Web 2.0, open source, open standards. These are concepts that many executives don't understand -- and they need to. They are related in what I will call Innovation 2.0 opportunities. These opportunities are different from others in one important way: they challenge companies to cede control of part of the value chain in order to play a role in a larger value chain. Now this concept in general is a well-accepted business strategy -- moving from a big fish in a smaller pond to a smaller fish in a bigger -- or, more importantly, growing -- pond. But those who are used to being big fish in a big pond lose sight of how to adapt when the big pond starts shrinking. Innovation 2.0 speaks to this challenge and provides insight into how to seize new opportunities.
First, let's start a definition. Innovation 2.0 is defined as innovating as part of an interconnected ecosystem of suppliers and buyers that service customers by working with other players in the ecosystem collaboratively. Innovation 2.0 puts the customer in the driver's seat, letting that customer assemble the solution they need from the available components. Those components are provided by members of the ecosystem -- and usually not just one provider.
Second, let's address the issue of why a successful company with a proprietary stronghold would be willing to give up control to other companies servicing its customers. Well, if we go back to the "pond" metaphor, what executives are really looking for is not "big ponds" but "ponds that are growing big." Once a pond is just big, it stagnates, and it gets competitive, and investors lose interest. And, what's worse is being in a big pond that is perceived as shrinking.
Investors love fast-growing ponds that are becoming big. That's where most successful folks in a capitalist society make hay. And, while being a big fish in a small pond is not very interesting for those with thoughts of grandeur, being any fish in a growing pond is probably a good thing.
Here's the problem for big-pond big-fish, though. They get comfortable being in that big pond, and they forget the scrappy ways that got them to be a big fish in a big pond. When I say "forgot", that really means they are not applying the same kind of entrepreneurial principles that they must have applied to get them to a position of incumbent stature that they have enjoyed in the big pond.
And what are those scrappy ways? They are the "do what it takes to reach as many customers as possible in a fast-growing market." If a market is growing at 50%, you want to grow as fast as the market. To do that, you must be relevant to as many of the participants in that market as possible. You must make yourself part of their being in that market.
In some markets, the customer's choice is fairly discrete -- they choose from a short list of similar suppliers. If you win a certain portion of those customer choices, you hold that share in the market,. But other markets are not so simple. Customers may even start making choices of other suppliers, and you need to find your way into those deals. Maybe you are a complement to the winning supplier. Maybe you are in a co-marketing deal, or cross-selling deal, or a partnership where you share revenue. These are all ways to attach yourself to the growth of that market.
Well, what Innovation 2.0 recognizes is two things. First, it recognizes an important customer behavior that is being driven by web 2.0, open source and open standards. That behavior is customer-designed solutions. They want to choose and "mash-up" the solution that makes sense to them based on available pieces. They want to "create-rip-mix-burn" as Richard Baraniuk proclaimed at a recent TED conference. They don't want to be forced to live within the constraints of a single supplier. Second, it recongizes that the expectations of customers towards suppliers have changed. Be "mixable" with other suppliers I am likely to choose. Support standards to make that happen. And be "flexible": don't make licensing of your proprietary stuff an impediment to me, or I'll just use someone else who is more mixable -- even if you have a better product.
Mixability and flexibility, then, are two product attributes of Innovation 2.0. If your business design or product concept limits or prevents mixability or flexibility, you will lose Innovation 2.0 opportunities.
Let's look at the example of IBM, who has taken this journey successfully.
In the early 1990s, you could hear the last echoes of "You can't get fired for buying IBM." Those echoes started to get drowned out by CIOs who didn't know how to play in a world moving toward the web and client-server computing that was an order of magnitude cheaper and faster-to-market than its dinosaur-like predecessor, the mainframe. When Louis Gerstner arrived at IBM in 1993, pundits were reading it last rites. But Gerstner did many things that turned around the company. One thing he did was to turn upside-down IBM's strategy when it came to its product investments. This move, in my opinion, saved IBM.
The first major move he made in this regard was to stop investing in IBM's multiple operating systems, realizing that it couldn't beat Microsoft (which should, by all accounts, have been an IBM technology), who made its living selling Windows licenses. And worse, a new, free operating system called Linux had emerged which was fueling the growth of this new thing called the World Wide Web. So, Gerstner pulled off one of the great chess moves of computing history. He said, in effect, "Let's stop spending billions on multiple redundant operating systems that compete against each other -- and paying lawyers lots of money to defend our technology through patents. Instead, let's take a fraction of our spending and use it to underwrite Linux as a legitimate competitor to Windows. We'll save money, we'll be the kingmaker of Linux, CIOs and CEOs will trust Linux because we're behind it, we'll buy a generation's worth of goodwill and we'll vault ourselves to the front of the line in being the servicers of the enterprise Linux market. Heck, we can even package and sell our own copies of Linux that come with our tools and add-ons."
It worked like a charm. Linux competed with Microsoft successfully to take a significant share the enterprise server market. They made billions servicing Linux without having CIOs have to pay a per-server license fee (like they had to with Microsoft) for their fast-growing web server farms. They stopped internal competition across product teams and got everyone working together in a world of "enlightened self-interest" -- making Linux better as a public good, which made their role in that growing marketplace more and more attractive.
IBM did this two other times, a second dig at Microsoft and one at Oracle, too -- both companies who relied heavily on revenues from proprietary software license sales to fuel them. IBM purchased a company with a great next-generation developer desktop (called an Integrated Development Environment, or IDE). Now, Microsoft owned the developer market for IDEs. They were not expensive, but the majority of developers used Microsoft. IBM, in a bold stroke, offered this new IDE as open source, worked with competitors to form a non-profit consortium around the technology, and started giving away -- for free -- the IDE to anyone who wants it. Now, it is important to know that the IDE framework is a highly strategic platform when it comes to the developer. Not only do end-developers need to use one, but developers who build dev tools need their tools to integrate with an IDE. By open-sourcing Eclipse, as IBM's open source contribution was called, they gave every dev tool builder a free platform to which could house their innovation. No longer did dev tool companies have to get special deals with IBM or Borland or Sun or Oracle or Microsoft. They could bundle with Eclipse and look like a suped-up IDE out of the box. It became the de facto development tool for open source projects, too. This drew millions of developers towards Eclipse and relegated Microsoft, Sun, Borland and others to a secondary position in the IDE market. Furthermore, IBM shut down internal competition across its many IDEs (it had an IDE for each different operating platform it supported), lowering its operating costs and gaining both goodwill and market share the way it did with Linux. It commanded each team that had value-added tools to re-tool them to be Eclipse plug-ins -- sold separately, of course.
The last example I'll mention -- I'm sure IBM has others -- is with application servers, the heart of any web site. IBM had its own Websphere application server that it licensed. Soon, though, it realized that Websphere could not differentiate significantly from open source application servers like Apache Tomcat. So, IBM again chose to embrace open source and wrap its tooling around these open technologies.
The results for Gerstner and IBM of this strategy are clear. He jumped out of the stagnant shrinking pond that IBM dominated and jumped into the smaller but fast-growing pond of open source, which gave IBM a commanding position in the ecosystem of the internet marketplace. They could compete everywhere Linux, Eclipse and Tomcat found themselves. They could be the collars to grab for the CIO. They could be the solution partner that made all of the open source stuff work together. And, they could be the heroes of the industry -- as opposed to the stuffed-shirt goats they were perceived to be when Gerstner first took the reins.
IBM is my favorite example of Innovation 2.0. They did so many things right. And the stakes were high. This was bet-the-business stuff. A lot of companies can learn from what they did. Innovation 2.0 is a way to understand what IBM and other companies -- such as Salesforce.com, Google, Facebook and LinkedIn -- are doing to establish dominant positions in the fast-growing ecosystem of a Web 2.0 internet.
