6
Achieving Strategic Alignment: Asset-Based Opportunity Spaces
Why Us?
A startup is not a smaller version of a large corporation; neither is a new business inside a corporation just a startup that happens to be hosted by a large company. For a new venture to be successful inside the corporate context, it must align with the strategic directions of the hosting company. Often, these strategic directions are not clearly stated. Discovering the boundaries of the company’s strategy and building ventures that can leverage the assets of the corporation is critical. Unfortunately, misalignments are often discovered too late in the process, to the disappointment of both executives and innovation teams.
The underlying cause of the frustration is a failure to set meaningful boundaries. Defining opportunity spaces helps. They provide the innovation team with guardrails that keep the team from straying too far from corporate strategy. If the company uses an Innovation Stage-Gate, opportunity spaces provide the basis for a strategic review of an initiative. One question the innovation team should answer is, “Why us?”
As noted above, Vijay Govindarajan estimates that, to succeed, an internal venture should leverage about 40% of its critical assets from the hosting company. These may be the customer base, core technologies, brand permission, or the service infrastructure, for example. The careful repurposing of an existing asset—if managed well—can provide significant advantages to the new company. Failure to do so begs the question, “Why us? Why do we think that we will be more successful with this venture than a startup, with its speed and flexibility, would be?”
Asset-Based Opportunity Spaces
An opportunity space is an area that is ripe for innovation. It may result from a new technology (or combination of technologies), from demographic shifts, from changes in customer behaviors, from new regulations, or from some combination of these. The major trends in the automotive industry, for example, are autonomy (driven by rapid advances in sensors and AI technology); electrification (supported to a large degree by environmental regulations and subsidies); shared use of transportation (which is driving new patterns in ownership and the emergence of consumer fleets); and connectivity (which is enabling new consumer use cases for the time customers spend in a vehicle). These trends are driving billions of dollars in investment, spawning hundreds of startups, and blurring longstanding industry boundaries. There are more opportunities in this space than there have been for years.
The opportunity space, however, will differ for each company. What creates the opportunity space is the intersection between the trends and the assets of an ongoing business. In the insurance industry, for example, the opportunity may be in the use of information technology and autonomy to significantly reduce casualty losses. A new partnership between insurance companies and automotive companies may make sense to both. In the logistics industry, the trends might enable new forms of collaborative shipping or new ways to reduce costs through driver-assist and route optimization. In the tire industry, the opportunity might be in support of consumer fleets, leveraging experience learned in commercial trucking.
Defining the opportunity spaces takes time. Many people can see trends; few are adept at repurposing assets.
A company can leverage many assets to grow into new markets. The six most common assets that can be leveraged are (see Figure 6.1):
Leveraging assets to move into new markets
- Customer base: The customer base for one product may overlap with the customer base for another product, even one that seems quite different. A corner gas station today, for example, sells food, coffee, lottery tickets, firewood, and propane.
- Channel: An established channel can be used to push a very different set of products. For instance, Frito-Lay leveraged its supermarket channel to sell cookies in addition to salty snacks.
- Infrastructure: The infrastructure for one business may support a very different business. Williams Pipeline, which repurposed its unused network of gas pipelines to carry fiber-optic cable for long-haul telecommunications, for example
- Value chain: Companies can move upstream or downstream in their value chain. It was popular in the industrial age for companies to be vertically integrated, in industries from steel to automobiles
- Technology: Technical expertise can be applied in new markets. For instance, Ball Corporation (the Mason jar company) has applied its expertise in container technologies in a wide variety of industries, from foods to aerospace
- Underlying customer need: A company that understands its customers’ needs deeply can migrate with the customer into new ways of meeting that need. Netflix’s move from movies on CD to streaming and content development is such an example—though they were ahead of many customers in anticipating their preference for streaming.
Leveraging assets to move into new businesses is a double-edged sword. On the one hand, it greatly increases an internal venture’s chance of success. On the other hand, repurposing an asset that is part of the smoothly operating machine that is the core business—the performance engine—can be very disruptive.
The process of identifying asset-based opportunity spaces is idiosyncratic. It can start with a market opportunity and seek to identify ways of developing competitive advantage by leveraging or extending existing assets. The categories listed above are fruitful hunting grounds. Alternately, innovators can start with existing assets and envision new or extended uses for them. This can be especially powerful when a company is able to leverage assets from different parts of the corporation in a synergistic way. Finally, at times, if you are alert to it, the market will point to opportunities to use existing assets in new ways. Customers may see something that you don’t.
Amazon is a master at innovation that leverages assets developed for one business to move into another. It has made such moves multiple times, converting internal assets into the building blocks for new businesses. Figure 6.2 is a partial map of how they have done this.
Amazon.com adjacencies
- Customer base: Amazon moved from selling books to selling CDs, toys, and many other items, leveraging and strengthening its customer base
- Channel: Amazon opened up its channel to competitors with its Marketplaces offering, which provides access to Amazon’s customer base and its web infrastructure through Amazon Storefronts. This move included presenting competitor products on an equal footing to those sold directly by Amazon, including pricing transparency. The decision to open up its channel was very controversial both inside Amazon and on Wall Street—it was viewed as literally “giving away the store”—but Marketplaces enabled Amazon to sell a much wider variety of things (see Brad Stone’s book, The Everything Store) [Stone, 2013]
- Infrastructure: Amazon developed expertise in warehousing and logistics to support its own growing business. It now provides these services to affiliated sellers through Fulfillment by Amazon (FBA). Amazon Prime, which provides free shipping for Amazon products, has been extended in some cases to affiliates. Amazon’s scale as a logistics company is now comparable to that of the United Parcel Service (UPS) and Federal Express
- Value chain: Amazon leveraged its Prime subscription offering, which initially provided free shipping for e-tail customers, to move into streaming music and then video. The company began by streaming other producers’ offerings and then moved upstream in the value chain for video, becoming an independent film studio
- Technology: Amazon developed for its own use a very strong infrastructure for cloud computing. Early in its evolution, it began to sell this asset to third parties as elastic storage and elastic computing capabilities. It is now the leading provider of cloud computing services, which account for a major portion of its revenues. Again, there was significant internal resistance to opening up the “crown jewels” to the world
- Underlying customer needs: As customers shifted some of their reading from paper to electronic forms, Amazon entered the e-book business with its Kindle device, the Kindle app, and the Kindle store. The Kindle product and its supporting assets have led to a shift from physical to electronic books for many readers. It also purchased audible.com, which now bundles audiobooks with some Kindle purchases.
Amazon continues to grow into new businesses that leverage its assets. It has moved into Amazon Care, originally provided only to Amazon employees in Washington State. Amazon describes Amazon Care on its website:
Amazon Care has two components: 1) virtual care, which connects patients to medical professionals via the Amazon Care app … and allows patients to quickly, conveniently, and confidently chat live with a nurse or doctor, via in-app messaging or video; and 2) in-person care, where Amazon Care can dispatch a medical professional to a patient’s home for additional care, ranging from routine blood draws to listening to a patient’s lungs, and also offer prescription delivery right to a patient’s door.
Amazon announced a national rollout of this service, including to non-employees, for the summer of 2021. The asset it leveraged in this case was its own employee base.
Amazon has also recently launched Machine Learning University, which will use Amazon scientists to offer online training and credentials in artificial intelligence. This capability will help to identify and train its future workforce and could compete with branded universities in its space.
Many of these asset-based innovation initiatives leverage a combination of assets (customer base and channel or value chain and technology, for example). The key is that, in each case, core assets provide an impressive source of competitive advantage; redeploying assets creatively has enabled the company to win in market after market.
As noted above, leveraging assets to create new businesses is difficult. Often, there is resistance to ceding a competitive advantage in the core business (and even helping to create new competitors). At other times, there is a concern that the new business will distract from and disrupt the core. Amazon confronted these challenges and used some of the tools discussed later in this book, including organizing for growth and developing ambidextrous leaders.
Although sharing assets of the core business with an internal startup can be difficult, it is also difficult for large companies to win in a new market without leveraging assets. A large company typically needs the advantages conferred by these assets to overcome the disadvantages of its size.
John Rossman on Innovation the Amazon Way
John Rossman created the Marketplaces business at Amazon and has reflected in depth on what makes Amazon so successful. This chapter includes an excerpt from an extensive interview with Rossman, titled “Innovation the Amazon Way.” Rossman illustrates asset-based innovation [Rossman and Euchner, 2108] from the perspective of a master practitioner.
Innovation the Amazon Way
An Interview with John Rossman
Customer obsession is everybody’s job at Amazon. Everybody is expected to understand the customer deeply. You need to understand customers, not just at the narrow intersection at which you happen to be dealing with them, but in a broader sense, as well. You’re expected to be able to use data to substantiate your position about the customer. Wherever possible, you also want to be a customer yourself, so you’re working to develop empathy. You look for lots of ways to get critical, demanding feedback from customers. You don’t look for the happy stories; you look for the dissatisfied, quiet, hidden stories from your customers.
And you’re willing to do hard things. You’re willing to invent and improve and pursue new opportunities that are not easy or obvious. As Bezos says, “You have to be willing to be misunderstood,” often for a long period of time …
Innovation happens in a lot of different ways, and there’s no one right way to do it. There is what I would call “small i” innovation and “big I” innovation. The “small i” innovation is the innovation and the improvements that come from asking, “How do we take what we’re doing today and do it better? How do we do it perfectly?” That work is always around your classical operational improvement objectives of decreasing defects, improving quality issues, decreasing costs, reducing safety issues, and increasing your throughput.
Many of Amazon’s innovations start with, How do we do what we’re doing today perfectly? Whether that is to fulfill an order or to avoid a customer contact or to provide the availability and speed that’s required in the AWS [Amazon Web Services] business, it doesn’t matter. It’s about being relentless. If you go to relentless.com, that leads you to Amazon. The company is relentless in its pursuit of perfection.
The “big I” innovation at Amazon is centered around the notion of being a platform company. A platform company is a company that takes a core capability and makes it good enough to serve not just itself, but external clients as well. Part of the benefit of serving external clients is that they are much more demanding than internal clients. Forcing yourself to have external clients can not only create a good business if done correctly, but it also makes your service better for your own organization to use. That’s where Amazon Web Services came from, and that’s where FBA [Fulfillment by Amazon] came from. Both derive from the same notion.
Amazon also uses the metaphor of a flywheel for its business strategy. It’s about creating momentum in your business and pursuing the long-term assets that your customers will always treasure—to create them and to always be building on them. I remember hearing Bezos talk about how he can’t imagine a world where customers would want to pay more or have less selection or slower delivery. So, one of the things Amazon has always done is to pursue competitive pricing, more selection, and faster delivery to customers. While the company goes about those things at times in incremental ways, it is making long-term investments; they are pursuits that the company has been committed to for a long period of time. Being centered on those long-term customer needs and core corporate assets has helped center Amazon’s investments in innovation …
AWS [Amazon Web Services] didn’t start out as a big bet. It started back in 2003 or 2004 as a question: How do we create a better and more scalable infrastructure for our own needs? A little later we thought, “Let’s make this better and see if external developers would like it.” We were forcing the infrastructure team to have external clients and to drive toward self-service for those clients. And what we found was that developers loved that self-service, on-demand infrastructure. So, the company started pursuing that business, and over time, it has put more and more and more commitment into it. But it didn’t start off as a massive commitment. It started with a big idea, a big vision, but with incremental steps and trials to realize the vision.
Relative to managing the internal tension, one of the things Amazon talks about is that platform businesses need to be self-service. People who want to use your capability shouldn’t have to talk to you in order to use it. The platform needs to abstract the complexity; it needs to be obvious in its use; it needs to be predictive in its management requirements; and it needs to be self-service. So much of Amazon’s scale and innovation has come from the notion of making things self-service. The way we scaled the Marketplace business was by taking a very complex integration and working in lots of ways to make it self-service. We wanted to develop the business so that a seller wouldn’t have to talk with us in order to start selling on Amazon. Similarly, a developer doesn’t need to talk to somebody at Amazon to start using AWS. Forcing things to be self-service forces you to make them simpler, and that’s why invent and simplify is the principle, not just invent. Simplification is part of the core value proposition of many platform businesses at Amazon …
[Whether to set up a separate business or not for an innovation] completely depends on the situation. There’s no tripping wire or specific threshold. In the case of Marketplace, we separated the Marketplace team from retail initially but coordinated thoroughly. It was a much smaller organization back in 2002 and 2003, and we separated it from the retail team because at Marketplace we were building competition for the Amazon retail team. We didn’t want to bury our very small organization deep within retail because we wanted a separation to create competition. Once we were successful, however, we reintegrated back into the retail business. It really depends on the situation whether you start out integrated or separated and whether, at some point, you reintegrate or you stay separate …
[W]hen we were launching this in 2002, it wasn’t clear that we were going to win. eBay was the dominant marketplace business. Amazon had tried a couple of versions as a third-party selling business that hadn’t been successful. We were taking the third run at it, and it wasn’t clear we were going to be successful. In fact, it took a long time for it to build to success; it took a couple of additional pieces to drive that success, including the development of Prime as a customer loyalty program and the development of FBA [Fulfillment by Amazon]. It was the combination of the Marketplace platform with Prime and FBA that created the dramatic growth in the third-party business at Amazon. And that was a few years after we launched the business, so Amazon was very patient with that business …
Bezos is on record talking about the fact this quarter’s results are based on things that were put in place months ago if not a year or two ago. The things you’re doing now are impacting forward quarter results. The intuition and the experience to know the difference between the things that are in your control today versus the things that are not within your control today is critical. If you miss financial results, of course you’re going to do a deep dive to understand why. But the focus is not typically on the things that you were doing recently; it is on the things you were doing a long time ago that led to the recent missed quarterly results …
Big operational leaders [at Amazon] typically have both operational things they’re striving for and innovation goals. It depends on the situation. I mentioned earlier work in supply chain. There’s a lot of operational execution going on there at Amazon, as well as a lot of innovation. Senior leadership at Amazon deals in both of those worlds, and they bring the ideas and their execution together in lots of different ways …
[B]usiness model innovations require bucking up against the traditions of the industry. They are the essence of a lot of great innovation, but they are the hardest kind of innovation for companies to do. Almost inevitably, they are going to upset the apple cart. They’re going to upset partners, they’re going to upset suppliers, and they are also going to upset some internal employees, like the sales force. When you truly want to innovate your business model, you need to “be willing to be misunderstood for a long period of time,” as Bezos says. But the results can be remarkable.
Key Insights
- A new venture inside a corporation needs a “right to win” against more nimble startups
- Asset-based opportunity spaces—which leverage corporate assets to move into growth markets—can provide both focus and sources of competitive advantage
- There are six key types of assets that companies can leverage to move into new and adjacent spaces
- Leveraging core assets can be difficult; the core business will often resist, especially if leveraging the assets might cannibalize the core business
- Amazon is a master at asset-based innovation and at defining opportunity spaces that leverage core assets; much can be learned from studying their approach.