Getting Your Head Around Value-Creating Systems

Here are some notes & thoughts from one of my summer reads – Rafael Ramírez and Ulf Mannervik’s Strategy for a Networked World.

This book sets out the latest version of a strategic approach called Value-Creating Systems (VCS). The late Richard Normann and his colleagues first developed VCS over 20 years ago. Its focus on relationships and connections, exploring collaboration as well as competition in business environments, seems ever more relevant in our increasingly networked world.

As people go on summer holidays and the pace of work in the northern hemisphere slows a little, it’s a great time to read, learn, and grow.

Polish your chains, or forge them into something new?

Ramírez and Mannervik’s version of VCS considers the ways in which we co-create different forms of value by interacting with one another.

Instead of looking at traditional chains, where suppliers add value which customers then consume, the VCS approach considers industry, and other human activities, as systems in which actors create value together.

Ramírez and Mannervik point to Facebook’s journey from 2004-2010 as one example of a well-designed VCS.

The early Facebook platform offered a place for users to post content, connect with friends, family, and colleagues, and build communities. As the user base grew – attracted by Facebook’s close attention to user experience – businesses and app developers also came to participate in the value creating system.

People who joined the network were both users of Facebook’s offer, creators of content in their own right, and the “product” – as their data was passed on to advertisers – much more than just a single link in a value chain.

Facebook also gave businesses targeted and customised lines of communication to the public, allowed for new advertising possibilities across demographics, and offered developers the opportunity to create new applications which enhanced the users’ experience.

The VCS strategist looks beyond the simple linear links connecting suppliers with customers, and instead tries to get a picture of the whole system in which value is created.

Instead of working out where you belong in the chain, or “polishing” the links to maximise profit, the aim is to design a system which helps all of those involved to co-create value.

That might not just be economic value. Ramírez and Mannervik use social media to give the example of Walter Palmer, the Milwaukee dentist who killed a lion in Zimbabwe on a hunting tour in 2015.

The ensuing outcry turned the hunter into the prey of an online campaign which vilified his actions. Palmer had paid $54,000 to kill the lion, only to find that the cost of the hunt might be much greater in terms of his notoriety, and that his own personal values would be made public and questionable.

The VCS approach doesn’t just apply to the apparently nebulous world of social media, either. The authors offer the example of Rolls-Royce’s “power by the hour” offering in the jet aircraft business, where airlines rent serviced engines and pay for each hour the engine is in the air.

Instead of simply making engines and selling them to airlines, Rolls-Royce found a way to enrol the airlines in a new relationship: the manufacturer keeps ownership of the engine, offers service support, and the airline pays only for the use it gets from its engines per hour flown. This created a more secure and sustained relationship for Rolls-Royce and its customers.

Ramírez and Mannervik propose an approach to strategy which is really about designing a network of relationships between actors who create value together – whether that is IKEA customers assembling their own furniture, or Airbnb users arranging to host strangers in their spare rooms via a trusted online community.

They note that “collaboration is at least as important as competition”: the ability to enrol people into your value creating system and make it attractive to them is more important than focussing on competition with those who have similar products or services.

For example, IKEA’s offering is unique and difficult to copy, but it only works if IKEA can convince people to collaborate with them and take on the roles being offered: seeking out furniture for themselves in the warehouse, taking it to the check out, taking it home and assembling it with their own hands.

(This also explains IKEA’s ambivalent relationship with “IKEA hacks”, where customers use IKEA in unintended ways. Initially the firm disapproved, but now have walked this back, navigating a cordial relationship with people who make their own value from IKEA in unconventional ways while seeking to avoid liability for harm caused by unendorsed uses of the product. Now, IKEA learns from the hacking culture by offering “open platform” modular products).

In another example of successfully enrolling others into your VCS, Facebook’s ultimate victory over MySpace was evident when it became possible for MySpace content to be posted on the Facebook platform: the victorious social medium had effectively enrolled MySpace users into Facebook’s VCS.

Ramírez and Mannervik argue that this focus on collaboration can also be useful for weathering turbulent times and moments of disruption. VISA and MasterCard, for example, helped banks to cope with the novelty of the credit card by developing global systems which created value for retailers, telecommunications providers, and consumers. Reimagining an enterprise as a value creating system within a larger ecosystem can build resilience as well as creating new opportunities.

The business of design, the design of business: putting VCS into practice

So what does it look like to actually do something with VCS? The authors describe three phases: an “opening phase” in which we map and research the existing system and its larger context; an “exploration phase” to consider how value creation in this space might change and what opportunities might exist; and a “closing phase” which defines and develops the offerings, and enacts the strategy.

Strategy in this approach becomes a relationship-focussed design process. Relationships are mapped. History and ethnography are brought to bear on understanding how the current system came to be, and what it feels like to operate within it in the present day.

Taking stock of the status quo is followed by what Richard Normann called “the crane”: a conceptual process which lets the strategist distance themselves from what currently exists and explore new territory. If we know what business we are in now, the next thing to ask is: what business should we be in?

Paying close attention to what other actors, especially customers, are doing in the present can highlight innovation opportunities. Researchers for W.L. Gore, the manufacturer of Gore-Tex fabrics and other polymer products, noticed a heart surgeon working with Gore’s synthetic blood vessels would use the vessel material to floss his teeth. The surgeon commented that he’d never found a material so good for flossing, and the Gore blood vessel team were able to bring this insight back to the company, where it was translated into a new and successful offering, the “Glide” dental floss.

New opportunities can also be found in the future. Despite it being impossible to send people forward to conduct ethnographies of a time that hasn’t arrived yet, methods like scenario planning do help us to look ahead and imagine plausible futures which challenge our assumptions in the present. Scenarios create a playbook of possible futures and responses to them, allowing us to rehearse what we might do if certain circumstances come to pass.

This can be as straightforward and self-evident, for example, as asking a whisky distillery whose specialty is 12 year old Scotch: The bulk of your product will be sold in 13 years’ time, so shouldn’t you think about who might be buying and drinking your product in the future? The answers which arise may help a business to rethink its offering.

The scenario processes also exploits “the crane” by moving between systemic-level big-picture thinking, looking at how different players interact with one another, and low-level time spent in each player’s shoes, thinking about how they will perceive the situation from their individual point of view. If this world comes to pass, what will it feel like for actors X, Y, and Z to inhabit it? What will drive their choices? What new actors will exist and how will they perceive this brave new world?

The iterative design process, moving up and down the “crane”, helps to build up a rich picture of the interactions which could exist in a number of plausible future settings. This picture, in turn, informs the kinds of offerings which could be designed to create value.

New offerings are teased out with questions such as:

• What can our organisation do to activate or make better use of underutilised resources? Do we need to do that with others, or can we do it alone?
• What can we do to enable others to more effectively create value?
• How do we use the things which are distinctive about our business, and what advantages do these distinct competences give us?
• Will we have to transform or abandon any of those competences in a future scenario, or to create the offering we seek?

Once an offering is developed, it can be developed and enacted in the “closing phase”.

For example, the heavy vehicle manufacturer Scania spent time mapping and scenario planning for large transport systems – not just those parts of the system where Scania normally operates, as a maker and seller of trucks. Doing so let them spot an opportunity to support vehicle operators and large global companies whose needs are similar to Scania’s own global production and logistics operation.

Scania set up a separate company called LOTS GROUP AB, not to sell trucks but to offer customers better logistics and transportation solutions. LOTS helps large firms with an intensive need for global transport to find solutions which are more socially responsible, more sustainable, and offer better value for money.  The company does this by analysing the firms’ total transportation systems and offering design solutions which encompass everything from stock management to the internal processes and logistics of both shippers and receivers. It’s a long way from being “just” in the truck business.

As Scania’s example suggests, innovative offerings discovered and developed by the VCS approach can be enacted by an organisation itself, trialled as a separate business and considered for later inclusion in the parent body, or spun off as their own concern.

VCS also lends itself to a “stepping stones” approach, where the actor with the configuring offering gradually enrols other players into their system.

Ramírez and Mannervik use the leasing company Ryder to illustrate this. Ryder bought trucks from manufacturers and leased them to trucking companies who might previously have bought those trucks direct. When it was established as a key client for the manufacturers and had developed strong relationships with the finance departments of its customers, Ryder then began to offer new services, such as HR and administrative support, as well as leasing other resources like trailers. More trucking companies became customers and this increased Ryder’s buying power.

Now Ryder began to work with other operators and helped them to organise their fleets together, just as airlines share codes. Each operator had more filled trucks on each route, which reduced costs and gave them more capacity. This is an example of when VCS is about collaboration not competition, enlarging the pie for all rather than fighting to take a big slice than your rivals.

Finally, Ryder began not only to operate repair and maintenance workshops, but to sell spare parts, sourced from other equipment manufacturers, at a price well below the heavy mark-up of the truck manufacturers themselves.

The truck makers, who thought of value in terms of chains and sought to compete with others who they perceived as having similar positions in the chain, discovered that Ryder – who they thought of as a customer – had actually taken a substantial part of their business. Ryder had shown its customers, the operators, that it could improve performance, create value, and make the pie bigger for the whole trucking system. By becoming a big customer in its own right for the truck manufacturers, Ryder could not easily be ejected from the position it had created. It had developed an offering, built it step by step, and enrolled those around it into a VCS of its own design.

Take the concept for a test drive

When I first encountered this work, I tried applying it, testing out the VCS frame for myself. To help you do the same, I’ve picked out a couple of recent examples which you could try applying the VCS approach to.

One of the best television series I saw this year was a quirky show called Doom Patrol, which streamed exclusively on the Netflix-like “DC Universe” platform.

The platform’s goal was to enrol fans of the DC comics brand through a subscription model, where they would have access to comics and movies from the past, forums for discussion, and a merchandise store, as well as fresh content like Doom Patrol. Could we see this platform through the VCS frame?

Fandom is a fascinating example of value creating systems, where people’s passion for stories and characters leads them to generate their own art and stories, participating in vast communities which generate a range of values – not just financial, although fandom is certainly big business these days.

Is JK Rowling, for example, the supplier in a chain which generates Harry Potter stories for readers to consume, for movie studios to purchase the rights to and adapt, toymakers to licence and make merchandise from? Or was hers the talent which inaugurated a wider system, whereby we participate in and create value from the fictional universe she originated?

Star Wars is perhaps an even better example – George Lucas has so clearly stepped away from creative control of his most famous creation that it really doesn’t make sense to think of that galaxy far, far away as a product which originated in the mind of a single creator. These days the Star Wars phenomenon is something which many of us participate in, as consumers and creators; some of that participation licensed and generating money for Disney, and some of it not.

The DC Universe example becomes even more interesting when you realise that the platform is already under threat, ten months after it went live. AT&T acquired DC’s parent Time Warner and is now considering a new, single Warner streaming service. One VCS is being consumed by another. DC Universe may become part of Warner’s HBO, or an even larger Warner offer. It may maintain its identity within those offers, or be entirely dissolved by them.

Will it be a smart move, because the new service will reach out to much larger audiences than just passionate DC fans? Or will the ability to reach out to, and engage with, the committed DC fandom be drowned in a more remote and less user-centred corporate strategy?

Ramírez and Mannervik point to how Myspace lost ground against Facebook once it was taken over by Rupert Murdoch’s News Corporation and began to focus on profitability rather than user experience. While Facebook understood that value was created by all parties in its offering, Myspace adopted its owners’ traditional view of value creation, focussing on product improvements, novel features, and ad revenue. Meanwhile its rival was enabling users and other actors to become more effective co-creators of value. The ultimate triumph came when Myspace content could be posted on Facebook: Facebook had effectively enrolled the other VCS into its own.

What are the lessons here for the people making decisions about the future of DC Universe? What would you advise Warner, if you were to look at this situation through the VCS frame?

Perhaps it’s too tempting to look for VCS examples in the media, which tend to be more about content and culture than physical labour and infrastructure. As we’ve seen, Ramírez and Mannervik’s examples also include Rolls-Royce’s jet engines and the transport solutions offered by Scania and Ryder.

I went looking for an example in a more tangible industry, and found this BBC story about the current coffee crisis: coffee prices have fallen to an all time low even as consumers in the UK and US are seeing prices rise.

The BBC article explains how bumper harvests in Brazil have glutted the market for coffee beans, putting pressure on other growers around the world. Farmers have seen their product price drop to historic lows, which challenges their ability to go on farming. The BBC’s journalists reported speaking with a number of Central American farmers in the October 2018 migrant caravan: they claimed that the coffee crisis had driven them to seek asylum in the US. Upsets in the system by which coffee is supplied globally had knock-on effects for another system, that of US political discourse.

The BBC also interviewed José Sette, the director of the International Coffee Organization founded to support the sustainability of the coffee market.

He noted the danger of coffee farms being wiped out by the current temporary surplus, given that global coffee demand continues to grow year on year:

“When we get to the level of prices that we are seeing today, the industry needs to look at itself and try to find ways in a spirit of shared responsibility, to somehow improve the lot of the coffee farmers. Especially the smallest farms.”

Does this speak to the VCS strategist’s notion of collaboration, not competition? Recognising that coffee production is a complex ecosystem whose impacts extend even to the way US politicians talk about migration, what would it mean to let go of the mentality which positions farmers as the least-paid link in a global value chain? Would a VCS approach help to develop a resilient and sustainable way of producing the world’s coffee, where all of us prosper?

Could the VCS approach help us to perceive the latte we buy in London as part of a global system which includes ethical and political dimensions? Would it help us to recognise that if we want to keep drinking those lattes, we will need to attend to the lives of farmers in coffee-producing nations? These aren’t just feelgood thoughts: they might motivate us to redesign the global coffee supply in sustainable ways which bring prosperity and success to all actors.

Take a look at the coffee industry article and see how it appears through the VCS frame. Imagine you were working for one of the players involved. What approach would you take?

This blog post is based on my reading of Rafael Ramírez and Ulf Mannervik’s Strategy for a Networked World, in the spirit of “showing one’s working”. Do check out the book for yourself if you want to fully get your head around VCS.