Ashridge

Virtual Learning Resource Centre

The bright stuff: How innovative people and technology can make the old economy new

Bookcover

by Arnoud de Meyer, Soumitra Dutta and Sandeep Srivastava, Financial Times Prentice Hall, 2002.

Abstract

Discusses how traditional businesses have fought back against e-business attacks by more innovative start ups. In-depth case studies show how Wal-Mart, Amazon, Merrill Lynch, Charles Schwab and others have proved that mammoths can learn to run like gazelles, without ditching all of their past.

(Reviewed by Kevin Barham in January 2003)

(These book reviews offer a commentary on some aspects of the contribution the authors are making to management thinking. Neither Ashridge nor the reviewers necessarily agree with the authors’ views and the authors of the books are not responsible for any errors that may have crept in.

We aim to give enough information to enable readers to decide whether a book fits their particular concerns and, if so, to buy it. There is no substitute for reading the whole book and our reviews are no replacement for this. They can give only a broad indication of the value of a book and inevitably miss much of its richness and depth of argument. Nevertheless, we aim to open a window on to some of the benefits awaiting readers of management literature.)

What would happen if your business was 'Napstered'? ask the authors of this book. Napster is the online music swapping business that made it easy for people around the world to download copyrighted music for free via peer-to-peer filesharing. What started as an idea in the head of a clever teenager in 1999 rapidly became a huge phenomenon with 60 million users. Although it ran into legal and financial problems, it redefined the way we think about intellectual property and in the process shook the foundations of the global music industry. Imagine what would happen to your own industry if something similar occurred. What would it mean if your customers could suddenly and easily exchange your products and services amongst themselves? Are you prepared for such a challenge? What are the implications for your organisation's strategy?

Try some other questions about your readiness for e-business. For example, how have the older parts of your business been affected by the Internet and how easy were the changes? Can you identify some specific examples where you have already created value using the Internet? How connected is your organisation with your customers? Can you name a few recent innovations that arose directly as a consequence of closer connections with your clients?

These are just some of the questions posed to established firms by this book. The good news is that the real winners in the Internet age (so it says) will be the old economy firms that seize the opportunities offered by the Internet and integrate its possibilities into their existing business. But how do you 'make a mammoth run like a gazelle'?

The book is based on research carried out by INSEAD's eLab which has looked at how traditional businesses have fought back against attack by more innovative start-ups. With in-depth case studies (of firms like GM, Auto-by-Tel, Amazon.com, Barnes and Noble, Wal-Mart, Charles Schwab, E*TRADE and Merrill Lynch) it lays out a framework for Internet-enabled innovation and shows how to exploit the 'true potential' of the technologies available. The 'bright stuff', it says, is the unprecedented promise of innovation that the Internet holds.

The dotcom failure should not obscure the fact that the Internet represents a far more serious discontinuity in business than anything that has happened in the past, say the authors. 'Embracing the Net' is an unmitigated imperative and opportunity to all incumbent businesses. The authors' research shows, however, that most incumbents have yet to enhance their competitive advantage using the Internet. The majority are doing little beyond the obvious - simply using the Internet as a medium for publishing corporate or product information. Or they are merely moving existing business models onto the new channel. The aim is not to connect people to your website, but to connect them to your business. Few have tried to use the Internet to transform their business. Few are creating innovative business models that exploit the true potential of the new technologies. It seems that the Internet has so far failed to touch the core routines of most organisations.

The authors' case studies highlight the new imperative - 'Innovation as Strategy'. The Internet and innovation are two sides of the same coin. The Internet makes possible a uniquely new strategic anchor for incumbents - innovation as an end in itself. The new organisational frontier is the 'Real Virtual Corporation' - a firm that is able to leverage the innovative power of the Internet and associated technologies to create value by enhancing customer relationships, managing integrated supply chains to improve the efficiency of all players, and empowering their employees to be more productive and innovative. It is about 'using the power of the virtual to innovate and enhance the real'.

From now on, innovation will be imperative for survival, not just growth. Innovation will be routine and the quantity of innovation will count no less than quality. The authors believe that incumbents can be as nimble-footed on innovation as start-ups. It's a tall order but forms like GE, IBM, GM, Charles Schwab and Merrill Lynch prove it can be done - that's the bright stuff.

The authors use the 'Marketspace' model to underpin their research. This is built on two dimensions - technological capability and strategic business. The technology dimension comprises two key capabilities enabled by the Internet:

  • Interactivity: relations between organisations and customers become richer and more interactive, creating new approaches to product design and customer service.
  • Connectivity: the Internet is fostering a shared global Marketspace with new communication and co-ordination mechanisms both across organisations and customers, and also within groups of customers.

The authors show how interactivity and connectivity are transforming the classical marketing model of the 4Ps - Product, Price, Promotion and Place (Distribution) to which they add an additional dimension, Customer Relationships. For example, the transformation of Product is occurring through the participation of customers in the specification and design of products. Promotion and Pricing are being transformed through the customisation of online promotions and the dynamic customisation of prices. Likewise, Place is being transformed through online ordering and distribution of products online. And Customer Relationships are radically changing through the creation of online communities for customers and the solicitation of online feedback from them.

Learning from the past

Not everything in the Internet environment is new. The authors believe that the lessons learned by 19 century entrepreneurs are a treasure chest of ideas for the entrepreneurial imperatives of the digital era. (Here, they echo Builders and Dreamers, which urged Internet era managers to look at the management lessons that can be drawn from history.) The Internet creates a discontinuity in the management of information and communication. So, what can we learn from the past about management of discontinuities? Internet-driven innovation is mainly about service innovation - providing solutions rather than 'products'. What do we know from the past about management of innovation in service environments? The Internet is a new technological infrastructure so what does history teach us about innovations made possible by new infrastructures? Any innovation runs into resistance against change. What have been the main drivers of resistance to innovation in the past?

There are four particular lessons to be derived from a study of the past. First, the 'technological life cycle model' shows that we need more flexible organisations, a willingness to question existing industrial organisation, and the need to build coalitions and communities of partners in order to create the 'quasi standard' for the industry. Second, the history of service innovation shows us that the Internet will offer many opportunities to create competitive advantage by experimenting with the overlap between customers and service providers. Thirdly, we know that the 'reverse life cycle in infrastructure-based services' that occurs when a new infrastructure is put in place (eg the railways, the automobile or the airlines) ultimately assists in generating wholly transformed or new services.

Lastly, history also gives us an understanding of the hurdles to be overcome if innovations are to be adopted and the benefits are to be realised. These include 'adoption hurdles' that slow down the rollout of the innovation such as price/performance, the investment risk for the firm, the user-friendliness of the innovation, and availability and quality of service. Then there are 'realisation hurdles' that prevent the user getting the full benefits of the innovation. These involve market structure (eg fragmented markets lead to faster adoption of innovations), and the resistance to change of users. As an example of the latter, some Asian managers who make great use of their informal networks are said to find Internet-based transactions quite threatening.

Managers need to consider which are the most important hurdles to innovation in their company and among their targeted customer base.

Innovation as strategy

The authors identify this as the new strategy being pioneered by the firms in their case studies. It is fundamentally different from having a 'great innovation strategy'. It is epitomised by innovation as a way of life, as the common thread running through the organisation, horizontally and vertically. There are four imperatives: Co-creation: 'roping in your customers' to lead the innovation process. E-nfrastructure: creating the right organisation to exploit the unique processes enabled by the Internet. Perpetual metamorphosis: leading the process of continuous adaptation to the changing environment. Institutionalising knowledge - both customer facing and operations intensive - to stimulate innovation.

Co-creation

Innovation in strategy is rooted in customers. Stop anticipating what your customers want - ask them and involve them. Co-creation demands 'destination-bound operational capabilities' - which means the ability to cater to the individuality of customers. (The authors say they have tried to keep their book jargon-free but there is still the occasional tongue twister.) This requires a comprehensive re-engineering of customer interfaces, in which the Internet clearly has a major role to play. The Net also creates a new opportunity - the ability to comprehensively service each customer. Pricing strategies, however, will hold the biggest potential for managerial misjudgement.

E-nfrastructure

This comprises three elements of the infrastructure - organisation, partners and information technology - that are particularly fertile areas for growth through innovation. Organisational boundaries offer new opportunities for innovation and competitive advantage. As organisations extend themselves to reach out to partners, resellers, and suppliers they create collective enterprises that tap deeper into collective knowledge and competences. The ability to create and recreate collective enterprises is taking centre stage of strategy. Cross-functional integration has to go much further than in the past and integration (horizontally and vertically) with partners into a network, and the quality of that integration, will be critical for success. Collective enterprises are opportunity driven and adaptable and can reconfigure rapidly to assemble the right complement of resources.

A lot of competence and knowledge about better serving customers lies with suppliers and resellers - so the question is how to partner with them to innovate continuously? The dichotomy between man and machine becomes meaningless as IT is increasingly interleaved with all operational processes. The imperative is to integrate the two seamlessly to create new value. It is important to remember that e-nfrastructure refers to more than the technology platform - it encompasses the entire organisational system - people, processes and partners - necessary for excellence and innovation. People as both leaders and executors are infinitely more important than 'bricks and clicks'. (Interestingly, the authors recognise that to create a naturally innovative organisation means building emotional energy among its people - that is precisely the theme of the other book review, The New Leaders, which looks at the role of 'emotionally intelligent leadership'.)

Perpetual metamorphosis

Successful firms don't just innovate once or twice; they keep on reinventing themselves. They aren't easy on themselves or complacent about their successes. They are not afraid of drastic strategic restructuring and reorganisation of their competence bases. The Internet is redefining innovation cycles and creating a new urgency for perpetual innovation within incumbents. But how to engage in perpetual metamorphosis without losing your sanity? Reinventing yourself takes guts. You have to be prepared to change the rules of the game. It needs managers who can make bold long-term decisions and who are fearless about undergoing drastic strategic restructuring and organisational change. You have to be ready to accept failure, learn from it and move on.

Institutionalising knowledge

In the new economy, knowledge is not just another asset like people, capital, etc. It is the asset to be managed and the other assets will be the means for the competitive management of knowledge. Traditionally it was argued that organisations existed to minimise transaction costs. Now, knowledge creation and nurturing are taking over as the rationale for organisational existence. Knowledge is the 'fountainhead' of innovation and the two form a closed-loop circuit.

To bring about 'knowledge institutionalisation', organisations will have to master the knowledge-innovation cycle. This has to be worked on at two levels - internal knowledge (organisational and operational) and external knowledge (customer related). The two must fuse together to be strategically meaningful, although the imperatives for managing each are different. The imperative for the first is the speed and spread of knowledge institutionalisation because the Internet makes sharing of knowledge by employees many times faster and wider in scope. The imperative for the second is the digital infrastructure to capture, store and deploy customer knowledge. The Internet makes it many times easier for organisations to integrate customers into their critical processes. Adopt a holistic approach - innovation is as much a social process as a technology-enabled process. Strengthen the informal organisation to build stronger co-operation and co-ordination between peers.

This is certainly one of the more worthwhile books to have appeared on e-business. Each chapter concludes with action points and questions that will inspire any manager to look anew at their business and its future. As the book makes clear, the potential of the new infrastructure created by the Internet is immense. The message is simple, say the authors: Reconstruct your business on to the new infrastructure and make innovation your corporate, tactical and operational mainstay. From now on innovation is going to be routine, an imperative for survival not just growth. The quantity of innovation will be as important as the quality. Take as much of your assets and processes online as possible.

The authors are convinced that incumbents can be as nimble footed as start-ups. A discontinuity in technology is the occasion to redefine the boundaries of an industry. If the message is simple, implementing the necessary strategies and changes will be very demanding. Incumbents often have a real or purely emotional stake in 'their' industry and this holds them back. They have to 'deconstruct' a legacy and then reconstruct it all over again - with a different architecture but with the same people. The wiser ones, however, quickly accept the change and work to cut out the slice of the new cake that should belong to them. They actually speed up the transformation. Be wise, say the authors.

Back to the top