CHAPTER 1

Reciprocity Right-of-Way

In which the complex notion of right-of-way is unpacked and put into play in search of growth and scale.

Right-of-way has multiple meanings. In law, it means a basic exclusivity where one person has permission to do something others cannot do. In California, Oregon, and some other states, pedestrians have the right-of-way over cars. According to Dictionary.com, right-of-way is defined as

1. a common law or statutory right granted to a vehicle, as an airplane or boat, to proceed ahead of another;

2. a path or route that may lawfully be used;

3. a right of passage, as over another’s land;

4. the strip of land over which a power line, railway line, road, etc., extends.

Right-of-way is an unrealized opportunity space where you can create a new large-scale practice of exchanging with others for mutual benefit. Right-of-way is the space within which you can create your reciprocity advantage. Indeed, a reciprocity advantage becomes possible only within your right-of-way. For example, consider the evolution of IBM over the last 30 years.

IBM’s Right-of-Way Reimagined

When Bob began his career in the 1970s, IBM (or Big Blue, as it was then called) had a very strong right-of-way selling big computers. Actually, big computers were the only computers then.

Institute for the Future, in those days, had Silicon Valley offices on Sand Hill Road (now referred to as the Wall Street of Silicon Valley) in Menlo Park, California, and IBM was IFTF’s neighbor.

In the 1970s, IBM was a conservative company that was doing very well. IBM people were known for their conservative dress: usually dark blue suits. IBM’s founder, Thomas J. Watson, purportedly said the reason IBM salesmen (they were almost all men at the time) wore blue suits, white shirts, and a red tie was because computers were so unreliable that the people who supported them had to look very reliable. Business casual came slowly to IBM, as did most everything else. Everything about IBM looked conservative. IBM offices looked conservative too.

One of the buildings IBM rented on Sand Hill Road, for example, was an especially fancy one that had been designed by an aggressively ostentatious company that eventually went bankrupt. IBM rented that fancy space anyway, but it just didn’t fit the IBM image. Some of the individual executive offices had private patios, for example. When IBM moved in, they put filing cabinets in front of the patio doors in a futile attempt to make this overly fancy space feel like an IBM office. Those of us on Sand Hill Road at the time kidded that IBM’s motto was “austerity … at any price.”

Then the world changed, and IBM started on a path to uncover its unrealized right-of-way. This change also came slowly, but it has been dramatic and successful.

In an iconic Super Bowl commercial in 1984, Apple Computer introduced the Macintosh that was about to hit the market on January 24, 1984. In an only slightly veiled comparison of Big Blue to Big Brother from the George Orwell novel 1984, the Apple commercial showed a female runner escaping gray guards and running up the aisle in a gray theatre with gray people sitting passively in rows watching a gray Big Brother lecture on a giant gray screen. The runner raced toward the front of the theatre and hurled a hammer through the screen. The shocked watchers gasped as they saw a flash just before a colorful message appeared on the screen announcing the new Apple Macintosh with this promise:

You’ll see why 1984 won’t be like 1984.

As computers got smaller and more ubiquitous, IBM found it increasingly difficult to make money selling big computers—or even small computers, although they gave that a good try. IBM’s right-of-way was disrupted by the very technology it was developing. The IBM story became a happy one, however, even though it had gloomy days. While IBM continued to sell to corporate clients, their hardware business became unprofitable. IBM smartly added a new source of growth: services. This was the first step in business reinvention done by CEO Lou Gerstner and followed up by Sam Palmisano with a move from an emphasis on products to an emphasis on services in support of products.

Services had always been part of IBM’s business, but not as big a part and not as profitable a part as they were to become. IBM’s services became a competitive advantage. The first reinvention of IBM was to understand service as a business in and of itself. This allowed the later decision to sell the computer hardware business and focus on other sources of growth. As business dress became more diversified, so did IBM’s business offerings. Now they even study “Service Science” (short for Service Science, Management, and Engineering)⁵ at their Almaden Research Center and other parts of the company. Just as IBM helped to seed and nurture the academic discipline of Computer Science, it is now seeding and nurturing Service Science.

IBM has become a vivid example of reciprocity at work. They call it “value co-creation.” IBM uncovered an underutilized right-of-way that was linked to both its internal past and the external future. IBM created what we would call a reciprocity advantage.

IBM gradually realized that its core right-of-way is big data analytics and big data know-how. IBM is successfully engaged in big data management for customers around the world. IBM is now focused on custom software to manage and make sense out of your data. IBM has extensive big data analytic skills but needs very large data sets to apply those skills and draw business value from them. Since each challenge is different, IBM brings together a team that can add value for that particular situation.

IBM is creating a big data market with other people’s data and then analyzing that data to achieve goals that neither IBM nor its clients could have done alone. IBM’s three businesses are products, services, and software—but what it calls “software” looks like software solutions and software services to us. Through its study of services sciences, IBM is learning how to provide services in new ways through software and solutions. It is moving from what have become low-margin services to high-margin software services, some of which include IP licenses.

The Birth of Smarter Planet

Big Blue has reimagined itself as Smarter Planet, and it is grounded in the underutilized right-of-way that IBM uncovered. Grounded in its big data right-of-way, IBM is creating a new reciprocity advantage that capitalizes on the disruptions we discuss in Part Two of this book. IBM’s big data expertise plus a customer’s big data problem equals new businesses and new growth for IBM—plus new value for more players. IBM still has service businesses, but now they are creating new Smarter Planet businesses around the world. This is what Harvard Business School Professor Clayton Christenson recognizes as competing against nonconsumption—creating a business that had not been there before and therefore had no competitors. These new businesses are focused on big data problems that would not have been addressed if IBM didn’t create new partnerships to solve them. IBM stakes out its right-of-way with these statements in its annual report:

Big data is the planet’s new natural resource.

Advanced analytics enable us to mine it.

Cloud computing is coming of age.

Social and mobile create a new platform for work.⁶

And we would add: there will be new opportunities for new businesses, based on reciprocity advantage.

IBM is now reaching out to a wide range of big data problems, such as wind energy, customer retention, cancer treatment, and city operations. Essentially IBM is going out into the world and working with a wide range of difficult problems in search of opportunities to make sense out of complex data sets. It is going into spaces where nobody else has gone. As opportunities are discovered and prototyped, the Smart Planet branding gets applied with vigor.

Nobody, not even IBM, can make a smarter planet alone. Partners are needed, and IBM now has partners everywhere, of all sizes and with all kinds of offerings. Often, customers are also partners, and sometimes even competitors are partners. In Istanbul, for example, IBM worked with local governments, agencies, and companies to study traffic patterns by doing big data analytics on mobile phone traffic patterns. Based on these results, the city re-routed public transit patterns to better distribute the traffic flow and reduce congestion. IBM is co-creating a smarter planet with customers, cities, and regional economic development groups—but it is also becoming a very successful business.

IBM’S partners are sometimes unusual. When IBM introduced Watson, the challenge was in demonstrating what was then the world’s most advanced computer with artificial intelligence that could understand free-form speech. How do you introduce a product that is so exotic and unusual? IBM chose to partner with the popular television show Jeopardy! At considerable risk, IBM entered Watson in a competition against two of the most successful human participants on Jeopardy! Fortunately for IBM, Watson won.

This limited partnership between IBM and Jeopardy! resulted in a mass understanding of what Watson could do, a mass understanding that played out over just two nights—but was rebroadcast in many forms afterward. Watson had a reputation overnight, which planted the seeds for the next big question: to whom could IBM give Watson so that it could have great value in creating a smarter planet and from whom IBM could make a considerable profit in providing services to support Watson? The answer is likely to be in health care, with a whole new set of partners—large and small.

As we were finishing this book, IBM announced that, about two years after its success on Jeopardy!, it is making Watson available as a development platform in the cloud to seed new software development applications on a worldwide scale.⁷ The IBM Watson Developers Cloud began on November 14, 2013.

In Louisville, Kentucky, IBM partnered with a small startup company called Asthmapolis (now called Propeller Health) to create a healthier environment for kids with asthma. Asthmapolis has a GPS sensor inhaler that broadcasts the locations where the spray is used. IBM then does big data analysis to understand the parts of the city where the inhalers are used most frequently. This analysis gives the city an indicator of where pollution is most intense and harmful. The city then tries to get the problem corrected, but at least the kids can be re-routed around the areas of town where they will have the most trouble breathing. This kind of asymmetrical partnering (large companies with small companies or even individuals) is becoming much more possible now with the cloud, given all of the connections being drawn on a global scale.

IBM is still in the early days of building its new Smarter Planet businesses. It faces many challenges in its core businesses, but experimenting to create the future in addition to protecting the core is a robust, necessary strategy.

Ironically, since 1984, Apple has become more closed, while IBM has become aggressively more open. IBM is now one of four major players in the cloud (along with Google, Microsoft, and Amazon), and IBM is a major proponent of the shift from more closed to more open. IBM has opened its reciprocity right-of-way, while Apple has remained super-protective. Whether or not this more closed intellectual property strategy will work in the post-Steve Jobs era remains to be seen, but what is clear is that IBM has gone another way since that iconic 1984 commercial. Big Blue has transformed itself into Smarter Planet.

IBM’S RECIPROCITY ADVANTAGE IN SUMMARY

What right-of-way does IBM share with others? Big data know-how. For example, when IBM released Watson as a cloud service for developers, it began connecting app-builders with skilled professionals who could assist them in the specifics of creating a successful application for Watson in the cloud. IBM has committed more than 500 of its own subject-matter experts as part of this program, with expertise in areas like design, development, and research.⁸

Who are IBM’s partners? Companies, cities, nonprofits, and others that have big data challenges partner with IBM, which looks for wicked problems and dilemmas that involve huge amounts of unstructured data. Those partners need to capture the data, analyze it, and create control strategies to make order out of chaos.

How did IBM experiment to learn? IBM experimented with a wide range of big data sources, such as stock exchanges, wind energy companies, customer retention studies, cancer researchers, and cities.

What assets does IBM give away in order to learn? Big data know-how in small chunks. It charges a lot for large chunks.

How did IBM scale? It seeks out the world’s biggest problems that are occurring somewhere locally. Once the problem has been solved for an individual client, mass customized solutions can quickly be created for everyone else.

What is IBM’s reciprocity advantage? The Smarter Planet Initiative has become synonymous with the IBM brand. Big data know-how embodied in software and services aimed at tackling the world’s most wicked dilemmas.

So What?

In 2000, $3.3 billion of IBM’s pre-tax profits came from hardware, $3.7 billion from services, and $2.6 billion from software, for a total of $9.6 billion. In 2012, software comprises $10.8 billion—larger than the whole company back in 2000—while hardware is still solid at $3.3 billion.⁹ Imagine IBM if it had not embraced the new world.

CEO Virginia Rometty says in the 2012 annual report,

To sustain an innovation model in our industry, a company must do more than accommodate major technology shifts…. [We are] becoming instrumented, interconnected and intelligent. Now the IT environment is moving from monolithic applications to dynamic services; from structured data at rest to unstructured data in motion; from PCs to unprecedented numbers and kinds of devices; from stable to unpredictable workloads; from static infrastructure to cloud services.¹⁰

Smarter Planet is becoming a key strategy for growth. Since 2005, IBM has acquired 33 companies to build its big data analytics capabilities, with a focus on helping customers turn massive volumes of unstructured data into valuable business information.

The same disruptions that disrupted IBM will disrupt all industries. IBM not only uncovered its right-of-way, it named and expressed it with great clarity: The Smarter Planet Initiative. Who doesn’t want to create a smarter planet? And IBM has the credibility and trust to do it. IBM can argue authentically that it knows how to build a smarter planet. If you have a right-of-way that nobody trusts, it is not a right-of-way.

IBM people are building a smarter planet. This purpose-driving strategy is very motivational. IBM has become a much more open and creative place, all under the very motivational vision of the Smarter Planet Initiative. The Smarter Planet Initiative is motivating to IBM’s own people, as well as to its customers. Language is very important. If you get the language right with regard to the future, the words draw you toward the future. If you get the language wrong, you fight it again and again. IBM got the language right. Smarter Planet is very clear and very aspirational.

IBM’s reciprocity advantage comes from a creative mix of openness, intellectual property, and services. Other competitors offer big data services, but it is difficult for them to compete with IBM in the space that IBM has defined as Smarter Planet.

The Historic Right-of-Way Story

The idea of right-of-way goes way back. The history of Silicon Valley, where both Bob and Karl live, is inextricably linked to railroads. Stanford University’s full name is the Leland Stanford Junior University, named after the son of the founder of the Union Pacific Railroad. You can see a golden spike in the university’s museum. The transcontinental railroad was cutting-edge technology for its day when finished in 1869. Suddenly it became possible to travel or send goods across the continent in what, at the time, was amazing speed.

The railroad developed into the major growth industry of the late nineteenth century. But how often do you ride a long-distance train today? In dense urban areas we still use commuter trains, but planes, trucks, and cars have now replaced the bulk of the transportation—and disrupted the trains business.

As much as the railroad companies missed the transition from trains to modes of transportation that did not require rails, the big miss was not foreseeing the potential that arose from thinking differently about the land that was under and above the rails. The land under the tracks is the classic right-of-way. But above those tracks, invisible in plain view, was a right-of-way that the railroads owned but completely missed: communications.

The railroads already had the land underneath their trains when the telegraph developers approached them and wanted to string wires above the tracks. To the railroads, this new telegraph technology offered the promise of reducing their old cost structure. With the telegraph, the railroads could know where all their trains were, for free.

All that the trains got from the telegraph, however, was an incremental cost reduction in their old business that was about to be disrupted. They did use the telegraph to make the trains run better. With the telegraph they could know whenever their trains entered a station. This enormous logistics benefit allowed them to easily adopt the telegraph as a tool for making their current business better.

It was a windfall to the railroads at the time, but years later we all now realize that the railroads missed claiming most of the benefits from their own right-of-way. The railroads completely missed the communications revolution—which turned out to be even more important than railroads.

The railroads owned the land over and underneath their tracks. Long before the development of airplanes and trucks—which would technologically disrupt the railroads—the space above their tracks was available for a new kind of business: communication.

If they had seen the potential for the telegraph to be a business in its own right as complementary to riding a train, today we might be talking on Union Pacific phones rather than AT&T or Verizon. They had the physical right-of-way in their land and used it only to grow their core business. Recall that there was no monopoly regulation in those days to constrain them.

The railroad companies probably never would have been great managers in the development of telecommunications. But they never had to become great telecommunications managers. They only needed to partner with others, offering their land rights to create a deal with those who could create that new business and then prosper together. Eventually, as it caught on, they would have the inside track on investing more deeply or even buying out their partners.

It seems clear in retrospect that the people who ran the railroads were train people with limited points of view. They failed to see the value of the space over their own tracks; they failed to see their own right-of-way. As Tim Brown, CEO of the design firm IDEO, observed, they loved their trains too much.

Uncovering your own right-of-way involves understanding what the railroads never did learn, that every company is really in three businesses.

Product—Railroads that move people and goods.

Service—Transportation, any way that moves people or goods en masse.

Experience—Communications, any way to get the benefit of travel without physical movement. (The railroads’ missed reciprocity advantage.)

Chapter 9 shows you how you can determine your three industries—your equivalent to trains, transportation, and communications. Companies must defend those businesses and make the difficult transition from one to another (e.g., trains to transportation to communications) in order to avoid becoming obsolete. Your equivalent of a communications business is the most likely place you will discover the potential for explosive growth.

Each business has the potential to create massively scalable reciprocity if it can uncover its right-of-way for complementary growth. Land for the railroads was a physical right-of-way, embodied in the air over the tracks. But right-of-way can include products, services, and experiences. For TED, it is the eighteen-minute speech format and TEDx-in-a-Box. For IBM’s Smarter Planet Initiative, it is IBM’s expertise in managing large data sets that is turned into a search for new data sets to manage.

Uncovering your right-of-way is the first step to creating a reciprocity advantage. Then you look for the right partner who can help you do what you cannot do alone.

Figure 4: Step Two toward Reciprocity Advantage.