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MBA Thesis
Managing a Portfolio of Business Verticals: From
Assessment of Business Verticals to Scaling-up/
Scaling-down
Author: Vivek Puri Student ID: 11864966
Email: vivekpuri2005@gmail.com Submission Date: 30th September 2018
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Abstract
An organizations’ long-term survival depends on its ability to profitably exploit existing assets while successfully explore new growth opportunities (Duncan, 1976; March, 1991, Raisch et al., 2009). In the context of new growth opportunities, crossing the chasm has become a popular term and was coined by Moore (1991). It refers to the notion that many new enterprises die off before ever making it to the mainstream market. The organization under consideration is Volkswagen Data:Lab, one of the many labs of the broader Volkswagen Group. Data:Lab’s primary goal is to future proof Volkswagen Group, by paving the way for digital transformation by turning the most valuable asset of the organization – data – into business solutions.
Data:Lab is organized along the lines of the organization of the broader Volkswagen Group & Brands. There are 2 key verticals (Enterprise & Customer) with 3 sub-verticals each. This alignment allows Data:Lab to have the required learning, focus and expertise to fulfil different needs of the associated vertical of Volkswagen Group & Brands. Data:Lab in itself is fairly new business initiative and as such the alignment mentioned above implies that each different sub-vertical has its own unique circumstantial strength and weaknesses.
In this thesis, I have assessed the sub-verticals (After-sales, Marketing and Mobility) of the Customer vertical using the ‘The Hierarchy of Powers’ framework, from Geoffrey Moore’s book Escape Velocity: Free Your Company’s Future from the Pull of the Past. The ‘Hierarchy of Powers’ is a framework of frameworks and the hierarchy is derived from taking an investor’s point of view of the company.
Post the assessment, I have quantified the scores of each sub-vertical and provided a scaling-up strategy using some practical industry case-studies from GE, Nike etc. For sub-verticals, where the assessment, led to weak scores, I have elaborated on the reasons for scaling-down the sub-vertical.
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Table of Contents
I.
Introduction
A. Company Introduction B. The Research Question
II. Literature Review/ Underlying Theory
A. Assessing Sub-verticals
B. ‘The Hierarchy of Powers’ framework
C. Components of ‘The Hierarchy of Powers’ framework D. Scaling-up Strategy I: Growth Outside the Core framework E. Scaling-up Strategy I: Growth Outside the Core framework –
Implications of using the Strategy
F. Scaling-up Strategy II: Global Expansion using CAGE framework
G. Scaling-up Strategy III: Business Transformation using Zone to Win framework
III. Theory Application, Analysis and Discussion
A. Applying ‘The Hierarchy of Powers’ framework B. Quantifying ‘The Hierarchy of Powers’ framework C. Assessing Marketing sub-vertical
D. Scaling-up Marketing sub-vertical E. Assessing After-Sales sub-vertical F. Scaling-up After-Sales sub-vertical G. Assessing Marketing sub-vertical H. Scaling-down Mobility sub-vertical
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IV. Conclusion & Limitation
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I. Introduction
General Electric (GE), for more than 100 years, made majority of its sales by selling industrial hardware. By the end of the first decade of 21st century, GE was at risk of
losing its key customers to incumbents from other industries, such as SAP and IBM and to new competitors, such as big-data related start-ups. Thus GE risked being left as a commodity equipment provider and forced into a position where it was unable to capture value.
“In 2011, GE responded with a multibillion-dollar initiative focused on what it calls the industrial internet” (Iansiti & Lakhani, 2014, p. 91). “Such digitally enabled, outcomes-based approaches helped GE generate more than $1.5 billion in incremental income in 2013” (Iansiti & Lakhani, 2014, p. 92).
This digital transformation – “the digitization of previously analog machine and service operations, organizational tasks, and managerial processes - is pushing both established and start-up players in many industries to compete in new ways” (Iansiti & Lakhani, 2014, p. 93).
There are three reasons why digital technology is transformational. “(1) Unlike analog signals, digital signals can be transmitted perfectly, without error. (2) Moreover, digital signals can be replicated indefinitely – without any degradation. (3) Once the investment in network infrastructure has been made, the information can be communicated to the incremental consumer at zero (or almost zero) marginal cost. And a digital task performed at zero marginal cost will immediately supersede any traditional analog task completed at significant marginal cost” (Iansiti & Lakhani, 2014, p. 92).
Thus to compete in this new era of ‘Digital Ubiquity’, “Companies will have to rethink their business models, identifying new opportunities for creating and capturing value” (Iansiti & Lakhani, 2014, p. 93).
According, to a White Paper published by World Economic Forum in January 2016, most industry leaders believe that the importance of digital technology is rapidly
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increasing. This importance of digital technology is shifting from being a driver of incremental productivity to being an enabler of disruptive innovation. Thus, it is imperative, that organizations, irrespective of their size, sector, industry, geography, maturity make a conscious effort to embrace the challenges posed by digital technologies.
In this thesis, the organization under consideration is Volkswagen Data:Lab which is one of the many labs of the broader Volkswagen Group. As discussed previously, the importance of digital technology is rapidly increasing and the automobile industry, much like other industries is not untouched by these ripples of change. While some digital disruptions in automobile industry have already become mainstream but at a broader level, the automobile industry is getting impacted because of disruptions such as Electric Cars, Autonomous Cars, Servitization of Mobility, Shared Mobility and widespread use of Data/ Data-enabled innovations (Connected-cars etc.).
A. Company Introduction
Volkswagen, headquartered in Wolfsburg, Germany, is a familiar name across the World. Volkswagen designs, manufactures and distributes commercial vehicles brands such as MAN, Scania, Volkswagen, passenger vehicles brands such as Audi, Bentley, Bugatti etc., and motorcycle brands such as Ducati. Additionally, the broader Volkswagen Group, is also involved in the design, manufacturing and distribution of engines and turbomachinery.
The broad corporate umbrella of multiple brands, is further organized under 2 key verticals (Enterprise & Customer) with 3 sub-verticals each. Finance, HR and IT form one of the sub-verticals of the Enterprise vertical. Volkswagen Data:Lab, is one of specialized business units within the Volkswagen’s IT sub-vertical. Data:Lab’s primary goal is to future proof Volkswagen Group, by paving the way for digital transformation by turning the most valuable asset of the organization – data – into business solutions. Data:Lab is housed by data scientists who are well-versed with latest technologies such
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as Artificial Intelligence (AI), Advanced Analytics, Natural Language Processing (NLP), Deep Learning, Quantum Computing etc.
Furthermore, the teams within Data:Lab are organized very much like the broader Volkswagen Group. Figure 1. summarizes the organizational structure of the broader Volkswagen Group and Data:Lab. Both the broader Volkswagen Group & Data:Lab are organized along two key verticals: Customer and Enterprise. Each of these two verticals has three sub-verticals each. The Customer vertical has three sub-verticals: After-sales, Marketing and Mobility and the Enterprise vertical has similarly three sub-verticals: Research & Development, Production and Finance/ Human Resources & Information Technology.
Data:Lab has chosen this particular organizational structure as this alignment allows Data:Lab to have the required learning, focus and expertise to fulfil different needs of the associated vertical of the Volkswagen Group. Data:Lab in itself is fairly new business initiative and as such the alignment mentioned above implies that each different sub-vertical has its own unique circumstantial strength and weaknesses.
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B. The Research Question
Needless to say, but it took some time to refine the ‘Research Question and Scope’. Initially, Data:Lab wanted to tackle questions such as ‘Framework of key success factors in data science implementation’ or ‘Data science labs in the context of classical organizations’.
However, after our initial discussions, we realized such questions might be too broad and thus we thought, assessing Data:Lab’s strength and weaknesses with respect to start-up, scale-up and mature organizations might be the way forward.
Thereafter, once we got into detailed discussion with sub-vertical teams of Data:Lab, we realized that each sub-vertical is so very different from other sub-verticals that an umbrella approach might be sub-optimal.
To give an example, while the R&D sub-vertical had individual brands as customers, the Marketing sub-vertical had NSC (National Sales Company), an amalgamation of 3-4 brands serving the geography as customers. Whereas, the After-sales sub-vertical had the entire Volkswagen Group (After-sales is organized centrally for the whole group) as customers.
Similarly, there is a huge difference in the solutioning time-lines and solution requirements of individual sub-verticals. The R&D sub-vertical, has a solutioning time-line of 1-2 months, works closely with the motorsports teams and generally has to build a fully implementable solution. On the other hand, the After-sales sub-vertical, is currently working on Data-Link project, which will probably have a solutioning time-line of 12-15 months. Similarly, the Marketing sub-vertical, has a completely different approach and is involved more in proof-of-concept type of solutions which have a 3-6 months of solutioning time-frame.
Given, the differences highlighted above, it is reasonable to conclude that a granular approach - looking at the sub-verticals separately, would have made the most sense. Consequently, we (Vivek Puri and Rodolfo Gordillo) decided to focus on sub-verticals. While, I assessed, the sub-verticals under Customer vertical, Rodolfo Gordillo assessed, the sub-verticals under Enterprise vertical.
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The overarching research questions are therefore as follows:
Q1) Given the heterogeneity of sub-verticals of Volkswagen Data:Lab, how do we assess different sub-verticals?
Q2) Once assessment is done, which sub-verticals do we identify for future scale-up opportunity and what scale-up strategy do we use for associated sub-vertical?
To answer to the 1st critical question, this thesis will provide Literature Review/
Underlying Theory (section II), followed by Theory Application, Analysis and Discussion (section III) for the assessment. Needless to say, but wherever required and possible, the Literature Review/ Underlying Theory has been suitably adapted to make it more applicable to the situation under consideration.
Additionally, to answer the 2nd critical question, this thesis will provide the Underlying
Theory for the scaling-up strategy in Theory Application, Analysis and Discussion (section III), along with the respective assessment of the sub-vertical. Given the non-universality of the scaling-up strategy i.e. scaling-up strategy is specific to a sub-vertical, the above arrangement makes sense.
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II. Literature Review/ Underlying Theory
An organizations’ long-term survival depends on its ability to profitably exploit existing assets while successfully explore new growth opportunities (Duncan, 1976; March, 1991, Raisch et al., 2009). In the context of new growth opportunities, ‘Crossing the Chasm’ has become a popular term and was coined by Moore (1991). It refers to the notion that many new enterprises die off before ever making it to the ‘Mainstream’ market.
Figure 2. The Chasm (Adapted from Moore, 1991)
The Chasm is essentially the gap between the ‘Niche’ market and the ‘Mainstream’ market as it is shown in Figure 2. Essentially for a business to be successful, the goal must be to first establish a foothold in the ‘Niche’ market and thereafter move as quickly and sustainably to the ‘Mainstream’ market through mass adoption by the Early Majority users. ‘Crossing the Chasm’, thus becomes inevitable part of growth trajectory of any organization.
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A. Assessing Sub-verticals
The key factors to ponder over while deciding the appropriate framework for assessment of sub-verticals was to ensure that the framework is: a) applicable for relatively less mature organizations, b) multi-faceted i.e. the framework can take the individual circumstantial strength and weakness of sub-vertical(s) into consideration, c) organized such that the framework gives more (less) relative importance to some strength/ weakness over other strength/ weakness i.e. the framework establishes a hierarchy. Fortunately, we have just the right framework. Geoffrey Moore, who coined the term ‘Crossing the Chasm’, introduced the ‘The Hierarchy of Powers’ framework, in his book Escape Velocity: Free Your Company’s Future from the Pull of the Past. Essentially, ‘The Hierarchy of Powers’ framework is a ‘framework of frameworks’ and has 5 components: 1) Category Power, 2) Company Power, 3) Market Power, 4) Offer Power, and 5) Execution Power organized in a relative order of respective importance from top to bottom.
Apart from the good applicability to current situation i.e. a) Data:Lab is a relatively less mature organizations, b) Unique circumstantial strength and weakness of individual sub-vertical(s) of Data:Lab and c) clear hierarchy of importance in the assessment criteria, the ‘The Hierarchy of Powers’ framework additionally addresses the assessment question from an investor’s perspective i.e. the ‘The Hierarchy of Powers’ framework measures economical value.
B. ‘The Hierarchy of Powers’ framework
The hierarchies in the ‘The Hierarchy of Powers’ framework are derived from an investor’s perspective i.e. the ‘The Hierarchy of Powers’ framework measures economical value. According to Geoffrey Moore, the first decision that investors typically make is regarding the categories to invest in by asking the question what is the growth potential of the category i.e. ‘Category Power’.
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Post the analysis on the attractiveness of the category, the investors chooses specific companies based on the company’s unique competitive advantage/ capabilities i.e. ‘Company Power’ and the level of competition it faces (current & expected future competition) i.e. ‘Market Power’. The investor then looks at the competitiveness/ completeness of the offering that is required by the customer i.e. ‘Offer Power’ of the company and company’s track record in executing what it promises to execute i.e. ‘Execution Power’. This then covers the hierarchy top to bottom and explains why it is in the order it is. Figure 3. depicts the 5 powers arranged in hierarchical order with Category Power, the most important at the top and Execution Power, the least important at the bottom.
Figure 3. The hierarchies in ‘The Hierarchy of Powers’ framework (Geoffrey Moore’s book Escape Velocity: Free Your Company’s Future from the Pull of the Past)
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C. Component of ‘The Hierarchy of Powers’ framework
While, the individual components of ‘The Hierarchy of Powers’ framework have been briefly mentioned in the preceding sections, in this section, each of the individual components will be looked at in detail, in the same hierarchal order.
1) Category Power
The assessment for ‘Category Power’ involves questions such as: Is the category attractive, Is the category big enough to matter, Is the entry in the category early-enough and where is the category in the adoption life cycle.
The answer to these questions, essentially lets us know what is the attractiveness of the category i.e. the absolute size of the category and the potential realizable growth opportunity within the category.
2) Company Power
The assessment for ‘Company Power’ involves assessment for unique competitive advantages/ capabilities of the company i.e. points of differentiation. These advantages needs to be of perceived value to the customer, must be unique to the company and at the same time defensible versus competition. Creating ‘Company Power’ is a longer-term process and involves carefully calculated effort by the company to raise specific barriers to entry for competition.
While, the more the points of differentiation versus competition the better for the company, but Geoffrey Moore insists that 3-4 solid points of differentiation are enough as striving for further differentiation reduces focus. Some examples of points of differentiations are such as: Business model, Reputation, Alliances/ Ecosystem, User experience, Balance sheet/ funding, Engine/ algorithm, Domain expertise etc.
3) Market Power
The assessment for ‘Market Power’ involves assessment of company’s growth and market share in the Categories that it operates in versus the competition i.e. how is the company doing versus the competition and how is the company expected to do versus the competition going-forward.
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4) Offer Power
The assessment for ‘Offer Power’ involves assessment of the competitive separation between the company’s offer and its competitive set. Traditionally speaking, this separation is generally measured along the three distinct value disciplines vectors: Product Leadership, Customer Intimacy and Cost Leadership (Treacy and Wiersema, 1994) with each vector implying a different organizational alignment to achieve the type of intended target separation.
The separation could also inspired by taking into consideration Larry Keeley’s ‘Ten Types of Innovation’. Larry Keeley (2013) bucketed these ‘Ten Types of Innovation’ under three broad buckets of: Configuration, Offering and Experience. Figure 4. below summarizes the ‘Ten Types of Innovation’ that Larry Keeley mentioned.
Figure 4. Ten Types of Innovation 5) Execution Power
As mentioned previously, ‘Execution Power’ is the least important power in terms of hierarchical importance, nevertheless, the assessment for ‘Execution Power’ involves assessment of the speed, scale and focus of company’s actions. Broadly speaking ‘Execution Power’ consists of two elements: a) Whether the company is organized to execute and b) Whether the Go-To-Market strategy of the company is sufficiently
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developed. To analyse a company’s ‘organized to execute’ capability, typically a company’s organization and team structure, resource alignment and funding status are analysed. Whereas, to analyse a company’s ‘Go-To-Market’ capability, typically a company’s solution characteristics, marketing programs, partner engagement capacities are analysed.
D. Scaling-up Strategy I: Growth Outside the Core framework
Chris Zook and James Allen conducted a five-year study of corporate growth involving 1850 companies in the early 21st century. According to Zook and Allen, their research
yielded two major conclusions.
Their first finding was that “Most sustained, profitable growth comes when a company pushes out the boundaries of its core business into an adjacent space” (Zook & Allen, 2003, p. 3). They identified six type of adjacencies, ranging from adjacent links in the value chain to adjacent customers to adjacent geographies.
Their second finding was that “Companies profitably outgrew their rivals by developing a formula for expanding those boundaries in predictable, repeatable ways” (Zook & Allen, 2003, p. 3). According to Zook & Allen, an average company succeeds only 25% of the time in launching initiatives, however, companies that use a repeatable formula have much higher success rates, generally between 50%-80%. They argue the underlying reason for the same is the inherent complexity of running a business which is generally “complex, experimental and somewhat chaotic process” (Zook & Allen, 2003, p. 3). “Repeatability allows the company to systemize the growth and, by doing so, take advantage of learning-curve effects” (Zook & Allen, 2003, p. 3).
To explain the same phenomena, Zook & Allen cite the Nike vs Reebok case study. In 1987, Nike’s operating profits were $164 million to Reebok’s $309 million and Nike’s market capitalization was half of that of Reebok. Fast-forward to 2002, Nike had grown it’s profits to $1100 million while Reebok’s profits actually fell from $309 million as of 1987 to $247 million as of 2002. The difference in CAGR (Cumulative Annual Growth
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Rate) in operating profits for these two companies over this 15 year period was roughly 15% per annum.
“Despite its fabled swoosh, Nike was regarded as an amateur when it decided in 1995 to branch out from shoes to golf apparel, balls, and equipment. Four years later, however, Nike had scored priceless marketing victories—not once, but three times running. First, the British Open champ wore Nike’s golf shoes in 1999. Next, Tiger Woods switched from Titleist golf balls, the leading brand, to Nike golf balls in 2000. And, finally, David Duval won his first major tournament just after switching to Nike golf clubs in 2001.
Nike’s entry into the golf market appeared to be the business equivalent of sinking three successive holes in one. But those who had followed the company closely over the previous decade were not surprised. They recognized the formula that Nike has applied and adapted successfully in a series of entries into sports markets—from jogging to volleyball to tennis to basketball to soccer. Nike begins by establishing a leading position in athletic shoes in the target market. Next, Nike launches a clothing line endorsed by the sport’s top athletes—like Tiger Woods, whose $100 million deal in 1996 gave Nike the visibility it needed to get traction in golf apparel and accessories. Expanding into new categories allows the company to forge new distribution channels and lock in suppliers. Then it starts to feed higher-margin equipment into the market—irons first, in the case of golf clubs, and subsequently drivers. In the final step, Nike moves beyond the U.S. market to global distribution” (Zook & Allen, 2003, p. 2-3).
The use of this formula for growth repeatedly, was “the reason that pulled Nike away from Reebok as leader in the sporting goods industry” (Zook & Allen, 2003, p. 3). Additionally, according to Zook & Allen, the successful repeaters in their study had two common characteristics. “First, they were extraordinarily disciplined, applying rigorous screens before they made an adjacency move. This discipline paid off in the form of learning-curve benefits, increased speed, and lower complexity. And second, in almost all cases, they developed their repeatable formulas by studying their customers and their
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customers’ economics very, very carefully. These capabilities may seem basic and unglamorous, yet companies that excel at them set the stage for industry-leading growth” (Zook & Allen, 2003, p. 3).
E. Scaling-up Strategy I: Growth Outside the Core framework –
Implications of using the Strategy
Zook & Allen, further argue that the advantages of this repeatability are four-fold: Learning-Curve Effects, Reduced Complexity, Speed and Strategic Clarity.
1) Learning-Curve Effects
According to Zook & Allen, “A repeatable model allows managers to refine skills and systematize processes that are developed mostly through guesswork the first time” (Zook & Allen, 2003, p. 5).
2) Reduced Complexity
To explain the impact of the use of a repeated formula on complexity, Zook & Allen use the case-study of Procter & Gamble (P&G). In their interview with P&G’s then CEO, A.G. Lafley, Lafley remarked that “Complexity is the bane of a large organization” and “It strangles growth”. Specifically, when P&G’s Crest brand was flagging in the late 1990s, the company sparked a growth revival by expanding into two large adjacencies— teeth whitening and brushing.
3) Speed
According to Zook & Allen, “When a company has mastered a repeatable formula for adjacency moves, it can successfully start—and finish—a number of moves faster than a competitor would” (Zook & Allen, 2003, p. 5) i.e. the company has a much better longer-term clarity.
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4) Strategic Clarity
According to Zook & Allen, “Companies savvy enough to identify and execute a repeatable formula for growth have the advantage of strategic clarity: Repeatable formulas are compelling, and they are easy to understand” (Zook & Allen, 2003, p. 5). This then ensures ease of communication with different stakeholders, be it shareholders, board, analyst community or the employees.
F. Scaling-up Strategy II: Global Expansion using CAGE
framework
In his widely popular article, ‘Distance Still Matters: The Hard Reality of Global Expansion’ Pankaj Ghemawat argued that “Companies routinely exaggerate the attractiveness of foreign markets, and that can lead to expensive mistakes” (Ghemawat, 2001, p.2).
Accordingly, Ghemawat proposed a more rational approach to evaluating global opportunities. According to Ghemawat, when it comes to foreign markets and global expansion -
“The problem is rooted in the very analytic tools that managers rely on in making judgments about international investments, tools that consistently underestimate the costs of doing business internationally. The most prominent of these is country portfolio analysis (CPA), the hoary but still widely used technique for deciding where a company should compete. By focusing on national GDP, levels of consumer wealth, and people’s propensity to consume, CPA places all the emphasis on potential sales. It ignores the costs and risks of doing business in a new market.
Most of those costs and risks result from barriers created by distance. By distance, I don’t mean only geographic separation, though that is important. Distance also has cultural, administrative or political, and economic dimensions
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that can make foreign markets considerably more or less attractive (Ghemawat, 2001, p. 2-3)”.
According to Pankaj Ghemawat, distance between two countries can manifest itself along 4 basic dimensions: cultural, administrative, geographic, and economic. Figure 5. below summarizes the key elements of these 4 dimensions.
Figure 5. Dimension of CAGE framework. Distance between two countries increases if any of the factors mentioned above holds true
G. Scaling-up Strategy III: Business Transformation using Zone to
Win framework
Geoffrey A. Moore in his book ‘Zone to Win: Organizing to Compete in an Age of Disruption’ proposed a 4 zone framework with 3 different time horizons to manage and scale-up innovation.
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According to Geoffrey A. Moore, most organizations focus on incremental innovation – be it ‘Performance Zone’ or ‘Productivity Zone’ as the impact of these innovations can be felt and seen immediately (Return on Investment start coming in 0-12 months). However, according to Geoffrey A. Moore, organizations would be better off focusing on innovation across different time horizons – ‘Transformation Zone’ (Return on Investment start coming in 12-36 months) and ‘Incubation Zone’ (Return on Investment start coming in 36-72 months).
Failure to focus on ‘Transformation Zone’ and ‘Incubation Zone’ innovations is a prime reason why many prominent organizations such as Kodak, Blackberry, Nokia etc. failed. According to Geoffrey A. Moore, the reason why organizations fail to focus on ‘Transformation Zone’ and ‘Incubation Zone’ innovations is because these innovations puts an organization in conflict with itself. However, if an organization wants to go through repeated ‘S’ curve then the organization must be prepared to go through the proverbial ‘J’ curve.
According to Geoffrey A. Moore, apart from different time horizons, each zone has its own priorities, culture and return profile. Figure 6. summarizes the key elements of the 4 zones. For example: ‘Transformation Zone’ is focused on disruptive innovations and contributes materially to organizational revenue growth. Apart from a 12-36 month time horizon for Return on Investment, ‘Transformation Zone’ is all about changing course and speed and ‘Transformation Zone’ requires a compete organization culture. On the diagonally opposite end is ‘Productivity Zone’. ‘Productivity Zone’ is focused on sustaining innovations and typically consumes investment. Apart from a 0-12 month time horizon for Return on Investment, ‘Productivity Zone’ is all about doing the right things i.e. operational excellence and ‘Productivity Zone’ requires a collaborative organization culture.
According to Geoffrey A. Moore, an organization must thus decide the appropriate zone for all its innovations and place adequate care in having enough innovations in all the zones. Additionally, according to Geoffrey A. Moore, an organization must be careful in managing the transition from one zone to the other for a particular innovation i.e. any innovation will go through different zones over a period of time. For example:
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According to Geoffrey A. Moore, it is far better to use ‘Transformation Zone’ as an intermediate step before ‘Performance Zone’ for an ‘Incubation Zone’ initiative.
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III. Theory Application, Analysis and Discussion
In the succeeding section, I have assessed the sub-verticals (After-sales, Marketing and Mobility) of the Customer vertical using the ‘The Hierarchy of Powers’ framework, from Geoffrey Moore’s book Escape Velocity: Free Your Company’s Future from the Pull of the Past. As discussed previously, the ‘Hierarchy of Powers’ is a framework of frameworks and the hierarchy is derived from taking an investor’s point of view of the company.
Post the assessment, I have quantified the scores of each sub-vertical and provided a scaling-up strategy using the scaling-up strategies mentioned previously. For sub-verticals, where the assessment, led to weak scores, I have elaborated on the reasons for scaling-down the sub-vertical.
However, before I take a deeper dive into the assessment of sub-vertical and the associated scaling-up strategy, I have suitably adapted the ‘The Hierarchy of Powers’, both quantitatively and qualitatively, so that the framework can be applied consistently across different sub-verticals.
A. Applying ‘The Hierarchy of Powers’ framework
As discussed in Section II. C, ‘The Hierarchy of Powers’ framework is a ‘framework of frameworks’ and has 5 components: 1) Category Power, 2) Company Power, 3) Market Power, 4) Offer Power, and 5) Execution Power organized in a relative order of respective importance from top to bottom.
To make the process of assessing verticals standardized, I have assessed the sub-verticals using a set of standard questions for each of the 5 components of ‘The Hierarchy of Powers’ framework. The next section summarizes the questions that were posed for each of the components -
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1) Category Power
The assessment for ‘Category Power’ involves questions such as:
i) Is the entry in the category early-enough and where is the category in terms of adoption life cycle? An early entry into a relatively new category implies a high score.
ii) Is the category attractive i.e. is the category big enough to matter? What is the financial (tangible) and non-financial (non-tangible) incentive to be derived for the sub-vertical? The bigger the category – financially and business-wise the higher the score.
2) Company Power
The assessment for ‘Company Power’ involves questions such as:
i) What is the technological complexity of the projects under-taken and is the technological capability rare? The rarer the technological capability and complexity the higher the company power.
ii) What is the potential for solution re-cycling? The higher the potential for solution rec-cycling the higher the company power.
iii) How fragmented/ concentrated is the customer base? Given the relatively smaller size of Data:Lab currently, fragmentation of customer bases dilutes company power.
3) Market Power
The assessment for ‘Market Power’ involves questions such as:
i) What is the state of current internal competition and what is the expected future internal competition? Higher competition implies lower score and vice-versa.
ii) What is the state of current external competition and what is the expected future external competition? Higher competition implies lower score and vice-versa.
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4) Offer Power
The assessment for ‘Offer Power’ involves questions such as:
i) What is the kind of solutioning required? Is it POC (proof-of-concept), is it MVP (minimum viable product) or is it a complete solution?
ii) Is there a reliance on external/ internal partners and what is the extent of this reliance? Reliance on external/ internal partners can work either way. Eventually, it depends on who is under control.
5) Execution Power
The assessment for ‘Execution Power’ involves questions such as:
i) What is the length of the solution cycle? The longer the solutioning time-line the lower the score.
ii) What are the capabilities of the customer? A technically proficient customer can reduce the burden for the sub-vertical. On the other hand a technically challenged customer could ensure a lock-in for the sub-vertical.
iii) What is the requirement for future resources/ time i.e. does the project involve maintenance etc.? Maintenance requirement reduce the score but are not a deal breaker as maintenance can be organized internally and through vendors.
B. Quantifying ‘The Hierarchy of Powers’ framework
In the preceding section, I have summarized the questions that were used to assess the sub-verticals (After-sales, Marketing and Mobility) of the Customer vertical as per the 5 components of the ‘The Hierarchy of Powers’ framework. However, the framework places a relatively more importance on Category Power vs Company Power and similarly a relatively more importance on Offer Power vs Execution Power. Unfortunately, the ‘The Hierarchy of Powers’ framework doesn’t specify the difference in this relative importance.
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That said, to keep the process of assessing sub-verticals standardized and in order to quantify the scores to derive meaningful insights, I have used different weights/ overall scores for each of the components of ‘The Hierarchy of Powers’ framework. Figure 7. below summarizes this quantification process.
Figure 7. Quantifying ‘The Hierarchy of Powers’ framework. The maximum achievable score for a sub-vertical assessment is 36 points
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C. Assessing Marketing sub-vertical
Based on my discussions with the Marketing sub-vertical team of Data:Lab, the scoring for the Marketing sub-vertical is as follows:
1) Category Power
i) While the use of data/ big-data in marketing is not a new phenomenon but data/ big-data is being increasingly used and accepted in marketing.
ii) The category is as such financially attractive as Volkswagen has multiple NSC’s (National Sales Companies) and thus the Marketing sub-vertical could potentially in future serve multiple NSCs or do different use-cases with the same NSC.
Category Power Score: 8/ 10 points
2) Company Power
i) The technological complexity of the projects undertaken by Marketing sub-vertical is sufficiently complex as they involve horizontal teams such as (Deep Learning, Machine Learning etc.) which raises barriers to entry.
ii) While it might seem that a solution for a NSC can be easily re-cycled across different NSCs and regions but given different maturity levels of marketing tools, data sophistication and legacy systems, it is not as easy to re-cycle solution across different NSCs and regions.
iii) Given that a NSC has a limited business coverage, the Marketing sub-vertical can only do a limited amount of business with a particular NSC.
Company Power Score: 5/ 8 points
3) Market Power
i) While there is limited internal competition currently but in future the internal competition is expected to intensify from other labs and NSC’s own capabilities. ii) External competition for Marketing sub-vertical is currently significant and it
comes from analytics and consulting companies. Furthermore external competition is expected to remain significant.
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4) Offer Power
i) The Marketing sub-vertical has an advantage that a POC could many times suffice as the solution. Moreover, results of a solution could manifest over a reasonably long-time, which could reduce performance pressure.
ii) The Marketing sub-vertical has/ continues to use services of horizontal specialized teams such as Machine Learning and Deep Learning team which helps the Marketing sub-vertical stand out in terms of Offer Power vs competitors.
Offer Power Score: 5.5/ 6 points
5) Execution Power
i) The length of the solution cycle of 3-6 months is not a big concern for the Marketing vertical, however, systems integration between Marketing sub-vertical and a NSC has historically been complicated which reduces the Marketing sub-vertical’s Execution Power
ii) Fortunately, the Marketing sub-vertical doesn’t have too much maintenance requirement for its solutions and infact according to the Marketing sub-vertical team future dev-ops and IT personnel requirements are manageable.
Execution Power Score: 4/ 5 points
D. Scaling-up Marketing sub-vertical
In my opinion, Data:Lab’s Marketing sub-vertical could use some inspiration from Nike vs Reebok growth model for their scaling-up strategy i.e. learnings from the Growth Outside the Core framework.
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As Chris Zook and James Allen highlighted in their publication, that while both Nike and Reebok had offerings across multiple sports categories, Nike chose a much more disciplined strategy. Nike preferred to completely cover a sport before moving into a new one, whereas, Reebok followed a more scatter-gun approach.
Figure 8. The Marketing sub-vertical of Data:Lab could take inspiration Growth Outside the Core framework and look to satisfy multiple needs of a particular NSC vs
satisfying one-off needs of multiple NSCs
Thus the Marketing sub-vertical of Data:Lab could use a similar approach i.e. fulfil multiple needs of a particular NSC rather than fulfilling one-off needs of multiple NSCs. A repeatable formula would allow the Marketing sub-vertical to benefit from learning-curve effects, reduced complexity and aid speed and strategic clarity.
Additionally, this makes all the more sense because of difference in IT infra/ systems of different NSCs which imply that IT integration between Data:Lab and NSC is a time and resource intensive process. Meanwhile, Data:Lab can simultaneously look at prioritising other NSCs for future projects based on the CAGE (Cultural, Adminstrative, Geographic, Economic) framework.
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While CAGE framework is very exhaustive in its decision criteria but in my opinion the most relevant points for Data:Lab are as per below. Additionally, it is important to note that as an organization Volkswagen is already present in the country under consideration. The foreign expansion is being considered specifically from Data:Lab’s perspective.
Cultural Distance: Difference in language
Administrative Distance: Data-privacy related policies Geographic Distance: Physical remoteness vs Data:Lab
Economic Distance: Difference in financial, human and information resources
E. Assessing After-Sales sub-vertical
Based on my discussions with the After-Sales sub-vertical team of Data:Lab, the scoring for the After-Sales sub-vertical is as follows:
1) Category Power
i) The After-Sales sub-vertical of the Data:Lab is currently building a Data-Link for the After-Sales vertical of the parent Volkswagen company. Under the scope of the project the After-Sales sub-vertical of the Data:Lab is consolidating the data for all the After-Sales operations of Volkswagen under one roof.
ii) After-Sales is most profitable vertical for the parent Volkswagen and After-Sales is organized centrally i.e. the After-Sales sub-vertical of Data:Lab has an incredibly large and financially powerful customer.
Category Power Score: 10/ 10 points
2) Company Power
i) Whilst the technological complexity of the Data-Link project undertaken by After-Sales sub-vertical is not technologically challenging but the project is operationally complex and has a long gestation period. Post the successful competition of the Data-Link project the After-Sales sub-vertical is probably going to enjoy lock-in benefits.
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ii) The Data-Link project has the backing and patronage of senior business stakeholders from Volkswagen’s After-Sales vertical and Volkswagen IT vertical. Additionally, post the competition of the Data-Link project, the Data:Lab would have a centralized database to play with for future projects.
Company Power Score: 8/ 8 points
3) Market Power
i) There is limited internal competition currently and one of the key reasons for Data:Lab getting this project is due to their technological superiority over traditional IT. Additionally, if After-Sales sub-vertical of the Data:Lab is successfully able to complete the Data:Link project then they could maintain their superiority over internal competition and thus limit future internal competition to simpler projects.
ii) Given the importance of the After-Sales vertical for Volkswagen and the sensitivity of the After-Sales data, it is difficult to forsee too much of external competition, nevertheless, it is imperative for the Data:Lab to deliver on the Data-Link project to keep external competition at bay.
Market Power Score: 6/ 7 points
4) Offer Power
i) The Data-Link project is in itself a complete project i.e. Data:Lab would have to organize support and maintenance in future. Whilst this is a tough ask but not out of the realms of possibility.
ii) The After-Sales sub-vertical could involve horizontal teams such as AI, Deep Learning for future projects and thus improve their Offer Power potential.
Offer Power Score: 4.5/ 6 points
5) Execution Power
i) The current solution cycle is long but that is in part to due to the scale and complexity of the project at hand. Additionally, a successful completion of the Data-Link project could help the Data:Lab achieve barriers to entry.
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ii) Perhaps the biggest challenge for the After-Sales sub-vertical of Data:Lab is the relatively limited technical capability of the customer which means that the Data:Lab will also have to deliver on support and maintenance
Execution Power Score: 3.5/ 5 points
F. Scaling-up After-Sales sub-vertical
In my opinion, the Data-Link project that After-Sales sub-vertical of Data:Lab is currently undertaking is an Incubation Zone initiative as described by Geoffrey A. Moore in his book ‘Zone to Win: Organizing to Compete in an Age of Disruption’. Data:Lab should thus consider getting into a Transformation Zone before getting into Performance Zone with their Data-Link project.
According to Moore, transformations are defining moments and the most common mistake that an organization makes is to withdraw support before tipping point has been reached i.e. many organization go directly from Incubation Zone to Performance Zone without the interim step of Transformation Zone.
Essentially, getting into a Transformation Zone involves changing operating and infrastructure models to enable the new business model. Additionally, enough focus must be placed on setting up a new ecosystem (partnerships/ stakeholders). Thereafter, transition from Transformation Zone to Performance Zone then involves small tweaks to operating and infrastructure models. More importantly, focus is on agility and customer experience.
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Translated into business language, this then means that once the Data-Link project is complete, Data:Lab should figure out a business configuration which could help them exploit their knowledge and understanding of the invaluable Data-Link.
Figure 9. The After-Sales sub-vertical of Data:Lab could take inspiration Zone to Win framework and thus consider Transformation Zone as an interim step before getting
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G. Assessing Mobility sub-vertical
Based on my discussions with the Mobility sub-vertical team of Data:Lab, the scoring for the Mobility sub-vertical is as follows:
1) Category Power
i) The Mobility sub-vertical of Data:Lab works with the Smart City team of the parent Volkswagen. Projects are sourced through the Smart City team. Volkswagen foray into the smart city opportunities is late by 3-4 years vs the competition.
ii) The category might be attractive for the parent Volkswagen and the Smart City Team but given the indirect involvement of Data:Lab it is difficult to see direct financial and non-financial benefits for the Mobility sub-vertical of the Data:Lab.
Category Power Score: 6/ 10 points
2) Company Power
i) The technological complexity of the projects undertaken by the Mobility sub-vertical is quite complex, however, the presence of multiple stakeholders such as government, government’s IT partner, government’s mobility partner and not to forget the Smart City team makes it a complicated task to manage these multiple stakeholders.
ii) Moreover given that Smart City team is the real face of the Volkswagen organization in the these projects, it is difficult to see Data:Lab benefitting or exploiting their own relationships in any way.
iii) There is quite a lot of potential for solution re-cycling provided system integration issues (much like the integration issues between Marketing and NSC) are appropriately addressed, however, the presence of point i) above i.e. multiple stakeholders reduces the re-cycling potential considerably.
Company Power Score: 3.5/ 8 points
3) Market Power
i) The Data:Lab currently faces considerable internal competition from other labs for the and it is expected that competition will remain stiff in future as well.
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ii) External competition for Mobility sub-vertical is currently significant and there are players with some amount of head-start. Additionally, future competition is expected to intensify as players from other industries are expected to join the competition from the industry players.
Market Power Score: 3.5/ 7 points
4) Offer Power
i) Given the real-life applicability of mobility solutions, a Proof-of-Concept (POC) doesn’t suffice as a sufficient solution and a complete operational solution is required.
ii) Additionally, as mentioned previously, there are multiple partners/ stakeholders involved – both internal and external.
Offer Power Score: 3/ 6 points
5) Execution Power
i) The length of the solution cycle depends on the complexity of the project and additionally, given the involvement of multiple stakeholders, requirement of complete solution, the solution cycle will tend to be pro-longed.
ii) With government as the customer, a significant amount of grand-fathering might be required which again reduces Execution Power.
iii) Future resources/ time would depend on the SLA with the government but given the real-life applicability of the solutions some amount of future maintenance and involvement is expected.
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H. Scaling-down Mobility sub-vertical
In my opinion, Data:Lab’s should reduce its focus on the Mobility sub-vertical and perhaps look to completely exit the vertical.
The involvement of multiple stakeholders at the user end (government, government’s IT service provider, end-user), lack of clarity in terms of pricing model (Data:Lab is working with other internal stakeholders such as Smart City team), VW’s relatively late-entry in the space and strong prevailing (plus expected future) competition make it a financially unattractive sub-vertical for Data:Lab.
That said, if we were to consider Data:Lab’s involvement from a stakeholder perspective (include the potential relationship benefits with Government, Communities and Political Groups), then Data:Lab’s involvement might still be warranted. However, in that case as well the benefits might accrue more at a group level than at a Data:Lab level and ‘value capture’ for Data:Lab might remain opaque.
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IV. Conclusion & Limitations
In this report, I have explored a real-life problem faced by a prominent team of a prominent organization i.e. Volkswagen Data: Lab (https://datalab-munich.com/). The challenge facing Data:Lab was that identifying and prioritizing their scale-up strategy. I have specifically assessed the sub-verticals of Customer vertical i.e. Marketing, After-Sales and Mobility. In order to assess the sub-verticals, I have used Geoffrey Moore’s ‘The Hierarchy of Powers’ framework. Using the framework, I came to a conclusion that scores of different sub-verticals decreased chronologically from After-Sales to Marketing to Mobility. This finding was corroborated by head of the Data:Lab who agreed that After-Sales is the most critical sub-vertical for Data:Lab’s long-term success.
Additionally, for each of the sub-vertical, I identified a suitable action plan. For the After-Sales sub-vertical the scaling-up strategy involved using the learnings from Geoffrey’s Moore ‘Zone to Win’ framework, whereas, for the Marketing sub-vertical the scaling-up strategy involved using the learnings from ‘Growth Outside the Core’ framework and ‘CAGE’ framework. On the other hand, the Mobility sub-vertical had a very poor score and thus in my opinion Data:Lab should gradually scale-down their commitment to the Mobility sub-vertical.
The obvious limitations that I faced was the lack of financial information for different sub-verticals, which could not be shared by Data:Lab due to confidentiality issues. Additionally, much like any other business analysis my analysis is hostage to individual subjectivity i.e. somebody else could have interpreted the information made available by Data:Lab differently or applied different frameworks or reached slightly different conclusion (Eg: Use multiplication instead of addition for calculating sub-vertical scores) with the same framework. That said, the key strength of my analysis is the unbiased and authentic nature of my analysis which has been duly acknowledged by Data:Lab as well.
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Moore, G. 1991. Crossing the Chasm: Marketing and Selling High-Tech Products to Mainstream Customers. Collins Business Essentials
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