Spider vs Spider

8/14/2019 Spider vs Spider

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STRATEGY


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Are "webs" a new strategy for the information age?The key question: should you a dapt or shape?How much ofthe wealth do you share?M anaging the dynamics of increasing returns

John Hagel II I

I would like to thankEric Beinhocker.Dick Foster, Joe Heel.Will Lansing. TetsuyaMori, Mike Nevens,Patil Sagawa. OlivierSibony, Jayanl SInha,Chuck Stucki. andSoimi Subtamaniamlor their contributionsto the thinking on webstmlcgics. In addition.McKinsey's StrategyTheory Init iat iveand the MultimediaPractice have activelysupported thedevelopment of theideas presented inthis article. 1 havealso benefited from

W HAT DOES IT MEAN when oiie of th eworld 's biggest matiufacturers ofpersonal computers fitids it difficultto stay itidependent? In the old days, biggermeant more powerful - and often a highmarket multiple too. But now, just the oppositemay be true.Think of Netscape, a company that barely existed18 months ago, and even today num bers onlya couple of hundred employees. Is Netscapeovervalued? Perhaps. But if you consider howquickly it has mobilized other eompanies to sup-port and implement its technology, you begin tosee why the excitement may be justified.Netscape exemplifies a new form of industrial


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Webs emerge from the turmoil wrought by uncertainty and change. Theyspread risk, increase flexibility, enhance an industry's innovation capa-bility, and reduce complexity for individual participants. They arecharacteristically the work of a single architect or shaper, which (unlike amonopolist) maximizes the size of the web by givitig away value lo othercompanies. The m ore companies - and customers - that join, the strongerthe web becomes.Webs create powerful new ways to think about strategy, risk, technologicaluncertainty, and innovation. They help us see why the virtual company maybe more than just an abstract concept. They influence management focus,organizational structure, perfortnanee measurement, and informationsystems. They may even represent the opening salvo in the transition frotnindustrial-age to information-age strategies.

What a re webs?An econom ic w eb is a set of companies that use a common architectureto deliver independent elements of an overall value proposition that growsstronger as more companies jointhe set. Before a web can form, two Webs may rep resen t theconditions must be present: a tech- ^.^.^^ ;^ ,|^g transitionnolog.cal standard and increas ing ,._. ^ ind us trial-a ge toreturns." The standard reduces risk inform atiotvage strateg iesby allowtng cornpanies to makeirreversible investment decisions inthe face of technological uncertainty. The increasing returns create amutual dependence that strengthens the web by drawing in more and morecustomers atid producers.Webs are not alliances, however. They operate without any formal relation-ships between participants. Each company in a web is wholly independent;only the pursuit of economic seif^-interest drives it into web-likc behavior. Itprices, markets, and sells its products autonomously


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In such industries as multimedia, where companies are dealing with morethan a dozen major technological discontinuities at once, it is only naturalfor this latest evolution in industrial dynamics to have occurred. But websare by no means confined to technology providers, as we shall see.Within economic webs, technology webs organize around specific tech-nology platforms. One prominent example of a technology web is thedesktop computing business. Back in the 1960s, mainframe computercompanies like IBM exhibited strong vertical integration and provided totalsolutions for large business customers. In the desktop computing businessof the 1980s, by contrast, highly specialized participants acted bothindependently and interdependently to assemble a complex package oftechnology components and services.Some companies manufactured microprocessors and semiconductors;others assetnbled printed circuit boards or CPUs and peripherals. Somedeveloped system software or software tools; others, specific applicationsoftware. Yet others focused on integrating cotnputer systems, supplyingconsulting or training services, or offering after-sales support. Theirrelationships with one another were cotnplex and fiuid, but they were unitedin their quest to provide users with desktop computing capability thatcotnpcted with more traditional mainframe and mid-range solutions.Online services represent a more recent example of a technology web. WhenProdigy entered this field in the late 1980s, it had to develop a verticallyintegrated busitiess that included not just content but also network designand operation, server design and operation, and billing and networkoperating systetns. Later, the industry unbutidled rapidly as specializedproviders emerged to supply virtually every element of an online servicetechnology platform. The growth ofthis web has lowered barriers to entry;now. new competitors can concentrate oncontent creatton or packagmg, and source , u J * i.- J-,. . . I . r .L .- In such industries as multimedia,the remaining elements from other parti- , ,. .,

. . , . " , '^ companies are dealing with morec i p an t s in the web. *u J * i. I I' than a dozen major technological


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Its early success stemmed from its ability to establish MS-DOS as the defacto operating system for PCs. An alliance with another leader, Intel, gaveit access to a further leverage point, the microprocessor. The operatingsystem and microprocessor represent leverage points because the func-tionality of the core technology influences the evolution of broader desktopcomputing architectures, thereby shaping the investments made by otherweb participants. The alliance with Intel also helped Microsoft to accelerate

standards adoption and strengthened. . - ft -ii J . I the architectural leadership oftheMicrosoft will undertake niaior , . *, , , 4 two companies,investments with long lead ^

times in order to pursue its . . . c , , , ,, ,1 , . . . L. i,u ^ Microsoft s technology focus hasleadership in web architecture , . . . . . . . .always straddled the product andarchitectural levels. The company

must offer strong products to succeed - but success is defined more by theopportunity to shape overall architectures than by the commercial fortunesof an individual product. For this reason, Microsoft tries to get its coretechnologies adopted as de facto standards. Its marketing tends to center ondifferentiating the architecture ofthe overall value web from competingwebs such as Apple's, rather than on the attributes of individual products.This architectural approach leads to a long-term investment strategy; if anopportunity arises to establish or strengthen architectural leadership,Microsoft will undertake major investments with long lead times in orderto pursue it.By contrast, Compaq, at least within its desktop business, has followed anadaptation strategy of exploiting near-term product opportunities withinthe Microsoft/Intel value web. In forming alliances, Compaq aims to boostits responsiveness by improving its access to technologies or markets. Itmaintains a sharp focus on product excellence, and its marketing accord-ingly stresses differentiation at the product level. Rather than trying to definenew standards, it concentrates on promoting product standards within theestablished architecture ofthe web. In linewith this overall strategy, Compaq invests ^ . - i

.^ . , ^ u I Compaq invests with an eye to


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Netscape has pursued an aggressive shaping strategy by commercializing aseries of technologies designed to enable commerce on the Internet.Around these core technologies, it has mobilized a web of other companiesthat are developing complementary technologies to establish a broadplatform for electronic commerce. These companies recognize the valueof de facto standards on the Internet andr: 11 believe that Netscape will be able to shapeEven small companies , ,- ,,, th em success iu l ly .can now pursue shapmg ^strategies in web-based ^ . . . . .Companies supporting or implementingenvironm ents r-1- => r- =Netscape technology include such majorardware providers as Sun. Silicon Graphics,DEC, IBM, and Apple, and such network providers as MCI and AT&T.Leading content providers are also adopting Netscape server software as aplatform for their web sites on the Internet. While the success of thisstrategy has yet to be proven, Netscape's recent public offering indicatedthat it has been able to generate over $2 billion in shareholder value.Success factors for shapersWithin technology webs, the success of shaping strategics ultimately hingeson four conditions: O w ne rship of a key platform techno logy that shapes broader archi-tectures and provides the basis for longer-term lock-in. Take IBM's role inthe emergence ofthe PC value web. By integrating numerous off-the-shelftechnologies into a new desktop computing platform and helping tomobilize industry participants behind it. IBM created an attractive alter-native standard. But it failed to retain ownership of a key platformtechnology within the new architecture, and thus lost its ability to shape theevolution ofthe value web. Instead. Microsoft and Intel seized architecturalcontrol and captured a disproportionate share of value. U nb un dlin g of the bu sin ess to expand opportunities for other webparticipants. Consider Novell's decision in the late 1980s to divest its local


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Reliance on economic incentives, rather than alliance structures orcontractual relationships, to mobilize o ther web participants. Apple was oneof the early creators of a value web. It established an entirely new categoryof employees known as "evangelists." Though not salespeople, they werecharged with telling companies about the business opportunities generatedby the Apple II. This simple and relatively cheap product could be easilyexpanded through add-in boards or peripherals, and enhanced throughapplication software. Through the efforts ofthe evangelists, many newbusinesses appeared in such areas as board assembly, peripheralmanufacturing, software development, retail distribution, value-addedreselling, technical consulting, and after-sales support. Few had directcontractual relationships with Apple; indeed, the company did not evenknow the names of many of them. But the pursuit of a common set ofeconomic incentives defined by Apple's product platform united them all. Active management of increasing returns dynamics to accelerate webgrowth and promote customer and participant lock-in. Again, Netscapeprovides a useful example. Its first product was a browser that built on theestablished Mosaic technology developed at the University of Illinois byone of the company's founders. The browseralso exp loaed the r,ch resources already Netsc ape's con troversialavailable: on the Internet. Leveraging ex.s- ^ ^f ^- - ^ting technology and infrastructure allowed . ^^^,^ ^^^ ^ ^Netscape to enter the market quickly and its ^^^^^ ^^ ^^^^ ^controversial strategy oi givmg the browseraway soon won it a market share of over 75percent. All these steps encouraged rapid customer adoption and helpedconvince industry participants including AT&T and News Corporation toadopt the core technology. The resulting momentum hastened Netscape'sentry into the web server software business and positioned it at the centerof a powerful new value web emerging on the Interne t.Web shapers can reap enormous rewards, but the source ofthis wealth isquite different from that of traditional monopolist returns. These tend to begenerated by powerful economies of scale that accrue at the firm level.


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lies at the level not ofthe firm, but ofthe web itself. Of course, the webshaper must own a technology component that allows it to shape thearchitecture defining the broader web, but the value of that componentdepends on the size and growth ofthe web.Success factors for adaptersFor those inelined to pursue adaptation strategies in technology webssuccess depends on three factors: Early participation in winning value webs. Aldus was able to build asizable software business by recognizing at an early stage the value oftheMacintosh computer as a platform for desktop publishing. It established apreemptive position in this attractive market and was able to form a closerelationship with Apple that gave itinsights into future architectural -rt. i r*u * i l, J I he value ot the technology^ ' com po nen t, and thus the abilityto extract high returns, depends Aggressive competition for , ^u r*i- i... ..L- .1. . ._ . .. on the grow th of th e webshare within the value web. In the1980s, Compaq emerged as one ofthe early participants in the PC value web, but it lost sight of theimperative of competing for share. A decade later, having been turnedaround by new senior management, the company regained its focus onrelative share position and became highly profitable once more. Having aleading share in the value web allowed Compaq to strengthen itsrelationships with Intel and Microsoft and improved its access toinformation generated within the web. Linking and leveraging (or diversifying) position. Value web partici-pants can build sustainable long-term positions by tightly linking theirstrategies to those of the web shapers, and leveraging this base intorelated areas. Alternatively, they can develop straddling positions acrossseveral value webs to pro tect against unexpected shifts in the strategies ofweb shapers or in the fortunes of the webs themselves. Com paq pursues alinking strategy through its close partnership with Microsoft in such


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leverage eonferred by increasing returns dynamics, and through enhancedflexibility Innovation is promoted through distributed information flows.The emergence of a technology web enables all participants to unbundletheir businesses and focus only on activities where they can offer distinctivevalue. The web promotes specialization by gathering many players around acommon technology platform. If a given company is not distinctive in aparticular business activity, several others will probably be able to performit instead. This safety net reduces risk by cutting overall investmentrequirements, by directing investment toward the areas most likely tosucceed, and by encouraging the supply of bottleneck components bymultiple producers.Technology webs' ability to provide such a safety net - and indeed, eventheir very existence - is closely related to the advent of open architectureswith widely available interface specifications, like the Windows/Intelcomputing platform and the Internet. The proprietary architectures of themainframe computer platforms of the 1960s, and even the early mid-rangeplatforms designed by DEC and Wang, did not allow technology webs toform and imposed major internal development burdens on the companydefining the architecture. While value creation could be enormous if theproprietary architecture gained widespread adoption, the risk was equallyhuge because of the concentrated investment required to make thearchitecture successful.Technology webs also limit risk by unleashing powerful drivers ofincreasing returns that help to create early advantage and reducevulnerability. They do so by accelerating and extending investment aroundtechnology platforms, thereby speeding customer adoption. Apple'sevangelists, for example, succeeded in mobilizing far more investmentaround the Apple II platform in the year or two after its introduction thanthe company could ever have mustered by itself With risk shared betweenmany players, more investment got madesooner. In turn , this investment boosted the , . , . - . r *ii ,c ^ r .- ,-. J . W ide ad op t ion dro ve a fur ther


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powerful platform for web formation. The Lisa and the Macintosh weremore self-contained, with only limited expansion slots and interfaces forperipherals. At about the same time, IBM and its partners were striving toshape a value web around their competing architecture. Apple's change ofapproach gave IBM the chance to spread the word about opportunitiesto design add-in boards and peripherals for its own platform. Applesubsequently introduced much more open CPUs in its Macintosh line, butit had lost considerable momentum.Another way in which webs limit risk is by enhancing the flexibility ofparticipants. Companies in a web enjoy expanding sourcing and distribution

options, while their fixed investment andCompanies in a web expand f " '


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term profitability in the late 1980s and early 1990s. Other participants in theweb either shifted to straddle the Macintosh and PC value webs, thuseroding the differences between them, or migrated completely to the PCweb. By choosing not to license its Macintosh operating system. Apple wasable to capture the lion's share of the revenues in its web, but the web itself-at least in terms of market share - began to shrink.In contrast, Microsoft captures only about 4 percent ofthe revenues in itsweb, but that web has grown to a size of more than $66 billion. Striking theright balance between maximizing value for the web and for the enterpriseis one of the main strategic challenges facing web shapers, and one of thechief concerns of other web participants.Web strategies turn traditional strategic thinking on its head in other ways,too. The conventional approach dictates that firms first define their ownstrategy and then negotiate alliances that are consistent with this strategyand advance its aims. Web strategy asserts that the two basic choicesconfronting senior management are which webs to participate in (or toform), and what role (shaper or adapter) to play within them. Once thesechoices have been made, the firm's strategy comes into focus, ln otherwords, firm strategy follows web strategy.In addition, web strategies have a profound impact on organization,especially for companies seeking to be shapers. Performance measurementfor managers, for example, needs toT, * * r J c * * expand to place much grea terT he con text ror detitim e strategy ^ , . , ,. '^. ,- . * . . - emphasis on web periormance.exp and s rrom max imizing ^ ^va lue for the en te rp ri se to ^- -, , , . 1 r *u u Similarly, aspiring shapers will needm axim izing value (or the web , , * , , .,,to develop the skills to createappropriate economic incentives forother web participants, to manage increasing returns dynamics, and tomarket the web. These skills include understanding the business economicsof potential participants and knowing what is likely to motivate them tojoin the web. Product design must be conceived not only in terms of the


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the enormous challenge of reengineering IT platforms to integrate an entireenterprise, it will encounter the even more daunting task of integratingsystems aeross the web. Since value webs tend toconcentrate informationflows in the key leverage points occupied by web shapers (indeed, this is oneofthe main advantages of being a shaper), other participants will need tobe proactive in extracting and interpreting this information. For those thatsucceed, there will be enormous scope for learning.Where else are web strategies relevant?This article has focused on technology webs in just one business environ-ment: multimedia. Other forms of web are emerging that are likely to be famore relevant to non-technology providers.New technologies are enabling the formation of powerful customer w ebsfor instance. Unlike technology webs, which focus on technology archi-tectures, customer webs are organized around the behavior and spendingpatterns of specific target customersegments. Whereas technology webs /- * . j . . . . . I- c Customer webs are organizedare shaped by the o wn e r sh i p of a J .i i_ i_ j

y ^c . \. y u around the behavior andplatlorm technology such as an ,- ^ r. .^^ ,. , ^ . spending patterns of Specificoperating system or microprocessor. \ * . .^ , . , , .1. target customer segmentscustomer webs revolve around the ^ ^ownership of customer relation-ships. Owning a platform technology offers the opportunity to establish a defacto standard; owning customer relationships provides the chance to builda unique customer database.Such a database creates the necessary economic incentives to mobilizother web participants interested in reaching the same customer segmentWhen a web shaper provides access to its database, it develops an evenricher profile of its target customers, and sets in motion a powerfulincreasing returns dynamic.Customer webs already exist today, albeit in a rudimentary form. Thanks to


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shapers will need to become adept at mobilizing a cluster of otherparticipants that seek access to customer profiles.Market webs represent a third form of web. Unlike customer webs, whichfocus on the behavior and preferences of an individual customer segment,market webs are organized around a specific type of transaction. Thecustomer web shaper wants to develop the broadest possible relationshipwith its chosen segment, and to serve these customers across a widerange of needs. The market web shaper tries to build the deepest possiblerelationship with all the buyers and sellersinvolved in a particular kind of market ^. , , , , , ,

The market web shaper buildstransaction. , , . , . , ,, ,

deep relationships with all theA ^ \ * u u K* f 1 buyers and sellers involved in aA market web shaper might, tor example, . t t . c(. , |,- . . ^ particular kind of transactionlocus on buildmg a compelhng environment __^for the formation and evolution of a marketin residential mortgages. Its objective would be to assemble a critical massof buyers and sellers and serve all their needs in relation to the purchaseand sale of residential mortgages. However, it would take little or no interestin the broader needs of these buyers and sellers beyond the transactioncategory that defines the market web. While customer web shapers exerttheir influence by owning unique customer profiles and databases, marketweb shapers exert theirs by controlling a physical or virtual space wherebuyers and sellers come to execute a specific transaction.Once again, market webs exist so far only in a rudimentary form. The NewYork Stock Exchange, with its critical mass of buyers and sellers, representsan early example. The efforts of financial information providers such asReuters to offer certain kinds of electronic trading capability illustratethe formation of market webs on electronic networks. In fact, as commonelectronic networks that are "commerce-enabled" become increasinglyavailable, opportunities for market web formation may well multiply.

Consider Microsoft; adept at shaping a technology value web. it is nowtrying to leverage its leadership position to build related technology value


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Not only is there potential for other forms of web, but webs are likely tobecome important in markets beyond multimedia. We believe tbat webs willform in any environment characterized by rapid and profound change, bythe prospect of increasing returns that are appropriable by consumers, andby the need for providers and consumers to make large and irreversiblecommitments of resourees. Webs already appear to be a notable feature offashion dominated markets. They can also be expected to play a growingrole in markets that are experiencing major discontinuities, such as health-care and financial services.

V -V -VIn multimedia, at least, webs are becoming a prominent new dimension incompetition. They can make or break a company in this rapidly changingworld, yet t radi t ional models of strategy offer l i t t le help with decisions

about when and how to participate in them.. . , , * 1 I So m e of the most exper t p layers inWebs represen t a whole new way , . j . - . . * - i

, . . - , , . J . ' mul t imedia - companies l ike Mierosor t ,o l th inking about lndusl ry ^ v, j v, . . -.- 1 - , . . Compaq, Novell , and Netscape - intuitivelys t ruc tu re , r e l a t ionsh ips be tween K M ^ I I IJ , . p u r su e web strategies. Survival , let alonecompanies, and value creation ^ ^ , ,, . ._ success, for many others will depend onacquiring a new set of strategy tools to assist

senior management as it tries to navigate through major discontinuities. Thelessons learned by multimedia companies are likely to grow ever morerelevant to players in many other industries Iraught with technological andregulatory upheavals.Webs represent a whole new way of thinking about industry structure,relationships between companies, and value creation. Though notmonopolies, they are just as powerful. For the rest ofthis decade perhapsmuch longer - we shall see industries being shaped by competing webs thatrelentlessly devour one another. O


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