Executive Thought Leadership

Business Webs Are Taking Over

Internet luminary Don Tapscott discusses how the Internet is transforming traditional business models.

As an internationally respected consultant, speaker, and authority on new media and the impact of information and communication technologies on business and society, when Don Tapscott discusses business model innovation in the digital economy, executives listen. Tapscott's experience is deep and wide-ranging. He is chair of itemus Inc., a leading architect of next-generation Internet strategies, solutions, and software for Global 2000 organizations. He has also served as chair of Digital 4Sight, an e-business strategy consulting firm, since the company's inception in 1994. In addition, he is a member of the board of directors of Celestica Inc. and is chair of the board of directors of Maptuit. Author and coauthor of several books about the application of technology in business, Tapscott's latest book—coauthored with David Ticoll and Alex Lowy—Digital Capital: Harnessing the Power of Business Webs (Harvard Business School Press, 2000), describes how business webs are the new corporate form replacing the traditional vertically integrated model. The editors at iQ spoke with Tapscott about how the Internet is stimulating business model innovation.

iQ: The Internet is known as a catalyst for rapid innovation and new tornado markets. How does your concept of business webs rely upon the Internet as a foundation and maximize upon it to enable tornado markets?

Tapscott: It turns out that the Internet enables new business models that are required for success in all markets. Sixty years ago a Nobel Prize-winning economist named Ronald Coase asked the question "Why do firms exist?" If Adam Smith is right—that is, an open market is the best mechanism to determine the allocation of goods and resources and people—then why isn't everyone an independent contractor at every step along the way?

Coase's answer was transaction cost or the cost of search—that is, assigning people and resources. Specifically, the cost of marshaling and coordinating resources to work together in production and distribution, and the cost of managing and executing transactions and handling payment.

It was a good question, and Henry Ford intuitively answered it by creating the Ford Motor Corporation. Ford owned a power plant, a shipping company, a glass factory, a steel mill, and even mahogany forests in Honduras to get the wood for dashboards. Ford did this because the costs of partnering with outside suppliers were greater than the costs of having the supply within the boundaries of Ford. It was a good theory for a century. All the big corporations were built on this model of vertically integrated corporations.

Then along comes the Internet, causing such transaction costs to drop to zero—or to be equal to or lower than the costs of carrying out transactions within the boundaries of the firm. So all of a sudden it doesn't make sense to integrate vertically; it makes sense to integrate horizontally where you define a unique area of competency, and then you partner with others as part of a business web.

As vice president of Customer Sales & Service for direct merchant Lands' End, Ann Vesperman Olson is taking full advantage of the Internet to provide individual attention to customers in order to improve the shopping experience and customer satisfaction. In 1999, the company's online shopping site had 38 million visitors, who spent $138 million.

iQ: What is a b-web?

Tapscott: The b-web [business web] is the new generic vehicle for creating wealth, and products and services for customers. It is replacing the traditional vertically integrated corporation. Customers, suppliers, affinity groups—even competitors—cooperate and, in some cases, compete to create value—all on the Internet. Industry by industry, sector by sector, business webs are obliterating the traditional model of the corporation.

Knowledge value can be added to a product or a service through innovation, enhancement, cost reduction, or customization at each step in its life cycle. Often, specialists do a better job of adding value than do 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.

At Digital 4Sight we investigated 200 b-webs as part of a large multiclient program. There are many types of business webs, but the five main categories include: agoras or marketplaces, such as eBay and business-to-business exchanges such as Covisint ; aggregations like Schwab, which aggregate value from a number of sources; value chains that deliver tightly integrated value propositions, such as Cisco; self-organizing alliances like the Linux operating system; and finally, distributive networks which are wreaking havoc throughout the energy and related industries.

Many other names have been given to groupings of collaborating companies, such as clusters, swarms, virtual corporations, keiretsu, outsourcing partnerships, business ecosystems, and econets. But each of these names refers to a unique form of this much broader phenomenon.

iQ: Cisco believes that the most effective companies doing business online create profitable and innovative models that leverage the principles of Internet Protocol: open, scalable, flexible, distributed, simple. How do these principles map to the features of successful business webs?

Tapscott: They map very well. The fundamental value of the Net is that it's a deep, rich, publicly available infrastructure that grows daily in functionality. The technology now exists to effortlessly establish and sustain information-rich relationships.

Look at this from the day-to-day perspective of an individual manager. The time and cost of moving from an idea to execution is rapidly declining. Projects can be reduced to bite-sized pieces and farmed out to specialists around the world with virtually no transaction costs. There is simply no excuse for failing to act.

With the business web, much can be accomplished in a similar manner to how a Hollywood film is made: A producer, a director, a screenwriter, actors, and stagehands come together, work intensely to produce a movie, and then disband, moving on to other projects. A characteristic of tomorrow's best managers will be their ability to deploy and to integrate the output of specialists scattered around the world who will likely never meet. In doing so they create open, scalable, flexible, and distributed environments that, ironically, are often simpler—due to their transparency—than life in the opaque, vertically integrated firm of the past.

iQ: How do companies leverage b-webs to create competitive differentiation: new services, deeper relationships, increased efficiency?

Tapscott: You achieve these goals by using the Internet to develop what we call digital capital. Digital capital results from the internetworking of intellectual capital. Let me explain. There is widespread agreement about what intellectual capital is. There are three elements. First, there are knowledge assets that are contained in the brains of the people who work in your organization. These assets walk out the door every night. Second, there are the knowledge assets that don't walk out the door, which are contained in your management, culture, processes, systems, and knowledge-management databases, and so on. Third, there is intellectual capital contained in the market—your brand, penetration, number of customers, and so on.

The Internet changes each of these into digital capital. Human knowledge is transformed because we now can have access to human brains, but we don't have to own them. Cisco is probably one of the best examples of a company that has reached outside its boundaries to network human capital. Further, structural capital is captured in the new business models as intellectual capital. Finally, when customers become part of the business web, the market capital becomes relationship capital, and the brand—rather than just being an image—becomes the measure of your relationship capital. The implications for CEOs are quite profound: Rather than just trying to hire a bunch of smart people, you must think about building up your digital capital.

iQ: Cisco maintains that the main driver of success is creating unprecedented value for customers. Can you explain how customer-centricity is at the core of how companies win in the Internet economy?

Tapscott: The wealth embedded in customer relationships is now more important than the capital contained in land, plants, buildings, and even in big bank accounts. Relationships are now assets. This "relationship capital" accumulates and provides a new foundation for marketing and sales revenue. A firm's ability to engage customers, suppliers, and other partners in mutually beneficial value exchanges determines its relationship capital.

The customer-facing aspects of relationship capital cause a profound rethinking of marketing. For the first time, companies can forge two-way, interactive, personalized relationships with all customers on a mass scale. Although the virtue of deep relationships was always self-evident in theory, it wasn't practical in reality. But now the ubiquitous, cheap, and interactive Internet—coupled with enormous low-cost databases—enables producers to develop a meaningful direct relationship with each customer. Sellers and buyers have ongoing dialogue, and customers expect you to tailor each iteration of your product to their needs and wants.

As I said earlier, the Internet slashes transaction costs. A customer buys a book from an online bookstore (aggregation b-web) because of low transaction costs—search costs, for example. She can request all books on a certain topic or a particular author. She can indicate authors she likes and find out what other authors are enjoyed by customers who share her views. She can request a bestseller list in a category or ask for a book's daily sales status. Some neighborhood boutique stores deliver a few such value-added services, but such stores are disappearing. The costs are too great relative to the revenue received.

iQ: What advice would you give managers about implementing b-web strategies?

Tapscott: The first step of b-web strategy is to disaggregate the value proposition that the customer receives and experiences. Focus on the end-customer, the person who really pays the bills and whose needs and appetites your b-web must meet. Think about the genuine customer needs that your product or service addresses, not just the "thing you (or the market incumbents) do" to get the business. And avoid preoccupation with the production or distribution channels that today stand between you and the real customer.