SHAPING
Be the Orchestrator
Novo Nordisk: Shaping to Win
When August Krogh cofounded Novo Nordisk in 1923 in Denmark, he couldn’t have predicted that his firm would play a critical role in the development of China’s sizable and booming insulin market. The company now controls about 60 percent of the market.1
Novo began building its Chinese insulin operation in the 1990s, well before the coming diabetes threat was widely appreciated or the market for diabetes care was fully developed. Early entry was critical, said CEO Lars Sørensen: “We came into China very early; we were one of the first international pharmaceutical companies that established a fully owned enterprise [there].”2 When Novo came to China, diabetes awareness was low. There were no established treatment protocols, and Novo had no educated physician base that it could work with to fight the disease. Then, diabetes was thought to affect 2.5 percent of the Chinese population, but the disease was underdiagnosed; today, approximately one in ten Chinese people are known to suffer from the chronic condition—some ninety-nine million patients.3
Initially, Novo tried to collaborate with local pharmaceutical companies to enter the Chinese market, said Sørensen, but found that those firms had little in the way of financial resources or technologies. Instead, Novo turned to other stakeholders to create a concerted effort to educate doctors, patients, and regulators to raise awareness and pioneer treatments.
Novo invested heavily in physician education to teach the medical community—potential customers and evangelists—about the diabetes threat and potential treatments. Sørensen established partnerships with the Chinese Ministry of Health and the World Diabetes Foundation, and Novo toured the countryside with its Changing Diabetes Bus program to reach remote rural physicians.4 In total, Novo has facilitated more than two hundred thousand training sessions and congresses to improve screening, treatment, and patient education.5
Sørensen said that partnering with doctors and regulators was critical: “What we did initially, which is what we do everywhere in the world, is to start building a relationship with the government, explaining to them about diabetes, the problems they have and starting to educate the whole public health sector. To date, we have educated maybe 50,000 to 60,000 physicians in China about diabetes. So you could say our marketing in China has been education.”6
Additionally, Novo reached out to patients to improve grassroots understanding. Its innovative support group, NovoCare Club, has more than nine hundred thousand members and redefines the drug company’s role. More than just a provider of insulin, the company has become a partner in care, offering dietary and lifestyle support and mechanisms to help manage the medication regimen.7
Finally, Novo invested in local communities to get a seat at the table with policy makers. In 1995, the firm opened its first production site, and in 2002, Novo became the first pharmaceutical multinational to open an R&D center in China.8 Sørensen says that these investments gave Novo the opportunity to help drive the development of nationwide clinical treatment guidelines through close work with the government and the China Diabetes Society.
As a result of these interconnected efforts, Novo has grown awareness and codeveloped treatment standards to support diabetes care, earning a leading market position along the way. By 2010, the company’s share of the country’s diabetes care market was twice that of its nearest competitor—in a market where the number of diabetes patients is expected to double by 2025.9
Sørensen explained how this shaping approach is a blueprint for his company’s strategy in other emerging markets: “The strategy we employ is exactly the same in emerging economies . . . Basically, we start by building a relationship with the ministry of health, with the medical association for diabetes and with the patient associations, and then start to educate doctors about diabetes. That means that after they start diagnosing people with diabetes, they can start treating them. We teach them how to treat the patients and they eventually end up buying our products. It’s a very simple model.”10
The Shaping Approach to Strategy: Core Idea
Like Novo, you sometimes get the extraordinary opportunity to shape or reshape an industry at an early point in its development, when rules have not yet been written and there is an opportunity for the industry to become large, attractive, and favorable to you, the shaper. Such an opportunity both permits and requires you to collaborate with others because you cannot shape the industry alone—you need others to share the risk, supply complementary capabilities and resources, and build the market quickly. A shaping firm operates under a high degree of unpredictability, given the nascent stage of industry evolution it faces and the participation of multiple stakeholders that it must influence but cannot control.
In these highly malleable and unpredictable circumstances, in order to succeed, firms engage other stakeholders to create a shared vision at the right point in time, building a platform through which they can exercise influence and orchestrate the collaboration, and finally they evolve the platform and ecosystem by scaling it and keeping it flexible (figure 5-1).
To return to our art metaphor, shaping is like creating a large mural with the help of many artists. You have to engage them with a compelling shared vision and, to avoid chaos, deploy your influence to orchestrate the efforts of the painters. You leverage their creativity by iterating on the emerging design as you proceed.
When applied successfully, a shaping approach can be extremely rewarding: a group of firms or stakeholders together creates a new market with the shaping firm as orchestrator, often with a disproportionate capture of rewards relative to latecomers. The parallel efforts of diverse ecosystem participants allow for faster innovation at lower costs and risks for any single participant, which allows the system to grow rapidly and to adapt quickly to change. Moreover, business ecosystems can be extraordinarily powerful because they can benefit from strong lock-in and network effects. What’s more, there is often only room for a single orchestrator and ecosystem to serve an entire market.
Since shaping firms operate in unpredictable environments, the approach shares some features with the adaptive approach: the dynamics of the new industry cannot be fully anticipated and will emerge evolutionarily via multiple iterations. But, like visionary organizations, shaping firms presume that the environment is malleable and seek to exploit a window of opportunity to define or redefine an industry to address a new problem or solve an existing one in a much better way. However, because the scope of the endeavor is greater and more unpredictable, instead of making a singular bet and going it alone, the shaping firm builds a new market collaboratively with other players. Even though many firms aspire to a shaping role, they rarely have the power and opportunity to play a central role in the evolution of an industry and to reap its disproportionate benefits.
WHAT YOU MIGHT KNOW IT AS
The notion that businesses can be successful by both collaborating and competing with external parties has its origins in ecological thinking, where concepts like symbiosis, or mutually beneficial relationships between organisms, originated. In the 1960s, Bruce Henderson already drew elaborate comparisons between competition in the natural and business spheres. More recently, complex adaptive systems theory has explored how such dynamic collaborative systems behave and evolve.11
Stakeholder management theory, or the notion that external stakeholders should be considered in designing business strategy, emerged in the 1980s. Initially this concept emphasized the wider implications of firm actions but did not focus on the codevelopment of markets.12
The early 1990s saw an increase in high-tech businesses using “deconstructed” business models, with one company orchestrating the activities of many others. Greater connectivity and lower transaction costs fueled the trend. Business theorists like James Moore and, later, Marco Iansiti and Simon Levin formalized the concept of a business ecosystem: a set of firms that could benefit from mutually beneficial coevolution. Around the same time, Adam Brandenburger and Barry Nalebuff published the idea of co-opetition, which held that firms sometimes needed to cooperate with potential competitors, rather than just with external stakeholders not directly involved in the value chain.13
In 1999, BCG’s Philip Evans and Tom Wurster, in their book Blown to Bits, explored how the new economics of information redefined the link between businesses and their customers, suppliers, and employees. The authors suggested new models for competition in digitally disrupted industries, including the “orchestrator” model, which is central to shaping strategies. Later, BCG elaborated the ideas of system advantage and shaping strategies as an alternative to classical scale and position-based strategies under certain circumstances.14
Henry Chesbrough codified the idea of open innovation, which advocates for the incorporation of external ideas and players in the innovation process to share resources and risks. In 2004, C. K. Prahalad and Venkat Ramaswamy introduced the concept of cocreation of products between firms and their customers, arguing that value creation was increasingly shifting beyond the traditional boundaries of the firm.15
When to Apply a Shaping Approach
Firms need to deploy a shaping strategy when there is an opportunity to write or rewrite the rules of an industry at a nascent stage of its evolution. These circumstances can apply in highly fragmented, young, dynamic industries; freshly disrupted industries; and emerging markets. In these cases, a shaping strategy can stimulate demand, build the economic infrastructure to address it, and minimize regulatory or other barriers as the market develops. Accelerating technological change and globalization make these opportunities evermore common.
Young or recently disrupted, dynamic industries, like software and internet services, offer significant upside to companies brave enough to try to shape them. The opportunities are intrinsically unpredictable: no one could have forecast with confidence the size, growth rate, and profitability of the markets created by Facebook or the pioneers of fracking. And such industries are malleable, too: barriers to entry are often low, products are new to regulators, and it is not obvious which firms or business models will come out on top. Disruptive innovation can have a similar effect too, thrusting a previously stable, nonmalleable industry into a new phase of unpredictability and malleability.
Emerging markets, like China and India, are characterized by similarly unpredictable and malleable circumstances: industries are at an early stage of their development, with underdeveloped regulation, few dominant players, and rapid growth. Our analysis suggests that emerging markets are fully twice as unpredictable and malleable as mature ones. Emerging markets greatly depend on exports and foreign direct investment and face vulnerability to fluctuations in commodity prices and exchange rates, shifting demographics and patterns of demand, evolving regulation, changing patterns of competition, and high growth rates (figure 5-2).
In these young industries and economies there is usually no dominant player with the resources or the risk tolerance to own the market single-handedly. Furthermore, product requirements in new markets are often unclear or change too quickly to be easily managed by a single player. Finally, firms may need to interact with a broad set of stakeholders, because the development of the market depends on shaping regulation or educating consumers. Therefore, the way to win is through codevelopment of the market and industry by multiple players.
Emerging markets are more malleable and unpredictable than developed ones
Source: Compustat, World Bank economic data, BCG analysis.
Note: Nonweighted average of industry environments within the country; uncertainty is measured as market-capitalization volatility and malleability using a composite index of growth, returns to scale, and industry fragmentation.
Consider mobile phone ecosystems. The Android and iOS operating systems are much more attractive to customers because Google and Apple ceded control of app creation to outsiders during the infancy of the smart-phone industry, inviting external developers onto their platforms in a mutually beneficial arrangement. At the same time, incumbent players like Nokia were challenged by legacy software architectures. The Symbian platform, used by most of the leading mobile phone companies before Android and iOS emerged, lacked the architectural flexibility and proper app store infrastructure to create a wide variety of apps quickly.16 Conversely, Apple’s App Store became the thriving nexus for apps du jour developed by many players—apps from Angry Birds to Candy Crush.17 Stephen Elop, the former Nokia CEO, reflected on the competitive dynamic: “Our competitors aren’t taking market share with devices; they are taking market share with an entire ecosystem.”18 Nokia has since reinvented itself: it has exited the mobile devices business to refocus on network equipment, technology licensing, and location intelligence.19
So what are some of the metrics that may suggest an unpredictable but malleable environment? Limited forecast accuracy and volatility in market cap, earnings, or competitive positions can signal unpredictability. Limited or diminishing returns to scale, high growth rates, lack of dominant incumbents, and embryonic and changing regulation suggest malleability.
Shaping conditions are on the rise because of accelerating technological change, increased global connectivity, the liberalization of trade, and demographic shifts that create new customer needs. However, external environmental conditions are not the only factor in considering whether you should adopt a shaping approach. Two other factors are critical: timing and your ability to orchestrate. Shaping strategists must seize an inflection point in the early development of a market or in the disruption of an existing one. And a firm must also have enough influence to attract other powerful stakeholders to its ecosystem. Most firms have insufficient influence to take a leading role, which partly explains why successful shaping strategies are rarer than the other approaches to strategy.
A firm may gain sufficient influence if, for instance, it innovates disruptively to put itself at the center of an ecosystem, as Apple did with its creation of the iTunes platform. Alternatively, a firm may secure influence through knowledge or scale advantage, like Novo in China; through the control of a dominant platform for interaction, like Facebook; or by serving as an access point to a fragmented customer or supplier base, like the supply chain orchestrator Li & Fung.
Lack of influence disqualifies firms from leading the shaping approach, but not from playing a role in an ecosystem: many firms build attractive businesses by participating in other firms’ ecosystems, utilizing an adaptive or a classical approach. Zynga, Playfish, and Playdom, for example, have all developed multi-million-dollar businesses by participating on Facebook’s platform as app developers.20
Why the Ecosystem Matters: Red Hat
Software provider Red Hat has built a $1 billion business by orchestrating the development of open-source software based upon the Linux language.21 The company supports software development by outside developers, engages with enterprise communities, and monetizes its investments by selling subscriptions for professional-grade versions of free software.
How did Red Hat build such a successful business based on open-source software, which is essentially available free of charge, using resources the firm doesn’t directly control? To start with, Red Hat has developed a clear, collaborative vision: “To be the catalyst in communities of customers, contributors, and partners creating better technology the open source way.”22
The firm constantly and deeply engages its external collaborators. Red Hat never acts without considering the implications for its stakeholders, especially software developers. Jim Whitehurst, Red Hat’s president and CEO, explained the importance of developing and evolving a win-win proposition: “When there are changes to make . . . we interact and consult carefully with all players in the system.” And serving as system orchestrator can require selfless contribution to earn the trust and goodwill of other stakeholders: “We add a massive amount to Linux that isn’t directly relevant to us—we are the largest contributor to virtually all open-source communities in which we participate. We choose to do it because it’s what our ecosystem contributors use and value.”
By being a responsible contributor to and orchestrator of its ecosystems, Red Hat accrues influence and license to monetize its services. Whitehurst, again: “Our strategy revolves around ecosystems: Scale is in our DNA for upstream credibility. We then work to build our own downstream commercial ecosystem around versions of open-source technologies that are unique to us.” For instance, Red Hat’s software certification program ensures that major applications from companies like SAP, Oracle, and IBM are guaranteed to work on Red Hat’s open-source products, effectively establishing Red Hat as the industry standard for Linux in enterprise data centers. Through its large contributions to open-source projects, Red Hat can influence the direction of the open-source industry. Simultaneously, the firm creates a path to monetization via industrial-grade versions, certification services, customer service, and software maintenance, since the open-source community and its customers trust and value the Red Hat seal of approval.
On the flip side, Red Hat doesn’t try to play in markets where it lacks sufficient influence. In other words, the firm carefully chooses where to employ a shaping strategy. Whitehurst explained: “Our key question is, can we construct the world of competition in a way that we can win? It’s not about execution or playing by the rules. It’s about defining the rules.” Without the power to influence, a shaping strategy will fail. “If the rules are unfolding in a way that isn’t playing to our strength,” Whitehurst told us, “we will abandon the sector or change technologies: pedaling harder doesn’t work.”
The benefits for Red Hat as the orchestrator are significant. The company believes it can develop, launch, and adjust software much more quickly than traditional closed-source competitors, like Oracle or SAP. As a result of its successful shaping approach, Red Hat has seen its stock go from a low of $8 to over $50 between 2009 and 2014 and is the first open-source software company with annual revenues over $1 billion.23
The Shaping Approach in Practice: Strategizing
Applying a shaping approach effectively is easier said than done. In part because shaping is the least familiar approach to strategy for most firms, companies tend to use the concept very loosely, to overestimate the malleability of business environments, and to employ practices inconsistent with a true shaping approach. For instance, we found that roughly two-thirds of companies intending to use a shaping approach still create detailed long-term forecasts for their business, a typically classical practice. What’s more, less than half of firms think that their success depends on collaboration with others, and only a third actively try to change the external environment by influencing regulation. Clearly, there is a need to develop a deeper understanding of the challenging but powerful shaping approach.
ARE YOU IN A SHAPING BUSINESS ENVIRONMENT?
You are facing a shaping business situation if the following observations hold true:
Your industry holds unexploited potential.
Your industry is shapable through collaboration.
Your industry’s regulations are shapable.
Your industry does not have a dominant player or platform.
As with the adaptive approach, the shaping strategy eventually emerges from continuous iteration of three elements—engagement, orchestration, and evolution of the ecosystem. Therefore, there is no clear separation between a strategizing phase and an execution phase, unlike a classical strategy. All three elements should therefore be deeply embedded in the intra- and intercompany structures and mechanisms.
Strategy setting for the shaping approach begins with engaging external stakeholders to develop a collaborative vision of the industry’s development. Then, the orchestrator builds and operates a platform that brings together stakeholders and allows the orchestrator to exercise its influence to create and extract value from the ecosystem. Finally, the orchestrator evolves the platform and the ecosystem by scaling and extending it and keeping it flexible in the face of external change.
Engage Stakeholders
The benefit of a shaping strategy comes largely from harnessing the resources and capabilities of other powerful stakeholders, so the orchestrator must engage others in the setting of strategy. The orchestrator needs to develop a collaborative shared vision, identifying the best stakeholders to enlist to that vision, understanding and incorporating those stakeholders’ interests, and launching the ecosystem at the right time.
Develop a Shaping Vision
A shaping vision outlines how the intended collaborators in the ecosystem can solve a problem dramatically better than any individual company could and how they can stimulate demand, build the economic infrastructure to address it, and remove potential constraints, like regulatory barriers, as the market develops. The vision needs to be mutualistic, emerging either through iteration with stakeholders or from within the orchestrator’s firm.
The shaping vision needs to be win-win to enlist other stakeholders and should anticipate that the orchestrator needs to share resources without the expectation of an immediate return. These collaborative qualities build trust, goodwill, and influence—advantages that pay dividends down the road. Ideally, resources shared come at a limited cost, as in the case of Novo: Sørensen’s firm shared its preexisting knowledge of diabetes care with Chinese doctors and regulators to secure them as future partners and, eventually, prescribers.
The shaping vision can emerge singularly or collaboratively. For instance, Novo single-handedly created its vision and then brought stakeholders on board, whereas Red Hat’s vision emerged through iterative interactions with developer communities. Regardless, a shaper should think of vision setting as an ongoing conversation with its ecosystem coparticipants especially since it may sometimes be difficult to understand external parties’ interests a priori and because those interests will evolve. Facebook, for example, changed the rules of its external development platform multiple times since its founding in 2007 to accommodate changing developer interests.24 Classical strategy is often called competitive strategy: winning classical firms concentrate primarily on exceeding their competitors. In contrast, shaping strategy is essentially collaborative. In fact, if a shaping strategy is successful, competition may be a limited concern because of the strong network effects inherent in an ecosystem structure: the greater the number of participants, the greater the value of the system to those participants.
The shaping vision does not imagine a precise end state or a final product spec. Rather, it details the ecosystem’s mutual value proposition: how value is created and shared by different players (figure 5-3). This is different from the vision in a visionary approach, which essentially imagines a specific outcome. It didn’t matter to Apple that the most popular app in 2014 was Goblin Sword, and no longer Koi Pond, as it was in 2008, the year in which the App Store—the realization of the ecosystem vision—was launched.25 What matters to Apple is that the system itself, rather than any specific app, stays attractive for developers and users and profitable for itself, the orchestrator. Several companies successfully deploying shaping strategies emphasized to us that tending an ecosystem was more about the catalysis of effective market mechanisms than “managing” toward specific outcomes.
Facebook’s extensive app and web ecosystem
Source: Facebook annual reports; “Floating Facebook: The Value of Friendship,” The Economist, February 4, 2012; Appdata.com; BCG analysis.
Identify Stakeholders and Understand Their Interests
To this point, we’ve stressed the importance of collaborating with multiple stakeholders. But this begs the question—which stakeholders? Whose resources or talents do you need? In some cases, like the Novo case study, the set of stakeholders can be easily identified in advance, but sometimes that is not possible or desirable. If the attractiveness of your platform depends on the variety and dynamism of its offering, then you need to cast the net widely. If you are developing a new market, you need key opinion leaders, firms that build complementary products, customers, and sometimes even competitors (Google Maps is one of the most popular apps in the Apple store).
The interests of the stakeholders in the ecosystem should be aligned with those of the ecosystem as a whole. Hence, the orchestrating firm should map how the interests of stakeholders fit with a potential ecosystem, how they contribute, and how they might influence other players. Are the stakeholders interested in obtaining access to your customer base, brand, or IP? Do they want to leverage your firm’s scale or resources?
Launch Collaboration at the Right Moment
Finally, timing is key. Act too early, and market conditions may not be favorable enough yet to compel others to join; act too late, and an alternative platform with a different orchestrator may have already gained prominence, with potential network effects and lock-in making it impossible to catch up.
Orchestrate
Orchestrating the collaboration between many different, often-changing players requires building and operating a platform that facilitates interaction and monetization, locks in stakeholders, and provides a focal point for the shaper to deploy its influence. Let’s look at these steps in detail.
Building a Platform
The goal of a platform is primarily to facilitate the direct interaction between ecosystem participants or between participants and customers. Therefore, the ideal platform reduces transaction costs for the stakeholders and management costs for the orchestrator. These would otherwise be prohibitive for large ecosystems, given their complexity. Successful platforms often provide feedback to participants so that they can adjust their contributions without direct, explicit mandates from the orchestrator. Finally, good platforms lock in value by inducing network effects that make it unattractive for stakeholders to leave or for rivals to build competing ecosystems. How many of us would wish to desert our app and data collections to move to a rival smartphone ecosystem?
For those reasons, platforms are often (digital) marketplaces that facilitate interaction at low cost and provide instant, market-based feedback. To return to the familiar example of Apple’s App Store, developers make apps in genres where customer demand is visibly the highest; users rate the apps up or down, depending on the apps’ perceived quality, and “vote with their fingers.” Developers get feedback and accrue rewards accordingly, but they cannot easily move their app to another platform, since the app is designed for the iOS operating system.
But platforms can take different forms, too, including either non-digital or non-marketplace formats, like the conferences Novo organized for regulators and doctors, or digital distribution channels like Red Hat’s Fedora. They can also, for instance, constitute a set of contractual standards that lay out the rules for collaborator engagement, like Li & Fung’s supplier terms.
Operating a Platform
Building a platform is a start, but it’s like a football stadium: there’s no game until the players are out on the field. Like a good referee (albeit one who also owns the stadium), shaping firms need to actively manage the platform through selective control of few key variables. Since it would be impossible and undesirable to control everything, the focus is on locking in stakeholders, monetizing value created, and adjusting the system to maintain win-win outcomes.
Successful ecosystem orchestrators often control the rules and mechanisms of interaction. Doing so allows them to catalyze, rather than directly manage in detail, the evolution of the ecosystem. Consider the platform operation of supply chain orchestrator Li & Fung: the company owns no looms, sewing machines, or textile factories, yet it is one of the largest consumer products trading companies in the world, providing time-sensitive, high-volume production and distribution services. How? All the work is done by an extensive network of third-party suppliers that connect with one another via Li & Fung’s platform, which matches independent production facilities and retailer needs. Li & Fung specifies the rules that its network members must follow to remain part of its ecosystem, and it manages its supplier system according to several principles, like constantly refreshing the ecosystem and monitoring, benchmarking, and providing feedback to its stakeholders. In other words, Li & Fung controls how companies participate and interact and therefore how the ecosystem performs and evolves. The outcome is unmatched speed, flexibility, and efficiency, with delivery lead times half the industry average. Finally, Li & Fung captures value by monetizing services like quality assurance via agency fees charged to customers. As of 2013, its revenue exceeded $20 billion.26
Effective platform management keeps value within the ecosystem by making participation in the ecosystem attractive, by maximizing network effects that discourage potential rival shapers from building a competing base, and by limiting value portability beyond the collaborating partners. Successful shapers do this by sharing their resources “with strings attached”—offering things that only have value inside the ecosystem, like platform-specific tools for app developers.
Evolve the Ecosystem
The power of a shaping strategy lies in the depth and breadth of stakeholder contributions, which support the ecosystem’s fast growth and quick adaptation in response to external change. Diversity in and of itself can drive end-user uptake: as mentioned above, Apple’s App Store trumped Nokia’s in part because of the former’s breadth. Diversity should therefore be maintained, even at the expense of efficiency. Shaping firms should also persistently invest in opportunities to maximize network effects by extending or scaling the platform. For instance, Alibaba, the Chinese e-commerce giant whose strategy we will explore in more detail below, invested so heavily in getting more sellers onto TaoBao, its eBay-like consumer-to-consumer marketplace, that it was unprofitable for eight years.27 But as of 2014, it’s the eleventh-most-visited website in the world.28
SIMULATING STRATEGY IN AN UNPREDICTABLE, MALLEABLE ENVIRONMENT
In highly unpredictable and malleable environments, companies need to both explore multiple options over time and invest deeply in shaping selected options to ensure success. To model such an environment, we simulated malleable options whose value increases with investment. In addition, we changed their rewards over time to reflect unpredictability. The resulting landscape is challenging for most strategies: classical ones lose out because they bet on an option whose relative value declines over time. More explorative, adaptive strategies fail to capture the value from deep and prolonged investment into shaping a limited number of options. Finally, a visionary strategy that displays a one-off phase of analysis and subsequent investment into a single option risks obsolescence in the face of changing circumstances.
Rather, our simulation showed that a strategy that invests periodically in exploring and investing in a select set of options and shifting this focus over time will trump others (figure 5-4). Such a strategy resembles the shaping approach, which requires investment in a family of options through an ecosystem. In such an ecosystem, you do not have to know exactly which option will turn out best, but leadership of the ecosystem will put the firm in a prime position to benefit once options crystallize.
Once the system has gained critical mass, the orchestrator must keep the ecosystem flexible—shaping environments change, and the ecosystem must, too. As the platform grows, the orchestrator should allow the stakeholder mix to change to maintain alignment. We see ecosystems fail when they become rigid. Sometimes, the orchestrator falls prey to the temptation to overextend its control, alienating stakeholders. Sometimes, it’s the lure of efficiency and specialization, for instance, when the shaping firm reduces the number of ecosystem players or the redundancy between them to lower management costs. Ultimately, these classical tendencies damage the ecosystem’s long-term appeal and adaptiveness by reducing its diversity and dynamism. And if only one player can produce a certain offering, the ecosystem risks becoming locked into that player’s demands.
Strategizing at Alibaba
The Alibaba Group is the unsung giant of global e-commerce—though that may change after its initial public offering on the US markets on September 19, 2014.29 The company, founded by Jack Ma in 1999, began with the business-to-business portal Alibaba.com, which connects Chinese manufacturers with foreign purchasers. Four years later, it launched its consumer variant, Taobao.com. By 2013, the group handled a larger transaction volume than Amazon.com and eBay combined, accounting for more than half of all Chinese parcel mail.30 In the meantime, Alibaba extended its platform into other complementary businesses, with associated portals, like AliPay for payment services and Aliyun for cloud computing. The firm has managed to grow at a remarkable 60 percent annually since 2008 by setting an expansive vision, engaging a broad set of stakeholders on its platforms, investing in platform expansion, and constantly evolving its ecosystems.
Chief Strategy Officer Ming Zeng explained to us how Alibaba’s vision recognized the unpredictability of the digital world but committed to shaping the market: “The original vision was that the internet would change everything, and we wanted to be there. But we did not know payments or B2C or anything—it was, ‘Can we add something to society by leveraging internet technology?’ So first, we started with international trading, then on to SME [small or medium-sized enterprise] growth, then retailing then payments then cloud computing.” Alibaba screens carefully whether to enter any platform business according to the opportunity to stimulate the development of a sizable market. “Don’t be in a business that only offers services to a limited number of customers,” Zeng said. “If a business targets only a specific segment, leave it to a third party.” He told us that Alibaba only wants to be the orchestrator where there are significant network effects. “Our business is a platform business, so everything is a platform. The most important thing is the number of clicks—people using it—whether you have enough critical mass on the platform.”
Alibaba’s orchestration philosophy is market-based rather than managerial. “We try to . . . intervene as little as possible,” said Zeng. Instead, Alibaba pursues win-win relationships by creating incentives at the platform level. “We have a unique competency in the marketplace. You need sellers so there’s something to buy, then you shift emphasis to buyers so that more sellers will come. [We can influence] the development of a positive feedback loop to reach scale.” He added wryly, “We don’t put MBAs near marketplaces, because they have been taught to ‘manage’ things.”
Alibaba constantly coevolves its platforms. For instance, it added instant messaging and seller credibility ratings to its Taobao platform to improve trust building between participants, an aspect traditionally important in Chinese commerce and a critical potential hurdle that can keep people from entering into online transactions.
Perhaps most importantly, Zeng realizes that Alibaba’s strategy is collaborative and part of a multiround game: “We are managing disruptive innovation,” he told us. “We disrupt existing paradigms by leveraging technology so we need to have a clear vision but to be extremely patient to work with partners who may also be newcomers.”
The Shaping Approach in Practice: Implementation
Since the direction of a shaping strategy emerges from the frequent engagement and orchestration of an evolving set of collaborators, the approach needs to be embedded in every aspect of the “organization” to be effective. A shaping strategy must however reach beyond firm boundaries, from fostering external innovation to developing an open organizational structure to leading with an eye toward inspiring and influencing other ecosystem participants.
Information
An ecosystem orchestrator must facilitate and monitor the relations between multiple parties and catalyze these interactions to create mutually favorable outcomes. This can be challenging given the enormous transactional complexity of interactions between all the parties in a large ecosystem. Li & Fung’s network has over 15,000 suppliers; there are more than 275,000 iOS developers in the United States alone.31 Information is the lubricant that smooths the interaction between orchestrator and stakeholders, facilitates coordination, and, as the vehicle for constant feedback, stimulates collective learning, thereby increasing the perceived value of the platform. Therefore, information needs to be easily sharable, accessible, and current, facilitating a market-based adjustment mechanism not requiring the constant intervention of the orchestrator.
Most naturally, the (digital) platforms described earlier function as the information-sharing mechanism, though sometimes orchestrators need to take a more active physical role, as Novo does with its conferences for the Chinese health-care community. Ideally, platforms are designed to automatically generate information on customer satisfaction, demand patterns, and the overall health of the ecosystem and do not need ad hoc orchestrator intervention to collect and share the information. Successful virtual marketplaces both collect data from and share it with participants in an easily digestible and valuable manner.
Alibaba leverages the information it collects to identify new opportunities to extend its platforms. With its huge data firepower, the firm is driving an economic transformation in Chinese retailing, delivering more products faster and to more people via more, new, and different business models. Feedback can enhance the vitality of Alibaba’s platform and its participants’ offerings. Alibaba sales data gives merchants insights to new opportunities, and its user feedback lets participating retailers improve their offerings, while giving Alibaba clues on how to adjust standards as end-user demand evolves. Zeng confirmed the critical importance of such information for Alibaba’s shaping strategy: “It’s trial by error. Economists can’t guess this, so we just keep trying. We get feedback from the market and we make some adjustments.”
Finally, select quantitative measurements can tell orchestrators whether the coevolution process is working. Measurements could include capturing a new-product vitality index, ecosystem growth, and combined profitability or the market share of an ecosystem as a whole. For Apple, measurements could include, for instance, the profitability and concentration of its app developers and the market share of end users who have iOS devices versus other devices, like Android.
Innovation
The very point of an ecosystem is to harness outside resources to support rapid, parallel innovation. Therefore, innovation mostly happens externally, drawing on the diversity of participants in the ecosystem but catalyzed by the shaping firm. Innovating with a shaping approach doesn’t mean directly managing every innovation; nor should it—a managed as opposed to a market-based approach would be infeasible at scale and would curtail the speed and variety of the ecosystem’s innovations. The orchestrator catalyzes innovation by putting in place incentives and providing feedback to stakeholders to allow them to innovate in ways aligned with the interests of the ecosystem.
Of course, not all innovation happens externally. The orchestrator’s innovations are mostly second order—designing and improving the business model and interaction platform, which reinforces the shaper’s right to orchestrate the ecosystem. Facebook innovates internally to continuously improve its platform’s value proposition for outside collaborators by selectively investing in two areas that help to legitimate its role as an ecosystem orchestrator. First, it prioritizes improvements to its development applications and platform infrastructure so that other parties can easily collaborate. Second, and perhaps more importantly, it continues to adapt its user interface, adding features like PhotoStream, Timeline, and other hooks to maintain interest and engagement from the critical mass of users that determine the platform’s attractiveness for advertisers and app developers.
Organization
Unlike the other approaches to strategy we’ve explored, the key unit of analysis in a shaping context is the business ecosystem, not just the firm itself. This larger view has implications for organizational structure, culture, and leadership. Shaping organizations need to be open to, and intertwined with, the external environment, in order to extend their reach beyond the boundaries of the firm and build a covenant of trust. Structurally, this means that orchestrators have few organizational boundaries; they leverage and share resources and knowledge externally and give up a certain degree of control by leveraging the same market-based mechanisms as the ecosystem itself.
For instance, the orchestrating firm might integrate itself with other stakeholders by rotating staff, investing in upstream and downstream ecosystem players, or by sharing IP when it serves the interest of the wider ecosystem. Google, for instance, regularly holds developer conferences, where it invests in collaborators by giving them training, offers one-on-one feedback sessions, or lets collaborators codevelop apps with Google engineers.32 Inevitably, this open organizational approach can require a mind-set shift—especially for leaders or employees who are used to a clear division between “them” and “us.” It requires comfort with letting go. Instead of giving strict, detailed operational rules, leaders set broad guidelines to foster external collaboration.
Culture
The same tenets of going beyond the boundaries of the firm hold true for culture. The culture of a shaping firm should look outward, have an inclusive attitude toward external parties, and encourage both catalysis rather than control in stakeholder interactions and collaboration rather than competition.
The firm should stimulate and reward employees for reaching beyond the boundaries of the company to build relationships. Openness and humility help to generate the trust necessary to build long-term, successful interaction with ecosystem participants. As Novo CEO Lars Sørensen said: “Then we have an open culture in the company; we hopefully have been able to create a culture whereby people feel they can be critical of the decisions that are being made, all of course with the intention to do a better job.” And, above all, shaping cultures encourage employees to respect other players in the ecosystem. Shaping firms often promote a nonmanagerial culture in which building relationships, rather than directly managing or controlling them, is most prized.
Leadership
It’s more of the same with leadership, where, counterintuitively, shaping leaders gain clout and respect through willingness to cede a degree of control. Shaping leadership extends beyond the boundaries of the firm. The shaping leader sets the ecosystem vision—often collaboratively—communicates the vision, builds external relationships rooted in mutual interest, resolves conflict, and influences rather than commands. In this way, the leader is more of catalyst than a manager who strictly enforces his or her will.
Organization, Culture, and Leadership at Red Hat: Jim Whitehurst
Red Hat CEO Jim Whitehurst underlined a number of the organizational and cultural imperatives for a shaping approach. For instance, Red Hat’s organization is strongly focused on building external relationships, which requires hiring very selectively: “Red Hat has been able to influence communities to get things done—to influence creative communities and accomplished techies with big egos where you don’t have control—because we respect the ecosystem. Organizationally, that means that we are surgical in who we hire. We understand the people with the most influence and get them to work for us.”
Red Hat’s decision-making culture reflects a willingness to selectively cede some control since, in a shaping organization, engaging internal and external stakeholders in a fair process can be as important as the outcome of that process. Most energy therefore goes into creating a culture that supports open, transparent dialogue:
Our associates have always expected this: tell me why we’re doing what we’re doing, and allow me at least a voice in the decision process. Now, a voice doesn’t mean decision rights. It doesn’t mean you have any say in the answer. But at least you have a vehicle for an opinion to be heard . . . Engaging people in how decisions are getting made means it can take forever to get decisions made. But once you make a decision, you get flawless execution because everybody’s engaged. They know what you’re doing and they know why you’re doing it.33
Whitehurst sees the requirements of a leader in a shaping organization as quite distinct from those in a more classical organization, like the one he experienced as a chief operating officer at Delta Air Lines. “Red Hat is fundamentally different culturally,” he told us. “I came in thinking I was adult supervision, but recognized that . . . openness generates openness. We have six thousand–plus people in eighty offices around the world who are working in a bottom-up management system.”
Nor does Whitehurst see the CEO’s role as one of command and control. “Leadership at Red Hat isn’t about internally focused control measures,” he said. “We are the catalysts in communities.” That external view helps him understand his role: “The leader is the ‘catalyst,’ not the leader—I don’t rule by fiat and that’s not how I want to position myself in an open-source community. We don’t lead anything, because leadership implies that you have control. So, in a way, I’m the chief catalyst for Red Hat. I catalyze, I help direct, but I don’t formally lead. And so that was a key word we spent a lot of time on: [being a catalyst means] credibility; consultation not control; contribution.”
ARE YOUR ACTIONS CONSISTENT WITH A SHAPING APPROACH?
You are embracing a shaping approach if you observe the following actions:
You select and engage stakeholders.
You create a shared vision for a better way of doing things.
You build a platform to orchestrate collaboration.
You coevolve the ecosystem and the collaboration platform.
As we’ve seen, the essential elements of a successful shaping strategy are engaging stakeholders with an attractive vision at the right time, orchestrating the ecosystem to push toward outcomes that are mutually beneficial for all stakeholders, and evolving the ecosystem to keep up with external changes.
In spite of the rising popularity of the word ecosystem in business, the shaping approach to strategy is clearly the least widely understood. Indeed, even leading practitioners whom we interviewed talked freely about how they are still figuring out how to create and shape advantaged positions within advantaged ecosystems. No surprise then that unlike the overrepresentation of the highly familiar classical and visionary approaches, the shaping approach was the least frequently encountered approach. It is both the least declared and also the least practiced approach to strategy. We also observed much inconsistency between the actual measured environment, the perceived environment, the declared strategy, and the practiced strategy for the shaping approach. For example, when companies perceive their environment to be malleable and unpredictable, they are more likely to adopt the practices of an adaptive rather than a shaping approach.
Table 5-1 presents a few tips and traps that firms should heed to sharpen their game in selecting and applying the shaping approach.
TABLE 5-1
Tips and traps: key contributors to success and failure in a shaping approach