Perspectives Systems Advantage This Perspective from The Boston Consulting Group’s Strategy In- stitute is the eighth in a series on the future of strategy. Earlier articles examined the central role of adaptive advantage in to- day’s turbulent and unpredictable business environment and the capabilities that contribute to it. This article discusses the impor- tance of “systems advantage” in leveraging the power of multi- company systems to extend the adaptive potential of an individ- ual organization. “ O ur competitors aren’t taking market share with de- vices; they are taking market share with an entire ecosystem.” This insight from Stephen Elop, Nokia’s president and CEO, explains an important aspect of the rapid rise of Apple’s iPhone and Google’s Android system in the global smartphone market.■ Many companies are finding According to traditional strategic paradigms, this swift andthemselves part of—or competing sizable competitive shift should not have happened. Nokiaagainst—highly networked systems had the advantages of being an early mover and market lead-of partners, customers, and suppliers. er with a strong cost position. If the experience curve were the key driver of success, the company would still be domi-■ As positional advantage is more nating the smartphone market. Yet Nokia was attacked by aneasily challenged, multicompany sys- entirely different kind of competitor: an adaptive businesstems extend the adaptive potential of ecosystem. It was not simply Apple but its system of morean individual player. than 200 components suppliers, multiple telecom partner- ships, and innumerable independent application develop-■ Multicompany systems are able to ers—all created to support the iPhone—that has proved soinnovate rapidly, leapfrog the experi- powerful. Google’s Android operating system also leveragedence curve, and quickly attain market a broad array of hardware partners and application develop-leadership. ers. The ability to bring together the assets and capabilities of so many entities allowed these smartphone entrants to■ Adaptive systems require a less leapfrog the experience curve and become market leaders indetailed “instruction set” that allows record time.some aspects to emerge spontaneouslyfrom interactions among players. Nokia’s experience offers three lessons for today’s managers. First, competitive shifts are now occurring with blistering speed. Second, as changes in markets and technologies occur more frequently, positional advantage becomes less durable, and the value of adaptiveness increases. Third, a multiplayer ecosystem can be a highly effective lever for addressing this adaptive imperative.
Systems Advantage 2There’s a reason why companies are increasingly find- Although the technology sector has proved fertileing themselves either part of—or competing against— ground for business systems, the systems approach isloosely organized groups of players and partners. Ad- not limited to the digital world. Collaborative supplyvances in information technology and telecom- chains—such as Toyota’s automotive-supply pyramids,munications—from cheap bandwidth and computing with their kanban and kaizen feedback mechanisms—power to online collaboration platforms—have enabled are early examples of adaptive systems.diverse sets of individuals and companies to interactquickly, richly, and on a greater scale than ever before.1 Systems can exhibit several properties that enable themAdvances in shipping—such as the ease and efficiency to deal effectively with adaptive challenges. They canthat results from the universal standards of container- mobilize an extremely broad range of capabilities andization—along with the steady erosion of trade barriers assets, innovate rapidly through parallel activity, andhave facilitated the exchange of physical goods within distribute risk across many players. Their modularsystems. Finally, the potential of a systems approach is structure facilitates responsiveness to changing needsincreasingly being demonstrated by a growing number through recombination, speedy scale-up, and broad-of examples from firms such as Apple, Procter & Gam- based signal detection. (See the sidebar “Nature’sble, and Toyota. Systems.”)Yet most executives lack a structured way to think aboutand create an advantaged system of actors. Traditional Nature’s Systemsapproaches to strategy focus primarily on the individualfirm or business unit and are largely silent about man-aging a network of players beyond its boundaries. Biology teems with examples of adaptive systems. The human immune system, for example, exhibits adapta-But even if the broader playbook on “transcorporate tion that enables it to cope with an unpredictable and vir- tually infinitely diverse set of pathogens. In spite of its so-strategy” has yet to be written, it is possible to define phistication, it can mobilize itself against threats by usingsome emerging guiding principles for companies seek- “rules” and properties intrinsic to the system, rather thaning to leverage a systems approach in order to extend taking direction from the brain in a top-down manner.their adaptive capabilities. Some of those properties include the following: ◊ Diversity is enabled by modularity. The recombinationProperties of Adaptive Systems of modular molecular structures enables a small num- ber of genes to generate a vast number of differentAn adaptive business system is formed by diverse play- antigen receptors.ers interacting in a semistructured fashion to achievemutual business goals. Systems can take many familiar ◊ Tight feedback loops facilitate rapid responses. When ac-forms, including the following: tivated by a particular pathogen, specialized cells ac- celerate the production of large numbers of specific◊ Production systems that are orchestrated by a central antibodies to counter a threat. player and that aggregate diverse capabilities, such as ◊ Learning is built into the system. Far from operating with the iPod/iTunes ecosystem a rigid design, the immune system “remembers” previ- ous threats and adapts its tool kit to increase its ef-◊ Collaborative production communities, such as Wiki- fectiveness over time. pedia or Linux ◊ Redundancy is key. The antibody response described◊ Innovation networks, such as Procter & Gamble’s ex- above is only one of several overlapping subsystems of the immune system that enable it to respond to differ- tended ecosystem ent kinds of threats over different timeframes.◊ Marketplace platforms, such as eBay, Google Adsense, As we continue to learn more about biological systems, or the iPhone App Store we are likely to uncover many more insights into how to structure, evolve, manage, and sustain advantaged and1. See the book Blown to Bits: How the New Economics of Information adaptive business systems.Transforms Strategy, by BCG’s Philip Evans and Thomas Wurster, for adetailed discussion of deconstruction—the end of traditional vertical in-tegration and a key trigger for adaptive multicompany systems. Here,we build on their pioneering thinking in this area.
Systems Advantage 3Although no business is an island in today’s globalized cline in shipping costs and an order-of-magnitude incre-and hyperconnected world, not every business possess- ase in shipping traffic among diverse nations and compa-es systems advantage—the ability to build and maintain nies as well as in modes of transport.a system of companies whose high collective adaptabil-ity enables them to perform together more successfully Foster trust among participants. To work together ef-and sustainably than their competitors. fectively, actors in a system need to trust one another. Trust can be nurtured by enabling players to interact fre-Guidelines for an Adaptive Systems quently and transparently in a “repeated game” that re- lies on shared norms and that is often facilitated by an Approach explicit reputational “currency.” One factor in eBay’s suc-In an increasing number of situations, traditional ap- cess, for example, was the company’s ability to accelerateproaches to change taken by single enterprises acting trust among its members by enabling photos of productsalone are either too slow or too risky or lack sufficiently to be uploaded and by creating a mechanism for ratingbroad capabilities to enable successful adaptation. Al- sellers—a scalable, visible form of trust.though many situations might call for a systems ap-proach, the following three are especially common Ensure minimal barriers to entry and sufficient re-across industries: wards to motivate participation. Systems will form and persist only if they offer a compelling value proposi-◊ To deal with high levels of product complexity or high tion to current and potential members. Both the costs demand for variety, a very diverse set of capabilities or and benefits of participation (which needn’t be entirely assets is required. monetary) must be managed. Consider Qualcomm’s Brew Mobile Platform. Despite debuting years ahead of◊ In periods of high uncertainty—which can occur when- Android, Brew has lagged in establishing a large com- ever companies enter or create a new market—it is munity of application developers. Whereas the process imperative to create a wide variety of options or to for submitting Android applications is both quick and share risk. free, Brew—until recently—required developers to purchase an application submission kit for more than◊ Situations of rapid or accelerating change in technol- $400 and endure a relatively cumbersome testing and ogy or customer demands call for the ability to con- approval process. In Android’s first three years, Android duct parallel experimentation with a diverse group of applications were downloaded more than 1.5 billion innovators. times. By contrast, Brew applications accounted for less than half as many downloads in three times as manyManaging an adaptive system differs from managing a years.single company. For one thing, a system is more com-plex, with many more moving parts. Also, in a system Limit the portability of value beyond the system. Forthere is less control over individual players—and a a system to be adaptive, members must be able to accessgreater range of ambitions and motivations, some of and build upon the knowledge of others. But to preventwhich may conflict. As a result, the “instruction set” for inadvertently benefiting competitors, companies must systems is less detailed by design, and some aspects of link the ability to extract value from intellectual propertythe system emerge spontaneously from interactions or other kinds of resources to participation in the system.among players over time. For example, sellers with a high rating on eBay have a documented monetizable asset: their price realization isWe’ve studied adaptive systems in a range of contexts, 6 to 8 percent higher than that of unrated or poorly ratedfrom business to biology, to understand what makes sellers. Because that rating is specifically linked to the them successful. Drawing on our analysis and from our eBay community, however, it would be difficult for sellers own experience, we’ve developed nine guiding princi- to monetize that reputation outside the eBay system.ples for creating and maintaining advantaged and adap- Thus, these sellers have an interest in the continued suc-tive business systems. cess of eBay.Establish common standards to enable frequent, low- Preserve redundancy. Adaptive systems typically havecost interactions. A good example of the power of stan- redundant communication pathways and multiple mem-dardization is the introduction of freight containers with bers capable of executing critical functions. These fea-standard sizes. Containerization enabled a dramatic de- tures ensure that the system cannot be crippled by the
Systems Advantage 4loss of any individual member or by changes in needs or leveraging external insights and capabilities. It estab-roles. lished Connect + Develop, an open-innovation platform designed to solicit new ideas from outsiders; created theFacilitate diversity within the system. Systems must YourEncore community of retired engineers and scien-have a diverse set of participants and capabilities so that tists to solve difficult R&D problems; and launched thethey foster innovation and adaptation in times of Vocalpoint community of more than 500,000 motherschange. Indeed, the diversity of contributors in open- who receive early access to new products in exchangesource systems such as the iPhone application network for sharing their opinions about them.and Linux has been central to those systems’ continuingsuccess. During stable periods, pressure from competi- These system-oriented efforts provide product-develop-tion and the desire for efficiency can tend to reduce di- ment teams with new ideas and critical feedback andversity as a system moves toward equilibrium. To sustain enable them to adapt quickly to changes in the market.adaptive capacity, it is critical to maintain diversity within These initiatives have helped boost R&D productivitythe system by continually seeking potential new mem- by 60 percent in just a few short years.bers and enabling them to contribute their unique capa-bilities, assets, or insights to the system. Moving Toward an Adaptive SystemCultivate flexibility in the system. As interactions be- If you are among the many business leaders who arecome trusted relationships over time, the perceived cost concerned about rapidly rising product complexity andof change increases. This shift can cause a system’s struc- variety, market uncertainty, and accelerating change inture to become rigid—inhibiting the recombination and technologies and markets—or if you are struggling withintroduction of new capabilities that are essential for in- how to maximize the strategic value of your growing listnovation and adaptation. Firms can cultivate flexibility of external partners—the following questions will helpby building modularity and interchangeability into their you prepare to create a systems advantage:products and business systems, by avoiding exclusivelong-term contracts, and by constantly looking for new ◊ How could a systems approach benefit our business?partnerships in response to change. ◊ Who might we want to participate in the system andEnsure tight feedback loops. To maintain the system’s how could we motivate them to participate?adaptability, participants must be able to readily identifyand respond to internal or external changes. Wal-Mart ◊ What platforms do we need to build or establish in or-fosters such feedback by frequently sharing real-time der for the system to emerge?sales data with its suppliers, which can then respondwith appropriate changes in distribution and stocking. ◊ Which elements of the system should we standardizeSuppliers that use the information to meet Wal-Mart’s or control?expectations on inventory metrics are able to share inthe resulting benefits, including reduced transaction ◊ Which elements of the system should we leave flexiblecosts and fewer stockouts. and open to creativity and innovation?Determine what to structure and when to relax con- ◊ What do we “give away” and what do we control totrol. A good rule of thumb is to enforce the mechanisms sustainably capture value from the system?that enable productive interaction among memberswhile relaxing constraints on who interacts with whom, ◊ Which mechanisms do we need to ensure and main-as well as on specific outcomes and activities. For exam- tain the adaptive capacity of the system?ple, iPhone maintains tight control over its OS platformand hardware specifications to ensure a consistent, high- A cruel paradox of competition—observed in businessquality user experience, but it exerts minimal control as well as biology—is that the efficiency and specializa-over the details of application development in order to tion that enable a competitor to excel in one environ-foster creativity and innovation. ment often inhibit successful adaptation when the envi- ronment changes. Thus, in highly demanding andBy following many of these principles, Procter & Gam- dynamic environments, the challenge is to find a strat-ble has pioneered an exemplary holistic approach to sys- egy that enables specialization without rigidity. Adap-tems advantage through a series of programs aimed at tive systems can help companies answer that challenge