Leaky Boats Sink in a Rising Tide-Get ready for economic recovery by meshing with business webs

When the economy rebounds, many companies will find the door to prosperity locked. The executives of these companies cling to the notion that they can compete in tomorrow’s business environment by relying on yesterday’s business architectures. But the old business models will fail to keep pace.

by Don Tapscott IntelligentEnterprise.com

Profound change is occurring deep in the structure of the firm — transforming how companies orchestrate resources to create value for customers. The Internet is slashing transaction and partnering costs between companies. The ability to mesh information, knowledge, and processes effortlessly among corporations and with other entities means that we have a new infrastructure for creating successful customer relationships. Stand-alone, vertically integrated companies are being replaced by what I call business webs.

Business webs perform better. Their constituents tend to have some combination of better revenue growth, market capitalization, return on assets, revenue per employee, inventory turnover, cash cycle, and profitability than traditional firms.

The basic laws of competitive advantage haven’t changed. Companies compete through offering differentiated products and services, lower costs, or intimate customer relationships. Business webs achieve these goals more effectively than traditional models of the firm. With the Internet, companies can farm out business functions or projects, with virtually no transaction costs, to firms around the world that specialize in manufacturing, human resource administration, and so forth. Doing so captures the enormous benefits of the open market for business services, with focused suppliers competing to reduce costs, increase quality, and accentuate innovation.

Taking advantage of business webs can wring enormous waste from corporate operations. Jack Welch, former CEO and chairman of General Electric, called e-business initiatives "a game changer for GE" that expanded "far beyond our original vision."

His successor, Jeffrey Immelt, says, "The Internet allows every company to have fewer, more efficient, and higher-value jobs. At GE, 60 percent of our resources are in the ‘front room’ — customer-facing, growth-driving, manufacturing, selling, and controllership. The other 40 percent of our resources are in the ‘back room’ — supporting as well as compiling and passing information. This will change. Digitized companies in the 21st century will have significantly smaller back rooms with more resources committed to growth and customer success."

Companies participating in business webs are not, as some commentators have suggested, forced to be small. It’s the companies that don’t form business webs that will be small … on their way to extinction. By focusing on what it does best and capturing new business, a company can easily grow beyond its previous size. Even though the firm sheds its non-value-adding activities, it can increase market share, capture economies of scale, and grow much larger because a more specialized firm can focus on what it does well.

Employees will leverage the business web architecture to achieve an impact far beyond their numbers. In the Internet era, firms can profit enormously from resources that don’t "belong" to them.

Some have wondered, if the Internet radically drops transaction costs between firms and enables firms to partner in new ways, why can’t it have the same effects within the firm? Intranets can gain some, but not all, of these types of benefits. In the traditional hierarchical corporation, information flow was rigidly vertical. Intranets, and effective internal communications systems, knock down these information silos. Knowledge and insight flows freely throughout the firm. So, yes, improvements in efficiency and effectiveness are dramatic.

But by far the biggest opportunities for gain exist between firms. Intranets simply circulate existing knowledge and expertise. Business webs bring fresh insight and market-tested capability, dramatically expanding the total universe of knowledge and innovation that the company can exploit. Business webs provide your employees with better quality inputs — ideas, customer feedback, or supplier expertise.

For innovative managers, the Internet slashes the time and cost of moving from an idea to execution. Large projects can be broken down into smaller components and handed off to more specialized companies around the world, with virtually no transaction costs. This competitive environment captures enormous benefits. Suppliers strive to reduce costs and increase quality and innovation, because they know there are other specialized workers and companies around the world who are eager to do the work.

By contrast, insisting on keeping a project in-house often means it’s comparatively more difficult to mobilize resources, even with a high-performance intranet. Employees are pressed into jobs unrelated to their skills, as managers try to make do with the workers on hand. Alternatively, adding new employees to the payroll is time-consuming and costly. Approvals must be sought, reporting structures developed, workspace arranged, and so on. Every manager knows these internal rigidities increase costs and stifle innovation.

Don Tapscott [[email protected]] cofounded Digital 4Sight (www.digital4sight.com) and is coauthor of Digital Capital (Harvard Business School Press, 2000).

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