The last twelve months

Last year, to the day, I wrote a post on my concerns on OpenStack and stated that in my opinion the next twelve months were critical.

Well, that twelve months is up. 

I don't see a benevolent dictator or a flourishing market of competitive providers with easy switching between them at scale. I do see a collective prisoner dilemma, a refocus on private cloud (a future niche) and capitulation in the public space with Amazon and Google gaining speed.

Back in October '12, I said

"I would like to see Open Stack succeed, there are many talented people (and friends involved). But I have my doubts because I feel it has wasted an opportunity, it has been very poorly led in my view despite its success in marketing."

Well, my view is that this project is not going to create the competitive public market we all hoped for back in 2010. There are outside chances it will be relevant due to the work of +Rick Clark, +Randy Bias and others but overall despite the claims of Mirantis that OpenStack will dominant everything and +Ben Kepes that is has thrown of its "dead duck" moniker - I don't buy it.

I'm fairly convinced that a number of companies will make a decent exit price around OpenStack, that a number of VMware based virtual data centres will come under pressure or be replaced by OpenStack . I'm sure some will claim that as success.

However, the grand idea was for a a future of public providers competing in a market with semantic interoperability based around an open source technology stack. Making such a grand idea happen needed more than just open source but good strategic play from co-option to massive scale investment. That hasn't happened.

Instead, what we're likely to see is consolidation of a market to Google, AWS and a few others. Fortunately, there will be a slow burn model around CloudStack / Eucalyptus and some groups within OpenStack to create a future more competitive market around open source but this will take considerable time. We're back into the old slog that open source found itself in the server market.

It didn't have to be this way.

I've got high hopes for Cloud Foundry to create a competitive market at the platform space around open source. I would wish that companies rather than trying to introduce alternative approaches which blur the market in order to support their dying past business models would just adopt. I expect them to however argue that differentiation on a commodity is key and the same old nonsense be repeated again. 

I would strongly urge people to get behind Cloud Foundry and ignore the rest. No thank you Mirantis, OpenStack has messed up one vision of competitive markets - I'd rather not see it mess up another.

Questions on how?

Twitter is an incredibly useful medium for numerous reasons but one of the things I like is that every now and then you're asked great questions. One of these for me was from Florian Otel on the use of incrementalism and the "art of muddling through".

To give a bit of background, when I talk about strategy it's all about the where (to attack) and the why (a relative statement of why here over there). Tactical choices are all about how you go about something and finally the what and when is simply implementation and operational planning. 

Most strategy documents I read have a tyranny of how, what and when and very little of the why because the where is almost always absent. I know they're called strategy documents but I usually refer to them as tactical and implementations plan with no strategy. On the most part, they're fairly hopeless.

Now in order to plan out a strategy you first need to map the landscape in order to determine where you might attack. For the last eight years I've happened to use a technique called mapping to do this though other techniques exist.

In figure 1, I've mapped out a hypothetical value chain of an organisation which is built from components (including activities, practices and data) over the state of evolution of the components. I will use this map to identify where I might attack and then determine why one route over another. 

Figure 1 - A Map

I'm not going to go through that exercise for now, since the above is a hypothetical example but instead I'll assume I've done the work and determined that the best option for strategic gameplay is three routes described in figure 2.

Figure 2 - The Strategic Play

The three routes are :

Step A) : A particular activity we consume is currently provided custom built and in-house but it is widespread and well defined enough to be suitable for provision by a product as evidenced by existing products on the market. I will therefore move away from our custom built example to using a more standard product with a view of minimising customisations. 

• How to go about it? I'd examine competing products for fit, check to ensure that data is extractable (i.e open data formats etc), determine standard market KPIs for implementation and probably implement with a waterfall method. A key part of this is ensuring that data is extractable because I know at a later stage the activity will evolve to a utility and for reasons of past business model it is unlikely that my vendor will provide the utility, so I'll have to move again. I'd therefore concentrate on what the cost of exit will be, aim to minimise it and certainly factor it into any purchasing decision.

Step B) : A particular activity we consume is provided as a product but it's widespread and well defined and suitable for utility provision. The technology exists to achieve this, I know customers are dissatisfied with the product cost but no utility provider exists. This is an opportunity for me. 

• How to go about it? If I have the technical capabilities then I'll aim to provide a utility service to the market based upon our experience of the product. We will focus on providing the utility through APIs and building up an ecosystem with an ILC model. Ecosystems are valuable future sensing engines if used correctly. I know existing vendors will have inertia due to past business models, this is beneficial to me. I know existing customers will have inertia due to past practices, changes in relationship (social capital), knowledge capital, prior investment along with concerns over lock-in. I'd look to counter by adopting an open approach (e.g. source). Since the activity is well known and defined, my focus is on industrialisation and hence I'd use a structured approached designed to remove deviation e.g. six sigma / ITIL.

Step C) : We've identified a concept for an entirely new activity which we believe has potential of being a differential.

• How to go about it? This novel act is uncharted by nature (being novel and new) and hence highly uncertain. It's a gamble but might provide us with a differential for our customers. I'd aim to minimise any costs by ensuring that underlying components consume commodity or utility services where possible. The approach we'd have to take is incremental i.e. we're going to be exploring our way and change is a necessity. I'd focus development on in-house with use of agile techniques (which include Test Driven Development). TDD is essential because though it incurs some overhead it reduces the overall marginal cost of change and I'm expecting lots of change. The approach will be one of minimal viable offering, quickly gathering feedback and "muddling through". We don't know what we will end up building, we'll have to find our way.

Now,  as per normal practice I'd break activities into small components with small teams (think FIST, Two Pizza etc) in order to focus on the right approaches, create the right cultural fit for that activity and use the right sort of people (pioneers, settler, town planners) but this is getting more into operational details. The point of the above is to show that once you've determined where and why, then the how varies accordingly. All three steps would probably occur simultaneously. Hence at the same time an organisation might embark on efficiency in one area, building of a utility in another and creation of entirely new activity with each using different approaches and methods.

Try doing that with one size fits all methods like "we're an agile shop", "we're a six sigma shop" etc etc. To answer Florian's question - incrementalism is a tactical approach (a how) to a specific type of problem. 

Now, if the above doesn't make sense to you, well I've been doing this for eight years and so it's easy for me to gloss over things and take them as granted. I will at some point write another beginner's series on this, just not now.

Four Basic Smackdowns on Economic Competition

Tl;dr Competitive gameplay requires an understanding of the landscape, the rules and experience in playing the game - there are no shortcuts.

The Problem

I read an awful lot at the moment on Entrepreneurship and I have to say that most suffers from a one size fits all mentality. It's the same issue with statements like culture eats strategy for breakfast  but usually expressed in terms of the top ten secrets of being a successful entrepreneur. Alas competition isn't that simple and the methods you use have to adapt with what you're doing. To demonstrate this I thought I'd cover some of the basic games of competition.

First, let us start with the simple premise that competition in business is like playing a game of chess. In order to play the game then you have to understand the board (the landscape), the rules of the game and then learn how to play. Many companies I met have no clear way of understanding the board let alone anything else. Hence everything seems random and one size fits all - either agile versus six sigma, push vs pull, network vs hierarchical, unstructured vs structured - tend to rule and we're bombarded with over simplifications from culture to disruptive innovation. 

Mapping

Contrary to popular belief there are ways of viewing the board. A technique that I've used successfully for the last eight years is mapping and I've given an example of a map from an extremely large heavy engineering project in figure 1.

Figure 1 - Mapping a heavy engineering project.

The map uses an axis of value chain from the visible needs of customers to the more invisible components needed to meet those needs versus an axis of evolution i.e. how evolved those components are. Once you have a map, there are some general rules of the game that need to be understood.

Basic Rules

• Organisations consist of many value chains

• Value chains consist of many components: Some of these components meet visible user needs and others that are invisible but enable that need to be met.

• Components include activities, practices and data.

• Everything evolves: All components evolve due to competition.

• Characteristics Change: As components evolve their characteristics change. For example the uncharted are rare, chaotic, constantly changing, deviating from what existed before, uncertain and a source of differential. The same component as it evolves becomes more industrialised and its characteristics are common, often provided through standard and what appear to be "linear" interfaces, it is known, measurable, deviation is undesirable and it becomes a cost of doing business.

• No one size: Since a value chain is likely to consist of many components at different stages of evolution with polar opposite characteristics (uncharted versus industrialised) then no one single management method is applicable across the entire value chain.  For any complex system it becomes important to break the system down into smaller components and apply appropriate methods i.e. it shouldn't be a case of agile versus six sigma but agile plus six sigma with each being appropriately used.

• Genesis begets evolution begets genesis: as any component evolves to a more industrialised form then this can allow for the rapid development of novel higher order systems, as in higher up the value chain.  For example, standard mechanical components (such as nuts and bolts) enabled the rapid development of machinery and engines. This is an effect known as componentisation.

• Efficiency, Agility and Wealth: evolution increases efficiency in provision but also through componentisation the rapid development and agility in building higher order systems. These higher order systems are also new sources of future wealth e.g. utility electricity enabled the creation of television and the media industry. 

• Choice is an illusion: The combined benefits of efficiency, agility and new sources of economic wealth are powerful competitive forces and hence organisations are forced to adapt as components evolve.  This is known as the Red Queen Effect.

• Co-evolution: the evolution of a component can force other components to co-evolve. For example, the evolution of computing infrastructure from product to utility has forced co-evolution of architectural practices from scale-up and n+1 to  distributed systems and design for failure.

• Inertia: Both consumers and vendors have inertia to change due to past success, existing business models, changes in capital whether knowledge (i.e. new skillsets needed due to co-evolved practices), social (i.e. changing vendor relationships), financial (i.e. past investment) or political (i.e. past choices). Inertia whilst manageable can often be fatal for an organisation by limiting adaptation when adaptation is actually a necessity.

• The speed of change is deceptive: Diffusion of any change has an exponential element but we are often lulled into a view of more linear change of evolutionary state because one “product” tends to be replaced by another “product”.  Hence we have the impression of a relatively long and linear process of improving computing servers (i.e. products). The shift from one evolutionary state to another e.g. product to utility has the same exponential element as the Red Queen creates a network effect of increasing pressure as more competitors adapt to it. In these circumstances our inertia to change due to co-evolving practices which is normally reflected in the “legacy question” combined with our past belief of more linear change (due to the long period of time that products have existed) tends to reinforce a belief that change will be gradual. It won't. This period of rapid but surprising change we call a Punctuated Equilibrium.

• The economy has states: The interplay between evolution and inertia creates different economics states that occur at both a macro and micro economic level. These include a relatively peaceful state of relative competition between product vendors where sustaining changes tends to exceed disruptive followed by a war state, a fight for survival caused by the evolution of product to utility. The war state is characterised by new forms of co-evolved practice, rapid and deceptive speed of change, new entrants and disruption of past companies stuck behind inertia barriers. This is then overlapped with a state of wonder where we see rapid development of new higher order systems, increased in new forms of data and flows of capital from past industry to these new wealth generating industries.

• Organisations evolve: The interplay between co-evolved practices (caused by evolution) and the changing economic states (i.e. peace to war) causing the disruption of past vendors tends to create new forms of organisation e.g. Fordism, Web 2.0. These organisations tend to demonstrate all the co-evolved practices and often have new methods of strategic gameplay.

• The map can be manipulated:  The landscape can be altered by changing rates of competition, use of open approaches (whether open source, open data or open hardware) or by deliberately driving a component to a more utility form. There are many strategic reasons for doing this from creating a new opportunity, undermining a competitors barrier to entry, building an ecosystem and running an ILC model, playing a tower and moat game to playing a standardisation game. 

Four Basic Smackdowns

Ok, now we have an idea of how to map and the basic rules of the game we can talk about four basic smackdowns of competition - i.e. how you fight.

Building the new
The first play is to build something that is actually novel and new i.e. the genesis of an activity such as the first ever telephone, first ever computer, first ever television. By nature this is highly uncertain, you don't know what customers will actually want as the act is new. 

You need to be adaptive, take a minimal viable approach and quickly create feedback loops with customers. You're in a fight to establish the new thing as being relevant and useful often in the face of bewilderment. Inherently this whole approach is uncertain, you just don't know whether it will succeed and whether people will want it. 

Building the novel and new can be done at any time, though there are certain times when the cost of reduction of underlying components makes certain novel acts possible.  The first televisions depended upon home electricity supply to be economically viable. This is why whenever we have an economic state of war caused by commoditisation (Custom made nuts and to bolts to standard nuts and bolts with Maudslay Screw cutting lathe, Electricity from own generators to utility services with Westinghouse and Tesla, Computing from products to utility services with Cloud)  then we see an explosion of higher order novel systems - a state of wonder. 

However being economically viable doesn't mean the act will succeed. Because the act is uncertain then you just don't know if it will work, you have to experiment, to fail fast and to gamble. Get used to it and work on this basis.

Substituting one product with another product
A second play is to go after an established product market with a view of substituting it for your product. I'm not going to talk about the more general product versus product competition of improving features as this is normal fare but instead the replacement of one category with another e.g. one format of hard drive with another format. 

To do this you have to find a property of the value chain which is not catered for and which will become important - e.g. size of hard drive, power consumption, provision of an application store. This novel property is uncertain and to establish it you'll almost always need to find an underserved market due to inertia within existing markets (i.e. customers and vendors are used to the other format). This is the classic case of disruptive innovation, using an uncertain property often developed in an alternative market to improve the product to a point that you can assault the main market where the vendors will be suffering from inertia due to existing business models.  

The uncertain nature of the property is both friend and foe. It protects you against incumbents because they'll tend to dismiss it but at the same time you don't know if it'll work. Hence this is another gamble but when it works you can seriously damage incumbents and take a chunk of the future e.g. smart phones vs mobile phones or ARM vs Intel.

Substituting one product with a utility
A third play is to go after an established product which is widespread and fairly well defined and create a utility service for it. This has all the benefits of a product to product substitution with existing vendors having inertia however it has several advantages over the former. First, it's not uncertain but instead a known process of evolution not reliant upon creating novel properties, hence it's far less of a gamble. Of course, this means it's more defendable against but since most companies have poor situational awareness of the landscape (i.e. they can't view the board) then they're not likely to defend against your move. 

Secondly, you can use ecosystem effects through models like ILC along with a host of other tactical plays such as using open source, open APIs, open data to enhance your position. This is the easiest play to make and the one most likely to give you success however the opportunity to make such a play depends upon the act being suitable and so you have to wait for the right timing. 

This is what has been going on with cloud and why I talked at OSCON in 2009 on how it was the perfect time to disrupt great giants. It might feel like you're David vs Goliath but just remember Goliath is looking the wrong way and can't see you coming.  You don't have to worry about their size, all they will do is help validate your market.  Naturally, the easy pickings have already been taken though some opportunity still exists but the window is closing. 

Examples of this include Amazon vs Dell, where Dell has now had the good sense to realise it has lost the public computing infrastructure battle for an activity (computer infrastructure) which it once was a dominant player. Knowing when to retreat is also an important part of the game.

Don't worry if you've missed the boat a new window of opportunity will open up around 2020 related to 3D printing / Printed Electronics and commoditisation of the manufacturing industry.

Substituting one utility with a utility
A fourth play which is incredibly hard to make work is to substitute one utility with another. Once a utility gets established and inertia sets in due to a large ecosystem built on top of the component provided then it's difficult to shake it. It becomes very hard if the vendor behind this is playing a good ecosystem game. Taking this on is less David vs Goliath and more like David vs Goliath and an Army of His Brothers all pointing straight at David with Gatling guns. 

To stand a chance, you'll have to counteract the impact of their ecosystem. Now remember, this isn't the same as a product ecosystem where information flows are slow (i.e. marketing surveys) but one which information flows are based upon consumption data and are almost real time. This is the toughest of all battles and the best plays are around co-option rather than substitution and huge bets i.e. think billions per year if you're taking on Amazon. Oh, and you'll need a master kung fu black belt oracle of strategy to make it happen and before you think you can just hire one, the number of people that I know who can pull off this trick are very few. They currently work for Amazon, Google, Microsoft, Dell, UK Gov, Cambridge University, Canoncial and seven other companies. None of them are consultants, you've almost certainly never heard of them and most of them are very wealthy. Good luck in trying to find one.

Beyond the Smackdowns

Now there's a myriad of options and gameplay beyond the four basic smackdowns from the use of resource constraints against opponents, weakening focus by reducing barriers to entry in an opponents business models, misdirection, tower and moat play, use of alliances, organisational structure and cultural fit, to an endless barrage of dark arts. Remember I've been doing this for eight years and it would take a long time to write this all down.

However, the point I want to mention is that even with the four basic smackdowns the approaches you need, the type of information available, how you focus, where you attack and when you can do this vary from a high risk gamble (building the new) to a low risk but time dependent gamble (product to utility substitution).

The idea that there are ten basic secrets applicable to all is like the idea there are ten basic secrets of playing chess. Beyond the trivial i.e. understand the board, know the rules, learn to play the game then the moves you make depend upon the situation at hand. Certainly you can learn basic moves which are applicable to certain situations but they are not applicable to all.

Culture eats strategy for breakfast ... sometimes.

Tl;dr whilst culture often matters more than strategic gameplay, this isn't true in all circumstances.

I often hear the line that culture eats strategy for breakfast but do we really know this? What we do know is that activities evolve through a common path from genesis to custom built examples to products with rental services and onto commodity with utility services. What we also know is the style of competition changes (from wonder to peace to war) as things evolve and that companies have inertia to change due to many factors from past success to changing practices to changes in capital (physical, financial, social and knowledge).

Now when faced with change, to use the concepts of John Boyd, we first have to observe and orient around the change then make a decision and act upon it. The former is about situational awareness, the latter is about culture. But herein lies a problem because not all change is the same.

From figure 1, the genesis of an act is uncertain as by its very nature it is novel and new. The best we can hope to say is not what will be created but when something novel might appear as a result of componentisation effects (i.e. utility provision of computing is likely to create an explosion of new activities which consume computing). Product to product substitution is also uncertain caused by a change in the value network - we have no way of knowing that the iPhone was going to be a success. But evolution of an activity is not uncertain i.e. the shift from product to utility is known. It will happen, and our only issue is when and this can be determined by looking for weak signals (suitability, technology exists, concept exists, willingness of customers to adapt).

Figure 1 - Changes of predictability with evolution

When faced with a product to product substitution then cultural aspects tend to dominate over situational awareness as an indicator of whether a company can take advantage of the change or even survive. Situational awareness doesn't help us because the reasons for the change (i.e. a delta in the value network) are uncertain and unpredictable. Those companies at threat of disruption by such a substitution will have inertia due to past success and unfortunately for them this is only reinforced by the uncertain nature of the change with concerns over cannibalisation and disintermediation of existing models. Hence they will often react late due to inertia or even deny the change is occurring and when they finally accept it, they need to adapt fast. The ability to decide and act in response to such a change in a short period of time depends upon their culture which in many cases resists the change. Doom awaits for those whose culture cannot respond.

Examples of this include Nokida and RIM and whilst many mis-steps were made such as not co-opting Android, ultimately they didn't know what was going to happen. Whilst their respective CEOs have been lambasted in the popular press, the disruption was difficult to predict and hence protect against. Culture was the key defence mechanism here in order to react and no amount of situational awareness or chess playing would prevent them being in this position. They were caught out by an uncertain change they couldn't respond to. Alas, that happens.

However, not all change is uncertain and unpredictable. For example, the cloud space which represents a shift from product to utility is highly predictable and we've even had have forty years prior notice that this would happen. In this case, situational awareness of a predictable change is critical to prevent a company continuing to build the wrong things. Inertia to change naturally exists but there is plenty of time to overcome this. Disruption should not happen because of the predictable nature. However as many former giants in the hardware world are finding out, disruption still occurs. But Why?

Well, the reason for disruption is spelt out in figure 2. The cause is not cultural but purely down to poor situational awareness.  In this case, those CEOs whose primary job was to see the highly visible storm heading their way and move the company out of its path were snoozing at the wheel. These companies will fail because their CEOs couldn't see the predictable storm, they had atrocious situational awareness and were basically playing a game of chess by not looking at the board. You can't blame their company's culture for that failing.

Figure 2 - Culture and Situational Awareness

The point of this post is simple. For certain stages of evolution then culture is critical but for others situational awareness (i.e. strategic play) matters most. Now any organisation is a mass of activities at different stages of evolution hence some parts are predictable whilst others are not. You hence always need to strive towards good chess play and an adaptive culture.

As Techcrunch pointed out - "While We’re Trying To Follow His Game Of Checkers, Jeff Bezos Is Playing Chess" - some people are better chess players.  But the brutal truth is not that competitor CEOs are daft or foolish but instead they simply cannot see the board they're playing on. If you've ever played chess, you'll soon discover that not looking at the board is a quick way to lose.

Many are playing a game of blind chess and are unaware that whilst some change is uncertain, a lot of change is highly predictable.  It is fair to say that some companies are being disrupted because their executive teams don't know how to play the game and manage predictable change. However, in other cases (like RIM, Nokia) then cultural aspects mattered more because no amount of situational awareness can prepare you for an uncertain change. 

When it comes to business, understanding the landscape, knowing the rules of the game and what is and what isn't predictable is a key part of playing the game and why I've used mapping for the last eight years. Bland statements like culture eats strategy for breakfast fail to appreciate the rich complexity of competition. Sometimes culture matters more, other times strategic gameplay and situational awareness are critical.  In the latter circumstances, no amount of the right type of culture will protect you from a better chess player. Of course, even when culture is supreme then you've still got to get the right balance of cultures within your organisation.

What? You think there's only one that matters?