Business Strategy in the Online Industry: Market and Network Strategy in Multi-Layered Industries

327 Pages·2001·9.753 MB·English

by  Christian Göttsch (auth.)

Gottsch
Business Strategy in the Online Industry
GABLER EDITION WISSENSCHAFT
Internationalisierung und Management
Herausgegeben von Professor Dr. Hans A. WUthrich
Die Schriftenreihe prosentiert Ergebnisse der betriebswirtschaftlichen For
schung zu den Themengebieten Internationalisierung und Management.
1m verbindenden Diskurs zwischen Theorie und Praxis verfolgt die Reihe
das Ziel, Organisationen praxisnahe Losungsansotze zu aktuellen Ma
nagementherausforderungen bereitzustellen und gleichzeitig einen Bei
trag zur theoretischen Fundierung von Fragestellungen der FOhrungs
praxis, nicht zuletzt im internationalen Kontext, zu leisten.
Christian Gottsch
Busi ness Strategy
in the Online Industry
Market and Network Strategy
in Multi-Layered Industries
With a foreword
by Prof. Dr. Hans A. Wuthrich
Deutscher Un iversitots-Verlag
Die Deutsche Bibliothek -CIP-Einheitsaufnahme
GCiHsch, Christian:
Business strategy in the online industry: market and network strategy in multi-layered industries
/ Christian GOttsch. With a foreword by Hans A. Wuthrich. -1. AuR ..
-Wiesbaden : 01. Univ.-Verl. ; Wiesbaden : Gabler, 2000
(Gabler Edition Wissenschaft : Internationalisierung und Management)
lugl.: Munchen, Univ. d. Bundeswehr, Diss.,2000
1. AuRage Dezember 2000
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ISBN-13: 978-3-8244-7318-2 e-ISBN-13: 978-3-322-85209-0
001: 10.1007/978-3-322-85209-0
to my parents
Foreword
"The Internet is like a 201'00t tidal wave
coming thousands ofm iles across the Pacific
and we are in kayaks. "
Andi Grove
In the course of the commercial distribution of Internet technology since the year 1995 new
business models emerged and ultimately established the on-line industry as a distinct eco
nomic environment. The author defines this new marketspace as " .... a multi-layered industry
consisting of five main layers: network, hosting, software, content and devices. Each layer
consists of sub-layers. Players from the converging industries telecommunications, computer
hardware/software, media and consumer electronics conduct on-line business units offering a
set of on-line services." (S. 17). Significance and growth of the on-line industry are enormous.
The market for multimedia products and services represents approximately 10% of the US
GOP already today. The industry volume is expected to double every 12 to 18 months. The
increasing relevance of the on-line industry is driving the interest of academia in a theoretical
foundation of the observed economic phenomena. The term network economics establishes a
new scientific area. Due to the specific structure and logic of the industry traditional business
concepts and strategy approaches can be translated only in a limited way. At this point the
work of Christian Gottsch comes in play, which - by utilizing the theoretical concepts of net
work economics and game theory - models the structure of the on-line industry and delivers a
methodic set of instruments to develop marketing strategies. These conceptual components
together with a host of case studies delivers deep insight for executives and professionals be
ing involved in the New Economy.
Prof. Dr. Hans A. Wuthrich
Preface
Coming up with the plan to approach such a rapidly moving and changing space as the Inter
net with a rather slowly developing medium as a dissertation seemed to be a very challenging
decision. Hence I decided to stay away from hype and hectic of the day to day business in the
Internet time and tried to find the general patterns and mechanisms in this space. This preface
is written for the publication of the book one year after the actual dissertation was finalized
and some statements and advice can already go through a reality check.
The surprising fact in an environment where windows of opportunities to create new busi
nesses seem to close so rapidly, is that many things do not change all that fast and enduring
principles can be perceived. All of us still have to cope with an unsatisfying user experience,
for example when we do not find what we want, sites deliver poor service quality, net soft
ware turns out to be unstable or too complex, and purchases in the virtual space are neither
faster nor cheaper than in the real life store next door. The lesson here is that speed is not eve
rything and that there is still way space for improvement. Opportunities are still out there, if
creativity and quality comes in play. For new businesses as well as the established players the
enduring economic principles of the networked economy and a co-opetitive conduct, as it is
laid out in this book, will provide guidance in navigating through this space. This becomes
even more true as large "info economy giants" representing the current paradigm, such as
AOL and Time Warner or Microsoft's ".net strategy", as well as a host of "start up davids",
representing the potential future paradigm (page 259), obviously follow these rules. In this
sense the increasing prominence of the notion of network effects underpins the emphasis of
this book.
This book was written during my professional involvement with CompuServe Europe and as
a visiting scholar at the Berkeley Round Table on the International Economy (BRIE) at UC
Berkeley. I want to thank my mentor Professor Hans A. Wuthrich for the freedom and advice
he gave me during the whole research project. Thank you also to Professor Arnold Hermanns
for being the co-corrector of the dissertation. At CompuServe and AOL Europe I would like
to thank specifically Dr. Konrad Hilbers and Dr. Klaus Hommels for supporting the research
with the resource and goodwill, which was required to make it happen. At Gruner + Jahr
thank you to Martin Stahel for carrying over the provision of this support. For all the joint
research I would like to express my special appreciation to the research fellows at BRIE and
the mcm institute in St. Gallen, Switzerland. At BRIE I would like to thank the co-directors
for having me there and particularly Professor John Zysman for continuously challenging my
thoughts. To initially kick-start this academic project and continuously reminding me to de
liver results thank you to Dr. Christian Hom. For the never-ending editing efforts I would like
to thank Brigette Buchet at mem and my girlfriend Maria.
Ultimately I want to thank my parents for always being there and supporting all my academic
efforts over the years. This book is dedicated to you.
Christian Gottsch
Table of Contents
List of Figures ..................................................................................................................... XIII
List of Case Studies .............................................................................................................. XV
Part I: Introduction. ............................................................................................ 1
1. Particular Approach, Research Focus and Methodology ................................................ .4
1.1. This Particular Approach ........................................................................................................................ 4
1.1.1. The Context of "Buzz Worc!s" ............................................................................................. ""'"'' 5
1.1.2. Research Perspective and Object Defmition ................................................................................. 9
1.1.3. The Internet and the Emergence of a New Constellation in the Process of Convergence .......... 15
1.2. Research Problem: Structure of and Strategy in the On-tine Industry ............................................. 18
1.3. Applied Theory, Scientific Positioning & Research Design ................................................................ 22
1.3.1. Applied Theory & Scientific Positioning ................................................................................... 22
1.3.2. Research Design ......................................................................................................................... 25
1.4. Structure of the Thesis ........................................................................................................................... 28
Part II: On-line Industry Structure -Analysis & Model .............................. 31
2. Analysis of the On-line Industry ....................................................................................... 33
2.1. Description of the Field .......................................................................................................................... 33
2.1.1. Political & Institutional Framework """"'"'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 34
2.1.2. Technological Framework .......................................................................................................... 41
2.1.3. Industrial Framework ................................................................................................................. 50
2.1.4. Socio-Economic Framework """'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 54
2.1.5. Conclusion from the Industry Environment ............................................................................... 58
2.2. Theoretical Framework for an Industry Model ................................................................................... 62
2.2.1. On Network Economics .............................................................................................................. 62
2.2.2. Competitive Industry Analysis in Overlapping Industries .......................................................... 88
2.2.3. Conceptual Model of Multi Layered Industries ........................................................................ 100
2.3. Analysis of the History of Proprietary On-Line Services .................................................................. 106
2.3.1. Utilization of Experience Curve Effects ................................................................................... 107
2.3.2. The Proprietary Online Service Business Model... ................................................................... 110
2.3.3. Proprietary On-Line Service Architectures .............................................................................. 116
2.3.4. Structure ofa Vertically Integrated Business System ............................................................... 121
2.4. The Shock of Convergence - Disintegration and Transition into the Internet Paradigm .............. 131
2.4.1. Deconstruction of the Value Chain ........................................................................................... 133
2.4.2. Economies of Scale and Scope ................................................................................................. 136
2.4.3. Competency based Competition ............................................................................................... 144
2.4.4. The Results: Unbundling, Differentiation and Explosive Growth ............................................ 147
2.5. On-Line Industry in the Internet Paradigm - Reinvention of the Past ........................................... 150
2.5.1. The Multi Layer Business System - The New On-Line Business Paradigm ............................ 152
2.5.2. The Applied Model. .................................................................................................................. 159
XI
Part III: On-line Business Strategy -Analysis & Tools .............................. 163
3. Navigating in the On-Line Industry -Firm Strategy .................................................... 165
3.1. ChaUenges for Business Strategy ........................................................................................................ 165
3.1.1. Challenges Caused by the Exogenous & General Field Parameters ......................................... 166
3.1.2. Challenges Based in the Product-Market Area ......................................................................... 167
3.1.3. Challenges Caused by the Interdependencies of the Multiple Layers ...................................... 168
3.1.4. Summary and Structure of the Strategic Challenges ................................................................ 169
3.2. Business Strategy Mainstream ............................................................................................................ 175
3.2.1. Market-Based View .................................................................................................................. 175
3.2.2. Resource-Based View ............................................................................................................... 194
3.2.3. Lessons for Competition in the On-Line Industry .................................................................... 206
3.2.4. Tool Set .................................................................................................................................... 208
3.3. Tools for Net-Centric Business Strategy ............................................................................................. 211
3.3.1. Enabling Externalities for a Network Strategy ......................................................................... 212
3.3.2. Product Strategy ....................................................................................................................... 219
3.3.3. Networking Strategy ................................................................................................................. 225
3.3.4. Pricing Strategies & Business Models ...................................................................................... 241
3.3.5. Adoption Strategy ..................................................................................................................... 253
3.3.6. Co-opetition Games with Your Complementors ...................................................................... 258
3.4. Summary of Tools, Tool Set and Industry Model .............................................................................. 271
Part IV: Summary & Outlook ....................................................................... 283
4. Summary & Outlook ........................................................................................................ 285
4.1. Summary - Dynamic Structure & Strategy ....................................................................................... 285
4.2. Outlook - Further Research Issues ..................................................................................................... 286
Glossary ................................................................................................................................. 289
References .............................................................................................................................. 291
Sources Consulted - Interview Partners ........................................................................... 317
XII
List of Figures
Figure 1-1: The E-Conomy, E-Commerce & the On-Line Industry .......................................... 8
Figure 1-2: Generic Perspectives Towards the On-line Business and the ICT Area ............... 12
Figure 1-3: Overview of Classical On-line Services ................................................................ 14
Figure 1-4: Convergence and the Emergence of the ICT Sector. ............................................. 16
Figure 1-5: Adoption of the Internet.. ....................................................................................... 17
Figure 1-6: Structure of the Problem ........................................................................................ 21
Figure 1-7: Cohesion of Theoretical Components and Business Practice ................................ 24
Figure 1-8: Research Design .................................................................................................... 26
Figure 1-9: Outline ................................................................................................................... 30
Figure 2-1: Exogenous Parameters of the On-Line Industry .................................................... 34
Figure 2-2: Conceptual Model of Components of On-Line Service Infrastructure ................ .43
Figure 2-3: Processing and Bandwidth Trends ........................................................................ .44
Figure 2-4: Projected Access Technology Rollout, 1998 -2008 ............................................ .47
Figure 2-5: Co-Existence and Co-opetition of Access Network Technologies ....................... .48
Figure 2-6: On-line Industry Positioning in the Converging ICT Constellation ...................... 51
Figure 2-7: Relevant Turnover in the Converging ICT Area in Europe .................................. 52
Figure 2-8: "Exogenous" Variables and Impact on the Firms Business Models ..................... 59
Figure 2-9: Exogenous Variables of the On-Line Industry System ......................................... 61
Figure 2-10: Authors in the Context of Network Economics ................................................... 64
Figure 2-11: US ISP I OSP Market Share 12 I 98 .................................................................... 68
Figure 2-12: Market Share & Positive Feedback ..................................................................... 69
Figure 2-13: Overview of I-Way & 2-Way Networks ............................................................. 78
Figure 2-14: Mechanisms in Network Markets Under the Presence of Externalities .............. 85
Figure 2-15: Model A with Network Externalities in a Multi-Layered Network .................... 88
Figure 2-16: Five Forces & Competitive Structure of Markets ................................................ 91
Figure 2-17: 5 Forces & Convergence of Vertically Related Industries .................................. 95
Figure 2-18: 5 Forces in Multi-Layered Industries .................................................................. 99
Figure 2-19: Demand & Supply Side and Competition in Horizontal Market Layers ........... 102
Figure 2-20: Conceptual Model of Multi-Layered Network Industries ................................. 105
Figure 2-21 : 20 Years Experience Gap .................................................................................. 109
Figure 2-22: Empirical Overview: Evolved and Stable Business Models ............................. 112
Figure 2-23: Needs and Solutions of On-Line Services ......................................................... 115
Figure 2-24: Classical On-Line Service Bundling ................................................................ 117
Figure 2-25: Component Structure of Proprietary On-Line Service System Architecture .... 120
Figure 2-26: Functional Clusters of Past On-Line Service Value Creation ........................... 122
Figure 2-27: Cross-Layer Analysis of Proprietary On-Line Service Layers .......................... 123
Figure 2-28: Primary Layers of The Past On-Line Business System ..................................... 125
Figure 2-29: CompuServe's Direct Activities and Allocation of Value Along the Layers .... 127
Figure 2-30: Decrease of Data Transmission Costs 1980-1997 ............................................. 128
Figure 2-31: Unbundling of Networks and the Emergence of Wholesale -Retail Relations 138
Figure 2-32: Browser Market Share and the Conduct of On-Line Services in the Browser War
........................................................................................................................ 142
Figure 2-33: Convergence translated a New On-line Business Paradigm in the Internet ...... 148
Figure 2-34: From Open Standard System Architecture Components to Industry Structure. 154
Figure 2-35: The Multi-Layered Internet Business System ................................................... 155
Figure 2-36: Market Layering in Layer I Sublayers & Typical Players (Snapshot 1999) ...... 157
Figure 2-37: Coordination & Strategic Conduct in the On-Line Industry, 1998 ................... 158
Figure 2-38: The Applied ModeI... ......................................................................................... 160
Figure 3-1: Translation of Business Strategy Challenges into Strategy Tools ....................... 174
XIII