher farm gate prices, ITC benefits from the lower net cost of procurement (despite offering better prices to the farmer) having eliminated costs in the supply chain that do not add value.”
Of course, for ITC to make this work requires a dedication to growing its business by engaging farmers as partners in making their businesses successful. ITC’s sustainability policies are based on a deep and unwavering commitment to the people of rural India: to help them improve the quality of their lives, provide them with the wherewithal to keep their families intact and grounded, and contribute fully to the betterment and sustainability of their local communities.
The effectiveness of this program on multiple fronts has not gone unnoticed. ITC has garnered several awards for the e-Choupal program namely, the Corporate Social Responsibility Award in 2004 from the Tata Energy and Resources Institute (TERI), the Wharton Infosys Business Transformation Award (WIBTA) in 2004, and most recently the Stockholm Challenge Award in May 2006.
The goal of e-Choupal is to sustain, strengthen, and scale the operations of farmers with small agricultural holdings throughout rural India. The success of this system is earmarked by farmers staying in business, improving their operations, caring for their families, and contributing to the welfare of their local communities. This outcome scores well in following the sequence of localize, link, and globalize mentioned in last week’s posting by the same title.
And there is room for more! In a country of one billion people, three-quarters of which live in rural areas the efforts of ITC and e-Choupal only touch a narrow few. Reliance Retail, Ltd. is branching out with farming and retail and is committed to build an infrastructure that stabilizes small scale farming operations rather than destroy them; in direct competition to Reliance Retail, ITC is introducing Choupal Fresh.
Then, there are companies like Bharti that partnered with the Rothschild Group to form FieldFresh Foods. They are entering the next stage of scaling up agricultural production in rural India to supply global markets. Are Indian farmers sufficiently stabilized in their newfound capabilities to remain sustainable as small businesses in light of this rapid scaling?
Andy Mukherjee writing for Bloomberg.com paints companies Reliance, ITC, and Bharti with a common brush regarding their intentions for the Indian farmers in light of a worse fate – Wal-Mart. The title of his article “Indian Food Trade Lures Reliance, Bars Wal-Mart,”1 suggests that a preferred strategy is keeping Wal-Mart at bay. Unfortunately, there are many paths that lead to premature globalization of food production at the farm level – even a seemingly healthy alliance between Bharti and Rothschild is fraught with difficulties!
Clearly, a Wal-Mart excursion into India would have a significant impact on the economics of farming and retailing in India. It poses a dilemma in whether to keep expanding the agricultural sector globally by building from a firm foundation of localized – linked – globalized farming operations, or prematurely opening the floodgates to global markets, compromising the system at local levels, and either becoming non-competitive due to excessive cost or entering the slippery slope of farm consolidation.
The title of a Knowledge@Wharton article, “Will Wal-Mart Succeed in India? Perhaps…But It Won’t Be Easy,”2 suggests imminent conflict with Indian retail chains and the Indian government in their unwillingness to allow direct foreign investment into the retail industry. In response, Wal-Mart has formed a joint venture with Bharti. Will that be enough to overcome native resistance? And in “Wal-Mart Pushing India to Lift Ban on Global Chain Stores” published in The Hometown Advantage by The New Rules Project, the argument is raised that large non-Indian retailers like Wal-Mart are not good for the local Indian economy because their realm of interest is with absentee shareholders, not the people of India at the local level. Proceeding further while carrying this lack of concern for the impact one’s business model has on people whose livelihoods are placed squarely at risk is catamount to unethical business practice. In this case, it reverses the preferred approach of localize – link – globalize to drive globalization first and align linkages to suck profits and resources away without stabilizing the local economies first.
The world has endured this “global first” extraction / domination model for centuries. It doesn’t work. It’s time to give it up!
A colleague of mine is working on a white paper about various trends affecting agriculture over the next 10 years. These futuristic endeavors are fraught with peril because who really knows what the future will hold – no one. But clients and colleagues are constantly looking for ways to talk about the future with sufficient clarity and confidence that their audiences go away having more insight than otherwise.
What can one say about the future that holds true beyond the simple inevitability that the world will end and life on this planet will cease? Not much, it seems, if one is searching for specificity. But in general, there are several points that can be made which offer a framework for consideration when looking at the future.
My previous posting discussed “push” and “pull” business models. The embedded diagram illustrated a progression from individual products / services to integrated product / service combinations.
In the diagram below, this same progression forms a backdrop to highlight an increasing integration over time characterized by solutionizing and convergence.
The objective is human equivalence as introduced in an earlier posting. The balance of this diagram sets up two critical relationships that supplement increasing integration. First, developments in nanotechnology, genetics, and robotics continue to displace people from making things. And second, as artificial intelligence becomes more robust and capable of emulating human problem-solving, human intelligence is pressed into service to address an expanding awareness of the enormous complexity within the whole of creation. In other words, human intelligence leads artificial intelligence into areas of greater sophistication, ambiguity, and choice. This accelerates the advances in artificial intelligence hastening the day when it effectively achieves human equivalence.
Between now and then, the trends to watch are directly influenced by technology operating at the molecular, atomic, and sub-atomic levels, recombining DNA, and merging the biological with the mechanical. Whether related to care and consideration for the environment, applying agricultural practices to the production of food, feed, fiber, or fuel, or raising the quality of life, all are overshadowed by developments in these three areas. In general terms, to watch the evolution of technology as it shrinks to the barely detectable, rearranges genetic structure at will, and creates androids that eventually replace us will be exhilarating, unnerving, and perhaps traumatic, but inevitable. These then, are the primary trends. All others are of secondary importance. More later…
Through the three hundred-year reign of the Industrial Age, businesses “pushed” their products and services onto consumers. Limited choice accompanied by considerable marketing hype was enough to make the consumer buy. It was a sellers’ market. Now, thanks largely to the Information Age, consumers are evolving into customers who can select what they want from a variety of providers. It is becoming a buyers’ market. But further changes are afoot. As customers get more they expect more, especially in terms of their business performance, their quality of life, and the welfare of the planet. Customers are beginning to “pull” solutions toward them rather than take what is “pushed” at them. Just like the challenges confronting the two-headed llama in Dr. Doolittle’s menagerie of strange animals, the implications of “push” or “pull” on business strategies are enormous. The differences between a business model intended to push products and services to consumers vis-à-vis a model built in support of customers pulling solutions into a shared reality are significant. While many companies will be impacted by this switch from “push” to “pull,” few will be prepared for the transition.
As indicated in the diagram below, there are numerous dynamics at play in the understanding and application of the push and pull business models. Can any business traditionally steeped in a push model operate concurrently with a pull model? It’s a question well worth consideration. There are no quick and easy answers. Read on…
Distance to the Customer Revisited
A previous post explored the relationship between the dissipating Industrial Age and the emerging Relationship Age in terms of “distance.” During the height of the Industrial Age, many products and services were built, packaged, and delivered according to rigid, standardized specifications. While individual customers may have had some leeway in personalizing their purchases, all too often the range of possibilities were narrowly prescribed by the provider. Basically, consumers were pressed into a mold that kept them at a “distance” from providers and in a position to have to accept whatever product configurations providers offered. This enabled businesses to take advantage of certain “economies of scale” and improve operating efficiencies which reduced their costs, improved margins, and led to lower prices and greater competitiveness. Successful marketing campaigns generated more sales and revenue. The resulting profits were distributed to shareholders and used to grow the business through investments in people and their research and development. It was a simple formula for sustainability!
The advent of the Information Age began to challenge this formula. Advances in communication and information technologies opened doors to opportunities previously unknown or unavailable. Consumers became more aware of and had greater access to a wider range of product and service possibilities. In effect, as consumer expectations became more specific and refined, they became customers no longer content to take only what was offered by a limited number of providers. Gone were the days when if they wanted a unique, customized package they had to be willing to pay an exorbitant price – an option out of the question for most during the Industrial Age. Now, it was becoming routine to get exactly what one wanted at a reasonable price by comparative shopping in a larger universe of providers.
Businesses were also taking advantage of the Information Age. Formerly, the buying characteristics and specific business and lifestyle needs / wants of individual customers were not discernible. What market analysis was done came at great cost and with little granularity in the results leaving businesses to make gross generalizations about consumer interests within broadly defined markets. However, just as communication and information technologies gave customers more choices in providers, businesses used these same technological advances to learn more about their current and prospective customers. Lack of distinction among market groups has given way to proliferation of well-defined market niches and segments. While developing accurate and complete profiles on individual customers in mass markets remains a goal still in the future, the gulf is closing and the distance between the customer and the provider is shrinking.
Application of Intelligence, Innovation, and Knowledge
Regardless of the industry or circumstance, businesses imbue intelligence, innovation, and knowledge into their deliverables. Whether for professional or personal use, when customers make purchases they are buying know-how. The narrowing customer-business gap is shifting the point at which customers expect intelligence, innovation, and knowledge to be applied and where businesses must be forthcoming and effective at imparting it.
During the Industrial Age intelligence, innovation, and knowledge were instilled in products and services at the moment of their invention then distributed widely into large market areas. In the Information Age, developments in technologies enabled products and services to be combined in different configurations that yielded much better performance, reduced prices, and a wider selection of possibilities for the customer to choose. In effect, the application of intelligence, innovation, and knowledge shifted from solely in the products and services to their combinations.
Companies successful at making this shift purposefully designed the interfaces between various product and service lines so that the highest level of efficiency, effectiveness, and value occurred with those products and services from the same company. Perhaps the most obvious example of this is Microsoft. Starting with a simple operating system that became the standard for the vast majority of PCs, Microsoft continued to develop an array of supplementary software packages that interfaced easily with its own evolving operating system. This powerful combination of products and services proved to be a huge barrier to entry for competitors and Microsoft became the dominant player in the industry within a very short period.
As technology advances even further, the point of application for intelligence, innovation, and knowledge moves along with it. This shift goes past individual products and services or combinations of them to include multiple combinations from a diverse selection of providers. It is fueled in large degree by the breakdown in barriers that separate the product and service lines of one company with those of another, especially among competitors. The elimination of boundaries directly challenges the Industrial Age paradigm wherein companies attempted to keep their parts, components, and assemblies proprietary, non-standard, and separate from those of other companies in order to leverage internal investments and resources. The Information Age paradigm is leading to widespread adoption of comprehensive, industry-wide standards such as ISOBUS in the agricultural equipment arena, and the integration of two previously incompatible and competitive products into one as with Apple’s beta version of Boot Camp, which enable Macs to run Windows operating systems and software natively. This is the advantage that comes from being able to fluidly mix and match product and service offering from a multitude of companies.
Who Is the Integrator?
While seamless combinations of products and services are certainly a major step forward for customers striving to improve their businesses and quality of life, they still require the customer to analyze requirements, consider alternatives, make selections, and deal with the consequences one way or the other. Basically, the customer is still the “integrator” – the one who puts a solution or system altogether at the end as businesses compete among themselves for the right to provide the various pieces. In an environment that went from offering few choices to one harboring an infinite variety, life went from the seemingly simple to the extremely complex.
This growth in complexity comes at considerable cost in terms of time, energy, creativity, and money for the customer managing a business or personal interests. As a result, responsibility for integrating complete and comprehensive solutions for customers is quickly moving from the customer to the business. The nexus for delivering intelligence, innovation, and knowledge is still on the move. It is beginning to cover the full range of customers’ businesses or personal endeavors, the processes and tools they utilize, and the groups, entities, and individuals with whom they interface and interact. Companies that once “pushed” individual and combinations of products and services are now being asked to “partner” with a single customer, focus together on that customer’s business / lifestyle model, and “pull” a solution to it from the myriad possibilities within a supportive network / web. The Relationship Age is dawning!
While this evolution is predictable and straightforward, it is difficult to carry out. Usually, companies do one and not the other. Even when they start with the more traditional push model and dedicate a portion of their business to the pull model, they will eventually isolate one from the other or jettison one and leave the other. One of the most recent companies to make such a transition is IBM. In 1991, IBM was known for its computer hardware and consulting business. Mainframes and PCs constituted core businesses within IBM’s portfolio. Then, in 1991 IBM started another division, IBM Global Services, focused on developing and delivering total solutions in response to the needs of customers’ businesses. Today, IBM Global Services generates nearly $50 billion in revenue – over half of the total revenue for the entire corporation. To accentuate how challenging it is to maintain both business models, in 2005, IBM completed the sale of its PC division to Lenevo, a subsidiary of Legend Holdings in China. After being in PC design and production from the inception of the industry, IBM was now out of this business. And its Global Services arm continues to grow.
Companies think because they are offering integrated product and service packages of varying degrees of comprehensiveness and coverage they are using a pull model. This is not the case. Most companies continue to use variations of the push model wherein individual products and services are blended into certain combinations which are integrated with other combinations to increase appeal to the customer. When the number of additional features and functions included in the package reaches the point where the customer feels the deal is better than competitive offerings, the customer buys. No matter how sophisticated the bargaining process is between sales agents for the company and the customer, it remains a ‘here’s-what-I-have-to-sell-what-is-it-going-to-take-for-you-to-buy’ transaction – the customer is still the integrator.
Businesses that use the pull model begin with the customer’s business or personal interest “portfolio” – the critical mix of conditions and expectations within which the customer develops plans, takes action, and pulls a solution to it. The businesses are intimately aware of the customer’s business model. As such, they know how an opportunity fits into the customer’s portfolio; and they have the customer’s confidence that they can pull a powerful solution into place and put it into play. The customer trusts that the provider’s intelligence, innovation, and knowledge in large systems thinking and behavior is sufficient to bring about an appropriate solution in response – one that is so much BETTER than the customer’s approach that there is no need for the customer to second-guess the provider. The company becomes the integrator. The customer is relieved from managing a substantial level of complexity and can apply new-found time and energy into other areas of opportunity or interest.
An Opportunity Looking for a Place to Happen
At the outset of this posting I asked, can any business traditionally steeped in a push model operate concurrently with a pull model? Yes, but only to the degree that the business is willing to invest in a one-on-one working relationship with a customer — one of the hallmarks of the budding Relationship Age — to the point that the customer trusts that the business is the better integrator. It is a negotiated “partnership,” not a bargaining agreement.
How would one know the difference? An example might help. In May 2000, the German Bundestag passed the Renewable Energy Sources Act. Amendments to the act went into effect in August, 2004 that opened the door for numerous business opportunities for those in agricultural production. As the name of the act suggests and its content describes in detail, development of renewable energy sources for electric power generation is a major focus of the measure. One of the renewable sources encouraged is bioenergy, which includes biogas and biomass. Given the growing interest in biogas, there is a high likelihood that for some in organic agriculture in Germany a significant percentage of their business portfolios would be enriched by a biogas production component. Studies show how German producers can extract a distinct advantage by integrating biogas production in their overall operations.
This is an opportunity for businesses to emerge that provide customers with comprehensive organic agriculture portfolio solutions “pulled” from a broad-based network of product and service providers. A list of companies involved in biogas / bio-energy listed by Renewables Made in Germany is telling: not many companies are shown; those who are offer products and services related to the technology associated with bio-energy; those with established reputations as integrators using pull-based models are not listed. This is a heretofore unrealized business opportunity. The company that shows up with a viable, trusted process of engaging customers who are in agriculture production to improve their business portfolios by drawing upon deep support networks to pull a solution into play will win. So far businesses in this market are pushing their products and services. The customer is relegated to an age-old role of an integrator. How much longer? Time is drawing short. Let’s watch and see what transpires over the next few months!
Solutions, as they are defined and delivered in response to identified needs and wants, are manifested along a continuum of virtualization-to-realization. In the graphic below, the uncolored image of the portal diagram from Solutions Triptych, Panel I becomes the background over which the dynamics of virtualization and realization are shown. The portal acts as a lens to focus that which is conceived virtually in preparation for its eventual realization in physical form at a later time.
As information and communication technologies extend their capabilities, three key characteristics of virtualization will accelerate the pervasiveness and rate of adoption for these technologies:
Intuitive – human interaction with them will become easier and more transparent
Intelligent – they will become more human-like in their functioning so that people are able to engage in other activities rather than tending to the technologies or what the technologies are designed to do
Integrated – interfaces between one technology and another and one component in a system with other components will be designed so that the components in a system can be upgraded and the system’s overall functionality and effectiveness improved without having to replace the entire system
In fact, as people become more experienced with and confident in virtual solutions meeting or exceeding their needs, their expectations for more intuitive human factors, more intelligent functioning, and more integrated features will grow. The result will be a decided pull from customers for business investment to continue in developing even more powerful virtual solutions.
However, that which is virtualized must be realized at some point either with the means to experience the solution satisfactorily in virtual space or with tangible goods. The flipside to the three virtualization characteristics is another set for realization. These are extensions of what is commonly experienced within most manufacturing operations, namely:
Cost – related to the business providing the realized solution and to the customer who is “investing” in it
Quality – how well the realized solution performs according to specifications and for how long under diverse / changing conditions
Schedule – when the realized solution is available from the business and when it is needed by the customer
The perennial challenge within industry is how to balance these three realization characteristics. The rule of thumb in management is to emphasize any two of the three depending on the tolerance of customers then develop strategies based on those and letting the third “float.” This is not an ideal circumstance in which to manage, but a conundrum of significant familiarity with those in industry!
Through rapid and marked increases in virtualization techniques and capability, the formulae for managing the realization characteristics have changed. The diagram below illustrates some of these dimensions.
At the heart of the virtualization-to-realization transition is the spatial and distance relationship between the point where the solution is virtualized and the point where it is realized. For instance, in the bottom relationship one product solution goes to many customers. The “point of realization” (PR) precedes the “point of virtualization” (PV) as inventory is produced then presented to the customer through virtual presentation in hope that sales are forthcoming, inventory is quickly turned, and the cycle repeats. The customer has little influence on the specification and utility of what is represented by a particular business. Instead, the customer exercises choice by cost – quality – schedule comparisons among competitors offering similar solutions.
In the middle relationship, a system solution is packaged using components from “some” providers then delivered to a well-defined market segment comprising a distinct “some” set of customers. PR and PV are in very close proximity to one another. The customer has more direct influence over the specification of the system solution rather than component parts. Businesses are able to facilitate the customer’s choice by offering a wide range of configurations and feature combinations along a relatively lengthy decision-making timeline. As a result, the customer has longer to consider the alternatives in virtual space before making a final selection. Also, businesses can defer adding inventory until the last moment when the customer’s decision triggers realization of a solution already sold virtually.
The top relationship shows how a much larger population of “many” businesses bring products / services into a total solution in response to well-identified needs and wants of “one” customer. In this instance, the PV precedes the PR and each customer has the latitude to experience a total solution tailored specifically for their situation and distinct requirements. Oftentimes, the virtual experience of the total solution is so effective that the customer can sharply reduce the investment in physical / tangible assets required to realize the application value of the solution. This is a win for both the businesses providing the solutions and the customers acquiring them as the costs of operating in virtual space are much less than with tangible assets. While the conversion of virtual experiences into physical applications will be the mainstay in many transactions, it is trending such that this will be less the case as time goes by. This is significant for businesses and customers everywhere!
These three relationships – one to many; some to some; and many to one – play across a larger continuum of commoditization-to-customization depicted with the arrow in the background. Depending on the capability of a business to influence the juxtaposition of its “point of virtualization” to its “point of realization” determines the guidelines for an appropriate strategy for that business. Those that can adopt more intuitive, intelligent, and integrated information and communication technologies are better prepared to differentiate themselves from competitors by presenting highly customized total solutions in virtual space. Those less willing or able to do so focus directly on going head-to-head with competition in the delivery of singular products and services with a more favorable cost – quality – schedule result in the eyes of customers. An “appropriate strategy” keeps the PV and PR aligned with placement on the commoditization-to-customization continuum. This assures care is taken for the transactions passing through its portal from virtualization to realization, which is the real significance of any thoughtfully considered and well-executed business strategy.
Originally posted to New Media Explorer by Steve Bosserman on Saturday, October 1, 2005 and updated on Monday, October 3, 2005
In business, the term “solutions” has a particular meaning. It refers to the results of conversational transactions wherein the needs and wants of a customer are identified and appropriate responses are made through a business (or multiple businesses) that satisfies those needs and wants for which the business is compensated. These appropriate responses are “solutions” in that in the moment they solve the problems of previously unmet needs and wants.
Conversational transactions between customers and business are conducted through a portal that connects “someone” having needs and wants with “something” that constitutes a solution. This concept of a portal is characterized in the diagram below as the overlap between what something and someone are not and what something and someone are. The relationships of solutions to customers are rarely anything to anyone. Instead, they are specific. While it is helpful to know what is not a viable solution and who is not a likely customer, at some point a match between someone and something must happen or the transactions will not be fruitful.
As a result, it is in the best interest of a business to know the needs and wants to which it will respond with solutions. To know them is to know the customer and to know the customer is to know the market. As we all know, businesses whose compensation is less than the cost of providing the solution are not in business for very long barring subsidization. Knowing what a solution costs is critical to business success. Along with this is the need to know what type of solution portfolio best fits a business given its culture.
Needs and wants are met by solutions of different types. For instance, if a person wants to improve the quality of their sound system they can upgrade their speakers with a new set and are satisfied with the difference they hear. In this case they are interested in a component solution. However, a person may want to make an even more substantial improvement in the sound quality by replacing all components with more advanced, integrated alternatives. In this instance, they are more interested in an equipment system solution. Some circumstances lead to an even more comprehensive approach. In building upon this example of a home entertainment system, a person may be designing and building a new home at which point it is no longer just a matter of the equipment system alone, but the layout of the space in which that system will be installed. In other words, their interests move toward a total solution.
Solutions are fractal in that depending upon the starting point, the continuum of component – system – total solution can be indexed along a scale of increasing complexity. Determining where on this complexity scale a company wants to be is critical for its strategy and organization design. As the diagram indicates, the connections through the portal vary in size depending on choice. A tendency toward component solutions places more focus on a portfolio of specific and relatively independent products and services that flow through a narrow, well-traveled pathway in the portal. The trade-off is a higher degree of similarity / commonality with the offerings of competitors; the portfolio is commoditized and competitive environment is head-to-head. A tendency toward total solutions opens the portfolio to include customized packages of integrated products and services. The pipeline between customer and business is enlarged with more opportunities. Attention must be given to the performance of the whole, which invites an entirely different type of challenge. But the pay-off comes in differentiation from competitors, which certainly carries an advantage in many circumstances.