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Soundview Executive Book SummariesFrom the beginning of the so-called "dot-com bubble," there were those who thought the Internet to be a revolutionary force for immediate change in the world, and those who thought the whole thing was simply speculative mania intended to con the gullible. They were both wrong. Indeed, the truth resides somewhere between those two extreme modes of thought - the Internet can be a powerful tool if companies and consumers learn how to use it creatively and imaginatively. It can open up possibilities for value creation and enhancement heretofore unimagined, providing companies with sustainable competitive advantage.
Part theoretical framework, part hard reality, Knowledge@Wharton On Building Corporate Value is based on articles and research drawn from the Wharton School's online resource, Knowledge@Wharton.
For companies eager to approach their Internet ventures like real businesses (i.e. with revenues and the hope of profits), the authors write that it is important to analyze both conceptual strategies, as well as real-world business models, in order to gain the best, most powerful competitive edge. Both are critical to success, they explain, particularly in the aftermath of the enormous losses in capital investment brought about by the bursting of the dot-com bubble.
According to the authors, those who poured billions into entrepreneurial ventures in the mid- to late-90s recognized the three broad conceptual effects inherent to Internet technology:
- Communication effect. The Internet has made it easy to search for and find vast amounts of information, in addition to making it much less expensive to store and transfer it. Note, it is less expensive, not free - a point overlooked by dot-com investors and entrepreneurs in their relentless drive to attract traffic to their businesses. For example, many companies that once gave away their content for nothing, generating revenues through advertising, discovered ads couldn't generate sufficient funds to maintain their businesses.
- Brokerage effect. Some analysts compare the Web to a giant market marked by openness, informality and interactivity. The authors write that this effect makes it possible for Internet users to access global markets at minimal cost, flattening the playing field enough for small companies to take on large conglomerates for the same customers. A good example of this effect is eBay, the online auction site whose mission is "to help practically anyone trade practically anything on earth." It boasts 40 million registered users, 126 million auction listings, and gross merchandise sales of $11 billion annually.
- Integration effect. The Internet realigns players in industry value chains as some players are disintermediated in the wake of the new technology. When the value chain changes, the authors write that it provides opportunities to create value. In addition, the Web's ability to connect buyers and sellers directly to one another knocks middlemen out of the value chain by eliminating the need for their participation in transactions. The Web can also create new intermediaries, or infomediaries, that mine customer transaction data to make "mass customization" possible.
A business model is made up of a company's goals, strategies, processes, technologies and structure - the things that enable an organization to capture and deliver value to customers. The authors explain that a business model must have four important elements: scalability, complementary resources and capabilities, relation-specific assets, and knowledge-sharing routines.
Information assets, which dominate e-business, the authors write, are generally costly to produce initially, but typically are easy and inexpensive to reproduce. Exploiting this on the Web requires companies to develop scalable business models. Technological advantages are often short-lived, however, and the authors point out that those advantages require companies that want to lead in the digital arena to acquire complementary resources, capabilities and assets to keep competitors at bay.
No firm can hope to dominate the Internet, the authors explain, but networks of allied firms can provide competitive advantage for those involved in such alliances, particularly if they are adept at managing collaborative relationships and relationship-specific assets. In such collaborations, they write, effectiveness depends largely on the knowledge-sharing routines collaborators develop between one another. These routines help partners enhance their collective competitive advantage over rivals and their partners.
Once a company has a strong business model in place, the authors write, it needs to gain and sustain competitive advantage through leveraging three elements:
- Position in opportunity space. If firms want to gain competitive advantage over rivals, the authors write that they must position themselves appropriately in their markets. After the Cold War, for example, defense contractors had to find ways to put their technologies to commercial use to stay afloat in a market that didn't need tools of defense.
- Leveraging capabilities. According to the authors, companies must learn to develop capabilities - the combination of skills, resources and knowledge firms bring to the table when they compete - that are unique. These capabilities should be difficult to duplicate, yet widely applicable across several products and services.
- Neutralizing competition. As important as it is for companies to position themselves correctly and develop unique capabilities, the authors write that they should also adopt strategies that anticipate competitive reactions. Copyright © 2003 Soundview Executive Book Summaries