In the old days, companies that were bigger were also more powerful—and they often had a high market multiple as well. But now, just the opposite may be true. Think of Netscape, a company that barely existed prior to 1995. Is Netscape overvalued? Perhaps. But if you consider how quickly it has mobilized other companies to support and implement its technology, you begin to see why the excitement may be justified.

Netscape’s strategy exemplifies a new form of industrial structure: "webs," or clusters of companies that collaborate on a particular technology. Webs are a natural response to environments fraught with risk and uncertainty—which is why they are prevalent in high-technology arenas. They create powerful new ways to think about strategy, risk, technological uncertainty, and innovation. Webs help us see why the "virtual company" may be more than just an abstract concept. They influence management focus, organizational structure, performance measurement, and information systems. Webs may even represent the opening salvo in the transition from industrial-age to information-age strategies.

What are webs?

An economic web is a set of companies that use a common architecture to deliver independent elements of an overall value proposition that grows stronger as more companies join. Probably the best known is the Microsoft and Intel personal-computer web, in which hardware and component makers, software developers, channel partners, and training providers combine to deliver the overall value proposition of a Windows PC. Before a web can form, two conditions must be present: a technological standard and increasing returns.¹ The standard reduces risk by allowing companies to make irreversible investment decisions in the face of technological uncertainty, while the increasing returns create a mutual dependence that strengthens the web by drawing in more and more customers and producers.

Webs are different from alliances. Webs operate without any formal relationships among participants. All companies in a web are wholly independent; they price, market, and sell their products autonomously. Only the pursuit of economic self-interest drives them into weblike behavior.

Within economic webs, technology webs organize around specific technology platforms. On-line services are one example of a technology web. When Prodigy entered this field in the late 1980s, the company had to develop a vertically integrated business that included not just content but also the design and operation of both networks and servers, as well as billing and network operating systems. Later, the industry unbundled rapidly as specialized providers emerged to supply virtually every element of an on-line service technology platform. The growth of this technology web has lowered barriers to entry; today, new competitors can concentrate on creating or packaging content and obtain the remaining elements from other participants in the web.

Within technology webs, clusters of players participate in competing value webs, which seek to capture a disproportionate share of the value-creation opportunity. Whereas economic activity in technology webs focuses on maximizing value to the customer, value webs add a second objective: to create value for a specific group of companies that have adopted a common technology platform. In the desktop-computing technology web, for example, at least two major value webs compete. One, organized and shaped by Apple, promotes the Macintosh as the standard desktop-computing platform; the other, controlled by Microsoft and Intel, champions the PC standard defined by the use of the Intel microprocessor and the Microsoft operating system.

What strategic roles do webs create?

Adapters capture considerable value by spotting business opportunities earlier and moving more quickly than the competition

Companies can play two different strategic roles in webs: adaptation and shaping. Each role has the potential to generate considerable value. In companies that opt for an adapting role, senior management deals with uncertainty by trying to stay one step ahead of other players in anticipating changes in the business environment. Adapters try to stay at the edge of events, rather than attempting to influence them, and capture value by spotting opportunities earlier and moving more quickly than the competition. Shapers, on the other hand, focus on the fluidity of events and on opportunities to determine or influence outcomes. They believe it is possible to mold the environment so that it enhances their ability to create value.

Whether a company chooses to be an adapter or a shaper has much more to do with its senior management’s degree of ambition and willingness to take risks than with objective market conditions. The decision has profound implications for the strategy and tactics the company must pursue to be successful (Exhibit 1). Consider, for example, the contrasting strategies of a leading shaper, Microsoft, and a leading adapter, Compaq, in the desktop-computing technology web.

Microsoft has concentrated on occupying key leverage points in the computer arena and using these positions to shape winning value webs. Its early success stemmed from its ability to establish MS-DOS as the de facto operating system for PCs. An alliance with another leader, Intel, gave Microsoft access to a further leverage point: the microprocessor. The operating system and microprocessor represent leverage points because the functionality of the core technology influences the evolution of broader desktop-computing architectures, thereby shaping the investments made by other web participants.

Microsoft’s technology focus has always straddled product and architectural levels. The company must offer strong products to succeed, but success is defined more by the opportunity to shape overall architectures than by the commercial fortunes of any individual product. For this reason, Microsoft tries to get its core technologies adopted as de facto standards. Its marketing tends to focus on differentiating the architecture of the overall value web from competing webs, such as Apple’s, rather than on the attributes of individual products. This architectural approach leads to a long-term investment strategy: if an opportunity arises to establish or strengthen Microsoft’s architectural leadership, the company will invest heavily, over a long period, to pursue it.

By contrast, Compaq, at least within its desktop business, has followed an adaptation strategy of exploiting near-term product opportunities within the Microsoft-Intel value web. In forming alliances, Compaq aims to boost its responsiveness by improving its access to technologies or markets. The company maintains a sharp focus on the excellence of its products, and its marketing accordingly stresses differentiation at the product level. In line with this overall strategy, Compaq invests with an eye to near-term paybacks.

Success factors for shapers

Within technology webs, the success of shaping strategies ultimately hinges on four conditions:

• Ownership of a key platform technology, such as the "Wintel" standard, that shapes broader architectures and provides the basis for a longer-term lock-in.
• Unbundling the business to expand opportunities for other web participants. Consider Novell’s decision, in the late 1980s, to divest its local-area network (LAN) hardware business and focus exclusively on its network operating system. At the time, the company had a 40 percent market share in the LAN business, and LAN hardware sales represented 70 percent of company revenue. Writing off such a large chunk of income seemed risky, but it proved essential. By freeing up opportunities for other companies to launch products and by allaying concerns that the company might use its network operating system unfairly to benefit its hardware business, Novell gave new entrants incentives to participate in the emerging LAN value web. The results were impressive: between 1986 and 1994, Novell increased its market share in LAN software to 75 percent, from 40 percent, and its revenues rose to almost $2 billion, from $120 million.
• Reliance on economic incentives rather than alliance structures or contractual relationships to mobilize other web participants. Apple became one of the early creators of a value web by establishing "evangelists," an entirely new category of employee. Although evangelists were not salespeople, they were charged with telling companies about the business opportunities—which could easily be expanded through add-in boards or peripherals and enhanced through application software—that had been generated by the Apple II. Through the efforts of the evangelists, many new businesses appeared in such areas as board assembly, peripheral manufacturing, software development, retail distribution, value-added reselling, technical consulting, and after-sales support. Few of these new businesses had direct contractual relations with Apple; indeed, the company did not even know the names of many of them. But the pursuit of a common set of economic incentives defined by Apple’s product platform united them all.
• Active management of increasing-returns dynamics to accelerate the growth of the web and to lock in customers and participants. Netscape provides a useful example. Its first product was a browser that built on the established Mosaic browser developed at the University of Illinois by one of the company’s founders. Netscape also exploited the rich resources already available on the Internet. Leveraging existing technology and infrastructure allowed Netscape to enter the market quickly, and its controversial strategy of giving out the browser for free soon won it a market share of over 75 percent. All these steps encouraged the rapid adoption of the product by customers and helped persuade industry participants, including AT&T and News Corporation, to adopt the core technology. The resulting momentum hastened Netscape’s entry into the business of making software for Internet servers and positioned the company at the center of a powerful new value web.

Web shapers can reap enormous rewards, but the source of this wealth is quite different from that of traditional monopolist returns, in which a firm’s strategies focus on expanding its own capacity, acquiring competitors, and employing predatory pricing to inhibit entry and to discipline competitors. By speeding the adoption of core technologies and expanding the range of web participants, shapers set in motion an increasing-returns dynamic that raises barriers to entry for competing shapers and switching barriers for web participants. For the web shaper, the source of advantage—and of the ability to extract above-average returns—lies at the level not of the firm but of the web itself. Of course, the web shaper must own a technology component that allows it to shape the architecture defining the broader web, but the value of that component depends on the web’s size and growth.

Success factors for adapters

For those inclined to pursue adaptation strategies in technology webs, success depends on three factors:

• Early participation in winning value webs. Aldus built a sizable software business by recognizing, at an early stage, the value of the Macintosh computer as a platform for desktop publishing. At the time, the company established a preemptive position in this attractive market and was able to form close relations with Apple that gave it insights into future architectural developments.
• Competition for share within the value web. Compaq emerged as one of the early participants in the PC value web in the 1980s but eventually lost sight of the imperative of competing for share. A decade later, having been turned around by new senior management, the company regained its focus on relative share position and became highly profitable once more. Having a leading share in the value web allowed Compaq to strengthen its relations with Intel and Microsoft and improved its access to information generated within the web.
• Linking and leveraging (or diversifying) position. Participants in the value web can build sustainable long-term positions by tightly linking their strategies to those of the web shapers and leveraging this base into related areas. Alternatively, they can develop positions that straddle several value webs to protect against unexpected shifts in the strategies of web shapers or in the fortunes of the webs themselves. Compaq pursues a linking strategy through its close partnership with Microsoft in such ventures as the effort to make Microsoft’s Windows NT (known, in its latest iteration, as Windows 2000) a winning enterprise-level platform for full-service broadband networks. Straddling strategies are evident among software vendors that develop their products for both PC and Macintosh platforms.

Why are web strategies so powerful now?

If a given company is not distinctive in a particular business activity, several others will probably be able to perform it instead

Web strategies can help manage risk and generate innovation in complex, changing, and uncertain environments. A technology web permits participants to focus on their strengths. If a given company is not distinctive in a particular business activity, several others will probably be able to perform it instead. This safety net reduces risk by cutting overall investment requirements, by directing investment toward the areas most likely to succeed, and by encouraging the supply of bottleneck components by multiple producers.

A technology web’s ability to provide such a safety net—indeed, even the web’s very existence—is closely related to the advent of open architectures with widely available interface specifications, such as the Windows-Intel computing platform and the Internet. The proprietary architectures of the mainframe computer platforms of the 1960s, and even the early midrange platforms designed by DEC and Wang, prevented the formation of technology webs and imposed major internal development burdens on the company defining the architecture. Although the value created could have been enormous if the proprietary architecture had been adopted widely, the risk was equally huge because of the concentrated investment required to make the architecture successful.

Technology webs also limit risk by unleashing the powerful drivers of increasing returns and enhancing the flexibility of participants. Companies in a web enjoy more choice in sourcing and distribution, while their fixed investment and skill requirements fall. As a result, such companies face less severe penalties for making wrong bets and can shift to new bets more quickly.

Finally, technology webs improve the climate for innovation. Webs are largely shaped by information flows; information is distributed far more widely and intensely in webs than in conventional markets. Webs disperse innovation to many participants and provide robust mechanisms for disseminating learning through information links and interdependencies. The web created by Apple for the Apple II platform spawned the first spreadsheet product, from Visicalc; the web for the Macintosh platform generated the first desktop-publishing software. Both innovations shifted the position of the core technology platform; in all likelihood, neither would have occurred if innovation had been tightly concentrated within Apple.

What is distinctive about web strategies?

Web strategies both narrow and broaden the focus of management. They narrow it because they encourage unbundling and the outsourcing of undifferentiated business activities.² They broaden it because the context for defining strategy expands from maximizing value for the enterprise to maximizing value for the web. If the web does not maximize value, neither can the enterprises within it.

Admittedly, maximizing the value of the web does not necessarily translate into maximizing the value of the enterprise, as IBM’s experience with the PC web suggests. But neglecting the value of the web is dangerous; consider what happened in the late 1980s and early 1990s, when Apple did just that while focusing on near-term profitability and choosing not to license the Macintosh operating system to other manufacturers. Other participants in the web either shifted to straddle the Macintosh and PC value webs, thus eroding the differences between them, or migrated completely to the PC web. Apple was able to capture the lion’s share of the revenues in the Mac web, but the web itself—at least as reckoned by market share—began to shrink.

By contrast, Microsoft captures only about 4 percent of the revenues in its web, but that web has grown to more than $66 billion in size. Striking the right balance between maximizing value for the web and for the enterprise is one of the main strategic challenges facing web shapers and one of the chief concerns of other web participants.

Web strategies turn traditional strategic thinking on its head in other ways, too. The conventional approach requires firms first to define their own strategies and then to negotiate alliances that advance their aims. Web strategy asserts that the two basic choices confronting senior management are which webs to participate in (or to form) and what role (shaper or adapter) to play within them. Once these choices have been made, the firm’s strategy comes into focus. In other words, firm strategy follows web strategy.

In addition, web strategies have a profound impact on organization, especially for companies seeking to be shapers. Measurements of the performance of managers, for example, need to expand to place much greater emphasis on how webs perform. Aspiring shapers will need to develop the skills to create appropriate economic incentives for other web participants, to manage the dynamics of increasing returns, and to market the web. These skills include understanding the business economics of potential participants and knowing what is likely to motivate them to join the web. Product design must be conceived to maximize not only the value the product delivers to customers but also the appeal it holds for providers of complementary goods and services. Investment decisions must take account of increasing-returns dynamics: for example, what is the economic return from deploying a cadre of evangelists who make others aware of the economic benefits of joining a web yet do not themselves generate any revenue?

Companies participating in webs must learn to manage organizations whose boundaries have become much more porous, with denser information links to other web participants. Since value webs tend to concentrate information flows in the key leverage points occupied by web shapers—indeed, this is one of the main advantages of being a shaper—other participants will need to be proactive in extracting and interpreting this information. For those that succeed, there will be enormous scope for learning.

Where else are web strategies relevant?

This article has focused on technology webs in just one business environment: multimedia. Other emerging forms of webs are likely to be far more relevant to nontechnology providers.

New technologies are making it possible to form powerful customer webs, for instance, which are organized around the behavior and spending patterns of specific customer segments. Whereas technology webs are shaped by the ownership of a platform technology, customer webs revolve around the ownership of customer relations. A unique customer database creates the economic incentives necessary to mobilize other web participants interested in reaching the same customer segment. When a web shaper provides access to its database, it develops an even richer profile of its target customers and sets in motion a powerful increasing-returns dynamic.

Market webs represent another form of web, organized around a specific type of transaction. While the customer web shaper wants to develop the broadest possible relationship with its chosen segment and to serve those customers across a wide range of needs, the market web shaper tries to build the deepest possible relationship with all the buyers and sellers involved in a particular kind of market transaction. A market web shaper might, for example, focus on building a compelling environment for the formation and evolution of a market in residential mortgages. The shaper’s objective would be to assemble a critical mass of buyers and sellers and to serve all their needs in relation to the purchase and sale of residential mortgages. However, the shaper would take little or no interest in the broader needs of these buyers and sellers beyond the transaction category that defines the market web. Customer web shapers exert their influence by owning unique customer profiles and databases, but market web shapers exert theirs by controlling a physical or virtual space where buyers and sellers come to execute specific transactions.

Webs will form wherever there is rapid and profound change, the prospect of increasing returns, and a need for providers and consumers to make large and irreversible commitments of resources. Webs already appear to be a notable feature of fashion-dominated markets. They can also be expected to play a growing role in markets that are experiencing major discontinuities, such as health care and financial services.

Although webs can make or break a company in these rapidly changing worlds, traditional models of strategy offer little help with decisions about when and how to participate in them. Some of the most expert players in multimedia—companies such as Compaq, Microsoft, Netscape, and Novell—intuitively pursue web strategies. Survival, let alone success, for many others will depend on acquiring a new set of strategy tools to assist senior management as it tries to navigate through major discontinuities. The lessons learned by multimedia companies are likely to grow ever more relevant to players in many other industries fraught with technological and regulatory upheavals.

Webs represent a whole new way of thinking about industry structure, relationships between companies, and value creation. Although webs are not monopolies, they are just as powerful. For the rest of this decade—perhaps much longer—we shall see industries being shaped by competing webs that relentlessly devour one another.