,Foreword
New Business Models and the Creation of
Wealth
Throughout the twentieth century, wealth was created by the integrated Industrial Age corporation.
A clear model of the firm was established, along with many assumptions. Organizations were
structured as hierarchies with reporting relationships and an internal economy. Marketing-based
print and broadcast technologies became central to revenue generation. Manufacturing plants and
processes that had many similarities across industries were established.
Understandably, the traditional starting point for strategic business thinking had been the
individual corporation. But in the digital economy, that is no longer appropriate. A new form of
value creation is becoming the basis for competitive strategy. We're entering the era of the business
web, or b-web. The b-web is any system—of suppliers, distributors, service providers,
infrastructure providers, and customers—that uses the Internet as the basis for business
communications and transactions.
The key to competing in the digital economy is business model innovation that exploits the power
of business webs. Industry by industry, business webs are destroying the old model of the firm.
To fully appreciate the fundamental realignments under way in the economy, we must reach back
to the early writings of the Nobel laureate economist, Ronald Coase. More than six decades ago,
Coase posed the question, "Why do firms exist?" If the marketplace is so efficient, why not have
each worker, each step in the production process, act as independent buyer and seller? Coase
cited transaction costs as the basis of contradiction between the theoretical agility of the market
and the durability of the firm. Firms incur trans action costs when, instead of using their own
internal resources, they go out to the market for products or services.
Transaction costs have three parts, which together, or even individually, can be prohibitive.
Search costs. Finding what you need takes time, resources, and out-of-pocket costs (such as
travel). Determining whether to trust a supplier adds more costs.
Contracting costs. If every exchange requires a unique, separate price negotiation and contract,
the costs can be totally out of whack with the value of the deal.
Coordination costs. This is the cost of coordinating resources and processes. In Coase's time,
innovations like the telephone and the telegraph made it easier for distant firms to coordinate their
activities.
The vertically integrated Industrial Age corporations developed to sidestep these costs. This is why
Henry Ford's company—the first archetypal Industrial Age firm—didn't just build cars; it owned
,rubber plantations to produce raw materials for tires and marine fleets for shipping materials on
the Great Lakes.
As communication tools got better and cheaper, transaction costs dropped. Firms began to
specialize. With the Internet's arrival, many transaction costs are plunging to zero. Now, large and
diverse sets of people scattered around the world can cheaply and easily gain real-time access to
the information they need to make safe decisions and coordinate complex activities.
A company can add knowledge value to a product or service through innovation, enhancement,
cost reduction, or customization, at each step in its life cycle. Often, specialists do a better value-
adding job than vertically integrated firms. In the digital economy, the notion of a separate,
electronically negotiated deal at each step of the value cycle becomes a reasonable, often
compelling, proposition.
New business models based on networks are the new keys to competitiveness and wealth creation.
This is why Ravi Kalakota and Marcia Robinson's book is timely. The term e-business began as a
marketing slogan for technology companies. It is now a central theme at the heart of business
strategy. However, most managers still view e-business and e-commerce as the buying and selling
of goods on the Internet. Ravi and Marcia show how it is much more than this. They provide a
wealth of information about the key technologies that are enabling new business models, as well
as some helpful practical advice on how to get from there to here.
Once you've read this book you'll know why all business will soon be e-business.
Don Tapscott
Chairman
Digital 4Sight
September 2000
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Preface
e-Commerce is changing the shape of competition, the dynamics of the customer relationship, the
speed of fulfillment, and the nature of leadership. In the face of change, is your management
, Willing to cannibalize its existing channels with a risky, untested new one?
Creating a click-and-mortar service infrastructure that gives customers the same experience
through all the channels?
Digitizing the supply chain and linking up with competitors to reduce costs further?
Managers and companies everywhere are at a crossroad. With so many ways to go, which road
will lead to success? What roadblocks will need to be navigated? Which business models,
management strategies, and tactics will ensure success? What will the characteristics of the next
generation of business applications be, and which vendors will lead in delivering them? To whom
can managers turn for help? If you're losing sleep over these questions, you've picked up the right
book. We'll help you find the road to take to learn the fundamentals of business built on a digital
foundation. If these questions are not of paramount importance to you, get used to mediocre
business performance.
In these days of frequent and rapid change, skill in designing and changing complex "digital
corporations" is a significant advantage. This advantage is highlighted throughout the book. To
achieve an edge, management must be able to create complex service models built on
technology—"e-service" designs. Simple designs offer no advantage and are easily copied. This
book is about the discipline needed to create complex infrastructure choices, which are central to
any modern firm. This book, based on several years of researching, consulting, managing, and
growing e-business start-ups, tackles two nagging questions.
Why are some companies relentlessly successful at e-commerce while others flounder?
What are the successful businesses doing differently to solve customer problems or pain?
How are successful companies, both old and new, moving from tradi tional applications to
the new breed of integrated, e-business application architectures?
Through detailed case studies and analysis, this book examines the e-business blueprint, offering
step-by-step guidance in choosing and implementing the right application strategies to survive the
e-commerce onslaught and to succeed. The thesis of the book is that durable application
frameworks can guide you through the e-business chaos. Business models change. Technology
changes. But application infrastructure design principles endure.
What This Book Is About
Managers of established companies are struggling to comprehend this new phenomenon: e-
commerce. But already, the next wave—e-business—is reaching shore. Intensified competition
and new e-commerce opportunities are pressing traditional companies to build e-business models
that are flexible, fast moving, and customer focused. In other words, the core of the enterprise itself
is undergoing a metamorphosis from e-commerce to e-business.
e-Business is the complex fusion of business processes, enterprise applications, and organizational
structure necessary to create a high-performance business model. The message is simple: Without
a transition to an e-business foundation, e-commerce cannot be executed effectively. Considering
New Business Models and the Creation of
Wealth
Throughout the twentieth century, wealth was created by the integrated Industrial Age corporation.
A clear model of the firm was established, along with many assumptions. Organizations were
structured as hierarchies with reporting relationships and an internal economy. Marketing-based
print and broadcast technologies became central to revenue generation. Manufacturing plants and
processes that had many similarities across industries were established.
Understandably, the traditional starting point for strategic business thinking had been the
individual corporation. But in the digital economy, that is no longer appropriate. A new form of
value creation is becoming the basis for competitive strategy. We're entering the era of the business
web, or b-web. The b-web is any system—of suppliers, distributors, service providers,
infrastructure providers, and customers—that uses the Internet as the basis for business
communications and transactions.
The key to competing in the digital economy is business model innovation that exploits the power
of business webs. Industry by industry, business webs are destroying the old model of the firm.
To fully appreciate the fundamental realignments under way in the economy, we must reach back
to the early writings of the Nobel laureate economist, Ronald Coase. More than six decades ago,
Coase posed the question, "Why do firms exist?" If the marketplace is so efficient, why not have
each worker, each step in the production process, act as independent buyer and seller? Coase
cited transaction costs as the basis of contradiction between the theoretical agility of the market
and the durability of the firm. Firms incur trans action costs when, instead of using their own
internal resources, they go out to the market for products or services.
Transaction costs have three parts, which together, or even individually, can be prohibitive.
Search costs. Finding what you need takes time, resources, and out-of-pocket costs (such as
travel). Determining whether to trust a supplier adds more costs.
Contracting costs. If every exchange requires a unique, separate price negotiation and contract,
the costs can be totally out of whack with the value of the deal.
Coordination costs. This is the cost of coordinating resources and processes. In Coase's time,
innovations like the telephone and the telegraph made it easier for distant firms to coordinate their
activities.
The vertically integrated Industrial Age corporations developed to sidestep these costs. This is why
Henry Ford's company—the first archetypal Industrial Age firm—didn't just build cars; it owned
,rubber plantations to produce raw materials for tires and marine fleets for shipping materials on
the Great Lakes.
As communication tools got better and cheaper, transaction costs dropped. Firms began to
specialize. With the Internet's arrival, many transaction costs are plunging to zero. Now, large and
diverse sets of people scattered around the world can cheaply and easily gain real-time access to
the information they need to make safe decisions and coordinate complex activities.
A company can add knowledge value to a product or service through innovation, enhancement,
cost reduction, or customization, at each step in its life cycle. Often, specialists do a better value-
adding job than vertically integrated firms. In the digital economy, the notion of a separate,
electronically negotiated deal at each step of the value cycle becomes a reasonable, often
compelling, proposition.
New business models based on networks are the new keys to competitiveness and wealth creation.
This is why Ravi Kalakota and Marcia Robinson's book is timely. The term e-business began as a
marketing slogan for technology companies. It is now a central theme at the heart of business
strategy. However, most managers still view e-business and e-commerce as the buying and selling
of goods on the Internet. Ravi and Marcia show how it is much more than this. They provide a
wealth of information about the key technologies that are enabling new business models, as well
as some helpful practical advice on how to get from there to here.
Once you've read this book you'll know why all business will soon be e-business.
Don Tapscott
Chairman
Digital 4Sight
September 2000
table of contents
search
Settings
queue
back
Support
Sign Out
Preface
e-Commerce is changing the shape of competition, the dynamics of the customer relationship, the
speed of fulfillment, and the nature of leadership. In the face of change, is your management
, Willing to cannibalize its existing channels with a risky, untested new one?
Creating a click-and-mortar service infrastructure that gives customers the same experience
through all the channels?
Digitizing the supply chain and linking up with competitors to reduce costs further?
Managers and companies everywhere are at a crossroad. With so many ways to go, which road
will lead to success? What roadblocks will need to be navigated? Which business models,
management strategies, and tactics will ensure success? What will the characteristics of the next
generation of business applications be, and which vendors will lead in delivering them? To whom
can managers turn for help? If you're losing sleep over these questions, you've picked up the right
book. We'll help you find the road to take to learn the fundamentals of business built on a digital
foundation. If these questions are not of paramount importance to you, get used to mediocre
business performance.
In these days of frequent and rapid change, skill in designing and changing complex "digital
corporations" is a significant advantage. This advantage is highlighted throughout the book. To
achieve an edge, management must be able to create complex service models built on
technology—"e-service" designs. Simple designs offer no advantage and are easily copied. This
book is about the discipline needed to create complex infrastructure choices, which are central to
any modern firm. This book, based on several years of researching, consulting, managing, and
growing e-business start-ups, tackles two nagging questions.
Why are some companies relentlessly successful at e-commerce while others flounder?
What are the successful businesses doing differently to solve customer problems or pain?
How are successful companies, both old and new, moving from tradi tional applications to
the new breed of integrated, e-business application architectures?
Through detailed case studies and analysis, this book examines the e-business blueprint, offering
step-by-step guidance in choosing and implementing the right application strategies to survive the
e-commerce onslaught and to succeed. The thesis of the book is that durable application
frameworks can guide you through the e-business chaos. Business models change. Technology
changes. But application infrastructure design principles endure.
What This Book Is About
Managers of established companies are struggling to comprehend this new phenomenon: e-
commerce. But already, the next wave—e-business—is reaching shore. Intensified competition
and new e-commerce opportunities are pressing traditional companies to build e-business models
that are flexible, fast moving, and customer focused. In other words, the core of the enterprise itself
is undergoing a metamorphosis from e-commerce to e-business.
e-Business is the complex fusion of business processes, enterprise applications, and organizational
structure necessary to create a high-performance business model. The message is simple: Without
a transition to an e-business foundation, e-commerce cannot be executed effectively. Considering
