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Slide 1

ENT202 / Innovation: Strategies and Systems

Week 11: Result-Based Integrated Solutions

College of Business and Law

Karmen Lužar

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Recognition of Traditional owners and Indigenous cultures

Charles Darwin University acknowledges the traditional custodians of the land on which we’re meeting and pays respect to Elders both past and present and extends that respect to all Aboriginal and Torres Strait Islander people.

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Introduction

• Use-oriented services model not suitable in all contexts (fast-moving consumer goods, commodities). E.g. water, electricity, etc.

• However, in a context of scarce and expensive resources, and growing regulations, the existing models are coming under pressure.

• Reduction of energy/water consumption on a worldwide base seems unrealistic given the strong demand from emerging economies. However, it does make sense on mature markets with low/no growth.

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Goods’ rendered service

• Physical goods are bought for the ‘service’ they provide.

• The product frames the formulation of the need and thus limits its resolution to a sole perimeter.

• Considering the basic need or job to be done opens other alternatives may exist to solve it besides the product currently in use.

• Commercially, the difference is enormous (complexity increases -> competitive advantage also). Value curve rapture.

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Goods’ rendered service cont.

• A shift of focus away from the product towards functional spheres – generic needs, e.g. mobility, health, education, habitat, entertainment, etc.

• This strategy creates the conditions of a possible decoupling between revenue growth, on the one hand, and consumption of resources and energy, on the other hand.

• Example: Koppert

• A true strategic rapture!

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Scope of activities

• Scope of activities is likely to change – diversification.

• Difficult to imagine that a water or energy supplier would embrace such a strategic change by purely and simply discarding a confirmed and competitive business model.

• Disruptive innovation is often carried by new entrants/entrepreneurs or internal incubation space within a company.

• This journey is often experimental.

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Catalyst for blue ocean strategies

• 2005 Blue Ocean Strategy by Kim and Mauborgne

• Two strategic spaces:

• Red oceans: current strategic space, with clearly defined boundaries and fierce competition among companies to gain market shares. Growth and profit prospects are limited, innovation is primarily incremental.

• Blue oceans: new, unexploited strategic spaces, free from competition, a particularly original value proposition to a specific demand. Radical innovations from a red ocean.

• Value innovation – simultaneous pursuit of differentiation and low cost.

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Catalyst for blue ocean strategies cont. • Despite the evidence that blue oceans are profitable, few

companies actually put it into practice. Reasons include:

• Companies are generally more inclined to add functionalities than to remove low perceived valued features.

• Such strategy is also riskier, and large groups are more reticent to take risks compared to apparently less risky continuous and incremental innovation.

• Blue ocean strategies taking longer to be developed.

• Inertia to change.

• Cognitive barriers, e.g. value leap.

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Slide 9

Defining a new value curve

Figure 1: Strategy canvas for two competing pesticides / Source: Sempels, C & Hoffmann J 2013

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Blue ocean strategy

• Aims to configure a new value curve:

• Which of the factors that the industry takes for granted should be eliminated?

• Which factors should be reduced well below the industry’s standard?

• Which factors should be raised well above the industry’s standard?

• Which factors should be created that the industry has never offered?

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Result-based integrated solution

Figure 2: Reconfiguration of the value curve by a result-based integrated solution / Source: Sempels, C & Hoffmann J 2013

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Contractual innovation

• The new value proposition required a commercial contract = ‘service level agreement’.

• Service rate is the base for the evaluation and the remuneration of the service.

• The service level agreement is a part of a service contract where the level of a service in terms of nature, quality, duration, performance, length and so on is formally defined.

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Contractual innovation cont.

• Defining the target service level and the appropriate invoicing unit requires:

1. A reliable indicator of the service level

2. Feasibility assessment and installation

3. Ongoing monitoring and reporting to control compliance with the contract terms

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Reliable indicator

• E.g. Availability, performance, operation or any other relevant attribute.

• Can define a target or a minimum service to be delivered.

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Feasibility assessment

• The target objectives must be specified, with a precise description of the methods and schedule of measurement.

• Feasibility study may be needed.

• Example: Anesco - Energy Saving Performance Contract

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Monitoring and reporting

• Piloting the service level supposes identifying and potentially sanctioning any noncompliant behavior in the execution of the contract.

• It is therefore necessary to set up methods and tools for monitoring the service level, validating compliance with the agreed contract terms and the flexibility authorised in the execution of the service.

• Internet of objects.

• Potential for generating substantial energy savings.

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Other contract parameters

• Agreement must also anticipate possible issues and the way they will be treated (incl. any penalties for non- compliance and conditions for application and exclusion).

• The rights and duties of each party.

• Any performance beyond the service rate must entail bonuses and shared division of benefits.

• Confidentiality and data access terms must be clearly specified.

• Usual contractual conditions must obviously be integrated, e.g. the competent jurisdiction in the event of litigation.

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Building the market

• Finding clients can be a challenge - typical for a rupture.

• Majority of customers prefer to “wait and see”.

• Adoption by some pioneers.

• Uncomfortable and risky situation for the service provider - requires adequate innovation management.

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Co-creation with early adopters

• Blue ocean strategy value innovation frame by Midgley:

1. Identify the innovating customers’ potentially sensitive to such an offer (early adopters). – potential partners, co-creators.

2. First version of the service for customers to try, collects their suggestions for improvements, and to adjust the offer, test again and so on – faster development process.

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Building the perception for the differentiating attributes • Positioning to emphasise the differentiating attributes of

the offer compared to the classically considered alternatives – see the strategy canvas competing factors.

• Emphasis should therefore be placed on those product attributes that are linked to the service offer – results.

• This positioning aims to persuade early followers -> build firm’s portfolio and address criticism.

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Management of criticism

• Opposing forces can be strong and may ruin innovation - it is all about customer perception!

• The capacity to attract clients to a co-creation process or to convince a reference client in the market to be an early follower will strengthen arguments against any detractors.

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Impact on the business model

• The implementation of a new value proposition will thus demand the definition of a new value chain, sustained by new resources.

• A service is managed very differently than a tangible good.

• The appreciation of the service, and the resulting satisfaction will be largely guided by the experience of the service.

• The customer relations will generally become direct where it was previously managed by distributers or sales reps.

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Impact on the business model cont. • The capacity to guarantee a result instead of the sale of the

means to reach that result will often require the development of partnerships, a potential source of innovation and value.

• Expert partnerships through an ‘open model’ -> the transition from a value chain to a ‘value constellation’.

• Mass of niches to be satisfied according to particular needs

-> Customer relations become personalised direct relations.

• Value innovation seeks simultaneously to increase the perceived value for the customer while minimising the costs.

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Emerging markets

• Emerging economies have a fast-growing environmental footprint.

• Result-oriented services demand a solid institutional frame and the respect of the legislation.

• Emerging markets are characterised by ‘institutional voids’.

• Challenges vary, but a central challenge lies in the existing infrastructures.

• Opportunity for the result-oriented services because the financial limitations call for lean management.

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In conclusion

• Result-oriented services are a credible economic alternative to businesses models built on logics of volume that are increasingly under pressure.

• Result-oriented services are certainly not an easy, risk-free path. Disruptive innovation comes at a price.

• Strategy is a reframing process. Which forces are shaping the business landscape for the years to come?

• Sustainability is becoming a paramount of a new world.

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Slide 26

Bibliography

• Sempels, C & Hoffmann J 2013, ‘Chapter 6’ in Sustainable Innovation Strategy: Creating Value in a World of Finite Resources, Palgrave Macmillan.

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