The Death of Competition: Leadership and Strategy in the Age of Business Ecosystems
By Susan Nathan
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About this ebook
The Death of Competition helps managers make sense of this chaos. Using biological ecology as a metaphor, it reveals how today's business environment parallels the natural world, and how, just like organisms in nature, companies must coexist and coevolve within their own business ecosystems. Through numerous examples, he explains the radically new cooperative/competitive relationships like the one forged between IBM and Microsoft and provides a comprehensive framework businesses can use to enhance their own collaborations with their customers, suppliers, investors and communities.
Susan Nathan
James F. Moore is one of the world's foremost advisors on leadership and strategy. His clients have included AT&T, Hewlett-Packard, Royal Dutch Shell, ABB Asea Brown Boveri, and other distinguished companies. His Harvard Business Review article, "Predators and Prey: A New Ecology of Competition," won the prestigious McKinsey Award for best article of 1993. Currently a visiting member of the faculty at the University of Virginia Darden Graduate School of Business, he is educated in both strategy and psychology. He earned his doctorate from Harvard in Human Development and conducted research on strategy, organizations, and technology at Stanford and Harvard Business Schools.
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The Death of Competition - Susan Nathan
Dedication
To Joanne, Graham, and Arthur
Contents
Dedication
Acknowledgments
Introduction
1. Why Businesses Fail
2. An Ecological Metaphor
3. Leading Business Ecosystems
4. The Stages of a Business Ecosystem
5. Coevolution and Cars: Stages in Action
6. Stage I: The Terrain of Opportunities
7. Stage II: The Revolution Spreads
8. Stage II Continued: Defending the Revolution
9. Stage III: The Red Queen Effect
10. Stage IV: Renewal or Death
11. The Paradox of Powerless Activism
Notes
Index
About the Author
Credits
Copyright
About the Publisher
Acknowledgments
This book benefited immensely from the generosity and able assistance of many fine people. I thank my wife, Joanne Cipolla Moore, for her love, wisdom, patience, and wit through the several years that I devoted to this project. In addition, my two sons Graham and Arthur have asked again and again, Daddy, when your book is finished, will you have more time to play?
Now I do. I would also like to convey my thanks to the rest of my extended family, including my parents, grandparents, brothers, aunts, uncles, cousins, in-laws, and outlaws.
I am especially grateful to those with whom I have had the opportunity to work closely over the years, and who have become members of my personal ecosystem. Hal Burlingame of AT&T has been a friend for many years, and deserves much of the credit for what I have learned about leadership and organizations. John Petrillo, also of AT&T, taught me a great deal about how to combine intellectual rigor and practical impact, and he has been a true inspiration. Don Schön of MIT has been a trusted mentor and colleague, constantly challenging me to stretch beyond my own limits. Lisa Fitzgibbons and Jane Bouffard have shared in the creation of GeoPartners Research, Inc., from the early days, contributing personal strategy, intellectual partnership, and an ongoing sense of comradeship and adventure. Walter Popper and Fleet Hill have offered steadying, guiding encouragement for many years. Sue Lowe Franklin has been a reliable friend, a treasured colleague, and an angel of serendipity. Michael Maccoby demonstrated to me that management advisers must be compassionate as well as passionate.
A number of executives helped to make this book happen by sponsoring related research and consulting and by sharing their insights. Jim Henson, creator of the Muppets, illustrated how to dance with change, and how to inspire others to join together to bring visions to life. Bill O’Brien of Starlight Telecommunications is one of the most promising entrepreneurs I know, a man who addresses multiple challenges with continuing creativity. I thank him for sharing his story. Frank Gill, Pat Gelsinger, and Craig Kinney of the Intel Corporation are leaders engaged in one of the most interesting and ambitious future-shaping initiatives in the world of business. All three were vital and valued contributors to the book. Lew Platt, Susan Burnett, Srinivas Sukumar, Claudia Davis, P. J. O’Brien, Kathy Hendrickson, Donna Ritchie, and Byron Anderson of Hewlett-Packard have been key supporters of these ideas. Their many insights are greatly appreciated.
Tom Cummings, Tony Warmsley, and Bob Campany of the Royal Dutch Shell Group provided a rich setting in which I could work with executives to transform scenarios into strategies. These efforts added immensely to the overall approach of this book. On a daily basis, Göran Lindahl, Lennart Haglöf, and Paul Kefalas are engaged in inventing the next ABB Asea Brown Boveri. I thank them for their contribution. Back in 1989, Scott McNealy, Eric Schmidt, Bill Joy, and Nancy Schoendorf of Sun Microsystems opened my eyes wide to the virtues of changing the game.
Much of what I have learned has emerged from working with many fine individuals at AT&T over the years. There are far too many to mention here, and there is too great a risk of omitting someone special to me. Let me then simply express my warm appreciation for all that each of you has contributed. There are two quiet heroes, however, whom I would like to single out and who have been important to my development: Henry Hoot
Gibson and Tapas Sen. Thanks ever so much.
On the academic front, Gregory Bateson, anthropologist and cybernetician, put forth seminal concepts that helped me recognize that economic, social, and biological systems have much in common. John Snow of the Episcopal Divinity School challenged me to bring these concepts to action. C. Roland Chris
Christensen and Harry Lasker, both of Harvard, Richard Pascale of Stanford, Chris and Dianne Argyris, Lee Geltman, Kathy Hearn, and Alan Robinson each taught me in their own special way to understand leadership and strategy as a mental and psychological process—and to work with executives to deepen their capabilities. Bo Ekman underscored the potential for dialogue about business and society. John Rosenblum and Jeane Leidke of the University of Virginia Darden School of Business have been valuable colleagues. They allowed me to see my ideas in the context of others across the field of management, and provided essential encouragement.
Jim Wetterer, a biologist who has done most of his work in affiliation with Harvard’s Museum of Comparative Zoology, afforded crucial assistance with ecological and evolutionary concepts, as well as with specific biological examples. My gratitude also to Edward O. Wilson of Harvard for bringing Jim and me together.
A number of management theorists have attempted to unite biology and business, including Bruce Henderson, Michael Rothschild, Richard Nelson, Sidney Winter, Glenn Carroll, Michael Hannan, John Freeman, and Charles Fombrun. However, I owe a special debt to W. Graham Astley, who, during my postdoc work in 1983, pointed out the parallels in ecological and business collapses, and supplied a link in my thinking that I have built on ever since.
Charles Fine of MIT’s International Motor Vehicle Program has been important in my understanding of the coevolution of the automobile business. For help in threading my way through the maze of health policy, I would like to thank Sam Levitt, formerly of the Harvard School of Public Health, Alain Entoven and Richard Scott of Stanford, Bo Saxberg of Johnson & Johnson, Norman Weinberg of Emerson Hospital, Don Harrington of AT&T, Kate Wolf formerly of Harvard Community Health Plan, as well as Ric Marlink of the Harvard AIDS Institute, and the irrepressible David Korkosz. Charles Firestone and the Aspen Institute furnished funding and excellent peer review for a paper on telecommunications and business evolution that proved seminal to this book. Stuart Brotman of Tufts, and Tony Oetinger of Harvard imparted useful insights into telecommunications policy. John Markoff and David Kirkpatrick have been valuable dialogue partners in the world of high technology. Arthur Cipolla Jr. has provided key insights.
My institutional base and second family has been GeoPartners Research, Inc., the strategy consulting and investment firm. Ashton Peery has ably led GeoPartners while I took time away to write this book, keeping our immersion in client challenges vigorously alive. Michelle Crews, as always, kept the community together. Michael Tattersall has taken the ideas and perfected methods to assist managers in developing corresponding strategies. Chris Mines has established business analysis capability to bring our perspective to bear on problems of investment assessment as well as strategic planning. I already mentioned Jane Bouffard and Lisa Fitzgibbons, my longtime collaborators. Abigail Christopher and Tom Hartley supplied vital research, intellectual dialog, and moral support for the book as did Patty Horan, Andrew Kaplan, Ken Bamberger, and Grace Tsai. Other professionals associated with GeoPartners who read and commented on the manuscript include Bob Beitcher and Richard Fishman as well as Ayis Antoniou, Ivar Bazzy, Scott Brady, Abigail Demopulos, Jeff Francer, Ben Goodman, David Halprin, David Hankin, Rebecca Kannam, Linda Levinson, Jim Levitt, and Murray Metcalfe. Nancy Goldberg provided friendship and great graphics. Brenda Jeglinski, Thea Moskat, Maureen Wall, and Mark Anders deserve special mention for their administrative contributions.
Thanks as well to all those others who took the time to convey their thoughts on the manuscript and have not already been mentioned, including Bob Allen, Jim Barksdale, Tom Eisenman, Greg Franklin, Sandy Fraser, Arie DeGeus, John Kelley, David Mellor, Lawrence Miao, Bob Mountain, R. Clay Mulford, Gil Roeder, Marion Smith, Caroline Vanderlip, Dick Wedemeyer, John Weimeister, Deborah Wolter, Gordon Wu, and our special friend, Amy Thaler.
An author is only as good as his or her editors. I’ve been blessed with a number of fine ones. They have taught me to write and, in so doing, to think. All of them, without exception, have also become friends. The late Nancy Jackson gave me my first exposure to real editing talent, and I still miss her. Marjorie Williams of Harvard Business School Press worked in my firm for two years, and she taught me a lot about grace in both writing and life. Nan Stone, the stimulating, rigorous, good-humored executive editor of the Harvard Business Review, was there for me early and often, all for the price of coffee and good cheer. Esther Dyson has been a wonderful support, demonstrating that character and boldness of both intellect and personal journey matter the most in writing and in life. Joel Kurtzman, executive editor of Strategy & Business, has proved a trustworthy guide and ally, not to mention a good friend, as I’ve grappled with this book and the challenges of big-time publishing. Karen Southwick of Upside has been a constant source of ideas and has quelled my panic on several occasions by coming through with emergency editing. Carol Franco of Harvard Business School Press believed in these ideas, and was key in helping me formulate the book in its early stages, and I will always be grateful to her.
Sonny Kleinfield provided editing throughout the book. I thank him for his grace, skill, good humor under pressure, and commitment to the project. Kirsten Sandberg, my editor at HarperBusiness, worked closely with me to bring the manuscript to completion. I appreciate her vast skill, faith, and ability to work around the clock with aplomb. Adrian Zackheim, vice president of HarperBusiness, has been the consummate supporter of the project, its driving conviction and force. Lisa Berkowitz of HarperCollins, and Beth and Leslie Grossman of CMA, did an excellent job in getting the word out about the book. Richard Pine, my agent, has been consistently effective, while also remaining charming and witty. Thanks very much to all of you.
Introduction
Growth, development, and business evolution are on our minds. Entrepreneurship is now the principal concern of businesses large and small. In a fast-moving economy, the status quo is clearly doomed and innovation wins.
Innovation usually requires that other organizations evolve their products and services in concert with yours. You must convince others to dream with you and work at your side. Embracing this challenge changes how you think about your company, your career, your community, and your competition. That’s why I chose the title The Death of Competition, even though I know that competition is intensifying. In a world of rapid innovation, head-to-head combat is simply not the most useful metaphor for considering your business. It tends to lock you into current patterns of operating and to perpetuate old business models rather than establishing new ones.
Innovation must be the focal point of your vision. In turn, you must enhance collaborations with your customers, suppliers, investors, and other allies. Intel Corporation, for example, is an intensely competitive company that makes microprocessor engines for powering personal computers. Vital to its success are relationships with hundreds of other firms, from giants like Hewlett-Packard and Compaq to tiny makers of electronic games.
Intel coevolves with these firms. That is, it seeks ways to work with this web of companies to upgrade everyone’s abilities. To maintain the value of its microprocessor-centered competencies and assets, Intel invests more than $100 million each year to help other companies develop software and hardware that use Intel technology. It encourages video conferencing, multimedia, and other customer applications requiring its most powerful microprocessors. Intel supports advances across the entire computer, communications, and media sector, while assuring the need for its own microprocessors.
Coevolution as a strategic concept is not just for high-tech companies, or for large ones. A magazine must coevolve with its advertisers, readers, contributors, and delivery systems. A restaurant must coevolve with groups of customers, neighboring businesses, and food suppliers. Regardless of your current position, you can unite with others to cultivate and shape the future—of your business, your community, and your life. This book provides ideas to sharpen your vision, engage others, and seize opportunities.
If you want a comprehensive framework for action, then read the first five chapters in sequence. They introduce a practical model for leading business evolution. If you want to focus on specific topics, then look for new ventures in chapter six; struggles for market leadership in chapters seven and eight; alliances among large companies and swarms of smaller ones in chapter nine; the renewal of threatened enterprises, chapter ten; and harmonizing personal and business values, chapter eleven.
The Death of Competition celebrates the birth of many new possibilities. May your enterprises take root and thrive.
1
Why Businesses Fail
Circling the big island of Hawaii in a small plane affords one of the most spectacular visual experiences imaginable. An isolated outcropping in the sea more than 2,000 miles from the nearest continent, Hawaii has as its center Mauna Kea, a magnificent extinct volcano that rises nearly 14,000 feet. Occasionally, its tip is sprinkled with snow. Closer to sea level, along the southeastern shore, glowing red, active volcanoes smolder. These boiling kettles periodically spew lava into the ocean, adding some small contributions to the landmass and generating immense steam clouds. Amid this varied terrain are dozens of distinct and glorious ecosystems, composed of communities of species, and ranging from alpine deserts to teeming rain forests.
For most people, Hawaii brings to mind images of towering hotels and pearl divers, not to mention pineapples and papaya. For me, Hawaii offers a picture of how some communities of businesses behave and evolve.
For most of its thirty-million-year history, Hawaii was a marvelously self-contained biological world. Plants and animals arrived by wind or wave, but few established themselves. The best scientific estimates are that a successful plant immigration occurred only once every 20,000 to 30,000 years. These few colonists gave rise to a wide diversity of new species. From some 270 colonizing flowering plants, more than 1,000 were created. From a few hundred insect settlers, around 10,000 came into being. From no more than 15 bird species, more than 70 developed.¹
Evolving in protected isolation, Hawaii’s flora and fauna are reminiscent of traditional industries: heavily protected by tariffs and regulations, old guard owners, and other well-entrenched interests. Inefficient technologies and business processes abound, similar to the unique life-forms that inhabit the Hawaiian islands.
Unlike Hawaii, however, traditional industries are not scenes of verdant splendor. More often, they exhibit intractable class divisions and crusty resistance to anything that threatens the established order. Yet the pattern of their establishment and the dynamics of their demise are strikingly similar.
Hawaii’s prolonged period of ecological equilibrium was snapped by the arrival of Polynesian voyagers more than 1,500 years ago. These settlers brought pigs, dogs, and a variety of new plants. Western influence commenced with James Cook’s landing in 1778. Subsequent voyages introduced ants, wasps, cats, rats, mosquitoes, and an immense array of plants. These invaders wrought havoc in paradise. More than 40 percent of the indigenous Hawaiian bird species have become extinct since human settlement began. More recently, golf courses and housing developments have radically transformed many local ecosystems.²
In much the same way, new technologies, business processes, and organizational life-forms invade all traditional businesses. They are borne on the winds of global capital flows and managerial migrations. They cross bridges of deregulation. They are encouraged by government policies that foster economic development. A vast tangle of skills and processes is being rendered obsolete.
As a management theorist of sorts, I realize the need and the benefits of these changes. But I also acknowledge the hurt and confusion that innumerable individuals feel as their businesses and livelihoods come under intense pressure. For many people, economic and technological progress constitutes the destruction of their Hawaiian paradise.
The Death of Competition
Shift now from beaches to traffic, from sand to carpet, from bright Hawaiian shirts to gray wool suits. Every day in my work, I observe companies that are drastically affected by the changing ecology of business competition and that seek ways to understand and shape the transformations engulfing them. I tell them about the death of competition.
Not that competition is vanishing. In fact it is intensifying. But competition as most of us have routinely thought of it is dead—and any business manager who doesn’t recognize this is threatened. Let me explain. The traditional way to think about competition is in terms of offers and markets. Your product or service goes up against that of your competitor, and one wins. You improve your product by listening to customers, and by investing in the processes that create it.
The problem with this point of view is that it ignores the context—the environment—within which the business lies, and it ignores the need for coevolution with others in that environment, a process that involves cooperation as well as conflict. Even excellent businesses can be destroyed by the conditions around them. They are like species in Hawaii. Through no fault of their own, they find themselves facing extinction because the ecosystem they call home is itself imploding. A good restaurant in a failing neighborhood is likely to die. A first-rate supplier to a collapsing retail chain—a Bradlees, Caldor, or Kmart—had better watch out.
Sometimes the ecosystem as a whole is more or less robust, but the particular niche a business occupies is challenged by newly arriving species. The problem becomes that there are so many similar businesses in a market that none can make a reasonable profit. Airlines, steel companies, long-distance telephone companies, and deregulated electric utilities all face this dilemma. Their contributions have become commodities traded mainly on price. One of the most significant side effects of electronic airline reservation systems has been to enable customers to do comparative shopping. This newly efficient market has been a major factor in driving down prices and margins.
The continued expansion of electronic shopping and the Internet will bring commoditylike trading into markets ranging from groceries to automobiles. While such intense price competition is good for consumers in the short run, the threat of razor-thin margins makes it difficult for companies to justify investing in next generation offers—and can stifle innovation.
Neither of these types of business problems—the collapse of the economic fabric around your business or the invasion of your territory by too many similar contributors—is recognized by the conventional view of competition. In my consulting practice, I have seen instance after instance of well-meaning, thoughtful, hardworking people whose businesses were wrecked by these effects. This despite having good products and services, produced by well-run processes.
By contrast, the executives who lead the world’s largest, most sophisticated businesses know a great deal about these issues. In many instances, a large portion of their strategic planning budgets is spent on figuring out how to turn around businesses that are being commoditized by aggressive new competitors, often located in lands halfway around the globe. And in more cases than they care to admit, they know that their products and services face limited lives, because the economic and social conditions to which they contribute are becoming obsolete.
I know a number of executives who find themselves stunningly helpless in the face of these challenges. Their models of management, based on traditional product and service competition and process improvement, are necessary but not sufficient. One executive, who oversees a multibillion-dollar enterprise, told me, I sometimes dream that I’m driving along in my car, and when I go to make a turn, my steering wheel won’t grab. I turn the wheel, but the car just keeps going straight. In this nightmare, I look more closely at the steering wheel, and discover it is one of those plastic wheels for babies. It looks more or less real, but does nothing.
One response is downsizing. With great resolve and a degree of luck, a firm can be cut down to size in advance of collapsing markets. People can be put on the streets. Assets can be written off. Costs can be cut before ruthless price competition causes revenues to fall. This tactic works for a while, but ultimately ruins the business. Morale sinks. Economies of scale are lost. Costs cannot drop forever. Margins suffer. Investors and other stakeholders withdraw. The last person out shuts off the lights.
Another response is market creation. Many executives rightly recognize that innovation is the only way to move forward. They search out growing economic sectors and promising new approaches—the Internet, biotechnology and health care, new markets like those in Asia. Here they face a different concern, one also not foreseen by the traditional concept of competition: Market creation is actually a form of applied economic development. It requires intensive cooperation among diverse contributors to realize a workable economic future. It takes generating shared visions, forming alliances, negotiating deals, and managing complex relationships. Few have been schooled in these arts, nor are they anticipated by most corporate planning and budgeting systems or supported by conventional organizational structures and job descriptions. So, in many cases, the new market creation initiative stumbles along. The originating executives should be commended for aiming at new business development, but their success rate is likely to be disappointing.
A Perspective from Which to Lead Business Evolution
The rate of economic change is going to continue to be high. Obsolescence and commoditization will not abate. What we need are better tools for business development and market creation. This book provides a start. Its intended audience includes entrepreneurs and corporate managers, as well as interested citizens who are concerned about the economic well-being of our society. It is intended to be a book of hope, despite its title. Beyond the death of competition lies the advent of something new and better. There are managers and companies who are figuring out how to prosper in the new economy, and who have much to teach us.
In the new world, product and service competition remains an important aspect 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.
Let me illustrate what I mean. ABB Asea Brown Boveri is a worldwide electrical engineering company that provides power generation technology, electricity transmission and distribution systems, and a wide variety of electrically powered industrial equipment.³ Headquartered in Zurich, it is jointly held by Swedish and Swiss owners and does business in 140 countries. For many years, it has been widely recognized as a source of innovative strategy-making and leadership.
In 1994, Paul Kefalas became CEO of ABB Canada, a region suffering from stagnant sales. The classic approach to reinvigo-rating the region would have been to concentrate on improving products and processes—that is, to ask what new offers might really catch on and what could be done to produce them efficiently and effectively? These questions direct attention to the present, and to oneself. Kefalas did the opposite. He asked his organization to look outward to the business environment it hoped to serve, and forward to the future. What he wondered was, Who are the major shapers of the future in this region? What visions and strategies do they have? By gleaning insights into the influences and interests shaping industry in Canada, he was able to set up learning teams to work with the movers and shakers to find ways that ABB could contribute to their success.
Leading companies were approached and asked to share their strategies with ABB. Prospects were selected because of their importance in influencing the future, regardless of whether they happened to be ABB customers. When a company was willing, ABB assembled a small group of experts from across ABB’s units and had them work with the company’s representatives to conceive creative ways to help the company realize its dreams. In one case, a large mining concern was struggling to reduce production costs and create safer working conditions. ABB is now collaborating with this firm to produce a system of mining robots, controlled by technicians stationed in comfortable offices remote from the mine, that can handle many of the most perilous and unpleasant tasks. This firm had not been an ABB client, nor was it being targeted by conventional product-oriented sales efforts.
Doing business this way has produced dramatic results for ABB Canada. More than a dozen major customer-partnering arrangements, including several joint ventures, were established by the end of 1995. Sales have turned strongly upward. Because most of the new sales are in the context of long-term partnering agreements, revenues can be expected to continue to increase.
As we will see throughout this book, close attention to one’s economic environment, and to those influencing its evolution, is essential to prosperity in the new economy. Indeed, the corporate strategy for ABB Canada reads, ABB contributes to the success of its customers by developing mutually beneficial long-term relationships.
Not a word about specific technologies or offers or markets. This strategy stresses that, in an economy of constant change, what you do is not as important as how your capabilities relate to what others are doing. Strategy-making involves having an awareness of the big picture and finding ways to play a role in it.
Successful business strategy helps us coevolve with others to create more attractive futures. Along this line, Kefalas tells an interesting story. In 1995, ABB moved its Canadian headquarters to a new building on the outskirts of Montreal, near the airport. Down this stretch of highway lie other similar buildings, housing multinational firms like Canon, Motorola, and Sun Microsystems. In early 1995, an entrepreneur bought a flagging fast-food restaurant on this same strip. After carefully studying the area, the new owner concluded that what this microeconomy of corporate headquarters really needed was not more fast food but a high quality restaurant catering to executives. Within months, the resulting restaurant was a runaway success, largely because it filled a need. Put another way, it nicely complemented the other components of the local economic system—the real estate development activities, the office buildings, the airport, and the executives working in the area.
For ABB Canada and the restaurant, competitive advantage stems principally from their cooperative, coevolving relationships with a network of other contributors to the