In this episode, Mike and Matt dig into the notion of API business models. Inspired by the thinking of Clayton Christensen, Alex Osterwalder, Melissa Perri, and others, they examine the concepts of value networks and value exchange to propose a method for mapping out digital business models powered by APIs. Have a listen here:
The following is a brief summary of the podcast:
Lesson #1: Digital business is about value
Matt and Mike recorded the podcast on the same day they presented their talk, “Choosing the right API business model,” at MuleSoft CONNECT 2020. Mike opens by recounting the early work ProgrammableWeb founder, John Musser, did on categorizing API business models, which featured a taxonomy based on the flow of money between API consumers and providers. He also mentions business model canvas creator Alex Osterwalder’s more general definition of business, which focuses on the creation, delivery, and capture of value. Matt discusses how he first thought of using value exchange as the mechanism for mapping business models when reading Melissa Perri’s book, Escaping the Build Trap. Digging deeper into the use of value in business modeling, Matt reread Clayton Chrstenson’s The Innovator’s Dilemma, Mike re-discovered Theodore Levitt’s Marketing Myopia, and colleague Harsh Karmarkar even pointed out Karl Marx’s notion of exchange value vs. use value in the 19th century. To his delight, Matt even found a company in the Netherlands — The Value Engineers — who have a defined methodology called e3value for defining business models through value exchange. Matt points out how Christenson’s concept of “value network” is analogous to what is commonly called an API ecosystem. “There’s a real explosion of synergy between Christensen’s business thinking of two decades ago and what we’re seeing playing out in today’s digital economy,” he says.
Lesson #2: Focus on the customer-bounded value network
Mike makes the observation that APIs are products the way products are products, and that the lesson we keep learning is it’s better to focus on customers than on products. He sees more people with this product mindset as he is consulting with organizations on their API strategies. Matt explains that starting with customer need, you can draw out the value network that functions to meet that particular need, with stakeholder companies as nodes and value exchanges as links in the value network topology. From here, you can examine the business models for each stakeholder in the network. Taking this visual approach, you can observe business model patterns, and even use analogies to project digital business models from industrial business model equivalents. For example, Twilio functions in the API economy much like a retailer functions in the physical product economy. Mike feels this pattern recognition in business models is eye-opening, and underlines the power of APIs as a distribution and packaging mechanism for digital. He envisions even more platform business models that will lead to new strategic thinking. Matt gives a few more pattern examples, including aggregators like Airbnb, and the evolution in the advertising economy from print media to social networks.
Lesson #3: Digital value has many currencies
Mike talks about the different dynamics and currencies in digital value exchange. Some value can be exchanged much more easily in the digital economy, such as property rental information, which opens up new possibilities. Matt enumerates the different types of currency: money, products, and services, as well as data — a special case to be discussed in detail later. He also talks about the experiential types of value that match the attributes of the User Experience (UX) honeycomb, which has “valuable” at its core. Specifically, he talks about usability leading to time-to-market value, and trust as value in itself. If an attribute of your product or service leads to it being selected over a competitor’s, that’s a sign of value. Mike mentions some other value added services, such as customer service, that can be scaled up more easily in the digital world.
Lesson #4: Data is a special digital currency
Matt cites data as the new tangible value currency, distinct from the old tangible currencies — money and products — and the new intangibles — UX properties. He believes data offers the biggest opportunity for unique value creation in digital business models. Matt gives the example of insurance, historically a data-driven business. He details how insurance companies are evolving from demographic-based data analysis companies to personalized businesses running on big data. Mike concurs with the potential of data, and talks about data being a non-rivalrous good in economic terms. That means it can be used without having its supply diminished by consumption, which distinguishes it from rival goods like money and physical products. This makes data bountiful, but also means organizations need to figure out unique ways to use it in order to provide differentiated value. Matt uses the example of Kyle McDonald’s one red paperclip to illustrate the importance of context in determining exchange value, and discusses how the companies that are succeeding the most in the digital economy are the ones who are propagating data across all of their value networks.
Lesson #5: Two flavors of innovation
Mike hones in on this idea of crossing value networks with data, and using it for value creation, likening it to “magic.” Matt brings up Christensen’s Innovator’s Dilemma again, this time to recall the two flavors of innovation: sustaining innovations that optimize existing offerings, and disruptive innovations that upend existing markets. He relates these two types of innovation to value networks; sustaining innovations happen within a current value network, while disruptive innovations emerge and grow in separate value networks, then enter existing networks with momentum. Companies looking at innovation opportunities should seek both. Mike highlights how much of the romance around digital innovation focuses on disruption. He encourages listeners not to sell the sustaining innovations short, pointing out the original idea of value engineering — from General Electric during World War II — was to improve product efficiencies by focusing on use as opposed to products. This thinking aligns well with customer centricity and Christensen’s jobs-to-be-done.
To close this episode, Mike and Matt both state their enthusiasm for this new approach to mapping business models through value exchange. Matt brings it back to the role of APIs, stating, APIs in a digital economy are the medium for value exchange.” They both agree that companies who can tap into this insight will be positioned well for digital success.
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