INTO OPPORTUNITY

Incumbents can do as good a job of releasing trapped value as even the most disruptive Silicon Valley start-up. Sometimes even better.

WHAT HAPPENS

when new and fast-improving technologies create opportunities to unleash untapped sources of revenue— some of them long trapped by market inefficiencies? As digital components become relentlessly better, cheaper and smaller, this is a question that every organization will need to answer.

That’s because technology is increasingly creating the tools your competitors — incumbents and entrepreneurs alike — are using to build new digital products and services that target and release latent demand and serve unmet needs. We call that potential revenue ‘trapped value’ — and if you don’t get to it before others, you may find not just your future growth disrupted, but your current business as well.

Trapped value to entrepreneurs is like honey to bears: It attracts new sources of capital investment and new entrants eager to experiment in your markets and collaborate with your customers, suppliers, and other stakeholders. But the good news for established organizations is that, in our experience, incumbents can do as good — and often better — a job of releasing trapped value as even the most disruptive Silicon Valley start-up. In this article we will describe how value gets trapped, and the four places to look for it.

Where Value Hides

For many companies, becoming the disruptor rather than the disrupted begins with a fundamental shift in attitude towards digital technologies. Rather than seeing them as bolted-on tools for developing a website or enhancing internal systems, you need to integrate them into both your product offerings and your internal operations. You need to design and redesign your interactions with stakeholders by putting new innovations and technologies at the forefront, becoming ‘digital first’.

Becoming digital first is only the first step, albeit for many companies a big and potentially costly one. Digital-first companies have a platform for continuous change: As the pace of disruption expands, they can use the platform to pivot faster than their competitors to whatever innovations come next,

As the gap between potential and actual value creation widens, the good that new technologies can do becomes hidden.

responding to rapidly changing customer needs and scaling both up and down as markets emerge, explode and contract.

That kind of flexibility is essential as the digital revolution continues to accelerate. As explained by Moore’s law — the prediction by Intel founder Gordon Moore that core computing components would double in capacity, miniaturization and energy efficiency without increasing in cost — digital technologies have long improved at something approaching an exponential rate every few years. As a result, everything from cloud storage to genomic sequencing, 3D printers, commercial drones and basic communications bandwidth has experienced logarithmic declines in price.

Between 2001 and 2017, for example, the cost of sequencing a complete human-sized genome fell from $100 million to around $1,000. Similar cost reductions, applied over an extended yet predictable period of time, have increased the risks and the opportunities for disruption in a growing list of industries. That’s because businesses are falling further behind in taking full advantage of digital components that are becoming simultaneously better, faster and cheaper.

The pace of change that technology makes possible and the speed with which that change is being realized are diverging. As the gap between potential and actual value creation widens, more and more of the good that new technologies can do becomes hidden, a latent but intensifying force of future disruption.

We refer to that mismatch as the trapped value gap. The faster technologies improve, the faster the gap widens. And the greater the urgency with which you must adopt new strategies to target and close it more quickly and effectively. Before someone else — competitors, new entrants or entrepreneurs — does it first.

In your quest to release trapped value, we suggest you start by looking to four interconnected sources: your enterprise, your industry, the consumer and society as a whole. Let’s consider each in more detail.

SOURCE 1: YOUR ENTERPRISE.

When evaluating new technologies, many managers focus solely on their potential for disruptive innovation. In doing so, they fail to recognize the technologies’ potential for improving the mundane parts of their current business, which might yield substantial cost savings and process improvements. Such changes reduce what economists call ‘transaction costs’ — inefficiencies that take the form of bureaucracy, incomplete information and outdated processes.

Enterprise trapped value also accumulates when an economic opportunity is visible, yet cannot be released by existing business models and capabilities. You might see others, especially new entrants, using disruptive technologies to dramatically improve the efficiency of business processes or to rapidly introduce innovative new products and services. But your business may be unable to respond quickly, held back by outdated rules and procedures, a corporate culture that doesn’t encourage innovation, or IT systems and other technology that haven’t kept up with competitors.

Value can also be trapped in the day-to-day management of core activities. Artificial constraints on how you delegate authority, budget for technology initiatives and manage relationships with internal and external stakeholders may raise unintended barriers. You might see great opportunity to automate high-cost activities by applying AI, for example, but feel restricted from doing so by labour contracts and regulations.

Generating other efficiencies might require closer collaboration with end-users. Given the right digital tools, including interactive websites and easy-to-use apps, your customers may be willing to take on some of your expensive service functions, such as order entry, tracking and answering questions from other users. The problem is that you may be cut off from your customers by intermediate supply-chain partners — including agents, resellers, retailers and service professionals who jealously control access — making collaboration or even direct interaction impossible.

Releasing trapped value at the enterprise level often requires a combination of improved business processes and more efficient technologies. Apparel manufacturers, for example, are deploying new robotic technologies that can rapidly learn new tasks. Nike, in conjunction with its manufacturing partners, can produce a shoe ‘upper’ in 30 seconds, with 30 fewer steps and up to 50 per cent less labour. Adidas, similarly, is working with Carbon, a company that offers 3D, or ‘additive’ manufacturing technology, to ‘print’ shoes personalized by the consumer, cutting the traditional design process from months to days.

SOURCE 2: YOUR INDUSTRY.

Trapped value accumulates at the industry level when technologies that could improve the entire ecosystem chiefly benefit only a small number of industry players, leading to what economists call ‘coordination costs’. Here, disruptive technologies create opportunities for improvements, perhaps enabled by new platforms and an extended ecosystem that connects more stakeholders.

Consider streaming music service Spotify, which allows independent artists to upload their music directly, bypassing the

exclusive and inefficient supply chain optimized for physical media such as records and CDS. Spotify shares 50 per cent of revenues and 100 per cent of the royalties these artists generate — far more than they would get from a label, assuming they could get access to one.

Because incumbents often lack agility, new entrants may establish new rules for the industry or create an alternative supply chain that excludes existing competitors. Tesla, for example, is leveraging its expertise in electric vehicles to disrupt energy storage with its Tesla Powerwall. The Powerwall, an in-home rechargeable battery, will allow consumers to store and access energy generated by solar panels in their homes rather than returning it to the existing electrical grid. Homeowners can then enjoy lower energy costs and protection from outages, but in the process they will be disrupting the core business of electric utilities. This is likely to occur even more quickly than predicted if, as expected, the early users are also the heaviest consumers of power.

Or consider the complex supply chain of the automotive industry. Traditional carmakers dominate the personal transportation market because of high capital costs that allow them to leverage economies of scale and an extensive distribution network. But a combination of emerging technologies, including electrification, autonomous driving, connectivity and the sharing economy, has the potential to release enormous trapped value, challenging the incumbent business model in the process.

Cars, after all, are a vastly underutilized asset. Even though American households spend more on transportation than food, their cars remain parked 95 per cent of the time. Emerging car-sharing businesses, including on-demand services such as Drivenow, as well as ride-sharing companies such as Uber and Lyft, release the trapped value of surplus availability. Industry estimates predict that car sharing combined with autonomous technologies will slow the annual growth rate for vehicle sales, with the new entrants capturing 40 per cent of the profits in a redefined industry.

SOURCE 3: THE CONSUMER.

Consumer trapped value exists when customers bear excessive costs that could be reduced by available technology. This includes their time and energy as well as their money; things like going to the store themselves, rather than having goods delivered. It also includes goods they own that are underutilized, as when homes sit idle when they could be rented out. Released trapped value at this level goes by the economic term ‘consumer surplus’.

Opportunities to find and release such value can be staggering. Take for example, most internet businesses, where consumers enjoy content, software and other services without paying anything beyond agreeing to have their interactions analyzed for more accurately targeted advertising. Our research estimates the release of trapped value in internet services at over $1.5 trillion, growing over 10 per cent annually. Much of that value comes in the form of information goods that can be infinitely reproduced at no added cost.

Releasing consumer trapped value, in particular, means sharing much, if not most, of it with the consumers themselves. Consider online marketplaces for lodging, car-sharing and other technology-driven innovations that improve the utilization of consumer-owned assets (including intellectual capital such as expertise). Once you buy your house or car, whoever sold it to you may have little incentive to help you get the most use out of it, even when new technology makes it easy to do so. For them, helping you may seem counterproductive, perhaps because your sharing that asset may mean reduced sales of new inventory for them.

The trapped value, however, may be much larger than the current industry’s existing revenue, with plenty to be allocated between the consumer and the industry. When incumbents ignore that opportunity, new entrants rush in. Airbnb is estimated to have released $20 billion in user revenue between 2010 and 2016; earnings that would otherwise have been left on the table. The company itself, meanwhile, earned $2.5 billion in revenue and $100 million in profit during the same period.

Alibaba and ebay, likewise, earned a combined $140 billion between 2004 and 2014 by facilitating transactions between consumers eager to buy and sell new and used goods for which there was previously no low-cost, easy-to-use global market. The liquidity the online platforms created released nearly $1.4 trillion in value, most of it literally trapped in garages, attics and storage lockers.

Beyond underutilized assets, consumer trapped value can be released by addressing unmet needs that translate to productivity and quality-of-life gains — often difficult to measure but unmistakable when you experience them yourself. Examples include technologies that shorten wait times or reduce errors, including Amazon same-day delivery, apps that allow fast-food customers to order by phone and skip the line, or rich media websites that make it easier and less unpleasant for consumers to self-service rather than navigate through a company’s phone tree.

Other value may be lurking in products and services consumers may simply not know they want until they are made available, at which point it becomes unthinkable to live without them. Smartphones included cameras as an afterthought. But having a single device that integrates photography and video with connectivity through social networks including Facebook, Instagram and Snapchat has unleashed profound value for users even as it decimated the stand-alone camera market.

SOURCE 4: SOCIETY. Finally, societal trapped value accumulates when commercial activities fail to create benefits that would aid everyone, what economists call ‘positive externalities’. These might include reduced pollution and carbon emissions, improved education, safe food and drinking water, and health and wellness.

Simply improving communications channels among residents of a community, for example, can improve the livability of a neighbourhood, releasing trapped value in the form of increased property values. Even relatively simple bulletin board and email alert systems, such as Nextdoor, and Urbansitter — which can dispatch a qualified caregiver within minutes — strengthens ties between neighbours.

Piggybacking off platforms created for other uses can also uncover societal trapped value. Ride-sharing services — which were created with younger, on-the-go urban residents in mind — are finding additional growth by helping seniors and those with disabilities get around without having to drive, allowing more people to age in place in their own homes. This additional release of value provides enormous though unquantifiable and intangible benefits for seniors, including improved quality of life and the ability to stay active in the community, unleashing profound trapped value previously lost to nursing homes.

Our research shows that a few superstar companies that

have found ways to identify and release trapped value across all four levels, often using the same combination of disruptive innovations. Chinese gaming giant Tencent identified trapped value in inefficient and untrustworthy financial networks, leveraging its existing relationship with Chinese consumers to add electronic payment capabilities that now generate $1.3 billion in revenue for the company. In just a few years, China’s mobile payment market has grown to over $5.4 trillion in transactions — 50 times the size of the equivalent U.S. market. Of that amount, Tencent processes nearly 40 per cent, while Alibaba, which got into the game sooner, handles over half of the traffic. China’s traditional banks, meanwhile, barely register.

Consumers also benefit from these applications, generating six hundred million payment transactions daily, many in small amounts for essential daily activities such as buying food and transportation. Another Tencent application, the wildly popular Wechat communications service, releases industry-trapped value by giving foreign firms a way to communicate and transact with Chinese consumers who might otherwise be inaccessible to them.

For Chinese society as a whole, Tencent’s banking application has leveraged low-cost technology, including smart devices and broadband networks, to offer basic services to millions of lower-income consumers who would otherwise have no access to financial services. With two billion people worldwide unserved by traditional banks, the company is showing the way to both inclusion and profitability.

California-based Illumina has likewise outgrown its peers in both the value generated by current operations and investor expectations. Founded in 1998, its main business is gene sequencing. Early estimates suggested the cost of decoding the human genome might be $3 billion, but the actual price fell to

just $300,000 with the 2006 release of Illumina’s first device. Then, in 2014, Illumina introduced the Hiseqx, which does the job for just $1,000. Even with a 90 per cent share of the market, Illumina continues to release trapped value, with its latest innovations expected to push the price below $100.

Meanwhile, the company, with revenues of $2.4 billion in 2016, is growing the size of the overall pie, staking a claim to new markets it is helping to create. In 2015, for example, Illumina spun out its subsidiary Helix, which makes Dna-based insights and their benefits more accessible, tapping latent consumer demand for personalized services and products. For $80, Helix can sequence key components of a customer’s DNA using a sample of saliva, creating an individual profile. Customers can use their profile in a variety of ways, including to learn more about their genealogy or acquire a tailored health and fitness plan from thirdparty providers in Helix’s app store. App providers release more trapped value, trading access to Helix’s customers and their data for a share of their revenue going back to Illumina.

Or consider coffee juggernaut Starbucks, which has found ways to use digital technologies to grow in-store revenues at an annual rate of 12 per cent since 2000. It has also invested in what it calls a ‘next-generation music ecosystem’, partnering with Spotify to integrate music into the company’s own app.

Starbucks also actively collaborates with its 20 million mobile consumers, supporting an online suggestion box that has attracted more than a hundred thousand submissions for improving the company’s offerings. Finally, the company reduces food waste and improves the lives of those most in need: Since 2016, it has donated more than 10 million meals to food banks from its unsold but-still-edible food products.

Separately, each of these innovations improves Starbucks’ bottom line. But taken together, they amount to a full-scale assault on trapped value, much of it reflected in the company’s balance sheet as improved brand value, goodwill and other intangibles. Investors have responded to Starbucks’ release of trapped value with a dramatic increase in the company’s market capitalization, which nearly tripled between 2011 and 2017. Of Starbucks’ $79 billion valuation in 2018, well under half is explained by current earnings. The rest reflects investor confidence that the company can continue to grow revenues and profits by releasing even more value going forward.

Starbucks has mounted a full-scale assault on trapped value.

In closing

Companies in very different industries are successfully deploying innovations that target a growing supply of trapped value. And the opportunities to find trapped value are increasing, even as the technologies to release it are becoming more accessible and cost-effective.

As the trapped value gap expands, the opportunity exists for you to close it by leveraging your own innovations, expertise, intellectual property, corporate culture and human capital to gain rather than erode competitive advantage.

You don’t have to attack the gap all at once. There is no need to abandon your core assets, resources and products prematurely. Instead, you need to leverage them to generate more revenue, applying new technology to restart stalled, older products and accelerate the development of newer ones. Then you’ll invest that revenue in building the next generation of your organization, scaling rapidly with new offerings based on even newer technologies.

Disruption is no longer a once-in-a-career problem to be dealt with. It’s a constant cycle. In every industry we studied, an expanding trapped value gap between what is possible and what is available is appearing and reappearing with greater frequency.

That translates to new opportunities and new imperatives to remake your business and your industry again and again. Going forward, the skills for finding and releasing trapped value will become an integral part of how you do business.

Omar Abbosh is Group Chief Executive of Communications, Media and Technology at Accenture. Paul Nunes is Global Managing Director of Thought Leadership for Accenture Research. Larry Downes is a Senior Fellow with Accenture Research. They are the co-authors of Pivot to the Future: Discovering Value and Creating Growth in a Disrupted World (Publicaffairs, 2019).