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Value 2.0: eight new rules for creating and capturing value from innovative technologies Matt Porta, Brian House, Lisa Buckley and Amy Blitz Matt Porta is the global leader of IBM’s Technology Strategy Consulting Practice (matt.porta@ us.ibm.com). Brian House is a Senior Consultant in IBM’s Strategy and Change practice in Global Business Services (bhouse@ us.ibm.com). Lisa Buckley is a Managing Consultant in IBM’s Global Business Services (lbuckley@ us.ibm.com). Amy Blitz is the Strategy and Ch
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  Value 2.0: eight new rules for creating andcapturing value from innovativetechnologies Matt Porta, Brian House, Lisa Buckley and Amy Blitz T he Internet, globalization and innovative new technologies are drivingtransformational change, and in doing so, are opening new territories for businessgrowth and competition. Executives need to understand how emerging technologiesareenablingnewstrategiesforvaluecreation – whatwecalltheeightnewrulesofValue2.0.The principal enablers of Value 2.0 are the emerging technologies of Web 2.0, socialcomputing, service-oriented architecture, 3D Internet and virtual worlds. Leading edgebusinesses are using these new technologies to improve performance and to find newopportunities for value creation.Executives have seen clear signals that the rules are changing. Companies like Craigslist,an online classified advertising service, are disrupting industry value chains with innovativebusiness models. Craigslist, which competes with local newspapers in some 450 citiesworldwide, runsawebsitethatserves5billionpageviewsper month andisoneofthetop40most visited sites in the world – all with only 24 employees.[1]In recent years, start-ups have leveraged emerging technologies to change the waycompanies and customers interact, and have developed new business models to supportthesechanges.Akeyquestionforallexecutivesis,‘‘Arethebusinessmodelsorapproachesto value creation of these start-ups applicable to established business?’’The answer is a definite ‘‘yes.’’ Our research on 100 technology start-ups and 40 earlyadopterlargeenterprisesledtotheidentificationofthenewrulesofValue2.0,whichwethenrefined based on insights from technology analysts, IBM business leaders and the venturecapital community. These rules illustrate unique ways in which emerging technologies areenabling new value creation in the enterprise and fall into three broad categories (seeExhibit 1).Of the start-ups and large enterprises we examined, innovative large enterprises tended toexperiment with multiple new rules of Value 2.0, while technology start-ups tended to focuson one to two new rules (see Exhibit 2).Our study of the 140 companies in our sample showed that large enterprises focusedprimarily on Value 2.0 in the context of customer intimacy, solutions and social networking.Start-ups,ontheotherhand,leanedmoretowardexploitinglongtaileconomicsandmeetingunderserved market segments. Both groups, however, had a significant focus on valuecreated by harnessing network intelligence (see Exhibit 3). Capitalizing on new markets and business models The first three new rules focus on expanding into new markets and creating new businessmodels. In essence, they hold the potential to capitalize on emerging market opportunities,develop new revenue streams and grow market share. Now is the time for enterprises to PAGE 10 j STRATEGY & LEADERSHIP j VOL. 36 NO. 4 2008, pp. 10-18, Q Emerald Group Publishing Limited, ISSN 1087-8572 DOI 10.1108/10878570810888713 Matt Porta is the globalleader of IBM’s TechnologyStrategy ConsultingPractice (matt.porta@us.ibm.com). Brian Houseis a Senior Consultant inIBM’s Strategy and Changepractice in Global BusinessServices (bhouse@us.ibm.com). Lisa Buckleyis a Managing Consultant inIBM’s Global BusinessServices (lbuckley@us.ibm.com). Amy Blitz isthe Strategy and ChangeLead for IBM’s Institute forBusiness Value withinGlobal Business Services(ablitz@us.ibm.com).  enter these markets, adjust their business model as necessary, and secure first moveradvantage. Rule #1: Grab and monetize the long tail of demand For many enterprises, managing according to the Pareto principle (or ‘‘80/20 rule’’) is afundamental business axiom. Those companies tend to focus on the roughly 20 percent oftheir customers or product mix that generates 80 percent of their revenue or profit.Executives have long believed that a very broad product selection is not cost effective.Therefore, marketing efforts are geared toward the critical 20 percent of their demand,versus other segments. This cycle is, of course, self-reinforcing. If you only offer limitedproducts and services, people will only buy those. Value 2.0 challenges the 80/20 rule.AsChrisAndersondiscussedinhisbook TheLongTail  ,newtechnologieshaveloweredboththe cost of accessing customers, as well as the cost of offering a much wider selection ofgoods and services.[2] Grabbing and monetizing the long tail of demand, beyond the core20 percent, applies both to startups and large enterprises. For startups, a focus on the longtail of demand in their industries has already proven effective. Threadless, the online T-shirt Exhibit 1Exhibit 2 VOL. 36 NO. 4 2008 j STRATEGY & LEADERSHIP j PAGE 11  company,enablesitscustomerstodesigntheirownshirts,thusofferinganendlessselectionof customized, small-order products.[3]Amazon.com demonstrates that large enterprises can generate real value using this kind ofapproach. For example, Amazon has been able to lower its search costs by leveragingsocial recommendation engines, as well as community marketing effects. The value createdis substantial – nearly 57 percent of Amazon’s book sales are titles that are not stocked in atypical brick-and-mortar store.[4]The enabling technologies behind Amazon’s success are available to all enterprises, andindeed, are starting to change customer expectations and purchase behaviors acrossindustries. Exhibit 3 shows that while less than one-third of large enterprises studied wereexperimenting with value creation based on this rule, nearly one-half of the startups weanalyzed were doing so. Rule #2: Get ready – your customers value digital content Emerging technologies are now enabling new ways to create, share and consume all formsof digital content. Forward-thinking enterprises can take advantage of this by adjusting theirbusiness models and business design. However, this is not easy. In our research, only 23percent of the large enterprises and 17 percent of the startups were attempting to createvalue based on this new rule.The music industry is a test case for this trend. Much has been written on how newtechnologies are breaking down the traditional bi-directional, pay-for-use industry businessmodel. While this has been viewed as a threat by music industry incumbents, overall music Exhibit 3 ‘‘The long tail of demand ... nearly 57 percent of Amazon’sbook sales are titles that are not stocked in a typicalbrick-and-mortar store.’’ PAGE 12 j STRATEGY & LEADERSHIP j VOL. 36 NO. 4 2008  consumption is actually growing. And music is being accessed across all types of devices,from mp3 players to phones to laptops. New business models are emerging, such as usinggiveaways to stimulate demand and buzz, with the objective of generating substantialrevenue through tours and limited-edition content sold at premium.And this new rule does not just apply to the entertainment industry. Digitization is expandingacross diverse industries. For example, motorcycle fans can download phone ring tones oftheir bike accelerating. They can also buy professional promotional videos of their bikes.And they can create and share their own videos with other enthusiasts, or even buy a virtualbike in Second Life. Although many companies do not yet realize it, these digital productextensions can be very valuable. In some cases, they can be worth more than the physicalproduct.[5]Whilethis trend doesnot currently apply equally to every industry,within manymarketsit is areal and significant opportunity for innovative enterprises. The race is now on for enterprisesto develop their innovative capacities and organizational abilities, to change their businessmodels, and to capture Value 2.0 generated by ubiquitous digital content. Rule #3: Jump in – virtual worlds are real business Virtual worlds and other three-dimensional (3D) online environments were born in themassively-multiplayer online game (MMOG) arena. However, they have quickly evolved tobecome one of the hottest areas of Value 2.0, representing a new frontier of opportunity. It isestimatedthatinvestorshaveputoverUS$1billionintovirtualworldssinceOctober2006.[6]It has been fairly easy for large enterprises to enter this space and explore value creation.Our analysis showed nearly 30 percent of sampled large enterprises were leveraging virtualworlds, compared to only 4 percent of the analyzed startups. Virtual worlds have a variety ofpotential applications and exciting business opportunities for large enterprises. Theseapplications are enabling Value 2.0 in three broad areas: B Creating new markets for virtual products and services . The visual, social andentertainment aspects of virtual worlds have created an entirely new market for virtualgoods and services paid for in real-world dollars. These include clothing for user avatars,virtualhouses,carsandmore,withtotalspendingonvirtualgoodsestimatedatmorethanUS$1.5 billion per year.[7] The popularity of virtual worlds has also enabled somecompanies to sell virtual products that complement or enhance real-world products – forexample, Mattel’s Barbie – making their overall brand experience ‘‘longer and stronger’’with customers. B Opening a richer direct channel to customers . Virtual worlds such as Second Life.comrepresent a new channel to customers and provide new opportunities to advertise andmarket real world products/services. The interactivity and social aspects of this mediumprovide extra value in customerinteraction, above that of a simple Web page or B2C/B2Bsite. This direct channel to customers is more akin to what channel partners and retailershave traditionally offered in the real world, further disrupting the value chain. B Enhancing collaboration and communication . MIT Professor Irving Wladawsky-Bergerbelieves that, ‘‘Meetings and learning and training may very well be the ‘killer app’ forvirtual worlds.’’[8] Enterprises are becoming increasingly more distributed acrossgeographies. Their knowledge ecosystem is becoming fragmented across employees,partners and customers. Telepresence is one way to bridge this gap. Telepresencerefersto a set of emerging technologies that help connect people by allowing them to feel thatthey are physically present at another location.[9] For example, IBM is currently holdingnew employee training sessions in Second Life in order to allow employees regardless ofgeography to ‘‘meet’’ in a virtual world. The goal is to offer a richer experience than aconference call. Getting closer to markets and customers The next set of rules illustrates how large enterprises can create new value with emergingtechnologies by becoming more intimate with customers, gaining better information and VOL. 36 NO. 4 2008 j STRATEGY & LEADERSHIP j PAGE 13
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