Professor
Barry Nalebuff
Complementors are a 6th Force in Porter’s
Five-Forces Model
Barry Nalebuff, Milton
Steinbach Professor of Management at Yale University, enlightens us. A prolific
expert on game theory, Professor Nalebuff has written extensively on its
application to strategy. He offers a fresh perspective on the field by
emphasizing the role and value of cooperating as well as competing. An active
consultant, Professor Nalebuff has advised executives at American Express, GE,
McKinsey, Google and the NBA.
In 1998, Professor
Nalebuff founded Honest Tea with Seth Goldman, one of his former MBA students
at Yale. In 2011, they sold their company, now recording sales of $70 million
to Coca Cola.
1. Can you give a recent example or case study of a firm or
industry that clearly illustrates the value-net concept?
The value net is a richer view of all of
the different players in the game. We have the traditional vertical view of
money flowing from the customer to the firm, and from them to suppliers. We
understand from the horizontal view the roles of competitors, but what is often
left out is the role of complementors. They are the symmetric role to
competitors. Whereas a competitor reduces the value of your products, a
complementor increases their value. In fact, a better name for competitor would
be substitutor.
Substitutes and complements can also
exist on the supply side. Harvard and Yale are not only competing for
customers. They are also competing for faculty on the supply side. A faculty
member who goes to teach at Harvard does not teach at Yale. At the same time,
the two universities’ faculty members can be complements, for example, when a
Harvard professor writes a case study a Yale professor uses.
Turning to an example from the business
world, Tata Motors recently introduced the Tata Nano, the first car for less
than $2,000. Creating a car that costs this little was something of an
engineering miracle. Used cars and motorcycles would be substitutes for the
Nano, but Tata failed to consider these complements when they planned the
auto’s introduction. In particular, the customer most likely to purchase a Nano
was also likely to be trading in a motor cycle. But Tata dealers did not have
any facilities or capability to accept trade-in motorcycles.
Furthermore, Tata had not thought about
car loans. First-time car buyers who had previously been riding motorcycles
typically did not have a credit rating. The issue was not that they had a bad
one – they just did not have one at all! Because Tata was not initially
prepared to provide car loans, many of their prospective customers were unable
to purchase a Nano. Tata eventually corrected both problems. The company made
motorcycle trade ins possible and provided car loans for the unbanked, but
their failure to consider complements initially had put them in a bad position
at the launch.
I believe the case of Japan is
different, but in the United States, Walmart has overtaken Toys R Us to become
the largest toy retailer. Whereas Toys R Us is destination shopping (in the
US), Walmart is a store where people shop all the time. Therefore, Walmart has
better complements. While you are already in the store shopping for other
merchandise, you can purchase a birthday present conveniently rather than
making a special trip to Toys R Us.
To my understanding, Toys R Us is not destination
shopping in Japan. Rather, the stores are integrated into shopping malls or
near other stores. Therefore, Toys R Us has been more successful in Japan.
Similarly, in the U.S., Toys R Us will have to open more stores in venues like
Time Square, where people already are, or add complementary products and
services such as children’s haircuts, or the option to hold a birthday party on
Aisle 6. In other words, Toys R Us must create other reasons for people to
visit their stores.
Gas stations suffer a similar problem
related to complements. You may have the world’s best gasoline, but if you
don’t have a convenience store, you are going to lose to a competitor that
does. You thought you were in the gasoline business, but you have to be in the
convenience store business, too.
Michael Porter does not really see
complements as a sixth force (in his Five-Forces Model). He continues to argue
that complements are simply value enhancers. As such, complements are nice to
have, but not a distinct force. I counter that they have to be a force by
definition: The opposite of literally anything that you could say about
substitutes applies to complements. Furthermore, you need to be concerned about
the structure of the complements industry. If you are Microsoft, you care
whether or not Intel has a monopoly. If they do, they have the same ability to
take industry profits as you do. Therefore, Microsoft supports AMD. Similarly,
because Intel is concerned about Microsoft’s monopoly, the former supports
Linux. The fact that the industry structure of the complements threatens their
capability to garner profits shows why complements are a sixth force in
industry.
2. Your dynamic, Co-opetition model contrasts with Porter’s static,
zero-sum Five-Forces Model. To what extent are the models compatible?
I would say our models are complements,
not substitutes. I add a sixth force, something that is missing. Customers and
suppliers are completely symmetric; they are the opposite face of the same
relationship. I would say the same is true for substitutes and complements. As
explained in my book, with the exception of the German language, which has a
word for everything, no other language has a word for the firms that supply complementary products and
services, that is complementors, I will
bet you have a single word for competitor in Japanese. But you do not have a
single word meaning complementor, a situation suggesting that this relationship
has not been well understood. While complements are not more important than
competitors, complements are equally important. The fact that we do not have a
word for complements indicates the concept is not well understood. We have a
word for every other relationship in the Five-Forces Model: We have a word for
the customer and the supplier; words for competitor and for rivalry, too. But
we do not have a word for complementor.
3. Value nets seem to be transient in nature. In this respect, they
appear similar to the notion of transient competitive advantage proposed by Rita
McGrath. On the other hand, you seem to hold the opinion that competitive
advantages must be sustainable, or at least, sustained. Are value nets also
sustainable, or are they transient? Are there conditions where the value net is
likely to be transient and other conditions under which it is likely to be
sustainable?
I do not think saying, “Value nets are
sustainable or transient,” is correct use of terminology. The value net is a
map. You can assert that competitive advantage is sustainable. I have little
more to add about the competitor side of sustainable advantage because that
area has been well mined by Porter, McGrath, and many others. However, we can
talk about the sustainability of a complementor advantage. If someone else
comes into a market like Curves following your initial entry with another brand
like Pepper or Eggplant similar to Curves, your advantage in the market could
decline. On the other hand, when others introduce complements, they can help
your products as well. As a result, your complementary advantage remains; it
does not go away.
If others start making car loans to the
unbanked, this complement helps Tata Motors sell more Nanos. In fact, helping
the customer acquire such complements more easily and cheaply is an important
goal. I distinguish what I refer to as proprietary complements from
industry-wide ones. If Tata Motors has no competitors selling Nano substitutes,
who furnishes the car loans does not matter. If the banks provide them, fine.
On the other hand, if other companies are selling Nano substitutes, but your
loans are proprietary, in other words, you only provide them for Nano
purchases, these complements lose value when rivals offer their own,
proprietary complements. For this reason, you want the complements to your product
to be better than those of other companies. In this sense, you can have a
transient, complement advantage. Both the creation and existence of complements
will help you, not harm you, as the market for complements to your product
develops.
4. In the current internet age, where change is rapid, do you feel
the concept of arena is more suitable than industry as the unit of analysis for
strategy? From the standpoint of your theory on value nets, which seems more
appropriate?
If you think about Tesla Motors’ latest
move, they are building a battery factory because the greatest obstacle to the
electric car is battery technology. It needs to be improved. This technology
also happens to be a complement that may be too expensive for any one player to
provide by itself. For this reason, we see a lot of alliance formation. Better
battery technology will help the entire industry, not just a single firm. It’s
also a missing, key complement.
In the case of Google, their approach to
the self-driving car seems to be to develop maps that are incredibly detailed.
Not the type of simple map you would view on your laptop, but one that maps
details from curb heights to potholes. Google’s database would be an example of
a proprietary complement. If you want to use a self-driving car, you will need
the detailed data they have on roads.
I believe Google recently purchased
Boston Dynamics, one of the most advanced robotics companies in the world. The
company has developed remarkable, four-legged robots that can travel off-road
terrain.
Why would Google acquire such a company?
The technology will allow them to map terrain that is not on roads. You can
imagine that Google will want to collect data on the inside of buildings like
shopping malls at some point, for example. Google is really good at collecting
and organizing data. The self-driving car not only relies on data, but once the
car is fully functional, will be good at collecting data, too. It can drive up
and down streets taking all sorts of photographs with Google Street View.
The invention of the Google car has
removed a complement—the driver. But it has also resulted in the need for
another key complement that is currently missing: insurance. We have yet to
figure out how to insure a driverless car. Regulations are another missing
complement that will have to evolve to accommodate the introduction of
driverless autos. You can manufacture the world’s best self-driving car, but
until you get the insurance complement right, you will not be able to use the
car. Once the insurance industry creates this complement, it becomes permanent;
it is not a transient entity that goes away.
On the other hand, whether or not
another company is able to manufacture a self-driving car depends on how the
company plans to do so. If they plan to use Google’s database, they will have
to pay Google a licensing fee. In this case, Google’s advantage remains. In
contrast, if another company creates an alternative technology, like having the
car communicate with cars surrounding them, this company may compete with
Google that does not rely on access to the data complement.
5.
Numerous once-lauded Japanese companies including Sony,
Panasonic, and Nintendo are now struggling in the market. From a value-net
perspective, how would you assess the source of their current competitive
difficulties? How can these companies apply the principles of your theory to
develop more successful strategies?
One of the greatest challenges such
Japanese firms face stems from the fact that many of their products have become
too good. First, we transitioned from black-and-white to colors television
sets, then from color to high-definition televisions and 60-inch screens. All
were noticeable improvements people were willing to pay for. But in much the
same way I will not pay for a car that accelerates from 0 to 60 mph in three
seconds because I cannot utilize this technology, people no longer want to
“upgrade” their televisions. I do not feel the need to upgrade my television to
the latest 3-D or 4K technology. I do not need a larger screen, either. A
bigger one would not fit on my wall!
The same thinking applies to personal
computers. I do not need a supercomputer on my desktop. Most of the time, my
computer waits for me! The most important features of current laptops are weight
and battery life, not processing speed or screen size. Recognition of this fact
has led to a lot of work on battery development. I now have three different
laptops—one in my office, another at home. Some are three and four years old,
but still work perfectly well. They are a little larger, so I do not always
want to lug them around, but when you think about it, I do word processing,
make PowerPoint presentations, and use spreadsheets. For these tasks, my
current laptops are perfectly adequate. Speed would become an issue only if
were to start doing video editing. For now, I care primarily about the
portability of my laptops and the life of their batteries.
For Japanese companies, I think this
technology issue is the real challenge. We have reached the point where the
sustaining innovation is no longer valued by consumers. As Clay Christiansen
would put it, Japanese companies continue to manufacture products that exceed
customer desires. The customers are unwilling to pay for the new product
features. As a result, Japanese firms’ sustainable improvements are no longer
providing value for these companies. To resolve this dilemma, they have to
create fundamentally new, disruptive innovations, which is a great challenge.
If you are an entrenched player, the challenge is especially monumental.
If you think back to Apple’s iPod, I
believe the key was the fact that their product was a complement to stolen
music. At the time, all sorts of music sharing sites like Napster allowed
people to amass giant libraries of stolen music essentially for free. But there
was no good away of carrying all those tunes around with you, organizing them,
or playing them, either. Furthermore, the music was all digital, so you had to
work with a Walkman.
Apple saw the opportunity to offer a
complement allowing you to fully enjoy this music. Now, the iTunes store makes
buying music easy, but at the time, stealing music was easier than purchasing
it. Today, people are no longer purchasing music at all. Instead, consumers are
joining music-subscription services like Spotify, Pandora, and Beats. People no
longer want to own any music at all because they can now play whatever they
want whenever they want. They no longer need a large, digital-storage device,
just connectivity.
Turning from iPads to cameras, the phone
has essentially become a substitute for them. You could make the world’s best
lenses like Sony, whose Alpha (α) camera line is amazing. But the best camera
you have is the one you are currently carrying. Your cell-phone camera is not
as good as your fancy Sony one, but because you have it in your pocket, it
wins. Before you know it, cell phones are going to offer image stabilization
and zoom lenses. As these technologies develop, Sony’s plight will only worsen.
More generally, I do not have any good news for my friends at Sony, Panasonic
and other once-leading Japanese firms.
6.
In a talk on Honest Tea, you give an interesting twist to the
tale of the Princess and the Pea, suggesting that aspiring entrepreneurs focus
their attention on the peas—products that do not fully satisfy or other
irritating situations—as sources of opportunity. What peas in the U.S. or world
markets have drawn your attention recently? What makes these opportunities
attractive to you?
In this children’s story, a princess is
lying on eight mattresses stacked on top of one another with a pea underneath
the lowest mattress. She cannot sleep because this pea is bothering her. In one
view of the story, this is how you know she is a princess. Only a princess
would be bothered by such a small annoyance. Yet another view is, “Princess,
get a life! Don’t let this tiny pea annoy you.” Most parents take this view
with their kids. But in my view, if you seek out these annoyances, the peas we
have learned to tolerate, they may turn out to be great business ideas. With
Honest Tea, the pea was my frustration with existing beverage options: They
were either boring like water; liquid candy like sodas; or dangerous diet
products. Interestingly, such is not the case in Japan, where you have weak
tea: unsweetened or very lightly sweetened canned iced tea. Before Honest Tea,
no similar product existed in the United States.
What we currently do not have is an
alcoholic beverage for people who do not want to become drunk. For this reason,
I recently started another beverage company to make a very low-alcohol drink.
It’s called KomBrewCha, which is a take off of Kombucha, fermented tea. The
motto of the company is, “Get tickled, not pickled.” It’s a product you can
enjoy when you want a slight buzz that also allows you to return to work, go
exercise, drive. With KomBrewCha, you can socialize without going to excess. .
