waking up in the networked era

Waking Up to the Network Era

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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

Platform Economics

The Connected Home

Relationship Networks

Real Options

Architectural Control Points

Sensory Networks

Convergence

Visualization

Expressive Data Models

Strategy

Organizational Behavior

Economics

Technology

Winning in the Network Era

Background Illustration: Relationships among firms in the software ecosystem

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AcknowledgementsI acknowledge the valuable assistance of Bruce Posner in the preparation of this piece. John C. Henderson, Nalin Kulatilaka, BalaIyer, Jim Ciriello and Tara Venkatraman provided useful comments and suggestions.

Waking Up to the Network EraBackground

Rip Van Wrinkle, who worked as a strategy consultant for ten yearsfollowing business school, woke up after being in a coma for twodecades. Confounding the expectations of medical experts, Rip, now58 years old, was alert, although understandably confused. Lookingout the window from the hospital, he noticed the telltale signs ofautumn—leaves turning to red and gold. His doctor had told him hewas in a suburb of Boston. But where had the missing years gone,and what had happened during his absence?

Now that he was awake, Rip was eager to reconnect with friendsand family and to venture out into the world. Following a battery oftests that found him in remarkably good health, Rip was releasedfrom the hospital to the care of his longtime friend and colleague,Bob Brown, whom he had known since graduate school and withwhom 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 withhis wife and two teenage children, had generously offered to helpRip with his re-entry into the world.

As Rip traveled around town during the first few days, he couldn’thelp but notice how much everyday activities had changed. Witheach interaction, he wondered how technology and business logichad shifted during the years he spent in a coma.

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N. VenkatramanDavid J. McGrath, Jr.

Professor in ManagementChairman, InformationSystems Department,

([email protected])

Boston University School of Management

595 Commonwealth Ave.Boston, MA

02215

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“Cell phone?” Rip asked. Bobreached into his own pocketand showed him what a cellphone 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 transmityour 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.

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As they entered the front door of Bob’s house, Bob’s teenagedaughter, Sara, was lying on the sofa listening to music on herheadphones. In her hand was what looked like a radio aboutthe size of a small deck of cards. Bob motioned for Sara tocome over and say hello to his old friend Rip.

Before his coma, Rip recalled, everyone listened to musicon the radio or played records on turntables. But things werechanging fast even then: increasingly, music was moving tocassette tapes, boom boxes were becoming the rage, andSony had just introduced the Walkman, which enabled usersto play music anywhere they wanted.

“Other than the new colors and the sleek style, it seemsthat little radios haven’t changed much in the past 20 years,”he observed.

“Actually,” Sara replied, “this isn’t a radio—it’s an iPod. Themusic I’m listening to isn’t from the radio—it’s stored inside.In fact, this little thing contains nearly all of my favoritesongs—more than 1,000 in total.”

Rip did the calculation in his head: 1,000 songs was some-where around 100 albums (more than the entire recordcollection he remembered having). Noticing the perplexed

look on Rip’s face, Bob gave him a brief tutorial on the basicsof digital technology and explained how digital music hadtaken over the music industry.

“So where do people buy their music—and who makesmoney on it?” Rip asked.

“Good question,” said Bob. “The technology has reached apoint where what’s possible for consumers to do from a tech-nical standpoint isn’t necessarily what’s desirable for therecording companies. In fact, there are lots of people outthere who don’t even buy music anymore—they copy it fromfriends or download it from the Internet.”

Rip wondered how the key players in the music industrythat he had known were doing in the digital and networktransformation. How would this shift settle down? Wouldpeople own music and hold it physically (like they did withrecords) or would they pay to access the music they likedfrom remote locations over the network? What was the bestway for companies to price music? Who would emerge as theleading music aggregators? Will music companies succeed inclamping down on the illegal copying of music?

A REVOLUTION IN MUSIC

What was the best way for companies to pricemusic? Who would emerge as the leading musicaggregators? Will music companies succeed inclamping down on the illegal copying of music?

Rip and Bob then headed into the kitchen to get something todrink, Rip hoping that food hadn’t changed much. On thekitchen table, Rip noticed a small camera. It reminded him ofthe 35 mm point-and-shoot camera his grandparents gave himas a high school graduation gift more than 30 years ago—onlysmaller. He imagined he still had some prints from his first rollof film sitting in a shoebox somewhere.

Given how much the music world had changed, Rip couldn’thelp wondering about photography. Did people still processrolls of film at the corner drug store and then mail their favoriteprints to relatives? Or was there some new way of recordingand sharing images? Well, later that day, Rip saw that, for manyconsumers, photography has evolved at least as much as music.

Rip had been sitting on a wooden bench downtown, sippingiced tea while waiting for Bob to return from a meeting.Nearby, he noticed a woman holding what looked to be acompact camera away from her face, then watched her as sheused her index finger to push buttons. Cradling the device inher left hand, she proceeded to fiddle with more buttons beforelifting it to her ear, laughing and talking with excitement.

When she finished talking, Rip approached her, curious to

know what she was doing. “Excuse me,” he said. “I’mwondering if that is a camera or a phone?”

“It’s my new camera-phone,” the woman replied. “It lookslike a phone but it has a little camera built into it. It can takepictures and a few seconds of video too! I just sent a photo ofmyself to my sister in Dallas and to my boyfriend in Phoenix.”

Rip was fascinated. “And, is that all it can do?”“No, it can also play music, has my address book and a diary

for my appointments.” The woman noted that she was able to save the digital

photos from her phone on her computer, along with otherphotos. Rip thanked her for her time, and he proceeded tothink about the impact such a device might have on thephotography industry. What would happen to companies likeKodak that depended on film and processing? Would peoplestill print photos or store them and view them on electronicdisplays? Was there already an industry standard as there hadbeen for 35 mm, or were battles for standards currentlyunderway? And how could companies go about capturingvalue in this network?

DIGITAL IMAGES TO GO

camera

mp3 player

phone

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diary

address book

WHAT WOULD HAPPEN TO COMPANIES LIKE KODAKTHAT DEPENDED ON FILM AND PROCESSING?

WOULD PEOPLE STILLPRINT PHOTOS OR STORETHEM AND VIEW THEM ONELECTRONIC DISPLAYS? WAS THERE ALREADY AN INDUSTRYSTANDARD AS THERE HAD BEEN FOR35 MM, OR WERE BATTLES FORSTANDARDS CURRENTLY UNDERWAY? AND HOW COULD COMPANIESGO ABOUT CAPTURING VALUEI N T H I S N E T W O R K ?

WHAT WOULD HAPPEN TO COMPANIES LIKE KODAKTHAT DEPENDED ON FILM AND PROCESSING?

WOULD PEOPLE STILLPRINT PHOTOS OR STORETHEM AND VIEW THEM ONELECTRONIC DISPLAYS? WAS THERE ALREADY AN INDUSTRYSTANDARD AS THERE HAD BEEN FOR35 MM, OR WERE BATTLES FORSTANDARDS CURRENTLY UNDERWAY? AND HOW COULD COMPANIESGO ABOUT CAPTURING VALUEI N T H I S N E T W O R K ?

Bob’s wife, Samantha, was the manager of a large super-market on the west side of town. After Bob got out of hismeeting, he and Rip decided to stop by her store.Samantha was thrilled to see Rip again and she offered totake him on a tour of her market to show him how super-markets had changed.

She began by highlighting some of the experimentsthat were underway at the store. In one, customersshopped with an electronic “shopping buddy,” whichaccompanied them through the store. Each cart had ascanner, and when customers showed their ID, it down-loaded their information. A screen showed them whatthey bought the last time, where items were located, andalso what was on sale that day. The information displayallowed the store to customize the shopping experiencefor each shopper.

Rip couldn’t help thinking about George Orwell’s 1984, which he had read as a teenager. Was the super-market becoming the Big Brother that Orwell predicted?

He turned to Samantha and asked: “Does this meanthat you store records of what customers buy? And youkeep it the way people hold onto their tax records?”

“In a word, yes,” said Samantha. “Marketing is uselesswithout good detailed information. Otherwise, youdon’t know how to price or promote your products. It’scalled data mining. We have become very good at gath-ering and using the data in our detailed marketing andpromotion activities.”

As Samantha led Rip through the frozen food aisle, shedescribed another experiment that was aimed at helpingsupermarkets and other businesses upgrade their logisticsand inventory control capabilities. She held up a little elec-tronic tag the size of a fingernail. “It’s called RFID—forradio frequency identification,” she said. “Think of it asthe next generation of bar codes. Once you stick a little taglike this on a container or a product, it can send out a radiosignal with all the relevant information—product type,expiration date, manufacturer, and whatever else we wantto capture. You can keep track of where your inventory isand when you need to reorder. You can even track howyour customers use products once they’ve left the store.”

“This sounds an awful lot like Big Brother,”commented Rip.

“Obviously,” Samantha conceded. “Customers willhave to buy into the process. There are a lot of issuesabout privacy that we have not fully thought through yet.But it could be that customers will want to take advan-

tage of the capabilities RFIDs offer. For example, theymay want to keep track of the products they bring homeso they know when they are running low on something.They may want us to help them plan healthy meals ormonitor their dietary requirements. Clearly, there will bea segment of people that views this as an incredible inva-sion of privacy. But others are going to see it as a greatstep forward.”

“Is RFID tagging happening only with packagedgoods?” Rip inquired.

“No, we’re starting to see it in apparel, electronics, youname it,” answered Samantha. “It’s starting to change thewhole supply chain process. And we’re talking aboutmore than just products. People use little tags to speed uppayments at the gas station, and they use them to paytheir tolls on the highway.”

Samantha led Rip into her crowded office. Written onthe white board were notes from a recent brainstormingsession: “When Homes are Connected…What ShouldWe Do?” The discussion, she said, had explored thefuture shape and role of supermarkets.

“Everyday, families all across the country are asking afamiliar question: ‘What’s for dinner?’ We need to figureout what supermarkets can do to help customers answerthat question. Do we do what we’ve always done andsimply sell groceries? Or do we redefine what we do andbecome more active, for example, in helping familiesplan meals? Some people think that we should movefurther into the information business and providecustomers with tools for keeping track of what they eatand where they eat.”

Samantha paused, then continued: “I guess the realquestion is, who’s going to control the informationnetwork in the kitchen? Based on our research, thecompany that controls this could become the Wal-Martof the network era.”

Rip was trying to grasp the impact of Samantha’scomments. How significantly did the tags and smartshopping devices enhance the capabilities of consumerpackaged goods companies? Were big brand companieslike P&G and Kraft learning to use information toelevate their marketing to the next level or were theybeing left behind? Were supermarkets sharing rich datawith manufacturers or were they mostly using it to exer-cise their bargaining power? Was customer privacybecoming a thing of the past? If so, to what extentwould customers really care?

THE BATTLE FOR THE KITCHEN

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How significantly did the tags and smart

shopping devices enhance the capabilities of

consumer packaged goods companies?

Were supermarkets sharing rich data

with manufacturers orwere they mostly using

it to exercise their bargaining power?

Were big brand companies like P&G

and Kraft learning to useinformation to elevate their marketing to the next level or were they

being left behind?

Rip’s mind was reeling. He was trying to make sense of thethings he had seen and experienced so far: the medical moni-toring system that was keeping an eye on his condition, thenew worlds of music and photography, and now the changesin supermarkets and packaged goods.

As he climbed into the front seat of Bob’s car, he studied thedashboard intently. He was half-expecting to notice somethingradically different. In appearance, however, it was all toofamiliar: the speedometer was much as he remembered it; thegas gauge was in the same spot. But as they headed home, Bobbegan demonstrating some of the new features.

He pressed a button on the dashboard. Within seconds, theyheard a female voice: “Good afternoon, Mr. Brown. How canwe help you?”

“Could you please direct me to the nearest Mobil gas

station?” Bob asked. Within seconds, the woman provideddirections to a Mobil station a little over a mile away.

Rip was flabbergasted. “What’s going on?” he asked. “Howdoes she know where you are? And where is she located?”

Bob explained the idea of OnStar, that it was owned byGeneral Motors but offered as a subscription service throughsome other auto companies as well.”

As he filled the car with gas, Bob noted some of the otherservices that were available. “If we get into an accident and theairbag deploys, OnStar will call an ambulance if they can’testablish a voice contact with the driver or passengers.Through global satellite positioning, they’ll know where thecar is located,” he noted. “Of course, this could also come inhandy if the car is stolen. And if I lose my car keys, they canunlock this car remotely. They can also investigate why the

RETHINKING THE CAR

WHY COULDN’T DRIVERS CONNECTED TO THE NETWORK SHARE REAL-TIME

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‘check engine’ light comes on and tell me if the problem isserious enough to stop driving.”

Bob noted that the scope of network services for car ownersdidn’t end there. Just last week he had received an e-mail froman insurance company offering a new product that was pricedin part on how fast you drove and where you went, based ondata from global positioning satellites. Again, Rip’s mind wentback to Orwell, and he wondered if anyone was currentlytracking their driving. Was there value in knowing a person’sdriving routes and patterns over time?

Bob said he thought that the telematics companies weresensitive to privacy issues and pointed out that customers stillhad the option of deciding whether or not to sign up for thesenetwork-based services.

“So cars don’t operate solo anymore,” Rip commented.

“They have become nodes on this network.” “That’s a great way to think of it,” said Bob. “And everyday,

more and more nodes are getting connected.”As Rip considered the implications, he wondered if there

were more possibilities to consider. For example, why couldn’tdrivers connected to the network share real-time informationabout traffic and road conditions with other drivers? Could thenetwork enhance safety and prevent accidents? Were thereopportunities for car companies to make more money in serv-ices than in manufacturing?

Rip’s mind went back to music, photography and grocerystore settings. To what extent was standard setting importantin the new networks, and which players would be instrumentalin setting them?

INFORMATION ABOUT TRAFFIC AND ROAD CONDITIONS WITH OTHER DRIVERS?

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 himplay for a few minutes and was deeply impressed. Not only were the videoimages of Formula 1 racecars eerily realistic but the characters and landscapesseemed life-like as well. In a burst of excitement, Skip jumped up from the sofaand 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 tocommunicate and play games in real time over the Internet.”

Rip found the idea of playing with someone on the other side of the worldamazing. When he was Skip’s age, his world revolved around the local kidswith whom he rode the school bus and played sports. It got Rip thinking: Whatwere the implications of eliminating distance as a constraint? In what othersettings could the same principles apply, and who could reap the benefits?

As they watched Skip play, Bob noted that the maker of Xbox wasMicrosoft, 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 personalcomputers. By controlling the operating system, he explained, Microsoft hadstaked 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 theevening browsing through a box of magazines, books, and papers Bob hadpulled together for him. Included in the mix was material that probed threeforces of change in recent times: the declining cost of computer processing,the increase in connectivity, and the explosion of bandwidth. Bob was leavingon a business trip to China the next morning, but he suggested that Rip spendthe next 10 days catching up on reading and relaxing. If Rip ran out of thingsto 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 blockout some time to go over your impressions. Why don’t we plan to meet at myoffice two weeks from today?”

Before going to bed, Rip unplugged the PDA from his health-shirt and sentoff his latest health data.

PLAYING GAMES ACROSS TIME AND SPACE

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THE NEWBEGINNING

Key capabilities and relationships

Incredible pervasiveness and speed of technology

Continued impact of technology forces

Bob had a returned after a successful business trip to China. Henow looked forward to his meeting with Rip. He asked a fewcolleagues to join him, billing it as an opportunity to hear aninteresting perspective on the changes that were sweepingtheir world from Rip—“one of the brightest people I know”.

As Rip entered the meeting room, he seemed relaxed andconfident. He had spent the past week holed up liked a grad-uate student preparing for his presentation and defense of histhesis. He dumped a large stack of papers on the table andbegan talking with Bob and his colleagues.

“I’ve told them a little bit about you,” Bob said. “We’d all love to hear what you’ve noticed since you’ve been back and what you’ve been thinking. We could all do with a fresh perspective.”

Rip thanked Bob for the reading material he’d shared and forhis family’s hospitality. Then he began presenting his thoughts.

“In some ways,” said Rip, “I feel like I have a real advantageover other people who have seen the world change steadilyover the past couple of decades. For me, the shifts have beenstark. For the sake of our discussion, I’d like to focus on fourmajor themes that have emerged from my travels around townand my reading.

“The first big change—and it’s huge I think—is thecontinued impact of technology forces. We know fromMoore’s law that tomorrow’s computers will be faster andcheaper than today’s. We know from Metcalf ’s law thatconnectivity is becoming increasingly widespread, and weknow from Gilder’s law that bandwidth will be more abun-dant. Put them all together and there will be more and morestrategic opportunities available to those who understand thepower of the network. We see it in digital music and photog-raphy, and we are seeing it in medicine. We see it in smallthings like RFID tags and big things like cars. These three lawsare creating the new network era. Some seem to focus on onetechnology force but not the others. The real power is whenyou look at the three of them together.

“The second theme I’ll mention has to do with theincredible pervasiveness and speed of technology. In contrastto the way it was 25 years ago, when most product categoriesevolved more slowly, we are now in an age where products andbusiness processes are practically changing before our eyes.Every week some company or another is coming out with anew feature in their camera or a new way of packaging theirproduct or delivering their service—then, everyone else tries tocatch up. What makes many of these changes possible is tech-nology. You can’t predict exactly what will happen next month,but you need to understand what’s driving the changes so youcan anticipate how to react. It is pervasive because it is affectingproducts, processes and services. In the very near future, I cansee it affecting every company and every organization. It willeither touch their products or their business processes or theirservice delivery. And the speed with which it happens is incred-ible from what I could read and observe.

“My third theme,” Rip continued, “is about key capabili-ties and relationships. In many instances, the old capabilitiesthat companies relied on are no longer enough. It doesn’tmatter what business you’re in—today, no business is an island.Managers need to find ways to link what they do strategicallywith what other businesses do—not just suppliers but perhapseven competitors. They need to build strong relationships withcustomers too. These linkages offer important opportunities.This is true not only in technology-based industries, where myhardware has to work with your software or my game has towork with your console. As I learned during my visit to thesupermarket, it really needs to happen everywhere—includingrather mundane categories like packaged goods. When wewere in business school,” Rip remarked, “we used to think ofcompanies as portfolios of products and businesses. Now,companies are portfolios of capabilities and relationships.

“Look at what Sony is doing with its joint venture withEricsson—linking its position in consumer electronics withEricsson’s position in telecommunications. And look at whatApple is trying to do as an aggregator of digital music and whatGM is trying to achieve as a provider of on-board auto services.”

Rip paused, wondering how his ideas were being received.As he scanned the room, Bob and one of his colleagues were nodding.

“My final point,” Rip said, “is about network orchestration.This is related to my previous comments about capabilities andrelationships but it is also closely tied to who will make moneyin these new networks. At the moment, I am still trying tounderstand what the critical driver of value is in networks. Inthe physical world, value was driven by land, minerals,machines, production process, design, and manufacturing tech-nology. But what elements are truly rare and valuable today?

“In pursuit of an answer, I made a list of the leading compa-nies in the different business settings. I am struck by thenumber of areas where Microsoft is steadily building a pres-ence. They seem to want to influence the music industry withthe Windows Media Player. They are pushing theirSmartphone software into the handheld device market. Andthey have an RFID team that is hoping to shape how that tech-nology gets implemented and adopted.”

Rip paused and addressed Bob: “I looked at some of thereports you gave me on the automotive sector, and it seemsthat Microsoft also wants to influence the software andconnectivity in the automobile. Beyond that, they are trying toinfluence how the next generation will access the Net by tryingto influence the videogame space.” He continued: “I have notbeen able to sort through the meaning of this issue completelybut I think we should think more about who plays the role ofkey orchestrator in a changing network—and what it takes tobe in that position. This may help us understand the elusivequestion of who gets to capture value. It would be interestingto know if Microsoft is using a playbook that other companiesaren’t using—or maybe people just don’t understand. ”

THE DAWN OF A NETWORK ERA

Network orchestration

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Rip looked at Bob and his colleagues, who were listeningintently to what he said. Then he began his recap.

“The four themes I’ve mentioned seem to provide a wayto look at the new business space. It seems to me that devel-oping successful strategies has never been more challengingfor managers. But if you’re able to understand the potentialadvantages that networks offer in your particular businesscontext, you’ll be ahead. Whether it’s music, automobiles,medicine, or even farming, you need to think about hownetworks will change the game—and how you can takeadvantage 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 thinkingabout these shifts, or am I out of touch with what’shappening?”

Bob didn’t hesitate. “I think your assessment is on themark. You’ve really captured the essence of the challenges inthose four themes quite well. As I see it, we are just enteringthe brave new world of business networks that are shaped bytechnology, and we are all trying to make sense of how thingswill unfold. It’s clear that many of the old rules don’t apply.At the same time, many of the fundamentals of businessremain the same. A lot of managers know that technology ispervasive and fast changing. Clearly, as you’ve noted, thevalue creation and capture question is on everyone’s mind.”

Rip wondered how rapidly companies would respond tothe changes so they didn’t get buried in the avalanche ofnetwork forces. He wondered if the forces would impacteveryone or just some. His gut told him that this was amassive transformation that all managers needed to preparethemselves for and that, in many cases, they would need toact quickly to seize the opportunities.

Related Readings

Barabási, A. (2002). Linked: The New Science of Networks, PerseusPublishing: Cambridge, MA.

Kulatilaka, N. and Ciriello, J. (2004). “The Story of Island Man: It’s Not Justthe Technology”, BUILDE.

Venkatraman, N. and Lee, C. (2004). “Preferential Linkage and NetworkEvolution: A Conceptual Model and Empirical Test in the U.S. Video GameSector”, Academy of Management Journal (forthcoming).

Venkatraman, N., Lee, C., and Iyer, B. (2004). “Make Way for the Penguin?Explaining Commitment to Linux by Independent Software Companies”, BostonUniversity Working Paper.

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