Making Value Migrate Your Way | 2014 Global Leadership Summit

Making value migrate your way
Global Leadership Summit Insight Session
London, June 24, 2014
Michael G. Jacobides

© Michael G. Jacobides
The changing dynamics of value creation and capture:
We don’t just compete in a sector. We compete for a sector
• Sectors dis-integrate, split off, re-integrate, split off again
• From Financial Services to Cars to Pharma to Computers
• New players invade from different sectors or countries
• With new ways of making money, changing the landscape
• Rules of the game change, leading to massive value migration
• Competition is no longer within a sector, it is to shape a sector

© Prof. Michael G. Jacobides
Look at the hot companies of today…
&
…and the reactions of concerned incumbents….
&

Tracking value creation and value migration

Trie
ste
Clev
erne
© Prof. Michael G. Jacobides, 2007© Michael G. Jacobides

A few things to remember:
It doesn’t matter how good you are. It matters what you do
• Firms often too focused on own segment and competitors
• Need to figure out how the world around you changes
• Value shift around the value chain, not just between offerings
• And firms strategically shape their industry architecture & playscripts
• The way you create and capture value changes over time
• Your strategy from yesterday doesn’t make sense today

Learning from disruption that didn’t happen in cars:
Outsourcing without value migration, despite the hype
• “The dawn of the mega-supplier” – new giant suppliers will quickly move to
“designing vehicle systems that can be ‘standardized’ within and across OEMs
– in other words, used in multiple models of an OEM and eventually by multiple
OEMs.” (Bain and Company, 1997)
• “Chrysler has played the role of the Compaq of the auto industry. Just as
Compaq helped to drive the entire computer industry to a horizontal/modular
structure, Chrysler’s strategy allows suppliers – even Ford’s and GM’s internal
suppliers – to strengthen their capability to develop whole automotive
subsystems, thereby pushing the entire structure of the industry from vertical
toward horizontal.” (Fine, 1998: 62)

©2010 Deloitte Turkey. Member of Deloitte Touche Tohmatsu Limited
Key Points
• Shift in profit allocation from
assembly to information
technology and components
• New “players“ from different
industries such as energy, IT
and electronics
• Change from one-to-one
towards multi-multi structure
• Lower entry barriers
With the transformation to e-mobility there will be a significant
change in the value chain of the automotive industry
Initiated by automaker
integration
Affiliated
Supplier
Affiliated
Importer /
Dealer
Automaker
A
Affiliated
Supplier
Affiliated
Importer /
Dealer
Automaker
B
Affiliated
Supplier
Affiliated
Importer /
Dealer
Automaker
C
Initiated by various players’
specialization
Sales
Manufacturing
PartsAssembly
R&D
Automaker
A
Automaker
B
Automaker
C
Independent Research Companies
(e.g. Engineering Companies
Independent Suppliers
(e.g. Battery, Motor, Inverter suppliers)
Independent Multi-brand Dealers
Value Chains
Conventional Vehicle EV

©2010 Deloitte Turkey. Member of Deloitte Touche Tohmatsu Limited
With “modularization-” and “plug-and-play-” concepts the role
and power of suppliers in the industry will significantly shift
• Definition of global standards enable “Modularization”
• Connectivity without calibration - “Plug-and-Play”
1. Supply to two or more automakers
2. Achieve economies of scale (similar to semiconductor industry)
3. Mega-suppliers would become profitable, while automakers producing
relatively small volumes of EVs would be less so
Battery Motor InverterCPU HDD Graphic
s

Lis
bo
n © Mi

What explains when sectors transform and value migrates?
• Principles that explain the dynamics of value migration
• …but also account for value sticking around!
• Study sectors that shifted, and sectors that managed not to
• Continuous struggle under the surface – what determines who wins?
• Consider the forces that explain stasis, change, and disruption
• And provide advice on how to adapt your strategy
• Replaceability and mobility. Let’s see how these work for wine & coffee

Computers, Cars, and certification
• In computers, IBM unwittingly “standardized itself out” of success
• Creating a more open value chain, allowing its value-add to diminish
• “Intel Inside” campaign, though accidental, shifted fortunes
• And work with Microsoft. As for HDD… Forget it!
• In cars, OEMs fought hard the battle of branding the experience
• Components invisible, through strategic action
• (Though car makers were lucky and started from a stronger place)

Cars vs computers: Industry structure & replaceability
Automobiles: Hierarchical Structure Computers: A set of verticals

Are (electric) cars becoming computer-like?
Apple, Inc

So rather than cars becoming computers, computers are
becoming cars. Witness Apple….
Our interviews with a number of Apple’s suppliers suggest that Apple
‘atomizes’ its supply chain to an unprecedented degree, breaking up
component processing steps across multiple vendors. This aids in preserving
product secrecy – since even the suppliers themselves often do not know
how Apple will ultimately use a component – and gives Apple inordinate
control over the manufacturing process, as if Apple were vertically integrated
and owned the factors of production. (Sanford Bernstein Research, March
2012)

Apple and the architecture of its ecosystem
• A “band of control” around
the user
• = iPhone by Apple
• Large integral “core”
• Little use of Open Source
• Proprietary formats for
complementors

…and the counter-attack from Google: a different architecture
• Open source everywhere
• Complementors design
and make handsets
• Search engine replaces
Store
• = Android by Google

Back to differentiability & mobility:
Google, Android & Samsung

What I want you to remember:
Differentiability and replaceability rule value migration
• The more differentiable you are, the better for you (& friends)
• Don’t think narrowly about yourselves, but broadly about the segment
• The more replaceable others become, the more you keep value
• Fight with standards, with practices, with clever positioning
• Some settings change easily, others manage to fight back
• Question of luck, question of positioning, question of perspective

What does this mean for incumbents or challengers?
Jacobides & Macduffie, HBR, summer 2013, How to Bring Value your Way

What else happens as sectors shift?
• Market cap jitters, even as OCF slowly moves along
• There’s froth, and there’s scope to educate or fool the market
• Changes from new players do affect expectations and pricing
• Even w small share, established business model is challenged
• Firms face a new set of strategic dilemmas
• The “equity vs dividend” dilemma, and the burden of scope

Why unbundling can have profound effects:
Uncovering multi-speed sectors with uni-speed incumbents
Transportation/infrastructure Devices Apps, content, access
• Need for CapEx &
planning
• Fixed income, not equity
• Local, not global
• User, not driver
• EBITDA will decline
• Huge change velocity
• Skewed, variable
• Fully global
• Platform wars
• Convergence threat
• Highest change
• Ecosystem changes
• Mostly global
• Platform wars
• Control wars

What’s the problem of existing firms?
• Faced with an innovation, they freeze
• Faced with headcount / budget reduction, they turn inside
• Faced with a new model, they want to copy it
• Which, as airlines learnt, may be a very silly idea
• As the world changes, they cant adjust their habits
• Integrated mentality, rigidity: organizational pathologies

Success stories
If you want to innovate… study what works & what doesn’t
Failures

What separates the wheat from chaff?
• Supply-side mentality, forgetting about the customer’s choices
• What do your customers want and where will they source it?
• Self-absorbed vertically integrated focus
• Doing it all inside or wanting to acquire anything that shines
• Allowing its (understandable) organizational issues to take over
• In times of hardship, we focus inside; org design & governance rule
• Which is why entrepreneurs are finding it easier to succeed
• Though they, too, require a good map of value migration & capture

What should we do as value migrates?
• Have a clear map of our sector and its business models
• Defend our position, but start by adding more value than others
• Replaceability, differentiability, growth… judo tactics
• See what changes are best suited to our organization
• Don’t just react: take a bold position, re-think your model
• Value from reshaping sector or re-thinking your business (FI vs EQ)
• Help re-wire your organizations’ DNA
• Manage in the new ecosystem, align your responses
• Articulate a vision, change your habits

What an Australian Jewel Beetle can teach us
Julodimorpha bakewelli

Making Value Migrate Your Way | 2014 Global Leadership Summit

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Making Value Migrate Your Way | 2014 Global Leadership Summit