Monday, March 16, 2015

Continuous and Sustainable Competitive Advantage comes from Managing the Middle not the Ends

The mechanics of biological and economic systems are near identical because they're driven by the same force - competition. The terms we use to describe economic systems from evolution, punctuated equilibriums, ecosystems, red queen, cell based structures, co-evolution, componentisation, adaptive renewal cycle and so forth, all have their origins in biology. 

I'm going to use a few of these to argue why the future of continuous and sustainable competitive advantage comes from the middle not the ends of evolution. If you are completely new to Wardley mapping then I'd suggest starting here.

First, we need to understand evolution. Evolution is not the same as diffusion. It describes how something evolves as opposed to how a particular instance of something diffuses (see Everett Rogers) in an ecosystem. 

Evolution is not predictable over time but it occurs over time. The best model I know of describing evolution is given in figure 1. It's based upon a pattern that was described in 2004 and primary research to determine why that pattern occurred between 2006 and 2007.

Figure 1 - Specific form of Evolution

It's the combination of supply and demand competition that causes things to evolve along a standard pathway. As things evolve their characteristics change. However, evolution doesn't just impact activities (the things we do). It also impacts practice (how we do things), data (how we record things) and even the mental models that we create (how we understand things).

The general form of evolution is given in figure 2 and in table 1, the characteristics of the different classes along with several general economic patterns are provided.

Figure 2 - General form of Evolution

Table 1 - Characteristics of General Form.

There are all sorts of subtle interaction (e.g. co-evolution of practice with activities, how to define ubiquity) but that's not the purpose of this post. What I want to concentrate on is the issue of evolutionary flow i.e. the competition that causes all things to evolve.

As a thing evolves then it enables higher order systems to appear through an effect known as componentisation (see Herbert Simon). For example, utility electricity provision enabled television, radio, electric lighting and digital computing. These news things exist in the unexplored territory, the uncharted space. They are about experimentation and exploration. They are only economically feasible because the underlying subsystems (i.e. the things they need, such as power) became more industrialised.

When this happens, visible user needs are no longer about the underlying subsystem but instead about the new higher order systems that have appeared. People only want electricity in order to power their computer, their TV, their radio and so forth. 

These higher order things are the visible user need, the underlying subsystem becomes increasingly buried, obscured and invisible. But any new higher order thing also evolves e.g. digital computing has evolved from its genesis to utility forms today. This in turn allows an even higher order of systems to be built.

When I use a cloud service, I don't care about the underlying components that the supplier might need (e.g. computing infrastructure). I care even less about the components below that (e.g. power).  I did care many years ago about things like servers and even power but today I care about what I can build with cloud services. Those underlying components are far removed from my visible user need today. Why? Because I'm competing against others who also use these services.

It is supply and demand competition that creates the evolutionary pressure which drives the novel to become the commodity, the uncharted to become the industrialised and the cycle to repeat. For activities that means genesis begets evolution begets genesis (see figure 3). For knowledge it means concept begets universally accepted theory begets concept.

Figure 3 - Genesis begets evolution begets Genesis

As an aside, this cycle has specific effects. It has three stages of peace, war and wonder due to its interaction with inertia to change. There are numerous forms of inertia and they act as what Allan Kelly described as a homomorphic force.  This cycle has a corollary in Hollings adaptive renewal cycle which is unsurprising given both are driven by competition. The war element of the cycle creates a punctuated equilibrium with the past due to network effects of competition i.e. the more people adapt the more pressure to adapt increases. The latter is known as the Red Queen Effect.

Of course, whenever you examine something it has a past, a present and a future. If I use a cloud based analytic service, I know it needs an underlying computing infrastructure, I know that computing infrastructure needs power and I know that the generators that make power need mechanical components. I also know that all these components evolved and were once novel and new. They each had their genesis. 

I've shown this constant evolution in figure 4. What's important to remember is the chain of needs (shown in a solid black line) is a line of the present. Those components evolved from the past and are evolving into the future (the dotted lines). The further you go down the chain, the more invisible the component becomes to the end user.

Figure 4 - Chain of Needs, The line of the present.

Being able to show the present on a landscape of what something is (the value chain) against how it is evolving (change i.e. past, present and future) is what mapping is all about. It's an essential activity for improving situational awareness, gameplay, operations and organisational learning.

It's key to understand that a map is a picture of the present in a dynamic landscape. All the components are evolving due to competition. That evolutionary flow affects everything. But if you know this, if you understand how evolution works, the change of characteristics, the requirement for different methodologies and common economic patterns, then you can exploit this. Figure 5 has an example map and a particular play known as Fool's mate.

Figure 5 - Map

With a map you can mitigate risks, obliterate alignment issues, improve communication and even examines flows of business revenue along with a host of other techniques. With enough maps you can remove duplication and bias in an organisation. 

You can also use maps to organise teams into cell structures and to solve the issues of aptitude and attitude i.e. we might have lots of engineering (an aptitude) but the type (an attitude) of engineering we need to create novel activities is different from the type of engineering we need to run an industrial service. This is a structure known as Pioneers, Settlers and Town Planners - a derivative of commandos, infantry and police from Robert X. Cringely's Accidental Empires, 1993.

You can use maps for scenario planning, for determining points of attack (the WHERE of strategy,  WHY is always a relative statement such as why here over there) and you can even create a profile of a company, an industry or a market i.e a frequency count of where components are along the evolutionary scale. 

Why bother with a profile? 

The components in the profile are all evolving from left to right (i.e. competition drives them to more industrialised). If nothing novel was ever created then it would all (assuming effective competition) become industrialised. You can use a profile to determine the balance of your organisation and whether you need more pioneers, more settlers or more town planners (see figure 6).

Figure 6 - Profile

To give you an idea of how to apply the three party structure. I've covered this before (many, many times) but this diagram will help.

Figure 7 - Applying PST (Pioneer, Settler and Town Planner) to a Map

As with the need for using different methods whether purchasing or project management (agile for genesis, lean for transition, six sigma for industrialised) then the roles of pioneers, settlers and town planners are different. So, is their culture. So is the way they organise. So are the type of people. See figure 8.

Figure 8 - Characteristics of Pioneer, Settler and Town Planner

Ok, but what has this to do with the middle?

The settlers and the transitional part of the profile, that is your middle.

This form of structure is the only way I know of sustainably solving the Salaman and Storey innovation paradox of 2002. This isn't "nice ideas", this came from competitive practice over a decade ago and subsequent re-use. Why it worked so well could only be explained afterwards in 2007 when the evolution curve went from hand waving pattern to something more concrete.

Of course, the techniques of mapping and evolution have evolved themselves over the last decade. Mostly this is by refining the terms used to make the language more transparent to others or through more adoption. However, every now and then something new appears and the latest addition is from a post by Dan Hushon on 'Digital Disruptions and Continous Transformation'. If you're familiar with mapping, I recommend you go and read now!

There's an awful lot to like in Dan's post. However, to explain why it's important, you need to first consider that a map can also be used to provide information on business revenue flows i.e. you can investigate a map to identify different business opportunities (see figure 9)

Figure 9 - Business Revenue Flow.

Some of those revenue streams will be profitable, others not. But even with a profitable revenue stream then this won't remain static. Take for example the pipeline of content in figure 5 above from commissioned shows to acquired formats i.e. the evolution of a new show like X-factor to a broadly repeated format show. The nature of the show has evolved.

With anything new (i.e. genesis) then you'd expect to add a high margin because of the risk taken. As that thing evolves and becomes more widespread and defined,  then you'd expect the margin per unit should be reduced and compensated with a much greater volume in a functioning marketplace.

In his post, Dan looks at this from the point of view of value vs evolution and overlays a PST (pioneer - settler - town planner) structure. I've slightly modified this but kept very close to the original in figure 10. This is not a graph of how things are, it's a concept that hasn't been tested yet. But evolution would suggest that this is how things should operate.

Figure 10 - Modified version of Dan Hushon's Graph

Why do I like this graph so much? Well, think of your organisation. You have core transactions you provide to others (in order to meet their needs). Those core transactions consist of underlying components (which can be mapped) that are evolving, These components effect the profitability of the transaction. The transaction itself is also evolving. As it evolves, the margin (or value) created by each unit of transaction should also change and reduce. Novel transactions should show high value per unit (and high margins). Commodity transactions should show low value per unit (and low margins) over time. 

You can use this graph to create a financial profile of your organisation and where your transactions are. They should all be evolving along the arrow. Of course, as transaction evolve to more commodity then you should be looking for those higher order systems to replace them. This can be used to create a financial pipeline for change and whilst the ends are important, it's the middle we really need to manage, the flow from one to another.

Ok, I get this but why is the middle so important?

If it wan't clear, situational awareness is key to a vast number of aspects of managing an organisation and the ONLY way I've found to significantly improve situational awareness is to map and compare the present against evolution. 

Evolution shows us that we're living in a dynamic environment with the constant flow of change from the novel to the industrialised. This impacts everything from project management to purchasing to team structure to finance.

Whilst there are two extremes (the uncharted vs industrialised, the genesis vs commodity) which require polar opposites in methods, culture and structure (Salaman and Storey, Innovation paradox, 2002) and everything (activities, practice, data and knowledge) in a competitive market (with demand and supply competition) evolves from one extreme to another ... there is a constant. That constant is change. The middle represents and governs this evolutionary flow from one extreme to another.

Yes, it's important to manage the extremes but both extremes can be outsourced either to suppliers or through the use of an ecosystem model, such as ILC.  Some firms will be able to hide in the relative safety of the industrialised space using ecosystem models to sense the future. Some will try and survive in the high risk space of constant genesis. For most of us then the one thing you need to manage above anything else is the flow between the extremes. This is where all the tactical plays matter. This is where situational awareness is critical. For most us, this is where continuous and sustainable advantage can be gained.

If you're going to build a two mode structure (bimodal, two speed IT, dual operating system etc) then do so by eliminating the pioneers from your organisation. Focus on creating public APIs for utility services and get every other company to build on top of it. Let everyone else be your R&D labs and your pioneers. Hide in the industrialised spaces and use ecosystems as your future sensing engines. Remove that pioneering capability internally through the use of a press release process i.e. force everyone to write a press release before the project hence preventing anyone creating the novel & new. Use the skills of the settler to mine the ecosystem for new successful changes which you then industrialise with town planners to commodity components or utility services. Alas, there's only a limited number of firms who can play that game.

This is why I'm not a fan of bimodal, dual operating system, two IT speed concepts in general. Most of us have to cope with the entire spectrum of evolution. These two mode methods appear to focus the mind too much on the extremes creating two groups which will exacerbate the internal conflict. It doesn't matter if they've included the all important middle (the transitional part, the settlers) in one group or another or if you have a little 'dance' between the groups. You've just buried that which truly matters.

The Settlers (like Cringely's infantry) are key. They make success happen. They control your destiny. They make the entire process sustainable. They play the most important games. They are where open source becomes a weapon. They are mostly ignored in favour of the extremes. Let us "take the pig and lipstick it" seems to be the mantra. Bolt on a digital side to our legacy and ignore the fact that the digital will itself become legacy over time. What do we call the legacy then? Legacy Legacy with Legacy Digital and New Digital ... let us add some more lipstick?

Organising by extremes creates two opposing camps, conflict and bottlenecks are inevitable and something I've seen over the last decade. Yes, these two mode methods may give you a short term boost in terms of efficiency and innovation but it's the sustainability issue that's the problem. That's why I strongly suspect in a decades time, the same people telling you to become a two mode type organisation will be flogging you a three mode solution to your new two mode problems. Save yourself the trouble and another round of re-organisation.

On the upside, all the mapping stuff (2005 onwards), all the profile work, flow, the PST structure and ILC models are creative commons share alike. It's all scattered throughout this blog and has been presented at hundreds of conferences between 2007 to 2014.

That's an invitation to help yourself.

Improve your situational awareness. Learn to play the game.

You'll soon discover why the "middle" is the all important battleground.

Oh, and on the question of bias ... am I biased towards mapping? Yes! I've been using mapping to outplay other companies in many commercial markets for over a decade and more recently in the last four years within Governments. I'm as biased as you can get. In my world, situational awareness helps. Yes, it's also true that maps are complex. In some cases, you can spend a whole day to create a first map that you can use.

--- 18th March 2015

Added figure 7 just so people can make the jump between PST and a map.