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Transcript of From web strategy to virtual organisations
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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: [email protected]
© 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
© 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’?
© 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
© 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.
© 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
© 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
© 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.
© 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
© 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)
© 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
© 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
© 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
© 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
© 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
© 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?
© 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?
© 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?
© 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
© 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
© 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
© 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.
© 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.
© 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
© 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
© 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
© 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
© 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)
© 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
© 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
© 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!
© 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
© 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
© 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