Shortly after a child is born her universe begins to be established. This universe consists of those items within her immediate sight and reach. If she can see it, hear it taste it, smell it or touch it, it exists. The instant that changes the object ceases to exist in that child’s universe. As she grows, she can start to actually recognize certain objects as familiar, however that still has its limits. If the baby is in a highchair playing with her bowl of strained carrots, the carrots and the bowl are very much a part of her universe. However, if the bowl of strained carrots were to find their way on the floor and out of sight, they are no longer a part of her universe (even if she was the one to knock the bowl off the tray). If dad is feeding Junior in the same highchair he will encounter a child who obviously adores his father and wants to spend the rest of his life listening to his wise and much sought-after advice. In fact, dad is not only a part of Junior’s universe. He is his universe. However (with the exception of my son and daughter) if dad leaves the room, dad ceases to be a part of that universe. I know many of you will find this hard to believe, and I do not state it lightly. It was only after extensive research (and the realization that my son and daughter were exceptions to this rule) that I came to this conclusion.
The good news is that once the child becomes a toddler this perspective changes. They then realize that just because you are not immediately present you are still very much a part of their universe. In fact, they believe that the sole purpose for your entire existence is to take care of their needs, wants and whims. As a result, they see you as an essential element in their universe; one they admire and often want to emulate. This is a view that stays intact until they reach adolescence, at which time they still see your purpose in life in exactly the same way except they think you are dumber than a rock, and they don’t even like you much. At this point in their life they start to see their peers, teachers and others as important influences in their universe.
There are a couple of reasons adolescent children behave the way they do. One is hormonal, and the other has to do with preparing them for adulthood. In Dr. James Dobson’s book Preparing for Adolescence, he asserts that God ordains the rebellion of adolescent children. He believes that both the parent and the child must prepare themselves for the eventual separation that is a part of a healthy adulthood, and the rebellion and dissension is a mechanism designed to prepare them for that separation. “If I don’t like you very much any more, I won’t miss you as much when I am away from you.” And “if you are not so smart after all, I guess I must expand my sphere of influence in order to get along.” This might also explain why my parents suddenly became so smart when I turned 23. And so the cycle continues, and each step along the way an individual’s universe changes.
In a healthy individual that universe grows continually larger as they mature. In order for businesses to stay healthy today their leaders must also continually increase their view of the universe. It is easy for someone who has come up in the ranks of a company to understand this concept to at least some extent. Let’s take the example of Marianne. When Marianne started in her career with the company, her universe consisted primarily of the department to which she belonged. She was told that her manager was her best friend; that she needed to get along well with the other department members by being a team player; and because the nature of her job required interfaces outside her department, she needed to treat those individuals in an appropriate manner. However, once Marianne became a first level manager her universe started to expand. And because Marianne has been very successful over the years her universe has continued to expand every step along her career until it encompassed the entire company and all of their suppliers and customers. It is easy to see how Marianne’s universe has expanded as her sphere of influence has expanded. It is no wonder she has become the CEO since she has been able to grow market share for the company, beat out competition, keep the customers very satisfied, and make a handsome profit. Although most business people aspire to that level of success, it may not be enough in today’s world.
Now let’s look at the example of Dan who was recently hired out of college. If Dan’s manager is paying attention, and is a good leader, he is not going to tell Dan that he is his best friend, or that his universe should be the company. Instead, Dan’s excellent leader is going to instill in him the understanding that his universe is much larger than the company. He knows that if Dan can focus on the industry to which he is a part and how it fits with complementary industries he has significantly increased his opportunities for success.
Let’s start with the industry then move on to complementary businesses and industries. To make the point I will focus on the maintenance service industry for information technology (IT) equipment. In the 1960s and 1970s we saw electronic computing explode. During that era, computers were quite large and quite expensive. As a result the vast majority of all computing was done in a central-site data center. Those data centers were few, quite large, and maintained in a very controlled environment. At the same time the computer operators tended to be highly trained. During that same era the manufacturer of the equipment almost always performed maintenance service, because they had a ready supply of expensive, proprietary parts. This was the perfect place to be; the ability to maintain a product that was in a controlled campus environment and run by skilled people. At the same time, the majority of the mission-critical devices had built-in redundancy to keep them running in the event of a failure. To make it even more attractive, maintenance service was typically priced as a percentage of Manufacturers Suggested Retail Prices (MSRP). Because these computers typically sold for millions of dollars, and because there was little discounting, maintenance prices were quite high, and profit margins were very attractive. This prosperous business model attracted other companies to want a piece of the action, and as a result, there was a surge of third party maintainers (TPMs) created.
Then the universe changed, and it went something like this. Technology allowed for more computing in a smaller box (footprint), and Personal Computers were invented. At first they were somewhat of a novelty, with some stand-alone computing capabilities, but they were not much more than a very large and powerful calculator and spreadsheet, or document processor. But as the technology continued to expand for both hardware and software for these computers, users were able to place more and more mission-critical applications on them. Today there are networks that may consist of a dozen PCs and a Server that have considerably more computing power and more mission-critical applications on them than an entire data center might have had in the ’60s and ’70s. Today we are seeing a proliferation of “server farms” where the primary processing power is held. These server farms are a cluster of PC servers all tied together to provide an incredible amount of processing power. Attached to them are a series of terminals, now referred to as “clients”. In some respects, we have come somewhat full circle. In the ‘70s we had mainframe data centers with “dumb terminals” attached. The difference is time and space. Today’s networks are everywhere from New York City to Fargo, North Dakota and all points in between. And when you consider that there is little or no redundancy or fault tolerance built into the hardware, when one of them stops working or has a problem that causes performance degradation, the customer wants it fixed NOW! In the past if the customer wanted that type of response and resolution for their computer environment the solution was obvious; put dedicated resources at the customer location, with an adequate supply of parts and tools to solve most any problem. This was not a problem because data centers tended to be quite large, in concentrated areas with extensive amounts of very expensive equipment. Depending on the size of the data center, you might have an entire team of professional that went to work every day at the customer’s site to keep things running smoothly. However, it is no longer economically feasible to do that in most cases because of the geographic dispersion of the computing.
In addition, because of this geographic dispersion, the customer no longer controls the environment of the data center. Where the ‘60s and ‘70s had data centers in raised floor, specially air conditioned environments with trained computer technicians operating them, today you might see the equivalent amount of processing power sitting over a fat fryer, and being operated by a tall eighth grader who likes to practice football with his coworkers during the slow hours. Do you think they may be more likely to break in this new environment?
If that is not disturbing enough, the customers still expect to pay a percentage of MSRP for the maintenance contract. And we all know what has happened to the manufacturer’s retail price of computers! Did I mention that at the same time the manufactures announced three year warranties on most of their products, which meant that maintenance contracts on many of the PCs were not necessary until year four; about the same time most customers were ready to buy a new model? Needless to say, all of these changes had a significant impact on the revenue growth and the profit margins of the companies in this industry.
So what happens when you have many competitors in a shrinking market with slim profit margins? You guessed it, competitors exit, but not before a healthy price war to see who can eke out a little more market share from the pack. An ugly situation, but what does this have to do with Dan expanding his universe?
It’s Really A Cosmic Thing!
More than ever scientists are starting to recognize the importance of the interrelationship of all matter to the survival of the universe. In the movie Jurassic Park, Jeff Goldbloom played the part of a scientist. During the movie he espoused the theory that when a butterfly flaps its wings somewhere in the world, it has an impact on the whether patterns elsewhere in the world. If you take this theory to its logical conclusion, you would never want to catch a butterfly in the fields of Kentucky for fear of causing a Tsunami on Okinawa. While many of us are not willing to take it to such extremes there is clear evidence that the rain forest in one part of the world is important to the amount of breathable air in the rest of the world. Even if you don’t buy that, you would at least concede that a prolonged period of heat at the Arctic Circle would cause disastrous flooding in other parts of the world.
In the world of medicine more and more doctors are moving toward a holistic approach to treating their patients. Modern science is again recognizing that if one part of the human body is not functioning properly, it can have a negative effect on other parts of the body. I also believe the converse is true. That one part of the body, if particularly healthy, can help to remedy other parts of the body that are ailing.
Now let us take a more cosmic approach to the computer maintenance industry. The scenario described above might seem totally hopeless if you take matters to their logical extreme. In fact, one might easily come to the prognosis that the patient is not going to live. However, if each competitor were to view their success as being dependent on the success of the entire industry, taking a more holistic look at the patient, a whole series of opportunities arise. I will not go into all of the possibilities for restoring the industry to health, but I will illustrate my point with an example.
In many ways the computer service industry is very much a business of velocity and density. That is, how many calls can I handle quickly in a particular geography. The more activity within a particular area, the more utilized the work force, and the better chances of making a buck each day. Now let’s suppose that there are only three national, and 25 regional competitors left in this industry once all the others have departed. The way I see it they have a couple of options. They can continue to slug it out until the last competitor is standing with blood freely flowing from the cuts and bruises on his face. In this scenario, even after the cuts have healed and the broken bones have mended, all that’s left is a punch-drunk fighter who can barely complete a sentence and keeps asking each day what happened to all of his prize money—another sad story. The other option is for each of the competitors to recognize that a healthy competition makes for a healthy industry. In this scenario the competitors would take an honest inventory of their core competencies and competitive advantages. They would then look for ways they could mutually exploit those comparative advantages to make the whole industry healthier. As an example, let’s assume that company A has core competency in servicing high-end desktop computers, requiring specialized skills, while company B has as a core competency of extensive geographic coverage of more generic PC skills. Also assume that the current market opportunity for the capabilities company A offers is limited but has the potential for high profit margins, and that a large percentage of the largest PC opportunities require the ability to service nationwide, including remote locations.
Conventional wisdom in this example might go something like this. Company A would quickly recognize that if they wanted to satisfy their largest corporate customers, they must expand their geographic breadth for generic PC skills. This will prove to be a costly investment, because of critical mass—remember my earlier comments about this being a business of density and velocity. Company B, on the other hand would see that they have a competitive advantage in the remote areas. They would therefore be well positioned to compete with company A on price the moment they tried to enter the remote markets, making it much more difficult for company A to recover their investment in the remote territories. So far, things are looking good. Company B has to sacrifice a bit on margins in the remote geographies, but is able to inflict even greater financial pain on company A. By the same token, Company B wants to exploit the high-end desktop market because of the attractive profit margins. This will however require a significant investment in specialized skills. And because the market opportunity is somewhat limited, they will have to adopt a “share” strategy in this market to reach critical mass sooner. That means they will have to undercut company A on the price again. They should be able to subsidize this somewhat through their market dominance in the generic PC market. Conversely, in this example, company A fully understands the market opportunity in the high-end desktop. Realizing that it is their “bread and butter” from a profit perspective, they are not about to lose share to company B. Since they have already reached critical mass they can cut their prices, and make it very painful for company B to achieve a dominant position in that market. So far, things still look good. Company A had to sacrifice some of the rich margins they were previously enjoying in that market, but they did not relinquish their dominant market position.
Will the Real Winner Please Stand Up!
So who is the real winner in the example above? Some would argue that it was a “win/win” for both companies. Company A successfully maintained their dominant position at the high-end, and made some inroads into the remotes. Company B maintained their dominant position in the generic PC market, and made some inroads into the high- end. As a side benefit, we saw some good healthy competition take place in the industry. Others would argue that the only clear winner is the consumer of this service. They now have at least two vendors to pick from, and the price point is now lower.
The Industry Perspective
I would like to offer a third opinion of who the winner is. In order to do so, we need to take the longer view from an industry perspective. First we see that both competitors in the industry are now making less return on their investments than before, therefore weakening the financial health of the industry. With that typically comes some amount of frugality from each of the companies. This frugality or cost cutting frequently manifests itself in areas that are not necessary for immediate survival. This could come in the form of training for future customer needs, or new and better service delivery techniques, or any number of breakthrough innovations. The pattern that begins to form becomes obvious. In the short-term, the customers love what is happening. They perceive lower prices with more vendor options. In the-long term they will be screaming murder because the industry is not meeting their needs. The ironic thing is that they seldom recognize that they were accomplices in this crime!
As an alternative I would like to propose the following scenario. As mentioned above, both companies take an honest inventory of their comparative advantages, and negotiate the following. Company B, recognizing that there is currently not enough opportunity in the high-end desktop space to allow both competitors to thrive, offers to subcontract the work in this arena with their large corporate customers to Company A. Company A readily agrees to this, knowing that it helps them defray fixed investment and charges company B handsomely. After all, they are competitors. On the other hand company A, recognizing the massive investment in people and training to penetrate the remotes regions, offers to subcontract that work to company B. They must have the offering, because their large corporate customers require it. Company B readily agrees to this, knowing that it helps them defray fixed investment and charges company A handsomely. After all, they are competitors.
You might be saying, “What about the customer? Are they now going to have to pay more for the services because there is built-in subcontract profits?” This is not likely. Chances are both companies will be able to offset those added costs with the benefits they received from expanding their presence in their respective competencies. And because they are no longer trying to stop the bleeding, and protect their vital organs, they are more likely to focus on developing innovation that will ultimately allow them to improve their market leadership. The ultimate beneficiary of a healthy industry and innovation is the customer.
This option has its problems, the most noteworthy being the difficulty in wanting to do business with the enemy. That problem, however, is merely an emotional argument driven by your perspective of the ultimate objective, and who the enemy is. If your long-term objective is to be a part of an industry that will remain healthy, providing leading edge solutions to the marketplace and offering strong and lasting financial returns to stakeholders, the enemy becomes ignorance of market needs, lack of investment funds and insufficient time. That is an enemy that an entire alliance of players in the industry could rally together to fight.
The primary difference in the two scenarios above is one of perspective. In scenario 1 the universe for both company A and B are contained within the confines of their own capabilities. In scenario 2 both competitors expanded their universe to include the entire industry. In the process, the industry was better positioned to thrive and remain somewhat stable, making it easier for the individual companies to also thrive.
So what does this all have to do with our new hire, Dan? If Dan’s manager is doing his job in today’s world he will instill in him the need to think beyond the confines of the office or company for which he is a part. He will awaken in him the possibilities of success by expanding his perspective to focus on the entire industry. In doing so, Dan starts to recognize opportunities for change and improvement that will have a two-fold benefit. The first is that Dan will be able to make a far greater contribution to the company through ideas and recommendations that will better position it for growth in a changing environment. Secondly, it will enhance Dan’s personal stock as an employee within the industry. Said differently he moves closer to being a player in the industry, rather than just and employee of the company. At this point a word of caution is in order. Dan is now more marketable than before. You have just increased the risk that a competitor will want to snatch him away from you. That means that as his stock increases, it is very important that you reflect it in the way he is recognized. This does not have to be money. It will be different for each individual. In Dan’s case it may mean more to him to have more influence in the shaping of the company’s future. Either way, it is more costly to have more marketable employees, and you may not think you want that headache. Let me assure you that your company will be much healthier if your employees are marketable in the industry. The benefits far out-weigh the costs.
I have asserted that both Dan and his company are better for having increased his perspective beyond the company to focus on the entire industry. It does not end there. In this age of technology industries are continually being redefined. The winners are those individuals who can create value in what they offer in the market. Often this requires the individual to look beyond the current game and the current set of players. This is very difficult to do because it requires looking at something to which they are very familiar with a completely different set of eyes. It is often difficult to have the perspective of the entire forest while amidst the trees. Taking this broader perspective increases the field of opportunity beyond what is obvious.
Adam Brandenburger and Barry Nalebuff write about this in the book Co-opetition. One of the examples they use deals with how companies have tried to create loyalty among their customers through added value is the airline industry.
“In 1981 the U.S. airline industry was experiencing turbulence. The market was still adjusting to deregulation. A wave of entrants – mainly no-frills carriers, such as People Express – was adding new capacity. The established airlines found themselves in a fierce battle for passengers. Prices tumble. The airlines discovered that passengers, in pursuit of low prices, displayed no loyalty.
At least that was the game until May 1 of that year, when American Airlines unveiled its AAdvantage frequent-flyer programs. The program allowed passengers to build up credits for each mile flown and then redeem these credits for free flights to Hawaii and elsewhere.”
As the story unfolds they describe the impact this change had on increasing customer loyalty and providing incentive for additional travel – thus increasing the opportunity envelope. This occurred even after many others in the industry followed their lead. Up to this point what American Airlines did was create value to the customer with little incremental cost to them. They later took it a step further by partnering with complementary businesses to grow the opportunity envelope even further.
“Frequent-flyer programs have helped companies in other businesses engineer customer loyalty, too. Car rental agencies, credit-card issuers, hotels, long-distance phone companies, and others have formed “affinity” programs with the airlines to allow them to offer frequent-flyer miles to their own customers. For example, there’s the Citibank credit card with American, and the First Chicago card with United. Each dollar charged on these cards earns a frequent-flyer mile. Long-distance phone company MCI gives five miles on Northwest for each dollar of calls; sign up with Sprint and get five miles on TWA. Program partners pay the airlines a fee for this privilege, around a penny a mile. These pennies add up. The airlines earn an estimated $2 billion annually in fees from affinity programs. The programs are so large that over half of the miles credited to frequent-flyer programs are now earned on the ground.”
This is a perfect example of how a company within a particular industry looked beyond the obvious industry boundaries to find opportunity. This is happening all around us, all of the time. With the advent of the Internet we are seeing this kind of complementary partnering exploding. If you want to enjoy the fruits of this activity it is important that your new employee, Dan, is encouraged to look at the world with this kind of “out of box” mentality. It is no surprise that some of the most significant and creative changes occurring in the market today are coming from people who were not even considered players in the past. They do not carry with them all of the historical baggage and industry paradigms to cloud their creativity.
© Mark P. Loschiavo
 Co-Opetition : A Revolution Mindset That Combines Competition and Cooperation : The Game Theory Strategy That’s Changing the Game of Business