One of the themes we have been exploring in the Cambridge Service
Alliance is the question of how organisations best innovate their service
business models. In some of our early work Ivanka Visnjic and I developed a
framework of 12 capabilities that underpin successful service business model
innovation. Since then we have been developing and iterating this framework,
creating a maturity model that firms can used to assess the maturity of their
capabilities for innovating their service business models. It seemed to me that
it would a good idea to write a series of blogs on this framework and the
twelve capabilities that underpin it - so here's the first one - explaining the
framework.
In essence our research suggests there are four categories of
capability that really matter when it comes to innovating the service business
model. These are: (i) the ecosystem; (ii) the value proposition; (iii) the
value delivery system and (iv) accountability spread. Let me explain these in
turn.
The first set of capabilities are concerned with the ecosystem - increasingly competition is taking
place at the level of the ecosystem, not the individual firm. In today's
interconnected economy, what matters is the way the ecosystem is configured and
how your firm is positioned to capture value from it. Apple and HP illustrate
the point. If you ask the question - "of the $1,000 someone pays for an
Apple or HP machine, who gets the money" - you find that Apple keep
60-70%, while HP keep only 30%. Why the difference? Because Apple use their own
proprietary operating system (they don't cede money to Microsoft), they use
their own chip (they don't cede money to Intel) and they have created their own
distribution infrastructure (they don't cede money to the retailers).
So what can HP do? It is too late for them to develop their own
operating system or get into chip manufacturing. Both technologies are too well
established, with large incumbent players and high barriers to entry. The cost
of establishing a retail infrastructure, certainly a high street retail
infrastructure, is prohibitive. But what they can do is invest in Linux. If HP
help Linux become a more dominant operating system then Linux reduces
Microsoft's power in the marketplace and hence their ability to appropriate
value, leaving more of the money on the table for HP. And in fact, it is in the
interests of all of HP's traditional competitors to increase the power of
Linux. So if HP collaborates with other laptop manufacturers, then collectively
they can try to shape the ecosystem and their ability to capture value.
It is not just the ecosystem perspective that matters. The second
theme that we saw in our research was the importance of innovating the value proposition - really understanding what the
customer valued and the outcomes they were looking for. There's an old Theodore
Levitt quote - "customers don't want quarter inch drills, they want
quarter inch holes". We don't think this is right. Customers don't
even want quarter inch holes. When innovating your value proposition you have
to understand why the customer wants the quarter inch hole. If it is to hang a
picture, then how else might the picture be hung - you could glue it to the
wall. You could invite an artist in to paint the picture on the wall. The key
to innovating you value proposition is to understand deeply what your customers
really value.
Beyond the value proposition, the third category of capabilities
centred on the value delivery
system. Here we are shifting into the question of how do we configure the
resources and activities required to deliver the value proposition. What should
we do? What should we ask others to do? Many of the services firms deliver
today require networks of organisations to pool their capabilities.
Understanding the right network structure and identifying the right partners is
essential when innovating the service business model.
Finally, we shift to capabilities concerned with accountability spread. Here the
idea is that by taking on responsibility for the outcomes your customers want -
you increase your risk and exposure. By innovating the value delivery system -
either through technology or partnering with others - you may decrease the
control you have over the ecosystem. Hence you have increased your
accountability, but potentially reduced your control - hence you may have
increased your risk or accountability spread. Understanding the implications of
this and how the risk will therefore be managed is paramount if the service
business model is to be sustainable.
These four categories of capability - ecosystem, value
proposition, value delivery system and accountability spread - form the highest
level of our framework for understanding business model innovation. In future
blogs I'll unpack each of these categories in turn and explain the capabilities
that underpin them.
