moving to the edge 2007

Friday, April 14, 2023 Net Value Associates LLC.

Extracting Value from Technology

John C. HendersonNalin Kulatilaka

Moving to the Edge:Leveraging Business Platforms


Exploiting Intelligence at the Edge

BP – Field of the Future Sears - Home Repair GE - Remote Monitoring of Engines US Army – Network Centric Progressive – Pay as you go …

Is there an Emerging Business Model?


Use Platform to Create Intelligence at the Edge

Pervasive Connectivity

Sensory Network

Intelligence atthe Edge


Moving to the edge: Three key challenges

Leverage the network of customers, suppliers and third parties

Invest in capabilities not technologies Earn and learn

Time

Earn

learn


Earn and Learn: A Business Platform Strategy

In the context of a Business Network, you must navigate the uncertainty of a dynamic, global market

• Create value by the ability to explore and exploit

• Capture the value of good ideas

• Operate at scale in a highly networked environment


Cope with Uncertainty

High

Low

Time

Value

Possible paths

?

?


Strategic Parity Depends on Competitive Conditions

Time

Value

Strategic Parity

?

?


Navigate the Cone

Time

Value

X

XX

X

Learn and Adapt

Reduce Downside

Capture Upside


Drive Increasing Value

Time

Value

X

XX

X

Capture Upside


The Economics of a Business Platform

A business platform is a set of capabilities that

•Has “options” value •Creates Network Effects •Has explicit Architectural Control Points


Business Capabilities Platforms

A business capability is

“What not how”• Value driven• Measurable• Action oriented

Achieved by combining• People• Process• Technology• Governance (Organization)


Network Systems: A User’s View

Value to users increase as more users use the system.• Reduced costs of search, transactions, synchronization

….• Consumers derive an autarky value and a network value

Direct (connected) network effects − Telephone, Fax, email− Excel, MS-Word, MP3

Indirect (complementary) network effects− VCRs and content, cars and gas stations typewriters and skilled typists, Hardware and software, operating systems and applications, shared data and models

Some networks have both types of network effects• Roads and vehicles, The Internet


Network Systems: A Producer’s View

Scale and scope economies

• High fixed costs (R&D) and low (near zero) variable costs create falling average costs (e.g., Information goods)

Network externalities result when the benefits of network effects can not be captured by the producers.

Platform strategies strive to “internalize” these effected


Size of Network

Value of Network

Cost of Building Network

Return on investment grows rapidly with scale

Large up-front investment

Value grows rapidly with scale


Business Platforms: Building on Existing Theory

Design Theory:Product Platform Architectures• Enhance Innovation/Manage Complexity

− Define interfaces (standards)− Encapsulate functionality/specialize

• Enhance Productivity− Core functionality (reuse)− Independent/parallel work (ecosystem)

Organization Theory: Capabilities• Dynamic Capability (Teece)

− Function competency vs reconfigurability (Pavlou/El Sawy)

• Shared knowledge and learning organizations


The Edge Organization

Where is the edge of the organization?• Where is the edge of a school bus company?• What would the business model look like if the bus

was the true edge and what would it take to make it so?

• How would it alter the ability to− Manage scale− Grow− Differentiate

Proposition: A Business PlatformEnables a shift to an Edge Organization


Moving to the Edge: Five Principles of a Business platforms

Leverage our understanding of design• Products• Organizations

Focus on the Economics of Platforms


Five principles of a Business Capability Platform

1.Integrity of Core Operations• Define the core – focus• Evolve the core• Defend the core – ACP

2.Observability• Connectivity• Information quality

− Technical− Analytical− Social

3. Working at the Edge• Leveraging distributed Cognition

− Knowledge sharing− Shared awareness

• Leveraging distributed work − Coordination− Synchronization


Five Principles of a Business Capability Platform

4. Contractual flexibility• Responsibility• Accountability• Incentives

5. Coherence• Share values• Shared intent• Strategic experimentation


Leverage the Network : The Edge Organizations

An organization form that • Leverages the network through co evolution in both execution and innovation

• Effectively exploits peer to peer, self-synchronization relationships while sustaining and adapting a shared strategic intent

• Can create and capture the economic value of platforms


Leadership Challanges

Earn and Learn• Evolve capabilities over time

− Connect− Shared awareness− Scale− Grow− Differentiate

Leverage peer to peer Drive strategic learning Create the new performance measurement system

moving to the edge 2007

Technology

business network

network systems

network of customers

business platform strategy

edge organizations

cone time value x x

leveraging business

options value