Strategy in the Era of Business Eco-Systems Over the past 250 years, the pace of change has increased at an increasingly rapid rate. Few enterprises are able to offer lifetime employment anymore; not because they don’t want to, but because they usually don’t survive long enough.
Increasingly, business strategists are coming to realize that the key to competitive advantage is integrating conventional microeconomics with an understanding of business eco-systems and complexity theory. Why? Because, as the speed of change has increased, conventional ways of developing strategy have begun to fail.
For example, Michael Porter’s five forces model remains one of the most useful frameworks for defining a corporate strategy.1 It links the microeconomic implications of industry rivalry to the economic power of customers and suppliers and to the threat from new competitive entrants and product substitutes. This model gives an important snapshot of the competitive situation at one point in time.
However, unlike in the past, the competitive situation is now a moving target. When Porter devised his model in the 1970s, change in most industries was still gradual and linear enough to permit companies to extrapolate on each of the five forces and have time to recover from all but the worst miscalculations.
Today, Porter’s model remains a superb representation of a firm’s strategic positioning, but the level of complexity needed to understand the behavior driving and being driven by each of the five forces is enormously more complex.
To understand what’s happening, it’s important to realize that the ideas of change over time and natural selection were explained earlier and more usefully by Adam Smith than they were by Charles Darwin. In fact, it can be argued that Darwin simply borrowed the economic principles from Smith and applied them to nature.
In a competitive environment, businesses develop new and better ways to operate. Those firms that develop the best methods ? that is, the most positive mutations ? are the ones that survive and grow, while the other competitors fail and become extinct. This “survival of the fittest” model operates exactly like Darwinian evolution is supposed to.
In Smith’s day, and up until about 30 years ago, we could look at an industry as a machine. Customers, competitors, suppliers, substitutes, and new entrant threats all remained relatively stable except during the very earliest years of a new industry. And just as naturalists don’t see new species coming into existence, strategists only occasionally saw new industries, with new competitors, spring into existence.
But that’s all changed. Today, new industries sprout up overnight and die just as quickly. Electronic photography has changed the rules for conventional photography and killed the instant photography business formerly owned by Polaroid and Kodak. Search engine advertising has nearly killed banner ads. ISPs have gone from stock market stars to boring commodities.
And just as the key to predicting which organisms will thrive and which will disappear is found in understanding the eco-system in which they reside, predicting which businesses will thrive and which will fail is a matter of understanding the business eco-systems in which they compete.
This is one place where business strategists are beginning to learn from military strategists.2 The U.S. military spends millions of dollars a year on computer-assisted simulations of conflict. The Army plans its annual computerized war game at Carlisle Barracks in Pennsylvania for months. It involves hundreds of officers and technicians, along with the latest computing technology, to test various scenarios in uncertain conditions.
This technology may prove to be just as useful to businesses that are facing uncertainty. For example, the Monitor Group, the business strategy firm founded by Michael Porter, recently formed an alliance with Sonalysts, a company run by former Naval strategists, to bring U.S. Navy war-gaming expertise to its corporate clients.
Companies like Royal Dutch/Shell have long used the tool of “scenario planning” to envision possible futures for the industries. They begin with one of the possible futures, and then the members of the planning team must develop a sound strategy to succeed in that competitive environment. Next, the strategy is deployed in the simulation so that the company can predict how well it might work in the real world.
The power of state-of-the-art computers and software now makes it possible to run thousands of passes through hundreds of alternatives, capturing the bottom-up complexity of the real world as well as the top-down decisions.
How is this achieved? The most obvious illustration is the computer game called “The Sims,” which presents a community of virtual people on users’ computer screens. “The Sims” is an example of complex adaptive systems that display emergent behavior.3 Because they are so true to life, they have intrigued military analysts and business strategists alike.
Most of the computer simulations that have been used by the government or by corporations are designed from the top down, by software programmers. The programmers outline all of the rules of the game, including instructions for how all of the players will react to different situations.
This is much different from the software that drives “The Sims,” in which every individual characters in the game follows a handful of rules that determine how it responds to its situation and to other characters. As thousands of individual characters interact, their reactions influence each other, and a fascinating array of complex behavior emerges.
With these tools just now becoming well-understood, we’d like to offer five forecasts for your consideration:
The Department of Homeland Security, the Pentagon, and the CIA will use complex adaptive systems aggressively in the ongoing war on terrorism. Media reports indicate that these agencies have already begun using them to develop scenarios, such as those for the occupation of Iraq in 2003. The CIA has asked “Sims” creator Will Wright to create models of foreign nations or governments. The government has also consulted with University of Pennsylvania professor Ian Lustick, who has built an emergent model of a generic Middle Eastern country. Lustick’s system can produce 1,000 possible futures if the U.S. starts a war, and 1,000 possible futures if it doesn’t. We forecast that this work will become ever more sophisticated and will eventually yield breakthroughs, which will dramatically improve the capabilities of commercial tools.
Commercial use of complex adaptive systems that display emergent behavior will become pervasive over the next decade. Computers will become more powerful, the theoretical underpinning will become better understood, and the software will become more robust and widely available. By 2009, we predict that 75 percent of the Fortune 500 will be using this technology to evaluate market entry and acquisition decisions.
Complex adaptive systems will become a major practice specialty for business strategy consultants. It’s a natural step for firms that already do extensive war-gaming work with the Department of Defense, like Booz-Allen Hamilton. Similarly, leading-edge strategy firms like Monitor and McKinsey are also likely to be in the vanguard. But we predict that virtually every firm that considers itself a serious player in business strategy will employ complex adaptive systems practitioners by 2008.
Mid-size and small firms will begin to use complex adaptive systems techniques by the end of the decade to evaluate product launches and advertising campaigns as well as market entries. However, the degree of penetration will depend largely on the degree to which these firms can afford the in-house talent or consulting expertise required to make use of this technology.
Complex adaptive systems technology will yield big wins ? but also big losses ? for its users over the next decade or so. Like every decision-making tool, it requires that the users objectively interpret the output and act on the results. The wealth-destroying decisions made at AOL, Enron, WorldCom, Lucent, and hundreds of other firms were not merely failures of analysis, but an unwillingness to act on the results of objective analysis.
References List :1. Competitive Strategy: Techniques for Analyzing Industries and Competitors by Michael E. Porter is published by Free Press. ⓒ Copyright 1980 by Michael E. Porter. All rights reserved.2. Financial Times, March 24, 2003, "War Games for the Boardroom: Simulate Strategy," by Simon London. ⓒ Copyright 2003 by FT Publications, Inc. All rights reserved.3. USA Today, April 2, 2003, "Military Strategists Could Learn a Thing or Two from The Sims," by Kevin Maney. ⓒ Copyright 2003 by Gannett Company, Inc. All rights reserved.
