Jelassi, Tawfik & Enders, Albrecht. (2008) Strategies For E-Business Creating Value Through Electronic and Mobile Commerce 2nd Edition PDF

Taw f i k J E l a s s i
albrEchT EndErs
francisco J. MarTínEz-lópEz
Third Edition
StrategieS for e-BuSineSS

creating value through electronic and
mobile commerce
•
•
concEpTs and casEs
•
•
Strategies for e-Business
A01_JELA7870_03_SE_FM.indd 1 10/03/14 3:44 PM

ii

Third Edition
Strategies for e-Business

Creating value through electronic
and mobile commerce
ConCepts and Cases
tawfik Jelassi
albrecht enders
Francisco J. Martínez-López
iii

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Contents
Brief contents
List of exhibits xx
Foreword xxiii
preface xxvii
authors’ acknowledgements xxxiii
the authors xxxv
publisher’s acknowledgements xxxvii
Part 1
Introduction 1
1 Key terminology and evolution of e-business 3
Part 2
The e-business strategy framework 31
2 overview of the e-business strategy framework 33
3 external analysis: the impact of the Internet on the macro-environment
and on the industry structure of e-business companies 40
4 Internal analysis: e-business competencies as sources of strengths
and weaknesses 79
5 strategy options in e-business markets 104
6 sustaining a competitive advantage over time 127
7 exploiting opportunities of new market spaces in e-business 152
8 Creating and capturing value through e-business strategies: the
value-process framework 174
9 Choosing the appropriate strategy for the internal organisation
of e-business activities 195
10 Choosing the appropriate strategy for interaction with suppliers 218
11 Choosing the appropriate e-business strategy for interacting with users 232
12 Moving from wired e-commerce to mobile e-commerce
and u-commerce 265
Part 3
A roadmap for e-business strategy implementation 297
13 a roadmap for e-business strategy implementation 299

Brief contents
Part 4
Case studies 315
14 Building e-business competence through concepts and cases 317
a guide to the main focus of the case studies 337

synopses of case studies 338
Case studies 357
Index 717
vi

Contents
List of exhibits xx
Foreword xxiii
Preface xxvii
Authors’ acknowledgements xxxiii
The authors xxxv
Publisher’s acknowledgements xxxvii
Part 1 Introduction
Chapter 1 Key terminology and evolution of e-business 3
Chapter at a glance 3
Learning outcomes 3
Introduction 4
1.1 Key terminology 4
1.1.1 e-Business 4
1.1.2 electronic commerce 4
1.1.3 Mobile e-commerce 4
FT article It’s too early for e-business to drop its ‘e’ 5
1.1.4 the concept of strategy 6

1.1.5 the concept of value creation and capturing 9
1.2 The evolution of e-business 9
1.2.1 the grassroots of e-business 14
FT article edI update 14
1.2.2 the rise of the Internet 16

FT article Boo.com founder fears net bubble 17
1.2.3 the crash 18
FT article Webvan’s billion-dollar mistake 21
1.2.4 the synergy phase 22
FT article From netscape to the next Big thing: how a dotcom decade
changed our lives 22
Blog box Google acquires Internet (May 2017) 27
vii

Contents
summary 28
Review questions 28
discussion questions 28
Recommended key reading 29
Useful third-party weblinks 29
notes and references 30
Part 2 The e-business strategy framework
Chapter 2 Overview of the e-business strategy framework 33
Learning outcomes 33
Introduction 33
2.1 Key challenges in e-business strategy formulation 34
2.2 A systematic approach to e-business strategy formulation 35
summary 38
Review questions 38
note and reference 39
Chapter 3 External analysis: the impact of the Internet on the macro-

environment and on the industry structure of e-business companies 40
Related case studies 41
Introduction 41
3.1 Examining trends in the macro-environment 42
3.1.1 the political and legal environment 42
FT article online gambling: the sector has been able to cash in on a regulatory
regime set up in alderney 43
FT article publishers sued over e-book price ‘collusion’ 45
3.1.2 the economic environment 46

3.1.3 the social environment 46
FT article UK online economy valued at £82bn 47
3.1.4 the natural environment 47
FT article a social network links our personal and office lives 48
Blog box How Facebook got its green back 49
3.1.5 the technological environment 50
viii

Contents
FT article trying on the future 51
3.2 Examining industry structure with the five forces framework 51
FT article Michael porter, management thinker – academic who shares his values 53
3.2.1 Industry rivalry 54

3.2.2 Barriers to entry 55
FT article Cloud computing cuts start-up costs 57
3.2.3 substitute products 59

3.2.4 Bargaining powers of buyers and suppliers 59
FT article Facebook shows it gets the message with Instagram deal 60
FT article Google buys UK price comparison website for £37.7m 61
3.3 Complementing the five forces framework with the co-opetition framework 62
FT article nokia and Microsoft talk up benefits of co-dependence 64
Critical perspective 3.1 Benefits and drawbacks of industry analysis tools 66
3.4 Defining industries, segmenting markets and targeting markets in e-business 67

3.4.1 defining an industry 67
3.4.2 segmenting markets in an industry 67
e-business Concept 3.1 the e-business market segmentation matrix 68
FT article: Vodafone and Facebook team up on smartphone 72
3.4.3 targeting specific markets in an industry 73
FT article Google searches to become personalised 75
summary 76
Review questions 76
Chapter 4 Internal analysis: e-business competencies as sources

of strengths and weaknesses 79
Introduction 80
4.1 Understanding core competencies in e-business 80
4.1.1 Competencies and core competencies: a brief overview 80
4.1.2 sources of value and core competencies in e-business 82
ix

Contents
FT article It linked to financial performance 84
4.2 Analysing the Internet-impacted value chain 86

4.3 Leveraging the virtual value chain 89
Critical perspective 4.1 Compatibility between the resource-based view and the
market-based view of strategy 91
4.4 Selecting activities for online interaction with customers – the ICDT framework 92
4.4.1 Information activities 92
FT article advertisers rush to master fresh set of skills 93
4.4.2 Communication activities 95
Blog box Moving back to personalised interaction – e-diets.com 95
4.4.3 transaction activities 96

4.4.4 distribution activities 96
4.5 Moving beyond the value chain to value networks 96
FT article outsourcing supply chain operations 97
summary 100
Review questions 100
Chapter 5 Strategy options in e-business markets 104

Introduction 105
5.1 Understanding the fundamentals of competitive advantage in
e-business 105
5.2 Examining the landscape of strategy options for e-business 107
5.2.1 Cost leadership strategies 108
5.2.2 differentiation strategies 111
5.2.3 outpacing strategies (and the risk of getting ‘stuck in the middle’) 113
5.3 Developing strategy alternatives 115
5.3.1 the strategic gameboard framework 115
5.3.2 e-Business models: a brief overview 117
Blog box Facebook made $9.51 in ad revenue per user last year in the Us and Canada 119
5.4 Creating a fit between the chosen strategy and the value chain 120
5.4.1 Consistency between activities 120

Contents
Blog box easyJet – setting up an organisation for a low-cost strategy 121
FT article airlines ditch simple model for complexity 122
5.4.2 Reinforcement of activities 123

5.4.3 optimisation of efforts 123
summary 124
Chapter 6 Sustaining a competitive advantage over time 127

Introduction 128
6.1 Building up barriers to imitation 128
6.2 Dealing with the threats of disruptive innovations in e-business 130
6.2.1 Understanding the fundamental process of disruptive innovations 130
Blog box strategy for startups: the innovator’s dilemma 132
6.2.2 discovering the underlying reasons for incumbents’ failure 135
FT article Why disruption can be good for business 136
6.2.3 Raising the right questions to recognise the threats of disruptive innovations 138
6.2.4 Finding ways to deal with disruptive innovations 139
FT article Light reading 140
6.2.5 selecting the appropriate mental frame for efficient reactions 143
FT article snapshot of a humbled giant 144
summary 149
Chapter 7 Exploiting opportunities of new market spaces in e-business 152

Introduction 153
xi

Contents
7.1 Gaining insights into new market spaces through the value curve 153
7.2 Looking outside one’s own box 154
FT article the way we shop now 156
7.3 Pinpointing possibilities for new value creation 158

7.4 Finding the right time to enter a market 159
7.4.1 early-mover advantages 160
FT article the first-mover advantage myth 161
Blog box Google just got a whole lot smarter, launches its knowledge graph 163
FT article Inside Match.com 165
7.4.2 early-mover disadvantages 170

summary 171
Chapter 8 Creating and capturing value through e-business strategies:

the value-process framework 174

Introduction 175
8.1 The value-process framework for e-business strategies 175
8.1.1 Creating value 176
8.1.2 Capturing value 177
8.2 Integrating strategic management analyses through the VPF 181
8.2.1 the value chain analysis and the VpF 181
8.2.2 the five forces analysis and the VpF 182
8.3 Sony BMG (Germany): an actual application of the VPF 183
8.3.1 the business context 184
8.3.2 Value creation 184
8.3.3 Value capturing 188
8.3.4 Findings 190
summary 192
xii

Contents
Chapter 9 Choosing the appropriate strategy for the internal organisation

of e-business activities 195

Introduction 196
9.1 Reasons determining ‘make-or-buy’ decisions in e-business 196
9.1.1 Reasons favouring ‘make’ decisions 198
FT article everyone’s a critic now – or are they? 201
9.1.2 Reasons favouring ‘buy’ decisions 201

9.2 Choosing the organisational structure for e-business activities 202
9.2.1 separate e-business organisation 203
9.2.2 Integrated e-business organisation 204
FT article Last bookstores standing may turn digital page 205
9.3 Value chain deconstruction over the Internet 206
Critical perspective 9.1 the limitations of deconstruction and unbundling 207
9.4 Unbundling the corporation over the Internet 208
FT article Model that works even in turbulent times 208
9.5 Managing conflicts between online and offline distribution channels 211
9.5.1 Understanding conflicts in distribution channels 212
9.5.2 the channel conflict matrix 213
FT article expedia stops american airlines ticket sales 214
summary 215
Chapter 10 Choosing the appropriate strategy for interaction with suppliers 218

Introduction 219
10.1 Advantages and drawbacks of online purchasing 219
FT article supply chain leaders identified 221
10.2 Classification of B2B e-marketplaces based on the purchasing process

and the purchased products 222
FT article amazon noses into industrial supply chain 224
xiii

Contents
10.3 Classification of B2B e-marketplaces based on their degree of openness 225

10.4 Integrating e-procurement systems 226
FT article supply chain is a strategic discipline 228
summary 229
Chapter 11 Choosing the appropriate e-business strategy for

interacting with users 232

Introduction 233
11.1 The Internet and social commerce 233
11.1.1 the advent of Web 2.0 233
11.1.2 Implications of Web 2.0 for Internet business models 235
11.1.3 Understanding user behaviour on the social web 240
FT article Facebook shows off new marketing tools 241
11.2 The trade-off between richness and reach 243
Critical perspective 11.1 the limitations to blowing up the trade-off between

richness and reach 245
11.3 Increasing the richness of interactions with customers 245
11.3.1 Customer relationship management (CRM) in a digital context 246
FT article social CRM mirrors rise in customer power 249
11.3.2 the concept of mass-customisation 251

11.4 Increasing the reach of interactions with customers 252
FT article Lights, camera, blender! How to create a hit 253
11.4.1 Viral growth 254

11.4.2 the ‘tipping point’ concept 255
11.4.3 the ‘long tail’ of Internet-based social networks 256
FT article Lulu aims to wag the Internet ‘long tail’ 259
Critical perspective 11.2 Is there unlimited choice and does it create unlimited demand? 261
summary 261
xiv

Contents

Chapter 12 Moving from wired e-commerce to mobile e-commerce

and u-commerce 265

Introduction 266
12.1 Mobility and unwired e-commerce 266
12.1.1 Understanding the value network of mobile e-commerce 267
12.1.2 segmenting mobile e-commerce consumers and business services 270
FT article the retailers’ increasing use of smartphones to reach consumers –

codes open new front in retail wars 273
12.1.3 Comparison of mobile e-commerce with wired e-commerce 274
12.2 Strategy and mobility 277
12.2.1 Leveraging wireless technologies to create a competitive advantage 277
12.2.2 Impact of wireless technologies on a company’s value chain 278
FT article Mobile: nirvana is tantalisingly close 280
12.2.3 Influence of wireless technologies on the industry’s five forces 281

12.2.4 Main challenges for mobile e-commerce companies 283
FT article the online challenges facing retailers – stores tap into shoppers as
mobiles ring the changes 285
12.3 Ubiquity and u-commerce: strategy for the ultimate evolution
of commerce 286
12.3.1 What is u-commerce? 287
12.3.2 Main features of u-commerce 287
12.3.3 From wired e-commerce to u-commerce: the definite evolution 288
12.3.4 types of u-commerce and new forms of marketing 289
FT article Welcome to a new reality 291
summary 293
xv

Contents
Part 3 A roadmap for e-business strategy implementation
Chapter 13 A roadmap for e-business strategy implementation 299

Introduction 300
13.1 What is the mission of our company? 300
13.2 What are the objectives for our e-business strategy? 303
13.3 What value do we want to offer through our e-business strategy? 303
13.3.1 What type of competitive advantage do we aim for? 303
13.3.2 How much breadth do we want to have in our product and
service offerings? 304
13.4 What are the customer segments to target and what is our value proposition for
each segment? 305
13.5 What kind of ethical issues, privacy concerns and security risks do we
need to consider? 305
13.5.1 dealing with ethical issues and privacy concerns 305
13.5.2 addressing security risks 306
FT article LinkedIn vows to tighten security after password breach 307
13.6 Should we implement our e-business strategy alone or with external partners? 309
13.7 What organisational structure should our e-business activities have? 309
13.8 What is our cost and revenue model? 309
13.8.1 What is the cost structure of our e-business activities? 310
13.8.2 What is the revenue structure of our e-business activities? 310
13.9 How should we align our physical-world strategy with our e-strategy? 311
summary 312
Part 4 Case studies
Chapter 14 Building e-business competence through concepts and cases 317

Introduction 318
14.1 Defining creativity and analytical ability 318
4.1.1 Creativity 318
xvi

Contents
FT article Breaking the barriers to creativity 320
14.1.2 analytical ability 322

14.2 Becoming a ‘catalyst for change’ 322
14.3 Learning about e-business through case studies 324
14.3.1 Case studies as a context for the analysis of e-business issues 324
14.3.2 Case studies as a context for the application of e-business concepts 324
14.3.3 Case studies as a stimulus for creative e-business strategies 325
14.4 Learning about e-business through concepts and frameworks 326
Strategy in action 14.1 Business thinking: on finding the right balance between
analysis and intuition 327
14.4.1 extending the breadth of the analysis 330
14.4.2 extending the depth of the analysis 331
Strategy in action 14.2 ‘Why?’ – the importance of questions in strategy formulation 332
summary 334
A guide to the main focus of the case studies 337

Synopses of case studies 338
B2C e-commerce 338
1 From a(pples) to Z(oom lenses): extending the boundaries of
multichannel retailing at tesco.com 338
2 From e-banking to e-business at nordea (scandinavia): the world’s
biggest clicks-and-mortar bank 339
3 ducati (Italy) vs. Harley-davidson (Usa): innovating business
processes and managing value networks 340
4 american Well: the doctor will e-see you now 340
B2B e-commerce 341
5 IBX (northern europe): expanding B2B e-purchasing from
indirect to direct goods and services 341
6 satec (spain): business transformation through It value reinvention
and organisational redesign 342
7 otis elevator: accelerating business transformation with It 343
8 topCoder (a): developing software through crowdsourcing 344
9 appirio: new venture on a cloud 344
10 ItC e-Choupal: corporate social responsibility in rural India 345
G2B2C e-government 346
11 e-Government in estonia: establishing the world’s leading information society 346
12 ICt in tunisia: a strategic lever for building a knowledge-based economy 347
13 Fostering innovation in the public sector: VivekKundra@Usgovernment 348
xvii

Contents
B2E e-communities 348

14Knowledge management at Booz & Company: towards a culture of
knowledge sharing and collaboration 348
C2C e-communities 349
15 spreadshirt: mass-customization on the Internet 349
16 When digital david meets physical Goliath: the case of Brockhaus vs. Wikipedia 350
17 nettwerk: digital marketing in the music industry 351
18 Licia Chery and MyMajorCompany: crowd funding to stardom 352
Mobile commerce 353
19 sMs for Life (a): a public–private collaboration to prevent stock-outs
of life-saving malaria drugs in africa 353
20 ntt doCoMo ( Japan): moving from a mobile phone operator to a
lifestyle service provider 353
21 M-pesa (Kenya): mobile financial services for the financially excluded in society 354
22 tunisiana: leading a mobile telecom operator in post-arab spring tunisia 355
23 12snap: reinventing mobile marketing 356
Case studies
1 From A(pples) to Z(oom lenses): extending the boundaries of multichannel
retailing at Tesco.com 357
2 From e-banking to e-business at Nordea (Scandinavia): the world’s biggest
clicks-and-mortar bank 373
3 Ducati (Italy) vs. Harley-Davidson (USA): innovating business processes and
managing value networks 389
4 American Well – the doctor will e-see you now 403
5 IBX (Northern Europe): expanding B2B e-purchasing from indirect to direct
goods and services 424
6 Satec (Spain): business transformation through IT value reinvention and
organisational redesign 441
7 Otis Elevator: accelerating business transformation with IT 454
8 TopCoder (A): developing software through crowdsourcing 469
9 Appirio: new venture on a cloud 486
10 ITC e-Choupal: corporate social responsibility in rural India 495
11 e-Government in Estonia: establishing the world’s leading information society 513
12 ICT in Tunisia: a strategic lever for building a knowledge-based economy 530
13 Fostering innovation in the public sector: VivekKundra@USgovernment 543
14 Knowledge management at Booz & Company: towards a culture of knowledge
sharing and collaboration 561
15 Spreadshirt: mass-customization on the Internet 577
16 When digital David meets physical Goliath: the case of Brockhaus vs. Wikipedia 597
17 Nettwerk: digital marketing in the music industry 608
18 Licia Chery and MyMajorCompany: crowd funding to stardom 621
19 Novartis SMS for Life (A): a public–private collaboration to prevent stock-outs of life-
saving malaria drugs in Africa 639
xviii

Contents
20 NTT DoCoMo (Japan): moving from a mobile phone operator to a lifestyle

service provider 653
21 M-PESA (Kenya): mobile financial services for the financially excluded in society 670
22 Tunisiana: a leading mobile telecom operator in post-Arab Spring Tunisia 690
23 12snap: reinventing mobile marketing 706
Index 717
xix

Exhibits
p.1 the cases cover several industries and focus on different themes xxxi
1.1 electronic business includes electronic commerce and mobile electronic commerce 5
1.2 the focus of the cases is on corporate-level and business unit strategy 8
1.3 technological revolutions move through different stages as their diffusion increases 10
1.4 Major technological revolutions during the past two centuries show similar
patterns of evolution 12
1.5 since the mid-1990s, e-business companies have passed through four distinct
periods, as is reflected in the evolution of the nasdaQ 13
2.1 the goal of e-business strategy is to achieve (long-term) success by building up
one or more sources of competitive advantage 35
2.2 the e-business strategy framework consists of three main steps 36
2.3 e-Business strategy formulation entails an internal and an external analysis to
identify strengths, weaknesses, opportunities and threats 37
3.1 e-Business companies are impacted by their industry and macro-environment 43
3.2 Five forces influence the attractiveness of an industry 52
3.3 the Internet has a profound impact on the five forces that influence industry
attractiveness 63
3.4 the value network outlines the main players in the co-opetition framework 63
3.5 the e-business market segmentation matrix classifies different types of interaction
between consumers, businesses and governmental agencies 69
3.6 segmentation variables are the basis for strategic customer analysis 71
3.7 target-market selection depends on the number of markets served and the
number of different products and services offered 74
4.1 distinctive e-business competencies result from the combination of unique
resources and capabilities 81
4.2 the core competence approach cuts across different functional areas within a firm 82
4.3 sources of value creation in e-business 83
4.4 an extensive e-business capability model 85
4.5 a company’s value chain consists of distinct value-adding activities 87
4.6 the Internet impacts on all activities in the value chain 89
4.7 the virtual value chain illustrates how information captured in the physical value
chain can be used to develop new markets 90
4.8 the ICdt model describes the four main usage dimensions of the Internet in the
virtual market space 92
4.9 the value network includes numerous partners with differing functions 98
5.1 the strategic triangle addresses the main drivers of competitive advantage 106
5.2 Impact of threshold features and critical success factors on consumer benefit 107
5.3 there are two generic approaches to achieve a competitive advantage 108
5.4 economies of scale lead to a decrease in per-unit costs as output increases, whereas
dis-economies of scale lead to an increase in per-unit costs 109
5.5 tangible and intangible sources of differentiation 112
5.6 perceived performance and relative price position determine a firm’s strategy 114
xx

Exhibits
5.7 the strategic gameboard helps to formulate consistent business strategies 116
5.8 Components of an e-business model 117
6.1 a company can build up numerous barriers against imitation 129
6.2 s-curves of e-commerce innovation: from i-, m- to u-commerce 132
6.3 disruptive innovations enter the market from below and improve over time until
they meet the demands of mainstream customers 134
6.4 to overcome organisational rigidities, incumbents who are faced with disruptive
innovations need to adopt two contradicting cognitive frames 148
7.1 the value curve provides insights into new market spaces 154
7.2 the six paths framework suggests different starting points for creating value
innovations in e-business 155
8.1 Value is created if the perceived use value exceeds costs 176
8.2 the price indicates how the value created is distributed between the producer
and the consumer 177
8.3 producers completely capture the value created in a (quasi-)monopolistic
environment 178
8.4 the competitive discount is equal to the consumer surplus provided by the strongest
competitor 179
8.5 the VpF – to achieve profitability, companies must be able to create and capture value 180
8.6 the VpF integrates different strategy analyses 181
8.7 Value is created by the individual business activities of the value chain 182
8.8 porter’s five forces influence the cost lever and competitive discount 183
8.9 porter’s strategy models can be used to analyse the levers of the VpF 184
8.10 a value chain analysis of the MVno project reveals numerous value and cost drivers 185
8.11 Multiple value drivers create perceived use value mainly in three dimensions 186
8.12 perceived use value and costs for the sony BMG MVno would both have been high 187
8.13 the German wireless telecommunications industry is of relatively low attractiveness 189
8.14 the five forces analysis indicates a high competitive discount 190
8.15 perceived use value has to be extremely high to achieve profitability 191
9.1 during the 1990s, the pC industry became increasingly fragmented 197
9.2 the clicks-and-mortar spectrum spans from integration to separation of a
company’s e-business activities 203
9.3 the traditional corporation can be unbundled into three distinct businesses 210
9.4 different businesses within a corporation have different imperatives regarding
economics, culture and competition 211
9.5 alternative views to the conflict–performance link in distribution channels 212
9.6 the channel conflict matrix analyses how different types of channel conflicts
should be resolved 213
10.1 the B2B e-commerce matrix classifies different types of B2B e-marketplaces 223
10.2 e-procurement solutions cover different parts of the supply chain 227
11.1 evolution of the business–customer mind-set with the advent of Web 2.0 234
11.2 evolution of the Web and related applications 236
11.3 Web 2.0: a four-factors model 237
11.4 activities for embracing Web 2.0 in existing Internet businesses 238
11.5 social networking sites help users to pursue their motives of discovery, homogeneity
and sharing by providing various communication tools 242
11.6 the advanced capabilities of the Internet help to dissolve the trade-off between
richness and reach 244
11.7 Customer relationship management consists of four elements 246
xxi

Exhibits
11.8 embedding social CRM into companies 248

11.9 the mass-customisation value chain puts the user in charge of many steps
traditionally performed by the company 251
11.10 the ‘long tail’ represents a large addition to the product range of traditional
retailers 257
11.11 the ‘long tail’ of social networking can give users access to previously
inaccessible market niches 258
12.1 the mobile e-commerce value network outlines the key players 267
12.2 m-Commerce consumer services and applications 271
12.3 m-Commerce business services and applications 272
12.4 Mobile e-commerce applications for consumers and businesses 275
12.5 Wired e-commerce vs. mobile e-commerce (m-commerce) 276
12.6 Impact of wireless technologies on the value chain 279
12.7 Impact of wireless technologies on the industry’s five forces 282
12.8 Wired e-commerce vs. mobile commerce 284
12.9 the evolution of markets: from traditional to ubiquitous markets 287
12.10 the evolution of It-based commerce 289
12.11 U-space: types of commerce and marketing forms associated 290
13.1 the roadmap for e-business strategy implementation addresses nine interrelated
issues 301
13.2 a mission statement serves multiple purposes 302
14.1 Fostering creativity and analytical ability helps a manager to become
a catalyst for change 323
14.2 new ideas can be found by analysing state-of-the-art companies within
one’s own industry and also across industries 325
14.3 effective strategy formulation requires the ability to cover a broad analysis horizon
and to perform selective, in-depth analyses of crucial issues 330
xxii

Foreword
The emergence of e-business

by F. Warren McFarlan
Harvard Business School, Boston, Massachusetts
We are over a quarter of the way into the second half of the Information Age revolution. Very
little of what is now accepted management practice and application opportunity today was
even conceived of some 15 years ago. The first half of the Information Age took place between
1955 and 1995. 1955 was the year when IBM built, in short order, its 701, 702 and 703 com-
puters, while Univac launched its Univac I. Large, rather unreliable and with a vastly limited
processing capacity in terms of today’s machines, those machines and their clumsy (by today’s
standards) languages nonetheless provoked a revolution in back-office transaction process-
ing, leading to sharp improvements in cost, quality and services. Insurance, banking, airline
reservations were where some of the most exciting IT applications took place in those early
days, with the structures of those industries being profoundly impacted over a long period of
time (over 15 years, for example, one insurance firm’s premium notice department gradually
withered from 150 people to one). Additionally, a heavy focus, of course, was on financial
processes relating to accounting, payroll, etc., with overall IT responsibility being most often
housed in the financial function. All of this was done mostly in the context of home-grown
systems, where the prevailing model was to build and run. Large IT departments, filled with
highly specialised technical skills, emerged to develop and operate these systems. They made
intense efforts to learn how to plan their activities, better manage projects and assess and
manage risk. This work evolved in a more or less linear way over two decades, creating the
great legacy systems, many of which still run today. How to cope managerially with this world
was captured by the first generation of IT literature, which was heavily executional in its focus.
In the late 1970s, a sharp shift in the technology cost performance allowed the emer-
gence of the PC, with desktop computing soon becoming a standard part of corporate life.
The technology rapidly spread across the desktops of the firm, causing great angst to the
operators of large data centres, whose processes were severely challenged. Nevertheless, all
through the 1980s much of the prevailing focus of a firm’s IT activities still remained in the
build and run category. Near the end of the decade, however, the first big outsourcing of IT
resource deals emerged. This fact, combined with the explosion of the applications software
industry (SAP, Oracle, etc.), caused the monopoly role of the in-house IT department to
build and deliver systems to begin to disappear. It was increasingly replaced by the source
and manage model. This resulted in a genuine revolution. Early adapters, Eastman-Kodak
and General Dynamics, found fundamentally different, and more effective, corporate oper-
ating models.
Increasingly, over the next two decades, managers came to focus on how IT could de-
liver a competitive advantage and they worried less about the mechanics of how to build
and operate systems, but turned that over to the burgeoning software and service industry
xxiii

Foreword
(represented by companies such as IBM, Accenture, CSC and EDS, plus a host of smaller
ones.) Conventional wisdom about how to manage IT and its impact was severely chal-
lenged, creating a new literature. For the first time, IT as a competitive weapon began to be
extensively talked about.
The thunder clouds of even more dramatic changes, however, were to emerge. Tom
Friedman, in his remarkable book The World is Flat (Farrar, Straus& Giroux, 2005), identified
three dominant events that have shaped this new world. From the 1990s until today, the first
was the fall of the Berlin Wall in 1989, which, combined with the emergence of China, effec-
tively delivered more than 3 billion people into the world markets (this topic is not dealt with
in this text), creating new sources of supply and demand for all forms of products and services,
and turning the IT world inside out.
The second event was the stream of activities that were triggered by the Netscape IPO in
October 1995. This is widely seen as the beginning of the Internet I Era, the emergence of
e-business, and the concurrent propulsion of the world towards open systems and widely
accessible data. The third event was the massive overinvestment by telecommunications
companies in fibre networks, which collectively created the wide, almost zero-cost highways
for today’s digital economy. Tom notes that these trends led to the words insourcing, out-
sourcing and offshoring, supply chaining and informing, which fundamentally transformed
the operation and performance of global enterprises. This text wisely ignores the issues of
where work is done globally (a separate book by itself), and chooses instead to focus on the
other aspects of this revolution – namely, on how the core processes and products of a firm
are shaped by these new opportunities in a world of essentially free telecommunication and
Internet-enabled interconnections. In doing this, they bring enormous insight to the task.
The text is a tour de force:
1 First, the text is grounded in a deep sense of history. It richly catches the forces that led
to the emergence of the e-business world and to its tremendous growth, which ultimately
led to the Bubble. They effectively document the Bubble’s collapse, the underlying reason
for it, and identify the exciting opportunities beyond. As one reads about the brief exist-
ence of Webvan, for example, nostalgic memories surge of an exciting, yet fundamentally
flawed vision. The text captures brilliantly both the opportunities and the drivers towards
excess of the early days. It provides useful warnings for today.
2 Secondly, the text has deep and informed command of the relevant literatures as they
relate to company and industry competitive strategy and dynamics (Porter et al.). The
discussion of the opportunities and risks of new technologies are firmly rooted in value
chain and other contemporary forms of strategic analysis. It is worth noting that there is
not a strategic framework the authors use that existed before 1982. They avail themselves
of the latest insights in this area. In short, the text combines the latest of strategic think-
ing with the opportunities posed by the new technologies.
3 The text is built on informed understanding of detailed management practice. A particu-
lar strength is the assembly of a rich collection of articles from the Financial Times, which
illustrate the key moves made by different players during this period and, in so doing, give
useful insight on the breadth of applications. Those articles ensure that the book is as well
rooted in management practice as theory, and make the text as relevant to the manager as
to the MBA student.
4 The text demonstrates a broad command of the general IT literature (summarised in the
Appendix, now on the Companion Website, along with an appropriate set of technical
xxiv

Foreword
definitions for those new to this area). This link between strategy, theory, IT application
literatures and the world of practice makes this a very unusual and impactful text.
5 The text reaches from the past to the absolute current leading edge of practice and
application. For example, the chapter on Internet II is as good a piece as I have seen on
this rapidly emerging technology.
6 Behind the articles for those readers who are interested in more ‘depth of applications’
lie a series of intensively researched and comprehensive IT application case studies.
Some 23 detailed, leading-edge, field-based case studies from different industries and
countries are presented for those who need deeper insight in the issues of contemporary
management practice. Combined with the chapters, these cases make this a compelling
text for MBAs.
This, however, is much more than just a text for an MBA course, although it has all the
material for a first-rate course. It is also a text for the thoughtful practitioner who is trying to
position his/her organisation to take advantage of these fast-moving technologies. The text
gives a detailed structure and guidance for how to find profitable business opportunities. It
contains a panoply of practical, easy-to-understand examples of applications. It also spends
an appropriate amount of time on the problems of implementation.
In short, the text is rich, high impact and very well thought-out.
xxv

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Preface
people tend to over-estimate new technology in the short run and under-estimate it in the
long run. (Roy Amara, Institute for the Future)
Context and positioning of the text
When we talked to colleagues and friends in autumn 2003 about writing the first edition of
our e-business book, many of them asked whether we were arriving too late with the text.
They reminded us that the Internet bubble had burst three years ago and that most online
companies had since gone bankrupt. Since then, the thinking has changed. Both traditional
bricks-and-mortar corporations such as Tesco, Sony BMG or Mercedes-Benz and pure on-
line companies such as Amazon, Google or eBay have continued to develop and implement
e-business strategies, albeit initially with less public attention and media coverage than be-
fore. Due to the recent rapid growth of so-called Web 2.0 applications, online companies
such as Facebook and Twitter once again dominate the headlines of the business press.
Similar to other important technological revolutions, such as railways or steam engines,
the Internet has also undergone a typical cycle of boom and bust. Following a bust, techno-
logical revolutions rebound, and it is only then – during the ‘golden age’ – that they show
their true impact. At the time of writing this third edition of the text, it looks as if e-business
has entered this golden age.
During our research for this text, we found very few books published after the collapse of
the dotcom bubble that specifically address e-business strategy issues. We also noticed that
there were many excellent books on strategy and many books on e-business, yet there were
relatively few books that attempted to bring the two fields together in a comprehensive and
rigorous manner.
This text, as its title suggests, attempts to close this gap. It aims at providing readers with
a holistic and integrated view of the realms of strategy and e-business by focusing on stra-
tegic management concepts and linking them to actual case studies of companies engaged
in e-business activities. It also aims at going beyond the hype by closely analysing examples
of failure as well as success, in order to help readers assess the underlying drivers for a suc-
cessful e-business strategy.
Target readers
Strategies for e-Business is a text targeted at senior managers, business strategists, entre-
preneurs and consultants, as well as participants enrolled in MBA, Masters and executive
education programmes and students in the final year of their undergraduate education. It
should be of interest to general management programmes and seminars, as well as to those
xxvii

Preface
specialising in e-business, electronic commerce, technology management, marketing, entre-

preneurship, innovation management and business strategy.
Key features
The key differentiating features of this text include the following:

● A comprehensive e-business strategy framework. This framework serves as a comprehen-
sive basis for e-business strategy formulation. It is based on rigorous and time-proven
concepts from the field of strategic management, which were adapted to the specific con-
text of e-business.
● An e-business roadmap. Chapter 13 of the text contains an e-business roadmap that is
meant as a guide to help in the formulation and implementation process of an e-business
strategy. It provides an overview of the key issues involved in this process. At the same
time, extensive cross-references to the more detailed e-business strategy framework
allow the reader to obtain more in-depth information when needed.
● A detailed study approach for e-business strategy. Creativity and analytical ability are of
fundamental importance in the strategy formulation process. Chapter 14 of this text dis-
cusses how to improve these qualities through the use of concepts and case studies.
● In-depth case studies. The text contains 23 real-world case studies, which provide in-depth
accounts of how companies in several industries (ranging from finance and insurance to
manufacturing to telecommunications and media) and different countries (in Europe,
North America, Africa and Asia) have developed and implemented e-business, electronic
commerce or mobile e-commerce strategies. All the case studies result from first-hand
field-based research, which the case authors have personally conducted in cooperation
with executives and top-level managers of the companies involved.
● Geographic focus on developed and emerging markets. While most of the existing e-business
casebooks focus on companies that are based in the USA, this text focuses on companies
in developed markets operating in Europe and the USA as well as emerging markets in
Africa and Asia. In addition to the USA, developed countries covered by the case studies
contained in this text include Canada, Estonia, Germany, Finland, Italy, Norway, Spain,
Sweden and the UK. With regard to emerging markets, the case studies cover India,
Kenya, Tanzania and Tunisia. In addition to the technological aspects discussed in the
case studies, the wide variety of countries that are involved helps to provide insights into
the specific business environment and national culture that characterise the different
countries covered.
Structure and content
Content-wise, Part 1 presents the broader context of the text. It introduces the key terminol-
ogy and evolution of e-business and provides an historic overview of the distinct phases that
technological revolutions typically go through before reaching their full potential.
Part 2 suggests a strategy framework for the formulation of e-business strategies. Chap-
ter 3 discusses the external environment of e-business ventures. This includes an analysis
xxviii

Preface
of the macro-environment and the industry structure. Chapter 4 focuses on the internal
dimension of e-business strategy formulation. Chapter 5 is concerned with generic strat-
egy options, which determine the overall strategic direction of an e-business venture. The
issue of sustaining a competitive advantage over time and the dangers that threaten to erode
such an advantage are discussed in Chapter 6. Chapter 7 provides a systematic approach
for developing innovations that aim to make the competition irrelevant. Chapter 8 presents
the value-process framework, which integrates different perspectives of strategy into a
holistic model. Chapters 9 to 11 address three strategic issues that are of special relevance
for e-business companies. These include the internal organisation of an e-business venture
(Chapter 9), its relations with suppliers (Chapter 10) and its relations with customers/
users (Chapter 11). Chapter 12 presents conceptual frameworks that are specific to mobile
e-commerce applications.
Part 3 provides a roadmap for the formulation of an e-business strategy. Through the use
of cross-references, this roadmap (presented in Chapter 13) is closely linked to the e- busi-
ness strategy framework presented in Part 2.
Part 4 first provides an introduction to case study work by discussing how the concepts
and cases presented in the text can help managers and students interested in e-business
strategies to expand their skills along the dimensions of creativity and analytical ability
(Chapter 14). Following this, a brief synopsis section provides an overview of the key topics
in the cases, which is then followed by the full-length case studies.
Getting the most from Strategies in e-Business
In order to benefit most from this text, we recommend that you try to achieve the following
when working through the chapters:
● Thoroughly understand the theoretical concepts presented in the e-business strategy
framework.
● Critically assess the strengths and weaknesses of each concept and determine the context
for its appropriate use.
● Apply the concepts when analysing the case studies and make action-orientated recom-
mendations backed up by logical reasoning and supporting arguments.
● Expand the usage of the concepts and the frameworks into other business situations that
you encounter in your daily work or study.
To make your learning experience more effective and enriching, the text contains the fol-
lowing features:
● Chapter at a glance at the beginning of each chapter provides a quick overview of the most
important topics discussed in the chapter.
● Related case studies are included at the beginning of each chapter to illustrate which
cases are most relevant for the topics discussed. For more information on this, Exhibit
P.1 on p. xxxi illustrates the relationships between the case studies and specific chap-
ters and sections of the text.
● Learning outcomes offer a brief description of what you should have achieved after read-
ing the chapter.
xxix

Preface
● Different types of boxes are contained in the text body of each chapter to provide added
information about the concepts that are discussed:
– FT articles are taken from the Financial Times to provide a journalistic perspective
(within the timeframe context) of the issue discussed in the section.
– Critical perspectives present a different, if not opposing, view to the position taken in
the main text of the chapter. For instance, the resource-based view is presented as a
critical perspective on Porter’s market-based view to strategy formulation. Weighing
the merits of each view is a valuable exercise for gaining a more in-depth understand-
ing of the concept that is presented.
– Blog boxes contain excerpts from blog writers, who provide their opinions on current
developments in the e-business world. These excerpts provide an additional and at
times different perspective to the concepts discussed in the chapters.
– Strategy in action boxes are examples that provide additional background to the con-
cepts discussed in the chapters.
● Summaries at the end of each chapter allow you to review the most important points that
were discussed in the chapter.
● Review questions help you assess your understanding of the material presented in the
chapter. In general, the answers to these questions are straightforward since they are
based on the material presented in the chapter.
● Discussion questions help you to transfer the concepts from the chapter into different busi-
ness contexts. They are also meant as a starting point for discussion with your colleagues
and peers.
● Recommended key reading provides a select list of additional books and articles that you
can read if you wish to find out more about a specific topic.
● Useful third-party weblinks provide additional information on some material contained
in the chapter.
xxx

Preface
Exhibit P.1 The cases cover several industries and focus on different themes
Chapter
3 4 5 6 7 8 9 10 11 12 13
Relashionship with suppliers

Value process framework
Sustaining competitive
Internal organisation
New market spaces
Relashionship with
External analysis
users/ customers
Internal analysis
Strategy options
Implementation
e-Government
advantage
Case study
Case study name
type
1 Tesco ● ●●● ●● ● ●●● ●●
B2C 2 Nordea ●●● ●● ●●● ●
e-commerce 3 Ducati vs. Harley ●●● ●● ● ●● ●●●
4 American Well ●● ● ●●● ●● ● ●●
5 IBX ● ●● ●●● ●
6 SATEC ● ●●● ●●● ●● ● ●
B2B 7 Otis ●●● ●● ●● ● ●●
e-commerce 8 TopCoder ● ● ●●● ●● ●●●
9 Appirio ●● ● ●●● ●
10 e-choupal ●● ● ● ●● ●●● ●●
11 e-Estonia ● ●● ● ●●●
G2B2C
12 ICT in Tunisia ●● ● ● ● ●●● ●
e-government
13 Kundra@USgov ● ●● ● ●●● ●●
B2E
14 KM at Booz ●● ●●● ●● ●●
e-communities
15 Spreadshirt ●● ●●● ● ●● ●● ●●● ●
Brockhaus vs.
C2C 16 ●● ●● ●●● ●● ●● ●
Wikipedia
e-communities
17 Nettwerk ● ●●● ●● ● ●●●
18 Licia Chery ● ●● ●● ● ●●●
19 Novartis SMS for Life ●● ●● ● ● ●● ●●●
20 NTT DoCoMo ●● ●● ●● ●
m-commerce 21 M-PESA ● ●● ●●● ●●● ●● ●● ●●
22 Tunisiana ●● ● ●●● ●●● ●
23 12snap ● ● ●●● ●● ●● ●
●●● Primary focus of the case study ● ● Secondary focus of the case study ● Tertiary focus of the case study
xxxi


Authors’ acknowledgements
Throughout the writing and publication process of this text, we have received valuable sup-
port and contributions from many people. Therefore, we would like to thank and express
our gratitude to the following individuals:
● Stephanie Ludwig, Research Associate at the ENPC School of International Management
(Paris), who has significantly contributed to the content of this text. Her strong dedica-
tion and quality management of the project were highly appreciated.
● Our colleague Professor Benoit Leleux at IMD, who kindly contributed some of his bril-
liant case study writing to this text.
● The authors who worked with us during the development of the case studies. These
include Kenneth Campbell (CEO of Tunisiana), Professor Charles Waldman (INSEAD,
France), Stefanie Leenen (BASS, Germany) and André Achtstätter, past MBA participant
at the ENPC School of International Management (Paris).
● Our colleagues and students at the Department of Management at the University of
Nuremberg (Germany), who conducted case study research with us. In particular, we
would like to thank our colleagues Prof. Harald Hungenberg and Andreas König, and
our students Sebastian Bartz, Henning Blarr, Hans Denker, Fernando Endarra, Thomas
Engelbertz, Sebastian Mauch, Matthias Promny and Maria Štšekotovitš. We also acknowl-
edge the help provided by Dhruv Bhatli, Research Associate, as well as Yingting Cheng
and Linda Crofton, Programme Coordinators, all at the ENPC School of International
Management.
● The authors who contributed the remaining case studies contained in the text. These in-
clude Professor F. Warren McFarlan, Professor John Deighton and Leora Kornfeld, as well
as Professor Karim Lakhani, David Garvin and Eric Lonstein (all from Harvard Business
School), Bala Iyer and Erik Noyes (both from Babson College), Saurabh Bhatnagar and Pro-
fessor Ali Farhoomand (both from University of Hong Kong), Professor Markus Kreutzer
and Marina Altuchov (both from University of St Gallen), Syeda Maseeha Qumer
and Debapratim Purkayastha (both from ICMR Centre for Management Research),
Professor Elie Ofek and Dr Ron Laufer (Indiana University Kelley School of Business),
Stephanie Weg (IMD Lausanne), as well as Catherine Daar and Victor Lugger (CommNa-
tion and MyMajorCompany).
● Professor F. Warren McFarlan (Emeritus Professor of Harvard Business School) for taking
time out of his busy schedule to write the foreword for the text.
● The students on several MBA and Executive MBA programmes in different countries,
as well as the managers in executive education programmes and seminars at business
schools, corporate universities and companies, who, through their analysis and discus-
sion of the case studies, contributed to the shaping of the text.
● The executives and managers of the companies featured in the case studies contained in
the text.
xxxiii

Authors’ acknowledgements
● The numerous reviewers who provided valuable insights through their detailed feedback
on the second edition of the text.
● Last, but not least, special thanks to our families, to whom we dedicate this text for their
unlimited support and much appreciated encouragement of this project. Furthermore:
– Tawfik Jelassi: I would like to dedicate this text to the digital generation in my home
country – Tunisia – who used information technology and Facebook to help topple
a 23-year-old dictatorship. The freedom, democracy and dignity which these youth
brought about inspired people’s revolutions in the Arab Spring countries and further
afield. I am very pleased that Albrecht Enders also joins me in this dedication.
– Francisco J. Martínez-López: I would like to deeply thank my co-authors Tawfik and
Albrecht for their kind invitation to join them in this new edition of the text; it has
been a really enriching experience. Also, a significant part of my work on this last edi-
tion was done during a stay as visiting scholar at the Zicklin School of Business, the
City University of New York (NY, USA). I am grateful to my colleague, Professor David
Luna, for his sincere and generous support during my stay there. Also, I really appre-
ciated the emotional support of my friends in NYC (Marta, Susan, Elizabeth, Chen,
Charles, Shirley, Gary and more) during my time writing this new edition of the text.
Finally, I thank the financial support received from ‘Programa José Castillejo’ (Ministry
of Education, Spain) and Research Project ECO2012-31712 (Ministry of Economy and
Competitiveness, Spain).
Feedback
We are interested in hearing your comments about this text. We appreciate both critical and
supportive feedback, which can help us to improve future editions of this text. You can reach
us via email at: jelassi@enpcmbaparis.com, albrecht.enders@imd.ch and fjmlopez@ugr.es.
In the spirit of the concepts and case studies presented in this text, we also encourage you
to provide feedback on the Amazon.com websites so that others can find out about your
opinion.
Tawfik Jelassi, Albrecht Enders and Francisco J. Martínez-López

July 2013
xxxiv

The authors
Tawfik Jelassi is Professor of e-Business & Information Tech-

nology and Dean of the School of International Manage-
ment at Ecole Nationale des Ponts et Chaussées (Paris).
He is also Chairman of the Board of Directors of Tunisiana,
the leading mobile telecom operator in Tunisia. Dr Jelassi
was Associate Professor and Coordinator of the Technol-
ogy Management Area at INSEAD (Fontainebleau) and
Faculty Guest at Harvard Business School (USA). He holds
a PhD degree from the Stern School of Business at New
York University (USA). His research focuses on e-business/
electronic commerce, the strategic use of IT and technolo-
gy-based innovation. His research has appeared in his books: Competing through Informa-
tion Technology: Strategy and Implementation (Prentice Hall, 1994), Strategic Information
Systems: A European Perspective (Wiley, 1994) and Strategies for e-Business: Creating Value
through Electronic and Mobile Commerce (Financial Times/Prentice Hall, 2005 and 2008).
Professor Jelassi has published over 90 research articles in leading conference proceedings
and academic journals, including MIS Quarterly, Journal of MIS, Decision Support Systems,
Information & Management, Decision Sciences, European Journal of Operational Research,
MIS Quarterly Executive and OMEGA. He has also written over 60 field-based case studies on
several industries in different countries, and been granted numerous research and teaching
research excellence awards in the USA and Europe. Professor Jelassi has taught extensively
on MBA, Executive MBA and management development programmes in over a dozen coun-
tries around the world. He has also served as adviser to several companies and governments.
Albrecht Enders is Professor of Strategy and Innovation at IMD. His major interest is the reac-
tion of companies to radical changes in their environment. He has worked for global corpora-
tions from different industries, including financial services,
consumer goods, industrial goods and the travel industry. In
addition to running highly customised company-specific pro-
grammes that focus on corporate transformation, he is also
the Program Director of Advanced Strategic Management,
one of IMD’s core general management programmes. Before
joining IMD, he was an Assistant Professor at the University
of Nuremberg and spent three years with The Boston Con-
sulting Group in the company’s Cologne office.
Professor Enders has published articles in academic jour-
nals such as Administrative Science Quarterly, Academy of
Management Review and Research Policy, and in practitioner-
orientated publications such as Harvard Business Manager,
xxxv

The authors
Management Information Systems Quarterly Executive and the Financial Times. His research
and case writing efforts have been recognised by awards from the BPS division of the Acad-
emy of Management in 2011 and 2012, EFMD in 1999, ECCH in 2001 and 2002 and SIM in
2005 and 2008.
Professor Enders holds a PhD in strategic management from the Leipzig Graduate School
of Management and a BA in economics from Dartmouth College.
Francisco J. Martínez-López holds an MSc in Marketing and

a European PhD in Business Administration, with Extraor-
dinary Doctoral Prize (University of Granada, Spain), and
is Professor of Business Administration at the University of
Granada and of Marketing at the Open University of Cata-
lonia (Barcelona) in Spain. He has been visiting scholar at
the Zicklin School of Business (NY, USA), Aston Business
School (Birmingham, UK), the University of Chicago Booth
School of Business (USA), the Michael Smurfit School of
Business (Dublin, Ireland) and the Complutense Univer-
sity Business School (Madrid, Spain). He is the Editor-in-
Chief of the International Journal of Business Environment
(Inderscience Publishers), Associate Editor of the European
Journal of Marketing (Emerald) and is a member of the
Editorial Board of Industrial Marketing Management (Elsevier). Dr Martínez-López has co-
edited several international journals’ special issues and research books for leading publish-
ers of business and management research, such as Springer and Elsevier; for example, he has
edited the Handbook of Strategic e-Business Management (Springer). In addition, he has pub-
lished more than 70 papers in international journals and conference proceedings.
xxxvi

Contents
Publisher’s acknowledgements
We are grateful to tthe following for permission to reproduce copyright material:
Figures
Figure on p. 10 adapted from Technological Revolutions and Financial Capital: The Dynamics
of Bubbles and Golden Ages, 1 ed., Edward Elgar Publishing Ltd (Perez, C., 2002) p. 48, used
by permission; Figure on p. 13 adapted from Yahoo! Finance, http://finance.yahoo.com/,
reprinted with permission from Yahoo. © 2013 Yahoo; Figure on p. 35 adapted from Strat-
egisches Management in Unternehmen, 4 edn, Gabler (Hungenberg, H., 2006) 83, with kind
permission of Springer Science+Business Media; Figure on p. 43 adapted from Strategisches
Management in Unternehmen, 4 edn, Gabler (Hungenberg, H., 2006) 90, with kind permis-
sion of Springer Science+Business Media; Figures on pp. 63 and 89, p. 89 from ‘Strategy
and the Internet’, Harvard Business Review (Porter, M.), [Exhibit RO 103D] Copyright ©
2001 by the Harvard Business School Publishing Corporation, all rights reserved, reprinted
by permission of Harvard Business Review; Figure on p. 52 adapted from The Free Press edi-
tion of Competitive Strategy: Techniques for Analyzing Industries and Competitors, Copyright ©
1980, 1998 by The Free Press, a Division of Simon & Schuster, Inc., all rights reserved (Por-
ter, Michael E.) reprinted with the permission of Simon & Schuster Publishing Group; Fig-
ure on p. 63 adapted from Co-opetition, Currency Doubleday (Brandenburger, A. and B. Nal-
ebuff, 1998) p. 17; Figure on p. 71 after Marketing Management, Prentice Hall (Kotler,
P., 2005) pp. 251–96; Figure on p. 74 adapted from ‘Strategy and Structure: Public Policy
Implications’ in Proceedings of Marketing and the Public Interest, Marketing Science Institute
(Abell, D., 1977); Figure on p. 81 adapted from Adapted from H. Hungenberg, Strategisches
Management in Unternehmen, Gabler (Hungenberg, H., 2006) p. 143, with kind permission
of Springer Science+Business Media; Figure on p. 83 from ‘Value creation in e-business’,
Strategic Management Journal, vol. 22, no. 6, p. 504 (Amit, R and C. Zott 2001), used by
permission; Figure on p. 85 from ‘E-business capability research: A systematic literature
review’, Proceedings of the 3rd International Conference on Information Management, Innova-
tion Management and Industrial Engineering, IEEE (Wu, J.-N, L. Liu, 2010) p. 145, reprinted
with permission; Figure on p. 87 adapted from Competitive Advantage: Creating and Sustain-
ing Superior Performance, Simon & Schuster (Porter, Michael E.) Copyright © 1985, 1998 by
Michael E. Porter, adapted from Figure 2.2, p. 36, reprinted with the permission of Simon &
Schuster Publishing Group; Figure on p. 90 adapted from ‘e-Banking to e-Business at Nordea
(Scandinavia) – The World’s Biggest Clicks-and-Mortar Bank’, Management Information Sys-
tems Quarterly Executive, vol. 5, no. 1, pp. 31–44 (Enders, A. and T. Jelassi, 2006); Figure on
p. 92 after ‘Designing mature internet strategies: the ICDT model’, European Management
Journal, vol. 21 no. 1, pp. 38–47. (Angehrn, A., 1997); Figure on p. 98 adapted from
E-Business and E-Commerce Management, Financial Times, p. 330 (Chaffey, D., 2011),
xxxvii

FT/Prentice Hall, © The Financial Times Limited. All Rights Reserved. Used by permission;
Figures on pp. 106 and 107 adapted from Strategisches Management in Unternehmen, Gabler
(Hungenberg, H., 2006) p. 185; with kind permission of Springer Science+Business Media;
Figure on p. 108 adapted from Strategisches Management in Unternehmen, Gabler (Hungen-
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In some instances we have been unable to trace the owners of copyright material, and we
would appreciate any information that would enable us to do so.
xliii

PART 1
Introduction
Part overview
this introductory part sets up the overall context for the text. It contains the following
elements:
● a definition of the key terminology used throughout the text;
● an overview of the evolution of e-business over time.
the goal of this introductory part is to provide a guide and a context for the content of
the text. Chapter 1 starts out with some definitions of the most important terms used
in the text, such as e-business, electronic commerce and mobile e-commerce, and the
concepts of strategy and value creation. It then provides an overview of the evolution of
e-business over the last decade and recognises four distinct periods: (1) the ‘grassroots
of e-business’, (2) the ‘rise of the Internet’, (3) the ‘crash’ (or the burst of the dotcom
bubble) and (4) the ‘synergy phase’.
M01_JELA7870_03_SE_C01.indd 1 10/03/14 9:21 AM

M01_JELA7870_03_SE_C01.indd 2 10/03/14 9:21 AM

Chapter 1
Key terminology and evolution

of e-business
Chapter at a glance
1.1 Key terminology 4
1.1.1 e-business 4
1.1.2 electronic commerce 4
1.1.3 Mobile e-commerce 4
1.1.4 the concept of strategy 6
1.1.5 the concept of value creation and capturing 9
1.2 The evolution of e-business 9
1.2.1 the grassroots of e-business 14
1.2.2 the rise of the Internet 16
1.2.3 the crash 18
1.2.4 the synergy phase 22
Learning outcomes
after completing this chapter, you should be able to:
● Understand what the terms ‘e-business’, ‘electronic commerce’ and ‘mobile
e-commerce’ mean.
● define the concept of strategy and recognise the different levels of strategy
development.
● describe the life cycle of technological revolutions and illustrate it through
different examples.
● Recognise the four main periods of e-business evolution over the past decade
and explain the peculiar characteristics of each period.
M01_JELA7870_03_SE_C01.indd 3 10/03/14 9:21 AM

Part 1 Introduction
Introduction
the purpose of this chapter is to set the stage for the remainder of the text. since, due to the
relative novelty of e-business, there is not yet a clear and shared view of what this domain
entails, we first want to ensure a common understanding of the key terminology used through-
out the text. section 1.1 includes the definition of e-business-related terms and concepts, as
well as some strategy-specific perspectives. Following that, section 1.2 provides a framework
that describes the typical stages of technological revolutions and positions the evolution of
electronic business during the past decade within this framework.
1.1 Key terminology
1.1.1 e-business
The term e-business is defined here as the use of electronic means to conduct an organi-
sation’s business internally and/or externally.1 Internal e-business activities include the
linking of an organisation’s employees with each other through an intranet to improve
information sharing, facilitate knowledge dissemination and support management report-
ing. e-Business activities also include supporting after-sales service activities and collabo-
rating with business partners, e.g. conducting joint research, developing a new product and
formulating a sales promotion.
In spite of the distinct terminology that is used, e-business should not be viewed in isola-
tion from the remaining activities of a firm. Instead, an organisation should integrate online
e-business activities with its offline business into a coherent whole. The Financial Times
(FT) article ‘It’s too early for e-business to drop its “e” ’ provides a further discussion of the
importance of the ‘e’ in e-business.
1.1.2 Electronic commerce

Electronic commerce, or e-commerce, is more specific than e-business and can be thought
of as a subset of the latter (see Exhibit 1.1). Electronic commerce deals with the facilitation
of transactions and selling of products and services online, i.e. via the Internet or any other
telecommunications network. This involves the electronic trading of physical and digital
goods – quite often encompassing all the trading steps, such as online marketing, online
ordering, e-payment and, for digital goods, online distribution (i.e. for after-sales support
activities). e-Commerce applications with external orientation are buy-side e-commerce
activities with suppliers and sell-side activities with customers.
1.1.3 Mobile e-commerce

Mobile e-commerce, or m-commerce, is a subset of electronic commerce. While it refers to
online activities similar to those mentioned in the electronic commerce category, the under-
lying technology is different since mobile commerce is limited to mobile telecommunication
networks, which are accessed through wireless hand-held devices such as mobile phones,
smart phones, hand-held computers and tablets.
4
M01_JELA7870_03_SE_C01.indd 4 10/03/14 9:21 AM

Chapter 1 Key terminology and evolution of e-business
Exhibit 1.1 Electronic business includes electronic commerce and mobile electronic commerce
e-business
Electronic
commerce
Mobile
e-commerce
Source: adapted from d. Chaffey, E-Business and E-Commerce Management, Ft prentice Hall, 2002, p. 9.
It’s too early for e-business to drop its ‘e’

Jargon is used to make the banal sound that it would be pointless, indeed damaging, to talk
enthralling, the simple sophisticated. It is often about it as a separate discipline.
used to disguise the fact that the speaker, or
E-business would and should disappear into busi-
writer, does not know what he is talking about,
ness. And so it should; but not yet. At the Richmond
or cannot be bothered to find a more precise
Events e-forum last October, several hundred senior
word. In the past five years, one letter has come
managers from blue-chip companies gathered on a
to symbolize the worst of jargon. The fifth letter
cruise ship to be assaulted by a mixture of cabernet
in the Roman alphabet, it has been used in front
sauvignon and hard sell from vendors of e-services of
of business, commerce, finance, procurement,
various sorts. There was a ‘last days of Rome’ feeling
learning, enablement, government. Almost any
about it, as delegate after delegate let slip that he or
noun you can think of has probably been an
she had either just left their e-job, or was about to.
e-noun. Companies have used ‘e’ liberally to give
themselves a buzz on the stock market. What was particularly interesting was that people
were revealing their ‘real selves’ beneath their
Now, ‘e’ is on its way out. Yet, despite everything I
e-titles: they were either information technology
have said, this is bad news. The ‘e’ has been chased
people, or they were something else. While a few
away by the dotcom crash, which transformed it
could talk strategy and technology with equal flu-
from magic drug to kiss of stock market death. But,
ency, most gave their backgrounds away. They
even before that, it was going out of fashion. One
were happy speaking about marketing and strategy,
senior consultant told me in 2000 that the ‘e’ would
or about integration issues; not both. I have since
be dropped by his organization within a year or two
received a letter from Richmond Events announc-
(it was). His argument – widely accepted – was that
ing the death of e-forum, saying that its functions
Internet-based business would become so pervasive
would be rolled into either the IT directors or the ➨
M01_JELA7870_03_SE_C01.indd 5 10/03/14 9:21 AM

Part 1 Introduction
marketing forum. The divide that was apparent at of the big consultancies. Meanwhile, a sizeable
the event has been formalized. minority of organizations kept their e-business
strategy in-house and under the control of their IT
Why does this matter? Because, even as it has
departments. Add to this the rush by boards to pour
crumbled, the value of the letter ‘e’ has become
money into Internet ventures simply for the sake of
ever clearer. It is, or has been, a bridge between
tickling the share price and it is not surprising that
technical and non-technical managers.
so much was wasted so fast by so many.
From the earliest days of the commercial Internet,
How is it, then, that any companies managed to
proponent after proponent of the strange new
exploit the new technology effectively? How did
medium said the same thing: ‘Don’t let the IT people
Cisco, Dell, Electro-components, General Electric
run it.’ They believed the effective use of the Internet
manage it? Largely, because people at the summit
depended not on the technology but on a strategic
saw that the secret was in bringing technologists
understanding of what it could do. Technologists
and non-technologists together and making them
were, of course, vital for implementing the strategy,
work together – and often they used the banner ‘e’ as
but they often knew too much about the trees to be
a marshalling-point. The good e-business managers
able to see the wood. Also, most IT directors had a
I have met are (or were) either technologists on the
‘supplier’ role to an organization; they were rarely
way to becoming strategists, or non-technologists
involved in strategic decision-making.
with an increasing understanding of IT. On the way,
As the commercial Internet became e-commerce I stress; rarely close to achieving fluency in both.
and then e-business, this view held, though there
The new media agencies, for all their arrogance,
were tensions. Many companies put their trust in
were also attempting to master both skills. Again,
new media consultancies led by marketing people
they had a long way to go; so it is a shame that they
who loved to talk strategy. ‘Leave your strategy
have been humbled so brutally. The danger, as the
to us; we understand it better than you can,’ they
e-bridge crashes into the river, is that the great
would tell their open-walleted clients. They hired
unrealized possibilities of the Internet will be swept
technical people – indeed, the real skills shortage
away with it. When an organization has a cadre of
was at the technical end – but they kept control.
managers with a real understanding of both strategy
Sadly, these agencies also sowed the seeds of and technology, fine – let the bridge collapse. But
their own destruction, because they could not until then, some form of e-business department and
match either the technical skills of systems function – labelled with whatever jargon – should
integration specialists, or the strategic skills remain essential to any intelligent group’s structure.
Source: Bowen, D. (2002) It’s too early for e-business to drop its ‘e’, Financial Times, 21 May.
© The Financial Times Limited 2012. All rights reserved.
1.1.4 The concept of strategy

In addition to e-business, strategy is the second key thrust of this text. More specifically,
we analyse and illustrate how firms develop and implement strategies for their e-business
activities and draw lessons and guidelines from the studied practices. However, we should
recognise that the term ‘strategy’ means different things to different people. To get a clear
understanding of the meaning of strategy as it is used in this text, let us first consider the
following definitions of strategy and then suggest a common foundation.
Strategy is:
. . . the direction and scope of an organisation over the long-term, which achieves advantage for
the organisation through its configuration of resources within a changing environment to the
needs of markets and to fulfil stakeholder expectations.
(Gerry Johnson, Kevan Scholes and Richard Whittington2)
M01_JELA7870_03_SE_C01.indd 6 10/03/14 9:21 AM

. . . the determination of the basic long-term goals and objectives of an enterprise, and the adoption
of courses of action and the allocation of resources necessary for carrying out these goals.
(Alfred Chandler3)
. . . the deliberate search for a plan of action that will develop a business’s competitive advantage
and compound it.
(Bruce Henderson4)
. . . the strong focus on profitability not just growth, an ability to define a unique value proposi-
tion, and a willingness to make tough trade-offs in what not to do.
(Michael Porter5)
Based on the above definitions, we would like to stress the following aspects that are crucial
for strategy formulation:6
● Strategy is concerned with the long-term direction of the firm.
● Strategy deals with the overall plan for deploying the resources that a firm possesses.
● Strategy entails the willingness to make trade-offs, to choose between different directions
and between different ways of deploying resources.
● Strategy is about achieving unique positioning vis-à-vis competitors.
● The central goal of strategy is to achieve sustainable competitive advantage over rivals
and thereby to ensure lasting profitability.
Having defined the concept of strategy, we can now differentiate it from the concept of
tactics, a term that is often used interchangeably with strategy. Tactics are schemes for
individual and specific actions that are not necessarily related to one another. In general,
specific actions can be planned intuitively because of their limited complexity. A firm can,
for instance, have a certain tactic when it launches a marketing campaign.
Strategy, on the other hand, deals with a more overarching formulation that affects not
just one activity at one point in time but all activities of a firm over an extended time horizon.
To achieve consistency between different activities over time, intuition is generally not suf-
ficient; it also requires logical thinking. Drawing an analogy with warfare, we could say that
while tactics are about winning a battle, strategy is concerned primarily with winning the war.
It has often been argued that the increasing importance of technology reduces the need
for clear strategies. Firms should instead focus on getting their technology to work. This
is especially true for the technology underlying e-business and electronic commerce. Yet
technology is not, and cannot be, a substitute for strategy. Overlooking strategy and how a
firm can create sustainable competitive advantage is a likely recipe for failure. Just because
certain activities are feasible from a technological perspective does not mean that they
are sensible from a strategic perspective. Ultimately, information technology (IT) and the
Internet should be used not for the sake of using them but instead to create benefit for cus-
tomers in a cost-efficient way.
Formulating long-term strategies has become more difficult due to the continuously chang-
ing business environment. How long-term can a strategy be when the technological environ-
ment is permanently changing? This is obviously a difficult question that has no clear-cut
answers. When a disruptive innovation emerges and redefines the basis of competition, previ-
ous strategies become all but worthless. This was the case, for instance, when Amazon.com
entered the book-retailing market with its online bookstore and when Napster launched its file-
sharing platform for online music distribution. Nonetheless, it is important to be aware of the
trade-offs that arise when a firm gives up long-term strategy in return for short-term flexibility.
7
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Part 1 Introduction
Exhibit 1.2 The focus of the cases is on corporate-level and business unit strategy
Corporate-
Corporation
level strategy
Business unit Business Business Business

strategy unit A unit B unit C
Operational
R&D Production Etc.
strategy
Within organisations, we typically recognise the following three different levels of strat-
egy (see Exhibit 1.2). They are (1) corporate-level strategy, (2) business unit strategy and
(3) operational strategy.7 It is important to note here that most of the cases featured in this
text deal primarily with issues related to the first two levels of strategy.
Corporate-level strategy
The highest strategy level, i.e. the corporate-level strategy, is concerned with the overall
purpose and scope of the firm. It typically involves the chief executive officer (CEO) and
top-level managers. Corporate strategy addresses issues such as how to allocate resources
between different business units, mergers, acquisitions, partnerships and alliances.
Consider, for instance, the merger in 2011 between the two online gambling companies
Bwin and PartyGaming, which created the world’s largest online gambling company. The
CEOs of both firms looked across their respective companies’ businesses before deciding the
merger. Another example of corporate strategy that is important in the e-business context
is the choice of distribution and sales channels. For example, the top management of Tesco
plc first made the decision in 1995 about whether to use the Internet to sell groceries online
and then on how to set it up organisationally. (See Chapter 9 for a discussion of the different
ways of organising e-commerce ventures.) Only then was the responsibility delegated from
the corporate level to the Tesco.com business unit.
Business unit strategy

Business unit strategy is concerned primarily with how to compete within individual mar-
kets. Dell, for instance, operates distinct business units that target large corporate custom-
ers, private households and public-sector customers. Since these are very separate markets,
with differing needs and preferences, it is also necessary to formulate a distinct business
unit strategy for each one of these markets. (See Section 3.4 on market segmentation for
e-commerce.)
8
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At a more detailed level, a business unit strategy deals with issues such as industry analy-
sis, market positioning and value creation for customers. Furthermore, when formulating
a business unit strategy, it is also necessary to think about the desired scale and scope of
operations.
Operational strategy
Operational strategy, also known as functional-level strategy, deals with how to implement
the business unit strategy with regard to resources, processes and people. In the context
of e-business, this includes issues such as optimal website design, hardware and software
requirements and the management of the logistics process. Furthermore, this also includes
operational effectiveness issues, which are addressed by techniques such as business proc-
ess re-engineering (BPR) and total quality management (TQM).
Although these approaches are important, they do not belong to the top sphere of strat-
egy formulation. Hence, though operational issues are of high importance for any organi-
sation, they are not our primary focus, and covering them in depth would overextend the
scope of the text.8 However, they will be tangentially treated in several passages of this text,
as a complement to the strategic issues being analysed.
1.1.5 The concept of value creation and capturing

The ability of a firm to create value for its customers is a prerequisite for achieving sustainable
profitability. In the context of e-business strategies, the concept of value creation deserves spe-
cial attention because many Internet start-ups that ended up in bankruptcy at the end of the
Internet boom years did not pay enough attention to this issue. Instead, they were frequently
concerned mainly with customer acquisition and revenue growth, which was sustainable only
as long as venture capitalists and stock markets were willing to finance these firms.
Nowadays, however, in a harder and more turbulent business environment, it is imperative
that strategies focus on what value to create and for whom, as well as how to create it and how
to capture the value in the form of profits. In economic terms, value created is the difference
between the benefit a firm provides to its consumers and the costs it incurs for doing so. (The
concepts of value creation and capturing are discussed in more detail in Chapter 8.)
1.2 The evolution of e-business
Before discussing e-business from a structural perspective through the e-business strategy
framework presented in Part 2, we first want to analyse the evolution of e-business over
the past decade and compare it with the life cycle of other technological revolutions. Carlota
Perez defines a technological revolution as a ‘powerful and highly visible cluster of new and
dynamic technologies, products and industries, capable of bringing about an upheaval in
the whole fabric of the economy and of propelling a long-term upsurge of development’.9
Whether the printing press, steam engine, railway or car, all such technologies have gone
through similar surges. Perez divides the surge of a technological revolution into two con-
secutive periods: (1) the installation period, which consists of an irruption stage and a frenzy
(‘gilded age’) stage, and (2) the deployment period, which consists of a synergy (‘golden age’)
stage and a maturity stage. These stages are typically separated by a downturn or crash, as
shown in Exhibit 1.3.
9
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Part 1 Introduction
Exhibit 1.3 Technological revolutions move through different stages as their diffusion increases
INSTALLATION PERIOD DEPLOYMENT PERIOD
Previous great
surge 5
Maturity
4
Degree of diffusion of the
technological revolution
Synergy
(‘golden age’)
3 Crash
2
Frenzy
(‘gilded age’)
1 Next
Irruption great
surge
Time
Big Next
bang big bang
Source: adapted from C. perez, Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages, edward elgar, 2002, p. 48.
Below, we describe in more detail each stage of the typical surge of a technological
revolution:10
● Irruption (1). The irruption stage takes place right after a new technology is introduced
to the market. Revolutionary new technologies, also called ‘big bangs’, include the
mechanised cotton industry in the 1770s, railway construction in the 1830s and, more
recently, Intel’s first microprocessor in 1971. During the irruption stage, innovative prod-
ucts and services based on the new technology appear and start slowly to penetrate the
economy, which is still dominated by the previous technology.
● Frenzy (2). The frenzy stage, also called the ‘gilded age’, is characterised by a sense of
exploration and exuberance as entrepreneurs, engineers and investors alike try to find
the best opportunities created by the technological big bang irruption. Using a trial-and-
error approach, investors fund numerous projects, which help to install the new technol-
ogy quickly in the economy. However, as investors become increasingly confident and
excited, they start considering themselves to be infallible. Depending on the technological
revolution, they have financed digging canals from any river to any other river, building
railway tracks between every city and village imaginable and, more recently, creating
online retailing websites for every conceivable product, be it pet food, medicine or fur-
niture. This process typically continues until it reaches an unsustainable exuberance,
also called ‘bubble’ or ‘mania’. At that point, the ‘paper wealth’ of the stock market loses
any meaningful relation with the realistic possibilities of the new technology to create
wealth.
10
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● Crash (3). The gilded age is followed by a crash, when the leading players in the economy
realise that the excessive investments will never be able to fulfil the high expectations. As
a result, investors lose confidence and pull their funds out of the new technology. Doing
so sets off a vicious cycle, and, as everyone starts to pull out of the stock market, the bub-
ble deflates and the stock market collapses.
● Synergy (4). Following the crash, the time of quick and easy profits has passed. Now,
investors prefer to put their money into the ‘real’ economy, and the successful firms are not
the nimble start-ups but instead established incumbents. While, during the frenzy stage,
there were many start-ups competing within an industry, the crash led to a shake-out
where most of these ventures went out of business. During the synergy stage, a few large
companies start to dominate the markets and leverage their financial strength to generate
economies of scale and scope. Now the emphasis is no longer on technological innovation
but instead on how to make technology easy to use, reliable, secure and cost-efficient.
In order for the synergy stage to take hold, governmental agencies need to introduce
regulations to remedy the fallacies that caused the previous frenzy and the ensuing
crash and, by doing so, to regain investors’ confidence. For instance, following the stock
market crash in 1929, the US government set up separate regulatory bodies for banks,
securities, savings and insurance, and also established protective agencies including
the Federal Deposit Insurance Corporation (FDIC) and the Securities and Exchange
Commission (SEC).
● Maturity (5). The maturity stage is characterised by market saturation and mature technol-
ogies. Growth opportunities in new and untapped markets are becoming scarcer, and there
are fewer innovations resulting from the new technology. During this stage, companies
concentrate on increasing efficiency and reducing costs, for instance through mergers and
acquisitions. In today’s mature automobile industry, for example, large global manufactur-
ers such as Renault and Nissan or VW and Porsche have merged or established strategic
partnerships in order to generate scale effects and expand market reach.11
For a more extensive example of the surge of a technological revolution, consider the evolu-
tion of the railway industry in England. Railways started to become popular in the 1830s.
Many entrepreneurs, financed by eager investors, started constructing railway routes
throughout the country, which culminated in an investment bubble in 1847. Initially, when
building railway tracks investors sought out those projects that showed a clear need and
were easy to build. As the bubble kept growing, investors, searching desperately for invest-
ment opportunities, started to fund projects for which there was hardly any demand and
that were complicated and costly. Ultimately, railway companies were even building tracks
that were running parallel to one another, although it was obvious that only one track could
be operated profitably in the long term.
Inevitably, the railway bubble burst; after the dust had settled, the stocks of railway
companies had lost 85% of their peak value. After the crash in 1847, when a large number
of railway companies went bankrupt, the industry bounced back, rapidly increasing mileage
and passengers and tripling revenues in just five years after the bust. After 1850, railways
drove much of England’s economic growth, and they continued to dominate the transporta-
tion market until the automobile became a medium of mass transportation in the middle of
the twentieth century.12
We can observe similar evolutions with other technological revolutions, such as steel
production, steam energy and, more recently, the automobile (see Exhibit 1.4).
11
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Part 1 Introduction
Exhibit 1.4 Major technological revolutions during the past two centuries show similar patterns of evolution
INSTALLATION PERIOD DEPLOYMENT PERIOD
1 2 3 4 5
Technological
revolution ‘Crash’
(core country) ‘Irruption’ ‘Frenzy’ ‘Synergy’ ‘Maturity’
The Industrial Revolution 1770s and early late 1780s and crash in 1797 1798–1812 1813–1829
(Britain) 1780s early 1790s
Age of steam and railways

(Britain, then spreading to
Continental Europe and 1830s 1840s crash in 1847 1850–1857 1857–1873
the USA)
Age of steel, electricity,

and heavy engineering
(USA and Germany 1875–1884 1884–1893 crash in 1893 1895–1907 1908–1918
overtaking Britain)
Age of oil, automobiles

and mass-production
(USA, then spreading 1908–1920 1920–1929 crash in 1929 1943–1959 1960–1974
to Europe)
Timeline
Source: adapted from C. perez, Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages, edward elgar, 2002, p. 57.
The above perspective illustrates that the time from the first commercial usage of a new
technology to its widespread application can stretch over a period lasting up to 50 years.
Within these long periods, the technology’s diffusion and growth are not continuous.
Instead, they are often marked by a crash, when the initial exuberance and optimism about
a new technology fades.
One of the main reasons for these long gestation periods between the irruption and the
synergy stages is that it is not sufficient just to have the appropriate technology in place. In
addition, managers need to be willing and able to abandon previous ways of doing things
and start using the new technology in such a way that it actually creates value. This takes
time and requires a lot of experimenting and fine-tuning.
The development of e-business has been quite similar to that described above. During
the past decade, e-business has changed dramatically – evolving through the following
four periods (see Exhibit 1.5), which mirror the evolution of the National Association of
Securities Dealers Automated Quotations (NASDAQ)13 during the same time period:
● Grassroots of e-business (1). Before the widespread commercial use of the Internet, the
NASDAQ showed only modest increases. Between 1983 and 1993, it hardly doubled
from 350 to 700 points. We refer to this period as the grassroots of e-business, which
corresponds to the irruption stage in the Perez model.
12
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Exhibit 1.5 Since the mid-1990s, e-business companies have passed through four distinct periods, as is
reflected in the evolution of the NASDAQ
Grassroots of Stock market

1 2 Rise of the Internet 3 4 Synergy
e-business crash
5000
– 45%
4500
4000
3500
Points
3000
2500
2000
1500
1000
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Source: Yahoo! Finance.
● Rise of the Internet (2). Even though the beginning of the dotcom boom cannot be
determined precisely, we chose 1995, the year when Amazon.com was launched, as
the starting point of the rise of the Internet period.14 The year 1995 also saw the going
public of Netscape, the maker of the Netscape Navigator web browser, which presented
the first initial public offering (IPO) of a major Internet company. This period, which
corresponds to the ‘gilded age’, is reflected in the strong rise of the NASDAQ, especially
during the late 1990s. At the peak of this frenzy stage, the NASDAQ traded at price/
earnings (p/e) ratios of 62, after it had not exceeded p/e ratios of 21 in the years
between 1973 and 1995.15
● Crash (3). The bubble burst in March and April of 2000, when the NASDAQ crashed.
Between 10 March and 14 April 2000, the NASDAQ dropped 1727 points, or 34%. By the
end of 2000, it had fallen by 45%. The subsequent consolidation has been characterised
by a more sober approach to e-business and a refocusing on the fundamental drivers of
value creation. The NASDAQ continued its decline for another two years, albeit at much
slower rates, until it bottomed out in early 2003.
● Synergy (4). By winter 2003 there were signs of an e-business revival, as reflected in the
rise of the NASDAQ during the second half of 2003. This trend continued, thus marking
the beginning of the synergy stage (‘golden age’) mentioned in the Perez model.
13
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Part 1 Introduction
In the following sections, the above four time periods are discussed in more detail. The pur-
pose of doing so is to explain, with hindsight, some of the underlying characteristics of each
time period using concepts such as the five forces industry framework, value creation and
capturing and economies of scale and scope. These concepts are explained in more detail
in Part 2 of the text.
1.2.1 The grassroots of e-business

Before the Internet became a widely used platform for conducting e-business transactions,
companies were already using other information and communication technologies (ICT)
infrastructures. These included electronic data interchange (EDI), inter-organisational
information systems (IOS) and public IT platforms such as the Minitel16 videotext system in
France. They enabled companies to connect their business functions internally and also to
reach out to their suppliers, customers and third-party partners.
However, the value-creation potential of these technologies was limited due to the high
costs involved and the limited benefits that were achieved. System implementation costs
were high, since most of these ICT infrastructures were more or less proprietary and had to
be adapted extensively to the individual needs of each company.
The benefits of these systems were limited due to two factors. First, the number of
companies using these IT systems was relatively low compared with today’s ubiquitous
Internet, thus limiting the number of potential partners. Second, even if a company used
an ICT infrastructure, its IT systems and applications were not compatible with those of its
business partners. This made it difficult at best, if not impossible, to interconnect different
‘islands of technology’. As a result of the above factors, e-business existed only to a limited
extent within and across companies or even beyond national boundaries. (See the FT article
‘EDI update’.)
EDI update
Computers are not infallible, but most errors and up-to-date, but it is still the most widely used
inefficiencies in business IT systems are introduced method of electronic trading worldwide.
when humans get involved. That’s why there was so
The problem is that, as with many ‘standards’, there
much excitement in the 1970s when electronic data
is more than one version. In fact, there are currently
interchange (EDI) standards appeared.
more than 50, illustrating the adage: ‘The best thing
By providing a strict format for structuring data, about standards is that there are so many to choose
EDI enabled computers to exchange information from.’
without human intervention.
Proliferation of EDI standards began in 1980s
It was the closest yet to a paperless trading and 1990s with the appearance of Tradacoms in
environment, without the need to print, post and the UK, Gencod in France, Edifact, in the rest
receive paper orders, invoices, remittance notes, of Continental Europe, and Ansi, a US standard
inventory lists, catalogues and forecasts. Moreover, specified by the American National Standards
financial transactions could be accomplished in Institute.
minutes rather than days.
Then came the internet and XML (extensible
More than three decades later, you might think markup language), which offered a simpler, more
that EDI had been eclipsed by something more user-friendly way to specify EDI formats and ➨
14
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spawned a vast number of e-commerce standards Lewis Maclean, founder and managing director of
customised for industries and sectors. Maclean’s Highland Bakery in Scotland, saved a day
a week while seeing sales rise by 15 per cent, when
Now anybody could create an e-commerce standard,
he implemented a cloud-based EDI system to take
and they did, by industry, by sector, and often by
orders from six local Tesco stores. Now deliveries
sub sector, says Steve Keifer, industry and product
are much more closely matched to requirements, he
marketing vice-president at GXS, a Washington-
says, and although he still prints orders, the trading
based supplier of EDI services.
process is 95 per cent paperless.
The European Union (EU) even developed one
To benefit from EDI in the 1980s, organisations had
specifically for short distance sea shipments such
to buy expensive hardware, but today they can use
as cross channel or single river routes, that was
web-based services from companies such as IBM,
different from the long haul shipping one.
SAP, GXS, which Maclean’s Bakery uses.
Industries and sectors, such as automotive,
EDI still has far to go if it is to create paperless
healthcare, electronics, finance, retail, food and
trading. Of the 30bn invoices exchanged each year
transportation, each felt they needed their own
in the EU, fewer than 10 per cent are electronic.
individualised standard. While food companies
Now that the EU has recognised electronic
might want to include expiry dates, for example,
documents as legally binding if they incorporate
clothing suppliers might choose to incorporate
digital signatures, EDI use is likely to grow.
colour and sizing information.
The proliferation of EDI standards in e-commerce
Even coffee growers in Latin America think their
continues to be a problem. When UN and European
requirements are radically different from those of
Commission committees tried to rationalise the
other commodity companies, says Mr Keifer.
12 flavours of e-invoicing being used in the EU,
Similarly, the International Air Transport it ended up with two, and the situation remains
Association created a version just for jet refuelling unresolved.
at the gate. ‘Why it can’t use the same invoicing
On the other hand, an advantage of EDI is its
system as everyone else is hard to understand,
ability to eliminate invoices altogether. Customers
though it believed there was a good reason.’
can create their own bills and pay automatically
The very fact that there are so many XML EDI because they know which goods were ordered,
standards puts many organisations off for fear of which received, and the agreed price.
choosing the wrong one, though some have become
Mr Keifer says that organisations should take EDI
well established, such as RosettaNet in high tech,
more seriously and look at what it could do to make
Galian (automotive, France), and VDA (automotive,
them more efficient. ‘If you want to get into new
Germany).
markets anywhere in the world, this is the way to
The next challenge for EDI came in the Noughties, do it; it’s like a common language.’
when the dotcom boom triggered a rush to establish
EDI is in the infrastructure of how businesses connect,
industry and sector specific electronic trading
and is critical to many problems that companies and
exchanges. These were expected to replace EDI.
industry organisations are trying to solve.
Although big companies with multimillion pound
All goods imported into the EU and US are tracked
revenues had the resources to implement systems
via EDI, which helps homeland defence with counter
based on trading exchanges, most organisations
terrorism. ‘It has become critical to manufacturing
have stuck with EDI because they know it works,
companies to enable flexible and responsive supply
is well established, and they understand how to
chains,’ says Mr Keifer.
use it.
‘And e-invoicing and e-procurement in the public
‘EDI has survived because organisations believe it
sector can help to reduce sovereign debt.’ But as
offers competitive advantage in being able to make
for the paperless office, doubters maintain that it is
business decisions faster,’ says Mr Keifer.
about as likely as the paperless toilet.
Source: Bird, Jane (2011) EDI update, FT.Freelance, 19 October.

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Part 1 Introduction
1.2.2 The rise of the Internet

In July 1995, the Internet boom years began with the launch of Amazon.com, one of today’s
best-known online retailers. The subsequent five years were characterised by great exuber-
ance and the belief in the seemingly unlimited potential of the Internet. During that time
period, the profitability and economic viability of companies and business models did not
seem to matter much. Instead, metrics such as ‘click-through rates’, or ‘number of eyeballs’
(i.e. the number of visitors to a site) were the main determinants for stock market suc-
cess and media coverage. In the case of the fashion retailer Boo.com, the founder, Ernst
Malmsten, did not even have to provide investors with these kinds of metrics. The mere
hope of high future profits allowed Boo.com to spend $30 million of venture capital money,
even before launching its website. Finally, after scarcely a year of existence, Boo collapsed.
(See, in the FT article ‘Boo.com founder fears net bubble’, the lessons that Boo’s founder
learned from his start-up company’s experience.)
For a more detailed insight into this period, consider the example of Priceline.com, which
allowed people to purchase airline tickets over the Internet. Priceline.com went public on
30 March 1999, and the shares that were issued at $16 each soared immediately to $85
each. At the end of the day, Priceline.com had reached a valuation of almost $10 billion,
which was more than those of United Airlines, Continental Airlines and Northwest Airlines
combined.17 While these airlines had a proven business model, valuable brands and sub-
stantial physical assets, Priceline.com owned only a few computer servers and an untested
business model.
In fact, the company even stated in its IPO prospectus that it did not expect to be profit-
able at any time in the near future, that the business model was new and unproven and that
the brand might not be able to achieve the required brand recognition. Investors ignored
these warnings because they believed that they would always be able to sell the stock to
someone else at an even higher price. This investment approach during the Internet boom
years became known as the ‘Greater Fool Theory’.18 In the USA, some 100 million people
(about half of the adult population) had invested in stocks at the peak of the bubble. As
the stock market kept soaring, more and more people – who had seen their colleagues and
friends get rich – also started investing in Internet stocks. This meant that the chances of
finding a ‘greater fool’ were high – at least during the Internet boom years.
The fundamental driver of the e-business boom was the belief that it would be possi-
ble to increase value creation many fold because, as explained below, the Internet would
lower costs while, at the same time, increasing consumer benefits. Costs were expected to
decrease significantly because managers and analysts alike believed that Internet ventures
would not require heavy investments in expensive bricks-and-mortar infrastructure, such as
warehouses, retail outlets and delivery trucks. Instead, they believed that all physical activi-
ties could be outsourced to external providers while they focused on the technology aspect
of the business and on customer interactions.
At the same time, the belief was that, compared with their more traditional bricks-and-
mortar competitors, Internet ‘pure-play’ companies would provide far superior consumer
benefits. It was thought that coupling the two-way connectivity of the Internet with data-
base capabilities and customer relationship management (CRM) systems would create
much higher benefits than traditional outlets ever could.
This still leaves us with the question of why so many companies rushed into this e-market
so rapidly during the Internet boom years. Several factors can explain this new ‘gold rush’
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(see also Chapter 7 for a more detailed discussion of early-mover advantages and disadvan-
tages in e-business).
By entering the e-market early, companies were trying to generate scale effects through
large sales volumes. They wanted to attract new customers quickly and build up a large
customer base. The underlying hope was that once customers had used a website a number
of times, then they would be unlikely to switch to a competitor since they would have to
get used to a new website layout and functioning. Furthermore, data-mining techniques
would allow online companies to customise their offerings to the specific preferences of the
individual customer. By switching to another provider, customers lose this level of customi-
sation, at least over the short term.
Internet ventures also expected to create a customer lock-in through network effects.
As more and more customers sign up and provide information about themselves, as is the
case at eBay and through Amazon.com’s book reviews, customers are less likely to switch
to competitors unless the latter offer better (or at least similar) network effects. Because of
these effects, there was a ‘winner-takes-all’ expectation, whereby a dominant player would
outperform competitors through high-scale economies and network effects.
Finally, and probably most importantly, the peculiar investment climate pushed com-
panies to spend and expand rapidly instead of taking a more cautious approach. In 1999,
Silicon Valley venture capitalist firms such as Sequoia Capital and Benchmark Capital
invested an all-time high of $48.3 billion. This represented a 150% increase over 1998, and
90% of this money went towards high-tech and Internet companies.19 In order to qualify
for venture capital funding, companies had to convince investors that they would be able to
grow big and fast and so fuel the hope of a rapid payback on investment.
These investors did not necessarily believe in the future of the start-ups they funded.
Yet they knew that as long as stock markets kept going up and people kept buying Internet
stocks, regardless of the underlying business model, they could not go wrong. At the same
time, investment bankers and venture capitalists who refused to play this ‘game’ also knew
that they would fall behind their less scrupulous competitors. These perverted incentives
contributed significantly to the build-up of the stock market bubble.
Boo.com founder fears net bubble

The founders of Boo.com, the sports fashion website said. Investors were assuming too much loyalty
that became one of the most high-profile casualties from website customers, he added.
of late 1990s dotcom excess, and Bebo, the social
Bebo was sold to AOL for $850m in 2008, but sold
network, have warned of a new bubble in internet
again by AOL to private investors last year for an
investments.
undisclosed sum reported to be less than $10m.
Ernst Malmsten, the Swedish entrepreneur who Michael Birch, the British co-founder of Bebo, also
launched Boo in 1999, said valuations being placed told the Financial Times that internet valuations –
on some technology groups at the moment were particularly in the US – were getting ‘a bit silly’.
‘crazy’ and ‘fuelled by greed’.
Privately run US companies such as Facebook, the
While many of the new generation of online social networking site, and Groupon, the discount
businesses were profitable and generating strong site, have attracted sizeable investments in recent
revenues, there would inevitably be winners and months. But the multi-billion dollar valuations
losers in the race to find the next big success, he being placed on such sites have triggered debate ➨
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Part 1 Introduction
about whether the market for internet companies is its website. By contrast, Boo employed about 400
becoming too frothy. people and spent £30m constructing its site, burning
through $135m of investors’ cash only to collapse a
However, Mr Malmsten, who is now chief executive
year after its launch.
of the London-based Lara Bohinc luxury accessories
group, said there were clear differences between the Mr Birch also remains an active technology
internet environment now and a decade ago, adding entrepreneur, recently launching Jolitics, a political
that certain markets had enormous growth potential. social network. But he echoed Mr Malmsten’s
‘It’s very easy for someone to come up with a concerns.
brilliant idea now,’ said Mr Malmsten. ‘In a couple ‘There is a bit of a mini bubble in Silicon Valley,’
of months you can have hundreds of millions of he said. ‘The terms of angel investing have become
users.’ a bit crazy. I think it’s been led by the Facebook
Mr Malmsten will this week launch a website for valuation.’
Lara Bohinc, his first new e-commerce venture Although he added it was ‘perfectly possible
since Boo collapsed in 2000. Facebook will be as big as Google,’ Mr Birch said that
Lara Bohinc was founded by the designer of the he had stopped investing in early-stage technology
same name in 1997 and sells jewellery, handbags groups because smaller companies basing their
and shoes. Mr Malmsten and Ms Bohinc have not valuations on Facebook is ‘a bit silly’.
taken any venture capital money. ‘The risk of an angel company is the same as it ever
The cost of building and running such a site has was,’ he said. ‘The chances of it becoming one of the
fallen sharply in the past few years. Lara Bohinc, batch of the billion-dollar companies is as small as
which employs 13 people, spent just £10,000 building it ever was. And there are more start-ups than there
ever were.’
Source: Watkins, M. and Bradshaw, T. (2011) Boo.com founder fears net bubble, FT.com, 11 April.
1.2.3 The crash

During 1995–9, investors and managers had artificially inflated market sizes for dotcom
companies and overlooked a number of important issues that led to the subsequent end of
the Internet boom years.20
On the one hand, revenues were artificially inflated in a number of ways. First, in order
to gain market share, Internet ventures subsidised customers’ purchases of their products.
For instance, Internet retailers such as Amazon.com and the pet food supplier Pets.com pro-
vided free shipping and delivery to their customers – even for 20lb dog-food bags. Second,
many customers bought products and services online more out of curiosity than to fulfil an
actual need. After the novelty wore off, many customers reverted to their traditional buy-
ing behaviour. Third, in many instances, revenues for the Internet ventures were generated
through stocks from partner companies that enjoyed equally high market valuations.
On the other hand, costs were not represented realistically, which further distorted the
true state of the underlying business. In many cases, dotcom companies received subsidised
inputs because suppliers were eager to do business with them, which helped them to reduce
costs. More importantly, many suppliers and employees accepted equity as payment,
expecting that the stock market boom would continue to rise.
The above-mentioned factors resulted in bad operating financials, which did not reflect
the actual Internet ventures’ business models in terms of costs and revenues. Furthermore,
bank analysts, such as Mary Meeker from Morgan Stanley (who, in 1996, wrote the highly
publicised Internet Report), had pointed out that the focus of investors should be not on
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current earnings but on earnings potential.21 Instead, investors were supposed to empha-
sise the numbers of online customers, unique website visitors and repeat online buyers.
Consequently, e-managers, trying to meet investors’ expectations, spent heavily on market-
ing and advertising to attract site visitors and customers, regardless of costs. As it turned
out, however, these metrics might have been a good indicator for spectator traffic on a
website but they did not represent a reliable indicator of profitability.
On Monday 13 March 2000, the dotcom bubble started to burst. Within three days, the
NASDAQ slid by almost 500 points. At that time, Jack Willoughby, a journalist for Barron’s,
published an article in which he calculated the ‘burn-rate’ of Internet companies, which
measured the rate at which these companies were spending money. He concluded that most
of the Internet companies would run out of money within a year:
When will the Internet bubble burst? For scores of net upstarts, that unpleasant popping sound is
likely to be heard before the end of this year. starved for cash, many of these companies will try
to raise fresh funds by issuing more stock or bonds. But a lot of them won’t succeed. as a result,
they will be forced to sell out to stronger rivals or go out of business altogether. already, many
cash-strapped Internet firms are scrambling for funding.22
This article shattered the hope of investors that, regardless of their economic viability,
Internet firms would always be able to raise more money.
Along with most other Internet firms, the stock of the aforementioned Priceline.com
started to slide from $150 at its peak down to less than $2. At this valuation level, the capi-
talisation of Priceline.com would not even have sufficed to purchase two Boeing 747 jets.
Other Internet companies faced similar fates and either went bankrupt (see the FT article
‘Webvan’s billion-dollar mistake’) or were acquired by a larger competitor, often a tradi-
tional bricks-and-mortar company from the so-called ‘old economy’. For instance, KB Toys,
an 80-year-old bricks-and-mortar toy retailer, purchased the intellectual property, software
and warehouses of bankrupt eToys.com – once one of the most highly praised online start-
ups and valued at $10 billion – and relaunched eToys.com in October 2001.
Subsequent to the burst of the Internet bubble, which took place in March and April
2000, e-business entrepreneurs, managers, investors and the media awoke to the new
reality and started reflecting on what had really happened. More importantly, they tried to
understand the reasons that led to the failure of so many Internet ventures, as well as the
flaws in their business models.
In addition to the hysteria that had distorted valuations, many of these ventures did not
create as much value as was anticipated, and they were also unable to capture the value
they created in the form of profits. Let us look at each of these points in turn.
Overall, the value created by Internet ventures turned out to be lower since costs were
higher and benefits were lower than it was thought throughout the boom years. The belief
that e-business would be comparatively low cost stemmed mainly from the idea that it
required only a couple of computer servers and a website to set up an online company.
Furthermore, it was thought that doing business over the Internet would be highly scalable
since it required only setting up additional computer processing capability to cater for new
customers around the globe.
Yet for many online businesses the costs of developing a website turned out to be only a
small fraction of the total costs. For instance, during the boom years, Amazon.com on aver-
age paid around $16 for buying and shipping a book. On top of that came $8 for marketing
and advertising and $1 for overheads (which included the website development), raising
overall costs per book to $25. Average price per book sold, however, was only $20.23 The
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Part 1 Introduction
main reason for the high costs was that most costs, including marketing and sales, were not
nearly as scale sensitive as the set-up of a website. In fact, the acquisition costs of online
customers were, in general, much higher than those of traditional bricks-and-mortar com-
panies. Internet ‘pure-player’ companies had first to build up their brand name and then win
over the trust of online customers.
Furthermore, the notion of the unbundled corporation in which external providers man-
age the high fixed-cost logistical processes did not work out as expected – at least during
those early years when the interfaces between e-business companies and their logistics pro-
viders had not yet been clearly defined. In order to maintain high levels of quality and reli-
ability, online companies such as Amazon.com reverted to setting up their own warehouses
and distribution centres, thereby adding significantly to overall costs.
It also turned out to be difficult for most Internet companies to establish a sustainable
revenue model. As a result, they were unable to ensure a high enough return on investment
to justify their stock market valuation. For instance, after starting operations in April 1998,
Priceline.com managed, by the end of that year, to sell $35 million worth of airline tickets – at
an overall cost of $36.5 million!
The inability of many firms to charge appropriate prices for products and services was
due to the following factors. First, the Internet lowered barriers to entry (see Section 3.2.2).
While in the past it was necessary to operate an extensive physical network to compete in
the retailing sector, many companies from all realms, such as Boo.com and eToys.com,
attempted to grab market share by leveraging the Internet. In the online market for pet
food, more than half a dozen web retailers were competing for customers. This led to a price
war to attract customers, with some companies giving away products or services for free.
Second, the strategic stakes that were involved further aggravated the competitive situa-
tion. Knowing that only a few online companies per sector would be able to stay in business,
these companies invested heavily and sacrificed profits for market share. They also hoped that
market share would translate into durable customer relationships. After all, e-business was
supposed to be a winner-takes-all market. Yet, ultimately, the lock-in effect created through
high switching costs and network effects occurred only in a few cases (see also Section 7.4.1).
As websites became more user-friendly, it also became easier for customers to switch from
one provider to another.
Regarding network effects, only companies that rely heavily on consumer interactions,
such as eBay, were able to leverage the power of their installed customer base. However, as
long as there was no substantial interaction with other users, individual customers usually
did not care much about the size of an e-business company’s installed user base.
The final dark side of the boom years was that many companies, most notably the energy
trader Enron (once hailed as the model Internet-based company) and the telecom opera-
tor WorldCom, applied illegal accounting practices to boost profits. This worked out as
long as the boom persisted and the stock market kept going up. However, once the market
had collapsed and investors started to scrutinise accounts more closely, the extent of the
criminal activities became obvious, forcing these companies and numerous others to file for
bankruptcy. Just like after previous crashes, regulatory agencies also reacted this time to
improve investor protection. In July 2002, President George W. Bush signed the Sarbanes–
Oxley Act of 2002, which mandated a number of reforms to enhance corporate responsibil-
ity and financial disclosures and to combat corporate and accounting fraud. In addition, this
Act also created the Public Company Accounting Oversight Board (PCAOB), which has the
role of overseeing the activities of the auditing profession.
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Webvan’s billion-dollar mistake

The demise of Webvan ends the hope that a vans fitted with sophisticated global satellite posi-
business as mundane as grocery shopping could tioning systems would allow each warehouse to
be transformed by a standalone Internet company. serve a 50-mile radius.
Webvan was the best funded and the most hyped It soon became obvious that Webvan was overbuild-
of the online grocers, soaring to an $8.7bn market ing – but by then it had nine centres open, each
valuation on its first day of trading in November bleeding cash and operating at a fraction of capacity.
1999. Now it has burnt through more than $1bn of ‘I believe they were doomed from the start because
cash in less than two years. their business model was one that was predicated on
reinventing the entire system rather than using any
The rise and fall of Webvan is a study in the illusions
of the existing structure,’ says Robert Mittelstaedt,
of the dotcom boom and the wishful thinking of
vice-dean of executive education at the Wharton
Wall Street. It is leaving little in its wake but a
School. Webvan’s profligate plan ‘defied economic
stain on the reputations of the blue-chip backers it
sense in a low-margin business,’ he adds.
attracted in its early days.
Groceries did not offer the prospect of fat margins
Founded in 1996 by Louis Borders of Borders
that a smart new entrant could try to undercut.
Books, Webvan managed to lure George Shaheen,
Kroger’s return on sales in 1999 was just 2.2 per cent
managing partner of Andersen Consulting, to be its
and Ahold achieved a 4.5 per cent operating margin
chief executive. Its board was filled with some of the
in the same year. Many online retailers have got
most revered names of the era: Christos Cotsakos of
round such issues by charging above-market prices
E*Trade, Tim Koogle of Yahoo and Michael Moritz of
for convenience but this was always likely to be a
Sequoia Capital. Its money came from such Silicon
challenge. Most families watch their weekly food
Valley powerhouses as Softbank Capital Partners
bills carefully, as food manufacturers that have
and Benchmark Capital and its shares were touted
raised prices know to their cost.
by Wall Street’s best-known investment banks.
The hope that e-tailers’ gross margins could exceed
Goldman Sachs said in February 2000 that Webvan
those of traditional retailers was punctured not
could become an Internet franchise to rank along-
only by high fulfilment costs but also by online
side AOL and Yahoo. ‘Webvan has re-engineered
grocers’ lack of purchasing power and the heavy
the backend fulfilment system to create a scalable
discounting many had to offer to attract customers.
solution to the last-mile problem of e-commerce,’
its analysts wrote. Having such names behind it The cost of Webvan’s infrastructure, however
ensured that Webvan was able to come to market – impressive, eventually prevented it from competing
with Goldman as lead underwriter – after only a few with traditional supermarkets. Mr Mittelstaedt says
months of trading in which it had managed to sell this problem was not unique to online grocers.
just $3.2m worth of goods. ‘The places you see where (e-tailers) successfully
changed the business model have nothing to do with
Nonetheless, its executives assured investors it
physical distribution – such as recruitment sites,’
had a vast opportunity. Groceries represented a far
he says.
larger market than books, videos or music – areas in
which e-commerce made its first forays. The typical Shoppers were not crying out for an alternative
US household spends $5,000 a year on groceries and way to buy groceries and it is notable that the
goes food shopping more than twice a week. supermarket model had not been challenged by
previous innovations such as catalogues.
From the start, the company had big ambitions.
Rather than starting off in a large city or two, Whether Webvan truly offered convenience is also
learning from its mistakes and perhaps making a questionable. Although it guaranteed delivery
small profit before expanding, it decided to open in within a 30-minute window chosen by the customer
26 markets within three years. – although not the same day – this still required
somebody to be at home to accept the goods.
Each distribution centre would be 18 times the size
of a typical supermarket and would cost $35m. The one factor that cannot be blamed for Webvan’s
Almost 5 miles of conveyor belts would bring prod- failure is online competition from traditional
ucts to the packers at each site and refrigerated grocers such as Safeway, Kroger and Albertson’s. ➨
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Part 1 Introduction
All were slow to the Internet and all invested only Webvan’s investors now face an anxious wait to
small sums in online operations. see whether they can salvage anything from the
physical assets left behind by this supposedly
The big retailers are slowly showing signs of learning
virtual business. For now, it seems, few people apart
from Webvan’s mistakes. Ahold invested last year
from the time-stressed technophiles who founded
in Peapod, an online-only grocer that now picks
the company really need Webvan.
merchandise from Ahold’s US chains. Safeway last
month gave up its warehouse model in favour of a There were a few mourners yesterday. Sarah
partnership with Tesco, the UK retailer that has built Lonsdale, a San Francisco freelance writer, was
the world’s largest online grocery business by using until yesterday a devoted user of the service. Now
a model whereby orders are assembled in its stores. she will have to lug her two children to the grocery
store. ‘I’m disappointed,’ she says. ‘Webvan had
Meanwhile, more than 200 of Webvan’s delivery
really got its act together. The convenience of
vans currently sit outside its closed plant in
ordering was fantastic.’ But in the end, that was
Lawrenceville, Georgia, awaiting auction next
not enough.
month. They are expected to fetch a fraction of what
Webvan paid for them.
Source: Abrahams, P. and Edgecliffe-Johnson, A. (2001) A billion-dollar mistake: Webvan’s failure has been an
expensive lesson for the Internet, Financial Times, 10 July.
1.2.4 The synergy phase

What messages can we take away from looking at these boom and bust cycles across his-
tory? First, in order to enter the synergy phase it is essential to return to business funda-
mentals. This entails paying close consideration to issues such as industry structure, value
creation and ways to create profits and a sustainable competitive advantage through the
Internet. Second, just as the railway, steel and automobile industries underwent boom and
bust phases before releasing their true economic potential, we are now observing a similar
evolution in the e-business sector. The booming installation years of the Internet were fol-
lowed by a bust. Since then, the time has come for the much more profound deployment
period of e-business (see also FT article: ‘From Netscape to the Next Big Thing’).24
From Netscape to the Next Big Thing:

how a dotcom decade changed our lives
Somewhere in the world in the next few weeks the offering – an event that triggered Wall Street’s
billionth human being will sit down at a computer, dotcom mania. Netscape’s browser made the Internet
log on to the Internet for the first time and join a more conducive place for the non-technical user
the swelling throng in cyberspace. That is quite and spurred the creation of companies such as
a record for a medium that broke away from its e-Bay, Yahoo and Amazon.com, which have all had
academic roots only a decade ago. But it may be 10th birthday parties of their own – although most
only a taste of the upheaval in store over the next dotcom companies never made it this far.
10 years.
It is worth considering the extent to which those
The Internet’s 10th birthday is marked next week survivors have become part of the everyday lives of
by the anniversary of the Netscape initial public their users. The $34bn of goods that changed hands ➨
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on e-Bay last year is roughly equivalent to the gross job of getting more value from each click,’ says Eric
domestic product of Kenya; Yahoo’s 379m unique Schmidt, chief executive officer of Google. ‘If you
users are equal to the populations of the US and show better ads – which sometimes means fewer
UK combined; and the average person on the planet ads – business improves. That’s something we’ve
views 10 webpages on Google each month. learnt over the last year.’
Even early enthusiasts for the medium did not quite None of this even touches on the less visible, and
foresee how far it would work its way into popular potentially even more profound, impact that the
culture. ‘It was a stretch to say that niche focus web has had on how businesses are organised,
newsgroups and bulletin boards about Unix would how social and political life has been affected or
some day be newsgroups about the latest Harry how a country such as India has been able to join
Potter book or Batman movie’, says Mary Meeker, the the world economy in a way that would once have
Morgan Stanley Internet analyst who was among the seemed impossible.
first on Wall Street to tout the Internet’s potential.
If that is the story of the Internet so far, then what do
Much of the early euphoria was of course misplaced, the next 10 years hold in store? In two words: more
even if it has been proved right over the longer upheaval, as the forces that caused consternation
term. It is three years in October since the nadir of in many corporate boardrooms in the late-1990s are
the stock market slump, which wiped more than once again unleashed, this time backed by more
$6,500bn from the peak value of Nasdaq stock market robust business models and better technology. ‘A
where many US technology companies are traded lot of business people were very happy about the
[see Exhibit 1.5]. Most of that wealth destruction Internet market correction – that pulled a lot of
reflected over-investment in telecommunications resources off the Internet,’ says Ms Meeker. ‘But the
networks and the technology companies that were Internet business just kept on going. The disruption
building the infrastructure on which the Internet to a lot of traditional businesses has only just
depends. Overcapacity in telecoms and tech, begun.’
though, has brought down prices and made the
Many Internet businesses are probably in for an
Internet more widely available, helping to fuel a
unsettling time of their own. As Meg Whitman,
new round of online innovation.
chief executive officer of e-Bay, warns, half of the
‘The pace of change is accelerating,’ says Ms Meeker. Internet giants 10 years from now may well be
companies that you have never heard of before.
It is hard to argue with the sheer weight of numbers.
Internet stock valuations, including Google’s price/
According to estimates by Morgan Stanley, 1bn
earnings ratio of 87, once again seem to be ignoring
people will be online by the end of next month,
the fact that barriers to entry in this global medium
three times as many as at the beginning of the
remain low and that the next disruptive idea may be
decade. Roughly one in five of those people already
just around the corner.
uses a broadband connection. And mobile access
to the Internet has barely begun: sometime during As with the last decade, the impact of the web in
the next decade, more mobile handsets than the next 10 years is likely to be felt most acutely
personal computers will be plugged into the global in those fields that depend most on disseminating
information network. Of course, eyeballs alone do information: in communications, commerce and
not create a business – a point amply demonstrated the media. While email and instant messaging
by the experiences of many dotcom pioneers. But were the low-cost communications of the Internet’s
this time around business is following close behind. first decade, the next communications revolution
may well take aim at the voice calls that account
Global online advertising hit $15bn last year, two-
for the bulk of the telecom industry’s revenues.
thirds of it in the US, and it is growing at some 30%
In its first year, more than 140m people have
a year as advertisers rush to keep up with the shift
downloaded free software from Skype, which lets
in their audience online. Consumer e-commerce,
computer users talk over the Internet, making
which reached $295bn last year, is set to grow by
it the fastest-growing consumer technology in
38% this year, according to IDC. At the same time,
history.
the companies that dominate the medium have
learnt from the mistakes of the past and are refining ‘We will have free global communications in very
business plans that already make them some of the short order,’ says Paul Saffo, director of Institute
most valuable on the planet. ‘We are doing a better for the Future, a California research group. Along ➨
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Part 1 Introduction
with new low-cost communications technologies There is another lesson from the first decade that
such as WiFi and WiMax, that signals a fresh threat is likely to hold good for the years ahead: for clues
to an industry that was hit hard during the first about how the Internet will eventually change your
phase of the Internet. As the barriers online between life, look no further than the teenager sitting next to
communications, commerce and media are eroded, you. ‘The 15- to 20-year-olds,’ says Ms Meeker, ‘will
meanwhile, the Internet is likely to bring forth new show and tell you where it is going.’
technologies and challenge existing forms of human
Jerry Yang was a student at Stanford University
interaction.
when he and David Filo started Yahoo as an index of
Two forces, in particular, characterise this latest Internet pages in 1994. ‘When we first got together,
wave: the rise of search engines, and the many online we weren’t even thinking about it as a business. It
tools that have been created to support the outpouring really began as a hobby – we wanted to keep track of
of what is known on the Internet as ‘user-generated our personal interests on the web. The Internet had
content’. Search engines have already established been around for a long time obviously, but it’s when
themselves as a pivotal form of distribution online. Mosaic [the Netscape browser] and some of the other
As more of the media become digitised, that role is earlier tools came out that we really started to get
only likely to become more significant. ‘The Internet excited about it. We knew there was a future to this
will become a very serious competitor to cable and whole thing but we never imagined where things
satellite in the home, and the impact on print media would end up. Eventually, our personal interest lists
is likely to be dramatic,’ says Roger McNamee, for the web became too long and unmanageable,
a Silicon Valley financier who specialises in the so we broke them out into categories and then sub-
media industry. ‘At the end of the day, search-based categories and there you had it – the core concept
technology is really how consumers will access and behind Yahoo was born. We also shared these lists
find that content – that’s a huge deal.’ with our friends but it wasn’t until we saw our first
million-hit day that we realised, ‘Hey, maybe we
An increasing part of this content is likely to come
have something here.’ So when I look at where we
from Internet users themselves. ‘We are in the middle
are today, I’m amazed. The success and growth of the
of a very big shift from mass media to personal media:
business has far exceeded anything I could have ever
you get to answer back and create if you want,’ says
imagined.
Mr Saffo. Blogging, now a pastime of more than 15m
people, has been an unlikely early manifestation. ‘I think when you look back at the last 10 years,
Other forms of self-expression and community- there are things that have happened much faster
building are gathering force, including photo-sharing than we had anticipated, but also things that took
sites that let families or groups of friends see each a lot longer than expected, such as users making
others’ pictures; podcasting (a form of audio blogging); the shift from the PC to mobile devices and general
and social networks that connect wider groups of access to broadband. I think if you look at users
friends. ‘Blogging is a transitional form on its way early on, people saw the web as this great outlet for
to something else. It’s interesting, but it isn’t stable,’ publishing. For the first time, people could have an
says Mr Saffo. The urge towards communication and individual voice out there. That was the driver for
self-expression, and the low-cost technology to make it the Internet from the beginning. But if you look
possible, will give rise to new fads. at how that has evolved over the last 10 years, it’s
still not as sophisticated as we thought it would
Seen from the perspective of 2015, search and
be. A good example of that is blogging – look how
blogging may look like quaint and antiquated
long it took before people actually embraced it.
ideas, overtaken by another Next Big Thing on the
It’s surprising to me how things like that took
Internet: some new way of fulfilling people’s desire
so long.
to interact and find information, entertainment or
goods to buy online. Whatever its form, though, ‘It’s always difficult to predict what’s next, but I
what comes next is likely to draw on the forces think there will definitely be a digital convergence.
manifested during the medium’s first decade: a If you look at the people who grew up with the
pervasive interconnectivity, aided by increasingly Internet, their media consumption and approach
sophisticated software tools that uncover and make to technology is totally different to their parents’
usable the ever-expanding sources of information on generation. They rely heavily on the Internet for
the open global database. information, personal communication, work and ➨
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entertainment and they want to take this with business. But it has levelled the playing field, and
them wherever they are. The online industry made small businesses as accessible as big ones.
is constantly evolving and I think the Internet That was an ‘a-ha’ moment. Some categories didn’t
will continue to impact traditional business far work the way we thought they would. We look
beyond anything we’ve seen today. With the talent, for markets where there is price and information
technology and resources out there today, I think inefficiency. It turns out that real estate is pretty
we’re going to see some great things happen over darn efficient.
the next few years.’
‘I am startled by the ubiquity of the Internet today.
Meg Whitman left a job at toymaker Hasbro to It is one of the fastest-growing technologies ever.
become president and chief executive of e-Bay in It’s just remarkable. It has changed the way we
1998. The value of goods traded on the company’s communicate, the way we play. Email has changed
sites has risen from $740m when she joined to the way business is conducted. The timing may
$34bn last year. ‘I look back and say, ‘What were we finally be right now for mobile access. We thought
thinking?’ We quit two jobs, moved to California, it was important to have mobile access to e-Bay
put the children in new schools. I didn’t think it was and the net five years ago, but nobody used it. That
going to be anything like it turned out. I thought could be changing because of the growing power
e-Bay could be a great collectibles website for the of mobile phones. In countries like China and
US. I thought this could be a small, quite profitable India, you may see a shift to primary access to the
company. We began to understand that what Internet coming through mobile handsets. Moving
worked in collectibles would work in other markets to 100% broadband penetration will also make a
as well. What e-Bay does is make inefficient markets huge difference. You will see an always-on Internet
efficient. The business model is very powerful. We that changes the way people behave.
were able to move globally far faster than land-
‘There is still room for new Internet leaders to be
based companies can. The remarkable thing about
created. Of the five biggest Internet companies 10
e-Bay is that it’s instantly local: 98% of our content
years from now, I can imagine that two or three of
is user-generated.
the existing leaders will stay on, but that two will
‘The other thing I wasn’t expecting was the way the be companies that haven’t even been born yet. The
market empowered small businesses. That was a Internet is an incredibly dynamic environment. You
big surprise. I thought this would be the home of big have to respond really fast.’
Source: Waters, R. (2005) From Netscape to the Next Big Thing: how a dotcom decade changed our lives, Financial
Times, 5 August.
At the time of writing the third edition of this text, about a decade has passed since
the crash. Companies with established Internet businesses, such as Ducati, eBay, Google,
Tesco.com or Nordea, some of which are documented in this text, confirm that if firms
have consistent e-business strategies and implement them superiorly, they can create
significant value for their customers while at the same time being highly profitable. As a
result, the stock valuation of some highly successful Internet ventures, such as eBay and
Amazon.com, has increased beyond the levels that we witnessed last during the Internet
boom years.
In addition, in recent years, entrepreneurial start-ups have also had substantial suc-
cess. Ironically, nowadays it seems to be the case that it really only requires a couple
of computer servers and a website to set up an online company. Most of the companies
that were recently acquired by large industry incumbents such as Yahoo! or Google.com
were founded by young entrepreneurs out of their private homes or college dorm rooms.
25
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Part 1 Introduction
Companies such as Flickr, YouTube, MySpace or del.icio.us have in common that they
have built communities around a website offering videos and photos, or enabling people
to network with their friends, all of which did not require heavy investments in market-
ing (because users mostly took care of this) or infrastructure (because no physical goods
were involved).
All these companies, however, had a different starting point than their predecessors of
the dotcom period. The actual network infrastructure of the Internet has changed dramati-
cally in the last few years. The spread of broadband Internet connections has had the effect
that more people spend more time online, and it has also allowed for richer content to be
created and viewed, which, in turn, makes it easier for new start-ups to create new service
sites around user-generated content. Furthermore, new technology standards such as RSS
and AJAX have evolved that make it easier to keep track of content updates and provide a
faster and more convenient web experience.
Based on these improvements, a new web-based service variety has evolved that
focuses on fostering communication, sharing or collaboration. The so-called ‘blogo-
sphere’, where bloggers author their own content and comment on other bloggers’ output,
is democratising the web by allowing individuals to engage in their personal journalistic
interests, delivering articles on any possible topic. While web-based folksonomies such
as YouTube or Flickr allow their members to upload, label and categorise content such as
videos or photos using tags, social networking sites allow their users to create their own
profiles and to connect with other people through a social network. Furthermore, there
is a whole variety of services evolving on the web, such as Google’s online calendar or
word processing and spreadsheet applications, which are mimicking traditional desktop
applications, thus posing another threat to established software industry incumbents
such as Microsoft.
By functioning as platforms for its users, these software services allow participants to
make various content items available and accessible for others. One common concept for
understanding to what extent this new service variety creates value from a user’s point of
view is the concept of the ‘long tail’, which is discussed in more detail in Chapter 11. By
allowing the individual to capitalise better on previously inaccessible market niches, the
‘long tail’ can be reached down. Search tools, for instance, are an integral part and are
needed in order to break down a complex world of choice into reasonable pieces that can
be handled by the user.
Still many of the new services have yet to prove that they have substantial revenue mod-
els. However, highly trafficked sites and high user numbers suggest that the value created
by these companies is more significant than the value created by companies during the new
economy era. While survivors of the dotcom bust, such as eBay and Amazon.com, always
had community aspects in their business models, and managed to be successful hybrid
retailers, companies selling solely digital content have the advantage of completely free-
ing themselves from the boundaries of a physical world, therefore being even more cost
efficient than others.
Furthermore, investors seem to be more realistic about their protégés’ future. Although
Web 2.0 is all about people, it is not about IPOs. Selling a successful – meaning heavily
trafficked – website to one of the established incumbents on the Internet appears to be
the modus operandi of exiting entrepreneurs. Google’s acquisition of YouTube or the
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acquisition of MySpace in a $580 million deal further demonstrates that substantial value
is created.
It seems that the maturity stage of e-business companies is not yet in sight. The Blog
Box ‘Google acquires Internet’ provides a glimpse into a possible, although not likely,
future.
BLOG BOX
Google acquires Internet (May 2017)

Mountain View-based search giant Google Inc today announced they’ve acquired the
Internet for the astounding sum of $2,455.5 billion in cash. The deal had been rumored
in various search blogs since the beginning of the year and was now confirmed by the
company’s CEO. ‘This is in line with our vision to make information more accessible to
end-users,’ says Eric Schmidt. ‘With the acquisition, we can increase the speed of indexing
as everything will already be on our servers by the time it’s published.’
In a conference call earlier today, Larry Page explained the strategy behind the acquisi-
tion. ‘We realized it’s not very cost-effective to buy the Internet in smaller portions.’ During
the past two decades, Google had acquired YouTube for $1.65 billion, DoubleClick for $3.1
billion, AOL for $12.5 billion, and last year, Microsoft for the record sum of $120 billion.
Questioned on the first steps the company would take integrating the Internet onto their
servers, Eric Schmidt announced immediate plans to redirect Yahoo.com to Google’s own
search engine. ‘From an end user perspective, having two search engines is just bad usability,
and causes confusion. While we appreciate Yahoo’s recent advances in search technology, we
felt this move is best aligned with the interests of our advertisers, users and shareholders.’
Eric added, ‘By leveraging third-generation mobile platforms in sustainable verticals, new
monetization opportunities can manifest into an improved web experience, greatly benefit-
ing investors and digerati alike – a true paradigm change synergizing the Web 6.0 framework
on the enterprise level.’
Accompanying Google’s acquisition revelation, privacy groups today released a paper
criticizing the move. However, Larry Page argues that privacy is improved by Google’s
acquisition, explaining that ‘[the] main privacy issues for users today are data leaks to third
parties. By eliminating all third parties, we closed this hole.’ Eric Schmidt adds that Google
intends to replace their current privacy policy with a ‘privacy scale’ which better balances
necessary compromises. ‘When you can improve the privacy of a large group of people by
violating the privacy rights of a small number of people, in the end this improves overall
privacy.’
The Chinese government in the meantime congratulated Google Inc. on their move.
Regarding the potentials of expanded censorship, Sergey Brin told members of the press
that Google would now drop all search results filtering and instead ‘address the root prob-
lem from a publisher perspective’ by directly blocking certain keywords the time they are
entered in Google-owned tools such as Blogger, Gmail, Page Creator, Yahoo 360 and MSN
Spaces. Amnesty International and Reporters Without Borders were not available for com-
ment at this time due to temporary technical problems with their web-based email clients.
Source: philipp Lenssen, ‘Google acquires Internet (May 2017)’, www.blogoscoped.com.
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Part 1 Introduction
Summary
● this chapter first introduced the definitions of e-business-related terms, including ‘e-business’,
‘electronic commerce’ and ‘mobile e-commerce’, and definitions of strategy and value creation.
● second, this chapter provided a framework that describes the typical periods of technological
revolutions. It also positions within this framework the evolution of the Internet during the
last decade. the four main periods that characterise this evolution are:
– the grassroots of e-business period, which took place before the widespread commercial
use of the Internet;
– the rise of the Internet period, which started with the launch of Amazon.com in 1995 and
continued until 2000;
– the crash (or burst of the dotcom bubble) which took place in March and april 2000 and
caused a 45% decline of the nasdaQ by the end of that year;
– the synergy phase, which followed the stock market crash and continues until today.
REVIEW QUESTIONS
1 define the terms ‘e-business’, ‘electronic commerce’ and ‘mobile electronic commerce’, and
describe how they differ from one another.
2 provide a definition of strategy as it is used in this text.
3 What are the three distinctive levels of strategy that can be recognised?
4 describe the different periods of the life cycle model, as proposed by Carlota perez.
5 What are the four time periods of the Internet’s evolution? What are the peculiar characteristics
of each period?
6 What are the main lessons that the Ceos of pure-player companies (such as Yahoo!, eBay,
Amazon.com, Google, etc.) might draw from these past years of the Internet?
DISCUSSION QUESTIONS
1 Referring to the Ft article ‘It’s too early for e-business to drop its “e” ’, do you think that it is
sensible to still speak today of e-business strategies or to drop the ‘e’ from the term ‘e-business’?
defend your arguments.
2 What do you think are the main elements of strategy formulation? does the perspective chosen
in this chapter correspond to your own experiences and observations?
3 Choose two technological revolutions and discuss their evolution using the perez framework
described in this chapter.
4 Have we already entered (or are we about to enter) the maturity stage of the Internet? explain
your position on this matter.
5 What specific issues does the hypothetical acquisition of the Internet by Google in May 2017
(as described at the end of the chapter) raise? What is your position regarding these issues?
28
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Recommended key reading
B. Henderson uses the metaphor of biological evolution to describe the essence of strategy in
‘The origin of strategy’, Harvard Business Review, 1989, November–December, pp. 139–43.
A detailed account of different levels of strategy can be found in G. Johnson, K. Scholes and
R. Whittington, Exploring Corporate Strategy, 7th edition, Prentice Hall, 2005.
H. Mintzberg is one of the most prominent critics of the design or positioning school.
For further reading, see Strategy Safari – A Guided Tour Through the Wilds of Strategic
Management, Prentice Hall, 1998, pp. 114–18, which offers no less than 10 different
approaches to explaining strategy. His article ‘The design school: reconsidering the basic
premises of strategic management’, Strategic Management Journal, 1990, vol. 11, no. 3,
pp. 171–95, provides a more condensed criticism of the design school.
M. Porter’s article ‘Strategy and the Internet’, Harvard Business Review, 2001, March, pp. 63–78,
provides an excellent overview of the impact of the Internet on strategy formulation.
C. Perez developed the five-stage model of technological revolutions presented in this chap-
ter: see Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden
Ages, Edward Elgar, 2002. She draws heavily on the writings of twentieth-century economist
J. Schumpeter. Among his important works rank the books Business Cycles, Porcupine Press,
1982 and Capitalism, Socialism and Democracy, Harper & Rank, 1975.
B. Arthur builds on the insights of C. Perez in the article ‘Is the information revolution dead?’,
Business 2.0, 2002, March, pp. 65–73, where he suggests that the Internet economy is under-
going the same evolutionary phases as previous technological revolutions.
In ‘Profits and the Internet: seven misconceptions’, Sloan Management Review, 2001, Summer,
pp. 44–53, S. Rangan and R. Adner analyse why the promises of the Internet economy were
not fulfilled.
J. Cassidy takes a critical perspective of the development of the Internet economy in Dot.con,
Perennial, 2003.
E. Malmsten (the co-founder of Boo.com), E. Portanger and C. Drazin provide an account of the
rise and fall of the Internet fashion retailer Boo.com in their book Boo Hoo, Arrow Books, 2002.
In The Long Tail: Why the Future of Business is Selling Less of More, Hyperion, 2006, C. Anderson
illustrates how, by using the Internet, companies can capitalise on niche markets better to
serve their customers.
Useful third-party weblinks
The website www.tutor2u.net provides interesting background information on a number of

concepts discussed in this chapter.
www.magportal.com/c/net/ebus/ provides deep coverage of articles on e-business and
e-commerce.
www.ecommercetimes.com is an online newspaper specific to e-commerce developments.
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Part 1 Introduction
Notes and references
1 For definitions of e-business and e-commerce, see A. Bartels, ‘The difference between e-business and
e-commerce’, www.Computerworld.com. Accessed 30 October 2000.
2 G. Johnson, R. Whittington and K. Scholes, Exploring Corporate Strategy, 7th edition, Prentice Hall,
2005, p. 10.
3 A. Chandler, Strategy and Structure in the History of the American Industrial Enterprise, MIT Press, 1962,
p. 13.
4 B. Henderson, ‘The origin of strategy’, Harvard Business Review, 1989, November–December, p. 141.
5 M. Porter, ‘Strategy and the Internet’, Harvard Business Review, 2001, March, p. 72.
6 Researchers of strategy have been engaging in a heated debate about what strategy entails. Most notably,
there are two different schools of strategy. The ‘design view’ of strategy considers strategy as character-
ised by deliberate planning and objective setting. The ‘experience view’ suggests that strategies develop
in an adaptive fashion and depend to a large extent on existing strategies. See also G. Johnson, K. Scholes
and R. Whittington, Exploring Corporate Strategy, 7th edition, Prentice Hall, 2005. The frameworks and
concepts proposed in this text focus on the design view of strategy.
7 For a detailed discussion of different levels of strategy, see ibid.
8 For a discussion of operational issues in e-commerce, including topics such as website design and HTML
programming, see D. Chaffey, e-Business and e-Commerce Management Strategy, Implementation and
Practice, 5th edition, FT Prentice Hall, 2011.
9 C. Perez, Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages,
Edward Elgar, 2002, p. 8.
10 Ibid., pp. 90–137.
11 Note that as one technology reaches maturity, the next technological revolution is about to emerge. As a
result, there can be considerable overlap between two technology surges.
12 C. Perez, Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages,
Edward Elgar, 2002, pp. 90–137.
13 The NASDAQ is the main US-based stock exchange for high-tech companies.
14 Amazon.com was the first firm to add the suffix ‘.com’ to the end of its name, thereby establishing the
expression ‘dotcom’, which refers to all types of Internet ventures.
15 The p/e ratio of a company’s stock is calculated by dividing its stock price by its earnings per share. For
instance, if a company made $5 per share in the past year and the share sells for $50, then the p/e ratio
for this share is 10.
16 France Telecom decided to close down this service by mid-2012.
17 J. Cassidy provides a detailed account of the exuberance and hysteria during the Internet boom years in
Dot.con, Perennial, 2003, pp. 2–5.
18 Ibid., p. 5.
19 M. Pandya, H. Singh, R. Mittelstaedt et al., On Building Corporate Value, John Wiley, 2002, p. 8.
20 For an excellent discussion of the flawed thinking during the boom years of the Internet, refer to M.
Porter, ‘Strategy and the Internet’, Harvard Business Review, 2001, March, pp. 63–78.
21 M. Meeker and C. DePuy, The Internet Report, Harper Business, 1996.
22 J. Willoughby, ‘Burning up: warning: Internet companies are running out of cash’, Barron’s, 20 March
2000, p. 29.
23 J. Cassidy, Dot.con, Perennial, 2003, p. 148.
24 See also T. Mullaney and H. Green, ‘The e-Biz surprise’, BusinessWeekOnline, 12 May 2003.
30
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PART 2
The e-business strategy framework
Part overview
this part proposes an e-business strategy framework that consists of the following three
phases:
● strategic analysis
● strategy formulation
● strategy implementation.
the goal of this part is to provide a comprehensive strategy framework that addresses
the crucial elements of e-business strategy formulation. the key elements of the three
phases of strategic analysis, strategy formulation and strategy implementation are as
follows:
● external analysis of the macro-environment and industry structure
● Internal analysis of key resources and capabilities
● Generic strategy options
● sustainable competitive advantage
● exploration of new market spaces
● Creation and capturing of value
● Internal organisation
● Interaction with suppliers, customers and users
● Mobile e-commerce and u-commerce strategies
● strategy implementation.
M02_JELA7870_03_SE_C02.indd 31 06/03/14 2:41 PM

M02_JELA7870_03_SE_C02.indd 32 06/03/14 2:41 PM

Chapter 2
Overview of the e-business

strategy framework
Chapter at a glance
2.1 Key challenges in e-business strategy formulation 34
2.2 A systematic approach to e-business strategy formulation 35
Learning outcomes
● Understand the key challenges that are involved during the e-business strategy
formulation process.
● Have a broad understanding of the structure and the key elements of the
e-business strategy framework.
Introduction
In part 2 of this text, we propose an overarching e-business strategy framework that can serve
as a comprehensive basis for e-business strategy formulation. this framework should help you
address the following:
● Understand the external macro-environment and industry structure of e-business
companies.
● Understand internal e-business competencies and choose a specific type of Internet-
enabled competitive advantage.
● sustain the Internet-enabled competitive advantage against imitation and disruptive
innovations.
● Create new market spaces through e-business initiatives.
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● Link the external and internal perspectives of e-business strategies using the value
process framework.
● Make decisions regarding the internal organisation of e-business initiatives.
● Interact with e-business customers, suppliers and users.
● Understand specific issues and applications of mobile e-commerce and ubiquitous
commerce (or u-commerce).
● Implement e-business strategies.
to do so, we believe that it is valuable to begin this part of the text by covering rigorous and
time-proven concepts from the field of strategic management and then to adapt them to the
specific context of e-business. this adaptation takes place in the following three ways.
First, although the conceptual chapters cover several generic strategy frameworks, they also
highlight specific concepts that are important for e-business and help us understand recent
successes and failures in the field. these include, for instance, economies of scale and scope,
switching costs, network effects and transaction cost theory.
second, the framework presents specific e-business concepts such as the virtual value chain
(see section 4.3), the ICdt (Information, Communication, distribution and transaction) model
(see section 4.4) and the ‘long tail’ concept (see section 11.4).
third, all the concepts and frameworks that are presented in the conceptual chapters are
illustrated through specific e-business examples and case studies. By doing so, we want to link
real-world applications with theoretical and conceptual considerations – hoping to make the
material more accessible to readers and useful to practising managers.
2.1 Key challenges in e-business strategy formulation
Before explaining the e-business strategy framework in more detail, let us return to Chapter 1
where we discussed the definition and goals of a strategy. There, we stated that:
● Strategy is concerned with the long-term direction of the firm.
● Strategy deals with the overall plan for deploying the resources that a firm possesses.
● Strategy entails the willingness to make trade-offs, to choose between different direc-
tions and between different ways of deploying resources.
● Strategy is about achieving unique positioning vis-à-vis competitors.
● The central goal of strategy is to achieve sustainable competitive advantage over rivals
and thereby to ensure lasting profitability.
The bottom line of the above statements is that a strategy is concerned with overarching
decisions that determine the fundamental direction of a company. In this sense, a strategy
helps to determine the positioning of a firm in the marketplace and the choice of required
resources. The overall goal of developing an e-business strategy is to succeed in using the
Internet as an enabler for achieving a competitive advantage (see Exhibit 2.1). There are
several ways of attaining a competitive advantage, including having a strong and unique
brand, a large and loyal customer base, innovative products and services and low-cost pro-
duction facilities.
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Chapter 2 Overview of the e-business strategy framework
Exhibit 2.1 The goal of e-business strategy is to achieve (long-term) success by building up one
or more sources of competitive advantage
Formulation
Environment Goals
Market
positioning
Competitive (Long-term)
advantage success
Resource
exploitation
Resources
Implementation
Source: adapted from H. Hungenberg, Strategisches Management in Unternehmen, Gabler, 2006, p. 83.
However, making the right decisions regarding where to build up a competitive advantage
is not trivial. The first challenge is that strategic decisions involve choices that might not take
effect until sometime in the future. Due to the high degree of uncertainty regarding future
developments, especially in the e-business environment where technologies and business
models change rapidly, making long-term commitments to a strategy is a difficult challenge.
Furthermore, there are usually numerous, different and frequently contradicting decision
criteria that need to be evaluated during strategy analysis and formulation. For instance, in
the case of Tesco.com featured in the case studies section of the text (see p. 338), a crucial
strategic issue was to choose between two different fulfilment approaches for online orders:
in-store-based fulfilment versus warehouse-based fulfilment. As the case study illustrates,
there were numerous arguments in favour and against each one of these two options. This
ambiguity and uncertainty is typical for strategic decision making.
2.2 A systematic approach to e-business strategy formulation
As stated above, the goal of e-business strategy analysis and formulation lies in gaining
an understanding of different strategy options and their implications, and then iteratively
evaluating arguments in favour of or against these options. This process does not revolve
around finding the one right answer, but focuses more on making trade-offs apparent,
making decision makers aware of the implications of different options and helping them
make decisions regarding the future based on past and current developments. In this sense,
strategic management can be considered to be a ‘planned evolution’ – the alternative to this
approach would be an unguided evolution based on pure chance.1
This raises the question of how to go, in a systematic way, about e-business strategy
development. As an anchoring point for the remainder of this text, we propose a three-part
e-business strategy framework consisting of: (1) strategic analysis; (2) strategy formula-
tion; and (3) strategy implementation (see Exhibit 2.2). The three parts of this framework
35
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Exhibit 2.2 The e-business strategy framework consists of three main steps
12 Mobile e-commerce strategy
E-business strategy
Strategic Strategy
Strategy formulation
analysis implementation
3
External
5 9
analysis
Internal
Strategy organisation
options
Opportunities/
threats
6 7
10 13
Strengths/ Sustaining Exploring
Interaction with
weaknesses competitive new market Implementation
suppliers
advantage spaces
4
Internal
analysis
8 11
Creating and
Interaction with
capturing
users/customers
value
are dynamically interconnected – i.e. they should be regarded as having a feedback loop
along the process offering inputs for adjustment and further refinement. Besides, note that
in this exhibit, a given number (inside a circle) corresponds to the specific chapter of this
text in which the listed issue is discussed in detail.
The first part of this framework entails the strategic analysis, which consists of two
different perspectives: the external analysis and the internal analysis.
The goal of the external analysis, which is covered in Chapter 3, is to gain an understand-
ing of the external developments that might have an impact on the e-business strategy of
your company. On an aggregate level, the external analysis refers to developments in the
broad macro-environment, which includes topics such as technological changes, overall
economic developments or societal changes. On a more detailed level, it also entails an
analysis of the different players within an industry, including competitors, suppliers or sub-
stitutes. The outcome of this analysis should help you gain an improved understanding of
the opportunities and threats that your company might face in the future.
The goal of the internal analysis, which is discussed in detail in Chapter 4, is to under-
stand the key resources and capabilities that a firm possesses to implement or sustain a
specific e-business strategy. Resources might, for instance, refer to a large installed user
base (as in the case of eBay), deep financial pockets to make targeted acquisitions (as is
the case with Google) or a strong brand (as in the case of Tesco.com). e-Capabilities refer
to a firm’s ability through IT and the Internet to turn resources into valuable products or
services. Based on the insights gained from the internal and external analyses, you should
be able to gain an understanding of the strengths and weaknesses that your company pos-
sesses vis-à-vis competitors.
36
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Exhibit 2.3 e-Business strategy formulation entails an internal and an external analysis to
identify strengths, weaknesses, opportunities and threats
Key environmental/
industry developments
Opportunities Threats
• Do we have the • Do we have the

Strengths strengths to seize strengths to fend off
Firm possible opportunities? possible threats?
charac-
teristics • Which opportunities do • To which threats do our
Weaknesses we miss because of weaknesses expose
our deficits? us to?
The overall insights from these two analyses can then be integrated into a SWOT matrix
(Strengths–Weaknesses–Opportunities–Threats matrix), which raises the four key ques-
tions listed in Exhibit 2.3.
After having gained a clear understanding of a company’s characteristics and the key
environmental and industry developments, we come to the crucial decision of choosing a
strategic direction. The primary choices are: (1) a cost leadership position where a company
competes primarily on the basis of low prices, and (2) a differentiated position where a
company competes on the basis of superior products and services. The strategic positioning
of firms for e-business and the related e-business models are covered in greater detail in
Chapter 5.
Obviously, a competitive advantage that a company possesses today is not necessarily
sustainable over time. In the e-business world, in particular, there is constant pressure
from new Internet start-ups or incumbent bricks-and-mortar firms trying to imitate or
otherwise outperform existing e-business companies. The issue of sustaining a competi-
tive advantage over time and the dangers that threaten to erode such an advantage are
covered in Chapter 6. In particular, this chapter deals with the threats of imitation and
disruptive innovations.
In addition to defending their competitive advantage against imitators, companies can
also build up new sources of competitive differentiation by developing new e-business
innovations, thereby creating new market spaces that hitherto have been uncontested. The
value innovation framework, presented in Chapter 7, provides a systematic approach for
developing these types of innovations that aim at making the competition irrelevant.
Chapter 8 presents the value-process framework (VPF), which integrates different
perspectives of strategy into a holistic model. The purpose of the VPF is to show how
a company’s ability to create and capture value is a necessary condition for long-term
success.
Following these broad considerations, Chapters 9 to 11 address three strategic issues
that are highly relevant to e-business companies. These are: (1) the internal organisation
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of an e-business venture, (2) its relationships with suppliers and (3) its relationships with
customers and users.
Chapter 9 deals with a firm’s internal organisation. The concepts of deconstructing
the value chain and unbundling the corporation stemmed an extensive debate among
managers and academics as to how integrated a firm should be in the digital age. During
the Internet boom years, popular management thinking suggested that firms should
focus on their core competence (or core business) and outsource all other value-creating
activities to external providers. However, this did not turn out to be a panacea. The main
question in this chapter is therefore: ‘How should we organise internally our e-business
activities?’.
Chapter 10 addresses the upstream issue of supply chain management. The main
question here is how to set up B2B relationships with external providers. A special focus
is placed on different types of electronic B2B transaction platforms and on third-party
e-service providers, such as IBX, which is discussed in detail in the case studies section of
this text.
Over the last few years, user-generated content has become a critical success factor of
some of the well-known e-business companies, such as YouTube, MySpace, Facebook and
Twitter. Chapter 11 presents some concepts and conceptual frameworks, such as the ‘tip-
ping point’, the ‘long tail’ and the ‘social CRM’, which provide insights into how best to lever-
age the power of user-generated content for creating and capturing value.
Chapter 12 presents some conceptual frameworks that are specific to mobile e-commerce
and u-commerce applications. Chapter 13, which is included in Part 3 of this text, discusses
operational issues related to the implementation of an e-business strategy. It also suggests
an e-business strategy roadmap that covers the main steps (from vision to alignment) of
formulating an e-business strategy.
Summary
● this chapter first stated the main goals of strategy, which focus on overarching decisions
that determine the fundamental direction of a company.
● next, it described the key challenges that companies face when formulating a business
strategy. these challenges include (1) the high uncertainty of future developments and (2)
contradictory decision criteria that need to be evaluated during the strategy analysis and
formulation process.
● Finally, this chapter provided a brief overview of the e-business strategy framework
and its main elements, which are strategic analysis, strategy formulation and strategy
implementation.
REVIEW QUESTIONS
1 What are the key challenges that companies face during the strategy formulation process?
2 What are the key elements of the e-business strategy framework?
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For a more detailed discussion of the SWOT concept, see G. Johnson, K. Scholes and
For a discussion of strategies in different types of organisations, see H. Mintzberg, J. Quinn
and S. Ghoshal (eds), The Strategy Process: Concepts, Context and Cases, 4th edition, Prentice
Hall, 1998.
Note and reference
1 See W. Kirsch, Wegweiser zur Konstruktion einer evolutionären Theorie der strategischen Führung, Kirsch,
1997.
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Chapter 3
External analysis: the impact of the

Internet on the macro-environment
and on the industry structure of
e-business companies
Chapter at a glance
3.1 Examining trends in the macro-environment 42
3.1.1 the political and legal environment 42
3.1.2 the economic environment 46
3.1.3 the social environment 46
3.1.4 the natural environment 47
3.1.5 the technological environment 50
3.2 Examining industry structure with the five forces framework 51
3.2.1 Industry rivalry 54
3.2.2 Barriers to entry 55
3.2.3 substitute products 59
3.2.4 Bargaining powers of buyers and suppliers 59
3.3 Complementing the five forces framework with the co-opetition
framework 62
3.4 Defining industries, segmenting markets and targeting markets
in e-business 67
3.4.1 defining an industry 67
3.4.2 segmenting markets in an industry 67
3.4.3 targeting specific markets in an industry 73
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Chapter 3 External analysis
Related case studies

Case study Primary focus of the case study
9 Appirio technological environment
20 NTT DoCoMo technological environment
16 Brockhaus technological environment
4 American Well 5Cs as value contributors
10 e-Choupal Inclusive markets
12 lCT strategy in Tunisia Inclusive markets
19 Novartis SMS for life Inclusive markets
17 Nettwerk Industry structure
13 Kundra@USgov political and macro-environment
Learning outcomes
● analyse trends in the macro-environment and explain their implications for
e-business ventures.
● Understand the value of the five forces industry framework for the analysis of
industry attractiveness.
● explain the key characteristics of the co-opetition framework and show how it
expands the five forces industry framework.
● define industries, segment and target markets for e-business applications.
Introduction
When an industry with a reputation for difficult economics meets a manager with a reputation
for excellence, it is usually the industry that keeps its reputation intact.
(Warren Buffett)
e-Business ventures, or any ventures for that matter, do not operate in isolation from their
environment. Instead, success depends not only on just what a company does by itself but also
on the actions of other actors in the industry, such as competitors or suppliers, and on broader
environmental developments such as changes in technology or government regulation. While
individual companies typically can shape, at least in part, the industry environment through
their competitive behaviour, the broader developments in the macro-environment can hardly
be influenced.
to adjust accordingly to environmental changes, companies need to be able to have a clear
understanding of important developments in their external environment. at this stage, for
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e-business companies technological changes are of critical importance, since, for instance, an
increase in available bandwidth for data transmission or new web development techniques
(such as ajax or Rss feeds)1 open up new possibilities for creating new business models. at
the same time, there are also societal changes, such as changing demographics and changes
in government regulations, that potentially have an impact on the sustainability of e-business
ventures.
Making sense of this very dynamic environment and acting sensibly is a highly complex task
that requires us to filter the multitude of signals to keep track of the really important develop-
ments. this task becomes even more challenging due to the wealth of public information that
is available through print media and online sites. as a result, there is just as much danger of
information overload as of information unavailability.
one important first step is to organise information about new developments in the macro-
environment and cluster them in such a way that they will not be overlooked. as a starting
point for such a systematic analysis, this chapter first provides a framework for analysing the
macro-environment. second, it discusses professor Michael porter’s five forces framework for
analysing the attractiveness of an industry. It also analyses the impact of the Internet on each
force of porter’s framework, i.e. industry rivalry, barriers to entry, threat of substitute products
and the bargaining power of buyers and suppliers. third, this chapter presents the co-opetition
framework, which offers an alternative perspective for industry analysis. Finally, it addresses
the issues of how to define industries within which to compete and how to segment specific
customer groups that a company should target through its e-business offering.
3.1 Examining trends in the macro-environment
The macro-environment takes a broad perspective of the factors that influence a firm’s
strategy and performance.2 Evolving trends in the macro-environment can present
significant opportunities and threats to a firm’s strategy. Therefore, at the outset of
any strategy formulation, it is useful to analyse the trends that characterise the macro-
environment in its different dimensions: political, legal, economic, social, natural and
technological (see Exhibit 3.1).
3.1.1 The political and legal environment

The political and legal environment relates to issues on different organisational levels. At
country and industry levels, it includes issues such as taxation, monopoly legislation and
environmental laws.
Because of the difficulty of agreeing on cross-border matters, taxation has been a diffi-
cult issue in electronic commerce. Yet, because of the boundary-less nature of the Internet,
it presents a major issue for governments and a source of opportunity for e-business ven-
tures. For instance, numerous online betting companies have set up their operations in
low-tax places such as Gibraltar, Alderney, Malta or the Isle of Man, which, in turn, reduces
government revenues from gaming in countries such as the USA, where gamblers previ-
ously had to pay a gaming tax (see the FT article: ‘Online gambling: the sector has been
able to cash in on a regulatory regime set up in Alderney’).
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Exhibit 3.1 e-Business companies are impacted by their industry and macro-environment
Remote Macro
al Econ
litic om environment
po ent ic
& en
al ronm vir
vi
g
Le
on
en
m
en
t
Industry
environment
Customers
ironment
Natural en
Company Competitors
nv
al e
viro
gic
nm
lo
en
no
t
ch
Te
Soc t
ial environmen
Online gambling: the sector has been able to

cash in on a regulatory regime set up in Alderney
Far from large sports venues, in a narrow street with 100 staff on Guernsey and nine on Alderney,
in St Peter Port, traders at Sportingbet monitor while Virgin Games has also established a presence.
international events, constantly adjusting odds
The Alderney Gambling Control Commission has
as they handle up to 70m wagers a year. Online
issued about 45 licences to companies including
gambling has become a rapid growth sector on
Rank, Gala Coral and Blue Square, with most
Guernsey and the Bailiwick has capitalised on the
operating through Guernsey. “Regulation is
reputation of the regulatory regime established
probably the key,” says Bob Dutnall, Sportingbet
more than a decade ago on its tiny neighbour island
managing director. “You need stability and robust
Alderney. According to a report from accountants
regulation and Alderney is at the forefront of that
KPMG, the online gambling industry contributed
across the world.” André Wilsenach, chief executive
£50m to Guernsey’s economy in 2009, up from
of the Alderney Gambling Control Commission,
£7m in 2007. Moreover, KPMG predicts further
the sector’s regulator which oversees companies
growth of 40 per cent in the next couple of years.
on both islands, says: “We are one of the longest
While still a small sector compared with financial
established online gambling authorities. Alderney
services, online gambling is seen as a welcome
is leading the online gambling world in terms of
diversification that puts Guernsey alongside other
regulation.” That regulatory position “didn’t just
offshore jurisdictions such as Gibraltar, Malta and
happen”, he adds. Alderney sought to capitalise on
the Isle of Man, which have lured gaming companies
the growth of telephone betting in the late 1990s
and bookmakers away from the UK mainland.
but quickly realised the future was online. The
Sportingbet is the largest employer in the sector, ➨
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regulatory regime brought companies to Alderney, housing market and bought properties for its young
and Sportingbet was launched there. traders from the UK to share. More senior employees
receive support for their open market rental costs.
But the sector’s growth and its technical require-
Sportingbet says it now has the skills available to run
ments soon ran up against Alderney’s infrastructure
a localisation training programme for the next wave
limitations. Sportingbet, for example, found it could
of traders, increasing the potential career choices for
not grow sufficiently and moved to London. The
islanders. Mr Dutnall says: “We offer something that
solution was an arrangement between Alderney
is not totally different from financial services, but
and Guernsey that allowed companies to be based
that is different enough that it gives [young people]
on either island and remain subject to Alderney
some variety in their career choice.”
regulation. That led to growth of the sector on
Guernsey and Sportingbet returned to Guernsey Mr Wilsenach does foresee regulatory challenges
in 2007 amidst uncertainty over the UK’s gambling ahead. Regulation by Alderney has been accepted by
regulations, while the Alderney economy now many nations regardless of where the gambler is based.
receives about £7m a year from the sector. With its However, some jurisdictions in Europe and elsewhere
excellent telecommunications capabilities, quality are considering changing their requirements, so
of life and internationally recognised regulatory transactions are deemed to take place where the
regime, Guernsey has proved to be the right consumer is based. That might require gambling
location for Sportingbet, says Ron Jenkins, head of companies to gain regulatory licences in a number
human resources. “The tax benefits are beneficial,” of jurisdictions while business-to-business services,
Mr Jenkins says, “but they were not the reason for us such as the software providers, could continue to be
coming here. They put us on no better a footing than licensed solely by Alderney. Mr Wilsenach believes the
most of our competitors [in offshore jurisdictions].” international regulatory picture is likely to become
But there are difficulties in setting up what is in more complex, but that Alderney will continue to
effect a new sector on an island with a limited play a large role in regulation, especially for online
employment pool. Of Sportingbet’s 100 staff only gambling platforms. He says: “I am positioning
about 50 are Guernsey locals, a particularly unusual Alderney with a view to creating comfort with these
ratio for a large company on the island. “When you other jurisdictions that they are happy for players to
bring in something that requires fresh skills, there is play on platforms based in Guernsey.” He remains
no talent pool for you to dip into,” says Mr Dutnall. upbeat: “We certainly don’t expect a significant
With no possibility of being granted enough housing drop [in business from the sector]. We will remain a
licences, the company simply moved into the open jurisdiction of choice for worldwide earnings.”
Source: Serwood, B. (2010) Online gambling: the sector has been able to cash in on a regulatory regime set up in
Alderney, Financial Times, 18 November.
Regarding monopoly legislation, throughout the 1990s Microsoft was accused of violat-
ing its dominant position in the operating systems market by leveraging it to move into
other software markets at the expense of competitors.3 More recently, Google has been
criticised for a similar dominance in the online advertising market.
When Amazon.com entered the German market, it was confronted with the price-fixing
regulation, which sets a common price for all new books sold in the country. This made it
impossible for Amazon.de to compete on the price dimension with rival bookstores. More
recently, Apple and five of the world’s largest book publishers have been sued by the US
Department of Justice for colluding to increase the price of e-books (see the FT article:
‘Publishers sued over e-book price “collusion” ’).
Furthermore, in light of peer-to-peer file-sharing networks, such as Kazaa or eMule, the
Internet has always been criticised for violating copyright laws. Contrary to the interests
of the music industry, however, considering the convenience and range of files available,
the online file-sharing practice is still highly popular among members of the Internet
community. Similarly, so-called mash-ups provoke further discussion on copyright protec-
tion and digital rights management tools.
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At the individual level, political and legal debates revolve around the extent to which
companies should be allowed to intrude into the private lives of Internet users. This
includes topics such as the placement of cookies4 and aggressive marketing via spam mails.5
Publishers sued over e-book price

‘collusion’
The US Department of Justice (DoJ) sued Apple and five of the world’s largest book
publishers yesterday, alleging that they colluded to increase the price of e-books and
cost consumers “tens of millions of dollars”.
The complaint, filed in the Southern District of New York, alleges Apple and publishing
executives agreed on a common response to Amazon’s pricing policy over phone calls,
emails and meals in the “private dining rooms of upscale Manhattan restaurants”.
Amazon, which had challenged the industry with a maximum e-book price of $9.99, is
not named as a defendant.
The publishers named in the suit are Hachette Book Group, part of Lagardère;
HarperCollins, owned by News Corp; Holtzbrinck, owner of Macmillan; Simon&
Schuster, a CBS subsidiary; and Penguin, owned by Pearson, the parent company of
the Financial Times.
The DoJ alleged that Apple and the publishers raised the price of best-selling titles
$2 to $5 each by introducing, at the same time Apple launched its i-Pad tablet, an
“agency” business model in which publishers set retail prices. Apple’s insistence on a
“most favoured nation” clause in which publishers agreed not to sell on cheaper terms
elsewhere – while giving Apple a 30 per cent commission on every sale – forced other
retailers to adopt the same terms, the DoJ added.
“Executives at the highest levels of the companies included in today’s lawsuits,
concerned that e-book sellers had reduced prices, worked together to eliminate
competition among stores selling e-books, ultimately increasing prices for consumers,”
said Eric Holder, US attorney-general.
Hachette, HarperCollins and Simon& Schuster settled with the DoJ, leaving Apple,
Macmillan and Penguin to fight in court. Not all of the publishers were immediately
available for comment, but have previously denied conspiring to raise prices and
argue the “agency” model promoted competition by challenging Amazon dominance.
The US suit claims that Steve Jobs, Apple’s late chief executive, personally facilitated
the agency model. “Apple clearly understood that its participation in this scheme
would result in higher prices to consumers,” the suit says. It also quotes Jobs as
saying that “the customer pays a little more, but that’s what you [publishers] want
anyway”. An Apple spokesman declined to comment.
From September 2008 through 2009, the publishers’ chief executives allegedly met
every quarter to discuss “confidential business and competitive matters, including
Amazon’s e-book retailing practices”, the DoJ said.
It highlighted executive dinners including Penguin’s John Makinson and Macmillan’s
John Sargent at “the chef’s wine cellar” – a private room at New York restaurant Picholine.
Source: Gelles, D. and Edgecliffe-Johnson, A., Publishers sued over e-book price ‘collusion’ (2012)
Financial Times, 12 April.
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3.1.2 The economic environment

The economic environment refers to broader economic developments within the context of
a country, a region or globally. Important factors in the economic environment are inter-
est and exchange rates, evolution of stock markets and, more generally, economic growth
rates. The favourable economic environment of the 1990s and the resulting cheap availabil-
ity of capital contributed strongly to the rapid rise of Internet companies.
This rise came to an abrupt halt with the burst of the dotcom bubble in March 2000
and the subsequent demise of a large number of Internet start-ups. The launch of some
Internet start-ups, such as the online fashion retailer Boo.com (see FT article ‘Boo.com
founder fears net bubble’, Chapter 1,) was feasible only because capital was so easily
accessible at the time. However, during the ensuing consolidation phase, which was
characterised by depressed stock markets and cautious venture capitalists, it became
much more difficult to gain access to capital, even if the underlying business idea was
sound.
Nevertheless, the e-business sector has clearly been revitalised during the last few
years. For example, just considering the US market, the total amount of B2B and B2C
e-commerce has reached $3 trillion.6 In the more recent past, as e-business companies
have shown their ability to operate profitably, investors have once again started to fund
young and innovative start-ups. In contrast to the previous heydays of the Internet,
however, investors seem nowadays to be more reasonable and driven by promising
business models. In addition to venture capital companies, there are now established
Internet companies that are willing to invest in or acquire start-ups and integrate them
into their existing business portfolio. The $3.1 billion acquisition of DoubleClick by
Google or the $4.1 billion purchase by eBay of the VoIP7 telephone service provider
Skype, which was subsequently sold in 2011 to Microsoft for $8.5 billion, are prime
examples of this newly found confidence. (For an illustrative view on today’s potential
of the e-business sector to generate substantial revenues, see the FT article: ‘UK online
economy valued at £82bn’.)
3.1.3 The social environment

The social environment considers factors such as population demographics, income distri-
bution between different sectors of society, social mobility of people and differing attitudes
to work and leisure. Social developments were the main driver behind the development
of numerous e-commerce applications. For instance, if, due to their careers, members of
a developed society increasingly become cash rich but time poor, then businesses that
address this specific customer segment can create substantial benefit. The online retailer
Tesco.com, for example, primarily targets customers who do not have the time or the desire
to shop systematically in a physical grocery store.
Other important dimensions of the social environment that impact on the development
and use of the Internet are online usage patterns. These are measured by the percentage of
the population using email or the web for information or transaction purposes. These types
of measurements provide good indications of the evolution of the population towards form-
ing an information society and establishing an e-habit. An additional indicator of changes in
the social environment is the degree of usage of online communities, such as Second Life,8
where Internet users come together in a virtual world.
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UK online economy valued at £82bn

The UK internet economy has been valued at £82bn ahead of the publication of the
government green paper on communications that will help define regulation of the
sector.
The digital economy is now worth almost 6 per cent of gross domestic product,
according to AT Kearney, the consultancy, which it said was significantly higher than
the global average. Vodafone, the mobile operator that sponsored the research, said it
was a larger section of the economy than mining and utilities combined.
The study found that every £1 spent on both fixed and mobile internet access in the
UK supported the creation of £5 in revenue for the rest of the digital economy. Greater
access to the web supported a wide range of applications from internet shopping to
gaming and social media.
Some £45bn is generated by e-commerce and mobile commerce, while connectivity
services, online search advertising and device manufacturing generate another £37bn.
The communications green paper will look to raise questions to be addressed in
a bill on the regulation needed to build the UK internet economy. The paper is
expected to focus on the role of the internet economy and in particular issues such
as piracy, with the threat that the government would consider regulation alongside
a voluntary code of conduct.
Other matters expected to be covered include how information is used by some of
the internet’s largest groups such as Google and Facebook, media plurality and
ownership, and Ofcom’s role as a regulator and consumer champion.
There will be coverage of plans to roll out superfast broadband and mobile internet
services. AT Kearney estimates that UK internet traffic will increase by an average of
37 per cent every year between 2010 and 2015, the equivalent of almost 200m albums
downloaded every day. Traffic over mobile networks is forecast to grow at 84 per cent
every year and account for 11 per cent of all traffic by 2015, compared with 2 per cent
in 2010.
Source: Thomas, D., and Telecoms Correspondent (2012) UK online economy valued at £82bn,
FT.com, 5 February.
The advent of social networking sites such as MySpace, Twitter or Facebook shows,
along with their popularity, that the Internet has become a place for people to interact and
share experiences. (See the FT article: ‘A social network links our personal and office lives’.)
Unsolicited self-presentation and open communication through social networking sites or
weblogs underline the democratisation of the web and indicate an important paradigm shift
in society, especially among teenagers and youngsters (for a more detailed discussion of
this issue, see Chapter 11).
3.1.4 The natural environment

In the environmental sphere, governments in many countries, such as Spain and Britain,
have zoning laws that make it difficult, if not impossible, for grocery retailers to set up new
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A social network links our personal

and office lives
Every morning, I have a routine that will be familiar of solidarity revealed that the same thing had
to most readers of this newspaper. I wake up, fall happened to him.
out of bed, and instead of dragging a comb across
It was at this point, that I realised there was more
my head, I check my email on my BlackBerry for
to my virtual break-in than an invasion of privacy
work and then my i-Pad for the Yahoo account that
and a dodgy hyperlink. First, it highlighted the
I use mostly for my non-working life.
degree to which our jobs and personal lives have
Like brushing my teeth or making a cup of coffee, merged. Like most people I know, just as I often
this morning sequence of technology mainlining use my “work” account for personal email, I often
has become rote; I turn on my phone and whip back use my “personal” account for work, and among
the lime-green cover of the tablet without even the friends and family in my contact list were some
realising that I’m doing it. colleagues.
But last Tuesday, something happened that so This leads to a second lesson: if you are still
jarred me out of my daily ritual that I almost poured desperately clinging to the idea that your work
that coffee on my Cheerios: I had been hacked. My and home lives are completely separate, you are
Yahoo account had been hijacked and an email with fighting a battle that was lost a long time ago. For
a suspicious hyperlink had been sent to my entire any professional with either a hint of ambition
contact list. or even a glancing interest in what they do for
a living – the ones most organisations want to
Ugh, I thought. How annoying how tedious and
employ – it has long been nigh on impossible to
how worrying! Worse, there was no easy way to
leave all of your 9-to-5 baggage at headquarters.
let everyone know that I might be a Trojan horse:
Technology, led by email, the BlackBerry and
rightly, Yahoo would not let me send another
now Facebook, has merely brought this out into
message to all of my contacts until the company
the open.
had worked out the source of the suspicious
activity. While not everyone thinks this is a good thing,
I largely do. Of course, there are limits to what
But as I slowly waded through the mire of my inbox,
I share about my personal life with co-workers
I began to wonder if my experience of being hacked
and what information and photos I post online.
wasn’t actually so bad. In fact, the whole affair has
But in the main, the always-on culture has made
taught me a lot about how we ought to view work
my own work–life balance more manageable, not
and the technology we use to do it.
less. Any dad who has nipped out on a Monday
First, there were all the nice replies from friends for an hour to watch his child’s school assembly
with whom I have not communicated for far too will attest to the usefulness of being in touch
long. A former neighbour asking if all was well. with what is going on at the office. It makes life a
A message from one friend telling me that he had lot easier when you get back to your desk to not
received a “weird virus-y looking email” from me. have to be briefed on what happened while you
And another who had opened the link writing to were out.
assure me it was innocuous.
Perhaps even more important is the third lesson:
After I had tweeted and emailed colleagues to warn interacting well online can help you to interact
that my identity seemed to have been stolen, yet better offline as well. Last month, a fellow dad
more helpful advice flowed. One confirmed that tweeted for help when one of his kids had created a
my identity had been in touch earlier. Another password for their i-Pad and couldn’t remember it
replied, to cheer me up, that when someone has or work it out. Not only did I learn that i-Pads are
stolen his identity, his first thought was, “Shouldn’t so easy to use that even a child can add a password
they be aiming a bit higher?” A third, meanwhile, – useful to know as my own son spends more
walked over when I got to the office and in an act time on our i-Pad than I do – but when I saw my ➨
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colleague the following day, I performed my own one of things that make office life a whole lot more
act of solidarity by telling him that I felt his pain. bearable. And that should always be part of the
daily routine.
I have no idea if this made him feel any better, but
I am certain that empathy for your colleagues is
Source: Mattu, R. (2012) A social network links our personal and office lives, Financial Times, 9 April.
hypermarket stores. Thus, some retailers in these countries thought of the Internet and
online sales as a possible alternative for business growth.
Global warming and negative environmental externalities of companies have also
had an impact on corporate e-business activities. A growing number of firms pay atten-
tion to the above environmental issues and make an effort to reduce their carbon print.
For instance, having for many years used fossil-fuel powered vehicles, Tesco.com has
switched to using an electrical fleet of vans to deliver groceries to its online shoppers’
households. Recently, Facebook has reported its sustainability effort consisting of using
a friendly animated infographic system (see the Blog Box below).
BLOG BOX
How Facebook got its green back

Today Facebook released an animated infographic about its ongoing journey to sustain-
ability, explaining “2010 marked an awakening for Facebook’s sustainability efforts”. As
viewers scroll past green stats like that 47% of Facebook employees commute via alterna-
tive methods, birds flutter and bikes whiz by. Designed by digital consultancy Beyond, the
new graphic also notes Facebook’s sustainable data centres, efficient photo storage, and
solar-powered campus.
The infographic quietly implies that before 2010, Facebook was too focussed on
scaling to make going green a priority. But by touting its new commitment to the envi-
ronment, Facebook could boost its public image and bolster recruiting efforts with eco-
aware talent.
Many of the stats in the infographic have been shared before (see coverage below)
but details of Facebook’s new Menlo Park mega-campus are the freshest. Similar to
the Googleplex, employees can ride between buildings on dedicated campus bikes.
Commuter shuttles from San Francisco and nearby Caltrain stops reduce the need for
employees to drive and contribute to the 47% of employees commuting alternatively.
Facebook is also investing in local civil infrastructure to improve bike lanes leading to 1
Hacker Way.
A solar cogeneration system replaces 60% of the campus fitness centre’s natural gas
needs, and also powers its kitchens with hot water and electricity. The Menlo Park campus
has earned a Leadership in Energy and Environmental Design Gold CI certification. ➨
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Blog box (continued)

Facebook’s past green initiatives include:
● The launch of its “Green on Facebook” Page

● A collaboration with past critic Greenpeace to make Facebook’s services more
sustainable
● The Open Compute Project to open source efficient server and data centre designs
● The construction of green data centres in Prineville, Oregon and Rutherford, North
Carolina
● Plans for a self-cooling and locally-powered data centre in Luleå, Sweden
● The creation of the Haystack photo infrastructure for efficient storage.
Source: J. Constine, ‘How Facebook got its green back [sustainability infographic]’, techCrunch.com, 16 March 2012.
3.1.5 The technological environment

For e-business ventures, the technological environment is of significant importance.
Technological innovations (such as the Internet or wireless devices) led to the emer-
gence of new market opportunities and business models. During the early years of the
Internet, important drivers of technological developments were standards and languages
such as the TCP/IP (Transmission Control Protocol/Internet Protocol), HTTP (Hypertext
Transfer Protocol), HTML (Hypertext Mark-up Language) and XML (Extended Mark-up
Language).9 More recently, new web development techniques such as Ajax or RSS feeds
open up new possibilities for keeping better track of content updates and for speeding up
the web experience.
The actual network infrastructure of the Internet has also changed dramatically over the
last few years. The spread of broadband Internet connections led to an increasing number
of people spending more time online and allowed for richer content to be created and
viewed, in turn making it easier for new start-ups to create new service sites based around
user-generated content.
After most of the technological standards have become more commonplace in
wired e-business applications, much attention has been paid to the evolution of new
technology standards for wireless devices. This includes, for instance, fourth genera-
tion mobile technologies such as 4G smartphones (see the FT article: ‘Trying on the
future’). The case study on NTT DoCoMo (see p. 353) illustrates the historic per-
spective of how a company can establish new technological standards in the mobile
e-commerce industry, as happened in Japan with the i-Mode system described in the
case study.
The factors mentioned within the five dimensions above should serve only as a start-
ing point for a careful analysis of the macro-environment. Depending on the industry and
country at hand, the importance of these dimensions will obviously differ. Needless to say,
a comprehensive understanding of the macro-environment is an essential prerequisite for
the formulation of a sound e-business strategy.
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Trying on the future

Just as fashion editors are having to become already started,” he says. “I can pay for a coffee
bloggers and tweeters, retailers should be thinking with my mobile now in the US.”
not just e-commerce but also m-commerce – as in James Hart, e-commerce director at the online
“m” for mobile. With the advent of the 4G world, fashion retailer Asos, says 8 per cent of visitors to
consumers are about to be able to shop for anything, the sites arrive “via non-traditional sources” such
everywhere, all the time. as mobile devices.
Imagine the following scenario, as envisioned by ng “And that number is going to grow exponentially,
Connect, a consortium founded by tech company starting this year, with the proliferation of tablets and
Alcatel-Lucent to explore the potential of high- cheap smartphones; connected TVs may even gain
bandwidth networks. some momentum this year. In emerging territories
Hanna, a shopper, has her body mapped at an in-store there are people accessing the internet for the first
kiosk and uploads a virtual version of herself to the time via mobile who may never even use a PC.”
high-speed data cloud. She then goes shopping on her However, just as there is no “stop” button on an
mobile and tries items on virtually. Later, when she iPod (only a “pause”), a default “shop” state for
goes home, Hanna continues shopping on her smart consumers will have its pros and cons. According
TV, chatting in real time with an online personal to Holition, which describes itself as an “augmented
shopper and sending choices to her friends via social reality retail specialist”, consumers will have access
networks. Meanwhile she takes in videos offering to a wealth of money-saving promotional codes
expert advice on L’Oréal beauty products from the offering more economical shopping.
editors of Elle magazine.
But Lynne Murray, brand director for the London-
This is not far-fetched. Already available in the US, based company, says there is a less welcome side.
4G LTE (long-term evolution) offers significantly “The user will be constantly profiled. The targeting
higher speeds and reduced latency (lag time), which of product based on what you bought most
means videos and web pages download instantly. In recently may have a negative effect on consumer’s
the UK, BT and Everything Everywhere are trialling attitudes as they switch off to a constant ambush of
superfast broadband, with a national roll-out planned communication from retailers,” she says.
for 2014, and near-4G networks have debuted in the
Jonathan Chippindale, Holition chief executive,
US, Japan, Sweden and Norway, with Russia leading
agrees. “Content will need to be presented carefully
the way thanks to Yota, an innovative provider.
so as not to appear to interfere or pester the individual
“It’s not all about speed, but the services we can with products and services they do not want.”
have when connected to the cloud,” says Silvio
Perhaps the greatest challenge for m-commerce is
Fernandez, head of ng Connect Americas. He says
for mobile phones to be seen as payment devices.
the shift to mobile retailing is inevitable, as faster
So-called “mobile wallet technology” has yet to
bandwidths make mobile phones our primary
be proved secure. Chances are that only when
connection to the digital world.
consumers stop leaving their mobiles on café tables
“Yes, for over 10 years there was a reluctance to while they eat will mobile payments, and thus
embrace e-commerce, and there’ll be a natural mobile shopping, come into their own.
reluctance with mobile shopping, but the shift has
Source: Harkin, F. (2011) Trying on the future, FT.com, 23 September.

3.2 Examining industry structure with the five forces framework
What does the profitability of any given firm depend on? First, a firm needs to be able to
create higher value than its rivals. Second, it also needs to be able to capture the value
that it creates in the form of prices that exceed its costs. If a firm can charge high prices
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for its products or services, then it captures large parts of the value it creates. If, on the
other hand, prices are driven down by competition, then consumers will capture most
of the value. (For a detailed discussion of value creation and value capturing, see Chapter 8.)
This highlights the fact that profitability depends not only on the internal competencies
and activities of an e-business company, which we shall discuss in detail in Chapter 4, but
also on its surroundings, i.e. the industry in which it competes. In this context, an industry
is defined as a group of firms that produce products or provide services that are close sub-
stitutes for each other.10
As an example, let us consider the personal computer (PC) industry. During the past few
decades, this industry has created immense value for consumers in the form of increased capa-
bilities of both desktops and laptops. While performance has also increased over the years,
prices have not risen; instead, they have actually decreased significantly over time, thereby
placing heavy constraints on the profitability of most computer manufacturers. In contrast,
there are industries such as software development where a firm such as Microsoft was able to
capture large parts of the value created (e.g. for computer operating systems), thus turning it
into one of the most profitable companies in the world. This stark contrast between industries
raises the question as to what determines the ability of a company to capture value.
Porter proposes a five forces framework, which outlines the main factors determining a
firm’s ability to capture the value it creates.11 In essence, this ability is determined largely
by the attractiveness of the industry in which a firm competes. Obviously, the advent of the
Internet has profoundly affected the structure of many industries. Yet there are no general
conclusions regarding how the Internet affects the structure of different industries; instead,
it is necessary to analyse each industry individually.12
The five forces shown in Exhibits 3.2 and 3.3 provide a guiding framework for under-
standing the sustainability of profits against competition and bargaining power. The
five structural features that determine industry attractiveness are: (1) industry rivalry,
Exhibit 3.2 Five forces influence the attractiveness of an industry
Potential entrants
Threat of
new entrants
Bargaining power
of buyers
Industry competition
Suppliers Rivalry among Buyers
existing firms
Bargaining power
of suppliers
Threat of
substitutes
Substitutes
Source: adapted with the permission of the Free press, a division of simon & schuster adult publishing Group, from
Competitive Strategy: Techniques for Analysing Industries and Competitors by Michael e. porter.
Copyright © 1980, 1998 by the Free press. all rights reserved.
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(2) barriers to entry, (3) substitute products, (4) bargaining power of buyers and (5) bar-
gaining power of suppliers. (See also the FT article: ‘Michael Porter, Management thinker –
academic who shares his values’, where this strategy guru reflects on the contemporary suit-
ability of his framework, three decades after its publication.)
Michael Porter, management thinker –

academic who shares his values
Prof Porter’s reputation has put him near the While Prof Porter retains an underlying optimism,
centre of discussions with both chief executives this loss of competitiveness obviously pains him.
and politicians about how to restore US growth “This is shocking for the US. If you go back 100
and prosperity. Sitting down at his own boardroom years, you find that the US really was a huge pioneer
table, with a look that brooks no small talk, he in public education . . . The US was a real pioneer
blames the depressed state of the economy in part in creating a national, very deep university system
on cyclical factors – retrenchment after the real . . . The US was a pioneer in the interstate highway
estate bubble, corporate boards’ caution about system . . . We stepped to the plate in the past and
domestic investment – and in part on “a more made very, very bold investments in the fundamental
fundamental competitiveness problem”. environment for competitiveness. But right now, we
can’t seem to agree on any of these things.”
It is predictable that competitiveness is the lens
through which Prof Porter sees the problem. At the The financial and economic crisis also sparked a
root of his success was his first article in Harvard bonfire of many of the widely accepted academic
Business Review, more than 30 years ago, which orthodoxies on which the developed world’s prosperity
outlined the “five basic forces” that determine the was built. Has it shaken his faith in his theories?
state of competition in any industry (customer
Not a bit. Prof Porter says his five forces are, if
power, supplier power, the threat of new entrants,
anything, “more and more and more fundamentally
substitute products and rivalry between established
important and visible, because a lot of the barriers
competitors). Companies – and subsequently
and the distortions that would blunt or mitigate
countries – found it a simple and useful way to
these forces and the need for strategy and competitive
assess their own strengths and weaknesses, and
advantage . . . have been swept away” by globalisation,
plot forays into new markets.
the increased velocity and transparency of
It still animates Prof Porter, whose steady, information, and the decline in trade barriers.
high-velocity delivery is punctuated by a mime
“What I’ve always tried to do, for better or for worse,
artist’s repertoire of hand gestures (sewing a
is to get at the underlying, fundamental, structural
button, screwing up a jar, chopping a carrot).
elements of competition and of how firms compete,
He points out that globalisation has benefited
in a way that’s really invariant to whatever best
higher-income, higher-skilled people like him.
practices happen to exist or whatever trends are,” he
So, having started his career giving speeches on
claims. “So you can do a five forces analysis in 1985
strategy and competitiveness in the US, he now
and you can come to one conclusion based on the
gets invited all over the world. “The market for me
circumstances of the day, and you can take the same
has increased exponentially,” he says, “because all
industry in 2010 and it’s going to look very different.”
these countries are looking for talent.” Lower- and
middle-income workers, however, have suffered. In 2008, Prof Porter revisited and revised his five
“We’ve let all kinds of obstacles fall in the way of forces article, reviewing the “vast literature” that
the US as an effective and efficient and productive had emerged around it and concluding that the
place to do business,” he says, citing skill gaps, original theory was robust.
poor infrastructure, and the burdens of health He has also not rested on his prominently displayed
benefits, regulation and litigation. At the same laurels. Having outlined the five forces’ impact on
time, “other countries have offered a better value strategy, he became interested in the competitiveness
proposition”. of locations and nations, as well as in the business ➨
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clusters that emerge around successful companies. America and construction company Urbi’s “rent-
He parlayed this into analyses of inner cities, the to-own” mortgage-financing plan in Mexico. But
compatibility of environmental progress and economic as Prof Porter himself says, most examples of best
growth, and his latest headline concept: “creating practice are “constantly changing, so that means a
shared value” (CSV) – the idea that corporate activity lot of management literature after a while starts to
which advances society will contribute to a positive look a little bit stale”.
cycle that allows everyone to grow faster.
Could that be the fate of his work on CSV? He
Prof Porter insists “CSV” will underpin the creation admits that finding empirical evidence and support
of “a next and more sophisticated view of what for the concept “is the preoccupation now”. But “if
capitalism is all about”, but it has stirred up some companies can start to show the growth in market
resentment in the established corporate social share [and] profit improvements that they get from
responsibility community. Advocates of CSR see pursuing these strategies, I think capital markets
Prof Porter’s concept as neither new nor different. will become the biggest cheerleaders”.
“It’s fundamentally different,” he retorts, pointing
Eventually, he says, the world will look back and
to the many emails he receives from companies
consider the development of CSV alongside China,
“energised by the idea that they could think about
globalisation and the economic downturn as “one
all of these social issues in this different way”.
of the big discontinuities of this particular point of
It is also different from his earlier work, which was economic history”.
grounded in data-based research. The Economist,
Few business people would expect to see their
for example, criticised “the paucity of evidence”.
strategies outlast them. Prof Porter, by contrast,
The HBR article Prof Porter co-authored in January
has no doubt that his ideas will still be fuelling
cites a series of examples of best practice, such
corporate, economic and political strategy long
as Nestlé’s support for coffee-growers in Latin
after he has left his institute for the last time.
Source: Adapted from Hill, A. (2010) Michael Porter, Management thinker – academic who shares
his values, Financial Times, 26 September.
3.2.1 Industry rivalry

Industry rivalry occurs when firms within an industry feel the pressure or the opportunity to
enhance their existing market position. High intensity of rivalry within an industry results
from the following structural factors:
● Large number of competitors. If there are numerous competitors in a given industry or
business sector, then individual firms may want to make a competitive move, e.g. by
lowering prices. Furthermore, the Internet has reduced the importance of geographic
boundaries, which traditionally limited the number of competitors within a region. For
instance, the business-to-business (B2B) e-marketplace IBX (featured in the case studies
section of the text) quickly expanded outside of its home country (Sweden) into other
Scandinavian and Nordic countries and eventually to Germany and France. Since com-
petitors followed the same strategy, competition became more intense.
● High fixed costs. High fixed costs (such as extensive physical infrastructure) create strong
pressure to fill capacity, even at the expense of having to cut prices. Consider bricks-
and-mortar retail stores, which have specific capacities that must be utilised. To create
the necessary turnover, retailers often find themselves in highly competitive price wars.
Through the Internet, the ratio between fixed and variable costs shifts more towards
fixed costs. Developing software has initially high costs, but rolling it out across differ-
ent markets is comparatively cheap. Thus, industry rivalry tends to increase because
e-business ventures want to optimise the use of their capacity.
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● High strategic relevance. Rivalry increases when firms have a strategic stake to succeed
in a given industry. One of the most prominent examples is Microsoft’s decision in 1996
to design all its new products for Internet-based computing. This decision led to the
browser competition between Netscape’s Navigator, the incumbent browser software,
and Microsoft’s Internet Explorer – a competition that Microsoft was determined to win.
In order to beat Netscape, Microsoft offered for free the web server software (which
Netscape sold for $1,000) and put 800 people to work on an upgraded version of
Explorer.13 Ultimately, Explorer pushed most competing products out of the market and
became the dominant Internet browser worldwide. However, with the rise of Mozilla’s
Firefox browser and the subsequent launch of Google’s Chrome, Microsoft’s dominant
position was definitely challenged. Nowadays, the average usage share14 of these three
desktop browsers is around 37% for Explorer, 25% for Chrome and 23% for Firefox.
● Little differentiation between products. Rivalry also increases when there is little differen-
tiation among products, which then become more like commodities. This situation leads
to more substitution among competing products, thus increasing consumers’ bargaining
power (see Section 3.2.4). This is the case, for instance, in the computer-chip industry,
where profits are low compared with the value created.
● Low growth rate of the industry. Intensity of rivalry also depends on the growth rate of a
given industry. Fast-growth industries can accommodate a larger number of providers
since, as the overall size of the market expands, each competitor gets its market share. In
slow-growth industries, rivalry tends to be intense since growth can be achieved only at
the expense of some competitors.
● Excess capacity. When the Internet became an online platform for commercial use,
scores of start-up companies in different industries embraced it, which resulted in highly
intense competition. Venture capitalists and stock markets provided cheap capital, which
led to an overinvestment in Internet start-ups, thereby creating overcapacity.
However, companies need not always be rivals and only rivals. As explained in Section 3.3,
some competitors cooperate with each other – hence the term ‘co-opetition’.
3.2.2 Barriers to entry

Barriers to entry determine the threat of new competitors entering the market of a specific
industry. New entrants, bringing additional capacity and the desire to gain market share,
have two negative effects on the attractiveness of an industry. First, new entrants take away
market share from existing incumbent companies. Second, they bid down prices, which in
turn reduces the profitability of incumbents. Consequently, the profitability of any given
industry tends to decrease as barriers to entry are lowered, and vice versa. The impact of the
Internet on barriers to entry, however, has been more ambivalent than initially assumed,
when it was commonly thought that the Internet would wipe out most barriers to entry. In
general, high barriers to entry result mainly from the following factors:
● High fixed costs. These deter many potential entrants because they do not have the required
capital and/or the willingness to invest large amounts of money in a risky market entry.
While it was necessary in the past to set up an extensive bricks-and-mortar infrastructure
to reach out to a large number of customers, the Internet has reduced this requirement.
This is especially true for digital goods, which can even be distributed online, while the
retailing, for example of music CDs, used to take place fully through physical outlets.
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● The rise of the online peer-to-peer file-sharing systems, such as Napster, illustrates
how a single person (Shawn Fanning in this case) with an ingenious idea can threaten
a whole industry, with its elaborate and high fixed-cost physical distribution network.
Through the Napster platform, individual Internet users were able to exchange music
files of their favourite songs, which undermined the traditional business model of the
music record industry. Subsequently, music companies attempted to raise barriers to
entry again by declaring file-sharing services illegal, yet it is clear that the Internet has
profoundly changed the way music gets distributed (for a more detailed account of how
the Internet has caused a paradigm shift in the music industry, see the case study in this
text on online file-sharing). The pressure on music companies that rely on a physical
distribution infrastructure has become so strong that some of them – Bertelsmann’s BMG
and Sony – merged their music divisions in December 2003.15 In contrast, the computer
manufacturer Apple recognised that, through online distribution, the barriers for entry
had been reduced substantially and that the Internet would also be a viable channel to
distribute music commercially. It successfully developed the iTunes online music store,
which has become the most successful format for selling music online.
● In industries that involve the distribution of physical goods or require a high level of
personal interaction, the impact of the Internet on barriers to entry is more ambiguous.
Amazon.com, for instance, initially thought that it could focus solely on the customer
interaction aspects of its business and outsource to external providers all the logistics
and distribution activities, which would have required substantial investment. However,
Amazon.com soon found out that in order to guarantee a high level of reliability, it had
to operate its own warehouses and distribution centres, which in turn increased the
required capital investment. Set-up costs for a warehouse averaged $50 million and
operating costs were also significant. In order to finance these infrastructure invest-
ments, Amazon.com was forced to issue more than $2 billion in bonds.16
● Similarly, in banking, several direct banks initially thought that they could acquire and
service customers solely through online channels. The case study of Nordea Bank, how-
ever, illustrates that an extensive branch network can be crucial for the acquisition of
online customers and the selling of more complex financial products. As a result, such
physical assets created effective barriers to entry for new online competitors.
● The use of information and communication technologies (ICT) contributes to reducing the
extent of capital that was traditionally required to enter into an industry.17 As ICT-based
outsourcing services become more widely available, the concentration in a given industry
decreases. In this context, a variety of offerings is nowadays increasingly available to com-
panies as services to use and no longer only as products to acquire, hence lowering the
financial investment needed. Thus, from a customer’s perspective, what used to be in some
sectors (such IT services) a fixed cost has now become a variable cost. An example in point
here is cloud computing, which represents a significant development in IT, especially for
small and medium-sized enterprises. (See FT article: ‘Cloud computing cuts start-up costs’.)
● Trust and brand loyalty. These are essential elements for customer acquisition and reten-
tion. Bricks-and-mortar companies were able to launch their online activities more easily
than Internet ‘pure-play’ ventures, since they already possessed a respected brand and
consumers trusted them. Pure online businesses, on the other hand, have to invest heav-
ily in marketing activities to build up their brand. Building trust is even more difficult for
a pure online business since, in case of problems, customers do not have a nearby physi-
cal branch that they can go to or a customer adviser with whom they can interact face to
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face. Companies such as Spreadshirt.com, which is featured in the case studies section of
the text, leverages the trustworthiness of its existing users to acquire new customers.
● A steep learning curve. This allows a firm to reduce its cost structure quickly or to find ways
to create more customer benefits. Any competitor that wants to move into an industry needs
to accept low returns while it goes through the same learning experience as incumbents.
Otherwise, it has to find ways to make the incumbents’ learning experience obsolete by offer-
ing a new way of running the business. (See Chapter 7 on how to create new market spaces.)
Amazon.com’s early start in online book retailing helped the company to stay ahead of its com-
petitors – such as BOL, the online book retailer of Bertelsmann. The latter was never able to
catch up with Amazon.com and ultimately withdrew from the online book retailing business.
● High switching costs and strong network effects. These help an incumbent to keep its
customers, even if a new entrant offers a higher value. Think about the retail banking
industry. If customers want to switch from one bank to another, they have to change
all their automated bill payment procedures to the new bank account, and also inform
relevant companies and individuals about the change. The effort associated with doing
so could be an effective deterrent for many customers to move to another bank, even
though the latter offers better value. In the Internet context, the so-called ‘stickiness’ of a
website refers to the switching costs involved with moving from one Internet site to the
next. High stickiness makes it unlikely that a user will move from one website to another.
Similarly, strong network effects also tend to increase barriers to entry.
eBay, for instance, has created strong barriers to entry for potential competitors through
the large customer base it has created over the past few years. For individual customers,
it makes sense to switch to a new provider only if they know that all or at least most other
current users would make a similar switch as well. Only then would they be able to enjoy
the same type of market liquidity as they did before. Similarly, through the creation of
strong network effects, social networking sites such as Xing have established a leading
market position. Once users have built up a significant number of contacts and are active
in different interest groups on Xing, it is unlikely that they will switch to another platform
unless their contacts migrate with them.
● Strong intellectual property protection. This is essential for firms that sell products with
high development costs but low reproduction costs, as is the case with digital goods such
as music, video and software. When intellectual property rights are not enforced rigidly,
barriers for new (albeit illegal) entrants are lowered, thus allowing them to push cheap,
pirated copies onto the market. Furthermore, without strong intellectual property pro-
tection it will be increasingly difficult in the future to entice authors or artists to write and
compose, since they will not be compensated adequately.
Cloud computing cuts start-up costs

Back in the days of the dotcom boom towards the If the site attracted too many visitors, the servers
turn of the century, an internet entrepreneur had would simply collapse under the weight of traffic.
to spend hundreds of thousands of pounds buying If there were too few visitors, the company was
computer servers, set them up, launch the service left with a roomful of expensive, under-used
and then pray that he had guessed correctly on equipment.
what the uptake would be. ➨
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“I remember playing all those guessing games. I “If you are launching an app and you aren’t sure
spent weeks trying to negotiate different kinds of how many people will be hitting the site, it makes
deals with internet hosting companies: could we sense. Even if it is 1m users, you will have the
have two servers for the first two months, then six flexibility to handle that,” Mr Raghavan said.
for the next two, not really being sure what we would
Mr Grant says that having unlimited amounts
need,” says Lachlan Donald, a veteran technologist
of computing power on tap has also helped to
who is now chief technology officer of 99Designs, a
spawn new types of companies that would not have
internet marketplace for graphic designers. been viable before, such as biogenomics businesses
If a company got its calculations wrong, it could offering specialised analysis of gene sequences.
take days or weeks to get more computer power. “If you are three guys in a garage and you need
“At previous companies it was a nightmare. Even to 10,000 servers because you are doing some super-
get a new web server set up would take a couple of fancy algorithmic calculations, the cloud is fantastic
weeks,” says Jags Raghavan, vice-president of business for that,” he says.
development at 8KMiles, an internet consulting Cloud computing can work for larger companies
company. “Now you can do it at a touch of a button.” as well as small ones. A number of Fortune 500
The difference is the arrival of cloud computing companies use cloud computing for some of their
services, which allow companies to rent computing operations, often where they want to experiment
power by the hour and by the megabyte, making it with new types of services, or create a website
vastly easier to launch an online business. Start-up around a new product, without huge IT investment.
costs are much lower. However, computing experts warn that after a
“Companies had to borrow a lot of money to buy all certain point, cloud services can prove very
those servers. It created a barrier to entry that cloud expensive, and it might make sense for companies
computing has removed,” says Mr Donald. When to move to running their own servers. After growing
he helped to launch 99Designs, using Amazon Web from six staff to 70 in four years, 8KMiles is still on
Services to run the website, the company was set up the cloud, but other companies are moving on.
without any external funding at all. Zynga, for example, recently moved a large portion
of its games from Amazon to its own computers.
“Amazon Web Services has been the biggest boon to
venture capital-backed companies in recent years. Cloudscaling is exploiting this trend and has a
It has meant you can now fund 10 companies for the growing business helping companies who have
price of one, and you are seeing new applications outgrown the start-up phase transition away from
being developed that would have been difficult public cloud services like Amazon to running their
to build cost-effectively in the early days,” says own private networks.
Michael Grant, chief executive of Cloudscaling, a The cloud might also not work for companies that
company that offers cloud infrastructure software. are too small. It can be complicated designing
These services also help to keep down staff costs. software to run well on the cloud, warns Mr Donald,
“If you are a fashion company, your business is and this is something that very small businesses
not information technology. Now, you don’t have could struggle with.
to set up an IT division that is not part of the core “It is much more technically complex. You need
business. You can run with minimal IT staff,” says to automate everything and assume everything
Mr Raghavan. is going to fail. Although a whole ecosystem of
Having computing power on tap like electricity software services companies has sprung up to help
or water has also helped fledgling companies to with this, it still has more complications,” he said.
deal with sudden jumps in popularity. Zynga, a Mr Raghavan agrees. “The cloud is not for everyone.
developer of games for social networks, for example, If you have a solid business case I would recommend
turned to Amazon Web Services in 2009 when users it. But if you just have a concept and don’t really
of its FarmVille game jumped from zero to 10m in know what your audience is, I would not recommend
six weeks and the company had run out of its own it, because the cloud is not free,” he says. “It reduces
data centre capacity. your capital expenditure costs, but it is not free.”
Source: Palmer, M. (2012) Cloud computing cuts start-up costs, FT.com, 29 February.
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3.2.3 Substitute products

About a decade ago, when reflecting on strategy and the Internet, Michael Porter highlight-
ed the role that the Internet could have in creating new substitutes for industries. The inten-
sity of pressure from substitute products depends on the availability of similar products that
serve essentially the same or a similar purpose as the products from within the industry. As
the availability and quality of substitute products increase, so profits generated within the
industry tend to decrease. This is due to the fact that substitutes place a ceiling on prices
that firms within the industry can charge for their products. However, the real substitutive
power of products must also be assessed taking into account the price of these products
and buyers’ switching costs as well. The Internet has helped to increase the pressure from
substitute products, especially for goods that are digital by nature or can easily be digitised,
as this enhances the variety of products available to customers.
For instance, online music-sharing has evolved so quickly that it has become a for-
midable substitute for physical music CDs, thereby threatening the traditional music
industry in its foundations. In the software arena, Microsoft (the dominant producer of
software for desktop PCs) has been facing new substitutes in the form of mobile devices
that increasingly provide many of the same functionalities as traditional PCs. However,
the software for these products is not primarily Microsoft-based.18 Similarly, Google has
developed a free package of online applications, including calendar, email, word process-
ing and spreadsheet functionalities, that operate as a substitute for Microsoft’s high-end
Office software package. Recent examples of how some companies deal with the threat
of substitute products include AOL’s acquisition of TechCrunch, a web-based publica-
tion that offers technology news and analysis, and Facebook’s $1 billion acquisition of
Instagram, the mobile photo-sharing application. (See the FT article: ‘Facebook shows it
gets the message with Instagram deal’.) The threat of substitution resulting from disrup-
tive innovations is discussed in more detail in Chapter 6.
3.2.4 Bargaining powers of buyers and suppliers

The bargaining powers of buyers and suppliers are two sides of the same coin; this is why
we discuss them jointly. The bargaining power of buyers tends to be high (and that of sup-
pliers low) if the industry displays the following characteristics:
● High concentration of buyers, which allows them to leverage their purchasing power
through pooling. One important feature of many B2B e-marketplaces – such as IBX, dis-
cussed in the case studies section of the text – is the aggregation of buyers’ orders. This
helps them to achieve better terms from suppliers than they could obtain individually.
● Strong fragmentation of suppliers, which makes it difficult to establish a joint approach to
pricing. In the PC industry, many producers are constantly trying to gain market share
at the expense of other competitors by undercutting each other’s prices. This, in turn,
undermines the pricing power of the whole industry.
● A high degree of market transparency, which allows buyers easily to compare the offers
of different suppliers. Advanced search tools available on the Internet allow customers
to choose from a larger pool of suppliers and to compare prices instantaneously, thus
making it easier for them to find the best deal. This is particularly the case for highly
standardised products that can be easily compared using search engines, usually known
as ‘price comparison services’, ‘price engines’ or ‘shopping bots’.19
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Facebook shows it gets the message

with Instagram deal
Remember when it seemed crazy that Google off such endeavours as small, ephemeral jewels.
was paying $1.65bn for YouTube? Thanks to the Yet Instagram packs a punch. As an alternative
incredible leverage of the web, an online video start- to importing their Facebook contacts, users can
up with only 65 employees had already amassed quickly build a new network of people to share
20m regular users in less than two years – though pictures with – something that reflects a growing
it had nothing in the way of revenue to show for it. willingness of users to juggle different networks
From the vantage point of today’s app world, that rather than export a single, homogenous Facebook
already looks so . . . 2006. experience to each new online service.
Enter Instagram. The photo-sharing app’s numbers And, thanks to the strong emotional connection
are more eye-opening than YouTube at the same that comes from browsing through friends’ pictures,
stage. With only 13 employees, it has garnered more Instagram claims to have captured a surprising
than 30m members in its first 18 months. amount of its users’ attention.
The revenue line may still be a big, fat zero – but How to make money from this will be a big question.
that didn’t stop Facebook from laying out $1bn Mobile advertising has been notoriously slow to
this week to secure an icon that enjoys prime take off. But image-centric services have an obvious
positioning on mobile screens everywhere. appeal to brands that want to create an emotional
connection with users. Like the image “curation”
If the YouTube deal represented an early flowering of site Pinterest, Instagram is an obvious first port
what used to be called user-generated content on the of call for brand-owners looking to test out future
web, the acquisition of Instagram is a harbinger of advertising formats that will mix in commercial
another new wave: the app that lives beyond the web. messages with users’ own content.
It is a place where the influence of the traditional
web powers – even one in the ascendant, such as So what does this $1bn deal say about Facebook?
Facebook – is muted, and different rules apply. Coming the month before its expected IPO, it should
give potential investors pause for thought. Facebook
It was less than four years ago that Apple ushered in has always displayed a strong sense of paranoia – no
this new world, with the launch of its App Store. The bad thing, given the low barriers to entry in its
resulting app economy, without much revenue to industry – and has used other acquisitions in the
show for itself, has been floated on a tide of venture past to latch on to new forms of online behaviour.
capital. But acquisitions like that of Instagram are a
harbinger of things to come. In a deal that was, in its Buying Instagram is an admission that, while its
way, even more eye-opening, social games company own mobile app is used by hundreds of millions of
Zynga last month paid about $200m for the start- people, Facebook was not built with mobile in mind.
up behind a simple game called Draw Something: A complex, busy web service can’t hope to compete
launched only seven weeks earlier, the game had with the simplicity and delight of a purpose-built
already attracted more than 35m users. app like Instagram.
The platform to support apps like this has come into That also explains why many Instagram users are
being remarkably quickly. Apple had sold some 80m unhappy about a Facebook acquisition, and why
iPhones and iPads at the time that Instagram was Mark Zuckerberg has just picked a big management
launched: that number has since grown to 230m, challenge. Reaching beyond Facebook into the
and sales of devices using Google’s Android software app world demands a balancing act: keeping
have exploded. Add in the social network effects that Instagram’s app-centric approach and alternative
many new services rely on, and this makes fertile “social graph”, to use a term that Facebook itself
ground for app phenomena like Instagram. popularised, while also using the app to extend its
own network into foreign territory.
The speed with which they emerge and the
simplicity of the experience makes it easy to write
Source: Adapted from Waters, R. (2012) ‘Facebook shows it gets the message with Instagram deal’,
Financial Times, 12 April.
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Some companies find ways to modify to their advantage the transparency of electronic
markets. Two specific actions can be mentioned here: modifying a search engine’s out-
puts in order to increase a company’s visibility20 (e.g., by purchasing a certain position
in search results) or practising what is known as ‘obfuscation’. The latter attempts to
obstruct consumers’ searches or to at least reduce damage to a company – i.e., obfusca-
tion practices increase search frictions in online markets. Some forms of obfuscation
include complicating a product’s description, impeding that search engine’s access to a
product’s price, or creating several versions of a given product with one of them being
very basic and low-priced so as to attract customers and then try to make an add-on sale.
These strategies affect the electronic markets’ transparency and thus may help increase
the profit of companies using them.21
● Products are increasingly becoming commodities, resulting in little or no differentiation
between different providers. The pricing of commodity products that do not require
extensive purchasing advice or after-sales service is especially affected by a higher degree
of market transparency, since customers can then safely choose the lowest price provider.
● Low switching costs and weak network effect, which make it easy for buyers to change
suppliers.
Conversely, the bargaining power of suppliers is high if the opposite of all or some of the
above characteristics holds true. As an example here, consider the case of Google’s acquisi-
tion of the online price comparison service BeatThatQuote.com, which helped Google to
strengthen its position in the UK financial products market (see the FT article: ‘Google buys
UK price comparison website for £37.7m’).
Google buys UK price comparison

website for £37.7m
Google has snapped up BeatThatQuote.com, a price comparison website, for £37.7m as
the technology group looks to widen its range of services and strengthen its foothold
in the UK financial products market.
BeatThatQuote helps users to compare a range of products including loans, insurance
and utilities. It competes with bigger UK rivals such as Moneysupermarket.com and
Comparethemarket.com as well as providing the underlining technology for price compari-
son services on other sites.
Google has shifted its focus during the past few years, turning itself from a straight
search company into a broader media player with interests ranging from television to
music and publishing.
Last month Google sought to go head to head with Apple by launching a payment
service for digital content that would give publishers a greater share of revenue than
its rival’s system.
Google’s open source Android operating platform now powers a range of smartphones.
The US group is also looking to compete with companies such as Apple and Spotify by
launching its own music download store. ➨
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The BeatThatQuote acquisition, though small, will help Google build on an existing
credit card comparison business in the UK, which will give search engine users faster
access to relevant queries.
Google has faced criticism from those who claim that its algorithms favour its
own products, something the US company denies. Google says its algorithms are
impersonal and it clearly labels its own services.
John Paleomylites, managing director of BeatThatQuote, said that by teaming up
with Google “we think we can offer more transparency and better pricing information
than existing online offerings”.
Not all of Google’s attempts to add on new services have been successful. Earlier this year
the group abandoned attempts to compete with the likes of the UK’s Rightmove in the
property search market. The feature allowed users in the US, Australia, New Zealand,
the UK and Japan to find real estate for sale or rent and then view the property using
Google’s Street View.
Source: Watkins, M. (2011) Google buys UK price comparison website for £37.7m, FT.com,
7 March.
The impact of the Internet on the five industry forces is depicted in more detail in
Exhibit 3.3.
3.3 Complementing the five forces framework

with the co-opetition framework
While the five forces framework focuses on the negative effects that market participants
might have on the industry’s attractiveness, the co-opetition framework enriches this
perspective by highlighting that interactions with other players can also have a positive
impact on profitability.22 These interactions can include: (1) joint setting of technology and
other industry standards, (2) joint developments and (3) joint lobbying:
● Joint setting of technology and other industry standards is often a prerequisite for ensuring
the growth of an industry. For instance, the Germany-based wireless marketing company
YOC joined other wireless marketing providers to set up ethical and data privacy industry
standards on how to conduct marketing campaigns over the mobile phone.
● Joint developments between different firms can offer the opportunity for improving
quality, increasing demand or streamlining procurement. Through its Zshops, Amazon.
com has made it possible for other sellers, who are, in principle, competitors, to sell
through the Amazon.com website. Similarly, competing car manufacturers (i.e. General
Motors, Ford and DaimlerChrysler) teamed up to set up the common e-purchasing
platform Covisint, aimed at streamlining their purchasing processes.
● Joint lobbying for favourable legislation is also frequently a prerequisite for growth and
for erecting barriers to entry.
The value net framework (see Exhibit 3.4), which is similar to the five forces framework,
focuses on the positive aspects of interactions and seeks to identify opportunities for value
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Exhibit 3.3 The Internet has a profound impact on the five forces that influence industry attractiveness
(–) Reduces barriers to entry such as

the need for a sales force, access
Barriers to entry to channels and physical assets.
(–) Internet applications are difficult to
keep proprietary from new entrants.
(–) A flood of new entrants has come
into many new industries.
Bargaining power Rivalry among Bargaining power of

of suppliers existing competitors channels and end users
(+/–) Procurement using the Internet (–) Reduces differences among (+) Eliminates (–) Shifts bargaining
tends to raise bargaining power competitors as offerings are powerful power to
over suppliers, though it can also difficult to keep proprietary. channels or consumers.
give suppliers access to more (–) Migrates competition to price. improves (–) Reduces
customers. (–) Widens the geographic market, bargaining switching costs.
(–) The Internet provides a channel increasing the number of power over
for suppliers to reach end users, competitors. traditional
reducing the leverage of (–) Lowers variable cost relative to channels.
intervening companies. fixed cost, increasing pressure
(–) Internet procurement and digital for price discounting.
markets tend to give all companies
equal access to suppliers, and
gravitate procurement to
standardised products that reduce (+) By making the overall industry
differentiation. Threat of substitute more efficient, the Internet can
(–) Reduced barriers to entry and the products or services expand the size of the market.
proliferation of competitors (–) The proliferation of Internet
downstream shifts power to approaches creates new substitution
suppliers. threats.
Source: Reprinted by permission of Harvard Business Review [exhibit Ro 103d]. From ‘strategy and the Internet’ by M. porter, March 2001.
Copyright © 2001 by the Harvard Business school publishing Corporation, all rights reserved.
Exhibit 3.4 The value network outlines the main players in the co-opetition framework
Supplier
Competitors Firm Complementors
Buyer
Source: adapted from a. Brandenburger and B. nalebuff, Co-opetition, Currency doubleday, 1998, p. 17.
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creation through collaboration.23 Therefore, it provides a complementary perspective to the

one offered by the five forces framework. The ‘value net’ framework looks at four categories
of players, which, through their interactions, characterise the market environment. These
players are customers, suppliers, competitors and complementors:
● Customers (who sometimes are the consumers) are the recipients of products or services
that a given firm offers in the marketplace.
● Suppliers are companies that supply the firm with resources, including labour and (raw)
materials.
● Competitors are companies whose products or services are considered to be substitutes to
the firm’s own offerings.
● Complementors are companies whose products are complementary to a firm’s own
offerings. The underlying idea is that customers value a given product more if they can
also buy a related complementing product from somebody else. This is the case, for
example, with CD and DVD players, or game cartridges and consoles.
The role of competitors and complementors can change depending on the context. For
instance, with the above-mentioned Zshops, Amazon.com has changed competitors into com-
plementors. Instead of looking at them only from a ‘negative’ (or zero-sum game) perspective,
Amazon.com decided that allowing these companies to offer their products on its website
would improve its overall value proposition and create a win–win situation for both parties.
Similarly, when three major car manufacturers (i.e. General Motors, Ford and
DaimlerChrysler) joined forces to set up the shared e-procurement platform Covisint, they
aimed at pooling their purchasing needs and thereby reducing procurement and supply
chain costs. (For other examples of complementary relationships, see the FT article: ‘Nokia
and Microsoft talk up benefits of co-dependence’.)
To sum up, if well established, coalitions in e-commerce are generally more beneficial for
the concerned parties than non-coalition scenarios. Likewise, ‘non-connex’ coalitions (i.e.
those set up among firms with complementary business activities) are more profitable than
‘connex’ coalitions (i.e. those made among close substitutes). One of the main reasons that
justifies such a better outcome lies in the pricing strategies followed by the ‘non-connex’
coalitions, which are usually more effective in attracting consumers and even taking market
share from the competition.24
Nokia and Microsoft talk up benefits

of co-dependence
The word that Nokia boss Stephen Elop uses to Nokia’s hardware and Microsoft’s Windows Phone
describe the close alliance with Microsoft on which software. If there is a way back, then these companies
he has bet his company’s future is a somewhat are betting that it lies in tying the technology pieces
unfortunate one. He calls it a “co-dependency” together more closely – an idea that has been coming
– which conjures images of unhealthy mutual into vogue in the handset world, where Apple’s
reliance as the two also-rans in the smartphone iPhone remains the shining example.
business cling together for support.
Hanging over all this is the question of whether the
A less-loaded description would be that tech industry dance between Microsoft and Nokia will end in the
catch-all, “convergence” – in this case, between ultimate corporate convergence. One person close ➨
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to Google’s board makes the case that the Finnish said, before going on to point out that smaller
company is now “in play” and that an acquisition acquisitions with less complexity to them were the
is the best hope for redemption for Microsoft boss ones that made the most sense in the tech world.
Steve Ballmer. Mr Elop also needs redemption:
For Microsoft, though, double-dipping with both
In the 16 months since he took the reins, Nokia’s
Nokia and RIM may look like a quick way to become
already-battered shares have lost another 47 per
a smartphone leader – if it could handle the angst
cent of their value.
that the loss of national tech champions would be
Google is, of course, contemplating a degree of likely to engender in both Finland and Canada.
smartphone convergence of its own. Its acquisition
But does the tight technology convergence on
of Motorola Mobility, which is still awaiting
which a Nokia acquisition would be predicated
regulatory approval, is intended mainly to bring it
really answer both companies’ smartphone woes?
the portfolio of patents it needs to fend off lawsuits.
But with the hardware business that comes along Microsoft has tried the hardware–software
with it, the search company will also have bought combination before. Its Zune player, launched years
itself some optionality, should it eventually decide late against the iPod, was meant to prove that there
it needs a true Google Phone. was a gadget gene embedded in its DNA. Despite
good reviews, it flopped.
The close alliance with Nokia also gives Microsoft an
option. But whether a full acquisition would help in It is not even clear that close integration of hardware
the fight with Apple and Google is debatable. and software is the secret to world domination
in smartphones, much as Microsoft and Nokia
From the point of view of a Microsoft shareholder, the
like to argue the case. The leader in smartphone
numbers certainly add up. Four years ago, before the
operating systems is Google’s Android, which has
financial crisis, Nokia was riding high, with a stock
given birth to an array of devices of varying quality.
market value half as big as that of Microsoft. It has
Google has worked closely with hardware makers
since lost 85 per cent of its value and, at $20bn, could
for the flagship Nexus phones it launches each
easily be handled with Microsoft’s $52bn of cash
year – much as Microsoft works with Nokia – but
reserves, even with a sizeable premium.
they have not been among the biggest Android
The fact that 85 per cent of Microsoft’s cash is successes. So either consumers don’t yet appreciate
held outside the US only adds to the attractions, the extra benefits claimed for integrated devices, or
since with foreign acquisitions it avoids the tax hit the real downside of fragmentation in the Android
that would come from repatriating the money. To ecosystem has yet to reach a critical stage, says Joe
complete the set, Microsoft could even think about Belfiore, who heads product and software design for
throwing in the tax-free money to buy Canadian Windows Phone.
BlackBerry maker Research In Motion, valued
Neither outcome is preordained. Mobile carriers and
at barely $8bn, which would further extend the
hardware makers like the extra freedom they get
footprint of its Windows Phone platform.
from Android and continue to promote it heavily.
Nokia itself has been strongly rumoured to have
In Las Vegas this week, meanwhile, Nokia and
looked at a RIM acquisition, which might aid in
Microsoft were talking up the Lumia 900, a new device
its efforts to re-establish a presence in the US.
they hope will reignite interest among US smartphone
However, Mr Elop played down the idea while
users. If it works, the odds will increase on their
visiting the Consumer Electronics Show in Las
co-dependency eventually becoming a bond for life.
Vegas this week. “I’m not sure that it would,” he
Source: Waters, R. (2012) Nokia and Microsoft talk up benefits of co-dependence, Financial Times, 12 January.
In the PC landscape, Microsoft’s Windows operating system is more valuable, i.e. faster
and more reliable, when it runs on a computer powered by an Intel microprocessor than
on a computer with a lesser quality microprocessor. Yet Microsoft would typically not be
part of Intel’s ‘five forces industry analysis’ screen, and vice versa. However, whatever
Microsoft does is of great importance to Intel. In contrast to the five forces framework,
where a decrease in the bargaining power on the part of one of the five players leads to
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CRITICAL PERSPECTIVE 3.1
Benefits and drawbacks of industry analysis tools

In all likelihood, porter’s five forces industry framework is one of if not the most widely used
frameworks in the field of strategic management. the framework has numerous positive
qualities that have contributed to its far-reaching success. Most importantly, it is a systematic
and comprehensive way to analyse industry structure. the five forces that the framework
addresses are mutually exclusive and they cover the most important players in a given industry.
In addition, the framework claims that there is a monotonic relationship between the power
of each individual player and industry attractiveness. this means, for instance, that as the
bargaining power of buyers or sellers increases, the industry becomes less attractive. similarly,
as competition increases, the industry attractiveness also goes down.
this required monotonic relationship between the power of the actors and industry
attractiveness is the main reason why Michael porter decided not to include government as a
sixth force. In an interview,25 porter explains why, to his mind, government does not present
a sixth force:
after much further work using and teaching the framework, I have reaffirmed my original
conclusion that government is not a sixth force because there is no monotonic relationship
between the strength and influence of government and the profitability of an industry. You
can’t say that ‘government is high, industry profitability is low’, or that ‘government is low, in-
dustry profitability is high’. It all depends on what exactly the government does. [. . .] and how
do you assess the consequences of what government does? Well, you look at how it affects
the five forces.
In essence, porter states that government is a variable that has an impact on the five forces,
which in turn impact on the profitability of the industry. Yet there seems to be no direct and,
most importantly, no monotonous effect of government on industry profitability. on the one
hand, governments in many countries have passed laws to deregulate industries, which has
led to a strong increase in competition and reduced profitability for incumbent companies.
this was the case, for instance, in the German telecom industry, where the entry of numerous
new players in recent years is severely threatening the position of the market leader deutsche
telecom. on the other hand, governments might also pass laws that prevent suppliers from
colluding and setting overly high prices. this, in turn, reduces the bargaining power of suppli-
ers, thereby making the industry more attractive for incumbents.
the comprehensiveness and clear structure that the five forces industry framework pro-
vides is especially valuable during the initial stages of a strategy project, when the task is to
gain a quick and broad understanding of the relevant players in an industry. Yet there are also a
number of drawbacks associated with the five forces industry framework, which one needs to
be aware of. Most importantly, it has been said that the framework is overly static in a rapidly
changing business world, where industries are in constant flux. It is, indeed, increasingly diffi-
cult to define industry boundaries, which are becoming more and more blurred due to, among
other factors mergers and acquisitions. However, this does not mean that the five forces indus-
try framework has become irrelevant, since it still helps to pinpoint competitive and industry
conditions that are subject to change.
Furthermore, the framework assumes that competitors’ behaviour and industry structure
can be explained by analysing a single industry. However, frequently there is multi-point com-
petition where firms compete in more than one industry and, more importantly, their behav-
iour in one industry is sometimes determined by competition in other industries. For instance,
apple competes not just in the music industry through its itunes online store but also in the
music player industry, where it sells its ipod music player.
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an increased attractiveness of the overall industry, this logic for complementors is more
differentiated. In the case of Microsoft, Intel benefits if Microsoft’s operating system
becomes more successful over time, since this also opens up new market opportunities
for Intel’s microprocessors.
3.4 Defining industries, segmenting markets and targeting

markets in e-business
3.4.1 Defining an industry

As discussed in Critical Perspective 3.1, one important challenge that we need to consider
when conducting an industry analysis is to define appropriately the industry boundaries. On
the one hand, if we define our relevant industry very narrowly then there will be few competi-
tors and there is a high probability that the industry will be rather attractive. Yet there is great
risk that a company from an adjacent industry might enter the industry. On the other hand, if
we define the industry too broadly it becomes overly difficult to reach any sensible conclusions.
Consider the example of the networking platform Xing, which was briefly mentioned above.
A narrow definition of the market might limit the industry to online networking platforms,
which would focus the competitor analysis on a very small set of companies such as LinkedIn
in the USA or Stayfriends.com in Germany. A broader definition, including all companies that
offer one or more functionalities that Xing offers, would lead to a vast competitive landscape
including companies such as Microsoft. This example illustrates that, depending on the indus-
try definition, there could be different customers and competitors that need to be considered.
The key question that always needs to be taken into account when defining an industry is:
which other products do customers consider as substitutes? Depending on the task at hand,
it is possible to use different types of definitions for a given industry. For instance, for a more
short-term-orientated external analysis, it might be sensible to scrutinise closely the main play-
ers in the direct environment and thus conduct a rather focused industry analysis. However, if
the task is to gain an understanding of longer-term competitive developments and threats, it
might be more sensible to adopt a broader industry definition that also includes more remote
substitutes and potential disruptive innovations that threaten industry incumbents.
3.4.2 Segmenting markets in an industry

Even narrowly defined industries are frequently too broad a category to allow for any
meaningful analysis. Consider the car industry, which consists of a broad array of differ-
ent car manufacturers catering to different customer segments. To conduct an industry
analysis that contains both high-end manufacturers (such as Porsche and Jaguar) and mass
producers (such as Toyota and Volkswagen) would provide only very limited insights into
the attractiveness of the industry. Similarly, lumping together different types of customers,
such as private consumers and corporate customers, also does not provide much insight,
since their needs are completely different. To remedy this, we need to segment industries
and markets within a specific industry into finer units and then decide which ones to target.
Why is it sensible to divide markets into finer segments?26 We need to do so because
different people have different preferences regarding product features and, therefore,
appreciate different value propositions. Let us look, for example, at mobile phones. A busy
young management consultant might value the possibility of checking his/her bank account
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balance via a mobile phone, while a senior citizen, who may be having some eyesight
problems, may not be attracted by mobile e-banking services. However, the latter customer
group might find valuable mobile phones that have enlarged dialling pads, allowing them
to key in phone numbers more easily. This example illustrates how differences in customer
preferences are the foundation for market segmentation. According to this, a market seg-
ment is defined as a group of customers who have similar needs.
Historically, segmenting markets and catering to different needs have not always been as
important as they are nowadays. For instance, in 1909, Henry Ford started offering car buy-
ers in the USA the Model-T car ‘in any color they wish, as long as it is black’! By 1926, Ford
had sold over 14 million Model-T cars. Obviously, with the advent of more sophisticated
production technologies and, more recently, the Internet, it has become possible and neces-
sary to segment markets in a much finer way and to tailor different products and services to
different customer segments. (See e-business concept 3.1.)
e-business concept 3.1

The e-business market segmentation matrix
the e-business market segmentation matrix27 provides an consumers supply businesses with information about their
overview of the different participants in electronic business. experiences with products or services. examples of C2B
It differentiates three types of participants – consumers, interactions are the book reviews at amazon.com and
businesses and government – who can act as both consumer opinions at Ciao.com – a product-comparison
suppliers/providers and buyers/recipients. this results in platform. the information that consumers provide is then
the nine quadrants shown in exhibit 3.5. Below, we explain shared with other consumers to help them make more
each one of these configurations, taking the perspective informed purchasing decisions. Furthermore, metadata
of a supplier/provider who is dealing respectively with a comprising information on actual user behaviour allows
buyer/recipient who can be a consumer, a peer or a citizen, companies to cater better to individual needs. Collaborative
as well as a business or a governmental agency. In other filtering of metadata, for instance, enables amazon.com to
words, we proceed with the description of the proposed recommend particular books to a customer by analysing
matrix row by row, rather than column by column. other users’ buying and viewing patterns.
the third category in this segment contains consumer-
The consumer/peer/citizen to-government (C2G) interactions, such as the online
as a supplier/provider submission of tax return forms and citizen-to-citizen
through the Internet, consumers can act as suppliers interactions. an example of the latter is the online social
themselves. Consumer-to-consumer (C2C) e-commerce media-based campaign that the candidate Barack obama
relationships are those where one consumer acts as a ran in the Usa during the 2008 Us presidential election.
supplier and sells goods to other consumers. the most during the election, obama’s campaign leveraged the
prominent examples for C2C interactions are online Internet as a platform for interacting with supporters and
auction places, such as eBay, where consumers can sell new citizens, outlining his viewpoints on different policy issues
and used products to other consumers. When interactions and raising funds.
between consumers are not of a commercial nature, we call
them peer-to-peer (p2p) interactions. these are voluntary The business as a supplier/provider
in nature and are free of charge. examples of p2p sites the most typical form of interaction is one where busi-
include online music-sharing platforms, such as Kazaa nesses act as suppliers to other parties. In business-
and emule. other forms of C2C interactions are social to-consumer (B2C) e-commerce interactions, firms sell
networking sites. although these interactions are not of a products and services through online means directly to
commercial nature, they happen to take place on an online their customers. a number of case studies featured in the
commercial platform brokering user-related information. text, such as tesco.com, focus on B2C interactions.
the second relationship type in this segment is the Business-to-business (B2B) interactions are platforms
consumer-to-business (C2B) relationship, where, in general, for the online purchase of operating or manufacturing ➨
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Exhibit 3.5 The e-business market segmentation matrix classifies different types of interaction between
consumers, businesses and governmental agencies
Buyer/recipient
Consumer/peer/citizen Business Government
Consumer-to-consumer
(e.g. ebay)
Peer-to-peer Citizen-to-government
Consumer/ Consumer-to-business
(e.g. Napster) (e.g. online tax
peer/citizen (e.g. Amazon.com)
Citizen-to-citizen return forms)
(French presidential
election 2007)
Business-to-government
Supplier/ Business-to-consumer Business-to-business
Business (e.g. online filing of
provider (e.g. Ducati.com) (e.g. Covisint.com)
corporate tax returns)
Government-to-citizen Government-to-business Government-to-

(e.g. information about (e.g. information about government
Government
pension statements most recent legal (e.g. exchange of
of citizens) regulations) diplomatic information)
inputs that other businesses need for making their prod- this allows e-business players to position their own
ucts and services. the e-marketplace platform Covisint, Internet operations within one or more quadrants of
which served car manufacturers (as buyers) and compo- this matrix, and also to consider the option spaces into
nent suppliers (as sellers), is a prominent example of a B2B which they may want to expand.
platform. For instance, amazon.com started out in July 1995
Business-to-government (B2G) interactions include, as a pure B2C firm, selling books online to customers. It
for instance, the online submission of corporate tax re- soon added a C2B component through the online reviews,
turn forms. which customers posted on the company’s website. Later,
amazon.com expanded into C2C, when it allowed cus-
The government as a supplier/provider tomers to sell used books through its website, using the
Compared with the above two categories (i.e. consumers amazon.com online payment mechanism.
and businesses), government activities in e-commerce another example is nordea, which, like most other
have so far been relatively low. However, this is chang- banks, was primarily offering retail (B2C) and corporate
ing, and it can be expected that in the future a significant (B2B) banking services. through the Internet, nordea
part of governmental agencies’ interactions with citizens now enables government-to-citizen (G2C) interactions
and businesses will be conducted online (for a compre- through an online connection with the Finnish govern-
hensive example of e-government applications, see the ment’s database that maintains the pension records of
case study on e-government in estonia in the case studies Finnish citizens. through this online link, nordea cus-
section of the text). tomers have instant access to their pension statements,
the e-business market segmentation matrix shown an important feature when deciding, for instance, on a
in exhibit 3.5 provides a classification of the different savings plan for retirement. Coincidentally, nordea bank
interaction types made possible through the Internet. also offers savings plans for retirement.
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There are two main reasons why it is useful to segment markets: (1) gaining insights into
customer preferences and (2) getting information about the potential segment size. These
two factors are now explained briefly:
● Insights into customer preferences. Segmentation enhances the understanding of the tar-
get customer group and its preferences. First, this knowledge is helpful in determining
how to shape a product and what kind of features to include. Obviously, these features
differ depending on the target customer segment. Second, customer preferences help in
deciding which distribution channels to select. For instance, Nordea Bank found out that
older customers were more likely to start using the Internet for online banking services if
they were enticed to do so during a personal face-to-face conversation at a physical bank
branch.
● Information about the potential segment size. Segmentation also helps to assess the
potential market. To have an approximate idea of how many customers might be using
a product or a service is crucial for estimating possible scale effects, the overall sales
turnover and subsequently the possible return on investment. Webvan in the USA is an
interesting case, since it illustrates the disastrous effects of faulty market segmentation
and sizing. Assuming an immense market potential, Webvan built large, centralised
warehouses that could serve a huge customer base. As it turned out, however, the
market segment attracted to this service was much smaller than expected. As a result,
the picking and packing facilities were underutilised and most of the delivery trucks
drove around half-empty.
Effective market segmentation that actually helps to meet customer preferences is by no
means easy. There are many different ways in which a market can be segmented. Kotler
proposes a number of different requirements that any type of segmentation should fulfil.28
A market segment should be:
● Measurable. It should be possible to measure the size of a defined segment in order to
determine its purchasing power and its peculiar characteristics.
● Substantial. A segment should be large enough to justify that it is addressed separately.
During the Internet boom years, many category specialists entered specific market
segments with a very targeted offering. Yet, as it turned out, the targeted segments were
not large enough – at least then – to be served profitably.
● Differentiable. The segments must be exclusive and react differently to a variety of
marketing approaches.
● Actionable. It should be possible to develop sales and marketing approaches to serve spe-
cific segments. For instance, the mobile marketing company YOC designs mobile market-
ing campaigns specifically to target the segment of 15–25-year-old mobile phone users.
As mentioned above, there are myriad ways of segmenting any market. However, depend-
ing on the specific product and context, some ways are obviously better than others. For
instance, it might be possible to segment the market of Ducati’s customers based on hair
colour and come up with blond, brown, black-haired and bald customers. In all likelihood,
doing so will not provide much insight regarding different preferences and will also not
be actionable. In this case, a segmentation between male and female groups or between
income groups would be much more valuable. The point is that segmentation is not one-
size-fits-all; instead, it requires creative and innovative thinking to differentiate meaningful
market segments.
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Exhibit 3.6 Segmentation variables are the basis for strategic customer analysis
Segmentation type Criteria to be considered
Geographic segmentation Geographic regions (e.g. continents, countries, states)
Demographic segmentation Age, gender, income, life style
Psychographic segmentation Personality type and personal interests

(e.g. cash-rich, time-poor)
Behavioural segmentation Purchasing frequency, usage patterns, etc.
Below, we outline the main possibilities for segmenting a given market using traditional
variables. These possibilities include geographic, demographic, psychographic and behav-
ioural segmentations (see Exhibit 3.6):
● Geographic segmentation entails the selection of specific geographic areas – for example,
continents, countries or specific regions within a country – and tailoring offerings
according to the customer preferences within that area or territory. For instance, in
Europe, certain countries (such as Finland and Sweden) have a very high Internet
penetration rate while others (such as Italy and Greece) do not. Segmenting according
to countries or regions can bring out these differences and help to design custom-fit
strategies for each region. Websites such as Google.com recognise whether a user is
logged on from Germany or the USA, for instance, and display information accordingly in
the local language, thus improving the Internet experience of each individual customer.
● Demographic segmentation focuses on different personal attributes of population
segments. Demographic segmentation can be done, for instance, by looking at (1) age,
(2) gender, (3) income and (4) lifestyle. For instance, regarding the age dimension, YOC
has positioned itself clearly to attract young mobile phone users to its mobile marketing
services.
● Regarding the gender dimension, the virtual community ivillage.com initially aimed
at serving both men and women. However, as it turned out that women were much
more interested in ivillage’s offerings, the company decided to focus on the female user
segment.
● Psychographic segmentation entails lifestyle issues such as personality type and personal
interests. For instance, the ‘cash-rich, time-poor’ segment of customers has been a
primary target for online grocery shopping services such as Tesco.com. In order to save
time for their social activities and hobbies, members of this segment are more inclined to
shop online (and pay the delivery fees) than spend hours in a physical supermarket.
● Behavioural segmentation divides customers into segments based on their use of a product
or service. This can be done, for instance, according to usage occasions or usage rates.
Dell uses an occasion-based segmentation to group its customers into the following
segments: home office, small business, medium to large business, government, education
and healthcare.29 Segmenting according to usage rates is often useful when different
customers show vastly different shopping behaviours. For many firms, 20% of customers
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make up 80% of revenues. Placing frequent and less frequent customers into different
segments and providing them with different levels of marketing or service can then be
appropriate. An illustrative example here is the low-cost smartphone recently introduced
by Vodafone in association with Facebook, which targets the heavy users of social
networking sites (see the FT article: ‘Vodafone and Facebook team up on smartphone’).
Vodafone and Facebook team up on smartphone

Vodafone and Facebook have teamed up to release Patrick Chomet, Vodafone’s group terminals
a low-cost smartphone dedicated solely to the social director, said that he was relaxed about the
networking service, which the operator hopes will operator’s brand being subsumed by Facebook’s, in
sell millions of devices to younger customers and in spite of fears that network providers could become
emerging markets. low-value “dumb pipes”.
The Vodafone 555 Blue, manufactured by Alcatel “The idea came from us. Our strategy here is that
Lucent, comes with a full qwerty keyboard and the application is the internet,” he told the FT.
a heavily customised operating system that puts “Our confidence comes from the fact that if we do
Facebook features into the heart of the device, great products that enable the customer to have
including placing Facebook messages alongside great experiences, they will see the added value of
SMS in the same inbox and a dedicated ‘F’ button Vodafone.”
for sharing to the site.
He added: “We hope to sell millions . . . Anything
The phone is expected to retail for around $100 – seen below millions will be disappointing.”
as a crucial price point for mass-market adoption –
Dave McQueen, analyst at Informa, a consultancy,
and is billed as the first Facebook-centric device for
said that Nokia and RIM’s BlackBerry devices had
pre-pay customers.
the most to lose in market share if the Facebook
The two companies hope that it will be popular not phone was successful.
only in markets such as India, South Africa and
But he said other devices using Google’s Android
Turkey where both Facebook and mobile data usage
operating system were already available at
is growing rapidly, but also in more established
comparable prices and allowed a wider range of
markets such as the UK, among teenagers and other
apps to be installed, rather than effectively limiting
social networking addicts.
the device to a single website.
Reaching mobile-phone users in countries where
“Vodafone has not been successful in the past at
fixed-line internet connections are scarce will be
providing apps,” Mr McQueen added, noting the
vital if Facebook is to reach its target of 1bn users,
limited uptake of its Vodafone 360 social networking
from 750m today.
hub for smartphones. He added that consumers in
The social networking company has previously emerging markets might prioritise other features
worked with other mobile phone manufacturers, such such as good battery life or the ability to use two
as INQ and HTC, to build customised devices using its SIM cards above access to Facebook.
wide range of social networking functions, from chat
Mr Chomet said that its latest device and Vodafone
to photo-sharing. But Vodafone believes that the 555
360 were targeted at “very different segments”. “This
Blue – which runs on 2.5G networks, slower than the
is part of a movement that we want to accelerate of
smartphone standard of 3G – is more efficient in its
empowering the mass market on data,” he said. “It
consumption of data than more sophisticated devices,
doesn’t do everything . . . but it will be better than
estimating it would use less than 100Mb per month for
your Facebook experience on your smartphone
a user with 300 Facebook friends.
because it’s not an app, it’s the whole phone.”
Source: Adapted from Bradshaw, T. and Digital Media Correspondent (2011) Vodafone and Facebook team up on
smartphone, FT.com, 27 July.
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3.4.3 Targeting specific markets in an industry

After dividing markets into individual segments, it is still necessary to determine how
to target a specific market segment. There are two main choices associated with market
targeting. First, we need to determine which market segment(s) to target. Second, we
need to determine how many different products and services to offer to the selected
market segment(s). As a manager at a car manufacturer, for example, you could decide to
produce just limousines for the upper-income class. Another manager might decide that it
is more appropriate also to produce sports utility vehicles (SUVs) and family vans for other
market segments. When deliberating the choices, managers always need to keep two main
questions in mind:
● Is the market segment or the group of market segments attractive? The attractiveness
of market segments can be analysed through the five forces framework (discussed in
Section 3.2). To find out about the attractiveness of a segment, one could, for instance,
analyse the overall growth of that segment, its current profitability and current competi-
tion within the segment.
● Can we compete successfully in this market segment? This depends on the ability to create
value through the resources and skills that a firm possesses. (For a detailed discussion of
value creation, see Chapter 8.)
Companies can choose from five main possibilities to target market segments (see
Exhibit 3.7). These possibilities are: (1) single-segment concentration, (2) selective
specialisation, (3) product specialisation, (4) market specialisation and (5) full market
coverage.
● Single-segment concentration. Premium providers (such as Ducati, which specialises in
the production of racing motorcycles for the higher-income motorcycle market) fre-
quently concentrate on single segments of a market. This allows them to gain profound
knowledge of customers, develop specialised production know-how and cater exactly
to the needs of their specific customer segment. The Ducati brand is positioned clearly
as a premium brand, undiluted by lower-class products, which allows Ducati to charge
a premium price for its motorcycles. Competitors with a broader positioning are likely
to over- or under-serve this specific customer segment. The downside of single-segment
concentration is that if the targeted segment fails to generate the required revenues, then
the whole firm is endangered.
● Selective specialisation. A company that pursues selective specialisation targets different
market segments with different product types. Doing so has the advantage of spreading
out the business risk. However, it also poses the danger that the firm loses focus, thereby
becoming vulnerable to attacks by more focused competitors. The German media group
Bertelsmann, for instance, offers a wide variety of media products in the online, print, TV
and radio areas, which target different customer groups.
● Product specialisation. A category specialist such as Spreadshirt.com, which focuses on
providing printing services, concentrates on one type of service but wants to reach out to
as wide a market as possible. The goal of product specialists is to generate either econo-
mies of scale or special learning effects that set them apart from their competitors. The
risk of product specialists is that if their specific product loses favour with customers,
then they would not be able to make up for a fall in revenues through other products.
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Exhibit 3.7 Target-market selection depends on the number of markets served and the number
of different products and services offered
Full market coverage

Product specialisation (e.g. Nordea Bank,
(e.g. Spreadshirt.com) Amazon.com, Tesco.com)
M 1 M2 M 3 M 1 M 2 M3
Many P1 P1
P2 P2
P3 P3
Selective specialisation
Number of (e.g. Bertelsmann)
market M1 M2 M3
segments
served P1
(scale) Single-segment P2
concentration Market specialisation
P3
(e.g. Ducati, Porsche) (e.g. ING DIRECT)
M 1 M2 M 3 M 1 M 2 M3
P1 P1
Few P2 P2
P3 P3
Number of different products

Few Many
and services offered (scope)
P = Product
M = Market
Source: adapted from d. abell, ‘Strategy and Structure: Public Policy Implications in Proceedings of Marketing and the Public
Interest, Marketing science Institute, 1977.
The online mobile payment provider paybox.net failed with its mobile payment serv-
ice for online and offline transactions because the uptake by customers and merchants
was not large enough to cover costs. Since paybox.net had focused only on the mobile
payment service, it was unable to generate enough revenues to sustain its business. In
2009 it was acquired by Sybase, an SAP company offering enterprise and mobile soft-
ware to analyse, manage and mobilise information.30 With this acquisition, Sybase aimed
at enlarging and better exploiting the realm of mobile payments services.
● Market specialisation. Firms that concentrate on a specific market segment aim at gaining a
strong reputation and trust with members of the targeted segment, and then expanding by
offering a range of products to the same segment. Cross-selling can be a valuable option to
increase revenues, since it limits customer acquisition costs. For instance, ING DIRECT offers
a complete range of banking products, yet targets primarily the cost-sensitive customers.
● Full market coverage. Firms that attempt to achieve full market coverage want to sell a
wide variety of product types to the whole spectrum of target segments. The economic
logic behind full market coverage is to create economies of scope by leveraging existing
production capacities, technological platforms or a strong brand name. Amazon.com is
an example of a full market provider. Although the company started out selling only new
books, it has subsequently added used books and a wide variety of product categories,
ranging from baby toys, to pet food, to consumer electronics. Xing has also been moving
into full market coverage in the social networking market. The company initially focused
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primarily on business users, as was expressed through its brand name, openBC (where BC
stands for business community). However, market specialisation poses the risk that the
segment in question is not large enough. That is one of the reasons why openBC was later
relaunched as a global networking platform under the Xing brand name.
Nevertheless, it should be said in conclusion that technological progress increasingly allows
targeting segments of one – developing a personalised offer in a profitable manner. In this
case, companies would practice micro-segmentation, or the market segmentation taken to
the extreme. (See FT article: ‘Google searches to become personalised’.)
Google searches to become personalised

Google has wielded its dominance of web search as a Google said it would “certainly be open” to including
key weapon in its battle with Facebook, with a new other services, but justified the current exclusion
approach that draws information from its Google+ because it “does not have access to crawl all the
social network directly into users’ search results. information on some sites.” It also said it only has
“persistent access to information from Google+”.
By including more personal and social information
in its results, the new feature also takes Google With the new feature, content shared privately
a big step towards fulfilling a dream long talked with contacts on Google+ will be included in search
about by its top executives: to create a personalised results, though Google said it would ensure that
search engine that “knows” its users so well that it kept the same levels of privacy as applied on its
all the results are tuned directly to their interests. social network. Google also said it would be able
to show profiles of friends when a user enters a
Known as Search plus Your World, the new
name in its search box, and that it would suggest
approach marks the most direct attempt yet by
interesting people or pages to follow on Google+ in
Google to use its core service to help it make up lost
response to some standard search queries.
ground in social networking. However, favouring
its own Google+ network at the expense of rivals The changes are part of a shift towards including
could heighten regulatory concerns at a time when personal and social information that marks “the
the company’s behaviour is already under the most radical transformation ever” for Google’s
microscope in Brussels and Washington. search service, Mr Sullivan said, while also meeting
a long-held ambition of the company’s leaders.
“They could have done this for Facebook and
Twitter and they didn’t,” said Danny Sullivan, Eight years ago, Eric Schmidt, then Google chief
editor of Search Engine Land. “That will probably executive, said: “We would like to have a Google that
make some antitrust people even more anxious over knows you, that understands your preferences.”
what [Google] is doing.”
Making search more personalised, meanwhile, could
Alex Macgillivray, Twitter’s general counsel, make it harder for brand owners to use search
tweeted that it was “a bad day for the internet. I engine optimisation techniques to ensure their pages
can imagine the dissension@Google to search being appear at the top of “organic” or natural results for
warped this way.” particular keywords, some experts warned.
The immediate impact on the rivalry with Facebook As a result, advertisers are likely to switch some
is likely to be limited given the newness of the their marketing spending away from optimisation,
Google+ network and the relative lack of content said Stefan Bardega, managing partner at
posted on it, some observers said. “The intent [behind MediaCom, WPP’s media agency. “All of this pours
personalisation] is great but I’m not sure today more money into the core business of Google,
Google+ is of sufficient volume or sophistication,” which is the pay-per-click AdWords model. It will
said Martin McNulty, general manager at Forward3D, become almost impossible to get the same level of
a UK search marketing firm. effectiveness in organic results,” he said.
Source: Waters, R. and Bradshaw, T. (2012) Google searches to become personalised, FT.com, 10 January.
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Summary
● this chapter addressed the question of where a firm should compete, and offered
frameworks for analysing the macro-environment, which includes political, legal, social and
technological factors.
● second, the chapter discussed porter’s five forces as a guiding framework for determining the
attractiveness of an industry. It also analysed the impact of the Internet on industry rivalry,
barriers to entry, threat of substitute products and the bargaining power of buyers and suppliers.
● third, the chapter introduced the concept of ‘co-opetition’, which refers to companies
that, at the same time, cooperate and compete with each other. It illustrated how the
Internet enables the implementation of such a concept and how it supports the underlying
interactions between the companies involved.
● Finally, the chapter addressed the issues of how to define industries within which to
compete and how to segment specific customer groups that a company should target
through its e-business offering.
REVIEW QUESTIONS
1 explain the impact of the Internet on the macro-environment.

2 Review the impact of the Internet on the five forces industry framework.
3 How can the Internet enable companies to implement the co-opetition concept?
4 outline the e-business market segmentation matrix based on its two underlying dimensions.
1 Illustrate the five forces industry framework through two e-commerce examples drawn from the
same industry: one of an Internet start-up and the other of an established bricks-and-mortar
company.
2 Choose an e-commerce example and discuss how a company can use the Internet to implement
the ‘co-opetition’ concept.
3 provide a real-world example of your choice for each one of the nine quadrants that make up
the e-business market segmentation matrix.
4 You want to define the industry of amazon.com. What are the major players in the industry?
What are possible substitutes?
G. Johnson, K. Scholes and R. Whittington discuss the macro-environment of firms in

Exploring Corporate Strategy, 7th edition, Prentice Hall, 2005.
For a more in-depth analysis of the five forces, see M. Porter, Competitive Strategy, Free Press,
1998.
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For a detailed analysis of the macro-economic and competitive implications of e-business, see
J. Prieger and D. Heil, ‘Economic implications of e-business for organisations’, in F.J. Martínez-
López (ed.), Handbook of Strategic e-Business Management, Springer, 2014.
A. Brandenburger and B. Nalebuff introduce the concept of co-opetition in their book
Co-opetition, Currency Doubleday, 1998.
For an extensive discussion of market segmentation and market targeting, see P. Kotler,
Marketing Management, Prentice Hall, 2005, pp. 251–96.
Specific examples of segmentation variables in electronic markets are presented in S. Sen et al.,
‘The identification and satisfaction of consumer analysis-driven information needs of market-
ers on the WWW’, European Journal of Marketing, 1998, Vol. 32, pp. 688–702.
For a more detailed coverage of electronic markets’ segmentation, see M. Aljukhadar and
S. Senecal, ‘Segmenting the online consumer market’, Marketing Intelligence & Planning,
2011, Vol. 29, No. 4, pp. 421–35.
www.ecommercetimes.com provides a sound archive of e-business-related articles and

publications.
http://techcrunch.com/ offers updated and rich information on technology news and experts’
analyses.
www.icompli.co.uk is a website concentrating on e-commerce laws.
http://blog.davechaffey.com/ contains updates about digital marketing and strategy.
1 For a detailed explanation of these terms, refer to the technology appendix on the Companion website.
2 A good discussion of macro-environmental influences can be found in G. Johnson, K. Scholes and
R. Whittington, Exploring Corporate Strategy, Prentice Hall, 2005. A more e-commerce-specific dis-
cussion of environmental factors is contained in D. Chaffey, e-Business and e-Commerce Management,
FT Prentice Hall, 2002, pp. 143–56.
3 ‘Windows of opportunity’, The Economist, 15 November 2003, p. 61.
4 Cookies are text files stored on a PC that allow the website operator to identify that PC.
5 Spam is unsolicited email messages.
6 Data reported by the US Census Bureau, E-Stats. Available at www.census.gov/econ/estats/
7 VoIP telephony stands for ‘Voice over Internet Protocol’.
8 See, in the second edition of this text, the case study ‘Second Life. Mercedes-Benz enters the metaverse’,
pp. 525–47.
9 TCP specifies how information should be separated into individual packets and reassembled at the desti-
nation. IP specifies how individual packets should be sent over the network. HTTP is a method of jump-
ing back between different files. HTML is a computer language for formatting hypertext files. J. Cassidy
provides an informative account of the most important Internet standards and technologies in his book
entitled Dot.con, Perennial, 2003, pp. 16–24.
10 For a detailed discussion of industry analysis, see M. Porter’s book Competitive Strategy, Free Press, 1998,
pp. 3–34.
11 The five forces industry framework is described in M. Porter’s book (ibid., p. 5).
12 R. D’Aveni suggests that levels of competition have risen in the past decade, leading to a phenomenon
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that he calls ‘hypercompetition’ (see R. D’Aveni, ‘Coping with hypercompetition: utilising the new 7S’s
framework’, Academy of Management Review, 1995, vol. 9, no. 3, pp. 45–57). However, G. McNamara,
P. Vaaler and C. Devers have empirically tested this thesis and have not found conclusive evidence for an
intensification of competition (see ‘Same as it ever was: the search for evidence of increasing hypercom-
petition’, Strategic Management Journal, 2003, vol. 24, no. 3, pp. 261–78).
13 J. Cassidy, Dot.con, Perennial, 2003, pp. 105–6.
14 Usage share of desktop browsers, March 2012. Source: Wikipedia, average based on diverse data sources
including StatCounter, Net Applications and W3Counter.
15 T. Burt and P. Larsen, ‘Sony and BMG sign music merger deal’, www.FT.com, 12 December 2003.
16 F. Vogelstein, ‘Mighty Amazon’, Fortune, 26 May 2003, p. 64.
17 Some of the ideas in this paragraph are based on a chapter by J. Prieger and D. Heil, published in the
Springer’s Handbook of Strategic e-Business Management, edited by F.J. Martínez-López, 2014.
18 ‘Software’s great survivor’, The Economist, 22 November 2003, p. 70.
19 Some examples are: www.kelkoo.com; www.pricerunner.com; www.beatthatquote.com; and www
.getprice.com.au
20 Increasing a company’s visibility in online searches is the main purpose of search engine optimisation
(SEO) and related new forms of Internet marketing such as search engine marketing (SEM).
21 For a deeper analysis see G. Ellison and S.F. Ellison, ‘Search, obfuscation, and price elasticities on the
Internet’, Econometrica, 2009, vol. 77, no. 2, pp. 427–52.
22 The concept of ‘co-opetition’ was developed by A. Brandenburger and B. Nalebuff, Co-opetition, Currency
Doubleday, 1998. It entails simultaneously cooperating and competing with other companies.
23 Ibid.
24 For a detailed description of these coalitions’ effects in the e-commerce context, see the chapter by
J. Prieger and D. Heil, in Martínez-López (ed.), Handbook of Strategic e-Business Management.
25 N. Argyres and A. McGahan published an interview they conducted with Michael Porter in the Academy
of Management Executive, 2002, no. 2, pp. 43–53.
26 For an extensive discussion of market segmentation, see P. Kotler, Marketing Management, Prentice Hall,
2005, pp. 251–296.
27 See also T. Hutzschenreuter, Electronic Competition, Gabler, 2000, pp. 28–9.
28 P. Kotler, Marketing Management, Prentice Hall, 2005, pp. 251–96.
29 This segmentation becomes apparent on the opening page of www.dell.com, where visitors can choose
between different segments.
30 For more details on this company’s activities, see www.sybase.com
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Chapter 4
Internal analysis: e-business competencies

as sources of strengths and weaknesses
Chapter at a glance
4.1 Understanding core competencies in e-business 80
4.1.1 Competencies and core competencies: a brief overview 80
4.1.2 sources of value and core competencies in e-business 82
4.2 Analysing the Internet-impacted value chain 86
4.3 Leveraging the virtual value chain 89
4.4 Selecting activities for online interaction with customers – the ICDT
framework 92
4.4.1 Information activities 92
4.4.2 Communication activities 95
4.4.3 transaction activities 96
4.4.4 distribution activities 96
4.5 Moving beyond the value chain to value networks 96

1 Tesco Internet-impacted value chain
15 Spreadshirt Internet-impacted value network
7 Otis Value chain transformation
2 Nordea Virtual value chain
3 Ducati vs. Harley Value network; ICdt framework
6 SATEC Core competencies in e-business
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Learning outcomes
● Understand the meaning of core competence in e-business.
● assess the impact of the Internet on the value chain.
● appreciate how a company can leverage the virtual value chain.
● Understand the four virtual spaces of the ICdt (Information, Communication,
distribution and transaction) framework.
● apply the ICdt framework for selecting activities suited for e-business.
● Recognise that companies move from managing an internal value chain to
operating along a value network.
Introduction
this chapter first defines the concept of core competence and discusses it in the context of
e-business. It then presents the value chain concept as a way to analyse the individual steps in
the value-creation process. afterwards, it introduces the virtual value chain concept and suggests
ways for companies to leverage it for value creation. the chapter then describes the four virtual
spaces of the ICdt (Information, Communication, distribution and transaction) framework
and indicates ways of using it when selecting activities suited for e-business. Finally, the move
for companies from managing an internal value chain to operating along a value network that
involves external partners is highlighted.
4.1 Understanding core competencies in e-business
The goal of strategy formulation is to position an e-business venture so that it can exploit
the opportunities that are afforded by its environment and so that it can avoid the risks that
it is exposed to. Doing so requires managers of e-business ventures to do two things. First,
they need to be able to recognise the opportunities and threats that arise from the external
environment. Second, they also need to be able to assess the unique strengths and weak-
nesses that allow them to exploit opportunities and avoid the threats. A company that is
able to align its strengths with the business opportunities and eliminate weaknesses in order
to avoid threats creates a ‘strategic fit’ between its internal competencies and the external
environment.1 In addition, competencies are also important from a different perspective,
since they can be the source of creating new market opportunities that previously did not
exist. That is what Hamel and Prahalad call ‘strategic stretch’.2
4.1.1 Competencies and core competencies: a brief overview

The terms ‘competence’ and ‘core competence’ have been used widely, meaning differ-
ent things to different people. Let us therefore establish some basic definitions before
proceeding (see Exhibit 4.1).
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Chapter 4 Internal analysis
Exhibit 4.1 Distinctive e-business competencies result from the combination of unique
resources and capabilities
Resources
Tangible Capabilities
Strategic importance
resources
The ability
to deploy Valuable
(Equipment, Unique
location, …) resources by
+ coordinating
them through
Hard to imitate/
substitute
e-Business
competencies
Intangible Valuable across
resources Structures different
Processes products/markets
(Technology,
Systems
know-how,
brand, …)
Build Utilise
resources resources
Most importantly, a competence is a combination of different resources and capabilities:

● Resources are all the tangible and intangible assets of a firm that can be used in the value-
creation process. Tangible resources include assets such as IT infrastructure, bricks-
and-mortar infrastructure and financial capital. Intangible resources include employee
knowledge, licences, patents, brand name and reputation of a firm.
● Capabilities represent the ability of a firm to use resources efficiently and effectively.
Skills manifest themselves in the design of processes, systems and organisational struc-
tures. For instance, even before the Internet became a mainstream technology, Dell had
already built up significant skills in managing the process flow of its direct sales model.
Adding the Internet was relatively easy, since the necessary skills were already in place.
However, not all competencies that a firm has are necessarily core competencies. In order for
a competence to be considered as core, it needs to be:
● Valuable. Customers have to appreciate the value of what the competence produces.
This can be achieved through either the lowering of costs or the increasing of customer
benefit, as perceived by customers.
● Unique. The competence needs to be unique so that it not only offers a source of value
creation but also allows the firm to capture the value it creates in the form of profit. If
a competence is not unique, then competition with other firms will drive down profits.
● Hard to imitate. The uniqueness of a core competence is sustainable only if other firms
find it difficult to imitate that competence. First, competencies are hard to imitate if they
require the tightly interlinked participation of many functions or divisions of the firm.
Nordea’s core competence in the integration of offline and online banking, for instance,
is hard to imitate because it requires the alignment of activities across multiple functions
and channels. Second, causal ambiguity also increases the barriers to imitation. Causal
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Exhibit 4.2 The core competence approach cuts across different functional areas within a firm
Inbound Operations Outbound Marketing After-sales

logistics logistics and sales services
Demand and supply processes
Service processes
New product development processes
Etc.
ambiguity exists when there is no clear understanding of the sources of a core compe-
tence, which makes it hard for an outsider to imitate the competence.
● Valuable across different products or markets. A competence is of major value to the firm
only if it is not limited to one product or to one market. One of Amazon.com’s core com-
petencies is its ability to manage the flow of merchandise from receipt of a customer’s
online order to shipping the product to the customer. To create this core competence, it
built up resources in the form of warehouses and IT infrastructure and created internal
skills. As the company moved into different product categories such as toys, home elec-
tronics and clothes, it was able reuse its skills and resources.
Both skills and resources are required in processes that run across the different business
functions of a firm. In fact, an important building block of the competence-based approach
is that strategy rests less on functional divisions and products (as is the case with the value
chain concept described in more detail in Section 4.2) and rather more on processes that
cut across different functions (see Exhibit 4.2).
4.1.2 Sources of value and core competencies in e-business

To understand the sources of value creation and the capabilities to leverage value through
e-business technologies, let us first propose the following definition: ‘ Value is the total
value created in e-business transactions regardless of whether it is the firm, the customer
or any other participant in the transaction who appropriates that value’3 The Internet and
e-technologies are considered as strong enablers of value creation by improving the con-
nections among the participants involved in the value creation process. The following four
dimensions4 are regarded as e-business value drivers (see Exhibit 4.3):
● Efficiency. It refers to efficiency enhancements, such as cost savings, in transactions
supported by e-business technologies, compared with the cost of these transactions in
an offline environment. These efficiency gains can be achieved by reducing information
asymmetry between buyers and sellers, lowering interconnectivity costs, simplifying
transactions, as well as speeding up transaction processing and order fulfilment.
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Exhibit 4.3 Sources of value creation in e-business
Novelty
New transaction structures
New transactional content
New participants, etc.
Lock-In
Efficiency
Switching costs
Search costs
Loyalty programmes
Selection range
Dominant design
Symmetric
Trust
information Value Customisation, etc.
Simplicity
Speed Positive network
Scale economies, etc. externalities
Direct
Indirect
Complementarities
Between products and services for
customers (vertical versus horizontal)
Between online and offline assets
Between technologies
Between activities
Source: R. amit and C. Zott, ‘Value creation in e-business’, Strategic Management Journal, 2001, vol. 22, no. 6, p. 504.
● Complementarities. e-Business technologies foster complementarity by, for example,

improving supply chain coordination, functional synergies and linkages between offline
and online channels.
● Lock-in. This dimension is related to customers’ (or partners’) motivation to engage in a
business relationship with firms that provide benefits supported by e-business technologies.
Lock-in effects can be achieved through, loyalty programmes of online retailers, offering
transaction safety and reliability guaranteed by third parties, promoting online communities
and allowing customisation of products, information and website layout and content.
● Novelty. A source of value creation is the use of e-business for product/service, process
and/or business model innovations. Several case studies in Part 4 of this text (e.g. Ducati,
SpreadShirt, Otis and m-PESA) illustrate the novelty e-business value driver along the
above four dimensions.
‘Taking into account the above framework, how can companies leverage business tech-
nologies in order to strengthen their competitive position and possibly achieve a com-
petitive advantage in the marketplace? (The FT article ‘IT linked to financial performance’
sheds some light on this issue.) The key question here concerns not only the suitability
of corporate investments in e-business technologies and resources but the development
of e-business capabilities. e-Business competencies therefore result from the proper com-
bination of e-business resources and e-business capabilities. The latter are presented in
a framework5 that explains both the firm’s internal value generation (see Section 4.2)
through e-business technologies and the external relationships within its value network (see
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IT linked to f inancial performance

There is a direct correlation between corporate Among the main findings to emerge from the sur-
financial performance and mastery of digital tech- vey, the authors note:
nologies, suggests a new report published by PwC.
● Everyone is now a mobile consumer. Executives
Tuesday’s report, based on PwC’s fourth annual must recognise that the expectations of employ-
Digital IQ survey of about 500 US companies with ees and customers are largely affected by con-
annual revenues of more than $500m, suggests that sumer-driven technologies. Employees want the
the financially best performing US companies tend to tools they use for work to be as good as those
make better use of digital technologies. they use in their personal lives, and customers
Specifically, they offer mobile tools for customers, expect to interact with firms on the platform and
measure data through social media, use the public device of their choice.
cloud for applications and make innovative use of ● The survey shows that while many firms are
business intelligence. focussed on developing better mobile tools for
“Consumerisation of IT is on the rise, and in the their workers, they are underinvesting in solu-
survey we continue to see a need to serve the mobile tions for their customers: only 45 per cent of all
customer, move to cloud services and use data more respondents say they interact with customers
effectively,” said Chris Curran, principal at PwC. significantly using mobile channels, and less
“Organisations that have an integrated strategy – than one-third are currently investing in mobile
which includes technology – seem to perform better.” technologies for customers.
“Raising a firm’s Digital IQ means improving the ● Social media is a critical data source. Social
way it leverages digital technologies and channels to media creates a channel to engage clients and
meet customer needs,” said John Sviokla, principal build loyalty. The real value is its ability to add
at PwC. “The core of the ecosystem for innovation a new dimension to the entire product life cycle
has moved from inside the firm to out in the market- and create more regular interaction across the
place. Customer and employee expectations are being lifespan of a product or service. This information
shaped by this new, dynamic and exciting environ- can be instrumental in wringing greater value
ment. If you miss this trend you will be increasingly out of existing products while providing invalu-
irrelevant to the market.” able insight as new products are developed.
As with previous Digital IQ studies, the results con- ● Despite this, most companies have yet to embrace
firmed that top-performing companies not only put the benefits these tools can provide: Among the
IT at the heart of their strategies, they ensure that total pool of survey respondents, only 37 per cent
senior management actively helps to drive the mobi- have invested in social media tools to reach custom-
lisation and execution of those plans. ers. Industries which have invested more signifi-
cantly on engaging customers through social media
The chief information officer plays a critical role
include the retail and consumer sector (51 per cent)
in the planning process for increasing a company’s
and the industrial product sector (50 per cent).
Digital IQ. To succeed, today’s chief information offic-
ers – and the ‘C-suite’ more broadly – must excel at ● Moving business applications to the public cloud
not just managing internally, but also putting new can make an organisation more competitive. The
plans into action, the report’s authors suggest. development of the cloud is arguably the strong-
est driver of the consumerisation of IT. Cloud
A high Digital IQ requires a chief information officer
computing not only allows consumers to access
to find better ways to sift through and drive insight
information on the internet, it also empowers
from the increasing torrent of data streaming from
them to solve complex problems, organise events
every manner of device and interaction and to create
on the fly and perform hundreds of complicated
a platform that can deliver these capabilities across a
tasks, all from their mobile phones.
varied set of changing mobile devices.
● In an age of outsourcing, the cloud increasingly is
The report’s findings suggest that excellence in IT has
an important consideration. This is perhaps the
not been commoditised and can still be used to cre-
reason why investment in public cloud applications
ate competitive advantage. Indeed, it suggests that
is on the rise. Among respondents that identify
IT-enabled, multi-channel connections with custom-
their organisations as top performers, 30 per cent
ers can make a marked difference to business results. ➨
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are investing in public cloud applications and will be investing more in the coming year to collect
87 per cent expect that investment to increase in customer data and 43 per cent say they will invest
2012. Private cloud investments still outweigh the more to measure operational performance.
public realm, however, suggesting that companies
According to the survey, 63 per cent of respondents
are embracing a hybrid approach, a positive step
revealed their greatest challenge is the inability
towards raising the organisations’ Digital IQ.
to gather, understand and act on customer data.
● Companies can gain greater insight from business Fifty-eight per cent cite an inability to quickly
data by working from the outside in. The wealth understand and adopt new information technolo-
of information created outside the organisation is gies needed to be competitive.
quickly outpacing that of the corporate world. As
a result, executives must think more broadly about Top performing companies are defined as those rated
how to use external data to provide critical insight in the highest quartile for annual revenue, growth,
into operations, product development and cus- profitability and innovation as well as revenue growth
tomer strategies. Top performing companies report of more than five per cent in the past 12 months. PwC
investing more to manage their data than organisa- defines a company’s Digital IQ as a measure of how
tions whose performance does not stand out. Out well companies understand the value of technology
of all the companies surveyed, 55 per cent say they and weave it into the fabric of their organisation.
Source: Taylor, P. (2012) IT linked to financial performance, FT.com, 31 January.

Section 4.5). This framework consists of the six sequential stages of interrelated capabilities
or sub-processes introduced below (see Exhibit 4.4):
Exhibit 4.4 An extensive e-business capability model
High
Value Organisational learning
realised Value External learning
External collaboration evaluation to realise value
Low
High Internal operation Business

innovation
Comprehensive business
Systems acceptance management innovation
Value
and use
potential Systems embedded in
organisational process
Systems
development Systems available to
organisation use
Low
Technology Decision on resource allocation needed
adoption to implement systems
Opportunities IT solutions matching with business

identification opportunities
Time
External organisational learning
Internal organisational learning
Source: J.-n. Wu and L. Liu, ‘e-business capability research: a systematic literature review’, proceedings of the 3rd International Conference on
Information Management, Innovation Management and Industrial engineering, Ieee, 2010, p. 145.
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1 Opportunity identification capability, or the firm’s ability to identify business opportuni-

ties, after both internal and external analyses, and then provide efficient technology-
based solutions.
2 Technology adoption capability, defined as the firm’s ability to decide on properly allocat-
ing its e-business-related resources when facing certain business problems.
3 System development capability, or the ability to obtain suitable e-business systems resourc-
es that are necessary to implement the best technology solution.
4 System acceptance and use capability, or the firm’s ability to convince personnel and busi-
ness partners to routinely use the e-business system(s).
5 Business innovation capability, or the firm’s ability to introduce organisational changes,
innovate and transform its products’ portfolio, resources, partnerships, or the way
knowledge is managed.
6 Value evaluation capability, or the ability of the firm to assess how the e-business value’s
objectives are achieved. This capability and the resulting feedback enable organisational
learning and the further refinement of the generated e-business value.
4.2 Analysing the Internet-impacted value chain
The value chain framework helps to address the question of how value is created within
a company.6 It does so by disaggregating a company into strategically relevant and inter-
related activities. In essence, the internal value chain of a company revolves around value
creation, where value is created through individual activities of the value chain.
Ultimately, competitive advantage rests on activities that a firm can perform better
or more efficiently than its competitors. There is no general blueprint prescribing which
activities should be included in analysing a company’s value chain. However, the following
criteria should be used when including specific activities. An activity should:
● Display different economics. For instance, the development activity of a new software
program displays very large economies of scale since the software can be replicated at a
negligible cost.
● Provide high differentiation potential. These are activities that can greatly increase tangi-
ble and intangible consumer benefits, such as product and service quality, convenience
and reputation.
● Present sizeable costs. These are activities that add significantly to the overall cost struc-
ture of the firm. For instance, in the case study on Ducati, in the case studies section,
these might be activities related to product development and manufacturing.
On an aggregate level, a company’s value chain contains primary and support activities (see
Exhibit 4.5).
To get a better understanding of the ways in which the Internet can change the value
chain, we shall take a closer look at how Dell has transformed its value chain:
● Inbound logistics consist of receiving, storing and distributing incoming goods within the
company. On a more detailed level, this might include activities such as checking inven-
tory levels and order placement. Through close linkage with its suppliers, Dell has man-
aged radically to change its inbound logistics. For instance, when Dell sources monitors
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Exhibit 4.5 A company’s value chain consists of distinct value-adding activities
Firm infrastructure
Support Human resource management
activities Technology development
Procurement
Inbound Operations Outbound Marketing After-sales

Primary logistics logistics and sales services
activities
Source: adapted with the permission of the Free press, a division of simon & schuster adult publishing Group, from
Competitive Strategy: Techniques for Analysing Industries and Competitors by Michael e. porter.
Copyright © 1980, 1998 by the Free press. all rights reserved.
from Sony, the boxes are not shipped to a Dell plant from where they are distributed.
Instead, Dell has made arrangements with logistics companies, such as UPS, to pick up
the monitors as needed from the Sony manufacturing plant, match them with the corre-
sponding computers and then deliver them to customers. Doing so reduces the need for
warehousing capacity and inventory, and cuts out transportation steps.7
● Operations consist of those activities necessary for the making of a product or a service.
The Internet has, in many cases, drastically changed a company’s production activities.
By taking orders online, companies can significantly shrink the time between order
placement and production, enabling them to start production in ‘real time’. For instance,
through the close linkage between the ordering website and the production facilities,
Dell can build products that match orders, thus increasing turnover and reducing inven-
tory costs.8 For companies such as YouTube, whose value processes are more orientated
towards the social web’s model (see Chapter 11), it is the user who generates content and
therefore becomes a crucial part of the value chain.
● Outbound logistics consist of activities required for getting the product to the buyer,
which can be done either physically or electronically (for digital goods). For example,
the reduction of inbound logistics by leaving products with suppliers also reduces Dell’s
efforts and expenses for outbound logistics. Complementary components, such as PC
monitors, are shipped directly from the supplier to the final customer. Furthermore,
Apple’s iTunes, for instance, proved to be a profitable online distribution channel for
music and shows how legal music downloads can be implemented.
● Marketing and sales activities aim at enticing customers to buy a product and to provide
the means for doing so. This includes activities such as providing online catalogues and
running online marketing campaigns. For example, the Internet has enabled Tesco to
increase grocery sales significantly by adding the Tesco.com online channel. In addition,
through the launch of Tesco Direct, the company has added a wide range of non-food
items such as electronics and furniture to its offerings. While leveraging the online channel
for creating incremental sales, Tesco also relies on its store network to market the online
channel. For instance, paper catalogues containing all products that are available online
are made available at the cash registers in the Tesco physical stores, thereby promoting
online sales. Customers who have purchased products online can choose between having
the product delivered to their home or picking it up at the closest Tesco store.
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In other industries, physical sales channels have also turned out to be more valuable
than was initially anticipated at the beginning of the Internet boom years. Consider the
banking industry, where most industry experts assumed then that virtual banks with no
physical presence would be able to outperform their cost-intensive bricks-and-mortar
competitors on both the cost and the benefit dimensions. As it turned out, however, bank
customers actually valued the presence of bricks-and-mortar branches, to which they
could turn and where they could meet with an adviser in a face-to-face setting. The exam-
ple of Nordea bank in Scandinavia shows how success in the online world depended to a
large degree on integrating online activities with sales activities in the physical branches.
● Service activities deal with the after-sales phase, which includes the installation of a
product, supplying spare parts and exchanging faulty products. In the case of Tesco, it
is possible for customers to return faulty products that they purchased online to a store.
The importance of the different activities in the value chain varies from one industry to another.
For service firms, the operations, marketing and sales activities are crucial. A retailer of physical
goods, such as Amazon.com, places a major emphasis on inbound and outbound logistics as well
as marketing and sales. To create high levels of consumer benefit, Amazon.com offers sophisti-
cated sales and marketing tools, such as the personalised recommendation list, which is based
on a customer’s previous purchases. As part of sales, Amazon.com has patented the one-click
payment mechanism, which allows customers, after having gone through a one-time registra-
tion process, to make a purchase simply by clicking on an icon and without having to provide any
further information about themselves. Thus, the above-outlined value chain is not a blueprint
for analysing any individual business. Instead, it should be set up based on the individual context
of the firm and with the goal of providing a good understanding of how the business operates.
In addition to the primary activities that are related directly to the production and sales
process, the value chain also comprises the following support activities:
● Procurement deals with the primary inputs for different processes within the organisa-
tion. This includes the purchasing of, for example, machinery, PCs, servers and office
equipment. Procurement is often a crucial element of the overall cost structure of a
company. The IBX case study in the case studies section of this text deals specifically with
how procurement processes can be made more efficient through the use of electronic
platforms (see also Chapter 10 for a discussion of B2B e-marketplaces).
● Technology development includes specific research and development (R&D) for product
design. It also refers to development activities that optimise the functioning of other
activities of the firm. For instance, one of the core assets of Spreadshirt is its highly devel-
oped website that allows shop owners easily to create new online shops offering custom-
ised designs. Constantly updating and adapting this website to changing customer needs
requires a major investment in technology development.
● Human resource management consists of recruiting, managing, training and develop-
ing people. The Internet transformed this activity through online recruiting, web-based
training and intranet-based knowledge management. Human resources issues also
influence the choice of an Internet company’s geographical location because employees
represent the least mobile corporate asset. Amazon.com, for example, set up its head-
quarters in Seattle, USA, to be able to attract qualified IT specialists.
● Infrastructure refers to a firm’s physical premises, including offices, plants, warehouses
and distribution centres. In spite of being an online retailer, Amazon.com operates a
network of its own warehouses in its key markets to coordinate the logistics of delivery.
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Exhibit 4.6 The Internet impacts on all activities in the value chain
Firm Infrastructure
Web-based, distributed financial and ERP systems
On-line investor relations (e.g. information dissemination, broadcast conference calls)
Human resource management
Self-service personnel and benefits administration
Web-based training
Internet-based sharing and dissemination of company information
Technology development
Collaborative product design across locations and among multiple value-system participants
Knowledge directories accessible from all parts of the organisation
Real-time access by R&D to online sales and service information
Procurement
Internet-enabled demand planning
Other linkage of purchase, inventory, and forecasting systems with suppliers
Direct and indirect procurement via marketplaces, auctions and buyer–seller matching
Inbound logistics Operations Outbound logistics Marketing and sales After-sales service
Real-time integrated Integrated information Real-time transaction Online sales channels Online support of
scheduling, shipping, exchange, scheduling of orders including web sites and customer service
warehouse and decision making Automated marketplaces representatives
management, demand in in-house plants and customer-specific Real-time inside and Customer self-service
management & components suppliers agreements and outside access to via websites and
planning, and contract terms customer information, intelligent service
advance planning & product catalogues, request processing
Customer and channel
scheduling across the dynamic pricing,
access to product Real-time field service,
company and its inventory availability,
development and access to customer
suppliers online submission of
delivery status account review,
Dissemination quotes, and order entry work-order update, etc.
Collaborative
through out the integration with Online product
company of real-time customer forecasting configurators
inbound and in-progress systems Customer-tailored
inventory data
Integrated channel marketing via customer
management profiling
Web-distributed supply chain management
Source: Reprinted by permission of Harvard Business Review [exhibit Ro 103d]. From ‘strategy and the Internet’ by M. porter, March 2001.
Exhibit 4.6 shows examples of how the Internet influences the different activities of a value
chain.
In order for a firm to perform certain activities within the value chain, it needs to dispose
of certain resources (such as physical, financial and human resources), as well as technol-
ogy and know-how capabilities. However, the portfolio of these resources and capabilities
is not static. As a firm performs certain activities during an extended period of time, it also
builds up capabilities internally, as the different departments improve their processes and
create assets. In addition, it also builds up resources such as improved technology, superior
brand reputation or strong relationships with suppliers and buyers.9
4.3 Leveraging the virtual value chain
In the context of the value chain discussion, it is also of interest to introduce the concept of
the virtual value chain,10 which emphasises the importance of information in the value-cre-
ation process (see Exhibit 4.7). Key drivers behind this concept are advances in IT and the
evolution of CRM (customer relationship management) systems (see also Section 11.3.1),
which have increasingly provided firms with a vast amount of information.
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Exhibit 4.7 The virtual value chain illustrates how information captured in the physical value
chain can be used to develop new markets
Customer Purchasing Physical

Logistics Etc.
identification process value chain
Gather
Organise
Data
Data
Data
Data
Select
Synthesise
Distribute
Customer
Purchasing Logistics Virtual
identification Etc.
information information value chain
information
New customers
New
New products
markets
New services
Source: adapted from a. enders and t. Jelassi, ‘From e-banking to e-business at nordea (scandinavia) – the world’s biggest
clicks-and-mortar bank’, Management Information Systems Quarterly Executive, vol. 5, no. 1, 2006, pp. 31–44.
The concept of the virtual value chain suggests that information captured in the physi-
cal value chain for activities such as order processing and logistics should be used to offer
enhanced quality of customer service. Based on this concept of recycling information,
the virtual value chain illustrates new opportunities to create value by using information
captured in the physical value chain. In the past, a lot of information was captured only to
support the value-adding processes in the physical value chain, although this information
in itself presented potential value for customers.
Opening up new opportunities to make this information available to customers, thereby
increasing the value created, is the main goal of the virtual value chain. The latter comprises
the following steps: gathering and organising information, selecting and synthesising rel-
evant pieces of information that are of value for customers and finally choosing appropriate
formats for distributing the information.
The virtual value chain framework can be used to analyse several of the case studies in
this text. Tesco, for instance, has used information that it had access to or already owned
to create value for its customers. Through its Clubcard, Tesco collects detailed customer
information about purchasing patterns and preferred products in the bricks-and-mortar
environment. When a customer starts buying online, his/her online shopping list is instant-
ly populated with all the products that he/she has purchased during previous visits to the
physical store. By leveraging this information, Tesco makes it easier for customers who are
new to Internet-based shopping to find quickly the products that they are likely to purchase.
Nordea bank allowed its customers to access their pension statements electroni-
cally, which are maintained by a government agency. The bank also made its online
customer-authentication process available to other companies that need to use Nordea’s
e-identification and e-signature services.
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Amazon.com has also extensively used information captured throughout its physical value
chain to create value. Customers have the possibility of tracking past purchases online and
checking the status of delivery. The personalised book-recommendation list, where custom-
ers get recommendations based on what other people with a similar profile have bought, is
another example of how Amazon.com has tapped into the previously unused information
stored in its databases. Furthermore, including reviews from other customers and providing
Compatibility between the resource-based view

and the market-based view of strategy
since the beginning of the 1990s, porter’s approach to sources and skills. the resource-based view, on the
creating competitive advantage, which is also called the other hand, starts out with internal considerations of
market-based view, has been criticised primarily because resources and skills. However, any given core com-
of its seemingly one-sided market orientation. the focus petence needs to fulfil the requirements of creating
of the criticism is that porter’s approach might help to value and being unique and sustainable. this, in turn,
diagnose a specific competitive problem but it does not requires considerations that are external to the firm
provide any means to solve it. other factors that have an and that provide insights into consumer preferences
important impact on a firm’s competitive positioning, and the competitive landscape.
such as internal structure, processes, resources and
● Dichotomy between activities and competencies. the
capabilities, do not receive adequate attention. to
market-based view starts out with the definition of ac-
alleviate these shortcomings, a resource-based view was
tivities, such as operations or marketing and sales. Yet
developed, which focuses on the internal perspective of
to perform these activities in such a way that they cre-
a firm – namely its core competencies.
ate a competitive advantage, a firm ultimately needs
For a moment, let us venture out into the theory
to possess superior resources and skills because they
of strategic management and discuss the relationship
are the building blocks of superior activities. the re-
between the resource-based view and the market-based
source-based view, on the other hand, starts out with
view. While many authors assume that the approaches
the core competence as the main building blocks of a
are fundamentally different, there is a growing strand of
competitive advantage. However, competencies that
research that suggests that the two approaches are not
consist of resources and skills create value only as part
in competition with one another but rather complement
of activities. a strong brand, for instance, is not valu-
each other.11
able in and of itself. Instead, it creates value when a
although the resource-based view and the market-
firm is able to spend less money on marketing activi-
based view approach strategy formulation from two
ties while still achieving the same results in consumer
different angles, they share a common underlying
awareness as other firms that need to spend more
thinking. this reduces the gap between the market-
heavily because they do not possess the same brand
based view (which focuses on the external environment
reputation. thus, competencies ultimately also rely on
and is activity-focused and functionally orientated)
activities as sources of a competitive advantage.
and the resource-based view (which is internally
orientated and competence-focused and takes on a ● Dichotomy between functional and cross-functional
cross-functional perspective). Upon closer scrutiny, the perspective. through the analytical framework of the
perceived dichotomy between the two views no longer value chain, the market-based view starts out with
holds, as is shown below: functional divisions that perform discrete activities.
Yet, building on the divisional structure, it also includes
● Dichotomy between external and internal focus. on
a cross-functional perspective when it emphasises
the one hand, the market-based view emphasises
the requirement of fit between different activities that
the competitive landscape in terms of industry struc-
can be achieved via consistency, reinforcement and
ture (see section 3.2), which is external to the firm.
optimisation. the resource-based view, on the other
However, it also emphasises the creation of competi-
hand, begins with competencies that are generally
tive advantage through internally executed activities,
cross-functional processes. Yet processes, in the end,
and the ability to create value through activities is
also consist of individual activities, which are located
ultimately determined by the quality of internal re-
in functional units.
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sample pages of selected books creates value for customers while requiring only marginal
investment, since the required information-capturing systems are already in place.
4.4 Selecting activities for online interaction with customers – the

ICDT framework
As companies have developed their e-business activities, they have started to offer increasingly
elaborate e-business capabilities. The ICDT model describes the main features that a firm can
offer to its customers.12 Essentially, there are four options, which are depicted in Exhibit 4.8.
4.4.1 Information activities

Information activities include advertising and posting information on the company website.
This includes company, products and services-related information. When the commercial
use of the Internet became widespread in the mid-1990s, companies first designed their
web presence to provide customers with information about their products and services.
At that point, the Internet was not yet tightly integrated with other marketing channels or
enterprise resource planning (ERP) systems.
Since then, information provision has changed drastically. Today, many companies
closely link their Internet advertising with other channels. Furthermore, information pro-
vided over the Internet is no longer of a static nature. Instead, online catalogues are linked
closely to warehousing and production planning systems, enabling customers to find out
instantaneously when their order will be fulfilled and delivered.
The FT article ‘Advertisers rush to master fresh set of skills’ illustrates the importance in
today’s online world of information activities in the form of advertising.
Exhibit 4.8 The ICDT model describes the four main usage dimensions of the Internet in the
virtual market space
The market space
Virtual Virtual
information communication
space space
Traditional
marketplace
Virtual Virtual
distribution transaction
space space
Source: adapted from a. angehrn, ‘designing mature internet strategies: the ICdt model’, European Management Journal, 1997,
vol. 21, no. 1, pp. 38–47.
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Advertisers rush to master fresh set of skills

Only a few years ago, digital marketers might have Perhaps the largest shift in recent years has been
thought all was plain sailing. After a decade of the transition from the one-way, broadcast messag-
disruption wreaked by the emergence of the popu- ing of television, print and outdoor, to the two-way
lar web, companies and advertising agencies had conversation that social options now allow compa-
finally understood the intricacies of placing online nies to have with their consumers. “It requires a
display and search ads. shift in your perception,” says Maryam Banikarim,
chief marketing officer of Gannett, the media com-
Yet in the past few years, a new generation of
pany. “People find it hard to realise marketing is a
technologies has come along to disrupt once again
two-way conversation rather than a one-way push-
the way advertisers operate. Led by Facebook and
ing out.”
Twitter, and joined by behemoths such as Google
and a bevy of start-ups, these Silicon Valley misfits Yet quantifying the effectiveness, and return
have muscled into the ad business and upended tra- on investment, of digital and social campaigns,
ditional assumptions about how companies should remains a challenge. Rather than tracking click-
allocate marketing budgets. through and conversion rates as with search and
In addition to search and display advertising, big display advertising, marketers are trying to count
companies must now factor in social media, video followers, measure sentiment and analyse purchase
advertising, mobile marketing and daily deals. intent. “A lot of people are just measuring their fans
“We’ve gone from display and search to this much and followers,” says Ms Lewnes. “But what’s impor-
longer list,” says Nick Law, chief creative officer in tant are the insights you can glean from the data;
North America for R/GA, the digital agency. “These understanding if someone is happy or unhappy
things are connected, and you can’t do one without with something.”
the other.” Social signals obtained from Twitter and Facebook
The promise of these platforms is tremendous. The can also give companies real-time insight. When
new world of digital and social media marketing can MTV saw there was a spike in online conversa-
give companies increased access to their customers, tions around the news that Beyoncé was pregnant,
fresh insights into their preferences, a broader crea- it added more pictures and stories about the story
tive palette to work with, and additional data and to its website. Yet many markers remain dis-
metrics to study. satisfied with the state of online measurement.
Keith Weed, chief marketing officer of Unilever,
Yet there are unsolved questions over how best the consumer products group that is the second-
to organise and execute digital and social cam- largest advertiser in the world, says: “Digital is
paigns. No single formula has emerged, leaving in theory more measurable than anything else, in
most companies and ad agencies in a state of theory and in practice, but it’s not broad enough
constant experimentation. There is also lingering yet. What we’ll see is a significant maturation of
confusion over how best to measure the effective- ROI in digital.”
ness of a campaign, and a company’s return on
investment. More insights and creative opportunities mean
more work for marketing teams, and can mean
Ann Lewnes, chief marketing officer of Adobe, the increased costs for marketers. In-house and at
software company, says she pushed the company agencies, marketers are scrambling to acquire
into digital and social marketing early on. “We new skills, and add staff to monitor the exponen-
saw the insights we could glean from customers, tial growth of online dialogue about companies.
the iterations we could do on a campaign,” she “You have to throw bodies at that,” says Ms
says. “We saw the ability to really, really measure Lewnes. “There are people who have to monitor
results.” Adobe now spends 74 per cent of its more it all day.”
than $100m marketing budget on digital. Even for
a digital-first company such as Adobe, each cam- Myriad options are also forcing companies and
paign is a fresh start of sorts. Ms Lewnes says 20 per agencies to change the way they work. “Twenty
cent of her budget is going towards experimental years ago there were templates,” says Mr Law
campaigns, and that each product launch requires at R/GA. “Now we don’t have a typical client
a different mix of paid, earned and owned media. engagement. Because media are so flexible, we
➨
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can get very specific.” One brand may need a different media,” says Mr Weed. “If you fragment
robust Facebook page, while another may call the message you’re making it less cohesive and
for a strategy of engaging with consumers on joined up.”
message boards, blogs and elsewhere on the web.
Technologies are changing fast, and few market-
Such approaches are forcing departments within
ers would claim to know what new social platform
organisations to collaborate in new ways. “It’s
might demand their attention a year from now.
brought the marketing teams much closer togeth-
Pinterest, the online pinboard and sharing site, is
er,” says Ms Lewnes. “They all used to be in their
the latest to draw a legion of users – and the interest
silos. PR was off operating by itself, advertising
of marketers – without having proved its business
was operating by itself. Now they’re working
model or staying power.
together.” At its best, this can result in truly inte-
grated marketing campaigns, with a unified mes- How this shift in the marketing world plays out will
sage being pushed out across television, print, help determine the winners and losers in the years
radio, and the web. “Things really are getting to come. At stake are the valuations of companies
joined up,” says Mr Weed. “The same creative is such as Facebook, which earned $3.7bn last year,
going to flow across multiple screens.” Growing mostly from advertising, and is preparing to go
access to the web in emerging markets is also public at a value of up to $100bn.
allowing for truly global campaigns. “A few years Yet some basic trends are emerging, with mobile
ago I would be engaging much more of a national access to the web leading the pack. “If the first
base on campaigns,” says Mr Weed. “But Google 1bn users connected to the internet through
and Facebook are truly global media companies PCs, the next 1bn will be through mobile,” says
in a way the world has never seen.” Mr Weed, who recently visited a family in the
The amount of money being committed to dig- slums of Mumbai who nonetheless had two
ital marketing varies widely, with more developed mobile phones. Unilever was the first and larg-
countries seeing a higher digital spend. Unilever, est customer for Apple’s mobile iAd marketing
for example, spends about 35 per cent of its US platform, and has renewed its contract for a
budget on digital, compared with 25 per cent in second year. “I want to get to the future first,”
Europe, and just 4 per cent in India. Yet emerging Mr Weed says. “I don’t want to be following my
markets could rapidly catch up, as they adopt dig- competitors.”
ital media. “In emerging markets they’re going to If marketers continue to flock to new digital and
go through these cycles much more quickly than social options, Facebook and its social media
us,” says Mr Law. peers may prove their worth. Yet if a proliferation
And digital advertising is still a small portion of of online options fragments advertisers’ spend,
global advertising, accounting for 16 per cent of or if the promise of social media goes unfulfilled,
total spend in 2011, according to ZenithOptimedia. this moment could one day be seen as another
That figure is growing fast, but television is set to bubble. Regardless of that, it seems certain that
remain the biggest advertising platform, account- new technologies are destined to change the way
ing for 40 per cent of total spend through at consumers interact with brands. Just as the web
least 2013. reshaped the advertising world a decade ago, the
new world of digital and social media market-
Managing the growing array of digital and social
ing is forcing companies and ad agencies to re-
initiatives has forced companies to revise their
evaluate where, how and when they engage with
relationships with ad agencies, as well. Unilever
potential customers. “Ultimately, this concept
reduced its register of more than 400 digital agen-
of digital will disappear,” says Mr Weed. “My
cies to fewer than 100, with just 12 lead glo-
20-year-old son laughs at me when I talk about
bal agencies, including Razorfish, AKQA and R/
online and offline.”
GA. “We’re already fragmenting our spend across
Source: Gelles, D. (2012) Advertisers rush to master fresh set of skills, FT.com, 7 March.
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4.4.2 Communication activities

Communication activities include two-way communication between a company and its
online visitors and customers. This can take place via Internet applications such as email
and real-time chat. In order to make communication more personal, the online fashion
retailer Landsend.com has included a Lands’ End live help icon on its website. By clicking
on it, customers can request to be called by a Lands’ End employee or to enter an online
chat to ask questions and obtain specific product information. Similarly, the online service
e-Diets.com provides the possibility to interact in real time with nutrition experts to analyse
personal eating habits and make appropriate recommendations. (See the Blog Box ‘ Moving
back to personalised interaction – e-Diets.com’ .
In addition to facilitating communication between businesses and their customers, the
Internet also facilitates communication between customers who are members of a virtual
online community. For some firms, such as eBay and Xing, the communication that takes
place among members of their online communities is much more important than the com-
munication between the company and its customers.
BLOG BOX
eDiets.com
eDiets.com, Inc., a brand of As Seen On TV, Inc., is an online who’s who of the hottest
celebrity “slimmers” and world-renowned weight loss experts. eDiets offers a variety of
digital diet plans, and nutritional products and supplements to help members take off the
pounds, improve their health, and get in shape.
eDiets is uniquely positioned in the diet category, offering an all-inclusive approach
to dieting and lifestyle maintenance. eDiets provides weight loss management tools,
access to healthy meal plans and recipes, and an online product shop to help users keep
with their weight loss or weight management goals. eDiets’ members also benefit from
the company’s tabloid approach to dieting, receiving celebrity and expert advice in addi-
tion to the support of an online social community. The platform is compiled, designed
and written to be as entertainingly informative as it is accessible.
For the past 15 years, eDiets has been committed to helping people reach their weight
loss goals and transform their lives. Its network of weight loss experts, skilled nutrition-
ists, and celebrity “slimmers” provide members with the guidance needed to obtain and
maintain a healthy lifestyle.
When a member subscribes to an eDiets Healthy Weight Plan, he or she generates a
personalized profile. Nutrition Insights™ technology analyzes a database of food items and
recipes to create a customized meal plan for each user. Meal plans are determined based
on three dietary guidelines – clinical, goal and preference. Clinical guidelines are sourced
directly from major health organizations or institutes for specific health conditions or consid-
erations. Goals include losing weight or eating sustainably. Preferences include gluten-free,
vegan, etc.
For more information, please visit http://www.eDiets.com or follow eDiets online at
Facebook.com/eDiets, @eDiets on Twitter and Pinterest.com/eDiets.
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4.4.3 Transaction activities

Transaction activities include the acceptance over the Internet of online orders (i.e. com-
mercial transactions) and electronic payments (i.e. financial transactions). At the outset
of the commercial usage of the Internet, there were two main drawbacks associated with
online transactions.
First, most Internet users, who were afraid of fraud, considered making e-payments as
too dangerous, which held back the evolution of e-commerce. However, as payment mecha-
nisms mature and trusted e-payment companies evolve – consider, for instance, the case of
Nordea – online transaction activities are becoming more and more commonplace.
Second, since payments were limited to credit or debit card transactions, the offering of
low-priced products or services (such as newspaper articles) was not economically feasible,
since transaction costs would have been prohibitively high. The development of online pay-
ment systems, such as m-PESA (featured in the case studies section of this text), addresses
this shortcoming.
4.4.4 Distribution activities

Distribution activities include the online delivery of digital goods, such as software, music,
videos, films and e-books, by letting customers download the purchased product(s). The
main bottleneck that has restricted online distribution so far is the limited bandwidth of
online connections. However, as broadband access has become more commonplace, even
in households, online distribution is expected to be used increasingly with products and
services, especially with those that can be digitised.
First, the online distribution of music, games or even movies will become the norm over
time, eventually replacing physical distribution through CDs and DVDs. Online shops such
as iTunes have already provided a first glimpse of this revolution in distribution. Second,
service providers from different realms, such as consulting and education, will use the
Internet increasingly to deliver lectures, presentations and services to their customers and
students.
4.5 Moving beyond the value chain to value networks13
e-Business ventures do not operate in isolation from other companies. Instead, their
value chains are frequently closely intertwined with the value chains of suppliers and
with external partners that provide other support services. The group of partners that a
company works with to deliver a product or a service to its customers is called a ‘value
network’.
Through the increased usage of IT-based communication, value networks have gained
importance as companies have outsourced numerous non-core activities to outside part-
ners (see below the FT article; ‘Outsourcing supply chain operations’). As a consequence,
the importance of managing external value networks has increased as well. In the context
of e-business ventures, this raises especially the question of which activities should be
maintained in-house, off-shored to different geographic locations or completely out-
sourced to external providers. (See Chapter 9 for a discussion of this deconstruction of the
value chain.)
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Outsourcing supply chain operations

Nokia Siemens Networks is in a fierce battle with repetitive tasks in order execution were defined
established competitors in the global telecommu- to be centralised, standardised and outsourced.
nications equipment business such as Ericsson,
Q. Why did you choose Capgemini?
Alcatel-Lucent and Samsung, and fast growing
Chinese vendors including Huawei. We applied three decision dimensions for choos-
ing the right partner:
At the same time, the globalisation of the supply
chain has added another level of complexity to a First, their ability to deliver significant and
key driver of growth and profitability in the telecom quick cost savings; second, business transfor-
equipment industry. To address this and other chal- mation, change management and IT capabili-
lenges, NSN announced a long-term outsourcing ties, and finally the job perspective for our
deal with Capgemini, the French-based consulting former employees (400 NSN employees joined
and IT services firm, in September. Capgemini under the terms of the agreement.)
In all three dimensions Capgemini convinced us
Hubert Giraud, head of Capgemini’s business proc-
and is performing according to our expectations
ess outsourcing unit, believes that as clients face an
increasingly global business environment, growing Q. What has your experience to date been?
supply chain costs, and a larger ecosystem of part- The first months after such a big change are
ners and customers, “a streamlined and sustainable always challenging. The focus was on stabilising
supply chain will be key to growth.” the business and keeping the business perform-
Under the terms of the contract Capgemini is pro- ance up. So far this has been managed very well
viding order management services to NSN includ- despite many unforeseen surprises in the daily
ing preparation for delivery, customer order man- business. The joint team of NSN and Capgemini
agement, distribution and customer invoicing worked very successfully together. In parallel
using its BPOpen technology suite and Rightshore we have progressed well in preparing the process
network to harmonise and standardise processes transformation which will kick off in the next
across NSN’s global operations. The contract does weeks with the first pilot being deployed.
not cover NSN’s customer facing activities, which Q. Do you anticipate expanding your agreement
have remained with Nokia Siemens Networks. with Capgemini?
I asked Johannes Giloth, global head of supply chain For the moment the focus is on delivering what
at Nokia Siemens Network, about the decision to we have promised in 2011.
outsource. Here is an edited version of his comments.
Q. Have there been any negative outcomes?
Q. Why did NSN decide to outsource elements of
Not more than expected. Changing the entire
your supply chain operations to Capgemini?
order management setup of a globally distrib-
We wanted to focus on core competencies in the uted company is by definition creating some
supply chain, address efficiency and cost saving friction and mistakes can happen, however the
potential and most importantly kick off a proc- team flexibly addressed the issues.
ess transformation covering the entire supply
Q. What advice would you give other companies
chain (not only the outsourced part.)
considering outsourcing?
Q. How did you decide what to outsource and what
Think about the right reasons for outsourcing,
to keep internally?
get top level management support, take time
We undertook a thorough analysis on customer to define the solution and the selection process,
impact: All customer interfacing project man- and manage the deal with a dedicated team after
agement related tasks remain internal, while signing.
Source: Taylor, P. (2011) Outsourcing supply chain operations, FT.com, 15 June.

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Exhibit 4.9 The value network includes numerous partners with differing functions
Strategic core value chain partners

Inbound Admin., e.g.
Manufacturing
logistics travel
Upstream Downstream
value chain partners Value chain integrators value chain partners
Suppliers Fulfilment
Core value chain
activities
Buy-side Sell-side
intermediaries intermediaries
Value chain integrators
Human Admin., e.g.

Finance
resources travel
Non-strategic service partners
Source: adapted from d. Chaffey, E-Business and E-Commerce Management, Ft/prentice Hall, 2011, p. 330.
Exhibit 4.9 shows the main partners in a value network14:

● Upstream value chain partners include direct suppliers and business-to-business exchanges.
● Downstream value chain partners include wholesalers, distributors, retailers and custom-
ers. For instance, Tesco Direct cooperates with logistics services companies to deliver to
customers’ households the products that are ordered through the Tesco Direct catalogue
and website.
● Strategic core value chain partners are those partners that fulfil core value chain activities.
Before Tesco started Tesco Direct, it cooperated with the mail order company Grattan,
which administered all back-end processes ranging from product selection to delivery. As
it became obvious that online selling of non-food products would be a substantial market
opportunity, Tesco decided to build up in-house the capabilities that were previously pro-
vided by Grattan. However, later on the company has increasingly outsourced the delivery
to logistics operators. For instance, Tesco has recently made a partnership with TNT Post
to manage a wide range of its activities, such as customer communications, the Tesco Club
Card and Tesco Bank.
● Non-strategic service partners fulfil functions such as finance, accounting or travel.
● Value chain integrators such as strategic outsourcing partners, application service provid-
ers (ASPs) and system integrators provide the electronic infrastructure for a company.
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Although there are certain similarities between a company’s value chain and the value net-
work in so far as both are involved in providing a product or a service to the end customer,
value networks and value chains differ in some key dimensions. Most importantly, the
value network is characterised by its dynamic nature. Typically, it is much easier to intro-
duce or remove partners from a value network than it is to add or, more importantly,
remove functions and employees from a more permanent value chain. Linking external
service providers with the internal value chain has become easier through advanced elec-
tronic communication, as is illustrated through the case of IBX (described later in the text)
that functions as a value chain integrator. Likewise, depending on the closeness of the
interaction, different types of technologies will be used. In the case of strategically relevant
and frequently recurring interactions, it might be sensible to install proprietary electronic
connections that interlink closely with the systems of each partner. In other cases, email
correspondence might suffice.
Here, a company’s external e-business capabilities – i.e. those abilities that are
necessary to successfully create e-business value in value networks – are as important
as internal activities, so they should not be overlooked. In section 4.1.2, we intro-
duced an e-business capability model that emphasises the importance of managing
e-business-related resources and processes with both an inside and outside focus. In the
sequel, we provide a summary of what can be called a value network, or collaborative
core capabilities in e-business:
● Developing partnerships, or the ability to establish and maintain productive relationships
with business partners and customers. Some of the benefits and implications of this
capability are facilitating a company’s communication with its partners and customers,
enhancing the understanding of the industry and the target market(s) and supporting
and improving customer relationships through involvement and cooperation.
● Governing the value network, or the firm’s ability through e-business technologies to
design and coordinate a value network of complementary resources and partnerships.
● Enabling open innovation – companies often have limitations to internally develop all the
e-business innovations they need and may resort to using external innovations to support
their e-business processes (see also Section 9.1.2).
● Improving co-production and value co-creation, involving partners and customers in the
value creation process has been a common practice since the 1980s. However, recently,
value co-creation started playing a central role in what is being referred to as ‘ Service-
dominant logic ’.15 The co-creation approach takes an even more important dimension in
the prevailing social web context (see also Chapter 11). Hence, this capability is related
to the firm’s ability to enhance, through e-business technologies, the participation of its
value network’s partners and customers in the value creation process.
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Summary
● First, this chapter defined the concept of a competence as a combination of different

resources and skills. It outlined the attributes that a competence must fulfil in order to
qualify as a core competence; these are: being valuable, unique, hard to imitate and valuable
across different products or markets. It also highlighted the core competence concept in an
e-business context.
● second, the chapter discussed the value chain that disaggregates the firm into strategically
relevant activities. It recognised two types of activities within a firm: primary activities (which
include inbound logistics, operations, outbound logistics, marketing and sales and after-
sales service) and support activities (which include firm infrastructure, human resources,
technology development and procurement). It then discussed the impact of the Internet on
the value chain.
● third, the chapter introduced the concept of the virtual value chain, which suggests that
information captured in the physical value chain (e.g. for activities such as order processing
or logistics) should be used as a new source of value creation to enhance the quality of
customer service. It also provided a critical perspective of the resource-based view versus
the market-based view of strategy formulation.
● Fourth, the chapter presented the ICdt (Information, Communication, distribution and
transaction) framework and illustrated its four spaces through some specific examples.
● Finally, the chapter described how a company can move beyond managing an internal value
chain to operating along an It-enabled value network. It also listed the different types of
external partners that are typically members of such a value network, and introduced the key
e-business capabilities that a firm should develop to successfully manage its value network.
REVIEW QUESTIONS
1 What is a competence and what criteria does it need to fulfil in order to qualify as a core
competence? What makes a competence distinctive for e-business?
2 What are the primary and secondary activities of the value chain? How does the Internet impact
on these activities?
3 through what measures can a firm improve the fit between activities in the value chain? explain
how the Internet can influence these measures.
4 define the concept of the virtual value chain. How does it relate to the traditional value chain
concept?
5 describe the ICdt framework and outline how a company can use it for selecting e-business
activities.
6 What is a value network and who are its main partners? What specific issues does a company face
when it moves beyond a value chain to become part of a value network?
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1 discuss whether competence-based thinking is more suitable for e-business strategy formulation
than the activity-based approach outlined in the value chain concept.
2 analyse the value chain of an e-commerce venture that you are familiar with. explain how the
Internet has impacted on the primary and support activities of its value chain.
3 think critically of possible applications of the virtual value chain concept within specific industries
and business sectors. are there some specific business sectors where this concept fits better than
in other sectors?
4 Illustrate the ICdt framework through the example of an Internet venture that you are familiar with.
5 Critically assess the ICdt framework and pinpoint its shortcomings.
6 Based on the specific context of the e-commerce venture that you considered in question 2
above, how could this company move beyond managing an internal value chain to operating
along a value network? How could it implement the value net concept and what benefits can it
expect to gain from it?
D. Besanko, D. Dranove, M. Shanley and S. Schaefer provide a detailed discussion

of value creation and value capturing in Economics of Strategy, John Wiley, 2003,
pp. 358–402.
M. Porter’s book, Competitive Advantage, Free Press, 1998, is a seminal work on value creation
and the value chain. M. Porter expands on his thinking about competitive advantage in ‘What
is strategy?’, Harvard Business Review, 1996, November–December, pp. 70–3.
R. Amit and C. Zott specifically discuss this chapter’s topic in ‘Value creation in e-business’,
Strategic Management Journal, 2001, vol. 22, no. 6, pp. 493–520.
An up-to-date discussion on collaborative value creation within the e-business framework can
be found in: M.L. Nelson, M.J. Shaw and T.J. Strader, Special Issue on ‘Collaborative value
creation in e-business management’, Information Systems and e-Business Management, 2012,
vol. 10, no. 1.
Within the field of strategic management, there is a broad literature on the resource-based
view. While there was already previous research on the resource-based view of the firm,
most notably in 1984 with the article by B. Wernerfelt, ‘A resource-based view of the firm’,
Strategic Management Journal, 1984, vol. 5, no. 2, pp. 171–80, this approach became
popular in the mainstream management literature through the work of C.K. Prahalad
and G. Hamel, ‘The core competence of the corporation’, Harvard Business Review, 1990,
May–June, pp. 79–91, and G. Stalk, P. Evans and L. Shulman, ‘Competing on capabili-
ties’, Harvard Business Review, 1992, March–April, pp. 57–69. M. Peteraf provides a more
recent academic perspective on the resource-based view in ‘The cornerstones of competi-
tive advantage: a resource-based view’, Strategic Management Journal, 1993, vol. 14, no.
3, pp. 179–91.
In the article ‘Towards a dynamic theory of strategy’, Strategic Management Journal, 1995,
vol. 12, no. 8, pp. 102–105, M. Porter attempts to reconcile the market-based and the
resource-based views of strategy.
J. Rayport and J. Sviokla present the concept of the virtual value chain in ‘Exploiting the virtual
value chain’, Harvard Business Review, 1995, November–December, pp. 75–85.
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F. Wiengarten, P. Humphreys and B. Fynes’ article ‘Creating business value through

e-business in the supply chain’ offers a timely and detailed theoretical discussion on
the use of e-business applications to create value within organisations and their sup-
ply chains, in F.J. Martínez-López (ed.), Handbook of Strategic e-Business Management,
Springer, 2014.
www.ctvr.ie is the website of the Centre for Telecommunications Value Chain Research and
provides publications on related topics.
www.ecommercetimes.com provides a sound archive of e-business-related articles and
publications.
www.valuecreationblog.net is a blog focused on the value creation of companies. Here, numer-
ous posts can be found, some of them covering aspects of the value creation in the e-business
framework.
1 For the concept of strategic fit, see also N. Venkatraman and J. Camillus, ‘Exploring the concept of fit in
strategic management, Academy of Management Review, 1984, vol. 9, pp. 513–25.
2 See G. Hamel and C.K. Prahalad, ‘Strategy as Stretch and Leverage’, Harvard Business Review, 1993,
vol. 71, no. 2, pp. 75–84.
3 R. Amit and C. Zott (2001) ‘Value creation in e-business’, Strategic Management Journal, vol. 22, no. 6,
pp. 493–520.
4 See also, Section 5.3.2, for examples of companies that base their business models on one or several of
these dimensions.
5 See J.-N. Wu and L. Liu, ‘E-business capability research: A systematic literature review’, Proceedings
of the International Conference on Information Management, Innovation Management and Industrial
Engineering, IEEE, 2010, pp. 142–7.
6 For an extensive discussion of the value chain concept, see M. Porter, Competitive Advantage, Free Press,
1998, pp. 33–61. A detailed discussion of the impact of IT on the value can be found in M. Porter and V.
Millar, ‘How information gives you competitive advantage’, Harvard Business Review, 1985, July–August,
pp. 149–60.
7 Michael Dell describes the PC manufacturer’s approach to supply-chain management in an interview
with J. Magretta, ‘The power of virtual integration: an interview with Dell Computer’s Michael Dell’,
Harvard Business Review, 1998, March–April, pp. 72–84.
8 R. Waters, ‘Dell aims to stretch its way of business’, Financial Times, 13 November 2003, p. 8.
9 M. Porter, ‘Towards a dynamic theory of strategy’, Strategic Management Journal, 1991, vol. 12,
pp. 102–5.
10 J. Rayport and J. Sviokla developed this concept in ‘Exploiting the virtual value chain’, Harvard Business
Review, 1995, November–December, pp. 75–85.
11 For this discussion, see also M. Porter, ‘Towards a dynamic theory of strategy’, Strategic Management
Journal, 1991, vol. 12, no. 8, pp. 102–5.
12 The ICDT model is described in A. Angehrn, ‘Designing mature internet strategies: the ICDT model’,
European Management Journal, 1997, vol. 21, no. 1, pp. 38–47.
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13 Part of the contents of this section is based on: D. Chaffey, E-business and E-commerce Management,
FT/Prentice Hall, 2011, pp. 329–31.
14 M. Deise, C. Nowikow, P. King and A. Wright, Executive’s Guide to E-business. From Tactics to Strategy,
John Wiley, and D. Chaffey, E-business and E-commerce Management, FT/Prentice Hall, 2011, p. 330.
15 The ‘Service-dominant logic’ was originally proposed by S.L. Vargo and R.F. Lusch. Detailed information
about it is available at www.sdlogic.net/
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Chapter 5
Strategy options in e-business

markets
Chapter at a glance
5.1 Understanding the fundamentals of competitive advantage in e-business 105
5.2 Examining the landscape of strategy options for e-business 107
5.2.1 Cost leadership strategies 108
5.2.2 differentiation strategies 111
5.2.3 outpacing strategies (and the risk of getting ‘stuck in the middle’) 113
5.3 Developing strategy alternatives 115
5.3.1 the strategic gameboard framework 115
5.3.2 e-Business models: a brief overview 117
5.4 Creating a fit between the chosen strategy and the value chain 120
5.4.1 Consistency between activities 120
5.4.2 Reinforcement of activities 123
5.4.3 optimisation of efforts 123

2 Nordea differentiation strategy
15 Spreadshirt outpacing strategy
1 Tesco Fit between strategy and value chain
22 Tunisiana strategic business investments
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Chapter 5 Strategy options in e-business markets
Learning outcomes
● Understand the fundamentals of competitive advantage in e-business.
● explain the generic approaches to strategy formulation.
● appreciate the meaning of an ‘outpacing’ strategy.
● assess the risk for companies of being ‘stuck in the middle’.
● Formulate strategy alternatives and define business models suited for e-business.
● Understand the levers that improve the fit between the chosen strategy and the
value chain activities.
Introduction
When formulating a business strategy, managers typically choose between two basic options:
cost leadership or differentiation. they aim at outperforming competitors, either by having
lower costs or by offering a superior product or service. a third possibility is to opt for an
outpacing strategy through which they aim at achieving, at the same time, cost leadership and
differentiation – however, by doing so they run the risk of getting ‘stuck in the middle’. this
chapter discusses the above strategy options, presents their advantages and drawbacks and
illustrates them through some e-business examples.
5.1 Understanding the fundamentals of competitive advantage

in e-business
The analyses of external opportunities and threats and internal strengths and weaknesses
are important steps in the strategy formulation process. Yet ultimately they provide only
the basis for deciding how a company is to compete in the marketplace. The decision about
competitive positioning is at the heart of strategy development, which is the focus of this
chapter.
Since the concept of competitive advantage is not trivial, it is useful to look at the require-
ments that need to be fulfilled in order to gain this type of advantage vis-à-vis rival firms.
The strategic triangle, shown in Exhibit 5.1, addresses the main drivers of competitive
advantage. In essence, a company needs to take into account customer needs, competitors’
offerings and its own offering. The goal of this framework is to address the following four
questions regarding the underlying drivers of competitive advantage:
1 Is the price/benefit ratio (also called value for money) that we offer better than the price/
benefit ratio of our best competitor? Having only a low price is usually not enough to
entice a customer to purchase a product (or a service). In addition, the product needs to
fulfil minimum customer requirements to be considered attractive. Similarly, a product
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Exhibit 5.1 The strategic triangle addresses the main drivers of competitive advantage
2
Customer
1 Price/ Price/
benefit benefit
4
Company Competitors
3
Cost Cost
with a superior performance still needs to be priced within the range of the customer’s
ability to pay.
2 Is the value that we offer to our customers perceivable and important to them? Customers
need to be able to recognise the value of the product that is offered to them and they also
need to consider it to be important and worth paying for.
3 Are our costs for making the product (or service) lower than the costs that we incur? Even
though this requirement should be quite obvious, especially during the Internet heyday,
until 2000 there were numerous business models that had such a high cost structure that
it would have been difficult to offset these costs through revenues. For instance, at that
time an online pet food retailer was offering free shipping, which turned out to be an
unprofitable business proposition since the shipping costs (think about a 20lb bag of dog
food) destroyed any margins that might have existed in that business.
4 Is this advantageous position sustainable into the future? Once actual and would-be com-
petitors find out that a specific way of running a business proves successful, they will
typically attempt to imitate this source of competitive advantage. (The process of imita-
tion is discussed in Section 6.1.) Although e-business ventures rarely succeed in building
a competitive advantage that is sustainable for an extended period of time, companies
such as eBay and Xing managed to create a sustainable advantage through strong net-
work effects.
The framework depicted above highlights the fact that the creation of benefits, as per-
ceived by customers, presents one core element of strategic decision making. In this
context, it is useful to differentiate between two kinds of benefits: (1) those that custom-
ers consider to be threshold features and (2) those that they consider to be critical success
factors.1
● Threshold features are the minimum requirements that a firm must fulfil in any prod-
uct or service. If a firm cannot meet these minimum requirements, then it will get
excluded from the market because customers will not even consider that firm’s offer-
ing. A threshold feature might be, for example, a website with functioning links or a
secure payment mechanism for online transactions. As shown in Exhibit 5.2, improv-
ing threshold features beyond a certain point has only a marginal impact on customer
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Exhibit 5.2 Impact of threshold features and critical success factors on consumer benefit
Consumer benefit
Critical success factors
Threshold features
Performance
satisfaction, which implies that these types of features are not suitable for differentiat-
ing a product.
● Critical success factors, on the other hand, are those benefits that are crucial for a cus-
tomer’s decision to purchase a given product. At Amazon.com, these features include
the large selection of books, their reviews, as well as the convenient and fast shopping
experience that is made possible through the company’s one-click ordering application.
At Nordea Bank, critical success factors include the ease of use of the online banking site
and the variety of e-business services that are offered through it.
To summarise, both threshold features and critical success factors create consumer benefit,
but only the latter help a firm to differentiate itself from its competitors by creating superior
consumer benefit.
5.2 Examining the landscape of strategy options for e-business
There are different strategy options that companies can pursue in order to achieve a favour-
able position in their respective e-business markets. To gain a better understanding of such
strategy options, Michael Porter proposed two generic strategies that build on two distinct
types of advantage: (1) a price advantage and (2) a performance advantage.
If a firm wants to be able to compete on low prices, it will adjust its cost structure and
aim for a cost leadership strategy in its industry. If, on the other hand, it can offer compara-
tively higher performance than competitors, then it will aim for a differentiated strategy (see
Exhibit 5.3).
In addition, there is a third strategy option called outpacing strategy, which aims at com-
bining the advantages of a cost leadership and of a differentiation strategy. These different
strategy options are discussed in more detail in the sections on the next pages.
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Exhibit 5.3 There are two generic approaches to achieve a competitive advantage
Generic types of competitive advantage
Unique product
with price
premium
Goal of the company Business strategy
Performance Provide something unique ‘Differentiation’

advantage that is valuable to buyers
Competitive
advantage
Provide a product with ‘Cost leadership’
Price lowest price
advantage Become the cost leader (Cost/price leadership)
in the industry
Similar product
with lower
price
5.2.1 Cost leadership strategies

Consider easyJet, the UK-based low-cost airline. The company’s ability to compete on low
airfares is primarily determined by keeping costs down throughout its value chain while not
compromising its threshold requirements such as the security or punctuality of its flights.
This example illustrates that a firm that wants to attain a cost leadership position in its
industry needs to strive to fulfil the following two requirements:
● Lowest cost position. A firm that aims for a cost leadership position has to be able to pro-
duce its product or service at substantially lower costs than its competitors. Lower costs
enable the firm to earn profits even in an intensely competitive environment.
● Benefit proximity. Having the lowest costs, however, is not sufficient. In addition, a firm
also needs to achieve benefit proximity relative to its competitors, which means that it
needs to fulfil at least all threshold criteria. If it is unable to do so, then it will eventually
have to offer even lower prices, an action that reduces or eliminates the benefits gained
through the low-cost position. For instance, through its unique direct sales model, Dell,
until recently, was able to position itself as a cost leader in the PC industry while, at the
same time, achieving high levels of consumer benefit.
Several levers (including economies of scale and scope, factor costs and learning effects) help
a firm to achieve a cost leadership position.
Economies of scale
The basic concept of economies of scale is that as a firm increases its product output, it
decreases its unit production cost. Why is that so? In general, any production process
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Exhibit 5.4 Economies of scale lead to a decrease in per-unit costs as output increases, whereas
dis-economies of scale lead to an increase in per-unit costs
Eventually, costs go up
As the cumulated production again when production
quantity increases, costs capacities reach their
per unit decrease constraints
Average costs
Price per unit
Economies Dis-economies
of scale of scale
Quantity
consists of fixed costs, which do not change as output increases, and variable costs, which
go up with an increase in output. Examples of fixed costs are software development, ware-
houses and machinery, while examples of variable costs are raw materials and package
delivery.
High economies of scale usually exist in production processes that have high fixed costs
and low variable costs. As the cumulative production quantity increases, fixed costs are
spread out over a larger number of products, thereby reducing the unit production costs
(see Exhibit 5.4). Once existing production costs reach their constraints, fixed costs increase
again as new facilities are required. Variable costs, on the other hand, increase proportion-
ally with output. For instance, as a mail order company handles more packages, postage
costs increase proportionally.
Due to extensive scale effects and efficient IT processes, Wal-Mart in the USA can sell its
products at massive discounts in comparison with competitors such as Ahold, Safeway and
Kroger. For example, it sells Colgate toothpaste at 63% of rivals’ prices, Tropicana orange
juice at 58% and Kellogg’s corn flakes at 56%.2
The expectation of high economies of scale was an important reason why Internet ven-
tures were so popular with business managers and entrepreneurs and highly valued in the
stock market. In the traditional book-retailing and banking industries, for example, when-
ever a company wants to expand its offerings to new customer groups, it has to build new
branches or sales outlets. Such physical infrastructure requires high capital investments,
while providing only limited potential for scale economies.
Amazon.com thought that it would be able to limit its investment to IT infrastructure,
website management and call centres, and then scale up these facilities depending on cus-
tomer demand. By doing so, it would not need to make any substantial additional invest-
ments, while still being able to provide a highly customised service.
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The evolution of Internet-based grocery retailing and the different approaches taken by
Webvan, now part of the Amazon.com family, and Tesco.com illustrate further the concept
of economies of scale. The strategy of Webvan relied heavily on the realisation of economies
of scale. It set up, throughout the USA, centralised and highly automated warehouses at
a unit cost of $30 million. These were essentially fixed costs, since they were incurred
independent of utilisation. The expectation was that variable costs for each shipment would
be very low, since the picking and packaging processes were highly automated, thereby
reducing the need for expensive labour.
The business rationale was that Webvan would be able to position itself as a low-
cost leader while still being able to deliver high levels of consumer benefit through the
automated delivery process. It was thought that as customer numbers increased, the
warehouses would operate at capacity, which in turn would create substantial economies of
scale. The latter were also crucial for the grocery delivery process, whereby delivery trucks
were filled at the centralised warehouse and then driven from house to house, delivering the
items. Costs for the delivery varied only marginally if the truck left half-empty or completely
full. Thus, having enough customers to be able to fill up the truck was another source of
substantial economies of scale in the delivery process. We cannot say whether the above
reasoning would have worked out eventually, since Webvan filed for bankruptcy only one
year after going public.
The important insight from this experience is that economies of scale are valuable only
if they can be realised, which usually requires a large throughput. Tesco.com reached a
different conclusion after analysing the economies of scale potential of warehouse-
based delivery. The company decided, contrary to the common wisdom, that it would be
sensible to organise the order fulfilment and delivery process out of its existing stores. By
doing so, it was able to reduce substantially the need for additional investment, which
would have created high fixed costs. Furthermore, through this model, Tesco.com was
able gradually to scale up its operations by adding additional regions on a store-by-store
basis.
Economies of scope
The logic behind economies of scope is similar to that of economies of scale. While econo-
mies of scale can be realised by increasing the production of one product type, economies
of scope result from expanding the variety of products sold using the same R&D, production
and delivery assets.
The main goal here remains the same: it is to spread fixed costs over a wider basis by add-
ing new products or services to the existing offering. Economies of scope can be achieved
by extending into different markets and sectors of an industry. Amazon.com, for instance,
has achieved economies of scope through the introduction of additional categories of goods
on its website, thereby potentially increasing its share of the wallet of any given customer.
Although it started out with just books, Amazon.com has since added new product catego-
ries, such as CDs, videos, electronics and clothes, using the same technology platform and
delivery infrastructure.
Economies of scale and scope should be considered within the context of a specific
strategy and not pursued just for the sake of lowering costs. What always needs to be kept
in mind is the type of value proposition that a company offers to customers. Adding scale
by reaching out to new customer groups, or adding scope by offering new products, might
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help to reduce the cost position of a firm. In addition to costs, however, it is also important
to consider the revenues that can be generated after expanding into different customer
segments or adding new product categories.
Factor costs
Factor costs represent a crucial cost driver, especially for retailing companies that act as
intermediaries. The ability to bargain down input prices, for instance through bulk purchas-
ing, can be an effective lever for lowering costs. Both low factor costs and scale effects are
most likely to be realised through high volumes. Thus, a large market share in comparison
with that of competitors is generally a prerequisite for being a low-cost provider. The goal
of e-marketplaces such as IBX, for instance, is to pool the purchasing power of different
business units within an organisation, thereby reducing factor costs.
Learning effects
Learning effects can lower costs as a firm improves its efficiency over time, thereby reducing
slack and wasteful activities.
5.2.2 Differentiation strategies

A differentiation strategy can be achieved by providing comparatively more consumer
benefit than competitors. The main questions for a firm that is striving for a differentiated
positioning are: What creates consumer benefit? What is unique? What cannot be imitated?
There are tangible sources for differentiation, such as product quality, service quality and
speed of delivery, and intangible sources, such as brand and reputation.
Similar to the cost leadership approach, firms seeking a differentiated position need
to ensure cost proximity to other competitors to guarantee superior value creation. This
means that the cost disadvantage has to be small enough so the differentiation advantage
can override it.
It is not uncommon for firms to overlook the need for cost proximity when they focus
solely on providing the highest-quality product in the market. Motorola’s development of
the Iridium phone is a prime example of a differentiation approach that did not pay close
enough attention to costs.
At this point, it is important to clarify the definition of benefit. It is inherently difficult to
measure, because consumer benefit cannot be objectively quantified, regardless of place,
time and person. Instead, it varies from individual to individual, depending on:
● Personal preferences. You might derive a high benefit from driving a sports car, whereas
your next door neighbour, who has three children, will get much more benefit from driv-
ing a mini-van.
● Place. Think of a freezer in the Arctic versus a freezer in the Sahara.
● Time. Think of the benefit of electric light during the day versus at night.
What elements need to be considered when determining the level(s) of consumer benefit?3
There are a wide range of sources for consumer benefit, which can be divided into tangible
and intangible sources, depending on whether they can or cannot be observed directly (see
Exhibit 5.5).
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Exhibit 5.5 Tangible and intangible sources of differentiation
Quality
Customisation
Tangible
Convenience
sources
Speed of
delivery
Sources of Product
differentiation range
Brand
Intangible
sources
Reputation
Tangible sources of consumer benefit include the following:

● Product/service quality. This characteristic refers to the objective traits of a product, such
as its functionality, durability (or reliability) and ease of installation. For instance, the
quality of Ducati motorcycles can be determined accurately by metrics such as maximum
speed, acceleration, fuel consumption or breakdown rate. In the service dimension, for
instance, the quality of Tesco.com’s online grocery business can be measured by the
freshness and overall quality of the goods delivered. Furthermore, service quality entails
characteristics such as the friendliness and know-how of salespeople or, in the case of a
website, the degree of personalisation, ease of use and response time and information
quality of online enquiries.
● Degree of product or service customisation. The more a product or service can be adapted
to specific customer needs, the more benefit it creates for the individual user. Dell manu-
factures its PCs to customer specifications, resulting in two types of benefit. First, all the
components that an individual customer values in a PC are included; second, all compo-
nents that are not valued are left out, thus helping to keep down PC prices.
● Convenience. The mental energy, effort and time that buyers have to spend during the
purchasing process need to be taken into account when comparing different providers.4
This is why people do not drive 10 km to the discount supermarket just to buy one item,
but instead go to the local corner store, even though that item might be more expensive
there. Through its online grocery service, Tesco.com aims at increasing convenience for
shoppers, and especially for busy people.
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● Speed of delivery. The ability to deliver products and services quickly is an important
source of consumer benefit. Speed depends on the availability of products, location of
the seller and quality of the logistical process. A firm that has the ability to deliver faster
than its competitors because of its management approach, superior process flow and IT
systems and applications can create a significant competitive advantage. Amazon.com,
for instance, installed proprietary warehouses to be able to ensure that products are
available and get shipped out in a timely manner.
● Product range. A broad and deep selection provides an important source of differen-
tiation since it allows convenient and quick one-stop shopping. Amazon.com is a prime
example of a retailer with a deep and broad product range, since customers can find, for
example, most book titles that are currently in print (and out of print).
Intangible sources of consumer benefit include the following:
● Brand. This characteristic refers to the perceived traits that consumers associate with
the company that is selling a product or a service. A strong brand tends to result from
products that meet high quality standards, yet this may not necessarily be so. It might
also come as a result of intensive and innovative marketing activities. Brands need
to be built and nurtured in order to use them as a differentiating characteristic in the
marketplace.
Most online firms, which could not benefit from ‘viral growth’ (i.e. through word of
mouth), had to invest heavily to build up their brand. On the other hand, for established
physical firms such as Tesco, Nordea and Ducati, it was much easier to acquire online
customers, since they already benefited from a strong brand through their store outlets,
branch network or physical dealerships.
● Reputation. The perceived past performance of a company is a major factor influencing
reputation. Customers value reputation because it decreases their purchasing risk. When
it comes to making online payments, a company’s reputation is especially critical, since
many online customers still feel uneasy providing their credit card information to an
unknown vendor.
5.2.3 Outpacing strategies (and the risk of getting ‘stuck in the middle’)
Porter argues that in order to have a unique and defendable competitive position, it is advis-
able to seek out one of the above two strategies.5 The underlying assumption is that power-
ful strategies require trade-offs: a high level of quality usually entails high costs, while a cost
leadership strategy usually impairs the ability to provide above-average levels of consumer
benefit. As a result, firms that try to be both a quality and a cost leader at the same time tend
to end up getting ‘stuck in the middle’ – a position that is characterised as neither low-cost
nor differentiated.
More recently, Porter’s concept of the generic strategies has been challenged by numer-
ous empirically based studies.6 A main conclusion of these analyses is that, in reality, com-
panies can also combine both types of advantage, i.e. a cost and a differentiation advantage,
by following an ‘outpacing’ or ‘hybrid’ strategy (see Exhibit 5.6).
For example, one possible source for an outpacing advantage is quality management.
This can be demonstrated using the example of Toyota. On the one hand, the Toyota
Production System increases the perceived use value of Toyota’s cars, since, for the past
decade, they have proven to be more reliable and functional than the products of most other
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Exhibit 5.6 Perceived performance and relative price position determine a firm’s strategy
High
Differentiation Outpacing
performance
Perceived
Low cost/
low price
Low
More expensive Cheaper
Relative price
car manufacturers. On the other hand, the high reliability that guarantees high levels of
use value also helps to improve Toyota’s cost position by reducing the number of expensive
call-backs.
Similarly, during the early 1990s Tesco competed in the British grocery retailing market
primarily on low price. At that time the motto of the company was ‘Pile it high and sell it
cheap’, in reference to the shelving practice of trying to accommodate as many products in
as little space as possible. Over the years, Tesco has refined its value proposition by adding
differentiating elements such as the online grocery retailing channel while still remain-
ing highly cost competitive, thereby outperforming competitors on both the price and the
quality dimensions. In doing so, Tesco effectively resolved the trade-off dilemma between
quality and costs.
From a theoretical perspective, the following factors can actually undermine this trade-
off: (1) the development of new technologies, (2) wastefulness and (3) economies of scale
and learning effects.
● The development of new technologies, as is the case with the Internet, offers innovative
firms the opportunity, at least initially, to make large leaps in both the cost and the differ-
entiation dimensions. Consider again the example of Amazon.com. Compared with other
online book retailers, and also with most bricks-and-mortar bookstores, it offers the most
differentiated product and service, yet at the same time prices are highly competitive.
This is possible because Amazon.com has been continuously improving its technology
to lower costs, as demonstrated by the company’s innovative and efficient management
of logistics or its introduction of revolutionary products such as the Kindle e-book. This
approach is possible as long as the technology is still evolving and serious competition
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has not yet emerged, though one may at least question its sustainability over time once
these technologies become commonplace.
If Internet ventures persistently can have lower costs or offer higher value than their
bricks-and-mortar competitors, then there will be two possible scenarios. First, if both
types of businesses (i.e. the online and offline businesses) continue to co-exist and serve
different markets, then competition will take place between Internet ventures. Second,
if Internet-based firms turn out to be a substitute for bricks-and-mortar firms, then the
latter will increasingly be driven out of business and the competition will start all over
again among Internet players. Either way, competition, and with it the need to have
a clear strategic position, is likely to increase.7 Other more mature industries, where
new technology developments are of only secondary importance, indicate that it then
becomes necessary to seek a more precise positioning.
● Many firms and industries are wasteful in their activities, which makes it possible to optimise
quality while at the same time reducing costs. When companies are highly inefficient they
can make great strides without having to face the trade-off between quality and costs.
Yet, at this point, we are also dealing not really with strategic decisions but with issues of
operational effectiveness. During the Internet boom years, many start-up companies, such
as the online fashion retailer Boo.com, were spending lavishly on marketing, PR events and
travelling (see the FT article ‘Boo.com founder fears net bubble’, featured in Chapter 1).
Cutting costs in such situations is easy since there are no real trade-offs to be made.
● Scale economies and learning effects might allow a firm to generate significant cost advan-
tages while still pursuing a differentiated strategy. They enable a firm to achieve both
low costs (through scale effects) and a superior product offering. Tesco, for instance, can
offer both its online and offline customers low prices because, due to its sheer size, it can
source products at lower purchasing costs than most competitors.
In spite of the above factors, the trade-off between differentiation and cost is an important
issue to consider in strategy formulation, because, more often than not, a firm cannot excel
in everything it does.
5.3 Developing strategy alternatives
5.3.1 The strategic gameboard framework

In the above sections, we described different generic types of strategy alternatives such as
cost leadership strategies, differentiation strategies and outpacing strategies. In contrast to
these generic strategy types, real-world strategies are characterised by numerous individual
aspects that, in sum, constitute the overall strategy. The strategic gameboard framework
provides a structural approach to determine systematically the different dimensions of a
strategy (see Exhibit 5.7).
The strategic gameboard framework raises three key questions that help managers to
formulate consistent business strategies. The first question relates to the type of competitive
advantage that the company wants to strive for. Is the focus on being a low-cost provider,
on having a differentiated product offering, or on pursuing an outpacing strategy? These
options were discussed in detail in the previous sections.
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Exhibit 5.7 The strategic gameboard helps to formulate consistent business strategies
2 Where do we want Market segment (niche)

to achieve the
competitive
advantage?
Whole market
New game 3 How do we want to

achieve the
competitive
advantage?
Performance Cost/price Old game
1 Which competitive
advantage do we
aim for?
In addition to the decision regarding the type of competitive advantage, it is also

essential to think where the company wants to compete – i.e. which market(s) or market
segment(s) it wants to target (for a more detailed discussion of market targeting, see
Section 3.4.3). On the one hand, it is possible to pursue a niche strategy by offering only
highly specialised products for special customer segments or for limited regions. This
type of a niche strategy can lead to a competitive advantage because it opens up the
opportunity for building up specific know-how (in the case of highly specialised products)
or specific customer knowledge (in the case of regional target markets). However, the
problems of niche strategies are that they can lead to a dependence on single customer
segments, which increases the overall business risk, and that they limit scale, which in
turn increases the per-unit costs. This is the main reason why low-cost strategies typically
cannot be pursued in niche markets. On the other hand, it is possible to address the whole
market with a given strategy type.
Finally, it is also important to determine the type of business model to implement the
strategy (see in the next section for an overview of e-business models). The strategic game-
board differentiates between pursuing (1) an old game and (2) a new game. The old game
stands for business models that historically have been used by other companies in the indus-
try. For instance, an entrepreneur who was thinking about setting up a traditional bricks-
and-mortar bookstore in the mid-1990s was pursuing the old game of book retailing. When
playing an old game, a competitive advantage can be achieved primarily through better
execution such as higher quality, higher productivity or faster time-to-market. An old game
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business model carries a lower risk because it has been done before, but at the same time it
also offers lower potential for differentiation vis-à-vis competitors because everybody else
is playing the same type of game.
In contrast, playing a new game implies using a business model that is fundamentally
different from what has been done before by other players in the industry. At the time
when it was first implemented, Dell’s business model of selling PCs through direct sales
channels presented a new game in the industry. In doing so, Dell was able to leapfrog the
competition. Similarly, through its innovative use of the Internet, Amazon.com was able to
become one of the largest booksellers worldwide, even though the book-retailing market
had been crowded and highly competitive before. However, it also needs to be pointed out
that the advantages derived from playing a new game do not necessarily last indefinitely.
Instead, they wither away as other companies imitate the game. (See Section 6.1 for the
different ways through which a company can build up barriers to imitation.) Nowadays,
for instance, Internet retailing by itself can no longer be considered a new game. Instead,
companies aiming at playing a new game again need to look for new ways to redefine
markets. Chapter 7 presents the framework of value innovation that helps to develop sys-
tematically new-game business models.
5.3.2 e-Business models: a brief overview8

Although there are many definitions of what a business model is, most of them have the
following components: (1) a target market; (2) a competitive environment to operate in,
which is addressed by a specific firm’s strategy; (3) a particular mode of value creation in
which a diversity of agents, both inside and outside the firm, participate through a value
creation process; and (4) a mode of value appropriation or revenue generation. These four
components are conjointly used to articulate the framework described below (see also
Exhibit 5.8):
● The target market of a firm is made of final consumers (B2C) or/and other businesses
(B2B);
● Cost-leadership vs. differentiation strategies. These are the two classic generic strategies
(introduced in Section 5.2) used to create a competitive advantage within the e-business
domain. Corporate examples of cost-leadership strategies include Wal-Mart and its cost-
driven model and Priceline.com, which allows buyers to optimise their search in order to
meet their preferences and budgetary restrictions and retailers to use its website to sell
Exhibit 5.8 Components of an e-business model
Value appropriation
Market Value creation Competitive advantage (revenue generation model)
B2B efficiency Cost leadership Commission fees

Complementarities advertising fees
B2C Lock-in differentiation subscription fees
novelty sales
Source: a. Rodríguez, F. sandulli and d. sánchez, ‘Value creation in e-business models’, in F.J. Martínez-López
(ed.) Handbook of Strategic e-Business Management, series pRoGRess in Is, springer, 2014.
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items online at lower prices than in their stores. For differentiation strategies, examples
include Dell, which allows its customers to configure highly personalised computers, or
Amazon.com with its huge selection of items and its one-click capability for faster shop-
ping and check-out.
● The value creation process relies on the four value drivers listed below, which were ini-
tially introduced by R. Amit and C. Zott. These drivers were conceptually introduced in
Section 4.1.2; they can be illustrated through the following examples:
– Efficiency. Examples of efficient companies include Dell, Amazon.com, Wal-Mart, eBay
and PayPal, which are renowned for the excellent management of their value chain
and business processes.
– Complementarities. There are different types of complementarity. For example, the
book retailer Barnes & Noble achieved good synergies by complementing its chain of
physical stores with its e-commerce website, thus offering its customers additional
value and convenience. Another kind of complementarity is the technology-based syn-
ergies created by eBay with its online payment system, PayPal.
– Lock-in. Companies use diverse ways to achieve customer retention (as noted in
Chapter 4). Examples here include loyalty programmes such as Barnes & Noble’s
rewards programme with MasterCard, Amazon.com’s ‘shopping cart’ technology
(which facilitates online purchasing), eBay’s trust mechanism to foster confidence
between the online buyer and seller, or Dell’s high level of customisation offered to its
customers to configure PCs.
– Novelty. Several companies base their value creation on their high-level innovation
capability. Examples here include Apple’s iTunes store, which was the pioneer in on-
line music sales, Google’s link-based approach (i.e. the number of links to a specific
website) to rank the popularity of websites and Priceline.com’s exchange mechanism,
‘name your own price’, which allows finding providers of products and/or services at
the price range set by customers.
● Revenue generation models, which can be classified in the following four categories:
– Commission-based model, allowing the company to charge a fee for each online trans-
action that it processes, as is the case, for example, with eBay.
– Advertising-based model, enabling the e-commerce company to generate revenues
from online advertising, as is the case for Google, Yahoo! and Craiglist.
– Subscription-based model, through which the e-commerce company receives a mem-
bership fee or periodical subscription payments that give customers access to online
content, as is the case with electronic newspapers and magazines.
– Sales revenue-based model, through which the firm generates revenues through
online sales transactions, as is the case with Amazon.com, iTunes, Dell and
m-PESA.
Obviously, firms may combine the above components in a variety of ways and also
simultaneously use different business models in order to generate revenues from their
online offering. For example, Amazon.com addresses both the B2C and B2B markets,
and Facebook generates revenues mainly from the online advertising fees that it charges
and also from the payments it receives for apps and games available on its platform.
(See the Blog Box: ‘Facebook made $9.51 in ad revenue per user last year in the US and
Canada’.)
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BLOG BOX
Facebook made $9.51 in ad revenue per user last year

in the US and Canada
Facebook made about $9.51 in advertising revenue per user in the US and Canada.
Europe was about half that much, with $4.86 in ad revenue per user. Asia and the rest
of the world follow that at $1.79 and $1.42 per user. What this shows is the revenue
trajectory that other more economically developed markets such as Western Europe and
Japan could get to if Facebook successfully grows there or convinces more regional brand
advertisers to come on board.
There are six main factors that affect how much Facebook’s advertising revenues can
grow over the next several years. They’re listed below and they have to do with raw growth
(or how many users Facebook has), to engagement (or how sticky and addictive the product
is), to targeting (how well Facebook can route the right ads to the right users).
Facebook is at 901 million monthly active users, so it’s running out of room to grow
given the sheer limit of world Internet usage. More importantly, it’s gotten a lot of the low-
hanging fruit, or users in developed countries. It’s also continuously changing the product,
which can affect short-term revenues. Facebook has bumped up the numbers of ads per
page to seven units from four over the past year.
In terms of Facebook’s overall ad pitch, the company’s chief operating officer, Sheryl
Sandberg, said that the company’s long-term goal is to be the place where 70 million business-
es worldwide go to offer personalised, relevant advertising. She said, ‘Every day on Facebook
is like the season finale of American Idol times two’, in a reference to the home page. She also
added that advertising budgets are not moving online fast enough to match user behaviour.
Of the roughly $600 billion spent on advertising every year, only 11 per cent of it is devoted
towards online ads. Another $1.5 billion in advertising is spent on mobile devices.
Overall, Facebook’s revenues have two components: advertising and payments. Both are
up on a year-over-year basis.
If we look closer at payments revenue, it’s up by quite a bit year-over-year. Facebook
earns a 30 per cent revenue share from apps and games on its platform. But this isn’t a fair
comparison, since Facebook only made the revenue share mandatory in July. Payments
revenue is pretty much flat on a sequential quarter-over-quarter basis, at $186 million from
$188 million in the fourth quarter. The concerning thing is that if you look at games on the
platform, Zynga’s quarter-over-quarter bookings for the Facebook canvas aren’t really grow-
ing anymore. Most of their bookings growth is coming from mobile. So, unless Facebook
turns on other kinds of payments revenue soon, this figure is going to stagnate.
Facebook’s chief financial officer, David Ebersman, stressed that the company may cut its
30 per cent revenue share if it expands payments beyond gaming, which we reported on a few
weeks ago. He also pointed out that Facebook’s operating margins are declining. A measure of
how profitably the company can run, operating margins fell to 36 per cent in the first quarter
from 53 per cent in the same time a year earlier. Ebersman said this has a lot to do with share-
based compensation expenses. He also added that the company is still in growth mode and
will make decisions that will hurt its short-term profitability from time to time. For example,
even though Facebook has only started to bring in revenue from its mobile apps, it will still
continue to spend aggressively on them. ‘We believe mobile usage of Facebook is critical to our
future’, he said. ‘Expect us to invest in it even if mobile monetization is uncertain.’
Source: adapted from K.-M. Cutler, ‘stats: Facebook made $9.51 in ad revenue per user last year in the Us and Canada’,
techCrunch.com, 3 May 2012.
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5.4 Creating a fit between the chosen strategy and the value chain
Activities in the value chain are not performed in isolation; instead, they are linked to each
other throughout the value chain.9 A firm’s ability to create a better and unique fit between
activities is ultimately responsible for its competitive advantage. Thus, the whole of the
value chain is more important than the sum of its individual activities. Sustainability also
results from a unique fit, since it is much more difficult for competitors effectively to imitate
a set of interrelated activities than just to replicate one activity.
There are three main levers that determine the fit of activities within a firm: (1) consist-
ency between activities, (2) reinforcement of activities and (3) optimisation of efforts.
5.4.1 Consistency between activities

Consistency ensures that individual activities, with their respective advantages, build on
each other instead of cancelling themselves out. For instance, if a company’s goal is to
differentiate itself from its competitors through a premium product or service, it needs to
design activities such that each activity adds to the differentiation advantage – i.e. increases
benefits for customers and creates uniqueness. On the other hand, if the goal is to be a
low-cost provider, then the costs of each activity should be kept to a minimum, while still
maintaining the threshold features that are required to stay in the market. Lack of consist-
ency dilutes the positioning of a company.
Why is that so? Porter argues that strategic positions are not sustainable if there are no
trade-offs with other positions.10 If a firm wants to provide the highest-quality standards,
then this usually entails higher costs, while the desire for lower costs usually results in a
decrease of quality. This trade-off arises from the following sources:
● Activities. The trade-off results, in part, directly from the activities involved. Different
positions require different processes, resources, skills and value chain set-ups. A firm that
wants to achieve a differentiated position needs to invest heavily to ensure the highest-
quality standards (and, hopefully, to be able to command a price premium). Cost leaders,
on the other hand, need activities that provide the lowest possible cost structure because
they want to compete through low prices. Customers of these firms want to receive the
basic service at the lowest possible price. Thus, a firm that wants to be a cost leader and
unnecessarily bloats its costs by over-engineering its activities is actually destroying value.
● Image and reputation. Trying to be both a low-cost and a differentiated provider can
easily cause inconsistencies in a firm’s image and reputation. It is much easier for a firm
to communicate its strategy credibly to its different stakeholders (such as customers
and shareholders) when it has a clear position. Think of the car manufacturer Porsche.
To build up and maintain the reputation of a premier sports car manufacturer, Porsche
needs to position itself clearly with its products and services. Similarly, a low-cost
provider such as the US retailer Wal-Mart focuses its efforts on providing its products
at the lowest possible costs.
● Strategy implementation. It is much easier to implement a strategy within a firm if
employees have a clear guiding vision of the strategy and if they do not have to ask
themselves with every decision: ‘Are we competing on low cost, or are we trying to be a
differentiated provider?’.
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The need for consistency emphasises the requirement that strategy is not just about decid-
ing which activities a company should perform but also, and equally importantly, which
activities not to perform. If a company wants to be everything to everyone, it runs the risk of
not being able to do anything better than the competition and will end up being ‘stuck in the
middle’, where it has neither a cost nor a differentiation advantage vis-à-vis the competi-
tion. Porter argues that strategic positions are not sustainable if there are no trade-offs with
other positions. If a company wants to provide benefits, this usually entails higher costs,
while the desire for lower costs usually results in a decrease of use value for customers.
The low-cost airline easyJet is a good example of a company that is continuously striving
for consistency across different activities of its value chain (see the Blog Box below). To mini-
mise costs, easyJet forgoes many of the features, frills and perks that are offered by traditional
BLOG BOX
easyJet – setting up an organisation for a low-cost strategy

easyJet keeps costs low by eliminating the unnecessary costs and ‘frills’ that characterise
‘traditional’ airlines. This is done in a number of ways:
● Use of the Internet to reduce distribution costs. easyJet was one of the first airlines to
embrace the opportunity of the Internet when it sold its first seat online in April 1998.
Now approximately 95% of all seats are sold over the Internet, making easyJet one of
Europe’s biggest Internet retailers.
● Maximising the utilisation of the substantial assets. Maximising utilisation of each aircraft
significantly reduces the unit cost.
● Ticketless travel. Passengers instead receive an email containing their travel details and
booking reference when they book online. This helps to reduce significantly the cost of
issuing, distributing, processing and reconciling millions of tickets each year.
● No free lunch. Everybody always jokes about airline food – so why provide it if people
don’t want it? Eliminating free catering on board reduces cost and unnecessary bureauc-
racy and management. It is also an important differentiator between easyJet and other
airlines and a potent reflection of its low-cost approach. Passengers can purchase food
on board and, ironically, easyJet has won awards for its catering service! The concept
of a ‘simple service model’ also reflects a more general point about eliminating other
unnecessary, complex-to-manage and costly services, such as pre-assigned seats, inter-
line connections with other airlines and cargo/freight carriage.
● Efficient use of airports. easyJet flies to main destination airports throughout Europe,
but gains efficiencies through rapid turnaround times and progressive landing charges
agreements with the airports. By reducing turnarounds to 30 minutes and below,
easyJet can achieve extra rotations on the high-frequency routes, thereby maximising
utilisation rates of its aircraft.
● Paperless operations. Since its launch, easyJet has simplified its working practices by
embracing the concept of the paperless office. The management and administration of
the company is undertaken entirely on IT systems that can be accessed through secure
servers from anywhere in the world, enabling huge flexibility in the running of the
airline.
Source: adapted from www.easyjet.com
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airlines. While the latter rely heavily on expensive ticketing offices and sales agencies, easyJet
sells almost solely through the Internet. Furthermore, customers do not receive printed tick-
ets. Instead, upon arrival at the airport’s check-in counter they receive their boarding pass,
following passport identification. On board, passengers are not offered free meals and drinks;
instead they have to pay for each drink or snack. Finally, after landing, aircraft are turned
around much faster than the industry average, which helps to reduce standing fees and
increase capacity utilisation. (See the FT article: ‘Airlines ditch simple model for complexity’.)
Airlines ditch simple model

for complexity
As New Year’s resolutions go, EasyJet’s is risky. Since its inception, the airline has
embraced open seating, using the logic that competition for seats gets passengers
aboard more quickly, producing faster turnround times which in turn help squeeze in
more flights per aircraft.
But starting this spring, the low-cost carrier will begin a trial of assigned seating on
flights.
EasyJet’s scrappier rival, Ryanair, already reserves its choicest seats – in the front
two rows and next to exits – for passengers willing to pay a surcharge. Ryanair
emphasises, however, that the practice does not prolong its 25-minute turnarounds. If
it did, reserved seating would be dropped, says Stephen MacNamara of Ryanair. “We
would not put those 25 minutes in jeopardy,” he adds.
EasyJet, based at Luton airport, also insists it will back away from reserved seating
should it damage turnaround times. Yet its trials underscore a wider trend across
commercial aviation – towards greater complexity.
While budget carriers creep towards the business models of traditional full-service
airlines by developing premium products, the flag carriers are adopting some of the
strategies employed by low-cost rivals, in particular by “unbundling” perks they once
lumped into first-class or business-class fares. That means passengers reluctant to pay
for premium seats but keen to secure, say, free schedule changes or access to the first-
class lounge can create bespoke seat classes by buying an economy ticket and adding
the perks à la carte.
For their part, airports are mirroring their airline customers, introducing premium
offerings for every step, from parking to check-in to security lines to border control.
Geoff van Klaveren at Deutsche Bank says: “Airlines want that because when they
ask people what they don’t like about flying, it’s not the time on the aeroplane, it’s the
hassle in the airports they really hate.”
In some ways, greater complexity is a natural response to a slowdown in some parts
of the industry. Global passenger numbers have risen by about 5 per cent a year
during the past three decades, a trend that looks set to continue. Much of the growth,
however, will come from developing countries, meaning that operators in mature
markets need to work harder for returns. When they do, passengers should benefit,
in turn boosting investors’ fortunes. However, there are risks associated with added
complexity. Airlines have needed to invest in new selling strategies and partners,
to make sure that travel agents – especially those dealing with lucrative business
travellers – understand and consider unbundled ancillary services. “It does add a layer ➨
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of complexity but as long as the cost of providing the ancillary product is outweighed
by the incremental revenue then I do think this strategy will be successful,” says
Mr van Klaveren.
EasyJet’s seating project has already cost a few million pounds, for investment in IT, but
analysts – while largely supportive – are more concerned about whether it might slow
turnround times.
Jason Steffen, an astrophysicist at the Fermi laboratories in the US, conducted a
number of experiments this year to investigate the factors that determine commercial
aircraft boarding times. He questions whether separating out travellers who are quick
and efficient – the business travellers, say – from those who need more time neces-
sarily improves operating efficiency. “It’s like filling up a jar with rocks and sand. If
you put all the sand in first, you can’t fit in the rocks. “In airports, if you put two slow
people next to each other, they might slow each other down, whereas a fast person in
their midst might speed them up,” Mr Steffen adds.
Source: Jacobs, R. (2012) Airlines ditch simple model for complexity, FT.com, 10 January.
5.4.2 Reinforcement of activities

Reinforcement is the second important characteristic of a good fit between the different
activities of a company. Its underlying thinking is that competitive advantage comes as a
result of how some activities influence the quality of other activities to create higher qual-
ity in products or services, thereby increasing the use value for customers. As emphasised
above, in terms of the value framework this implies that the total value created throughout
the value chain is larger than the sum of the values created in the individual steps of the
value chain.
For instance, if a company has a highly motivated and skilled sales force, it is much more
effective if the company also has excellent R&D and production facilities to produce a high-
quality product. Similarly, a sophisticated website, such as that of Amazon.com, becomes
more valuable when it is combined with a warehouse system that allows for fast, reliable
and efficient deliveries. The case of Nordea illustrates the importance of reinforcement.
Among other reasons, Nordea is successful because it managed to create a tight fit between
all its online and offline banking activities, which allowed the bank to move a large number
of its branch customers online quickly. Pure online banks cannot imitate this effective
customer-acquisition approach, since they do not have a physical branch network. Other
bricks-and-mortar banks that tried to follow suit did not realise the importance of closely
connecting the online and offline businesses. They opted instead for distinct profit-centre
structures, thereby creating competition between their online and offline activities. A firm’s
ability to cross-sell and/or sell through complementary distribution channels is critical,
since, especially in the service industry, the cost of acquiring a new customer can be two to
three times the cost of selling to an existing customer.
5.4.3 Optimisation of efforts

The third characteristic of a good fit is the optimisation of efforts. While reinforcement
focuses primarily on improving the customer experience by linking up separate activi-
ties, optimisation emphasises the importance of cost reduction through the elimination
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of redundancy and wasted activity. For instance, Internet companies that have optimised
their order-taking process can reduce their costs for truck fleet and personnel. Dell currently
presents one of the examples of best practice in optimisation of efforts. Activities such as
sourcing, production, sales and service are connected in such a way as to minimise costs
while still providing superior customer benefits. Within the value framework, optimisation
of efforts implies that the cost reduction in one area of the value chain leads to cost reduc-
tions in other parts of the value chain as well.
Creating fit between activities through consistency, reinforcement and optimisation of
efforts connects the conceptual act of strategy formulation to operational implementation
issues, which determine how to choose and structure a company’s activities. The value-
process framework helps to conceptualise this leap from broad strategy formulation (e.g.
the low-cost positioning of easyJet), to the actual implementation throughout the different
steps of the value chain.
It is necessary to analyse closely the vertical and horizontal boundaries of a firm and to
set up the internal organisation accordingly, in order to create fit among activities. This
requires substantial resources and managerial skills, which also explains why strategy
has long-term implications. Changing strategies randomly makes it hard to obtain a com-
petitive advantage, because creating fit takes time and effort. This does not mean that new
tools and concepts such as total quality management (TQM), which might help to increase
operational effectiveness, should generally be discarded, yet it is important to realise that it
is sensible to implement these tools only as long as they do not alter the fundamental basis
of the strategic position and its trade-offs.
Summary
● this chapter focused on strategy options in e-business markets. First, it reviewed generic
strategy options for value creation in e-business. these options revolved around cost
leadership and differentiation strategies.
● second, this chapter discussed the concept of being stuck in the middle, which refers to
companies that focus on neither a cost leadership nor a differentiation strategy. these
companies face the risk of not possessing any competitive advantage vis-à-vis more specialised
rivals. However, there are also factors that can allow a firm to outpace its rivals by offering
both lower costs and differentiation. these include the development of new technologies,
wastefulness of companies, scale economies and learning effects.
● third, in order to develop strategy alternatives to the above generic strategies, the chapter
suggested using the strategic gameboard framework. the latter provides a structural approach
to systematically determine the different dimensions of a strategy. the chapter also presented
a theoretical framework to structure e-business models and illustrated these models through
some corporate examples.
● Finally, this chapter discussed how to create a better fit between the chosen strategy and the
value chain activities in order to achieve a sustainable competitive advantage. It described
the three main levers that determine the fit of activities within a firm; these are: consistency
between activities, reinforcement of activities and optimisation of efforts.
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REVIEW QUESTIONS
1 What generic strategies can a company use to create value for its customers?
2 What levers can a company use in e-business to create a cost or differentiation strategy?
3 Why do some companies end up being ‘stuck in the middle’?
4 What are the factors that allow a company to pursue an outpacing strategy?
5 How can a company look for new market spaces outside its own industry?
6 What are the three main levers that determine the fit of activities within a firm?
1 Illustrate each quadrant of the generic strategy options matrix through an e-business example.
2 explain how the Internet can help a company to achieve a competitive advantage in the
marketplace through (1) cost leadership and (2) differentiation. Illustrate each case through an
actual example, other than those mentioned in this chapter.
3 pick out an e-business company of your choice. Which type of competitive advantage does it
pursue? What factors help this company create superior customer value? Is the strategy sustainable?
4 analyse how the Internet can help companies not to get ‘stuck in the middle’. Illustrate your
answer through an actual example.
5 discuss how an Internet venture can outperform its competitors on both the price and quality
dimensions. provide some examples to support your arguments.
6 Consider an Internet venture that you are familiar with and think of ways in which it could further
improve the fit among its activities through consistency, reinforcement and optimisation.
M. Porter’s book Competitive Strategy, Free Press, 1998, provides detailed accounts of different
generic strategy types.
B. Henderson emphasises the importance of differentiation as a key element in strategy formu-
lation when he compares strategy to biological evolution in ‘The origins of strategy’, Harvard
Business Review, 1989, November–December, pp. 139–43.
An updated approach to e-business models can be found in ‘Value creation in e-business mod-
els’ (by A. Rodríguez, F. Sandulli and D. Sánchez), in F.J. Martínez-López (ed.) Handbook of
Strategic e-Business Management, Series PROGRESS in IS, Springer, 2014.
www.davechaffey.com contains updates about diverse aspects of strategy in e-business.

www.ecommercetimes.com is an online newspaper containing articles on a variety of e-
commerce topics.
www.strategy-business.com is the online edition of the management magazine strategy+business
(s+b).
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1 For a detailed discussion of threshold features and success, see G. Johnson, K. Scholes and
2 ‘Make it cheaper, and cheaper’, The Economist, 13 December 2003, pp. 6–7.
3 There are numerous approaches available to estimate consumer benefit. They include (1) the reservation
price method, (2) the attribute-rating method, (3) hedonic pricing and (4) conjoint analysis. For a more
detailed discussion of these approaches, refer to D. Besanko, D. Dranove, M. Shanley and S. Schaefer,
Economics of Strategy, John Wiley, 2003, pp. 416–19.
4 See also P. Kotler, Marketing Management, Prentice Hall, 2002, pp. 60–1.
5 Ibid., pp. 41–4.
6 A. Fleck discusses the concept of outpacing strategies in his book Hybride Wettbewerbsstrategien, Gabler,
1995.
7 For a discussion of the economic fundamentals, see S. Liebowitz, Rethinking the Network Economy,
Amacom, 2002, pp. 115–17.
8 The content of this section is based on the chapter entitled ‘Value creation in e-business models’ by
A. Rodríguez, F. Sandulli and D. Sánchez, in F.J. Martínez-López (ed.) Handbook of Strategic e-Business
Management, Series PROGRESS in IS, Springer, 2014.
9 For different types of strategic fit among activities, see M. Porter, ‘What is strategy?’, Harvard Business
Review, 1996, November–December, pp. 70–3.
10 Ibid.
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Chapter 6
Sustaining a competitive advantage

over time
Chapter at a glance
6.1 Building up barriers to imitation 128
6.2 Dealing with the threats of disruptive innovations in e-business 130
6.2.1 Understanding the fundamental process of disruptive innovations 130
6.2.2 discovering the underlying reasons for incumbents’ failure 135
6.2.3 Raising the right questions to recognise the threats of disruptive
innovations 138
6.2.4 Finding ways to deal with disruptive innovations 139
6.2.5 selecting the appropriate mental frame for efficient reactions 143

22 Tunisiana sustaining a competitive advantage
23 12snap Market repositioning; barriers to imitation
7 Otis Business transformation; barriers to imitation
1 Tesco Business transformation; new channels and segments
3 Ducati vs. Harley Business transformation
16 Brockhaus disruptive innovation
21 M-PESA disruptive innovation
2 Nordea sustaining innovation
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Learning outcomes
● Understand the requirements for a successful imitation and the barriers to
imitation.
● appreciate how companies can assess the threat of a disruptive innovation.
● Identify the ways that companies can follow in order to deal with a disruptive
innovation.
● Recognise the cognitive frames that companies can adopt when facing a
disruptive innovation and understand the reasons underlying their contradicting
nature.
Introduction
this chapter first discusses how a company can build up barriers to imitation. It then focuses
on how to deal with the threats of a disruptive innovation in e-business. More specifically, it
stresses the importance of understanding the fundamental process of disruptive innovations and
determining the underlying reasons for the incumbent’s failure. next, the chapter suggests some
questions that companies need to raise in order to assess the threat of a disruptive innovation.
possible ways for dealing with a disruptive innovation are then suggested. the chapter concludes
by providing some ways for selecting the appropriate mental frame for an efficient response to
a disruptive innovation.
6.1 Building up barriers to imitation
Maintaining a competitive advantage, be it through cost leadership or through a differentiat-

ed position, is a difficult challenge for most companies, especially in the realm of e-business
where there are few sources of competitive advantage that remain stable over time.
Consider, for example, the rise of Netscape Navigator – the most prominent web browser
in the mid-1990s. At that time, Netscape Navigator had a global market share of over 80%.
When Microsoft started to include online capabilities in all of its software products, it also
developed Internet Explorer – essentially an imitation of Netscape Navigator, albeit with
more advanced functionalities. Ultimately, Netscape lost its dominant position to Microsoft.1
However, successful imitation is not trivial and there are measures that companies can
take to reduce the risk of being imitated. Below, we discuss the requirements that need
to be fulfilled for a competitor to imitate successfully, and we also discuss the barriers to
entry that incumbent companies can build up to prevent others from invading their market
(see Exhibit 6.1).2
First, in order to become aware of a successful business model, potential imitators must
be able to identify its competitive superiority. In the case of non-public companies, finding
out about successful business models is not trivial since there is frequently no hard data
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Chapter 6 Sustaining a competitive advantage over time
Exhibit 6.1 A company can build up numerous barriers against imitation
Imitator Incumbent
Requirements for successful imitation Barriers against successful imitation
1 Must be able to identify competitive Withhold information about profitability

superiority Forgo short-term profits for long-term
success
2 Must be willing to imitate Deterrence: signal promise of retaliation

Make commitments to make threat credible
Pre-emption: exploit all available investment
opportunities/secure access to resources
3 Must be able to understand sources of Tacit knowledge: rely on skills, processes or

competitive advantage culture/resources that are implicit
Causal ambiguity: rely on a complex,
multidimensional mix of sources
4 Must be able to build/acquire necessary Base differentiation on resources that are

resources rare/immobile/contracted
Exploit-time lags
available regarding profitability or even sales. During the writing phase of this text, we had
an interesting exchange with the leading German auction platform www.My-Hammer.de,
where private homeowners place requests for painting or repair jobs and carpenters and
other craft workers offer their services to them. The business model has proven to be highly
successful in Germany and would have provided an excellent source for writing a case
study. Even though, in principle, the management of My-Hammer was interested in col-
laborating in the development of a case study, they finally decided against it because they
did not want to divulge information about their company to would-be competitors.
Second, potential entrants in a market must be willing to imitate the successful business
model. Incumbents can take measures to prevent them from entering the market. One way
to do so is through deterrence. For instance, if a low-cost competitor wants to enter a market,
existing companies might signal to the new entrant that they will retaliate by also lowering
their own prices, which would render the market entry unattractive. Furthermore, to make
threats via potential imitators credible, it is often helpful to ‘burn the bridges’ – i.e. make irre-
versible commitments by investing substantially. Finally, it is also possible to pre-empt poten-
tial competitors by exploiting all available investment opportunities and by securing access
to scarce resources (such as patents or crucial personnel). For instance, pre-emption might
entail buying up a small competitor with the sole purpose of ensuring that other, potentially
more threatening, would-be competitors do not acquire the company and its know-how.
Third, potential entrants must also be able to understand the sources of competitive advan-
tage. Most frequently, the competitive advantage does not just result from one resource
or capability but instead from the complex interplay between multiple different factors
that might not even be clearly understood by the incumbent company itself. Obviously,
acquiring this type of tacit knowledge is even more difficult for outsiders who do not have
direct access to the company. Also, it is not always clear what the causal linkages between
different factors are that lead to a competitive advantage. For instance, it is not entirely
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clear whether it is the free time that developers at Google have to work on their pet projects
that contributes to the success of the company, or whether it is Google’s success that allows
management to give this time to developers.
Fourth, a would-be imitator must also be able to build or acquire the necessary resources
and capabilities successfully to copy the incumbent’s business model. The most promising
way to provide protection from this is to base the competitive advantage on resources that
are rare, immobile or contracted. For instance, in the case of Facebook, a core element of
the company’s competitive advantage lies in its broad membership base of more than 900
million users. Replicating this membership would be very difficult for a potential imitator.
Protecting against imitators is only one of two key levers for the preservation of competi-
tive advantage. The other possibility is constantly to upgrade one’s own capabilities through
continuous innovation, thereby making imitation attempts irrelevant. We discuss this pos-
sibility in more detail in Chapter 7, which deals with ‘value innovation’.
6.2 Dealing with the threats of disruptive innovations in e-business3
Let us think back to the mid-1970s. During those years, Apple introduced the first PC in
the private consumer market. The Apple II, developed by Steve Wozniak, was techno-
logically inferior to the then dominant mini-computers, which were first developed in the
1960s. They were the size of a large refrigerator, cost $20,000 or more and were meant
for accounting departments and other corporate users that required advanced computing
capabilities. When confronted with PCs, highly successful mini-computer manufacturers
such as Digital Equipment Corporation considered them to be ‘toys’ that were of no interest
to their demanding main customers. As a result, they did not invest in this new technology.
Due to its technological simplicity, however, the Apple was also much cheaper (an Apple
II was about $2,000 while a mini-computer cost at least $20,000), it was much smaller (an
Apple II had the size of today’s PCs while the mini-computer was as big as a wardrobe)
and much easier to use than a mini-computer. As the technological performance of PCs
improved over time, they attracted new users who hitherto had not been using comput-
ers and also caused customers who had previously bought mini-computers to switch over
to PCs. Interestingly enough, by then, incumbent manufacturers of mini-computers were
unable to integrate PCs into their existing business models, which, ultimately, led to the
demise of the mini-computer industry.
6.2.1 Understanding the fundamental process of disruptive innovations

This failure of once highly successful incumbents and the parallel rise of successful start-
up companies is not uncommon. The disruptive innovation theory attempts to explain the
reasons for this seemingly inexplicable demise of established incumbents. The fundamen-
tal assumption of the theory of disruptive innovation is that there are two distinct types
of circumstances that companies can find themselves in: (1) sustaining circumstances and
(2) disruptive circumstances.
In sustaining circumstances, established companies develop innovative products that
help them to generate higher margins by selling better products to the most demanding
customers. Sustaining innovations can be year-by-year gradual improvements, such as
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increased processing power and larger storage capacity of PCs or added features on the
current Windows 8 operating system. Somewhat counter-intuitively, sustaining innova-
tions can also be of a ground-breaking, radical nature that helps companies to leapfrog their
competitors. For instance, the transition from electromechanical to electronic cash registers
was a radical but sustaining innovation. NCR (National Cash Register) dominated the mar-
ket for electromechanical cash registers but missed the new technology in the 1970s, which
led to a drastic decrease in sales. Yet NCR quickly decided to introduce its own electronic
cash register and, through its extensive sales organisation, was able rapidly to regain its old
market share.
Whether incremental or radical, what all sustaining innovations have in common is that
they entail a better product that can be sold for higher profit margins to the best customers.
As the example of NCR shows, while incumbents are not always first to develop a sustaining
innovation, they generally succeed in their large-scale commercialisation. This is due to the
fact that, compared with their start-up competitors, incumbents tend to have more financial
resources, a larger customer base and have the processes in place to push the innovation
onto the market.
In contrast to sustaining innovations, disruptive innovations are not focused on bringing
better products to existing high-end customers. Instead, they usually tend to be significantly
worse in the performance dimensions that traditionally were important in the industry.
However, before providing specific examples of companies whose offerings are based on
disruptive innovations, let us briefly mention that even the Internet and e-commerce could
be used as a type of disruptive innovation for commerce. Attributes that support this claim
include the following (see also Chapter 11):4
● The economics of exchanging information, which enable both market reach and content
richness to be achieved at the same time.
● Network externality effects and economies of scale.
● The speed of exchanging information and other types of content that drive connectivity
and interactivity.
● The economics of abundance, as information and digital products can be reproduced and
distributed at almost no marginal cost.
● Merchandise exchange, when a large assortment can be offered without the necessity of
having a large physical display.
● Prosumption, which means that an active participation of consumers is technically and
economically viable if a customisation of exchanges is desired.
● The generated value transcends industrial sectors.
Furthermore, the evolution of e-commerce reveals three main categories of commerce inno-
vations (see Exhibit 6.2): Internet-wired or traditional e-commerce (i-commerce), mobile
commerce (m-commerce) and ubiquitous commerce (u-commerce).5 While the evolution
from e-commerce to m-commerce could be considered as radical, the move from m-com-
merce to u-commerce is more disruptive in terms of both technology and business models.6
In order to succeed in their e-commerce initiatives, it is important that companies iden-
tify the key disruptive attributes for their e-strategies and related business models. The
same logic applies when designing new products and services. The origins of Apple are very
paradigmatic in this regard. The Apple II computer, for instance, had far less computing
power than mini-computers. Yet this disruptive innovation by Apple offered other benefits
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Exhibit 6.2 S-curves of e-commerce innovation: from i-, m- to u-commerce
Rate of technological progress

Ubiquity and universality
U-commerce
Mobility
M-commerce
I-commerce
Time and effort
Source: J-H. Wu and t-L. Hisa, ‘developing e-business dynamic capabilities: an analysis of e-commerce innovation from i-, m-,
to u-commerce’, Journal of Organisational Computing and Electronic Commerce, 2008, vol. 18, p. 97.
such as ease of use, convenience and, most importantly, a lower price. As a result, initially
it primarily appealed to less demanding customers who were willing to pay less for a com-
puter. Since at that time PC buyers had not previously owned a computer at all, they would
probably not have purchased a clumsy and expensive mini-computer. This is a typical
strategy that has been followed over time by technology-based start-ups (see the Blog Box
‘Strategy for startups’).
BLOG BOX
Strategy for startups: the innovator’s dilemma

Strategy. Unfortunately, it suffers from a bad reputa- the Harvard Business School. The innovator’s dilem-
tion among startups. It is associated with consultants ma discusses a situation in which there are established
who are paid millions of dollars only to come back incumbents in a specific market who are investing
with a two-by-two matrix of animals. Not that there is in sustainable innovations – these are incremental
anything wrong with it. Some of my best friends are improvements to an existing product. Usually, they
consultants. are doing that to support the incremental needs of
However, strategy is crucial for startup success. their customers.
Startups usually operate in an environment of con- They are then faced with a new entrant to the mar-
strained resources while competing with strong ket that introduces a disruptive innovation. The new
incumbents. Hence, the right strategy can be a matter entrant attacks only a small part of the incumbents’
of life and death. This post is the first in a series of business, usually the one in which the margins are very
posts that will explore concepts in strategy and how low. At this point, the incumbent decides not to com-
they apply to startups. pete in this business anymore because they don’t want
The first concept we’ll look at is the “Innovator’s to invest in defending their least profitable business
dilemma”, a term coined by Clayton Christensen from and/or are afraid of cannibalising their main business. ➨
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Blog box (continued)

As a result, the new entrant is then able to capture a Zynga: Gaming Companies, AirBnB: Hotel Chains,
significant market share in that specific segment. Box: Sharepoint.
What happens next is funny. After it captures the
low end of the market, the entrant moves upstream to
The innovator’s dilemma and your startup
the next part of the business. Again, the incumbent is
There’s a reason why so many internet startups were
reluctant to compete in that segment which is now its
able to use the concepts from the innovator’s dilemma.
newest least profitable segment. The entrant then cap-
The internet provides an amazing platform to build
tures a significant market share in this second segment.
disruptive products, and more importantly, create and
What happens next is funny. OK, you got the point. . . .
leverage new distribution channels.
Before we continue, it is important to understand
So, how should you think about the innovator’s
the types of disruptive innovation that exist. There are
dilemma? Here are four key takeaways:
four: a new product, a new technology to produce a
product, a new way to distribute a product and a new 1 Understand what the source of your disruption
way to provide services. The entrant can introduce is. Is it a new product or a new way to distribute
a disruptive innovation along one or more of these an existing product? This will help you
dimensions. understand whether you are really disrupting
Why would anyone buy books on the internet? the market or just building an incremental
1995. The commercial internet is in its early days. product.
Jeff Bezos decides to start selling books online. At that 2 Pay attention to opportunities in new distribution
time, the biggest booksellers in the United States are channels. Zynga’s biggest innovation was taking
Barnes and Noble and Borders. advantage of Facebook as its distribution channel
Bezos understands that he can disrupt the book before the traditional gaming companies could say
industry by taking advantage of the internet as a new “Mark Zuckerberg”.
distribution channel. Amazon launches and grows
3 Start by marketing to the group of customers for
exponentially. It takes B&N two years to open its own
which the incumbent in your industry has the
website. What took them so long? Well, not too many
lowest margin or the lowest interest to defend.
people buy on the internet and they are far better
Don’t go head to head on their most important
investing their resources in their major business – the
customers. They will crush you.
retail stores.
It takes Borders three years to launch their website. 4 Remember these lessons when you are at the top.
At this point, Amazon is far down the road. In 2001, 5 Figuring out how to compete in your market
Borders decides to let Amazon run their website for will take a lot of time and effort. Remember that
them. After all, the internet is just a small percentage these frameworks are just tools to help you think
of their sales anyway. through the problem and will not provide you
On February 16th, 2011 Borders files for bank- with a magic answer. You’ll have to discover it
ruptcy. yourself.
If you’ll look around, you’ll find many industries
Source: U. shmilovici, ‘strategy for startups: the innovator’s dilemma’,
that experienced or are experiencing a similar type TechCrunch.com, 8 april 2012.
of disruption. A small sample from internet startups –
The two trajectories of sustaining and disruptive innovations development are illus-
trated in Exhibit 6.3. The upper trajectory shows the performance evolution of the mini-
computer industry, which was moving along the path of sustaining innovations – developing
ever-more powerful, yet also more expensive and more complicated, mini-computers to
meet the demands of large corporate customers. The lower trajectory shows the perform-
ance evolution of the PC industry, which started out at a much lower absolute performance
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Exhibit 6.3 Disruptive innovations enter the market from below and improve over time until
they meet the demands of mainstream customers
Most demanding
customers
Sustaining
innovations
Performance
demanded by
Performance
mainstream
customers
Disruptive
innovations
Least demanding
customers
Time
Source: Reprinted by permission of Harvard Business school press. From The Innovator’s Solution by C. Christensen & M.
Raynor. Boston, Ma, 2004, p. 33. Copyright © 2004 by the Harvard Business school publishing Corporation; all rights reserved.
level than the mini-computer industry. Yet PCs also became increasingly powerful as they
continued to evolve along their path of innovation.
In addition to the two trajectories of sustaining and disruptive innovations, the third
important trajectory in this framework depicts the evolution of customer needs, shown
by the dashed line. Over time, customers demand increasingly higher performance from
the products they purchase. However, technological progress typically evolves faster
than customers’ demand for better performance. This implies that technologies that, dur-
ing their early development stages, do not fulfil customers’ performance requirements
continue to evolve and, at one point in time, outstrip the ability of customers to absorb
it. That is the point where the two trajectories intersect. Consider the functionalities of
Microsoft Office and how they have evolved over time. Early versions were characterised
by frequent crashes, incompatibilities with other programs and lack of important func-
tionalities. During that time (bottom left of the graph) customers were under-served,
i.e. they did not get as much performance as they asked for to do the jobs they wanted
to do. Over time, the Office package continued to improve, reliability and compatibility
increased and new functionalities were added. By now, Excel and Word have become so
powerful and all-encompassing in their functionalities that most users only use a frac-
tion of what these software tools offer. Undoubtedly, the few high-end users who require
cutting-edge functionalities for their work are pushing software packages to their limits,
but this group is probably fairly small.
The different user groups are visualised through the bell curve on the right side of the
framework. It presents the distribution of users according to their performance require-
ments. The dashed line presents the average, mainstream customers who constitute the
broad base of a user group. At the upper end of the distribution there are a few customers
who have much higher performance requirements than the average user. Similarly, at the
lower end of the distribution there are also some customers who have much lower require-
ments than the average user.
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As more and more customers are over-served by the expanding functionalities of

Microsoft Office, there are opportunities for disruptive innovations that address this seg-
ment with less powerful, yet cheaper and more convenient offerings. Consider Google’s
spreadsheet, word processing and calendar software that can be accessed online free of
charge. Although these packages are certainly not as good as the Office software, they are
in all likelihood good enough to meet the needs of less demanding users. Incidentally,
these users also happen to be the customers who provide the lowest profit margins to
established incumbents anyway. As a result, the latter are typically not upset to see them
leave. However, the theory would suggest that as Google’s software improves over time,
it will eventually reach the point where its performance is good enough to meet the
demands of mainstream customers. At that point, the mass market switches over to the
new technology.
6.2.2 Discovering the underlying reasons for incumbents’ failure

The pattern that is described above raises the question of why these types of disruptive inno-
vations take place over and over again in different industries and countries. Frequently it is
argued that it is the inability of companies to develop the appropriate innovations that later
turn out to be successful. Yet established companies, such as Kodak with its digital imaging,
do constantly innovate, and oftentimes even develop the technologies that later turn out to
be the disruptive innovation.
Instead, the driving force behind the inability of incumbent companies to commercialise
these innovations successfully is not located in R&D departments, but instead in how com-
panies allocate their resources (i.e. management time and financial resources). Here, the
theory of resource dependence provides interesting insights that explain more fully why
incumbents fail in the face of disruptive innovations. The theory states that it is actually cus-
tomers and investors – not managers – who control the allocation of resources in an organi-
sation. This is so because companies that invest in projects that do not satisfy the needs
of their best customers and do not suit the risk structure of their investors will not receive
the necessary funding over the long run. Furthermore, companies generally generate most
of their profits from their most demanding customers, who are willing to pay premium
prices for more sophisticated products. At the same time, profit margins from customers in
lower segments are generally much lower. Consequently, innovation efforts tend to revolve
around the improvement of products at the high end.
Similarly, when deciding whether to maintain or even increase their stake in a com-
pany, investors look for innovations and other growth initiatives that promise a substantial
increase in revenues, which then translates into a share price increase. Since the market
potential of disruptive innovations is typically small during the early years and cannot be
measured precisely, developing a solid business plan is largely guesswork, which makes it
hard to sell to investors.
The problem for incumbent firms would be less critical if new competitors entering the
market with disruptive innovations remained in the low-margin market segments. Yet once
disruptors have entered a market they are motivated to move upmarket into more demand-
ing customer segments in order to increase their profit margins. For their part, incumbents
are motivated to flee upmarket into their most demanding customer segments since that is
where their most profitable customers are located. This asymmetric motivation is at the core
of the innovator’s dilemma.
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Why disruption can be good for business

The problem with most management theory, says That said, Prof. Christensen’s stellar trajectory
Clayton Christensen, leaning forward in his chair, has engendered a certain amount of professional
is that it breaks fundamental rules about how good jealously. Rivals have claimed that the best ideas in
theory should be created. ‘Too many academics The Innovator’s Dilemma were already present in
and business researchers make the leap from Innovation: the Attacker’s Advantage, a book written a
observation to theory without paying attention decade earlier by McKinsey luminary Richard Foster.
to the intermediate step categorisation,’ he says. Others cock a snook at the way disruptive innovation
‘They don’t think about their recommendations in has become a kind of pseudo-intellectual fashion item.
a circumstance-contingent way.’ A more substantive charge is that the world
I am perched on a sofa in Prof. Christensen’s spa- view laid out in The Innovator’s Dilemma – in
cious basement office, deep in the bowels of Harvard which innovations are classified as ‘disruptive’ or
Business School, struggling to keep pace. I am here ‘sustaining’ – is in itself too simplistic. Surely, I
ostensibly to talk about The Innovator’s Solution, suggest, the world is a more complicated place than
his new book, but the conversation has taken an suggested by this two-part taxonomy.
epistemological turn. What he is saying – or at least Prof. Christensen’s response is that the distinction
what I think he is saying – is that a good deal of what between disruptive and sustaining innovations has
passes for management theory is, well, bunk. Study been widely misunderstood. ‘If I had to do it again, I
10 successful companies, work out what they have would have found another word. Disruption had so
in common and recommend that everyone does the many prior connotations,’ he says.
same. The genre was popularised by In Search of
There is some truth in this. Like ‘core competences’
Excellence, Tom Peters’ and Bob Waterman’s 1984
and ‘business process reengineering’, the other
management blockbuster. A more recent example
big business concepts of the 1990s, disruptive
was Good to Great by former Stanford University
innovation has been stretched in common usage.
academic Jim Collins, the biggest-selling business
The true Christensen meaning is precise. Disruptive
book of the post-dotcom bubble era.
innovations are technologies or business models that
If Prof. Christensen is slating his peers, he is doing allow companies to offer simpler, less expensive
so with great grace. ‘I have enormous respect for Jim products or services than have been offered before.
Collins,’ he says in his slow, sincere voice. ‘He’s got Often these are not breakthrough innovations but
a good head and very high principles. But take his clever repackaging of old technology. A classic
finding that the people who run these Good to Great example is Linux, the open-source computer operating
companies are solid, grounded, humble people. The system that is a repackaging of technology found in
next question should be: is there a circumstance Unix, the dominant enterprise computer platform.
when you really need a Rudi Giuliani [the famously
As spelt out in The Innovator’s Dilemma and recapped
truculent former mayor of New York]? We need
in the sequel, market leaders find it difficult to
circumstance-based categories for all these things.
respond to a disruptive innovation because it tends
Part of the reason why that kind of research plays
to appeal first to non-customers, people who don’t use
so well is that many managers are just looking for
that category of product, or to low-end customers, who
an easy answer, a silver bullet. There is a lot of
are prepared to accept a less-than-brilliant product
pressure on writers to cater to that need.’
if it saves money. Neither segment is particularly
Prof. Christensen has done very well by catering to appealing to companies that lead their industries.
something quite different: the hunger of a certain type They prefer to invest in serving existing customers
of manager for books more grounded in theory than with proven technology and predictable returns.
Good to Great-style bestsellers, but less taxing than
Prof. Christensen is clearly bothered by lazy
textbooks. His first book, The Innovator’s Dilemma,
application, or rather misapplication, of his ideas.
sold by the truckload and made him one of the biggest
The distinction between disruptive and sustaining
names in management theory. He remains arguably
innovations is no panacea. In answer to the charge
the brightest star on Harvard Business School’s star-
of over-simplification, he also points out that
studded faculty. His contribution to the lexicon of
getting to grips with the subtleties of disruptive/
management is great – ‘disruptive innovation’ is used
and abused the world over.
sustaining innovation is the easy part. The real ➨
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work begins when you try to place new technologies customer is not yet satisfied with the performance of
and business models into one or another category. available products.’
‘An innovation that is disrupting to one firm is Simple, right?
sustaining to another firm. So the Internet was Like the disruptive/sustaining innovation frame-
sustaining technology to Dell Computer, which work, this is a lot easier to grasp in the abstract
already sold personal computers by telephone. But than it is to apply in practice. In the hands of the
it was a disruptive technology to Compaq Computer master, however, it all looks so easy. Thus the semi-
[which sold mainly through stores].’ conductor industry is on the verge of a huge upheaval,
What really lights Prof. Christensen’s fire is applying Prof. Christensen believes, as the basis of competition
his framework to companies, industry sectors and changes from trying to cram more and more transistors
economies. Like a scientist with a new microscope, on a chip to offering customised products to the makers
he cannot resist turning it on whatever comes to of the new breed of wireless and similar devices.
hand. Semiconductors, education, healthcare – each He switches the discussion to the US healthcare
is examined, dissected and diagnosed in the course system, explaining that he sits on the strategy
of our 90-minute conversation. board of one of Boston’s big teaching hospitals. ‘We
The Innovator’s Solution, Prof. Christensen’s sequel, commissioned a study that showed that 70% of the
adds at least one important element to the oeuvre: people in the hospital would have been in intensive
a model for trying to understand why the ability to care 30 years ago, and 70% of the people in intensive
make profits seems to migrate between parts of what care would have been dead 30 years ago. In other
strategy wonks like to call the ‘value chain’. Why, words, hospitals are moving to the high-end, focussing
for example, did profits in the personal computer on intractable, multi-dimensional diseases.’
industry migrate from the designers and builder of The disruptive innovation in this case is coming
machines (Apple, Compaq, and IBM) to the makers from technology that enables procedures that used
of sub-systems (Microsoft and Intel)? Why does the to be handled in hospitals to be dealt with in
balance of power appear to be shifting away from specialist outpatient centres, and procedures that
large car companies and towards the makers of would have been handled in outpatient centres to be
value-added components and sub-systems? dealt with in doctors’ offices. Then there is a whole
His answer is that the basis of competition changes category of things, including complex procedures
when products ‘overshoot’ the needs of the majority of such as dialysis that people can now handle at home.
customers. As this happens, raw performance becomes ‘The focus now in America is how we get these
less important than the ability of manufacturers to very expensive hospitals to become cheaper, when
get products to market quickly and in wider variety. we should be thinking about how we can help
The companies that concentrate on designing and the inexpensive venues to do more. We should be
assembling finished products (Apple or General facilitating the disruption rather than trying to make
Motors) thrive in the first era. They use proprietary the status-quo less expensive. Yet public policy, like
technology and vertical integration to achieve corporate policy, works against disruption.’
maximum performance. Once performance is ‘good
Think of The Innovator’s Solution, Clayton
enough’ for the average consumer, however, product
Christensen’s much anticipated new book, as ‘the
architectures tend to become modular. This enables
nine habits of highly disruptive companies’. While
shorter development times and products that are
The Innovator’s Dilemma (1997) spelt out why well-
easier to customise.
run companies find it so difficult to respond to what
In this environment, it is the sub-system and Christensen termed ‘disruptive innovations’, the
component suppliers whose products are no longer sequel is nothing less than a handbook for managers
good enough. They come under greater pressure from who would rather disrupt than be disrupted.
manufacturers to improve performance but reap
The promise is rich: ‘The Innovator’s Solution
attractive profits for their trouble. Prof. Christensen
summarises a set of theories that can guide managers
summarises all this in one pithy sentence: ‘The
who need to grow new businesses with predictable
power to capture attractive profits always shifts to
success and ultimately kill their well-run, established
the activities in the value chain where the immediate
competitors.’
Source: London, S. (2003) Why disruption can be good for business, FT.com, 2 October.
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6.2.3 Raising the right questions to recognise the threats

of disruptive innovations
The main contribution of the theory of disruptive innovation is that it challenges conventional
management thinking that is perfectly logical and rational in most situations yet leads to
failure in the face of a disruptive innovation. Before discussing the key questions that need to
be asked to recognise threats of disruptive innovations, we want to take a closer look at the
key fallacies of conventional thinking that lead to failure in the face of disruptive innovations.
First, conventional thinking would suggest that most advanced customers who are using
products that are of cutting-edge quality will be key to recognising imminent changes in
industry structure. In contrast, disruptive innovations have their roots with those customers
who are over-served by existing products or with those users who had previously not been
using the product.
Second, conventional thinking would also suggest that managers need to pay most atten-
tion to the largest competitors in an industry. In contrast, companies that disrupt industries
frequently are not even on the competitive radar of those companies that are competing in
that industry.
Third, conventional thinking suggests that those companies with the most resources that
can be spent on activities such as R&D or marketing are likely to be successful. In contrast,
those companies that succeed with disruptive innovations leverage asymmetric motivation
and serve those customers that their competitors are unable to or do not want to serve.
To counter these traps of conventional thinking and to determine whether there exists
a threat of a disruptive innovation in their industry, managers of established incumbents
need to ask the following set of questions dealing with (1) non-served customers, (2) over-
served customers and (3) the disruptiveness of the innovation relative to competitors:
● Non-served customers: Is there a large group of people who previously did not have the
money or the skills to purchase the product themselves? Did customers have to go to
a central, inconvenient location to purchase the product? For instance, families with
grown-up children who wanted to sell the clothes and toys they no longer needed
belonged to the group of non-served customers because they had the desire to get a job
done but did not have the appropriate means to do so, with the exception of a garage sale
or the local second-hand store, both of which have a very limited market potential. eBay
provided a simple and relatively cheap format to extend this market to a much broader
audience, thereby substantially increasing the revenue potential.
● Over-served customers. Are there customers at the bottom end of the market who would buy
the same product with fewer features for a lower price? Is it possible to build a profitable
business model while keeping down prices? One important indicator of over-served cus-
tomers is that they do not use many of the features that are offered in the most up-to-date
version of a product. As we showed above, the market for spreadsheet and word process-
ing software contains numerous customers at the bottom end of the market who would be
willing to work with fewer features, as offered by Google’s online version. For over-served
customers, price or other performance features that had not been of dominant importance
previously become the primary drivers for purchasing and usage decisions. In contrast,
under-served customers are eagerly awaiting the next upgrade or new product version.
● Disruptiveness to competitors. Is the innovation disruptive relative to all relevant rival compa-
nies that are currently competing in that market? This question emphasises the crucial point
that a technology or business model is never disruptive in absolute terms but only in relation
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to an existing technology or business model that is already used by established companies.

For instance, the Internet as a technology is neither disruptive nor sustaining. Instead, it is an
infrastructural technology that can be used in either a sustaining or disruptive way. Thinking
of the Internet as only a means to disrupt established firms and failing to look at the whole
market was actually a critical failure factor for many dotcom start-ups during the early years
of the Internet. For instance, the online retailing of PCs was certainly highly disruptive relative
to manufacturers who were selling their PCs through physical stores. Consequently, compa-
nies such as HP or Compaq were threatened by the rise of Internet-based retailing. Yet for
other companies such as Dell, the Internet was a sustaining innovation. Previously, Dell had
used the telephone and fax as primary sales channels, and the Internet was a natural exten-
sion to serve its existing customer base better and to attract new customers. As a result, Dell
had the incentives and resources to compete in the online world and it did so very success-
fully, becoming by the end of the 1990s the world’s largest PC retailer. The disruptive innova-
tion theory would have predicted that new start-up companies attempting to sell PCs over the
Internet would have been successful if they only had to disrupt competitors such as Compaq.
The banking industry is another example where the Internet had a sustaining impact. The
case of Nordea illustrates how an established company successfully integrated the Internet
into its value proposition because it was a way to serve existing customers better by offering
online access to bank account statements, bill payment, etc. In contrast, pure Internet banks
that sprang up in droves during the late 1990s have been struggling to make significant
inroads into the banking industry or to sustain a significant growth.
The questions that we have raised in the above three areas aim at increasing the aware-
ness for disruptive threats and providing the basis for appropriate reactions, which we shall
discuss in the following section.
6.2.4 Finding ways to deal with disruptive innovations

A large part of the literature on disruptive innovations discusses the question of how
incumbents can react successfully once they realise that a specific innovation has a disrup-
tive potential.7 In principle, there exists a broad spectrum of possibilities ranging from not
responding at all to leapfrogging the disruptor. The different possibilities with their respec-
tive advantages and disadvantages are discussed in more detail below:
● Not responding at all. That is what many traditional firms did when e-business ventures
started to enter the market on a large scale in the late 1990s. At that time, typical justi-
fications of such no-response strategy were voiced through statements such as: ‘Internet
ventures are not my business’; ‘e-Commerce will only make up a small niche of the overall
market and is therefore not attractive for our company’; ‘We don’t want to set up an online
channel that could cannibalise our physical operations’; and ‘We don’t have the IT skills
or the necessary IT systems to compete online’. Obviously, managers were (and still are)
bombarded with a myriad new technologies and business threats and opportunities on a
daily basis; the challenge for them is determining which of these threats and opportunities
could materialise in the future. Yet, in the face of substantial threats, paying too little atten-
tion to a changing environment is often more hazardous than paying too much attention.
● Migrating/harvesting. This entails a less passive form than not responding at all. While
the above strategy of not responding is quite often based on ignoring or not properly
assessing the underlying facts, the migration strategy is based on a conscious decision to
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‘milk existing resources’. This means, for instance, that if the book retailer Barnes & Noble
had come to the conclusion that Internet-based book retailing would overtake physical
book retailing, it would have stopped investing in its network of physical bookstores.
● Defending. This entails an active response to the new threatening business model. When
defending their existing markets, incumbents need to improve their business model in
such a way that they are able either to lower their prices or disproportionately to increase
the benefits they provide to their customers. However, this option is usually difficult to
implement successfully because the new business model or technology tends to have
faster improvement dynamics than those created through a defensive strategy.
● Straddling. This means to rely on the old business model while simultaneously introduc-
ing the new model. This can either be done as a transitional hedge to determine the
potential of the new technology or be set up right from the start as a long-term strategy
where both models will co-exist. This strategy attempts to combine the best of both
worlds, i.e. to continue profiting from the old business model while simultaneously gain-
ing traction in the new business model. An illustrative example, in this regard, could be
found in the book industry (see the FT article: ‘Light reading’).
Light reading
In the departure lounge at Heathrow Airport, sales in the first half were up at 14 per cent, while
people are reading. There’s nothing particularly in the UK it agreed with the general consensus
unusual about the scene – we read all the time, on that e-books now make up about 6 per cent of their
buses, trains and planes. What stands out here is trade/consumer business. We expect e-books to be
that many of these readers are glued not to tatty at about 10 per cent by the end of the year.”
paperbacks or glossy hardbacks or even those large
So what does this all mean? Are we reading more?
format airport specials but to e-books.
Are e-books taking over from physical books? Are
It’s all part of what is being dubbed the “Kindle hardbacks about to go the way of vinyl? And where
Summer” – the first summer when e-books have sold does it leave readers, writers and publishers?
strongly, marking a turning point for publishing.
There are now several major platforms for e-books.
And if you’ve recently packed for a beach holiday,
Amazon’s Kindle is the market leader, but Apple’s
as I did last week, you’ll understand the benefits.
iBooks, Barnes and Noble’s Nook, Waterstones
Why take a stack of heavy hardbacks that eat into
and retailers such as Kobo have all expanded the
your precious luggage allowance when you can take
horizons of e-books in the past couple of years.
an e-reader stocked with thousands of books? Gone
Although each platform has its own unique feel,
is that mad rush at the airport bookshop as you try
what are selling particularly well across all devices
to find something you might want to read; and gone
are thrillers, misery memoirs and blockbusting
is the suitcase crammed with hardbacks packed
popular fiction.
“just in case”.
Yet, while readers are embracing the digital book
In April, the Association of American Publishers
more than ever, this shift hasn’t been easy for
announced that for the first time e-books had
publishers. The music industry struggled through
outsold all other traditional formats; and since
the impact of Napster and the rise of the MP3 player,
the beginning of April, Amazon.co.uk customers
but publishing – one of the most traditional of all
have been purchasing Kindle books over hardcover
the creative industries – has until now remained
books at a rate of more than two to one. “E-book
relatively resistant to change.
sales are rising, and rising faster than previously
predicted, led in the most part by the Kindle,” “Culturally there was resistance pretty much at
says Philip Jones, deputy editor of the Bookseller. every publishing house,” says Michael Bhaskar,
“Penguin reported in July that its global e-book digital publishing director at Profile Books. “People ➨
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thought that e-books and digital publishing were One of Constable and Robinson’s literary bestsellers
out there to kill books and the book industry.” is Jennifer Egan’s Pulitzer Prize-winning A Visit
That attitude has slowly been replaced with one from the Goon Squad. The novel, also available
of acceptance that digital is here to stay and that as an e-book (£5.99), has become an iPhone and
publishers (and writers) must adapt to survive. iPad app. For just £2.99, readers get not only the
“Digital isn’t a way of killing print books, but full text of the book but the audiobook, video
supporting them. It’s the content that matters and illustrations. It’s hard to see how the £7.99
most.” paperback can compete.
From the readers’ point of view, it’s not hard to see But publishers have to be cautious about how
why. Joe Dunthorne, author of Submarine, says: they embrace the digital possibilities. The question
“When reading all 1,200 pages of Infinite Jest last hanging over these complex and often expensive
year, I cut my copy into three chunks (re-binding apps is: are they commercially viable? They require
each bit with masking tape) to make it easier to investment and can ultimately compete with other
carry. But then, each night, I had to come home and products such as the hardback or paperback,
catch up on the footnotes. Needless to say, it was cutting publishers’ margins. Henry Volans, Head of
annoying. Now my girlfriend’s reading it on Kindle, Faber Digital, is more positive. “If publishers don’t
and it’s ideal. David Foster Wallace’s Infinite Jest stretch what you can do then start-ups will. I think
seems like a good enough reason, on its own, to buy there’s an imperative to innovate.”
an e-reader.”
Yet, digital books are not simply running amok.
Earlier this year, e-books had a prominent Physical books, far from obsolete, are competing
breakthrough when the judges of the 2011 Man with their digital counterparts. For mainstream
Booker Prize were given a choice of how to read the hardback books we could also see a push to greater
138 contenders. “We could choose to use Kindles or quality and exclusivity. “As digital culture becomes
not – as I recall two did and three didn’t,” says the more prevalent the value of speciality culture
novelist Susan Hill, a judge on this year’s panel. becomes greater,” says Bhaskar. “I’m convinced
Hill’s book Howards End is on the Landing (2009) that we’ll start to see more limited, boxed and
explored her experience of rediscovering old books numbered editions produced on incredible paper
during a year of reading – something that couldn’t with extra design features. We’ll see the resurgence
happen in a purely digital world. Did she embrace of the book as a sort of collector’s item.” Paperbacks
the Kindle for her Booker reading? “I didn’t read and more disposable types of books, however, may
on a Kindle and have never even seen one,” she not fare so well.
says. “I am a real book person – and always will be.
We can also expect new financing models for
I am a great laptop person and an internet/Twitter/
authors. In the US, Amazon has “dropped a brick in
Facebook one too so I am no Luddite; but the real
the publishing pond” with its digital self-publishing
printed book is a joy – it ain’t broke so. . .”
element (in June, John Locke became the first
However, many book-lovers are embracing the self-published author to sell a million e-books
e-book. The thriller writer and former literary agent through Amazon). In the UK, the Unbound project is
Emlyn Rees is now an e-book fan: “I got a Kindle publishing books by pitching ideas direct to readers
for Christmas and now read more books on it than who then stump up the funding for the ones they
not. It’s particularly great for holidays, in that you want to read. When an idea has received 100 per cent
can load it up with beach reading, without having of the financing needed, the writer starts work and
to pay airlines for the privilege of carrying all that “investors” receive a copy of the finished product.
extra weight.”
Literary agents, too, are getting in on the act. Last
“All writers have to embrace e-books,” says Rees. year, Andrew Wylie launched Odyssey Editions to
“Any writer with a mainstream publisher is going publish modern classics by the likes of Saul Bellow
to have to get used to promoting their e-books and William Burroughs as e-books through Amazon.
online as the market is growing so quickly it can’t Part of the move was to cut publishers out of the
be ignored. The main arguments concerning the loop. Next month, the agent Ed Victor will follow
pros and cons of e-books come down to royalties Wylie, setting up his own e-books imprint Bedford
and piracy. What slice will the writer get of the Square Books. “I started Bedford Square Books for
electronic pie and how can they protect themselves three reasons,” Victor explains. “One was to please
from having their work distributed for free?” my authors, to have books that they thought were ➨
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dormant living and breathing again. The second non-fiction publishers such as atavist.net and
reason was to have fun. I was a publisher, but byliner.com are finding niches for new forms of
the last book I actually published was in 1972. I’m writing. Byliner made a splash in April publishing
learning about how you publish and market books Three Cups of Deceit by award-winning author
in the 21st century and it’s fascinating. And the Jon Krakauer, about allegations that Nobel Peace
third thing is not to lose money.” Prize nominee Greg Mortenson fabricated parts of
his bestselling books. Known as “Singles”, these
But while digital publishing has opened up the
e-books are intended to be read in a single two-hour
means of publishing to anyone with a computer,
sitting. Fiction writers, too, could benefit. “There
pity the poor reader. Sitting on a beach with my
are so many possibilities for interactive fiction,
Kindle, I didn’t start trawling through all the books
which is where I see the e-readers really coming in
by authors I’d never heard of. Instead, I downloaded
to their own,” says Dunthorne.
Julian Barnes’ The Sense of an Ending, which
was published while I was abroad, but could be “Writing always changes and evolves,” agrees
downloaded. When faced with vast choice, we Bhaskar. “Tweeting, blogging, the way people
gravitate to what we know. The brand (be it author interact on social media – all of those things are new
or publisher) is all important. One of the biggest – forms of writing and what we will see is new great
JK Rowling – will begin selling Harry Potter e-books writers master these forms. It’s a new commercial
exclusively through her Pottermore website in the and creative challenge for writers. Publishers have
autumn. It is a canny move for the author, allowing to be there to help make it a success.”
her to maintain complete control (and reap the
There are, of course, hurdles to this brave new
benefits).
digital world. Sitting on the plane, waiting to fly
Below the horizon, there is also mushrooming home, I heard a voice: “I’m sorry sir, could you
creativity from new start-ups keen to break the turn that off for take-off?” I’ve never been asked to
mould. This summer, 24symbols.com, a “Spotify switch off a book before.
for books”, has launched. Readers can download
“ ‘Digital isn’t a way of killing print books, but
e-books either ad-supported without charge or for
supporting them. It’s the content that matters most.”
€9.99 per month ad-free. Meanwhile, small digital
Source: Adapted from Wilkinson, C. (2011) Light reading, Financial Times, 13 August.
Nevertheless, while this option might seem to be the more promising at first sight, it also
entails major risks in certain scenarios. First, continuing to invest in something that may no
longer work might mask a company’s unwillingness to make tough choices. As we pointed
out in Section 1.1, the willingness of top management to make tough trade-off decisions is
one of the cornerstones of strategy formulation. Second, when companies try to integrate
the disruptive innovation into their own existing business model, this frequently leads to
‘cramming’. Cramming means that the new technology is primarily used to improve the
existing business model. For instance, the newspaper industry provides an interesting
example of how publishers initially attempted to cram Internet-based news publishing into
their existing business model. In the late 1990s, the LA Times, like many other newspapers
around the world, recognised the importance of the Internet and decided to enter this mar-
ket with an online version of its print edition. In essence, it opted for a straddling strategy.
Yet, as in most cases, it was primarily the journalists and editors of the traditional print
version who became involved with the creation of the online format. This has resulted in
an online edition that mirrored largely the print edition with the same content and similar
layout. Such newspapers did not leverage the distinct advantages of electronic publishing
such as discussion boards, site-searching tools and breaking news from third-party sources.
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The following quote from a newspaper executive sums up this inability to operate two dis-
tinct businesses simultaneously: ‘Where I think we missed the boat is that we saw it [the
Internet] as an extension of the newspaper. [. . .] Our Internet operations were really run
by people who came out of the newsroom, so they were editors who tended to look at this
[online channel] more as a newspaper.’8
● Switching completely. This is a more radical response than straddling, since it entails a
complete switch to the new business model. The obvious attraction of this option is that
it focuses all managerial and financial resources on the strategy, which helps to avoid
distractions (as was the case in the straddling examples mentioned above), create a
sense of urgency and build implementation speed. Yet it is also the riskiest of all options
since there is always a high degree of uncertainty associated with these types of innova-
tions. Furthermore, it is at least questionable whether the resources and capabilities (see
Section 4.1) that were valuable in the old bricks-and-mortar environment, such as physi-
cal assets, know-how in store management, etc., will be valuable for managing an online
venture.
● Leapfrogging. Doing this to the disruptive competition means that a company tries to
out-substitute the substitution. From a long-term strategic perspective, this option is
highly attractive, but it requires a very deep understanding of how technology and
market demand will evolve. It is not enough just to have a clear understanding of which
future technology could be successful. It is also essential to get the entry timing right,
because entering a market too early can be just as detrimental as entering it too late
(the issue of entry timing is discussed in more detail in Section 7.4). If, for instance,
Barnes & Noble had attempted to compete against Amazon.com by selling books in a
digital format (as e-books), it would have leapfrogged the competition by skipping one
technology generation. Obviously, doing so would not have been an easy task, especially
considering the fact that Amazon.com was in all likelihood better equipped to make the
move to digital goods than Barnes & Noble.
6.2.5 Selecting the appropriate mental frame for efficient reactions

In recent years, management researchers have further developed the theory of disruptive
innovations, mainly driven by anomalies that the existing theory could not explain. In this
section, we want to delve more deeply into these extensions of the theory.
One of the most important claims of the disruptive innovation theory is that incumbent
firms do not invest in disruptive innovations because they focus on the needs of their best
customers, which leads to resource dependence. This lack of resource, the theory goes,
explains why they are unable to commercialise disruptive innovations successfully.
However, more recent research has shown that there are, in fact, numerous companies
that have invested substantially in disruptive innovations, but still failed. Consider, for
instance, Kodak’s move into digital photography in 1996.9 George Fischer, then CEO of
Kodak, knew that digital photography would eventually threaten Kodak’s core business. He
and other senior executives at the company were tempted to ignore it because the profit
margins were much lower than on the core business and digital photography also did not
address Kodak’s traditional customers. Nonetheless, Fisher rallied support from his top
management and invested more than $2 billion in R&D for digital imaging. Yet, because
Kodak was so worried about the threat, most of the money was spent before it became
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obvious how the market would develop. Instead of basing the new digital products on home
storage and home printing capabilities, which later turned out to be the successful business
model, Kodak invested hastily in 10,000 digital kiosks in its partner stores and committed
itself to price points and product specifications that were difficult to change later on. In
contrast, industry outsiders such as Hewlett Packard, Canon or Sony invested in the home
storage capabilities, thereby driving the development of digital photography. (For more
detail on how Kodak failed to take the right train in the digital technology innovation, see
the FT article: ‘Snapshot of a humble giant’.)
Snapshot of a humbled giant

When, one sunny weekend in July 2007, Eastman But current and former Kodak executives and
Kodak demolished Buildings 9 and 23 – disused directors interviewed for this article claim such
facilities in “Kodak Park” near the US group’s a simplistic interpretation of the group’s recent
headquarters in Rochester, upstate New York – trajectory – that its managers simply did not see
the local newspaper, the Democrat & Chronicle, digital technology coming and, when they did,
covered the story with a mixture of excitement turned a blind eye to its importance – is wrong.
(“Kaboom!” ran one headline) and nostalgia. “You People in the group predicted the transition of
were only steel, concrete and bricks, but you housed its historical imaging business from analogue to
a significant part of Eastman Kodak’s intellectual digital, described by one former executive as an
property, its engineers, its skilled trades people, “oncoming freight train”, and started preparing for
Kodak’s manufacturing intellect,” wrote Kenneth it as early as the mid-1970s.
Budinski, a metallurgist who had worked in
The bigger question is why Kodak was unable, or
Building 23 for 38 years, in a letter to the paper.
unwilling, to jump on to the digital train – or at least
It was an illustration of the change ripping through dodge out of its path.
the traditional photography market the company
had dominated for more than a century. As teary- A history of innovation
eyed retired employees talked of their sadness at George Eastman, Kodak’s founder and one of the
the end of an era, they took pictures and video greatest entrepreneurs and inventors in industrial
of the buildings’ demolition – with their digital history, understood the value of intellectual
cameras. property. He developed the emulsion and coating
Antonio Pérez, Kodak’s chief executive, likes to apparatus that underpinned the company’s
point out the irony of that scene to those who start photographic dominance and did everything he
lamenting the group’s missed opportunities, or could to protect his inventions with patents.
even accuse him of accelerating its decline. He has But in the 1890s, having come up with the
heard a lot of laments and accusations. In his quest affordable combination of roll-film and camera
to give Kodak a future in more promising markets, that democratised photography, he realised – as
he has moved it away from retail consumers, business historian Richard Tedlow has written –
exploited its digital-imaging patents and developed that to maintain leadership, he needed to “turn his
its commercial printing business. But in the first company into a moving target”.
phase of restructuring up to 2007, he also had to
axe 13 Kodak factories, 47,000 jobs and about 130 Eastman wrote that he wanted his business to be
processing labs. In January, overburdened with the able to create “a rapid succession of changes and
legacy costs of its industrial past, Kodak filed for improvements. . . If we can get out improved goods
Chapter 11 bankruptcy protection. The reaction of every year nobody will be able to follow us and
US strategy expert Gary Hamel, who in 1992 praised compete with us. The only way to compete with us
Kodak for creating “stored energy” for the future, is will be to get out original goods the same as we do.”
typical. Asked recently how he explained Kodak’s Kodak innovated successfully on the back of
decline, he said: “It was denial. It was just denial.” Eastman’s original scientific breakthroughs for ➨
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more than 100 years. But as the potential disruption But while these efforts yielded many of the patents
of electronic and digital technologies became Mr Pérez believes could yet be Kodak’s salvation,
clear in the 1980s and 1990s, Kodak’s board, top they sucked in investment for little return. Until
management and investors maintained their focus the early 2000s, Kodak’s leaders judged that digital
on the traditional photography business. That initiatives would probably continue to complement
was understandable. Kodak had a technological the hugely cash-generative roll-film business rather
lead, backed by those patents. The competition, than disrupt the whole image-making process.
from rivals such as Japan’s Fujifilm, the German–
Bob LaPerle, who led teams assessing the impact
Belgian group Agfa-Gevaert and Britain’s Ilford
of digital technologies in the early 1990s, says
Photo, was eating into its dominant position. But
the board missed an opportunity when it replaced
as Kodak’s official regulatory filings continued to
chief executive Colby Chandler in 1990 with Kay
emphasise through the 1990s, the group’s products
Whitmore, a relatively conservative 33-year veteran
and services “competed with similar products and
of the group. “From the time [the digital strategy]
services of others”. Crucially, the gross margins on
was published, we really had a hard time getting it
the traditional photography process – from roll-film
approved by Kay Whitmore,” he says.
sales to photographic paper – remained, in the words
of one former executive, “luxurious”, estimated at 75 The blind spot was not his downfall – indeed,
per cent or more, and apparently reliable. It was only another person close to the company at the time
as late as 1999 that Kodak’s roll-film sales peaked. recalls discussing the electronic future with the
board under Whitmore. Kodak had suffered a series
They saw what was coming . . . of restructuring charges, its early diversification
The contrast with the market and technology for into healthcare had faltered, and even the core
digital photography, particularly in the consumer photographic business appeared to be stagnating. So
area, was stark. Margins there were lower, when the directors decided to oust Whitmore (who
competitors more numerous, and the pace of change died in 2004), they belatedly took the opportunity
frenetic and harder to forecast. Frank Sklarsky, to appoint a technology expert – George Fisher, who
who joined Kodak from outside the industry in had earned plaudits as chief executive of Motorola,
2006 and served as chief financial officer under Mr then riding high as one of the most innovative US
Pérez until moving to Tyco International in 2010, electronics companies.
says: “Kodak’s core competence was in chemistry-
based, continuous flow manufacturing; the digital
. . . but not the pace of change
business is very different: product transitions are
Rick Braddock, a Kodak director since 1987, whose
much quicker.”
career spans Wall Street, online retailing and private
According to former employees, however, Kodak had equity, recalls that “the mindset of the company
not been shirking its duty to look into the future. In was ready for the challenge: it was ‘Batten down the
1975, for instance, Kodak employee Steven Sasson hatches’. We sold the healthcare business and we
invented a crude, “toaster-sized” digital camera – started the process of developing a digital response.
producing 0.01 megapixel images. In 1979, the company But the way the market shifted was dramatically
put together a graphic timeline laying out roughly faster than we had anticipated or than I’d ever seen”.
when Kodak’s customers would make the transition
Willy Shih was president of Kodak’s consumer
to digital imaging, starting with government clients,
digital unit from 1997 to 2005 and is now a
moving through graphic businesses and ending, in
management professor at Harvard Business School.
about 2010, with retail consumers. In 1991, the group
He says that when he joined the company, “people
drew up a digital strategy which led it three years
like George Fisher [then chief executive] and Dan
later to develop a digital camera – though it kept its
Carp [who succeeded Mr Fisher in 1999] absolutely
brand off the device – with Apple, the company whose
knew that this was coming. They completely had
mould-breaking products would help accelerate the
their heads around a lot of the issues that went
analogue decline a decade later.
with that, including the lower gross margin, the
Meanwhile, Kodak also launched “hybrid” products different competitive environment, the very high
such as the photo CD and the standalone Picture barriers to entry in film, whereas there are no
Maker retail photo-printing kiosk. Even the potential barriers to entry in digital. These guys weren’t
threat from camera-enabled mobile phones was stupid; they understood that, they understood it
“war-gamed” by Kodak executives in the early 2000s. very well.” ➨
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But the image the company presented in its regular Prof Shih points out, however, that Mr Fisher, Mr
filings to the financial regulator and shareholders Carp and their senior executives believed they had
from the early 1990s changed only gradually. a duty to “maximise how much you could earn out
Apple’s QuickTake 100 digital camera – the one of the traditional business”. In addition – a point
developed with Kodak – was no secret, but the easily forgotten in a world of eight-megapixel camera-
first time the company mentioned explicitly in its phones and 100Mb download speeds – Kodak could
official filings that it had “developed [consumer] not exploit the full potential for consumer digital
digital camera systems which do not use silver photography until high-speed internet access was
halide film technology” was in the 1997 report – rolled out more widely round the turn of the century.
three years after the QuickTake. The company
Wall Street applied another brake to Kodak’s digital
only embarked on a radical rewriting of what it did
evolution. Mary Benner, associate professor at
in its 2000 annual report, when it put itself at the
the University of Minnesota’s Carlson School of
centre of “infoimaging”“ – a $225bn industry that
Management, has studied equity analysts’ reactions
included digital hardware, software and online
to the strategies of companies facing radical
services.
technological change in the newspaper, telecoms and
Defenders say the official coyness up to this point photographic sectors. She concluded they were “more
reflected two realities of the market in the 1990s. attentive and positive” towards those companies
First, Kodak did not want to reveal its hand to that tried to extend and preserve the old technology.
competitors. Second, it did not want to bet too One analyst in 1994 referred to Kodak “squandering”
publicly against its traditional consumer film investors’ money on “digital nonsense”.
business, until it could point to stronger profits
Even five years later, when they were more positive
from its longer-term investment in digital.
about digital strategies, analysts continued to warn
Burdened by its legacy about the potential cannibalisation of the film
business. “[Kodak] was stuck on film and Wall
Mr Fisher and his successors declined to comment
Street was doing nothing to discourage it,” says
for this series. But one former executive who joined
Prof Benner.
Kodak in the 1990s claims Mr Fisher believed digital
products would merely substitute for their analogue Far from being the “moving target” George Eastman
counterparts, rather than disrupt the whole image- had hoped to create, Kodak was in danger of
making process. becoming a sitting duck.
Source: Hill, A. (2012) Snapshot of a humbled giant, Financial Times, 3 April.

A similar development can be observed in the newspaper industry. Initially, most news-
papers underestimated the potential of the Internet. In the mid-1990s, only a small number
of Internet users were getting their news from online sources. At that time, most readers of
physical newspapers did not even have access to the Internet.
Thus, managers who tried to secure funding for Internet initiatives in the early 1990s,
before the threat of the Internet to the existing business model became obvious, had a hard
time convincing management of the potential of the Internet. As a result, newspaper com-
panies did not enthusiastically embrace the opportunities of online publishing. The report
of an online publisher of an established newspaper company sums up this sentiment:
I had trumpeted the new business to everyone and asked for their cooperation with the online
group. one day, I asked a staff member of the online business how things were going and if
the newspaper staff was helping out. He told me that he had recently asked for some help and
the response was, ‘Get the hell out of here; I’ve got a real newspaper to get out’!10
Only when it became obvious in the late 1990s that Internet portals such as Yahoo! or job
search sites such as Monster.com were threatening the traditional profit pools of classified
advertisements and job posts did the newspaper industry wake up to the potential impact of
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the Internet on their business. This sentiment is exemplified through this publisher’s state-
ment: ‘I live in terror that some big thing is going to happen and I don’t see it coming.’ This
sense of threat and urgency was then also translated in substantial investments in the new
technology. For instance, at a newspaper company that was studied, staff for online opera-
tions increased from 15 to 40 people within a matter of months.
Interestingly enough, however, the framing of the threat also had a strong influence on
the reaction patterns of top management. In the face of a threat, the typical reaction pattern
of top management is to centralise decision making at the top and to reduce experimenta-
tion. For instance, line managers of the online sites received sample budgets, marketing
plans and checklists that they had to adhere to. One top manager remembers:
It was very centralised in the beginning, which was very uncharacteristic, because the culture is
very much to let each newspaper run its own business. We had a basic business model for every
[online] site. We gave them money. We told them they could hire people, but we told them
exactly how to run the site.11
The resulting websites were simply longer versions of the printed newspaper – with more than
75% of the content directly imported from the print edition. The features that other Internet
start-ups in e-publishing had long integrated, such as customisation and community building,
were not included. In the advertising realm, the company also did not experiment with new
revenue sources such as demographic advertising, email marketing and classified services.
The important insight of this example about the newspaper industry’s reaction to the
Internet is that the mental frame with which top management approach a disruptive
innovation strongly influences both how many financial and management resources are
allocated and how the innovation is implemented within the organisation. In essence, man-
agement face a framing paradox that is difficult to resolve.
If, on the one hand, a mental frame is used that focuses primarily on the opportunities
that are opened up by the disruptive technology, then, so the theory goes, there will be
plenty of freedom for line managers to experiment with novel ways of employing the tech-
nology. Yet it will be difficult to get the required resources approved. If, on the other hand, a
mental frame focusing on the threat is used, the willingness to invest in the new technology
will be much higher. But because of the importance of the new technology and the associ-
ated fear, centralisation of decision making and lack of experimentation will result in a
lacklustre implementation of the new technology within the corporation.
This paradox is illustrated in Exhibit 6.4, which differentiates between different frames
during the resource commitment stage and the implementation stage. As is shown in the
upper left quadrant, threat framing during both stages leads to an intense, yet rigid reac-
tion. The opposite bottom right quadrant is equally problematic, because not enough
resources are made available. The theory proposes that only by combining threat framing
during the early investment stage with opportunity framing during the implementation
stage is an incumbent organisation able to commercialise a disruptive innovation success-
fully. This combination leads to high financial commitment and a flexible plan, which is
shown in the top right quadrant of the matrix.
This raised the question of how companies can possibly manage simultaneously these two
opposing mindsets. The example of the newspaper industry revealed that newspaper compa-
nies that managed the integration of the new Internet-based news publishing more success-
fully shared two common characteristics.
First, they received advice from people outside of the newspaper industry. For instance,
in one case, the opinion of a CEO had been shaped by the recommendations of a friend
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Exhibit 6.4 To overcome organisational rigidities, incumbents who are faced with disruptive
innovations need to adopt two contradicting cognitive frames
Framing during resource

Rigid plan, Flexible plan,
Threat
high commitment high commitment
commitment
Rigid plan, Flexible plan,
Opportunity
low commitment low commitment
Threat Opportunity
Framing during implementation
Source: adapted from C. Gilbert, ‘Change in the presence of residual fit’, Organisational Science, 2006, vol. 17, no. 1, p. 152.
who had been based in Silicon Valley, where he was observing the changes created by the
Internet. In addition, they also hired industry outsiders who had gained previous online
experience in other unrelated industries.
Second, they decided to separate the online organisation structurally from the print organi-
sation. During the early years of e-business, most newspaper companies had decided to inte-
grate the online organisation with the print organisation – motivated by the desire to leverage
the assets of the print business. This is summarised by the following CEO quote:
our basic goal is an integrated strategy. [. . .] In the local information market, the newspaper has an
advantage. to separate the online unit from the newspaper is to give away a lot of that advantage.
However, the influence of outsiders also led the newspaper companies to reconsider this
initial strategy. The structural separation combined with the hiring of industry outsiders
allowed the separated online unit to frame the Internet as an opportunity instead of a
threat, as had been perceived by the parent organisation. One online manager of a sepa-
rated website reported:
When we simply changed our name from the newspaper name to ‘the city.com’ [. . .] it changed
people’s expectations of what would be on the [web]site. this, in turn, changed how people in our
online organisation viewed who they were and what they were producing.12
Another manager of a separate online division reported: ‘Now that we are separate, we own
the opportunity in a way we never did when we were still with the [physical] newspaper.’
This thinking in terms of opportunity allowed the online organisations to think creatively
about developing new revenue streams without having to worry about cannibalising the
existing print business. One website editor who came from the print business commented
about the online director who was brought in from outside: ‘He is constantly seeing digital
media in different ways than I am used to or appreciate. At first, this bothered me, but now
that I see it working, I increasingly endorse the input.’
These new revenue sources, which hitherto had not been used by the online editions
of newspapers, included fee-based archival access, email marketing, email list rental,
fee-based data analysis and behavioural and demographic targeting.
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Summary
● this chapter first discussed how a company can build up barriers to imitation. these include
(1) withholding information about profitability, (2) forgoing short-term profit for long-term
success, (3) signalling the promise of retaliation, (4) exploiting all available investment
opportunities or securing access to resources, (5) relying on resources that are implicit (such
as skills, processes and culture), (6) basing differentiation on rare or contracted resources
and (7) exploiting the time lag with the imitator.
● the chapter then focused on how to deal with the threats of a disruptive innovation in
e-business. More specifically, it stressed the importance of understanding the fundamental
process of disruptive innovations and determining the underlying reasons for the
incumbents’ failure.
● next, the chapter suggested some questions that companies need to raise in order to
assess the threat of a disruptive innovation. these questions deal with (1) non-served
customers, (2) over-served customers and (3) the disruptiveness of the innovation relative
to competitors.
● possible ways for dealing with a disruptive innovation were then suggested. these include
(1) not responding, (2) migrating/harvesting, (3) defending, (4) straddling, (5) switching
completely and (6) leapfrogging.
● the chapter then discussed the issues underlying the selection of the appropriate mental
frame for an efficient response to a disruptive innovation. It concluded by stressing
the need for incumbents facing a disruptive innovation to adopt two contradicting
cognitive frames: one that focuses primarily on the opportunities that are opened up by
the disruptive innovation, and one that focuses on the threats that are created by the same
disruptive innovation.
REVIEW QUESTIONS
1 What are the requirements for successful imitation and the barriers to imitation?
2 What questions do companies need to raise in order to assess the threat of a disruptive innovation?
3 What possible ways can companies consider taking to deal effectively with a disruptive innovation?
4 What are the main cognitive frames that companies can adopt when facing a disruptive
innovation? Why are these cognitive frames contradictory in nature?
1 Can you find examples of how companies built up barriers to imitation? pick out specific
examples from different industries and explain what these companies did. Were they successful
in their attempts?
2 Consider different industries of your choice (e.g. music, book retailing, etc.) and analyse whether
they are faced with the threats of disruptive innovations. If so, discuss how the new entrants are
attempting to compete. also, discuss the reactions of the incumbents.
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3 Why did Intel develop the Celeron chip? Why have low-cost airline companies (e.g. Ryanair)
succeeded over incumbent companies (e.g. British airways)? or, why has online banking (such
as InG direct) gained such market share to traditional, full bank services? Can you explain this
decision using the disruptive innovation logic?
C. Christensen offers an updated view of his seminal theory in The Innovator’s Dilemma: The
Revolutionary Book That Will Change the Way You Do Business, Harper Business, 2011.
Also, C. Christensen and M. Raynor provide an excellent account of the theory of disruptive
innovations in their book The Innovator’s Solution, Harvard Business School Press, 2003.
C. Gilbert discusses the influence of framing on an incumbent’s ability to react to discontinu-
ous change in ‘Unbundling the structure of inertia: resource versus routine rigidity’, Academy
of Management Journal, 2005, vol. 48, no. 5, pp. 741–63, and in ‘Change in the presence of
residual fit’, Organisational Science, 2006, vol. 17, no. 1, pp. 150–67.
Consult www.innosight.com for up-to-date research findings and practical implications of the
disruptive innovation theory.
www.innovationzen.com provides a detailed overview of different management theories dealing
with innovation.
www.innovationmanagement.se is an online knowledge centre for creating value with innova-
tion management. This site offers insights, case studies, solutions and a multitude of useful and
cutting-edge content for today’s companies.

1 Later on, after the launch of new desktop browsers, the usage market share changed. This question
was covered in more detail in Section 3.2.1, where recent data on leading browsers in the market (i.e.
Explorer, Google Chrome and Firefox) is provided.
2 For a detailed description of barriers to imitation, see P. Ghemawat, Strategy and the Business Landscape,
Prentice Hall, 2005.
3 For a detailed and comprehensive description of the theory of disruptive innovations, see C. Christensen
and M. Raynor, The Innovator’s Solution, Harvard Business School Press, 2003.
4 See C.S. Lee, ‘An analytical framework for evaluating e-commerce business models and strategies’,
Internet Research, 2001, vol. 11, no. 4, pp. 349–59.
5 See Chapter 12 for an in-depth coverage of these types of commerce.
6 See J.-H. Wu and T.-L. Hisa, ‘Developing e-business dynamic capabilities: an analysis of e-commerce
innovation from i-, m-, to u-commerce’, Journal of Organisational Computing and Electronic Commerce,
2008, vol. 18, pp. 95–111.
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7 See P. Ghemawat, Strategy and the Business Landscape, Prentice Hall, 2005, p. 106.
8 See C. Gilbert, ‘Unbundling the structure of inertia: resource rigidity versus routine rigidity’, Academy of
Management Journal, 2005, vol. 48, no. 5, pp. 741–63.
9 For a detailed account of Kodak’s foray into digital photography, see C. Gilbert and J. Bower, ‘Disruptive
change: when trying harder is part of the problem’, Harvard Business Review, 2002, May, pp. 95–101.
10 Quoted in C. Gilbert, ‘Change in the presence of residual fit’, Organisational Science, 2006, vol. 17, no. 1,
pp. 150–67.
11 Ibid.
12 Quoted in C. Gilbert, ‘Unbundling the structure of inertia: resource versus routine rigidity’, Academy of
Management Journal, 2005, vol. 48, no. 5, pp. 741–63.
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Chapter 7
Exploiting opportunities of new market

spaces in e-business
Chapter at a glance
7.1 Gaining insights into new market spaces through the value curve 153
7.2 Looking outside one’s own box 154
7.3 Pinpointing possibilities for new value creation 158
7.4 Finding the right time to enter a market 159
7.4.1 early-mover advantages 160
7.4.2 early-mover disadvantages 170

1 Tesco early-mover advantage
2 Nordea early-mover advantage
5 IBX Value innovation
7 Otis Value innovation
8 Topcoder Value innovation
4 American Well Value innovation
9 Appirio Value innovation
17 Nettwerk Value innovation
18 Licia Chery Value innovation
15 Spreadshirt Value innovation
20 NTT DoCoMo Value innovation
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Chapter 7 Exploiting opportunities of new market spaces in e-business
Learning outcomes
● explain how firms can open up new market spaces and thereby create
completely new types of value.
● Understand how to draw a value curve and gain insights from it.
● explain the six paths framework and be able to use it for value creation in
e-business.
● appreciate the importance of finding the right time to enter a market.
● Recognise the advantages and disadvantages of being an early mover in e-business.
Introduction
the strategy options presented in Chapter 5 focus mainly on the traditional form of competition,
which assumes a clearly defined set of competitors within an industry. the key performance
measure is relative performance vis-à-vis competitors. as a result of this competitor-focused
competition, improvements tend to be incremental through an increase of benefits or a
decrease of costs. an alternative way to approach strategy development is to move beyond the
sole industry focus and look for new market spaces across different industries.1
doing so allows a firm, at least temporarily, to break out of the cycle of ever-increasing
competition within an industry, either by redefining the industry competition or by creating a
new industry. the goal of this approach is drastically to increase consumer benefit while at the
same time reducing price.
the first three sections of this chapter deal with the value innovation logic. section 7.4 dis-
cusses the advantages and disadvantages of being an early mover in a new market.
7.1 Gaining insights into new market spaces through the value curve
The concept of the value curve depicted in Exhibit 7.1 is used to illustrate how to redefine
competition along different dimensions of benefit. In the book-retailing example, these
dimensions include price, convenience, selection range, speed and face-to-face interaction.
Obviously, on these dimensions, traditional and online bookstores offer varying levels of
benefit. This is shown in Exhibit 7.1 where, on the vertical axis, a value of ‘1’ refers to the
highest level of benefit and a value of ‘0’ refers to the lowest level of benefit.
Sketching the value curves of different companies in a specific industry that have diverg-
ing value curves is a valuable exercise to gain an understanding of what drives value crea-
tion and how companies are positioned along the key dimensions that determine customer
benefit. Drawing the value curves in the book-retailing industry (as shown below) requires
us, first, to think about what the key dimensions of customer benefit are. During this first
step, it is important to ensure that all key dimensions are listed, i.e. nothing important such
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Exhibit 7.1 The value curve provides insights into new market spaces
High
Value curve of
traditional
bookstores
Performance
Value curve of
Amazon.com
Low
Price Convenience Selection Speed Face-to-face

range interaction
Dimensions of benefit
Source: Reprinted by permission of Harvard Business Review [exhibit 99105]. From ‘Creating new market space’ by C. Kim and
R. Mauborgne, January–February 1999. Copyright © 1999 by the Harvard Business school publishing Corporation, all rights reserved.
as selection range or price is forgotten, and that the dimensions listed are mutually exclu-
sive, i.e. that they do not overlap logically. Second, we need to determine how different
competitors rank on each dimension. Connecting the different dots then allows us to draw
the value curve for each company.
The visualised profile of the value curves provides the basis for thinking about new types
of value curves that might break the existing trade-offs of the current business models.
7.2 Looking outside one’s own box
How can this type of value creation be attained? A firm needs to analyse the way it wants
to create value by ‘looking outside the box’ – i.e. outside the standard business practices of
its own industry. Doing so can lead to the discovery of uncovered market spaces between
separate industries.2
The six paths framework developed by Kim and Mauborgne suggests six ways of doing
so (see Exhibit 7.2):
● Looking across substitute industries. The main question that needs to be asked here is how
customers make trade-offs between different products (or services) that serve as substi-
tutes. The goal is to determine why customers choose one product and not the other, and
what criteria they use in making their decision. In the traditional business environment, the
most severe competition does not necessarily come from within the industry. Customers
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Exhibit 7.2 The six paths framework suggests different starting points for creating value
innovations in e-business
6 1
Looking
Looking
across substitutive
across time/trends
Factors industries
to be
reduced?
5 2
Looking Factors Factors Looking
across functional or to be to be across strategic
emotional appeal eliminated? created? groups
Factors
to be
4 raised? 3
Looking Looking
across complementary across the chain
offerings of buyers
Source: Based on C. Kim and R. Mauborgne, ‘Creating new market space’, Harvard Business Review, 1999, January–February,
pp. 83–93.
make trade-offs, for example, between using cash or a credit card, travelling by car or train
and using a pen or word processing software. In the online world, customers make trade-
offs between shopping online or going to the store, and between banking online or going to
the bank branch. When Nordea Bank considered this trade-off, it found out that customers
who go to the branch value the ease of use of over-the-counter banking. Thus, Nordea set
out to develop a highly user-friendly online interface to offer the ease of use of a branch
office with the benefits (and the lower costs) of an online channel.
● Looking across strategic groups. A strategic group consists of firms that produce the same
type of products, for instance cars, for a certain customer segment. Firms usually com-
pare themselves with competitors positioned in the same strategic group as themselves.
Doing so usually does not lead to radically new insights, since firms in the same strate-
gic group tend to be similar in their product offerings. Looking across strategic groups
means looking at what companies do that produce the same basic product for different
customer segments, thereby finding out potential new ways of creating value. In car
manufacturing, for instance, Mercedes, after analysing lower-ranked strategic groups,
developed the Smart Car, which is offered at prices that compete with low-cost cars while
still containing the Mercedes technology inside. Similarly, car manufacturers from lower-
ranked strategic groups, such as Toyota, developed cars that possess many features of
higher-ranked competitors while still maintaining a low price. A more recent example
concerns tablets, where Apple’s iPad became the reference while other companies, such
as Samsung, have a similar market positioning. However, Amazon’s Kindle Fire can be
seen as a challenger offering a cheaper and lower-quality product, a kind of disruptive
innovation as discussed in the previous chapter (see FT article: ‘The way we shop now’).
● Looking across the chain of buyers. The underlying logic of this perspective is that the
person in charge of purchasing is not necessarily the one using the purchased product or
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The way we shop now

One morning last September in New York, Jeff In online retail, Amazon has changed the way we
Bezos swept his forefinger across a 7.5-inch screen shop – and to a large degree the way we live. The
as fast as he could, slicing through flying mangos, essence of its model is still low prices, low profit
melons and apples to the sound of splatting. The margins and high volumes. But it has also introduced
founder and chief executive of Amazon was showing a Marketplace where other retailers can sell their
off the $199 Kindle Fire – a colour touchscreen goods from its site; product recommendations based
device he wants to use to storm the world of tablet on what other shoppers buy; and the Prime loyalty
computing. Fruit Ninja, the video game, was his programme, which entices customers to pay $79 a
way of introducing it. year for “free” shipping.
It was perhaps no coincidence that Bezos chose to Amazon’s bricks-and-mortar critics complain that
destroy digital fruit – the Fire was a direct challenge its price advantage in the US comes mainly from a
to another Apple, the technology giant founded by loophole that enables it to avoid sales tax in many
Steve Jobs. It was also the latest expression of states. The company counters that it does collect
Amazon’s uninhibited ambition. sales tax outside the US and there is no evidence of
that hampering its sales growth.
“You can see how fast the dual core processor is,”
he told the audience of journalists, bloggers and Amazon has achieved the prosaic but difficult goal
gadget hounds. “You can also see that my Fruit of creating a quick, reliable shopping experience,
Ninja skills are lacking. I also have to admit I find according to Scot Wingo, co-founder and chief
this a little uncomfortably therapeutic.” executive of ChannelAdvisor, a software group that
counts the company as a client.
It is more than 17 years since Bezos opened an
online bookstore in Seattle on the US’s northwest “The Amazon buyer experience is so good compared
coast that would go on to revolutionise retail. to everything else,” he says.
The ride has been neither smooth nor predictable: In 2007, Amazon branched out again to launch
Amazon lost money from the start, and when the its first e-reader, the Kindle, gamely creating an
internet bubble burst it came close to joining the in-house challenge to the world of physical book
pile of tech wrecks. But Bezos pulled the company retailing from which it had emerged.
back from the brink and it turned its first net profit
Last year in New York, when Bezos recalled Amazon’s
– $5.1m on sales of $1.1bn – in the fourth quarter of
effort “to reinvent something that has been around
2001.
for five centuries”, he conveniently overlooked the
Since then, the company has launched new services, efforts of those who had tried to digitise the book
acquired other businesses, shaken up industries before him. But the Kindle did more than any other
and diversified at a frenetic pace – one that would device to make e-readers a mass-market product.
probably be judged impossible, illogical or insane in
The entry into tablet computing took the e-reader
the offline world.
one step further. True to its secretive nature,
Its market capitalisation has increased from $6bn 10 Amazon has not disclosed how many Kindle Fires
years ago to roughly $82bn today. it has sold, but analysts estimate that from the
November 15 launch to the end of the year it moved
Bezos – who possesses unswerving self-confidence,
between 4m and 6m.
a barking laugh and a goofy streak – owns a stake of
just over 19 per cent. For the fourth quarter of 2011 – 10 years on from its
first profit – it reported net earnings of $177m on
Not only does Amazon now sell children’s nappies,
sales of $17.4bn.
dog food and cocktail dresses, its all-purpose
commercial empire spans book publishing, the The Fire’s challenge to the iPad sparked inevitable
Internet Movie Database (IMDb), the packing and talk of a clash of the tech titans. The death of
shipping services of Fulfilment by Amazon, and the the Apple founder just a week after the Fire was
rentable cloud computing infrastructure of Amazon unveiled, and five weeks before it began to ship,
Web Services. meant such a personal battle never came to pass. ➨
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Amazon has replicated Apple’s system by creating Apple’s world – and shift them into its ecosystem.
a device that plugs into a content “ecosystem” of That is a big task. Apple sold more than 15m
digital books, music, video and magazines on its iPads in the fourth quarter of 2011. Adding to
servers. But while the Fire is a challenge to the the competition, Barnes& Noble, the book retailer,
iPad, it is not an attempt to best it. The Fire is unveiled its own Nook-branded tablet in November.
not filled with new technologies, but is rather a
The Fire has come at the cost of reduced profit
stripped-down piece of hardware.
margins. Amazon spent a lot on development and
Product reviewers liked its compact size (smaller analysts reckon it may be selling the device at or
than the 9.5-inch iPad), the connection to Amazon close to a loss.
media content and the decision to hide its Android
That helps explain why an operating profit margin
operating system.
that was already thin at 5.5 per cent in the first
But it has been criticised for a clunky user interface; quarter of 2010, fell to just 0.7 per cent in the third
relatively limited battery life and memory; the lack quarter of 2011, before ticking back up to 1.5 per cent
of a volume button, camera and microphone; and in the fourth quarter. Amazon has even warned that
the difficulty of accessing non-Amazon content. it could report an operating loss.
Overall, it is undoubtedly less capable than the For some investors, that stirred uncomfortable
iPad. But the point is the $199 price tag – $300 less memories of the growth-over-profits mentality of
than the cheapest iPad. Amazon’s innovation was the original dotcom boom. Even some of its more
creating a new low-end niche in the tablet market. evangelical supporters wobbled when Amazon
reported slowing sales growth in the fourth quarter
“One of the only things they innovated on was price,
of 2011, although a 35 per cent year-on-year gain is
which was crucial,” says Andrew Eisner, director
hardly pedestrian.
of content at Retrevo, an online marketplace for
consumer electronics. For all his zeal in the assault on corporations
as varied as Apple, Google and Walmart, Bezos,
“We did surveys that found price was one of the
Amazon’s ruthless chief, shows little interest in
most important things that prevented people from
courting investors. Yet even without that, the
buying the iPad.”
company is valued at roughly 76 times its forecast
In that sense, the Kindle Fire is classic Amazon. earnings for the next 12 months, a multiple befitting
Apple is premium and pure, but Amazon is an internet superstar.
proletarian and prolific. It is about the humdrum-
On its careers site, Amazon tells job hunters: “We
but-vital business of low prices, speed and reliability,
have revolutionised the online shopping experience,
whether it is delivering a packet of nappies in a
cloud computing and the book. . . . join us and see
cardboard box or a Hollywood blockbuster over a
what’s next!”
wifi network.
Ultimately its future will depend on whether it can
Amazon needs to persuade consumers to uproot
keep clicking with customers.
their digital lives – many of them already planted in
Source: Jopson, B. (2012) The way we shop now, FT.com, 20 March.

service. For instance, the procurement department and the corporate user usually have
different definitions of value. While price and the purchasing procedure are important
for the former, the latter focuses on ease of use. If a firm has previously considered only
one of the two groups, taking on the other group’s perspective might lead to new value
creation. For example, the Spreadshirt case study featured in the case studies section of
this text illustrates how the firm moved up the chain of buyers. While printing shops typi-
cally targeted the end consumer with their offerings, Spreadshirt entered the market by
mainly addressing potential online shop operators, who were provided with the means
to customise a shop easily to meet their needs.
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● Looking across complementary products and services. Most products and services are
not used in isolation, but instead need others to complement them. Computers, for
instance, require software in order to operate. Amazon.com recognised the power of
complementary products when it launched its personalised book recommendation
service, which suggests to customers a list of books that might be of interest to them
based on their previous purchases. Nordea Bank wants to push the concept of offering
complementary services even further through the use of a triggered database, which
works as follows. When there is a change in a customer account – for instance, a large
incoming money transfer, a change of address or a change in marital status – a trigger
in the database is set off and informs the bank about this change, which then raises
a number of questions regarding complementary products: what does this change
mean for the customer in terms of financing, long-term payments, insurance and
e-services?
● Looking across functional or emotional appeal to buyers. Products or services often focus
either on functional or tangible characteristics (such as durability and breadth of choice)
or on their emotional appeal, which is captured by the strength of the brand. Looking
across boundaries by, for instance, turning functional products into emotionally appeal-
ing products can lead to a vast increment in the perceived consumer benefit. Take the
example of the coffee house Starbucks, which has turned a functional mass product
(i.e. coffee) into an emotional experience for its customers, thus being able to charge a
premium price for it.
● Looking across time/trends. By assessing early on the impact of future changes in the
macro- or competitive environment, a firm can adapt its value-creation strategies based on
the expected changes. For instance, Nordea realised in the 1980s the importance of elec-
tronic channels and swiftly introduced PC-banking services. This helped Nordea to create
substantial cost savings while at the same time significantly increasing customer benefit.
● Looking across unrelated industries. In addition to the six paths, it is also possible to
venture out and look across completely different industries to see how value is cre-
ated there. This is one of the key messages that the case studies in this text convey.
Looking across different industries requires creative leaps on your side, but it has
the potential to create surprising insights. An insurance salesperson might ask, for
instance, what lessons can be taken away from Ducati’s exclusive Internet sales of
new motorcycle models directly to consumers, and to what extent the learning can
be adapted to the insurance business.
7.3 Pinpointing possibilities for new value creation
After looking across the above dimensions, different questions arise in the four areas listed
below (see also Exhibit 7.2). By answering these questions, new opportunities for value
creation arise:3
● Eliminate. Does what we do really create consumer benefit? If not, which components or
features of our product or service should we eliminate? Even if a company has made a
proper assessment of these issues at some point in time, it should then raise these ques-
tions again, since buyers’ preferences are dynamic by nature.
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● Reduce. Where can we reduce our range of offerings? What costs us a lot of money but
does not create benefit?
● Raise. Where should we raise the standard of products or services? Where can we
increase benefit by expanding our existing offering?
● Create. What can we do that has not been done so far?
Tapping into hitherto uncovered market spaces provides firms with the opportunity not
only to capture large parts of the market by taking away market share from competitors, but
also to expand the overall market size. Amazon.com, for example, did not just take buyers
away from traditional bricks-and-mortar bookstores. It also turned people who previously
had not purchased many books into avid buyers through the depth of its offerings and
value-adding services, such as the book reviews and personalised recommendations.
However, the move into new market spaces is not a one-time affair, since superior profit
will last only as long as competitors do not move into this newly discovered market space.
Just as it is with generic strategies, competitors will try to catch up if they believe that the
new model promises attractive returns, thereby eroding profitability. The sustainability
depends again on the uniqueness of the positioning and on how difficult it is to imitate this
positioning.
Summarising the value innovation thinking, there are five characteristics that differenti-
ate this type of thinking from conventional competitive thinking:
● Different assumptions. Conventional thinking tells us that an industry’s value curves
follow one basic shape. Value innovation logic assumes that new value curves can be
shaped by creatively resolving historic trade-offs.
● Strategic focus. Conventional thinking tells us that the primary goal is to pursue a compet-
itive advantage and to beat the competition. Value innovation logic pursues a quantum
leap in customer value, where competition is no benchmark.
● Customers. Conventional thinking tells us that the primary goal is to retain and expand
the existing customer base through segmentation and customisation. Value innovation
logic focuses on the mass of buyers. The focus is on finding the key communalities that
customers value.
● Resources. Conventional thinking tells us to exploit existing assets and capabilities. In
contrast, value innovation thinking poses the question: what would we do if we were
starting anew?
● Offerings. Conventional thinking tells us to offer the products and services of the industry
we are competing in. Value innovation thinking refocuses the thinking on offering total
customer solutions exceeding industry boundaries.
7.4 Finding the right time to enter a market
Early- or first-mover advantages were a major driver for the Internet boom during the late
1990s. No potential entrepreneur or investor wanted to miss out on the profit potential that
was promised to early movers. Thus, they all rushed into setting up or financing Internet
start-ups – accepting large initial losses but expecting high returns over time due to first-
mover advantages.
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Undoubtedly, for some Internet start-ups, such as eBay, Yahoo! and Amazon.com, early-
mover advantages helped to pave the way for a dominant market position. In most cases,
however, companies that started out early during the Internet boom have either gone out of
business or been acquired by other firms that embraced the Internet much later.
Before moving into a more detailed discussion of early-mover advantages, we want to
emphasise that a major difference between the Amazon.com-like ventures and the bankrupt
Internet companies is that Amazon.com was not only early but also best in class. Since its
launch in Seattle (USA) in July 1995, Amazon.com has strived continuously to improve the
customer experience while simultaneously increasing operational efficiency, thereby reduc-
ing costs. In other industries, early movers were unable to compete with late entrants and
eventually went out of business.
Similarly, Yahoo.com, eBay and other successful Internet start-ups managed to get
the timing right and also deliver superior value on a continuous basis. Thus, while early-
mover advantages have been traditionally seen as important, some studies suggested
not giving this time factor importance in explaining a company’s competitive advantage
in an Internet market context.4 Basically, the rationale here stems from the fact that in
the digital world, the sources of early-mover advantage (e.g. switching costs or network
externalities) may have a weaker effect compared to those in the physical market context.
When considering the role played by an early-mover company, an important question to
bear in mind is whether a firm can maintain its product/service quality or cost leadership
over competitors in order to keep its dominant position in the market.5 (For a critical per-
spective on the first-mover advantage, see FT article: ‘The first-mover advantage myth’.)
In the following sections, we first analyse the different types of early-mover advantages
and discuss how they affect Internet-based industries. Early-mover advantages can result
from (1) learning effects, (2) brand and reputation, (3) switching costs and (4) network
effects. We then analyse early-mover disadvantages, which are (1) market uncertainty, (2)
technological uncertainty and (3) free-rider effects.6
7.4.1 Early-mover advantages

Learning effects
The idea of learning effects is that as output increases, a firm gains experience.7 This allows it
to conduct its business more efficiently, thereby reducing costs and increasing quality. When
Amazon.com entered the German online book market in 1998, it was able to capitalise on
its three years of experience in the USA, where it had learned how to do online and offline
marketing, make its website user-friendly and streamline its logistics and delivery processes.
Germany’s Bertelsmann Online (BOL), on the other hand, entered the online book-
retailing business later and still had to go through the learning process, while Amazon.com
kept improving at the same time. Ultimately, BOL was never able to provide a shopping
experience that could compete with Amazon.com’s – a shortcoming that contributed to the
Bertelsmann Group’s eventual decision to abandon BOL.
Brand and reputation

Companies that come to market first with a new product or way of conducting busi-
ness impress consumers quite strongly, thus gaining reputation and brand awareness.
Furthermore, media coverage creates free and strong publicity, which can enhance
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The first-mover advantage myth

In 2001 the idea of first-mover advantage was challenged by the academics Peter
Golder and Gerard Tellis, whose research into the history of 66 industries found that
companies get limited rewards from being pioneers. In fact, it is later entrants that
tend to succeed.
In Will and Vision: How Late-comers Grow to Dominate Markets, they showed that
many companies believed to be pioneers in categories that they led (at least for a
time) were in fact late arrivals: Kodak in cameras, Xerox in photocopiers, Apple in
personal computers. “Market pioneering is neither necessary nor sufficient for long-
term success,” they wrote. Instead, so-called “fast followers” have the advantage of
being able to use pioneers’ experiences to learn about consumer tastes, new designs
and manufacturing techniques, and the potential size of a market. They can also learn
from their mistakes.
Eric Schwartz, general manager of laundry care at Henkel in the US, echoes this view.
“The first mover sometimes overcomplicates in the beginning,” he says. “At the end
of the day, it’s not about how intricate you make a new offering. It’s about how close
to what the consumer wants your offering is.”
But the myth of first-mover advantage remains firmly embedded in business. One
reason is that first movers that fall by the wayside get forgotten. Another is the law,
which gives first movers the right to register new patents and brands.
The belief that first is best is also buried deep in many people’s minds. “There’s
tremendous romance around the idea of pioneering, breakthrough innovation,”
says Patrick Barwise, emeritus professor at London Business School and co-author
of Beyond the Familiar: Long-term Growth through Customer Focus and Innovation.
“It’s an extension of people’s exaggerated belief in the importance of differentiation.”
Given the high costs and high risks involved, he believes that being the first mover
is generally not a good thing if you are trying to create an entirely new product
category. [. . .]
How Amazon keeps its advantage flowing
For those who defend the idea that being first to market matters, Amazon seems to
provide compelling supporting evidence. The pioneer of online retailing, set up by
Jeff Bezos to sell books from Seattle more than 17 years ago, has stayed ahead of
competition until this day. Not only has no other internet-only retailer in the US got
close to it since the bursting of the internet bubble, it has grown so big that its sales
make it larger than all but a handful of bricks-and-mortar retailers.
But this is not because Amazon has been able to kick back and reap rewards from its
first-mover advantages (although name recognition was especially valuable in the
early days). Instead, it has continuously built new innovations on top of that first move.
These are often unglamorous, back-office tweaks, such as new pricing algorithms, the
one-click purchase button or improvements to inventory management. But they make
shopping cheaper, quicker, easier and more reliable – features that are as prosaic as
they are hard to achieve.
Source: Adapted from Jopson, B. (2012) The first-mover advantage myth, Financial
Times.
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the brand and reputation. The business press is always interested in new business
developments, successful or not, and covers them extensively. When Amazon.com went
public in the middle of the 1990s, major business newspapers and journals wrote about it,
thereby creating free and credible publicity. For instance, in 1996, The Wall Street Journal
published a front-cover story on Amazon.com; on the following day, book sales on the com-
pany’s website doubled.8 Other early movers such as Yahoo.com and eBay have received
similar levels of media coverage.
Being an early entrant in a market can also help to build up a strong reputation with
customers, provided that the company can meet customer expectations during the first few
contacts. This may seem obvious, but many Internet start-ups were unable to do so due to
their badly designed websites and the lack of timely and reliable product delivery. More
successful Internet start-ups such as Amazon.com managed early on to provide customers
with a superior shopping experience. Customers who have had a good experience with one
provider are unlikely to switch to another. Therefore, any new competitor must provide a
higher value than that offered by the early entrant in order to offset the uncertainty of being
new and to induce the customer to switch over.
However, an established brand and reputation are no guarantee of lasting success. Since
the cost of search, trial and comparison can be very low in the Internet, information asym-
metries are usually reduced and customers switching to another competitor increases in
the digital market space. The case of the search engine Google is an excellent example of
how a newcomer managed to overcome the brand recognition and reputation of older and
more established rivals such as Overture and AltaVista. Google was able to do so because
it offered radically higher user benefits through higher speed and better search accuracy
than all other companies. Without doing any massive advertising, Google quickly became
the preferred search engine for millions of Internet users. (See Blog Box ‘Google just got a
whole lot smarter, launches its knowledge graph’ for an example of Google’s ongoing com-
mitment to improve its service value.)
Switching costs
Switching costs, also called self-compatibility costs, result from moving from one product
to another. Even if a new product is superior to the one you already possess, you might still
decide to keep the old product because of switching costs, which, in effect, create a weak
form of lock-in. The expectation that switching costs on the Internet would be high was one
of the main drivers behind the race for ‘eyeballs’ and ‘clicks’, whose levels determined the
stock market valuation of many companies (more traditional metrics such as price/earnings
ratios were not considered to be suitable for Internet start-ups).
The common belief was that once customers got used to the set-up of a website, and
once they had provided their customer information, they would no longer want to switch
because of switching costs. This belief turned out to be fatal for many companies that
spent heavily on marketing and customer acquisition, only to find that their customers
were happily switching to other websites when a competitor offered better value. In fact,
Michael Porter already warned against this false belief about a decade ago, when pointing
out that switching costs could be very low in the digital market space, considering how
easy switching is with just a few clicks (see also Section 3.2.4). On the contrary, offering a
superior value proposition is what was highlighted as a key source of competitive advan-
tage. However, this does not mean that companies could not build switching costs on the
part of their customers, precisely based on a value proposition that is superior to that of the
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BLOG BOX
Google just got a whole lot smarter, launches its knowledge graph
Today, Google is launching one of its most ambitious and interesting updates to its search
engine in recent months. Starting in a few days, you will start to see large panels with
additional factual information about the topic you were searching for take over the right
side of Google’s search result pages. The panels are powered by what Google calls its new
“Knowledge Graph” and they will serve two different functions. Google will use this space
to show you a summary of relevant information about your queries (think biographical
data about celebrities and historical figures, tour dates for artists, information about books,
works of art, buildings, animals etc.), as well as a list of related topics. In addition, Google
will now allow you to clarify what exactly you are looking for and will use these boxes for
disambiguation. Thanks to this, you will soon be able to tell Google you were looking for
the L.A. Kings ice hockey team and not the Sacramento Kings when you searched for ‘kings.’
The company has actually been working on the semantic technology that drives this
knowledge graph for quite a few years. This specific project, Google told me earlier this
week, has been in the works for about the last two years. During this time, the company
has been working hard on creating the vast database of structured knowledge that powers
the features it is launching today (through Google’s acquisition of Freebase). Today, the
knowledge graph database holds information about 500 million people, places and things.
More importantly, though, it also indexes over 3.5 billion defining attributes and connec-
tions between these items.
As Google Fellow Ben Gomes told me yesterday, the company really wants to move
beyond just understanding the characters you are typing into its search engine to getting
a better understanding of what it is you are really looking for (“strings to thing” is what
Gomes likes to call it). To do this, Google is using both its own and other freely available
sources like Wikipedia, the World CIA Factbook, its own Freebase product, Google Books,
online event listings and other data it crawls, but it is also using some commercial datasets
(though Google wouldn’t reveal which companies specifically it is working with here).
Looking ahead
Google, of course, has been adding bits and pieces of semantic search smarts to its search
engine over the last few years (and so has Microsoft after its acquisition of Powerset). With
Google Squared, one of its recently shelved experiments, it also once launched a pretty
ambitious project to understand information on the web and then display it in a table
(some of this technology likely lives on in the Knowledge Graph now). Today’s launch,
however, represents Google’s most ambitious move in this direction.
As Gomes has told me, now that Google’s algorithms have access to this structured data
and can understand it better, the next step will be to understand more complex questions
like “Where can I attend a Lady Gaga concert in warm outdoor weather?” For now, though,
it is worth noting that this update isn’t about natural language processing and answering
questions so much as about displaying relevant data.
It’ll be interesting to see how this new feature will influence how people search and
what links they click on. I wouldn’t be surprised if this had quite a negative influence on
traffic to Wikipedia, for example. At the same time, though, the disambiguation feature
may just help drive more relevant traffic to the sites Google links to as well.
Source: F. Lardinois, ‘Google just got a whole lot smarter, launches its knowledge graph’, techCrunch.com, 16 May 2012.
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competition. In particular, the Internet is a market context where first movers can enjoy an
advantage by creating what is known as non-contractual switching costs9 – i.e. those costs
related to switching in a situation whereby the customer is not constrained by any contract.
Four sources of non-contractual switching costs can be identified: (1) switching costs
from relearning, (2) switching costs because of customised offerings, (3) switching costs
because of incompatible complementary products and (4) switching costs resulting from
customer incentive programmes. These are defined below:
● Switching costs from relearning are a result of getting used to a new product. Users of
software programs who are thinking about switching from one provider to another often
stick with the old product for as long as they can in order avoid relearning costs. Consider
the case of IBX, which developed a proprietary B2B e-purchasing software platform.
Once customers get used to this software and train their personnel to use it, switching to
a competitor would entail considerable relearning. Similarly, Internet users get used to
the functionalities of a specific website and might not want to switch to another website.
The more website-specific the knowledge is, the less likely it is that a person will switch
to another website. In other cases, such as with search engines where the usage is easy
and intuitive, switching costs are minimal. This was another reason that helped Google
to become, within a matter of months, the most popular10 Internet search engine. As the
Internet continues to mature and users become more accustomed to using it, relearning-
induced switching costs are likely to decrease.
● Switching costs because of customised offerings result from a firm’s ability to adapt a web-
site to the specific needs and preferences of individual customers. Investing in personali-
sation tools is one way to generate customised information and advice and therefore to
seize the ‘lock-in’ opportunity offered to first movers. Since these tools usually perform
better with the accumulation over time of customer’s transactions, first movers need a
longer period to gather customers’ information and maintain their superiority over later
entrants.11 For instance, as customers make purchases and search for books, Amazon.
com learns about their preferences and is then able to make customised recommenda-
tions based on previous purchase patterns. Another example here is Netflix, the pro-
vider of on-demand Internet streaming media, which offers movie recommendations. If
customers want to switch to a competitor, they first need to ‘teach the system’ through
a number of purchases before the latter can provide them with the same level of cus-
tomised offerings. Similarly, when Tesco.com customers first enter the online retailing
site, their shopping list is instantly populated with all the items that they had previously
purchased in physical Tesco stores with their Tesco Clubcard. This customisation elimi-
nates the initial effort for Internet shoppers to set up their shopping list online. Another
interesting example is Match.com, the biggest dating website in the world. It achieved
a leading market position due to a better knowledge of its users than the competition.
In a business where giving the right suggestions to meet quite ‘compatible’ people (i.e.
potential couples) is a core part of the value proposition, a higher performance of the
system used to do the matches can be a source of competitive advantage. (See also the
FT article: ‘Inside Match.com’.)
● Switching costs because of incompatible complementary products result from the inability
to use the new product in combination with old products. An illustrative example of
this was the introduction of the CD player, which rendered the existing vinyl record
collections of music lovers worthless if they decided to switch to the new technology.
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Inside Match.com
Mandy and Amarnath have a very special with an engineer at the company who was born
relationship. As Match.com’s president and key halfway across the world. They soon married. “If I
engineer, they’ve taken the world’s biggest dating had laid out a criterion for what I was looking for,
site to a new level. It now knows its users better it would not have been a guy from south India,” she
than they know themselves. told me. “People are complex. You’re constantly
making trade-offs about who’s too tall, too short, too
Entering the offices of Match.com is a bit like
smart and too dumb. People come in and tell us a bit
strutting into a disco. Coloured lights flash from
about what they’re looking for. But what you say
the ceilings, workers lounge on circular banquettes,
and what you do can be different.” Academics call
dance music plays from hidden speakers. Despite
this “dissonance”. “It’s a theme that runs through
being in a mid-rise office tower overlooking a
social psychological literature,” says Andrew Fiore,
turnpike in the dry, landlocked city of Dallas,
a visiting assistant professor at Michigan State
Texas, the Match offices are evocative of a racier
University, who works on computer-mediated
environment, where anything might happen. […]
communication. “We don’t know ourselves very
With the number of paying subscribers using Match, well on a descriptive level.” The same is true
the world’s largest online dating site, approaching for the millions of Match users, says Ginsberg,
1.8 million, the company has had to develop ever and she tried to incorporate dissonance into the
more sophisticated programs to manage, sort and algorithm. “I might come in and say I’m looking
pair the world’s singles. Central to this effort has for a nice Catholic guy between 30 and 40 who is
been the development, over the past two years, of an non-married,” she says. “But after weeks of looking
improved matchmaking algorithm. “We had to get at people, I might get an email from a guy who has
more intelligent,” Mandy Ginsberg, the president kids, and I might accept that. It’s all about behaviour
of Match.com US, says. “If you say you want a guy modelling. All that data goes into algorithms and
between 30 and 35 in New York who has a master’s affects who we put in front of you.” […]
degree, you’re going to get thousands of matches.”
A key recruit was Amarnath Thombre, a soft-
Codenamed “Synapse”, the Match algorithm uses a spoken engineer from Pune, India. Yet Thombre
variety of factors to suggest possible mates. While says his experience at i2, where he spent years
taking into account a user’s stated preferences, finding ways to move products around the country
such as desired age range, hair colour and body more efficiently, was perfect preparation for the
type, it also learns from their actions on the site. online dating industry. And once at Match, he,
So, if a woman says she doesn’t want to date Ginsberg and a team of nine maths whizzes hired by
anyone older than 26, but often looks at profiles Thombre, set about updating the Match algorithm.
of thirty-somethings, Match will know she is in The way the Match algorithm learns, he says, is
fact open to meeting older men. Synapse also uses similar to the way the human brain learns. “When
“triangulation”. That is, the algorithm looks at you give it stimuli, it forms neural pathways,” he
the behaviour of similar users and factors in that says. “If you stop liking something, those shut
information, too. off. It’s learning as you go.” The same principles
Until Ginsberg joined IAC, which owns Match, in are powering the recommendation engines at
2006, she worked at i2 Technologies, a supply-chain popular sites around the web. Amazon uses similar
management company, also based in Dallas. She technology to recommend new products for people
was promoted to her current post earlier this year, to buy, Pandora learns from likes and dislikes to
after former Match president Gregg Blatt was made customise its internet radio stations, and Netflix
chief executive officer of IAC. Besides having the famously offered $1m to anyone who could improve
right resume for the job, Ginsberg had enough the effectiveness of its algorithm by 10 per cent.
experience in love to know that finding the right It is a subtle shift, but one with profound
partner is tough. implications. “Before, matches were based on the
After a divorce shortly out of college, she tried criteria you set. You meet her criteria, and she
JDate, a site for Jewish singles, but kept coming up meets yours, so you’re a good match,” Thombre
short. Then, while still at i2, she became involved explained. “But when we researched the data the ➨
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whole idea of dissonance came into focus. People She also says there is no reason to expect growth to
were doing something very different to the things stall any time soon, as online dating becomes more
they said they wanted on their profile.” As a result, mainstream and new singles of all ages come online.
Match began “weighting” variables differently, “With the divorce rate in this country being 50 per
according to how users behaved. For example, if cent, we’re a reflection of that society,” she says.
conservative users were actually looking at profiles
Internet dating has also matured into a robust
of liberals, the algorithm would learn from that
business. Online dating is also an international
and recommend more liberal users to them. Indeed,
phenomenon. Native language sites flourish in
says Thombre, “the politics one is quite interesting.
countries around the globe. Match UK is successful,
Conservatives are far more open to reaching out to
though operated independently. And while Match
someone with a different point of view than a liberal
is the best-known and largest online dating site
is.” That is, when it comes to looking for love,
on the web, it has plenty of competition. Chemistry.
conservatives are more open-minded than liberals.
com, another IAC property, is growing. eHarmony,
With a mountain of data in its servers from the a rival, has proved popular with an older crowd
75 million users it has had since it was founded, looking for serious relationships. Niche sites cater
Match has been able to uncover a series of curious to specific nationalities and religions, such as
trends. Some findings are obvious. Women are less Shaadi for Indians and JDate for the Jewish crowd.
likely to email with men who live far away, men OkCupid, launched in 2004, is free to use and has
who are older than they are, and men who are short. caught on with the young, hipster subset. Its success
Other findings are more nuanced. Catholic women led IAC to purchase it for $50m earlier this year. […]
are especially unlikely to email a Hindu or atheist
So far, Match has not been knocked askance by the
male. While men are most particular about hair
advent of social networking. In fact, advertising
colour, a woman’s income is less important to them.
on Facebook has become a great recruiting tool
“We are so focussed on behaviour rather than stated
for Match. “Facebook is about people you know,
preferences because we find people break from their
and Match is about connecting to people you don’t
stated preferences so often,” Thombre says.
know,” says Ginsberg. And while there is indeed
The Match algorithm is constantly at work behind more competition than ever before, 16 years after
the scenes, scouring terabytes of data and working Match.com was founded as one of the original online
to find possible matches. Likely candidates are dating sites, it is still positioned as the industry’s
suggested when users ask to see “more like this” frontrunner.
and are also put forward through the “Daily5”, a
Match.com was founded in 1995 by Gary Kremen,
selection of profiles emailed to users each day. But
an entrepreneur who saw the potential of the web
it is not enough for Match simply to suggest dates
early on. Single at the time, Kremen was using
without gauging the effectiveness of its efforts.
1-900 number dating hotlines he found in the
When each Daily5 profile is viewed the user has to
classified sections of newspapers to meet women.
“rate” that profile before he or she can see the next
“I noticed I was paying a lot of money for those
one. The site asks users if they are interested in the
numbers, and those big bills got me thinking that
suggested match, and gets a reply of “Yes”, “No” or
maybe people would pay the same online,” he
“Maybe”. Each answer is recorded and logged with
says. Kremen was right. He founded a company
the user’s profile, becoming another data point for
called Electric Classifieds in 1993, and two years
the algorithm to work with. […]
later unveiled Match. It was one of the first sites
Online dating has come of age. Once a seedy corner to use the internet to facilitate dates, and among
of the internet, digital romance is today nearly as the first to charge money for a service. “That was
commonplace as e-commerce. Of the 87 million the original idea, to do classified ads but make
singles in the US, nearly half of them, or 40 million, it electronic,” said Kremen. “I always knew a lot
have tried online dating, according to the US of women; I’ve done a lot of dating in my life.”
Census. Some surveys estimate that one in five new Kremen says he designed the site with women in
relationships, and one in six new marriages, begins mind. “You have to design the whole system for
online. “This is one of those businesses where scale women, not men,” he said. “Who cares what men
really matters,” says Ginsberg, noting that Match think? So things like security and anonymity were
has facilitated 1.2 billion emails since 2005, and 110 important. And little things, like talking about
million virtual winks [a way for members to “break body types, not pounds. Never ask a woman her
the ice” before emailing] in the past six months. weight.” […] ➨
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Not all digital romances are wholesome and perfect. “There’s a tipping point happening,” says Ginsberg.
Nor is the online dating experience universally “There used to be this stigma, or it was ‘good for
positive. Plenty of users give up on the service my friends but not for me’. People don’t realise how
after one too many bad dates. An online profile, of pervasive online dating is.” And it is an industry
course, is not an accurate reflection of someone, but that has evolved. While plenty of online hookups
a template for them to project their ideal self-image. still happen the old-fashioned way – by searching
“Once you meet them in person, it’s harder to have based on criteria such as location, age and interests
as many optimistic illusions about them,” says – an increasing amount of digital matchmaking
Fiore. “We engage in this kind of idealisation when is being powered by sophisticated algorithms like
we’re faced with limited information about people the ones Ginsberg and Thombre conjured up. With
online. We fill in the gaps optimistically.” Fiore their algorithm, Ginsberg and Thombre have taken
calls this “an illusion of specificity”. “It’s a way to the allure of online dating and amplified it. Instead
give someone a sense of control,” he says. And even of simply creating a digital disco where it is easy to
Fiore acknowledges that for all the utility online find lots of potential dates, they have put forward
dating provides, reducing potential soulmates to a tantalising promise. By evaluating your stated
pixilated thumbnails and fields of information can preferences, mapping your site behaviour and
be a draining experience. “It can feel a lot like using triangulation, Match.com will get to know
shopping for a blender on Amazon.com,” he says. you, and what you want, better than you know
“But these are people we’re talking about, not yourself.
blenders.” Not even the most potent computers
It’s not a promise Match can keep with all of its
in the world, it seems, can engineer a panacea for
users. But for some, it can prove transformative.
lonely hearts.
“We don’t know another industry that can change
Despite these concerns, it is becoming accepted people’s lives so profoundly, except maybe the
wisdom that any lingering shame around online medical industry,” says Ginsberg. “We often deal
dating is gone. Familiarity with the internet, a with the maths and the statistics, and we have to
more casual dating culture and verifiable success keep reminding ourselves that this is about helping
stories have all helped. By now, most of us are people find love. There’s not that many businesses
not far removed from a couple who met online. that can say that.”
Source: Adapted from Galles, D. (2011) Inside Match.com, Financial Times, 29 July.
Through the symbiotic relationship between the iPod player and the iTunes music down-
loading service, Apple also created high switching costs for customers. When iTunes
users contemplated the idea of purchasing a digital music player other than an iPod,
they would have faced the switching costs of not being able to play the songs that they
purchased through the iTunes platform, since their format was only compatible with the
iPod product.
● Switching costs resulting from customer incentive programmes occur when firms offer
customers benefits in return for their loyalty. A prominent example here is the frequent-
flyer bonus programmes offered by airlines, where passengers earn free upgrades or free
tickets after having flown a certain number of miles with the specific airline. Also, Tesco
has created switching costs for customers through its Tesco Clubcard. Owners of a Tesco
Clubcard, who have been using it for shopping in physical stores, have strong incentives
to prefer Tesco.com over other online grocery and non-food shopping sites because they
can continue collecting incentive points by shopping online.
For consumers, it is sensible to consider overall costs, including switching costs, when
deciding on a new purchase. With hindsight, it is surprising that switching costs received
so much attention during the Internet boom years, since the above-mentioned types of
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switching had been around before then. Therefore, for many online businesses there was
really no need to gain market share as rapidly as possible and to invest heavily in new tech-
nology. History has shown that, in most cases, if a new entrant offers a substantially better
product then it will most likely drive the weaker product out of the market, even if there are
substantial switching costs.12
Network effects
Network effects are present when a product becomes more useful to consumers in propor-
tion to the number of people using it.13 There are two types of network effects, direct and
indirect:
● Direct network effects. The strength of these effects depends directly on the number of
users of a given device or technology that exhibits a network effect. An example of a
product with strong direct network effects is the mobile phone. While a single mobile
phone by itself is essentially worthless, it becomes very valuable when large parts of
the population own a mobile phone and can use it to communicate with each other.
Similarly, the Internet increases in value for the individual user as the number of users
increases. Bob Metcalf found that the value of a network increases proportionally to the
square of the number of people using it. Thus, if you double the number of participants
in a given network, the value for each individual participant doubles, which leads to a
fourfold increase in the overall value of the network.14 This coherence becomes espe-
cially relevant in the context of social networking sites such as openBC/Xing, where the
number of users determines directly the value of the overall network due to the likely
interaction between community members.
● Indirect network effects. Similar effects also apply with products that require comple-
mentary goods, such as video recorders and video games. Their value increases as the
size of the installed user base increases, because more companies offer complementary
products such as video tapes and games cartridges.
The first mover’s offering is expected to be more attractive to current or potential con-
sumers due to the size of its network, which is usually larger than that of the competi-
tion. In fact, network externalities constitute a potential source of competitive advantage
for first-mover companies. However, there could be some moderating effects for certain
dimensions, such as product category, market, industry, etc. Consequently, whether a
firm can benefit or not from network effects depends largely on the nature of the net-
work. For instance, if network effects exist in a publicly owned platform that is open to
all firms, then network effects benefit the whole community but do not accrue special
benefits to any individual party.
The mobile phone and the Internet, for instance, are open networks where the benefits
of network effects accrue largely to customers. If, on the other hand, network benefits are
specific to a particular website or community, then the operator of this website can reap
benefits from these network effects.
However, the relevant question is whether, when creating a first-mover advantage,
network effects in the digital market space are similar, lower or higher than those in
physical, traditional markets. There are several reasons that explain having higher net-
work effects in the digital market space:15 there are no physical constraints that limit the
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number of buyers and sellers involved in a market exchange; and electronic transactions
can take place irrespective of time and place. These factors significantly contribute to
creating, for the early movers, a critical mass of online customers.
In e-commerce, a vivid example of network effects is eBay. On a stand-alone basis, this
online auction platform is not valuable at all; its value comes from the millions of users
who post products for sale and search for products to buy. This results in a highly liquid
market, where it is easy to match sellers and buyers. Furthermore, the strength of network
effects is increased through the information that is posted about sellers and buyers, who
both get rated by their peers on criteria such as timeliness of delivery, payment and quality
of the products sold. eBay users who have received strong peer ratings are likely to continue
using eBay because of their reputation, which makes it easier for them to sell items. eBay,
as the operator of the community, can capture parts of the value, e.g. through fees for post-
ing on its website information about the product on offer, and sales commission once the
product is sold.
Through its book reviews, Amazon.com has also created network effects. As more custom-
ers use its website and post their comments about books and other products, Amazon.com
becomes more valuable to other customers, who can now retrieve information from many
different reviewers about any given book. Other companies, such as ciao.com, have turned
customer reviews into a complete business model, where they create a website that consists
primarily of consumer ratings of different kinds of products.
From the individual customer perspective, switching from a network that is built
around a large installed user base is sensible only if everybody else switches as well. It
is possible, at least in theory, that a company with strong network effects can induce
customers to stay in spite of the advent of new competitors with superior products. Users
decide not to switch because they do not want to lose the compatibility with other users.
If all users could agree to switch to the new product, however, then they would be better
off doing so.
The logic of the Internet boom years was that if companies wanted to generate strong
network effects, then they needed quickly to generate large market share, even if the
costs for doing so were high. Part of this thinking was also that quality in comparison
with competitors was not of central importance, because it was assumed that barriers to
entry would increase as a result of network effects – making it difficult for newcomers
to steer away customers. However, network effects, when they existed, often did not
turn out to be strong enough to keep customers at one website. In fact, there were only
very few instances, such as online auctioning, where network effects were sufficiently
strong to have a substantial impact on user value. Today, however, where online social
networking sites are of great importance, the lock-in due to network effects is more rel-
evant than ever.
Additionally, even if network effects are strong, this does not necessarily mean that
consumers will not switch to a new, superior product. When choosing between an existing
and a new product, customers do not look just at the existing situation; they also anticipate
its future evolution – otherwise CD players, for example, because of their need for CDs,
would never have become popular. Thus, as has always been the case, in order to succeed
new entrants need to demonstrate the superiority of their product and to give the impres-
sion among the general public that their product presents the most attractive features for
the future.
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7.4.2 Early-mover disadvantages

Firms entering the market early with a new technology do not necessarily achieve a com-
petitive advantage over their rivals.16 In fact, there are a number of reasons why a late
entrant might actually accrue some benefits. These reasons are (1) market uncertainty,
(2) technological uncertainty and (3) free-rider effects. (See also the FT article: ‘The first-
mover advantage myth’).
Market uncertainty
During the early stages of an innovation cycle, it is very difficult to establish clearly
what customers’ needs are. During the 1990s, Internet start-ups were trying out various
business models and value propositions, many of which misjudged the actual consumer
needs.
In banking, for instance, there was a much higher desire for security, trust and face-
to-face interaction than was anticipated initially when many online financial institutions
entered the market. In the end, banks with established brand names and branch networks
were in a better position than their online competitors to fulfil customer needs through a
multi-channel banking approach.
Market uncertainty is aggravated if the market is not ready for a new product or serv-
ice. Consumers need to get used to a new product or service before it becomes valuable
to them. However, they will not do so unless there are already a sufficient number of
providers in the market. On the other hand, providers will not invest unless they believe
that there will be enough consumers to make their investment worthwhile. Thus, both
sides face a ‘chicken-and-egg’ situation, which results in uncertainty regarding future
developments.
Furthermore, the market also needs to be ready from a technological perspective. Many
of the online services that turn out to be successful today rely on the widespread availability
of always-on broadband Internet connections. For instance, on-demand streaming media
such as Netflix, social networking sites such as Facebook, the videosite YouTube or the
Internet telephony provider Skype depend on the broadband access of their users to be able
to provide their services.
Technological uncertainty
Betting on wrong technologies can be as problematic as overestimating market demand.
In mobile e-commerce, for instance, early adopters of the Wireless Application Protocol
(WAP) found that this highly praised technology did not deliver on its promises to create
superior customer value. Instead, it proved to be very cumbersome to use, with a compli-
cated 35-step procedure to configure a mobile phone for WAP access, long connection time
(over 60 seconds) and the tiny screen space of a handset. As a result, market pick-up was
much lower than expected.
Third-generation (3G) mobile phones also faced the same type of uncertainty. European
telecommunication operators bid billions of euros for the acquisition of 3G licences to be
able to enter the market early, though it was a technology that was finally more slowly
adopted than 2G technology. When 3G technology was introduced, companies had doubts
on whether the investment in this specific technology would pay off; however, nowadays,
3G networks are very common. A similar situation is now happening in some countries with
the ongoing investment in 4G networks.
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Free-rider effects
Learning effects can constitute a first-mover advantage. However, if they cannot be kept
proprietary then competitors will benefit from them without having to make the same
mistakes as the first mover(s). In general, developing a market as a first mover is more
expensive than just imitating it.
Many traditional bricks-and-mortar retailers that were initially hesitant to enter the
online business and then embraced the Internet profited greatly from the failed experiences
of the early movers. They leveraged their well-known brand and installed customer bases to
overtake quickly their pure online competitors. Thus, for example, Wal-Mart in the USA has
become one of the largest Internet retailers by using its strong brand name and synergies
with its physical store network.
Summary
this chapter analysed how firms can break away from traditional forms of competition and
redefine their value proposition by opening up new market spaces. this can be done first
by gaining insights into new market spaces through the value curve. It can also be done
through the six paths value creation framework by looking across (1) substitutive industries, (2)
strategic groups, (3) the chain of buyers, (4) complementary products and service offerings, (5)
functional or emotional appeal to buyers and (6) time and trends.
this chapter also discussed timing issues for market entry in e-business. More specifically,
it analysed the different types of early-mover advantages and disadvantages that an Internet
venture can exploit (or should avoid). early-mover advantages include (1) learning effects,
(2) brand and reputation, (3) switching costs and (4) network effects. early-mover disadvantages
include (1) market uncertainty, (2) technological uncertainty and (3) free-rider effects.
REVIEW QUESTIONS
1 How can a company look for new market spaces outside its own industry?
2 explain the six paths framework. How can it be used to create value in e-business?
3 outline the timing issues for market entry in e-business.
4 What are the advantages and disadvantages that early movers in e-business should exploit or
avoid?
1 Working in a group, pick out an e-business company of your choice. Write down what you
consider to be the key product/service elements. as a group, discuss and reach consensus on
these key elements. Using a chart similar to the one shown in exhibit 7.1, rate the offering’s
level on each key element against the main competitors. do you see competitors with radically
different value curves?
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2 adopt the perspective of a new industry entrant and consider the existing value curves. Use one
or two of the paths to experiment with the creation of a new value curve.
● Industry: Which elements of substitute industries are un/important to target buyers?
● strategic groups: Which key elements of the offer compel buyers to buy up or buy down?
● Buyers: Who are the decision makers and how would changing buyer focus affect the key
elements?
3 Working in a group, assess the ‘lock-in’ network effect of Facebook with its users. also, how
plausible is it that Facebook maintains in the future its hegemony in the online social networks
sector? do you see Facebook losing its leading position in about a decade or so?
4 as discussed in the Ft article ‘the way we shop now’, amazon has challenged with its Kindle Fire
the strategic group of apple for the tablets product category. do you think that this path taken by
amazon to create value can make a significant impact on the high-ranked strategic group? Back
up your position with arguments.
C. Kim and R. Mauborgne developed the concept of creating new market spaces by looking
outside one’s own industry in ‘Creating new market space’, Harvard Business Review, 1999,
January–February, pp. 83–93. See also ‘Value innovation – the strategic logic of high growth’,
Harvard Business Review, 1997, January–February, pp. 103–12.
Building on their insights from the value innovation studies, C. Kim and R. Mauborgne published
the book Blue Ocean Strategy: How to Create Uncontested Market Space and Make Competition
Irrelevant, Harvard Business School Press, 2005.
R. Varadarajan et al. analyse the first-mover advantage in the digital market space in ‘First-
mover advantage in an Internet-enabled market environment: conceptual framework and
propositions’, Journal of the Academy of Marketing Science, 2008, vol. 36, pp. 293–328; also
see the chapter by R. Varadarajan et al. in F.J. Martínez-López (ed.), Handbook of Strategic
e-Business Management, Series PROGRESS in IS, Springer, 2014.
www.blueoceanstrategy.com revolves completely around value innovations and provides up-to-

date examples of successful innovations and their underlying drivers.
www.innovationzen.com provides information on innovation management, business strategy,
technology and more.
1 See C. Kim and R. Mauborgne, ‘Creating new market space’, Harvard Business Review, 1999, January–
February, pp. 83–93, and also G. Johnson, K. Scholes and R. Whittington, Exploring Corporate Strategy,
7th edition, Prentice Hall, 2002, pp. 132–3.
2 See Kim and Mauborgne, ‘Creating new market space’.
3 A detailed discussion of this approach to value creation can be found in C. Kim and R. Mauborgne,
‘Value innovation: the strategic logic of high growth’, Harvard Business Review, 1997, January–February,
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pp. 103–12, and ‘Creating new market space’, Harvard Business Review, 1999, January–February,
pp. 83–93.
4 See, for instance, M.E. Porter, ‘Strategy and the internet’, Harvard Business Review, 2001, vol. 79,
pp. 63–78.
5 S. Rangan and R. Adner discuss the pitfalls of early-mover advantages in the Internet world in the article
‘Profits and the Internet: seven misconceptions’, Sloan Management Review, 2001, Summer, pp. 44–6.
6 For different types of early-mover advantages, see D. Besanko, D. Dranove, M. Shanley and S. Schaefer,
Economics of Strategy, John Wiley, 2003, pp. 438–46. W. Boulding and M. Christen point out that
there are also important early-mover disadvantages in ‘First-mover disadvantage’, Harvard Business
Review, 2001, October, pp. 20–21. Likewise, see R. Varadarajan et al.’s paper ‘First-mover advantage
in an Internet-enabled market environment: conceptual framework and propositions’, Journal of the
Academy of Marketing Science, 2008, vol. 36, pp. 293–328; also see the chapter by R. Varadarajan et al. in
F.J. Martínez-López (ed.), ‘Handbook of Strategic e-Business Management, Springer, 2014.
7 The importance of learning and experience first received attention through the development of the expe-
rience curve: B. Henderson, ‘The experience curve reviewed’, in C. Stern and G. Stalk (eds), Perspectives
on Strategy, John Wiley, 1998, pp. 12–15.
8 J. Cassidy discusses the story of Amazon in Dot.con, Perennial, 2003, pp. 135–50.
9 See Varadarajan et al., ‘First-mover advantage in an Internet-enabled market environment: conceptual
framework and propositions’, p. 300.
10 However, at the same time, this lack of lock-in is also the greatest danger that Google faces today as com-
petitors, such as Yahoo! or Microsoft (Bing), heavily invest in search engine development. Nevertheless,
recent search engines rankings clearly show the dominant position of Google.
11 See Varadarajan et al., ‘First-mover advantage in an Internet-enabled market environment: conceptual
framework and propositions’, p. 300.
12 S. Liebowitz refutes the frequently cited QWERTY keyboard and VHS/Betamax examples in Re-thinking
the Network Economy, Amacom, 2002, pp. 47–8.
13 A good discussion and critique of the impact of network effects on e-commerce companies can be found
in ibid., pp. 13–48. S. Rangan and R. Adner also discuss network effects in e-commerce in ‘Profits and
the Internet: seven misconceptions’, Sloan Management Review, 2001, Summer, pp. 44–6.
14 George Gilder coined the term ‘Metcalf’s Law’ in 1993. The article can be found at www.discovery.org
15 See Varadarajan, ‘First-mover advantage in an Internet-enabled market environment: conceptual frame-
work and propositions’, p. 298.
16 For a detailed discussion of first-mover disadvantages, see M. Liebermann and D.B. Montgomery,
‘First-mover (dis-)advantages’, Strategic Management Journal, 1998, vol. 19, no. 12, pp. 47–9.
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Chapter 8
Creating and capturing value through

e-business strategies: the value-process
framework1
Chapter at a glance
8.1 The value-process framework for e-business strategies 175
8.1.1 Creating value 176
8.1.2 Capturing value 177
8.2 Integrating strategic management analyses through the VPF 181
8.2.1 the value chain analysis and the VpF 181
8.2.2 the five forces analysis and the VpF 182
8.3 Sony BMG (Germany): an actual application of the VPF 183
8.3.1 the business context 184
8.3.2 Value creation 184
8.3.3 Value capturing 188
8.3.4 Findings 190

6 SATEC Value creation and value capturing
17 Nettwerk Value creation and value capturing
4 American Well Value creation and value capturing
21 M-PESA Value creation and value capturing
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Chapter 8 Creating and capturing value through e-business strategies
Learning outcomes
● Identify the main drivers for value creation and capturing.
● Understand how the value-process framework integrates the value chain and
the five forces analyses.
● apply the value-process framework to conduct an overarching strategy analysis.
Introduction
Unless at some point the company can see the design, see how the pieces fit, and make
the interdependent choices consistent, the company is not going to be successful.
(Michael Porter2)
In essence, strategy formulation revolves around the concepts of value creation and value
capturing. during the Internet boom years, online ventures often did not pay enough atten-
tion to these fundamental economic concepts. nowadays, though, economic viability of
any e-business venture is of paramount importance to managers and investors alike. this is
why we devote a full chapter to the concepts of value creation and capturing. the goal of
this chapter is to bring together, into one framework (the value-process framework – VpF),
the two strategy analyses that we discussed earlier in the text: the five forces analysis, which
focuses on the external environment of the firm (see Chapter 3), and the value chain analy-
sis, which provides an internal perspective of the firm (see Chapter 4). By using the VpF, you
should be able to:
● Integrate the findings of the above-mentioned strategy analyses in order to assess the
different levers of competitive advantage.
● develop an integrated business strategy that takes into account both the internal and
external environments of the firm.
● Communicate this integrated business strategy to a management audience in a
comprehensive way.
8.1 The value-process framework for e-business strategies
The concept of value creation and value capturing is at the core of any (e-)business strategy,
since creating superior value to rivals and the ability to capture parts of this value in the
form of profit are prerequisites for building a competitive advantage. The latter is the basis
for reaching the fundamental goal of any company: that is, achieving sustainable success.3
Building on the two concepts of value creation and value capturing, the following sections
outline the main elements of the VPF.4
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8.1.1 Creating value

In order to create value, a company must provide customers with a product’s perceived use
value that is greater than the costs incurred for providing that product. Accordingly, the
value created is the difference between a customer’s perceived use value from a given prod-
uct5 and the firm’s costs for providing that product Exhibit 8.1 illustrates the relationship
between these two terms.
When discussing the concept of value creation, it is essential to clarify the definition
of value within the VPF context, since previous definitions of the term were sometimes
unclear. For instance, when Porter states that ‘value is what buyers are willing to pay,
and superior value stems from offering lower prices than competitors for equivalent
benefits’,6 he subsumes in one term the similar yet conceptually distinct concepts of
perceived use value and consumer surplus. However, if we do so, it then becomes con-
ceptually impossible to differentiate between value creation, which results largely from
activities within a company, and value capturing, which is largely driven by the competi-
tive environment.
In this chapter, we use the term perceived use value, which is defined as ‘the price that a
customer is prepared to pay for the product if there is a single source of supply’.7 Important
categories for the creation of use value are quality, speed and brand. Quality includes
product characteristics such as functionality, durability and reliability. Speed refers to
how fast a company can deliver a given product. Brand entails the perceived traits that
consumers associate with the product or its producer, including trust and the emotional
benefit derived from a product. Here, it is important to notice that the perceived use value
depends entirely on the customer’s subjective perception. Each customer will perceive the
use value of a given product differently depending on factors such as gender, age or cultural
background.
Exhibit 8.1 Value is created if the perceived use value exceeds costs
Value creation
Perceived Value Costs

use value created
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The second dimension that drives value creation entails costs. These include (1) the costs
for the purchase of resources (labour, materials, information and capital), (2) the costs of
combining resources in production, marketing and delivery and (3) the costs of selling the
product.
Creating value that is positive is a first necessary condition for building a competitive
advantage. As we shall describe below, in order to capture parts of the value created, a com-
pany’s created value must be greater than that of its competitors, and must be imperfectly
imitable and substitutable.
8.1.2 Capturing value

Value creation by itself does not provide any information about how the value is distributed
from producers to consumers. Porter emphasised this point when he stated that ‘satisfying
buyer needs may be a prerequisite for industry profitability, but in itself it is not sufficient’.8
Instead, in order to succeed, a firm must not only be able to create superior value over
a sustained period of time, but also be able to capture the value created in the form of an
economic profit (producer surplus). Porter states that ‘if profitability is the firm’s foremost
goal, [strategic] positioning must start with price and cost’.9
In VPF terminology, the value captured, or producer surplus, is the difference between
the price charged for a product and the costs incurred for producing that product. In general
terms, the consumer surplus is the difference between perceived use value and price (see
Exhibit 8.2). Thus, the overall goal of strategic management is to help managers (1) max-
imise the value created by increasing the perceived use value and by minimising the cost of
Exhibit 8.2 The price indicates how the value created is distributed between the producer and
the consumer
Value creation Value capturing
Consumer surplus
Price
Value captured
(producer surplus)
Perceived Value Costs

use value created
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providing this use value, (2) capture as much of the value created as possible in the form
of producer surplus and (3) do so in a sustainable way over an extended period of time by
defending the company’s position against imitators and substitutes.
At this point of the analysis, it also becomes clear that the frequently used term ‘supe-
rior value’ should more concisely be called ‘superior consumer surplus’, since it refers
to the difference between the use value and the price paid. This conceptual clarification
is of fundamental importance when distinguishing between value creation and value
capturing.
When determining the levels of value creation and value capturing, it is helpful to
differentiate between a monopolistic and a competitive environment. In a monopolistic
environment, the VPF is rather simplistic. Here, the use value, as perceived by the cus-
tomer, represents the maximum amount he/she is willing to pay for a product. Hence, in a
perfectly monopolistic environment, producers are able to capture (almost) completely the
value created, provided that (1) there is no other source of supply and (2) they are able to
discriminate on price (see Exhibit 8.3).10
In reality, however, companies usually operate in a competitive environment where
the consumer surplus provided by rival companies determines the customer’s choice.
This has important implications for the company’s ability to capture the value it creates.
Conceptually, the willingness to pay is reduced by the amount of consumer surplus offered
by the strongest competitor or the best substitute product.
To illustrate this point, we use the hypothetical example of two companies, A and B,
which are competing in the same industry (see Exhibit 8.4). Let us suppose that Company B,
which is the strongest competitor of Company A, offers a product with a high perceived use
value at a low price, thereby generating high potential consumer surplus. A given customer
Exhibit 8.3 Producers completely capture the value created in a (quasi-)monopolistic

environment
€
Price = Willingness to pay
Perceived Value Costs Value Producer

=
use value created created surplus
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Exhibit 8.4 The competitive discount is equal to the consumer surplus provided by the strongest competitor
Consumer
surplus Price = 19
4 3
€ €
1 1
5
4
8
7
20 20
15
12
Perceived Value Costs Competitive Maximum Profit Costs Value Perceived

use value created discount value to be created use value
captured
Value
Value creation Value capturing capturing Value creation
1 2
Company A Company B
(Strongest competitor)
will only consider purchasing Company A’s product if the consumer surplus provided by
Company A is either equal to or higher than the one offered by Company B. We call this
reduction in the consumer’s willingness to pay competitive discount.
In our example, Company A provides a use value of €20 for a given consumer. Production
costs and other costs, including marketing and overheads, amount to €12. The value cre-
ated is thus €8 (as shown in step 1 of Exhibit 8.4). The competitive discount is then deter-
mined by the value creation and capturing of the strongest competitor. As shown in step 2
of Exhibit 8.4, Company B creates a value of €5 by producing a perceived use value of €20 at
costs of €15. As shown in step 3 of Exhibit 8.4, Company B sells its product for €19, thereby
creating a consumer surplus of €1.
The crucial point of this analysis is that, as a result of the competitor’s offering, Company
A will no longer be able to raise its price to the level of perceived use value. Instead, the
maximum value that can be captured needs to be reduced by the amount of consumer
surplus offered by Company B. As shown in step 4 of Exhibit 8.4, Company A now needs to
charge a price that is at least marginally lower than €19. If it charged more, the consumer
surplus would drop below €1, thereby enticing the customer to switch to the competitor’s
offering that provides a higher consumer surplus.
In industries with highly intense competition, such as the PC industry, the competitive
discount might even increase to the point where it is equal to the entire value created by
the strongest competitor. In our example, Company B would decrease the price in order to
compete with Company A until it reaches a level of €15. Company B would not be able to
lower this price further, since at any price below this level it would not be able to cover the
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Exhibit 8.5 The VPF – to achieve profitability, companies must be able to create and capture
value
Consumer
3
surplus
Price
Producer
surplus
1 2
Perceived Value Costs Value Competitive Profit

use value created created discount
costs it incurred. This is the reason why companies can only compete successfully if their
value created is greater than that of competitors.
After having discussed the concepts of value creation and capturing it is now possible to
summarise the key steps of the VPF, as depicted in Exhibit 8.5.
Although only the main VPF dimensions are outlined above, this figure provides an over-
arching understanding of the three main levers that influence a company’s value creation
and value capturing. These three levers are (1) use value as perceived by the customer, (2)
costs for creating this value and (3) competitive discount, which reduces the customer’s
willingness to pay and, in turn, reduces profit (see Exhibit 8.5).
In order to achieve a sustainable competitive advantage, a company needs to fulfil the
following requirements with respect to value creation and value capturing:
● Value creation. First, a company must create value by providing customers with a per-
ceived use value that exceeds the company’s production costs (levers 1 and 2). However,
only if this value created is greater than the value created by the strongest competitor
does the company have the opportunity to provide a higher consumer surplus to cus-
tomers while still being able to capture value itself in the form of an economic profit (or
producer surplus).
● Value capturing. Furthermore, in order to limit the amount of the competitive discount,
the consumer surplus (i.e. the ‘value for money’ a company offers) needs to be unique
(lever 3). This uniqueness can be achieved, for instance, through exceptional quality,
a strong brand image or a fast time-to-market. Only uniqueness leads to a reduction in
the number of competitors, which, in turn, also limits the maximum consumer surplus
offered elsewhere. In order to sustain the achieved competitive advantage over time, it is
also important that this consumer surplus is imperfectly imitable or substitutable.
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8.2 Integrating strategic management analyses through the VPF
In this section, we show how insights from the two main strategy analyses (i.e. Porter’s
value chain analysis and the five forces model) can be integrated through the VPF by analys-
ing their various interdependencies (see Exhibit 8.6).
Exhibit 8.6 The VPF integrates different strategy analyses
1 2
Value chain Five forces
8.2.1 The value chain analysis and the VPF

Porter’s value chain analysis helps to address the question of how value is created within
a company. It does so by disaggregating a company into strategically relevant and inter-
related activities. Within the VPF, the value chain primarily helps to analyse the left-hand
side of the framework – i.e. the interaction between perceived use value and costs. In
essence, the value chain model revolves around value creation, where value is created by
the individual business activities of the value chain (see Exhibit 8.7).
On the one hand, each (primary) activity contributes to the aggregate use value as per-
ceived by the customer. On the other hand, each activity also creates costs. Thus, based on a
mapping between the value chain and the VPF, the aggregate ‘perceived use value’ is equal
to the sum of ‘perceived use values’ resulting from the different business activities, and the
aggregate costs correspond to the total costs incurred by these activities.11 Therefore, firms
should (1) invest in value-enhancing activities and (2) reduce costs, especially for non-
value-enhancing activities. For example, a fancy product brand that drastically increases
the perceived use value from shoes in the lifestyle segment is likely to justify increased
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Exhibit 8.7 Value is created by the individual business activities of the value chain
Marketing &
R&D Sourcing Production Service
sales
1 2 1 2 1 2 1 2 1 2
1 2
marketing expenses to establish the brand image. If, on the other hand, the manufacturing
process of these shoes does not create a high perceived use value for the customer, then this
business activity could be outsourced in order to reduce costs.
8.2.2 The five forces analysis and the VPF

After discussing value creation, which is primarily based on the value chain model, we
now focus on the value-capturing dimension of the VPF using Porter’s five forces analysis.
Conceptually, if, on the one hand, a company can charge high prices for its products or
services, it captures large parts of the value it creates. If, on the other hand, prices are driven
down by competition, consumers will capture most of the value.
The purpose of Porter’s five forces model is to determine the attractiveness of an industry
by analysing the power of the different actors. The five forces include (1) the competition
within the industry, (2) the threat of new entrants, (3) the bargaining power of custom-
ers, (4) the threat of substitute products and (5) the bargaining power of suppliers. The
first four factors determine the competitive discount, as is illustrated by the upper arrow in
Exhibit 8.8. As the power of the different actors increases, so does the competitive discount,
thereby lowering the customer’s willingness to pay. The bargaining power of suppliers
mainly influences the cost position and thereby the value creation of a company; this is
illustrated by the lower arrow in Exhibit 8.8.12
Porter’s five forces highlight the fact that profitability depends not only on the internal
activities of a company but also on its business environment – i.e. the industry in which it
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Exhibit 8.8 Porter’s five forces influence the cost lever and competitive discount
Entrants
3
Suppliers Rivalry Customers
1 2
Substitutes
competes. One of the primary goals of the VPF is to integrate the industry attractiveness
perspective with the internal company perspective. Industries with a highly intense compe-
tition, low entry barriers and readily available substitutes are likely to have higher competi-
tive discounts. Thus, even though companies in these industries might create high levels of
value, through either low costs or high perceived use value, they can capture only a fraction
of this value in the form of profits.
We briefly illustrate this logic using the example of the German fixed-line telecommunica-
tions industry. Due to deregulation and the advent of substitutes (such as VoIP telephony),13
barriers to entry were significantly lowered and rivalry increased dramatically. As a conse-
quence, customer power rose, too. Fixed-line telecommunication operators started reducing
their charge rates and ended up in a price war that eroded their profitability. In VPF termi-
nology, the above industry developments reduced the customers’ willingness to pay, thus
increasing the competitive discount and thereby decreasing the value captured by the telcos.
In introducing this chapter, we stated that one of the main goals of the VPF is to integrate
the internal company perspective with the external industry perspective. In this section, we
used the VPF to show conceptually how to integrate the results of Porter’s value chain and
five forces analyses. The resulting overarching framework (shown in Exhibit 8.9) helps us
to understand better the interdependencies and analyse the different levers of competitive
advantage, as well as their effects on value creation and value capturing.
8.3 Sony BMG (Germany): an actual application of the VPF
In this section, we provide an illustrative example of how to apply the VPF to an actual busi-
ness situation. The context for this real-world application is Sony BMG (Germany), which is
also featured in detail in the case studies section of this text.
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Exhibit 8.9 Porter’s strategy models can be used to analyse the levers of the VPF
• Entrants
• Rivalry
• Customer power
1 2 • Substitutes
Value drivers Supplier power
Cost drivers
8.3.1 The business context

Between 1995 and 2005, the German music major Sony BMG grappled with a ubiquitous
crisis that threatened the entire music industry. This crisis, which was mainly caused by
increased piracy through illegal online music downloading and burning of compact discs,
led to declining physical CD sales and dwindling industry revenues. The latter dropped at
an almost double-digit rate for 10 consecutive years. In order to secure its future, Sony BMG
looked for ways to exploit the growth opportunities in the nascent digital music market. In
particular, mobile music, driven by increased UMTS14 and multimedia handset penetration,
was gaining a strong foothold and presented a lot of potential. eMedia, the department in
charge in Germany of Sony BMG’s digital music business, pondered the launch of its own
mobile service, equipped with Sony BMG digital music content. This MVNO15 concept, tar-
geting 12- to 25-year-old mobile phone users, was designed as a prepaid mobile offer com-
prising a UMTS-enabled multimedia handset and downloadable premium content scattered
around in virtual music worlds (rock, pop, Latin-American, etc.).16 This business expansion
entailed a very high risk but had a strong potential to impact on the future bottom-line per-
formance of Sony BMG (Germany). In the following sections, we use the VPF to analyse the
extent to which Sony BMG would have been able to create and capture value through the
implementation of the above-mentioned MVNO project.
8.3.2 Value creation

We start with an examination of the value and cost levers and their influence on Sony BMG’s
value creation. We do so by integrating the results of a value chain analysis into the VPF
to identify (1) what value drivers could have created perceived use value for Sony BMG’s
customers, and (2) what major costs would have accrued during the product’s realisation
process. Exhibit 8.10 shows the value chain of Sony BMG’s prospective MVNO.
To achieve a differentiated positioning for its MVNO, Sony BMG considered includ-
ing multiple value drivers along the business activities of its value chain. It expected
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Exhibit 8.10 A value chain analysis of the MVNO project reveals numerous value and cost drivers
Content,
Handset MNO Marketing, Sales, MVNE
product
purchasing services branding distribution services
design
Concept
Concept
UMTS design, Content
Value UMTS image,
multimedia artist roster, distribution /
drivers technology concept
handset applications, over the air
brand
features
Cost Wholesale MNO Advertising Retail MVNE

Royalties
drivers costs service fees costs margins service fees
that the purchase of UMTS-enabled multimedia handsets would drastically increase the
attractiveness of its prepaid starter packages. In contrast to competitive prepaid offer-
ings, Sony BMG also wanted to offer wireless telecommunication services (i.e. MNO17
services) based on cutting-edge UMTS technology. Furthermore, the content component
of its mobile offering (i.e. the concept design of the virtual music worlds) was unique and
the first on the market. It was supposed to create additional value through unique music-
based applications and features. Sony BMG’s artist register and digitised music catalogue
were thought to serve as the backbone of the virtual music worlds. Furthermore, Sony
BMG wanted to enhance the perceived use value through large-scale marketing and
branding activities that were expected to create a strong concept brand, enticing custom-
ers to become Sony BMG mobile subscribers. The underlying UMTS technology was seen
as an enabler for Sony BMG to sell and distribute its premium content directly over the air
to its customers’ handsets.
At this point in the analysis, it is crucial to discuss how each one of the above-listed
value drivers could have been converted into actual use value as perceived by prospective
Sony BMG mobile customers. Based on our experience, both managers and students often
omit this important step of specifically working out how particular product features or a
company’s technology actually translate into perceived use value. For example, in the case
of Sony BMG, customers would not have appreciated the underlying UMTS technology
of a mobile offering but would have enjoyed the fast ‘anytime and anywhere’ access to
entertainment content. In the same way, customers would not have derived value from a
Caribbean beach itself but from the enjoyment they would have experienced when spend-
ing time at that beach. In the Sony BMG example, multiple value drivers were supposed
to create use value mainly for the following three dimensions: quality, brand and speed
(see Exhibit 8.11).
We now describe in more detail how Sony BMG considered translating the different
value drivers into perceived use value.
● Quality (of the product). Potential customers who would have downloaded and con-
sumed Sony BMG content would have valued its entertainment and fun dimension.
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Exhibit 8.11 Multiple value drivers create perceived use value mainly in three dimensions
Value drivers (step 1) Perceived use value (step 2)
• Artist roster, content, applications, Entertainment & fun

multimedia handset
24/7 access
• UMTS technology, handset
Quality
• Applications, community Interaction
• Applications, features Individualisation
• Image (brand) Emotional benefit

Brand Value
• Image (brand) Individualisation
• UMTS technology, handset 24/7 access

Speed
• UMTS technology, handset Fast downloads
Furthermore, they would have appreciated the ‘anytime and anywhere’ access to the
virtual entertainment worlds. Through applications and community features, custom-
ers could have satisfied their interaction needs too. Furthermore, the diverse content
applications would have allowed customers, through customised mobile phone configu-
rations, to differentiate themselves. All these features were designed to increase product
quality.
● Brand. Customers would have derived emotional benefits from possessing the starter
package of a specifically branded virtual world. For example, a Latin-American music fan
would have perceived the emotional benefit of owning a specific ‘Latino-branded’ hand-
set that would have the corresponding genre-related content. The branding would have
enabled Sony BMG subscribers to differentiate themselves from common mobile phone
users and perceive a strong sense of customisation.
● Speed. Compared with common General Packet Radio Service (GPRS) data transfer,
UMTS technology creates use value in the form of fast downloads and short waiting
periods. By providing UMTS services, Sony BMG would have enabled customers to take
advantage of ‘anytime and anywhere’ access to entertainment content. In particular, cus-
tomers who needed to kill some ‘idle time’ (e.g. when waiting for a bus or a train) would
have been expected to appreciate these product features especially.
After having analysed the drivers of perceived use value, we now identify the corresponding
cost drivers (see step 2 in Exhibit 8.11). Due to its differentiated positioning, the Sony BMG
MVNO concept was thought to lead to substantial costs. First, the wholesale costs of top-
end handsets would have been very high, which would have forced Sony BMG to subsidise
its handsets highly. Second, the provision of cutting-edge UMTS technology would have
resulted in high service fees charged by prospective MNO partners. Third, Sony BMG would
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have had to pay royalties to its artists for the sale of music-related content. Fourth, since no
concept brand was established, advertising costs for TV, print and online promotion would
have been another major cost pool. Additional cost drivers that were identified through the
value chain analysis included retail margins for distributors and service fees to MVNEs18 for
their technical support.
Moreover, the moderate to high bargaining power of suppliers (i.e. the handset manu-
facturers and wireless operators) would have further increased Sony BMG’s purchasing
costs. Handset manufacturers such as Nokia or SonyEricsson produce prepaid phones with
similar basic functionalities. However, their handsets differ in terms of brand and image –
features that are very important to customers. In sum, the bargaining power of handset
manufacturers was moderate and would have slightly increased the wholesale costs of Sony
BMG’s handsets. Wireless operators, in turn, provide telecommunication infrastructure and
sell air traffic to MVNOs. Since E-Plus was the only wireless telecom operator willing to sell
air traffic to potential MVNO partners, its bargaining power was substantial. Thus, Sony
BMG’s MNO service fees to E-Plus would have risen considerably and therefore decreased
the value created. This last step again highlights the fact that the process of value creation
would have depended not only on the internal activities of a company, but also on its exter-
nal environment – i.e. the industry it competed in.
In this section, we have shown how the value creation dimension can be analysed by
integrating findings from Porter’s strategy models into the VPF and assessing their impact
on the value and cost levers, and thus on the value created (see Exhibit 8.12).
Exhibit 8.12 Perceived use value and costs for the Sony BMG MVNO would both have been high
Value creation
• Quality
• Brand
• Speed
1 2
• Handsets costs
• MNO service fees
• Royalties Supplier
• Advertising costs power
• Retail commissions
• MVNE service fees
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8.3.3 Value capturing

In the previous section, we found that Sony BMG could have created value as the prospec-
tive high perceived use value could have exceeded the high costs of the MVNO project. We
now focus on the value-capturing dimension to determine to what extent Sony BMG would
have been able to capture parts of the value created in the form of profit. To do so, we ana-
lyse Sony BMG’s ability to influence the level of competitive discount.
As stated in Section 8.1.2, the level of competitive discount depends on the unique-
ness of a product. The probability that a product is unique is high if (1) the internal
resources and capabilities enable the firm to create a unique product, and (2) the indus-
try structure is such that it remains unattractive for new entrants. First, we analyse the
resource base of Sony BMG and its internal power to create a unique product. We then
apply Porter’s five forces model to assess industry attractiveness and its impact on the
competitive discount.
Sony BMG’s internal key resources must be valuable, rare and imperfectly imitable
to enable the company to create a potentially unique product that appeals to custom-
ers. From the VPF perspective, if a company is able to offer a unique product based on
resources that are valuable, rare and imperfectly imitable, it can then limit the number
of competitors and keep the competitive discount small. In our case, Sony BMG’s major
valuable resources were (1) concept design, (2) artist register and (3) marketing
expertise.
● Concept design. This comprised value-added services, special applications and additional
features that were likely to satisfy customers’ entertainment, customisation and interac-
tion needs. As the first on the market, the Sony BMG concept design was not only valu-
able but also rare. Thus it could have created a unique product with a limited competitive
discount. However, since followers did not face major barriers in duplicating the concept
design, the competitive discount would have increased over time.
● Artist register. Since all three major competitors (Universal, EMI and Warner) controlled
more or less similar artist rosters, Sony BMG’s artist register represented a valuable but
not rare resource. Furthermore, it was not imperfectly imitable since content aggregators
such as Napster or iTunes faced no major hurdles for acquiring the rights to sell digital
music themselves. This implied that the artist register was not a source of a unique prod-
uct and therefore would not have decreased the competitive discount.
● Marketing expertise. Launching a new premium product would have forced Sony BMG
to carry out large-scale marketing campaigns. Strong marketing expertise would have
guided Sony BMG efforts to introduce successfully on the market a new product brand
and image. However, the competing music majors also claimed to have strong marketing
competencies. As a result, marketing expertise did not constitute a resource that would
have created a unique product vis-à-vis competitors and thus would not have reduced the
competitive discount.
In conclusion, the concept design was in the short term the only source of product unique-
ness. However, Sony BMG did not control valuable resources that were rare and imperfectly
imitable. Therefore, in the long run, it would not have been able to achieve sustainable
product uniqueness or a competitive advantage. As a result, the competitive discount would
have been relatively small in the beginning but, in all likelihood, would have increased
substantially over time.
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Exhibit 8.13 The German wireless telecommunications industry is of relatively low attractiveness
Threat of new entrants

(moderate to high)
• Low technical barriers, high
barriers for brand and access to
attractive content
• Low switching costs for prepaid
customers
• Low exit barriers, only sunk
costs for advertisement
• Easy access to distribution
channels
Bargaining power of suppliers

Industry rivalry Bargaining power of customers
(moderate to high)
(moderate to high) (relatively high)
• No input differentiation in terms
• Telco market is close to • No considerable switching costs
of air traffic (this argument
saturation • Huge amount of prepaid
applies only to resellers and
• Player concentration depending offerings → low differentiation
MVNOs)
on market definition parameters
• Moderate input differentiation in
• Low exit barriers for non MNOs • Willingness to pay important for
terms of handsets
• Product differentiation only via premium content providers
• Strong supplier concentration
premium content • High market transparency
(only E-Plus in Germany)
Threat of substitutes
(relatively low)
• No devices in sight that could
adequately fulfil the product’s
major functions
We now use Porter’s five forces model to assess the industry’s attractiveness from a new
entrant’s perspective and analyse its effect on the competitive discount. Exhibit 8.13 summarises
the competitive environment in which Sony BMG considered the set-up of its own MVNO.
By the end of 2005, the German wireless telecommunications industry was close to satu-
ration. Rivalry in the industry was steadily rising, voice traffic had become a commodity
and differentiation via premium content was essential for future growth. However, in con-
trast to other incumbents, one major wireless telecom operator (namely E-Plus) pursued a
different strategy and started to gain market share by selling air traffic to emerging virtual
telecom operators. Due to the low technical entry barriers, easy access to distribution chan-
nels and low exit barriers, these virtual telecom operators started to flood the market. As
a consequence, prepaid mobile customers especially, who had almost no switching costs,
were able to choose from a large pool of mobile telecom offerings with low differentiation.
Now we draw on the main insights gained from the five forces analysis of the German
wireless telecommunications industry and integrate our findings into the VPF. In our
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Exhibit 8.14 The five forces analysis indicates a high competitive discount
Value capturing
New entrants
3
Customer
Rivalry
power
Substitutes
example, three forces had a major impact on the degree of product uniqueness and thus
explicitly influenced the competitive discount. As uniqueness is hard to achieve in the face
of rising competition, the moderate to high threat of new entrants and the moderate to
high industry rivalry both drove the competitive discount up, thereby reducing the value
captured. Only the low threat of substitutes had an increasing effect on the value captured,
as industries with a low threat of substitutes usually have lower competitive discounts.
In this section, we focused on the competitive discount as the third lever of competi-
tive advantage to find out whether the value created by Sony BMG could also have been
captured. We have shown how insights from strategic analysis increased the competitive
discount and demonstrated its impact on value capturing. We visually integrate the results
of this section in Exhibit 8.14. For Sony BMG, the competitive discount would have been
substantial over time, especially due to the imitability of its key resources, the moderate to
high industry rivalry and the moderate to high threat of new entrants.
8.3.4 Findings
Ultimately, Sony BMG had major doubts as to whether the MVNO project would have been
profitable, taking into account the high risk due to the high cost structure, the moderate to
low industry attractiveness and the imitability of its key resources. Therefore, Sony BMG
decided to put on hold the project’s implementation plan. However, in order to enter the
digital music market, Sony BMG started leveraging its resources and capabilities through
cooperation with other service providers.
The VPF helped us to understand and explain Sony BMG’s decision and its underlying
rationale. Exhibit 8.15 shows the findings of the analysis, which can be summarised as follows:
● Perceived use value (1). Perceived use value was expected to be substantial, mainly driven
by features such as UMTS handsets, concept design, artist register, strong concept brand
and over-the-air distribution of music content.
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Exhibit 8.15 Perceived use value has to be extremely high to achieve profitability
Effects on competitive
discount
• Industry forces (low entry
barriers, relatively high
rivalry, high customer
power, low substitute
threat)
• Short-term uniqueness of
resources (especially
concept design), but
imitable in the long run
3
Value drivers Cost drivers

• Handset • Wholesale costs
• UMTS • Increased MNO service
• Concept design, artist fees (due to high supplier
roster power)
• Brand • Royalties
• Over-the-air distribution • Advertising costs
1 • Retail margins
• MVNE fees
2
● Costs (2). As a consequence of the differentiated positioning, the costs of the project
would have been very high. MNO service fees, resulting from the high bargaining power
of mobile operators, were likely to result in high costs to Sony BMG.
● Competitive discount (3). Even if the perceived use value had exceeded the costs, the
relatively low entry barriers and the high industry rivalry would both have led to an
increasing effect on the competitive discount, thereby reducing the value captured (i.e.
the profitability). Moreover, the uniqueness of the concept design would have only
temporarily limited the number of competitors. In the long run, the concept and its
underlying resources would have been imitated and would not be a source of sustained
competitive advantage. As a result, the competitive discount would have risen over time
and substantially eroded the value captured by Sony BMG.
Overall, our analysis shows that implementation of the MVNO project would have been very
risky for Sony BMG. Since costs and the competitive discount would have been relatively
high, only a blockbuster product would have had the potential to create sufficiently high
perceived use value. In addition, Sony BMG would have been forced to aim at a very fast
cost amortisation and a short payback period due to the high imitability of the project.
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Summary
In this chapter, we presented the value-process framework (VpF), which is a conceptually unifying
analysis tool that addresses the main levers of sustainable competitive advantage. this framework
stipulates that, in order to succeed, companies need to create and capture value. In particular,
when formulating a business strategy, managers need to bear in mind the following key points:
● Value creation and capturing are ultimately the only two levers of strategic management. all
other concepts in the field serve to address one or both of these two core dimensions.
● When creating value, a company needs to focus on the use value as perceived by customers.
only value that is considered as such by customers will eventually translate into value created.
● In order to maximise the value created, a company needs to optimise the trade-off between
perceived use value and costs.
● In order to be competitive, a company needs to ensure that the value it creates is at least
as good as (or better than) the value created by its rivals. otherwise, competitors offering
a higher level of value created will be in a position either to undercut prices while still
maintaining a good profitability margin, or to provide a higher level of consumer surplus at
a similar price. Both scenarios will severely undermine the company’s profitability.
● In order to limit the size of the competitive discount, the value created has to be somehow
unique.
● In order to sustain a competitive advantage over time, a company needs to ensure that its
value created is difficult to substitute or imitate, since only value created that can be shielded
against current and future competitors will ultimately lead to sustainable profitability.
It is important to emphasise that the value-process framework is not just intended to help
make decisions at the product level. It also helps address, at the business unit or corporate
level, strategic issues such as outsourcing, diversification or mergers and acquisitions. Whenever
managers contemplate, for instance, the introduction of a new product line or the outsourcing
of a business process to an external provider, it will be insightful to analyse how these decisions
impact on the value that is being created and the ability of the company to capture this value.
REVIEW QUESTIONS
1 What is meant by ‘perceived use value’ and what are its main drivers?
2 What is meant by ‘competitive discount’ and what determines its level?
3 Which requirements does a company need to fulfil in order to achieve a sustainable competitive
discount?
1 How would you personally define value creation? does your definition differ from the one
suggested in this chapter? If so, how?
2 discuss through the value-process framework how companies in an industry (of your choice)
create and capture value. Visualise your findings through the diagrams of the framework.
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The concept of perceived use value is described in more detail in C. Bowman and V. Ambrosini,
‘Value creation versus value capture: towards a coherent definition of value in strategy’,
British Journal of Management, 2002, no. 1, pp. 1–15.
For a more detailed discussion of these approaches, refer to D. Besanko, D. Dranove, M. Shanley
and S. Schaefer, Economics of Strategy, John Wiley, 2003, pp. 416–19.
The five forces industry framework is described in M. Porter’s book Competitive Strategy, Free
Press, 1998, p. 5.
N. Argyres and A. McGahan, ‘An interview with Michael Porter’, Academy of Management
Executive, 2002, no. 2, pp. 43–52.
For a new and solid approach to the process of value creation, see the service-dominant logic
framework originally proposed by S. Vargo and R. Lusch. Among the numerous publications
on this theme, see, R. Lusch and S. Vargo (eds), The Service-Dominant Logic of Marketing:
Dialogue, Debate and Directions, M.E. Sharpe, 2006, or R. Lusch and S. Vargo (eds), Special
Issue: Service-dominant logic: continuing the dialogue, Journal of the Academy of Marketing
Science, 2008, vol. 36, no. 1.
1 This chapter was written by Albrecht Enders, Andreas Koenig, Thomas Engelbertz and Tawfik Jelassi.
2 Quoted in N. Argyres and A. McGahan, ‘An interview with Michael Porter’, Academy of Management
Executive, 2002, no. 2, pp. 43–52.
3 See M. Porter, Competitive Advantage, Free Press, 1998.
4 In order to simplify the model, we use the example of a single consumer with an unlimited spending
budget.
5 In the context of this chapter, we use the term ‘product’ to include both goods and services.
6 See M. Porter, Competitive Advantage, Free Press, 1998.
7 The concept of use value is equivalent to the idea of consumer benefit, which we introduced in Section
5.2. Since, in this chapter, we attempt to delve more deeply into the theory of strategic management, we
decided to use the specific, albeit somewhat clumsy, terminology of perceived use value suggested by C.
Bowman and V. Ambrosini, ‘Value creation versus value capture: towards a coherent definition of value
in strategy’, British Journal of Management, 2002, no. 1, pp. 1–15.
8 M. Porter emphasises this point in ‘Towards a dynamic theory of strategy’, Strategic Management Journal,
1991, vol. 12, no. 8, pp. 102–5.
9 Quoted in N. Argyres and A. McGahan, ‘An interview with Michael Porter’, Academy of Management
Executive, 2002, no. 2, pp. 43–52.
10 This means that a company knows the maximum amount a customer is willing to pay, which entails that
it can set a price that is only marginally lower than the customer’s perceived use value and the customer
would still be willing to purchase. Since perfect price discrimination is not possible, even in a perfectly
monopolistic environment, consumers will always capture at least a marginal proportion of the value
created in the form of consumer surplus. This reduction of the value created is of conceptual importance.
However, we chiefly designed this framework for pedagogical purposes and practical application. Thus,
in the following, we neglect the effect of a marginal reduction of producer surplus due to the lack of price
discrimination.
11 M. Porter in ‘What is strategy’, Harvard Business Review, 1996, vol. 74, no. 6, pp. 61–79, argues that
by creating a fit between the individual business activities through consistency, reinforcement and
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optimisation, a firm can even create value that increases the sum of the parts. For example, reinforce-
ment of activities has a positive influence on the overall perceived use value, whereas optimisation
efforts can potentially reduce total costs.
12 In fact, the behaviour of suppliers also affects the competitive discount. For example, the better the rela-
tion of a supplier is with a competitor, the lower will be the competitor’s cost position. Accordingly, the
value created by the competitor and, as a consequence, the competitive discount will be larger.
13 Voice over Internet Protocol (VoIP).
14 UMTS is the third-generation mobile phone technology that provides data rates of up to 2 megabits per
second.
15 A mobile virtual network operator (MVNO) is a mobile operator that does not have its own network
infrastructure. Instead, MVNOs buy minutes of use (MOU) from traditional operators for sale to their
own customers. In Germany see Lidl, Tchibo, etc. On a global scale check out Virgin Mobile/USA, UK,
Universal Scoop/France, Mobile ESPN/USA, etc.
16 A preliminary version of the virtual music worlds included a Rock & Pop, R’n’b & Hip-Hop and Latin-
American music world. Each world made genre-related content available for over-the-air download. The
download offer comprised at least content in the form of ringtones, news, games, videos and full tracks.
17 Mobile network operator (MNO).
18 Mobile virtual network enablers (MVNEs) are intermediaries and position themselves between MVNOs
and MNOs. In terms of services, MVNEs offer a one-stop shopping solution for MVNOs by providing
and selling infrastructure and a full range of services necessary for MVNOs to launch and run their
operations.
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Chapter 9
Choosing the appropriate strategy

for the internal organisation of
e-business activities
Chapter at a glance
9.1 Reasons determining ‘make-or-buy’ decisions in e-business 196
9.1.1 Reasons favouring ‘make’ decisions 198
9.1.2 Reasons favouring ‘buy’ decisions 201
9.2 Choosing the organisational structure for e-business activities 202
9.2.1 separate e-business organisation 203
9.2.2 Integrated e-business organisation 204
9.3 Value chain deconstruction over the Internet 206
9.4 Unbundling the corporation over the Internet 208
9.5 Managing conflicts between online and offline distribution channels 211
9.5.1 Understanding conflicts in distribution channels 212
9.5.2 the channel conflict matrix 213

6 SATEC Business model evolution
3 Ducati vs.Harley deconstructing the value chain
10 e-Choupal streamlining the value chain
7 Otis Re-engineering business process
1 Tesco Managing the online and offline channel conflict
2 Nordea Managing the online and offline channel conflict
8 Topcoder Unbundling the corporation through the Internet
14 KM at Booz Managing knowledge
11 e-Estonia Introducing online channels in the public sector
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Learning outcomes
● describe the spectrum of ‘make-or-buy’ options.
● Identify the main reasons that favour ‘make’ decisions.
● Identify the main reasons that favour ‘buy’ decisions.
● describe the concept of value chain deconstruction and the role of the Internet
within this concept.
● Understand the concept of unbundling the corporation.
Introduction
after discussing in the previous chapters the strategic positioning of e-business ventures,
Chapter 9 focuses on internal organisational issues that need to be addressed in order to
implement an effective e-business strategy. We focus on two main questions that are crucial
in the context of e-business strategy formulation. the first question is: which activities within
the value chain should we perform in-house and which ones should we outsource to exter-
nal providers? the second question is: how should we align our e-activities with our physical
activities in order to avoid possible conflicts between our online and offline channel offer-
ings? this question, which is addressed in section 9.5, is only relevant to companies that have
both online and offline operations, as is the case, for instance, with tesco, ducati and nordea
(all of which are featured in the case studies section of this text).
9.1 Reasons determining ‘make-or-buy’ decisions in e-business
Consider the recent merger of Sony, Toshiba and Hitachi to integrate their small and medi-
um-sized LCD1 screen businesses. This joint venture, named ‘Japan Display’, had several
objectives such as strengthening the companies’ potential for technological innovation and
achieving economies of scale. Another interesting example of a merger is that of AOL and
Time Warner, about a decade ago. The two firms merged because they wanted to create an
integrated value chain in the media industry that spanned content production to content
delivery and leveraged both the physical and online channels. Substantial synergies were
expected from this merger. Nevertheless, as it turned out, these synergies proved difficult
to achieve and many critics argue that it would have been better to have kept the two firms
separate.
From a more historic perspective, let us consider the evolution of the PC industry. In
1985, IBM, which then dominated this industry, conducted in-house all the value chain
activities, from the development of microprocessors to production, marketing, sales and
distribution. As a result of open standards and the increased use of mass production,
this integrated value chain became more fragmented over time. Today, as shown in
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Exhibit 9.1 During the 1990s, the PC industry became increasingly fragmented
Microprocessors,
IBM-integrated Operating Application Marketing, sales
integrated circuits, PCs
value chain (1985) systems software and distribution
memory chips
Compaq Retail
Microsoft
Dell Office Megastores
Unbundled value Intel IBM Windows
chain (1999)
Online
Apple Netscape
Motorola UNIX Post order
Adobe
OS/2
AMD Cyrix Mac OS Direct sales
Linux
Source: adapted from d. Heuskel, Wettbewerb jenseits von Industriegrenzen, Campus, 1999, p. 53.
Exhibit 9.1, companies focus on (and dominate) only some individual activities of the
PC industry value chain.
The above-mentioned examples illustrate how companies can choose from a variety of
options available to them for making a product or service. They can decide to perform some
activities internally (‘make’, or the so-called hierarchy form of governance) or ‘purchase’
them on the open market (‘buy’). The different options that companies can choose from are
as follows:
● Market transactions entail purchase from an external provider on an individual contrac-
tual basis.
● Long-term contracts entail purchase from an external provider on a contractual basis,
spanning an extended period of time.
● Alliances entail the close cooperation of two separate firms that join up in the production
of a certain product or service.
● Parent/subsidiary constellations entail the setting up of a distinct firm that operates sepa-
rately from, yet under the auspices of, the parent company.
● Internal production entails a process that is managed completely internally, without any
outsourcing to external providers.
At one end of the spectrum, firms that rely heavily on input from external providers include
car manufacturers such as DaimlerChrysler and BMW, and sports goods manufacturers
such as Nike and Adidas. Another example is Dell, which concentrates on tightly integrating
different suppliers to deliver the components for the PCs that it assembles and sells. At the
other end of the spectrum, highly integrated firms, such as Procter & Gamble and Nestlé,
perform most functions internally – ranging from R&D and production to marketing and
distribution.
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Tesco.com is situated somewhere in the middle of this continuum. On the one hand,
Tesco itself sources many activities that were previously fulfilled by outside providers.
Consider, for instance, the arrangement that Tesco had reached with the online vendor
Grattan. Through this agreement, all the back-end activities of the value chain were out-
sourced to Grattan, while Tesco only managed the front-end activities. When Tesco recog-
nised the potential business impact of selling non-food products, Tesco Direct was set up
in-house to provide the services that were previously performed by Grattan. Tesco Direct
even decided to set up an internal publishing studio with a staff of 40 employees to produce
high-quality photos for the 8,000-item print catalogue and the Tesco Direct website. On the
other hand, Tesco Direct has outsourced the goods delivery activity to external partners.
Many e-business analysts have argued that the increased use of the Internet makes it
more attractive to rely more heavily on external providers and perform fewer activities
internally. In order to assess this claim, we need to analyse the different factors that favour
‘make’ and ‘buy’ decisions and determine how the Internet affects them.
9.1.1 Reasons favouring ‘make’ decisions

There are several reasons and characteristics defining a business context that favour per-
forming activities in-house (i.e. the ‘make’ option).2 These are: (1) a strong linkage between
activities, (2) highly differentiated products and/or services, (3) proximity to the company’s
core business, (4) confidentiality of information and, most importantly, (5) production cost
advantages and (6) high transaction costs.
Strong linkage between activities

We discussed extensively in Section 5.4 the importance of linkage between activities. If it
is crucial for a company to integrate tightly different activities of its value chain, then these
activities should be performed internally if that is the only way to achieve such integra-
tion. Creating close linkages throughout the value chain can help a firm either to provide
superior customer benefit through reinforcement of activities or to lower costs through an
optimisation of efforts.
Highly differentiated products and/or services

How differentiated a product or service is determines its degree of uniqueness vis-à-vis the
competition. (For a conceptual discussion of differentiation strategies, see Section 5.2.2.)
Referring to the ‘make’ versus ‘buy’ decision, a company that follows a differentiation advan-
tage should first ask, when considering the outsourcing possibility, if there are qualified
firms to subcontract to – i.e. which are able to perform the required tasks. In other words, a
potential subcontractor has to satisfactorily contribute to the firm’s differentiation strategy,
performing the outsourced activity at the value level that matches the company’s require-
ments. If the company cannot find a suitable company to subcontract to, then it would have
to consider performing the concerned activity (or activities) itself.
Proximity to the company’s core business

Activities or processes that are strongly linked to a company’s core business, due to their
strategic importance in the value proposition, need to be closely controlled and coordinated.
Therefore, if a reliable and quality collaboration with a suitable partner cannot be found,
the company will have to carry out the concerned activity internally.
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Confidentiality of information
Confidentiality of information is another reason that can lead a firm to perform activities
internally. The sharing with external providers of critical information about R&D processes,
customers and production methods may undermine the firm’s competitive advantage.
Microsoft, for instance, refuses to provide other software development firms with the source
code of its software because it fears that doing so would eventually result in a leak into the
public domain.
Production cost advantages

In Section 5.2.1, the concepts of economies of scale and economies of scope were presented.
If a company can easily obtain, when carrying out certain activities, important cost advan-
tages related to the above-mentioned economies, then it should not subcontract but rather
integrate these activities internally. Besides, by doing so the company may be able to create
entry barriers or get rid of some competitors.
High transaction costs

Costs related to the actual transaction process, also called transaction costs, represent
an important factor in the ‘make’ versus ‘buy’ decision.3 These consist of costs that a firm
incurs when it relies on the market to produce a product or service. Transaction costs arise
because of diverse factors, including behavioural aspects related to the economic agents
involved in the transaction, the characteristics of the context where the transaction takes
place (i.e. its level of uncertainty and complexity) and the inherent characteristics of the
transaction being dealt with (i.e. frequency, asset specificity, level of uncertainty, etc.). For
instance, in relation to the former factor, buyers and sellers usually have diverging interests,
which might make them act with opportunism – i.e. ‘self-interest seeking with guile’, as the
Economics Nobel Prize-winner O.E. Williamson put it.4 The seller wants to maximise profits
by charging as high a price as possible, while the buyer wants to keep costs down by paying
as little as possible. To avoid opportunistic behaviour, a company needs to invest time and
effort in searching for an appropriate business partner, negotiating conditions and monitor-
ing and enforcing the contract.
Which factors or situations cause the possible rise of transaction costs and how does
the Internet influence these factors? We now describe some of the most important factors
involved here:
● First, asset specificity, which is related to the investment needed in order to set up a
transaction between two or more parties. A transactional context is said to have high
asset specificity, thus creating bilateral dependency between parts, when it is difficult to
redeploy an asset to alternative uses outside the original context without sacrificing the
product value.5 For instance, before the advent of the Internet, companies that wanted to
engage in electronic transactions with one another had to invest in proprietary electronic
data interchange (EDI) systems, which were quite costly to install and rather complex to
manage technically – especially if multiple partners spanning different industries were
involved. Once such a system was in place, the parties were locked into the agreement
because of the high investment made and the limited choice of partners.
Imagine the case of the tyre manufacturer Tire Inc., which sources rubber from the
rubber producer Rubber Corp. In order to optimise the production flow, Tire Inc. has
agreed to install a traditional EDI system that connects it to the IT system of Rubber
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Corp. The two companies draw up a contract and delivery takes place as planned.
Subsequently, Rubber Corp. informs Tire Inc. that it needs to raise prices by 20%, know-
ing that Tire Inc. needs to keep the business relationship going to recover the investment
in the EDI system. Tire Inc. might decide to accept the price increase, or to take Rubber
Corp. to court, or to terminate the relationship altogether. In any case, there will be
substantial costs involved for Tire Inc. Knowing what might await it next time, Tire Inc.
decides to produce the rubber internally, thereby avoiding transaction costs.
Now, let us think about what this scenario might look like today. Over the Internet,
Tire Inc. could connect to the system of Rubber Corp., thereby substantially reducing the
costs for specific IT investments. Rubber Corp. at the same time would not be inclined to
try to raise prices because it knows that Tire Inc. could easily switch suppliers. Therefore,
transaction costs are now much lower due to lower asset specificity, which makes it more
likely that Tire Inc. will outsource activities to external providers.
● Second, the degree of information asymmetry between the involved parties. Often, a
buyer lacks vital information about a seller because it does not know the track record of
the seller, and vice versa. If a buyer can hide past cases of fraud, then it is much more
inclined to act opportunistically in the future and try to commit fraud again.
This type of information asymmetry is also easier to remedy over the Internet.
Through virtual communities, such as those at eBay, buyers can rate the quality of
sellers, and sellers can rate the reliability of buyers. This has a twofold effect. First, any
buyer who is considering a purchase can base his/her decision on the track record of
the seller. If a seller has hundreds of positive ratings, then it is very likely that he/she
will also fulfil his/her promises during the next transaction. Second, as the number
of positive ratings increases, sellers are more likely to maintain their high standards
in order to protect their reputation. Thus, a self-reinforcing virtuous cycle is set in
motion through the rating system, which deters opportunistic behaviour and thereby
also reduces transaction costs. (See FT article: ‘Everyone’s a critic now – or are they?’.)
Because of the lower asset-specific investment and improved information, it is sensi-
ble to assume that the Internet reduces transaction costs. This should, in turn, make it
more attractive to outsource parts of the value chain to external providers.
● Third, a company’s ‘buy’ decision is in part justified by its low performance compared
to that of an external product/service provider. However, some business partners may
eventually perform badly, requiring the company either to change the outsourcing com-
pany or to revert to a ‘make’ decision (i.e. to an insourcing approach).
● Fourth, the level of uncertainty that characterises the business environment. One solution
here would be to integrate the company’s main business processes inside the organisa-
tion. However, a ‘make’ decision may not be the optimal choice for a company, since
a ‘buy’ approach offers flexibility and choice – two key features that help cope with
unexpected market changes. An illustrative example here is the social media strategy of
Yahoo!. In the past, Yahoo! sought to leverage its social connections with users through
Yahoo email, messenger, address book, etc. This represented a clear ‘make’ decision
and a corporate integration strategy. However, this approach did not enable Yahoo! to
achieve its objectives. Finally, the company opted for a social media strategy based on a
partnership with Facebook, thus linking its products to Facebook Connect.
On the other hand, if a company foresees an undesirable dependency on its partners
due to investments in specific assets, then a ‘make’ decision could be a good choice. Since
a partnership cannot always be adequately formalised through a contractual agreement,
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Everyone’s a critic now – or are they?

How seriously is that?
The limited evidence we have suggests that people are drawing quite sensible inferences
from the reviews they read. Ebay auctions have been studied by the economist David
Reiley and a number of his colleagues. Reiley finds that positive ratings for a seller push
up the prices she receives, but that the effect is small and not statistically significant.
On the other hand, negative ratings have a much larger and statistically significant
effect in depressing prices. This makes sense: sellers might go to some lengths to round
up friends (or “sock-puppets” – online aliases that they control) and ask them to post
positive ratings. But who bothers to post negative Ebay ratings for the sheer joy of it?
Negative ratings are also rarer and so might be regarded as more informative.
Seller ratings aren’t the same as reviews

No, but we also have evidence on Amazon reviews, thanks to work by Judith Chevalier
and Dina Mayzlin. They compared books for sale on the Amazon and Barnes & Noble
websites, observing both the reviews and the relative popularity of any given title on
each site. This is a nice statistical tool. Obviously one would expect good books to earn
good reviews and lots of sales, but when a book has particularly notable reviews on one
site, Chevalier and Mayzlin were able to use that fact to track the effect of the reviews
on the book’s sales.
Source: Adapted from Hartford, T. (2012) Everyone’s a critic now – or are they?, FT.com,
3 February.
a hybrid solution between ‘make’ and ‘buy’ could sometimes be more appropriate. At
any rate, a more dynamic view6 of the transaction costs theory suggests coping with
uncertainty by avoiding fully integrated business processes, looking for partnerships and
reducing specific transaction assets.
9.1.2 Reasons favouring ‘buy’ decisions

Today, many companies rely heavily on sourcing parts and services from external suppliers.
There are four main reasons for doing so: (1) difficulty to achieve economies of scale, (2) high
capital requirements, (3) specialised know-how and (4) higher efficiency of the open market.
Difficulty to achieve economies of scale

A firm that produces only for its own use usually requires a much smaller quantity than a
supplier that produces for many different firms. Therefore, the external supplier has the pos-
sibility to reap much larger economies of scale than the individual firm that decides to make
the part by itself. Dell, for instance, could decide to build its own factories for producing the
microchips that it uses in the PCs it sells. However, the investment required for doing so is
too large, relative to the expected output, and would make every chip produced prohibitively
expensive. Therefore, Dell sources the chips from specialised manufacturers, such as Intel
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and AMD, which also supply many other computer manufacturers with chips. In fact, Dell has
chosen this approach for almost all its inputs. Since it is a large customer for most of its suppli-
ers, it is in a position to capture large parts of the economies of scale in the form of low prices.
High capital requirements

If the production of a specific part requires a major investment upfront, such as the con-
struction of a specialised plant, then it may be sensible to find an external supplier that
already has the required facilities in place. Doing so might be more expensive on a per-unit
basis, yet it reduces the overall risk. For instance, Webvan, the US online grocery retailer,
might have fared better if it had relied more on external suppliers when it set up its online
grocery business. Instead, Webvan organised by itself all parts of the value chain and invest-
ed heavily in a custom-built IT platform, highly automated warehouses and a large fleet of
delivery trucks, only to find out that the business model did not work as anticipated. The
expensive IT platform, the warehouses and the trucks were later sold during the bankruptcy
proceedings for a fraction of their original prices.
Specialised know-how
Specialisation effects are likely to be related to economies of scale. A firm that produces large
quantities of goods also tends to build up, over time, substantial know-how regarding R&D proc-
esses and production methods. This specialised know-how should then lead to lower produc-
tion costs and higher quality standards, or both. Consider Tesco Direct’s delivery system. The
company owns large warehouses to organise the logistics of incoming and outgoing shipments.
Yet for the actual shipment process, Tesco Direct relies on specialised logistics firms, which pos-
sess strong experience in logistics and delivery and have optimised their processes over time.
Higher efficiency of the open market

Finally, external suppliers are often more efficient because they are facing permanent com-
petitive pressure from other companies within their specific industry. If performed internally,
the production of a sub-product or the provision of a service can become highly inefficient
over time because of a lack of control, thereby causing unnecessary costs. External firms pro-
ducing that same product, on the other hand, do not enjoy the same type of ‘protection’ and
are therefore forced constantly to maintain high levels of efficiency, thus keeping down costs.
9.2 Choosing the organisational structure for e-business activities
In 1998, when Bertelsmann was about to launch its online bookstore, BOL, the company
faced a difficult issue. Should BOL operate as an independent business, or should it be inte-
grated within the company?
Many traditional bricks-and-mortar companies that launched their e-business ventures
during the Internet boom years faced the above question. They had several organisational
options to choose from. The clicks-and-mortar spectrum shown in Exhibit 9.2 helps to ana-
lyse these different options.7
At one end of the spectrum, companies fully integrate their e-business activities within
the firm. At the other end, the e-business operation is completely separated from the com-
pany and spun off. Both approaches have distinct advantages and drawbacks.
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Exhibit 9.2 The clicks-and-mortar spectrum spans from integration to separation of a company’s
e-business activities
Integration
The clicks-and-mortar spectrum
Separation • Established brand
Independent Strategic Joint venture In-house • Shared information
• Greater focus
business/ alliance (e.g. KB Toys division • Purchasing leverage
• More flexibility
spin-off (e.g. Amazon.com and (e.g. Tesco.com) • Cross-promotion
• Access to
(e.g. BOL.de) and Borders) Brain-Play.com) • Distribution
venture capital
efficiencies
for funding
• Shared customer
services
Source: Reprinted by permission of Harvard Business Review [exhibit Roo 313]. From ‘Get the right mix of bricks and clicks’ by R. Gulati and
J. Garino, May–June 2000.
9.2.1 Separate e-business organisation

Let us first consider separating the e-business activities from the parent company – an option
that was particularly popular during the Internet boom years. Bertelsmann, for instance,
decided to launch BOL as a separate business to enter the online market for book retailing.
At the time, many other bricks-and-mortar companies chose this separation approach of
their online activities because they believed that it gave them the following advantages:8
● Greater focus. Due to the fast-moving business environment and the increasing Internet-
based competition, companies wanted to set up entities that focused solely on e-business
activities and did not have to take into consideration the overall strategy of the firm.
(Section 6.2 also deals with the benefits of creating separate organisational structures,
which is especially important when companies are faced with disruptive innovations.)
● More flexibility and faster decisions. A separate e-business organisation also allowed for a
more flexible and faster decision-making process.
● Entrepreneurial culture. Established management approaches and business procedures
were considered to be inadequate for the Internet world, where ‘everything’ had been
turned upside down. To accommodate this change, e-business ventures were often
staffed with young individuals, having an entrepreneurial drive, strong IT know-how and
analytical capabilities, yet often little knowledge of the industry.
● Access to venture capital. The soaring stock markets of the late 1990s were another reason
for separating an online business from its parent company. The outrageously high valua-
tions of companies were focused primarily on pure dotcom businesses without any physi-
cal bricks-and-mortar structures that may hold them back or dilute their business strategy.
With the burst of the Internet bubble in March 2000, many companies that had spun off
their e-business activities could not exploit the synergies between their online and offline
channels and operations and, therefore, were not able to pursue a clicks-and-mortar strate-
gy. After wasting large sums of money on doomed dotcom businesses, shareholders wanted
to see fewer fast decisions and more sustainable strategies and profitable business models.
As a result of the above developments, many of the companies that initially spun off their
e-business operations have reintegrated them into the parent company. A prime example
of this development was the case of the Internet bookseller BOL, which started out as a
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completely separate business, with its own management structure and business model.
However, as the Internet boom subsided, the online book-retailing operation was reinte-
grated into the Direct Group of Bertelsmann.
9.2.2 Integrated e-business organisation

Some companies chose right away to integrate their e-business activities tightly with their
bricks-and-mortar operations. Office Depot seamlessly integrated its website with its physi-
cal retailing network. Thus, it was able to leverage its existing infrastructure with a call
centre and a vast fleet of delivery trucks. Similarly, when deliberating whether to fulfil
orders using its existing store network or warehouses, Tesco.com opted for the integrated
in-store-based fulfilment approach.
Today, it seems that in most cases the benefits of an organisational structure that combines
online and offline channels outweigh those of a separated organisation. These benefits include:9
● Established and trusted brand. Companies moving from the physical world into the online
world can leverage the brand they have established with their customers. Trust is a criti-
cal issue in e-business, and it increases when customers can resort to face-to-face interac-
tion in case of problems.
● Shared information. Information about customers can be shared across different chan-
nels. For instance, Tesco.com uses purchasing information from its online channel to
adapt offerings in its physical grocery outlets.
● Cross-promotion. Online and offline channels can benefit from one another through
cross-promotion. Nordea uses its bank branch staff to convince customers to use the
online channel. At the clothing company Gap, signs throughout the physical stores point
to the online presence of Gap.com.
● Purchasing leverage. Purchasing can be pooled for offline and online channels. This increases
a company’s bargaining power vis-á-vis its suppliers, thereby reducing purchasing costs.
● Distribution efficiencies. Different channels within a company can use the same infra-
structure facilities, thereby increasing utilisation and scale effects. Consider Tesco and
its store-based picking approach. There, most of the picking is done during the store’s
off-peak hours, when there are fewer customers. At barnesandnoble.com, customers can
browse and order their books online and pick them up at the physical store. The same
option is available, for instance, at Home Depot, the big home furnishings retailer, and
at Guitar Centre, the world’s largest retailer of music instruments, and their related web-
sites: homedepot.com and guitarcenter.com
● Shared customer service. The offline channel is very useful for providing customer servic-
es for the online channel. It is much easier for customers to return defective or unwanted
purchases to a physical store than to repackage them and return them by postal mail or
courier service. Similarly, employees at physical stores can also help by providing main-
tenance and inspection work.
As mentioned in several parts of this chapter, there are also some hybrid options spanning
the two extreme choices of full separation and full integration. These include setting up
joint ventures and strategic partnerships. These approaches seek to combine the technologi-
cal know-how, nimbleness and entrepreneurial culture of an online venture with the strong
brand name and existing customer base of a bricks-and-mortar company.
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Consider, for instance, the partnership between Amazon.com and the Borders Group, the
second largest US book retailer, which filed for bankruptcy in 2011. It illustrates how a major
book retailer failed to adapt itself in a timely manner to the new digital business environment,
which disrupted the traditional book-retailing industry. In 2001, as part of this agreement,
Amazon.com provided the Borders Group with its e-business solution, technology services,
site content, product selection and customer service for the co-branded ‘Borders teamed
with Amazon.com’ site. Amazon.com records all orders that take place through the site and
passes on a fixed sales percentage to the Borders Group. Through this agreement, the two
companies leverage Amazon.com’s strong technological know-how and the Borders group’s
extensive physical store presence. Depending on availability, customers who order through
the website have the possibility to pick up their purchase on the same day at the nearest
Borders store. Customers then receive an email confirmation from Borders, informing them
that the purchased item has been picked and reserved under their name for express in-store
pick-up. Basically, this was the partnership model between the Borders Group and Amazon.
com, whereby Borders got a percentage of the online sales from Amazon. However, although
this collaboration agreement was extended after its first years, Borders decided to drop
Amazon and launch in 2008 its own e-commerce website, Borders.com. This decision aimed
at integrating Borders’ offline and online channels, thus enabling the company to become a
clicks-and-mortar book retailer. However, the worsening financial results of Borders between
2008 and 2011 showed the company’s inability to effectively transform itself in order to meet
the new challenges of digital content and online retailing, which shifted the book industry’s
paradigm. (See the FT article: ‘Last bookstores standing may turn digital page’.)
Last bookstores standing may turn digital page

The bookstore looked like something out of a post- Makinson, chairman and chief executive of Penguin,
apocalyptic Stephen King novel. Dust swirled in which like the Financial Times is owned by Pearson.
empty corners of the cavernous retail space, and “This is a vote of confidence by some reasonably smart
forgotten, unwanted titles lay scattered on shelves people. It’s a really positive day for the industry.”
once stocked with bestsellers.
Analysts and industry executives say opportunity
This scene in Boston last month, at a branch of Borders exists at two levels. As the only major chains in
that was going out of business, symbolises the plight their respective markets, both Barnes & Noble and
of book retailers in the US and the UK. As consumers Waterstone’s, if well-run, could thrive in the absence of
increasingly buy books online from Amazon and bricks-and-mortar competition. After all, the majority
embrace e-readers, there are simply fewer bookstores of readers still cast their eyes on paper, not pixels.
needed to satisfy waning customer demand. The impact “There is ‘last man standing’ value in this market,”
of this new reality has been immediate. Borders and said Mr Makinson. “As Borders shrinks, there will be
Borders UK have gone bankrupt. And last week, Barnes a lot of traffic from Borders stores to Barnes & Noble.”
& Noble in the US, and Waterstone’s in the UK, were
Barnes & Noble turned a profit of $60.5m in the
in play as opportunistic billionaires sought to snap up
latest quarter, which included the holidays. And
companies whose value has plummeted in recent years.
while sales are falling at Waterstone’s, analysts
Yet while Borders was unable to survive in an expect it to post earnings before interest, tax,
increasingly digital world, both Barnes & Noble and depreciation and amortisation of about £20m ($33m)
Waterstone’s are profitable, if inconsistently so. And at full-year results next month.
the billionaires who seek to control these chains
But the more intriguing plot twist may be the one
clearly sense some untapped value in the brands.
unfolding online. Barnes & Noble has made quick
“They can obviously see an opportunity,” said John ➨
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inroads into the booming digital reading market with of the strongest new platforms.” E-book penetration is
its Nook e-reader, though it still trails Amazon’s much lower in the UK than it is in the US today.
Kindle. Analysts say it is the opportunity to become
These developments could lead to a world in which
a major e-book vendor that has attracted the bid
books indeed survive the apocalypse. In such a
from Mr Malone. “It’s not about Borders being out
scenario, there may be one dominant physical retailer
of commission so Barnes & Noble can sell more
in each market, Amazon for online sales, and various
physical books,” said Forrester Research analyst
companies including Amazon, Barnes & Noble and
James McQuivey. “It’s about new digital customer
Apple selling e-books. In such a world, to be the last
relationships, and Barnes & Noble happens to have one
man standing may amount to a happy ending.
Source: Adapted from Gelles, D., Edgecliffe-Johnson, A. and Barrett, C. (2011) Last bookstores
standing may turn digital page, FT.com, 22 May.
9.3 Value chain deconstruction over the Internet
The concept of deconstruction builds on the foundations of transaction cost theory.10 The
fundamental idea of this concept is that traditionally integrated value chains within indus-
tries get unbundled and are reconfigured as a result of two main developments. These are:
(1) the separation of the economics of things (physical goods) and the economics of informa-
tion (digital goods); and (2) the blow-up of the trade-off between richness and reach. (The
limitations of the concept of deconstruction are discussed in Critical Perspective 9.1.)
Let us take a closer look at the first point. How do the economics of things and of infor-
mation differ? When physical goods, such as a chair or a table, are sold, ownership is trans-
ferred from the seller to the buyer. Informational goods, on the other hand, can be used
many times, with low (if any) incremental costs. Take a newspaper article that is published
online; it does not affect costs much if it is read by 10 or 10,000 people. Furthermore,
physical goods are location dependent. They cannot be moved easily, and they often take
up substantial space. Information, on the other hand, can be sent across the globe quickly
and requires only disk storage space on a computer server.
In the past, the two different types of economics were combined within a unified business
model, which led to compromises. Consider the example of used-car dealerships. What are
the reasons for customers to go to a used-car dealership? They want to find out about dif-
ferent choices, go for a test drive, get an attractive financing scheme and receive a warranty
and maintenance services.
In order to provide the customer with as much product information as possible, it makes
sense to put many cars on display, so that customers can easily compare between different
models and make a more informed purchasing decision. However, since information about
cars is linked to the physical product, maximising the number of cars in the showroom is
in conflict with the desire to decrease costs by limiting showroom space and inventory. A
further compromise is that, for sales purposes, it is sensible to build large car dealerships
in central locations to maximise the number of cars on display. For servicing purposes,
however, it would be much better to have small repair shops located near the car owners’
homes.
The online auction company, eBay, has effectively deconstructed the used-car busi-
ness, thus becoming the largest used-car dealership in the USA. Like a traditional car
dealer, eBay offers a wide choice of cars, but unlike physical dealers it is not constrained
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The limitations of deconstruction and unbundling

How should we evaluate the applicability of the ‘unbundling’ concept? Its proposition is simi-
lar to that outlined in the concept of deconstruction.11 Both state that different parts of the
value chain, here called businesses, should be reconfigured so that the trade-offs and com-
promises inherent in integrated firms can be resolved. the examples of eBay and dell, where
deconstruction has worked out very well, thereby rewarding the two companies with high
profitability, need to be contrasted with other companies engaged in e-business where this
type of deconstruction has been more limited. there are different reasons why deconstruction
might not be appropriate for a firm:12
● Lack of linkage between externally and internally performed activities. amazon.com, for
instance, initially set out with a highly deconstructed business model in which the focus
rested on the front-end of interacting with the customer. Back-end warehousing and logistics
were to be left to external suppliers. However, integrating the front end with external logistics
providers turned out to be more cumbersome than anticipated, and thus it became impos-
sible to deliver the promised customer benefit in terms of speed of shipment, quality and
reliability. amazon.com therefore decided to reintegrate parts of the value chain by setting
up a proprietary warehousing system.
● Increased convergence and ease of imitation. When key steps of the value chain that previ-
ously constituted substantial sources for competitive advantage are outsourced to external
providers, this creates the risk that competitors turn to the same vendor, thereby making
purchased inputs more homogeneous. doing so decreases possibilities for differentiation
and increases price competition. Furthermore, it also lowers barriers to entry because new
entrants only need to assemble purchased inputs rather than build their own capabilities.
by physical space on a car lot. eBay acts as an integrated market maker for sellers,
thereby offering unsurpassed choice. Through the deconstruction and reconfiguration
of the value chain with external partners, eBay can offer higher benefits to consumers at
reduced costs.
How does it work? Sellers wanting to sell their car on eBay face the problem of not
being able to convince potential customers of the quality of their car. To remedy this,
eBay works in partnership with PepBoys, a certified vehicle inspection chain, which
inspects the car and issues a certificate for the seller to post on the eBay website. The
information about the state of the car is even better than in the traditional marketplace,
where the buyer, who typically does not know much about cars, has to inspect the car
him/herself. eBay also has partnerships with financing companies and with neutral
third-party payment operators, which, to prevent fraud, act as proxies and send the pay-
ment from buyer to seller.
Overall, this deconstruction leads to a development called de-averaging of competitive
advantage. Here, a firm picks out individual parts of the value chain and decides to compete
on only one dimension through larger-scale, higher degrees of specialisation, or other fac-
tors that contribute to competitive advantage, while outsourcing other activities to external
providers or even to customers themselves, as in the case of Spreadshirt, which provides
website owners with a shop system allowing for mass customisation.
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9.4 Unbundling the corporation over the Internet
The concept of ‘unbundling the corporation’ is very similar to the deconstruction approach.13
It also argues that companies need to rethink the traditional organisation and unbundle
their core businesses (or core activities) as a result of falling transaction costs made possible
by the Internet and IT advances in general. (The limitations of this concept are discussed in
Critical Perspective 9.1. Also see the FT article: ‘Model that works even in turbulent times’.)
Model that works even in turbulent times

In the 25 years since such western multinationals as market has expanded to embrace relatively small
Eastman Kodak, GE, Citibank and American Express and medium-sized companies. In the UK, for example,
began to outsource their IT operations, the global IT Everest, a provider of double glazed windows, wanted
services industry has grown into an $820bn behemoth to upgrade its network and IT infrastructure but did
and outsourcing has gone mainstream. not want to commit to a long-term deal. “Initially,
we needed a supplier with system expertise but with
“Outsourcing is no longer a novel business tactic
flexibility in its approach,” explains Dave Gordon, IT
where companies are forced to farm out a function
services manager. Last year, Everest selected Calyx,
they cannot manage internally,” says Jagdish Dalal,
a US-based independent managed service provider
managing director of the 110,000-member International
for the project. “We agreed a one-year contract with
Association of Outsourcing Professionals. “Out-
Calyx that had the merit of minimal set-up costs,”
sourcing is providing companies with alternative
says Mr Gordon. “Once we had worked with Calyx for
business models, whereby they can manage a small
a while, its team’s ability to innovate while retaining
but market-differentiating core while engaging
a flexible approach in day-to-day operations was
expert third parties to perform the necessary work.
obvious. “We have been pleased with the team’s input
This ‘atomic’ business model is helping them not only
and extended the managed services agreement and
weather the [economic] storm, but create a market
this is helping us ensure enhanced wide area network
advantage – even in these turbulent times.”
(WAN) capabilities for our departmental users.”
Companies, big and small, also use outsourcing to
In the past, outsourcing mainly focussed on IT
give them flexibility as they expand their markets.
services, but one of the fastest areas of growth
In March, Royal Haskoning, a Netherlands-based over the past decade has been business process
engineering and environmental consultancy, outsourcing (BPO). As with IT outsourcing, there
signed a multiyear, multimillion IT infrastructure are many reasons why companies such as Microsoft,
outsourcing deal with India’s Tata Consultancy the US software group, and pharmaceutical
Services (TCS). TCS is providing a full suite of IT companies including AstraZeneca have chosen to
infrastructure services, including a multilingual hire external help with business processes. Microsoft
service desk, datacentre hosting and management, set out to re-engineer its global finance processes
end-user computing services and application and operations under its ‘OneFinance initiative’,
support services. “Royal Haskoning is planning to launched in 2006. As part of this effort, the company
grow, not only in our home countries but across outsourced back-office finance transactions in 95
emerging markets,” explains Eric Overvoorde, chief countries to Accenture, the consultancy, under an
information officer. We face interesting challenges, so agreement designed to promote a commitment to
consistent experience of service delivery is essential “mutual gains and performance improvements”.
for us to be successful.” With TCS taking care of
More recently, in 2009, Genpact (the Indian BPO
Royal Haskoning’s IT infrastructure, its management
company that was spun out of GE) signed a
will be able to focus on business performance and
five-year contract with AstraZeneca to provide
international growth plans in Europe and elsewhere.
the pharmaceutical group with global finance and
As Royal Haskoning demonstrates, IT outsourcing accounting services, which it did not consider to be
is no longer the preserve of big multinationals. The a “core competency”. Tony Glynn, AstraZeneca’s ➨
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senior director for transformation global transac- Nash, the recruitment business, reached similar
tional finance, explains: “We had entered into a conclusions. While cost reduction was the rationale
period when the whole pharmaceutical industry was most often given for outsourcing, companies
changing and getting ready for greater competition, reported that the second most important reason
more uncertainty around patent expiries and so forth.” was to access skills not found in-house. The same
Mr Glynn initially identified some six BPO providers survey also underscores the growing popularity
that could offer the transactional finance processing of IT outsourcing. Almost a third of CIOs said
services that he was looking for and finally chose they would spend up to a quarter of their entire IT
Genpact. “We signed a contract in November 2009, budget this year on outsourced activity and more
and we are now about 80 per cent of the way through than one in 10 said they will spend 50 per cent of
the transition of our activities across to Genpact,” their budget on outsourcing. Software application
he says. Like most other big pharmaceutical development remains the most popular outsourced
companies, AstraZeneca has also outsourced activity, although external help/service desks are
much of its IT. “We have also signed a contract to now being used by 40 per cent of CIOs worldwide.
outsource some of our human resources work, and
Do companies also have an eye on the growth of
we’ve already done some selective outsourcing of
enterprise cloud computing? “Cloud computing
some of our R&D work,” explains Mr Glynn.
is one form of outsourcing,” says Daryl Plummer,
Mr Dalal points out that the pharmaceutical industry of Gartner, the research company. “The difference
is full of examples of companies that outsource their is in the types of contracts and terms applied. In
R&D activity for drug development. On the other hand, cloud computing, there is one contract that
he says: “real estate outsourcing provides companies is applied to all customers in the same way.”
with options for conserving their capital instead of Mr Plummer believes cloud computing and traditional
investing in a building.” And IT departments have outsourcing will both continue to exist side by side.
long used outsourcing to provide innovation and “Some companies need the customised delivery of
fill skills gaps. “Manufacturing outsourcing [also] services that traditional outsourcers deliver. Some
provides many examples of converting fixed cost base need more commoditised services at the large scale
for production to a more variable cost basis,” he says. that cloud computing delivers. But as the cloud
model continues to grow, it will steal more and more
A recent survey of more than 2,500 chief information
attention away from traditional outsourcing models.”
officers conducted by PA Consulting and Harvey
Source: Taylor, P. (2011) Model that works even in turbulent times, Financial Times, 29 June.
The ‘unbundling’ concept recognises that a corporation consists of the following three
core businesses (see Exhibit 9.3):
● Product innovation, which focuses on R&D but also includes activities further down the
value chain, such as market research to find out about consumers’ preferences. The globally
operating firm IDEO, which designs products and services for large corporate customers, is
a prominent example of a company focusing primarily on the product innovation business.
● Infrastructure management, which focuses on logistics and support functions. This busi-
ness includes the building and management of physical facilities, such as manufacturing
or assembly plants, retail outlets and truck fleets, for high-volume production and trans-
portation processes. Through its extensive physical retail network, Tesco.com is strongly
involved in managing the infrastructure business.
● Customer relationship management, which focuses on the interfaces between the firm and
its customers. These interfaces include activities such as marketing, sales and service.
Their common goal is to attract and retain customers. For example, the online bank ING
DIRECT focuses on the customer relationship management business while outsourcing
its product innovation to external financial providers and minimising its infrastructure
requirements through its direct banking approach.
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Exhibit 9.3 The traditional corporation can be unbundled into three distinct businesses
Customer relationship
management
Identify, attract, and build

relationships with customers
Infrastructure
Product management
innovation
Build and manage facilities
Conceive attractive new for high-volume, repetitive
products and services operational tasks
and commercialise them
Source: Reprinted by permission of Harvard Business Review [exhibit 99205]. From ‘Unbundling the corporation’ by J. Hagel and
M. singer, March–april 1999.
The reason why the different businesses conflict with one another is that they have the fol-
lowing differing economic, cultural and competitive imperatives (see Exhibit 9.4):
● Economics. In product innovation, speed (which allows a firm to introduce to the market new
products sooner than the competition) is the most valued asset. However, in the customer
relationship and infrastructure management business, what matters most are, respectively,
economies of scope (getting a large share of the consumer wallet) and economies of scale.
● Culture. Product innovation focuses on creative employees who are responsible for
developing new ideas. This is mirrored in flexible pay schemes and work schedules
that are designed to make employees content. The customer relationship business, on
the other hand, focuses on the external customers, while the focus of the infrastructure
business is on costs. To run large-scale operations efficiently, it is necessary to create a
culture of standardisation, predictability and efficiency.
● Competition. For a successful product innovation, it is essential to gain access to skilful and
talented employees. Developing innovations often does not require large start-up costs, as is
illustrated by the founders of some of the e-commerce success stories (such as Amazon.com,
eBay and Google). Therefore, in product innovation, there are usually many small players,
of which few will succeed. In both of the other businesses, however, competition tends to be
driven by economies of scope and/or scale, which leads to a consolidation where a few big
players dominate the competition.
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Exhibit 9.4 Different businesses within a corporation have different imperatives regarding economics, culture
and competition
Businesses
Customer relationship Infrastructure

Product innovation
management management
Early market entry High cost of customer High fixed costs make
Economics allows for a premium acquisition makes it large volumes essential
price and a large market imperative to gain large to achieving low unit
share; speed is the key shares of wallet; economies costs; economies of
Imperatives
of scope are the key scale are the key

Culture Employee centered; Highly service oriented; Cost focused; stress on
coddling the ‘customer comes first’ standardisation,
creative ‘stars’ predictability, efficiency
Battle for talent; low Battle for scope; rapid Battle for scale; rapid
Competition barriers to entry; many consolidation; a few big consolidation; a few big
small players thrive players dominate players dominate
Source: Reprinted by permission of Harvard Business Review [exhibit 99205]. From ‘Unbundling the corporation’ by J. Hagel and M. singer,
March–april 1999.
The problem for integrated firms is the difficulty of simultaneously optimising scope, speed
and scale; therefore, firms need to make trade-offs. For instance, in order to maximise
scope, a retailer should provide a vast variety of products, possibly also from external stores.
This is what Amazon.com has been doing with its Zshop system, which allows other
used-book retailers to sell their products through the Amazon.com website. Doing so makes
the site more attractive for customers because they find not only the new Amazon.com
offerings but also used books, which are generally cheaper. From a scope perspective, this
makes a lot of sense. However, if doing so leads to fewer orders originating from Amazon.
com, this would then result in a lower utilisation of physical infrastructure, such as ware-
houses, thereby compromising the company’s economies of scale.
9.5 Managing conflicts between online and offline

distribution channels
Manufacturers and retailers that have in the past sold their products through physical
outlets using a sales force, fear that moving into online sales will cannibalise their physical
sales.14 Their argument is that the new online channel is not creating a new market or extra
sales but merely syphoning off existing sales.
To understand whether manufacturers should fear distribution channel conflicts, they
need to analyse how new online channels affect their offline channels, and whether the
various channels actually serve the same customer segments. For instance, companies may
believe mistakenly that different channels are competing with one another when, in fact,
they are benefiting from each other’s actions. They may also believe that the loss of sales is
ascribed to a new channel when, in reality, it results from the intrusion of a new competitor.
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9.5.1 Understanding conflicts in distribution channels

Conflict is inherent to almost all distribution systems, but what do we mean by conflict?
One of its classic definitions refers to ‘a situation in which one channel member perceives
another channel member(s) to be engaged in behaviour that is preventing or impeding it
from achieving its goals’.15 In this context, two specific dimensions should be emphasised:
(1) a channel member perceives that its objectives are blocked or interfered by another
channel; and (2) there is an implicit assumption that the related conflict can negatively
affect the relationship between channel members.
A conflict does not suddenly emerge from a channel relationship, but it is the result of a
process. A typical structure of a multi-stage conflict process comprises:16 (1) a latent con-
flict, when conflict sources are not yet perceptible; (2) a perceived conflict, when there is a
cognitive perception of some conflict aspects, but with no negative emotional effects yet in
the members’ relationship; (3) a felt conflict that carries an emotional response (including
anxiety or stress); (4) a manifest conflict, which explicitly involves a behavioural evidence
of conflict between the members; and (5) the conflict aftermath, which is the final conse-
quence of the process – i.e. the stage in which members face the conflict either by solving it
or breaking up the relationship between them.
Obviously, the existence of a channel conflict affects the distribution channel’s perform-
ance (in terms of efficiency and effectiveness). There are several theoretical approaches to
this ‘performance–conflict’ relationship, which can be grouped into two main views (see
Exhibit 9.5): the negative linear correlation, or a higher level of conflict as performance
decreases; and the inverted-U curve, which suggests that the level of conflict increases when
the relationship performance between channel members is moderate while it decreases at
low and high levels. A third approach, which is quite similar but superior to the negative
linear model, is proposed by Duarte and Davis. It suggests that a conflict slowly increases
as performance decreases until a certain threshold, where conflict is triggered. This model
suggests that a conflict should be adequately handled when it is still at a low level, before
it reaches a threshold level and escalates. This is an important issue for bricks-and-mortar
companies that consider adding an e-commerce channel. In order to avoid an online/offline
channel conflict, companies need to proactively address related issues and take pre-emptive
actions. This subject is discussed in detail in the next section.
Exhibit 9.5 Alternative views to the conflict – performance link in distribution channels
(1) Negative linear model (2) Inverted u-curve (3) Duarte and Davis’ view
High High High

Performance
Low Low Low

Low High Low High Low High
Conflict Conflict Conflict
Source: adapted from M. duarte and G. davis, ‘testing the conflict–performance assumption in business-to-business relation-
ships’, Industrial Marketing Management, 2003, vol. 32, no. 2, pp. 91–9.
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9.5.2 The channel conflict matrix

The channel conflict matrix (see Exhibit 9.6) analyses how traditional bricks-and-mortar
retailers should react towards possible conflicts between their offline and online channels.
There are two main dimensions that determine how to deal with possible channel conflict:
(1) the prospect of destructive conflict between different channels and (2) the importance
of the existing channel that is threatened by the new online channel.
The resulting matrix provides insights into how to deal with possible channel conflicts.
The four quadrants of the matrix are now described:
● Quadrant 1. If the prospect of destructive conflict between channels is high and the
importance of the threatened channel is also high, then it is sensible to address the prob-
lem and find ways to reconcile the two channels. For instance, when Nordea Bank started
its online banking operations, it was positioned clearly in quadrant 1. Branch-based
banking was severely threatened by the rise of the online channel, yet it was of great
importance to the overall functioning of the bank. Contrary to many other banks, Nordea
decided to integrate its online banking fully within its physical banking operations, there-
by eliminating possible competition between the two channels. In fact, branch employees
were enticed to move branch customers over to the Internet. Ultimately, the ability to
leverage the branches to move customers to the Internet, thereby eliminating the need
for expensive marketing campaigns, was one of the main reasons why Nordea managed
Exhibit 9.6 The channel conflict matrix analyses how different types of channel conflicts should
be resolved
Relative importance of threatened channel

High Low
1 2
Mail order
Address Accept the decline of

Risk of conflict between different channels
High
channel conflict threatened channel
Traditional retailer Conflict Internet
3 4
Others
Reassure members of
Low Ignore
threatened channel
Source: adapted from C. Bucklin, p. thomas-Graham and e. Webster, ‘Channel conflict: when is it dangerous?’, McKinsey
Quarterly, 1997, no. 3, pp. 36–43.
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to acquire a dominant position in the online banking world. (As an illustration of this type
of conflict in the air travel industry, see the FT article: ‘Expedia stops American Airlines
ticket sales’.)
Expedia stops American Airlines

ticket sales
Expedia became the second large travel website to fall out with American Airlines in
as many months as the online travel company stopped selling the carrier’s tickets on
Saturday.
American and its online partners have struggled for months to agree terms as their
contracts expire. American wants to pay the sites less and has pushed them to
connect directly with its own computers rather than using intermediaries called global
distribution systems. In December American stopped selling tickets through Orbitz
Worldwide, another travel and fare comparison website. In an effort to dissuade the
carrier from taking further steps to undermine online travel agencies, Expedia effectively
buried American’s content on its website, as contract negotiations faltered in an effort
to press American into a more amicable deal and prepare its own customers should
talks fail. The disagreements set the stage for a testy 2011, when contracts between
other airlines and websites expire and so called “full-content” agreements between the
carriers and GDSs, such as Travelport and Sabre Holdings, also begin to run out.
In their publicity campaigns, Expedia and its peers have accused the carrier of trying
to make it more difficult for consumers to compare prices on third-party websites
and buy the most affordable tickets. Expedia said: “American Airlines’ direct connect
model is of questionable, if any, benefit to travellers, would be costly to build and
maintain and would compromise travel agents’ ability to provide travellers with the
best selection”. American argues that a direct connection to its website is vital for
it to create a closer relationship with its customers, thus letting the carrier create
tailored products that take into account things such as frequent flyer status.
The face-off between the two sides leaves American in a delicate position. While
Expedia and Orbitz have diversified away from air travel into hotel bookings and
package deals, airlines remain dependent on third-party sites for substantial sales.
Orbitz estimates that it booked $800m of tickets for American in the four quarters.
Conversely, Orbitz says that American represents only about 5 per cent, or $30m, of its
annual revenues. Jake Fuller with Soleil Securities, estimates that Expedia has even
less exposure to American than Orbitz, roughly 1 per cent of its $3bn annual revenues
– although when commissions are included, the total impact could be between $40m
and $60m annually. American said it had continued to see a year-on-year increase in
its ticket sales since it removed its data from Orbitz, although analysts have said the
carrier has offered substantial discounts to encourage Orbitz users to book on aa.com.
Shareholders in the travel companies have been rattled by the arguments and the
prospect of more conflict in the coming year. Expedia shares have fallen 6 per cent
to $25.09 since the spat with American became public, while Orbitz shares have
dropped more than 10 per cent to $5.59 since the carrier pulled its inventory from the
company’s sites. Shares in AMR Corp, American’s parent corporation, are down about
2 per cent to $7.79 over the same period.
Source: Lemer, J. (2011) Expedia stops American Airlines ticket sales, FT.com, 1 January.
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● Quadrant 2. If the prospect of destructive conflict between channels is high and the
importance of the threatened channel is low, then it is usually sensible simply to allow
the threatened channel to decline.
● Quadrant 3. If the prospect of destructive conflict is low but the importance of the threat-
ened channel is high, then the latter’s employees need to be reassured that they will not be
affected. This is the case, for instance, with Tesco’s bricks-and-mortar retail store network.
In spite of the drastic increase of online sales through the Tesco.com channel, retail stores
continue to play a major role. Thus, it is important to let employees know that the new
channel does not present a threat to them. To alleviate fears of cannibalisation, Tesco
physical stores are credited with all sales that they fulfil. Similarly, when Ducati started
selling motorcycles directly to consumers exclusively over the Internet, it was necessary to
comfort the network of dealers and reassure them of their continuing importance. To back
up this claim, Ducati identified the closest dealer to an online customer and then informed
that dealer about the online transaction. The dealer could subsequently agree or refuse to
accept the order and hand the motorcycle over to the online customer. In the case of accept-
ance, the dealer would receive a 10% commission of the total price, which was less than the
average commission received on a normal Ducati motorcycle sale. However, with online
sales, dealers had no inventory management cost, no inventory risk and no advertising or
marketing costs. The goal of Ducati’s online sales was not to cannibalise sales made through
the offline channel, but instead to expand into hitherto untapped market segments.17
● Quadrant 4. If the prospect of conflict between the online and offline channels is low and
the importance of the threatened channel is also low, then the channel conflict is not
important and, therefore, it can be ignored.
Summary
● First, this chapter analysed the degree of integration of individual activities of the value chain.
More specifically, it discussed which activities a firm should perform (or ‘make’) internally
and which activities it should source (or ‘buy’) from external providers. Reasons that favour
‘make’ decisions include strong linkage between activities, confidentiality of information and
high transaction costs. Reasons that favour ‘buy’ decisions include high economies of scale,
high capital requirements, specialised know-how and higher efficiency of the open markets.
● second, the chapter analysed how to choose the organisational structure for e-business
activities and presented the following four options: (1) in-house integration, (2) joint
venture, (3) strategic partnership and (4) independent business (i.e. spin-off). It then
discussed the benefits and drawbacks of each organisational option.
● third, the chapter analysed the unbundling of the traditional organisation as a result of falling
transaction costs made possible by the Internet. the unbundling concept distinguishes three
core businesses in a corporation: (1) product innovation, (2) infrastructure management and
(3) customer relationship management. these three businesses have different imperatives
regarding economics, culture and competition.
● Finally, the chapter analysed how a company can choose between online and offline
channels to conduct its activities. It also offered a framework to assess the impact of a
possible channel conflict and ways to resolve it (or even pre-empt it).
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REVIEW QUESTIONS
1 describe the different organisational options along the ‘make-or-buy’ spectrum.

2 In general, which factors determine whether a firm should make or buy a product or a service?
3 Why should a company consider deconstructing its value chain over the Internet?
4 outline the concept of unbundling the corporation and explain its underlying rationale.
5 explain the online/offline channel conflict matrix and illustrate it through specific examples.
6 What are the different options that a company has when choosing the organisational structure
for its Internet venture?
7 What criteria should a company use when deciding on whether to integrate its Internet activities
in-house or whether to spin them off?
1 Illustrate through different examples how the Internet enables companies to integrate activities
across their value chain.
2 provide examples of Internet ventures that favour (or have favoured) either ‘make’ or ‘buy’
decisions.
3 explain how a company deconstructs its value chain over the Internet and illustrate your answer
through an actual example.
4 provide two examples from two different industries (one related to physical products and the
other with digital goods) that demonstrate the concept of unbundling the corporation.
5 Critically assess the deconstruction and unbundling concepts, and show their limitations using
actual e-business examples.
6 should a company refrain from launching an Internet venture if it judges the prospect of a
destructive conflict with the offline channel to be high? defend your arguments.
R. Coase wrote the first influential article on transaction cost theory in ‘The nature of the firm’,
Economica, 1937, vol. 4, pp. 386–405. O.E. Williamson provided an additional foundational
perspective on this topic in Markets and Hierarchies: Analysis and Antitrust Implications, Free
Press, 1975. Also see O.E. Williamson, ‘Comparative economic organisation: The analysis of dis-
crete structural alternatives’, Administrative Science Quarterly, 1991, vol. 36, no. 2, pp. 269–96.
P. Evans and T. Wurster developed the concept of deconstructing the value chain in Blown to
Bits, Harvard Business School Press, 1999. For a condensed version of this concept, see, by
the same authors, ‘Strategy and the new economics of information’, Harvard Business Review,
1997, September–October, pp. 71–81.
J. Hagel and M. Singer wrote the article ‘Unbundling the corporation’, Harvard Business Review,
1999, March–April, pp. 133–41.
216
M09_JELA7870_03_SE_C09.indd 216 07/03/14 11:41 AM

M. Porter criticises the deconstruction and unbundling concepts in ‘Strategy and the Internet’,
Harvard Business Review, 2001, March, pp. 72–4.
A.A. Tsay and N. Agrawal, N. analyse the topic of conflict and e-commerce channels in ‘Channel
conflict and coordination in the e-commerce age’, Production and Operations Management,
2004, vol. 13, no. 1, pp. 93–110.
B. Rosenbloom reflects on several challenges that industrial firms have to face with their multi-
channel marketing strategies, the management of the emergence of eventual conflicts between
the different channels being one of them, in ‘Multi-channel strategy in business-to-business
markets: prospects and problems’, Industrial Marketing Management, 2007, vol. 36, pp. 4–9.
1 Short for liquid-crystal display, a low-power, flat-panel display used in many digital devices to display
numbers or images.
2 The content of this section is partially based on the following articles: E. Anderson and A.T. Coughlan,
‘International market entry and expansion via independent or integrated channels of distribution’, Journal
of Marketing, 1987, vol. 51, January, pp. 71–82; E. Anderson and B.A. Weitz, ‘Make-or-buy decisions:
vertical integration and marketing productivity’, Sloan Management Review, 1986, vol. 27, no. 3, pp.
3–19; J.T. Mahoney, ‘The choice of organisational form: vertical financial ownership versus other meth-
ods of vertical integration’, Strategic Management Journal, 1992, vol. 13, pp. 559–84; and J. Stuckey and
D. White, ‘When and when not to vertically integrate’, Management Review, 1993, vol. 34, no. 3, pp. 71–83.
3 Transaction costs are an important concept for explaining firm structures. For a detailed discussion of the
impact of the Internet on transaction costs, see A. Afuah, ‘Redefining firm boundaries in the face of the
Internet: are firms really shrinking?’, Academy of Management Review, 2003, vol. 28, no. 1, pp. 34–53.
4 O.E. Williamson, Markets and Hierarchies: Analysis and Antitrust Implications, The Free Press, 1975, p. 26.
5 O.E Williamson, ‘Comparative economic organisation: the analysis of discrete structural alternatives’,
Administrative Science Quarterly, 1991, vol. 36, pp. 269–96.
6 See, e.g., K.R. Harrigan, ‘Matching vertical integration strategies to competitive conditions’, Strategic
Management Journal, 1986, vol. 7, pp. 535–55.
7 R. Gulati and J. Garino, ‘Get the right mix of bricks and clicks’, Harvard Business Review, 2000, May–June,
pp. 107–14.
8 Ibid.
9 Ibid.
10 For more detailed discussions of the concept of deconstruction, see P. Evans and T. Wurster, Blown
to Bits, Harvard Business School Press, 1999, pp. 39–67, and D. Heuskel, Wettbewerb jenseits von
Industriegrenzen, Campus, 1999, pp. 57–72.
11 J. Rayport and J. Sviokla developed a similar concept to the two concepts mentioned here. They pro-
posed an unbundling along the dimensions of content, context and infrastructure. Since their findings
are essentially the same as in the deconstruction and unbundling concepts, we do not elaborate fur-
ther on this concept. However, for a detailed discussion of this concept, see J. Rayport and J. Sviokla,
‘Managing in the market space’, Harvard Business Review, 1995, November–December, pp. 141–50.
12 M. Porter, ‘Strategy and the Internet’, Harvard Business Review, 2001, March, pp. 72–4.
13 For a detailed discussion of this concept, see J. Hagel and M. Singer, ‘Unbundling the corporation’,
Harvard Business Review, 1999, March–April, pp. 133–41.
14 For a more extensive discussion of channel conflicts, see C. Bucklin, P. Thomas-Graham and E. Webster,
‘Channel conflict: when is it dangerous?’, McKinsey Quarterly, 1997, no. 3, pp. 36–43.
15 L.W. Stern and A.I. El-Ansary, Marketing channels, Prentice-Hall, 1992, p. 289.
16 L.R. Pondy, ‘Organisational conflict: concepts and models’, Administrative Science Quarterly, 1967,
vol. 12, September, pp. 296–320.
17 T. Jelassi and S. Leenen, ‘An e-commerce sales model for manufacturing companies: a conceptual frame-
work and a European example’, European Management Journal, 2003, vol. 21, no. 1, pp. 45–6.
217
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Chapter 10
Choosing the appropriate strategy

for interaction with suppliers
Chapter at a glance
10.1 Advantages and drawbacks of online purchasing 219
10.2 Classification of B2B e-marketplaces based on the purchasing process
and the purchased products 222
10.3 Classification of B2B e-marketplaces based on their degree of
openness 225
10.4 Integrating e-procurement systems 226

5 IBX Vertical and horizontal e-marketplaces
6 SATEC sourcing diversification
10 e-Choupal streamlining the supply chain
19 Novartis SMS for life enhancing the supply chain (product distribution)
Learning outcomes
● Understand the basic concepts and issues in business-to-business e-commerce.
● assess the advantages and drawbacks of B2B electronic purchasing.
● differentiate B2B e-marketplaces based on the ‘what’ and the ‘how’ of purchasing.
● distinguish the different levels of openness in B2B e-marketplaces.
● appreciate the functionalities offered by different e-procurement solutions and the
trade-offs that companies need to make when choosing one of these solutions.
● Recognise the increasingly competitive dimension of e-supply chain management.
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Chapter 10 Choosing the appropriate strategy for interaction with suppliers
Introduction
In order to produce their own products and services, companies rely heavily on purchasing
raw materials and other manufacturing inputs, as well as maintenance, repair and operating
(MRo) goods, from external providers. there are different types of business-to-business (B2B)
electronic marketplaces where companies or other organisations make their purchases.1 First,
industrial markets, where buyers purchase raw materials to turn them into tangible goods, are
primarily used by companies from industries such as agriculture, manufacturing, electricity
or construction. second, reseller markets, where buyers purchase products or services with
the sole purpose of reselling them later on, have mainly the wholesale and retail industries
operating in them. Finally, there are also government markets, where government agencies
buy goods and services. transactions in government markets take place, for instance, when
government agencies make purchases for running the public administration or equipping the
armed forces.
this chapter provides a comprehensive understanding of the basic concepts and issues in
B2B e-commerce. First, it presents the advantages and drawbacks of electronic purchasing.
second, it suggests a classification of B2B e-marketplaces based on the purchasing process
(i.e. the ‘how’ of e-procurement) and the types of goods that are purchased online (i.e. the
‘what’ of e-procurement). third, the chapter identifies different levels of openness among B2B
e-marketplaces and discusses issues that are specific to each level. Fourth, it recognises the
functionalities offered by different e-procurement solutions and highlights the trade-offs that
companies need to make when choosing among these e-procurement solutions.
10.1 Advantages and drawbacks of online purchasing
When organisations in any one of the above B2B markets make buying decisions, these deci-
sions are influenced by different factors:2
● Who is buying? Typically, different members in an organisation are involved in the buy-
ing process, which includes the actual users, influencers, buyers and decision makers.
Depending on a company’s requirements regarding financial control and authorisation
procedures, the constellation of this group varies. As more parties get involved, purchas-
ing processes tend to get more complicated and protracted.
● What is the type and size of purchase? Purchases can be categorised according to volume
and value. Low-frequency, high-value transactions, such as the selling of large pas-
senger aircraft, tend to be purchased where the Internet does not have a high impact.
This is because these transactions typically require substantial negotiations, special
contracts and financing arrangements. In contrast, for high-volume, low-value transac-
tions, such as the purchasing of office supplies or travel services, that are repetitive and
of relatively low strategic importance, placing orders over the Internet is much more
widespread because of the faster speed and the possibility to access more detailed
information.
● How much information is required to make the purchasing decision? Typically, the infor-
mation requirements of commercial purchasers are higher than those of individual
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consumers, since they need to match product specifications more closely with buying
requirements. Therefore, the buying processes also tend to be longer and more compli-
cated. The B2B e-purchasing service provider IBX, which is featured in the case studies
section of the text, offers a platform that provides purchasing departments with detailed
information and product specifications from potential suppliers.
The most frequently cited advantages of online procurement are the following:3
● Higher transparency. Online procurement ensures access to comparable information for
all parties that are involved in the purchasing process, including buyers, decision makers
and users. In contrast, paper-based purchasing systems can cause confusion in human-
based systems as parties may not have access to the same information. In addition, online
systems allow buyers to track and trace the purchase process and to control different
aspects such as delivery and internal distribution.
● Reduced risk of maverick spend. The above-mentioned point of higher transparency is
closely coupled with the reduced risk of maverick spend that can be achieved through
online procurement systems. ‘Maverick’ purchasing takes place when employees buy
items or services that are outside the preferred process or system. Instead of buying from
a preferred supplier with which the company has negotiated a contract with discount
pricing, an individual goes outside the normal process and purchases that same item at
retail prices. Setting up a dedicated system through which purchases need to be made,
and having the means to monitor whether buyers adhere to the rules, lowers the risk of
maverick spend.
● Price reduction through online negotiations. For instance, the e-Sourcing solution of IBX,
which is explained in more detail in the IBX case study, allows buyers to obtain lower prices
through reverse online auctions, where suppliers compete to capture the purchase volume
by offering lower prices and better conditions. The auction events occur online, reducing the
sourcing cycle duration by almost 30% when compared with the offline method.
● Process optimisation. Fully integrated online procurement systems eliminate the need
to re-key ordering information, thereby getting rid of data entry errors, cutting back on
manual labour and speeding up the procurement process.
Yet there are also a number of disadvantages and risks that are associated with the introduc-
tion of e-procurement systems:4
● Organisational risk. Depending on the level of integration, which is discussed in more
detail below, there is a critical need to adjust the organisational structure to make
e-procurement work. As individual employees are allowed to make e-purchases from
their desktop computers, the procurement department loses importance.
● Technology risk. Implementing an e-procurement system usually entails a substantial
commitment to a given technology with the risk of getting involved with a marketplace
that could go out of business over time.
● Supplier resistance. Frequently, suppliers are not eager to enter online purchasing sys-
tems since doing so may force price cuts and disrupt stocking and labour agreements.
To conclude this section, the FT article ‘Supply chain leaders identified’ offers a timely over-
view of supply chain management issues, briefly commenting on certain global companies
(such as Dell, Cisco, Intel, HP and IBM) that are most effective in managing their supply
chains and concluding with some recommendations.
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Supply chain leaders identified

Supply chain management has been a hot topic in in the Top 5 every year since we started the ranking,
the boardroom this year after natural disasters such landed in the number three slot.”
as the Japanese earthquake and tsunami which
Two companies, Canada’s Research in Motion, the
focussed attention on the increasing complexity and
BlackBerry smartphone maker, and Amazon, the
interdependency of many companies’ processes.
internet retailer, made it into the top five. Both
While it may not be possible to anticipate every appeared on the list for the first time last year,
threat to a corporate supply chain, experts suggest having cleared the revenue cutoff, and both jumped
that it is possible to learn from global supply chain up this year – RIM with its global postponement and
leaders – those companies judged to manage their collaborative supplier management capabilities,
supply chains most effectively. and Amazon, coming in second in the peer vote with
advanced network delivery capabilities.
Last month Gartner, the IT research firm, published
its seventh annual “Supply Chain Top 25” ranking, “The ranking also includes stellar supply chain
which highlights global supply chain leaders. The performers – companies such as Cisco, Samsung,
list is designed to highlight best practices that all Intel, HP, PepsiCo, Wal-Mart, Coca Cola, IBM,
companies can learn from, and help raise the bar for Unilever, Colgate and others that continue to push
the supply chain profession as a whole. the envelope of supply chain innovation with a
demonstrated commitment to supply chain as
It focusses on large, public manufacturers and
essential to their success,” said the report’s authors.
retailers, drawn primarily from the Fortune Global 500
and Forbes Global 2000 lists. “We derive a composite Four new companies joined the top-25 list this year.
score for each company (there were 263 companies on Nestle, one of the world’s largest food producers;
the list this year) made up of 50 per cent financials Starbucks which has been transforming its supply
and 50 per cent opinion, a balance of objective and chain to be a strategic differentiator; 3M, an icon
subjective components,” explain the authors of the of innovation; and Kraft Foods, with its leading
study, Debra Hofman, Kevin O’Marah and Carla Elvy. channel management strategy. “All will provide
rich sources of supply chain best practices from
The Gartner team assesses three financials
which others can learn,” the Gartner team said.
measures taken from each company’s annual report,
return on assets, inventory turns and revenue There were also some interesting trends related
growth. The opinion portion is equally weighted to the recovering economy. “Increasingly we see
between a Gartner analyst opinion and a Peer Panel a two-way street in global supply chain strategies,
vote. There were 156 supply chain executives who where emerging markets, once attractive primarily
voted in the peer panel this year, coming from the for low-cost manufacturing and sourcing, have
manufacturing and retail sectors around the globe. become important sources of new revenue growth,
and this represents a new set of challenges for
So which companies led the way this year? The
supply chain practices,” said the team.
top five this year include three mainstays – Apple,
Dell and Procter & Gamble which have all ranked Four key themes emerged this year among the
consistently close to the top every year. Despite leading companies. These included how they dealt
some challenges with its initial iPad introduction with the demand volatility they experienced during
and subsequent supplier issues, Apple retained the the downturn and which they now fear is here to
number one slot for the fourth year in a row, riding stay. Leading companies are now actively building
the crest of superior financials and top-of-the-line in the capacity for resilience – the ability to deliver
voting scores. predictable results in the face of unanticipated
events – as a core strategy going forward.
“Dell, moving into the number two slot on the basis
of strong opinion scores and high inventory turns, “We are also seeing the traditional question of
has been radically redefining itself with segmented Z“vertical integration” versus “focus on core
supply chain response models,” said the authors. competencies” become more nuanced,” say the
“And Procter & Gamble, one of the most respected authors. “What’s more important than which one of
supply chain leaders in the world, an early pioneer those strategies a company chooses is the extent to
of the consumer-driven supply chain concept, and which it’s able to control the output of its end-to-end ➨
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value chain and response to the end customer, and differently and go beyond conventional wisdom to
the leaders are devising innovative ways to do that.” push the boundaries on performance levels.
The four main recommendations that emerged from 3 Measure your supply chain as your customers ex-
the study were: perience it. Develop the capability to internalise
customer needs, and proactively build customer
1 Develop supply chain processes and methodolo-
feedback into your supply chain design.
gies throughout your trading partner network
that will provide the resiliency to deliver predict- 4 Step back and consider the basic supply chain
able results in the face of ongoing volatility. capabilities you need, as well as the innovations
that will differentiate your performance. Ensure
2 Supplement a clearly articulated, long-term value
the sustainability of your efforts and initiatives
chain vision with strong, agile, and sustainable
through a constant focus on governance, change
execution capabilities. Push your team to think
management and culture.
Source: Taylor, P. (2011) Supply chain leaders identified, FT.com, 25 July.

10.2 Classification of B2B e-marketplaces based on the purchasing

process and the purchased products
To systematise the landscape of rapidly changing B2B markets, Kaplan and Sawhney pro-
pose a classification of B2B electronic marketplaces based on what businesses purchase and
how they purchase.5 ‘Regarding the what, there are essentially two different types of goods:
● Operating inputs. These goods are also often called MRO (maintenance, repair and
operations) goods or indirect goods because they do not form part of the final products a
company produces. MRO goods, which are typically not industry specific, include items
such as office supplies, airline tickets and travel services. For instance, companies such as
Spreadshirt and Ducati, which are in very different industries, both need computers and
office supplies for their employees. MRO goods are usually purchased from horizontal
platforms and shipped through third-party logistics providers. These items are typically
not strategically relevant to a company’s production process and therefore are not crucial
for developing a competitive advantage.
● Manufacturing inputs (raw materials and components). These industry-specific goods are
also called direct goods because they are used for the final product that is delivered to the
customer. These goods, which include raw materials (such as steel or cement) and goods
that are used for final products (such as electronic components) are usually purchased
from vertical suppliers/distributors. To handle and deliver these manufacturing inputs, it is
typically necessary to use specific fulfilment mechanisms. For instance, a motorcycle manu-
facturer, such as Ducati, that sources engine parts on a continuous basis from an external
supplier is unlikely to use courier services, such as Federal Express, DHL or UPS, for delivery.
The second determining dimension is how these goods are purchased from suppliers. There
are two main types of sourcing:
● Systematic sourcing. This type of sourcing involves negotiated contracts with qualified
suppliers. Contracts are usually long term and built on mutual trust, hence leading to
lasting relationships between buyer and seller. The goal of systematic sourcing is to
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create value for both buyer and seller, by sharing, for instance, sales forecasts, customer
data and production statistics. Thus, systematic sourcing relationships are usually about
more than just optimising price. To corporate customers, it is more important to get the
right product at the right time with the right service than to save an additional 1–2% of
the price. Usually, it is advisable to set up systematic sourcing contracts when (1) compli-
cated products are involved that need specific adjustment and service, and (2) it is neces-
sary to make investments that are specific to the relationship. The relationship that Dell
maintains with external suppliers of PC components is an example of systematic sourcing.
● Spot sourcing. Firms typically use this type of sourcing to fulfil an immediate need at the
lowest possible price. Commodities (such as oil, gas and iron) are typically purchased via
spot sourcing. Thus, it rarely involves a long-term relationship between buyer and seller.
In contrast to systematic sourcing, spot sourcing focuses primarily on price, so both buyer
and seller will try to maximise their own benefit at the other party’s expense.
Based on the above dimensions, it is possible to construct a B2B Internet matrix depicting
the following four different types of B2B e-marketplaces (see also Exhibit 10.1):
● MRO6 hubs are public and horizontal e-marketplaces with long-term supply relation-
ships, usually for non-production-related products and services. For instance, Grainger
in the USA sells goods that companies need to keep their plants and facilities running.
IBX, a case study featured in this text, is another example of an MRO hub that sells,
among other things, non-strategic, low-value items. Lastly, an interesting example to
mention is the platform that Amazon has just released at amazonsupply.com. (See the FT
article: ‘Amazon noses into industrial supply chain’.)
Exhibit 10.1 The B2B e-commerce matrix classifies different types of B2B e-marketplaces
MRO hubs Catalogue hubs
Systematic Horizontal markets Vertical markets that

sourcing that enable systema- enable systematic
tic sourcing of sourcing for
How do firms buy?
operating inputs manufacturing inputs
Yield managers Exchanges
Spot Horizontal markets Vertical markets that

sourcing that enable spot enable spot sourcing
sourcing of operating for manufacturing
inputs inputs
Operating inputs Manufacturing inputs
What do firms buy?
Source: Reprinted by permission of Harvard Business Review [exhibit Roo 306]. From ‘e hubs: the new B2B marketplaces’
by s. Kaplan and M. sawhney, May–June 2000.
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● Catalogue hubs sell manufacturing inputs through a systematic sourcing system.

Goods sold through catalogue hubs are tailored specifically to meet the individual
needs of the purchasing company. An example here is Covisint, which is a vertical
e-hub for the automotive industry, linking car manufacturers with their suppliers.
● Yield managers are horizontal e-marketplaces for spot procurement of usually operat-
ing, manufacturing inputs. They are most valuable for operating inputs that display
high fluctuations in price and/or demand. Yield managers tend to be more vertical
than MRO hubs, as their aim is to protect buyers and sellers from production varia-
tions by allowing them to scale their manufacturing resources upwards and down-
wards.7 Some examples here are Imark.com, offering software solutions to industrial
businesses, or Employease.com, focused on on-demand human resources-related soft-
ware solutions.
● Exchanges are closely related to more traditional commodity exchanges. They are used
primarily for the selling of commodities (such as steel and copper) that are used in the
production process. An example of such an Internet-based exchange is E-steel.com.
Amazon noses into industrial supply chain

The prospect of head-to-head competition with That reflects Amazon’s reputation as a powerful
Amazon would fill most companies with dread. retailer with the ability to destroy traditional sales
patterns and undercut competitors. Amazon Supply
Yet the US’s biggest industrial suppliers – who
also offers free two-day shipping on orders over $50,
provide manufacturers such as General Electric,
corporate lines of credit and a dedicated customer
General Motors, Boeing and Caterpillar with
service centre.
everything from toilet paper to complex electronic
components – seem remarkably unruffled by the To Amazon, the US industrial supply clearly appears
debut last month of Amazon Supply, a website with ripe for low-cost competition. Not only are online
more than 500,000 products aimed at grabbing a sales the fastest-growing segment of the industry,
share of the $160bn market for US industrial supplies. but companies such as MSC and Grainger enjoy
gross margins of up to 50 per cent.
“This business is much more complex than selling
books,” says Tom Cox, executive vice-president However, says Dave Manthey, an analyst at
of sales at MSC Industrial Direct, one of the US’s RW Baird, that encapsulates the challenge of
biggest industrial suppliers. “For many years, competing on price. Industrial customers value
there’s been lower-priced online competitors; we’re long-established sales relationships, technical
used to competing with them. It’s hard for me to support and product availability as much as lower
imagine that in the short term Amazon will have a prices.
significant impact.”
Moreover, he notes, the incumbents already offer
But investors are not convinced, and Amazon big discounts for bulk orders. “You might end up
has already proved its ability to disrupt disparate paying more for everything because you wanted to
sectors by branching out into areas such as tablet spend $10 less on a wastebasket,” he says.
computer manufacturing and web hosting.
Amazon Supply is also debuting after most
Since Amazon Supply launched on April 23, the industrial companies have spent years slashing
shares of MSC and other big industrial suppliers their purchasing departments. Few, therefore, have
such as WW Grainger and Fastenal have fallen by the time to check which website has the lowest
13–15 per cent. price on individual products. ➨
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The trend is clearly towards internet sales, which Supply”. She refuses to be drawn, however, on
are growing at twice the pace of brick-and-mortar how many technical staff the company has hired.
sites, according to Citigroup, and now account for
It will be hard for Amazon to compete with the
30 per cent of orders at Grainger and MSC.
technical expertise of the established industrial
However, Jim Ryan, chief executive of Grainger, suppliers. Grainger has hired up to 500 new
notes that the overwhelming majority of his technical sales staff in North America annually
customers are “multi-channel” buyers who buy for the past few years. It provides on-site inventory
from sales representatives, in physical branches management for more than 1,500 customers
and over the phone as well as online. “Less than and advises customers how to meet health and
1 per cent of our customers buy only on the web,” safety or energy efficiency requirements.
he says.
By contrast, Mr Manthey says, Amazon Supply’s
Having said that, the big industrial supply product expertise is questionable. “If you want any
companies have invested heavily in recent years in kind of technical support, you’re out of luck,” he
ramping up their e-sales capabilities, in part to pre- says. “I called the Amazon people. They’re clearly
empt online competition. order-takers, and are in no way trained to understand
industrial products.”
Amazon’s challenge to Grainger and MSC is not
as novel as it appears. There have been several Amazon’s two-day delivery service may also be out-
failed attempts to offer low-cost industrial supplies. of-step in an age of just-in-time inventory
Indeed, Amazon has itself been doing so for several management. “We can open a branch in the middle
years – the retailer has offered industrial products of the night to get a product for our customers,”
on its main Amazon.com website for over a decade. boasts Mr Ryan.
Amazon Supply, then, is more a rebranding. Amazon is well aware of the challenges. It is said
Even now, all the products available on the new to be privately stressing to investors that Amazon
website are also for purchase on Amazon.com. Supply is not a big investment and it is not expecting
Nevertheless, it represents an attempt to appeal to grab significant market share.
to industrial businesses in a more targeted way
That is just as well, says Ryan Merkel, an analyst
than simply expanding the product range on
at William Blair in Chicago. “Cheaper prices aren’t
Amazon.com.
new. Website competition isn’t new,” he says.
Grace Chung, an Amazon spokeswoman, notes “The only new thing about is that it’s Amazon and
that the new website has “a dedicated customer when people hear that name, they get scared. But
call-centre that is ready to answer technical everything Amazon touches is not going to turn to
questions about the items sold on Amazon gold.”
Source: Weitzman, H. (2012) Amazon noses into industrial supply chain, FT.com,
20 May.
10.3 Classification of B2B e-marketplaces based on their degree

of openness
This classification focuses on the degree of openness of B2B e-marketplaces.8 At one end
of the spectrum, e-marketplaces with a high degree of openness are those that are pub-
licly accessible to any company. At the other end of the spectrum, e-marketplaces with
a low degree of openness are accessible only upon invitation. Based on this distinction,
we recognise three main types of e-marketplaces: public e-markets, consortia and private
exchanges:
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● Public e-markets are generally owned and operated by a third-party provider. They are
open to any company that wants to purchase or sell through the e-marketplace. Because
it is easy to enter and leave public e-markets, businesses processes are primarily stand-
ardised and non-proprietary. Products that are most likely to be sold through public
e-marketplaces are commodities that need little or no customisation. An example of a
public e-market is Mondus.com.
● Consortia are typically jointly owned and operated by companies that participate in
the online B2B exchanges. Access is much more limited than in public e-markets,
since only equity holders and selected trading partners are admitted. Covisint,
founded by General Motors, Ford and DaimlerChrysler, is an example of a B2B
consortium.
● Private exchanges are the most restrictive e-marketplaces in providing access to
external parties. They are typically operated by a single company that wants to opti-
mise its sourcing activities by tying its suppliers closely into its business processes.
The operator of the private exchange invites selected suppliers to participate in the
private exchange and provides them with detailed information about, for instance,
sales forecasts or production statistics. In turn, this helps the supplier to optimise its
supply chain. In order to achieve this type of close integration, it is generally neces-
sary to build a customised system that tightly integrates the information systems of
both buyer and seller. As a result, business relationships in private exchanges tend to
last longer than in public e-marketplaces. One of the most prominent examples of a
highly successful private exchange is that of Dell with its suppliers.
10.4 Integrating e-procurement systems
When thinking about e-procurement solutions, it is also essential to determine if only part
of the procurement cycle or the whole supply chain should be covered. Different types of
systems are discussed below (see Exhibit 10.2):9
● Stock control systems are designed to facilitate production-related procurement. For
instance, these systems notify purchasing managers when stock levels have fallen below
a certain level and items need to be reordered.
● CD/web-based catalogues replaces paper-based catalogues, with search functions to make
it easier to locate specific items.
● Email or database-based workflow systems integrate the originator of the order, approval
by manager and order placement by buyer. Through the use of one of these systems,
orders can be quickly and reliably passed from one person to the next without losing
information.
● Order entry on website allows users to buy items directly on the seller’s website. However,
since there is no integration with the internal accounting system, purchasing data needs
to be re-keyed.
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Exhibit 10.2 e-Procurement solutions cover different parts of the supply chain
Stock control
catalogue
catalogue
CD/web
Originator selects,
requests order
E-mail/workflow systems
Integrated e-procurement or ERP system

Manager
approves order
Order entry on website

Buyer, originator
places order
Accounting system
Goods received,
and delivered
Matching and
payment
Source: d. Chaffey, E-business and E-Commerce Management, Ft/prentice Hall, 2011, p. 368.
● Accounting systems allow the buying department to place orders and simultaneously to
pass the information on to be used for internal accounting processes, e.g. to make pay-
ment upon receipt of the invoice.
● Integrated e-procurement systems integrate all of the above functionalities. In addition,
they are also integrated with the suppliers’ systems.
When choosing between different types of e-procurement solutions, difficult trade-offs
need to be made. At one end of the spectrum, it is possible to link existing legacy systems
with new technologies or to purchase a new system that completely integrates all func-
tionalities. Buying a new system might be the simplest option, but upfront investment is
usually higher than adjusting existing systems. In addition, switching to a new system
requires staff training.
With the advent of new technologies, supply chains are becoming increasingly inte-
grated. One example of the integrative power of advanced technologies is the RFID (Radio-
Frequency Identification) chip, which can be used for monitoring anything it is attached to
in a store location or a warehouse.
To conclude, as the Internet and advances in e-procurement solutions allow companies
to globally coordinate their operations both internally and externally (e.g. with business
partners, suppliers, third-party logistics companies, etc.), today’s management of supply
chains has a strategic role to play for a company’s competitiveness. (See the FT article:
‘Supply chain is a strategic discipline’.)
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Supply chain is a strategic discipline

Globalisation has driven a revolution in corporate be viewed as a cost-cutting mechanism; now they
procurement and put a new generation of are being used as growth drivers to open up new
professional supply chain managers and their markets, particularly emerging markets.”
technology tools at the forefront of the push to build
Which companies operate the most admired
sustainable and profitable businesses.
demand-driven supply chains and document
Supply chain management has changed a great their best practices? In October, Gartner’s AMR
deal over the past decade. A complex web of unit published its annual list of the top 25 companies
global partners and suppliers, volatile energy that demonstrate leadership in supply chain
and commodity prices coupled with currency management. Apple, whose extended supply chain
fluctuations are now the norm. Rick Blasgen, is regularly cited as one of the most sophisticated
chief executive of the Illinois-based Council of and effective, took the top slot for the third year
Supply Chain Management Professionals, says: running, Procter & Gamble, the only company to
“The number one issue facing our members is have been in the top five for six consecutive years,
the increasing pressure from global competition.” came in at number two, followed by Cisco, Walmart
Mr Blasgen, whose 25-year career has included Stores and Dell. Five companies joined the Top
senior supply chain positions at three of the world’s 25 for the first time: Research in Motion (RIM),
largest food companies – Nabisco, Kraft Foods Amazon, McDonald’s, Microsoft and Inditex, the
and ConAgra – took leadership of the Council in fashion distribution group.
2007. He says the second most important issue
But even the best managed supply chains still
his members face is keeping tabs on the information
face unexpected challenges. Mr Blasgen cites the
transmitted between supply chain partners.
case of Mattel, the US toymaker that was forced to
Today, companies need to collaborate with supply recall nearly 1m toys in 2007, after it emerged that
chain partners to minimise risk and maximise a Chinese contract manufacturer had covered them
transparency, he says. “You have to trust your with lead-based paint. As companies extend their
partners with information that in the past you supply bases and manufacturing operations across
might have considered proprietary.” Businesses the globe, new risks are introduced, including
operating global supply chains also have a range intellectual property theft, supplier viability,
of other factors to consider including the tax, volatile exchange rates, product safety, and even
regulatory and environmental impact of their piracy. “Supply chain risk has become a big deal
decisions. Most importantly, they need to view the in the past five years, and very, very prominent at
supply chain function in an entirely new way. Kevin the time of the oil price spike,” says Mr O’Marah.
O’Marah, a Gartner analyst in charge of supply “When oil was hitting $140 a barrel, people started
chain research, says, “traditional planning cycles worrying about whether they were over-exposed
are obsolete. “Internet connectivity and global in Asia or whether they were overly reliant on
markets have accelerated change so dramatically materials that are based on oils such as plastics.
that businesses must revisit daily investments in
Fortunately, there are technologies that can
product development, manufacturing capacity, and
help manage these problems, but nevertheless,
inventory.”
Noha Tohamy of Gartner says strategic thinking
Businesses should also take advantage of is essential. Generally, she says, software tools
technologies such as GPS (the global positioning can be grouped into two main categories. First,
system) tracking, RFID (radio frequency ID) tags, there are those that enable strategic scenario
communications networks and software tools. “We management, or “what-if” analysis. Second,
always look at how technology is applied,” says are tools that focus on what is happening in
Rob Riddleston, head of transport and logistics at real time.
Barclays, the banking group.
Global logistics presents another set of challenges
When companies get it right, their supply chains that have been amplified because while import/
can become a strategic and competitive advantage. export was once a small slice of many economies,
Mr Blasgen notes: “Supply chain logistics used to today it is big and vital. “The need for both adequate ➨
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capacity on ocean lanes, rail, road and air links as environmental accounting is expected to weigh
well as visibility to where your shipments are increasingly on supply chains where factories and
and whether they’re at risk is suddenly mission- transportation contribute substantially to their
critical,” explains Mr O’Marah. But while many carbon emissions. Such considerations mainly
logistics firms are being pressed to provide capacity apply to physical products such as cars, food and
and visibility, adequate technology tools are still clothing. These have a big variable cost component.
lacking, he says. Digital supply chains for music, software and games
can be reproduced and “shipped” at essentially zero
Supply chain professionals also have to grapple
marginal cost and present different challenges.
with a new class of supply chain in emerging
“Intellectual property ingredients of physical
markets. “Economic growth is disproportionately
products can often be separated from the plastic,
coming from emerging markets such as India,
metal or other material that gets shipped,” says
China, Brazil and sub-Saharan Africa,” says
Mr O’Marah.
Mr O’Marah. He adds: “Consumer demand is
high, but supply chains often look very different, Managing 21st century supply chains requires a
requiring companies to think and build their new set of skills. The notion of “supply chain” as
networks to suit these markets. So, for instance, a professional discipline barely existed a decade
in Brazil you have serious problems with the ago, says Mr Blasgen. Before the internet connected
roads, whereas in China you have good roads but companies globally, most people working in the
you have other issues with respect to borders. shipping, production and purchasing departments
“Unfamiliar local distribution infrastructure, of businesses were tactical operatives in cost
retail networks, manufacturing capacity and of centres. Today, supply chain competence has
course regulatory and cultural factors all call for become a competitive weapon essential to success
specialised strategies.” in launching products, entering markets and
responding to competitive threats.
Companies, particularly multinationals, are
also more concerned about sustainability, while
Source: Taylor, P. (2011) Supply chain is a strategic discipline, FT.com, 25 January.

Summary
● the chapter proposed a classification of B2B e-marketplaces based on what goods

companies purchase from suppliers and how they purchase them. It also discussed varying
degrees of openness in B2B e-marketplaces.
● First, this chapter discussed some issues in B2B e-commerce and presented the main
advantages and drawbacks of electronic purchasing. the advantages include (1) higher
transparency, (2) reduced risk of maverick spend, (3) price reduction through online
negotiations and (4) process optimisation. drawbacks consist of (1) organisational risk,
(2) technology risk and (3) supplier resistance.
● second, the chapter suggested a classification of B2B e-marketplaces based on
the purchasing process (i.e. the ‘how’ of e-procurement: is it spot or systematic
sourcing?) and the types of goods that are purchased online (i.e. the ‘what’ of
e-procurement: are they operating or manufacturing inputs?). Based on these two
dimensions, four distinct quadrants are recognised; these are ‘MRo hubs’ and ‘Yield
managers’ for horizontal e-marketplaces, and ‘Catalogue hubs’ and ‘exchanges’ for vertical
e-marketplaces.
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● third, the chapter identified different levels of openness among B2B e-marketplaces
and discussed issues that are specific to each level. at one end of the spectrum,
‘public e-marketplaces’ have a high degree of openness and are accessible to any
company. at the other end, ‘private exchanges’ are e-marketplaces with a low
degree of openness and are accessible only upon invitation. In between, ‘Consortia
e-marketplaces’ have a medium level of openness and are jointly owned and operated by a
few companies.
● Fourth, this chapter recognised the functionalities offered by different e-procurement
solutions, including stock control systems, database-based workflow systems, accounting
systems and integrated e-procurement systems. It also highlighted the trade-offs that
companies need to make when choosing among these e-procurement solutions.
REVIEW QUESTIONS
1 What are the advantages and drawbacks of e-purchasing systems?

2 outline the business-to-business (B2B) e-commerce matrix based on its two underlying
dimensions.
3 What B2B purchasing models do companies use? What criteria determine what specific B2B
model to use?
4 explain the concept of openness in B2B e-marketplaces. What different types of e-marketplace
can you identify, based on their degree of openness?
5 What are the different types of e-procurement systems? What part of the supply chain does each
e-procurement type cover?
1 Illustrate each quadrant of the B2B e-commerce matrix through a real-world example.
2 provide an example of a B2B e-marketplace for each one of the B2B purchasing models outlined
in this chapter.
3 discuss the advantages and disadvantages of the varying degrees of openness in B2B
marketplaces, i.e. public e-markets, consortia and private exchanges.
4 discuss the trade-offs that companies need to make when choosing between different types of
e-procurement solutions.
An overview on how the Internet changed supply chain management is provided in M.E. Johnson
and S. Whang, ‘E-business and supply chain management: an overview and framework’,
Production and Operations Management, 2002, vol. 11, no. 4, pp. 413–23.
S. Kaplan and M. Sawhney developed the concept of e-hubs in ‘e-Hubs: the new B2B market-
places’, Harvard Business Review, 2000, May–June, pp. 97–103.
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M10_JELA7870_03_SE_C10.indd 230 10/03/14 10:37 AM

W. Hoffman, J. Keedy and K. Roberts differentiate e-marketplaces according to their degree

of openness in ‘The unexpected return of B2B’, McKinsey Quarterly, 2002, no. 3, pp. 97–106.
For an interesting discussion on how the adoption of e-procurement systems and strategies
can contribute to a company’s value creation and business competiveness, see W.D. Presutti Jr,
‘Supply management and e-procurement: creating value added in the supply chain’,
Industrial Marketing Management, 2003, vol. 32, no. 3, pp. 219–26.
To understand e-procurement practices in a business-to-business context, as well as the suc-
cess factors and challenges of e-procurement, see R. Angeles and R. Nath, ‘Business-to-
business e-procurement: success factors and challenges to implementation’, Supply Chain
Management, 2007, vol. 12, no., pp. 104–15.
www.scmr.com is the website of another magazine, Supply Chain Management Review,

that provides numerous articles and other resources on managing supplier relationships in
e-business.
1 See D. Chaffey et al., Internet Marketing, FT/Prentice Hall, 2006, p. 494.

2 Ibid., p. 502.
3 Ibid., p. 501.
4 See D. Chaffey, E-Business and E-Commerce Management, FT/Prentice Hall, 2006, pp. 318–320.
5 S. Kaplan and M. Sawhney, ‘e-Hubs: the new B2B marketplaces’, Harvard Business Review, 2000, May–
June, pp. 97–103.
6 Acronym for maintenance, repair and operating.
7 See D.F. Ross, Introduction to Supply Chain Management Technologies, 2nd edition, CRC Press, Taylor &
Francis Group, 2011, p. 100.
8 W. Hoffman, J. Keedy and K. Roberts, ‘The unexpected return of B2B’, McKinsey Quarterly, 2002, no. 3,
pp. 97–106.
9 See D. Chaffey, E-Business and E-Commerce Management, FT/Prentice Hall, 2011, pp. 367–8.
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Chapter 11
Choosing the appropriate e-business

strategy for interacting with users1
Chapter at a glance
11.1 The Internet and social commerce 233
11.1.1 the advent of Web 2.0 233
11.1.2 Implications of Web 2.0 for Internet business models 235
11.1.3 Understanding user behaviour on the social web 240
11.2 The trade-off between richness and reach 243
11.3 Increasing the richness of interactions with customers 245
11.3.1 Customer relationship management (CRM) in a digital context 246
11.3.2 the concept of mass-customisation 251
11.4 Increasing the reach of interactions with customers 252
11.4.1 Viral growth 254
11.4.2 the ‘tipping point’ concept 255
11.4.3 the ‘long tail’ of Internet-based social networks 256

8 Topcoder open innovation
17 Nettwerk Internet business models
18 Licia Chery open funding
14 KM at Booz Internal content sharing and collaboration
15 Spreadshirt Mass-customisation on the Internet
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Chapter 11 Choosing the appropriate e-business strategy for interacting with users
Learning outcomes
● Understand the technological developments leading to the advent of Web 2.0.
● Recognise how these technological developments brought about
user-generated content and change of behaviour.
● Be aware of the evolution of CRM to embrace Web 2.0 advances and its
potential to address relationships with the new social customers.
● Use the insights gained from the ‘mass-customisation’ and ‘long tail’ concepts
to increase the richness of interactions with customers.
● Use the insights gained from the ‘tipping point’, network externality effects and
‘viral growth’ concepts to increase the reach of interactions with customers.
Introduction
since the beginnings of e-business, which we discussed in Chapter 1, the Internet has changed
dramatically. While years ago it was closer to a read-only web, with a static and unidirectional
information flow, users today have the opportunity to become editors and active content
generators on the Internet. In this chapter, we take a closer look at how companies leverage
the new technological capabilities of the Internet to involve their customers and website users
more deeply in the information-sharing and content-creation process.
the chapter starts out by giving an overview of Web 2.0,2 including the technological
advances that led to its advent and the implications for business (including the main guiding
principles, services offered through it, users’ behaviour on the so-called ‘social web’,3 etc.). In
section 11.2, we analyse the trade-off between richness and reach. Building on this trade-off,
we then discuss concepts such as customer relationship management, mass-customisation,
viral growth, the tipping point and the long tail.
11.1 The Internet and social commerce
Compared with its early years, the Internet has become an increasingly interactive plat-
form, thanks to its huge number of users and a large variety of new service sites catering to
their users’ communication wants and transaction needs. In the following, we examine the
Internet’s main technological developments and their induced applications.
11.1.1 The advent of Web 2.0

The advent of Web 2.0, which has opened up new ways to communicate, share content
and collaborate, symbolises a paradigm shift from website provider or supplier-generated
content to user-generated content. Tim O’Reilly calls Web 2.0 ‘the business revolution in
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the computer industry caused by the move to the Internet as a platform, and an attempt to
understand the rules for success on that new platform’. The applications should ‘harness
network effects to get better the more people use them’.4 Technological advances in IT have
enabled significant changes in the way companies create value and manage relationships
with customers and suppliers. More specifically, Web 2.0 can be defined as
a collection of open-source, interactive and user-controlled online applications expanding the
experiences, knowledge and market power of the users as participants in business and social
processes. Web 2.0 applications support the creation of informal users’ networks facilitating the
flow of ideas and knowledge by allowing the efficient generation, dissemination, sharing and
editing/refining of informational content.5
Customers and users nowadays have much more information and market power. They are
not merely receivers of a company’s generated content, as was the case with the previous
Web 1.0 capabilities; they can now produce and share content. This is probably the main
technological shift and distinguishing feature of the new Internet and its related busi-
ness models. Ignoring the capabilities of Web 2.0 to enable an active role of customers in
exchanges, content generation and value creation would be a strategic mistake. In other
words, organisations must be aware of the new mind-set of collaboration and conversation
with customers (see Exhibit 11.1) and related Web 2.0 applications (e.g. social networking
sites, microblogs, wikis, internal blogging, etc.), which, among other benefits, speed deci-
sion making, foster innovation and enhance effectiveness.6
To conclude this introduction, let us focus on the two key areas that enabled recent tech-
nological advances: network infrastructure and software capabilities.
Network infrastructure
In recent years, households’ access to broadband Internet has increased rapidly. One
important driver for this development was the overinvestment during the Internet boom
years in fibre-optic cable companies, which then laid out massive amounts of fibre-optic
Exhibit 11.1 Evolution of the business–customer mind-set with the advent of Web 2.0
Traditional mind-set New mind-set

One-sided Opaque Transactional Collaborative Transparent Conversational
Sales employee Sales team
Customer
Customer
service Customer service
employee
Marketing employee
Marketing team
Corporate ecosystem Customer ecosystem
Source: o. acker et al., ‘social CRM: how companies can link into the social web of consumers’, Journal of Direct, Data and Digital Marketing
Practice, 2011, vol. 13, p. 4.
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cable – thereby driving down data transmission costs. For Internet users, this increased band-
width resulted in higher connection speeds, which translates directly into an improved Internet
experience. This, in turn, attracted more users and made them spend more time online.
The rapid decline in storage costs in recent years has also had a major impact on com-
panies whose business models rely heavily on storage capacity. Today, it is not unusual
to have more than a gigabyte of storage space on an email account such as Gmail, or an
unlimited uploading of photos on a social networking site (such as Facebook) free of
charge. Depending on the amount of data that needs to be stored, there are different busi-
ness models in use. For example, online back-up solutions (such as Dropbox.com, Mozy.ie
or Box.com), which handle a large volume of data, use a subscription model to recover their
high storage costs. On the other hand, social networking sites (SNS) try to cover these costs
through online advertising revenues.
Software capabilities
Capitalising on technological advances in network infrastructure and using the web as a
platform, new software standards have emerged that allow for user participation in creat-
ing content. The deployment of web application development techniques (such as AJAX)
started to make the Internet experience faster and more convenient as it enabled websites
to reload separately different parts of a page. As a result, it became possible to surf web
pages as you would navigate traditional desktop programs. Google Docs, for instance, offers
text processing, spreadsheet modelling and calendar functions that can be accessed directly
online from any PC with an Internet connection.
Software has also made it easier for users actually to publish content on the Internet.
It was just a few years ago that writing on a website was the privilege of programmers or
those having the necessary HTML technical skills. To do so today, users no longer need to
install tools or programs; instead, they log on to their account on the service website that
hosts a blog and allows its users to manage their profiles and content. Active communities
of developers were actually created around websites and specific programs that either use
an ‘open source’ approach for collaborative software development (as is the case with the
Linux operating system), or grant access to an application program interface.
Furthermore, the creation and adoption of new syndication formats (such as RSS) enable
users easily to track content updates on other websites. Also, by allowing users to subscribe to
other people’s content, communication, sharing and collaboration have significantly improved.
Furthermore, blog software installation and administration made it easier for individuals to
manage their own web space. Wordpress, for instance, is a state-of-the-art blog publishing tool
that offers powerful, yet easy-to-handle customisation and administrative features.
11.1.2 Implications of Web 2.0 for Internet business models

Exhibit 11.2 presents an overview of past, current and expected web technologies and their
applications. Four sequential stages are proposed, with their respective applications. The
next step is related to a significant and expected technological advance: the semantic treat-
ment and integration of the information. This is the milestone of Web 3.0, also called the
semantic web – the next step for the social web.
The current stage of the web presents serious implications for businesses and organisa-
tions. The following subsections present important related questions as the main guiding
principles of Web 2.0 – the most important shifts brought by this web stage, its new func-
tionalities and strategies for companies to effectively adapt to them.
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Exhibit 11.2 Evolution of the Web and related applications
The WebOS Web 4.0

2020–2030
Semantics of Information Connections
Intelligent personal
Semantic Web agents
SWRL Web 3.0 Distributed Search
OWL 2010–2020
Semantic Databases
OpenID AJAX SPARQL
ATOM Semantic Search Widgets
P2P RDF RSS
Javascript Office 2.0 Mashups
SOAP XML Flash Web 2.0
Java 2000–2010 Weblogs Social Media Sharing
World Wide Web HTML
Directory Portals Wikis SaaS
Social Networking
HTTP
VR Lightweight Collaboration
Keyword Search
BBS
Gopher
Web 1.0 Websites
1990–2000
MMO’s MacOS SQL
Groupware
Desktop SGML Databases
Windows
File Servers
Email PC Era
FTP IRC 1980–1990
USENET
PC’s File Systems
Semantics of Social Connections
Source: Radar networks & nova spivack (2007).
Main guiding principles of Web 2.0 applications

Advances in Web 2.0-based applications have been driven by the following principles:7
● Focus on service-based, simple and open-source solutions featuring:
– A shift towards online services: from software as a product to software as a service
(SaaS). Applications in Web 2.0 are platform independent and usually offered as a
free service – easy to access, download and share.
– Simplicity. Web 2.0 services have been designed with an easy-to-use logic offering
users numerous customisation possibilities.
– Network effects as a lever to lock in customers. Although users can easily shift from one appli-
cation service to another, they may be deterred from doing that due to network effects and
peer usage. An illustrative example here is a Facebook user, who would be very reluctant
to shift to another social network since (most of) his/her friends are also using Facebook.
– Continuous and incremental application development requiring the participation of
users not only as passive consumers but also as active contributors.
– Continuous, real-time improvement. Web 2.0 applications are characterised by con-
tinuously requesting feedback from their users. Such information is used to identify
and fix malfunctions, as well as improve the applications’ performance.
– Perpetual ‘beta version’. Due to the above-mentioned continuous feedback loop, Web
2.0 is considered as a ‘beta version’, which is in constant change and evolution.
– More users: more value is generated through the aggregation of collective intelligence.
An illustrative example here is Amazon.com, or other e-commerce websites that
offer their users recommendations based on past consumer behaviour. These
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recommendations (including users’ comments, opinions, product or service reviews,

etc.) can obviously influence the user’s purchasing decision.
– New service-based business models and new opportunities for reaching individual cus-
tomers with low-volume products.
– Changes in revenue generation and usage models. Since most Web 2.0 services are
offered for free, companies generate revenues not by charging users but by selling
either online advertising and/or a premium version of these services. This is the case,
for example, of the streaming music provider Spotify, which enables users to down-
load for free a basic version containing ads or to pay for unlimited access to a premium
version that has a better audio quality and no ads.
– From mass markets to individual customers. This is an important feature of Web 2.0
that will be covered in detail in Sections 11.3 and 11.4.
The above principles are complementary with the recent four broad factors (and sub-fac-
tors) framework.8 Note that some of these factors are not completely new but their impact
increased in the Web 2.0 context. Exhibit 11.3 lists these factors (and their sub-factors),
Exhibit 11.3 Web 2.0: a four-factors model
Interaction Orientation
Cooperative
Customer Interaction Customer
value
centricity configuration response
generation
customization
Customer
power
Personal
Customization / Personalization
word of
mouth
Virtual
Social Networking
customization
Group
Web 2.0
identity
Social
customization
Social
Social
trust
User-generated User-generated User-generated User-generated

content creativity innovation revenue/contacts
User-Added Value
Source: B. Wirtz et al., ‘strategic development of business models. Implications of the Web 2.0 for creating value on the
Internet’, Long Range Planning, 2010, vol. 43, p. 279.
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Exhibit 11.4 Activities for embracing Web 2.0 in existing Internet businesses
Factor Activity
Social networking • Build your own social networking — e.g. by creating blogs, forums and chats
for your website
• Check and comment on postings on networks (e.g., review platforms)
• Present your company on relevant social networking platforms
Interaction orientation • Be highly responsive and available 24 hours
• Provide users a reward for interaction (social status, prizes, rebates)
• Encourage positive and negative feedback
User-added value • Integrate the following tools on your website: user reviews, user-generated
information (wikis), media uploads (videos, etc.)
• Offer incentives
• Use metadata that tracks clicks, recommendations, behaviour, etc.
Customisation/personalisation • Make good use of available user information as a base for customisation
efforts (e.g., build track profiles based on customer history)
• Focus on making customisation/personalisation easy to use
Source: B. Wirtz et al., ‘strategic development of business models. Implications of the Web 2.0 for creating value on the Internet’, Long Range
Planning, 2010, Vol. 43, p. 284.
which include social networking, interaction orientation, user-added value and customisa-
tion/personalisation. Related actions that companies should make to effectively embrace
these four Web 2.0 factors are presented in Exhibit 11.4.
Web 2.0 services

Different business models for Web 2.0 applications (sometimes referred to as Enterprise
2.0) currently try to seize new business opportunities. Media-sharing portals (such as Flickr
and YouTube), free voice-over-IP applications9 (such as Skype), major online collaborative
applications (such as the encyclopaedia Wikipedia) and the broad ‘blogosphere’10 realm rely
on new technologies to promote the collective spirit of the Internet. In general, the flock of
new services and applications can be divided into the following categories:
● Blogs and blog aggregators. User-generated websites containing continuously updated
entries in periodic order. Blogs can be generated through different blog providers such
as blogger or Wordpress. Several services, such as Technorati, provide tools to browse
through the sheer number of blogs (often referred to as the ‘blogosphere’).
● Wikis or content communities. Derived from the Hawaiian word for ‘fast’, these websites
display content that users can incorporate as is, or modify at will. In order to assure the
quality of its content, Wikipedia, for instance, relies on users’ mutual content control,
article rating and indexing.
● Social networking sites (SNS). These online communities enable users to communicate
and connect with each other and build up a personal network, as well as share personal
content. On these sites, members create their personal profile to present themselves to
others, while community providers primarily act as enablers – offering support capabili-
ties as well as search and communication tools. The €482 million acquisition in 2005 of
MySpace by Rupert Murdoch’s media conglomerate News Corp. made it the poster child
for these new SNS services. Later, in December 2006, the business networking site Xing,
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previously called openBC, staged its initial public offering (IPO), thus becoming the first
Web 2.0 company in the world to go public. Nowadays, SNS market leaders include
Facebook, which has more than 50% market share with its 800 million users,11 LinkedIn,
the world’s largest professional network with about 7% market share, and Twitter with
about 12% market share.
● Social bookmarking. Users of these services, provided by companies such as Delicious.
com, can collect their favourite websites as bookmarks, using ‘tags’ – i.e. short descriptive
key words instead of the traditional browser-based folder taxonomy. They can also share
their favourites with other users, who can browse for certain ‘tags’ when looking for
interesting weblinks.
● Media and information-sharing platforms. The 2008 presidential campaign in the USA
has already discovered the huge reach of sites such as YouTube, where users can upload,
index, share and rate all kinds of videos. Another media and information-sharing plat-
form, Flickr, which was acquired by Yahoo! in March 2005 for $35 million, is similar to
YouTube but uses photos instead of videos.
● Web-based tools. A variety of services can be accessed directly from the web but offer a
degree of customisation and functionality that rather resembles conventional programs
and desktop applications. There are services providing map and navigation data, such as
Googlemaps, or websites such as Netvibes that offer a fully customisable desktop surface
where users can receive RSS feeds, weather forecasts, email notifications and other features.
● Web-based desktop applications. Even though these applications use the web as a plat-
form, they can be downloaded and installed on a local computer, not just accessed
through an Internet browser. Skype was one of the first applications successfully to
offer a working service, enabling people to talk to one another over the Internet for
free. Telecommunication operators, realising the disruptive nature of Internet-based
telephony, soon jumped on the bandwagon – offering their own VoIP products. Online
file-sharing networks such as Napster, Kazaa, Gnutella or BitTorrent have shown how
peer-to-peer (P2P) networks can impact on traditional businesses by eliminating (or
decreasing) the friction between producers and consumers, thereby changing users’
behaviour and causing a paradigm shift in some industries.
Business impact of social networks

Not to be left behind, companies ought to pay attention to the business impact of Internet-
based social networks, which are gaining increasing importance all over the world. The
rationale for the huge popularity of these networks is many-fold:12
● Social networks are large. Their overall size is continuously growing and is expected to
increase by 18% over the previous year and reach 1.73 billion users by the end of 201313 –
about a quarter of the world’s population. This is obviously a great audience for busi-
nesses to capture, not only as a source of revenue generation but also as a potential pool
for content generation and value co-creation.
● Social networks are active. Their members are not mere observers but active participants
who share experiences about ideas, products/services and people, and who can also
influence other network users.
● Social networks are a clearing house of information. Social media users post opinions
about their experiences with brands and their likes and dislikes. They also post personal
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opinions and unedited comments that can have a stronger influence on other people’s
purchasing decision than a company’s communication and marketing campaigns.
● Ad spending on social networking is strong. Companies are spending more advertising
resources on online social networks. For instance, in the USA, this spending is about $2
billion and is forecast to reach $8.3 billion by 2015.14 Consequently, if a firm ignores or
disregards the importance of social media for communication and advertising, then its
competitive position may be negatively affected. (See FT article: ‘Facebook shows off
new marketing tools’.)
● Social networks are unique. Some of them (such as Facebook and LinkedIn) have become
part of the daily lives of a large number of people all over the world.
● Social networks are varied and provide access to potentially large target segments. The vari-
ety of interest groups that can be found on social networks is very large and in constant
growth – e.g. academic and research topics, books, music, photography, religions and
many more.15 For a company, it is very useful to easily identify and access particular
groups of individuals who match a certain target profile. Also, considering the level of
knowledge and engagement these groups have with their topics of interest, companies
can greatly benefit when interacting with groups whose interests are close to their busi-
ness offers and activities.
● Social networks are effective because they consist of consumer-to-consumer content. As
already mentioned, social network users generate content and disseminate it among
their peers. In this context, word-of-mouth and viral marketing can be very effective.
● Social networks are easy to use. No proprietary technology or special skills are required
to use these networks, thus making them accessible to almost everybody in society.
Notwithstanding, unlike traditional media, firms should manage conversations with
target audiences through social networks with dynamicity, continuity and creativity.
Otherwise, their efforts in the social media will be futile.
11.1.3 Understanding user behaviour on the social web

Two key developments that led to changing user behaviour are: (1) the ease with which
people can share information through conveniently accessible service sites and (2) the
improvements in network infrastructure. The Internet has always been about exchanging
information; however, we are just starting to tap into the vast potential of the web as a com-
munication platform. Exhibit 11.5 highlights the interaction processes that underpin social
networking sites.
Since the most recent applications usually contain a social component that lets users
generate and share content and thereby engage in social interactions, it is important to look
at what motivates people to interact with each other on the web. There are essentially three
main motives: (1) finding valuable peers (discovery); (2) associating with valuable peers
(homogeneity); and (3) imparting information (sharing).
● Finding valuable peers (discovery). One of the basic motives for getting to know people
is curiosity and an interest in discovering new things (learning). People like to explore
and have an innate interest in communication, either in order to solve problems or for
the sake of conversation. In return they expect entertainment in the form of casual or ran-
dom conversations or problem solving through target-orientated discussions. SNS such
as Xing, previously called openBC, provide sophisticated search tools that allow users to
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Facebook shows off new marketing tools

Facebook pitched a series of new marketing tools then keep a percentage of the sale, are earning
to advertisers on Wednesday, including mobile healthy revenues for themselves at the same time as
advertisements and more sophisticated Facebook they feed traffic and ad dollars to Facebook.
pages for businesses, as it attempts to increase its
“Other people are making a tonne of money on the
appeal to marketers before its launch as a public
back of Facebook,” said Rebecca Lieb, an analyst
company in the coming months.
with the Altimeter Group. “I’m sure it’s a billion-
The social network’s first big event for advertisers, dollar industry, if not more.”
held in New York, will generate new business not
Reggie Bradford, chief executive of Vitrue, said the
only for itself but also for the range of third-party
social network’s new offerings would increase his
advertising and marketing intermediaries that have
register of new clients and boost his contracts with
been quietly building a marketing infrastructure for
existing clients.
the social web.
“The complexity is hard for marketers to get their
“It’s not us, it’s we,” said Sheryl Sandberg, Facebook’s
arms around,” he said. “We’re seeing a really strong
chief operating officer, addressing a room full of
uptick in adoption and growth.”
executives from these companies. “If we’re going
to make marketing truly social, it won’t be us, it’s Investors and bankers are increasingly beguiled by
going to be you.” the rapidly growing revenues at these companies
and the business models that promise regular
These companies, unlike the gaming or music
income via monthly subscription fees.
companies integrated with the social network, are
unknown to Facebook users but play a big role in Mr Reback said many of these companies had grown
how the site makes money. more than 100 per cent in each of the last few years
and showed promise of sustaining 30 to 50 per cent
“This isn’t like Zynga,” said Brad Reback, managing
revenue growth for the next three to five years.
director at Oppenheimer, the investment boutique.
“You don’t know who’s powering the Coca Cola “Couple that with the size of the Facebook platform
Facebook page or the McDonald’s Facebook page, and this idea that buyers of the product are moving
and you don’t really care.” from the experimental stage to the truly operational,
and it will be an integral part of everyday marketing
The more Facebook introduces new ad products,
programmes,” he said.
the more complicated it gets for big companies such
as Coke and McDonald’s to manage the hundreds Hoping to ride the growth, venture capitalists and
of Facebook pages they have, in multiple countries bankers have made a string of new multimillion-
and multiple languages, or target and deliver the dollar investments in start-ups in this field recently,
millions of dollars-worth of Facebook ads they buy. with others being eyed for their own potential
initial public offerings.
With Wednesday’s announcement, consumer
companies had to worry about reshaping their Goldman Sachs has called the chief executives at both
Facebook page to fit the new timeline design, which Vitrue and TBG Digital in recent weeks, the companies
gave companies a “launch pad” to tell their “stories”, said. The bank has been vigorous in contacting
said Mike Hoefflinger, Facebook’s director of global companies in this field as it attempts to position itself
business marketing. Then they had to work out how more prominently with technology companies, after
to take advantage of the various paid distribution landing in the number two underwriter spot behind
channels on the site to spread those “stories,” from Morgan Stanley on some of the hottest tech IPO
the traditional ads column on the right-hand side of filings – most recently Facebook.
a user’s page to the user’s mobile NewsFeed. “It’s no a secret that Goldman Sachs is the next
Groups such as Vitrue and Buddy Media, which prettiest girl,” said Tony Zingale, chief executive of
license page management software to companies for Jive, a social networking tool for businesses that just
a monthly fee, as well as TBG Digital and Brighter went public in December. “Everyone starts calling
Option, which buy social ads for the companies, on you as your company becomes more successful.”
Source: Dembosky, A. (2012) Facebook shows off new marketing tools, Financial Times, 29 February.
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Exhibit 11.5 Social networking sites help users to pursue their motives of discovery, homogene-
ity and sharing by providing various communication tools
Social networking site
A Peers B
Matching
Person A Peers Peers Person B
Profile Profile
• Contact data Peers Peers • Contact data

• Multimedia • Multimedia
• Personal Instant Boards/ Private • Personal
network Chats VoIP network
messaging groups messages
• … • …
Communication tools
find other peers who have the information required to solve a specific problem. Users’
satisfaction with a platform is directly linked to (1) the ease with which they can browse
through a social network of friends and (2) the accuracy of the search results when they
look for individuals with certain characteristics.
● Associating with valuable peers (homogeneity). The motivation to have like-minded
people around oneself is as natural as exploring one’s personal environment. Just
like gregarious animals in nature, people like to surround themselves with peers with
whom they share personal beliefs, values or attitudes. Furthermore, for most people,
conformity increases security and identity. One fundamental aspect of SNS is therefore
the possibility to connect with like-minded individuals, since users provide information
about their preferences, tastes and interests in their personal profile that can be viewed
by others. In addition, communication tools such as instant messaging functions, online
chats or private email, provided by some web services, facilitate users’ information
exchanges according to their individual preferences.
● Imparting information (sharing). People enjoy communicating and sharing what
they have learned from their peers. Peers can be relatives, friends, colleagues, mere
acquaintances, experts or social contacts of any other kind. While every individual has
a certain personality recognised by others, some like to try to control the impression(s)
other people form of them. This impression management is closely related to
self-presentation, where a person tries to influence the perception of his/her image.
Self-portrayal and, in more extreme cases, craving for recognition are some of the
underlying motives for people to make themselves stand out from the masses and per-
sonally express themselves. SNS let people articulate their personality. Depending on
the context and focus of the SNS platform, individual profiles contain various data and
diverse information and let the individual build a reputation. Furthermore, this leads
to opportunities to signal one’s competence or interests to others who are in the stage
of discovering people. For instance, on media-sharing platforms (such as YouTube),
where users can upload and promote their videos, users can present themselves with
the content they have created.
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11.2 The trade-off between richness and reach
As mentioned above, SNS operators can help fuel an individual’s communication needs
and goals by providing the user with access to diverse information (discovery), like-
minded people (homogeneity) and the possibility to provide information themselves
(sharing).
Below, we discuss how companies can address a large number of users and provide them
with rich means of communication at the same time – a trade-off that has been consider-
ably weakened by the changes of the Internet leading to Web 2.0. The trade-off between
richness and reach focuses on the constraints that companies traditionally have faced
when interacting with existing or prospective customers.16 In this context, reach refers to
the number of people exchanging information. Richness is defined by the following three
dimensions:
● Bandwidth. This dimension refers to the amount of information that can be moved
from sender to receiver in a given time: email requires only narrow bandwidth, while
music and video require broad bandwidth. On a different level, face-to-face interaction
provides a broad bandwidth. This offers an information exchange that goes beyond the
content level by also including facial expressions, gestures and tone of voice. The tel-
ephone, on the other hand, is much more limited in its bandwidth since it cuts out the
visual aspects of interaction; email is even more limited since it also excludes the voice
component of the interaction.
● Customisation. This dimension refers to the ability to address the needs and preferences
of individual customers. For instance, a bank employee at a branch office can provide a
much higher degree of customised service than a mass-mail advertisement.
● Interactivity. This dimension refers to the possibility of having bidirectional communi-
cation. Traditional one-way TV broadcasting has a very low level of interactivity. The
Internet, on the other hand, is very interactive, since it allows for an almost instantane-
ous bidirectional exchange of information (see Exhibit 11.6).
Let us now turn to the historic trade-off between richness and reach. Traditionally, the com-
munication of rich information required proximity to customers and also channels suited
for transmitting such information. For instance, rich information exchange takes place in a
bank’s branch office, where customers talk in person to the bank agent.
However, reaching a large number of customers used to come at the expense of rich-
ness, which was due to the limited bandwidth of most mass-media devices. This resulted
in little customisation and a lack of interactivity, as is the case, for example, with a TV
advertisement. To achieve reach and richness at the same time used to require substantial
investments in physical infrastructure and sales force. In other words, scale economies
were very limited when a firm wanted to expand its customer base – that is, expand reach –
while still maintaining a high level of richness. Proof of this is the extensive branch
network of universal banks through which banks can reach a large number of customers
while serving each one of them individually. As the number of customers goes up, so do
the costs.
The main argument of the richness and reach framework is that two important drivers
have blown up this trade-off between richness and reach. These drivers are: (1) the increase
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Exhibit 11.6 The advanced capabilities of the Internet help to dissolve the trade-off between
richness and reach
Richness
• Bandwidth
• Customisation
• Interactivity The Internet
Sales- Tele Postal TV Reach

person marketing mailing advertising • Number of
people
interacting
Source: Reprinted by permission of Harvard Business school press. From Blown to Bits by p. evans and t. Wurster, Boston, Ma,
1999, p. 24.
in connectivity made possible by the Internet and (2) the development of common standards
such as TCP/IP, HTML and XML. Connectivity and open standards have allowed firms to
reach out to a larger number of customers, while at the same time ensuring a high degree
of richness.
Does this concept stand up to reality? In many cases it does. A global auction place such
as eBay would not have been possible in the pre-Internet days. Then, people could sell
their used lawnmowers and stamp collections at a local garage sale. They had very high
levels of richness, where buyers could actually touch and try out the product, yet reach
was very limited since, typically, it did not extend beyond the immediate neighbourhood
of the seller.
eBay has created a much more liquid market by connecting buyers and sellers across
cities and countries, enabling them to share rich information about products as well as
the reputation of buyers and sellers. Similarly, the Zshops at Amazon.com, where cus-
tomers and other booksellers can sell their used books, also provide a high level of reach
and richness. For setting up these business models, traditional assets such as a large
sales force or an extensive physical branch network (which allowed for richness in the
traditional bricks-and-mortar world) would have been more of a liability than an asset.
In the case of digital products or services, the concept of reach and richness becomes
especially viable.
SNS allow their members to manage more contacts more efficiently than is possible
offline, therefore they increase their personal contact reach. In addition, users have more
information about their contacts or potential contacts due to visible virtual profiles; there-
fore, they also increase personal information richness.
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The limitations to blowing up the trade-off between richness

and reach
due to several reasons, the blow-up of the trade-off between richness and reach has not hap-
pened to the expected extent. on the bandwidth dimension, the Internet cannot replicate the
richness of face-to-face contacts, which can only be achieved in the physical world.
dell, the struggling computer maker, recently outlined plans to reverse two decades of
reliance on direct sales by broadening its business model to include third-party vendors
and retailers. the move to embrace computer resellers, the vendors who design and install
computer systems for clients ranging from hedge funds to hospitals, represents a change in
strategy for a company that built its business on direct sales of computers to customers over
the telephone and through its website.
dell had previously hinted that it was examining ways to broaden its retail presence, which so
far consists of a single experimental store and more than 100 smaller kiosks. Michael dell, chief
executive, said in an interview, published in CRn (a trade magazine focused on resellers): ‘there
are certainly folks out there who don’t want to buy direct. so now those customers will have a
chance to have dell product as well.’ He said the company intended to build on its relationships
with resellers and retail partners ‘not only here in the Us, but around the world’.
While other computer makers – including IBM and Hewlett-packard – have long relied on
resellers and retailers for a substantial chunk of their annual sales, dell has shunned such indirect
relationships, arguing that direct contact with the customer is the best way to streamline costs
and respond to changing demand. although the company has links with some third-party ven-
dors, it said it had never before viewed the channel as a significant business. Mr dell indicated
that would change. ‘there is great interest here,’ he told CRn. ‘We’re going to ramp it up quickly.’
dell declined to comment on any other retail plans. It has traditionally avoided selling
computers through retailers, because it allows the company to avoid carrying costly inventory.
shares of dell rose 3.3% on Wednesday to $25.49. they had fallen from a high of $41.29 in
august 2005, before the company’s stumbles began. the rise came in spite of news that andrew
Cuomo, new York’s attorney general, had sued the computer maker, alleging that its sales
practices had deceived customers. dell said it intended to fight the suit.
Last year, a series of stumbles led dell, which was founded by Mr dell in his University of
texas dorm room more than 20 years ago, to lose its place at the top of the pC market to Hp.
this year, Mr dell returned to the chief executive role, replacing Kevin Rollins, in an effort to
put the company back on track.
Source: allison, K. (2007) dell to broaden sales model, FT.com, 16 May 2007.
© the Financial times Limited 2012. all rights reserved.
11.3 Increasing the richness of interactions with customers
In Section 11.2, we identified bandwidth, customisability and interaction as the main

drivers for richness of interaction with users. We now focus on how a company can lever-
age these drivers in order to foster the richness of interactions with customers. In the fol-
lowing sections, we look at two possible ways of enhancing such richness: (1) customer
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relationship management supported with IT-based tools (this implies a typical e-CRM, but
also a CRM based on Web 2.0 applications, or social CRM); and (2) mass-customisation,
which entails the tailoring of products and services to specific customer requirements.
11.3.1 Customer relationship management (CRM) in a digital context

e-Customer relationship management (e-CRM)
e-CRM refers to the use of the Internet and IT applications to manage customer relation-
ships. As the Internet has permeated all the activities of a company’s value chain, e-CRM has
also become more important. Specifically, it aims at:
● Creating a long-term relationship with customers to offset their acquisition costs.
● Reducing the rate of customer defections.
● Increasing the ‘share of wallet’ through cross-selling and up-selling.
● Increasing the profitability of low-profit customers.
● Focusing on high-value customers.
e-CRM comprises the following four main elements (see Exhibit 11.7): (1) customer selec-
tion, (2) customer acquisition, (3) customer retention and (4) customer extension.
● Customer selection refers to customer segment targeting, which was discussed in detail in
Section 3.4.
● Customer acquisition includes promotions and other incentives to (1) acquire new custom-
ers and (2) entice existing customers to use the company’s Internet-based offering. In order
to engage a customer in a relationship through the online channel, a firm needs to have at
least the customer’s email address. More detailed customer profiles include information
such as a customer’s personal interests, age, financial status and role in the purchasing
process. To acquire this more detailed information, it is usually necessary to offer customers
Exhibit 11.7 Customer relationship management consists of four elements
‘What criteria determine ‘How can we acquire this

who will be our most customer in the most
profitable customer?’ efficient and effective way?’
1 2
Customer Customer
selection acquisition
Customer relationship
management cycle
4 3
Customer Customer
extension retention
‘How can we increase the ‘How can we keep this
loyalty and the profitability customer for as long
of this customer?’ as possible?’
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an incentive, e.g. a gift certificate or a free product sample. e-Commerce companies use a
number of different tools to get the attention of potential customers. Initially, this was done
primarily through banner advertising. More recently, marketers have added more sophisti-
cated tools such as ‘viral marketing’, where customers forward a website address or other
types of company information to each other via email or SMS. Another effective way of
acquiring customers is link building, which Amazon.com does in partnership with affiliate
sites that refer to the Amazon.com site. For instance, the alumni club of the Leipzig Graduate
School of Management in Germany maintains an affiliate relationship with Amazon.de. As
part of this agreement, the alumni club’s homepage hosts a link to the Amazon.de website
and receives a 5% commission on all sales that take place through this link.
● Customer retention aims at (1) turning one-time customers into repeat-purchase customers
and (2) keeping customers for as long as possible in the online channel. Customer retention
is achieved primarily through two features: personalisation and communities. The person-
alisation of a website designed to meet specific customer needs helps to create ‘stickiness’.
If customers want to change their online provider, then they will incur switching costs.
Strong online communities with many different users help to create network effects. Both
personalisation and online communities entice users to stay with a specific website.
● Customer extension focuses on maximising the lifetime value of a customer. Companies
achieve this primarily by expanding the scope of an existing customer relationship through
cross-selling. Nordea, for instance, is turning towards triggered data mining to cross-sell
additional financial products to existing customers. Triggered data mining works as fol-
lows: when there is a change in a customer account – for instance, a large incoming money
transfer, an address change or a marital status change – a trigger in the database is set off
and informs the bank about this change. This, in turn, raises the following question: what
does this change mean for financing, long-term payments, insurance and e-services?
Towards the social CRM
To effectively manage customer relationships, CRM should be designed by leveraging
multiple communication channels, whether they are electronic or not. While the previous
section provided a description of traditional e-CRM, this section focuses on the social CRM,
which is an extension of the initial concept offering bidirectional exchanges and collabora-
tion with customers, as presented in Exhibit 11.1. Through Web 2.0 technology, customers
become co-creators of value and the new emphasis is on developing a customer–supplier
relationship through interaction and dialogue.17
To leverage social CRM capabilities for business competitiveness, companies should
consider using the following MASTER approach, recently proposed by Acker et al.18 and
comprising the following six actions:
● Monitor. Target audiences that continuously generate data, content, etc., and gather useful
information about them.
● Assess and analyse. Analyse the data collected in the previous stage and identify potential
threats and opportunities in social customers, which could be addressed by social CRM.
● Strategise and structure. Design and develop specific actions that target customer com-
munities and create value for them. This can be called the platform mix of social or Web
2.0 applications (see the FT article: ‘Social CRM mirrors rise in customer power’).
● Test. Before implementing the social CRM plan, run a small-scale test in order to fine-
tune the solution.
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● Embed. Once social CRM activities are established, it is important to determine their
related organisational processes and people’s roles, responsibilities and incentives.
● Review. In view of the dynamic business environment surrounding the social web, regu-
larly review the CRM activities and decide on future actions.
To effectively embed social CRM in the corporate structure, specific actions should be taken
at the following three levels: (1) Business functions: product innovation, social marketing
and public relations, social sales, social service; (2) Organisational structure: people and
skills, culture; and (3) Technology platforms: tools and systems, integration. These actions
should be considered at the initial stage of rolling out social CRM and at the mature stage
(see Exhibit 11.8).
Exhibit 11.8 Embedding social CRM into companies
SOCIAL CRM Initial Stage Mature Stage
Business Functions
- Develop product insights from external social - Crowdsource research and development to accelerate
Product Innovation networks, leveraging the service as well as marketing product to market and improve the change of product
insights adoption
- Develop marketing insights from external social - In near real time, monitor chatter on social networks,
Social Marketing & networks including overall sentiment monitoring
- Create one main blog, usually by the CEO’s office or - Manage the organization’s events
Public Relations other upper management - Promote corss-department blogging and social customer
interactions
- Develop sales insights from external social networks - Develop leads and sales opportunities from social
- Provide social customers with product information communities
Social Sales through social media - Use peer-to-peer lead generation through social
- Develop internal networks to collaborate on sales recommendations, referrals, and customer testimonials
opportunities and leads
- Develop service insights from external social networks - Develop rapid service response to issues raised on social
- Develop internal networks to collaborate on the networks by proactive monitoring and establishing in-
Social Service response to customer issues and service requests house social support structure
- Harness the collective expertise of customers to develop a
peer-to-peer social service
Organizational Structures
- Create isolated social programs typically focused on - Dedicate a team, decentralized or centralized based on
one department company size, to coordinate social CRM programs across
- Leverage select existing employees to interact with all departments
People & Skills customers on social networks - Develop internal specialized skills to write, develop, and
publish social media content such as blogs, podcasts, and
multimedia
- Encourage employees to view social CRM program - Integrate social CRM into the business with a clear
as a positive new experiment mission, ROI, and KPIs
Culture - Harness an active and empowered change management
program to help customer-centricity, collaboration, and
transparency pervade the company’s culture
Technology Platforms
- Leverage public and mostly free social media - Invest in social CRM platforms that are becoming
Tools & Systems platforms available on the Web with no or minimal increasingly available in the market with specialization in
investment in hardware or software social sales, social service, or social marketing
- Do not have to integrate program with in-house - Integrate the social CRM platforms with operational
Integration platforms such as CRM or business intelligence platforms
Source: o. acker et al., ‘social CRM: how companies can link into the social web of consumers’, Journal of Direct, Data and Digital Marketing
Practice, 2011, vol. 13, p. 9.
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Social CRM mirrors rise in customer power

As their customers embrace social media tools like consultancy, and called “The Future of Customer
Facebook and Twitter, companies are rushing to Service, The Rise of the Social Customer”, argues
embrace social customer relationship management that last year was significant because social media
(CRM). finally entered the mainstream.
But Natalie Cowen, head of brand and “2011 arguably marked a tipping point, as the
communications for First Direct, the UK-based combined weight of customer expectations and
HSBC banking subsidiary, warns that while there technological innovation pushes industries and
are “real benefits of moving towards the social institutions into a new era of social power,” says
enterprise, in terms of reducing costs, strengthening Mr Currah, a technology and strategy consultant
customer loyalty and raising positive brand and former Oxford university lecturer.
awareness”, companies should avoid “any hasty
The report notes that over 44 per cent of adults now
investment in specialist tools before the social
use the web to share grievances about products, with
dynamics of the company’s customer interactions
customers expecting to interact with companies
are fully understood”.
online and get a speedy response.
Ms Cowen, writing the executive summary
“The scale of participation in social media has
to a report commissioned by First Direct and
pushed industries and institutions into a new era of
published on Tuesday, argues that companies
social power,” Mr Currah argues. “With 800m users
“need to understand the operational and
worldwide, Facebook is leading the transition to
staffing requirements of social CRM technology
greater openness and transparency.”
before retooling their existing customer service
infrastructure”. “The rise of the social customer demands that
companies evolve into a fully fledged ‘social
“The social customer has given rise to the social
enterprise’ that prizes openness and thrives
company, one that listens to its customers in
on collaboration,” says Mr Currah. “The social
real-time and asks them to collaborate in future
enterprise will need to listen and engage across a
developments,” says Ms Cowen. “In turn, this
range of media – telephone, email, mobile and web.”
has led to the emergence of hosted community
platforms, through which companies are able To succeed, companies will increasingly need to
to harness the support of their most loyal and attract, engage and delight a new generation of
passionate customers.” “social customers” who have grown accustomed to
the simplicity and speed of conversing and sharing
At First Direct, Ms Cowen notes: “We started to
on the modern web, says the report.
recognise some time ago that the tide was turning
and a customer service revolution was taking place “The identity and success of companies will
this time in social media. Our early response was increasingly depend on their ability to participate in
to introduce ‘Talking Point’, and become the first this new sharing economy,” argues Mr Currah. “To
bank to give customers their chance to say, live and attract and engage the social customer, companies
unedited, how they felt about the bank.” will need to think, operate and communicate as
a fully fledged social enterprise. The hallmark of
Since then, the bank has introduced firstdirect
the social enterprise is its customer centricity; the
Lab, where crowd sourcing enables customers and
creation and dissemination of information is driven
prospects to raft and tweak the bank’s products
by the pursuit of customer satisfaction. The social
and services, and most recently it launched
enterprise places the social customer at the very
firstdirecthelp@twitter.
heart of its day-to-day operations.”
“Whilst it has been a long and often difficult
The report describes the cultural, functional and
journey to get to where we are, it’s fantastic to see
technical changes that are required to build the social
the personality of firstdirect and the essence of our
enterprise, starting with support at the highest level:
service success coming to life in the digital space,”
“Executive leaders should stop treating social media
Ms Cowen says.
as a passing fad and recognise the enhanced customer
The new report, written by Andrew Currah on service and satisfaction it delivers and potential cost
behalf of First Direct and ItsOpen, a UK-based media savings it can bring, as customers themselves take ➨
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on activities previously carried out by the customer Companies that have opened up fully to social
service and marketing functions,” says Ms Cowen. media have made customer data available to all
relevant internal agents – making the resolution
Company executives are urged to “make themselves
of customer enquiries less labour intensive and
more visible, especially when public crises occur,
increasing opportunities for cross selling.
provide all employees with the training, tools and
authority to engage with customers and to look By fostering their own online communities,
beyond standard metrics to the value of brand companies are able to encourage their customers to
loyalty, advocacy and a sense of community”. resolve each other’s queries – eventually allowing
the forward thinking company to reduce its own
Among its conclusions, the report acknowledges the
customer service presence.
importance of CRM software as a means to harness
the collective knowledge within the company and Mr Currah notes that even in heavily regulated
thereby provide a means to tap into a powerful sectors such as financial services, the concept of
analytics and monitoring platform without the need the social enterprise is taking root. For example
for a significant capital investment and describes in the UK, HSBC recently launched an online
how some companies are building online support newsroom that is envisioned as a centre for
communities with the participation of their most customer engagement. Integrating Facebook and
loyal customers. Twitter, as well as blog posts across the company,
the newsroom will outline the company’s position
“Social CRM technologies enable employees at every
on key issues and actively seek the engagement of
level to play a more active role in customer service,
customers.
both indirectly through internal collaboration and
problem solving, and directly through a multi- Similarly, in a recent change of policy, the UK’s
channel service hub,” says Mr Currah. Financial Ombudsman Service announced plans
to significantly expand the use of social media in
“When social media permeates an organisation and
the resolution of disputes between customers and
moves beyond the ‘silos’ that many companies put
financial service providers.
it in, it allows the social company to deliver high-
quality customer service and compelling products But despite this momentum, both Ms Cowen and
based on the insights its customers provide. Simply Mr Currah say it is important to recognise a number
leaving social media to the PR or marketing of caveats. In particular, they point out that the
department will never allow a company to engage technology behind the social enterprise is still
in online customer conversations, react to issues extremely young and that companies need to fully
and eventually turn customer relations channels understand the online social dynamics of their
into revenue earners in the way that the pioneer respective customers before committing to any
social companies already do. investment in social CRM.
“Zappos, O2, Tesco and First Direct are blazing Mr Currah suggests companies should conduct
a trail. They are companies that understand the “a wide ranging audit of their customer base to
shift that social media has brought about and identify in which parts of the ‘conversation prism’
have redesigned their corporate structures to allow they need to establish a presence, and what types
their customers to interact and engage through the of engagement would be appropriate in the context
channels that suit them.” of the wider market and regulatory obligations”.
Importantly, the report highlights the ways that As one survey respondent told the author: “No
newly social companies are reaping financial matter how sophisticated, [social] CRM technology
benefits. Customers who are “served” online are far is only as effective as the people that man the
less likely to make use of expensive telephone-based frontline of customer service.”
customer service channels.
Source: Taylor, P. (2012) Social CRM mirrors rise in customer power, FT.com, 31 January.
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Exhibit 11.9 The mass-customisation value chain puts the user in charge of many steps traditionally performed
by the company
Firm infrastructure
Support activities
Research & development
Information & communication technology
Order-
Elicitation of Order-
specific
customer specific Customer
inbound Order-
preferences construction Order- service/
logistics specific
specific building a
General outbound
Marketing/ Order- operations learning
purpose logistics
sales neutral relationship
inbound
forecast pre-operations
logistics
Primary activities
Order-neutral Order-specific
Source: adapted from F. piller, Mass-Customisation, Gabler, 2006, p. 175.
11.3.2 The concept of mass-customisation

The concept of mass-customisation acts counter-intuitively to the large wave of standardi-
sation and exploitation of economies of scale, which originated from industry economics.
The amount of customisation in a given product or service is an important determinant driv-
ing the richness of interaction between a company and its customers. However, in the past,
customisation was rather expensive and customers had to pay a significant price premium –
for instance, for the customised interior of their apartment or car. Exhibit 11.9 illustrates
how mass-customisation includes almost all primary activities of the value chain.
If a company wants to pursue a mass-customisation approach, it first needs to elicit the
customer’s preferences, which form the basis for the individual construction of the product.
Frequently, the procurement of customisation-relevant parts only takes place once the
preferences’ elicitation has been completed. The most prominent example of a mass-
customisation company is Dell, which lets customers specify exactly which parts should be
included in their PC. Tesco.com also leverages customer data to tailor the product list to a
customer’s needs, e.g. by recommending special offers on a one-to-one basis.
From a strategic perspective, mass-customisation opens up the opportunity to pursue an
outpacing strategy (see Section 5.2.3) that combines low prices with superior performance.
A mass-customisation company does not have to opt for one of the two directions of com-
petitive advantage, but can simultaneously pursue the two generic strategies using IT and
the vast possibilities of user-generated content. On the one hand, mass-customised products
are, by definition, highly differentiated, since they are based on each buyer’s specifications.
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For instance, ‘NikeiD’ by Nike19 allows designing highly differentiated products to consumers
by letting them choose and combine different materials, textures and colours for a sneaker
or trainer, which is then manufactured and delivered to them. On the other hand, due to
efficiency advantages of customer-pulled production, which results in lower business risk and
smaller stock levels, mass-customised products are also competitive on the price dimension.
Mass-customisation options can generally be divided into two different approaches. First,
the soft-customisation approach involves only activities that take place after manufacturing.
One example of soft-customisation is to provide customers with the possibility to customise
products themselves after their purchase. For instance, when users configure the set-up of their
Microsoft Office software, they essentially customise it to meet their specific needs. The main
drawback of this approach is that, in order to allow multiple customisation options, the product
must have a certain built-in flexibility, which typically results in a relatively high product com-
plexity as well as high development and production costs. Yet the limited overall variety opens
up opportunities for standardisation, which in turn leads to economies of scale. From the cus-
tomer’s viewpoint, this mass-customisation concept is suitable if customisation needs changing
often during product use, which, for instance, is the case with many software applications.
In addition to soft-customisation, we also recognise the hard-customisation approach,
which entails a customised manufacturing process. The starting point of this approach is
the splitting of the production process into a customer-specific part, which is performed in
direct interaction with the buyer, and an order-neutral part. For efficiency reasons, the lat-
ter should outweigh the former so that economies of scale can be achieved. Nike’s NikeiD is
an example of a hard-customisation approach that takes place at the beginning of the manu-
facturing process. Another example is Mykea,20 a small, new Amsterdam-based company
whose core business is customising many Ikea products. Basically, it offers original and
creative stickers, especially designed to cover the visible parts of Ikea furniture. Consumers
can select among a wide variety of designs and colours, and place the order online. Designs
can be easily attached to the surface of the furniture and consumers receive their items in a
transport-tube with instructions.
As information technologies are increasingly ubiquitous, consumption and production
are becoming inseparable,21 thus making consumers more and more involved in the value
creation process. Web 2.0 has therefore enabled collective consumer creativity and produc-
tion, or crowdsourcing, as it is called.
11.4 Increasing the reach of interactions with customers
SNS can greatly increase the richness of users’ interactions. One crucial prerequisite for
creating richness is the ability of an Internet service to attract a critical mass of users. SNS
can only work if there are enough people registered on them that users can actually build
up a personal contacts’ network of a sufficient scale.
More generally, any e-commerce venture that wants to leverage the power of user-
generated content needs to devise a growth strategy that allows it to reach a critical mass of
buyers or members, as is the case for SNS. (See the FT article: ‘Lights, camera, blender! How
to create a hit’.) In the following section, we first explore how growth can be fostered by
tapping into the power of network effects, which could lead to a ‘viral growth’, then explain
the concept of the ‘tipping point’, and finally investigate the applicability of the ‘long tail’
concept to SNS.
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Lights, camera, blender! How to create a hit

Food blenders do not make the sexiest marketing “the your man could smell like” character, who
material. But Blendtec found a way round that by spoke to potential customers in 2010, half-naked,
having its chief executive, Tom Dickson, drop an from a beachside shower: “Hello ladies. How are
iPhone into its home blender, push the smoothie you? Fantastic. Does your man look like me? No.
button, and grind it to a black dust. Can he smell like me? Yes. Should he use Old Spice
body wash?”
“I’m going to put this on Ebay,” he tells the camera,
holding up a cocktail glass full of smoking iPhone Two weeks after that commercial aired, the
dust and flashing an earnest smile. company’s advertising team at Wieden+Kennedy
pushed social media to a new level, when it took
The video was viewed 10.5m times on YouTube. To
questions from fans on Facebook and Twitter, then
date, Blendtec has made 130 Will it Blend? videos,
wrote, produced, and posted video spots online of
featuring the destruction of lightbulbs, golf balls,
their Old Spice guy answering them, in less than 10
even a Nike running shoe. Almost all have gone viral.
minutes each. Many thousands wrote in.
Since the company started the “meme” in 2006,
Sales of Old Spice body wash doubled after the
sales of its retail blender have shot up almost 800
social campaign, compared with the same time
per cent, says Kels Goodman, Blendtec’s video
period the year before, the company said.
producer. “It was entertainment, not selling,” he
says. “That’s why people loved it.” “It was so far off the chart compared with what we
had dreamt about,” says Mike Norton of Old Spice.
These days, practically every marketer is salivating
“Also, you get this instant feedback and sentiment
for a similar internet sensation. With the extensive
analysis from people who put their trust in the
reach of Facebook and Twitter, and the speed of
brand and want to be part of it.”
sharing that comes with them, a short video can be
distributed at almost no cost on the web, usually “It’s almost unfair to own what we did – it’s so
with the recommendation of a trusted friend behind basic,” says Jason Bagley, a creative director with
it. The value to companies over the anonymous, Wieden. But the experience confirms to him: “Social
multimillion dollar placement on television is huge. media campaigns are going to exist for a long time.”
But coming up with a video that taps into the In some cases, companies have come up with such
cultural zeitgeist is an elusive task. successful “memes” that they build a secondary
marketing business around it.
“Everyone wants every campaign to be viral, just
like everybody wants every movie to be a hit,” says Just three months into the Will it Blend? series,
Rebecca Lieb, an analyst with the Altimeter Group. Blendtec started receiving calls from other companies,
“But it’s not something you can plan for. There’s no including Ford and Google, begging them to destroy
formula for saying ‘this will strike a chord and get their product in the blender. Blendtec charged
millions of views’.” anywhere from $5,000 to $35,000 for each video, with
the price going up if the company wanted the video
There are some key elements to a viral video, she
posted to Blendtec’s unique YouTube channel.
says, such as being very funny, very topical, or
using cutting-edge technology, like Burger King’s But this made Mr Goodman wary, as the more
online “subservient chicken”. promotional videos were posted, the more he felt it
hurt the entertainment value of the series.
Building on a television commercial, the 2004 online
campaign featured a man dressed in a chicken suit Ms Lieb confirms there is a balancing act marketers
with a garter belt and stockings who performed must perform. “The most viral campaign is the
whatever action a user typed into a dialogue box on least branded,” she says. “People don’t pass on
the screen, from touching its toes to doing Michael commercials. They pass along jokes and stories,
Jackson’s moonwalk. The gimmick promoted the things that really resonate with them, not ‘30 days
chain’s fried chicken sandwich and “Have it your to whiter teeth and fresher breath’.”
way” campaign slogan.
“That has led to a wave of homemade videos starring
More recently, Old Spice has had raging success ordinary people that are in fact company backed ads
online, finding multiple ways to exploit its iconic made by professional producers and paid actors.” ➨
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But there are two dangers here as well. One is women bought a Blendtec Total Blender, saying
that people may never connect the ad with the their sons saw it on YouTube.
brand, laughing and talking about a funny beer
As always, with a hit, there is pressure to produce
commercial, but not remembering what brand it
another: this puts makers of accidental successes in
was for.
a tough spot.
The other danger is not reaching the right audience
“The good days of Will it Blend? were when we were
for the product. Blendtec’s videos were hugely
just fooling around,” Mr Goodman says. “Once you
popular with young boys who enjoyed watching
have to start concentrating, once you start putting
things crash and explode – not the demographic
dollar signs and a timeframe to creativity, it’s really
that buys $400 blenders. But over time, middle-aged
hard.”
Source: Dembosky, A. (2012) Lights, camera, blender! How to create a hit, Financial Times, 7 March.
11.4.1 Viral growth

Any business trying to benefit from viral growth needs to offer incentives for users to invite
others to join the service. Incentives can be intrinsic when users know that inviting other
users to the platform will enrich their own experience because they can add them as con-
tacts. When these intrinsic motivations fail, a company has to think about providing appro-
priate incentives for users.
Information (in its broadest sense, including everything from a simple fact to new
products) sometimes spreads epidemically. Like a virus that spreads by infection, infor-
mation spreads through word of mouth. (This is actually where the term viral growth is
derived from.) The mechanism of viral information spread is simple and can be compared
with the tradition of fairy tales or legends, which spread all over the world only through
word of mouth, being retold countless times and passed on from generation to genera-
tion. Transferred to a broader basis, this means that if only 10 people are addressed in the
first generation (at the top of the pyramid), 10,000 people can be reached by the fourth
generation. This huge potential has attracted the interest of marketing researchers: if viral
news spread could be systematically implemented as a marketing vehicle, this would have
major advantages. First, in comparison with traditional marketing campaigns whose effect
gets diluted over time, the effect of viral news spread is self-reinforced with an increasing
degree of distribution, resulting in a sustainable anchoring of information. The reason for
this effect is simple: when moving down the pyramid, the absolute number of people fur-
ther spreading the news gets continuously larger. Second, the expected costs of viral news
spread are low, as no additional costs occur after a certain start-up investment to initiate
the news spread (seeding). This is possible because consumers act as a medium to spread
the news, once it is seeded.
Viral marketing thus aims to find a way of using epidemical news spread as a marketing
tool, making it measurable and repeatable. The goal is to create a viral marketing campaign
as a planned initiative, where advertisers develop and spread online marketing messages
(viral agents) that motivate the receiver to become a sender. However, there are some bar-
riers to implementing viral news spread as a marketing tool. These barriers are:
● Lack of control over people. Viral marketing is consumer-driven as opposed to traditional
interruption marketing, which is driven and controlled by the marketer. It is therefore
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unpredictable as to what kind of content people will recommend, when and why.
Furthermore, even if people forward the message, it is uncontrollable what they will add
to it or say about it when doing so.
● Lack of control over content. The content of a viral marketing campaign cannot be pro-
tected from being tampered with or modified by the people passing it on. Once the news
is seeded, there is no way of stopping it from spreading. Thus, the danger of a viral
marketing campaign backfiring at the advertising company must not be underestimated.
Hotmail, for example, included an email footer with a Hotmail advertisement in each
email that was sent over a hotmail account. Recipients forwarding such an email could
easily modify this footer or add some other content, such that the viral campaign would
backfire for the initiating company.
11.4.2 The ‘tipping point’ concept

Malcolm Gladwell’s concept of the ‘tipping point’22 builds on the idea of viral growth. Based
on his observations in different industries and areas of life, Gladwell suggests that news or
products sometimes spread at quite moderate rates and then at some point in time – the tip-
ping point – start to spread epidemically. In one of the original examples used by Gladwell, he
analysed the increase in sales of fax machines in the 1980s. Around 1986, there was a massive
surge of sales that can be regarded as the tipping point. Tipping points in new technologies
can often be attributed to network (externality) effects (see also Section 7.4.1).23 These effects
also exist in Web 2.0 applications as users benefit from other users joining the platform – for
instance, on business networking sites that can provide a vast network of skilled and special-
ised individuals. Gladwell identified three factors influencing viral spread: (1) the law of the
few, (2) the stickiness factor and (3) the power of context.
The law of the few focuses on the people involved in spreading a message. It suggests
that, when seeding a message, one has to concentrate on three types of people: connectors,
mavens and salesmen.
● Connectors are people with an extraordinary high number of contacts, friends and acquaint-
ances, who ideally belong to ‘different worlds’ – i.e., different areas of life. Gladwell argued
that almost everyone knows people who seem to be connected across social, geographic
or organisational boundaries, and who have a very diverse circle of friends and acquaint-
ances. Lars Hinrichs, for instance, started his social networking site, openBC, with only the
help of his direct network of entrepreneurs and business professionals.
● Mavens are people who have expertise in various products, prices or places. Furthermore,
they enjoy sharing their knowledge with their friends and acquaintances and other users
on Internet platforms. Due to their knowledge and their ability to connect, they also have
the ability to start word-of-mouth epidemics. Numerous online platforms such as ciao.
com, an online product evaluation forum, or trivago.com, a site where users exchange
recommendations about travel destinations, restaurants, etc., leverage mavens to gener-
ate content and create traffic on their website.
● Salesmen are people who have the skills to persuade others who are unconvinced.
Gladwell provided a typical example for this group of people using an extremely
dedicated car dealer. On the Internet, ‘salesmen’ could be a dedicated corporate blogger
such as the openBlog, the company weblog of Xing (formerly openBC).
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The stickiness factor deals with the content of the message that is to be spread. Gladwell
postulated that in order to spread epidemically, the content has to be memorable enough to
create change and move people to the action stage. Gladwell used the compelling example
of the famous television show Sesame Street. By testing the single episodes countless times,
while monitoring the children’s attention, Sesame Street managed to increase its stickiness
to almost hypnotic levels among its young target group. Viral marketing seems to have a
great potential for stickiness, as content spread by peers is more memorable than content
distributed by traditional marketing channels.
The power of context focuses on the conditions and circumstances under which epidem-
ics can occur. It has two implications:
● Outer circumstances have a significant impact on people’s inner states. The immediate
context of behaviour influences people’s convictions and thoughts. Even very small
changes in certain outer circumstances can cause a situation to tip – for example, a small
temperature change triggering a flu epidemic.
● Small sub-movements. In order to create one contagious movement, many small move-
ments have to be created first. In order to magnify the epidemic potential of a message
or idea, groups must be close-knit, as in bigger groups people become strangers to each
other and the group loses its tightness. An analogy could be a fire started by a number of
small fires – maybe a bonfire that got out of control or a cigarette that was thrown away
carelessly. If the small fires make their way through a wood, they can create a huge forest
fire once they come together. This was the case in one of the biggest online viral spreads
in the last years – the ‘Coke/Menthos experiments’.24
11.4.3 The ‘long tail’ of Internet-based social networks

To illustrate the concept of the ‘long tail’,25 Anderson initially compared online music
retailers (such as Rhapsody) with traditional bricks-and-mortar retailers (such as Wal-Mart),
just as we compare Internet-based networking (such as StayFriends.com or Xing) to tradi-
tional ‘flesh-and-blood’ networking.
Wal-Mart distributes, through a large chain of physical stores, the variety of physi-
cal goods it sells. However, it can only offer a predefined selection of products due to
limitations in shelf space as well as the costs of producing (or sourcing), storing and deliver-
ing the goods. Therefore, Wal-Mart and other physical retailers are likely to offer only the
‘hits’ (i.e., in the case of music, the songs and albums that sell best and are most worthwhile
to stock), just as people in the case of networking will only keep in touch with others whom
they consider to be the most ‘valuable’ contacts in one way or another.
In contrast to the above, digital content can be stored, replicated and distributed at much
lower cost. Goods here include media-based products (such as music, photos and videos),
or personal content (such as profiles, online group discussions and personal networks). At
Rhapsody, an online music downloading service, 98% of all products sell, and the fact that
they sell is reason enough for carrying them, especially since shelf space is not as restricted
as it is in the real world. Since digital products can be offered at virtually no additional cost,
it is a viable strategy for online retailers to ‘sell less of more’ – i.e., to offer a large array
of products including those that sell only in small quantities. Due to the fact that digital
products bring no additional costs or complexity, they are worth carrying. These niche
products make up the ‘long tail’, as opposed to the hits that reflect the ‘short head’ offered
by bricks-and-mortar retailers (see Exhibit 11.10).
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Exhibit 11.10 The ‘long tail’ represents a large addition to the product range of traditional retailers
10,000
Songs available
Downloads
at Rhapsody
and Wal-Mart
Songs available
5,000 only at
Rhapsody
0 25,000 50,000 100,000 900,000

Titles, ranked by popularity
Source: adapted from C. anderson, The Long Tail. How Endless Choice is Creating Unlimited Demand, Random House, 2006.
Transferring the ‘long tail’ concept to the realm of Internet-based social networks helps
us to understand more fully the above-mentioned benefits of networking sites. First, via
traditional means of networking, individuals almost exclusively contact people they have
personally known in the past. For the most part, this is the inner social circle of people
that an individual has a strong relationship with, either in business or socially. However,
via traditional networking, people usually do not have easy access to the contacts of
their contacts. Yet in many situations, such as advice seeking or job searches, we do not
benefit so much from the people with whom we have strong social bonds, but we quite
often benefit from people we do not know directly or know only very superficially – our
so-called weak ties.26 By granting access to these weak ties, SNS offer a much larger pool
of potentially interesting contacts than the traditional means of physical networking can
typically provide.
Second, traditional networking allows individuals to stay in touch only with a limited
number of people due to time restrictions. It requires simply too much effort to update
permanently all contact data in a traditional address book or an Excel sheet, since contacts
do not regularly inform the individual about changes in their contact data, such as address,
telephone number, job position or email address. Hence, contact data is not always up to
date and the individual might lose track of these people, even if he/she would, in theory, be
willing to retain the contact. Relationships thus expire over time due to a lack of interaction.
On SNS, however, terminating a relationship requires the user’s active intervention; other-
wise, a contact will be retained in a user’s contact list. Thus, it becomes possible to manage
a constantly growing number of contacts without any additional effort. Actively used SNS
grant users access to valid contact data at all times, with the profiles acting as a de facto
self-actualising address book.
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Exhibit 11.11 The ‘long tail’ of social networking can give users access to previously inaccessible
market niches
Networking frequency Contact pool

accessible via
traditional
networking tools
Additional network
potential of
online networking
Contacts ranked by frequency
Source: adapted from C. anderson, The Long Tail: How Endless Choice is Creating Unlimited Demand, Random House, 2006.
The combination of the above two factors, i.e. the impact of weak ties and the improved
contact management, creates a vast potential for online networking. We call this potential
the ‘long tail’ of social networking (see Exhibit 11.11).
The X-axis depicts the number of a user’s contacts, ranked by networking intensity, while
the networking intensity, depicted on the Y-axis, is a function of the contact frequency and
the amount and type of information that is exchanged between individuals and their contacts.
The ‘long tail’ curve reflects the fact that we tend to have a few people with whom we have
very close relationships (the very top left of the graph), whereas there are a lot of people we
know only superficially and contact only infrequently (on the lower right of the curve).
In addition to facilitating communication between businesses and their customers, the
Internet also facilitates communication between customers who are members of a virtual
online community. For some firms, such as eBay and Xing, the communication that takes
place among members of their online communities is much more important than the com-
munication between the company and its customers.
The ‘short head’ on the left contains those contacts that are easily accessible via traditional
networking. It consists of a limited number of contacts with whom we have frequent associa-
tion. After the ‘short head’, there is a cut-off point beyond which contacts either are inaccessible
via traditional networking or have such a low contact intensity that the connection is not worth-
while maintaining and will therefore get diluted over time. Social networking sites offer the
possibility to get to know more people and stay in touch with them, even if they are contacted
only once a year or even less. SNS grant their users access to these contacts in the ‘long tail’.
Therefore, a cut-off point after the ‘short head’, as with traditional networking, does not exist.
The ‘long tail’ concept has three main implications for companies that want to access and
leverage the ‘long tail’ for their customers:
● Lengthen the tail. By giving people access to a large pool of individuals, SNS lengthen
the tail of potential social contacts. In the same way, other services revolving around
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user-generated content provide their users with access to unique and individual content.
For example, through Second Life technology users even generate virtual content that is
actually traded and sold – for real money.
● Fatten the tail. SNS use a variety of mechanisms to enrich communication between
users and thereby fatten the tail by increasing the frequency of interaction. Personal
messages, guest books, ‘poking’ people virtually on Facebook or ‘Twittering’27 about
the latest news are ways that increase the overall level of communication between
users.
● Drive demand down the tail. This can be achieved by shifting users’ attention to content
that normally is not as easy to find. Amazon.com has done this for quite a while with its
unique recommendation mechanism, but, today, services such as YouTube do the same
thing by constantly providing a given user with similar videos or more ‘favourite’ videos
that match his/her interest.
Lulu aims to wag the Internet ‘long tail’

The Curta calculator, a mechanical adding machine and films – will have the impact on dead trees and
shaped like a coffee grinder, was made redundant in celluloid that Red Hat had on software. ‘I have no
the 1970s when its electronic successor was popularised idea what I’m doing,’ says Mr Young. ‘The guys
by Texas Instruments. Bob Young, who collects the running Google have no idea what they’re going to
antiquated devices, wants to wreak similar havoc in do. We’re making it up as we go along.’
the book publishing industry today. Such chutzpah
Lulu.com, a self-publishing site, and Lulu.tv, a novel
might be dismissed if Mr Young did not have form
way of distributing revenues to film-makers, are the
for successful, disruptive ideas. As co-founder of Red
twin weapons in this. Both rely on the Internet’s
Hat, the open-source software company, Mr Young
‘long tail’ – the term describing its capacity to help
has built a formidable challenger to the dominance of
niche products find an audience and make a profit.
Microsoft by helping rethink the industry’s business
Authors write a description of their book, upload
model, making himself a billionaire in the process.
it, choose a binding, find a cover image and set
Back in the mid-1990s, Red Hat broke with the industry the price. ‘We make you the publisher so you don’t
tradition – in which a tightly knit group of software have to go through Random House and get lots of
developers produced tools that were sold for royalties rejection slips,’ says Mr Young.
– by allowing anybody to contribute to programming
The revolution is not only Internet-driven; it relies
code. With Red Hat, now the biggest distributor of the
on advances in printing technology too. New
landmark open-source operating system known as
professional digital printers can cost as much as
Linux, Mr Young has proved that money can be made
their traditional offset rivals, but there is little or
from providing installation and support.
no additional cost for printing different books. Until
For his next business opportunity, Mr Young decided recently, volume has been essential to profitability;
to ‘solve a social problem’ while also building a new but on a digital printer 1,000 copies of 30 different
company – rather than using the money earned at books costs the same as 30,000 copies of a single book.
Red Hat to make a large purchase. ‘I’m not Rupert
The Lulu top 10 bestseller list is an extraordinary
Murdoch, so I’m not going to throw half a billion
collection ranging from Pay-Per-Click Search Engine
dollars at MySpace or whatever the next MySpace is.
Marketing Handbook at number one, through The
I’m an entrepreneur – so if I can find the next engineer
Didymus Contingency, a super-natural thriller, to
building the next MySpace, I’d be happy to help.’
How to Become an Alpha Male, described as ‘the lazy
There is no guarantee, of course, that his latest man’s way to easy sex and romance with 20 or more
venture, Lulu – a self-publishing outfit for books women a month’. ➨
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Although Lulu was founded on the possibility of YouTube and Google Video. ‘They’re doing a good
exploiting the ‘long tail’, Mr Young still had to job as channels but a less good job in funnelling
learn that traditional marketing could sometimes back money to the creators,’ says Mr Young.
be futile. Near the beginning of the project, which
In contrast to Lulu the publishing vehicle, Lulu.tv
was launched three years ago, Mr Young saw that
is ‘embryonic’, Mr Young admits. Its business model
a serious-looking scientific title had been uploaded
is not as developed as the ‘dead-tree’ side and, while
to Lulu. He contacted the author to ask if he wanted
publishers have been shaken by the digitisation
a big promotional slot on the site. ‘The author said:
of their medium, video has quickly attracted the
“I should warn you that there’s a worldwide market
biggest Internet companies, including Google and
for my book of about 162 people and I know 148 of
traditional giants such as Viacom. Mr Young is not
them”,’ says Mr Young. In traditional publishing, he
alone in seeking profits from the ‘long tail’. But
contends, an academic imprint would have turned
given his record, he stands more chance of finding
down the project or sought a high price from buyers
the right business model than being left with the
for covering the costs of a short print run. ‘At Reed
latter-day equivalent of the Curta calculator.
Elsevier, they would have a price of $1,500 and you
would have sold three,’ says Mr Young. The world of open-source software was once
anathema to US software giants such as Microsoft and
With the self-publishing Internet model, this part of
Oracle. Its emphasis on sharing intellectual property
the ‘long tail’ can find its select band of readers, who
went against the grain of established companies that
pay a modest price – of which 20% goes to Lulu and
spent time and money safeguarding their products’
80% to the author. The motive for self-publishing is
secrets. But Bob Young, who co-founded Red Hat, the
often to pass on specialist skills rather than make a
open-source software company, is no anarchist. His
quick buck. Mr Young says ‘that a scientist-author, for
hero is Adam Smith. ‘If the citizen and the consumer
example, makes money on the project – admittedly not
are the same thing in a free-market economy, the
a lot of money but he makes the world a better place’.
bigger the social problem you can solve, the bigger
About 50 people are making a ‘decent wage’ the business opportunity must be,’ he says.
from publishing through Lulu, according to the
Coming out of Red Hat in 2002 and searching for
company; and Lulu itself is seeing moderate but
the ‘social problem’ on which to base his next
fast-growing sales as it takes a slice from each book.
venture, he was struck by the controversy shaking
It made revenues of $1m in 2004, $5m in 2005 and is
the music industry over file-sharing on websites
forecasting $15m (£7.9m) for 2006. The model has
such as Napster. ‘We were watching the music
been ‘highly profitable’ but most of the spare cash is
industry suing their customers because they didn’t
ploughed back into Lulu and its associated projects.
understand [the phenomenon],’ he says. ‘It wasn’t
‘We’d be even more profitable if we stopped doing
about price. The music industry wanted you to get
wild and crazy things,’ says Mr Young.
into your car, drive across town to the music store,
Mr Young is in London to spread the message pay $20 for a CD with 19 songs you didn’t really
about one of these: Lulu.tv, the next step in his want, drive back home and somehow get the music
self-publishing vehicle’s evolution and the latest on to your computer to listen to it. It took Steve Jobs,
attempt to profit from the Internet’s ‘long tail’. a computer geek [and CEO of Apple Computer], to
Constantly smiling, wiry and nervously energetic, see this problem and come up with the solution [the
the 52-year-old entrepreneur is evangelical about iTunes online music store and iPod music player].’
this latest assault on the media world.
He has a personal motivation, too, for setting
Video-makers pay $14.95 a month. Eighty per cent of up Lulu, his self-publishing venture. In 1999 he
the fees are put into a pot and this money is divided published Under the Radar, his account of the rise
according to which videos attract the most viewers. of Red Hat. Mr Young was upset about the quality
Mr Young says the competition here is coming of printing in the book, the meagre royalty payment
not just from the traditional media companies – he collected and the fact that several thousand
although they are hungrily acquiring new media unsold copies of the book were due to be pulped.
assets as their audience fragments – but from He demanded they be sent to him and had them
the new breed of online video companies such as converted into furniture.
Source: Braithwaite, T. (2006) Lulu aims to wag the Internet ‘long tail’, FT.com, 24 August.
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Is there unlimited choice and does it create unlimited demand?

While Chris anderson finds good examples in electronic retailing, empirical evidence has yet
to be produced. even before publishing his book, anderson was criticised for his blunt and
straightforward statements in several articles in WIRED magazine that seemed to turn retailing
upside down. However, this is maybe not the case.
Wall Street Journal’s steve Gomes straight-out contradicts anderson’s findings: he claims
figures published by Rhapsody contradict the statement that ‘98% of all products sell’; the no-
play rate, meaning songs offered on the website that are not downloaded at all, is more like
22%. Closely related to that is anderson’s statement of ‘misses outselling hits’, meaning the
traditional 80/20 rule of making 80% of revenues from 20% of the products offered, the ‘hits’.
Gomes again contradicts, using Rhapsody data showing that the top 10% of all songs roughly
get more than 80% of all streams.
shortly after the first wave of comments on his findings, anderson had to step back from
his initial claims and rephrase some of them for the book published in 2006. and still a lively
discussion is spreading throughout the blogosphere about the validity of his claims.
While the potential of the web, especially considering new developments towards ‘Web
2.0’, to offer far more choice (for example by letting users generate content) certainly exists,
the actual question is how this potential can be monetised. It seems that hits still do account
for the largest amount of retailers’ revenues, and it is doubtful whether that will change any
time soon.
Summary
● this chapter provided an overview of Web 2.0. It explained how advances in network
infrastructure and software development led to an increased number of web users and a
richer user experience. Furthermore, the chapter depicted the Web 2.0 service variety and
showed how it enables better networking and sharing of information and content among
peers.
● social networking sites (sns) allow their members to manage more contacts more efficiently
than is possible offline; therefore, they increase personal contact reach. In addition, users
have more information about their contacts or potential contacts due to visible virtual
profiles; therefore, sns increase personal information richness.
● through the mass-customisation approach, manufacturers or service providers try to elicit
customer preferences and then tailor the product or service to their clients’ liking.
● Businesses that want to benefit from ‘viral growth’ need to provide incentives for users to
invite others to join the service. these incentives can be intrinsic when users know that
inviting others to join the platform will ultimately enrich their own experience.
● Viral marketing is a tool that has a strong potential for building brand awareness. therefore,
finding a way (e.g. Gladwell’s ‘tipping point’) of controlling viral growth is essential for
companies.
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● By giving members access to a large pool of other individuals, sns lengthen the ‘long
tail’ of potential social contacts. they further use a variety of mechanisms to enrich users’
communications, thereby fattening the tail by increasing the frequency of interactions.
driving demand down the tail can be achieved by shifting users’ attention to content that
normally is not as easy to find.
REVIEW QUESTIONS
1 several new business models have been suggested for ‘Web 2.0’. try to position them within the
reach versus richness framework (shown in exhibit 11.6).
2 Review users’ motivations for joining Internet-based social networks and for each one of these
motivations provide an example of real-world social interactions.
3 explain how anderson’s ‘long tail’ concept can be applied to Internet-based social networks.
What are the main similarities and differences between the application of this concept to sns
and to traditional networking?
4 suggest at least two examples of people you know for each one of the categories proposed in the
law of the few by Gladwell’s ‘tipping point’.
1 assess the following statement: ‘Unlimited choice creates unlimited demand’.

2 Chart the value chain of an Internet-based mass-customisation service. (to answer this question,
you may want to refer to the value chain model shown in exhibit 11.9.)
3 Considering the evolution of CRM and the advent of Web 2.0, do you think new e-CRM
capabilities can impact a company’s competitiveness?
4 Can you think of products that do not have the potential of spreading virally through the
Internet? For services that have such a potential, is it worth giving up control of the spread of the
message about them?
5 Make a critical assessment of the following statement: ‘the application of anderson’s “long tail”
concept leads to an unlimited choice and creates an unlimited demand’. try to illustrate your
answer with some actual examples.
See M.M. Tseng and F.T. Piller, The Customer-Centric Enterprise: Advances in Mass-Customisation
and Personalization, Springer, 2005, for an in-depth look at mass-customisation.
D. Meerman Scott, The New Rules of Marketing and PR: How to Use News Releases, Blogs, Podcasting,
Viral Marketing and Online Media to Reach Buyers Directly, Wiley, 2007, offers an exhaustive
guide for companies to know how to use Web 2.0 communication tools with target audiences.
See L. Weber, Marketing to the Social Web. How Digital Customer Communities Build Your
Business, Wiley, 2007, for a detailed review of the impact of Web 2.0 on a company’s market-
ing activities.
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More practical examples of the ‘long tail’ concept can be found in C. Anderson, The Long Tail:
How Endless Choice Is Creating Unlimited Demand, Random House Business Books, 2006.
M. Gladwell’s Tipping Point, Abacus, 2001, provides further vivid examples of how information
can spread virally.
http://radar.oreilly.com is a widely recognised blog from the US media company O’Reilly Media,
which started the first conferences under the label Web 2.0.
http://mashable.com is a blog dedicated to social networking sites.
www.novaspivack.com/ is a new site managed by Nova Spivack providing interesting informa-
tion on current and future issues related to information technologies, evolution of the Web,
social web applications, etc.
http://venturebeat.com presents news about new Web 2.0 ventures and their funding.
www.virales-marketing.net is a blog on viral marketing campaigns, videos, etc.
1 We greatly appreciate the assistance of Sebastian Mauch and Matthias Promny (former Masters’ students
at the University of Nuremberg) in preparing this chapter.
2 The term Web 2.0 originated from a series of conferences about new web technologies of the same title.
These conferences were initiated by Tim O’Reilly an internationally renowned expert on the Internet and
open source technologies.
3 Although both terms, Web 2.0 and social web, are interchangeably used, the former refers to the new
Web 2.0 applications while the latter is related to the social aspects of these applications. The social web
transcends Web 2.0 and includes future evolution and applications of the web.
4 Tim O’Reilly, ‘Web 2.0 compact definition: trying again’, O’Reilly Radar, http://radar.oreilly.com/
archives/2006 ÷ 12/web_20_compact.html
5 E. Constantinides and S.J. Fountain, ‘Web 2.0: conceptual foundations and marketing issues’, Journal of
Direct, Data and Digital Marketing Practice, 2008, vol. 9, no. 3, pp. 232–3.
6 S. Lin et al., ‘Web 2.0 service adoption and entrepreneurial orientation’, Services Business, 2010, vol. 4,
p. 198.
7 E. Constantinides and S.J. Fountain ‘Web 2.0: conceptual foundations and marketing issues’, Journal of
Direct, Data and Digital Marketing Practice, 2008, vol. 9, no. 3, pp. 234–7.
8 B. Wirtz et al., ‘Strategic development of business models. Implications of the Web 2.0 for creating value
on the Internet’, Long Range Planning, 2010, vol. 43, pp. 272–90.
9 Voice-over Internet Protocol (VoIP) is the routeing of voice conversations over the Internet or through
any other IP-based network.
10 Blogosphere is the collective term encompassing all blogs as a community or social network. Many
weblogs are densely interconnected and have grown their own culture. Technorati: www.technorati.
com
11 Market data provided by comScore (an Internet marketing research company), November 2011.
12 T. Singh and J. Cullinane, ‘Social networks and marketing: potentials and pitfalls’, International Journal
of Electronic Marketing and Retailing, 2010, vol. 3, no. 3, pp. 211–14.
13 ‘Social networking reaches nearly one in four around the world’, eMarketer, 18 June 2012.
14 See ‘BIA/Kelsey forecasts social media ad spending to reach $8.3 billion in 2015’, www.biakelsey.com
15 For an extensive list of social networking topics and sites, see www.sociallifenetwork.com
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16 P. Evans and T. Wurster developed the richness and reach concept in their book, Blown to Bits, Harvard
Business School Press, 1999, pp. 23–38.
17 I. Rodríguez, F.J. Martínez-López and P. Luna, ‘Going with the consumer towards the social web environ-
ment: a review of extant knowledge’, International Journal of Electronic Marketing and Retailing, 2010,
vol. 3, no. 4, pp. 415–40.
18 O. Acker et al., ‘Social CRM: how companies can link into the social web of consumers’, Journal of Direct,
Data and Digital Marketing Practice, 2011, vol. 13, pp. 3–10.
19 http://nikeid.nike.com
20 www.thisismykea.com
21 R. Kozinets et al., ‘The wisdom of consumer crowds. Collective innovation in the age of networked
economy’, Journal of Macromarketing, 2008, vol. 28, no. 4, pp. 339–54.
22 M. Gladwell, The Tipping Point, Abacus, 2000.
23 Network effects exist whenever a service has a value to a potential customer which depends on the
number of other customers who are already using the same service.
24 A YouTube video showing a drastic explosion-like reaction when dropping a Menthos, a type of candy,
into a bottle of Coke fuelled a huge chain reaction of imitators.
25 C. Anderson, The Long Tail: How Endless Choice is Creating Unlimited Demand, Random House Business
Books, 2006.
26 M. Granovetter, ‘The strength of weak ties’, American Journal of Sociology, 1973, vol. 6, pp. 1360–80.
27 See www.twitter.com. The service provides users with the possibility of reaching out to a large number
of people by sending frequent updates about themselves free of charge. The hype around Twitter has
resulted in a whole variety of mash-ups and applications for the service.
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Chapter 12
Moving from wired e-commerce to

mobile e-commerce and u-commerce
Chapter at a glance
12.1 Mobility and unwired e-commerce 266
12.1.1 Understanding the value network of mobile e-commerce 267
12.1.2 segmenting mobile e-commerce consumers and business
services 270
12.1.3 Comparison of mobile e-commerce and wired e-commerce 274
12.2 Strategy and mobility 277
12.2.1 Leveraging wireless technologies to create a competitive
advantage 277
12.2.2 Impact of wireless technologies on a company’s value chain 278
12.2.3 Influence of wireless technologies on the industry’s five forces 281
12.2.4 Main challenges for mobile e-commerce companies 283
12.3 Ubiquity and u-commerce: strategy for the ultimate evolution of
commerce 286
12.3.1 What is u-commerce? 287
12.3.2 Main features of u-commerce 287
12.3.3 From wired e-commerce to u-commerce: the definite
evolution 288
12.3.4 types of u-commerce and new forms of marketing 289

23 12snap Mobile marketing
21 M-PESA Mobile financial services
20 NTT DoCoMo Mobile technologies and services
19 Novartis SMS for Life Mobile logistics solution in the health industry
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Learning outcomes
● define mobile e-commerce and outline the key components of the mobile
value network.
● Recognise mobile e-commerce applications and be able to categorise them.
● depict the advantages of mobile e-commerce over wired e-commerce.
● Understand how wireless technologies affect the value chain and influence the
industry’s five forces.
● Identify the challenges for the successful adoption and use of mobile e-commerce.
● Understand ubiquitous commerce and its related market strategies.
Introduction
the first part of this chapter provides an overview of mobile e-commerce. It highlights (1) wire-
less technology providers, (2) mobile e-commerce applications and services and (3) their most
salient benefits compared with wired e-commerce. the second part of the chapter discusses
how wireless technologies influence porter’s value chain and the industry’s five forces. It also
provides some illustrative examples drawn from different industries. the third and final part
of this chapter presents ubiquitous commerce, which is believed to be the new frontier in the
field going beyond wired and mobile e-commerce.
12.1 Mobility and unwired e-commerce
Mobile e-commerce, or m-commerce, is a subset of electronic commerce. While traditional

e-commerce refers to transactions conducted via fixed or wired Internet terminals, m-commerce
refers to e-commerce transactions via mobile or wireless terminals.1 The Internet, for instance,
was fixed to a wired location at the beginning. Mobile access to the Internet, however,
allows users to become time and location independent and, therefore, broadens traditional
e-commerce characteristics. Furthermore, Internet-enabled mobile devices enable users not
only to make voice calls and use messaging functions, but also make it possible to access data-
bases, retrieve information, download content and carry out transactions.
Although for mobile e-commerce there is a consensus regarding the use of mobile
devices to establish commerce-related communication processes with the support of mobile
telecommunication networks, one main difference concerns the purpose of such communi-
cation. In this context, a ‘restrictive’ view of mobile e-commerce links its related communi-
cations with the development of monetary transactions (e.g., buying a concert ticket with
a smartphone). A broader view extends m-commerce to all mobile services in a variety of
sectors including information, communication, transaction and entertainment.
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Chapter 12 Moving from wired e-commerce to mobile e-commerce and u-commerce
Obviously, there is a need to distinguish the mobile e-commerce concept and its under-
lying technologies, since the latter are dynamic and evolve over time. The former, mobile
e-commerce, offers the following distinguishing features:2
● It implies communication, either unidirectional or interactive, between two or more
persons or objects (e.g. devices).
● At least one of the parties involved in the communication has to be mobile (i.e., not based
on any kind of wired connection).
● The communication process should be maintained in an uninterrupted manner from one
place to another.
● At least one of the parties involved should look for an economic profit in the communica-
tion process, either in the short or long term.
12.1.1 Understanding the value network of mobile e-commerce

The mobile e-commerce value network3 comprises different players that interact and col-
laborate within the industry. These players are mobile technology providers, such as mobile
vendors for infrastructure and devices, wireless network operators, IT enablers, application
and content providers, as well as portal providers. The m-commerce value network (see
Exhibit 12.1) outlines the multi-faceted role of these players. Based on their business focus,
the latter offer different kinds of mobile e-commerce services and can be assigned to the
application, technology or service area:
● Mobile network operators (MNOs) are the industry’s linchpin. Their close contact with
customers positions them at the centre of the network and gives them a dominant serv-
ice role. Since MNOs carry out payment and billing activities, they enjoy a loyal and
Exhibit 12.1 The mobile e-commerce value network outlines the key players
Infrastructure Provider of
equipment enabling
vendor technologies
End consumers
Application Mobile
developer/ network Portal provider
provider operator
Mobile
Content
device
provider
manufacturer
Service area Application area Technology area
Source: adapted from F. Müller-Veerse et al., UMTS Report – An Investment Perspective, durlacher Research, 2001, p. 23.
Reprinted by permission of panmure Gordon & Co.
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trustworthy relationship with their customers. Furthermore, since MNOs have access
to their clients’ data (such as geographical location or Internet behaviour), they enjoy a
unique and privileged position within the network.
MNOs differ in their service offerings. While offering a wireless network with an
Internet gateway implies a low degree of involvement in the mobile value network, pro-
viding an additional mobile portal or further access to applications and services increases
an operator’s involvement. T-Mobile, for instance, not only offers customers voice calls,
but also promotes its mobile portal T-Zones through which it sells content ranging from
ringtones to videos and games.
Mobile virtual network operators (MVNOs), such as Virgin Mobile, are a variation of tradi-
tional MNOs. They become part of the value network by buying bandwidth from traditional
operators for resale to their own customers. MVNOs have their own market presence and a
billing relationship with end users and, therefore, share similar characteristics to traditional
MNOs. Furthermore, MVNOs sometimes bundle their services with other offerings, such as
mobile music, in order to establish a deeper relationship with their end consumers.
● Mobile device manufacturers play another crucial role within the industry. They not only
determine the design and functionality of mobile phones, but also set the communication
standards and take care of the pre-installation of browsers, operating systems and other
applications. Furthermore, device manufacturers have a close relationship with end con-
sumers and therefore play a key role in influencing m-commerce developments.
The competition in the hand-held industry is fierce, since product cycles have become
shorter and profitability margins thinner. Mobile device manufacturers have seen their
market share erode, thus having to extend their business by developing additional activi-
ties. Motorola, for instance, also acts as an infrastructure equipment vendor, while Nokia
offers a variety of applications to mobile portals. Data-ready mobile phones, personal dig-
ital assistants (PDAs), music players and similar wireless handsets are converging, thus
increasing the functionality of the hand-held device and therefore affecting consumer
electronic providers and other industries.
● IT enablers provide operating systems, micro-browsers, databases and other middleware
technologies. These enabling technologies determine a user’s mobile experience in terms
of usability. Companies such as Microsoft, Google (Android), Nokia (Symbian) or Sun
Microsystems generate revenues from licensing, leasing, consulting and/or maintenance
fees. YOC, a mobile marketing service provider from Berlin (Germany), covers activities
ranging from the design of mobile marketing campaigns to the provision of content and
applications, and also acts as an enabler in the mobile marketing space. YOC can thus
guarantee a fit between single activities and make users’ mobile experience as seamless
as possible.
● Infrastructure equipment vendors provide the technical backbone of mobile communica-
tion networks, comprising access points and broadcasting towers. The design and imple-
mentation of mobile networks is simpler and more cost-efficient than that of fixed-line
networks. Developing countries rely heavily on wireless technology, especially in regions
with poor fixed-line telecommunication infrastructure. Furthermore, since mobile net-
works can reach out to users with limited resources, they cover a broader consumer base
than fixed mobile networks.
● Portal providers bundle on the starting page a customer’s preferred services and applica-
tions. Horizontal portal providers cover a broad spectrum of topics, while vertical portals
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focus on a single subject area and provide in-depth information. Portal providers gener-
ate revenues through monthly subscription fees, traffic-based revenue-sharing arrange-
ments with mobile telecom operators, commissions on transactions, advertising and so
forth.4 Mobile network operators (such as T-Mobile), mobile device manufacturers (such
as Nokia) and portals from the wired web (such as Yahoo!) are trying to play an impor-
tant role in this segment.
● Application and content providers often cooperate with portal providers in order to gain
access to customers and make their products (such as news, shopping and games) avail-
able to their target audience. Ovi Store of Nokia (formerly Widsets.com), for instance,
provides users with a wireless application that allows customised access to a variety of
content items.
● Among the different parties involved in the mobile e-commerce value chain, it is the end
consumers who represent the most important element, followed by the mobile network
operators (MNOs). The former represent the demand for mobile e-commerce content
and services, while the latter ensure the connectivity and the direct contact with con-
sumers. Other important parties involved in the mobile e-commerce value chain include
mobile device manufacturers, application developers, software providers, system inte-
grators, etc.
If the provision of an optimal value to consumers is wanted, critical success factors for
mobile e-commerce providers include the following:5
● Time-critical needs and arrangements. One of the distinguishing features of mobile
e-commerce, compared to the traditional wired e-commerce, is extending the time and
place where users can access the Web. This allows attending to users’ needs anytime and
anywhere and thus represents an opportunity to develop new value-added services.
● Spontaneous needs and decisions. It is well known that not all the consumers’ purchases
come from a planned process, as many of them are the result of a spontaneous decision
motivated by internal and/or external stimuli. Such diverse questions as, for example,
downloading a song, looking up financial information, searching for a book or an elec-
tronic product, etc., can be associated with spontaneous needs of consumers that might
be satisfactorily fulfilled by suitable mobile e-commerce-based services.
● Entertainment needs. Mobile e-commerce offers clear opportunities to combine mobility
and entertainment. It is not unusual that entertainment needs arise at unexpected times
(e.g. when the user has some free time between two consecutive activities). In these situ-
ations, without having the possibility of using a wired connection, people could rely on
their mobile device to access mobile services and applications (e.g. music, newspaper,
ticket reservations, etc.). In fact, it could be argued that there is a relationship between
these needs and the above-mentioned spontaneous needs.
● Efficient needs. Nowadays, time is one of the most valuable assets, so individuals have an
increasingly strong need to improve the efficiency of the time used to manage their daily
activities. Mobile devices have been conceived to enhance time productivity while being
mobile. They allow managing a broad variety of tasks with an unprecedented flexibility
of time and space.
● Mobility-related needs. These represent the main source of value of mobile e-commerce,
as fulfilling these needs is at the core of the value proposition that is offered. Actually,
this benefit is subjacent to the variety of needs mentioned above. Notwithstanding,
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there are specific situations where needs are more intrinsically related to the individual’s
mobility. Examples of location-based services include traffic coordination and man-
agement, location-aware advertising and general content delivery, integrated tourist
services, safety-related services and location-based games and entertainment.6
12.1.2 Segmenting mobile e-commerce consumers and business services

Hand-held devices allow for a wide range of wireless applications and services to be
deployed in either consumer or business markets. Depending on the context, these appli-
cations and services can help to improve lifestyle on a personal level or productivity on a
business level. Basic uses of the mobile phone include the following voice, Internet and
messaging functions:
● Voice. In addition to basic telephony functions, data-ready mobile phones allow for
richer voice applications. Rich voice services use the data connection of a device to offer
advanced call capabilities. Compared with traditional mobile voice calls, VoIP (Voice
over Internet Protocol) calls are cheaper and can enrich a user’s call experience through
video support. In a business context, VoIP allows for substantial cost savings and enables
a company to maintain voice, image and text contact with its field staff, thus boosting
productivity.
● Internet. Connectivity to the Internet allows users to access email accounts and is
expected to become a major driver of the ‘fixed–mobile convergence’. It is anticipated
that voice as well as Internet traffic will soon shift from wired to mobile networks and
will not only provide wireless Internet access to users in consumer markets, but also
offer Internet, intranet and extranet access to business clients. In communication-
intensive industries (such as finance, transportation, insurance, public safety or health
care), mobile access to desktop applications such as email, contact lists or spread-
sheets will be increasingly crucial. Furthermore, there is a variety of Java applications,
for instance, which allow users to download, view, edit or send a variety of content
through a hand-held device.
● Messaging. Mobile messaging services are dominated by SMS and MMS, and are widely
used among young people for asynchronous conversation through text or multimedia
messages. Since blogging has gained importance on the Internet, the interest in other
people’s lives and the wish to share one’s own life is addressed by services such as Myspace
or Facebook. Twitter takes this phenomenon mobile and implements it through the micro-
blogging concept. Twitterers define their friends online (through the twitter.com website)
and provide their accounts in Twitter and/or their mobile phone number. Then users send
a plain text message, popularly known as a tweet, to Twitter answering the question: what
are you doing? Twitter then resends this text message to all defined friends and posts the
update on a user’s web profile page. This service is free, if accessed through the company’s
website, which is the typical access method – especially as the worldwide penetration rate
of smartphones increases. However, messages can also be sent as SMS but at a cost, which
varies depending on the mobile phone service provider that is used.
Similar to the idea behind Twitter, mobile messaging can also be used for notification-
based solutions. That way, real-time sports results or real-time information for decision
making can be delivered to users independent of time and location. Location-based serv-
ices (LBS) include location-sensitive information in their service. In the business context,
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Exhibit 12.2 m-Commerce consumer services and applications
Information Communication
• News • m-Advertising
• Weather • m-Health
• Catalogues • SMS/MMS
• … • …
Transaction Entertainment
• m-Banking • m-Games
• m-Tailing • m-Gambling
• m-Payment • m-Music
• … • …
Reprinted by permission of panmure Gordon & Co.
this can be of tremendous importance for emergency services. It also has implications for
fleet management and the tracking of vehicles or remote mobile workforce management.
In consumer markets, localised content such as weather, news, hotels, restaurants, traffic
and travel information and navigation prevail.
m-Commerce consumer services

The following segmentation focuses on m-commerce consumer services. Consumer services
can be classified into four major categories: (1) information, (2) communication, (3) trans-
action and (4) entertainment services (see Exhibit 12.2):
● Mobile information comprises news, weather or other information. Many newspapers
have embraced the Internet and started developing applications that make content
available through mobile phones. Bild.de, the biggest German tabloid newspaper, for
instance, is accessible through a WAP portal developed by YOC.
● Mobile communication includes services that allow users to communicate with each other
or with remote systems. Mobile marketing, for instance, is still highly dominated by SMS
and used as a means of prompting consumers to a point of sale or to some desired action.
In push campaigns, marketing services are delivered directly to the user on the mobile
device through a text message. In response-orientated mobile marketing campaigns or
pull campaigns, it is the user who initiates the communication by sending in a promo-
tional code that is, for example, found on a bottle or seen on TV.
● Mobile transactions allow users to conduct various transactions over the mobile phone.
Mobile e-banking applications give users access to their bank statements or account
balances and allow them to pay bills or transfer funds. Users also receive alerts – for
example, in case a payment is due or the account balance has fallen below a speci-
fied amount. There are also mobile e-shopping and mobile e-payment services such as
m-PESA (which is featured in the case studies section of this text), which allow users to
make ticket reservations, for instance, or take part in auctions (as in the case of eBay).
NTT DoCoMo even developed specific mobile phones that let users store credit card
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Exhibit 12.3 m-Commerce business services and applications
M-SCM M-CRM
External
• m-Inventory • m-Services
• m-Tracking • m-Sales
• … • …
m-Workforce
Internal
• m-Office
• m-Fleet tracking
• …
Reprinted by permission of panmure Gordon& Co.
information for mobile payments at convenience stores. Nowadays, the world’s lead-
ing company in mobile payment transactions is Starbucks. Recently, its CEO, Howard
Schultz, has highlighted the importance of its mobile payment system in strengthening
its competitive position and increasing its sales turnover. One year after its January 2011
launch of the mobile payment system, Starbucks processed 26 million mobile transactions.7
● Mobile entertainment refers to downloading ringtones, games, music or videos and
trivia through wireless technologies. Companies such as Jamba sell all kinds of digital
entertainment content to mostly younger users, generating massive revenues. In Japan,
mobile entertainment has even become a cultural phenomenon for the millions of com-
muters who daily spend a lot of time on trains.
m-Commerce business services

Business services can be broadly categorised into mobile supply chain management
(M-SCM), mobile customer relationship management (M-CRM) and mobile workforce
services and applications (see Exhibit 12.3):
● Mobile supply chain management services and applications aim at enhancing the perform-
ance of activities along the supply chain and facilitate collaboration with partners, since
information sharing can be conducted in real time. Mobile inventory applications alert
suppliers, for instance, if a given stock of products or materials has fallen below a prede-
termined level (push approach), but also allow for remotely checking the availability of
items in warehouses and reordering in case of unavailability (pull approach).
● Mobile customer relationship management services and applications enhance interactions
with customers before, during or after sale by gathering data about customer prefer-
ences, purchased products and required maintenance. Access to this data enhances a
sales agent’s productivity and allows for an effective response to customer demands.
Therefore, these services help to increase customer satisfaction and company revenues.
● Mobile workforce services and applications support field staff and other employees work-
ing on client sites. Hand-held devices give sales teams or managers on the move secure
wireless access to corporate LANs and VPNs and to their offices, or help track vehicles
and dispatch them to new locations.
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The retailers’ increasing use of smartphones

to reach consumers – codes open new front
in retail wars
US retailers have become engaged in a battle for The retailers are, in part, responding to a challenge
hearts and mobiles. As leading retailers, including to their traditional grip on instore information from
Walmart and JC Penney, continue to grapple with a plethora of independent services and smartphone
the potential of the internet, the proliferation of apps. Shopsavvy, for example, is one of a range of
smartphones has inevitably caught their attention. apps that deliver price comparisons, reviews and
Three years after Apple launched its first iPhone, product information, based on scanning a product’s
mobile connectivity is shaking up the way retailers identifying bar code. Snaptell, now part of Amazon,
do business, not only online but in their stores. delivers customer reviews, ratings and information
“Unlock the code,” says the poster in the window to customers in response to camera-phone images of
of a Best Buy consumer electronics store on New books, CDs or other media products. “The retailers
York’s Fifth Avenue. Beneath is a pixellated black can’t be absent from that conversation,” says Mr
and white square – a QR, or quick response code – Silverman. Smartphones also intensify the risk that
that can be scanned by a smartphone camera to link shoppers will choose to visit retailers’ physical stores
the device to the retailer’s mobile website. to view products, followed by a purchase made from
a rival, lower-cost retailer online. But Mr Silverman
For retailers, the black and white square is sign
argues that this kind of price transparency already
of dramatic changes under way as a growing
exists on price comparison search engines such as
number of customers arrive in stores equipped with
Pricegrabber, and TheFind. “If you talk to folks,
smartphones that give them access to the internet.
price plays a role but it’s not the final factor. Brand
“I think it’s one of the most exciting developments
and trust are really important as well. So I think the
in retail,” says Scott Silverman, head of Shop.org,
brand promise; service; trust; these are all tools that
a national online retailers group, of the impact of
the retailers will use to win sales.”
mobile connectivity on retail. “You have all the
abilities that you have with online shopping… . . Much of that battle, argues Mike Boylson, chief
and you can take that into the store.” Customers of marketing officer of JC Penney, will be waged on
the US retailers are already using the phones not mobile phones. “We really believe that the handset
just to make online purchases but to check prices at is where the future interaction is going to be
other retailers, to look up information on potential between the customer and the retailer,” he says.
purchases, and to receive digital money-off coupons Dialling into customer needs:
that can be scanned at check-out. “Everyone needs to
get past this idea of buying things on this small little ● Sephora, the cosmetics retailer, used QR codes
screen,” says Mr Silverman. “There are so many this year to link customers’ phones to the web-
other things that the small screen can do right now.” site of its Tarina Tarantino cosmetics line. The
retailer also has a mobile phone link for cus-
Over the past 18 months, leading US retailers tomer generated product reviews. Customers
including Walmart, Sears and Gap have responded can upload favourite products and comments to
by launching mobile versions of their websites, their Facebook page.
together with shopping and browsing applications
● The North Face, the outdoor brand and retailer,
for iPhones and BlackBerrys. Now they are rapidly
has launched one of the first location-based, or
exploring ways to tie their brands into Facebook and
“geo-fenced” marketing programmes with a sys-
other social networking sites, and pursuing a range
tem developed by Placecast, sending marketing
of other initiatives aimed at delivering marketing
messages to customers near its stores, or attend-
messages and promotions to smartphone wielding
ing sporting events, of visiting recreation areas
companies. Retailers such as JC Penney and
such as mountains or lakes.
Sephora have embraced Facebook’s new initiative
that enables users to populate their Facebook pages ● Mass retailers, including Kroger, the supermar-
with product information, images and reviews. ket, and Target, the discounter, have begun ➨
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issuing money-off “digital coupons” on the ● Best Buy, the electronics retailer, and Macy’s,
internet that can be downloaded to mobile the department store, are working with a start-
phones, and scanned against purchases at their up called Shopkick on an Apple and Android app
store checkout. that will offer location-based coupons.
Source: Extract from Birchall, J. (2010) FT series e-commerce. In the second of a two-part series,
Jonathan Birchall looks at retailers’ increasing use of smartphones to reach consumers – codes
open new front in retail wars, Financial Times, 18 May.
A classification of mobile e-commerce services and applications for consumer (B2C) and
business (B2B) is presented in Exhibit 12.4.
12.1.3 Comparison of mobile e-commerce and wired e-commerce

Business opportunities in mobile e-commerce and critical success factors for companies
in this field greatly depend on the value proposition that can be offered to customers –
whether they are end consumers or business clients. In this context, it is critical to have a
good understanding of what can be referred to as ‘mobile experience’, i.e. the relevance
and significance of the mobile-e-commerce value provided to customers (see Exhibit
12.5). Compared with wired e-commerce, mobile e-commerce has unique value-adding
attributes. When formulating a new business strategy, managers need to be aware of
these attributes and leverage them service-wise. These unique value-adding attributes
are (1) ubiquity, (2) convenience, (3) localisation and (4) personalisation. They are now
discussed in more detail:
● Ubiquity is the most decisive characteristic of mobile e-commerce applications. It means
that users are able to use their device at any time and in any location, whether to obtain
information or perform a transaction. Ubiquity increases the immediacy of communica-
tion and is equally valued in consumer and business markets. This is the core attribute
and essence of a new form of electronic commerce called u-commerce, which will be
covered in detail in Section 12.3.
● Convenience is high, since the functionality and usability of wireless devices have
increased. Mobile content is inferior to other media in terms of screen size and
downloading speed. However, it is superior to other media in terms of conven-
ience and ease of use. Mobile e-commerce is comparable with a convenience store
where customers buy daily but in small quantity, whereas wired e-commerce can
be compared with a hypermarket where customers spend a lot of money but only
occasionally. 8
● Localisation of devices and their users is based on the portability of wireless devices and
knowledge about a person’s location. It enables location-based services that provide
their users with location-specific information. This inherent feature to mobility con-
siderably extends the contextualisation possibilities of the value proposition to offer.
For instance, a store could detect the nearby digital device of a customer and then
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Exhibit 12.4 Mobile e-commerce applications for consumers and businesses
Category of applications Details Illustrative examples
Mobile financial applications (B2C, applications allowing to manage Banking, brokerage and payments
B2B) and follow-up financial transactions for mobile users
through mobile devices
Mobile advertising (B2C) applications turning the wireless User-specific and location-sensitive
infrastructure and devices into a advertisements
powerful marketing medium
Mobile inventory management applications aiming at reducing the Location tracking of goods, boxes,
(B2C, B2B) amount of inventory needed by troops and people
managing in-house and inventory-
on-the-move
product locating and shopping (B2C, applications helping to find the Finding the location of a new/used
B2B) location of products and services car of a certain model,
that are needed colour and features
proactive service management (B2C, applications aiming at providing transmission of information related
B2B) users with information on services to ageing (automobile) components
they will need in the very-near- to vendors
future
Wireless re-engineering (B2C, B2B) applications that focus on improv- Instant claim-payments by insurance
ing the quality of business services companies
using mobile devices and wireless
infrastructure
Mobile auction or reverse auction applications allowing users to buy airlines competing to buy a landing
(B2C, B2B) or sell certain items using multicast time slot during runway congestion
support of wireless infrastructure
Mobile entertainment services and applications providing entertain- Video-on-demand, audio-on-
games (B2C) ment services to users on per-event demand and interactive games
or subscription basis
Mobile office (B2C) applications providing the complete Working from traffic jams, airports
office environment to mobile users and conferences
anywhere, anytime
Mobile distance education (B2C) applications extending distance/ taking a class using streamed audio
virtual education support for mobile and video
users everywhere
Wireless data centre (B2C) applications supporting large detailed information on one or
amount of stored data to be made more products being downloaded
available to mobile users for making by vendors
‘intelligent’ decisions
Source: adapted from U. Varshney and R. Vetter, ‘Mobile commerce: framework, applications and networking support’, Mobile Networks
and Applications, 2002, vol. 7, pp. 185–98.
send commercial information to attract him/her to the store. However, to increase the
relevance and impact of the information to send out, the store should also know the
individual’s interests and any past interactions with the store. This obviously depends
on whether the individual at hand has previously introduced his/her main interests
and likes in their mobile device(s), enabling connections with external communica-
tions that provide physical-sensitive commercial information. Recently, Facebook
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Exhibit 12.5 Wired e-commerce vs. mobile e-commerce (m-commerce)
High
Relative value
Value area for

traditional Value area for mobile e-commerce
e-commerce
m-commerce
e-commerce
Low
Speed Cost Ubiquity Convenience Localisation Personalisation
Value propositions attributes
Source: adapted from I. Clarke, ‘emerging value propositions for m-commerce’, Journal of Business Strategies, 2008, vol. 25,
no. 2, pp. 41–57.
has launched a service called ‘Places’, which allows their users’ current location to be
revealed. This enables retailers to access this information and then make personalised
offers, which could subsequently be commented on by users to their friends through
this social network.
● The degree of personalisation in mobile e-commerce is higher than in wired e-commerce.
When calling a mobile phone, users call the number of a person and not the number of a
location, as in the case of a fixed-line phone. Furthermore, as initially demonstrated by
Apple’s iPhone, and subsequently by other smartphone manufacturers such as Samsung,
HTC and Sony-Ericsson, the mobile phone is increasingly integrating different multime-
dia functions and reflecting the user’s lifestyle dimension. However, although it is more
challenging to optimise content for the handset’s small screen size than for the wired PC,
recent technological advances in smartphones and tablets illustrate the move towards a
fully-fledged digital convergence.
Mobility in general allows for more flexible and efficient communication; it also enables
users to socialise with their peers and friends. Informative and/or entertaining content can
be targeted much more to the user’s needs and made more personal by tracking the user’s
wireless transactions and by drawing implications from these. User-related information
can be used to tailor specific products for consumers in ways that were not feasible with
traditional e-commerce. However, there are also disadvantages, including (1) privacy and
security and (2) device and network limitations, such as screen and keyboard size as well
as connectivity and transmission speed.
● Privacy and security are decisive prerequisites for all wireless transactions. Users are
likely to insist on having privacy and security safeguards. They also need to be in control
of their data, especially if it contains information about their geographical location.
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● Device and network limitations. Due to slow transfer rates and limited connectivity,
a user’s wireless Internet experience can be very restricted. When this is added to
the small screen and tiny keyboard of the handset, users are still often reluctant
to try out the emerging wireless services. However, as mentioned above, current
technological capabilities enable companies and organisations to overcome these
limitations.
12.2 Strategy and mobility
Although the wired Internet enables users to access information from any computer
around the globe, it is tied to a physical location. Wireless technologies, however, make
users independent of place and time. They may be used strategically in most indus-
tries, especially those that are information and communication intensive. Being able to
incorporate wireless technologies into business operations could result in a first-mover
advantage. What makes companies successful, however, is the translation of a first-
mover advantage into a sustainable competitive edge. It is important not only to align IT
with strategy, but also to align mobility with strategy in order to make a company more
efficient, attract new customers with a differentiated product or service and ultimately
outperform competitors. In the following, we shall (1) discuss how to achieve a com-
petitive advantage through wireless technologies, (2) examine how these technologies
affect a company’s value chain and (3) analyse how they influence the five forces of the
industry.
12.2.1 Leveraging wireless technologies to create

a competitive advantage
Mobility benefits mainly those organisations that manage to integrate wireless technologies
seamlessly into their business processes. By improving the linkages between their human
resources and business processes, companies can substantially improve their overall per-
formance. Wireless technologies strengthen these linkages by making information available
where and when users need it.
The creation of economic value depends on the gap between perceived use value and
costs (see Chapter 8). Wireless technologies can increase use value and decrease costs and,
therefore, increase a firm’s operational effectiveness. Each (primary) activity of the value
chain contributes to the aggregate use value as perceived by customers. A more effective
mobile workforce, for instance, increases productivity and allows a company to decrease its
overhead costs or increase the perceived use value. In the next section, the concept of the
value chain will be analysed in the context of mobility.
The goal of every firm is to outperform its competitors and eventually achieve above-
average returns. Long-term strategic positioning means that a company is able to outper-
form competitors by offering customers a better price/performance ratio than competitors.
While economic value depends on a customer’s willingness to pay a price for a product that
is higher than its production costs, strategic positioning depends on industry forces and the
profitability of the average competitor within the industry. The five forces model presented
in Section 12.2.3 shows how mobility can affect industries.
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12.2.2 Impact of wireless technologies on a company’s value chain

Companies perform value-creating activities, which are interdependent with activities of sup-
pliers or customers. Porter’s value chain provides a framework for identifying all these activities
and analysing how they affect a company’s relative cost position and the value delivered to
customers. IT is relevant to all the primary and support activities of the value chain, since every
activity involves the creation, processing and communication of information. (For a detailed
discussion of how the wired Internet impacts on a company’s value chain, see Chapter 4.)
Wireless technologies help to create new kinds of activities or enable streamlining of
existing activities. They influence the design, production, marketing, sales and support of
products, services and processes (see Exhibit 12.6).
Support activities can generically be categorised into a firm’s infrastructure, human
resources management, technology development and procurement:
● The firm’s infrastructure supports all the company’s activities. Moving from physical
(paper-based) activities to digital applications that can be remotely accessed through
wireless devices allows a company to reduce its data collection time and operational
costs while improving its responsiveness to customers and its overall service level.
Salespeople in the field, for instance, can access through hand-held devices corporate
databases (such as phone directories), and marketers can receive customer feedback in
real time or supervise a delivery status.
● Mobile technologies can also affect human resources’ activities such as recruiting, train-
ing, developing and rewarding staff members. Wireless access in the field to a company’s
knowledge base, for instance, enables employees to keep in touch with their colleagues
(whether in the office or on the move) and also to foster their productivity.
● Through wireless devices, a company’s technology development can improve products,
services and processes. It is important to note here that mobile business professionals
often seek better on-the-move work tools and practices, while IT managers want to have
reliable and secure IT systems and applications. In order to reconcile both dimensions,
issues of interoperability, usability, security and privacy need to be addressed early
enough in the technology development process.
● The procurement of raw materials and other inputs can be improved through wireless
technologies. For example, the use of radio-frequency identification (RFID) enables
better real-time tracking of goods and inventory items. RFID tags can be automatically
read from remote locations and therefore do not need to be held near a reader (or a scan-
ner) as is the case with barcode-based tags.
Wireless technologies can also affect a company’s primary value chain activities, such as
inbound logistics, operations, outbound logistics marketing and sales, as well as after-sales
service:
● Through wireless technologies, a company can foster its inbound logistics by receiving, stor-
ing and disseminating inputs to products and services. For example, in the context of user-
generated content, whereby users are an active part of the value chain, mobile technologies
can become a valuable input medium. For instance, the German tabloid newspaper Bild
encourages readers to send in pictures of events or celebrities through MMS. Thus, the reader
is turned into a newspaper affiliate – encouraged to contribute content to the latest edition.
● Operations. Especially in industries where information is a crucial part of the prod-
uct, wireless technologies can add to a customer’s perceived use value. For example,
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Exhibit 12.6 Impact of wireless technologies on the value chain
Firm infrastructure
• Mobile financial and ERP systems, incl. legal and government information
• Mobile investor relations (e.g. information dissemination, broadcast conference calls, alerts)
• Voice-to-data conversions: mobile forms-based applications, multimedia cellular and wireless broadcast
• Mobile services: rich vioce (image, video), Internet (intra–extranet), messaging (SMS, MMS, LBS) and content
• Mobile access to e-mails, personal information management

• Mobile activities in recruiting, hiring, training, development and compensation
• Mobile self-service personnel and benefits administration, incl. mobile time and expense reporting
• Mobile sharing and dissemination of company information
• Mobile services via HRM: voice guidance, messaging (SMS, MMS, LBS push or pull), internet and infotainment
Technology development
• Mobile teams, distributed collaborative product design across locations and among multiple value-system participants
• Knowledge directories accessible from any location
• Real-time access by R&D to mobile sales and service information
Procurement
• Mobile demand planning and fulfilment
• Other mobile linkage of purchase, inventory and forecasting systems with suppliers and/or buyers
• Mobile direct and indirect procurement via marketplaces, exchanges, auctions and buyer/seller matching
Inbound logistics Operations Outbound logistics Marketing and sales After-sales service
Mobile activities in Mobile activities associated Mobile activities associated Mobile activities with means Mobile activities associated
receiving, storing and with transforming inputs into with collecting, storing and for buyers to purchase with providing service to
disseminating inputs to final products/services distributing products/ products/services and enhance or maintain the
products/services services to buyers inducing them to do so, incl. value of products/services
• Mobile information advertising, promotion,
• Mobile scheduling, exchange, scheduling • Mobile order processing sales force, channels, • Mobile support of
shipping, warehouse/ and decision making in and scheduling pricing customer service reps
demand manage- in-house plants, contract • Mobile delivery vehicle (incl. voice guidance,
ment and planning assemblers and operation • Mobile sales channels, SMS, MMS, LBS, e-mail,
and scheduling components suppliers • Mobile forms of customer- e.g. websites, market- billing, co-browse, chat,
across the • Mobile available-to- tailored agreements and places VoIP, video streaming)
company and its promise information contracts • Mobile access to • Mobile customer
suppliers to sales force and • Mobile customer/channel customer information, self-service via portals
• Mobile distribution channels access to product product catalogues, and mobile service
across the company development and dynamic pricing, request processing, incl.
of real-time inbound distribution status inventory, quotes, updates, alerts and
and in-progress • Mobile channel order entry notifications to billing,
inventory data management, incl. • Mobile product/service shipping, etc.
information exchange, configurators • Mobile field service
warranty claims, contract • Mobile push/pull adver- access to customer
management (versioning, tising account review,
process control) • Mobile customer feed- availability and
back, incl. mobile surveys, ordering, work-order
opt-in/opt-out marketing updates, service parts
and promotion response
tracking
Mobile supply chain management Mobile customer relationship management
Source: d. steinbock, The Mobile Revolution: The Making of Mobile Services Worldwide, Kogan page, 2005, p. 260.
directory services (such as the German ‘11833’) provide callers with phone numbers and
address information. In addition to announcing over the phone the result of the customer
query, ‘11833’ offers callers the option of receiving an SMS containing the requested
information. By doing so, ‘11833’ better supports the caller (who may or may not have
writing materials readily available) and improves its overall customer service.
● Outbound logistics refer to wireless activities that are associated with collecting, stor-
ing and distributing products or services to customers. Mobile music providers (such as
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Mobile: Nirvana is tantalisingly close

For a decade or so, someone has proclaimed every with consumers’ greater preference for consuming
year as the “year of mobile advertising”. The promise content in that format. However, maintaining a
of marketing directly to a device in someone’s hand, mobile web presence is important for simple but
material tailored and targeted to their individual often overlooked tasks such as email or search
needs, has been a long-awaited nirvana. But a queries. As a result, the “bounce rate” for visitors
combination of small screens, a fragmented media who leave a site on mobile after viewing a single
market and concerns that mobiles may be just too page is almost nine in 10.
personal for advertising held back the explosion.
However, despite Google and Apple lowering
However, after the aggressive entries into the
the upfront costs of their display advertising in
market of Google and Apple in 2010 and with
February to encourage more into the market, price
smartphones taking almost half the market in the
has not been the main barrier to brands’ use of
US and Europe, last year finally saw a turning point.
mobile. Nielsen found that ads shown on mobile
“2011 was the first real year of mobile,” says Brian
ranked lowest among any kind of media when
Wieser of Pivotal Research, an independent equity
judged by consumers’ trust. Just 26 per cent trusted
analyst firm. “After many years of expectation,
text-message ads and 27 per cent mobile display ads,
mobile at last arrived as a relatively mainstream
lower even than regular banners on the web (29 per
marketing channel.”
cent) and well below adverts in search results (36
A barrage of big numbers explains why the per cent) or on TV (46 per cent). Similarly, a poll of
technology has finally broken through. The mobile more than 4,000 adults in the UK and US by YouGov
internet now has a scale of audience that has on behalf of Upstream found that two-thirds
demanded brands’ attention. A study by Nielsen would find it unacceptable to receive “unwanted
and NM Incite, the market researcher’s joint advertising” on their mobiles. “The main problem
venture with McKinsey, found there are nearly as is that ads on such an intimate device are perceived
many mobile internet users today as there were differently from when seen on a TV screen or
internet users in 2000, with 44 per cent of US mobile outdoor advertising screen,” says Christophe
subscribers using a smartphone. ComScore found Cauvy, European head of digital and innovation at
that by the end of 2011, 127.6m mobile users in the US JWT, a WPP agency. “The screen size does not allow
and 108m users in Europe were regularly consuming much nice, non-intrusive advertising.” So, as more
some kind of mobile media, whether through apps brands move into mobile marketing, retailers face
or the browser – a 30 per cent rise on the previous perhaps the greatest challenge.
year. Google announced its mobile revenues hit
Armed with smartphone cameras and barcode-
$2.5bn during 2011, including searches on tablets
scanning apps such as Ebay’s Red Laser, shoppers
such as the iPad, and Facebook announced it has
are comparing prices in-store but buying online
425m mobile users. Blyk, a mobile media network
instead. “We are now seeing one item purchased
that works with operators in India and the UK,
every second via mobile devices in Britain, double
said the number of people opting in to view ads
the rate we saw at the beginning of last year,” says
leapt from 1m to 4m during 2011, with response
Angus McCarey, UK retail director at Ebay. “Apps
rates among its subscribers of between 20 and 65
such as Red Laser are blurring the lines between
per cent, a level unheard of with traditional online
online and offline shopping.” ComScore found more
marketing. Mobile adspend in the UK is estimated
than half of US smartphone owners used their
to have more than doubled in 2011, according to
mobile for purchasing in a shop, with one in five
the Internet Advertising Bureau. An IAB study
scanning a barcode and one in 10 searching for
last year found smartphone owners go online an
online discounts. ComScore, a supplier of digital
average of 18 times a day.
marketing intelligence, says: “The retail industry,
Despite the slow build-up, many companies have which experienced an upheaval with the advent of
been caught off-guard by the arrival of mobile as online shopping, is poised for further disruption,
a serious media and marketing channel. Only 15 as smartphones enter bricks-and-mortar stores,
per cent of FTSE 100 companies have a mobile- bringing the internet right on to retailers’ home turf
formatted homepage, says the IAB. Many have leapt and further complicating consumer conversion.” It
with gusto into app development, which tallies notes: “Smartphones have become consumers’ most ➨
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valued shopping companion.” In such a situation, and folded, and though their last remaining
retailers are being strong-armed into the mobile big rival Foursquare has notched up some 15m
world whether they like it or not. users globally, it remains a specialist rather than
a mass-market proposition. As such, Mr Wieser
However, despite the significant growth of the
of Pivotal Research believes that “geo-targeting
past 18 months, one element of mobile marketing
remains ahead of its time”. “While some marketers
remains largely out of reach: the holy grail of
will place value on information associated with
location-based targeting. Facebook’s attempt
location, we believe that most large marketers are
to harness “check-ins” to specific spots via its
not organised in a manner that affords effective
smartphone app for localised deals did not generate
management of campaigns targeted on the basis of
enough revenue to warrant a mention in its filing to
a narrow geographic location,” he says. “Narrow
go public. Other check-in apps such as Gowalla and
geo-targeting will be generally inefficient in terms
Rummble failed to break through to the mainstream
of costs and benefits for most brands.”
Source: Bradshow, T. (2012) Mobile: Nirvana is tantalisingly close, Financial Times, 7 March.
Jamba) enable users to access content instantly while on the move. Also, wireless portals
(such as Yahoo! mobile) deliver to consumers, through mobile applications, various
types of information.
● Marketing and sales. Mobile marketing approaches enable companies to enhance brand
or product awareness, lead consumers to the point of sale, generate dialogue with mar-
keting contacts, increase sales or support customer loyalty programmes. Coca-Cola, for
instance, used on-pack promotions in order to entice consumers at the point of sale to
buy a Coke. Handsets and other hand-held devices also allow companies to offer a high
level of personalisation and the possibility of treating each customer as a segment of
one. Also, Renault, during the latest Amsterdam Motor Show, provided visitors with an
RFID-enabled card that allowed them to access Facebook, not through a mobile phone
or tablet but through pillars located near every car model on display. Once on Facebook,
they can click the ‘Like’ button with the car model(s) they want. Similarly, the clothing
company Diesel designed a mobile campaign using Quick Response (QR) codes related
to denims in its stores. It allowed consumers to obtain price discounts if they scanned the
QR code that takes then to a product page where a ‘like’ button’ could be clicked, and a
post then appeared on the Facebook wall of every person reporting this fact. This was an
original campaign to both actively involve consumers and spread the message through
their social network. (See the FT article: ‘Mobile: Nirvana is tantalisingly close’.)
● Service. As customers become increasingly mobile, companies need to extend their reach
to these customers by offering support services through wireless channels. By doing so,
they can respond to customer needs faster than ever before. For example, airlines (such
as Lufthansa) allow passengers to make or confirm a seat reservation through an SMS –
thus helping customers to save time.
12.2.3 Influence of wireless technologies on the industry’s five forces

A company’s position within an industry determines its ability to create value for the mar-
ketplace. Industries with high information intensity, a large mobile workforce and activities
can leverage wireless technologies in a significant way.
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Exhibit 12.7 Impact of wireless technologies on the industry’s five forces
(+)(+) Increases barriers to entry by

eliminating waste and contributing
to efficiencies
(+/–) Mobile applications are difficult to
Barriers to entry keep proprietary from new entrants,
but consolidation favours
incumbents
(–)(–) A flood of new entrants has come
into many new industries
Bargaining power Rivalry among Bargaining power of

of suppliers existing competitors channels and end users
(+/–) Procurement using mobility (–/+) Reduces differences among (+) Complements (–) Shifts bargaining
tends to raise bargaining power competitors as offerings are powerful power to end
over suppliers (e.g. Wal-Mart difficult to keep proprietary, but channels and consumers
and RFID), though it can also increases the potential for can improve (+/–) Increases/
give suppliers access to more efficiences bargaining decreases
customers (–/+) Migrates competition to price, power over switching costs
(+/–) Mobility provides a channel for but can increase potential for traditional
suppliers to reach end users, differentiation channels
reducing the leverage of (–) Widens the geographic market,
intervening companies, but it may increasing the number of
also provide a direct channel to competitors
industry rivals and thus (–) Lowers variable cost relative to
disintermediate channels fixed cost, increasing pressure
(+/–) Mobile procurement and mobile for price discounting
markets tend to give all companies
equal access to suppliers, but they
can also be used to create
privileged access to some firms
(+) By making the overall industry
(+/–) Mobility can gravitate procurement
Threat of substitute more efficient, mobility can
to standardised products that
products or services expand the size of the market
reduce differentiation, but it can
(–) The proliferation of mobility
also be deployed to diversify
approaches creates
products/services, which increases
complementary opportunties,
differentiation
rather than substitution threats
Source: d. steinbock, The Mobile Revolution: The Making of Mobile Services Worldwide, Kogan page, 2005, p. 266.
As stated in Chapter 3, the five forces model helps determine the attractiveness of an
industry in general. In particular, the wired Internet influences each one of the industry’s
five forces (see Exhibit 3.3), as do wireless technologies (see Exhibit 12.7):
● Industry rivalry. Since wireless technologies widen the physical marketplace by reducing
the importance of geographical boundaries, it increases the number of competitors with-
in an industry and, therefore, tends to lower the attractiveness of an industry. However,
for wireless technologies and mobile applications, charges for international roaming
continue to be very high and represent an important uptake factor for consumers.
● Bargaining power of suppliers. Companies that embrace wireless technologies can capi-
talise on a quite unique online channel to reach out to customers and, thus, to reduce
the leverage that other suppliers may have in the market. However, these technologies
also offer a direct channel for dis-intermediating traditional players in an industry. For
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instance, Sony BMG investigated the possibility of creating its own MVNO in order to
position itself in the growing mobile music market. However, it eventually refrained
from launching its MVNO due to the high cost structure that is required and the high risk
of such a venture.
● Bargaining power of buyers. Wireless technologies can shift the bargaining power to end
consumers; they can also complement existing channels and improve the bargaining
power over traditional channels. For example, most newspapers are now accessible not
only through stationary PCs, but also through hand-held devices such as tablets and
smartphones. These devices allow readers to circumvent traditional newspaper stands
and at the same time to increase the number of accessible newspapers.
● Barriers to entry. On the one hand, wireless technologies can increase barriers to entry by
helping companies to streamline some of their business processes and thus contribute to
efficient operations. On the other hand, since mobile applications are difficult to keep pro-
prietary, barriers to entry could therefore be rather low and consolidation in the industry
favours incumbents. For example, YOC is facing new entrants from multimedia agencies
that are trying to transfer to mobile marketing their competence in digital marketing.
However, the technical complexity involved in creating and managing mobile market-
ing campaigns favours specialised companies (such as YOC) over multimedia agencies.
Furthermore, technical competence in wireless technologies and mobile applications is
viewed as a key factor for the sustainability of specialised companies such as YOC.
● Threat of substitutes. Companies should view wireless technologies as an enabler for cre-
ating complementary opportunities and not just a threat of substitute products or serv-
ices. Mobile phones and wireless communication networks are substitutes for fixed-line
phones and wired networks and, therefore, are becoming a threat to some industries.
For instance, O2, the UK-based mobile communication network, is offering customers a
‘home zone’ option, which allows subscribers to make local calls from their handset for
cheaper rates.
12.2.4 Main challenges for mobile e-commerce companies

The main barriers to a large-scale, worldwide uptake of mobile e-commerce have been
the lack of users’ online trust in mobile e-commerce and the usability of mobile devices.
(See also the FT article: ‘The online challenges facing retailers – stores tap into shoppers as
mobiles ring the changes’.)
Online trust
As was the case some 18 years ago or so with the traditional, wireline e-commerce, users’
trust in mobile e-commerce is a critical success factor for offerings in this area. Customers
do not embrace mobile transactions unless they sufficiently rely on both the mobile
e-commerce approach in general, and on the mobile e-commerce channel of a certain
company, in particular. Desirable goals that companies should pursue with their mobile
e-commerce strategies include the following two groups:9
Group 1: Goals aimed at generating users’ initial trust.
– Increase customers’ familiarity with mobile technologies and mobile services.
– Build brand reputation as a mobile service provider.
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– Provide good-quality information through the mobile channel.

– Work with independent (third-party) certifications of quality and security for mobile
e-commerce.
Group 2: Goals aimed at generating lasting trust in a company’s mobile channel.

– Continuously improve a company’s mobile channel in order to develop good-quality
communication.
– Improve the company’s competences with mobile-based services and activities.
– Maintain the firm’s integrity in the mobile channel.
– Publicly announce the company’s privacy policy with e-commerce transactions and in
particular those taking place through the mobile channel.
– Foster customers’ communication with the company through the mobile channel.
– Arrange periodical external audits to monitor a company’s online operations and
eventually identify irregularities or bad praxis.
Usability
Usability of mobile e-commerce depends on the ease of use of mobile devices and applica-
tions and, as such, is strongly linked to the quality of interactions in mobile environments.
In spite of the major advances in usability during the last decade, this dimension remains
a challenge for many companies, especially for those that need to better understand the
mobile experience context and the value proposition that would appeal to users. This link-
age between mobile experience, usability and value proposition in mobile e-commerce is
shown in Exhibit 12.8
The above-mentioned linkage requires companies to consider the following principles:10
● Make careful use of graphics and images. This is due on the one hand to the limited
visualisation capability of the mobile device (as compared to that of a PC, a laptop or a
Exhibit 12.8 Wired e-commerce vs. mobile commerce
Context of Mobile User

Experience Mobile Services
Time Pressure
Usability Compelling Value
Location
Needs and Desires to Consumers
Convenience
Relevance
Structure
Personalization Leverage
Device for Design
Limitations, Revenue Sources
e.g. screen for Providers
size/input
Source: V. Venkatesh et al., ‘Understanding usability in mobile commerce’, Communications of the ACM, 2003, Vol. 46, no. 12,
pp. 53–56.
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tablet) and, on the other hand, to the fact that rich graphical resources require larger files
to download and therefore slow down interactions with users.
● Avoid long lists and give users immediate information on the number of options avail-
able, in case they cannot be fully visualised at once.
● Make important options visible to customers. For instance, a company’s website with
a clear transactional capability would facilitate the identification of the purchasers’
options, shopping cart, etc.
● Provide users with helpful and meaningful error messages, avoiding the use of coded
messages without an easily understandable error description.
● Avoid dead-ends. A company needs to ensure that its entire website’s links are active and
working properly.
● Format and present content appropriately. Mobile websites’ designers should be aware
of the specificities (including the limitations) of the mobile context in order to propose
appropriate designs.
● Offer consistency in navigation and menu options.
● Provide users with sufficient prompting. Users should be given useful information, which
helps them to navigate efficiently through the mobile portal.
● Minimise user input. In spite of the significant technical advances in mobile devices, users
still have some limitations to interact comfortably and quickly with mobile e-commerce
websites. This shortcoming calls for reducing the users’ need to both click on links and
introduce more information.
● Structure tasks to help users’ interaction with the mobile environment. Mobile services
should be designed in such a way that they are presented to users in a logical, well-
structured and easily accessible form.
The online challenges facing retailers – stores

tap into shoppers as mobiles ring the changes
JC Penney, the mid-price US department store Elsewhere, Target, the US discount retailer, is
chain, cut back on expenses last year, as the preparing to launch a fully independent digital
recession hit its core middle-class shoppers. But it platform by late 2011, ending its dependence on
did not stop spending on everything. “We invested Amazon, the online marketplace which currently
heavily in our digital initiatives,” Mike Ullman, runs its website.
chief executive, told investors recently. “During
Walmart, the world’s largest retailer, is accelerating
the downturn, under the covers, there was a lot of
work on a new global e-commerce platform.
heavy investment in building muscle to make sure
Gap, the clothing retailer, is preparing to launch
we got a head-start in this.” JC Penney, with more
e-commerce businesses in Western Europe, Canada
than 1,000 stores, is at the leading edge of digital
and China. In part, the enthusiasm reflects the lure
retailing. In February, for example, it held its
of online sales growth – which continues to outstrip
monthly board meeting at Facebook’s headquarters
conventional sales – at a time when few retailers
in California, to give its board members a crash
are investing in new store growth. But retailers are
course in the potential of social networking.
also responding to the second stage of the online ➨
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revolution that began a decade ago. In the first by the fact that shoppers will now increasingly
stage, many retailers ran their online e-commerce be online, via their phones, even as they visit a
businesses as separate units. Walmart based its physical store. They will expect a unified shopping
online operation in San Francisco, rather than at its experience. “Consumers don’t think of themselves
headquarters in Arkansas. as ‘multi-channel’ shoppers,” says Brett Hurt, chief
executive of Bazaarvoice, a provider of online
Macy’s, the department store, Borders, the
reviews and other content. “They just care about
bookseller, and Toys-R-Us, the toy retailer, all
the efficiency of the medium.” Customers will
initially relied, like Target, on Amazon to run their
expect to see the store merchandise also available
sites. But three years after Apple launched its first
online, at the same prices, and merchandised in
iPhone, the advent of what retailers call “mobile
similar ways.
connectivity” is profoundly shaking up the way
retailers do business, not only online, but in their For many retailers, that will require technology
stores. “People are going to be making decisions systems to co-ordinate prices, inventory and other
on what to buy in the store with their mobile elements, and changes in their traditional ways
phones,” says Scott Silverman, executive director of of doing things. “Retailers are asking ‘how do I
the National Retail Federation’s Shop.org industry manage my brand across all the channels that affect
group. “What’s going on will affect the mothership – the consumer?’, says Janet Hoffman, of Accenture’s
the store – and all of a sudden the store experience retail consultancy. Tom Nealon, JC Penney’s chief
is going to completely change.” “I’ve never seen a information officer, says its digital platform is
time like this in retail,” says Andy Murray, head of seeking “alignment” of the physical and digital
Saatchi & Saatchi X, the in-store marketing agency experience. “We are not just building a new web
that works with customers including Walmart and page, or dot.com page,” he says, “this is a digital
Procter & Gamble. “I think mobile is changing infrastructure that supports every customer touch
everything in retail.” point . . . at home, in your car, in the store.” JC
Penney is also projecting that its enhanced online
Much of the initial attention has been focussed
presence will lift its e-commerce sales from $1.5bn
on retailers embracing new digital marketing
last year to $2.5bn by 2015, accounting for one fifth
techniques aimed at mobile users, such as sending
of its planned sales growth in the next five years.
text messages, using digital money-off coupons,
“That much of our focus on digital is . . . because we
and on steps to make their existing websites
think the survivors in the industry are going to lead
function on mobile browsers. But retailers are
in this category,” says Mr Ullman.
also facing a world that is more profoundly altered
Source: E-Commerce FT Series. In the first of a two-part series, Jonathan Birchall looks at the
‘Online challenges facing retailers – stores tap into shoppers as mobiles ring the changes’, Financial
Times, 11 May 2010.
12.3 Ubiquity and u-commerce: strategy for the ultimate evolution

of commerce
U-commerce is a new generation of commerce that is based on today’s ubiquitous com-

munication networks. The vowel ‘u’ can be related to terms such as ‘über’, ‘ubiquitous’,
‘universal’ and ‘ultimate’. Each one of these terms represents a particular nuance of the
u-commerce phenomenon. This section discusses the evolution from the wired e-commerce
to u-commerce and the main distinguishing features of the latter. It also presents a typol-
ogy of commerce within the u-commerce framework, along with related new forms
of marketing.
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12.3.1 What is u-commerce?

One of the first and widely accepted definitions of u-commerce11 is ‘the use of ubiquitous
networks to support personalised and uninterrupted communications and transactions
between a firm and its various stakeholders to provide a level of value above and beyond
traditional commerce’.
More specifically, u-commerce goes beyond traditional e-commerce as it integrates
unwired electronic communication channels, TV, VoIP and other technologies to identify
and interact with users.12 It represents a new step in the evolution of markets to which the
wired and mobile e-commerce already contributed. However, in view of its unique features,
u-commerce could be considered as the definite evolution of commerce. Indeed, the appli-
cation of IT advances to commerce has led to the increasing blurring of the physical market
constraints. The implicit ‘space–time’ paradigm, on which transactional marketing is based,
has now evolved towards the ‘virtual–now’ of the e-commerce era.13 In the near future, a
real materialisation of u-commerce will need a real ubiquitous space (or u-space) that ena-
bles the integration of physical and electronic markets.
To conclude this section, a synthetic view on the evolution of markets is presented (see
Exhibit 12.9). It is organised along three market types: (1) traditional (physical) market or
marketplace; (2) electronic market or market space; and (3) ubiquitous market or u-space.
12.3.2 Main features of u-commerce

U-commerce is considered as a new paradigm for the development of electronic transactions
– transcending the Internet era by providing ubiquity, universality, personalisation and uni-
son. These are the four main features of u-commerce that are frequently cited.14 They are
now defined.
Exhibit 12.9 The evolution of markets: from traditional to ubiquitous markets
Market-driving
Market Definition Theme technologies
Marketplace Traditional Exchange of goods and services Constructions and

physical via face-to-face human interaction, mechanical devices:
marketplace where value is extracted from a vehicles, trains, air-
physical location planes, ships, etc.
Marketspace Informational Exchange of goods and services Computers

marketplace via computer interaction, where
value is extracted from information
U-space Transcension Physical and informational are Ubiquitous networks

and integration globally integrated to provide
of marketplace value through amplification, atten-
and marketspace uation, context and transcension;
value is extracted from networks
Source: R.t. Watson et al., ‘Marketing in the age of the network: from marketplace to u-space’, Business Horizons, 2004, vol. 47,
no. 6, p. 36.
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● Ubiquity. This characteristic was previously introduced for m-commerce in section 12.1.3.
In a generic sense, it refers to all that can be everywhere at the same time. In the context
of markets, u-commerce implies the possibility of doing exchanges everywhere, every time
and, most importantly, without human intervention in the process (i.e. exchanges can
be automatically processed). As previously mentioned, it is obvious that the Internet and
mobile devices have contributed to break down the spatial dimension, which has tradition-
ally constrained the development of commercial exchanges and transactions. As IT and
communication technologies continue to evolve, a new reality will emerge: the passing
from the current state whereby mobility is linked to devices, to another one whereby mobil-
ity becomes an intrinsic characteristic of the context where individuals, users, consumers
are – i.e. the omnipresent computation.15 Therefore, through u-commerce, there will be a
subjacent complex network of interconnected electronic objects helping individuals to go
about their daily tasks almost effortlessly. Individuals will get so accustomed to move in
this context that, even though they will be surrounded by electronic objects and devices,
these omnipresent communication networks will be invisible for them.
● Universality. Although the mobility enabled by electronic communication devices has
contributed to the emergence of ubiquitous commerce, compatibility problems among
communication standards makes it difficult for u-commerce to prevail. However, it is
expected that the coming true convergence of communication standards through univer-
sal protocols will allow electronic devices to connect to ubiquitous networks, thus mak-
ing the universality and ubiquity of e-commerce become a reality for users, regardless of
their location and context.
● Personalisation. Mass-personalisation has been an important feature of some e-commerce
value propositions, such as that of Dell.com (for customised PCs) or Levis.com (for per-
sonalised jeans). It allowed the adaptation of a supplier’s offer to each shopper’s prefer-
ences, thus treating each customer as a segment of one. Although mass-customisation
can be implemented in a variety of ways and to different degrees, u-commerce allows
it to reach its fullest meaning. Indeed, through it, exchanges can be unique, taking into
account that all the contextual factors at hand, such as the time of the interaction, user’s
localisation, his/her personal preferences (whether they were explicitly stated or auto-
matically derived from past experiences), his/her possible role (e.g. as a worker, a tourist
or a father, among others), etc., surrounding certain consumption experience could be
altogether known and addressed.
● Unison. This feature refers to the integration of a person’s electronic devices, be it a PC,
a laptop, a tablet or a mobile phone. All these devices will be interconnected and coordi-
nated in real time, so any action realised by the user through any one of his/her devices is
automatically updated on the other devices – thus enabling all the user’s devices to work
in unison. This synchronisation among electronic devices could be extended to include
digital household products and appliances (e.g. a refrigerator), thus achieving the total
unison of a person’s electronic devices.
12.3.3 From wired e-commerce to u-commerce: the definite evolution

U-commerce is thought of as the last and definite stage in IT-based commerce through the
integration of all the types of commerce. The latter have served as intermediate steps to
this integration and have thus individually contributed to the advent of u-commerce (see
Exhibit 12.10).
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Exhibit 12.10 The evolution of IT-based commerce
U-commerce
Silent commerce
(full interconnection of electronic
devices in the u-network)
TV-commerce
(based on interactive digital TV)
Voice-commerce
(based on voice recognition)
m-commerce
Wired e-commerce
Source: adapted from H. Galanxhi-Janaqi and F. Fui-Hoon Ha, ‘U-commerce: emerging trends and research issues’, Industrial
Management + Data Systems, 2004, vol. 104, no. 8/9, p. 745.
12.3.4 Types of u-commerce and new forms of marketing

New forms of marketing, in terms of approaches and strategies, have been suggested in
the literature for the u-space.16 As shown in Exhibit 12.11, the u-space is structured along
two dimensions: on the horizontal axis, the time and space of the interaction can be either
specified or ubiquitous; and on the vertical axis, the customer’s degree of consciousness can
range from unconscious to ultra-conscious.
Each one of the four quadrants in Exhibit 12.11 refers to a particular form or orientation
of marketing in u-space. Thus, in scenarios where time and space are specified, contextual
marketing is applied. In the opposite scenario, companies need to implement marketing
programmes that transcend users’ temporal and spatial restrictions; this approach is known
as transcension marketing. Regarding the consciousness dimension, if customers are ultra-
conscious, then amplification marketing is recommended in order to improve the conscious
interaction with objects related to the consumption experience. On the other hand, in the
unconscious scenario attenuation marketing is recommended in order to create value by
reducing customers’ conscious need of interaction with the consumption phenomenon
(See also the FT article: ‘Welcome to a new reality’.)
The above-mentioned u-space dimensions, along with their corresponding marketing
approaches, are used to define four types of ubiquitous commerce: the hyper-real, the
post-human, the matrix and the node. As can be observed in Exhibit 12.11, each quadrant
represents an area that is a combination of the two u-space dimensions. Consequently,
it would not make sense to apply for every dimension one of the marketing approaches
related to the four scenarios described above, as these are specific to different situations
in the u-space. However, the above-mentioned four types of commerce correspond to
mixed areas, whereby the applied marketing approach ‘hybridises’ the four basic forms of
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Exhibit 12.11 U-space: types of commerce and marketing forms associated
U-space Marketing objective: Amplification

Create value for customer by extending or
enhancing interaction with phenomena
Ultra-conscious
(extends/enhances awareness)
Create value for customer by enabling the
Marketing objective: Contextualization
transcension of time-space constraints

enhancement of time-space specificity
Create value for customer by enabling

Immersion marketing Transformation marketing
Marketing objective: Transcension

Extend or enhance conscious Extend or enhance conscious inter-
interaction with phenomena action with phenomena indepen-
(time-space independent)
in time-space situations dent of time-space situations
(time-space specific)
The The
Ubiquitous
hyper-real post-human
Unique
The The
node matrix
Nexus marketing Sync marketing

Reduce necessity to conciously Reduce necessity to conciously
interact with phenomena in interact with phenomena inde-
time-space contexts pendent of time and space
Unconscious
(behind or out of conscious awareness)
Marketing objective: Attenuation

Create value for customer by reducing the
conscious interaction with phenomena
Source: R.t. Watson et al., ‘Marketing in the age of the network: from marketplace to u-space’, Business Horizons, 2004, vol. 47, no. 6, p. 37.
commerce. Hence, the four types of mixed marketing forms in the u-space are: immersion
marketing, transformation marketing, sync marketing and nexus marketing. Next, each
type of commerce in the u-space, with its associated marketing form, is briefly presented:
● The hyper-real. This type of commerce is identified through consumption experiences
characterised by ultra-consciousness within unique locations. Exchanges here between
companies and customers have specific time and space dimensions, though technology
is used to enhance the customer’s conscious sensation in such a manner that a normal
experience becomes rather unique. For instance, a Formula 1 fan who has the possibility
to watch a Grand Prix seated in a kind of cockpit and having picture-feed (through an
on-board camera) of his/her favourite driver’s experience during the race.
● The post-human. This kind of commerce is characterised by an improvement of the con-
sumer’s consciousness of a certain phenomenon in a ubiquitous manner (i.e. with no
time–space restrictions, wherever the place, whenever the moment). It is in this context
that transformation marketing takes a leading role. This may be the case, for example, of
today’s virtual learning, which transformed the way knowledge is transferred – especially
when compared with traditional, location-based learning. Through e-learning, the origi-
nal time and space constraints have disappeared and users can access academic services
wherever and whenever they need them. Furthermore, as new learning tools get intro-
duced, users’ consciousness of their e-learning experience is enhanced.
● The matrix. Here, too, time and space restrictions are relaxed; however, customer
exchanges usually take place in a conscious way. The idea is that communication
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infrastructures allow the automatic and de-contextualised execution of the customer’s

tasks. This execution is not conditioned by a specific time or place and is not triggered
by an explicit customer action. Therefore, actions here do not result from the customer’s
conscious will but from the automatic responses of some IT applications. This quadrant
of the u-space uses sync marketing, which consists of automatically updating and inte-
grating processes across time and space.
● The node. In this type of commerce, operations are also automatically and unconsciously
triggered (as in the above matrix case), but these operations are related to a specific
time–space context (i.e., automatic processes start when customers are in a specific con-
text). It is here where nexus marketing takes place, with processes designed to reduce
customers’ need to consciously interact with a phenomenon in a particular context. For
instance, let us think of the following future scenario: a person enters a hypermarket;
his/her mobile device detects that and subsequently accesses this person’s integrated
database to check his/her possible product’ needs; the latter are defined based on auto-
matic database updates through data feeds received from the customer’s refrigerator;
next, the customer receives a notification, through his/her mobile device, suggesting
buying certain products he/she may need. All the steps of the above process are auto-
matically performed, without any consumer intervention.
Welcome to a new reality

Imagine sitting in a café on holiday enjoying a bring print advertisements for the film Bridesmaids
bottle of wine. You would like to know more about to life, for example, simply by pointing their devices
it, perhaps order some for home. You get out your at the image. If they had downloaded the application
smartphone, take a picture of the label and are Aurasma Lite, created by Autonomy, the UK search
instantly taken to a website with information about technology company, the device would recognise
the vineyard and the grape variety, as well as a link the poster and automatically play the film trailer.
to an e-commerce site where you can order a case at
Similarly, in June, the Financial Times ran an
the click of a button. You wonder what the historic
advertisement for a collaboration with Wally yachts
building on the piazza in front of you is, so you hold
which, when viewed through an iPad equipped with
up the phone, which links to a Wikipedia page on
the app, turned the still image into a film of the
the history of the monument. You then turn your
boats racing. Touch the screen and you are taken
attention to the menu, written in a language you do
directly to the Facebook page for the promotion.
not speak. Hold the smartphone over the page and
the text is translated for you. In the US, meanwhile, Google is experimenting with
uses of a similar service, called Google Goggles.
All these things are becoming possible as image
This recognises objects – such as books, logos and
recognition technology and augmented reality come
products – and takes users directly to search results
together with portable devices such as smartphones
relating to them. The J. Paul Getty Museum in Los
and tablet computers. These developments could not
Angeles, for example, has joined forces with Google
only change the way we interact with the internet,
to allow people to view a painting through their
enabling us to use real-life objects and places,
smartphone and to be instantly taken online to
rather than typing in text, to find information. They
access more information about the works.
could also change the way business interacts with
consumers. Google also has trials with Buick, Disney, Diageo,
T-Mobile and Delta Air Lines using the search for
A number of recent advertising campaigns give a
marketing campaigns. The appeal for companies is
flavour of what is possible. Consumers in the UK
that visual search could create a more direct link
with an iPhone, iPad or a Google Android phone can ➨
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with customers. It could also provide an alternative take off elsewhere. In 2008, Pepsi put QR codes on
to search engines such as Google. This may explain about 400m cans and bottles, linking to an internet
why Google is keen to develop its own offering in site with games, ringtones and competitions, but
the area. the campaign was not seen as a success. “QR
codes failed because people did not know what to
Lego began using augmented reality in its stores
do with it,” says Oliver Newton, head of emerging
three years ago. Customers who hold up a Lego
platforms at Starcom MediaVest Group, the media
box in front of a computer kiosk will see a three-
agency.
dimensional image of the toy inside it appear on
the screen. “We have images of all our toys in 3D Mike Lynch, chief executive of Autonomy, says his
format already,” says Olav Gjerulfsen, director of technology is different. “With Aurasma, there is no
the company’s 3D projects. “The idea was to see how barcode needed,” he says. “It expands the way the
we could utilise that. We wanted to give parents technology can be used. You can’t put a barcode
and children a wow effect, something they hadn’t on a bus or on Buckingham Palace. We should
seen before. And if we could give better product get to the point where you hold your phone up to
information at the same time, that was good too.” anything and it works.” There is, he admits, still
Lego is now rolling out technology that can show a long way to go in getting people to understand
augmented reality images of even more products. the technology. Ads that can be brought to life
It is also developing an interactive window that can with Aurasma have a little “A” logo at the bottom
transform the images of people walking past into to alert people, and Aurasma’s key challenge is
characters in a Lego scene. “We know it helps brand getting enough people to download the app. “There
building and we know that it increases sales among is a behavioural change to overcome,” Mr Lynch
the people who try it out.” said. “We are still at the stage of getting critical
mass. It is a long game.” So far, there have only
Acrossair, part of the Imano digital media group,
been about 1m downloads.
created an iPhone app that shows people the way to
the nearest tube station in London, by overlaying a Steve Allan, chief executive of advertising
sign pointing in the correct direction over the image agency MediaCom, which is using Aurasma for
of the street viewed through the phone. However, advertisements promoting Universal’s film
this is based on recognising the phone’s location Bridesmaids, believes that despite the current buzz
through a GPS signal, rather than recognising the around augmented reality, it is still unclear if the
image of the street. The company is now looking technology will take hold. “People have been trying
at taking augmented reality beyond marketing to create campaigns with augmented reality for a
campaigns into areas such as medicine, where good couple of years, but this is the best version
it could be used as a diagnostic tool. They are I have seen,” he says. “It just worked. So many
developing technology for surgeons that would times technology doesn’t. But it is early days still
allow them to overlay scan images on to patients and there are barriers and challenges. Part of the
to make it easier to plan operations. “Augmented challenge is getting enough people to upload the
reality has been a bit of a gimmick, but we are app. Scale matters for a lot of companies.”
now trying to take it into areas where it has more
Mr Newton agrees: “Augmented reality is still
utility,” says James Williams, account director at
an exotic campaign. It is still the preserve of the
Imano.
brand-led clients although the investment costs
Companies have also experimented with are coming down.” The technology may also
alternative ways to navigate to internet pages, for need a little more work. Visual search works best
example using two-dimensional bar codes known for flat images such as posters, and less well for
as quick response or QR codes. Rather than typing three-dimensional objects. However, Mr Lynch
in an internet address, consumers scan a small is confident improvements will come soon. “This
black-and-white box image with their smartphone is like TV in the 1940s. We are seeing the first,
camera and are taken to a website. QR is popular grainy pictures of what will become a very powerful
in Japan and South Korea, but has struggled to medium.”
Source: Extracted from Palmer, M. (2011) Welcome to a new reality, Financial Times, 25 July.
292
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Summary
● this chapter started out by giving a definition of mobile e-commerce and depicting the
players of the mobile value network. these include mobile equipment vendors for wireless
infrastructure and hand-held devices, mobile network operators, It enablers, application
and content providers, as well as portal providers.
● By segmenting mobile e-commerce consumer and business services, this chapter illustrated
the many uses of wireless applications. While consumer services can be categorised into
information, communication, transaction and entertainment services, business services
can be categorised into mobile supply chain management, mobile customer relationship
management and mobile workforce services. a detailed classification of mobile commerce
services and applications, for both corporate and individual consumers, was also presented.
● next, this chapter explained the main advantages of mobile e-commerce over wired
e-commerce. Ubiquity, convenience, localisation and personalisation represent some of the
key capabilities of wireless technologies that can be leveraged for value creation.
● While the value chain framework exemplified how wireless technologies impact on the
primary and support activities of the firm, the five forces framework illustrated how these
technologies can affect the strategic positioning of a firm within its industry.
● However, there are some challenges that mobile e-commerce companies need to address
as they are key to improving customers’ trust and usage of mobile online services.
● Finally, a brief presentation of the ubiquitous commerce framework, which is considered to
be the next stage in e-commerce evolution, highlights the new strategies and applications
in the field.
REVIEW QUESTIONS
1 outline the value network of mobile e-commerce and briefly explain its players.
2 Which categories can be used to segment mobile e-commerce applications?
3 What are the advantages of mobile e-commerce over wired e-commerce?
4 pick two support and two primary activities of the value chain and describe how wireless
technologies can affect them.
5 explain to what extent wireless technologies increase or decrease an industry’s rivalry.
6 describe the u-commerce framework and its related market approaches.
1 Critically assess to what extent mobile network operators play a key role in mobile e-commerce.
2 Illustrate the advantages of mobile e-commerce through a real-world example.
3 provide an example of a company that uses wireless technologies for customer relationship
management and discuss how it adds value.
4 pick an industry of your choice and show how wireless technologies affect its incumbents.
5 Reflect on how companies are currently managing the challenges of mobile e-commerce.
293
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For an in-depth portrayal of mobile services, see D. Steinbock, The Mobile Revolution: The Making
of Mobile Services Worldwide, Kogan Page, 2005.
For more information on the categorisation of mobile content, also see F. Müller-Veerse et al.,
UMTS Report – An Investment Perspective, Durlacher Research, 2001.
For a detailed presentation of the u-commerce framework, see R.T. Watson, L.F. Pitt, P. Berthon
and G.M. Zinkhan, ‘U-commerce: expanding the universe of marketing’, Journal of the
Academy of Marketing Science, 2002, vol. 30, no. 4, pp. 333–47.
www.mmaglobal.com is the website of the Mobile Marketing Association, which strives to stimu-
late the growth of mobile marketing and its associated technologies.
www.ecommercetimes.com is an online magazine, which also provides in-depth coverage of
mobile commerce topics.
www.fiercemobileit.com is a website that provides frequent updates from the mobile content and
mobile marketing sector.
1 R. Dholakia and N. Dholakia, ‘Mobility and markets: emerging outlines of m-commerce’, Journal of
Business Research, 2004, vol. 57, pp. 1391–1396.
2 S. Balasubramanian, R.A. Peterson and S.L. Jarvenpaa, ‘Exploring the implications of m-commerce for
markets and marketing’, Journal of the Academy of Marketing Science, 2002, vol. 30, no. 4, pp. 348–361.
3 F. Müller-Veerse et al., UMTS Report – An Investment Perspective, Durlacher Research, 2001, p. 23.
4 N. Sadeh, M-Commerce: Technologies, Services and Business Models, John Wiley, 2002, p. 52.
5 B. Anckar and D. D’Incau, ‘Value creation in mobile commerce: findings from a consumer survey’, The
Journal of Information Technology Theory and Application, 2002, vol. 4, no. 1, pp. 43–64.
6 C.S. Jensen et al., ‘Location-based services – a database perspective’, Proceedings of the 8th Scandinavian
Research Conference on Geographical Information Science (ScanGIS 2001), As. Norway, 2001,
pp. 59–68.
7 C. Tode, ‘Starbucks is worldwide leader in mobile payment transactions’, Mobile Commerce Daily, 31
January 2012.
8 D. Steinbock, The Mobile Revolution: The Making of Mobile Services Worldwide, Kogan Page, 2005.
9 K. Siau and Z. Shen, ‘Building customer trust in e-commerce’, Communications of the ACM, 2003, vol. 46,
no. 4, pp. 91–4.
10 C. Condos et al., ‘Ten usability principles for the development of effective WAP and m-commerce serv-
ices’, Aslib Proceedings, 2002, vol. 54, no. 6, pp. 345–55.
11 See R.T. Watson et al., ‘U-commerce: expanding the universe of marketing’, Journal of the Academy of
Marketing Science, 2002, vol. 30, no. 4, p. 336.
12 See H. Galanxhi-Janaqi and F. Fui-Hoon Ha, ‘U-commerce: emerging trends and research issues’,
Industrial Management + Data Systems, 2004, vol. 104, no. 8 ÷ 9, pp. 744–55.
13 See L. Berthon et al., ‘Postmodernism and the web: metha themes and discourse’, Technological
Forecasting and Social Change, 2000, vol. 65, no. 3, pp. 265–79.
294
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14 Some of these ideas have been extracted from R.T. Watson et al., ‘U-commerce: expanding the universe
of marketing’, Journal of the Academy of Marketing Science, 2002, vol. 30, no. 4, pp. 336–8.
15 D. Amor, The e-Business (R)evolution: Living and Working in an Interconnected World, 2nd edition,
Prentice Hall, 2001.
16 Contents of this section are an adaptation of the original framework proposed by R.T. Watson et al.,
‘U-commerce: expanding the universe of marketing’, Journal of the Academy of Marketing Science, 2002,
vol. 30, no. 4, pp. 338–44.
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PART 3
A roadmap for e-business strategy
implementation
Part overview
this part proposes a roadmap for e-business strategy implementation; it addresses the
following issues:
● Vision
● objectives
● Value creation
● target segment(s)
● privacy, ethical and legal issues
● external partners
● organisational model
● Revenue and cost model
● strategy alignment.
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Chapter 13
A roadmap for e-business strategy

implementation
Chapter at a glance
13.1 What is the mission of our company? 300
13.2 What are the objectives for our e-business strategy? 303
13.3 What value do we want to offer through our e-business strategy? 303
13.1.1 What type of competitive advantage do we aim for? 303
service offerings? 304
13.4 What are the customer segments to target and what is our value
proposition for each segment? 305
13.5 What kind of ethical issues, privacy concerns and security risks do
we need to consider? 305
13.5.1 dealing with ethical issues and privacy concerns 305
13.5.2 addressing security risks 306
13.6 Should we implement our e-business strategy alone or with
external partners? 309
13.7 What organisational structure should our e-business activities have? 309
13.8 What is our cost and revenue model? 309
13.8.1 What is the cost structure of our e-business activities? 310
13.8.2 What is the revenue structure of our e-business activities? 310
13.9 How should we align our physical-world strategy with our
e-strategy? 311

4 American Well starting-up an e-business
12 lCT strategy in Tunisia Road map for a national ICt strategy
20 NTT DoCoMo Business transformation
299
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Learning outcomes
● explain the nine steps of the e-business strategy formulation roadmap.
● Link the individual steps of the roadmap to the different parts of the e-business
strategy framework.
● Understand the main business and management issues involved in each stage of
the e-business strategy formulation roadmap.
Introduction
to help you, as an executive, manager or manager-to-be, to develop and implement an

e-business strategy for your company, this chapter proposes a roadmap consisting of the
following elements: (1) vision, (2) business objectives, (3) customer-value creation, (4) mar-
ket segmentation and targeting, (5) privacy, ethical and legal issues, (6) vertical boundaries,
(7) organisational model, (8) revenue and cost model and (9) strategy alignment (see exhibit 13.1).
after having presented the e-business strategy framework in the course of the previous
chapters, what is the purpose of this implementation roadmap? While the e-business strategy
framework outlines from a structural perspective the key elements of strategy formulation, the
goal of this roadmap is to propose from a process-orientated perspective the different steps
involved in setting up and implementing an e-business strategy.1
In spite of their different perspectives, the roadmap and the strategy framework are closely
interrelated. on the one hand, this roadmap aims at providing you with a practical way to
develop an e-business strategy. on the other hand, the cross-references to the more exten-
sive e-business strategy framework allow you to reference back, depending on your previous
knowledge and the specific organisational situation at hand. the depth of the analysis obvi-
ously depends on the issue at hand. If you do not choose carefully where to drill deep and
where to stay at the surface, you increase the risk of over-analysing issues of relatively low
importance while overlooking other issues of critical importance.
13.1 What is the mission of our company?
As mentioned above, the mission presents the starting point of strategy formulation. It
reflects the strategic intent of the firm and points to its desired future state.2 As examples,
consider the following mission statements:
We will be valued as the leading financial services group in the nordic and Baltic financial market with
a substantial growth potential. We will be in the top of the league or show superior profitable growth
in every market and product area in which we choose to compete. We will have the leading multi-
channel distribution with a top world ranking in e-based financial services and solutions.3
(Nordea Bank)
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Chapter 13 A roadmap for e-business strategy implementation
Exhibit 13.1 The roadmap for e-business strategy implementation addresses nine interrelated
issues
1
Vision What is the vision/mission for our company?
2
Objectives What are the objectives of our e-business strategy?
3
What value do we want to offer through our e-business
Value creation
strategy?
4
What are the customer segment(s) to target and what is
Target segment(s)
our value proposition to each segment?
5
Privacy, ethical What kind of privacy concerns, ethical and legal issues
and legal issues do we need to consider?
6
Should we implement our e-business strategy alone or
External partners
with external partners?
7
Organisational
What organisational model should we apply?
model
8
Revenue and
What is our cost and revenue model?
cost model
9
Strategy alignment How is our e-strategy aligned with our physical strategy?
We seek to offer the earth’s biggest selection and be earth’s most customer-centric company,
where customers can find and discover anything they might want to buy online.4
(Amazon.com)
Google’s mission is to organise the world’s information and make it universally accessible and useful.
(Google.com)
everyone has ideas and many of them fit on a shirt. We give those ideas the space they deserve:
spreadshirt’s customers can let their fantasies run free on over 150 different products. they can use
their own designs and texts, or use works from other designers. Whoever likes to create themselves
or would like more attention for their projects can also sell with spreadshirt – in their own free online
shop or via other channels spreadshirt offers to market the products. Companies and clubs, artists and
bloggers, individuals both private and famous take advantage of this offer. over 45.000 shop partners
and more than 35,000 designers were active with spreadshirt around the world in 2012. spreadshirt’s
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e-commerce platform let’s anyone create, buy and sell ideas on products consumers love to wear, use,
and carry. It’s a flexible, risk-free, print-on-demand approach with multiple points of sale. spreadshirt’s
fulfillment service handles everything from production and payment to shipping and customer service.
(Spreadshirt.com)
openBC is committed to powering relationships based on trust for all professional people. Based
on the theory that ‘no two people are more than six degrees apart’, openBC enables members
to grow their trusted network by making their contacts’ contacts visible to them. as an active and
productive community, we constantly strive to create real value for the world’s professionals, as
an everyday online and live resource – across all countries, languages and industries. openBC
crosses barriers – for a sustainable world.
(openBC.com, now Xing.com)
We want to be the recognised leader in service excellence among all companies – not just eleva-
tor companies – worldwide. We will inspire our customers’ total confidence through exceptional
service that earns us 100% of their business, 100% of the time.5
(Otis Elevator)
By expanding the applications of mobile phones beyond communication, we are promoting the
creation of a lifestyle infrastructure.
our goal is to serve our clients as a lifestyle service provider.6
(NTT DoCoMo)
The goals of formulating a company’s mission are threefold. As is shown below, mission
statements typically address one to three key questions of ‘where’ and ‘how’ a business
wants to compete, as well as ‘why’ it wants to do so (see Exhibit 13.2):
● Definition of business scope (Where?). On a very broad level, this question addresses the
areas, both on a regional and product basis, in which a firm wants to compete. This deci-
sion is of essential importance because it serves as a guideline to prioritise the resource
allocation. For instance, Xing explicitly states in its mission statement that the company
wants to be ‘an everyday online and live resource – across all countries, languages and
industries’, which is, admittedly, a very broad definition of its business scope.
● Definition of unique competencies (How?). This question addresses, also on a highly aggre-
gate level, which competencies a firm wants to develop and exploit. Regarding the issue of
Exhibit 13.2 A mission statement serves multiple purposes
Mission statement
• Areas in which the firm wants to • Starting point and

Definition of business
compete ‘home base’ of
scope
• Priorities for the firm’s development strategic direction
Where? and resource allocation
• Base for reflection
• Competencies the firm possesses now/ and reaching
Definition of unique
will develop and exploit in the future consensus
competencies
• Resources/capabilities that create those
How? competencies • Definition of
priorities for the
• Emotional values that inspire people strategic agenda
Definition of values • Sources of commitment and
involvement • Direct/empower
• Ethical standards people
Why?
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competencies, Spreadshirt emphasises in its mission statement that it ‘wants to be the world’s
creative apparel platform, inspiring people to create, buy or sell individualised apparel with
the best tools, assortment, content and fulfilment’. In doing so, Spreadshirt explicates the
different types of capabilities that need to be developed in order to fulfil the mission.
● Definition of values (Why?). Laying out the emotional values that should guide the firm
has the goal of inspiring people, thereby securing their commitment and involvement
in their work. In addition, the definition of values helps to establish ethical standards of
which behaviour is acceptable and unacceptable. The Spreadshirt mission statement also
addresses this dimension when it states that ‘we want to be a fun and inspiring place to
work, where integrity, delivery, and innovation reign’.’
By addressing these three dimensions and providing broad guidelines, mission statements
serve as a starting point during strategy discussions, since the ideas laid out in these state-
ments serve as a common basis for reflection and reaching consensus, and since they help
to define priorities for the strategic agenda. In addition, ethical standards that are made
explicit in the mission statement direct and empower employees.
However, developing a powerful mission statement that will be supported by all mem-
bers of an organisation over many years presents a challenging task. On the one hand, it
needs to consider the specific characteristics of the company and its employees. On the
other hand, it also needs to incorporate the broader context within which the company
operates. Doing so can include asking questions such as: what are the major recent tech-
nological developments that we can leverage in the future? and how are demographics
changing in our society and what does this mean for our company in the long term? For a
structured approach to formulating these types of questions, it is helpful to analyse the dif-
ferent dimensions of the macro-environment, which were outlined in Chapter 3.
13.2 What are the objectives for our e-business strategy?
While a mission statement is important to establish the direction of your company, it is

equally important that you select parameters to measure the success of your efforts towards
achieving the vision. These parameters are the quantifiable objectives, which can include
measures such as revenues, market share, profits and customer satisfaction level.
Depending on the type of mission statement, the objectives will differ. Yet all of them
should have in common the fact that they can be measured and quantified. Only then
can they provide goals for the employees to strive for, and only then is it possible to track
progress and make adjustments along the way in order to achieve the objectives.
Consider the example of the vertical e-marketplace Covisint. The founding car makers,
General Motors, Ford and DaimlerChrysler, stated their objective to achieve $6 billion of sav-
ings per year through online collaboration, e-procurement and e-supply chain management.
13.3 What value do we want to offer through our e-business strategy?
13.3.1 What type of competitive advantage do we aim for?

When answering this question, you need to determine why customers would want to buy
your products or services. They could do so because of low prices or high quality, or both.
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If your company decides to compete primarily on price, you need to strive to become
a cost leader within your industry. The low-cost airline easyJet is a prime example of a
low-cost leader. The Internet is an integrated part of the company’s strategy since it allows
easyJet to cut out expensive ticketing offices and sales agents.
The other option is to strive for a differentiation advantage vis-à-vis rivals (see
Section 5.2). You can achieve this, for instance, by offering high levels of convenience,
broad product selection, high service quality or a superior brand name. Additionally, you
can leverage information that is already available in your organisation to create benefits for
your customers (see Section 4.3 on the concept of the virtual value chain).
Regardless of which of the two options you choose, it is important to create a strong
fit between different activities by (1) aiming for consistency among them, (2) ensuring
reinforcement between activities to increase customer benefits and (3) optimising overall
efforts so as to reduce costs (see Section 5.4).
Finally, you can also aim at achieving both cost leadership and differentiation advan-
tages at the same time – similar to what Amazon.com and Tesco.com have achieved in their
respective markets. However, doing so entails the risk of getting ‘stuck in the middle’, where
you possess neither a cost nor a differentiation advantage vis-à-vis rivals (see Section 5.2.3).
The likelihood of outpacing your competitors along both the price and differentiation dimen-
sions improves if you find ways to open up new and attractive market spaces (see Chapter 7).
For instance, you can break out of traditional ways of conducting business by looking across
substitute industries, strategic groups, complementary products or unrelated industries.

service offerings?
In addition to the type of competitive advantage that you want to provide to customers,
the second key dimension of the value you offer to your customers relates to the breadth
of products and services that you want to offer. This breadth depends to a large degree on
the target market segment(s) that you want to serve (see Section 4.2). If your company
wants to achieve broad coverage, you will, in all likelihood, need to offer a broad variety of
products to meet the needs of different customer segments. This is the case, for instance,
with the car manufacturer Volkswagen, which offers different models covering all target
segments. If, on the other hand, your target segment is very narrow with well-defined pref-
erences, as is the case with, for example, Ducati, then it is advisable also to limit the number
of products offered. When thinking about an extension of scope, you need to consider the
trade-offs involved. The opportunities are increased market reach and sales, while the risks
include a possible loss of internal focus and a dilution of the brand name from a customer
perspective.
In addition to a company extending product scope by itself, it can also leverage the
Internet to establish partnerships with complementors. Here, the critical question is: what
else would your customers want to buy in addition to the products and services that are
currently offered? The online travel agency ebookers.com, for instance, has links on its
website that point to weather reports, currency exchange information, car rental services
and travel insurance. Amazon.com went even beyond the Amazon.com vision statement
mentioned above. It invited all types of retailers to sell their products on its online platform
(including new and used books), which might be in direct competition with its own product
offerings.
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13.4 What are the customer segments to target and what is our
value proposition for each segment?
Closely linked to value creation is the decision about who your customers should be.
Deciding on a target market entails two steps. First, you need to select criteria for divid-
ing your potential market into segments. The chosen criteria will have a significant impact
on the segmentation outcome (see Section 3.4). For instance, you can segment markets
according to customer types (i.e. consumers, corporate and governmental/public-sector
customers) or according to age or income.
Based on the market segmentation, you need to decide which segments to target (see
Section 3.4) with what products and services that are tailored specifically to a segment’s
needs. Consider how some of the companies featured in the case studies section of this text
have chosen their target segments. Tesco.com, for example, focused initially on targeting
upper-income shoppers with its online grocery service. Subsequently, it expanded into mass
market segments. Spreadshirt primarily targets entrepreneurs who want to set up their own
online shop to sell customised T-shirts and other merchandise.
13.5 What kind of ethical issues, privacy concerns and security risks
do we need to consider?
13.5.1 Dealing with ethical issues and privacy concerns

Ethics refers to the principles of right and wrong that individuals use to make choices to guide
their behaviour.7 The pervasive nature of the Internet raises a host of new ethical issues that
managers need to address in their daily work. Most important in this context is the issue of
privacy, which stands for the right of individuals, be it in the online or offline world, to be left
free from surveillance or interference from other individuals or organisations.
As an e-business manager you need to deal with privacy issues primarily on two impor-
tant levels. First, and most importantly, you need to manage the trade-off between the
desire to profit from information gathered about customers and the need to safeguard pri-
vacy. The Internet provides unprecedented opportunity to collect data about customers and
to adjust market targeting accordingly. Regarding different types of customer information,
it would be interesting to collect some or all of the following data:
● Contact information. Includes name, postal address, email address. This information is
typically collected through online forms.
● Profile information. Includes information about a customer’s personal characteristics
including age, sex, occupation, etc. To obtain this type of information, companies usually
have to provide some kind of incentive to users. Tesco, for instance, asks customers who
register for the Clubcard to provide information about dietary preferences and who they
live with. In return, Clubcard owners receive promotional offers when shopping both
online and offline.
● Behavioural information (on a single site). Includes click-through patterns or purchase
history on a single website, such as Amazon.com.
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● Behavioural information (across multiple sites). Includes information on how Internet

users navigate through different websites.
Obviously, the data only becomes relevant when it is used in one way or another to under-
stand customers better, by scrutinising and analysing customer information using data-
mining techniques and to target these customers directly. As we discussed in Section 3.4 on
customer segmentation, the more you know, the more it becomes possible to target custom-
ers with specific product advertisements.
Both the acts of data collection and data mining entail the risk of undermining the
privacy of customers, especially so when computers are leveraged to combine data from
multiple sources to create electronic dossiers of detailed information on individuals – a
procedure that is called profiling.
On another level, e-business managers also need to determine to what extent they wish
to monitor their employees’ online activities, such as web-surfing or email correspondence.
Technological advances have made it possible to monitor all incoming and outgoing traffic
on a permanent basis. The underlying goal of these monitoring activities is to increase pro-
ductivity and to prevent employees from wasting time on non-business activities. However,
employees have the competing goal of having their privacy protected.
The conflicting goals described in these two realms point to a more fundamental basis
of making ethical choices, which is to manage trade-off between different goals. Below, we
summarise some of the key issues that you need to consider in order to make some ethical
choices.8
Typically, ethical conflicts refer to higher values such as freedom, privacy or protection
of property. Having a clear understanding of what these higher-value orders specifically
mean is a first step to making an ethically responsible choice. Only after an understanding
of the higher-order values has been generated does it become possible to outline clearly
the dilemma between two opposing goals – e.g., the goal of gathering as much as data as
possible about customers and their goal of maintaining a certain minimal level of privacy.
Furthermore, you also need to understand clearly who is involved and affected by the
choices that you make. For instance, these stakeholders might be customers and consumer
rights groups, on the one hand, and companies such as Tesco on the other hand. Finally,
when it comes to making a choice there are a number of questions you can ask yourself to
determine whether the choice is ethical:
● Would you want to be treated the same way if someone else made this type of decision
that affected you personally? If not, the choice you made is unlikely to be ethical.
● Would it be appropriate if everyone in the organisation behaved this way? Would the
organisation or the larger society you live in be able to survive and prosper?
● Could this action be taken repeatedly over time? An action that is carried out only
once might not seem problematic. However, if you imagine extending this decision
into the future, then it might become obvious that the long-term effects would not be
acceptable.
13.5.2 Addressing security risks

The greatest asset of the Internet, which is its openness, also presents at the same time the
biggest risk to security for both companies and customers. Since information about com-
mercial or financial transactions passes through many computers, where it is captured,
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monitored, stored and processed, e-business ventures are particularly susceptible to out-
side penetration. Numerous problems include stolen credit card details. These threats in
the online environment are similar to those in the offline world; they include burglary,
breaking and entering, embezzlement, trespass, malicious destruction and vandalism.9
Below, we briefly discuss the most prominent security threats that e-business companies
and their customers face today:10
● Malicious code refers to security threats such as viruses, worms or Trojan horses.
● Phishing refers to deceptive attempts by third parties to obtain financial information for
financial gain. It does not involve malicious code but instead relies on misrepresentation
and fraud. One well-known example of a phishing attack is an email from a rich uncle
in Nigeria who is seeking a bank account to store millions of dollars for a short time. In
return, he is willing to give you a few hundred thousand dollars. Some people are fooled
and provide their bank account information.
● Hacking and cyber-vandalism refer to acts committed by individuals who attempt to gain
unauthorised access to a computer system. They do so by finding weaknesses in the secu-
rity procedures of websites and computer systems. A recent example here is the password
breach that happened to 6.5 million members of LinkedIn. (See the FT article: ‘LinkedIn
vows to tighten security after password breach’.)
LinkedIn vows to tighten security after

password breach
LinkedIn, the social networking service used by many Security consultants suggested that the LinkedIn
business executives, has promised to implement new attack and a similar breach last week at eHarmony,
security measures after 6.5m members’ passwords an online dating service, had highlighted the security
were posted on a Russian hacker site. weaknesses of even large and mature organisations.
LinkedIn said that it had since implemented an LinkedIn had stored hashed passwords (scrambled
improved password storage encryption policy using versions churned through an algorithm called SHA-1)
a technique called “salting”, which had made it without salting them. Salting adds an extra layer
much harder for hackers to crack passwords that of security by adding random characters, either at
have been encoded. “We have no reports of member the beginning or the end of the already scrambled
accounts being breached as a result of the stolen password.
passwords,” LinkedIn said on its blog.
“There is no good reason why LinkedIn was not
The company has called in private security experts using . . . salting – it does not use any more
and the Federal Bureau of Investigation over the technology or resources or knowledge,” said
security breach. “Based on our investigation, all Chester Wisniewski, a senior security adviser at
member passwords that we believe to be at risk Sophos, a cyber security company.
have been disabled,” it said.
“We can speculate that a lot more information
LinkedIn, which has 160m members, said that it was stolen rather than just passwords, because
did not know the full extent of the breach. It passwords are usually stored alongside user names
denied accusations that it had been slow to alert and email addresses,” said Mr Wisniewski.
members to the problems, which were disclosed on
But in spite of almost daily security breaches,
Wednesday.
consultants said they were surprised by how ➨
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many organisations took a lackadaisical approach will happen and they should always be on [the]
to data security. A recent LogRhythm survey of defensive,” said Ross Brewer, managing director
UK-based IT managers found that more than half and vice-president of international markets at
of businesses had not increased the proportion of LogRhythm.
IT budget they spent on security in the past five
“Today’s security strategies need to be based on
years. Twenty-seven per cent of IT staff said they
proactive – as opposed to reactive – principles,
did not know whether their organisation had ever
underpinned by continuous network monitoring
experienced a data breach.
that affords organisations a 360 degree view of
When it comes to IT security, ignorance can everything that’s happening across IT networks
cost businesses millions in lost revenues. A at all times,” he said. “This enables the real-
relatively small but successful start-up may use time identification, correlation and remediation
unsophisticated security techniques, but as it grows of any anomalous activity throughout the
it needs to upgrade its systems, said Mr Wisniewski. IT infrastructure, and provides a truly holistic
approach to protecting the data of those customers
Experts said tighter security was not necessarily
that place so much trust in service providers such
expensive, but not taking precautions was costly.
as LinkedIn.”
“Businesses should assume that compromises
Source: Mahmudova, A. and Taylor, P. (2012) LinkedIn vows to tighten security after password breach,
Financial Times, 11 June.
● Credit card fraud is one of the most feared occurrences on the Internet. This fear prevents
many users from providing their credit card information online. In reality, however, this
type of fraud is much lower than users think, since it represents less than 2% of all online
card transactions.11
● Spoofing (pharming) takes place when hackers misrepresent their true identity or mis-
represent themselves by using fake email addresses. When a hacker spoofs a website it is
called pharming, which involves redirecting a weblink different from the intended one.
Once an unknowing user has been redirected to the fake website, hackers then collect
and process orders, effectively stealing business from the real site.
● Denial of service (DOS) refers to large-scale email attacks on websites with useless
traffic. The goal of these email floods is to shut down websites. When they succeed,
the costs for the affected website operator are substantial, since, while the site is shut
down, customers cannot inform themselves through the site and, more importantly,
they also cannot make purchases. For instance, in April 2007 a series of DOS attacks
disrupted Estonia’s most vital websites, including the websites of the president, the
parliament, almost all of the government ministries, two of the biggest banks and firms
specialising in communication. The government had to take emergency measures and
block access to the websites from the outside world, which resulted in substantial eco-
nomic losses.
There are a number of different ways to protect against security threats. These include, on
the one hand, technological measures such as encryption, firewalls or virtual private net-
works (VPNs). On the other hand, companies can also implement procedures and policies
to limit the danger of outside attacks on their systems. These measures include clear online
authentication and authorisation for users of the system and conducting routine reviews of
access that identify how outsiders are using the website.12
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13.6 Should we implement our e-business strategy alone

or with external partners?
When deciding on the degree of integration of e-business activities, you need to analyse
the value chain again and decide which e-business activities to perform in-house and which
ones to outsource to external providers (see Chapter 9). The main reasons that favour
‘make’ decisions are strong linkages between individual activities within the firm and high
transaction costs. Reasons that favour ‘buy’ decisions include high economies of scale, high
capital requirements, specialised know-how and higher efficiency of the open market.
As the Tesco.com example illustrates, making the right ‘make-or-buy’ decision can be a
major source of competitive advantage. Tesco’s success in the past resulted partly from its
ability to find the right balance between activities that are sourced from external providers,
thereby reducing costs, and activities that the company performs in-house to ensure differ-
entiation from other competitors.13 Consider, for instance, Tesco Direct’s internal build-up of
a media centre for a team of 40 experts including designers, photographers and publishers.
13.7 What organisational structure should our e-business

activities have?
As part of the internal set-up of your company, you need to choose the appropriate organi-
sational structure for the e-business activities. At one end of the spectrum, this would mean
completely integrating e-business activities into your existing organisation. At the other end
of the spectrum, it would mean setting them up as an independent entity or spin-off (see
Section 9.2).
The benefits of setting up a spin-off include factors such as greater focus, a faster deci-
sion-making process and a higher degree of entrepreneurial culture. As valuations of online
companies are soaring again and IPO activities are picking up, access to venture capital
might also once more become a relevant reason for spinning-off online operations.
However, overall, favour has tilted towards integrating e-business activities into the
existing operations of the firm. By doing so, companies can leverage their established
brands to attract customers to the online channel, as is illustrated through the examples
of Ducati and Tesco. Additionally, it becomes possible to provide multi-channel offerings,
where customers can choose between the online and offline interaction, depending on their
individual preferences and needs. This opens up the opportunity for cross-promotions,
shared information systems and integrated customer services, where customers can, for
instance, return products purchased over the Internet to a physical store.
13.8 What is our cost and revenue model?
The final and most critical issue to address concerns the financial matters involved in
e-business activity. To find these out, you need to analyse the business model of your firm
in terms of both the cost structure and the revenue structure.14
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13.8.1 What is the cost structure of our e-business activities?

To determine the cost structure, you need to consider the individual parts of the value
chain – such as production, IT, marketing, sales and after-sales service – and analyse their
underlying cost drivers (see Section 5.2). This entails asking questions such as ‘How will
costs evolve as the scale of operations increases?’ (see Section 7.1) and ‘How can we use the
Internet to lower costs across the value chain?’.
As the focus of investors has shifted towards the profitability of e-business ventures, it
has become much more important to control costs. Ultimately, the cost structure of your
e-business venture determines the gross profit margin that your company must earn in
order to cover overheads and generate profits. However, if you start out from the beginning
with high costs due to, for example, high fixed costs or marketing expenses, this limits your
spectrum of business opportunities. Obviously, your cost structure dictates the types of rev-
enues you need to generate in order to achieve the desired profitability. For instance, with
a cost-intensive infrastructure in place, you will generally find it difficult to justify targeting
small markets (although these may be very promising), since they are unlikely to generate
enough revenues to cover costs. In addition, you will also find it more difficult to adjust your
e-business strategy if market realities do not meet your expectations.15
To determine the required scale, you need to analyse the (expected) cost structure of
your e-business activities. This entails an analysis of each activity of the value chain and its
underlying cost drivers. If costs are primarily fixed, as is the case with warehouses or web-
site development, it is likely that they display high economies of scale. This, in turn, requires
that your operations need to be sufficiently large in order to benefit from the cost reduction
brought about by scale effects.
Beware, however, that scale effects are achieved only if your company is also able to
generate the required sales volume. As the example of Webvan shows (see the FT arti-
cle ‘Webvan’s billion dollar mistake’ in Section 1.2.3), many companies during the early
Internet boom years ramped up operations very quickly in order to achieve economies of
scale. However, they did so without first having understood the underlying economics and
customer demand. After having developed expensive proprietary technology platforms and
putting into place vast physical warehouse infrastructure, it became impossible for Webvan
to adapt the chosen strategy to meet the different market conditions.
13.8.2 What is the revenue structure of our e-business activities?

In order to determine the revenue structure of your e-business activities, you need to ana-
lyse the different options for generating revenues. The latter depend on the type of business
you are operating and can include the following sources:
● Advertising revenues and usage fees, as is the case in P2P e-commerce.
● Information posting and transaction fees, as is the case in C2C e-commerce.
● Hosting service fees, membership fees, transaction fees and/or (monthly) subscription
fees, as is the case in B2B e-commerce.
● Transaction fees, advertising revenues and subscription fees, as is the case in B2C
e-commerce.
In addition to analysing revenue sources, you also need to assess the sustainability
of your business model, which depends to a large degree on the customer’s ability to
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bargain down prices, competition intensity, substitute products and barriers to entry (see
Section 3.2).
In order to sustain revenues, you should consider the following two options, which are
not mutually exclusive. The first option is to ‘reinvent’ your e-business activities continu-
ously to stay abreast of changes and avoid being pushed out of the market. As the Internet
matures, it becomes less likely that fundamental changes will overthrow established busi-
ness models (see Section 1.2). Nowadays, the rise of Internet-based start-up companies,
such as Google, Amazon.com and eBay, which revolutionised ways of doing business by
using the Internet, is still possible, yet they become more unlikely as the technology matures
and e-business applications become established.
The second option is to aim at creating customer lock-in (see Section 7.2), which you can
achieve through the following means:
● By setting up customisable websites where customers can adapt the company’s website
to their own needs. For instance, in Second Life customers can construct their personal
virtual world including building infrastructure and creating inhabitants. At Tesco.com
online shoppers can store their shopping list for future purchases.
● By leveraging data-mining techniques to analyse customer information (age, gender,
income, etc.), click-stream patterns, past purchases and comparisons with other like-
minded customers. The information gathered by means of data mining can then be used
to make specific targeted service and product offerings based on individual preferences.
Numerous companies, including Nordea and Tesco, both of which are featured in the
case studies section of this text, have used data-mining techniques extensively to build
up loyalty among their customers.
● By leveraging network effects. To do this, you need to find ways in which your product
or service becomes more valuable for customers as the overall number of customers
increases (see Section 7.4 on network effects). The most popular way of achieving this is
to set up social networking communities in which online users have the opportunity to
interact with one another on topics that are of special interest to them (see Chapter 11).
13.9 How should we align our physical-world strategy

with our e-strategy?
Reaching a decision on how to align the online activities with the offline ones is only rel-
evant for those companies that are already running physical operations and now want to
branch out into the online world. The alignment of a company’s physical-world strategy and
its e-strategy requires strategic decisions to be made on issues such as branding, product/
service offering, pricing, IT and multi-channel management. The guiding question here is
as follows: for each one of these issues, what should we do regarding our physical opera-
tions and our Internet operations? For example, regarding branding, should we name our
Internet activity after our physical world brand (e.g. Ducati.com at Ducati, Tesco.com at
Tesco), or should we use a different brand name (e.g. ooshop.fr at Carrefour)?
Regarding the channel management issue, when adding the online channel you need to
determine how to align it with the existing physical channel (see Section 9.2). This includes
addressing the following three issues: what products/services to offer online compared
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with what has been offered offline; what pricing strategy should be used for goods sold
online; and how to pre-empt (or proactively address) any conflicts between the online and
offline channels.
Regarding the online offering, although it can consist of the same product/service range
that is offered offline, most often it is either (1) a totally different portfolio of goods (as is
the case on Ducati.com where the company sells new, limited edition motorcycles, apparel
and accessories that cannot be found at physical dealerships), or (2) a combination of new
products/services and some of the existing offline offering (as is the case on Tesco.com,
where online customers can find grocery items that are also available in stores and at the
same time financial, travel and legal services that are only offered online).
Regarding the issue of what pricing strategy to use for products/services sold across the
online and offline channels, there are three main options (as illustrated below in the context
of, for example, Internet-based grocery retailing):
● Apply online the same product prices as in stores (the way Tesco.com does in Britain) to
convey the message that the value is elsewhere than in price savings.
● Charge lower prices online (as Alcampo.es did in Spain) to attract, through this financial
incentive, a large number of online shoppers and quickly build a critical mass of customers.
● Charge higher prices (the way Ahold does) to reflect the extra costs involved in order
fulfilment and packing and delivery of the goods.
In financial services, Nordea has used a differentiated pricing strategy. Customers pay a sig-
nificantly lower fee for a given banking transaction if it is carried out online rather than in
a physical branch office of the bank. This approach has helped Nordea to attract customers
to its Internet-based banking services.
If the offline and online channels compete for the same customer group, then this is likely
to result in a conflict because of cannibalisation effects. If the offline channel is expected
to remain important and the likelihood of a channel conflict is high, then it is essential to
address this conflict early on and to find ways to reconcile the interests of the two channels.
This can be achieved, for instance, by creating one unified profit centre or, as in the case
of Ducati, by providing dealers with a financial incentive if they support the online direct
sales channel.
Summary
● First, the chapter suggested in broad terms a roadmap for e-business strategy formulation.
● It then described in detail each of the nine steps involved in this roadmap and illustrated
them through some examples and some of the case studies contained in this text. these
steps consist of:
1 defining a vision or mission.
2 setting up quantifiable business objectives.
3 deciding on the specific customer value to create.
4 selecting the target market(s) and customer segment(s).
5 addressing the privacy, ethical and legal issues of the e-business activity.
6 deciding on the vertical boundaries for the e-business activity (should it be carried out
internally or in partnership with external organisations?).
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7 defining the organisational structure of the e-business activity (including scale and scope).
8 establishing a business model that outlines the expected cost and revenue structure of
the e-business venture.
9 For companies that are adding clicks to bricks, aligning their e-business strategy with
their physical-world strategy.
REVIEW QUESTIONS
1 What are the nine steps involved in the e-business strategy formulation roadmap?
2 What strategic issues does a company need to address when adding clicks to bricks?
3 What possible decisions can a company make regarding branding and goods pricing across
channels?
4 What options does a company have for solving the online/offline channel conflict?
5 What possible revenue streams can a company consider for its e-commerce activities?
1 Illustrate the nine steps of the e-business strategy formulation roadmap through a real-world
example that you are familiar with.
2 What challenges do traditional companies face when moving from bricks to clicks?
3 Critically assess the three broad pricing strategies for goods sold online, which are outlined in
section 13.9.
4 Choose an e-business activity of your own and formulate it through the nine steps of the
e-business strategy roadmap.
N. Venkatraman suggests a five-step approach for developing e-business strategies in ‘Five steps
to a dot-com strategy: how to find your footing on the Web’, Sloan Management Review, 2000,
Spring, pp. 15–28.
D. Chaffey presents general questions related to e-business strategy processes and implementa-
tion in e-Business and e-Commerce Management, FT/Prentice Hall, 2011, pp. 235–306.
C. Christensen and M. Raynor provide a detailed account of how to choose different strat-
egy development processes depending on the type of innovation at hand in The Innovator’s
Solution, Harvard Business School Press, 2003, pp. 214–31.
D. Palmer and M.L. Stoll offer a detailed analysis of the ethical issues associated with e-business
in ‘Ethics in e-business: emerging issues and enduring themes’, in F.J. Martínez-Lòpez (ed.),
Handbook of Strategic e-Business Management, Series PROGRESS in IS, Springer, 2014.
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1 For an excellent discussion of different forms of strategy formulation processes, see C. Christensen and
M. Raynor, The Innovator’s Solution, Harvard Business School Press, 2003, pp. 217–34.
2 See also R. Grant, Contemporary Strategy Analysis, Blackwell, 2003, pp. 29–30, and G. Johnson,
K. Scholes and R. Whittington, Exploring Corporate Strategy, 7th edition, Prentice Hall, 2005.
3 Taken from Nordea company website.
4 Amazon.com, Annual Report 2002, Part I, p. 1.
5 Ari Bousbib, CEO of Otis Elevator, quoted in the Otis case study contained in the case studies part of this
text.
6 Quotes from, respectively, Masao Nakamura, President & CEO of NTT DoCoMo, and Yuichi Kato,
President & CEO, NTT DoCoMo Europe, both cited in the NTT DoCoMo case study contained in the case
studies part of this text.
7 K. Laudon and J. Laudon, Essentials of Management Information Systems, Pearson, 2005, p. 153.
8 Ibid., pp. 157–8.
9 See K. Laudon and G. Traver, E-Commerce, Prentice Hall, 2007, p. 252.
10 Ibid., pp. 257–68.
11 See CyberSource Corporation, 7th Annual Online Fraud Report, 2006 edition.
12 See K. Laudon and G. Traver, E-commerce, Prentice Hall, 2007, pp. 257–68.
13 C. Christensen and M. Raynor, The Innovator’s Solution, Harvard Business School Press, 2003, pp. 170–1.
14 The term ‘business model’ has been widely used, entailing many different elements. To keep things sim-
ple, we decided to include only costs and revenues in it. For a more extensive definition of the business
model concept, see D. Straub, Foundations of Net-Enhanced Organisations, John Wiley, 2004, pp. 237–9.
15 For an insightful discussion of how companies should manage their cost structures during different
stages of growing a new business, see C. Christensen and M. Raynor, The Innovator’s Solution, Harvard
Business School Press, 2003, pp. 216–31.
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PART 4
Case studies
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Chapter 14
Building e-business competence through

concepts and cases
Chapter at a glance
14.1 Defining creativity and analytical ability 318
14.1.1 Creativity 318
14.1.2 analytical ability 322
14.2 Becoming a ‘catalyst for change’ 322
14.3 Learning about e-business through case studies 324
14.3.1 Case studies as a context for the analysis of e-business issues 324
14.3.2 Case studies as a context for the application of e-business
concepts 324
14.3.3 Case studies as a stimulus for creative e-business strategies 325
14.4 Learning about e-business through concepts and frameworks 326
14.4.1 extending the breadth of the analysis 330
14.4.2 extending the depth of the analysis 331
Learning outcomes
● Understand how creativity and analytical abilities contribute to the strategy
development process.
● Recognise the value of case studies for learning about e-business.
● explain the value of concepts and frameworks for learning about e-business.
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Part 4 Case studies
Introduction
Let us venture out from the e-business world for a moment and compare managers in charge
of strategy development with architects who are designing new buildings.1 We will consider
first what kind of qualities good architects need to have and determine, in a following step, to
what extent this analogy is relevant for managers.
Good architects are those who bring new, creative and surprising elements into their
work. While planning buildings, they do not just copy what has always been around within
their cultural area. Instead, they develop a unique style that combines well-proven, generally
accepted solutions with new, individual and creative ideas. It is this way of solving technical
and artistic problems that sets their work positively apart from others. they design buildings
where bypassers appreciate the work done and sometimes recognise who the architect was.
How do good architects develop their ideas? architects need to get inspired and find ‘food’
for their mind to work and play around with. they derive their inspiration from many differ-
ent sources. they can turn to the leading architects within their own country and culture and
learn from their styles. to expand their horizon further, they might travel around the world to
see other settings and cultures to find out more about other architectural styles. on a more
abstract level, they might also turn to nature to see how plants and trees have solved their own
‘architectural’ challenges.
Yet good architects are not only creative; they also have the analytical ability to assess critically
the feasibility of their ideas. this includes finding answers to questions such as ‘Will the building
be structurally sound?’, ‘What will the construction costs be?’, ‘Will people enjoy living in this
building?’ and ‘Will my client be able and willing to pay for it?’. to answer these questions, good
architects need to be able to conduct their analysis both on a broad level to cover all relevant
issues (such as structural soundness of the building design, legal restrictions and financial consid-
erations) and also on a detailed level to address the specific problems of the project at hand. the
critical ability is that they are able to switch back and forth between broad overall considerations
and important detailed issues that require in-depth analysis.2
the essence of this analogy is to point out that, just like good architects, successful managers
are likely to be those who come up with innovative strategic ideas. additionally, they are able
to determine whether their ideas hold when scrutinised from an analytic business perspective.
We start this chapter by briefly outlining the dimensions of creativity and analytical abil-
ity.3 Following that, we discuss how the conceptual e-business strategy framework and the
case studies contained in this book can help students and managers involved with e-business
strategy development to expand their skills and knowledge along the dimensions of creativity
and analytical ability.
14.1 Defining creativity and analytical ability
14.1.1 Creativity
In its broadest sense, creativity can be defined as the ability to develop new ideas. Just like
it is inherently difficult to determine what makes some people more intelligent than others,
it is also difficult to determine why some people are more creative than others. However, in
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Chapter 14 Building e-business competence through concepts and cases
spite of this uncertainty, one predominant characteristic among creative people is that they
have been exposed to different experiences, thinking styles and disciplines from which they
draw in their search for new ideas.
Consider, for example, the great German baroque composer Johann Sebastian Bach, who
lived in the eighteenth century. Even though he led a rather provincial life, never travelling
outside Germany, his music was inspired by other great European composers of the baroque
period. Most importantly, Bach transcribed the orchestral work of Italian composers such as
Antonio Vivaldi, which later had a profound influence on Bach’s composition style – as can
be witnessed, for example, in his Italian Concerto for harpsichord.
The American inventor Thomas Edison, who invented the electric light bulb and the tel-
egraph, also immersed himself in a broad variety of knowledge from an early age. Edison’s
parents taught him, when he was 11, how to use the resources of the local library. He
started with the last book on the bottom shelf and planned to read every book in the build-
ing. At age 12, he had read Gibbon’s Rise and Fall of the Roman Empire, Sears’ History of the
World and Burton’s Anatomy of Melancholy, in addition to The World Dictionary of Science
and books on practical chemistry.4
These two examples are meant to illustrate that a broad knowledge or experience pool –
a characteristic that Csíkszentmihályi, a creativity researcher, calls ‘differentiated mind’ –
seems to be a prerequisite for creativity.5 Based on this knowledge, creative individuals are
able to produce many new ideas, mostly by taking existing ideas that are seemingly unre-
lated and then connecting them in new ways.
The inevitable question is, then: how can we improve our creativity in order to be able to
develop innovative ideas? There exists a vast literature on creativity that suggests detailed
methods on how to think creatively individually or in team settings.6 In the context of this
book, we consider the following steps to be of special importance:
● Create a vast and diverse pool of knowledge and experiences. Search outside your domain
of expertise to provide your mind with enough ‘food’ for developing creative ideas. A
good starting point is to capture interesting ideas from different settings (industrial,
organisational, geographical, cultural, etc.). In most cases, it will probably not be clear
what this information will be good for, or even whether it will ever be good for anything.
The problem with creativity is that you just do not know beforehand which ideas will
turn out to be valuable and which ones will not. The collection of case studies in this text
provides some examples of good (and bad) ideas and successful (and failed) implemen-
tations. You might also want to look across disciplines by studying, for instance, history
or biology.
● Produce as many different ideas as possible. Play around with the existing ideas from
others, get a feeling for why they work, or do not work, and try to connect ideas that
are seemingly unconnected (see the FT article: ‘Breaking the barriers to creativity’).
Creativity is not a plug-and-play affair; rather, it requires time and patience. However,
to look for new applications of old ideas is a good way to jump-start a creative thinking
process. Consider, for instance, the deployment of the steam engine in the nineteenth
century. At first it was used only in mines, and it took 75 years for someone to work out
that it could also be used to power steamboats. For a more recent example, consider Jeff
Bezos, the founder of Amazon.com. He saw the potential of the Internet and connected
that with book retailing to create the idea of Amazon.com, which, in a matter of a few
years, has turned into the largest bookstore in the world. To connect existing ideas in
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Part 4 Case studies
new ways requires one to break out of the known reality by making a mental leap into
new and uncharted territory.
● Produce unlikely ideas. At this early stage, there is no need to think about implementation;
instead, all that matters is creation. Just ensure that the ideas you produce are unlikely
ideas – i.e., ideas that are very different from what other people come up with and that
diverge from traditional thinking. That is what constitutes their novelty and uniqueness.
At the same time, these ideas are not bizarre. Once others see them, they say: ‘Oh, that’s
so obvious. I could have thought of that myself ’. Maybe they could have, but they did not;
they were unable to make this seemingly obvious connection between A and B. That is
the big difference between creative and not-so-creative people – it is the almost-but-not-
quite dimension that sets them apart. For instance, with hindsight it is easy to see that an
online auction house such as eBay would be highly successful. Yet someone had to have
the creative insight to come up with this idea and, later, the courage to implement it.
Breaking the barriers to creativity

Creativity, a philosopher once remarked, is We are exposed to these moments every day; if we
whatever you choose to make of it. Creativity fail to notice them, they pass us by. If we pause to
begins with recognising opportunities as they reflect and question, the situation might become a
present themselves in everyday life. Once these trigger, an impulse to creative action.
‘triggers’ for creativity have been spotted, the
History has recorded other triggers. While on
manager then needs to assess the problem, often
vacation, Edwin Land took pictures of his daughter.
overcoming barriers to new solutions.
When she showed her disappointment that she
Creativity is achieved through breaking down couldn’t see the results right then and there, he set his
existing relationships and analysing the elements mind to the task of developing instant photography.
of the problem, then moving these into new patterns Art Fry sang in a church choir for years. As many
until a solution is found. Creativity requires a choir members did, he put slips of paper in his hymn
desire to experiment, an ability to understand book to mark each selection. His technique was
problems and ask questions, and a refusal to be not foolproof, however; the slips of paper often fell
afraid of failure. Developing these traits is not easy, out. Taking his dissatisfaction back to his job, he
but it can be done. Every person in an organisation developed what became 3M’s Post-it note pads.
has the potential to make new and better things
The non-stick coating Teflon was an accident.
happen, to bring into being new ideas regardless
However, its subsequent application to a myriad
of their job or background. Whether they do so is a
of products happened because a curious chemist
matter of their ability to see the world around them
didn’t throw away the accident; he played with it to
and whether they can recognise the opportunities
learn more about its properties. He found that the
or ‘triggers’ for creativity that can be found in
new product could have many uses, such as non-
everyday life.
stick frying pans.
Triggers for creativity These events probably happened to hundreds of

other fathers, choir members, and chemists. The
Intermittent windshield wipers for automobiles
only difference is they were triggers to these people,
were not invented by an auto engineer, but by
and events to be forgotten by the others.
someone who tinkered with cars in his spare time.
Collectively, the major automakers had thousands
of engineers on their payrolls, most of whom would Defining the problem
at some time have had the experience of driving It has been said that ‘a problem correctly stated is
in the rain. Yet none of these ‘experts’ saw this half solved’. Edward de Bono talks about an office
situation as an opportunity to do something new. building where people complained about the time ➨
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they had to wait for the elevators. Seeing the problem or ‘They’ll never replace horses’ (said about auto-
as one of ‘How can we speed up the elevators?’ the mobiles). Often judgements are passed on a situa-
building’s owners felt they were up against a brick tion before all the information is known, and thus
wall of prohibitive costs. In a triumph of lateral opportunities are lost.
thinking, it was suggested that mirrors be placed on ● Your thinking patterns can be another barrier
the walls around the elevators. Thus people would to creativity. However, while these can inhibit
spend the time looking at themselves, combing creativity, you could not survive without them.
their hair, and would be oblivious to the wait. Like experience, thinking patterns can be both
However, suppose the problem had originally been an asset and a liability. The key lies in know-
stated in terms of the true choice: ‘How can we ing when to depend on them and when to lock
eliminate the complaints about the elevators?’ them away. If you are driving down a highway
Speeding them up would have been an idea; mirrors and you hear a siren, a stored thinking pattern
might have been recognised as an idea, as well as immediately takes over. You locate the source
mounting television sets on the wall or piping in and, if it is in your line of travel, you pull over to
news broadcasts. The problem was first looked at in get out of the way of an emergency vehicle – or
terms of changing the performance of the product to receive your speeding ticket. At other times,
(the elevators). It was solved by creating change though, thinking patterns tend to lead us to
in how the product was perceived, by changing the routine behaviour and thought, so that we fail to
product’s environment. recognise the new as a source of opportunity.
● A fifth barrier is the right answer syndrome.
Barriers to creativity So much of current education emphasises the
An important first step in developing creative need to ‘get the right answer’. Answers are just
abilities is to recognise what stands in the way of arrangements of information. For example, the
creating ideas. game of noughts and crosses has nine boxes.
If each box contains a piece of information,
● The foremost of these barriers is your own expe- how many combinations are there of these nine
rience. The advertising guru David Ogilvy once pieces of information? There are 362,880 possible
commented that ‘The majority of businessmen combinations of these nine pieces of informa-
are incapable of original thought because they tion. (The answer is 9 factorial, which means it
are unable to escape from the tyranny of reason.’ is determined by multiplying 9 × 8 × 7 × 6 × 5 ×
As an example, Kenneth Olsen, the president 4 × 3 × 2 × 1 = 362,880.) However, knowing this
of Digital Equipment Corporation, relied on his answer does not help us to win at noughts and
extensive experience in computers when he told crosses. In the same way, knowing how many
attendees at the World Future Society’s 1977 units of product we are selling does not help us
Convention: ‘There is no reason for any individu- to sell more. Creativity involves looking beyond
al to have a computer in their home.’ Relying on the simple facts.
what he himself knew about the industry meant
● The last barrier is fear of failure. Failure is
that Olsen lost out in the race to enter the home
actually a great learning tool. Unfortunately,
computer market, as his company was overtaken
too many managers are graduates of the right-
by rivals such as Apple.
answer school and are oblivious to the value of
● The assumptions you make are another barrier to failure. The best answer to the fear of failure
creativity. For years, the greeting card companies syndrome was expressed by Thomas Edison.
assumed that their competition was other greet- When a friend suggested that Edison’s attempts
ing card companies. However, research showed to develop an electric storage battery were a
that companies in other sectors, such as tele- failure since he had tried thousands of materials
communications company Florists Telegraph without success, Edison replied: ‘Why, I’ve got
Delivery (FTD), were also significant competitors. a lot of results. I know several thousand things
● The judgements we make are a third barrier to that won’t work.’
creativity. When was the last time you reacted to
an idea with: ‘It will never work’, or ‘We tried that An approach to creativity
before’, or ‘They’ll never buy it?’ Think about judg- The path to creative ideas has three stages, which
ments you’ve laughed at like, ‘He’ll fall off the end involve breaking down the previously perceived
of the earth’ (said about Christopher Columbus) relationships between parts of the problem; ➨
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Part 4 Case studies
then re-examining the pieces individually; then Reynolds in the eighteenth century: ‘Invention is
rearranging the pieces to form new relationships little more than new combinations of those images
until we find a pattern that works and solves which have been previously gathered and deposited
the problem. The first step in creating ideas is in the memory.’ It is this development of new
to destroy the familiarity, the relationships of patterns and pictures which is the final act of
everything you know about the problem. Before creativity.
Edwin Land invented instant photography, every
consumer knew that seeing the results of a picture- In summary
taking session was related to developing the film, The fundamental steps to developing your own
which was related to a place called a darkroom, creative-thinking capabilities can be summarised
which was related to the local drugstore as its as follows:
contact point.
1 Recognise the triggers you are exposed to every
Everybody was a prisoner of that familiarity, day and see the opportunities presented.
including Edwin Land himself, until he let his
mind destroy those relationships. Once this act of 2 Define the problem in terms of the ‘true choice’, and
destruction has happened, you have a rich reservoir make sure the right questions are being asked.
of bits and pieces of information, of unconnected 3 Recognise your barriers to creativity and
facts and fantasies. However, just like the words in overcome them.
a dictionary, they do nothing until they are selected
4 Forget everything you know in terms of
and assembled to become a coherent sum. The value
relationships between the elements of the
of these pieces was neatly summed up by Albert
problem.
Szent-Gyorgyi: ‘Discovery consists of seeing what
everybody has seen – and thinking what nobody 5 Remember everything you know and assess all
thought.’ the pieces of the problem.
The final step is to look for new ways of assembling 6 Rearrange everything you know by moving the
the pieces. The value and simplicity of this step same pieces into new relationships with each
was succinctly described by the painter Sir Joshua other.
Source: Altier, W. (2002) Breaking the barriers to creativity, FT.com , 5 September.

14.1.2 Analytical ability

Analytical ability refers to the skills that are necessary to integrate the knowledge that one
possesses into a coherent whole. Thus, while creativity is concerned with divergent thinking,
i.e. coming up with ideas that are out of the ordinary, analytical ability is concerned with
convergent thinking, i.e. relating multiple parts of one’s thinking and integrating them into a
coherent whole.7 Managers with an integrated mind-set are able to break down a complex
business problem into its manageable parts and identify crucial variables and questions. They
do so by first looking at the ‘big picture’ that encompasses a broad overview over all involved
issues and then focusing on those issues that are of special relevance to the problem at hand.
14.2 Becoming a ‘catalyst for change’
By nature, not all managers are endowed with the genius of creativity and profound ana-
lytical ability. Instead, they differ along these two dimensions, leading to the classification
of manager types explained below, which include (1) the novice, (2) the visionary, (3) the
efficient performer and (4) the catalyst for change (see Exhibit 14.1).
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Exhibit 14.1 Fostering creativity and analytical ability helps a manager to become a catalyst
for change
High
Creativity (degree of differentiation)

‘Catalyst for
‘Visionary’
change’
‘Efficient
‘Novice’
performer’
Low
Low High
Analytical ability
(degree of integration)
● Novices have a low level of both creativity and analytical ability. In order to develop
innovative yet sound strategies, they need to expand their abilities along the creativity
and analytical ability dimensions. Note that novices as referred to in this context must
not be confused with novices who are new to a company. The latter type of novice might
well have had varied experiences and honed their analytical skills before joining the
company. Thus, they already possess the skills and knowledge to become a catalyst for
change. In the proposed classification, however, the novice does not possess these skills
and knowledge.
● Visionaries are characterised by an immense level of creative energy yet little analyti-
cal ability. Throughout their lives and careers, they have collected many different ideas
and they continually develop new ideas. They have a very differentiated mind-set. Yet,
because they are unable to integrate the many different ideas and evaluate them by
means of structured, logical reasoning, their endeavours often tend to end up in chaos
and are frequently abandoned prematurely.
● Efficient performers possess the opposite characteristics of the visionary. While they do
not have the ability to develop creative new ideas, they dispose of strong analytical
abilities. This is reflected in the way they perform qualitative and quantitative analyses
with rigour and depth.
● The catalysts for change combine the positive traits of both the visionary and the efficient
performer. Thus, they have high levels of creativity and of analytical ability. They know
that strategy formulation is more than just crunching numbers and hoping that some-
thing will come out that ensures value creation and competitive advantage. They also
know that ideas by themselves are not enough to build a sustainable, profitable business.
Instead, to them, strategy formulation is a mix between creativity and analysis.
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These manager types are characterised by a number of opposing attributes, which are effec-
tively united in one person. Catalysts for change have the ability to (1) alternate between
imagination and fantasy and a rooted sense of reality, (2) be very playful at certain times yet
return to a very disciplined working style within a matter of minutes and (3) shift quickly
from openness, where they work closely together with others, to closure, where they seclude
themselves to work out the details of their thinking.8
The proposed classification of different types of manager is helpful in two ways. First, at
an individual level you can think where you would place yourself within this matrix. You
can also discuss with your colleagues or classmates where they would place you within the
matrix. Doing so also allows you to determine which abilities you need to develop further
in order to become a catalyst for change.
Furthermore, when working in a team, you can also think about the different people needed
to ensure a high level of both creativity and analytical ability. Selecting individuals with com-
plementary abilities can then help your team, as a whole, to become a catalyst for change.
14.3 Learning about e-business through case studies
This text is an integrated, case study-based learning package, as is demonstrated by the large
number of cases included in it. When writing this text, we had three primary aims in mind:
the case studies should provide (1) a context for the analysis of e-business issues, (2) a context
for the application of e-business concepts and (3) a stimulus for creative e-business strategies.
14.3.1 Case studies as a context for the analysis of e-business issues

The first aim of the case studies in the text is to provide a broad overview of the critical
issues and challenges that organisations face when developing their e-business strategies
and, subsequently, conducting their online activities. The diversity of settings and contexts
of the cases provides insights on different issues, including e-procurement, online/offline
channel conflicts, e-logistics, e-payment, one-to-one marketing and the move from mass-
production in the physical world to mass-customisation through the Internet.
We hope that, after working through these case studies, you will have a richer pool of
experiences. However, instead of providing ready-made answers to the questions they
raise, these case studies aim at giving you a deeper understanding of the issues involved and
the choices and trade-offs that need to be made when you are faced with making similar
decisions of your own.
14.3.2 Case studies as a context for the application of e-business concepts

The second aim of the cases is to provide real-world situations for applying the conceptual
frameworks described in the e-business strategy framework part of the text. Compared with
typical strategy textbooks, this ‘laboratory’ setting offers a number of advantages. Just like
in the real world, information is not neatly packaged and presented. Instead, you have to
sift through the rather large amounts of information provided in the cases and distil from it
the most important facts. You need then to determine which framework is most applicable
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to a given situation. In order to arrive at a conclusion and make recommendations, you will
have to collect more data and build supporting arguments to defend your stance in front of
colleagues.
However, be cautious: there is no single right answer to the questions raised in the cases.
As alluded to above, strategy formulation is not maths, where you plug in the numbers and
get just one clear answer. There are, however, answers that are better supported by factual
evidence than others, and there are answers that use logical reasoning more stringently
than others. Thus, the case setting with its inherent ambiguity provides an excellent envi-
ronment for practising the development and exchange of arguments and the sharpening of
analytical skills.9
14.3.3 Case studies as a stimulus for creative e-business strategies

In addition to providing factual information and a basis for applying the proposed frame-
works, the cases in this text are also meant to serve as a source of creative idea development.
As discussed above, it is important to collect ideas from many different sources so as to
provide ‘food’ for the creative thought-development process.
Just like the architect who studies different building styles from different countries, the
cases from different industries and organisations aim at providing you with the opportunity
to gain insights into different ways of conducting e-business. For example, consider a group
of managers in the strategy division of a large German bank. How do they get inspired to
develop innovative strategies? Essentially, the case studies enable the following three pos-
sibilities (see also Exhibit 14.2):
● Intra-industry benchmarking (within own culture). The above-mentioned bank managers
can first benchmark other banks in Germany. This might provide them with either the
Exhibit 14.2 New ideas can be found by analysing state-of-the-art companies within one’s own
industry and also across industries
High (‘State- Nordea NTT Covisint YOC Spreadshirt

of-the-art’) Bank
DoCoMo Ducati Tesco
Degree of creativity within an industry
ING
Intra-industry
benchmarking
Cross-industry
inspiration
Bank
XYZ
Low
Financial Telcos Automotive Media Consumer Etc.
services goods
Industries
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Part 4 Case studies
comforting feeling that the competition is lagging behind or the feeling that there are
some relatively minor adjustments that need to be made. In any case, the closed-in per-
spective of looking within an industry in one’s own culture is often unlikely to provide
the creative ideas that would give the bank a lasting source of competitive advantage.
● Intra-industry benchmarking (across cultures). The potential for relevant new insights
increases as the bank’s managers start looking outside their own business culture. For
example, they may focus on countries with an established ‘e-habit’ – i.e., having a large
portion of the population frequently using the Internet for a wider variety of activi-
ties than in Germany. Finland, where e-banking has been customary over the past two
decades and where customers are now heavily into using mobile banking, represents
an interesting case. The German managers could focus on this country to scout out the
recent developments, which will most likely also take place in Germany in the not-so-
distant future. Studying Finnish banks, such as Nordea, which is at the cutting edge of
electronic and mobile banking, would thus offer an interesting benchmark to analyse in
more detail.
● Cross-industry inspiration. A far more innovative and ground-breaking, albeit more chal-
lenging, source of new ideas is to look across different industries and think about how
their way of conducting e-business could be transferred to one’s own industry. A bank
might ask: ‘What can we learn from the way Ducati sells some of its motorcycle products
exclusively online, or from how YOC manages its one-to-one mobile marketing opera-
tions?’. Building bridges requires creative leaps; that is ultimately the source of competi-
tive advantage, since there are only a few companies willing and able to take such leaps.
‘The case studies in the text are meant to be a source of inspiration for cross-industry
fertilisation. For example, during our teaching we found out that managers from a global
insurance company were able to derive interesting and valuable insights from analysing
the Ducati case study. Obviously, these cross-industry comparisons should not be adopted
‘as is’ in one’s own industry, but rather used to stimulate new and unconventional thinking
and to raise the simple, yet powerful question: ‘Would it not be possible for our company
to do something similar if . . .?’.
14.4 Learning about e-business through concepts and frameworks
After discussing the creative element of strategy formulation, we also need to find ways to
evaluate creative ideas and strategies and determine whether it is sensible to implement
them. What are the possibilities to test the usefulness of strategy ideas? What makes one
strategy more likely to succeed than another? Essentially, there are two different routes that
managers can choose from.
At one end of the spectrum, managers rely solely on their intuition, which is based mainly
on their past experiences. At the other end, they rely on analysing the problem at hand in
a structured fashion to come up with a solution. In contrast to intuitive decisions, where
judgement is based on implicit criteria that are not spelt out, analytical decision making
relies on a clearly defined set of explicit criteria that are used to evaluate the merits and
drawbacks of different options. In most cases, managers, unknowingly or knowingly, use a
combination of these approaches, as discussed in Strategy in Action 14.1.
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STRATEGY IN ACTION 14.1
Business thinking: on finding the right balance between analysis and intuition
Business thinking starts with an intuitive choice of defer decision to beyond the time horizon. a frame of
assumptions. Its progress as analysis is intertwined reference is needed to screen the intuitive selection
with intuition. the final choice is always intuitive. If of assumptions, relevance of data, methodology and
that were not true, all problems of almost any kind implicit value judgments. that frame of reference is the
would be solved by mathematicians with non-quan- concept.
titative data. Conceptual thinking is the skeleton or the frame-
the final choice in all business decisions is, of course, work on which all the other choices are sorted out. a
intuitive. It must be. otherwise it is not a decision, just a concept is by its nature an oversimplification. Yet its
conclusion, a printout. fundamental relationships are so powerful and impor-
the trade-off of subjective non-quantifiable values tant that they will tend to override all except the most
is, by definition, a subjective and intuitive choice. extreme exceptions. such exceptions are usually obvi-
Intuition can be awesome in its value at times. It is ous in their importance. a concept defines a system of
known as good judgment in everyday affairs. Intuition interactions in terms of the relative values that produce
is in fact the subconscious integration of all the experi- stable equilibrium of the system. Consequently, a con-
ences, conditioning and knowledge of a lifetime, includ- cept defines the initial assumptions, the data required
ing the emotional and cultural biases of that lifetime. and the relationships between the data inputs. In this
But intuition alone is never enough. alone it can way it permits analysis of the consequences of change
be disastrously wrong. analysis too can be disastrously in input data.
wrong. analysis depends upon keeping the required Concepts are simple in statement but complex
data to manageable proportions. It also means keeping in practice. outputs are almost always part of the
the non-quantifiable data to a minimum. thus, analysis input by means of feedback. the feedback itself is
by its very nature requires initial oversimplification and consequently a subsystem interconnected with other
intuitive choice of starting assumptions with exclu- subsystems.
sion of certain data. all of these choices are intuitive. theoretically, such conceptual business systems can
a mistake in any one can be fatal to the analysis. any be solved by a series of simultaneous equations. In
complex problem has a near infinite combination of practice, computer simulation is the only practical way
facts and relationships. Business in particular is affected to deal with the characteristic multiple inputs, feedback
by everything, including the past, the non-logical and loops and higher order effects in a reasonable time at
the unknowable. this complexity is compounded by reasonable cost with all the underlying assumptions
multiple objectives to serve multiple constituencies, made explicit. pure mathematics becomes far too
many of whose objectives must be traded off. problem ponderous.
solving with such complexity requires an orderly, sys- Concepts are developed in hard science and busi-
tematic approach in order to even hope to optimize the ness alike from an approximation of the scientific meth-
final decision. od. they start with a generalization of an observed pat-
When the results of analysis and intuition coincide, tern of experience. they are stated first as a hypothesis,
there is little gained except confidence. When the analy- then postulated as a theory, then defined as a decision
sis reaches conclusions that are counter-intuitive, then rule. they are validated by their ability to predict. such
more rigorous analysis and reexamination of underlying decision rules are often crystallized as policies. Rarely
assumptions are always called for. the expansion of the does a business concept permit definitive proof enough
frame of reference and the increased rigor of analysis to be called a ‘law’ except facetiously.
may be fruitful. Intuition disguised as status, seniority and rank is the
But in nearly all problem solving there is a universe underlying normative mode of all business decisions.
of alternative choices, most of which must be discarded It could not be otherwise. too many choices must be
without more than cursory attention. to do otherwise made too often. data is expensive to collect, often of
is to incur costs beyond the value of any solution and uncertain quality or relevance. analysis is laborious ➨
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Part 4 Case studies
Strategy in action 14.1 (continued)
and often far too expensive even though imprecise or It is a matter of observation that much of the value of a
superficial. rigorous and objective examination of a problem will be
Yet two kinds of decisions justify rigorous and found in one of three areas:
painstaking analysis guided by intuition derived from
● First, the previously accepted underlying assump-
accumulated experience. the irrevocable commitment
tions may prove to be invalid, in fact, or inadequate
of major reserves of resources deserves such treatment.
as the problem definition is changed.
so do the major policies which guide and control the
implementation of such commitments. ● second, the interaction between component func-
all rigorous analysis is inherently an iterative proc- tions may have been neglected, resulting in subopti-
ess. It starts with an intuitive choice and ends with an mization by function.
intuitive decision. the first definition of a problem is ● third, a previously unknown or unaccepted or misun-
inescapably intuitive. It must be in order to be recog- derstood conceptual framework may be postulated
nized as a problem at all. the final decision is intuitive. which both permits prediction of the consequence of
It must be or there is no choice and therefore no need change and partially explains these consequences.
for decision.
It is also a matter of common observation that the wisest
Between those two points of beginning and ending,
of intuitive judgments come after full exploration and
the rigorous process must take place. the sequence is
consensus on the nature of the problem by peers of near
analysis, problem redefinition, reanalysis and then even
equal but diverse experience.
more rigorous problem redefinition, etc. until the law of
Finally, it is also a matter of general experience that
diminishing returns dictates a halt – intuitively.
implementation of the optimum decision will prove dif-
the methodology and sequence of business thinking
ficult if that discussion and consensus have not been con-
can be stated or at least approximated.
tinued long enough to make the relationship between the
● state the problem as clearly and fully as possible. overall objective and the specific action seem clear to all
● search for and identify the basic concepts that relate who must interpret and implement the required policies.
to the perceived critical elements. otherwise, the intuition of those who do the implemen-
tation will be used to redefine the policies that emerged
● define the data inputs this conceptual reference will
from analysis. this is one reason planned organization
require. Check off and identify any major factors,
change is so difficult, and random drift is so common.
which are not implicitly included in the conceptual
Here are some fundamental procedural suggestions.
base.
define the problem and hypothesize the approach to a
● Redefine the problem and broaden the concept as solution intuitively before wasting time on data collection
necessary to include any such required inputs. and analysis. do the first analysis lightly. then and only
● Gather the data and analyze the problem. then redefine the problem more rigorously and reanalyze
● Find out to which data inputs the analysis is sensi- in depth. (don’t go to the library and read all the books
tive. Reexamine the range of options with respect before you know what you want to learn.) Use mixed
to those factors and the resulting range of outputs. project research teams composed of some people with
finely honed intuitions from experience and others with
● Based on the insights developed by the analysis, rede-
highly developed analytical skills and too little experience
fine the problem and repeat the process.
to know what cannot be done. perhaps in this way you
● Reiterate until there is a consensus that the possible can achieve the best of both analysis and intuition in
incremental improvement in insight is no longer combination and offset the weaknesses of either.
worth the incremental cost. that consensus will be
Source: B. Henderson, ‘Business thinking’, in C. Stern and
intuitive. It must be. there is no way to know the G. Stalk (eds), Perspectives on Strategy, John Wiley, 1998,
value of the unknown. pp. 260–263.
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Intuition is valuable because it provides a quick solution to a problem. However, its value
is somewhat limited when the environment changes as quickly and drastically as is the case
with e-business. Then, managers risk overlooking or misjudging important factors, which
results in misguided strategies.
An analytical approach to strategy formulation, on the other hand, allows for a broad-
er and more profound analysis of the issues at hand. However, it is time-consuming and
difficult, since it is not immediately obvious which factors need to be analysed when
evaluating strategies in a systematic way. Questions such as ‘Should we start selling our
products online?’ and ‘How should we position ourselves vis-à-vis our competitors and
how should we organise our firm?’ cannot be answered by just looking at individual
and isolated factors. Instead, it is necessary to acquire a thorough and comprehensive
perspective.
How can this be done? One possible approach is to use conceptual frameworks that break
down the problem at hand into manageable sub-units, which can be analysed individually.
The goal of a framework is to facilitate thinking through a problem by providing a struc-
tured approach that is independent of industry or starting position. A good framework has
the following qualities:10
● It captures the most important dimensions of the problem. This means that all the impor-
tant elements that constitute an integral part of the real world are included in the frame-
work. One of the reasons why, for instance, Porter’s industry analysis framework, which
is defined in Section 3.2, has been used widely in the business and academic communi-
ties is that it has captured the essential factors that determine the attractiveness of an
industry. At the same time, a good framework captures the essential variables with the
least number of dimensions, which in turn helps manage complexity. A framework with
hundreds of variables might cover all dimensions, yet it is not practical in everyday prob-
lem solving. Thus, finding the right balance between being exhaustive on the one hand
and keeping the framework as simple as possible on the other hand is a crucial challenge
in framework building.
● All the elements that the framework contains are mutually exclusive. This means that the
elements or dimensions in the framework differ systematically from each other and
do not overlap. To a large extent, this criterion determines the clarity of frameworks.
Consider, for example, the value chain concept, which is discussed in more detail in
Section 4.2. This concept helps a manager to separate distinctive, albeit interrelated,
activities within a firm such as inbound logistics, production, outbound logistics, market-
ing and sales and after-sales service. The separation into discrete activities opens up the
way to a more rigorous analysis and to raising questions such as ‘Which of our activities
should we perform internally and which should we outsource?’ and ‘Through which
activities can we differentiate ourselves from our competitors?’.
Frameworks such as Porter’s five forces and the value chain are frequently criticised for
being too rigid and leaving too little room for creativity.11 There are essentially two alter-
natives to a framework-based approach. First, to rely solely on intuition, which presents
its own set of problems, as was discussed above. Second, to use an analytical approach
without a structured framework and to start from scratch every time. Doing so entails two
main risks.
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Part 4 Case studies
First, you might forget an important dimension that, in the end, may turn out to be cru-
cial for the problem-solving process. Second, it requires substantially more effort because
you need to determine the most important variables that drive the analytical process. Doing
so might force you to consider every variable involved but never to achieve any real depth
in your analysis.
Instead of the above-mentioned approaches, it is more sensible to familiarise yourself
with key frameworks and concepts and then adapt them to the needs of the specific situa-
tion at hand. The goal of the e-business strategy framework (which we presented in Part 2
of the text) is to make you more familiar with the most important strategy frameworks and
to show, through examples, how they can be used in an e-business context. However, the
proposed framework is not meant to provide any ready-made answers. Instead, it aims to
raise questions and provide a structured approach to asking ‘Why?’ and ‘Why not?’.
In particular, it aims to expand the analysis along two directions: first breadth and then
depth (see Exhibit 14.3).
14.4.1 Extending the breadth of the analysis

As mentioned above, it is difficult to achieve an overarching perspective of the issues
involved in strategy formulation. Therefore, it is advisable first to gain a broad understand-
ing of the relevant issues and then to embark on a more detailed analysis. The proposed
sequencing of these steps is important, especially knowing managers’ time limitations.
Exhibit 14.3 Effective strategy formulation requires the ability to cover a broad analysis horizon
and to perform selective, in-depth analyses of crucial issues
Extend the depth of the analysis

2 by probing selectively into
specific issues
High
Issue B
Depth of analysis
Issue C
1
Issue A Extend the breadth of the
analysis to ensure that the
following elements of
strategy formulation are
considered:
- Industry structure and
Initial analysis horizon markets
- Value creation
- Horizontal boundaries
Low
- Vertical boundaries
Narrow Broad - Internal organisation
Breadth of analysis
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To illustrate the above issue, let us consider two companies – DeepFirst Inc. and
BroadFirst Inc. – involved in oil exploration. The exploration engineers of DeepFirst Inc.
start drilling in front of the company’s headquarters to find out whether there is any oil.
Then they move on and keep drilling randomly, in different places, until they eventually
encounter an oil well. However, this process is very time-consuming and expensive. The
exploration engineers of BroadFirst Inc., on the other hand, have developed elaborate sys-
tems based on geology research and advanced ultrasound devices. Using this technology,
they quickly scan vast areas of land and can then predict precisely where it is worthwhile
drilling. In effect, they look at the bigger picture first before investing substantial efforts in
drilling, thereby reducing cost and increasing the likelihood of success.
Often, however, managers behave more like the engineers from DeepFirst Inc., overlook-
ing the ‘bigger picture’ and instead focusing first on isolated issues, which often turn out to
be of only marginal importance. In doing so, they collect vast amounts of data and build
elaborate quantitative models only to find out later that the issue they were working on so
diligently did not really matter in the broader context. However, while getting immersed in
a side issue, they forgot to move on to other areas of analysis that were significantly more
important.
In order to reduce the danger of missing key variables in the strategy-formulation proc-
ess, it is important to have a clear understanding of the overall dimensions that are likely to
be relevant. In the e-business strategy framework there are three main dimensions, which
are all closely interrelated. These are: (1) external environment and markets, (2) value
creation and strategy options and (3) firm structure and organisation. Depending on the
strategic context at hand, certain dimensions are more relevant than others. But in all cases
it is important to have the broad picture at the outset and only then to drill deeper into more
specific issues.
14.4.2 Extending the depth of the analysis

In addition to expanding the breadth of the analysis, a second goal of the concepts discussed
in the e-business strategy framework is to expand the depth of the analysis. To illustrate this
point, let us consider the case of a firm that wants to enter the online auction market. At first
glance, this market might seem attractive because existing players, such as eBay, are highly
profitable. Digging deeper, we would then ask ‘Why is this so?’ – a question to which there are
several answers. First, there are high economies of scale, which limits costs. Second, there are
also high barriers to entry, which allows incumbent firms to charge healthy margins.
Moving down to the next level of analysis, we can determine the reasons for the high
barriers to entry. They result largely from network effects. Once an e-auction place has
managed to attract a critical number of users, it is unlikely that customers will switch to a
new competitor. This is due to the fact that much of the value of an e-auction place depends
on how many other customers use it, which creates a liquid market where it is easy to sell
and buy things.
Moving down one more level, we could ask how the firm was able to create strong net-
work effects and whether these effects could be replicated. This probing can continue by
always asking ‘Why?’. Eventually, however, there will be a point where it is not sensible to
keep raising questions any more because the effort of doing so will outweigh the expected
benefit. Yet, more often than not, we tend to stop asking ‘Why?’ too soon, rather than too
late (see Strategy in Action 14.2).
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Part 4 Case studies
STRATEGY IN ACTION 14.2
‘Why?’ – the importance of questions in strategy formulation

the single most important word in strategy formulation is why.
Asking why is the basic act of probing. searching for root causes takes strategy formulation
away from the unconscious repetition of past patterns and mimicry of competitors. asking why
leads to new insights and innovations that sometimes yield important competitive advantages.
asking why repeatedly is a source of continuous self-renewal, but the act of inquiry itself
is an art. It can evoke strong reactions from the questioned. It is only rarely welcomed. It
is sometimes met with defensiveness and hostility, on the one hand, or, on the other, the
patronizing patience reserved by the knowledgeable for the uninformed.
to ask why – and why not – about basics is to violate the social convention that expertise
is to be respected, not challenged. Functional organizations in mature industries have a par-
ticular problem in this regard. one risks a lot to challenge the lord in his fiefdom.
Questioning the basics – the assumptions that ‘knowledgeable’ people don’t question – is
disruptive. probing slows things down, but often to good effect. It can yield revolutionary new
thoughts in quite unexpected places.
to probe to the limits is to simplify the problem to its essentials and solve one problem rather
than many. to pursue such probing takes a special, strongly motivated person, unless one makes
it the norm for the organization. asking why five times is easy to say, but hard to do. It challenges
people’s knowledge and even self-respect. It can call into question their diligence and the basis
of their expertise. It requires fresh thinking on all sides. Yet it’s so basic to learning, to seeing new
things from the familiar. In the early 19th century, doctors routinely went, without washing, from
autopsies to the treatment of patients – with disastrous results. Ignaz semmelweis is the man who
first hypothesized the basic relationship and proposed and tested a change to clean hands – yet
in his own time he had to struggle with his peers because he questioned the accepted practice.
Probing takes us beyond data analysis

Good strategy depends critically on knowing the root causes. Finding them is often a task
beyond quantitative analysis. one must look to broader frames of reference and bring basic
judgment and common sense to bear. probing – asking why – is the often intuitive search for
the logic that heavy data analysis can miss or bury.
asking why is a qualitative act. It is different from quantitative analysis, but the one gains
power from the other. It propels analysis forward by raising new questions to be subjected
to rigorous analysis. It takes us beyond the numbers to new answers, new solutions, and new
opportunities. Quantitative analysis should not become both the means and the end.
asking why can raise the questions that are fundamental, but not necessarily answerable
through rigorous analysis itself. these are the basic questions of leadership and common
sense. they are the search for ‘the point.’ For example:
● Why do we continue in this business?
● Why should anyone buy this product?
● What will prevent competitors from matching us? What will we do then?
● Why are we making so much money?
● Why won’t it eventually come to an end?
● What must we do now to prepare for or moderate that change? ➨
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Strategy in action 14.2 (continued)
these sorts of probes search for the bedrock reasons for value and advantages to test how
enduring they may be. they ask whether the shape and character of the business and its
strategy make sense.
asking why is easy in concept, but harder in practice. It can be very rewarding. Why not
do it?
Source: J. Isaacs, ‘Probing’, in C. Stern and G. Stalk (eds), Perspectives on Strategy, John Wiley, 1998,
pp. 276–8.
Furthermore, with today’s advanced IT capabilities, companies can more easily collect
relevant data to answer deeper-seated questions. For instance, when analysing customer
service at Amazon.com, Jeff Bezos requires detailed quantitative run-downs of numbers
regarding the average customer contacts per order, average contact length, breakdown of
email and telephone contacts and total cost of each contact.
The move along the chain of causality by asking ‘Why?’ helps you to understand the root
causes of successes and failures. You can then use these insights for evaluating your own
ideas and making more informed strategy decisions. To foster the analysis, the concepts
discussed in this text represent the following three levels of thinking:
● e-Business-specific concepts. On the first level, concepts such as a company’s virtual value
chain (see Section 4.3), the unbundling of the traditional organisation (see Section 9.4)
and the ICDT (information, communication, distribution and transaction) model (see
Section 4.4) are specific to e-business. Frequently, these concepts implicitly or explicitly
build on concepts from strategic management literature (such as the value chain concept)
and also on fundamental economic thinking (such as the concept of transaction costs).
The strength of these concepts is that they are tailored to the e-business context; there-
fore, their applicability is rather straightforward. However, this specific tailoring presents,
at the same time, their main weakness, since, as the experiences of the last few years have
shown, these concepts often fall short of explaining more complex cause–effect relation-
ships, thereby possibly misguiding managers into seemingly obvious yet faulty strategies.
Consider, for instance, the concepts of deconstruction and unbundling that became
popular during the Internet boom years (see Chapter 9). Managers were supposed to
take apart their company’s value chains and focus on individual activities or businesses
where they possessed a competitive advantage. The initial logic was, in many cases, com-
pelling. In other cases, however, it did not turn out to be fitting because crucial linkages
between different activities within the firm were overlooked. Probing beyond the initial
level of analysis might have provided a more profound explanation and, in turn, would
have led to more sensible conclusions and better strategies
● Generic strategic concepts. In order to move beyond the initial level of analysis and find
deeper cause–effect relationships, it is useful to have a good understanding of the key
strategic concepts, such as the five forces industry model, the concept of co-opetition, the
generic strategy options and the value chain. These concepts can be applied irrespective
of the industry or firm at hand. The common characteristic of these concepts is that they
do not provide any ready-made answers. Instead, they define the relevant variables and
thus help managers to raise the right questions. We discuss these concepts at length in
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the e-business strategy framework and link them to some real-world examples to
illustrate how they can be applied in the specific e-business context.
● Fundamental economic concepts. Underlying the strategy concepts there is another
level of thinking based on fundamental economic concepts. These include
economies of scale and scope, transaction costs and value creation. They are also
relevant in the e-business context and provide a strong basis for more in-depth
analysis.
Summing up this section on conceptual thinking, we would like to stress again that
concepts and frameworks are not meant as a substitute for the development of crea-
tive ideas. Creative ideas are a prerequisite for any innovative strategy. Conceptual
thinking is the next step to help select those creative ideas that are likely to succeed.12
Summary
● First, this chapter outlined the dimensions of creativity and analytical ability and pointed out
the importance of these two qualities in the strategy-development process.
● second, this chapter suggested a categorisation of different manager types along the
dimensions of creativity and analytical ability. the resulting four manager types are (1) the
novice, (2) the efficient performer, (3) the visionary and (4) the catalyst for change. the goal
of the concepts and case studies presented in this text is to help you move closer towards
becoming a catalyst for change.
● third, this chapter showed how case studies can serve as an inspiration for creative strategy
development. Readers can use them to conduct intra-industry benchmarking (within one’s
own culture and across cultures) and as a source for cross-industry inspiration.
● the chapter then discussed the value of frameworks in the strategy-formulation process and
outlined the key requirements that a good framework needs to fulfil. First, it must capture
the most important dimensions of the problem at hand. second, all the elements contained
in a framework must be mutually exclusive.
● the last section of this chapter outlined two analytical techniques to evaluate strategies. the
first involves expanding the breadth of the analysis to ensure that each important element
is considered thoroughly. the second entails expanding the depth of the analysis to ensure
that the most important issues for the problem at hand are assessed rigorously.
REVIEW QUESTIONS
1 What are the three possibilities mentioned in this chapter that can help you to improve your
creativity?
2 How do the four types of managers mentioned in this chapter differ? What are the specific
qualities of the ‘catalyst for change’?
3 What are the three ways in which case studies can help you to learn about e-business?
4 What are the key characteristics of a good framework?
5 What are the three levels of conceptual thinking presented in this chapter?
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1 Where do you position yourself within the ‘catalyst-for-change’ matrix?

2 discuss your above assessment with colleagues. In light of their feedback, in which area would
you especially like to improve your abilities?
3 discuss how case studies can help you to develop creative strategies. provide some examples.
4 Is it always sensible to try to get a broad understanding of a problem before addressing more
detailed issues? What problems do you foresee with this approach?
5 How can you increase the depth of analysis through the concepts and frameworks presented in
this book?
B. Nalebuff and I. Ayres outline an approach to creative problem solving in Why Not? How to
Use Everyday Ingenuity to Solve Problems Big and Small, Harvard Business School Press, 2003.
M. Csíkszentmihályi analyses different dimensions of creativity in Creativity, HarperPerennial,
1997.
E. de Bono, one of the leading thinkers in the field of creative thinking, proposes ‘lateral think-
ing’ as a way for creative idea development in his book Lateral Thinking – A Textbook of
Creativity, Penguin Books, 1990.
B. Minto gives a practical and very insightful discussion of structuring and problem solving in
The Pyramid Principle, FT Prentice Hall, 2002.
M. Porter discusses the importance and value of frameworks in the article ‘Towards a Dynamic
Theory of Strategy’, Strategic Management Journal, 1991, vol. 12, no. 8, pp. 95–117. For fur-
ther reading on M. Porter’s thinking about frameworks, see also N. Argyres and A. McGahan,
‘An Interview with Michael Porter’, Academy of Management Executive, 2002, vol. 16, no. 2,
pp. 43–52.
R. Rumelt, D. Schendel and D. Teece discuss the tension between case-based approaches and
theoretical constructions for the strategy formulation process in ‘Strategic Management and
Economics’, Strategic Management Journal, 1991, vol. 12, no. 8, pp. 5–30.
S. Huff, T. Jelassi and J. Cash discuss how to teach information systems courses through the
case study-based approach in: ‘Teaching Information Systems Management with Cases’,
Information Systems (IS) World, 1995.
www.creativitypool.com is a database with creative and original ideas.

www.pyramidprinciple.com is the website of Barbara Minto. She invented the Pyramid Principle,
which provides a structured approach to problem solving.
www.thomasedison.com is a website containing biographical information about the inventor
Thomas Edison.
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Part 4 Case studies
www.trendwatching.com is a website that spots emerging consumer trends and related new
business ideas on a global basis.
www.whynot.net is the online forum for people to share and talk about their ideas.
1 T.V. Ghyczy describes the usefulness of metaphors for strategy development in the article ‘The Fruitful
Flaws of Strategy Metaphors’, Harvard Business Review, 2003, September, pp. 86–94. One of his key
messages is that, contrary to popular thinking, the true value of a metaphor for generating new strategic
perspectives becomes apparent when the metaphors themselves stop working, which is the case when a
metaphor is not entirely transferable to the problem depicted. Attracted by the familiar and repelled by
the unfamiliar connections, one is, at the same time, left in a state of understanding and incomprehen-
sion. In this state of mind, the likeliness of looking at things in new and creative ways increases.
2 Obviously, strategy development is not the same as designing a building. Most importantly, architects
face nowhere near as much uncertainty regarding environmental changes as managers do in the still
rapidly evolving e-business environment. If we were to include this business-like level of uncertainty, this
would mean that the architects would not know whether the buildings they are designing will be built on
quicksand or on rock, in the tropical rainforest or in the Arctic Circle.
3 Due to the length limitations of this text, this chapter might not cover many of the aspects that peda-
gogues or psychologists would want to see discussed in this context. Nonetheless, for students who have
previously had only little exposure to the case method and conceptual approaches to problem solving,
we believe that this chapter can provide a valuable context for their learning experience.
4 For more information on Thomas Edison’s life, visit www.thomasedison.com
5 See M. Csíkszentmihályi, Creativity, HarperPerennial, 1997, pp. 368–70.
6 For a good discussion on idea development and creativity, see A. Hargadon and R.I. Sutton, ‘Building
an Innovation Factory’, Harvard Business Review, 2000, May–June, pp. 157–166, and B. Nalebuff and I.
Ayres, Why Not?, Harvard Business School Press, 2003. For more recommended reading on this topic,
refer to the list at the end of this chapter.
7 M. Csíkszentmihályi, Creativity, HarperPerennial, 1997, pp. 362–3.
8 Ibid., pp. 360–3.
9 See R. Bruner, B. Gup, B. Nunnally et al., ‘Teaching with Cases to Graduate and Undergraduate
Students’, Financial Practice and Education, 1999, vol. 9, no. 2, pp. 138–47.
10 For an excellent discussion of the value of frameworks in strategy research, see M.E. Porter, ‘Towards
a Dynamic Theory of Strategy’, Strategic Management Journal, 1991, vol. 12, no. 8, pp. 95–117. For a
practical discussion of structuring and problem solving, see B. Minto, The Pyramid Principle, FT Prentice
Hall, 2002.
11 R. Grant criticises Porter’s frameworks in Contemporary Strategy Analysis, Blackwell, 2002, p. 89.
12 R. Grant offers an excellent explanation of the value of analysis in the strategy development process in
his book Contemporary Strategy Analysis, Blackwell, 2002, pp. 31–2.
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A guide to the main focus of the case studies
Chapter
3 4 5 6 7 8 9 10 11 12 13
Z01_JELA7870_03_SE_CASE01.indd 337
Case study
Case study name
External analysis
Internal analysis
Strategy options
Sustaining competitive
advantage
New market spaces
Value process framework
Internal organisation
Relashionship with suppliers
Relashionship with
users/ customers
e-Government
Implementation
type
1 Tesco ● ●●● ●● ● ●●● ●●
2 Nordea ●●● ●● ●●● ●

B2C
e-commerce 3 Ducati vs. Harley ●●● ●● ● ●● ●●●
4 American Well ●● ● ●●● ●● ● ●●
5 IBX ● ●● ●●● ●
6 SATEC ● ●●● ●●● ●● ● ●
7 Otis ●●● ●● ●● ● ●●
B2B
e-commerce 8 TopCoder ● ● ●●● ●● ●●●
9 Appirio ●● ● ●●● ●
10 e-choupal ●● ● ● ●● ●●● ●●
11 e-Estonia ● ●● ● ●●●
G2B2C
12 ICT in Tunisia ●● ● ● ● ●●● ●
e-government
13 Kundra@USgov ● ●● ● ●●● ●●
B2E
14 KM at Booz ●● ●●● ●● ●●
e-communities
15 Spreadshirt ●● ●●● ● ●● ●● ●●● ●
Brockhaus vs.
16 ●● ●● ●●● ●● ●● ●
C2C Wikipedia
e-communities
17 Nettwerk ● ●●● ●● ● ●●●
18 Licia Chery ● ●● ●● ● ●●●
19 Novartis SMS for Life ●● ●● ● ● ●● ●●●
20 NTT DoCoMo ●● ●● ●● ●
m-commerce 21 M-PESA ● ●● ●●● ●●● ●● ●● ●●
22 Tunisiana ●● ● ●●● ●●● ●
23 12snap ● ● ●●● ●● ●● ●
●●● Primary focus of the case study ● ● Secondary focus of the case study ● Tertiary focus of the case study
10/03/14 3:40 PM
SYNOPSES OF CASE STUDIES
the 23 case studies are structured along the following categories:

● B2C e-commerce
● B2B e-commerce
● G2B2C e-government
● B2e e-communities
● C2C e-communities
● Mobile commerce
B2C e-commerce
1 From A(pples) to Z(oom lenses): extending the boundaries of

multichannel retailing at Tesco.com
Business context and challenge: Fifteen years have passed since Tesco, one of the world’s
largest grocery retailers, introduced its online grocery shopping business ‘Tesco.com’. The
case looks back at this online venture and assesses its past performance and current busi-
ness model. Tesco.com CEO, Laura Wade-Gery, and other executives provide their insights
on ‘The Tesco way’ of doing Internet business.
The objectives of this case study are twofold: first, to appraise how Tesco’s online service
and its underlying business model have evolved over time, especially with respect to the in-
store order fulfilment approach. Second, to understand and assess Tesco’s recent expansion of
its multichannel retailing activities with the start of a new online portal called ‘Tesco Direct’.
The case study concludes with an outlook of possible future extensions of Tesco.com. In
this context, it briefly presents ‘Tesco Diets’ as an example of how the company pushes out
the boundaries of online retailing. At the end, the case study raises the question of whether
there are any limits to this extension into new business areas.
Teaching objectives: This case study provides students with insights into the online grocery
retailing industry through the example of Tesco.com. After working with the case, students
will be able to:
1 Understand different business models of multichannel retailers and position Tesco in
relation to its competitors;
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Synopses of case studies
2 Develop an understanding of sophisticated use of CRM methods, as employed by Tesco;

3 Identify critical sourcing decisions in Tesco’s retailing activities and understand how they
helped shape the company’s success; and
4 Discuss possible extensions of the multichannel approach and potential limitations for
future growth in Tesco and other multichannel retailers.
Key business concepts, issues and technologies: multichannel retailing; online retailing;
e-commerce; customer relationship management; sourcing; business growth; value crea-
tion; business integration; incremental strategy implementation; importance of strategic fit
Industry: Retail trade
Geographical focus: UK, Europe
2 From e-banking to e-business at Nordea (Scandinavia): the world’s

biggest clicks-and-mortar bank
Business context and challenge: This case study focuses on the move of Nordea, a lead-
ing Scandinavian bank, from e-banking to e-business. It starts out by presenting Nordea’s
vision for e-banking and shows how e-habit and e-trust among citizens have contributed to
implementing the company’s vision.
The case study then describes the main e-business services that Nordea offers to its retail
and corporate banking customers. These include e-identification, e-signature, e-billing,
e-salary and e-payment. The case study also discusses how Nordea integrates and manages
its different banking channels, which include physical branch-based banking, ATMs and
pay terminals, PC-banking, TV-based banking and mobile electronic banking. As part of its
channel management strategy, Nordea also uses pricing schemes to entice customers to use
the online platform. The case raises possible future threats, from other physical banks and
Internet pure players, to Nordea’s multichannel banking approach.
The case study concludes by outlining Nordea’s future growth opportunities in existing
markets and through new services. The latter include using triggered data-mining techniques
to improve customer service and also offering risk management services for e-business.
Teaching objectives: After working through the case, students will be able to:
1 Recognise the critical importance of making information technology an integral part of a
business strategy and understand how to gain business value from IT capabilities;
2 Better understand how to optimise the mix of bricks-and-clicks in a banking context in
order to create innovative services;
3 Assess the issues involved in gaining IT-based competitive advantage and in sustaining it
over time; and
4 Realise that bottom-line success in e-banking and e-business stems from a strategic com-
mitment to such an initiative, a well-coordinated cross-functional implementation and
the ability to define an appropriate business model.
Key business concepts, issues and technologies: e-banking; e-payment; channel management
strategy; online marketing; information and knowledge management; data mining; value cre-
ation; first-mover advantage; competitive environment; growth strategies; risk management
Industry: Banking
Geographical focus: Scandinavia, Europe
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Part 4 Case studies
3 Ducati (Italy) vs. Harley-Davidson (USA): innovating business

processes and managing value networks
Business context and challenge: This case study compares the e-business strategy of two
leading motorcycle manufacturers and demonstrates how Ducati, unlike Harley-Davidson,
has made the Internet an integral part of its business strategy. More specifically, the case
study describes how Ducati has successfully repositioned itself and adopted a new focus on
R&D, marketing and sales – moving away from its initial manufacturing focus. It also analy-
ses how Ducati has fundamentally changed its business model, from traditionally operating
through a narrow value chain to setting up a value network that integrates online and offline
processes and business partners. The case study contrasts this approach with that of Harley-
Davidson, which uses the Internet mainly as a communication channel with its dealers and
customers, including the creation of a virtual online community. It also highlights the way
each company manages its business processes and the roles that IT and the Internet play in
R&D and design, purchasing, manufacturing and assembly, logistics, marketing and sales
and after-sales service.
Teaching objective: After working through this case, students will be able to:
1 Better understand the value chain in a manufacturing context and recognise the critical
importance of innovative business process improvements throughout the value chain to
sustain competitive advantage;
2 Comprehend the advantage of value networks and the challenge of managing and inno-
vating them;
3 Understand the potential of ICT for supporting or even driving a business turnaround.
Key business concepts, issues and technologies: distribution and sourcing strategy;
e-commerce; niche products; turnaround and lean management; process innovation; mar-
keting and sales; cross-selling; value network management; supplier relations; product
development process; oligopolistic competition
Industry: Manufacturing
Geographical focus: Italy, Europe and USA, North America
4 American Well: the doctor will e-see you now

Business context and challenge: What is next for the healthcare IT provider American
Well, whose innovative Online Care technology allows physicians to deliver, through the
Internet, care to patients in real time? Using American Well’s platform, patients with non-
emergency health concerns can communicate with physicians online or by phone and
receive advice or even a diagnosis without having to visit the physician’s office. American
Well’s co-founders, Ido and Roy Schoenberg, believe this platform will reduce the cost of
healthcare delivery, create new revenue-earning opportunities for providers and contrib-
ute to a more efficient, convenient healthcare delivery system. While the platform could
benefit insurers, providers, employers and patients alike, the company has only marketed
to a few health insurance companies to date. Heading into 2010, the company considered
several new initiatives: marketing a new service that allows health providers to connect
with specialists to obtain immediate counsel; expanding the customer base to deliv-
ery networks (such as hospitals and large clinic chains), retail clinics and pharmacies;
340

international expansion; and taking the concept of brokering between excess supply of
time with excess demand for time to other services.
This multidisciplinary case firstly illustrates the importance of understanding what
and for whom value is created by a new product or service, and how a marketing strat-
egy (along with a 5 Cs analysis) can be effectively formulated. Secondly, it shows the
challenges inherent in facilitating the adoption of a concept that dramatically changes
the existing practice – and to evaluate the adoption to date in the context of consid-
ering next-generation proposals. Additionally, it takes the notion of tele-medicine a
step further by examining what and who in the healthcare space needs to be aligned.
Finally, the case shows how start-ups expand into new target markets or offer new
value propositions.
Teaching objectives: After working with the case, students will be able to:
1 Understand the barriers to innovation adoption by all the parties involved in the value
chain and conceive ways to overcome these barriers and align the parties;
2 Explore the positioning of an innovation as a complement vs. substitute to the status quo;
3 Comprehend the implications of positioning a new concept as a ‘process’ vs. ‘product’
innovation;
4 Assess the impact of choosing a customer whose benefits from a new technology hinge
on its ability to subsequently market downstream;
5 Grasp the marketing of a multi-sided platform;
6 Analyse the new business opportunities generated by a new core concept; and
7 Think creatively about a new concept, both in terms of benefits and target customers,
and its potential impact on modifying or augmenting the initial concept.
Key business concepts, issues and technologies: barriers to innovation; positioning; multi-
stakeholder marketing; business expansion; value chain analysis; customer targeting;
multi-sided health platform; process and product innovation
Industry: Health care; online health care
Geographical focus: USA, North America
B2B e-commerce
5 IBX (Northern Europe): expanding B2B e-purchasing from indirect

to direct goods and services
Business context and challenge: This case study discusses the key success factors that
helped IBX survive the dot-com crash and position itself as one of the most successful B2B
platforms in Europe. It starts with a brief description of B2B e-commerce, its evolution over
time, and the business outlook in this sector. It then describes the history of IBX and the
importance of forging business and technological alliances. The company’s business model
is reviewed, emphasising (1) its on-demand solutions portfolio (for sourcing, procurement,
payment and supplier network modules) and (2) the subscription-based revenue model in
terms of its advantages, customers’ acceptance and impact on IBX financial viability.
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Part 4 Case studies
The case study also illustrates the ‘anchoring’ marketing strategy that IBX used to build
its brand and discusses how contract compliance reduced maverick buying. It then assesses
some success factors, such as contract compliance, process transparency and system inter-
operability, that helped IBX achieve a leading position in the B2B market. The case study
concludes by presenting the challenges that IBX faces following its move into the (direct)
vertical platform market. It highlights the governance problem raised by such a move and
the IBX strategy to meet the new challenges.
Teaching objectives: This case study provides students with insights into B2B platforms
through the example of IBX. After working with the case, students will be able to:
1 Recognise the critical importance of making information technology an integrated part
of a business procurement strategy;
2 Understand the importance of contract compliance in order to generate savings through
the use of business-to-business platforms;
3 Better understand the importance of a good fit between the solutions portfolio and the
revenue model (within the business model) to provide a sound business strategy;
4 Identify the main benefits expected by buying organisations from joining a B2B platform
as a buying organisation;
5 Recognise liquidity as the most important success factor of B2B platforms; and
6 Comprehend why the governance issue within a B2B platform is a critical issue when
entering into the vertical markets.
Key business concepts, issues and technologies: online procurement; global; web-based
electronic data interchange; on-demand capabilities; interoperability of B2B platforms;
sustainability of eSolutions; supply chain integration; governance challenges in multi-tier
vertical exchanges; subscription and transaction based revenue models
Industry: Purchasing services provider
Geographical focus: Germany, Europe
6 Satec (Spain): business transformation through IT value reinvention

and organisational redesign
Business context and challenge: The case study starts out by presenting the history of Satec
(Spain), a family business created in 1987 by Luis Rodriguez-Ovejero Alonso. It outlines
the company’s evolution from initially being a retailer of stand-alone supercomputers to
becoming a provider of integrated and customised IT products and services. Satec focuses
on networking engineering in communication-intensive industries and competes with com-
panies such as Telefonica and Indra.
The case describes Satec’s successful shift from a product-anchored to a service/
solution-based business model. It also addresses the challenges faced in shifting over time
from a founder-led family business operated in Madrid to a professional team-managed
international enterprise present in Spain, Portugal, Morocco, Algeria and Tunisia.
Challenges faced by Satec include the continuously changing technological skills and
competencies, the corporate marketing positioning and customer expectations, the business
model and management style, as well as the organisational model and corporate culture
that are fit for the new multinational enterprise.
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Teaching objectives: This case study provides students with insights into the business
operations of an IT and systems integrator company. After working through the case, stu-
dents will be able to:
1 Understand Satec’s evolution from a retailer of supercomputers to a system integrator;
2 Understand the company’s business model;
3 Discuss Satec’s competitive environment and its strategic positioning; as well as
4 The company’s shift from an entrepreneurial venture to a professional team-led firm in
light of its international expansion and organisational change.
Based on this company-specific knowledge, students will be able to:
5 Better understand the IT industry;
6 Identify the critical success factors of a system integrator;
7 Assess the related business model; and
8 Identify the opportunities and challenges that IT companies face in light of technological
changes and international competition.
Key business concepts: market expansion; culture-sensitive business approaches; tech-
nology convergence; standardisation; trade-off between richness and reach; business
integration; business diversification; leadership, corporate culture; business process
re-engineering
Key words: Cloud Computing
Industry: Information technology (IT)
Geographical focus: Spain, Europe
7 Otis Elevator: accelerating business transformation with IT

Business context and challenge: This case study focuses on a major business transforma-
tion that recently took place at Otis Elevator. Led by the CEO, this transformation represents
a remarkable long-term re-engineering of all the business processes of the firm to drive
operating costs down and service performance up. Otis’s business transformation is the
continuation of a change process that has been going on for more than 20 years.
Teaching objectives: This case study demonstrates the implementation and impact of a
major IT-enabled business and organisational change in a manufacturing context. Having
worked with the case, students will be able to:
1 Realise IT enablement can fundamentally change a firm’s infrastructure and basis of
competition;
2 Understand the main processes of e-logistics; and
3 Understand the critical role of leadership in general and of a CEO in particular.
Key business concepts, issues and technologies: organisational structure; organisational
change; business process re-engineering; leadership; e-logistics; competitive service-orien-
tated business; service quality
Industry: Manufacturing
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Part 4 Case studies
8 TopCoder (A): developing software through crowdsourcing

Business context and challenge: The crowdsourcing-based business model of TopCoder,
in which software is developed through online tournaments, is presented. The case
highlights how TopCoder has created a unique two-sided innovation platform consist-
ing of a global community of over 225,000 developers who compete to write software
modules for its over 40 clients. Also, the case provides details of a unique innovation
platform where complex software is developed through ongoing online competitions.
By outlining the company’s evolution, the challenges of building a community and
refining a web-based competition platform are illustrated. Experiences and perspectives
from TopCoder’s community members and clients help show what it means to work from
within or in cooperation with an online community. In the case, the use of distributed
innovation and its potential merits as a corporate problem-solving mechanism is discussed.
Issues related to TopCoder’s scalability, profitability and growth are also explored.
Teaching objectives: The TopCoder case provides students with an overview of how an IT
platform-based firm uses software development. Objectives of the case include:
1 To understand why clients use TopCoder’s unconventional crowdsourcing software
development platform and explore how the company addresses clients’ concerns;
2 To study the diverse motivations for why community members participate in TopCoder con-
tests and how the firm tailors its system to foster competitor engagement and motivation;
3 To look at how TopCoder facilitates a triangular relationship between the clients and
community by adjusting contest design, governance mechanisms and management
resources; and
4 To assess and understand the issues TopCoder faces as it plans to scale and grow its
business.
Key business concepts, issues and technologies: multi-stakeholder collaboration; distrib-
uted innovation; competition; crowdsourcing
Industry: Information technology (IT); software development
9 Appirio: new venture on a cloud

Business context and challenge: Appirio, a cloud computing services and consulting busi-
ness, is experiencing explosive growth driven by its successful strategic partnerships with
Google and Salesforce.com. The company practices what it preaches: keeping all of its IT
systems in the cloud. Appirio’s senior leadership team is convinced that building its venture
on the cloud offers a competitive advantage in terms of agility, scalability and employee
empowerment to drive rapid innovation. This case explores the opportunities and chal-
lenges of cloud computing pure-play companies, such as Appirio, and provides insights into
how to turn IT systems into an entrepreneurial growth engine.
Teaching objectives: After working through the case, students will be able to:
1 Consider the role of IT and cloud computing in building entrepreneurial venture
capabilities;
2 Articulate entrepreneurial challenges and opportunities enabled by a disruptive IT inno-
vation such as cloud computing;
344

3 Assess the changing industry and competitive landscape of IT systems implementation;

4 Define a transition plan for organisations shifting from traditional corporate IT infra-
structure to a cloud computing-based one;
5 Evaluate enablers and barriers to the adoption of a new technology, including organisa-
tional and political objections to technology adoption; and
6 Identify ways to minimise the costs and maximise the agility of entrepreneurial
IT systems.
Key business concepts, issues and technologies: competitive strategy; entrepreneurship;
general management; management of information systems; operations management; serv-
ice management; cloud computing
Industry: IT systems consulting
10 ITC e-Choupal: corporate social responsibility in rural India

Business context and challenge: Set against the backdrop of under-served, over-exploited
rural India, this case highlights how the use of technology by the Indian conglomerate ITC
transformed the lives of many rural Indians at the same time that it was benefiting the
company. Continually plagued by an inefficient supply chain in rural agriculture, ITC imple-
mented the e-Choupal initiative in 2000. Under the initiative, ITC set up small Internet
kiosks in villages that allowed farmers access to an efficient and transparent alternative to
the traditional mandi for marketing their produce. By establishing a direct channel between
the farmer and ITC, e-Choupal significantly marginalised the role of middlemen, thereby
ensuring farmers more money for their produce.
Aware of the multitude of challenges faced by impoverished rural Indians, ITC extended
its e-Choupal framework to deliver core services such as access to health care, education
and information. They even liaised with other companies to deliver products and services
to rural Indians that had previously commanded huge premiums or were simply unavail-
able. Evolving into a platform for community development, e-Choupal was both eradicating
poverty and chipping away at rural isolation, even while ITC continued to enjoy the benefits
of functional procurement and distribution value chains.
Teaching objectives: After working with this case study, students will be able to:
1 Understand the triple bottom line – meaning that businesses should aim at being profit-
able (financially sustainable), supporting the community and protecting the environ-
ment they act in;
2 Discuss different corporate social responsibility models and understand the linkages
between CSR and competitiveness;
3 Comprehend the opportunities and challenges associated with alliances between foreign
retailers and their Indian partners; and
4 Better understand how ITC e-Choupal balances short-term profitability with long-term
sustainability while considering broader business issues related to competitive advan-
tage, corporate governance, risk management, environmental changes and ethical
trading.
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Part 4 Case studies
Key business concepts, issues and technologies: corporate social responsibility; business
growth strategy; triple bottom line; inclusive business model; value chain analysis; competitive
advantage; corporate governance; risk management; ethical trading; access to markets; health
care; education and information; agriculture; e-governance
Industry: Private sector conglomerate, agriculture
Geographical focus: India, Asia
G2B2C e-government
11 e-Government in Estonia: establishing the world’s leading

information society
Business context and challenge: This case study focuses on the development of e-government
in Estonia in the context of building an information society in this Baltic Sea country. It high-
lights political and economic changes that took place in Estonia and emphasises the role of
political foresight and leadership in promoting the use of ICT in the country. It then discusses
the history of public-sector transformation and the development of e-government.
The case study provides an overview of Estonia’s national information systems and
describes in detail the e-government IT infrastructure and its three pillars: (1) the data
exchange layer X-Road, (2) the PKI infrastructure (i.e., the national ID card and digital
signature) and (3) the ‘virtual office’ – a unified service space that offers citizens a ‘one-stop
approach’ to access all public services. The case study provides some illustrative examples
of Estonia’s e-government services: e-Cabinet, e-Democracy, e-Voting and e-Tax Board. It
discusses security and privacy issues and highlights the challenges that the Estonian gov-
ernment faces to create an efficient e-government. It also highlights the measures that the
government took to overcome these challenges. The case study concludes with an outlook
of Estonia’s future e-government plans.
Teaching objectives: After working through the case study, students will be able to:
1 Better understand how the use of ICT in public administration helps create value for
citizens and how it can boost a country’s overall development;
2 Recognise the critical importance of making information technology an integral part of a
country’s strategy;
3 Analyse Estonia’s approach to e-government and the reasons for its success;
4 Understand the virtual value chain and apply it in the context of e-government;
5 Appreciate the four virtual spaces of the ICTD (information, communication, distribution
and transaction) model and apply them when analysing different types of e-government
offerings; and
6 Identify ways of creating customer (i.e., citizen, entrepreneur, civil servant) value
through the usage of ICT in the public sector.
The case study further serves as a platform for discussing the applicability of Estonia’s
e-government approach to other countries and, more generally, issues related to e-govern-
ment and e-democracy.
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Key business concepts, issues and technologies: e-Government; e-government applica-

tions; e-governance; e-democracy; value creation; virtual value chain; ICTD model; IT in
the public sector/government; data management; security and privacy issues
Industry: Public sector
Geographical focus: Estonia, Europe
12 ICT in Tunisia: a strategic lever for building a

knowledge-based economy
Business context and challenge: This case study relates the way in which Tunisia has
positioned information and communication technologies (ICT) at the heart of its national
development plan to build a knowledge-based economy. It describes the government’s
national digital culture, including: (1) providing ICT access to all citizens, regardless of
gender, region, or any other criteria; and (2) establishing a trustworthy ICT environment
through the development of a specific legal framework, which is seen as a prerequisite for
the successful implementation of e-commerce, e-banking and other online services. The
case study also discusses the high priority the government has placed since the country’s
independence on education and human capital development, and its effort to ensure a
better fit between training supply and market demand. It highlights the government focus
on fostering scientific research and technological innovation by setting up technology
parks all over the country. These parks host science and technology education and train-
ing programmes, as well as research and development projects and start-ups. The case
study also describes the challenges that the country faces in implementing its ambitious
ICT strategy and in developing e-content, and future perspectives for fostering Tunisia’s
position as an international destination for value-added ICT services. It concludes by
suggesting some lessons learned from Tunisia’s experience that other countries may find
relevant to their own context.
Teaching objectives: After working with the case, students will be able to understand the
various levels impacting the knowledge-based economy. Furthermore, they will:
1 Understand the need for having a national ICT strategy that fosters the growth of a key
economic sector;
2 Comprehend how such a strategy can serve as a leverage for socio-economic develop-
ment and international competitiveness;
3 Gain insights into the importance of setting up nationwide technology parks and ICT-
based business clusters;
4 Understand the importance of developing e-content that is relevant for the local market
and possibly beyond;
5 Appreciate the potential and also the challenges underlying the implementing of an
ambitious ICT strategy in a developing country.
Key business concepts, issues and technologies: multi-stakeholder approach; strategic
public – private partnerships; technology parks and business clusters; government regula-
tions; IT investments; human capital development in ICT; value-added ICT services
Industry: ICT; information technology (IT); telecommunications
Geographical focus: Tunisia, North Africa/Maghreb
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Part 4 Case studies
13 Fostering innovation in the public sector:

VivekKundra@USgovernment
Business context and challenge: This case is about Vivek Kundra, who was appointed as the
first ever Federal Chief Information Officer (CIO) of the USA in March 2009. Before this assign-
ment, Kundra had had less than a two-year reign as the Chief Technology Officer at the District
of Columbia (DC). However, during this time, he had ushered in a new era of experimentation
by democratising data and providing an open, participatory government wherein citizens could
access government data and hold the government accountable for its operations. The case
discusses how Kundra overcame certain challenges and fostered innovation in the DC govern-
ment. He incorporated technology in all of the government’s operations in order to develop a
user-friendly e-government infrastructure, and to provide public safety and educational and eco-
nomic growth opportunities for citizens, businesses and visitors in the district. He democratised
government data to make the operations of the government transparent to the public. He intro-
duced several information technology (IT) initiatives in the district so that citizens could access
government services easily. In doing so, he made good use of emerging media such as social
media and other consumer technologies. Costs and timeframes for introducing services were
drastically reduced through the use of open-source technology and user-generated applications.
Teaching objectives: The case will help students to:
1 Understand the issues and constraints faced by a public sector/governmental organisa-
tion in fostering innovation;
2 Understand the issues and constraints in planning and harnessing the power of IT in
providing better governance;
3 Understand the issues and challenges faced by the government in democratising data
and incorporating technology into its operations;
4 Understand the strategic role of the CIO and how the role and challenges change for a
CIO in the public sector;
5 Study how Vivek Kundra unleashed the innovation potential of IT and fostered innova-
tion in the DC government; and
6 Understand the challenges faced by Kundra in his new role as the first ever Federal CIO
of the US government, and explore ways in which he could overcome these challenges.
Key business concepts, issues and technologies: leadership; change management; new
public management; conflict management; e-governance; public sector innovation; social
media; open data; citizen participation
Industry: Public sector
B2E e-communities
14 Knowledge management at Booz & Company: towards a culture of

knowledge sharing and collaboration
Business context and challenge: After its split from Booz Allen Hamilton in July 2008, Booz
& Company emerged as a globally operating strategy consulting firm. As a new organisation,
Booz & Company had to redefine its brand, culture and values. The new CEO stressed the
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importance of knowledge management (KM) as part of the firm’s competitive strategy to

be foremost in foresight and provide essential advantage to clients. A new firm-wide KM
system that would act as a differentiator in enabling connections across the firm was rolled
out. The case shows the importance of KM to professional service firms and management
consultancies that depend heavily on knowledge for their existence and growth. It illus-
trates the process of renewing the KM system at Booz & Company by describing the triggers,
obstacles and challenges encountered throughout the initiative and the major actions taken
to overcome them.
Teaching objectives: After working through this case study, students will be able to:
1 Understand the importance of knowledge management to professional service firms and,
more specifically, to management consultancies that depend heavily on knowledge for
their existence and growth;
2 Comprehend the process of renewing the knowledge management system at Booz &
Company by describing the triggers, obstacles and challenges encountered throughout
the initiative and the major steps and actions taken to overcome them;
3 Recognise the role that corporate culture and strategy, as well as the firm’s history, play
in influencing knowledge management; and
4 Understand the role of strategic initiatives in corporate renewal initiatives.
Key business concepts, issues and technologies: intellectual capital; knowledge manage-
ment system; knowledge management strategy; codification; personalisation; knowledge
sharing and collaboration; corporate culture; learning
Industry: Professional services
Geographical focus: Global
C2C e-communities
15 Spreadshirt: mass-customization on the Internet

Business context and challenge: This case study describes the evolution of Spreadshirt
since its foundation in 2001 and highlights the key role that Lukasz Gadowski, the com-
pany’s founder and CEO, has played in the process. It stresses the major milestones of
Spreadshirt’s evolution from being a small German start-up to becoming one of the world’s
leading micro-merchandising firms. Within five years, the number of Spreadshop operators
has increased from 100 in 2002 to approximately 200,000 in 2006, greatly benefiting from
viral effects among its existing customers and shop partners. Likewise, the company’s turno-
ver has increased exponentially to approximately 20 million in 2006, with 260 employees
in Europe and the USA.
The case study focuses on Spreadshirt’s business model, which relies on providing free
of charge its online platform (called Spreadshop) to individuals interested in selling their
own customised merchandise. While the shop owner is responsible for product design and
self-marketing, Spreadshirt takes care of the fulfilment process.
The case describes the five additional business areas that Spreadshirt added to its initial
business, through either organic growth or acquisitions, and the company’s international
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Part 4 Case studies
expansion. It also describes Spreadshirt’s competitive strategy, which relies on quality- and
time-based differentiation and is backed by strong human resources and sophisticated proc-
esses and IT systems. The case also looks at the competition, which is mainly US based,
and highlights Spreadshirt’s future growth opportunities such as strengthening its product
range, exploiting network effects, creating or acquiring new businesses and further expand-
ing internationally. Spreadshirt aims at further gaining business value through Web 2.0 by
creating a sophisticated Internet-based social network.
Teaching objectives: This case uses Spreadshirt to showcase how to link online mass-
customisation with social networks. After working with the case, participants will be able to:
1 Understand the basics and significance of mass-customisation and its business potential;
2 Comprehend the concept of the ‘long tail’;
3 Understand the peculiarities of Spreadshirt’s business model in combining the concepts
of mass-customisation and the long tail.
Key business concepts, issues and technologies: business expansion strategies, differentia-
tion, internationalisation; network effects; product management; value chain; e-commerce;
viral marketing
Industry: Online retailing; micro-merchandising; Internet-based social network
16 When digital David meets physical Goliath: the case of

Brockhaus vs. Wikipedia
Business context and challenge: This case study shows the struggle of Brockhaus, a pub-
lisher of Germany’s best-known encyclopaedia, to survive two major challenges: (1) the
advent of digital encyclopaedias marketed on CD-ROM, and (2) the rise of online encyclo-
paedias that are accessible free of charge. While Brockhaus was able to successfully deal
with the emergence of digital encyclopaedias in its war against Microsoft, the company
stumbled over the rise of online encyclopaedias and ultimately had to quit the encyclopae-
dia market, which it had dominated for over a century.
The case is structured in three sections. Section one describes Brockhaus’ response to
the emergence of digital encyclopaedias and identifies the main reasons that enabled the
company successfully to cope with this innovation. Here students are asked to analyse
(1) the strategic situation Brockhaus faced when dealing with digital encyclopaedias;
(2) its reactions to this innovation; and (3) how Brockhaus successfully dealt with this
strategic challenge. Section two contains a review of two theoretical concepts: disruptive
innovation theory and the value curve. This theory section should provide the participants
with the tools necessary to understand radical innovations and to successfully respond
to them. Section three describes Brockhaus’ war against Wikipedia and the actions the
company took to deal with online encyclopaedias. Here, students are asked (1) to ana-
lyse how the strategic challenge brought about by online encyclopaedias differs from
the challenge resulting from the rise of digital encyclopaedias, and (2) to use the value
curve concept to design possible strategies in response to the emergence of online ency-
clopaedias. In its concluding part, the case describes how Brockhaus failed to cope effec-
tively with the emergence of online encyclopaedias and was ultimately forced to leave
the market.
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Teaching objectives: The aim of the case is to enable students to understand how a
company analyses the business impact resulting from a radical innovation and how it
reacts to it. More specifically, it enables students to appreciate (1) how the emergence of
Microsoft’s Encarta and of Wikipedia both represented major challenges for Brockhaus,
and (2) how they differed in a very important aspect: while the emergence of digital
encyclopaedias was a continuous change, the emergence of online encyclopaedias was a
discontinuous one.
Having worked through the case, students will understand that:
1 The emergence of Microsoft’s Encarta and of Wikipedia both represented major chal-
lenges for Brockhaus;
2 The emergence of digital encyclopaedias was a continuous change, while the emergence
of online encyclopaedias was a discontinuous one; and
3 This fundamental difference lies at the heart of Brockhaus’ failure, since the company
tried to tackle both situations with the same strategic approach.
In addition, students will learn to assess whether a strategic challenge is discontinuous or
not, to recognise typical behavioural patterns in response to discontinuous change and how
these can be overcome.
Key business concepts, issues and technologies: bottom-up market entry strategy; defend-
ing market share; disruptive innovation theory; organisational inertia; radical innovations;
rules of the market; online versus print media
Industry: Educational media; encyclopaedia market
17 Nettwerk: digital marketing in the music industry

Business context and challenge: This case focuses on how music is marketed in the digital
era. The Nettwerk Music Group built on its foundation as a social, grassroots marketer of
music and artists and emerged as a leader in the Internet-enabled social media environ-
ment. For most of the past decade Nettwerk CEO Terry McBride let fans consume music
on their own terms. He encouraged file-sharing, remixing his artists’ songs and videos and
an environment in which ‘the audience is the record company’. In the digital marketplace,
compact discs mattered much less, said McBride. ‘Digital assets’ were the currency, in the
form of ad, television, movie, videogame song placement, ringtones, mixes and community-
created content. But new artist – label contracts were needed if digital assets were going to
flow freely. Moving away from the infrastructure of the music business also meant having to
do without the financial, logistical and promotional power of the major labels. To provide
an alternative to the muscle of the major labels, the company launched a venture capital
project called ‘Polyphonic’.
Teaching objectives: This case focuses on a product that along with its promotion, can
be delivered digitally and, therefore, can be shared and re-worked by the consumer/fan.
Having worked through this case students will be able to:
1 Compare and contrast fandom in mass markets with fandom in fragmented niche markets;
2 Understand how the music industry uses web and mobile platforms, social networking sites,
shared online content repositories, unfiltered reviews and blogs and user-generated content;
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Part 4 Case studies
3 Explore how business structures need to change when the whole market changes and
when vertical markets are the new locations of value and revenue instead of the product
itself; and
4 Understand the impact of the ‘long tail’ concept as it pertains to the digital music
marketplace.
Key business concepts, issues and technologies: market types; long tail; network effects;
product marketing; value generation; market positioning; product marketing and sales;
network effects; social and collaborative networks
Industry: Music industry, media and broadcasting industry
Geographical focus: Canada, North America
18 Licia Chery and MyMajorCompany: crowdfunding to stardom

Business context and challenge: By accompanying the singer Licia in her struggles for
a music career, this case explores the business model of crowdfunding in the music
industry and beyond. Licia, a Geneva-based Music Academy graduate of Haitian decent,
had banged on doors from Paris to New York to fulfil her dream of becoming an inter-
nationally known musician. Step by step she learnt the ropes, but somehow these ropes
were always too short for her to launch her first album. In 2010 she tried her luck with
a participative music label in Paris called MyMajorCompany (MMC). MMC provided a
platform for emerging artists to promote themselves by posting their music online. Unlike
traditional music labels, MMC did not invest its own capital to launch new artists; instead,
it provided a crowdfunding platform (CFP) through which amateur investors, also called
‘producers’, were able to fund emerging talents, such as Licia, with contributions of as
little as €10. These micro-investors could gain not only financially through a stake in the
future album returns, but also emotionally through a direct connection to ‘their’ artist(s).
Crowdfunding was a great way to get started and it enabled recording the album, but
now Licia had to deal with the everyday realities of building a lasting music career. The
case further explains the need of a sound social media marketing strategy to support the
first launch. In a nutshell, it outlines the challenges start-ups face in launching their first
project – in scaling up and in maintaining momentum using internet-driven funding and
outreach methods.
Teaching objectives: After working through this case, students will:
1 Have a comprehensive understanding of crowdsourcing and crowdfunding business
models;
2 Learn about the concept of participative music labels;
3 Comprehend the potential of internet-based social media platforms that link individuals
with common interests and business ideas; and
4 Understand the challenges individuals face in getting started in the music industry.
Key business concepts, issues and technologies: viral marketing; business start-ups; initial
investments; business expansion; crowdsourcing; crowdfunding; social media
Industry: Music industry
Geographical focus: Switzerland, France, USA; Europe and North America
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Mobile commerce
19 SMS for Life (A): a public–private collaboration to prevent

stock-outs of life-saving malaria drugs in Africa
Business context and challenge: This case study investigates the use of mobile technologies
to enhance logistics of distributors of the pharmaceutics company Novartis in Tanzania. To
tackle frequent stock-outs of life-saving anti-malaria drugs, and thereby overcoming the
challenges of product delivery over the ‘last mile’ to the customer, Novartis implemented
the ‘SMS for Life’ project. This case describes the initiatives taken by the former CIO, Jim
Barrington, from concept creation, technology innovation, pilot implementation and part-
nership building to launch this mobile health project. In addition, the case provides infor-
mation on malaria and its impact on the population in malaria-prone areas.
Teaching objectives: This case study provides students with insights into the m-health sec-
tor and highlights the potentially large impact of a well-implemented, localised, SMS-based
project. After working with the case, students will be able to understand the strong relationship,
when creating inclusive markets, between ICT and business leadership. Furthermore, they will:
1 Understand the potential that innovative inclusive approaches offer to change industries
and markets and recognise the connection between business process improvement and
corporate Social Responsibility initiatives;
2 Comprehend how to create business value through ICT, especially in the high-potential
market of developing or emerging countries;
3 Assess the high potential of using ICT to enhance value chain processes;
4 Understand the potential of ICT capabilities for addressing local health challenges;
5 Recognise the importance of local factors for product development and roll-out; and
6 Understand the challenges of a multi-partner project with regards to the partners’
collaboration, continued buy-in and shared values and approaches.
public–private partnerships; localisation; competitive advantage; diversification; inclusive
business models; business strategy; technology management; innovation management;
value chain management; corporate social responsibility
Industry: m-Health and pharmaceutics
Geographical focus: Tanzania, Sub-Saharan Africa
20 NTT DoCoMo (Japan): moving from a mobile phone operator

to a lifestyle service provider
Business context and challenge: With the launch in 1999 of its wireless Internet service
‘i-mode’, NTT DoCoMo, the world’s second largest mobile communications company,
evolved from a ‘wireless infrastructure’ to an ‘IT infrastructure’ operator. With the 2004
introduction of its ‘Osaifu-Keitai’ service, which transforms the handset into a mobile digital
wallet, the company fostered its shift towards becoming a wireless ‘lifestyle service pro-
vider’. The case study traces the evolution of DoCoMo’s business strategy and the impact
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Part 4 Case studies
of its Vision 2010 on transforming the company into a highly differentiated, value-adding
wireless service provider in an increasingly competitive market.
Teaching objectives: After working on this case, students will be able to:
1 Develop a good understanding of the mobile telecom industry in Japan;
2 Assess DoCoMo’s value creation strategy and understand the importance of a corporate
vision;
3 Determine the revenue streams of the ‘lifestyle infrastructure’ business model; and
4 Appraise the critical relevance of international networks for sustaining the company’s
worldwide leadership position.
Key business concepts, issues and technologies: competitive landscape; first-mover advan-
tage; value creation strategy; revenue generation streams; value innovation logic; value
curve; five forces analysis; business transformation; technological change
Industry: Telecommunications
Geographical focus: Japan, Asia
21 M-PESA (Kenya): mobile financial services for the financially

excluded in society
Business context and challenge: This case study investigates the development in
Kenya of M-PESA – the world’s most successful mobile financial service provided by
Safaricom, Kenya’s incumbent telecom operator. This ICT-based transformative finan-
cial service allows the sending and receiving of e-money quickly and safely. Using an
inclusive business approach, M-PESA is targeted at low-income customers, providing
access to financial inclusion and other socio-economic benefits to its users. Safaricom
created a new profit centre by targeting a customer segment it had not been able to
reach properly before. The case study describes the birth of M-PESA, its development
and roll-out as well its use by different segments of society including the poor and
the financially excluded citizens. The case outlines how the M-PESA approach can be
applied to other areas in future and brings to the fore several important topics and
issues, including the following:
● The analysis of M-PESA as an example of inclusive business (in terms of its characteris-
tics, ICT-based innovation, economic model as a profit centre and the extended multi-
stakeholder approach that was used in developing the service);
● M-PESA business model evolution (in terms of value creation and value capture, roll-out
execution, critical mass building and network externality effect);
● M-PESA global strategy and business expansion (in terms of market and product
extension);
● The sustainability of M-PESA’s first-mover advantage (in terms of market leadership
position); and
● The ethical issues surrounding M-PESA and Safaricom’s relationship with the Kenyan
government (for developing public – private partnerships).
Teaching objectives: This case study provides students with insights into the mobile finan-
cial services industry through the example of Safaricom’s M-PESA. After working with the
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case, students will be able to understand the strong relationship, when creating inclusive
markets, between ICT and business leadership. Furthermore, they will:
1 Understand the potential that innovative inclusive approaches offer to change industries
and markets;
2 Comprehend how to create business value through ICT, especially in the high-potential
market of developing or emerging countries;
3 Assess the high potential of targeting the often-neglected customers at the bottom of the
pyramid;
4 Appreciate the potential of ICT capabilities for socio-economic development;
5 Recognise the importance of local factors for product development and roll-out; and
6 Understand how to maintain a leading market position when facing increasing competition.
public–private partnerships; localisation; competitive advantage; diversification; inclusive
business models; usage-based pricing; business strategy; international business; marketing;
technology management; innovation management; e-commerce and e-business
Industry: Mobile financial services; telecommunications; banking
Geographical focus: Kenya, Sub-Saharan Africa
22 Tunisiana: leading a mobile telecom operator in

post-Arab Spring Tunisia
Business context and challenge: Tunisiana, the leading mobile telecom provider in Tunisia,
has successfully manoeuvred through politically challenging times and is now gearing up
to further strengthen its market base and expand both its service portfolio and its reach.
This case describes the business challenges that Tunisiana’s CEO faced and the strategic
decisions that he had to make in order to ensure the company’s market leadership, ranging
from investments in infrastructure to sustaining financial results, from enterprise and con-
tent services to international expansion. This case also highlights the strategic importance
of addressing the customer experience as a major market differentiator.
Teaching objective: This case outlines the challenges of a forthcoming telecommunications
provider and highlights the company’s key strategic decisions necessary to ensure future
market leadership. After working on this case, students will:
1 Understand the challenges of a telecom provider in a post-Arab Spring situation to suc-
ceed in stabilising the market while simultaneously growing;
2 Comprehend the need for prioritising corporate strategies and making timely decisions
to remain competitive;
3 Understand managing the stretch between high-quality service and return on investment; and
4 Realise the requirements and challenges in a highly regulated market.
Key business concepts, issues and technologies: change management; business strate-
gies; market positioning; pricing strategy; geographical and portfolio expansion; mobile
telecommunications
Industry: Telecommunications; mobile telephony; mobile technology
Geographical focus: Tunisia, North Africa
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Part 4 Case studies
23 12snap: reinventing mobile marketing

Business context and challenge: 12snap AG was founded in 1999 in Munich by six former
McKinsey consultants who hoped to ride the Internet boom to build a successful company
with a financially attractive exit. The company name, ‘12snap’, described the business idea:
a mobile auctioneering platform. Despite corporate efforts, the large customer use of the
12snap platform never materialised. While the core mobile auctioning business failed to
deliver, mobile marketing had been sidelined. Challenged by financial pressure, 12snap
founders repositioned the company as a mobile marketing hub between the consumer/user
base, providers (such as mobile phone operators and mobile media channels) and corpo-
rate marketing departments. Using the latest technology, 12snap developed campaigns for
big brands through a one-stop mobile agency model fed by revenue sharing from media
partners, agency fees and traffic income. Over the years, the firm went through numerous
changes including a change of ownership and leadership, a new marketing direction and a
streamlining of business operations.
Having suffered from the economic crisis, 12snap’s market position was under growing
threat. Management needed to make important decisions. Should 12snap, the niche player,
continue alone or search for strategic partners? Should it rework their pricing strategy to
stay competitive? How could they position the company to survive the imminent fight for
market share and clients?
Teaching objectives: This case outlines the challenges of Internet companies and the often-
recurrent need to rethink their company’s positioning and market focus to stay competitive.
After working through this case, students will:
1 Understand the challenges faced by a small, ideas-driven Internet company to succeed in
mobile auctioneering and mobile marketing;
2 Comprehend the need for constantly re-evaluating one’s positioning in a fast-paced mar-
ket such as mobile marketing and for reinventing one’s self to stay competitive;
3 Understand the leadership challenge a company faces due to a high executive turnover;
and
4 Appreciate the need and requirements for streamlined business operations as the com-
pany grows out of its start-up infancy phase.
Key business concepts, issues and technologies: change management; lean management;
pricing; market positioning; business expansion; mobile auctioning; mobile marketing
Industry: Mobile marketing; telecommunications; mobile media
Geographical focus: Germany, Italy, UK; Europe
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CASE STUDY 1
From A(pples) to Z(oom lenses)

Extending the boundaries of multichannel
retailing at Tesco.com
Having an extremely strong existing brand, the power of the a perfect mirror of the UK population, just as the main
Internet, and our ability to use it – these are the key factors bricks-and-mortar business had been since the turna-
to our success. there is virtually no limit to what we can sell,
round led by Lord MacLaurin in the 1980s.
be it physical goods or services, and where we can sell it.1
(Laura Wade-Gery, Ceo, tesco.com)
Laura Wade-Gery jumped out of the white delivery Tesco – history of a grocery giant
truck and looked at her watch. Delivery was right on In 1956 the first Tesco self-service supermarket was
time. So was the launch of the spring catalogue for opened in a converted cinema. During the 1950s and
the new online non-food operation ‘Tesco Direct’ that 1960s Tesco grew primarily through acquisitions.
had been added to the existing dot.com operation. These included 70 Williamson’s stores in 1957, 200
Integrating different order and fulfillment options Harrow stores in 1959, 212 Irwin’s outlets in 1960,
was a constant challenge, and Laura had at least one and 97 Charles Phillips stores in 1964. By the 1960s
more on her mind: the company had almost reached Tesco had become a chain of 600 stores. The Tesco
the limit of its in-store picking model in some areas in that opened in Leicester in 1961 with 16,500 square
the UK and had to think about alternative fulfillment feet of selling space entered the Guinness Book of
models. Records as the largest store in Europe.
As the driver started to unload bottled water, vege-
tables, frozen food, wine and a flyer advertising a buy-
one-get-one-free offer on Californian Chardonnay,
1 Unless otherwise indicated, all quotations from Laura
Laura took a moment to look around. It was a typical Wade-Gery, Steve Robinson and Daniel Roberts were
suburban neighbourhood north of London, neither recorded during an on-site interview at Tesco.com on
posh nor poor. In many ways her service had become 4 May 2007 in Welwyn Garden City, UK.
this case study was written by sebastian Mauch, Research associate at Insead, under the supervision of albrecht enders, assistant
professor at the school of Management at Friedrich alexander University, nuremberg, tawfik Jelassi, professor of e-Business and
It at the school of International Management at the ecole nationale des ponts et Chaussées, paris, and Charles Waldman, senior
affiliate professor of Marketing at Insead. It is intended to be used as the basis for class discussion rather than to illustrate effective
or ineffective handling of a management situation.
Copyright © 2007 Insead.
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Part 4 Case studies
As customers began looking for quality and For the year 2006, overall group sales increased
choice in the 1970s and 1980s, Tesco’s ‘pile-it-high- by 10.9% to £46.6 billion [€65.2 billion], and group
and-sell-it-cheap’ strategy was less successful and profit before tax increased by 20.3% to £2,653 million.
results slipped dramatically. The primary reason for UK sales grew by 9% to £35.6 billion, of which 5.6%
the dismal performance was that customers had a came from existing stores and 3.4% from new stores.
negative image of the company and the products it UK profits climbed to £1,914 million, international
sold. With its exclusive focus on low prices, stores sales grew by 17.9% to £11 billion and contrib-
were poorly maintained and the selection of items uted £564 million to profits, which presented an
offered was perceived as inadequate and of medio- 18% increase over the previous year. Tesco employs
cre quality. more than 450,000 people worldwide across all of its
But by the time MacLaurin retired in early 1997, businesses.
Tesco had become the largest, most profitable super-
market chain in the UK. His first move had been to
pour large amounts of money into the construction of Four key strategy elements
new superstores in order to attract upper market seg- Tesco has a long-term strategy for growth that has
ments. Simultaneously, new systems and technology been in place since 2000, based on four key elements:
were introduced in sales and distribution to position to grow the core UK business, to expand by growing
Tesco across a range of store formats and market seg- internationally, to be as strong in non-food as in food,
ments. and to follow customers into new retailing services.
Another development was about to change the The strategy is being pursued via a number of initia-
rules of the retailing industry: the advent of the tives and decisions:
Internet. Although Tesco had been trying to meet new
● Core UK: The UK business consists of a dense net-
customer demands and develop business models to
work of more than 1,800 stores with a combined
cater to them, until the Internet provided new ways of
sales area of 55 million square feet [5.1 million
communicating with customers, that had not been an
square meters], and accounts for 75% of group sales.
easy task, as Laura Wade-Gery recalled:
Around 250,000 people work in the group’s UK busi-
We started out with the basic customer demands. since the ness. Tesco plans to grow through new shopping
early 1990s customers came up to us and said ‘It would be space with a multi-format approach and from exten-
great if you could deliver my groceries to my home’, so we
started experimenting with catalogue and phone ordering.
sions of existing shops. It has a strong customer base
It was an operational mess and very inefficient. so for us, of more than 26 million people in the UK, with more
the Internet came to the rescue in terms of providing the than 11 million households having a Tesco Clubcard.
technology which enabled cost-efficient and operationally
● International: The group operates in 12 European
effective home delivery.
and Asian markets outside the UK and owns more
than 800 stores. Over 100,000 employees work in
international operations, serving over 15 million
Tesco’s bricks-and-mortar business customers. More than half of the group’s space is
The current CEO, Terry Leahy, has worked for the now outside the UK. A market entry into the US
company for more than 20 years. Much of Tesco’s took place in 2007.
recent success is credited to his leadership ability. In ● Non-food: Sales of non-food products account
order to respond to increased competition and declin- for more than £6.8 billion in the UK alone. Tesco
ing prices in the food segment, Tesco significantly has a market share of 7% in non-food in the UK,
expanded its range of products. Its largest stores now compared to 20% in the grocery sector. Still, only
devote 40–50% of their shelf space to non-grocery one quarter of the UK population is within reach
items such as clothes and products for the home. In of a Tesco Extra store offering a large non-food
2000 Tesco opened up a new front in retailing, selling selection.
consumer electronics, televisions, DVD players and ● Retailing Services: The group has moved into
mobile phones. additional services such as Tesco Personal Finance
358

Case study 1 From A(pples) to Z(oom lenses)
(TPF), Tesco.net and Tesco Telecom. The latter 13.2 million square feet (53.7% of total UK shelf
currently serves more than 1.5 million customers, space) located in the UK.
including 1 million in an MVNO2 in cooperation
with O2. These services offer a great revenue
Competition in grocery retailing
potential, with TPF accounting for £65 million in
The UK has a highly consolidated and competitive food
profits.
retail industry. Other leading players include Asda
(owned by the US company, Walmart), Morrisons
(which acquired Safeway in 2004), Sainsbury’s and
Five different store formats Somerfield (see Exhibits 1 and 2). Discount play-
Tesco aims to serve a broad range of customers and ers, such as Lidl and Aldi, have entered the bottom
therefore takes a multi-format approach. After estab- segment of the market, adding to the existing price
lishing the original superstore format in the 1970s, it pressure.
has differentiated its presence into four more store Traditional high street businesses are also under
formats since the early 1990s: competitive pressure from Tesco and other large
retailing chains. Tesco’s main business has come
● Homeplus: This new store format, initially intro-
under criticism from various directions, prompted by
duced in seven stores in the UK, offers a wide range
the fear of large supermarkets eliminating high street
of non-food items, including clothing. Further
shopping with its small, specialized shops. Critics
products are available through the Tesco Direct
claim that retailing in the future risks being dominat-
order and collection point in every store. With a
ed by large, anonymous chains, as this comparison by
sales area of more than 30,000 square feet, stores
Andrew Simms, Policy Director of the new economics
are stand-alone or in retail parks and complement
foundation (nef),3 indicated:
the local Tesco food offer.
the chains became the economic equivalent of invasive spe-
● Extra: Introduced in 1997, Extra stores represent
cies: hungry, indiscriminate, often antisocial and destructive.
the largest store format, ranging from 60,000 to [. . .] Britain is being sucked into a vortex of Us-style, chain-
125,000 square feet. These hypermarkets offer a store-led, clone retailing [. . .]4
wide selection of non-food items as a complement
Local authorities have accused Tesco of using ‘back-
to the regular supermarket product range.
door tactics’5 by taking over existing high street retail
● Express: These stores have a sales area of up to sites in order to dodge the need to obtain planning
3,000 square feet. The format was introduced in permission. In response, Tesco insists that, ultimately,
1994 and now consists of over 700 stores selling a no retailer can move against the preferences of its
range of up to 7,000 lines including fresh produce, customers, as the response of Lucy Neville-Rolfe,
wines and spirits and bread and confectionery from Executive Director, Corporate and Legal Affairs of
their in-store bakery. Many of these stores have Tesco plc affirmed:
a petrol station (Tesco is one of Britain’s largest
andrew simms’ attack [. . .] demonstrates that he knows far
independent petrol retailers). more about flora and fauna than he does about modern
● Metro: The first Metro store was opened in 1992, retail. tesco will only prosper if we meet customers’ desires
bringing the convenience of Tesco to town and city and demands. simms’ problem is that he doesn’t like the
choices people freely make!6
centre locations, meeting the needs of High Street
shoppers and the local community. Metros offer a
tailored range of food lines, including ready-meals
2 Mobile Virtual Network Operator: a company providing
and sandwiches.
mobile telephone services without actually owning the
● Superstore: These stores have a minimum selling network infrastructure.
surface of 26,500 square feet and display 25,000– 3 URL: http://www.neweconomics.org/gen/.
4 Quoted from the Guardian, 22 March 2007.
30,000 SKUs (stock keeping units). The oldest and
5 Quoted from Hull Daily Mail, 20 February 2007.
most established store format of the group, there 6 Talking Tesco, 3 April 2007, URL: http://www.tesco.
are now 433 superstores with a total sales area of com/talkingtesco/news/?page=article5.
359

Part 4 Case studies
Exhibit 1 Development of UK grocery retailing Shopping for groceries at Tesco.com

industry and Tesco
actually, we weren’t particularly bothered about the
website, as long as it enabled customers to do the basics
Total market volume UK grocery industry, in bn £ of a shopping trip: find the products they need, look at
140 them, make their choice and pay. so we decided to keep
120 it as straightforward as possible.
(Laura Wade-Gery, Ceo tesco.com)
100
80
60 Registering for the website

40
Users who want to order groceries online via Tesco.
com need to register by providing their person-
20
al data, including delivery directions. They are
0
2001 2002 2003 2004 2005 2006 2007 strongly encouraged to provide their Tesco Clubcard
details when registering because this enables them
Annual
growth
instantly to review their previous purchases in phys-
6.13% 2.89% 2.62% 3.53% 3.75% 3.28%
rate UK ical Tesco supermarkets. In this way, first-time
groceries
online customers can start with their usual shopping
without having to key in each item separately. If a
Annual
growth of customer does not have a Clubcard number or does
50.2% 25.6% 29.1% 24.1% 31.9% 29.2%
Tesco.com not want to reveal it, the system creates a new, vir-
sales
tual Clubcard number to track the shopping history
and award points.
Tesco Plc 65,176
J Sainsbury plc 28,949

Annual sales
Accessing the website
ADSA Group Ltd. 26,80
(in million £) Customers have a number of different options to
Wm Morrison
22,864 access Tesco’s online services. Since 2001 shoppers
Supermarkets PLC
Somerfield 9,480 at Tesco.com have been able to use mobile com-
merce applications to make their purchases. In part-
Tesco Plc 1,878 nership with Microsoft, Tesco.com launched Tesco
Access, which allows users of hand-held computers
Somerfield 1,300
and WAP-based wireless phones7 to shop online,
Number of
J Sainsbury plc 727
UK stores as John Browett, at the time CEO of Tesco.com,
Wm Morrison
Supermarkets PLC
368 explained:
ASDA Group Ltd. 300 since the launch of tesco access, our customers can shop
any time, any place, on any device, whether through the
Tesco Plc 260,000 Internet, digital tV or pocket pCs.8
Wm Morrison
130,000 Tesco Access has since been included in the regular
Supermarkets PLC
Number of website Tesco.com. As of July 2007 users can choose
ADSA Group Ltd. 128,000
employees directly from within their Tesco.com account settings
J Sainsbury plc 118,000 how they want the site to be displayed.
Somerfield 44,768
Source: datamonitor 2007, company reports.
7 WAP stands for Wireless Access Protocol.

8 ‘Online shopping: Tesco.com opens for WAP/PC orders’,
Financial Times, 21 July 2001.
360

Exhibit 2 Page rank and daily reach comparison of largest UK online grocery retailing websites
Hitwise UK Online Performance Awards 2006, Category

‘Shopping and Classifieds – Grocery and Alcohol’
Rank Domain
1 www.tesco.com/superstore
2 www.asda.co.uk
3 www.asda.com
4 www.sainsburys.com
5 www.sainsburystoyou.co.uk
6 www.waitrose.com
7 uk.aldi.com
8 www.tesco.com/winestore
9 www.lidl.co.uk
10 www.ocado.com
Daily reach (percent)

0.06
0.04
0.02
0
Apr May Jun
5 June 2007
Source: www.alexa.com.
Navigating the website choose the product they want and move on to the
The website offers several types of functions to facili- next item on the list.
tate the online shopping process. They include: ● Lunchbox Tool: Aimed at busy parents and
● Express Shopper: Customers can write shop- customers wanting to order complete lunch
ping lists on the Tesco.com website, just as they meals, this tool enables them to customize their
would do for a regular shopping trip. The website sandwiches.
then searches for items from the product line that ● My Favourites: This function displays a list of all
matches the customer’s wishes. Customers simply the items that a customer has purchased recently.
361

Part 4 Case studies
Customers click on any items that they want to buy function that appears on the website next to each
again. product (see Exhibit 3). If an item is out of stock, they
● Online Recipe Book: Customers can browse all have the option of either choosing a suitable substi-
the ingredients needed for a particular recipe and tute or skipping that item. If a customer does not like
click to buy. Products are split into those that the the substitute, they can return it to the driver upon
customer probably has at home and those that are delivery and the amount is re-credited.
special to the recipe. The website stores the virtual shopping cart each
time the customer leaves the online store, there-
● Organic Box: Tesco offers pre-selected baskets of
by making it easy for different family members to
organic products in different sizes.
retrieve the stored shopping list next time they con-
● Season’s Choices: This displays items for special nect to Tesco.com. Tesco is also trying to integrate
events such as Christmas, a barbecue or a party. the online and offline shopping experience: Clubcard
Customers choose a specific list and then tick the members can enter their card number through the
products that they want to add to their shopping website and view recent purchases from offline stores.
basket.
Although not every feature is used by all customers Scheduling delivery and paying for the goods
equally, there are certain occasions where Kate Cook, Tesco.com’s prices are the same as those in Tesco
a regular Tesco.com shopper, makes use of some of stores. In-store discounts, promotions and special
them: offers are made available to online customers, for
I really like the ‘favourites feature’. that way, I complete my example, a ‘buy-one-get-one-free’ offer. If the offer
£100 order that I do every other week in 10–15 minutes is already valid when the order is placed, it will also
during my lunch break. When I have people come over for be displayed on the website. Payment can be made
dinner, I check the recipe selection for some cool snacks
or season’s Choice section for offers on BBQ. a colleague
by credit card or debit card such as Visa, MasterCard,
of mine, a mother of two, loves the Lunchbox tool for her Switch, American Express and the Tesco Clubcard
children – if you have to make a sandwich for the little ones Plus. The account is debited when the packing is
five times a week, all year long, you just run out of ideas.9 completed.
If customers have a preference regarding a product
(e.g., they like their bananas particularly ripe), they 9 Quotes from Kate Cook are taken from a telephone inter-
can mention this to their shopper using a special note view on 20 May 2007.
Exhibit 3 Choosing and specifying products on the Tesco.com website
Personal
specifications
for picking and
substitutions
Source: tesco.com.
362

Exhibit 4 Choosing a delivery slot at Tesco.com
Source: tesco.com.
For the first couple of years Tesco charged a flat able, reusable, plastic trays, which will be taken
fee of £5 for home delivery, regardless of order away by the driver. Consumers who shun bags are
volume and delivery time. Currently, delivery fees rewarded with additional Clubcard loyalty points.
differ according to the day of the week, with early Around 40% of customers have already opted for
weekday deliveries being cheapest, and evening no-bag delivery.
and/or weekend deliveries more expensive (see
Exhibit 4). Customers choose a two-hour delivery
slot anytime between 9.00 am and 11.00 pm. They The Tesco.com business model
seem to be satisfied with the model, as online shop- When Tesco first started its delivery service, it was
per Kate Cook confirmed: possible for customers to place orders through multi-
they are always on time. I have been shopping at tesco. ple devices: telephone, fax and also via the Internet.
com once a week for the last four years and delivery was However, the ordering system turned out to be too
late by 10 minutes once – the driver really apologized and slow and inaccurate, as each order was captured
I got £10 off my order. In fact, a lot of times they are even a manually, leading to frequent errors and frustration
little bit early. sometimes I come home from work and the
for customers. Delivery costs were high since the
van is already parked in front of my house and the driver is
waiting for me! picking system was manual and paper-based – pickers
would walk around the store with order lists and take
Items are delivered in plastic bags, with substituted
the requested items off the shelves. Laura Wade-Gery
items marked so that customers can inspect them
recounted the early days of grocery delivery:
upon delivery and accept or reject the substitute.
In an attempt to reduce pollution and waste, Tesco It was disastrous. You took the phone order, then typed it in
manually, then sent it down to the store by fax, where it was
is reducing plastic bags used for home delivery. A
then picked. We often had a kind of Chinese whisper effect,
recent study revealed that for an order of 32 items
Tesco.com used 11 bags10 (other online retailers
even more). The company recently announced a 10 ‘Shops fail to deliver on bags’, Scottish Daily Record,
‘no-bag-option’, whereby groceries arrive in stack- 26 February 2007.
363

Part 4 Case studies
so when a person ordered a grapefruit, by the time he got ity, product quality, and other aspects shopping the store, is
the order, it might have become a cabbage. the same as that for somebody walking in from the street.
In essence, tesco.com pickers are our eyes of the regular
To overcome these initial difficulties Tesco decided to customer on the shop floor, to the extent that the tesco.
automate its delivery service to a large degree and use com metric for availability has become the tesco metric for
the Internet as the sole ordering channel to streamline availability.
and improve the order processing. When contemplat- Tesco.com picks around 250,000 orders a week from
ing the delivery format for its online shopping it had 300 British stores. By delivering from local stores no
to choose between two different approaches: either to route takes longer than 25 minutes, since 94% of
pursue a warehouse model or to use its British stores the population in England live within a 25-minute
as distribution centers. Both strategies carried risks: radius of a Tesco store. In order to ensure an undis-
building huge warehouses would have cost millions turbed shopping experience for its customers, Tesco
of pounds, which Tesco was hesitant to spend on an has refined its in-store model over the years. Picking
unproven service, while packing and picking groceries starts at 6.00 am and continues until 2.00 pm. Over
from stores might clog the aisles, thereby frustrating the course of the day the number of picking staff is
store customers. Hence, the business model evolved gradually reduced as more customers do their gro-
slowly over time (see Exhibit 5), starting with the sim- cery shopping. In this way the daily peaks of in-store
plest fulfillment model of in-store picking. picking and regular shopping are de-synchronized
to avoid clogging the aisles. Using improved picking
In-store picking algorithms is another means of reducing the distur-
Tesco.com CEO Laura Wade-Gery explained the bance by spreading the trolleys more evenly across
rationale behind ultimately choosing the in-store the store.
picking model: One of the biggest challenges of the daily operation
is to accurately forecast the incoming orders. While on
In the beginning, a lot of people looked at our idea of a nationwide level demand is fairly easy to forecast,
in-store picking and said: ‘You are mad, this can’t possibly
be right.’ they automatically assumed that the warehouse
exact predictions on the individual store level are
model was the answer. But think about the costs of fulfil- almost impossible, resulting in overtime picking after
ment: the costs are actually in delivery. that made it nec- 2.00 pm.
essary to start near the customer – our dense network of Despite all attempts at optimizing the in-store
supermarkets all over the country that were there anyway. picking, eventually stores reach a limit that is hard
so actually it was much less of that strategic debate than I
guess it has been made to appear on the outside. It was just
to exceed. Other bottlenecks include the size of the
the obvious thing to do. backroom where orders are stored and loaded onto
the delivery vans, and the parking space available for
Giving customers a natural extension of the bricks-
the delivery fleet, as Daniel Roberts explained:
and-mortar experience also yielded advantages for the
company, as Daniel Roberts, Operations Development one problem we do have is congestion, especially at Christ-
Director at Tesco Direct, added: mas. In some stores, we have literally dozens of trolleys
on the shop floor and they start to cause distractions with
If you place an order on tesco.com, we will go and pick customers and other pickers, so we can see some bottle-
that order in a tesco store. so our experience of availabil- necks in that area. and although you might be able to work
Exhibit 5 Development of fulfillment models at Tesco.com
In-store picking Hubs Dot.com-only store
TESCO TESCO Extra Tesco.com
Source: tesco.com.
364

around that, you will then hit the next bottleneck – maybe order handling area in the back of these stores. These
because replenishment can’t keep up with the rapid pick- serve a larger area, thus taking away some of the pres-
ing speed, causing too many items to be out of stock. so
sure from congested supermarkets.
eventually, you get to a point where you run out of ideas
and solutions.
The ‘dot.com-only store’

Building delivery hubs In some parts of the UK, we have pushed the limit of the
Tesco’s fulfillment activities are run from about 300 store-based model probably as far as we can. But given cus-
shops in the UK, which vary in size from a 30,000 tomer demand for the service, we tried to find a way to fur-
ther our online business. so this is why, about one year ago,
square foot store to a 125,000 square foot hyper-
we built what we call our ‘dot.com-only store’. From the
market. Constraints vary accordingly, as some stores outside it looks just like one of the huge automated ware-
operate only 2–3 delivery vans, while large stores with houses built by some of our competitors. From the inside it
more floorspace can have a fleet of up to 20 vans. The looks just like a tesco store. and essentially that’s what it is:
entire delivery fleet numbers 1,800 vans. Tesco is a large tesco supermarket – except without customers, cash
registers and checkout staff.
starting to address environmental issues with its new
(Laura Wade-Gery, Ceo, tesco.com)
fleet of zero-emission battery-powered ‘green vans’.
Fifteen of these vehicles operate in London and in an The ‘dot.com-only store’, located in Croydon, south
environmental model store in Shrewsbury. The vans, London, opened in February 2006. Its size is compa-
which have the same carrying capacity as the regular rable to that of the Tesco superstores ranging from
delivery vans, have a maximum speed of 50 mph [80 20,000–50,000 square feet. It was pragmatically
km/h] and a range of 100 miles [160 km] before they designed in a way that would enable Tesco.com
have to be recharged. to use all of its experience in the in-store picking
Occasionally Tesco has built a supermarket larger model, including specially equipped picking trolleys
than actually needed. A couple of these Tesco Extra (see Exhibit 6) and the logistical process know-
stores have been expanded into ‘hubs’ by increasing how that had been refined over time in the stores,
picking staff, delivery fleet and building a customized while dispensing with the constraints of time and
Exhibit 6 Picking trolley interface
Source: tesco.com store visit.
365

Part 4 Case studies
space that some of the crowded Tesco stores around picking personnel, delivery fleet, drivers, equip-
London were facing. The ‘dot.com-only store’ serves ment, IT system, etc.
as a hybrid approach combining the benefits of ● Indirect costs: Incremental costs incurred by the
in-store picking with the spaciousness of a large dot.com operation, e.g., additional cleaning costs
warehouse. on the shop floor, additional replenishment during
picking hours, etc.
Integrating the model into the stores ● Pure bricks-and-mortar costs: For instance, the
Tesco had to focus on both customers and the bricks- operating costs of a store’s restaurant will not be
and-mortar stores from where it would actually do the shared in any way by Tesco.com.
fulfillment. From the perspective of a store manager,
According to Laura Wade-Gery, Tesco.com follows a
integrating the Tesco.com operation into their daily
very pragmatic approach when it comes to splitting
business might at first seem like a drastic intrusion
costs between the dot.com business and the bricks-
and an extra challenge for store managers. However,
and-mortar business:
it does have a significant impact on the development
of sales per square foot. This being one of the key met- We clearly separate between genuine or incremental
costs that are caused by us, and costs that would be there
rics for determining a store’s success, store managers
anyway. a good example is, when we started we were
are quite eager to integrate the service. The online operating in a narrow corridor in the store’s storage area,
business has a similar operating margin to Tesco’s closed off by a metal bar that we put in for maybe £600.
physical business of approximately 5.7%; however, so did we charge ourselves huge amounts of the store’s
it has much higher sales growth rates of up to 30% lighting, heating, and capital development costs? no, we
didn’t! By now, we have our own design standard for what
online, compared to 9% sales growth at UK stores.
we need a dot.com area to look like, which has its own
Fulfilling online orders is seen as an opportunity freezer, its own chiller and decent amounts of space. that
rather than an additional burden, as Laura Wade-Gery can cost up to a quarter of a million pounds, so we pay for
confirmed: that because that was genuinely caused by us, as well as
for the additional heating, electricity, replenishment, and
the online business is quite a lot of extra work for the cleaning.
store manager, so why would he want this rather com-
plicated time-critical operation in his store’s back area?
Well, the answer is, he wants it because it is providing Growing non-food: the launch of
significant sales growth. and as a retailer, the first thing
that counts for him is sales – no matter where they come Tesco Direct
from. so even if the dot.com operation may only account as long as you’re doing food, it is quite clear who your
for 4% of a store’s total sales, it is a portion that is growing competitors are. now, with tesco direct, you are not only
constantly at 25–30% per year. competing against multinational retailers, you are also
competing against a whole range of Internet pure-plays
such as e-bay, amazon and the like. and on top of that,
Making online grocery retailing you are competing with Joe Bloggs from putney who owns
an electronics shop and decides to put his stuff online.
profitable – Tesco.com costs (Steve Robinson, Ceo tesco direct)
In addition to the workload and complexity, the
The addition of non-food products to the product
integration and operation of online activities incurs
range of Tesco supermarkets began on a large scale
additional costs that must be split between the main
with the introduction of the first Tesco Extra stores in
business and Tesco.com in a way that fairly reflects
1997. These hypermarkets now carry a line of 4,000
the input involved from each side. In the past, some
non-food products, including a small range of cloth-
analysts had claimed that Tesco.com merely ‘piggy-
ing. Some existing supermarkets were turned into
backed’ on the success of the main business. Tesco.
Tesco Extra stores by building additional shopping
com differentiates between three different types of
areas, or, where lack of space prohibited it, with the
cost that are incurred:
help of mezzanine floors that basically cut shopping
● Direct costs: Dealing with the direct costs involved room height in half, which was only possible in some
in the fulfillment of the orders is quite straightfor- areas of the store. Tesco soon realized that the expan-
ward: Tesco.com takes into account the costs of sion of the bricks-and-mortar business into non-food
366

had its limitations and that, anyway, customers want- Director at Argos,12 one of the largest UK retailers (see
ed more ordering and delivery channels. Exhibit 7). In September 2006 the service went live in
Tesco’s entry into a non-bricks-and-mortar, non- time for the Christmas shopping season, handling the
food business was via joint venture with mail order spike in festive sales and significant increase of Grattan
company Grattan,11 announced in 1998. Tesco brought Joint Venture volumes with relative ease.
its high-performance IT system into the partnership, as
well as its large customer base; order fulfillment was
Setting up the organization
managed by Grattan. The joint venture lasted until
Unlike the launch of Tesco.com, Tesco Direct was
2006. In essence, Tesco passed on non-food orders
integrated into the existing organizational structure.
from its own customers to Grattan and let the fulfill-
Steve Robinson explained:
ment expert deal with it, and the two shared the profits.
But the Grattan Joint Venture had its limitations in When I joined tesco in July 2005, I did not step on the
terms of range and flexibility in developing the cus- scene and say: ‘oK, I need 400 people and a completely
independent business unit to set up the business.’ Instead, I
tomer proportion and revenue, and Tesco ultimately
saw that tesco had already accumulated quite a lot of non-
decided it was better positioned to grow the online food expertise in the bricks-and-mortar business and a very
non-food businesses on its own.
Using the expertise gained from a decade in the
online grocery business, Tesco brought a couple of sen-
11 URL: http://www.grattan.co.uk.
ior non-food retailing veterans into the team, includ-
12 Argos is one of the UK’s largest multichannel retailers,
ing Steve Robinson, and started developing its own offering goods through an extensive print catalogue,
non-food competence under the new brand ‘Tesco over the Internet and a network of almost 700 stores.
Direct’. Robinson had previously worked as a Financial URL: http://www.argos.com.
Exhibit 7 Daily reach comparison of largest UK online retailing websites
IMRG/Hitwise UK ‘Hot Shops List’ 2007
Rank Feb 07 May 06 Name Domain
1 1 1 Amazon UK www.amazon.com
2 3 4 Tesco.com www.tesco.com
3 2 3 Argos www.argos.com
4 4 5 Play.com play.com
5 7 6 Amazon.com www.amazon.com
6 6 7 Expedia.co.uk www.expedia.co.uk
7 10 10 Apple Computer www.apple.com
8 5 8 easyJet www.easyjet.co.uk
9 11 9 RyanAir.com www.ryanair.com
10 9 11 British Airways www.britishairways.co.uk
Source: www.imrg.com, www.hitwise.com.
367

Part 4 Case studies
successful online presence. so we basically piggybacked on Robinson built up a media publishing centre with a
this know-how and added people in the non-food and dot. team of 40 publishing experts including designers,
com business to cope with the additional workload and get
photographers and publishers who had previously
the multichannel knowledge that we would need for the
project. developed catalogues for Argos and other retailers.
Putting them all into one building close to the rest of
The Tesco Direct team worked closely with the com-
the Tesco business also yielded another crucial ben-
mercial teams in the main business. The buyers work-
efit, as Robinson explained:
ing for the bricks-and-mortar side of the business
dealt with suppliers across the globe and aligned the It is priceless to have all these people working so closely
with us. If a colleague from the web design looks at the raw
different channels, since some of the range available at
shots for the catalogue, he can immediately step in and tell
Tesco Extra stores was also included in the catalogue. us that it might work in print but not on the web, or vice
versa. that way, we can immediately modify the material
and still benefit from only having to shoot once. that saves
us a lot of time and money.
Developing a suitable value chain
Tesco believed that every part of the value chain that
had significant impact on the customer experience Choosing the right products and order
needed to be performed by Tesco itself. One of the fulfillment
key insights that Robinson provided from his experi- Robinson’s experience at Argos gave Tesco Direct a
ence in multichannel retailing was the fact that pure head start in selecting a product range that would
Internet-based ordering was not enough. He aimed appeal to consumers. Product categories of more than
for a customer experience that was far from cutting 12,000 SKUs include everything from garden equip-
edge and had been used for quite a while by retailers: ment to toddler toys (see Exhibit 8). Not satisfied with
a catalogue. merely copying the catalogue of his former employer,
Having experimented with a small catalogue that Robinson came up with some ideas that would soon
was printed for the launch in September 2006, the prove to be hits:
next issue of the Tesco Direct catalogue, published in
Horse riding is an incredibly popular sport in the UK. How-
March 2007, had a print run of several million cop- ever, none of the multichannel retailers had got into eques-
ies. Scheduled to be printed twice a year in Spring trian equipment yet. We did! We even started to include
and Autumn, with smaller leaflets featuring seasonal swimming pools and garden sheds.
and special offers over the year, copies were distrib- Going online also meant that Tesco could do what it
uted across the store network, where they were put had been doing in the grocery business. It extended
on large pallets of a couple of thousand units each, its ‘good-better-best’ philosophy, offering not only the
as well as distributed with every Tesco.com order. value or the standard item of each product, but also a
Demand was high: within two weeks almost all copies low-cost and a luxury version of a lot of products (see
of the catalogue had gone. Exhibit 9).
Producing a catalogue of more than 1,000 pages While offering products via a print catalogue or
posed some serious sourcing challenges. At the time, online did not pose any particular challenges, fulfillment
Tesco’s core competences did not include high-end of orders certainly did. While the Tesco Direct operation
photographic publishing; most people involved in was viewed as a natural extension of non-food retailing,
developing the online non-food business were con- fulfillment could be accomplished with the proven in-
vinced that the whole design process for the catalogue store picking approach, as Robinson explained:
had to be outsourced to a publisher. But the team was
In grocery, the challenge is to keep the food fresh through-
in for a surprise when Robinson arrived:
out the supply chain, so everything should be available
When we discussed the topic, I immediately said ‘no way.’ If everywhere to minimize delivery time. With non-food, it’s
you’re going to sell something over the Internet and through almost the opposite. I can’t fulfill an order of a £5,000 tel-
a catalogue, you absolutely have to own the photography evision set through my store network because I will only
and the design. It’s not like in a store where people can sell one of them every 6 weeks – and I don’t know where.
simply touch and look at the goods. owning the publish- so at the end of the year I would have a huge number of
ing facility was an absolutely crucial strategic capability we out-dated tVs that no one wants to buy. It just makes more
needed to develop – and that’s what I did. sense to hold stuff centrally.
368

Exhibit 8 Tesco.com product range
Source: tesco.com website.
Exhibit 9 Tesco.com retailing brands
Source: tesco.com.
‘One-man products’ consist of smaller items, such houses. Although stocking large items incurs addi-
as consumer electronics and multimedia products, tional costs, Robinson is convinced that it is money
that are fulfilled from a central distribution centre well spent:
in Daventry (see Exhibit 10). ‘Two-men’ products, eighty per cent of all sofas bought in the UK are black, brown
such as furniture and white goods, are distributed or beige. We offer a selection of these models with a delivery
through logistics specialists using dedicated ware- time of 5–10 days. that’s much faster than the 60-day delivery
369

Part 4 Case studies
Exhibit 10 Fulfillment options for non-food goods
Supplier TESCO TESCO TESCO TESCO

Van
Existing (customer
Store
Distribution Store pays £6)
Product
Centers (free)
Lines
(DC) 1 man
Direct
(Common) Non-Food
Customer order by phone, store, net

DC
New
Delivery
Direct
service
Product
(customer
Lines
pays £4)
(Unique)
TESCO
New
Direct 2 man Delivery
Product Direct service
Lines Non-Food
DC
(Unique)
New
Direct
Direct from supplier
Product
Lines
(Unique)
Source: tesco.com.
of large furniture stores. It was a gamble we took, but it has Pricing at Tesco Direct
changed the landscape of retailing in the UK. Pricing has its challenges as different order and deliv-
For all but the largest items, customers can choose ery channels can incur different costs. However, cus-
two-hour delivery time slots, just like in the grocery tomers are not willing to pay different prices according
business. Or they can pick up items in the stores. to the delivery channel. At the moment, apart from the
Besides being able to pay cash (still the preferred pay- £5 delivery fee, prices are the same for each channel,
ment method, especially in lower-income customer except for localized seasonal clearings in single stores
segments), this gives busy customers greater freedom or overstock items of the Internet business. These
of choice by not having to pre-select a time window prices are merely the result of a cost–benefit trade-off,
for delivery and having to stick with it. Being able to as Robinson explained:
order all items over the phone and at the Tesco Direct In general, we have the policy to provide the same price on
desks installed in many larger Tesco supermarkets is the web as in the store. However, some stores might have
yet another example of the freedom of choice Tesco an overstock of, let’s say, garden furniture after the summer
strives to offer, as Robinson explained: season. It would simply not be cost-efficient to ship these
items all the way back through the supply chain. Instead,
Being able to offer people interaction with real human be- stores can clear them by offering lower prices that are not
ings is something that clearly distinguishes us from Internet matched on the web.
pure-plays such as amazon or e-bay. It is only logical for
us to use our physical store network and let the customer Other competitors had tried differentiated pricing
choose how he wants to do business with us. models. Argos, for example, originally provided free
370

delivery for orders over £100. The order value was families, students or senior citizens. In addition, quar-
later increased to £135 and then £150 before finally terly mailings are sent to all participating households,
being abandoned altogether. Clearly there are limits which in total make up more than 6% of the UK’s
to this model when it comes to Tesco Direct and the annual post bag.15
option for customers to pick up their goods directly During the first couple of years after launching
from the store: while it adds extra flexibility from Tesco.com, the Clubcard idea was of great value, as
customers’ point of view, it can create additional com- Laura Wade-Gery recalled:
plexity and costs that might result in a negative yield especially in the first year of tesco.com, we received numer-
for smaller items. ous comments from new customers who couldn’t find a lot
of the items they regularly bought offline, the choice was
simply overwhelming. so now, if a first-time online shopper
The Clubcard – an ace up Tesco’s already has a Clubcard, our system will recognize that and
automatically populate his/her shopping list with the items
sleeve? they usually buy in their supermarket, making it a lot easier
there’s no rocket science involved with Clubcard. It’s about for new customers to find the things they want. Besides, we
educating, empowering and rewarding consumers.13 can track how many online shoppers are also frequent tesco
(Andrew Mann, Marketing director, tesco Clubcard) shoppers, and how many we are drawing from other chains.
In 1995 Tesco introduced the first customer loy- Soon after Tesco.com was launched it turned out that
alty card, which offered benefits to regular shoppers the vast majority of Tesco.com customers shopped
while at the same time helping Tesco to analyze online and offline. Rather than perceiving this as evi-
its customers’ needs. Today, Tesco has 13 million dence of cannibalization – one of the big fears when
Clubcard members. Tesco first added the online channel – Laura Wade-
Shoppers’ names and addresses and the category Gery saw it as a proof of the business model:
of products purchased are recorded and used for everybody who does grocery shopping for a household
direct-mail campaigns and other promotions. For knows how difficult it is to buy fresh groceries for a whole
instance, when Tesco launched its pet insurance week. so people buy stock items along with some fresh
items and then return to a tesco store once or twice a week
product, it was able to pitch to customers who had
to pick up fresh vegetables, fruit or meat. and that is abso-
recently bought dog food and cat litter at its online lutely fine for two reasons: first, because it shows how com-
store. On a regular basis it distributes printed fly- patible the offline and online shopping experience at tesco
ers along with the shopping order according to the has become. second, because these customers are our most
products chosen. For example, customers ordering valuable ones in terms of overall order volume.
only vegetarian food will not receive a ‘BBQ season The vast amount of data collected by Tesco about
opening’ flyer. Clubcard evenings – complimentary their customers’ habits has also raised concern about
in-store gatherings for selected Clubcard holders – privacy and data security issues (if the data stored got
are held to promote products. Customers of the wine into the wrong hands). Tesco insists that it only uses
or cheese departments at Tesco might be invited to a the data for serving customers better by making tai-
wine-tasting evening; shoppers who have purchased lored offers to each of its customer segments.
shampoo or cosmetics might be invited to a hair-
care event, as Karen Marshall, Tesco spokesperson,
explained:
Future outlook
there are four crucial things I want our customers to say
It’s a small ‘thank-you’ to customers for shopping with us. about tesco.com, regardless of what we sell:
the main idea is to help serve our customers better. Besides,
we get into personal contact with our shoppers and gather ● ‘I know Tesco will have it.’ so I want tesco to be known
information about how to serve them better – something to have pretty much anything a customer could want.
difficult to achieve in the mass-marketing age.14 ● ‘I trust Tesco to offer me great value.’ so we have to make
Tesco also sends Clubcard members a monthly maga- sure that we offer customers the best value.
zine with recipe ideas, details of new product launch-
13 ‘Lessons in loyalty’, Marketing Direct, June 2007.
es and other information tailored to particular demo- 14 ‘Getting the points at Tesco in the UK’, Progressive Grocer,
graphic groups. Each edition reflects the interests 19 June 1999.
and lifestyle of a target market group such as young 15 ‘Lessons in loyalty’, Marketing Direct, June 2007.
371

Part 4 Case studies
● ‘They make it easy for me to shop.’ We want to be able Laura Wade-Gery describes the benefits of the
to create a different shop window for different types of model for Tesco:
customers.
this is a very good example of using the Internet to cre-
● ‘I don’t have to think about it, it simply works.’
ate a new business that is actually very close to tesco’s
all of our processes have to run absolutely smoothly
core business. It works brilliantly in a low-cost environ-
and need to be optimized and redesigned continuously.
ment, very scalable, fantastic low-cost business to de-
(Laura Wade-Gery, Ceo tesco.com)
liver. You get support online; you can help one another
Laura Wade-Gery got back into the passenger seat of in forums, etc. now, people who joined the service have
even started to meet – in one of the coffee shops in our
the white delivery truck. The journey was almost com-
store. overall, the online dieting business is very scalable,
pleted, with only one more stop. She took a look at the requires almost no capital and is very low cost to deliver.
electronic delivery device: she was about to deliver a
couple of low-fat products, skimmed milk, a lot of fresh Back at her office, she reflected on the progress made
vegetables and fruit and dietary information, as well as in online retailing at Tesco and where the journey
a personalized meal plan. No doubt this was a customer would go next. The issue of coming up against bound-
of Tesco’s increasingly popular dieting service. aries geographically and product-wise was getting
In 2004 Tesco teamed up with online dieting business urgent. Her objective was to come up with a plan to
‘e-diets’16 and signed an agreement licensing the technol- extend them. Adapting the order fulfillment model
ogy and using it for TescoDiets,17 a service that is essen- had been achieved slowly – hesitantly almost – after
tially the online equivalent of ‘Weightwatchers’. Users get the early failures in warehouse fulfillment. But with
a personalized record with their previous dieting history, the introduction of Tesco Direct, a pure in-store picking
meal plans and the goals that they want to achieve. Then approach had become impossible.
they are able to click on the appropriate shopping list for
delivery to their home via Tesco.com. The subscription
fee is £2.99 per week, with a minimum subscription of 16 URL: http://www.ediets.com/.
ten weeks. 17 URL: http://www.tescocdiets.com/.
372

CASE STUDY 2
From e-banking to e-business at Nordea (Scandinavia)

The world’s biggest clicks-and-mortar bank
Nordea company background Company history

Nordea Bank is the product of several mergers
our philosophy is both high tech and high touch, not
either or. between banks from four Scandinavian countries.
(Bo Harald, Head of electronic Banking, nordea)1 Domestic mergers in Finland accelerated after a sus-
tained economic crisis in the early 1990s caused by
Customers entering Nordea’s main branch in Helsinki the collapse of the Soviet Union and the downturn
at lunchtime on a busy weekday encounter something of the global economy. The crisis strained Finland’s
very different from what is typically seen at banks in timber-based economy and forced banks to cut costs.
other capital cities. Those long lines in front of the coun- The mergers took place over several years (see
ter, so common at its competitors, have disappeared – Exhibit 1). In 1997, the Swedish Nordbanken and the
even during peak hours. Finnish Merita merged to form Merita Nordbanken.
During the past two decades, Bo Harald, Nordea’s In 1999, the Danish Unidanmark acquired TRYG
Head of Electronic Banking, has steadily and patiently and, later, Vesta. In 2000, Unidanmark and Merita
moved the bank into the electronic age. As Business Nordbanken merged to form Nordic Baltic Holding,
Week pointed out: ‘Forget flash, fanfare and giant which became Nordea after merging in 2000 with the
ambitions. This small Scandinavian outfit [Nordea] Norwegian Christiania Bank Og Kreditkasse.
has quietly built the world’s most successful Internet
bank.’2 Now that e-banking has become a reality at
Nordea, the next big challenge for Harald is to move 1 Nordea company presentation at Caisse d’Epargne Group,
the bank into e-business: 13 June 2003.
2 ‘The dynamo of e-Banking’, Business Week online,
We are moving from e-banking to e-business. We are not 16 April 2001.
moving into market places as such. What we are doing is 3 Unless stated otherwise, quotations from Bo Harald were
taking our e-banking services and bringing them to the gathered during company interviews made in Helsinki in
e-business value chain. We are an enabler for e-business.3 September 2003.
this case study was written by albrecht enders, Research Fellow at Insead (Fontainebleau), under the supervision of tawfik Jelassi,
affiliate professor of technology Management at Insead, and Charles Waldman, senior affiliate professor of Marketing at Insead. It is
intended to be used as the basis for class discussion rather than to illustrate effective or ineffective handling of a management situation.
this case study was made possible by the cooperation of Bo Harald, Head of electronic Banking at nordea.
Copyright © 2004 Insead, Fontainebleau, France.
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Part 4 Case studies
Exhibit 1 The creation process of Nordea through mergers of Scandinavian banks
1998 1999 2000 2001

Sweden Nordbanken
MeritaNordbanken PostGirot
Nordic Baltic Holding
Finland Merita
Nordea
Unidanmark
Denmark Unidanmark
TRYG
Vesta
Norway Christiania Bank
Og Kreditkasse
Source: nordea Bank.
On completion of the merger process at the end 2002. Corporate and institutional banking accounted
of 2002, the market capitalisation of Nordea reached for 19%, asset management for 4%, investment bank-
€12.6 billion, making it the fifth largest company in ing for 2%, and group treasury for 1%.
the Nordic region and the fifteenth largest bank in At the end of 2002, Nordea had 10.6 million private
Europe. Today, it is the largest financial group in the customers, which the bank considers to be its main
Nordic region with approximately €262 billion in total asset. Some 45% of the total population in the Nordic
assets. Its market share in the Nordic banking markets countries has either a main or secondary account
ranges from 40% in Finland, 25% in Denmark, 20% with Nordea. At least 3.2 million customers are active
in Sweden, to 15% in Norway. In the life insurance e-banking customers (see Exhibit 2). In addition to its
market, Nordea has a market share of 35% in Finland, retail business, the bank also serves 950,000 corpo-
10% in Denmark, 9% in Norway and 6% in Sweden. rate customers. Nordea employs 35,000 people and
Retail banking represents the most important busi- has 1260 branches throughout the Nordic and Baltic
ness area, constituting 74% of Nordea’s income in region (see Exhibit 3).
To outline the bank’s purpose and goals, Nordea
has formulated the ‘Nordic Idea’ and the ‘Nordea
Exhibit 2 Evolution of Nordea customers
Vision’. Its Nordic Idea states that:
and e-banking
● We share and exchange Nordic ideas.
10.6
10.4
12 ● We are Nordic in operations while personal and local

9.5
in delivering services. We think Nordic and act locally.

8.7
10
● Our market is of a size that makes it worthwhile to
6.8
8
develop joint concepts, products and services.4
Million
6
Nordea’s Vision for the future is built upon three main
3.2
2.7
4
2.1
pillars:
1.4
1.0
2
● We will be valued as the leading financial services
0 group in the Nordic and Baltic financial market
+ PostGirot
Nordea Q3
2001
+ Unibank
2000
2002
+ CBK
2000
MeritaNord
1998
with a substantial growth potential.

● We will be at the top of the league or show superior
profitable growth in every market and product area
Personal and corporate customers
in which we choose to compete.
e-Banking customers
Source: nordea Bank. 4 Taken from Nordea company website.
374

Case study 2 From e-banking to e-business at Nordea (Scandinavia)
Exhibit 3 Nordea’s European branch network
Nationwide branch network

Branch or subsidiary
Associate bank
Oslo Helsinki
Bergen Stockholm
St Petersburg
Tallinn
Tartu
Copenhagen Riga
Moskva
Gdynia
Hamburg Vilnius
Gdansk
Berlin Radom
Frankfurt
Luxemburg
● We will have the leading multi-channel distribu- and white compared to the color Internet, but it was a start
tion with a top world ranking in e-based financial and it gave us the experience.7
services and solutions.5 Starting out early also helped to keep costs down.
Harald says:
Nordea’s approach to e-banking e-Banking is not expensive if you start early and you build it
up gradually. . . . . However, it can be very expensive if you
Bo Harald has been the main architect of Nordea’s wake up in the middle when things are already happening,
approach to e-banking. He joined the Union Bank of because then you need to ask expensive consultants for
Finland in 1975 after studying law and economics, and advice and you end up buying all the expensive bells and
opened the bank’s first foreign office in Luxemburg in whistles to outshine your competitors.
1977 and in Asia in 1980. His job assignments pushed With the advent of the Internet, Bo Harald became
him to use computers to carry out banking transactions: Head of Internet Services at Merita Bank with the
While away from home, I started using the computer to au- explicit mission to put as much business as possible on
thorize payments. the beginning of pC banking in 1984 was the Web in order to reduce costs and free up branch
a blessing for me. It became so much easier to do things employees to focus on selling complex, higher-margin
from a distance.6 financial products.
Union Bank introduced electronic payment systems
and started to phase out cheques in 1982. 5 Taken from Nordea company website.
6 ‘Online extra: Q& A with Nordea’s Bo Harald’, Business
I think the secret of our success was to start early. We started Week online, 16 April 2001.
back in 1982 with telephone voice commands. By 1984, we 7 ‘Online extra: Q& A with Nordea’s Bo Harald’, Business
added pC banking with a dial-up modem. It was like black Week online, 16 April 2001.
375

Part 4 Case studies
Nordea’s e-banking strategy evolved through dif- someone on a high enough level who pushes e-business,
ferent stages. The first was the creation of an ‘e-habit’ then the Ceo does not have to do it. actually, I am a little bit
afraid if Ceos become too obsessed with something. they
among its customers. To achieve this it was crucial
have such a big voice that it might be overdoing it. It must
to involve the 35,000 branch staff who enjoyed the be planted somewhere in the bank, and I have been lucky
trust of customers and were in frequent face-to-face to have that role at nordea. I would love to have had more
contact with them. In addition, the bank strived to support in the past, though. We would have taken off much
keep e-banking simple to understand and use in earlier!
order to create a higher level of customer satisfac- While Nordea and other Scandinavian banks were devel-
tion. The underlying principle was that the bank’s oping their e-banking know-how, their e-customers
website should be designed in a way that would be simultaneously built up other assets important for the
easy even for 65-year-old customers to understand. success of e-banking. These included ‘e-trust’ (in the
Harald explains: security and reliability of electronic banking channels)
I met the Ceo of an important corporate customer. He had and ‘e-habit’ (the routine use of the Internet for bank
said before that he would never use a pC and that he would transactions).
never retire. now, at the age of 78, he had decided to retire.
then he came to me and said: ‘now that I am retired, I don’t
have my secretary doing my banking transactions anymore, Sustaining Nordea’s Internet lead:
so I have to do it myself. and I started using your solo serv- from e-banking to e-business
ice [the nordea online banking system] and it works ex-
tremely well.’ now he is really fond of our basic e-banking The e-trust and e-habit have prompted Nordea to
service. He is even talking about it to the people of his own leverage the competencies built up for its e-banking
age group. they tested it [solo] themselves, and they also
services to also provide e-business solutions. In fact,
like it. that’s how it works: first, our customers become be-
lievers [in e-banking] and then they become preachers. Harald believes that e-banking alone is no longer a way
for a bank to differentiate itself from its competitors:
The goal of the second stage was to interconnect
customers by integrating the different banking e-Banking services are kind of passé. every bank offers
them. the really important thing is launching e-banking
channels: e-banking, mobile e-banking (or m-banking),
services for e-business. It’s a huge market! Banks are get-
branch-based banking, contact centre and providing ting their acts together but very slowly. so I am worried
different types of e-services such as e-payment, that banks are losing their opportunity to earn substantial
e-billing, e-signature, e-ID, e-salary and e-invoicing. income from e-business.
All the Internet services are concentrated in Nordea’s Nordea started to move into e-business by leverag-
Internet bank, ‘Solo’, which provides the following ing the capabilities it had built up for e-banking. Bo
banking services: account management, transfers Harald explains:
between own accounts, domestic and foreign invoice
the underlying principle is that we try to reuse technologies
payments, equity (domestic and foreign), mutual funds
that we already have. For instance, we have file transfers for
and bond investments, electronically signed credit accounts, so why not have file transfer for bills as well?
facilities, as well as life and general insurance.
The goal of the third stage is to personalize fur- The main e-business services that Nordea currently
ther the e-banking services and customise offerings offers to its private and corporate customers include
by tapping into the value of data-mines. But for Bo e-identification, e-signature, e-billing, e-salary and
Harald, when developing new products and services e-payment.
at Nordea: ‘We avoid asking customers directly. We
would rather use our colleagues and their experience e-Identification
in the branches.’8 Through Nordea’s e-identification services, Nordea
Getting top-management support for e-banking customers can identify themselves on the websites
has not always been easy, Harald acknowledges: of other participating companies and governmen-
either you have a Ceo who supports e-banking right from tal agencies. For the latter, the Finnish Ministry of
the beginning and has the staying power to see it through,
or he lets you take care of it yourself. I can’t say that our
Ceos early on were particularly excited about it. If you have 8 ‘Learn from the largest Internet bank of the world’,
accessed at www.tietoenator.lv
376

Finance has officially stated that if customers need largest telecom operator in Finland, that customers
reliable identification, they can and should use the could get a loan online, they said: ‘Look, if you can
bank’s identification standards. For example, consider sign up for loans through your system, you should
the case of citizens who want to access the state pen- also be able to sign a phone subscription contract.’
sion system to find out the balance of their pension Within a few weeks, Nordea reached an agreement
in order to decide how much to save for retirement. with Sonera to send all interested customers an
Initially, they access the state pension system’s web- online phone contract through a link to Nordea’s
site with links to all major banks in Finland that pro- Solo Internet bank website where they could identify
vide e-identification services. They then choose their themselves and then sign the contract. This system
bank, access the respective website and identify them- was later extended to other businesses that wanted to
selves with their one-time password. Upon registering provide e-signatures for their contracts.
there, they can switch to other services, including the
state pension service, while staying within the identi-
fied area. ‘This state pension site is accessed 2000 e-Billing
times a day’, says Bo Harald. Through Nordea’s e-billing services, companies can
send their invoices electronically to the bank, which
our e-identification service is so convincing that the Finnish
post office has stopped its own identification service. they then forwards them to their customers who have
use banks because it’s very expensive to have a reliable e-banking agreements, while those customers without
identification service only for the post office. Why should e-banking accounts automatically receive a printed
they do it themselves? invoice via the mail (see Exhibit 4). Customers who
get their invoice through their e-bank connection are
e-Signature asked: ‘Do you want to pay this bill?’; they approve
The e-signature service came about ‘by accident’. the payment with a mouse-click and the bill is paid.
When Bo Harald told executives from Sonera, the This service was first used in 1998 by Finland’s main
Exhibit 4 Nordea switchboard for invoice processing
Other domestic banks Other domestic banks
Other foreign banks Other foreign banks
Other service providers Other service providers
Large Invoice circulation:

corporate • acceptance
Large
Nordea • reconciliation
corporate
switch Solo
• book-keeping
Service
• payment initiation
bureaux
SME SME
customers Invoices Solo customers
Solo Template Salaries
Public sector
Entrepreneurs
Solo
Entrepreneurs Archive
Solo
377

Part 4 Case studies
telephone companies to send invoices to customers important reason for going into e-banking because each
via Internet. Bo Harald comments: and every company and governmental agency is increas-
ingly moving to digital value chains and the bank has a big
In europe, there is a cost of $50 billion every year for role to play there for customer identification, direct payment
paper invoices. Who pays for that? In the end, it is always in real time, invoicing, e-salary, e-pension and e-signature.
the customer. We can eliminate that when we go to elec-
tronic invoicing. In sweden, we are sending out invoice files
to a nordea switch, which are then distributed to private Banking channels at Nordea
and large corporate customers [e.g. a telecom company
that sends invoices to its customers]. In the future, you will After introducing online banking in 1984, Nordea
see it with other banks as well. What’s fantastic about this is continued to introduce new customer interfaces
that if you are an entrepreneur you can pay your bills online such as Internet banking, TV banking, WAP-enabled9
and you can also send out your invoices easily and quickly.
the party that is sending the bills doesn’t have to worry. Isn’t
mobile phones and digital TV (see Exhibit 5).
that the obvious way? We are already sending these bills According to Bo Harald:
to other banks in Finland, sweden, soon to other banks in When adding channels, a bank’s main goal should be to add
denmark and norway, and later to the rest of europe. value . . . But it is also crucial that all channels and services
have the same look and feel so as to offer customers a con-
sistent user experience. the key is to have one core to our
e-Salary electronic bank and then to keep adding doors to it.
Through the e-salary function, companies can send
Kaisa Juhanni, a Nordea customer from Finland, con-
income statements straight to the e-bank of their
siders Nordea’s reliable multichannel services to be a
employees, thereby eliminating the need for printed
major asset of the bank:
salary statements sent via mail.
I like the quick and instant access without having to queue
If you have enough staff, say 10,000 employees, it makes up at a branch. I also like the flexibility of being able to do
sense for the employer to send out e-salaries instead of pa- my banking any time and any place, be it from home, the
per salaries. that’s where getting to a critical size really starts office or through the mobile phone. the solo system is
to matter. also very reliable. the system has probably been down just
once during the past six and a half years. Finally, nordea
has also a very large installed base of users in Finland
e-Payment
which allows me to transfer money to them without any
The e-payment function is an adaptation of the invoic- delays.
ing function, which online merchants on the Solo
platform can use for settling payments. It allows cus-
tomers to go to the website of any online store in the ATMs and pay terminals
Solo marketplace, place an order and click on a link Automatic teller machines (ATMs) and pay terminals
to Nordea’s e-payment system where they request an still play an important role in cash withdrawal and
electronic invoice. After approving the payment with a other transactions. However, as card payments and
mouse click, the amount is instantly transferred to the Internet transactions become more important, the
seller’s account. This method has a twofold benefit: role of ATMs and cash in general becomes less rel-
the merchant does not need to send out paper invoices evant (see Table 1). Bo Harald explains:
or to worry whether the buyer pays. To ensure that
In our danish organization, we have the highest number of
there is no fraud on the merchant’s side, Nordea con-
card payments per capita in the world; the second highest
ducts a reliability check on all 2000 merchants who is our Finnish organization. actually, Finland has the lowest
sell goods in the Solo e-marketplace. Says Bo Harald: amount of cash in relation to Gnp [gross national product].
as a result, atMs have become less important. earlier this
For corporate customers, the value of the solo e-market-
year, we saw a fantastic development in Finland, which we
place grows exponentially with the increase in the number
consider as a laboratory. Compared to 2002, cash withdraw-
of retail customers . . . We have achieved a critical mass
als have gone down by 15–16% in our branches and 8% from
among our retail customers so we now have people who
our atMs. that’s excellent because atMs are very expensive:
want to buy all kinds of things – from Cds and stereo systems
to kitchen appliances and bicycles. that’s what we need for
the e-marketplace. as part of this move into e-business, 9 Wap stands for Wireless Application Protocol, a secure
we see the evolution of value chains in which the banks specification that allows users to access information
are supplying essential parts. In the future, this is the most instantly via handheld wireless devices.
378

Exhibit 5 Evolution of banking devices at Nordea
DIGI
TV
2002
Customer satisfaction
2001
webtv 1999
1998
1996
SOLO
1992
1984
1982 Devices
you have to keep the money there, you need to protect them m-Banking
and sometimes they are destroyed. Cash is actually the most Nordea’s wireless service started out with WAP phones
expensive way to pay for things. transactions at pay terminals
in 1999. Through WAP-enabled phones, Nordea cus-
are also quickly decreasing. We have started to charge people
for using these terminals, so this year they should go down tomers can track their account and credit card trans-
quite drastically. Just like atMs, pay terminals are also unprof- actions, transfer funds between accounts, pay bills
itable. actually, I don’t want to see them at all five years from both domestically and abroad, trade equities and
now. people shouldn’t be paying their bills in the street; they read customer mail. The WAP service extends to the
should do it at home. Why should people use cash at all? It’s
mobile phone Nordea’s Internet services originally
unhygienic, it’s unsafe to carry around and there is a high risk
of counterfeit money. It’s irrational! available through Solo. In 2000, Nordea introduced
stock trading and bank transfers via mobile phone and
Table 1 Household transactions in Finland also made it possible for customers to purchase movie
tickets which are debited directly from their Nordea
Transactions % account. Adapting Internet services to the WAP cost
(millions) change Nordea less than €500,000; it mainly required adding
1999– a server for wireless services. However, Harald sees a
1999 2000 2001 2002 2002 lot of potential for wireless banking:
Manual transactions 184.9 163.9 141.0 125.3 232.2 I firmly believe that, with nokia, Finland will continue to
pay terminals 35.5 35.6 34.3 31.7 210.7 play a leading role world-wide in mobile phone technol-
ogy. I was recently on a train from arlanda airport [in stock-
Card payments 234.3 263.1 306.9 363.0 154.9
holm] and I saw a group of teenagers all using their mobile
Cash-withdrawal atMs 197.9 202.5 207.2 204.4 13.3 phones. these are our future customers.10
direct debit 69 75.3 78.5 81.5 118.1
solo payments 32.7 58.2 78.2 97.6 1198.5
total 754.3 798.6 846.1 903.5 120
10 ‘Online Extra: Q & A with Nordea’s Bo Harald’, Business
Source: nordea Bank. Week online, 16 April 2001.
379

Part 4 Case studies
In January 2002, Nordea expanded its wireless nordea decided consciously to offer no consultation on
services by providing a more elaborate m-payment the Internet and very little on the phone. You must keep
your offer simple to succeed in Internet business and to
version for Finnish customers who have GPRS11
gain the necessary confidence and trust of your custom-
handsets and are connected with Telia’s, Sonera’s or ers. that’s difficult but necessary, and if your offer is simple,
Radiolinja’s wireless communication networks. This you don’t need to provide expensive instructions over the
service was made possible via a joint launch with Internet. For complex [financial] products, customers go to
Nokia of a dual-SIM12 handset for mobile transac- the branch anyway. However, the shift of transactions to
electronic channels frees up resources for improved service
tions. The phone has two separate slots: one for the
levels in the branch.17
operator’s SIM card, the other for the m-payment
card issued by Nordea, which is based on wireless Tuukka Seppa, a Nordea customer from Finland, is
identification module (WIM).13 Harald believes that fond of Nordea’s banking services:
customers should be free to choose the supplier of What I really like is the simplicity of the authentication proc-
their banking services: ess and the website itself. It is also very helpful that it offers
immediate transactions between two nordea accounts.
You don’t buy groceries from a furniture store, so why
should you buy your banking services from the mobile op- Today, all Internet banking activities at Nordea take
erator? plus, it’s really not a big deal nowadays to make a place through Solo, the company’s online banking
handset with two chips.14 service, which has become increasingly popular (see
Table 2). This is demonstrated by the following statis-
PC banking tics (figures correspond to the highest month of usage):
Wells Fargo, Citibank and Bank of america have, similarly, ● Student loans: 84% of all student loans are com-
as many customers as our Internet Bank ‘solo’. But with pletely paperless. Students apply online by provid-
124 million payments over the Internet in 2002, no other
ing information about their financial status and the
bank can keep up [with us]! this number might be about
twice as large as those of the previously mentioned banks loan is approved within one hour through a com-
combined. puterized scoring system. Once approved, students
(Bo Harald)15 sign by keying in their customer number once more
Online banking at Nordea started as early as the and a one-time password.18
mid-1980s when Nordea allowed its customers to start ● Equity orders: 80% of all equity orders are made
doing transactions from computers at their workplace. through Solo.
Harald explains: ● Mutual funds: 65% of all mutual funds are man-
In the mid-1980s, people didn’t have computers at home, aged by Solo.
and if they did, they didn’t have modems. so we asked our
large corporate customers: ‘Can’t you allow your employees
to log on to their banking account through the workplace 11 General Packet Radio Service (GPRS) is a technology used
computer? that will save you a lot of time and money be- to send and receive data via packet delivery over a wireless
cause people won’t have to go to the branch any more.’ ever network allowing the user to stay connected to the Internet.
since, workplace access has been a very important pillar for 12 A subscriber identity module (SIM) is the smart card
our e-banking. inside a mobile phone that identifies the user account
to the network, handles authentication and provides
e-Banking and bricks-and-mortar banking have never data storage for user data such as phone numbers and
been in competition at Nordea. Rather, they are con- network information. It may contain applications that
sidered to be complementary, as Harald emphasizes: run on the phone.
13 WIM allows users to identify themselves with digital
one of the main reasons for our success is the fact that we signatures to confirm their banking transactions.
made e-banking already part of our branch business in 1982. 14 ‘Two slots are better than one’, Silicon.com, 23 May 2002.
We never considered it to be a competitor. e-Banking is not 15 ‘Learn from the largest Internet bank of the world’,
a separate profit center. that is important in order to quickly accessed at www.tietoenator.lv
achieve a crucial size. Without the support of the branch 16 ‘Learn from the largest Internet bank of the world’,
employees, one is not able to reach that goal.16 accessed at www.tietoenator.lv
17 ‘Learn from the largest Internet bank of the world’,
However, direct online consultation from bank employ- accessed at www.tietoenator.lv
ees either in a branch or a call centre is kept to an abso- 18 For more information on the one-time password, refer to
lute minimum: the authentication section below.
380

Table 2 Evolution of online usage at Nordea not so far fulfilled the high expectations associated
with it. Says Bo Harald:
Jan–July 00 Jan–July 01 Jan–July 02 Jan–July 03
Clearly, every family has a tV in their house, so in principle
Log-ons it should work well . . . but we believe that people just do
denmark 6 091 418 8 924 759 11 721 765 14 659 759 not want to check emails or do their banking in front of the
Finland 17 495 518 20 582 125 24 671 753 28 199 328 whole family. those are rather private things and that’s why
norway 1 595 000 3 562 704 4 528 822 6 118 581 the tV in the living room is not well suited. that’s the reason
sweden 4 640 100 11 562 033 16 738 683 22 863 322 why we haven’t invested more in this channel. We only offer
nordea 29 822 036 44 631 621 57 661 023 71 840 990 basic services for e-payments. With the continuing conver-
gence of the tV and the pC this might change, though.
Online payments
denmark 2 773 192 5 186 359 7 220 065 8 781 289
Finland 20 774 000 26 293 637 30 712 994 35 626 067
norway 2 150 000 4 121 013 5 236 914 6 641 027 Branch-based banking
sweden 6 660 147 18 845 501 25 202 502 31 401 953 The role of branch offices at Nordea has changed in
nordea 32 357 339 54 446 510 68 372 475 82 450 336
recent decades. While in the past bank clerks spent
Source: nordea Bank. most of their time keying in transactions manually,
this has drastically decreased (see Table 1). For 2003,
Bo Harald expects a further reduction of 20 million
manual transactions:
If every transaction takes one minute, what can you do
● Foreign payments: 59% of all private and small
with this time once customers start banking online? It frees
business foreign payments take place via Solo. up the branch staff to give customers advice. We use our
Customers key the account number of the recipi- branches primarily for establishing personal relationships
ent into their computer (or mobile phone) and the with our customers, which is important when making a big
money is received as fast as international transfers decision (such as purchasing insurance or a pension scheme)
that requires personal trust. In a sense, banking is local but
travel – within Nordea one day at most. Fees are
it doesn’t always require an expensive branch. sometimes
€15 in a branch and €7 for online payments. an office is enough. You don’t have to offer transfers there
● Currency deposits: 30% of all currency deposits take but you will never be able to replace either the personal
sales nor the fostering of personal relationships. to achieve
place through Solo.
this it is absolutely paramount not to create separate profit
● Foreign exchange: 35% of all foreign exchange centres for Internet and branch banking because the two
transactions occur with Solo. have to feed each other. there mustn’t be competition but
co-operation between the two channels. Combining and
● Car finance: 25% of all car financing takes place leveraging high-tech and high-touch is the key to success.
through Solo.
Nonetheless, the number of Nordea branches in
● Home mortgages: 24% of home mortgages come in
Finland decreased significantly during the last decade –
through the Internet.
down from 1300 in 1991 to 400 in 2000. The number
● Bo Harald summarizes Nordea’s challenge for of employees shrunk to less than half during the same
2005: ‘All the numbers mentioned should be up to period, falling from 22,000 to 10,600 (see Exhibit 6).
80% or 90%. That’s the challenge in our bank.’19 Getting strong and influential labour unions to agree to
such staff reductions has not always been an easy task.
Bo Harald recalls:
TV banking
TV-based banking was launched in 1996 through We had to speak to the unions in great length and we had
to hand out very generous packages since no employee
the use of a set-top box that connected to normal was actually fired . . . But we also tried to show that solo
household TVs. Through this box, Nordea customers [the nordea Internet bank] had led to a great increase in
could log on to the Nordea banking system and carry customer satisfaction and that this would make nordea a
out basic banking transactions. The underlying idea more competitive and stable institution in the future. We
was that those people who disliked computers would
use the TV to write emails and to check their account 19 ‘Learn from the largest Internet bank of the world’,
balance. However, as it turned out, TV banking has accessed at www.tietoenator.lv
381

Part 4 Case studies
Exhibit 6 Evolution of Nordea’s staff and branches in Finland
1400 25 000
Number of employees
Number of branches
1200 20 000
1000
15 000
800
600 10 000
400
5000
200
0 0
00
00
91
92
93
94
95
96
97
98
99
91
92
93
94
95
96
97
98
99
90
90
20
20
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
also showed the [labour] unions that Finland is absolutely Because of its large size, Nordea takes a mass-
world-class when it comes to Internet banking and that it market approach to its banking activities. Bo Harald
was necessary to make changes in our organizational struc-
explains:
ture in order to maintain this lead. Finally, we pointed out
that it was problematic to have people do this type of man- If you are as big a bank as we are, you can’t afford not to
ual, repetitive, low-paid work and that it would be much target all customers . . . there is also a misconception that
more valuable if we educated these people to do a more there is a clear distinction between profitable and unprofit-
creative and interesting job. able customers. of course, there are customers who come
to the branch every day. they are unprofitable, but there
Today, Nordea operates 1,288 branch offices through-
is no way to get rid of them, so you might as well not even
out the Nordic region and employs 34,600 people try. another typical feature of less profitable customers is
(full-time equivalents). In addition to the Finnish that they are young. However, soon enough they’ll need a
branches, there are 267 branches with 8,500 employ- mortgage and a retirement plan. If you look at the older
ees in Sweden, 151 branches with 4,400 employees in segments, you don’t find that many unprofitable customers.
thus, when you want to talk about profitability, you really
Norway and 348 branch offices with 9,400 employees
need to take a dynamic view of customers.
in Denmark. Says Bo Harald:
In its marketing activities, Nordea differentiates
We have been cutting branches for a long time, partly
between two types of customer:
thanks to mergers and now thanks to the Internet . . . Finland
used to be over-branched, but now it is almost under- ● Internet believers. These customers have been
branched. the future is to change the way branches work:
online for years and have the know-how and trust
we are now opening teller-less branches in places such as
shopping centers. the idea is to use the branch to sell and to navigate the Internet, to shop online and to
provide services, not to make transactions. the branch staff do their banking online. To them e-banking is a
should add value for customers. they shouldn’t do routine, normal day-to-day activity; something that is not
uninspiring work.20 worth talking about with their friends. From a mar-
keting perspective, these customers are therefore
considered to be ‘infertile’.
Marketing
● Non-believers. These customers are just starting
Due to its early start in e-banking, Nordea has spent to surf the Internet. They require substantial con-
little on marketing its Internet initiatives in com- vincing to build enough trust and know-how to
parison with other online banks. From 1996 to 2001, start doing e-banking. Friendly branch employees
Nordea spent about €18 million to market its Finnish are best suited for removing that insecurity. Once
Internet initiatives. This money was not directed pri-
marily towards attracting new customers but instead
towards getting the nine million branch customers to
20 ‘Online extra: Q & A with Nordea’s Bo Harald’, Business
move to the Internet. Week online, 16 April 2001.
382

they are online, however, these customers are Pricing

amazed and proud of their accomplishments and
want to pass the news on to their friends. After e-Banking is not free because every transaction has a cost.
turning them into believers they take the next Customers who use it should pay for it, not those who don’t.
If a bank comes out and says that their e-banking services
step and become preachers – a viral marketing are for free, they are lying. It is only a question of who pays.
effect where customers acquire more customers, as (Bo Harald)
Harald emphasizes: ‘When you get a critical mass
Nordea’s rates for retail customers contain fixed and
of customers, they are the best sales force for you.’
variable elements. The monthly fee for basic services,
At Nordea, the importance of a branch cannot be regardless of usage, is €2 per month. Access to the
under-estimated when it comes to turning non- credit card balance costs an additional 40 cents, and
believers into believers. Says Harald: mobile WAP services an additional 30 cents; these
Just imagine an enthusiastic clerk serving a client, who says, charges are now being removed. Customers who want
‘Hey, why don’t you also do e-banking? everyone else does to do equity trading pay from €4 per month for a basic
it’ and then convincingly seals the deal . . . the value of the version and up to €20 for the most advanced version.
branch network is absolutely fantastic. that’s why you need Nordea’s competitors tend to be cheaper. E*Trade, for
to get employees to like it. otherwise they won’t move busi-
instance, charges a fee of €10 per trade, a quarter of
ness into the online channel.
Nordea’s price. However, Nordea’s fees seem still to
In spite of having achieved a high penetration rate be reasonable, as Magnus Grann, a 40-year-old soft-
throughout Scandinavia, Harald still sees significant ware engineer, points out: ‘Nordea’s fees just aren’t
potential for the bank’s e-banking services, especially high enough to make a difference.’21
among senior citizens: But other customers struggle with the pricing of
even if you are the largest e-bank in the world, of course Nordea. Tuukka Seppa, a Nordea customer from
you still have a lot to do in the 60-year-old-plus sector. We Finland, points out:
feel a social responsibility to organize evenings – especially
in the countryside – where senior citizens learn how to use nordea is definitely not cheap and charges some fees for
the Internet. For those people, we organize senior citizens’ every additional service. For instance, I really don’t like it
clubs. We just had one in the east of Finland that was origi- that there are additional monthly payments for accessing
nally set up for 100 people. In the end, 1500 people wanted my investments.22
to participate. When someone in that age group finds out Tomas Bauer, a Nordea customer from Sweden, goes
that they can send an email to their children or their grand-
even further:
children, that’s a big deal. the sooner they come on board,
the better it is. and then they can take part in online com- I think nordea’s pricing practices are a little dubious. I actu-
munities and discussion forums. Finland is a country of as- ally feel that they tricked me into opening a savings account
sociations; there is an association for everything, even for when they offered me an interest rate slightly above market
siamese cats. Whatever it is they like, they can find it on level. after one year they dropped the rate to almost 1%
the Internet. and they need e-payment, e-invoicing and below the comparable market level.23
e-identification. all those services are required to manage
your siamese cat association! then, those senior citizens On average, for its online services, Nordea generates
will get so much more out of their lives, because there is revenues of slightly more than €2 per customer, which
such a huge window that opens up into the world – a new amounts to €7 million per month. These revenues
dimension. and e-banking is just one part of it.
cover all costs for the online banking channel and also
While targeting senior citizens with its e-banking, generate a profit (which is not disclosed).
marketing these services to the younger, Internet- Corporate customers pay from €20 to €5000
savvy generation is not at the top of Nordea’s agenda. depending on the level of service. To be a member of
Bo Harald says: the e-marketplace, merchants pay a €200 connection
I wouldn’t spend any money on marketing to people young- charge up front and a monthly fee of €20. For each
er than 30; there is no need for that . . . You can start with
e-banking when you are 15; to get the message through
to these people, you let them know what’s possible. that’s 21 ‘The dynamo of e-Banking’, Business Week online,
worthwhile putting some marketing money into. But from 16 April 2001.
18 to 30 or 40, there is not much you need to do. Instead, I 22 Personal interview, 5 October 2003.
would put all my money into the 60 years and above group. 23 Personal interview, 5 October 2003.
383

Part 4 Case studies
transaction, an additional fee of 35 cents is levied. Customer authentication

In contrast to credit cards, the transaction fee does
Nordea’s customer authentication procedure has
not depend on the volume of the purchase. This is
been in place since the early 1980s. For all contact
due to the fact that with credit cards, the bank has to
with the bank, whether via the Internet, mobile
finance the period – up to 30 days – between when
phone or call centre, customers use one identifica-
the merchant gets the money and when the customer
tion number: the one-time code (OTC). These OTCs,
pays the bill. Since the Solo direct payment is similar
which are printed on a card, are comparable to the
to a debit card, there is no time gap to be refinanced.
transaction number which customers use for trans-
Merchants benefit because they no longer have to
fers. To access their bank account through any one of
send out invoices by mail. In addition, while previ-
the above-mentioned electronic channels, customers
ously they had to wait to be paid, they now receive
need to have the OTC handy. Bo Harald considers
payment in real-time before even shipping the goods,
the Nordea authentication approach to be superior to
thereby eliminating their credit risk.
most others:
We pay attention to the profitability of our e-banking op-
erations. our basic principle when introducing new ap- to connect to nordea, customers need to have their code,
plications is that we don’t give added value for free. our which is given after opening an account with us. the latter
customers pay a monthly fee for Internet banking. If fur- can be done only if the customer shows up in person at the
ther services are taken up such as brokerage, credit card bank branch and presents an Id document. other banks,
reporting or Wap, then it costs more. Customers accept it especially Internet banks, are not so rigorous. there, all you
if they benefit from it, for example, if a transfer becomes need to do is send in a phone bill where you can see the
more favorable and simpler. the added value which is cre- customer’s address. that’s easy to forge and then you can
ated here cannot be free. Many companies have just started get into the money laundering business quickly.
to understand it.24 He points out additional advantages of the OTC:
The pricing of banking services is also used as an effec- With the one-time-password and the identification
tive tool for steering customer business into certain number they [the customers] get access to a safe e-business
channels. Bo Harald shares his personal experience: marketplace, which they can visit from everywhere and
on which they can do much more than traditional bank-
In 1983, we introduced a charge of 10 cents for all cheque ing transactions. For example, they can sign contracts
forms, which were very popular at that time and my wife was with their energy and telecom suppliers, buy credit on-
very good at writing these cheques. But once this fee was in- line, or assign attorneys. plus, they don’t need any pe-
troduced, she didn’t write out one single cheque any more. dantic installations of card readers or programs. at the
In fact, chequebooks just disappeared because it wasn’t moment, we have a very interesting situation since the
worth even 10 cents to the people. Instead, they started to Ministry of Finance recommends that for future trans-
pay with a debit card and afterwards they used the debit actions in the public sector which require an electronic
card at payment terminals to pay bills. those same people identification this should be done through e-banking
later on started using computers at their workplace to do the platforms. again, that’s trust, which upholds our services.
transactions. . . . In the Us, people write somewhere around ‘You want to know something concerning your pension?
50 billion cheques a year. that amount of paper is please click here.’ We – and the other banks in Finland –
transported by airmail to the banks and back. It costs offer the use of otC to everyone who has to offer identi-
somewhere around $75 billion a year to pay for these fication and signature possibilities. Millions of customers
transactions and, on top of that, it’s an environmental already have this code, and for them it’s an additional
problem. It takes a lot of time and costs a lot of money. If service if they can interact with other companies or gov-
you don’t put an upfront price tag on costs, you still have ernmental agencies.25
to pay for them and you don’t direct the activities of your
customers. showing the customer what it really costs al- However, the OTC is not popular with everyone. Kaisa
lows the customer to make rational choices because they Juhanni, a Nordea customer from Finland, points out:
are paying for these costs. ‘What I really dislike about the Nordea online banking
Nordea has implemented similar pricing structures
between branches and Internet banking to entice
customers to move online. For instance, a foreign 24 ‘Learn from the largest Internet bank of the world’,
currency wire costs $7 online but $14 in a branch. Bill accessed at www.tietoenator.lv.
payment is free online, whereas it costs $3.50 per bill 25 ‘Learn from the largest Internet bank of the world’,
in a branch. accessed at www.tietoenator.lv
384

is that you always need to carry the pass-code list with ● Applications: roughly 9,000 applications.
you in order to access the service.’ ● Networks: four different branch networks.
For the future, Nordea plans to develop a public-
key infrastructure (PKI)26 that would allow customers Since then, Nordea has undergone efforts to integrate
to log on to PCs or mobile phones using smart-cards the various IT systems and organizational structure to
equipped with chips. streamline its activities. For example, real-time process-
ing systems, which have been in place since 1985,
Technology needed to be aligned. On the organizational side, the
changes are reflected in the increased importance of the
The evolution of the technological platform at Nordea – group processing and technology unit (see Exhibit 7).
the backbone of all its e-banking operations – has been The electronic banking and production and productivity
strongly influenced by the original individual banks units were moved over from retail banking. The cor-
which all had different technology platforms. For porate and institutional banking unit handed over the
instance, the Finnish Merita bank had an e-banking
infrastructure that allowed customers to log on to
their system with just a browser and a simple pass-
word system. At the Swedish Nordbanken, on the 26 Public key infrastructure is an electronic framework for
other hand, customers needed to install special soft- trusted security. Participants in a PKI each obtain a dig-
ware and get a smart-card reader before going online. ital certificate from a trusted certificate authority (CA),
which then authenticates their identity when initiating a
After the completion of the merger, Nordea was secure transaction. Individual transactions are encrypted
faced with a very complex IT infrastructure which by each participant using their own pair of electronic
included the following: keys, one of which they keep for their own private use,
while the other – the ‘public key’ – is made available to
● Production: four main production centres with other participants. PKI has been widely adopted as the
multiple platforms. basis for secure Internet and web services transactions.
Exhibit 7 Change of business structure to support the integration of IT and processes
Nordea
Retail Corporate and Group processing

Group staff
banking institutional banking and technology
Electronic Global operations

Group IT Group IT
banking services
Production and Electronic

productivity banking
Production and
productivity
Global operations
services
385

Part 4 Case studies
global operations services while group staff handed over Competition

the group IT. Several reasons led to this concentration
Even though Nordea has achieved a dominant role in
of technology functions in one unit, including focusing
the Nordic region, a number of Swedish and Finnish
on integration and cost efficiency, releasing time for
banks compete head-on with Nordea – also with
business areas to focus on customers and capitalizing on
regards to e-banking services. Swedbank, for instance,
change management.
which had 1.3 million online banking customers in
Today, IT costs correspond to 20% of total
2002, is planning to allow its m-banking customers to
expenses, averaging around €200 million per quarter.
view their mobile phone account statements, update
These costs are almost evenly divided between devel-
their subscription contracts and access itemized calls.
opment costs (47%) and production costs (53%).
Okobank in Finland has 720,000 retail custom-
Nordea has formulated a philosophy to drive its IT
ers on the Internet. Matti Korkeela, Executive Vice-
operations, which includes the following elements:
President at OKO, believes in the quality of the bank’s
● A comprehensive governance and control structure e-offerings:
on IT development and IT production. We have estimated that active users of the system make up
● Business-driven development, i.e. business decides approximately 80% of our Internet-banking clients. I be-
the ‘what’, IT decides the ‘how’. lieve this figure is higher than that of our competitors. With
oKo Bank, Internet banking per customer is more intensive
● Strict prioritization of development to support inte- than with most other banks. to be honest, I do not believe
gration and cost efficiency. in pure Internet banking. We at oKo have a multi-service
concept, where the banking outlet still plays an important
● Gradual creation of common Nordic platforms,
role.27
including consolidated production and applica-
tions. In 2002, the bank saw a 48% increase in web-based
transactions. In total, 40% of 110 million invoic-
● Business-case-driven approach to consolidation,
es were handled online. Other competitors with
assuming that the integration of all systems will
sophisticated e-banking services include Rabobank,
most likely not be profitable.
Enskilda Banken and Svenska Handelsbanken. Says
In relation to overall IT costs, e-banking expenses Bo Harald:
were low. From 1981 to 2000, the Finnish arm of there has been no real price competition . . . Cost savings
Nordea spent a cumulative total of €19 million on its have been passed on in two ways. First, if you pay your bill
e-banking technology. However, today expenses are in a branch today, you pay a lot of money, but if you pay it
significantly higher because 17 different e-banking online you only pay the monthly charge. second, competi-
systems throughout the Nordea group need to be tion has moved to housing mortgages. all the cost savings
have been pushed into mortgages with margins down from
maintained and improved. The main cost item is 1.6% to 0.8%. Most banks have done the same thing and
the development of an integrated e-banking system, have passed on the cost savings, so it’s always the customer
which Nordea is jointly pursuing with TietoEnator, a who, in the end, wins the most.
Finnish company specializing in consulting, develop- At Nordea, pure online banks are not viewed as a
ing and hosting its customers’ business operations. major threat:
The annual e-banking costs are in the ‘two-figure mil-
lions’ range. We haven’t lost a significant amount of business to pure
e-players . . . they may be cheaper than us but an e-bank
In the late 1990s, at the peak of the dot.com years, has no personal selling capabilities, no customer base, and it
Nordea considered selling its technology systems to costs them a fortune to acquire customers. I am convinced
other banks in Europe. Bo Harald explains: people value the safety of branches and a trusted relation-
ship. our vision is to be high-tech and high-touch. that will
In the end we didn’t do it because all banks are very
make us invulnerable to cyber-attacks. I believe traditional
different and it would cost a lot of effort to make them
banks will play a central place in the e-economy. they have
work. Banking is a complicated business and if you really
trust. they have established brands. today, nobody would
want to have the best return on equity, you should have
high-touch and high-tech. We ended up making money
but it wasn’t enough to justify the effort of selling our
technology. Instead, we decided to focus all of our energy 27 ‘The massive e-habit as a natural resource’, Nordicum.
on our customers. com, No. 1, 2003.
386

try to set up an amazon.com-type bank any more. It’s just Come and do your banking with us on our great website!’ –
too expensive and it doesn’t work in our business.28 what would people say? that’s why we have never tried to
penetrate foreign markets where we don’t have a physical
Customers who have been clients of Nordea for a long branch network.
time are a major asset for the bank. Tuukka Seppa said:
In addition to expanding geographically, another
Initially, I was a customer of Kansallis-osake-pankki (Kop), main growth area for Nordea is expanding its service
which became Merita in 1976. For personal purposes, I
started using the solo online service in 1995. through it I
range:
pay all my bills, review my account transactions as well as even in our Finnish market, we can expand quite a lot by
my credit card charges. I also use it to authenticate access to offering new services that we didn’t have before. If you look
my electronic mailbox which is hosted by the Finnish post.29 at these services, you can only offer some of them over the
Internet, but not at a branch. For instance, customers won’t
Where will new competition for Nordea come from?
come to the branch to check the balance on their credit
Will it be from software houses, large international card but would like to do it through their mobile phone.
banks (such as Citibank or Deutsche Bank) or others?
Bo Harald replies: For Nordea, there are two promising future e-business
opportunities. First, to develop further customer rela-
these companies don’t have the local branch structure tionship management, the bank is turning towards
and they don’t have our cost-income ratios . . . telecom
operators that have very broad access to their mobile
triggered data mining, which works as follows: when
phone customers might enter the competition. there is a change in a customer account – for instance,
a large incoming money transfer, change of address or
However, contrary to popular belief, he does not
marital status – a trigger in the database is set off and
believe that customer retention has gone down as a
informs the bank of the change, which then raises a
result of e-banking:
number of questions: what does it mean for financing,
the idea that the next bank is only one click away is abso- for long-term payments, for insurance and e-services?
lutely not true. to become a customer, you need to go to Based on the answers to these questions, Nordea
the bank and open up an account. When you are used to
one system, you don’t want to change.
plans to make an offer either via mail or face-to-face
in a branch. While Bo Harald sees substantial value in
this approach, he wants to go a step further:
Growth opportunities triggered data mining is not enough because it looks into
the past. Instead, we should ask the customer directly: What
In its domestic markets, where Nordea operates its are you going to be doing next? What’s your next life event,
branch network, there is limited opportunity for as we call it? For instance, the most important thing that can
growth. Bo Harald explains: happen to a man in Finland is the purchase of a new car. We
want to invite the customer to tell us about it and then ask
We can’t grow very much in Finland. In sweden, we are the
ourselves: What can we do? What can the private sector do?
second biggest bank. In denmark and norway, we are still
What can the public sector do? Well, he’ll have to look for a
too small in private and corporate banking, which leaves
car. our solo partners can send him car offers. He’ll have to
plenty of room for growth. In neighbouring markets such
buy the car and sign a contract – this can be done through
as estonia, we are already the third largest bank with sub-
e-signature. He’ll have to pay for the car – this opens up
stantial growth potential. In poland, we bought four banks,
the opportunity for financing arrangements. He’ll have to
which we now need to consolidate before we can start
have his car inspected – again an opportunity for one of
thinking about further growth.
our partners on the solo marketplace . . . of course, when
Moving into other European markets as a pure e-bank we think about these services, a major concern is always
without a branch network is not a real option for the issue of data privacy, to which we are very sensitive.
nordea never shares any information with anyone outside
Nordea: the bank. Customers voluntarily decide to share informa-
as a pure play, you might be able to attract the tech-savvy tion with, say, the car seller. during the initial stage it’s even
people who are constantly checking interest rates. those possible to have a protected identity which is unknown to
guys easily sign up for anything new but this market seg- the merchant.
ment is very small. our experience has been that if you don’t
have a strong brand name and a solid branch structure that
allows you to get in personal contact with your customers, 28 ‘Online extra: Q & A with Nordea’s Bo Harald’, Business
you will have problems addressing the mass market. I mean, Week online, 16 April 2001.
if we went to southern France and said, ‘Hi, we are nordea. 29 Personal interview, 5 October 2003.
387

Part 4 Case studies
The second major opportunity is risk management which fell by 4% while expenses increased by 2%.
services for e-businesses: However, Harald believes that another important fac-
In the electronic world, business partners do not know
tor is that investors do not value e-banking activities
each other well. at the same time, market volatility is very appropriately at the moment:
high, which has led to numerous big crashes. therefore those who know e-banking know that we are the number
you shouldn’t trust anybody. to accommodate this you can one in the world. during the dot.com bubble we had invest-
either use direct payment [e-payment as explained above] ment bankers and analysts here every single day – I could’ve
or get credit ratings. today, most companies have a lot of spent all my time just talking to them! they told me: ‘You
people working in risk management. they pay tens of shouldn’t really be classified as a bank, you should be an It
millions for credit information and insurance in order to company and have a valuation that is ten times higher than
reduce credit loss. In general this works well but it raises the your current valuation.’ actually, our valuation went up quite
question: How much should you pay? If you could use the a bit. But now, how many analysts come to see us? What I
bank’s knowledge and its ready-made credit information am complaining about are the analysts. now that the real
and integrate it into the billing process, you could save a thing is happening, why are they not interested in it? they
lot of money. that’s what we plan to make available in the were only interested in sensation. the underlying problem
future. every company in the world has a bank and usually is that people tend to overestimate new technology in the
the bank has made a credit evaluation of that company and short run but underestimate its influence in the long term.
established a credit line. these banks have the most in-
depth information and therefore it’s probably the best credit Regarding the future, he sees the importance of
evaluation anybody can get. If all banks made these evalu- e-banking and e-business in a broader perspective:
ations available electronically by issuing trade-related bank
guarantees on the Internet, companies could save a lot of Getting people accustomed to e-banking is really a social task
money. It would be a lubricant on the e-business machinery. to make europe more competitive. We can’t afford not to do
this is a very obvious idea but sometimes the things that are it. e-Banking services can be used to make people more pro-
so simple and self-evident don’t take off. that’s the way the ductive to compete with the Us and the Far east. due to our
world works – never quite perfectly. high costs and our powerful [labour] unions, we can’t afford
not to increase productivity. to achieve this, the all-important
thing is the national resource of e-habit that we have been
Future outlook building up [over the years]. that’s the key to the future. none-
theless, you can’t plan or foresee the future, you can only cre-
In spite of its successful e-banking and e-business ini- ate it – and that’s exactly what we want to do at nordea.30
tiatives, Nordea’s stock performance has been below
average in the last few years, falling 28% in 2002. This 30 ‘Learn from the largest Internet bank of the world’,
was due, in part, to a drop in the bank’s total income accessed at www.tietoenator.lv.
388

Case study 3 Ducati (Italy) vs. Harley-Davidson (USA)
CASE STUDY 3
Ducati (Italy) vs. Harley-Davidson (USA)

Innovating business processes and managing value networks
In 2001, as Ducati celebrated its 75th anniversary, Ducati’s parent company, Caviga, faced a major finan-
some executives wondered whether the recent cor- cial crisis which led to the sale of a 51% stake in DMH
porate restructuring had repositioned the company to the USA-based Texas Pacific Group (TPG) and
successfully. As part of this, the Italian motorcycle Deutsche Morgan Grenfell Capital (Italy). A new man-
manufacturer had adopted a new focus on R&D, agement team initiated a turnaround programme aim-
marketing and sales, moving away from its initial ing at increased production efficiency, net sales and
manufacturing strength. In addition, the company profit. ‘Since 1996, we were really working against
had embraced the Internet, deciding in January 2000 a backdrop that wasn’t so far removed from bank-
to sell its new motorcycle, apparel and accessories ruptcy’, said Carlo di Biagio, Chief Executive Officer of
exclusively online. Though this had been a risky deci- DMH. ‘Now our situation is different. Sooner or later,
sion, it had been tremendously successful. Federico we think investors will see that.’
Minoli, President and CEO of Ducati.com, and Chair By 2001, the company had restructured its value
of the Board of Ducati Motor Holding, announced chain activities, outsourcing 90% of its production
with pleasure that: and, in order to decrease costs, introducing a platform
since 1 January 2000, we have sold over 2,500 motorbikes
strategy that provided a common technical base for
online with the help and involvement of our official dealer Ducati motorcycles. All models subsequently shared
network, proving the validity of our Internet strategy. With a fundamental engine configuration (L-shaped twin-
this success, we further confirm the value of our brand and cylinder engine), tubular trestle frame and many
our product. generic or commoditized parts. In addition, all models
(excluding the ST2) used one of only two types of
Ducati: company overview engines: two-valve – or four-valve – making assembly
easier and manufacturing less costly. Furthermore,
Ducati Motor Holding SpA1 (DMH) was a manufactur- DMH restructured its distribution network by reduc-
er of expensive high-performance motorcycles. Since ing the number of its dealer outlets and replac-
1926, the medium-sized company, based in Bologna, ing multibrand dealers with Ducati-designed stores.
Italy, has been developing and producing racing-
inspired motorcycles, winning the World Superbike
Championship uninterruptedly for decades. In 1996, 1 SpA (Società per Azioni) is a joint stock company.
the case was made possible by the cooperation of ducati Motor spa (Italy).
Copyright © 2003 Insead, Fontainebleau, France.
389

Part 4 Case studies
Thus, after the restructuring, DMH consisted essen- Table 1 Ducati financial data (million euros)
tially of an R&D and design centre, an assembly unit
1999 2000 2001
and a marketing and sales department. Support and
logistics were also outsourced. total revenues (motorcycles,
One of Ducati’s key strengths is its brand name accessories, apparel, spare
parts, etc.) 294.5 379.5 407.8
and product innovation capability. The company has
successfully revamped its existing product line and accessories and apparel 37.1 55.9 61.4
introduced several new motorcycle models, accesso- Gross profit 118.0 150.6 166.5
ries and apparel. The new products were sold either Registration (units) 32,135 38,130 38,969
through the traditional dealer network or exclusively eBItda 50.8 60.0 66.1
over the Internet.
depreciation and amortization (24.3) (29.6) (34.6)
Ducati’s e-commerce activities were first launched on
Financing expense (14.3) (19.4) (12.1)
1 January 2000, when a new, limited-edition MH900e
motorcycle, priced at €15,000 was sold exclusively over non-recurring items 4.5 6.7 (28)
the Internet. The entire first year’s production of the Income tax and minority
MH900e was sold out in just 31 minutes, despite the fact interest (7.8) (7.2) (8.9)
that production was not scheduled to start before June net profit 8.9 10.5 10.5
2000. Industry-wide, it was the first event of its kind. net debt 112.3 97.4 112.9
‘Produce what is already sold’ thus became a new motto total shareholders’ equity 131.1 143.1 154.6
for Ducati, and it subsequently set up an independent
total net capitalization 243.4 240.5 267.5
online entity, called Ducati.com on 6 March 2000.
net debt/total net
In countries where Ducati took control of its dis-
capitalization (%) 46.1 40.5 42
tribution network, the company experienced a sig-
nificant rise in motorcycle registrations, a key meas- net debt/eBItda 2.2× 1.6× 1.7×
ure of retail sales. In 2001, Ducati announced the Source: adapted from ducati documents, July 2001 and January 2002.
fifth consecutive year of record profits, amounting
to €10.5 million (see Table 1). For the same period,
the company sold 38,969 motorcycles, with revenues Buell Motorcycle Company,5 and financial services
of €407.8 million and EBITDA2 up by 10% to €66.1 with the Harley-Davidson Financial Services (HDFS).
million, i.e. 16.9% of revenues. In 2001, Ducati had a The latter provided wholesale and retail financing
6.4% share of the Western European market. and insurance programmes to Harley-Davidson/
On 2 April 2001, DMH joined the STAR3 segment of Buell dealers and customers, including credit, insur-
the Mercato Telematico Azionario of Borsa Italia SpA, a ance and production options, the Harley-Davidson
new high-standard stock segment.4 Ducati was among Extended Service Plan6 and the Harley-Davidson
the first 20 Italian companies to qualify for the STAR Visa card.
segment. Thereby, the company tried to obtain greater
visibility in the financial markets and to enhance share-
holder value through increased liquidity.
2 EBITDA stands for earnings before interest, taxes,
depreciation and amortization.
3 STAR stands for Segmento Titoli con Alti Requisiti. This
Harley-Davidson: company overview
means a stock segment with high requirements.
Another major motorcycle manufacturer was the 4 The Mercato Telematico Azionario of Borsa Italia SpA is
a screen-based stock exchange dedicated to small and
USA-based Harley-Davidson, which was in the mar-
medium-sized capitalization companies in Italy that oper-
ket niche of cruisers and touring motorcycles (see ate successfully in traditional sectors of the economy and
Exhibit 1). Like Ducati, Harley-Davidson offered satisfy a series of requirements in terms of transparency,
motorcycles, spare parts, accessories, apparel and liquidity and corporate governance.
general merchandise. Harley-Davidson Inc. was active 5 Buell Motorcycle Company produces sport motorcycles in
addition to motorcycle parts, accessories and apparel.
in two business segments: motorcycles and related
6 The Harley-Davidson Extended Service Plan covers
products with Harley-Davidson Motor Company and motorcycle repairs.
390

Exhibit 1 Expanding the niche boundaries of Ducati motorcycles: the move from performance, functional
motorcycles to comfort and lifestyle-orientated motorcycles
Performance
748R Special Monster

models
996R
Limited-edition
motorcycles
Function Lifestyle
Sport Touring
models
BMW HARLEY-DAVIDSON
Comfort
Source: adapted from ducati document, september 2001.
In June 1981, 13 Harley-Davidson senior execu- Davidson Financial Services’ net earnings amounted to
tives bought Harley-Davidson Motor Company from US$61 million, i.e. 14% of the company’s total.
its former parent company AMF, through a leveraged For its third quarter 2002, Harley-Davidson
buy-out. At the time, the company suffered from a announced record revenue and earnings, with rev-
reputation for poor quality and low reliability, and enues of US$1.14 billion, an increase of 31.8% over
it lacked innovative product design and develop- the third quarter of 2001. ‘As we began our year-long
ment. A turnaround programme was begun, com- 100th anniversary celebration, we achieved our big-
prising of a 40% reduction of the overall workforce, gest quarter ever, setting new records in revenue and
a 9% wage-cut, and the introduction of new prod- earnings’, said Jeffrey L. Bleustein, Chair and Chief
ucts. Over 20 years later, as it celebrated its 100th Executive Officer of Harley-Davidson Inc. ‘The com-
anniversary, Harley-Davidson was one of the most memorative products for our 100th anniversary cel-
successful motorcycle manufacturers in the world, ebration were a major driver for our exceptional third
enjoying strong brand recognition and an innovative quarter performance and are a great springboard for
design and development capability. In 2001, Harley- growing demand for the future.’7
Davidson was elected Company of the Year by Forbes
Magazine, and was described as one of the ‘most
admired companies’ in the USA. Ducati’s business strategy
In 2001, Harley-Davidson announced record rev- despite the challenging business environment in 2002, we
enues and net earnings for the 16th consecutive year. are continuing to invest in innovative products and brand-
The company’s revenues were US$3.4 billion, an building activities to lay the ground for strong and sustained
increase of 15.7% over the previous year (see Table 2). future growth.
(Carlo di Biagio)
Revenues of the Harley-Davidson motorcycle division
increased by 17.1% to US$2.6 billion. Net earnings of 7 www.harley-davidson/investorrelations/pressrelease,
the company grew by 25.9% to US$438 million. Harley- 15 October 2002.
391

Part 4 Case studies
Table 2 Harley-Davidson financial data niche position, for example with the sale of the top-of-
(US$ millions) the-line motorcycle model 996R, and by focusing on
its core competencies.
1999 2000 2001
By February 2002, the company had 92 Ducati
total revenues (motorcycles, 2453 2906 3363 stores worldwide. These retail outlets were
accessories, apparel, spare designed to help the company gain more control
parts, etc.)
over its distribution network, develop closer con-
Costs of goods sold 1617 1915 2183
Gross profit 836 991 1180 tact with its customers, increase profit margins and
Financial services income 133 140 181 reduce lead times. Ducati had also been selling lim-
Financial services interest 105 103 120 ited-edition motorcycles, accessories, apparel and
and operating expense memorabilia exclusively over the Internet. Some of
operating income from 28 37 61
the products sold online, particularly motorcycles,
financial services
net income 267 348 438 were delivered to customers through the dealer
network. Products sold online were normally not
2000 2001 (%)Change
available at the dealer outlets. The dot.com line
Revenues
offered restyled, classic motorcycles, and collec-
total motorcycles 2304 2692 16.8
(Harley-davidson and Buell) tor’s items. The latter included limited-edition new
Motorcycles parts and 448 507 13.3 motorcycles not yet launched at dealers and limited
accessories editions of enhanced or redesigned current motor-
General merchandise 151 164 8.3 cycle models. With its online sales, Ducati tried to
other 2.6 0.2 (92)
strengthen rather than undermine dealers through
Registration (units) 204,500 234,461 14.6
Harley-davidson motorcycles 10,189 9925 (2.6) increased sales volume and increased cross-selling
opportunities.
Source: Harley-davidson annual Report, 2001.
After announcing the successful online sale of
the MH900e motorcycle, the biggest Internet-based
Since the 1996 company turnaround, Ducati aimed sale ever made in Italy, DMH’s share price on the
at the following objectives: improving production Milan Stock Exchange increased by an impressive
efficiency, developing high-margin motorcycle-related 11.7%. ‘It was at the time when the Internet bubble
businesses, leveraging the Ducati brand, pushing the was at its peak’, reflected Christopher Spira, Head
boundaries of the Ducati products’ niche, reinforc- of Investor Relations at DMH. The Internet since
ing the company’s core niche position, improving the became an inherent part of DMH’s corporate strat-
distribution network, and developing Internet and egy. By 2001, the company was trying to integrate
e-commerce activities. the separate Ducati.com operation into the real
Although Ducati was continuously learning and ‘World of Ducati’. Hence, through trial and error,
enhancing its products and processes, the company the company was fine-tuning its e-strategy and
believed that it had attained its goals. To improve trying to adapt quickly to the changing business
production efficiency, the company introduced sev- environment.
eral projects, including the Ducati Improvement Ducati’s business model had fundamentally
Process (DIP). Sales of high-margin, motorcycle- changed from operating through a narrow value
related products such as spare parts, accessories and chain to setting up a value network, which integrated
apparel increased by 9.8% from €55.9 million in online and offline processes and business partners
2000 to €61.4 million in 2001. The company also (see Exhibit 2). The value network included custom-
leveraged its brand through the sales of apparel and ers, suppliers, dealer outlets, marketing partners and
accessories. Ducati expanded its niche boundaries of sponsors. Through its network marketing partners
high-performance, functional motorcycles with the and sponsors, Ducati tried to expose and leverage its
Sport Touring models, special Monster models, and brand.
limited-edition motorcycles such as the S4 Fogarty As a result, Ducati had closer contact online and
(see Exhibit 1). At the same time, it reinforced its core offline with its customers and a better understanding
392

Exhibit 2 The Ducati value network: Ducati in-house, networked and outsourced activities
gn
g
si
e es
rin
ic d
tin d
de
Activity
st un
g
ke n
ic al
st d
tu
in
g
ar s a
y
gi un
rv -s
d
gi o
ac
bl
s
s
an
lo tb
se fter
ha
ic
lo o
m le
em
uf
b
u
Sa
rc
D
In
an
A
s
R&
Pu
As
M
Network partners
Suppliers
(partners and sub-suppliers)
Ducati Motor SpA
Customers
Dealer outlets
Marketing partners
and sponsors
Carriers
In-house activities Networked activities Outsourced activities
Source: Based on information provided by ducati.
of their needs. ‘The Internet changes your relation- Exhibit 3 The insourcing/outsourcing decision matrix
ship with customers’, commented Federico Minoli.
‘Your customers become your marketing department. High
Support Core
They tell you what kind of bike they want.’ Indeed, activity competence
generated by the activity
the company considered customers a valuable

In- or Insourcing
Customer value
source of information and took into account their outsourcing Distinctive

preferences and views when making strategic deci- Selective competence
sions. For instance, Ducati conducted a major online
survey asking Ducatisti8 whether the company Marginal Strategic
activity activity
should participate in the World Grand Prix Champ
Outsourcing In- or
ionship. The 4,500 positive responses reassured
outsourcing
Ducati executives in their decision to participate in
Low Selective
this major event.
The role of suppliers also became more important
as Ducati outsourced most of the manufacturing of
parts and components. At Ducati, the decision to Low High
outsource or keep in-house a certain activity was Relative strength
based on a two-by-two matrix (see Exhibit 3). If the compared with rivals
customer value generated by a given activity was low
and Ducati’s relative strength compared with rivals Source: adapted from ducati document, september 2001.
was also low, then the activity was marginal and
should thus be outsourced. If the value of both crite-
8 Ducatisti are Ducati employees and Ducati fans owning
ria was high, then the activity was considered a core Ducati motorcycles.
393

Part 4 Case studies
competence of the firm and kept in-house. If the value Part of Harley-Davidson’s success lay in its abili-
of one criterion was high and the value of the other ty to understand its products and the marketplace.
one was low, then the decision to insource or out- Executives knew what the brand stood for and how to
source was made selectively. appeal to its customers’ ‘heart, soul and mind’.10 The
Ducati’s relationship with suppliers tended towards company also aimed at having a smooth relationship
a long-term partnership, which involved suppliers in with its dealers. One initiative of Harley-Davidson’s
several activities of the value chain: R&D, design, man- turnaround programme was to focus on its core cus-
ufacturing and assembly. To improve efficiency, Ducati tomer base, expanding it to include CEOs, lawyers
was intending to establish electronic linkages with its and doctors. By 2002, about 70% of the customers of
suppliers through electronic data interchange (EDI). the William Bartels Californian dealership were ‘rubs’
With its distribution network, Ducati strength- (rich urban bikers). Another project was the Harley
ened its ties both on- and offline. First, techni- Owners Group (HOG), founded in 1983 and aimed
cal training and support were intensified. Second, at helping Harley-Davidson dealers attract and retain
through the virtual Ducati store, traffic was generat- customers. In 2001, there were more than 660000
ed to the Ducati dealer. Third, Ducati stores became HOG members in over 115 different countries.
virtually integrated through B2B software called Despite the business climate, Harley-Davidson
Softway, which provided an electronic catalogue of announced it was raising its 2002 motorcycle produc-
spare parts and took orders and tracked processing tion to 263,000 units, up by 12% from the 234,500 in
electronically. 2001. For 2003, the target was set at 289,000 units,
The value network also included marketing part- another 10% increase over 2002. Celebrating its 100th
ners and sponsors such as Virgin Entertainment, anniversary in 2003, the company declared that its aim
Mattel and Maisto. Offline, Ducati partnered on the was to ‘sustain growth . . . the next 100 years’.11 More
racetrack with companies such as Royal Dutch Shell, specifically, Harley-Davidson attempted to increase
signing sponsorship and supply agreements with demand for its products and enhance its production
them. Online, Ducati.com had multiple partners such with the goal of growing earnings faster than revenues.
as the Italian telecommunication company Infostrada, The company stated that its success drivers were its
which was a principal sponsor of the Ducati World strong brand recognition, exciting products and serv-
Superbike Championship, and supported Ducati tech- ices, mutually beneficial relationships with suppliers,
nically in establishing its communications network. and experienced management team supported by an
Ducati.com offered dynamic partnership opportuni- empowered workforce. With its extensive 100th anni-
ties to drive traffic to partners’ websites, enhance versary celebrations, the company sought to increase
partners’ brand exposure, and/or provide content to its brand exposure, celebrate with family and friends,
a wider audience. and reach out to new customers. Several events were
As the value network partners were increas- planned, variously entitled the ‘Open Road Tour’, the
ingly integrated into Ducati’s single value-creating ‘Ride Home’, the ‘Celebration’ and the ‘Party’.
activities, communication became more important. Although Harley-Davidson recruited 500 addi-
Reflecting on the past actions of Ducati and the pos- tional workers to increase its production capacity
sibilities provided by the Internet, Carlo di Biagio said: in 2002, it still could not meet demand. In fact, the
‘We should have communicated more, better and company preferred not to do so. Some dealers even
earlier . . . Once you create an Internet-based relation- charged 20% premiums over the manufacturer’s sug-
ship with your network partners, you cannot abandon gested retail price (MSRP) or forced customers to wait
them.’ As a result, DMH subsequently provided its
customers with weekly news on the latest production
9 Harley-Davidson sponsors an annual rally in which the
of the motorcycle M4 Fogarty. tattoo contest is a keenly anticipated event. G. Hamel,
Leading the Revolution: How to Thrive in Turbulent Times
by Making Innovation a Way of Life, Plume, 2002, p. 84.
Harley-Davidson’s business strategy 10 ‘Marketing: the five best companies’, www.forbes.
It is one thing for people to buy your products. It’s another com/2002/08/01 ÷ 0801marketers.html
for them to tattoo your name on their bodies. 11 www.harley-davidson.com/investorrelation/resources/
(Harley-Davidson Inc.)9 eventsandpresentations
394

up to 18 months for products. Impatient customers company to reduce the time to develop a motorcycle
often refused to wait, resulting in the fall of Harley- prototype from seven years to four years. Starting
Davidson’s US market share from 48% in 1997 to with the R&D and design phase, several processes
44% in 2001. ‘Harley’s true earnings and cash flow were carried out simultaneously, with all relevant
generating power are held back by production’, said internal and external departments and groups par-
Joe Yurman of Bear Stearns, a US investment bank- ticipating in a given process. These typically included
ing, securities and brokerage firm.12 R&D, design, manufacturing, quality control, sales
In 2002, Harley-Davidson had more than 1,300 and marketing as well as suppliers and sub-suppliers.
dealer outlets in 48 countries. Furthermore, satellite In 2000, Ducati invested almost €13 million, or
stores located in shopping malls and other high-traffic 3.4% of total sales, in R&D and design activities. This
locations were convenient for customers in search of sum represented an increase of 32% over the previ-
gear and collectables. Motorcycle sales rose by 19% ous year. Over 150 people were dedicated to R&D
during the first nine months in 2002. ‘This, togeth- and design, including 38 engineers. ‘We also have a
er with better than expected accessories and motor section on our website to integrate our customers in
clothes sales in a difficult economy, gives us confidence our R&D work’, said Christopher Spira. The engineers
in the robust demand for our products’, said Bleustein. used the latest CAD13 and CNC14 technology to design
for assembly. ‘We can use the parts developed for
racing for our model line’, commented Christopher
Innovating the physical and virtual value Spira. ‘Over a period of two to three years, all the
networks innovations trickle through the model line.’ R&D and
I am like a priest for ducati and my religion is innovation. design innovations were first introduced in racing and
We are pushing innovation in a broad sense. this means later used in the model lines, starting with the top-of-
that we innovate our products, processes and organization, the-line models and subsequently integrated into less
and also the way we do business through our online prestigious models.
community.
(Carlo di Biagio)
Purchasing
our [Harley-davidson’s] success didn’t happen overnight. It Ducati
was built on a foundation laid by generations – past and Back in 1996, the relationship between Ducati and
present. and it will continue to grow well into the future.
its suppliers was tense. Suppliers were sending com-
(Harley-Davidson Inc., Annual Report, 2001)
ponents in an unreliable and inconsistent manner,
and Ducati’s payments were often overdue. Thus,
R&D and design the company needed to win back supplier trust.
Before the reorganization, it typically took seven years It began by drastically overhauling its purchasing
to develop a new motorcycle prototype at Ducati. strategy: by 2002, 90% of part and component
R&D and design involved a long sequence of activi- production was outsourced to suppliers and sub-
ties, with just a single activity carried out at any one suppliers, with all components delivered directly to
time and requiring the involvement of not only the Ducati. A hierarchical structure of four different lay-
R&D and design departments but also manufacturing, ers of components and suppliers was developed to
external designers and suppliers. Christopher Spira replace the formerly flat system. Sub-suppliers sup-
explained how the process had changed: plied to other sub-suppliers, or to Ducati partners, or
directly to Ducati (see Exhibit 4); in recognition of
With this linear procedure, each time one unit of the com-
the importance of their role, the company has devel-
pany did a little bit they passed on the hot potato to anoth-
er unit. today, we have cross-functional experts, including oped a long-term partnership with sub-suppliers. In
those concerned with the end of the project, such as [the]
marketing [department]. they work together right from the
beginning, all the way through the end of the [new product
development] process. 12 http://www.forbes.com/best/2001/0910/008.html,
10 September 2001.
This new product development process at Ducati 13 CAD stands for computer-aided design.
used a network-based design approach, enabling the 14 CNC stands for computer–numerical control.
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Part 4 Case studies
Exhibit 4 Ducati’s supply management model implement innovative, personalized solutions and to
react flexibly on demand as well as to deliver quickly
Past model and reduce lead time.
Several projects were under way to improve
Ducati’s supply network. The Ducati Evolution and
Manufacturing Supply Management Optimization project (DESMO)
examined the flow of material and information from
Ducati
sub-suppliers to supply partners, and from them to
Ducati’s production and assembly department, includ-
ing outbound and inbound logistics. The objectives
were to: (1) standardize the communication strategy
with all companies; (2) reduce expenditure through
cost analysis; and (3) enhance product and service
Suppliers quality.
Ducati’s B2B e-commerce activities were still lim-
Current model
ited. As most of its systems were custom-designed
rather than generic goods, the company was not
keen on using electronic marketplaces. However,
Assembly Ducati planned to launch its own e-marketplace for
non-essential standard products. Other parts, includ-
Ducati
ing spark plugs, chains, tyres and lamps, could be

purchased by joining Motoclusters, an online pro-
curement system for the motorcycle industry set
up by Giuseppe Narducci, Ducati’s former Head of
Purchasing.
Sub- Partners More important to the company was its EDI con-
suppliers (suppliers) nection to its major suppliers. A pilot web-based EDI
project was carried out with five suppliers, aimed at
Source: adapted from ducati documents, september 2001. electronically integrating them over the medium term
with the Ducati IT system.
order to reduce costs, Ducati requested a constant
supply of quality goods and services through an Harley-Davidson
optimized process. Since 1998, the company has At Harley-Davidson, purchases were already conduct-
reduced the number of its suppliers by 26% to 175, ed online through traditional or Internet-based EDI. All
while increasing purchasing costs by 59% to €196 Harley-Davidson suppliers were expected to become
million and increasing motorcycle production by EDI trading partners. EDI was an effective, cost-saving
43% to 40,016 units. way to transact business and minimize paper.
Several criteria were used to select suppliers. First, In 1996, Harley-Davidson redesigned its supply
goods and services had to be priced competitively chain process. Given that over half of Harley-Davidson’s
and combined with best-practice quality. Second, products were made up of parts from outside suppli-
the company’s philosophy and values had to be ers, worth US$1 billion per annum, efficiently manag-
shared. These requirements enabled Ducati to have ing the supply chain was critical to Harley-Davidson’s
consistent and reliable supply, trust in its employees, production and financial improvement. The company
and solid financing and business continuity. Third, reduced the number of its suppliers by 80% from 4,000
the supplier had to be large enough to benefit from to 800. Product development time decreased by 30%,
economies of scale and to be able to invest in R&D, as did defective parts, from an average of 10,000 to
production technology and IT infrastructure. Fourth, 48 parts per million for over 75% of its suppliers. This
the supplier had to constantly improve its processes resulted in a high reduction of waste and assembly-
and efficiency. Lastly, the supplier had to be able to line down-time. Harley-Davidson’s operating margins
396

increased as a result of this redesign, going from 15% line. The company used a number of tools, such as
in 1997 to 18.4% in 2002. the Kaizen15/Ducati Improvement Process (DIP), the
In 2002, Harley-Davidson’s online platform was zero-defects concept, the one-piece-flow principle and
still being rolled out. Even in its early phase, it offered the total productive maintenance approach to ensure
secure access to the company’s six-month billing his- production reliability and reduce machine down-time.
tory and to its 52-week demand forecast for parts from Besides its radical process innovations, Ducati also
each of Harley-Davidson’s five US plants. Suppliers carried out incremental improvements. While radical
could also access detailed information on purchase- innovations required long and costly planning and
order terms and conditions, e-commerce information, implementation processes, the Ducati Improvement
packing and shipping requirements, quality-assurance Process (DIP), introduced in 1999, aimed at continu-
standards and Harley-Davidson news. ously improving the company’s processes using a step-
wise, bottom-up approach, as opposed to a top-down
approach. To optimize the internal production proce-
Manufacturing and assembly dure and synchronize processes with suppliers, DIP
the historical achievement [of producing more than 200
was carried out at three levels (see Exhibit 5): on the
motorcycles a day] is not a final goal, but an incentive to shop floor (operative orientation), within the com-
improve and satisfy the requests of our ducati enthusiasts. pany’s functions (tactical orientation), and company-
(Massimo Bordi) wide (strategic orientation).
Part of Ducati’s turnaround programme was to DIP activities in manufacturing aimed at achieving a
introduce lean production and assembly in order to 98% availability of parts and reducing wait periods and
improve its key production indicators. These aimed change-over time. For assembly, the company tried to
at: (1) enhancing motorcycle quality by reducing the
number of defects; (2) decreasing costs by developing
serial production; and (3) improving delivery service 15 The Japanese word ‘Kai’ means ‘change’, ‘zen’ means
by trimming down the faulty parts at the assembly ‘better’.
Exhibit 5 Ducati Improvement Process (DIP): development of the DIP project
Across the company External

Strategic orientation logistics
Layout of the shopfloor
Within the company Internal

Tactical orientation logistics
Shop oor Workshop/

Operational project level
orientation
Optimization of Synchronization
production processes of suppliers
Source: adapted from ducati documents, september 2001.
397

Part 4 Case studies
eliminate buffers, reduce the assembly stock and assem- In June 2002, Ducati introduced its 999 Testastretta
bly time, and introduce production standards. Through motorcycle model. Since the previous 998 Testastretta
DIP activities, the production process was redesigned to model, the company had streamlined its assembly
reduce operator ways (km/day) by 20%, material ways and decreased the component parts by 30%. Clean,
(minutes) by 34%, lead times by 50%, the default pieces renewable energy sources such as bio-gas, photo-
by 21% and the workforce by 16% (see Exhibit 6). voltaic, wind, solar and biomass of agricultural and
To reduce stock, investment, lead time and requi- forestry derivation were all used in production.
site space, Ducati applied synchronized production By 2002, the dealer network provided Ducati with
and one-piece-flow. Hence, a maximum number of the company motorcycle sales forecasts, which formed
parts and components were manufactured simultane- the basis for production. While it typically took the
ously both in-house and by suppliers to be made ready company 37 days to manufacture and assemble one
for assembly. Since the production process redesign, motorcycle, with an optimized process this would
daily motorcycle production increased from 25 units require just two days. Once produced, the motorcycle
in 1996 to 225 in 2001, although staff numbers was stocked at DMH and shipped to the dealer outlet,
remained constant at 980. which it typically reached four months after the order
Exhibit 6 Impact of introducing Kaizen and one-piece flow on Ducati’s efficiency: The case of the Alberi Motors
workshop
Before the redesign After the redesign
Workstations 1–4
Finished
goods Pallet
Workstations 1–3 Flow of
Semi- Semi- material
finished finished Direct Small
goods goods material items
4 1
KAIZEN and 2
1 3 one-piece flow
3
2
Finished Small
Semi- goods
Semi- items
finished
finished
goods
goods
Supermarket
Small items
Improvements (change in %)
• Space (m 2): –10%
• Lead time (days): –50%
• Quality (default pieces): –21%
• Operator ways (km/day): –20%
• Material ways (minutes): –34%
• Production time: –27%
• Operators needed: –16%
• Operator training +100%
Source: adapted from ducati documents, July 2001.
398

was placed. Carlo di Biagio explained the cyclical con- Furthermore, the company changed its parts sup-
straints on production: ply at the production and assembly line from a push
Most consumers buy their [motor]bike between March and
system to a pull system. This system, called Kanban,
June. the season is very short. I think it’s less probable that consisted of having boxes containing parts located
one day we’ll build to order. I know that there’s a lot of pres- next to the production line. Once a box was empty,
sure [from the market] in this direction. there are several shop-floor workers filled out a purchase order. Based
constraints to deliver on order, including the quantity of on this, a kit was prepared in the warehouse and
supplies. If the customer now orders in March, we end up
delivering in June and that is too late in the season.
delivered immediately to the assembly line (see
Exhibit 6).
Logistics
With its turnaround programme, Ducati tried to rede- Marketing and sales
sign its logistics process to align it with business While Ducati’s target customer was an athletic male with
strategy. As inbound and outbound logistics were con- a median age of less than 30 years, Harley-Davidson’s
sidered non-core activities, they were outsourced to customer median age was 45 years (see Table 3). In
a specialized firm. Ducati still carried out its in-house 2001, the average household income of Ducati cus-
logistics, which supplied the production line with parts tomers was below that of Harley-Davidson customers
and components, although the warehousing of spare (which was US$78,300). Customers of both companies
parts and finished goods was outsourced. Giovanni are brand-loyal: repeat purchasers at Harley-Davidson
Giorgini, Director of Manufacturing, elaborated: represented 41% of sales, while at Ducati they were
ducati sells 80% less in december compared to March. 65%. Also, there were more female riders at Harley-
a service company managing stocks employs people Davidson (9% of total customers) than at Ducati (5%).
throughout the year. It can easily even out seasonal ups and
downs. But we can’t change a shopfloor worker in March to
[become] a warehouse operator in december.
Ducati
Ducati used two distribution channels to market
In 2000, as part of the Ducati Improvement Process, its products: the dealer network and the Internet.
the company launched several projects to optimize Federico Minoli stated:
logistics. They included the reduction of expendi-
We have the proof that we can sell products over the Internet
ture and material flow within the factory as well as
that are expensive and complicated. and the Internet gave us
improving delivery punctuality. These projects were the opportunity to better understand and assess the market
prioritized based on their duration and cost-saving potential of countries [in which] we were hardly represented.
potential, and were to be implemented throughout
the end of 2004. The company first sought to improve
its internal flow of material. For example, while in
Table 3 Demographic profile of Harley-Davidson
the past incoming parts remained in stock for four
customers
days before being assembled, they would henceforth
be used the same day. Second, a logistics control 1997 1998 1999 2000 2001
procedure was introduced. Third, the transporta-
Gender
tion of incoming material by carriers was optimized.
The punctuality of part and component delivery, for Male (%) 93 93 91 91 91
example, increased from 75% to 97%. Furthermore, Female (%) 7 7 9 9 9
inbound quality-control functions were transferred Median age (years) 44.6 44.4 44.6 45.6 45.6
to suppliers. Median income per
Ducati tried to pass on the just-in-time (JIT) deliv- household (Us$1,000s) 74.1 73.6 73.8 77.7 78.3
ery process not only to its suppliers but also to its sub- Harley-davidson purchasers, 2001:
suppliers. The underlying premise of JIT is that supply 41% had owned a Harley-davidson motorcycle previously;
functions provide what is needed, when it is needed 31% had come from competitive motorcycles;
and where it is needed. The aim is to reduce or even 28% were new to motorcycling or had not owned a motorcycle for at
eliminate lead time, down time, space used, as well as least five years.
repairs and faults. Source: ‘demographics’ on Harley-davidson Investor Relation website.
399

Part 4 Case studies
Since its first successful sale on 1 January 2000 of Harley-Davidson

the MH900e motorcycle, the company sold two addi- Harley-Davidson had a key strength in marketing and
tional limited-edition motorcycles exclusively online. selling its products by emotionally involving its cus-
Christopher Spira pointed out: tomers. Some of the appeal that a motorcycle could
the MH900e is a pure collector’s item. It has an emo- exert on customers was explained by one HOG mem-
tional value. the price [of €15,000 per unit] was extremely ber, Walter Durandetto:
aggressive because of the experiment and the nature of
If you come along riding a Harley, people seem to notice
the [Internet] initiative. We were offering a sort of avant-
you more. It isn’t the fastest motorcycle but sounds the
garde way of purchasing a very special item. We had
best. It’s still a myth, a legend. everybody I grew up with
no idea what the reaction was going to be and wanted
wanted to have one. now, I have two of them and many of
to make sure that the price wouldn’t be the hindrance.
my friends have one. We take trips together. It’s more than a
actually, the MH900e online sale was not very profitable,
bike. It’s the people, the camaraderie.
the main return being in terms of marketing and brand
building. We could have probably sold the MH900e for In 2001, the company’s motorcycles revenues reached
more, but that’s one of the issues you can never really
US$2.6 billion, accounting for over 78% of total sales
answer.
(see Table 2). Parts and accessories revenues also
Ducati’s second exclusive online sale took place on 12 increased by 13% to over US$500 million, i.e. 15%
September 2000, with the new, limited-edition 996R of total sales. General merchandise grew by 8% to
motorcycle, which went for a unit price of €26,000. US$164 million, i.e. 5% of total sales. In 2001, the
The entire annual production (350 units) was sold out company had a market share of 44% in the USA and
in just a day. A year later, on 21 June 2001, the third Canada, followed by Honda (21%). In Europe, Harley-
online sale met with almost as much success. Within Davidson had a 6.7% market share. Through its
three days, the annual production (380 units) of the Custom Vehicles Operation (CVO), Harley-Davidson
limited-edition S4 Fogarty, priced at €18,000, was sold also sold limited-edition motorcycles.
out. ‘With the Fogarty S4, we were taking the Monster Harley-Davidson Financial Services was the largest
S4 [model] as a base, adding a few more performance speciality motorcycle-insurance company, insuring
parts, giving it a special sort of colour scheme and pro- 300,000 motorcycle owners worldwide. The company
moting it’, said Christopher Spira. Apart from the S4 also had a motorcycle-leasing business operating in
Fogarty, all other motorcycles of the 2001 model year over 32 US states as well as in Canada, Costa Rica,
were sold through the Ducati dealer network. France, Germany, New Zealand and the UK.
For every motorcycle sold offline, the dealer The Harley-Davidson website showed every
receives a 12–15% commission. However, for every motorcycle model, described its technical details
motorcycle sold online that the dealer delivers to the and enabled the website visitor to compare various
customer, the dealer gets 5–10% commission. Carlo di Harley-Davidson motorcycles. It offered financing
Biagio commented on this mix: and insurance options and emphasized the emo-
tional content of Harley-Davidson products. It also
the dealers agree that we have to use the Internet to reach
out to the ducatisti. It’s right for special-edition [motor] illustrated the ‘Harley lifestyle’ with facts and figures
bikes to sell them through the Internet. I firmly believe that from engine history to motorcycle rider tips. HOG
for normal bikes, the normal distribution channel [i.e., the members received a 15% discount when signing up
dealer network] adds more value because in the end you for motorcycle rallies on the Harley-Davidson web-
need the dirty hands of a mechanic to prepare the bike for
site. Furthermore, Harley-Davidson used the Internet
a customer.
to communicate with its dealers about technical tips,
In September 2002, Ducati announced the online sale service bulletins and sales information. Dealers could
of a bicycle developed in co-operation with Bianchi, also place orders, pass on warranties, and receive
the 125-year-old Italian manufacturer of high- information on a motorcycle’s service history.
performance racing bicycles. The limited-edition In October 2002, Harley-Davidson increased the
series included 200 units, which were made to meas- convenience of browsing the 4500 accessories cata-
ure for each customer, priced at €5,500 each, and logued on its consumer website, Harley-Davidson
sold exclusively on the Ducati.com website from 5 .com. The accessories section of the site was organ-
November to 5 December 2002. ized by model and year, so that users could view a
400

catalogue of accessories designed for every Harley- able at any dealer outlet worldwide within 24–48
Davidson model dating from 1984. ‘Customers can hours.
view a complete selection online, from year-round Through Ducati.com, the company leveraged the
riding gear and accessories to limited-edition 100th Internet to raise levels of customer service and to
anniversary merchandise’, said Jeanne Winiarski, develop an online community of Ducati aficionados.
e-Commerce Operations Manager at Harley-Davidson To increase traffic on its website, content posted on
Motor Company. For example, a customer could the website was constantly enriched. For example,
enter the name of a specific vehicle, year and model in 2001, in co-operation with the Italian motorcycle
and subsequently access a catalogue of accessories magazine Motociclissmo, Ducati tried to strengthen its
designed for that model, such as trousers, boots, community through a series of five two-day courses
gloves, eyewear, etc. aimed at teaching women the basics of motorcycle
For Harley-Davidson customers, the online cata- riding. The registration fee for this course was €100,
logue was the source of the most current information which covered riding lessons, accommodation and
on new and updated accessories. While purchas- meals. After the announcement was made in the mag-
ing accessories online became possible in 2001, the azine, 600 women applied for the 150 available slots.
company was still keen to send customers into its Harley-Davidson’s approach to creating an online
dealerships, stating on its website: community differed slightly. It opted against a chat
For Harley-davidson stuff, go to a Harley-davidson dealer.
room for HOGs, deciding that it did not fit with the
Besides, it might do you some good to get away from your company image. The company’s website stated: ‘Chat
computer and see the real world, maybe even do a little rooms are for people who drive cars. We prefer to chat
shopping.16 in the middle of a national park with a few thousand
Alternatively, customers could combine both, select- of our friends.’
ing limited-edition products online and adding them
to a ‘wish list’ that could either be printed or emailed
to the Harley-Davidson dealer. Riding gear, accesso-
Future outlook
ries and collectables could also be purchased online Ducati
from the convenience of the home or office.
ducati’s priority for the future is clear. We will stay focused
on building our brand around the globe, revamping opera-
tions in the Us, and above all, innovating our products to
After-sales service drive our growth.
Ducati pursued its strategy of getting closer to end (Carlo di Biagio)
customers online through Ducati.com and offline
Since the 1996 launch of its turnaround programme,
though its dealer outlets. The company’s high-mar-
Ducati has successfully set up a value-added network
gin after-sales sector yielded a higher percentage of
with its suppliers, customers and sponsors. Through
total sales every year. In 2001, Ducati’s online and
this value network, the company aims at improv-
offline sales of spare parts, accessories and apparel
ing efficiency while enhancing product and service
amounted to €62 million, i.e. 15% of total revenues,
quality.
compared with 14.7% of revenues in 2000 and 12.6%
For Ducati, its ‘new’ core competencies were
in 1999. In some geographical areas, Ducati provided
R&D and design as well as assembly, marketing and
technical assistance through ‘flying doctors’, based on
sales. Its online activities enabled it to strengthen its
customer needs and location.
relationship with customers, dealers and suppliers.
At its dealer outlets, Ducati had a 93% availability
However, in spite of its incremental improvements
level for its spare parts. This was made possible by
through DIP, Ducati still suffered from an uneven
the platform strategy. Dealers could order parts using
quality of supply, out-of-stock problems and the need
Softway, the online catalogue listing over 15,000
for bigger stocks. To alleviate these problems, Ducati
items. Outlets were connected electronically, and
each dealer could place orders and track them online.
Partnerships with carrier service companies such as
DHL and SAIMA meant that products could be avail- 16 www.harley-davidson.com
401

Part 4 Case studies
planned to replace its unstable production planning Harley-Davidson

system. Would this help the company to schedule At Harley-Davidson, would the company succeed
production better according to the variations in sea- in its ambitions of sustaining growth for the next 100
sonal demand? Could Ducati quickly implement its years? Would it retain its leadership in motorcycle
multiple projects with its partners? Was the decision branding? Would it be able to effectively manage its
to outsource the manufacturing process, which used human resources, specifically since Rich Teerlink,
to be Ducati’s core activity, a wise one? How would Harley-Davidson’s former CEO and current board
employees perceive the changes in Ducati’s corporate member, said:
culture and processes? Would the human dimension
We still have people who just want to bring their bodies,
in managing the new business processes become a and not their whole selves, mind included, to work.17
stumbling block towards Ducati’s future success?
Could the company fully exploit B2B e-commerce This case was written by Stefanie Leenen, doctoral
opportunities, or would this remain a longer-term student at the University of St Gallen, Switzerland,
goal? Christopher Spira commented: and Tawfik Jelassi, Affiliate Professor of Technology
Management at INSEAD, Fontainebleau. It is intend-
We would certainly like to reach a stage where custom-
ed to be used as the basis for class discussion rather
ers give us an order over the Internet telling us what
they would like us to have in their motorcycle. We are than to illustrate effective or ineffective handling of
not there yet, and it is probably a long way from here to an administrative situation.
achieve that.
When – if ever – would Ducati be able to use a mass-

customization business model? 17 Harvard Business Review, 2000, July–August, p. 52.
402

CASE STUDY 4
American Well
The doctor will e-see you now
On a crisp morning in November 2009, Ido Schoenberg and telephony to connect physicians and patients,
was walking briskly through Boston’s Logan Airport within minutes in real time. Since its founding, the
when he spotted his brother, Roy Schoenberg, stand- company was successful in developing the necessary
ing in line to board a flight to Washington, D.C. technology platform, and its efforts to market the
The two brothers, cofounders of American Well, vision to major health insurance companies (also
the Online Care company, were taking a flight to called health plan providers) in the U.S. had started to
Washington to deliver a presentation at the World yield results. In fact, Blue Cross Blue Shield of Hawaii
Health Care Innovation and Technology Conference was the first to roll out the service earlier in the sum-
(WHIT). With the debate over health-care reform rag- mer on a statewide basis, and so far the implementa-
ing in Washington and with Bill Clinton as the keynote tion of the platform had gone well.
speaker, this year’s conference was sure to be a big American Well management faced several press-
event. As the flight lifted off, the view from the plane’s ing questions regarding where the company should
window revealed the historic Boston cityscape, where go next. Although focusing on a nationwide rollout
many significant events leading to the American and adding more health insurance companies to the
Revolution had taken place. But as they settled in for service would be a monumental task for any start-up
the short 90-minute flight, Roy and Ido had a different company, Ido and Roy were already considering new
revolution on their mind. applications for their platform. Being well aware
Just three years ago, Ido and Roy founded American of the first-mover advantage that American Well
Well in an attempt to forever change health-care enjoyed, they were thinking about the next service
delivery and improve the way patients interact with concept, called “Team Edition.” While the service
physicians. Traditionally, patients had two primary offered in Hawaii facilitated connectivity between
choices when seeking medical care – to show up at an patients and physicians, the next generation of serv-
emergency room or a similar acute-care facility, or to ice, if developed, would add connectivity between pri-
submit themselves to the schedule of their physician, mary care physicians (PCPs) and specialists. Patients
which could result in weeks of waiting for an office would no longer have to wait for weeks to see the
visit. American Well’s vision was to use the Internet specialist and then more time before coming back to
professor elie ofek and dr. Ron Laufer, adjunct professor, Indiana University Kelley school of Business, prepared this case. HBs cases
are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or
illustrations of effective or ineffective management.
Copyright © 2010, 2011 president and Fellows of Harvard College. to order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business
school publishing, Boston, Ma 02163, or go to www.hbsp.harvard.edu/educators. this publication may not be digitized, photocopied, or otherwise reproduced, posted, or
transmitted, without the permission of Harvard Business school.
403

Part 4 Case studies
their PCP for follow-up. Instead, Team Edition would Exhibit 1 U.S. health expenditures by source of funds,
connect the PCP and specialist instantly during the 2008 ($ billions)
patient’s initial office or online visit.
Ido and Roy were also contemplating new cus- 2008
tomer segments for American Well’s platform, includ-
Private
ing hospitals, retail clinics, and pharmacies. While the
Consumer out-of-pocket $277.8
platform held the potential to boost efficiencies and
Consumer private health insurance $783.2
revenues for each of these would-be customer chan- other private (e.g., philanthropic sources) $171.1
nels – and for American Well – pursuing these markets
would divert resources from the company’s existing Public
efforts. Having been approached by a number of Federal
non-U.S. health insurers, expanding into interna- Medicare $469.2
Medicaid $201.3
tional markets was also a possibility worth exploring. other federal $146.4
Although Roy and Ido were confident that American state and local
Well’s platform had revolutionary potential even Medicaid $143.0
beyond the health-care industry, they wondered: if other state and local (inc. sCHIp) $146.8
they invested resources in new markets and product Total health expenditures $2,338.7
launches too early, would they undermine American
Well’s opportunity to become the definitive leader in Source: adapted from “national Health expenditure
Online Care? data—Historical—nHe Web tables (table 3),” Centers for
Medicare and Medicaid studies, http://www.cms.hhs.gov/
nationalHealthexpenddata/02_nationalHealthaccountsHistorical
Health-care delivery in the U.S. .asp#topofpage, accessed december 2009.
Note: numbers may not add to totals due to rounding.
In 2009, U.S. health-care expenditures were esti-
mated to top $2.5 trillion and were projected to
reach $4.3 trillion, or $13,100 per resident, by 2018.1 financed health-care ventures, and academic and
This outlay represented 17.6% of gross domestic other institutional researchers.
product (GDP) – a greater percentage than in any Providers included entities involved in delivering
other country – and reflected the fragmentation care, such as hospitals, nursing homes, and health
and complexity of a system that was the subject clinics, as well as physicians and other health profes-
of intense reform debate in public policy circles in sionals. Of the approximately 5,500 hospitals provid-
2009. Chronic diseases (e.g., cancer, diabetes, and ing inpatient and outpatient services, close to 90%
heart disease) were leading causes of disability and focused on acute care, while the remainder special-
caused 7 of every 10 deaths each year in the U.S.2 The ized in rehabilitation, psychiatric care, and other spe-
prevalence of chronic disease made it a focal point cialties.4 Institutional providers also included nursing
for health-care providers, who were also bracing for homes, assisted-living facilities, home-based care pro-
the significant demographic shift expected to occur viders, and others.
over the next two decades, by which time Americans
over age 65 would comprise 20% of the population.3
1 “Trends in Healthcare Cost and Spending, March 2009,”
(See Exhibits 1 and 2 for a breakdown of U.S. health Kaiser Family Foundation, http://www.kff.org/
spending in 2008.) insurance/upload/7692_02.pdf, accessed December 2009.
2 “Chronic Diseases and Health Promotion,” Centers for Dis-
ease Control and Prevention, http://www.cdc.gov/chron-
Players icdisease/overview/index.htm, accessed December 2009.
The key players in the U.S. health-care system were 3 “Wireless Health: State of the Industry 2009 Year
patients, providers, public and private payors, and End Report, December 16, 2009,” Mobile Health
News, p. 4, http://mobihealthnews.com/wp-content/
suppliers (of products such as therapeutic drugs and
Reports/2009StateoftheIndustry.pdf, accessed January 2009.
medical devices). Other supplier subsectors included 4 Jeffrey W. Englander, “Healthcare: Facilities,” October 8,
health-care information technology (IT) providers, 2009, p. 10, Standard & Poor’s Industry Surveys via
private equity and venture capital (VC) firms that NetAdvantage, accessed December 2009.
404

Case study 4 American Well: the doctor will e-see you now
Exhibit 2 U.S. health expenditures by type, emergency rooms often served as the main source of
2008 ($ billions) care. There were regional shortages of some special-
ists (e.g., mental health, obstetrics, and gynecolo-
2008 gy); as such, the patient experience of receiving care
varied between and within states. Insufficient access
Hospital care $718.4
to care was especially problematic in rural areas,
physician, clinical, and other professional $561.9
where provider shortages, low population density,
services
and disproportionate reliance on self-employment
dental services, other personal health-care $169.3
and low-skill jobs – which had low rates of employ-
Home health-care $64.7 er-sponsored health insurance – created barriers
nursing home care $138.4 to care.10
prescription drugs $234.1 The U.S. system for financing patient care was
durable medical equipment, nondurable $65.5 a complex web of public (federal and state) and
medical products private-sector payors. Coverage requirements, pre-
Gov. admin and public health work, $229.0 mium limits, reimbursement levels (for Medicaid),
private insurance net cost and other constraints imposed on insurers varied
Investment in research, structures, and $157.5 by state. As of 2008, 53% of health spending was
equipment funded by private payors, including health insurance
Total health expenditures $2,338.7 companies, individuals, and philanthropic sources.11
Health insurance companies offered several types of
Source: adapted from “national Health expenditure health plans at different price and coverage levels.
data—Historical—nHe Web tables (table 2),” Centers for Individuals with private coverage either purchased
Medicare and Medicaid studies, http://www.cms.hhs.gov/ plans independently or received coverage through
nationalHealthexpenddata/02_nationalHealthaccountsHistorical
.asp#topofpage, accessed december 2009. their employer. Most firms with 50 or more workers
Note: numbers may not add to totals due to rounding. offered health coverage; smaller companies were less
likely to do so.12 The format of employer-sponsored
Approximately 990,000 physicians worked in the

U.S., 40% of which were PCPs:5 generalist physicians
who served as the first point of contact for their patients’ 5 “State Health Facts – Providers & Service Use,” Kaiser
physical and mental health needs.6 Nonphysician pro- Family Foundation, http://www.statehealthfacts.org/
comparecat.jsp?cat=8, accessed December 2009.
viders included 2.5 million registered nurses, 74,000
6 “Primary Care,” American Academy of Family Physicians
physician assistants, 147,000 nurse practitioners, and website, http://www.aafp.org/online/en/home/policy/
others.7 Some physicians were employed by hospitals, policies/p/primarycare.html, accessed January 2010.
while others ran private practices comprising one or 7 “State Health Facts – Providers & Service Use.”
more physicians. On average, family doctors earned 8 U.S. Bureau of Labor Statistics, “May 2009 National
Occupational Employment and Wage Estimates, United
$168,000 per year (about $81 per hour), registered
States,” http://www.bls.gov/oes/current/oes_nat.
nurses earned $67,000 ($32 per hour), and pharma- htm#29-0000, accessed June 2010.
cists earned $107,000 ($51 per hour).8 9 Englander, “Healthcare: Facilities.”
10 Jon M. Bailey, “The Top 10 Rural Issues for Health Care
Delivering and paying for patient care Reform,” March 2009, no. 2, pp. 1, 3–4, Center for Rural
Affairs, http://files.cfra.org/pdf/Ten-Rural-Issues-for-
The type and quantity of care delivered to patients Health-Care-Reform.pdf, accessed January 2010.
depended on several factors, including health insur- 11 “National Health Expenditures Aggregate,” Centers for
ance coverage (if any) and geographic location.9 Medicare and Medicaid Services, http://www.cms.gov/
Patients with health insurance typically had a PCP NationalHealthExpendData/downloads/tables.pdf,
accessed June 2010.
who served as their chief contact for health con-
12 “Employer Health Benefits – 2009 Summary of Find-
cerns, and who referred them to specialists (e.g., ings,” Kaiser Family Foundation and Health Research
cardiologists, dermatologists, surgeons, etc.) as and Educational Trust, p. 4, http://ehbs.kff.org/
needed. For patients without insurance, hospital pdf/2009/7937.pdf, accessed December 2009.
405

Part 4 Case studies
Exhibit 3 Community hospitals’ payment-to-cost ratios* by payor (%), 1980 to 2007
Source: “Fast Facts—Costs/Insurance—Community Hospital payment-to-Cost Ratios, by source of Revenue, 1980–2007,” Kaiser Family Foundation,
http://facts.kff.org/chart.aspx?ch=179, september 16, 2009, citing american Hospital association and avalere Health analysis of 2007 american
Hospital association annual survey data, for community hospitals, Trendwatch Chartbook 2009, Trends Affecting Hospitals and Health Systems,
table 4.4, p. a-35, accessed december 2009.
*Note:Ratios illustrate the extent to which each payors’ reimbursement to hospitals covered the hospitals’ cost of providing patient care. they
cannot be used to compare payment levels across payors, however, because the service mix and intensity vary. Medicaid includes Medicaid
disproportionate share payments.
insurance varied, but typically involved employees that 14% of Americans did not see a doctor due to cost
paying a portion of premiums (periodic payments to concerns in 2008.14 This was even true of many who
the insurer) and employers covering the rest. In 2009, had insurance, because their plans had high deducti-
the average annual premium for employer-sponsored bles – the required out-of-pocket payment before
insurance was $4,800 for individuals (17% paid by insurance kicked in – or had limits to the services or
employee) and $13,400 for family coverage (27% dollar amount that would be covered.
paid by employee).13
The balance of health spending (47%) came from
public payors, chiefly Medicare (federal program for
Health-care IT background
Americans age 65 and over) and Medicaid (state pro- American Well’s novel service model, which the com-
gram for eligible low-income and disabled residents), pany termed Online Care, came on the heels of a
as well as the Department of Veterans Affairs (for mili- number of developments in the use of telecommuni-
tary personnel) and SCHIP (State Children’s Health cations and computer-based tools to collect, manage,
Insurance Program). In some cases, public payors did and communicate health-care–related information
not cover the full cost of care delivery, leading provid- and transactions. Examples included computerized
ers to rely heavily on revenues from privately insured decision-support and order-entry systems for physi-
patients. (See Exhibit 3 for community hospitals’ cians, electronic health or medical records (EHRs or
payment-to-cost ratios from different payors from EMRs), and tools for searching for health informa-
1980 to 2007.) tion (e.g., WebMD). Patients’ use of health-related
Patients without health insurance – about 17% of
Americans under age 65 – paid for care out of pocket 13 “Employer Health Benefits – 2009 Summary of Findings.”
and, in many cases, went without: one survey found 14 “State Health Facts – Providers & Service Use.”
406

Exhibit 4 Private health insurance net administrative costs* per person covered, 1988 to 2008 ($)
Source: adapted from “Fast Facts—Costs/Insurance—private Health Insurance administrative Costs per person Covered, 1986–2008,” Kaiser Family
Foundation, http://facts.kff.org/chart.aspx?ch=217, January 7, 2010, citing the KFF calculations nHe data from Centers for Medicare and Medicaid
services, office of the actuary, national Health statistics Group; and private health insurance enrollment data from Centers for Medicare and
Medicaid services, office of the actuary, national Health statistics Group, accessed February 2010.
*Note: data show the net cost of private health insurance per private enrollee (including Blue Cross/Blue shield, commercial insurance, HMos,
and self-insured plans), as calculated by the Centers for Medicare and Medicaid services (CMs). net cost of insurance is the difference between
premiums earned and benefits incurred, and includes insurers’ costs of paying bills, advertising, sales commissions, and other administrative costs;
net additions/subtractions from reserves; rate credits and dividends; premium taxes; and profits or losses. private enrollment is estimated by CMs
using the national Health Insurance survey and the Current population survey.
websites increased through the 2000s, and by 2006, online communication was on the rise: one survey
80% of respondents to a survey of Internet users of Internet-using physicians in the U.S. noted that
reported searching online for health-related informa- from 2001 to 2008, physicians who communicated
tion.15 Other electronic exchanges included bill-pay with patients online increased from 23% to 36%.17
services, appointment scheduling, and communica- Some data suggested online communication created
tion of lab results. Many of these innovations aimed efficiencies by reducing the number of patient visits
to reduce the administrative burden facing provid- to physicians and decreasing the volume of phone
ers and payors. (See Exhibit 4 for private insurance calls to physicians’ offices; for example, a 2007 study
administrative cost data.)
Electronic patient-physician interaction 15 “US Internet Users Who Have Searched Online for
Health Information, 1998–2009 (% of respondents),” via
By the mid-2000s, patients and physicians were eMarketer Digital Intelligence, accessed December 2009.
becoming more comfortable communicating elec- 16 “Is There a Doctor in the Chat Room?” October 4, 2006,
tronically through e-mail and secure messaging (also via eMarketer Digital Intelligence, accessed December
referred to as e-visits). In 2006, a survey found 2009.
17 “US Physicians Who Own a PDA/Smartphone, 2001–
that 74% of respondents wanted to communicate
2008 (% of respondents)” and “US Physicians Who
with their doctors using e-mail, but only 4% were Communicate with Their Patients Online, 2001–2008
actually doing so, largely because such a service (% of respondents),” via eMarketer Digital Intelligence,
was not offered.16 Concurrently, physicians’ use of accessed December 2009.
407

Part 4 Case studies
Exhibit 5 Survey responses by U.S. consumers on advantages of e-mailing their PCP or family doctor regarding
an illness or condition, August 2009 (% of respondents)
Source: “Hassle-Free Healthcare, delivered digitally,” november 9, 2009, via eMarketer digital Intelligence, citing “Consumers Would embrace
email Communication with their doctor,” Lightspeed Research press release (Basking Ridge, nJ, september 29, 2009), Chart 2, p. 2,
http://www.lightspeedresearch.com/pdf/LsR_pR_ConsumersWould embraceemailCommunication.pdf, accessed december 2009.
Note: n = 1,000
of Kaiser Permanente, a large health-care system, in 1996 to address privacy and security risks stemming
found that e-mail-using patients were 7% to 10% less from increasing use of electronic channels to transmit
likely to schedule an office visit, and physicians offer- patient information. The act applied to providers,
ing e-mail communication received about 14% fewer insurance companies, group health plans, govern-
phone calls.18 (See Exhibit 5 for consumer attitudes ment payors, and health-care clearinghouses (entities
about e-mailing their PCP in 2009.) that processed other entities’ health-care transac-
Yet, many doctors were reluctant to engage tions).20 HIPAA’s Security Rule set national standards
patients via e-mail, as an April 2008 article noted: for protecting electronic health information, and its
some [physicians] say they worry it will increase their work-
Privacy Rule dictated how patient information could
load, and most physicians don’t get reimbursed for it by
insurance companies. others say they fear hackers could
compromise patient privacy — even though doctors who
18 “Patient E-Mail Cuts Office Visits,” July 10, 2007, via
do e-mail generally do it through password-protected Web
eMarketer Digital Intelligence, accessed December 2009.
sites. there are also concerns that patients will send urgent
19 Alicia Chang, “Is Medical Advice Just an E-mail Away?
messages that don’t get answered promptly. and any prob-
Not for Many; It’s No LOL: Few US Doctors Answer
lem raises the specter of legal liability.19
E-mails from Patients,” The Virginian-Pilot & The
Ledger-Star, April 23, 2008, via Factiva, accessed
HIPAA January 4, 2009.
20 “Understanding HIPAA Privacy,” U.S. Department
The market success of health-care IT innovations
of Health and Human Services Office of Civil Rights,
depended on their compatibility with HIPAA (Health http://www.hhs.gov/ocr/privacy/hipaa/understanding/
Insurance Portability and Accountability Act), enacted coveredentities/index.html, accessed January 2010.
408

be used and disclosed.21 Since 1996, HIPAA had been between patients and providers. In 2006, McKesson
revised in light of technological advancements, but Corporation, a health-care IT and automation supplier
users of new health-care IT remained wary about acquired RelayHealth. By mid-2009, 50 health-care sys-
HIPAA compliance and malpractice risk. tems and hospitals had contracted with RelayHealth.26
Payment Medfusion
Physician adoption of new technology was also con- North Carolina–based Medfusion, founded in 1996,
tingent upon payors’ willingness to reimburse for also facilitated online physician-patient communi-
electronic communication with patients. Physicians cation through its Virtual Office Suite, a secure,
were typically reimbursed on a fee-for-service basis. HIPAA-compliant web-based platform through which
For classification and billing purposes, services were physicians could connect with patients by phone or
“coded” by the American Medical Association (AMA) online.27 This included appointment requests, bill
in conjunction with federal payor agencies. AMA payment, prescription renewal, and other services.
assigned a descriptive phrase and numeric code to each Medfusion also offered virtual office visits, employing
medical service, and issued new codes periodically as an interactive questionnaire similar to that used by
the nature of services evolved. Payors would not reim- RelayHealth.28 In 2009, Medfusion served more than
burse services without a code. As such, the issuance of 28,000 physicians, including over 4,000 practices,
codes was critical to the success of new health-care IT in various specialties across the U.S., and had over
innovations. In 2009, codes had been issued for some 1 million patient accounts.29 “We are committed to
forms of health-care delivery via IT platforms, and the
number of health insurance companies covering such 21 “Security 101 for Covered Entities,” HIPAA Security
care was increasing. However, most insurers remained Series 2, no. 1 (revised March 2007): 1–4, Centers for
reluctant to cover online services due to concerns over Medicare and Medicaid Services, http://www.hhs.gov/
security, privacy, and uncertain patient demand.22 ocr/privacy/hipaa/administrative/securityrule/
security101.pdf, accessed December 2009.
22 Jonnelle Marte, “Doctor Is In – Online,” Wall Street
Journal Online, August 9, 2009, via Factiva, accessed
Recent developments in health-care June 2010.
provision 23 “Future Health 100 – Giovanni Collela,” http://healths-
pottr.com/fh100; and “Contact Us,” RelayHealth web-
Tele-medicine services
site, https://www.relayhealth.com/general/contactUs/
The term “tele-medicine” described a range of pro- default.aspx, accessed January 2010.
grams and services that involved health-related elec- 24 Anna Wilde Mathews, “The Doctor Will Text You Now;
tronic exchanges with the objective of improving Patients Visit With Their Physicians Online as More
patient care. A number of companies offering such Insurers Begin Paying for Digital Diagnoses,” Wall Street
Journal Online, July 9, 2009, via Factiva, accessed
services are described below. December 2009; and “Patient Quick Tour,” RelayHealth
website, https://www.relayhealth.com/ general/
onlineQuickTour/html/PatientQuickTour.html, accessed
RelayHealth January 2010.
Founded in 1999, Georgia-based RelayHealth offered 25 “Provider Quick Tour,” RelayHealth website, https://
online solutions for facilitating patient-physician com- www.relayhealth.com/general/onlineQuickTour/html/
munication.23 Through RelayHealth, patients could ProviderQuickTour.html, accessed January 2010.
26 “RelayHealth; 50 Health Systems and Hospitals Use
schedule appointments, update their health records,
RelayHealth’s Information Exchange Capabilities to
and request lab results, prescription renewals, and Create Connected Communities,” Biotech Week,
referrals. For nonurgent issues, patients could com- October 28, 2009, via Factiva, accessed January 2010.
plete interactive online questionnaires describing their 27 “About Medfusion,” Medfusion website, http://
symptoms;24 this information was then transmitted to medfusion.net/medfusion_about.html; and “Corporate
Overview,” Medfusion website, http://medfusion.net/
the patient’s physician, who determined whether an
docs/MF%20Co%20Overview%200707.pdf, accessed
in-person office visit was necessary.25 Most provid- January 2010.
ers replied within eight business hours. RelayHealth 28 Mathews, “The Doctor Will Text You Now.”
pioneered the use of secure (HIPAA-compliant) e-mail 29 “Corporate Overview,” Medfusion website.
409

Part 4 Case studies
meeting our clients’ demands to optimize communi- whose provider network included nearly 600,000
cation with their patients. . . . [Medfusion offers] a physicians and 5,000 hospitals.36
self-service technology providers want to make avail-
able to their patients so that patients can be more Convenient “Offline” care
involved in their care,” noted Medfusion CEO Steve Nurse practioners (NP)
Malik in 2009.30 The idea for NPs was conceived in the 1960s to
address the problem of PCP shortages in rural areas.
TelaDoc NPs underwent more training than registered nurses
Founded in 2002, TelaDoc offered patients year- and were licensed to perform many of the same tasks
round, 24-hour by 7-day phone access to a network as physicians.37 In 2009, NPs worked in numerous
of physicians in a call center model.31 In a 2007 settings, including hospitals and emergency rooms,
interview, TelaDoc CEO Michael Gorton described private practices, retail clinics, nursing homes, and
the question that had driven the creation of TelaDoc: schools. In addition to clinical care, NPs engaged in
“What percentage of primary care visits could be han- health promotion and education, disease prevention,
dled with just a telephone and an electronic medical and counseling. Each year, NPs engaged in approxi-
record?”32 The company suggested patients use the mately 600 million patient visits.38
service when their PCP was unavailable (e.g., after
normal office hours), when traveling, for short-term 30 “Medfusion Maintains Leadership in Patient Portal
prescription refills, and to obtain physician advice to Performance,” Medfusion press release (Raleigh, NC,
December 18, 2009), http://www.medfusion.net/docs/
supplement that provided by their PCP. To request a Medfusion%20Maintains%20Leadership%20in%20
medical consultation, which cost $38 or less, TelaDoc’s Patient%20Portal%2012-17-09F.pdf, accessed January
more than 1.6 million “members” could access their 2010.
online account or call TelaDoc.33 After reviewing the 31 “What Is TelaDoc?” TelaDoc website, http://www
request and the patient’s EHR, a physician licensed .TelaDoc.com/what-is-TelaDoc/; and “About TelaDoc,”
TelaDoc website, http://www.teladoc.com/
to practice in the patient’s home state phoned the aboutteladoc/overview/, accessed December 2009.
patient, typically within one hour.34 After the consul- 32 Michael Gorton, as quoted in “Interview: Michael
tation, physicians updated the patient’s EHR, which Gorton, TelaDoc,” Scribemedia.org citing Consumer
could be viewed online by the patient and her PCP. Heath World, January 2007, http://health.scribemedia.
org/2007/01/15/michael-gorton-interview/, accessed
January 2010.
Cisco TelePresence 33 “What Is TelaDoc?” TelaDoc website.
34 “How Does It Work?” TelaDoc website, http://www
Founded in 1984, Cisco was a leading global provider .TelaDoc.com/how-does-it-work/, accessed January
of networking technology.35 Cisco’s TelePresence, 2010.
which enabled live video conferencing and collabo- 35 “Fact Sheet,” Cisco website, http://newsroom.cisco.
ration, was adapted to the health services setting to com/dlls/corpinfo/factsheet.html, accessed March
create HealthPresence, which combined TelePresence 2010.
36 Chris Payatagool, “UnitedHealth Commits ‘Tens of
with medical devices to enable real-time interaction Millions’ to Cisco TelePresence Health Initiative,”
between health-care providers and patients. Using Telepresence Options website, http://www.
HealthPresence, patients could interact with physi- telepresenceoptions.com/2009/07/unitedhealth_
cians over video conference while also sending data commits_tens_of_m/, accessed March 2010.
(e.g., blood pressure) collected from medical devices 37 “A Comparison of Changes in the Professional Practice
of Nurse Practitioners, Physician Assistants, and
to the physician, enabling a real-time evaluation. At a Certified Midwives: 1992–2000,” U.S. Department
specific time and location where the HealthPresence of Health and Human Services Health Resources
technology was set up, trained professionals oper- and Services Administration, http://bhpr.hrsa.gov/
ated the medical equipment and helped the patient healthworkforce/reports/scope/scope1-2.htm, accessed
communicate with the remotely located physician. January 2009.
38 “FAQs about Nurse Practitioners,” American Academy of
In 2009, Cisco was creating a nationwide network Nurse Practitioners website, http://www.aanp.org/NR/
based on HealthPresence technology in collaboration rdonlyres/67BE3A60-6E44-42DF-9008-DF7C1F0955F7/
with UnitedHealth Group, a large U.S. health insurer 0/2010FAQs WhatIsAnNP.pdf, accessed March 2010.
410

MinuteClinic cies and Take Care Clinics began offering walk-in vac-
MinuteClinic was a provider of walk-in health clinics cinations for the H1N1 flu virus in December 2009.47
based primarily in large pharmacy or grocery chains
(e.g., CVS, QFC, Cub Foods), as well as malls and cor- The entrepreneurial roots of
porate and government offices. In 2009, MinuteClinic American Well
had locations in 25 states offering medical care for
Before becoming an entrepreneur, Ido Schoenberg
nonemergency needs, as well as preventive care
was trained as a physician at the University of Tel
and vaccinations.39 Clinics were open seven days a
Aviv Sackler School of Medicine in Israel. In 1996,
week, including evening hours, and patients were not
Ido and his wife, Phyllis Gotlib, cofounded iMDsoft,
required to make an appointment. In a visit that typi-
a health-care enterprise software company. iMDsoft
cally lasted no more than 15 minutes and cost $62,
was among the first to recognize the opportunity for
a physician assistant or NP could examine a patient
IT to have an impact on the nature and quality of
for issues stemming from a minor illness or injury.40
critical care. Initially focusing on adult, pediatric, and
Patients often paid out of pocket, though many health
specialty (e.g., burn, cardiac) intensive care units,
insurance companies covered MinuteClinic services.
iMDsoft developed an expert system that monitored
critically ill patients. Previously, doctors and nurs-
RediClinic
es had to continuously observe several monitoring
Like MinuteClinic, RediClinic was a walk-in, retail-based
devices and integrate the information on the fly in an
clinic offering treatment for routine health issues, as
attempt to translate independent clinical measure-
well as vaccinations and certain health tests and screen-
ments into a comprehensive clinical assessment. The
ings. RediClinics were located in the stores of Texas-
software of iMDsoft integrated the separate meas-
based grocery and pharmacy chain HEB and staffed by
urements, enhanced the quality of decision making,
physician assistants and NPs.41 “Research over the past
reduced errors, and improved the financial perform-
30 years has consistently shown that the primary care
ance in one of the most high-cost units of any hospi-
provided by nurse practitioners is comparable in quality
tal. The company then expanded its product line to
to that provided by physicians,” said Webster Golinkin,
cover the full peri-operative environment and general
CEO of RediClinic.42 Several insurers covered RediClinic
wards. In 2000, Ido left the company but continued
visits—treatment of conditions such as ear infection and
common cold cost $79—though many patients paid out
of pocket.43 Golinkin noted that, “research shows that 39 “Locations,” MinuteClinic website, http://www.
as many as 50% of the people who seek care at over- minuteclinic.com/en/USA/Clinics.aspx; and “Services
burdened emergency rooms could be treated much less and Costs,” MinuteClinic website, http://www.
minuteclinic.com/services/, accessed January 2010.
expensively in convenient care clinics.”44
40 “Services and Costs,” MinuteClinic website.
41 “Frequently Asked Questions,” RediClinic website, http://
Take care clinic www.rediclinic.com/faq.asp, accessed January 2010.
Part of Take Care Health Systems, a wholly owned 42 Web Golinkin, “Health Care When You Want It,” Wall
subsidiary of convenience and pharmacy chain Street Journal, August 2, 2007, via Factiva, accessed
January 2010.
Walgreens, Take Care Clinics were located inside
43 “Frequently Asked Questions,” RediClinic website.
certain Walgreens locations throughout the U.S. 44 Golinkin, “Health Care When You Want It.”
Take Care Health Systems also managed workplace- 45 “About Us,” Take Care Clinic website, http://www
based health services through its Take Care Employer .takecarehealth.com/about/, accessed January 2010.
Solutions division. In 2009, there were more than 46 “About Us: Our Commitment,” Take Care Clinic website,
http://www.takecarehealth.com/about/our-commitment.
340 Walgreens-based Take Care Clinics and some 370
aspx?tab=tc_our_commitment, accessed January 2010.
workplace-based health centers.45 Offering walk-in 47 “Walgreens Offering H1N1 Vaccine in 27 States,
appointments starting at $65 for treatment of com- Assisting Federal and State Governments in Nation-
mon ailments, Take Care Clinic claimed to “deliver wide Inoculation Effort as Many States Lift Priority
healthcare that fits your life.”46 Illustrating the grow- Group Restrictions,” Take Care Health Systems press
release (Deerfield, IL, December 16, 2009), http://
ing role of the “retail clinic” industry in delivering
www.takecarehealth.com/about/press-release.
direct-to-consumer health care, Walgreens pharma- aspx?id=12.16.09_1, accessed January 2010.
411

Part 4 Case studies
to serve as chairman of its scientific advisory board. I settled in an apartment in Herzliya, Israel, overlooking the
Gotlib stayed on to lead the company in becoming a Mediterranean, and got into the vacation routine of relaxing
on the beach in the morning, enjoying long lunches, and
global leader in hospitalwide acute care information
hanging out with friends. the problem with taking time off
systems. in your thirties is that all your friends are working during the
In 2001, Ido became CEO of CareKey, a provider day and available only at night, so I had lots of time on my
of electronic health management systems that his hands. I started to reflect on all that we had learned through
brother Roy founded the previous year using capital our CareKey experience about health-care IT. Of all the
ideas Ido and I discussed, the issue of affordable, conven-
raised from angel investors. A graduate of Hebrew
ient access to quality care, particularly in terms of place and
University Medical School, Roy had worked as an time of delivery, was an area where technology could really
internal medicine physician in Israel before pursu- make a difference. I thought about my own experience as
ing a research fellowship at the Center for Clinical a clinician. Health care for patients is still perceived as see-
Computing and a master’s of public health degree ing a doctor. That is how it has been for centuries— physi-
cally bringing the pain to a health-care professional. I asked
from Harvard University. As a fellow, Roy published
myself whether someone is developing the technology to
a scientific paper in the British Medical Journal that imitate that interaction with a doctor online. But everyone
described a hypothetical online system of personal still thought the Internet was about redistribution of medi-
health records (PHRs). cal records. People did not recognize that you can redis-
The brothers envisioned CareKey as a model for tribute medical services. And there was the opportunity. At
that point, we decided the vacation was over. It was time to
enabling more direct interaction between patients
found a new company.
and health insurance companies. CareKey was first
to provide patients with Internet-based PHRs coupled
with a comprehensive personalized set of tools to self-
Online care: from concept to reality
manage certain health and wellness issues, as well as
communicate effectively with nurses and other staff The two brothers formed American Well in 2006.
members at their health plan. CareKey’s platform As chairman and corporate CEO, Ido oversaw the
greatly assisted health insurance companies in tran- company’s business strategy and affairs, while Roy,
sitioning from the episode-of-care model – simply who served as president and CEO of American Well
paying for each covered service an insured member Systems, was in charge of product development and
received – toward an advanced care–management operations. The cofounders believed technology could
model, which sought to minimize members’ long-term be leveraged to extend traditional health care into
health costs through prevention and early detection. people’s homes and workplaces. They envisioned
In the typical approach to care management, in which a brokerage system that used web-based technolo-
nurses phoned patients when they were due for a test gies and telephony to bring patients and physicians
or checkup, patient compliance was poor. CareKey together in real time. “In most health care today,”
helped narrow this compliance gap by giving patients explained Ido, “supply and demand is geographically
access to a personalized, on-demand platform for and temporally constrained – by the physical location
self-management and transactional communication and time availability of physicians and patients. We
with health plans’ staff and resources. After growing devised a service that eliminates these restrictions and
CareKey over the next five years, Roy and Ido sold links excess supply, wherever it is located and when-
the private company to the TriZetto Group, one of ever available, with excess demand.”
CareKey’s early corporate partners. By the end of Physicians who were enrolled in the system would
2009, more than 45 million people were using the be able to log on essentially any time they wanted to
CareKey system (renamed CareAdvance). conduct 10-minute sessions with patients. A patient
After selling CareKey, Ido and Roy frequently met would log on to the system, provide her credit card
to discuss the remaining gaps in health care and ways information, indicate what type of doctor she would
IT could help bridge those gaps. Both agreed that like to consult with, and instantly get a choice of the
insufficient access to affordable, quality health care current doctors online that matched her request. The
constituted a major opportunity. chosen doctor would receive access to the patient’s
In the summer of 2006, Roy returned to Israel for a medical records and then interact with the patient
few months. He recalled: via the phone or the Internet (including video or live
412

chat options). Once the interaction ended, the system working as usual, but on the weekend will be able to make
would manage the billing process seamlessly. Ido additional money. Young docs will be able to add a second
shift in the evening time, in case they have to leave their
explained the novelty of the American Well solution:
office early to pick up their kids from day care or school.
“All health-care today is point-to-point: doctors and Even retired docs will be able to come back to practice –
patients need to be at a specific place at a specific people that quit midlife and didn’t want to live the life of a
time in order for the service to take place. We’ve built traditional clinician.
a platform that is many-to-many: there is no appoint-
ment, no specific time and place, but rather care can
Choosing a customer
be delivered from any place at any time. The American
Given the value to patients and doctors, a direct-to-
Well marketplace coordinates this.”
consumer (DTC) model, where American Well would
The novel system was designed to provide different
directly sign up patients and doctors to a nationwide
value propositions to the different parties involved. For
system run by the company, was definitely conceiv-
patients, the focus was on immediacy, convenience,
able. As Yael Glassman, vice president of marketing,
quality, affordability, and choice. The company rec-
noted, “if we were running the service on our own,
ognized that there would likely be skepticism about
as a DTC company, we would have total control over
whether physicians could effectively assess patients’
the user experience. Not to mention that we would be
health needs without a hands-on physical examination.
able to establish ourselves as the one and only place to
However, there were other dimensions that American
go to for Online Care.” Yet, there were also significant
Well would be adding: there would not be a need
benefits to building American Well as a B2B company
to schedule the appointment in advance, the patient
that marketed to health insurance companies. Selling
would be able to take the appointment at her location of
to insurers would be similar to a franchise model,
choice (as long as it had a phone or Internet connection,
“though the end product is different between states
preferably with a webcam), and it would offer a new
and health plans. We can adapt the platform and the
form of privacy, thus eliminating potential elements
interfaces for patients and physicians for each health
of shame. (For example, it was believed that many
insurance company,” Glassman explained.
of those with symptoms of depression did not seek
One argument for pursuing a DTC model was that
medical attention because of the social stigma associ-
adoption by insurance companies could be hampered
ated with the disease.)48 In addition, patients using
by the volatile U.S. health-care environment, com-
American Well’s system would enjoy a much greater
bined with the economic recession. President Obama
choice of providers and could seek a second opinion
had committed to reforming the health-care system,
immediately after receiving a diagnosis. The patient
and it seemed he might actually be the first president
experience was also more personalized: patients could
to do so in decades. However, 11 months after Obama
access and manage their online medical information,
took office, it was still unclear what such reform
personal self-management tools, and records of care
would look like. As a result, a wait–and-see attitude
before and after connecting with a physician. (See
started to dominate the health-care services industry.
Exhibit 6 for a description of the patient experience.)
Many health insurance companies had implemented
For doctors, the value proposition was different.
spending freezes, and it remained unclear when such
Having been clinicians themselves, Roy and Ido were
restrictions would be lifted.
well aware of what a service provider needed to put
Danielle Russella, executive vice president of sales,
in place before she could practice medicine. That
argued that opting not to be a DTC company could be
included accreditation, leasing and equipping an
a competitive advantage: “I’m not saying we can’t do
office, hiring and training staff, setting up a transac-
DTC, but there are other companies which are trying
tion system, purchasing necessary insurance, and so
to do that with call centers of doctors. In fact, that
on. The American Well system would alleviate the
[could be] a differentiator for us.”
need for much of that infrastructure and provide doc-
tors with a new level of flexibility, as Roy explained:
Docs that have had a clinic for many years and are fed up 48 M. Goodman et al., “Industry Overview: A Bright Out-
with the routine will be able to work in their clinic less days look for Depression,” Morgan Stanley Equity Research,
and make up the revenue from home. Others will keep June 7, 2002.
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Part 4 Case studies
Exhibit 6 American Well consumer experience: description and screen shot
American Well makes it easy for consumers to talk to physicians, immediately, from home. Consumers don’t need
to call ahead or wait for a doctor. By logging on or using their phone, consumers can connect to a physician of
their choice immediately. Of the many doctors available on American Well, the service helps consumers choose
the physician who is right for them. Consumers can review doctors’ credentials, satisfaction ratings, and even
watch personal video introductions. Once the consumer selects a physician he or she is comfortable with, a live
conversation begins.
Some consumers may be unsure about what kind of physician to talk to or may have difficulty describing the exact
nature of their symptoms or conditions. Consumers may present with a symptom, (e.g., headache) and need help
identifying the right type of provider to see. American Well guides the patient to the most appropriate provider
and helps articulate discussion topics for the conversation. By helping to structure the consultation process, the
service ensures that consumers maximize their time with the physician.
Once connected, the consumer can interact with the physician using online chat, live web-conferencing,
or phone. The consumer can also share relevant medical information and past conversations. American Well
maintains a full record of the discussion, allowing consumers to forward comprehensive care reports to primary
care physicians, ensuring continuity of care.
Source: Company documents.
Ultimately, American Well decided health insur- panies had internal resources they could commit to
ance companies should constitute its primary target the marketing efforts needed to encourage physicians
customer. Although the industry’s spending freeze and patients to use Online Care. In addition, because
was worrying, Ido believed insurers would view health insurance companies were financially strong,
American Well’s service as part of a solution to their they represented a more lucrative customer chan-
problems. Moreover, these customers could serve nel than individual patients. (See Exhibits 7 and 8
American Well as “aggregators,” providing easier for major health insurers’ 2008 revenues and net
access to large pools of patients and doctors. They incomes, respectively.) The value proposition for
could also facilitate access to patients’ medical records, health insurance companies had a clear economic
and, importantly, they could sponsor online medi- component, as online visits would cost less than in-
cal consultations directly or indirectly (via employer person office visits. Under available health plans,
groups that would promote its use). Insurance com- health insurance companies paid PCPs depending on
414

Exhibit 7 Top publicly owned managed care organizations, 2008 revenues ($ millions)
Source: Adapted from Phillip M. Seligman, “Healthcare—Managed Care—Industry Profile,” April 16, 2009, Standard & Poor’s Industry Surveys via
NetAdvantage, accessed February 2010.
Exhibit 8 Top publicly owned managed care organizations, 2008 net income ($ millions)
Source: Adapted from Phillip M. Seligman, “Healthcare—Managed Care—Industry Profile,” April 16, 2009, Standard & Poor’s Industry Surveys via
NetAdvantage, accessed February 2010.
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Part 4 Case studies
Exhibit 9 Breakdown of costs for commercial health plan and estimated savings using online care
The actuarial model estimated that Online Care would enable a $3.36 net difference in first-dollar costs
per-member-per-month, representing a 9.3% difference on a starting cost estimate of $36.06 in traditional
service on a per-member–per-month basis.
Service Utilization per Allowed Cost Allowed per

1,000 Members per Service Member per Month
Estimated first-dollar values
Emergency department facility 161.05 $933.58 $12.53
Emergency department physician 142.59 142.25 1.69
Acute physician office visits 2,762.99 82.33 18.96
O/P psychiatric visits 286.81 100.92 2.41
Urgent care visits 79.81 71.26 0.47
3,433.25 $126.05 $36.06
Source: Adapted from Art Wilmes, FSA, MAAA, “What if Healthcare Worked Like iTunes?” The Actuarial Digest, Summer 2009, p. 10.
the complexity of the visit, geographic location, and Health insurance companies have a valuable asset, their
other factors; but on average, PCPs were paid about network of doctors, but few ways to monetize that asset.
The American Well platform will allow offering online con-
$100 for new patients and $75 for existing patients.
sultations to anybody willing to pay out of pocket. Health
Most specialists were typically paid at levels well insurance companies will be able to determine how much
exceeding those earned by PCPs (from hundreds to they want to charge for that service, with $45 to $50 seem-
thousands of dollars). The typical copay (portion of ing quite reasonable, and generate revenue from a market
cost paid by the patient) for a primary care office visit they never pursued before.
was approximately $15 to $20, and for a specialist Ido added, “Health insurers offering Online Care
visit was approximately $25 to $30, though these could also see significant revenue and strategic gains
varied depending on the patient’s health plan.49 For by opening their physician network to nonmembers.
emergency room visits, payors reimbursed hospitals Offering such a service to nonmembers can facilitate
and physicians also according to the complexity of a dialogue with potential new clients often covered
care delivered. This could vary extensively – from a by the competition.” Health insurance companies
brief visit to multiple tests (e.g., X-rays and CT scans) would also see benefits from the improved provider-
to complex surgery – and cost hundreds to thousands driven care management enabled by Online Care. Ido
of dollars. A 2009 analysis from The Actuarial Digest explained:
estimated that Online Care could save insurers $3.36
Rather than a nurse working for the health insurance
per patient per month (see Exhibit 9).50 company calling the patient at home out of the blue at an
Roy elaborated on that point: inconvenient time to explain how taking future steps could
improve their health, our system can alert physicians or
One of our main value propositions to health insurance
other providers during an active online session that the
companies will be significant savings. The amount they re-
patient’s gaps in care warrant discussing certain interven-
imburse the physician per 10-minute online consultation,
tions. Patient compliance is likely to be much higher when
expected to be roughly $25, will be less than the reimburse-
a physician recommends a certain test or service to a
ment of an office visit and significantly less than that of an
patient—and when the patient is ready to receive guidance
emergency room visit. Being able to resolve health prob-
(“a teachable moment”) in a session she originated. Access
lems online, at the cheapest point of care, will create those
savings. In addition, our platform will allow treating medical
conditions earlier because of the immediacy of receiving
professional medical attention. For patients, this will mean
49 “Kaiser/HRET Survey of Employer-Sponsored Health
better health outcomes, but for the health insurance com-
Benefits, 2009,” Kaiser Family Foundation website,
panies, it will mean less costly complications.
http://ehbs.kff.org/, accessed February 20010.
Another value proposition will be the ability of health in- 50 Art Wilmes, FSA, MAAA, “What if Healthcare Worked
surance companies to “open their doors” to nonmembers. Like iTunes?” The Actuarial Digest, Summer 2009, p. 10.
416

to personalized content and tools before and after the ses- improve retention; second, because faster access to
sion is also helpful. Employer groups are much more likely care would enable discovery of health issues at an
to sponsor this new type of highly targeted care manage-
earlier stage, employers would probably see higher
ment versus the existing model.
employee productivity and incur less cost associ-
Ido believed health insurance companies would ated with catastrophic illness and time off from work;
also see a reputational benefit by offering Online and third, kiosks with webcam-equipped computers
Care. Historically, the public image of health insur- could be added to worksite health clinics, afford-
ance companies had often been unfavorable. This ing employees the convenience of American Well’s
was especially true recently, as health-care reform service and avoiding the need to take time off to visit
advocates argued in editorials and on nightly news a doctor. Early trials had shown high employee utili-
programs that insurance companies were out of zation of Online Care-equipped worksite clinics. Ido
touch with average Americans and primarily driven commented, “Because of the strong value of Online
by profit. By offering a novel, convenient, afford- Care to employers, health plans offering the service
able, and personalized care service, insurers could can be significantly more attractive when competing
build goodwill with their members. Most important- for employer group business, especially in the ‘open
ly, insurers could improve their image by offering enrollment’ period.”
Online Care to nonmembers, including underserved
populations, individuals living in remote locations, Capturing value for American Well
disabled patients, and uninsured Americans whose
As far as the business model was concerned, American
lack of access to health care was frequently blamed
Well would seek a combination of upfront and recur-
on insurance industry greed. Insurers could be seen
ring revenues. Health insurance companies offer-
as proactive in solving other health-care issues, such
ing Online Care would pay a one-time fee for each
as clogged emergency rooms.
“addressable life” (individual members and nonmem-
Lastly, health insurance companies could use
bers) who would have access to the service, an annual
Online Care to address one of the most intractable
maintenance and support fee for each addressable
problems they faced: aligning their financial incen-
life (a percentage of the one-time fee), and an annual
tives with those of physicians. Because physicians
hosting (on computer servers) fee per addressable
were usually paid on a fee-for-service basis, they were
life. While this revenue stream was independent of
often incentivized to increase the number of services
utilization, American Well would also earn $2 to
they delivered; meanwhile, more services resulted
$7 for every Online Care transaction (a session that
in higher costs for insurance companies. However,
lasted longer than 10 minutes would be prorated).
health insurers’ costs could decrease if physicians
In addition, if the health insurance company wanted
encouraged their patients to use Online Care for non-
continued tailored assistance in IT or marketing,
emergency and follow-up appointments. American
American Well would provide these services on a per
Well believed that by arranging to share these new
project basis (as a consultancy).
cost savings with physicians, insurance companies
would encourage greater Online Care utilization by
physicians, resulting in a win-win situation for both Rolling out the plan
parties. Moreover, Online Care could improve reten- With a business plan in hand, Ido and Roy set out to
tion of PCPs and other providers by offering them a finance their new company. However, their previous
more attractive way to practice. experiences led them to shy away from traditional
Employers also stood to gain from the American financing practices. Ido recalled:
Well model. Most medium-size and large compa-
I would urge entrepreneurs not to think sequentially. The
nies provided health benefits to their employees and
“salami financing” of seed, early, mid-stage, and late-stage
negotiated with health insurers for an attractive ben- rounds makes management focus on milestones that may
efit plan at the lowest possible cost to the employer. not be relevant after a while. Every round creates anxiety
The value proposition to employers was threefold: and distraction and is bad for the company’s development.
first, the convenience and choice of American Well’s It is better to over-finance and worry less about dilution. We
mainly raised capital from high-net-worth individuals who
service would likely boost employee satisfaction and
are sophisticated investors, many of whom invested in our
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Part 4 Case studies
previous companies. Financing is not an event; it is a mark of a few dollars per session. It will cover physicians using our
of a relationship. So you need to look for investors that are platform on a per consultation basis, regardless of whether
like minded. High-net-worth investors are often entrepre- their regular malpractice coverage includes Online Care or
neurs who made their money the same way as we are trying not. What was interesting to realize was that the cause of
to. They are like minded. malpractice insurance claims is often something physical
which the doctor did to a patient during the office visit. By
We raised capital twice – the first round took 10 days, and
keeping the interaction online, less is likely to go wrong.
the second round, a week. But that is the result of long-term
relationships and preparing people. When it was time, we Once the platform was near completion, Ido, Roy, and
put a fair term sheet on the table and did not open it for Russella started to present the concept in industry
negotiations.
circles. As Russella recalled:
Having secured financing, the company began the Prior to American Well, I worked for one of CareKey’s com-
daunting task of building the platform. While many petitors. In fact, Ido and Roy were my formidable competi-
of the ideas in the business plan required novel tech- tors and that’s how I got to know them. As a result, we had
nology solutions, those were also an opportunity complementing Rolodexes in an industry that values rela-
for the company to develop proprietary intellectual tionships and track record. We started to meet with execu-
tives from the large health insurance companies. Initially,
property that could serve to block competition in the they had several challenging questions for us. First, they
future. American Well invested $70 million to create had concerns about overutilization—giving people a new
a sophisticated technology platform that enabled phy- “hobby” that will lead to overconsumption of health-care
sicians and patients to transition seamlessly among services. Second, they were concerned about the ability
communication modalities – phone, video conference, to recruit doctors into the system. They would often ask:
“Aren’t our doctors already overworked?” Third, there were
and live online chat – and also allowed asynchronous questions about practicing medicine without being able to
communication (e.g., leaving a voice or e-mail mes- perform a physical examination. But we had answers for
sage). Using this platform, a patient could begin chat- all those concerns. For example, we acknowledged that
ting with a physician online, then, without any time the system is not for every medical condition. In fact, we
lag, reroute the conversation to his phone by simply facilitated a major study by the firm that sets the industry’s
insurance guidelines to determine which medical condi-
pressing a button. In addition, the technology allowed tions are most appropriate for Online Care [see Exhibit 10
patients to view the queue for a specific doctor online, for selected episodes of treatment]. For the rest, there is still
and, if the patient wished to speak to that specific doc- the office or the emergency room.
tor, she could add herself to the virtual queue. When American Well made a point of attending and often
the doctor became available, the patient would be speaking at industry-related conferences. Roy’s and
notified by phone or e-mail. “The platform eliminates Ido’s past track record and the desire of health-care
clinical waste,” explained Ido. He continued: executives to learn about how they could innovate
Not just with respect to wasted cost, but also getting the often resulted in packed sessions whenever they
wrong service. Today, many patients see a doctor when their spoke. At the 2007 WHIT conference, Ido and Roy
issue could be handled by a nurse practitioner, and patients
delivered a talk and hosted a dinner, inviting select
often see nurse practitioners when they could just be get-
ting advice by accessing personalized content or tools. By health-care industry players as guests. Among the
offering a prescreening tool, our system can also improve attendees was an executive from the Hawaii Medical
the match between medical need and care recommended, Service Association (HMSA), a member of the Blue
with tiered pricing and reimbursement depending on the Cross and Blue Shield (BCBS) Association. Ido and
level of care provided.
Roy had established a positive rapport with BCBS
From a marketing standpoint, the company put an during their time at CareKey, and they believed
emphasis on anticipating potential future barriers Hawaii would be an ideal environment for launch-
to adoption and addressing them ahead of time. ing American Well’s service. First, access to care was
For example, physicians’ fear of malpractice litiga- an issue in Hawaii: due to the unique geography
tion was one such anticipated barrier. Matt Jarman, of the state, HMSA often had to fly doctors from
American Well’s vice president of corporate develop- one island to another to meet its members’ needs.
ment, elaborated: Second, the state was small and isolated, the perfect
We worked with a leading insurance company in develop- setting to experiment with the new service. Ido con-
ing unique malpractice coverage for Online Care at the cost vinced the executive to seriously consider American
418

Exhibit 10 Selected episodes of treatment potentially suitable for online care
Acute Maintenance (cont’d) Maintenance (cont’d)

Minor infectious disease Benign hypertension, Ongoing Rx therapy w/o provider
Tonsillitis, adenoiditis or pharyngitis, w/ or w/o co-morbidity intervention (cont’d):
w/o surgery Chronic sinusitis, w/o surgery Parkinson’s Syndrome therapy
Allergic rhinitis Asthma, w/ or w/o co-morbidity Neurology
Acute sinusitis Chronic bronchitis, w/ or w/o Glaucoma therapy
Other ear/nose/throat infection, complication, w/ or w/o co-morbidity Ophthalmology
w/o surgery Emphysema, w/ or w/o chronic Anticoagulant therapy
Minor ear/nose/throat inflammatory bronchitis Antiplatelet therapy
conditions, w/o surgery Inflammation of the esophagus, Antiarrhythmic therapy
Acute bronchitis, w/o co-morbidity w/o surgery Hypertension/Heart Disease
Minor infectious pulmonary disease Ulcer, simple therapy
other than acute bronchitis Irritable bowel syndrome Cardiology
Gastritis and/or duodenitis, simple Hiatal hernia, w/o surgery Fluoride therapy
Monilial infection of the vagina (yeast) Hemorrhoids, simple or complicated Sinusitis/Rhinitus therapy
Minor burns w/o surgery Otolaryngology
Minor skin trauma, except burn Adult rheumatoid arthritis, Asthma therapy
and open wound w/o co-morbidity Bronchodilator therapy
Major orthopedic trauma other than Joint degeneration, localized, Emphysema/COPD therapy
fracture or dislocation, w/o surgery w/o surgery Pulmonology
Minor orthopedic trauma Ongoing Rx therapy w/o provider Inflammatory Bowel Disease
Bursitis and tendinitis, w/o surgery intervention: therapy
Other minor orthopedic disorder Non-HIV Antiviral therapy Irritable Bowel Disease therapy
Exposure to infectious diseases HIV/AIDS Antiviral therapy Acid Peptic Disease therapy
Prophylactic proc. other than inoculation Leprosy therapy Gastroenterology
& exposure to infect. disease Infectious diseases Benign Prostatic Hypertrophy
Poisonings and toxic effects of drugs Diabetes Mellitus therapy therapy
Hyperuricemia/Gout therapy Incontinence therapy
Maintenance Impotence therapy Urology
AIDS Antihyperlipidemic therapy Vaginal Antifungal therapy
HIV sero-positive without AIDS Nutritional therapy Gynecology
Insulin dependent diabetes, Pancreatic enzyme replacement Acne therapy
w/ or w/o co-morbidity therapy Antifungal/skin therapy
Non-insulin dependent diabetes, Respiratory Enzyme Deficiency therapy Topical Retinoid therapy
w/ or w/o co-morbidity Thyroid Hormone Replacement Dermatology
Female sex gland disorders therapy Arthritis/Anti-inflammatory
Male sex gland disorders Testosterone Replacement therapy therapy
Gout Weight Reduction therapy Osteoporosis/Bone Disease
Hyperlipidemia Endocrinology therapy
Obesity, mild Colony Stimulating therapy Skeletal Muscle Spasm therapy
Obesity, morbid w/o surgery Hematology Orthopedics & Rheumatology
Minor depression Anxiety/Panic Disorder therapy Contraceptive therapy
Anxiety disorder or phobias, minor Depression therapy Hormonal Replacement therapy
Migraine headache, common Mania/Affective Disorder therapy Preventative and administrative
Eating disorder Psychosis/Schizophrenia therapy Insomnia therapy
Psychosexual disorder Psychiatry Pain therapy
Alcohol dependence, w/o complication Anticonvulsant therapy Isolated signs and symptoms
Migraine headache, common Alzheimer’s Disease therapy
Congestive heart failure, Migraine therapy
w/ or w/o co-morbidity Multiple Sclerosis/ALS therapy
Source: Compiled from Arthur L. Wilmes, FSA, MAAA, “An Actuarial Analysis of Online Care—Appendix: Chart F.5,” Milliman, pp. 1–17.
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Part 4 Case studies
Well’s solution, and after a series of meetings in Product development

Hawaii, in January 2009, HMSA became the first Roy and Ido had begun developing the concept for
health insurance company to offer Online Care using American Well’s next-generation product. Code-
American Well’s platform. Although HMSA had only named Team Edition, the new product would revolu-
750,000 members, the company purchased 1.3 mil- tionize the interactions between doctors and provide
lion “addressable life” licenses, as it anticipated utili- value to the entire health-care chain.
zation by nonmembers and, subsequently, an increase Traditionally, patients who needed to be evalu-
in membership. ated by a specialist would receive a referral from
their PCP, see the specialist per his or her scheduling
availability, and then typically return to their PCP
Moving forward: important decisions for further follow-up, again per their availability.
ahead The professional dialogue between the specialist
and the patient’s PCP would be conducted via visit
By the fall of 2009, American Well was still busy
reports and could take weeks to complete. With
supporting its first launch in Hawaii and prepar-
Team Edition, once a PCP determined that a con-
ing to launch for three other customers. BCBS of
sultation with a specialist was in order, the PCP
Minnesota was the first health insurance company
would be able to log on to the system and reach out
in the continental U.S. to adopt, initially rolling out
to any of the specialists who were available online.
the system to its own 10,000 employees and family
The consultation would take place right then, with
members, with the intention of making it available
the patient still in the PCP’s office. The cycle time
to employer groups and additional consumers later.
from the patient’s initial visit to the follow-up with
BCBS of Minnesota was also the first to deploy
her PCP would be reduced from weeks or months to
virtual worksite clinics based on American Well’s
minutes. Team Edition could also improve the qual-
platform. At the same time, TriWest Healthcare
ity of care. Resolving medical problems early, before
Alliance, a provider of health-care benefits for U.S.
further complications arose, would offer patients
military personnel and their families, decided to
a better quality of life and deliver significant sav-
use American Well’s platform to connect its mem-
ings to health insurance companies. (See Exhibits
bers with psychologists and psychiatrists. Lastly,
11 and 12 for average waiting times for patients to
Optum Health, a UnitedHealth Group company,
see a family practice physician and three specialties,
was getting ready to go into production with its
respectively.)
“Now Clinic” service in Texas (with plans to expand
Team Edition would also relieve some medical
nationwide) and use American Well technology.
licensing barriers that most states had tradition-
American Well was also in the process of business
ally put in place. Most often, state governments
discussions with other health insurers and other
limited the access of their residents to physicians
companies across the U.S.
who were licensed to practice in their own state.
Everyone at American Well agreed that current and
However, PCPs were typically free to consult regard-
future launches by health insurers needed to be flaw-
ing their patients with specialists from anywhere in
less and demonstrate the potential of the American
the United States.
Well solution. Glassman explained:
Team Edition seemed to Ido and Roy like a natu-
We work closely with our clients and provide them access ral extension of American Well’s business plan. It
to our knowledge and experience, as well as materials we
would leverage the company’s existing technology
developed as part of our Go to Market Center of Excellence,
so that they will succeed in their launch. We assist them in platform, add value to its existing stakeholders, and
recruiting physicians to the service, in marketing to patients, further drive the company toward its ultimate goal:
and in communicating with the media. We provide channel being the market leader in enabling Online Care.
management and consulting services by a dedicated team However, they were less certain about the right
of American Well employees.
timing for such a rollout. Trying to push multiple
As these promising developments were unfolding, services in one sales pitch could be too confusing for
management was considering several new opportuni- certain health insurance companies and might delay
ties for expanding American Well’s reach. adoption of the core product.
420

Exhibit 11 Average time new patients wait for appointment with family practice physician, selected
cities, 2009*
Source: Adapted from “2009 Survey of Physician Appointment Wait Times,” Merrit Hawkins & Associates, p. 9, http://www.merritthawkins.com/pdf/
mha2009waittimesurvey.pdf, accessed February 2010.
*Data reflect results of phone survey of physician offices (10–20 per metropolitan area) conducted by Merrit Hawkins & Associates from September
2008 to March 2009.
Market opportunities preliminary information about his ailment. Many

Although they had focused solely on the health insur- patient visits could thus be expedited, and the hospi-
ance market to date, Ido and Roy saw several other tal’s overall efficiency improved. Similarly, patients
potential customers along the health-care value chain. could consult a physician online from home, before
They believed delivery networks—hospitals, chains of leaving for the hospital. Beyond the ability to bal-
health clinics, and other systems of providers—could ance loads across facilities, hospitals in low-demand
achieve cost efficiencies, provide better customer geographic locations could leverage their physicians’
service, and boost revenues by adopting American excess capacity using Online Care; doing so would
Well’s platform. also build relationships with patients, who might then
Hospitals, for instance, could install an Online be more willing to visit the particular hospital despite
Care kiosk in emergency rooms, allowing patients in the distance.
the waiting area to consult with a physician online Retail clinics could also augment their services
while waiting to be seen. Instead of sitting idly (and by installing Online Care kiosks. American Well’s
growing increasingly frustrated), patients could take research had revealed a patient preference to receive
advantage of excess physician capacity through the care – even Online Care – at dedicated health-care
online system. Moreover, by the time hospital per- sites such as retail clinics. Because NPs were usually
sonnel could see the patient, he would already have the highest-level clinical staff at retail clinics, offering
421

Exhibit 12 Average time new patients wait for appointment for cardiology, dermatology, and obstetrics/gynecology (OB/GYN),
422
selected cities, 2009
Part 4 Case studies
Source: Adapted from “2009 Survey of Physician Appointment Wait Times,” Merrit Hawkins & Associates, p. 8, http://www.merritthawkins.com/pdf/mha2009waittimesurvey.pdf,
accessed February 2010.
*Data reflect results of phone survey of physician offices (15–20 per metropolitan area) conducted by Merrit Hawkins & Associates from September 2008 to March 2009.
10/03/14 2:08 PM
access to physicians through an online service could physicians or pharmacists through a hospital, retail
boost patients’ perceptions of the legitimacy of retail clinic, or pharmacy channel, the insurance company
clinics. Retail clinics could also use the Online Care would lose out.
platform if the NP was not able to address a patient’s
issue or if the patient wished to obtain an immediate
A change of direction?
second opinion.
Pharmacy chains represented yet another potential Ido and Roy were pondering these questions as their
customer base. Pharmacists provided expertise on flight began its descent into Washington, D.C. To
prescription medicine usage, potential side effects, both brothers, it seemed that the Team Edition serv-
dangerous drug combinations, and other important ice offered a value proposition that would appeal to
information. However, many patients failed to ask patients, providers, and payors alike. Team Edition
questions of pharmacists in person, whether because held the promise of alleviating some of the greatest
they were embarrassed to do so in front of other cus- frustrations in a health-care delivery system fraught
tomers or simply forgot to ask at the time of the trans- with costly inefficiencies. Roy and Ido also agreed
action. If pharmacists were available online using that American Well could offer significant value to
American Well’s platform, patients would have the health-care delivery networks. But with only limited
freedom to ask pharmacists questions at the time and adoption of its core service so far, was it too soon for
place of their choosing. American Well to launch a major new undertaking?
Finally, American Well was considering expand- Furthermore, pursuing any of these opportunities
ing its service internationally; would-be customers would likely require additional hiring (at the end of
in Australia, Germany, and the United Kingdom had 2009, the company had under 100 employees) and
already expressed interest. Pursuing this route would, securing additional funds.
of course, require extensive changes to American Ido and Roy believed that the essence of American
Well’s organizational structure. The company would Well’s model – linking real-time excess capacity with
also have to tailor its service to each individual real-time excess demand – had applications well
market, as regulations governing privacy and online beyond the health-care industry. Numerous types of
transfers of health information varied from country expertise – legal advice, accounting services, even reli-
to country. gious counseling – could be delivered using American
As they considered these options, Ido and Roy rec- Well’s platform. As they weighed the benefits and
ognized that any new venture would require a sig- disadvantages of pursuing the almost endless oppor-
nificant marketing investment and divert resources tunities they envisioned, Ido and Roy kept returning
from the U.S. health insurance market, where to the same quagmire: diverting resources to focus
American Well was just starting to make inroads. on new ventures could undermine the company’s
Moreover, serving both the insurance and deliv- initial Online Care rollout, but if American Well
ery network markets could create conflicts of inter- waited too long, would another company seize these
est with respect to noninsured patients. If nonmem- opportunities? They agreed that the most important
bers accessed American Well’s platform through the thing was to maintain excellent client satisfaction,
insurance company channel, the insurer would reap the concluding that “you are only as good as your first
revenues; however, if this patient population accessed failure.”
423

CASE STUDY 5
IBX (Northern Europe)

Expanding B2B e-purchasing from indirect
to direct goods and services
Peter Lageson, Senior Vice President at IBX and Background: B2B e-platforms
Managing Director of IBX Germany in Frankfurt is
Long before the advent of the Internet, several
amazed by the rapid growth in such a short period.
attempts were made at establishing electronic com-
Five years after its launch, IBX has achieved a leading
munication among companies. Systems like Prestel2
position in the purchasing services provider market,
(1979) in Great Britain and BTX3 (1983) in Germany
or sometimes referred to as SRM on demand, work-
had moderate success, with the latter having as many
ing with global companies including IKEA, LEGO and
as 1.2 million users at the end of 1996. Nevertheless,
Volvo. After having established a leading position as
it was the Teletel/Minitel system (1982) from France
a provider of solutions in the area of indirect material
Telecom that achieved great acceptance with almost
and services – in the past referred to as a horizontal
9 million terminals and around 25 million users at the
platform – IBX’s next significant challenge is to move
into purchasing of strategic and direct materials.
Lageson is confident that IBX’s business model meets
the requirements also in direct materials in different
industries and vertical segments. He states: 1 Unless stated otherwise, quotations from Peter Lageson
were gathered during an interview on March 1st 2006 in
Our industry experience and our collaboration with Ericsson the IBX German office in Frankfurt am Main.
and other large European corporations helped us succeed 2 Launched by the British General Post Office, Prestel was a
in the horizontal market. The success gave us the credibility system which transmitted data via the telephone lines to
needed to enter into direct materials. Now, for instance our a set-top box terminal, enabling interactive services and
work with Skanska, the third largest construction company a crude form of email. However, the costs of the required
in the world, gives us lots of experiences helping us to enter hardware constituted an obstacle for Prestel’s success.
the vertical segment with a well-developed set of solutions 3 Bildschirmtext is a system launched by the Deutsche
and a proven business model.1 Bundespost.
This case study was written by Fernando Endara, Master of International Business student, under the supervision of Albrecht End-
ers, Assistant Professor of Strategic Management, Harald Hungenberg, Chaired Professor of Strategic Management (all three from
University of Nuremberg), and Tawfik Jelassi, dean and professor of e-Business and It at enpC (paris). It is intended to be used as
the basis for class discussion rather than to illustrate effective or ineffective handling of a management situation.
This case study was made possible by the cooperation of Peter Lageson, Senior Vice President, IBX.
Copyright © 2006 FAU, Nurnberg, Germany and ENPC MBA, Paris, France.
424

Case study 5 IBX (Northern Europe)
end of 1999. This system allowed access to various (n:1:m) relationships, thereby generating network
categories of services like databases, airplane or train effects. This permitted third-party agents such as ASPs
ticket purchases, and mail-orders to retail companies. to integrate complementary eServices like logistics,
However, there was another system that had sur- insurance and payment services, especially in the
vived the emergence of the Internet: Electronic Data so-called open platforms.7 With improved user inter-
Interchange (EDI), which was developed in the late face, many of these platforms became integrated
1960s in the shipping and transportation industries. with the ERP8 systems of buyers and sellers, thus
It was established as a standard for the business-to- acting as an extended supply chain management
business exchange of electronic documents. Despite system.
users’ strong acceptance of EDI (there are currently B2B platforms have been categorized into horizon-
around 125,000 organizations using EDI,4) it was not tal and vertical platforms based on the types of goods
as successful as initially anticipated. The reliance on that are traded through them (see Exhibit 2):
VANs5 to encode EDI’s data, as these networks were
● Horizontal platforms deal with indirect goods or
not compatible with each other, increased the com-
MRO items across industries. Such items include
plexity of the system. Each industry has its own EDI
office supplies and maintenance goods (e.g., elec-
standard and vertical integration was encouraged only
tric bulbs) which are not strategically relevant to
in the form of Private B2B platforms or exchanges.
a company’s production process and therefore not
Starting in 1996, with an increasing number of
crucial for developing a competitive advantage.
companies launching web-pages, it became clear to
procurement agents that they could use the Internet ● Vertical platforms are industry-specific platforms
as a search tool for new vendors and products. When that operate in an individual industry such as
the Extensible Markup Language (XML) emerged as the chemical industry or the automotive industry.
a replacement to the HyperText Markup Language Vertical platforms typically focus on the exchange
(HTML) standard, new possibilities of combining of direct goods that are used for the final product
text and other information types about a product that is delivered to the customer. These direct goods
became feasible, including eCatalogues. These kinds include raw materials such as steel or cement and
of tools were promptly adopted by large corpora- goods that are used for final products such as elec-
tions as a way of optimizing and automating the pur- tronic components. An example of such a platform
chasing process of indirect materials, also known as is E2Open that provides a supply chain solution for
MRO6 goods, thereby reducing their purchasing cost. IT providers such as Vodafone. Furthermore, there
With this goal in mind, Desktop Purchase Systems are also vertical platforms that focus on indirect
(DPS) were installed, allowing requesters to order goods yet within one industry.
materials directly from their desk through web-based Buyers and sellers choose to operate a B2B plat-
catalogues, which were linked to pre-qualified suppli- form, especially if it is industry specific, to increase
ers. Such platforms enhanced horizontal integration their leverage vis-à-vis their suppliers or buyers. In
between buyers and MRO vendors. addition, there are also third-party platforms which
Meanwhile, EDI evolved into web-based EDI, mak-
ing web-browser transactions possible and connecting
users with EDI infrastructure to those who did not 4 This rate corresponds to 5% of all companies around the
have it. Soon, hybrids of Web-EDI and XML, which world and 2% of all American enterprises.
supported automatic data processing, were intro- 5 Value Added Network is a specialized application service
duced in the market, thereby fostering the evolution provider (ASP) that acts as an intermediary between trad-
ing partners sharing data or business processes.
of B2B platforms. These technologies opened up the
6 MRO stands for Maintenance, Repair and Operation.
possibility for new transaction mechanisms such as 7 Open platforms, in contrast to private platforms or
online bidding as well as forward and reverse auc- exchanges, allow the involvement of an unrestricted
tions, thus enabling the procurement automation of number of participants at the buyer side as well as at the
direct goods such as machines or product parts (see seller side and are mostly operated by ASPs.
Exhibit 1). The transaction structures also experienced 8 Enterprise resource planning systems (ERP) are integrat-
ed software applications that automate an organization’s
a change, shifting from bilateral (n:m) to multilateral business processes using industry best practices.
425

Part 4 Case studies
Exhibit 1 Strategic relevance vs. automation potential of procurement goods
A-Goods
High
Investment Purchase Direct Material Purchase
Features Core business requirement Features Production requirement

Tender Regular purchase
Individual requirements Forefront product assortment
Higher Value/ Small Quantity Bigger Quantities
Examples Machines Examples Tires

Building Gearbox
System Bidding systems System B2B Solutions for direct materials

Strategic eRFI/eRFP/eRFQ e.g. Reverse Auctions
relevance
Variety Purchase MRO Purchase
Features Miscellaneous requirements Features Individual requirements

Irregular demand Regular purchase
Value and Quantity vary Forefront product assortment
Low value
Examples Single company car Examples MRO Goods/C-Goods
Single office furniture Product related small parts
System Difficult to automate System Desktop Purchasing/eCatalog

Low
B-Goods C-Goods
Low Automation potential High
Source: Michael Nenninger and Oliver Lawrenz, B2B-Erfolg durch eMarkets, 1st edition, Vieweg Verlag, Braunschweig/Wiesbaden, 2001, p. 4.
Exhibit 2 Characteristics of horizontal and vertical e-business platforms
Types of Goods Purchased

Shipping of goods
on e-Platforms
• Office supplies (stationary • Usually shipped through

paper, writing material, office courier service companies
Horizontal furniture, etc.) (e.g., UPS, FedEx, DHL, etc.)
platforms • Airline tickets, hotel bookings
• Other non-industry specific
products and services
• Raw materials (e.g., wood, • Requires specific logistics,

steel, cement, fuel, liquefied transportation and fulfillment
Vertical gas, etc.) mechanisms
platforms • Goods for final products
(e.g., parts, components,
electronic systems, etc.)
426

offer a more neutral basis for transaction process- Exhibit 3 Procurement processes supported by
ing. As a consequence of the dot.com bubble burst in special software solutions
2000, many B2B platforms (such as mondus.com) and
exchanges had to stop their operations, reinvent their 100
business model or, in some cases, were acquired by
81
other companies. 80
However, with technological advances that ena- 64 67
bled fast and secure multi-purpose communication 60
51 49
between enterprises as well as increasing savings
through procurement and sourcing process optimi- 40
zation, ePurchasing solutions and B2B platforms
22
became more attractive. The term ePurchasing refers 20
to the overall purchasing process which is equivalent
to supply chain management. This process can be sub- 0
Bi d d sing
O iati line
ic s
Ps
ar rs
io Ru plie es
divided into sourcing (including spend management,
rv od
m plie
RF
fro g ata
/n in rs
in s
es
t
p ic
ot on
ke
se go
on
en ly
su vo
s/
th up
sp Ana
supplier recognition and auctioning), procurement
eg g
or g
m in
in g s
RF
n
er
e
llin
ns n
and payment.
in
rd
nd
in
Fi
nn
According to e-business w@tch, a market
Ru
ct
research initiative launched in 2005 by the European
au
Commission, about 25% of European9 companies,
across all size segments,10 bought online over 5% Source: e-Business W@tch, The European e-Business Market Watch: The
European e-Business Report, European Commission, November 2005,
of their total purchase volume. IT services, tour- p. 30.
ism, automotive, publishing and machinery industries
were the most active online buyers.
The same survey11 also revealed that on average curement platform. With Ericsson’s eProcurement
26% of companies in all ten industries12 were using system ‘Click-to-buy’ (which operated successfully
some kind of eSourcing solution with the aeronautics with over 15,000 users and close to 70 suppliers)
and automotive industries having the highest par- as a benchmark, the newly formed team wanted to
ticipation rates with 63% and 39% respectively. The develop a similar stand-alone platform outside of
most frequently used sourcing processes were goods Ericsson. The goal was to integrate buyer and supplier
and services ordering (81%), finding suppliers (67%), platforms into one solution – an initiative was born
running requests for quotations and proposals – and was initially called ‘Bizface’.
RFQs/RFPs – (64%), and analyzing expenditure data In December 1999, Bizface approached Ericsson
analysis (51%). (See Exhibit 3.)13 and presented a proposal to reduce the cost of
There are no reliable forecasts regarding the
growth rate of B2B platforms, but by observing the
gap between the implementation rate of ERP systems
and the acceptance of eSourcing solutions across 9 The survey conducted by e-business w@tch included the
following countries: Czech Republic, France, Germany,
all four European enterprise segments, especially in Italy, Poland, Spain and the UK, which represent alto-
medium- and large-sized enterprises (see Exhibit 4), gether 75% of the EU-25 population and GDP.
the demand for these solutions is likely to increase in 10 The enterprises have been segmented according to their
the future. number of employees in four different categories; micro
(1–9 empl.), small (10–49 empl.), medium (50–249
empl.) and large (250+ empl.).
The history of IBX 11 The European e-Business report 2005 by e-business
w@tch and the European Commission.
The initial idea 12 The sectors are: Food, Textile, Publishing, Pharma,
In 1999, Christer Hallqvist, Björn Böhme and Peter Machinery, Automotive, Aeronautics, Construction,
Tourism and IT Services.
Lageson left Ericsson with the idea of creating their
13 RFI stands for request for information, RFP for request
own company and developing an innovative ePro- for proposal, and RFQ for request for quotation.
427

Part 4 Case studies
Exhibit 4 Companies using ERP systems and eProcurement solutions by branch and company size
80
71
71
70 70
63
59
60 60
58
52
50 50
39
39
40 40
37
33
34
32
30
29
30 30
21
22
20 20
18
18
16
16
14
14
13
12
11
10
10 10
8
0 0
es
ry
ng
od
ro
al
tic
iv
til
rg
io
ne
ris
iu
ic
Sm
ic
hi
Fo
ot
x
ct
ar
La
au
ed
M
rv
Te
u
is
hi
m
ru
Ph
To
Se
bl
n
ac
M
to
st
ro
Pu
M
Au
on
IT
Ae
C
ERP Systems ICT Solutions ERP Systems ICT Solutions
Source: e-Business W@tch, The European e-Business Market Watch: The European e-Business Report, European Commission, November 2005,
Annexe, p. 6.
managing the 70 suppliers. The ‘Click-to-buy’ ven- of having Ericsson on board for the eventual success
dors were indirect materials and service suppliers, of IBX:
most of them generic also supplying other large We had a golden egg with Ericsson as one of the earliest
corporations in the region. For Ericsson, outsourcing adopters of eProcurement in the world.
the entire Supplier Centre to Bizface and sharing this
with other large Swedish corporations seemed like a CommerceOne, a marketplace software provider,
good solution to try to ‘share’ the cost with other large had also been trying to find a ‘franchise partner’ in
corporations. the Nordic region. It was essentially looking for inter-
Ericsson embraced the idea and expressed its interested companies to outbid each other in acquiring
est in investing in the solution, and asked Bizface the exclusive CommerceOne license. Three consortia
in January 2000 to develop a business plan. The came into play: Bizface/Ericsson, SEB15 in partnership
Bizface initiators saw the need for senior management with the venture capital company b-business partners
experience and convinced Hans Ahlinder to join the and a third initiative. Bizface started to assess pos-
founding team. Ahlinder was in 2000 Chief Operating sible technology providers, including CommerceOne.
Officer of Gambro14 and former Senior Vice-President Realizing the magnitude of the agreement between
of Sourcing at Ericsson. At the end of February, Bizface and Ericsson, CommerceOne proposed to
Ericsson and Bizface signed a Letter of Intent in which introduce these two companies to SEB and b-business
Ericsson agreed to invest in Bizface with the agree- partners.
ment that Bizface takes over and continues to operate
and develop the supplier centre of ‘Click to buy’ with
its current and future suppliers.
14 Gambro is a leading European healthcare technology
At this time, lots of other B2B platform initiatives corporation with headquarters in Sweden.
tried to convince Ericsson to join their respective 15 Skandinaviska Enskilda Banken (SEB) is a Swedish
business ideas. Peter Lageson recalls the importance financial services corporation.
428

SEB tried to convince Ericsson to join their ini- Subsequently, IBX identified a good opportunity
tiative, which led to intense negotiations between to expand across Europe by buying Emaro, an eMar-
Ericsson, SEB and b-business partners. At last, how- ket owned by SAP and Deutsche Bank. Negotiations
ever, the small Bizface team was brought back to the started in mid-2002 but ultimately failed mainly due
negotiation table. Two facts had kept Bizface in the to internal changes at SAP. Deutsche Bank, though,
deal: the agreement with Ericsson and their experi- asked IBX to carry out several e-procurement studies
ence in eProcurement and B2B platforms. In July and an analysis of its purchasing functions in Italy and
2000, Ericsson, SEB, b-business partners and Bizface Spain. However, the long-term relationship that IBX
agreed to jointly launch an eMarketplace16 called had hoped for never materialized.
Integrated Business Exchange (IBX). SAP and IBX decided to deepen their relationship
IBX started to assess all of the technology by bringing a value proposition to large Nordic
platforms available on the market. This move took corporations. This consisted of IBX selling its IBX
CommerceOne by surprise, because it brought all eProcurement solution based on MySAP SRM18
the platform members together. After assessing eProcurement technology instead of CommerceOne
solutions from Ariba, SAP, Oracle and others, IBX Procurement. IBX closed the year 2002 with 23
decided to go for the MarketSite platform technology buying organizations and 250 suppliers. In early
of CommerceOne, primarily because of their new 2003, after a few months of internal restructuring,
strategic partnership with SAP. IBX executed the first IBX won a contract with the municipality of Oslo
transaction on December 18, 2000. and later with Arla Foods and with Bang& Olufsen.
The latter two got attracted by the IBX–SAP joint
solution. At the end of 2003, IBX reached a turnover
Pan-Nordic consolidation of 10.2 million euros, which amounted to a 38%
By May 2001, IBX had 33 suppliers connected to the growth over the previous year.
platform, and in June 2001, Volvo decided to join the In 2004, IBX closed a significant agreement with
platform as a buyer and signed a three-year agree- Skanska, a Swedish construction company, thus open-
ment, thus becoming the first customer outside of the ing the doors for IBX to move into the construction
IBX owner group. The objective was clear for IBX: in industry. This deal represented a major challenge
order to succeed, it had to become the leading pro- for IBX since, unlike previous agreements, the deal
vider in the Nordic region. included all of the critical flows of construction mate-
To achieve this objective, IBX started to focus on rials and Skanska’s subcontractors that were actually
finding the right partners to use as ‘anchors’ prior to needed for the production process. This new contract
building a local organization in each Nordic country. led to an expansion of the IBX business model from
Novo Nordisk, a Danish healthcare company, thus the horizontal ‘MRO goods and services’ to the vertical
became a shareholder customer and an ‘anchor’ in ‘direct materials flow’ dimension.
Denmark, placing its first transaction through IBX on
September 27, 2001. In 2000, IBX held talks with a Expansion across Europe
large Norwegian corporation to convince them to join
Together with Deutsche Post, Lufthansa and other German
in as the ‘anchor’ for Norway, but these talks failed.
customers we will now prove that we can deliver to compa-
Nevertheless, on December 5, 2001, the Norwegian nies outside of the Nordic region.19
state awarded IBX a five-year contract to build and (Lars Thunell, Chairman of IBX and CEO of SEB)
operate a marketplace for the entire Norwegian public
sector. IBX closed 2001 with 6 buying organizations 16 Ericsson, SEB and b-business partners each held 30% of
and 135 suppliers on its network. the stock.
IBX continued its growth in 2002 by signing a con- 17 Suppliers and transporters of petroleum products,
tract with Nycomed, the Danish pharmaceuticals com- electricity, and district heat in the Nordic countries and
pany, and with Fortum,17 a Finnish energy supplier, worldwide.
18 Supplier Relationship Management: an information
which joined in as a buyer in Finland. Through this system that automates sourcing, purchasing and the
deal, IBX reached its first goal of establishing opera- management of daily supplier relations.
tions in Sweden, Denmark, Norway and Finland. 19 Taken from www.ibxeurope.com.
429

Part 4 Case studies
In 2004, IBX tried hard to acquire a French market- revenues while strengthening its position in Germany.
place but failed mainly due to a lack of commitment Later in 2005, the LEGO Group signed a three-
from their owners to continue as major customers of year-long agreement with IBX for the provision of
the new entity. The failure was a big disappointment, eCommerce solutions and consulting services for devel-
although at the same time it became obvious in the oping the LEGO Group’s electronic purchase system.
due diligence process that it would have required sub- In November 2005, IBX signed an important agree-
stantial efforts to turn the marketplace into a sound ment with IKEA, the global furniture retailer. The
operation in France.20 deal included the complete on-demand solutions for
With an expected 30% growth rate, IBX went pub- eSourcing, eProcurement, ePayment, and access to
lic in the spring of 2004 and secured 4.9 million euros the IBX Supplier Network for global implementation.
in additional funding. This funding was intended to Pontus Björnsson, country manager of IBX Sweden,
support the European expansion and the extension of points out the importance of this contract:
the value proposition by developing new products and The agreement is particularly important to IBX since it confirms
capabilities, especially in the vertical segment. IBX the trend that large corporations are increasingly choosing
started an intensive selection process to find the best on-demand solutions for their sourcing and procurement.23
possible software solution for coping with the busi-
IBX ended 2005 with a turnover of 20.3 million euros
ness challenge that Skanska represented.
and with an order stock for 2006 of 22.6 million
In mid-2004, IBX significantly enhanced its
euros, ensuring already a growth of 14% for 2006.
European coverage after partnering with trimondo,
a German eProcurement service provider founded
The business model
by Lufthansa and Deutsche Post. IBX and trimondo
signed a contract with Deutsche Post that allowed IBX Company vision
to take the global responsibility for 5,000 suppliers The IBX vision is built around the following four main
of Deutsche Post in more than 20 countries, while pillars:24
trimondo supported Deutsche Post in Germany. As
● IBX aims to be the leading provider of services
Torsten Breuer, CEO of trimondo, explained:
and solutions for efficient purchasing in Europe by
With the expansion of the product and service portfolio as becoming the source of knowledge on sourcing and
well as the increased geographical coverage, we will enhance
procurement.
the offer to our customers in many aspects [……] the actual
co-operation with IBX for the deutsche post global roll-out is ● IBX seeks to support their customers in transform-
very successful and our staff is looking forward to building a ing their current purchasing functions into highly
joint international team to maximize customer value.21 efficient ones.
At the same time, Volvo expanded its collabora- ● IBX also expects, through their ‘best of breed’
tion with IBX to include global purchasing solutions, eSourcing and eProcurement solutions and services
including Volvo’s business in France, Belgium and the portfolio, to help its customers to create savings
US. Volvo’s subsidiaries, Renault and Mack Trucks, through better compliance to corporate contracts,
were also included in the agreement. Ola Hansson, better prices and lower costs of operations.
e-Procurement Manager at Volvo, mentioned the ● IBX started strictly in the purchasing field and will
reasons for this: preserve that line, maintaining a skilled organiza-
In sweden, we have had affirmative, satisfying results and tion and management team with extensive experi-
therefore we chose IBX’s solutions globally. during 2005 ence in purchase processes, being trustworthy and
and 2006, after the expansion in these three markets, we are professional towards its customers.
planning to introduce the system in several other countries.22
Other deals closed in 2005 with Saab in Sweden, 20 Ibid.

Finnair in Finland, Helse Ost in Norway and Lundbeck 21 Ibid.
22 Ibid.
in Denmark strengthened the position of IBX in the
23 Quoted in ‘IKEA Turns to On-demand Supply Chain
Nordic region. Solutions’, Supply & Demand Chain Executive,
In April 2005, IBX acquired trimondo, thereby add- 13 January, 2006.
ing 35 employees in Frankfurt and 4.8 million euros in 24 Taken from www.ibxeurope.com.
430

One of the key questions that IBX faced was which eProcurement solution enables the end user to
business model to adopt so that the company would select and purchase any article registered on its
meet the investors’ financial return expectations. suppliers’ catalogues from any enabled terminal.
Peter Lageson emphasizes: Purchase orders were generated automatically
The discussion we try to have with customers is that it informing the selected supplier which product
comes down to how you design the project. It’s not a tech- to deliver while following all approval levels and
nology question; that’s not why you choose IBX. Instead, affecting the corresponding cost centers. The
you choose IBX because of our business model that will search engine serves as an interface to the supplier
take you through the transformation much faster than any
community, where buying organizations searched
alternative [sourcing and procurement] solution.
for the desired items by vendor name, region,
In order to reach this goal of quickly and cost- and commodity classification among other search
efficiently transforming the purchasing processes of options. It was also designed to provide a single
its customer, IBX has developed a solutions’ portfolio procurement channel that supported a number
(see Exhibit 5). Peter Lageson comments on the of call-off methods including product catalogues,
importance of providing such an integrated solution: end-user requests, free text orders, and access
A buying organization faces a Make or Buy decision. It can to supplier’s web shops. Lageson emphasizes the
buy the software, set it up, operate it and connect suppliers importance of the single channel:
to the platform by itself. Alternatively, it can buy the service
as part of an integrated solution. IBX’s intention is to be 30% We want to give suppliers a single point of contact, so they
to 40% cheaper than the alternative to make it, where the can deliver content, receive orders and have one business
buying organization doesn’t need an implementation team partner for all business processes.
over 12 to 18 months to ramp up, because typically, that
● IBX Source: This module, currently based on
is not part of the core business of the buying organization.
Emptoris, provides several capabilities ranging
This portfolio started with a content and connectiv- from planning procurement, requesting informa-
ity core. Later, on-demand solutions (also referred to tion (eRFI/eRFQ/eRFP), bidding, reverse auction-
as ASP tools such as eProcurement and eSourcing) ing to bundle buying. Lageson explains:
and transformation capabilities and services (such
as supplier activation, implementation, sourcing and The product strategy was growing from the content and
connectivity core to the next layer of a complete Source-
consulting services) were added. This resulted in the Procure-Pay capability, becoming a full on-demand Sup-
following on-demand solutions portfolio: plier Relationship Management solution.
● IBX Procure: This module includes the IBX ● IBX Pay: This module, mostly based on the ePay-
eProcurement solution based on MySAP SRM ment technology of trimondo, consists of the IBX
technology and the IBX search engine. The IBX eInvoice and the IBX Easy Payment tools. The
first one links suppliers with buying organiza-
Exhibit 5 IBX modules tions through a fully electronic invoicing inter-
face, while reducing the workload and approval
instances. The second tool is also capable of
validating all the invoices against the authorized
Procure
purchase orders, and, if so desired, consolidates
different invoices into one account.
Source Pay ● IBX Strategy: IBX Strategy consists of a series of
IBX organizational models, best practice processes,
sourcing and procurement strategies, as well as
a skilled team of consultants with experience at
Supplier implementing such strategies.
Strategy
network
● IBX supplier network: This network contains
about 12,000 global suppliers, 1,400 catalogue
suppliers and over 10 million line items. It may be
Source: IBX.
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Part 4 Case studies
accessed either by an internal eProcurement solu- the total revenue is generated by recurring subscrip-
tion connected to IBX search engine or by using IBX tions, so-called recurring fees. However, IBX expects
complete eProcurement solution. consulting fees to increase over the next 3 to 4 years
to 25% of total revenues.
The main business drivers in setting the subscription
The revenue model fees are (a) the number of users, and (b) the number
IBX business model is buyer centric, and IBX focuses of suppliers that the customer wants to have access to
its main efforts on working on behalf of the buyers. through IBX. IBX also typically awards discounts for
IBX helps the customers in transforming their current long-term agreements (up to 5 years) and does not
sourcing, procurement and payment business process- charge additionally for training and activation of sup-
es into more efficient ones leveraging IBX on demand pliers, as those are included in the annual subscription.
solutions. When a buyer, for instance, has chosen IBX 15 of the 80 companies buying through the plat-
to provide support in transforming the procurement form account for almost 80% of the total revenue.
process, IBX among other things assesses the buyer’s These 15 companies include global corporations such
preferred vendor base, or helps the customer to assess as Ericsson, IKEA, Deutsche Post and others who
it through a team of skilled consultants. Afterwards, have registered around 100,000 users with IBX. Peter
the existing buying procedures of the company are Lageson explains:
optimized and taken to the procurement platform, At the moment, the main growth driver for our company is
while the system is fed with all viable call-off methods to go for the large corporate market. Implementing our sys-
(catalogues, e-Forms, etc.). Subsequently, IBX trains, tem entails a big change management effort and only the
activates and connects the suppliers to the platform. big corporations are able to implement this at this point.
We expect that the mid-market and public sector will be-
The revenue generated on the buyer side by IBX
come more interesting in 3 to 4 years.
accounts for about 90% of total revenues. The seller
side accounts for the remaining part of IBX’s revenue.
Peter Lageson explains: Financial development and cost structure
We are of the opinion that the value that is created by IBX has shown a steady annual growth of 30% since it
means of the automated purchasing processes goes to the started operations back in 2000. In 2005, IBX became
buyer in large parts. That’s the reason why buyers should
EBIT positive and reached a 1.8 million euro EBITDA.
also be the ones paying for these services.
The total revenue in that year was around 20.3 million
The main components of IBX revenue model consist of euros, which represented an increase of around
subscriptions and consulting fees, where over 80% of 7 million euros compared to 2004 (see Exhibit 6). This
Exhibit 6 IBX revenues and EBITDA 2002–2005
EBITDA 2002–2005 in MEuro

4,0
Revenues 2002–2005 in MEuro
25,0 2,0
2002 2003 2004
20,0 0,0
2005
15,0 –2,0
10,0 –4,0
5,0 –6,0
0,0 –8,0
2002 2003 2004 2005
–10,0
Source: IBX.
432

60% growth over the previous year can be explained quickly. IBX expects to execute this concept in the
in large part by the acquisition of trimondo and next 4 to 5 years.
the addition of major accounts such as IKEA. Peter
Lageson added:
This is our strategy: we would like to continue to grow
Implementing the business model
organically at about 30% and at the same time add 30% Using an ‘Anchoring’ marketing strategy to build
through acquisitions in Europe.
the IBX brand
Thanks to the subscription model, which helped the We have quite an ambitious approach to marketing. Our
company to close 3-to-5-year agreements, IBX has marketing is mainly set up to create awareness among deci-
secured an order stock for 2006 of 22.6 million sion makers. However, the really good sales cases are the
euros, which represents a 14% guaranteed growth ones that came through word of mouth, like IKEA that came
in through references. The essence of this business is that
over 2005. The budget for 2006 has reached around
trust is very important. Seeing the effect of getting the IKEA
27 million euros with an expected EBITDA of around brand was amazing from the marketing viewpoint, you get
3.2 million euros. The main revenue components, invited to companies that you just don’t know how to get
core recurrent and core non-recurrent fees are as through the door.
high as 80% and 20% respectively. For every euro of (Peter Lageson)
revenue, IBX reports 60 cents of costs; with its cost The collaboration with Ericsson during the start-
structure as follows: up phase of IBX not only secured the transaction
● IT operations (hardware, software, 10.7% volume for a successful start, but it also enhanced
third party costs) the IBX image in the market place. Through the
● External costs (consultants, legal 10.7% association with Ericsson, IBX became trustworthy
support) from the outset. After recognizing the advantage of
● Marketing 3.8% having a reputable local buying organization such
● Personnel 74.8%
as Ericsson in Sweden vouching for the platform
image, IBX implemented an ‘Anchoring’ strategy for
● Total 100.0%
the rest of the Nordic region. Through customers
like Novo Nordisk in Denmark, who joined as an IBX
Transaction volume shareholder, Fortum in Finland, and the Norwegian
Government, IBX secured credibility and solid initial
The fact that we handled 4.4 Billion Euros in 1.2 million transaction volume in the Nordic region.
purchase orders in 2005 is evidence that we can help Building on the initial success of this anchor strat-
customers to capture the procurement spending in a very egy, IBX decided to enter the German market by offer-
successful way. We have the means to actually grab the
ing Deutsche Post and Lufthansa a small participation
purchasing volume and this is what is creating compliance
and ultimately savings to customers. share, and later on by acquiring trimondo.
(Peter Lageson)
This enormous transaction volume also opens up an Choosing between a transaction- vs. a
additional business opportunity to IBX: By using the subscription-based revenue model
eProcurement system, all buyer requisitions reach When deciding the type of revenue model to adopt,
the respective supplier only after approval of the IBX had to choose between the following two alterna-
relevant management instance within the buying tives:
organization, while binding the necessary monetary
resources to proceed with the transaction. This guar- ● a transaction-based model, which consisted of
antees that every invoice issued by suppliers will be charging a fee for every transaction made through
backed up by the necessary funds, thus diminishing the platform; or
the financial risk for the vendors. This transactions ● a subscription-based model, where users paid an
information could be sold to financial institutions in annual fee for the usage of the platform regardless
order to create additional factoring services for IBX of the volume of transactions made during that
customers, which would benefit by getting paid more period.
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Part 4 Case studies
At the end, IBX opted for the subscription-based Generating compliance among users
model. Although a transaction model can be very
Traditionally the purchasing department is about negotiation
appealing to customers initially because they only and contracting, but I think this is completely wrong. If you
pay for the services that they actually use, and also close a framework agreement and bring down agreed prices
to the platform operator because it can earn high by 10%, you will only achieve these 10% savings if you have
revenues if fees are a percentage of the negotiated 100% compliance. But if your compliance is only 50%, then
you’ll only get 5% of these savings. The rest is maverick buy-
volume, customers feel that the long-term costs of the
ing25 and, ultimately, you may end up without any savings.
solution could be very high and not controlled. Most (Peter Lageson)
customers are typically facing a make versus buy
decision and want to know that the solution becomes Before the advent of eProcurement systems, it was
cost efficient long-term as in the case of a subscrip- common that end users in a given company would
tion model. order MRO items from suppliers that did not belong to
The subscription model also provided IBX two deci- the preferred vendor base or were not even registered
sive advantages. First, it provides a better cash flow with the company. This so-called maverick or off-
since the fees do not depend on a transaction volume contract buying increased the expected spending of
that might or might not be realized. Second, the cash the company since these vendors typically had higher
flow is stable and predictable because of the long- prices than the preferred vendors.
term subscriptions. Ultimately, this creates a more That is one reason why eProcurement became
sound foundation to build the company on. popular with companies since it introduced an auto-
Additionally, since it is the buying organizations mated process that made off-contract buying difficult,
that pay the subscription fees, suppliers do not feel resulting in increased savings. But, as IBX correctly
pressured to invest in a technology that they did recognized, making every one buy through the sys-
not choose; a fact which increases the commitment tem does not guarantee that every one buys from the
of buyers and suppliers to the new process. Peter cheapest vendor, especially if a company has more
Lageson explained: than one supplier for the same items. Thus, it is pos-
sible that the expected savings potential of increasing
What is interesting with Lufthansa, IKEA, Skanska and
the contract compliance could be up to 80% or 90%,
Ericsson, is that they made the full investment and got
the sponsorship and the management commitment to go while the process effect only delivers up to 20% sav-
through the necessary changes. This type of commitment is ings. Lageson explained:
absolutely decisive for success.
Normally, after closing a framework agreement, the pre-
It also became clear to IBX that the advantage in ferred vendor had to ‘market’ the idea inside the buying
organisation, because the agreement didn’t guarantee that
a transaction-based model (which other platforms
end users were buying from this supplier as they should.
such as mondus.com have used) of charging fees as But if the compliance can be assured or at least increased
percentages of auctioned purchase volume, was just within the procurement system the competition rises, be-
superficial. Large companies like Deutsche Post or cause suppliers then know that it is a life or death situation
IKEA with a huge purchase volume did not want to see with the account, and then you get an enormous effect on
prices.
their suppliers’ prices increase by 1% due to the IBX
transaction fees. Transaction-based fees also would Therefore, IBX decided to develop a model that
have increased the danger that the involved parties allowed its customers to add any kind of suppliers,
start closing transactions outside of the platform in even if they did not offer the lowest prices. This model
order to avoid paying for these fees. Peter Lageson called ‘green, yellow, and red’ ranked a company’s
comments:
We were purchasing people ourselves and we understood
that buying organizations would not accept this interme-
diation. Some of them even argued: Why should I pay one
or two per cent to a third party on a continual basis? Thus, 25 Any company or employee purchase that does not meet
even if you have a transaction model today, you will be a company’s purchasing policy. This includes using off-
forced by the buyers to impose a cap at some point, so, in contract methods of procurement and non-authorized
all reality, you are back to a subscription model. purchases.
434

suppliers according to their price levels and closed to then becoming a third-party platform, thus enter-
agreements with the buying organization, where: ing in direct competition with companies such as IBX.
Other smaller eProcurement software providers or
● Green suppliers comprised preferred suppliers with
niche solution providers (such as POET or Healey-
approved prices;
Hudson) play more of a complementary role than
● Yellow suppliers included preferred vendors with- a competitive one. These can offer just a fraction
out specified products; and of what B2B platforms do and are mostly used by
● Red suppliers were any ad-hoc suppliers. companies that do not require a complete solutions
portfolio.
This model had two main advantages. First, it allowed
According to IBX, ERP vendors like SAP or Oracle
buying organizations to gradually shift spending from
have also recognized the growth potential in the
ad-hoc suppliers to preferred ones, focusing the pur-
eProcurement solutions market. Their main advan-
chase volume on just a few. Second, this gradual
tage consists of their vast pool of existing customers,
change in the company’s purchasing behavior helped
particularly large enterprises that have shown an
the organization to avoid engaging in two fights
increased interest in eProcurement. Their limited
simultaneously (1) changing the buying behavior
expertise in operating such platforms has been over-
from manual to electronic, and (2) altering the pat-
come through strategic alliances with other B2B plat-
tern from old supplier to preferred vendor.
form operators and software providers. In fact, these
The benefit of higher compliance, which can be
vendors have entered into partnership with supplier
increased to levels of up to 80%, is not only reflected
networks and are reselling or recommending them as
in a diminished level of maverick buying, but also in
integrated parts of their supplier relationship manage-
gained bargaining leverage vis-à-vis suppliers. The
ment (SRM) solutions.
bargaining position improves mainly because suppli-
ers are more interested in closing agreements, where
agreed purchase volumes are actually being adhered Direct competition
to. This is the main reason why IBX does not encour- In the B2B platforms market there are four leading
age its customers to engage in bundle buying initia- supplier networks, including IBX, cc-hubwoo, Perfect
tives, because even if large companies managed to put Commerce and Quadrem that provide services
their purchase volumes together, suppliers already for supplier enablement and host search engines
know how high their compliance to framework agree- connected to eProcurement solutions. Additionally,
ments would be; a fact that impedes buyers to reach they also offer end-to-end connectivity for order
the desired leverage. Peter Lageson comments: documents, acknowledgement and invoices, as well
Therefore, these companies should focus on ending the as content management. These four companies are
implementation of the eProcurement system and restruc- grouped according to their business models, where
ture their own purchasing behavior first, as suppliers know Quadrem and cc-hubwoo show a supplier-centric
that they won’t allocate all the volume. transaction-based model, while IBX and Perfect
Commerce are considered to be buyer-centric,
Competition subscription-based platforms26 (see Exhibit 7).
While the main competitor of IBX in regional terms
Indirect competition is cc-hubwoo in Europe (especially in Germany and
IBX confronts a number of direct competitors, but France), Perfect Commerce and Quadrem concentrate
other players in the industry also represent an indi- their business operations on the North American and
rect or a future competitive threat. Companies such Asian markets respectively. Quadrem also differenti-
as Ariba, SAP and Oracle are the three major licensed ates itself as the only vertical platform, specialized in
eProcurement software providers. They pursue a the mining, metal and mineral industry, concentrating
strategy of selling their software licenses to B2B
platforms on a regional basis without any contact at
the operational level. Nevertheless, Ariba has shown
interest in moving from initially being a software 26 Taken from ‘On demand and end-to-end’, Efficient
vendor, to becoming a software service provider and Purchasing, vol. 1, issue 1, p. 50, 2005.
435

Part 4 Case studies
Exhibit 7 Leading B2B platforms
Professsional ASP Content and Market

= 100% Software
Services Source Procure Pay Connectivity US Europe Asia
cc-hubwoo
IBX
Perfect Commerce
Quadrem
Source: Johan Beer, ‘Leveraging the network: on demand and end-to-end’, Efficient Purchasing, vol. 1, issue 1, 2005, pp. 50–51.
95% of its business on that industry. Peter Lageson Success factors

elaborates on Quadrem’s positioning: The success of IBX is a combination of many factors: the
Quadrem seems to be the most successful example of a right time, the right people, the right founding companies,
vertical platform, but they also focus on indirect materials the right investors, the right business model and ultimately,
rather than the sensitive direct flows. fewer mistakes made.
(Peter Lageson)
After the competition in the American market had
increased significantly during and after the dot.com IBX started with strong industry support. In spite of
bubble, numerous American platforms have tried the crash of the Internet bubble that led to the demise
to enter the European market to benefit from its of many B2B initiatives, IBX was able to survive and
higher price levels. This was, for instance, the case grow. Peter Lageson is convinced that the leading
with Perfect Commerce, which on February 7, 2006 market position of IBX comes as a result of the com-
announced the acquisition of the former e-business pany’s relentless focus on the most decisive features
star CommerceOne. This strategy not only allowed of B2B platforms. He elaborates:
Perfect Commerce to own the eProcurement solu- Deep knowledge in purchasing and liquidity are the most
tions developed by the software provider, but also to important success factors now and back then. The morning
expand its operations in Europe through the acquired after we started, we had almost one billion Euro transaction
customer database. volume and around 80 suppliers from Ericsson ready to use.
In terms of growth, only IBX and Quadrem have That’s real liquidity.
shown a steady annual growth rate of around 30% Liquidity not only assured transaction volume, which
in terms of revenue, while Perfect Commerce grew in turn guaranteed revenues to IBX, but it also was a
at a pace of less than 10% and cc-hubwoo at just sign of quality to the market. By pursuing liquidity,
3%. It is worth mentioning that although cc-hubwoo especially through their anchor strategy, IBX opened
was 30% larger than IBX, it has only been grow- new doors in various markets.
ing through mergers and not through customer IBX’s success is also due in large part to the com-
acquisition. Market observers are expecting a con- pany’s ability to forge strategic alliances with the right
tinued consolidation; hence, IBX has already looked partners. IBX would have had opportunities to collabo-
towards the Benelux and UK markets. Peter Lageson rate with firms such as Accenture and IBM. However,
explained: there were some aspects that demonstrated to IBX
It is an international game; we don’t compete on a local that such collaborations could end up in competitive
level anymore. Before, there were a lot of local players with situations. Choosing SAP as a partner underpinned the
a 3–4 million euros turnover that could get a big customer IBX position. Both have complemented each other’s
and do oK. today, we are basically facing ariba and cc-
role: SAP provides the software and IBX the solutions
hubwoo, and we see that Quadrem and perfect Commerce
are around and we are running into the accentures and and deep understanding of the purchasing processes.
IBMs of this world. It’s another level of competition com- Stefan Geilen, Head of Organization, Standards& Tools
pared to a couple of years ago; it’s much more international. at Deutsche Post Corporate Procurement, commented:
436

We chose to work with IBX because of their high global suppliers because of the guaranteed purchasing
competence in the field of procurement processes – and volume.
their comprehensive sap experience27
● Process optimization that increases the savings
Industry knowledge has also played an important potential by up to 20% thanks to IBX’s eProcure-
role in IBX success. Through its expertise, IBX has ment solution. This optimization cuts the purchase
managed and solved complex situations, showing management cost, reducing the cost per order from
that it can handle the required tasks year after year, 70–90 euros down to 30–40 euros.
thus winning customers’ trust. According to Peter
● Process transparency, through the use of the IBX
Lageson, the tricky part has been to transform this
platform. Buying agents can track and trace the
industry knowledge into a brand. As IBX looks ahead
complete purchase process and control different
and wants to position itself as a source of sourcing and
aspects such as delivery and internal distribution.
procurement knowledge, the strength of the brand
Additionally, IBX delivers statistics on buying
and customers’ trust become increasingly important.
patterns and helps identify process areas that can
Lageson explained:
be further optimized, especially for commodities
today, IBX doesn’t need to rely on its owners anymore. But, that are hard to control (such as professional
during the early years, they guaranteed the quality and the services).
liquidity. our brand is now positioned as a cross-industry
solutions and services provider for efficient purchasing. ● High interoperability. IBX supports its operations
We are working with the most renowned companies in the with XML messaging technology, which makes it
world, in the biggest industries. We have won the confi- easy for the platform to connect to other systems
dence of IKea, ericsson, Lufthansa and deutsche post. their
not using SAP technology. This was the case of
endorsement is immensely valuable as we continue our ex-
pansion into new markets and new industries. Skanska, which uses an Oracle-based ERP system.
Front-to-back supply chain integration was then
IBX started as a buyer-centric platform, which means assured and provided to all buying organizations
that neutrality towards the suppliers was never an for data processing and integration of purchase
objective. However, neutrality became an issue on the orders, order changes and invoicing.
buyer side in the early years, as many buyer organiza-
● Price reduction through online negotiations.
tions thought that IBX would give preferential treat-
The eSourcing solution of IBX allows buyers to
ment to Ericsson. Peter Lageson recounted:
obtain lower prices at reverse auction events,
When Volvo joined [the platform], which was of the same where suppliers compete to capture their pur-
size as ericsson, the market understood that IBX wouldn’t chase volume by offering better prices and con-
prefer any large corporation over another. solving this issue
ditions. These events occur online, reducing the
helped us to increase confidence among new companies to
join as customers. sourcing cycle duration by almost 30% when
compared to the offline method. According to
Beside the key success factors that IBX was able to IBX, at reverse auction events, customers achieve
exploit, external organizations decide to join the plat- savings ranging from 5% to 40% depending on
form mainly because of the multiple benefits that IBX whether the categories have been sourced previ-
offers on both the buyer- and the seller-side. ously or not.
The main advantages that buyers on the IBX plat-
● Bundled volume purchases. IBX also enables buy-
form benefit from include the following:
ers to launch joined auction events, where buying
● Contract compliance effect that has substituted organizations bundle their purchase volumes in
maverick buying is the most important benefit order to attain better price levels.
of using eProcurement solutions. IBX has man-
As a buyer-centric business-to-business platform,
aged to increase average levels of compliance of
IBX concentrates its efforts on creating added value
around 30% to 50% up to 80%. This has led (1)
for its main customers, the buying organizations.
to the realization of savings potential (price cut-
offs) reached through framework agreements by
each buying organization, and (2) to an increase
27 Taken from www.ibxeurope.com.
in the bargaining power of buyers vis-à-vis their
437

Part 4 Case studies
Nonetheless, there are also some important benefits great challenge for the IBX business model. Skanska
for suppliers using the platform; these include: trusted IBX to build a vertical direct materials solution
according to the distinct needs of the construction
● Reduced cost of sales. Suppliers benefit from an
industry.
automated purchase order system that reduces the
Together with HOCHTIEF, Skanska had already
error percentage on incoming purchase orders,
worked on an initiative called AEC global, an ePro-
which can be as high as 40% due to inaccurate or
curement platform that never got into operation.
incomplete data.
IBX attained understanding of the desired purchas-
● Deeper market insight. Suppliers are provided ing processes and understood that the construction
with additional statistics and information that industry was highly project centric (see Exhibit 8).
help them monitor customer demand and market The construction industry handles roughly 80% of
changes. Suppliers can thus identify market needs, the purchase volume through project sourcing, in
set price levels accordingly and also quickly react contrast to other companies in the manufacturing
to newcomers and low-cost vendors. industry that procured the same percentage from
framework agreements. To meet the specific needs
IBX’s next challenge: expanding the of the construction industry, IBX has built a specific
project-centric request solution to launch requests
business model into Europe and into the
for information, proposals and quotations as well as
direct vertical market
to run online auctions. Based on this technology, the
The five-year contract that IBX closed in 2004 with IBX source solution was developed and rolled out
Skanska, one of the world’s largest construction com- throughout Skanska. Through this deal, IBX is suc-
panies with around 54,000 employees, not only deliv- cessfully penetrating the construction industry as a
ered average annual revenues of 2.5 million euros for vertical B2B platform for tracking direct and indirect
outsourcing their material flows, but also entailed a material flows.
Exhibit 8 Overview of the IBX solution for Skanska
Sourcing Procurement Performance Supplier

(Strategic + Spot) (call-off) Management Management
Agreements Catalogues
IBX Content
Refinery
Central IBX
Sourcing eSourcing IBX Content IBX
organisation Workbench Statistics
Supplier
IBX IBX
IBX IBX
Construction IBX eProcurement Search
Connect Invoice
projects Request (MySAP SRM) Engine
IBX Supplier
Activation
IBX Program Management
Behind Firewall Outsourced Services
Source: IBX.
438

Dealing with the governance question a ‘critical mass’ of transactions. At the same time, its
From the outset, IBX was aware of the governance inability to master basic technical integration impeded
problems that other vertical B2B initiatives such as the creation of switching costs on the vendor side.
Covisint, Eutilia28 and Forrest Express29 had encoun- Contrary to the Covisint approach, IBX from the
tered. In particular, Covisint, which was founded outset assumed complete responsibility for Ericsson’s
by Ford, General Motors, and DaimlerChrysler (and eProcurement transactions and for its suppliers’ net-
later joined by Renault, Nissan, and Peugeot Citroen) work. This meant that IBX had to customize its
as an exchange in order to obtain significant compo- services both for suppliers and buyers, thus making
nent price reductions as well as to become a de-facto it a customer-driven B2B platform. Such cooperation
standard for eCommerce platforms in the automotive never took place at most vertical B2B platforms, which
industry,30 faced serious governance issues. hired developing teams with no purchase experience
This platform was created in 1999 to broker and having to force at the end their purchase depart-
500 billion USD in purchase volumes. By the time ments to bring in the requirements. Additionally, IBX
it was sold to Freemarkets31 in December of 2003, started as an indirect material initiative, which from a
Covisint had already burnt 350 million USD invest- strategic perspective was not as sensitive as the direct
ment funds from the carmakers. Ultimately, it came materials since the latter represent a strong differen-
as no surprise that this platform, which had received tiating element of buying organizations, especially if
praise for its liquidity and the bargaining power of they compete in the same industry.
its owners, failed. In December 2002, Gerry Kobe, IBX used its cooperation with Skanska to establish
Executive Director for Automotive Industries, wrote: an eProcurement and eSourcing standard that coped
today the B2B exchange is floundering. the investment is
with the distinctive needs of suppliers and buyers in
nearly gone; suppliers have been burnt by oeMs32 in ma- the construction industry. IBX was convinced that by
nipulated online auctions; brokered sales are a fraction of developing a strong vision of the right processes, it
what was expected and competition has eroded the value would avoid within the platform governance prob-
of the auction service itself. Covisint has reduced its work- lems between competing construction companies.
force by 35% and is relocating to smaller and cheaper office
space. Covisint is slowly dying; it’s as simple as that.33
IBX’s intention was to deliver a proven business
model with customization capabilities while not let-
The development of such a standardized portal ting the incumbents control any discussion regarding
became more complex than expected due to problems best practices, purchase processes or priority issues.
of (1) governance between the three giant founders, According to Peter Lageson, IBX entered the construc-
(2) choice of technology standards, and (3) adaptation industry with a strong message:
tion of internal process to the Covisint solution. The
We may accept change but thanks to our experience with
OEMs also did not allow the suppliers to get directly Skanska, we are coming with an established and 80%
involved in the development of the platform. This proven business model. We know the right processes, so
resulted in serious technology conflicts during the we can take the arguments, fight back and customize the
roll-out phase since Covisint did not match the sup-
pliers’ existing IT systems. This situation coupled with
the growing mistrust towards the carmakers led to an 28 An eMarket for the European utility companies founded
unexpected reaction of the first-tier suppliers. Bosch by EdF, Electrabel, Endesa, Enal, Iberrola, National Grid,
GmbH, Continental AG and INA Werk Schaeffler oHG Nuon, RWE, Scottish Power, United Utilities and Vatten-
launched in April 2000 SupplyOn as a competing fall (www.eutilia.com).
29 Paper Exchange founded by Georgia Pacific, Interna-
platform. tional Paper and Weyerhaeuser.
In the end, Covisint did not reach its goals. It 30 Taken from ‘Shaping IT Standardization in the Automo-
reduced costs only on the buyer side, while position- tive Industry’, Electronic Markets, Vol. 15, issue 4, p. 339,
ing itself as an intermediary, charging subscriptions 2005.
as well as transactions fees, and therefore generating 31 Freemarkets was bought by Ariba in January 2005.
32 Original Equipment Manufacturers.
more costs than value to suppliers. Although more 33 Quoted in ‘Covisint in Europe: analysing the B2B auto
buying organizations joined the platform, Covisint e-marketplace’, Int. Journal Automotive Technology and
did not manage to attract enough suppliers to reach Management, Vol. 5, Issue 1, p. 31, 2005.
439

Part 4 Case studies
remaining 20%, if needed. This way and because we are really paid off and our services and on-demand solutions
strong in our own thinking, we hope and believe that we will play an important part in our continued growth. […]
create trust with the new prospects. Germany and Scandinavia are important markets for us but
beyond this, we want to expand with a focus on France and
the UK.34
Next steps
Clearly, IBX still faces many challenges. It remains
IBX is not yet satisfied with the position they have to be seen whether its business model will be able to
achieved, as Hans Ahlinder, CEO of IBX, explained: cope with the challenges of moving into a vertical B2B
We plan to continue our expansion in Europe. […] We are platform and whether its success factors are only fit
seeing a clear trend. Purchasing moves up higher and higher for the horizontal market. In a way, the jury is still out
on the corporate management agenda and there is a large and the market will have the last word.
demand for purchasing-related services in all the markets
where we operate. 2005 was an amazing year for IBX and
I expect continued strong growth in 2006. The successful
acquisition of trimondo and strategic deals, such as the one
with IKEA, validated our business model. Our efforts have 34 Taken from www.ibxeurope.com.
440

CASE STUDY 6
Satec (Spain)
Business transformation through IT value
reinvention and organisational redesign
Things have changed a lot. The competitive intensity is brutal can bet on doing the growth yourself. However, that also
and margins are increasingly under pressure. Our competi- leads to losing control, changing the organisational set-up
tors have another mentality. They are merging and buying and bringing in new people. that means that the role of a
companies just like [buying] cars. They think very industrial. lot of people in this company needs to change.”
The market today is driven by cost and we don’t have a cost
advantage. We are still too small to be in the [first] league. The entrepreneur Juan was referring to is Luis
(Juan Amias Gorostiza, director of Business Rodriguez-Ovejero Alonso, the founding CEO of
development, satec) Satec1, who has led the company since its beginning.
As he finished making the above statement, Juan With the drastic growth that Satec enjoyed over the
Amias turned around from the flipchart and looked last two decades, Luis has been feeling the urge to
at the assembled Executive Committee of Satec. He further professionalise the company. However, that
just spoke out loud what everybody in the room was can only be achieved by transforming Satec from a
thinking about for a while. The company needed to family business to a more professional company, as
find a way to strengthen its competitive positioning. Juan Amias summed it up:
Juan Amias continued: We have to do something and go back to the basics. We
have talent; we have markets and clients. We also have a
“the entrepreneurial process moves from idea to concept, good [brand] name and goodwill. But how could we cash
from concept to launch, and from launch to a sustainable in on these intangible assets? We need money and a pro-
business that further evolves and grows. We have a sustain- fessional board. We need a financial controller and a CFo
able business, but we are in the middle of the entrepre- that says ‘“we can do this and we can’t do that’”. We need
neurial road where the entrepreneur has to decide how to [to have] a strategy!
manage the company in the future. satec can be successful-
ly managed as it is right now through family and friends, but
there is an issue of control to put this company into value.
You can lose control now by selling the company, or you 1 Sistemas Avanzados de Tecnología, S.A.
this case study was written by Matthias promny, Research assistant, under the supervision of tawfik Jelassi, professor of e-Business
and It at the school of International Management at the ecole nationale des ponts et Chaussées, paris. this case was made pos-
sible through the cooperation of Luis Rodriguez-ovejero, Ceo of satec, Juan amias Gorostiza, director of Business development at
satec, and Juan Calleja, director of satec International. this case study is funded under the phillip Law scholarship by the european
Case Clearing House (eCCH). It is and intended to be used as the basis for class discussion rather than to illustrate effective or inef-
fective handling of a management situation.
Copyright © 2009 enpC school of International Management, paris
441
Z06_JELA7870_03_SE_CASE06.indd 441 06/03/14 10:35 AM

Part 4 Case studies
Satec feels it is at a crossroad and needs to reinvent tion support services, e-business, software development,
itself. The good old days of reselling supercomput- managed services and e-learning. As a technology inte-
ers to corporate customers in Spain are gone. The grator and application developer, Satec today is present
company is now an IT integrator operating in several in five countries: Spain, Portugal (through its sub-
countries that span Europe and North Africa. Its man- sidiary Convex Consultoria e Integraçao de Sistemas),
agement has also shifted from a founder-led company Morocco (via a majority share holding in Intelcom),
to a professional team-led multinational corporation. Algeria (via a majority share holding in Telematis) and
Tunisia (through Netcom). Furthermore, Satec plays
Company overview a major role at InterHost, a company focused on data
In 1987, Luis Rodriguez-Ovejero Alonso founded Satec centre engineering solutions and hosting.
as a family business based in Madrid, Spain. After ini- Overall, Satec currently employs 1,000 people,
tially being a retailer of stand-alone computer systems, 85% of whom are university graduates. The individual
Satec became a provider of integrated and customised IT companies that make up the group have a common
products and services. The company focuses on network- strategy and shareholding structure and are led by the
ing engineering in communication-intense industries same management team.
and competes with firms such as Telefonica and Indra.
Satec offers its clients solutions which include com-
From supercomputer retailing to IT
puter systems as well as telecommunications equipment
and software. These solutions enable the integration and
integration services
execution of projects requiring different types of hard- Satec has changed a lot over the 22 years of its history;
ware, technological environments and applications. For its evolution is marked by a continuous innovation
corporate customers, Satec’s added value is a fully opera- process. Exhibit 1 highlights the company’s key mile-
tional solution that is tailored to their specific needs. stones over time. Juan Amias said:
Satec’s current product and service portfolio includes
There are not that many companies in Spain that have gone
Internet-based applications, IT systems, security, opera- from supercomputing, to networking, to applications, to
Exhibit 1 Satec’s key milestones
Technology
bubble
(Infrastructure)
Bubble burst
1000 people
(Re-structuring)
Leaders in
supercomputing New wave:
New markets
(CONVEX) IP networking
(Maghreb)
(CISCO) 140 people
Company New integration

founded business model
10 people 30 people
Time
‘87 ‘92 ‘92 ‘97 ‘00 ‘03 ‘05 ‘07
Source: Company presentation.
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Case study 6 Satec (Spain)
services, and that are still growing. We are one of the most In 1997, as a result of clients’ investment in IT net-
changing companies. When we talk about strategy, one of works, Satec’s sales drastically increased, forcing the
the key questions for us is the rate of innovation and the
company to undertake a major recruitment of addi-
product life cycle. In hospitality, it is 10 years; in oil, it is 5
years; but in IT, it is hardly 3 years. So it is a very short time tional IT experts. The latter had to satisfy clients’ need
frame! for a quick installation of new and reliable IT networks.
The burst of the dot.com bubble

Convex supercomputing During the 1990s, Satec grew from 10 to 140 people
Prior to founding Satec with a group of friends, Luis and its annual revenues reached 70 million euros with
Rodriguez worked for Control Data Corporation a margin of 20%. However, the situation changed in
(CDC) and had a deep knowledge of the computer 2001 with the burst of the dot.com bubble and the
industry. He believed that the distribution of the subsequent decline of the IT market.
new ‘Convex’ supercomputers2 presented a great We had a big problem. The percentage of services that you
business opportunity. As a product, ‘Convex’ was sell to customers is a proxy of how much value you are really
outstanding compared to the supercomputers avail- adding to the project. At that time, the product/service ratio
in the telecommunications business was 80/20.
able at that time. It was cheaper and less complex
( Juan Amias)
to operate, thus offering a good value to a growing
customer segment. In 2001, Satec’s annual sales dropped to 43 million
Soon after its start, Satec’s client base grew sig- euros, resulting in a major financial loss. The com-
nificantly and became the highest market share of pany struggled to survive, especially because top
Convex distribution in Europe. The success was not management did not want to lay off staff, as most
only due to good timing in terms of market demand; companies did at that time. Juan Amias said: “We
it was also due to Satec’s strong IT competency. Since didn’t fire a single employee and salaries were still at
supercomputers were tested on their performance, the peak of the year 2000”. We were in deep trouble!”
Satec was able to drastically decrease processing At that time, IT provider Dimension Data4 and
time3 with Convex computers. In benchmarking tests, some venture capitalists were interested in buying
Satec was able to convince clients of the benefits of Satec. There were irrational evaluations of the com-
Convex, and thus won many new contracts. At that pany which lacked cash in 2001 and clients in 2002.
time, Satec employed 10 people and its first clients Interestingly, the external due diligence revealed sev-
included Federal Express and the National Weather eral internal and organisational issues at Satec.
Forecasting Agency of Spain. They asked us how much Satec owed Cisco over the fol-
lowing three weeks, but Satec simply wasn’t able to answer
that question. Investors were saying: “You are telling us
that you have a 70 million euros business and you have no
IP networking and Cisco [IT-based] systems that enable you to answer such a simple
question!” Actually, we hated systems because they limit
Once you buy one of these expensive computers, you want
to optimise your operations and share [the processing ca-
pacity]. Sharing meant communication and at that time,
customers wanted Cisco [products] for communication. 2 Convex Computer was a company that produced one of
That’s how we ended up partnering with Cisco, because of the first affordable supercomputers for small-to-medium
indirect and customer-triggered demand. sized enterprises. Convex was later bought by Hewlett
( Juan Amias) Packard.
3 Customers gave Satec the data and Satec had to process it
Satec sees itself as a leader in technology with a
within a certain time frame. The processing time depend-
strong focus on understanding customer needs. This ed on the actual computer capacity and also on how the
customer focus has led CEO Luis Rodriguez and his computer was programmed to carry out the processing.
technical management team to adopt Cisco’s suc- 4 Dimension Data is a specialist IT services and solutions
cessful communication applications and to shift from provider that helps clients plan, build, support and man-
age their IT infrastructure. Today, the company is posi-
retailing Convex supercomputers to selling integrated
tioned in IT networking and communications in nearly
IT solutions. 40 countries around the world.
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Part 4 Case studies
creativity and everything else. Satec was like a rocket going there are no contracts and the more projects there
higher and higher. So, it didn’t have to worry about selling are the more support contracts arise. The contracts
because the demand was so high and the numbers were
are similar to having an insurance policy to which the
crunched at the end of the year. Satec didn’t have quarters;
it had years! client subscribes to ensure that the implemented tech-
(Juan Amias) nology runs smoothly. The contract’s price depends
on the technology used and the type of skills required
to maintain it.
Geographical expansion and business
Exhibit 2 illustrates this process; it shows how
reinvention
projects involve IT equipment to be sourced from
Despite the company’s struggle subsequent to the dot.
suppliers and installation to be carried out by Satec.
com bubble, Satec not only had substantial business
These contracts ensure that installed IT networks
value, but was able to expand into the Maghreb coun-
are technically maintained and parts are replaced
tries. In 2003, the company invested in the Moroccan
in case of damage or malfunction. Ninety per cent
IT company Intelcom, which was experiencing huge
of sales generated through contracts are related to
growth. However, Luis Rodriguez realised the dif-
maintenance. Due to the decreasing product margin,
ferences in mindset and management style between
it is the maintenance contract that generates most of
the two companies. After several strategy meetings,
the profit.
the management team concluded that Satec needed
Although the end-consumer markets strongly
a computer-based financial control system. Luis said:
determine Satec’s success, the company does not
“At that time, we put an ERP5 [system] in place. First, we deliver products and services to end-consumers but
bought an SAP system, then an Oracle one. We implement- to telecom operators who cater to specific consumer
ed a platform which is one of the best in ERP. However, it
market needs. The more applications the consum-
took us 5 years [from 2002 to 2007] to really believe in the
numbers. We are now deploying the system in all our coun- er market demands through telecom operators, the
tries of operation. Sales representatives calculate commis- more business there is for Satec (see Exhibit 3). The
sions by looking into the system instead of [using] papers. price for components, however, determines the price
The people believe in the system and it works.” for the end-consumer product.
The new ERP system was a huge success, but there The market for components is a global one and
were still many problems that needed to be solved, suppliers provide the same products depending on
especially in relation to Satec’s business model. This the country of operations and the specific market (tel-
issue became urgent in light of increasing competition ecommunication, radio broadcasting services, etc.).
and customers’ bargaining power. It therefore became The integrator usually sells a project to an operator.
more and more difficult for Satec and the like to stand A typical Satec project, which may cost the corporate
out, unless they offer a highly differentiated service on client 600,000 euros, consists of 300,000 euros for IT
top of the product. Furthermore, large multinational equipment (routers, etc.) sourced from suppliers and
companies have large financial resources which allow 300,000 euros for services (10,000 hours at 30 euros
them to prolong billing cycles for customers or engage per hour, for instance). The integrator buys from
in backward integration. Cisco, as in the case of Satec, and resells the sourced
components with a margin. While the margin in
mature markets is around 10%, it is about 20 to 25%
The business model in emerging markets. Furthermore, some integrators
Customer IT projects and contracts are the back- are specialised in specific component suppliers such
bone of Satec’s business model. Projects are typi- as Cisco or Juniper.
cally one-off and last for a certain period of time (e.g., A prospective corporate client sends a request for
6 months). During that time period, IT equipment proposal stating that he needs an IT network, for
(such as computer servers, routers and software) is instance. Satec makes an offer including the cost
technically installed at the clients’ site. Contracts are of the network installation and how long it takes to
recurring, usually lasting a year and consisting of IT
maintenance and support. These contracts are fuelled
by the number of projects: if there are no projects, 5 ERP stands for ‘Enterprise Resource Planning’.
444

Exhibit 2 Satec business model
Equipment
• Software € Request for Proposal

€
• Hardware
Projects
Installation 1
Effort 10.000h
# of hours
Billing Rate
Time
€ per hour Satec
80€/h # projects
Maintenance 90%
Fixed Direct Costs for

Technical Assistance 2
Contracts
10%
Replacements
Equipment
instal it. The price per hour depends on the type of it decreased the value of this certification. More
technology involved. If it is a very common technol- certified IT engineers who are able to integrate rout-
ogy (such as Cisco routers), it will be cheaper for the ers within a certain time frame decrease the value
client compared to when there is a more complex of Satec’s IT engineers, which in turn led Satec to
technology involved. charge less for its services. Juan Amias said: “We
Satec competes with other integrators that are also buy- fully depended on Cisco and our customers had Cisco
ing from Cisco. If Cisco thinks that Satec will get the client products.. Actually, they often said: ‘We called Cisco
project [rather than a Satec’s competitor], it will try to de- to get some routers’, while in fact they called us! But
fend its margin. Cisco gives an x% on the price (sometimes for them, we were the guys from Cisco.”
up to 90%), so you have to bargain with them. If Cisco thinks
Satec won’t get the client’s project because the equipment’s
When credit line conditions with Cisco wors-
price is too high, it will lower the price. It may do that ened, Satec started thinking about new suppliers
for Satec and not for the competitor, or vice versa. Cisco (such as Alcatel) and Cisco’s share in Satec’s sales
doesn’t say at what price it will sell. In a low margin busi- dropped from 95% to 70%. Still Cisco continues to
ness, it’s the seller that dominates the market. be a major supplier, due to the fact that Satec has
(Juan Amias)
a significant amount of work related to the mainte-
nance of installed IT infrastructures. Furthermore,
From a dependence on Cisco to a sourcing
diversification
Satec invested more than its competitors in the cer-
tification of its IT technicians, thus building a very 6 A ‘CCIE’ is a ‘Cisco Certified Internetwork Expert’, which
good pool of talent comprising skilled and certified is the highest level of professional certification that Cisco
IT engineers. When Cisco started certifying CCIEs,6 gives.
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Part 4 Case studies
Exhibit 3 From component suppliers to the end consumer
Juniper,
Cisco
30€/month
Alcatel Market France Telecom
End Consumer
Nokia Creates Demand
Global
Radio Broadcasting Services, e.g.

Sells Project
Projects to Operator
Integrator Operator
Contracts
600k€ charge clients
• 300k€ for routers (Cisco)
• 300k€ for services
the new suppliers (Alcatel and Juniper Networks7) manage the client’s project but we don’t have project man-
increase the solution’s complexity for Satec’s technical agers. In order to deliver on time and anticipate issues, we
had to put in place a project management methodology.
engineers. According to Juan Amias:
Our technical people need to know more things and the Clients explain to Satec their processes and ask for
support requires more knowledge than just about Cisco”. custom-made solutions. The challenge for Satec is to
“Your CCIEs lose their value when you start selling another make things technically functional and leverage the
brand. They have to reengineer their heads but the change certification and expertise of its IT staff. This dual
of mindset is difficult and takes time.
capability is what differentiates Satec from consulting
Today, the dependence on Cisco is not as strong as it was companies that are very good in processes but lack
in the past. Satec has a more balanced technology port- technological expertise.
folio. The company has invested in new IT platforms and
technically complex applications. Furthermore, SOA,8 Competition
web services and mobility started to play an important
role in Satec’s service portfolio. Satec has diversified Satec’s competition is not only made of IT integrators
its technology, clients, services and suppliers. In order and IT service providers (such as Telefonica). There
to ensure liquidity, it has also increased the number of is also a major threat of backward integration from
banks it works with. In the past, nearly 80% of Satec’s
funds were deposited at two banks; today, Satec deals 7 Juniper Networks Inc. is an information technology
with 27 banks located in different regions of Spain. company founded in 1996 and headquartered in Sunny-
For Juan Amias: vale, California. The company designs and sells Internet
Protocol network products and services. Juniper also
the problem is that the product margin dropped from 25% partners with Nokia Siemens Networks, Ericsson, and
to 12%; that’s a 50% decline! so we have to make money Alcatel-Lucent.
in the services. For a large service deployment, we need to 8 SOA stands for ‘Software Oriented Architecture’.
446

traditional telecom operators. Furthermore, the low IT market positioning

product margin pushes IT integrators (such as Satec)
In the past, the highest margins were made through the
to offer services with a higher margin, thus competing product. Customers were not used to pay for services;
with IT consulting firms. services were offered free of charge on top of the product.
Today, the business is more focused on the execution and
the client’s technical satisfaction. Does the IT network run
The threat of backward integration without any problems or not? Customers want plug-and-
Satec used to have more certified Cisco experts than play solutions; they want to turn the key and that’s it. This
Telefonica, but the more competitors acquire such is a question of talent. If you are good enough, you make
money out of this and create substantial value for yourself.
skills, the more the integrator loses its ability to dif- (Juan Amias)
ferentiate itself. While in Spain and France some
providers go directly to clients, operators increasingly To sustain its market position and increase its value-
engage in all kinds of technical activities.9 adding potential, Satec needs to be closer to its custom-
Backward integration from operators is a threat to ers. The percentage of service revenues in the product/
established IT integrators such as Satec (see Exhibit 4). service mix is critical. Satec used to be a value-added
For instance, Telefonica Sistemas (in Spain) and product reseller. However, the most value can be real-
T-Systems (in Germany) offer integration work, while ised in the consulting business. The goal of the industry
Maroc-Telecom (the national telecom operator in and of Satec in particular, is to shift towards a more
Morocco) owns Casanet. The rationale behind back- service-orientated business (see Exhibit 5).
ward integration is a faster ‘time-to-market’ and higher ● Box Movers are product resellers such as Affina
knowledge. When an operator wants to win over a client or Mayoristas10 in Spain. These companies have
(e.g., the Minister of Finance in Spain), it usually has a a high sales volume and a strong financial power.
problem to technically explain the project due to its lack They are usually not involved in very complex
of technical expertise. However, an integrator has techni- projects, but differentiate themselves through
cal knowledge. Although a company such as T-Systems attractive financial terms they offer to customers.
may lose money, Deutsche Telekom makes money in its
core operator business. The unique selling proposition of
an integrator, however, is its independent view on prod-
ucts. Since the integrator usually is not limited to specific
9 Some operators used to be sellers and provided IT equip-
component suppliers (such as Juniper or Cisco) and has
ment, but due to the global nature of the business, they
international sourcing access, clients may see this as an stopped doing that.
advantage over dependent in-house integrators. 10 Mayoristas de Partes y Servicios, S.A.
Exhibit 4 The threat of backward integration
Minister of
Components Telematics T-Mobile
Justice
Provider Integrator Operator Consumer
T-Systems
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Part 4 Case studies
Exhibit 5 IT market positioning
Intelcom
Morocco %*
80–100
%*
60–80 IT
Satec Tunisia %* Consultants
30–60 System
%* Integrators
10–30 Value-
%* Added
5–10 Corporate
Resellers
Resellers
Box
Movers
No
services,
large
accounts
determine Thales
Data UK success. Aris Atos Accenture
*of sales
To move up is challenging!
The business model is simple; it relies on a large It is very rare to see a value-added reseller offer-
volume, good logistics and an effective financial ing products from, for instance, both Cisco and
department. Clients often pay within 180 to 360 Juniper. Value-added resellers integrate different
days, but component suppliers may bill a box technologies and manage the related IT opera-
mover within 30 days. A lot of working capital is tions; however, they are tied to the technology
thus needed. Furthermore, box movers’ salespeo- they work with.
ple are not very skilled in technology, unlike the ● System Integrators ensure integration regardless
certified engineers of system integrators. Satec of the technology involved. They do not just sell
does not compete in this segment. components, they use them. Thales and Atos,12
● Corporate Resellers offer a certain type of service for instance, are system integrators. They include
layer on top of delivering the IT equipment. In this in their sales a certain percentage of third-party
context, pre-configuration and maintenance of the technologies. A typical project for a system inte-
equipment are crucial although they do not repre- grator consists of 50% products and 50% services,
sent differentiating factors. For corporate resellers, although the extent of the service component usu-
a critical success factor is winning large corporate ally exceeds that of the product.
accounts. In Spain, when opening new stores, retail ● IT Consultancies offer tailor-made service solu-
chains (such as El Corte Inglés11) need not only PCs tions. They provide consulting, business process
but also rolling out IT infrastructure. A corporate reengineering (BPR), and the development of the
reseller does that and Satec in Tunisia is still a cor- client’s solution.
porate reseller. Integration is not demanded there
at the moment, but Satec is moving towards offer- For a system integrator, the only way to achieve a
ing more services and upgrading Satec Tunisia to sustainable position is to move up into consulting
become an integrator. services and be closer to the client. This, however,
● Value-Added Resellers offer value on top of the

technology of a third party. Most of the time, 11 www.elcorteingles.es/
they are specialised by technology and provider. 12 Atos Origin S.A.
448

implies a change in the business model. Exhibit 6 lists solutions. As the company grows, its goals and approach
the drivers required to achieve a sustainable service to business undoubtedly need to evolve and change.
positioning.
System integrators, such as Satec, very much depend
on technology. This not only increases the amount of
From entrepreneurial to professional
working capital required but also the technology risk management
involved. Exhibit 6 depicts the technology and the peo-
We are at the end of the entrepreneurial process. With over
ple dimensions of the business. IT networks, platforms 1,000 employees and successful operations in 5 countries
and applications13 represent three layers of technol- spanning Europe and Africa, Satec is not anymore a small
ogy, while telecom and system engineers along with company. Our employees have to understand that we are
business consultants represent the people dimension of not here for friends; we are here for professionalism.
the business. Consultancies, such as Accenture, do not (Juan Amias)
instal IT networks or platforms; their success relies on
the project’s organisation and management. Satec has been lately shifting from an entrepreneur-
While Accenture is a 100% IT consulting com- driven, family-led business to a professional team-
pany, Telematics is 100% involved in setting up IT managed company. This change calls for a new man-
networks. Satec’s business is 50% networks and 50% agement approach and organisational adaptation.
platforms; the more it ties itself to a certain technol- The company feels the urge to put in place a new cor-
ogy, the more it will depend on it. However, business porate structure and a more professional organisation.
consultants do not need to understand the technol- One big challenge, however, is the ongoing conflict
ogy. They have to understand the problem and the
customer requirements, and then offer a solution and
13 IT networks consist of physical installation of routers,
manage its induced change.
cables and telecommunication infrastructure. Platforms
The difference between technology and organisa- use the network and allow for an integrated use of it.
tion is crucial for Satec’s operations. Satec always had Applications on top of these platforms are actual tools that
a focus on technology to offer clients effective technical enable people to communicate and work with each other.
Exhibit 6 Technology-driven vs. organisation-driven firm
Accenture Business
Application
Organization Consultants
Atos
System
Platform 50%
Engineers
Satec
Technology Telecom
Network 50% Telematics Engineers
Algeria 100%
Network
Tunisia 92%
449

Part 4 Case studies
between the technical and commercial departments well in chaos in Tunisia. It is difficult to organise everything
of the company, as Luis Rodriguez alluded to: there, but we can survive chaos. If we have too much or-
ganisation, we would feel constrained.
We understand the requirements of the market which aim (Luis Rodriguez)
at value, but transmitting that within the organisation is
taking us a terrible effort. people are not interested in that All Satec’s departments at have gone through tremen-
kind of effort; they are challenged by solving a technical is- dous change. There are new regions and new offices
sue. Making money or selling a product is not so sexy [for throughout Spain: in Asturias and Galicia (in the
them]!
north-west of the country), in Castilla (in the centre),
Juan Calleja, Director of Satec International,14 further in Valencia (in the east), in Andalucia (in the south),
elaborated on this issue; he said: and in the Canary Islands. Exhibit 7 depicts Satec’s
organisational structure. The company’s management
Making money is an issue. engineers act; they don’t talk
about money. We have to integrate the engineers and this committee comprises CEO Luis Rodiriguez, Teresa
is what we are working on right now. We have to convince Taubmann (who is responsible for marketing and
employees that talking about money is healthy for the com- communications), and Miguel Angel Vences (who is
pany and we have to overcome strong resistance there. responsible for the technical department).
Luis Rodriguez is known inside the company for
getting to the very details of the business, but also for
Organisational change
We have ten offices in spain and five offices abroad. Learn-
ing how to work with people distributed all over the place is
challenging. [. . . . . .] some opportunities will develop in the 14 Juan Calleja joined Satec in 1992 as the company’s first
health care sector in tunisia or in Morocco. We work pretty telecommunications engineer.
Exhibit 7 Satec’s organisational structure
Board of
Directors
Luis
Rodriguez-
Ovejero
President
HH.RR.
Staff
Of ce
Executive
Mª Victoria
Committee
Orasio
Financial Business Technical Operations InterHost
Pedro Rodríguez
Carlos San Narciso SPAIN and
PORTUGAL Miguel Ángel Inciarte
Financial Director INTERNATIONAL Teresa Taubmann
Paula Lopes Vences President
Raquel Ledesma Teresa Taubmann General Manager
Country Manager General Manager Félix Díez Sacristán
Controller General Manager
General Manager
450

managing the strategic aspects of it. The challenge for Satec’s mission and values
him is twofold: (1) to find a trade-off between strat-
All people in the company have been friends [with each
egy and operations; and (2) to delegate some of his other] since they were kids. In this company, this is how it
activities to members of the management team. Juan works and it works. In the first days, it was totally family;
Calleja, for instance, has been the general manager of everybody was a brother. the good thing is that [this way]
Satec Morocco for more than two years but feels lim- you have a low risk in terms of culture.
(Juan Amias)
ited in his decision-making power. This has hindered
his entrepreneurial attitude. In order to strengthen its internal teams, Satec tries
Teresa Taubmann’s commercial team generates to create a shared vision and a consensus-seeking cor-
80% of the sales and interacts with operators, public porate culture. The company believes that a distinct
administration and banks. Theresa’s sales force, how- corporate culture with a clear mission, strong values
ever, faces problems. In the past, sales representatives and common goals helps to increase professionalism
had a very clear view of the solution they presented to and can better integrate new employees. Satec’s mis-
customers but nowadays, with the increasingly wide sion is:
scope of technology, they encounter some difficulties
to create value and generate growth through innovative It
to fully understand the technical aspects of a solution. solutions and services, contributing to the evolution, effec-
In the past, sales representatives were supposed to tiveness and productivity of our customers’ business within a
generate leads, but today Satec wants them to become culture that promotes talent, integrity and teamwork, with the
key account managers who can assess the technical aim of being a leader in both our industry and community.
feasibility of a solution in addition to negotiating the For Juan Amias, Satec is an integrator. He said:
price with the client.
We have three options: either we are the lowest cost inte-
Miguel Angel Vences’ technical team develops
grator, the most innovative integrator, or the closet to cus-
and installs Satec’s service solutions. The team is tomer integrator. the latter involves empathy and the abil-
comprised of an increasing number of people who ity to understand customers and offer them many different
have different backgrounds and skills. Its challenge is things. the goal is to increase the clients’ return on invest-
to manage the increasing complexity of the product ment. We help customers to make more money through
the support of their It systems.
and effectively handle the maintenance and support
operations, which represent the cash cow of the In addition to the goal of helping clients to increase
company. return on investment, Juan Amias stressed the impor-
A major weakness at Satec is the company’s low tance of attracting new talent. According to him, IT
commitment to its finance department. Satec bills technicians recruited from anywhere in Spain come
clients when the latter indicate that they are ready to in with the same level of skills. In Madrid, there are
be billed. Satec does not bill when it should. Although many multinational companies that create a strong
the CFO is involved in the accounting and preparation competition for attracting the best talent. People are
of the balance sheet, the management of payments, expensive and there is a high rate of staff turnover
as well as maintaining the contact with banks and and a low level of loyalty to employers. In order to
tax departments, he is not a member of the Executive overcome this problem, Satec started building devel-
Committee. Therefore, it is not always clear to this opment centres within the regions. Due to the geo-
committee what is financially possible and what is not. graphic proximity of these centres, people were easier
our problem is management; that’s management in terms to attract and retain. While some years ago, 80% of
of organisation”. “at satec, you either sell or produce. You Satec’s employees were based in Madrid, today only
don’t think of new services or how to organise things. one 45% of the company’s staff works in Spain’s capital.
objective is to increase the management skills of the com- Similarly, an increasing percentage of employees is
pany. the company’s move from a founder-led to a profes-
recruited locally and not in Madrid.
sional team-led management is so complex. […] satec can
generate additional value through better management. We the company has value and a lot of intangibles. But we are
need to help teresa [taubmann] and Miguel angel [Vences] not able to translate that into euros. We don’t know how to
because they are the ones who are selling and developing do it. We are assuming that the business development team
the platforms. knows how to do marketing plan and that our people know
it as well since they did an MBa.
(Juan Amias)
(Juan Amias)
451

Part 4 Case studies
At Satec, there is still a strong resistance to change In the Maghreb, we bought the goodwill. For example, what
and to accept the fact that the company has become a we did in Morocco was not buying the technical compe-
tency, but the entry ticket into the market. In Algeria and
multinational firm, as Juan Calleja explained:
Tunisia as well, we bought companies that do sales and
If I say we are a multinational company, people laugh at pre-sales and that outsource everything else. You need an
me. there is a lack of self-confidence in this company. We entry ticket that brings you some key [corporate] accounts
have a mission and we have value. Why is it so hard for this and contracts.
company to forecast? to say I want to be there although I
don’t know how I am going to be there. there is a lack of Juan Amias stressed the learning that Satec acquired
ambition. also, in a family business, it is hard to talk about through its international expansion:
numbers, because people feel that someone is judging
We did something that is difficult to do. We invested in
them. But it is just a number. We have a small mentality with
an international core development team. You never know
a big business!
which company to buy. You have to find an opportunity, go
through the due diligence and deal with the local partners.
so we learnt how to buy companies and how to fix con-
International expansion tracts and shareholder agreements. Before, we had weak
Satec’s international expansion has shown the extent arrangements, but now we have strong agreements. these
things are so complicated, especially when you have to deal
to which the company is able to transfer knowledge, with them in a foreign language.
enter new markets and develop through an active
change management programme. Luis Rodriguez sees Despite the strong cultural differences which Satec
further growth opportunities: faced when dealing with each one of the three
Maghreb countries, the company enjoys today a good
If you look at the market, we are strong in Madrid, the
north-east, the north-west, and central spain, which rep- presence in Tunisia, Algeria and Morocco. In light of
resents almost 40% of the total market in spain. In other re- this expansion, Satec has learnt to think like a multi-
gions, we are not even present, so there is a huge domestic national company. The expansion into the Maghreb
market there to grab. region has opened the company to new cultures,
Portugal has about the same size as north-west Spain in an important fact which will ease the integration of
terms of sales, but in 2008, Morocco already surpassed future foreign business entities. Luis Rodriguez com-
Portugal and Algeria. Luis Rodriguez explained: mented on Satec’s international foray:
In the Maghreb countries, we have only done the It net- the worst is done. now we need a reasonable ‘need struc-
working part, which has been growing a lot. But we haven’t ture’ and learn how to operate. then we have to capitalise
done the systems and applications part of the business. on our international presence and create synergies between
this market is a tremendous opportunity, because it is a our different sites. We went to Morocco because we were
growth market. For us, the problem is not the technology. confident in our ability to transfer competence and also be-
the problem is that we have to change the mindset of the cause we had the ambition, time and money to jump on an
people [who work there]. opportunity. It’s surprising why our competitors aren’t look-
ing at these [Maghreb] markets. I really don’t understand it.
For now, IT network installation is the main driver for

North Africa, a back door to France and Europe
revenues in the Maghreb region. Satec intends to move
North Africa has become an important business region more into the development of applications in order to
for Satec. In Morocco, Satec employs more than 100 gain a lasting foothold in this market. It believes it is
people who generated in 2008 revenues of 20 million important to actively create the market and start today
euros. In Algeria, Satec has 50 employees and a turno- working on solutions for future client needs.
ver of 10 million euros. In Tunisia, Satec employs 50
people and had in 2008 revenues of 7 million euros. Exploring new markets
So the Maghreb as a whole has become for Satec a
region worth almost 40 million euros of annual rev- the projects that satec does in the Maghreb are as good
as, if not better than the ones we carry out in spain. some
enues, while Portugal is worth 25 million euros and customers are very interested in our experience in Morocco
Spain 70 million euros. These revenues are highly and we have even started thinking about [doing business in]
dependent on the company winning large hardware France. It’s of course a big and challenging market, so we
contracts. Juan Calleja stated that Satec’s growth was have to enter it through the back door.
made possible through acquisitions: (Luis Rodriguez)
452

Satec started with small projects in Morocco setting up similar to marketing, which people also did not think of 15
IT networks and developing messaging applications. years ago. Now the importance of IT is internalised and this
represents opportunities for us more than ever before.
The company realised that the one who is recognised
(Juan Amias)
as the best will be able to take the market through a
word-of-mouth effect. In a service-orientated busi- Satec sees the following business sectors as poten-
ness, language is key, especially because language tial growth markets, despite their relatively high
transports culture. Juan Amias noted: entry barriers: e-health; environment and water treat-
ment; defence; and mobility. For instance, health
We are trying to go to Mexico, but although this country
speaks the same language [as spain], from a cultural per- care in Spain is administered by the local government
spective words have a different meaning. the country is authorities and the industry is driven by a high level
very big and there are already established companies in the of professional skills. Spanish authorities have a huge
market, so we have to address customers in a convincing influence on budgets and the execution of projects, as
manner in order to win them over. there is not one single
Juan Calleja explained:
strategy and the adaptation is very complex.
Spain is almost a federal country. Catalonia, for instance, has
In addition to language and cultural proximity it is the more autonomy than any federal government in Germany.
perseverance to stay the course which creates success. This, in fact, is creating a strong competition among the au-
Furthermore, it is the courage to do things differently. tonomous regions of Spain; each region wants to be more
Juan Amias elaborated: advanced than the others.
We don’t do things by the book. If you talk to venture capi- Furthermore, 65% of the total budget in the public
talists, you hear ‘we do things like this and like that’. Maybe sector administration is managed by the regions which
there is a book and it makes sense to use it, but for this com- are increasingly interacting with citizens through the
pany there is no book. We haven’t done things by the book.
electronic exchange of information. While decades
By the book, it means that you don’t go to a country if you
don’t speak the language. If you really want to go by the ago, Spain massively invested in building physical
book, you won’t meet any criteria although in the end there roads, the Spanish authorities are now setting up the
are more profitable opportunities than you might think. information highways to cover the entire country. The
that’s why you have to write the book. fact that e-administration is mostly local and the trend
For Luis Rodriguez: is for a citizen-centric approach represents a big future
market for Satec.
things have to change a lot. Will there be a market in alge-
Luis Rodriguez believes that with the growth of
ria? sure! Look out of the window; they have a lot of things
to do. Will it be safe to go there investment-wise? sure! It consumer applications on the fixed and wired-line
is around the corner; it’s a one-hour flight [from Madrid]. Internet, Satec’s business will grow too. He said:
However, they speak about algeria with some prejudice.
Cisco was amazingly successful, but we are looking for other
spain’s first supplier of gas is algeria. I think we were right
partnerships. Today, Cisco is no longer leading in technol-
with the investment and we learnt a lot. We also have some
ogy; it is leading in marketing. Cisco was doing networking.
opportunities through portugal in the portuguese-speaking
Today, the user is the leader as the iPod has shown. For in-
countries and we might go to Mozambique and angola,
stance, AT&T has significantly increased its net profit thanks
which represent another [business] opportunity.
to apple’s iphone. also websites such as Youtube, Facebook
and twitter already attract dozens of millions of daily users,
Future outlook thus exponentially increasing data traffic.
Satec wants to see change as an opportunity, not as a Juan Calleja concluded:

threat. To keep up with competition and differentiate You have now a huge bottleneck problem. It has destroyed
itself, it aims at leveraging its expertise and experience all the It networks in spain. people want to download more.
in telecommunications as well as in IT systems and We have to put up more networks and increase the capacity
of the Internet. digital tV is certainly coming out and the
applications. To achieve this end, the company recognis- current backbones cannot put up with users’ demand. We
es the need to put in place a continuous change process. are not going to rebuild the pC. We are going to sell appli-
even if customers and suppliers have today a stronger bar- cations or services on top of the platforms. one day, Cisco’s
gaining power [than before], potential clients are currently customers will buy applications over the Internet.
more interested in It than some years ago. nowadays, they
understand that It is the key for a successful business. It is
453

CASE STUDY 7
Otis Elevator
Accelerating business transformation with IT
At Harvard the only thing considered duller, safer, and less Otis was the largest manufacturer, installer, and servic-
adventurous than working for a bank was working for some er of elevators, escalators, and moving walkways in the
old-line can’t-miss industrial firm like otis elevator, which
world. The operating landscape was shifting. ‘Today,’
only needed caretakers.
(Tom Wolfe, A Man in Full [new York: Farrar, Bousbib said, ‘we are no longer making things; we are
straus and Giroux, 1998], p. 31) moving things. Our differentiating focus is orders-of-
at the northeast corner of 20th street is the turreted red-
magnitude improvements in logistics and service.’ No
brick Victorian apartment house… the first cooperative longer was Otis an old-line industrial company.
apartment house in new York City. peek into the luxurious Just a year earlier, when Bousbib held his annu-
lobby! the foyer is adorned with stained glass and Minton al leadership conference, he set forth a vision for
tiles, and the building is equipped with otis hydraulic eleva- Otis: ‘To become the recognized leader in service
tors installed in 1883, and among the oldest of their kind still
in service.
excellence among all companies – not just elevator
(Gerard R. Wolfe, New York: 15 Walking Tours companies – worldwide.’ In its quest for service excel-
[new York: McGraw-Hill, 2003], p. 261) lence, Otis’s future standards for comparison would
be companies such as UPS that had institutionalized
In early 2004, Otis Elevator President Ari Bousbib
customer service and had developed standard work,
(pronounced boozbe) finalized his presentation to
process flows, and metrics to govern every customer
United Technologies (UTC) – the parent company.
interaction and every internal activity. Achieving this
The past 12 months had been a success for Otis, as
goal would require transforming the culture at Otis.
highlighted in the 2003 Annual Report:
In Bousbib’s description, the company did not
otis completed the second-largest acquisition in its his- simply provide elevators but total solutions to custom-
tory with the addition of amtech elevator services. amtech ers. This meant that every function of the business,
brings . . . a customer base spanning universities, hotels,
hospitals, airports and convention centers throughout the
from design to sourcing to manufacturing to new
United states. overall, otis revenues grew by more than
$1 billion to $7.9 billion. operating profit increased by more
than $300 million to $1.38 billion, and operating profit mar- 1 http://www.utc.com/annual_reports/2003/review/
gin grew by more than one point to 17.4%.1 page41.htm, accessed May 26, 2004.
professor F. Warren McFarlan and Research associate Brian J. deLacey prepared this case with the assistance of the Global Research
Group. HBs cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources
of primary data, or illustrations of effective or ineffective management.
Copyright © 2004 president and Fellows of Harvard College. to order copies or request permission to reproduce materials., call 1-800-545-7685, write Harvard Business
school publishing, Boston, Ma 02163, or go to http://www.hbsp.harvard.edu. no part of this publication may be reproduced, stored in a retrieval system, used in a spread-
sheet, or transmitted in any form or by any means–electronic, mechanical, photocopying, recording, or otherwise–without the permission of Harvard Business school.
454

Case study 7 Otis Elevator
equipment installation to maintenance, needed to and East Europe, the United Kingdom and Central
be run with a customer-focused mind, and all these Europe, North Asia, South Asia, and Japan.
functions further needed to be integrated into a sin- Revenues climbed from $6 billion in 2000 to
gle customer-centric business model. Otis Elevator $8 billion by the end of 2003 with 80% coming from
was proving to be nothing like the company of Tom outside the United States. The company’s return
Wolfe’s description. on sales, which historically fluctuated around 10%,
reached 13% in 2000 and then increased by more
than 500 basis points to over 18% by first-quarter
Company background 2004. As margins expanded, productivity soared and
Otis Elevator is named for the company’s founder, profits grew. The company had always provided solid
Elisha Graves Otis, who invented the ‘safety-brake and steady profit contribution to UTC since its acqui-
elevator’ in 1853. (Exhibit 1 describes events leading sition more than 25 years earlier. In the period from
up to the installation of the first passenger eleva- 2000 through 2003, Otis’s contribution to UTC’s profit
tor.) Otis’s core business was the design, manufac- increased from 25% to 35%. Otis’s sales and profit
ture, installation, and service of elevators and related growth helped drive the strong performance of UTC,
products, including escalators and moving walkways. which had projected revenue of $35 billion for 2004,
Otis’s name had become synonymous with one of the 14% over 2003’s. (See Exhibit 2 for the stock perform-
most useful and dramatic inventions of the 1800s, the ance of UTC.)
passenger elevator.
UTC’s chairman and CEO, George David (who Elevator industry: competition and
joined Otis in 1975 and became president of Otis in marketplace
1986), noted the recent accomplishments of Otis:
‘Otis Elevator . . . had really good, powerful results in Otis’s main ‘hardware’ competitors included foreign
this last three years, even in the face of pretty tough multinationals Hitachi, Kinetek, KONE, Mitsubishi
economic conditions.’2 Electric, Schindler Holding, Tatung, ThyssenKrupp,
From 1997 to 1999, Bousbib was UTC vice presi- and Toshiba. Industry competitors typically attained
dent of strategic planning, and from 1999 to 2000 he operating profit margins of 5–10%.
was UTC vice president, corporate strategy and devel- For a small-building project, the elevator manu-
opment. In 2000, at the age of 39, Bousbib became facturer was selected by the contractor, architect, or
Otis’s executive vice president and chief operating building owner. Larger projects often involved all
officer. Bousbib was elected president of Otis in 2002. three parties in the decision-making process. Buyers
Prior to coming to UTC, Bousbib had been a part- selected an elevator company on the basis of its abil-
ner at an international management and technology ity to satisfy the elevator performance specifications
consulting firm. Bousbib earned a master’s degree in and architectural requirements, price, reputation, and
mechanical engineering from the Ecole Supérieure past performance on other projects.
des Travaux Publics in Paris and an MBA in finance An elevator service company was selected by the
from Columbia University. building owner or property manager on the basis of
By 2004, Otis had 1.5 million elevators and 100,000 responsiveness, quality, and price. As a building aged
escalators operating throughout the world. Otis had and competition for tenants increased, the cost of
elevators in 10 of the world’s 20 tallest buildings and service often became the major consideration, and the
more than 1.4 million elevators and escalators under lowest bidder typically received the service contract.
maintenance. Otis sold products in more than 200 Many elevator manufacturers offered discounts for
countries and territories. Engineering headquarters long-term service contracts. Some had begun to bun-
was in Farmington, Connecticut with international dle up to a year of service for free with a new elevator
facilities in Japan, France, Germany, Spain, Korea,
and China. Of 60,000 employees, nearly 90% worked
2 CNBC: Kudlow & Cramer, Interview: United Technologies
outside the United States. Otis operations were organ- Chairman and CEO George David discusses his company’s
ized into seven regional businesses: North and South performance, May 6, 2004, ww.factiva.com, accessed
America, South Europe and the Middle East, North May 16, 2004.
455

Part 4 Case studies
Exhibit 1 The first elevators
The story of Elisha Graves Otis is a textbook tale of inventiveness,

opportunity and enterprise. Along with other folk heroes of Victorian
America, Otis took his place in books of precept and example.
Imagine the scene: a small factory in Yonkers, making cheap iron
bedsteads. The young Elisha Otis, master mechanic and inventor
of a system for raising and lowering beds, contemplates the arid
prospect of his future. Then in comes Mr. Newhouse from Hudson
Street, New York, to ask if Mr. Otis could adapt his safety elevator to
the problem of shifting merchandise. Could he, in fact, build him two
elevators for hauling goods rather than lifting bedsteads. Two years
later there were 27 Otis elevators in service in New York, and the
foundations has been laid for enduring fame and fortune. Otis
demonstrated his safety elevator in characteristically dramatic fashion
at the New York Crystal Palace exhibition in 1853. He had himself
hoisted up on the elevator platform, in full view of alarmed spectators
and delighted journalists, and promptly cut the suspension cord.
Nothing happened; the rack and pinion saftey lock ensured that he was
All safe, Gentlemen! The first passenger elevator was installed in
E. V. Haughwout and Co.’s store on Broadway in 1857; it was the talk,
and envy, of the town, attracting thousands of visitors.
Otis Collection.
Source: F. Warren McFarlan and Donna B. Stoddard, ‘Otisline (A),’ HBS Case No. 186–304, revised 1990 (Boston: Harvard Business School
Publishing, 1986).
456

Exhibit 2 United Technologies stock price OTISLINE® customer service centre –

January 1, 2003–January 1, 2004 early applications of IT
In the early 1980s, at the urging of its then executive
100
vice president and chief operating officer, George
90 David, Otis created a centralized customer service
system to dispatch service mechanics. IT worked with
80 many functional areas to implement this 24 × 7
concept, called OTISLINE customer service centre.
70 Previously, service personnel were dispatched from
local offices, and there was no central view of service
60
delivery, response time, or cumulative product issues
50 in the field.
With the OTISLINE customer service centre run-
Ja 02
M 03
Ap 3
M 3
Ju 03
Ju 3
Au 3
Se 03
O 03
N 03
De 03
03
-0
r-0
0
l-0
c-
n-
-
n-
g-
p-
-
-
c-
ar
ay
ct
ov ning on a newly installed mainframe, a centralized
De
Otis service dispatch group of 160 people operat-

Source: Company documents. ing 24 hours a day could respond to a customer in
less than a second. Information from multiple Otis
data sources was aggregated. Rapid response was an
sale in an effort to attract and maintain customers. important design element; customer service experi-
New elevator sales were directly correlated with ence had shown it was unacceptable for more than
building cycles, but the elevator service market had 2% of transactions to take longer than a five-second
been very stable. As the installed base grew, service response time.
historically accounted for a much higher portion of OTISLINE customer service centre improved vis-
profits than new-unit sales. ibility of the elevator service business performance
The service market attracted many participants to management, enabling it to provide more effective
because of its steady demand, low barriers to entry, quality service to customers. Prior to this, service
and high profitability. Thousands of elevator service problems might be unknown to senior management
companies existed, including both elevator manufac- until they had become critical situations resulting in
turers and many small companies devoted exclusively customer complaints or in some cases service contract
to elevator service. These companies serviced elevators cancellations.
from almost any manufacturer – particularly elevators OTISLINE customer service centre allowed Otis to
made prior to the introduction of microprocessor- produce ‘excess’ callback reports for various levels of
based control that used similar generic technology. management. For example, elevators receiving three
The U.S. and Western European elevator markets or more callbacks in a month were reported to the
were mature, and growth in new-elevator sales was district manager; those receiving eight or more in
coming primarily from emerging economies. China 90 days were reported to the regional vice president.
was a particularly hot marketplace and key area of Critical situations were reported to the president
growth: ‘62,000 units of elevators and/or escalators of the regional business. The expectation was that
were installed in China in 2002.’3 reducing callbacks and improving product reliability
From 2000 to 2004, Otis was aggressively growing would improve customer satisfaction, thereby reduc-
with the market by acquiring elevator businesses in ing maintenance contract cancellations. OTISLINE
China. Otis’s rival, Kone, was quoted as saying: ‘China customer service centre was first deployed in the
has become a growth engine for the world’s elevator United States and then was introduced to other Otis
industry.’4 Others competing with Otis and Kone for regions.
China included Schindler, Mitsubishi, and Hitachi.
The market was built almost entirely on revenue and
3 Lu Haoting, ‘GOING UP! KONE RAISES PRODUCTION,’
profits from new sales, compared to more mature Business Weekly, April 20, 2004, www.factiva.com,
markets where service accounted for as much as 75% accessed May 16, 2004.
of revenues and profits. 4 Lu Haoting, ‘GOING UP! KONE RAISES PRODUCTION.’
457

Part 4 Case studies
With OTISLINE customer service centre, manag- Table A Fivefold improvement in order-to-hand-
ers had the information they needed to truly manage over cycle
service business operations. Aided by technology,
Otis was able to restructure the company, eliminating Proportion of Cycle time
several layers of management and speeding com- Step in overall elapsed time reduction
business process (current%) (target factor)
munication between field mechanics, customers, and
company management. Project proposal 3 103
Another important IT application of the 1980s was Sales processing 8 43
Order fulfillment 30 53
REM® elevator monitoring. This application enabled a
Field installation 41 123
microprocessor-based elevator to monitor its control Closing activities 18 23
system and log performance statistics directly onto a Total 100 53
distant computer. Elevators communicated problems Source: Otis internal documents.
to a computer at headquarters. The computer ana-
lyzed problems and produced trouble reports used to
in the order-to-hand-over cycle within five years.
dispatch service mechanics before the elevator went
Historically, this complete cycle had taken anywhere
out of service.
from eight months to 18 months or more depending
With data from REM elevator monitoring, service
on the customer and many other variables. Bousbib’s
mechanics adjusted running elevators to keep them
goal was to reduce the cycle time and ensure consist-
operating at maximum performance levels and could
ent delivery of quality products and services to all
handle problems before customers were even aware
customers. (See Table A.)
of them.
These gains were to be achieved through the
The OTISLINE customer service centre concept
coordinated effort of multiple ongoing change pro-
fundamentally changed the expectations of custom-
grams in engineering, supply chain, and sales and
ers in the elevator maintenance industry and helped
field operations. In addition, a major IT initiative, the
stabilize the cancellation rate.
e*Logistics™ program, was established to enable and
sustain the quantum leap improvement.
Setting the stage for the next
transformation wave Engineering
Bousbib recognized that being a service company Otis had acquired more than 150 companies since
meant delivering more than flawless performance for 1995. Each brought with it its own products and opera-
units under maintenance. Bousbib liked the phrase, tions. These diverse products had to be rationalized in
‘We maintain elevators, we service customers.’ It meant order to fit into the Otis family. At the same time, Otis
that Otis needed to embrace a culture of service and needed to move from a regionally driven product strat-
to develop the processes needed to deliver world-class egy to a global one. Traditionally the product strategy,
service. Otis had to redefine its processes beyond service product development, and production were managed
support tools such as OTISLINE customer service centre regionally. This led to redundancy, overall inefficiency,
and REM elevator monitoring, and in fact beyond just and complexity. Otis decided to deliver a range of glo-
the maintenance side of the business, to include new- bal components that could be integrated into global or
equipment design, supply chain, new-equipment deliv- local systems. All engineering centers were reorganized
ery, and field installation. Bousbib said, ‘As an engineer- to report centrally to a worldwide engineering function.
ing and manufacturing company, we did not have the In 2001, Otis began a program, the SIMBA™
same focus on customer service processes … we needed program, to fundamentally change the product
to change the culture and better reflect that we are in
fact a service company. These new processes had to be
embedded in every aspect of the company’s operations.’ 5 BHAG – which stands for big, hairy, audacious goal at the
intersection of what drives the economics of a firm, what the
In early 2002, Bousbib decided to focus on the new-
firm is passionate about, and what the firm can be world best
equipment business cycle and set what he described at – was a phrase introduced by Jim Collins and Jerry Porras
as a BHAG5 for achieving fivefold improvement in their book, Built to Last (New York: HarperCollins, 1997).
458

architecture and ultimately the design process; the 1987 as an operations manager and held a variety of
goal was a standard-interface, modular-based archi- positions in manufacturing, branch management, and
tecture defining modules and subsystems from which engineering before becoming vice president of engi-
all Otis elevator systems could be created. neering in 2003. Saxe recalled, ‘At one time, Otis held
The SIMBA program reduced the number of mod- 72 types of motors in their inventory. As a result of
ules in use and lowered project costs throughout the the SIMBA program, that had been reduced to only 10
value chain. Distinct engineering programs (such as motors needed for future designs.’ (Exhibit 3 shows
the design of new motors) fell from more than 500 to one of Otis’s newest elevators; Exhibit 4 depicts the
50. Tom Saxe, who held an MSc in engineering and key subsystems used in the construction of a typical
an MBA, both from Stanford University, joined Otis in Otis elevator.)
Exhibit 3 Otis Elevator Company brings Gen2™ elevator system to North American markets
Otis revolutionised the world’s elevator market when it introduced the Gen2™ elevator system three years ago, and
has now brought the global product for low- and mid-rise buildings to North America. Otis Elevator Company is a
subsidiary of United Technologies Corporaration (NYSE: UTX).
The Gen2 elevator has been Otis’s fastest selling new product introduction in its 150-year history. A major
breakthrough in lifting technology, the Gen2 elevator is the first ever to use flat, coated-steel belts to lift the elevator
car. The belts are one to two inches wide (30 to 60 mm) and only one-tenth of an inch thick (3 mm), yet they are
stronger, more durable and far more flexible than the heavy woven steel cables that have been in the industry since
the 1800s.
As a result of this technological innovation, the Gen2 system
requires a machine that is only one-quarter the size of
Gearless Machine
conventional systems, eliminating the need for a separate machine
room while providing superior reliability, energy efficiency and
Governor
advanced ride quality.
The Gen2™ system’s flat, coated-steel belts are comprised of Coated Steel Belts
12 woven high-tensile steel strands encased in a black
polyurethane sleeve. They are quieter and lighter than traditional,
Controller
heavy steel ropes.
The flexible belts easily bend around a sheave only 4 inches in
diameter (100 mm), approximately 20 percent the size required with
current steel rope technology. This compact sheave is integrated
into an energy-efficient gearless machine so small that it fits easily
inside the elevator shaft, or hoistway.
The Gen2 design is Otis’s first application of gearless machine
technology to low- and mid-rise buildings, offering customers
gearless simplicity, ride quality, reliability, and energy efficiency that
were previously available only in high-rise towers.
At the center of the Gen2 system’s communications structure is the REM®
remote monitoring system, which provides computer-based system diagnostics and performance measurements.
REM data is tracked continuously and provides indications of elevator system performance, alerting Otis to minor
equipment problems before they can cause a malfunction or shutdown. This allows Otis mechanics to make
timelier elevator repairs – often before a customer or passenger is aware of a problem – and increases elevator
availability.
The Gen2 system is offered in all standard passenger and serivce models up to 5,000 pounds with speeds up to
350 feet per minute, and will be immediately available for buildings up to 30 feet of rise.
Source: Otis Elevator Newsroom, May 8, 2003, www.otis.com
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Part 4 Case studies
Exhibit 4 Elevator subsystems
OPTIMUS SUBSYSTEMS
Subsystem 1 Subsystem 2 Subsystem 13 Subsystem 14

Fixtures Control / Drive Governor Ropes

Cab Position Reference Car Doors Counterweight

Wiring Car Frame Machine Assembly Hoistway Doors
Subsystem 8
Hoistway Material
Source: Otis company documents.
Part of this new process was adhering to a standard Supply chain

terminology that could be used with all customer set- Throughout the 1990s, Otis applied total qual-
tings, such as: ity management (TQM), lean manufacturing, root-
cause analysis, and the teachings of quality guru Dr
● Project – complete customer project (usually one
Yuzuru Ito.6 A UTC proprietary program, Achieving
contract)
Competitive Excellence (ACE), was designed around
● Contract – all elevators or escalators in a customer a standard problem-solving model and standard tools
agreement that empowered employees to identify and solve
● Proposal – possible configurations of elevators or problems while at the same time practicing continu-
escalators ous improvement.
● Group – similar elevators, escalators (e.g., adjacent Otis streamlined manufacturing operations from
elevators in a high rise are a group) 52 factories in 1995 to 26 by 2003. Manufacturing
would move to where lowest costs and highest quality
● Unit – an individual elevator or escalator
levels could be achieved. Otis addressed two ques-
● Field module – controller, machine, frame, motor, tions: whether or not to produce components in its
and so on (typically 20–60 depending on model)
● Subsystem – logical grouping of field modules 6 See http://www.utc.com/profile/quality/ for more
(typically 10–15 per unit). discussion of Dr Ito’s quality work, accessed August 4, 2004.
460

value chain and, if they decided to produce, where an average cost of around $40 per hour – required to
to do the work. A number of previously manufac- install, modernize, and maintain Otis products.
tured items would be outsourced. In 2001, Bousbib Best practices were identified from the most suc-
announced a reorganization of the supply manage- cessful sales offices, and these were made standard
ment function and of the manufacturing function processes across the organization. For instance, the
into a new single global supply chain and logistics use of a pre-bid checklist became a requirement for all
management function that would become a key driver sales order personnel. This proved to be a key success
of the strategy. factor in helping the customers define their needs,
As in Tom Wolfe’s description, many of the com- and it also helped bring sales and field installation
pany’s employees still thought of Otis as a manufac- teams together to discuss customer proposals early in
turing company. Bousbib wanted to change this mind- the sales cycle.
set and convince his organization that at a specified
quality requirement, there were not any parts of the
e*Logistics – the information transformation
elevator that had to be made in-house for strategic
The critical enabler of this information transformation
reasons. ‘I have concluded that we never need to
was a project called the e*Logistics information trans-
make anything ourselves,’ he said in a somewhat pro-
formation project. This initiative provided IT systems
vocative statement that shocked many at Otis. ‘The
to facilitate business process re-engineering that was
only reasons why we make components are cost and
taking place throughout the company.
logistics.’7
The project team was made up of subject-matter
Vincent Della Valle, a director in the supply chain
experts in the areas of sales, field, and order manage-
organization, was responsible for the elevator passen-
ment along with IT project managers who led proc-
ger interface modules (including doors, cabs, carpets,
ess development requirements writing and system
lighting, and other features). His team was working
development. The team reported directly to a steer-
hard to streamline the leadtime from supply chain to
ing committee chaired by Bousbib that met every two
manufacturing to field on a global basis. The simplest
weeks.
way to do this would be to produce a limited number
Giuliano Di Francesco joined Otis in the engineer-
of elevator models for sale globally. However, custom-
ing organization. He held various positions in engi-
er needs, code requirements, and aesthetic considera-
neering, manufacturing, and logistics before becom-
tions made this impractical. Della Valle said, ‘We real-
ing project director for the e*Logistics program in
ized we could not sell a global elevator. The challenge
2001. He was involved from the formal launch of the
of the supply chain organization became the coordi-
project. The first steps involved the merger of separate
nation of multiple global suppliers located in various
IT initiatives that had been under development for
parts of the world. We had to work with the suppliers
contract estimating, pricing, and online ordering.
to ensure that aggressive delivery times were met.
Di Francesco saw the e*Logistics program as the
E*Logistics capabilities became a key requirement.’
means for connecting sales, factory, and field opera-
tions through the Web. Technology in the project
Sales and field operations relied on open standards, Internet-based communica-
Tony Black, a graduate of Florida Atlantic University tion, workflow tools, and back-end integration with
with a BSc in engineering and an MBA from Darden established enterprise systems. Virtually all of the
School of Business, joined Otis in June 1991, work- technology was proprietary and built by Otis software
ing in field offices as an account manager and later resources and based on standardized data interfaces –
managing field operations. From 2001, Black was such as Otis’s own version of RosettaNet.8
responsible for quality and field operations world-
wide. He initiated an improvement program called
the Sales and Installation Process (SIP). Following les- 7 Kristin Roberts, ‘UTC’s new Otis CEO outlines priorities
for change,’ Reuters English News Service, May 10, 2002.
sons learnt in the ACE program, Black’s team gathered
8 RosettaNet represents industry standards for transactions
best practices from around Otis related to sales and between suppliers and manufacturers over the Internet.
field operations. An important objective he had was The nonprofit organization www.rosetta.org was estab-
to rationalize the 65 million hours of annual labor – at lished in 1998 to support and advance these standards.
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Part 4 Case studies
Bousbib’s view was that Otis would become ‘infi- completely electronic and project scope and cost seen
nitely information enabled,’ and the e*Logistics pro- by end users as easy to execute. The new automated
gram was the key facilitator of that information trans- process solidified commitment for the estimates, a
formation. Bousbib described this vision: notable improvement in an area viewed as critical for
Traditionally we had focused on the management of physical two organizations that had to work together through-
assets. The next step in our evolution will be the management out the life of a customer account.
of information flows between all the participants both in the Other elements of the project proposal included:
production of our elevator and escalator systems, and in the
performance and delivery of our installation and maintenance 1 Gathering account information. Most Otis compa-
processes. this is a remaking of the entire company where in- nies lacked sophisticated customer relationship
formation flow has mastery over product flow. It is only pos- management (CRM) systems. North America had
sible because of the technology, network, World Wide Web, a mainframe system; France used Siebel; many
and new computer and software tools available today.
country organizations relied on simple databases
Otis’s ‘Global State of the Business Report 2001’ running on PCs or nothing at all.
highlighted two overriding objectives: ‘First, the con- 2 Determining elevator configuration (the act of
tinuous transformation of our business processes to putting together the proposed elevator specifica-
improve innovation, quality, cost and speed; second, tions). Otis entities in Europe, Asia, and North
the migration of our core business competencies America relied on configuration systems that ran
from product and service management to customer on either mainframes or PCs, programmed into a
solution management and eventually to logistics and simple spreadsheet. In fact, a number of branch
information management.’ locations still submitted requirements on paper
According to Di Francesco: and relied on the factory to prepare a configuration
to achieve continuous transformation, the e*Logistics pro- for the customer proposal.
gram makes sure the business process change sticks. at 3 Proposal preparation. Some countries devel-
first, business executives saw process improvements from
oped front ends for creating proposals, including
sIp, but after even just a few employees left, benefits fell
off and became inconsistent. With the e*Logistics program, elevator and installation engineering drawings.
best practices from sIp are baked into the organization and Generally, there was a work template, but none of
institutionalized to achieve that continuous transformation. the countries had integrated to a point where they
could easily push a button to prepare the proposal
Virtually everyone in the company would come in
or readily communicate it to the factory.
contact with the e*Logistics program, since it so
thoroughly spanned the value chain. ‘That’s the key Prior to the e*Logistics program, the first two steps
thing that gets me and the team up every day,’ said Di used minimal pieces of automation, and the third was
Francesco, ‘the extent of the impact we’re having on mostly manual. Data was dispersed across separate
every area of the new-equipment business.’ systems and in most cases had to be re-entered to
Each of the key processes, and the corresponding be shared. With the e*Logistics program, all of this
elements of the e*Logistics program are described became automated and the data integrated; technol-
below. ogy handled the basic steps and allowed easy manage-
ment of changes to orders. The technology had been
Project proposal developed over two years by Otis, with a web-based
At the very beginning of dealing with a new customer, front end, a back-end database, and workflow tech-
SIP required a prebid checklist. Historically, these nology that allowed each individual user to interact
had been simple forms filled out on paper. With the with the system based upon his or her assigned roles.
introduction of the e*Logistics program, both sales Finally, the e*Logistics program fed the proposal’s
supervisors and field-installation supervisors were information directly into Otis financial systems.
required to review and approve the project as part
of the prebid process. (Previously, field-installation Sales processing
supervisors might have never seen sales order infor- Once the customer accepted a proposal, the order then
mation until the elevator components were delivered needed to be booked, validated, and scheduled. These
to a job site for installation.) The new process was steps had previously been handled manually, but the
462

e*Logistics program automated the workflow of all an emphasis on reducing internal lead times in the
these activities – electronically circulating key docu- complete value chain of a CLC or SSI. In some areas
ments to all the appropriate supervisory personnel. progress happened quickly: Japan reduced its internal
This culminated with booking the order and feed- lead time to less than one week for some products. In
ing the data directly into the various Otis financial other regions several weeks – and sometimes months
systems using standardized interfaces. (Hyperion®9 – were the norm and became the subject of great
was used to roll the data up from around the world management attention. Otis was edging closer to a
into corporate systems.) just-in-time model for delivering product to job sites.
Once a contract was awarded, the field-installation At the same time the e*Logistics program was
supervisor was required to meet with the customer being rolled out, CLCs were also being rolled out
and review the field-installation terms of the contract. around the globe. CLCs were built with knowledge-
Most crucially, before the order was released to the able resources from the manufacturing arm of the
factory, the field-installation supervisor was required business, often staffed with personnel displaced as
to visit and assess the quality and readiness of the job manufacturing operations were restructured.
site and formally note his concurrence with the timing CLCs became centers of expertise around markets
of delivery. This helped manage lead times, reduce and their respective product models – such as Otis’s
inventory levels, and eliminate waste throughout the Next Step™ escalator or Otis’s Gen2™ elevator. At
Otis value chain. first, CLCs placed orders only with a single SSI, but
During the long sales cycle, Otis personnel rou- in time the supply chain became more flexible and
tinely helped customers reengineer their orders. The globally connected by the e*Logistics program. CLCs
e*Logistics program made the changes easy to record eventually could order from multiple SSIs – wherever
and visible to the entire supply chain simultaneously. they could find the lowest cost for required quality
and delivery times.
Order fulfillment Under the direction of CLCs, the SSIs shipped
Bousbib told his supply chain team, ‘Ultimately, our their components and modules to distribution centers
long-term vision is to shift the centre of gravity of our (DCs), which were strictly cross-docking locations on
business from manufacturing to logistics and informa- the way to job sites.
tion management.’ Network technologies (intranets and the Internet)
At the heart of this shift was the creation of several made it easy for CLCs to see all orders across the sup-
regional contract logistics centers (CLCs). CLCs were ply chain. Because of this, CLCs could source supplies
responsible for accepting orders from the sales organi- and components from anywhere in the world. None
zation and delivering on-time, complete systems to of this would have been possible even five years
job sites. CLCs did no manufacturing – they managed earlier.
the supply chain including Otis factories, suppliers, Major responsibilities of the CLCs included
field feedback, and the product improvement process. communications with field-installation supervisors,
They were also responsible for market analysis, identi- customers, and sales representatives. Other tasks
fication of customer needs, and creating product unit included estimating, specifying, and processing; prod-
configurations. uct administration; contract engineering and layouts;
Prior to CLCs, sales representatives submitted their customer service and contract control; contract con-
orders by faxing or mailing documents directly to fac- solidation, storage, shipment, unloading, and place-
tories all around the world – the process had become ment; and overall field quality.
unwieldy and error prone. Staffing in CLCs and DCs varied considerably
CLCs handled all logistics and information flows by region, product responsibility, and countries/
between subsystem integrators (SSIs) – which were languages served. (Exhibit 5 details the CLC func-
initially just the manufacturing facilities that existed tions; Exhibit 6 depicts the central role of CLCs in
at the time CLCs were first established. The SSI of Otis’s overall value stream.) All of these activities had
the future would be the low-cost provider of a given
subsystem (see Exhibit 4), which might be an Otis- 9 Hyperion® is a registered trademark of Hyperion Solu-
owned entity or an outsourced provider. There was tions Corporation.
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Part 4 Case studies
Exhibit 5 Contract logistics center operating responsibilities
Sales Tools
Contract Special
Requests Current Prices Estimating
Product Administration
Sales Systems
Estimates Contract Engineering
Force
Specifying
Cost
Layouts Customer Service
Contract Control
Export Documentation Standard layouts Proposal
Contract Tactical Purchasing Generation
Sales Binder
Status PIC / Field Quality System
Field Updates
Consolidated Field Industrial
Organization
Material Orders Engineering
(Job Site)
Process Sales
improvements FOOD Ordering
System
Contract
Logistics Contract Orders
Maintenance Failures and
Base
Center Material Shipments
Callback Subsystem
Component Integrators
Traceability Data
Failure Information
Failure
Receiving
Data
Material Handling
Continuation Product Change Contract Service
Storage
Engineering Requests Configuration Systems
Shipping
Engineering
data
Source: otis company documents.
been enhanced through the network connectivity of Otis to control, yet materials delivery scheduling
the e*Logistics program. depended on predicting when the site would be ready
Cisco Systems in their online publication IQ Magazine for elevator installation. Field coordination with order
noticed the transformation of Otis in these terms: processing had been poor in the past. If equipment
During the festivities celebrating his company’s 150th
was ordered too early, orders could sit on a job site
anniversary in April 2003, Otis elevator’s president, Ari for weeks and be damaged by weather or vandalism.
Bousbib, made an unusual announcement. ‘We’re not really If an order was placed too late, major construction
a manufacturing company.’ Even though the company sells delays occurred.
approximately 80,000 elevators and 8,000 escalators annually, Otis field-installation supervisors were responsi-
Otis’s real business, Bousbib says, is maintenance . . . Otis is
part of a vanguard of manufacturing firms that is beginning
ble for as many as 100 construction locations. They
to look at the processes of how they build, sell, and service were responsible for communicating when sites were
products not as individual processes but as one integrated ready for orders to be delivered. With the e*Logistics
process that is as collaborative as their enterprise software program, they were now prompted to check site
systems or computer networks.10 progress by workflows and could communicate job
status by email.
Field installation
Historically, there had been no automated globally 10 ‘Manufacturing: Beyond the Assembly Line,’ IQ Maga-
standardized project management tools for field zine, July/August 2003, http://business.cisco.com/,
installation. Site conditions were impossible for accessed September 7, 2004.
464

Exhibit 6 Value stream and central role of CLCs
Branch
Branch
CLC
Branch
6-
5-
4
3-
2-
1 7–8
SSI Job
sites
SSI
Distribution Center
SSI
Source: Otis company documents and casewriter adaptation.
Before the e*Logistics program, a number of proc- meant holding orders until the last possible time and
ess improvements had been put in place to improve avoiding building slack into order and delivery sched-
overall sales cycle time, but application of the process ules. This also allowed SIP to maintain lean manufac-
was inconsistent. Black noted, ‘The e*Logistics pro- turing flows and low inventory levels.
gram will take out the inconsistency – by automati- Throughout the process, the e*Logistics program
cally emailing reminders and updates it forces critical introduced timed email reminders for the field-
steps of SIP and makes good process part of the way installation supervisor to visit the job site. This helped
you do business.’ the company to maintain contact with the general
To address cost inefficiencies and compress time contractor. The e*Logistics system required status
to delivery, Otis moved from a push system (where information to come back from the job site before the
product was sent into the field as soon as it was manu- company shipped any items to the field.
factured) to a pull system (where the field-installation Orders were not allowed to go to CLCs early. While
supervisor determined when the product was needed the order was still sitting in a sales queue, the account
and requested it, using electronic correspondence representative could sell additional product options.
remotely and directly from the job site, based on its As a building project evolved, new elevator features
expected readiness). With the e*Logistics program, all could be added (e.g., mirrors, lighting fixtures, and
the involved parties were asked to focus on managing a range of premium finishes) before the order was
to a delivery date based upon ideal site conditions – this released to the CLC. This simplified and lowered the
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Part 4 Case studies
cost of change order management, both for customer Beaver noted, ‘We’re a very diverse, $8 billion com-
billing and for production. pany with operations in a thousand branch offices. As
With more visibility to the order process and more a company, we grew through acquisitions. We have
control over shipping dates, the field-installation 50 financial systems and 15 different manufacturing
supervisor had increasing control over the financial systems operating all around the world.’ The Otis infra-
success of each project. As one person described the structure included nearly 1,000 local-area networks
shift, ‘We need to change field-installation supervisors with 600 wide-area networks (WANs) in the U.S. and
from being firefighters to being business managers. 400 WANs internationally. There were 30 types of
That’s a huge cultural change.’ routers and switches supporting 3,000 applications.
The new processes helped eliminate many hidden The Otis global network processed 60,000 orders each
costs of lost, stolen, damaged, and misplaced material. year – resulting from approximately 300,000 proposals.
As Black said, ‘SIP tried to get the field-installation Otis did not break out IT investment for the
teams to manage the delivery date based on job-site e*Logistics program from other process-engineering
progress, but e*Logistics helps to bake good process in.’ expenses such as those for ACE or SIP, nor did it account
for return on investment on IT separately from returns
Closing activities associated with other business-process change initia-
tives. All these were considered together because the
The principal activities in this phase were transition-
belief was that the benefits were tightly interrelated and
ing the unit from Otis installation to Otis service and
could not be decoupled as easily as the costs might be.
handing the elevator over to the customer. This stage
Beaver had dotted- or direct-line responsibility for
included reviewing any engineering change requests
450 Otis IT employees, in addition to 250 contrac-
and processing final billings. The process varied
tors. He had budgetary responsibility for all major IT
greatly by geography and even by contract but gener-
expenditures.
ally involved meeting with the customer and present-
About 70 people from Beaver’s organization were
ing the final bill to review and settle all change orders.
dedicated to the e*Logistics project, reporting to
With e*Logistics, as soon as the supervisor con-
Di Francesco. Beaver described the integration of
firmed the job was complete, a workflow was trig-
e*Logistics with legacy systems: ‘The goal of having a
gered prompting a series of customer contacts and
single finance and/or manufacturing system in Otis is
billing. This was expected to result in more accu-
not achievable in the short term. Therefore, building
rate billing of change orders, higher conversion of
the e*Logistics system to be ERP [enterprise resource
new equipment to maintenance contracts, and faster
planning] system-agnostic was essential to obtaining
collections.
the business benefit quickly.’
Beaver’s staff was also responsible for a middle-
Information technology at Otis ware broker used on the e*Logistics program – much
Ron Beaver, CIO, joined Otis in 1989. He initially of it custom coded for Otis, with some development
worked in sales and marketing and became CIO in taking place in an Otis-owned, India-based software
2001. Beaver held responsibility for global IT, with company. Internal sales modules were built with
seven regional IT leaders around the world reporting Microsoft.NET development tools. The supply chain
to him on a dotted-line basis. Each regional IT director and field systems were built around JD Edwards
reported directly to the president of one of these seven ONEWORLD® software. Systems access, security, and
Otis regions: North and South America, Southern connectivity relied on the UTC employee portal.
Europe and the Middle East, North and East Europe,
the U.K. and Central Europe, North Asia, South Asia, Remaining challenges for the e*Logistics
and Japan. program
Regional IT leaders were responsible for all local
systems and operations, supported by an outsourced There were a number of technological challenges with
infrastructure agreement with CSC. They had their the e*Logistics program. According to Beaver:
own local development team and technology support The first is the delivery of the e*Logistics program to the
services. desktop. We have more than 20,000 pCs in the company
466

and over 1,000 different major locations. so our ability to the e*Logistics program, but scaling the system to
standardize the infrastructure and then understand how this be used by all of the field-installation supervisors
application can perform across wide-area networks, local-
remained the biggest challenge.
area networks, etc., was very important to us.
In the last two years we’ve obtained emerging technology

that allows us to simulate applications across our global The next transformation
infrastructure. If one of the switches is wrong, or an Inter-
net browser configuration setting is wrong, it impacts the The transformation at Otis required a tremendous
performance of these applications. now we can simulate amount of effort on the part of management person-
this, sitting anywhere in the world but operating systems as nel and every individual employee of the company.
though we are in Korea, Japan, China, or Russia.
A number of important improvement programs had
There were also many personnel challenges. There been running in parallel, and they worked together to
were 1,500 sales representatives and 1,500 field- multiply the benefits. Black observed:
installation supervisors around the world who would The rollout of the e*Logistics program is based on the matu-
use this system. Substantial technology and process rity of SIP. If we hadn’t done SIP, and just did the e*Logistics
training was needed for all users. program, it would have taken much longer.
Pilot projects in The Netherlands, France, Germany, Some of the rollout is dependent on people’s adaptability to
and the U.K. during 2003 had been successful. The change. In North America, we’ve put laptops into the hands
U.K., which had a particularly long sales cycle, was of field-installation supervisors. they are salaried, nonunion
able to cut its average sales cycle time for orders personnel who have usually come from the union ranks.
processed through the e*Logistics program from more about 30% of them are familiar with computers, and this
only works when people know how to use the technology.
than six months to less than three (corresponding
to the first half of the complete cycle described in Bousbib was pleased with the progress of the e*Logistics
Table A). While the success was due to a number of program rollout to the pilot countries in Europe. There
factors – a new country manager, an involved man- had been approximately 300 person-years of effort
agement team, effective SIP deployment, local initia- invested in e*Logistics, and Bousbib realized how
tives, and other programs – everyone recognized the much work remained to gain full benefit from their
critical role of the e*Logistics program in making and global investment in IT. By early 2004, all of Otis’s
sustaining this reduction in cycle time possible. major products could be ordered through CLCs in cer-
From the pilots, Otis learnt that it took approxi- tain regions. The global deployment of the e*Logistics
mately six months for benefits to become visible after program was proceeding according to schedule.
an e*Logistics installation. Data entry and systems A simple measure marking deployment progress
initialization would take two to three months, tech- was the number of new orders that went full cycle
nology and tools training would take a month, and through the e*Logistics program. In the U.K., for
three to four months would be required for staff to example, that amounted to 5% of all the units sold in
fully adapt to the new business processes. all of 2003. But the U.K. was expected to rely solely on
Full-scale rollout in Europe and China was sched- the e*Logistics program by the beginning of 2005 for
uled for 2005. The system would be deployed for the 100% of its orders. Otis had not yet decided on a glo-
rest of the company by 2006. Regions were prioritized bal cut-over date when all orders would flow through
based upon need and return on investment, with the e*Logistics systems.
areas with the least developed systems infrastructure Between 2000 and 2003, Otis revenue and oper-
in their business coming first. ating profit had grown. But at the same time, work-
Adoption and success rates of the new system ing capital turns nearly doubled. Improvement in
would be tracked by several metrics, including the information flow had contributed significantly to
number of units proposed per salesperson using the improvement in cash flow. Bousbib took stock of his
e*Logistics program and the ratio of sales support time at UTC and Otis: ‘We have outstanding people
people to sales representatives. The supply chain with outstanding values, and we can become an ever-
showed improvement in factory turns and lead time as greater company. What we have undertaken requires
a result of the e*Logistics program. Field-installation a remaking of the entire company. When we launched
times had been materially reduced for regions using our CLCs and SSIs and deployed the e*Logistics
467

Part 4 Case studies
program it was a mini revolution, but today’s results one service company in the world – not just in the ele-
are proving the success of this approach.’ vator business but compared against the greatest serv-
Over time, Otis realized that there was not a direct ice companies ever: ‘Our quest for service excellence
correlation between product quality (as evidenced by will now require another mini revolution – to become
callback rate) and cancellation rate. Beyond a certain number one in service – but this will also make us an
minimum expected level of product reliability, Otis ever-greater company.’
concluded that the customer cancelled maintenance United Technologies Company (UTC), the parent
agreements because of dissatisfaction with the quality company, was interested in hearing more about the
of service, not the quality of the product. progress of the e*Logistics program and also about
Even as the e*Logistics program was still rolling the challenges inherent in Otis’s new quest for service
out, Bousbib challenged his executive staff to launch excellence.
a new initiative that would help make Otis the number
468

CASE STUDY 8
TopCoder (A)
Developing software through crowdsourcing
In December 2009, Jack Hughes, CEO and founder of In the past eight years, Hughes had refined
TopCoder Inc., entered his company’s headquarters TopCoder’s business model to accommodate ongoing
in Glastonbury, Connecticut, eager to review a par- changes in the software industry, while also pursuing
ticularly complex software development project for its unique competition-based software development
an energy firm’s dynamic power pricing system. Eight approach. He had transitioned his business from a
years after founding TopCoder, Hughes still enjoyed model that helped other software firms identify “top
detailed project reviews. He was particularly proud coders” to a company that developed custom software
that his company could produce high-quality software through a combination of traditional IT consulting
solutions for which his own employees did not have to services and competitions, pitting developers world-
write a single line of code. Instead, the firm nurtured wide to solve clients’ problems.
a global community of more than 225,000 program- The shift to a greater emphasis on competitions,
mers who competed to design and create software encompassing all aspects of software development,
modules for TopCoder clients, a process that the however, meant that project volume was a “grow-
popular press called crowdsourcing.1 ing” issue – for TopCoder. Hughes had to think
Hughes smiled at the project’s success. The result- through how a competition-based business model,
ing software code was bug-free and operational on its which increasingly stressed contests as an organizing,
first day, a rarity in the software industry. Especially as well as money-making approach, could handle
impressive to Hughes was that in four months, 65 increases in numbers of competitions, clients, and
participants from 11 countries in 6 continents had participants. Hughes considered his own goal: attain-
competed in 57 contests to create this critical pricing $200 million in revenue from a high of just over
ing system for the client (see Exhibit 1). As of 2009, $18 million in 2008. He fundamentally believed that
TopCoder routinely produced software solutions for
over 45 clients, including AOL, Best Buy, Eli Lilly, 1 Jeff Howe, “The Rise of Crowdsourcing,” Wired Magazine,
ESPN, GEICO, and the Royal Bank of Scotland. Issue 14.06, June 2006.
Professors Karim R. Lakhani and David A. Garvin and Research Associate Eric Lonstein prepared this case. HBS cases are developed
solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of
effective or ineffective management.
Copyright © 2010 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School
Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu/educators. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmit-
ted, without the permission of Harvard Business School.
469

470
Exhibit 1 TopCoder members involved in making a power pricing system for an energy company
Part 4 Case studies
Source: Company documents; developed via a TopCoder Studio competition.
10/03/14 3:19 PM
Case study 8 TopCoder (A): developing software through crowdsourcing
contest demand would spur the supply of TopCoder the rules of engagement between clients and the com-
participants who would in turn create high quality munity members. Pete Bourdon, TopCoder’s CFO,
software solutions. But, was $200 million in revenue explained the company needed to excel at five core
a reasonable goal? Did his assumptions make sense? tasks: breaking down large client software projects
If so, what would it take to increase revenues by over into components, taking in and processing client
an order of magnitude? project specifications, determining appropriate con-
test prizes, having a consistent and unbiased way of
picking contest winners, and fixing bugs at the back
Background and current operations
end of development.
Before he founded TopCoder in 2001, Hughes had Setting out to amass an initial collection of highly
built a custom software development2 company, skilled programmers, from 2001 to 2003 TopCoder
Business Data Services, in 1985; renamed Tallan asked established software development companies
in 1991. Tallan employed some 600 people before to sponsor world-wide web-based programming com-
being sold to CMGI in 2000.3 As he was completing petitions. The sponsorships increased the popularity
the transaction, Hughes reflected on what he had and legitimacy of TopCoder’s competition platform
learned from his experiences at Tallan – these experi- and provided the company with access to talented
ences would inspire the core tenets of the TopCoder programmers from around the world. In return, the
business model. Although Hughes enjoyed his time sponsors, including Sun Microsystems and Google,
at Tallan, there were areas in which the company used the contests to advertise and recruit new talent.
struggled. For example, recruitment was an expen- Tanya Horgan, TopCoder’s V.P. of Finance, explained
sive and frustrating process because finding qualified that during the sponsorship phase, TopCoder offered
programmers was time consuming and talent was dif- unusually large prizes – as much as $5,000 to $10,000
ficult to assess. Due to constantly evolving technolo- per match for tournament winners – to attract com-
gies, programmers’ skill sets often became obsolete petitors and expand the community. In addition,
after only a few years of productive service, leading every contestant that participated was given an objec-
to high levels of employee turnover. Furthermore, tive numerical rating for their performance against
despite Tallan’s goal of maximizing billable hours, the global talent pool, providing a clear signal to
Hughes believed there were opportunities to save TopCoder and others about the talent in the com-
clients time and money by, for example, reusing community.
puter programs’ basic components instead of building By the end of 2004, the TopCoder community was
each application from scratch. 50,000 members strong. In its early efforts to use the
Drawing upon these and other insights, Hughes community to generate revenue, TopCoder acted as a
set about creating a new kind of organization that placement firm, matching top rated community mem-
would build a “community” of programmers to help bers with firms seeking new talent. Hughes, however,
address the issues he had identified. These program- was dissatisfied: “I cringed at the idea of TopCoder
mers would compete – as well as affiliate – by building becoming a placement firm. That was not my end-
and using components that had already been tested vision for the company.”
and found workable. The idea of reusing software As of 2005, TopCoder began to use its commu-
components for new projects would become the core nity to develop software components and applica-
of the solutions the new company, called TopCoder, tions. Hughes first tested this model by having highly
provided. Hughes envisioned the company as a “two-
sided platform” for software development. One side
of the platform would be clients, firms that needed
2 Custom software development done by specialist firms in
software developed, who would work with his staff the global IT consulting and services sector (for example,
to specify programming challenges. The other side Accenture and IBM) was an over $500 billion segment in
would be community members who would compete 2008. (Source: “Global IT Consulting & Other Services:
in contests to create solutions to the challenges for Industry Profile,” Data Monitor, March 2009.)
3 Clint Boulton, “CMGI Acquires Tallan for $920 million,”
money and skill ratings. TopCoder would be in the
February 14, 2000, http://www.internetnews.com/
middle as the platform host, designing and enforcing ec- news/article.php/303771 8/1/2009.
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Part 4 Case studies
rated community members compete to redesign and to be a broken, inefficient model.” In 2007 and 2008,
rewrite the firm’s own software platform. The result- TopCoder produced nearly $20 million in revenue but
ing code was higher quality and much less expensive platform manager costs remained high (see Exhibit 2
than TopCoder’s own internally developed solution. for information on revenue and platform manager
Hughes now had positive proof that complex software costs). Attempting to alleviate costs, in 2007 TopCoder
systems could be built through competitions. introduced competition tracks for component architec-
Initially, TopCoder adopted a model to create ture and assembly. With these new competition tracks
solutions for clients by contracting with commu- in place, the work traditionally done by platform
nity members, running competitions, and provid- managers would now be done by the community. In
ing consulting services. The company broke down 2008, the company also added competitions in soft-
the software development process into seven dis- ware development tasks such as conceptualization and
tinct but interrelated tasks: 1) Conceptualization, specification, as well as deployment and bug fixing.
2) Specification, 3) Architecture, 4) Component By early 2009, TopCoder had moved increasing-
Production, 5) Application Assembly, 6) Certification, ly away from the hybrid consulting model. It now
and 7) Deployment. Most revenue came from consult- focused on completing all tasks in software develop-
ing services: TopCoder billed clients for the time the ment through competitions. Instead of paying for
company’s platform managers spent conceptualizing time and materials for TopCoder platform managers,
and specifying client problems, setting up component clients paid a monthly platform fee, based on the
design and development competitions, assembling complexity of their software requirements and the
components, and delivering finished solutions. estimated number of competitions they would run
Shortly after TopCoder started developing soft- through the TopCoder platform each month. The
ware for clients, the company identified reusable platform fee also provided clients with unlimited
components from the software it was creating and access to the over 1400 components in TopCoder’s
collected the components in a catalog. These software catalog. Roughly 60% of most clients’ projects could
components became an important part of TopCoder’s be accomplished through reusing components from
value proposition to its clients. Many of the custom the catalog. The move from the hybrid consultancy
applications could be produced by combining exist- model to a competition model was coupled with the
ing catalog components with new components built reduction of many platform manager positions, leav-
through competition. ing the company with 16 project managers servicing
TopCoder’s hybrid consulting model led to large 35 clients by the end of 2009.
increases in revenues. However, Hughes was still dis- As of late 2009, TopCoder ran two different types
satisfied: “I viewed the hours-based services approach of competitions on its platform: algorithm and client
Exhibit 2 Number of clients, revenue, number of platform managers and platform manager costs by quarter
2007 2008 2009

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Number of Clients 32 32 34 25 24 38 37 47 46 47 38 35
Total Revenue 4.66 4.50 3.80 5.35 5.80 5.50 4.85 2.60 2.25 1.92 1.82 2.45
($MM)
Number of 51 51 44 52 52 46 44 36 20 19 18 16
Platform
Managers
Cost of Platform 1.23 1.24 1.12 1.30 1.36 1.19 1.13 0.91 0.53 0.49 0.46 0.40
Managers ($MM)a
Source: Company statistics.

aIncludes Platform Managers’ salaries, benefits and other expenses.
472

software development. Algorithm competitions served based peer review system. In particular, expert and
as the primary means for attracting new members experienced TopCoder community members were
and retaining existing members. These competitions paid to grade and comment on all contest submis-
required members to develop creative software solu- sions using detailed scorecards, ultimately picking
tions to relatively difficult programming challenges. All the contest winners. The winning competitors for
members were assessed against each other through an each contest were then awarded monetary prizes and
automated computer scoring system; they then received all participants were given updated ratings for their
a TopCoder rating for their performance. Some algo- performance. TopCoder also ran Studio contests if an
rithm competitions also had cash prizes for winners. application required logos or graphics; in those cases,
The second type of competition was targeted at clients chose the winners.
developing software applications for specific client
needs. A TopCoder platform manager initially worked
Evolution of the TopCoder community
with the client staff to develop a “Game Plan” (see
Exhibit 3 for a representative Game Plan) or a project Growth and composition
road map for building the software. The first step From 2001 to 2009, TopCoder added an average of
typically involved a contest where the general client 25,000 new computer programmers to its community
problem was presented to the TopCoder community each year. After filling out a short online registration
in a conceptualization contest. Here contestants pub- form, anybody in the world could participate in a
licly cross-examined the client staff as to their actual software development competition; by spring 2009,
needs and then submitted a business requirements the TopCoder community had over 200,000 members
document and high- level use cases. The client picked (see Exhibit 4 for community growth). Although the
the submission(s) that best represented their needs size of the overall community was large, the number
as the basis for further development. Then a series of of people within that community who actively par-
specification contests were held to create the appli- ticipated in contests and posted in forums was much
cations requirements documents, application wire- smaller. The majority of community members at
frames (i.e. the logical flow of application) and story- TopCoder registered as members of the community
boards (detailed cases of the user experience). Next, but never competed in any contests. In fact, by 2009,
the output of the specification contests were fed into only 35,000 unique individuals had competed in con-
several architecture contests where the overall system tests. To Mike Lydon, TopCoder’s Chief Technology
and component level designs would be created. At Officer, the remaining 82.5% of the community was
this point the TopCoder platform manager would the “latent pool”: people who were interested enough
work with the client to either select components from in the TopCoder platform to register and had the
the catalog or commission the creation of new com- potential to provide TopCoder with increased devel-
ponents through design and development competi- opment under the right conditions.
tions. After the component production phase, all the A second group within the TopCoder community
relevant components were put together through an comprised those members who at one time partici-
assembly competition with the objective of creating pated in TopCoder contests but then stopped partici-
a working system. Assembly was then followed by pating. Lydon noted that, after TopCoder decreased
certification and testing contests and then eventually prize values in 2008, many competitors from the
deployment. Throughout the execution of the Game United States and Canada left the TopCoder com-
Plan, TopCoder retained flexibility in development by munity. Yet another group included people who
running “Bug Races” to accommodate changing client participated in TopCoder contests but did not win.
specification or unforeseen errors. TopCoder also had TopCoder saw those competitors as the “long tail” –
been issued eight U.S. patents on various aspects of people who primarily competed for the sake of learn-
running online programming contests in a distributed ing. One of TopCoder’s main goals was to cultivate
community setting and had other patents pending the long tail so that lesser skilled competitors could
domestically and internationally. improve over time and increase their levels of con-
To determine winners and assess quality in client tribution. Lastly, TopCoder’s most valuable group
software development, TopCoder used a community- of competitors included the everyday winners. The
473

Part 4 Case studies
Exhibit 3 Sample game plan
Source: Company documents.
474

Exhibit 4 Community growth
talent of TopCoder’s elite programmers was equal for a traditional software engineering company. After
to the best in the world, but such members only winning significant money with TopCoder, Gasper
accounted for 0.5% of the total TopCoder population. decided to quit his job in 2005 and devote forty to
The core of TopCoder’s community was made up of fifty hours a week to TopCoder. Gasper explained:
single, highly competitive males in their 20s. According “TopCoder is my full time job; I don’t have a day job.”
to Michael Paweska, a six-year veteran at TopCoder: Gasper was one of TopCoder’s regular winners, a
“To be successful at TopCoder, you must ask yourself, member of the “global elite” of programmers. In archi-
‘Are you a competitor?’ You need to be able to thrive on tecture competitions, Gasper came in at least 2nd place
competition; you can’t be scared of it. You also need the 95% of the time and had a win percentage of 69.23%.
flexibility to work long hours. TopCoder is a bachelor’s Competitors at TopCoder could choose which contests
sport: the moment you become involved with someone and what type of contests to join (see Exhibit 5 for par-
else, it becomes a point of friction.” TopCoder attracted ticipation and prize data by contest type).
competitors from developed nations such as the United
States, Canada, South Korea, and Japan, as well as from
emerging economies such as China, Russia, Poland, Profiles and ratings
India, and Ukraine. Wu Yanbo, a Chinese TopCoder Each programmer in the TopCoder community main-
community member studying abroad in Australia, tained a public profile that displayed his or her user
explained that most competitors in the lower-paid con- name, contest history, and basic personal informa-
tests were from developing countries. According to Wu, tion. Another part of the member profile displayed
the prizes were not large enough for many individuals a competitor’s numeric rating for each type of con-
from developed countries to compete, since they could test. The rating system was modeled on the one
spend their time better elsewhere. used to rank grandmaster chess players engaged in
Justin Gasper, a member since 2001, began experi- worldwide competition. A “red color rating,” or a rat-
menting with the TopCoder platform while working ing of over 2,200, represented elite status within the
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Part 4 Case studies
Exhibit 5 Average contest registration, submission and prize amount for client contests in 2008 and 2009
2008 2009
# of # of
Registrants Submissions Prize $ per Registrants Submissions Prize $ per
Contest Type per Contest per Contest Contesta per Contest per Contest Contesta
Conceptualization n/ab n/ab n/ab 17.57 3.60 $1,314
Specification n/ab n/ab n/ab 14.20 1.94 $1,017
Architecture 16.3 1.64 $1,590 19.34 1.75 $1,095
Component Design 9.83 2.85 $899 16.26 1.94 $559
Component 15.4 2.69 $733 25.59 2.56 $465
Development
Assembly 16.09 1.12 $1,628 18.38 1.18 $913
Studio 27.55 14.57 $795 27.57 20.04 $1,015

aPrize per contest = Prize for 1st & 2nd places and reserve for Digital Run.
b
n/a – Data not available for most of 2008.
community and a high skill level. Yellow, blue, and $1000 per month in my spare time.” TopCoder typi-
green color ratings represented descending skill lev- cally awarded prizes to the top two submissions in
els. Each competitor’s country rank, total community each contest, with the lion’s share of the prize money
rank, success rates for contests, and reliability – or per- going to the top performer.
centage of times the contestant joined a competition Besides prizes awarded on a contest-by-contest
and submitted a passing solution – were featured in basis, another main source of income for members
their profiles. TopCoder members could also choose was the Digital Run. In the Digital Run system,
whether or not they wanted to display their total earn- the top five ranked competitors for each contest
ings on their profiles (see Exhibit 6 for an example of were awarded points based on contest rank and
a member profile). performance. At the end of each month, TopCoder
tallied competitors’ total points and awarded the top
point earners thousands of dollars in bonus prizes.
Motivating members Paweska explained that success in the Digital Run
Between 2001 and 2009, TopCoder paid out over was not all about who was the best programmer
$20 million dollars in prizes and peer review money but more about who could handle the most all-
to its community of developers. However, prize nighters. Other competitors, such as Gasper, also
money was not evenly distributed throughout the made money through contracted projects that
TopCoder community. The top 5% of prize earners TopCoder assigned.
received approximately 80% of the total prize pool, In addition to their cash earnings, many commu-
while the majority of TopCoder community members nity members reported that their TopCoder rating
earned little or no money from competitions. Some was very important because it provided an objective
competitors were extremely successful. For exam- assessment of ability. Wu commented that it was not
ple, from 2006 to 2008, Paweska earned $200,000 easy to maintain a very high rating as it required famil-
to $300,000 per year, while Gasper averaged over iarity with many kinds of technologies, quick thinking,
$100,000 annually. Wu commented: “I have to the ability to learn independently, a strong work ethic,
say money is the most attractive thing. The prize and attention to detail. According to Wu, a TopCoder
is very good compared to the income of my friends rating could be important for a programmer’s future
who are working in some local companies in China. career. For example, a high TopCoder rating helped
Even though the economy is not very good and one of Wu’s friends earn a job at Google. Gasper noted
TopCoder reduced its prizes, I can still earn around that TopCoder ratings were also symbols of status
476

Exhibit 6 Example of a member profile
Source: http://www.topcoder.com/tc?module=MemberProfile&cr=287614 - 12/23/2009.
477

Part 4 Case studies
and prestige for many programmers: “If you have to solve. It’s a skill that comes from doing tons and
red ratings, people look up to you.” Indeed, many tons of contests.”
prestigious software firms asked potential recruits to
get a TopCoder rating before applying for a job. To A “community” of competitors
others, however, the rating system was less important.
Wu noted that, although the firm was competitive in
Gasper, for example, explained that winning and mak-
sprit, competition at TopCoder was never disrespectful
ing money meant more to him than ratings.
or nasty and that people liked to help each other, even
Although there were differences of opinion regard-
when they competed in the same arena. TopCoder
ing the importance of ratings, almost all community
forums were the main source for collaboration. In the
members agreed that competing at TopCoder pro-
forums, less experienced community members asked
vided numerous opportunities to learn and improve.
for assistance on certain problems and received instant
In fact, for many programmers, a TopCoder career
feedback from more experienced competitors.
often began with failure, but post- contest evalua-
At TopCoder, conversations and relationships
tion and peer review of each submission helped them
extended beyond the scope of software development.
grow and improve. Gasper noted: “I totally failed in
Hughes reflected on a particularly remarkable exhibit
my first competition. But the reviewers were really
of communal strength and caring for fellow com-
good at pointing me in the right direction, saying
munity members outside of software development.
‘here’s where you went wrong’. . . . You can’t fake
“When one of the community members died,” he said,
it because you’re getting peer reviewed by people
“the outpouring of support was such that a number
who are better at programming than you are. The
of the community members took all of their winnings
reviewers don’t care if they hurt your feelings; they
for a few weeks and gave it to the deceased’s wife. It
are direct. If they see a bad design, they rip it apart.”
ended up being tens of thousands of dollars.”
Paweska agreed that getting feedback from review-
Once a year, TopCoder paid for all of the best
ers was crucial and added that community mem-
talent from the community to travel to Las Vegas,
bers could also learn from acting as a reviewer for
Nevada, to compete in the TopCoder Open (TCO).
contests. For scientists and developers, Wu believed
In additional to serving as a proving ground for the
that algorithm contests were particularly helpful
best programmers in the world, the TCO provided
at sharpening research skills and improving critical
community members with the opportunity to network
thinking abilities. In all cases, continual learning
professionally and socially.
opportunities from peers were an important reason
The TopCoder community had a distinctive cul-
for participation.
ture, with identifiable personalities. Wu explained:
Gasper described the appeal of working at home on
“I believe this community, like all others, has its own
a web-based platform instead of in a traditional “cubi-
culture. Clearly, the members built it up continuously.
cle farm” setting: “I like the flexibility that TopCoder
When I joined the community, there were already
gives me. I don’t need to drive a half an hour to work
some leading members who were active in competi-
each day and can do the same work at home. If I want
tions and forums, brought out good suggestions, and
to take off a day to play golf, I just do it. I also don’t
started up interesting and important discussions.” In
have to work from 2 to 6 pm, my most unproductive
some cases, the fame of community leaders extended
hours.” Sharing similar sentiments, Paweska liked
well beyond TopCoder. For example, Tomasz Czajka,
that while working at TopCoder he did not have a
from Poland, achieved “rock star” status and had his
supervisor looking over his shoulder.
picture plastered on billboards throughout Warsaw
Setting one’s hours was convenient but also chal-
after he won the TopCoder Open in 2006.
lenging, as competitors had to actively manage their
individual levels of participation. Gasper constantly
balanced effort and reward to maximize income The client’s perspective
while still living a sustainable lifestyle. “If there’s Clients came to TopCoder to have high quality soft-
something that is way too much work for the pay- ware developed in a cost effective and time efficient
ment, I won’t do it… that’s a super power I’ve devel- manner. TopCoder positioned itself to serve both large
oped. I know when the spec is clean and worthwhile firms and medium to small-sized business that wanted
478

to see systems developed. Keith Moore, a TopCoder cli- to the marketing management team and say, ‘We could
ent and former Senior Vice President at LendingTree. do x, y, and z that we may not have previously consid-
com, believed that, regardless of size, any company ered.’ They’re adding value to our business because they
could take advantage of TopCoder, whether it was a bring us solutions that quite frankly we may not have
five man operation or large outsourcing vendor. For considered or were not resourced to deliver.”
many CIOs, the process of software development and
talent recruitment was a major headache, and missed Superior quality, cost, speed and flexibility
deadlines and large cost overruns were common wor- Clients praised TopCoder’s rigorous evaluation and
ries. According to Stephen Laster, the CIO at Harvard documentation process for being well above industry
Business School and a TopCoder client, “A typical IT standards. Reflecting on his experience working on
shop will turn over 48% of its employees every three the Google Talk interface to AOL Instant Messenger,
years. This process is very costly. The same problem Perez stated that TopCoder and its community had a
exists with our outsourcing consultants. When select- strong desire to deliver bug-free code and that even
ing consultant teams, we tried out 60 programmers the most complex systems always had fewer than 100
before finding our team of 20. With TopCoder, I pay identified bugs. According to Perez, the same sized
for performance and the CIO sees Nirvana.” projects, developed internally, at AOL would have had
As of 2009, TopCoder had developed a strong rela- 5-8 times that number of bugs.
tionship with existing clients for delivering high qual- Another TopCoder client, a web-based startup busi-
ity software solutions and superior customer service. ness, noted that it would have had to pay $350,000 to
After completing their first project with TopCoder, a large IT consulting firm, $200,000 to a small IT con-
82% of clients signed up for a second round of sulting firm, or $80,000 to individual contractors to
contests. They cited several advantages. build the company’s website. Using TopCoder, the cli-
ent only spent $35,000. This same client proclaimed:
“At $35,000, it’s priceless. There is no other game out
Benefits there.” A different client noted that based on its experi-
Better ideas ence working with almost every type of software devel-
Before sinking thousands of dollars into a project, a opment company, TopCoder charged approximately
client could run a conceptualization contest through half of the fee of a large, tier one IT consulting firm.
which TopCoder members helped identify bad ideas Using the community for parallel problem solv-
and generate better approaches early in the developing, TopCoder marketed itself as faster than other
ment cycle. When the client introduced a business software development shops. This was true for back
problem to the community, members asked hundreds end bug races and system checks, as TopCoder took
of questions. Nic Perez, a former Technical Director at 72 hours to complete the same bug testing that a
AOL, explained that the community’s questions “gave us traditional development firm finished in 10 business
insights into problems I didn’t even really know I had” days. However, for other steps in the software devel-
and “saved us money by doing all of those questions opment process, reports on speed were mixed as some
upfront.” Using online forums, clients answered ques- clients said that TopCoder worked at about the same
tions for all competitors only once, avoiding repeated speed as a large IT consulting firm while others lauded
efforts. In some cases, clients scrapped product ideas TopCoder for speed of completion.
entirely after the community raised concerns about the Especially appealing to clients was TopCoder’s
product’s likely success or usability in the marketplace. ability to supply flexible software development capac-
TopCoder’s contest-based development system con- ity. In particular, a TopCoder client could expand or
sistently produced highly creative ideas and solutions. reduce its business requirements and development
According to Darren Smith, a Solution Architect for the capabilities without having to hire or fire program-
e-commerce division at Ferguson Enterprises, North mers. According to one client, a basic in-house compu-
America’s largest plumbing supplies wholesaler and ter programmer cost $120,000 a year, after accounting
distributor: “The community comes back with many for benefits, sick time, and vacation. Working with
options. It really has surprised us. You never know what TopCoder, clients did not have to spend as much on
you are you going to get. The creative side allows us to go employees’ benefits and downtime.
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Part 4 Case studies
Concerns software development process also made it difficult

Although CIOs were impressed by TopCoder’s tech- for a single competitor to insert harmful code into a
nical capabilities and cost saving potential, many program, since individual contests only addressed one
often had initial reservations about working with small piece of the overall program.
TopCoder’s unusual software development model.
Cultural change
Intellectual property and security Many clients realized that working with TopCoder
According to Ira Heffan, TopCoder’s Chief Legal would be difficult culturally for their company. In par-
Counsel, “For new clients unfamiliar with TopCoder’s ticular, CIOs believed that internal employees would
model, IP and security concerns can be an initial point view TopCoder as a threat to their job security. One
of resistance. Until they understand the documenta- new client observed: “TopCoder is a CIO’s dream but
tion and processes we have in place with the com- a programmer’s worst nightmare. I fully expect that if
munity members, they see IP and security as potential this goes well and if my programmers see good qual-
barriers to working with a community.” For example, ity work coming out of TopCoder, fear will quickly
some clients were apprehensive that a TopCoder explode throughout the building.” Although using
community member might divulge proprietary ideas, TopCoder could help a company scale and reduce the
business plans, or operations to their competitors. programming staff costs, companies still had to retain
In addition, some clients worried that once a com- the “big thinking” people – the employees who could
ponent became an integral part of their IT systems, guide the TopCoder development process. The man-
the community member who built the component agers at TopCoder clients also had to adjust to a per-
might attempt to prohibit its use or ask the client to ceived loss of control over the software development
pay considerable royalties. Lastly, some clients were process. Smith commented: “We set the competitions,
concerned that a solution submitted by a community but they manage the whole process. Our project man-
member could be stolen, copyrighted, or taken from agement group works with the TopCoder manager
open source software projects, thus potentially open- to ensure delivery according to pre-determined SLAs
ing the door for intellectual property disputes. (Service Level Agreement).” Some clients even found
TopCoder had in place a number of initiatives tar- a few community members to be pushy and rude dur-
geted at addressing these concerns and reducing the ing pre-competition question and answer sessions.
risk level for clients, and also took steps to communi-
cate its processes. To ease client’s intellectual property Coding challenges
and security concerns, TopCoder produced a white Even if TopCoder did all of a company’s internal
paper that detailed confidentiality policies, intel- development work, the company still needed to have
lectual property assignment rules, and TopCoder’s an internal staff to integrate the deliverable into the
modular approach to software development. In addi- client’s existing systems, review the code for security
tion, TopCoder allowed clients to keep their company issues, and adjust and fix code as systems changed over
names anonymous during competitions and helped time. For example, Smith’s team at Ferguson spent
clients generate test data sets to avoid the exposure a significant amount of time inspecting, testing, and
of sensitive information. At the client’s request, before processing TopCoder’s work to make sure that there
a community member was allowed entry into a com- were no security threats or bugs. In some contests,
petition, all competitors could be required to sign a TopCoder clients also spent time evaluating ideas and
standard Competition Confidentiality Agreement. approaches from multiple winning solutions.
The peer review process was another means to Another ongoing issue for clients was finding the
ensure code security and quality. Peer reviewers were right types of problems and providing the appropri-
selected and vetted by TopCoder employees based ate amount of problem detail for the TopCoder com-
on their superior performance on prior competitions. munity. As Moore described it, “You want neither
TopCoder clients also had the option of running test- too much nor too little detail. You do not want to
ing competitions at the back end of software produc- quell innovation but also want a solution that makes
tion, serving as an additional means of checking code sense in your system.” Clients discovered that contest
security and quality. TopCoder’s compartmentalized participation decreased if they were unclear about
480

what problems they wanted to solve or presented one member development day in China, TopCoder reg-
problems that were too complex or vast in scope; in istered over one thousand new community members.
those cases, the TopCoder community struggled to Bourdon noted that TopCoder had achieved critical mass
produce an acceptable solution. Clients also found once it crossed the 200,000 member threshold as there
that community members worked best when contests were now many members with deep and narrow skills
lasted less than two weeks. If projects took too long over a range of software development challenges. (See
to complete, contestants would lose interest and not Exhibit 7 for the number of participants by contest type.)
make submissions.
Norms
Managing TopCoder As the community grew, TopCoder paid close atten-
tion to establishing community norms. As contest
The supply side administrator, the company had to maintain the high-
A management job at TopCoder was unique. Along est standards of contest integrity, fairness, transpar-
with supervising internal TopCoder employees, man- ency, and quality. For example, TopCoder person-
agers at the firm had to oversee a community of over nel strictly monitored competitions and tolerated no
200,000 members and direct the process of competition- form of cheating. Community members who peeked
based software development. According to Senior at other competitors’ solutions, shared ideas during
Vice President George Tsipolitis, the key to success competition, or used unauthorized code were imme-
was effective process management: “When you’re diately eliminated from the contest. Often they were
managing a community, you are no longer managing kicked out of the community entirely.
individuals, you’re managing a whole. We can’t control If any uncertainty or disagreement arose about
individuals. We can only control the process of their which competitor won a particular contest, TopCoder
participation.” Clients and employees alike believed would spend the extra money to re-run the competition.
that the sustainable value of the company was depend- Another part of contest integrity, Tsipolitis explained,
ent on TopCoder’s ability to facilitate community was TopCoder’s emphasis on maintaining consistency
participation and foster community growth. Lydon of rules and procedures: “The second that participants
described the risks: “From the beginning, we focused can’t figure out how to win, they’ll stop participating. So
on the community. We knew they could be unforgiv- we can’t change the rules of a competition mid-stream.”
ing. If you did the wrong thing, you got crucified.” TopCoder also guaranteed complete contest transpar-
ency by storing all contest and competitor statistics,
Attraction peer reviews, and solutions in a data warehouse. The
To run many competitions simultaneously and produce data were publicly available to registered community
solutions for many clients at the same time, TopCoder members, accessed via the TopCoder website.
needed to have access to a critical mass of talent and Integrity and fairness also extended to TopCoder’s
coding capacity. TopCoder’s primary means of attract- corporate motivations and community compensation
ing new members into the community was the appeal philosophy. In particular, TopCoder was upfront with
and challenge of the algorithm challenges. In addition, the community over its intention to make money.
TopCoder occasionally advertised its online competi- When TopCoder made a decision to change corporate
tion platform by paying for Google keyword searches direction or competition procedures, Hughes posted
using terms such as “design contests.” A third mecha- the information in the forums and explained the
nism for attracting talent was “member development business reasons behind his decisions. Hughes also
days.” Organized by a small team of TopCoder employ- believed that, since the company benefited from the
ees, member development days were held at Chinese community’s hard work, adequately compensating
and other international universities. At a member devel- community members was essential.
opment day, a student representative would post signs
around the school and explain the TopCoder system. Governance
A primary goal of these member development days Although TopCoder executives were responsible for
was to encourage participation in the higher revenue final decisions, they frequently incorporated commu-
producing development and design contests. During nity members’ views into the process. Lydon explained:
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482
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Exhibit 7 Number of unique participants by contest type per year and month/total number of official contests per year
2005 2006 2007 2008 2009
Average Submitters Contests Average Submitters Contests Average Submitters Contests Average Submitters Contests Average Submitters Contests
Contest Type per per Year per Year per per Year per Year per per Year per Year per per Year per Year per per Year per Year
Month Month Month Month Month
Algorithm Contests
Single Rounda 1,319 5,287 81 1,930 7,525 105 2,638 8,994 113 2,945 10,433 66 2,558 9,616 51
Marathon 500c 500c 1c 273 1,532 20 281 1,588 30 253 1,621 29 314 2,150 35
Matchb
Client Software
Development
Contests
Conceptualization 7c 11c 9c 6 34 70
Specification 5c 7c 16c 6 32 71
Architecture 1c 4c 4c 4 29 65 9 36 145
Component 33 157 362 45 225 615 61 243 698 38 144 488 20 93 300
Design
Component Dev. 58 316 287 88 451 484 135 605 780 91 434 733 41 204 337
Assembly 7 47 86 10 59 191 20 104 416
Design Contests
Studio 65c 223c 17c 81 453 118 66 279 451 102 429 456
Totald 1,370 5,565 730 2,146 8,517 1,224 2,867 10,072 1,825 3,198 11,487 2,023 2,911 11,122 1,881
a 75 minute programming contest.

b Programming contest that run from 3-30 days.
c Partial year data – contest track officially did not start until the middle or end of the year.
d Represents the unique number of participants during a given time period. Columns are not additive.
10/03/14 3:19 PM
“We treat the community as the driver for everything contests running concurrently, and the problem’s
we do. If we have enough dissent from members, we complexity and scope. When deciding on the ideal
always take that into account. The problem is that number of competitors, TopCoder also considered
when we don’t know what to do, our members will also contestants’ reliability. As a last resort, TopCoder
be split.” Community member Gasper, shared a similar employees reached out directly to individual com-
perspective: “TopCoder tends to push out ideas into munity members if other methods did not lead to the
the forums to get feedback. Seventy-five percent of the desired participation levels.
time, they listen to the community. But TopCoder also Although TopCoder managers could pull many
has its own business interests to consider. Sometimes levers to influence contest participation, they believed
the community and business interests don’t line-up.” it was important not to act like the community’s boss.
Similarly, if competitors were unhappy with a peer Hughes explained his community management phi-
review scoring outcome, TopCoder allowed them to losophy: “We don’t own this community. We want
appeal the decision. Over 90% of contests featured at people to be here when they want to be here. You
least one appeal. If a member appealed, peer review- are just going to get much better results when you let
ers had to provide specific reasons why the appeal people do what they really want to do.”
was accepted or rejected. If disagreement remained
between contestant and reviewer, TopCoder employ-
ees often investigated. Contestants could also appeal Retention
directly and privately to TopCoder personnel or post At the same time, TopCoder executives worked to
complaints publicly on the TopCoder forums. retain community members and encourage future
TopCoder managers inevitably made decisions contest participation. At least one client raised con-
that sometimes disturbed and upset the TopCoder cerns in this area: “I think that communities are fickle.
community. For example, facing a very difficult eco- Community members could start to ask, why do I
nomic environment in the summer and fall of 2008, need them? For example, what happens if an imita-
TopCoder reduced the contest prize amounts, cut tor comes along and offers 2x the prize amount?” To
payments to peer reviewers, and reduced the number avoid such problems, TopCoder tried to supply com-
of algorithm competitions. During this period, some munity members with consistent work streams and
TopCoder competitors left the community entirely prize money. TopCoder also encouraged community
and others dramatically reduced their participation members to engage in the community as much as pos-
levels. Gasper argued that the payment cuts also led to sible by dedicating significant resources to facilitating
many superficial reviews because the best reviewers forum discussions and inviting contestants to partici-
were no longer doing the work, which then required pate in peer reviews, write problems for contests, and
additional cycles to achieve acceptable quality. develop TopCoder’s internal systems.
TopCoder community members differed on their
level of loyalty to the TopCoder community. Paweska,
Resource allocation appreciative of all the opportunities TopCoder had
Another part of the TopCoder managerial role was provided, reflected, “I have some loyalty. I think it
allocating community resources and controlling con- would take a lot for me to leave. Only if there were no
test participation. Lydon explained, “We have to projects would I leave.” Gasper viewed his position in
figure out how to distribute the number of people the community in a different light. “I’m not super loyal
who want to participate across the number of contests to TopCoder or anything,” he said. “To defect, the pay-
that have to be solved.” Unlike a typical software ment and work would have to outweigh the payment
development firm, TopCoder could not assign specific and flexibility I have at TopCoder.”
people to a task or project. As participation manager,
TopCoder’s goal was to minimize the costs of evalua-
tion, stimulate effort through competition, and get at The demand side
least one solution that was acceptable to the client. To Platform managers
achieve the ideal number of submissions and partici- The other side of management at TopCoder was
pants, TopCoder adjusted the prize amount, the dura- guiding clients through the contest-based software
tion and timing of the contest, the number of other development process. This was the responsibility of
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Part 4 Case studies
the company’s platform managers, whose job was to nity member or an external consultant familiar with
induce the appropriate amount of community partici- TopCoder’s platform – someone who would serve as a
pation, make suggestions for contest prize amounts, “co-pilot” to assist the client staff. With co-pilots tak-
gather feedback between contests, and provide ing the role of platform managers, Hughes estimated
project status updates to clients. Before starting the that the platform manager’s weekly time on a project
next step in the Game Plan, platform managers also would shrink from forty hours to two, thus sav-
adjusted contest requirements based on the work ing the client and TopCoder considerable time and
already completed. Once the product was delivered money.
to the client, TopCoder platform managers were
required to act in a support and service role. If there
was a technical problem with a solution, the platform The future
manager often contacted the community members
As of December 2009, no competitors had elected to
who developed the component and worked with the
copy TopCoder’s business model by offering full service
community members to fix the issue.
software development through a competition-based
Most enterprise-level clients believed the platform
approach. Instead, companies such as RentACoder,
manager was pivotal to a project’s success. At a large
Elance, and oDesk served as online liaisons between
client like LendingTree, the platform manager was
clients and freelance software developers. Unlike
onsite three to four days a week, conducting daily
TopCoder, whose clients only paid for solutions,
meetings with the internal teams. A large part of
clients at these firms used a “buy talent” approach:
the platform manager’s role was managing client
they selected one or more programmers to solve
expectations and serving as a sounding board for
their problem. More similar to TopCoder, uTest used
client concerns. At the backend of projects, although
crowdsourcing to find bugs and check the functional
the community often assembled a project’s compo-
usability of web, mobile, desktop, and gaming appli-
nents through competition, the platform manager
cations, but did not engage in software development.
was also an expert at combining the small software
According to Hughes, this lack of direct competition
pieces. The component integration role saved the
reflected the technical difficulties and costs associated
client hours of work trying to figure out how all the
with building a full-fledged community and platform.
pieces fit together. At Ferguson, Smith considered the
After a significant downturn in the global economy
TopCoder personnel working onsite to be an integral
in 2008 and 2009, Hughes believed that TopCoder
part of his team.
was primed for growth. Sales staff were forecast-
ing aggressive targets for the volume of competi-
TopCoder direct tions and revenues and there were several strategic
However, each platform manager added to TopCoder’s partnerships under consideration. However, signifi-
overhead costs and narrowed profit margins. As of cant challenges and uncertainty remained. In par-
2009, a typical platform manager at TopCoder cost ticular, Hughes wondered whether the community,
$100,000 a year including benefits. To Tsipolitis, the as well as the company, could grow to meet increas-
platform manager’s time was not always well spent. ing demand.
“Our project managers spend a lot of time babysit- Stakeholders had divergent views. Mike Morris,
ting,” he said. Vice-President of Sales, saw unlimited potential: “If
To avoid a potentially large increase in expenses as sales grow at a linear rate, membership grows at an
TopCoder added clients and projects, Hughes came exponential rate. The supply of community members
up with the concept of “TopCoder Direct,” in which is not going to limit growth. If you throw enough
the client used the company’s platform with little to money out there, you will get enough programmers.”
no intervention from its employees. Under this self- Community members Paweska and Wu agreed that
service model, platform managers would educate offering more money per contest would increase
clients on how to use the TopCoder platform to man- participation among existing members. Paweska also
age the contest-based software development process believed, however, that holding many more contests
themselves. Hughes envisioned shifting the platform than usual in a given week would result in inexperi-
manager’s responsibilities to an experienced commu- enced competitors competing actively for the prizes,
484

possibly reducing code quality. Furthermore, Lydon responding to all those clients’ questions and con-
noted that that during TopCoder’s last large scale up cerns. For large clients, expansion might require
in 2007, review quality suffered during a transitional adding more platform managers, but Rob Hughes,
period of a few months. As more contests became TopCoder’s COO, was concerned that too many plat-
available, the usual reviewers wanted to compete form managers might make the firm appear to be like
in the contests, rather than review them, leaving any other large IT consulting company, with the risk
TopCoder scrambling to find replacements. In addi- of losing its unique business model.
tion, a few clients worried that as the number of Even if Hughes succeeded at growing TopCoder,
avenues of competition at TopCoder grew, attracting he was unsure about the company’s competitive
the same group of competitors would prove much position. In particular, Hughes wondered if com-
more difficult, reducing contest consistency and con- munity members would stick with TopCoder if a
tinuity, which were especially critical for addressing new competition-based software development com-
legacy systems. pany emerged. What would happen if a company like
Hughes also worried about client service. If the Accenture started to develop software in the same
number of TopCoder clients expanded significantly, way as TopCoder? Would the TopCoder community
TopCoder’s staff might face increasing difficulties remain intact?
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Part 4 Case studies
CASE STUDY 9
Appirio
New venture on a cloud
As he left the meeting with Appirio’s board and had cemented vital strategic partnerships with Google
investors, Chris Barbin took stock of the remarkable and Salesforce.com, but it was difficult to predict
situation the company was in. Under his leadership as with confidence the speed and risks of the move to
CEO, the company had added clients and employees the cloud. Appirio planned to lead the big switch as
faster than expected. To his delight, the business had it offered cloud services and consulting to large and
hit all of its top-line and bottom-line financial targets. medium-sized enterprises.
The company was getting excellent exposure in the
trade press with a forthcoming article on Appirio and
Appirio
cloud computing in CIO Magazine. As projected, large
and even medium-sized companies were actively Appirio was founded on the premise that companies
moving parts of their IT operations into the cloud. could get more value from their systems and software
On his ride home, he began to play back the risks by moving their IT systems to the cloud. Under the
that his team had identified as they grew Appirio current model of delivering IT services, companies had
to a 40 million dollar company. During the board to license software from a vendor and deal with issues
meeting, he had remarked to Glenn Weinstein, “My such as systems implementation, hardware, updates,
greatest fear is a cataclysmic event – say, some high- hosting, support, and maintenance. This generally
profile company that operates in the cloud loses the required costly systems and technology investments
credit card information of four million customers. not directly related to a company’s core business. A
That would change everything, I fear.” Almost daily, recent technology known as cloud computing provided
he assured potential clients that such risks were neg- an opportunity to break out of the old model by allow-
ligible due to the unique protections and safeties of ing specialists to focus on technical and delivery aspects
cloud-based implementations, but he wondered quiet- of software, leaving companies to focus on their busi-
ly, “Can cloud computing live up to its full promise – to ness operations. To support this agenda, Appirio deliv-
drive down dramatically the costs and complexity of ered both products and services that helped enterprises
running IT?” During the past four years, the company accelerate their adoption of the cloud.
This case was prepared by Bala Iyer, Associate Professor of Technology Operations and Information Management, and Erik Noyes,
Assistant Professor of Entrepreneurship, of Babson College, based on published sources. It was developed as a basis for class discus-
sion rather than to illustrate effective or ineffective handling of an administrative situation. It is not intended to serve as an endorse-
ment, source of primary data or illustration of effective or ineffective management.
Copyright © 2012 Babson College and licensed for publication to European Case Clearing House (ECCH). All rights reserved. No part of this publication can be reproduced,
stored or transmitted in any form or by any means without prior written permission of Babson College.
486

Case study 9 Appirio: new venture on a cloud
The Appirio leadership team a-service and the cloud were aimed at small business.
There wasn’t much in the market that was aimed at
The founders of Appirio had all worked for tradi-
the enterprise. Appirio existed to deliver the benefits
tional software companies such as SAP, Borland, and
of cloud computing to large and medium-sized enter-
WebMethods. Within these firms, they had held roles
prises. A big question in the minds of the founders
in IT, consulting, and tech support. Accordingly, each
was, “Did we catch the right market with the right
had intimate knowledge and awareness of the bur-
assumptions?”.
dens traditional software placed on large businesses.
To the CEO and CIO of Appirio, Chris Barbin and
Glenn Weinstein, IT was supposed to foster agility and Cloud computing
competitiveness in the marketplace. But too often, The Burton Group defined cloud computing as:
the complexity and costs of developing and updating
The set of disciplines, technologies, and business models
IT systems squashed rather than supported business
used to render IT capabilities as on-demand services.1
innovation.
In most large global organizations, the IT group The National Institute of Standards and Technology
spent 70 to 80 percent of time just keeping the lights put forth the following definition for cloud comput-
on, maintaining and operating the existing software. ing:
Many weeks or months of planning went into upgrad- Cloud computing is a model for enabling convenient, on-
ing software or accepting patches and hot fixes. demand, network access to a shared pool of configura-
Considering the rippling implications of these deci- ble computing resources (e.g., networks, servers, storage,
applications, and services) that can be rapidly provisioned
sions could take just as much time. This left little time
and released with minimal management effort or service
for analysts to contemplate new business functionality provider interaction.2
or consider how IT could deliver more value to busi-
nesses (i.e., enable new competitive advantages and While it was hard to come up with a single definition,
organizational capabilities). Broadly, this dilemma there were shared expectations about the value an
resulted in IT departments going into survival mode organization could derive from adopting cloud com-
trying to keep the applications they operated running puting.
without interruption. (See Appendix A for an overview of the five core
While this description characterized the costly and layers in the cloud computing stack, analogous to
competitive arena of large IT system implementa- a software stack. Collectively, this design simplified
tions, a new model called software-as-a-service (SAS) getting data to system users. Because cloud comput-
was gaining widespread acceptance and technical ing existed in four different forms, companies could
maturity to the point where it had become viable for choose the type of cloud best suited to them: public,
enterprise software. This trend was primarily dem- private, community, or hybrid. These variations are
onstrated by Salesforce.com, which made sales lead detailed in Appendix B.)
management and customer relationship management
(CRM) affordable, scalable, and easy to manage by The early days of Appirio
operating in the cloud.
Appirio was incorporated and launched in 2006 with
Chris recalled that Appirio was founded on four
the mission and vision to accelerate adoption of
core beliefs: “First, software-as-a-service is going to
the cloud. Chris, Glenn, and Chief Strategy Officer
become a major revolutionary trend in IT. Second,
Narinder Singh put together $100,000 in seed capital
over the next five to 10 years, enterprise-class IT will
and bootstrapped the venture for the first 15 months.
start to realize the benefits of this model. Third, enter-
prises need to be educated on the cloud value proposi-
tion. And last, CIOs need guidance and assistance to 1 Reeves, Drue et al., “Cloud Computing: Transforming IT,”
realize the agility and lower costs that can come from Burton Group Cloud Computing In-Depth Research Over-
view, vol. 1, April 20, 2009.
cloud computing.” Appirio wanted to be the catalyst 2 NIST Special Publication 800-145, “The NIST Definition
that accelerated entry into this brave new world. At of Cloud Computing,” by Peter Mell and Timothy Grance,
the time of Appirio’s founding in 2006, software-as- September 2011.
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Part 4 Case studies
The first thing they did was launch an online col- Growth phases
laboration site in the cloud on Google. Chris recalled,
For an initial horizon, Narinder, Glenn, and Chris set
“This really helped accelerate momentum, like lock-
their sights on growing from zero to 10 million dollars
ing in on our core values right away.” He continued,
in annual sales. They felt that going to 10 million dol-
“We literally had multi-hour discussions about our
lars in revenues presented its own unique set of chal-
core values, and we agreed we were going to live or
lenges. The company focused on finding and devel-
die based on those particular values.”
oping a few vital strategic partnerships, including
Before hiring their first employee, the team agreed
relationships with Salesforce.com and Google. After
they would collectively interview and approve all new
quickly reaching 10 million, the company recalibrated
hires. In addition, they decided that any of them could
its sights. They set their next horizon on growing from
exercise veto power on any hire for the critical first
40 million to 100 million-plus while considering how
100 people. They knew that seeking those with a simi-
to position themselves for an IPO.
lar vision and passion was critical to building a unique
Both the operations of Appirio and the market
culture to deliver on the promise of cloud computing.
opportunities it chased were up in the cloud. The
They were determined to find and screen the right
leadership team viewed movement to the cloud as a
people. They built a flexible human resources system
20-year transition period, similar to the time for adop-
in the cloud that allowed Appirio to screen efficiently
tion of electricity after Edison’s discovery, and Appirio
more than 25,000 applicants.
sought to enable this new future. As a team, they
From its founding, Appirio considered the strategic
agreed that, given the early stage, there was a deep
value of the cloud for its own operations and growth.
need for education and evangelism for this growing
The management team strongly believed they could
industry. In a competitive landscape where larger IT
build a company of more than 10,000 people com-
players such as Accenture and IBM had vested inter-
pletely in the cloud. In their hearts, Glenn, Narinder,
ests in traditional, expensive, waterfall-style imple-
and Chris aimed to create the next generation IBM
mentations, Appirio was aiming to be a pure-play in a
without the baggage of hardware – a systems solu-
brave new world. But the concern was whether large
tions company without the cost, complexity, and
enterprises would trust a cloud-only upstart to bring
rigidity of prior technology. They focused on moving
them to the cloud. IBM and Accenture each offered
non-core or what they termed edge business systems
cloud services and consulting, but they also offered all
to the cloud. Chris explained, “The trading desks at
the traditional services systems. In short, would a com-
JPMorgan Chase or Morgan Stanley are core to the
plete focus on the cloud catapult higher or potentially
businesses. Therefore, they are not ripe for being
complicate Appirio’s reputation in the marketplace?
moved to the cloud. But their customer relationship
management system, which is critical but not core, is
a prime candidate for realizing the cost benefits and
flexibility of being put in the cloud.” Appirio’s CIO
Appirio measured business progress by the number Glenn took the title of CIO from the beginning. He
of go-lives, its term for successfully bringing a client ran the consulting practice and all IT efforts. The IT
project to the cloud. Across hundreds and hundreds of side amounted to 10 percent of his time. Therefore,
go-lives, Appirio tracked the cost savings, innovation, Appirio’s IT staff was 0.1 full-time equivalent (FTE)
and increased flexibility experienced by its clients. For when founded, and this IT structure continued for at
aggressive differentiation from IBM and Accenture, least two and one-half years. By year two, the com-
companies with strong interest in the old model of IT pany started to scale IT operations. In 2011, Appirio
system implementation, the Appirio executive team had one full-time IT person. In addition, Glenn spent
focused on delivering benefits quickly. Chris scoffed, about 25 percent of his time hiring contractors or
“The old way of thinking about multi-year waterfall consultants, resulting in the equivalent of two full-
implementation systems runs generally in eight fig- time IT personnel. The full- time person running IT
ures, and results can be risky. In the cloud world with was a system administrator acting as a “traffic cop.”
a pilot, we aim to demonstrate value and functionality As Glenn proclaimed, “We’ll never own a server
in four to six weeks!” or depend on on-premise software as long as we run
488

Appirio.” This principle guided IT decision-making. As of scale were realized for large investments. For
with many companies in startup phase, Appirio was Appirio, based on reports from the research firm
in bootstrap mode following its philosophy of doing Gartner, their low investments in IT as a percentage
what it preached to customers. The founders agreed it of revenue suggested that they had gained efficien-
would be hypocritical to run IT differently from how cies equivalent to those of a billion dollar company.
it advised customers, even those who belonged to the Their IT spending as a percentage of revenue had
Fortune 500. generally been well under two percent. It was trend-
By 2011, with some 250 employees serving thou- ing up somewhat as their business requirements
sands of customers, Appirio had remained without became more complex and sophisticated. However,
servers or traditional software. The leadership team it was expected to be under three percent of total
showed the empty server room to visitors at the San revenue. According to Gartner, a typical company of
Mateo office. A large door behind the copiers bore a their size and revenue was spending seven percent or
sign indicating “Server Room,” beyond which visitors more. Appirio’s expenditure level was due to its abil-
could see a phone switch and exposed flooring. ity to share costs with thousands of other customers
Appirio had adopted basic systems such as and use exclusively software and platform as service
QuickBooks Online for financials, Salesforce.com for offerings.
CRM, Google Apps for collaboration and productivity, Although Appirio was a three-person startup, dur-
and Workday for HRM. When management adopted ing the first year of operation they decided to become
these systems, it was still customary for startups to a thousand-person company. They wanted to build IT
use the ASP model of hosted software. Even more infrastructure that would support 100 and later 1,000
recently, it was typical for firms receiving venture employees. Appirio designed its IT infrastructure care-
capital funding to use the old model. Using the newer fully. They redefined the term infrastructure and untied
systems allowed Appirio to avoid dealing with issues it from the notion of hardware and networking. To
of scalability or buying and updating software. them, the real meaning of IT infrastructure was: Where
Appirio believed IT departments should not be in does your data live? How does your data move around?
the business of providing and maintaining laptops What systems do people use for different purposes, and
for employees. Appirio questioned why IT should be what integration points do they have with their custom-
involved with laptops. Years ago before employees ers and partners? Appirio saw IT infrastructure as a
had computers at home or understood how to connect logical entity physically manifested in arbitrary ways by
to a network, IT departments took on such respon- different companies. Appirio believed what mattered
sibilities. However, these activities were no longer ultimately was how it was implemented.
needed, now that employees typically maintained To Appirio, IT infrastructure was a collection of pic-
their own home networks and software support with tures in logical diagrams. The Appirio team discussed
significant expertise. how their CRM integrated with their financials and
Under this self-service model, each employee at how that exposed information to employees and cus-
Appirio was given a certain spending allowance and a tomers. These conversations did not mention how they
few broad guidelines for supporting his or her personal implemented systems. Their IT was implemented on
computing needs. Within this budget, employees could someone else’s hardware, and they believed it did not
buy a laptop, either a MAC, a Windows machine, or any make sense to revise the Google network as their infra-
other, as long as they could connect to the Internet. One structure. The physical machines that moved Appirio’s
of the enabling technologies that allowed Appirio to bits lived in Google hosting centers, Salesforce.com
take a hands-off attitude was that they had strategically hosting centers, and Amazon.com server farms.
committed to software-as-a-service for all their software
needs. In addition, Appirio did not create a corporate
IT as “traffic cop”
network. Their corporate network was the Internet.
They were entirely committed to the public cloud. Appirio used a highly decentralized decision model
A standard measure of efficiency in the IT indus- for IT projects. It saw its role as a traffic cop and not
try was to assess IT costs as a percentage of total a gatekeeper or approver of projects because the cost
revenues. Costs generally dropped as economies implications were almost exclusively contained in the
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Part 4 Case studies
manpower required for implementation. There were consulting services for the same thing. Appirio went
virtually no other costs. about this systematically. At the founding of the compa-
For example, if their online marketing director ny, they adopted Google Apps for email and calendar-
wanted to implement a new approach for integrating ing services. Although they started using these as stan-
their lead and opportunity data in Salesforce.com, dalone applications, the farther they progressed, the
and to use that to drive a series of events in the next more they started to integrate these applications into
year, they launched it directly. Most organizations other systems and into other aspects of the business. As
required a call for proposals followed by vendor audi- a result, they were not just users of Google Apps, but
tions, after which they would select a new marketing full-fledged adopters of every cutting-edge technology
automation system. IT people would then install and and idea that came out of the Google Apps ecosystem.
configure the software. With the user-driven cloud Appirio encouraged employees to build unique
approach, the only commitment was time invested relationships with personnel from Google. This
by the marketing director and the marketing staff to occurred at user conferences, on social media sites,
build out their concept for this system. and in face-to-face meetings. This strategy of forg-
Appirio was able to accomplish this because, unlike ing deep and diverse connections with their supplier
with most companies, every employee was technically ensured that Appirio’s customers received the highest
savvy. This meant that marketing people could access quality service possible.
Salesforce.com and start implementing an applica- Appirio was also trying to be an innovator/early
tion when they identified it as a strategic priority. adopter with Salesforce.com. When Salesforce.
They needed IT only as a traffic cop to make sure their com released their notion of a platform where cus-
system did not interfere with others. This changed the tomers could log ideas, Appirio released an ideas
role of IT at Appirio, moving it from gatekeeping and package internally, following a lead-user as market
prioritizing systems to “policing” the various systems. leader model, which enabled them to stay ahead with
IT provided any technical support needed to get technology.
projects done. This approach was radically different in A more recent example was their adoption of
bigger companies where business units felt beholden Workday for human capital management systems.
to IT. Business units depended on IT spending time Workday was a rising software service vendor found-
with their concerns but often became frustrated and ed by the same group that started PeopleSoft 20 years
sought third parties to help with their IT needs. They ago. Appirio not only implemented Workday, but
installed their own systems, resulting in systems integrated it deeply into their sales and professional
incompatible with corporate IT. service management systems.
In a typical IT project portfolio of a big company, These experiments helped Appirio build and dem-
many projects were pushed out three to six months in onstrate an architecture that could be shown to cus-
time. It was difficult for these projects to be included in tomers. Appirio intended its IT to serve as an example
a current quarter. Appirio projects did not need to rise and an inspiration to customers.
to the top of the portfolio to be implemented. Appirio
did not need or use a portfolio tracking system. Projects Getting value from the cloud
moved quickly to fruition in the quarter desired. As
Although Appirio spent less than three percent of
long as people were willing to allocate their own time
total revenues on IT, they were forward-looking and
and their staff’s time, it was not a burden for IT. Rather
revolutionary in the services they delivered to their
than disempowering, the traffic cop role allowed IT to
business, including:
forge front-line strategy with executives, just as busi-
ness magazines had suggested for more than 10 years. ● tools and equipment given to their sales people;
● the ability to collect, combine, and repurpose mar-
Building competencies around an keting collateral;
emerging technology ● how they measured financials;
Appirio was in the unique position of having to learn ● their sales pipeline and projections; and
a new IT services delivery model while providing ● how they collected product and service revenues.
490

They were able to achieve this level of productivity company sharing this vision of the future. Also, large
because they could directly affect and implement their enterprise customers would look, and not just leap,
own technology, due to the openness and the ease of into the cloud. How could Appirio ensure its contin-
use of the cloud platform. As Chris pointed out, “It’s all ued growth and differentiation? Was the future of
built to scale from day one!”. cloud computing as bright and unstoppable as they
Overall, this approach freed the IT team and moved all believed? What would come after the cloud and
them from a 70 to 80 percent maintenance mode to how would Appirio’s decisions today shape future
virtually 100 percent innovation mode. Although competitiveness?
Appirio was a relatively small company, its activ- The goal was to march aggressively to an IPO, but
ity could translate effectively to larger firms. Appirio IPO activity was almost non- existent in the depressed
managed to create a beehive of innovation where peo- global economy. Moreover, there were questions
ple did not feel constrained by an IT gatekeeper. This about how the market would value Appirio’s IT assets,
happened because Appirio was not limited by typical as there were few market comparables for such a
IT maintenance burdens. venture. While the overall forecast was bright, there
was also the very real question of the pace at which
CIOs would embrace the cloud. More than anyone
Future directions
else, CIOs knew that technologies would come and go,
Appirio carefully selected its ecosystem partners such so there were incentives to wait and see. How would
as Google and Saleforce.com, whose platforms were a blip, or worse, a catastrophic problem, affect the
growing fast. Google Apps had over three million busi- growth of the industry?
ness users, and 963 applications on Salesforce.com had The opportunity seemed so large, but there were
been downloaded more than 651,000 times. However, real risks too. Would the industry for cloud comput-
these two platforms did not cover all the needs of an ing grow as quickly as Chris and his team expected?
enterprise delivering solutions in the cloud. What other Would large companies trust a startup, versus IBM or
platforms should Appirio support? How should they Accenture, to migrate their business onto the cloud?
go about selecting their partners? As a company, what IBM offered cloud consulting and services as part of
metrics should they track to monitor their success? a large bundle of services and hardware. The phrase
“no IT manager ever got fired for hiring IBM” was per-
haps still true today. Was it possible to be a pure-play
Arriving home
cloud consulting and services business as the Appirio
As Chris pulled into his driveway, he knew the next team wanted, or would customers prefer a full range
few years would be defining times for Appirio. The of “traditional” IT systems services as well? Moreover,
company had built a wide range of agile systems in the was Appirio’s core value proposition compelling to
cloud and empowered company leaders to develop IT all companies it targeted, or just to technologically
solutions as they saw fit. The leadership team had actu- savvy ones?
alized core facets of its IT strategy, practicing what it Turning off his car, Chris thought Appirio truly
preached. The company had no vested interest in keep- had the potential to become the next Accenture, but
ing its enterprise clients tethered to costly on-site sys- there was so much to navigate before then. Appirio
tems since Appirio was a cloud computing pure-play. could serve as an example to countless other entrepre-
The industry for cloud services and consulting neurial ventures. Getting businesses large and small
would have many new entrants. Appirio was the only to rethink IT seemed a limitless opportunity.
491

Part 4 Case studies
Exhibit 1 Appirio’s Serverless IT Infrastructure
Source: “Serverless Enterprise,” Appirio, Inc. Web Site, http://www.appirio.com/company/philosophy.php, accessed April 2011.
492

Appendix A stack. This layered model can be used to identify the

set of functionalities that vendors offer, so that poten-
The cloud computing industry features vendor offer-
tial customers may compare vendors, pick the best in
ings falling into five different levels of abstractions,
each layer, and test for interoperability.
like a software stack but called a cloud computing
Figure A: The Cloud Computing Stack
1. Infrastructure clouds. Vendors such as Amazon provide basic services, for example machine instances to
developers. These services function like dedicated servers with memory, under total control of develop-
ers. Once an instance is started, the developer has complete sovereignty over its operations and must add
necessary instances to it and then terminate it once they are done. Examples of companies providing this
are Amazon EC2, VMware, AT&T, and Citrix.
2. Platform as a service. This enables a higher level of abstraction through which developers can build appli-
cations without worrying about instances. Typically, vendors such as Google and Salesforce.com provide
a development environment with a programming language to create new applications. Popular platforms
are Microsoft’s Azure, Apple’s iOS, Salesforce.com’s Force.com, and Google’s App Engine.
3. Application clouds. This is the most popular type of cloud, offered by Google Maps, Salesforce.com, and
Google Docs. Users can access these services online, paying as they go.
4. Collaboration clouds. A special case of application clouds focusing on social media applications such as
Facebook, LinkedIn, and others.
5. Service clouds. This layer includes companies providing consulting and integration services, such as
Appirio, Boomi, and Opsource.
Source: B. Iyer and J. Henderson, “Preparing for the Future: Understanding the Seven Capabilities of Cloud Computing.” MIS Quarterly Executive,
vol. 9, pp. 37-51, 2010.
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Part 4 Case studies
Appendix B portability. Most large companies will face dif-

ficulties with a single cloud, and their legacy
The National Institute for Standards and Technology3
defines the following four types of clouds:
systems and unique needs necessitate a hybrid
solution.
1 Public cloud. The cloud infrastructure available
4 Community cloud. An infrastructure shared
to the general public or large industry groups
by several organizations, supporting a specific
and owned by an organization selling cloud
community with shared concerns. A community
services, the most popular being EC2. Using
cloud may be managed by a participating organ-
EC2, for example, Amazon provides a globally
ization or a third party, on- or off-premise. The
shared infrastructure through which companies
SETI project4 serves as a good example: SETI
can host and run their mission-critical applica-
sponsors developed software allowing users to
tions.
plug home computers into a grid that uses spare
2 Private cloud. An infrastructure operated solely cycles for listening to signals from outer space.
for an organization, which may be managed In the future, unique needs (even some unre-
by the organization or a third party and may lated to computing cycles), such as those around
exist on- or off-premise. Lack of technological compliance, could motivate the development of
maturity and security concerns about the public specialized clouds for healthcare and financial
clouds have led some companies to adopt pri- services.
vate clouds.
3 Hybrid cloud. An infrastructure composed of
two or more clouds that remain unique entities
3 [Note on p. 3 of case] “The NIST Definition of Cloud
but are bound together by standardized or propri- Computing,” by Peter Mell and Timothy Grance.
etary technology enabling data and application 4 http://setiathome.berkeley.edu/
494

CASE STUDY 10
ITC e-Choupal
Corporate social responsibility in rural India
It was August 2006, and Mr S. Sivakumar, CEO of the Under the initiative, ITC set up small internet kiosks
International Business Division (“IBD”) of ITC, one in the villages that provided farmers access to an
of India’s leading conglomerates, was listening to the efficient and more transparent alternative to the tradi-
Indian prime minister’s Independence Day address. tional mandi3 for marketing their produce.4 By estab-
India has marched a great distance forward in these sixty
lishing a direct channel between themselves (ITC) and
years [of independence], but the challenge of banishing the farmer, e-Choupal significantly marginalised the
poverty remains with us. We have yet to banish hunger from role of the middlemen, who played a vital role in link-
our land. We have yet to eradicate illiteracy. We have yet to ing the supply chain but were also responsible for sev-
ensure that every Indian enjoys good health. eral inefficiencies. By eliminating these inefficiencies
[. . .] I see that our farmers in many parts are in crisis, not e-Choupal ensured farmers got more money for their
managing to eke out a decent living from their land. When produce, thereby raising their standard of living from
I visited Vidarbha, the plight of the farmers there made a the sub-penury levels they had invariably sunk into.
deep impact on me. The agricultural crisis that is forcing
them to take the desperate step [of committing suicide]
Emerging from his thoughts, Sivakumar heard:
needs to be resolved. We need to think about how we can The challenge for us as a nation is to address this duality5
provide a decent livelihood to our farmers. to ensure that, while we keep the wheels of progress mov-
(Dr Manmohan Singh, prime minister of India)1 ing rapidly forward, no section of society and no part of the
country is left behind; to ensure that growth generates
As Sivakumar considered this statement, his thoughts
turned towards Misrod. Misrod was like most Indian
villages; farmers were underserved and overexploit- 1 Prime Minister’s Independence Day Speech (2006)
ed. As a participant in the agrarian supply chain, ITC http://pmindia.nic.in/lspeech.asp?id=365
was familiar with these abysmal conditions; but held (accessed 11 April 2007).
to ransom by its own supply chain constraints and the 2 Choupal is a Hindi word meaning “gathering place”.
3 A mandi is a traditional government-designated
associated bureaucracy, it was unable to do much.
marketplace.
However, its e-Choupal2 movement in 2000 changed 4 According to the Agricultural Produce Marketing
everything. Conceived as ITC’s answer to mitigate the Committee (APMC) Act, 1962, agri-companies could only
constraints of the agrarian supply chain, e-Choupal purchase commodities through government-designated
not only transformed the business of farming but also mandis.
5 This duality is that of sustaining high levels of growth while
with it the life of the Indian farmer.
providing for the economically weaker sections of society.
Saurabh Bhatnagar prepared this case under the supervision of Professor Ali Farhoomand for class discussion. This case is not
intended to show effective or ineffective handling of decision or business processes.
© 2008 by The Asia Case Research Centre, The University of Hong Kong. No part of this publication may be reproduced or transmitted in any form or by any means—electronic,
mechanical, photocopying, recording, or otherwise (including the internet) – without the permission of The University of Hong Kong.Ref. 08/384C
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Part 4 Case studies
Exhibit 1 ITC’s diversified business portfolio
Source: Corporate website.
the necessary wealth which can then finance the welfare among India’s private sector corporations. Identified
of marginalised groups; to ensure that growth generates as being among the “Top 10 most valuable (company)
employment and a bright future for our youth.
brands in India” by Brand Finance, a leading independ-
(Dr Manmohan Singh, prime minister of India)6
ent brand valuation consultancy in the world, ITC’s
Faced with a host of strategic challenges, ranging business interests were spread over tobacco, hotels, agri-
from the lack of physical infrastructure to the dearth business, packaged foods, retail, information technol-
of qualified human capital, Sivakumar considered ogy and branded apparel, among others [see Exhibit 1].
how e-Choupal could contribute to overcoming this From 1997 to 2006, ITC was one of the country’s
rural isolation? How could e-Choupal’s scope be wid- biggest foreign exchange earners, aggregating about
ened to provide sustainable development and what US$2.8 billion in revenue.8 Of its various divisions, the
would it mean for ITC? How far and how fast could he IBD was the single largest contributor at about 60%.9
expand e-Choupal’s service offerings without stretch- Set up in 1990, IBD’s objective was to leverage
ing its basic fabric? Could he liaise with other ITC ITC’s agri-business competency to promote the export
group companies to deliver business synergies? What of agricultural commodities such as soybean meal,
more could e-Choupal deliver? rice food grains, wheat and wheat products, lentils,
marine products and coffee.10 Over time, leveraging
IBD’s expertise in sourcing wheat, ITC also forayed
History of ITC and its international business
division
6 Prime Minister’s Independence Day Speech (2006)
Incorporated in August 1910, ITC went on to become http://pmindia.nic.in/lspeech.asp?id=365 (accessed 11
one of India’s foremost private sector companies with April 2007).
a market capitalisation of nearly US$18 billion and an 7 For details see ITC’s website http://www.itcportal.com.
annual turnover of US$4.75 billion by December 2007.7 8 For details see ITC’s website http://www.itcportal.com.
9 ITC-IBD (Date unknown) “About ITC-IBS”, http://www
Rated among the “World’s best big companies”, Asia’s .itcibd.com/aboutitc.asp (accessed 5 May 2007).
“Fab 50” and the “World’s most reputable companies” 10 ITC-IBD (Date unknown) “FAQs”, http://www.itcibd
by Forbes Magazine, ITC ranked third in pre-tax profit .com/faq.asp (accessed 5 May 2007).
496

Case study 10 ITC e-Choupal: corporate social responsibility in rural India
into the domestic Indian market with its wheat prod- Committee (APMC) Act, which made things both
ucts. Within two years of its launch, its domestic flour painfully slow and grossly inefficient.
brand, Aashirvaad, became the foremost flour brand In accordance with the APMC Act which was
in India, with a market share of about 50%.11 enacted during the 1960s, agri-companies could only
In its 16 years of operation up until 2006, IBD had buy agricultural produce through designated markets
not only grown to become a US$600 million division, called mandis and exclusively through registered com-
but had also become the flag-bearer of the company’s mission agents. As a consequence, once the crop was
“Citizen First” mission.12 harvested, the farmers would cart their produce to the
The innovative combination of digital, physical and human mandis where their produce was auctioned through
assets constitutes the basis for your [our] company’s deeper these commission agents. By virtue of being the only
engagement with the rural economy through the progressive channel between the farmers and the processor, these
development of low cost broadband fulfilment capability. agents would typically aggregate multiple small lots
For ItC, these are expressions of a commitment beyond the before selling/transporting to a processor, thereby
market, of a conviction that country must come before cor- ensuring there was no price and quality transparency
poration [and] of a true pride in being “Citizen First”. along the chain. Moreover, since the mandis were at
(Y.C. Deveshwar, chairman of ItC)13 a distance from the villages, once the farmer trans-
ported his produce to the mandis they were under
The birth of e-Choupal pressure to sell irrespective of the price they received.
The movement of goods through this rather long,
Business rationale
traditional, farm-to-factory cycle [see Exhibit 2]
Although IBD was a key business unit of the ITC fam-
ily, the going was not always smooth for it. Despite
there being a huge demand for its products in both the 11 Interview with S. Sivakumar, chief executive ITC-IBD,
domestic and international markets, IBD was unable interviewed on 4 April 2007.
12 “Citizen First” was an expression of commitment beyond
to make the most of the opportunity for a long time.
markets. Of a conviction that country must come before
Eight years into operations, up until 1998, IBD was corporation. For details see ITC’s website:
only making a marginal contribution of about US$112 www.itcportal.com.
million to ITC’s annual turnover of US$1.9 billion.14 13 ITC Chairman’s Speech (2006) “Vision, Values and
At a time when competing in the international Vitality Powering ITC’s Transformation”, http://www
.itcportal.com/chairman_speaks/chairman_2006.html
markets required an organisation to be both agile and
(accessed 5 May 2007).
decisively competitive, ITC was part of an agrarian 14 Upton, David M. and Fuller, Virginia A. (2004) “The ITC
supply chain that was regulated by the archaic gov- e-Choupal Initiative”, Harvard Business School, Case
ernment regulation of Agriculture Produce Marketing No.9-604-016.
Exhibit 2 The traditional soybean supply chain
Source: ItC e-Choupal Initiative Ravi anupindi.
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Part 4 Case studies
Exhibit 3 The transaction costs in the mandi chain
Source: S. Sivakumar (2004) “e-Choupal Experience sharing”, http://blog.lib.umn.edu/chri1010/symposium/sivkumar.pdf (accessed on

26 March 2008).
resulted in costly delays, higher procurement costs equacies of the system. Suffering from these pitfalls
for the company [see Exhibit 3] and low price realisa- and facing increasing competition from Brazilian and
tion for the farmers. Although ITC had mandated its US producers, ITC realised that the key to its interna-
contracted agents to pay a set price for the produce tional competitiveness was inextricably linked to the
that was guided by the prices in global markets, the competitiveness and competence of the entire value
agents typically procured the crops at a lower price, chain. Thus, in a bid to marginalise the ill-effects
sold it to ITC at the mandated prices and pocketed the of the power wielding middlemen and improve its
difference.15 own procurement process, Sivakumar and his team
Operating in such a paradigm allowed the mid- at IBD sowed the seeds of a new digital revolution,
dlemen to skim away most of the gains and virtually e-Choupal.
suffocate the procurement process for ITC. Being the Surmounting the regulatory barriers of the APMC
only conduit between the farmers and the processing Act by convincing the political and bureaucratic lead-
companies, the middlemen constantly abused their ership that the spirit of the Act (to benefit the farmers)
position to create information asymmetry and to block was better served through e-Choupal’s,16 ITC set up its
market signals. Not only did they indulge in constant first e-Choupal in Misrod Village in Madhya Pradesh.
price manipulation but also rarely compensated the Rolled out in June 2000 under the e-Choupal initia-
farmers commensurate to the quality of their produce, tive, ITC set up small internet kiosks in villages aimed
therefore thwarting the incentive for farmers to sow a
high quality produce. Yet, the role played by middle-
men was very critical as they made up for the lack of 15 Upton, David M. and Fuller, Virginia A. (2004) “The ITC
infrastructure and kept the system working. e-Choupal Initiative”, Harvard Business School, Case
Such was the state of the agri-business cycle. No.9-604-016.
16 Asia Pacific Development Information Program
The key stakeholders – processors like ITC and the (17 October 2006) “e-Choupal, Ujjain, Madhya
farmers – were stuck in this unproductive cycle Pradesh”, http://www.apdip.net/resources/case/
wherein they were continually exploited by the inad- in06/view (accessed 5 May 2007).
498

Exhibit 4 Transaction costs in the e-Choupal chain
Source: S. Sivakumar (2004) “e-Choupal Experience sharing”, http://blog.lib.umn.edu/chri1010/symposium/sivkumar.pdf (accessed on

26 March 2008).
at delivering the key benefits of what it described as farmers to adopt modern agricultural practices. In
an “improved supply chain”. Creating a direct chan- doing so, it was able to improve both the quality and
nel between itself and the farmer, e-Choupal helped quantity of the produce it received.
ITC eliminate wasteful intermediation and multiple Initially designed to tide over the concerns spe-
handling costs [see Exhibit 4]. Now the farmer could cific to its soybean procurement chain, the scope of
directly liaise with the sanchalak, ITC’s contact in the e-Choupal was subsequently widened. Seeing its pro-
village, obtain a rate for his or her produce, go directly found impact, the e-Choupal network soon embraced
to the ITC hub to deliver the grain and get paid. While the procurement chains of wheat and other commodi-
ITC saved on the transportation costs and the com- ties, as well. While e-Choupal was continually nudg-
mission it previously paid its agents, the farmers too ing ITC’s bottom line, it was also delivering a bigger
emerged wealthier. social objective – that of enabling rural transformation
With the elimination of a host of non-value-added by adopting technology to reduce poverty and rural
activities, the traditional farm-to-factory cycle had isolation. For its work, the project received numer-
been completely metamorphosed [see Exhibit 5]. The ous awards [see Exhibit 6]. By 2007, e-Choupals
expulsion of the middlemen and removal of a multi- were already spread over 38,000 villages with 6,500
tude of activities from the supply chain (eg, bagging, e-Choupal installations serving close to 3.5 million
repeated transport and storage), left more money in farmers.
the farmer’s hand. The farmer saved 50% of the trans-
action costs while ITC paid 20% less than what it had
17 IBN Live (23 February 2007) “Internet Brings Prosperity
in the pre e-Choupal days.17 As an additional benefit, for Farmers”, http://www.ibnlive.com/news/internet-
the direct liaison also allowed ITC to monitor the qual- brings- prosperity-for-farmers/34299-7.html (accessed
ity of the produce it bought and offer incentives to the 5 May 2007).
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Part 4 Case studies
Exhibit 5 Modified supply chain
Source: ITC e-Choupal initiative as described in an interview with Ravi Anupindi.
Exhibit 6 List of awards won by ITC for e-Choupal
The Stockholm Challenge 2006. This award is for using information technology for the economic development of
rural communities.
Innovation for India Award 2006. ITC e-Choupal was awarded under the Social Innovations category for busi-
ness organisations. The first of its kind in India, based on the parameters of number of lives impacted, degree
of impact on organisation and environment, uniqueness, leverage of resources and whether it was scalable and
sustainable, e-Choupal was declared one of “India’s Best Innovations”.
The Development Gateway Award 2005. previously known as the petersberg prize, ItC was the first Indian com-
pany and the second in the world to win this prestigious award for its trailblazing e-Choupal initiative.
The Golden Peacock Global Award for Corporate Social Responsibility in Emerging Economies for 2005. the
company received this award for its e-Choupal and social and farm-forestry initiatives, which are transforming
lives and landscapes in rural India.
The Corporate Social Responsibility Award 2004. presented by the energy and Resources Institute for its e-
Choupal initiative, the award provides impetus to sustainable development and encourages ongoing social re-
sponsibility processes within the corporate sector.
the inaugural World Business Award 2004, instituted jointly by the International Chamber of Commerce, the
HRH prince of Wales International Business Leaders Forum and the United nations development programme. this
award recognises companies who have made significant efforts to create sustainable livelihood opportunities and
enduring wealth in developing countries.
Enterprise Business Transformation Award 2004 for asia pacific, instituted by Infosys technologies and Wharton
school of the University of pennsylvania.
pC Quest’s IT Implementation Award 2004 in the “Best project” category.
Golden Peacock Innovation Award 2004.
the nassCoM award for “Best IT User in Fast Moving Consumer Goods Companies” in 2003. the
award is a recognition of ItC’s successful integration of its information technology usage with its business
processes.
Seagate Intelligent Enterprise of the Year 2003 award, for the most innovative usage of information technology.
500

Social benefits ter farming standards were never rewarded. Not only
did this dissuade farmers from incurring higher costs,
The business rationale of launching e-Choupal was
but it also pushed them deeper into the vicious circle
not intentionally altruistic. However, in empowering
of low productivity [see Exhibit 7].
the community, not only had ITC realised both brand
Furthermore, farmers faced great difficulty in
recognition and actual value in profits but had also
receiving the money:
germinated the seeds of a profound social and eco-
nomic transformation. The farmers for the first time After the weighing, we had to wait for receiving our pay-
had an alternative. Although the prices offered by the ment. There it was so hard to collect payment. [The trader]
would pay us for one sack and keep us waiting for the rest.
e-Choupal were similar to those prevailing at the near-
Those were such bad days that only God had mercy on us.
est mandi, the absence of overheads [see Exhibit 4] May God not show those days to anyone ever!
and the prevention of handling losses meant farm- (Indian Farmer)21
ers got more for their grain. Furthermore, trading via
Exploiting the farmers’ position, most traders never
e-Choupal safeguarded farmers’ interests by rewarding
paid the farmers a fair price, cheated them on the
them for their product quality.
weighing scale and also delayed their payments.
The e-Choupal initiative rests on the principle that what However, in the absence of alternatives the farmer
farmers need first is empowered access to markets. If that is had no choice, and in this predicament was the alarm-
available, the awareness of rights will follow.
ing reminder of the crisis facing the Indian farmer.
(S. Sivakumar, chief executive of ItC-IBd)18
However with e-Choupal, ITC was silently usher-
e-Choupal was the catalyst transforming the decades- ing in a rural transformation anchored on providing
old way of doing business. It decoupled the flow of farmers with more transparency and choice. The
information from the physical transaction, therefore e-Choupal delivery framework was structured in the
allowing farmers to make informed decisions regard- following way.
ing their sales. Information and knowledge about
the price of the produce was provided to the farmer
for free via the e-Choupal. This way the farmer knew
The website (echoupal.com)
the price of their produce even before leaving the vil- The website, specially developed by ITC’s subsidiary –
lage allowing them the flexibility to time the sales. ITC Infotech Limited – in multiple local languages,
e-Choupal was transforming the hitherto powerless delivered unique value to farmers that bundled the
and humiliated farmer into an empowered and confi- knowledge of what to use (eg, fertilisers, seed and
dent entrepreneur. pesticides) with information on when to use it (eg,
Concerns revolving around the auction process and weather briefings and monsoon timing) and assist-
payments too were set to disappear: ance on how to use it (eg, superior agricultural tech-
niques).
agents and mandi employees go from trolley to trolley, auc- The website also delivered real-time and relevant
tioning them one at a time. they would raise bids Rs. 0.05,
information. In addition to offering the weather fore-
0.10, 0.25 at a time.19 We used to feel ashamed of our worth.
We would have brought Rs 25,000–50,000 worth of produce, cast and the latest technological trends in the farming
yet [increments] would be mere Rs. 0.25. We would get very domain, the website also offered the commodity pric-
angry but what could we do? We had no other option. es as prevalent on the various stock exchanges. In this
(Indian Farmer)20 way, e-Choupal eliminated information asymmetry
With a mere visual inspection of their product lasting
less than a minute, the farmers found the entire auc-
tioning process very demeaning and appalling. Since 18 Interview with S. Sivakumar, chief executive of ITC-IBD,
these inspections did not employ the more appropri- interviewed on 4 April 2007.
19 US$1 = Rs.40.5 on 5 June 2007.
ate scientific measurement standards for determin-
20 Prahlad, C.K. (2005) “The Fortune at the Bottom of the
ing the quality viz. density, oil content or moisture Pyramid: Eradicating Poverty through Profits”, Pearson
content etc. in the produce, the price realisation Education, Inc., Video published on e-Choupal, ITC.
mechanism was never satisfactory. Consequently, the 21 ITC (Date unknown) “ITC’s e-Choupal Film”, http://
advantages of acquiring better seeds or adopting bet- www.itcportal.com/sets/echoupal_frameset.htm
(accessed 5 May 2007).
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Part 4 Case studies
Exhibit 7 Circle of low productivity
regarding prices and allowed farmers to time the sale The IBD processing centre (Choupal Saagars)
of their produce, consequently fetching higher prices. The focal point of e-Choupal’s hub-and-spoke model,
Anecdotal evidence suggested that farmers would Choupal Saagars were introduced as an alternative
monitor future rates on the international commodity to the mandis, with one Choupal Saagar catering to
exchanges such as Chicago Board of Trade also before about 40 choupals and working within tractor-able
deciding when to sell their produce. distance of all. Here, the farmers enjoyed the ben-
efits of accurate weighing through electronic weigh-
The sanchalak ing scales as well as prompt and full payments and
Sanchalaks were the kiosk managers – locally elected another hitherto unknown luxury: customer care.
farmers who acted as an interface between the com- The farmers were paid on time and in full. Typically,
puter terminal and the often illiterate farmers. In a payment was made in less than two hours, ensuring
addition to assisting farmers with the services on that the farmer got back home for dinner, unlike in
e-Choupal, sanchalaks assisted farmers in assessing the earlier days when farmers had to travel overnight
and pricing their produce. ITC had trained them to to queue up at mandis and wait. In addition to hous-
evaluate a sample of produce and provide a spot quote ing the granaries, Choupal Saagars also doubled up
to the farmer. This allowed the farmer to make an as rural malls where the farmers could buy several
empowered decision on whether to sell to ITC or to try agricultural products, such as fertilisers, seeds and
alternate market mediums, or even wait for a better fumigants.
price. Since the farmer had not yet travelled out of the While the e-Choupal initiative had carved a more
village, as would have been in the case of the mandi rewarding engagement for the farmers, ITC had
option, he was under no pressure to log the deal. displaced another section of the society, the trader
502

Exhibit 8 India’s macroeconomic picture
Macroeconomic Indicators 1993 1998 1999 2000 2001 2002 2007
nominal Gdp (measured in ‘000’s of 273.93 414.32 444.35 450.68 481.42 500.99 695.78
Us$)
agriculture (% of Gdp) 28.16 25.42 23.85 22.74 22.76 23.15 19.6
Industry (% of Gdp) 23.88 24.33 23.53 24.23 23.59 26.35 30.6
services ( % of Gdp) 38.9 42.05 43.59 44.16 44.85 50.5 49.9
Source: economic Intelligence Unit.
commune. Cognizant of the social and business ramifi- The e-Choupal program was carefully interwoven
cations of such an act, every effort was made to facili- into Sunehra Kal, ITC’s corporate social responsibil-
tate the absorption of these traders into the new model. ity (“CSR”) initiative to act upon objectives, akin
Some of these agents were employed as samyojaks (co- to UNESCO’s Millennium Development Goals [see
ordinators), who assisted ITC with either identifying Exhibit 9]. e-Choupal’s physical infrastructure was
new e-Choupal locations or managing the logistics at used to ensure the smooth and continuous delivery of
the hubs, or as managers to whom some of the activi- services, and its human infrastructure for monitoring
ties at the Choupal Saagars were outsourced. them. In the sanchalaks, ITC had cultivated a driv-
ing force that ensured both local expertise and social
acceptability. Having the sanchalaks on the ground
Corporate social behaviour at ITC allowed ITC to constantly monitor the progress of its
Corporate social responsibility is the continuing commit- various schemes. As Sivakumar said, “Accountability
ment by business to behave ethically and contribute to is the central issue [. . .] lots of schemes take off, but
economic development while improving the quality of life
in some time they are forgotten.”25
of the workforce and their families as well as of the local
community and society at large.
(World Business Council for sustainable development)22
Primary education through e-Choupal
In spite of agriculture contributing close to 20%
The focus of ITC educational initiatives is to make more chil-
to the Indian gross domestic product, or GDP [see dren join school and finish school, critically supporting the
Exhibit 8], core benefits like economic development, existing government primary school network by creating
clean drinking water, education for employability 23 an ambience of encouragement, assistance and access to
and health care still eluded the farmer. System-wide learning resources.
(ItC website)26
inefficiencies in governmental policies and general
apathy had long hindered farmers’ economic stance. Rural India had long been disadvantaged by a lack
Although aware of these challenges, most of the com- of education for employability and knowledge about
panies associated with the agrarian society struggled
to find the means to balance both the social commit-
ments of their enterprise and the financial objectives
of their shareholders. However, with e-Choupal, ITC 22 For details see World Business Councils for Sustainable
had discovered a model that demonstrated sustaina- Development’s website http://www.wbcsd.org.
ble convergence between these presumably divergent 23 Young people develop skills and knowledge that help them
develop an understanding ensuring lifelong learning and
needs of the corporation.
work.
the primary purpose of any commercial organisation is to 24 Interview with S. Sivakumar, chief Executive ITC-IBD,
deliver shareholder value. one can do that by being indif- interviewed on 4 April 2007.
ferent to the society or at times even at the cost of the so- 25 Interview with S. Sivakumar, chief executive of ITC-IBD,
ciety, but if one can do that through serving the society – as interviewed on 4 April 2007.
we have done – then nothing can be more exciting and sus- 26 ITC (Date unknown) “ITC’s Rural Development Phi-
tainable than that. losophy at Work” http://www.itcportal.com/sets/ru-
(S. Sivakumar, chief executive of ItC-IBd)24 ral_frameset_education.htm (accessed on 5 May 2007).
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Part 4 Case studies
Exhibit 9 Millennium development goals
a. Eradicate extreme poverty and hunger: by 2015, reduce by half the proportion of people who suffer from
hunger.
b. Achieve universal primary education: by 2015, ensure all boys and girls complete a full course of primary
schooling.
c. Promote gender equality and empower women: eliminate gender disparity in primary and secondary
education primarily by 2005, and at all levels by 2015.
d. Reduce child mortality: by 2015, reduce the mortality rate among children under five.
e. Improve maternal health: by 2015, reduce the maternal mortality rate by three-quarters.
f. Combat HIV/aIds, malaria and other diseases: by 2015, halt and reverse the spread of HIV/aIds, incidence
of malaria and other diseases.
g. ensure environmental sustainability: by 2015, reduce by half the proportion of people without sustainable
access to safe drinking water.
h. develop a global partnership for development: further develop an open trading and financial system that is
rule-based, predictable and non-discriminatory.
Source: UNESCO (Date unkown) “World Water Assessment Programme”, http://www.unesco.org/water/wwap/facts_figures/mdgs.shtml (accessed
on 16 May 2008).
opportunities. This meant that children in rural India offered was also used by several NGOs to organise
grew up mostly unaware of non-agricultural opportu- various programs, including vocational training and
nities. With a burgeoning services sector in India, such other extra-curricular activities, to foster the holistic
an act of deprivation practically contributed to keep- development of children. In addition to abetting the
ing 66% of India’s population away from participating learning environment through the kiosks, ITC also
in the country’s growth. established Supplementary Learning Centres (“SLC”),
Although the government of India had identified which provided infrastructural support such as uni-
illiteracy as a key concern and had launched the Sarv forms and books for students.
Shikhsha Abhiyan (Education for All) program, it still As Sivakumar recalled, “It is not the e-Choupal
left a lot to be desired. There were still about 13.4 mil- website which sees the maximum traffic from these
lion out-of-school children; 27 education had to be made kiosks [. . .] it is the news portal”. By connecting the
more accessible and appealing to them [see Exhibit 10]. villagers to the world, ITC was awakening rural India
To supplement the efforts of the Sarv Shikhsha
Abhiyan program, ITC extended the e- Choupal frame-
work to provide digital content and virtual training 27 World Bank (15 March 2008) “World Bank Supports
India’s Elementary Education Program with US$600 Mil-
sessions for children on a pilot basis. These training
lion”, http://newsletters.worldbank.org/external/default/
sessions provided weaker students additional tutor- main?contentMDK=21769659&theSitePK=442942&pa
ing in the hope of improving their scholastic abilities gePK=64109805&pi PK=64106905 (accessed on 26 May
and ensuring lower dropout rates. The digital material 2008).
Exhibit 10 Delivering primary education
Primary Education – At a glance Agenda for 2010
number of schools assisted 134 number of schools assisted 1,000

students receiving books 50,260 students receiving books 50,000
supplementary learning centres 775 supplementary learning centres 1,000
Source: ItC company website: http://www.itcportal.com/sets/rural_frameset.htm (accessed 13 May 2007).
504

by addressing some of the evils of illiteracy, including health spending,30 affording health expenses was not
superstitious beliefs, social taboos and ignorance of easy for the poor. In spite of various technological
innovations in science. advancements, access to primary healthcare in rural
Anecdotal evidence also suggested that the India was still very disparate. Consequently, several
e-Choupal kiosks were used by children for other tasks communicable diseases, including HIV/AIDS, tuber-
such as downloading their examination results, read- culosis and typhoid, were still rampant in rural India.
ing the latest movie reviews, chatting and preparing Although there were several government agencies
greeting cards – the things an urban teenager would working to address the needs of the rural poor, their
also do. The information deprivation of the village efforts were woefully insufficient.
community – especially that of children – was now a Realising that inexpensive and accessible health-
thing of the past. care was an essential prerequisite for rural renewal,
ITC planned to extend its e-Choupal framework to
deliver quality health services. Still in its pilot phase at
Women’s empowerment
the start of 2007, ITC had tied up with several health-
In order to awaken the people it is the woman who has care companies to use the e-Choupal infrastructure to
to be awakened. Once she is on the move, the household create a health services platform that would ease the
moves, the village moves, the country moves and thus we
build the India of tomorrow.
constraints associated with delivering medical aid.
( Jawahar Lal Nehru, India’s first prime minister)28 Under the arrangement, ITC developed its three-tier
Choupal Healthcare model [see Exhibit 11] to catalyse
In many parts of rural India, women still lived in the
the deployment and delivery of both preventive and
shadows of their husbands, confined to the four walls
curative healthcare services to the villagers.
of their houses. Realising the need to engage this
latent force, ITC forged an empowering partnership
with rural women by providing them both informa- Tier one: the Choupal
tion and market linkages via the e-Choupal network. Since many illnesses and deaths could be averted by
In partnership with several NGOs, ITC worked with the timely availability of information and treatment,
village women to link several non-farm-skill-based it was crucial to promote awareness about the various
services of rural origin to global markets. By foster- health risks and provide preventive healthcare details.
ing these initiatives, ITC provided for the economic Managed by a Choupal Health Champion – a trained
empowerment of women. paramedic, village health worker and sanchalak – the
ITC also supported services for livestock devel- kiosks delivered general medical advice and stressed
opment and micro-credit programs. Since women crucial health determinants, thereby dramatically
were traditionally involved in livestock management, reducing the risk of chronic conditions. Their respon-
any income generated from these activities benefited sibilities included:
women. This transformation of the rural woman
● Providing basic medical and health services
from homemaker to bread-winner not only led to
the building of a complementary livelihood stream, ● Dispensing over-the-counter drugs and health kits
but also meant additional money was being spent on on advice of the Choupal Saagar doctor31
children’s welfare.29
By taking the convergence approach in working
28 Agrawal. Meenu (2007) “Women Empowerment:
with society, not only had ITC made a substantial
Today’s Vision for Tomorrow’s Mission”, Mahamaya
improvement to its bottom line but had also accrued Publications: India.
numerous intangible benefits, such as brand equity, 29 Interview with S. Sivakumar, chief executive ITC-IBD,
staff loyalty, reputation and trust. interviewed on 4 April 2007.
30 Bajpai, N., Dholakai, R.H. and Sachs, J.D. (November
2005) “Scaling Up Primary Health Services in India”,
Healthcare services through e-Choupal Centre on Globalization and Sustainable Development,
Working Paper Series No. 29, The Earth Institute at
In a country where public spending on healthcare was Columbia University.
less than 0.9% of the GDP in 2004–2005 and out-of- 31 A Choupal Saagar doctor was a doctor stationed at the
pocket spending accounted for more than 80% of total Choupal Saagar.
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Part 4 Case studies
Exhibit 11 ITC three-tier Choupal Healthcare model
Source: Rural Healthcare Services through e-Choupal, ITC Presentation.
● Creating awareness in the villagers, fostering pre- ● A telemedicine centre connecting the Choupal
ventive healthcare Saagar to the network hospital partner.
● Communicating the villagers’ medical needs to the
Choupal Saagar doctor Tier three: the network hospital
● Interacting through “telemedicine” with the While the smaller clinics at the Choupal Saagars were
Choupal Saagar doctor designed to handle regular medical cases, complex
● Administering simple pathological tests cases were transferred to these hospitals. These bigger
network hospitals were linked to the Choupal Saagar
● Working under the supervision of the doctor at the
clinics and used telemedicine facilities to provide:
Choupal Saagar.
● Specialist online medical advice through telelink
Tier two: the Choupal Saagar ● Render high level and specialist medical attention
The curative needs of the villagers were taken care ● Required medical information for Choupal Saagar
of at the Choupal Saagars. Every Choupal Saagar doctors.
possessed:
Taking dispersion of information on health seriously,
● A clinic managed by a doctor, assisted by a technician ITC promoted multiple new channels of communica-
● A laboratory with a microscope, autoclave, basic tion. Beyond the regular methods of camping and can-
reagents and kits vassing, ITC introduced a new section on health in their
● A pharmacy to dispense drugs, both generic and newspaper, published in collaboration with Agriwatch
branded [see Exhibit 12], and also on the e-Choupal website.
506

Source: Rural Healthcare Services through e-Choupal, ITC Presentation.

Exhibit 12 ITC health news letter
507

Part 4 Case studies
Exhibit 13 e-Choupal expanded fmcg distribution capability
Even the multimedia capabilities of the computers cost-efficient and effective distribution platform, ITC
at the e-Choupal were put to use as they were used had opened doors to this once elusive market. With a
to prepare and showcase promotions on important population base of almost 700 million, rural India was
health and other societal messages. Furthermore, ITC a market waiting to be tapped.
also anchored a new radio channel, Choupal Radio. Given the value proposition that e-Choupal offered,
Choupal Radio aired messages on disease symptoms a host of companies had queued up to use the Choupal
and preventive measures, and called in experts to network to peddle their own products. Thus what
answer villagers’ questions. They not only encour- had begun as a project to streamline the supply chain
aged community level accountability but also sought had now created a new business opportunity for ITC
to deliver “timely, cost-effective, quality healthcare at [see Exhibit 13].
walking or tractorable distance for the rural citizen”.32
Seeing the value in using technology to dispense infor- Retailing via Choupal Saagar
mation at such a rapid pace, ITC sought to roll out its After the success of the e-Choupal network in dis-
medical services across all its sites by 2008. tributing packaged consumer goods through its rural
outlets,34 ITC cultivated the Choupal Saagar dream to
Impact provide full-scale retail services to the rural popula-
tion. The first Choupal Saagar retail outfit was set up
If we stop thinking of the poor as victims or as a burden and in August 2004 in Sehore, Madhya Pradesh.
start recognising them as resilient and creative entrepre-
neurs and value-conscious consumers, a whole new world of
opportunity will open up. 32 ITC Corporate Presentation (2007) “Mission e-Choupal
(C.K. Prahalad)33 Rural Health Services Model”.
With the cost of servicing the last mile in rural mar- 33 Prahalad, C.K. (2005) “The Fortune at the Bottom of the
Pyramid: Eradicating Poverty through Profits”, Pearson
kets being prohibitively expensive, many companies
Education: USA.
had ignored them. With e-Choupal, however, ITC 34 Initially, small product sachets were distributed via the
had changed the rules of the game. By building a sanchalaks at the kiosk level.
508

Improving the lives of the billions of people at the bottom of However, in the absence of far-reaching delivery
the pyramid is a noble endeavour. It can also be a lucrative one. networks and other logistical issues, the penetration
(C.K. Prahalad)
level for these cards was very low. As a consequence,
Dubbed as “rural hypermarkets”, Choupal Saagars a significant number of farmers still had to turn to vil-
worked as hubs for clusters of villages within trac- lage moneylenders who charged astronomical interest
tor-able distance. Villagers visited Choupal Saagars rates. Sensing a business opportunity, ITC offered its
not only to deposit their grains at the processing e-Choupal network as a delivery platform for the State
centres, which were situated in the same physical Bank of India to deliver the KCC.
location, but also to shop for the products avail- By using the e-Choupal network, what the bank is able to
able at the hypermarket. Stocking products from over do is two fold. They are able to reduce their transaction
110 companies, Choupal Saagars had become an costs. A lot of things they were doing themselves are being
efficient multi-company marketing channel. Products outsourced to us now and, given our infrastructure setup in
villages, we are able to do this at lower costs than what the
ranging from small-ticket items like oral care products,
banks are able to do. Second is that our knowledge of the
branded apparel and home appliances to big-ticket consumer/borrower is a lot better because it goes beyond
items like tractors and motorcycles, were all distrib- just the credit history of the person but also of the knowl-
uted under the same roof. Bundled along with these edge levels, what kind of farm practices are being used, as-
consumer goods were additional sophisticated service set ownership etc. Therefore our assessment of the credit
worthiness and productivity usage is much better. So both
offerings. At the Choupal Saagars, the farmers could
the quality and the cost aspects are improved.
seek services ranging from soil testing to banking to (S. Sivakumar, chief executive of ITC-IBD)36
insurance and even medical facilities.
However, one of the major achievements of the
Choupal Saagar initiative was the sale of liquefied Third–party loans
petroleum gas as a cooking fuel. Not only did this In addition to distributing the KCCs, ITC also fur-
accrue environmental benefits such as reduced tree nished third-party loans through the e- Choupal chan-
felling, but it also positively impacted the health of nel. With higher disposable incomes, assured pay-
rural women. ment inflows and access to better personal utilities
Such malls, working in synergy with the e-Choupal and farming equipment, Indian farmers were begin-
network, evolved to serve as a part of the core infra- ning to think big. To support their aspirations of pur-
structure of ITC’s rural distribution strategy. Thus chasing motorcycles or even tractors, ITC had tied up
ITC spent extensively on scaling up the number of with a multitude of financing companies and banks
Choupal Saagars to 24 by year 2007. to offer credit services via its delivery channels. The
credit services were offered via the Choupal Saagar,
Financial product marketing providing the added advantage of one-stop, hassle-
free service access.
1,00,248 farmers have committed suicide between 1993
and 2003.
(Sharad Pawar, union agriculture minister of India)35 Channel credit
The financial crisis in which Indian farmers often At the start of the season, the agri-input companies,
found themselves had for long forced them to take the such as seed and fertiliser companies, made loans
extreme step. Although the government had tried to to the farmers to aid them in buying their products.
mend the situation through several schemes, the lack However, these companies were always circumspect
of timely and adequate credit delivery was one of the about the quality of the loan. In the absence of
major challenges. Identifying this as an opportunity,
ITC offered to sell credit facilities through its network.
35 Faleiro, Sonia (9 September 2006) “Death of a
Son, Grandson and all of Life’s Dreams”, Tehe-
Kisan Credit Card lka, http://www.tehelka.com/story_main19.
The Kisan Credit Card (“KCC”), promoted by the asp?filename=Ne090906death_of_CS.asp (accessed on
5 May 2007).
government of India, was offered by public sector 36 Interview with S. Sivakumar, chief executive ITC-IBD,
banks to provide cheap credit to Indian farmers. interviewed on 4 April 2007.
509

Part 4 Case studies
any organised activity, there was always the risk of to improve production, farmers kept away, preferring
default. Again, identifying this as an opportunity, ITC to keep their input costs low, even if that meant a
decided to share its e-Choupal structure to provide lower quality of produce.
more secure loans, to be furnished in a two-step for- Although farmers in India had been provided pub-
mat. This credit, which flowed through its network, licly administered crop insurance schemes since 1972,
was called “channel credit”. the effectiveness of the schemes was suspect. The
These loans were furnished in a two-step process: schemes were plagued by high monitoring and admin-
farm input companies extended credit to the sancha- istrative costs, lacked knowledge of crop growth
laks who in turn sold these inputs on credit to farm- cycles at the village level and had long claim settle-
ers. While the liability of repaying still belonged to ment cycles. Rural farmers could not bear to wait
the farmer, by allowing the sanchalak to disperse the one year to receive their claim amounts and thus the
loan through goods, the company was able to leverage schemes failed to flatter.
upon the sanchalak’s knowledge of the credit-worthi- Realising the need for an efficient system that
ness of the proposed recipient. With the sanchalaks encouraged farmers to obtain higher yields per acre
and the recipient farmer coming from the same vil- and seek better quality produce, ITC collaborated with
lage, the sanchalak was usually able to better assess insurance companies38 to provide weather insurance
the credit risk and thus ensure that the quality of the to farmers. Leveraging the local knowledge of their
loan was higher. sanchalaks, ITC was able to design weather insurance
Although ITC consciously waited for about five products according to crop, district and phase, thereby
years before it started dispensing credit through its improving the effectiveness of the risk cover offered.
network, it was already servicing 15% of its market by Since these policies were dispersed using the e-Choupal
2007 and planned to scale its operations to potentially network, the distributing and servicing costs were very
100% by 2009. low, making it easier for people to acquire them.
Now, for a premium, farmers could pass their
weather-related risks on to a third party [see Exhibit 15].
Insurance
Although these insurance schemes were also offered by
To increase my crop yields and incomes I need to adopt bet- government agencies, many farmers did not take them
ter inputs and practices which require higher investments. because agency structures were not very strong, claim
But who will protect me if my crop fails?
conditions were unknown and other such factors.
(Indian Farmer)37
Cognizant of these problems, ITC delivered improved
This was the common lament of the Indian farmer. An service levels by setting a benchmark of 45 days to set-
estimated 90% of crop losses in India were attributed tle claims, providing farmers with information on how
to the weather [see Exhibit 14]. With only 40% of the to claim money, when to pay premiums and so on.
net sown area under irrigation, 60% was still at the Over time, the importance of life insurances poli-
mercy of the weather. Against this backdrop and in cies was also advocated through the network. ITC
the absence of risk mitigation tools, it was not surpris- distributed multi-media presentations through the
ing that, despite being aware of expensive techniques network that highlighted the importance of having
life insurance policies and how such policies cared
for family needs (eg, by providing regular cash flow
Exhibit 14 Key causes of crop loss and covering costs of weddings and illnesses) in case
of a family tragedy. Partnering with Life Insurance
Cause Proportion of Losses Corporation of India, ITC planned to offer group
Drought/Low Rainfall 70%
Floods/Excess Rainfall 20%
Others* 10% 37 Naik, Shailesh (2007) “Weather Insurance/Derivaties
Marketing”, ITC Corporate Presentation, ITC-IBD.
* includes storms, earthquakes, disease, pests, negligence etc. 38 In 2007, insurance services were being provided by ICICI
Source: Parchure, Rajas (2002) “Varsha Bonds & Options: Capital Market Prudential Life, a private sector insurance company,
Solutions for Crop Insurance Problems”, http://www.utiicm.com/Cmc/ and Life Corporation of India. Several others were still
PDFs/2002/rkparchure%5E36.pdf (accessed on 26 May 2008). exploring the possibilities.
510

Exhibit 15 Explaining weather insurance
insurance policies that provided comprehensive ben- munications, no power supply and low literacy rates,
efits in terms of life insurance, pensions and disability the challenge of taking technology to rural India was
income, as well as lump-sum survivor benefits to land- very onerous. Not only did ITC have to develop its own
less agriculture workers. infrastructure to provide access to the internet, buy
With an increase in awareness, be it the sale of VSAT equipment, power backup units and telephone
farmers’ produce, the quality and quantity of produce, connections, it also had to tutor farmers on the ben-
finding suitable markets or even selling products at efits of the information and the operational use of the
the right price, by making insurance policies accessi- kiosks. With additional concerns emerging from archa-
ble, ITC lent some stability to rural Indians’ cash flows. ic government rulings, another challenge was putting
together a business model that would obtain the gov-
ITC Infotech ernment’s buy-in. Another area of serious resistance
Another ripple effect of the e-Choupal initiative was came from the traders’ lobby. With e-Choupal chal-
the positive effect it had on ITC Infotech. Given the lenging their trade monopolies, traders not only tried
positive ramifications it had on the rural population to lobby the government to derail the process but also
in India, the e-Choupal initiative had attracted a lot created problems at the execution level.
of interest. A host of governmental and multinational Having meandered around these initial hiccups,
agencies had sought ITC’s assistance in implementing by 2007 ITC had drawn up ambitious plans to set
similar models in countries in Africa, Latin America up 20,000 e-Choupal kiosks by 2012 and about 700
and South-East Asia. However, with its eyes set on Choupal Saagars eventually, to service these e-Chou-
expanding its footprint in India, IBD politely declined pals, entailing an investment of nearly US$1.2 billion.
such requests and offered ITC Infotech’s services These numbers were not only reflective of an explosive
instead. As the key architect of the e-Choupal infra- growth strategy but also a reminder of the increased
structure, ITC Infotech volunteered to offer both services ITC had adopted. The e-Choupal network was
technical as well as business consultancy services for no longer the commodity-sourcing operation it was con-
operations based on the e-Choupal model, thereby ceived to be; it was fulfilling its promise of “improving
developing a new revenue stream for itself. the quality of life in rural India”. However, in pursuit of
continually delivering on its promises and expanding its
geographical reach, ITC had to counter some key chal-
Challenges lenges in building its delivery infrastructure.
Taking e-Choupal to rural India was not easy. Conceived The first concern was providing the digital infra-
at a time when rural India had no access to telecom- structure to cater to ever-increasing service offerings.
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Part 4 Case studies
Most of these pertained to delivering digital media in Exhibit 16 ITC’S plans for E-choupal
local languages, standardising web-forms and provid-
ing increased accessibility, all of which, according to Milestones 2007 2012
Sivakumar, were minimalist concerns. “All these can
States covered 9 15
be fixed at a cost”, he said.39
Villages covered 38,500 100,000
The second challenge was that of building the
e-Choupal installations 6,500 20,000
physical infrastructure – the Choupals and the Empowered e-farmers 3.5 m 10 m
Choupal Saagars – which were the key components
of the unique hub-and-spoke model of ITC. Since the
required backbone of rural infrastructure, including
electricity, was virtually missing, ITC was forced to maintain talent that could keep pace with its growth
build things from scratch. Although it had employed while at the same time not compromising its brand.
innovative solutions to overcome some of these con- The other challenge was, definitely, what to do next.
straints, they were stretched by the economic invest- Having already established the delivery framework,
ments required to build infrastructure. The additional how could ITC leverage on it to deliver value to rural
need for funding these developments required ITC to India?
pursue an innovative business model that would help At the same time that Sivakumar was thinking about
it finance the investment. these challenges, he was also wary of the rising public
The third and, according to Sivakumar, gravest expectations and accompanying criticism. ITC had
challenge facing ITC was that of “building the capac- drawn up aggressive expansion plans [see Exhibit 16]
ity of the human infrastructure”.40 For a model estab- but certain sectors of society still complained about
lished on delivering a whole new experience, it was them not keeping pace with increasing innovation
paramount that the company representatives – the and not widening the service net fast enough. How
sanchalaks and the samyojaks – be well versed in the could he convince people that e-Choupal was not
complete bouquet of services offered, as well as the just a CSR initiative but also a profit driven business
company ethos. initiative? How could he measure the effects of the
CSR? For an organisation that had discovered the
The basic raw material exists in terms of people [. . .]. So to
delicate balance between corporate profitability and
pickup people to manage the Choupals is not a problem
[. . .] But it is really the capacity of these people in doing so social contribution, he wondered what would be the
many varied businesses. To choose a farmer as a sanchalak or best performance indicators to articulate the tangible
samyojak to do agriculture commodity sourcing is one level (financial) and non-tangible (non-financial) benefits
of challenge. But you expect the same person to sell farm of e-Choupals’ service offerings?
inputs, sell insurance, deliver credit, and facilitate the deliv-
ery of health services, so this complexity is something which
requires capacity to be built.
(S. Sivakumar, chief executive of ITC-IBD)41 39 Interview with S. Sivakumar, chief Executive ITC-IBD,
For some of these issues, the standard technical interviewed on 4 April 2007.
40 Interview with S. Sivakumar, chief Executive ITC-IBD,
or economic solutions were available, but others interviewed on 4 April 2007.
required a broader perspective. One of the key chal- 41 Interview with S. Sivakumar, chief Executive ITC-IBD,
lenges for ITC was how to recruit, train, nurture and interviewed on 4 April 2007.
512

CASE STUDY 11
e-Government in Estonia
Establishing the world’s leading information society
Introduction the development and supply of electronic services and

citizens’ capacity to adopt and use public-sector IT
If the Internet were reborn as a country, it would be Estonia. solutions. When asked about the secret of Estonia’s
(Mark Malloch Brown, Administrator of the United Nations Internet deployment and up-take success, Karen Rits,
Development Program)1 Head of the Information Society Unit at the Estonian
E-stonia, as the country of Estonia has smartly branded Ministry of Economics and Communications, said:
itself, is obsessively connected. When driving through We have always had strong political support notwithstand-
Estonia, one can see big blue road signs marked with ing which parties have been in power for information
society-related developments. Being a small country with
‘@’, pointing to the hundreds of free public Internet
access points. Estonians have even equipped trains and
inter-city buses with wireless Internet (see Exhibit 1).
Per capita Internet access in Estonia exceeds that in 1 Quoted in ‘If it works, you can break it’, Forbes.com,
Britain and Germany, close to 90% of bank transactions 20 December 2004.
take place online or via mobile phones, and govern- 2 After John W. Heywood, Fulbright scholar in
ment ministries and agencies do much of their commu- e-Governance Academy in Estonia in 2005–6. [URL] http:
//starfid.com/papers/Estonia_The_Internet_and_
nication and information exchange online.
Wireless_Development_A_Brief_History_and_Looking_
Having spent over the last decade about 1% of the Forward_Final.pdf or http:// estonianwifi.blogspot.com/.
state budget on public sector IT development, Estonia 3 See Online Availability of Public Services: How Is Europe
has established itself not only as a ‘wireless miracle’,2 Progressing? (conducted by Capgemini in June 2006),
but also as a recognized e-government champion in European Commission’s Information Society Benchmark-
ing Report 2005, Global Information Technology Report
Europe and world-wide.3 Putting into practice the
2004–2005 (published by the World Economic Forum),
information society concept, the Estonian govern- Top 10 Who are Changing the World of Internet and Poli-
ment seems to have struck the right balance between tics (compiled by the global eDemocracy Forum in 2005).
This case study was written by Maria Štšekotovitš, Master of International Business student, under the supervision of Albrecht
Enders Assistant Professor of Strategic Management, Harald Hungenberg, Chaired Professor of Strategic Management (all three
from University of Nuremberg, Germany), and Tawfik Jelassi, dean and professor of e-Business and It at the school of International
Management of ecole nationale des ponts et Chaussées (enpC, paris). It is intended to be used as the basis for class discussion
rather than to illustrate effective or ineffective handling of a management situation.
this case study was made possible by the cooperation of Margus püüa, Head of the state Information systems department at the
estonian Ministry of economic affairs and Communications.
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Part 4 Case studies
Exhibit 1 Area of wireless Internet in trains about 30 years old – succeeded in transforming the
country from a centrally-planned economy to a free-
market economy, and pulled it off more quickly than
any other nation in the former Soviet Union bloc. The
government made several key decisions including the
liberalization of markets, introduction of a currency
board,5 flat tax6 and zero tax rate for profits that are
re-invested, sensible privatization, open-door policy
to foreign capital, absence of trade tariffs (until 2004
when the country joined the European Union), or easy
and cheap incorporation of new ventures. These deci-
sions, which enabled the country’s transformation to
a free-market economy, have proven, over time, very
successful.
The country has early recognized a clear link
between information and communication tech-
nologies (ICT) and higher productivity. It watched
Finland’s major technological innovations (e.g., at
Nokia) that were taking place 80 km across the Gulf,
as Helsinki’s TV feeds were transmitted wirelessly and
reached Estonia. At that time, most people in Estonia
did not even have a phone, not to mention a personal
computer!
When the newborn Republic of Estonia liberal-
ized its economy, technologically advanced Finnish
Source: wifi.ee. and Swedish companies were the first to enter the
market, taking advantage of Estonia’s cheaper, yet tal-
ented, workforce. In 1992, the Estonian government
relatively limited resources has forced us to be as cost-effi-
decided to hand over 49% of the Estonian Telephone
cient and transparent as possible. What we consider impor- Company (ETC) to Finland’s Sonera and Sweden’s
tant is the fact that the state has been increasingly active in Telia.7 These telecommunication operators paved the
developing e-services that do not only generate revenues way for bringing innovations to the Estonian market.
for the state itself, but also provide benefits for individuals.4 They set up the first mobile phone network, and built
optic fibre lines. Swedish Swedbank and SEB acquired
shares in (and later completely bought out) Estonia’s
Country background
Estonia, one of the smallest countries in Europe, is
4 Quoted in ‘Good things come in small packages’, The
located in the northeastern part of Europe, on the
Guardian, 23 November 2005.
eastern shore of the Baltic Sea. Roughly the size of 5 In 1992, Estonian kroon was pegged to Deutsche Mark at
The Netherlands, its population of approximately 1.32 the rate of 1 DEM = 8 EEK (now 1 EUR = 15.675 EEK).
million people is twelve times smaller. Yet Estonia is 6 In 1994, ignoring IMF advice to increase graduated tax
widely viewed as the most advanced of all the former rate, Estonia implemented a flat income tax of 26%,
which turned out to energize what had been a stagnant
East-European countries, a perception that the coun-
economy. In due course, flat tax was reduced to 22% in
try has worked hard for. 2007 and is planned to be reduced to 20% by 2009.
Like other European countries in the former 7 A Concession Agreement, signed between the Govern-
Eastern bloc, Estonia had the chance 17 years ago ment of Estonia and ETC in 1992, granted exclusive rights
(right after the fall of the Berlin Wall) to start over, to ETC for the period of eight years for the provision of
basic services. In return, ETC was obliged to digitalize the
from scratch, to re-invent itself. In the early 1990’s,
existing network and to cover rural areas with telephone
government officials – who were then on average lines.
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Case study 11 e-Government in Estonia
Hansa Bank and United Bank, contributing to the contributed significantly to the economic growth of
development of a strong banking system, and intro- the country, which has been since 2001 on average
ducing Internet banking services in the mid 1990s. 9.1% annually.11
The government considers IT and the Internet as a Citizens’ positive attitude and eagerness towards
key pillar of Estonia’s future economy. Since 1994, it technology explain in part Estonia’s successful IT
has been allocating approximately 1% of the annual revolution. Toomas Somera, an Estonian communica-
national budget to IT development. It has also taken tions executive, said:
foresight actions facilitating ICT and establishing an If a Frenchman loves to sip wine with his friends and a Ger-
IT-friendly business culture. The country has also man enjoys his beer, then an Estonian likes to sit behind
attracted significant foreign investments in the ICT his computer on a dark evening, surfing the net and at the
sector, and helped the emergence of private initiatives same time talking on his mobile phone.12
and start-up ventures. The government promoted
ICT use by citizens in society and invested heavily in
education. Ivar Tallo, Director of the e-Governance Building e-government
Academy, said: The history of e-government in Estonia goes back
We had to ask where we should best invest our scarce to the beginning of the 1990’s. Margus Püüa, the
resources. It was clear that we couldn’t do everything, so we Head of Department of State Information Systems
chose to help the next generation to get the ICt skills neces- (RISO) at the Estonian’s Ministry of Economics and
sary to help them when they get into the labour market.8
Communications, which is now responsible for the
A technology awareness and promotion campaign, development and implementation of state IT strate-
the Tiger Leap programme, began in 1998 with the gies, explained:
slogan: ‘The Internet connects people, not computers.’
When the soviet [Union] time was over, we had to start
Under the patronage of the former President of the building all the state structures and everything practically
Republic Lennart Meri, this initiative aimed at reshap- from scratch. there was nothing to take with us and it was
ing through technology the Estonian educational good, as we didn’t have the burden of legacy systems. other
system. Tiger Leap brought computers to Estonian countries have huge problems with legacy It systems: they
need new versions, which have to be adapted to older ver-
schools and connected all of them to the Internet. To
sions. When we started to develop It systems for the state,
meet the growing need for high-level IT profession- we were able to use the most up-to-date technology. at
als, the government established in 2001 the Estonian the beginning, when ministries organized their work, we
Information Technology College. At the same time, just couldn’t wait to build a centralized system. However,
the private sector has taken several initiatives for decentralized development was the fastest way to solve the
problem and everyone started to work on their own, devel-
further developing the country’s ICT infrastructure.
oping computerized information systems that would meet
Furthermore, private companies (including banks, their specific needs.13
telecom operators, and ICT firms) organized and
financed a project, called Look@World, aiming at
considerably increasing the number of Internet users.
Since 2001, this project enabled approximately 10% 8 Quoted in ‘Building government from scratch’, PCTM
Magazine, 10 March 2006.
of Estonia’s adult population (mostly senior citizens,
9 Usage of mobile parking constitutes approximately 50%
‘blue-collar workers’, and Internet sceptics) to acquire of total income gathered from parking fees.
basic PC and Internet skills. 10 Programmers Ahti Heinla, Priit Kasesalu and Jaan Tallin
Furthermore, over the last decade, the country were the prime code writers of the world famous peer-
has experienced a major technical transformation. to-peer file sharing service KaZaa and global system of
Internet-telephony Skype. In fact, Skype’s research and
Almost 90% of the population use online banking, development division is based in Tallinn, the capital of
86% of citizens file their income taxes electronically, Estonia.
everyone has one or more mobile phone and uses it to 11 Statistics Estonia, Estonian Telecom Company (2006).
pay a bill or a parking fee.9 Moreover, Estonia is now 12 Quoted in ‘Online biz is booming in Estonia’, Wired.com,
a technology producer and the reputation of Estonian 21 April 2003.
13 Unless stated otherwise, quotations from Margus Püüa
IT specialists does not fall behind that of their Indian were gathered during an interview made via Skype in
colleagues.10 Rapid maturity of the ICT sector has May 2007.
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Part 4 Case studies
By the end of the 1990s, different IT applications institutions went into operation; it offered citizens
of ministries and agencies were developed. Margus official forms that they can download. Furthermore,
Püüa said: the official database of Estonia’s current legisla-
What we needed next was to inter-connect these decen-
tion ‘State Gazette’ became available online. The
tralized information systems and databases to the common Government Communication Office opened a virtual
data resource as to make them accessible to wider user briefing room, providing information on activities and
groups. Furthermore, we needed a secure mechanism for decisions of the Ministries’ Cabinet.
online user authentication and a secure environment for In 2003, in the context of the e-Citizen project, the gov-
government–citizens interactions and document exchang-
es. [……] It’s hard to say whether we had this vision from the
ernment set up a common integrated ICT environment
very first day, but relatively fast we started to develop sys- to enable mutual information exchange. Furthermore,
tematically these main components. with the introduction of the Citizen’s Portal, it started
In 1998, Estonia made the strategic decision to the development of numerous e-services for citizens,
become an information society when its parliament businesses and public administration.
(the ‘Riigikogu’) approved the ‘Principles of the State The evolution of Estonia’s ICT to an integrated
Information Policy’. The implementation of the infor- infrastructure enabled connecting, through a sin-
mation policy then became the ‘lighthouse’ guiding gle interface, different information systems and the
the development of ICT infrastructure and electronic provision of comprehensive e-services. Introducing
services in the public sector. This development pro- e-services in all state agencies became one of the
ceeded in three stages. The first involved the moderni- main objectives of the revised ‘Principles of State
zation of government agencies’ document manage- Information Policy’ for the 2004–2006 period.
While transforming the public sector, policy mak-
ment and included redesigning and computerizing
ers realized that sophisticated e-services achieve little
the entire document ‘life cycle’, from the initial cap-
benefits if citizens cannot access them. Thereafter,
ture of a record, to its signing, registration, process-
they gave a lot of attention to the deployment of the
ing, archival and preservation.
The second stage focused on modernizing public Internet. By 2001, all public libraries in the country
sector databases. For example, the X-Road project14 offered free Internet connections and the first Wi-Fi
hotspots were installed. Wireless Internet access has
included the implementation of an integrated Internet
quickly become available throughout the country.
search system, which enables authorized users a quick
Within five years, the number of Public Internet Access
and easy extraction of data from numerous databases.
Points (PIAPs) exceeded 1,100 and wireless Internet
The third stage involved the development of several
connection, mostly free of charge, can be found in
projects including an electronic ID card, e-signature,
post offices, shopping centres, ferry terminals, bus sta-
e-Citizen, TOM, e-Tax Board, and the digitization of
tions, conference halls, high schools, universities, gas
public libraries. These projects, along with others in
stations, bars, cafés, and even castles.15 In addition,
the field of justice and court affairs as well as public
procurement, helped to develop Estonia’s Internet- the government started a project called ‘Village Road
based ICT infrastructure. Partners from the private 3’ (a follow-up on the 2001 projects which connected
sector were also included in the development of these local governments and public libraries to the Internet)
various IT projects. to improve access to permanent Internet connec-
By 2002, the e-government technological infra- tions in sparsely populated rural areas. Through this
structure became operational; however, e-services for project, the government wanted to achieve quality
citizens were still under development. Margus Püüa Internet coverage of 100% of Estonia’s territory. The
explained: country’s broadband strategy adopted in 2005 aimed
at bringing by 2007 cheaper and faster Internet con-
We started simply providing information, then we moved to nections into households all over the country.
information exchange, and now we have reached the stage
of integrated e-services.
In 1994, the first government website went live pro-

14 This and further mentioned projects will be discussed in
viding public information to citizens. In 1998, a detail in the following sections.
new portal called the ‘Estonian State Web Centre’ 15 WiFi Internet access is available in Laitse Castle and
and containing all the web pages of governmental Narva Castle.
516

The high Internet penetration rate helped the ‘X-Road’. Digital signatures and ID cards are the basic
deployment and use of e-government applications. elements enabling the creation for citizens of high-
Linnar Viik, a technology consultant, explained: quality integrated e-services, and the reduction for the
In the country side, the Internet is even more practical than
government of traditional interaction costs.
in urban centres. It saves users there a lot of time and effort
since they would otherwise have to travel a long way to take
care of administrative chores. And that’s the kind of thing
Data exchange layer X-Road
Estonians like, pragmatic as they are.16 It is in the framework of the X-Road project that
the architecture of Estonia’s e-government was
Today, developments in wireless technology and the
developed. The Ministry of Economic Affairs and
prospects of WiMAX17 represent a springboard to
Communications initiated the X-Road project in 2001
achieve a greater Internet penetration, which will
with the aim of connecting governmental databases
further enhance e-services access and usage. Ivar
and information systems to a common data resource
Tallo, an IT expert and the Director of e-Governance
accessible on the Internet. At the same time, necessary
Academy, recalled:
software, hardware and organizational methods for
There was an element of muddling through in all of this. standardized usage of national databases were devel-
Everyone speaks about national e-government strategies
oped. After the successful start of processing database
these days, but we never had a national strategy. The de-
velopment of the information society was dependent on inquiries over the Internet, the X-Road environment
the cooperation of the public and private sectors along was expanded to securely send over the Internet all
with NGOs [Non-Governmental Organizations]. What is a kinds of XML-format20 electronic documents; it also
national ICT strategy anyway? Is it a master plan for the near became a skeleton of all e-government services.
future; a means of allowing interest groups to influence the
Technically, the X-Road architecture consists of
state policy; or a declaration of joint values on introducing
ICt into policymaking? the way you answer this question several servers, software as well as numerous data-
depends on whether you are a policy maker, a member of bases and information systems (see Exhibit 2). The
parliament or an ICt enthusiast.18 X-Road security server is a standard software solution
For Ivar Tallo, the process of creating a national ICT installed by all governmental agencies willing to use
strategy for a government is more important than the the system; it organizes the traffic on the X-Road. The
strategy itself. He said: latter’s certification authority certifies, with the help
of a special hardware module, all security servers.
It helps raise awareness of the importance of ICt among de-
The data of certified security servers is transmitted to
cision makers. In the case of estonia, it helped policy mak-
ers realize that it was a pre-condition for development and a other security servers via central servers. The security
function of the reform of our public sector administration. […] server encrypts and decrypts incoming and outgoing
so instead of formally developing an ‘ICt master plan’, we de-
fined some information policy principles, and the government
proceeded with a project-based development approach. 16 Quoted in ‘From Soviet farms to IT can-do’, The Europe
In 2006, Estonia’s e-government services availabil- Journal/FAZ, 9 May 2006.
17 WiMAX (Worldwide Interoperability for Microwave
ity,19 as measured by the European Union, reached Access) is a standards-based technology enabling the
76% while the average of the 25 EU member states was delivery of last mile wireless broadband access as an
50%. In 2006, 29% of Estonians aged 16 to 74 years alternative to cable and DSL. It aims to provide wireless
and almost 70% of firms used the Internet to interact data over long distances, in a variety of different ways,
with governmental agencies. The number of users is from point to point links to full mobile cellular type
access.
expected to grow, as new e-services are launched and 18 Ivar Tallo, “Building government from scratch in Esto-
citizens are realizing the benefits of online communi- nia’, PCTM Magazine, 10 March 2006.
cation with governmental institutions. 19 This indicator shows the percentage of the 20 basic serv-
ices, offered to citizens and businesses, which are fully
available online, i.e. for which it is possible to carry out
ICT infrastructure: a cornerstone for full electronic case handling. Source: Eurostat.
e-solutions 20 The Extensible Mark-up Language (XML) is a general-
purpose mark-up language. Its primary purpose is to
The cornerstone of Estonia’s information society is a facilitate the sharing of data across different information
modern e-state infrastructure, commonly known as systems, particularly via the Internet.
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Part 4 Case studies
Exhibit 2 Overview of the X-Road system
Heterogeneous Heterogeneous
environment: Uni ed security environment: environment:
different operating provides confidentiality, integrity, availability and different database
systems, non-repudiation in unified way. Single protocol and systems,
authentication and single interface (XML–RPC) technologies, protocols
access methods and interfaces
Citizens database
Integrated
Client Adapter
Information
Program Security Security Server
System
Server Server
Oracle
Vehicles database
Web Web Adapter

Internet
browser Portal Security Security Server
Server Server
MS SQL
Weapons database
Mobile
Mobile Adapter
Access
Phone Security Security Server
(WAP, SMS)
Server Server
Progress
Coordination:
Certification, Time-stamping,
Secure directory
Source: Cybernetica Ltd.
messages, compiles logs, checks the rights of institu- Internet data from national databases. Every citizen
tions to use the services and prohibits unauthorized can use the system via the Citizen’s Portal; however,
access. Local and central monitoring stations monitor such usage presumes a successful authentication of
the X-Road system, see the actual state of security the user either through the Estonian ID card23 or by
servers and generate statistics about the services used. using the electronic authentication of the main com-
X-Road allows different information systems and mercial banks in the country. Obviously, a citizen
databases to interact directly with each other and cannot read the data of another citizen, nor can an
the Estonian Informatics Centre ensures the inter- official read or write data that does not concern his/
operability of these systems. Different ministries her tasks. The responsibilities, i.e., the owner of some
house and manage various systems and databases; specific data and the rights of different user groups
they have the exclusive right to update the stored (in terms of information access and usage), are well
data while other institutions or persons can only use defined and recorded in the law.
or duplicate information. X-Road integrates the data
from different ministries and develops (within a few
hours or days) new services21 for the public and busi- 21 E-services will be discussed in detail in the following
ness sectors, at costs ranging on average from 1,000 sections.
22 Here and further in this section, the information is pro-
to 10,000 euros.22
vided by the Estonian Informatics Centre.
X-Road allows authorized governmental agencies, 23 ID card principles and functions are described in the
legal entities and users at large to search over the next section.
518

Exhibit 3 offers an overview of the Estonian ID card

government’s information system. So far, 69 data- To achieve significant savings from the implementa-
bases (on population, businesses, registered cars, tion of e-services, both in terms of time and money, the
driving licences, passports, land slots, buildings, government initiated in 1997 the ‘compulsory nation-
ships, health insurance, pension, etc.) are inter- al ID card’ project. It introduced a smartcard for per-
connected by the X-Road and offer more than 700 sonal identification, digital signature and electronic
e-services. The number of X-Road enquiries averages
2.5 million per month and in 2006, more than 12%
of Estonia’s population through different portals’ 24 X-Road services are explained further in the next
section.
X-Road services.24 25 PKI (public key infrastructure) enables users of a
X-Road is unique in the sense that it is not just a basically unsecure public network such as the Internet
pilot system but also a nationwide information capa- to securely and privately exchange data and money
bility covering all Estonian citizens, public institu- through the use of a public and a private cryptographic
tions and private companies. The system is scalable key pair that is obtained and shared through a trusted
authority. The public key infrastructure provides for a
and the Estonian public key infrastructure25 (the digital certificate that can identify an individual or an
national ID card and digital signature) is its major organization and directory services that can store and,
backbone. when necessary, revoke the certificates.
Exhibit 3 Estonia’s information system
Public sector Private sector
Document
Health record Estonian
Population Vehicle Documents Elion Banks
Insurance management Energy
Register Register repostitory IS
Register systems IS
Security Security Security Security Security Security Security Security

server server server server server server server server
Internet X-ROAD
Security Central Central Security

server server I Monitoring server
E-institution – institutionview
Central Administrative
E-county – countyview HelpDesk
server II system of
Governmental Portal – Your Estonia the state
information ID card &
Institutional Thematic system Mobile ID
view of the state view of the state X-road certification center
www.riik.ee/arr
www.riik.ee www.eesti.ee
X-Road Center Certi cation

KIT EIT AIT
Center
Citizen view Enterpriser Public
view servant
view
User interfaces
Source: Estonian Informatics Centre.
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Part 4 Case studies
certificates. On December 18, 2001, Riigikogu estab- separate PIN codes. According to the Estonian law,
lished the ID-card as a compulsory identity document, the certificates are suspended if the card is lost and
and the Estonian passport is thus only a travel docu- verifiers query the certificates’ database.
ment for trips abroad. In January 2002, the first ID The certificates contain only the holder’s name and
cards were issued to Estonian citizens and foreigners a personal code (11-digit national ID code) and are
living in Estonia with a resident permit for at least one by nature universal. While names may overlap, the
year. Between 2002 and mid-2007, the number of ID code is unique. The certificates lack restrictions
cards issued has exceeded one million and more than on their field and, therefore, the card can be used in
80% of the Estonian population holds now an ID card. the public as well as private sectors, and also between
The ID card contains only personal data that is nec- individuals. In addition, the authentication certificate
essary for the identification of a citizen or a resident contains the cardholder’s government-assigned email
(see Exhibit 4). The data contained on both sides of address, which uses the following format: Forename.
the card, except the photo and the hand-written signa- Surname@eesti.ee.
ture, is stored in electronic form on the chip, in a spe- The Estonian Citizenship and Migration Board
cial publicly readable data file. All other information is (CMB) is responsible for the Estonian ID card scheme;
stored in different information systems, and the card however, the process itself is managed through a
serves as a key to access personal data in the database. public–private partnership between CMB and the fol-
Additionally, each issued ID card contains two lowing two private organizations:
X.509 certificates: one for user authentication and
● Certification Centre Ltd. (Legal name AS
one for digital signature. Associated with the certifi-
Sertifitseerimiskeskus, hereinafter ‘SK’) – a joint
cates are two private keys that are protected by two
venture formed in 2001 between Estonia’s two
Exhibit 4 Estonia’s ID card and its main security elements
ID card front cover ID card back cover
LFI™ – Latent Filter Image, Kinegram® – upon turning

Microprint Shadow Image upon turning the card, the the card, the image of the
Eesti Vabariik Map of Estonia image EST alternates between map of Estonia and the image
positive and negative. of the abbreviation EST changes.
Chip – the carrier of
electronic information.
MLI™ – Multiple Microprint

OVI® A poem by
Laser image, which screen Machine-readable
Optically variable ink, P.E. Rummo
base includes the moving and code
from golden to green.
alternating personal code
and expiry date of the card.
Source: www.id.ee.
520

largest banks (Hansa Bank and United Bank) part of the reply. This allows interpreting the OCSP
and telecommunication organizations (Estonian positive reply as ‘at the time I saw this digitally-signed
Telephone and EMT). SK is responsible for devel- file, the corresponding certificate was valid’. As the
opments related to the ID card, digital signature, Estonian public sector is legally obliged to accept
and other PKI infrastructure elements in Estonia. digitally-signed documents, the ‘time-stamp feature’
It is also responsible for issuing authentication and is especially important when sending documents to
digital signature certificates to Estonian ID cards. governmental agencies and, above all, to courts of
● TRUEB Baltic AS – a subsidiary of the TRUEB law. A 2003 ruling by a district court made digital
financial services organization, headquartered in signatures valid in the Estonian court system.
Switzerland, is responsible for manufacturing the DigiDoc components can be easily integrated into
ID cards. existing applications in order to allow for digital signa-
ture capabilities. People can use Estonian ID cards and
SK and its partners have developed a secure, reli- DigiDoc to give digital signatures in any form of commu-
able, easy-to-use digital signature architecture nication. DigiDoc Client and DigiDoc Portal are availa-
named DigiDoc. DigiDoc is based on the Technical ble free of charge as standard applications for end-users.
Specification TS 101 903 from ETSI, also called This technology has become a de facto standard in
XAdES. It allows creating, handling, forwarding and Estonia. More than two million digital signatures have
verifying digital signatures, and supports file encryp- been made using DigiDoc. The system is used by the
tion/decryption. private sector and most of the public sector, including
In DigiDoc, the validity of the signer’s certificate is courts, central government, and local municipalities.
obtained at the time of digital signature in the form of
OCSP response26 and stored within the signed docu-
ment. (See Exhibit 5 for an example of the validity 26 The Online Certificate Status Protocol (OCSP) is an In-
confirmation.) Furthermore, the created signature is ternet protocol used for obtaining the revocation status
sent within the OCSP request and received back as of an X.509 digital certificate.
Exhibit 5 Validity confirmation sheet
Source: Screenshot from digidoc.sk.ee.
521

Part 4 Case studies
Legal entities can use SK’s ‘Business ID’ product, the idea was to develop a secure environment, where every
which includes authentication and digital signature person could save his or her government-related docu-
ments and where he or she can look up the data that gov-
certificates issued to an organization, a chip-card
ernment holds about them. We started with the principle
as well as a set of procedures defining its use. As an that people don’t ultimately care whether the service comes
example, some organizations are using this product from the state, the local government, or even from some
as a digital stamp. private contractor.
In May 2007, a Mobile-ID service was launched. It Being a single entry point to online public information
enables highly secured identification of a person and dig- and services, Citizen’s Portal (KIT) is organized as a
ital document signing via a mobile phone, and thus helps virtual common space, where authorized users can
to give greater freedom for performing transactions. It play three possible roles: that of a citizen, an entre-
presumes a new type of SIM card, but works with most of preneur and an official. For citizens, the portal serves
the mobile phone models that are in use today. as a secure personalized ‘virtual office’ through which
Besides its prime functions as an authentication they can, in their different roles, manage their affairs
method and provision of digital signature, Estonian (e.g., use public services) and communicate with the
citizens can use many other ID card applications. government, businesses and other citizens.
These include: A citizen’s communication with all other informa-
● To buy an e-ticket for public transportation (in tion systems in the state occurs via his personal infor-
Tallinn and Tartu)27 mation system (virtual office). State information sys-
tems (or that of enterprises connected to the system)
● To read their information in the population register
have an obligation to communicate with the citizen’s
● To check the status of health insurance office and reflect the state of processing his/her affairs
● To check the telephone bill to that office. That means the citizen no longer needs
● To sign and encrypt emails to search for services, but has the opportunity to order
services and to follow up the processing of these with-
● For drivers permit verification
out leaving his or her ‘office’.
● Additional features can be consolidated into the So far Citizen’s IT environment has developed the
card (e.g., work passkeys and bank cards). following capabilities:
The ID card is a very secure authentication mecha- ● E-Forms. There are over 400 official applications
nism. Margus Püüa proudly explained: and forms in PDF-format that can be printed out,
In Estonia, there is a very tight connection between the cer- and about 80 forms that can be filled in directly on
tificate placed on the Id card and the population Register. If the screen and submitted online. Thus, a new pass-
someone uses such certificate, we guarantee at the country port can easily be applied for by post, on condition
level that the person behind it is that true person. this is called
a person already possesses an identification docu-
qualified certificate. only a few countries in the world have
such capability. If two persons want to communicate, they ment issued by the CMB.
must meet; however, by exchanging certificates we make sure ● Direct X-Road services. The X-Road environment
they are those who they personate, and then they can trust
comprises several national databases and registries
each other. In estonia, you can trust everyone, because the
state gives you this identification guarantee. and that’s the that citizens can access to look up their personal
foundation for building personal services for citizens. data.28 For example, in the database of the Health
Insurance Fund, a citizen cannot only control the
Doing business in the ‘virtual office’

The concept of a ‘virtual office’ evolved within the 27 ID ticket revenue accounts for over 65% of the overall
framework of the nationwide e-Citizen project started ticket revenue in Tallinn. According to SK, more than
in 2003 and aiming at creating an Internet portal to 2 million ID-tickets have been sold in Estonia since its
become the main channel for e-government services. introduction in March 2004.
28 According to§10 of the Estonian Personal Data Protec-
Later it developed into a unique solution, enabling
tion Act, each individual has the right to know what
citizens to participate in the information society. information state holds on him or her and how this
According to Margus Püüa, information is used.
522

validity of his or her health insurance, but also notification of when vehicle licences are ready.
directly apply for the EU health insurance card by According to Margus Püüa, the notification service
pushing the proper button on the screen. In other is the most popular one amongst students:
registries, the user can control the validity of his/
For the third year running, Estonian students can look up
her driving licence and, if needed, apply for a new
their national examination results in the Citizen’s portal.
one, or register residency, or apply for parental They can also order result reports by email or SMS. This year
leave benefit. Students can send their admission 80% of students have used this service.
application to the higher education schools directly
from the Admission Information System (SAIS), ● Official email address. The official address
also part of the X-Road portal. (Forename.Surname@eesti.ee) is a citizen’s lifetime
The system also allows a citizen to make possible cor- address and is supposed to be the main communica-
rections of his/her personal data (nationality, education channel between citizens and the government.
tion, mother tongue, field of activity, etc.) and see A citizen can configure the system to forward incom-
who made enquiries about him or her. Anna Ivanova, ing messages to his/her current email account.
a woman in her fifties, has shared her opinion on the ● Election information. A citizen can loop up the
X-Road system: location of his polling station, its opening hours or
during elections, go directly to the e-voting space
I was quite impressed, if not to say shocked when my
daughter first showed me what kind of information our to cast his/her e-vote.
government holds on me. I guess it is because all the data
Since the Citizen’s portal is connected to the Internet
is gathered in one place: what kind of car I have, apartment
I own, where I live, that I am Russian by nationality, that I applications of the main Estonian commercial banks,
have two children, and other more sensitive information. users can carry out payments for specific services like
now I think it’s a good idea that I can see how this data state duties or customs and money transfers usually
is used. I wouldn’t like it if someone misuses my personal occur in less than two hours. To access the citizen’s
data.29
portal requires authorization either with the ID card
● Digital signing environment. It represents the or via e-banking PIN. However, signing documents
authentication and transmission system of digital digitally is only authorized through the ID card.
documents. Raini Ots, an advocate in Tallinn, said: Citizens and foreigners residing in Estonia use the
Citizen’s portal based on data held in the Population
For me this digital signing environment is very practical. For
example, when you deal with a court, it is very important Register. Business users are authorized to use the
to follow the procedure and meet all the deadlines. If I am Entrepreneur portal (EIT) based on data held in the
working outside the city, I don’t need anymore to rush and State Commercial Register, which enables them to
submit my client’s application or an appeal to the court. access transactional business services. The development
I log on to my ‘virtual office’ with my Id card, upload the
of EIT was initiated in 2005; currently, the most popular
document, sign it digitally and send the appeal directly to
the judge’s office email address. […] I can also receive digit- service is the application for alcohol sale licence.
ally signed document or send them for signing by entering In addition to the ‘virtual office’, residents can use
the personal 11-digit code of the recipient. the Government and information portals (described
● Location-based services. Citizens can retrieve below) which do not require a prior user authorization.
information from government agencies or private The Government Portal (www.riik.ee) encom-
enterprises participating in the system. For exam- passes several closely integrated government portals.
ple, Estonian Energy Ltd. provides information It offers citizens and business users a single access
about planned interruptions of electricity supply point to public information about state agencies’ func-
in specific areas. Also, city authorities post infor- tions and services. The aim of the portal is to provide
mation on city roads closed for reconstruction or government-related information and services based
repair, as well as changes of public transportation on the X-Road technology, geographic information
routes. systems, and mobile solutions.
● Notification. The system allows participating

departments to send text messages (SMS) to citi- 29 Quotation collected during interviews with Estonian
zens on topics ranging from emergency alerts to citizens made in Estonia in June 2007.
523

Part 4 Case studies
Thematically structured, the Information portal the simplest case) or by the following business day at
(www.eesti.ee) gives practical information about the the latest.
rights and obligations of the people living in Estonia,
in addition to tips about dealing with Estonian state
institutions. The topics range from consumer infor-
Best practices in Estonia’s public sector
mation to legal help, from human rights to work
Estonia is one of the smallest countries in the world. We
and entrepreneurship. The portal offers forms and have to be efficient and optimal in dealing with our admin-
references to legal acts, useful web pages and links to istrative burden. online solutions are a great opportunity to
specific services that can be carried out in the Citizen’s bring the government closer to people.31
Portal. Additionally, the portal presents content relat- (Siim Raie, General director, estonian Chamber
ed to a citizen’s life cycle (whether he/she is a child, of Commerce and Industry)
a juvenile, a working person, a senior citizen, or an
In a relatively short time, Estonia has developed an
individual with special needs). Margus Püüa said:
impressive array of e-government services, some of
e-services must solve a citizen’s problem, because that’s the which are described below.
only way to entice people to use them.
An integrated e-service example that required cooper- e-Cabinet

ation between different agencies is claiming parental
leave benefits. Margus Püüa explained: Check out the world’s most high-tech cabinet room. this
e-cabinet doesn’t just look cool. It is cool – and it promotes
Just a few years ago, a new parent had to physically go to efficiency and saves money, too.
five agencies to obtain five certificates with eight signatures
(Newsweek, 11 March 2002)
in order to receive his/her parental leave benefits. eighteen
data requests were made to five information systems, and In August 2000, the Estonian government outfitted its
were then followed by a computation at the end. today, this
Cabinet meeting room with sleek PCs terminals and
procedure can be done via the Internet, from a parent’s ‘vir-
tual office’, in just three minutes and one mouse click. cordless keyboards that ministers activate with their
ID card (see Exhibit 6). This new electronic environ-
In the case of the ‘parental leave benefit’ service,
ment, coupled with the use of digital signatures on
the real-time interaction takes place between five
official documents, has virtually eliminated paper-
information systems, namely the Citizens’ Portal, the
work. Ministers go over draft bills and regulations, put
Register of the Social Insurance Board, the Population
in their comments and suggestions, and vote online.
register, the Information System of Health Insurance
Cabinet sessions that used to take most of a day, now
Fund, and the Information System of Tax and Customs
take half an hour!
Office. Such automated interaction of systems con-
Apart from a single copy needed for the state
siderably saves time (and money) for both parties:
archives, the official record of cabinet meetings is no
citizens and state officials. Other popular examples
longer printed on paper but exists solely on the web
of integrated e-government services include the use
and citizens can download it from the government’s
of the ID card as a bus ticket, the mobile phone to pay
website. Moreover, the Prime Minister’s press con-
for municipalities’ parking, and SMS to obtain exam
ference (which takes place every Thursday at 12:00
results.
noon at Stenbock House) is broadcasted real-time via
Another integrated e-service, which was intro-
the Internet and citizens can watch it either live or on
duced early in 2007 and has become very popular, is
demand later on.
registering a new company online. The service is so
The new web-based document system automated
far limited to registering a private limited company
the preparation process and the proceedings of the
with a share capital at least 2,555 euros or a self-
employer new venture. Users enter in the system the
required data, confirm the application with a digital
signature, pay state duties and share capital using 30 For more information read the Manual for Company
e-banking, and submit the application online to the Registration Portal, available here: https://ekanded.eer.
ee/ help/help_eng.html.
Centre of Registers and Information Systems (RIK).30 31 Quoted in ‘Good things come in small packages’, The
The new company is registered within 12 minutes (for Guardian, 23 November 2005.
524

Exhibit 6 e-Cabinet meeting The TOM portal has led to a number of changes in
Estonian laws; for instance, the proposal to move the
clock forward in the spring and backward in the fall.
Tex Vertmann, who served from 2001 to 2004 as IT
advisor to the Prime Minister, commented:
The Parliament had made a stupid change in the weap-
ons law. Students and sportsmen weren’t allowed to carry
swords or guns anymore. The sportsmen and members of
student fraternities proposed that they could carry their
swords on the streets again. The law was subsequently
amended.36
By April 2007, TOM had 6,800 registered users but
the number of its visitors is much higher. The portal
Source: The State Chancellery.
has been in use since its introduction; however, its
popularity has been decreasing due to a lack of politi-
cal interest caused by changes in Government leader-
Cabinet meetings; it also enabled ministers to par- ship and a shortcoming in the initial design. Margus
ticipate in the meetings from any location. The State Püüa considers TOM an interesting idea but thinks
Chancellery said: It is something which has made that citizens should play a different role in the law
decision making at the ministerial level much more making process:
transparent.32 We are looking at this as if people want to participate in
Total investment into the e-Cabinet project amount- making legislation. I think the approach should be different.
ed to 200,000 euros, but the system is saving some Politicians should put forward their ideas and ask questions
to citizens. When I wake up in the morning, I don’t feel like
192,000 euros per year in paper and photocopying
saying anything [to law makers] but if a politician asks me
costs.33 Furthermore, the e-cabinet project enabled civil something, I’ll reply with pleasure. TOM doesn’t work yet
servants to rethink the role that technology can play like this.
in their work environment and how to create a paper-
less administration. As a result, citizens can now deal
directly with the administration’s back office, without e-Voting
having to go through an intermediate civil servant. In many countries, e-government is more political rhetoric
than hard reality. But not in the tiny Baltic nation of Estonia,
where democracy is running about as close to real-time as
e-Democracy you can get.37
In June 2001, in response to Prime Minister Mart Laar’s
(Clark Boyd, BBC News)
request, the government launched its direct democracy
portal ‘Today I Decide’ (TOM, or ‘Täna Otsustan Mina’).
This project aimed at creating a tool that would allow
people to have an impact on government work by being
able to speak up about all spheres of life. It was the first 32 Taken from the State Chancellery webpage.
attempt to launch a discussion between the govern- 33 Ibid.
34 The portal has helped Estonia to gain international
ment and Estonia’s citizens and residents about pos-
recognition for its e-democratic initiatives; the European
sible applications of ICT and the Internet. Eventually, Commission has presented the Estonian Prime Minister’s
TOM gave birth to e-democracy in Estonia.34 Kristiina Office with an award for implementing TOM. TOM is
Ojuland, Estonia’s Minister of Foreign Affairs, said: also regularly listed among international best-practice
initiatives in e-democracy.
The system [TOM] has been built up on the principle that 35 Quoted in ‘Talk time: Kristiina Ojuland’, The Guardian,
everyone who has something to say to the government can 11 March 2004.
write it into the system. In the ministries, there are people 36 Quoted in ‘Estonia – the state of the e-state’, The Baltic
who look into the proposals to see if there is anything se- Times, 22 July 2004.
rious. It does have a negative side if people write stupid 37 ‘Estonia opens politics to the web’, BBC News, 7 July
things.35 2004.
525

Part 4 Case studies
In October 2005, Estonia became the first country in the total votes and 7% of the advanced votes. This
the world to enable its citizens nationwide to vote over relatively low percentage did not stop the government
the Internet for a political election – municipal gov- from declaring this first experience a success, since
ernment election. Citizens could vote electronically systems and procedures worked well and there were
ahead of the polling day with a possibility to change hardly any security problems. This achievement led
their vote on the Election Day at the polling station, in the government to make e-voting optional during the
which case the previously given e-vote becomes void. parliamentary elections of March 2007, when 3.4% of
Arne Koitmäe, Member of the Secretariat of Estonia’s the 940,000-strong Estonian electorate cast their vote
National Electoral Commission, said: electronically.40
Peeter Marvet, a representative of e-Estonia, said:
The goal is to make things easier for people, to increase
participation. No one has managed to prove that e-voting Voting online does not change the essence of the democ-
actually raises participation, so that remains unanswered. racy, but it appears to be a powerful means to promote
But this gives people another possibility.38 e-administration. It is a paradox, but our lack of long demo-
cratic tradition might be a chance for faster progress into
The premise of e-voting is the secure authentication
the present era. My conviction, which is shared by many
(with the ID card) of the voter’s identity. Once authen- people here, is that the more new technologies in the pub-
ticated on the special website, voters cast their ballot lic sphere the more transparency, and in the end – more
through an encrypted system and then affix their democracy.41
digital signature before transmitting their vote. In
e-voting, the system takes into account all the major
principles underlying the paper-based voting proce-
dure (see Exhibit 7).
38 Quoted in ‘Online voting clicks in Estonia’, Wired.com,
Although the older generation is still sceptical 2 February 2007.
about entrusting their vote to a computer, younger 39 Quotation collected during interviews with Estonian
people, like Liisa Lumiste, have embraced e-voting citizens made in Estonia in April 2007.
with enthusiasm. Liisa said: It’s quite practical and 40 This time, an additional feature was added to the proc-
ess: voters could request their elector cards to be sent to
very convenient. The most important is not how and
them electronically, eliminating thus the need for the
where to cast your vote, but to do it.39 paper card and doing one’s bit for the environment.
The number of e-votes cast during the 2005 local 41 Taken from Peeter Marvet’s personal blog:
elections amounted to 9,287 representing 1% of www.tehnokratt.net.
Exhibit 7 e-Voting : envelope scheme
Encrypted E-voters
vote
Digital signature
Results
E-votes
Public
Private
Source: Cybernetica Ltd.
526

Margus Püüa of RISO believes that the mechanism The extension of e-services played a key role in
of e-voting may be best used on the municipal level, increasing the popularity of the e-Tax Board system.
where residents can actually participate in the local It included adding more languages, simplifying the
administration: tax filing process, speeding up the service, and adding
an automatic checking procedure. Furthermore, the
On the local level, we can come to know everyone’s opin-
ion on this or that question very fast and very cheaply. It system enables taxpayers to receive their tax refund
is very convenient. […] I don’t think that people care that within 5 working days.
much about what happens at the state level, but rather what For businesses, TCB developed an e-application
happens in their house, in the neighbourhood, their kinder- for customs and excise duties (called e-Customs)
garten, school, and grocery store. They want to know right
in cooperation with the European Commission to
away, what happens there and they want to express their
opinion. ensure inter-operability with the common EU custom
systems. After TCB introduced in May 2006 the new
system for processing customs declarations, there
e-Tax Board was a significant increase of its usage and within five
The Tax and Customs Board (TCB) launched in 2000 months corporate customs declarations were filed
its electronic system called e-Tax Board. With time 100% online.
e-Tax Board has become one of the most popular Due to its innovative approach, Estonian taxpay-
e-solutions among ordinary citizens. In 2007, 86% ers view TCB as one of the most reliable govern-
of private income tax declarations were submitted ment authorities. Having invested several years ago
online, using safe and easy Internet application. some 150,000 euros for the implementation of its
Priit Rebane, an employee of a construction com- e-application, TCB has since made significant time
pany in Tallinn, appreciates the convenience that and cost savings. In 2007, there were 455,000 per-
e-Tax offers; he said: sonal income e-tax returns, which saved 135 days
of data entry corresponding to 6 months of manual
There was a time when I had to get permission from my
boss to leave my job earlier to go to the Tax Board. They work.43 According to Dimitri Jegorov, the deputy
were open until 5 p.m. and there were always hundreds of director-general in charge of the service, Estonia is
people before you in the line, loud and impatient, making still today one of the leading countries in the world
you nervous. There I had to wait at least a couple of hours for the popularity of its electronic submission of tax
for my turn to speak with a tax consultant. I would show
returns and customs declarations.44
my tax declaration application, salary and social tax refer-
ences and dozens of other documents, to help me fill in
the tax return … some months later, I would at last get the
refund. thanks God, that’s all past. now I just need a few
Security and privacy issues
minutes for the whole process. I log into the e-tax Board E-government in Estonia relies on appropriate legisla-
system with my bank identification or Id card. the main
tion45 as well as specific standards and procedures
fields like my salary, social tax and pension deductions, or
unemployment insurance are already filled in. I add some such as security requirements for databases, services,
more information, like payments I made for my son’s edu- and state procurement. This foundation enabled the
cation, and then press the ‘send’ button. It’s as simple as state to provide secure e-services and establish trust
that!42 among online users. In developing these services, the
Taxpayers can file in, view and correct their tax
returns online. The main services that e-Tax Board
currently offers include the following:
42 Quotation collected during interviews with Estonian
● Personal income tax return, tax demand notice, citizens made in Estonia in April 2007.
social tax balance for private persons; 43 According to information provided by the TCB.
44 Ibid.
● Income tax and social tax returns, value-added tax
45 There is no specific e-government law in Estonia. The
(VAT) return, overpaid VAT refund claim for legal legislation affecting the development of e-government
persons; and concerns freedom of information, data protection/
privacy, e-commerce, e-communications, e-signature/e-
● Tax decisions, tax balance and calculation, requests
identity, e-procurement, and other legislation, like
and applications, and tax debt information. Databases Act.
527

Part 4 Case studies
government used modern ICT technologies and novel had serious consequences, including a huge economic
methods for testing the new applications. Kristiina loss. For specialists, this unprecedented breakdown in
Ojuland, former Minister of Foreign Affairs, said: terms of scale and duration (three weeks) was a major
We have hired hackers whose task was to test for example learning experience.49 Since this breakdown, Estonia
the [e-voting] system by breaking into it in order to inflict has set up a centre of excellence on cooperative cyber-
damage.46 defence aimed at dealing with the legal aspects of
Another system security aspect is ensuring that users fighting cyber-terrorism.
protect their PC from external dangers. Margus Püüa
said: Challenges faced and measures taken
although the number of people using firewalls and anti-
The Estonian government overcame several hurdles
virus programs has been growing, it’s still low. Moreover,
many people are careless about their passwords. phishing to create integrated public e-services. Though it devel-
scam is just one way [for hackers] to steal your personal oped the basic e-government infrastructure in a rela-
information. tively short time, the major challenge was to ensure the
To increase citizens’ awareness, the government set interoperability of information systems, registries and
up in 2006 a special website that provides informa- interfaces, and to integrate them into a single portal
tion on how to protect one’s computer from cyber- serving citizens, businesses and other organizations.
criminals and avoid Internet fraud, especially when Another challenge was to promote the use of ID cards
shopping online. It is the first project of a nationwide since although 950,000 citizens had them, only 60,000
initiative called ‘Computer Protection 2009’, which ID cards are actively used for online authentication.
was launched by the Ministry of Economic Affairs Hurdles for achieving a broader use included chang-
and Communications in cooperation with the larg- ing people’s habits and equipping usage points with
est banks and telecom operators in Estonia. The ini- ID card readers. Furthermore, harmonizing e-identity
tiative, carried out by the Look@World Foundation, standards, achieving digital signatures interoperability
aims at making Estonia by 2009 the country with the with other countries as well as ensuring the interop-
most secure information society in the world. To this erability of X-Road with pan-European information
end, the government launched several sub-projects systems has been a major challenge.
including the promotion of secure ID card-based To overcome the above challenges, the Estonian
authentication in the use of e-services. government took a series of steps to ensure the interop-
During past years, Estonia has become a ‘test site’ erability of information systems. In 2004, it elaborated
for e-services; several IT companies have tried their ‘The Government IT Architecture and Interoperability
products first in Estonia before launching them in Framework’ in cooperation with state and local gov-
other countries. Margus Püüa explained: ernment agencies as well as private sector IT experts.
The framework defined a set of recommendations and
We can try and test everything here. Bad guys also do that.
guidelines, which described the way in which organiza-
Most of the cyber-attacks are first tested in estonia, because
if you succeed here then it will definitely work elsewhere! tions should interact with each other. Adhering to the
framework’s policies and specifications is mandatory to
The government is also enhancing privacy protection
all parties. Beside inter-organizational agreements and
and network security with the launch in May 2006 of
technical inter-operability (allowing different systems
CERT47 Estonia. This unit aims at raising awareness
to work with each other and seamlessly exchange data),
and helping Internet users implement preventive
measures that reduce damage from network security
incidents. In April 2007, a series of DDoS48 attacks
disrupted Estonia’s most vital computers, including 46 Quoted in ‘Talk time: Kristiina Ojuland’, The Guardian,
the websites of the presidency, the parliament, most 11 March 2004.
government ministries, political parties, as well as 47 Computer Emergency Response Team.
some of the biggest banks, news organizations and 48 In ‘distributed denial-of-service’ attacks, a target site is
bombarded with so many bogus requests for informa-
communications firms. The government took emer-
tion that it crashes.
gency measures and blocked access to the govern- 49 ‘In Estonia, what may be the first war in cyberspace’, The
ment’s websites from the outside world. These actions International Herald Tribune, 28 May 2007.
528

the major area of concern was semantic interoperability. Future outlook

The latter refers to the IS capability to adequately use
In 2006, the Estonian government approved a new
data received from other IS applications in spite of their
‘Information Society Development Plan’ for the period
varying software systems, application objectives and
2007–13. The plan calls for using IT to improve
organizational contexts. To resolve these issues and
citizens’ quality of life and increase their involvement
facilitate data identification, RISO focused on creating
in public life, with the ultimate goal of achieving
a semantic repository.
a completely paper-less public administration. The
To bolster the mass-market use of the ID card, the
state intends to continue with the creation of a unified
government took several initiatives to make PKI the main
service space, which will enable citizens to access all
authentication method and to phase out old authen-
public services through a ‘one-stop’ concept, as well
tication technologies (such as password-based cards).
as with the development of public sector e-services for
These initiatives include Internet-based Parliamentary
citizens and enterprises.
elections, online declaration of taxes, and lowering the
For Margus Püüa, using IT to increase the well-
amount of online money transfers for those not using
being of society pre-supposes that besides develop-
the ID-card. Another initiative within the ‘Computer
ing Internet connections and various e-services, the
Protection 2009’ project consisted of significantly lower-
government aligns processes and business procedures
ing the price of card readers to 5 euros for retailers, and
with the new technological capabilities. Moreover, he
even giving them to banks free of charge so they can
believes that quite often the biggest problem is not
be used with e-banking applications. Since the start of
the technical implementation of new applications, but
the ‘Computer Protection 2009’ initiative, the number
rather the legal aspect surrounding them:
of active ID-card users has doubled and is expected to
reach 100,000 by the end of 2007.50 The aim is to reach It’s not uncommon that a given law says that a citizen must
400,000 ID card and Mobile-ID users by 2009. provide a certain data, while another law says that a civil
servant must extract this same data from the state records.
Achieving cross-border and cross-organizational
That’s stupid!
interoperability, managing multiple systems, standard-
izing digital signatures are current challenges for the Regarding the future, Margus recognizes the impor-
Estonian and other European governments. In 2003, tance of the existing X-Road and the PKI infrastruc-
Estonia has reached an agreement with Finland regard- ture for the creation of a fundamentally new approach
ing legally binding digital documents. To harmonize to deliver public e-services to citizens. He said:
electronic identity standards with its neighbouring Our dream is that with e-state version 2.0, when I take to
Latvia and Lithuania, leading banks, telecommunica- the public servant a dozen of references and filled-in docu-
tion operators and certification service providers from ments, he says that he doesn’t need them since he can
check all of them electronically. With e-state version 3.0,
all three countries founded in 2007 the Baltic WPKI.51
I won’t have to go to the state servant anymore since as the
The European Union has also been exploring digital ID e-service will find me over the Internet.52
usage in government and business applications between
its member states, and harmonizing standards for cross-
border use of digitally signed documents.
In Estonia, the government has deployed X-Road
for a wider use. Its further objective is to integrate
X-Road with pan-European information systems. To 50 Andres Käärik, Council Chairman of the Look@World
Foundation, quoted in www.delfi.ee.
this end, Estonia participates in several pilot projects
51 Wireless Public Key Infrastructure is the name of the
including IDA eLink, GUIDE, Electronic Exchange of highly secure technology used in the services.
Social Security Information (EESSI) and the Schengen 52 Quoted in ‘Millal tuleb e-riik 3.0?’, DELFI.ee, 21 June
Information System. 2007.
529

Part 4 Case studies
CASE STUDY 12
ICT in Tunisia
A strategic lever for building a knowledge-based economy1
Information and communication technologies (ICT) electronic document exchange adopted. The World
can be used as a strategic lever for socio-economic Summit on the Information Society (WSIS) which
development and a competitive means in an increas- Tunisia proposed to the United Nations in 1998
ingly global and deregulated market. In Tunisia, the to organise, and hosted its second phase in 2005,
government has positioned these technologies at the boosted the role of ICT in the country’s economic and
heart of the national development plan. They are social development. In this context, specific actions
considered an enabler for economic diversification included (1) creating in different parts of the country
and for the creation of new, value-added activities in technology parks aimed at strengthening the synergy
all sectors. between education, research and the private sector,
Tunisia has been among the first African countries and (2) fostering the national programme for enter-
to implement an ICT-based national strategy aiming at: prise upgrading which promoted corporate use of ICT
and made it economically affordable for companies.
1 Modernising country-wide the telecommunication
infrastructure;
2 Formulating a regulatory framework for the digital 1 The author gratefully acknowledges the valuable inputs
economy that supports the private sector and fos- provided by Prof. Naceur Ammar (Director of the School
ters corporate competitiveness; of Communications at the University of Tunis), Ms.
Saloua Benzaghou (Director General of the Tunisian
3 Developing human resources through the restruc- Institute of Competitiveness and Quantitative Studies),
turing of education, training and research institu- Mr. Abdelhaq Kharraz (Director General of Strategy and
tions; Planning, Ministry of Communication Technologies), Ms.
Mongia Khemiri (Director General of the Foreign Invest-
4 Enhancing international cooperation and partner- ment Promotion Agency), Mr. Khaled Néji (Director of
ships in the ICT field. Cooperation and International Relations at the Ministry
of Communication Technologies), Mr. Kamel Saadoui
Furthermore, since 2002, the telecommunications (CEO of the Tunisian Internet Agency), and Prof. Belhas-
sector has been deregulated, a national telecommuni- sen Zouari (Director General of the National Information
cations agency created, and electronic signature and Security Agency).
Professor Tawfik Jelassi, dean of the school of International Management at the ecole nationale des ponts et Chaussées (paris)
prepared this case study as a basis for class discussion rather than to illustrate either effective or ineffective handling of a business
situation.
Copyright © 2010 by enpC MBa paris.
530

Case study 12 ICT in Tunisia
This case study presents an overview of Tunisia’s from online services offered by the government and
ICT strategy and its contribution to building a knowl- other institutions, companies are increasingly integrat-
edge-based economy. The following section highlights ing ICT into their business activities. To this end, 90% of
the role that ICT has played as a booster of Tunisia’s Tunisia’s companies were connected to the Internet in
growth and competitiveness. Next, the case describes 2009, up from 88% in 2008 and 80% in 2007. Moreover,
the way the government created a digital culture 47% of the companies surveyed have their own website,
nationwide, provided ICT access for all, and estab- a rise from 37% in 2008 and 32% in 2007.6
lished a trustworthy environment for ICT develop- The ICT sector analysis carried out in 2009 by the
ment. The following sections discuss the importance of Tunisian Institute of Competitiveness and Qualitative
education and technology parks in building a knowl- Studies revealed that 54% of service companies,
edge-based economy. The case concludes with chal- especially in banking, insurance and tourism, have
lenges in implementing the ICT strategy, future per- their own website; compared to 42% for industrial
spectives and lessons learnt from Tunisia’s experience. enterprises. This increase can be explained by top
management’s attitude towards ICT and their com-
mitment to using these technologies for business
ICT: a powerful booster of Tunisia’s growth competitiveness, especially because online services
and competitiveness have become more than ever before a crucial market
The importance of ICT in fostering a knowledge-based imperative (see Box 1).
economy is confirmed year after year. Measurements
of the degree of companies’ knowledge appropriation Creating a digital culture nationwide
have shown over the last few years a net increase of This section highlights the approach that Tunisia has
ICT contribution to such an economy. For the 1997– taken in order to create a digital culture nationwide.
2005 period,2 the Knowledge Economy Index has More specifically, it addresses how the government
registered an average growth rate of 4.3% per year, provided ICT access for all, built a state-of-the art ICT
essentially due to companies’ use of ICT (for which infrastructure, and established a trustworthy environ-
the average annual growth rate was approximately ment for ICT development.
9%).3 Thus a better ICT utilisation enables companies
to achieve a better integration of their business proc-
ICT access for all
esses and stronger market competitiveness.
Aware of the essential role that ICT plays in building
Tunisia’s policy and actions, highlighted above,
the information society, Tunisia has implemented a
have started bearing fruit. The share of the ICT sec-
strategy that guarantees over time digital access for
tor in the country’s GDP rose from 2.6% in 1997
all, regardless of gender, region or any other criteria
to 10% in 2008, and is expected to reach 13.5% in
of possible exclusion. Indeed, in order to secure a dig-
2011. This encouraging trend is mirrored in Tunisia’s
ital opportunity for everyone, several initiatives have
performance in the Network Readiness Index (NRI)
been carried on, as follows:
2009–2010, in which it ranked first in North Africa and
39th worldwide. Between 2001 and 2008, investments ● Establishing a national IT centre for children7
in the ICT sector have increased by 8.1% annually. For as well as regional centres (known as CRIPE)8
the last three years, the increase has been 15% sector- throughout the country aiming at training children
wide and 26.6% in ICT-related activities. Government
incentives to set up ICT ventures and the increasing
2 The last period for which data is available.
spread of a digital culture have led to the annual crea- 3 ‘Report on the Knowledge-based Economy’, Tunisian Insti-
tion of, on average, 400 private enterprises.4 tute of Competitiveness and Quantitative Studies, 2008.
In 2007, Tunisia was the fourth African exporter 4 Excluding call centres.
of ICT and ICT-enabled services. The exports’ value 5 Information Economy Report, United Nations Conference
on Trade and Development (UNCTAD), 2009.
was US$572 million while imports amounted to $496
6 Source: Tunisian Institute of Competitiveness and Quanti-
million.5 tative Studies, 2009 (www.ieq.nat.tn).
On a related note, to enhance their internal effi- 7 www.cnipe.nat.tn
ciency and overall effectiveness and in order to benefit 8 Centre Régional d’Informatique pour Enfants.
531

Part 4 Case studies
BOX 1
The contribution of the enterprise upgrading programme to ICT

adoption and use
Corporate adoption and use of ICT is a major impera- up and some ICt applications’ development. Regarding
tive to gain business value. These technologies enable software acquisition, the following are some software
companies in today’s highly competitive market place categories that pMn pays for:
to improve the quality, cost and time-to-market of their
● Management software (e.g., CRM, eRp, accounting,
products and services. ICT applications go indeed be-
finance, marketing and production);
yond fostering internal efficiency and effectiveness to
● technical software (e.g., Cad, CaM and computation
establishing shared processes and inter-organisational
software);
systems, thus linking a company with its customers,
suppliers and business partners. ● Collaborative and document management software
the key ICt role in improving business competitive- (e.g., workflow, digital document management and
ness is at the heart of tunisia’s national programme for archiving); and
“enterprise Upgrading” (known as “programme de Mise ● networking software (e.g., network management and
à niveau” or pMn). this programme covers a good share firewalls).
of corporate ICt adoption costs since it pays for up to
as of May 2009, some 2,800 companies planned to make
50% of computer hardware cost, 70% of software cost,
ICt investments totalling 294 million dinars within the
and 70% of some technical assistance costs.
pMn framework. this figure includes 177 million dinars
More specifically, pMn covers the costs of compu-
in software-related investments.
ter hardware acquisition, communication network set
aged between 5 and 15 years. Moreover, in order ● Improving the rate of household PC owner-
to cater to children who have specific needs, spe- ship. The number of computers in Tunisia has
cialised areas within each CRIPE and an IT centre increased from 472,000 in 2004 to 997,000
for disabled children (Centre d’Informatique pour units in 2008, and PC penetration in households
Enfants Handicapés – (CIPEH) were established. increased from 7% in 2004 to 13.1% in 2008.12
● Using IT as a teaching aid for kindergartens’ activi- This growth results from the boost in compu-
ties, resulting in the setting up, especially in big cities, ter usage created by “The Family PC” national
of micro-enterprises focussed on this market niche. initiative.13
● Connecting elementary schools, colleges and high ● The national strategy for e-Administration offered
schools9 as well as all higher educational institu- citizens and corporations an integrated set of
tions to the Internet.10 e-services from different government organisa-
tions. This strategy also aims at reducing costs,
● Connecting university libraries, community arts’
centres (161 out of 209), municipal libraries (203
out of 318), and almost all youth clubs (294 out of
296) to the Internet.11 9 www.edunet.tn
● Fostering the creation of computer and multimedia 10 www.cck.rnu.tn
11 www.jeunesse.tn
clubs within community arts’ centres (79 out of
12 www.infocom.tn
209) and of public Internet access centres through- 13 This initiative, launched in 2001, offered incentives to
out the country. the private sector to promote the PC assembly industry
and create jobs as well as reduce PC purchase price. It
● Fostering ICT access in rural areas, by special buses
has also helped promote Tunisia’s e-content industry and
equipped to serve as mobile computer laboratories, enhanced the perception and the application of the law
with Internet connection and educational tools and on intellectual property rights by requiring the use of
games targeted at young users. original software licenses. See www.pcfamilial.tn
532

enhancing citizens’ involvement and improving A reliable and state-of-the-art ICT infrastructure:
public sector’s efficiency14. towards high-speed connectivity
● Modernising the national health care infor- A high-quality ICT infrastructure is a critical pillar
mation system by establishing a broadband for establishing a knowledge-based economy. The
infrastructure to connect 280 health care cen- investments made since the 1990s enabled Tunisia
tres and developing high value-added services to set up a state-of-the-art infrastructure which
such as tele-medicine. includes a high performance network with more than
10,000 km of optical fibre links. With its country-wide
multiple-link network of 10 gigabits per second
A trustworthy environment for ICT (Gbps), the national Internet protocol/multiprotocol
development label switching (IP/MPLS) backbone enables high-
As early as 1999, Tunisia formulated a national cyber- speed Internet transmission. Industrial and business
security strategy aiming at increasing information zones connected to the IP backbone allow data and
systems’ security in the country, fostering electronic Internet transfer at a speed of up to 1 Gbps.
commerce and online services as well as protecting ICT networks for higher education, health care
users against cyber-threats. A first measure was the and e-government were designed using virtual pri-
enactment in 1999 of a law defining cyber crime and vate networks (VPN) and fibre-optic links with the
specifying sanctions against IT hackers. Subsequent IP/MPLS backbone. Access networks installed in
measures included the establishment of the National Tunisia by telecom operators offer several technolo-
Agency for Computer Security (ANSI)15 and the gies such as worldwide interoperability for micro-
Tunisian Computer Emergency Response Team wave access (WIMAX), very small aperture ter-
(TunCERT). ANSI’s mission is to raise governmental minal (VSAT), asymmetric digital subscriber line
and business organisations’ awareness and assist them (ADSL), symmetric digital subscriber line (SDSL),
to implement actions to ensure the security of their and fibre-optic links. All regions, including rural
information systems. Through its TunCERT, ANSI is areas, have benefited from total convergence of
the first operational centre in Africa recognised by fixed and mobile telephony, allowing a penetration
the worldwide network Forum of Incident Response rate of more than 98.8%.
and Security Teams (FIRST). It is a member of the The deployment of broadband networks has
Network of Centres of Excellence of the UNCTAD and resulted in a significant expansion, mainly through
also serves as Vice President of the Organisation of the the rapid deployment of DSL and fibre-optics technol-
Islamic Conference-Computer Emergency Response ogies. The number of Internet users has grown over
Team (OIC-CERT). the past few years to reach one-third of the popula-
The establishment in 2000 of the National Agency tion, stimulated by the reduction in DSL subscription
for Electronic Certification16 as Tunisia’s certifica- costs, making subscription affordable to most citi-
tion authority has provided a technical and legal zens. More specifically, the cost of 1Mb connection
framework for the recognition of electronic signa- was reduced by 25% in 2008 and by an extra 45%
tures. Furthermore, the implementation in 2001 in 2009 to reach almost US$27 per month compared
of the local electronic payment system E-dinar17 with US$61.5 in 2007.18
by the Tunisian Post and in 2005 of secure online For international connectivity and as part of the
banking solutions “SPS” (Secure Payment Server) “Hannibal system”, Tunisia has just laid out its
fostered the development of electronic commercial own submarine cable to Europe, with a capacity of
transactions. The above actions aimed at creat-
ing a trustworthy IT environment, a prerequisite
for the successful implementation of e-commerce, 14 www.pm.gov.tn/pm/article/article.
e-banking and other online services. As of November php?id=188&lang=en
2009, more than 80% of companies’ income taxes 15 www.ansi.tn
16 www.certification.tn
are paid online using electronic signatures, and all
17 www.e-dinar.poste.tn
students country-wide make their university regis- 18 Source: Ministry of Communication Technologies, Tunis
tration online. (www.infocom.tn).
533

Part 4 Case studies
3.2 tera bits per second (Tbps). Added to this is the Exhibit 2 Evolution of international Internet band-
capacity provided by the Keltra cable (which links width in Tunisia (Gigabit per second)
Tunisia to Italy) and by the international “South-
East Asia–Middle East–West-Europe 4” SMW4 sub- 30
marine fibre-optic cable consortium. International 27.5
connectivity using several submarine cables, the 25
national IP/MPLS and multiple technology access
networks has enabled operators to offer reliable 20
national and international links at an affordable
15
price. The international Internet has reached 27.5
Gbps in November 2009, from only 11.25 Gbps in 11.2
10
2008 (see Exhibits 1 and 2).
5
3.1
Qualified human capital and the building 1.2
0
of a knowledge-based economy
2009 2008 2007 2006
This section argues that qualified human capital is a
key building block of the knowledge-based economy.
It stresses Tunisia’s focus since its independence on Source: Ministry of Communication Technologies, Tunis.
education and the country’s effort to ensure a better fit
between training supply and market demand. It also
highlights the importance at the national level of fos- reinforcement of women’s rights have been the salient
tering scientific research and technological innovation. features of public policies. In Tunisia, nearly one-third
of the national budget (nearly 7.5% of the GDP) is
spent on education. For the current academic year,
Betting on education 2009–10, one Tunisian in four (that is 2.5 million
Since its independence in 1956, Tunisia has bet on people out of a population of 10 million) is attend-
education as a key lever for its social and economic ing a school, a college or a university. Comprised
development. This strategic choice continued after of a majority of female students, this enrolment is
the advent in November 1987 of a new political divided up between educational and vocational train-
leadership. The democratisation of education and the ing. The latter has an enrolment of 2.1 million with
a 90% schooling rate for the 6–16 year age group,
Exhibit 1 Number of Internet users in Tunisia while the former accounts for 400,000 students with
(per million) 40% schooling rate for the 19–24 year age group.19
Based on an index that takes into account access to
3.5 education, equity, efficiency and quality of reforms in
3.3 primary and secondary education, Tunisia is in a pole
3
2.8 position in the MENA region according to a World
2.5 Bank report.20
Over the last couple of decades, higher education in
2
1.7 Tunisia has evolved at a quickening pace. The country
1.5 today has 14 universities and 200 higher-education
1.3
1
0.5
19 Source: Ministry of Higher Education, Scientific
0 Research and Technology, Tunis (www.mes.tn). This
rate of 40% is close to the average rate for the OECD
2009 2008 2007 2006 countries.
20 The Road Not Traveled: Education Reform in the Middle-East
Source: Ministry of Communication Technologies, Tunis. and North Africa, Washington, DC: World Bank, 2008.
534

institutions covering various parts of Tunisia and pro- members, PhD candidates and Master’s level students.
viding students with over 1,000 study programmes or Tunisia’s budget for scientific research and techno-
career paths. Total university enrolment has increased logical innovation currently represents 1.25% of GDP
from 40,000 students (including 37% women) in the and is expected to reach 1.5% of GDP by 2014.23
academic year 1986–1987 to more than 350,000 stu- In order to reinforce science–industry links and
dents (including 59% women) in the academic year bolster R&D and innovation, the country’s infra-
2007–2008. Students enrolled in sciences and engi- structure also includes technical centres, high-tech
neering increased from 10% in 1992–1993 to 25% in enterprises, and incubators, mostly located within a
2007–8. Also, the number of higher-education gradu- network of 10 technology parks spread all over the
ates increased twelvefold within two decades, from country. Furthermore, the government established
5,200 in 1987–88 to more than 60,000 in 2007–2008, the Research and Innovation Promotion Agency in
thus significantly contributing to the country’s eco- 2009 with the aim to promote and transfer research
nomic development.21 results across different sectors of the economy.
ICT education programmes Technology parks: an inter-disciplinary meeting

Faced with the double challenge of integrating the
of minds
country into the global economy while ensuring Tunisia’s transition towards a knowledge-based econ-
employment for the growing number of universi- omy represents a key pillar of the country’s 10th and
ty graduates, Tunisia has implemented some major 11th development plans (for respectively the 2002–6
reforms. These include increased deregulation of sev- and 2007–11 periods), thus extending the national
eral economic sectors, enhanced R&D efforts through effort started in the 1990s to restructure the higher
sustained public investment, developing new technol- education and research sectors. Within this frame-
ogy parks across the country, and higher awareness work, the government set up a dozen technology
in the public and private sectors about the country’s parks (three of which were devoted to ICT) country-
move towards a knowledge-based economy. wide, in order to create the inter-disciplinary innova-
In this context, ICT study programmes have taken tion and synergies needed for a sustainable economic
a more market-orientated focus with the aim to gen- development.
erate skills and competencies that can attract foreign The above approach enables technology-based
direct investment (FDI). During the academic year developments and provides solid foundations for
2007–8, approximately 46,000 students (i.e., 13% a high-tech industry. These technology parks host
of the total student’ population) were enrolled in ICT science and technology education and training pro-
study programmes. Furthermore, increased effort was grammes as well as R&D projects. Such activities are
put on creating digital educational resources, e-learn- aimed at enhancing Tunisia’s value-added products
ing programmes, and setting up the Tunis Virtual and services and the country’s attractiveness for FDI.
University. Also between 1997 and 2007, engineering The success of the technology parks’ strategy requires
programmes had a threefold increase in enrolment, having a minimum critical mass (through the effec-
with the number of graduates climbing from 1,500 to tive onsite presence of several stakeholders), a good
about 4,500 engineers per year. In 2007, about 30% experimentation, learning and adaptation approach,
of the graduating engineers specialised in ICT.22 as well as an institutional and organisational prox-
imity (enabling the sharing of experiences and best
practices).
Scientific research and innovation
Since the government introduced in 1996 a law enact-
ing new research policy guidelines, Tunisia’s scientific
research has advanced at a steady pace. In addition 21 Source: Ministry of Higher Education, Scientific
to 30 specialised research centres and institutes, the Research and Technology, Tunis (www.mes.tn).
22 Source: Ministry of Higher Education, Scientific
country has today 140 laboratories and 630 research Research and Technology, Tunis (www.mes.tn).
units (mainly located within universities) grouping 23 Source: Ministry of Higher Education, Scientific
together some 20,000 researchers, including faculty Research and Technology, Tunis (www.mes.tn).
535

Part 4 Case studies
El-Ghazala24 is the first technology park in Tunisia with a speed of more than 100 Mbits/second to pro-
and North Africa which is fully devoted to ICT. Since vide a range of secure corporate services that meet
its inception in 1999, it has housed many high value- the needs of banking, commercial and industrial enter-
added start-ups and companies. It currently hosts prises. The award, in 2009, of a new telecommunications
90 enterprises employing more than 1,700 people, licence for the development of fixed telephony and
predominantly engineers. These enterprises cover a Internet networks as well as 2nd and 3rd generation
wide range of activities (e.g., network engineering, mobile telephony services to Divona/Orange-France
computer systems and services engineering, web tech- Telecom, aims at enhancing the sector’s competitive-
nologies, embarked electronic systems engineering, ness through sound competition among operators.
etc.) and include some leading ICT firms (such as
ST-Microelectronics, Alcatel Lucent, Ericsson, Satec, ICT investment and a conducive business
Microsoft, etc.), which export 75% of their Tunisian environment
activities. In the Euro-Mediterranean region, Tunisia offers
Since 2002 El-Ghazala has been a member of the today an attractive transport and logistics platform.
International Association of Science Parks (IASP) The latter comprises nine international airports, seven
and is referred to as a Business Innovation Centre by sea-shipping ports, a 2,400 km rail network, and
the European Business Innovation Centre Network 20,000 km of roads. It also boasts a free zone, a deep-
(EBN). It also has several partnership agreements with water port, a new petrochemicals’ port at Skhira, a
world-class technology parks including STPI in India network of seven logistics platforms, new sea and air
as well as Sophia-Antipolis, Marseille Innovation and transportation carriers, and a new inter-continental
System@tic-Paris in France. airport at Enfidha (in the centre of the country) with
El-Ghazala’s education and research facilities an annual traffic capacity of 20 million passengers.
include the School of Communications (Sup’ Com) Tunisia also launched several reforms to facilitate
which offers telecommunications’ engineering pro- cross-border trade and offer guarantees to foreign
grammes, the Institute of Technological Studies in investors. These reforms have earned Tunisia the
Communications (ISET’Com) which trains high-level 1st place in Africa for ease of doing business, 10th in
technicians in telecommunications, the Centre for terms of procedures needed to launch a business, and
Training and Documentation (CIFODE’Com), and the 11th for the time it takes to start a new venture.25
Centre for Studies and Research in Telecommunications Priority technological investments in Tunisia have
(CERT). Research is particularly active within the recorded, for the first seven months of 2009, a 10%
7 research laboratories and units associated with increase in investments compared to the same period
Sup’Com, bringing together more than 250 research- of 2008. The share of investments made in content
ers working on a wide range of ICT-related themes. (i.e., data, information, and software) in relation to
The ongoing extension of El-Ghazala (the main ICT hardware-related investments has reached 63% dur-
technology park) to the Ennahli and Manouba areas, ing the first seven months of 2009, compared to 59%
coupled with the creation or the further development during the same period of 2008.26
of 15 technology parks throughout the country (in
Gafsa, Kef, Kasserine, Monastir, Siliana, Kairouan, Tunisia and value-added ICT services
Sousse, Tozeur, Kébili, Tataouine, Zaghouan, Béja,
Jendouba, Medenine and Sidi Bouzid) constitute a This section explains Tunisia’s effort to foster its
national priority for the government (see Exhibit 3). position as an international destination for value-
This effort, which will create by 2014 a total of added ICT services. It describes the country’s current
500,000 square metres of high-tech facilities, aimed
at fostering the ICT sector and also contributing to
regional development and integration. 24 www.elgazalacom.nat.tn
Furthermore, the government implemented a 25 These rankings are according to the World Bank’s inter-
national annual report on ‘Doing Business’. See: www
national programme to connect 300 industrial and .doingbusiness.org/ExploreTopics/StartingBusiness/
service areas to fibre-optic telecommunications net- 26 Source: Ministry of Communication Technologies, Tunis
works. In 2008, it also put in place the MPLS network (www.infocom.tn).
536

Exhibit 3 Technoparks, cyberparks and incubators in Tunisia
Bizerte
Tunis
Béja
Jendouba
Grand Tunis
Zaghouan Nabeul
Ariana
Hammam Sousse Borj Cedria
Le Kef Sousse Gammarth
Siliana Monastir Manouba
Ksar Hellal Rades
Sidi Thabet
Kairouan
Mahdia Tunis ville
Kasserine
Sfax
Sidi Bouzid
Gafsa
Djerba
Tozeur
Gabès
Medenine
Kébili
Tataouine
Existing In progress
Incubator
Technopark
Cyberpark
Source: Ministry of Communication Technologies, Tunis.
position in the global ICT market and the national the ICT sector was mirrored in the ratings achieved
strategy to offer state-of-the-art IT services. by Tunisia in this field. Besides the NRI ranking
mentioned above, the 2009 A.T. Kearney report28
Tunisia’s position in the global ICT market
The success of the second phase of the 2005 World
27 See in Box 6 detailed information on the ICT4ALL forum.
Summit on the Information Society (WSIS) in Tunis, 28 ‘The Shifting Geography of Offshoring – The A.T. Kear-
and the subsequent annual ICT4ALL international ney global services location index’, A.T. Kearney, 2009.
forum27 enhanced the international visibility of The Report, which looked at the financial attractiveness,
Tunisia’s ICT and business process outsourcing (BPO) the availability of human resources and the business
environment, ranked Tunisia 17th out of 50 countries
sectors. This has fostered the country’s competitiveness
selected for their offshoring services. An interesting
in the ICT field and attracted a growing number feature of the A.T. Kearney report is its emphasis on the
of foreign R&D and engineering operations, set up balance between a country’s offer and the durability of
in partnership with national firms. The evolution of the benefits that offer provides.
537

Part 4 Case studies
confirmed Tunisia’s positioning in the service field and government promotes ICT through appropriate use
its ambition to become an ICT hub in the Mediterranean of these technologies in the country’s development
region. strategies. Thanks to this effective utilisation, ICT
contribution to the GDP has increased from 7% in the
National strategy for offering last three years to 11% at present.
state-of-the-art IT services Several major initiatives were taken over the last
Tunisia’s ICT development strategy aims at mak- decade to develop ICT-based value-added services.
ing this sector a catalyst for economic growth and These were either fully supported by the government
international competitiveness. Determined to stay or made possible through public–private partner-
at the cutting edge of the ICT field, the country pays ships. Examples of such e-services, which received
special attention to the continuous improvement of international recognition and in some cases were
the installed infrastructure. The use of ICT in the adopted and used by other countries, include Tunisie
public sector enhances its adoption in all economic TradeNet, TrainPost and Financial e-clearance. (See
sectors and in society at large. As a result, Tunisia was detailed information on these services in Boxes 2–4.)
ranked, in the 2009–10 Davos competitiveness report, Furthermore, the new US$3 billion project, called
among the first 10 countries in the world whose “Tunis Telecom City”, will position Tunisia as a key
BOX 2
Tunisie TradeNet – the electronic “one-stop shop” for clearing trading

transactions
Tunisie TradeNet (TTN) was set up to streamline for- 7 days a week. Since 2006, TTN has reduced from 15 to
eign trade transactions. It is an IT network that links 3 days the time needed to clear all trade procedures and
the different stakeholders in Tunisia involved in foreign thus the time that goods stayed in port. Furthermore,
trade transactions. These include customs and selected the system allows stakeholders to start the clearance
government agencies, the Central Bank and other process before the physical arrival of the goods. TTN
banks, technical monitoring services, sea-shipping port received the first prize in the public–private partner-
authorities, maritime and air freight carriers, trans- ship category in the 2009 technology in Government
porters, logistics and handling companies. Since 2001, in africa (tIGa) awards competition, organised by the
it has enabled administrative and other foreign trade economic Commission for africa and the Canadian
procedures to be fully digitised, thus eliminating Fund for africa and is part of the african Information
paperwork and offering the service 24 hours a day, society Initiative.
BOX 3
TrainPost: a platform for e-learning and vocational training

trainpost is a distance training platform developed by the these courses, delivered in arabic, French, spanish and
tunisian postal service with the aim of enhancing postal english, covered the following topics: terminal and tran-
staff skills within the Universal postal Union member sit expenses, parcel post, philately, service quality, uni-
states. It is an integrated, multifunctional platform that versal postal service, postal reform and development,
offers courses on trade topics related to postal services. letter post, postal security, postal markets, and customs.
since 2004, seven trainpost distance training courses trainpost received the 2009 World summit award for the
have been organised for 3,012 managers working in the best development of digital content suited for e-learning
postal service of 148 countries from all over the world. and distance training.
538

BOX 4
Télé-compensation – Tunisia’s financial e-clearance system

The financial e-clearance system ensures the electronic ● the removal of any paper trail for financial clearance
exchange of stock to be compensated. It is based on: transactions.
● the electronic exchange of data on stock to be the e-clearance system, operational since december
cleared and of scanned cheques and bills of ex- 1999 for financial transfers and withdrawals, is currently
change; used by tunisia’s Central Bank, 21 banks and the national
● the electronic archiving of online consultations for a post office in tunisia as well as banks in Central african
six-month period (which can be renewed); and and arab countries.
international destination in the telecommunications Challenges for the ICT sector

sector. It will offer state-of-the-art education, research Tunisia has faced several challenges in implementing
and training in the telecommunications field, a busi- its national ICT strategy. In particular:
ness incubator for telecom start-ups, as well as ven-
1 Insufficient innovation in software and application
ture capital and financing (see Box 5).
development in spite of the government’s action to
offer companies financial support and tax incentives.
Challenges for implementing Tunisia’s ICT 2 Competition in the global market from other IT
strategy offshoring, BPO and IT service destinations in the
This section reviews the main challenges that Tunisia region (such as Morocco and Egypt) to attract for-
has faced when implementing its ICT strategy. It also eign investment and international companies.
highlights the challenges encountered in developing 3 Enhancing the country’s technology platform
e-content. remains a challenge although several projects were
BOX 5
Tunis Telecom City

tunis telecom City is a 3 billion dollar investment by the test new protocols for the Internet as well as for data
Vision 3 consortium, which is an alliance of Global Fi- and mobile telephony products and services;
nance House (GFH) with Ithmaar Bank and abu dhabi ● a business process outsourcing (Bpo) facility com-
Investment House (adIH). this mega-project, which will prising technology, consulting and outsourcing cen-
create 26,000 jobs, comprises the following: tres;
● an international telecommunications university with ● an offshore business centre offering professional
a business school and an engineering school focuss- support and back-office services to non-technology
ing on the telecommunications field; firms;
● Venture capital institutions specialised in telecom- ● a data recovery centre managing and recovering
munications to fund telecom start-ups; electronic data and documents (it will be the first
● an international stock exchange dedicated to the tel- centre of its kind in africa and the Middle east re-
ecommunications sector; gion); and
● an Institute of technology and design to develop ● a multimedia and content management centre which
new products in the field of integrated circuits, semi- will develop multimedia content and satellite-based
conductors and software. a research laboratory will mobile applications.
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Part 4 Case studies
BOX 6
ICT4ALL Forum – A Flagship ICT event for Africa and the MENA region
ICT4ALL Forum is a multi-stakeholder, high-level global and “ICT innovation as a tool for strengthening competi-
forum hosted by Tunisia since 2006. It has been hailed tiveness and growth”. The Forum’s programme typically
since its inception as an important international event comprises plenary sessions, panels, parallel events and
particularly for Africa and the Middle East/North Africa an international technology exhibition.
(MENA) region. The forum aims at contributing to the The 2009 edition of ICT4ALL has witnessed the par-
implementation of the outcomes of the WSIS through ticipation of 1,800 delegates from 52 countries, 23 in-
the promotion of investment and partnerships in the ICT ternational organisations and over 200 worldwide ICT
sector and also the development of a knowledge-based companies, with a view to enhance opportunities in this
economy. field, promote investment and partnerships and stimu-
ICT4ALL, which is organised in collaboration mainly late growth. In 2010, ICt4aLL will have a special impor-
with UNCTAD and the International Telecommunica- tance since it will enable making a mid-term evaluation
tions Union (ITU), addresses key issues such as “ICT in- of the WsIs tunis agenda and action plan as related to
vestment in Africa”, “Public–private partnership in ICT”, the United nations’ millennium development goals.
launched to develop software for telecommunica- (including the return on investment) which they
tions and industrial systems, machine-to-machine could achieve.
solutions, embedded software, mobile services and 2 Poor digital marketing: even when SMEs launch
content, digital media, and security for informa- their own website, it is often poorly referenced and
tion systems and infrastructure. infrequently updated.
4 In spite of government efforts to improve the 3 International competition for web hosting services:
online service quality and expand the use of ICT better web hosting solutions available abroad do
in educational institutions, public sector agencies, not encourage companies to opt for locally offered
and through cyber-cafés throughout the country, hosting services.
the digital divide in society is still not completely
4 Lack of a viable business model: Tunisian com-
overcome.
panies have not so far made significant use of
5 In spite of government incentives to boost R&D online advertising,29 thus limiting content provid-
activities in the ICT sector, many ICT firms faced ers’ interest in this sector.
difficulties in competing internationally. This is
due to their limited financial resources and the lack To foster the development of local e-content services,
of private investments in ICT. several actions have been taken, including the following:
6 Cooperation between universities and the private 1 Offering export-orientated companies state subsi-
sector is rather weak, thus hindering R&D and dies to cover 70% of website development costs.
company-sponsored projects in the ICT field. 2 Increasing public grants to civil society organisa-
tions in order to encourage them to develop their
Challenges in developing e-content website, in addition to giving a free domain name
Another important challenge that Tunisia faced in and free web hosting.
implementing its ICT strategy is the development of dig- 3 Setting up a National Digital Excellence Award to
ital content. This is mainly due to the following factors: reward the best e-content in different fields (e.g.,
education, government, culture, etc.).
1 Lack of awareness: many small and medium enter-
prises (SMEs) still do not feel the need to have their
own website, or are not ready to invest in setting 29 Internet advertising represented in 2007 nearly 2% of
up a website, thus overlooking the positive impact total advertising spent.
540

Developing e-content has become even more press- certification of 20,000 managers and engineers in the
ing with the advent of a third telecom operator next five years is underway.
expected to launch 3G services by early 2010, in The country’s programme for the 2009–2014
addition to the need for other services such as period represents a major opportunity for Tunisia’s
mobile e-commerce, m-government, mobile-TV, ICT sector. It calls for ambitious projects for the coun-
etc. In this regard, the incumbent operator Tunisie try including the following:
Télécom has launched its venture capital enterprise
● Providing broadband access to everyone in society;
“DIVA Sicar” to promote mobile content startups,
as has the second mobile operator Tunisiana which ● Developing quality digital content that is relevant
has also set up an investment fund for developing to all stakeholders and implementing a terrestrial
mobile e-content. digital television; and
● Strengthening the country’s telecommunications
infrastructure, promoting ICT investment and
Future perspectives
employment, and fostering the knowledge-based
Tunisia’s restructuring of its higher education system economy (see Box 7).
aims at providing more internationally recognised
degrees and sought-after graduates in the global
marketplace. To this end, the country’s 11th devel- Lessons learnt
opment plan, for the 2007–2011 period, considers
Tunisia’s ICT experience offers several lessons that
investment in developing highly qualified human
other countries may find relevant to their own con-
resources that have a good command of advanced
text. In particular:
technologies as a national strategic priority. Such
human resources will boost the country’s socio- ● Steady investment in education and human capital
economic development and contribute to building a development is key to providing a country with the
knowledge-based economy. The new law providing skills and competencies needed to implement an
policy guidelines for the higher education sector ambitious ICT strategy.
redefines universities’ mission and role with a view ● The creation of a nationwide digital culture and
to improving the quality of their services, reinforc- the provision of ICT access to all represent the pre-
ing engineering studies as well as technological requisites for building the information society.
and scientific specialisations, promoting foreign lan-
● An ambitious policy to set up a network of technol-
guages, and bringing about the information soci-
ogy parks creates the necessary inter-disciplinary
ety. It is in this context that the deployment of the
synergies between education, research, funding
Bologna system (of Bachelor’s, Master’s and Doctoral
and commercialisation of ICT-based products and
degrees) will help harmonise Tunisia’s diplomas and
services.
curricula with international quality standards and
align the country’s higher education system with the ● The creation of a suitable legal framework and
European one. the offering of a variety of incentives are crucial to
Engineering education is also part of the above- attract FDI and allowed Tunisia to become a major
mentioned programme, with the target on the one outsourcing destination in the region.
hand of doubling the number of graduate engineers ● The strong and continuous commitment to the
by 2014, and on the other hand of providing these ICT sector in the government’s agenda is a criti-
engineers with technical/technological, linguistic, cal enabler for the creation of a knowledge-based
managerial and entrepreneurial expertise recognised economy and the emergence of local ICT champi-
by international certifications. A programme for the ons able to compete internationally.
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Part 4 Case studies
BOX 7
The 2009–2014 national programme for Tunisia’s ICT sector

The national programme for Tunisia’s ICT sector for the — developing the most recent broadcasting tech-
2009–14 period calls for making these technologies a major nologies such as high-definition technology.
pillar of the country’s economic development. Specific ob- ● Involving civil society in building the knowledge-
jectives of this ambitious programme include the following: based economy and adopting modern technologies
by providing a grant of 10,000 dinars to each associa-
● Achieving one million new subscribers to broad-
tion that creates an interactive website (Web 2.0) with
band Internet, by:
content pertaining to tunisia’s culture and national
— Using most advanced communication networks
heritage and reflecting the various concerns of the
providing high-speed connections;
country.
— Increasing the international internet bandwidth
to reach 100 Giga-bytes per second by 2014; and ● Developing Tunisia’s Internet domain name (i.e., tn).
— Operating third-generation mobile telephone ● Setting up a national agency for the promotion of
networks. investments in the digital economy, with a focus on
● Offering a digital opportunity to Tunisian families, fostering technology parks and developing digital ac-
including pupils and students. tivities and remote services.
● Establishing digital terrestrial television: ● achieving a qualitative improvement of the activities
— Covering all the regions of the country by 2014; offered by public Internet service centres.
— Re-allocating the used frequency spectre in order ● Allocating 0.5% (compared to the current 0.15%) of
to develop future services of high-speed radio the sales turnover of telecommunication operators
communication and wireless broadband Internet and ICt companies to research and innovation.
(such as WIMaX); and
References Documents/Global_Services_Location_Index_2009.
pdf/
ITCEQ (Tunisian Institute for Competitiveness and
UNCTAD (United Nations Conference on Trade and
Quantitative Studies), 2009. ‘Report on the Knowl-
Development), 2009. ‘Information Economy Report’,
edge-based Economy’, Tunis.
New York and Geneva: United Nations.
Jelassi, T. and Enders, A., 2008. Strategies for e-Business –
World Bank, 2008. ‘The Road Not Travelled: Education
Creating Value through Electronic and Mobile Commerce.
Reform in the Middle-East and North Africa’, MENA
2nd edition. London: Financial Times/Prentice-Hall.
Development Report, Washington, DC: World Bank.
A.T. Kearney, 2009. ‘The Shifting Geography of
World Bank, 2009. ‘Doing Business 2010’, Washing-
Offshoring – The 2009 A.T. Kearney Global Services
ton, DC: World Bank.
Location Index’, available at www.itida.gov.eg/
542

CASE STUDY 13
Fostering innovation in the public sector

VivekKundra@USgovernment
[I]’m going to be working very closely with all federal CIOs in CTO at DC, Kundra was widely credited with having
terms of the agency level to ensure that they are advancing ushered in a new era of experimentation by democ-
an agenda that embraces open government, an agenda that
ratizing data and providing an open, participatory
looks at how we can fundamentally revolutionize technol-
ogy in the public sector and reject the view that the public government wherein citizens could access govern-
sector has to lag behind the private sector.1 ment data and hold the government accountable for
(Vivek Kundra, Federal Chief Information its operations. As the first-ever federal CIO of the US,
officer, Usa, in 2009) Kundra planned to bring about a similar change at the
as the country’s first-ever CIo, Vivek Kundra faces significant

challenges modernizing the nation’s It infrastructure and will
be charged to do so at a time when self-interests and a lack
of industry oversight threaten not only our freedoms and 1 Timothy M. O’Brien, “Vivek Kundra: Federal CIO in His
privacy but also the long-term innovation potential of It.2 Own Words,” http://radar.oreilly.com, March 5, 2009.
(Paul Venezia, senior Contributing editor, 2 Paul Venezia, “10 IT agenda items for the first U.S. CIO,”
InfoWorld test Center, in 2009) www.infoworld.com, March 9, 2009.
3 The Chief Technology Officer (CTO) was responsible for
making technology advancements and overseeing the
technology needs of the residents of the District.
Introduction
4 On March 5, 2009, US President Barack Obama appoint-
In March 2009, Vivek Kundra (Kundra), then Chief ed Kundra as the country’s first ever federal government
CIO, a position created by the Obama administration. The
Technology Officer (CTO)3 of the District of Columbia
role of the Federal CIO was to use technology to improve
(DC), was appointed to the newly created position performance and lower the cost of government opera-
of Federal Chief Information Officer (CIO)4 of USA. tions, establishing a secure IT architecture and overseeing
Though he had a less than two-year tenure as the all federal IT spending.
This case was written by Syeda Maseeha Qumer, under the direction of Debapratim Purkayastha, ICMR Center for Management
Research (ICMR). It was compiled from published sources, and is intended to be used as a basis for class discussion rather than to
illustrate either effective or ineffective handling of a management situation.
© 2009 ICMR Center for Management Research
543

Part 4 Case studies
national level by making the operations of the govern- tiatives he took. They resisted the changes as they felt
ment more transparent and interoperable, while also that democratizing data would contravene data secu-
safeguarding it from cyber threats. However, experts rity and lead to misuse of information. Some analysts
felt that there were many daunting challenges that also felt that the new technological tools developed to
Kundra would have to overcome if he were to trans- access government services easily may not be within
form his plans into reality. the reach of the lower economic groups as they did
Kundra served as the CTO of DC between not have adequate resources to go online. This, they
May 2007 and March 2009. As the chief of OCTO5, felt, would result in a digital divide in society. As a
he incorporated technology into all its operations result, the lower economic groups without access to
in order to develop a user friendly e-government technology would be under-represented in the deci-
infrastructure and to provide public safety and edu- sion-making processes of the government, they said.
cational and economic growth opportunities for the The criticisms notwithstanding, Kundra received
citizens, businesses, and visitors in the district. He various awards and recognition for his contributions
democratized the government data to make the oper- as CTO of DC. In early 2009, he was also appointed
ations of the government transparent to the public. as the Federal CIO. Some analysts felt that though
He introduced several information technology (IT) Kundra had played a major role in building the
initiatives in the district so that citizens could access technology infrastructure and making the DC govern-
government services easily. The DC government set ment’s operations transparent, implementing similar
up over 200 data feeds6, data catalogs, mapping strategies at the national level would be a daunting
applications, and social media7 tools to help citizens task, given the huge IT budget spread across sev-
access information related to crime rates, properties, eral agencies and departments. Commenting on the
construction projects etc. In 2008, under Kundra’s challenges ahead of Kundra, Stan Sloane (Sloane),
leadership, OCTO launched a contest called “Apps president and CEO of SRA International, Inc.,10
for Democracy” wherein software developers used said, “Trying to provide any kind of over-arching
the open data sources to create useful applications
for the citizens of the district. As a CTO, Kundra set
the standard for transparency and accountability by 5 The Office of the Chief Technology Officer (OCTO) is
adopting Google Apps8 as a collaboration platform, the district’s central technology agency with over 700
employees and an annual operating budget of approxi-
taping vendor communications, and introducing strict mately US$72 million as of 2008. The aim of OCTO is
accountability for government contracts. He also put to develop and provide technological infrasructure and
in place a stock market-like model for evaluating IT services to district agencies, employees, residents, busi-
projects. This attracted the attention of analysts. nesses, and visitors. It oversaw technology projects and
Kundra was widely commended for his technol- budgets for 86 agencies.
6 A data feed is a file that can store a huge amount of infor-
ogy strategy and for incorporating the concept of mation usually taken from a database. A data feed gets
digital democracy. Experts felt that bringing about updated regularly and users can download the informa-
such changes in a government organization was a tion from a data feed into their own database.
tough task, particularly because of the bureaucratic 7 Social media comprises works of user-generated con-
structure present in such organizations. Kundra too tent such as video, audio, text or multimedia that are
published and shared in a social environment, such as a
had identified this as a key challenge when he was blog, wiki, or video hosting site.
appointed as the CTO. “It’s [government bureaucracy] 8 Google Apps is a service from the leading Internet soft-
my biggest challenge. I’m driving a pace of innovation ware firm, Google, Inc., for using custom domain names
that requires people to be open to change. The govern- with several Google products. These applications include
ment, in general, tends to resist change. Innovation Gmail, Google Calendar, Google documents and sites,
and instant messaging services.
can’t just happen at the top. We need to find a smart 9 Elizabeth M Ferrarini, “District of Columbia CTO Talks
way to channel it across the organization,”9 he had about the Payoff of Smart Technology Investments,”
said. Experts felt that Kundra had succeeded in his www.btminstitute.org, June 18, 2008.
objective, and they appreciated his contribution to 10 Headquartered in Fairfax, Virginia, SRA International,
this change process. However, the bureaucrats of the Inc. provides expert knowledge, technical tools, and
solutions to governments, agencies, and companies to
district agencies had reservations over some of the ini- improve their performance and to reduce costs and risks.
544

Case study 13 Fostering innovation in the public sector
architecture for the federal information technology senior level position in the government of Virginia.
space, trying to integrate it, make it more efficient, This was also the first time in the state’s history that
more transparent, and more cost-effective across a person had been given a dual cabinet role. Prior to
[hundreds of] disparate agencies that in some cases that, Kundra was CEO of Creostar, a company that
still operate in stove pipes is just a tough job. Doing provided consulting services related to capital invest-
that in an environment where you have huge deficits, ments and IT governance and strategy.
economic issues, and a lot of budget pressure is going On March 27, 2007, Kundra was appointed by the
to take someone with very clear vision and a lot of mayor of DC Adrian M. Fenty to the Cabinet post of
intestinal fortitude.”11 CTO for DC (Refer to Exhibit 1 for a note on IT Initiatives
at DC before Kundra’s appointment). With his experi-
ence in technology and public policy in public and
About Vivek Kundra
private industry, experts felt that Kundra had taken
Kundra was born in 1975 in New Delhi, India. He was the role of CTO to a new level. He was responsible for
raised in Tanzania in East Africa. When he was 11, developing IT initiatives to simplify government oper-
Kundra’s parents moved to Gaithersburg, Maryland, ations, improve access to public services, and maxi-
in search of better opportunities for their son and mize the participation of citizens in state procurement.
four daughters. Kundra completed his Masters in
Information Technology and Bachelors in Psychology
Kundra@DC
and Biology from the University of Maryland and grad-
uated from Sorensen Institute for Political Leadership, Kundra’s responsibility was to decide on the technol-
University of Virginia. He was greatly influenced by ogy investments and how these investments could
his father who worked as a DC public school teacher be leveraged to benefit the citizens. His role was to
for 16 years. ensure that government operations involving the police
After completing his studies, Kundra worked as department, the school system, libraries, and health
adjunct faculty at the University of Maryland where department became cost-effective and transparent. A
he taught subjects related to emerging technologies yearly budget of US$500 million was allocated for
and their applications. Later, he shifted to the private technological developments in DC. On assuming office,
sector and worked as the Vice President of Marketing Kundra realized that there were certain inefficiencies in
for Evincible Software, a company that developed the way the government functioned. For instance, the
digital and electronic signature software for financial DC government was spending a significant amount of
and defense sectors. tax payers’ money that was unaccounted for. Kundra
In September 2001, Kundra was appointed Director planned to transform the business operations of the
of Infrastructure Technologies for Arlington County. government by making investments in technology so
He was responsible for developing IT initiatives to that data could be analyzed and disseminated to pro-
simplify government operations, improve access to vide services to residents.
public services, and maximize the participation of
citizens in state procurement. Within nine months of
his tenure, he had built the first municipal I-Net12 in
11 Meridith Levinson, “Job 1 for Vivek Kundra, New Fed-
the country. Kundra also worked with World Cities eral CIO: Balance Openness with Security,” www.cio.
Alliance13 to advance business and economic devel- com, March 6, 2009.
opment in Arlington, Zurich, Paris, Berlin, and Wales. 12 An iNet is any network that uses the Internet Protocol
Before joining Arlington, he worked as a consultant (IP). Generally it includes the Internet, intranet, and
extranet.
for Science Applications International Corporation
13 World Cities Alliance, based in Washington D.C. is a non-
(SAIC),14 and provided consulting services to the US profit organization that promotes its member regions as
Health and Human Services Department (HHS). perfect locations for starting or expanding a business.
In January 2006, Kundra was appointed Assistant 14 Science Applications International Corporation (SAIC)
Secretary of Commerce and Technology for the is a Fortune 500 company that provides scientific, engi-
neering, systems integration, and technical solutions to
Commonwealth of Virginia. He was one of the
its clients. Its offices are located in more than 150 cities
youngest Indian Americans to be appointed to a worldwide.
545

Part 4 Case studies
Exhibit 1 IT initiatives at DC before Kundra’s appointment
DC’s vision was to be the best among the American districts telecommunications systems to improve services. OCTO also
and to provide its citizens with an able and efficient assessed new and emerging technologies to determine their
government. In the late 1990s, DC had a fragmented IT potential application to district programs and services (Refer
system and its technical infrastructure was archaic. There to Box 1a for objectives of OCTO).
was no coordination among IT groups of different agencies.
Under the leadership of Mayor Anthony A. Williams (Williams),
This resulted in an inability to correlate data hampering
DC adopted the strategy of e- governance as it was felt that
government functions such as tax collection. The district did
technology would help run government ably by streamlining
not have an enterprise-wide network and e-mail systems
processes and eliminating unnecessary costs through the use
were in a mess. The communication networks for the fire
of software applications. As an IT makeover required massive
and police departments were chaotic. The district had many
funds, the government sought the help of the private sector.
independent websites operating across different agencies,
most of which were technically outdated. Every agency In early 2000, the DC government launched the DC Web
was allocated an IT budget ranging from US$200,000 to portal to build an online web-based government. The
US$5 million per year.15 The government faced problems website featured applications that provided residents,
in maintaining complex information systems in its different businesses, visitors, and district employees information
agencies. about the government’s operations along with convenient
service. The website supported about 170,000 web pages
Residents had limited access to the district’s operational
and registered 14.5 million visits in 2006.
data. Procedures for handling service requests were manual
and cumbersome. There was no particular agency to look DC owned no servers. Millions of records were scanned and
after the development of IT systems in the district. The indexed through “cloud computing”16. The move to store
government agencies with their specific applications worked data at multiple data centers came after the 9/11 terrorist
independently and as a result, the citizens had to deal with attacks17 as government realized that storing information at
each of them separately. Residents found it difficult to a single data center was not safe.
find information, navigate through various applications of In 2002, to support government operations and deliver better
different agencies, and compile data from multiple sources. services to citizens, nine Service Modernization Programs
In order to improve coordination among the different (SMPs) were designed by OCTO. Each of these programs
government agencies and to provide efficient service focused on a major functional area of business within the
to residents, the DC government established OCTO in government and was designed to identify, develop, and
January 1999. OCTO was established to provide advice to deploy critically needed technology and infrastructure in
district departments and agencies about how to use IT and district agencies. The SMPs were effectively implemented
BOX 1a
Objectives of OCTO
1 Provide and maintain a secure computing envi- 3 Ensure high quality service delivery of technology
ronment for the government as well as residents, projects and enforce architectural standards.
businesses, and visitors. 4 Bridge the digital divide and enable economic
2 Lower cost of government operations and development.
enhance service through innovative technologies. Source: http://octo.dc.gov/octo/cwp/view,a,3,q,639908.asp ➨
15 Roy W. Schulte, “Case Study: Washington, D.C. Portal over the Internet through a shared network of servers
Builds on Top of a Major IT Overhaul,” www.limbic and connections known as the “cloud.”
systems.com, May 21, 2007. 17 The September 11 attacks, referred to as 9/11, were a
16 Cloud Computing is an Internet-based computing series of coordinated suicide attacks by militant group
system in which all information is processed and stored Al-Qaeda upon the US on September 11, 2001.
546

and brought significant improvements to citizens as well as the government and allowed residents to monitor the
businesses. Based on the benefits realized, the nine SMPs performance of the government.
were divided into three groups (Refer to Box 1b to know
In February 2004, the DC government built a high-speed
more about SMPs).
fiber optics network called DC-Net to provide voice and
In 2004, OCTO developed a program called DCStat that data communications services throughout the district. The
provided real-time operational data20 from multiple government invested US$87 million in building the DC-Net
agencies. In 2006, the program was renamed as Citywide infrastructure.24 DC-Net linked over 300 sites throughout
Data Warehouse (CityDW). CityDW facilitated data exchange DC and provided services such as real-time interactive video
between different agencies by providing access to data feeds for public schools and an emergency communications
to users through formats such as Real Simple Syndication system for the police and fire departments. The initiative
(RSS)21, XML22, and Atom.23 This resulted in greater saved the district a minimum of US$10 million per year in
accountability across all business groups and agencies of communications costs.25
BOX 1b
Service modernization programs

Back office service modernization programs the DC government and district residents. CSMP delivers
These include Administrative (ASMP), Financial (FSMP), benefits by providing efficient services to residents.
and Transportation (TSMP) modernization programs.
Government vertical service modernization programs
Back Office SMPs automate business processes of
Human (HSMP), Services (SSMP), Education (EdSMP)
government internally and are not visible to the residents.
and Enforcement (ESMP) modernization programs are
ASMP is a business transformation program launched to
part of the Government Vertical Service Modernization
improve the district’s administrative functions such as
Programs. Vertical SMPs automate the delivery of high
Human Resources, Procurement, Budget and Planning,
priority government functions. They are designed to provide
Payroll/Time and Attendance, Benefits, Pension, and
assistance to problems that require immediate action in
Property Management. The program enabled agencies
areas such as human services and schools. The HSMP
to fulfill their goals more effectively by providing the
is an information technology initiative to improve the
needed administration support to run their operations.
management and delivery of human services to district
Front office service modernization programs residents. The National Association of State Chief Information
Citizen (CSMP), Property (PSMP), and Motorist (MSMP) Officers (NASCIO)18 recently awarded HSMP’s Safe
modernization programs come under Front Office Passages Information System (SPIS)19 with the Outstanding
Service Modernization Programs. Front Office SMPs Achievement in the Field of Information Technology.
automate processes that support direct contact between Compiled from various sources. ➨
18 NASCIO, founded in 1969, represents state chief infor- publishes data in a standardized form. RSS provides
mation officers and information technology executives the data in the form of summary reports.
and managers from state governments across the United 22 XML stands for EXtensible Markup Language. Open
States. NASCIO’s mission is to promote government ex- XML is a file format which allows users to view data as
cellence through good information management, quality spreadsheets, charts, presentations, and word process-
business practices, and technology policy. ing documents.
19 In May 2005, the DC implemented the Safe Passages 23 Atom is an XML-based file format used to organize
Information System that supports automated data shar- content. It allows users to sort information, build ap-
ing across various human services agencies and private plications, and perform data analysis.
sector partners in order to provide assistance to the 24 “The District of Columbia Selects Cisco as the
District’s neediest residents. Infrastructure Provider for its Next-Generation Com-
20 Real-time data denotes information that is delivered to munications Network,” www.newsroom.cisco.com,
users as soon as it is received by the system. There is no February 9, 2004.
delay in the timeliness of the information provided. 25 Null Null, “DC-NET Takes Charge of Telecommunica-
21 Real Simple Syndication (RSS) is a web format that tions,” www.govpro.com, February 13, 2004.
547

Part 4 Case studies
In 2005, OCTO devised a model called the District Enterprise By 2007, the DC government had made a name for itself for
Integration Stack (DEIS) that integrated data from multiple its technology strategy. However, experts felt that significant
agencies. DEIS used Enterprise Application Integration (EAI)26 challenges still remained. Fenty, who was elected in 2007,
tools to transfer data through multi-agency applications and wanted to redesign the DC municipal administration to make
the district’s portal network. OCTO worked with each of the it more receptive to citizens’ needs. He wanted to simplify
district’s agencies to identify and develop a hierarchy of government services further. He felt that technology was the
application development. Instead of each agency having a base for e- government initiatives as it provided residents
different infrastructure with different design, development, with quicker access to government services and eliminated
maintenance, operation, and support, the district merged corruption from the government machinery by making
them into a single functional unit that was not only government operations transparent. Fenty decided to invest
effective, but also reliable. Platform-based risks such as in web-based applications to make the DC government
security, redundancy, operational failure, and technological operations foolproof.
obsolescence were addressed collectively.
Compiled from various sources.
Digital democracy infrastructure was designed to ensure easy usage of

Kundra revolutionized the operations of the DC applications by quick loading, easy navigation, on-
government by introducing digital democracy. This line transactions, and a search engine. Technologies
ushered in a new age of governance in which tech- like wikis28, data feeds, videos, and dashboards29
nological advances allowed people free access to were used to bring people closer to the government.
government services. With the help of technologi- According to experts, e-governance was not just about
cal initiatives, citizens could hold their government technology. It involved redesigning the way govern-
accountable. The basis for digital democracy was ment worked. For instance, the average time taken by
the “Digital Public Square” (DPS), a phrase coined the government to bring an employee on board was
by Kundra, where citizens were able to ‘Discover, four weeks because of the extensive paperwork and
Participate, and Connect’ with the government. multiple departments involved. By redesigning the
According to Kundra, the DPS was not just a techno- process, the time taken was reduced to just 48 hours.
logical exercise but a way for citizens to take part in According to analysts, the municipal administration
the day-to-day operations of the government. It proof DC had become a model practitioner of e-governance.
vided an open, participatory government where the The DC government stored a vast amount of data on its
citizens could access government data and participate portal related to every aspect of its operations ranging
in the democratic process. from government contracts to crime statistics to eco-
On the DPS portal, DC’s operational data was nomic development. The data was made available to the
available to citizens, policymakers, and businesses of public in the form of data catalogs and live data feeds.
the district. All the data was reviewed and modified Through the government portal, residents were able
and presented in a useful format. Kundra described
the DPS as “One in which technological advances 26 Enterprise Application Integration (EAI) is a business
now allow people from around the world unfettered computing term that refers to the plans, methods, and
tools used to integrate and coordinate computer
access to their government. Through these advances,
applications in an enterprise.
constituents can hold their government accountable
27 Mark Segraves, “District’s Top Techie Advises Obama
from the privacy of their own homes.”27 Transition,” www.wtopnews.com, November 25, 2008.
According to analysts, the goal of e-governance 28 Wikis are simple web pages that allow users to freely
was to provide efficient, effective, and responsive create, edit, and modify web page content through any
governance by digitizing government operations. The web browser.
29 A dashboard is a user interface that organizes and
focus of Kundra’s e-government initiatives was to
presents information in a way that is easy to read. On a
serve the residents, businesses, district employees, dashboard, real-time information is collated from vari-
and visitors through technology. The e- government ous sources.
548

to renew a driving licence, pay local taxes and parking decide whether to hold on to the project, invest more,
fines, and report broken traffic lights. or kill it – similar to what portfolios in a private market
The DC portal and home pages of individual agen- would do as far as sell, buy, or hold. That’s brought a
cies were monitored regularly to ensure that criti- lot of scrutiny and moved us aggressively in terms of
cal information was displayed accurately. The DC killing projects that won’t deliver.”30
government continuously updated its portal, which The implementation of the stock market model
offered the most number of online services by any designed by Kundra changed the approach to all IT
municipality in the nation. Kundra rewarded those investments made by the government and resulted in
employees who worked hard to make the initiatives considerable cost savings and revenues. An IT project
successful. He invested significantly in training and was implemented only when it offered a solution to a
educating his staff about the emerging technologies. business problem and not just for the sake of invest-
Kundra regularly interacted with the government ing in technology. The buy/hold/sell approach led to
agencies in DC to review their web pages and estab- cancellation of non- performing projects. The stock
lished procedures to develop future applications. To market model helped managers to decide on the funding
ensure that all residents of DC had access to comput- required for future investments and allowed them to bal-
ers and the Internet, Kundra incorporated technol- ance riskier strategic IT investments with non-risky ones.
ogy through networks in schools, libraries, public
housing, community-based organizations, and other
Adoption of emerging technologies
public places. Most of the public services in the district
Kundra’s core philosophy was to incorporate con-
such as licensing, tax refunds, and requests for snow
sumer technology in all areas of operations. He intro-
removals were handled electronically.
duced Web 2.0 technologies31 to communicate faster
OCTO tracked customer satisfaction through user
and to improve the transparency and efficiency of
polling, service request surveys, and quarterly service
government operations at low cost. Web 2.0 technolo-
summits to evaluate the DC government’s performance
gies played a vital role in the procurement process of
as an organization. The government regularly sched-
government projects. Talking about the effectiveness
uled meetings with each agency and carried out custom-
of these technologies in procurement projects, Kundra
er satisfaction surveys to get feedback on its programs.
said, “The value that these Web 2.0 technologies
demonstrate surpasses the old command-and-control
model of application development. It’s basically like
Stock market model for evaluating a movie being played in front of the world. It allows
It projects every potential bidder to have equal footing when it
In October 2007, to drive accountability and transpar- comes to competition.”32
ency in evaluating IT projects, Kundra created a stock In October 2007, CityDW built three applications –
market model that appraised projects just like invest- the CapStat website, DC Data Catalog and Data Feeds,
ments in the stock market. Every project was treated and Summary Reports to provide operational data to
like a stock. He set up a team of six Portfolio Managers citizens. The CapStat was an accountability program
who managed a portfolio of projects under differ- to track the performance of individual agencies based
ent agencies. Each individual project was treated as on the statistics provided by the agencies. The Data
a stock and was evaluated on the basis of customer Catalog and Data feeds had several live feeds provid-
value, budget, start schedule, and delivery time. ing citizens with different kinds of data from multiple
To help managers evaluate projects easily, Kundra
developed a web-based IT investment portfolio tool
that used dashboards, web reports, podcasts, and 30 Matt Williams, “Vivek Kundra Rumored Working on
videos to present project related data and allowed Obama Transition,” www.govtech.com, November 20,
managers to gauge the value, budget, and schedules 2008.
of the projects quickly. Based on this data, the manag- 31 Web 2.0 Technologies is a term used for advanced Inter-
net technology and applications including blogs, wikis,
ers could decide whether to invest more in the project,
and social networking sites.
hold on to it, or abandon it totally. About the evalua- 32 Florence Olsen, “Collaboration Gurus,” www.fcw.com,
tion process, Kundra said, “We use that [stock] data to February 29, 2008.
549

Part 4 Case studies
Exhibit 2 Web-based applications
CapStat Website: CapStat is a performance-based citizens quickly and easily. Citizens can view or download
accountability program that helps the district government government data directly at any time without delays. The
to run efficiently as well as offer higher quality of service district provides citizens with access to over 200 datasets
to its residents The website serves as a single point of from multiple agencies. Residents can use the data catalog
entry to DC residents to access information related to to subscribe to a live data feed of their choice in the Atom
government operations. Using CapStat, residents can track format and access data in XML, KML34 or ESRI Shapefile35
the performance of individual agencies, find statistics, and formats. The DC Data Catalog and Data Feed is a three-tier
learn about the initiatives taken by the government. This site web-application with the representation layer based on ASP.
is managed by OCTO. NET36 technology, the logic layer on a set of .NET37 web
services, the data layer being the Oracle database.
CapStat conducts accountability sessions where the Mayor
and City Administrator bring all executives together and Summary Reports: Summary Reports is a web-application
take their advice on exploring ways to improve government which displays city operational data in a variety of formats.
services. The sessions result in improvements in customer The data is represented in the form of tables and charts.
service, productivity, and fiscal benefits throughout the Residents can access prepared reports related to Law
district. The website then communicates these improvements Enforcement, Housing Complaints, Public Space Permits, and
to DC’s residents, communities, and the media. The website Registered Vacant Properties. Through these reports, they are
features an “Issues in the Spotlight” section on the homepage able to monitor the performance of the government. These
that invites suggestions from residents to solve citywide issues. reports provide greater accountability for business groups
and private agencies.
Data Catalog and Data Feeds: The Data Catalog and Data
Feeds provide real-time data from multiple agencies to
Compiled from various sources
agencies. Over 200 data feeds were created to make it 63,561 personal computers in DCPS classrooms and
easier for residents to download data. The Summary linked them to the district’s email and Internet access
Reports provided operational data of various agencies network. The computerized systems, installed at a
in different formats. (Refer to Exhibit 2 to know more cost of US$4 million, gave a clear picture of admin-
about these Web-based applications.) istrative problems, absences, and incompetencies
One of the biggest issues in DC was public educa- at DCPS. OCTO also offered the “$100 laptop”33
tion. It was found that 85 percent of the District of scheme for DCPS students. The DCPS students were
Columbia Public Schools’ (DCPS) IT infrastructure provided with an electronic identification card so that
was infested with viruses and that the network failed they could rent books online and avail themselves of
regularly. In January 2008, Kundra undertook cer- the benefits offered by the government. To protect
tain initiatives to centralize all the IT systems that students from the threats of the Internet world, the
supported DCPS and to deliver classroom technol- DCPS installed restrictive filters to limit their access
ogy in the simplest and fastest way. OCTO installed to the Internet.
33 The “$100 Laptop” or “One Laptop per Child” is an file is a vector file that contains geographical data as a
inexpensive laptop computer designed to be distributed shape comprising a set of vector co-ordinates.
to school children in developing countries around the 36 ASP.NET is a web application framework developed by
world. Microsoft which allows programmers to build web sites
34 Keyhole Markup Language (KML) is a file format used and web applications.
to display geographic data in geo-browser applica- 37 NET framework developed by Microsoft is a large library
tions such as Google Earth, Google Maps, and Google of pre-coded solutions to address common program-
Maps. ming problems and executed programs written specifi-
35 Environmental Systems Research Institute (ESRI) shape- cally for the framework.
550

By July 2008, Wi-Fi38 was installed in 88 DCPS. system provided district employees with a sim-
The DC government placed technology in the hands pler and easier way to directly access their payroll
of the DCPS teachers to enhance classroom learning documents and make requests and updates online.
and to automate administrative functions, such as Employees were able to view their paychecks online
curriculum and attendance. In 2008, Fenty allocated and even make tax deduction changes. With the help
US$ 20 million for technology investments in DCPS.39 of the new payroll system, employees with multiple
In February 2008, Kundra switched the software jobs got a single paycheck along with consolidated
platform of DC from Microsoft Office40 to Google Apps tax withholding. To prevent identity theft, social
for its administrative operations. Google Apps was security numbers were replaced with employee ID
rolled out to 2000 DC employees spread across its dif- numbers. The new payroll system increased accuracy
ferent agencies at a cost of US$500,000.41 They used in district pay processes and records as there was a 90
Google applications such as Google Docs and Google percent reduction in payroll corrections and checks.46
Spreadsheets for their work processes and Google’s Commenting on the new system, Kundra said, “The
Gmail for e-mails. DC shifted to Google Apps as its payroll implementation is just one step in our ongo-
data centers were geographically dispersed and also ing efforts to modernize and automate core functions
because it ensured data security and business continu- throughout the DC government. This administration
ity in the event of a disaster. According to Kundra, the has declared a ‘War on Paper,’ and OCTO is on the
shift was initiated to check rising IT costs as Google front lines. We are leading a citywide transformation
Apps costs around US$50 per employee per year com- of government operations in order to serve district
pared to US$50 a month per employee for commercial residents faster and more efficiently.”47
software.42 About the cost-effectiveness of Google In June 2008, the government launched the DC
Apps, Kundra said, “Why should I spend millions on “One Card” program that allowed residents to inter-
enterprise apps when I can do it at one-tenth cost and act and get access to government services and pro-
ten times the speed? It’s a win-win for me.”43 grams. For instance with DC “One Card”, residents
According to analysts, Google simplified access were able to electronically borrow books from DC
to public databases and made online search more libraries, sign up for swimming classes, or procure a
spontaneous. Residents were able to interact with
the government online, just as they did with personal
friends and professional contacts. Google supported
38 Wi-Fi, short for “Wireless Fidelity” is a wireless network-
corporate video through YouTube.44 The district used ing technology that uses radio waves to provide high-
YouTube for training, employee performance reviews, speed Internet and network connections in a local area.
and budget planning. With the help of Google Apps, 39 “Mayor Fenty Announces More Than $20 Million in
Kundra came up with innovations such as a video job Federal Dollars for DCPS,” www.newsroom.dc.gov, May
7, 2008.
board, where hiring managers posted descriptions of
40 The Microsoft Office software performs functions such
job openings; a wikipedia styled page with text and as word processing and creating spreadsheets and
video explaining the DC’s procurement process; and presentations.
an application that provided a list of contractors hired 41 Heather Havenstein, “D.C. Municipal Employees Get
by DC, the projects worked on, and their pay rates. Choice between Google Apps, Microsoft Office,” www.
computerworld.com, October 15, 2008.
All the DC employees were to have their own wikis
42 C.G Lynch, “Fighting Government Waste with Google
and a personal website describing their skills, talents, Apps,” www.pcworld.com, September 23, 2008.
and interests so that project managers could assign 43 C.G Lynch, “Fighting Government Waste with Google
tasks to them based on their capabilities. The day-to- Apps,” www.pcworld.com, September 23, 2008.
day work of the DC government was shown on sim- 44 YouTube, owned by Google Inc, is a video sharing web-
site where users can upload, view, and share video clips.
ple spreadsheets. To reach wider audiences, the DC 45 Facebook is a popular free social networking website
government expanded its presence to Facebook45 and that connects people with friends and others who live
YouTube under the “DC Government” label. around them.
In March 2008, Kundra deployed a new auto- 46 “DC Deploys Enterprise Payroll System,” www.
mated enterprise payroll system to improve payroll newsroom.dc.gov, March 28, 2008.
47 “DC Deploys Enterprise Payroll System,” www.
processes in all the government agencies. The new newsroom.dc.gov, March 28, 2008.
551

Part 4 Case studies
license. The card did away with the need to involve The reporting process for patrol officers with
multiple agencies in the provision of these services the Metropolitan Police and firemen in the Fire and
to residents. Emergency Medical Services Departments was prima-
As part of Kundra’s initiatives to introduce con- rily manual. As part of its technological advancement
sumer technology in all the agencies of DC, iPhones48 drive, Kundra replaced the paper-driven reporting
were distributed to mobile workers. In June 2008, DC process with an automated process and provided
distributed iPhones to as many as 1,000 DC employ- patrol officers and firemen with mobile laptops. In
ees including police officers. The DC police officers October 2008, the DC government installed 2,600
were provided with iPhones instead of police radios. Panasonic Toughbooks53 with the Global Positioning
By integrating the cellphone signal with the map and System (GPS)54 in police cruisers. This process allowed
satellite picture provided by Google, the control room officers to file electronic reports, use GPS to map effi-
was able to keep track of the police patrol cars. About cient routes to destinations, and streamline communi-
the use of consumer technology in government opera- cations. These Toughbooks cost only half as much as
tions, Kundra said, “We’re a big proponent of this the mobile data terminals that were used earlier.
technology. One of my mantras is to introduce more In January 2009, OCTO announced the launch of
consumer technology into the enterprise.”49 two new websites55 to make the procurement transac-
In July 2008, OCTO released a new Intranet portal tions of the government open to the public for the first
called “DCpedia” that provided DC employees with the time in the district’s history. Through the new portals,
flexibility to communicate and work together. Modeled potential bidders and residents could view, down-
on the lines of Wikipedia, DCpedia was a free online load related data,56 and participate in procurements
encyclopedia created through the combined efforts
of all the district employees. On DCpedia, any user
48 The iPhone, designed by Apple Inc, is a smartphone with
could post as well as edit information. To build the
advanced features such as Internet connectivity, e-mail
new portal, OCTO used low-cost open-source technol- facility, camera, and multimedia player.
ogy50 that reduced the costs from an estimated US$10 49 David Haskin, “iPhones Trickle into the Enterprise,”
million to US$500,000.51 The portal had an automatic www.computerworld.com, June 2, 2008.
check system against misleading information. Through 50 In open source technology, the source code of the
program can be accessed by all users. Users can view,
“DCpedia”, employees in different agencies were able
modify, and debug the code. This type of technology
to work collectively on issues related to contracts, regu- raises the development capacity of a business.
lations, and legislations without the need for long meet- 51 “District of Columbia Launches New Intranet,” www.
ings or emails. According to DC City Administrator, newsroom.dc.gov, July 24, 2008.
Dan Tangherlini, “With our new Intranet portal, we 52 “District of Columbia Launches New Intranet,” www.
newsroom.dc.gov, July 24, 2008.
are aiming to make work life in the district richer,
53 Toughbook is the brand name of rugged laptop com-
more efficient, and also more exciting. We are creat- puters (designed to operate in harsh environments)
ing a virtual community and an open market of ideas designed by Japanese electronic goods manufacturer,
and resources to empower employees so that they can Panasonic Corporation. Toughbooks are commonly used
deliver better informed and higher quality service to by police, fire, medical, and military personnel.
54 The Global Positioning System (GPS), developed by the
our customers.”52
United States Department of Defense, is a satellite-based
The business of government involved moving a navigation system which helps mobile users to deter-
lot of paper around. In a bid to do away with the mine their precise location based on signals received
need to move paper from one government building from satellites.
to another, Kundra built a digital scan center which 55 One of the new procurement sites was http:// contracts.
dc.gov where visitors could view and participate in the
enabled all DC’s paper-based communications to be
procurement process. The other site offered complete in-
routed to employees electronically. In 2008, Kundra formation on the procurement of contract staff including
set up district-wide electronic content management their position, hourly rate, start date, and subcontracting
systems to digitize millions of pages of documents vendor.
throughout the district’s agencies. OCTO digitized 4.6 56 The district’s procurement procedure became transpar-
ent as these websites provided related data such as Re-
million pages of DCPS HR personnel file records and
quest for Proposal (RFP), questions and answers, videos
eliminated the need for paper files in the schools. of pre-bidding conferences, and public announcements.
552

carried out by the government agencies in the district. contest began on October 14 with the DC government
The launch was part of Kundra’s plan to democratize making its data open to the public in various formats.
data and provide an open, participatory government It was open for a month and received 47 software
to the citizens of the district. Commenting on the submissions that included web applications, widgets,
launch of the sites, he said, “We are driving transpar- Google Maps Mashups60, iPhone apps, and Facebook
ency by practicing government in the public square. apps. Entries were judged by an appointed jury based
With our new procurement sites, we are opening a on their originality and their usefulness to the public
window on district procurement and inviting the pub- and government. The contest concluded on November
lic to examine and comment on the ways we spend 14 2008, with an awards ceremony to announce the
taxpayer dollars.”57 winners.
The contest gave away 60 cash prizes worth
US$20,000 in total and ranging from US$2000 to
The apps for democracy contest US$100 (refer to Exhibit 3 for award winning applica-
Kundra felt that as OCTO maintained huge reserves tions of ‘Apps for Democracy’ contest). Commenting
of operational data related to government con- on the long-term goals of the contest, Kundra said,
tracts, crime statistics, and economic development “While the immediate goal of the Applications for
in the form of data feeds and catalogs, it made sense Democracy contest is to develop innovative soft-
to utilize this data constructively. He planned to ware to present district data, its long-term goals are
use the data to create new online tools that would broader. By making government data easy for every-
be useful to the public as well as to the government one to access and use, the district hopes to foster citi-
agencies. zen participation in government, drive private-sector
For this purpose, on October 14, 2008, OCTO, technology innovation and growth, and build a new
under Kundra’s guidance, launched the ‘Apps for model for government-private sector collaboration
Democracy’ contest which invited software develop- that can help all governments address the technology
ers to create software applications using DC’s open challenges of today and tomorrow.”61
data catalog. Talking about the contest, Kundra said, According to analysts, the contest created valuable
“The Apps for Democracy contest is part of our drive solutions and made life easy for the residents of the
toward digital democracy in the nation’s capital. district as well as the government. Talking about the
Especially in these difficult economic times, it’s crucial advantages of the contest, Kundra said, “The greater
to the government’s mission to find more efficient part here is the democratization of public data, and
and impactful methods for delivering an even higher the engagement of citizens, and the engagement of
level of service for a fraction of the cost. We are usher- the private sector to help us drive innovation and lev-
ing in a new age of participatory democracy, one in erage the power of technology.”62
which technology is developed by the people for the
people.”58
The idea for the contest occurred to Kundra in
September 2008, when he approached iStrategy-
Labs59 to suggest ways to develop online tools using 57 “District of Columbia Opens New Window on Procure-
the public data. Kundra had two options – contract ments,” www.newsroom.dc.gov, January 6, 2009.
big consultancies to develop online tools or launch an 58 District of Columbia Launches Open Innovation Chal-
innovative contest where data could be placed in the lenge, www.newsroom.dc.gov, October 15, 2008.
59 iStrategyLabs is a digital consultancy that provides cli-
hands of the people to create online tools and who
ents with integrated and interactive marketing strategy
could be given cash prizes and recognition for their and content creation solutions.
efforts. He preferred the latter as he felt that contract- 60 Mashup is a web application that integrates data from
ing to big consultancies would consume time as well multiple sources into a single integrated tool.
as money. After Kundra’s approval, iStrategyLabs 61 “Apps for Democracy Yields 4,000% ROI in 30 Days for
DC.Gov,” www.istrategylabs.com, November 15, 2008.
designed the contest in six days. 62 Matt Williams, “Vivek Kundra Rumored Working on
Initially called the ‘Hack the District’ contest, it was Obama Transition,” www.govtech.com, November 20,
later renamed by Kundra as ‘Apps for Democracy’. The 2008.
553

Part 4 Case studies
Exhibit 3 Award winning applications of ‘Apps for Democracy’ contest
Name of the application About the application

DC Historic Tours DC Historic Tours is a Google Maps Mashup where users can create their own custom
tour map using Flickr photo feeds and Wikipedia, and then save and use it as reference
while touring the city.
iLive.at iLive.at provides information related to an exact location. The information is organized
into categories. Users can enter the address and click on a category and the relevant data
is plotted on a map of the location.
Park It This application allows checking a specific area in the district for parking information.
Users can check parking information before leaving the house. They can find out which
streets are available for parking, check the parking fee and the parking permit zones.
Where’s My Money, DC? A forum based Facebook application that allows users to discuss procurements made by
the DC government.
DC Crime Finder This application reports instances of crimes within a three-mile radius of a specific loca-
tion. Users can click the URL and type their phone number. The application will then
determine the location and returns information about crimes committed in the area.
We the People It is a peer-led community reference website that allows users to edit information based
on DC’s public data. It empowers everyone to build a responsive community by allowing
residents to view their opinions and make changes.
DC Location – Aware It is a real time alerting tool for the iPhone, which reports crimes, building permits, etc. in
Realtime Alerts a specific area. It is a “location aware” tool, meaning the crime alerts in the user’s area of
choice will show up first.
Carpool Mashup The Matchmaker helps users find carpools that suit their schedules and preferences.
Matchmaker
Source: http://www.appsfordemocracy.org/apps-for-democracy-medal-winners/
The contest reportedly saved millions of dollars that Results

OCTO would otherwise have had to incur as software
According to Kundra, the IT initiatives taken by the DC
development costs. As the contest proved to be a success
government were intended not just to provide technol-
in DC, concerned agencies in other US states planned to
ogy to the residents of the district but to provide educa-
introduce it in their states as well (refer to Box 1 for some
tional, economic, and social benefits as well. When DC
key points related to ‘Apps for Democracy’ contest).
opened the government data up to the public, people
BOX 1
‘Apps for Democracy’ contest – key points

● During the contest, 47 applications were built in 30 ● OCTO estimated that under their legacy procure-
days using DC’s open data catalog. ment method, it would have taken them 1–2 years
● OCTO estimated the value of the applications at to complete the procurement process and receive
US$2,000,000 including external contracting costs delivery of such applications.
and internal procurement time.
● The cost to OCTO on this contest was US$50,000
including prizes, marketing, management, etc. repre- Source: http://www.istrategylabs.com/apps-for-democracy-yeilds-
senting an estimated 4,000% return on investment. 4000-roi-in-30-days-for-dcgov/
554

BOX 2
Key accomplishments of DC government

● 2007: Kundra created “OCTO Labs” to test the emerg- ● October 2008: Arranged 1,006 mobile data comput-
ing technologies and to improve their speed and ers for fire, emergency medical, and police officials.
simplify government services. Installed 802 mobile computers in police cruisers to
● Mid 2007: Adapted the district’s human services data reduce paperwork.
sharing system so that district health agencies could ● 2008: Digitized 4.6 million DCPS paper records in 54
work together and help the residents better and days. Digitized over 6 million documents, including
faster. records from various agencies of the DC government.
● January 2008: Deployed 6,561 new computers Joined wireless transcripts across the government to
throughout DCPS. Provided online tools for DCPS cut cell phone costs.
teachers to save time from administrative duties. ● Between May 2007 and February 2008: Added
● July 2008: Connected 88 DCPS sites to OCTO’s high- 15 new online services and 18 new websites to the
speed fiber-optic network to access data, voice, and district’s web portal such as customer-friendly public
video applications. The connection made the DCPS libraries site to real-time snowplow tracker portal.
network 60 times faster.
Compiled from various sources
and organizations were quick to respond. They not only Box 2 for key accomplishments of the DC government).
viewed the data, but also analyzed and reframed it in Kundra was credited with having played a key
useful ways. For instance, a DC resident collected the role in providing technology solutions and improving
government data related to building and public space services to residents in all areas of district governance.
permits and created a web-based informational clear- Through his innovative strategies, OCTO was able to
inghouse site that provided southeastern DC residents achieve its objectives successfully. In the process, it
with information on local real estate development and also won a number of awards and recognition (refer
the available government services in that area. to Exhibit 4 for awards won by OCTO).
Another non-governmental organization, the In 2008, Kundra was honored with major IT awards.
Knight Foundation,64 started an online community He was given the “IT Executive of the Year” award
news forum by assembling the public data. Visitors by the Tech Council of Maryland (TCM). In June,
could enter their area’s zip code and find information InfoWorld Magazine featured him on its annual list
related to local businesses, real estate listings, crimes, of top 25 CTOs. The 2008 MIT Sloan CIO Symposium
road constructions, and community meetings in the recognized Kundra as among the outstanding IT
area. A private entrepreneur assembled law enforce- innovators who had used their leadership skills and
ment data from the district and created an online business-technology acumen to address challenges
database, called “CrimeReports.” Through this data- facing their organizations. David Raths of Public
base, visitors were able to access crime data and maps CIO65 noted, “Some CIOs find themselves swimming
by entering address, zip code, and type of crime. They upstream against a turbulent combination of dysfunc-
were also able to sign up for personalized crime alerts. tional organizations and political leaders scared of
Analysts were of the view that the IT initiatives that
Kundra had undertaken had produced a number of
tangible results. The democratization of government 64 Knight Foundation is a nonprofit organization based in
Florida, USA. It promotes journalism and invests in com-
data led to a new age of participatory democracy
munity development in the US.
where citizens could interact directly with the govern- 65 Public CIO is a magazine that provides technology
ment, they said. Some experts opined that the goal of news and solutions to public sector C-level technology
DC’s e-governance had been accomplished (refer to executives.
555

Part 4 Case studies
Exhibit 4 Awards for OCTO
1 In November 2008, The Tech Council of Maryland Technology Achievement in “Government Honorable
presented the “IT Executive of the Year” award to Mention award” for the Procurement Wiki website.
Vivek Kundra, CTO of District of Columbia. 6 National Association of State Procurement Officers
2 The National Association of Chief Information Officers George Cronin Award for “Procurement Excellence
Recognition Award in the “IT Project and Portfolio for Government” for DC’s Procurement Wiki website.
Management” Category for DC’s Stock Market Model. 7 In June 2008, the MIT Sloan CIO Symposium “IT
3 The National Association of Chief Information Officers Innovator Award” and InfoWorld Magazine “2008 Top
Recognition Award in the “Digital Government: CTOs” award were awarded to Vivek Kundra.
Government to Business Category” for DC’s Certified 8 Public Technology Institute Significant Achievement
Business Enterprise Resource Center.65 Award in the “Web and e-Government Services” cat-
4 The National Association of Chief Information Officers egory for CapStat Website.
Recognition Award in the “Government to Citizen’s 9 Public Technology Institute Significant Achievement
category” (Finalist) for the CapStat website. Award in the GIS category for DC’s Public Snow
5 Government Computer News Outstanding Information Response Reporting System.
Source: http://grc.dc.gov/grc/cwp/view,A,1175,Q,457285.asp
technological change. Yet across the country, a pool combines counter-intuitive visions with the ability to
of new talent is entering the CIO ranks – many bring- execute and maintain support from his political and
ing private-sector experience to their new roles – and business leaders.”69
finding themselves in a position to instill real change. However, not everyone was impressed with the
These CIOs are making progress, in part because they initiatives taken by Kundra. Critics pointed out that
have developed a sophisticated understanding of the some bureaucrats and agencies of the district did not
political and business objectives of their jurisdictions favor certain of the initiatives and were averse to the
and made clear how the IT organization can play a idea of making government data such as crime rates
constructive role.”66 open to the public. They feared that the information
According to some analysts, Kundra’s idea of giv- provided by the government might be misused by
ing citizens access to government data was a bold anti-social elements. Kundra faced difficulties in
move. Generally, a government agency would take implementing IT advancements across some hierar-
years to initiate changes while a private sector agen- chical agencies of the district as they resisted change,
cy would do it in a shorter period of time. But the experts said.
IT initiatives that Kundra implemented had helped
change that perception, they said. According to Arun
Gupta, partner at a venture capital firm Columbia 65 DC’s Certified Business Enterprise Resource Center reg-
Capital who attended Kundra’s brainstorming ses- isters a company into a DC agency database and labels
sions with district employees to develop new initia- it as a Certified Business Enterprise (CBE). Businesses
tives, “There’s normally a dividing line between the with CBE certification receive preferred procurement
and contracting opportunities from DC government.
public and private sectors – a different culture and
66 David Raths, “New Generation of Public CIOs Bring
mindset. Vivek is someone who can bridge those Talent, Innovation,” www.govtech.com, June 25, 2008.
sectors to really unleash innovation.”67 Experts felt 67 Kim Hart, “D.C.’s Kinetic Tech Czar,” www.washington-
that Kundra had negotiated the challenges very well post.com, January 5, 2009.
and demonstrated good leadership in the process. 68 Gartner, Inc., is one of the world’s leading information
Gartner, Inc.68 analyst Andrea Di Maio (Di Maio), technology and research companies.
69 KC Jones, “Federal CIO Vivek Kundra Outlines Priori-
described Kundra as “a very smart person, who
ties,” www.informationweek.com, March 5, 2009.
556

According to analysts, though e-governance in moving the project forward and impressed eve-
provided better services to the public, the biggest ryone “in terms of how he handled the information,
challenge for Kundra was to make these services technology, and cyber stuff during the inaugural and
accessible to a certain section of the society that did helped in coordinating all of the different agencies
not have the resources to go online. Otherwise a dig- without a hitch.”71
ital divide would be created between people with and Kundra’s new role as Federal CIO entailed creation
without access to technology and the purpose of dig- of policy and strategic planning of federal IT invest-
ital democracy would not be served, they said. Some ments and oversight of federal technology spending. It
felt that the cost incurred on the implementation of entailed overseeing enterprise architecture to ensure
these initiatives was too high. system interoperability and information sharing and
In practicing e-governance, the political system ensuring information security and privacy across the
of a region played an important role. Political pres- federal government. This would involve coordinating
sure usually affected implementation of new ini- the IT operations across numerous government agen-
tiatives with the projects being shelved or neglected. cies. The Federal CIO was also to work closely with
According to analysts, it was too early to declare the CTO72 (at the national level) to advance Obama’s tech-
DC system an all-round success as most of what the nology agenda. Some experts felt that though there
DC government had done was a means of measuring was a national level, “Administrator of E-Government
the district’s problems rather than solving underlying and Information Technology”73 and CIOs in each fed-
problems. eral agency, the positions were not being utilized to
their full potential. (Refer to Exhibit 5 for a brief note on
the US federal e-governance and role of the Administrator
New role for Kundra of E-Government and Information Technology.) They
On March 5, 2009, US President Barack Obama felt that the new move by Obama would provide the
(Obama) appointed Kundra as the Federal CIO. various public sector CIOs operating in the country
Kundra was responsible for coordinating the IT opera- with the much needed central direction.
tions across all the government agencies through Kundra would be part of the Office of Management
Web-based approaches and to make the government and Budget and oversee a budget of around US$71 bil-
data accessible to the public so that they could par- lion per annum.74 He was expected to have budgetary
ticipate in the government’s decision-making proc- authority to launch entirely new IT projects, and also
ess. Announcing Kundra’s appointment, Obama said, terminate on-going multimillion-dollar IT projects.
“Vivek Kundra will bring a depth of experience in Kundra’s initiation into his new role was, how-
the technology arena and a commitment to lowering ever, somewhat inauspicious. The government started
the cost of government operations to this position. I investigation of a scam at OCTO in which one of his
have directed him to work to ensure that we are using top aides was arrested on charges of bribery, money
the spirit of American innovation and the power of laundering, wire fraud, and conflict of interests. This
technology to improve performance and lower the prompted Kundra to proceed on leave barely a week
cost of government operations. As Chief Information into his appointment in the new position, but he soon
Officer, he will play a key role in making sure our
government is running in the most secure, open, and
efficient way possible.”70 Chris Willey who served as
the Deputy CTO of Infrastructure Services for the DC 70 “President Obama Names Vivek Kundra Chief Informa-
government was appointed as the interim CTO of DC. tion Officer,” www.whitehouse.gov, March 5, 2009.
71 Aziz Haniffa, “‘Vivek Kundra is Going to do Great Things
Earlier, Kundra had been one of the team leaders for US’,” www.rediff.com, March 6, 2009.
in the Obama Presidential Transition Team for IT 72 Obama also planned to create the first ever position of
development and had reportedly impressed Obama CTO at the national level.
with the Recovery.gov website, through which Obama 73 Before being replaced by the position of Federal CIO,
the ‘Administrator of E-Government and Information
wanted to help citizens track how and where the
Technology’ position was headed by Karen Evans.
government was spending taxpayer money. A source 74 Saul Hansell, “The Nation’s New Chief Information Of-
close to the project said that Kundra was instrumental ficer Speaks,” www.nytimes.com, March 5, 2009.
557

Part 4 Case studies
Exhibit 5 US Federal E-Governance and the role of Administrator of E-Government and Information
Technology
The US government has established a whole-of-government or government acquired and used IT services, the Clinger-Cohen
“enterprise” architecture (the Federal Enterprise Architecture) Act of 1996, also known as the Information Technology
to support a citizen-focused approach to e-government, Management Reform Act, was established. The Clinger-
facilitate integration, and leverage the value of IT investments Cohen Act served as the primary guidance for most executive
across government. The architecture is a top-down approach departments and agencies for IT management. Section 103 of
consisting of reference models that: the Act directed the creation of a CIO position in each federal
agency. The duties of the CIO were to provide information
● Describe at a high level the services the government management advice and policy to the agency head, develop,
provides, independent of the agencies that provide maintain, and facilitate information systems and evaluate,
those services. assess, and report the progress to the agency head and
● Provide a standardized framework for measuring the develop IT systems.
performance of IT investments and their contributions Building upon the Clinger-Cohen Act, the E-Government
to program performance. Act was enacted in 2002 to guide federal IT management
● Describe the data and information that support gov- practices and to make government information and services
ernment programs and business. available online. One of the most important provisions of the
act was the creation of an Office of Electronic Government
● Classify service components and identify how they
within the OMB. The OEG was headed by the Administrator
support government business of the Office of E-Government who led the activities of the
● Identify the standards, specifications, and technologies agency-level CIOs. The role of the Administrator of the Office
that support the business of government of Electronic Government was to oversees implementation of
IT throughout the federal government including advising the
Together these reference models provide a framework Director of the OMB on the performance of IT investments,
enabling better decisions about investments in ICTs and their overseeing the development of enterprise architectures
application to US government services. within and across agencies, directing the activities of the
The Office of Management and Budget (OMB) also initiated CIO Council, and overseeing the usage of the E-Government
marketing initiatives to boost citizens’ awareness of federal Fund to support interagency partnerships and innovation.
e-government services. Marketing efforts included targeted The position also had responsibilities in the areas of capital
outreach to particular customer segments, innovative ideas planning and investment control, information security,
on how to increase usage, and methods on providing greater privacy, accessibility of IT for persons with disabilities, and
synergy among e-government offerings. access to, dissemination of, and preservation of government
information.
To develop well-organized and user-oriented IT practices
in all federal agencies and to improve the way the federal
Compiled form various sources.
joined back as it was clarified that he was not a target amounts on IT purchases. “One of the biggest ticket
of the investigation.75,76 items in that $71 billion is the money the federal
government spends on contracts, some that, frankly,
haven’t performed very well, and there haven’t been
Looking ahead consequences,”77 Kundra said. Experts opined that
Kundra was looking ahead to replicate his success as the besides significant savings, open-source technology
CTO at DC in his broadened role at the US government.
To revolutionize the government’s technological opera-
tions, he planned to embrace more off-the-shelf tech-
75 Ben Smith, “D.C. Bribery Scheme Detailed,”
nologies and formats like cloud computing and open-
www.politico.com, March 12, 2009.
source technology, the use of which was ubiquitous 76 Patrick Thibodeau, “Vivek Kundra Reinstated as Federal
in the private sector. Analysts felt that the use of such CIO,” www.infoworld.com, March 18, 2009.
technologies could result in significant savings for the 77 Stephanie Condon, “Obama’s CIO Wants More Citizen
federal government, which reportedly spent significant Activity on Web,” http://news.cnet.com, March 5, 2009.
558

could help the government improve its cyber security References and suggested readings
and reduce the procurement time of projects.
1 “DC-NET Takes Charge of Telecommunications,”
Kundra, who had championed the use of websites
www.govpro.com, February 13, 2004.
and blogs like Twitter, Facebook, and YouTube as
2 “The District of Columbia Selects Cisco as the
good media through which to communicate with
Infrastructure Provider for its Next-Generation
citizens, was expected to build on the broad use of
Communications Network,” www.newsroom.
these technologies on the national level too. Kundra
cisco.com, February 9, 2004.
planned to create a data website through which US
3 “DC.Gov Again Named Best of the Web,”
citizens would get easy access to official statistics
www.grc.dc.gov, September 2005.
and other government information. But according to
4 “NASCIO Recognition Awards: IT Project and
experts, one of the challenges for him in this endeavor
Portfolio Management,” www.nascio.org, 2006.
would be to bridge the digital divide and make data
5 Roy W. Schulte, “Case Study: Washington, D.C.
available to every individual. Kundra said he would
Portal Builds on Top of a Major IT Overhaul,”
strive to ensure that the US had “the ability to run an
www.limbic systems.com, May 21, 2007.
open, transparent, participatory, and collaborative
6 “District Technology Chief Testifies on Agency
government.”78
Performance,” www.newsroom.dc.gov, February
Some analysts were apprehensive about Kundra’s
15, 2008.
goal of making government operations more open to
7 Florence Olsen, “Collaboration Gurus,” www.fcw.
the public as they felt it ran contrary to the govern-
com, February 29, 2008.
ment’s responsibility to safeguard people’s privacy and
8 “DC Deploys Enterprise Payroll System,”
protect national secrets. Others, however, were posi-
www.newsroom.dc.gov, March 28, 2008.
tive that these technological initiatives would make the
9 “Mayor Fenty Announces More Than $20 Million
federal government a model for good technology use
in Federal Dollars for DCPS,” www.newsroom.
and governance. According to Lena Trudeau, program
dc.gov, May 7, 2008.
area director of strategic initiatives at the National
10 David Haskin, “iPhones Trickle into the Enterprise,”
Academy of Public Administration79, “Vivek demon-
www.computerworld.com, June 2, 2008.
strated what is possible in government technology. His
11 Galen Gruman, “2008 InfoWorld CTO 25: Vivek
actions, often using free or purely internal resources,
Kundra, District of Columbia,” June 2, 2008.
have shown that innovation can enable government
12 “District of Columbia Launches New Intranet,”
bureaucracy to respond flexibly and intelligently to
www.newsroom.dc.gov, July 24, 2008.
challenges. Under Vivek’s leadership, D.C. has come
13 Darlene Darcy, “Vivek Kundra Embraces Change
to be regarded as a model of innovative action for the
in D.C,” www.bizjournals.com, August 8, 2008.
federal [information technology] community.”80
14 C.G. Lynch, “Fighting Government Waste with
However, some analysts wondered whether
Google Apps,” www.pcworld.com, September
Kundra would be as successful in his new role as it
23, 2008.
involved fostering innovation and change on a much
bigger scale and involved many complexities. And as
if these challenges were not daunting enough, Kundra
was taking over the newly created position at a time
when the country was facing some tough challenges
due to wars and the economic crisis. Di Maio said, “In 78 “Vivek Kundra to Head Obama’s Technology Mission,”
such challenging times, with budget issues, a daunt- http://www.domain-b.com, March 6, 2009.
79 Based in Washington DC, The National Academy of Pub-
ing task to monitor and measure the outcome of the
lic Administration is a non-profit organization focused
American Recovery and Reinvestment Act, a recent on analyzing emerging trends in governance and public
call by the President to review relationships with administration in order to tackle the nation’s critical and
federal contractors, the desire to socialize informa- complex challenges.
tion and engage all stakeholders on line, Vivek will be 80 “Federal 100 Winner: Vivek Kundra,” http://www.fcw.
com, March 23, 2009.
immediately confronted with a tough prioritization
81 KC Jones, “Federal CIO Vivek Kundra Outlines Priori-
task.”81 ties,” www.informationweek.com, March 5, 2009.
559

Part 4 Case studies
15 “Mayor Fenty Announces Three National Awards 21 “Maryland Tech Council Honors Vivek Kundra,”
for the Office of the Chief Technology Officer,” www.indiapost.com, November 21, 2008.
www.newsroom.dc.gov, September 29, 2008. 22 Mark Segraves, “District’s Top Techie Advises
16 “Building the Digital Public Square,” www.apps- Obama Transition,” www.wtopnews.com,
fordemocracy.org, October 15, 2008. November 25, 2008.
17 Heather Havenstein, “D.C. Municipal Employees 23 Emma Newcombe, “Vivek Kundra Grabs National
Get Choice between Google Apps, Microsoft Attention,” www.govtech.com, January 5, 2009.
Office,” www.computerworld.com, October 15, 24 Kim Hart, “D.C.’s Kinetic Tech Czar,” www.wash-
2008. ingtonpost.com, January 5, 2009.
18 “Apps for Democracy Medal Winners,” www. 25 “District of Columbia Opens New Window on
appsfordemocracy.org, November 13, 2008. Procurements,” www.newsroom.dc.gov, January
19 “Apps for Democracy Yeilds 4,000% ROI in 30 6, 2009.
Days for DC.Gov,” www.istrategylabs.com, 26 “Corporate Users Migrated to Google Apps,”
November 15, 2008. www.blog.g-asiapac.com, January 8, 2009.
20 Matt Williams, “Vivek Kundra Rumored Working 27 www.dc.gov
on Obama Transition,” www.govtech.com, 28 www.grc.dc.gov
November 20, 2008. 29 www.octo.dc.gov
30 www.capstat.oca.dc.gov
560

Case study 14 Knowledge management at Booz & Company
CASE STUDY 14
Knowledge management at Booz & Company

Toward a culture of knowledge sharing and collaboration
Introduction to capture the knowledge of the firm and to connect

experts to deliver the best possible result for clients.”
In July 2008, Booz Allen Hamilton (BAH) announced
(Matthias Bünte, PhD, partner, August 2008.)
the separation of its two core businesses: the U.S.
Barry Jaruzelski, a partner and head of corporate
government consulting business, which retained the
marketing, approached Adrienne Crowther, a princi-
Booz Allen Hamilton name, and the commercial man-
pal with over 10 years of strategy consulting experi-
agement consulting business, which continued opera-
ence and three years developing intellectual capital
tions as a new firm, Booz & Company.
(IC) for the firm. When Crowther accepted the leader-
After the split, Booz & Company had to redefine its
ship of Booz & Company’s KM agenda, she defined
brand, culture, and values to enhance its strength and
her new role as the director of knowledge sharing and
competitiveness as a globally operating management
collaboration (KS&C):
consulting firm. As one element of its strategy and
positioning, Booz & Company’s CEO, Shumeet Banerji, ● to develop the firm’s agenda for instilling a culture
challenged the firm to be “foremost in foresight” – that of sharing and collaboration,
is, to be known for ideas that are both cutting-edge ● to lead the creation and roll-out of a new firm-
and rigorous. A key part of that strategy was directed wide, state-of-the-art KM system,
toward knowledge management (KM) across the firm.
● to act as an ambassador for improved connection,
Banerji’s vision for the 90-year-old “new” firm stressed
coordination, and communication to foster innova-
the importance of managing knowledge as part of the
tion across the firm.
firm’s competitive strategy, to bring the best of Booz’s
thinking to every client engagement: “By instilling In an early discussion with Crowther, Banerji stated
the concept of capabilities-driven strategy at Booz & that he expected the firm’s KM activities to act as a
Company, our CEO Shumeet Banerji put emphasis on major differentiator, a challenging task in an industry
the importance of having a state-of-the-art KM system known for advanced KM systems.
© 2011 This case was written by Prof. Dr. Markus Kreutzer, Assistant Professor of Strategic Management, University of St.
Gallen (Institute of Management) and Marina Altuchov as part of the research program “Responsible Corporate Competitiveness”
(RoCC). It is intended to be used as the basis for class discussion rather than to illustrate either effectiveness or ineffectiveness of
managing situations.
561

Part 4 Case studies
One month later (August 2008), Thomas A. Stewart scale to face market challenges and create sustainable
joined Booz & Company as chief marketing and know- growth for its clients. It has 60 offices and staff of over
ledge officer (CMKO). As former editor and managing 3,300 serving clients around the world. The split pro-
director of Harvard Business Review and best-selling vided an opportunity for both companies to resume
author in the areas of IC and KM, Stewart possessed focus on their respective business models and for Booz
extensive expertise and was appointed to lead the & Company to address the question of what kind of
firm’s efforts in the areas of marketing, IC, and KM.1 firm it wanted to be. There was a need to define the
Along with Crowther, Stewart would drive the change kind of culture that would best help the firm realize
needed to foster a culture of KS&C within Booz & its strategic aspirations. At the same time, the new-
Company. old Booz & Company faced the opportunity – and
in some cases the necessity – to rebuild parts of the
firm’s infrastructure to serve the new, more focused
Booz & Company – an introduction business. Knowledge Management was one of those
In 1914, Edwin Booz founded Booz & Company, the opportunities.
first management consulting firm to provide services
and expertise in solving the most important strategic Booz & Company – KM history
problems plaguing corporations. In establishing his
firm, Booz created a new management consulting Booz & Company builds on a strong heritage in KM.
profession.2 In 1997, BAH was among the first management con-
With added partners over the years, Booz & sulting firms to establish a professional KM system.
Company became Booz Allen Hamilton (BAH) and This system, “Knowledge On-Line” (KOL),3 was a
evolved into one of the largest, globally operating man- precursor to today’s enterprise content management
agement consultancies, providing its services to both systems. KOL provided a means to capture, store,
businesses and governments. Commercial consulting and offer searchable access to the firm’s global IC. As
initially outpaced government consulting. In the 1990s, KM technology matured throughout the late 1990s
however, the U.S. government began outsourcing sig- and early 2000s, the ability for internal teams to
nificant portions of business. As a result, BAH’s govern- share information via community sites was added.
ment business (much of it outsourcing as opposed to By 2003, the market had again evolved, with portal
strategy consulting) grew to become four times bigger technology offering a means to bring together enter-
than the commercial consulting business. Considering prise content management and community sites.
its entrepreneurial commercial consulting business and With the fast- growing government consulting busi-
the significantly larger U.S.-centric government con- ness dominating its KM efforts, in 2004 –2005, BAH
sulting business, it became clear that the firm was oper- launched an enterprise-wide portal, “iShare,” that
ating two distinct business models. In 2008, prompted housed KOL, community and team sites, and profiles
by an offer from The Carlyle Group, the partnership of partners and staff. Whereas KOL had been widely
agreed to split into two businesses. As part of the deal, acknowledged as a success in leveraging commercial
Carlyle assumed control of the government-related business knowledge and expertise, iShare was gener-
business (for US $2.54bn) that retained the Booz Allen ally perceived as a step backward due to a number of
Hamilton name. Booz & Company evolved from the deficiencies.
former commercial consulting arm of BAH. iShare, built on the first version of Microsoft’s
The year 2008 saw the worst economic crisis since SharePoint technology, was launched in 2005 at a
the 1930s, with a consulting market contraction of time when the Internet was undergoing tremendous
20–30% and unprecedented overcapacity. Booz & change. Google Search, social networking sites, and
Company, however, stayed on track and proceeded
against the strategy articulated by new CEO Banerji 1 Source: http://www.booz.com/me/home/what
to be foremost in foresight and to provide essential _we_think/40007409/40007869/45080925
2 Source: http://www.boozallen.com/about/history
advantage to all clients. 3 Source: Galunic, C. & Weeks, J. (1999), Managing Knowl-
Today, Booz & Company is one of the top-tier, full- edge at Booz-Allen & Hamilton: Knowledge On-Line and Off,
service strategy consultancies operating on a global INSEAD, Fontainebleau, France.
562

other Web 2.0 applications were emerging and quick- Having personally experienced the iShare environ-
ly gaining traction. iShare was, from a technology ment, she knew that she needed to provide the firm
perspective, poorly designed. Its search application with an intuitive system that would make it easier
was not intuitive and did not yield relevant results, for staff to perform their tasks, otherwise her efforts
leading to widespread user dissatisfaction. The user would be largely wasted.
interface was also cumbersome, requiring significant
training and support. In addition, the platform was
slow relative to Internet sites and extensive support
The knowledge sharing and collaboration
was required to develop and maintain team pages. framework
Overall, iShare lacked interactive Web 2.0 functional- Setting up the KS&C team
ity which made it distinctly not state-of-the-art. This Several characteristics made Crowther a good fit to
proved especially disadvantageous for the consultants define and lead the knowledge sharing agenda. As
from BAH’s commercial arm, who missed the simple a director, she was positioned high enough in the
KOL tool that gave them ready access to information organization to attract the attention and command
they needed. iShare quickly became an unused, out– the respect of senior leaders. With her experience as
of-date, static repository. As a result, staff members a management consultant and time spent in internal
had no incentive to use it. Instead, they developed positions, she had an extended network across the
the habit of storing content on their hard drives firm and was known as a highly energetic person with
(rather than uploading it to the system) and search- strong communication skills, someone who could get
ing for content with emails sent to the whole firm things done.
asking people to send along documents that might Crowther’s first task was to learn the capabilities
help with a client project. With a highly suboptimal of the existing KM team. She inherited a small team
system, email blasts and internal networks became of five that possessed KM experience, yet was largely
the de facto KM system. This put the firm at risk of reactive and tactical. While Polly Kahler had almost
overworking junior staff, who lacked strong networks, 20 years of KM experience and knew the history of
and of falling behind its competitors due to increased Booz’s KM efforts, other team members focused on
time-to-market when responding to proposals for new building sites and uploading content. The team in
client engagements. Knowing that iShare had failed general lacked strong project and vendor manage-
with the commercial business, the newly formed Booz ment skills, user interface expertise, and a full under-
& Company was presented with a unique opportunity standing of the everyday challenges of client staff.
to reshape its KM agenda, without the baggage of the Within 18 months, Crowther rebuilt a global and
BAH legacy systems. virtual team with a mix of consultative and techni-
When Crowther stepped into her new role, she cal skills aligned to running and maintaining a KM
knew that she could have a significant impact in help- platform, as well as providing excellent KM support
ing the firm achieve its goals if she could rebuild Booz across the firm (see Exhibit 1). For technical support
& Company’s KS&C capability. While looking forward
Crowther established a strong working relationship
to the change, a few key questions were heavily
with Rick Boulin, the firm’s chief information officer
weighing on her mind:
(CIO), and Bill DeSalvo, manager of collaboration
● Would she be able to gain the necessary active technologies and the KS&C technology leader.
senior support given the fact that the firm was in a
rebranding and rebuilding mode? Launching a global community of practice
● Could she quickly (re)build a team with the right In September 2008, Crowther launched a global
mix of skills to help her create not only the best “community of practice” (CoP) as a forum to test
tools but also help the firm break with its existing ideas and solicit feedback throughout the design
email habit? and development of the “Next Generation” (Next
● Would she be able to overcome staff inertia to Gen) knowledge sharing platform. The CoP grew to
affect cultural change and reach a tipping point of well over 100 participants; a mix of client staff from
adoption? all levels and internal staff from all firm services
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Part 4 Case studies
Exhibit 1 Supporting KM across the firm – the KS&C team service offerings
Knowledge Sharing and Collaboration Team Charter

● Promotes knowledge sharing and collaboration agenda across the firm
● Oversees the design, launch, maintenance, and upgrading of the knowledge infrastructure
● Facilitates connections, coordination, and communication across the firm
Consultative Services Technical Services

● Provide teams with Knowledge Liaisons to help rebuild a ● Manage and maintain the Sharepoint 2007 platform
culture of sharing and collaboration that insidebooz is built upon, as well as all other
– Work jointly on developing team specific knowledge knowledge sharing tools
sharing strategies ● Ensure that insidebooz.com has a high performance
– Build best in class collaboration team sites and provide level
UI support ● Address platform bugs and feature enhancements
– Encourage new processes and the use of web 2.0
applications such as blogs, wikis ● Provide ‘basic’ team sites to engagement and account
teams
● Provide quarterly firmwide knowledge metrics
● Maintain (along with Finance) the firm’s taxonomy
● Train the firm on best practice use of insidebooz
● Manage large scale data migration, content backfill,
● Communicate new features and processes to the firm and updating efforts
● Ensure that insidebooz content is relevant and up to date ● Maintain an ongoing ‘platform/product’ roadmap
● Work with staff to understand improvement needs ● Manage outside contractors for platform fixes and
improvements
representing every major region where Booz & IT practice, as well as two European internal profes-
Company operated. Membership was open to anyone sionals from research and learning and development.
who was interested. Whenever Crowther received a The team established a KM framework (see Exhibit 2)
KM question, she provided the answer along with an as a guide, which encompassed:
invitation to join the CoP. Although members of the
1 strategy
CoP did not possess direct decision rights concerning
the Next Gen effort, the monthly CoP calls represented 2 process
important input from a cross-section of the firm when 3 organization
addressing questions about content, design, tools, and 4 technology.
functionality. The CoP was involved in choosing the
(1) Crowther built the team’s strategy around four KM
name insidebooz for the platform and were the alpha
value propositions aligned to the business: respond,
and beta testers of the new system. CoP calls were
connect, collaborate, and innovate (see Exhibit 3).
well attended; participants became important ambas-
First and foremost, the new system had to respond
sadors of the new platform when it launched.
quickly and effectively to client demands and allow
consultants to get up to speed rapidly by leveraging
Shaping the Next Gen initiative existing IC. Second, it needed to act as a facilitator
With the CoP in place, Crowther proceeded to elabo- for Booz staff to connect with each other and the
rate the technical and cultural solution and design a firm’s experts, thereby enhancing and extending the
launch program for the platform. During this phase, existing internal network of staff around the globe.
she augmented her team’s skills with expertise from Third, it had to encourage collaboration, the build-
two senior associates provided by Booz & Company’s ing of communities, coming together, and sharing of
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Exhibit 2 Next Generation KM framework
Exhibit 3 The KM value proposition
ideas and content to provide fluidity across the firm planned to make KS&C part of the firm’s DNA not
globally. Fourth, it needed to foster innovation via only by fostering the development, capture, and dis-
online forums and expert communities. Collectively, semination of high-quality, ready-to-use IC, but also
these value propositions focused on creating essential by always linking content to people, with the intent
advantage for clients by sharing and highlighting best of putting people at the center and encouraging new
content. connections. This would improve efficiency and con-
The initial focus centered on developing effective sistency as well as minimize legal, regulatory, and
respond and connect aspects. Crowther and her team economic risks. In the long term, the platform needed
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Part 4 Case studies
to encourage increased innovation, especially by pro- (3) In terms of the organization, Crowther and her
moting expert networks and entrepreneurship across team focused on a number of themes. First, it was
the firm. By enabling a culture of KS&C to drive inno- crucial to ensure top-down support and strong senior
vative market-leading foresight, the system would sponsorship at the firm, regional, and practice levels
allow staff to fully leverage the firm. from senior leaders who could “walk the talk.” KS&C
(2) Looking at the firm’s processes, Crowther and was reinforced and became a key theme in Banerji’s
her team realized they had to approach the initiative quarterly firm-wide chalk talks. In addition, senior
from a perspective of how Booz staff already oper- partner Niko Canner became an executive sponsor
ated. Rather than create a whole new set of processes and counseled Crowther and her team. At the local
around KM, they wanted to embed sharing and col- level, the KS&C team focused on a number of bot-
laboration into the consulting engagement lifecycle tom-up concerns: guidelines, templates, training on
(see Exhibit 4) by developing a simple, easy to use knowledge-sharing best practices, how to collect and
portal for consultants. upload backfill content, and how to deploy engaging
As part of the firm’s business processes, the KS&C team sites. Crowther worked with regional and prac-
team acknowledged that the Next Gen platform tice leaders to name senior staff to be responsible for
would be only as good as the content and information each team’s knowledge agenda. She then provided a
it provided. Thus, they saw the need to introduce four single point of contact on the KS&C team, with the
processes, two aimed at getting ready for launch and intention of building strong relationships between cli-
two aimed at maintaining relevant content: ent staff and her team.
(4) Based on experience with the former KM
1 Launch a new firm-wide people expertise system
system, DeSalvo and Crowther developed a set of
2 Develop a backfill process to collect existing
principles that shaped the technology decisions they
shareable content (currently on hard drives)
had to make for the new portal. In addition to speed
3 Establish an ongoing process to collect end-of- for launching the new system (to minimize penalties
engagement IC to Booz & Company for using the BAH platform), the
4 Include updating resumes and expertise information portal needed to be hosted in order to avoid costs
in the annual appraisal cycle to ensure that the and complexities of in-house hosting and support.
most relevant staff information is always on The team also sought a solution that would require a
insidebooz. minimal degree of customization and that was easy
Exhibit 4 The consulting engagement lifecycle
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to operate, maintain, and avoided complications for ees responded and provided excellent feedback for
future releases. By seeking a centralized, firm-wide, designing insidebooz. To provide real value to the
unified platform that delivered a suite of functional- firm, the Next Gen system would need a significant
ity instead of a collection of point solutions, DeSalvo amount of relevant, high-quality content linked to
hoped to minimize custom development and integra- topic expert(s). A process to continually update
tion requirements. knowledge and to make experts visible to others had
Throughout the Next Gen process, Crowther pro- to be developed.
vided regular updates to the CoP and Stewart and As part of the internal baselining, the team also
occasional updates to the firm’s executive commit- took a close look at former internal KM initiatives.
tee. She engaged in more frequent communication One hypothesis on why prior initiatives did not reach
with the knowledge and marketing advisory com- their full potential was that the business did not stay
mittee (KMAC), a governance body composed of involved through the entire process (IT took over
client-facing partners providing senior sponsorship at the design stage), coupled with a general lack of
and advising the KS&C team on strategic matters. attention by senior staff to central KM topics. The
With the split from BAH, the KS&C team was aligned rebuilt KS&C team was dedicated to develop, design,
with the marketing organization, providing clear launch and maintain the new platform. The team
links to senior sponsorship. In contrast, the prior KM faced many challenges along the way, starting with
team within BAH had been reporting within the IT the difficult task of translating business requirements
team. As long-time KM team member, Polly Kahler into technical functionality.
emphasized: “When we aligned with the marketing In preparation for working with developers on
organization we could see that our CMKO under- the customization of the platform, approximately
stood the inherent benefit of knowledge sharing. We 50 detailed use cases were created by November
now had direct support from the KMAC up to the 2008. These business scenarios enabled consultants to
CEO.” (December 2008) describe what they wanted to happen without initially
indicating how it was to be accomplished. DeSalvo
summarized the advantages of use cases as follows:
Refining the requirements of insidebooz
“There are a lot of different ways to collect require-
Equipped with the overall requisites (i.e., KM frame-
ments for a system but what is paramount is knowing
work), Crowther and her team began to further define
the business requirements. We created scenario based
the technical requirements for the Next Gen solu-
use cases to give a holistic view of what needs to be
tion, which came to be called insidebooz.com. Four
accomplished not just by the system but also by the
workstreams geared to requirement gathering were
people using the system.” (October 2008)
initiated, including the identification of staff needs,
That same month, November 2008, another mile-
external benchmarking, internal baselining, and a
stone was reached. After a thorough vendor review,
vendor review for the technology solution.
the KS&C team chose Microsoft SharePoint 2007
In October 2008, two user design workshops were
as its platform technology. SharePoint was a broad
conducted, one in the U.S. and one in Europe. The
collaboration suite that would require some cus-
results revealed central insights into what the firm
tomization, but did not require cobbling together
lacked in terms of KS&C and what would enhance
a number of best-of-breed solutions. In addition,
the daily work of consultants. Questions addressed
it integrated well with the firm’s other Microsoft-
included: What content do you need to be more effi-
based products.
cient in your work? How might you rate the quality
of content? What should the process of capturing
content look like? How do you find and connect Defining the look and feel of insidebooz
with experts? How might technology make this Danielle Phaneuf, a senior associate from the IT
easier? The KS&C team also conducted interviews practice, joined the KS&C team in full capacity from
to learn of competitors’ activities and carried out a October 2008 through March 2009, later maintain-
firm-wide survey on KM topics. One in three employing an advisory role. With experience in leading
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Part 4 Case studies
Exhibit 5 Intranet best practices Exhibit 5). They wanted to create an easy to use and
graphically pleasing website, according to the brand
Intranet Best Practices guidelines of Booz & Company. The site needed to be
● Put people (not content or technology) at the center engaging while providing access to the appropriate
● Integrate into the business people and content.
● Provide universal access (e.g., single sign on)
● Create seamless enterprise experience – one place ● The homepage (see Exhibit 6) provided rotating
for info, people, and content feature stories to keep staff up-to-date on Booz &
● Support cross-boundary interaction Company activities; a blog spot focused initially on
● Keep it simple and easy to use
knowledge themes, with the long- term goal for a
● Make it visually appealing
management blog to all staff.
● At the top of every page users could easily access
their Profile (where their expertise and resume
IT-related projects, she acted as the project manager
information resides), upload documents, search,
for building the portal and supervised development
and obtain help.
and system design. With no internal Booz & Company
developers, the entire look and functionality of the ● Team and community sites (see Exhibit 7) offered the
system was contracted to outside developers who ability to build collaboratively on existing content.
began their work in January 2009. ● Search provided the ability to preview documents
The KS&C team defined the look and feel of the as well as see related content and the team that
portal with a set of Intranet best practices in mind (see worked on the engagement.
Exhibit 6 insidebooz homepage
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Exhibit 7 Example of a team site
● Document upload (see Exhibit 8) was easy to use firm-wide taxonomy in June 2009. Again, Crowther
and placed the uploaded document in the right cooperated closely with the senior leadership of the
place taking any guesswork out of the process. firm. As opposed to previous KM initiatives, it was the
first time the firm established a consistent taxonomy
Working with outside developers presented numerous
that would integrate across finance, human resources
challenges and delays. It quickly became clear that the
(HR), and KS&C.
SharePoint user interface would require significantly
Pearl Nartey, who left client work in 2009 to join
more customization than the team had expected. The
the KS&C team, identified the benefits of consolidat-
team was being forced to choose between two of its
ing the taxonomy: “After each practice and function
guiding principles: the need for a user-friendly plat-
had come up with their preferred taxonomy, we as
form vs. the need for minimal customization.
the KS&C team worked with each team to ensure
With the fate of iShare fresh in memory, the team
consistency and to map the old taxonomy to the newly
had little hesitation in putting users first.
defined one. Before, we used to have different taxono-
Even with strong project management, difficulties
mies across different regions, across how we rolled up
involving customization of the platform led eventually
our business and how we thought about content and
to a delay of the projected launch of insidebooz, from
expertise. Now this is completely aligned. Without
spring 2009 to early autumn 2009.
that it becomes difficult to know how to identify and
search for information.”(June 2009) Ultimately, the
Defining a firm-wide taxonomy taxonomy served as a map for the whole portal.
Despite the delay, another milestone of the initia- As the firm’s taxonomy continually evolved,
tive was marked with the final determination of a Crowther worked with the finance team to put a
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Part 4 Case studies
Exhibit 8 Document upload
process in place to ensure that any changes were Content

approved across all regions and made to the HR, A golden rule of intranet adoption is that content is
finance and knowledge systems concurrently, with king. Without robust content, staff would search for
the end result of creating a globally consistent lan- something, become discouraged, and not return. A
guage to define the firm’s areas of expertise. core value proposition of insidebooz was to enable
staff to respond to client demands quickly to develop
strong proposals as well as to find relevant content
Preparing for launch when starting an engagement. Thus, everything from
Encouragement previous proposals, staff resumes, standard qualifi-
In spring 2009, Crowther worked closely with the cation slides, frameworks, and methodologies from
director of human capital to revise the appraisal prior engagements needed to be readily accessible.
form for junior staff. As Stewart stated: “If you want Nartey was tasked with leading a comprehensive con-
people to use the system, you make using the system tent backfill initiative. As she stated: “Because we’re
something that they are measured on for their per- a knowledge firm, our portal is only as good as the
formance and in their rewards. Measurement must content on it. We realized that we needed to do a lot of
be on not only if they use the system but also if they work to start collecting content that was now on hard
add to the system.” (June 2009) drives. Structuring the process to do mass content col-
Now, during the annual appraisal process, client lection across all our industry and functional teams
staff are required to check if they recently updated was nontrivial.” (January 2009)
their resumes and profile/expertise on insidebooz. For this to be successful, a clear process had to
They are also assessed against the competency of be set up to define the major steps to be taken by
collaboration and knowledge sharing. Rather than each practice. Crowther worked with practice lead-
a quantitative assessment measuring the number of ership to obtain approval and support for the effort.
documents submitted, staff are qualitatively evaluat- Nartey quickly established a process to gather rel-
ed on their abilities to leverage experts and content. evant existing content that had not been uploaded to
570

the previous KM system in the past three years. Each culture, and human capital. Ilona Steffen was named
practice then named a knowledge liaison (and team) director of the center. Steffen had also been instrumen-
to work closely with a member of the KS&C team to tal in creating the Booz & Company taxonomy. With
collect and tag content from its practice. This also the impending insidebooz launch, Steffen saw a great
involved identifying the elements of the firm-wide opportunity to showcase the best of the Katzenbach
taxonomy that matched each document. With content Center content. She organized a team to screen the
collected, Nartey developed a process for sanitizing legacy Katzenbach Partners knowledge system, focus-
the documents (i.e., removing client-specific data) ing on best bet materials. Over 350 documents were
and uploading them to insidebooz. chosen, which were transformed into the standard
It was a formidable challenge for the KS&C team Booz & Company format and uploaded to insidebooz.
to mobilize and motivate the necessary resources in To showcase this content, Steffen and her team
the practices to drive the backfill effort. The process worked with the KS&C team to adapt HUB+ col-
took longer than the team had planned; however, by laboration tools, starting with a wiki-based site for
late summer 2009, the KS&C team had accomplished Katzenbach content that was easy to navigate and
a great success in collecting, tagging, sanitizing, and update. Leveraging former Katzenbach consultants
uploading a few thousand documents. side by side with Booz consultants, the team created
what would become the best practice way of shar-
Engaging sites ing topic specific content: they created an engaging
Adding to the complexities of gathering existing con- site, highlighting “best of” and overview content,
tent was the integration of Katzenbach Partners, a showcasing training videos, and organizing content
New York based consultancy that had been acquired by need (marketing, proposals, starting an engage-
in January 2009. With this acquisition, Booz & ment – see Exhibit 9). The Katzenbach Center wiki
Company complemented its knowledge and skill base site became a showcase site. This was a turning
in the domain of organizational performance. For the point for the KS&C team. The wiki-based site was
KS&C team the challenge lay principally in finding a place where knowledge could not only be stored,
a way to effectively integrate Katzenbach’s IC and but also highlighted, shared, and even created.
KM experiences. Katzenbach was much smaller than This approach was significant in embodying the
Booz & Company but had recently developed a home- vision of Booz & Company to become innovative
grown cutting-edge KM system, “HUB+”.4 HUB+ was thought leaders on a wide array of topics. By sup-
particularly advanced in the use of informal KM tools, porting and extending the creation and development
such as wikis for team sites, user-selected best bets in of IC, the Katzenbach Center demonstrated a best
search, cloud tagging, and a folksonomy rather than a practice example for other practices in the firm. Soon,
formal taxonomy to help staff in uploading and find- other teams wanted to highlight their best content via
ing documents. As a smaller firm, Katzenbach could a similar wiki format.
use client names as the organizing construct.
HUB+ deployed many Web 2.0 features, and the Connections
client-based organizing construct worked well for In late summer 2009, with the impending launch
Katzenbach. However, Katzenbach had different con- of the portal, Stewart and Crowther decided to pre-
tractual agreements with its clients than did Booz launch the My Profile functionality. In addition to
& Company and, as a larger firm, Booz & Company having robust profile data filled in for the formal
required more formal policies on document saniti- launch, they could also generate interest and buzz
zation. This required a very different system from within the firm. Even though the platform did not
Hub+, one that felt more cumbersome to former support the latest in social networking or microb-
Katzenbach employees. Crowther was faced with the logging, with My Profile, staff could indicate their
question of how to integrate the Katzenbach content
in an engaging way.
As part of the acquisition, Booz & Company estab- 4 Source: Burgelman, R. A. & Blumenstein, B. (2007),
lished a think tank, The Katzenbach Center, an innova- Knowledge Management at Katzenbach Partners LLC,
tion engine in the areas of organization, leadership, Standford Graduate School of Business, Stanford.
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Part 4 Case studies
Exhibit 9 Katzenbach Center wiki site
expertise using a three-star rating scale, upload their platform that was soon to be launched. In October
resumes in a standard format, and enter their per- 2009, insidebooz went live.
sonal data (see Exhibit 10). Profiles could also be Booz & Company’s CEO Banerji sent out the launch
auto-populated with information including general email, welcoming staff to leverage insidebooz, the
detail (name, phone, assistant), authored content, firm’s next generation knowledge platform intended
and engagement history. to pave the way for a new approach of working
In addition to creating excitement around the and collaborating in the firm. Emphasizing the new
initiative, My Profile served as a powerful tool that functionality of the system and the great work of
allowed staff to connect with experts in the firm. the KS&C team, he also pointed out that, although
Staffing for an engagement would be largely facili- important, this effort was only a first step. To further
tated with resumes online and highlighted areas of enhance the firm’s KS&C capabilities, Banerji stressed
expertise. With access to profiles, staff would be able the need to use the system on a daily basis, to
to search for people by office, skill, and level and view modify business practices, and to align incentives.
photos, resumes, and contact details. At the time of This email was followed by a series of webinar-based
launch, over 60% of staff had filled out their profiles. “Getting Started” sessions; executive endorsement
was provided when Crowther was asked to give a
live demo of the platform at the worldwide partner
Launch of insidebooz and first experiences
meeting in December 2009.
Throughout August and September 2009, Stewart Initial feedback was mainly positive. Steffen stat-
sent out four emails containing links to fun videos ed: “I have high hopes that insidebooz will catapult
based on the pillars of insidebooz: respond, connect, us into the league of the absolute best practice in the
collaborate, and innovate. These short videos built world of KM. I think we were there a few years ago,
excitement and increased awareness of the new KM and then we lost momentum. With insidebooz I think
572

we’re on the trajectory to be right up there again.” Exemplary of many users of the new system, Bünte,
(June 2010) Ezzeddin Zahzah, an associate who had a partner from the Health practice, emphasized: “We
joined the KS&C team in April 2010, praised the com- have created a system which is state-of-the-art and
munity aspect of the new system: “Insidebooz is not very functional. insidebooz goes far beyond being a
just a repository for our firm’s IC; besides the thou- document management system – it is more a ‘connec-
sands of documents and useful content it hosts, its tion system’ that connects people, content, and meth-
community sites and interest groups are designed to odology.” (June 2010)
facilitate knowledge sharing and collaboration across Insidebooz now faced two key challenges. (1)
our teams and regions.” (June 2010) Performance was surprisingly slow; it took too long
Exhibit 10 Screenshots: ‘My Profile’
➨
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Part 4 Case studies
Exhibit 10 (continued)
to navigate from site to site or to get results from I do, I go there every morning. I look at what’s on the
a basic search. (2) The firm was still a long way homepage every day, I read the stories. Whenever I
from reaching a tipping point of mass adoption. Not need something I go there first before I call some-
enough new content was being put on insidebooz, body or ask somebody else. It becomes a tool that
and (because the system was new) there were few everybody uses every day.” (June 2010)
people who used insidebooz as a matter of habit. As Looking back, Stewart thought: “It could still fail.
a result, client staff continued to either reach out to But the indicators of success will be that we see a
their known internal networks, or send a global email steadily rising percentage of content on insidebooz
asking for content. Steffen summed up the type of from closing engagements along with steadily increas-
behavioral change that Crowther and Stewart were ing usage stats.” (July 2010)
going to need: “Full adoption will mean that using Crowther realized that she would have to find ways
insidebooz becomes standard behavior, a standard to demonstrate the inherent value of the system to sup-
way of conducting your day to day business. Just like port staff success within Booz by connecting to experts
574

or by finding relevant content. As Stewart emphasized: Initially, the technical performance of insidebooz
“KM does not substitute for networks. It automates represented a significant barrier to use. CIO, Boulin
them, it provides substance to networks, and it helps launched an initiative to find what was causing the
you grow your network faster.” (July 2010) performance issues, set a goal for acceptable perform-
ance level (in terms of page load speed), and solved
the performance issues.
The situation today and looking ahead Addressing widespread adoption was a more com-
About two years into the initiative, Crowther and her plex issue. Concurrent with the launch of Booz &
team had spent enormous effort creating a KS&C solu- Company, the firm embarked on a major culture ini-
tion that was intended to enable the foresight agenda tiative. One outcome was Project Closed Loop (PCL), a
of the firm, decrease time-to-market, and increase project management tool launched in early 2010 to
innovation and entrepreneurship. support team effectiveness while driving extraordi-
Crowther and Stewart focused on three areas: nary client impact. PCL consisted of a series of conver-
sations throughout the life cycle of each client project
1 Ingrain insidebooz into the culture of the firm;
that was designed to help teams set expectations
find ways to change specific behaviors and embed
and goals for client impact, individual team mem-
insidebooz into the everyday processes of Booz &
ber development, and firm impact (see Exhibit 11).
Company.
Crowther worked closely with the culture team to
2 Build high impact sites with deep ready-to-use
ensure that PCL encouraged staff to embrace insid-
content; with the Katzenbach Center wiki as the
ebooz, leveraging content at the start of engagements
model, Crowther’s team would be able to show
and providing content after an engagement. Using
other teams a best practice example.
guides and templates, PCL showed staff how to close
3 Develop a clear set of metrics to show progress and out engagements and capture relevant content. “It’s
to monitor the firm’s performance against each of a process for making sure that the right kinds of dia-
the KS&C value propositions. logue happen at every part of the project; for example,
Exhibit 11 Project Closed Loop
Project Lifecycle
Project Launch Ongoing Project Delivery Project Mid-Point(s) Project Close-Out
● Kickoff session for project ● Regular ‘on-the-job’ ● Team check-in to collec- ● Close-out conversation
about what success looks feedback with team tively assess team per- to close the loop on
like for client, firm, and members after critical formance against vision, project kickoff
each individual; mutual meetings and deliv- client impact standards
expectations; how we will erables and aspirations dis-
live the aspirations; and cussed during kickoff
how to keep dialogue
open about these goals
during the work itself
● Dialogue around relevant ● Team touch-point on ● Make decisions on
IC – what knowledge can knowledge – are firm knowledge capture:
be leveraged, where are experts being utilized to develop quals, sanitized
there knowledge gaps, the fullest, has IC been high value IC and upload
and how might they be created that should be to insidebooz, comment
filled shared with the firm? on existing IC on inside-
booz, update profiles and
resumes as appropriate
● 1-on-1 expectations con- ● 1-on-1 feedback to each ● End-of-project review
versation between asso- team member conversation with each
ciates and job manager team member
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Part 4 Case studies
at the beginning of an engagement we need to talk continued to have close communication with the
about what content already exists that can be lever- global practice leaders, KMAC, and culture team.
aged. At the end of projects teams reflect upon the Although senior leadership understood the impor-
results delivered to the client and how the Booz team tance of knowledge sharing, there remained a lack
can best capture knowledge for the firm.” (Caroline of active support in terms of leading by example and
Kronley, culture team member, June 2010). holding teams accountable, as suggested by PCL.
To track the progress of PCL and knowledge shar- Change is an evolutionary process and takes time to
ing in general, Crowther and her team developed be fully integrated in the firm’s DNA, especially since
quarterly knowledge metrics. Metrics were provided Booz & Company was a large and globally operating
at the firm, regional, and team levels, they focused firm. Initiatives such as PCL demonstrated a consider-
on content collected from closed jobs, profiles and able step in the right direction to embed new behavior
resumes updated, and overall usage. Crowther began in the firm.
sending quarterly metric updates to the executive Crowther and her team knew that what had started
team, regional leaders, and practice leaders with out as the Next Generation initiative would be an
one-on-one follow up conversations to discuss how ongoing evolution. The market was quickly evolving
teams could actively improve their knowledge shar- and changing how people used technology to interact
ing. Where possible, she tried to spark competitive with friends and colleagues. Already Crowther was
fires, challenging laggard practices to rise to the per- investigating how to incorporate social networking
formance of leaders. On most accounts (number of and smart phone apps into the current platform. New
sites, usage, resume and profile updates) the metrics features and functionality, however, did not present
showed strong positive momentum; however, the the biggest challenge. The KS&C team remained
majority of post- engagement content was still not focused on communicating and promoting a consist-
being sanitized and uploaded to insidebooz. ent set of KS&C behaviors that would lead to the
Crowther and her team remained focused on over- adoption of insidebooz; if successful, they would have
coming the challenges of getting staff to sanitize built a differentiated capability for the new Booz &
and upload more content to insidebooz. Crowther Company.
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Case study 15 Spreadshirt: mass-customization on the Internet
CASE STUDY 15
Spreadshirt
Mass-customization on the Internet
Introduction Rhine-Westphalia), where he studied business admin-

istration and information technology and worked for
Spreadshirt has an unrealistic business model which is char- Campus Consult, one of the largest student consultan-
acterized by arbitrary investment planning and declining cies in the world.
market development.
(Jury statement at the NUK Business Plan Competition1 in I was very much involved with Campus Consult from the first
February 2002 in Cologne [Germany]) day on. so I didn’t spend a lot of time in the lecture rooms.
Instead, I carried out consulting projects, participated in
Today, five years after the Cologne event, the internal seminars, and was a member of the management
jury’s decision could be questioned, especially with board. But particularly through the consulting projects I
Spreadshirt being now the European market leader learnt what was really going on in the business world.
(Lukasz Gadowski, Ceo spreadshirt)
in micro-merchandising2 and one of the top three
players worldwide with an accumulated sales amount
of more than 5 million customised merchandising
articles. 2006 turnover was EUR 15 million, and the
company currently employs more than 250 people in 1 NUK: Netzwerk und Know-how (Engl.: network and
Europe and the United States. know-how). The annual NUK Business Plan Competition
is organized by the non-profit association NUK Neues
Company background Unternehmertum Rheinland e.V. based in Cologne
(Germany).
Idea 2 Micro-merchandising enables consumers to create their
Spreadshirt’s CEO and founder Lukasz Gadowski3 own merchandise by putting their own logos, slogans, and
designs on apparel and other articles.
has always been interested in entrepreneurship. 3 Lukasz Gadowski was born in 1977 in Upper Silesia
He founded his first company during his third (Poland) and emigrated with his family to Germany at the
semester at the University of Paderborn (in North age of seven.
this case study was written by sebastian Bartz, International Business Master student, under the supervision of dr albrecht enders,
assistant professor of strategic Management, Harald Hungenberg, Chaired professor of strategic Management (all three from Uni-
versity of nuremberg), and tawfik Jelassi, dean and professor of e-Business and It at school of International Management of ecole
nationale des ponts et Chaussées (enpC, paris). It is intended to be used as the basis for class discussion rather than to illustrate
effective or ineffective handling of a management situation.
this case study was made possible by the cooperation of Lukasz Gadowski, Chief executive officer, spreadshirt and Konrad
Marx, Country Manager (Germany, austria, switzerland), spreadshirt.
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Part 4 Case studies
Along with other Campus Consulters (that is what was responsible for marketing and business proc-
the members call themselves), Gadowski did market esses. In May 2002, the first fully automatic version
research projects, built and sold websites and content of the website went online. Now, people interested
management systems. They founded a limited liability in a Spreadshop could open it themselves online and
company and started selling and implementing con- offer merchandising articles they designed. This was
trolling software; however, long-term success was the enabler for the subsequent growth in the follow-
not in sight. One semester later, Gadowski founded a ing years. In order to finance this growth, Gadowski
mobile commerce company, but again it did not suc- attempted to raise some capital:
ceed. Market conditions were not favorable since it was throughout the year, I was trying to get in touch with
right after the Internet bubble burst. He remembered business angels in order to convince them of our busi-
the idea he had been thinking about for some time: ness model. However, I never succeeded. Very often, I was
already turned down by the secretary saying: ‘We don’t do
In 2000, one of our first clients was a small textile printing
Internet anymore.’ It was such a waste of time.
company in Hesse. through this project I got to know the
printing technology and market. and the spreadshirt idea
popped right up. […] I was also inspired by the amazon af- Growth
filiate program that enabled people to put adequate books
on their websites. so if it worked with books, why should it Spreadshirt’s growth had to be financed internally,
not work with shirts? resulting in a business that hit break-even right from
(Lukasz Gadowski) the start. The innovative business model even won a
business plan competition in Saxony in October 2002.
Realizing that his strengths lay within management
rather than IT, Gadowski first went to the University the FuturesaX 2002 award was very important to us be-
of Mannheim (Baden-Wuerttemberg) to study busi- cause it generated a lot of attention right from the begin-
ning. Furthermore, the 2004 Hp Business Vision award
ness administration, but later decided to pursue a
meant a lot to us because it was the first international one
diploma programme at the Leipzig Graduate School we received.
of Management4 that is renowned for its entrepre- (Lukasz Gadowski)
neurial focus.
By the time Gadowski finished his studies at HHL in
June 2003, Spreadshirt already registered more than
5,000 shop partners. Since the number of orders and
Foundation
sales volumes grew exponentially, Gadowski and
In the summer of 2001, the first website bearing the
Spiess hired more staff – especially for customer
name Spreadshirt was launched. Gadowski explains
service. Potential candidates were found quickly
where the name stems from:
via placards or Internet ads. The first job interviews
I chose this name because the business model was to took place in the HHL lecture rooms because at the
spread shirts via the Internet. Furthermore, the company it-
time the company had no office. All candidates had
self would be spread on the web through all the shop part-
ners, which would also spread the word about us. I didn’t to pass several tests like writing service emails, fig-
want a central portal where people could only go to order uring out brainteasers, solving maths problems, and
their shirt. I wanted thousands of other mini-entrepreneurs designing t-shirts. A lot of students were grateful for
to create their own products in their own shops using my the opportunity to work for a dynamic and success-
platform.
ful start-up. There were not many student jobs in
The first website version, however, did not allow users Leipzig that offered such a broad range of interest-
to create their own shop by themselves. Gadowski had ing tasks.
to do it manually and thus concentrated on the most
important customers – requiring at least 100,000
page impressions5 per month in order to set up a 4 In German: Handelshochschule Leipzig, HHL (Saxony).
Spreadshop for them. 5 A page impression is a request to load a single page of a
website. It serves as an indicator for a site’s traffic and
Late in 2001, one of the first Spreadshop owners,
thus is often used to evaluate the expected revenues from
Michael Spiess, joined Gadowski, and both founded advertisements on the page.
Spreadshirt GbR6 based in Leipzig. Henceforth, Spiess 6 GbR – Gesellschaft buergerlichen Rechts (Engl.: civil-law
took charge of the IT development while Gadowski association).
578

In May 2004, counting more than 25,000 shop ● Relocation activities

partners, Spreadshirt opened its own production and ● Spring 2005, Spreadshirt Inc. moved from
logistics centre with a surface area of 130 m2 next to Louisville, Kentucky to Greensburg/Pittsburgh,
its office building in the west of Leipzig. It enabled Pennsylvania
the company to be independent from the former ful-
● Fall 2005, Spreadshirt moved into the new
fillment partners and to produce as well as pack the
production and logistics centre in Taucha, just
articles for faster shipping – now within 48 hours. Also,
east of Leipzig, tripling its production capacity
the Spreadshirt Designer, an online customization
and order tool, was launched, first in German, then in ● Spring 2006, Spreadshirt also relocated its
English, French, Spanish, Dutch, Italian, Norwegian Leipzig headquarters to a neighbouring build-
and Swedish. Now most European and North American ing, which allowed the company to house all its
customers are able to customize their own articles departments in a 1,200 m2 surface area.
directly at Spreadshirt without having to open a shop In July 2006 as the first European company in its
themselves or having to search for an existing shop industry, Spreadshirt closed a deal with London-
that might have a similar article as desired. based Accel Partners, which invested several million
Later that year, former HHL colleague Michael euros of venture capital. Gadowski makes an interest-
Petersen returned to the company and joined ing comment about this in his personal blog:7
Gadowski and Spiess on the management board after
We don’t really need venture capital, and above all, not that
having worked for McKinsey for some time.
much. But a little bit of it makes sense, especially when you’re
I knew Michael from HHL. Very often, we had worked expanding internationally and simultaneously trying to en-
together and felt that we got along very well. It was also hance product development. However, the major part of the
planned that he would start working at Spreadshirt after his money is cushion which will be used in case of catastrophes
studies. However, he was a little sceptical about our sales or for seizing certain opportunities such as acquisitions.8
forecast and thought we wouldn’t achieve our goals. And
In October 2006, the business organization
when he got the offer from McKinsey, he accepted it, but we
kept in touch. Before Michael went to McKinsey, he had two Entrepreneurs for Growth9 published its new list of
months to help us out. There he really saw his impact on Europe’s 500 strongest growing mid-sized compa-
the company. He never forgot that and eventually returned. nies. It includes the most successful businesses in 28
(Lukasz Gadowski) European countries and is sponsored by KPMG and
Microsoft. In total, these 500 companies have shown
At the same time, Spreadshirt Inc. was founded
a 57% staff increase and a growth of 67%. Spreadshirt
in Louisville, Kentucky, as a 100% subsidiary of
has ranked among the top 1% of this list and even
Spreadshirt GmbH – the limited liability company that
finished number one in Germany. Between 2002
had been created out of the GbR in December 2003.
and 2005, the Leipzig-based online merchandiser
The years 2005 and 2006 were characterized by
increased its turnover from about EUR 100,000 to
winning awards and relocating facilities:
more than EUR 8 million, and its staff from 2 to 200.10
● Personal awards for Lukasz Gadowski
Spreadshirt’s superior ranking among the top 5 strongest
● 2005, Saxony’s Founder Champion of the year growing mid-sized companies in Europe is very impres-
sive. This award shows that business success can stem from
● 2005, Entrepreneur of the year of Middle
Germany.
Germany (Rezzo Schlauch, Chairman of Spreadshirt’s
● 2006, Internet Entrepreneur of the Year supervisory board)
● Awards for Spreadshirt

● 2005, German Internet Prize
● 2005, FutureSAX Business Plan Competition
● 2005, Nomination for the renowned German 7 http://www.gruenderszene.de.
Founder Prize 8 http://www.gruenderszene.de/?p=19.
9 For information on the organization visit: http://www
● 2006, Red Herring 100 Europe Award .entrepreneursforgrowth.org.
(Europe’s 100 most innovative companies) 10 http://www.spreadshirt.net/26_10_2006.1004.0.html.
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Part 4 Case studies
Exhibit 1 Spreadshirt’s production facilities and offices
Legnica Krakau
(Production) (Development Center)
Taucha
(Production)
Pittsburgh Greensburg Leipzig

(Marketing/Sales) (Production) (HQ)
Utrecht
(Marketing/Sales)
Cork Paris
(Marketing/Sales) (Marketing/Sales)
Source: Own illustration.
At the end of 2006, Spreadshirt operated three pro- Business areas

duction plants, four marketing and sales offices, and
Exhibit 2 gives an overview of Spreadshirt’s different
sales offices and one development centre in Europe
business areas. The original ones on the left have a
and the United States (see Exhibit 1).
mass-customization approach and would probably
Exhibit 2 Spreadshirt’s business areas
Spreadshirt
(sprd.net AG)
Mass-customization Mass production Marketplace
Shop partner Design Bulk Handmade

End customer platforms
platform competition orders things
580

be considered the core business. However, the three The process of opening and operating a Spreadshop
remaining business areas (La Fraise in particular) also works as follows (Exhibit 3 visualizes the process):
contribute significantly to the company’s success. potential shop partners need to register online before
they can start creating and selling their own merchan-
dise. Currently, there are about 80 different types of
Spreadshirt.net
merchandising articles and several hundred designs
The award-winning Spreadshirt business model dif-
to choose from. Additionally, shop owners can upload
fers substantially from the traditional textile print
their own vector or digital graphics. At the end, they
shop around the corner, although at first sight it
determine the margin for every customized article,
may appear as if Spreadshirt, too, only refined shirts
i.e. a price equal or above the base price charged by
and other articles. However, the company uses the
Spreadshirt (currently EUR 12.90 for the Men’s Slim
Internet to enable virtually anybody to become an
Contrast Tee, EUR 9.90 for the mug, EUR 3.00 per motif
entrepreneur and sell merchandise; or, as Gadowski
or text). The assortment (see Exhibit 4 for examples)
puts it simply: ‘We enable users to do their own thing.’
ranges from classic t-shirts, casual, trendy apparel, and
He is referring to the so-called Spreadshop system
sportswear, to accessories and gifts including mugs,
that has been offered at spreadshirt.net from the
mousepads, badges, and bags. Commission levels are
beginning:
uncapped and earnings are paid out quarterly. Also,
Our business model is that we offer everybody the possibil- shop partners have the option to personalize the shop
ity to open their own shop and to start selling customized itself in terms of colors or fonts, for example.
merchandising articles within minutes. Since shop manage-
ment is done online, all you need is an Internet connec-
By December 2006, the company had about
tion to get started. Spreadshirt takes care of all the rest: the 200,000 shop partners including private individuals,
shop software, inventory management, printing, packaging, associations, companies, sports teams or artists. Very
shipping, payments, and after-sales service. Thus, our value often these are people interested in a specific niche
creation lies within the order fulfillment where we generate which they want to promote online, or webmasters
revenues per unit.
Exhibit 3 The process of opening and operating a Spreadshop
Open your Create your Set the Start Collect your

shop product price selling commission
• Register at • Choose from • Determine the • Spreadshirt • Spreadshirt

spreadshirt.net about 80 market price by takes care of pays the
merchandising choosing your the whole commission to
• Upload your
articles commission fulfillment its shop
motive level process partners on a
• Create your quarterly basis
product within
seconds
Source: spreadshirt.
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Part 4 Case studies
Exhibit 4 Spreadshirt merchandise assortment examples

Spreadshirt.net / Designer
Promodoro Lady
Sonar Retro Shirt Winter Cap Messenger Bag
Leisure Jacket
Spreadshirt Sports
Nike Park Plus Adidas Avantis

Jako Short Cardiff Puma Stirrups
Jersey Jersey
who simply want to earn some extra money with their offers. Regular shop partners do not encounter any
website. fixed costs, and therefore do not need to sell any
Once a regular Spreadshop is set up and is running articles. Only when items are sold are they paid the
successfully in terms of sales, a shop partner may con- individually selected commissions. Like Spreadshirt
sider upgrading it to a premium shop. For EUR 10.00 itself, every regular shop hits break-even right from
a month, a premium shop operator benefits from sev- the start. Premium shop sales, however, will have to
eral advantages: compensate the monthly fee charged for the extra
functions.
● Offering the shop in 13 languages,
● Running the shop without Spreadshirt advertising,
Spreadshirt Designer/Spreadshirt Sports
● Having almost unlimited motif uploads, The Spreadshirt Designer allows online users to create
● Including a personal logo on invoices and delivery their customized apparel, accessories and gifts with-
notes, out opening a shop. Personalized designs and texts
● Offering limited editions, and are printed on any item in the Spreadshirt assortment.
It is an on-demand solution that does not require
● Offering sales discounts to best customers.
any minimum order quantity. The company does not
Some of Spreadshirt’s most famous premium shop define a typical Spreadshirt Designer customer; any-
partners include: Harry Potter, BoingBoing (see one looking for a gift can use it.
Exhibit 5 for screenshots), Eurosport, Ryanair, A special form of the Spreadshirt Designer is
Napster, Tiscali, LinkedIn, Texas Instruments, RTL, Spreadshirt Sports. Here, the product line is adapted
and Coca-Cola. to the needs of people interested in sports. Among
The success of spreadshirt.net is due to the easy the different types of t-shirts, users also find several
handling of the shop by its owners and users as jerseys, shorts, and socks that are not available at the
well as the completely risk-free profit opportunity it regular Designer.
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Exhibit 5 Big account Spreadshop screenshots
Source: Screenshot taken from http://harrypotter.wbshop.com.

Screenshot taken from http://www.spreadshirt.com/shop.php?sid=3533.
Konrad Marx, Spreadshirt’s D-A-CH11 Country Man- forms are dime a dozen on the market. So every one of
ager, comments on the importance of having the Desig- them has to buy customers through marketing campaigns
and hope they will stay loyal and come back. In contrast,
ner and Spreadshirt Sports next to the Spreadshops:
shop partners are businesses themselves. They want that
The shop partner platform is the core of Spreadshirt’s their products sell. We only provide the platform for it.
business. It is the main reason why we were able to grow
exponentially in the past. However, the designer shops are The three business areas presented above resort to the
important, too. Internally, we call them the ‘own shops’ that same fulfillment process displayed in Exhibit 6. After
independently promote our customized merchandising
articles. They account for more than 40% of the sales. But
they have a big disadvantage: Online shirt designer plat- 11 Germany, Austria, Switzerland.
Exhibit 6 Spreadshirt’s mass-customization fulfillment process
Customer
Order receipt Preparation Warehousing Operations Logistics
service
• Digital receipt • Preparation • Optimization • Transfer of • Attractive • Multi-lingual

of motive(s) of the printing of stock the motive shipping service center
and article(s) depending on onto the conditions based at
• Avoid running
the printing article Leipzig HQ
• Receipt of out of stock • Shipped by
technology
payment • E.g. pressing Deutsche • Currently:
• Minimize
• Technologies: of the flex Post, DHL service by
• Forwarding to working
flex, flock, motive onto email by
production capital
digital, offset, a shirt native
transfer speakers
Source: Spreadshirt.
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Part 4 Case studies
receiving the individual order, production prepara- to get set up, he began selling t-shirts aiming at the
tion takes place, depending on the printing technol- geeks and gamers community. Within only a short
ogy used. In the case of flex or flock printing, the time period, he started receiving the first submissions
motifs are plotted on colored plastic foils and then from community designers visiting the online shop
separated from the foil rests. In the warehouse, motifs and blog – the design competition was born. Cassard
and their corresponding merchandising articles are explains how it works:
brought together and a first quality check takes place. Designers submit their drafts directly on the website. The
Thereafter, the motifs are transferred onto the articles. following week, the designs are subject to the visitors’
Flex and flock motifs, for example, are pressed onto a votes. At the end of the grading period, and in concord-
garment under strictly controlled conditions of heat ance with several criteria, we award a EUR 1,000 cheque
and pressure. In a second quality check Spreadshirt to the selected designer and print a limited edition of 500
shirts. Usually, we pick between 16 and 20 new designs
employees meticulously examine the operations’ out- every month.13
come and take action where necessary. Then, the cus-
tomized articles are packed and ready for shipping. This model strongly benefits from viral effects because
International after-sales customer service is done by users generate the content and each one of them has
native speakers from Leipzig headquarters. the incentive to gain new users, e.g. by saying: ‘Hey,
can you vote for my design please? Thanks!’ Also,
users have a different relation to the shirts produced –
The Derby/La Fraise
after all, they have voted and thereby influenced their
The Derby is a continuous online t-shirt design com- fate. Most important to the leveraging of viral effects
petition, which was introduced by Spreadshirt in is the quality of the products, i.e. the quality of the
April 2006. All amateur and professional designers designs. And thanks to the active and professional
are encouraged to upload their motifs which are then community of more than 70,000 users, the designs
subject to popular voting. Every two weeks, the win- are usually very fancy, funny as well as graphically
ning designs are eventually awarded a certain amount appealing.
of money, produced in a limited edition, and offered Cassard knows the reason why the community is so
to the public in the Derby online shop. The Derby active in contributing content:
customers are typically fashion-orientated individual-
ists who do not fall for brands and want something I always made sure to take their opinions and comments
into account. The website is all about its community. It isn’t
special. limited to marketing but is an everyday reality. In a way, a
After only two months in business, Spreadshirt sort of huge board of directors.14
decided to back up its Derby by going offline and
opened its very first bricks-and-mortar shop in According to Gadowski, the success of La Fraise is due
Berlin12, called The Derby Store. Since then, the to several factors:
Derby winner shirts could not only be ordered online, One thing is that it came to market relatively early. Also,
but also picked up at the store. CEO Lukasz Gadowski its website is really simple and pleasing. Last but not least,
explains this move: there is Patrice [Cassard] who composed the very popular
‘boss blog’ of La Fraise and who simply has the talent to
The Derby Store is an additional channel that distinguishes build a community.15
us from our competitors. Furthermore, our shop partners
and design contributors at The Derby like the shop. Now we After months of meetings with Spreadshirt, Cassard
are able to present their motifs offline. We can even imagine decided to sell his company and signed the contract
expanding this [physical] channel. But this is not our priority in July 2006.
number one right now. We’ll only open more stores in case
of special opportunities.
In July 2006, it became clear what Spreadshirt would

use a part of its venture capital for: the Leipzig-based 12 The Derby Store is located at Gabelsbergerstraße 16,
merchandiser acquired Europe’s number one online Berlin Friedrichshain.
13 http://blog.spreadshirt.net/uk/index.
t-shirt design competition La Fraise. Patrice Cassard php?itemid=6222&catid=32.
had launched La Fraise in 2003 from his apartment 14 Ibid.
in Saint-Etienne (France). With only EUR 10,000 15 http://www.gruenderszene.de/?p=20.
584

patrice’s motivation [to sell La Fraise] was probably to do for small-scale orders where delivery time and flex-
something different. Furthermore, there is a big difference ibility are essential, but are sourced out to partner
between starting an enterprise and running it on a day-to-
print shops. The same measure holds true for the
day basis. the latter makes different demands on the organ-
ization, administration, and logistics. not everybody wants La Fraise limited editions that do not require a mass
to be bothered by this.16 customization approach either. Spreadshirt benefits
(Lukasz Gadowski) from a strong bargaining position with its textile
suppliers because of its huge purchasing volume.
For Spreadshirt, however, acquiring La Fraise was
Therefore, Spreadshirt is able to compete on the price.
an important move into this new market segment of
online t-shirt design competitions. In addition, La We probably have the best purchasing conditions of all
Fraise would foster Spreadshirt’s shop partner busi- textile refiners in Germany. thus, small print shops cannot
compete with us at all. on top of that, we hardly need to
ness. Designers whose drafts do not make it to market
actively acquire any customer because most of the requests
will most likely open up their own Spreadshop and come from our shop partners. our competitors do not pos-
sell their work there. This leads to additional shop sess this enormous customer network. and there is another
partners and additional sales for Spreadshirt. beneficial side effect: the more articles we process at dds,
the better our conditions get because the typical orders are
We are proud and feel honored that patrice decided to sell always significant in quantity. Recently, for example, we sold
[La Fraise] to us. that’s indeed a great sign of confidence. 15,000 shirts to General Motors.
and such a takeover is by all means delicate because, after (Konrad Marx)
all, it’s a community business. [. . .] thus, there was some tur-
moil [within the community] after patrice’s announcement
[of the deal], but which he was able to ‘blog-manage’ with Sozeug
calmness.17
(Lukasz Gadowski)
Sozeug is a German online platform for buying and
selling handmade things which went online in March
For a short while, Spreadshirt was thinking to keep 2006. But according to its founder Hannes Diedrich,
both design competitions – The Derby and La Fraise. it differs considerably from established online market-
But it became obvious that one of them would even- places such as eBay or Amazon. At Sozeug, designers,
tually lose. In terms of usability and high profile, artists, and others do not just buy or sell products.
La Fraise was the better platform, so it was decided to Instead, they are the focus themselves, acting and
phase out The Derby and to refactor and internation- communicating with each other – corresponding per-
alize La Fraise instead. fectly to the first of the 95 cluetrain theses: ‘Markets
are conversations.’19 People can leave comments or
DDS write messages to each other. The products for sale
DDS18 is the bulk order service of Spreadshirt which online, and thereby their creators, are linked via
offers the whole range of merchandising articles for tags. Thus, the conventional hierarchical structure is
quantities starting at 25 pieces. Ironically, it was never replaced by a more flexible mode.20 Revenues are not
intended to engage in such a business, as Konrad generated by charging the offering of a product, but
Marx explains: by a 7% sales commission to the company.
We didn’t plan to take part in the classic textile printing Diedrich came up with the Sozeug idea after
business because of the fierce competition. there are thou- observing many designers in Berlin who had at best
sands of textile printers in the world and probably around their own small stores, but mostly sold their self-made
30 in Leipzig alone. Usually, the customer invites offers from products at the weekly market. On the one hand, he
10 companies and decides upon the price. However, we re-
realized that this is a business that works. On the other
ceived so many requests with order quantities of 100, 200
or more, and many of our proposals were even accepted
by the customers – which surprised us. then, the requests
became so relevant that we decided to form a separate unit 16 Ibid.
to deal with this business. so we hired a bunch of people 17 Ibid.
who created the dds in early 2004. 18 DDS stands for Deutsche Druckservice (Engl.: German
Printing Service).
Orders fulfilled by DDS – which very often come from
19 http://www.cluetrain.org.
larger corporations – do not resort to the company’s 20 http://www.sozeug.de/pressematerial/sozeug-
own production capacities, since these are reserved pm230306.pdf.
585

Part 4 Case studies
hand, he thought an online platform would connect Organization

supply and demand on a much larger scale. Also, he
Organizational structure
found out about Etsy21 and decided to launch a simi-
Spreadshirt is organized in a matrix structure as
lar enterprise in Germany. In October 2006, Diedrich
shown in Exhibit 7. Its second management level
posted a comment in his corporate blog carrying the
represents a functional and a regional specialization.
title ‘Friendly Takeover’:
Thus, every organizational unit reports either to its
I’m happy to announce that, henceforth, Spreadshirt [. . .] area manager, country manager, or both.
will take over sozeug.net. [. . .] Spreadshirt’s experience and
Interestingly, Spreadshirt does not have an explicit
knowledge only promise the best for the future of sozeug.
net. Some exciting things have already been planned.22 organization chart. According to Konrad Marx, the
(Hannes Diedrich) company simply does not need it:
One may wonder why Spreadshirt decided to buy The responsibilities of every single employee are put down
on our Intranet. [. . . .] The whole organizational chart is writ-
a company that does not have anything to do with ten down if you will. You can read who is responsible for
textile printing or merchandising. Additionally, what and who is everyone reporting to. Basically, you don’t
Sozeug may seem somewhat irrelevant to traditional need anything else.
online shoppers. But it has a quite homogeneous
community – possibly a creative class – that Spreadshirt 21 http://www.etsy.com.
is obviously interested in. Sozeug shows what social 22 http://sozeug.net/blog/2006/10 ÷ 09/freundliche-
shopping could look like in the future. uebernahme/.
Exhibit 7 Spreadshirt’s organizational structure
CEO COO CIO CEO USA

Lukasz Gadowski Michael Petersen Matthias C. Spieß Jana Eggers
Online Product Customer

Branding Graphics IT
Marketing Management Service
D, A, CH
UK
Scandinavia
PL
USA
586

At Spreadshirt, there is the so-called owner principle of And what’s more obvious than resorting to the ideas and the
responsibilities. Everyone can assume as much respon- joy to create of our online community?24
sibility as desired. At all times, there is a list of project As Milles states, the OLP was aimed at the vast inter-
proposals posted on the Intranet. Everybody can take national Spreadshirt community which, at the time,
what they want. The area or country manager then represented more than 100,000 shop partners, many
simply activates the budget for it. If someone seizes a of whom were either professional or amateur design-
project, nobody is going to mind as long as the project ers. Before giving the starting signal, Spreadshirt
is managed in a professional way. However, if the framed several important guidelines for the project
project does not advance well, others will try to get it. (see Exhibit 8).
Besides defining the OLP’s objectives and require-
Open Logo Project ments, Spreadshirt explained how it would proceed
In December 2005, Spreadshirt launched the Open Logo with the submissions and what the awards for the
Project (OLP) in order to refresh its corporate design. As winners would be.
the name suggests, the design development process was Spreadshirt will choose up to 10 winners from all entries.
not conducted confidentially with a professional design The grand prize of EUR 5,000 (USD 6,000) will be split
agency as most companies do it. Instead, Spreadshirt among the winners. In addition, there will be a special prize
set up a blog platform23 and invited everybody to
submit design proposals. Andreas Milles, Spreadshirt’s
so-called Brand Evangelist, comments on the decision:
23 http://olp.spreadshirt.net.
For our new corporate design we didn’t want any long- 24 http://www.spreadshirt.net/28_03_2006.809.0.html?
winded bids. After all, we’ve got our numerous shop partners. lang=de&locale=DE.
Exhibit 8 Guidelines of the Open Logo Project
Logo / Trademark Color Scheme Text Logo
The logo should: • Finding a color “atmosphere” • Developing an international

that represents and text logo
Objectives
• Look and function like a label

characterizes Spreadshirt
• Definition of a font to use
• Show our internationality and internationally
in-house and for
make sense internationally
advertisements and claims
• Reflect what Spreadshirt offers
• High international recognition, • Cross-media, credible • Matches with the logo

able to function as an international application
• International recognizability
independent icon
• Clear specifications in
• Memorability, can function
• Cross-media usability: pantone/CMYK/RGB color
independently
optimized for intergration/ systems
Requirements
recognition online, also in

• Broad acceptance
smaller presentations
• Expresses the Spreadshirt
• Simple and flexible combination
values: reliability, speed,
possibilities with a claim
freshness
• Positive and negative
presentation options
• Single-color reproduction
possibilities
587

Part 4 Case studies
for the most original design. Copyrights must be passed on Exhibit 9 The Fingerprint – the winning design of the
to Spreadshirt before any prizes are distributed. Until prizes Open Logo Project
are awarded, all designs remain your property. Spreadshirt
employees are excluded from entering the competition.25
(Andreas Milles)
The design collecting period ended in February 2006.

The response to the project was enormous: within
only two months, 600 participants submitted a total
of 1,100 designs. All proposals were published on the
official website for the community to comment on. An
average of 1,500 users viewed this website every day.
The OLP was posted more than 140 times in other
blogs. Therefore Spreadshirt estimated that several
hundred thousand people have read at least one of the Source: Spreadshirt.
blog entries, making the project a great success.
Following the design collecting period, the OLP circles that spread when something hits the water
team had the difficult task of narrowing down the vast surface. The curves make it look very dynamic – which
amount of proposals to a maximum of ten as they had the young company really is. Colin was awarded EUR
announced before. Eventually, six concepts made it 1,000 and a design tablet worth EUR 2,500.
to the finals. Through the OLP we’ve learnt how our customers perceive
us, and what they think is important about Spreadshirt.
We picked 6 drafts of which we thought they’d have the What I liked best about the OLP was that a very interesting
potential to represent Spreadshirt in the future. We could international community was created.29
also have picked more designs because we had received so (Andreas Milles)
many sophisticated concepts. But in the end, we just had
to make a decision: We picked 3 drafts that had a fresh and The original draft was subsequently enhanced into
dynamic signet, a very clear and strong logo. On top, we four additional versions of the fingerprint – shown in
picked 3 more drafts that had a very interesting concept as
well as the potential to be developed further.26
Exhibit 10 – that are used at random for any occasion.
(Andreas Milles) Their names only distinguish them from each other.
These six designs were then presented and discussed

in a number of forums and weblogs for the interna- Business strategy
tional community to vote on their favorite one. Two Spreadshirt’s long-term goal is ‘to become the glo-
weeks later, the winner – with 25% of the votes – was bal market leader for customized merchandise.’30
chosen: Maxime Colin, Junior Art Director from Lyon
(France). Ironically, Colin was an actively contribut- Exhibit 10 The five different versions of The Finger-
ing designer to La Fraise, which Spreadshirt acquired print used by Spreadshirt
only a few months later. He had submitted the design
called The Fingerprint (see Exhibit 9), which not only
the community liked, but also Andreas Milles: ‘The
result [of the voting] thrills us. The Fingerprint is a
perfect metaphor for Spreadshirt.’27 Leipzig Taucha Greensburg Paris London
Colin’s logo concept managed to combine vari-
ous important issues of Spreadshirt and its busi- Source: Spreadshirt.
ness model: First, the fingerprint clearly symbolizes
uniqueness, which is exactly what Spreadshirt’s mass- 25 http://olp.spreadshirt.net/wordpress/?addon=brief.
customization approach enables. At the same time, it 26 http://olp.spreadshirt.net/wordpress/?p=1485.
also represents the first capital letter ‘S’ of the com- 27 http://www.spreadshirt.net/28_03_2006.809.0.html.
28 http://olp.spreadshirt.net/wordpress/index.
pany’s name; or, as Colin puts it: ‘That’s the logic link php?p=1113.
between the design and the [. . .] word’.28 Third, the 29 http://companice.twoday.net/stories/1818009/.
logo also symbolizes the viral effect, resembling water 30 http://www.spreadshirt.net/About_Us.124.0.html.
588

Exhibit 11 Spreadshirt growth summary (2002–2006)
260 €15 m 200,000
× 20
00
× 15
0
× 13
0
2002 2006
2 € 100 k 100
Staff* Turnover Shop Partners*

* Figures taken from January 2002 and December 2006.
Source: own illustration.
Since Spreadshirt already is the European market it is. A start-up cannot afford to work with average
leader and has grown tremendously during the past staff for a very good reason:
years (see Exhibit 11), the company seems to be on
Excellent people replace [corporate] rules. You can’t set up
track. Gadowski anticipates that Spreadshirt will have as many rules as you would need. That’s why you definitely
become number one worldwide by 2010. need excellent people.31
(Lukasz Gadowski)
success stems from many factors: we are just different and
we execute well. We have a strong long-term perspective In order to find excellent employees, Spreadshirt has
and we think about real customer value. We have a good
software and, above all, excellent people. that’s probably
developed a multi-level recruiting process. Incoming
why so many companies have failed and we’re still around. applications are analyzed and promising ones imme-
[. . .] also, right from the start, we’ve approached the right diately forwarded. Before inviting a candidate to
customer segment and got something across – a message a personal interview, a telephone conversation is
that was commercial but that people could identify with. arranged to evaluate the applicant’s basic social fit.
(Lukasz Gadowski)
The first personal interview usually takes place with
the participation of Human Resources staff and two
or three department managers. If the candidate is
convincing, a second personal interview is conducted
The Spreadshirt people
only days later, led by a division manager and/or a
For Gadowski, it is the Spreadshirt people who make member of the management board. Thereafter, the
the difference. That is why it has always been of final decision is quickly taken and communicated
utmost importance to him to identify the ones that fit. to the applicant. Although Spreadshirt is currently
We really expect much from our employees – during the having trouble filling all the vacancies with excel-
interviews and on the job. our motto is: ‘Good is not good lent people, the Leipzig area offers a well-educated
enough.’ this means that everybody, including the service labour pool.
personnel, has to contribute more than just the ordinary.
especially during the first two years, we have been rigorous sometimes venture capitalists are sceptical and ask me:
with our staff. I’ve even fired people who did their job quite ‘do you get the talent in Leipzig?’ they think the only place
well. so I guess, even today, there are still some people in where you can do business is silicon Valley. that’s nonsense!
Leipzig who think I’m a lunatic. (Lukasz Gadowski)
(Lukasz Gadowski)
Gadowski believes that if a company in its early stages

31 http://www.connectedmarketing.de/cm/2006/11/
is not able to pay exceptional people, it must wait until besuch_in_leipz.html.
589

Part 4 Case studies
After a new employee has joined the team, the so- Especially job candidates often arrive with the expectation
called Spreadshirt Academy program fulfills important that we’re only a start-up and everything must be chaotic.
But then, they’re surprised.
on-boarding functions, ensuring immediate knowl-
(Konrad Marx)
edge transfer during the first days on the job. It con-
sists of different modules that a mentor can combine. Project management, for example, is very important
Each module contains a set of tasks whose execution at Spreadshirt. Everything that takes longer than one
creates interaction with other Spreadshirt people. day requires a project plan which is created on the
Some introductory tasks only require getting a login company’s Intranet – based on a Wiki32 platform – and
and a password. Others, for example, assess the defines the main project parameters:
knowledge about Spreadshirt’s products and competi-
● Project team and leader,
tors in the form of a written test. Furthermore, newly
hired employees working at the Leipzig headquarters ● Project objectives,
carry out a so-called Production Day in order to learn ● Milestones,
how the customization is done. They take part in each ● Deadlines,
stage of the entire fulfillment process, from plotting
● External contacts,
the motifs on the flex and flock plastic foils to the
packaging of the refined articles for shipping. ● Internal/external dependencies, and
As job motivation is crucial, Spreadshirt regularly ● Possible risks.
organizes informal get-togethers in bars or other loca-
There is also a mandatory debriefing in order to share
tions. There, employees get the chance to talk about
all the lessons learnt from the project. Furthermore,
other than work-related issues. More professional
Spreadshirt employs sophisticated performance
topics are addressed in the monthly general assembly
measurement systems. Marketing Overview, for exam-
where latest news is spread and future objectives
ple, gives control over the use and efficiency of mar-
announced. Good communication as one motivat-
keting channels. Cockpit is used regularly to provide
ing factor is also guaranteed by frequent intra- and
relevant key performance indicators on a monthly
inter-departmental meeting sessions. Moreover, the
basis. Additionally, SpreadReports is a reporting sys-
company intends to motivate in monetary form: Most
tem (based on open-source SQL) that supports vari-
of Spreadshirt’s employees receive a performance
ous queries to Spreadshirt’s database (see Exhibit 12).
bonus besides their base salary. For the sales staff,
performance is quite easily quantifiable, but for oth-
ers it depends on the quarterly 360 degree feedback Competitive advantage
based on the following six criteria: Our competitive advantage is just a better service level. No
other competitor is able to deliver as fast as we do. [. . .] More
● Responsibility,
than 80% of the articles ordered are ready for shipment
● Results/Effectiveness, within 24 hours; the rest within 48 hours at the latest. [. . .]
The secret lies within our back-end. It’s our people, our proc-
● Efficiency,
esses, and our management.
● Organization, (Konrad Marx)
● Innovation, and Capitalizing on its staff’s competencies and skills,
● Leadership. Spreadshirt pursues a strategy of differentiation
in terms of quality and time, based on its strong
Also, in the future, there will be chances for an
Spreadshop platform. The well-designed processes
employee share pool to be set up, whereby identifica-
tion with the enterprise is planned to be intensified.
32 A wiki is a website that allows visitors to add, remove,

The Spreadshirt processes and systems edit, and change content. It also enables linking among
any number of pages. This ease of interaction and
What I really like about Spreadshirt, and what you can operation makes a wiki an effective tool for mass col-
hardly see from the outside, is that in terms of manage- laborative authoring. For more information visit http://
ment processes we perform better than many other SMEs. en.wikipedia.org/wiki/Wiki.
590

Exhibit 12 SpreadReports screenshots ● A marketplace,

● User-generated content involved,
● A community,
●• Mass-customization, and
● A fun or entertainment brand.
Core business competition

Spreadshirt’s main German competitor is Shirtcity.34
The Bavarian-based company was founded in 2002
and is active in all of Spreadshirt’s core businesses:
the online shop platform, the end customer business
and the design competition. It also has a bulk order
service. However, according to Gadowski, there are
more important competitors to be watched closely
(see Exhibit 15 for a table of Spreadshirt’s most impor-
tant competitors):
In the beginning we observed Shirtcity a little. [. . .] But today,
we are rather keeping an eye on Cafepress and Zazzle in
Source: Spreadshirt. the US.
Cafepress, 35 headquartered in Foster City

(California), was set up in 1999. It was the first
enable the company to achieve short fulfillment times.
company to succeed with a business model similar
Also, Spreadshirt has been expanding its markets and
to that of Spreadshirt. It offers print-on-demand and
business areas. Exhibit 13 shows its market penetra-
e-commerce services that enable individuals and
tion for the years 2002, 2004, and 2006.
organizations to create, buy, and sell customized
In order to enter the Eastern European micro-
merchandise online. The company has a network
merchandising market, the company took over the
of 2.5 million shopkeepers who have created over
Polish market leader Butik33 in the fall of 2005,
35 million unique products on customizable mer-
enabling the Eastern European shop partners to oper-
chandise such as apparel, home and office accesso-
ate on the Spreadshop platform. Lukasz Gadowski
ries, posters and cards.36 Currently, about 50 major
stresses the strategic importance of this move:
accounts (such as Dilbert, Wikipedia, and Startrek)
We’ve acquired Butik for strategic reasons. We didn’t want use the Cafepress platform for their own merchan-
a direct competitor to grow up in a neighbouring country
dising projects. Despite its large size, Cafepress has
having a totally different cost structure combined with an
expansion strategy. not yet entered the European or Asian markets. The
website is only available in English and fulfillment is
Exhibit 14 illustrates Spreadshirt’s diversification exclusively done in Kentucky. International orders,
strategy which relies on either organic growth or on however, can be made with the goods being shipped
acquisition of new businesses. This strategy was oper- out of the USA to their destination abroad. Unlike
ationalized in 2004 and 2006 by the creation of the Spreadshirt, Cafepress offers neither a design com-
DDS, Spreadshirt Sports, the Spreadshirt Designer, petition nor a bulk order service.
and The Derby as well as the acquisition of La Fraise
and Sozeug.
According to Gadowski, the choice of business
partners depends on the industry Spreadshirt wants
33 http://www.butik.pl.
to step into. However, for business areas to become 34 http://www.shirtcity.com.
relevant, they should meet certain criteria. There 35 http://www.cafepress.com.
should be: 36 http://www.cafepress.com/cp/info/about/.
591

Part 4 Case studies
Exhibit 13 Spreadshirt’s worldwide market penetration in the past
2002
2004
2006
592

Exhibit 14 Spreadshirt’s diversification strategy allows people ‘to create, share and celebrate […]
unique interests and passions’.38 Zazzle started in
1999 producing on-demand products with automated
2002 2003 2004 2005 2006
manufacturing systems; however, it did not go online
Spreadshirt.net
until 2003. Today, customers can shop at zazzle.com
and choose from existing designs and products, cre-
DDS ate their own customized merchandise, or publish
their product in a gallery earning a 10% commission
Spreadshirt Sport every time their creation is purchased. According to
the website, Zazzle combines ‘innovative manufactur-
Spreadshirt Designer ing, a robust community, the largest online collection
of customizable digital images and unmatched per-
The Derby sonalization tools to empower [customers] to create
apparel, posters, cards, stamps and more.’39
La Fraise The main international competitor to La Fraise is
Organic growth Threadless40 – the initial project of Skinny Corp,41
Sozeug which was launched in 2000. Today, the Chicago-based
Acquisition

37 http://www.zazzle.com.
The second major competitor of Spreadshirt, 38 http://www.zazzle.com/welcome/first/aboutus.asp.
39 http://www.zazzle.com/welcome/first/aboutus.asp.
Zazzle,37 uses the same business model of on-demand 40 http://www.threadless.com.
manufacturing and an e-commerce platform that 41 http://www.skinnycorp.com.
Exhibit 15 Spreadshirt’s main competitors by origin and business area
Shop partner End customer Design

platforms shops competitions
• Shirtcity • Shirtcity • Shirtcity

Germany, • Personello • Personello • Cajong
Austria,
Switzerland • eQuisto • Shirtalarm
• Shirtinator
• Comboutique • Comboutique • Teetonic

Europe
• TShirtStudio • Split the Atom
(except • Divao • StyleTax
D, A, CH)
• Koalala
• Cafepress • Cafepress • Threadless
• Zazzle • Zazzle
USA
• Printfection • Printfection
593

Part 4 Case studies
ongoing design competition is probably the most In order to expand on the Asian market, Spreadshirt is
famous one in the world. Since La Fraise’s founder currently planning to build its own production capaci-
Cassard was inspired by Threadless, the two concepts ties in Beijing in 2007. By doing so, the company will
are very similar. At Threadless, the submitted designs not only be able to operate in Japan (as it already does
get scored for seven days, usually receiving between today), but also in China, Taiwan, and South Korea to
2,000 and 3,000 votes. Then, the four to six top-scoring achieve its 2008 worldwide market penetration goal
designs are picked, printed in a limited amount, and (see Exhibit 16). According to Gadowski, by 2010
sold online. The winning designers are awarded up Spreadshirt’s turnover could be made up of 40% from
to USD 2,000 in cash and prizes. Although Threadless Europe, 35% from North America and 25% from Asia.
may appear very US centric, its large and active com- Spreadshirt is continuously enhancing its prod-
munity is actually international: 35–40% of all orders ucts and processes in order to sustain and further
and 50% of the winning designs come from abroad. strengthen its market position. The focus is put on
The 2006 sales are predicted to be near USD 20 million, the Spreadshop platform. From January 2007 on, not
with a sales volume of over 80,000 shirts a month.42 only big accounts but also premium shop operators
will be able to integrate the Spreadshirt Designer
interface into their website, thereby increasing the
Future outlook customization features for buyers. There are also
Spreadshirt’s future business strategy focuses on the plans to further interconnect the tens of thousands of
following four factors: Spreadshops via an online social networking platform.
Currently, shop partners can create their own profiles
● Conquering the Asian market,
and send messages to each other. However, the
● Pushing the offline model, objective is to set up a central motif database through
● Creating new business areas, and
● Growing through small acquisitions. 42 http://boetter.dk/podcast/category/customermade/.
Exhibit 16 Spreadshirt’s future market penetration goal
2008
594

which the participating shops’ content becomes avail- bricks-and-mortar stores or online. Via its Spreadshop
able to everybody.43 This adds value to most of the technology, however, Spreadshirt 1.0 capitalizes on
partners, as Konrad Marx explains: viral effects by spreading the company’s front office
Imagine you’re a shop partner, but you hardly have any traf-
online. Konrad Marx explains how this may function
fic on your site. now you can make all your designs avail- in practice:
able to the whole community. If somebody buys a product Suppose you’re a Harry Potter fan and one day you find
with your design, the earnings are split between you and out that the official online shop is run on a spreadshirt
the selling shop. platform which anybody can use for personal merchandis-
ing purposes. so you decide to open your own shop selling
By these new initiatives, Spreadshirt aims at becom-
ing a Web 2.044 business. Exhibit 17 illustrates the
network effects generated through this business 43 An early beta version has already been launched at
model as well as its distinctive features compared to a www.spreadshops.de.
classic shirt shop and the initial Spreadshirt 1.0 busi- 44 The term Web 2.0 suggests a new Internet generation
ness model. Likewise, it assigns the various success after the bursting of the dot-com bubble in 2001 and be-
came popular in 2004 when the first Web 2.0 Conference
factors to each business type. was held in San Francisco. For a definition of the term
With the right technology, a classic shop can offer by its creator Tim O’Reilly visit http://radar.oreilly.com/
mass-customized products to its customers, either in archives/2005/10/web_20_compact_definition.html.
Exhibit 17 Business model enabled success factors
Classic shop Spreadshirt 1.0 Spreadshirt 2.0
Mass-customization
E-commerce
Viral network effects
Entrepreneur partners
User-generated content
Social network
Creativity generation
Growth potential
Source: spreadshirt.
595

Part 4 Case studies
jerseys of your soccer club, for example. Then, one of your Peers trust each other much more than any company
team-mates likes the idea, starts running a shop for his dog- slogan.
breeding association, and tells his friends about it.
Moreover, Spreadshirt sees future growth oppor-
Through this approach, all shop partners become tunities by:
entrepreneurs and promote their ideas and designs
● Educating its shop partners – especially in terms of
within their social environment – or even beyond
self-marketing,
by using Google ads, for instance. In the end, such
actions lead to higher sales for Spreadshirt because ● Pushing its brand,
fulfillment can only be done with them. Furthermore, ● Promoting La Fraise design competitions, and
the Spreadshirt Designer tool allows users to gener- ● Acquiring more corporate customers, especially
ate their own content which many make use of, again among small and medium-sized enterprises.
leading to higher sales.
Spreadshirt’s next step is to develop a Web 2.0 busi- Through the above measures, Spreadshirt aims
ness model driven by the effects of a social network at doubling its worldwide sales in 2007 and 2008
through which people not only communicate with the respectively (see Exhibit 18 for its sales perform-
hub, but also with each other. The other main pillar of ance until 2006), while keeping its market focus and
Spreadshirt 2.0 is the creativity generation whose basic innovation drive. Regarding the company’s future,
assumption is that people are creative, but that they Gadowski says:
do not (or rather did not) have the means to express What keeps me up at night are rather internal questions like
their creativity. Spreadshirt 2.0 not only enables users ‘How are we going to enhance our organizational structure,
to generate their own designs and thereby express keep high quality levels and organize our product develop-
ment?’ We are not afraid that somebody attacks our mar-
their creativity, but also to find a market for their
kets and threatens our position. […] One day, there might be
products through the Spreadshops’ network. By this someone who emerges with an innovation. But it will be up
social network, shop partners can inform potential to us to respond quickly.
customers about their products and the ideas behind
them, exchange experiences with each other and
recommend certain designs, sell products at a self- Exhibit 18 Spreadshirt’s sales performance
determined margin and let Spreadshirt do the rest – (in EUR million)
all without any upfront costs. If Spreadshirt 1.0 is
the showroom for one’s creativity, Spreadshirt 2.0 is 15
the marketing platform that will bring in visitors and
potential buyers.
Growth opportunities are obviously far greater for
Spreadshirt 2.0 than for the classic shop. There are far
more individuals on-board, i.e. the tens of thousands
of Spreadshop partners involved in creating value for 8
customers. All of them have the incentive to promote
their shops in order to achieve higher sales, thus lead-
ing to higher sales for Spreadshirt. Connecting them
via a social platform will result in even higher growth 2.5
opportunities. Intra-community communication
should make trends emerge more quickly and spread 0.5
0.1
further, again leading to higher sales for Spreadshirt. 2002 2003 2004 2005 2006
Users will be able to make recommendations about
their designs and products, or about Spreadshirt. Source: Spreadshirt.
596

CASE STUDY 16
When digital David meets physical Goliath:

the case of Brockhaus vs. Wikipedia
As storm clouds gather
It was an exceptionally bright and sunny day in June Duden logos waving proudly in the warm summer
2004. Standing in his office, Ulrich Granseyer, CEO of breeze. He had just a few minutes left, before he was
the time-honoured Brockhaus Company, looked out due to meet with Matthias Schindler and his col-
of the open window and took a deep breath. leagues, the founders of the German Wikipedia.
He and his company had been sailing rough seas Granseyer’s colleague and head of the New Media
over the past few years. With the emergence of dig- division, Bernd Kreissig, had continually pointed out
ital encyclopaedias, several new competitors had how urgent it was to meet with the founders of this
entered the market, most prominently Microsoft’s new online encyclopaedia. At last, a meeting had been
Encarta. Introduced in 1996, this digital encyclopae- arranged and Granseyer was already late for it, since he
dia had quickly gained market share and thus become could see the Wikipedians just crossing the front gate.
a serious competitor. Although Brockhaus invested He grabbed some papers from his desk and was just
heavily in its own digital product, the company had about to close the window, when a cold gust of wind
found it extremely difficult to fight back. However, suddenly blew in, as if it was raining heavily a few
finally, their efforts seemed to have paid off; just a miles away. Looking up, Granseyer caught a glimpse
few months earlier, Brockhaus’s digital encyclopaedia of what seemed to be dark clouds gathering on the
had won the Digita award for the best German educa- horizon. They were very distant and hardly more than
tional media product, for the first time. This was a real a thin dark line, but as he stood contemplating the
triumph over Encarta, which had won the award four view, he saw that the dark line was rapidly approach-
times between 1997 and 2002. ing. “Looks like there’ll be some rain this afternoon,”
“Well, it was tough, but we made it!” Granseyer he thought, closing the window as he left for the meet-
said to himself as he stood at his window watching ing. “We’ll see what it brings. . . .” And with that he left
the three huge flags with the Brockhaus, Meyers and his office to meet Wikipedia.
Johannes Muck, Marcel Persang and Michael Schweikart prepared this case under the supervision of Professors Albrecht Enders
of IMD and Andreas König and Harald Hungenberg of the University of Nuremberg as a basis for class discussion rather than to
illustrate either effective or ineffective handling of a business situation.
Copyright © 2012 by IMD, Lausanne, Switzerland (www.imd.org). No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by
any means without the permission of IMD.
597

Part 4 Case studies
German market for encyclopaedias for example a ten-volume edition or a one-volume

edition.
Before the emergence of the internet, printed encyclo-
paedias were the only source of reliable information
that was accessible to almost everybody. Containing Distribution
short articles, sorted alphabetically, from virtually all Despite changing trends, in 2004 encyclopaedias
fields of knowledge, encyclopaedias long served as were still sold in a very traditional way. One out of
an indispensable basis for all who wanted to inform two encyclopaedias was bought in a classic book
themselves about a specific topic. store (refer to Exhibit 1). The second most important
distribution channel was the internet (for example,
Amazon, Buch.de and Buecher.de), accounting for
Production
9% of total sales, followed by book clubs (mainly
Before people started to use personal computers, it
Bertelsmann) with 6%, warehouses (mainly Kaufhof
took publishers such as Brockhaus nearly a decade to
and Karstadt) with 5% and discounters (such as Aldi
produce a new encyclopaedia. In those days, dozens
and Lidl) with 4%.
of professionals had to work on creating new articles,
revising existing ones and manufacturing a new edi-
tion. However, at the beginning of the 1990s, the Sales/players
production process was dramatically changed with The year 2004 brought the long-awaited turnaround
the introduction of SGML editorial systems.1 This for the German book market – at least to a certain
digital production environment enabled editors to extent. After more than three years of decline, indus-
digitally create content and design layouts. Using try sales remained almost stable at €9.076 billion,
SGML-based systems, editors could reduce the pro- indicating a slight increase of 0.1%. Nevertheless,
duction time of an encyclopaedia considerably. By compared to the €9.412 billion in 2001, this still
2004, it took only three years for a new edition to be represented a dramatic reduction in market volume
released. Furthermore, employing SGML publishing within a very short time. The market for encyclopae-
systems, editors were able to attach meta-information dias was a very small segment of the German book
to the articles, allowing them to decide whether a cer-
tain article should appear solely in a comprehensive
twenty-volume edition or also in smaller versions, 1 SGML stands for Standard General Mark-up Language.
Exhibit 1 Distribution channels
2003 2004
10% 11%
5% 5%
7% 6%
42% 40%
7% 7%
9% 10%
20% 21%
Other bookstores Top 5 bookstores Internet Book clubs

Warehouses Discounter Miscellaneous
Source: Company information.
598

Case study 16 Brockhaus vs. Wikipedia
market, accounting only for €111.2 million or 1.2% a merger with the Bibliographic Institute, forming the
of total sales. Bibliographic Institute F.A. Brockhaus (BIFAB). As a
Among the players in the German encyclopaedia result, on 17 May 1984, Brockhaus lost its independ-
market, Brockhaus was clearly the unchallenged mar- ence after 178 years.
ket leader. With annual sales of €53.8 million, the Just four years after the merger, on 6 April 1988,
company held a market share of almost 50%. A huge the newly-formed company again got into trouble as it
gap separated Brockhaus from its competitors. Among became apparent that Robert Maxwell, a British media
these, Bertelsmann, one of Germany’s largest media mogul, intended a hostile takeover of Brockhaus. The
companies and Brockhaus’s major competitor, gener- CEO at the time, Hubertus Brockhaus, felt that it would
ated revenues of €8.6 million with encyclopaedias, be impossible to establish an effective defence within
followed by Weltbild with €5 million. the few remaining weeks. Therefore, he turned to Karl
Ernst Tielebier-Langenscheidt, CEO of Langenscheidt
KG, one of the biggest publishing houses in Germany,
History of Brockhaus and proposed a possible merger of the two companies:
With 199 years’ experience in the business, the making After one hour Mr Langenscheidt called me back and told
and commercialising of encyclopaedias was the bed- me he wanted to involve his two sons and two of his con-
sultants in the negotiations and asked me if I was comfort-
rock of the Brockhaus Company. Founded in the year
able competing one against five. Considering what was at
1805 by Friedrich Arnold Brockhaus, the company stake, I was not happy with the idea but it also presented
soon became an internationally renowned publisher me with an opportunity. If I were able to awaken interest in
of encyclopaedias. This was mainly due to the success all five of them, the result would be much better than if the
of the Brockhaus Encyclopaedia, which F.A. Brockhaus consultants ripped the suggestions apart after the conversa-
tion without having taken part in it.3
purchased as an unfinished manuscript and turned
into what had become the best known German ency- As the negotiations went well and all participants
clopaedia by 2004. The Brockhaus Encyclopaedia also agreed on not letting Brockhaus fall into the hands of
served as a standard for encyclopaedias in other coun- a foreign investor, Langenscheidt decided to act as a
tries, such as the Encyclopédie Française in France. “white knight,” taking over 52% of Brockhaus’s shares.
Encyclopaedias experienced their anthesis in the In return, Langenscheidt demanded an active role on
19th and 20th centuries since at that time, possessing the executive board of Brockhaus. Consequently, Karl
an encyclopaedia was almost a prerequisite for being Ernst Tielebier-Langenscheidt became the new CEO
considered “upper-class.” This is also mirrored by the of Brockhaus, with two of his sons joining the com-
fact that Theodor Heuss, the first president of the pany as members of the executive board.
Federal German Republic, wrote in 1955:
I keep the volumes of the Brockhaus encyclopaedia in a row Brockhaus in 2004
directly behind my desk, whereas the small Brockhaus is to Brockhaus was headquartered in Mannheim, with
be found on a stand on the left side for fast access . . . I a subsidiary set-up in Leipzig. In 2004, BIFAB AG
always use them when preparing my speeches in order to
generated revenues of €65.1 million, indicating a
ensure the validity of data.2
30% increase in sales compared with 2003 (refer to
In its almost 200 years’ existence, Brockhaus under- Exhibit 2). Although these figures seem to denote
went several profound organisational changes. One that Brockhaus had successfully managed the turna-
important period of organisational renewal was dur- round after several years of declining sales, growth
ing the 1970s, when Brockhaus had to adapt to severe was mainly due to the acquisition of Paetec and
challenges in the competitive landscape. At that time, Harenberg, publishers of schoolbooks and calendars.
the German media giant Bertelsmann AG entered the Furthermore, despite the growth in sales, BIFAB AG’s
encyclopaedia market. Moreover, during the 1970s, annual net profit remained stable at €2.5 million,
an emergent recession negatively affected the profit-
ability of the entire book industry. Together, these
2 Thomas Keiderling. F.A. Brockhaus 1905–2005. Leipzig:
developments led to serious difficulties for Brockhaus, Brockhaus, 2005: 246.
threatening the very existence of the company. In an 3 Thomas Keiderling. F.A. Brockhaus 1905–2005. Leipzig:
attempt to overcome the crisis, Brockhaus agreed on Brockhaus, 2005: 285.
599

Part 4 Case studies
Exhibit 2 Sales and profit of the BIFAB AG and the BIFAB group
160 1996: Sales record due to 21st edition of the

Duden because of the copletion of the spelling
1994: Completion of the 19th edition reform; Start of the 20th edition of the BE
140 of the Brockhaus Encyclopedia
1997: Discussion about spelling
120 1995: Discussion reform; decline of the BE
Sales volume in million €
about spelling reform

1999: Completion of the
100 20th edition of the BE 2004: Growth due to
2000: Start of the 22nd Paetec and Harenberg
edition of the Duden
80
60
2001: Start Wikipedia
Germany
40 2003: Bifab purchases Paetec
and Harenberg
20
0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
BIFABAG (sales) BIFAB Group (sales) BIFAGAG (profit) BIFAB Group (profit)
representing a slight decrease of 0.6% compared with Exhibit 3. In spite of its size, the company managed
the preceding year. to remain a family business, highly valuing long-time
At that time, Brockhaus ranked among the 20 traditions. This is illustrated by the fact that all mem-
biggest publishing houses in Germany, as shown in bers of the executive board were engaged in opera-
Exhibit 3 Twenty biggest publishing houses in the German book industry
Name Revenue 2004 in Mio €

1. Springer Science+Business Media 543.9
2. Cornelsen Verlagsgruppe 339.1
3. Klett-Gruppe 332.4
4. Weltbild 220.7
5. Westermann Verlagsgruppe 214.4
6. Random House 195.7
7. WEKA Firmengruppe 195.0
8. Vogel Medien Gruppe 188.8
9. Wolters Kluwer Deutschland 184.9
10. Haufe Gruppe 152.0
11. C.H. Beck 130.0
12. MairDuMont 125.0
13. Deutscher Fachverlag 118.4
14. Rentrop Verlagshaus 113.9
15. Thieme 101.0
16. Langenscheidt 85.5
17. Wiley-VCH 79.5
18. BI/Brockhaus 76.7
19. Droemer Knaur 65.4
20. Verlagsgruppe Lübbe 59.4
600

tional tasks to keep in touch with every-day business. encompassed a language consulting division, which
As Hubertus Brockhaus observed: ranked among the most successful services in the
Tradition is priceless and a treasure of exceptional value.
area, with the number of subscriptions to its newslet-
Preserving and continuing this tradition of encyclopaedias ter rising to 80,000 in 2004.
represents a wonderful task and a challenging responsibility.4
After a process of fundamental restructuring, Topical reference books
Brockhaus was structured in six divisions, with each The Topical Reference Books division published
division representing an independent profit centre: different special interest encyclopaedias, such as
General Encyclopaedias, Duden, Topical Reference Brockhaus – Nutrition, Brockhaus – Nobel Prizes, and
Books, Calendars and Yearbooks, Education and Brockhaus – Philosophy. It was also responsible for
Learning, and Brockhaus Duden New Media. several reference books on different topics, includ-
ing the Brockhaus German History and some atlases
General encyclopaedias mainly sold under the Meyers brand.
General Encyclopaedias was responsible for the print-
ed versions of the well-known Brockhaus Encyclopaedia Calendars and yearbooks
in thirty volumes as well as several smaller editions, The Calendars and Yearbooks profit centre mainly
such as the Brockhaus in one, three, six, ten, and consisted of the products brought in by the acquisition
fifteen volumes. Moreover, all the Meyers encyclo- of Harenberg, a publisher of calendars. This division
paedias, for example the Meyers Big World Atlas, were published over 80 different calendars as well as differ-
part of this profit centre. General Encyclopaedias also ent yearbooks, for example Harenberg Aktuell 2005.
published encyclopaedias that evolved from collabo-
rating with other companies, such as the Zeit-Lexikon,
a twenty-volume encyclopaedia released in collabora- Education and learning
tion with the German newspaper Zeit. Education and Learning was responsible for all pub-
lications relating to school and learning. The German
market for school and learning materials could be
Duden divided into two submarkets: a “morning-market,”
This was mainly concerned with publishing the Duden including all books that were actually used at school,
and all its spin-offs. The Duden brand was one of and an “afternoon-market,” embracing all books con-
Germany’s most powerful. The Duden had been the taining additional learning materials used for study-
standard work for German orthography ever since ing at home.
chancellor Otto von Bismarck declared it as the only Gaining a foothold in the morning-market was not
valid standard for correct spelling. Its importance in an easy task for BIFAB AG because this segment was
terms of German orthography can be compared with strictly controlled by the government and subsequent-
Samuel Johnson’s Dictionary of the English Language ly dominated by several incumbents. Consequently,
or Noah Webster’s An American Dictionary of the the company first concentrated on the afternoon-
English Language. market which adhered to the general rules of the book
It was only in 1996 that this monopoly started to market. Only as BIFAB’s market share and expertise
erode. During that year, the German government increased over the years was it able to enter the
decided that every work containing orthographic morning-market. To do so, it acquired several smaller
rules should be considered as a valid standard as long publishers in this field that provided the company with
as these rules corresponded to the federal spelling the necessary distribution channels. This proved to be
laws. Nevertheless, the Duden still represented a de pivotal to BIFAB’s success since books in the morning-
facto monopoly with a market share of more than market required completely different distribution
90%. Over the years, the Brockhaus management channels since they could not be sold in bookstores but
founded several spin-offs as additions to the product
portfolio, including Duden – Foreign Words, Duden –
Spelling and Grammar and Duden – Quotations and 4 Thomas Keiderling. F.A. Brockhaus 1905–2005. Leipzig:
Sayings. Furthermore, the Duden profit centre also Brockhaus, 2005: 6.
601

Part 4 Case studies
directly to schools and other educational institutions. well as video clips for selected articles. These features
Subsequently, the education and learning profit cen- were not part of the traditional process of creating
tre published several schoolbooks and accompanying an encyclopaedia and accordingly Brockhaus had to
materials under the renowned brand Duden. build up the necessary competences from scratch and
create the new content which was to be included in
the digital encyclopaedia.
Brockhaus Duden New Media
Brockhaus’s management quickly realised the
Brockhaus Duden New Media combined all
great challenges brought about by the advent of dig-
Brockhaus’s activities related to digital content and
ital products. However, chiefly due to its success in
new media. Consequently, the division served as a
the print area, the company hesitated to abandon the
competence centre for new media within the organi-
established technology and to prepare the ground for
sation. Brockhaus Duden New Media was responsible
digitalisation: As Kreissig explained:
for the digital publishing of some of Brockhaus’s print-
ed products, including the Brockhaus Multimedial, As a publishing company, we felt strongly attached to what
a digital version of the Brockhaus Encyclopaedia in we knew and that was the problem at the beginning of the
1990s. We were badly positioned for the challenge brought
one volume, and an electronic version of the Duden. about by the digital change because we had been so suc-
There were also several products solely available in cessful up to that moment. Nothing is a larger impediment
electronic form, such as the Duden Corrector, a spell- to innovation than success. And the house was rolling in
checker that could be installed as an add-on for differ- money.5
ent word processors, such as Microsoft Word. Nevertheless, to deal with the technological change,
the company took a first step towards digitalisation
War with Microsoft by hiring a manager to be responsible for everything
concerning new media. The new manager, Christoph
Brockhaus’s war with Microsoft can be split into two Bläsi, was well suited to this position since he had
phases: the first phase, 1993 to 1996, was character- worked as an assistant at the chair of computer lin-
ised by close cooperation between the two companies, guistics at the University of Heidelberg, where he
whereas during the second phase, 1996 to 2004, there attended colloquia in linguistics.
was fierce competition for market leadership in the When Bläsi was hired, the entire organisation was
digital encyclopaedia segment. still highly uncertain about how to adopt digitalisa-
tion. He recalled:
Phase I: curious cooperation (1993–1996) They were quite disorientated and wanted to establish a
At the beginning of the 1990s, the media landscape staff function in this field as a first step into the new era.6
changed rapidly as digital encyclopaedias distributed
Shortly after hiring Bläsi, Brockhaus introduced a
on floppy disks started to appear on the German book
SGML-based digital editorial system, which fundamen-
market. In order to meet this trend, Brockhaus had
tally changed the lexicographic work. Implementing
to completely restructure its established production
the new system presented a challenge in itself. Until
process, which posed a huge challenge in two ways.
this point, nobody within Brockhaus knew anything
First, the publishing of digital encyclopaedias on
about digital publishing. Thus, the editors had to learn
floppy disc or CD-ROM required the whole content
how to use the new system on their own by trial and
to be digitised. Hence, Brockhaus introduced a com-
error and they had to do it in a very short time. As a
puter-based SGML editorial system, which created
consequence, many of Brockhaus’s employees were
strong resistance among the editors who were not
reluctant to accept the new technology. As Granseyer
really familiar with computer-based work. Second,
explained:
and more important, digital encyclopaedias allowed
for additional features that had to be accounted It was completely unfamiliar to the employees, which led to
strong resistance. there were those who thought that this
for during the production process. These features
included hyperlinking between articles, tagging arti-
cles with keywords that could be searched by the 5 From an interview with Bernd Kreissig, 29 August 2008.
user, an elaborate search function and sound files as 6 From an interview with Christoph Bläsi, 12 August 2008.
602

was the way to go. Others, however, did not understand digitalised and pressed onto a disc, the work of centuries
what they needed this gadget for. They claimed that their would be lost if it fell into the wrong hands.9
tasks now took up much more time and that they had to
direct their attention to things other than the mere content. Throughout the first half of the 1990s, the mar-
It took a few years, i.e. until shortly before the millennium, ket demanded more and more sophisticated digital
for the new editing system to be completely accepted.7 encyclopaedias. In response, Brockhaus released the
As a further step towards digitalisation, Brockhaus Brockhaus Multimedial Kompakt in 1996, which con-
began to collaborate with the software giant Microsoft tained the Brockhaus Encyclopaedia in one volume.
in 1993. This was initiated by Florian Langenscheidt, However, this reaction was only a cosmetic move. The
a member of Brockhaus’s management board, who managers at Brockhaus still considered creating digital
had many contacts in this area due to his studies in products as “playing around” compared to producing
the US. The aim of the cooperation was to improve a “real” printed encyclopaedia. These decision makers
Brockhaus’s electronic skills so that the company was also continued to shy away from the new technolo-
able to get a solid bridgehead in the market for digital gies because of cannibalisation effects. Furthermore,
encyclopaedias. they argued that, in 1996, digital products accounted
Microsoft insisted that Brockhaus should take care for only 5% of Brockhaus’s total revenues. Finally, as
of the process of digitalisation, which led to a strong Kreissig pointed out, Brockhaus managers felt quite
increase in workload for all employees concerned confident about their potential to react and therefore
with new media. To deal with the overload, the adopted quite a defensive strategy:
company hired a second employee responsible for We acted cautiously and economically, following the motto:
new media, Bernd Kreissig. Still, human resources even if we act one year later than everyone else, the size
proved to be extremely scarce during that time and of our company will still enable us to easily conquer the
market bottom-up and take it over within two years. As far
Brockhaus’s management had to improvise to keep up as the book market was concerned, this was the adequate
with the increasing demand in digitally based solu- strategy, but it is fatal with regard to the digital markets.
tions. As Kreissig put it: There, the markets are gone after a year.10
We used our resources in the classic German way. Having

hired one person, we waited for the next shortfall. In this
case, another person might be taken on board but only Phase II: rigorous rivalry (1996–2004)
after a long time of clamouring.8 Despite the success of the joint product LexiROM,
The result of the cooperation with Microsoft was the Microsoft ceased its cooperation with Brockhaus after
LexiROM, a CD-ROM presented in 1995. The LexiROM three years and worked on creating its own digital
contained three types of lexica: the Meyers Lexicon encyclopaedia, the Microsoft Encarta. Its introduction
in three volumes, three Duden dictionaries referring into the German digital encyclopaedia market in 1996
to the German language and Langenscheidt’s pocket had a considerable impact on the market due to its
dictionary in English. Like Brockhaus’s traditional unique content: consisting of approximately 27,000
products, the LexiROM was sold the conventional articles, more than 10,000 media elements, such as
way; classical book stores and online retailers rep- photos, audioclips, and videoclips as well as an out-
resented the most important distribution channels. standing search function. Moreover, with a price of
Although it contained only a relatively small selection roughly DM 200,11 the Encarta was quite cheap com-
of keywords and despite the fact that it was much
more expensive than the company’s respective printed
lexica, the LexiROM was successful from the start.
7 From an interview with Ulrich Granseyer, 22 October
Notwithstanding this initial accomplishment, 2008.
Brockhaus hesitated to extend its digital activities to 8 From an interview with Bernd Kreissig, 29 August 2008.
the top-of-the-line segment of its renowned Brockhaus 9 From an interview with Christoph Bläsi, 12 August
Encyclopaedia. As Bläsi explained, this reluctance was 2008.
10 From an interview with Bernd Kreissig, 29 August 2008.
heavily driven by fear of cannibalisation:
11 The Deutsche Mark (DM) was the official currency in
What held them off was their extreme fear for the essence Germany until 2002 when the Euro was introduced. At
of their work. They were afraid, that once this would be the time, the exchange rate was DM 1.51 = $1.
603

Part 4 Case studies
Exhibit 4 The Brockhaus Multimedial
Audio les in
Edition Words in Mio Keywords Images
hours / videos
1999 5.4 140,000 4,200 9

2000 6.3 165,000 12,000 10
2001 10.5 172,000 13,000 11.5
2002 14.4 190,000 145,000 13
2003 16 195,000 160,000 16
2004 17 315,000 195,000 18
pared with Brockhaus’s LexiROM, which, at that time, Brockhaus’s management immediately discussed
cost almost DM 400. In order to create the Encarta, possible strategies in response to the Encarta. Yet all
Microsoft purchased non-exclusive rights to the Funk the decision makers were highly aware of the effects
& Wagnalls Encyclopaedia and used it as a basis for that creating a digital encyclopaedia would have on
its articles. Microsoft was thus able to quickly gain Brockhaus’s existing products. Accordingly, they con-
experience in the field of digital encyclopaedias, a ducted endless debates about whether or not a digital
market the company had previously been completely encyclopaedia should be a lot more expensive than a
unfamiliar with. printed one in order to avoid endangering the printed
Being the first real encyclopaedia released on business.
CD-ROM, Microsoft’s Encarta was an immediate suc- The board of executives also sought the advice
cess, which came as quite a surprise for Brockhaus, as of Kreissig and Hans Huck-Blänsdorf, the heads of
Kreissig remembered: Brockhaus Duden New Media. Kreissig and his col-
Then came the Encarta – it was like a big bang. The Encarta
league told them:
was cheaper than the LexiROM, it was a lot more successful We can do it, but only if we adhere to the rules of the mar-
and had been made without us . . . We were shocked. It was ket. We need more men, we need more money and, most
simply not possible that the best-selling German encyclo-
paedia was now a CD-ROM from Microsoft. That hit us to
the core.12 12 From an interview with Bernd Kreissig, 29 August 2008.
604

importantly, the price of the product cannot be constrained behind this principle was that the content of a website
by the price of the print version. There should not be any could be accessed by its users, new content could be
discussion about whether or not the price should be twice
created and existing content could be amended or
as high or the same as the book. The price will be deter-
mined by the market and, in this case, by the competitor deleted.
who has already set foot in the market. We cannot exceed With so many people willing to contribute to
this price, at best, we will charge the same Microsoft does.13 Wikipedia, a key prerequisite to successfully run such a
Over the next few years, Brockhaus undertook great website was to strictly adhere to basic rules. In particu-
efforts to develop a product that would be able to lar, four basic principles emerged that all articles had
make a stand against Microsoft’s Encarta and regain to meet: (1) Wikipedia contained only encyclopaedic
market leadership. The result was released at the end articles; (2) all articles had a neutral point of view;
of 1998: the Brockhaus Multimedial, a CD-ROM con- (3) all articles were licensed to the public; and (4)
taining the Brockhaus Encyclopaedia in fifteen volumes contributors treated each other respectfully. Since
(refer to Exhibit 4). Wikipedia did not possess an editorial board, there
Even though the Brockhaus Multimedial quickly was no central committee to monitor compliance with
gained ground, the Encarta remained the most suc- these principles or guarantee the quality and reliability
cessful digital encyclopaedia, winning the Digita of the articles. Instead this was left to the Wikipedia
award for the best German educational media prod- community. Furthermore, if there was any disagree-
uct four times between 1997 and 2002. However, ment regarding the content of an article, this was
after four years, the Brockhaus Multimedial was able solved through open discussion within the community.
to draw level with Microsoft’s Encarta and by 2003,
had even begun to outpace its competitor. Finally,
in 2004, it received the Digita award, thus regaining Wikipedia in Germany
leadership in the encyclopaedia market. But this suc- The German Wikipedia was founded in May 2001,
cess had been hard-earned, as Kreissig described: just six months after the English version. Although the
concept quickly gained acceptance and was adopted
It took painstaking efforts to catch up with the Encarta. It
was exhausting and it dragged on for several years. It would in many different languages, the number of articles
have been smarter to lead the way and to take the first share grew slowly (refer to Exhibit 5). One year after its
of revenues and profit ourselves. they were irreversibly lost release, the German Wikipedia contained only 2,000
anyway.14 articles, which seemed fairly negligible compared
to the 260,000 articles of the 20th edition of the
Brockhaus Encyclopaedia. It was not until June 2004
The forthcoming war with Wikipedia
that the German Wikipedia reached the threshold of
In 2000, while all the forces within Brockhaus were 100,000 articles.
devoted to the fight against Microsoft, internet entre- Thanks to Kreissig’s knowledge and affinity with
preneur Jimmy Wales had a revolutionary idea: what the internet, Brockhaus was aware of the German
if internet users could not only read the articles of an Wikipedia when it first started. However, due to its
encyclopaedia online but also edit them or even write slow growth and the poor quality of many of the arti-
new articles on topics that so far were not covered in cles in the beginning, the company did not consider
encyclopaedias? This was the beginning of a new era – Wikipedia’s development as a relevant topic. In fact, it
the birth of Wikipedia. did not even consider it to be an encyclopaedia at all,
because, for the people working at Brockhaus, a neces-
sary condition for an encyclopaedia was the reliability
The wiki principle
Wikipedia is a freely licensed, general-interest encyclopae-
dia written by thousands of volunteers all over the world
and in every possible language.
(Jimmy Wales)15 13 From an interview with Bernd Kreissig, 29 August 2008.
14 From an interview with Bernd Kreissig, 29 August 2008.
The key characteristic of Wikipedia was its deploy- 15 From an interview on Treehugger Radio with Jimmy
ment of the so-called wiki principle. The basic idea Wales, 22 February 2006.
605

Part 4 Case studies
Exhibit 5 Number of articles on the German Wikipedia website
250000
200000
Number of articles
150000
100000
50000
0
1
4
/0
/0
/0
/0
/0
/0
/0
/0
/0
/0
/0
/0
/0
/0
/0
04
07
10
01
04
07
10
01
04
07
10
01
04
07
10
of the information it contained. Klaus Holoch, chief In 2001, after a long time devoted to development,
spokesman of Brockhaus, commented: Holtzbrink and Brockhaus launched the website
It bothers me when people call Wikipedia an encyclopae-
xipolis.net which was intended to be a platform
dia because that is not what it is. The basic requirements on which companies could offer knowledge online.
for an encyclopaedia are secured and verified contents and Brockhaus presented the content of the Brockhaus
attested sources and these stipulations certainly do not Encyclopaedia in fifteen volumes on this website using
apply here.16 the same articles and layout as in the printed version.
Wikipedia’s philosophy was to be a free online encyclo- Short versions of the articles were accessible for free,
paedia and consequently the company did not possess whereas the complete articles had to be paid for.
a real business model. Wikipedia users could access all Brockhaus tried several different payment methods,
articles for free and both the creation of new articles including payment via credit card, an elaborate credit
and the amendment of existing ones were also free of point system, as well as a subscription system.
charge. Furthermore, Wikipedia’s website did not con- However, none of these methods turned out to be
tain any advertisements, such as banners or sponsored very successful because many users were simply not
links. Instead, the company financed itself via private willing to pay for online content. This was mainly
donations and sponsorships from other companies. due to the fact that at that time most websites were
free of charge, covering the costs using online adver-
tisements such as banners or pop-up windows. In
Xipolis – Brockhaus’s online encyclopaedia spite of the slow growth of Xipolis, Brockhaus never
Brockhaus was one of the first players in Germany considered giving away its precious content for free
to gain experience in the field of online encyclopae- and financing Xipolis based on advertisements, but
dias. The company saw this as a natural addition rigidly stuck to the paid-content business model, as
to its activities in the market for digital encyclopae- Holch, recalled:
dias. In 1997 Brockhaus had already recognised the We did not want to give our content away for free; quality is
rapid growth in the number of internet users as an expensive and we always stuck to the paid content policy.17
important development and began to collaborate
with Holtzbrinck Networks on a joint venture called
16 From an interview with Klaus Holoch, 16 October 2008.
Xipolis.NET GmbH Munich.
17 From an interview with Klaus Holoch, 16 October 2008.
606

As a consequence, the number of users remained He turned to look out of the window again. Things
at very low levels and the project incurred heavy had changed rapidly, even faster than he had thought.
losses in the range of several million euros per year It was getting darker as thick raindrops fell from the
which had to be sponsored by both Brockhaus and black clouds now covering the sky. Watching the
Holtzbrinck networks. Wikipedians stepping into their red car outside in the
car park, he could see the three flags that had been
sailing proudly in the wind this morning hanging
Weathering the storm? down motionless, drenched by the heavy rain.
After his meeting with the people from Wikipedia, Leaning back in his chair, Granseyer thought over
Granseyer returned to his office. He sat down in his what he had heard at the meeting and mumbled to
chair and reflected upon the past two hours. Indeed, himself: “Could Wikipedia really turn out to be a
this whole affair started to puzzle him. Would any- real threat for us or is it just a nice little gimmick for
body ever be willing to use an online encyclopaedia internet freaks? Should we react to the emergence
full of articles that had been written by the users of Wikipedia or not and if so, what should we do?
themselves and where no reliability was guaranteed? Should we cooperate with a non-profit organisation
For him this seemed inconceivable. like Wikipedia?” He was still searching for an answer
as he hastened through the rain, across the car park
and into his car.
607

CASE STUDY 17
Nettwerk
Digital marketing in the music industry
For fifty years the goal of aspiring musicians was to about digital music marketing to work in a vehicle
be signed to a major record label. Support from one that could attract investors.
of the large music labels had been essential to the Initial response from investors was mixed, however.
success of an artist. By 2009, however, major label “Returns on entertainment products when portfo-
profits and power were declining. Had the point been lios are small are typically very erratic”, said one New
reached where a band could prosper without the sup- York-based venture capitalist.2 Was the non major
port of a major label? label approach about to fail again?
Nettwerk was an independent music label, pub-
lisher and management firm. In July 2009 its founder,
Terry McBride, joined forces with Brian Message, a
The music industry
partner in the company that managed Radiohead, The music industry comprised a wary alliance between
to offer the industry a new idea. Under the name art and business. Artists, musicians and songwriters
Polyphonic they would invest $20 million of seed relied on business people in the form of publishers for
capital to put bands in charge of their own careers. the promotion and sale of recorded music product.
“It’s pretty much a venture capital firm for bands,” one Publishers were of two kinds, “majors” and “inde-
of the partners told Billboard magazine.1 pendents.”
Alternate structures for financing and promoting
recorded music, such as artist-run labels, had been
tried before without much success. What gave these
investors hope in 2009 was the belief that digitized
1 Cortney Harding, “Polyphonic tries a new tack on artist
music and the Internet would combine to create new, funding model,” Billboard, July 25, 2009.
low cost ways to promote music. McBride and his 2 Brad Stone, “Artists find backers as labels wane,”
partners were ready to put what they had learned New York Times, July 22, 2009.
Professor John Deighton and Research Associate Leora Kornfeld prepared this case. HBS cases are developed solely as the basis for
class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective
management.
Copyright © 2009, 2010 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Busi-
ness School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu/educators. This publication may not be digitized, photocopied, or otherwise reproduced, posted,
or transmitted, without the permission of Harvard Business School.
608

Case study 17 Nettwerk: digital marketing in the music industry
In 2009 the majors were Universal Music Group, Since the days of vinyl records, the music industry
Sony Music Entertainment, Warner Music Group, and had earned much of its revenue from sale of physical
EMI Group. Each housed a number of music labels, product. Law and custom entrenched this practice.
some of which had previously been independent labels When a composer committed a song to paper, he
themselves. For example, Universal Music Group had or she became the copyright holder. Because it was
become home to A&M, Decca/London, Deutsche expensive to commercialize a song, the composer
Grammophon, Island, MCA, Motown, Polygram, and normally sold the copyright to a major or independent
others. In the past ten years consolidation had reduced publisher, whose job was to find an artist to record it.
the number of majors from eight to four. Once the song had been recorded, anyone was free to
Independent labels, or “indies”, were music labels copy it (a provision of the US Copyright Act applying
that operated outside of the major label system. In only to music), but royalties, known as “mechanical
general, independent label releases were less com- royalties”, had to be paid to the copyright holder for
mercially-oriented than those of major labels. every physical copy produced. In 2009 the rate was
There were literally thousands of indie labels, spe- 9.1 cents for songs of 5 minutes or less, with overtime
cializing in styles such as singer-songwriter, garage rock, rates of 1.75 cents per minute or fraction.3
bluegrass, and electronica. The indies often focused on Each time a song was performed live or broadcast,
musical niches, serving the dedicated fans of particular further royalties, known as “performance royalties”,
genres. Some of the independent labels were small cot- had to be paid to the copyright holder. In situations
tage industries that released product a few times per where it was difficult to keep track of the number of
year, while others put out several albums a month. For times the song was performed, such as when it was
the smaller indie labels, sales volume ran anywhere used in a motion picture or advertisement, lump sum
from the single digit thousands to tens of thousands, “synchronization royalties” were paid to the copyright
while for the larger indie labels sales in the millions holder. (See Exhibit 1.) However, the largest source of
sometimes occurred. Some of the independent labels
had distribution agreements with the major labels and
some did not. For those that did not, getting recorded
3 Association of Independent Music Publishers Press Re-
product into retail outlets was more challenging, par- lease, February 8, 2009; http://www.aimp.org/news/8/
ticularly as music retailing increasingly moved to “big Register_of_Copyrights_Publishes_Final_CRB_Mechani-
box” stores such as Best Buy, Wal-Mart, and Target. cal_Royalty_Rates, accessed May 19, 2009.
Exhibit 1 Royalty streams in the music industry
Economists viewed music, for all practical purposes, broadcast or to buy a recording. Revenue flowed to
as intangible intellectual property. Once a song had the artist in small amounts – pennies and dollars – on
been written down, recorded, or even just performed huge volumes, so that the cost of collection threat-
in public, it was little more than information. Econo- ened to swamp the benefits.
mists termed information a “nonrival” good, which The solution was a system of copyright laws to cre-
meant that when one person consumed a unit, the ate title to the creative products, and agreements ne-
amount available for the next person was undimin- gotiated and enforced by artist unions acting on behalf
ished. Once such a good is produced, no more eco- of the titleholders to collect and distribute the royal-
nomic resources needed to be invested to create ties. There were three kinds of royalties, whose names
more of it. The producer of information, then, was corresponded to the (often obsolete) technologies in
vulnerable to costless copying by competitors. Gov- use at the time that each class of royalty was created.
ernments took the view that the economic incentive
to produce intellectual property needed bolstering
by copyright laws to protect the producer against Mechanical Royalties
competitors’ and consumers’ costless copying. Mu- The U.S Copyright Act gave special rights to music not
sic, however, faced another problem. Consumers available to other kinds of intellectual property. Once
were unwilling to pay very much to hear an individual a piece of music had been rendered mechanically, ➨
609

Part 4 Case studies
anyone else could record it without the approval of of the sale, including digital rights management costs,
the songwriter, but had to pay a royalty set by statute bandwidth fees, transaction fees, mechanical royalties,
to whoever owned the copyright. Thus each time a and marketing costs.
song was recorded, the recording party had to pay
the copyright holder (termed the publisher) a so-
called mechanical royalty for each copy made from Performance Royalties
the mechanical master. In 2009 the rate of mechani- Each time a song was performed live or on radio, tel-
cal royalties was 8 cents per copy. The law allowed evision, or as background music in a store, the record-
the copyright holder to accept a lower rate, but not ing party incurred an obligation to pay the copyright
to demand a higher rate. (The term mechanical roy- holder a royalty as a matter of routine copyright law.
alty dated back to the reproduction of music on pi- Collecting these royalties was cumbersome, so copy-
ano rolls.) right holders organized themselves into copyright co-
The copyright holder then had side agreements, operatives, termed performance rights organizations
not governed by statute, to pay parties who contrib- (PROs,) to set royalty rates and to collect payments
uted to creating the song. Usually these parties were from performers. PROs conducted audited surveys to
the songwriter and the artist performing the song. The measure the volume of performance, negotiated royalty
songwriter typically received half the mechanical roy- rates with each class of performer on behalf of their
alty. (If the songwriter held the copyright, of course, the members, collected the royalties, and distributed them
recording party paid the whole mechanical royalty to among their members in approximate proportion to
the songwriter.) the use of their songs.
Artists’ earnings were not related to the mechani- In the U.S. the first copyright collective was AS-
cal royalties. Artists were usually paid a proportion of CAP, founded in 1914. However the association faced
the suggested retail price of the recording, the exact problems in setting rates that pleased all members and
percentage ranging between 6% and 18% depending were tolerated by broadcasters, and in 1939 a group of
on the prominence of the artist. Major labels typically members willing to accept lower or more flexible rates
recouped 100% of the cost advanced to artists for mak- broke away to form BMI. After periods of litigation and
ing an album, and for any tour support they provided. allegations of price fixing, the PROs became essentially
The recoupment rate for marketing costs and video regulated monopolies.
production was usually 50%. It was not uncommon for Somewhat arbitrarily, performance royalties were
an artist to have to sell at least one million units before divided equally between the two kinds of organizations
these costs were recouped and revenues were gener- that made up the membership, publishers and song-
ated for the artist. writers. The publisher’s royalty claim became a freely
Copies made for Internet sale incurred statutory traded asset. For example, in 1985 Michael Jackson
mechanical royalties in the usual way. Negotiation be- bought the assets of one publisher, ATV music, includ-
tween artists and major labels were yielding royalty ing 250 Beatles titles, for $47.5 million.* The AOL/Time
rates about 20% lower for songs downloaded from Warner merger of 2000 led to that group’s acquisition
the Internet than for songs sold on physical media. of the rights to the world’s most famous song, “Happy
Internet record labels, however, offered an equal split Birthday To You” (from publisher Warner Chappell Mu-
of the net dollars made on music downloads between sic Corporation), which has yielded millions of dollars
the record label and the artist, after deducting costs per year in licensing revenues.† ➨
* Associated Press, “Michael Jackson Sells Rights to Beatles is the Question – The Happy Birthday Controversy”,
Songs to Sony”, November 8, 1995, http://www http://www.musicreports.com/smart_licensing/
.nytimes.com/1995/11/08/business/company-news- content_article.php?article_id=44&title=P.D.+or
michael-jackson-sells-rights-to-beatles-songs- to-sony.html, +Not+P.D.%3F+That+is+the+Question+-+The+Happ
accessed March 3, 2009. y+Birthday+Controversy, accessed March 16, 2009.
† Cary Ginnell, “Smart Licensing: P.D. or Not P.D.? That
610

Synchronization Royalties name to the number of times the record player needle
The term synchronization referred to the early days would drop onto the vinyl recording, and computed
of motion pictures when music was first synchronized royalties on a per-use basis as a basis for negotiat-
with film. The term persisted to describe the royalties ing a single payment in advance. Alternatively, there
payable by film producers, advertisers, and other well- were royalty-free contracts. Publishers would negoti-
identified and large scale users of audio-visual material ate a single fee for access to a library of music, without
with whom it made sense for publishers to negotiate regard to the likely utilization of any particular song.
directly over copyright. Contracts usually followed one The contract between Apple and publishers for sales
of two formats. ‘Needle drop’ contracts owed their through iTunes conformed to this model.
Source: Compiled by casewriter from industry records.
revenue for the majors was not royalties but sales of companies because managing large venues was a
albums to retailers. specialized activity. One of these concert promotion
Artists and musicians were traditionally paid from companies, Live Nation, had emerged as a dominant
these album sales. A music label, functioning both as force in the industry.
investor and mentor, would contract with an artist to Led by the major labels, the music industry flour-
record an album, or, if the label saw high potential, ished in the last half of the 20th century. Sales were
multiple albums over a number of years. The label stimulated in 1984 by the introduction of the compact
would provide the artist with funds for touring, music disc. As consumers replaced vinyl records with the
video production, and publicity, and incur recording compact disc format, recorded music revenues in the
costs, which included the costs of studio, engineer, United States flourished, reaching an all-time high of
and producer. The contract entitled the artist to a $14.5 billion in the year 1999. (See Exhibits 2 and 3.)
proportion of the suggested retail price of the physical
product, the rate ranging from 6% to 18% depending
on the pulling power of the artist, but only after the An old industry falters, a new industry
label had recouped its fixed costs. It was not unusual takes shape
for the cost of bringing a major label album to mar-
ket to be so high that sales of one million units were But 1999 marked the recorded music industry’s peak.
needed to break even. Artists employed managers to Experiments in digital audio encoding had led in 1991
represent them in negotiation with labels, typically to the global adoption of a standard digital format
paying them 15% of the artist’s gross earnings. known as MP3. Soon thereafter software products
Major labels were fully integrated: they owned the began to appear that enabled compact discs to be
resources to do everything from scouting for promising “ripped”, or transferred into digital files, and other
artists, signing them to contracts, refining the sound of software was available to play the files. Compact disc
the artists, producing their albums, designing and exe- sales began to slow as music fans began to copy discs
cuting marketing plans, and nurturing relationships and share them. In 1999 audio file sharing became
with radio and video music programmers and retail an Internet phenomenon. A college student named
outlet buyers. Indies were seldom fully integrated. Shawn Fanning wrote software known as Napster to
They all performed the scouting function, but they search the hard drives of computers and move MP3
tended to buy in some of the other services. The deals files among subscribers to the system. Although this
between indie labels and artists therefore depended large scale peer-to-peer file sharing was later ruled
upon the label’s in-house resources. As a result, how- to violate music publisher copyright, sales of compact
ever, indies could be more flexible and more creative discs began to collapse. By 2008 annual sales were
than majors in the deals they struck with artists. 428 million units, less than half of 2000 levels.4
One task that was not integrated into the major
label menu of services was the booking of live per-
formances. It was outsourced to concert promotion 4 Ibid.
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Part 4 Case studies
Exhibit 2 U.S. dollar recorded music sales by format (in $ millions)
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Compact Discs $11,416 $12,816 $13,215 $12,909 $12,044 $11,233 $11,447 $10,520 $9,373 $7,452 $5,471
Cassette $1,420 $1,062 $626 $363 $210 $108 $24 $13 $4 $3 $1
Music Video $508 $377 $282 $329 $288 $400 $607 $602 $451 $485 $219
Downloaded $0 $0 $0 $0 $0 $0 $138 $363 $581 $802 $1,023
Singles
Downloaded $0 $0 $0 $0 $0 $0 $46 $136 $276 $425 $569
Albums
Mobile $0 $0 $0 $0 $0 $0 $0 $422 $774 $879 $816
Subscription $0 $0 $0 $0 $0 $0 $0 $149 $206 $201 $188
All other $273 $282 $197 $144 $74 $114 $84 $92 $94 $123 $193
formats
and revenue
sources
$13,617 $14,537 $14,319 $13,746$12,616 $11,854 $12,345 $12,297 $11,758 $10,370$8,480
Source: Created by casewriter using data from the Recording Industry Association of America.
Exhibit 3 U.S. unit recorded music sales by format (in millions of units)
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
CD 847.0 938.9 942.5 881.9 803.3 746.0 767.0 705.4 619.7 511.1 384.7
CD Single 56.0 55.9 34.2 17.3 4.5 8.3 3.1 2.8 1.7 2.6 0.7
Cassette 158.5 123.6 76.0 45.0 31.1 17.2 5.2 2.5 0.7 0.4 0.1
Music Video 27.2 19.8 18.2 17.7 14.7 19.9 32.8 33.8 23.2 27.5 12.8
DVD Audio 0.0 0.0 0.0 0.3 0.4 0.4 0.3 0.5 0.1 0.2 0.0
SACD 0.0 0.0 0.0 0.0 0.0 1.3 0.8 0.5 0.3 0.2 0.1
Download Single 0.0 0.0 0.0 0.0 0.0 0.0 139.4 366.9 586.4 809.9 1033.0
Download Album 0.0 0.0 0.0 0.0 0.0 0.0 4.6 13.6 27.6 42.5 56.9
Mobile 0.0 0.0 0.0 0.0 0.0 0.0 0.0 170.0 315.0 361.0 338.4
Subscription 0.0 0.0 0.0 0.0 0.0 0.0 0.0 1.3 1.7 1.8 1.6
Source: Created by casewriter using data from the Recording Industry Association of America.
As the industry shrank, the resources available to Wal-Mart and Best Buy, stocked only bestsellers. Radio
labels to build and serve demand for new artists became stations with more adventurous playlists featuring new
fewer. Retailers that stocked music in depth, like Tower or local artists lost share to networks like Clear Channel
Records, Musicland, and Virgin Megastores, downsized that tended to program to the broadest tastes. The music
or folded as compact disc sales declined. Their succes- television channel MTV, once a major marketing outlet,
sors, the music departments of big box retailers like had reduced its daily music video rotation to just three
612

hours.5 Without the “push” or broadcast promotional With the shift in buying behavior came a revitaliza-
power of radio and television, and with piracy eroding tion of the live concert business. Revenue from tours
album sales, the recorded music industry was in trouble. reached $4 billion in 2008, an increase of 13% over
the previous year.8 And beyond touring, music gener-
ated revenue from placement in movies, on television
Monetizing and promoting digital music programs, in advertisements, in videogames, in ring-
Apple’s iTunes Store, launched in 2003, marked the tones, and even through licensing karaoke versions of
industry’s first ray of hope. Where Napster had eroded songs. The answers to the problems created by digital
the industry’s asset base by disregarding its copy- music seemed to lie in innovation, not litigation.
rights, Apple negotiated royalty sharing agreements. To capture a share of these new revenue streams,
Companies such as MusicNet had tried to venture major labels began to require artists to sign contracts
down this path, but none had found a model and rev- that they called “360 deals”, in place of traditional
enue split that the major labels would accept. Apple’s album contracts. 360 deals gave labels the rights to
Steve Jobs said he was able to convince the labels to revenue sharing from such sources as concerts, fan
sign the agreement because at the time of the negotia- clubs, and merchandise. But if labels could organize
tion Apple’s market share was so small as to be incon- concerts, then concert promoters could release albums.
sequential. Within 2 years, however, Apple’s music In 2006 Live Nation, the concert promotion company,
download software was adapted to run on the 95% of began offering 360 deals to big name artists such as Jay
computers that were not manufactured by Apple. By Z, U2 and Madonna, sweetened by up-front payments.
then the music industry had begun to see Apple’s per For example, Live Nation gave Madonna $50 million
song pricing as an answer to piracy.6 in cash and stock for the right to promote her concerts
By mid-2009, iTunes was the largest single retailer for ten years, about $50 million in advances for her
of music in the U.S., even though it was unrepre- next three albums, and a $17.5 million signing bonus.
sented in the dominant channel, big-box retailing, Additionally the contract gave Madonna the industry’s
which included Wal-Mart, Best Buy and Target and standard shares of touring, merchandising, and licens-
accounted for 65% of all music sold (Exhibit 4.) And ing and endorsement revenues.9
despite the success of digital retailing, 95% of digital Tools to take the place of radio and television to
music downloaded in 2008 was not paid for.7 introduce music fans to new artists began to prolifer-
ate. YouTube and MySpace enabled the online sharing
of music videos. A number of webcasters, including
Exhibit 4 Music sales by channel and retailer Pandora, Spotify and Last.fm streamed music to lis-
share of U.S. music sales in first half of 2009 teners, and, using the principle of ‘if you liked that
you may like this,’ introduced new or less-popular
Share in Digital artists to listeners. (See Exhibit 5 for an overview of
Channels Share in Physical
(Digital channels Stores (Physical
sold 35% of all stores sold 65%
5 “The Fall Of ‘TRL’ And The Rise Of Internet Video,”
Retailer music in 2009) of all music in 2009)
WNYC/ NPR, November 12, 2008, http://www.npr.org/
iTunes 69% 0% templates/story/story.php?storyId=96869060, accessed
April 23, 2009.
Walmart 3% 20% 6 Steve Knopper, Appetite for Self-Destruction: The Spec-
tacular Crash of the Record Industry in the Digital Age
Amazon 8% 10%
(New York: Free Press, 2009), p. 172–177.
Best Buy n.a. 16% 7 Jen Wilson, “Most music downloads illegal” Billboard On-
line, January 18, 2009, via Factiva, accessed March 5, 2009.
Target n.a. 10% 8 Ray Waddell, “‘08 Year in Music & Touring: The Rules of
the Road In Uncertain Times”, Billboard, December 20,
2008, via Factiva, accessed March 3, 2009.
Read as: iTunes sold 69% of all the music sold through digital channels,
9 Ethan Smith, “Madonna Heads for Virgin Territory –
and digital channels accounted for 35% of all music sold in the U.S.
Concert Promoter Lures Material Girl From Warner Mu-
Source: The NPD Group press release, http://www.npd.com/press/ sic with $120 Million”, The Wall Street Journal, October
releases/press_090818.html, accessed September 18, 2009.
11, 2007, accessed March 17, 2009.
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Part 4 Case studies
Exhibit 5 Tools that introduced music audiences to new artists
Online music distributors, sometimes referred to Slacker

as webcasters, have been in existence since the dot Slacker is an online music service, launched on the In-
com boom of the late 1990s. At that time the desktop ternet in March 2007, and as of early 2009 available
computer was the main access point for users, and a on mobile devices. First popular on the Blackberry and
number of the services did not adhere to copyright then the iPhone via a free app, Slacker offers over 3
law and therefore attracted litigation. Since the mid million songs, 100 preset “stations” programmed ac-
2000’s a number of mobile services emerged, as well cording to genre, and 10,000 stations programmed ac-
as “apps” that provided online and wi-fi access for cording to artists. Users can also create and share their
devices such as smartphones and iPods. These legal own stations.
music-streaming services have catalogs of hundreds
of thousands to millions of songs, as determined by
the agreements made between the service and the Spotify
artists and/or record labels. Services are subject to Spotify, developed in Stockholm in 2006, provides users
digital rights management (DRM) agreements, which with online music on demand either free of charge with
govern how the songs can be used by listeners (e.g. advertising, or advertising-free if a monthly subscrip-
on their personal computer, but not on other devices, tion is purchased. Listeners can choose specific tracks
or vice-versa). DRM agreements ensure that royalties or browse by artist, album, or playlists. In 2009 Spotify
are paid to artists and/or record labels. As of 2009 was available in Sweden, Norway, Finland, Spain, France,
several online and mobile music services are popu- and in the U.K, and boasted a user base of over 8 million.
lar, and a selection of them are described here. Major Spotify reported that 325,000 of its users were paying
media companies such as MTV, Yahoo! and AOL have subscribers.
experimented with subscription-based online music
services but have shuttered those offerings due to
Shazam
lack of profitability. Despite the very large user bases
of some webcasters, a profitable service of this kind Shazam, established in 2002, is a mobile phone-
has yet to surface. based music recognition service that allows indi-
viduals to use their phones to identify music heard
in locations such as restaurants and stores. It uses a
Pandora
database of tags, known as the Shazam Tag Chart,
Pandora is an online music recommendation serv- to classify songs. As of 2009 Shazam was available in
ice that was born out of the Music Genome Project, over 60 countries and had a user base of 35 million.
started in 2001. The Music Genome project ascribed Each day over one millions songs were tagged on
over 400 characteristics to songs and used an al- Shazam by users around the world. Premium (paid)
gorithm to organize the songs in a database. Users downloads are offered to users via their mobile car-
could go to Pandora.com, enter a song of their liking rier’s music store.
and Pandora would respond with a playlist of musi-
cally similar selections, essentially creating a custom
radio station for the user. If Pandora offered a song the Last.fm
user did not like, the system could be informed and Started by a U.K. computer science student in 2002,
that song would not appear in the user’s future music Last.fm combines online music streaming with social
streams. Users were able to purchase songs heard on network. At the core of the service is its “audioscrob-
Pandora through such services as iTunes and Amazon. bler” database, a recommendation engine that makes
com. Though very popular with users (31 million it easy to meet one’s “musical neighbours”, or other
members and over 65,000 new users each day as of people who share similar musical tastes and interests.
October 2009,) Pandora teetered on the brink of bank- In May 2006 CBS Corp. purchased Last.fm for $280
ruptcy for several years, kept alive with a combination million. As of 2009 Last.fm reported 30 million users in
of funding from the founders and investors. over 200 countries.
Source: Casewriter research.
614

these services.) Other Internet ventures stepped in to Exhibit 6 Nettwerk artists in 2008
provide outsourced versions of the services of a major
label. Topspin was a company that helped to manage 65 artists were managed by Nettwerk in 2008.
a band’s online presence. TuneCore was a distribu- Their net revenues for the year were distributed as
tor of digital music to online services like iTunes and follows:
Amazon. 9 had revenues in excess of $1 million.
Some artists decided that the tools for marketing 11 had revenues in the range of $100,000 to $1 million.
were so ubiquitous that they could handle the busi-
45 had revenues in the range of $10,000 to $100,000.
ness side of the industry themselves. In 2007 the
highly acclaimed British pop rock band Radiohead Source: Company records.
broke with its label EMI and released an album, “In
Rainbows”, as a download on its website, inviting independent label, Nettwerk Records, signing artists
fans to pay whatever they felt the album was worth. It in electronic, dance, and industrial genres. His bands
was available exclusively on the band’s website from attracted cult followings in Canada, the U.S. and
October to December 2007, and thereafter at retail. Of Europe. Without radio airplay or mainstream press
the 1.2 million people who visited the “In Rainbows” coverage they had to sustain themselves through tour-
website in October 2007, 60% of them opted to pay ing and sale of merchandise at concert venues.
nothing and the rest paid about $6, for an average A breakthrough for the new label came in 1985
of $2.26. “Under a typical recording contract”, wrote when, on the road in Halifax, Nova Scotia, Jowett
New York Times music critic Jon Pareles, “a band saw a classically trained teenager, Sarah McLachlan,
receives about 15 percent of an album’s wholesale performing in a backup band.11 Nettwerk courted and
price after expenses are recovered. Without middle- eventually signed the young artist to a deal that made
men, and with zero material costs for a download, Nettwerk her label, publisher, artist manager, and the
$2.26 per album would work out to Radiohead’s holder of merchandising rights. Her airy and sophisti-
advantage, not to mention the worldwide publicity.”10 cated pop sound did not fit into any of the established
radio formats of the 1980s, so trying to build airplay
on national radio was not an option.
Nettwerk Without the ability to launch nationally, Nettwerk
Nettwerk was one of the larger independent music had to build awareness and interest in Sarah
labels, publishers and management firms, whose ros- McLachlan in one local market after another. In the
ter over its 25 year history had included artists from first year, 1988, it penetrated ten local markets. The
a wide range of musical genres: Coldplay, Barenaked Nettwerk team would enter a town and book a tour
Ladies, Datarock, Avril Lavigne, Old Crow Medicine date with a local concert promoter. Next they’d call
Show, and Sarah McLachlan. By 2009 Nettwerk on retailers. “We’ve got an artist performing in town
had offices in Canada, four United States cities, the in a couple of weeks who we think will sell very well to
United Kingdom, and Germany. The largest offices, your customers,” they would say. They would ask the
Los Angeles and Vancouver, had staffs of 50 people retailer to display posters in the store, and McLachlan
each, and the Nettwerk Music Group, if partner opera- would make an in-store appearance on the day of the
tions were included, employed about 500 people. show to meet fans and autograph albums. Then the
(For some information on the artists represented by
Nettwerk in 2008 see Exhibit 6.)
Nettwerk was born from Terry McBride’s passion 10 Jon Pareles, “Pay What You Want for This Article”, New
for music as an engineering student in the 1980s at York Times, December 9, 2007, http://www.nytimes
the University of British Columbia in Vancouver. He .com/2007/12/09/arts/music/09pare.html?ex=1354
shared his enthusiasm for British and European music 856400&en=ec2f1c29937292be&ei=5090&partner=
as a host on the campus radio station and nightclub rssuserland&emc=rss&pagewanted=all, accessed May
14, 2009.
disc jockey, and became involved with local bands 11 http://www.thecanadianencyclopedia.com/index.cf
as booking agent, concert promoter and manager. m?PgNm=TCE&Params=u1ARTu0003998, accessed
In 1984 he and a friend, Mark Jowett, formed an March 4, 2009.
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Part 4 Case studies
team would move to the next town, having scheduled shift its focus to the digital music marketplace. Many
a return visit for three to six months in the future to in the room felt blindsided by this announcement.
consolidate the nascent base. The cost was estimated After 18 years in existence, the team felt they knew
at a few thousand dollars per market, versus six figure how to navigate a music business based on promot-
budgets for national promtion. ing and selling CD’s and getting artists onto the road.
McLachlan’s first two albums were marketed in this What McBride was describing sounded risky to many.
manner, each taking a year to build out the fan base. McBride argued that the popularity of file-sharing
In 1993, when McLachlan’s third album, “Fumbling on peer-to-peer networks foreshadowed an entirely
Toward Ecstasy”, came out, one million copies were new model for the music industry. Fans’ listening
sold in its first year of release. Her success helped create habits were changing. They were starting to con-
a new national radio format, album adult alternative, sume music in the form of single songs, not albums,
pop rock for the 30+ demographic, and featured artists and, whether or not the music industry approved,
such as Sheryl Crow, Sting, and Chris Isaak. McLachlan’s they were getting much of their music for free. He
fourth album, “Surfacing”, released in 1997, entered argued that unauthorized copying of digital music
the Billboard charts at number two, went on to sell 11 would hurt sales: 25 million sellers, whether singles
million copies, and netted the artist 2 Grammy awards. or albums, would become 5 million sellers, and mil-
As new releases flourished, her back catalog, comprised lion sellers would become quarter-million sellers.
of her previously released recordings, became an impor- Geography would also matter less.
tant source of revenue for the label. The city-by-city micromarkets that had served
Nettwerk’s success at managing the career of Nettwerk so well would be less important, and net-
McLachlan attracted established artists. In 1995 works of like-minded individuals, linked internation-
Barenaked Ladies, a Canadian folk-pop band under ally, would begin to matter more. “Instead of one city
contract to Warner Music, hired McBride as man- being a niche for a band, the world is becoming the
ager to help them break into the U.S. market. McBride niche. . . .globally dispersed niches can be very profit-
picked a strong single from the band’s new album able”,13 said McBride.
and promoted it one city at a time. A band member The goal was to market to fans wherever they
remarked: “Terry worked it like crazy, basically doing spent their time. The result was that media invest-
the label’s job.”12 Barenaked Ladies played live shows ment began to move away from radio and television
in the targeted cities, building fans as they went. In and print and toward the Web. “I’m more interested
1998 the band’s fourth studio album “Stunt” sold spending the time and money servicing the top 500
more than 5 million copies. bloggers than MTV. My bet is that those bloggers will
As the Nettwerk team developed its city-by-city have more effect in the long run than MTV will. I’m
marketing capability, it got to know not just channel interested in the tribal leaders. The heads of those
members, such as college radio music directors, club tribes are marketing in an authentic way to their own
owners, and retailers, but the fans themselves. In each tribes. MTV is marketing to the dollar.”
community they were able to identify tastemakers for By staying abreast of fans’ changing media use,
particular genres of music. Where the tastemakers Nettwerk soon found itself exploring the social net-
went, others followed. McBride termed them the lead- working site MySpace and the artist and fan pages
ers of their tribes, and fed their voracious appetites that had began to populate that site. When Barenaked
for inside information about the artists, pre-release Ladies was recording songs for its 2006 album
singles, and advance information of tour schedules. “Barenaked Ladies Are Me”, it was natural to provide
In response the tastemakers talked up artists and
albums, and encouraged people to attend concerts. 12 Jeff Howe,“No Suit Required”, Wired Magazine Issue 14.09
Sept 2006, http://www.wired.com/wired/archive/14.09
/nettwerk.html?pg=2&topic=nettwerk&topic_set=,
Nettwerk responds to the digital accessed March 3, 2009.
transformation 13 Mark Glaser, “Nettwerk CEO Terry McBride Puts Fans
in Charge of Bands”, PBS Mediashift, December 11,
In the spring of 2002 Terry McBride proposed a radi- 2008. http://www.pbs.org/mediashift/2008/12
cal reshaping of the company. Nettwerk, he told his /nettwerk-ceo-terry-mcbride-puts-fans-in-charge-of
team, would phase out its compact disc business and -bands346.html, accessed March 5, 2009.
616

information about the album on the band’s My Space that met at Club Passim in Cambridge, Massachusetts
page. Seeking fan engagement, Nettwerk posted in 2001, The Weepies’ acoustic sound was attractive to
unmixed audio tracks that the band had just recorded television show producers and was placed in episodes
in the studio, grouped according to sound source of Grey’s Anatomy, Scrubs, How I Met Your Mother, and
(vocals, guitars, and percussion, for example). Fans Gossip Girl, and the motion picture Sex and the City.
were invited to download files and construct their The duo’s music was featured in holiday advertising
own mixes. “The audience is the record company,”14 campaigns for national retailers JC Penney and Old
said McBride.” As fans moved to new social media Navy. Each placement caused a spike in awareness
such as Facebook and the microblogging tool Twitter, which Nettwerk magnified with targeted communi-
Nettwerk moved with them. cation on social media sites to fans of The Weepies,
Integral to the Nettwerk approach was what fans of the relevant television show, or customers of
McBride called “collapsed copyright”. Traditionally the retailers, in the week of their inclusion. When
artists signed separate contracts for each of the roy- the Sex and the City movie was released in London
alty streams defined in the industry – mechanical, and Australia, the soundtrack CD was promoted to
performance and synchronization. With collapsed Facebook fans. In 2008 the Weepies’ net revenues
copyright all the rights required to license, sell, and from licensing and album sales exceeded $400,000.
publish musical product, were housed in as simple a
business structure as possible. Nettwerk co- founder Ad placement
Mark Jowett remarked, “If a company like Paramount Nettwerk’s New York office called regularly on advertis-
comes along and wants to use one of [the] tracks, it’s ing executives, matching its bands to the needs of adver-
extremely easy for us to clear both the master and the tising campaigns. When a song was used in an ad the
publishing. . .if [there was] an outside publisher, they band typically earned between $20,000 and $60,000
may push for very stringent terms and. . .hold up the if they were a lesser known independent artist and
process. . . .the deal might not happen. . .Collapsed $150,000 or more if they were a higher profile act.16 In
copyright allows us to move forward quickly with film 2006 the ad agency for Liberty Mutual Insurance hired
deals or mobile deals, any of the new deals that are a relatively unknown band, Hem, to provide the sound-
possible in the new paradigm with so many new forms track for the seven ads in its ‘Responsibility’ campaign.
of distribution coming on stream.”15 Nettwerk put references to the Liberty Mutual cam-
Another important element in McBride’s new phi- paign on Hem’s website and asked the insurer to put
losophy was the “long tail” argument, first articulated Hem’s name on its website, to help Google searchers
in late 2004 by Wired Magazine’s Chris Anderson. The identify the soundtrack. At the same time they promot-
argument contended that digitization would enable ed the seven songs on iTunes, Amazon’s digital store,
marketers to serve small pockets of demand far out Rhapsody, and other digital download sites.
on the tail of the distribution of music tastes, many of
which had previously been too small to serve profitably. Cause-related marketing
Indie labels had always made their living on the long Two of Nettwerk’s artists, Sarah McLachlan and State
tail of demand, giving up the mass market to the major Radio, were passionate supporters of social causes,
labels, but McBride saw the opportunity to move further and, while Nettwerk did not advocate exploiting
down the tail. He spoke of something he called “squirre- causes for gain, it was not reluctant to leverage public-
ling the tail”, in which alert marketers could profit from ity when it came.
transitory spikes in demand for niche music. Squirreling
meant taking advantage of brief “awareness bumps”
and the pinpoint targeting power of digital media. 14 Ibid.
15 Christopher Taylor Jones, “Nettwerk’s new model: col-
lapsed copyright is a new way of looking at publishing”,
Squirreling the tail Words and Music, Spring 2007 Issue, http://www
Television placement .socan.ca/jsp/en/word_music/Spring07_ Publish.jsp,
accessed March 20, 2009.
Folk pop duo The Weepies, managed by Nettwerk,
16 “More Artists See The Music in TV Ads”, http://market-
was one of the beneficiaries of a squirreled tail fol- place.publicradio.org/display/web/2009/08/28/am-tv
lowing an awareness bump. A husband and wife team -tracks/, August 28, 2009, accessed September 21, 2009.
617

Part 4 Case studies
Sarah McLachlan supported initiatives ranging found that the album that had caught his attention
from humanitarian causes to animal protection. In was “Sargam Scales of Music”, a self-released album
2006 she was approached by the American Society that Morissette sold while travelling the world as an
for the Prevention of Cruelty to Animals (ASPCA) to ambassador for the yoga wear company Lululemon,
participate in a fundraising ad. It featured images of visiting yoga retreats, conferences, and studios. In late
neglected dogs and cats over McLachlan’s plaintive 2006 McBride tracked down Morissette and signed
song Angel. McLachlan herself appeared on camera him to a three-album deal with Nettwerk’s Nutone
and made a direct appeal to the public for dona- label. He added kirtan artists such as Krishna Das and
tions. The ads were kept fresh with the use of two Jai Uttal. In 2008 the magazine Yoga Journal pub-
more McLachlan songs. When the commercials were lished a list of the top ten yoga music artists. Eight of
uploaded to YouTube, Nettwerk bought advertising them were on the Nutone label.
on the site to promote her songs and albums. The
campaign raised $30 million for the ASPCA. “Sarah
Promotion
made it possible to do in two minutes what took 30
Artists often released collections of holiday songs
minutes before”, said Jo Sullivan, ASPCA Senior Vice
for the Christmas season. Barenaked Ladies’ holiday
President for Development and Communication. “She
album, “Barenaked for the Holidays”, was a popular
literally has changed the way we fundraise.”17
holiday season album when first released in 2004. It
State Radio was a politically-charged band with a
reached #64 on the Billboard album charts. For the
fervent word of mouth following. Its lead singer Chad
2008 holiday season the band released a digital ver-
Stokes was an activist at heart who had opted to live in
sion of the “Barenaked for the Holidays” at a $2.99
Zimbabwe for a year instead of attending college, and
promotional price on Amazon.com. News of the offer
the visit inspired the creation of the Elias Fund to aid
was promoted directly to fans on the band’s website
the youth of Zimbabwe. Nettwerk’s Internet market-
and social media sites such as Facebook. Unit sales of
ing team developed an understanding of supporters of
the four-year-old seasonal album exceeded sales of
the causes that Stokes promoted, and helped nurture
competing 2008 seasonal albums, and, because the
State Radio’s “tribe” with the aid of Facebook and
product was digital, did so more profitably.
other social media. The band performed at many ben-
By regularly remarketing older releases when-
efit concerts and played alongside political rock band
ever circumstances or awareness bumps presented
Rage Against the Machine at the 2008 Democratic
an opportunity, Nettwerk had succeeded in growing
National Convention. In 2009 Kayem, official hotdog
back catalog sales to 50% of its total revenues, far
of the Boston Red Sox, used State Radio songs in their
higher than major labels.
advertising Nettwerk’s Dalton Sim explained, “This is
a band that doesn’t really ever get played on the radio.
Tying into a commercial like this has been a great The polyphonic venture
way for people to hear the song, and they go on the
In 2009 the century-old recorded music industry pre-
Internet and search it.”18 State Radio’s net revenues
sented a paradoxical picture. Consumers had never
from licensing, performance and album sales in 2008
been more passionate about music. Never before had it
were about $300,000.
been so abundant and accessible. One industry meas-
urement source, Nielsen Soundscan, reported that
Niche tastes: the case of yoga four times as many albums were released in 2008 as
While attending a yoga class, McBride had been
intrigued by the call and response style of music
17 Stephanie Strom, “Ad Featuring Singer Proves Bonanza
playing in the background. He learned that it was for the ASPCA”, New York Times, December 25, 2008,
known as “kirtan,” and that the artist was Wade http://www.nytimes.com/2008/12/26/us/26charity
Imre Morissette, a yoga instructor who had studied .html?_r=3&scp=1&sq=ASPCA&st=cse, accessed
in India and had taught classes for 15 years. He March 3, 2009.
18 Sydney Lupkin, “Commercial Makes Local Band, Hot
was also a musician, and the twin brother of singer
Dog Brand Sizzle”, WCVB Channel 5, August 12, 2009.
Alanis Morissette. Locating kirtan music wasn’t easy. http://www.thebostonchannel.com/money/20370933
“And I’m in the music business!” said McBride. He /detail.html, accessed September 21, 2009.
618

in 2000. Never before, however, had industry profits our relationship with our artists to match the seismic
been under such pressure. Of the 105,000 new albums shift that’s going on in our business. . .there are no
released in 2008, just 6,000 sold more than 1,000 cop- rules anymore, flexibility is key.”20
ies at a retail price of about $12.19 (See Exhibit 7 for In July 2009 McBride and Message formed a new
complete distribution of revenues from album sales.) venture called Polyphonic. “We are all witnessing
Among the major labels, structures and contracts major labels starting to shed artists that are hitting
that had served them well through numerous transi- only 80,000 or 100,000 unit sales,” said one of their
tions in the technology of recording and playback early partners. “Do a quick calculation on those sales,
were being challenged by a climate of rampant experi- with an artist who can tour in multiple cities, and that
mentation. Nettwerk’s McBride was one of the leaders is a good business. You can take that as a foundation
among the experimentalists. “We never got used to and build on it.”21
knowing where we were headed. We have always Polyphonic was funded to $20 million, and the
lived on the edge. We never found it rewarding to proposal was to identify bands either not yet signed to
squeeze the last dollar out of our operations or worry record deals or dropped by their labels, and advance
about our inefficiencies. We knew we’d just be opti- about $300,000 to each band to cover recording,
mizing an obsolete process. The turbulence in the video production, and initial touring costs, as well
industry is our opportunity.” as marketing and promotion expenses. Net reve-
Others in the industry recognized the turbu- nues from publishing, touring, merchandising, sales
lence. Brian Message of ATC Management, the U.K. of recordings, and other licensing, would be split,
based music company that managed, among others, 50-50 for new artists and on more favorable terms
Radiohead and Kate Nash, noted “. . .it’s been quite a for experienced artists. Unlike conventional labels,
dramatic period of change; our business models have Polyphonic would not own the master recording copy-
migrated away from earning 20% commission and right. Nor would it require bands to buy its services for
having to put up no investment to nowadays having to music distribution, promotion and marketing. Artists
put up a lot of investment and changing the nature of would retain ownership of their copyrights although
Polyphonic would have the right to exploit copyrights
created during the term of its contract for ten years.
Artists’ managers would submit a business plan to
Exhibit 7 Distribution of revenues from album
Polyphonic, including details of ‘best in practice’
sales in 2008
service providers with whom they would like to work.
Artists would be free to hire whatever services they
Albums Ranked by Average Unit Sales needed from whoever they chose. They could use out-
Annual Sales per Album side contractors for services ranging from distribution
Top 10 albums 2,000,000 to promotion to merchandising, or they could use the
Albums 11 to 20 1,500,000 services of the three founders if they saw fit.
David Pakman, a New York venture capital partner
Albums 21 to 30 1,200,000
with long experience with music technology, liked
Albums 31 to 40 900,000
the model, although he did not see entertainment
Albums 41 to 50 800,000 as an asset class with enough upside potential to
Albums 51 to 100 600,000 appeal to venture investors. He estimated a $7 royalty
Albums 101 to 500 150,000
Albums 501 to 1000 40,000
19 Bruce Iglauer, “Labels Are Here to Stay; Acts Need The
Albums 1001 to 2500 12,000 Support That Record Companies Can Give”, Billboard,
Albums 2501 to 5000 2,000 July 4, 2009, via Factiva, accessed September 14, 2009.
20 Manager Brian Message interviewed at music industry
Albums 5001 to 120,000 50
event MIDEM, January 22, 2009, http://www.youtube
.com/watch?v=n1hs42t1Mvs, accessed October 13,
Source: Casewriter estimates based on a variety of published sources 2009.
including Billboard, Recording Industry Association of America, Nielsen 21 Brad Stone, “Artists find backers as labels wane”,
Soundscan, and NPD Musicwatch. New York Times, July 22, 2009
619

Part 4 Case studies
per album sold, and assumed that revenues from and so on. The Polyphonic contract has the right bal-
all sources would be about double album revenues. ance of incentives.”23
If Polyphonic signed 20 artist groups each year for Harmony of incentives between artist and investor
three years, he estimated that it stood to earn only would not, on its own, be enough to save the industry.
$27 million on its $20 million investment, unless its But if digital tools could directly harness the passion
artists performed way better than typical. “The other of fans and produce a disproportionate number of
challenge with this model is that the funder owns successes, perhaps the point had been reached where
nothing more than a ten year cash flow interest in art could flourish without the industrial age power of
the bands in the portfolio. It’s hard to sell it for a big major labels.
multiple.”22 That said, Pakman was enthusiastic about
Polyphonic’s likely effect on the morale of the music
industry. “The typical major label contract pits the 22 David Pakman, “A New Music Model? Perhaps, but not
for VC’s”, July 22, 2009, http://dpakman. wordpress
artist against the publisher. The artist looks for the .com/2009/07/22/a-new-music-model-perhaps-but-
best advance that they can get, and has no incentive not-for-vcs/, accessed July 23, 2009.
to make money on the back end, touring, appearances 23 Ibid.
620

CASE STUDY 18
Licia Chery and MyMajorCompany

Crowdfunding to stardom (abridged)
Geneva, June 2012. Licia still could not believe it. For In 2010 she tried her luck with a participative
years she had struggled to launch her singing career. music label in Paris called MyMajorCompany (MMC).
She begged, she lied, she banged on doors from Paris MMC provided a platform for emerging artists to
to London, from New York to Montreal. Step by step, promote themselves by posting their music online.
bruise by bruise, she learned the ropes but somehow Unlike traditional music labels, MMC did not invest
these ropes were always too short for her to launch its own capital to launch new artists – instead it pro-
her first album. Of Haitian descent, born and raised in vided a crowdfunding platform (CFP) through which
Geneva, Licia was a classically trained musician and amateur investors, also called “producers,” were able
a graduate of the Geneva Music Academy. She wrote to fund emerging talents such as Licia with contribu-
her own songs, music and lyrics, and her voice and tions of as little as €10. These micro investors could
charisma had already generated a group of dedicated gain not only financially through a stake in the future
fans on social networks and around the Geneva and album returns, but also emotionally through a direct
Paris music scenes. Her music was clearly enthralling connection to “their” artist(s). MMC pooled the micro-
and her stage presence engulfing. But that still did not investments together, and once the preset €10,000
cut it – traditional music producers were unmoved. threshold had been reached, the fundraising was
officially declared successful and was closed to new
investors. MMC then put on its more traditional music
label jacket to produce the artist. In effect, the music
community (the “crowd”) decided whom to support
through its investments and MMC acted as the music
producing arm of the collective wish.
On 4 March 2010, less than 75 days after posting
her songs on the MMC platform, Licia had 987 fans
willing to collectively invest €100,000 in her and a
contract with MyMajorCompany for the production of
her first album. The dream could start…
Professor Benoit Leleux, Stephan Schmidheiny Professor of Entrepreneurship and Finance, prepared this case with the assistance of
Catherine Daar (CommNation) and Victor Lugger (MyMajorCompany) as a basis for class discussion rather than to illustrate either
effective or ineffective handling of a business situation.
621

Part 4 Case studies
But dreams take time to materialize. Writing the From crowdsourcing to crowdfunding:
songs, recording them professionally, preparing the the maturing of affinity financing
album release and performing the associated mar-
Crowdsourcing referred to activities that used the
keting activities took almost 18 months. Finally, on
power of the “crowd” (a community at large, in
June 11, 2012, the album “Blue Your Mind” hit the
particular when connected through the internet) to
shelves…
deliver some form of service to individual users. The
Yet many questions remained. How could Licia
community, bound by some common interest, created
maintain the momentum? Crowdfunding was a great
valuable network externalities that were harnessed
way to get started and it enabled recording the album,
and leveraged to accomplish things that were other-
but now she had to deal with the everyday realities of
wise unavailable or economically unachievable. A key
building a lasting music career. How could Licia sup-
enabler was widespread web technology that allowed
port her budding career? How could she complement
communities to form at will and at virtually no cost to
MMC1’s activities and contributions? Contractually, she
pool the interests and energies of individuals.
had given MMC a right of first refusal on her second
Among the many services that could be provided
album, even though it was still not clear how effective
through crowdsourcing, financing quickly took center
they would be at pushing her first one. What did this
stage. Crowdfunding (also known as crowd funding,
mean going forward? The affinity financing model also
crowd financing or hyper funding) described the col-
meant keeping a large group of small investors/fans
lective cooperation, attention and trust among people
involved and happy. What could she do to maintain a
who networked and pooled their resources, usually via
strong and growing bond with them and increase their
the Internet, to support efforts initiated by other people
“emotional returns”? Right now, they were ecstatic to
or organizations. Crowdfunding served a wide variety
see “their” album available on store shelves and through
of purposes, including bottom-of-the-pyramid finan-
iTunes, but how long would that initial excitement last?
cial activities such as peer-to-peer (P2) lending, dis-
How might she transition from MMC to a major label
aster relief, citizen journalism (as in the Wikipedia or
that could provide a full range of support services?
Wikileaks business models), supporting artists, funding
Emotionally, the roller coaster was just starting.
political campaigns, startup companies, movies or free-
In April, in New York, Licia had met Wyclef Jean,2
ware development (such as the Mozilla Foundation5)
her Haitian singing idol, originally associated with
and scientific research. Crowdfunding also referred
“The Fugees” and who had sold over 20 million
to the funding of a company by selling small amounts
albums since. He promised to collaborate with her
of equity to many investors, as enabled by the United
in the future, in a format still to be defined.3 Licia’s
States of America JOBS Act signed into law by President
first major video was also catching attention on the
Obama on April 5, 2012,6 which allowed pooling of
web,4 particularly on YouTube where it was viewed
small investors with few restrictions.
thousands of times. How else could she surf the initial
Crowdsourcing could occur online or offline,
wave of interest in her music? It was overwhelming
allowing individuals, institutions, non-profits or cor-
and gave her an addictive high, a warning that difficult
porations to create projects and use “open call” invi-
times lay ahead. When and where would the next shoe
tations to potential crowd participants to undertake
drop? How could she manage the demands of this
a particular project or task. Crowd members offered
newfound exposure? How would it affect her alloca-
their talents and other resources, including money,
tion of time? MMC had been surprisingly passive in the
to a defined project and goal. The rewards for crowd
last few weeks. She had expected it to move aggres-
sively to organize her appearances at summer music
festivals, the ticket to being heard on radio stations 1 www.mymajorcompany.com
around the country, and ultimately push it onto the 2 http://en.wikipedia.org/wiki/Wyclef_Jean
charts and sales rankings. Little of that was happening 3 http://youtu.be/ZELbpzaz7nA
and she felt, once again, left to her own devices. Could 4 http://youtu.be/tl4UPfssbkI
5 http://www.mozilla.org/foundation/
she also find original ways to promote her songs and 6 The U.S. Securities and Exchange Commission was
album through social networks? What would an effec- expected to come up with specific rules and methods for
tive guerilla promotion strategy look like? crowdfunding by the end of 2012.
622

Case study 18 Licia Chery and MyMajorCompany: crowdfunding to stardom
contributors included personal satisfaction, social rec- of affinity financing models. Early examples included
ognition, or even some form of tangible or economic the “Bond bonds” in 1999, through which Italian film
compensation.7 producer Cecchi Gori issued $280 million worth of
bonds backed by revenues from cinema and video sales
of many original James Bond movies. Shortly there-
A short history of crowdsourcing after, in 2000, the “Bowie bonds” raised $55 million,
The concept of crowdsourcing to solve problems had secured by future revenues from the sales of David
a relatively long history, with its roots in competitions Bowie’s early albums. Any future cash flow stream
to solve seemingly intractable problems. One of the could be “repackaged” or securitized by the financial
earlier examples was the development of the original industry and sold to willing investors11 keen to diver-
Oxford English Dictionary, which was started in 1879 sify their revenue streams and risk exposures.
with editor James Murray publicly soliciting input This revenue-stream securitization concept was
from thousands of reader volunteers on English words soon extended to provide opportunities to invest in
and word definitions and their usage by scouring the careers of both established and new artists, famous
historic and contemporary sources, and submitting or yet-to-be-famous. For example, in 2003 F1 fans in
findings to the dictionary project’s team of editors.8 the UK were offered a chance to invest in the emerg-
Another example of early crowdsourcing initiatives ing career of rookie driver Justin Wilson through a
was the Longitude Prize, offered by an act of British “special purpose vehicle” (SPV) called Justin Wilson
Parliament in 1714, to find ways to more accurately plc. Shares in the company were offered to the public
determine a longitudinal position on Earth. While to raise money to pay for Justin’s seat in the Minardi
latitude could be easily determined from the altitude team, a “feeder” program for more established teams.
of the sun at noon, determining longitude was a far Investors were entitled to some of Justin’s car racing
more difficult problem of considerable importance income for a period of 10 years.12
in seafaring. The problem was considered so difficult With the coming of age of web-based social net-
that the British Parliament offered a prize of up to works such as Facebook and LinkedIn as well as online
£20,000 (comparable to £2.87 million in modern cur- payment tools such as Paypal, crowdfunding evolved
rency) for a workable solution9. into a powerful new force to promote a wider range
More contemporary examples of crowdsourcing of concepts. Originally, such schemes were limited to
can be found in Exhibit 1. enabling charitable donations, providing only intangi-
Crowdfunding was not a new phenomenon either. ble, “feel good,” non-financial returns. Crowdfunding
In the 19th century, French sculptor Frédéric-Auguste platforms evolved to support a diverse range of deals,
Bartholdi was inspired by the idea of a statue cel- including for-profit transactions in many different
ebrating liberty that would be a gift from France to areas, from technology startups to microfinance
the United States. He designed the statue and helped schemes, from innovation to peer-to-peer lending.
promote its creation. The statue was financed by over
100,000 subscribers, including thousands of French
and American schoolchildren10 to find its ultimate 7 http://en.wikipedia.org/wiki/Crowdsourcing
8 http://www.bl.uk/learning/langlit/dic/oed/dictionary.
resting place in the harbor south of Manhattan as the
html
Statue of Liberty. 9 Although there were many contributors, no one ever
More recently, crowdfunding appeared under vari- won the official prize. However, John Harrison, a self-
ous guises as “affinity financing.” The intent was to educated English carpenter and later clockmaker,9 did
identify groups of investors sharing an emotional receive a total of £23,065 for his ongoing contributions
to the longitude problem, by inventing and improving
connection or affinity with a particular project, which
the marine chronometer.
would provide not only financial but also “emotional” 10 http://history1800s.about.com/od/immigration/f/
returns. If the emotional returns were significant statuelibertypaid.htm
enough, it would lower the need for financial returns, 11 http://www.vinodkothari.com/ipsecur.htm
thereby reducing the overall cost of financing. Develo- 12 Leleux, Benoit, and Katrin Siebenbuerger. “Justin Wilson
plc: Financing a Formula One Rising Star,” case no. IMD-
pments in securitization and other structured finance
1-0206. The case won the 2004 EFMD European Case
instruments in the 1990s facilitated the emergence Writing Award in the Risk Management category.
623

Part 4 Case studies
Exhibit 1 Contemporary examples of crowdsourcing
based on the popular philosophy that “a problem

shared is a problem halved.” For example, in April,
2012 Unilever hosted a 24-hour, global online event
to receive new insights on issues such as sustainable
sourcing, production and distribution and consumer
behaviour change. Unilever also established a per-
manent crowdsourcing platform to enable external
collaborations on 10 key priorities set by Unilever’s
sustainable living plan.†
Amazon’s Mechanical Turk (MTurk) platform was a

marketplace created to help source people to per-
form specific tasks that were not practical for com-
puters to perform. The Mechanical Turk web service
allowed companies to programmatically access a
diverse, on- demand workforce.* Task “Requesters”
posted tasks such as choosing the “best” among
several images of a store-front, or writing product
descriptions. Platform users interested in performing
tasks (called “Providers”) could browse the task data- Heineken established its “Ideas Brewery” as an open-
base, and select and execute tasks for payments set by innovation competition platform, to crowdsource
the Requester. Requesters could request Providers to ideas for sustainable materials, sustainable transpor-
provide qualifications and even set up tests to verify tation, recycling and re-use. To bolster its quest to be
these qualifications. The results from the Providers the greenest brewing company on earth, Heineken
could be accepted or rejected by the Requesters, offered participants $10,000 for the best ideas. The
with the acceptance ratio serving as the basis to rate a participants voted on the ideas themselves and were
Provider’s reputation. Providers could be located any- encouraged to actively promote their ideas on social
where in the world, while Requesters were restricted networks since the number of votes was a determin-
to US-based entities. Payments for completed tasks ing factor in picking the contest winner.‡
were made on Amazon.com via gift certificates or
deposits on the Provider’s account.**
Online support forums (sometimes referred to as

“unsourcing” platforms) had been used by technol-
ogy companies to reduce product and technical sup-
port costs. In this model of crowdsourcing, the user
community of an application or product contributed
problems and solutions using web-based peer-to-
peer support forums, typically edited by a company-
Even multinational corporations such as Unilever used provided “moderator.” Problem-solving support took
crowdsourcing to solve certain business problems, place in discussion forums set up on the company’s ➨
* http://aws.amazon.com/mturk/ † http://www.guardian.co.uk/sustainable-business/crowd-
** http://en.wikipedia.org/wiki/Amazon_Mechanical_ sourcing-crack-corporate-sustainability
Turk ‡ http://www.triplepundit.com/2012/04/heineken-asking-
design-greener-six-pack/
624

website, or on social networks like Facebook and support model was that the process was turned into a
Twitter. For example, TomTom, a satellite-navigation competitive challenge for users. Lithium, the company
systems maker, used such social network forums that provided TomTom’s support system, motivated
to support its customers. In the first month, mem- participation by awarding points for helpful answers,
bers handled 20,000 cases, saving the firm around with points connected to a helper’s status and standing
$150,000 in costs that would have been incurred had in the community.** Unsourcing had natural limitations
the problems been handled by company staff instead too: It could not deal with certain customer issues (for
of the user community.* example those requiring access to confidential data,
such as billing and payment), and peer- to-peer sup-
According to estimates by Gartner, a market-research
port in health, government and banking arenas faced
firm, such user communities could reduce support costs
stiff legal and regulatory hurdles.† Even more treacher-
by up to 50%. Part of the appeal of the peer-to-peer
ous were the reputational risks faced by companies
charged with operating “digital sweatshops.”
WikiLoot, a crowdsourcing data mining experiment,

posted thousands of previously unpublished photos
and documents of stolen artefacts online to help
track down some of the world’s oldest antiquities and
treasures to combat archaeological “tomb raiding,” an
illegal enterprise estimated to cause damages in excess
of $10 billion a year. Advice was being sought from
open-source experts on how to structure the WikiLoot
website. Lawyers offered to advise on legal issues and
social media experts consulted on how to involve the
Artefact recovery: this 2,300-year-old Greek krater was returned to general public, to spot and report a “lost” treasure on
Italy by the J Paul Getty Museum. Photograph: Beatrice Larco/AP display at their local museum.‡
* http://www.tomtom.com/en_ca/ ‡ http://www.guardian.co.uk/science/2012/jun/06/
** http://www.economist.com/node/21556094?frsc=dg|a wikiloot-crowdsourcing-stolen-artifacts
† Ibid.
A quick industry analysis of crowdfunding ● Donations-based CFPs, where the motivations of

Crowdfunding platforms (CFP) could be categorized funders are primarily philanthropic.13
into four main types: As illustrated by Exhibit 2, the growth in the number
● Equity-based CFPs, where investors participate in of CFPs in existence between 2007 and April 2012
the revenue streams or share in the profits as equity was phenomenal, from just shy of 100 CFPs globally
owners; to some 452. Another 84 were expected to be added
before the end of 2012, according to research and
● Lending-based CFPs, where funders operate pri-
advisory firm massolution (www.massolution.com).
marily as lenders, earning some form of interest
In 2011 the lion’s share of funds raised through CFPs
income and expecting the repayment of the loan
was in North America, with close to $837.2 million,
principal at some point in the future;
representing about 60% of the total amount raised
● Rewards-based CFPs, where investors essentially
prepay for goods or services, providing the neces- 13 http://www.forbes.com/sites/suwcharmanander-
sary working capital or development funds to the son/2012/05/11/crowdfunding-raised-1-5bn-in-2011-
receiving company to complete production; set-to-double-in-2012/
625

Part 4 Case studies
Exhibit 2 Evolution of CFPs worldwide (April 2012)
Source: Crowdfunding Industry Report, May 2012.
globally that year, as shown in Exhibit 3. North CFP business models

America also had the fastest growth rate for crowd- Among the hundreds of crowdfunding platforms, only
funding. The top five platforms accounted for 95% of a limited number attracted attention, either because
the total funds raised in Europe and 73% of the total of the originality of their business models or because
funds raised in North America,14 indicating heavy they helped prime popular projects. Operating in an
concentration in the industry. The accumulated emerging field still subject to rapid regulatory changes
funds raised, broken down by category, are shown in forced them to adapt their business models as they
Exhibit 4, with a clear dominance of donation- and went. CFP could be characterized by their primary
lending-based CFPs, even though the fastest growth focus (equity-, donation-, rewards- or lending-based),
rates in 2012 were in reward- and equity-based CFPs their fee structure (what party actually paid what
(refer to Exhibit 5). Anecdotally, in North America fees, success vs setup fees, etc.), their target groups
the average minimum crowdfunding contribution (individuals vs communities, groups vs SMEs, etc.),
ranged from $3 for reward-based projects, $8 for the presence of capital pooling or not (opportuni-
charitable donations, and $60 for equity or debt ties offered as single deals or included in some form
financing. of portfolio, as in P2P lending), the minimum entry
Donation-based campaigns, which represented ticket and the maximum investment limit per inves-
49% of all the funds raised as per Exhibit 5, tended tor, the “investment return” practices (when and how
to target smaller amounts but with a greater chance returns were offered), the due diligence practices
of reaching their goals. Equity- based projects raised (whether the intermediator actually performed any
18% of the total, lending-based 22%, and rewards- kind of check on the parties, such as credit checks on
based just 11%. The latter paid out on average about
50% of pledged funds, compared to 75% for equity, 14 Ibid.
79% for donations and 88% for lending.15 15 Ibid.
626

Exhibit 3 Total CFP fund raised by continent (2011)
Exhibit 4 Historical evolution of cfp funds raised by category (2009 to 2012e)
627

Part 4 Case studies
Exhibit 5 Historical evolution of number of CFPs by category (2007 to 2011)
borrowers, etc.), and the breadth of projects tackled In 2007, three guys working together at a major music label
(some CFPs were very focused, others very generic). acknowledged the new reality - there was no more money
to finance and produce new artists there. We were 27 to 30
years old, with our entire producing careers in front of us. this
was all we were good at – discovering new artists and giving
MyMajorCompany (MMC) to the rescue them a chance to launch. Majors would not do it anymore –
the prospective financial returns were just too small with new
The genesis of MyMajorCompany artists. Frankly speaking, you could not blame them. With the
Speaking from the company headquarters in Paris, recording industry in a tailspin since 2003, there was no more
Victor Lugger, the CFO of My Major Company, money in the industry to fund young artists.
described the genesis of MMC and the development It was not all gloom and doom, though. the good point
of its participative funding platform for new artists: about the music industry was that when you could find
MMC founders Michaël Goldman, Anthony Marciano and Sevan Barsikian
628

and develop an artist, you added tremendous sentimental generate cash flows. We would bring back venture capital to
and emotional value. If there was no more money in the the industry. With capital and expertise, we would improve
industry, we thought maybe we should look at the public of the odds of success of promising new ventures.17
enthusiasts and fans for that money. We knew there were
people out there interested in contributing financially to the MMC launched in November 2007, offering internet
discovery of new artists. If our jobs disappeared, who suf- users the opportunity to co-produce the first albums
fered? Ultimately it was the audience, the public at large.16 of emerging artists by betting small amounts of money
The three founding partners, Michaël Goldman, on their future success. As such, MMC offered one of
Anthony Marciano and Sevan Barsikian, postulated the first dedicated platforms focused on discovering
an alternative scenario. and promoting musical artists. Originally self-funded,
The chance for a new artist to be discovered the company increased its capital with a round of local
and promoted by a Big Four-operated label (major) angel money, a round crowdfunded directly through
declined to virtually nil. Consequently, new artist dis- the company’s website and finally, in 2008, a control-
covery and development became the almost exclusive ling round with a large family investor.
territory of smaller independent labels and publishing our 360-degree approach to artist development went
houses, the number of which had been declining for beyond the traditional music company reliance on record
years. Arguably, artists could develop themselves, sales. In today’s music business model, the artist is a brand.
the music company has to exploit the artist’s brand through
if they had sufficient means to self-finance their publishing, merchandising, live performances, records, dig-
launches. The startup stage for a young artist had ital media, endorsements, etc.18
effectively gone from difficult to daunting…
Without the financial backing, management Such 360-degree deals were not new. They started
and resources of a label, artists had to revert to a to appear as early as 1998, with stars such as Jay-Z
do-it-yourself mode. This meant developing pro- and Madonna, but the price tags on these deals were
fessional quality recordings and working through in the multi-million dollar range. New artists did not
an established distributor to obtain access to retail have the bargaining power of established stars.19
channels. While theoretically possible, relatively few MMC founders brought with them their artist and
artists ever managed to be simultaneously creative repertoire (A&R) experience in the traditional music
performers, savvy financiers and business operators in business. A&R managers actively scouted new talents
a highly competitive business environment… One of and screened piles of demo recordings to spot the next
the most pressing challenges that these artistic entre- promising artist. A&R also found songs for their artists
preneurs faced was to “create demand.” Financial to record, especially those that were recording compo-
success never came from music sales alone; artists sitions written by others.20 With this experience, MMC
had to see themselves as real brands that had to be could think in terms of the broad emotional appeal
tirelessly promoted to a fan base, and aggressively and of a musical talent and helped them develop a keen
diligently developed. The fans, a word derived for the sense of the business side of the industry.
term “fanatic,” would not only follow the artist and It’s very much a deal-to-deal business, with Ip and brand
its music but they were also inclined to pay for a wide building. You have to feel good negotiating these rights
range of artist-related experiences, such as concert because the music business is very much based on Ip.21
tickets and merchandise.
16 Victor Lugger, personal interview at MyMajorCompany,
With MyMajorCompany we wanted to take only part of the 3 May 2012.
financial risk of developing a new artist and share the rest 17 Victor Lugger, personal interview at MyMajorCompany,
with the public. Why would the public do that? It certainly 3 May 2012.
was not a rational investment; however, it was a novel way 18 Ibid.
of taking part emotionally in the project. 19 Geoffrey P. Hull, Thomas Hutchison, and Richard
We would operate very much as a venture capital firm. typi- Strasser, The Music Business and Recording Industry,
cally, there were two or three artists in ten who made it and Third edition. New York, NY: Routledge, 2011: 206–07.
the rest were not financially viable. If you think about it, 20 Geoffrey P. Hull, Thomas Hutchison, and Richard
majors were like banks. What distinguished them was their Strasser, , The Music Business and Recording Industry,
financial firepower. they could invest big time in projects Third edition. New York, NY: Routledge, 2011: 317.
that were “bankable,” in other words, relatively sure ways to 21 Victor Lugger, personal interview at MyMajorCompany,
3 May 2012.
629

Part 4 Case studies
IP in the music business covered a broad range of rights their investment. Even if they lost their money, the
above and beyond distribution rights. It involved emotional rewards of connecting with an emerging
brand trademarks, design of merchandise – essentially artist compensated the loss to some degree. Meeting
all the obligations and rights that were contractually with the artist, receiving early album releases or
definable between the artist and the label. attending an opening night concert all had value for
the producer.
Since 2007 MyMajorCompany had managed to
The MMC business model raise more than €12 million from its producers. The
MMC was thus conceived as a hybrid business model, platform progressively diversified: It extended its
mixing features of a traditional music label with those funding and support to books and comics in 2010
of a social media Internet start-up. This hybrid nature and to independent film-making in 2011. In 2012
was captured in their slogan: “Music is your busi- it opened its website to an even wider variety of
ness.”22 While crowdfunding revolutionized the financ- projects.33
ing of artists, MMC kept one foot firmly planted in the MMC toyed with a variety of return-sharing formu-
traditional music industry because, for the artist, the las with its producers. The latest formula provided a
best way to break into the music industry was to “play very high return to producers at the beginning to ena-
by the rules and be the best at these rules,” said Lugger. ble early recoupment of invested funds. “It is impor-
tant for people to get their money back, even if the
It’s an extremely data-driven business, and one that needs
album only sells 10,000 units,” said Lugger.25 Returns
rational middle management processes such as finance
and accounting. We are in a highly competitive business to investors decreased as album sales increased, up
with small margins in the e-business. the traditional music to the “platinum” status defined as over 100,000
business is heavy on processes – even though most of the units sold in the awards certification of the Syndicat
majors do not manage them properly. You make money on National de l’Edition Phonographique (SNEP) in
one out of ten projects. When one artist is successful, you
France.26 According to Lugger, if an album ever
make really huge money. But you cannot go to the other
nine artists and tell them, “if you manage your business bet- reached platinum status, it would be largely attribut-
ter…perhaps, you could improve your margins.” It just does able to MMC’s marketing push. Accordingly, it made
not work that way. sense to reduce the returns to producers to free more
We had to be very complementary in our overall manage- funds for marketing activities. It was not uncom-
ment of the company. We needed to be good at creativity, mon for MMC to invest in promising artists on its
good at communicating, and good at Ip management; both own account, well beyond the €100,000 provided by
sides had to have processes and for the Internet side of the crowdfunders, to maximize the success opportunity.
business, we had to be data-driven.
For the artist, beyond the ability to raise the funds
Beyond just having good music and distributing it, selling it to produce a first album, the financial agreement was
and communicating about it in a traditional way, we needed actually quite attractive. Of the €10 average sales price
the media, the distribution and all that to be a major break-
of a CD album produced by MMC, the distributor,
through. It’s like making a big movie. You need to be big at
communicating, big in the cinemas. We were going by the
rules as far as producing and developing and leaving the
innovation to the (crowdfunding) financing. that was our
unique model: take the best of both worlds.23 22 http://en.wikipedia.org/wiki/My_Major_Company
(accessed June 9, 2012).
MMC’s crowdfunding approach was an industry game 23 Victor Lugger, personal interview at MyMajorCompany,
changer. 3 May 2012.
24 Ibid.
traditional labels perceived themselves as private equity 25 http://www.mymajorcompany.com/
companies, as the ones taking all of the risks, explained 26 Victor Lugger, personal interview at MyMajorCompany,
Lugger. It took a year for them to understand that because 3 May 2012.
of MMC’s crowdfunding component we took less risk and 27 http://fr.wikipedia.org/wiki/Disque_de_certification
also made less money. Repaying the crowdfunder investors The number of albums sold to reach platinum status
seemed strange to them.24 decreased progressively from 400,000 in the 1980s
to 100,000 since July 2009. In the USA, the Record-
Crowdfunding investors – or “producers” – placed ing Industry Association of America (RIAA) requires
high value on the emotional returns gained from 1,000,000 albums sold to qualify for platinum status.
630

Warner Music, received 30%, the manufacturer of the reclusive writer or an idiosyncratic cartoonist. MMC
album around 10%, and another 10% went to the copy- set high expectation standards on all project crea-
right holder, or author of the songs (if the author was tors. They had to be willing to produce a three to five
not the artist). Of the remaining 50%, only about 10% minute clip that “thrilled” and expressed – with emo-
went to the performer. The remaining 40% was shared tion – their unique vision and what they would do with
between MMC to cover its costs (management team, the money raised. Since May 2012 MMC has limited
project management, marketing, promotion, website the number of projects allowed on its website to about
costs, etc.) and the “producers” who originally invested 1,000, way short of the 50,000 that once crowded the
in the artist. site. They found that the key to success was to have
Over 50 French artists and albums had been pro- fewer projects but of a much better quality.
duced so far by MMC, giving many artists a chance, Our model became a Kickstarter with a twist. We have a
including Grégoire, who was funded by 347 producers global website for all creative and cultural projects.
of which 40 were featured in his music video of “Toi +
Moi.” Over 1.5 million of Grégoire’s albums were sold. Even with a global appeal, and a site accessible
Irma and Joyce Jonathan were other MMC portfolio in French and English (and soon in Spanish and
artists. Joyce Jonathan’s first album Sur mes gardes German), 95% of the viewers were still from French-
achieved gold status in May 2010, just five months after speaking countries.30 MMC producers set up private
its release, and was certified platinum within one year. accounts but belonged to a community, not just
a commercial relationship. The average producer
invested over €140 and the average return per pro-
Evolving crowdfunding ducer topped €70. Since MMC was founded in 2007,
MMC refined its business model over time to better it has raised over €12 million for its artists.
use its crowdfunding component. It quickly became During the first half of 2012, the MMC website col-
clear that the more people were included and partici- lected investments worth more than €5 million and
pated, the better the concept functioned.27 It quickly received an average of 300,000 hits per month. The
envisioned leveraging the Internet to increase expo- typical visitor stayed on the website for 29 minutes
sure of the artist. Digital communication and digital and around 1,000 new investors entered into commit-
media strategies had to be developed to more effi- ments with artists every month.
ciently grow communities and direct-to-fan commu- MMC is a mix of e-business, gaming and social media. Crowd-
nications. funding platforms are still complicated websites. Crowdfund-
The financial model was adjusted to balance the ing remains a niche. We see fewer people investing bigger
value as perceived by the investors/producers and money. So we are again working on encouraging more peo-
ple to invest smaller amounts of money. We want to keep a
MMC’s margins. broad community and discourage “punting” and speculation.
We are not making big money on crowdfunding. We are We would rather have a community of 1,000 contributing
trying to lose as little as possible by adjusting the margin €10 than have 100 producers contributing €100 each.31
and increasing the “non-financial” returns by keeping up
with the latest internet technologies that help producers
participate and be part of the music business.28 You can- The future of crowdfunding
not crowdfund anything without delivering an emotional
We are also working hard to make crowdfunding main-
return. the person who is “impersonating” the project – the
stream. I have always feared about potentially misusing
artist, or writer, or entrepreneur – has to be truly willing to
crowdfunding. I try to keep that fear because that’s what
play the game and participate.29
Beyond music: MMC as artistic 27 Victor Lugger, personal interview at MyMajorCompany,

project enabler 3 May 2012.
As MMC expanded into areas such as book publishing, 28 Ibid.
cartoons, and other artistic endeavors, the question 29 Ibid.
30 Victor Lugger, video Skype interview at MyMajorCom-
arose as to whether the emotional returns could also pany, 25 June 2012.
be guaranteed in these fields, and how. Generating 31 Victor Lugger, personal interview at MyMajorCompany,
high levels of affinity may be more difficult with a 3 May 2012.
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Part 4 Case studies
drives me to do our work properly. We are the market leader The irony was, of course, that while most small inves-
in Europe. Being in that position, we have always wanted to tors were for all practical purposes completely shut
be exemplary and to prevent those misuses. If tomorrow we
out from investing in interesting but risky start-ups,
are regulated, part of the processes that we will be required
to do, we already do32…and the fact is, after four years and they were being encouraged by the same governments
€12 million in transactions, we have never had one case of to buy lottery tickets in any amounts they chose…
farud or money laundering. Recognizing these inherent contradictions, and seek-
ing to provide access to a broader base of capital, sev-
Lugger also saw MMC developing further services
eral countries, such as France, the UK and the USA, had
to artists, such as better tools to interface with the
passed or were about to put forward legislation allow-
crowd, and APIs (application program interfaces),
ing small-scale participation in investment opportuni-
software tools to build applications to help promote
ties. For example, the JOBS Act, which President Barack
the artist and connect to the fan base.
Obama signed into law on April 12, 2012, was intended
to enable investments up to $1 million in deals, subject
Crowdsourcing or crowdfrauding: to certain investor restrictions (such as the amount that
fleecing the flock? can be invested as a percentage of annual income). In
As crowdfunding made its way into the financial France, a similar regime existed, albeit restricted to
mainstream, it also raised some questions. Was it €100,000 per investment deal, the legal basis on which
really a source of financial deliverance for young art- MyMajorCompany designed its platform.
ists and budding entrepreneurs desperately seeking
resources? Or was crowdfunding possibly just another Licia Chery and MMC
gimmick that bilked money from small, naïve inves- “Keep your eyes wide open, it’s not that hard,” were
tors while offering a fragile branch of hope to the Licia Chery’s soulful words from please, a song she
talented but desperate? What exactly could crowd- composed and sang, gently pleading for a world of
funding do for the careers of talented entrepreneurs justice. These words also described Licia’s personal
otherwise shut out from traditional funding sources? philosophy. Since her childhood, Licia’s eyes were
Could crowdfunding replace the role of traditional wide open – open to her amazing gifts for music as
label financing, venture capitalists and angel inves- pianist, composer and singer. Each step she took to
tors? Could crowdfunding provide entrepreneurs with develop her music career combined the trust and
enough clout to launch new products? innocence of a child with the intelligence of a woman
Popular press accounts started portraying crowd- wise to the world of challenges.
funding platforms as powerful tools for the otherwise Licia Chery was born in 1985 in Geneva,
disenfranchised. But the actual role it could play in the Switzerland, from Haitian parents. By age 18, Licia
longer term was still unclear. Whether CFP could live had self-produced an album for which she received
up to their initial promises, or simply become another some local recognition. Her initial self-promotion
Internet fad, remained anybody’s guess. Unlike estab-
lished banks and securities firms that had existed for
over a century, and companies such as Warner Music
Group, which was founded in 1958, CFPs were less
than a decade old, and their sustainability remained
unproven. In many countries, investing in any security
interest, debt or equity required strict adherence to
securities laws and regulations, ostensibly designed
to protect small investors. In practical terms, such pro-
tective requirements often road-blocked the efforts of
start-ups to raise money from the general public since
the startups could not afford the extensive disclo-
sures and registrations. Only wealthy investors were
given prospectus exemptions because of the assumed
“financial sophistication” attached to their wealth. 32 Ibid
632

efforts went nowhere however, so she decided to needed to record her first album. Licia became a dig-
invest more in her art, enrolling in a Geneva music ital Scheherazade (a legendary Persian queen and the
school. For a while she bided her time, studying piano storyteller of One Thousand and One Nights), leaving
and music theory, further building her skills and self- many times more than 1,001 messages for her fans,
discipline. But her hunger and yearning for musical hoping to convert them into producers.
expression proved irresistible. Much like a bride elop- On March 4, 2010 Licia reached the critical €100,000
ing with her lover, Licia left the confines of college marker. Within just 75 days she had found 987 com-
life, where her parents believed her to be, and after mitted producers, whom she blushingly called her
a few menial jobs to save enough money, she ran off “marketing army,” since they were mostly male, aged
to America in pursuit of her real love, a music career. 25 to 45, and more than 95% of them lived in France.
Success proved elusive. One day when she saw
I would leave messages telling them they really needed my
an advertisement for a casting call due to take place music as an accessory to their survival. I posted my videos
the very next day in New York City. She packed her on their walls. I asked them to come and participate when
bags and boarded an overnight bus to the Big Apple. I appeared on TV, and during a video shoot, 20 producers
Surely, the city that feted so many of her idols, like came and wrote “please” on their hands.
Ella Fitzgerald, Aretha Franklin, Billie Holiday and Licia’s personality was complex but difficult to resist.
Miles Davis, could make room for one more. She made Promotion pictures captured the all-seeing and soul-
it to the audition and… was selected for a local gig. ful eyes of an innocent set in the gently rounded facial
That first fleeting moment of victory in New York contours of a young woman. She was a demure, play-
City fell short of paying the bills, though. With her ful young woman who could charm and disarm even
money running low, she conceded a tactical retreat, the most sophisticated audiences. She also showed
returned to Geneva and re-enrolled in university. the resilience typical of the would-be entrepreneur.
Once home, Licia’s doe-like brown eyes viewed her She had to stomach many “no’s,” which she just took
once familiar world with new insight. Her life story to mean “not now.”
of exile and assimilation – of growing up cradled
I realized soon enough that if you did not see MyMajor-
between two languages, two cultures, and two coun-
Company as just a platform, like an entrepreneur, you had
tries took on a whole new meaning. Licia realized the already lost. It took more than a year to start recording my
power of music to deliver a political message. Her album, a whole year! During that time, I did gigs, went to
diversity became a new source of creativity and a way radio stations and got everyone in Geneva to know my
to reach out to fans with similar backgrounds. Licia’s name. I went to magazines and had interviews and went on
TV… I was not waiting for MMC because I knew they were
song writing evolved to embrace universal themes,
not going to move fast enough. It took another six months
such as cultural heritage (“Proud”) and immigration to record the album. My artistic director was supposed to
(“M’pa ladan’l”). Back on the music scene in Geneva, come to the studio and tell us what he thought. Someone
She received considerable praise, but experienced was supposed to come to the studio and film the studio ses-
no real progress in her music career. She desperately sions. nobody ever came. It gets pretty lonely out there: it’s
you against the world. they don’t owe you anything: you
needed the legitimacy of a music label…
have to go get it.
In March 2009 Licia spotted the MyMajorCompany
website and submitted a demo recording. Rejected! Actually, Licia turned MMC’s apparent initial indiffer-
At the time, MMC was a closed system: an artist had ence into an opportunity. No one from “head office”
to be “selected” by the label to earn a spot on the web- would interfere with her music; she could do exactly
site. She persevered, doing gigs everywhere between as she pleased! She turned to friends and relatives
Paris, Lyon and Geneva. In December 2009 Licia to prepare her Electronic Promotion Kit (EPK) in the
again tried to register on the MMC website, now more way she really wanted it filmed. After completing her
broadly opened to artists. This time she was allowed album, she arranged a show in Paris, but still no one
in. Success at last! from MMC came. So she decided to take that aspect
But limited success really: Licia appeared on a into her own hands too.
crowded webpage “wall” amongst 36,000 other hope- Licia met with MMC’s marketing team in December
fuls . . . The goal through MMC’s platform was to 2011. She was not impressed: they said her album
reach out to her fan base and secure the €100,000 should come out in January 2013 because their
633

Part 4 Case studies
pipeline was rather full and she was not “ready.” With Finance remained an issue. She was contractu-
a grinding sense of urgency, this reply did not sit well. ally committed to delivering two albums to MMC
I don’t remember exactly what I said but by the end of the
but in practice she had only raised enough money
meeting, I had won four months and the album release had to produce the first one. The €100,000 would soon
been brought forward to September 2012. A victory of sorts be used up, and considerably more money would be
again… needed to promote herself and her music on an ongo-
She did not stop there: She started working on new ing basis. Would MMC invest more money in those
pictures and the video to accompany “Please,” her first activities? If so, on what terms? Would it really take
video clip. She asked French celebrities to appear in on the music label prerogatives and responsibilities
the video, and most agreed. She developed video cov- with respect to promotion? It was definitely in its
ers and arranged for French TV coverage of her album. own interest but that never guaranteed anything.
In January 2012 – one month after meeting the mar- How would the development of her second album
keting team – Licia arrived unannounced at MMC with be funded? Would MMC use crowdfunding again to
a full TV crew! The dynamics were now clearly altered: raise the necessary funds, or would Licia need to find
She was in control and would move things forwards. money herself, from other sources? How would all of
That swayed the label, which declared “we love your this work in the context of her existing contract with
video” and asked Licia to name her price for it because MyMajorCompany?
they wanted to buy it. MMC was suddenly prepared to Crowdfunding via MMC arguably gave Licia the
bring forward the album release to June 2012. credibility that came from being backed by a legiti-
mate music label. The MMC crowdfunding platform
I don’t have to count on them, I count on me… You cannot had galvanized Licia’s fan base and provided a portal
sit and wait.
for their financial support, which funded her first
But MMC did allow her to take the all-important first album. But it was becoming clearer by the day that
step. As a signed artist, Licia enjoyed more credibility the MMC experience would not be that different from
in the music world, a credibility she could use as lever- other music labels. She would need to deal with the
age for her next career steps. label, negotiate legal and financial structures, reach
out to her fan base and persuade them to help her
Building a social media strategy build a following.
Successful strategies that other artists had used
A first requirement for a successful artist was to build included presence on sites such as Myspace.com and
means to connect with the fan base. Britney Spears, Youtube.com, with plenty of free content, such as free
Lady Gaga and Ani diFranco, to name just a few had all songs and music videos. Offering teaser samples had
found original ways to reach out and connect. Finding been shown to help generate interest. Also, enabling
a strategy that would work for Licia was an interesting potential fans to become part of an artist-centric social
challenge. First, she had to identify more clearly the network, and providing ways for such followers to
needs and desires of her 987 producers, musically and then promote the artist to their friends, using blogs
otherwise. She engaged some of them to play roles in and social network venues such as Facebook, could
her please video clip (http://youtu.be/tl4UPfssbkI), a also be powerful tools to help develop a following. To
novel way to make sure they got involved. Second, she achieve commercial success, Licia would definitely
had to determine how she would measure success for have to be prepared to wear many hats, truly running
herself. Would that include only financial metrics or a startup business venture.
looser “satisfaction” measures?
634

Exhibit 6 A sample of crowdfunding platforms (April 2012)
635

Part 4 Case studies
Exhibit 7 Case studies of some of the most visible CFPs
Kiva: global microfinance aggregator acted primarily as a facilitator for unsecured loans to
candidates with good credit history. For those with less
than “perfect credit,” Prosper relied on its members
(especially lenders) to endorse the candidate. Prosper
often loaned money to individuals without the usual
collateral that a main street bank would require.
Kiva (www.kiva.org) was a non-profit microfinance

organization that invited individuals to lend as lit-
tle as $25 via the Internet to create opportunities
for others. Kiva’s global reach was helped by its 142
partner microfinance institutions which Kiva calls field
partners.*
Since 2005, almost 1.2 million people in 220 countries Zopa (www.zopa.com) launched in 2005 in the UK.
have borrowed money and benefitted from the more Its name was an acronym for “zone of possible
than 775,000 benefactors who had loaned money agreement,” a negotiating term that identified the
through Kiva. Kiva projects enabled local initiatives bounds within which an agreement could be reached
like the purchase of a tractor for a farmer in Bolivia. between two negotiating parties. Zopa pioneered the
The repayment rate was impressive - at close to 99%. “man in the middle” role between lenders and bor-
Since its launch, Kiva has loaned more than $323 mil- rowers. It also launched services in Italy and Japan.‡
lion with an average loan amount of $270 per Kiva Kickstarter: Innovation booster
funding contributor.
Prosper and Zopa: Peer-to-peer lending
Manhattan-based Kickstarter (www.kickstarter.com)

was founded in 2008 as the “world’s largest funding
for creative projects.” Projects that would typically not
be considered by traditional funding sources, such as
banks or venture capitalists, could turn to Kickstarter
In contrast to Kiva’s more philanthropic approach, fans to obtain funding for projects ranging from
in 2005 Prosper (www.prosper.com) launched a music, comics, video games and indie movies.
peer-to-peer lending marketplace in the USA, which A remarkable Kickstarter success story was the Pebble
provided access to higher amounts of debt financing. E-paper watch. Canadian engineer Eric Migicovsky
Prosper connected US-based borrowers and lenders wanted to raise both interest and funding for his
via the Internet, to arrange loans of between $2,000 E-paper watch, a device that could be programmed
and $25,000 at interest rates ranging from 6.6% to from, and display messages from a Bluetooth-linked
35.8%.† By 2012 Prosper.com had loaned more than smartphone. To promote his invention, Migicovsky
$353 million to more than 1.3 million people. Prosper ➨
* http://en.wikipedia.org/wiki/ ‡ http://techincollaborativeconsumption.wordpress.
Kiva_%28organization%29 com/2010/10/14/zopa/
† http://www.prosper.com/about/
636

first launched a company in Canada, networked at The Kickstarter funding campaign for Pebble launched
technology incubator events, and eventually moved on April 11, 2012 with a funding target of $100,000.
to Silicon Valley. After years of effort, Migicovsky Essentially, investors were offered a price discount for
managed to raise only US$375,000 from typical seed pre-ordering the Pebble watch. Within just two hours
capital investors. By his own admission, Migicovsky of the Kickstarter campaign going live, the Pebble
said that funding for his hardware designs always project reached its $100,000 target. On May 18,
seemed to lose out to geeks with trendier software- 2012 the funding was closed with an unprecedented
based ideas.* $10,266,844 pledged by 68,928 people.
All pledges made through Kickstarter were subject Since then, it has hosted over 100,000 campaigns for
to a five percent fee. Projects had to reach their music, charity, small business and film. Co-founder
goal funding target, otherwise pledged funds were Slava Rubin stated the site was “… about allowing any-
returned to investors. All Kickstarter pledges were body to raise money for any idea.”†
processed via Amazon Payments, which charged an
Indiegogo’s platform allowed funding requesters to
additional fee of 3% to 5%.
set up an account funded by Paypal, make a list of
Indiegogo: “anything-goes” CFP “perks” for different levels of donation, then create
a social media-based publicity effort. It offered two
major types of fee structures: flexible and fixed. The
flexible fee structure enabled projects to keep all the
funds that were raised, subject to a 4% fee, as long as
the minimum target was reached. If not, a 9% fee was
applied and the project would receive the balance of
raised funds. For the fixed fee structure, a 4% fee was
applied if the funding target was reached, otherwise
all contributions had to be refunded. With both flex-
Indiegogo (www.indiegogo.com), launched in 2008, ible and fixed structures, processing charges applied
described itself as “the world’s funding platform.” (about three percent) only if projects proceeded.‡ ➨
* http://articles.businessinsider.com/2012-05-07/ † http://en.wikipedia.org/wiki/Indiegogo
tech/31606163_1_pebble-apps-eric-migicovsky ‡ http://www.indiegogo.com/learn/pricing
637

Part 4 Case studies
Seedups: VC for the masses
for rewards- and $664 for donations-based cam-

paigns.‡
MyMicroInvest: Co-investment opportunities
Seedups (www.seedups.com) was an equity crowd-

funding platform based in Northern Ireland. Founded
in 2010, the Seedups platform hoped to link the best
MyMicroInvest (www.mymicroinvest.com) based in
tech start-ups with tech-savvy investors.* Founder
Wavre, Belgium, offered a web-based investment
Michael Faulkner estimated the equity segment of
platform where private and professional investors
the crowdfunding market to be potentially worth up
could collaborate and invest in the most promising
to US$2 billion a year.†
start-ups. Its platform made it simple for individuals
The average Seedups equity campaign raised $84,597, to invest as little as €100 in a startup, or in a growing
compared to the average $5,587 for lending-, $4,076 small business.
* http://www.crowdsourcing.org/navigate- ‡ http://www.forbes.com/sites/suwcharmanander-
search?q=The%20Crowdfunding%20Revolution son/2012/05/11/crowdfunding-raised-1-5bn-in-2011-
† http://www.seedups.com/blog/ set-to-double-in-2012/
638

CASE STUDY 19
Novartis SMS for Life (A)

A public–private collaboration to prevent stock-outs of
life-saving malaria drugs in Africa
Every 30 seconds a child dies of malaria. Over 40% of adventure. By January 19, 2009, he was sitting alone
the world’s children live in countries in which malaria is in an empty office, with only his computer, a phone
endemic. Each year, approximately 300 to 500 million and a solitary desk and chair. It was a few days after a
malaria infections cause about one million deaths, US Airways pilot had successfully landed his plane in
most of them African children under the age of five. the Hudson River after birds flew into the engines. Jim
Increasing resistance to anti-malarial drugs, coupled described his thoughts at the time:
with widespread poverty, weak health infrastructure I was tremendously motivated. I was excited. I felt inside
and, in some countries, civil unrest mean that mor- that this was a problem I could solve. I thought about the
tality from malaria in Africa continues to rise. The pilot, who did such a fantastic job landing that plane in the
tragedy is that the vast majority of these deaths are Hudson River and I remember him saying afterwards that
he felt his whole life, everything he did, all his training, was
preventable. The main reason why malaria is still such
preparing him for this one moment. I can really relate to
a threat, despite the existence of drugs to cure the dis- that, and I felt that this project was something that would al-
ease, is a supply chain problem. Supply does not meet low me to utilize all the skills, training and experiences I had
the demand where it occurs, and stock-outs of drugs gained from 40 years in IT. If I could apply all those learnings
to treat malaria cost lives. to solve this one problem, this would be just magic.
Jim Barrington, former chief information officer
Malaria as a disease
(CIO) at Novartis and current director of the SMS
for Life project, had been trying to solve the problem Malaria is a mosquito-borne infectious disease caused
since 2006, when he first heard about the “last mile” by the plasmodium parasite. The species Plasmodium
problem from Silvio Gabriel, executive vice president falciparum is the most common cause of infection and
(EVP), Novartis Malaria Initiatives. At the end of is responsible for about 80% of all cases of malaria,
2008 Jim decided to commit 100% of his time and and about 90% of deaths.
effort to an initiative to solve the supply chain prob- Malaria is a public health problem in over 100
lem and, after receiving the green light from Novartis countries worldwide, inhabited by over 2 billion
to leave his current job as CIO, embarked on this new people. It occurs in tropical and subtropical regions,
Research Associate Anna Moncef prepared this case under the supervision of Professor Donald A. Marchand as a basis for class
discussion rather than to illustrate either effective or ineffective handling of a business situation.
639

Part 4 Case studies
including parts of the Americas, Asia and Africa. cerebral malaria, and loss of investment and tour-
About 85% of the 300 to 500 million cases annually ism.4 In some countries with a heavy malaria burden,
occur in Africa, over 50% of them in five countries: the disease may account for as much as 40% of public
Nigeria, Democratic Republic of the Congo, Ethiopia, health expenditure, 30% to 50% of hospital admis-
Tanzania and Kenya.1 The African region accounts sions, and up to 50% of outpatient hospital visits.5
for 90% of malaria deaths globally, of which 85% of
deaths are of children under five, especially in remote
rural areas with poor access to health services.
The fight against malaria
Although malaria is preventable and fully curable, it
Causes and symptoms is a challenging task for African countries to control
and eliminate it. In the last few years some progress
Malaria is transmitted to humans by the bite of an
has been achieved, with 9 countries in Africa and
infected female Anopheles mosquito, which injects
29 elsewhere documenting reductions in malaria
the parasites into the bloodstream.2 The parasites
cases of more than 50% in 2008 compared with 2000.
travel to the liver, where they grow for six to nine
However, the number of cases fell least in countries
days. They then leave the liver and invade red blood
with the highest incidence rates.6
cells, where they multiply rapidly until the cells burst,
releasing thousands of parasites into the bloodstream,
which then attack other red blood cells, and the cycle Malaria prevention
continues. Malaria can be prevented by the use of prophylactic, or
It takes between 7 and 21 days for symptoms to preventative, drugs; by mosquito eradication through
appear. These include waves of fever (when the blood indoor spraying with insecticides; or by avoiding
cells are attacked), followed by shivering (when the mosquito bites by using mosquito nets impregnated
blood cells burst), plus other symptoms such as sweat- with insecticide. The first method is recommended to
ing, headache, joint pain, vomiting, anemia and con- short-term visitors and travelers to countries where
vulsions. If not treated within 24 hours, P. falciparum malaria is endemic. Intermittent preventative treat-
malaria can progress extremely rapidly and cause ment is also recommended for pregnant women in
death within days or even hours. Overall fatality rates areas of high transmission, where a single curative
in endemic areas can be as high as 10% of all malaria dose of an anti-malarial drug is administered at least
cases. Young children and pregnant women are espe- twice during pregnancy. It is not practical and too
cially vulnerable. expensive to be used for all full-time residents.
Malaria is a major cause of anemia in children and Vaccines for malaria are currently under develop-
pregnant women, of low birth weight, premature ment, but no effective vaccine is yet available.
births and infant mortality. Infants and children who
have suffered from severe malaria may also develop
mental impairments and even brain damage.
1 The WHO World Malaria Report 2008, http://www.who

Economic burden .int/malaria/publications/atoz/9789241563697/en/
Malaria is a disease that primarily affects the poor, index.html
but it is also a cause of poverty and a major hin- 2 A mosquito becomes infected by biting an infected person
drance to economic development. The gap in prosper- and sucking up some blood containing malaria parasites,
which undergo further development before being passed
ity between countries with and without malaria has
on when the mosquito feeds.
become wider every year.3 3 Sachs, J. and Malaney, P., “The Economic and Social
The economic impact of malaria has been esti- Burden of Malaria.” Nature, 415, February 7, 2002.
mated to cost Africa US$12 billion each year. This 4 Greenwood B.M., K. Bojang, Ch.J.M. Whitty and
includes the cost of health care and medication, A.T. Geoffrey. “Malaria.” The Lancet, Vol. 365, Iss. 9469.
5 http://www.rollbackmalaria.org/cmc_
publicly managed mosquito control, education and
upload/0/000/015/363/RBMInfosheet_10.pdf
research, work and school days lost due to sickness, 6 WHO World Malaria Report 2009, http://www.who.int/
decreased productivity due to brain damage from malaria/world_malaria_report_2009/en/index.html
640

Case study 19 Novartis SMS for Life (A)
Diagnosis and treatment for Malaria Venture, a non-profit foundation dedicated

Malaria can be diagnosed by examining a patient’s to the development of affordable new anti-malarials.7
blood under a microscope, but this is often not prac-
ticable in Africa, particularly in remote areas where
Institutions and funding committed to
there are no laboratories. Rapid diagnostic tests are
eradicating malaria
a possible alternative. They are simple to use, require
The key institution in the fight against malaria was the
only a drop of blood and display results in a few
Roll Back Malaria (RBM) Partnership,8 founded in
minutes. The World Health Organization (WHO)
1998 by the WHO, the United Nations Development
recommends that malaria be confirmed by this type of
Programme, the United Nations Children’s Fund and
diagnosis before treatment is given, but some coun-
the World Bank, in an effort to provide a coordi-
tries that cannot afford rapid diagnostic tests often
nated global response to the disease. It has since
use symptoms as the indication to treat for malaria.
become a global movement of more than 500 partners
The best available treatment for P. falciparum
organized in eight constituencies: malaria endemic
malaria – and the only one recommended by the WHO
countries, multilateral development partners, the pri-
– is artemisinin-based combination therapy (ACT). It
vate sector, foundations, ex officio members, non-
contains the basic compound artemisinin, which is
governmental and community-based organizations,
isolated from a herb used in Chinese traditional medi-
research and academic institutions, and OECD donor
cine, before being chemically modified and combined
countries. It forged consensus between key actors in
with other drugs, for example lumefantrine. ACT is
malaria control, harmonized action and mobilized
very effective when used within 24 hours of symptoms
resources to fight malaria in endemic countries.
occurring. The WHO explicitly discourages the use of
The RBM Partnership together with the World
artemisinin by itself as a monotherapy as there are
Health Assembly, the decision making body of the
signs that malarial parasites are developing resistance
WHO, established goals to reduce the number of
to the drug, which makes the highly effective artem-
malaria cases and deaths recorded in 2000 by 50% or
isinin derivatives and their partner drugs vulnerable
more by the end of 2010, and by 75% or more by 2015.
to the same risk, endangering future malaria control.
These were further emphasized in the Global Malaria
Action Plan launched by RBM in September 2008,
Drug producers which defined the necessary steps to accelerate
The pharmaceutical company Novartis, based in achievement of these targets. Two other very impor-
Basel, Switzerland, was the major producer of ACTs tant targets were outlined in the Abuja Declaration,9
in the world. In 2001 the company began a program committing African governments to an intensive effort
to produce and distribute a treatment called Coartem to halve the burden of malaria in Africa by 2010, and
without earning any profit on these costs. By 2010 the the United Nations Millennium Goals.10 Goal no 6
company had produced and distributed over 320 mil- was about combating HIV/AIDS, malaria and other
lion doses. To ensure a dependable supply and meet diseases and one of its targets was to have halted by
rising demand for Coartem, Novartis invested heavily 2015 and begun to reverse the incidence of malaria
to expand production in China and the United States, and other major diseases.
scaling capacity up to 100 million treatments annu- Another important organization in the fight against
ally. Since 2001, production efficiency gains enabled malaria was the Global Fund,11 a public/private part-
Novartis to halve the price per treatment, greatly nership created in 2002 and dedicated to attracting
increasing patients’ access to the drug.
Novartis supplied Coartem in color-coded packages 7 http://www.corporatecitizenship.novartis.com/
with doses to suit different ages. In 2008 the company patients/access-medicines/access-in- practice/
developed Coartem Dispersible, a cherry-flavored malaria.shtml
sweet formulation of Coartem for children, which 8 http://www.rollbackmalaria.org/docs/AMD/
dissolved easily in a small amount of water. It eased RBM_Background.doc
9 http://www.rbm.who.int/docs/abuja_declaration_
administration and helped ensure effective compli- final.htm
ance. Coartem Dispersible was the result of a public- 10 http://www.undp.org/mdg/basics.shtml
private partnership between Novartis and Medicines 11 http://www.theglobalfund.org/en/about/
641

Part 4 Case studies
and distributing financial resources to prevent and chain problem. He thought it would be a good chal-
treat HIV/AIDS, tuberculosis and malaria. This part- lenge for his team to take on and asked René Ziegler,
nership between governments, civil society, the pri- head of Global IT Governance and Operations, to
vate sector and affected communities represented a go to Zambia, where Novartis had been supplying
new approach to international health financing. The Coartem to the public sector since 2001, to explore
Global Fund worked in close collaboration with other the situation.
bilateral and multilateral organizations to supple- René met with the Zambian Ministry of Health and
ment existing efforts dealing with the three diseases. visited medical stores, hospitals, dispensaries and the
It provided three quarters of all international funding like. He looked at the healthcare system, in particular
for malaria, with an allocation of $1.8 billion over at the processes for drug distribution, consumption
the next five years. Every year a round of funding reporting and needs forecasting, as well as the avail-
was conducted and grants were awarded to countries able technology and telecommunications. He discov-
based on the assessment of the programs requesting ered that the stock-out problem was huge, there was
support. In 2010, the 10th round of funding opened for no consistent forecasting and consumption reporting
applications. The funding came from about 50 donor in place, and ordering was paper based and sporadic.
governments and private sector donors, for example He produced a report with his main findings which
the Bill & Melinda Gates Foundation. highlighted two main problems. First, the informa-
Despite the increased funding from international tion and communications infrastructure was still very
sources (from $0.3 billion in 2003 to $1.7 billion in poor – especially in rural areas– computers were not
2009) there still was a major gap.12 The estimated readily available, there were frequent power cuts, and
global requirement to eradicate malaria by 2015 was the mobile phone coverage was not sufficient at that
about $3.2 billion a year. time but it was growing very fast. Second, Novartis
could not assume responsibility for the in-country
distribution of Coartem, since this was the primary
Exploring the problem at Novartis responsibility of the Ministry of Public Health in each
country. They concluded that there were no practical
In June 2006 Silvio Gabriel, EVP, Novartis Malaria
solutions to these issues.
Initiatives, spoke at an internal Novartis IT confer-
ence in Basel designed to bring Novartis IT employees
closer to the company’s patients. He talked about the Defining the solution
problem of malaria and the existence of Coartem,
which cured over 95% of cases after only three days In March 2008 Jim found another opportunity to
of therapy. At the same time he mentioned the death explore the issue further, in an IMD/Novartis execu-
statistics in Africa and the huge problem of matching tive development program called IT Excellence (ITX).
patients with the pills. The in-country supply chain Silvio once again made an inspiring presentation to
did not work very well, and there were many stock- the participants. Several of them were so moved by
outs in rural health facilities, where patients received the story that they formed a voluntary project team
free drugs, as opposed to having to pay for them from (ITX team), headed by Cathy Hein, senior project
pharmacies or private clinics. African countries found manager, to tackle the problem. Cathy recalled:
it difficult to accurately forecast the usage levels of A personal belief in the impact we could make as a whole to
the drug, which resulted in Novartis receiving a lot save lives was more than enough motivation to be persist-
of emergency orders. This meant it had to ramp up ent in overcoming all hurdles. It was particularly rewarding
to know we were contributing to the fight against malaria.
production and ship everything by air in order to meet
this sudden demand. The pharmaceutical company They went back to their home countries and contin-
could not hold too much stock of Coartem because it ued working on the project remotely. Because they
guaranteed that when the drugs were delivered they all had other work commitments their resources and
would still have a shelf-life of at least 18 months, out
of the original 24 months. 12 The WHO World Malaria Report 2009,
As CIO, Jim Barrington, participated in the confer- http://www.who.int/malaria/world_malaria_
ence and thought that IT could help solve the supply report_2009/en/index.html
642

time for the project were limited. At around this time, to help explore problems and find solutions. The pro-
René and Jim made a presentation to Silvio, recom- gram enlisted the help of students, who were valued
mending that the SMS13 cell phone technology was for their fresh thinking, which was uncontaminated
the only viable IT solution for the rugged African by the “corporate way” of solving problems.
environment. Jim and Silvio agreed to act as sponsors and to
René then spoke with Jim about asking for help share the expenses and finance the students from their
from IBM, Novartis’s major outsourcing partner, and departmental budgets; IBM agreed to provide people
specifically from the Value Creation Centre, a joint to lead the project. There was no time to lose. It was
Novartis and IBM activity to drive innovation with already May 2008 and they had to find and hire eight
IT in the pharmaceutical company. They contacted students for a summer internship. Charlotte and Jörg
Charlotte Newton, chief innovation officer at the started recruiting immediately. From 66 candidates,
Value Creation Centre, and Jörg Sprengel, Global they chose a diverse team of 4 undergraduates and
IBM R&D Client Manager on the Novartis Account. 4 graduates, 4 male and 4 female, from various back-
Charlotte was convinced about the project: grounds and nationalities; 3 of them had malaria.
On July 1, 2008, they kicked off the 12-week project
Corporate responsibility projects carry something indefin-
ably motivating to allow people to reach into their own self with the sponsors and the ITX team. They started by
and to make a contribution that they are truly aligned be- mapping the existing supply chain, in particular “the
hind. and this was the case with this project, where you are last mile” problem (refer to Exhibit 1), and investigated
essentially saving babies’ lives.
The IBM team proposed using the Extreme Blue

method, which it had used successfully for 10 years 13 SMS = Short Messaging Service, text message.
Exhibit 1 The last mile problem
Source: sMs for Life project team.
643

Part 4 Case studies
possible improvements to the Coartem in-country it and we will see. Which I did. He gave me the approval in
supply chain in Nigeria and Tanzania. Typically, once January and I purposely didn’t go near him again until I had
everything in place.
stocks of drugs arrived in the country by airplane from
abroad, they were transported in trucks to a central
medical store (MSD in the exhibit). From there they Enlisting the Roll Back Malaria Partnership
went to zonal medical stores, then district warehouses In January 2009, in his new and empty office on the
and, finally, health facilities or health posts, which Novartis Basel campus, Jim set to work preparing what
each served a large number of villages. Distances he called the “SMS for Life” project proposal to present
were great and the poor condition of some roads and to Professor Awa Marie Coll-Seck, executive director
climate complicated matters. At each step in the chain of the RBM Partnership. His idea was to establish a
there was a lack of information flow. partnership project under the leadership of RBM in
Coached and facilitated by Charlotte and Jörg, order to take ownership of the project away from
the students brainstormed 142 ideas, reduced them Novartis and give him credibility and legitimacy when
to 80, refined 42 of them and produced 10 possible bringing other partners on board. When he presented
solutions, which were combined into 5 final ones: to her and her team on February 10, 2009, they were
SMS-based stock management, malaria schools initia- quite excited about the project. They liked the fact that
tive, a distribution coordination service, the year-out it tackled a major problem, and that both the problem
program, and community healthcare access. and the potential solution were clearly defined.
In September 2008 the students presented beauti-
ful posters with drawings explaining the five proposed
solutions in detail and their value assessment to Jim Finding corporate partners
and Silvio, who chose SMS-based stock management While waiting for RBM to commit, Jim started sell-
as the preferred solution. The essential idea was to ing the idea to potential corporate partners based
create an in- country forecasting system based on on the proposed project governance. The concept
the use of SMS messaging between the health posts was that each selected partner would undertake to
that dispensed Coartem and the district and regional provide skilled resources and a financial contribution
warehouses that distributed the drug. A data manage- of approximately $200,000. This would provide a
ment system with a reporting interface using charts project team of five or six skilled people and an overall
would provide stock level information from all facili- budget of $1 to $1.2 million.
ties to facilitate stock movement and supply, as well as By the end of February 2009, Jim had secured the
improving stock forecasting and planning. funding and resources from Novartis, a project man-
ager and the use of LotusLive project management
Finding the right partners software from IBM, funding and advisor resources
At the end of September the students went back to from Sara Lee, and initial interest from P&G. Sara
their universities and Jim continued thinking about Lee and P&G were both interested based on their
how to move the project forward. By December 2008 logistics experience in African countries selling low-
he had decided to resign from the Group CIO position cost essential products like Kiwi Shoe Polish and
and his boss Raymond Breu, Novartis’s CFO, agreed to soap. He still needed a mobile telecommunications
sponsor him for 12 months until his early retirement company, an IT company to develop the system, and
to focus solely on special projects. Jim recalled: some type of visualization or mapping technology. He
started talking to three companies: Zain, a mobile tel-
Before this project, I had already made up my mind to re-
ecommunications company founded in Kuwait with
sign from the CIO position for personal reasons. And the
agreement with Raymond Breu was that I would be work- operations in 17 African countries and 6 in the Middle
ing on any special project he gave me. But this project was East; Vodafone, the world’s largest14 multinational
certainly at the back of my mind and one of the areas that mobile telecommunications network company with
I was going to target like crazy. And I persuaded him that operations in 31 countries; and Google, whose map
I would like to progress it and see if I could make it hap-
pen. He didn’t really think I could: He was very skeptical;
it required funding, it was highly political; and I would get
caught up in bureaucracy, he thought. But he said: Fine, try 14 Based on revenue.
644

service was of interest. Their responses and the ways the financial crisis meant it had to cut funding of all
these companies approached the potential coopera- non-essential activities. After many discussions with
tion were quite different. What was similar was that P&G, the company wrote back to say that it would not
they all wanted to do everything by themselves, with- participate in the project.
out other partners. Jim recalled: The initial concept of obtaining donations from
Google, which was by far the most enthusiastic, put six a number of partner companies changed to having
people on the project. I was sure they would be the most fewer partners, who each would finance their own
successful. After the initial contact I talked to them twice a parts of the project. They all agreed to fund their own
week, but by April we still had nothing in writing. With Vo- travel costs and their people, eliminating the need for
dafone’s team we had an initial meeting in London with the
a central project budget.
director of intellectual property, the scientific director and
the head of corporate research. after that they kept con-
tacting me and disappearing for a while as they discussed Getting ready
the project internally. Zain kept quiet.
With the partners on board, the work on designing the
He also started to look for a potential country in which
system solution and preparing for the pilot began. In
to pilot the project. Two were on his list, Tanzania
April, Jim hired Olympia Wereko-Brobby, one of the
and Zambia, and he started to talk to their Ministries
students who had taken part in the Extreme Blue proc-
of Health.
ess earlier in 2008, to help him coordinate the project.
Other members of the team were three part-time
Setting up a steering committee project members from Novartis (Tara Cook, associ-
In April, Professor Coll-Seck agreed to support the ate director, IT, sales & marketing US; Marty Putenis,
project and to chair the steering committee. Other executive director, healthcare compliance US; and
members of the committee, from a broad range of Peter Buesch, head of IT project office Germany);
backgrounds, were: Kevin Ferriday, project manager, from Vodafone; and
Peter Ward, project manager, from IBM.
● Dr Alex Mwita, Tanzania National Malaria Control
Program (NMCP) manager
● Dr Desmond Chavasse, PSI15 vice president and Field trips to potential pilot countries
Global Malaria Control director The team started to refine the project scope, technical
requirements and desired outcomes, as well as plan-
● Professor Marcel Tanner, director of the Swiss
ning the project in detail. In May, they departed on a
Tropical Institute
three-week field trip to Tanzania to meet with National
● Professor Klaus Leisinger, CEO of the Novartis Malaria Control Program (NMCP) representatives on
Foundation for Sustainable Development the ground, including the manager Dr. Alex Mwita
● Silvio Gabriel, EVP of Novartis Malaria Initiatives and the senior health officer Winfred Mwafongo. The
● Jim Barrington, who became the “SMS for Life” NMCP would be the main owner and user of the SMS
program director. for Life solution in Tanzania. The team visited hospi-
tals, health centers, dispensaries and warehouses in
At the first steering committee meeting on April 20, the three districts that the NMCP had chosen to partici-
2009, Jim had to present the commitments from pate in the pilot, namely Lindi Rural, Kigoma Rural and
potential partners. By this time, he had received writ- Ulanga (refer to Exhibit 2 for the location of the three
ten confirmation from Vodafone that it would partici- districts). The three districts covered a population of
pate. It committed to cover all the costs of developing over 1.2 million people in 226 villages and 129 health
the software, for which it would hire an external soft- facilities. They were chosen because of their situation
ware house, MatsSoft Ltd,16 as well as costs related to
implementing the pilot, including providing handsets
and covering the SMS costs. 15 PSI provides malaria control support to national Ministries
The other partners were not ready. Google was of Health in over 30 countries around the world, tailoring
its programs to the environment in each location.
unable to obtain internal approval in time. Zain did
16 MatsSoft had previously worked with Vodafone on
not respond. Sara Lee withdrew its commitment after developing an SMS-based banking solution.
645

Part 4 Case studies
Exhibit 2 Map of Tanzania and the three pilot districts
Source: SMS for Life Tanzania Pilot Project Report, p. 8.
in three different regions that were representative of of NGOs17 that worked in Tanzania and understood
the country and supplied from different zonal medical the health system well, in order to benefit from their
stores; malaria was the most common cause of death experience. Based on the inputs from all stakehold-
there; and there were no other pilots running at the ers, the team modified their project. The feedback
same time, which might have skewed the results. received gave them a high degree of certainty that the
Thus, Lindi Rural represented an “average” district in designed solution would work. Once they were back
Tanzania; Ulanga was one of the top 10 most difficult in the UK, MatsSoft started to develop the system.
districts to work in, because of its remoteness and staff At the beginning of June, Jim went to Zambia to dis-
shortages and skill levels; and Kigoma Rural was so cuss implementing the pilot there. Google representa-
large that the zonal medical store was a one-day drive tives joined him on the trip to explore the possibility
away from the main town, Kigoma, and the furthest of doing the pilot in that country in place of Vodafone.
health facility was a 12-hour boat trip away.
The team explained the pilot to all stakeholders, 17 The Mennonite Economic Development Association
showed them the draft solution and obtained their (MEDA) and PSI Social Marketing & Communications
agreement to participate. They also met with a couple for Health (PSI).
646

They also met with a representative of Zain, which Countdown to launch

had temporarily regained interest in the project.18 Over the summer of 2009, the team focused all
After the trip, Google withdrew. Internal changes at their efforts on getting ready to launch the pilot in
google.org had led to a revised strategy and the reas- Tanzania. They prepared training sessions for 157
sessment of all projects in the pipeline, and the SMS health workers, in both English and Swahili, printed
for Life project no longer fulfilled the new selection training materials including wall posters (refer to
criteria. In further discussions with the head of the Exhibit 3), designed and ordered branded T-shirts
NMCP in Zambia, it was agreed that Zambia did not
need to run a separate pilot, as it could benefit from 18 On June 8, 2010 Zain sold its operations in 15 African
the Tanzanian results because the healthcare system countries to the Indian company Bharti Airtel, keeping
organization in the two countries was very similar. only those in Sudan and Morocco.
Exhibit 3 Training poster
Source: SMS for Life project team.
647

Part 4 Case studies
with the logos of the RBM Partnership and the other register their phones in the system and send the SMS
partners. They also prepared a project website that messages (refer to Exhibit 4 for training details). The
was hosted on the RBM website. The SMS/mobile training included pharmacy best practices, which
phone system, the Web-based reporting system and were well received by the health workers who had
Google mapping were readied and tested. very little training.
On August 5, the second steering committee meet- On October 1, the pilot was launched in the first
ing took place. It endorsed the start of the pilot in district, Lindi Rural. Subsequently it was launched
Tanzania, despite the fact that the memorandum of in Ulanga, on October 15, and Kigoma Rural, on
understanding with the Tanzanian Ministry of Health October 22. The pilot ran for 21 weeks to cover two
had not been signed. quarterly order and delivery cycles.
How it worked
Piloting the solution
The solution consisted of two components: an SMS
At the end of September 2009, the first training management application and a web-based reporting
sessions took place. The training was tailored to tool. All of the data was collected in a central system
three different user groups: (1) central management, housed in the UK in the Vodafone MatsSoft data center.
including NMCP and MSD employees, (2) district The SMS application stored the locations of the
management, including district management officers health facilities and the personal mobile phone num-
(DMO), district pharmacists and zonal MSD repre- bers of the health workers, which were registered in
sentatives, and (3) health facility workers, who were the system to ensure that information was only sent
trained on how to store medicines, count stock levels, by authorized workers. Every Thursday at 14:00 the
Exhibit 4 Training of user groups
Source: SMS for Life Tanzania Pilot Project Report, p. 13.
648

Figure 1 SMS stock levels and interpretation
Y4: Coartem Yellow, for babies 5–15 kg: 4 boxes

B3: Coartem Blue, for children 15–25 kg: 3 boxes
R2: Coartem Red, for children 25–35 kg: 0 boxes
G1: Coartem Green, for children above 35 kg and adults: 2 boxes
Q99: Quinine injectables: 99
system sent a weekly stock request message to all the web-reporting usage statistics – e.g. how many times
registered mobile phones. The health facility workers the web tool was accessed. Jim commented:
had to count the level of stock in quinine injectables One of our criteria was to design and build a solution that did
and four different dosages of Coartem and send back the minimum necessary and was stripped of all complexity.
an SMS with the stock count message, as shown in We felt that this was necessary because in Africa it is quite
Figure 1. In order to ensure maximum response rate, a difficult to work: remote locations, varying levels of educa-
free phone number was established and the costs were tion and literacy. We had to come up with something that is
very simple. We designed a system that collects just five piec-
covered by the pilot. es of information every week in a very simple sMs message.
On Friday at 14:00, the SMS system sent an auto-
matic reminder message to all health facility workers
who had not yet responded. At 17:00, the system Pilot support and monitoring
sent a credit of 1,500 Tanzanian shillings (the usual Each DMO appointed one person to take the lead in
top-up amount in the area) to all mobile phones that driving corrective actions resulting from the stock
had submitted a stock level SMS message. Late mes- level visibility. This person received a Blackberry
sages were accepted but no credit was awarded. The device to access the system and was responsible
mobile phone credit was an incentive to motivate for registering new users, educating them, assisting
health workers to send the message on time and also workers experiencing difficulties, and ordering and
to recognize the additional tasks they had to perform redistributing medicines in response to the stock-outs.
for the pilot above their normal workload. Because An additional salary was paid to the district lead per-
health workers were using their personal phones, the son for the duration of the pilot in recognition of the
credit was for their personal use. extra tasks he/she was asked to perform.
Every Monday at 12 noon, the system sent an The project team monitored the pilot in two ways.
automatic message to the DMO indicating the health There was a daily review of the online information
facilities that had not sent a message and the details available through the web application. In addition, for
of all health facilities with a stock-out. The web-based the duration of the pilot, the team conducted surveil-
reporting tool enabled access to the data through a lance visits to 116 out of the 129 pilot health facili-
secure reporting website (refer to Exhibit 5), which ties. There they registered physical stock counts and
was available via the internet or Blackberry mobile matched them against the most recent data entered
phones. It enabled the users, namely the NMCP dis- in the SMS for Life application. They also checked the
trict and central management employees, to view the GPS positioning of the health facilities and provided
current and historical stock levels at both the health answers to any questions the health workers had, as
facility and the district level. It displayed the facilities well as gathering their feedback. In total, the team
on Google maps, showed the SMS messages sending spent over 370 man days on the ground supporting
statistics, as well as any errors, and indicated the the pilot. These follow-up visits were very important
649

650
Exhibit 5 The web-based view of the information reporting from the system
Part 4 Case studies
Source: SMS for Life project team.
06/03/14 5:01 PM
for the health care workers’ perception of the project 2 To demonstrate that a data-gathering infrastruc-
and its significance. Olympia recalled: ture can be made available via simple tools that
To me, the most important part of the training was the vis- can be used by people in the most remote
its we made to individual health facilities throughout the locations.
pilot. This process often involved long and difficult journeys 3 To demonstrate the effectiveness of a public –
to very remote areas, but the opportunity to catch up with
private partnership model.
people we had met at the centralized training, to experience
their daily working environment and get their feedback on By the time the pilot concluded at the end of
the project in an intimate setting, was amazing. they were
February 2010, all three objectives had been ful-
also motivated by the visits and in having their feedback
taken into account for the countrywide scale-up. I am sure filled. The SMS for Life application provided, for the
this contributed to both the accuracy and the frequency of first time ever, reliable weekly stock information
their sMs messages. the project is as much about the peo- about anti-malarials in the health facilities. This
ple you meet and learn from as it is about technology. enabled the district management to act upon the
On December 17, 2009, the third steering committee information and reduce or eliminate the stock-outs.
meeting took place, at which the pilot’s progress and At the beginning of the pilot, all three districts had
initial results were discussed. The members also dis- high stock-out rates of one or more of the five drugs.
cussed handing over the pilot to the Ministry of Health During the pilot the stock-outs of all drugs were
and Social Welfare in 2010 and the possible imple- reduced from 57% to 0% in Lindi Rural, from 87%
mentation of the solution in other African countries. to 30% in Ulanga, and from 93% to 47% in Kigoma
To do this, they agreed to organize meetings with the Rural (refer to Exhibit 6). At the beginning of the
Global Fund, WHO and UNITAID. pilot, 26% of facilities had no stock of any dosage
of Coartem; this figure was reduced to 0.8% by
the end.
Pilot results
The average response rate over the 21 weeks across
The pilot had three objectives:
all three pilot districts was 95%, never dropping
1 To demonstrate that visibility of stock levels will below 93%. The data accuracy rate was 94%. The
prompt action to reduce stock-outs, thereby im- average usage of the system per user group was more
proving access to anti-malarial drugs. than once per day.
Exhibit 6 Pilot results
source: sMs for Life tanzania pilot project Report, p.28.
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Part 4 Case studies
In the final report19 the team made a recommen- The collaboration with them has been absolutely excellent;
dation to implement the solution in all districts of we managed to establish a team without the need for a con-
tract, without the need for a budget, without any need for a
Tanzania and other African or non-African countries
formalized memorandum of understanding or agreements.
to bring visibility to drug stock levels, which could The goodwill coming from those companies was amazing.
be used for all priority drugs, depending on national And there are external partners that collaborated, for ex-
environments. The solution could also be applied to ample British Airways gave a substantial discount on our air
disease surveillance and the public-private partner- travel, which was a major cost in the project.
ship model could be used to tackle other societal He continued talking about their motivation to work
problems. for the project:
The pilot results and recommendations were for-
The most important was to establish the emotional connec-
mally presented and the final report handed over to tion with what we were trying to achieve. All the people in
the Minister of Health, Professor David Mwakyusa, in MatsSoft, Vodafone and IBM, they know about malaria and
Dar es Salaam on World Malaria Day,20 April 25, 2010. they know that they are involved in a project that is directly
He said: contributing to saving people’s lives. That’s what drives us
and keeps us all together.
If I only had that system before it would have made my life
so much easier. I wanted to say: thank you.
Dr. Alex Mwita, NMCP manager, commented: Post-pilot strategies

the sMs for Life project has demonstrated that it is pos- The pilot was successful, but Jim’s work did not stop
sible to overcome the challenge of stock-outs by employing there. Three issues had to be resolved:
existing communications technologies. the use of mobile
phones to inform about the stock position for anti-malarials ● How to keep the pilot alive in the three districts and
has prompted the supply chain to replenish those medi- continue funding it for a “transitional” period?
cines on time and thereby avoid stock-outs. the outcome
has improved malaria treatment, patient satisfaction and, I ● How to find support and financing for a full roll-out
have no doubt in my mind, has saved hundreds of lives in in Tanzania?
the districts where the pilot project was implemented.
● How to approach a pan-African roll-out?
Asked what he would do next, Jim replied:

Looking back
The team wrote the following in their final report: In the end the only single barrier is the funding. I believe that
we can exercise tremendous power and influence through
the sMs for Life pilot created a unique public – private the donors such as the Global Fund, the WHo, UnICeF, the
partnership model that enabled the problem to be precisely Bill and Melinda Gates Foundation. the donors are giving
identified and a technical solution to be designed, built and millions of dollars to buy the drugs and they would be very
implemented in three rural districts in tanzania in about disheartened to hear that a country is running with a 76%
one year. In the end, no formal budget, legal contracts or stock-out rate and is happy to do so, and not make an in-
memorandums of understanding were developed between tervention. so, I need to talk to the donors to make them
any of the partners. the team working on the project was aware of the potential to solve the stock-out problem with
very lean but combined all the expertise, skills and influence a small amount of funding. Maybe they would be prepared
necessary to tackle a complex problem. each partner com- to divert some of the drug funding to managing the supply
mitted their unique resources and covered their associated of drugs on the ground.
project costs, eliminating the need to source and manage
budgets on a project level. this model also made it easier,
faster and more efficient to obtain results, bypassing the of-
ten lengthy and difficult approval process for project fund- 19 SMS for Life Tanzania Pilot Project Report.
ing allocation and transfer. 20 World Malaria Day was declared in 2007 by the World
Health Assembly after Africa Malaria Day, which was
When asked about the rules of collaboration between adopted in Abuja at the African Summit on Malaria in
the partners, Jim responded: 2000.
652

CASE STUDY 20
NTT DoCoMo (Japan)

Moving from a mobile phone operator to a
lifestyle service provider
On March 7, 2007, Yuichi Kato, President and CEO DoCoMo. The name DoCoMo was an acronym for ‘Do
of NTT DoCoMo, and his management team were Communications over the Mobile Network’ and also a
reflecting in their European headquarters in Paris homonym of the Japanese word ‘anywhere’.
on the history of NTT DoCoMo, the mobile telecom With more than 52 million customers, NTT
business of Nippon Telegraph and Telephone. Since DoCoMo is the world’s second largest and Japan’s
its beginning, NTT DoCoMo has been focusing on its leading mobile communications company. With the
Japanese home market and offering innovative and launch of its wireless Internet service ‘i-mode’ in
value-adding mobile phone services. Mr Kato has February 1999, it evolved from a mobile telecom and
recently announced to a rather surprised audience ‘wireless-infrastructure’ (mobile voice) operator to an
that ‘IT-infrastructure’ (mobile data) one. Introducing in
our goal is to serve our clients as a lifestyle service provider.1
July 2004 the ‘Osaifu-Keitai’ service which transforms
the handset into a mobile digital wallet, the company
fostered its shift towards becoming a lifestyle service
Company background provider (see Exhibit 1).
NTT, Japan’s former telecommunication monopoly,
was privatized in 1985 with 46% of its shares held by
the Japanese government. Soon after the 1992 dereg-
ulation of the Telecom market in Japan, it spun off its 1 Excerpt from an invited speech to the first World Congress
mobile telephony division, became its majority stake- of the ENPC MBA Alumni held on March 2 and 3, 2007 in
holder and appointed Kouji Ohboshi first CEO of NTT Marrakech (Morocco).
This case study was prepared by André Achtstätter, MBA participant at the ENPC MBA Paris, and W. Henning Blarr, Research As-
sistant under the supervision of Tawfik Jelassi, dean and professor of e-Business and It at the school of International Management
of ecole nationale des ponts et Chaussées (enpC, paris). It is intended to be used as the basis for class discussion rather than to
illustrate effective or ineffective handling of a management situation.
this case study is made possible thanks to the cooperation of Mr Yuichi Kato, president & Chief executive officer of ntt doCoMo
europe.
Source: Wikipedia.com.
653

Part 4 Case studies
Exhibit 1 Evolution of NTT DoCoMo subscribers and mobile phone services
60
50
40
(million)
30
20
10
0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Total Subscribers i-mode Subscribers Osaifu-Keitai Subscribers
Source: NTT DoCoMo, 2007.
The shift from 1G to 2G mobile NTT DoCoMo charged ¥95 per minute for voice
communications technology calls and basic subscription plans started at ¥8,000
per month. By introducing the PDC service, it was the
Over the last decade, mobile communications tech-
first to provide customers with a high transmission
nology has made giant strides, rapidly moving from
quality. This new service brought clearer communi-
first-generation (1G) analogue voice-only service to
cations, less background noise and fewer call inter-
second-generation (2G) digital voice and data com-
ruptions. Within months, PDC became the standard
munications. The year 1979 was the start of the
in Japan and was adopted by competitors, whereas
analogue cellular era with NTT’s introduction of the
demand was artificially held back by regulators.
first mobile phone network in Tokyo. The mobile
phone was only affordable to wealthy business peo-
ple because of the high service fee that was charged. Creating wireless internet services
Services were especially tailored for in-car use and Network infrastructure close to collapse
became available only on a rental basis. Users were
During the 15 years that followed the 1979 launch
charged a deposit of ¥200,000,2 a ¥72,000 subscrip-
of the world’s first commercial cellular service, only
tion fee, a ¥26,000 monthly fee and a call charge of
2.1 million subscribers signed up for this service. In
¥280 for every three minutes of usage. These high
charges led to an unsuccessful launch.
Second-generation (2G) mobile communications
technology included D-AMPS3 in the US, GSM4 in 2 In January 1979, the monthly average exchange rate was:
Europe and PDC5 in Japan. NTT DoCoMo started $1 = ¥201.40; in April 2007, it was: $1 = ¥118.64.
3 IS-54 and IS-136 are second-generation mobile phone
operations in a highly competitive environment, char-
systems, known as Digital AMPS (D-AMPS), used
acterized by an overregulated mobile phone market, throughout the Americas, particularly in the United States
poor transmission quality, costly subscription fees, and Canada.
and heavy handsets. The company established in 4 The Global System for Mobile Communications (GSM)
1993 its PDC service, named ‘mova’, including voice is the most popular standard for mobile phones in the
world. GSM service is used by over 2 billion people across
services, call waiting, voice mail, three-way calling,
more than 212 countries and territories.
call forwarding, data service (up to 9.6 Kbit/s6), and 5 Personal Digital Cellular (PDC) is a 2G mobile phone
packet-switched wireless data (up to 28.8 Kbit/s) (see standard developed and used exclusively in Japan.
Exhibit 2). 6 A kilobit per second (Kbit/s) is a unit of data transfer rate.
654

Case study 20 NTT DoCoMo ( Japan)
Exhibit 2 Different generations of mobile phone services
First Second Third Fourth

1990’s 2000’s 2010’s
Generation Generation Generation Generation
Voice Low-speed Data High-speed Data Broadband

NTT (1997) GSM (1992) cdma 2000 1X (2000)
AMPS (1983) PDC (1993) W-CDMA (2001)
TACS (1985) IS 95 (1995) HS DPA (2006)
the mid-1990s, several factors, including 2G mobile In January 1997, Kouji Ohboshi asked Keiichi
services, market deregulation, as well as lower sub- Enoki to design, develop and launch a new mobile
scription fees and handset costs, led to a rapid cus- data communication service to be delivered over a
tomer uptake. For the first three years after deregula- single handset and target the mass market. The new
tion, the number of mobile phone subscribers doubled service was called ‘i-mode’, with ‘i’ standing for inter-
every year. In 1997, NTT DoCoMo’s competitor KDD active, Internet and information.
announced an alliance with DDI, forming the KDDI At first, the i-mode team thought of launching
group. Two years later, the merger between Digital SMS and information services similar to those offered
Phone Group (DPG) and Digital TU-KA Group led to by their competitor, J-Phone (J-Sky Web services).
the creation of J-Phone Co. Ltd. It also looked at new business models developed in
Due to the rapid growth of cellular phones in the PC-Internet environment and tried to understand
Japan, NTT DoCoMo’s network was by 1997 close to the correlation between the number of sites and the
collapse, suffering from dropped calls and poor trans- number of Internet users. The more content was
mission quality. The company knew that if it could available on the Net, the greater the number of users,
entice subscribers to use more data than voice through and vice versa. However, some team members did not
the existing network, it would postpone investing believe that simply putting information on the mobile
in a completely new infrastructure. It noticed that network would differentiate i-mode from the existing
Japanese mobile phone users frequently changed PC-based Internet. They thought that users would
their handset – on average, every eight months. need some guidance and selective information for
Handset features were one factor that the company the new service to be truly useful. The idea was then
could control, due to the leverage it had over mobile to offer a user-friendly menu that customers could
phone manufacturers. However, in Japan dial-up prompt through a single click of the ‘i’ button of the
Internet access was too expensive for most users and handset. This main menu, showing simple informa-
PC penetration was very low. tion categories and made easy to navigate, enabled
accessing a large number of useful sites.
Based on the above design ideas, the i-mode
Developing and launching i-mode team developed an innovative business model. NTT
Until 1997, although most of its wireless data services DoCoMo collaborated closely with equipment manu-
were not very successful, NTT DoCoMo believed in facturers, content providers and other operators to
their future market potential. In October 1998, right ensure that wireless technology, content quality and
after the Asian financial crisis, it went for its Initial user experience evolve in parallel. This synchroniza-
Public Offering (IPO) at the Tokyo Stock Exchange and tion guaranteed that customers, partners, and share-
became listed in the Nikkei 225 Index. In December holders had converging objectives, thus enabling all
1998, it acquired the Personal Handyphone System parties to maximize value and improve the quality of
(PHS) business from NTT Personal Group. the products and services accessed through i-mode.
655

Part 4 Case studies
From mobile phones for talking to mobile phones for using, i-mode sites, thus lowering costs for customers since
this is where the mobile phone market is going. Voice-less they are only billed for the data volume which they
communication is sure to exceed voice communication in
send and receive. During all the development phases,
the future!7
NTT DoCoMo pursued a policy of open technology
On February 22, 1999 the i-mode service was exchange with the world’s leading research organiza-
launched and attracted 17.2 million subscribers by tions, mobile communication operators, and equip-
the end of 2000, 30.2 million by the end of 2001 and ment manufacturers.
47.6 million subscribers by the end of March 2007 The first i-mode handsets looked like mobile
(see Exhibit 3). phones of that time, but had a larger LCD9 screen and
the distinctive ‘i’ button. The screens were able to dis-
The i-mode technology play up to 48 Japanese characters (corresponding to 6
i-mode websites are created with ‘i-mode Compatible lines of text). Retail prices for the handsets, still heav-
HTML’, a subset of the standard HTML.8 Converting ily subsidized by the operator, ranged from ¥35,900
existing HTML websites to the i-mode format requires to ¥42,800, an increase of about 25% over regular
only minor changes, making it fast and easy to create
new content. As a result, the number of i-mode sites is
high and still rising. 7 Kouji Ohboshi, in Computing, Japan, Vol. 6, Issue 4, April
In order to provide users with an ‘always-on’ net- 1999.
work access, the i-mode team designed a packet- 8 Hypertext Markup Language (HTML) is the predominant
markup language for the creation of web pages.
switched communications technology, eliminating 9 A liquid crystal display (LCD) is a thin, flat display device
the need to log on or log off. This meant that no made up of any number of color or monochrome pixels
dedicated radio channel is required for accessing arrayed in front of a light source or reflector.
Exhibit 3 Evolution of i-mode services and number of subscribers
DCMX
Osaiti-Keitai
Launch
1999 2000 2001 2002 2003 2004 2005 2006 2007
i-mode subscribers
656

mobile phones. Users were charged a ¥300 monthly offerings became available and some of them offered
fee to subscribe to the i-mode service, between ¥100 enhanced services.
and ¥300 for each site they subscribe to, plus the voice In October 2001, NTT DoCoMo became the world’s
and data transmission fees based on usage volume. first carrier to launch a W-CDMA13-based 3G service,
called ‘FOMA’.14’ The 3G technology enabled shift-
ing the use of mobile phones from data and voice
Expanding the i-mode services
communication only to enhanced and highly dif-
Since they used 2G technology mova, the first i-mode
ferentiated services (see Exhibit 3). Deployed in the
services that NTT DoCoMo offered (including email
2 GHz frequency band, FOMA transmitted data on
or text-based push-information) had a small amount
the downlink ranging from 64 Kbit/s to 384 Kbit/s,
of data usage. However, the transfer of Java tech-
compared to 28.8 Kbit/s with the 2G standard PDC.
nologies10 from the PC to the mobile phone was the
High handset prices and technical problems, such as
starting point for the company to offer in January
short battery life and poor reception within build-
2001 ‘i-appli’ services which consisted of software
ings, reduced the demand for 3G devices. KDDI
(programs) that can be used with i-mode compat-
launched its next-generation service in April 2002
ible phones. By downloading an i-appli service, users
using the CDMA2000-1X15 standard, a 2.5G technol-
can broaden the functions of their mobile phone. For
ogy. Although the downlink of 144 Kbit/s was slower
example a game portal site is available at the iMenu
than NTT DoCoMo’s FOMA, the company was able to
with a monthly charge of ¥525 per game used.
offer at lower prices better-equipped phones, using
To get quick and easy area information, i-area
the existing network. SoftBank, the third mobile
was introduced in July 2001 and integrated into the
communications provider in Japan, introduced in
iMenu. This service automatically selects and displays
December 2002 its W-CDMA-based 3G services.
i-mode content that is related to the geographical
location of the user. The latter does not select service
areas since base stations recognize his/her location Mobile multimedia
and offer location-based content such as weather, Three years after i-mode’s launch, NTT DoCoMo
restaurants, town information, maps, nearby ATM,11 offered several highly differentiated services, aligned
etc. With the ‘imadoco-search’ (¥210 per month), the with the i-Menu that went beyond the traditional
user can pinpoint the position of the people that he/ mobile phone functions. Just as important as the
she cares about, or set up a scheduled search. enhancements of the net-infrastructure was the con-
tinuous improvement of the handset, moving from
being a telephone to becoming a miniaturized enter-
Setting up the IT infrastructure tainment device.
Third-generation mobile communication Digital camera technology integrated in mobile
technology phones enabled the offering in June 2002 of the
‘i-shot’ service. i-mode users could send pictures taken
Voice communication services decreased but data commu-
nication increased. It makes stabilizing total ARPU.12
(Tatsuro Hayakawa, Director, DoCoMo Europe)
Before i-mode became successful, Kouji Ohboshi had 10 Java technology, which was developed by Sun Microsys-
to struggle to develop this new data service. Since its tems, is a system for developing and deploying cross-
platform applications.
costs threatened the financial stability of the com-
11 ATM stands for Automatic Teller Machines.
pany, some opponents of the project thought that NTT 12 Statement made during a meeting held in Paris on
DoCoMo was wasting its time and money. March 7, 2007 with the case study authors.
However, the company was first to market and 13 Wideband Code Division Multiple Access (W-CDMA) is a
its i-mode service enjoyed a few months of competi- type of 3G cellular network.
14 Freedom of Mobile Multimedia Access (FOMA) is the
tive lead. By exploiting its first mover’s advantage,
brand name for NTT DoCoMo’s 3G services and is com-
NTT DoCoMo was able to minimize the threat of new patible with standard UMTS.
entrants and take advantage of the market expansion. 15 CDMA2000 is a hybrid 2.5G/3G protocol of mobile
Right after the launch, several other wireless Internet telecommunications standards.
657

Part 4 Case studies
with their phone to other DoCoMo phones, non- play a greater role in people’s life and focus on the
DoCoMo phones and even to personal computers. The needs of women, children, senior citizens and handi-
maximum size authorized for i-shots increased from capped people.
100kb16 to 500kb, thus allowing users to send high- A ‘Mobile Remote Learning System’,’ which ena-
quality (megapixel) images. bles the transmission of 3D optic sensitive touch
To send videos taken with the mobile phone, NTT over the air and can be used for network community
DoCoMo introduced in January 2003 the ‘i-motion schools, is one of the new services illustrating Vision
mail’ service. Compared to similar competing services, 2010. Other services include a mobile digital wal-
i-motion mail provides a consistent frame rate17 of let that fosters e-commerce purchases and enables
15 fps,18 allowing a fluid and smooth rendering. Since customers to pay merchants online even for micro
videos were converted to the size (or format) sup- charges. Customer’s input information ensures an
ported by the receiving terminal, this service offers optimized and smooth handling at delivery points. A
an exchange of videos between FOMA phones, non- ‘Mobile Town Monitoring System’ provides customers
FOMA phones and personal computers. To offer this with information like seat availability at restaurants,
compatibility, videos sent via i-motion were first real-time data on urban situations, traffic jams, etc.
temporarily stored on a server, while the receiver gets ‘Mobile Medical Examination Systems’ enable online
an email with the link, allowing him/her to download examinations; hospital databases are linked through
the video within 10 days. Charges for the i-shot and the network with doctors and patients to allow remote
i-motion mail services vary depending on the data and speedy medical diagnosis. The ‘Mobile Virtual
volume used through each service. Laboratory’ links the mobile network with large-
Launched in January 2005, ‘i-channel’ enables volume databases 24 hours a day permitting envi-
users to connect to a wide range of channels, such as ronmental monitoring in places difficult to access.
news, sports, entertainment, or fortune. It is a push- Furthermore, the mobile network combines personal
service that updates its content every two hours from data in an all-in-one terminal for daily situations like
morning to night. In order to foster its uptake, new passport control in airports or contact-less flight check
handsets included a special i-channel button. The in (the latter service is called ‘One-Stop Boarding
displayed information, comparable to RSS-Feeds,19 is System’). Public transport traffic systems and user
free of communication charges but additional packet terminals are linked to buses enabling efficient route
charges of about ¥157.50 apply when detailed con- planning and allowing users to select boarding times
tent is viewed. By the end of 2007, DoCoMo had more (this service is called ‘Bus-On-Demand System’).
than 10 million i-channel users. The Vision 2010 project is aligned with NTT
DoCoMo’s corporate social responsibility; it ultimately
aims at contributing to a healthier and more secure
Beyond the mobile frontier society while strengthening the company’s brand in a
In 1999, Kouji Ohboshi and Keiji Tachikawa initi- highly competitive and globalized market. The tech-
ated a project called ‘Vision 2010’ and carried out by nology underpinning Vision 2010 is expected to lead
the Corporate Strategy Planning Department of NTT the strategy of NTT DoCoMo into the future, creating
DoCoMo. The aim was to stimulate further growth a new generation of wireless services and positioning
of the mobile communications market through the the company as a lifestyle service provider.
use of mobile multimedia. The project was based
on five key concepts nicknamed MAGIC (Mobile
Multimedia; Anytime, Anywhere, Anyone; Global 16 A kilobyte (kb) is a unit of data storage on a computer.
Mobility Support; Integrated Wireless Solutions and 17 The frame rate is the measurement of how quickly an
Customized Personal Service). imaging device produces unique consecutive images
In 2002, NTT DoCoMo produced a video illustrat- called frames.
ing its 2010 vision of mobile multimedia services and 18 The frame rate is most often expressed in frames per
second (fps).
the opportunities they offer to customers, enriching 19 Really Simple Syndication (RSS) is a web feed format
personal lives and supporting global corporate activi- which is used to publish frequently updated digital
ties. According to this vision, mobile data services will content.
658

The mobile phone as a ‘lifestyle network types (see Exhibit 6 for a technical compari-
infrastructure’ tool son of mobile telecommunication operators in Japan)
and had, by December 2006, 15.8 million subscribers
Increasing rivalry in the marketplace
(corresponding to 16.3% market share) but its oper-
If NTT DoCoMo sticks with simply carrying voice and data, ating revenues were not disclosed. SoftBank bought
it’ll have no way to go but down!20 in the spring of 2005 the mobile phone business of
(Philip Sugai, Marketing researcher at the Vodafone, which left Japan after its market share
International University of Japan in Niigata) declined from 17.6% in 2002 to 16.6% in 2006.
By December 2006, Japan had a population of 128 After the struggle and subsequent sale of the Vodafone op-
million people including 95 million mobile phone sub- erations in Japan, foreign companies were cautious to enter
scribers, representing a penetration rate of 74% (see the Japanese mobile phone market.21
Exhibit 4). NTT DoCoMo leads the market and is fol- (Tatsuro Hayakawa, Director, DoCoMo Europe)
lowed respectively by KDDI and SoftBank; the latter
Strong competition within the nearly saturated mar-
took over the business of Vodafone KK (see Exhibit 5).
ket led to the decline of the industry’s average rev-
As of March 2007 NTT DoCoMo had 52.6 million
enue per unit (ARPU) for voice services from ¥6,320
subscribers divided into 17.1 million subscribers to
per month in December 2002 to an estimated ¥4,720
the 2G service (mova) and 35.5 million subscribers
per month in 2007. All three mobile network provid-
to the 3G service (FOMA). Among the 52.6 million
ers have reported a customer migration from 2G to
subscribers, 47.6 million are i-mode subscribers and
3G services. To attract customers, mobile network
21 million are Osaifu-Keitai subscribers. Its operating
providers introduced flat-rate pricing (which include
revenues for the Financial Year 2006 were 33.6 billion
voice and data services); however, these pricing
euros. In March 2005, its market share was 56.12%; it
models made revenue and ARPU growth even more
dropped to 55.72% by December 2006 and to 54.41%
difficult.
by March 2007 (see Exhibit 5).
The competition is expected to increase, since
KDDI offers 2G (cdmaOne) and 3G (CDMA2000-
1X) network types and had, by December 2006,
26.6 million subscribers (corresponding to 27.8% 20 Quoted in Business Week, June 2005.
21 Statement made during a meeting held in Paris on
market share) and operating revenues of €16 billion.
March 7, 2007 with the case study authors.
SoftBank also offers 2G (PDC) and 3G (W-CDMA)
Exhibit 4 Performance in Japan
100 80,0%
80
60,0%
60
40,0%
40
20,0%
20
0 0,0%
2002 2003 2004 2005 2006
Population of Japan (in m.) 127,330 127,560 127,650 127,678 127,780
Number of subscribers (in m.) 73.8 80.2 85.5 90.2 94.9
Penetration rate 58% 63% 67% 71% 74%
Source: Statistics Bureau, Ministry of Internal Affairs and Communication/Telecommunication Carriers Association.
659

Part 4 Case studies
Exhibit 5 Competitors’ share of the mobile telecommunications market in Japan
Operating Revenues 33.6 Billion €
Subscribers 52.2 millions

NTT
DoCoMo ARPU 42.72 €
16.5% Churn rate 0.93% / month
Operating Revenues 16.08 Billion €

54.4%
Subscribers 27.2 millions
29.1%
KDDI
ARPU 42.27 €
Churn rate 1% / month
Operating Revenues N.A.

SoftBank KDDI NTT DoCoMo Subscribers 15.5 millions
SoftBank
ARPU 35.61 €
Churn rate 1.6% / month
Source: NTT DoCoMo, KDDI, Softbank, 2007.
Exhibit 6 Technical comparison of mobile telecommunication operators in Japan
NTT DoCoMo KDDI SoftBank
2G PDC PDC, CDMA PDC
Network 3G W-CDMA CDMA 2000 W-CDMA
3.5 G HSDPA EV-DO Rev.A HSDPA
Brand Own Brand Own Brand Own Brand
Handset One-Segment TV
GPS
Portal i-mode EZ-Web Yahoo!Keitai
Video-Conferencing
Full Music Downloads

Services
E-Wallet (FeliCa)
Data Flat Rate
Credit Business i-mode
International Roaming 149 22 173

(Handset Roaming) Countries and Regions Countries and Regions Countries and Regions
Source: NTT DoCoMo, KDDI, SoftBank, 2007.
660

Exhibit 7 New entrants into the mobile telecommunications market in Japan
New Entrant EMOBILE IP Mobile
Network W-CDMA TDD/TD-CDMA
Launch Date March 31, 2007 Spring, 2007
Planned number of
subscribers after 5.05 million 11.6 million
5 years from launch
Source: eMobile, Ip Mobile, 2007.
two new companies have entered the market in by improving the quality of the FOMA network and
spring 2007. Offering attractive deals and promo- expanding the number of base stations. The creation
tions, EMOBILE plans to acquire 5 million subscribers of new revenue streams was aimed at compensat-
and IP Mobile aims at reaching 11.6 million subscrib- ing the slowdown of the mobile phone market and
ers within the next five years (see Exhibit 7). helping to achieve sustained growth. NTT DoCoMo
expected national and international equity and busi-
ness alliances to be critical for generating new rev-
Responding to new challenges
enue sources and creating synergies with the core
ntt doCoMo serves its customers with an integrated serv- mobile phone business. These alliances cover the
ice model.22 following five areas: payments and commercial trans-
(Yuichi Kato, president and Ceo, doCoMo europe) actions, broadcasting, content and Internet, global
services, and mobile phone peripheral technology.
The strategy of NTT DoCoMo is to achieve sustained
Yuichi Kato said:
growth by focusing on a customer-oriented manage-
ment policy. In 2004, under the leadership of Masao The mobile phone industry is driven by innovation. NTT
Nakamura and in order to be more competitive, DoCoMo’s strategy is to be the first-mover in the market
with new services. In Japan we are one month ahead of the
the company implemented this policy which called
competition. However, between Japan and the international
for a drastic reform of operations with respect to market, there is a technology gap of about one year.23
the rate structure, handset lineup, network quality
Between 2002 and 2006, NTT DoCoMo’s net profit
and after-sales support. As a result of these efforts,
margin was volatile: it was –2.49% in 2002, 4.42% in
the churn rate (subscriber termination rate) was
2003, 12.88% in 2004, 15.43% in 2005 and 12.81%
reduced to 0.77% (which was the lowest figure ever)
in 2006.24 The financial performance of NTT DoCoMo
but increased in the 3rd Quarter of 2006 to 0.93%.
provided returns to shareholders and Standard&
However, NTT DoCoMo still has today the lowest
Poor’s rated it AA – with a stable outlook.
churn rate in the market. Furthermore, it achieved in
2005 the largest market share of net additional sub-
scriptions, which was 48.7%, but this figure dropped
during the first 9 months of 2006 to 34%. Its main
competitor KDDI increased its market share of net March 7, 2007 with the case study authors.
additional subscriptions from 14.2% in 2002 to 48.1% 23 Statement made during a meeting held in Paris on
in 2006. In 2006 the migration from mova services to March 7, 2007 with the case study authors.
FOMA services led to this increase. The total number 24 Regarding the ROE analysis of NTT DoCoMo, the net
profit margin was the only ratio that was very volatile.
of FOMA subscribers increased to 32.11 million, rep-
The Asset Turnover ratio as well as the leverage did not
resenting 61.5% of total subscribers (see Exhibit 8). drastically change. The ROE in 2002 was –3.53%, 6.11%
The first priority of the customer-oriented man- in 2003, 17.55% in 2004, 19.13% in 2005 and 15.07%
agement policy is to strengthen the core business in 2006. It was driven by the volatile net profit margin.
661

Part 4 Case studies
Exhibit 8 mova and FOMA subscribers in Japan
60 80%
70%
50
60%
40
50%
million
30 40%
30%
20
20%
10
10%
0 0%
Jun-03
Aug-03
Oct-03
Dec-03
Feb-04
Apr-04
Jun-04
Aug-04
Oct-04
Dec-04
Feb-05
Apr-05
Jun-05
Aug-05
Oct-05
Dec-05
Feb-06
Apr-06
Jun-06
Aug-06
Oct-06
Dec-06
Feb-07
Subscriber (mova) Subscriber (FOMA) % of FOMA
Source: Telecommunication Carriers Association, May 2007.
Strengthening the core business manufacturer. Lastly, the handset is developed accord-
ing to the specifications also provided by DoCoMo.
We will continue to offer and promote new services aggres-
sively!25 Japanese customers only trust good brands!26
(Masao Nakamura, President and CEO, NTT DoCoMo) (Yuichi Kato, President and CEO, DoCoMo Europe)
The mobile phone has become an integral element of Standard handset models offer a wealth of up-to-
consumers’ daily life and its use shifted from being date choices and primarily target the core segment
just a communication and information tool (as it was of mobile phone users whose age ranges between
in the 1990s) to becoming a mode of self-expression. teens and mid-thirties. There is on the one hand the
Thus NTT DoCoMo diversified its range of services ‘9 series’, which is equipped with advanced features,
and handsets in order to meet new customers’ needs and on the other hand the ‘7 series’, which offers a
and expectations. balance between design and functionality.
In September 2004, DoCoMo introduced its FOMA
Handsets tailored to customers’ needs ‘RAKU RAKU Phone’, the first model in the easy-to-
use Raku Raku phone series that is compatible with
DoCoMo focused on expanding its standard handset
the 3G network. Current Raku Raku phones, includ-
models in order to make them suitable for the core
ing the one designed by Kenya Hara (a renowned
customer segment. It also developed special models
graphic designer and art director of the popular goods
that meet various user needs. Handsets are manufac-
manufacturer Muji), offer special features like ‘Slow
tured by several well-known companies, but all bear
Voice’ and ‘Clear Voice’. The former feature improves
the NTT DoCoMo brand name.
Firstly, DoCoMo defines the product lineup,
commercial launch date and required functions for
each handset series which includes several mod- 25 Quoted in Telecommunications International, January
els. Secondly, a detailed plan for a specific hand- 2005.
set is discussed and finalized by DoCoMo and each
662

comprehensibility through embedded software that Giovannoni – design for cellular phones.’ This move
slows the other person’s voice speed, while the latter enabled DoCoMo to enter the market of designer
one automatically adjusts voice and ringtone volume handsets, a move also made by Motorola with
according to the surrounding noise level. Enhanced Dolce&Gabbana and LG with Prada.
‘Read Aloud’ audibly announces the name of the
caller or email sender and provides audio readouts of
Upgrading the network
i-mode pages, while ‘Simple Mail Generation’ offers
pre-set messages for quick replies to emails. The Higher speed and larger capacity are the characteristics of
Raku-Raku PHONE Basic is compatible with i-channel future networks.27
and the text can be displayed in large letters for easy (Shinsuke Kuroda, Manager, DoCoMo Europe)
reading. Besides the above standard series, DoCoMo
In December 2005, NTT DoCoMo was the first mobile
offers a range of handsets targeting the various needs
telecom operator in Japan to introduce the ‘push-
and preferences of special customer groups.
to-talk’ walkie-talkie features. Using handsets made
by manufacturers such as Mitsubishi, Matsushita
and NEC, users were able to simultaneously talk to
Innovative mobile services
several people by pressing a button on the i-phone.
Knowing how horrible it is for a kid to get snatched, at least Customers pay ¥5 per ‘push’ or ¥1,000 per month
someone is trying something. However, there is not a sin- if they subscribe to the ‘all-you-can-use’ plan, while
gle company that does things without thinking of a profit
margin.
users wishing to speak to up to 20 people at once need
to sign up to an upgraded plan for ¥2,000 per month.
(An NTT DoCoMo customer, tokyo, november 2005)
In addition, NTT DoCoMo offered a wireless LAN28
In Japan, the increase in crime against school chil- service (called ‘MZone’), using Wi-Fi29 to provide
dren led NTT DoCoMo to introduce in March 2005 high-speed data transmission at up to 11 Mbit/s
the ‘Kids’ PHONE’, which the company considered for PDAs and mobile PCs. As part of the transition
as part of its corporate social responsibility. This from 3.5G to 4G, NTT DoCoMo’s R&D effort aims
handset includes a GPS function, providing the user’s at creating a network with even a higher speed and
geographical location and a crime prevention buzzer larger capacity. Introduced in August 2006, HSDPA
interlinked with the functions of the phone and send- (3.5G) can achieve a speed of up to 14 Mbit/s even
ing a mail even when the handset is switched off. when using the same 5 MHz frequency band as
A battery lock prevents the battery destruction by a W-CDMA (3G) (see Exhibit 11).
third party. Using the imodoco search service, the
handset has additional functions such as the confir-
Setting up new partnerships in Japan
mation about the user’s whereabouts (including date
and time), retrieval of location information when the By expanding the applications of mobile phones beyond
device is turned off, and a mail notification of the communication, we are promoting the creation of a ‘life-
style infrastructure.’ We consider that collaboration with
user’s location to its guardian when the crime preven- businesses in various sectors will be even more essential
tion buzzer is triggered. Four months after the Kids’ than before.30
PHONE was launched, 170,000 units of it were sold. (Masao Nakamura, President and CEO, NTT DoCoMo)
NTT DoCoMo also launched in April 2006 the
‘SIMPURE series’, which simplified the handset by In July 2004, NTT DoCoMo launched the i-mode
narrowing down its functions. This model targeted FeliCa service for mobile wallet applications
cost-conscious customers. In April 2007, it launched
a new 3G FOMA handset developed with award-
winning designer Stefano Giovannoni (the creator 27 Statement made during a meeting held in Paris on
of highly acclaimed designs for world-famous com- March 7, 2007 with the case study authors.
28 A local area network (LAN) is a computer network.
panies such as Alessi) and the collaboration of the
29 Wi-Fi is a brand to describe the underlying technology of
handset manufacturer NEC Corporation. Giovannoni wireless local area networks (WLAN).
also designed the new exhibition booth of the com- 30 Quoted in Telecommunications International, Japan,
pany, entitled ‘DoCoMo: New Vibes from Stefano February 2006.
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Part 4 Case studies
Exhibit 9 The mobile wallet: i-mode FeliCa services
Credit
Cards
Season Membership
Tickets Cards
ID Cards Coupons
Mileage
Cards Keys
Digital Trans-
Money portation
(see Exhibit 9). FeliCa is a contactless RFID31 micro- fication card. FeliCa-enabled touch-and-go payments
processor-based smart card system by Sony, prima- work over a distance of a few centimeters and take 0.1
rily used in electronic money cards. First used in the second to complete a transaction.
Octopus card system32 in Hong Kong, the technology
is also integrated in a variety of cards in countries
The mobile wallet service
such as Singapore and Japan. FeliCa is externally
The first Osaifu-Keitai wallet service ‘Edy’, provided
powered; i.e., it does not need a battery to operate.
by bitWallet Inc., made the mobile phone a pre-paid
The card uses power supplied from the special FeliCa
rechargeable smart card. Activated via i-appli, the
card reader when the card comes within its range.
e-money could be loaded onto the handset and the
When the data transfer is completed, the reader stops
customer could pay simply by waving the handset
supplying power.
across a reader/writer at participating stores or vend-
Mobile FeliCa is an adaptation of FeliCa for use in
ing machines. In addition to the terminal’s cost, mer-
mobile phones by FeliCa Networks, a subsidiary com-
chants are charged a transaction fee ranging from 2%
pany of both NTT DoCoMo and Sony. NTT DoCoMo
to 3% of the transaction value.
developed a wallet phone concept, called ‘Osaifu-
Keitai’, based on mobile FeliCa and set up a wide
31 Radio-frequency identification (RFID) is an automatic
network of business partnerships. Sony started ship-
identification method, relying on storing and remotely
ping the FeliCa cards in 1996 and has since shipped retrieving data using devices called RFID tags or trans-
approximately 160 million microprocessors for use in ponders.
FeliCa-based cards (such as ‘Suica’33‘ and ‘Edy’34‘) and 32 The Octopus card is a rechargeable contactless stored
over 40 million Mobile FeliCa chips (used in Osaifu- value smart card used to transfer electronic payments in
online or offline systems in Hong Kong.
Keitai mobile phones with digital wallet functions).
33 Suica is a rechargeable contactless smart card used as a
Handsets equipped with the FeliCa chip can be used fare card on train lines in Japan, launched in November
for a variety of functions, including train pass, debit 2001.
card (digital wallet), credit card and personal identi- 34 Edy is a prepaid rechargeable contactless smart card.
664

Complementary to Edy, NTT DoCoMo introduced and promoting the use of credit via the phone. In specific
in November 2005 the ‘ToruCa’35 service. ToruCa ena- terms, we expect sales revenue to reach about ¥100 billion,
but regarding the specific time when such a figure will be
bles customers to obtain information by simply wav-
achieved, we cannot as yet say.
ing their phones in front of a dedicated reader/writer
(Masao Nakamura, president and Ceo, ntt doCoMo)
installed at restaurants, theatres, music stores, arcades
and other establishments. For example, when users In April 2005, NTT DoCoMo agreed to invest about
buy a CD at a store using Osaifu-Keitai, they can wave ¥98 billion in Sumitomo Mitsui Card Co. to promote
their DoCoMo phone in front of the store’s reader/ a new payment service through Osaifu-Keitai. This
writer to retrieve extra information about the CD, art- investment led to the launch of the mobile credit
ist, etc., and possibly a promotional coupon offered by platform ‘iD’ and the consumer credit service ‘DCMX’.
the artist’s recording label. Information obtained from The idea to enter the credit business resulted from two
readers/writers are available at i-mode sites. Moreover, market trends: the increasing number of Osaifu-Keitai
users could perform customized searches to receive the users, and the expanding Japanese credit card mar-
information they are looking for (see Exhibit 10). ket. Moreover, the domestic credit card market had
In January 2006, East Japan Railway Company a strong potential in the small-account payment (less
(JR East) launched a service named Mobile Suica,36 than ¥3,000) market, which NTT DoCoMo estimated
enabling users through their mobile Suica handset to be worth ¥57 million annually.
to ‘touch and go’ by just holding the mobile phone NTT DoCoMo’s first stage of participation in the
near the sensor of the automatic fare gate and be on credit business was the provision in December 2005 of
their way. The new service also enabled mobile phone the credit platform iD. Users could complete their pay-
users to conduct all ticket-related transactions such as ments quickly by waiving their Osaifu-Keitai device,
reservations, purchases and fare collection. Moreover, like using Edy. In addition, iD is an open model plat-
Mobile Suica-ready phones can be used to pay for pur- form, which allows various credit card companies to
chases at JR East railway stations and other stores that provide their mobile credit service via iD. To expand
support the service. the number of places where iD can be used, DoCoMo
NTT DoCoMo merges its credit card and mobile

35 ToruCa is a term coined from two Japanese words, ‘Toru’
phone businesses
(pronounced ‘toe-roo’) meaning capture and ‘Ca’ (pro-
We consider that the market has extremely high poten- nounced ‘kah’) is the first sound of the word for card.
tial for growth by improving infrastructure and services, 36 Suica stands for ‘Super Urban Intelligent Card’.
Exhibit 10 NTT DoCoMo press release
McDonald's and DoCoMo to Jointly Promote e-Marketing based on Osaifu-Keitai Partnerships

TOKYO, JAPAN, February 26, 2007 --- McDonald's Holdings Company (Japan), Ltd. and NTT DoCoMo, Inc. today
announced they have agreed to jointly promote e-marketing based on DoCoMo Osaifu-Keitai™ e-wallet services.
The undertaking will include the establishment of a joint venture company to plan and manage e-marketing
promotions to McDonald's newly planned membership club, and the introduction of DoCoMo’s iD™ platform for
mobile-phone credit cards and ToruCa™ information-capture service at McDonald's stores.
McDonald's plans to establish the membership club by October 2007 to offer enhanced membership services and
to strengthen customer loyalty. Members of a current membership club will be invited to join the new club. Mobile
services for iD credit-card payments and ToruCa information capture will be introduced in McDonald's stores
throughout Japan beginning in October 2007. The joint venture company will aim to quickly launch services by
integrating the massive customer bases comprised of McDonald’s 1.4 billion annual customers and DoCoMo’s 52
million mobile phone subscribers, as well as their respective brands and know-how. The company will be
established in July 2007 with paid-in capital of 300 million yen, 70% coming from McDonald's and 30% from
DoCoMo.
Source: ntt doCoMo, 2007.
665

Part 4 Case studies
secured cooperation with Sumitomo Mitsui Card Co. Telecom since November 2002, and in Russia with
and UC Card Co., reaching 320,000 installed iD termi- MTC since September 2005. Furthermore, i-mode
nals by April 2006. services were launched in several countries including
The launch of NTT DoCoMo’s credit card service is Australia, Greece, Israel, Spain, Italy, Netherlands,
the second stage of participation in the credit business. Hong Kong, Philippines, Belgium, the UK, Taiwan
Since April 2006, DoCoMo has been offering the con- and Singapore. The international strategy of NTT
sumer credit service ‘DCMX Mini’ to customers over DoCoMo is to provide i-mode services in each country
12 years of age and applying for it through the i-mode through a strategic alliance with a local mobile net-
website, and ‘DCMX’ as a normal credit card to custom- work operator. Another important strategic issue is
ers over 18 years of age. DCMX Mini offers a monthly that NTT DoCoMo invested in international operators
credit line of ¥10,000, and DCMX offers a monthly like HTCL in Hong Kong, FET in Taiwan, KTF in Korea
credit line of ¥200,000. The service of DCMX Mini can and PLDT in the Philippines, Guamand Northern
be made available through the pre-installed i-appli Mariana Islands.
software. Payments of DCMX Mini are billed at the NTT DoCoMo also invested in companies that are
end of each month together with the user’s phone bill. its main suppliers like Sumitomo Mitsui Card Co.
I don’t think these types of services represent a global trend.
or Lawson in the payment and commercial transac-
They are going to be strictly in Japan!37 tions business, and Fuji Television Network in the
(Kirk Boodry, telecoms analyst at
broadcasting sector. Through these investments, NTT
Dresdner Kleinwort Wasserstein) DoCoMo hopes to be able to influence its suppliers’
products.
Since the start of Osaifu-Keitai in 2004, the number of
We select our partners according to our strategy and the
subscribers has quadrupled. By February 2007, NTT
strategy of our suppliers to create a win–win situation.40
DoCoMo had 19 million customers using their hand-
set as a digital wallet. (Yuichi Kato, President and CEO, DoCoMo Europe)
Internationally, NTT DoCoMo has offices in London,

DoCoMo’s international network and alliances where DoCoMo’s European strategy is developed,
in Paris, where surveys of European regulations and
Our basic international strategies are to expand i-mode markets are conducted, and in Amsterdam, where
alliances, enhance user convenience by global roaming and
the European expansion of the i-mode service is
increase earning opportunities through investments in and
partnerships with mobile operators and related businesses.38 managed. Through its New York City office, NTT
DoCoMo coordinates the company’s strategy in the
(Masao Nakamura, President and CEO, NTT DoCoMo)
USA. DoCoMo’s supporting centre for world roam-
In order to foster its international activities, NTT ing is located in Hawaii. In China, NTT DoCoMo’s
DoCoMo was in 2002 first listed on the London Stock offices in Beijing and Shanghai serve as liaison with
Exchange and then on the New York Stock Exchange. the Chinese government and its related agencies and
In June 2004, Masao Nakamura was appointed also for assessing opportunities for new business in
DoCoMo President and CEO; prior to that he worked China. In Singapore, DoCoMo’s office collects data
for both DoCoMo and NTT for 35 years and served concerning mobile communications in India and the
as Senior Executive Vice-President since June 2002. ten ASEAN countries.
Masao Nakamura said: NTT DoCoMo runs two overseas R&D centres in
The total number of subscriptions among our i-mode California: one centre (DoCoMo Communications
partners overseas had already exceeded six million as of Laboratories USA, Inc.) which focusses on next-
December 2005. We will continue to consider potential new generation Internet technology and international
partners in markets where there are no i-mode services.39 standardization; the other centre (DoCoMo Capital,
NTT DoCoMo has been offering its i-mode service all
over the world and has today outside of Japan more 37 Quoted in the Economist magazine, 2005.
than 6 million i-mode subscribers in 25 countries. It 38 Quoted in Telecom Asia, June 2006.
has had a cooperation agreement in Germany with 39 Quoted in Telecom Asia, June 2006.
e-plus since March 2002, in France with Bouygues
666

Inc.) searches for and invests in venture companies muscles. Currently, the five vowel sounds in Japanese
with innovative state-of-the-art technology appli- language (a, i, u, e, o) can already be recognized by this
cable to mobile communications services. DoCoMo technique and consonants are currently in the works.
Communications Laboratory in Munich (Germany), Furthermore, the analysis of physiological information
staffed with 35 researchers, focusses on next- such as brainwaves, body temperature, and electro-
generation platform technologies and participates myography has a strong potential depending on what
in research/standardization projects in Europe. The information is acquired and how it is utilized.
DoCoMo Beijing Communications Laboratory focuses For Nayeem Islam, Vice President of NTT DoCoMo
on cutting-edge wireless technology aimed at the next Inc.’s mobile software lab in San Jose (California),
generation of mobile communications and partici- the future is in the software; the hardware is a com-
pates in standardization activities in China. modity.41
The know-how and technology transfers take place
both ways between NTT DoCoMo’s headquarters in
Tokyo and its overseas offices. Patents and new tech-
Reaching a new level
nologies are imported to Japan to be implemented in By 2010, NTT DoCoMo plans to upgrade its network
new innovative products. to the ‘Super 3G’ network for less than one-tenth of
As of the end of March 2007, international services what it costs to roll out the existing infrastructure.
(like the roaming-out service) were expanded to 149 The new network will enable uploads and downloads
countries and regions for voice calls and short mes- at up to 260 times the speed that is used in 2007 by
sage services (SMS), packet communications to 98 FOMA. Initial investments will be around ¥100 to
countries and videophone calls to 36 countries. ¥200 billion.
NTT DoCoMo is currently carrying out research
into the infrastructure required for the fourth-
A strong focus on R&D generation mobile communications (4G). A key focus
NTT DoCoMo is determined to continue leading the of this research is VSF-OFCDM (Variable Spreading
way in the global mobile communications industry. In Factor – Orthogonal Frequency and Code Division
fiscal year 2005, NTT DoCoMo spent over ¥110 billion Multiplexing) technology, offering transmission at an
on R&D activities through its research laboratories extremely high speed of up to 100 Mbit/s outdoors
and development centres in Japan and overseas. It and 1 Gbit/s42 indoors. The basic functionality of this
continues exploring the new potential of mobile com- groundbreaking technology has already been con-
munications. firmed and NTT DoCoMo is now conducting field tests
and experiments. In fact, in a 4G field experiment
conducted in December 2005, NTT DoCoMo achieved
Human beings and mobile phones will merge
a maximum packet transmission speed of 2.5 Gbit/s,
A new technology, which is already operational today,
which is a world record. In December 2006, the com-
uses the human hand as part of the receiver. The
pany announced that it achieved a maximum packet
Finger Whisper handset ‘Yubi-Wa’ being developed
transmission rate of approximately 5 Gbit/s in the
at the NTT DoCoMo Yokosuka R&D centre is a quest
downlink using 100 MHz frequency bandwidth to a
for future communication possibilities and a new
mobile station moving at 10 km/h. The field experi-
kind of wearable telephone handset. Worn on the
ment of fourth-generation (4G) radio access took
wrist, this watch-like terminal converts voice to vibra-
place in Yokosuka, Kanagawa. As compared with
tion through an actuator and channels this vibration
the December 2005 test, the frequency spectrum
through the bones to the tip of the index finger. By
efficiency, or the ratio of data transmission rate to
inserting this finger into the ear canal, the vibration
channel bandwidth, was also doubled from 25 bit/s/
can be heard as voice.
Another approach, named Mime Speech
Recognition, enables handsets to recognize vowels
from muscle activities around the mouth. Speech
41 Quoted in RCR Wireless News, 2004.
recognition is accomplished by electrodes on the 42 A gigabit per second (Gbit/s) is a unit of data transfer
face that detect electromyography in the underlying rate equal to 1,000 megabits per second.
667

Part 4 Case studies
Exhibit 11 NTT DoCoMo’s planned network evolution
Downlink transmission speeds (bits/s)

1G
4G
100M Super 3G
10M
HSPA
1M
HSDPA
W-CDMA
100k
~2006 2007 2008 2009 2010
Hz to 50 bit/s/Hz. Through its ongoing R&D activi- should do in order to maintain its market lead. More
ties, NTT DoCoMo aims at contributing significantly specifically, what additional products and services
to the global standardization of 4G technology (see should the company consider offering in order to
Exhibit 11). sustain its first-mover advantage in Japan and inter-
nationally? How can it leverage new technological
advances (such as 4G and wearable technology)
An uncertain future to create new customer value? How can it educate
customers and generate demand in overseas markets
We always keep our eyes on potential future technologies
and markets.43 where the technology gap with Japan is quite signifi-
cant and NTT DoCoMo relies on its local partners for
(Yuichi Kato, President and CEO, DoCoMo Europe)
rolling out its mobile services? In further developing
With the launch of i-mode and Osaifu-Keitai, NTT its innovation capability and marketing its high-tech
DoCoMo shifted the purpose of mobile phones from products and services along its new ‘life-style pro-
voice-only to a multi-utility device and the company vider’ positioning, NTT DoCoMo needs to properly
has been transforming itself from initially being a determine the timing of its value delivery in Japan
mobile network operator to becoming a lifestyle serv- and overseas and assess the risk involved with its
ice provider. strategy.
In light of this new market positioning and the
increasingly fierce competition, Yuichi Kato and his 43 Statement made during a meeting held in Paris on
management team wondered what NTT DoCoMo March 7, 2007 with the case study authors.
668

GLOSSARY
0G Mobile radio telephone systems preceded modern cellular mobile the circuit switched domain. While the terms 2G and 3G are
telephony technology. Since they were the predecessors of the first officially defined, 2.5G is not. It was invented for marketing
generation of cellular telephones, these systems are sometimes purposes only.
retroactively referred to as 0G (zero generation) systems. 3G Third-generation technology (3G) is a collective term for mobile
1G First-generation wireless telephone technology (1G) is a collective standards with the ability to transfer simultaneously both voice
term for the analogue mobile phone standards that were intro- data (a telephone call) and non voice data (such as downloading
duced in the 1980s. information, exchanging email, and instant messaging).
2G Second-generation wireless telephone technology (2G) is a col- 3.5G High Speed Downlink Packet Access (HSDPA) is a 3G mobile
lective term for the digital mobile standards that were introduced telephony protocol which provides a roadmap for UMTS-based
in the 1990s. networks to increase their data transfer speeds and capacity.
2.5G 2.5G is a stepping stone between 2G and 3G cellular wireless 4G There is no definition yet for fourth-generation technology (4G).
technologies. The term is used to describe 2G systems that However, the 4G will be a fully IP-based integrated system capable
have implemented a packet switched domain in addition to of providing 100 Mbitls and lGbitis.
669

CASE STUDY 21
M-PESA (Kenya)
Mobile financial services for the financially excluded
in society
Michael Joseph, CEO of Safaricom,1 the leading tel- innovative products and services we have introduced to the
ecom operator in Kenya, has just received a market Kenyan market. It has been an extremely exciting 10 years
and has been a great honour to work with such a talented
update for one of the company’s profit centres: the
and committed team and indeed with the over 16 million
highly acclaimed M-PESA (‘M’ for mobile and ‘PESA’ Kenyans who believed in the brand. [. . .] We started with five
for money in Swahili) service launched by Safaricom people and we built this company to what it is today. I can’t
in March 2007 and used by more than 12 million just walk away from this company, which I consider to be my
Kenyans. Looking down from his high-floor office baby, with no successor in place.4
in the Nairobi corporate headquarters, he thought- Safaricom’s Board appointed Robert Collymore,
fully glanced at the jammed Waiyaki Way, filled 52 years old, as the new CEO of the company; he
with cramped matatus.2 Indeed, there is so much to has worked in the telecommunications industry for
be done to improve living standards in Kenya. With more than 30 years. He served at Vodafone as the
M-PESA, he has committed to provide a service to the Governance Director for Africa and also as Purchasing
country’s financially poor3 that has transformed their Director for UK business. He is very familiar with the
socio-economic situation for the better.
Michael Joseph recalled the major milestones he had
managed which has changed Safaricom and has affected 1 Michael Joseph has been CEO of Safaricom since July
Kenya. Satisfied with his achievements, he decided that 2000 when the company was re-launched as a joint-venture
the time had finally come for him to step down. with Telkom Kenya. For more details on Safaricom, see the
appendix of this case study.
I have been the CEO of Safaricom for the past 10 years. 2 Shared taxis in Kenya.
I believe the time has now come for me to hand over the 3 Regarding Pierre Bourdieu’s (1986) theory on capital
reins of the company to someone else. I am very proud of dimensions, we use the term ‘financially poor’ referring
what we have accomplished as a team, in particular our to a lack of material resources. People may be rich of
achievements to become a market leader, our extensive cor- cultural, social and symbolic capital.
porate social responsibility program [. . .] and the numerous 4 http://afrinnovator.com, 2010
this case study was written by stephanie Ludwig, Research associate, and tawfik Jelassi, professor of e-Business and Information
technology, at the school of International Management of ecole nationale des ponts et Chaussées, paris. It is and intended to be
used as the basis for class discussion rather than to illustrate effective or ineffective handling of a management situation. the case
was compiled from published sources and the author’s own field research and interviews.
670

Case study 21 M-PESA (Kenya)
Kenyan telecom sector because he was a member of poor individuals into the value chain as producers,
Safaricom’s Board for the past four years. To facilitate partners, employees and consumers. Enterprises can
the transition, Michael Joseph decided to set up a also provide social investments or public advocacy.
meeting with his team and present to Bob Collymore Michael Joseph and many other entrepreneurs
their recommendations in order to sustain Safaricom’s worldwide have followed the inclusive business
success, and in particular it’s M-PESA; ‘[Joseph’s] sin- model approach. They recognise that:
gle greatest legacy’.5 ● Business operations, innovation and risk manage-
Launching M-PESA, a service that offers access to ment rely on grasping and proactively addressing
financial inclusion through a mobile phone, has made local socio-economic and environmental issues;
a substantial difference at the country level.6 M-PESA
● Investing in providing access to goods, services,
is a mobile online service offering micro-payment,
and livelihood opportunities for the ‘bottom of
remittance and e-money storage through the handset.
the pyramid’8 in commercially viable ways means
It is a technology enabling money deposit and with-
investing in untapped and growing markets. These
drawal on the mobile account through the conversion
people, referred to as ‘next billions’,9 represent an
of cash in e-value and vice versa. The main benefits
estimated annual spending of US$2.3 trillion10
are to conduct financial transactions at a lower risk
worldwide. The inclusion of low-income people in
and cost as well as higher speed and convenience
business operations creates employment, income
than alternative money transaction systems such as
and qualitative capacities which again upgrade the
Western Union, automatic teller machines (ATM),
financially poor as consumers. Additionally, busi-
post offices and other physical transportation means
nesses enter unsaturated markets characterised by
or even online banking.
a long-term demand; and
Offering the possibility to send money from one
mobile phone to another has included 12 million peo- ● Building a sustainable market requires long-term
ple in Kenya’s financial system. By sending and receiv- investments in infrastructure (e.g., power, telecom-
ing e-money, they can now support their families in munications, piped water supply, sanitation, sewage)
rural areas and do much more. and technology by the public and private sectors.
M-PESA: an inclusive business ICT as an enabler for socio-economic

model application development
Utilising Information and Communications Technologies Information and communication technologies (ICT)
(ICT) as a catalyst for social and economic progress is an can be used as an effective enabler for improving liv-
opportunity long held in high regard by the international ing quality and driving socio-economic development.
development community. Impacting society at both the
The impact from investing in and implementing ICT is
micro and macro levels, the tools of ICT equip us to help
address our greatest social, economic and environmental manifold. Direct and indirect impact can be felt in the
challenges. everyday lives of the poor, as ICT enhances the effi-
(World Economic Forum) ciency of development approaches and allows reach-
ing out to a higher number of people. Furthermore,
Business, as an engine of growth and development, these technologies eliminate geographical and time
has a critical role to play in accelerating progress in barriers. They enable people living in rural or remote
developing countries through increasing investment,
creating jobs, improving skills, and developing goods,
technologies and innovations which can make peo-
5 Ibid, Nicholas Nganga, Chairman of Safaricom.
ple’s lives better. This includes the private sector’s role 6 This case study is based on ethnographic field research,
as a source of capital in developing countries: glo- including expert interviews in Kenya, carried out by one
bally private sector investments make up over 85% of of the case authors.
investment and financial flows. Global businesses ben- 7 World Economic Forum, 2010.
8 Prahalad, 2010.
efit from providing sustainable solutions to the devel-
9 Hammond et al., 2007.
oping countries. Inclusive business models integrate 10 World Economic Forum, 2009.
671

Part 4 Case studies
areas to take part in the economic activities which The M-PESA project started in 2003. It was initially
usually happen mostly in urban areas.11 In order to developed by Vodafone and co-financed by the UK
succeed, such high-impact projects required an ena- Department for International Development (DFID). It
bling environment and a stringent ICT strategy. is very likely that the basic idea stemmed from earlier
In the last decade, ICT growth worldwide was African practices of paying airtime17 to a beneficiary
driven by mobile technologies.12 The mobile phone as a method of distance payment. People often had
has been the most rapidly adopted technology ever informal agreements with merchants to resell their
and is currently the most popular and widespread minutes in exchange for cash.
personal device, leading up to an estimated 4.6 billion For M-PESA’s initial development, Vodafone con-
subscriptions (compared to approximately 7 billion tracted a small team from Sagentia, a technology
world population). consultancy located in Cambridge (UK). The team
Mobile phones – often referred to as agents of designed the business processes and developed the
change – provide, through solutions and services, an software for M-PESA; it also provided operational and
effective support for people living in developing coun- technical support during the pilot test and also after
tries. The mobile phone seems to have a comparable the system’s launch.
impact on connectivity for the base of the pyramid M-PESA’s pilot test started in October 2005 and
as computers and the Internet had on the affluent.13 lasted 6 months, involving 250 users. During the test,
Low-cost devices and ever increasing mobile phone users made payments on their loans with Faulu, a
network coverage offer the means for communica- Kenyan microfinance firm, through M-PESA as a tool
tion and data transfer to approximately 2 million new for the re-payment of loans granted. Then, the team’s
subscriptions per day.14 Further drivers are stimulat- research on the usage patterns of M-PESA’s pilot
ing market competition, liberalised regulation and user sample led to changing the system’s application
bottom-up innovations. A massive number of services, design and to turn it into a person-to-person (P2P)
for a variety of purposes, has been recently created to money transfer service.
cater to the un-served. These include: Safaricom launched M-PESA on 6 March 2007. The
roll-out started with 750 stores in all of the 69 districts
● Healthcare-related services for remote monitoring
of Kenya. From the beginning, the operator aimed at
or awareness building;
offering a country-wide coverage in order to build a
● Education and training via the mobile phone; critical mass of users.18 User numbers continuously
● Agriculture-related information for receiving mar- increased: one year after the launch, M-PESA had
ket price data; more than 1 million users. The Sagentia team was on
● Sustainable development and environment through call 24/7 resolving system issues. A few months after
disaster management or weather alerts; M-PESA’s launch, the initial system-related shortcom-
ings were almost overcome. Especially in early 2008,
● Solutions like rural enterprise development or
M-PESA had attracted more customers than expected,
employment exchange; and
which led to network congestion (mostly during peak
● Rural finance like remittance or insurance.15 times such as Friday nights) resulting in money trans-
fer delays of several days.
M-PESA: a mass-market, technology-based 11 Arunga and Kahora, 2007.

service targeting the un-served in society 12 International Telecom Union, 2009a.
13 GSMA report, 2009.
[The] innovative and successful scheme [of M-PESA has] 14 World Economic Forum, 2009.
great potential to increase financial inclusion and drive eco- 15 ZMQ, 2010.
nomic activity. the reach and influence of their product has 16 M-PESA is the 2010 winner of The Economist’s ‘Social
been extraordinary, not just within Kenya but also beyond, and Economic Innovation Award’, which was announced
as operators have been inspired by M-pesa’s success and in October 2010, www.economistconferences.co.uk,
launched similar services. 2010.
17 Airtime refers to calling minutes that can be used on a
(Tom Standage, digital editor of The Economist magazine)16 mobile phone.
18 Mas and Radcliffe, 2010.
672

Exhibit 1 Financial access in Kenya’s urban areas
Formal other
URBAN 11%
13.3% 10.4%
20%
Formal Informal
21.1% 18.5%
3.6%
Formal only Formal and informal

Formal and formal other Informal only
Formal and formal other Formal other and informal
and informal
Formal other only
Source: Financial sector deepening Kenya, 2009.
Safaricom’s slogan ‘Send Pesa by Phone’ helped fronted with an estimated unemployment rate of over
create awareness about the service’s initial offer- 40%,21 the informal sector kept growing.22 Micro and
ing. Kenyans quickly adapted to M-PESA, but had small enterprises (MSEs) make up the most important
to learn how to use it. A small percentage of trans- source of informal employment because barriers to
fers were sent to the wrong person. However, due launching a small business are usually low.
to loose ID requirements and non-registered SIM Any gains in productivity, profitability and even basic stabil-
(Subscriber Identification Module) cards at the begin- ity are of the utmost importance to the livelihoods of the
ning, criminals took advantage of M-PESA and used households involved.
it for blackmailing, ransom paying (subsequent to a (Jonathan Donner, senior Researcher, Microsoft (south africa))23
kidnapping) and other frauds. M-PESA’s development
team designed a service specifically for Kenya. The Access to formal banking services is scarce, espe-
system’s research and pilot test helped gain a better cially in rural/remote areas of the country. Only
understanding of the market which enabled the team 23% of Kenyans have a bank account. A substantial
to identify unmet users’ needs and to understand key proportion of the Kenyan population either has to
external factors in the Kenyan environment. rely on informal financial services or has no financial
access at all. Although micro-finance is on everyone’s
Tackling unmet needs in Kenya lips, only 3.4% use companies offering such services.
Urban dwellers often combine formal and informal
For a market-based solution to enable a transition services24 (see Exhibit 1).
towards a sustainable and inclusive future there must
19 World Business Council for Sustainable Development 2010.
be an underserved need, a supporting external envi-
20 The 39 million Kenyans represent a labour force of 17.5
ronment and enabling legal, institutional and finan- million accounts for an average monthly GDP per capita
cial frameworks.19 of US$ 1,600. However, Kenya’s top 10% households
Although Kenya20 acts as a regional trade and gain 42% of the total income while the bottom 10%
finance hub for East Africa, inequality in the country make less than 1% (Society for International Develop-
ment 2004, CIA World Fact Book 2009).
is high, with half of the Kenyan population (about
21 CIA World Fact Book, 2009.
39 million) living below the poverty line. Out of the 22 Macaria, 2007.
entire Kenyan labour force of about 17.5 million, only 23 Donner, 2007.
10% receive formal wage employment. Being con- 24 FSD Kenya, 2009.
673

Part 4 Case studies
Exhibit 2 Mobile phone and banking penetration in urban Kenya
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Mobile penetration Unbanked

People without mobile Banked
Source: Financial Sector Deepening Kenya, 2009.
The urban population accounted in 2008 for 22% was no legal framework in place. M-PESA was not
of the total Kenyan population at an annual urbani- as tightly regulated as commercial banks in Kenya
sation rate of 4%.25 The country has shown strong since, according to the banking act, Safaricom was
migration dynamics characterised by the movement not operating as a bank. As long as the money was in
of mainly young, male Kenyans to the cities in search transit, a telecom operator was not considered a bank.
of work or better education. These domestic migrants In other countries like South Africa, telecom operators
tend to keep strong relations with their family left that received deposits from customers were viewed as
behind in their home town or village. The money banks and needed a banking licence.28
earned in urban areas serves to sustain the migrant’s Commercial banks raised concern because many
family, which makes urban-to-rural financial transac- M-PESA subscribers actually used their M-PESA
tions very common in Kenya. accounts as a checking account and shifted money
In 2009, the penetration rate of mobile phones from bank accounts to M-PESA accounts. In late
reached 70% in urban areas and about 45% in total26 2010, to address this issue, Kenya’s Central Bank was
(see Exhibit 2), while Internet and landline access expected to introduce a National Payment System act
were still very limited. The ubiquity of mobile phones as a core component of the broader financial system.
has in fact leapfrogged that of the fixed-line phone. Telecommunication operators and regulatory bodies
Today, owning a mobile phone in Kenya, like in most of Af-
worked closely together and exchanged information
rica, is as much a personal decision about how life should about planned products or security issues.
be lived as a realisation of the age-old idea that prosperity Mobile banking will be the banking of the future. [. . .] For a
is built on the ability to establish effective communication. system or an economy to be cashless, it is really not up to
(Arunga and Kahora, Researchers on the Impact of Mobile the regulator; it is the people themselves.
Phone) (Stephen Mwaura Nduati, Head of National Payments
System Division at CBK)
M-PESA’s rapid uptake depended partly on the coun-
try’s open regulatory approach. Kenyan regulatory
25 CIA World Fact Book, 2009.
bodies, mainly the Central Bank, allowed telecom- 26 International Telecommunications Union, 2009.
munication providers to process cash-in and cash-out 27 Arunga and Kahora, 2007.
although they were no financial institutions and there 28 Omwansa, 2009.
674

Exhibit 3 M-PESA launch advertisement; comparison of advertisements of ZAP and M-PESA
Source: Safaricom, 2009; co-author’s documentation 2009.
M-PESA development and roll-out code, as it is for a debit card. The majority of Kenyan
users (81%)30 stated that M-PESA is very easy to use.
Having identified the main external factors that drive
To make a cash deposit, the user hands over cash
the adoption of a new service, the M-PESA develop-
to an M-PESA agent and in exchange receives an elec-
ment team formulated a marketing strategy for the
tronic value (the agent sends the e-value through an
new service. They knew that achieving quick adop-
SMS). Once the deposit is done, the user can either
tion and usage of M-PESA required flawless execution
store the money on the phone or send it to another
of the pre-launch, launch and follow-up phases. The
person/party by entering the recipient’s mobile phone
team also had to further refine the product’s offering
number, the amount to be sent and the PIN for secu-
and establish a sound marketing mix. They set up a
rity reasons. The recipient receives an SMS about the
distribution network, a pricing strategy and accom-
receipt of the monetary value. Subsequently, they
panied the product launch with a comprehensive
may convert the money at any M-PESA agent kiosk
communication campaign to ensure brand awareness
or ATM. The menu structure on the phone display for
and customer education. For the team, it was critical
processing an M-PESA money transfer is relatively
to rapidly create momentum and to achieve scale in
simple, as shown in Exhibit 4. A simplified model of
order to avoid the adverse impact of network effect.29
an m-transaction is provided in Exhibit 5.
Also they knew that more customers would attract
Selling airtime has been the core business of tel-
more M-PESA agents and vice versa. The team was
ecom operators. Re-loading credit became easier
convinced that customer education and trust are
since pre-paid phone accounts can be recharged any
major challenges for ensuring M-PESA’s success.
time with the money previously deposited. Prior
to that, mobile phone users were only able to buy
M-PESA’s main requirements and features scratch cards at the agents’ outlets and were therefore
M-PESA started with simple functions such as pur- restricted to the shops’ opening hours.
chasing airtime, making domestic money transfer
and deposit/withdrawal of cash at agents’ shops (see
Exhibit 3). Registration for these services required 29 The service’s value increases with an increasing number
little identification and in most cases took less than 5 of users, and vice-versa.
minutes. Like a debit card, e-value is protected by a PIN 30 Pulver et al., 2009.
675

Part 4 Case studies
Exhibit 4 M-PESA phone menu structure
From main phone From Applications From Safaricom

Call up main
menu, select menu, select menu, select
phone menu
Applications Safaricom M-PESA
From M-PESA
menu, select
Confirm OK Enter PIN Enter amount Enter phone # Send money

Confirm OK Enter PIN Enter amount Enter agent # Withdraw cash
Confirm OK Enter PIN Enter amount My phone Buy airtime
Confirm OK Enter PIN Enter amount Enter phone # Other phone Pay goods
Confirm OK Enter PIN Enter amount Enter account # Enter business # Pay bill
Enter PIN Enter agent # ATM withdrawal
From My Account My account
menu, select
Enter PIN Show balance
Confirm call OK Call support
Repeat new PIN Enter new PIN Enter old PIN Change PIN
Confirm OK Enter PIN Enter new secret word Secret word
Enter PIN Update menu
Enter PIN From language menu, Language
select English or
Kishwahli
Source: GSMA, 2009.
Exhibit 5 m-Transaction model (simplified)
Bank Bank
Aggregator Aggregator
Agent A Agent B
Customer A Customer B
(Sender) (Recipient)
Utility Other of
Retailer School
provider 200 partners
Source: Illustration by authors.
676

Registered M-PESA users can take money out of an able.31 Still, not every M-PESA agent was successful
ATM without using any debit or credit card. The user as rural areas are more difficult to manage. For this
only needs to enter the registration number, displayed reason, many agents provide M-PESA together with
on the ATM, in the mobile phone. A message then their core business (e.g. a coffee shop).
appears on the mobile phone showing the transaction Agents are often located near bus stops, post
code to key in at the ATM. Then the actual withdrawal offices, etc., where people usually send money.32
operation takes place. Safaricom used a network of Safaricom’s network covers urban areas very well. By
independent ATMs called PesaPoints from the begin- 2008, Kenya had seven times more M-PESA outlets
ning. Over time partnering banks also provided their than bank branches. In April 2008, each one of the
ATM networks. 3,000 agents served about 1,000 customers and in
The ‘paying bills’ function is used to settle amounts August 2009, Safaricom had a network of 12,000
that are regularly due such as the payment of electric- agents each serving 600 customers.33 However,
ity bills or school fees. In order to broaden the scope of remote areas are insufficiently covered as they have
this payment function, telecom operators established fewer customers to serve. The issue of handling
many partnerships with companies in a variety of cash is passed on from the user to the agent. Rural
business sectors ranging from retail to transport to agents receive more e-value but lack cash to handle
loan repayment. requested withdrawals. To balance the float between
cash and e-value, they have to physically balance
Distribution: establishing consumer at an agent HO or a bank (acting as a super-agent),
touch points which can involve a greater travel distance in remote
Safaricom built its distribution system through dif- areas. Additionally, they run the risk of attracting
ferent layers. They set up an intermediary level criminals due to the cash accumulated in their kiosk.
made of HO agents, who acted as aggregators and Small sub-agents often prefer not to provide money
managed liquidity, the distribution of commission conversion of large amounts to the customer (who
as well as contracting or acquiring sub-agents. then needs to address another agent) to avoid theft or
Banks acted as super-agents, using Safaricom’s par- float imbalance. As a rule there are no agents’ outlets
lance, who service agents and may offer ATMs for where there is no network coverage.
withdrawal. Bank customers either physically went less frequent-
Safaricom’s 19,500 agents (as of September 2010) ly to their branch or exchanged their bank account for
were mostly airtime sellers or retailers ranging from an M-PESA account. Banks targeting low-income peo-
petrol stations to pharmacies. Often the agents are ple started to form strategic partnerships with their new
running their small shops in the community they live competitor. They became super-agents and allowed
in. Agents convert cash and e-value and write down Safaricom to use their ATM network. They also encour-
every transaction in the Safaricom log book. aged their customers to use M-PESA with the hope to
Becoming an agent required some basic busi- cut overhead costs by reducing customer contact.34
ness skills and start-up money, because the agent
exchanges users their personal funding for e-money Pricing strategy
with M-PESA. Furthermore, they are required to Safaricom set up a simple pricing structure for
buy licences such as US$1,250 for SIM replacement, M-PESA, which in spite of high inflation has not
US$175 for establishing a small financial enterprise changed for the last three years in order to increase
and another US$175 as a municipality fee (which people’s familiarity with the service. Also the fact that
is waived if the agent is based in a slum). However, M-PESA agents displayed a tariff flyer led to over 66%
since agents earned US$9 cents per transaction,
which is three times more than they would earn with
selling airtime, and received financial incentives for
31 Pickens, 2009.
newly registered customers, more people wanted to
32 GSMA report, 2009; in Zambia, a very similar strategy
become M-PESA agents. On average, agents process was used.
86 transactions per day. However, those processing 33 Jack and Suri, 2010.
fewer than 30 transactions per day are not profit- 34 Maima interview, 2009.
677

Part 4 Case studies
Exhibit 6 M-PESA price list
Transaction type Transaction range Charge

Min. Max.
Deposit cash 100 35,000 0
Send money to a registered user 100 35,000 30
Send money to a 100 2,500 75
non-registered user 2,501 5,000 100
5,001 10,000 175
10,001 20,000 350
20,001 35,000 400
Withdraw cash by 100 2,500 25
registered user at agent 2,501 5,000 45
5,001 10,000 75
10,001 20,000 145
20,001 35,000 170
Withdraw cash by 200 2,500 30
registered user at ATM 2,501 5,000 60
5,001 10,000 100
10,001 20,000 175
Withdraw cash by non-
registered user 100 35,000 0
Buy airtime 20 10,000 0
Pay bill transactions - - 0 –30
Source: Safaricom, 2010.
of users understanding the service’s pricing struc- example’.) Per user, the maximum daily transaction
ture35 (see Exhibit 6). is US$870, while it is US$435 per transaction. Money
In order to stimulate M-PESA’s usage, making a can be received across different telecom operator net-
deposit is free of charge. However, the sender pays works, although at a higher fee.
a transaction fee of US$40 cents per remittance36 Non-M-PESA registered recipients can also receive
(For illustrative purposes, see box: ‘An actual usage money but the sender incurs additional costs. The
An actual usage example

Hosea wants to mpesa37 his friend Hyda US$1 to pay her matatu (shared taxi) fare. He has to deposit
US$1.70, since due to the transaction fee (of 40 cents); Hyda will receive only US$1.30. When she
finally withdraws the money, she will have to pay a fee of 30 cents and then receive US$1. Thus,
Hosea had to add to the M-PESA transaction value 55% of the requested amount. Relatively speak-
ing, the fee would be significantly lower if Hyda needed a larger amount (e.g., US$100).
35 GSMA report, 2009. 37 Kenyans have indeed included M-PESA in their every-
36 US$1 = KES 80. Figures are rounded. day language.
678

latter bears additional costs if the transaction goes tomer support training. Furthermore, the company set
through different telco networks. Many Kenyans up a hotline for both customers and agents.
found a way around paying these costs as they use Safaricom became omnipresent in Kenya as it
multiple SIM cards from different operators to capi- required its agents to paint their point of sale in the
talise on the best tariff. This usage has become more green corporate colour. It also created the Safaricom
frequent since multiple-SIM handsets became avail- Foundation to carry out charity projects and activities.
able in the market. After every transaction, users Such action positively contributed to earning custom-
receive a confirmation SMS stating that the money ers’ trust, a critical success factor for offering mobile
has been sent (although not yet received) and their financial services.
new account balance. For withdrawal transactions,
M-PESA uses a step-wise fee structure instead of a
Expanding M-PESA’s service capabilities
percentage of the amount involved.
Building on M-PESA’s initial success, the service was
M-PESA is costly for Kenyans, especially for those
further expanded by allowing withdrawal from ATMs,
located in remote areas and living on US$1 a day,
payment of goods and bills, bulk payment and money
although recipients do not have to bear any costs.38 Low-
collection as well as mobile banking.
value remittances are not cheap per se, but compared to
Organisationally, Safaricom did not set up M-PESA
the price, speed and convenience of alternative systems,
as a new profit centre. Instead it considered it as an
M-PESA remains an attractive way of making payments.
additional means to enhance customer retention and
Retail commissions for the M-PESA agents are
the average revenue per user (ARPU). For Safaricom,
directly deducted from the customer’s transfer fee and
buying airtime is M-PESA’s core business. Often, peo-
sent to Safaricom. Subsequently, the agent received
ple used the service not necessarily to transfer money
an aggregate commission, thus preventing agents
but rather to store their money on the phone as an
from any possible fraud if they directly took their com-
alternative to a bank account, something that the
mission from senders. While customers do not pay
company did not expect. Although Safaricom offered
for deposits, M-PESA agents also receive a small fee
a mobile financial service, it did not aim at entering
for deposits made. Head Offices agents (HO) receive
the banking sector. Between its launch in March 2007
30% of the commissions paid by customers, while sub-
and July 2009, M-PESA registered more than 11,000
agents receive 70% of the commissions. However, the
new users per day. By 2009, Safaricom was able to
HO agents earn more than the sub-agents due to the
convert 40% of its mobile phone subscribers into
higher amount of transactions they process.
M-PESA users, thus strongly impacting the way peo-
ple in Kenya went about their financial transactions.
Communication approach Bulk payments facilitate the payment of wages
The M-PESA development team tailored the service and salaries to employees. It was especially targeted
to the needs of financially poor people, thus aiming at at companies that have a large number of employees,
integrating them in the country’s economic activities. including temporary workers earning a small wage.
Its communication strategy leveraged the strong and Cash collection allows efficient chanelling of
trustworthy brand of Safaricom. This strategy enabled donations for NGOs (e.g. Red Cross), wholesalers
M-PESA to be perceived by the under-banked target or other companies working with a large base of cli-
group as a ‘product for people like us’. ents, whether they are donors or small suppliers. The
To create awareness about M-PESA, Safaricom service is especially beneficial to sellers since they no
used print advertisements – such as bill boards – longer need to collect a large number of cheques.
(42%), TV and radio ads (30%), and also relied on Payment for goods39 through the mobile phone,
word-of-mouth (30%) through family members or dubbed ‘Nunua na M-PESA’ (Swahili for Buy with
friends, whereby 10% of Kenyans learnt how to use M-PESA), can be done from two of Kenya’s lead-
M-PESA from their social contacts. In addition to these ing retail chains Uchumi and Naivas. Uchumi
communication activities, Safaricom pursued when
launching M-PESA’s a major outreach operation in
order to introduce the service and explain it to poten- 38 Brewin interview, 2009 and Karugu interview, 2009.
tial users. It also relied on agents to whom it gave cus- 39 www.safaricom.com, 2010a.
679

Part 4 Case studies
Supermarkets is Kenya’s second largest retail chain

by annual turnover; about 20 million customers spent Examples of an informal
US$120 million last year. Naivas ranks fourth. The
individual use of M-PESA:
payment process follows the usual process: Customers
are required to show their ID and then select the fol-
● Salesman Abdul received the fare from his boss
lowing commands on their M-PESA menu: when he got stuck on an extended business trip.
1 Select ‘Buy Goods’.
● John frequently sends money to his sister living
2 Enter the ‘Till Number’ of the organisation they
in the countryside to support her starting up
are paying (every shop has its own till number
her own business.
which is displayed in the shops).
3 Enter the amount they wish to pay (Sh100– ● Mama Mercy pays her daughter’s school fees
35,000). and saves the equivalent of a month’s rent as
she no longer has to pay for the bus ticket to go
4 Enter the M-PESA PIN number, confirm their
and settle quarterly bills during the school year.
entry and then press OK.
After payment, both the customer and the supermarket ● Student Benson discreetly receives financial
sales assistant receive a confirmation SMS. The sales support from a local politician.
assistant then completes the transaction and hands
● Cattle re-seller Francis stores his revenues on
over the sales receipt in paper form to the customer.
his mobile phone after a market day, since rob-
Currently there is no charge to use the service; however
beries are frequent in his region.
Safaricom may introduce a nominal fee in the future.
This is yet another effort by Safaricom and partners to ● Lillian sends her weekly instalments to her sav-
deepen online and cash-less payment solution in Kenya and ings circle when she cannot physically attend
also a first in the region. [. . .] It resonates with our company’s the meeting.
commitment to lead the way in innovations that improve
the living standards of our subscribers, in line with M-pesa’s ● Farmer John borrows money to buy medicine for
‘Bigger than Cash’ aspirations. his ill cow and thereby prevents a considerable
(Michael Joseph)40 loss of money in case the cow dies.
● Bar owner Derrick attracts new customers by
Through these partnerships the M-PESA mobile
accepting payment by M-PESA as clients often
money transfer platform transforms into an elec-
run out of cash at night. Customers using M-PESA
tronic commerce tool that has the potential of chang-
consume more than others as e-money is less tan-
ing the dominant cash-based Kenyan commerce. gible. Derrick charges every customer the M-PESA
Safaricom now provides a total end-to-end offering withdrawal fee, but he only has to pay the fee once
for corporate, SME, home and individual users. It when withdrawing the total sum. M-PESA has
currently has around 200 pay-bill partners, which become an additional source of income for him.
allows manifold usage of M-PESA. For example,
the ‘Fly with M-PESA’ partnership established with ● Agent Leonard has increased sales in his phar-
East African, Air Kenya and Aircraft Leasing Service macy because the provision of M-PESA as
additional service has augmented the traffic in
allows air travellers to book, to confirm and to
his small store in the Kibera slum, Nairobi.
m-pesa (to buy) a regional airline ticket of up to
US$1,000. However, users need to have a data-
Change of usage patterns
enabled mobile phone.
In addition to these partnerships with Safaricom, Before the introduction of M-PESA, money was either
M-PESA customers have used the service in various remitted by handing money in an envelope over to
creative ways. The recipient (mostly the seller) only friends or family members (43%), through courier or
needs to agree on mobile payment and provide their
mobile phone/account number41. 40 ibid.
41 Individual usage examples gathered during field work by
one of the authors. Examples are not representative.
680

bus companies (20%), via the post office, Western for emergencies (7%), ranked third. Early adopters
Union (18%), commercial banks (8%), etc. In 2009, were generally more likely to be farmers, public serv-
47% of Kenyans sent money via M-PESA, which was ants or businessmen, who tended to be more male,
perceived as the least risky means (by 26% of users), slightly older, more literate and educated and have
the cheapest (32%), the fastest (64%) and the easi- higher income. With the maturation of the service, a
est service to access for making money transfer (see high diversity of customers used M-PESA. Most remit-
Exhibit 7). Sending and receiving money was by far the tances occurred at the beginning of the month (salary
most frequently used service (representing respective- payment). Typically, they consisted of mobile money
ly 28% and 25% of usage). Safaricom’s core business transfers made to family members living in a separate
(of selling airtime) accounted for 22% of remittanc- household. By March 2009, the average transaction
es. Saving money, either for everyday use (14%) or value decreased from US$41 to US$28. Over 84% of
Exhibit 7 M-PESA usage patterns
How did people send money before M-PESA? How did people send money today?
Other Other
Direct deposit
Hand 6%
Direct deposit 12% 6% M-PESA
Bus
8% 9%
43%
47%
18%
32%
Post office
money order 20% Hand
Bus
What M-pesa is mainly used for? Why do people send money?

Pay bills Repayment of debt
2% 1% Others Business
2% 2% Extension of credit
Receive money
7% Help in case of 5%
emergencies
9%
28%
22% 9%
Buy airtime Other
63%
10%
14% 25% No reason
in particular
Store money
for everyday use Send money
Regular support
to recipient
Source: Adapted from Pulver et al., 2009.

Note: Financial Sector Deepening Kenya (2009) carried out the ‘FinAccess National Survey 2009’ in partnership with Safaricom and the CBK.
Sample used: 6,598 people.
681

Part 4 Case studies
Kenyans indicated that a sudden disappearance of August 2009, Zain had 3 million customers, out of
M-PESA would mean a tremendous loss for them.42 which 300,000 are registered ZAP users. Zain offered
mobile money transfer at a fee of only US$12 cents
Adapting M-PESA’s distribution approach per transaction, making it 33% less than M-PESA’s
basic fee. Besides a similar product offering, Zain
In early 2010, Michael Joseph decided to simplify
capitalises on its international presence, allowing
the way of recruiting agents by introducing the
cash transfer from participating Western Union loca-
‘Aggregator Model’, which removed the need to deal
tions around the globe to ZAP customers in Kenya,
with sub-agents directly. About 10 newly appointed
Tanzania and Uganda. Zain has launched its service
agent aggregators were set up on top of the agents’
in three more African countries and is now available
channel; each aggregator managed 2,000 to 4,000
to a total population of 150 million in six countries.
agents. Safaricom selected them based on their
Safaricom and Zain had a different market position-
liquidity and performance as HO agents. Aggregators
ing. While Zain offered pan-African modern advertis-
received a commission of 20% (instead of 30%) since
ing and targeted the wealthier, Safaricom addressed
they benefited from a higher transaction volume.
local masses in Kenya and aimed at low-income peo-
Thus sub-agents received a bigger commission equal-
ple (see Exhibit 3).
ling 80% instead of 70% (see Exhibit 8).43
YuCash (Econet Wireless/Essar) was launched in
Safaricom planned to introduce an IT system at the
December 2009, achieving a market share of 5%.45
agent’s level to overcome the current paper processing
work. Agents will be required to key in data into a PC
having an Internet connection rather than into their 42 Pulver et al., 2009; This profile goes along with research
paper log book. However, these technical require- from South Africa (Ivatury and Pickens, 2008).
ments would increase the agents’ costs of doing 43 Mas and Ng’Weno, 2010.
business as few field agents own a computer or have 44 Zain started in 1983 as part of the Middle-East based
access to the Internet or even to electricity. MTC Group, which is now present in 8 countries.
Launched in 2004 as Celtel in Kenya, it was rebranded
in 2008 as Zain. In June 2010, Zain sold 100% of Zain
Africa BV (which operates in 15 counties) to Bharti
Sustaining M-PESA’s lead in Kenya Airtel Limited, one of India’s telecom operators. Zain
has 2.1 million subscribers, representing an 11% market
In February 2009, Zain, Safaricom’s main competi- share. In 2009, it had revenues of US$154 million, with
tor,44 launched ZAP as a response to M-PESA. Initially, a US$7 million EBITDA. Its ARPU in Kenya was US$4.
it had 500 agents, but six months later it accounted 45 In 2008, Yu (Econet Wireless) sold a 49% stake of the
for 4,000 dealers all over the country. The service’s company to India’s Essar Communications Holdings.
Econet Wireless Kenya is 70% owned by Econet Wireless
roll-out was similar to the one used by Safaricom. International. Essar Telecom Kenya Limited (ETKL)
However, in contrast to M-PESA, ZAP came as an is a unit of the Essar Group. In November 2008, ETKL
additional service and required a ZAP SIM card. In launched the ‘Yu’ brand.
Exhibit 8 Value chain and roles of selected M-PESA players
Transaction fee
Agent (distributors and

Operators Users
outlets)
Commission (% of transaction fee1) Money conversion
Source: Ludwig, 2010.
682

In a similar way to Safaricom, Essar cooperated with M-PESA’s international expansion

Equity Bank and Obopay, a company specialised in
In August 2009, Safaricom was authorised to launch
mobile payment systems. Customers of competing
a new service called ‘International Money Transfer
networks used SMS to transact through YuCash and,
(IMT)’, allowing one-way remittances from the UK to
unlike M-PESA and ZAP users; they did not need to
Kenya, thus serving the Kenyan diaspora. With this
have a Yu SIM card. Another difference consisted of
new service, Safaricom wanted to tap into Eastern
allowing users to request money from subscribers,
African countries or countries with a strong Kenyan
access transaction statement and include a personal
diaspora (such as the USA).
message when sending money by phone. Yu set up
To develop IMT, Safaricom worked with Vodafone,
partnerships with banks and developed an incen-
Western Union and relevant regulatory authorities. In
tive system to attract users into its service. YuCash
2008, tests and a three-month pilot were carried out
currently has 2,500 agents around the country and
with Western Union, Provident Capital and KenTV,
is used by 55,000 out of the 1.5 million Yu subscrib- which served as agents in the UK. These tests involved
ers.46 Yu mainly targets young customers (aged 18–35 19 outlets covering areas with a high population
years) and offers a competitive price for its service. density. IMT partners provided the cash-in location
Orange47 by Telcom Kenya has a market share of for senders to transact. The money was sent directly
about 5%. Orange’s strategy is to target top-range to the recipient’s mobile phone with a Safaricom
consumer and business services. Orange Money was line. Safaricom customers got notified by SMS that
launched in Kenya in November 2010 after being they received money. Registered users could with-
already launched in five other African countries. draw the money at any agent’s outlet all over Kenya,
Orange took a different approach from M-PESA by while unregistered users had to go to Western Union
combining the money transfer capability of a telco branches.
with the mobile banking service of a bank. Orange and The maximum amount that could be remitted via
Equity Bank forged a strategic partnership for setting M-PESA in a single transaction is US$400. The maxi-
up the technical solution and ensuring the distribu- mum amount to remit through M-PESA cannot exceed
tion of Orange Money. The latter is a money transfer US$1,590 per month, with fees ranging between
service linked to a bank account and hosted on Equity US$6.5 and US$10 charged to the sender. Recipients
Bank’s mobile banking platform. Users are offered are not charged any fees. In contrast, sending money
through their mobile phone a banking capability that from the UK to Kenya via a bank transfer costs US$16.
has a less stringent transaction limit (KES 100,000). Leveraging Western Union’s and Vodafone’s global
A co-branded Orange Money Debit Card, which is presence, Safaricom could quickly expand its IMT
linked to the mobile phone, will soon be launched. service to offer remittances in more foreign markets
Then, users can either withdraw money with the card such as Uganda, Tanzania, Rwanda, the UAE and the
or the phone from Equity’s ATM network and they USA.
can pay for goods and services at retail outlets. The Through its global partnership with Vodafone,
two partners intend to establish by the end of 2011 Safaricom was able to expand the international roll-
a joint distribution network with over 20,000 agents out of M-PESA to other countries. It did so in 2008 first
in Kenya. The Orange Money roll-out is expected in in Afghanistan in partnership with Roshan and then in
19 more countries in Africa and the Middle East. The Tanzania in partnership with Vodacom. Afghanistan’s
partnership is also planned to be extended to some ‘M-PAISA’ offered financial services to the 97% of the
other African countries where France Telecom is unbanked population of Afghanistan. The service was
present (such as Uganda).
Mobile telecom operators have been aggressively
competing with each other by cutting tariffs and intro-
ducing various new promotions and offers, making their 46 Business Daily Africa, October, 2010.
47 In 2007, Orange (France Telecom) acquired a 51%
services more affordable to the wider population. More
stake in Telkom Kenya through its holding company
financially poor people would be able to process micro- Orange East Africa (OrEA). In Sept. 2008, Telkom Kenya
payments if the minimum transaction amount (US$1.2) launched its mobile voice service; it is currently a fixed,
and transfer fees (US$40 cents) were reduced. mobile and Internet operator.
683

Part 4 Case studies
based on an Interactive Voice Response (IVR) system M-KESHO is a bigger barrier to leave the network [than
available in Dari, Pashto and English and serving other value-add services].
illiterate customers (which represented 70% of the (Pauline Vaughan, M-PESA Manager)
population).48
In order to sustain its leading position in the mar-
In Tanzania, where M-PESA was also launched
ket, Safaricom launched additional services. First,
by Vodacom in 2008, subscribers’ uptake was much
it introduced Kilimo Salama (Swahili for ‘safe farm-
slower than that of Kenya. By June 2009, i.e. 14
ing’) in partnership with the Syngenta Foundation
months after the launch of the service, M-PESA only
for Sustainable Agriculture and UAP Insurance. The
had 280,000 users and 1,000 agents.49 Although
service offers insurance policies to over 11,000 farm-
Kenya and Tanzania are East African neighbours, the
ers to send them financial support in times of crop
two countries have major geographic, cultural and
loss. The second new service was the Mbale pension
economic differences. The two carriers (Safaricom in
product, launched in cooperation with the Jua Kali
Kenya and Vodacom in Tanzania) had different strate-
Traders’ Association. The service enabled the 18,000
gies. Kenya’s distribution network relies on medium-
informal sector workers (who hold a pension account)
sized airtime retailers as master agents, while in
to deposit money as an investment in their future.
Tanzania an aggregator model was built as a separate
Through M-PESA, traders can deposit money at any
entity from the existing airtime distribution network.
frequency, with amounts as small as 25 cents.53
M-KESHO: a banking revolution

M-PESA today
Now, Kenyans will have self-service savings accounts on In October 2010, Michael Joseph looked back at
mobile phones. When these accounts are linked though M-
PESA, we will be the most-banked country in Africa and the
M-PESA’s constant development over the last 3.5
developing world. years. After overcoming its infancy challenges, the
service matured and became increasingly enhanced
(James Mwangi, CEO of Equity Bank)50
with new capabilities and features. M-PESA’s inclu-
In May 2010, Safaricom launched M-KESHO – ‘a sive market approach has socio-economically bene-
product that is expected to promote a savings’ cul- fited its customers and other stakeholders. Its current
ture in Kenya’, as Michael Joseph put it. M-KESHO standing can be summarised by the following figures:
(with M standing for mobile and KESHO for tomorrow
● 12 million registered customers (most of them
in Swahili), was launched in cooperation with Equity
being active users) representing 75% of Safaricom’s
Bank.51 Through M-KESHO, Equity Bank’s 4.5 million
total customer base, 31% of the Kenyan popula-
account holders and M-PESA’s 12 million customers
tion, and 53% of Kenyan adults.
could connect the two services with one another. M-PESA
customers have often expressed their wish to gain inter- ● 19,500 M-PESA agents providing cash-in and cash-
est with M-PESA accounts and were now heard. out services; half of them are located in rural areas.
M-KESHO is an interest-bearing savings account ● Customers buy about 20% of their airtime via
at Equity Bank that can be opened at any M-PESA M-PESA,54 consuming more call minutes than
agent. Money can be moved to and from an M-KESHO before.
account and M-PESA wallet, and from M-KESHO to
another Equity Bank account. Safaricom’s M-PESA
48 Roshan website, 2010.
agents became also agents for Equity Bank account 49 Rasmussen, 2009 quoted in Camner et al., 2009.
holders, and M-PESA users can withdraw cash from 50 Rosenberg, 2010.
over 650 Equity Bank ATMs. Equity Bank also offers 51 Equity Bank is the leading microfinance bank in Africa
a personal accident insurance policy to M-KESHO and the largest bank in the region in terms of customer
base. It has over 4.5 million bank accounts, represent-
holders. By November 2010, an instant loan product
ing 54% of all bank accounts in Kenya. Equity Bank also
(based on a credit scoring model) was added to the operates in Uganda and Southern Sudan.
offering. M-KESHO was able to grow its customer 52 www.itnewsafrica.com, 2010.
base to 455,000; however, only 176,000 were active 53 Mas and Radcliffe, January 2010.
customers.52 54 Ibid.
684

● US$ 650 million per month in cash deposits and Txteagle,60 for example, a cloud-based provider for
withdrawals take place through M-PESA agents. The virtual outsourcing, is about to become Kenya’s larg-
average transaction amount is about US$30 while est employer, with a worker base of approximately
50% of the transactions are worth less than US$10.55 10,000 users. Txteagle uses mobile crowd-sourcing,
● The amount of money which was transferred thereby providing personal reach to millions of remote
through M-PESA since the 2007 launch of the customers for virtually any business or organisation.
service reached US$6.5 billion in July 2010. The Furthermore, it offers short-term employment to local
service processed the transfer of US$408 million people for providing mainly market information and
in July 2010 alone (compared to US$247 million participating in online/mobile surveys. While the
a year earlier). M-PESA is expected to transfer ‘outsourced staff’ is usually paid by airtime or online
20% of Kenya’s GDP by the end of 2010.56 M-PESA banking, people receive cash in Kenya via M-PESA.
transactions in numbers were about 70% of the
volume of electronic transactions but amounted to What next?
only 2.3% in value in June 2010.57
CEO Michael Joseph leant back in his armchair while
In the 2009 fiscal year, M-PESA generated for reflecting on M-PESA’s past and future. The service
Safaricom earnings of US$94.4 million representing operates in a fast-paced market where innovative prod-
9% of the company’s total revenues, thus becoming a ucts, new partnerships and advanced technologies cre-
significant profit centre for the company.58 ate an increasingly competitive business environment.
● Mobile online financial services are currently He was convinced that Safaricom could not rest on its
mushrooming around the world. However, com- laurels; it needed to sustain its innovation capability
petitors consider M-PESA as a global best practice. and be able to continuously provide additional value to
Safaricom’s international presence was made pos- customers in Kenya and abroad. Michael Joseph knew
sible through the partnership with Vodafone. For the all too well that M-PESA mobile money transfer and
industry, M-PESA has a broader significance, since:59 M-KESHO mobile account offered financial inclusion
to millions of people. However, a developing country
● By reaching out to millions of financially excluded
like Kenya is lagging behind in many other sectors.
people, the service demonstrated how to leverage
technology for socio-economic development at a If the mobile phone can penetrate and transform the finan-
country level; cial sector, which is dominated by old and powerful players,
imagine what it can do in [. . .] other market spaces.
● It illustrated how to develop and successfully roll
(Olga Morawczynski.
out a usage-based business model. Banks tradi-
Researcher at the University of edinburgh, UK).61
tionally apply a float-based approach and evalu-
ate customers’ profitability by their deposits, an Safaricom’s CEO was convinced that mobile phones
approach that has traditionally led to un-serving would be increasingly used for areas such as m-health
the financially poor. In contrast, telecom operators and m-agriculture. Safaricom has already started pre-
recognised the potential of generating profit from paring its entry into these sectors by providing ‘Kilimo
millions of low-income customers who send small Salama’ weather insurance via M-PESA. Safaricom has
amounts of money but at high frequency; also formed a partnership with Grundfos LIFELINK
● It has shown the economic and business impor- (part of the global pump manufacturer Grundfos),
tance of establishing a low-cost transaction plat- which enables rural communities to access safe water
form. and pay for it through M-PESA.
55 Ibid.; Pulver et al., 2009.

M-PESA as facilitator and enabler for other 56 ICT Works, June 2010.
(mobile) service providers 57 Alexandre, 2010.
M-PESA is increasingly used by other service provid- 58 McKay and Pickens, 2010.
59 Mas and Radcliffe, 2010.
ers, which offer more holistic services to their custom- 60 Txteagle website, 2010 and www.jwtintelligence.com,
ers, enabling them to conveniently pay or be paid for 2010.
their services via their mobile phone. 61 Morawzcynski, 2009.
685

Part 4 Case studies
Since only 25% of M-PESA’s customers are in September 2008. His team of 2,470 employees
unbanked,62 Michael Joseph wondered how these provides mobile voice and data (SMS, M-PESA and
untapped prospects could be addressed in a mutually broadband) services. With its country-wide GSM 900
beneficial way for them and for Safaricom. He knew network, Safaricom provides broadband high-speed
that M-PESA is widely known among Kenyans and data through its 3G network, Wimax and fibre.
international industry experts. Still, he felt that it was Safaricom, which started as a department of Kenya
time to open up the service under the Safaricom brand Posts & Telecommunications Corporation (KP&TC),
name to a broader public, especially internation- the former state-owned monopoly operator, launched
ally. However, Safaricom has a limited international its operations in 1993. Safaricom Limited was incorpo-
expansion capability and giant Vodafone would be a rated in 1997 under the Companies Act as a private lim-
direct competitor in rolling out the very same product. ited liability company. In 2000, the UK-based Vodafone
Keeping in mind the excellent work that his team Group Plc, the world’s largest telecommunication com-
has done so far, Michael Joseph asked himself what pany, acquired a 40% stake in Safaricom and obtained
recommendations he could make at his next board management responsibility. In 2002, Safaricom was
meeting. He knew that Safaricom needed to keep transformed into a public company with limited liabil-
advancing to sustain its customer base and financial ity. Until 2007, the Government of Kenya (GoK) held
revenues. However, the market has clearly become 60% of the company shares, making it a state corpora-
much tougher and competitors have learnt from tion. In March 2008, after the GoK sale of 25% of its
Safaricom’s experience. M-PESA’s success in Kenya shares, the State Corporations Act no longer applied.
cannot be easily replicated in other countries. Having Today, Safaricom is East Africa’s biggest company
had a recent talk with Bob Collymore, Michael Joseph by market capitalisation (US$2.76 billion). Dividends
shared his successor’s optimism, trusting Safaricom’s for the 40 billion shares held by local individual share-
growth potential. holders were paid out in 2010 by M-PESA. Safaricom
With the support of the board of directors, I am very con- is market leader in Kenya’s telecom sector with a
fident of leading safaricom into the future. Given the com- market share of 77% (down from 84% in 2008) cor-
petitive nature of the mobile industry in Kenya, my focus responding to almost 16 million customers. It earned
will be on delivering value and innovation for our custom- revenues of US$1.04 billion (EBITDA at US$455 mil-
ers and developing and empowering our employees and
lion). In 2009, voice revenues represented 81% of
together with our Kenyan stakeholders, strengthening our
outstanding brand. total revenues with data services making the remain-
ing 19% (see Exhibit 9). Capex decreased from US$
(Bob Collymore, newly appointed Ceo of safaricom Kenya)63
3.81 million (40.2% of revenue) in 2008 to US$ 216
There are tens of millions of financially excluded peo- million (20.8% of revenue) in 2010.
ple and un-served customers in many African coun- In 2008–9, Safaricom’s ARPU decreased 24% to
tries and other regions of the world. So for Safaricom US$6.3. Income tax expense at the group level was
and other telecom operators, willing to offer mobile US$59.8 million in 2009 (against US$76.1n in 2008),
financial services and a broad range of other mobile- thus making it the biggest tax payer in Kenya.
related services, the sky is the limit . . .
Appendix Background information 2

Background information 1 The Kenyan ICT market
Safaricom at a glance Kenya shows impressive growth rates with significant op-
portunities.
safaricom changed the game: what used to be ping-pong
(Dearbhla McHenry, analyst at pyramid Research)
is now rugby. It is still a ball game, but a very different one.
(Winifred Karugu, Research Fellow at the Undp
Growing Inclusive Markets Initiative).64
62 Jack and Suri, 2010.
Safaricom is Kenya’s leading provider of converged 63 http://afrinnovator.com, 2010.
communication solutions. Michael Joseph has been 64 Director, School for HR Development at Jomo Kenyatta
working at Safaricom since 2000 and joined the board University of Agriculture and Technology, Kenya.
686

Exhibit 9 Safaricom’s revenue breakdown
Safaricom’s revenue share by Revenue share of data segment

segment in % (2010) in million (2008–2010)
7.56
2.93
9% 0.37 2.98
1.51
0.34
81% 4% 4.26 4.67 5.19
2008 2009 2010

6%
Data segment:
M-PESA Broadband SMS Voice segment
Source: Safaricom, 2010.
Kenya is the third largest telecom market in sub- References

Saharan Africa, accounting for 7% of mobile phone
References and data sources used for writing
subscribers, behind Nigeria (26%) and South Africa
the M-PESA case study
(19%). In 2009, it had 17.4 million mobile phone
subscribers, which corresponds to a penetration rate
Articles, Books, Reports
of almost 46%. With the rapidly improving mobile
● Alexandre, Claire (2010): 10 Things You Thought
infrastructure and intensifying competition among
You Knew about M-PESA, CGAP: Washington,
mobile operators, the number of mobile subscribers in
http://technology.cgap.org/2010/11/22/10-
Kenya will grow at a double digit rate.65
things-you-thought-you-knew-about-m-pesa/
Total market revenues are expected to increase
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billion by 2013. 78% of these revenues will be gen- Phone Revolution in Kenya, London, http://
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services generate the largest share of revenues and IBL_Arunga_Kenya.pdf (accessed 14.12.2009).
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to increase in 2013 from US$62 million in 2008 to and Research for Sociology of Education, New York:
US$224 million thanks to the launch of 3G services Greenwood Press. 241–58.
and the growth of low-tech, low-margin mobile data
services like M-PESA. 65 Pyramid Research, 2010.
687

Part 4 Case studies
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What Makes a Successful Mobile Money Implementa- PESA’s Success: Branding, Channel Management and
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Kenya. ● Mas, I., and Radcliffe, D. (2010): Mobile Payments
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Kenya, www.cia.gov/library/publications/the- Gates Foundation.
world-factbook/geos/ke.html (28.01.2010). ● McKay, C., and Pickens, M. (2010): Branchless
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nancial Services to Poor People. ID21 Insights, 69, 5. Next?, Washington: CGAP.
www.id21.org/insights/insights69/art05.html ● Morawczynski, Olga (2009): What You Don’t Know
● FSD Kenya (2009): FinAccess National Survey 2009. About M-PESA, Washington: CGAP, http://tech-
Nairobi: Financial Sector Deepening Kenya. nology.cgap.org/2009/07/14/what-you-dont-
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Annual Report 2009. London and Atlanta: GSMA, ● Nokia (2008): Expanding Horizons, Espoo: Nokia
www.gsmworld.com/documents/mmu_2009_ (1/2008).
annual_report.pdf ● Omwansa, Tonny (2009): M-PESA: Progress and
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and Walker, C. (2007): The Next Four Billion. Market Nairobi: Strathmore University, www.strathmore.
Size and Business Strategy at the Base of the Pyramid, edu/pdf/innov-gsma-omwansa.pdf
Washington: World Resource Institute and IFC, ● Pickens, Mark (2009): Understanding What Drives Prof-
http://pdf.wri.org/n4b_full_text_lowrez.pdf its for Agents – M-PESA, Washington and Paris: CGAP.
● ITU (2009a): Information Society Statistical Pro- ● Prahalad, C.K. (2010): The Fortune at the Bottom
files 2009: Africa, International Telecom Union: of the Pyramid. Eradicating Poverty through Profits,
Telecommunication Development Bureau, Geneva Pearson Education; Wharton School Publishing.
(Switzerland).
● Pulver, Caroline, Jack, William, and Tavneet, Suri
● ITU (2009b): The World in 2009: ICT Facts and Fig- (2009): The Performance and Impact of M-PESA:
ures, International Telecom Union: Telecommuni- Preliminary Evidence from a Household Survey,
cation Development Bureau, Geneva (Switzerland). Nairobi: FSD Kenya.
● Ivatury, Guatam, and Pickens, Mark (2008): Mobile ● Pyramid Research (2010): Communications Mar-
Phone Banking and Low-Income Customers. Evidence kets in Kenya, www.pyramidresearch.com/docu-
from South Africa, Washington: CGAP. ments/090312%20Kenya%20excerpt.pdf
● Jack, W. and Suri, T. (2010): Mobile Money: The ● Rosenberg, Jim (2010): M-PESA Meets Microsavings
Economics of M-PESA, www.mit.edu/~tavneet/M- with Equity Bank Deal in Kenya, Washington: CGAP,
PESA.pdf http://technology.cgap.org/2010/05/18/m-
● King, Kenneth (1996): Jua Kali Kenya: Change and pesa-meets-microsavings-with-equity-bank-
Development in an Informal Economy 1970–95, deal-in-kenya/
London: James Currey; Nairobi: EAEP; Athens, OH: ● Sciadas, George et al. (2005): From the Digital
Ohio University Press. Divide to Digital Opportunities: Measuring Infostates
● Ludwig, Stephanie (2010): Socio-economic Impacts for Development, Telecommunication Development
and Creative Usage of Mobile Financial Services Bureau, Geneva (Switzerland).
among Low-income Micro-entrepreneurs. Evidence ● Society for International Development (2004): Pull-
from an Ethnographic Field Research in Kenya. The- ing Apart. Facts and Figures on Inequality in Kenya,
sis. Vienna: University of Vienna, Austria. Nairobi: SID.
● Macaria, Daniel (2007): Entrepreneurial Spirit: ● Taga, Karim, and Oswald, Gregory (2009): Mobile
The Jua Kali Micro and Small Enterprises of Kenya, Payment Update 2009, Vienna: Arthur D. Little
Booklocker.com Austria.
688

● The Economist (2010): Social and Economic In- ● Vaughan, Pauline (2009 and 2010): Face-to-face
novation Award, London: The Economist, www. interview with Pauline Vaughan, M-PESA Manager
economistconferences.co.uk at Safaricom, September 2009, Nairobi: Safaricom.
● Vodafone (2005): Africa: the impact of mobile ● Vaughan, Pauline (2010): Telephone interview
phones, moving the debate forward. In: The Vo- with Pauline Vaughan, M-PESA Manager at Safari-
dafone Policy Paper Series: 3, www.ictportal.org. com, October 2010, Nairobi: Safaricom.
za/documents/d00003/Vodafone_March2005.
pdf
Online sources
● World Business Council for Sustainable Develop-
ment (2010): Creating Inclusive Business Opportuni- ● Business Daily Africa (2010: Essar’s entry into
ties. Linking Local Communities with Big Business, money transfer to deepen turf wars, www.business-
www.inclusivebusiness.org dailyafrica.com/Company%20Industry/Essars%20
entry%20into%20money%20transfer%20to%20
● World Economic Forum (2009): Scaling Opportuni-
deepen%20turf%20wars/-/539550/905566/-/
ty: Information and Communications Technology for
view/printVersion/-/6cgat1z/-/index.html
Social Inclusion, Geneva: World Economic Forum,
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bank.co.ke
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Unreached, Gurgaon: ZMQ, www.m4dev.org/ ● ICT Works (2010): Safaricom’s M-Pesa to Transfer
m4d.pdf 20% of Kenya’s GDP in 2010, www.ictworks.
org/news/2010/06/23/safaricom-mpesa-20-
gdp-2010
● IT News Africa (2010): M-Pesa costumers up by
Interviews conducted by the authors
60%, www.itnewsafrica.com/?p=8665
● Brewin, Michael (2009): Face-to-face interview
with Michael Brewin, consultant to Concern’s ● JWT Intelligence (2010): www.jwtintelligence.
Cashaid project, September 2009, Nairobi. com
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with Jonathan Donner, Senior Researcher at Micro- co.ke
soft, October 2010, South Africa: Microsoft. ● Roshan (2010): Official Website, www.roshan.af
● Karugu, Winifred (2009): Face-to-face interview ● Safaricom (2010): Official Website, www.
with Winifred Karugu, Managing Director Jomo safaricom.co.ke
Kenyatta University of Agriculture and Technology; ● Safaricom (2010a): Press Release October 2010,
Consultant to UNDP on M-PESA case study in 2007, www.safaricom.co.ke/index.php?id=1105
September 2009, Nairobi.
● Txteagle (2010): Official website, www.txteagle.
● Maima, Stephen (2009): Face-to-face interview com
with Stephen Maima, SME officer at K-REP Bank,
● Vodacom (2010): Vodacom and Nedbank launch
September 2009, Nairobi: K-Rep Bank.
mobile money revolution in South Africa, Mirand:
● Mwaura Nduati, Stephen (2009): Face-to-face Vodacom, www.vodacom.com/news_article.
interview with Stephen Mwaura Nduati, Head of php?articleID=679
National Payments System Division at Central Bank
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of Kenya, September 2009, Nairobi: Central Bank.
● Zain (2010): Official Website, www.africa.zain.
● Pulver, Caroline (2009): Face-to-face interview
com/splash/
with Caroline Pulver, Researcher at FSD Kenya,
September 2009, Nairobi: FSD Kenya.
689

CASE STUDY 22
Tunisiana
A leading mobile telecom operator in
post-Arab Spring Tunisia
Background guard who are awaiting news of their fate after the
government of Ben Ali fell at the start of the Arab
The road that leads from the Tunis-Carthage
Spring in January 2011.
International Airport to the seaside suburb of La
Nestled next to the US Embassy is a mod-
Marsa in the North African country of Tunisia has
est four-story twin-office block, the headquarters
seen little change in the last ten years. A few new
of Tunisiana, the country’’s leading mobile phone
overpasses help the traffic move along. New pedes-
operator and its first private telecom operator.
trian crossings have been put in place – although
Established in 2002, Tunisiana was the product
they seem to be largely ignored. The twin business
of government policies to introduce competi-
districts of “Berges du Lac” which you pass along
tion to the telecom market in the region. Backed
the way have seen new buildings pop up like mush-
by Egyptian magnate Naguib Sawiris and his com-
rooms, although a number of empty shells serve as a
pany Orascom Telecom, along with Kuwait’s tel-
reminder that economic conditions have to be right
ecom operator Wataniya (acquired in 2007 by Qatar-
for construction to start again. The signage on the
based regional telecom operator Qtel), Tunisiana
business offices reflects an interesting blend of local,
was intended to bring competition to the market –
regional and international companies. Outdoor bill-
and indeed it did.
boards pepper the landscape with ads of mobile tel-
ecom operators and handset suppliers dominating
the messaging along with the requisite consumer The country
goods companies. The large US Embassy sitting
Tunisia is a North African country of approximately
beside the main artery is a vivid reminder of the
11 million people. It has an area of 163,000 square
influence that America still has in the region. Also
kilometers and a coastline of 1,100 km.
along the road, within sight of the embassy sits a
Geographically, it borders the Mediterranean Sea and
military installation, the home for several of the old
This case study was written by Ken Campbell, CEO of Tunisiana, and Tawfik Jelassi, professor of e-Business and Information technol-
ogy at the school of International Management, ecole nationale des ponts et Chaussées, paris. It is intended to be used as the basis
for class discussion rather than to illustrate effective or ineffective handling of a management situation.
690

Case study 22 Tunisiana
sits between Algeria to the east and Libya to the south The telecom industry
(see Appendix 1). Its northern tip is only 60 km from
Large state-run monoliths largely dominated the glo-
the Italian island of Sicily. Despite this small distance,
bal telecom sector until the late 1990’s when this
Tunisia’s culture is deeply rooted in its Arabic his-
changed with the advent of wireless communica-
tory with a noticeable French influence from its colo-
tions. From 1998 to 2004, North Africa saw no fewer
nial past. A largely Arabic-speaking country, French
than six new telecom operators enter markets from
is still prevalent and, indeed, still dominates business
Morocco to Egypt.
communications.
An auction initiated by the Ben Ali government
With a GDP per capita of $9,600, the country is
resulted in Cairo-based regional player Orascom
amongst Africa’s wealthiest. Despite a lack of natural
Telecom securing the license and launching in 2002
resources, it has become a hub for manufacturing
Tunisiana, the country’s first private operator. Their
exports and a favored tourist destination among
$454 million bid secured a 15-year license, renew-
budget-conscious Europeans.
able for consecutive five-year periods, and a mandate
A protectorate of France from 1881, Tunisia gained
to compete against the incumbent operator, Tunisie
its independence in 1956, abolished the royal system
Telecom (TT).
and became a republic. It was dominated by two strong
As of the end of 2012, with nearly 6.5 million
leaders between 1956 and 2011. Under the leadership
subscribers, Tunisiana had managed to secure a
of its charismatic first president, Habib Bourguiba, it
strong, 55% market share. Its competitors included
became a uniquely secular country. It led the way in
TT and a relatively new player, Orange (France
protecting women’s rights and based its development
Telecom). For its part, Orange was a top interna-
on compulsory education. Control of the country took
tional brand, which had managed to carve a 13%
a turn on November 7, 1987 when Zine El Abidine Ben
market share in just over two years. TT, the incum-
Ali deposed Bourguiba, and consolidated control over
bent which had been the dominant player with
the country during his tenure. Ben Ali’s authoritarian
services ranging from fixed to internet to mobile,
measures permeated every element of life, particularly
had seen its market share for wireless services
when it came to controlling key elements of business,
decline dramatically to about 32% as of December
where his family and cronies were generously served.
2012 (see Exhibit 1). It remained, however, the
He also regularly used a strong interior ministry and
dominant supplier in fixed line. (See Appendix 2 for
police force to suppress dissent.
the P&L statement of TT.)
For internet services, the Tunisian government
The Jasmine Revolution had managed to create a unique industry struc-
ture where Internet Service Providers (ISPs) were
On December 17, 2010 in Sidi Bouzid (a city in the
licensed to sell access to end-users but used the
center of Tunisia), a young grocery stall owner named
infrastructure of Tunisie Telecom. An internet cus-
Mohamed Bouazizi was pressured by local authori-
tomer, therefore, was required to take a fixed
ties to close his stall, as he did not have the necessary
line from TT. The customer would then set up an
permits to sell his produce. This bullying by local
internet account through the ISP, which would bill
authorities was a typical practice by the government
for internet/data services to the home or business.
as it sought to control all elements of commerce. In
Five ISPs were licensed by the Ben Ali government.
a fit of rage, the young stall owner lit himself on fire.
These included three operator-affiliated ISPs:
His death roused anger in Sidi Bouzid, which ended
Tunet (acquired by Tunsiana), Topnet (acquired
up reverberating throughout Tunisia and ultimately
by TT), Planet (founded by the Tunisian partner of
the Arab world.
Orange) as well as two independent ISPs: Globalnet
After massive demonstrations in Tunis and
and Hexabyte. (See the latter’s financial results in
throughout the country, Ben Ali fled on January 14,
Appendix 3.)
2011 to Saudi Arabia as large segments of the police
Prior to the revolution, the internet had largely
and military joined those who demanded change. His
been controlled through a quasi-government body
government had fallen and Ben Ali’s ousting inspired
called the “Agence Tunisienne d’Internet” (ATI),
similar democratic movements across the region.
691

Part 4 Case studies
Exhibit 1 Market share evolution of mobile phone operators between 2003 and 2013
80%
73%
71%
70%
57.20% 56.20% 55.36% 55.06% 54.59%

60%
53.70% 52.30% 51.50% 53.40%
50%
53.50% 55.30% 55.27% 54.76% 54.66%
48.90%
46.30% 47.70% 46.60%
40%
42.80% 31.60% 31.18% 31.53% 31.64%
40.20%
30%
29% 33.50% 31.21% 31.29% 31.70%
27%
20%
13.10% 13.55% 13.71% 13.70%
10%
10.30% 13.43% 13.65% 13.70%
6.30%
0%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 January Feb- March April May June
2013 ruary 2013 2013 2013 2013
2013
Tunisiana Orange TT
Source: Tunisiana internal data.
which managed and monitored all internet traffic. Its The shifting tide
role was substantially changed after the revolution
Tunisiana’s position as market leader in mobile
when the internet security apparatus put in place by
telephony was the result of aggressive market actions
Ben Ali was greatly reduced.
and continuous investment in network quality and
In October 2012, the number of ADSL subscrip-
expansion over 10 years.
tions reached 506,380 lines. Tunet’s (Tunisiana’s
In 2003, as it entered the market, Tunisiana suf-
ISP) market share of 3.6% remained almost stable
fered from inferior network coverage and an eco-
compared to 2010, with approximately 20,000 sub-
nomic model which favored the incumbent. The
scribers (see Exhibit 2).
Tunisian regulatory body (the “Instance Nationale
By way of comparison, as of December 2012, the
des Télécommunications” or INT) supported TT’s
total market revenues for mobile telephony were
insistence on high terminating access rates, which
$1,629 million, which included $173 million for fixed
are the fees paid by the operator of the calling cus-
telephony and $39 million for ISPs.1
tomer to another operator when a call is completed
on its network. In practice, the higher the termination
rates, the cheaper (comparatively) the calls to other
Exhibit 2 ISPs market share breakdown – 2013 customers of the same operator (“on net” calls), and
the greater the competitive advantage of the operator
Subscriptions with the higher market share, with customers having
4% a strong financial incentive to choose (or stay with)
Topnet
8% the operator who serves their family, friends and col-
17% Orange leagues. While regulators in most of the world allow
53%
Globalnet an asymmetry to take place (allowing terminating
18%
rates for new players with lower market share to be
Hexabyte
Tunet
Source: National Agency for Telecommunications (INT), May 2013. 1 Source: Arab advisors group.
692

higher), the bias in favor of TT was one indicator of a problem. During the course of the events, many
the close political alliances that sometimes existed shops closed and curfews were put in place, making
across government bodies and government compa- it difficult or impossible for customers to purchase
nies in Tunisia at the time. top-ups. Stress levels were high. People could not
Despite this economic disadvantage, Tunisiana stay in touch with their loved ones. They could not
continued to be aggressive in its efforts. The large find out what was happening in the country. They
incumbent, TT, was slowed down by its size and could not act or react.
slower decision-making processes. Its capital invest- On January 14, 2011, the first day of the nation-
ment slowed as well and it began experiencing wide curfew, Tunisiana made the unprecedented
network capacity constraints. Tunisiana, meanwhile, decision to top up the mobile phones of all of its
was able to establish a foothold and then grow its customers – for free. It did this again the next day
market share to a critical mass where it could over- and it continued throughout a week. This act of
come the terminating rate disadvantage, then posi- benevolence was incredibly well received by cus-
tively benefit from it. At first, low-income consumers tomers. They could communicate. They could check
joined Tunisiana, followed by the economically sensi- on their loved ones. They could coordinate their
tive youth and small businesses. Ultimately, larger actions. It created huge loyalty to the company and
businesses began to test the new network. In 2009, helped it further position itself as a Tunisian brand
Tunisiana reached a market share advantage over its of the people.
larger, full-service competitor.
Throughout its history, Tunisiana insisted on a Shareholders and governance at Tunisiana
brand positioning as a “people’s brand”. Its aggres-
sive pricing and improved distribution allowed it Tunisiana’s success leading up to the revolution drew
to be much more accessible to consumers than the attention of the Ben Ali government. As Tunisiana
the incumbent operator. While historically, mobile continued to grow and increase its influence in the
communication services had been only available market, the government (but in particular the Ben Ali
to the wealthy and powerful, Tunisiana’s aggres- family) considered means to gain an increasing influ-
sive pricing and promotion targeted everyone. The ence over the telecom operator.
result was that Tunisiana effectively democratized In the second half of 2010, Orascom Telecom
mobile communication services; in Tunisiana’s first expressed its interest in selling its stake to Qtel,
10 years of operations, the country’s adoption of which then began its search for a local partner to
mobile phone (“penetration level”) rose from 18.8% hold a minority stake. On January 4, 2011, a deal
to 123.7%. was announced whereby Qtel would acquire half of
Tunisiana’s role was also extended beyond the Orascom’’s shares (thus increasing Qtel’s stake from
mobile phone industry into other aspects of life. Its 50% to 75%, via its Kuwaiti subsidiary, Wataniya),
position in the country as a contributor to artistic while Sakher El Materi, a son-in-law of President
and sporting events helped maintain the company’’s Ben Ali who had been strongly recommended by the
positioning as the operator that helped the people. government as the appropriate partner, would pur-
Tunisiana’s “Football Academy” program, for exam- chase the remaining 25% of Orascom’s shares. Thus
ple, encouraged youth to participate in organized Sakher El Materi became Chairman of the Board of
sport. It also played a role in small businesses, having Directors at Tunisiana. Ten days later, on January 14,
created a new venture incubator called the “Start-Up the revolution began and Sakher El Materi also fled
Factory” that provided needed funding to Tunisian the country.
entrepreneurs. The overthrow of the government resulted, in
During the revolution, Tunisiana went one step the following months, in the seizure all of the assets
further. It did better than TT (Orange had not yet formerly held by President Ben Ali and his family.
launched) to keep its network on air during the From real estate to luxury automobiles and fine art to
course of events as employees and management businesses in every sector, the government now found
did all they could to keep critical paths of commu- itself as a shareholder. Among the most prized assets
nication open to its customers. But there was still were the 25% El Materi shares in Tunisiana.
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Part 4 Case studies
3G and the future not, another son-in-law of President Ben Ali). The
license granted Orange a one-year exclusivity period
The mobile landscape is in constant change. Since
during which only Orange could offer 3G services. The
the introduction of computer-to-computer com-
objective was clearly to provide the new entrant with
munications, then the introduction of the inter-
an advantage in establishing its business.
net, the shift from voice-centric communications
In April 2011, the government also decided to
to data has been a constant in the industry. This
grant a 3G license to TT, leaving Tunisiana as the only
shift was accelerated when 3G services were first
operator without the critical license and spectrum
launched in the 1990’s, as data access becomes
allowed for new growth. This was a direct process,
mobile. Indeed, most operators predict that 100%
without tendering.
of communications will be data in the not-too-
In December 2011, after the first post-revolution
distant future as the technology supporting voice
elections of October 23, 2011, a new government
calling fully transitions to “voice over IP” (internet
was put in place. It was a coalition led by a moderate
protocol). (See Table 1.)
Islamist party called Ennahda. With very little expe-
Radio spectrum (the frequencies that allow for
rience in managing a nation, the new government
delivery of wireless communications) are owned
took their place as the first freely elected representa-
and licensed by governments. They control who,
tives of the Tunisian people. It also appointed a new
when and how companies and individuals may use
Minister of Telecom, Mongi Marzouk, a Tunisian who
the frequencies. They issue licenses for prescribed
had previous experience as a Director with Orange
terms and under prescribed conditions. (By way
in France.
of example, it is governments which have declared
Mr. Marzouk had taken leave in order to take up
that the frequencies used for wi-fi need not be
the position as Minister. He had largely a technical
licensed, subject to limitations on signal strength.)
background but knew the industry well and had a
The process for gaining a 3G license in most mar-
clear vision for how the industry must evolve in order
kets has been through an open auction process. This
for the sector to develop. With a clear mandate, the
has typically resulted in current operators securing
new Minister set out with an aggressive agenda to
new frequencies, at a cost (passed on to subscrib-
build up the sector.
ers), which allow for the launch of 3G.
Among his first announcements was that a new 3G
In the case of Tunisia, the government of Ben Ali
license would be issued. In a twist, he also grouped
decided to award a mobile communications license
it with a fixed-line license, forcing any bidder to
to Orange (France Telecom) when it first entered the
invest in both the wireless and the wireline sectors.
market in 2010. Orange Tunisie was a consortium
Clearly designed as a means for Tunisiana to gain
that included Marwan Mabrouk (coincidentally, or
an equal footing in the market, the license could
have the effect of creating three full-service telecom
operators. In contrast to previous government exer-
cises, this one was a fully open auction. International
Table 1 Voice–data revenue mix evolution
investors as well as new entrants would be invited to
participate.
Q1 Q2 Q3 Q4 Q1
Statistics 2012 2012 2012 2012 2013 The telecom business requires significant capital
Mobile revenues in the Tunisian market
expenditure. Any new entrant in any market requires
(in millions of US$) deep pockets to deploy its network. Hundreds of
● Voice 326.02 335.6 317.74 311.35 304.58
millions of dollars are typically required before the
first call is even made. In Tunisia, with network pen-
● Data 22.13 22.88 21.78 23.94 25.85
etration rates at mature levels and with three competi-
Data 6.36 6.38 6.4 7.1 7.8
tors, it was pretty clear that the economics for a new
weight in
total entrant would be daunting.
revenue On February 9, 2012, the Ministry of Telecom issued
(%) an international call for bids for the 3G and fixed-line
Source: Informa, 2013. license. On March 26, 2012, the Tunisiana team pulled
694

up to the Ministry of Telecom in a nondescript white The additional consideration was the value of a
van. At daybreak on the day of the submission, a fixed-line license. Campbell and his team had under-
few employees had arrived in front of the Ministry taken extensive analysis to determine the value of
in order to see if any other companies may enter and the fixed-line license. While the wireless spectrum
submit a bid. At exactly 11:55am, 5 minutes before could be valuable simply to protect the existing
the deadline, with no other competitive bids in sight, business, the value of wire-line was less clear. With
Ken Campbell, the CEO of Tunisiana (who had joined penetration rates below 20%, fixed communications
the company in December 2011), pulled “Envelope B” services had been left behind by mobile. A fixed
from his briefcase and slid it into the large white box license could address high-bandwidth consumer and
that was Tunisiana’s financial bid. Four men lifted the enterprise needs, but capital investment costs would
heavy box with the technical bid to the Ministry steps. be high and the business case was not compelling.
The offer was submitted. Depending on the means of deployment, returns
Despite some preliminary interest from other could easily take 10 years or more to realize. An
regional players, Tunisiana was ultimately the only unclear regulatory environment impacting on fixed/
company to submit a bid for the new license. On internet prices and mobile broadband brought addi-
April 20, 2012, the Ministry organized a press tional uncertainty. Tunisiana had valued the fixed-
conference for the opening of the envelope. But line license at less than 15 million Tunisian dinars
prior to the opening, he made two important (TND),2 and that was generous. But the government
announcements – the first that Tunisiana was the wanted more. They needed more. And they also
only submission – hardly a surprise. But the second wanted a commitment to deploy and support eco-
announcement was a surprise. The government had nomic development in the poorer interior regions of
decided to establish a floor price. In the next minute the country (where the Tunisian revolution started
he opened the envelope submitted by Tunisiana in December 2010).
and announced that the submission of 161 million The team went back to the ‘drawing board’. On
Tunisian dinars (approximately $107 million) was April 28 2012, it submitted a new bid. The Minister
not enough. of Telecom again called a press conference on May 4,
The failure of the bid deepened the resolve of 2012 to open the envelope. He announced Tunisiana’s
Tunisiana and the Qtel Group. What was the govern- new bid of TND 205 million – a 20% increase from the
ment looking to achieve? What was their number? first bid. He then opened a second envelope that con-
Discussions with Qtel and Tunisiana’s Board of tained the minimum bid requirement – TND 190M.
Directors followed the recommendations of Qtel’s The license was Tunisiana’s.
Group CEO, Dr. Nasser Marafih, and Tunisiana’s
Chairman, Dr. Tawfik Jelassi, to raise the bid.
With Orange and TT moving to consolidate the
A new strategy
benefit from their head start in 3G, failure was not A few weeks later, in September 2012, Campbell
an option. sat down in the resort town of Sousse on a two-day
While Tunisiana had survived in the past without retreat with his management team. The objective was
a 3G license, there were other considerations. As to consider Tunisiana’s plan for 2013 but also to look
the market grew, Tunisiana’s success had resulted beyond. Historically, management had been largely
in another problem. The limited 2G spectrum that focused on the day-to-day operational challenges of
it had was insufficient to serve its ever-larger sub- the business. It seldom took time to assess where the
scriber base, compelling the company to introduce business was going to be in three to five years. An
“half rate” compression at peak hours, which sig- annual budgeting process and a long-term business
nificantly reduce the quality of the calls. The new plan were part of the annual regime, but management
spectrum provided by 3G was not only designed had concluded that a deeper look into the future was
to bring new data services. It was also important required at this time in the life of Tunisiana.
for voice communications. Without it, Tunisiana’s
service quality would fall, and with it, its customer
2 About 10 million US dollars. In April 2012: 1 TND =
appeal. 0.5006 Euros and 0.6600 US dollars.
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Part 4 Case studies
They had won the license for 3G and, moving at domestic terminating rates declined. However, pres-
a break-neck pace under the hard driving leadership sures to grow dividends and improve cash generation
of Chief Technical Officer, Hatem Mestiri, they had would remain. Management needed to review the
made it to market in record time. Taieb Farhat, the basics, ensure a lean operation for the future and
intensely competitive Chief Commercial Officer and optimize its balance sheet.
his commercial team had launched the service on Could management grow its way out of the
July 18, 2012 with a glitzy event at a local hotel. The problem or should they consider cost reduction and
public had taken notice but sales were modest. Being a tighter review of their capital investment? Were
the third to market was more difficult than they had there opportunities to share infrastructure with
anticipated. That said, voice traffic was starting to other operators as had been undertaken in other
shift to 3G, taking some pressure off the congested markets?6 Could management mitigate the nega-
2G network. tive impact of OTT applications such as WhatsApp
As management considered the market, the macro- and Viber that were cannibalizing SMS and interna-
economic challenges ahead and the growth oppor- tional revenues?
tunities available in telecom, it became abundantly
clear that deteriorating margins and marginal top-
2. Differentiating the customer experience
line growth could have a significant long-term
As the business matured, the battle for market share
impact. Tunisiana’s growth had been driven since
had intensified. (See Appendix 5 on the mobile tel-
the company’s inception by underlying market
ecom market size.) Indeed, the competition had
growth of mobile services in general. Inflationary
become more about consumers’ share of wallet,
pressures would force an increase in costs, par-
believed to be near its maximum, rather than market
ticularly wages, as union pressures began to mount.
share. Customers had already demonstrated their
With costs rising, the post-revolution Tunisian mar-
price sensitivity by purchasing multiple SIM cards,
ket in disarray, the mobile market reaching new
and shifting their operator quickly to benefit from the
levels of penetration, the threat of the so-called
most advantageous pricing offer of the day. Loyalty
“over-the-top” players (OTT)3 and growth slow-
programs were considered in a decision but the qual-
ing, it became apparent that the company must
ity of the network and customer care operations were
approach things differently. A new strategy for the
also important considerations.
future must be developed.
In this context, Tunisiana started in mid-2012 a
“Customer Experience Program”. Its goal was to really
The way forward understand the customer experience with a view
to a focused improvement on those “touch points”
As part of their strategy review, management decided
which could drive loyalty. (See Appendix 6 for mobile
to consider three distinct themes that had been out-
operators’ customer satisfaction scores.) A better
lined by the Qtel Group and were a relevant frame-
experience would mean lower churn and more share
work for the Tunisian situation.4
of wallet. However, a strong experience did not come
without a cost. Network improvements took time. A
1. Strengthening the internal foundation better experience on most dimensions meant more
With margins close to 57%, Tunisiana was among investment in critical billing and support systems. It
the most profitable businesses in the Qtel Group and,
indeed, the industry.5 Its strong financials were the
3 Overt-the-top (OTT) refers to video, television and other
result of good margins on domestic traffic as well as services (e.g., Facebook, YouTube, Skype, etc.) provided
the attractive rates it received for terminating interna- over the internet rather than via a service provider’s own
tional calls in Tunisia. (See Appendix 4 for Tunisiana’s dedicated network.
P&L as of December 2012.) There was broad consen- 4 ITP.net ‘Qtel defines 2012 strategy’, January 30, 2012.
sus among management that the regulatory and 5 Qtel Annual Report, 2011.
6 Mobile Tower Sharing and Outsourcing: Benefits and
competitive environment would force a decline Challenges for Developing Market Operators; Telecom &
in margins. Price pressures would also increase as Media Insights, Issue 43, Capgemini, 2009.
696

also meant more investment in training and people updated. The result was that Tunisian consumers
development. Could this cost be justified in the new did not pay for content. Their annual fees went
context? Could it afford to be ignored? to Dream Box providers who ensured their boxes
were updated regularly with decryption codes.
While quality varied, the average consumer was
3. Invest in new growth
happy to have this access. Could Tunisiana couple
As European telecom operators matured, their growth
its fixed access strategy with content offerings? If
became very similar to the growth of their economies.
so, could it leverage its shareholder connections9 to
Mobile telecom, in particular, took on the financial
develop something that Tunisians would buy? And
profile of any other public service utility. In order to
would government support this?
combat this growth challenge and as the regulatory
environment permitted, operators began to consider ● International expansion – The revolution in neigh-
new lines of business, including a bundled service boring Libya had started to create new opportu-
offering, including television, internet, wireless and nities (see Appendix 9). Operators in Libya had
mobile. This broadening of an offering provided new lacked exposure to international best practices.
growth opportunities although at lower margins and They needed people and support to develop the
with some significant capital investment require- sector. With a strong and experienced Tunisian
ments.7 team, Tunisiana management believed that their
Tunisiana management brainstormed over new expertise could be leveraged into a consultancy to
opportunities it might be able to realise. It had already provide short- and long-term support to Libya as
decided to develop the fixed business to be able to well as other operations in emerging markets. A
offer triple- and quadruple-play bundles in the future. managed services bid document was to be released
(See Appendix 7 on the fixed telecom market size.) shortly that could be the opportunity it needed.
Tunisiana had its license and this would be a corner- Clearly there was a lot to consider. Management
stone for offering in the future fixed-line high-speed knew that, while there were many potential paths
broadband services to consumers and enterprise cus- to take, it needed to focus its efforts. Employees
tomers. But fixed-line services had a long payback. were anxious, with many starting to feel the frus-
The low value delivery “pipe” would not secure good trations of a company entering a slower mode of
margins. Other opportunities fell broadly into a few growth with fewer opportunities for individual
categories: growth. In uncertain times, a clear path forward
● Enterprise services – These included managed net- was needed.
work services, private networking, cloud services,
IT services and infrastructure hosting. Companies
such as BT in the UK had managed to develop a
robust portfolio of services for small and large
enterprises. This complemented the existing serv-
ice offering and tended to offer stronger margins.8
● Content services – The Tunisian government had
historically turned a blind eye to the use of “Dream
Boxes” in Tunisia. These small set-top boxes were
hooked to satellite systems to allow for unencrypted 7 telecoms.com, ‘Telefonica goes quad-play to win back
viewing of any satellite channels. (See Appendix 8 mobile line losses’, September 20, 2012.
8 www.business.bt.com/products-and-services
for Tunisia’s TV landscape.) They simply required
9 Qtel shareholders also had an interest in Al Jazeera and
an internet connection for codes to be constantly their sports properties.
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Part 4 Case studies
698
Appendix 2
P&L statement of Tunisie Telecom (2012)
Tunisie Telecom In millions of Tunisian dinars

Revenues 1,407
Gross margin 1,021
EBITDA 672
EBIT 374
Net income 224
(TND in millions) 2012
Net revenues 1,287
Other operating revenues 48
Operating revenues 1,335
Annual growth 3%
Operating contribution 1,016
Margin (%) 76%
EBITDA 595
Margin (%) 45%
Annual growth 5%
D&A 303
Margin (%) 23%
Provisions 50
EBIT 243
Margin (%) 18%
Financial results 9
Other gains and losses 0
Profit before tax 234
Income tax 103
Tax rate 44%
Net income 130
Margin (%) 9.8%
Fiscal control provision 159
Adjusted net income 29
Margin (%) 2.2%
Source: Company data, management reporting.
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Part 4 Case studies
Appendix 3
Hexabyte quarterly results
Dec. 2012*
Hexabyte Tunisian dinars
Revenues (1) 5,114,171
Dial-up revenues 5,597
Residential ADSL revenues 3,669,173
XDSL enterprise revenues 823,907
Site hosting and domain names revenues 74,698
IP supervision solutions and network revenues 115,830
Sales of tablets and PC packs 325,353
Other miscellaneous revenues 99,613
Operating expenses excluding amortization and 3,821,318
provisions (2)
Staff costs 1,186,315
Other operating expenses 803,758
EBITDA 5 (1) 2 (2) 1,292,854
EBITDA margin 25%
Interest income (3) 200,362
Financial expenses (including leasing) 289,277
Total income (1) 1 (3) 5,314,533
Source:*These figures are extracted from Hexabyte’s provisional accounting statements up to December 2012.
700

Appendix 4
P&L statement of tunisiana (wireless business)*
Financials (‘000) 2012

Total post-paid revenue 86,997.2
Total pre-paid revenue 976,117.9
Total other revenue 59,946.9
Total revenue 1,123,062
Total cost of sales (235,764.7)
Gross margin 887,297.3
Gross margin% 79%
Operating expenses (excl. depreciation)
Direct technical OPEX (85,890.6)
Support OPEX (101,987.5)
Direct marketing& sales expenses (35,688)
Employees cost (84,484.6)
Total operating expenses (OPEX) (308,050.8)
OPEX% of revenue 27.4%
EBITDA 579,246.5
EBITDA% 51.6%
Depreciation (130,429.2)
Amortization (56,859.8)
Operating margin 391,957.5
Non operating items (input Inc (±)& Exp (−)
Forex gain or (loss) 2,267
Financing costs (interests, fees, etc.) (564.6)
Interest income 11,718.6
Other non-operating items 48
Taxes (169,049.9)
Net profit/ (losses) before minority 236,376.6
Return on sales (net profits/ total revenue) 21%
Minority share in P&L
Net income after minority 236,376.6
*in Tunisian dinars (TND).

Source: Tunisiana.
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Part 4 Case studies
Appendix 5
Mobile telecom market size
Subscriptions
TT
Tunisiana 4 382 439 Tunisie telecom
6 652 866
Orange
Orange
1 580 855 Tunisiana
Total mobile market size Tunisie Telecom Orange Tunisiana

12,616,160 4,382,439 1,580,855 6,652,866
Penetration rate: 116%.

Source: INT, May 2013.
Appendix 6
Market research (customer satisfaction)
90 NPS Score (total market) CSAT top 2 boxes (%) (total market)
80
70
60
50
40
30
20
10
0
1 Q13 2 Q13 1 Q13 2 Q13 1 Q13 2 Q13
Tunisiana Tunisie Telecom Orange
Tunisiana Tunisie Telecom Orange

Q1 2013 Q2 2013 Q1 2013 Q2 2013 Q1 2013 Q2 2013
NPS score (total 48 44 34 14 10 49
market)
CSAT top 2 boxes 81 82 79 79 81 82
(%) (total market)
Source: Study carried out by Nielsen corporation among 1,500 respondents through face-to face interviews. Areas covered by the fieldwork
during the second quarter of 2013 are: Tunis, Sousse, Sfax and Gabès.
702

Appendix 7
Fixed telecom market size and share
Subscriptions
5,4%
Tunisie telecom
94,6%
Orange
Tunisie Telecom market share Orange market share

94.6% 5.4%
Fixed market size

Total fixed market size Tunisie Telecom Orange
1,094,660 1,035,643 59,017
Penetration rate: 10%

Source: INT, May 2013.
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Part 4 Case studies
Appendix 8
Tunisia’s TV landscape
Public TV channels
● Tunisian TV 1 ‘Al Watania 1’

● Tunisian TV 2 ‘Al Watania’ 2. In January 2012, this TV channel became a regional broadcaster focusing on
regional information.
Private TV channels
TV channels pre-14 January 2011 (with launch date indicated)
● Hannibal TV(2005)
● Nessma TV(2007)
TV channels post-14 January 2011
● El Hiwar Ettounsi (2011)
● Attounissia TV (2011)
● Tunisia World Television (TWT) (2012)
● Al Janoubia TV(2012)
● TunisnaTV (2012)
● Al Qalam TV (2012)
● Al Mutawasset TV (2012)
● Tunisia News Network (TNN) (2012)
● T-Sport (2012)
Tunisia TV channels
704

TV Channel Share of the 2012 Advertising Revenues

IP TV revenues in Tunisia in 2012: 106.4 million TND (+45.6%)
TV advertising revenues in 2012: – 83.7%

74.5 million TND excluding taxes
(average discount: 30%)
Wataniya 2
Tunisia TV
0.2%
7.5%
Wataniya 1 – 4.1%
– 21.0% 14.6%
Hannibal TV
32.9%
Ettounsiya TV
23.5%
Nessma TV 45.6%
28.0%
Source: SIGMA survey, 2013.
Appendix 9
Libya intends to award a third mobile license within three to six months
Communications Minister Usama Siala told Bloomberg that the government is keen to decrease its hold on
the telecom sector and “get the private sector more involved, whether local or foreign”. He added that nego-
tiations are currently underway with the Ministry of Economy in order to make the concession “attractive
to the entrant”.
The new operator will be given the option of sharing infrastructure with the incumbent operators in heavily
populated areas, freeing it up to invest in the coverage of new regions.
According to TeleGeography, previous attempts at introducing a third player ground to a halt in July 2010
when it was confirmed that UAE’s Etisalat and Turkcell of Turkey had both been overlooked for a new LYD1
billion (USD 825 million) concession.
Meanwhile, March 2013 saw plans to introduce a management tender for state-backed cellular duo Libyana
and Almadar Aljaded abruptly cancelled. A number of major international players had been linked to the
process, including Zain Group of Kuwait, Etisalat of the UAE, Orange Group (formerly France Telecom-
Orange), Digicel Group of Jamaica, the UK’s Vodafone Group, Vimpelcom of Russia, Qtel of Qatar (now
Ooredoo), and India’s Bharti Airtel.
Sources: Bloomberg, TeleGeography.
705

CASE STUDY 23
12snap
Reinventing mobile marketing
December 2010. The snow was falling slowly outside the global financial crisis, which crushed marketing
the offices of 12snap, a mobile marketing agency in budgets and reduced business for 12snap.
Munich. Stefanie Krebs and Peter Prislin, the two The only good news was that 2009 had been so
management board members of the company, were successful that 12snap was not under immediate
discussing the situation. The weather condition was financial pressure. However, the challenges were
quite appropriate: this had been a challenging year mounting and required important decisions to be
and they now had to decide whether to move on with made and implemented quickly to defend the position
the business, and if yes how. In the last 12 months, in the market. Should 12snap continue alone? Would
12snap had lost the active participation of its major it, as a niche player, be able to compete, especially
shareholder and visionary, Bernd Michael, due to after losing its lead visionary? Should it continue to
health reasons. This brilliant mind had guided the look for strategic partners? Would a financial inves-
company strategy and had been an important mentor be a good alternative to give 12snap the neces-
tor to Stefanie and Peter. At the same time, mobile sary cash to push forward effectively? Should it drop
technologies were emerging as one of the next major its asking price in the face of resistance? The board
trends, and large traditional advertising companies would have to make decisions on all these matters.
and technology houses were pushing into the seg- Stefanie and Peter were unapologetic: they remained
ment, forcing 12snap to defend its niche aggressively. convinced that the mobile marketing industry and
Sensing this development in the market, Stefanie and 12snap as an organization presented a huge opportuni-
Peter tried to find a strategic partner to strengthen ty. But how could they position the company to survive
the company’s competitive position. However, most the imminent fight for market share and clients?
balked at the lofty valuations 12snap thought it
deserved. As if all this was not enough of a challenge,
the company’s clients were still feeling the impact of Looking back: the beginning of 12snap
12snap AG was founded in September 1999 in Mu-
nich by six former McKinsey consultants who hoped
to ride the Internet boom to build a successful com-
pany with a financially attractive exit. The company
name, “12snap,” described the business idea: a mobile
Dr Benoît Leleux, Stephan Schmidheiny Professor of Entrepreneurship and Finance, prepared this case with Stephanie Weg, IMD
MBA 2010 and partner at Ynovation.com, as a basis for class discussion rather than to illustrate either effective or ineffective han-
dling of a business situation.
706

Case study 23 12snap: reinventing mobile marketing
auctioneering platform. In the Internet hype, inves- perfumes, backpacks, holiday packages and popcorn
tors provided more than sufficient funding: 12snap makers, to name just a few.
managed to raise a generous amount of cash from The business started slowly. The six founders were
16 venture capitalists and institutional investors, 4 not always of the same opinion, as could be expected
private investors and 21 founding partners. (Refer to with consultants, and everyone was doing everything,
Exhibit 1 for the capitalization table.) honestly but inefficiently trying to help the company
The company was set up according to the typical take off.
German two-tier board system, with a management In 2000 12snap UK Ltd and 12snap Italy s.r.l. were
board and a supervisory board (refer to Exhibit 2 for founded as 100% subsidiaries. The mobile industry
more information). The business model was simple: in the UK was ahead of continental Europe, and in
12snap provided a platform that allowed customers Italy, large customers such as Ferrero promised good
to purchase items through auctions using their mobile potential. The UK and Italy operations were scaled up
phones. 12snap bought these items in bulk and stored to 19 and 25 employees respectively within one year.
them with a third party warehousing firm that also In 2001 the operative business was spun off into the
took care of shipping and handling the items sold. newly founded 12snap Germany GmbH to prepare for
The range of items offered was broad: mobile phones, a potential IPO in the future.
Exhibit 1 12snap initial capitalization table (December 2000)
Total shares Percentage ownership

VCs/Institutional investors
Viventures Partners FCPR 536,933 10.92%
Nokia Ventures, L.P. 369,363 7.51%
Apax Europe IV-A, L.P. 656,303 13.35%
Argo II, L.P. 618,750 12.58%
ARGC IV, L.P. 6,250 0.13%
Sirios Capital Partners, L.P. 11,321 0.23%
Sirios Capital Partners II, L.P. 64,033 1.30%
Sirios Overseas Fund Ltd 99,696 2.03%
Sirios/QP Partners L.P. 262,450 5.34%
CDB Web Tech International LP 125,000 2.54%
Broadband Capital AG 125,000 2.54%
GS - The Goldman Sachs Group 93,547 1.90%
GS - PEP Technology Fund 2000 17,222 0.35%
GS - PEP Technology Fund 2000 Offshore 6,797 0.14%
Holdings
GS - Stone Street PEP Technology Fund 2000 6,157 0.13%
Total institutional investors 2,998,822 60.99%
Private investors 22,581 0.46%
Founders 1,895,760 38.55%
Total shares issued 4,917,163 100.00%
Source: 12snap information.
707

Part 4 Case studies
Exhibit 2 German 2-tiered board system: Vorstand, Aufsichtsrat and co-determination
In German corporate governance, the Vorstand is the Vorstand meetings are commonly held on a weekly basis, and
management board of a corporation. It is hierarchically can last up to a whole day. Formally, the power to appoint
subordinated to the Aufsichtsrat (supervisory board), as members of the Vorstand lies with the Aufsichtsrat, which can
German corporate law imposes a clear two-tier board system. appoint members with a two-thirds majority vote of approval,
The Vorstand is expected to act collectively and collegiately or a simple majority if multiple rounds of voting are required
and has real decision-making power. It is, by law, driving the in order to reach a decision. Because 50% of the members
management of the company. The members of the Vorstand of the Aufsichtsrat are employees, this prevents employees
are personally liable for their actions. The specific scope of from blocking the appointment of members of the Vorstand.
duties of a Vorstand varies from business to business. The Members of a Vorstand enjoy a degree of job security,
head of the Vorstand, and the role of that office, is determined which is in part a preventive measure aimed at ensuring that
by the Aufsichtsrat. German law permits, but does not require, Vorstands are not dominated with hand-picked appointees.
members of the Vorstand to elect a chairman from amongst They are usually appointed for the maximum term permitted
their members. There are no specific legal requirements for by law: 5 years. Removal can only be for good cause such as
the role of chairman, or even for the name of the office of gross breach of duty, and is subject to veto by the Aufsichtsrat.
chairman, although in practice the most common title is When a member of a Vorstand is less able to perform their
Sprecher (Speaker) with the implication that the chairman is duties because of old age, it is customary for them to serve
no more than primus inter pares. The relationships of members out their term but with their duties being performed with the
of the Vorstand to one another can vary, too. It is common aid of a deputy. Neither the shareholders nor the Vorstand
practice for individual members to have individual areas may compel a member to retire. However, the Aufsichtsrat
of executive responsibility. However, the law requires that may. Commonly the chairman receives between 30% and 50%
they oversee the activities of their colleagues, since they are greater salary than that of the other members. A member’s
still personally liable for any failings outside of their specific remuneration usually comprises 65% basic salary, and 35%
departments. Each member of a Vorstand has one vote. that is equally split between annual bonuses and benefits.
Source: Jonathan P. Charkham (1994). Keeping Good Company: A Study of Corporate Governance in Five Countries. Oxford University Press.
pp. 14–21 http://en.wikipedia.org/wiki/Vorstand
Despite all the efforts, the great customer rush to 12snap V 2.0
the 12snap platform never materialized. Soon after
The company’s creative minds and skilled technical
the spin-off, the founders had to admit that mobile
team allowed 12snap to quickly conquer a position for
auctioning was not catching the wave of success.
itself in the mobile marketing industry. Positioned as an
Their target group, mostly young people and often
expert hub between the consumer/user base, provid-
teenagers, purchased items in auctions using their
ers such as mobile phone operators (Vodafone, T-D1)
mobile phones; getting them to pay for the items
was a whole other story. The high default rates and mobile media channels (GSMBox, YourMobile)
seriously hurt 12snap, which struggled to generate and the marketing departments of their clients, 12snap
enough business to cover the cost of the expensive developed campaigns for big brands, using the latest
software and the outsourced fulfillment. The regu- technology in a one-stop mobile agency model fed by
lar write off of receivables precipitated cash flow revenue share from media partners, agency fees and
problems. The founders read the writing on the traffic income. (Refer to Exhibit 3 for detailed charts of
wall and discontinued the mobile auctioning busi- 12snap’s positioning and business model.) The first cam-
ness, selling the remaining inventory to employees paigns were based on SMS. Later, MMS and mobile
at fire-sale prices. Internet as well as mobile applications allowed more
In less than two years, the initial investments had and more complex and creative campaigns.
been burned and 12snap was back to square one. A Contrary to what had happened in the mobile
complete repositioning was required. While mobile auctioning space, success was quickly visible in this
auctioning had taken the front stage, and failed to business. The first big mobile marketing revenue
deliver, mobile marketing had been sidelined. With (€50,000) was realized in 2001, after more than
no other prospects in sight, the owners decided to 10,000 calls had been achieved with the campaign
refocus on that area. 12snap had developed for McDonald’s.
708

Exhibit 3 12snap positioning and business model
MoMa model
Positioning
Consumer/User base providers
Operators
Clients/marketers
Vodafone
BT
McDonald’s
T-D1
Omnitel Nestlé
Wind Smart
American Express
M-media channels
GSMBox 20th Century Fox
Your Mobile Etc.
UCP
Myalert
MoMa business model

Illustration of mechanics
100
60
16
30 1
10 5
Media COGS Rev. Media Agency Traffic 12snap

value (SMS,...) share rev. fees rev. net
(CPM) media 12snap share revenue
partner
In 2003 12snap won its first Cannes Lions1 award

1 The Cannes Lions Festival of Creativity is an annual award
for the campaign “Sony Playstation 2 Xmas wish” in ceremony held in Cannes and which awards “Lions” for
which the company designed and implemented the creativity in advertising and related fields. Source: Wiki-
world’s first mobile wish delivery service, achieving a pedia (accessed 6 March 2012).
709

Part 4 Case studies
total response of over 14%, an outstanding number. 12snap was their first step into the European market.
Building on this success, more awards followed, with However, in 2007 NeoMedia had a change of heart
two Lions in 2004 for the “Fanta – Message in a bottle” and started divesting non-essential divisions to focus
campaign and one Lion in 2005 for “Nokia Rocky Cam.” on its core business. In April 2007 Bernd Michael – a
Based on these successes, 12snap expanded contin- former shareholder – and two management team
uously, both organically and externally across Europe members purchased the company back in a bargain
and in the US. In 2003 it acquired a significant par- buyout for €4.2 million. Bernd, who hda become the
ticipation in Lokomobil AB in Stockholm, Sweden. It new main shareholder, was one of Germany’s stars in
increased this in 2004 to a majority stake, ultimately the marketing industry; he had earned a place in the
renaming the company “12snap-Lokomobil AB.” Hall of Fame2 of German marketing in 2006 and had
The pace of growth soon required the recruitment more than 15 reference books to his name. Mobile
of a new, experienced creative director to manage the marketing was one of Bernd’s visions for the future
increasing amount of creative work required. of the industry; investing in 12snap was his ticket to
taking advantage of that growth. A new supervisory
board was put in place, headed by Bernd Michael
Bringing in new executive talent himself. NeoMedia retained 10% of the shares in
A New Marketing Director on Board: Peter Prislin 12snap.
first heard about 12snap when he was looking for 12snap Finds a COO: The supervisory board had
a career change in 2004. He was new to mobile been looking for a COO for a while: 12hsnap needed
marketing but was exhilarated to hear the company someone who could structure the operations of the
worked for prestigious clients such as Coca-Cola, company, put processes in place and ensure that the
Adidas and Vodafone. Peter’s career in marketing had everyday business was conducted more professionally.
experienced a meteoric rise. With a background in One of the investors found out that freelance
journalism, he started in 1993 as news editor at Radio consultant Stefanie Krebs was looking for local oppor-
NRJ, followed a series of assignments in marketing tunities in Munich and approached her to join the
and multimedia agencies, such as Serviceplan, H5B5 company. Stefanie’s experience in the Internet and
Media AG and Die Prinzregenten. Prior to joining technology space included six years with Accenture
12snap, he was global head of concept at a chain of in Germany, France and Spain, working on a variety
design hotels. Peter started as 12snap’s creative direc- of Internet projects, as well as an assignment as man-
tor in June 2004. aging director of DMR Consulting Germany (today
He soon discovered the 12snap environment was Everis, a leading IT consultancy in Spain and Latin
quite different to what he was used to: his manager America). Stefanie was thus a perfect fit for 12snap.
was even younger than himself and had “lots of crazy She had already started working with 12snap as a
ideas,” the internal culture was best described as part-time consultant as early as September 2005. She
unstructured, verging on chaotic, and the variety of co- loved the environment and challenge. A permanent,
operations and assignments for new clients were mind- Munich-based position would allow her to spend
blowing and a real culture shock. After a few weeks at more time with her four-year-old daughter, so she
12snap, Peter admitted to his wife that he was not sure readily joined the company in January 2006 on a
how long he would remain with the company. But the two-year contract as COO. 12snap allowed Stefanie’s
dynamic environment and the young, innovative team entrepreneurial spirit to roam free. What she found
quickly grew on him and he chose to stay. In 2006 he was an award-winning mobile marketing agency with
was promoted to managing director (creation), to lead about 70 dedicated employees but insufficient struc-
more award-winning campaigns, which were crucial ture. Profitability was low and there were no clear
to give 12snap the profile it needed. responsibilities and processes in place.
The founders made their exit in February 2006, Stephanie quickly took charge and established a
selling 12snap AG to the US-based mobile enter- dedicated project management group responsible for
prise and marketing technology firm NeoMedia the timely and profitable execution of projects, while
Communications for €18.5 million in cash and
stock options. NeoMedia was on a buying spree and 2 http://ddv.de/index.php?id=93
710

the account managers were now only responsible Spring 2010: a challenging time
for client relations. Project management guidelines for 12snap
and processes were established, and with Stefanie’s
technical background and process focus, 12snap’s The year 2010 proved to be a lot more challenging.
business and profits started to pick up. Difficulties hit 12snap in waves.
First, Bernd Michael, who had been so valuable in
steering 12snap, retired from active participation in
Streamlining 12snap the company in spring 2010 after a polo accident left
him with serious health issues. The brilliant marketer
Stefanie, as COO, was joined by founders Michael
and passionate entrepreneur had been instrumental
Birkel and Bernd Mühlfriedel as CEO and CFO respec-
in setting the firm up to take on the competitive chal-
tively. The management team dedicated 2007 and
lenges. His departure left a huge gap.
2008 to streamlining the operations, stepping up the
Bernd had envisaged finding an investor and part-
creative work and further improving relationships
ner to strengthen the company’s position in the mar-
with the big brands. 12snap delivered a number
ket but his efforts proved unsuccessful. Part of the
of outstanding campaigns that won mobile market-
problem seemed to be that the price tag for 12snap
ing awards in 2006 and 2007 with campaigns for
was near the upper end of the industry range, even
Nokia (Nokia New Year’s Eve) and McDonald’s (FIFA
for a company of its size and reputation. Since the
Fußball WM 2006).
industry was still developing, companies looking to
The management team further consolidated the
business; it closed the unprofitable 12snap Italy in add mobile capabilities to their portfolio preferred
January 2008 and sold its participation in 12snap- acquiring smaller, cheaper companies or individuals.
Lokomobil AB in April 2008. That same year, 12snap The time was not ripe yet for big mergers and high-
won more contracts than ever and its financial results value deals.
improved rapidly. Partnering with a strong brand was 12snap’s
In January 2009 Michal Birkel resigned from his intended response to an increasingly competitive
position as CEO and the supervisory board proposed industry. As mobile devices grew in popularity, mar-
to Stefanie and Peter that they run 12snap together keting agencies added more mobile marketing capa-
with Stefanie as speaker of the management board bilities to make sure they did not miss the start of a
and Peter as the newly promoted CMO. After care- new trend. At the same time, small technology com-
ful consideration, Stefanie and Peter both accepted panies pushed into the niche. While the big players
the arrangement (refer to Exhibit 6 for their respective offered a large range of services, small players exerted
responsibilities). Bernd Michael also became more considerable pressure on prices. When dealing with
involved in the operative business during 2009 after customers, 12snap could already feel the increased
he retired from his role as senior advisor at Grey competition. While 12snap was still one of the three
Advertising Group. He became coach, consultant, largest standalone mobile agencies in the German
pathfinder and the person “with the thick address market, next to Yoc and Clamno, it now had to com-
book” to Stefanie and Peter, which made a huge dif- pete with worldwide agency network players such as
ference to the company. Neue Digitale and PlanetMobile and small technical
Throughout 2009 the awards kept coming. (Refer providers.
to Exhibit 4 for an excerpt of award- winning campaigns A successful 2009 had left the company with suf-
12snap delivered.) In June Stefanie closed down ficient financial means to not need new investors
12snap UK because it had no significant business. She rapidly. This was a blessing since, as an agency with
wanted to focus even more on Germany where 12snap an EBIT margin of between 10% and 20%, 12snap
delivered the quality and benefitted from the critical was not a particularly attractive investment from a
size needed to create a brand. By the end of 2009 the purely financial perspective, despite its results being at
management team knew that its efforts had paid off the upper end for digital agencies. Finding a strategic
when it presented to the supervisory board the best partner willing to pay a premium price was hard, but
financial results in the company’s history. (Refer to Stefanie and Peter did not want to undersell 12snap.
Exhibit 5 for the consolidated P&L statement of 2009.) After all, they both believed in the company’s potential,
711

Exhibit 4 Some award-winning campaigns delivered by 12snap (2003–2010)
712
Year Campaign Client Short Description Medium Results Awards
The Sony PlayStation2 mobile campaign was the
world’s first mobile wish delivery service, using the
MobileCard mechanic developed by 12snap.
Part 4 Case studies
2003 Sony Sony Campaign objectives: Using an acustic based Mobile Concept, design & realisation of Total response over Cannes Lions
Playstation2 Marketing campaign to impact desire for the PS2 in the txt message campaign 14%, 11% unique
xmas wish the target group and increase awareness among older contacts, average
age groups of parents and relatives and impact PS2 send-on factor 2,05
buying behavior. times
Support of the effects of classic advertising campaigns.
2004 Fanta - Coca-Cola The 2005 Fanta Flaschenpost campaign was the larg- Concept, creation, technology, More than 160 billion Two Cannes
Message in est mobile marketing campaign in the world so far. campaign management and bottle codes were Lions (silver
a bottle Codes from the labels on the bottles of 6 Coca-Cola implementation incl. print, online, activated in only 7 and bronze)
brands (Fanta, Sprite, Mezzo Mix, Coca-Cola, Coca- tv, mobile, bottle labels, POS weeks, more than
Cola light, Bonaqa, Lift) could be sent in via SMS to advertising. 5,9 billion participa-
receive one of differtent mobile goodies (e.g. mobile tions
greeting card, MMS, mailbox loader, ringtones, logos).
2005 Nokia Rocky Nokia Christmas cards turned mobile for Nokia’s End of the Concept, design, realisation and 7,7% response rate Cannes Lions
Cam Year Campaign in 2005. Campaign goals: Generate campaign technology.
positive emotions towards Club Nokia and have user’s
learn & enjoy the technology of their phone (camera,
MMS). Users download the mobile application via
WAP-push link, took a picture after selecting one of
different Rocky Cam themes and sent the picture on
to friends.
2006 McDonalds’ McDonald’s Clients in McDonald’s restaurants in Germany and 49,8 billion scratch cards, TV spot, Over 1,3 billion send CommAwards
FIFA WM Luxemburg received scratch cards which guaranteed mobile (text messages), general ins, peak with up
2006 Fever them an instant win mobil special. Additional ly ,cli- advertising and instore media to 43,000 messages
ents automatically participated in a draw for prizes with code texted one
such as tickets for the Soccer World Cup, stadium day, response rate
tours or Deutsche Bahn train tickets. Campaign also over 9 weeks: 10%
runs in UK, but with different price partners.
2006 Nokia New Nokia A mobile WAP platform allowed New Year’s cel- WAP portal incl. mobile content, Over 1,9 billion users CommAwards
Year’s Eve ebrants to share their experiences from their New Bluetooth activation at the event, on mobile site, more
Year’s Eve parties with the whole world. mobile live streamings, SMS & than 1,2 billion txt
MMS boards during the concerts, send ins, 848.000
SMS pre-event activation, mobile mobile content dow-
download centre, SMS sweepstake loads.
06/03/14 5:04 PM
Year Campaign Client Short Description Medium Results Awards

2008 Hüttengaudi McDonald’s Winter, snow and chalet-themed campaign. Users Realisation of the entire online & Over 3,7 billion page Kontakter
- Move your could upload a photo of their face and attach it to a mobile campaign / mobile (SMS views, more than Client Award
Lederhos’n Bavarian dancing Schuhplattler (traditional German & MMS), online, general advertis- 500.000 send videos CommAwards
dance). They could choose from different moves ing and tablet sets
and thus create their own traditional yet crazy dance
movie. Sending the link of their dancing performance
to friends via MMS or eMail entered them in the draw
for more then 200 attractive winter-themed prices.
2008 Los Wochos McDonald’s Mexian themend campaign with Diego Hotriguez as Concept, creation & realisation Over 730.000 page CommAwards
- Diego “ambassador” of the whole campaign. Diego taught online and mobile, banner and views
Hotriguez the clients the mexican way of life with 4 different advertising material
“lektionos” (el amor, el sporto, el musica, el apetito).
Clients could let Diego give a call to their friends
mobile phone to teach them the mexican way also.
Source: 12snap.
713
06/03/14 5:04 PM
Part 4 Case studies
Exhibit 5 12snap consolidated income statement Exhibit 6 Senior management responsibilities and
2009 (in € 1,00) biographies
Stefanie Krebs
2009
Speaker of the Management Board 12snap AG & MD
Revenues 4,219 12snap Germany GmbH
Cost of Sales 166 Responsibilities:
GROSS MARGIN 4,053 ● COO for all clients (Technology and Project
Technology & Development –535 Management)
● Account Executive for Nokia & NB
Marketing & Selling –2,003
● Managing Director Entities Helsinki and Timisoara
General & Administration –572
● Finance
Other Operating Expense / Income –19
Prior to 12snap:
EBIT 924
● Partner & Managing Director Everis Consulting
Financial Income(+)/Expense(-) Minority –226 Deutschland
Interest ● Accenture (assisting international customers in tel-
EARNINGS BEFORE TAXES 698 ecom and high tech sectors)

● Degree in Computer Science from the University of
Taxes –8
Mannheim
PROFIT(+)/LOSS(-) 690 ● BA in Economics from Berufsakademie Mannheim
Peter Prislin
Source: 12snap. Chief Marketing Officer 12snap AG & MD 12snap
Germany GmbH
its people and their creative capabilities. For all these Responsibilities:
● Executive Creative Director for all clients
reasons, Stefanie and Peter decided to continue with
● Account Executive for McDonald’s, Vodafone, GSK, NB
their standalone strategy. This required revisiting the
● Human Resources
business model and strategy to position the company
for the future. Prior to 12snap:
● Global Head of Concept design hotelsTM
To top off the various challenges, the 2008/2009
● Creative Director Dieprinzregenten
global financial crisis affected the entire market- ● Creative Director H5B5 Media AG
ing industry. As companies experienced heightened ● Freelance Copywriter e.g. JvM, Lucie P, fjr
financial strain, marketing budgets were cut back. ● Copywriter Serviceplan
● Marketing Manager Radio NRJ

For example, Nokia, a long-term 12snap client, lost
● News anchor Radio NRJ
market share quickly to Samsung, LG, RIM and Apple,
● News Editor FM Radio Network (Bertelsmann Group)
dropping from 39% in 2008 to 36% in 20093. Its cel-
ebrated operating system, Symbian, lost presence in Source: 12snap.
the market in favor of alternatives. To make matters
worse for Nokia, some of its major competitors (LG,
Samsung, Motorola, etc.) joined Google in the Open Thomson Reuters, it was estimated that the global
Handset Alliance4 to develop Android, a new power- mobile advertising market would grow from around
ful operating system. US$3.5 billion (1% of total advertising spending) in
2010 to $14 billion (3% to 4% of total advertising
spending) in 2015. In developing economies, mobile
Mobile marketing in 2011: thriving again marketing growth was expected to be even higher,
By early 2011 the mobile marketing industry had
definitely woken up. A key driver of the growth was 3 See “Top-5 Mobile Phone Vendors Lost Market Share in
the mass adoption of smartphones, which repre- 2009” (http://www.cellular- news.com/story/42084
.php)
sented already 35% of the handset market in the US,
4 More information: http://www.openhandsetalliance
Europe and Japan – and tablets were close behind5. .com/
Mobile usage was increasing rapidly and advertis- 5 According to the Thomson Reuters Mobile Marketing
ing spending was expected to follow. According to Industry Report 2011.
714

with 2012 spending expected to be three to six times ity, for which 12snap was known and recognized.
higher than 2009 (refer to Exhibit 1). Advertising Second, they would broaden the business model to
agencies, especially those specialized in mobile, allow 12snap to compete with upcoming rivals. Apart
were going to benefit from this growth and were from projects, the company would also offer white
expected to raise their organic growth to long-term label, out-of-the box mobile solutions that lever-
GDP-plus rates. aged existing 12snap technologies. Those solutions
A second key driver of the mobile marketing indus- would be customized for the clients who developed
try growth was the variety of opportunities it pre- the campaign themselves. The solutions would also
sented, extending the digital capabilities to a highly include 24/7 technical support and maintenance,
personalized, interactive and 24/7 way of communi- which would generate a steady stream of income and
cating with consumers. allow for longer term planning.
Mobile was also introducing a new layer of com- To stay focused, Stefanie and Peter elected to con-
plexity that called for a more integrated approach centrate on four specific areas, namely MCommerce,
to marketing, which created new opportunities for Loyalty, Couponing and Mobile Social Media, as
mobile marketing agencies. Mobile campaigns could the core fields for 12snap. The strategy paper was
not be independent from other marketing campaigns: approved by the supervisory board in May 2011.
mobile messages had to be consistent with the brands’
other creative messages. For this reason, most adver-
tising companies were building mobile capabilities. Implementing the strategy
This opened up opportunities for small specialized By the second half of 2011 it looked like 12snap was
mobile marketing agencies to develop long-term part- well set for the future. Organizational structures and
nerships or to integrate with bigger agencies in need processes were in place. With offices in Munich (head
of such capabilities. office) and Düsseldorf (since 2005), 12snap’s main
market continued to be Germany. An office in Helsinki
(Finland), which was opened in 2008 and set up as
Preparing for the future: consolidation and
a Finnish entity (12snap Oy) in 2010, guaranteed
realignment of strategy
a strong presence in the Nordic countries. 12snap
The last of the original investors had recently sold Timisoara (Romania) had provided cost-efficient and
their shares to Bernd Michael and disengaged high-quality development and technical services with
from the company. Bernd now owned 91% of the a professional data center and 24/7 technical sup-
company while Stefanie Krebs owned 9%. A new port, and a representative in the US and even some
supervisory board was established in early 2011 contacts and projects in Asia allowed 12snap to cover
to represent the new shareholder structure and to many geographical areas. The newly opened 12snap
support the management of 12snap. The board was Benelux office started strongly and had already won
headed by Dr. Hans-Dieter Kleinhückelskoten, a its first contracts in the second half of 2011.
seasoned board member with more than 20 years Internally, responsibilities were clearly structured
of experience in the advertising industry. He was and the team performed well. 12snap’s employee turn-
supported by two other experienced marketers: over rate was about four times lower than the industry
Wolfgang Kemmerich who was a long-standing average. The model whereby Stefanie and Peter ran
marketing expert in the financial industry and was the company together seemed to work well and the
founder and owner of his own marketing agency team was growing with new capable managers joining
ImpulsKomm; and Jürgen Knauss, chairman of Heye the team, including Oliver Fahle as director of strate-
Group, who joined 12snap at Stefanie and Peter’s gic sales and Dan Racek as creative director. The com-
request. Jürgen knew the industry well and sup- pany further developed its abilities for touch screens,
ported the management team with helpful opinions smart phones, HTML5 and integration with social
and a strong network. media. New abilities were developed in MCommerce
At the same time, Stefanie and Peter worked and monitoring and tracking solutions.
on a strategy proposal based on two pillars. First, Throughout 2011 12snap was able to maintain
they would maintain the company’s focus on creativ- its competitive position in the mobile space, even
715

Part 4 Case studies
Exhibit 7 Projected growth in mobile marketing in BRIC countries, 2010–2012
600%
2010 2011 2012
500%
400%
300%
200%
100%
0%
Brazil Russia India China
against big globally networked agencies. The fact the first big Android and Symbian/QT based applica-
that 12snap had worked closely with large clients tion and ran some campaigns in over 40 countries, for
over a number of years and commanded consider- instance Indonesia, Arab countries and Latin America.
able knowledge of its clients’ brands paid off. At the 12snap had truly moved beyond start-up stage and
same time, 12snap attracted new clients with its was a successful, well-functioning company. However,
track record. A travel health application designed the coming years would not be easy. Although the
for GSK (GlaxoSmithKline) scored more than 40,000 market was growing, there was not enough business
downloads and won three major awards, outdoing for everyone. Stefanie and Peter felt that the compe-
the Nokia Star Trek campaign, which achieved more tition would increase further, so finding a strategic
than 700,000 visits, more than 62,000 downloads of partner was a topic they would definitely have to
content pieces and two awards. 12snap also delivered revisit…
716

INDEX
Abrahams, P. 21–2 financing of 417–18

Abuja Declaration 641 health-care IT background 406–9
Accenture 449 market opportunities 421–3
accounting systems 227 moving forwards 420
Achtsätter, A. 653–69 Online Care 412–13, 421
Acrossair 292 product development 420
Adidas 197 recent developments in US health-care
advertising provision 409–11
and augmented reality 291 Amias, J. 441, 443, 445, 446, 447, 449, 451, 453
digital 93–4 Amit, R. 83, 118
and Facebook 119, 241 amplification marketing, and u-commerce 289
mobile 60, 273, 280–1, 714 analytical ability 322
and Nettwerk 617 Anderson, C. 256–8
and social networks 240 Anupindi, R. 497, 500
advertising-based model 118 AOL 196
Ahlinder, H. 440 acquisition of TechCrunch 59
airlines 122–3 Appirio (case study) 344–5, 486–94
Allan, S. 292 background 486
alliances in ‘make-or-buy’ decisions 197 building competencies around an emerging
Allison, K. 245 technology 490
Alonso, R-O. 441, 442 early days 487–8
Altier, W. 320–2 future directions 491
Amazon 156–7, 221 getting value from the cloud 490–1
and Kindle 140, 141, 156, 206 growth phases 488
and Kindle Fire 156–7 IT infrastructure 489–90, 492
Amazon Web Services 58 leadership team 487
Amazon.com 17, 19, 69 Apple 45, 156–7, 221
competencies 82, 88, 91 App Store 60
and crowdsourcing 624 and disruptive innovation 131–2
digital self-publishing 141 iTunes 613
and first-mover advantages 161 and supply chain management 228
mission of 301 Apple Computers 131–2
strategy points 109–10, 114, 117, 118 asset specificity in ‘make-or-buy’ decisions 199
supply chain 224–5 AstraZeneca 208–9
timing of market entry 160 attenuation marketing, and u-commerce 289
unbundling 211 Aufsichtsrat 708
American Airlines 214 augmented reality 291–2
American Well (case study) 340–1, 403–23 Aurasma 292
background to health-care delivery
in US 404–6 B2B e-marketplaces
building the platform 418 openness of 225
capturing value for 417 and purchasing 222–4
choosing a customer 413–17 Bach, J.S. 319
entrepreneurial roots 411–12 backward integration, Satec (Spain) 447
717
Z24_JELA7870_03_SE_IDX.indd 717 06/03/14 5:08 PM

Index
bandwidth, as richness 243 KM history 562–3

Banerji, Shumeet 561, 562, 572 knowledge sharing and collaboration
banking, and M-KESHO 684 framework 563–72
Barbin, C. 486, 487–9, 491 launching of global community of
Bardega, S. 75 practice 563–4
bargaining powers preparing for launch 570–2
of buyers and suppliers 61 Project Closed Loop (PCL) 575–6
and wireless technologies 281–2 situation today and looking ahead 575–6
Barnes & Noble 118, 157, 205–6 Booz, E. 562
Barr, W.H. 653–69 Borders Group 205
Barrett, C. 206 Borders.com 205
barriers to entry 55–7 Bordi, M. 397
and wireless technologies 281–2 Bouazizi, M. 691
Barrington, J. 639, 642, 643, 644, 645, Boulin, R. 563, 567
646–7, 652 Bourdon, P. 471
Barrington–J. 639 Bousbib, A. 454–68
Barsikian, S. 629 Bowen, D. 6
Bartholdi, F.-A. 623 box movers 447–8
Bartz, S. 577–96 Boyd, C. 525
BeatThatQuote.com 61–2 Boylson, M. 273
Beaver, R. 466 Braddock, R. 145
Bebo 17–18 Bradford, R. 241
Beer, J. 436 Bradshaw, T. 72, 75, 281
behavioural segmentation of markets 71–2 Braithwaite, T. 259–60
Benner, M. 146 brand loyalty 56, 113
Bertelsmann 202–3, 205, 599 and early mover advantages 162
Best Buy 274 and perceived use value at Sony 186
Bezos, J. 156, 161 Breu, R. 644
Bhaskar, M. 140–1, 142 Brockhaus (case study) 350–1, 597–607
Bhatnagar, S. 495–512 divisions 601–2
Biagio, C. di 389, 392, 394, 399, 401 forthcoming war with Wikipedia 605–7
Birch, M. 17 history of 599–601
Birchall, J. 286 war with Microsoft 602–5
Bird, J. 14–15 and Xipolis 606–7
Birkel, M. 711 Brockhaus, H. 599, 601
Black, T. 462, 466 Brown, M.M. 513
Blasgen, R. 228 Buffett, W. 41
Bläsi, C. 602, 603 Burger King 253
Blendtec 253 business innovation capability 86
Bleustein, J.L. 391, 395 business models
blogs 238 crowdsourcing platforms 626–7
BMW 197 IBX (Northern Europe) 430–1, 433–5
Böhme, B. 427 expanding 438–9
Boo.com 17–18, 115 M-PESA (Kenya) 671
Boodry, K. 666 MMC 630–2
books, digital 140–2 Satec (Spain) 444–5
bookstores 205–6 Tesco.com 363–5
Booz & Company (case study) 348–9, 12Snap 707, 709
561–76 business as supplier/provider 68–9
history 562 business thinking
and insidebooz 567–9, 572–5 analysis and intuition 327–8
718

Index
breadth of 331–4 Chaffey, D. 5, 98, 227

depth of 331–4 Chandler, A. 7
strategy formulation 332 channel conflict matrix 213–15
business unit strategy 8–9 Charkham, J.P. 708
buyer chain and new market spaces 155–6 Chery, Licia 352, 621–2, 632–4
buyers’ bargaining powers 59–61 Chevalier, Judith 201
Chippindale, J. 51
Calleja, J. 450, 452, 453 Chomet, P. 72
Campbell, K. 695, 696 Christensen, C. 132, 134, 136–7
Canner, N. 566 Chung, G. 225
Canon 143 Cisco 443, 445, 453
capabilities as core competencies 81 Cisco TelePresence 410
Capgemini 97 Clarke, I. 276
capital requirements in ‘make-or-buy’ cloud computing 56, 57–8, 84–5, 209
decisions 202 and Appirio 486–94
CapStat 549, 550 definition 487
capturing 9 layered model 493
CareKey 412 types of clouds 494
case studies 324–6 co-opetition framework 62–7
12snap 356, 706–16 co-production 100
American Well 340–1, 403–23 Colin, M. 588–9
analysis of e-business 324–5 Collymore, C. 670–1, 686
Appirio 344–5, 486–94 commission-based model 118
applications 324–5 communication, and M-PESA 679
Booz & Company 348–9, 561–76 communication activities 94–5
Brockhaus vs Wikipedia 350–1, 597–607 community cloud 494
concepts and frameworks 326–34 community of practice, and Booz & Company
creative strategies 325–6 563–4
Ducati vs. Harley-Davidson 340, 389–402 Compaq Computers 136
Estonian government 346–7, 513–29 competition
IBX (Northern Europe) 341–2, 424–40 in e-banking 386–7
ITC e-Choupal 345–6, 495–512 in grocery retailing 359–62
Licia Chery and My Major Company 352, at IBX (Northern Europe) 435–6
621–38 and Satec 446–7
M-PESA (Kenya) 354–5, 670–89 and TopCoder 473, 475
Nettwerk 351–2, 608–20 competitive advantage 105–7
Nordea 339–40, 373–88 critical success factors 107
NTT DoCoMo 353–4, 653–69 de-averaging 207
Otis Elevator 343–4, 454–68 identifying 128
Satec (Spain) 342–3, 441–53 resources for 129–30
SMS for Life 353, 639–52 sources 129–30
Spreadshirt 349–50, 577–96 in Spreadshirt.com 590–3
Tesco.com 338–9, 357–72 sustaining 127–50
TopCoder 344, 469–85 threshold features 106–7
Tunisian ICT 347, 530–42 value offered 303–4
Tunisiana 355–6, 690–705 in wireless technologies 277–8
Vivek Kundra 348, 543–60 competitive discount 190–1
Cassard, P. 584 competition, and unbundling 210
catalogue hubs 224 complementarities 83, 118
catalysts for change 323–4 computer industry 197
cause-related marketing, and Nettwerk 617–18 connectors 255
719

Index
consortia 225–6 social 247–50

Constine, J. 50 and unbundling 209–10
consumer as supplier/provider 68 customer retention 247
contextual marketing, and u-commerce 289 customer selection 246
convenience of mobile e-commerce 274 customers, and new value creation 159
copyright, collapsed 617 customisation, as richness 243
core capabilities in e-business 99–100 Cutler, K.-M. 119
core competencies in e-business 80–6 cyber-vandalism 307
sources of 82–6
corporate resellers 448 Daar, C. 621–38
corporate social responsibility, and ITC e- DaimlerChrysler 197
Choupal 495–512 Data Catalog and Data Feeds 550
corporate-level strategy 8 database-based workflow systems 227
cost leadership 108–10 David, G. 455
vs differentiation strategies 117–18 Davis, G. 212
costs DC (District of Columbia) 543–60
at Tesco.com 366 IT initiatives before Kundra’s appointment
and VPF 177–80 546–7
Cowen, N. 249, 250 key accomplishments of government
Cox, T. 224 of 555
crash stage 11, 12, 18–23 ‘One Card’ system 551–2
creating shared value (CSV) 54 see also Kundra, Vivek
creativity 318–20 DCpedia 552
approach to 321–2 de-averaging of competitive advantage 207
barriers to 321 deconstruction, limitations of 207
triggers for 320 defending in disruptive innovation 140
credit card fraud 308 Deighton, J. 608–20
critical success factors 107 DeLacy, B.J. 454–68
cross-industry inspiration 326 Dell Computers 86–7, 197, 221
crowdfunding 621–38 customisation 251
business models 626–8 disruptive technologies 136, 139
and crowdfrauding issue 632 integration of supply 197, 201–2
case studies 636–8 richness and reach trade-off 245
example of platforms 635 strategy options 108, 112, 117, 118
history 623 supply chains 221
industry analysis of 625–6 Della Valle, V. 461
and MMC 630, 631–2, 634 Dembosky, A. 241, 254
crowdsourcing 622–5 demographic segmentation of markets 71
contemporary examples of 624–5 denial of service 308
history 623 DeSalvo, B. 563
and TopCoder 469–85 Di Francesco, G. 462, 466
Crowther, A. 561, 564–5, 567, 569, 570, Di Maio, A. 556, 559
574–5 Diedrich, H. 586
Csikszentmihalyi, M. 319 different assumptions and new value
culture of unbundling 210 creation 159
Currah, A. 249, 250 differentiation 198
customer acquisition 246–7 strategies 111–13
customer extension 247 in value chains 86
customer power, social CRM mirrors rise in vs cost-leadership 117–18
249–50 digital advertising 93–4
Customer Relationship Management (CRM) 89 digital books 140–2
720

Index
digital democracy, and Kundra 548–9, 555 mission of business 300–3

direct competition at IBX 435–6 objectives 302–3
direct network effects and early mover organisational structure 202–5, 309
advantages 168 partners in 309
discovery on Web 2.0 240 and physical world strategy 311–12
disruptive circumstances of disruptive privacy concerns 305–9
innovation 130 revenue structure 310–11
disruptive innovation 130–48 security risks 306–9
dealing with 139–43 separating from offline business 203–4
efficient reaction to 143–8 systematic approach to 35–8
failure, reasons for 135 value offered 303–4
as good for business 136–7 e-business capability model 85, 99
threat of 138–9 e-business models 117–18
understanding 130–5 e-business specific concepts 333
disruptiveness to competitors 138–9 e-Cabinet in Estonia 524–5
distribution activities 96 e-commerce 4
distribution channels, conflicts between 212–15 mobility of 267–77
District of Columbia see DC e-Customer Relationship Management
Donald, L. 57–8 (e-CRM) 246–7
Donner, J. 673 e-Democracy in Estonia 525
dot.com bubble, bursting of 443–4 e-Diets.com 95
DoubleClick 46 e-gaming 43–4
downstream value chain partners 98 e-governance
Duarte, M. 212 and Kundra’s initiatives at DC 548–9,
Ducati 215 555, 557
case study 340, 389–402 US federal 558
business strategy 391–4 e-government in Estonia
company overview 389–90 building 515–17
value networks 395–402 ID cards 519–22
Dunthorne, J. 141 infrastructure for 517–22
Durandetto, W. 400 e-taxation in Estonia 527
e-voting in Estonia 525–6
e*Logistics at Otis Elevator 461–8 early movers
e-banking 375–7 advantages 160–9
e-books 140–2, 156, 206 disadvantages 170
prices 45 Eastman, G. 144
e-business EasyJet 108, 121, 122, 123
case studies 324–6 eBay 200, 201, 206–7
challenges to 34–5 economic environment 46
channel conflict matrix 213–15 economics of unbundling 210
core competencies in 80–6 economies of scale 86
cost structure 310 difficulty to achieve 201–2
customer segments of 305 as strategy option 108–10
definition 4 economies of scope 110–11
e-banking as 376–8 Edgecliffe-Johnson, A. 21, 45, 206
ethical issues 305–9 EDI 14–15
evolution of 9–28 Edison, T. 319
gaming on 43–4 education
grass roots of 14 ITC e-Choupal and primary 503–5
integration with offline business 204–5 and Kundra 550–1
market segmentation in 67–70 and Tunisian ICT 534–5, 541
721

Index
efficiency 82, 118 and competitive discount 190–1

efficient performers as managers 322–3 and VPF 182–3
Eisner, A. 157 wireless technologies in 283
El Materi, S. 693–4 fixed costs 54, 55
El-Ghazala (Tunisia) 536 flexibility of e-business organisations 203
Elop, S. 64, 65 focus of e-business organisations 203
emotional appeal and value creation 158 Foster, R. 136
encyclopaedias free rider effects and early mover
German market for 598–9 disadvantages 171
see also Brockhaus frenzy stage 10, 12
Endara, F. 424–40 Fry, A. 320
Enders, A. 373–88, 597 Fui-Hoon Ha, F. 289
Enoki, K. 655 full market coverage 74–5
entrepreneurial culture of e-business Fuller, J. 214
organisations 203 functional appeal and value creation 158
Equity Bank 684 fundamental economic concepts 334
Estonian government (case study) 346–7,
513–29 Gabriel, S. 642, 643
background 514–15 Gadowski, L. 577–96
challenges 528–9 Galanxhi-Janaqi, H. 289
e-government Gap 285
building 515–17 Gartner 221
infrastructure for 517–22 Garvin, David A. 469–85
public sector 524–7 Gasper, J. 475, 476, 478, 483
security and privacy 527–8 Gelles, D. 45, 93–4, 165–7, 205–6
virtual office 522–4 generic strategic concepts 333–4
Evans, P. 244 Genpact 208
Everest 208 geographic segmentation of markets 71
excess capacity 55 German board system 708
exchanges 223, 224 Gilbert, C. 148
Expedia 214 Giloth, J. 97
Ginsberg, M. 165, 166, 167
Facebook 17, 94, 275–6 Giorgini, G. 399
acquisition of Instagram 59, 60 Giraud, H. 97
and advertising 119, 241 Gjerulfsen, O. 292
green initiatives 49–50 Gladwell, M. 255
mobile users 280 Glassman, Y. 413, 420
new marketing tools 241 Global Fund 641–2
and retailers 273 Glynn, T. 208–9
teams up with Vodafone 72 Golder, P. 161
and Yahoo! 200 Goldman, M. 629
factor costs 111 Gomes, S. 261
Fanning, S. 611 Goodman, K. 253
Farhat, T. 696 Google 46, 59
Faulkner, M. 638 acquisition of Motorola Mobility 65
fear of failure 321 Android operating platform 61, 65
financial performance, link to IT 84–5 and augmented reality 291–2
First Direct 249 innovation 135
first-mover advantages 161, 168–9 launching of Knowledge Graph 163
Fisher, G. 145, 146 mission of 301
five forces framework 51–61 mobile revenues 280
722

Index
personalisation of searches 75 homogeneity on Web 2.0 242

purchase of BeatThatQuote.com 61–2 Horgan, T. 471
Google Apps 551 HSBC 250
Google Goggles 291 HUB+ 571
Gori, C. 623 Hughes, J. 469–72, 478, 485
Gorostiza, J. 441 human resource management
Gorton, M. 410 in value chains 88
government as supplier/provider 69–70 and wireless technologies 277–8
Grainger 224–5 Hungenberg, H. 35, 43, 81, 129, 597
Granseyer, U. 597, 602–3, 607 on competitive advantage 107, 108
Grant, M. 58 on strategy options 116
green initiatives, Facebook 49–50 hybrid cloud 494
Groupon 17 hyper-real, and u-commerce 290
growth rate of industry 55
growth strategies IBX (Northern Europe, case study) 341–2, 424–40
in e-banking 388 business model 430–2, 433–4
at Tesco.com 358 expanding 438–9
Gupta, A. 556 competition 436–7
e-platforms 424–7
hacking 307 history of 427–30
Hagel, J. 210, 211 horizontal platforms 425
Hallqvist, C. 427 revenue model 432
Hamel, G. 144 success factors 436–8
Harald, B. 373–88 transaction volume 433
hard customisation 252 vertical platforms 425
Harkin, F. 51 ICT (information and communication
Harley-Davidson (case study) 340, 389–402 technologies) 56
business strategy 394–5 as an enabler for socio-economic
company overview 390–1 development 671–2
value networks 396–7, 400–1, 402 Kenyan market 686–7
Hart, J. 51 in Tunisia 530–42
Hartford, T. 201 ICT4ALL Forum 540
harvesting in disruptive innovation 139–40 imitation, barriers to 128–30
Hayakawa, T. 657, 659 inbound logistics, in value chains 86–7
health-care delivery, in US 404–6 Indiegogo 637
Heffan, I. 480 indirect competition at IBX (Northern Europe)
Hein, C. 642 436–7
Heineken, and crowdsourcing 624 indirect network effects and early mover
Henderson, B. 7, 327–8 advantages 168
Heuskel, D. 197 industry
Heuss, T. 599 defining 67
Hewlett Packard 144 market segmentation in 67–72
Hexabyte 700 targeting markets in 73–5
Hill, A. 54 industry analysis tools 66
Hill, S. 141 industry rivalry 282
HIPAA (Health Insurance Portability and Ac- information activities 92–4
countability Act) 408–9 information asymmetry 200–1
Hisa, T.L. 132 information and communication technologies
Hoffman, J. 286 see ICT
Holoch, K. 606–7 information confidentiality in ‘make-or-buy’
Home Depot 204 decisions 199
723

Index
information, shared, and integration with offline Ito, Y. 460

business 204 Iyer, B. 486–94
information technology see IT
information-sharing 238–9 Jacobs, R. 122–3
infrastructure Jarman, M. 418
management and unbundling 207 JC Penney 273, 285, 286
in value chains 88–9 Jelassi, T. 90, 389–402, 530–42, 670–89
and wireless technologies 278 Jobs, S. 45, 156, 613
infrastructure equipment vendors 208 Johnson, G. 6
Instagram 59, 60 joint development 62
insurance, and ITC e-Choupal 510–11 joint lobbying 62
intellectual property protection 57 joint technological standard setting 62
and TopCoder 480 Jones, P. 140
interactivity, as richness 243 Jopson, B. 157, 161
internal production in ‘make-or-buy’ Joseph, M. 670, 671, 680, 682, 684, 685, 686
decisions 197 Jowett, M. 615
internet
crash 18–20 Käärik, A. 528
rise of 16–17 Kahler, P. 563
and social commerce 233–42 Kahora, A. 674
internet business models, implications of Web Kaplan, S. 223
2.0 for 234–40 Karugu, W. 686
internet dating 165–7 Kato, Y. 653, 662, 666, 668
internet function in mobile e-commerce 270 Kearney, A.T. 537
intra-industry benchmarking 326 Keedy, J. 226
inverted U-curve 212 Keifer, Steve 15
irruption stage 9, 10, 12 Kemmerich, W. 715
iShare 562–3 Kickstarter 636–7
Islam, N. 667 Kim, C. 154, 155
IT (information technology) Kisan Credit Card (KCC) 509
enablers 268 Kiva 636
link to financial performance 84–5 Klaveren, G. van 122
outsourcing of 208–9 Kleinhückelskoten, H.-D. 715
IT consultancies 448 Knauss, J. 715
ITC e-Choupal (case study) 345–6, 495–512 Knight Foundation 555
birth of 497–500 knowledge-based economy, and qualified human
business rationale 497–9 capital 534–6
challenges 511–12 knowledge management, and Booz & Company
corporate social behaviour at 503–8 561–76
financial product marketing 509–11 Knowledge On-Line 562
healthcare services through 505–8 knowledge sharing, and Booz & Company
history of ITC 496–7 563–72
IBD processing centre (Choupal Saagar) Kobe, G. 439
502–3 Kodak 143, 144–6
impact of 508–11 Koitmäe, A. 526
list of awards 500 König, Andreas 597
primary education through 503–5 Korkeela, M. 386
sanchalak 502 Kornfeld, L. 608–20
social benefits 501 Kotler, P. 70
website 501–2 KPMG 43
and women’s empowerment 505 Kraft Foods 221
724

Index
Krebs, S. 706, 710–11, 714, 715 London, S. 136–7

Kreissig, B. 597, 602, 603, 604–5 long tail concept 256–9
Kremen, G. 166 long-term contracts in ‘make-or-buy’
Kreutzer, M. 561–76 decisions 197
Kundra, Vivek 348, 543–60 Ludwig, S. 670–89
adoption of emerging technologies at DC 549–53 Lugger, V. 621–38
background 545 Lulu 259–60
creation of stock market model for evaluating Lydon, M. 473, 485
projects 549 Lynch, M. 292
introduction of digital democracy 548–9, 555
launching of Apps for Democracy contest m-commerce 51
553–4 M-KESHO 684
new role as Federal CIO 557–9 M-PESA (Kenya) (case study) 354–5, 670–89
results of IT initiatives 554–7 adapting distribution approach 682
Kuroda, S. 662 as an inclusive business model application 671
background 672–3
Lageson, P. 424–40 change of usage pattern 680–2
Lakhani, K.R. 469–85 communication approach 679
Land, E. 321–2 development and roll-out 675–80
Landend.com 94 distribution 677
Langenscheidt, F. 603 expanding service capabilities 679–80
LaPerle, B. 145 future 685–6
Lara Bohinc 18 international expansion 683–4
Lardinois, F. 163 pricing strategy 677–9
Last.fm 614 sustaining lead 682–3
Laufer, R. 403–23 tackling unmet needs in Kenya 673–4
law of the few 255 today 684–5
Law, N. 93 McBride, T. 615, 616, 617, 618, 619
Lawrenz, O. 426 McFarlan, F.W. 454–68
Leahy, T. 358 Macgillivracy, A. 75
leapfrogging in disruptive innovation 143 McLachlan, S. 615–16, 617–18
learning effects 111 MacLaurin, Lord 357
and early mover advantages 160 Maclean, Lewis 15
Leenan, S. 389–402 McQueen, D. 72
legal environment 42–6 macro-environmental trends 42–51
Lego 292 Mahmudova, A. 308
Leleux, B. 621–38, 706–16 ‘make-or-buy’ decisions 196–202
Lemer, J. 214 malaria 639–52
Lewnes, A. 93 causes and symptoms 640
Libya 705 economic burden of 640
Lieb, R. 241 fight against 640–2
limitations of mobile e-commerce 276–7 see also SMS for Life
linkages in ‘make-or-buy’ decisions 198 malicious code in e-business 307
LinkedIn 307–8 Malmsten, E. 17, 18
Liu, L. 85 Mann, A. 371
Live Nation 613 Manthey, D. 224, 225
localisation of mobile e-commerce 274–5 manufacturing inputs 222
lock-in 83, 118 Marchand, Donald A. 639
logistics in value chains Marciano, A. 629
inbound 86–7 market segmentation 67–72
outbound 87 market specialisation 74
725

Index
market transactions in ‘make-or-buy’ mobile banking 380–1

decisions 197 mobile communication 271
market uncertainty 170 and NTT DoCoMo 653–69
market-based view of strategy 91 mobile customer relationship
marketing management 272
of mobile banking (Nordea) 382–5 mobile device manufacturers 268
and u-commerce 289–91 mobile e-commerce 4–5
in value chains 97 business services 272, 274
and wireless technologies 281 consumer services 271–2
Marshall, K. 371 critical success factors for 269–70
Marvet, P. 526 distinguishing features 267
Marx, K. 583, 585, 590, 595 main challenges 283–6
Marzouk, M. 694 online trust 283–4
mass-customisation 251–2 and retailers 285–6
MASTER approach 247–8 segmenting 270–1
Match.com 165–7 strategy and mobility 277–86
matrix, and u-commerce 290–1 and usability 284–5
Mattel, and supply chain management 229 value network 267–9
maturity stage 11 and wired e-commerce 274–8
Mauborgne, R. 154, 155 mobile entertainment 271
Mauch, S. 357–72 mobile financial services, and M-PESA
mavens 255 (Kenya) 670–89
maverick spend in online purchasing 220 mobile information 271
Maxwell, R. 599 mobile marketing 714–15
Mayzlin, Dina 201 and 12Snap 706–16
Medfuion 409–10 mobile network operators 267–8, 269
media-sharing 239 mobile phones 672
Meeker, M. 18, 23 mobile shopping 51
Mercedes-Benz 155 mobile supply chain management 272
Meri, L. 515 mobile transactions 271–2
Merkel, R. 225 mobile virtual network operator
Message, B. 619 (MVNO) 268
messaging function in mobile e-commerce 270 mobile wallet technology 51
Mestiri, H. 696 mobile workforce services 272
Michael, B. 706, 710, 711, 715 Moncef, A. 639–52
Microsoft 46, 59, 128, 134, 268 Moore, K. 479, 480
and Nokia 64–5 Morawczynski, Olga 685
war with Brockhaus 602–5 Morris, M. 484
Migicovsky, E. 636–7 motivation, and TopCoder members 476–8
migrating in disruptive innovation 139 Motorola Mobility 65
Millennium Development Goals 504, 641 MRO hubs 223
Milles, A. 587–8 Muck, J. 597–607
Minitel 14 Mühlfriedel, B. 711
Minoli, F. 389, 392 Müller-Veerse, F. 271, 272
MinuteClinic 411 Murdoch, R. 238
MMC (MyMajorCompany) 358, 621–38 Murray, A. 286
business model 630–2 Murray, L. 51
and crowdfunding 630, 631–2, 634 music industry 608–13
genesis of 628–30 digital 613–15
and Licia Chery 632–4 royalty streams in 609–11
mobile advertising 60, 273, 280–1, 714 sales by format 612
726

Index
tools to introduce new artists to music fans competition 386–7

613–14 growth 387–8
see also Nettwerk marketing 382–3
Mwafongo, W. 645 pricing 383–4
Mwakyusa, D. 652 sustaining its lead 376–7
Mwangi, J. 684 and competitive advantage 107
Mwita, A. 645, 652 integration with offline business 213–14
Mykea 252 mission of 300
MyMajorCompany see MMC new market spaces 155
MyMicroInvest 638 North Face 273
MySpace 238, 616–17 Novartis 641, 642–52
see also SMS for Life
Nackamura, M. 662, 663, 665, 666 novelty 83, 118
Napster 611, 613 novices, as managers 300
Narducci, G. 396 Noyes, E. 486–94
Nartey, P. 569, 570–1 NTT DoCoMo
NASDAQ 12 case study 253–4, 653–9
natural environment 47–50 alliances 666–7
NCR 131 communication technologies 654
Nduati, S.M. 674 company background 653
negative linear correlation 212 infrastructure 657–8
Nehru, J.L. 505 mergers within 665–7
Nenninger, M. 426 mobile phones 659–61
NeoMedia 710 new challenges 661–5
Nestlé 54, 197, 221 research and development 667–8
Netscape 22–5, 128 wireless internet services 654–7
Nettwerk (case study) 351–2, 608–20 mission of 302
background and history 615–16 nurse practitioners (NPs) 410
and cause-related marketing 617–18
Polyphonic venture 618–20 Obama, B. 557
shifts focus to digital 616–18 OCTO (Office of the Chief Technology Officer)
network effects 544, 546, 547, 550, 552, 553, 556, 557
and early mover advantages 168–9 Ofek, E. 403–23
and tipping point 255 offerings and new value creation 159
network infrastructure of Web 2.0 234–5 Ohboshi, K. 653, 655
Neville-Rolfe, L. 359 Ojuland, K. 525, 528
new market spaces 153–4 Old Spice 253
News Corp 238 Olsen, K. 321
Newton, O. 292 O’Marah, K. 228
nexus, and u-commerce 291 online gambling 43–4
Nike 197, 252 online interaction activities 92–6
Nokia 268 communication 94–5
and Microsoft 64–5 distribution 96
Nokia Siemens Networks 97 information 92–4
non-served customers 138 transaction 96
non-strategic service partners 98 online music-sharing 59
Nordea 69, 81, 139 online purchasing 219–22
case study 339–40, 373–88 open innovation 100
approach 375–6 operating inputs 222
background 373–5 operational strategy 9
banking channels 378–82 operations in value chains 87
727

Index
opportunity identification capability 86 post-human, and u-commerce 290

Orange 691, 694 power of context 255
Orange Money 683 Prahalad, C.K. 509
Orascom Telecom 693 price reductions in online purchasing 220
order entry on website 227 price/benefit ratio in competitive advantage
O’Reilly, T. 233–4 105–6
organisational risk in online purchasing 220 Priceline.com 16, 19, 20, 117–18
Otis Elevator (case study) 343–4, 454–68 Prislin, P. 706, 710, 711, 714, 715
company background 455 privacy of mobile e-commerce 276–7
competition and marketplace 455–7 private cloud 494
e*Logistics at 461–8 private exchanges 226
information technology at 457 process optimisation in online purchasing 220
service culture at 457–8 Procter & Gamble 197, 221
supply chain 360–1 and supply chain management 228–9
outbound logistics procurement
in value chains 87 at IBX (Northern Europe) 425–7
and wireless technologies 279, 281 integrated systems 227
outpacing strategies 113–15, 251–2 in value chains 88
outsourcing 208–9 and wireless technologies 278, 281
of supply chain operations 97 product differentiation 55
over-served customers 138 product innovation and unbundling 209
product specialisation 73–4
Pakman, D. 619–20 production cost advantage 199
Palmer, M. 58, 292 Project Closed Loop (PCL), Booz & Company
Pandora 614 575–6
parent/subsidiary in ‘make-or-buy’ decisions 197 Promny, M. 441–52
partnerships, developing of 99 Prosper 636
patient-physician interaction, electronic 407–8 proximity to core business 198
Pawar, S. 509 psychographic segmentation of markets 71
Paweskia, M. 475, 476, 484 public cloud 494
Paypal 118 public e-markets 225
peer review process, and TopCoder 480 Purkayastha, Debapratim 543–60
Pepsi, and QR codes 292 Püüa, M. 516, 522, 523, 525, 528, 529
perceived use value 176
at Sony BMG 185–6, 190 QR codes 292
Pérez, A. 144 quality and perceived use value at Sony 185
Perez, C. 9, 10 Qumer, S.M. 543–60
Perez, N. 208
Persang, M. 597–607 Raghavan, J. 58
personalisation of mobile e-commerce 276 Raie, S. 524
Peters, T. 136 Rajas, P. 510
Petersen, M. 579 Raynor, M. 134
Phaneuf, D. 567–8 reach of Web 2.0 243–5, 252–9
phishing 307 Reback, B. 241
Piller, E. 251 Red Hat 259–60
Plummer, D. 209 RediClinic 411
political environment 42–5 Rees, E. 141
portal providers 268–9 RelayHealth 409
Porter, M. 42, 52, 53–4, 66, 427 reputation
on strategy options 107, 113, 120 and early mover advantages 160, 162
on VPF 177, 181, 182, 189 as strategy option 113, 120
728

Index
Research in Motion 221 Schlauch, R. 579

resource-based view of strategy 91 Schmidheiny, S. 621–38, 706–16
resources Schmidt, E. 75
as core competencies 81 Schoenberg, I. and R. 403, 411–12, 413, 416–18,
and new value creation 159 421, 423
retailers security of mobile e-commerce 276–7
and mobile e-commerce 285–6 Seedups 638
use of smartphones 273–4 selective specialisation 73
retention, and TopCoder 483 Seligman, Philip M. 415
revenue generation models 118 seller ratings 201
IBX (Northern Europe) 432 Sephora 273
Reynolds, J. 322 service
richness of Web 2.0 243–4, 245–54 in value chains 86
right answer syndrome 321 and wireless technologies 281
Rits, K. 513 service modernization programs 547
Roberts, D. 364 Serwood, B. 43–4
Robinson, S. 306–71 Shazam 614
Rodriguez, F. 117 Shih, W. 145
Rodriguez, L. 443, 450–1, 452, 453 Shopsavvy 273
Roll Back Malaria (RBM) Partnership 641 Siala, U. 705
Royal Haskoning 208 Silverman, S. 273, 286
Russella, D. 413 Simms, A. 358
Ryan, J. 224–5 Singer, M. 210, 211
Ryanair 122 single segment concentration 73
Sivakumar, S. 495–6, 498, 499, 501, 504,
Safaricom 670 509, 512
history 686 Skype 46
and M-KESHO 684 Slacker 614
see also M-PESA smartphones 72, 714
sales revenue-based model 118 use of by retailers 273–4
salesmen 255 Smith, D. 479
Sánchez, D. 117 SMS for Life (case study) 353, 639–52
Sandberg, S. 241 background and genesis 642–7
Sanduli, F. 117 design of project and pilot preparation
Satec (Spain) case study 342–3, 441–53 645–51
business model 444–5 finding corporate partners 644–5
company overview 442 post-pilot strategies 652
and competition 446–7 results of pilot 651–2
expansion 444 social bookmarking 239
future outlook 453 social commerce and internet 233–42
international expansion 452 social environment 46–7
IT market positioning 447–9 social media 84, 93, 94
key milestones 442–3 social networking sites 348–50
mission and values 451–2 long tail of 256–9
new market exploration 452–3 social networks 48–9
organisational change 450–1 and advertising 240
sourcing diversification 445–6 business impact of 239–40
threat of backward integration 447 socio-economic development, ICT as an enabler
Sawhney, M. 223 for 671–2
Saxe, T. 457 soft customisation 252
Schewikart, M. 597–607 software capabilities of Web 2.0 235
729

Index
software-as-a-service (SAS) 487 strategy, as concept 6–9

Somera, T. 515 strategy options for e-business 107–24
Sony 144 alternative strategies 115–16
Sony BMG (Germany) consistency 120–2
and VPF 183–92 cost leadership 108–11
business context 184 differentiation strategies 111–13
competitive discount 190–1 optimisation 123–4
value capture 188–90 outpacing strategies 111–13
value creation 184–7 reinforcement of activities 123
sourcing 222–3 at Tesco.com 358
Sozeug 585–6 and value chain 120–4
specialised know-how in ‘make-or-buy’ strategy of startups 132–3
decisions 202 strengths-weaknesses-opportunities-threats
speed and perceived use value at Sony 186 (SWOT) matrix 37
Spiess, M. 578 subscription-based model 118
Spiraç, C. 394, 400, 402 substitute industries and new market spaces 154–5
spoofing 308 substitute products 59
Sportingbet 43–4 and wireless technologies 283
spot sourcing 223 Sugai, P. 659
Spotify 614 Sullivan, D. 75
Spreadshirt.com 157, 207 Summary Reports 550
case study 349–50, 577–96 Sun Microsystems 268
business areas 580, 581 supplier resistance in online purchasing 220
company background 577–8 suppliers’ bargaining powers 59–61
competitive advantage 590–3 supply chain management 221–2
DDS 585 as a strategic discipline 228–9
diversification strategy 591 top companies in 228–9
foundation 578 supply chain operations, outsourcing of 97
organization 586–9 supply chains 221–2
people 589–90 sustaining circumstances of disruptive
processes and systems 590–1 innovation 130–1
Sozeug 585–6 switching costs 57
mission of 301 and early mover advantages 162–8
Spreadshirt.net 581–5 switching in disruptive innovation 143
Starbucks 221 Symbian 268
startups, strategy for 132–3 synergy stage 11, 12, 22–7
Steffen, J. 123, 571 system acceptance and use capability 86
Steinbeck, D. 279 system development capability 86
Stesekotovits, M. 513–29 system integrators 448–9
Stewart, Thomas A. 562, 570, 574–5 systematic sourcing 222–3
stickiness factor 255 Szent-Gyorgyi, A. 322
stock market model, and Kundra 549
Stoddard, D.B. 456 Take Care Clinics 411
Stokes, C. 618 Tallo, I. 517
straddling in disruptive innovation 140 Tangherlini, D. 552
strategic core value chain partner 98 target market 117
strategic focus and new value creation 159 Tata Consultancy Services (TCS) 208
strategic groups and new market Taylor, P. 84–5, 97, 250, 308
spaces 155 technological environment 50
strategic management and VPF 181–3 technological uncertainty and early mover
strategic relevance 55 disadvantages 170
730

Index
technology adoption capability 86 future 484–5

technology development game plan 473, 474
in value chains 88 growth and competition 473, 475
and wireless technologies 278 managing of 481–4
technology parks, Tunisian ICT 535–6 motivation of members 476–8
technology risk in online purchasing 220 profiles and ratings 475–6
Teerkink, R. 402 TopCoder Direct 484
TelaDoc 410 Toyota 113, 155
Tellis, G. 161 trade-offs 35
Tesco 15 TrainPost 538
and TNP Post 99 transaction activities 96
Tesco Direct 198, 202 transaction costs in ‘make-or-buy’ decisions
launch of 366–71 199–201
Tesco.com 49, 198 transcension marketing, and u-commerce 289
case study 338–9, 357–72 transparency in online purchasing 220
business model 363–6 Trudeau, L. 559
clubcard 371 trust 56
competition 359 mobile e-commerce and online 283–4
costs 366 Tsipolitis, G. 481
grocery shopping 360–3 Tunis Telecom City 538–9
history 357–8 Tunisia 690–1
non-food sales 366–71 fixed telecom market size and share 703
competencies 87 Jasmine Revolution 691
customisation 251 map of 698
integration with offline business 204 mobile telecom market size 702
‘make-or-buy’ decisions 309 telecom industry 691–2
strategy options 110, 112, 114 TV landscape 704
Thomas, D. 47 Tunisian ICT (case study) 347, 530–42
Thomas-Graham, P. 213 aims 530
Thombre, A. 165–6, 167 challenges 539–41
3G, and Tunisiana 694–5 contribution of ICT to growth and
3M 221 competitiveness 531
threshold features of competitive advantage creating a digital culture nationwide 531–4
106–7 cyber-security strategy 533
Thunnell, L. 430 and education 534–5, 541
Tielebier-Langenscheidt, E. 599 future perspectives 541
Time Warner 196 ICT infrastructure 533–4
timing lessons learnt 541–2
and market entry 159–69 national programme for (2009-14) 542
and value creation 158 qualified human capital and the building of a
‘tipping point’ concept 255–6 knowledge-based economy 534–6
TNT Post 99 scientific research and innovation 535
Tohamy, N. 229 technology parks 535–6
TomTom 624–5 value-added ICT services 536–9
TopCoder (case study) 344, 469–85 Tunisiana (case study) 355–6, 690–705
background and current operations 471–3 and 3G 694–5
clients perspective 478–81 background and history 690–3
competition model 472–3 content services 697
concerns and challenges 480–1 enterprise services 697
consulting model 472 international expansion 697–8
evolution of community 473–81 new opportunities 697–8
731

Index
P&L Statement 701 virtual 89–92

shareholders and governance at 693–4 in wireless technologies 278–81
way forward 696–8 value co-creation 100
Tunisie Telecom 699 value creation 9, 118
Tunisie TradeNet (TTN) 538 and new market spaces 154–8
12Snap (case study) 356, 706–16 in Sony BMG (Germany) 184–7
award-winning campaigns 712–13, 716 and VPF 175–7, 180
beginnings 706–8 value creation in e-business, sources of 82–6
bringing in new executive talent 710–11 value curve 154
business model 707, 709 value evaluation capability 86
challenges 711, 714 value net framework 62–3
consolidation and realignment of value network in e-business 99–100
strategy 715 value networks 96–100
streamlining 711 Ducati 395–402
Harley-Davidson 397–8, 400–1, 402
u-commerce 286–92 value-process framework (VPF) 175–80
definitions 287 capturing value 177–80
main features of 287–8 creating value 176–8, 180
types of and new forms of marketing 289–91 and Sony BMG (Germany) 183–91
and ubiquity 288 and strategic management 181–3
and uniqueness 288 Varshney, U. 275
and unison 288 Vaughan, P. 684
and universality 288 Venezia, P. 543
ubiquity, and u-commerce 288 Venkatesh, V. 284
ubiquity of mobile e-commerce 274 venture capital for e-business 203
UK online economy, value of 47 Vertmann, T. 525
Ullman, M. 285 Vetter, R. 275
unbundling, of corporations over Viik, L. 517
internet 208–11 viral growth 254–5
Unilever, and crowdsourcing 624 virtual value chains 89–92
unique core competencies 82 Ducati 395–402
uniqueness, and u-commerce 288 Harley-Davidson 397–8, 400–1, 402
unison, and u-commerce 288 visionaries as managers 323
universality, and u-commerce 288 Vodafone 47
unlimited choice and demand 261 and M-PESA 672, 683
unrelated industries and value creation 158 teams up with Facebook 72
upstream value chain partners 98 voice function in mobile e-commerce 270
Urbi 54 Vorstand 708
usability, and mobile e-commerce 284–5
Wade-Gery, L. 357–72
valuable core competencies 81, 82 Wal-Mart 109, 117, 120, 273, 285
value added resellers 448 Wales, J. 605
value capture and VPF 177–80 Waters, R. 22–5, 60, 64–5, 75
at Sony BMG 188–90 Waterstone’s 205
value chain integrators 98 Watkins, M. 61–2
value chain(s) Watson, R.T. 287
deconstruction of 206–7 Web 2.0
internet-impacted 86–9 advent of 233–5
partners 98 and business-customer mindset 234
and strategy options 120–3 definition 234
at Tesco.com 368 four factors model 237
732

Index
implications for Internet business Wisniewski, C. 307

models 235–40 Wolfe, G.R. 454
and Kundra 549–50 Wolfe, T. 454
main guiding principles of applications women’s empowerment, and ITC e-Choupal 505
of 236–8 World Summit on the Information Society (WSIS)
reach 243–4, 252–9 530, 537
richness 243–4, 245–50 Wu, J.-H. 132, 478
services 238–9 Wu, J.-N. 85
and social CRM 247 Wurster, T. 244
user behaviour 240–2
Webster, E. 213 Xing 238, 240
Webvan 21–2, 110
Weg, S. 706–16 Yahoo!, and Facebook 200
Weinstein, G. 487–9 yield managers 224
Weitzman, H. 225 Young, R. 259–61
Whitman, M. 25 YouTube 87, 239, 242
Whitmore, K. 145 and Kundra 551
WikiLoot 625
Wikipedia 350–1, 605–7 Zahzah, E. 573
Wikis 238 Zain 682
Wilkinson, C. 140–2 Ziegler, R. 642, 643
Willey, C. 557 Zopa 636
Willoughby, J. 19 Zott, C. 83, 118
Wilson, J. 623 Zynga 58, 60
wireless technologies 277–81
733

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Taw f i k J E l a s s i

StrategieS for e-BuSineSS

A01_JELA7870_03_SE_FM.indd 1 10/03/14 3:44 PM

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Strategies for e-Business

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First published 2005 (print)

the print publication is protected by copyright. prior to any prohibited reproduction,

the screenshots in this book are reprinted by permission of Microsoft Corporation.

IsBn: 978-0-273-75787-0 (print)

British Library Cataloguing-in-Publication Data

print edition typeset in 9.5/12.5 Charter ItC std by 73

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14 Building e-business competence through concepts and cases 317

a guide to the main focus of the case studies 337

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Chapter 1 Key terminology and evolution of e-business 3

1.1.4 the concept of strategy 6

1.2.2 the rise of the Internet 16

1.2.3 the crash 18

FT article Webvan’s billion-dollar mistake 21

1.2.4 the synergy phase 22

Blog box Google acquires Internet (May 2017) 27

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Part 2 The e-business strategy framework

Chapter 2 Overview of the e-business strategy framework 33

Chapter 3 External analysis: the impact of the Internet on the macro-

FT article publishers sued over e-book price ‘collusion’ 45

3.1.2 the economic environment 46

3.1.4 the natural environment 47

FT article a social network links our personal and office lives 48

Blog box How Facebook got its green back 49

3.1.5 the technological environment 50

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FT article trying on the future 51

3.2 Examining industry structure with the five forces framework 51

3.2.1 Industry rivalry 54

3.2.3 substitute products 59

FT article Google buys UK price comparison website for £37.7m 61

FT article nokia and Microsoft talk up benefits of co-dependence 64

Critical perspective 3.1 Benefits and drawbacks of industry analysis tools 66

3.4 Defining industries, segmenting markets and targeting markets in e-business 67

FT article: Vodafone and Facebook team up on smartphone 72

3.4.3 targeting specific markets in an industry 73

FT article Google searches to become personalised 75

Chapter 4 Internal analysis: e-business competencies as sources

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FT article It linked to financial performance 84

4.2 Analysing the Internet-impacted value chain 86

4.4.2 Communication activities 95

Blog box Moving back to personalised interaction – e-diets.com 95

4.4.3 transaction activities 96

Chapter 5 Strategy options in e-business markets 104

Chapter at a glance 104

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Blog box easyJet – setting up an organisation for a low-cost strategy 121

FT article airlines ditch simple model for complexity 122

5.4.2 Reinforcement of activities 123

Chapter 6 Sustaining a competitive advantage over time 127

Chapter at a glance 127

6.2.2 discovering the underlying reasons for incumbents’ failure 135

FT article Why disruption can be good for business 136