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In his book Strategic Innovation, professor Allan Afuah provides us with a comprehensive strategic framework for assessing the profitability potential of a strategy or product.- the value of “new game” strategies –  in the face of rapid technological change and increasing globalization.
It’s not enough to create value in new and different ways, he says. Nor is it sufficient to merely capture value today. To compete and win, firms may need to rewrite the rules of the game altogether, overturning existing ways of both creating and appropriating value.
The most important thing, he stresses, is that a firm pursue the right new game strategy…

A brief Interview of Professor Allan Afuah by Deborah Holdship

Let’s start by talking about strategic innovation in the most general sense.
 
Afuah: By strategic innovation, I mean a game-changing innovation, not only in products and services, but also in business models, business processes, and the way you position yourself vis-a-vis competitors. People tend to think about products and services when they talk about value creation, and that’s fine. But people are finding out that, on the average, a business model innovation may be more profitable than a product or a service innovation. For example, look at what Google did. Google is this great company with great search engines and a great brand. But that’s not what made them profitable. What made them become profitable was coming out with these paid listings. It sounds so simple, straightforward: Why didn’t I think about it? It was a big, big invention. So you move from a business model where you are renting your search engine to one where people are bidding for key words. And they didn’t invent that tool either. So we are in a world where you have to be aware that it’s not just about coming out with new products or services, but changing your business model, your framework for making money. Do you need to change your processes? Like Dell, selling directly to customers instead of going through distributors.

You have a framework called the AVAC analysis that anyone can use to evaluate the potential of a new game strategy, no matter the scale.

Afuah: AVAC answers the question: What do you do when things are done differently and you want to make money from it? AVAC stands for activities, value, appropriability, and change. The idea behind it is very simple: If strategy is about performance, it’s about having a competitive advantage, and shouldn’t there be some way to evaluate the profitability potential of your strategy? So if you define strategy as a set of activities a firm performs to create and capture value, that profit is what will give you competitive advantage. When you think that way, suddenly the problem of assessing the profitability potential of a strategy becomes a lot simpler: Let me see how each activity contributes to the value I am trying to create and also contributes toward my ability to capture that value instead of someone else. And remember: If there’s change happening, you want to know if the activities you are performing allow you to take advantage of that change. If not, someone else will. And then the value you’ve created is useless or someone else has captured it. Using AVAC, you may even decide to initiate that change yourself.

Crowdsourcing and “the long tail” are a couple of fascinating phenomena you explore in the book. Let’s talk about crowdsourcing in terms of new game strategy. Specifically, there’s a company called Innocentive that illustrates the concept beautifully.
 
Afuah: Crowdsourcing is a way firms use the public to seek solutions to issues, challenges, problems. For example, a company in Alaska was researching ways to keep oil from freezing during deep Alaskan winters. After speaking to a number of specialists — and getting no results — they reached out to Innocentive, which facilitates crowdsourcing on behalf of companies. Innocentive posts the problem online, and invites the public to offer solutions. The oil company got a solution by way of a concrete producer, who pointed out that if you keep shaking the components of concrete, they don’t solidify. Turns out a similar principle holds true for oil. By the old paradigm, the firm would have spent millions hiring all kinds of consultants and engineers to reach a result.

Crowdsourcing itself is a new game strategy. But Innocentive takes it to the next level: It created a business out of facilitating crowdsourcing on behalf of firms.
 
Afuah: Exactly. And the reason I’m so excited is that there are lots of people who are extremely smart who can solve many problems for your firm. They just happen to not be at your firm for whatever reason. There may be someone in Australia or South Africa who can solve your problem. The beauty is the solution may come from a resource you don’t normally use. If you go to a group of doctors for a medical problem, you might be missing out on the guy who knows the cement business. Why keep going to the same source when you have these other options?

Reverse positioning is another type of new game strategy. You cite the Nintendo Wii as one example where it worked really well.
 
Afuah: When Microsoft and Sony introduced their own consoles and videogames, they went after the latest technology and graphics, microprocessors, etc. That was their selling point and was something that would satisfy hardcore gamers who liked to play for five or 10 hours at a time. But that new technology cost a lot and the firms had to recoup what they lost in consoles by way of game sales. But what happens when you don’t have enough games?

Then Nintendo came in and said: “Wait a minute. There may be people who don’t want to spend that much time on a game or may be totally frightened by all these buttons. Suppose we go after old technology that nobody pays much attention to and doesn’t cost too much?” Wii still meets the requirements of those who want to play one or two hours and who don’t care about graphics being so sophisticated and tantalizing. And with each console Nintendo ships, they already are making money.

By the way, many of the hardcore gamers just laugh at that. But that’s okay. You don’t have to satisfy the whole world. Look at Ikea. They said: “Our furniture is not going to last a long time and it doesn’t cost very much. And we don’t even have delivery.” Some people are like, “What? You cannot do that.” Others are like, “That is great. That’s what I’ve wanted this whole time.”

Now we’re seeing it with these netbook computers. They may not have as much memory, they’re not very sophisticated. They are light and have a small screen. But they can cost less than $500. And that’s absolutely wonderful for some people. That’s a new game strategy. You are doing things differently. You are entering a product space no one is in at the moment.

Are some industries more amenable to new game strategies than others?
 
Afuah: It’s difficult to put a finger on a particular industry. But some are more used to change than others, like semiconductor companies or high-tech firms. More mature industries are not used to change so when it comes, it’s a bloodbath. I think of newspapers or the auto industry. It just depends on whether they are used to change or not.

When you embark on a new game strategy, you’re going to need people in the firm to be on board with the change. This can be the most challenging part, right?
Afuah: Yes. First, you need the champion for the cause who can articulate the vision of what a new game is going to bring, not only to the organization as a whole, but to different groups within the organization. What is in this for them? Get them thinking positively.

Next, we have the godfather: someone very high up in the firm who backs the project. Lee Iacocca was the godfather for the minivan at Chrysler. If you mess with the project, you are messing with him. When you have a clear godfather, people who otherwsie would have sabotaged the idea or not worked hard enough to change the culture will work harder than before.

Then you have the boundary spanner. What happens during most new games and most innovation is that the knowledge everyone has is not enough — that what you need actually comes from the outside. But not everybody within the organization speaks the new language or knows people outside who speak the new language. So you generally need somebody who can act as a liaison, who understands both worlds.

And of course, the traditional role is always the project manager.

There is a term in your book: coopetitors. I thought it was a typo, but it’s not.
 
Afuah: The whole idea of coopetition started about the time when the Internet was really taking off, and people started to understand complementors — people who produce products that complement your product. Think of oil companies and car companies. If there’s no gas, people won’t buy cars.

When you work with people like that, sometimes you might compete if they produce products that go up against yours. But you know very well that without them you will not live. So look at your supply, your customer, even your competitor. There will be times when you cooperate. And when you cooperate, keep in mind that you have to try to capture some value there. And when you compete, there are always ways you can cooperate and still come out ahead.

Imagine you are making a pie. You need a piece to bring home — and a bigger one than the other guy. But don’t take all of the pie, or your competitor will starve to death and there will be no one to work with next time. And others will run away altogether. At the same time, if you make the pie, and then just celebrate about what you created, someone else may take the whole pie when you’re not paying attention. And you go hungry.

We are trying to get this into every strategy person’s head to really understand. But we still live in a world where some people think strategy is only about how much value you can capture. Others think it’s not just about capture but how much value you can create. I’m saying it absolutely has to be both.

Deborah Holdship

For more information, contact:
Bernie DeGroat, (734) 936-1015 or 647-1847, bernied@umich.edu