Please read the case study "The Problem with Legacy Ecosystems" and answer the following question in one page.

1. Discuss how its relevance to Innovation & Entrepreneurship and Merger & Acquisition

Case Study:

A s automation and digitization transform the economy, well-resourced incumbents in industry after industry are losing out to upstarts. Traditional retailers that have entered the e-commerce space appear no match for digital-native Amazon. Electric-vehicle sales at the world's most storied automotive companies consistently trail Tesla's. And even after substantial investments in technology, no taxicab consortium has been able to fend off Uber's attack. Why is it that so few of the powerhouses of the 20th century are leaders in the new data-driven world? The three of us have been exploring that question in a course called "The Industrialist's Dilemma" that we teach at Stanford University's Graduate School of Business. Part of the answer has already been suggested by Clayton Christensen and other business scholars. All companies' internal systemstheir metrics, resource allocation processes, incentives, approaches to recruitment and promotion, and investment strategiesare set up to support their existing business models. These systems are generally well established and extremely difficult to change, and they often conflict with the needs of digital business models. But the CEOs we interview in the classroom pinpoint a different challengeone that arises because of how value is created in a digitized economy. Many of the most successful business models of the 21st century are built on being able to reach into peoples' lives, using software that generates information on customer habits and patterns of usage. These digital relationships provide a new level of intimacy, allowing firms to personalize their offerings and better orchestrate how they serve customers. Most older companies, however, struggle to take advantage of the opportunity to extend their relationships with customers, because they're constrained by their existing value chains. A network of partners with fixed ways of doing business presents an external challenge, even if the internal challenges that go along with business model reinvention can be overcome. Firms that have had relatively stable relationships with suppliers, competitors, collaborators, and customers for many years can't easily shake up those networks. But doing so may be essential for long-term survival. To better understand why, let's take a deeper look at ways in which the digital era has changed how we create and capture value.

Software Transforms Customer Relationships Uber's success is not a story about big data. It's a story about small data obtained directly from customers in a new way. Uber realized that it didn't need to amass and analyze vast amounts of information about taxi usage; it simply had to capture the most meaningful piece of information about users at exactly the right time: where a potential rider is located when he or she needs a ride.And the company knew it could learn that if it had access to the customer's cell phone. Afforded such access, Uber could make a rider's experience easier and more convenient than taxicabs did. Many of today's most iconic companies share a similar story: Their success is built on an ability to reach further into a customer's world than competitors do (or than anyone could have 20 years ago). The clearest examples are in the realm of connected devices. Tesla equips its cars with sensors and software to understand how customers drive and to offer them autopilot functions. Nest sells "smart" thermostats, smoke detectors, and video cameras that keep tabs on what's happening in users' homes in order to improve energy efficiency and safety. General Electric is reaching into its customers' industrial sites to monitor assets in real time, providing service alerts and changing maintenance schedules according to data gleaned from embedded software. But it is not just connected products that enable companies to extend their relationships with customers. Consider Netflix: By instrumenting its apps to detect everything from where customers are geographically to when viewers stop watching a movie, the company is able to understand people's preferences intimately. The streaming-media giant uses this knowledge to provide timely recommendations and to sourceor even createcontent that people will love.23andMe, a provider of genetic testing, also takes customer relations to a new level. Instead of simply sending test results to doctors and hospitals, as most labs do, 23andMe maintains a connection with clients, periodically sending them questionnaires, creating a community through online forums, and pointing people to relevant information about their health and genetics. Such ongoing engagement allows 23andMe to conduct innovative research while spending far less than competitors and continually gaining insights to share with clients. The ability to connect more personally with customers creates immense opportunity for companies to capture data about the market, supply new products and services, and build extremely defensible network effects and feedback loops. But transforming a customer relationship is not simple; it often requires doing things differently up and down the value chain.

Disrupting Partnerships Most corporate strategists fail to grasp that software alone won't transform their business model. Each of the aforementioned companies leverages software in innovative ways, but each also changed how products are distributed and servicedand even how input materials are sourced.Let's return to the example of Nest. Cofounder Tony Fadell told our class that an early differentiation for the company was that it chose to market its first product, the Learning Thermostat, directly to homeowners for do-it-yourself setup, bypassing the typical distribution and installation channelprofessional contractors. Why does that matter? Nest's team knew that only a small fraction of thermostats were ever programmed to adjust a dwelling's temperature depending on the time of day, the day of the week, and the seasonthe process was just too complicated. To deliver on the promise of a thermostat that would actually program itself, Nest had to enable the device to learn the customer's temperature preferences and schedule. And for the software to work best, the team needed to create user profiles, ensure that the thermostat was connected to a home's wireless network, and confirm that the customer had the Nest mobile app on his or her phone. Approaching product sales and installation differently made this possible. Without contractors in the supply chain, Nest could develop a user-friendly product from which customers could easily derive value. The company's decision to abandon the traditional distribution channel committed the team to building a strong retail strategy and a consumer-facing brand. But it disadvantaged professional installers and challenged the existing ecosystem.As the case of Nest shows, when companies use digital technologies to form new relationships with customers, software development is only part of the process. Sometimes this is because companies seek to change customers' behavior at various points in the customer journey. Sometimes it is because delivering value involves using the data collected to supplant former partners. In either situation, business models and channel strategies must change in unison requiring tough decisions that can upset long-standing partners.

The Need for Interdependence In some circumstances, the shift from an industrial to a digital setting has even more radical consequences for partnerships than what we saw in the Nest example. To understand why, we need to take a brief detour, to look at what scholars understand about how transformative innovations emerge and evolve. Clayton Christensen, drawing on the work of Alfred Chandler and other business historians, has observed that the need to restructure the extended value chain is common when major innovations are introducednot just because business models are often in flux, but also because innovative product designs are still emerging. Early in the life of a new product, the inventors don't have a deep understanding of how to optimize different components of an innovation relative to one another. The first automobile manufacturers, for example, needed to maintain tight control over research, design, and manufacturing. Changes to one part of the car often meant changes throughout the automobile. For that reason, product development required an interdependent network of partners. Over time, as more standard design architectures emerged, companies developed a sophisticated understanding of how the different components worked togetherhow transmissions relate to batteries, for instance, and how batteries relate to electrical systems. Components and subsystems could then be modularized. Today traditional automobile manufacturers have the luxury of allowing innovation to occur at the subsystem level; nextgeneration products will plug in easily to most car platforms. Such broad scope for independent partner activity is typical of mature technologies and mature industries.

What's Different About Today's Information Technology? Far more born-digital companies replace incumbents now than was the case a generation ago. That's because the nature of IT innovation has changed in fundamental ways. In the 1990s most IT inventions (and investments) were designed to support large organizations' internal processes. Businesses like SAP, Oracle, and IBM were all about helping corporations operate more efficiently. At the time, infrastructure and applications were expensive and inflexible. It was easier to focus on automating processes than on disrupting how client businesses made their money. For those reasons, the first generation of IT benefited large organizations more often than not (although the displacement of employees caused some pain). Today incredible improvements in the price and flexibility of IT infrastructure have aided newcomers across industries, enabling them to use technology to create businesses with operating models entirely different from those of their 20th-century peers. Further, the spread of the internet into our homes and onto our mobile devices has made it easier for digital innovators to reach customers directly. These innovators seek to displace rather than support legacy organizations making it critical that older businesses pay close attention to what's changing and adapt when necessary.

However, the more dramatic the innovation, the more interdependence may be required. As we find our way into a world of autonomous and electric vehicles, a level of interdependence that resembles vertical integration seems needed again. Tesla's cars maintain some of the most interdependent architectures on the market. The automaker controls every component of its vehicles, including the hardware, the software that manages the complex electrical system, and the algorithms and sensors that enable the self-driving functions. And the tight control extends even further:Tesla owns its distribution channel, service network, and charging network. This integrated model allows the company to address all the challenges involved in producing autonomous and longdistance electric vehicles, along with fast-charging batteries. (There's a drawback, thoughthe model also creates operational complexity that might slow the company's expansion.)

Building a New Ecosystem Let's assume we accept the first two points in this discussionthat advances in computing and communication allow businesses to extend their relationships with customers, and that taking advantage of these digital technologies requires companies to create a more interdependent architecture for the innovation. Then the implications become clear: Companies of all varieties will need to reshape their value chains. And sometimes this change will impact longtime partners in unfavorable ways. Netflix, as we mentioned earlier, monitors everything its customers do and uses that information to power decisions ranging from content recommendations to content sourcing. But to do this effectively, it needed new ecosystem partners with compatible goals: content owners looking for "long tail syndication" (like the BBC), distribution vendors (like Amazon Web Services), and platform partners that would enable the instrumentation of applications (like Apple and Google).Sometimes existing partners are eager to reinvent themselves. Sometimes they can be financially motivated to adapt to a company's new needs. But just as often, they have business models that are too difficult to change. Waiting hopefully for partners to catch up can jeopardize the long-term viability of a business. There's no easy way to manage the transition from one business model to another, but over the past year, we have observed a handful of best practices among the companies most successfully navigating this environment.

CONCLUSION Establishing a polestar, changing performance metrics, and creating opportunities for partners can make it easier for industrial-era companies to manage the change to new, digital enabled business models. But we don't mean to suggest that these transformations will be straightforward or pain-free. Companies will have to make difficult decisions that leave members of their legacy ecosystems behind. Some partners will necessarily turn into competitors. Others may simply become obsolete. But if business leaders can acknowledge that digital requires changes beyond softwareand often beyond the direct control of their business the opportunities are enormous.