Co-Opetition - Adam M. Brandenburger [79]
IBM’s real error was pursuing the outsourcing and open-architecture policies together. Had it stopped at bringing in Intel and Microsoft, and not given up control of the hardware portion of the business, it would have remained in a strong position. Had it kept control over the chip and operating system technologies, then, despite cloning of the hardware, it would still have been in a strong position. Either approach might well have been effective. But outsourcing together with opening the architecture was a mistake. It’s a case of two rights making a wrong.40
Even bringing in Intel and Microsoft and opening up the architecture wouldn’t have been as bad for IBM had it made Intel and Microsoft pay to play. IBM could have demanded equity stakes in Microsoft and Intel in return for bringing them in. Back in the early 1980s IBM had the power to shape the game in this way. But it missed these opportunities.
Realizing its error, in 1987 IBM tried to regain control by introducing the PS/2 line of personal computers, which contained the OS/2 operating system developed jointly with Microsoft. But by then it was too late. Microsoft didn’t need IBM. Microsoft’s 1990 release of Windows severely damaged the prospects of OS/2 becoming widely adopted.
If you do give up much of the pie to another company, the smart strategy is to acquire a piece of that company. Early on, IBM had the financial resources to take a large equity position in both Intel and Microsoft. It did make an investment in Intel in 1982, getting a 20 percent equity stake and warrants to purchase another 10 percent. But, ironically, IBM sold out in 1986 and 1987 for $625 million. Ten years later that 20 percent stake would have been worth $25 billion. As for Microsoft, IBM had an opportunity to buy 30 percent of Microsoft for under $300 million in mid-1986. By the end of 1996, that $300-million investment would have been worth $33 billion.41 Had IBM acquired and kept large equity positions in both Intel and Microsoft, we suspect that today, people would be talking about IBM’s continuing success rather than its failures.
Our first and last stories in this chapter are polar opposites. Nintendo exerted tight control on the video game business. Had Nintendo adopted an open-architecture policy and not put in a security chip, perhaps the total pie would have been larger. Perhaps not. There might simply have been a flood of low-quality games into the market and another Atari-like crash. Either way, Nintendo’s actions ensured that its added value was equal to the whole of the pie, whatever its size, and that everyone else’s added value was kept small. In contrast, IBM’s outsourcing and open-architecture policies cost it control of the PC business. By facilitating more rapid and widespread adoption of the IBM PC platform, IBM increased the size of the pie. But by erasing much of its own added value, IBM sharply limited its ability to capture the pie.
Once again, the distinction between the added value of a company and a product is crucial. Just as the added value of Sony is much less than that of televisions, and the added value of Nissan much less than that of cars, so the added value of IBM today is much less than that of personal computers. It didn’t have to turn out that way.
5. Changing the Added Values
If you have little competition, your added value is assured. Then the strategic issue is whether and how to limit the added values of the other players in the game. We saw this played out with Nintendo. It established a virtuous circle that gave it a monopoly in 8-bit video games. For a time, there was no real threat from competitors. But the other players in Nintendo’s Value Net—customers, suppliers, and complementors—still had claims on the pie. Nintendo’s strategy limited the added values of all these other players.
Most of the time, there’s plenty of competition—in which case the challenge isn’t how to limit the added values of other players, it’s how to have some added value of your own. Building added value is the hard work of basic