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Japanese Edition
Fujitsu Institute of Management, Tokyo
September 1998

French Edition
La chaîne de la connaissance
Stratégies d'entreprise pour l'Internet

Preface de Francis Lorentz

Editions Village Mondial, Paris, May 1998

Excerpt from:
The Knowledge Channel
Corporate Strategies for the Internet

Chapter 4, Implications for corporate strategy, page 55

This text has been slightly edited for presentation on the web site.

Corporate Strategies for the Internet

There is little doubt that the evolving internet mass medium has strategic implications for companies in nearly every industry. It is likely to impact not only on external relations with customers, on internal management practices, but just as importantly on how we all think about the world.

The immanence of such fundamental change makes it very desirable to have a clear picture of what is likely to happen, but achieving this is deeply problematic.

For example, in 1983 AT&T hired McKinsey & Company to assess the future of cellular telephone market. Since the prediction was off by more than 2000%, the business decisions that AT&T made as a result ended up costing the company billions of dollars.22

Whether it is the technologists themselves who make the forecasts or the consulting firms that they hire, things often go differently than predicted As a result of the persistently dismal track record, some consultants prefer the blanket prediction that, "All predictions are wrong." While this is convenient for the futurists, it is not particularly helpful for executives. Since every decision is also a prediction, executives are obliged to make predictions as a regular part of their daily work.
But it takes time to gather complete information, and while waiting to make a decision the market environment may be rapidly changing. Windows of opportunity open and close, and in any case the choice not to make a decision is itself a decision, and possibly a significant one.


A structural model of economic change

So while precious few may be able to predict specific events particularly well, it will probably be more useful to look at the patterns that underlie the events. In the transition from the industrial economy of the 19th and 20th centuries to the knowledge economy of the 21st, one of the most compelling patterns is the enormous impact of new technologies on established markets, particularly during the last 25 years.

A good example is the credit card industry, which was created in large part by American Express. Throughout the 20th century, the company developed a global communications network and unique services for which it could charge premium prices. By the 1970s, however, the global infrastructure of telecommunications and the parallel development of large scale computing caught up with Amex and enabled Visa to become a significant competitor.

Visa pursued a strategy of ubiquity and low cost, and by consistently exploiting its unique position as a joint venture among banks and its use of new technology, the company was able to transform the differentiated market that American Express dominated into a commodity market whose key characteristic was price.

In the two decades following the rise of Visa, American Express struggled to understand the behavior of its new competition, and to respond to it. When it was clear in 1993 that CEO James Robinson could not come to grips with the scale and scope of changes in the marketplace, he was abruptly fired by the Amex Board of Directors.

The same process seems to apply to many other industries as well. In the personal computer industry, Apple saw the advantages of its Macintosh eroded by the progress of Windows, but failed to respond. In the end, the differentiated Mac market was swept into the commodity market defined by the Windows-Intel alliance, crushing Apple's profit margins in the process.

In the auto industry, the Japanese turned the differentiated luxury car into a commodity by mastering the efficient design and manufacture of high quality cars. Lexus, Acura, and Infiniti displaced Cadillac, Mercedes, and BMW at the pinnacle of the market.

In these situations it is clear that the application of new technology may have compelling impact on existing differentiated markets. In particular, the use of information technology spreads know-how, enabling new competitors to enter the market. Further, new technology can make it possible to offer high quality products and services at lower cost, enabling newcomers to undercut the cost basis of existing providers.

Third, technology can reduce the underlying cost of administration and management, leaving companies with high operating cost structures trapped in marginal market niches.
Finally, technology can redefine the competitive game by switching who controls whom in the chain of value.

Separately or together, the result is a pattern whereby industries and industry segments that once supported product or service differentiation and premium pricing lose that advantage to new competitors who cleverly apply new knowledge and new technologies to create new market niches. Once-differentiated companies find themselves thrust into commodity markets where they have no protection, and where they are forced to fight for identity and market share.

Harvard professor Michael Porter defined the terminology of differentiation and commodity strategies, but apparently he has not extended his analysis to show how technology drives change as a general process. (Michael E. Porter, Competitive Advantage: Creating and Sustaining Superior Performance. New York, Free Press, 1985; and, Michael E. Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors. New York, Free Press, 1980.) This dynamic effect of technology seems to be one of the major forces that is displacing the industrial model and creating the knowledge age, a process that largely explains the massive discontinuities in the marketplace and the board room that we have observed during the last fifteen years.

The same dynamic is clearly present when regulated monopolies are deregulated. Because of their monopoly protection, they enjoy premium pricing and sustain themselves profitably as high cost producers. When their monopoly protection is removed, however, valuable knowledge is disseminated throughout the market and they are forced to compete with low cost producers in commodity markets.

Many of the hundreds of thousands of people who lost their jobs in the massive layoffs of the early 1990s worked in industries where this dynamic was prevalent. High cost producers found themselves unable to compete in the new commodity markets in which they unexpectedly found themselves: In the telephone industry following the breakup of AT&T; in the computer industry with the shift to the client-server architecture; in the airline industry following its deregulation; and coming soon to an electric utility near you.

But it wasn't just the rank and file who lost their jobs. In a prior work, Managing the Evolving Corporation, I compiled a list of 16 CEOs of major American companies who were fired between 1991 and 1993. (Langdon Morris, Managing the Evolving Corporation. New York, Van Nostrand Reinhold, 1995.)

Reviewing that list from the perspective of differentiated and commodity markets, it is apparent that at least ten of the fired CEOs (including James Robinson of Amex) were caught in the economic discontinuity brought on by technology.

From this I concluded that most of these fired CEOs must have misunderstood the nature of the challenges that they faced. They apparently failed to realize that they had encountered not just another business cycle, but a fundamental and permanent change in the character of their industries, one that was largely driven by the diffusion of new technology.

This situation has led to a significant change in how future CEOs are identified. Whereas it was once the case that future CEOs were developed within a corporation, and succession plans were carefully implemented over decades, it has now become common for the insiders to be passed over. Today, 40 of the largest 100 American corporations are run by CEOs who were recruited from the outside.

This says in no uncertain terms that being on the inside is not necessarily an advantage, and it may be a tremendous disadvantage. As the rate of change accelerates, it may become more difficult for insiders to recognize the important trends, to understand their meaning, and to make the necessary and difficult adjustments to corporate culture and corporate strategy that they demand.

Hence, corporate boards are now looking outside for new ideas, new experiences, new business models, and experience with new technologies to reinvigorate their organizations.

As a new technology that is becoming a mass market, the internet has the potential to amplify these dynamics in many existing industries, and force an even faster rate of change. We have already discussed possible impacts on broadcasting, advertising, television and computer manufacturing, and while we don't have high expectations for internet retail in the short term, over the long term it will displace distributors and retailers in many market segments.

To prepare for these kinds of challenges, our extension of Porter's model suggests that there are four strategic platforms, four generalized business models to employ depending upon the company, the industry, and the underlying trends:

1. Applying new technology to strip away differentiation
2. Competitive strategies for established commodity markets
3. Applying new technologies to create differentiation
4. Adding value to sustain differentiation.

The use of these strategies is not mutually exclusive, nor is it even black and white. It is not unusual for a company to apply more than one strategy and more than one platform at the same time, even in the same market segment. Nevertheless, the model will be useful if it helps to focus on the correct patterns rather than just on the confusion of events. It also provides an interesting tool for reverse engineering the strategies of competitors, suppliers, and customers that one needs to understand more clearly.

Excerpts from The Knowledge Channel

• The purpose of this report

• Implications for Corporate Strategy