This article was published by The Economist (Insights) in November 2013, and can be found here. Some areas covered in this article are explored further in the Economist Intelligence Unit report ‘Supply on demand: Adapting to change in consumption and delivery models’, which Aleyn Smith-Gillespie was interviewed for. The report can be found here.
Volatile and rising resource costs, regulatory pressures and supply chain risks are the new normal – part of the complex global environment in which companies have to operate and plan. Although many have embedded processes to drive efficiencies and mitigate risks, very few companies have recognised the opportunity to profit from these trends.
The reality is that we cannot maintain current resource-intensive business models and consumption patterns. The world’s population is expected to grow by a further billion over the next two decades, reaching 8.3 billion by 2030. This in itself presents challenges for global food supplies and energy resources. Add to this the fact that sixty per cent will adopt middle class consumption habits over that period – roughly double today’s level – the resulting increased demand for resources will only exacerbate current pressures.
Bold innovation will be crucial to decouple business models from resource risks. This will also enable companies to capture opportunities if they apply the same logic to their customer propositions. Approaches include shifting from a ‘linear’ production and consumption model towards a ‘circular’ one based on sharing, re-using, and/or potentially re-manufacturing assets; cutting out waste (or recovering value from it); and utilising more sustainable materials and technologies.
A key area of opportunity is for services that enable customers to reduce their own costs of ownership. These can arise from capital being tied up in idle assets or from the cost of depreciation, operation, and maintenance.
One way of doing this is to substitute owning a product for using it on a subscription or on-demand basis. For example in the consumer space, propositions are emerging to extract value from under-utilised assets, as illustrated by car clubs or peer-to-peer leasing (one aspect of the trend known as ‘collaborative consumption’). An EIU report sponsored by Zuora found that 51% of companies have either changed, or are in the process of changing, how they price and deliver goods and services. Similar models are also appearing in the B2B sector, such as cross-leasing underutilised machinery and other business assets.
These types of solutions work best in cases where the cost of ownership is relatively high, asset utilisation is low, and access can be planned within a reasonable lead time. Importantly, the services must be user-friendly and hassle-free in order to gain and retain customers. Scale is also critical to obtain network effects, reduce usage costs, and create ‘liquidity’ in the case of shared-asset models (effectively matching supply with variable demand).
Entirely new business models and propositions can also deliver significant value while reducing resource footprints, costs and risks. For example, the American LED lighting company Digital Lumens has shifted from selling equipment to delivering lighting as a service under a ‘managed asset’ model. Philips Lighting, part of the engineering and electronics group, is following a similar approach. Customers pay for the outcome, not the product: the supplier integrates lighting expertise, technology, analytics, and service at a superior price-performance level compared to the traditional model. As the company has an integrated end-to-end responsibility for the service it can take a systems-level, whole lifecycle, approach to optimising costs and resources – benefiting both the customer and the environment.
Sustainable business models and propositions require a deep understanding of value chain dynamics as well as customer needs and behaviours. Furthermore, companies need to keep abreast of developments in technology, design, and infrastructure which are creating the space for new solutions to emerge. Establishing a platform for collaboration and open innovation with suppliers, customers and other partners (e.g. designers and software companies) can be a powerful approach to getting these solutions to market more quickly and effectively. In the UK, this is being catalysed through collaborative-supply chain innovation projects funded by the Technology Strategy Board. Another example is BT, a telecommunications services company, which is working with suppliers to develop products and services designed for ‘circularity’ while also aligning its revenue model with a ‘net positive’ enablement of carbon reduction.
While collaboration is important, there will also be increased competition among players in the value chain as they vie to own the end-customer relationship, influence industry standards, and capture value. In some cases distributors and retailers can utilise their scale, customer insights, and diversified supplier base to act as integrators and provide a compelling proposition. For example, Vodafone’s Red Hot service is effectively moving from selling handsets to a lease and take-back model. In a different sector, retailer Kingfisher is developing closed-loop hardware products, as well as service-focused propositions for customers undertaking big DIY projects.
These examples show that, if done correctly, more value can be delivered while cutting waste and material resource requirements. The trend in some sectors towards combined product-service propositions also represents a strategic shift for equipment makers who will need to adapt their relationship with retailers and consider downstream services.
As new models take hold, these will also create indirect opportunities for a number of ‘enabling’ industries. These include financial services (insuring and financing leased assets); ICT (telematics, tracking, and ‘smart’ infrastructure), and third-party logistics providers (for reverse logistics of used products, as well as collection/distribution for asset-sharing models).
Macro-economic trends and government policy responses will redefine the rules of the game and impact market behaviour. We are already seeing more of our customers adopt long-term, total cost of ownership approaches to buying. Legislation in many countries is imposing increasing costs on waste (not to mention energy and carbon), which together with rising raw material costs is making new, resource-efficient and ‘circular’ solutions competitive and desirable. For companies to succeed they will need to fundamentally re-examine their propositions and business models, as well as their market strategy.