This blog first appeared as Steve Wunker's piece for Harvard Business Review
By Steve Wunker
Partner relentlessly, or do it yourself? New ventures face this question early on, whether they are housed inside big corporations or small start-ups. A lot of business literature advocates teaming up wherever possible to open the doors to new ideas, draw on the unique strengths of others, and speed time to market. So why have some of the hottest new businesses been throwing out this idea in favor of going it alone?
Look for example at Lytro, a company whose impact on photography might turn out to be on par with the digital camera. The firm has developed a sensing system that captures light hitting the camera from a variety of angles, not just what strikes a plane set behind a small aperture. Advanced algorithms process these inputs to enable features such as 3D effects or focusing on different parts of the image after the photo has already been taken. The photography market is highly competitive, populated by famous brand names, and dominated by powerful sales channels. Yet rather than license its breakthrough technology to a company such as Nikon and sell the product through traditional camera retailers, Lytro is building its own camera that it will sell through Internet channels such as Amazon and via the company’s own website.
Lytro is far from alone in its quest for self-reliance. Square, a financial services start-up created by Twitter cofounder Jack Dorsey, markets its transaction processing services directly to consumers and small businesses via the Internet. BYD, a leading Chinese maker of novel electric vehicle batteries, is getting into the car business rather than licensing out its inventions. Even giant consumer products companies like Procter & Gamble have embraced “pop-up stores” for test markets, creating shops that sell a very small number of new products to gauge consumer reactions rather than trial the innovations on the shelves of big retailers. If business orthodoxy sings the virtues of partnerships, why are these companies doing so much in-house?
A problem with partnerships full of inter-dependencies is that they are slow to make big changes. Lytro is revolutionizing not just image capturing systems, but also a camera’s software and back-end computational functions. If the company were selling just one small piece of a camera, a manufacturer such as Nikon might swap out old technology for the new one. But to be revolutionary Lytro had to make several changes to camera design all at once. Big companies hesitate to make those decisions, which require bringing many people to the table and taking real technical risks. Besides, the more a big company partners with outside suppliers, the harder it is to orchestrate a large ecosystem of firms to re-orient its offerings to accommodate a truly novel component. The paradox is that the move by big firms to embrace partnerships, partly in the name of innovation, can force some of the most innovative potential suppliers to forge their own path.
Sales channels can also choke bold inventions. People in these companies often live to make their quarterly quotas, and fundamentally new products take a while to move the sales needle. While their potential rewards are far-off, big innovations create clear near-term costs in training staff, educating customers, and dealing with inevitable hiccups in a new proposition. Channels have strong incentives to wait and see whether a new concept takes root, which does little to help a firm get novel products off the ground.
As Lytro, Square, BYD, and others show, going it alone is a sensible strategy if companies:
· Compete in industries with highly-interdependent products sourced from a wide range of suppliers
· Have a truly novel proposition that will stand out in a crowded marketplace
· Target a customer that incumbent companies do not prioritize
· Create a new market – a new kind of consumption that existing firms may be slow to exploit
· Can use direct channels to make a straightforward case to target customers with authority to make decisions (enterprise sales, with their complex purchase decisions, are notoriously difficult to make via a direct approach)
These conditions certainly do not apply to all firms. However, they describe some of the biggest and most profitable opportunities. Standard Oil, AT&T, Ford, and American Express are just some firms that demonstrated the value of a go-it-alone approach for truly innovative offerings throughout business history. Today, with Internet sales, contract manufacturers, and other enablers of this strategy gaining rapid strength, we’ll see many more companies turn their backs on partnerships to create new markets on their own.