A friend of mine from Microsoft recently explained how the world's most powerful software company had missed the biggest transformation in computing since the PC. His colleagues were thinking like rational engineers, he said. They assumed computer users would prefer the faster response, better sound, and crisper graphics of CD-ROM over the barely controlled chaos of the Internet. The company, he vowed, would not make the same mistake twice. Or would it? Today nearly 1,400 software engineers are expected to report each week on how they're helping Microsoft win on the Net — about the most un-Net-like approach imaginable. When another friend, this one a Microsoft rival, heard about the plan he breathed a sigh of relief: "Thank goodness its 1,400 engineers. If it were just 20 we'd be in trouble."
Welcome to the mind-bending logic of business on the Net.
The Internet is the most dramatic economic phenomenon of the decade, but many other Nets touch our lives. When I discuss "the Net" I mean any reasonably large, decentralized, interdependent system that affects how people work and live. That definition includes telephone networks; trading systems for stocks, bonds, and commodities; fax systems; travel networks. Nets don't just affect the fortunes of individual companies; they also overturn many cherished assumptions about how to compete, innovate, and manage.
In short, Nets change the guiding logic of business. Here are ten principles that explain the new logic.
1. Nets route around greed.
Forget Gordon Gekko. Nets detect and subvert excess at every turn. In theory, all markets work this way; companies that overreach or underperform create openings for new entrants. But "free markets" have never been all that free. Big companies deployed an arsenal of weapons — distribution clout, saturation advertising — to create entry barriers and limit competition. Nets obliterate those barriers.
Here too Microsoft is a case in point. Within months, its attempt to create a proprietary online service, the Microsoft Network (MSN), went from a feared juggernaut to a strategic failure. Why the retreat? Because the me-first logic of operating systems doesn't conform to the logic of the Net. Now Microsoft is scrambling to "open" MSN by forging alliances with America Online, Sun Microsystems, and other partners.
2. Generosity begets prosperity.
More than 70 years ago, Gillette turned marketing upside down when it gave away razors to sell more Blue Blades. The Gillette model has become standard operating procedure on the Net.
Netscape is the most famous example of strategic generosity. By allowing users to download its Navigator software for free, Netscape created a new technical standard. And because it established a standard, Netscape was able to sell so much server software and related products that it became the fastest-growing software startup in history.
3. Open systems win over time.
Nets punish ruthlessly any attempt to control how they want to evolve — a lesson Apple has learned all too painfully. Companies that follow Apple's proprietary model are doomed to suffer the same consequences. The smarter course is to embrace emerging standards and innovate within them.
Consider the market for notebook computers. The leading products are all perfectly compatible with one another and with the broader environment in which they operate. Yet each offers distinct benefits and features. Compaq's notebooks are light, rugged, and fast; Toshiba's have best-in-class displays; Dell has unsurpassed direct marketing and delivers its products overnight; IBM's notebooks have internal bays for many different modular subsystems.
Nets reward this approach to competition.
4. You can't predict the future.
The history of Nets is one of surprise innovations from unseen directions. That's because Nets respond to new ideas at blazing speed. It's simply not possible to predict in advance the "killer app" for a new technology or the next big use of an existing technology.
Think about the multibillion-dollar market for pagers. No market research could have predicted all the exotic new uses for pagers: investment management, news distribution, sports information, whale-migration tracking. "Researching" your way to success virtually guarantees failure. The right approach is to design products for rapid adaptation and to observe carefully as new uses emerge.
5. More is different.
There are no stand-alone products on the Net — and that changes the nature of products themselves. As more devices interconnect and depend on one another, they develop interactions that no one can anticipate — and that become the basis for entirely new applications.
The lowly telephone is a classic example. One telephone is an invention. Two telephones enable a conversation. Millions of telephones become the basis for a vast array of services that revolutionize how people communicate. So it is with all Nets: more of something inevitably turns it into something different.
6. There's safety in speed.
Nets obey the laws of increasing returns: as more people sample and select a product, they generate interest, excitement, and an installed base that attracts still more people — unleashing positive-feedback loops that increase momentum. And when products for the Net get distributed over the Net, these feedback loops operate with remarkable speed. Think of it as the "whoosh effect."
The whoosh effect explains how Netscape's engineers could begin writing code in April 1994, introduce their first product in December, and hold a 75% market share by April 1995. Distributing the Web browser didn't require Netscape to hire a fleet of trucks, conduct long negotiations over retail shelf space, design elaborate ad campaigns. Netscape posted its software on the Web and allowed users to click and download; the whoosh effect was under way.
Warning: The "best" products don't automatically achieve the greatest momentum. Companies like Netscape understand that the whoosh effect is 25% engineering and 75% imagineering — using the Net to dramatize, promote, and popularize innovations.
7. Win-win beats win-lose.
Too many companies associate winning with control — using an innovation to acquire a dominant position in technology, distribution, or cost. On the Net, companies seldom win unless they find ways to help others share in the wealth their innovations create.
The "value chain" is giving way to value webs — market structures in which customers have multiple pathways to the products or services they need. Value webs explain why the Net spawns so many alliances between rivals and joint ventures between companies in different industries. More than ever, winning big requires giving up a piece of the action.
8. Familiarity overcomes inertia.
People everywhere are prone to inertia: they do what is familiar even in the face of superior alternatives. And familiarity comes in various forms. Interface familiarity is what allows us to rent cars we've never driven before without having to learn new ways to steer or accelerate; cars are designed to maximize familiarity. Behavioral familiarity helps people accept new products because they resemble old products. Much of Intuit's success with Quicken can be explained by the fact that the software makes electronic bill-paying feel similar, visually and procedurally, to writing checks.
What works for cars and Quicken works across Nets: breakthrough innovations must evoke a sense of the familiar if they are to successfully overcome inertia.
9. There is no central control of anything.
Fish swim in schools without any single fish being in charge. Monarch butterflies don't need a Monday morning staff meeting to decide when to migrate south. Birds flock without voting on their destination.
Nets operate more like nature than man-made assembly lines. Indeed, the defining companies of the Net era — Netscape, Sun, Yahoo! — apply the power of distributed intelligence to how they function. They are obsessed with meeting performance goals and winning — but they are also thoroughly decentralized. They're organized around small teams that work when they want, how they want, and (often) where they want. On the Net, even the most hard-charging leaders don't fool themselves into believing that they are "in charge."
10. No one is as smart as everyone.
Nets enable greater participation among larger and larger groups of people. That's why millions of people are getting into the habit of visiting the World Wide Web every day. The Web changes like a newspaper, but the changes are co-constructed by the users. No one is in charge and almost anyone can find something of value. That's why intranets (knowledge-sharing systems designed for use within companies) have become the fastest growing market for Web servers and software.
In short, Nets allow individuals to shape and share information and ideas more quickly than ever before — a principle that winning organizations embrace rather than resist.
Larry Keeley (firstname.lastname@example.org) is president of Chicago-based Doblin Group, a leading design-strategy firm, and an adjunct professor at the Illinois Institute of Technology's Institute of Design.