Staying Power
Six Enduring Principles for Managing Strategy & Innovation in an Uncertain World
(Lessons from Microsoft, Intel, Apple, Google, Toyota & More) Oxford University Press 2010 Nihon Keizai Shimbunsha 2012 January 2012
Michael A. Cusumano
MIT Sloan School of Management 2012 cusumano@mit.edu
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1985
1991
1995
1998
1998
2002
2002
2004
2010
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Bigger Picture in Staying Power
Now an age of innovation & commoditization, in both products & services, across multiple industries, global Long history, recently accelerated
E.g. Hardware Products: Mainframes to PCs and cell phones E.g. Software Products: Millions & thousands of dollars to free Manufacturing: Chinas prices becoming the worlds prices Hi-Tech Services: Indias prices becoming the worlds prices
Value shift, from stand-alone products to more complex industry platforms & related value-added services Little room for error in strategy or operations, but Hard to separate fads from enduring practices!
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Best Practice Research?
Lots of popular books & academic articles
E.g., In Search of Excellence (1982), Good to Great (2001), Blue Ocean Strategy (2004) Japan as Number One (1979)
Hard to generalize confidently
Mostly case studies, small samples, or limited analysis What works in one firm, time, industry, or nation may not transfer (e.g., what happened to Japan? Or the U.S.?)
Partially a problem of knowledge and context:
Imitation or best practice to standard practice Lifecycle stage or type of technology/innovation Industry structure & clockspeed Institutional or cultural & social environment Luck (timing) or population ecology (survivor bias)
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Japan vs. the US/West
US and Europe once the center of best practices
Japan in 1950s and 1960s: cheap, low-quality goods, but fastest growing economy
Japan later overtook the West in many areas
Best practices in manufacturing, quality, HR, product development, industrial policy
But since 1990, many Japanese strengths now seen as weaknesses. Even the mighty Toyota had quality problems in 2009-10.
WHAT CHANGED?
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Japan 1980s Strengths
Japan 1990s Weaknesses
inefficient use of capital poor investment returns bankrupt banks bankrupt government
Financial System
low interest rates lots of capital for investment protected banks deficit financing
stable, conservative, consensus-oriented sharing of wealth through subsidies
Political System
struggles over shrinking pie political gridlock slow/negative growth, unemployment
Social & Cultural System
standardized primary education shared values hierarchy & authority, group/individual
weak universities too much emphasis on rote learning, not enough individualism & creativity
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low wages high savings high exports
Economic System
rising value of yen bubbles in stocks and real estate low consumer spending
Management & Employment
lifetime employment in large firms seniority-based wages company-based unions consensus decision making long-term view institutional share-holding Just-in-Time (Lean) production QC & kaizen low-cost dedicated supplier networks
reduced flexibility do not reward merit & achievement inadequate concern -- worker welfare lowest-common denominator little pressure for efficiency/profits some problems in global competition over focus on manufacturing; traffic diminishing returns shell game of transferring costs
Made in Japan Problem?
Firm-level
The best firms still very good & globally competitive. But Western and Asian competitors have improved (manufacturing, product quality, engineering) at a fast rate and largely caught up to Japan in many sectors, especially in price-performance Weaker, protected firms and sectors still weak The high yen hurts exports and global competitiveness
Nation-level
Japan still a very rich country. Low growth vs. decline But political gridlock makes economic reforms difficult Other areas can improve (e.g. weak university research & ability to generate new industries, government-businessuniversity-VC relations), but progress slow
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Staying Power at the Firm/Nation?
The phenomenon of great or excellent firms declining or slowing down in growth over time, like great economies such as the US or Japan declining or going in cycles of good and bad performance, is the norm.
No competitive advantage or set of distinctive capabilities are permanent and all are relative to the state of competition at any given time.
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Six Enduring Principles
Not original to me, but underlie my work and that of the strategy and innovation fields over 25+ years
1. Platforms, Not Just Products
2. 3. 4. 5. 6.
Services, Not Just Products (or Platforms) Capabilities, Not Just Strategy Pull, Dont Just Push Scope, Not Just Scale Flexibility, Not Just Efficiency
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Narrow Way of Thinking About Focus and Competitive Advantage at the Product Level
Examples: Ford in Model T Era GM in the 1920s
Sony in Betamax era IBM before Open Source Apple before mid-2000s
Push
Strategy
Scale
Products
Efficiency
Broader Way of Thinking About Agility and Competitive Advantage at the Ecosystem Level
Examples: Toyota Microsoft Intel JVC in VHS Era Apple after mid-2000s Google, Adobe Cisco, Qualcomm, et al.
Pull, Dont Just Push Capabilities, Not Just Strategy Platforms & Services, Not Just Products
Scope, Not Just Scale
Flexibility, Not Just Efficiency
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Thoughts for Japan?
Japanese firms & economy doing well relative to many countries; future demographics a worry Defining the situation through 6 principles lens could be helpful to think about present & future Japans Challenge: How compete in a world of
global, industry-wide platforms & services, driven by deep capabilities in science & technology, dominated by relatively agile (or entrepreneurial) organizations, economies, and governments? 14
Platforms Examples
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Platforms, Not Just Products
In-house product platform: set of common components or modules around which an organization can create a family of related products or services Retail distribution platform: network of distribution channels, including physical outlets or web sites, through which an organization can distribute a variety of products or services Supply-chain platform: network of suppliers who provide components (or content) that enable an organization to create new products or services Industry-wide platform: one of the above but opened to outside 16 organizations to create an ecosystem of partners
Platform Ecosystem: Platform + Complements + Network Effects
number of users
Indirect network effect
Platform
complementary product (E.g., VHS player, Windows-Intel PC, Apple iPhone, Barbie doll)
Direct network effect
complementary service
positive feedback loop
number of advertisers, content providers, channel partners, etc.
17 Source: M. Cusumano, Staying Power (2010)
Ongoing Platform Battlegrounds
Web Search Google vs. Bing/Yahoo, foreign engines Smart PhoneOS Apple vs. RIM, Nokia/Symbian, Android, Microsoft, Palm, Linux, ARM, Intel Atom) Digital Media Apple (iPod, iPad & iTunes) vs. Microsoft (Media Player, Zune) vs. Real? Social Media Facebook, Twitter, LinkedIn, etc. Video Games Sony, Nintendo, Microsoft Enterprise s/w SAP vs. Oracle/Sun, Microsoft, IBM Micropayments Sony Felica vs. PayPal, credit cards Displays E-Ink vs. LCD vs. Plasma (Sharp, Sony, Samsung) Batteries Sony vs. Panasonic, Sanyo, A123, others Power systems Toyota hybrid vs. traditional vs. hydrogen FC
And many more platforms, or platforms within platforms, in smaller or emerging markets
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Basic Network as Platform
Where is the Money?
Value-Added Services Development Ecosystem
In-House for Businesses In-House for Consumers 3rd Party Developers Enterprise Customers
Applications Programming Interfaces (APIs)
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Mobile Network
Basic Network Platform
Fixed Network
Wi-Fi/Wi-Max etc.
Mobile Cloud as Platform
Where is the Money?
Value-Added Services Development Ecosystem
In-House for Business In-House for Consumers 3rd Party Developers Enterprise Customers
APIs
Mobile Cloud Platform
Applications Programming Interfaces (APIs)
Storage Compute
Basic Network Platform
Mobile Network
Fixed Network
Wi-Fi/Wi-Max etc.
Horizontal Services as Platform
Where is the Money?
Value-Added Services Development Ecosystem
In-House for Business In-House for Consumers 3rd Party Developers Enterprise Customers
APIs
APIs
Mobile Cloud Platform
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APIs
Horizontal Services Platform
VPN Storage Compute Security / Privacy Location/Presence Customer Care
Basic Network Platform
Identity Network Data Customer Info. Billing
Mobile Network
Fixed Network
Wi-Fi/Wi-Max etc.
Distribution System as Platform
Distribution Platform Retail Stores Partners Web sites Directories Telephone sales Devices Apps Stores Bundling
Where is the Money?
Value-Added Services Development Ecosystem
In-House for Business In-House for Consumers 3rd Party Developers Enterprise Customers
APIs
APIs
Mobile Cloud Platform
Horizontal Services Platform
VPN Storage Compute
APIs
Identity Network Data Customer Info. Billing
Security / Privacy Location/Presence Customer Care
Basic Network Platform
Mobile Network
Fixed Network
Wi-Fi/Wi-Max, etc.
The Argument
To compete effectively in a platform market requires having the best platform & platform strategy, not necessarily the best product!
Best platform? = (1) Open (but not too open) interfaces; (2) modular architectures (easy to build on/extend); (3) compelling complements (generally result of most vibrant ecosystem)
Best product? Hard to define, and, while starting here is good, usually not enough for a platform market
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Product vs. Platform Strategy?
Lever 1: Source of Key Complements
Betamax, Macintosh
First iPod & iPhone??
Mainly In-house
Product-mainly strategy
Mainly Outside
Current iPhone, iPad?
Lever 2: Platform/ Interface Technology
Mainly Closed
Intel microprocessor? iMode? Microsoft Windows? iTunes, AppStore?
Mainly Open
Cisco router + IOS?
Red Hat (Linux)?
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Apple:
Before 2003 = Product-First Thinking Now = Product + Platform + Services!
Apple still lower sales and profits compared to Microsoft, but catching up fast!
Surpassed Microsoft in market value in May 2010 Why? PC sales FLAT but not so in consumer electronics: smart-phones, tablets, digital content/media, internet services
What Apple did:
Moved beyond traditional boundaries to link PCs to consumer electronics & smart phones, & these to digital services, content, accessories, apps, etc. Common OS, and iTunes now iCloud service platforms for iPod, iPhone, iPad, Mac, App Store, eBooks store, and with access for other platforms (Google, Windows, RIM). Multi-sided, multi-platform!
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Microsoft
Revenues ($million) 2010 2009 2008 2007 2006 2005 Operating Profits (%) Year-End Market Value ($m) Revenues
Apple
Operating Profits (%) Year-End Market Value
$62,000 58,437 60,420 51,122 44,282 39,788
38.0% 34.8% 37.2 36.2 37.2 36.6
$245,000 246,630 149,769 287,617 251,464 233,927
$65,000 36,537 32,479 24,006 19,315 13,931
28.0% 21.0% 19.3 18.4 12.7 11.8
$312,000 180,150 118,441 74,499 45,717 29,435
2004
2003 2002 2001 2000
36,835
32,187 28,365 25,296 22,956
24.5
29.7 29.2 46.3 47.9
256,094
252,132 215,553 258,033 302,326
8,279
6,207 5,742 5,363 7,983
3.9
(loss) 0.3 (loss) 6.5
8,336
4,480 4,926 7,924 5,384
Winner Take All (or Most) if
1) Strong network effects between the platform and complements (direct or indirect) 2) Little differentiation among competing platforms (few niche opportunities or ways to be distinctive among competitors!) 3) Multi-homing rare (difficult or costly for users, app developers, or other players to use more than one platform as their home): MAKE THEM CHOOSE!
Ref: Eisenmann, Parker, and van Alstyne, Harvard Business Review (2006); Cusumano, Staying Power (2010) 27
Multi-Homing vs. Switching Costs
1 SETUP + 1 ONGOING
Mono-homing
2 SETUPS + 1 TERMINATION + 1 ONGOING
Switching
2 SETUPS + 2 ONGOING
Multi-homing
Source: G. Parker
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Why Did VHS Win 100% of the Consumer VCR Market?
Network effects? Differentiation? Multihoming?
1. Strong network effects? Yes. VHS and Betamax
incompatible. More licensing of VHS = more vendors, more prerecorded tapes, more sales to users, ad infinitum
2. Little differentiation? Yes. Initial differences soon
eliminated. Same prerecorded tapes available. Quality better with Betamax but not better enough.
3. High cost of multihoming? Yes. Machines were
expensive in the 1970s and 1980s, so users chose one. Sony quickly drops from 100% market share to zero! Little first-mover advantageWhy? 29
Why Did Windows Win 95% of the Desktop OS Market?
Network effects? Differentiation? Multihoming?
1. Strong network effects? Yes. Many more apps for
Windows; incompatibility of the Mac (modified recently with the switch to Intel chips & virtual s/w)
2. Little differentiation? Yes, eventually. Growing
similarity with the Mac; rivalry among PC manufacturers & low entry barriers brought PC prices down. Mac survived in a niche desktop publishing & extreme ease of use, e.g. for schools
3. High cost of multihoming? Yes. The Mac usually
cost 2x a WinTel PC. Both are costly so users choose one.
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Why No Permanent Winner in Video Game Consoles?
Network effects? Differentiation? Multihoming?
1. Strong network effects? Yes. Specific games for each
platform (Sony PlayStation, Nintendo Wii, Microsoft Xbox).
2. Little differentiation? No. Each platform different
Sony -- high-end , Nintendo -- non-traditional with hardware innovations, Microsoft -- like PC/internet. Also hit games or features vary by generation and vendor.
3. High cost of multihoming? No. Consoles relatively
cheap. Often subsidized by makers. Serious game users buy more than one platform. Some games on multiple consoles.
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Will There Be One Winner in the Global Smart-Phone Market?
Network effects? Differentiation? Multihoming?
1. Strong network effects? Yes.
Specific applications and some services for each platform (Nokia/Symbian, RIM/Blackberry, Apple iPhone , Google Android, NTT Docomo, Microsoft Windows)
2. Little differentiation? No. Different vendor strengths
(e.g. business/email vs. consumer functions, computer-like, social networking, etc). And different operator strengths, politics, and bundles in different regions.
3. High cost of multihoming? Yes. Phones often
subsidized, but service contracts expensive. Most users chose 32 one vendor. But users can and do switch over time.
Will There Be One Winner in the Social Media Market?
Network effects? Differentiation? Multihoming?
1. Strong network effects? Yes. Very strong indirect
friends, colleagues, etc. Very strong direct tie specific applications and some services to the platform APIs & data, though weaker if use cross-platform APIs.
2. Little differentiation? No so far. Social media sites
very different. Yes Facebook copying features, and Google pushing cross-platform openness & applications.
3. High cost of multihoming? No users can use
multiple social media platforms, for different purposes so far.
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Platform Thinking: Managerial Implications
Different from conventional product or service businesses in terms of: Strategy & Implementation (for a platform vs. a
product strategy, or a complementor position)
Monetization & Business Models (different
ways of making money & increasing the pie)
Value Creation, Capture, Delivery (impact on
market value, e.g. valuations of Microsoft then Apple, Google, Facebook, et al.)
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Services, Not Just Products
Many firms today, in different industries :
(a) generate more revenue or profits from maintenance + valueadded or personalized services than from standardized products or standardized services (e.g., IBM, SAP, Oracle GM, Ford in past decade); (b) have transformed standardized products into more tailored service-like offerings (e.g., Salesforce.com, Windows Live Zipcar .. Rolls Royce) (c) elevate products to become new service-delivery platforms (e.g., Google Apple iTunes & iPod, iPhone, iPad e-books or the automobile, aircraft engine)
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Source: O. Gadiesh and J. Gilbert. Profit Pools: A Fresh Look at Strategy, HBR, May-June 1998
Source: O. Gadiesh and J. Gilbert. Profit Pools: A Fresh Look at Strategy, HBR, May-June 1998
Software Product Companies Listed in U.S.
Service vs Product as % Sales - Average All Sample
.8
Excludes video games. SaaS counted as product revenue Services include professional + maintenance
.4 .2
1990
.5 .3
Note: Maintenance about 55% of services revenues for firms breaking this out
.6
.7
1992
1994
1996
1998 fyadj
2000
2002
2004
2006
(mean) servpctsales
(mean) prodpctsales
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Service Revenue %, Select Hardware Firms
70%
60%
50%
IBM HP
% Sales
40%
Sun Microsystems EMC
30%
Cisco Dell
20%
10%
0%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Calendar Year
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40
Taxonomy of Services from the Product Firm
Complementary
Enhance/Smooth
Substitution
Substitute
Extend
Financing Customization that Before product release (e.g., Warranty/Insurance creates new features Zapmail) Implementation specific to a customer After product release (e.g., Maintenance/Repair Training or software application hosting, Technical support consulting that automobile leasing, SaaS) Training in basic introduces new uses uses Integrating the core Customization that product with new makes existing products product features easier to use
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Impact of Services % on Operating Margins*
0.25
Opmargin (operating margin)
0.20
0.15
0.10
0.05
0.00 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1
Servp (% of total revenues that corresponds to services)
*Analysis using both Fixed Effects and GMM panel data estimations
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Product = Platform for Selling Services
(Like a smartphone, e-book, iPad, others?)
Example: Servitizing the Automobile
Financing (loans, leasing; insurance) Lifecycle (warrantee, maintenance) Repair (remote diagnostics) Semi-Customization (configured features) Telematics Services/Content Intermediary
Internet access Practical Content (navigation, satellite radio) Entertainment Content (music, games, movies, etc.)
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Services Thinking: Implications for Managers
Many if not most product companies today hybrids that have to manage both a product business (or standardized services) and a value-added or custom services business Three challenges: How manage the crisscross? (best balance of
products vs. services of different types)?
How servitize products? (innovate around the product
to generate value-added customization, support, training, consulting, or to create new pricing/delivery models)
How productize services? (software factory-like scope
economies for customization/personalization on one extreme vs. 43 automated service delivery on the other).
Capabilities, Not Just Strategy
In the long run, the best firms distinguished by different organizational + individual knowledge & skills, as well as technology, processes not just strategic positions Important to evolve strategy & capabilities together, incrementally, through trial and error, experimentation Capabilities = ultimate sources of product & process innovation, or handling unknown future opportunities and threats, especially when skills are close at hand
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Pull, Dont Just Push
Pull a fundamental philosophy of management, emphasizing not detailed push-style planning but feedback & change & adaptability, with direct linkages to customers (backwards information flow from sales, marketing, service).
Set the clock speed or pace for feedback, innovation, and adjustment the heartbeat of the process with techniques such as kanban in production management, or prototypes and daily builds in product development, or check-in meetings for other operations.
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Scope, Not Just Scale
Scope economies delivering multiple products or services with shared knowledge and resources, at a lower cost than delivering them separately potentially as valuable to efficiency as traditional economies of scale.
Need to manage a more complex organization, overcome potential tradeoffs, seek complementarities among efficiency, flexibility, quality, and cost. But important to firm differentiation precisely because scope economies are difficult to achieve!
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Flexibility, Not Just Efficiency
The future is uncertain. And some markets change very quickly and unpredictably. Cannot prepare for the unknown, but managers can promote flexibility of different types into organizations, operations, structures, processes (routines), planning, people. Flexible thinking as well as people, processes, and structures can overcome tradeoffs and enhance organizational effectiveness when dealing with change and unforeseen opportunities
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U.S.A. on the 6 Principles?
Platforms: Yes, global leaders; platform-first thinking is
common, esp. in computer h/w, s/w, internet services
Services: Yes, strong in professional & automated Capabilities: Yes, build on university science/tech,
though secondary education weak, too variable
Pull: Usually tight linkages to customers, though not all
manufacturing; push-pull balance in sci-tech
Scope: Yes (e.g. GE, IBM), and learning to do better Flexibility: Yes, firms, economy, & govt, but skills
always less so (e.g. too high unemployment)
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Japan?
Platforms: Emphasis is on global products & hardware,
or complements to others platforms
Services: Japanese product firms dont know how to add
& monetize services, or not interested? Capabilities: Evolving, but weak universities
Pull: World-class JIT, but in manufacturing. Not enough
push-pull in science & technology?
Scope: World-class, in mfg & engineering. But full line
companies often inefficient, replicate industry economics
Flexibility: Yes in mfg & engineering, but not in strategy
or org. capabilities more broadly, or govt capabilities?
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China?
Platforms: Not global, but domestic market big enough to
create China-specific platforms
Services: Focus is on manufacturing; many firms dont
know how to add or monetize services
Capabilities: Evolving, but still low on value chain Pull: Plan-driven, becoming more market-driven Scope: Diversified firms have much to learn? Flexibility: Political rigidity, but lots of entrepreneurial
activity. More like the US than Japan?
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India?
Platforms: Nothing global or industry-wide; largely rely
on US technology
Services: World-class, in software/R&D, with some global
delivery company platforms, but limited innovation
Capabilities: Evolving, but little innovation or ties to
creative or advanced university research
Pull: Responsive to market change, but limited industries Scope: Some in large industrial groups? Flexibility: Many rigidities in government & society but
lots of entrepreneurial activity
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How Achieve Staying Power
Firms & nations need to be very agile Need to periodically reinvent themselves as customers, competitors & technologies change Need to pay attention not only to disruptions but to subtle details of change
Indicators of larger disruptions or deeper organizational or managerial problems
Need to overcome the ups & downs of markets, good & bad luck, mistakes & decline in attention
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