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Q: The Internet is a part of every business strategy by now. But you say most executives are missing what is fundamentally new about the 'Netand how it is changing business as we know it.
A: Too many executives think that sustaining advantage in the digital economy means nothing more than relegating digital technologies to nifty Web-site designs, superficial cost-saving initiatives, or databases that help track customer buying patterns. These are potentially fatal errors of an industrial-age mindset. The most important implication of the 'Net for business is not that it is becoming faster, safer, and more robustbut that it is becoming rich in function. We now have a digital public infrastructuretransaction engines, payment systems, negotiating tools, agentsthat make it possible for us to think about how we create wealth in entirely new ways. What this means is that we can take essentially any customer value proposition, disaggregate its essential components, and reassemble them on the Net as partnerships, rather than traditional firms.
Q: You refer to these new partnerships as "business webs (b-webs)," and to the wealth they create as "digital capital." Can you define these core concepts?
A: In b-webs, inter-networked, fluidsometimes highly structured, sometimes amorphoussets of contributors come together to create value for customers and wealth for their shareholders. The contributors typically include suppliers, distributors, commerce services providers, infrastructure providers, and customersand in the most elegant of b-webs, each participant focuses on a limited set of core competencies, the things that it does best.
B-webs are the mechanism for the accumulation of digital capital, the knowledge-and relationship-based currency of the new economy. There are three elements to digital capital: human (people), relationship (customers and suppliers), and structural (e-business models). These three elements were all vital to the way we viewed the traditional firmbut they all become transformed by internetworking. Now, you can have human capital without having to own it. You can build relationship capital not through mass-produced, one-way communication, but through a dynamic, two-way communication in which customers become partners in innovation. Structural capital is built not by proprietary business processes and systems, but through the creation of radical new business models.
Q: Your research study was very significant in that it provided an empirical foundation on which to base e-business strategy formation. Can you explain the study and the five b-web types that emerged from it?
A: As part of a three year, multimillion dollar research program, we investigated hundreds of potential b-webs of all kindsboth in the physical and virtual worlds, and ranging from the Microsoft Alliance to the Open Source Code movement to the automotive industry. Our goal was to discover whether there was any real pattern or structure to the digitally connected partnerships we saw emerging. We ultimately reported on dozens of embryonic success stories, reverse-engineered their business strategies, and noted five distinct patterns that traversed industry boundaries: Agoras, Aggregations, Value Chains, Alliances, and Distributive Networks. These patterns ultimately resolved into the taxonomy employed in the book.
Q: So the new terms-b-webs, digital capital, the business model typesare more than just new vocabulary words to add to the business lexicon.
A: Yeswe're not talking about buzzwords here. This is a new taxonomya whole new way of viewing, understanding, and executing e-business strategy and a structure for understanding the new business models. Unlike management concepts or trends such as the "virtual corporation," process redesign, or knowledge management, b-webs are an inevitable new force on the business landscape. They are emerging as the generic, universal platform for creating value and wealth in the new economy. Ignoring them will be perilous for any business.
Q: Can you describe each of the b-web types and give an example of each?
A: Agoras facilitate exchanges between buyers and sellers, who jointly "discover" a price through on-the-spot negotiations. Examples include eBay, an Internet-based consumer auction, and Freemarkets, an innovative online business procurement site. In an Aggregation b-web, one companylike Wal-Martleads in hierarchical fashion, positioning itself as a value-adding intermediary between producers and consumers. E*Trade has aggregated many companies to create a virtual brokerage firm, charging one-tenth the fees of a traditional broker. In a Value Chain, the context provider structures and directs a b-web network to meet a specific customer order or market opportunity. Cisco Systems, which makes networking products such as routers, sits at the top of a $12 billion Web-enabled value chain. In Alliances, participants freely come together to design goods and services, create knowledge, or simply produce dynamic, shared experiences. The Open Source initiative and the MP3 phenomenon are both alliances. Distributive Networks are the bedrock of the economythey service the other types of b-webs by allocating and delivering goods from providers to users. Examples include postal services, data network operators, and banks.
Q: You talk a lot about the primary importance of the customer in the b-web.
A: The customer's role is critical to value creation in all five b-web classes. In Agoras, customers typically create and deliver value themselves. eBay is the context provider for customers who define the content-and the goods at the digital table. In Value Chain b-webs, customers design and co-service the products. Customers are part of the Dell b-web, using the Premier Page to configure the product and initiate the manufacturing process. In Alliance b-webs, customers often create the most value. Individual PalmPilot customers are active innovators and content providers.
Q: You say that in a world of b-webs, outsourcing is dead. Why?
A: Managers will no longer view the integrated corporation as the starting point for assigning tasks and functions. Rather, they will begin with a customer value proposition and a blank slate for the production and delivery infrastructure. Through analysis, they will parcel out the elements of value creation and delivery to an optimal collection of b-web partners. The lead firm in a b-web will want to control core elements of its digital capitallike customer relationships, the choreography of value creation and management processes, and intellectual property. Depending on the particulars, partners can take care of everything else.
Q: Is it necessary to lead a b-weba role you call a "context provider"to succeed?
A: Context providers set the rules and standards for competitionand therefore can position themselves to reap the highest possible rewards. But countless firms participate successfully in b-webs in which someone else orchestrates the context. Ultimately, however, this is riskier. Many customer-facing industries of the pastin telecommunications, banking, insurance, stock brokerageswill become infrastructure providers to others who own the customer interface.
Q: How can managers decide whether to build internally, buy, or partner to gain access to a needed capability?
A: Like outsourcing, vertical integration is dead; horizontal integration lives. In the world of b-webs, firms should develop the digital capital that provides competitive advantages to their horizontal value offerings. Only acquire specialist firms that fit your horizontal slice of the universe. To avoid lock-in for the vertical capabilities that you need, cultivate the structural and relationship capital of alternative suppliers in your b-web, and promote deregulation and open standards. This horizontal mind-set applies in every industry.
Q: You also present an intermediate option-the internal venture fund.
A: Rather than build or buy, some companies have formed internal venture capital initiatives to achieve two goals. First, they take minority stakes in high-potential e-business firms. Second, they function as incubators for internally generated e-business initiatives. Such initiatives provide good learning opportunities for the investor companies to accumulate digital and financial capital. Sometimes, as with Delta's stake in Priceline, these investments provide billion-dollar returns. The downside? They can divert investee company managers into focusing on their investors, rather than on customers and the competition.
Q: How does the function and purpose of Human Resources change when your "employees" are no longer just the people that reside within the walls of your company?
A: As we move into the world of b-webs, the HR profession must reinvent itself. Rather than HR management, we need to think in terms of IHRMinter-enterprise human resource managementhuman capital in its internetworked form. Companies must view the employees of their b-web's partners as extensions of their own capital, because competitiveness and customer value creation depend on accumulating and unleashing digital capital in all its forms. This will require a radical rethinking of traditional functions like recruiting, conflict resolution, and compensation.
Q: In the book you essentially say that everything we know about marketing is wrong. Explain how b-webs upend traditional marketing and what will replace it.
A: The four P's of marketing (product, place, price, and promotion)and the traditional categories of advertising and PRdon't work in cyberspace. In a b-web, everyone and everything communicates: two-way, multi-way, and all the time. Marketing's job becomes focused on accumulating relationship capital. The brand still matters, but as a measure of relationship capital, not as an image. PR professionals will find that relationships, not messages, are the primary capital they must create for their corporation or clients. To respond to these radical changes, executives need new practices, and fast. We replace the old four P's with a new marketing approach we call the ABCDE's of marketing: Anyplace, anytime, anyway shopping replaces place; B-web relationships drive revenue; Communication works, not promotion; Discovery of price replaces fixed price; Experience replaces product.
Q: How can managers go about formulating their own successful b-web strategies?
A: In the book we provide a six-step plan that takes managers from the initial step: disaggregating the value proposition that the end-customer receives and experiences; to reaggregating an entirely new set of value offerings in the context of the digital infrastructure; to the final step of actually defining a b-web typing strategy that will improve your competitive advantages. In the digital marketplace, business model agilitynot choosing the one right b-web modelcan be the determining factor separating success from failure. David Ellington, president of NetNoir, says the company's business model has changed five times since he co-founded it in 1995: "Each model was absolutely right for its time, and wrong for the next round of competition."
Q: You say that these new business models and the new kinds of wealth they're creating demand a new way of viewing the stock market. Contrary to doomsayers who insist that Wall Street has grossly overrated and overvalued Internet companies, you say that launching and investing in dot.coms is the wise thing to do.
A: Many investment bankers, pundits and journalists have been bewildered by the seemingly absurd evaluations for so-called Internet stocks. Using lenses from the old economy, such evaluations are incomprehensible and the capital markets don't make sense. But what many shrewd investors know intuitively is that many of these companies are amassing huge digital capital. They are creating new business models, new networked relationships, and acquiring new human know-how on Networksall which given them far-reaching ability to create value and generate wealth. The bottom line is that dot.com doomsayers just don't understand digital capital.
Q: So you're saying that we shouldn't be worried about the recent wild fluctuations on the NASDAQ?
A: These are only the early days of digital capital. It's only natural that many e-business experiments will stumble and fail, and the markets will react to this. What analysts and other market watchers fail to understand is that this isn't a "new economy versus old economy" question. New business models call for new kinds of digital capital lenseswe simply can't evaluate dot.coms the way we do the Blue Chip companies. When the steam engine came along in the nineteenth century, some people said, "No way, we're sticking with horses. There will always be a need for them." Others said, "Looks promising. We will invest in railroads, in the companies that build locomotives and make products shipped by rail, and in the new communities built in the new territories." So the real question is: are you investing in stables, saddles, and blacksmiths, or in the emerging infrastructure?