The Strength of Business Ecosystems

As introduced in a previous article, Business Ecosystems are the “dark matter” usually not considered while designing a winning Company Strategy.
The Company Centric vision - where the focus is on the Company “within a Market and against Competitors” – should be instead altered by that of “an Ecosystem where other Companies live, competing but also coexisting and – possibly – fitting together”.
The single Customer need which a Company would fulfill through its product/service requires to be seen as one of a Chain of Needs which are the reason for a Business Ecosystem to exist.
The two visions – Business Ecosystems and Chain of Needs – are complementary and cannot be faced with separately as they clearly affect each other.
Having such a Strategic paradigm in mind, which are the two key questions that require to be taken into account while designing an effective Strategy?

Which is the extent of the Chain of Needs that a Company contributes to satisfy?
Intuitively, a Chain of Needs with one need only is the typical approach where a Company competes in the Market trying to pursue a unique position, introducing barriers to incumbents and gaining/conserving as much competitive advantage as possible. One need only brings to the underlying image of a set of Companies which compete for a single Market resource and the behavior of such system is clearly explained by the Lotka-Volterra equation (you may refer to a previous article - Preys, Prayers and Market Behaviors - for an extended analysis). Questions are: does the “one need only” model really exist in a real Chain of Needs? Or is it the consequence of overlooking/underestimating the underlying complexity within a Market?

Given a Chain of Needs, which are the “adjacent possible” which might be perceived by Customers as more attractive?
The concept of adjacent possible is that of an Ecosystem which slightly differs from the one a Company is aiming to tackle. Crossing many “adjacent possible” Ecosystems might lead to a brand new Ecosystem able to satisfy a more appealing Chain of Needs. Truth is that a Business Ecosystem – as any living system – is always “evolving” towards new directions: small changes – accumulated over time – may lead to an abrupt change where Companies could appear completely out of focus, being now part of a Chain of Needs which is destined to extinction.

Strategy and Business Ecosystems

The classic foundations of Competitive Strategy are all focused the way a Company is organized and operates in a Market: specifically, what a Company does (and not does), the unique position the Company wants to pursue, how its activities fit together and self-reinforce within the Company.
This approach – absolutely consistent and full of good sense – gives the idea of a Company Centric approach, where the focus is on the Company “within a Market and against Competitors”.
Truth is that a Company works within an “ecosystem” where other Companies live, competing but also coexisting and – possibly – fitting together (and this way a Company behaves as any other living system).
This extended vision becomes extremely clear when thinking to the Customer needs, which are – in fact – not a single “need” but more “a set of needs which are necessary to fulfill a more articulated process”.

The Water Case
For instance, water is a commodity, meaning that it is widespread, is made of the same substance and is – de facto – not easy to be differentiated (the proof is that these days water differentiation is based on the saline content, that was a brilliant idea for five minutes, after which all the producers did the same reducing the differentiation to pure advertising presence and no more real content).
But if water is a commodity “per se”, the Customer set of needs might be richer. If you were a producer of water you might be willing to position your product as something to be served at high level restaurants. In this case, the bottle has to be beautiful; the logo clear, readable and easy to remember; the size appropriate to fit with any table. Maybe glasses might be sold either with the same brand; other producer’s forks and knives could be of an aesthetic which fits with the bottle; a special pouch to conserve water at an appropriate temperature could be part of the offering, possibly produced by others but with an exclusive design for that specific bottle of water; and so on…
If such an “ecosystem” of products, which are meant to recall each others, should establish on the Market, then for a competitor it might become difficult to enter into Top Restaurants Chains as it should not simply replace an object/need but also break a system that would surely be resilient to these attacks and for that reason more robust.
The Strategy focus – in this case – would reach a second level which is that of the Ecosystem, which is more subtle to be understood and governed. Successful Companies should focus at this level all the time.

A Theoretical Italian Airline Company

I started to be interested into Airline Companies – and the way they compete with each other – when I realized that most of the times to make a personal choice I was used to focus on a few key indicators only: flight price and flight schedule.
In fact there are some others “relevant” indicators that typically Airline Companies submit to customers in terms of Questionnaires: truth is that since these Key Performance Indicators are consistently used by most of the Companies, these finally benchmark with each other converging towards the same Market Arena.
When this phenomenon occurs, either a Company invests into Marketing and creates the so called “Marketing Obfuscation”, proposing packages apparently not comparable with each others, or moves towards the frontier of Operational Effectiveness trying to squeeze costs as much as possible.
The latter operation – when done from the very beginning – may lead towards a Market Segment called “low cost” (which most of the time is not even synonym of “low service”, once again showing that standard services are not strategically relevant).
The former operation allows instead some companies to survive for a longer period: when finally the Operational Costs vs. Revenue ratio no longer justifies the presence within the Market, only three are the most relevant alternative scenarios:

1. End of the Company
2. Buyout of the most relevant assets (e.g. for an Airline Company the slots to fly and the presence on key airports)
3. Merge with another Airline Company in good shape to absorb Operational Inefficiencies in the short term and invest into Operational Effectiveness in the long term

Alitalia – One Year Later
The latter two points, mixed together, were the recipe through which one year ago the former Alitalia Company was somehow re-branded and repositioned within the Airline Market. One year later, the relevant question is: did something really change in terms of Market Positioning?
When I made the simple exercise to access the web site and look for a flight, the perception I had – as a final Customer – was that nothing really happened: if I had not known from newspapers and media, I would have not be in the position to sense it.
Why is that? The key point is that the Company did not position itself in terms of Strategic Approach but just in terms of Operational Effectiveness, a move not particularly visible by the final Customer (apart, maybe, flight ticket prices which are now lower than before, since they do not have to cover a relevant debt exposure).
But was this the only way this NewCo could approach the Market starting from anew?

How a Theoretical Italian Airline Might Look Like
As said in one of the previous articles, it is always possible to work on a Theoretical Strategy, meaning a Strategy that should work fine as a model first and then proved through a specific – and as complex as necessary – Business Plan.
An interesting Theoretical Strategy for a Company focused on Italy would be just that of focusing on Italy. As a Country, Italy is known to be the place with the 60% of the World Art, as the “Bel Paese” where living well is a must, where cooking and eating are a pleasure, where Tourism is so various in terms of offering to fulfill any request.
Such a Country (that from the description I’m giving might sound to be a “Theoretical Country”, while it is not) joined together with an Airline Company whose mission and position would be that of bringing people in and help them enjoy their staying, might be an incredible barrier, allowing to create a new “Customer Questionnaire” tailored on a brand new Market Segment.

Just some quick hints:

• Strategic Alliance with Inland Transportation to bring the Customer in the most relevant places, creating a unique experience, with a great variety of choices
• Strategic Network to access the most relevant “events of the period” to make them accessible, reachable and appealing
• tailored – unique – way to map together the outcomes of such Strategic Alliances to allow a tourist to have a single – not repeatable – experience
• a way to show to foreigners how these unique experiences – in small scale – might happen also in their own Country, counting on a set of Business Processes and Skills which at this point would become unique into the Airline Market

Is there anyone out there brave enough to accept such a challenge?

Brian Arthur and the Technology Evolutions

Years ago, while reading Stuart Kauffman’s At Home in the Universe, an essay on Self Organization and Complexity, I got struck by the following sentence:

“The car comes in and drives the horse out. When the horse goes, so does the smithy, the saddler, the stable, the harness shop, buggies, and in your West, our goes the Pony Express. But once cars are around, it makes sense to expand the oil industry, build gas stations dotted over the countryside, and pave the roads. Once the roads are paved, people start driving all over creation, so motels make sense. What with the speed, traffic lights, traffic cops, traffic courts, and the quiet bribe to get off your parking ticket make their way into the economy and our behavior patterns.”

This statement – as the author explained – did not belong to Kauffman himself but to W. Brian Arthur, economist, and very well known inventor of the El Farol Bar problem, a landmark within the Game Theory models.

I found – and still find – this Arthur’s statement enlightening: Economy as an ecosystem where major forces may change forever the overall landscape.

It also has a direct impact on Competitive Strategy, specifically when it comes to the possibility of Changing the Rule of the Games, like when transistors were used instead of tubes or Nintendo WII introduced an innovative remote control, which dramatically changed the way to think about video games and related user experience (just to make a couple of examples).

Since then, for many years I have been waiting for Brian Arthur’s masterpiece, the book that would have represented a sort of new start on how collective economy should have been conceived.
After 15 years, the book in subject has been finally published and titled “The Nature of Technology – What it is and how it evolves”.

The Author spends an entire book to define what Technology is and how it evolves and co evolves: the book per se is fine, but after 15 years my expectations were pretty much different. Personally, I was hoping to see some light shed to some fundamental questions like:

— If a new technology comes is, how does it spread within a Market?
— How long does it survive before changing into something else?
— When an ecosystem is a closed circle (a virtuous circle), how much robust is it to external disturbance?

Well, if you expect this kind of questions – and possibly answers – just forget the book.
If you are interested in dissect the technology definition, you might be interested to have a look at it.
As per myself, I’ll give Brian Arthur another chance and wait for another 15 years…

Less is More - The Steve Job's Way

There is a natural trend within most of the Companies – product based – which is so widespread to be considered as a Law of Nature.
At the beginning of its life, a “Forerunner” Company intercepts some “unexpressed Customer needs” which become “the Product”.
If the Product is successful in terms of functionalities, market positioning and marketing, then it gets bundled to those customers which concur to define its own “Customer’s base”.
Incumbent competitors may try to get the same Customer’s base entering the market with a similar product: when this happens, then the typical reaction of the Forerunner is to add new functionalities, to make its own product more rich and valuable. Differentiation – as a process – is practically what always happens and contains the gene of the Forerunner’s death: if the product gets more complex (e.g. improves/evolves, as the saying is) the Customer’s base shifts along as well, finally reducing its size, compromising the sales revenue and offering competitors the chance to fill again those initial unexpressed needs that were the original motivation to have “the Product” in the Market.
If it is not yet too late, a further reaction of the Forerunner is then to consider the product as a commodity and differentiate in Services, possibly compensating the product’s loss of value. But again, this form of differentiation will change the Customer’s base for some extent, moving the whole Company in an unexplored land.

The Stars Analogy
It is easy to see that what happens to product based Companies recalls the life of Stars.
A Young Sun grows in time becoming a Red Giant and finally falls into one of two possible conclusions: a Black Hole or a somehow eternal Pulsar, a White Dwarf.
Many companies easily get to the Black Hole condition, sinking without any remedy.
Others, niche based and offering high value services, may continue as Pulsars are used to.
But is this analogy just an analogy (and then with a possible different “Finale”) or a mandatory path?

The Steve Job's Way
I recently read this book “Leander Kahney - Inside Steve’s Brain”, whose content is focused on the strategy followed by Apple Computers, mainly along the guidance of Steve Jobs.
The most surprising element of Steve’s strategy is that “less is more”.
Apple's strategy is not focused on creating products which finally grow in complexity under the weight of new functionalities. On converse, the mission while conceiving a new success consists to add functionalities which simplify the use of the product through the interaction with the other functionalities already in place: a continuous positive feedback mechanism where any functionality may exist only if of some help to the others.
Any nice functionality which does not fulfill this approach gets discarded. Old functionalities which may be simplified with a new approach are removed as well.
This view sounds to me quite unique on the Market and allows to read the Star Analogy under a new interesting light.
It is certainly true that for most of the Companies the Star Analogy is a mandatory path but this is not the result of a “Lex Naturalis”: it is just the result of a bad Strategy.

Search Engines and Stephen Wolfram

Nowadays we all have experience of what a search engine is and how much useful it is. What is sometimes not that clear is the Strategy model they are based upon.

The main service they provide is the search for documents based on keywords. They all provide such a service, meaning Google, Yahoo, and the like, but with some differences.
Yahoo – when Google stepped in – was at its fullest, implementing the concept of “portal”, that is search for documents plus news, e-commerce, finance news, anything that could be brought at the attention of the user through this communication vehicle.
On converse, Google started offering a search engine that could be quicker and more reliable while providing results. What could really hit of Google was that the search engine home page was really bare and the first question “how do they make money out of it ?” could sound quite natural.
Then – after some time – something changed. The increase of speed and the greater accuracy of Google search results brought more advertising in, users started to know that advertising on Google could work better and took advantage of it. Advertising brought at the Google management attention that the more the content is present in Google – emails, blogs (like this one), Earth maps, even documents written directly through a software as a service model given by Google for free and the more effective the advertising could be (and the higher the revenue could be as well).
So, if it is still true that a bare home page is what we get typing www.google.com, it is also true that a universe of services built by Google itself or acquired through merge and acquisition actions – like YouTube – with the main purpose to bring always more content in – and then feed ads investment – are now available to users.
The Strategy pursued by Google is then simply this: feed the contents, search for contents, ads on contents.
Any of these three key processes sustain/fit with each other, implementing one of the cornerstones of Competitive Strategy. Looking at it we might also think that if operational effectiveness should be already in place, then the barrier for possible newcomers could become higher and higher as the time goes by…

So what Stephen Wolfram has to do with this?
Stephen Wolfram is a scientist – someone who got the PhD in theoretical physics at the Caltech at the age of 20 – and has contributed so far with many publications, many important results and – as an entrepreneur – being the founder and CEO of Wolfram Research, developing the software platform Mathematica.
This month Stephen Wolfram is going to launch the WolframAlpha.com computational knowledge engine.
The terms “computational knowledge” puts in evidence Wolfram’s scientific background so that – practically – the questions “what is it about?” and yet “how does he make money out of it” again come up quite naturally.
Apparently, it is another bare page which enables the search for documents but – as we can understand from outside – with two important differences:

1. Searches are made in English natural language, not just typing keywords
2. Answers are not lists of documents but a structured solution to the question posed by the user

I haven’t seen it in action so far, but the consequences of such a service may be easily spotted: the more final users will get accustomed to receive human like answers – supported by content, graphs and the like – the more the content will be provided by those who want to advertise their own interests in a way they could emerge as the preferred answer (or part of it). One thing is to get easy ads that may – or may not – get your attention, another is to get a “solution” where the ads are not just a possibility but the answer.
This kind of service will not just take advantage of content already available through other search engines, but will definitely be feeded by a “new kind of content” – more presentable and structured – and this new Company, as the critical mass gets reached, will design new ways to self sustain the service interest.
The Strategy pursued by WolframAlpha will probably be this (a variant of Google’s): search for any content, assemble the solution, ads on solutions and feed the solutions.
This sort of dynamic Wikipedia is going to change the rules of the game and this is always the worst possible risk within the Market arena when playing the Game of Competition.
Whenever Wolfram should make this Company public, just keep an eye on it…

Theoretical Strategies

In the previous article, the term Strategy has been defined – and refined – three times. Let's now see how we can make an effective use of it. The first definition, pretty academic and clearly referred to Porter’s classical statement has been followed by two concrete definitions, which underlie a methodology while facing with Strategy analysis:

Strategy = Strategy Design and Analysis + Strategy Implementation (a.k.a. Business Plan)
&
Strategy = Strategy Map + Business Plan

The development of a Business Plan is an activity which requires – on average – a huge effort and is substantially the financial proof that a Strategy might work. Without this insight, the Strategy Design and Analysis – possibly through a Strategy Map – may be considered as a Theoretical Strategy.

Are Theoretical Strategies useful ?
But in this case, which is the usefulness of defining a Strategy without any Business Plan? The answer to this question is quite profound and might be summarized in the following two rules:

1. If a Theoretical Strategy works, then the Strategy obtained adding the Business Plan might work
2. If a Theoretical Strategy does not work, then the Strategy designed along with the associated Business Plan will not work

The feasibility of a Theoretical Strategy is a necessary but not sufficient condition to have a Strategy really work.
Therefore these two statements make a Theoretical Strategy an interesting and useful tool, since it allows to provide an insight for any possible Company acting within a Market, foretelling whether the Company is inherently destined to fail or has good chances to play its game and succeed.
It also allows to define Theoretical Strategies that might be adopted within a specific industry depending on how far the various Companies – that are part of the examined industry – are from the designed Strategy.
A Theoretical Strategy is not a best practice: best practices bring different Companies to behave similarly while the objective pursued by designing and adopting a Strategy consists on being different by competitors.

The “best practice” approach has been the Trojan Horse used by Consulting Companies for a couple of decades, claiming that a best practice may reduce risks: unfortunately this brings all Companies in a vertical Market to converge on the same arena, competing with the same offering in the same way. As a clear example you may have a look at the way Telco Companies are substantially interchangeable…