Playing the Power Game - The Route to Sustained Success in Tech
June 1, 2014
All tech companies, no matter how large or small, must play for both Power and Performance if they are to be relevant. Let’s consider the second one of these levers first, because it’s a more familiar concept to most management teams and boards.
What exactly do we mean by Performance? Key elements include developing and launching products on time, on spec, and on budget; finding and serving customers effectively; growing the business and making your quarterly numbers; hiring and training employees and managers; running a well-organized operation; managing important transitions; reporting to investors, complying with regulations, etc. Unfortunately, Performance-related activities tend to consume virtually every hour of the business day, despite the cruel reality that excessive focus on them comes at a high cost. Most tech executives get so focused on fulfilling commitments (“executing”) that they find themselves with no time or energy to play the all-important Power game even though the latter is rewarded disproportionately in relation to Performance.
What do we mean by Power in this same context, and what is the secret to becoming a Powerful company – whether you are a startup company needing to punch above your weight in order to survive and thrive, an established company entering a disruptive new category, or any business seeking to increase your market share in an existing product category? Here are five major “themes” to help you play the Power game:
Make sure you are playing in an investable category — a fast-emerging and/or fast-growing category that promises major benefits to customers and users in spite of the almost inevitable disruption that any exciting new offer causes to how people work or play today. There’s a critical difference between a promising nascent category and an investable one – the former usually doesn’t have a meaningful number of users or revenues from paying customers, whereas the latter already has at least early adopters using the product or service to solve a significant problem, showing some tangible evidence of real growth potential. This means that you must understand what stage of adoption your category is at, and therefore which type of buyer is ready to adopt your type of offering — visionaries, pragmatists, or conservatives. Having a sense of adoption dynamics helps you to determine what strategy to employ to attract the largest possible number of customers at any given stage (more on this in item 3 below).
What if you realize that your main category will never become investable, or is no longer investable? The list of categories that never exited the Chasm or that declined from their glory years is far more extensive than the list of investable categories at any one time. In these cases, management must decide whether to de-emphasize or exit the category, or enlarge your footprint by acquiring your way into a more investable category. Today the latter strategy would include, for example, a co-location or dedicated hosting company buying its way into cloud, as Rackspace did five years or so ago by adding cloud servers and storage to its successful but maturing dedicated hosting business.
The list of companies that have succeeded in this area of building category-based power inevitably includes Apple, notable for having created not one but three massively investable categories out of three “chasm” categories. These were categories that for various reasons struggled for years to move beyond early market adoption to attract pragmatist buyers, and showed no signs of succeeding until Apple intervened to reframe each of them. It is doubtful whether the feat of redefining MP3 players into the digital music player (iPod), establishing a whole new concept of what we now call a smart-phone (iPhone), and transforming the limp tablet computing movement into a winner (iPad) and building three separate multi-billion dollar franchises in just one decade can ever be repeated, let alone surpassed. The rarity of this explains why Apple has generally been the most quoted market success story of recent times and why Steve Jobs is regarded by many as the pre-eminent business genius of the past fifty years. Apple didn’t invent the original platform technologies in these three categories; it worked and waited until the market and each technology were ready to be turned into a product ready for prime-time.
In 2006, the young entrepreneurs at YouTube created a new, viral category around enabling users to broadcast their own videos. By being the first mover, and also by getting acquired by Google within a couple of years, YouTube found a sponsor to provide the massive amount of computing and storage resources required to store videos indefinitely, while it set about figuring out a business model that would eventually generate profitable revenues. Although YouTube cannot be said yet to have proven out its business model, it’s the power of the category is still considerable, and a number of other players have sprung up since then including Vimeo and others.
Netflix is another company that built a powerful franchise by redefining how we consume movie and TV programs at home, first by establishing a mail-order DVD business with a model that marginalized the previous gorilla, Blockbuster, then by migrating its customer base to a new streaming service. This transition was not without its hairy moments, causing the company a plunging stock price after management tried to charge users separately (and therefore additionally) for each service in order to protect its established revenue stream. Once the company learned its lesson, it pulled off a very tricky transition, cannibalizing its DVD business before someone else did.
In the business-to-business marketplace, Cisco established switches and routers as the two main pillars of networking in the nineties, building a $30bn+ business that is still responsible for the bulk of their total revenue despite investments in many other categories since then, such as teleconferencing, web conferencing, telepresence, home networking routers, etc. And Salesforce.com has crusaded its way to making CRM as a service into a multi-billion dollar category with many other participants. A decade ago, VMware put itself on the map by reframing the virtualization category that IBM and HP had initiated as a sideline. By focusing exclusively on virtualization for enterprise IT customers, VMware became the category gorilla, with a market valuation that today stands at $42bn despite dramatically increased competition from off-premise cloud computing.
Note that while I am citing specific companies as having developed and exploited Category Power, in the process they made a market for other companies to participate in; in fact, Google’s Android now dominates in terms of smartphone operating-system market share while Samsung has established a powerful position as leader of the Android smartphone device makers. Although to be fair Apple is hardly delighted at Android’s astounding growth and would rather Android never existed, the market still considers Apple’s iOS and device premium offerings in the category, and they generate by far the highest profitability. In switches and routers, Juniper became a successful number two to the gorilla Cisco, and newer companies such as Palo Alto Networks, a network security vendor, have built multi-billion dollar business in this adjacent category.
Be very clear about the one or two elements of sustainable differentiation that will enable you to become a major player, if not the dominant player, in your category. Alongside this, make sure that you understand the full implications of your business architecture – complex systems or volume operations, or a blend of the two – so that you execute the right operational disciplines and processes for each model. From this definition you get to the issue of whether or not you can develop a powerful economic engine that will generate rapid revenue growth and produce healthy profits over the long haul.
What if you discover that you have no crown jewels, i.e., no sustainable competitive differentiation even though you are in an investable category? Well, two options come to mind: 1) identify potential crown jewels that you must then develop or acquire, 2) if neither of these avenues is feasible, consider exiting the category via a sale of your business.
To continue the example of Apple, the company was very clear from the start that it differentiated itself in sleek device design and superb user experience. While it was unable to deliver on these two brand promises, it held back the launch of not only the iPhone but the iPad too. As regards, business architecture, Apple has always been unapologetically a volume operations business focused on consumer markets and uninterested in enterprise markets. So when iPads quickly became a device of choice for business users, Apple did little or nothing to develop an enterprise marketing strategy. As for business model, there was no viable model for the newly redefined digital music player until Apple developed the iTunes service (which became its third crown jewel) based on negotiated agreements with the major record labels for legalized and paid music downloads. Thus was born the combined model of device sales plus song downloads for 99c each, rescuing the music industry from likely extinction.
In B2B markets, RIM (now Blackberry) became a dominant force with their email appliance, the Blackberry, later to become a successful phone plus text plus email device. RIM’s differentiation was based on enterprise-grade security, a mirroring technology to push emails from Outlook and other email platforms out to the user wirelessly and instantly, and an innovative keyboard that engaged our thumbs – something that no one thought would work until it did. RIM was a volume operations business focused on business users until consumers adopted it too, before eventually falling prey to its deficits when compared to the Apple-defined smartphone model. RIM’s business model was – and still is – the classic subsidized device plus wireless usage contract, with the alternative of selling just normally priced devices with no wireless usage contract.
Choose a target market segment where customers have problems that your offering is designed and best-equipped to address. When crossing the chasm into mainstream markets, focus on winning dominant share in that segment, then duplicate the strategy in more (adjacent) segments over time. Later on in the adoption life cycle, you can default to a broader strategy when pragmatist customers are adopting en masse (in the Tornado), before reverting to focusing on different niche market segments consisting of conservatives adopting for the first time while and visionaries pragmatists upgrade to new versions (on Main Street).
What if you never make the decision to prioritize a specific target market segment? Well, this probably means that you will get some share in many markets for which you get very little pull from customers, partners, or investors, thus seriously limiting your power. Despite these limitations, this is the path that most companies default to on their way to either moderate success (assuming they are differentiated and/or face a competitive landscape that is relatively forgiving), mediocrity, or worse. Performance can be reasonable but Power will be negligible.
To cross the chasm Apple tended to focus on the demographic of younger, more educated, high-earning and status-conscious consumers in the major western economies. The fact that other demographics and geographies came to adopt all three products was largely a consequence of the frenetic adoption by the target demographic, causing a network effect among friends, work, colleagues, relatives and others. In each case, the chasm was crossed rapidly, and a brief niche-focus was replaced by mass-market tornadoes. The main lesson here for consumer-focused companies is to be very clear about which demographic, in which geography(ies), is your target sweetspot and design your offer to solve for their needs and preferences. The iPod allowed you to play your favorite music anywhere, even while working out. The iPhone provided for all your mobile phone, camera, text, email, and computing needs on one device. And the iPad allowed you to consume all kinds of content, from browsing to email to books, to videos, to movies, with a larger, more engaging screen.
In B2B, to cross the chasm Salesforce.com targeted small to medium businesses in a relatively small number of countries (mainly North American and Western Europe); these were closely followed by departments or divisions of mid-sized and larger companies, and today the company targets major Fortune 1000 corporations with a different, consultative sales and marketing approach. As a business-to-business volume operations company, Salesforce’s economic engine is built on a basis of per-user subscription revenues in different packages, mainly negotiated as three-year or other term contracts. As it enters the tornado, it is broadening its market strategy into new geographies and verticals in order to become a truly global player.
Design a unique, repeatable whole product solution to “solve” as close to 100% of the customer’s preferences or, if they are a business, mission-critical problem(s) that you have identified as causing them unacceptable pain.
What if – as most companies do – you choose not to develop a repeatable whole product aimed at solving specific customer problems? One outcome is that you will take much longer than a “smarter” competitor that is equipped with repeatable solutions to deliver value to your customers; you are also likely to be a product company trapped in custom-project mode, which tends to annihilate profitability besides causing customers to harbor resentments because of the work they end up doing to compensate for your non-delivery of a scalable, usable solution to their problem.
Continuing the analysis of Apple’s success in consumer markets, one major element of its massive Offer Power in all four of its categories (including the Mac) has been (a) its determination to only launch products that meet strict user experience and reliability criteria, (b) its courage to exclude features or technologies that might hamper product performance (such as CD drives in the Mac Air, or Adobe’s Flash in the iPad), and (c) always limiting each product line to just a few SKUs. On this last point, HTC stands in stark contrast. After a highly promising beginning the first smartphone to run on Android, HTC fell into the trap of launching a slew of products, eventually causing so much confusion for customers that it was rapidly overtaken by the more disciplined Samsung with its highly successful Note and Galaxy offerings. In terms of positioning, Apple has stuck to its premium offer and pricing – even with the iPad mini – despite the surprising growth of Android-based smartphones, now approaching 80% opf the total market for smartphones.
In electric cars, long a chasm category, Tesla has experienced both early success and some nightmarish problems with batteries occasionally catching fire. Concluding that it needs to take control of quality and reliability in this area, the company has decided to build two major battery plants in the U.S. to ensure that it provides as close to a flawless driver experience as possible. As part of its designed but not-yet complete whole product, Tesla has determined that it needs to sell and service directly to customers rather than depending on existing dealership for conventional automobiles. This recognition by Elon Musk and his team demonstrates the intestinal fortitude required at times to ensure that your power in other vectors is not compromised by delivering a partial solution to customers. This strategy of an integrated whole product experience is also more critical while the overall market infrastructure and supply chain for electric cars is still being formed.
In the enterprise market, AWS (Amazon Web Services) has leveraged its early commitment to cloud infrastructure-as-a-service through consistent product leadership (setting a torrid pace of technological innovation to make adoption easy for customers) alongside operational excellence (via increasingly automated provisioning and aggressive price reductions). Today the company has gained a gorilla position in Iaas among techies such as dev/ops engineers in fast-growing internet companies, and more recently penetrating larger enterprises and government agencies, notably with the landmark $600m deal signed with the CIA in 2013. Other public cloud players such as Microsoft (with Azure), and Google (with its app engine) are competing in both Iaas and Paas (Platform as a service) to try to neutralize Amazon’s lead.
Another early player in cloud infrastructure, Rackspace, whose principal differentiation has always been around its commitment to customer intimacy is enhancing its renowned Fanatical Support to encompass all forms of hosting in its portfolio. In light of the dominance that the major players have in public cloud infrastructure, Rackspace has restructured its offer to leverage its portfolio of public and private cloud plus dedicated hosting – all based on its open-source Openstack operating system and tied together to provide the best fit for customers’ various applications, enabling them to use whichever hosting form factor best suits a given application.
Especially when crossing the chasm with a new category of offering, it is critical for B2B companies to determine what it will take to achieve dominant share in your target segment within a reasonably aggressive timeframe – say, 12-18 months – and in the process transform your offering from a custom project to a repeatable whole product playbook, and later to a refined product. Start with a dedicated cross-functional Special Ops team entirely focused on this segment, and allow it to scale as you achieve adoption. Rinse and repeat as many times as necessary to gain broad market adoption. Later on in the adoption life cycle, especially when you have a portfolio of different offerings to manage, keep nascent or emerging categories organizationally separate from your established businesses, and make sure that you avoid critical execution pitfalls. Ring-fence the resources for these younger businesses, enabling them to build a material business without having to constantly beg or borrow resources. This includes allocating dedicated field resources to the virtual (or actual) business unit that you have formed around the new offering(s). The key concept here is the need to reach a tipping point, between the world resisting your new offering, to assisting you because it sees the value that you bring to solving problems in a new way. As you progress in your execution plan, you will usually discover that partners become critical to your success. By thinking carefully and developing insights around partnering opportunities, you will be making a market for other players, and inevitably enlarging the market opportunity for yourself.
What is the penalty for not adopting the above model? Most often, this means that your efforts to establish the new business will take much longer because of the resource “dilution” effect, and you may never reach a key tipping point. Furthermore, you will risk abandoning new initiatives before you have given them a chance to succeed, something that severely curtails your overall influence in the marketplace, besides probably jeopardizing your future growth.
In the consumer marketplace, throughout each of its three tornadoes, Apple has managed to avoid the common tornado pitfalls – not managing to fulfill demand, or shipping defective products. In fact, one source of competitive differentiation that has not received as much attention as it deserves is Apple’s superlative management of its supply chain. One memorable example was the iPad launch in early 2010. For a product that no one had yet seen, Apple managed to respond to a rush of demand flawlessly, delivering more than a million iPads in its first month on the market, and in general managing to avoid lengthy shipping delays with any of its three product lines (four, including the Mac line).
One risk to Apple’s power is its tendency to bully other companies in its supply ecosystem. This is not only a flaw in execution strategy, but in the company’s overall approach to competition, its secretiveness, and paranoia. Companies with, Gorilla power, which Apple enjoys in all three “i” categories though not in PCs, have a strong tendency to turn into playground bullies. Apple is not the only bully around: Amazon is currently skirting anti-trust jeopardy with the harsh tactics it is employing publisher Hachette in its book and e-book business.
Two more examples of Apple’s execution power can be found in the ground-breaking partnerships it managed to make with music companies to deliver paid music downloads via iTunes. Following the iPhone launch several years later, Jobs and co. launched the App Store, thus changing the power dynamics between device makers and wireless carriers forever. My colleague Geoffrey Moore has written extensively about Apple’s execution prowess in his 2011 book, Escape Velocity.
Most consumer-focused internet businesses face a different problem: to acquire users, keep them engaged, monetize your business as soon as you have a critical mass and can figure out which users are willing to become paying customers, and encourage enlistment (which is much easier if you have network effects) to keep increasing your user base, and so on. Facebook is doing a respectable job of monetizing its business seven or eight years after launching its business, while its recent acquisition, WhatsApp is still focused on user acquisition and engagement, and is only monetizing experimentally today. Its enlistment “gear” benefits from the natural network effects of each user wanting as many of their friends and family to communicate with them via WhatsApp rather than via more expensive traditional texting. Companies like these must avoid alienating users when monetizing, whether it be via advertising or usage fees, and WhatsApp’s CEO, Jan Koum, is determined to avoid this major pitfall. Currently, despite a highly successful IPO, Twitter is being second-guessed by investors who are unhappy about the slowing growth of its user base, open-to-question levels of engagement, and its average revenue growth. Twitter has been actively addressing these three gears, adding videos to increase engagement, and trying to increase advertising among other tactics. As things stand, the answers to these questions are still not convincing.
In the enterprise world, Cisco’s implementation of its partner distribution channel from the early 2000s onwards provides an object lesson in developing a partner ecosystem on which Cisco could rely for increasing amounts of its revenue growth. Today 75%+ of Cisco’s revenues are generated by or with distribution partners, a remarkable accomplishment in channel partnering and management. One of the keys to this success was Cisco’s commitment to and insistence on a strict certification process that became a best practice for the industry. More recently, in cloud infrastructure services, one secret to AWS’s success has been its decision to organize AWS as a separate business unit with command over all the resources needed to build its business and serve customers. IBM has also placed a major bet on this approach with its highly promising Watson cognitive analytics offering: a separate, cross-functionally resourced business unit not tied to the mainstream company’s metrics or resources.
If you are able to establish power in two or three of these five areas without neglecting the others, you give your company a real chance to become relevant in the marketplace. Thus, these five Power vectors represent opportunities for creating a powerful position in the marketplace, making your company very attractive to investors as well as customers. Since everything in the tech world is a constantly moving target, your Power “ranking” needs to be re-assessed on a regular basis, perhaps twice a year or more, and sometimes product by product if your organization has a portfolio of different offerings to manage.
The prize for achieving high Power ratings in each vector is that customers begin to treat you as their default choice, partners pursue agreements with you, suppliers give you preference over your competitors because they know they can rely on the demand that you command. This is the situation enjoyed by established companies such as the Usual Suspects (Microsoft, Oracle, SAP, Google, Amazon, Facebook and others) as well as emerging power-players such as AWS, Salesforce.com, Workday, and Splunk, as well as Twitter, Box, Dropbox, AirBnB, Square, and others.
Without Power – being in a strong category, having clear differentiation against competitors, developing a superior economic engine, becoming dominant in target markets, delivering the best offers consistently, and executing with discipline including being ruthless about what not to do – a company cannot gain the influence to shape its industry or marketplace. But Performance – fulfilling the strategic and tactical commitments you have made in the past and are now executing on – is the essential corollary to Power. One misstep in Performance, and customer and/or investors will penalize you in a heartbeat. Today Amazon, acknowledged as the dominant force in (e)retailing in North America and Europe and the early leader in public cloud infrastructure-as-a-service, is being questioned not so much about elements of Power, but on its risible Performance in terms of profitability. Salesforce.com, a company that has played its Power hand very well to date, is also being pushed to treat profitability seriously. When Marc Benioff, the company’s CEO, reveals to investors that profitability (=Performance) is not a priority today and that instead growth (=Power) is the company’s number one priority, he is running a serious risk of being sent to the penalty box by analysts. In fact, this strategy has already resulted in many analysts shorting the company. Still, the jury is out as to whether this out-of-balance Power vs. Performance approach will in the end be vindicated.
What about over-performing on your day-to-day and quarter-to-quarter commitments, how well rewarded can that be? This is an interesting point. If the market can connect your over-Performance to your Power levers in a way that explains your success, you will be handsomely regarded in terms of valuation. But if your successful Performance seems to come out of nowhere, or the market doesn’t understand your business or your model, then it is likely to be treated as a fluke, possibly resulting in an up-and-down valuation. Thus, over-performance can be a good thing but is not necessarily rewarded unless it instantiates your Power.
To summarize, Power is a function of leadership, whereas Performance is a function of management. Both disciplines are needed for a company to succeed over time, which means that CEOs and management teams must find ways to exercise thought and action leadership while still tending to the harsh demands of day-to-day execution. Few boards and management teams today seem to understand the different weighting and vital interplay between one and the other. The ones that do understand this dynamic inevitably become more successful than their peers.
Disclosure: Author has provided consulting services to some of the companies cited in this article. However, all information disclosed here is publicly available.