To escape its demands, "outlaw" filmmakers began moving their operations to Hollywood, whose distance from New Jersey, where Edison operated from, made it difficult for the trust to enforce its patents. Soon, large studios were set up in Hollywood, and the film industry increasingly consolidated its base there. Although a series of court decisions later ended the trust's monopoly by 1915, the trust was effectively dead long before that date, its monopoly circumvented by the "outlaws" who went to Hollywood.
Digital Equipment Corporation (DEC) was a hallowed name in the technology industry during the 1960s and '70s. Their proprietary PDP and VAX minicomputers were far superior to competing products and led the industry by an overwhelming margin. When the minicomputer market declined in the face of the PC's advent, the company responded by bringing out personal computers based on proprietary, closed architectures, a strategy that had served them well in the minicomputer era. However, the company failed to make a mark in the PC industry, where open technologies from IBM, Microsoft, and others had taken root. DEC went into a decline from which it never recovered. Although the Digital name is still remembered with reverence by industry veterans, the company has long since vanished, to become a vestige in the history of the industry.
Lending money to consumers has traditionally been the bastion of large banks and financial institutions. These institutions operate under the watchful eye of government regulators and financial authorities, and their credibility is assiduously indexed based on their sources of funds, quality of assets, and so forth. Now, a "peer-to-peer" lending model is emerging, pioneered by startups such as Zopa and Prosper, which allows loans to change hands directly between individuals who wish to lend or borrow.
What, if anything, do these vignettes from diverse industries — cinema, technology, and financial services — teach us? Read on …
The Two-Sided Levee in Business
Here's a scary fact for anybody in business: If your company is within your industry's top revenue quartile today, there is a 30 percent probability that in five years' time, it will no longer occupy such a position.2 Thus, high corporate mortality is not a chimera conjured up by doomsayers of various persuasions, but a very palpable, plausible reality.
And what's more, such mortality has shown an accelerating trend for decades. During the 1960s and '70s, about 4 percent of the Fortune 500 — the largest U.S. industrial companies — turned over annually, but by the 1980s, the average annual rate of turnover had doubled to 8 percent.3 It would hardly be surprising if this turnover has only increased in subsequent years.4
There exist myriad reasons why successful, well-managed businesses see their fortunes ebb. Demand for their products declines. Smarter or nimbler competitors usurp market share. They can no longer produce their products economically enough. Changes in the market or regulatory environment take away their competitive advantage.
Many of these reasons can be traced to one fundamental truth: They ignore the levees in their business.
Clearly, many other companies see their fortunes rise dramatically. These are the companies that not only pay great attention to levees in business, but also use those levees imaginatively to prosper.
What, then, are these levees, which appear to have the potential to either seriously undermine a business or propel it to greater heights?
Levees are the abstract and often subtle "walls" that inhibit the free play of market forces and hold environmental pressures from being transmitted to our business.
In the case of the Edison Patents Trust, the levee was the phalanx of patents on key filmmaking technologies that comfortably ensconced the trust in an unassailably superior negotiating position with respect to industry players and would-be entrants. The wall of patents proved so forbidding that, rather than promoting compliance, it caused flight. Already rendered ineffective, it was further dismantled by court action that invalidated some of its patents, the result being that the trust collapsed completely.
The levee that DEC lived behind was the customer lock-in that its proprietary technologies created, which was highly effective in the minicomputer era. Faced with the open technologies of the PC era, that lock-in became ineffectual, as customers realized that they were better off with technologies that were open.
Peer-to-peer lending outside the banking system has existed for centuries, but it was essentially confined to borrowers and lenders who belonged to the same neighborhood or community or who had long-standing trust relationships. Zopa and Prosper are among the vanguard of a new breed of peer-to-peer lending innovators that have taken on large banks by facilitating direct lending between individuals who have no existing bond of trust. The levee here was the belief that such lending can only happen via the intermediation of large banks.
As each illustration above shows, the shelter afforded by the levee in the form of protection from market or environmental forces can be highly reassuring, and can easily lull us into an illusion of immunity from those forces. It can be safely assumed that the Edison Trust, DEC, and the intermediary entities in the PC value chain were all run by perfectly competent, sincere, and able managers. Yet it can be plainly seen that their worlds yielded when they were overtaken by forces beyond their control. And, much as happens when a real levee breaks, those forces were the very same ones that had been held in check by the seemingly formidable levees in their businesses.
Somewhat counterintuitively, a levee of the nature we describe may be easy neither to spot nor to reduce dependence upon. Indeed, we may fail to recognize such a levee in our business or may ignore it for reasons that make perfectly good business sense.
It is important to note that the word "levee" is not used in the sense of being an obstruction or impediment. We use the term "levee" because, much like its physical counterpart, the levee in business is an abstract "wall that protects."5 Occasionally, to relieve any repetitiveness, we will use the word "wall" to describe the same phenomenon.
It is even more important to note that a levee has two sides.
| Levee | Traditional Beneficiaries | Levee-based Innovators |
| Lack of information transparency between service providers and customers | Travel agents, full-service stock brokerages | Expedia, Travelocity, Schwab |
| Lack of visibility into product supply chains | Part and product vendors and suppliers | Toyota, Wal-Mart |
| Technological and economic barriers for small players to enter telecommunications service provision | Conventional telecom service providers | Skype, Jajah, Dingaling |
| Perceived indispensability of authoritative and credible experts for producing reference sources | Encyclopedia Britannica | Wikipedia |
| Customer lock-in by means of proprietary technologies | Digital Equipment Corporation | Purveyors of open technologies (IBM, Microsoft) |
| Belief that payment service provision is confined to banks | Banks | Mobile phone service providers |
| Belief that consumer lending is the preserve of large banks | Banks | Zopa, Prosper, microfinance providers |
| Apprehensions of intellectual property being compromised | Traditional in-house R&D | Open InnovationC1 |
| Belief that specialized work within companies must be performed by expert professionals | Professionals, specifically within companies | Amateur enthusiasts (via "crowdsourcing"C2) |
| Standard consumer product packaging | Consumer product manufactures | Consumer product manufacturers (micropackaging) |
| Belief that consumer products should be sold using national or international brands | Consumer product manufacturers | Retailers (retailer-branded packaging) |
| Stock photography is the preserve of large, well-established companies | Stock photography agencies | "Microstock" providers, such as iStockphotoC3 and ShutterStock |
| Capability and economic barriers for a single company to vertically integrate across the PC value chain | Manufacturers of PC hardware and software | Intel-Microsoft (Wintel) alliance |
| Information Technology (IT) services being perceived as nontradable across borders | U.S.-based IT service providers | Offshore IT services providers |
| High-tariff and nontariff trade barriers within a region | Producers of tradable products or services | European Union, free trade zones |
| National barriers to contract negotiation and enforement | Transnational sellers, particularly online | Negonation (Tractis) |
Why You Should Know About the Levees in Your Own Business
The levee concept is important for its defensive aspect of helping to facilitate understanding of what insulates a company from risks and threats. However, used creatively, it can also serve as a basis for innovation. Much business model innovation happens via a process wherein a would-be entrant into a market breaks down existing levees and builds its business model on the resulting state of affairs.
The archetypal example would be Dell Computer, which was on the "other side" of the levee: It was the industry distributors, resellers, and retailers that lived in the ephemeral shelter of the levee. These intermediaries derived their legitimacy and sense of indispensability from the belief that customers just wouldn't buy computers without an opportunity to visually experience them beforehand, and that persuasive and knowledgeable salespeople were necessary.
Thus, the levee has two sides: The business that is on the "sheltered" side faces disruption from loss of that protection, while the other side of the levee, buffeted by tidal forces, affords many would-be entrants an opportunity for creating disruptive innovation.
Discovering the Levees in Business
As the preceding examples show, the levee may be an artifact of our business model, a feature of the environment within which our business functions — or even an element of our own mind-set.
Acknowledging the presence of a fallible levee in their business may be a task that presents many managers with a degree of challenge: The levee may be seen as providing a nurturing, welcome protection; it may look insurmountable and foster an illusion of permanence; it may be subtle or abstract, and there may be insufficient hard data to pass the "business case" test; or it may appear fundamental to the business. Recognizing levees may also need foresight into the unknown — what looks impregnable today may be rendered fallible by technology or business acumen that is as yet undiscovered.
Nevertheless, once the concept has been grasped, it is possible to think of a great many levees that can exist in business. Elsewhere, we provide a full toolkit that practicing managers can use to discover the levees in their business.6 This article does not purport to furnish an exhaustive methodology for the above. We provide several examples of levees throughout this article, and more particularly in Table 1, which should suffice for the reader to obtain a fair grasp on where to look for levees. In the remainder of this article, we will focus on the possible set of actions available to managers once the levee has been found, either in their own business or those of others.
What You Can Do About the Levees in Your Business
Once a levee has been found, one possible action is to strengthen or buttress it. This is a perfectly natural and well-intentioned response — huge forces are being held back by the levee that, if released, can have disastrous consequences for the business, and attempts must be made at all costs to coax the possibility of the release of those forces into recession.
However, such a response may all too often prove counterproductive — indeed, by doing so a company may even be unwittingly cooperating with the very entities that have the potential to disrupt its business model, much as DEC did.7 The Edison Trust also followed this strategy, hastening its own demise.
A response that holds significantly more promise is for a company to dissolve, neutralize, or lower its own levees — in other words, to render them ineffective before someone else does. While DEC may not necessarily have survived by adopting open technology standards, it could have reassured customers, who had stuck with the company and had great respect for its products, and made them less likely to defect to the competitors' open technologies. Had the Edison Trust been more moderate and circumspect in enforcing and encashing its monopoly, it would have provoked fewer filmmakers to join the outlaw bandwagon.
Fortunately, telecom service providers today are embracing precisely such a strategy, by moving to offer VoIP-based services. Large companies are seeking to make levees more porous by adopting open innovation approaches. Big pharmaceutical companies are moderating their propensity to fight legal battles with manufacturers of generics for the privileges of selling drugs going off-patent, and often striking deals that seek to gain a share of the generic revenues instead.
Dealing with levees in the above manner is admittedly a difficult strategy, as it usually involves cannibalizing your own sources of advantage or cooperating with the "enemy."
What Others Can Do About the Levees in Your Business
It is considerably easier, and far more attractive, for another company to undermine or render ineffective the levees in your business, as they face none of the wrenching emotional or organizational challenges that a company faces in administering this treatment to its own levees. This strategy was used with enormous effect by the "outlaw" filmmakers, to create what is arguably one of the finest — and certainly the most entertaining — innovations of the last century: the Hollywood film industry.8
More recently, the phenomenon of Crowdsourcing9 has emerged, as amateur enthusiasts in diverse fields have succeeded in partially dismantling the barriers separating them from professional "experts." By undermining the belief that only large banks can lend money, peer-to-peer lending innovators such as Zopa and Prosper may be sidestepping the banks.
Dell Computer innovated by demolishing a levee, which was the seeming indispensability of the intermediaries in the PC value chain. VoIP providers such as Skype and Jajah have lowered the technological and economic barriers that prevented small companies from competing with mighty telecommunication service providers.
A somewhat more lateral and "constructive" approach is for a hopeful entrant or challenger to create a levee. PayPal, the world's most popular online payment system, derives its raison d'
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