Navigating the Networked Economy

We suggest that both a deep understanding of the change drivers as well as the way a company creates and captures value are key to navigating the networked economy.

This blog article presents an excerpt of the book Connected Business, Create Value in a Networked Economy.

The networked economy has become the main paradigm in today’s business world; it is the emerging economic order within the information-based society. Products and services are created, produced, and distributed on networks, platforms, and ecosystems along the customer journey. The base of the networked economy on a company level consists of connected businesses, where most products, processes, and services become smart and connected.

Classic reactions to these developments have been to either be afraid and freeze, to delegate the task to R&D or to hire a Chief Digital Officer. Neither approach will bring the desired results.

Business leaders seeking to implement a successful connected business need to possess a fundamental understanding of the change drivers in the relevant industry and a deep insight into the way companies create and capture value.

Game Changers in the Networked Economy

We can identify twelve pivotal trends that have to be addressed when developing connected business for the networked economy:

1. Ubiquitous connectivity has been increased: 
   Technology has become ubiquitous and cheap. IoT has become a big value driver as it bridges the physical and the digital world. Because IoT is being more widely used, information—specifically, vast amounts of environmental data, often unstructured—is collected and exchanged between machines and devices.
2. Digital technologies become commodities:
   Despite all the talk about digitalization, these technologies are no longer differentiators. Standardization and application programming interfaces (APIs) drive modularity in technology development. The innovation cycles become shorter, while the available portfolio of applicable technologies increases significantly.
3. Achieving mastery in orchestrating all necessary technologies in a single system becomes crucial:
   Only companies that have the required human and technical resources will excel in this market, or at the very least survive.
4. Transaction costs go down dramatically:
   This facilitates the creation of many new collaborative business models along the value chains.
5. It is not about big data; it is about smart and relevant data:
   Exponential data growth will continue, mainly driven by connected devices. The biggest challenge for a company is often how to identify the relevant data and transform it into useful information and business-relevant knowledge so that business models can create and capture value.
6. Data analytics increase the value of data:
   Data has become the new oil. But if data is the new oil, the trained model is the new refinery. A data strategy has, therefore, to include how to manage and protect the AI-based data model.
7. Shifting customer expectations drive user experience and convenience: 
   Customers expect a superior user experience in terms of convenience, one-stop shopping, provision of solutions, and ease of transactions in various areas.
8. Points of sale are shifting in several product categories:
   Not only has the point of sale relocated to your pocket via the smartphone app but the vendor has also changed. You pay Uber for the ride, not the local taxi driver; you pay Netflix or the ticket sales platform for the movie, not the local cinema owner.
9. Platform companies with two-sided markets are winning in many industries: 
   In many cases, industry outsiders, because they are neutral players, have the best chance of securing wide market acceptance from all actors. Most companies do not want to jump on competitors’ platforms.
10. Value creation has shifted in the connected world: 
    The music industry is a good illustration of this shift. In the unconnected age, the publishing label and the musician earned $1 each per CD sold. In the connected Spotify world, music has become very cheap, and turnover has shifted to the music streaming service platform, Spotify. The label gets $0.0016 per song played; the musician only $0.00029.
11. The development of ecosystems along the customer journey requires multilateral partnerships: 
    The goal of such collaborative efforts is to develop a superior or new value proposition for the customer. This is enabled through data sharing in order to increase convenience and user experience and create positive spillover effects from one service to the other.
12. Coopetition becomes more the norm than the exception: 
    Amazon and Apple cooperate when you buy your new iPhone via Amazon. But, at the same time, both companies are serious rivals when offering competing digital media ecosystems.

How to create and capture value in open ecosystems

Business value is about creating and capturing value. This is relevant for all kinds of innovation, not just the networked economy. Developing the 72 generation of rear axles for Volkswagen is known terrain where customer insights and functions are clear. But starting a connected business initiative is much tougher. At the beginning of the innovation curve, several technologies are available, and multi-options on platforms, technologies, and functionalities produce uncertainty. Too often, implicit and untested assumptions on customer expectations lead to the neglect of business value considerations. Therefore, thinking in terms of business value is of particular importance in connected business initiatives. Consider a simple definition of business value:

Business Value = Customer Value + Company Value

Every product innovation, process innovation, and business innovation should follow this basic formula to create a core business value. Without business value, innovation makes no sense commercially. 

These basic business value considerations are a condition sine qua non for commercially successful innovation. However, in many areas of open ecosystems, it is not enough. 

Amazon on its own would never be as successful without dealers using its platform. In other words, if Amazon’s platform wasn’t attractive enough for dealers to sell their products, there would be no value at all. It is crucial to create additional value for partners, especially when the
platform is first launched. Airbnb and booking.com are only successful because they create value for their customers and their house landlords when they use the platform.

It is only when several partners come together to co-create new products and services that a whole value chain becomes competitive. This “full business value,” as we call it, is essential in ecosystems where multi-lateral partnerships strive to create superior or new value for their customers.

Extended definition of business value in open ecosystems:

Full Business Value = Customer Value + Company Value + Partner Value 

The most impactful business value can be developed through win-win situations for the customer, the company, and its partners in the ecosystem. 

Thinking in terms of complex multilateral partnerships and stakeholders is becoming increasingly important for most ecosystems. Conceiving mechanisms to create value across the board for all stakeholders involved is more challenging than devising means to generate traditional business value, and it will become increasingly important in the future. This broad creation of value has been a demand of the stakeholder perspective for many years. A company should not only create value for its shareholders but also for its employees, customers, suppliers, and all partners including society as a whole. In the modern ecosystem, this ethical stakeholder perspective has been reformulated into commercial thinking. Without at least long-term fair value creation and distribution to all relevant partners in an ecosystem, the innovation will not be sustainable.

Surviving the Networked Economy

To survive in the networked economy, companies need to consider trends in relation not only to their overall competitive strategy but also for each individual product and service offering.

Since business innovation is initiated primarily through industry outsiders, it is equally important to recognize the attractiveness that a particular industry may hold for new entrants.

Business leaders need to reflect on these change drivers in terms of their relevance to their own industry. They ought to ask themselves the following questions: 

• What are the implications of these new competition rules? 
• What should companies strive for in these times of uncertainty? 
• How can companies create comparative competitive advantages when superior technologies are no longer enough to win? 
• How do companies keep their customers and win new ones when they shift their demands and the points of sale? 
• How does a company position itself when industries merge into large ecosystems with new profit allocations?

Answering these questions may appear straightforward, but they do present serious challenges for businesses. What is more, value drivers such as new technologies need to be assessed holistically.
Instead of simply jumping on a new technology trend, the emerging technology should be evaluated in an end-to-end view to understand the complete solution. 

Without deep customer insights and understanding of their likely pains and benefits, the risk of an electronic mouse trap is high. Over-engineering and technology for technology’s sake are often R&D-driven responses.