Infrastructure investments need functionality!

Anastasia Tsvetkova, Senior Researcher

An investment that works as it should

What is the value of investments in infrastructure? Surprisingly, the answer is not obvious – it depends on whose perspective we consider. For investors, the interest is in an adequate return on investment. For those who build the investment object, the goal is to maximize the profit from the construction process and fulfill the investor’s requirements. For end users, it is the value they receive from using the investment object that matters. 

If the value chain is properly aligned, everyone benefits and receives their share of the total value creation. The involved actors are entitled to higher profits if they deliver something that creates more value for the end users or takes on the end user’s risk. These are the fundamentals for a functional investment, - an investment that maximizes benefits for the all the involved actors. 

Unfortunately, this is often not the case. The goals of the different actors along the value chain are misaligned. Also the goals and needs of end users may be excluded from the equation, making win-win-win situations unlikely. Why does this happen and what can be done about it? Or should we take it for granted that the interests of a multitude of business actors will always be in conflict?

Business ecosystem structures can limit functionality of investments

Products and services, as well as investments, do not exist in a vacuum, but are always embedded in a business ecosystem. This system includes actors in the immediate value chain, as well as other actors that affect or are affected by the focal investment in some way. 

The interconnections between the activities of this multitude of actors define how value is created on an industry level. This means, when an investment is introduced, it is not only the technology behind it that matters; the way it is designed, delivered, and operated by various actors defines its real functionality. The structure of a respective business ecosystem has to be in line with the intended value and functionality of the investment.

In certain cases the current business ecosystem structure creates obstacles, and the governance of the interconnected activities prevents from delivering a functional investment. Then, the business ecosystem has to be changed so that the optimal functionality of an investment can be achieved. 

The market failure that requires shaping business ecosystems can happen for a number of reasons. Industries and business ecosystems evolve over time, and the value chains, which were initially aligned through vertical and horizontal integration, tend to become fragmented and specialized. As a result, the system goal of a business ecosystem, which was originally to collectively fulfill a certain need, (such as, for example, reliable, sustainable, and affordable transportation or energy supply) is not achieved. Instead, companies and clusters of companies start to focus on sub-goals, and their interests become contentious and controversial over time.

What can be done?

Investments need to fit into the related business ecosystem and unlock the potential for increased value creation. This is how they become functional and deliver not only the value from the actual investment but also at the overall system level. When the surrounding business ecosystems are inefficient, it is necessary to extend the governance of an investment’s delivery towards governance at the business ecosystem level. This can be done through creating new organizational and governance structures, e.g. alliances. This way, the goals of different actors become aligned towards achieving system and lifecycle value. Such a proactive ‘ecosystem shaping’ mindset needs to be embedded in companies’ investment planning and delivery processes. This way, infrastructural investments will steer industries towards enhanced efficiency and sustainability, while stakeholders will be able to fully capture their share of the created value.

If you are interested in reading more about this topic and explore the example of a functional vessel investment, please see our joint paper with colleagues from Global Projects Center at Stanford University:

Anastasia Tsvetkova (PhD) is a Senior Researcher at PBI. Her research interests lie within the field of sustainable business models and business ecosystems. She has been working in a number of strategic consulting and development projects devoted to biofuel production and consumption systems, sustainable logistics and renewable energy industry. 

FinancialWolf Virkki