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Strategy In A Networked World

2014 June 15

Legendary strategists have long been compared to master chess players, who know the positions and capabilities of each piece on the board and are capable of thinking several moves ahead.  Historically, that’s been a smart way to run businesses too.

The boundaries were marked by clear industry lines, the timelines defined by strict accounting periods and the players well known.  Through clever planning and effective execution, you could create important efficiencies in crucial areas and attain dominance.

Yet strategy is no longer a game of chess because the board is no longer set out in orderly lines.  Industries have become boundless and permeable.  Competitive threats and transformative opportunities can come from anywhere.  Strategy, therefore, is no longer a punctuated series of moves, but a process of deepening and widening connections.

The Sum Of All Efficiencies

The first person to think seriously about how businesses function was Ronald Coase.  In his groundbreaking 1937 paper, he argued that firms gained competitiveness by reducing transaction costs, especially those related to information.  In his view, firms could grow until the point that organizational costs cancelled out transactional benefits.

It was a revolutionary idea and Coase won the Nobel Prize largely on the strength of it. However, it was of little use to managers until Michael Porter codified its precepts in his concept of value chains in the 1980’s.


Porter’s ideas essentially provided managers with a blueprint for building competitive advantage.  By increasing scale they could create efficiencies along the entire value chain through either operational excellence or bargaining power with suppliers and customers. Costs would be further reduced through scale as firms moved up the experience curve.

In effect, competitiveness was the sum of all efficiencies and you created those efficiencies by building greater scale.  Bigger was, in fact, better.

The End Of Scale And The New Age Of Disruption

The world envisioned by Coase and Porter was relatively stable.  Transaction costs were like weeds, which managers could gradually root out.  Once the lines of competition were drawn, strategy was a mainly a matter of bringing “relative strength to bear against relative weakness,” as UCLA’s Richard Rumelt has put it.

Yet today we live in a world of accelerating returns, where cost efficiencies can improve exponentially, nullifying scale advantages.  Further, technology cycles have begun to outpace planning cycles.  So in the course of planning and executing any given strategy, relative strength and relative weakness are likely to change—sometimes drastically.

So we find ourselves not in an age of stability, but an age of disruption, where agility trumps scale.  Strategy, therefore needs to take on a new meaning and a new role.  We can no longer plan, we can only prepare.  This requires what Columbia’s Rita Gunther McGrath calls a shift from “learning to plan” to “planning to learn”.

The Rise Of Ecosystems

When Jeff Bezos started Amazon, his purpose was to sell books against traditional competitors like Barnes & Noble.  Yet today, Amazon is much more than a retailer.  It offers cloud computing services to enterprises, builds devices and even develops TV shows. It directly competes with firms as diverse as Microsoft, Wal-Mart and Netflix.

However, Amazon is not a conglomerate, it is a platform.  The same cloud architecture that runs its online store is what it offers as a service to enterprises and how it distributes entertainment to consumers.  As it expands connections to into new areas, it deepens capabilities at its core.   Industries are now irrelevant.  What matters is ecosystems.

In today’s semantic economy, anybody can wake up in the morning with an idea, design a product online, get bids to manufacture it, crowdsource financing, promote it and arrange shipping in the cloud—all without ever getting up from the breakfast table.  Proprietary assets and capabilities have given way to accessed assets and capabilities.

When Coase wrote his famous paper in 1937, transaction costs were a much heavier burden. Today’s most valuable corporate resources aren’t tied to a physical place, don’t substantially diminish with use and are easily distributed.  The world has changed and so must strategy.

The Sum Of All Connections

In her excellent book, The End of Competitive Advantage, McGrath argues that sustainable competitive advantage is no longer possible and we must be content with achieving transient advantage.  In her view, rather than focusing on a distinct set of capabilities, firms must constantly be moving on to greener pastures.

While there is much value in what McGrath has to say, I’m not sure that part of her argument holds.  Clearly, there are plenty of firms such as Amazon, Walmart and Apple that are able to not only maintain, but deepen their advantages over time.  Sure, they’ve increased their scope as well as their scale, but their core businesses have also improved.

What’s changed is that competitive advantage is no longer the sum of all efficiencies, but the sum of all connections.  Strategy, therefore, must be focused on deepening and widening networks of information, talent, partners and consumers.  Brands, in effect, have become more than mere assets to be leveraged, but platforms for collaboration.

Clearly, the game of strategy has changed.  Leaders today are no longer at the top of the heap, but at the center of the circle and the new role of leaders is not to merely plan and direct action, but to inspire belief.  In a networked world, the best way to become a dominant player is to become an indispensable partner.

– Greg

Note: An earlier version of the post first appeared in Harvard Business Review.


15 Responses leave one →
  1. June 15, 2014

    But there are still instances where scale is important: telecommunication firms, cable television firms, and even consumer media firms like Amazon. I think, though, that both scale and being a platform player are the foundation for creating a competitive presence. I agree that scale and platform are not sufficient today: enterprises must have the cultural strength to be continually disruptive.

  2. June 15, 2014

    Yes, that’s certainly true. I didn’t mean to imply that scale advantages had disappeared completely, just that they have been substantially mitigated.

    Thanks for clearing that up, Barry.

    – Greg

  3. Tansel permalink
    June 18, 2014

    This is excellent. I really like how you hit the nail on the head that ‘Industries are now irrelevant. What matters is ecosystems’. And especially to inspire belief. Being a digital Project Manager I am told by many experienced professionals not to concentrate so much on digital as the management side of things. But I believe in today’s industry, both are just as important as each other.

    I am more inspired by a great manager who is fluid and can also do the work they manage (if called for) as opposed to managers who can only plan.

  4. June 22, 2014

    Strategy – maybe we need another word?

  5. June 22, 2014

    What would you suggest Martin?


  6. June 23, 2014

    No idea .. maybe direction, intention ….

  7. June 23, 2014

    Seems like strategy will suffice for now:-)

  8. June 25, 2014

    As I read this I also think of how this applies to current national and global politics and conflict. ISIS instantly arises from literally nowhere and everywhere to disrupt and change the game in the middle east while large nation states like the US wonder what happened and how to engage. As you say “Proprietary assets and capabilities have given way to accessed assets and capabilities.” Governments, elections, and borders are meaningless when people can connect to raise capital and mobilize faster than nations can make decisions. Again as you say “agility trumps scale” and “We can no longer plan, we can only prepare”.

  9. June 25, 2014

    It’s a good point Mike. I actually discussed a similar idea with regard to the situation in Ukraine in Harvard Business Review a few months ago. You can find it here:

    – Greg

  10. July 12, 2014

    Great insights, Greg. More leaders need to”get” this … I’ve seen the “everything is changing” mantra rejected by managers who don’t see it happening (yet) in their industries (e.g. Cable TV, as Barry suggested). The factor they miss is that it happens to different industries at different times … And that is a fantastic advantage for the later industries. For example, magazine publishers struggled to learn the lessons of the music industry, which was disrupted 5 or 10 years ahead of them, and that was a very worthwhile exercise. Cable TV execs need to be doing that now, not waiting for the falloff in cable subscribers to reach dramatic levels. Honestly, who thinks they’ll be paying Cablevision $200/month in 5 or 10 years? The cable guys (just as an example) have this fantastic advantage of being able to take the lessons of the music, publishing, etc. businesses and adapt them now, before the deluge. The question is whether they will.

  11. July 12, 2014

    Thanks Chet. Interesting points. What makes “S curves” difficult to deal with is that the change is always incremental to begin with, but when it takes off it is often too late for incumbent firms to respond.

    – Greg

  12. April 17, 2016

    I appreciate your optimism for the future and would respectfully call you on oversimplification (driven by zeal?)

    We live in a both-and world, and these things that “no longer matter” still matter. It’s just that they may matter a bit less now.

    Platforms are not new, they’re just another form of distribution, which takes advantage of scale.

    Transaction costs are really the cost of forming agreements between human actors, and these will always be present.

    Technology enables many new processes, producs and relationships; at the same time, the fundamentals remain.

    Keep writing – you inspire all of us who are seeking to make sense of the present.

  13. April 17, 2016

    Thanks for your input, Rob.

    – Greg

  14. August 31, 2020

    What you said here in 2014 about being an indispensable partner in a networked world makes even more sense this 2020. Indeed the competitive advantage that is based in physical infrastructures have been eclipsed by building ecosystems in this global pandemic.

  15. August 31, 2020

    An indispensable partner in a networked world makes even more sense this 2020. Indeed the competitive advantage that is based in physical infrastructures have been eclipsed by building ecosystems in this global pandemic.

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