By 1980, IBM had hit an inflection point. It had already missed out on the minicomputer revolution. Now, with new, even smaller “microcomputers” evolving into a growing market, it was about to miss out again. So it set up a “skunk works” in Boca Raton, FL and, in less than a year, launched the IBM PC.
Today, at the end of the digital revolution, IBM is at a similar juncture. Yet its approach is the polar opposite than it took four decades ago. Rather than operating in secret, it is building a collaborative network to develop quantum computing. The reason: the technology is simply too complex for anyone to go it alone.
It’s not just IBM either. A recent report by Accenture Strategy found that found that ecosystems are increasingly seen as a “cornerstone” of future growth. In fact, almost half of the executives it surveyed are actively seeking to participate in ecosystems to create new business models. Today, if you want to compete effectively, you need an ecosystem strategy.
Porter’s Competitive Advantage
The dominant view of strategy in the 20th century was based on Michael Porter’s ideas about competitive advantage. In essence, he argued that the key to long-term success was to dominate the value chain by maximizing bargaining power among suppliers, customers, new market entrants and substitute goods.
Porter’s ideas dominated thinking in corporate strategy for decades, yet they had a fatal flaw that wasn’t always obvious. Thinking in terms of value chains is viable when technology is relatively static, but when the marketplace is rapidly evolving it can get you locked out of important ecosystems and greatly diminish your ability to compete.
IBM’s history has shown a steady evolution from value chains to ecosystems. When it developed its System 360 mainframe architecture in the late 50s, the value chain was almost completely self-contained and vertically integrated. The PC was more of a hybrid strategy, in which it partnered with companies like Microsoft and Intel, but mostly kept them at arm’s length.
Today, rather than looking to dominate value chains, the company seeks to widen and deepen connections with research partners, customers and startups. Importantly, it does this not out of any newfound altruism—it would probably prefer to dominate the value chain if it could—but because of hard business realities.
The truth is that markets today are much faster, more interconnected and more complex than they were when Porter formulated his ideas about competitive advantage. If you are always looking to maximize your bargaining power, you are likely to cut yourself off from important information and capabilities that you will need to effectively compete.
Understanding Ecosystem Dynamics
Value chains are linear, so the biggest and most powerful link in the chain tends to dominate. A major industry player like McDonald’s or Walmart has significant bargaining power that impacts both customers and suppliers and helps to create barriers to entry for new market entrants and substitute goods.
Ecosystems are nonlinear and complex. So power emanates from the center instead of at the top of a value chain. You move to the center by connecting out. So while an industry giant may possess significant bargaining power, exercising that bargaining power can be problematic, because it can weaken links to other nodes in the ecosystem.
Consider the case of Ford, which in the 1920s built the almost completely vertically integrated River Rouge plant to dominate the value chain. Because the company had the ability to produce just about every facet of its product itself (the plant even had its own steel mill), it had tremendous bargaining power.
However, as the industry matured, other companies began to specialize in particular components. Ford, unable to compete in so many directions, became integrated into the larger ecosystem. In fact, during the financial crisis in 2008, the company’s CEO, Alan Mulally, said this in testimony to Congress:
In particular, the collapse of one or both of our domestic competitors would threaten Ford because we have 80 percent overlap in supplier networks and nearly 25 percent of Ford’s top dealers also own GM and Chrysler franchises
In a value chain driven world, Ford would have welcomed the collapse of its competitors. In an ecosystem driven world, however, their collapse would do major damage to nodes that the company itself depended on. Clearly, the principles of competitive advantage have changed.
Ecosystems are essentially networks of networks, so a crucial component of any ecosystem strategy is to participate in convening spaces. Traditionally, these have been industry-based associations, such as the National Retail Federation. Yet as the importance of ecosystems has increased, so have the number and types of convening spaces.
Some of these convening spaces focus on a particular technology, such as the Internet of Things Consortium or the Partnership on AI. Others focus more widely around a particular domain, like the Joint Center for Energy Storage Research or the Composite Materials Institute. These types of platforms should be considered essential for any ecosystem strategy.
For quantum computing, IBM has taken the more ambitious step of creating its own Q Network to collaborate with a wide array of partners. Other companies create accelerators and VC funds to help them to connect with emerging startups. Google’s academic program helps it connect to the world’s best minds and gives it a leg up on recruiting up and coming talent.
The truth is that there is really no limit to the ways in which you can connect. What’s important is not any particular platform or direction, but understanding the importance of connection. In an ecosystem driven world, widening and deepening links is how you move to the center of networks and increase your power.
Preparing For A Future You Cannot See
Historically, the lines between industries were fairly clear-cut. Ford competed with GM and Chrysler. Later, foreign competition became more important, but the basic logic of the industry remained fairly stable: you produced cars and sold them to the public through a network of dealers.
Today, however, industry lines have blurred considerably. A company like Amazon competes with Walmart in retail, Microsoft, IBM and Google in cloud computing, and Netflix and Warner Media in entertainment. The company itself is much more than simply a bundle of operations competing in different value chains, but a platform for accessing a variety of ecosystems of talent, technology and information.
In much the same way, automobile manufacturers are making investments to transform themselves into mobility companies. To do so, they are building ecosystems made up of technology giants, startups and others. They are not seeking to “maximize bargaining power,” but rather to prepare for a future that hasn’t taken shape yet.
The truth is that value chain based strategies are slow and rigid and the world has become fast and agile. You can’t simply seek to build a better mousetrap, you need to relentlessly connect to build a better ecosystem. Today, that’s becoming less a matter of competitive strategy and more a basic requirement of survival.
Image credit: Pixabay
Wait! Before you go…
Greg Satell is a popular author, keynote speaker, and trusted adviser whose new book, Cascades: How to Create a Movement that Drives Transformational Change, will be published by McGraw-Hill in April, 2019. His previous effort, Mapping Innovation, was selected as one of the best business books of 2017. You can learn more about Greg on his website, GregSatell.com and follow him on Twitter @DigitalTonto.