July 8, 2015

Underlying the collaborative economy are a handful of very strong and general trends that are challenging the conventional business models in just about every sector of the economy—not just in the types of transactions that we usually think of as the sharing economy.

Focus is shifting from selling stand-alone, physical products to creating services that enable users to make the most of the resources around them.

The cost of coordinating even very small and non-standard resources to fit individual user’s needs is falling.

Everyone is increasingly empowered to participate and contribute to the value creation.

Everything is getting connected; interacting, collaborating and coordinating.

All of this is taking place with a backdrop of ever-harder pressure to make the most of our natural resources.

What this means is that, generally, value creation will increasingly focus on solutions that are created for a specific context by coordinating resources from a wide network of contributors with an exact knowledge of the user’s current needs.

Sounds obvious, perhaps, but for most companies this will require a basic shift in approach and business model.

From Broadcasting to Co-creation

The industrial value chain was linear. Companies would push ready-made products and service to consumers. It was a broadcast model, so to speak, with the company, at the center of the process, defining, designing and delivering the same product to a mass market. Consumers would have very little influence on the design of the product. Even if a company were supplying components that other businesses bought, their development processes would be separate.

Since industrialism, companies have evolved from selling mass produced one-size-fits-all objects, to gradually offering more choices. To compete, customized and individual solutions are gradually becoming even more specific, to the point where they are created for a particular context: not just matching an individual user, but also factors such as the location, the time, the person’s schedule and his or her profile of preferences.

From Stand-alone Products to Networked Solutions

The industrial model was focused on products. If consumers wanted faster or more comfortable transportation, they would buy a better and bigger car.

Today, a bigger car will generally not get you faster to your destination. Instead, mobility can be improved by coordinating the use of the car with a range of other resources. Knowing that you can drive directly to a vacant parking place, the quick and smooth transfer to a train, or being able to use a city bike saves time. Sharing the ride with others saves money, and reduces congestion in traffic.

The car company can still be part of these solutions, but the new value for customers is created by coordinating all the elements involved in enabling mobility in the specific situation.

In a collaborative economy, value is created in networks. This changes the relations: Customers are the starting point, and an ecosystem of suppliers and stakeholders make themselves available to contribute elements to solutions that fit the individual user’s specific context. Users are involved in specifying the solution, and the resources involved are not necessarily just coming from companies, but could also be public services, or contributions from the end-users themselves or from their peers and communities.

Contextual Solutions are Instances

The coordination of resources and knowledge about the user’s context creates an instance. A search on the web is an example of an instance. Several billion times a day, Google generates a search result based on the coordination of vast amounts of information on the web—as well as detailed knowledge about each user’s situation, location, interests and preferences. Likewise, for hundreds of millions of users of Facebook or Amazon, each page presented is different; an instance composed for this specific context.

Such detailed coordination is commonplace in the digital realm, but it will increasingly also be the way solutions are delivered in the physical world.

As described, a transportation solution can take into account the current traffic conditions, as well as all available resources, including the option of using city bikes and sharing cars or rides. Like a web search, each mobility solution will be an instance: It is created for this particular user’s specific context, and the next solution that is generated will likely be different.

Similarly, solutions for a meal, a training course, a medical treatment, or the design of a 3D-printed personalized chair or shoe can be generated once, and not necessarily be repeated.

Already, the economy is a world of constant and rapid change, and the trend towards contextual solutions will reinforce the fluid nature of services and designs. As customers we will expect much greater flexibility in the solutions that we are offered. Conversely, as companies and as suppliers, we will meet a greater demand for flexibility.

Platforms are the New Giants

Platforms are emerging as a new central player in this economy—just witness the rise of Airbnb, Uber, eBay, Alibaba or Nest.

Platforms are asset light. Platforms are brokers. They typically don’t own the resources they coordinate, they merely connect suppliers to end-users. Compared to a conventional company, a platform is very light on physical assets. There is no production line, no investment in machinery, no large staff—only software, data and computing power. This means that, once the platform has been established, it can quickly scale to coordinate millions of interactions worldwide. This explains the enormous valuations that some platforms have received with investors.

Platforms have strong monopoly tendencies. The more suppliers and resources the platform can present, the more users will be attracted. And with a large number of users, more suppliers will want to be part of the platform. Not being available through the dominating platform would effectively make a supplier invisible to most potential customers. Obviously, this makes the largest platforms extremely powerful.

As an increasing part of all transactions will be mediated by platforms, any company will need to consider how it positions itself on, or outside of, available platforms.

Strategies for Adjusting the Business Model

For established companies there are two main ways to adjust the business model: making yourself available through platforms, and building a platform.

Companies should make what they produce available in a form that can be coordinated with other resources and by others. Some ways of doing this are through:

Offering fractional ownership, making what you produce available as an on-demand service or subscription.

Modularizing the product or service so users can pick the parts they need or configure a solution individually.

Using open or common standards, allowing your product to be combined with others’.

Opening your API to allow others to integrate your backend and your data into broader solutions.

At the same time, companies can build a platform that enables them to integrate external resources and create solutions that cover a wider range of their users’ needs. This could entail:

Systematically integrating resources from other companies, organizations and the users themselves into solutions that are precisely matched to the user’s context.

Creating a layer of service that augments the value of a physical product. Let third parties and the community of users co-create value through user forums and discussions, galleries, events and tutorials.

Opening the entire value chain for contributions, and making use of external resources for everything but the absolute core.

Focusing design and development efforts on building a platform that is easy to use, transparent, safe, efficient and engaging.

Building tools and organizing processes that enable value creation everyone around the user – rather than providing finished products.

The long tail of co-creation

All Parts of the Business Model are Affected

Arguably, more or less any business would benefit from moving some notches in those directions. However, doing so will typically require changes across the entire business model of a company.

Many companies use the Business Model Canvas to systematically analyze how a change in approach affects all parts of the business model. The Canvas model divides business models into nine elements, such as Value Proposition, Revenue Stream, Key Partners etc.

Source: businessmodelgeneration.com

Going through these elements, it is clear that a collaborative approach is quite different from most conventional models.

Conventionally, the value proposition to users is to sell a finished product. In contrast, platforms offer access to an ongoing process, that enables the coordination of instances; solutions that fit the specific, temporary context.

Conventionally, a company’s resources would be in-house: Employees, production facilities and distribution networks. Now, such resources can be accessed or integrated from the outside. Instead, the platform for coordinating the collaboration becomes crucial.

In conventional manufacturing there are high variable costs: The more you produce, the more you need to spend on raw materials, labor and distribution. For a platform, the marginal cost of coordinating more users and resources is very low. However, there are large initial costs to build the platform and attract a critical mass of resources and users.

Traditional roles change: Customers are also contributors, co-creators and experts, competitors can becomepartners, and some of those involved in creating a solution may come from industries that a company might not normally think it anything in common with.

Furthermore, revenue and costs are different from conventional economics, because it’s not just about money. A larger part of the resources that contribute to a solution come from participants who are also motivated by helping other, by reputation and by social status or ideology.

We are moving towards a hyper connected economy in which a growing part of what creates value is coordination, interaction, sharing and collaboration. Clearly, we are increasingly interdependent. Whether we thrive and have success depends on how well the other stakeholders around us are doing.

In short, we are moving from a ME-economy to a WE-economy.

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WE-economy is a Danish research project examining how existing companies can adjust to benefit from the trends underlying the collaborative economy. The project recently published a report outlining the underlying changes and presenting a number of case stories of how companies have responded. A large part of the report is a ”toolbox”, based on the Business Model Canvas method, which offers companies a way to systematically reconsider their existing business model.

The report can be downloaded from the We-economy website.