Friend or Foe?
Wal-Mart thrives, Apple Computer stumbles, and the start-up Netscape emerges out of nowhere to threaten to eat Microsoft's lunch on the World Wide Web. Business puzzles--or predictable biological outcomes?
"Think biologically," advises James Moore, author of The Death of Competition (HarperCollins). "The key to success in today's business environment is co-evolution--that is, building links with others so that we all evolve and get stronger."
According to Moore, this growth strategy is one that companies as diverse as Wal-Mart and Netscape are illustrative of, and to which they owe their success. "When we don't sustain the growth of the links, however, we falter, as Apple has done," adds Moore. "Biology can be a key tool in understanding--and shaping--the business context."
Radical as Moore's thinking is, businesses--including giants like AT&T--are flocking to his Geo-Partners research firm in Cambridge, Massachusetts, for a dose of his biologically based strategic thinking. The reason: "There's a growing awareness that competition as we have known it, the head-to-head conflicts of the past, is no longer the way to build a business," says Moore. But businesses that nurture their "ecosystems"--of suppliers, customers and so forth--will prosper, says Moore.
"We need to think differently, more collaboratively. That's how successes are created today," says Moore, who elaborates on his innova-tive views of business strategy in this exclusive interview.
The Death of Competition
Entrepreneur:When you tell business leaders "Competition is dead," what's the usual response?
James Moore: It depends on whether I stop right there. Usually, I continue and say that, obviously, competition is not going away. In fact, it is intensifying. But the way in which we have been trained to think about competition--which is to see it as head-to-head--is dead.
When I say that to executives, they tend to understand right away. They have come to see that just running faster--just doing more of what they're now doing--no longer cuts it.
Entrepreneur:If old-fashioned head-to-head competition doesn't work, what is the path to prosperity?
Moore: Today, one of the keys to making a business succeed is to link it with other businesses and with customers in creative ways. That requires collaborative thinking--thinking about networking, about building relationships.
This is coevolution, the notion that you will evolve your capabilities and I will evolve mine and if we don't evolve, we'll both rapidly be made obsolete. But often we can find ways to evolve together, to link what we're doing, and in the process, creative things happen, and we'll find sustainable and healthy profit margins.
Entrepreneur:Is coevolution important only to big companies, or should entrepreneurs care about it, too?
Moore: If they want to survive, they need to care about it. There was a time when it was enough to come up with a good product or service. But we now live in a highly competitive global economy where lots of companies around the world can make most of the products or services people are interested in. Think in terms of coevolution, though, and you can build a strong company by building strong relationships.
Wal-Mart shows how this can be done. Key to its success has been its relationships with suppliers, customers and the small towns in which it has traditionally located. In many of those towns, Wal-Mart is seen not as a discounter but closer to an [upscale department store]--its shopping environment has seemed upscale compared to what has been there. And Wal-Mart often is a major employer in the town in which it locates.
Wal-Mart doesn't simply open a store, it creates an ecosystem around itself--a system of suppliers, employees, customers and the community.
Entrepreneur:Can a small business do likewise? Can it, too, create an ecosystem?
Moore: Small business can create small ecosystems, too. In Cambridge, Massachusetts, where I live, there is a neighborhood pharmacy, Skendarian, that has created an ecosystem. It's built close relationships with hospitals and physicians. It distinguishes itself from chain drugstores by offering a much wider range of prescription drugs and by carrying orthopedic devices such as wheelchairs and braces.
The chains don't carry this merchandise, and Skendarian, too, would find it uneconomical if it hadn't built a close relationship with local hospitals and physicians. In a sense, Skendarian has reinvented itself as the resource for physicians and hospitals. That's creating an ecosystem.
Entrepreneur:So are you telling entrepreneurs it's essential to see their businesses as part of a broader economic context?
Moore: What I advocate is understanding that your success is critically dependent on the business environment around you--and that you can help shape that environment. You need to learn to reach out to customers, suppliers and other potential allies to share visions and better understand how to coevolve. You want to build a committed relationship with your customers so it's [worthwhile] to rework your business model to better serve them.
For instance: In my book, I cite a restaurant located on the outskirts of Toronto. An entrepreneur noticed that many [international] companies had established Canadian headquarters in the neighborhood, but there was no high-quality restaurant nearby. So he bought out a fast-food place and converted it into a high-end restaurant dedicated to serving the needs of the local executives and their clients. It's been very successful. That entrepreneur has consciously coevolved his restaurant with the neighboring businesses and, in many ways, operates what amounts to a club for them.
The Apple Computer Business Ecosystem
Entrepreneur:Does Apple Computer illustrate both the promise and peril of business ecosystems?
Moore: Apple is the wondrous and sad tale that illustrates this principle. In the early days, Steve Jobs had a vision where he saw personal computers as distinct from micro-computers--computers assembled by hobbyists who often were happy if the machine had blinking lights. Instead, Jobs said, he was looking for "the bicycle for the mind." Just as the bike made walking more efficient, he wanted the PC to leverage intellectual capabilities.
Jobs envisioned a total product concept--involving software, for instance--and he wasn't intent on Apple doing it all. He began working with alliance partners such as software developers, and Apple's ecosystem quickly outstripped Tandy's [the parent company of Radio Shack]. Tandy had gained an early lead in PCs, but it tried to control the market and, in fact, punished companies that developed third-party software by not allowing any in its stores. While Tandy hit the $100 million mark before Apple did, Tandy soon shriveled while Apple continued to grow.
Apple's ecosystem served it well--until IBM came along. IBM had the might and legitimacy to reach a much larger customer base because it had huge recognition in the business and consumer communities. The size of that potential stimulated interest from third-party vendors such as Intel, Microsoft and many others. Soon these alliances far overshadowed Apple's ecosystem, and Apple began its decline.
Entrepreneur:Yet an irony is that IBM, too, has lost control of the ecosystem it spawned and now ranks as a lesser player in the PC business.
Moore: Once an ecosystem becomes established, there are winners and losers, and IBM clearly has been a loser in the ecosystem it helped to spread. Intel and Microsoft have become the winners.
How do you become a winner? By maintaining an innovation trajectory that is critically important to other members of the community. Both Microsoft and Intel have continued to innovate, and their innovations provide tremendous value to end customers. Plus, both companies work closely with other businesses in the ecosystem that have coevolved their own innovations to work with Intel chips and Microsoft software.
The lesson for all businesses is the need to innovate and to keep innovating. Everybody has to con-stantly think about their innovation trajectory--how will you evolve today's products or services into tomorrow's? You have to, because somewhere in this global economy is somebody who's willing to discount heavily or invest heavily in research and development and who wants to spoil your margins.
Microsoft Vs. Netscape
Entrepreneur:Isn't Netscape a clear-cut example of innovation? It's put out three major releases of its Navigator software in the space of 18 months.
Moore: Netscape's battle with Microsoft [for dominance of the World Wide Web] is the premier example of the hottest of hot zones in the global economy. The Internet is the global economy's hot zone, and we all need to watch it, whether we're involved in computers or not, because this is where the new strategic ideas are facing their toughest tests.
For some years, Microsoft has dominated the PC business by moving quickly compared to the old standards. It would put out a major operating system revision every three years or so and would put out major updates of its applications at the same pace or slightly faster.
Then along comes Netscape, which decides it will radically accelerate the pace of new releases of its core product, the Web browser. It also sought to involve its customers as partners in the testing of new software--that is, it released early versions of new programs to a customer base that was tolerant of mistakes and willing to work with Netscape to coevolve the product. This dramatically shortened the testing cycle.
Moreover, Netscape decided to bypass traditional retail channels, meaning it could skip the months of preparation it took to get retailers ready to sell a new product. Yes, Netscape now puts some products in the traditional retail channel, but much of it is available via the Internet so it can be downloaded whenever the customer wants it.
The results are that Netscape has changed customer expectations and the retail channel, and dramatically accelerated its ability to get new releases into the market.
Entrepreneur:Good as all that might be, it wouldn't be enough to cause Microsoft to redirect its corporate strategies. How exactly has Netscape managed to force Microsoft to shift gears?
Moore: By building its own ecosystem. As Netscape worked to improve its core product, it took another key step--it worked very aggressively to develop relationships with software development allies. The result is literally thousands of small software companies that create what are called "plug-ins"--software that goes with Netscape [and enhances its capabilities]. So Netscape put in place the architecture for a community of coevolving businesses to work in parallel--and, collectively, Netscape has created a fast-moving business ecosystem.
About a year and a half ago, Microsoft woke up and realized Netscape had become a threat by emerging as an alternative center for software innovation. So the threat to Microsoft is the Netscape ecosystem, a combination of fast-moving core products and a very open framework in which other players can participate. Now Microsoft is responding, vigorously, and this battle between Netscape and Microsoft is one we can all profitably learn from.
Entrepreneur:You advise entrepreneurs that, when building a new business, they should pursue customers "who support learning." Why?
Moore: When building a new business ecosystem, it's usually not clear what customers will value. A key at this phase is to have a relationship with customers where they will tell you what they do and don't like. At this early stage, you also want customers who will accept a less-than-perfect product to have something that is dramatically better than what came before.
Netscape has done this brilliantly. It has developed a huge network of customers who are intrigued about being part of the coevolution of a whole new ecosystem. But all companies need to look for these customers because they are the ones who support and accelerate your innovation trajectory by helping you improve.
The Future of Your Business
Entrepreneur:You also stress the need for the entrepreneur to think hard about the future shape of the business.
Moore: You especially need to think about your business in terms of how it will scale up. Sam Walton is the classic example of this. From the very beginning, Walton wanted to create a system, not just a chain of stores. He thought a lot about how he would train people--other than himself--to be good retailers. He thought a lot about incentive compensations and early on began using stock to motivate people.
Henry Ford was the same way. From the beginning, he was obsessed with the idea that he wasn't creating a business but a business system that could be replicated in various markets--the assembly line. This thinking is central to successful entrepreneurship.
Entrepreneur:You advise entrepreneurs to "stay in naturally bounded markets." But how can we do that today when there are no safe harbors?
Moore: We can still find those naturally bounded markets. Wal-Mart has found them in retailing--an industry that traditionally has few boundaries to keep out competitors. But Wal-Mart nonetheless managed to identify rural markets that, in fact, are naturally bounded. Once Wal-Mart is entrenched in a market, there usually is just not enough additional business available to attract a competitor, whereas K mart--in its suburban and urban locations--has had to constantly fend off competitors because in those markets, there is plenty of business.
Similarly, the reason Netscape, Microsoft, Oracle and others are aggressively pursuing the "intranet" market [internal company networks that use Internet technology] is that these are relatively bounded markets. Once an insurance company goes with a specific software vendor to automate its back office, if the vendor does as good a job as the alternatives, the customer is not likely to switch. It's simply too difficult because the software becomes too embedded in the business processes.
So there are bounded markets--the entrepreneur just has to learn to look for them. Go back to Skendarian pharmacy in Cambridge. It is effectively meeting the needs of hospitals and physicians, and it doesn't charge exorbitant prices. In effect, Skendarian has found a small niche it can dominate. All companies need to think in those terms. It is crucial that businesses not be the second or third player in a market. It is better, especially for a small company, to be the only player in a small market that it has defined and now dominates.
Entrepreneur:What's the biological bottom line for an entrepreneur?
Moore: You need to think about the evolving economy to which you contribute. There are tremendous opportunities for finding a profitable place in a fast-evolving global economy if the entrepreneur understands that he or she is not alone.
In an environment where everyone's contributions are evolving, there are tremendous opportunities to be had in looking beyond your own business to find ways of working synergistically with other businesses to shape the future together.
GeoPartners Research Inc.,