- Michael Hilb
Mastering Multidextrous Strategy
Platform-driven ecosystems follow their own rules. The article explains these rules and presents four key principles that guide every strategic move in platform-driven ecosystems, i.e. from linear to circular value creation, from centralized to distributed governance, from the five forces to platform forces, and finally from strategies to stratagems. By shedding light on the eleven platform forces, it provides a strategy framework for identifying the strategic actions of other actors and planning one's own strategic moves. Finally, it proposes the concept of multidextrous strategy as a meta-skill that should be mastered by any strategy leader who wants to excel in ecosystems.
As more sectors transform from vendor-centric models to user-centric ecosystems, business leaders must decide whether to shape their company's future under these new conditions or be shaped by them. The transformation they must confront is not just about making the right move in a game with known rules, but often about learning a new game with new rules. Knowing these rules, and learning how to apply them, is therefore the key to success in this new game.
What are the key rules of the game for ecosystems? We see four key principles guiding every strategic move into or onto platform-driven ecosystems:
1) From linear to circular value creation
2) From centralized to distributed governance
3) From the five forces to the platform forces
4) From strategies to stratagems
From Linear to Circular Value Creation
The first and fundamental rule to apply is to take a circular perspective to value creation as opposed to a linear approach. The linear perspective on value creation, which prevailed for a long time, assumed economic value creation as a sequential process along the value chain. Companies positioned themselves in the value chain, either through one or several stages, and focused on downward and upward relationships, i.e., their suppliers and customers. As highlighted by Ramírez and Mannervik (2016), value creation was mainly additive, i.e., each actor used the components provided by its supplier as the basis for its output, e.g., a component or a final product. Those companies that managed this process more effectively and efficiently than their competitors gained power and, thereby, profitability.
While this logic still holds for many manufacturers, the balance of power shifted when new types of players entered the scene, offering a more efficient and effective way to market making, i.e., allocating resources, goods, services, and capital: digital platforms. Because of their ability to connect many more potential buyers and sellers than was previously possible for any one company, even the largest, they were able to better match supply and demand (Parker, Van Alstyne, and Choudary 2016). These companies benefited from and leveraged new technologies that were increasingly becoming available at a lower cost, i.e., the 3Cs, computing, connectivity, and cognitive performance through artificial intelligence. This changed the strategic challenge of the companies.
As a result, companies began to realize that their greatest challenge is not primarily competition, but rather their ability to cooperate and compete at the same time, or to co-operate, as suggested by Brandenburger and Nalebuff (2021). In this context, it is about being part of a larger network of firms, some of which are competitors, collaborators, or complementors. Consequently, innovation becomes more open (Chesbrough, 2003) and the rules of the network economy replace those of economies of scale (Williamson and De Meyer 2020). What remains, however, is a shared value proposition (Adner 2017). This has clear implications for the notion of industry and strategy, as Ramírez and Mannervik (2016, 32) note: “The increasingly outdated notion of ‘industry’ unduly and artificially narrows the frame the strategist uses; and thus the strategic focus of attention with regard to opportunities and threats.”
In summary, value creation logic is changing from a linear, one-dimensional perspective to a circular, multidimensional approach. This requires a multidextrous mindset.
From Centralized to Distributed Governance
The new economic realities are also reflected in the changing governance logic: from purely centralized, hierarchical governance to more distributed, shared governance. This is a direct consequence of the nature of ecosystems, as defined by Jacobides, Cennamo, and Gawer (2018, 2264): “An ecosystem is a set of actors with varying degrees of multilateral, nongeneric complementarities that are not fully hierarchically controlled.” While decentralized value architectures have existed in the past, they have usually been influenced directly or indirectly by individual organizations.
If we combine the changes in value creation with those in governance logic, we can distinguish between four different value creation logics:
Value chain: The value chain architecture proposed by Porter (1980) assumes a linear logic in which firms seek to extend control downstream, i.e., to suppliers, and upstream, i.e., to distributors. Industry consolidation is an important means of extending control, either by buying out other firms or by increasing bargaining power over them.
Value network: The value network architecture as introduced by Brandenburger and Nalebuff (1996) still assumes a linear value creation logic, but takes into account a distributed control logic that leads to co-opetitive relationships between actors, as a business partner can be both a competitor and a complementary.
Value hub: By contrast, value hubs assume a circular value creation logic driven by a central "platform" as proposed by Gawer and Cusumano (2002) or Parker, Van Alstyne, and Choudary (2016). The value hub, i.e., the platform, is at the center of the value creation mechanism and seeks to exert influence to maximize interdependencies and thereby optimize its value.
Value web: Finally, the value web architecture shares the circular value creation logic of the value hub, but also assumes a distributed governance logic, i.e., without a central platform that attempts to exert control over the various actors. In this approach, the different actors agree on the terms of a common governance to control the value creation activities.
While all four value creation architectures can be observed, and will continue to be so in the future, the value creation potential among them differs over time. While in the past, well-organized value chains embedded in value webs were the most profitable, many of the most capitalized companies today are value hubs. Only the future will reveal whether value webs will replace value hubs as the most profitable value architecture. Therefore, companies must be well versed in operating across all value architectures.
From the Five Forces to the Platform Forces
This change in the relevance of value architectures, and the increasing relevance of circular value creation logic, has direct implications for strategic logic. As outlined above, the focus is shifting beyond competition (Porter 1980) and co-opetition (Brandenburger and Nalebuff 1996) to platforms (Gawer and Cusumano 2002 or Parker, Van Alstyne, and Choudary 2016). Hence, we will move mentally from the five forces to the platform forces. What are they, and how do they differ from the five forces?
The key difference is the importance of organizational linkages in the platform logic (Gulati 1999). While the positioning of individual actors relative to others is still important, the relationships between them matter just as much. The five forces are as follows (Hilb 2020):
Platform orchestrator: The platform orchestrator is at the center of an ecosystem and forms the connective bond for all players. It manages and controls all data and information flows.
Platform feeder: The platform feeder provides the inputs for any transaction or transfer, e.g., goods, services, and information, to any other party. It considers the platform orchestrator as its channel to connect with the platform user.
Platform user: The platform user views the platform orchestrator as the source of goods, services, or information. It appreciates the variety of opportunities that would not be enjoyed if it had to interact with every individual platform operator.
Platform aggregator: The platform aggregator helps platform feeders and platform users navigate the growing universe of platforms, select the most appropriate platforms, and adapt partner strategies in an ever-changing environment.
Platform enhancer: The platform enhancer offers additional services or products that facilitate the transaction and interaction relationship between the other platform players. Their offer is usually closely linked to individual transactions and interactions.
The three shifts described above have direct implications for the nature of competition and collaboration. First, the circular nature of value creation presupposes the simultaneous application of a combination of different strategic logics, i.e. competition and collaboration. Second, the trend toward distributed leadership implies a division of influence and responsibility, but also a limitation of strategic autonomy. Third, companies will have to choose not only between multiple ecosystems, but also between different roles within them, i.e., platform forces.
Therefore, these transitions directly affect the concept of competitive advantage, or as Jacobides (2019, 11) summarizes, “Competing is increasingly about identifying new ways to collaborate and connect rather than simply offering alternative value propositions.” Are we observing the end of competitive advantage, as suggested by McGrath (2013), or simply a new application of Teece's (2007) dynamic capabilities?
From Strategies to Stratagems
While the nature of competitive advantage may change, the central role of strategy will remain. However, the way strategies are developed and applied is likely to change. Strategies will be more ephemeral, will need to be more adaptive, and will therefore need to be developed in a more agile manner. Therefore, we may no longer even speak of ‘strategy’ but rather of ‘stratagem,’ defined as “a carefully planned way of achieving or dealing with something, often involving a trick” (Cambridge Dictionary, 2021), whereby we would define ‘trick’ as a clever way of interacting with other players to achieve a goal.
What are the stratagems for succeeding in ecosystems? To outline the option space, it can be useful to look at the company lifecycle and business model. In that context we can distinguish between three types of companies (Hilb 2020): the upstart, the incumbent, and the platform orchestrator.
While upstarts are usually well-positioned to play the vertical game, i.e., take on the role of platform aggregator, orchestrator, or enhancer, as they are not locked into old thought patterns and relationships, incumbents that have grown in a more linear value creation logic may have an advantage to play the horizontal game in platform-driven ecosystems, i.e., evolve as platform feeders and users. Finally, platform orchestrators are well-positioned to move in all four directions. What are the stratagems in play?
1. Connector play: With the increasing number of ecosystems and players within them, there is a need to provide independent guidance and navigation. New players are well positioned to act as aggregators and help provide clarity and orientation in the world of ecosystems.
2. Disruptor play: Even disruptors risk being disrupted. Upstart companies are ideally placed to challenge an existing platform by offering a novel experience or a superior coordination model, such as distributed governance.
3. Micro-solution play: Most upstarts find their white space in developing a new application embedded into a platform that helps enhance its offerings and experience. Micro-solution plays can benefit from an existing network, but platform dependency may also limit its option space.
4. Channel play: The obvious way for any player to leverage ecosystems is to try to capture distribution channels and reach as many players as possible to market and sell their products and services.
5. Emulator play: Many established players try to emulate the strategies of existing platforms to become platform orchestrators themselves. As logical as this may sound to many players, the path usually proves difficult. Instead of trying to emulate an existing platform, it may be smarter to team up with other players to form an alliance.
6. Optimizer play: As with the channel play, most companies see benefits in using ecosystems as a sourcing option, whether for goods, information, or data. This usually leads to better prices and optimized results, and helps to identify new potential business partners.
Platform orchestrator plays
7. Value capture play: Platform orchestrators have the most opportunities to position themselves in ecosystems because they are in a comfortable starting position. One obvious choice is to move from connecting sellers with buyers to selling products on their own. This allows the orchestrator to capture more of the value of a transaction.
8. Absorber play: Another strategy often chosen by platform orchestrators to expand their reach is to become an aggregator and thereby absorb the business of competing platforms. This is often done through acquisitions but can also be achieved in a greenfield approach.
9. Gatekeeper play: One way for digital platforms to grow in the analog world is to get closer to end users, in channels they may not yet control. Since in many cases the middlemen remain between the platforms and the users, platform orchestrators may be well positioned to replace the middleman altogether.
10. Infrastructure play: Another area where platform orchestrators can find future growth is expansion into infrastructure, i.e., becoming a platform enhancer. Moves into infrastructure are often the result of a lack of technology or services available in the quality and quantity needed or may even become a competitive advantage.
11. Replicator play: Finally, platform orchestrators can replicate effectively the platform model in another ecosystem. Because they have the experience, technology, and business acumen, which are required to be a successful platform orchestrator, they can easily apply those capabilities in other ecosystems.
We have discussed four major shifts that companies need to master to lead successfully in ecosystems: From linear to circular value creation, from centralized to distributed governance, from the five forces to the platform forces, and finally from strategies to stratagems. These shifts not only present a major change and challenge for organizations, but also put pressure on the organization to navigate a multidimensional option space that requires multidextrous strategies and governance. In this context, the main challenge for decision makers is to consider simultaneous options along four dimensions:
Which ecosystems? Since most companies can be a part of various ecosystems, decision makers need to prioritize and evaluate the relevance of each one. The assessment must be based on both the capabilities of the business and the future attractiveness of the ecosystem.
Which roles? All five roles that companies can play in ecosystems require certain skills, but also deliver advantages and disadvantages under their respective conditions. Companies need to decide which roles they want to play now and in the future. In many cases, they must choose multiple roles simultaneously and adjust their choices as ecosystems evolve.
Which stratagems? Once the positioning is clear, at least in the short term, organizations need to know what strategic options they have available, i.e., what stratagems they should pursue. Again, different stratagems can work and may need to be adjusted as the game evolves.
Which behaviors? Finally, organizations should be clear about how they want to interact with the other players in the ecosystem, competitively or collaboratively. Since relationships with most actors will proceed in both directions, organizations must not only be able to behave in different ways, but also know when to behave in which specific way.
In conclusion, success in ecosystems requires a multidextrous mind and skill set. Multidexterity, however, does not mean doing everything, for any reason, at all times. Rather, organizations should develop the necessary capabilities and be clear about when to use them, either individually or in multiple form, as required.
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This article was published as a chapter in the book Governance of Ecosystems in October 2021.