Category: Strategy

I finished my MBA 40 years ago. Courtesy of the current pandemic, I won’t be having the reunion I was looking forward to. But, I have been thinking back to lessons from those days.

One of the hottest courses my second year was “Industry and Competitive Analysis.” Professor Mike Porter was putting the final touches on what would become Competitive Strategy : Techniques for Analyzing Industries and Competitors and we were the beta testers for what would become the bible of corporate strategy. Because Harvard is committed to the case method, there wasn’t much explicit discussion of theory as theory. You absorbed the theoretical essentials in the course of applying the tools and techniques to the case examples.

Fast forward several years. I’ve left the world of consulting and come back to school one more time. I’m now writing cases instead of reading them. And I’m soaking up formal theory in multiple subjects. One of the courses I take is a course in Industrial Economics from Richard Caves. Industrial Economics is the study of markets and competition from an economist’s perspective. Caves was Porter’s thesis advisor when Porter was getting his Ph.D.

When economists study markets and competition, their driving question is “why do markets fail?” Economists believe in markets and their theories presume perfect competition. Deviations from perfect competition are anomalies to be understood and explained. What gets in the way of the theoretical ideal of Adam Smith where sellers compete on price and features to meet the needs of well-informed buyers. The catalog of things that cause markets to be less than perfectly competitive is long: monopoly power, monopsony power, barriers to entry, barriers to exit, price fixing, collusion, are only a partial list. Economists then seek potential solutions to prevent or eliminate these sources of market failure.

Midway through the course it dawns on me. Porter’s genius in competitive strategy is to recognize that an economist’s market failure is a CEO’s strategic coup. Your goal as a CEO is pick your markets and shape your organization’s behaviors to maximize the probabilities of market failures that work in your favor. I’ve found that to be a very powerful lens for understanding how business strategy plays out in practice.

WTF?: What’s the Future and Why It’s Up to Us.  Tim O’Reilly

Tim O’Reilly has had a backstage pass to the technology change we have been coping with for the past three decades. WTF is his effort to make sense of what he’s seen and offer some counsel about what it may mean for the next decades we’ll be living through. While some cynics and skeptics might view this as no more than O’Reilly’s attempt to hit the speaker’s circuit, there’s value here to those of us with a more restrictive view of the show. Can O’Reilly offer the rest of us valuable insights even if he may have been mostly a combination groupie/roadie for the more visible performers on the stage? My assessment? This is one smart roadie with insights worth paying attention to.

What makes WTF work is that O’Reilly is an unusual blend of techie, communicator, and entrepreneur. In ethnographic terms, he’s been a participant/observer throughout this unfolding process. Most of those reporting from the new territories are one or the other; they are participants either too busy or too biased to offer dispassionate analysis or they are observers too removed from the action to see the really interesting stuff.

One of the early battles was between open vs proprietary strategies. Eric Raymond labeled this as a choice between the Cathedral and the Bazaar. Today it is evolving into the emergence of networked platforms as one of the next arenas being contested. O’Reilly frames this continuing evolution as a requirement to differentiate between value creation and value capture. Organizations that focus on capturing all the value that they create do not prosper as abundantly as those who focus principally on value creation. Those who focus on playing positive-sum games do better—both for themselves and for the rest of us—than those who choose to play zero-sum games. This is a countercultural if not a counterintuitive strategy. The rhetoric of Wall Street and VCs is anchored in a zero-sum mentality; the winners in this new world, however, are playing a deeper game.

What I find especially intriguing about this line of thought is how it makes strategy and organizational design tightly coupled and how it then shrinks the differences between how things work inside the organization and how they work outside. One of the curiosities of large, traditional, organizations is that they cling to the worst practices of centrally planned and managed economies internally as they celebrate the value of the free market outside their walls.

At heart, what O’Reilly is arguing in WTF is not only that this is a hypocritical debate but that it has become a dangerous mindset as well. As he puts it “Amazon Web Services was the answer to a problem in organizational design.” O’Reilly reports on an interview with Jeff Bezos talking through the origins of AWS;

“Four years ago is when it started, and we had enough complexity inside Amazon that we were finding we were spending too much time on fine-grained coordination between our network engineering groups and our applications programming groups. Basically what we decided to do is build a [set of APIs] between those two layers so that you could just do coarse-grained coordination between those two groups.”

Working through this logic is anything but intuitive. Learning how to do so consistently may be the central skill for thriving, or possibly even surviving, in what is to come. O’Reilly has come in for some criticism in his perspective on Uber and its evolving working relationships with its drivers. I think the criticism is overblown and misses the nuance that O’Reilly is attempting to call attention to.

This goes to the heart of what WTF tries to do. Looking at a sample of successes, failures, and yet to be determined experiments, O’Reilly is trying to understand the strategic logic of the world we are brining into existence in a way that would let more of us contribute to that logic. I’m less interested in whether he has worked out the answers than I am in learning how to think along similar lines.

An interesting thought to start the day.

The Mantra of Entrenched Industries

By Tim O’Reilly

CJ Rayhill, our CIO, and the organizer of O’Reilly’s Tools of Change for Publishing conference, passed on a fabulous quote from Robertson Davies that aptly captures the hopes of entrenched industries: “The world is full of people whose notion of a satisfactory future is, in fact, a return to the idealised past.” (The quote is from his 1960 book A Voice from the Attic.)

I’d have to agree with Virginia Postrel here. The article is a very succinct and thought-provoking summary of Amazon’s plans to make elements of its technology and distribution infrastructure more generally available. Amazon’s plans strike me very much as an example of the real time lags we need to account for when trying to understand technology as a strategic, and frequently disruptive, force.

Fixed Costs “By the Drink”

One of the most interesting business articles I’ve read in a long time. And it’s short….

Here are the core summary grafs from the article.

The repercussions if that happens? Well, look at what’s going on in the media. The Internet created a platform for user-generated content. Now, blogs, videos, music, animation and websites from individuals and small companies constantly challenge traditional media companies. YouTube got bought by Google for $1.7 billion. TV networks are rushing to put content on the Web. Newspapers have lost readers to blogs.

Media are only a fragment of global industry. Imagine that same scenario plowing though one consumer sector after another: food, clothing, cosmetics, sporting goods, musical instruments and so on. It could be a wonderful, vibrant, scary chaos. [Amazon’s new direction: Point, click, make a product to sell to the world]