Sept. 11, 2000

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Upstarts Alter The Rules

Businesses are becoming sectorless

By Howard A. Rubin

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he new challenges for IT are being shaped by discontinuities in the world of business. Upstarts of the New Economy--whether their business is based on clicks, bricks, or a hybrid of the two--are changing the rules.

These companies' business practices, performance, and market valuation defy the conventional laws of business gravity rooted in the Industrial and Information Ages. They have broken through the barriers of being associated with a particular sector or industry, they have invented or reinvented their business, and a few have reinvented the concept of a business sector. In fact, these companies are sectorless.

The way these companies think and operate is so different from traditional business models that their performance can't be measured using traditional methods. No longer can value be judged through scorecards of financial performance, customer satisfaction, and internal process efficiency.

Successful companies today compete as what might be called competitive communities, or E-communities. An E-community is a network of business entities created with a common purpose. Thinking in network terms will give you a better understanding of the enterprise and its competitive position in the New Economy.

Amazon.com Inc. is a classic example of the way businesses redefine themselves beyond sector bounds through their interactions and relationships. Amazon.com's ability to leap between sectors has been underlined by its recent toy-retailing deal with Toys "R" Us Inc.

Look beyond the Amazon.com folklore of personalization, customer-relationship management, and other innovations to the company's network structure. In place of the conventional hierarchical company model, Amazon.com operates as a much flatter E-community structure with three basic divisions: core business (such as books and music), international, and early-stage businesses. This structure allows greater sharing between the E-retailer's various components and alliances as well as greater business responsiveness overall.

Sharing content and distribution directly among the nodes in the network is far more efficient, effective, and responsive than the conventional top-down business model. E-communities develop the ability to quickly push large amounts of investment and revenue between nodes. In contrast, practically all product and communication in a traditional, hierarchical business has to be pushed up and down a hierarchy of stakeholders and lines of business. This both slows responsiveness and insulates many units from interaction with the outside world.

In the network model, the nodes have a high degree of autonomy. Every node can interact directly with the marketplace--customers and suppliers--and pass along information gained from the market directly to anywhere in the network. The nodes, therefore, form a sensitive business skin--a surface that is stimulated by and responds to the market in real time, enabled by the technology of the Internet.

The nodes act as binding points for alliances, mergers, and ventures. These result in a high degree of marketplace responsiveness and let companies seek opportunities. The company can rapidly add new nodes to the network without the whole structure collapsing.

The power of Amazon.com and the lessons to be learned are in its structure and its reach across sectors. Believe it or not, the bastions of the Industrial Age--companies such as General Motors Corp. and Ford Motor Co.--compete as E-communities. Their structures are more Amazonlike than the hierarchies of old industries. These automakers earn much of their profit from financing rather than selling new cars. Their manufacturing units have been forced to almost halve development time to compete with Japanese carmakers. Their finance arms operate like banks, reacting independently to daily changes in financial markets.

Interestingly enough, older media and entertainment companies, which are under attack from Internet Age technology, exhibit hierarchical characteristics that likely make them far less agile. Sony, for example, resembles a jellyfish, with many dangling tentacles that represent its subsidiaries and lines of business. In general, these must communicate through the corporate hierarchy. Sony's E-business unit lies at the bottom of one of these tentacles.

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Illustration by Brian Cronin

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