CXO

Risk strategies: Are you a rule breaker, shaker, maker, or taker?

John Kador says there are only four types of relationships to risk taking in the e-commerce arena. Take a look at this article to find out where your company fits.


To determine your company’s attitude toward risk, you need to examine whether your enterprise would be considered a rule breaker, a rule shaker, a rule maker, or a rule taker. Each of these terms reflects a strategy or posture that people or companies take on to define their willingness to take risks in the e-conomy.

In this article, we’ll examine these labels to determine which level of risk best describes your enterprise.

The strategy for e-conomy success
Successful companies excel by engaging in one of four types of relationships with the e-conomy to deliver value to their chosen customers. The key is focus. E-conomy leaders choose a single strategy:
  • Rule breaker
  • Rule maker
  • Rule taker
  • Rule shaker

And then they build their organization’s intellectual contribution around this strategy for a time. Laser-like focus on one strategy at a time is the key to success in the e-conomy.

One of the ironies of the e-conomy is that, as your vision becomes ever more expansive, your company focus must become narrower and narrower. One formula for failure is to spread yourself too thin. Seemingly limitless market opportunities and roles abound. Pinpointing the unexploited opportunity that could develop into a large market is the first challenge for any leader. But the second challenge is just as critical: Deciding on the best path to the opportunity and then sticking with it, relying on your focus to keep you from being distracted by the myriad other paths calling out to you.

One strategy is not better than another. And choosing one over the others doesn’t mean that you are abandoning the other three. Actually, most companies will have initiatives falling under all four disciplines at any one time.

Nevertheless, a company must stake its reputation in a particular channel—and focus its energy and assets—on a single discipline to achieve success over the long term. There is no moral weight to any of these disciplines. Each one can represent the most valid course for an organization at a point in time. Generally, each discipline can be evaluated in terms of the level of risk an organization is willing to take on, as well as the level of reward it hopes to secure. This relationship is shown in the E-business Value Matrix below (see figure).



The characteristics of each strategy
By mapping the roles of rule makers, rule breakers, rule takers, and rule shakers against the E-business Value Matrix, certain conclusions about the characteristics of these roles are revealed. Market dominant players tend not to be rule breakers, because they are usually more risk averse and see no incentive in disturbing a business model that is perceived to work. Rule breakers are usually born on the Web. Rule shakers are second- or third-tier companies or companies in tangential markets, because these companies have less to lose. Rule makers, who tend to be early adopters, usually end up with higher market share and higher margins.

Rule breakers
Rule breakers bust up business models. They explode in an industry by offering a new paradigm so compelling in its benefits that it simply cannot be ignored. By virtue of the insanely great value proposition of their offers (think Apple in 1985, Amazon in 1996), they quickly redefine their industries and instantly change the norm. Recently, examples of this would be Autobytel and E*Trade. Rule breakers often cause a shift that carries organizations to new, unexplored territories.

If they get lucky, rule breakers can dictate the rules of the industry to such an extent that they essentially create a new market and dominate it. In such a case, the rules offered by the rule breaker become the standard, de facto or otherwise. When this happens, the rule breaker shifts to being a rule maker (see next section). Rule breakers often take advantage of early mover advantages that translate into significant practical benefits. Rule breakers often have first and preferred access to:
  • Customers and markets
  • The best talent in the market
  • Funding and venture capital
  • The most valuable partners

At the same time, as rule breakers create relationships with customers, they have unprecedented opportunities to lock customers in by imposing high switching costs.

Rule breakers also take on disadvantages. The downsides of rule breakers include:
  • Readily replaceable business models
  • Thin profit margins
  • Obstacles created by technology changes
  • High risk

If you think about who the rule breakers are, you start to notice that they are rarely the dominant players in the markets they serve. Rule breakers are more commonly the second- or third-tier participants, and some even come from entirely outside of the industry. The reason for this is because there is generally no incentive for the dominant players in an industry to be rule breakers because they already own the industry. It’s a very rare executive who questions the practices that made him rich. That’s why rule-breaking activity usually comes from outside the norm.

Not all rule breakers succeed, and for those who fail, the penalties can be high. Jim Manzi, the creator of Lotus 1-2-3, attempted with Nets Inc. to create a breakthrough mall of malls for industrial and business-to-business applications. If Nets Inc. had succeeded, a number of industries would have found the rules by which they operated not only broken but shattered forever. Instead, Nets. Inc went for a proprietary, lock-in business model when the world preferred open standards. As it turned out, various parts of the company’s value proposition were assumed by entities such as VerticalNet and Netbuy.

The positions of rule breakers are perilous because they are completely exposed to every competitor. Netscape broke the rules in the browser space and, for a while, it completely dominated the industry with an almost 100 percent share. But first mover advantage cannot be sustained in the e-conomy. Temporary advantage is the only advantage in the e-conomy, and, in Netscape’s case, its advantage was measured in months.

Rule shakers
Rule shakers believe that a good way to get fruit is to take the branches of a tree and start shaking. Not every initiative will bear fruit, but some will. Rule shakers distinguish themselves from rule breakers by being content to Web-enable or otherwise juggle a larger number of non-critical business processes. By experimenting with business processes before they become mission-critical, rule shakers hope to build something that clicks in the marketplace. It’s a lower-risk approach than the rule breaker model.

A good example of the rule shaker strategy, The Williams Company, as it was called when it was founded 90 years ago in Fort Smith, AR, was an unremarkable construction company until it started assembling its nationwide system of interstate natural gas pipelines in 1982. By 1992, Williams established itself as the largest volume-transporter of natural gas in the U.S. What makes Williams a rule shaker is its realization that decommissioned pipelines represented an infrastructure it could use to run fiber-optic cables. Overnight, Williams reinvented itself as a communications company. Today, Williams is a global leader in energy and communications. Through entrepreneurial-style risk taking and rule shaking, Williams carved out a position for itself in the e-conomy.

Priceline is another good example of a rule shaker. It did not originate the concepts—buyer aggregation, informatization, auction, customization, and community—on which it is based. But it aligned these concepts around a unique value proposition in such a way that it has shaken up the travel industry.

Rule makers
Holding a position as a rule maker is a highly desirable state because it is a token of the fact that you dominate the industry to such an extent that everyone else has little choice but to play follow-the-leader.

Microsoft, by virtue of its market share, is a rule maker. It would be a foolish independent software vendor who decided to test its independence by developing a product that ignored the rules of Windows 98.

Rule makers exploit the new dynamics of the e-conomy: customization, digitization, personalization, just-in-time processes, lack of inventory, and, most of all, perfect alignment between front-end and back-end processes and the entire value chain. Without ruthless execution, even the most compelling vision never matures into rule making status. At the end of the day, most organizations are better off by claiming the privilege of being rule makers.

Benefits of being the rule maker include taking on less risk than the rule breaker. After all, rule makers can exploit the experiences—good and bad—that the rule breakers paid for. Rule makers take the strategy of allowing the other guy to develop a market for them. They give up first mover advantages in exchange for leveraging the other guy’s mistakes. If they time it right, rule makers hope to introduce new operational refinements that will ultimately make them the rule makers of the industry and allow them to enjoy higher margins in a more mature market. Besides competing head-on with the rule breaker, rule makers can pursue other possible strategies. For instance, they can buy the rule breaker. Once having purchased them, they can either exploit the technology or, in rare cases, kill it.

Rule takers
You don't have to be a trailblazer to be successful. Rule takers can look at what competitors are doing, benchmark companies outside their industry, get track records of what's worked, and then copy whatever has been successful.

On one hand, rule takers operate at a distinct disadvantage since they have to adhere to the rules of the road as dictated by others. For example, Gateway, IBM, and the other PC makers pretty much have to adhere to the rules as established by Dell. Dell is a rule breaker by virtue of its pioneering success in making the Web a successful channel for selling PCs. Dell has been accepted as a rule maker and now Gateway and the other PC makers have, by default and against their interests, been forced to take on the roles of rule taker. They have had little choice in the matter.

But a rule taking strategy represents the lowest risk of the three disciplines. Rule takers are satisfied with adhering to the rules established by others and identifying a corner of the industry where they can somehow add value. While risk is low for rule takers, potential returns tend to be low, as well. Margins and market share are usually small. It’s a perilous strategy, but it can work. Risk aversion is a legitimate tactical consideration for operations that are not strategic. A rule-taking model is usually not useful for a core business or primary play.

In the information technology space, application developers are the clearest examples of rule takers. Currently, applications must be written for operating systems, which, in this context, are nothing more than an elaborate set of rules. One of the first strategic decisions a company with a new software product has to make is which operating system it will support. For business software, at least, this question is a no-brainer. Microsoft’s Windows controls over 90 percent of the world’s business desktops. Microsoft is the rule maker these rule takers must follow. Only after the company releases the Microsoft version of the application does it have the luxury to think about porting it to other rule makers, such as Apple’s Macintosh or UNIX.

A freelance writer in Geneva, IL, John Kador is the co-author of Net Ready: Strategies for Success in the E-conomy (McGraw-Hill).

What characteristics do you think make for successful risk takers? Give us an example of a successful risk taker and one that wasn’t so successful and why. Click here and we’ll publish your comments in an upcoming article on risk taking.

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