To Lead or Follow in the Innovation Ecosystem?
Succeeding in innovation ecosystems requires a clear, specific, plan for how the different elements and actors need to come together. This raises the question: who is responsible for bringing the plan to fruition? Who should take the reins and drive the endeavor, accepting the risks in an attempt to capture the glory and gains of leadership? When envisioning the relative profit and prestige of leaders like Intel, Microsoft, and Amazon, it is easy to conclude, “I want to lead.” But wanting to lead and leading effectively are two different things.
Consider this story:* A senior manager from IBM and a senior manager from Oracle meet up with the owner of a midsize value-added reseller. They are all part of the same ecosystem—IBM and Oracle collaborate and compete in the information technology (IT) space, and the reseller has worked with both—and they get to talking about who is the leader. “Easy,” says the man from IBM, “clearly, we are the leader here. We are the biggest, the most established, and have the largest network.” The manager from Oracle counters, “You are the past and we are the future. We are growing our partner network faster and winning more business, so we are the leader.” Finally, the reseller jumps in, “With all due respect, we are the leader. You guys make the products, but we guide the customers. We are the ones who influence who gets the sale, so we are the leader.”
Who is the ecosystem leader in the story?
The answer is no one.
Yes, each plays an important part of the overall system, but being in the picture is not the same as being in charge of the picture. The leader is not the one who says, “I’m the leader.” He’s the one about whom everyone else says, “He’s the leader.” This is the litmus test of leadership and why no one in the story makes the grade: a “leader” without followers is just a guy in a suit.
Every participant in an ecosystem must ask himself whether he should lead or follow. Not, “Do I want to be the leader,” but rather, “Is there a good reason that others would be willing to follow me?”
Creating followership among partnering firms entails more than just having a sound strategic vision or a great preexisting brand. These are all helpful, but they are not enough. In most cases, creating followership entails first making the up-front investments and taking the up-front risks required to get the system working, and only later reaping the rewards.
To be clear, ecosystem “leader” and “follower” do not map onto ecosystem “winner” and “loser.” For the value proposition to succeed, everyone must win. The difference between leaders and followers is the way they win—the investment and risks they take up front, and the timing and size of their back-end payoffs.
The ecosystem leader’s core challenge is creating a blueprint that creates value for the end user, assures that all necessary partners get enough surplus to warrant their participation, and leaves enough value in the end to make the leader’s own efforts worthwhile.
What is the most difficult phrase in the sentence above?
In the end. Successful ecosystem leaders capture their outsized returns in the end, after the ecosystem is established and running. But in the beginning they build, sacrifice, and invest to ensure everyone else’s participation.
Amazon creating the technology infrastructure and then subsidizing the publishers so that they would come aboard the Kindle effort; the movie studios finding a way to finance digital cinema systems for the exhibitors—there was no question who was leading in those cases, whose blueprint was being followed. Effective leadership demands not just an effective blueprint but also patience, a willingness to commit, and often (but not always) deep pockets as well. Without the means and desire to stay the course until your efforts reach fruition, you have nothing.
So who can lead? Who should lead? To help answer these questions I developed a tool I call the Leadership Prism. It helps to clarify which actors in an ecosystem qualify for leadership contention and which actors should not bother wasting their resources on anything other than a (profitable) follower role. The leadership prism builds on the total-cost/relative-benefit logic of chapter 3 to assess the expected surplus of every actor in your value blueprint. It then considers which actor(s) has sufficient expected surplus to justify investing to offset whatever deficits exist in the system. It is only the actor(s) that meets these criteria that stands a credible chance of having the staying power to be the ecosystem leader.
Figure 5.1: A generic leadership prism identifies all the actors in the ecosystem and the surplus they expect from participating.
To clarify the logic of leadership in an ecosystem, we will explore the multidecade effort to shift from error-prone paper-based medical records to electronic health records (EHRs). Our question is, who will be in a position to lead the EHR effort out of the tangle of co-innovation and adoption risk? It has taken nearly fifty years of false starts for the candidate to come to light. Who should lead?
Electronic Health Records
Each year, thousands of patient deaths are caused by avoidable medical errors in American hospitals. In 1999, the Institute of Medicine famously estimated that number to be as high as 98,000. More recently, an April 2011 study from the Institute for Healthcare Improvement found that adverse events occur in one-third of hospital admissions—increasing the projections for avoidable harm. These medical errors can result from a variety of missteps—from infections caused by unwashed hands to mistakes made by overtired staff—but a great number are due to the archaic, paper-based record-keeping that, in 2010, was still in place in approximately 80 percent of American hospitals.
Adverse drug errors alone are estimated to harm 1.5 million people per year and kill several thousand, costing $3.5 billion annually. These medication missteps occur when prescriptions are hastily scribbled by a doctor—and then just as hastily read by a pharmacist. “It seems self-evident that many, perhaps most, of the solutions to medical mistakes will ultimately come through better information technology,” said Dr. Robert Wachter, chief of the UCSF Medical Center in 2004.
In a $2 trillion industry (the largest in the United States) that is in many ways technology driven, health care’s reliance on paper and pen to document patient records is all the more surprising. Other information-intensive industries invest 10 percent of their revenues on IT, but the health-care industry spends only 2 percent. So why is it that we can have our brains scanned by a state-of-the-art MRI machine and our faulty heartbeats regulated by pacemakers that can wirelessly transmit updates on our cardiac status, but we must still rely on the pharmacist’s best guess at the doctor’s scribbled drug prescription?
Health-care insiders, pioneering technology companies, and policy makers have been discussing a digital alternative to paper-based medical records since the 1950s. Besides the obvious benefit of improved safety, studies show a gain of nearly 30 percent efficiency through the reduction of paperwork (the average physician fills out more than 20,000 forms each year) and unnecessary or redundant tests. Ultimately, according to senior researchers at the RAND Corporation, “the adoption of interoperable EMR [electronic medical record] systems could produce efficiency and safety savings of $142–$371 billion.”
For the health IT sector, the successful implementation of electronic health records is an enormous opportunity. Over the years players big and small have devoted massive resources to finding a way to implement EHR in the health-care industry—but have mostly left a wreckage of false starts. Why?
Using the leadership prism we can identify the source of the breakdown as well as the path to a solution.
The first electronic health records emerged in the late 1960s. Larry Weed at the University of Vermont began one of the earliest attempts, dubbed PROMIS (problem-oriented medical information system). This was soon followed by similar efforts across the country at a small number of hospitals and universities giving rise to a sea of acronyms. In Salt Lake City, LDS (Latter-Day Saints) Hospital developed HELP (health evaluation through logical processing), and in Boston, Massachusetts General Hospital created COSTAR (Computer Stored Ambulatory Record). Leading companies from IBM to 3M and new entrants like HBOC (later purchased by McKesson) and SMS (now part of Siemens Corporation) also invested heavily toward the goal. But despite early enthusiasm and investment, this first wave of electronic health records failed to spark the revolution. While the early deployments at pioneering hospitals showed that the benefits of EHR were real, the technology hurdles were simply too great to make meaningful progress: computers were unwieldy, processing expensive, and storage difficult to maintain. Expectations for widespread adoption and efficiency gains crashed on the shoals of co-innovation risk, resulting in huge write-offs, exits, and continued systemwide inefficiency.
By the year 2000, many of the technology challenges standing in the way of electronic medical records had been solved. On the hardware front, everything from microprocessors, memory, and computer screens were light-years ahead of where they had been during earlier efforts. The cheapest, worst-performing laptop in 2000 was orders of magnitude more powerful than the best multistory mainframes of the 1960s and 1970s.
For proponents of EHR, the most important change was the widespread adoption of the Internet, which enabled easy transfer and communication of records. The largest technology companies all sensed an opportunity in the space and invested millions developing electronic health records solutions in various capacities. By the mid-1990s, IBM was again involved in EHR development on several fronts. The company’s Pre-Scribe network, which gives pharmacies the capability for electronic prescriptions, was employed by more than 5,000 pharmacies by 1997. Its Health Data Network Express, announced in 1998, was a Web-based system that recorded and saved information a patient would share with a nurse when calling with a health issue. Furthering its mission to find an IT solution for health-care organizations, IBM teamed up with several providers in the early 2000s—including Kaiser Permanente, an HMO with nearly 9 million members—to digitize patient records.
Intel, the leader in computer chips, also entered the EHR game as the century got going. In 2006, it joined forces with several other blue-chip companies (Wal-Mart, Pitney Bowes, Applied Ma-terials, British Petroleum, and Cardinal Health) to create Dos- sia, an employer-led program that planned to provide electronic health records for more than 2.5 million people. “It’s time to modernize the health care system,” exclaimed Intel chairman Craig Barrett.
Simultaneous efforts by several health IT specialists also furthered EHR development. Epic Systems Corporation, founded in 1979, created and deployed software in midsize and large health-care organizations. Cerner Corporation, another entrant, offered software and support for practices seeking digital solutions. Medical equipment giants GE, Siemens, and Toshiba entered with their own IT offerings.
On the consumer end, in 2007, Microsoft entered the picture with the launch of HealthVault, a free Web-based health records system that patients themselves control. The idea was that patients would be empowered to manage their own medical records and ultimately give doctors, clinics, and hospitals (who agreed to partner with Microsoft) permission to access and update their medical records. Google Health, a similar offering, entered the field the following year but, in frustration, discontinued its service after 2011.
These efforts were well funded, numerous, and varied—targeting hospitals, departments, employers, patients, and health systems. And yet, even with this diversity of approaches and intensity of effort, as late as 2009 only 9 percent of U.S. hospitals had implemented electronic health records systems. And even among those facilities equipped with the technology, actual use was well below potential. Why?
A Someday, One-Day Proposition
As the co-innovation hurdles to electronic health records were finally disappearing, lives were going to be saved—and money was going to be made. So why did EHR begin to gain serious momentum only in 2011? The answer lies in recognizing what, beyond technology, is required to actually put electronic health records into operation in a hospital setting. And no less important, in identifying who has the means—and the will—to lead such a massive change effort.
A hospital is an unwieldy organization, a complex array of caregiving, economics, and branding. For a hospital to embrace an entirely new system of record-keeping, a chain of adopters would have to sign on—administrators, department heads, and medical staff—each with its own unique way of examining the costs and benefits of the EHR proposition. (Note that, for the sake of clarity, I am presenting a simplified ecosystem here. Adding the myriad complexities of the U.S. health-care system to include lobbyists, regulators, standards bodies, and the host of other ecosystem participants would make the analysis more complicated but would affect neither the message nor method.)
What would the cost and benefit look like for the partners in this adoption chain? (I will offer illustrative numbers drawn from a scale of 1 to 10 to clarify the intuition.)
For the IT provider, the answer is straightforward: a big up-front investment in developing the EHR system and a costly sales and deployment process at every client site could yield a big reward in the form of a hefty sales price ($20 million to $50 million is not out of line for a large hospital), as well as the promise of recurring revenue for system maintenance and updates (on the order of 20 to 25 percent per year). Cost is high: 5. Benefit is higher: 8. Surplus: +3.
Figure 5.2: A simplified adoption chain for electronic health records (excludes regulators, standards bodies, etc.).
For the hospital’s administration, the benefits of EHR are abundantly clear: with this system in place, thousands of errors can be avoided, leading to a reduction of complications, costs, and even deaths. Indeed, the promise of EHR converges perfectly with the pillar of medical ethics: primum non nocere, “first do no harm.” And while clinicians are the ones who take this oath, the philosophy permeates the system.
Price is an issue, of course. Setting up an electronic health records system is an expensive proposition, requiring retraining of all staff and constant maintenance costs. The direct costs are evident. And the indirect costs—training, project management, change management, customization—can be nearly double the initial outlay. Despite the expense, though, most administrators will agree: the benefits of lives saved and efficiencies gained exceed the cost. And in today’s competitive environment, health-care providers are eager to be perceived as technologically innovative.
Even so, the hospital administrators have had a hard time signing on the dotted line. Why? First, although everyone initially agrees that EHR is an exciting idea, they start to wonder: How else could that $40 million be spent to improve patient care? What about training the staff to wash their hands before and after every patient encounter? After all, poor hand hygiene contributes to the high rates of infections acquired in hospitals that, according to the World Health Organization, kill more than 90,000 patients per year globally. What about giving overworked nurses—that crucial first line in patient care—more time off? Or more training? Or purchasing the latest-generation imaging machine to diagnose brain tumors and other hard-to-spot cancers? There are countless ways to increase the quality of patient care, many of which seem more enticing than an invisible IT system. Dr. Russell Ricci, then general manager of global health care industry at IBM, expressed frustration at the pace of adoption: “The Institute of Medicine study says that we kill 100,000 people a year with hospital errors. Yet most of the hospitals still do not have an electronic point-of-care order-entry system. With it, that number of errors would never happen. But instead of investing in that, many hospitals are out building new buildings or buying new M.R.I.’s.”
This issue of opportunity cost—what other value proposition could I purchase for the same price?—is only the first problem. The second is the assurance of no “opportunity lost.” The administrators know that the opportunity to adopt EHR isn’t going to disappear. Not only will the EHR sales rep be back, but she’ll be back with a better and possibly cheaper system. Compounding this hesitation is the regulatory uncertainty inherent to any new technology. Why take on the “first adopter disadvantage” for a product that may not have worked out all the kinks? What if some other system becomes the standard in a few years, and they have to scrap the whole thing and start over? Frustratingly for the sales rep, the administrators never say, “No, thanks. We don’t want digital records. Leave and never come back.” Instead, they say, “Now isn’t the right time. Let’s look again next year.”
But some administrators will be convinced of the need for immediate action. For academic and research-focused facilities, because of their pioneering approach to health-care solutions, the benefits of EHR often outweigh the total costs. Breaking new ground is a central mission of these health-care providers, thus the value of EHR is heightened. The Mayo Clinic, University of Pittsburgh Medical Center, and the Dartmouth-Hitchcock Medical Center were early adopters, launching pilots and deploying systems—often homegrown—in the 1990s, as was the Veterans Health Administration, whose mandate and size both increased the attractiveness of EHR. Cost is significant: 4. Benefit is higher: 6. Surplus: +2.
But even a procurement order and the support of top management are not enough to reap the benefit of digitized health records. Hospitals are divided up into administrative (billing, records) and medical departments (pediatrics, orthopedics, radiology, etc.), all of whom must come on board for the promise of EHR to be fulfilled. And why wouldn’t they? EHR means that communication within and among these various departments will be more efficient and less error prone. With patient records available in real time, with the click of a button, handoffs among departments are streamlined; intake and discharge are seamless. But as our intrepid sales rep trudges from department to department, she is met with the same answer: “Communicating with all the other departments sounds great. I love it. Come back to me just as soon as you have everyone else on board.” It is the rare department that wants to be the one to pioneer EHR in its organization—especially if it needs to fund the transition from its own budgets.
Some departments, like billing and radiology, tend to stand out in their willingness to embrace digital records. As the middleman between insurers and patients, billing is a paperwork jungle, so going digital means a more streamlined workflow. For radiologists—doctors who analyze X-rays, CAT scans, and MRIs—EHR offers an especially high value proposition. First, these images are expensive to print, and digital files cut costs. (Because X-rays contain silver, a month’s worth of blank X-rays can cost upward of $50,000 for an active radiology center.) Second, the ability to send images across town—or the world—for a second opinion on a time-sensitive case can save lives. Third is the improved quality of life that EHR offers—radiologists no longer have to head to the hospital for emergency calls at 3 a.m. Now they can read images from their home offices in their pajamas. As of 2009, 78 percent of hospitals were enabled with electronic radiology reports. Cost: 2. Benefit: 3. Surplus: +1.
But even departmental sign-off is not enough for EHR’s benefits to be realized. Nothing will happen unless and until the health-care practitioners themselves begin using the system. Radiologists have been the exception. In the typical scenario, the co-opted department heads call a meeting with their respective staffs. “Going digital is going to be great,” they’ll say. “You’ll each reach a higher level of performance, and patient safety will increase.” For the doctors and nurses, this sounds well and good except for the fact that the onus is on them to learn and use the new system. Transitioning from paper-based patient records to a digital system is not a simple endeavor. Training takes weeks, not days, which means the staff will not be able to see patients while they are learning the new computer systems, and therefore no money will be coming into the facility.
Even with training, doctors know that those first weeks or months back on the job are going to be rough. One estimate predicts doctor productivity dipping 20 percent for the first three to six months after EHR implementation. There is a learning curve involved with any new skill, and the promise of heightened productivity will seem a distant prospect as they stand in the hallway while their patients wait, trying to find the right pull-down menu for a patient’s varied medical history.
For most doctors, the relative benefit of a digital over a paper-based system is slim to none. Sure, theoretically, EHR sounds good, but no doctor sees himself as the problem. Is there any surprise that an overscheduled doctor who spends his days talking to patients, interpreting, diagnosing, and operating sees note-taking as the trivial part of the job? And since doctors are not the ones who tend to handle the reams of paperwork that make a hospital function, nor the ones who must interpret their own handwriting to fill prescriptions, their motivation to change is low. At the same time, their opportunity cost is high since they feel their time would be better spent learning the latest medical advancements instead of becoming data entry clerks. While doctors agree with the theoretical benefits of EHR, they see them as unjustified given the opportunity cost. And in small practices, where doctors bear the IT expenses more directly, the proposition looks even more negative. Cost: 3. Benefit: 1. Surplus: –2.
Who Will Lead in EHR?
Without a clear leader in place, EHR faces an exasperating paradox: most actors in the health-care provider ecosystem will always want it, but no one will ever be ready for it. At the beginning of the chapter, I introduced the leadership prism as a tool to help us assess the net gains to each party in any development effort and whether or not anyone has sufficient surplus to be the ecosystem leader. Let’s take a look at the EHR leadership prism below and briefly examine how each party views the cost and benefit of going digital.
For the IT provider, while the cost of developing EHR is quite substantial, the benefit is huge. After all, health care is the leading industry in the United States, so any firm that captures even a small piece of the EHR pie is going to see substantial profits. IT gains a sizable surplus (surplus: +3). For the hospital administrations, there is some surplus but not as much as that for information technology. The benefit of reducing errors is of course significant. Then again, so is the cost of implementation (surplus: +2). The individual departments will see some benefit from the added efficiency EHR will bring. But hospital-wide implementation will be difficult and slow, given that the departments are fragmented (surplus: +1). Finally, for the doctors, the benefits of EHR are low, but the cost of adoption is high, given the time lost to training followed by lowered efficiency—leading to a deficit (surplus: –2).
Figure 5.3: Leadership prism for electronic health records (EHRs) at a hospital with example values for relative benefit and total cost for each partner.
And where does the patient—health care’s raison d’être—fall in the EHR leadership prism? Is it possible that patients themselves can lead us out of the dark ages of pen and paper? Certainly, the patient bears no (direct) cost for the EHR effort, so shouldn’t he be a huge advocate for the system? No. On an individual level, statistics mean very little. Most people who go into a hospital believe they will once again see the light of day. Moreover, most people who pick up a prescription from the pharmacy don’t view the transaction as putting their lives at risk. Consider the numbers: even if medication errors kill thousands of people each year, that represents only a tiny fraction of a total of 3.9 billion prescriptions filled. The probability of any one individual coming to any harm due to medical error is akin to winning the lottery (though considerably less appealing). Cost: 0. Benefit: 0.1. Surplus: 0.1. The individual patient sees no meaningful surplus here.
Recalling the adoption chain methodology from chapter 3, the doctors in our EHR effort are at a clear minus. It takes only one negative to undermine an endeavor, so without an ecosystem leader who can turn that negative into a positive, electronic health records will remain a pipe dream. One might assume that IT, with its large surplus, would be in a position to take the reins. But even Microsoft and Google, who each launched their own Web-based health records systems in 2007 and 2008, respectively, have failed to move the market forward in a significant way. And, as for Intel’s efforts, according to Colin Evans, the director of policy and standards at Intel’s digital health group, “We underestimated the challenges.” In the context of the leadership prism, we clearly see that if they were to allocate their surplus to offset the doctors’ deficit, they themselves would hardly break even.
Where is the great value promised by the transition to EHR? Where is the huge surplus from all those lives saved? Without an actor who can find it, and deploy it to shift the doctors into surplus, nothing will happen.
If the ecosystem includes just the five traditional players, EHR will remain an academic dream. The answer, then, requires introducing a new player—an aggregator. Because the odds of mistakes are so low, the benefits of EHR are invisible to the individual patient. They become material only when we aggregate outcomes over a large enough number of patients. We need to find an actor whose surplus is affected by patients not as individuals but as a group, and who is able to both capture and distribute this benefit; insurers, health-care systems, and governments all fit the bill. And the larger the group, the larger the surplus.
For example, the Veterans Health Administration (VHA) is the largest medical organization in the United States, serving over 8.5 million veterans at 1,100 facilities. It employs the Veterans Health Information Systems and Technology Architecture (VISTA), an EHR solution that is one of the largest used in the world. The system is credited with reforming a health-care system mired in substandard safety and efficiency. While up to 8 percent of prescriptions in the United States are filled incorrectly, the VHA has an error rate of just 0.003 percent. In the private sector, Kaiser Permanente operates the largest privately deployed EHR solution in the world, linking 36 hospitals and 454 medical offices to coordinate the care of 8.6 million patients.
Biggest of all, of course, are governments. In the United States, the federal government stepped into the picture in 2009 with the passage of the Health Information Technology for Economic and Clinical Health Act, legislation to promote EHR. Ironically, for twenty years the IT industry had lobbied for the government to stay out of the EHR game. With dollar signs in their eyes, they assumed any government intervention could only hurt their bottom line. But after years of stalled efforts, the industry changed its approach, clamoring for someone to create a law to enforce EHR adoption.
The Obama administration allocated substantial funding ($27 billion, compared to the prior administration’s $50 million) to the EHR effort, the vast majority of which will be used to incentivize doctors and hospitals. These incentives are in the form of increased Medicare and Medicaid payments for “meaningful use of certified EHR systems” that start high and decrease over time. This legislation calls for doctors who buy and use EHR systems to receive up to $44,000, spread over five years through Medicare, or up to $63,750 over six years from Medicaid. Then, in 2015, these carrots turn to sticks when doctors who have not adopted EHR “meaningfully” (consistently updating digital records with diagnoses, monitoring drug interactions, and ordering prescriptions) will see their payments cut.
To be sure, a variety of concerns remain about the true benefits that will be gained through EHR—from implementation problems to privacy risks to the daunting challenge of creating cross-platform compatibility across what are currently closed and proprietary IT systems. What is clear, however, is that with the current structure of the EHR ecosystem, large aggregators are the only parties with enough surplus to lead. Deep pockets, along with a willingness on the part of the government to prioritize the effort, mean that electronic health records will finally have a chance to gain traction outside the academic sphere.
The EHR case offers a powerful demonstration of the leadership prism at work. The ecosystem struggled for years as IT providers tried to compete and differentiate in a setting where a critical link in the adoption chain was broken. In the absence of a credible ecosystem leader—one with sufficient benefit to bring everyone into surplus—meaningful progress was impossible.
The leadership prism logic helps explain the contrast between the successes of digital cinema and of Amazon in e-books, on the one hand, and the failures of Michelin’s run-flats and Sony’s attempt at e-book leadership, on the other. Beyond a vision and a blueprint, leadership requires a willingness to sacrifice and an ability to induce followership. It is not for everyone.
The Case for Followership
The temptation to grab the leadership torch is powerful. Who wouldn’t want to call the shots so they can win big every time? The leadership prism should help put those urges in perspective. The reality is, no one has pockets deep enough to finance every endeavor. Ask Microsoft in television set-top boxes, Intel in WiMAX mobile communication, and Wal-Mart in radio frequency identification (RFID) chips for consumer packaged goods. Ask every IT player in EHR: only when they chose to follow (and support) the government’s lead was real progress—and money—made. No one will stop you from spending a fortune on a leadership candidacy you can’t win. You can try to lead in every ecosystem where you play, or you can choose to be involved only in leading ecosystems. The latter, smarter, option means that sometimes you will be a follower.
For ecosystem followers, smaller up-front commitments mean a smaller downside risk. In contrast to a leader, who invests early and profits late, a follower’s required investment is lower and more quickly recovered. And whereas the ecosystem leader must juggle the nine balls that are the key followers while simultaneously maintaining discipline within his own organization, the follower need only manage his one. By definition, any successful ecosystem is filled with followers who win. Their piece of the pie may be smaller than that of the leader, but then again, they bear a much smaller risk. For the leader to win, followers have to win too. There is a lot to like.
A Checklist for Smart Followership
So, if you aren’t in a position to lead, whom should you follow? It’s likely there will be a multitude of leadership candidates wooing you. This is what gives followers their leverage. If you have an element that companies X, Y, and Z all need to further their competing value propositions, whose ecosystem should you grace with your participation?
First, assess the quality of their plan. What are the co-innovation risks—not just those that touch you directly but across the entire design? What is the adoption chain? Where are you positioned, and what do the surplus balances reveal? Draw out the complete value blueprint to see what the color scheme is. And then, no less crucial than your own assessment, confirm that the ecosystem leader sees the blueprint the same way you do. It could be that he sees things you don’t. But it may also be that he has a major blind spot that hasn’t been accounted for, in which case you know to either consult or keep looking.
Second, for the blueprints that are sound, construct a leadership prism. This will reveal how much each potential leader has at stake in the endeavor. Which candidate’s surplus is sufficient to make a real go of it, subsidizing others when necessary and funding the effort for the long haul? They will all tell you, “We’ll do everything to make this ecosystem work.” But, at best, what they really mean is, “We’ll do everything we can to make this ecosystem work.” Their expected surplus is the hard upper bound on the resources—money, labor, time, commitment—the leadership candidates can make available. With a clear eye on the balance of surpluses and deficits across each plan, you can then assess whether, given the size of their resource base and their own expected surplus, they are really able and willing to afford the price required to turn all the red lights green.
Third, the smart follower will probe the details of the win-win proposition: Do they make money when I win? Do I make money when they win? Expect problems unless you can reply with two definitive yeses. This question is crucial because it helps you avoid signing on for an opportunity that may seem fruitful on the surface but is undermined from the outset by misaligned incentives. Recall the Sony/Amazon discussion from chapter 4. One of the reasons the publishers found it easier to follow Amazon’s lead was that they recognized a commonality: just as publishers make their money by selling individual books, so too does Amazon. Sony, on the other hand, is primarily a hardware company, banking on its Reader device to drive profits. The follow-on sale of individual books is of much lower concern to them (a fact that is also true of Apple’s priorities in the e-book ecosystem).
Fourth, while leadership can be lonely, followership can quickly get crowded. Ask yourself: Who else is in the room? Whom will I be competing with? The pace of today’s technological advancements means that many companies gather a slew of competing followers into a specific ecosystem. While the leader waits to see who writes the best and fastest code, or who creates the most effective diagnostic tests, rival followers sweat to create the better product for a lower price. Exclusivity, or at the very least a reduction of competitive pressures within an ecosystem, is a factor that may be worth fighting for.
Every innovation effort will involve some uncertainty for both leaders and followers. For the latter, this insecurity is compounded by a lack of control. Will this plan—constructed and implemented by someone else—work? Will I get my promised share? And, how long can I stay before the leader starts squeezing my surplus? When a follower’s position becomes too attractive, too critical, or too easy to assume, it can be very tempting for the leader to step in with its own competing effort, cutting the follower out of the ecosystem. The evolving relationship between Amazon and traditional book publishers is telling in this regard. The attractive leadership candidate is aligned with your goals but doesn’t overlap with your activities.
We are all navigating through an imperfect world. But with eyes wide open, we can make more informed choices.
Leadership Revisited
Leadership in any arena is rarely uncontested. In the race to win, an ecosystem leader must act fast, enticing critical followers early on, ensuring the effort gains momentum. And, in order to appeal to these partners, leaders need to have an understanding of how potential followers will be evaluating their proposition. This ability to see your offering from the perspective of followers is crucial; it is the key to creating effective enticements to get them, and keep them, on board.
Remember: the litmus test for leadership is that everyone else agrees to follow—which only happens when everyone else wins too. An effective leader creates the ecosystem’s structure, establishes fair standards and consistency, and convinces potential followers that there is value in it for them. We have already encountered examples of effective ecosystem leadership in earlier chapters.
The first was the case of digital cinema. In order for digital cinema to reach audiences, the expensive systems would have to be installed in theaters across the country. Who was going to pay the high costs up front? Not the theater owners, who saw a big minus in the digital cinema adoption chain. So, for a decade, digital cinema was stagnant. In an example of effective inducement, the studios finally took the reins of the digital cinema effort by creating the virtual print fee system, creating a financing bridge to enable the installation of the digital system in thousands of movie theaters across the country. It was a big up-front commitment but a bargain for a leader with a long time horizon. Remember: the leader usually captures value in the end. Moreover, in the end, the studios stand to capture huge savings as they phase out expensive prints and shipping costs in favor of cheaper digital files. And the structure they built, with an explicit expiration date for the virtual print fee payments, should help maintain an atmosphere of trust and fairness as they eventually reduce the subsidy.
In another instance of smart leadership, Amazon brought e-books to mainstream readers by leveraging its retail power in an ecosystem where it played a crucial center role. Amazon kept all the players aligned as it headed toward the ultimate goal of offering a seamless e-book solution. Furthering its mission, Amazon eased the transition by sacrificing its share of e-book margins in order to subsidize the publishers. It wasn’t the Kindle device that launched e-books, it was Amazon’s effective ecosystem leadership that pushed the effort forward.
Ultimately, in a successful ecosystem, leaders and followers both prosper. Either position holds the promise of winning. The worst-case scenario: being a leader that loses. No one is going to stop you from throwing good money into a bad plan. It falls on you to prioritize where you want to lead, whom you want to follow, and—if neither choice is appealing—when to opt out and wait for a better opportunity.
