Blueprint to the Digital Economy [Secure eReader]
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eBook by Don Tapscott & Alex Lowy & David Ticoll
eBook Category: Business
eBook Description: Building on the message of Don Tapscott's highly successful book, The Digital Economy, Blueprint to the Digital Economy offers breakthrough insights and strategies designed to help today's businesses succeed in an emerging and highly competitive digital business environment. Through first-hand accounts, top executives of world-class corporations like Kodak, IBM, Microsoft, and AT&T offer provocative examples of how their businesses used networking and multimedia technologies to achieve their individual corporate objectives.
eBook Publisher: McGraw-Hill Companies, Published: 2002
Fictionwise Release Date: June 2002
by Don Tapscott
Alliance for Converging Technologies
Since the publication of The Digital Economy less than 3 years ago, the technology industry and the world at large have seen a major shakedown. Old leaders of mainframe, minicomputer, PC, LAN, software, and telephony industries alike have fallen, giving way to the new. At the time of publication, Netscape had just gone public; few had heard of a seemingly irrelevant networking company called WorldCom, and many of today's hottest technology and Net-based companies like Firefly did not even exist.
On the customer side, electronic commerce was used more often as a punch line in jokes and everyone asked, "But can you make money on the Net?" Examples of "inter-networked businesses" were few and far between.
In terms of new business models and new economic forces, little was published, and the Harvard Business Review was just beginning to think about what comes after reengineering. A year later, James Moore published the seminal The Death of Competition and thereafter a series of interesting books began to appear.
Clearly, the first 40 years of the computing revolution have been preamble. Much greater change lies just ahead. The marriage of computers and communication networks is transforming most aspects of business and consumer activities. Organizations face enormous changes, many occurring simultaneously.
We're all wondering how digital media is changing business. How big will electronic commerce be? When will it take off? What will the new enterprise look like? What will happen to the brand? It's as if we're sitting on a beach wondering what the weather will be like today. But we haven't noticed that just beyond the horizon is a 100-foot-high tsunami, which will not only affect the weather today, but will sweep us all away if we don't get ready.
There is a tsunami approaching which few have noticed. This tidal wave results from the intersection of the technology revolution and a demographic revolution which I call the Net Generation, or N-Gen (children aged 2-22 in 1999). This baby boom "echo" is the largest generation we've seen, and because they are the first to come of age in the digital era, they have a different culture, psychology, and approach to learning, consuming, working, and playing than their boomer parents. As these kids enter the workforce, they will blow all our estimates for electronic commerce right out of the water.
Central to the changes afoot are our notions of the firm and competition. New models of the enterprise and of how wealth is created are emerging. They are about as different from the old corporation as it was from the feudal craft shop of the agricultural economy.
As I discussed in The Digital Economy, it was over 50 years ago that the famous economist Ronald Coase asked why firms exist. Why are there groups of people working together under one organizational framework? He wondered why there is no market within the firm. Why is it unprofitable to have each step in the production process, each worker, become an independent buyer and seller? Why doesn't the draftsperson auction their services to the engineer? Why is it that the engineer does not sell designs to the highest bidder?
One of the most common answers to these questions has to do with the cost and challenges of managing information. Producing a loaf of bread, assembling a car, or running a hospital emergency ward involves a number of steps where cooperation and common purpose are essential for a useful product. An emergency room where each doctor bids for nursing services in an attempt to get the lowest price, while at the same time determining if the nurse is actually capable of assisting with the operation, might provide an efficient market, but, to a dead patient, this is not a particularly useful service. Similarly, holding an auction before the axle assembler in an automotive manufacturing plant passes along his or her product to the chassis assembler might slow down the line. It would be even less efficient if information on engineering viability and compatibility needed to be purchased on the shop-floor marketplace at every step.
What makes a pure market impractical is the time and cost of acquiring the information needed to undertake complex production processes. What is being sold? What is the quality of the labor? What is the quality of the raw material or intermediate input? What is the price for the final product? How will it be sold? By whom? With what kind of information or marketing? Who will finance the production process and how much will financing cost? The ensemble of functions within a firm consists not only of a series of discrete products but also of the infrastructure of collaboration.
A clear framework and strict regimentation worked on many battlefields and marketplaces of the past. The role of the overarching infrastructure of the firm or army was clear and indivisible. But today, as Alliance collaborator Riel Miller puts it: "The Net changes what is possible. It opens up new horizons for what is economically and practically feasible. The costs of information and coordination are dropping. More than ever we are in a position to create wealth by adding knowledge to each product at each step."
So how are these developments changing the nature of the firm? What are the new concepts to be implemented for success in the new economy? Most important is the concept of community -- much touted but little understood. Relationships, both business-to-business and business-to-consumer, are key as firms learn to coevolve in online business communities -- dubbed by the Alliance as "e-business communities."
E-business communities are a new form of commercial organization that are enabled by digital technology. Driven by the need to reduce supply chain costs and respond more quickly to end-user demands, communities of companies are using networks to trade with one another and create products or services that draw on the talents of many players. Digitally-savvy firms in every industry are beginning to use this model to establish the conditions for value creation and for dominance.
For example, in the electric power industry, 172 transmission providers are joined in OASIS (open access, same time information system), an e-business community that enables firms to buy and sell electric transmission capacity in an online marketplace. Negotiations that formerly took days are now accomplished in seconds by software, and the cost of doing business has fallen dramatically.
High technology firms such as Nortel and Cisco have created end-to-end digital information systems that tie distributors, component suppliers, and manufacturers in highly efficient cooperative supply networks. By crafting a corporate culture that focuses on core competencies and by using digital technology to share information with supply network partners, these companies have emerged as a time-to-market leader in a field where products have a half-life measured in months.
In Hollywood, the high-speed, high-bandwidth Drums network, established by Sprint, allows movie companies, animators, film editors, and others to work together online in real time. The impacts are impressive: months are shaved off production schedules and firms can work with creative professionals anywhere, as long as they're on the network. Collaboration tools, such as online film editing and video conferencing, enable producers, directors, and editors to quickly solve problems and reach decisions that used to be delayed by the need to meet in person.
In each of these cases internetworked enterprises are creating products and services through collaboration in e-business communities. These new models of wealth creation are at the center of Blueprint to the Digital Economy.
The book captures the insights of many of the leaders of the digital revolution. In the following pages, they share their visions about converting digital promise into reality. The authors represent some of the most influential companies in the world and are themselves a good selection of leading thinkers and practitioners of the radical changes occurring today in business and society. The authors are members or collaborators of the Alliance for Converging Technologies or Alliance collaborators.
The editors of this collection have divided the essays into four parts: Part One covers the new rules of competition; Part Two covers the transformation of vertical industries such as banking, automotive, government, logistics; Part Three is a discussion of some key challenges in enabling the internetworked enterprise; and Part Four is centered on the theme of governance in the twenty-first century.
PART ONE. THE NEW RULES OF COMPETITION
Most managers now recognize that digital media and electronic commerce are affecting the rules of competition. Requirements for success are changing, along with business goals. Nothing new there. But what are some of the new rules and requirements? Two thoughtful pieces from leaders of the Alliance for Converging Technologies explore this question and create the context for the rest of the book.
The first, by David Ticoll, Alex Lowy, and Ravi Kalakota lays down the cornerstone by explaining how Net-based "industry environments" support "e-business communities" (EBCs) which are populated by "internetworked enterprises." Firms that evolve with partners will achieve success in "value creation." An e-business community leader focuses on enhancing the success of its cosuppliers and customers through mutually beneficial long-term relationships and complementary, system-enhancing offerings. By defining the four kinds of e-business communities, the authors provide practical tools for rethinking business strategy.
By recognizing the types of opportunities to create new relationships with business partners on the Net, as well as new channels for reaching customers, new kinds of firms and business models are emerging that create wealth in radically new ways.
But how do we design these new business models and what is the process whereby a new vision can be forged? Vince Barabba of General Motors shares for the first time publicly the invaluable experience of GM with its "envisioning process." The idea is not just to avoid crossing what I have previously referred to as the fine line between vision and hallucination, but to use envisioning for quite practical purposes -- as a decision support process. Businesses that want to be successful in the future must begin working today to define what type of companies they want to be. Dealing with tomorrow's uncertainty requires a "learning" rather than "knowing" attitude toward the future.
The envisioning process involves bringing together leading experts from a variety of fields, along with a company's own executives, to develop scenarios -- plausible, challenging stories about what might happen in the future -- for their industry. These are not predictions, rather they leave the organization with an understanding of possibilities. By taking certain actions the desired reality can be achieved.
Barabba's discussion is not abstract, but rather outlines the process GM management went through to envision the future. (I was very fortunate to participate in this process.) Four very stimulating scenarios regarding the future of the transportation industry were developed and presented. You will learn a new approach to systematic thinking about the future, which differs significantly from traditional scenario planning. The approach builds on what is already known (that is still worth knowing), recognizes the uncertainty of what we don't know (but need to know), and attempts to bound that uncertainty by helping us take steps to shape the future. Like many of the essays in the book, this one is worth the price of admission.
IBM strategist Bruce Harreld adds another critical thread in this rich tapestry -- the intersection of organizational speed and knowledge. For years leading thinkers and practitioners have been discussing both topics. Immediacy is a driver of the digital economy -- commerce is nonstop and real time; products obsolesce more quickly; the first to market are rewarded. Agility and the capacity to shift to ever-changing conditions are basic.
Similarly the recent debates about intellectual capital (for which balance sheet measures will, no doubt, soon be required by the SEC) reflect the growing appreciation that human know-how, intellectual assets, and the management of knowledge is a key requirement for success. It has been estimated that 80 percent of the information that companies need to know about their competitors is already known to their own employees, suppliers, or customers. Businesses today are unable to execute their strategies fast enough. The cause lies in the growing knowledge content of what is fast becoming the digital economy. The fact is, our traditional ways of organizing ourselves as businesses have left us unable to deal with all the knowledge that organizations now accumulate. The capture, dissemination, application, and retention of all these kinds of knowledge are what the learning organization is all about.
But while many organizations are accelerating business processes and building their knowledge resources, few have seized a larger opportunity -- to combine speed with knowledge to dramatically affect performance. Harreld sets out to explain how organizations can become smarter faster, and he succeeds. Just as Big Blue got smarter faster than Gary Kasparov, so can your organization.
James Moore approaches the issue of e-business communities from the perspective of strategic partnering. He effectively argues that any truly revolutionary advances in serving customers, in creating and transforming markets, in introducing new products or processes, or in restructuring the enterprise require complementary adaptations -- coevolution -- on the part of many other organizations.
Coevolution is at the heart of e-business communities and wealth creation in the digital economy. Enabled by network technologies, we have entered an age of organizational plasticity where the key to growth is found in building innovative business community relationships and mastering business design. Companies are establishing networks of complementary functions -- some provided by themselves, but most contributed by others -- that comprise synergistic communities, or "business ecosystems." Accordingly, Moore explains, the focus of competitive strategy is shifting toward the creation of new markets and industries and away from core operations.
Organizational form follows function and as the functionality required for wealth creation changes, so does its form. The old multidivisional firm (M-form organization) is giving away to the E-form (ecosystem form) organization which is focused on markets and potential markets within ecosystems. E-form organizations pull together the functions needed to establish product architectures, end-to-end business processes, organizational networks, and business arrangements essential to ensuring supply. E-form organizations manage the economics of the total business ecosystem to its advantage. Chances are, your company needs to evolve into an E-form organization.
The picture is completed by the Alliance contribution by Paul Woolner, whose special interest is the capital market side. The opportunity for new enterprise in the digital economy has attracted near-frenzy investor interest and produced unprecedented levels of return. In early 1997, Web-based enterprises were still finding valuations that are up to 15 to 20 times greater than projected revenues. But, according to Woolner, there are serious questions as to whether this approach is sustainable. The gold rush may be over, or may end soon, and that will rapidly change the context for what is required to build the successful, entrepreneurial digital enterprise.
PART TWO. INDUSTRY TRANSFORMATIONS
In the old economy there were many different industrial "sectors" such as retail, financial services, manufacturing, and education. But these old sectors break down in the new economy.
Money is numbers, issued by central banks and printed on paper. Soon money will be encrypted numbers issued onto hard drives. What will it mean to be a financial services company when a 14-year-old purchases a hot new song off the Net, transferring digital cash from her hard drive to that of the recording artist? She and the artist are both the "financial services company." There is no bank or credit card company involved.
What does it mean to be a manufacturing company in the new economy? An airplane, as they say, is "a collection of parts flying together in close formation." Now Boeing becomes a design, networking, project management, and marketing company working with suppliers and customers to design aircraft in cyberspace. The specifications are shared on the Net with all relevant parties, and the plane is constructed on a network by knowledge workers in remote locations. If a third of the cost of a 777 is software, then Boeing is in the "software industry" and the new value leaders in the "aircraft industry" can be software companies.
What does it mean to be in the educational sector when work and learning become the same activity? Every company will become an "education" company or it will fail. If your company doesn't have plans to establish its own "college," it is probably in trouble.
Every industry is affected. Who will be the leaders in the "health care industry" when much of health care is delivered on networks? How did it happen that Microsoft became one of the largest "travel agents" in the world with Expedia -- $100 million in revenue in the first year? Is not the competition of a newspaper like the Charlotte Observer, Charlotte's Web -- a community-based Web site which has much of the function of a newspaper and a lot more? What about the photographic and image industries when pictures become bits?
This section of the book shares intimate and thoughtful insights into how important companies see their futures. What are their responses to the forces of change; how are they changing their business strategy to correspond to market and industry upheaval?
The following chapters emerge from the frontlines of some key industry sectors, starting with the financial services industry. One bank best positioned, in our opinion, to avoid disintermediation is the Bank of Montreal. Walter Wriston, former chairman of Citibank, shocked his company and the world years ago by posing the question "who will create the financial services market? Something called a bank?" Personally he is skeptical, thinking companies like GE (with massive cash flows) and 7-Eleven, with access to a high-transaction customer base, were both well positioned. The Bank of Montreal is working hard to reintermediate -- to create new value between customers and suppliers based on the digital media.
Lloyd Darlington of Bank of Montreal explains that for the first time in 300 years, the very nature of banking has changed. The banking industry -- or, more accurately, a significant number of individual financial institutions -- has had to confront three new facts of business. First, banks are now competing in a customer's market. Second, customers can access this market from anywhere in the world, at any time. Third, the competition for these customers is coming from very powerful nonbank players and from outside national borders. Using a delightfully polemical style, he counterposes his company's views on the reinvention of financial services and the survivability of the banks. You'll enjoy and learn from this chapter, not just as a business strategist but as a consumer of financial services.
According to Chuck Martin, author of the The Digital Estate, and a leading thinker about the digital revolution, publishing is one of the industries most threatened by the digital economy, but at the same time it is offered the greatest opportunity to redefine itself. For traditional publishers, the dictum is e-publish or perish. But this involves more than just delivering the same information online. An entirely new business model is required. As the potential for interactivity and commerce increases, the entire publishing space is transformed. Traditional publishers are threatened by new entrants, eroding advertising revenue streams, and declining levels of literacy. To compete in this new environment, publishers must move from static, content-focused publications to online services. This involves developing customized content, new community aggregation models, and other value-added services, as well as creating new revenue methods that exploit core editorial competencies while opening the way to new partnerships.
Linked to publishing, the photographic and image industries are also in upheaval. I got a taste of this last year when, 2 hours after my niece Marisa was born in Denver, members of my family in several cities thousands of miles apart were all looking at pictures of her, in turn looking at the world for the first time. The convulsions in the image industry became clear to millions in a cover story in Business Week that discussed Hewlett-Packard's plans to take over the photography business. "An HP moment? I don't think so!" responded Kodak CEO, George Fisher.
In a jarring discussion of photos in the digital economy, Kodak's Carl Gustin presents views which suggest that Kodak may be an exception to the old rule of paradigm shifts -- leaders of the old are often the last to embrace the new. In the twenty-first century, photographs, he says, will serve as information tools beyond what the early photographers ever dreamed about. They will link people and ideas over time and distance, using developments in digital technology that are just beginning to take shape. The capabilities of "industrial-strength" imaging tools are finding their way to desktops in organizations of all sizes. But to Gustin, that's just the beginning; it's what people do with the picture once it's digital that's important.
But, writes Gustin, while digital technology is good and getting better, a low-cost point-and-shoot camera with traditional film can still record a scene in much greater detail than all but the most expensive digital cameras, and this will remain the case in the foreseeable future. When quality of the image is paramount, conventional film is still the technology of choice. It is after the original image is recorded that digital technology revolutionizes the craft. Because the two technologies can happily coexist and complement each other, he sees the growth of the global photographic industry proceeding down two almost parallel tracks. I personally learned a lot about an important technology and industry reading this chapter.
At the center of these changes is learning and education. Peter Drucker shocked many in 1997 when he declared that in 30 years the universities of America would be barren wastelands. The implication of his statement was that education, particularly the postsecondary variety, came out of an old economy where learning happened for a certain period of one's life and could only occur at a specified location. With the rise of life-long learning and networked-based learning, both assumptions are obviated. Many would hope that Drucker is wrong, arguing that surely there is a role for a campus experience in a young person's life. Nevertheless, many of our colleges and universities clearly have their heads in the sand.
Carol Twigg is, in my opinion, one of the leading thinkers in the reinvention of learning for a digital economy. She and Alliance principal Michael Miloff discuss how the digital media is making it possible for us to think about new ways of responding to new demands for learning. During the past two decades, major shifts in who is learning -- when and where -- have resulted in a mismatch between the role of the traditional campus and the needs of students. In addition, the knowledge explosion is calling into question long-held beliefs about what students need to learn during their undergraduate years, while newly emerging tools for accessing, creating, displaying, and assessing information are transforming the nature of the learning process.
In particular, they discuss a watershed initiative that will soon affect each of us -- the Global Learning Infrastructure (GLI) which is currently being constructed to meet the learning needs of the twenty-first century. The GLI enables us to move beyond campus-centric models of the university, engage diverse learning styles, embrace life-long learning, and meet the demands of both an increasingly heterogeneous student population and a new economy. The university will increasingly function as an internetworked enterprise, leading to the emergence of new e-business communities including media organizations, publishers, content specialists, and technology companies.
There has been much talk of the customer over the last decade, of being customer-focused and customer-intimate, etc. John MacDonald and Jim Tobin of Bell Canada breathe new life into this issue (and this coming from two senior executives in what was once "the phone company" -- the archetypal basis for Scott Adams' book The Dilbert Principle.)
For MacDonald and Tobin, new technologies equip the hunted with better camouflage, or perhaps it turns the tables completely, and the hunted becomes the hunter. They imagine a future where people deal not with computer operating systems but rather personal operating systems. People will be able to establish a personal electronic space, creating a number of "persona," each with a specific profile and customized interface to communities of interest. Electronic agents would become a key part of this scenario, searching the network, completing transactions, and negotiating with other agents. Rather than the vague and vacuous talk about customer empowerment, MacDonald and Tobin show how the new marketplace is shifting real power to customers, with huge implications for industry strategy, marketing, and technology infrastructure.
As firms become internetworked in function and form and as information flows become digital, there is still a need to move physical goods around, especially from suppliers and to customers. Logistics become more, not less, important. The pressure is on logistics companies to provide services that keep up with this metamorphosis by offering comprehensive state-of-the-art solutions for supply-chain management and by allowing retailers to furnish products more quickly and more cheaply to a more demanding marketplace. In the spirit of e-business communities, it increasingly makes sense to partner for logistics rather than home growing the function. Federal Express has been the world's leader in rethinking logistics and Dennis Jones is one of its leading thinkers and executives. The FedEx story he tells is rich with lessons.
Copyright © 1998 by Alliance for Converging Technologies Corporation