Saturday, June 30, 2012

Strategic Adjacency: A New Model of Integrated Diversification

Microsoft has made a stunning strategic move in recent days with the announcement of its own tablet computer, named Surface. For a technology giant and software pioneer whose business model, ever since inception, focused only on developing and supplying software for computer manufacturers and computer users, this move signals the company's significant shift in strategy. It is, however, not the first time that Microsoft forayed into hardware. Its X Box and Kinect gaming devices have been runaway hits; however, they have been hardware forays into a new domain of entertainment and gaming for the company. The entry into tablet manufacture represents its first move to forward-integrate into an adjacent product-market segment.

Microsoft has not been the first or the only one to do so, however. Google, the developer and supplier of Android mobile operating system, launched its own Nexus mobile phone a few years ago and has followed up with the acquisition of Motorola Mobility for adding on robust mobile phone development and manufacturing capability. It has also ventured in earler years into development of its own software akin to Office suite (pioneeringly on cloud platform), development of Chrome computers (extending the search concept) and now into tablet computers (a personal connectivity move announced just a few days ago). Amazon and Barnes & Noble have forward-integrated into electronic reading business through their e-readers and media tablets (Kindle, Fire and Nook) over the last few years. In old-world language these would have been defined as integration or diversification moves. This blog post proposes that in today's world, we need to conceptualize these moves differently.

Strategic adjacency

The above moves by companies which have achieved iconic status in their core technologies and businesses are not classic integration models as such moves are also accompanied by significant outsourcing. They are also not classic diversification moves which seek new diversified market segments, related or unrelated. Rather, these represent a definite attempt to move into strategically adjacent areas. The example of Apple having its own integrated software and hardware platforms, and the likelihood of personal computers being phased out by tablets have, no doubt, prompted Microsoft to protect, if not expand, its business by moving into the tablet computer domain. Faced with the lost time in developing an appropriate chip for smartphones that allowed other chip makers to dominate the mobile space, Intel is now leveraging its own Atom mobile chip with a newly launched Intel branded smartphone combination. Simultaneous dvelopments of convergence and divergence in an industry or related industries are blurring the definition of industry. This represents both an opportunity and a challenge for firms. Strategic adjacency provides a model to handle these.

Strategic adjacency could be seen as a sequential, and sometimes simultaneous, move to expand the business canvas, keping the ultimate customer focus unchanged while providing enhanced user functionality. For Microsoft, computer manufacturers were intermediaries and operating systems were enablers to reach to the computer user. Through Surface tablet, the firm is attempting a paradigm shift to reach the end-user dirctly. When Apple moves into its proprietary televisions the focus would still be on the same consumer who uses its iPhones, iPads and iPods, and who is traditionally covered by Apple with its unique ecosystem. Theoretically, any domain that helps the human being, operating as a domestic person or as a business person, fulfill his needs could result in strategic adjacency. Apple one day could create global tele-presence solutions and Microsoft could help in remote management of offices and homes. Google can help one visualize and rlat to the whole world from one spot. Facebook could institutionalize its own way of global social networking throgh its own branded mobile and tablet devices and exclusive email addresses. The question, then, relates to the basic triggers for firms to achieve strategic adjacency.

Competence versus commoditization

Competence, or core competence has, in the past, been the primary driver of business focus. Multiple competencies enabled companies to become corporate groups or conglomerates dealing in integrated or divrsified businesses. Rarely competencies were seen as enablers to move up or down, or even sideways in strategic spaces within an evolving broader domain. Traditionally, a truck manufacturer never sought to become a transport service provider. Nor did component maker aspired to become a truck manufacturer. The concept of competence as a driver, and also as a limitation of business, was well recognized and respected. Companies typically used different filters (technology, product, channel, market for example) to identify competencies that could drive business expansion and diversification. All of these tended to be company specific and investment intensive and zealously protected by owners or innovators of such proprietary technologies.

Recent times have seen a fundamental shift in understanding competencies. A central core competncy is now considerd enough to integrate multiple competencies. Innovation that has been the driver of competencies has, by and large, become commoditized with early commercialization to multiple partners. Notwithstanding hundreds of patents, companies are unable to hold off industry-wide replication as well as outsourcing and inlicensing of products. No single company today needs to be the in-house innovator of bundles of all the tchnologies, components and systems. Many innovator firms are keen to outlicense their patented or proprietary components to as many end-products as possible. Even large firms which have proprietary internals are willing to provide their parts to competitors. As a result, any company with access to reasonable finances can develop a new end-product in a strategically adjacent space.

Competence within commoditization

Despite the lowered entry and exit barriers however, it is still left only to a few firms to make an optimum use of strategic adjacency. This is due to the capability of such firms to achieve competence within the aspects of commoditization. Samsung has achieved uniqueness in the already standardized (or commoditized) ultrabook computer market by becoming the only ultrabook with optical DVD drive. Microsoft is planning to achieve similar uniqueness in its Surface tablet by offering standard USB 3.0 port (to ensure compatibility with the established computing devices as well as easy portability of data) and by converting the front cover into a key board (to gain an innovative advantage over conventional tablets in space usage). Clearly, seamless portability and integration between established PC usage power and contemporary tablet usage profile is seen to be the unique selling proposition. In designing Windows 8, Microsoft has sought to overcome its delay handicap with an operating systm that straddles multiple mobile, media and computing applications seamlessly.

The unique competency paradigm clearly counters the limitations of commoditized innovation. When Audi designed its Q3 SUV it showed the competence to bring in the larger Q5 SUV architecture into a smaller space at a lower price point. Another classic case is that of Samsung Galaxy Note which brought back the stylus to provide drawing and writing capabilities onto a smart phone . However, competence in a commoditized world offers no permanent protection against other follow-on moves. It is necessary for such firms to achieve rapid success and huge scale to ensure that replication of the paradigm by others would be delayed, if not deterred. Typically, such firms project their uniqueness very strongly to the customers to be able to capitalize. Sony could bring Xperia series of camera phones into competitive reckoning by focusing on Bravia engine and better camera sensors. In contrast, the reluctance of Nokia to project its unique Pure View camera phone with an unprecedented 41 megapixel camera demonstrates how the potential benefits of competency could be frittered away by hesitant marketing.

Integrated diversification

The concept of stratgic adjacency is the building block of a new model of integrated diversification. A combination of central organic core comptence and multiple acquired, licensed or leveraged competencies enables the modern firm to define its marketplace as an ecosystem of adjunct products and services that redfine the marketplace in an ever enlarging manner. This would typically require a conflunce of technologies. All of these, do not change the central focus of the marketplace but could change how the marketplace could be served, either incrementally or in a breakthrough manner. As an example of technology kaizen (continuous improvement), we can think of enhanced driving experince. Today, GPS systems in automobiles are seen to be an accessory, with destinatioms to be keyed in. In future, SIRI type of voice recognition and response technology could enable the user or the driver just state the destination orally whereupon the driving assistant takes over and guides the user to the destination. This would involve bundled strategy with the satellite communication system providers. Other improvements could involve the automobile recognizing the driving concentration when the drivers speak on cellular speaker phones and alerting the drivers. Future cars could become driverless, or be capable of selective autopilot at least based on robotics and continuous distance measurement technologies.

As a breakthrough adjacency, one can consider the provision of power to home consumers by public sector electric utilities in India. Faced with shortages in power generation leading to daily power cuts and the consequent consumer distress, the utilities may diversify into solar power generation and undertake to establish solar power plants in every home they serve. The utilities thus can not only diversify their offering through strategic adjacency but also in the process serve the same consumer in a much better fashion. Another breakthrough adjacency could be in terms of hospitals opening mobile diagnostic and mobile home treatment clinics with fully equipped buses bringing healthcare to the home (socially too, one wishes the hospitals would show the same empathy in bringing healthcare to the patients' doorstep as well as they display in deploying ambulances to bring patients to hospitals for critical care). A leading business process outsourcing firm in India has found a new strategic adjacency in adding analytics to its core business of transaction processing.

Strategic adjacencies and ecosystems

This blog post has provided several examples of the concept of strategic adjacency. It has also showed variations in terms of incremental steps as well as breakthrough strides in serving the customers. Starbucks' phenomenal growth has been in terms of finding strategic adjacncies in an incremental fashion while Amazon's phenomenal growth has been through strategic adjacencies of a breakthrough nature. Both approaches work admirably given appropriate technological and business contexts. The beauty of the stratgic adjacency model is that the firm evolves and grows while creating a new ecosystem around the same marketplace. In that sense it provides a smart way for integrated diversification without the investment intensity that the classical models of integration and diversification entail. Ecosystems created by the model of strategic adjacencies provide enhanced customer fulfillment and sustainable growth for firms.

Posted by Dr CB Rao on June 30, 2012

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