The Impact of Web 2.0 on Enterprise Strategy

by David Rowe and Cassian Drew

Once dismissed as a vacuous Silicon Valley buzzword, Web 2.0 is gradually becoming recognized as an important collection of technologies, business strategies, and social trends. In our next issue, we will discuss the technologies and concepts that underlie Web 2.0 — and what they mean for the enterprise. Learn how to resolve vexing issues of online trust, identity, and reputation so your organization and its customers don't fall prey to online fraud. Discover how you can use Web 2.0 techniques to enrich your enterprise BI applications, leading to increased user adoption and greater application “intelligence.” And find out how you can form and sustain a vibrant product community that will improve your ability to deliver the right software at the right time. The “next new thing” is here — is your organization ready to take advantage of it?

Through a natural technological and business evolution of the dot-com era, the Web today is clearly different to the Web five years ago. Whatever we call it, there are new opportunities in the marketplace for startups and enterprises alike. Rather than a hollow moniker, “Web 2.0″ encapsulates a number of trends that illustrate a significant shift in the behaviors of developers, consumers, and businesses. This, coupled with the fact that Web 2.0 is being discussed so broadly, creates an opportunity to step back, review some of the bigger questions, and explore how Web 2.0 may impact strategy.

When considering strategy, we have taken the contemporary view that strategy is not about planning, it is about identifying the best alignment of an enterprise's capabilities and resources with the external environment [8]. In this article, we consider the key Web 2.0 trends within the Internet environment, within the enterprise, and within the commercial environment. We then explore the process of assessing enterprise capabilities and resources with a view to understanding how an enterprise can take advantage of emerging opportunities.

The changing landscape

There are many definitions of Web 2.0, but Tim O'Reilly's seminal article “What Is Web 2.0″ [18] provides the logical starting point. O'Reilly coined the phrase Web 2.0 upon observing that the Web, far from having “crashed” in 2001, is more important than ever, and its evolution toward a more ubiquitous medium that has encompassed more and more people and applications only adds to its momentum. However, Tim Berners-Lee, the man credited with inventing the World Wide Web, recently contributed to the debate by debunking Web 2.0 as “useless jargon” [16]. Nonetheless, he does agree with the empowering effect of the Web and its ability to connect people and facilitate new kinds of collaboration. For our part, we recommend that you review the definition of Web 2.0 featured in Wikipedia [22]. Regardless of hype, businesses that retain the 1990s notion of “Internet” and “online” are less likely to identify threats and opportunities in the evolving Web 2.0 environment.

People matter

Like open source software, Web 2.0 has seemed to rise from the will of the masses. A common synonym for Web 2.0 is the “participatory Web” [16], a term that emphasizes the tools and platforms that enable users to blog, tag, comment, modify, augment, rank, and generally refer back to the contributions of others. Indeed, many commentaries focused on Web 2.0 in the enterprise argue that blogs and wikis may well supplant other communication and knowledge management systems because of their superior ability to capture tacit knowledge, best practices, and relevant experiences throughout an organization [17]. The accumulated knowledge of its people is widely regarded as an enterprise's most valuable asset, and Web 2.0 tools such as these can actively (and voraciously) capture corporate memory, even from those who have retired or moved on.

In a Web 2.0 world, it is also critical to think outside the organization. The spontaneous combustion of a Dell laptop in Japan coupled with a community of interconnected, communicative buyers had an immediate impact on the multinational — and the incident was soon etched in the collective knowledgebase of Wikipedia [3].

The web as a platform

Another key Web 2.0 effect is the rise of online services rather than packaged software [16]. Resulting business models offer Web services interfaces and content syndication along with the reuse of other data services where possible. Google is a prominent example of Web services delivery.

Lightweight programming models have emerged that allow for loosely coupled systems and the potential for composite applications, in which complementary data and services are brought together in a single online application — often called a “mashup.” This is not dissimilar to the service-oriented architecture (SOA) approach, a much-applauded enterprise development objective. When you strip away the hype, this simply amounts to implementing tangible services and making them available in a distributed fashion behind well-defined APIs according to business needs and objectives.

To this end, the key requirement for the enterprise (as opposed to a consumer Web 2.0 application) is that the APIs and the services behind them are likely to require an agreed quality of service. We explore this issue further below.

Applications in the browser

Ajax (Asynchronous JavaScript and XML) is a key technical enabler for Web 2.0, delivering responsive and interactive Web pages without the delays and overheads associated with traditional Web programming. If you have used Pageflakes, Google Maps, or Microsoft's Outlook Web Access (OWA), you're already familiar with the power of Ajax. While Pageflakes is a largely consumer-focused application, Google Maps delivers real business value by enabling third parties to access its database of information and maps, via published APIs, to create new, richer applications (such as real estate pricing company housingmaps.com).

Ajax helps bring together disparate services to deliver the rich, browser-based experience that is often associated with Web 2.0 applications. For the enterprise, OWA is possibly the first and most widely deployed enterprise-ready example of Ajax. Initially developed in the late 1990s, OWA now has 70-80 million users (representing approximately 70% of deployed Exchange mailboxes) in many Fortune 500 companies.

Enabling Enterprise 2.0

In parallel to the overall Web 2.0 debate, industry commentators and analysts are also split on the definition of Web 2.0 for the enterprise. One commentator maintains that “Enterprise Web 2.0 = SOA” [2]. Some focus on the seepage of consumer Web 2.0 technologies (such as VOIP) into the enterprise [12]. Others focus on the trends associated with social networking, collaboration, and self-expression [17]. Indeed, Wikipedia contributors have embedded “Enterprise 2.0″ within the “Enterprise social software” entry [5].

We believe that Web 2.0 for the enterprise incorporates each of these aspects and is consequently larger than each of the parts. It is also an evolving field. Gartner's recent report on emerging technologies places Web 2.0 at the peak of its hype cycle, stating that “Web 2.0 technologies and business models dominate emerging technologies” [6]. The report also points out that Web 2.0 in the enterprise is only just beginning to happen, predicting that some aspects will not be “enterprise ready” for another 12-18 months. However, many enabling technologies are already well established and are finding their way successfully into the enterprise.

Web 2.0 for the enterprise is the intelligent application of the Web-based trends discussed thus far. For the CIO, Web 2.0 also consists of iterative development, regular application updates, and hosted services. Here we will focus on three key aspects and show how they are enabled in the enterprise, with explicit references to leading solution providers.

Harnessing the collective

Enterprise Wikis

Dresdner Kleinwort Wasserstein, the Europe-based investment banking division of Dresdner Bank, started its first wiki in 1997. Its design team now uses it to track the completion of its Web-based projects in real time. In addition, a wing of the bank's equity financing team uses a wiki to supplement e-mail, thus eliminating the need to sift through inboxes [4]. Market watchers cite other early wiki adopters, including Symantec and Walt Disney [13], while Gartner predicts that by 2009, 50% of companies will have adopted the wiki as a collaboration tool [6].

Well-regarded corporate wiki providers include Socialtext and JotSpot. Both companies have current implementations in the Fortune 500 environment, with JotSpot aiming to ease enterprise users into the wiki experience by adding a suite of familiar, Microsoft Office-like tools to enhance productivity and uptake. Microsoft also delivers wiki functionality to the enterprise via its Windows SharePoint Services (a set of Windows Server 2003 features), which provide rich collaboration tools, including team workspaces, RSS, and blogging.

Corporate Blogging

Corporate blogging has also become more widely acknowledged. Ex-Microsoft employee Robert Scoble has long been blogging [21], and we now see executives from Sun Microsystems and General Motors contributing to the “blogosphere.” Unlike wikis, blogs are more suited to engaging in a dialogue with a broader — often external — audience. This form of communication has its pros and cons, and organizations need to strike a balance between sanitized corporate communications and open, so-called naked, dialogue [20].

Despite the benefits of having a more open dialogue with the industry and your customers (Scoble's efforts are widely credited with putting a more human face on the world's largest software company), the ROI of blogging is difficult to quantify. There are also inherent risks to blogging, such as negative PR from unhappy bloggers, untimely information leakage, and defamation liability through unmonitored corporate channels. In response to these factors, each company needs to evaluate whether or not blogging fits its model and how blogging should be managed.

Social Networking

Gartner highlights social network analysis as another significant Web 2.0-related enterprise IT trend [6]. In contrast to consumer social networking sites such as the teenage favorite MySpace.com, business-focused sites such as Visible Path and LinkedIn have proven themselves by helping establish sales leads and hiring prospects from the collective contacts of colleagues [19]. After all, businesses are simply networks formed to make or sell something, and “relationship capital” is gaining in credibility.

Open BC/XING represents the largest network of European professionals, and the site is also credited with offering possibly the first feasible commercial model for a social networking company. Currently in beta is Cogenz, a UK-based enterprise social bookmarking company aiming to emulate the consumer success of del.icio.us. And Microsoft is putting an intranet twist on social networking with its upcoming release of Office SharePoint Server 2007, which includes a social networking component that uses information about your organization responsibilities, skills, and electronic communications to help identify colleagues with common interests and responsibilities or complementary expertise.

Composite applications and software as a service (SAAS)

Implementing enterprise applications as a service, publishing their interfaces via well-established Internet standards (i.e., APIs utilizing XML and REST), and developing composite applications (i.e., enterprise mashups) are all technically feasible now with skills that are already available [9]. Furthermore, McKinsey concluded in a recent industry report that SaaS (the predominant Web 2.0 delivery method) has already gained traction in a number of enterprise application areas — such as payroll, human capital management, CRM, conferencing, procurement, logistics, information services, and e-commerce — and should make gains across a much broader cross-section of applications over the next three years [1]. IBM is also seeing a growing interest in and demand for enterprise mashups. The company recently defined a framework that uses Web services and wiki technology to allow people to create customized applications in less than five minutes [14].

Combined, these trends point toward lightweight, composite applications that efficiently combine data and services from multiple services and applications, requiring only a minimal amount of additional code. There are many examples of tangible enterprise mashups — even if they don't officially go by that label. Four years ago, Microsoft UK developed a composite application that securely combined employee data with externally supplied (and managed) payroll data from Sage, a leading UK accounting and payroll solution provider, so employees could complete their tax returns online and then post them directly to the UK government's online self-assessment service. A more recently documented success is Sprint Nextel's mashup experience. Born out of a long-running SOA strategy, Sprint's mashups allowed the company to efficiently implement such applications as an online dealer location service that combined mapping information with registered dealer data. The company attributes its success with mashups to the time spent developing appropriate policies and a platform that ensured quality of service [10].

Maturing development tools

A recent review by Web 2.0 industry commentator Dion Hinchcliffe found very few good-quality tools for building enterprise mashups [11]. The only tool highlighted was Data Mashups, a drag-and-drop visual Web application builder that was selected for its conceptual ease of use (it was, however, still in beta when we wrote this article). A more recent review finds development applications such as Nexaweb, which already boasts a strong list of reference customers, including Siemens and the global investment bank Jefferies & Company.

IBM is working on a project called QEDwiki (quick and easily done wiki) with which businesspeople can develop their own Web pages by dragging and dropping components onto a pallet [7]. Focused on delivering quick and powerful “application wikis,” such as a salesperson's dashboard, the project was announced in November 2005 and again previewed in April 2006 [15]. With a similar focus on self-built composite information views, Microsoft Office SharePoint Server 2007 enables drag and drop of Web Parts1 that integrate with enterprise data repositories and Web services to mash up data and information relevant to the user. Development of these Web Parts is done using typical development environments such as Microsoft Visual Studio 2005.

As for the development of bespoke, in-browser applications, Ajax remains the de facto standard. Many early adopters developed their own Ajax libraries and focused on the use of open source frameworks. Challenges with this environment included security, integrity, and testing. More advanced commercial platforms are available from vendors such as Tibco, JackBe, or Backbase. The Ruby on Rails Web development framework introduces its own language, Ruby, with a focus on Web programmer productivity. However, it is likely that the larger vendors, such as Microsoft with its Atlas project and Sun with its Java EE, Ajax will ultimately win over a large portion of the enterprise developer community, particularly when each vendor fully integrates these efforts into its development platforms.

Integrating strategy

Since its conception, the Internet has matured from directed information provision to a user-driven economic and social community powered by a more pervasive platform. Consequently, most organizations have had to consider the strategic impact of the changing landscape and available enabling technologies.

Winning and retaining customers

Along with the ability to communicate, collaborate, and publish, buyers now have the power to actively discriminate against brands. Product marketing and pricing have become more transparent, and the corporation no longer controls PR. Buyers both at the consumer and B2B levels have increased power through enriched engagement in online communities and have access to cost structures and other customer feedback. While this has not consolidated buyer groups or increased purchasing power, immediate and topical global communication between buyers does create a strong position.

In a Web 2.0 world, buyers also enjoy increased power through their ability to switch vendors at little or no cost. Services over the Internet is a strong Web 2.0 theme, and as buyers continue to adopt SaaS, organizations are likely to experience higher customer churn than in the traditional licensing and installation market. To combat customers' greater propensity to switch and the increased ease of doing so, organizations will have to build alternative “barriers to exit” in order to minimize customer churn. Fortunately for the consumer, such barriers are likely to involve enriched customer engagements, innovation aimed at increasing customer value, and higher levels of customer intimacy through data retention and analytics. Amazon.com's one-click model is a simple example — even the hassle of retyping your address and Visa card number on a competitor's checkout is a switching barrier.

It is clear that in the Web 2.0 world, data is key, whether it is customer-based or proprietary. Many, if not all, successful Web 2.0 companies achieve sources of advantage through the collection, manipulation, and enrichment of data important to the user. For companies operating in this new competitive environment, where price comparison engines are commoditizing almost everything, data management and enrichment will become the key critical success factor. Beyond data, Web 2.0′s mashup potential will help broaden the range of customers and transactions engaged through the Web, enabling more complex transactions that require a high level of judgment. As Internet transactions increase in scope, customers will require a deeper level of engagement before committing to a purchase. McKinsey & Company sees this increased need for tacit interaction [1] as a key area where mashups will enable existing people-intensive sales processes to be automated and scaled through the Web.

Competitive advantage and barriers to entry

While customer enablement, Internet-delivered services, a broadening market of sites, and enriched data will change some aspects of competition in many industries, it is unlikely that they will impact fundamental factors, such as minimum efficient scale, experience curves, regulatory barriers, or capital intensity. Of course, industries that rely on high levels of software development capital expenditure as an entry deterrent could be vulnerable to new entrants that deliver competing SaaS and mashup applications from a lower cost base. Infrastructure costs are no longer barriers, as they are easily overcome through leased capacity or through leveraging user resources and tools (such as CacheLogic does). Other costs can be reduced with user-generated content and open source infrastructure, thus providing further opportunities for new market entrants.

With the emergence of Web 2.0, traditional defensive strategies such as proprietary APIs are less accepted in the market. In fact, opening up APIs could produce a far better source of advantage. Web 2.0 flag carrier Salesforce.com exemplifies successful execution of a “first mover” advantage in opening up its API and creating a network effect of third-party complementary products. The value of the Salesforce.com CRM platform has been significantly increased through the company's third-party add-on marketplace; the more participants in the network, the more valuable the company's platform.

Of course, not all firms can be first to market, and the network effect is only one strategic play — and thus unlikely to suit every situation. Developing an effective Web 2.0 strategy to suit a unique situation requires broad thinking and should begin with an understanding of the organization's core capabilities and resources.

Taking a resource-based view

Many organizations take a market view, beginning strategy formulation by asking questions such as “Which markets do we serve?” and “Who are our customers?” However, for firms that have commercial exposure to the Internet or are focused on software in some way, using customers as the basis of strategy can be problematic.

In a world where customer preferences are volatile, and where customer identity and the technologies that serve customers are changing, taking a resource-based approach to strategy can provide better stability. In the 1990s, the resource-based view of the firm strengthened in popularity as executives found that defining a firm in terms of what it was capable of doing resulted in a more successful strategy, as measured by outcomes, than taking a broad market view.

Of course, even technically savvy businesses will rarely have the required resources and capabilities to take immediate advantage of the entire Web 2.0 phenomenon. More importantly, there are many businesses that are not interested in becoming Web 2.0 companies. Regardless of the organization's interest in Web 2.0, assessing capabilities and resources within the context of a Web 2.0 environment can help a company spot any key strengths or weaknesses that may have a longer-term impact should the market continue to follow Web 2.0 trends.

A comparative analysis

Salesforce.com was founded in 1999 with the vision of delivering Internet-based applications; subsequently, the firm developed capabilities and acquired or developed resources to support that vision. Fortunately, the founder's foresight has paid off, and the business is now well positioned in the Web 2.0 environment.

Salesforce.com has taken advantage of its overall capability and followed the trends well. The company has reached out and created a strong community facet of the business through community-developed complementary applications, blogs, and broader community seminars and engagement events.

By contrast, Sage, publishers of CRM applications Act! and SalesLogix, has roots in shrink-wrapped software, where application development, retail presence, channel management, and large support teams have been success drivers. In response to market demand, the company has developed an Internet-enabled version of Act!, but it has not pursued other important aspects of Web 2.0.

Comparing these two competitors' relative capabilities and resources shows how changing markets can weaken a once-strong strategic position (see Figures 1 and 2) by elevating the importance of different capabilities. Before discussing the two companies, we would like to say that the objective of this comparison is not to say that one company is better than the other. Rather, it is to highlight the way factors considered important in Web 2.0 have shifted the power balance away from traditional software licensing companies.

Figure 1 — Sage Act! Web 2.0 capabilities and resources analysis.

Figure 2 — Salesforce.com Web 2.0 capabilities and resources analysis.

By comparing the relative strengths of a company to the importance of those strengths in a marketplace, it is clear that strengths formerly critical to success in the retail shrink-wrapped market have become superfluous in a Web 2.0 environment. Furthermore, capabilities and resources once considered irrelevant can quickly become key weaknesses. Sage's capabilities and resources analysis identifies shifts in importance relative to the Web 2.0 environment and exposes several weaknesses, highlighting threats from Web 2.0 competitors. The company's resources and capabilities are far better aligned for success in traditional shrink-wrapped software markets, where channels, retail presence, sales teams, and support are more important. The question for Sage is, how can these capabilities and resources be better aligned to maximize the return on capital employed across the enterprise should Web 2.0 trends dominate the market?

In contrast, Salesforce.com provides a strong example of an organization successfully aligning its capabilities and resources with the Web 2.0 market, which is why we have used it as the reference case in our example.

Conclusion

Not all companies can transform into a Web 2.0 company overnight — nor do all companies have the desire. But every company should consider the impact of Web 2.0 on its business strategy and conduct an analysis to better understand how it may be able to take advantage of Web 2.0.

Opportunities exist to create value by harnessing Web 2.0 trends and technologies such as social network analysis, collective knowledge collaboration (i.e., wikis and peer-to-peer workspaces), broad customer connection (e.g., through blogs), and SaaS (leading to mashups and composite applications). Web 2.0 also presents risks. In the commercial environment, buyers have increased power and are demanding richer, more adaptable online services; unless suppliers can create strong engagement, buyers can easily switch.

We contend that companies must at least acknowledge and consider these trends and technologies, because the playing field has shifted significantly. Successful firms are implementing better solutions, creating customer value, and retaining customers through enriching user data. A capabilities and resources analysis is a powerful way to explore how the market places new values on company assets that have driven success in the past. Companies that are exposed to the Internet and software markets — and desire more exposure to Web 2.0 — should take the time to consider the impact of changes in the environment and adjust their strategies accordingly.

Sources

  • Blogs of Prof. John Vu, Carnegie Mellon University

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