Harvesting at the Farm’s Edge

For many generations, farmers have relied on wind to pump water and power other activities.¹ But today, it is not only farmers who exploit the wind on farmlands. Farms now rent out the vast open space on their properties to developers. These developers, in turn, construct wind turbines to harness the latent energy potential that happens to already exist in the air above the fields.² This is a great example of an enterprise edge strategy.

Someone thought to ask the key question: “Who, besides a direct competitor, would pay for rights to my land?” One answer is an energy company. At its simplest level, wide open fields in Kansas provide highly attractive real estate to support a wind farm. With minimal burden and little risk to its core business, a farm can lease the rights to build windmills above its crops, powering generators and driving a new revenue stream at the edge of its farming enterprise. “I think it’s one of the greatest things that ever happened,” said Chuck Goodman, a retired farmer from New Alta, Iowa. “It’s good for my pocketbook. It’s good for the environment. And wind is renewable; we’re not digging it out of a hole in the ground.”³

Wind leases typically provide farmers with annual payments ranging between $4,000 and $8,000 per turbine, plus additional royalty payments of 3 percent to 6 percent of gross revenues.⁴ Farmers are selling access to a key asset (their land) to a new customer base (wind developers) with minimal disruption to their core business (raising crops). The land sits at the base of a farm’s stack of foundational assets; its core purpose is to enable the growth of crops, but when viewed through another lens, it offers much additional potential.

As with product and journey edges, exploiting enterprise edges requires little incremental investment; in this case, the land already existed to serve the core business. Unlocking latent potential at the edge of the enterprise also serves a new customer permission set in a way that doesn’t interfere with the core business.

Where Are Enterprise Edges Found?

We have already introduced the concept of the enterprise as a stack of foundational assets. Enterprise edges tend to be found lying along the periphery of all of these foundational assets (see figure 4-1). Importantly, all of the assets that support your core offering have edges of their own.

Any foundational asset could, at its edge, unlock an opportunity. Sometimes, an asset that directly supports your core can coincidentally support the majority of what is needed to satisfy a completely different customer permission set. This coincidence is an important distinction. What characterizes the thinking behind this third type of edge strategy is the recognition that the new way of using or deploying your asset is already close to a useful solution for the new customer. Your organization also requires little incremental effort to present this new solution to the new customer.

Opportunities for incremental growth exist in any situation in which you can challenge the true utilization of foundational assets. If you can unlock additional utility by leveraging a foundational asset’s potential to serve a new product-to-customer intersection without affecting the core business, it is an edge of the enterprise opportunity. Most fundamentally, finding an enterprise edge opportunity involves asking and exploring the answers to the question our farmers asked of themselves: Who, besides a direct competitor, would pay for the rights to any of my foundational assets?

Growth initiatives for which your organization has inadequate experience, knowledge, or relationships are typically not candidates for prioritization. However, enterprise edges are atypical.

Unlike traditional forays into new customers or new products, significant risk taking or investment is not necessary to exploit enterprise edge opportunities. Instead, they involve recognizing the latent value in your assets if you make them accessible to another organization. As such, executing on enterprise edge opportunities is primarily about connecting others with, or allowing others to access, your existing assets.

Often, this starts by selling limited usage rights for one of your foundational assets to a player that previously had no interaction with this part of your business. This allows you to monetize the opportunity without disrupting, or adding undue complexity to, your core. You may have amassed assets that support your core business that you can rent out profitably (to other companies) in a way that poses no threat to your commercial viability. These assets could be tangible, say, a factory or a piece of machinery, or they could be intangible, say, capabilities or relationships.

An enterprise edge opportunity may be present with an intangible asset, such as data (see figure 4-2). The company can align its foundational asset with an entirely new customer permission set, one completely distinct from the customer permission set of its core offering.

Consider a highly transactional organization such as a health insurance company, constantly processing transactions, claims, and payments for its thousands of customers. In doing so, the health insurer will amass vast amounts of data about its customers and their health. This data is a storybook on how its customers live and respond to care, which, if presented appropriately, would provide insight to companies that also provide care to those customers. (See the example of UnitedHealth in the next section.)

Enterprise edge opportunities become manifest in many forms, yet they all leverage foundational assets in one of three ways:

• Monetizing by-products
• Unlocking latent capacity
• Exploiting unconstrained or intangible assets

Let us now consider each form in turn.

Monetizing By-products

By finding new ways to harvest the full value of your output, you can monetize by-products. You can find the most obvious example in the by-products of your core business, the material left over from—or created by—the process of producing your core goods and services. While the wind energy example may be a new opportunity for farmers, they are no strangers to enterprise edges. Using by-products of one activity to support another is standard practice in farming, for example, feeding cornstalks to dairy cows.⁵

There are also many industrialized examples where enterprise edges are commonplace. For example, in the oil-refining industry, gasoline production generates a number of by-products, such as hydrogen. A typical oil refinery sells and processes these by-products, or “intermediates,” into additional products at colocated chemical processing plants.⁶

These activities are, of course, well-established industry norms. The value of the enterprise edge framework is to provide a mindset that can help us see these opportunities for what they are, even though they are not parallel with our core operations. A good illustration of a modern and less traditional use of by-products is UnitedHealth’s efforts to monetize its data assets.

As the largest health insurer in the United States, UnitedHealth has a core business that generated revenues of $113.9 billion in 2014: the selling and managing of health insurance to individuals and employers, as well as to the government via the Medicare and Medicaid programs.⁷ UnitedHealth also operates a smaller business called OptumInsight that provides its customers with information culled from the enormous database that the parent company has developed to track health outcomes in its core insurance business.⁸ This is an enterprise edge business—one that serves drug companies.

OptumInsight was founded in 1996 under another name: Ingenix.⁹ As analysts noted at the time, the business “builds upon the company’s database and expertise in providing knowledge and information services.”¹⁰ Here we see the familiar characteristics of an enterprise edge opportunity. In pursuit of its core business, UnitedHealth built a considerable data trove that is more broadly valuable than what could be exploited by its core alone. It recognized that due to the nature of data, it could readily leverage this foundational asset elsewhere without significant new investment. It also recognized that it could generate incremental cash flow without affecting its core business.

With more than 80 million people using its insurance products, and with a collection of patient information on 114 million people dating back to 1993, UnitedHealth claims to have “one of the largest and most robust proprietary healthcare databases in the world.”¹¹ For the drug companies, the patient-specific, longitudinal nature of the data set (that is, the fact that it tracks the outcomes of patients over time), together with its geographic diversity, is hugely valuable. OptumInsight developed a suite of products that allow the drug companies to use this data for their own purposes, which is quite separate from UnitedHealth’s core business.¹²

One of the tools—offered under the brand name Clinformatics—is called “Data Mart.” This online tool, providing anonymized or “de-identified” information on patients, is designed to help drug companies understand how their products (and those of their rivals) are used by and perform for customers. In its promotional literature, UnitedHealth urges companies to “see how a greater depth of knowledge can help you reduce research and development costs, shorten go-to-market timelines and maintain quality and compliance.”¹³

The edge insight was that nearly everything required to power a new offering—in this case, the data—was already present within the enterprise. So while it is typically a step into the risky unknown to target new customers in a new sector, enterprise edges represent a special case; risk is heavily mitigated because much of the new offering already exists. All that remains is to make it available to the customers who value it.

OptumInsight’s overall revenue figures suggest that their new customers see the value. In 2014 the division generated $5.2 billion—up from $956 million in 2006.¹⁴ Over this time, its annual growth rate, 16 percent, was more than three times the growth rate for UnitedHealth as a whole (7 percent).¹⁵ Its profitability is even more impressive. In 2014, OptumInsight earned $1 billion in operating income—a 19 percent margin. By contrast UnitedHealth, as a whole, reported $10.3 billion—an 8 percent margin.¹⁶ By any measure, OptumInsight has grown over time to become a core business for UnitedHealth. Sometimes edge strategies can evolve into robust profit centers that transcend the original incremental opportunity.

Unlocking Latent Capacity

Finding creative means to release any of the resources or capabilities in your stack of foundational assets unlocks latent capacity. Many enterprises build capabilities to produce and/or deliver their core products. Often these are vast and complex assets: production plants, infrastructure networks, data centers, and so on, where an opportunity can sometimes be found in their spare capacity.

As with by-products, monetizing spare capacity is commonplace for some industries. For example, many manufacturing and production companies, such as brewing, food processing, even pharmaceuticals, rent out spare production capacity or offer toll manufacturing services.¹⁷ However, we have also found examples of companies using the same edgelike thinking that spawned these standard practices in less obvious situations. Just as with the more conventional manufacturing examples, these businesses also recognized ways to create incremental revenue streams by renting out spare capacity that would have otherwise gone unused. Some examples include seasonal call centers that handle customer service for other companies during the off-season and universities that rent out meeting spaces for private events outside of term.¹⁸

An excellent illustration of this kind of edge strategy is Major League Baseball’s discovery that it could effectively deploy its streaming video capabilities for other broadcasters and content providers during baseball’s off-season. When you watch Clayton Kershaw throw a pitch at Dodger Stadium in Los Angeles or see Miguel Cabrera hit a home run at Comerica Park in Detroit, chances are you are catching a live streaming of the game on your laptop, tablet, or smartphone. Every one of the three hundred or so pitches in a game, every one of the twenty-five hundred games in a season, are now readily available on any device, wherever you are.¹⁹

This service is brought to you not by a traditional broadcaster but by Major League Baseball’s (MLB) own media business: Major League Baseball Advanced Media (MLBAM). Set up in 2000, at the height of the dot-com boom, this company, which is jointly owned by the thirty clubs in the league, was tasked with running the websites of the MLB and its different clubs.²⁰ But, in the intervening fifteen years, it has branched out and become a pioneer in the business of streaming live video content online worldwide.

Early on, the narrow focus was on how the league and the clubs could improve their websites with the pooled resources of the various clubs. Each invested just $2.6 million, creating a total fund of $77 million. “Centralizing these activities means that we have more money to build state-of-the-art technology,” reflected Bob Bowman, the company’s CEO. Also, by orchestrating a collaborative effort, MLB ensured that super-rich teams—such as the New York Yankees or the Boston Red Sox—would not break away and establish their own digital operations. It “means that the fan in Milwaukee is going to get the same great site as the fan in New York,” Bowman explained.²¹

Soon MLBAM was entering a new world of digital technology—leading the way with not just website management but also app development and video streaming. In 2008 it debuted its “NexDef” feature, downloadable software for high-quality streaming of video on widescreen formats. The following year, MLBAM launched a new video player with high-definition pictures, the functionality of digital video recorders, multigame viewing options, live game highlights, and a player tracker.²²

By this time, MLBAM was attracting more than 50 million unique visitors to its websites every month. Among these, there were 1.5 million subscribers to its multimedia content—including five hundred thousand people who paid $100 or more for access to MLB. TV, the flagship video product.²³

Yet, for nearly half the year, during baseball’s off-season from October to March, the company was less productive than it could have been. When viewed through a more expansive lens, there was significant theoretical capacity trapped in the system it had built for its own needs.²⁴ The banks of computers and other digital infrastructure occupied nearly eight thousand square feet at the company’s Manhattan headquarters, but they were underused during the winter months.²⁵ MLBAM realized that the assets it had built to serve its core business, its technology, and its people could be leveraged to capture an entirely new income stream. Recognizing this edge opportunity set the stage for a remarkable success story.

In March 2010, ESPN, the television sports channel, announced it would contract with MLBAM to stream all of its online content.²⁶ In ten years, MLBAM had leaped past traditional broadcasters in the delivery of live web-based content and, by renting out its spare capacity, had found a lucrative opportunity at the edge of its core business. The league and the clubs had recouped their investment in the company after only seven years, so all the activity after this was hugely profitable.²⁷ In 2014, MLBAM’s revenue was approaching $800 million.²⁸ Of this, about $50 million came from its edge customers, ESPN and a host of other clients, including CBS, World Wrestling Entertainment, and even the latest Guns N’ Roses world tour.²⁹

In 2005, Major League Baseball had considered spinning off MLBAM. At the time, its putative value was $2.5 billion.³⁰ Today, with the fast-growing “edge of the enterprise” business helping to boost the number of live events from ten thousand in 2011 to thirty thousand in 2014, the company is almost certainly worth considerably more.³¹

Exploiting Unconstrained or Intangible Assets

The most expansive form of enterprise edge is found in the exploitation of unconstrained or intangible assets. In some circumstances, the enterprise has developed an asset that is so easily scalable that a company can leverage it elsewhere in a way that is unlimited and yet still has little or no effect on the core. In these situations, the potential to unlock not only incremental value but even disproportionately significant value is possible.

An example of this type of asset is your know-how and the ways of doing business that are codified in your corporate culture, traditions, and experience. Another is the technology and intellectual property your organization has developed to deliver on its business model. Amazon, the global e-retailer that developed a scalable technology to support its global business, only to realize it had also created new business-to-business services in the process, is an example of this form of edge strategy.

In the early 2000s, Amazon had started to build the complex cloud-based digital infrastructure it requires to deliver an online shopping service that operates twenty-four hours a day, seven days a week.³² This was a costly undertaking in terms of time and money. Amazon executives realized the company was spending more than 70 percent of its time making and managing the back-end technology needed to run its business. This work was necessary to enable its core, but the functionality it provided was not uniquely useful to its business model. Its managers posited that if Amazon was investing so much in what retailers call “muck,” then so too are other companies. So why not make these extensive assets available to other companies? Why not monetize this seemingly unconstrained asset?

This realization led to the formation of Amazon Web Services (AWS) in 2003. As Andy Jassy, the head of AWS, said in recent profile of the business: “One of the things we tell customers is, ‘We make muck so you don’t have to.’”³³ It proved a compelling sales pitch. Today, Netflix’s streaming video service comes courtesy of AWS. So does Pinterest’s social network. Even the Central Intelligence Agency has placed a $600 million data storage contract with AWS, in what Jassy calls “a credibility builder.”³⁴

How exactly does this enterprise edge strategy work? Amazon recognized it needed to operate its core business in real time across multiple data centers. In the United States, Amazon has three huge regional computing centers—in Virginia, Oregon, and California—each with multiple buildings and thousands of servers. There are many other computing centers in countries worldwide, including Brazil, Ireland, Japan, and Singapore.³⁵ The company developed a key foundational asset, the web services capability, to link all these together.³⁶ Amazon’s enterprise edge strategy was quite simply to let other companies use these web services. “In many ways, we had been working on the foundation of AWS since Amazon’s inception, but didn’t really know it,” mused Jassy.³⁷

The value proposition to Amazon’s new customers was clear. Other companies “could not buy the software necessary to operate at Amazon’s scale,” noted Jassy. “Amazon built virtually every piece of software necessary to run a web business that could scale, on demand, to virtually any level imaginable. Only a handful of companies around the world could claim that level of software competency.”³⁸

Renting out this technological investment did not conflict with Amazon’s core business. But it has proved an effective way to monetize the digital infrastructure, which cost billions of dollars to build.³⁹ Amazon CEO Jeff Bezos characterized AWS as a $5 billion business in 2015, adding that it’s “still growing fast—in fact, it’s accelerating.”⁴⁰

With profit margins of around 50 percent, AWS operates in a very different way from its parent company, which famously took eight years before it posted its first profit and even today sacrifices most of its margin in exchange for growth.⁴¹ But it may yet realize the true potential of this strategy. As Jassy has boldly claimed, “AWS can be at least as big as our other businesses.”⁴²

Such is Amazon’s belief in this enterprise edge opportunity that it is now investing more heavily in the infrastructure that supports it. By 2007, AWS was consuming more bandwidth than Amazon’s websites.⁴³ It is, perhaps, not surprising that the Wall Street Journal chose to dub Jassy, “The Man Who Really Runs the Internet.”⁴⁴

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We will now turn to part two of this book, “Where to Unlock Value.” Here we will explore in greater detail the various ways companies have used an edge mindset to advance their growth strategies or respond to market challenges. First, in chapter 5, we will return to the first form of edge strategy, the product edge, and explore the many ways companies have found to offer upselling opportunities to their customers.