Business Strategy Needs a Big Shift

Business strategy has evolved dramatically over the past four decades in response to the Big Shift that is re-shaping our global business landscape. We’re on the cusp of yet another shift that will determine who wins and who loses in the years ahead.

We’ve recently been exploring some key elements required to escape from the dark side of technology: passion, institutional innovation and movements shaped by narratives.

Today, we’ll look at the importance of new approaches to strategic advantage. These new approaches offer the potential to learn faster in ways that will be very difficult for others to copy. In a world of mounting performance pressure, this is a powerful advantage.

A brief history

Business strategy emerged in full force in the 1970’s and 1980’s with a strong focus on structural advantage. The essence of structural advantage was simple: find barriers to entry that will protect a company from competition. These barriers could take many forms: for example, geographic, economic, technological (patents) or regulatory. This made sense in a push based world: the key was to build walls to prevent others from pushing you out of your leadership position.

But here’s the problem. The Big Shift is ultimately about the convergence of two powerful forces: digital technology infrastructures and long-term shifts in public policy towards economic liberalization. These two forces together are systematically and significantly reducing barriers to entry and barriers to movement on a global scale. The structural advantages that used to provide safe havens became less and less effective. If you’re an incumbent, welcome to the dark side!

In response to these developments, we saw a first big shift in strategic thinking, one that could be broadly framed as a transition from strategies of position to strategies of movement. The key thrust was that, if you couldn’t rely on position to protect you, you had to focus on moving faster. Strategy was reduced to execution, hustle and adaptation. Move more quickly and efficiently than anyone else and you could still stay ahead of the pack.

But this also has a problem. The dark side of technology offers the trifecta of all challenges:

1. Increasing competitive intensity,
2. accelerating change and
3. growing uncertainty, often taking the form of extreme unanticipated events, sometimes known as “Black Swans” (per Nassim Nicholas Taleb).

In that kind of environment, movement quickly becomes a treadmill that moves faster and faster and, when you least expect it, lurches to a stop and throws you against the wall.

Don’t get me wrong. Execution, hustle and adaptation are all necessary for survival. But movement alone, no matter how efficiently executed, may no longer be enough for us to escape the dark side of technology. Instead, it may just suck us deeper and deeper into the abyss of the dark side.

So, what is to be done? Perhaps it’s time to execute yet another shift in business strategy. One that helps us to harness the capabilities of the Big Shift to accomplish things that weren’t even possible before.

What would this new form of strategy look like? John Seely Brown and I started to reflect on this in some earlier writings here and here. But let me offer a brief update and synthesis here.

We now have an opportunity to take strategy to a new level, one that integrates position and movement in a profoundly new and powerful way.

The Growing Importance of Position

Let’s start with position. What if we expand our thinking about position? In the past, position was all about protection – how do we build bigger and more secure barriers to hold off the hordes seeking to unseat us?

In the world of the Big Shift, the most valuable positions help us to influence events and achieve greater leverage by mobilizing the resources of others – we’re able to accomplish far more with a lot less. Let’s call these strategic positions “influence points”. Control is less and less feasible in a turbulent world, but if we play our cards right, we might be able to significantly influence or shape the evolution of the world around us. Through influence, we can motivate others to invest and act in ways that reinforce and amplify our own efforts.

The Big Shift is creating a much more richly connected world. Platforms of various types are making it easier for us to find and connect with each other on a global scale. Business networks and other kinds of business ecosystems are emerging on top of these platforms to help us move from short-term transactions to long-term relationships. And we’re able to scale these relationships in ways that draw in increasingly diverse participants from across the globe. Connections proliferate, but they don’t expand evenly. They increasingly exhibit power laws where a few nodes concentrate an extraordinary number of connections and a very large number of nodes have very few connections.

Influence points tend to emerge whenever and wherever relationships begin to concentrate. Think about it. In a world shaped by knowledge flows, you want to be at the intersection of as many flows as possible. These influence points bring some awesome advantages:

1. By having privileged access to flows, you’re in a better position to anticipate what’s going to happen by seeing signals before anyone else does.
2. By being in the middle of more flows, you have an opportunity to shape those flows in ways that can strengthen your position and give you important leverage in a world of mounting performance pressure. When you’re in the flow, small moves, smartly made, can indeed set very big things into motion.
3. By concentrating information and knowledge flows within a broader system, these influence points drive more rapid learning by offering privileged access to a growing and diverse set of information or knowledge flows. In a turbulent world, this is perhaps the most significant advantage of all. If my firm or institution can learn faster than anyone else, it will have a significant advantage relative to those who are scrambling to catch up.

OK, now all of this can sound pretty abstract. Let’s make this a little more concrete. We can explain a lot of the evolution of the personal computer industry by focusing on who established a leadership position in the key influence points of that device – the microprocessor and operating system components. Why were these such important influence points? Because they shaped the functionality and options for all the developers of all the other components of the device.

As a result, all the participants in the personal computer ecosystem had a strong motivation to connect with the owners of the leading microprocessor and the leading operating system – they were trying to anticipate how these components would evolve and what the implications might be for their own development efforts. The companies owning these two critical components became a concentration point for knowledge flows as more and more participants reached out to them and shared their own business plans. They had privileged access to knowledge flows that no one else could match.

What are some of the criteria for anticipating where these influence points might emerge?

• They tend to provide significant and sustainable functionality to the broader platform or ecosystem. Again, think about the critical role that the operating system plays in the personal computer – almost all of the activity in the device is governed in one way or another by the functionality of the operating system.
• The functionality of these influence points tends to evolve rapidly over time – think once again about the evolution of the personal computer operating system.
• The influence point benefits from network effects that drive consolidation and concentration of participants at the influence point. Lots of participants vied to provide operating systems for the personal computer but at the end of the day only one or two players remain in this space.

Finally, these influence points encourage fragmentation of the rest of the platform or ecosystem. It’s not an accident that the operating system promoting both fragmentation of device manufacturers and application developers won the battle for the personal computer. This fragmentation of the rest of the system reinforces the advantage of the company occupying the influence point.

Influence points emerge and evolve by harnessing the power of pull. They attract more and more participants through the value they provide. Equally importantly, they pull participants to act by creating positive incentives that shape action.

But is this limited just to technology platforms? I don’t think so. I’ve spent a long time studying the structure and evolution of social networks and business ecosystems. These systems also tend to develop influence points driven by the dynamics of the interactions and network effects. As mentioned earlier, social networks and business ecosystems tend to develop power law profiles – a very few participants aggregate the largest number of interactions while there’s a “long tail” of participants with very few interactions.

Often, the organizer of an ecosystem or network becomes a natural aggregator of interactions because the organizer meets the four attributes of an influence point described above. This isn’t to say that these ecosystems or networks are hub and spoke, where all interactions must pass through a central hub. But often a very large number of the total interactions concentrate at these points, often far more interactions than any other aggregation point.

So, position may once again become a significant source of competitive advantage. But note that the value of the position has profoundly shifted from one of protection to one of leverage and learning. Rather than trying to build walls, these positions seek to connect with others in ever richer ways in order to expand influence, leverage and learning.

Integrating Movement into Position

But position alone will not be sufficient to create lasting strategic advantage. The key is to develop the capacity to move rapidly to reap the most benefit from influence, leverage and learning. Firms and other institutions need to cultivate the ability to participate in an expanding range of knowledge flows effectively. They must also find ways to effectively filter through this expanding range of knowledge flows to extract the insights and approaches that have the potential to create the most value. Finally, they also need to quickly turn around and apply these insights and approaches both within their organization and across a broader range of participants in the system. In sum, the winners will be those who master the techniques required for scalable learning.

Ultimately, the true winners of these new strategies will not just be those who find ways to occupy influence points, but those who also are adept at building the only sustainable edge – the capability to learn faster by working effectively with others. By effectively combining position and movement, these players will be able to tap into the power of network effects, attracting more and more participants, drawn by the potential to learn faster.

So, strategies of movement have a prominent role to play but it’s a very different kind of movement. Now, we’re not just talking about reacting and moving quickly. These are proactive strategies of movement – designed to strengthen influence points by harnessing their learning potential. If done right, it creates a powerful virtuous cycle – more effective learning attracts others and expands influence which in turn increases the potential for further learning. To borrow a favorite phrase from my colleague, John Seely Brown, we trigger a generative dance between position and movement that takes us to unforeseen levels of impact.

Bottom Line

We’re on the cusp of yet another fundamental shift in approaches to business strategy. In the place of the raging battles that have occurred between advocates of strategies of position and strategies of movement, the Big Shift will reward those who can find effectively integrate new approaches to both position and movement.

In thinking about potential influence points that can focus these strategies, don’t just look at what exists today, but what could exist. Often, the most powerful influence points are not yet in play but instead could emerge from a deep understanding of the unmet needs of participants and unexploited capabilities of new generations of technology. If an influence point already exists, it’s likely to be occupied by incumbents that may be difficult to unseat. It’s likely to be far more effective to identify and target influence points that haven’t yet emerged and to design shaping strategies that will help to coalesce these influence points.

I’m not by any means suggesting that all institutions must occupy influence points to be successful – that clearly would be an impossible task. The good news is that you don’t need to occupy the influence point itself, but you do need to understand where the influence points are and find ways to connect to them so that you can learn faster as well and participate in the opportunities to expand value creation that come from leverage and learning.

Here are some key questions you should be asking and answering:

• Who occupies influence points today within my market or industry?
• What are potential new influence points that might emerge from the fundamental forces reshaping my market or industry?
• Who is working to build and occupy new influence points?
• Have I built robust relationships with these players?

If we shift our strategic focus to this new opportunity, we may indeed be able to craft strategies that help us to escape from the clutches of the dark side of technology. But we may accomplish far more. We may become the catalysts for those collaboration curves that help us to unleash increasing returns opportunities. These increasing returns may ultimately benefit not only ourselves but many others.

One final thought – what if we applied this strategic notion of influence points and accelerated learning to our individual lives? How could we increase our personal impact?

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John Hagel leads a major research center in Silicon Valley and writes extensively on evolving forms of innovation. His most recent book is The Power of Pull, his personal blog is Edge Perspectives, and his Twitter handle is @jhagel.