The Topology of Invention and Power
So what are the elements of this dance of Power and invention? The script usually plays like this:
Flux in external conditions creates new threats and opportunities. In the case of Netflix, it was both: the eventual decline of their DVD-by-mail business was the threat, and streaming the opportunity.
The nature of flux demands that it unfolds in fits and starts, so any company wishing to capitalize on these new conditions must invent—again, by crafting, not design. For a single company, these tectonic shifts do not occur frequently, but you can be certain they are coming. The relentless forward march of technology assures this.
Amidst this cacophony, you must find a route to Power. It wasn’t a fine-tuning of their DVD-by-mail business which increased Netflix’s market cap by a factor of 100; it was streaming, with its insurmountable Scale Economies.
Building on that, I can now chart the Dynamics of Power:
Figure 8.4: The Dynamics of Power–1
Now let’s apply this framework to Netflix streaming:89
Resources. You must start with the abilities you can bring to bear. Using the academic convention, I will call these “resources.” They might be as personal and idiosyncratic as Steve Jobs’ aesthetic sensibilities, or as corporate as Google’s vast stores of organized data. For Netflix, their original DVD-by-mail business endowed them with numerous resources relevant to streaming, including such directly transferable skills as their recommendation engine, their UI, their customer data and their relationships with content owners. Equally important was the platform of their existing business, which allowed them to easily offer streaming as a complement to DVD-by-mail, rather than a standalone service. This was far more important than you might think, as it silenced potential complaints about the initial small streaming catalogue that could have driven fatally negative word-of-mouth. Conversely, though, there were also many abilities Netflix had to develop, and as they moved aggressively into originals, this set of required competencies expanded considerably.
External conditions. These resources then intersect an opportunity set driven by evolving external conditions: technological, competitive, legal and so on. For Netflix, an advancing technology frontier opened up the potential for streaming: Moore’s Law in semiconductors, plus similar exponential advances in optical communications and storage. The embodiments of these trends were high-speed Internet connections, acceptably costed digital storage and a broad dispersion of devices with adequate performance (displays, storage, graphics processing and connectivity). If Netflix had bet the company on streaming any earlier, they would have been dead in the water—external conditions were not yet ripe.
Invention. For Netflix, the inventions were their new product directions: streaming and originals and all the associated complements. Crafted, not designed. Note in Figure 8.4 that the arrows from Resources and External Conditions are dotted not solid. The potential for invention may be there but someone must seize it.
Power. The final step was the thrust into exclusives and originals. By bringing to rein the cost of content, Netflix forged powerful Scale Economies and hence Power. Note also in Figure 8.4 that the connection from Invention to Power is also dotted. Most inventions don’t assure Power. As I have discussed, operational excellence—really a constant process of re-invention—does not result in Power.
So if you want to develop Power, your first step is invention: breakthrough products, engaging brands, innovative business models. The first step, yes, but it can’t be the last step. Had Netflix invented the streaming product without introducing originals, they would have been left with an easily imitated commodity business. There would have been no Power and little value in the business.
This is where the 7 Powers figures in. In the midst of invention, you need to be ever watchful for Power openings. The 7 Powers framework focuses your attention on the critical issues and increases the odds of a favorable outcome. This is the most Strategy can accomplish. It’s not everything, certainly, but it’s a lot.
Mintzberg’s article threw down the gauntlet: “Can an intellectual discipline meaningfully contribute to a craft?” Or more specifically, “Does Strategy matter to strategy?” Now you know the answer. Yes, it can matter, but only if it works to guide you toward Power in these decisive formative moments. I developed the 7 Powers with exactly this purpose in mind: a practical strategy compass.
Invention: the One-Two Value Punch
So far, so good. By looking through the lens of the 7 Powers, we have come to a vital insight: Power arrives only on the heels of invention. If you want your business to create value, then action and creativity must come foremost.
But success requires more than Power alone; it needs scale. Recall the Fundamental Equation of Strategy:
Value = [Market Size] * [Power]
In Statics (Part I of this book), rightfully, we focused solely on Power and took market size as a given. Not so with Dynamics. Recall that Netflix’s invention (streaming) not only created an opportunity for Power but created the streaming market as well. Both factors must be present to bring about value increases of 100x. Invention has a powerful one-two value punch: it both opens the door for Power and also propels market size.
Figure 8.5: The Dynamics of Power–2
Compelling Value90
Invention drives a favorable change in system economics—you get more for less. The resulting gain in the end will be split somehow between your company and other segments of the value chain. The 7 Powers is all about making sure that you get some of the increase. But it is the gain customers experience that will shape the market size. In the Netflix streaming case, if customers hadn’t responded favorably to this new delivery mode, then all opportunities for Power would have come to naught. The remainder of this chapter will explore this customer value side. I will use the phrase “compelling value”91 to characterize products that are sufficiently superior in the eyes of the customer to fuel rapid adoption; they evoke a “gotta have” response. It is this impetus that drives the left-hand side of the FES, market size.
The product differences must be dramatic in order to achieve that “gotta have” response. Just how much is enough? It is tempting to try to attach a number. Andy Grove, the formidable Intel CEO, did just that, suggesting that 10x was in the right ballpark.92 And it was probably dead-on, at least for the business he was in—semiconductors. But it misses the mark elsewhere. For example, a 50% increase in photovoltaic efficiency, or a battery with double the existing charge-storage density, would both likely clear the bar.
Compelling value requires that you mobilize your capabilities to offer up a product that fulfills a significant customer need currently unmet by competitive offerings. This need drives customer adoption.
Figure 8.6: Compelling Value
Capabilities-Led Compelling Value: Adobe Acrobat
There are three distinct paths to creating compelling value. Each has different tactical needs, so it is instructive to think of them separately. First is Capabilities-led compelling value: when a company tries to translate some capability into a product with compelling value.
Figure 8.7: Capabilities-Led Invention
Consider Adobe’s creation of Acrobat. Here the key capability brought to bear was Adobe’s existing fluency at the intersection of software and graphics. John Warnock, Adobe’s co-founder, wanted to utilize this expertise to create a software that enabled the sharing of documents transparently across diverse computer platforms while exactly maintaining visual integrity.
After two intense years of fits and starts, Adobe launched Acrobat 1.0 on June 15, 1993. Acrobat seemed to represent the solution to a vexing problem faced by all corporations: document chaos. As such, anticipation ran rampant:
…it was hyped up a lot. Expectations were unbelievably high. It was kinda on the heels of Photoshop, which took off really fast.93
But sales in the first year barely cleared $2 million, with the second year not much b
etter. Bob Wulff, the technical lead, kept his job, but the Acrobat general manager slot became a revolving door. Before long, release 2.0 flopped as well.
In the end, the advance of technology (the Internet, in this case) created an unexpected opportunity for Acrobat. HTML, the Internet’s enabling language, causes documents to reflow to match the user’s platform. Fine in most cases, but there are many documents (presentations and contracts, for example) which depend on preserving the exact look and feel of the original. Acrobat fulfilled this need. By the end of 1996, sales were up to $25 million; by the end of 1998, $58 million. Ten years later, Acrobat had emerged as a nearly billion-dollar business, an important contributor to Adobe’s value.
But here’s the uncertainty of such a capabilities-led initiative: the customer need is unknown, making such efforts profoundly risky. So risky, in fact, that they should probably be undertaken only if an assured Barrier appears early on. Beware, too: in such cases, the customers’ expressions of wants may provide some guidance, but they can prove highly misleading, too. IBM, for instance, had encouraged Adobe early on in its Acrobat endeavor but then balked at the shortcomings of the software. This dynamic is underneath Steve Jobs’ remark:
A lot of times, people don’t know what they want until you show it to them.94
Success requires that a company stay in the game, appropriately morphing to suit the requirements of the situation. Typically this takes a long time—five years, in Adobe’s case—and involves many twists and turns. High testosterone commitments, with all the attendant weight of expectation, should be avoided. If the new business is a standalone one, such commitments will lead to unsustainable external funding requirements, and if the new business has been created by an existing one, such commitments will give rise to the corporate antibodies ever lurking to neutralize new initiatives.
Customer-Led Compelling Value: Corning Fiber Optics
A second path to compelling value is customer-led compelling value. In this case, many players spy an unmet need, but no one knows how to satisfy it.
Figure 8.8: Customer-Led Invention
Here Corning’s fiber optics provide a good example. By the early 1970s optical fibers—also known as waveguides—had come to be seen as the holy grail of communications, holding the potential to handle vastly increased traffic density. Their creation seemed to carry an assurance of compelling value for any company that could crack the problem. Unfortunately, the transparency demanded of the optical fiber glass was nearly unthinkable: if the ocean matched the clarity required, you could stand over the Marianas Trench and see all the way to the bottom, 35,798 feet below.
More daunting still, Corning was woefully outpaced and under-resourced. Although formidable in glass, the company was new to telecommunications and a pipsqueak next to the other players. Even AT&T, a world leader in telecommunications technology and a behemoth compared to Corning, had lately turned its sights to the prize of optical communications.
Those competitors had opted to follow a quite logical, incremental path in their search for a solution to the transparency problem. They were using the glass formulations already successful in short-distance fiber optics and then trying to tweak them for enhanced clarity. Frank Maurer, an MIT Physics Ph.D. and an old Corning hand, went the other direction. He decided to take pure silica, a glass already known for its clarity, and attempt to make waveguides out of it from scratch. The silica was a very ornery material with a high melting point and high viscosity, but it had two advantages going for it: it was already exceedingly clear from the start, and as a material, it was far more familiar to Corning than anyone else.
Fiber optics are composed of an outer cladding and an inner core, and the physics of the interface between these two keeps the light from “leaking out.” Maurer and his two team members, Don Keck and Peter Schultz, faced a big hurdle: how to get silica into the core. After many dead ends, the team finally struck on the idea of using vapor deposition to lay down a uniform film of silica inside the cladding glass.
In September of 1970, Schultz and Keck pulled a full kilometer of fiber. Even though it broke during wrapping, they were left with two great samples. The fiber was ready to test late one Friday afternoon. Schultz had headed home, but Keck was impatient to test the fiber, so worried over its fragility.
He set up a test jig that aimed a red helium-neon laser beam into the fiber to help him align it. “I remember so vividly moving the fiber over, and when the laser spot hit the core, all of a sudden I got this flash of light”… recalled Keck… [Confused at first,] eventually he realized that the light had gone back and forth through all 200 meters of fiber… He had before him the clearest glass ever made.”95, 96
Although not the final act of the story, this transparency breakthrough was the development that achieved compelling value. Optical transmission radically reduced the price of a vital human need: interaction at a distance. Fiber optics would quickly become one of the great enabling technologies of the last century, profoundly changing nearly every realm of society: social, industrial, military, academic, etc. The Internet that we know today, of course, would be impossible without fiber optics.
The uncertainty in this case is technical: “Can we invent it?”
Competitor-Led Compelling Value: the Sony PlayStation
The third and final path to compelling value is competitor-led. In this case, a competitor has already brought to market a successful product, and the inventor must produce something so much better (in whole product terms) that it elicits the “gotta have” response.
Figure 8.9: Competitor-Led Invention
Sony’s PlayStation exhibited competitor-led compelling value. In the early 1990s, Sony was an imposing presence in consumer electronics, but a newcomer to video games, facing the formidable established presences of Nintendo and Sega.
Once again, an advancing technology frontier created an opening for a pioneering challenger. An evolutionary product would not have offered much chance of stealing the march on their well-entrenched rivals but Sony’s Ken Kutaragi, a brilliant and feisty engineer and the point man for Sony’s thrust into video games, was convinced that the breakthrough of real-time 3D graphics would lead to “gotta have.” Immersion is the gamer’s nirvana, and 3D was a step-change in mimicking reality, eliciting a range of right and left-brain responses that are immune to 2D.
The PlayStation story had many moments of high drama, all of which culminated in the enabling chip order personally guaranteed by Sony President Norio Ohga:
In May 1993, the Executive Committee heard Tokunaka (Kutaragi’s immediate superior) and Kutaragi’s presentation and, following Ohga’s lead, approved a $50 million investment to develop the computer chip at the heart of the machine, despite the fact that prospects for the new business were at best uncertain… Tokunaka recalls that his hand trembled as he wrote a purchase order for 1.3 million computer chips….97
On Dec. 3, 1994, Sony launched the PlayStation in Japan. There were lines around the block. Within a month 300,000 consoles had been sold. At the close of the 1999 fiscal year (March 31), the video game group accounted for 27% of Sony’s operating profits. By the time the PlayStation 2 launched in 2000, there was an installed base of 90 million machines, completely eclipsing rival’s Nintendo’s eighteen million N64 sales and burying poor Sega, which sold only nine million units of its Saturn.98 Today, as Sony seeks to remake itself, its video game business remains one of its few bright lights.
In cases of competitor-led compelling value, the uncertainty is two-fold: (1) Will the new features be differentially attractive enough to drive share gains? And (2) will the existing competitors be sufficiently delayed in their response?
Competitor-led origination often requires gut-wrenching big bang commitments up front. The time constants are less, and competitive response far more imminent. Often, you must make formal arrangements with providers of complements ahead of time—they will not sign up without such commitments. For example, in the case of the PlayS
tation, Sony had to make such commitments to independent game companies to ensure they would create games for the platform in the first place. In the case of the iPhone, it was telecommunication giants.
Conclusion
Those two questions—“What must I do?” and “When can I do it?”—hold the key to developing Power in your business. This chapter covered the first question, and shortly in the next chapter, we will tackle the second.
The answer to the “What?” question provides a vital insight into Dynamics: Power comes on the heels of invention, be it in products, processes, brands or business models. However, most invention is merely a manifestation of operational excellence and thus not immune to the arbitraging actions of competition. So in this formative period, as your invention takes shape, you must attune yourself to the exigencies of Power and stay constantly vigilant. This is why I developed the 7 Powers—to give you a ready guide for this.
Steve Jobs famously proselytized for “insanely great products.” This was not whimsical, but deeply strategic. Invention not only opens the door to Power, it also fuels market size, the other half of the Fundamental Equation of Strategy.
7 Powers Page 11