In 1980, an obscure professor at Harvard Business School named Michael Porter published Competitive Strategy, which called for managers to drive efficiency by optimizing their firm’s value chain, maximize bargaining bargaining power with buyers and suppliers, while at the same time minimizing threats from new market entrants and substitute goods.
These concepts launched Porter into the top rank of strategic thinkers and profoundly influenced how businesses were run. Much like chess grandmasters, CEO’s worked to develop the right sequence of strategic moves that would position their firms to exert power and dominate their respective industries.
Yet much has changed in since then. Rather than an orderly marketplace defined by clear boundaries of industry and geography, we operate in a semantic economy where everything is connected. The most important assets are no longer the ones we control, but those that reside in ecosystems that we access through platforms. That changes the game entirely.
Going From Research & Develop To Connect & Develop
Procter & Gamble is exactly the type of company that Porter had in mind when he formulated his theory of competition. Through its efficient supply chain and world class marketing operation, it created massive bargaining power with buyers and suppliers, while its century long commitment to R&D helped it fend off potential competitors and grow revenues.
However, in the late 90’s, when Nabil Sakkab took over as Senior Vice President of Research and Development at the Fabric Care division, he saw that even the resources of a giant like P&G were no longer enough to keep growth going. He quickly realized that he had to do something radically different.
So rather than looking to increase his bargaining power with suppliers, he did something that had the potential to undercut it. He began working closely with suppliers to solve key research challenges. It worked so well that the process was expanded into P&G’s Connect & Develop program, which has made open innovation a top priority.
Today, Connect & Develop is clearly an unqualified success. Sakkab was able to meet the goals he set out to achieve for his division, helping to grow the business by 50% while reducing R&D resources by 25% by the time he moved to a corporate role in 2005. It also led to the led to development of Swiffer and to the expansion of Febreze, both are now billion dollar brands.
Why Open Beats Closed
Around the time that Sakkab began thinking about partnering with suppliers to solve problems, executives at Eli Lilly were thinking about how they could leverage the Internet. Alph Bingham, who was a responsible for managing the pharmaceutical giant’s portfolio of research, was invited to a brainstorming session to stimulate new ideas.
Bingham was already fascinated with Linux, the open source operating system that Linus Torvalds had released in 1991, and how an ecosystem of thousands of volunteers were able to create and advance complex software that could compete with the best proprietary products. He thought that there could be great potential for a “Linux with a bounty” that could solve some of the tough problems that Eli Lilly hadn’t been able to find an answer for.
The Innocentive platform went live in June 2001 with 21 problems, many of which the company had been working on for years. Although the bounties were small in the context of the pharmaceutical industry — $20,000 — $25,000 — by the end of the year a third of them were solved. It was an astounding success!
It soon became clear that more challenges on the site would attract more solvers, so they started recruiting other companies to the platform. When results improved, they even began inviting competitors to post challenges as well. Today, Innocentive has over 100,000 solvers that work out hundreds of problems so tough that even the smartest companies can’t crack them.
In 2005, Eli Lilly spun out InnoCentive as a fully independent platform. It only attracted about $30 million — not a material event for a company that counts its revenues in the billions. Being able to access a fully open platform was worth more to it than being able to own one it could control.
Making Common Cause With The Barbarians At The Gate
While Linux may have inspired Alph Bingham, Microsoft CEO Steve Ballmer was considerably less sanguine. In fact, he called it a cancer in 2001 and vowed to fight it tooth and nail.
Yet things had changed by 2010. When Microsoft launched Kinect for the Xbox in 2010 it quickly became the hottest consumer device ever, selling 8 million units in just the first two months. Almost as soon as it was launched, hackers started fiddling with it, altering its capabilities to do things that Microsoft never intended.
Historically, Microsoft would have had its lawyers crank out cease and desist orders. But it didn’t. In fact, the tech giant embraced the hackers, altering the USB cable to allow for more developmental flexibility, releasing a software development kit (SDK) in order to make modification easier and even creating an incubator to offer financing for the best hacks.
As for Linux, apparently Microsoft now loves it and has built its new Azure cloud platform around the open source operating system. It seems now that even in Redmond it is clear that power has shifted from corporations to platforms.
Collaboration Is The New Competitive Advantage
Clearly, much has changed since Porter wrote his book nearly a half century ago. Today, we live in a networked world and competitive advantage is no longer the sum of all efficiencies, but the sum of all connections. Strategy, therefore, must be focused on widening and deepening links to resources outside the firm.
So we increasingly need to use platforms to access ecosystems of talent, technology and information. Even the internal capabilities of corporate giants like Procter & Gamble, Eli Lilly and Microsoft pale in comparison to that which can be found outside the boundaries of an organization. As Bill Joy put it, “no matter who you are, most of the smartest people work for someone else.”
Power, therefore, no longer resides at the top of the value chain, but at the center of networks. That’s why collaboration is becoming a new source of competitive advantage. Today, the best way to become a dominant player is to become an indispensable partner. Nobody, no matter what assets they control, can afford to go it alone anymore.
So this new era of platforms offers great opportunities, but also great challenges. We now need to design our organizations for agility, empathy and interconnectedness, rather than for scale, dominance and efficiency.
This article has been adapted from my book, Mapping Innovation