For decades, the starting point for strategic thinking has been the stand-alone, vertically integrated corporation. These powerful companies do everything from soup to nuts and dominate the competitive landscape. We think of them as intrinsic to the economy, and they provide the context for theories about competitive strategy.
Companies prospered with this model of production because it was cheaper and simpler for them to perform the maximum number of functions in-house, rather than incurring the high cost, hassle, and risk of partnering with outsiders to execute vital business activities.
This is no longer true.
The CEO of Boeing Company says his company is no longer an aircraft manufacturer; it has become a systems integrator. Mercedes-Benz doesn’t build its own E Class cars; the Magna Corporation does the work, including final assembly. IBM has become a computer company that doesn’t really make its computers; its partner network does.
Indeed, we are seeing spectacular growth in contract manufacturing — with companies such as Celestica, Flextronics, and Solectron partnering with computer and telecommunications vendors to provide core electronics manufacturing services. Virtually overnight, the top five contract manufacturing firms have achieved aggregate revenues of more than $50 billion, averaging return on invested capital of more than 25 percent.
All of this is possible because of networking — specifically, the Internet. This deep, rich, publicly available communications technology is enabling a new business architecture that challenges the industrial-age corporate structure as the basis for competitive strategy. My colleagues at Digital 4Sight and I have studied hundreds of different examples of this architecture, what we call a business web, or b-web. We define it as any system composed of suppliers, distributors, service providers, infrastructure providers, and customers that uses the Internet for business communications and transactions. B-webs across industries, in which each business focuses on its core competence, are proving to be more supple, innovative, cost-efficient, and profitable than traditional vertically integrated competitors.
Established companies, not dot-coms, are the main beneficiaries of b-web thinking. Successful businesses such as Enron, Citibank, Herman Miller, Dow Chemical, American Airlines, Nortel Networks, and Schwab are now transforming themselves by partnering in areas that were previously unthinkable. The performance advantages of a b-web also explain why new Internet-based companies such as eBay, Travelocity, E-Trade, and Amazon are growing dramatically and competing well despite volatility in their stock prices. And b-webs explain why an upstart e-business entity like Napster is wreaking havoc in the music industry, and why open source software such as Linux poses a huge threat to Microsoft.
Profound changes to the deep structures of the corporation are under way. Yet most of this underlying restructuring has been either unnoticed or underappreciated by the financial media and business schools. They remain shell-shocked at the rise and collapse of the Nasdaq. And since “Nasdaq” and “New Economy” are so frequently (but incorrectly) used interchangeably, the Nasdaq collapse is often cited as proof the New Economy is a bogus notion (See “Six Reasons There Is a New Economy”). As for eBay, Amazon, Linux, Napster, and others, they are dismissed as Internet aberrations.
Michael Porter’s obituary for the New Economy, “Strategy and the Internet,” published in the March 2001 Harvard Business Review, is typical of this thinking. In it, Professor Porter exhorts business leaders to “return to fundamentals” and abandon thoughts of “new business models” or “e-business strategies” that he says encourage managers “to view their Internet operations in isolation from the rest of the business.”
When a politician makes a motherhood statement that receives wide support, pollsters say it “resonates with” the voters (i.e., it’s considered credible and is consistent with citizens’ values). Such is the appeal of Professor Porter’s article. Profitability still counts. True economic value, measured by sustained profits, is the arbiter of business success — not eyeballs, stickiness, hits, or even market share. To compete, companies must operate at a lower cost and/or command a premium price, either through operational effectiveness or by creating unique value for customers. Being a first-mover does not guarantee competitive advantage over the long haul.