Given the Internet’s power, a reasonable person might ask: Why can’t corporate managers simply deploy intranets to get at the resources they need and reap the rewards? Economics 101 tells us why: Intra-corporate solutions fail to capture the tonic of the marketplace.
Most of what companies do is not based on their core competencies. Instead, firms attempt to make do with some combination of in-house design, manufacturing, marketing, and other capabilities that are often not best-of-breed. Now with the Net, business functions and large projects can be reduced to smaller components and farmed out (often simultaneously) to more specialized companies around the world with virtually no transaction costs. This captures the enormous benefits brought on by the competitive environment. Suppliers strive to reduce costs and increase quality and innovation. They know there are other specialized workers and companies around the world keen to replace them.
In this environment, the management of partnering, corporate boundaries, distribution channels, industry restructuring, and strategic repositioning is suddenly much more complex. And there are new issues, too. It used to be that sellers simply established prices. No longer. Transparency across the value chain, customer power, and global real-time information make variable pricing mechanisms far more important.
The Net and Competitive Advantage
Professor Porter avers that “As all companies come to embrace Internet technology … the Internet itself will be neutralized as a source of [competitive] advantage.” The more robust competitive advantages, he says, will arise instead from traditional strengths such as unique products, strong personal service, relationships, and sustainable operational efficiencies.
This astonishing statement has two problems. First, effectively implementing the Internet is not a binary matter like turning a light switch on and off, buying a T1 line, or installing an off-the-shelf application. As we saw during the dot-com craze, there are 1,001 ways to employ the Net, many of which make no sense whatsoever. Moreover, there is a continuum of business transformation that occurs, from setting up a Web site, to implementing radical new business models, to transforming an entire industry. The Net enables many new applications, technologies, and business innovations. Firms that understand strategy in today’s more complex business environment will plumb deeper into the growing pool of possibilities.
Second, Professor Porter doesn’t see how the Net is precipitating profound changes to the structures and cultures of successful businesses. In fact, these changes enable companies to compete better — precisely through deploying resources that allow them to create better and unique products, stronger personal service, relationships, and sustainable operational efficiencies. These three core areas are ripe for business model innovation:
• Unique Products. IBM has shifted its mentality from vertically integrated fortress to b-web proponent and player. In its earlier incarnation, it reaped huge profits by locking customers on a treadmill of high-margin proprietary hardware and software. Today IBM trumpets Linux. This year it will invest more than $1 billion in the open source software, collaborating with its partners on the Net to develop, enhance, and market Linux-based applications and services. A typical initiative has IBM joining 18 other companies, such as Hewlett-Packard, Dell, and Intel, to underwrite a $24 million Open Source Development Lab solely to support projects already under way in the open source community.
Four years ago IBM decided its customer relationship management (CRM) software needed to be the best in the world. It mothballed a massive internal development effort and a $40 million revenue stream to partner with Siebel Systems. Today IBM’s CRM business is over $2 billion and one of its most profitable.
Critics of partnering, such as Michael Porter, condemn IBM’s decision to build a PC industry based on the Microsoft standard. Allegedly, this depressed industry profitability and hurt IBM. Not true. PCs became a commodity, leading to a vast explosion in the use of information technology and, ultimately, networking, which is the foundation on which the 21st-century IBM is based. Today, the revenue and earnings from IBM’s software and services dwarf all hardware sales, not just the sales of PCs.