All business activities evolve through a common lifecycle and we’re currently witnessing a shift of many IT related activities from a product to a utility service world. This is commonly referred to as “the cloud”. This transition brings benefits, risks, different methods of operating but also impacts the tactical plays in the great skirmish between companies. There are two models of tactical play which are particularly noteworthy – ILC and Tower & Moat.
In my previous LEF post, I discussed the innovate, leverage and commoditise (ILC) model that seems to be naturally appearing in companies such as Salesforce. To summarize, it is a technique by which a company uses a surrounding ecosystem to not only reduce the cost of innovation but to encourage innovation and rapidly identify success. By acquiring and providing such innovations as common services, a virtuous circle can be created.
A second model is the tower and moat. The principle here is to defend a revenue stream (the tower) by creating a moat devoid of differential value with high barriers to entry around it. By way of example, Salesforce created its own tower around provision of CRM as a utility service in a world where CRM was generally provided through customisable products or rental services. As barriers to entry into this new field were eroded (i.e. Amazon enabling widespread access to utility infrastructure) then new barriers were created through the acquisition of platform technology.
Whilst product based competitors attempt to differentiate themselves with activities such as social CRM, Salesforce acquired such activities with the view of providing common services. The net effect is this eliminates the differential value of social CRM and helps establish a moat. Salesforce has been extensively using its ecosystem (an ILC model) to identify and acquire a wide range of potential differentials and further strengthen its moat.
When competitors finally move to a cloud model then they will find the space inhabited by a large player with a large ecosystem and few opportunities to differentiate – a reasonably fatal combination.
Both ILC and the Tower & Moat model are powerful tools which can also be used to counter competitors. They can be used together, or individually or combined with other tactical plays such as open source.
Take the case of Apple vs Android: whilst the iPhone is not one activity but a device describing many activities, Google has effectively created an ecosystem around Android which provides a means of identifying and accelerating innovation in this field whilst reducing costs. By providing the system as open source and creating a hardware ecosystem, then Android has effectively removed much of the differential value that Apple might have sort. Apple would appear to have been pushed into a high risk, stand alone innovation game against a broad ecosystem.
Take the case of cloud infrastructure: we’ve already seen Rackspace & NASA move to create open source software – the OpenStack project – to provide infrastructure as a service. Their vision is to create a competitive marketplace of computer utilities around OpenStack. Such a world plays to Rackspace’s strength of service delivery as a utility provider but also fits with NASA’s goals of increasing efficiency of infrastructure. The ecosystem around openstack should encourage rapid innovation and if successful will create the standard that a competitive marketplace depends upon. It will also drive out differential value in this space making it tough for new competitors or those with a proprietary offering.
Take the case of large scale infrastructure: into which Facebook has announced the OpenCompute project and in effect open sourced how to create large scale data centres. This should over time help eliminate differential value that such knowledge created and whilst beneficial to the future computer utility world it will also help to undermine those for whom such skills have acted as a barrier to entry into their industry – namely massive scale search engines and data processors.
Take the case of healthcare: which has seen the VA (Veterans’ Association) create an open source electronic health record system from VistA. It seems clear that the VA are focused on encouraging innovation through ecosystem effects and creating a marketplace of competitive providers. Visions of a worldwide standard are not beyond the realm of reason.
Take the case of platform as service into which VMware has announced an integrated set of open source platform components known as CloudFoundry. If successful and there’s every reason to believe it will be then VMware will succeed in creating a huge moat devoid of differential value in the platform space and a vast ecosystem driving this. Any would be competitors will face an uphill struggle to compete against VMware’s effort. Those planning proprietary platform offerings should take note of this move.
But wait … where’s the tower?
The beauty of creating a competitive marketplace of utility service providers is that it opens up a huge range of opportunities from service provider, support, assurance, brokerage, exchange, marketplace and a dozen more. Being at the heart of this, which is where VMware will be, means they are well positioned to take advantage. It’s a bold move, perfectly timed and well executed.
Of course, CloudFoundry has already been made to run on Amazon EC2 which means CloudFoundry on OpenStack built on an environment designed around OpenCompute can’t be far behind.
The world of IT is changing and many IT activities have become suitable for provision through utility services. With this change comes tactical plays designed to take advantage of this shift. At the OSCON conference in July 2007, I stated that in this future utility world, open source was the only way of effectively competing. Time will tell but the increasing drive towards open source and its use by major companies as a tactical weapon seems to be pointing that way.
Smart move by VMware, it’ll certainly shake up the industry.