Strategies for small fish in a big pond
From HBS Working Knowledge
Special to CNET News.com
August 26, 2004, 5:00 PM PDT
Editor's note: Welcome to the age of business interdependence, say HBS professor Marco Iansiti and collaborator Roy Levien, authors of the new HBSP book, "The Keystone Advantage: What the New Dynamics of Business Ecosystems Mean for Strategy, Innovation, and Sustainability."
Think of the business environment as a series of ecosystems, they urge, with "keystone" companies such as Microsoft and Wal-Mart providing for the health of all who do business with them. What are the best strategies for companies living in these ecosystems? This excerpt focuses on strategies for niche players.The art of business today seems to be the ability to influence resources your company doesn't own--resources such as the production scheduling of manufacturing partners, the packaging requirements of distribution partners, and the development of technical standards your products must incorporate.
The essence of a niche strategy is to achieve specialization by taking explicit advantage of the opportunities provided by the ecosystem while avoiding the kinds of traps that challenge firms in such environments. Our observation of a variety of niche strategies in action highlights a few critical components.
Specialize in unique capabilities
Over time, it was inevitable that these new niches would merge with existing ones. The services are now broadly offered, but the firms that started developing them have ceased to exist as independent entities. In those cases in which the skills and capabilities that characterized new ecosystem domains were distinct enough to justify a truly focused strategy (for example, personal financial accounting or customer relationship management software), these strategies have endured for many years and enabled the growth of large and successful firms, such as Intuit and Siebel Systems.
A well-executed niche strategy, because of its focus, will exhibit strong defenses against a keystone and dominator trying to expand. Intuit is again a strong example here, with the continued success of its Quicken application against Microsoft Money. The key is finding a large enough market that requires specialized capabilities.
Leverage other capabilities from keystones
In doing this, niche strategies trade off risk with productivity. Strong economies can often be found by niche players by leveraging a single platform--for example, Nvidia can optimize its designs for yields on TSMC's production lines. If a strong, trustworthy keystone is present in the niche player's ecosystem, there may be no apparent reason for the niche player to connect to multiple platforms.
However, because of the risk of keystone collapse and keystone holdup, niche players may want to diversify and invest in connecting with multiple hubs. As we discuss in some detail later, the crucial factor in figuring out which of these strategies to pursue is developing an understanding of the necessary "coupling strength," which defines the switching costs between keystones.Sustain innovation
Whether dealing with one or multiple keystones, the heart of technology strategy for a niche player is to continually innovate by integrating technology available from the ecosystem to sharpen the niche offering that it is crafting. It is important to examine technological threats coming from the edge, and to leverage the ecosystem in crafting response strategies. This lets focused players develop specific solutions and concentrate on integrating these with key specific assets inside the firm. Intuit enabled its application, Quicken, for the Web by integrating technology components provided by Microsoft.
This implies a fundamental change in technology strategy models. In a vertically integrated setting, a company needs to develop into a massive organization and cover a broad variety of business areas in order to scale and survive. This makes scaling the company very challenging and requires a massive amount of capital. Additionally, it makes the company highly vulnerable to technological changes and other types of shocks. In a distributed business ecosystem, a firm can scale more easily and respond to shocks by leveraging capabilities provided by others.
Healthy business ecosystems will support a large number of niche firms for long, sustained periods of time. In the software industry, a large number of niche players have endured for many years, constantly generating a variety of product innovations. Despite the contraction caused by the crash of 2000 and the recession that followed, the ecosystem is still enabling thousands of different firms to survive.
Value sharing and risk management
Tight coupling: Manage risk and dependencies
First, the tighter the coupling between organizations, the higher the risk of hold-up and the more power that platforms have over niche players. Thus, niche firms are much more at risk if a keystone decides to dominate its environment. Additionally, if the coupling strength is high, niche firms are more vulnerable to significant changes in technology and business models, which explains the many challenges and incumbent failures highlighted in a variety of research.
A common failure of niche players is to bind too tightly to a keystone, which increases the power of the keystone over the niche player and can ultimately compromise the health of the entire ecosystem.
Loose coupling: Embrace mobility and flexibility
The emergence of loose coupling has enormous implications for niche firms because it means that an organization is no longer as threatened by the replacement of one technology with another. Because interfaces in loosely coupled systems are lightweight and noninvasive, firms can change much more easily in response to massive shifts in the technological environment. In essence, this means that they can much more easily "plug in" to a different way of doing business. Examples are provided by Nvidia easily cutting across generations of semiconductor technology, or by enterprise IT departments easily embracing the Web.
In the software industry, for example, we have witnessed how the emergence of loosely coupled interfaces has enabled the majority of application companies to leverage multiple platforms. The same is true in the semiconductor and retail industries. The reality is that loosely coupled interfaces such as XML are quite powerful, so that reasonably strong efficiencies can be achieved with little commitment of platform-specific assets. Niche players can connect to both TSMC and UMC, or to Wal-Mart and Target, or to Microsoft and Apple. They can exchange design rules and purchase orders, and can optimize supply chains across different systems.
Niche leverage: Power over keystones
Niche players, in effect, can use this leverage to keep keystones honest and to prevent them from straying into becoming dominators. It is in fact in this sense that ecosystems compete: They compete with each other for mobile niche players. And it is precisely this competition that keeps ecosystems healthy. Without niche players who understand and exercise this leverage, ecosystems will be less healthy than they could be and may fall into sickness if their keystone loses sight of its role.
Innovation and niche evolution
Firms that actively seek out new terrain in this way have the further advantage that as they distinguish themselves in new domains they may create platforms and become keystones themselves. Nvidia is a great example of this kind of pattern.
Nvidia's emergent keystone strategy
Nvidia's Select Builder program, for example, supports system builders for PCs, laptops and workstations. Nvidia also maintains reseller and distributor partnership programs for firms that promote the its line of products. In addition, the firm supports an active Nvidia Registered Developer program to provide software developers in sectors ranging from video games to engineering simulation with training, tools, and support for application development tailored to exploit the unique capabilities of its graphics processors.
Nvidia provides a significant set of tools, libraries and standard interfaces that enable its own ecosystem to be more effective. This sharing of assets with channel partners and applications developers makes the comapny a keystone in its own right, with a role that is likely to increase in significance over time.
Building the complexity of the ecosystem
© Copyright 2004 President and Fellows of Harvard College
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