Emerald Publishing Limited
Copyright © 2018 Emerald Publishing Limited
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Using Market Shaping to Design New Strategies for Innovation, Value Creation, and Growth
Using Market Shaping to Design New Strategies for Innovation, Value Creation, and Growth
University of Auckland Business School, New Zealand
United Kingdom – North America – Japan – India – Malaysia – China
Emerald Publishing Limited
Howard House, Wagon Lane, Bingley BD16 1WA, UK
First edition 2018
Copyright © 2018 Emerald Publishing Limited
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ISBN: 978-1-78743-798-2 (Print)
ISBN: 978-1-78743-797-5 (Online)
ISBN: 978-1-78743-839-2 (Epub)
Kaj insists on cultivating an image of book-writing à la Swedish film director and author Ingmar Bergman’s writing process – months of toil on a far-flung Scandinavian island with the company only of our interior muses. But while we write from homes on offshore islands both in New Zealand and in our native Finland, the process of realizing the volume in your hands has been anything but a solitary endeavor.
We are firm believers in what we call theorizing with managers, rather than merely about them. As social scientists, we see little point in detaching managers from knowledge creation; we would much rather make and shape our new ideas and frameworks in partnership with them. Therefore, our first and most fundamental thanks belong to those 37 companies who welcomed us in and shared their experiences through the four “SMASH – Strategies for MArket SHaping” consortia projects in Finland, New Zealand, Singapore, and Sweden. From A to Z, the 37 companies are: Affecto, Aktia, Beca, Blunt Umbrellas, Comptel, Designer Textiles, Fletcher Building, Fonterra, Griffin’s, Heartland Bank, Huhtamäki, IAG, Icehouse, Inspecta, K. Hartwall, Kiwibank, Lemminkäinen, Lobster Exporters New Zealand, MetService, New Zealand Trade & Enterprise, Normet, NZ Post, OP Group, Outotec, ReGen, Relacom, Spring Sheep Dairy, Tamro, Texus Fibre, Tru-Test, Turners & Growers, Uponor, Villa Maria, Vodafone, Wärtsilä, YLE, and Zespri.
The four consortia projects would never have taken shape and held together, though, without the robust and responsive organizational backbone of the institutions we work in. Our deepest thank-yous are therefore also extended to Talent Vectia Ltd, The University of Auckland Business School, and Hanken & SSE Executive Education Ltd.
The foundational research for this book has been financially supported by the Royal Society of New Zealand and their Marsden Fund grant (grant number UOA1333). During this research project, we had the privilege of studying in detail 21 successful market shaping firms in the four economies through a series of 82 interviews. Those companies and their executives are the unnamed heroes of this book. And to the extent we had muses, these were they: the insights from the research project have inspired many of the ideas we present in this book. Here is also the place to thank our wonderful research project team for their stellar and unstinting work: Dr. Charlotta Windahl, Dr. Catherine Frethey-Bentham, Mattie Wall, Joel Allen, and John Lim, we owe you more than you can imagine.
Academic work always stands on the shoulders of giants, past and present. Looming particularly large for us is the late Professor Robert F. Lusch, who was a continuous inspiration for us and directly influenced the last chapter of our book. Our collaborations and conversations with several individuals have been vital to the evolution of our own thinking over the last 10 years: Dr. Melissa Akaka, Professor Luis Araujo, Professor Roderick J. Brodie, Professor Pennie Frow, Professor Hans Kjellberg, Professor Cristina Mele, Professor Kristian Möller, Professor Adrian Payne, Professor Jaqueline Pels and Professor Stephen L. Vargo.
Research and writing also require safe and stimulating intellectual homes. We are deeply grateful to the former Dean, Professor Greg Whittred, and former Associate Dean, Professor Jilnaught Wong, for welcoming us to New Zealand and The University of Auckland Business School. Thank you for trusting us and opening so many metaphorical doors for us. In Finland, two people in particular have provided us platforms to test and develop our frameworks. Tom Lindholm, CEO of Talent Vectia, and Kaj Åkerberg, Business Development Manager at Hanken & SSE Executive Education: thank you for believing in us, year after year.
On the writing side, we want to thank our brilliant and devoted freelance editor, David J. Thompson. David is not only masterly at the micro tasks of turning our “Finglish” into proper sentences, but he is also our most trusted macro critic of logic, structure, and flow … or lack thereof! All the flair and wit in the following pages have also flowed from David’s pen. We may have done the heavy lifting of figuring out what we wanted to say, but David’s magic made it both lucid and, we hope, enjoyable.
Finally, no amount of research or writing would have sufficed without connection to a publisher! One of the legends of marketing, Professor Jagdish N. Sheth introduced us to Jeanne Glasser Levine, President of Pub Zone Consulting, who was instrumental in making that connection. And as the final link between us and the reader, Charlotte Maiorana, Senior Editor and Nick Wolterman, Assistant Editor at Emerald Publishing deserve the last word of thanks.
Lest that list forgets anyone: we are deeply grateful for all the support we have received. And in case we share the love too widely: while we owe most of the insights that follow to others, any errors, of course, are completely our own.
Suvi Nenonen and Kaj Storbacka
Krokö and Waiheke Island
Time and again, in one company and one country after another, our consultancy and research experience hammers home one point: What makes or breaks strategy is whether managers “get” something so overarching it mostly escapes attention: the very nature of markets.
For, whilst markets are the core concept of economics and commerce, they have so far been overwhelmingly glossed over or misunderstood by orthodox strategy. But in 2018, business has crossed a threshold of complexity where a correspondingly complex market view becomes indispensable.
Foundation: Market Views Make or Break Strategy
Today, only by getting the nature of markets as complex adaptive systems, can firms hope to read and respond to their environment? More enticingly, only by learning to operate, and co-operate, in complexity, can they take part in proactively adapting that environment to themselves – instead of reactively adapting themselves to the environment? And therein lies the strategy’s new prize, which turns established strategy paradigms on their head. Mastering the collaborative dynamics of complex market systems enables Strategies for MArket SHaping — SMASH. Market shaping unleashes value gains from greater market size, efficiency, and profitability which dwarf the zero-sum wins eked out in market-share increments by traditional competitive strategy.
The importance of market views – in other words, why readers should even care – crystallizes from our opening pair of case histories: the puzzling fall of Nokia Mobile Phone and the dazzling rise of Uber. Infamously, Nokia plummeted from sure market leader to a fire sale of its mobile phone business line in a few short years. Yet, conventional explanations for the demise of Nokia Mobile Phone miss the forest for the trees. Those explanations overlook the secret lurking in plain sight by seeking answers at the firm level: failures of Nokia’s leadership, or failures in product-related competitive advantage against industry rivals, causing loss of product market share.
Ironically, Nokia CEO Stephen Elop raised his eyes to the market level and glimpsed the true explanation in the leaked Burning Platform memo from 2011. He concluded: “Our competitors aren’t taking our market share with devices; they are taking our market share with an entire ecosystem. This means we’re going to have to decide how we either build, catalyze, or join an ecosystem.” Elop’s ecosystem epiphany, of course, was too little, too late. But he can hardly be faulted for that. What really stands out is that Nokia went from hero to zero because it did everything by the book – a strategy playbook complete with an implicit view of markets that had passed its use-by date.
If Nokia was the model student following all the rules of the doomed old school, Uber Technologies Inc. doesn’t just represent the new school; it’s unschool. The online ride-sharing company, with its game-changing app that lets riders hail, track, and pay for a cab online, and its alleged non-workforce of mere partner drivers, is shaking up market institutions and flouting the rules of the old taxi-scape. Uber understands that markets are shapeable, makeable systems. It’s a born market-shaper – and one of the most radical.
Orthodox Strategy States No View of Markets, But Implies a Poor View
The case histories generalize. Nokia represents the received view of markets and strategy, while Uber gestures toward an intuited, but as yet unarticulated, alternative. For decades, the received wisdom of management strategy has largely skipped over articulating any theory, or view, of markets. However, by working backwards we can deduce the views it implied. Our text dubs these as the poor views.
The standard playbooks still weighing down managers’ bookshelves have taught a single meta-formula of strategic success. Broadly, the formula goes: Analyze your market to identify opportunities, find your unique position, and create a master plan to outwit your competition.
Working backwards, this strategic posture makes assumptions, assertions, and approximations about markets, which imply that markets are either very simple, like a supply and demand graph, or utterly incomprehensible.
The market is externally given: from whence it came, we cannot know. The exception is that occasionally a heroic outlier launching a breakthrough technology manages to conjure into being an entire new market.
Market opportunities are precursors to strategy. The non-heroic majority of firms are stuck with the market they’ve chosen, and must adapt their firm to the opportunities that they find.
Market dynamics are deterministic. They can be analyzed, predicted, and operated on using the everyday mechanical logic of cause and effect.
Markets are synonyms for the aggregate demand for products – hence phrases like “the mobile phone market.” What this view leaves out is the value created when customers use the product.
Markets are industries. Consequently, we create institutions that limit our ability to look beyond the boundaries of the industry: statistics that measure the growth of the industry, and trade associations that stabilize the market.
None of these premises is true, and many are incompatible.
Poor Market Views Impoverish Your Strategy Playbook
To strategize on this basis is to build strategy on sand. In most cases, the operating environment is so inherently unpredictable that market analyses aren’t worth the pixels they’re written in. The poor views impoverish strategy from every angle:
They make strategy reactive and defeatist because markets are supposedly given.
They doom firms to compete for market share in a zero-sum competitive game.
Their very dominance kills the hallmark of good strategy: originality.
Finally, they miss the main chance: to unleash value that is orders of magnitude greater than market-share increments. In other words, they miss market shaping, achieved by adapting markets to the firm, not vice versa.
If these poor market views and the strategy built on them are so deficient, why do they still prevail? We argue they have persisted partly because of sheer incumbency; partly through self-reinforcing definitions in the data on markets and industries; and partly for the lack of an articulated alternative. But the day of reckoning has come in one field after another as markets have crossed a threshold of complexity. Globalization, digitalization, and network effects render the old models of markets and strategy obsolete.
A Rich Market View Requires Systems Theory
Drawing on the transdisciplinary science of systems theory, and combining insights from biology, psychology, and sociology as well as economics and management, we offer the rich reality of markets as complex adaptive systems. That’s “complex” like an ecosystem or a society, rather than merely “complicated” like the flight deck of a Dreamliner. Indeed, as frequent fliers, we’re delighted that airplanes still obey mechanical cause and effect. But complex systems don’t. They can be neither controlled nor safely predicted. Markets as systems constantly evolve; partly by random “emergence,” partly by the deliberate market shaping efforts of the likes of Uber and its smart entrepreneurial cousins. Consequently, the firm is part of the market, rather than the market being external to the firm.
Markets are complex systems of exchange for the purpose of co-creating value. More precisely they create what classical-era economics called “use value” to the customer. Use value is as opposed to our standard neoclassical metric: exchange value, which is really price. Yet boosting use value – which is limitless – can ultimately boost exchange value, markets, and profits.
The complex systems’ view of markets has always been true but only recently become essential. Recognizing markets as complex systems spells strategic implications. Notably, just as markets are socially constructed, so they can be reconstructed by social methods. And while they cannot be predicted or controlled, they can be influenced by market players.
The Book Rebuilds Strategy on the Rich View of Markets
Rooted in the richness of market systems, the book therefore traces the three main resulting shifts in strategic thinking: (1) from firm focus to context focus, where the relevant context is our definition of the market; (2) from competing and winning to value creation and cooperation; and (3) from analysis, prediction, and planning to non-predictive strategizing and experimentation.
The book weaves these three strands together into a cohesive strategic framework – market shaping. Market-shaping strategies acknowledge that much of firm performance, both turnover growth and profitability, is explained by the markets where a firm operates. Crucially though, strategic choices go beyond market selection, entry and exit; markets are malleable and therefore firms can – and should – actively seek to shape them in their favor by value-creating coalitions.
Key Contribution: An Easy, Actionable Framework for Market Shaping
Market shaping is not entirely new. Research by Boston Consulting Group and McKinsey suggests that 9% of firms already engage in market shaping. However, most of them do so intuitively. Therefore, their methods are hard to replicate. What is new – and the book’s key contribution – is systematizing and articulating a universal, teachable, and actionable framework for understanding and shaping markets. Whereas traditional strategy skipped glibly over the subject, SMASH recognizes markets as strategy’s necessary foundation and then rebuilds.
Crucially too, our framework is one that any firm can grasp and practice. It does not take traditional market power and resources, or intuitive genius, to understand markets as complex systems and to shape them to your own benefit. As a master metaphor and structural device, we use the colorful, reader-friendly diagram of a market Fan, comprising four layers plus a core. The Fan groups and orders the 13 elements of markets we’ve identified that savvy market shapers of any size can influence, in closely explained and topically illustrated ways, to reshape the whole.