The story of Blackberry underlines a new truth about the competitive landscape we live in: success or failure isn’t a function of a good product or service, or a well-run, cost effective company with a sound capital structure. It also requires an effective strategy to manage your ecosystem.
This was Blackberry’s failure. The company had become complacent about its remarkably loyal customers and didn’t recognize the threat posed by rival ecosystems. Like many established firms before it, Blackberry blew the opportunity to become a nodal player and leverage the energies of its complementors, in the way that Apple does with its apps.
But incumbents don’t always have to lose in the game of value capture. By playing their cards right, they may be able to sustain their position and both create a value proposition that will appeal to the end customer, and keep their suppliers and complementors in check.
In the July issue of HBR, Wharton’s John Paul MacDuffie and I report the results from our research on how value migrates in industry ecosystems. We consider why in sectors like the computers of the 1980s value can migrate from the former integrated firms, giants such as IBM, to the new specialists that spring up in the industry ecosystem, such as Microsoft and Intel, and see what makes the “bottleneck,” the core of the system’s value, shift around in the sector.
We then consider why other sectors, such as automobiles, despite the hype and the expectations of change and value chain reconfiguration, have been remarkably stable. Despite the massive outsourcing that has happened in cars, value appropriation (in terms of share of market capitalization in the ecosystem) still rests with car manufacturers and not the ever-growing component makers.
Our research offers an explanation about what drives value to move or not.
We find that firms that succeed are those that proactively manage the structure of their sectors and keep a set of suppliers working for them in hierarchical,[…]
Greece is back in the news. It’s not all bad. The country hasn’t crashed out of the euro and there’s even talk of “Grecovery”. Major funds, including Third Point LLC, are poised to invest billions of euros in the country. Chinese giant Cosco has announced big investments in Greece’s major port, Piraeus. Approval has been granted to build a new gas pipeline, which will pass from Azerbaijan through Greece.
Yet the recent kerfuffle around the national TV company and the near-collapse of the government are reminders that the country still has a way to go before it’s off the sick list.
On the positive side, Greece has tidied up its balance sheet (at least the privately held debt), and nearly balanced its budget, excluding interest payments. But it hasn’t yet tackled its operational challenges, the root causes of the country’s crisis.
The fact is that Greece is monstrously inefficient as a manager of public services. It is unable to collect taxes fairly, thus imposing unreasonable tax burdens for the few who work and pay taxes; tax evasion is still rampant; and, perhaps more importantly, the excessive red tape, strong bias for incumbents, and weak competition authorities get in the way of the efficient functioning of the economy.
Precious little has changed in this regard.
The previous government was an apolitical compromise between the conservative ND, the socialist former ruling party PASOK, and the left-wing DIMAR party. True, to the surprise of many analysts, the Prime Minister, Antonis Samaras, abandoned his earlier populist rhetoric and tried to sort out public finances. But on the issue of administrative reform, his government procrastinated, wasting a valuable year.
Pressures from EU creditor nations have mounted steadily in the last few months, and the Government was asked to identify 14,000 job cuts by September, with the first 2,000 to be fired by the summer. This was to signal that Greece had the will and skill not only to cut salaries but also to reform. Predictably, Greece was unable to meet its commitment.
Two weeks ago, the government got bad news on another structural front:[…]
The recent massive recall of Toyota and Nissan is a stark reminder of the costs of strategic dominance.
Although external suppliers create most (around 75%) of the value added in a car, automobile manufacturers have long for been legally responsible for the entire product. This principle, enshrined in US law by a famous decision of the New York Court of Appeals in 1916 (MacPherson vs. Buick), means that the automobile manufacturers, for better and for worse, have to stand by the car’s faults, whether they are the result of themselves or their suppliers.
Now, being legally liable for something might appear to be a headache, and many in the automobile industry certainly treat it as such. Yet my recent research, with Wharton’s John Paul MacDuffie, suggests that this short-term headache is also a long-term strategic weapon, which automobile manufacturers have used to ensure they keep a high, and steady proportion of the total value-add in the sector.
Despite the extensive outsourcing that took place in cars, from the 1980’s onwards, automobile manufacturers have been able to retain value. Unlike the computer sector, where vertical dis-integration led to value migration from computer makers such as IBM to chipmakers such as Intel and software and OS writers such as Microsoft, in cars the automobile OEMs still are able to keep the lion’s share of the sector’s total market capitalization.
This achievement is in no small measure due to the fact that they are ultimately legally responsible for a car. Their legal liability has allowed them to shape standards and demand compliance (with backing from regulators) from their suppliers. As a result the “master and servant” relations between those who outsource and those who produce have not reversed in the car industry, unlike the computer industry.
That being so, it is quite reasonable to expect automobile manufacturers to graciously accept responsibility for the faults of their cars, and take the short-term financial hit that recalls, small and large, impose.
The same goes for Tesco’s and other retailers in Europe, who were found to have horsemeat in their burgers.[…]
The recent scandal with Tesco’s burgers has reignited a discussion about who, along the value chain, should bear the brunt of responsibility for a product. Much has been said about the moral dimension; there’s been quite a bit of discussion about the legal issues of liabilities and representations; but much less has been said about the underlying strategic issues, where the burden of the certification and the liability that comes with it is a major blessing in disguise.
We live in a world of complicated, global value chains, with a myriad of participants in increasingly interdependent ecosystems. Simple, vertically integrated structures, responsible for all parts of the value chain are becoming a thing of the past. For more and more products — from simple ones like a cup of coffee to complex devices like smartphones and tablets — you find a bewildering plethora of firms (let’s call them ecosystem participants) coming together to give something to the final customer.
In these complicated ecosystems the question of who guarantees quality is absolutely pivotal. And, interestingly, it isn’t determined by fate or technology alone. Let’s take a simple product – wine, and consider who guarantees quality. For a good bottle of Bordeaux, what name would you think of? Perhaps Château Margaux, Petrus, or Lafite-Rothschild. For Port, the names might include Churchill, Warre, Sandeman, Taylor. Odd, isn’t it? For Bordeaux it’s French, yet for Portuguese Port, the names are English… Why so? It’s a fascinating story. It turns out that in Port, the quality is certified by shippers — who often don’t own any of the vineyards. In Bordeaux, it’s the producers. In the Cotes-du-Rhone area, it’s the commerçants — those who buy and oversee vinification. And, increasingly, supermarkets, further down the distribution chain, are also starting to be seen as guarantors of quality .
The question of who certifies quality is closely associated with the question of which part of the value chain becomes[…]
So the Davos schmooze-fest is over, and it’s been quite fun. One of the high points was organizing and moderating a private session on reforming the reform agenda, using as discussion leaders two prime ministers (Sweden and Latvia), the President of the European Parliament and the FT‘s Martin Wolf. Another was being told by an archbishop, at the Duke of York reception that evening, that he was thrilled to see PMs treated as if they were students – being asked questions, told when to get up or down. Funny thing is, they said they enjoyed it, too! It was also inspiring to take part in the private breakfast and lunch discussions, engaging on topics of substance with some pretty interesting souls. A preoccupation was the financial services sector, which is still a mess and isn’t about to be fixed just yet. Then again, apart from suffering an overdose of chit-chat over lunches and dinners with ambitions to change the world (if only…), it was fun to see that Blair looks older, that Gates does have an odd voice, and that in one panel a neighbor from my intentionally isolated country house at Kastriani, Kea was presenting (!). Oh, and the band in the McKinsey party, plus freezing in the small hours of the morning and chatting with the guy behind Google’s driverless car who turns out have been Herb Simon’s close friend and collaborator – and still has his calculator.
But, beyond the fun and feeling of self-importance associated with a personal (as opposed to institutional) invitation, what was the point of it all? On a personal level, it’s fun to expand your horizons and see beyond your peripheral vision. I was surprised to see the private and public sessions looking at how and why higher education, US-style, has to rethink its model and uniformly high cost base, which cripples alumni with debt without securing their future. Technology is on the cusp of disrupting this time-honored model, which still funds my own employer, and things are moving fast – faster than many in our profession would think. It was also encouraging to see the extent of talk (if[…]