2. 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
4. “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.
5. 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
6. 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
7. 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
8. 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?
9. 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
10. 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
11. 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
12. 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.
14. 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. ”
15. 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
16. 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.
