Ecosystem & Porter

A common characteristic of Next generation organisations (as opposed to traditional) is their focus on ecosystems and the provision of platforms to support their growth. The purpose of such ecosystems is not simply some form of marketing exercise but instead a mechanism for managing the innovation paradox (i.e. the need to be efficient to compete today but also to be creative in order to compete tomorrow).

Consider the provision through an online API of a software system whether it’s SalesForce, Amazon’s AWS or PayPal’s x.commerce platform. These services are core utilities that the organisation is providing with the express aim of others consuming i.e. an ecosystem of consumers developing around the service.

The consumption of the service may represent general use or even novel and more creative uses e.g. the early provision of big data Hadoop systems on AWS. Since the genesis of any activity is uncertain (being chaotic) and likely to fail, then the use of utility services helps reduce the cost of failure and thereby encourages the creative pursuits of others. The larger the ecosystem, the more likely that creative models of consumption and the genesis of new activity will be occurring.

Naturally, if those activities are useful (i.e. Hadoop on AWS) they will spread through the normal process of diffusion. By monitoring the ecosystem’s use of your services this spread can be detected.
These factors enable a model known as ILC (innovate-leverage-commoditise) to be used (see figure below). Through provision of utility services and the development of an ecosystem, you enable others to create new activities at a lower cost of failure and hence encourage innovation to occur in the ecosystem and around your services. Through monitoring, you can leverage the ecosystem to identify novel activities that are spreading. An organisation then can either copy or acquire such activities and commoditise these to create further services that enable growth of the ecosystem and hence further innovation through componentisation effects.

For example, the introduction of AWS enabled others to build Hadoop on AWS. With the spread of Hadoop on AWS, Amazon introduced an equivalent utility service - Elastic Map Reduce (EMR) - which in turn has enabled novel activities to appear that consume EMR. And so the cycle repeats ...

Figure 1 - ILC model (click on image for higher resolution)

NB, I italicise the term innovation because I'm referring to the creation of novel activities i.e. genesis of an activity rather than the broad use of the word innovation which is applied to almost everything from feature differentiation to service provision of a pre-existing activity. See "The Abuse of Innovation"

It’s through models such as ILC that an organisation can simultaneously appear to be :-

• highly creative - by pushing such uncertain activities to a wider ecosystem
• customer focused - by leveraging the ecosystem to identify that which is becoming adopted
• highly efficient - by focusing on commoditisation

In Porter’s terms these Next generation organisations have a primary focus on a cost leadership (a best price) for provision of the utility service.

BUT they also have a strong differentiation strategy which is heavily influenced through creative pursuits of others within the ecosystem that develops around their utility service (i.e. genesis of novel activities being driven outside the organisation). This is why Next generation organisations often cite “enabling others to build upon our services” as criticial.

BUT they also have a strong customer focus strategy heavy influenced by adoption within the ecosystem (i.e. they leverage the ecosystem to identify activities that are spreading) and subsequent provision of these activities as further utility services.

In such cases, all three of Porter's strategies are being pursued simultaneously with the major nuance between these players is whether they use copying (a weak ecosystem play) or acquisition (a strong, reinforcing ecosystem play).

I mention this because "focus on customer, innovation or efficiency" is one of those truisms like "culture eats strategy for breakfast". It's a great sound bite but on closer examination, it doesn't seem to stand up to rigorous scrutiny today. The game has changed.

I'm currently collecting a selection of truisms and each one of them seems to leak like a sieve when exposed to rigorous study. The following are ones which in my view are all in need of serious re-evaluation :-

• You can't manage what you can’t measure
• You need to give customers what they want
• The best way to predict the future is to create it
• Avoid the commoditisation trap
• Business has only two functions - marketing and innovation
• Culture eats strategy for breakfast
• Focus on customer, innovation or efficiency

Culture eats strategy ... where's the data?

I find irksome the management mantra that is commonly spouted of "Culture eats strategy for breakfast" because no-one ever seems to be able to justify the statement with data. I thought I'll pen a few thoughts on this.

An organisation consists of a mass of people, activities and practices combined with reserves of physical, financial, human and social capital. It's the interaction of the former three which impacts the latter either positively or negatively.

Culture results from the interaction of people with social (e.g beliefs, values, reputation) and human (e.g. skills, knowledge, myths) capital. In much the same way, the business itself can be described through the interaction of people, activities and practices with various forms of capital.

Strategy, is simply a plan of action, an intention and an aim e.g. it's the act of trying to achieve a particular goal or result. Either something has a strategy or we leave it to chance, randomness and accident.

We often talk about product strategy, marketing strategy, business strategy and organisational strategy but equally (if not in many cases more) important is cultural strategy. If you don't aim or plan to develop a particular culture, you'll end up with something by accident and that is not necessarily a good thing.

In recent years, the creation, building, "gaming" and planning of culture has become an increasingly more visible topic. Few have highlighted this trend as much as Zappos and Tony Hseih's work on delivering happiness. Be under no doubts, you can plan to build a specific culture.

Once a culture has formed it can certainly impact what business, product and marketing strategies you can effectively deploy in much the same way that past product strategies often impact future product strategies through inertia such as concerns over cannibalisation etc. In some cases, a future product strategy may require you to plan a new culture by spinning-off a group from the main corporate body.

As a rule of thumb your future strategies are impacted by today's strategies.

Whilst I can see some modicum of merit in bland arguments such as culture trumps products in certain industries, the culture eats strategy argument appears entirely misguided because you can plan to create or change a culture. Your strategy might require you to create a new group, to focus on happiness or to game the system - it doesn't have to be random or accidental.

To cut a long story short, the "Culture eats strategy" statement hypothesises that :-

unplanned, random and accidental [lacking strategy] culture eats for breakfast having a plan, intention or aim [for culture].

... I'm sorry I don't buy that, especially unless backed up by considerable amounts of data to counter examples such as Netflix and Zappos which show the opposite.

The counter hypothesis is that having a strategy for culture, organisation, business, product, marketing etc is better than not having one i.e. strategy eats all for breakfast, lunch and tea. In other words having a plan of action, aim or intention to achieve a goal is better than relying on randomness, accident and fate to do the same.

Now, the counter hypothesis would appear to be an obvious truth which is dangerous in itself. So, I'll start the process of collecting data and let's find out whether the "Culture eats Strategy" brigade have a leg to stand on. I doubt they do but then I might be pleasantly surprised.

OSCON 2010

I thoroughly enjoyed the OSCON cloud summit and the talk that I gave at OSCON - the audiences were fantastic and the organisation was superb (huge thanks to Edd, Allison and the O'Reilly crew for making this happen).

I'm really proud to have played my small part in this event as the MC for day, along with John Willis.

I haven't yet talked a great deal on my research, but the keynote at OSCON gives a taste of it - so I thought I'd link to it here. Those who know me, also know that this had been a hobby horse of mine over the last decade. It's finally good to spend some focused time on it though of course these ideas are far from new.

A couple of final notes :-

• Utility services are just a domain within the commodity phase of an activity's evolution. There are constraints which will prevent a commodity being provided through services. I sometimes plot on the graph a wider "services" stage, however for the sake of simplicity I've left this out.
• The stages of lifecycle are approximate only i.e. this is where products appear, this is where utility services generally appear etc.
• Multiple activities can be bundled into a single product. For example the iPhone is a combination of different activities from personal communication to digital recorder to web surfing to time keeper to ... the list is quite long. These activities are all evolving and being implemented by others, which forces Apple to focus on two areas :- the bundling of new innovative activities into the iPhone and application innovation through the App Store. The former is expensive and risky. The later requires development of a strong ecosystem, ideally with users being allowed to create and distribute their own applications. The manner in which Apple manages this is less than ideal and they now face severe disruption from Android. As there is also little exploitation of the wider manufacturers' ecosystem, Apple has cornered itself into creating highly costly & risky innovations with weak leveraging. IMHO, they are in trouble and this should become painfully clear in the next five years unless they change.
• The ILC model is generally applicable. I picked examples from cloud providers but equally I could have discussed Canonical with Ubuntu. Canonical ruthlessly commoditises activities to provide a stable core and I'd strongly argue that Rackspace & Canonical point to the future direction of IT.
• Open source is the natural end state for any activity described by software which is ubiquitous and well defined. This doesn't mean that open source can't be used earlier, of course it can and there are numerous tactical advantages of doing so, along with benefits such as increased collaboration. However, what I am saying is that by the time an activity has reached the commodity phase then only open source makes sense. Those who have been questioning whether "cloud is the death of open source" have a poor understanding as to what is actually happening.
• Open core is in general a tactical anomaly. On the one hand, if successful, it will cause widespread distribution (driving an activity towards more of a commodity) and yet it attempts to generate revenue through proprietary elements which is against the natural state that open core is forcing activities towards. A number of companies have used this approach successfully and have even been bought for huge sums by large companies. However, it still remains a tactical anomaly which attempts to achieve both the benefits of open and closed by being both.
• The S-Curves I use are not time based. If you follow the evolution of an activity through specific phases of its lifecycle and plot adoption against time, you will derive a set of non-uniform S-Curves for Roger's diffusion of innovation. It's important to realise that the accelerators I mentioned (open source, participation, network effects) along with others I didn't mention (communication mechanisms, co-evolution etc) alter the speed at which an activity evolves. Whilst, this doesn't impact the S-Curves I use, it does compact Roger's curves of more recent innovations when compared to earlier diffusions.
• The speed at which an activity moves across the profile graph (i.e. through its lifecycle) depends upon the activity.
• None of these ideas are new. The nearest to new is company profile which I've been refining in the last year from earlier work (between '04-'07) and this refinement is simply a formalisation of already existing concepts. If you watched the video and thought, "that's new", then my only advice is be concerned.
• On the question of science, the models presented (S-Curve, Profile) are part of a general hypothesis on the evolution of business activities. Whilst data exists, there is neither the volume of evidence nor independent observation to validate beyond this. Furthermore, whilst the models show some usefulness and can be falsified, they are not predictive (and hence this cannot be considered scientific but remains firmly within the field of philosophy). The reason for this is that in order to generate the graphs and avoid asymptotic behaviour, a definition of commodity is required. The consequence of such is that an activity can only be plotted in terms of relative historical position i.e. after it has become a commodity. This means, all positions of activities which have not become a commodity are uncertain (as per one of the axis of the graph) and therefore approximations. The models do not create a crystal ball and the future is one information barrier we can't get past. Even though the new pattens of organisation are testable it should always be remembered that fitness does not guarantee survival.

That's enough for now, I'll expand the topic sometime later.