Towards a New Language of Value - from the perspective of business ecosystems
Mark, CEO of a Fortune 50 company, was fielding questions from Wall Street regarding the amount of investment he was putting into different types of innovation, particularly what his company calls “WoW-based Innovation” – e.g., breakthrough innovation designed to create net new lines of business greater than $500 million / year. "When will you get a return on its WoW investments?", Mark was asked recently. "I’ll get back to you on that", was his response. A response that triggered a flurry of internal activity to figure out the answer. The answer would take a while to answer; the journey to answer it exposed rich and robust ways to build a new language around value throughout the ecosystem they were architecting to capture new sources of value.
Ask a different question, get a different answer. This is an adage many of us may have heard from our teachers, if not parents or friends. We certainly did. My uncle was a tenured professor of computer science and economics at Notre Dame for many years. He used to prod his students and family to “see differently from how many do by asking differently what seldom do.” Questions are hard. New types of questions even harder. It’s typically much easier simply to ask what many in our professions, our businesses, have asked before. A risk of doing so, of course, stems from seeing what everyone else sees. New sources of value, and distinctive market impact results from seeing – and executing – on what few have - in response to changing circumstances, shifts in technology and business affordances… and asking new (types of) questions. An ecosystem perspective changes the unit of focus, from any one business or even industry to the network of interactions, and actors, in which we are all engaged. It only logically follows that many of the key terms – or questions – examined through a traditional lens expand when we look at them from an ecosystem-centric one. The notion of value is no different. What it is, how to measure it and arguably, most importantly, how to understand the operational implications of value in an ecosystem is what expands, and what Mark's example illustrates.
“When will we be net cash positive on the WoW investments we are making?” That was the starting question for Mark’s executives. A fine question. An understandable one. Just not an effective one.
We cannot know what will happen in the future. Of course. What we can do, however, is figure out how we can begin to shape that future in a particular direction. Clearly, this is not something we can do alone. The world, and our competitive environment, are far too messy and involve far too many different types of actors, organizations and network of interactions to control it. But, influence it we can. And figuring out how to “perturb” that network of interactions in a way that catalyzes and helps to capture new sources of value *is* doable. Changing one’s unit of focus to the ecosystem away from any one business, or even industry, helps to make this discussion of where and how to “perturb” or engage within your ecosystem a pragmatic discussion. It raises new questions to ask and thereby creates new opportunities to pursue. It also suggests how and why Mark's question of “when will we be net cash positive” had to change, and how it did so.
Again, we don’t know what the future will look like. We do know two things, however.
First, whatever we think the future will look like, it won’t. It will be different: technologies change, new competitors arise, regulations shift, customer expectations evolve, and so on. Therefore, it makes more sense to get insight into different possible futures, and the conditions - the technologies, competitors, regulations, customer expectations, etc. – that give rise to them.
Second, we know that different types of stakeholders care about – or value – different things, both within and outside your business. For example, executives in charge of sustainability – whether at Samsung, Boeing, CitiGroup, Unifrax, or wherever – tend to define value in terms of reducing a company’s carbon footprint, among other sustainability-sensitive ways. Executives responsible for public relations and marketing tend to define value in terms of brand equity and customer satisfaction. Other executives, from other industries, such as healthcare, define value other ways: in terms of clinical outcomes or population health measures, for example. Each and all of these motivate people to act in ways that align with what matters, and how they define value; after all, as the adage goes, you get what you measure. And, each of these *is* measurable. All of these reflect a type of value that motivates behavior of the folks who care about them. Each of these reflects a different unit of value – let’s call it a “currency”. Consequently, each of these reflect a different type of value – or currency – that is meaningful (important to people), material (can be measured) and motivational (gets people to act in certain ways).
Why does this matter? Because ecosystems consist of different types of actors, many of which are motivated by different types of value. Business ecosystems require the orchestration of different capabilities across different types of actors in support of new sources of value. Orchestration is simply the capability to motivate people towards a common objective. If motivation is driven by different types of value that matters, then don’t we need to have a common way to figure out: a) what *does* matter and b) how to get more of it to those who care about it? Currencies are no more than a way to get different folks who care about different types of value to share a common language and thereby increase the likelihood of acting in service to capturing new sources of value.
Pragmatically, how does, and did, this play out? For but one example of how it did, let’s go back to Mark.
It became clear that it isn’t possible to separate discussions of value from considerations of how to capture it. Pragmatically, it meant that discussions around “value” break into two parts of the same coin. We had to break the initial question of “when will we be net cash positive” into two questions: a value measurement question, and an execution implication one. The first question was modified to: when will we realize different types of value, under different conditions? And what are the currency bundles – e.g., the different types of value – being created through the innovation programs? The second – and new – question became: what can we do within our ecosystem either to speed up or to increase the amount of value that can be created? In short, what *are* the execution implications of our program in the ecosystem in which we are embedded? The first question was answered through simulation, the second through visual insights into new ecosystems impacted by the innovation programs.
The Shell Scenario Group, out of Royal Dutch Shell, has been creating business scenarios for nearly 50 years. They describe “possible futures” and explore what to look for to get a sense of which of the possible futures described is more or less likely to come to pass. For example, one of their scenarios is called “Prism with Glasses” and another “Prism with Flags.” The underlying question for these scenarios was, what is the global economy likely to look like in 2025. Prism with Flags described a world fragmented by regional economic and political blocs. It suggested that the European Union would splinter from an ever increasing reluctance of Europe’s wealthier countries to continue underwriting the debt of its lesser well-off countries. Over time, nationalism would reassert itself at the expense of the broader regional promise of integration. The Eurozone project would splinter back to national boundaries – or flags. Prism with Glasses described a world of regional economic and political divisions structured around regional trade and political regulations. Countries would recognize that many of the challenges they faced required even more regional, if not global cooperation to support them, requiring deepening the bonds of cooperation. The US – Asian trade negotiations – the Trans-Pacific Partnership (TPP) – as well as the December 2015 Paris Climate Agreement are signals indicating some movement towards a Prism with Glasses future. Scenarios are not intended to be either “right or wrong.” Their intent is different: to build a shareable language around what might be possible and thereby clarify what activities or capabilities would be needed to increase the likelihood of one or more scenarios were to actually happen.
Two tools critical to make scenarios pragmatic are: a simulation model - to allow you to play 'what if' games to explore the implications of taking different actions The second is what we call a “currency map.” Currencies are different units of value that different people care about. As we described earlier, some folks focus on financial returns, others on the reduction of carbon emissions, others brand equity, and so on. Each of these reflects a different unit of value that motivates their behavior. As such, each is important to be able to talk about, and critical to have a common language to align around such critical topics such as, what value *do* we want to capture, when, and how *can* we begin to do so? There have been three implications of these two models and the insight this way of thinking provides.
First, they have allowed executive teams to share a common language.
Here’s a question for you. How many times have you been in meetings where folks used the same words and appeared to be in agreement, but when they went back to their office and their teams said, I’m not sure what we agreed to, or recognized that folks may have used the same words, but meant different things by them leading to mis-alignment of what needed to get done? The very exercise of creating “possible worlds” typically forces new ways to think about possibilities. One output of this is often the creation of a new, a shared, language of what might be possible, and what types of value might be created as a result.
Second, it provides a common unit of value for discussions on different types of value.
The concept of currencies is based on building a common language around different types of value that motivate action from different folks – both inside as well as outside your organization. A typical challenge, to take but one example, of those who care about carbon emissions is how to communicate the “value” impact of one’s carbon footprint with net new cash in the door. The former is “squishy,” hard to figure out when it will impact you and impossible to do alone, whereas the latter is the opposite of all of these: it is directly measurable, has clear timing implications and you (for the most part) can directly influence it. So, on the face of it, these different types of value seem impossible to compare and consequently, seemingly share no common basis for communication. It’s no surprise then that much discussion on carbon emissions, again just to take this as an example, falls into the category of CSR – or corporate social responsibility – or PR (public relations) rather than part of the core business. There are powerful changes afoot in this type of currency, even prior to the Paris 2015 Climate Agreement Framework – which will play out for decades to come.
Europe has been at the forefront in trying to figure out how to create an “equivalency” of value of carbon emissions. They have been doing so through modifying the SASB – accounting – standards for sustainability accounting. SASB, as of 2016, recognizes that the translation of environmental, social and other so-called externalities (defined as a side effect or consequence that impacts other parties within it being captured in the cost of its creation) cannot be clearly equated with many financial measures. However, SASB has a reasonable argument that the rigorous FASB definition of materiality provides a bridge to a more “hard core” grounding in some sort of quantification. The two concepts that are newly linked are socially shared capital (externalities) and materiality. These two elements, it is now argued, could sway institutional investor portfolio decision making and make a far more pragmatic step towards building a common language than the current “finger in the air impact rating.” In other words, if you mess up the water supply in province X, you’re undermining my investment of real estate in X. This is completely different than the internal or “issuer” accounting, traditionally centered around revenue / cost. SASB seeks to impose the same legal standard of materiality for companies to report on externalities from an investor portfolio point of view. Historically, that “reasonable investor” may not have had the fiduciary responsibility for ethical investments for its portfolio. Now, it seems that the disclosure of externalities is part of materiality whatever the portfolio mandate is. This could be a game changer
Here’s an example of how this could play out for any particular business. Once a company, like Mark’s, had this concept of “currencies” as a new way to align their executives around different types of value, they could have a frank conversation around different types of value they might want to capture over time. They had a language around which to align. The result? Mark recognized that the carbon emission game was moving in Europe far faster than it was in the US. But, whatever came out of SASB would find its way, in some form, into US Accounting – or GAAP – standards at some point in time. Consequently, getting ahead of the curve in terms of the implications on carbon-based accounting on how they defined, and accounted for, this type of value could become a market differentiator over time. This insight led them to re-prioritize the timing and resources committed to carbon-footprint based projects even though the financial returns on these projects was neither clear, nor immediate. Having a “common language” around the broadening of value – recognizing that different types of value were equally critical to motivate different types of folks, both within their organization as well as in their ecosystem – provided new ways for them to answer the question of “when will we realize different types of value under different conditions.”
Third, exploring possibilities leads to discussions of what capabilities are needed to capture different types of value, as well as how and when to do so.
Seldom does any particular firm have all of the capabilities needed to capture new sources of value. Businesses are optimized for a world that no longer exists. They perform well, based on customer needs, technology affordances and market conditions at any one particular point in time. This is why innovation becomes so critical, and why there is so much discussion on the criticality to be agile, to adapt and to innovate. A quick reflection on the accelerating topple rates is a blunt reminder why this is so critical. However, the key question to consider is not which capabilities will be needed to capture emerging sources of value, but which ones do we want to have to do so? Clearly, we can’t have them all (unless, of course, you are in the ranks of Google, Apple, Amazon and Facebook). So, which ones do you focus on, which do you partner for, which do you monitor and which do you merely ignore. And, underlying these considerations is the key question, how *do* you orchestrate your ecosystem and the capabilities distributed throughout it in a way that helps you capture the types – and amount – of value that matters to you?
The revised question of “how do we capture different types of value under different conditions” unpacks into a rich set of considerations with profound implications, as we’ve hinted at above.
Our next post unpacks these even more. It will have a crisp objective: to describe the building blocks of a broader understanding of what value means from an ecosystem perspective, why it matters and how to begin to orchestrate different capabilities to capture it.
This entry was originally posted on Linkedin by Ralph Welborn.