From web strategy to virtual organisations New Strategies for the Network Economy

1. 1 From web strategy to virtual organisationsNew Strategies for the Network Economy Professor Feng Li The Business School University of Newcastle upon Tyne E-Mail: Feng.li@ncl.ac.uk

2. � 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

3. � Feng Li, 2006 3 From Web Strategy to Virtual Organisations The Web Strategy Deconstruction of integrated business models Unbundling the unbundled �When is Virtual Virtuous�?

4. � Feng Li, 2006 4 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

5. � Feng Li, 2006 5 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.

6. � Feng Li, 2006 6 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

7. � Feng Li, 2006 7 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

8. � Feng Li, 2006 8 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.

9. � Feng Li, 2006 9 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

10. � Feng Li, 2006 10 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)

11. � Feng Li, 2006 11 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

12. � Feng Li, 2006 12 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

13. � Feng Li, 2006 13 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

14. � Feng Li, 2006 14 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

15. � Feng Li, 2006 15 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

16. � Feng Li, 2006 16 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?

17. � Feng Li, 2006 17 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?

18. � Feng Li, 2006 18 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?

19. � Feng Li, 2006 19 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

20. � Feng Li, 2006 20 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

21. � Feng Li, 2006 21 Vertically Integrated Companies Discourage risk taking Well established procedures for resolving conflicts & coordinating activities Could tackle long-term objectives KEY - Balance Incentive & Control

22. � Feng Li, 2006 22 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.

23. � Feng Li, 2006 23 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.

24. � Feng Li, 2006 24 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

25. � Feng Li, 2006 25 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

26. � Feng Li, 2006 26 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

27. � Feng Li, 2006 27 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

28. � Feng Li, 2006 28 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)

29. � Feng Li, 2006 29 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

30. � Feng Li, 2006 30 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

31. � Feng Li, 2006 31 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!

32. � Feng Li, 2006 32 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

33. � Feng Li, 2006 33 WHAT IS E-BUSINESS?How the Internet Transforms Organisations Chapter 6. New Strategies for the Network Economy: Web Strategy, Business Unbundling and Virtual Organisations

34. � Feng Li, 2006 34 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