Competitive strategy and market failures

Mike Porter's 5-forces modelI 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.

Review: WTF-What’s the Future?

Cover Image - WTF. What's the Future

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.

Strategy and organizational design in a crowded ecosystem

When I teach organizational design, I start with the observation that organizations survive because they’ve struck a balance with their environment. That environment is now an ecosystem teeming with other organizations seeking their own balance. One consequence is that you cannot separate organizational design from strategy. A second is that both must operate from a deeper understanding of the ecosystem.

Ecosystem has become a popular way to think about the competitive environment. Some of this is simply evolving language preferences; terms go in and out of style. But there is a deeper and more significant rationale for this evolution in terminology. The appeal behind talking about ecosystems lies in the adage that “everything connects to everything else.” While that has always been true, it wasn’t terribly relevant until recently; “everything” didn’t add up to very much. For a long time, organizations had to only pay attention to a well-defined set of customers, a small handful of suppliers, a small handful of competitors, and a handful of other factors that impinged on their freedom to act.

Wouldn’t it be nice to have that sort of environment today? Not only are there more players to consider in every category, those players bump up against one another more tightly. It’s easy to cross an empty room to get to the bar; in a crowded cocktail party it can be hard to move just a couple of feet. You need to think and manage differently if you need to cross that crowded room. To further complicate things our hypothetical room is surrounded by a balcony full of people shouting conflicting, contradictory, yet potentially essential advice.

The temptation is to put your head down and bull your way through the crowd toward your destination. If you’re a bull and you’re in a china shop, this strategy will get you to the other side. You might also think it acceptable that the floor is now littered with broken china. On the other hand, if we are indeed in an ecosystem rather than a china shop, then we trample at our own risk and as risk to others in the broader system. Are we trampling over a future food source? Predators? Poison? Future mates? Risks to others might be ignored; but many risks are to our own future existence.

It’s a popular notion that today’s environment calls for innovators to move fast and break things. If that environment is as tightly packed as today’s actually is, what may end up broken is the ecosystem itself. That’s a contest with no winners.

Problem-finding on the Path from Invention to Adoption

The intersection of two key dimensions of how we think offers an interesting insight into the path from new idea to successful innovation. Alan Kay discusses them in a talk he gave last year at Demo 2014 called “The Future Doesn’t Have to Be Incremental.” It’s an excellent use of your time, if you’re prepared to think about what Alan is saying. Alan can be a deep and a dense thinker; he’s the kind of teacher where it might take days or weeks before the argument he is making hits you with its full force. This is our problem as the student; not Alan’s as teacher. Consider yourself warned as well as encouraged. The payoff is worth the effort.

If you want to skip to the part of the video I want to examine today, go to the 18-minute mark. The first dimension he addresses is how we respond to new ideas or tools when they appear. Most of us (95% per Alan) respond to a new idea or tool in an instrumental way; we evaluate the idea in terms of how it might advance our current agenda. Our default response is WIIFM—what’s in it for me? One in twenty of us, however, asks a more generative question—should I revise my agenda based on this new idea? This difference in attitude is essential to invention.

Another way to characterize this is whether someone reacts to a new idea in a closed or an open way. A closed response to a new idea treats the idea in terms of how it advances an existing agenda or goal, while an open response maps to Kay’s notion of reacting to a new idea in terms of how it might modify, reshape, or obsolete a current agenda. While WIIFM may be the question in either case, the shift in stance is important.

The second dimension Alan explores is that of extraversion/introversion. I find it more helpful to think of this dimension as your compass; is it social or personal? Do you look to the group for your primary source of direction or do you look inwardly. Again, more than 80% of us take our cues from the group. We are, after all, social animals.

Taken together, we get the following diagram, which I’ve scaled to reflect the general 80/20 proportions at work:


These dimensions aren’t completely orthogonal, but they do set up an interesting set of questions about invention and innovation. Work gets done by the grand majority of people who are tuned into the social matrix and see new ideas in terms of how they can advance existing agendas. At the opposite end of the diagonal, new ideas are generated by the few percent who don’t pay much attention to the social matrix and are on the prowl for truly new ideas.

The challenge is that you need both groups to collaborate to generate big innovations. This collaboration is hard because the mindsets are so different from one another. The greater burden, I suspect, lies with the inventors (broadly writ). They are the ones who must walk their thinking back from what might be to what can be done now and set a path forward that avoids the temptations to settle for the incremental.

This is a leadership task. And not simply a visionary exercise in painting the future in an attractive and compelling way. It depends on some ability to anticipate key forks in the path and to recognize the risks of alluring junctions that lead to the incremental rather than the transformative. Essentially the leadership task here is one of problem-finding and problem-framing; it is about directing the problem-solving capacities of the organization toward a future that is not simply a straight line projection of the present.

Focusing on mission – why asking why is where to start

Morry Fiddler is a friend and one of my personal trusted advisors. During one of our recent breakfasts, he recommended the following TED talk by Simon Sinek on how leaders inspire action.


Since then, I’ve found myself weaving Sinek’s thinking into my own work and recommending it to others.

I also made a point to get my hands on the book version of Sinek’s thinking: Start with Why: How Great Leaders Inspire Everyone to Take Action.  While it helps fill in some holes in his argument, I think most will find the TED talk more than sufficient to grasp Sinek’s argument and start adapting it to their particular situations.

As you’ll discover, Sinek believes that the differentiating role of leadership is to define and ultimately embed into an organization’s culture a clear sense of "why" the organization exists.

Sinek’s arguments and examples are sufficient to encourage me to make the why/mission question more explicit in my work and I’m already seeing it bear fruit in several settings. Sinek makes an effort to anchor his ideas in what we’ve been learning about the organization of the human brain. While he makes an interesting case, I think it’s a bit of a stretch and not essential to his argument.

What Sinek does do is give you both a framework and some plausible examples to support important conversations with organizations and leaders who are struggling to find their focus.

Two explanations for the near collapse of the financial system

The earliest blog posts were essentially pointers to ‘good stuff’ out there.  Here’s such a pointer from last fall from my former partners and still good friends Paul Carroll and Chunka Mui. They’ve found two very worthwhile reads that I otherwise would have missed.

Calvin TrillinFollowing up on yesterday’s post about John Cassidy’s New Yorker article, The Real Reason that Capitalism is so Crash-Prone, we want to highlight an alternative theory put forth by Calvin Trillin. Trillin’s recent NY Times op-ed starts with this intriguing line: If you really want to know why the financial system nearly collapsed in the fall of 2008, I can tell you in one simple sentence.

Calvin Trillin s Food for Thought
Paul Carroll and Chunka Mui
Tue, 20 Oct 2009 15:25:35 GMT

If you’re interested in the deep challenges of thinking strategically you would also do well to start paying attention to the work that Paul and Chunka are doing at The Devil’s Advocate Group. It’s a continuation of the work they did in creating Billion Dollar Lessons, which I reviewed here.

The Mantra of Entrenched Industries

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.)


New business models on Amazon’s infrastructure

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]

Go to the head of the distribution by explaining the tail

The Long Tail : Why the Future of Business Is Selling Less of More

Rating: 5 out of 5

Author: Chris Anderson

Year: 2006

Publisher: Hyperion

ISBN: 1401302378

The book length version of The Long Tail has now been published. Based on Chris Anderson’s seminal Wired article, the book expands and elaborates on the article’s thesis that one consequence of network economics is to reset the balance in markets between hits and the rest of the distribution. Anderson also began a blog on the Long Tail as he conducted his research, which has become its own resource on the topic for those interested in it.

In most markets, sales/popularity follows a power curve with a tiny handful of items, “the hits,” garnering attention and sales. In physical markets, hits dominate and drive management attention and thinking. In markets that bypass the barriers of the physical, such as Amazon or iTunes, the dominance of hits shrinks. Sales from the tail of the distribution, in aggregate, come to rival sales from the head.

Where the initial Wired article identifies and labels the phenomenon, the book strives to work out the implications. While I think it occasionally oversteps the evidence, on balance it succeeds in opening up the concept and its consequences. I confess I was dubious, although unsurprised, to see Anderson take his long tail lens to Wikipedia. Yet, in the end, his analysis did shed substantive new light on a phenomenon that is more often used as poster child or whipping boy depending on the writer’s agenda.

If you have products, services, or ideas that would benefit from finding their market, the Long Tail is a concept you had best understand and The Long Tail is your best starting point. I’m sure it will end up in the head of the sales distribution to Anderson’s well-earned benefit. Be smart and make the effort to actually read it and think through its application to your circumstances so that you might benefit as well. 


Tags: network-economics strategy

A compelling argument for organic business growth

Let My People Go Surfing : The Education of a Reluctant Businessman

Rating: 4 out of 5

Author: Yvon Chouinard

Year: 2005

Publisher: Penguin Press HC, The

ISBN: 1594200726

I got this book as a Christmas present from my brother-in-law. I probably wouldn’t have picked it up otherwise and that would have been unfortunate because this turned out to be among the best books I read last year. Chouinard was the founder of Patagonia and this book is a very readable and thought-provoking combination of memoir and reflection on business leadership and strategy.

Chouinard and Patagonia start with product quality and excellence and stay there instead of following the more typical path of trying to trade off excellence and growth. If you suspect, as I do, that we are likely to see a shift toward smaller and more nimble organizations, then you will want to put this on your reading list.

Tags: strategy