Old economy ecosystems signal innovation opportunities

rail-crossover-points-2Paul and I have been writing mostly about ecosystems and platforms in the abstract to date, not spending a lot of time talking about specific companies or industries.

We took this approach because we wanted to establish a firm foundation about ecosystems and platforms generally, that wasn’t subject to debate about their applicability to one industry or another.

In the next several posts we will be looking at two diametrically opposed industries and the importance of ecosystems and platforms to both of these industries. Fittingly, I’ll be looking at the importance of innovation in ecosystems and platforms for an “old economy” industry – the railroads, while Paul looks at the importance of platforms and ecosystems in a new economy company – Alibaba.

On the (rail)road again…

Full disclosure, my spouse works for a railroad affiliated company, so a lot of what I know, rightly or wrongly, about the industry comes from that source.  The railroad industry relies on an important platform, one that is shared by every rail company, box car company and transporter.  That common platform is the tracks themselves.  In North America we have a common rail platform across states and across borders between Canada and Mexico, making it simple for trains to move from coast to coast and north to south.  At one time it was important, if not strategic, in European countries to have different track gauges.  This was done to keep invaders from using a country’s railroads against them, but it meant people and equipment had to transfer at some border crossings.  Spain and Russia intentionally used different gauge sizes than their neighbors.

Virtual Platforms matter

It is from a common platform (rail gauge) that so much commerce flows. But the railroads increasingly share other platforms as well, and these platforms enable the increase in transport we’ve witnessed lately.  From an outsiders perspective, railroading seems straightforward but in reality is one of the most interconnected of the large industries, because equipment from one railroad (say a box car) could end up on another railroad’s system.  That box car could even be maintained by a third railroad company, and all three want to track the costs and revenue associated with the car and its load and tally up at the end of a quarter.  This means that beyond rails, the railroads need common platforms for tracking assets, maintaining assets and determining the revenue each company should expect from each train.

When you add to this the “ecosystem” involved in trains and goods transport, you can see it becomes much more complex, because many of the cars that have a specific railroad brand, for instance NorfolkSouthern, may in fact be owned by a private equity firm and leased to that railroad.  A vast amount of rolling stock, as the cars are called, are actually owned by private equity firms and leased to the railroads.  This allows a tremendous amount of flexibility for the railroads, as goods increase or decrease in demand.  For example, when the Bakken Shale Oil in North Dakota was discovered, many of the railroads needed more tanker cars to transport the oil than they had on hand.  The railroads leased the additional cars, and as the demand for the oil falls, they’ll end their leases.

What appears on the surface to be a rather staid and old-fashioned industry is in fact built on a handful of robust platforms – rails, financing and data – and incorporates a wide array of companies in an ecosystem:  data companies, companies that maintain the equipment, companies that manufacture rail cars and engines (GE as an example), leasing companies, trans-shippers, the railroads themselves and much more.

Why should innovators think about platforms and ecosystems?

Once we understand the platforms that exist, and the ecosystems that are enabled by these platforms, we can begin to consider the real innovation opportunities in the industry, and the challenges of attempting innovation because of the existing investments and ecosystem.

Innovators must consider the platforms and ecosystems that exist in an industry for several reasons:

  1. Platforms and ecosystems play simultaneous roles – they facilitate an industry but also create standards, which can lead to rigidity.  Standards and rigid structures or conventions are often the target of disrupters.
  2. Understanding platforms and ecosystems may help identify important gaps or emerging needs.
  3. Platforms and ecosystems that have long lives often facilitate complacency in the participants, leading to new opportunities
  4. Understanding platforms and ecosystems will help innovators understand the “whole product” their innovation must deliver.
  5. As Kansas City’s Southern’s struggles demonstrate, fixed platforms (in their case tracks that go to Mexico) can become a problem if an administration decides that specific types of trade aren’t favored.  Rigid, fixed platforms can be disrupted by political or economic changes, as well as technology changes.

For example, imagine that a company that manufacturers rail cars spots an innovation opportunity – a car that can convert from a tank car during high demands for oil into a car that carries grain or other farm commodities.  If the car is practical, the manufacturer still has to consider the car’s place in the ecosystem.  Can it be adequately tracked as it traverses different rail lines and companies?  Can the existing maintenance companies adequately clean the car and maintain it?  Can it fit within existing infrastructure?  You may laugh at the idea of fitting into the infrastructure, but when new railroad engines were introduced in France, it was discovered that they couldn’t be used in many stations, because the engines were so large that they could scrape against the existing platforms.  Further, cars use different methods and devices to offload their cargo.  A grain car may have  bottom vent or provide for an elevator to remove grain, while a tank car may use a pump.  This infrastructure is relatively consistent at each loading and unloading point.  Would a new innovation to a car require new loading and offloading technology?

Build, Catalyze, Join…disrupt?

In Stephen Elop’s famous “burning platform” memo about the fate of Nokia, he said that Nokia had to build, catalyze or join an ecosystem.  Right now, Elon Musk is trying to demonstrate several of these activities, creating a new “hyperloop” transportation system that would compete with high speed rail.  The question is, does Musk’s system build and catalyze a platform and ecosystem while simultaneously disrupting other forms of mass transit – both passenger trains and even short hop flights?  And, further, what other ecosystem partners does Musk need in order to succeed?  Building a prototype is one thing.  Building a full fledged rapid train system in crowded, litigious California and competing with the car and the airlines is quite another.

Starting from the outside and working in

It’s in this context that good innovators will start from the outside, looking at the customer need and experience, then understanding the ecosystems and platforms, before beginning an innovation activity.  Musk looks at the system and sees incomplete and inefficient passenger transport, which leaves customers frustrated and causes them too much agony and cost.  He blames this on a poorly constructed and aging platform (old trains, old, crowded roads, congested airports and airspace) and rather than compete with a powerful and lethargic ecosystem, he’s going to try to create a new one to disrupt the old.  This doesn’t mean that other innovations within the ecosystem aren’t viable.  There are certainly gaps and need throughout the entire customer experience or journey.  But he’s a good example of an innovator considering the ecosystem and customer experience, working from the outside of the problem toward the technology, rather than the other way round.

Come full circle

And so we come full circle.  The first railroads in England were wonders, traveling at 20 to 25 miles per hour, new technology that soon made travel possible and created the basis for more industrialization.  Musk’s hyperloop concept may create an entirely new and faster way to travel or ship goods, opening up new opportunities.  Both the original steam locomotives and the new hyperloop will rest on important platforms, and will rely on extensive ecosystems for success.  We can also see the many difficulties a company with significant, tangible platforms has when it attempts to innovate, while a company like Alibaba with few tangible assets or platforms finds opportunities in business model, channel, financing and value network innovation everywhere it turns.

The lesson that these two firms provide for us is that innovation opportunities are almost always available, but often there’s far more potential in the virtual opportunities – business models, channels, service innovation and customer experience, especially in industries and companies that possess a lot of legacy infrastructure.  The future of innovation lies in understanding the physical and virtual platforms and the ecosystems that are symbiotic with those platforms, and turning those platforms and ecosystems to your advantage.





One thought on “Old economy ecosystems signal innovation opportunities

  1. Pingback: Services, channels and experiences matter in old economy industries | Ecosystems4innovators

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