Sun Sets: Fumbling the Open Source Challenge

More than a decade after open source software began acquiring market traction, it still poses difficult questions and dilemmas for IT firms. Initially, it was scoffed at by the software industry, and companies like Sun tried to discredit Linux as unsafe and incomplete, hoping to deter further adoption and defection from their own proprietary offerings.

The recent acquisition of Sun by Oracle brings to a close a chapter of computing history. In the early ‘80s Silicon Valley was home to dozens of small Unix workstation makers. Sun was the only one to survive, growing to become the leading Unix company. Its servers were noted for reliability, and the big software makers, including Oracle, focused on writing software to run on Sun’s Solaris operating system. Ironically, Sun was an early supporter of the Internet and visionary in its approach to network computing. But the combination of the Internet and open source software, in particular, were the source of Sun’s decline.

More than a decade after open source software began acquiring market traction, it still poses difficult questions and dilemmas for IT firms. Initially, it was scoffed at by the software industry, and companies like Sun tried to discredit Linux as unsafe and incomplete, hoping to deter further adoption and defection from their own proprietary offerings. Microsoft was equally disdainful. Bill Gates was quoted in a 1998 PC Week article as saying, “Like a lot of products that are free, you get a loyal following even though it’s small. I’ve never had a customer mention Linux to me.” Within a few years, though, Microsoft heard from loads of customers about the open source threat, and was forced to open some of Windows source code to outside partners.

The early, sometimes fearful responses to Linux took an understandable but narrow and one-dimensional view of the situation, regarding it as a worrisome problem which needed to be removed. “Linux is a threat to our pricing. How can we compete with free?” or, “Linux is giving away knowledge of high economic value that industry has invested heavily in creating. This is not right or fair.”

Time proved that open source was here to stay, and arguably for the right reasons: it made superior use of networked intelligence for creating and realizing value. Companies throughout the computer industry and even some beyond it would have been better off to regard the emergence of Open Source software as a dilemma to understand and exploit rather than a problem in need of a solution. Some did. Start-ups like Red Hat prospered by creating new offerings or supplying services needed by Linux users. Resourceful software firms capitalized by building new products directly on the Linux OS. But the transition proved much more difficult for the large, established incumbents who tried desperately to hold on to or grow existing revenues, while adapting to a new model which gives away much of the product, in order to increase innovation and widen the market.

In that class of corporate titans, there were a few who adjusted their approach fast and prospered. Notable among the beneficiaries was IBM, which understood early on that the dramatically lower cost of Linux and open source applications increased demand for commodity server hardware, installation and services. The company saw Linux as an opportunity to establish new leadership and perhaps weaken competitors dependent on proprietary solutions. Sun, of course, later embraced open source, opening its OS and leading the Java community of developers, but never adequately addressed Linux’s impact on its proprietary hardware and OS business.

(For a quick economic analysis of open source as a complementary good that increased demand for IBM’s services read Joel On Software.)

IBM’s ability to adjust quickly and well to open source lies in how they framed the situation. Open source was not an annoying problem to solve or eliminate; as a legitimate challenge to the way the industry operated, it represented a dilemma that redefined roles, relationships, value creation processes and business models. By understanding the opposing forces at play and their implications, they could see the competitive landscape more clearly, and make better choices. The 2 x 2 matrix below is one plausible and constructive way to render the open source dilemma:


Mapping Profitability versus Customer Autonomy – Building a better mousetrap usually costs money and involves risk. While some innovators are motivated to share their ideas freely, businesses have a legitimate interest in protecting their ownership rights and making a profit. The tension between achieving profit and enabling the autonomy that customers want is on the surface only increased by a movement whose goal is to create openly and provide access to all. (Consider the tremendous loss of value by copyright holders in the music industry. Even today 90 percent of all downloads are illegal.)

By becoming leaders in the Open Source movement, companies like IBM and Red Hat found ways to collaborate with autonomous customers and strategic partners while still making a profit (upper right in our diagram). Their strategies and business models differ, but each has grown its business by giving customers greater direct access to the information and software they need to improve their businesses or lower costs.

On the other hand, customers are increasingly skeptical of proprietary products that lock them into technology directions that are determined by a single vendor (upper left). Proprietary software vendors have been forced by customers to make their products interoperate with open source offerings. Even Apple, a stellar example of a proprietary shop, has found its greatest success since adopting industry-standard Intel processors for its computers, and making hardware/software products such as iPods, iPhones and iTunes, which interoperate across computer platforms.

acernetbookA new challenge for proprietary operating systems may be brewing in Acer’s announcement that it will install Google’s Android, a software platform originally designed for phones, on its small netbook computers. If netbooks, which sell for around $300, become increasingly popular, it will be difficult for software firms to charge customers hundreds of dollars more for operating systems and applications. By going with an open, free OS, Acer hopes to build market share quickly, at the expense of software profits.

The tension between ownership of value and customer control is not limited to the software industry. The combination of free information, transparent source code, and a global network of voluntary contributors is upending fields from media to biotech, and lessons need to be found and shared for the interests of all parties. We’ll look for those answers in future columns.

Foundations: What Is 2 x 2 Thinking?

We use the term “2 x 2 Thinking” to describe a powerful approach to problem-solving that we have observed, documented and taught in our work as consultants and business advisors. It’s a method that recognizes that dilemmas are inherent in business and uses creative tension as fuel to drive innovative solutions and break the logjams that impede strategic decision-making.

The classic BCG (Boston Consulting Group) matrix offered a way of evaluating products and divisions along two axes: Market Share (which represents financial performance) and Market Growth (which represents the capital needs of the business unit)

In the book, Power of the 2 x 2 Matrix, we present fifty-five remarkable 2 x 2 frameworks. These were carefully chosen, (from more than 300) to help managers and institutions organize and focus problem-solving efforts. We find that nearly all 2 x 2 models share a common structure, one which is responsible for their strength. 2 x 2 models can range from the highly intuitive to the ingeniously complex. Classics such as the BCG Product Portfolio (familiar to any business school grad) or Stephen Covey’s Urgency vs. Importance (well-known to the millions of people who have read his books) help frame the common tradeoffs that organizations and individuals face. Others such as the perceptual maps frequently used in competitive marketing analysis, are more taxonomic, defining possible areas of focus and action, and creating a sound basis for decision-making.

It is the underlying dynamic structure of 2 x 2 modeling that brings richness, depth and a uniquely transformational power to this simple form. There is a right and wrong way to construct a 2 x 2 matrix, and the key lies in how the prime factors are selected and applied. Successful application is dependent on a particular cognitive and emotional bias in approach, which we call 2 x 2 Thinking. 2 x 2 Thinking is open as opposed to closed, proactive, and drawn towards inherent conflicts in search of resolution. The very best instances of problem-solving share a number of characteristics which comprise the core of 2 x 2 Thinking. The following seven points illustrate this more fully:

* 2 x 2 Thinking leads to an open exploration of issues to unearth inherent tensions; these tensions exist within an evolving context, where focus shifts as old points are resolved and new tensions emerge.

* 2 x 2 thinkers recognize the importance of learning as both a condition for change and a key enabler; learning involves embracing the new and letting go of unhelpful and invalid views.

* 2 x 2 Thinking is often but not necessarily interpersonal; where others are involved, dialogue is rich, informative and honest.

* 2 x 2 thinkers move towards not away from complexity; the act of focusing on a core set of variables does not reduce or simplify analysis – it enriches it.

* 2 x 2 Thinking requires openness leading to rapid modeling and reframing; problems are re-considered, and underlying assumptions are vigorously challenged.

* 2 x 2 thinkers are drawn to seeing both sides of an issue; this often leads to paradoxical situations which are explored rather than denied or ignored.

* 2 x 2 thinkers simplify to intensify focus; confusion is replaced by a core dilemma that holds the key to deeper meaning and more informed choices.

The simplest 2 x 2 problem-solving behavior involves looking at the other side of an issue before reaching a conclusion. A simple “what if” exercise will accomplish this. Dilemmas are a more interesting case. Dilemmas pull us simultaneously in competing directions, each one compelling in its own right. While dilemmas rarely feel good, they often contain the seeds of deeper understanding and a superior solution than we are otherwise capable of finding. The trouble with our experience of dilemmas is that they generally happen to us, and we feel out of control. 2 x 2 Thinking recognizes the power in exploring competing forces. By intentionally constructing dilemmas, we challenge ourselves to think at a higher logical level

Most small businesses ultimately face tough dilemmas about growth and exit strategies.

Often it is not really about choosing one or another option. Something is missing in the decision process. It could be perspective, excitement, confidence, agreement among parties, or additional alternatives. Here’s an example: Should we invest in growing our business or should we take profit now? This simple dilemma has caused thousands of business owners sleepless nights over the years. Viewed as a simple and straightforward choice, it is not very interesting or enlightening. However, a poorly thought through decision based in fear, greed or misplaced confidence can prove hazardous to the business over time. In contrast to this, we can construct a 2 x 2 decision-matrix to intensify and deepen the way we think through the issue. Looked at in this way, there are really two sets of choices to make rather than one. And, it may not have to be a forced choice between this and that. In the best of cases, it is possible to realize both ideals by reframing the question, seeking a solution that is both/and rather than either/or. This is what we call a transcendent solution.

Transcendent both/and solutions are all around us in the business world. Southwest Airlines is both a discount carrier and highly profitable, a combination that conventional wisdom said was impossible when Southwest was crafting their strategy two decades ago. When IBM had been battered by years of losses, Lou Gerstner turned a deaf ear to Wall Street’s demand that he sell off parts of the company in order to get back to basics. Instead, by focusing on services as the main offering to customers, he was able to leverage and recombine the company’s expertise in semiconductors, computers and software and return to record profitability. Toyota was long a low-cost leader in automobiles, but also became a quality leader when it introduced its Lexus brand, bringing the values of maintenance-free reliability into the luxury car market. Today, it is a leader in low-cost production and high-quality luxury cars, positions that were previously considered an either/or option for manufacturers. In all these cases, and many more, strategists were willing to challenge previous assumptions, and reframe competitive dilemmas in a way that enabled them to create innovative positioning and solutions that others could not match.

All materials copyright Transcend Strategy Group 2009