Book Excerpt from ‘Embracing the Net’
The Internet is ranked by many as one of the greatest inventions of the 20th century. Much as the other major technological inventions such as telephones, airplanes and computer chips have irrevocably changed our lives, so too will the Internet. In fact, the changes are only beginning, and as the new millennium unfolds, we can look forward with great excitement, and some trepidation, to what the future holds.
Each technological revolution brought a massive shift in our life -social and economic. Traditional leaders have been toppled, and in some cases, exterminated. New players have made their marks and laid the foundations for new business empires. But the winners at the outset were not always the winners in the long term. History will repeat itself again – to be a winner in the long-term organisations need to retool their business models and incorporate commensurate changes within their structure and culture.
Going online is easy; succeeding online is much harder. Much has been written about the ‘front-end’ of electronic commerce – what happens on the web site. Yet little attention has been directed to the ‘back-end’ – the organisational redesign that is highly critical for success on the Internet. A new strategic perspective must permeate organisations and galvanise them into new entities centred on customers. In that process, innovative business model(s) must be drafted to make the most out of the new connections with the customers. Organisations should then be re-engineered to conform to the finer details of the chosen business model(s)
But why are some of us so obsessed with the Internet? Quite a few revolutions -technological, social and cultural – have shaped our evolution but the Internet stands out for one simple reason: velocity. It’s like the last industrial revolution compressed in time by 90%. If the railroads fundamentally altered the competitive landscape of business in the 19th century by throwing previously protected regional companies into battles with distant rivals, say Carliss Y. Baldwin and Kim B. Clark, expect e-commerce to do the same in the 21st century. The global (economic) village was never more close to realisation. We have already seen the impact of the industrial revolution on the supply side of the economy -expect e-commerce to bring about a similar impact on the demand (customer) side of the chain.
The Internet presents ‘once in a lifetime’ business opportunity driven by technological changes. Says Larry Ellison, Oracle’s CEO: “The transition to Internet computing is the last big architectural change we’ll see in computer technology for a long, long time. That’s because with the Internet, computer and network services will finally begin to look like the electricity utility, the phone utility, or the water utility systems, and economics of scale will really apply. Bigger really is better.”
The economist Napier Collyns – a co-founder of the Global Business Network, a California think-tank that helps big corporations ponder the future – believes: “For the first time, we’ll really see supply and demand working,” he says. The market, not corporations, will set prices. “It will be like the oil companies, which, for a hundred of years, kept the price of oil in their own hands. Now the price of oil is decided on Wall Street.” The extent of the impact will indeed be sweeping. A simple manifestation will be that every penny of the price paid by a consumer will bring in the expressly desired value from the product bought – there will be no imperfect market surpluses. If revolutions in the past have significantly changed our lives, there is no reason to expect anything less this time.
COMMUNITIES: ALL THAT THERE IS
Customer communities are as old as you can imagine – perhaps Adam and Eve formed the first customer community! Such communities were linked through ascriptive values such as language affinity, kinship and geographical proximity rather than objective values such as professional affiliation, hobby, interest and free choice. However, in the e-era, customer communication will transcend all the ascriptive limitations and create global communities based on objective affiliations. Such communities will greatly transform relationships between companies and their customers. Knowledge exchange among members of a community is the primary source of such transformations. The seamless linkage among members could create infinitely global communities, ready to accept change and assert themselves together. To be honest, the most significant impact of the Internet is to facilitate the creation of global communities. This is also the most visible of the ‘back to basics’. Your most sustainable competitive advantage is the size, composition and loyalty of your community and not your size, resourcefulness or price/product.
While communities tip the balance of power toward the customers, they also provide a powerful vehicle to producers to deepen and broaden their relationships with their customers. To be honest, there cannot be a better recipe for growth and innovation in business. Product ideas would be free; consumers would be talking about the product features that they want, for free. They would be giving money for experimenting to the extent that they are ready to pay a ‘higher’ price for customised products. Companies stand to gain, on balance, from the growth of communities, especially those which can leverage this new customer power.
ORANISATIONS ON THE EDGE
But such organisational changes are, for the most part, changes in the employees’ context, and thus employees have become a critical variable as never before. At Kozrno.com, a New York based online convenience store, the CEO sees his top management team as a panacea for all the potential problems in the expansion of the company. Sceptics often point to the three key challenges for online grocery stores: route planning, inventory management and staff productpicking skills, and they think that these may become the bottleneck when Kozmo expands in the suburban markets. However, Kozmo’s co-founder and CEO Joseph Park downplays these challenges. His defence is as follows: Scott Evans, a Kozmo vice president, was a former executive in charge of logistics at United Parcel Service -America; Jim Alt, another Kozmo vice president, was in charge of supply-chain management at Dayton Hudson, a family of department store chains; and Kozmo general manager Sean Jackson in his previous job ran the discount merchandise store Sam’s Club for Wal-Mart Stores in the Washington, DC area. This is a new way of reasoning about competitive advantage! Technology can only create the necessary infrastructure. It can’t create the one thing – imagination – needed to build the vision. It takes people to do that – people, both as leaders and executors. Employees were never more important to business.
Book excerpt from ‘The Bright stuff’
Innovation: lessons from the past reinforced?
Before we proceed to elaborate upon the lessons from these case studies, we need to see whether what we observe today is really unprecedented. Have similar things happened before in business history? In other words, what are our past experiences about changes in competitive dynamics following a major disruption in a technological trajectory? For instance, the changes at the beginning of the 20th century in the automotive industry, or in the 1950s with the introduction of transistors. Let’s take the automobile industry. By most reckonings, between 1895 and 1905 there were more than 2,000 start-ups in the automobile industry in the US alone, and putting ‘Motors’ in your company’s name immediately increased the attractiveness of your company to investors.
However, by 1910, the entire automobile industry had gone through a shake-out and only a few dozen companies remained afloat. It sounds familiar, doesn’t it? Indeed, it is not the first time that we are confronted with a major disruption in technological trajectories. The lessons learned by 19th century entrepreneurs may actually be a treasure chest for today’s entrepreneurs. Can we learn something from these past experiences? At the same time, we should be open-minded and ask ourselves whether there are any new imperatives, and opportunities, in the emerging digital-economy. We argue that the answer is yes to both of the above questions. There are many similarities with other moments in business history where we had discontinuities, but there are also some interesting differences, which create new challenges for the management of innovation in the digital era. This chapter will dig out the similarities.
Two quick insights
- Not everything we observe in the Internet environment is ‘new’. We have witnessed in the past other moments of technological discontinuities and incumbent companies can learn from these experiences about how to better manage the integration of the Internet into their business strategies. Be humble.
- A discontinuity in technology is the occasion to redefine the boundaries of an industry. Incumbents have often a real or purely emotional stake in ‘their’ industry and this holds them back. But the ‘wiser’ ones
- quickly accept the eventuality and work to cut out the slice of the new cake that should belong to them. They actually speed up this transformation. Be wise.
Service innovation: the real face of innovation on the Internet
The Internet is an information tool. A tool that can be used for increasing the amount of information exchange between a firm and its customers. As we will argue elsewhere in the book (see Chapter 8), the Internet is making customers co-creators of the products they want. Innovating by exploiting the advantages of the Internet is essentially innovating in the service component of a value proposition. We have seen that in all the case studies. For example, in the GM and Auto-By- Tel set of case studies (Chapter 5), we saw how the automobile sector is moving beyond the simple act of a customer buying a car to a reconceptualisation of the process from conception to crusher.
Therefore, there is probably something to be learned from how the service industry has traditionally conceived innovation. The service management literature always has had a bit of a conceptual problem with the definition of a product innovation. Why? It usually argues that process and product are identical in services. Think about the educational services. The product is as much determined by what the teacher has to offer in terms of content as by how he or she goes about delivering that content. In a first-class restaurant, we appreciate the food as much as the way we are treated in terms of overall service and attention. All airlines deliver the same product: transport from point A to B with basically similar physical planes. But we know that airlines are all different – they are each different in the way they take you from point A to B.
Airbus or Boeing notwithstanding. How a service is delivered is as important, if not more important than, what the service consists of. Innovation in services is thus very often the consequence of innovations in the process or the way a service is delivered.
Conceptually, a new technological infrastructure enables us to make changes on three levels in a service:
- the place of delivery;
- the qualitative nature of the service;
- the relationship between the service provider and the customer.
One of the most important design parametres of a service system is the degree of ‘overlap’ or interactions between customers and service delivery system and this is the area to watch. Generically, there is nothing right about the overlap increasing or decreasing due to a specific technology in a given service.
The Internet infrastructure provides us with many more degrees of freedom in the design of service delivery systems. Interestingly enough, the change can take effect in both directions: an increase or a decrease in overlap! Online trading is an example where the overlap is reduced to the essential (i.e., the customer does much more on his or her own) as compared to the overlap in branch-based stock brokerage. Home banking is another example of reducing the overlap. On the other hand, we see that the electronic bookstore, as designed by Amazon, actually increases the interaction. In a normal bookstore, you may perhaps have a short chat with the store salesperson and pick up your books. Through Amazon, you can contribute to the reviews of the book, understand how the book is related to other publications, learn more about the author, get advice on what other books you should read when you are interested in a particular topic, etc.
We believe that the Internet fundamentally presents two kinds of opportunities to firms: they can use the Net to make their existing processes more effective and efficient (e.g., banks can reduce cost by moving transactions online) or they can exploit the Internet to redefine the scope and vision of their business operations (e.g., Amazon.com redefined retailing on the Web). While we do not wish to undermine the importance of the first option, it’s the second opportunity that’s the more interesting one. It’s about the need for continuous change. Perpetual metamorphosis is the term we chose for this: the act of undergoing a slow death for rebirth – achieving a break from the past body and soul in order to build a new one. However, having the humility to recognise failures and then metamorphose into yet another stage of experimental evolution is all part of the process of perpetual metamorphosis.
Perpetual metamorphosis is not really new. Many leading firms have transformed their guts and core businesses several times over the last decades. IBM is a good example. It was incorporated in 1911 to manufacture and sell commercial scales and industrial time recorders, meat and cheese slicers, and of course, tabulators and punch cards. During the 1940s and 1950s it evolved into an office automation company. Looking at IBM today, it is more of a software company than anything else and one would be hard pressed to find traces of its original roots in its current businesses.
You were right – enough of virtuality – get real. Get focused on value delivery and build competencies for the same. Business remains business-as-usual! Products have to be produced, delivered, and serviced as always. But the foundation of the real is increasingly being enhanced by the virtual. It is not about virtual reality but about reality plus!
For some years, many believed that the Internet would create a virtual world where organisations and individuals would cohabit and interact in virtual ways. In fact, this has been the fundamental goal of virtual reality – how to create a virtual world which provides a ‘real-life-like’ representation for individuals and firms. However, our experiences over recent years have shown us that people still like to lead real lives. Technology cannot replace the real world but can certainly provide a more enhanced version of the real world that compensates for many of its limitations. Consider a simple example. When you visit a convention or a fair, you typically gain the most from meaningful conversations that you conduct with other interesting individuals whom you also meet at the fair. How many such conversations can you conduct over a day at a typical convention? Do not count the dozens of quick acquaintances that you make in such a setting. If you had extended conversations with about half-a-dozen interesting individuals, you have probably gained a lot from your day at the convention.
How many other such conversations were possible? Assuming that there were 500 individuals at the convention, there were at least 493 other one-to-one conversations that you potentially could have engaged in (and many more in groups of different individuals). Granted, you would probably not have wanted to have one-on-one conversations with all 493 other attendees, but there were probably certainly several other attendees that you missed connecting with. This happened because you were limited by time and due to the simple fact that it was probably not easy to deter- mine who among all 500 attendees were interesting individuals for you. Imagine a scenario where your personal digital assistant had some knowledge of your interests and could communicate with the digital assistants of other conference attendees.
Each digital assistant, with knowledge of the interests of its ‘owner’; could determine the degree of interest in initiating a conversation between its owner and other individuals. Your digital assistant could propose a set of relevant individuals to you and you could select and request your digital assistant to schedule appropriate meeting slots. Suddenly technology is enabling you to get more out of your time at the convention. Technology is not replacing the physical convention, but is creating new possibilities for you and helping you to get more out of the real world. As we noted before, it is not about virtual reality but about reality plus -reality enhanced by the power of technology.