Waking up in the networked era
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    Waking up in the networked era Waking up in the networked era Document Transcript

    • Large Tagline Waking Up to the Network Era K/O version
    • Large Tagline K/O version ENVISIONING new ways to compete and win EXPLORING new theories to guide practice EXAMINING new logics of value creation and capture Intelligence at the Edge Strategic Experimentation The Connected Home Winning in the Network Era Platform Economics Real Options Relationship Networks Architectural Control Points Visualization Sensory Networks Expressive Data Models Strategy Convergence Economics Technology Organizational Behavior Background Illustration: Relationships among firms in the software ecosystem
    • Waking Up to the Network Era No Tagline Background N. Venkatraman Rip Van Wrinkle, who worked as a strategy consultant for ten years David J. McGrath, Jr. Small Tagline Professor in Management following business school, woke up after being in a coma for two Chairman, Information decades. Confounding the expectations of medical experts, Rip, now Systems Department, (venkat@bu.edu) 58 years old, was alert, although understandably confused. Looking out the window from the hospital, he noticed the telltale signs of Boston University autumn—leaves turning to red and gold. His doctor had told him he Large Tagline School of Management 595 Commonwealth Ave. was in a suburb of Boston. But where had the missing years gone, Boston, MA 02215 and what had happened during his absence? Now that he was awake, Rip was eager to reconnect with friends K/O version and family and to venture out into the world. Following a battery of tests that found him in remarkably good health, Rip was released from the hospital to the care of his longtime friend and colleague, Bob Brown, whom he had known since graduate school and with whom he shared an office prior to the mishap that led to the coma. Bob, now a senior partner in a global consulting firm and living with his wife and two teenage children, had generously offered to help Rip with his re-entry into the world. As Rip traveled around town during the first few days, he couldn’t help but notice how much everyday activities had changed. With each interaction, he wondered how technology and business logic had shifted during the years he spent in a coma. © BUILDE, 2004 Acknowledgements I acknowledge the valuable assistance of Bruce Posner in the preparation of this piece. John C. Henderson, Nalin Kulatilaka, Bala Iyer, Jim Ciriello and Tara Venkatraman provided useful comments and suggestions. 1
    • “Cell phone?” Rip asked. Bob reached into his own pocket and showed him what a cell phone looked like. BRAVE NEW WORLD As Rip prepared to leave the hospital, he asked the attending nurse when he had to come back for his next appointment. “Actually,” the nurse said. “We don’t need to see you for awhile. We can keep an eye on you remotely. Just wear this sensor- packed vest for at least three hours a day, and someone will be able to monitor how you’re doing through the network. There is a team of specialists based in Bangalore, India, that keeps an eye on patients 24 hours a day. Your vest can transmit your vital signs wirelessly. If we identify anything of concern, we’ll call you on your cell phone.” “Cell phone?” Rip asked. Bob reached into his own pocket and showed him what a cell phone looked like. “We’ll need to get you one of these things,” Bob told him. “Nowadays, practically everyone over the age of 12 has a phone, which they keep with them.” He offered to run his friend by a phone store on the way home.
    • What was the best way for companies to price music? Who would emerge as the leading music aggregators? Will music companies succeed in clamping down on the illegal copying of music? A REVOLUTION IN MUSIC As they entered the front door of Bob’s house, Bob’s teenage look on Rip’s face, Bob gave him a brief tutorial on the basics daughter, Sara, was lying on the sofa listening to music on her of digital technology and explained how digital music had headphones. In her hand was what looked like a radio about taken over the music industry. the size of a small deck of cards. Bob motioned for Sara to “So where do people buy their music—and who makes come over and say hello to his old friend Rip. money on it?” Rip asked. Before his coma, Rip recalled, everyone listened to music “Good question,” said Bob. “The technology has reached a on the radio or played records on turntables. But things were point where what’s possible for consumers to do from a tech- changing fast even then: increasingly, music was moving to nical standpoint isn’t necessarily what’s desirable for the cassette tapes, boom boxes were becoming the rage, and recording companies. In fact, there are lots of people out Sony had just introduced the Walkman, which enabled users there who don’t even buy music anymore—they copy it from to play music anywhere they wanted. friends or download it from the Internet.” “Other than the new colors and the sleek style, it seems Rip wondered how the key players in the music industry that little radios haven’t changed much in the past 20 years,” that he had known were doing in the digital and network he observed. transformation. How would this shift settle down? Would “Actually,” Sara replied, “this isn’t a radio—it’s an iPod. The people own music and hold it physically (like they did with music I’m listening to isn’t from the radio—it’s stored inside. records) or would they pay to access the music they liked In fact, this little thing contains nearly all of my favorite from remote locations over the network? What was the best songs—more than 1,000 in total.” way for companies to price music? Who would emerge as the Rip did the calculation in his head: 1,000 songs was some- leading music aggregators? Will music companies succeed in where around 100 albums (more than the entire record clamping down on the illegal copying of music? collection he remembered having). Noticing the perplexed 3
    • ph on e DIGITAL IMAGES TO GO Rip and Bob then headed into the kitchen to get something to know what she was doing. “Excuse me,” he said. “I’m drink, Rip hoping that food hadn’t changed much. On the wondering if that is a camera or a phone?” kitchen table, Rip noticed a small camera. It reminded him of “It’s my new camera-phone,” the woman replied. “It looks the 35 mm point-and-shoot camera his grandparents gave him like a phone but it has a little camera built into it. It can take as a high school graduation gift more than 30 years ago—only pictures and a few seconds of video too! I just sent a photo of smaller. He imagined he still had some prints from his first roll myself to my sister in Dallas and to my boyfriend in Phoenix.” of film sitting in a shoebox somewhere. Rip was fascinated. “And, is that all it can do?” Given how much the music world had changed, Rip couldn’t “No, it can also play music, has my address book and a diary help wondering about photography. Did people still process for my appointments.” rolls of film at the corner drug store and then mail their favorite The woman noted that she was able to save the digital prints to relatives? Or was there some new way of recording photos from her phone on her computer, along with other and sharing images? Well, later that day, Rip saw that, for many photos. Rip thanked her for her time, and he proceeded to consumers, photography has evolved at least as much as music. think about the impact such a device might have on the Rip had been sitting on a wooden bench downtown, sipping photography industry. What would happen to companies like iced tea while waiting for Bob to return from a meeting. Kodak that depended on film and processing? Would people Nearby, he noticed a woman holding what looked to be a still print photos or store them and view them on electronic compact camera away from her face, then watched her as she displays? Was there already an industry standard as there had used her index finger to push buttons. Cradling the device in been for 35 mm, or were battles for standards currently her left hand, she proceeded to fiddle with more buttons before underway? And how could companies go about capturing lifting it to her ear, laughing and talking with excitement. value in this network? When she finished talking, Rip approached her, curious to camera pl ayer mp3
    • WHAT WOULD HAPPEN TO COMPANIES LIKE KODAK THAT DEPENDED ON FILM AND PROCESSING? WOULD PEOPLE STILL PRINT PHOTOS OR STORE THEM AND VIEW THEM ON ELECTRONIC DISPLAYS? WAS THERE ALREADY AN INDUSTRY STANDARD AS THERE HAD BEEN FOR 35 MM, OR WERE BATTLES FOR STANDARDS CURRENTLY UNDERWAY? AND HOW COULD COMPANIES GO ABOUT CAPTURING VALUE IN THIS NETWORK? diary ad dre ss boo k 5
    • THE BATTLE FOR THE KITCHEN Bob’s wife, Samantha, was the manager of a large super- tage of the capabilities RFIDs offer. For example, they market on the west side of town. After Bob got out of his may want to keep track of the products they bring home meeting, he and Rip decided to stop by her store. so they know when they are running low on something. Samantha was thrilled to see Rip again and she offered to They may want us to help them plan healthy meals or take him on a tour of her market to show him how super- monitor their dietary requirements. Clearly, there will be markets had changed. a segment of people that views this as an incredible inva- She began by highlighting some of the experiments sion of privacy. But others are going to see it as a great that were underway at the store. In one, customers step forward.” shopped with an electronic “shopping buddy,” which “Is RFID tagging happening only with packaged accompanied them through the store. Each cart had a goods?” Rip inquired. scanner, and when customers showed their ID, it down- “No, we’re starting to see it in apparel, electronics, you loaded their information. A screen showed them what name it,” answered Samantha. “It’s starting to change the they bought the last time, where items were located, and whole supply chain process. And we’re talking about also what was on sale that day. The information display more than just products. People use little tags to speed up allowed the store to customize the shopping experience payments at the gas station, and they use them to pay for each shopper. their tolls on the highway.” Rip couldn’t help thinking about George Orwell’s Samantha led Rip into her crowded office. Written on 1984, which he had read as a teenager. Was the super- the white board were notes from a recent brainstorming market becoming the Big Brother that Orwell predicted? session: “When Homes are Connected…What Should He turned to Samantha and asked: “Does this mean We Do?” The discussion, she said, had explored the that you store records of what customers buy? And you future shape and role of supermarkets. keep it the way people hold onto their tax records?” “Everyday, families all across the country are asking a “In a word, yes,” said Samantha. “Marketing is useless familiar question: ‘What’s for dinner?’ We need to figure without good detailed information. Otherwise, you out what supermarkets can do to help customers answer don’t know how to price or promote your products. It’s that question. Do we do what we’ve always done and called data mining. We have become very good at gath- simply sell groceries? Or do we redefine what we do and ering and using the data in our detailed marketing and become more active, for example, in helping families promotion activities.” plan meals? Some people think that we should move As Samantha led Rip through the frozen food aisle, she further into the information business and provide described another experiment that was aimed at helping customers with tools for keeping track of what they eat supermarkets and other businesses upgrade their logistics and where they eat.” and inventory control capabilities. She held up a little elec- Samantha paused, then continued: “I guess the real tronic tag the size of a fingernail. “It’s called RFID—for question is, who’s going to control the information radio frequency identification,” she said. “Think of it as network in the kitchen? Based on our research, the the next generation of bar codes. Once you stick a little tag company that controls this could become the Wal-Mart like this on a container or a product, it can send out a radio of the network era.” signal with all the relevant information—product type, Rip was trying to grasp the impact of Samantha’s expiration date, manufacturer, and whatever else we want comments. How significantly did the tags and smart to capture. You can keep track of where your inventory is shopping devices enhance the capabilities of consumer and when you need to reorder. You can even track how packaged goods companies? Were big brand companies your customers use products once they’ve left the store.” like P&G and Kraft learning to use information to “This sounds an awful lot like Big Brother,” elevate their marketing to the next level or were they commented Rip. being left behind? Were supermarkets sharing rich data “Obviously,” Samantha conceded. “Customers will with manufacturers or were they mostly using it to exer- have to buy into the process. There are a lot of issues cise their bargaining power? Was customer privacy about privacy that we have not fully thought through yet. becoming a thing of the past? If so, to what extent But it could be that customers will want to take advan- would customers really care?
    • How significantly did the tags and smart shopping devices enhance the capabilities of consumer packaged goods companies? Were big brand companies like P&G and Kraft learning to use information to elevate their marketing to the next level or were they being left behind? Were supermarkets sharing rich data with manufacturers or were they mostly using it to exercise their bargaining power? 7
    • WHY COULDN’T DRIVERS CONNECTED TO THE NETWORK SHARE REAL-TIME RETHINKING THE CAR Rip’s mind was reeling. He was trying to make sense of the station?” Bob asked. Within seconds, the woman provided things he had seen and experienced so far: the medical moni- directions to a Mobil station a little over a mile away. toring system that was keeping an eye on his condition, the Rip was flabbergasted. “What’s going on?” he asked. “How new worlds of music and photography, and now the changes does she know where you are? And where is she located?” in supermarkets and packaged goods. Bob explained the idea of OnStar, that it was owned by As he climbed into the front seat of Bob’s car, he studied the General Motors but offered as a subscription service through dashboard intently. He was half-expecting to notice something some other auto companies as well.” radically different. In appearance, however, it was all too As he filled the car with gas, Bob noted some of the other familiar: the speedometer was much as he remembered it; the services that were available. “If we get into an accident and the gas gauge was in the same spot. But as they headed home, Bob airbag deploys, OnStar will call an ambulance if they can’t began demonstrating some of the new features. establish a voice contact with the driver or passengers. He pressed a button on the dashboard. Within seconds, they Through global satellite positioning, they’ll know where the heard a female voice: “Good afternoon, Mr. Brown. How can car is located,” he noted. “Of course, this could also come in we help you?” handy if the car is stolen. And if I lose my car keys, they can “Could you please direct me to the nearest Mobil gas unlock this car remotely. They can also investigate why the
    • INFORMATION ABOUT TRAFFIC AND ROAD CONDITIONS WITH OTHER DRIVERS? ‘check engine’ light comes on and tell me if the problem is “They have become nodes on this network.” serious enough to stop driving.” “That’s a great way to think of it,” said Bob. “And everyday, Bob noted that the scope of network services for car owners more and more nodes are getting connected.” didn’t end there. Just last week he had received an e-mail from As Rip considered the implications, he wondered if there an insurance company offering a new product that was priced were more possibilities to consider. For example, why couldn’t in part on how fast you drove and where you went, based on drivers connected to the network share real-time information data from global positioning satellites. Again, Rip’s mind went about traffic and road conditions with other drivers? Could the back to Orwell, and he wondered if anyone was currently network enhance safety and prevent accidents? Were there tracking their driving. Was there value in knowing a person’s opportunities for car companies to make more money in serv- driving routes and patterns over time? ices than in manufacturing? Bob said he thought that the telematics companies were Rip’s mind went back to music, photography and grocery sensitive to privacy issues and pointed out that customers still store settings. To what extent was standard setting important had the option of deciding whether or not to sign up for these in the new networks, and which players would be instrumental network-based services. in setting them? “So cars don’t operate solo anymore,” Rip commented. 9
    • PLAYING GAMES ACROSS TIME AND SPACE Returning home, Bob and Rip entered the family room, where Bob’s 13-year- old son, Skip, was playing a videogame on his Xbox console. Rip watched him play for a few minutes and was deeply impressed. Not only were the video images of Formula 1 racecars eerily realistic but the characters and landscapes seemed life-like as well. In a burst of excitement, Skip jumped up from the sofa and waved his fist at the screen. “Nice try, Brad, “ he yelled, “but now I’m going to run you off the road!” Rip turned to Bob. “Who is Brad?” he asked. “Brad is an Australian boy who Skip plays video games with,” offered Bob. “They’ve never actually met, but thanks to broadband they are able to communicate and play games in real time over the Internet.” Rip found the idea of playing with someone on the other side of the world amazing. When he was Skip’s age, his world revolved around the local kids with whom he rode the school bus and played sports. It got Rip thinking: What were the implications of eliminating distance as a constraint? In what other settings could the same principles apply, and who could reap the benefits? As they watched Skip play, Bob noted that the maker of Xbox was Microsoft, the same company that over the past 20 years had come to domi- nate the operating systems of more than 90 percent of the world’s personal computers. By controlling the operating system, he explained, Microsoft had staked out a lucrative position in the industry value chain; now, it was maneu- vering to establish a dominant position in video games. After a quiet dinner with Bob and his family, Rip spent the rest of the evening browsing through a box of magazines, books, and papers Bob had pulled together for him. Included in the mix was material that probed three forces of change in recent times: the declining cost of computer processing, the increase in connectivity, and the explosion of bandwidth. Bob was leaving on a business trip to China the next morning, but he suggested that Rip spend the next 10 days catching up on reading and relaxing. If Rip ran out of things to read, Bob noted, there was more in his study. “You’ve had an exciting day,” Bob told Rip, “but don’t burn yourself out. And please stay in our guest cottage. When I get back from my trip, let’s block out some time to go over your impressions. Why don’t we plan to meet at my office two weeks from today?” Before going to bed, Rip unplugged the PDA from his health-shirt and sent off his latest health data.
    • THE NEW BEGINNING 11
    • THE DAWN OF A NETWORK ERA Bob had a returned after a successful business trip to China. He “My third theme,” Rip continued, “is about key capabili- now looked forward to his meeting with Rip. He asked a few ties and relationships. In many instances, the old capabilities colleagues to join him, billing it as an opportunity to hear an that companies relied on are no longer enough. It doesn’t interesting perspective on the changes that were sweeping matter what business you’re in—today, no business is an island. their world from Rip—“one of the brightest people I know”. Managers need to find ways to link what they do strategically As Rip entered the meeting room, he seemed relaxed and with what other businesses do—not just suppliers but perhaps confident. He had spent the past week holed up liked a grad- even competitors. They need to build strong relationships with uate student preparing for his presentation and defense of his customers too. These linkages offer important opportunities. thesis. He dumped a large stack of papers on the table and This is true not only in technology-based industries, where my began talking with Bob and his colleagues. hardware has to work with your software or my game has to “I’ve told them a little bit about you,” Bob said. “We’d work with your console. As I learned during my visit to the all love to hear what you’ve noticed since you’ve been back supermarket, it really needs to happen everywhere—including and what you’ve been thinking. We could all do with a rather mundane categories like packaged goods. When we fresh perspective.” were in business school,” Rip remarked, “we used to think of Rip thanked Bob for the reading material he’d shared and for companies as portfolios of products and businesses. Now, his family’s hospitality. Then he began presenting his thoughts. companies are portfolios of capabilities and relationships. “In some ways,” said Rip, “I feel like I have a real advantage “Look at what Sony is doing with its joint venture with over other people who have seen the world change steadily Ericsson—linking its position in consumer electronics with over the past couple of decades. For me, the shifts have been Ericsson’s position in telecommunications. And look at what stark. For the sake of our discussion, I’d like to focus on four Apple is trying to do as an aggregator of digital music and what major themes that have emerged from my travels around town GM is trying to achieve as a provider of on-board auto services.” and my reading. Rip paused, wondering how his ideas were being received. “The first big change—and it’s huge I think—is the As he scanned the room, Bob and one of his colleagues continued impact of technology forces. We know from were nodding. Moore’s law that tomorrow’s computers will be faster and “My final point,” Rip said, “is about network orchestration. cheaper than today’s. We know from Metcalf ’s law that This is related to my previous comments about capabilities and connectivity is becoming increasingly widespread, and we relationships but it is also closely tied to who will make money know from Gilder’s law that bandwidth will be more abun- in these new networks. At the moment, I am still trying to dant. Put them all together and there will be more and more understand what the critical driver of value is in networks. In strategic opportunities available to those who understand the the physical world, value was driven by land, minerals, power of the network. We see it in digital music and photog- machines, production process, design, and manufacturing tech- raphy, and we are seeing it in medicine. We see it in small nology. But what elements are truly rare and valuable today? things like RFID tags and big things like cars. These three laws “In pursuit of an answer, I made a list of the leading compa- are creating the new network era. Some seem to focus on one nies in the different business settings. I am struck by the technology force but not the others. The real power is when number of areas where Microsoft is steadily building a pres- you look at the three of them together. ence. They seem to want to influence the music industry with “The second theme I’ll mention has to do with the the Windows Media Player. They are pushing their incredible pervasiveness and speed of technology. In contrast Smartphone software into the handheld device market. And to the way it was 25 years ago, when most product categories they have an RFID team that is hoping to shape how that tech- evolved more slowly, we are now in an age where products and nology gets implemented and adopted.” business processes are practically changing before our eyes. Rip paused and addressed Bob: “I looked at some of the Every week some company or another is coming out with a reports you gave me on the automotive sector, and it seems new feature in their camera or a new way of packaging their that Microsoft also wants to influence the software and product or delivering their service—then, everyone else tries to connectivity in the automobile. Beyond that, they are trying to catch up. What makes many of these changes possible is tech- influence how the next generation will access the Net by trying nology. You can’t predict exactly what will happen next month, to influence the videogame space.” He continued: “I have not but you need to understand what’s driving the changes so you been able to sort through the meaning of this issue completely can anticipate how to react. It is pervasive because it is affecting but I think we should think more about who plays the role of products, processes and services. In the very near future, I can key orchestrator in a changing network—and what it takes to see it affecting every company and every organization. It will be in that position. This may help us understand the elusive either touch their products or their business processes or their question of who gets to capture value. It would be interesting service delivery. And the speed with which it happens is incred- to know if Microsoft is using a playbook that other companies ible from what I could read and observe. aren’t using—or maybe people just don’t understand. ”
    • Cont inued impa ct of techn ology force Incredible per s vasiveness an d speed of techn ology s an d relationships Key capabilitie ation hestr ork orc Netw Rip looked at Bob and his colleagues, who were listening intently to what he said. Then he began his recap. “The four themes I’ve mentioned seem to provide a way to look at the new business space. It seems to me that devel- oping successful strategies has never been more challenging for managers. But if you’re able to understand the potential advantages that networks offer in your particular business context, you’ll be ahead. Whether it’s music, automobiles, medicine, or even farming, you need to think about how networks will change the game—and how you can take advantage of the network forces in your own world.” He turned to Bob and asked: “Is what I’m saying consis- tent with what you see and how managers are thinking about these shifts, or am I out of touch with what’s happening?” Bob didn’t hesitate. “I think your assessment is on the mark. You’ve really captured the essence of the challenges in those four themes quite well. As I see it, we are just entering the brave new world of business networks that are shaped by technology, and we are all trying to make sense of how things will unfold. It’s clear that many of the old rules don’t apply. At the same time, many of the fundamentals of business remain the same. A lot of managers know that technology is pervasive and fast changing. Clearly, as you’ve noted, the value creation and capture question is on everyone’s mind.” Rip wondered how rapidly companies would respond to the changes so they didn’t get buried in the avalanche of network forces. He wondered if the forces would impact everyone or just some. His gut told him that this was a massive transformation that all managers needed to prepare themselves for and that, in many cases, they would need to act quickly to seize the opportunities. 13
    • forces logy echno t of t mpac in ued i Cont do f technology veness and spee In credible pervasi Key capabilit ies and relati onships Netw ork o rches tr ation No Tagline Small Tagline Large Tagline The logos and pictures of products that we have used are copyrighted by the respective companies. Related Readings K/O version Barabási, A. (2002). Linked: The New Science of Networks, Perseus Venkatraman, N. and Lee, C. (2004). “Preferential Linkage and Network Publishing: Cambridge, MA. Evolution: A Conceptual Model and Empirical Test in the U.S. Video Game Kulatilaka, N. and Ciriello, J. (2004). “The Story of Island Man: It’s Not Just Sector”, Academy of Management Journal (forthcoming). the Technology”, BUILDE. Venkatraman, N., Lee, C., and Iyer, B. (2004). “Make Way for the Penguin? Explaining Commitment to Linux by Independent Software Companies”, Boston University Working Paper.