Strategic Acts of Generosity

As more and more leading corporations in developed economies butt their heads against the demands for top-line growth, they are finding that their “Defend and Grow” strategies are spending most of their time defending rather than growing. 

Much of the problem is due to the tiredness of the categories in which they play.  Market positions have matured, and there is little stimulus for growth left in the system.  Migrating to new categories is an option, but to do so the company must forsake the leverage it enjoys in its established lines of business. 

A better path is to revitalize your existing category by opening it up to a next generation of participants.  We call such a move a strategic act of generosity. 

The idea here is that market share leaders in mature markets offer up access to their customer base to a new generation of partner/competitors in order to stimulate a new round of customer interest in their category.  In this new round the legacy systems provider’s role shifts from being a solution provider to being a platform or environment for next-generation solutions, which may or may not come from its company.  But everyone benefits from the renewed level of investment.

We have seen strategic generosity work in market development before, but mostly from companies on the rise.  The Open Source movement was founded upon one such act and thrives by a continuing stream of them.  Salesforce.com is doing the same thing by opening up its installed base through its AppExchange.   Google offering to underwrite the deployment of WiFI in downtown San Francisco is another example.  These are all ecosystem-friendly market-expanding acts that increase company power and thus long-term competitive advantage.

SAP is doing something similar, but gutsier, because it has a large legacy position at stake.  The company is opening up its entire mySAP installed base to partners—and competitors—through its Business Process Platform.  This puts near-term revenues from module upgrades at risk, as those dollars may be diverted to partner/competitor offers.  The bet is, however, that this risk will be more than compensated by the overall stimulation to invest in reinvigorating the platform. 

The challenge for such strategic acts of generosity in an established gorilla is that the Defend team becomes understandably outraged by such acts of treason and seeks to curtail the Grow team’s radicalism.  It is supported in the actions of Wall Street traders who dump the stock in fear of short-term erosion in stock price.  Board reprisals can lead the executive team to retreat from their offer, creating a miserably compromised, semi-strategic head fake that leaves everyone disillusioned.  It takes real fortitude to navigate a company through these obstacles. 

That said, it is a less risky option, in my view, than trying to migrate your company into a whole new catgegory.  And it is a better option too than sitting still, clinging to a dominant position in a stagnant category, watching and waving to investors, customers, and partners as they move on to greener pastures.

Comments

[Alexander Muylle]

Hi Geoff

History teaches us that every new bull market is lead by new leaders.

i don't think it will be different this time.

i think the existing gorillas (MSFT, INTC, SAP, ORCL, CSCO) are just protecting their franchises, hence are too much defending than focusing on creating a new market.

IMO, their value chains are under attack. Hence their CAPs are in decline and will continue to do so.

[Alexander Muylle]

Geoff

Most often, success breeds failure. and as einstein says so well: “We can’t solve problems by using the same kind of thinking we used when we created them”

Simply put, a run of success can be dangerous. Outstanding companies often succumb to crises because their leaders were innovative years ago but continue to favour strategies and activities based on past success, which do not always translate well after changes in the business and consumer environment.

When the world changes, organisations trapped in active inertia do more of the same. They resemble a car with its back wheels stuck in a rut. Managers step on the accelerator. But rather than escape the rut, they only dig themselves in deeper.

Companies get in the rut in the first place because of the very commitments that enabled a company’s initial success. Everyone knows that success often breeds complacency and arrogance. But there is a more fundamental link between early success and subsequent failure. Clear commitments are required for initial success, but these harden with time and ultimately constrain a company’s ability to adapt when its competitive environment shifts. This dynamic can lead good companies to go bad, even when executives avoid arrogance and complacency.

Hamel says it well too: "Trying to get an organisation to innovate is like trying to teach a dog to walk on its hind legs," quips Gary Hamel, the management guru. "If you get its full attention and hold a biscuit in front of its nose, it might take a few steps. But as soon as you turn your back it goes down on all fours."In other words, most organisations were not designed to innovate. They were built to perform repetitive tasks with maximal speed and minimal error. Doing things differently - the essence of innovation - is not in their nature.

So when considers human psychology, escaping the 'success breeds failure" phenomenon is almost impossible.