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Low cost: why ecosystems are so important

The implementation of a low-cost strategy means that we should reason at the level of the ecosystem. Focusing on value creation for the end user is not enough. When a firm is placed within a complex network, it must create value for the entire ecosystem. Of course, this requires analyzing the different players and their interactions. But we need to go further, with a more collective involvement. This ecosystem approach opens up new areas for design, which we need to learn to drive.

October 2017
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Executive Summary

Different approaches are possible, depending on whether the ecosystem is known and stable, unstable, or unknown.

Mobilizing stakeholders within a known and stable ecosystem

When a complex value network is part of a known and stable ecosystem, it is wise to create value for all players in the ecosystem in order to ensure the viability of the low-cost product.

The classic leverage of low-cost products, reducing the price for a single actor (the end consumer) through cost reduction, is not enough.

Let us take a first example, with the emergence of OUIGO, the low-cost high-speed trains from the SNCF. Cost reductions are mainly achieved thanks to changes in the offer, negative transfer and the removal of functions. Thus, customers pay if they carry more than one luggage, their presence on the platform is required 30 min before the departure of the train and the amount of seats per carriage is increased.

But the launch of OUIGO would not have been possible by modifying these parameters alone. The SNCF explored other ideas, some of which mobilized other players. In particular, by using secondary stations and less busy lines. Thus, not only were they able to improve the use of these railway stations and to reduce the cost of using the infrastructure (tolls account for the main operating costs of the TGV), but it was also possible to create value for local players with these stations, as well as for the companies located nearby and for the town halls of the concerned cities. Working with these players, mobilizing their resources, promoting their interests has contributed to building an economic model that is both more original and more robust.

The example of Transmilenio shows the same dynamics. This high-level bus system built in Bogota has attracted the attention of researchers, who see it as the leading example of a low-cost metro. Its innovative low-cost design offers drastic changes compared to the metro: even if it is possible to carry the same volume of passengers as in the metro, the vehicle remains on the surface. These buses with drivers travel on dedicated lines, but they can interact seamlessly with other modes of transport. For the organizing authority, the creation of value is very clear. Furthermore, the development of an overground network is much cheaper than an underground subway.

But other players are also involved in the dynamics of value creation: the new transport system offers better performance to its users, its construction contributes to the development of the city, businesses and the urban fabric.

A third example comes from the RATP, which launched a focused creative approach using the CK method, a few years ago. This innovative low-cost design model led to the emergence of new business models, such as crowdfunding. The principle was to have some of the costs of the transportation service borne by individuals or companies interested in funding it. For the organizing authority, part of the value created by this approach is very clear: it allows transport costs to be borne by another actor. On the other hand, this isn’t enough to make this offer feasible. Other parties need to be attracted by offering value. In this particular case, one of the chosen approaches was to give contributors the possibility to propose transport lines of interest, by providing them with tools not only to finance but also to design their transport. This type of tool allows to engage the creativity and reflection of stakeholders that are otherwise seldom consulted. It also allows to centralize the information on transport needs, to create value for the transport organizing authority and other operators.

Creation of generic value

Unstable ecosystems are another type of configuration, where an evolution of players can also be observed. Therefore, the question shifts to creating value for actors that are still unknown. The company is confronted with an equation with two unknown variables: the actor and the value.

This type of situation was dealt with in the works of Olga Kokshagina (2014), who studied the design of generic technologies in “double unknown situations,” with an unknown market and technology. Her reflections can be transposed on the double unknown “actor/value”. They open up a prospect: companies cannot solve the equation but instead, they minimize the difficulty by creating generic value. A process driven by the creation of generic value reduces the risk of failure, as in the case of generic technologies.

Let us illustrate with an example. Once again, the RATP offers an example of creation of generic value, with the development of a low-cost service for on-demand transport. The principle of this service is to offer the possibility of reserving an on-demand service (without preset route or schedule), but which will be operated only if profitable. To make this service profitable, it will be shared between several passengers, with close origins and destinations.

This offer allows the creation of generic value, since it can be offered to very different customers, for whom it has a different value. It can be offered to organizing authorities by avoiding them the high costs often associated with conventional on-demand transport services (often focused on target populations) or allow them to offer new lines without any additional cost. It can also be offered to associations with regular activities – or not – such as cultural outings or courses, enabling them to benefit from a tailor-made transport offer without having to organize the transport. For a company, this type of offer can be an attractive complement for its employees or even replace dedicated shuttles, reducing the need for the company to ensure their profitability. This offer may be of interest to individuals who would be able to organize their own journeys for routes with no regular offers today or insufficient supply, for example during a sports match.

How to successfully create this generic offer? Is requires both method and imagination. The RATP chose a system that involves layers of ecosystems. Thanks to this strategy, it was possible to create a viable offer by spreading it over several markets. Viability comes from the diversity of customers. Indeed, when we considered the possibility of proposing only one offer to the demand opened to individuals, the offer was not viable.

The originality of this approach must be emphasized. I have not observed this model of generic value creation with a suitable low-cost product or service in the literature, nor in any other case studies. In fact, the usual definition of “low cost” does not open to this type of solution: it simply adapts an existing product to reduce its costs while maintaining a high value for a previously identified customer. The double unknown value/client does not exist. A revision of cost and value could lead to a product that appeals to new customers, beside the original target. But it is counterintuitive to use a value analysis approach for a client to create value for other clients that are not yet identified. This is a promising track.

The (re)design of value networks

By studying the impact of innovative low-cost products on their ecosystems, we see that these products often require a new conception of the value network, because of the composition and rules of coordination of the ecosystem.

The case of low-cost airlines illustrates how the ecosystem can lock the launch of low-cost products. During a long time, the impossibility of launching low-cost flights in Asia was due to binding laws and regulated tariffs that prevented low-cost airlines from entering the market and attracting passengers with lower prices.

These same airlines are a good example of how, in some contexts, the ecosystem (or part of the ecosystem) needs to be redesigned. When we study low-cost airlines launched in Europe and America, a key factor for success has been the use of secondary airports. These airports offered fewer services and cost reductions to airlines, thanks to lower fares than busier airports. But they also gained in reliability and flexibility, thanks to less traffic. The limits of this system were reached when, with the expansion of low-cost airlines, existing secondary airports became insufficient to become the solution for all the routes that the companies wanted to offer. In order to continue to offer low fares, low-cost airlines have contributed to the emergence of new airports adapted to their needs: low-cost airports.

Other interesting examples can be found in high-tech products developed from an innovative low-cost design.

The most striking example is SpaceX, the space company created by Elon Musk. Legislation and certification on all space activities have always been very constraining. Since these activities were carried out by public entities (such as NASA) and not private companies, their responsibility lies on governments. The emergence of private companies such as SpaceX has changed the situation. The participation of these companies in space activities (sometimes as subcontractors of public entities) and in particular, the emergence of “space tourism,” call for a major revision of the legislation.

Standards and regulations can be obstacles to the development of technologically innovative low-cost products. Let’s take another example: the design of low-cost cockpits by Thales. Alongside issues of engineering and technical design, this innovative approach resulted in the reconfiguration of the ecosystem. The exploration work highlighted the importance of certification in the aerospace industry. However, certification is intimately linked to the technology used and truly radical innovations make the object non-certifiable. The low-cost cockpit could only emerge as a non-certified object... and could therefore never be implemented in any plane! The certification needs to be changed. But it isn’t an easy process because most of the major evolutions are related to serious accidents observed in the field. One of the proposals resulting from the exploration process was to change the certification process itself. This is a deep evolution of the ecosystem and it calls for the creation a new space for discussion.

When creating new ecosystems around a new product, being the driving force behind proposals can ensure a prominent place in the new ecosystem.

As we can see, the work on low-cost products can lead to redesigning structuring aspects of the coordination of actors in the ecosystem, such as infrastructure or legislation.

Thinking in terms of ecosystem is one thing. However, it is not easy to get involved in the complex and sometimes demanding process of designing an innovative low-cost product, sharing design work with other actors and possibly reconfiguring an entire existing ecosystem.

The companies that got involved in these processes – we cited a few examples in this article – had nevertheless very good reasons for doing so.

A company can find multiple reasons to participate in the design of innovative low-cost products: to expand their design spaces, create new partnerships, and combine their resources with those of other players in order to break into new markets or reposition themselves in their historic markets.

Low cost can also help companies overcome their own limitations, especially in the field of design. As we have seen in the case of RATP, the transversality of low cost and the fact it is part of a complex network of value allows to move beyond the classic conception space of the company. Working with the ecosystem not only creates new partnerships, it also identifies new value creation potential.

Companies can adopt these processes on the basis of strategic considerations, to ensure, for example, that they will be present in the value network of new products. Hence, the challenge is not only to be part of the network, but also one of its driving forces. When creating new ecosystems around a new product, being the driving force behind proposals can ensure a prominent place in the new ecosystem.

Finally, it is possible to use these products as catalysts to change the value and rules of coordination of their ecosystem. This is particularly interesting for companies that are subject to stringent regulations.

The first version of this article has been published as Chapter 7 of Milena Klasing Chen’s new book, Innover avec le low cost. Le cas du transport public (Presses des Mines, 2017).

Milena Klasing Chen
Innovation Project Manager, SNCF