Completed in 1928, Henry Ford’s River Rouge plant was a marvel of its age. It was almost 100% vertically integrated, even producing its own steel and by the 1930s over 100,000 employees worked there, producing nearly every component for the cars that Ford built. It was, at the time, considered to be a key advantage.
Nobody makes factories like that anymore though. It wouldn’t make any sense. In today’s economy, it would be impossible for any one firm to be competitive in more than a handful of the thousands of components that go into a modern automobile. That’s why today we have global supply chains.
All to often, we think of innovation as an problem of developing internal capabilities but in today’s world, far more value can be unlocked by widening and deepening connections. So we need to learn to use the entire ecosystem, including partners, suppliers, customers and open resources and think in terms of value networks rather than value chains.
Automation Is Shifting Value To New Areas
The first Automatic Teller Machine (ATM) became operational in 1966. By the 1970s, they became commonplace and by the 80s they seemed to be everywhere. Bank tellers appeared to have outlived their usefulness and the death knell rang for physical bank branches. Who would need brick and mortar in an increasingly digital world?
Yet somehow, just the opposite happened. In fact, there more than twice as many bank branches today than there were in the 1970s. The truth is that automation always shifts value from one place to another, often onto a higher plane. For example, we usually don’t go to a local bank branch to facilitate a transaction any more, but to solve a problem or get advice.
Today, we’re seeing automation change the dynamics of a number of industries. Retail stores are being transformed from a place to drive transactions to one where we go for service, consultation and to pick up things we bought online. Factory work is shifting from manual labor to a place where workers manage robots.
The truth is that the work of humans is increasingly to collaborate with other humans in order to design work for machines. That means that we have to develop new skills and compensate differently if we are going to extend capabilities into the new areas where value is shifting to.
Extending Data Into Open Spaces
Typically, proprietary scientific data is something that’s closely guarded. But in 2005, a researcher at the National Cancer Institute (NCI) named Jean Claude Zenklusen saw an opportunity to go in another direction. “We said, ‘Let’s gather data along with some basic analysis, publish it and allow the scientific community to study it,’” he told me.
This approach formed the basis for The Cancer Genome Atlas, a joint project between NCI and the National Human Genome Research Institute, which began in 2006 and has since sequenced the tumors of over 10,000 patients encompassing 33 types of cancer. “Cancer data has now become open data,” Zenklusen told me proudly.
A similar effort, the Materials Genome Initiative, is building databases of material properties like strength, density and other things, and also includes computer models to predict what processes will result in the properties a manufacturer needs. Like The Cancer Genome Atlas, it is making the data available to anyone who can find a use for it.
A mining company called Goldcorp took a similar approach to finding new seams in old mines. By releasing its data to the public, it was able to connect with far more resources and extend its capabilities far beyond what it could achieve internally. It dramatically decreased its costs to produce while increasing its output by a factor of ten.
Using Platforms To Extend Capabilities
Drug research is a core capability of any major pharmaceutical firm and the success or failure of any particular treatment can mean a difference of billions to the bottom line. So, not surprisingly, the exploration into new drugs is something that most drug companies want to keep pretty close to their vest. Yet Alph Bingham, a research executive at Eli Lilly, saw an opportunity to do something different.
Long an admirer of Linux, he was fascinated with the way thousands of volunteers were able to create and advance complex software that could compete with the best proprietary products. He thought that there could be great potential for a “Linux with a bounty” that could solve some of the tough problems that Eli Lilly hadn’t been able to find an answer for.
The Innocentive platform went live in June 2001 with 21 problems, many of which the company had been working on for years. Although the bounties were small in the context of the pharmaceutical industry — $20,000 to $25,000 — by the end of the year a third of them were solved. It was an astounding success.
It soon became clear that more challenges on the site would attract more solvers, so they started recruiting other companies to the platform. When results improved, they even began inviting competitors to post challenges as well. Today, Innocentive has over 100,000 solvers that work out hundreds of problems so tough that even the smartest companies can’t crack them.
In 2005, Eli Lilly spun out InnoCentive as a fully independent platform. It only attracted about $30 million, not a material event for a company that counts its revenues in the billions. Yet the ability to extend its capabilities into a massive ecosystem of talent was far more valuable than a proprietary internal platform.
Deploying The Entire Ecosystem
In Michael Porter’s landmark book, Competitive Advantage, the Harvard professor argued that the key to long-term success was to dominate the value chain by maximizing bargaining power among suppliers, customers, new market entrants and substitute goods. His ideas dominated strategic thinking for decades.
Henry Ford’s River Rouge plant was a prime example of this type of thinking. Few companies at the time — or even now — had the capital to build such a massive, vertically integrated facility and its ability to make nearly every component that went into an automobile certainly increased its bargaining power.
However, today your competitiveness is not based on the assets and capabilities you control, but what you can access. So rather than focusing on what your capabilities are internally, you now need to think about how you can extend them into customers, partners, vendors and open platforms to access ecosystems of technology, talent and information.
Bill Joy once famously said that “no matter who you are, most of the smartest people work for someone else,” but that doesn’t go nearly far enough. Today, the best of just about everything resides outside your organization and competitive advantage no longer lies at the top of a value chain, but at the center of networks.
An earlier version of this article first appeared in Inc.com