Sunday, 8 May 2011

Effect of the Internet on business models

For reference, the text of a speech I did for an internal meeting. 5 minutes on the effect of the Internet on business models:

"From the 2011 vantage point it is clear that the Internet has had a profound effect on the fortunes of every business, government, NGO and individual in the developed world. And its reach is ever extending: to the deserts of the Sahara, to a billion consumers in China and a billion more in India, not to mention the further billion in the rest of developing Asia, Latin America and Africa.

But it’s not that colossal expansion of scale of influence and the consequent opportunities and challenges for us and our clients that I think we should focus on today, but the even more profound expansion of scope that will accompany the next stage of the Internet’s evolution.
When I think about the effect of the Internet on business models, I see three aspects:
· Polarisation (of success and failure)
· Acceleration (of decisions)
· Diversification (of models)
The rebound from the downturn has demonstrated the structural impact of the Internet on some business models. For example, the Internet has ravaged the traditional classified advertising model for many, but not all the incumbents; it has had little impact on broadcast television, save of course to complement it.

This polarisation is down to the business models that rose up during the first phase of the Internet’s emergence. Companies that appeared in the initial expansion replicated traditional business models, but with the competitive advantages bestowed by the economies of scope and scale that the Internet enabled. Amazon, Yahoo, eBay are all extensions of conventional models. Likewise, the news aggregators that have reduced the newspapers that spawned them are merely faster, leaner replications of the old model. They are to their progenitors what Walmart is to supermarkets – a super-competitor in certain narrow markets, but limited in their societal effect and hence their effect on business models in the macro sense.

Their sometimes overstated ability to service needs faster and cheaper aside, the underlying reason for the polarising effect of the Internet on business models and on businesses is acceleration. By this I mean that the emergence of the Internet and the communications layers that sit on top of it has accelerated the decision-making processes of buyers and of sellers to the point where a product can be launched one day and pulled from sale only weeks later, the victim of the huge and immediate swell of information available to would-be consumers almost immediately after its launch. Microsoft’s ‘Kin’ phone range being a recent example of this effect.

Acceleration is reflected in consumers’ willingness to embrace new technologies, which means that the process from inception to mass adoption can now take place over the span of only a couple of years. The effect is also felt internally in business, where speed of decision making has advanced ahead of the capacity of operating model, processes and talent to keep up, hence massively increasing the stress placed on an organisation’s “heroes” and increasing organisational risk. Acquisitions, in particular could be said to be increasingly driven by knee-jerk reaction to trends that appear (and unfortunately for buyers, disappear) in a matter of months.

The fascinating thing about this hyper-tension that the Internet has created in businesses and in markets is that it in turn has sparked an almost primal imperative to innovate – something that leads to the third theme I’d like to talk about, namely diversification.

In Web 1.0, we had the supplementing of traditional business models through Amazon, eBay, Yahoo, so the effect on business models in the macro sense was quite small. In Web 2.0 things got more interesting, because the consumer voice got louder, news (particularly bad) got louder and spread further. In 2009 and 2010, the Web helped elect Governments. In 2011, we are really feeling the force of the Web – it is helping to topple regimes.

And now we have Web 3.0 – the “influence layer” as I’ve heard it described. This is new and no one has a clear handle on what it means or how important it’ll be. What is possible is that by adding an ability to influence behaviour, something that has polarised business models in a few markets and situations now has the ability (although perhaps personification is not appropriate) to polarise models in the wider world. How much does one have to understand about decision makers in order to change the brand of detergent they buy? What about a car? What about who they vote for? People are more connected and we – and hence the Web – ‘knows’ more than ever about them.

For the first time, the Internet has the ability to impact the models of businesses beyond basic retail, beyond communications. We at Deloitte have played a leading role in the first two generations of the Internet, now we need to lead the third."

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