Reassembling the Value Network for Business Model Innovation

A company never creates value in isolation. There are always other companies involved in some way to realising and delivering the final product for the customer. Such value chains of companies optimise connections on their complementary capabilities, which enables each to focus on what they’re good at.

The composition of a car is a good example here. Car manufacturers design, and assemble cars under their own brand. But all the parts required for assembly come from different suppliers (for pistons, suspension, braking technology, seat manufacturing, etc), and distribution & sales of the car to the final customer is done through networks of car dealers.

Value chain analysis is great for supporting business as usual. However, when you need to shift your business to a seemingly similar, adjacent customer segment (as is often case in today’s turbulent business environments), the value chain’s usefulness breaks down. The solution lies in framing partnership relations in a different way, as I’ll explain in this article.

The Functional Value Chain
Value chain analysis is a great way to understand production systems. You sketch out the value chain for the product from its origin to the end consumer. The value chain shows the companies involved in value creation, and the sequence in which value creation is achieved.

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The linkages in the value chain can be used to describe the relation between each company in that chain. The value chain is a great tool to examine how and where value is created, and where the risks in the production system reside.

The Disfunctional Value Chain
The value chain approach works well for analysing very formalised, industrial production systems with a clear hierarchy in the organisation of production. But the knowledge that comes from analysing the value chain gives an elusive sense of control about the ability to actually change a production system.

The instant you want to focus on a different customer segment, or change your value chain, because a partner role is not contributing value (or has become obsolete) you start sensing the illusion. Change takes more than replacing some of the mechanics in a sequential production system.

When changing your company, and changing the value chain with it, you see that in reality you are part of a complex, highly interdependent, nested production network, that is designed to drive value creation towards a very narrow purpose.

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Attempts to focus on a customer segment outside of the scope of that system flushes up restrictive dependencies, and the configuration’s immune system will have you ousted, rather than change with you. You’re on your own!

This is what Unilever experienced with the recent hostile take-over bid from competitor Kraft. Though Unilever, and its customers are on a change route to sustainable consumption, shareholders remain with their demand of maximising shareholder value. The Kraft bid showed how Unilever has set each foot in a different value network, and that this inconsistency can painfully split a company.

Changing Partner Relations
Professor Tim Kastelle said it well:

“not only do our end users have to prefer our idea, but we also have to get others within the value network to stop using [and supporting] our competitors”.

In order to change your business model to serve a different customer segment, you need to draw in partners involved in other value networks, and lure them to investing resources into yours.

To achieve this, the perspective on partnership relations needs to shift from that of value chain efficiency, and scale, to that of value network discovery, and growth. This entails that partnership relations shift from tweaking business model efficiency, to a joint search for creating, delivering, and capturing new value.

This shift can be seen in Amazon’s partnership with an air freighter. It’s not that existing value chain partners like UPS, and Fedex aren’t able to work to the particular requirements  of Amazon’s operations. It’s more so that Amazon’s B2C customer segment is adjacent to UPS, and Fedex’s existing core B2B customers. They have different demands regarding delivery rhythms, volumes, and shipping rates than Amazon’s customers.

The Business Model, and Partnership Canvas: Tools that change Perspective
The objective is to define the logic of tying 2 business models together in an exercise of joint value creation. Search is required to figure out how you can collaborate in such a way that both your, and your partner’s business benefit from this new value.

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Partnership Design, which is based on Alexander Osterwalder’s Business Model Canvas, and my  Partnership Canvas, provides a way for achieving this. Partnership Design frames partnering as a business model innovation challenge. It brings focus to value inputs that partners can respectively bring to the table to jointly create a new form of value for delighting customers.

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By focussing on the potential of synergy between value offered, and value desired from each partner, discussions on relationships are framed around the merit of their creative potential. It allows thinking to escape the trap of conventions of efficiency in partnership relations, and upfront disqualification of new linkages due to differences in company size, market power, and assumptions about where industry boundaries lie.

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By looking at your partners one-by-one, you can start to gradually reassemble your value network, around a new customer segment.

The Business Model, and Partnership Canvas help teams to quickly flesh out key hypotheses. These need to be tested to verify whether the new relationship will add value to both their partner’s, and their own business model at the same time.

Continue the exercise for all the partners that you’ll need to build the value network, and watch the ripple effects change an industry!


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The relationship perspective on Amazon’s collaboration with air freighter Atlas Air

Partnerships tend to be used as catch-all for collaboration between businesses. This clutters understanding about why collaborating businesses are engaging with each other. In this post I’ll take the case of the recent Amazon and Atlas Air collaboration, and show how sifting apart their collaboration on a relationship basis, brings more understanding to how the deal is structured.

Business collaboration can take form in 3 different types of relationships, namely:

  1. customer-supplier
  2. partner
  3. investor

Each is a different type of relationship, with a discrete requirement for contribution, and of expected output. To assess the opportunity, and performance of the collaboration as a whole, each relationship needs to be judged on its own merit, rather than by an average of the mix.

By taking a relationship perspective, partnership is shown to be only 1 facet of the collaboration between Amazon and Atlas Air. Only once all the relationship types involved in their collaboration are made explicit, can we see the complete picture.

Background to the partners
Before we look at the various types of relationships at play in the Amazon-Atlas Air collaboration, lets have a look at where they’re both coming from.

Amazon is on a high-growth trajectory. It’s becoming a strong player in consumer retail. One of the drivers for their competitiveness is speed, and dependability of delivery. It is the foundation of their Prime service, for which customers pay a fixed yearly fee for faster shipping. Amazon is keen on increasing its speed, and capacity of delivery for Prime, as well as having more control over fulfilment hiccups, especially during peak seasons, like the upcoming holidays.

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More air freighting is key to increasing Amazon’s speed. Its option to realise this, would be to take control over air freighting infrastructure, something which Amazon currently depends on suppliers for, like UPS, and FedEx. But to go at it alone would mean buying the 20 planes it needs to grow, outright, at 70-80 million USD each. This is a huge risk, because Amazon does not have the capabilities to efficiently run this type of infrastructure. Partnering with specialised freighters seems to be the better option, but at the same time, Amazon is outgrowing its current delivery service suppliers’ capacity to realise Prime’s rapid, same, or two-day delivery.

Atlas Air is an air freighter. But e-commerce is a difficult game for this type of logistics company. Air freighters, in general, are not accustomed to servicing to the rhythm of e-commerce. Striking a balance between cost, and service levels is a delicate game for them. Freighters would need to adjust internal logistics to that of the e-commerce companies they work for, to perform better. But that would also increase dependencies on demand from only a select few e-commerce companies, and the according risks.

Atlas could invest in its own capability to become better at e-commerce shipping. But it would still have a difficult time catching up with competitors like UPS and DHL who are more advanced in their operations, and are actually suppliers to Amazon already.

The supplier, the customer, the partner, the investor.
The setting for collaboration is complex. But there is opportunity to gain from collaboration for both Amazon, and Atlas. There are three types of relationships at play in their collaboration.

Amazon Prime Air announcement

The first relationship concerns the lease of the planes. This is about Atlas as a supplier, and Amazon, as a customer.

The second relationship concerns the actual partnership, where Amazon is seeking a way into air freighting to scale up, and accelerate its Amazon Prime shipments. Atlas is trying to expand its entry into a new market to service e-commerce platforms with air-freighting.

The third relationship concerns an investment relationship, where Amazon has an option to invest in Atlas Air, and establish itself as a player in the logistics market. Lets go through these relationships one-by-one, and the input-to-expected output for each, before coming to a final conclusion about the collaboration.

The supplier-customer relationship
The big visible part of the collaboration are the aeroplanes. Under a so-called dry lease construction, Amazon has committed to leasing planes from Atlas for the coming 10 years. From a separate entity that falls under Atlas air, Amazon is also hiring staffing, and maintenance services: so-called wet leasing. This is a pretty straightforward arrangement. It gives Amazon control over the costs of operating an airline freighter, and Atlas has secured revenue on its planes, and staff.

But Amazon doesn’t yet know how exactly to utilise this freighting capacity for expanding its own Amazon Prime fulfilment process, nor does Atlas Air. That is where the partnership comes in.

The partnership
Atlas has capabilities for air freighting, but not in playing to rhythm of e-commerce. Generally freighting services are transactional. Freighting companies aren’t integrated with the fulfilment process of the e-commerce vendors. On top of that air-freight transportation management system are antiquated. Globally, only about 20% of airway bills are electronic. This is not the best vantage point for accelerating the e-commerce fulfilment processes.

To achieve the goal of increasing the capacity of its Amazon Prime service, Amazon has to create this new fulfilment management system, together with Atlas. The partnership relation shows how they intend to do this.

What Amazon would desire in a partner, is having access to raw air-freighting logistics management systems. Amazon would prefer a freighting partner that doesn’t have any visibility with consumers, over freighters that are already active in the consumer market.

Without any legacy of software built for shipping to consumers, Amazon has the opportunity to build its own Prime order fulfilment on top of business-to-business infrastructure. That would give Amazon more control, and a consistent presence of its service to its customers. Atlas checks all these marks.

By integrating airline freighting logistics software with Amazon’s own warehouse fulfilment, and micro distribution network, a complete supply chain is shaped for faster delivery (a logistics supply chain that is unheard of as of yet). For Atlas, this collaboration adds to its resources to support other e-commerce customers with similar air-freighting services.

Below you can find an overview of this partnership design, made with the partnership canvas.

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The Amazon-Atlas Air partnership design, depicted using the partnership canvas, and the business model canvas (Strategyzer.com)

 

The investor
The last part of the collaboration consists of an option for Amazon to also buy Atlas Air stock. Over the duration of the collaboration this option is vested to grow into a 30% stake.

Why are stock options involved in the deal? The answer is that it forges long-term commitment between the 2 companies. Atlas signals that it is committed to a long term arrangement. Procurement of stock would also provide Atlas with some financial leverage, needed to procure extra planes as more planes are demanded later on in the lease arrangement.

For Amazon this arrangement increases its influence over the future direction of Atlas Air’s development, and creates an option for full procurement of the company if the success becomes really big. But this will only be vested over a period of 7 years, which means that there is enough time to substantiate the business case for acquisition.

Conclusion
By teasing apart the various relationships at play in this collaboration, we can start to see the overall design of the collaboration. Air freighters are generally not suited for e-commerce velocity shipments. Atlas Air is not guaranteed to succeed with either. Therefore there are some contingencies built in the collaboration, with the various layers of relationships that are forged between Amazon, and Atlas.

Amazon is technically only tied to the lease of the planes. It can wind down the other parts of the collaboration at 180 days notice. Worst case scenario is that Amazon needs to find another logistics partner who can coordinate the freighting if the collaboration with Atlas doesn’t work out. In that case the costs of operations area clear.

Looking at just the partnership facet of the relationship, you can see that it designed around learning about optimising fulfilment. Both parties stand to learn about how to best collaborate to achieve better e-commerce velocity fulfilment. If the partnership fails, then there’s the fall-back. If it succeeds, then Amazon will likely utilise its stock procurement options.

There’s no question that Amazon needs to figure out air freighting to grow. But the big question remains why this type collaboration with B2B freighters (there is another collaboration Amazon is running in parallel, with Air Transport Services Group) is Amazon’s only bet to expand its Amazon Prime service.

Amazon is known for its frequent business experimentation. It wouldn’t be that difficult to create a bidding process for shipping services at check-out. Customers could then hire whatever delivery service they would need, based on the estimations that various freighters, including Amazon Prime would provide. That would provide an interesting benchmark to see whether existing freighters, or Amazon itself will be the most effective in winning the game of e-commerce logistics.


Interested to learn how you can reinvent your industry through partnerships, like Amazon?
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