The essence of strategy is choosing what not to do.
Applying HBS Professor Michael Porter’s classic strategy framework to Facebook’s decision to enter the VR/AR market
For all the focus on driving operational efficiencies in tech startups, running faster or harder than your competitor will only take you so far. After achieving product/market fit, the next question for all companies is how to sustain a lead over time in ways that are not linearly proportional to the effort exerted. That comes down to choosing the right strategy and aligning your organization behind it.
Harvard Business School professor Michael Porter defined “strategy” in his classic 1996 article on the topic. I am going to summarize a few of his core insights, and then show how they apply to a fascinating case study — Facebook’s strategy in VR/AR.
First, to reiterate, operational efficiency is not strategy. Making better products, or making comparable products at a lower cost, is only a temporary advantage. In competitive markets, innovations will be copied quickly. Improvement in operational efficiencies is, therefore, necessary, but not sufficient to achieve superior profit margins in the long-term.
Choosing the right strategy entails defining how your business differs from the competition, both in terms of your values and the activities you pursue. That means proactive choices in the variety of products your business provides, the customer segments it serves, and the channels through which it goes to market.
Even the most thoughtful strategic choices, however, will not result in a sustainable advantage if they lack meaningful tradeoffs. For Porter, these tradeoffs occur when “more of one thing necessitates less of another. [For example,] an airline can choose to serve meals — adding cost and slowing turnaround time at the gate — or it can choose not to, but it cannot do both without bearing major inefficiencies.” He goes on:
“The essence of strategy is choosing what not to do. Without tradeoffs, there would be no need for choice and thus no need for strategy. Any good idea could and would be quickly imitated. Again, performance would once again depend wholly on operational effectiveness.”
Once those tradeoffs are determined, the crux of a strong strategy is how the chosen activities reinforce one and other to drive an unfair advantage. To explain, Porter turns to the classic example of low-cost carrier Southwest Airlines:
“Southwest’s rapid gate turnaround, which allows frequent departures and greater use of aircraft, is essential to its high-convenience, low-cost positioning. But how does Southwest achieve it? Part of the answer lies in the company’s well-paid gate and ground crews, whose productivity in turnarounds is enhanced by flexible union rules. But the bigger part of the answer lies in how Southwest performs other activities. With no meals, no seat assignment, and no interline baggage transfers, Southwest avoids having to perform activities that slow down other airlines. It selects airports and routes to avoid congestion that introduces delays. Southwest’s strict limits on the type and length of routes make standardized aircraft possible: every aircraft Southwest turns is a Boeing 737.
What is Southwest’s core competence? Its key success factors? The correct answer is that everything matters. Southwest’s strategy involves a whole system of activities, not a collection of parts. Its competitive advantage comes from the way its activities fit and reinforce one another.”
With that framework in mind, I turn to a strategic choice that Facebook catalyzed in 2014 when it acquired VR pioneer Oculus for $2 billion.
In 2015, Facebook CEO Mark Zuckerberg presented a broader vision of what VR/AR could mean for Facebook in an internal memo leaked to TechCrunch. He wrote the memo to justify a planned purchase of Unity Technologies, but the deal never materialized. Nevertheless, the memo demonstrates Zuckerberg’s visionary capabilities and gives us a peak behind the curtain at Facebook’s corporate strategy.
In 2015, Facebook was a little over a decade old and was worth ~$230 billion. That’s objective success by any measure. Yet Zuckerberg’s motivation in this memo is equal parts fear and opportunity. As Ben Thompson pointed out, Facebook has always wanted to be a platform, but has never achieved that goal in the strictest sense. It has settled to be an app — the world’s biggest, but an app nonetheless. On mobile, its app sits on top of Google and Apple’s platforms, and that fact has always given Zuckerberg angst. He says so directly in the memo:
“We are vulnerable on mobile to Google and Apple because they make major mobile platforms. We would like a stronger strategic position in the next wave of computing. We can achieve this only by building both a major platform as well as key apps.”
VR/AR represents an orthogonal choice for Facebook. Zuckerberg could clearly continue making Facebook’s core products better, faster, and more performative for advertisers. His fear is that doing so would only create more dependence on established platforms run by competitors. He would rather spend billions for the chance of owning his own platform, which ultimately has the potential to present an even more pervasive and compelling consumer experience.
He then makes it clear how the choice to move into VR/AR will require different choices and activities. It moves Facebook from extension into invention, from software into hardware, from a constellation of 1st party apps to a platform with millions of 3rd party apps. The activities underlying this strategy include massive investments in hardware and a set of developer tools for the new VR/AR environment. The latter underlies the motivation for buying Unity.
If I can fault anything in this memo, it’s that Zuckerberg wants to have his cake and eat it too:
“The key apps [in VR/AR] are what you’d expect: social communication and media consumption, especially immersive video. Gaming is critical but more hits driven and ephemeral, so owning the key games seems less important than simply making sure they exist on our platform. I expect everyone will use social communication and media consumption tools, and that we’ll build a large business if we are successful in these spaces.”
The strategic shift from app to platform usually involves giving up some control of the app ecosystem to third parties. The grey area is what shared services will make all apps better, if run by the platform. A good example is notifications in iOS. If every 3rd party developer designed its own notifications, the iOS platform experience would suffer as a whole. So Apple tightly controls this feature, giving tools to 3rd party developers to build notifications into their apps, but ultimately giving the user configurability and consistency via iOS.
The same tension lies at the heart of the social services that will blossom in a VR/AR world. Is Facebook truly positioned to provide the best experience around social connectivity in its new platform? Or will a 3rd party developer build something even better? When it does, will Facebook try to acquire that player and integrate it natively? What will that acquisition tell the developers about the health of the ecosystem? Is Facebook simply better off letting 3rd party social platforms bloom in VR/AR, as long as it maintains something like the 30% take rate we see in Android and iOS?
For these reasons, strategic shifts from app to platform, or vica versa, are rare and often unsuccessful. As Porter says, such a shift involves a tangible tradeoff, in this case between the wildly profitable advertising business Facebook has today in its own web/mobile app vs. a speculative profit pool as the dominant platform in a new medium. The former won’t necessarily work in the latter environment.
I encourage you to read the memo (linked below) and come to your own conclusions about Zuckerberg’s thinking. Mine is that the shift to VR/AR makes a ton of sense for the world’s dominant consumer platform, but that its eventual business model in VR/AR will likely be much different and will require a massive strategic pivot for Facebook.
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