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 / Third Quarter 2001 / Issue 24(originally published by Booz & Company)


Rethinking Strategy in a Networked World (or Why Michael Porter is Wrong about the Internet)

But would it have been sensible to judge the telephone as “not necessarily a blessing?” Overall it advanced the economy and benefited society enormously. It was a threat only to the firms that didn’t want to change. This becomes even more important when you consider that the telephone’s impact pales compared to the Net’s.

It is good that customers will be smarter, more active, and more powerful. Because of this, more real value will come to the fore, and fewer businesses will try to make garbage smell like roses. As businesses increasingly deliver what their customers value, it may turn out the capital businesses earn from customer relationships will dwarf the value of physical assets or money in the bank.

The years from 1997 to 2000 were the dog days of strategy. A get-rich-quick mentality distorted the assertion that “the Internet changes everything” (which is true) into the hope that “all things done on the Internet will prove lucrative” (which is rubbish). For a market economy, it was a shameful period. We saw egregious excesses and spectacular market capitalizations based on absurd or nonexistent business models. Momentum investing set in and massive damage was inevitable. Thankfully, those times are past, and sanity is returning. But what’s important to understand is that the headline-grabbing dot-com machinations, be they startups or spin-offs, were largely a distraction and represented only a sliver of the businesses trying to harness the power of the Internet.

Today, in the broad space between yesterday’s irrational exuberance and today’s equally irrational orthodoxy, there is a new frontier of business strategy. There are great new possibilities for creating economic value, customer value, shareholder value, and community value. Business strategy is an idea whose time has come once again. But new rules for competing require some fresh thinking. Business fundamentals, indeed. Fundamentalism, no.

Six Reasons There Is a New Economy

There is nothing fundamentally new about the way capitalism works. In capitalist countries, there is still private, not state, ownership of wealth, and the economy is based on a market. The traditional business cycle (overproduction, inventory gluts, tight employment markets, inflation) is alive and well. Profits are still the ultimate measure of success. Yet, there are characteristics of 21st-century capitalism that make it entirely different from its predecessors.

  1. New Infrastructure for Wealth Creation. Networks, specifically the Internet, are becoming the basis of economic activity and progress. This is not unlike how railroads, roads, the power grid, and the telephone supported the vertically integrated corporation.
  2. New Business Models. Instead of thinking of New Economy companies as Internet companies or dot-coms, think about them as companies that use the Internet infrastructure to create effective b-web–based business models. In this sense, the New Economy can include steel companies, banks, gas distribution companies, and furniture manufacturers, just as the old economy can include high-technology firms.
  3. New Sources of Value. In today’s economy, value is created by brain, not brawn, and most labor is knowledge work. Knowledge infuses itself throughout products and services. Michael Porter is right to say that intellectual capital has no intrinsic value. However, recent experiments in measuring knowledge-based assets suggest wealth contained in such assets can outstrip the wealth contained in physical assets and even bank accounts.
  4. New Ownership of Wealth. The silk-hatted tycoons owned the most wealth in industrial capitalism. Today 60 percent of Americans own stock, and the biggest shareholders are labor pension funds. Most economic growth comes from small companies; entrepreneurialism is everywhere.
  5. New Educational Models and Institutions. As lifelong learning becomes the norm, the services of private companies, not public institutions, are proliferating to meet growing demand. The model of pedagogy is also changing with the growth of interactive, self-paced, student-focused learning. Colleges are becoming nodes on communications networks, not just places where people go to study.
  6. New Governance. Industrial-age bureaucracies rose simultaneously with the vertically integrated corporation and mimicked its structure. New Net-driven governance structures, such as the Knowledge Network of Los Angeles, enable Internet-based cooperation between public and private organizations to deliver services for citizens. Expect to see similar changes in the democratic procedure (e.g., the voting processes) and the relationship between citizens and the state.

— D.T.

Reprint No. 01304

Don Tapscott, [email protected]
Don Tapscott  is president of the New Paradigm Learning Corporation and co-founder of Digital 4Sight, a company that designs and implements new business models for corporations. He is the coauthor, with David Ticoll and Alex Lowy, of Digital Capital: Harnessing the Power of Business Webs (Harvard Business School Press, 2000).
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  1. Don Tapscott, David Ticoll, and Alex Lowy, Digital Capital: Harnessing the Power of Business Webs, Harvard Business School Press, 2000
  2. Lawrence M. Fisher, “From Vertical to Virtual: How Nortel’s Supplier Alliances Extend the Enterprise,” s+b, First Quarter 2001; Click here.
  3. Keith Oliver, Anne Chung, and Nick Samanich, “Beyond Utopia: The Realist’s Guide to Internet-Enabled Supply Chain Management,” s+b, Second Quarter 2001; Click here.
  4. Michael E. Porter, “Strategy and the Internet,” Harvard Business Review, March 2001; Click here.
  5. David Ticoll, “Strategy and the Internet,” Letters to the Editor, Harvard Business Review, June 2001
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