Drop in on the chat portion of last week’s Friday Fireside Chat with Dartmouth Professor Ron Adner, in which we discuss the concepts from his new book, “Winning the Right Game: How to Disrupt, Defend and Deliver in a Changing World.” Here are responses to the questions that came through on the chat.
Ron Adner’s latest book is chock a block full of concepts, frameworks, and examples that lead you to rethink the taken for granted assumptions about what happens in business, by looking through an ecosystem lens. For instance, why is TomTom still a viable business in light of Google and Apple literally giving away for free what generated all their revenue? Why did Spotify have to trim back its plans to become an intermediary between artists and audience? Why was Lexmark, a printing company, able to survive the decimation of the printing business? Why did Satya Nadella put Microsoft in the position of being a valued partner when that eluded Steve Ballmer? Read on to explore some of the questions asked by our audience.
Defining an ecosystem and the threats within it
Question: How do you define an ecosystem, in your words and experience?
This is described in detail in Chapter 1 of the book, which you can download for free at this link.
Before you get to defining an ecosystem, it’s important to understand a few other concepts first. The place to start is with an understanding of the value to be created by the ecosystem, or the value proposition. The formal definition I use is:
A value proposition is defined by the benefit that the end consumer is supposed to receive from your efforts.
Although this definition may sound simple, there are some key strategic choices implied by it. The first is who your end customer is. In the case of Kodak, one of the examples used in the book, the value proposition revolved around the “Kodak moment” – an event with particular resonance that a consumer wanted to relive and share through images. The core Kodak customer in the home market was the customer who wanted to both capture the images and revisit them when they were put in an album or displayed elsewhere. Where most analyses of the Kodak story go wrong is that Kodak most certainly did not miss the digital revolution. What they did miss was how the reliving and sharing would be done in a world of high-quality, mobile, screens. The company doubled down on printing in a world that saw little value in printed pictures and in which the new photo album was Instagram.
An ecosystem, then, is how this value proposition is delivered and by whom. The definition for that is:
An ecosystem is defined by the structure through which partners interact to deliver a value proposition to the end consumer.
This definition highlights three key aspects important to understand ecosystems:
1. The goal is value creation for the end customer, which might involve multiple firms, products and technologies
2. There is an identifiable set of partners that choose to interact to create the value proposition – in a big departure from the traditional concept of the value chain, these are not traditional buyer/supplier relationships but cooperative ones in which each partner has a specific role to play.
3. There is a structure to the ecosystem, with specific roles, positions and flows of transactions. A key strategic question is how to align the interests of parties so that an ecosystem can emerge, deliver value to an end customer and benefit from doing so.
This brings us to a third important definition, namely the value architecture of an ecosystem:
A value architecture is defined by the elements that are brought together to create the value proposition.
In the case of Kodak, for instance, we might think of four high-level value elements: Capture the moment; Produce the image; View the image; and share the image. What ultimately proved to be a strategic disaster for them was that the “view” value element moved from printed images to electronic ones, making photo printing irrelevant.
Question: You point to the threat coming from your partners within the ecosystem. Is it a bigger threat then the competition from other ecosystems?
Not necessarily, although in a concept described by Ron as “value inversion” one or more of the partners in an ecosystem take actions that destroy value for others.
For example, as R “Ray” Wang has pointed out, food delivery apps, from which food could be ordered from local restaurants, initially were perceived by these restaurants as beneficial. They got more orders, had more reach, didn’t have to build out their own technology and otherwise benefitted. But, as the apps became ubiquitous, what began to happen was that they used their power in knowing customer habits, controlling customer access and dominating essential infrastructure to put the squeeze on those self-same restaurants. Articles are even predicting that the result will be fatal.
Ecosystems vs. Value Nets
Question: So what is the difference to the “The Value Net”?
The idea of a “value net” was articulated by Adam Brandenberger and Barry Nalebuff in their highly impactful book “Co-Opetition.” They suggested that to understand the competitive playing field, strategists need to also understand the gains (or losses) to be had by cooperating, to some extent, with potential competitors and showed how this could be applied in strategic analysis. In a more recent article in the Harvard Business Review, they update this framework to inform bargaining positions in the increasingly common case of companies both competing with and cooperating with one another, with advice for how to take differing positions into account, dividing their cases along the dimensions of whether cooperating will endanger a company’s “secret sauce” and how much value will subsequently be created.
The focus in Winning the Right Game is less on bilateral negotiations between players and more on the strategies to create multi-lateral alignment structures that underpin value creation in the first place, then then how value migrates over time as ecosystems evolve. Both perspectives are useful, depending on which kind of analytical challenge you are trying to address.
Question: What do you feel is the reason that the Kodak CEO could not see around corners?
The snarky answer to this is, because he came from HP and printing was the world to them! He built his whole career on success in the printing business and only departed the company when he lost out to Carly Fiorina in the bid to become CEO.
CEO’s backgrounds often influence the strategies they pursue at their firms, even when they move to other firms. Leo Apotheker, for instance, was himself put in charge of HP. As many said at the time, it was a curious choice, as Apotheker’s background was in software and HP at the time had only 2% of sales in software. Didn’t last long – the board ousted him after only 11 months.
Back to Perez. He’d been fascinated by Kodak’s printing technology while still at HP – indeed, he reportedly led an effort while there to acquire Kodak.
In other words, Perez had begun dreaming of Kodak’s technology in printing years before committing the company to that strategy. As long ago as 2000, when Perez was still at HP, Kodak and HP entered into an ill-fated joint venture called Phogenix Imaging.
By 2003, tensions and differences between the two companies resulted in them parting ways, BUT Perez had by that time hired two top former HP executives to evaluate the consumer market for Kodak. Reportedly, this trajectory came to a head in June of 2003, when Perez gave the green light to make a deep corporate commitment to the high-quality consumer home printing business.
It is worth noting that cameras incorporated into cell phones were becoming a technological possibility by then. By 2003, more camera-enabled cell phones were being sold than stand-alone digital cameras. The quality was nowhere near what could deliver a “Kodak moment” level of capturing a key event but it was only a matter of time before that changed.
Bottom line: getting into consumer printing was already a trajectory that Perez had been on for some time. After years of this momentum, he (and his team, presumably) could not conceive of a world in which photographs would not be printed at all. In a 2009 article, as the company struggled through the Great Recession, Perez told investors that he was putting his faith in two new types of printers – a high-end one for home use and a super-fast one for commercial people.
In a classic case of focusing on the wrong game, the company believed that special technology that incorporated silicon technology in the printer itself, allowing it to price cartridges less expensively than those produced by rivals like HP, would give it an advantage with people who did a lot of high-volume printing and were annoyed by the high prices of replacements.
What happened instead was that once screens became capable of displaying high definition, high quality images, and the digital revolution gave us all many outlets for those images on social media and elsewhere, printing photos went the way of dial-up Internet.
Ironically, Kodak had developed a product that displayed photos in digital form in its very popular Kodak photo frame product.
Strategic Clarity and Ecosystem evolution
Question: Can you talk about Peter Drucker’s observation that many companies do not know their objectives or their strategy?
It is not uncommon, particularly in far-flung parts of an organization, for people to express confusion about what their strategy is. It would be a mistake, however, to attribute most causes of corporate failure to CEO cluelessness – you don’t get those jobs without a hefty measure of capability and competence. Instead, there can be many other issues that lead to confusion, among them the necessary unfreezing of a strategy that occurs as an ecosystem evolves and changes.
For a great read on how to create strategic clarity, see this great article “Can You Say What Your Strategy Is?”
A Quote to Share
Question: One of my favorite quotes from Ron Adner’s Strategy class at Tuck (2014) is: “if you have to choose between good luck and great strategy, always pick good luck.” Is there a Adner corollary to that quote stemming from the new book?
Yes! “Why does good strategy matter? Because every time someone says the word ‘pivot’ an entrepreneur loses equity.”
Shopify – a Stellar Example!
Question: Can you tell us what you think about SHOPIFY. It appears to be competing strongly in many different ecosystems – piggyback on bigger ecosystems (e.g. Amazon) while delivering what ultimately will be a superior value proposition across time and space
Brilliant! A poster child for ecosystem – offense and defense.
Duggan’s Insight Matrix and the Amazon Fire Phone story
Question: Is the Amazon Fire story and it’s spread out to success via the technology an example of William Dugan’s“Elements” that can form into something new, useful and maybe magical?
Yes! For those that don’t know it, Bill breaks down strategy into different component problems that can be solved. In a great framework called the “insight matrix,” he shows you how to break a big, gnarly strategic topic into manageable chunks, allowing you to find solutions from a variety of places and then recombine them. Read the article in the link for insight matrix for details on how to use it. Here’s what it looks like:
Microsoft’s Radical Shift of Direction
Question: This is excellent. How does Satya Nadella’s instructions to Peggy Johnson in 2014 that competitors can be “friends” in certain arenas and contexts. This inflection must be part of this story
One of Nadella’s breakthrough moments was when he spoke at the Salesforce conference demonstrating Office on an iPhone – breaking multiple taboos in a single moment. This is core to the advice given in Chapter 6 of the book.
A point that is made in the book is that the kind of leader needed to create alignment across an ecosystem (like Nadella) is a different kind of leader than is necessary to dominate and win in a particular market.
A new perspective on strategy
Winning the Right Game sheds a new light on strategy and competition in ecosystems. It is a perfect complement to Ron’s earlier book, The Wide Lens: What Successful Innovators See that Others Miss, which focused on innovation in ecosystems. Interested in more? Another great perspective on value creation through interactions vs simple product and service attributes is offered by Erich Joachimstaler. You can watch Rita’s Friday Fireside chat with Erich here.
A whole new world for strategy!