On the Strategic Control of Architecture and Platform
The Gorilla Game's root concept is Michael Porter's competitive advantage. According to Moore (p. 46, his italics), "The critical connection between technology markets and financial markets is a mutual interest in power. Moore points out that managers seek to increase their power to gain competitive advantage in the marketplace, and investors seek companies with competitive advantage because they provide higher returns to their shareholders. Tall GAPs require strong competitive advantages; long CAPs require sustainable competitive advantages.
Gorillas develop unique competitive advantages that are expressed by: (1) getting more customers, (2) keeping more customers, (3) driving costs down, and (4) keeping profits up. Recently, business strategy in high technology has shifted from vertically integrated firms and products toward open-systems. A company becomes part of a larger ecosystem that responds to discontinuous innovations by creating new markets. According to Moore (1999, p. 48, his italics), "these cooperatives are termed value chains." A value chain links a number of components from numerous companies into a whole product that fulfills a value proposition targeted to a set of customers.
To meet the demands of hypergrowth, the value chain must scale up rapidly both to meet the volume of demand and to broaden its scope to meet its customers' priorities. This requires standards to insure seamless integration of the whole product. Moore (p. 48) noted, "The market creates these protocols on the fly by standardizing on the conventions embedded in the market-leading products that make up the chain."
To sustain themselves going forward, value chains need clear and stable power structures. Moore (p. 48, his italics) continued, "The companies that gain ascendancy within these value chains, however, not only have power over the chain, they have the power of the chain. That is, they can compete using the chain itself as a weapon…" And, "Companies that can get their protocols designed into the very standards of the market have enormous influence over the future direction of that market. That is the essence of gorilla power."
Next, Moore discussed specifically how value chain power translates into gorilla advantage. Getting more customers: All market leaders benefit from attracting the dominant share of the market's attention [building mind share or brand]. In addition, Moore (p. 49, his italics) indicated, "business partners actively bring new customer opportunities to gorillas on an unsolicited basis!" Partners hope to share in the bounty and to ensure its side has a winning offer. "This is because pragmatic customers like to see value chains made up of the de facto standard components and get nervous any time any company other than the market leader is recommended" (p. 49). Moore concluded that the gorilla sees more deals, sells more, and gains more customers, which reinforces its power going forward due to the law of increasing returns.
Keeping more customers: Barriers to entry keep competitors out, and high switching costs keep customers and partners in. According to Moore (p. 49, his italics), "…once again the gorilla has an advantage--it can make more work for its competitors anytime it wants! Anytime the gorilla changes its interfaces, everyone else in the market has to match it to stay with the standard." The pain of switching is rarely offset by the gain because either the complex interdependencies in a system may prevent it or the time that it would take to switch eats into the total time that a company could benefit from the new offer during the lifespan of a technology wave.
Driving costs down: Gorillas carve out the sweet spot from the value chains they dominate, selecting the juicy parts of the offer that have high value and low cost and outsourcing the low-value high-cost work
Keeping profits up: The gorilla's profits are sustainable because their whole product (the complete set of products and services needed by customers to fulfill the value proposition) is superior. The priority of the value chain must be to complement the market-leading solution before putting resources into some competing offer. When the gorilla has more market share, its partners continue to make the gorilla's offer more valuable at no additional cost to the gorilla.
To gain and sustain competitive advantage Moore believes a gorilla must have power. That power is rooted in architectural control, one form of strategic control. At its core, Moore's (1999, p. 52) Gorilla Game seeks to invest in gorillas whose power stems from control of "a proprietary open architecture with high switching costs."
Thus, it is no wonder that we seek to understand precisely what is intended in this formula, how to specifically measure its ingredients, how to determine the fine details of the processes of its interacting elements within the matrix of time, how to use this logic to understand the gorilla's ability to sustain or lose power through time, how to leverage its power into new promising markets, and how to use this knowledge of the fine details of the machinations in the gorilla game to produce desired investing outcomes, and especially how to invest to generate our hoped for outstanding excess returns.
Moore's Definitions and Principles:
Architecture: "defines the way in which various parts of a system hook into one another in order to make the whole thing work" (p. 52).
Proprietary/Not-Proprietary Architecture: "architectures under the exclusive control of a single company" (p. 52). "the opposite of a proprietary architecture is one that is controlled by some form of a committee-a standards body or consortium" (p. 53).
Open/Closed Architecture: Open: "its protocols are published, and any vendor who chooses can build products to its specifications," and Closed: "the secrets of the architecture are closely guarded, and only licensed vendors can build products using it" (p. 53).
High Switching Costs: "an architecture has high switching costs if, once the value chain has formed, the work to swap it out is so costly as to make it unthinkable" (p. 52)
"The whole combo-a proprietary open architecture with high switching costs-is the formula for gorilla power, assuming the company is successful in assembling the partners needed for a working value chain around this architecture, and the market for that value chain goes into hypergrowth" (p. 52)
"In hypergrowth markets, where the first goal of market development strategy is to eliminate bottlenecks to growth, the most rapidly proliferating architectures have proved to be proprietary and open" (p. 53, his italics).
"The advantage of proprietary control is that the architecture can adapt rapidly and stay coherent" (p. 53).
"The advantage of an open architecture is that many vendors can develop products for the market in parallel" (p. 53).
"When proprietary architectures are open, other companies leverage the hypergrowth market of the gorilla, increasing their sales but also increasing the gorilla's value as a standard."
"When a company has the power of a proprietary architecture in a product category that imposes high switching costs, it achieves the acme of gorilla power" (p. 55).
Paraphrased principles: Hypergrowth markets institutionalize an architecture as a de facto standard; Having a proprietary open architecture gives a gorilla the strongest position in a hypergrowth market; When these markets pass out of hypergrowth, multivendor support is no longer so important because customers are locked in and a single vendor can handle the volume requirements comfortably.
Paraphrased: Committee-controlled architectures have serious drawbacks, lacking a single implementation, providing only an illusory freedom from switching costs, producing stalemates or slowly changing specifications as competitors battle because every player secretly wants proprietary control if they can get it. (p. 54-55)
"Wherever possible, seek out markets where the gorilla candidates have proprietary control over an open architecture" ( p. 55, his italics).
Much Similarity, A Small But Significant Contrast
Because Moore "proudly appropriated" their ideas about architectural control, there is much overlap with Morris and Ferguson. Whereas, the latter believed, "success flows to the company that manages to establish proprietary architectural control over a fast moving space," the former described an investing strategy called the gorilla game.
Morris and Ferguson saw proprietary architectures as necessary because of the astonishing rate of evolutionary improvements, given Moore's law, and the need for components to integrate seamlessly in an open-system. Architectures impose order because their published standards and interface protocols allow software and hardware to blend seamlessly. The architecture becomes a favored distribution channel for new products optimized to the architecture; but competing vendors are disciplined by modifying the proprietary architecture. Only an open architecture can be broadly diffused. All of this is also reflected in Moore' thinking.
The contrast between Moore and Morris and Ferguson on the strategic use of architectural control is a matter of focus and emphasis more than any substantive disagreement. Moore's focus is on the Technology Adoption Life Cycle and its tornado in establishing the gorilla's proprietary open architecture with high switching costs as a de facto standard. Whereas, Morris and Ferguson focused more on controlling the architecture through time, including its evolving architectural franchise, its increasing generality and broadening scope, and its obsolescence and regeneration.
This is a difference in focal time-span. Moore emphasized the formation of architectural control during the tornado; whereas Morris and Ferguson emphasized controlling a generative open-ended architecture that becomes a stabilizing platform. The platform's scope continues to broaden, and its life is long, but its growth cycle begins with the birth of an architecture, which runs on for its time and then ends in obsolescence. Then, the older architecture is cannibalized to regenerate a newer and better architecture. This architectural cycle is nested in the life span of the stabilizing, long-lived, and multi-architectured platform.
This is the difference generated by theorists who want to explain either the process of gaining strategic control or the process of sustaining it. As investors, we need to understand both processes. Of course, we want the lifetime of strategic control to extend far beyond the initial tornadic diffusion of the discontinuous innovation that formed the first de facto architectural standard. (And, of course, Moore does too, as, for example, his case study of Cisco indicates.) Nonetheless, this contrast, while small, remains significant if it helps us further gorilla game investing.
These quotes capture the flavor of Morris and Ferguson's extended temporal focus:
"While any single product is apt to become quickly outdated, a well-designed and open-ended architecture can evolve along with critical technologies, providing a fixed point of stability for customer and serving as the platform for a radiating and long-lived product family" (p. 121, my bold).
[In contrast to the non-proprietary architecture of committees,] "Proprietary architectures, by contrast, because they are such extremely valuable franchises, are under constant competitive attach and must be vigorously defended. It is this dynamic that compels a very rapid pace of technological improvement."
"Architectures that cannot evolve to occupy an ever-broader competitive space are dead ends."
"But lock-in is sustainable only when a company aggressively and continuously cannibalizes its own product line and continually and compatibly extends the architecture itself."
"The better the architecture, the longer its lifespan; but sooner or later every architecture, no matter how well designed, becomes obsolete. And before it does, the market leader [gorilla] must be prepared to move ahead, to do away with the old and introduce the new."
From Architectures to Platforms
My primary purpose here is to embrace Moore's (p. 52, my bold) claim that "Gaining control over the formative architectural decisions, therefore, is the key battle in any gorilla game," and, in the same spirit, to extend this irreplaceable principle to include what was left implicit. Architectural control in the form of an expanding, stabilizing, and coherent platform sustains strategic control as the gorilla moves from profit zone to profit zone. The difference in the degree of strategic control provided by architecture and platform is the difference between setting a single de facto standard and becoming a de facto standard-setter.
Only a weak claim is being made. That is, distinguishing between "architecture" and "platform" is a matter of clarity and convenience that might prove useful in making certain conceptual distinctions and in guiding our investing. Admittedly, "architecture" and "platform" can be used synonymously, but the latter is a broader and more general term that can encompass the continuing evolution of sustaining technology, the evolution in scope that occurs when additional features that were not part of the original architecture are incorporated, and even the introduction of new discontinuous technologies with their own trajectories of performance. Moreover, when speaking precisely, architecture derived from a discontinuous innovation is bounded by and limited to its technology's trajectories of progress in performance.
In his stimulating The Innovator's Dilemma, Clayton Christensen used several concepts derived from Giovanni Dosi's 1982 article in Research Policy, "Technological Paradigm and Technological Trajectories." [My understanding here is limited to Christensen's account of Dosi. Can anyone find and duplicate Dosi's paper for me?]
From Christensen (1997, p. 57, footnote 6), "Dosi characterizes a technological paradigm as a pattern of solution of selected technological problems, based on selected principles derived from natural sciences on selected material technologies. New paradigms represent discontinuities in trajectories of progress as defined within earlier paradigms. They tend to redefine the very meaning of progress, and point technologists toward new classes of problem as the targets of ensuing normal technology development."
Christensen (p. 9) uses the concept of a technology's trajectory to distinguish between two types of change, sustaining or disruptive, in the technology of the disk drive industry, each producing very different effects on the industry's leaders. According to Christensen (p. 9, his italics), "Technologies of the first sort sustained the industry's rate of improvement in product performance (total capacity and recording density were the two most common measures) and ranged in difficulty from incremental to radical. The industry's dominant firms always led in developing and adopting these technologies. By contrast, innovations of the second sort disrupted or redefined performance trajectories-and consistently led to the failure of the industry's leading firms."
Thus, the difference between trajectories of progress in an established technology's performance and new trajectories of progress as redefined by a disruptive technology is not only crucial conceptually but also has strategic significance. This means that investors must find understanding and using such conceptual distinctions to be useful and valuable.
Christensen noted that manufacturers established a trajectory of performance when they measured the rate of a technology's progress over time along established dimensions of performance to estimate its probable continued rate of progress. For example, Intel improved the speed of its microprocessors about 20% a year between 1979 and 1994. Moore' law, in which performance doubles every 18 months at the same cost, is an expression of the expected improvement in the trajectories of performance of microprocessors that result from both increasing the density of transistors, which shortens distances between them on a die, and increasing the number of dies per wafer, which increases volume exponentially as wafer-size increases arithmetically in diameter. An advance along these trajectories of performance reduces cost as performance improves. Thus, there are trajectories of expectable progress in performance in all established technologies that are widely understood. Product performance unambiguously evolves along the trajectory of its enabling technology.
However, Christensen also noted that the impact of disruptive technology change, which transforms the nature of technology trajectories and thereby redefines what is wanted and valued, is both different from normal sustaining technology and less well understood. He used the example of change in technology from mainframe to notebook computer. The differences in how these technologies are used introduce a significant ambiguity as to which is better. This is so because the answer becomes conditional on the customers different priorities of use. He said (p. 9), "This is an ambiguous question [Which is better?] because the notebook computer established a completely new performance trajectory, with a definition of performance that differs substantially from the way mainframe performance is measured."
Most changes in technology are far less radical than a revolutionary change in a technology's paradigm or even the sharp change in the nature of the solutions brought about by a discontinuous innovation or disruptive technologies. Normal technological change is evolutionary, sustaining progress along the technology's established trajectories of performance.
One significant principle in the stunning ascent of technology is reflexivity: the use of tools (including ideas) to make better tools. If you create intellectual property that makes use of microprocessors, you can count on microprocessors to advance along their trajectories of performance, currently doubling it closer to, perhaps, 13 months than 18. That is, simply by using the microprocessor as a tool, your intellectual property is made more valuable just by the reduced costs and increased speed of the microprocessor-tool alone. If you use, say, algorithms, that you can improve, you add that increased performance as value from progress in intellectual property development to the improving-tool-value. Sometimes an architectural improvement, which may also increase at an established rate along it trajectories, adds still more value to both tool- and IP-value. Most technological progress is like this: cumulative evolutionary advance along established trajectories of performance.
It Takes a Platform To Be A Standard-Setter
However, architectural innovations may be classed as either sustaining or discontinuous. A discontinuous innovation in architecture creates new performance trajectories. As Moore noted, discontinuous innovations can produce new markets. I contend that the concept of a platform can be inclusive of both evolutionary changes along established trajectories of performance that sustain progress and new trajectories of performance deriving from discontinuous innovations in technology, including architecture as a subclass.
Whereas, the term architecture, when following Moore's principal usage, cannot subsume a second discontinuous innovation after the first discontinuous technology because each architecture would have its own trajectories of performance. Clearly, in this case of two technology innovations, we have Architecture 1 and Architecture 2. In contrast, a platform may begin with a single standards-based architecture, add additional features with different trajectories of performance based on other architectures, and also add new discontinuous architectures to its proprietary open platform. It is the company with a platform, not just a single de facto standard architecture, that is recognized as a standard-setter.
[I stop here but continue in one final post (I promise) in which I look at case studies of Qualcomm and Microsoft to try to prove my point. Then, I speculate some more.
I hope this helps.]
Don |
