The Complete Picture

The rate of economic change is going to continue to be high. Obsolescence and commoditisation will not abate.What we need are better tools for business development and market creation. In the new world, product and service competition remains an important aspects of what we do. as does process improvement. But the new paradigm is about market creation. It is about envisioning and helping to shape networks of contributions and processes in order to weave rich new economic tapestries.

The new paradigm requires thinking in terms of whole systems, that is, seeing your business as a part of a wider economic ecosystem and environment.

There has been a profound change in the management thinking of senior executives over the last two-three years. Many senior managers could rightfully be accused living in dental about the transformation of the world economy and its impact on their business. Today, nearly no management be charged with living in such a state. There is no need to argue that the economic times have shifted - there is a widespread agreement that it is true. The traditional industry boundaries that we have all taken for granted are blurring - and in many cases crumbling.

There are certain hot spots of rapidly accelerating evolutionary activity in the global economy, places where the speed of business is exceedingly and fast and loose. New technologies, deregulation and changes in customer behavior are opening up new competitive landscapes. On such newly cleared and fertile grounds, embryonic or transformed businesses are sprouting.

These new renditions are businesses with an edge. In a sense, they are renegades. In their marauding ways, they do not respect traditional paradigms and partitions. Indeed, what they share is tendency to upend business and industry models and to redraw increasingly porous boundaries.

What we are seeing, in fact, is the end of the industry.

That's not to say that we now need to mourn the dissolution of the airline industry or the cement industry. Rather, it means the end of the industry as a useful concept in contemplating business. The notion of industry is really an artifact of slowly paced business evolution during the middle of this century. The presumption that these are distinct, immutable businesses within which players scramble for supremacy is a tired idea whose time is past. It has little to do with what is shaping the world. The designation itself is simplistic, describing certain players better than other. But, in truth, the label is not much more than a crude grid used to compare and contrast businesses, a fiction conjured up by policymakers and regulators, business analysts, and even academic students of business strategy.

Enter a new logic to guide action

The important question for management today is not whether such changes are upon us but how to make strategy in this new world. Few management teams have been able to put together systematic approaches for dealing with the new business reality. Most find themselves struggling with varying degrees of effectiveness, but with no clear way to think about and communicate, let alone confront, the new strategic issues.

What is most needed is a new language, a logic for strategy, and new methods for implementation. Many of the old ideas simply don't work anymore. For instance, diversification strategies that emphasize finding "attractive" industries often assume the fixedness of industry structure, yet our experience tells us that industry structures evolve very rapidly. Our traditional notions of vertical and horizontal integration fail us in the new world of cooperating communities. Competitive advantage no longer accrues necessarily from economies of scale and scope. Many firms can attain the volume of production to be efficient. Flexible systems are widely available that enable firms to customize their offers, proliferate variety, and do so at little additional cost. In the new world, scale and scope matter, but only as they contribute to a continuing innovation trajectory so that a company continually lowers its costs while increasing its performance.

Companies agitating to be leaders in the volatile new world order must transform themselves profoundly and perpetually so as to defy categorization. Is Wal-Mart a retailer, a wholesaler, or an information services and logistics company? Is Intel governed by the economic realities of the semiconductor industry, or does it lead one of several coevolving, competing personal computer - centered ecosystems? Are its competitors Texas Instruments and NEC or Microsoft and Compaq?

In place of "industry" I suggest an alternative, more appropriate term: business ecosystem. The term circumscribes the microeconomics of intense coevolution coalescing around innovative ideas. Business ecosystems span a variety of industries. The companies within them coevolve capabilities around the innovation and work cooperatively and competitively to support new products, satisfy customer needs, and incorporate the next round of innovation. Microsoft, for example, anchors an ecosystem that traverses at least four major industries: personal computers, consumer electronics, information, and communications. Centered on innovation in microprocessing, the Microsoft ecosystem encompasses an extended web of suppliers including Intel and Hewlett-Packard and myriad customers across market segments.

A second new term is "opportunity environment," a space of business possibility characterized by unmet customer needs, unharnessed technologies, potential regulatory openings, prominent investors, and many other untapped resources. just as biological ecosystems thrive within a larger environment, so do business econsystems. As traditional industry boundaries erode around us, companies often unexpectedly find themselves in fierce competition with the most unlikely of rivals. At the same time, the most creative and aggressive companies exploit these wider territories,transforming the landscape with new ecosystems. Thus, shaping cohesive strategy in the new order starts by defining an opportunity environment. Within such an environment, strategy-making revolves around devising novel ways to seize opportunities and create viable networks with other business ecosystems.

Unfortunately, most prevailing ideas on strategy today begin with the wrongheaded assumption that competition is bounded by clearly defined industries. As a result, these ideas are nearly useless in the current business climate and are sure to be even less valid in the future. Can one understand the economic events of tomorrow relying on these ideas? I very much doubt it. It is more important to see a company within its food web than in competition with superficially similar firms bundled together in an industry.

We compete in a bifurcated world. Executives today really must view strategy from two perspectives: They must pay attention to the wider opportunity environment and strive to lead in establishing the business ecosystems that will best utilize it. The dominant new ecosystems will likely consist of networks of organizations stretching across several different industries, and they will joust with similar networks, spread across still other industries.

At the same time, executives must continue to see their companies in the traditional sense, as members of homogenous industries clawing away at rivals for market share and growth. In terms of strategy, it no longer matters if the industries are old and venerable like banking and automobiles, or frisky new ones like cable television and personal computers. So understanding one's industry will be only the first step to pursuing customers, innovation, and the creation of wealth.

Learn from companies investing in the new approach

A word about structure and intent: In this book, I put on my naturalist's outfit and report from the field some observations on leading businesses in the new and fluid environment. This book combines scholarship with on-the ground accounts to inspire lasting change in the way that corporate leaders formulate strategy and purpose - thinking as biologists and cognitive scientists - so that they can triumph in this marvelous new world. I believe that this change in conceptualizing is vitally important for three reasons.

First, the conditions and challenges prevalent in the fastest moving sectors of the global economy are spreading inexorably to all theothers. The dynamics of these centers, and the challenges confronting their feistiest companies and leaders, are now relevant to us all.

Second, some of the hottest centers of economic competition-computers, communications, media, retailing, health care - are now devising fresh approaches to strategy and leadership. These approaches are not very well understood, even by many of their creators, and they surely are not appreciated by the wider public. Nevertheless, the scope of the strategic ambitions are truly breathtaking. If their creators succeed in their endeavors, their initiatives will have profound implications in our daily lives. What it already means, as the title of this book emphasizes, is the end of competition as we know it.

Third, these ideas are already propagating across the general business landscape and thus are guaranteed to have a dramatic and irreversible impact on how we do business from now on.

Because of these reasons, business people, no matter what business they conduct, must comprehend at least the broad outlines of what is afoot.

Establish new value by creatively linking business elements

In recent years, ecologists have sought to understand the specific ways in which biological communities establish themselves and to distinguish the results of chance and historical accident from biological necessity. They have come up with what they call "assembly rules." These rules tell which species can coexist in a community, as well as the sequences in which species are likely to colonize an ecosystem. Not until a plant establishes itself to colonize an ecosystem. Not until a plant establishes itself can the grasshopper that feeds off it arrive. Not until the grasshopper is there can the dragonfly that dines on it enter. Other assembly rules describe how much competition can exist in an ecosystem. A songbird species may arrive and multiply, consuming so much of the food supply that when additional songbird species come along, only one or perhaps two can squeeze into the econsystem. The others are rebuffed and must settle elsewhere.

The parallel to business ecosystems is strong. In both cases, a system and a sequence of symbiotic relationships are established. Early business ideas galvanize a small number of supporters, who inject additional ideas, capital, and if the ideas can demonstrate benefits, cultivate still more support. Overtime, the continuing cycle of new contributions and expanding benefits may result in a rich business ecosystem of interrelated customers and suppliers, products and services, processes and organizations.

If we look at any business ecosystem over time, we can see that specific capabilities and relationships were established in complex sequences. For example, Fidelity Investments now makes about 15 percent of all the trades on the New York Stock Exchange. It anchors a vast and powerful financial services ecosystem. But none of this happened overnight. When Ned Johnson took control of his family's small mutual fund company in the 1960s, he concluded that the brokers that had hitherto made the funds available to consumers did not add enough value to justify their cost. Hence he began to assemble the telemarketing capabilities to make his products available directly to end users. The cost savings were partly passed on to consumers to encourage participation, and partly poured into national advertising that established Fidelity as a leading brand in investment services.

Embrace your executive creating Sequences of synergistic competencies

Increasingly managers must anticipate what needs to be done to take their ecosystem to the next level. As innovation becomes more important, and as companies realize they can't go it alone, the explicit study of business assembly rules is becoming a high priority. The notion of the "whole product" or "whole offer" has emerged in Silicon Valley to help managers sketch out the full scope of what the customer must experience to exploit a particular technology. Managers are learning to ask: if I want my customers to take maximum advantage of the potential in my products and services, what other capabilities besides those I am directly supplying will be needed by the customer? What can be technical product will often require complementary goods and services to become a viable offer for all but the most advanced customers. similarly, suppliers must be able to make available key components or services. Finally, the customers themselves must build capabilities and demands for the innovation.

As a manager, you must not only have a plan for your own product or service, but a plan to help out the entire ecosystem. Some leading companies are now introducing what they call "precursor products," which are specifically designed to draw customers into a cocreating, coevolving relationship with the company. Then they can concurrently create supply chains, complementary products and services, and customer and lead supplier competencies. Computer software companies are particularly attuned to this way of doing business. Quicken, from Intuit, is an inexpensive program that allows users to write checks and keep financial records using their personal computers. But intuit has more in mind. It wants to link its customers with financial institutions, becoming the center of a universe of offers and relationships.

It is the identification of capabilities and relationships and the choices about how and when to establish them that are central to strategy-making in our new economy. Later on, when we look at specific cases - from a telephone company in Africa to Wal-Mart-we will see how an initial set of starting elements were elaborated upon, ultimately creating a rich community of interdependent organizations.

The close study of these sequences is the key to answering a number of difficult strategic questions. For example, it has become a truism that companies often fail by being "too early" with particular innovative contributions. But there is little systematic guidance on how to get the timing right. Study of business ecosystems reveals that often the problem is better seen not as a matter of being early or late, but of not being sensitive to the current state of capability building within an ecosystem. In some cases, the necessary precursors to a product are not likely to become available soon, whether in technology, organizational capabilities, or customer and market readiness. In the early 1990s, computers without keyboards failed because voice and handwriting recognition technologies were not ready.

On the other hand, sometimes a business will fail because its offer has already been superseded by that of an emerging ecosystem. Federal Express's Zap Mail assumed people would pay for expensive fax service from FedEx, office to office, delivered to businesses and homes by local couriers. Zap Mail was a flop because FedEx executives misread the importance of, and timing of, developments in telecommunications, semiconuctors, and consumer electronics that were spawning business ecosystems that made affordable business and personal fax machines.

Think in terms of eras and stages of coevolution

Ecologists sometimes speak of the changes undergone by biological ecosystems in terms of stages of succession. My preferred definition of ecological succession is:Progressive change in composition of a community of organisms, e.g.from initial colonization of a bare area (primary succession) or of an already established community (secondary succession), toward a largely stable climax. Not only does the biomass of the community increase during this succession, but the very structure and organization of the community goes through changes. Grasslands and weedy plants give way to alder trees, which in turn convert enough nitrogen in the soil to a nutrient that enables conifers to thrive.

Business leaders often sensitize themselves to such changes in their business ecosystems by thinking in terms of what I call "eras". They try to define the eras that describe their ecosystem. They try to determine what era they are currently in, how long it is likely to last, and what will herald the next era.By doing this, they find that they can better anticipate important potential changes and take precautionary action. In some cases, companies can prepare themselves to supply the next key contribution to the community. In other cases, they may be able to determine how valuable their current contribution will be in the next era and take the appropriate action.

An ecological analysis shows that the sequence and nature of the great eras in the development of a business ecosystem are to some extent predictable. In my work with companies, I have found it extremely helpful to think of the succession that occurs in a business ecosystem in terms of a series of four roughly sequential stages: pioneering, when the basic paradigm of the ecosystem is being worked out;expansion when the community broadens its scope and consumes resources of all types;authority, when the community architecture becomes stable and competition for leadership and profits within the ecosystem gets brutal and either renewal,when continuing innovation must take place for the community to thrive, or death.

Each stage presents particular developmental challenges for the business ecosystem.

* Pioneering an ecosystem - During this stage, the search for a viable new business ecosystem takes place. It is a brainstorming stage, a stage when visionaries aflame with zeal and armed with stiff-backed reserve focus on identifying the particular seed innovations, whether technologies or concepts, that will create radically better products or services than those already available.

* Expansion of the ecosytem - Effective business ecosystems must expand. This involves sopping up demand, or it can mean tying up the available supply of key components or related products and services and making sure that they support your position and your conception of the overall ecosystem.

* Authority in an established Ecosystem - In the third stage new entrant begin to force their way into the ecosytem. The competition at this stage turns inwards as well as outwards. To stay successful, a lead company must maintain and fortify its ability to shape the future directions and investments of the ecosystem's key customers and suppliers.

* Renewal or death - This is the geriatric stage, when the ecosystem must win the struggle against obsolescence.

Challenge yourself and your colleagues to meet the Four Tests

As business ecosystem matures, it must surmount four fundamental tests. These can be used by managers to help focus thinking - both their own and that of their associates across their organisations and ecosystems. Indeed, one of the central tasks of management may be seen as focusing attention and investment to create networks of competencies and relationships that will meet the four tests:

* Establishing a system and sequence of symbiotic relationships that result in the creation of something of real value relative to what else is available.

* Establishing critical mass as the ecosystem expands across the available customers,markets, allies, and suppliers.

* Lead innovation and coevolution across what one has wrought.

* Ensuring that the business sustains continuous performance improvement rather than becomes obsolete.

Considering these tests is an excellent way to evaluate the robustness of a business ecosystem as well as the leadership contributions of a particular member. Ecosystem-savvy strategies should be designed to address these tests. Finally, these tests help us to anticipate challenges that will emerge during the life cycle of a business ecosystem. The specific tests tend to come forth in a sequence that corresponds to the four stages of dvelopment.

There is an ongoing discussion in business circles about the primacy of cooperation or competition. Which is more important? The study of business ecosystem suggests that both are important in each of the stages of development, but in differing ways. What a holistic approach to leadership requires is the shaping of coevolution. Coevolution - in biology and in business - proceeds by both competition and cooperation. In the pioneering stage, you ust cooperate with others to create something of real value, while also protecting your ideas. In the expansion stage, you must work with others to achieve market coverage, while also blocking alternative ecosystems. In the authority stage, you must provide a galvanising vision to motivate the copmmunity to keep working together, while also ensuring that your leadership position and margins are not weakened. Finally, in the renewal stage, you need to look beyond the community for innovative contributions, while also attempting to prevent customers and partners from defecting to more recently established ecosystems...

Coevolution and cars: stages in action

What would happen if somehow the tectonic plates under the earth shifted so radically that Hawaii and Costa Rica were thrust together? Ecosystems would meet ecosystems, species with commingle across the land. The probable result would be the wholesale transformation of the Hawaiian ecosystems - and continuance and expansion of the Costa Rican communities - albeit woth a few new introductions. Actually, with the collapse of industry and other similar boundaries, such experiments are going on all the time in business ecosystems.

For example, most of the large business ecosystems that grew up behind industry walls had middle years of Hawaiian isolation, even if their early formation was often tumultous. This was the case for big oil. big steel, railroads, autos - and utilities from electricity to telephony. In each of these domains fierce initial competition eventually gave way to a few dominant players and roles - and long periods of relative stasis. In some cases regulation kept the environment simple; in others it was the lack of capital, a lock on expertise, and a firm grip on key markets. But today land bridges are being errected, and species are on the move. Globailsation of capital and markets, and the challenge of substitute technologies and offers has made life substantially more complicated. It is as if the isolation of the Hawaiian paradise has been breached. Costa Rica, here we come.

The varieties of coevolutionary time

The large traditional industries - including steel, oil, and autos - all took many decades to go through the four stages. Most of the initial slowness is probably explained by the fact that these were the first generation of industrial ecosysytems on earth - a dna vast array of capabilities had to eveolve from scratch. But isolation no doubt played a major role, particularly in extending the reign of established business paradigms.

On the other hand, since their isolation has been breached, business evolution is now speeding up dramatcially. What once took decades may now take only a few years. Moreover, many business arenas are becoming so denigrated, so modular, and so competitive that we are experiencing the almost constant emergence of multiple, concurrent ecosystems.

What I wil do in this chapter is examine the development of the great auto-making ecosystems. My purpose is to give you a rich feeling for the stages of development, including the challenges at each stage to executives. The stages of business evolution have existed since the beginning of commerce; therefore an ecological approach can be used to analyse the emergence of any major business, illustrating both cooperative and competitive challenges and the approaches necessary to master them. I will also contrast the long, slow development of a traditional industry with the hypercompetitive, paradigm-breaking competition engendered once its boundaries are breached.

Book - The Death of Competition

Author - James F Moore

Pages - 297, Price - $ 25

Publisher, Harpercolli/NS

Publishers Inc.

Distributors - Rupa & Co.