Are Vertical Integration and Coopetition based business model related?

Coopetition (Cooperation + Competition) has been an aggressively researched topic in the recent past. I was introduced to this term only during my studies at HEC Paris and while I read this interesting article – ‘Coopetition based business models‘ it brought a few more thoughts to my mind.

This piece on strategy-business.com puts forth various perspectives about Coopetition based business models. It raises valid points about organizational resistance and subsequent benefits of pulling through the strategy – not only to the firm but also possibly to the industry as a whole. It presents the potential impact of effecting an increase in the size of the whole pie, thereby dramatically increasing the firm’s own share.  In Amazon’s case, my interpretation is that while Amazon entered the e-commerce space as a consumer-goods-provider, it soon transformed itself primarily into a platform-provider – cleverly shifting its position within the industry value chain.

While reading this article, I couldn’t help but think of two more examples. One – from my not-so-distant past and the other from my current day experience.

In the Smartphone industry, Samsung & Apple are fierce competitors. Despite this fact, Samsung still makes the 64-bit A7 processor for the Apple iPhones (See here). Their partnership extended to more areas than just the processor.

In the Flat TV Industry, Samsung is a clear global leader in market share. Yet, notably Samsung is a major supplier of flat panel displays to several other TV makers in the industry. (See here)

In the consumer electronics industry, known for its rapid pace of innovation, is this a conscious strategic decision? Do vertically integrated corporations have an inherent competitive advantage over others in the industry value chain?

On the one hand, evolving customer specifications are a definite source of competitive intelligence for the firm – gaining insights on industry trend evolution. On the other hand, being suppliers of ‘critical components’ of a product gives the firm a higher bargaining power – allowing some control on the supply chain within the industry and also impacting product portfolio planning.

Read the original research ‘Coopetition based business models‘ via Strategy-Business.com

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Smart e-Governance – An entry strategy for Smart Cities

There is a lot of discussion and hype around Smart Cities. Analysts use different criteria to define Smart Cities as an aggregation of different types of services. While the obvious Smart Players exist, several companies also aspire to grab a big chunk of this pie. With this mind, they are all busy charting out plans to be Smart City players – trying to tie together individual services & technologies under their umbrella and assessing what more can be done to close the gap.

Typically ‘Smart’ Transportation vendors are looking to fill the gaps and hoping to be a dominant player. I decided to take an alternate view to this approach. Trying to map out the value curve of what I believe are the main factors of competition in the industry and then reversing this value curve to explore other opportunities. The merits of the approach may be questioned; nevertheless it was an interesting exercise to delve in.

Resorting once again to the value curve, I have attempted to devise an alternate entry strategy into the Smart Cities. Being aware that Blue Ocean Strategy creates uncontested market space, this one is an attempt to create a sneak-in-entry strategy.

Your thoughts are more than welcome.

mPOS: Addressing new customer segments! A case of blue-ocean strategy!

In an attempt to better understand and apply the blue-ocean strategy, I decided to test the framework on a rapidly evolving market – the payment’s industry.

The solutions in the payments industry can be broadly classified into categories: those addressing emerging economies and those addressing developed economies. It naturally follows that the value propositions of the payments solutions in these two segments are quite apart and hence the associated value networks differ as well.

Here, I take a look at the developed economy market and specifically into a trend that has attracted several firms – mobile point of sale (mPOS).

In its simplest form, mPOS can be described as a payment-terminal (like the traditional credit card terminal) on your phone! Well it literally is that – pay using a mobile device (Smartphone/Tablet) and use funds from the traditional card accounts (magnetic stripe cards and the chip & pin EMV cards). Vendors like SumUp and Square Inc. are good examples.

The surge of companies in this space indicate a rapidly evolving technology area wherein there is yet to be a dominant technology. But it has seen innovative business models and new value propositions.

The key elements of the traditional credit card terminal used at retail outlets have the following characteristics:

Key elements

Value to customer

Upfront cost A significant fixed cost is involved to procure such a device (Anything between $150 to $1000 per terminal depending on product specifications)
Enrollment processing time This involves enrolling with payment solution providers and fulfilling a barrage of legal requirements to get the process started.
Pricing structure complexity In addition to an initial fixed cost, there are monthly maintenance charges that could be accompanied with long term agreement charges and other complex pricing structure.
Transaction volumes The high fixed cost and complex pricing structure necessitate a certain number of transactions to break even.
Payment authorization End users that swipe their cards through these terminals feel secure due to pin-entry provision.
Fraud prevention It follows that both front-end and back-end systems must complement to avoid fraudster from abusing the payment systems.
CRM information CRM software and other middleware solutions can enable merchants to pull out relevant sales information transacted through the payment terminal

The value curve for the traditional credit-card terminal industry would look as below:

Traditional Credit Card Terminals - Key Elements and its relative offering level
Traditional Credit Card Terminals – Key Elements and its relative offering level

Vendors likes SumUp and Square Inc. have however reversed this curve, and brought to the fore the mPOS dongle that extends the ubiquitous Smartphone (& tablet) into a payment terminal. Taking advantage of the app-store eco-system it provides merchants with a basic application for usage and also allows merchants to create customized apps to exploit the backend services. Merchants can take this a step ahead to analyze the sales data & customer preferences and thus derive business intelligence. All this comes at zero additional charges – the dongle comes for free – and in short turnaround time.

The grid below indicates the application of the Four-Action Framework (ERRC) – depicting a change in priorities of the key elements identified before, in addition to additional elements provided by the new offering.

Four Action Grid - mPOS
Four Action Grid – mPOS

Eliminating the high fixed investment and cutting down the enrolment process drastically, these vendors have been able to attract a new customer segment – micro-merchants – those that traditionally stayed away from the card-terminal and primarily dealt in cash.

mPOS vendors maintain a simple revenue model – charging a fixed percentage of sales revenue (typically 2.75% as of today). mPOS thus met the unmet need of a previously ignored segment of customer. An analogy I can think of here is text-based mobile banking (like M-PESA) in emerging economies – it met the banking needs of the un-banked customers in such geographies.

The value curve of the mPOS solution is overlay-ed on the previous chart as shown below:

mPOS vs. Traditonal Payment Terminal value curve
mPOS vs. Traditonal Payment Terminal value curve

Clearly mPOS is an interesting proposition for the payments industry. While the use of this ‘cool’ gadget may sync with the brand image of some merchants, there is need for caution. mPOS vendors must seek to address concerns, if any, of consumers reluctant to type in their PINS into a merchant’s phone or tablet!

Blue Ocean Strategy for a networked society.. my two cents to some interesting posts…

Recently while working on a self-imposed assignment – testing the application of blue ocean strategy on an actual business situation – I came across a series of recent blog posts by Sami Dob at Ericsson. I was delighted to see an industry practitioner write about the blue-ocean-strategy. While it has insightful recommendations, it did challenge some of my understanding of the concept.

These blog entries refer to the application of Blue Ocean Strategy to the Networked Society – defined as a combination of heterogeneous networks, connected by end-point devices and served by the cloud ecosystem.

So? Why this blog entry?

For one, I wonder if the ‘Networked Society’ is the right ‘unit of analysis’ when applying this framework here? Secondly, there are couple of smaller observations I had about the application in this particular example. And lastly, it raised typical questions about organizational challenges.

What’s this about strategy and ocean?

Blue Ocean Strategy – as per my understanding – is a business model innovation framework; it enables a firm to ‘create an uncontested market space’, gaining a first-movers advantage, maintaining a lead and keeping competition at bay (apparently as competition is nullified).

A part of this – the four-action framework ERRC (Eliminate, Reduce, Raise, Create) – is instrumental in leveraging the ‘value curve’ to create the ‘new offering’. Changes to factors of competition can be driven by a motivation to improve the value for the buyer and/or reduce costs for the provider. The focus on these attributes can thus be eliminated, reduced or raised. Attributes in Create (C) are best when borrowed from the ‘closest-substitute’ industry (there are statistical ways to figure this out), adapting only the relevant, low-cost, high-value attributes relevant to the offering. For instance, in the (often mentioned) case of Cirque du Soleil the substitute was among those that ‘Entertained’! Theatre’s could be considered the closest match – and pulling in some attributes from here enabled creating a new offering as we know it today.

Back to the dilemma

Coming back to my initial conundrum I am still struggling with the question of substitution in this particular case? What can possibly substitute an aggregation like the Networked Society? Hence, I still wonder if it is the right ‘unit of analysis’?

Then,the value-curve (a.k.a the strategy canvas) for the red-ocean of the networked society, suggests that the offering level score of ‘Price’ for current buyer is way too low. I would argue however, that end-consumers today benefit from low prices thanks to the intensity of competition among telecom operators. This makes me conclude that the offering level score on this canvas for the red-ocean should be on the higher side. (Either that, or my understanding of the Y-axis’s representation is skewed)

Secondly, in the second part of the blog, Mr. Dob suggests that regulators “should remove national roaming charges in order to stimulate voice traffic”.  If that were the case, wouldn’t it give all the players the same level of advantage – competitive parity to all! How is it going to benefit a single operator? The notion of achieving a sustainable competitive advantage would fall apart here.

The organizational challenges when applying Blue Ocean Strategy in a leading industry incumbent player are two fold:

1. Cannibalization: The new service offering strategy would have a different value curve to the existing one, impeding continuation and growth  of the existing portfolio. This surely impacts the culture in an organization and hence needs a careful change management practice.

2. Managing multiple business-models – This is a derivative of the previous. An organization can decide to stick with multiple business models for the longer term, or decide to transition from one to another. This can be tricky to manage as outlined by Osterwalder & Pigneur

The articles have driven me to put some more thought to this framework, encouraging me revisit the literature! Hopefully I shall have some more clarity in the days to come.