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From web strategy to virtual organisationsNew Strategies for the Network Economy

Professor Feng LiThe Business SchoolUniversity of Newcastle upon TyneE-Mail: Feng.li@ncl.ac.uk

© Feng Li, 2006

© Feng Li, 2006 2

The Need for New Business Strategy

The New Business Environment The ‘ICTs Revolution’ & Information

Economy New strategies, organisational designs

& inter-organisational relations for E-Business

The Internet is challenging existing strategic approaches

Many new strategies emerging in leading organisations

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From Web Strategy to Virtual Organisations

The Web Strategy Deconstruction of integrated

business models Unbundling the unbundled ‘When is Virtual Virtuous’?

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The Web (Cluster/Platform) Strategy

Webs – not the WWW, but ‘clusters of companies collaborating around a particular technology’

Web – a new form of industrial structure

Webs create powerful new ways to think about strategy, risk, technological uncertainty and innovation

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The Web Strategy … continued

Webs influence management focus, organisational structure, performance measurement & information systems

A key feature of the transition from the industrial- to the information-age strategies

Examples –Microsoft/Intel; Novell PC networking system; SAP integrated IT solutions; Netscape; Sony playstation etc.

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Economic Web

‘A set of companies that use a common architecture to deliver independent elements of an overall value proposition that grows stronger as more companies join the set’

Two compulsory conditions: Technological Standard & Increasing Returns

Tech standard – reduces risks allowing companies to make irreversible investment decisions in face of technological uncertainty

Increasing Returns – create a mutual dependence that strengthens the web by drawing in more and more customers and producers

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Characteristics of the Web

Webs are not alliances – no formal relationships between participants

Different from virtual organisations The Pursuit of economic self-interest drives

behaviour Each company independent and prices, markets; and

sells products autonomously Webs are natural responses to risk and uncertainty in

turbulent environment The safety net of the web allows a firm to focus

exclusively on activities it can offer distinctive value Web reduces overall investment requirements; focus

investments on areas most likely to succeed; promote multiple suppliers for bottleneck components

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Technological Webs

Organised around specific technology Example 1 - Desktop computing: highly specialised

participants act to assemble a complex package of tech components & services

Relationship between players complex & fluid United to provide users with desktop computing

capability to compete with more traditional mainframe and mid-range solutions

Other examples – Online services: integrated services unbundled & specialised providers supply every element of an online service platform.

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Value Webs

Within each tech web, clusters of players try to capture a disproportionate share of the value-creating opportunity

Two objectives: Maximising value to customers Create value for a specific group of

companies adopted a common tech platform

E.g. Microsoft/Intel Versus Apple Versus Opensource

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Strategic Roles in Webs

Shapers – Focus on fluidity and opportunities to determine or influence outcomes; mold the environment in ways enhancing their ability to create values [define]

Adapters – Deal with uncertainty by staying one step ahead of other players in responding to & anticipating environmental changes [follow]

Profound implications for strategy and tactics (e.g. Microsoft versus Dell)

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Microsoft Versus Dell

Microsoft – MS-Dos/Windows as de facto operating system for PC; alliance with Intel strengthens architectural leadership & standard adoption; fortune comes from overall architecture rather than features of individual products; long-term investment strategy to strength/differentiate overall tech web

Dell (desktop business) – exploiting near-term product opportunities in the Microsoft/Intel value web; marketing focus on product excellence and differentiation; not try to define new standards but near-term paybacks for investments

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Success Factors for Shapers

Ownership of a key platform technology – shapes broader architecture & long-term lock-in (IBM Versus Microsoft/Intel)

Unbundling of the business – release opportunities for other web participants (Novell in 80s divest LAN hardware & focus on network operating system)

Reliance on economic incentives to mobilise other web participants

Active management of increasing returns dynamics to accelerate web growth

Microsoft versus Redhat, Apple, open office, star office etc.

Microsoft – Xbox, Nintendo – Cube; Sony – PS2

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Success Factors for Adapters

Early participation in winning value webs – establish pre-emptive position in attractive market

Aggressive competition for share within the value web – strengthen relationship with shapers for information

Linking or diversifying position – linking strategy with key shapers or straddle several webs

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The Power of Web Strategy

Manage risk & generate innovation in complex, changing & uncertain environment

Reduce risk through focus, increasing returns & enhanced flexibility

Innovation through distributed information flows Enables participants unbundle business & focus on

distinctive competence– specialisation around a common tech platform

Push out the inferior & encourage supply of bottle neck components by multiple suppliers

Reduce risk & accelerate invest in tech platform Boost functionality, service & customer adoption

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What is Distinctive about Web Strategy

New mindset required – new way of thinking about industry structure, relationships between companies and value creation

Unbundling and out-sourcing of undifferentiated business activities (what about transformational outsourcing?)

Maximising value for entire web by shapers – not just the company (market share vs size of pie)

Strategic decision - webs to join/form & roles to play New performance measurement Product design satisfy customers but also appeal to

providers of complimentary products & services Information systems – beyond the enterprise

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Organisational Implications

Flexible organisational design – new structures and processes

Outsourcing of non-key activities Virtual organisations & new inter-

organisational relations New ways of working ? New production systems? New logistics? Other organisational innovations?

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Other Potential Webs?

Customer web – ownership of customer relationships and customer segments (serve a wide range of their needs)

Market web – specific type of transaction (deep relationship for a particular need with all customers e.g. mortgage)

E-Supermarkets – web strategy?

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Virtual Organisation: When is Virtual Virtuous?

One of the most popular management concepts of the 1990s

Related concepts: Out-sourcing, sub-contracting, decentralizing, down-sizing, forging alliances …

Is virtual organisation suitable for everyone?

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Why Go Virtual?

Bureaucracy is bad (?) Flexibility is good (?) Market is better than hierarchy (?) Virtual organizations more responsive &

competitive - Successful cases The other side of the the coin - Failed

Virtual Organisations Virtual organizations have advantages

but so is large integrated organizations

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Virtual Organisations

Key to success – Incentives & Responsiveness

Not all the smart people work for you - market gives you access to them

Potential Problems? Each party acts in its own self-interest Friendly partnership can go sour Short-termism Excessive risk-taking for high rewards Squeeze efficiency so very little organisational

slack for disruption

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Vertically Integrated Companies

Discourage risk taking Well established procedures for

resolving conflicts & coordinating activities

Could tackle long-term objectives KEY - Balance Incentive & Control

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Organizational Strategy & Nature of Innovation

Autonomous innovations Can be pursued independently (turbo charger) Virtual, decentralized org. designs work well

 Systemic Innovations Benefits depends on related innovations (e.g.

instant photography - camera and film techs) Virtual org. may not be suitable - depending

on members you have no control, so integrated org. work better

 Wrong organizational design can be costly.

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Information Flows and Innovations

Codified information - easy to travel between organizations

Tacit knowledge - deeply embedded in individuals and companies - key asset of an company (e.g. MacDonald)

Information sharing essential to inter-organizational innovations.

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Market Influence: Industry Standards

Highly risky - winners & losers When no industry standard exist,

integrated large companies can choose one and influence others to support it

Once a new standard has established, virtual organizations can manage further innovations

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Example: 3.5 inch Floppy Disc

Introduced in 1987 - 720 kilobytes Within two years - doubled to 1.44 megabytes In 1980s, everyone followed IBM - not today Today - no company has the reputation &

strength to set a new standard (but changing … Iomega zip drive; CDs; USB memory sticks)

Scale, integration, market leadership required to establish & advance industry standards

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The Success and Failure of IBM

Only 15 months for 1st PC launched in 1981 Processor from Intel (8088) Operating system from Microsoft (DOS) Open architecture - based on standards &

components widely available Third-party developers - new software

applications and hardware accessories Market for distribution - Computer land and Sear

(as well as itself) 1984 - overtake Apple as No.1 suppliers of PCs

(26%) - increase to 41% in 1985

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The Success and Failure of IBM (2)

Unable to direct the PC architecture it created (Microsoft + Intel)

Once compatibility achieved after a few years struggle - same CPU and software (system and application)

IBM has nothing left to establish a competitive advantage

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The Success and Failure of IBM (3)

Introducing OS/2 - new standard but Microsoft introduced Windows work with the old DOS.

Third-party developers invested in old systems - reluctant to change

Intel and Compaq - 80386 ahead of IBM Nearly went down in early 1990s By 1995, IBM 7.3% of PC market vs. Compaq 10.5% Modestly profitable - sold to China’s Lenova in 2005 Created many super-rich rival companies E-Business – changing the game From software to services to solutions Services and business solutions account for over

50% of revenue (PwC)

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Lessons?

Don’t outsource everything Key to long-term development:

choose, nurture & guard internal capabilities to underpin competitive advantages

Without core competencies & internal strength, strategic position in virtual networks is short-lived

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Other Examples

MIPS (ACE) Vs. Sun Microsystems (SPARC)

Toyota’s lean production Intel control of 80X96 microprocessor

standard Microsoft - PC operating system Nike - design and marketing capability

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Tom Peters … Re-Imagine

The concept of the ‘virtual organisation’ is essential to understanding how new business works

Sept 11 – ‘ … a tiny band of Internet-Savvy fundamentalists humbled the world’s only superpower ….. Passionate focus, coordinated communication, and a few $3.19 box cutters.’

‘In an era when terrorists use satellite phone and encrypted e-mails, US gate keepers stand armed against them with pencils and paperwork, and archaic computer systems that don’t talk to each other.’ – Boston Globe

The failure of organizations invented for another era … brilliant for dealing with Soviet Unions … and a lousy structure for dealing with al Qaeda

Sears was brilliantly equipped for dealing with Montgomery Ward … and totally unprepared for Wal*Mart; IBM vs Control Data but not Bill Gates; Merrill Lynch vs J.P Morgan but not Charles Schwab

New strategies and business models are needed for the new network economy!

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Key Lessons

A mixture of internal development capabilities, licenses, partnerships and alliances, & tech purchased from other companies - right balance!

Without control & internal capability, market led virtual network won’t work.

Internal capability crucial - shape or follow the market

Short Vs long-term - too short time horizon dangerous

Decentralization without strategic leverage &

coordination is dangerous

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WHAT IS E-BUSINESS?How the Internet Transforms Organisations

Chapter 6. New Strategies for the Network Economy: Web Strategy, Business Unbundling and Virtual Organisations

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Readings:

Hagel III, John (1996) Spider versus spider, Mckinsey Quarterly 1996 (1) pp04-19, http://mckinseyquarterly.com/strategy.spve96.htm

Two subsequent books by John Hagel (Netgain and Networth) Chesbrough, H. W. & Teece, D. J. (1996) When Virtual is

Virtuous? Organizing for Innovation, Harvard Business Review, January-February: 65-73

Birch, D & Burnett_kant, E (2001) Unbundling the unbundled. Mckensey Quarterly, 2001 pp 103-111

Peters, Tom (2003) Re-Imagine. Dorling Kindersley, London Linder, Jane C (2004) Transformational Outsourcing. Sloan

Management Review 45(2) pp52-58 Peters, Tom (2004) Re-Imagine Sviokla, John & Anthony Paoni (2005) Every product’s a

platform. Harvard Business Review, October, 17-18 Books and papers on virtual organisation – lots of old and new

ones