Tuesday, October 20, 2009

Strategic Planning Analogy #285: Anti-Gravity Tree

You’ve all heard of Sir Isaac Newton. He’s famous for his discovery of the law of gravity by watching fruit fall from a tree. Well what about his jealous brother Figaro “Fig” Newton?

Wanting to make a name for himself, Figaro claimed to have discovered the anti-gravity tree. Fruit never falls off this tree. Therefore, Figaro declared that the tree defied gravity.

Why is it we never heard about this anti-gravity tree discovery? Well, one day, Figaro Newton was up in the anti-gravity tree doing his daily chore of applying glue to the fruit. (He claimed that the glue was for medicinal purposes and had nothing to do with keeping the fruit from falling.)

On that particular day, Figaro had climbed higher in the tree than normal. He had crawled out onto a thin branch. The branch broke under Figaro’s weight, and Figaro fell to the ground and died. Once people saw that branches and people could fall out of that tree, its status as an anti-gravity tree went away.

Gravity is a basic law of physics. The law applies everywhere on earth. The law cannot be repealed; exceptions cannot be made. Therefore, one cannot have an anti-gravity tree. As much as you try to fight it, gravity will make things fall out of that tree.

There are also some basic laws of business. In a similar fashion, these business laws cannot be repealed and exceptions cannot be made. If you try to defy these business laws, you will end up out on your own thin branch and eventually fall to your doom.

The principle here is that consolidation is a law of business. Consolidation cannot be repealed and exceptions cannot be made. All industries eventually consolidate into just a small handful of players, with typically one or two dominant players. Any strategy which depends on an assumption that an industry will not consolidate is based on a false assumption.

I was reminded of this by an article in the Economist magazine recently. The article was talking about the rise of cloud computing. Cloud computing is when do not keep your software or data on your computer. Instead, you access it from a third party via the internet.

In the article, there were references to moves by government regulators to try to keep cloud computing from consolidating. The idea is that the governments do not want another situation like what occurred in PC-based software, where nearly everything consolidated into Microsoft’s hands. Therefore, the governments will work to keep consolidation from happening in cloud-based software.

In its interpretation of the Economist article, the Corporate Executive Board went even further, by saying, “There will probably not be a single dominant provider of cloud services.”

It sounds here like people are trying to repeal the law of consolidation. Well, I don’t buy it. All industries eventually consolidate. Cloud computing will as well.

Yes, governments can slow the down the process a little bit. But that is like trying to glue fruit to a tree. It is only temporary. Governments can force openness of choice, but if everyone decides to choose the dominant player, the industry will still end up consolidating.

Just because governments can force Microsoft to make it easier for customers to avoid its Internet Explorer does not mean that the industry will suddenly be full of dozens of internet web browser companies, with none being dominant. The same is true for cloud computing.

There are many factors which tend to make consolidation inevitable, including:

1) Economies of Scale (which favor the larger firms)

2) Risk Avoidance (people like to purchase from the ‘winners”)

3) Price Wars (which favor the larger companies with the deeper pockets)

4) Mergers and Acquisitions (which put more power in fewer hands)

5) The General Acceptance Of Dominant Standards (which makes anyone not using the dominant standard vulnerable to obsolescence—as a provider or as a user)

6) The Law of Positioning (which says that only one firm can own a position in the mind of the consumer. Whoever owns that position in the mind will automatically own the dominant market share.)

Therefore, I predict that cloud computing will not be an exception to the law of consolidation. This industry will not be an anti-gravity tree. It will consolidate.

Why is this such an important point to make? The reason is that one’s assumptions on how an industry will evolve impacts the type of strategy one may follow.

For example, if you believe that an industry will not consolidate, you may create a strategy based on having a modest market share in a wide open playing field. However, if you believe that consolidation will occur, the strategy might focus on a cut-throat war to achieve commanding leadership.

I remember reading an article decades ago, back in the early years of PC manufacturing. The writer of the article gathered up the strategic objectives of these PC manufacturers. The majority of the manufacturers were targeting a long-term market share somewhere in the range of about 15%.

There was a problem with this predominant strategy. First, there were around a dozen firms each trying to achieve this level of market share. Add them all up and you get a lot more than 100% of the market. So the math doesn’t work.

Second, this strategy ignores the law of consolidation. Under consolidation, one usually ends up with a couple of firms having far more than 15% share and some niche players with far under 15%. Almost nobody long term operates in the 15% range.

According to the Q1 2009 data (source: Gartner), PC market shares in the US are as follows:

HP 27.7%
Dell 26.2%
Acer 13.6%
Apple 7.4%
Toshiba 6.6%
Everyone Else 18.6%

As one can see, the law of consolidation has occurred, and most of those PC firms in the article had the wrong initial strategy. It is also interesting to note that most of the firms in that original article are no longer in the PC business. Do you think there may be a connection between no longer being in business and having the wrong strategy (based on the wrong initial assumption)? I do.

Strategies are based on assumptions. Any strategy relying on breaking one of the fundamental laws of business as part of its assumptions will almost assuredly fail. Consolidation is one such fundamental law of business. If your strategy depends on suspending the laws of consolidation, you may want to consider rethinking that strategy.

Why is it that when a space ship in a Star Wars movie gets destroyed, it always starts to drift downward? Out in space there is no gravity, so an incapacitated ship has no reason to fall down. The law of gravity is so ingrained in our minds that we even have trouble ignoring it in our imaginations of outer space. We should have the law of consolidation equally ingrained into our minds.

1 comment:

  1. Gerald,
    And I shall have this article ingrained into my mind. AS it is easier to swim with the tide than it is against the tide, so going with the gravity of business rules is less energy consuming than going against the rules.