Extract from e-commerce course

NETCENTRIC BUSINESS

In this section we look ahead and attempt to forecast how business will be organised and
operated in the netcentric world. It includes some more business models, an examination of
the power of emerging technologies, some old economic ideas and a discussion of the way
the nature of business organisation may have to change. There is a some overlap between
this section and section C, and they are considered separately only to aid discussion. They
are fundamentally looking at the same phenomenon.

The word netcentric may be unfamiliar but its use is growing and is likely to stick. It
represents a way of looking at business and encapsulates the sort of thinking and
perspectives discussed in this section. As the word suggests, it means putting the network at
the centre of our thinking. (Some commentators use the term web-centric to mean
essentially the same thing,)

An early discussion of the netcentric approach is contained in an article in Accenture's

Outlook magazine where the authors say: ".... the reach of netcentric computing allows an
organisation to link its employees, customers, suppliers, partners and others, irrespective of
time, location or device." (Goodyear & Chang 1999)

Netcentric computing is, not surprisingly, a product of new technology and new strategic
thinking. We look here at the strategic thinking, and for this purpose we do not need insight
into the nuts and bolts of the technology, merely what it allows us to do. (In another context,
for example in planning and commissioning new technology a manager would need rather
more insight into the technology and so we will return to this subject in Unit 4).

The ICDT Spaces models

The ICDT Model Source - Anghrn(1996)
The Five Dimensions Of E-Commerce
(These sections omitted)

Metcalfe's Law And Network Effects

Robert Metcalfe is the founder of 3Com and the designer of the Ethernet networking system.
He recognised a universal feature of networks, one that had been apparent in areas like the
railways and the telephone system, that a network required a critical mass to take off, and
after that point it increased in value at a much higher rate. Indeed Metcalfe's Law, as it has
come to be known, states that beyond the critical mass the value or utility of a network
equals the square of the number of users. As with many of these 'laws' the apparent
mathematical precision is misleading, but it is certainly true that beyond a certain point the
value of a network does increase exponentially.

A network promotes modularity and the distribution of intelligence within a system. Instead
of being concentrated (typically at the centre of an organisation) intelligence can remain
where it is developed, or gravitate to where it is most easily maintained. This migration
occurs within organisations but in a netcentric environment it can as easily occur between
firms.
The Nature Of The Firm

When the economist Ronald Coase was awarded the Nobel prize in 1991 one of the two
citations justifying the prize was his paper published in 1937 entitled The Nature of the Firm.
Coase, then a socialist, had been studying in the USA to determine why private enterprise
had evolved monolithic corporations which carried out the full range of market functions from
market research through manufacturing to support. He concluded that the nature of firms
was not accidental or political but followed an inexorable economic law. His conclusion was
that economic activity is carried out in the way which best minimises the cost of transactions.
If these costs are minimised by a firm doing something in-house, then that is where it will be
done. A good example is procurement. If every office clerk bought his own paper and pens
from an external stockholder there would be a duplication of the research, ordering and
accounting costs, so it is better to bring the stock holder in house. In a similar (though more
complicated way) the minimisation of transaction costs produced the vertical enterprises that
characterised the most part of the twentieth century. Coase identified the following main
costs:

• Search costs - buyers and sellers need to find each other in what may be a
disorganised and dispersed market.

• Information costs - researching the appropriateness, quality and price of the

good/services available.

• Transaction costs - negotiating terms; exchanging letters; holding meetings etc

• Decision costs - evaluating offers; taking legal advice; evaluating longer term
implications of the transaction

• Policing costs - ensuring that the goods/services are of the required quality,
delivered on time etc

• Enforcement costs - coping with failures in the contracting, payment or delivery

process.

In the social and technological environment of the time these costs were minimised by
bringing everything in-house. It was the only way to ensure continuity of business without
excessive costs. It is reported that Henry Ford even bought a rubber plantation to ensure
supplies of rubber.

In a netcentric business environment some of these transaction costs disappear and many
more are very much reduced. It is no longer necessary to bring everything in-house indeed it
becomes uneconomic to do so because the in-house transaction costs (management,
maintaining expertise etc) are greater than the costs of external transactions.

Link the implications of this law with the law of network effects and it would appear that the
nature of the firm is likely to change. There are indeed already signs of this change:
companies are increasingly outsourcing non-core operations. It is already possible to identify
well managed value chains among cooperating independent companies which are more
efficient than the internal chains of vertically integrated firms.

(There is a reprint of The Nature of the Firm and other related papers in The Nature of the
Firm: Origins, Evolution, and Development (Williamson and Winter 1993))
Unbundling The Corporation

The theme outlined in the last paragraph is developed by Hagel and Singer(2000) whose
analysis is centred on the three main types of business that a typical organisation runs. It will
have a customer relationship business, a production (of goods or services) business and an
infrastructure business. These three businesses have been traditionally welded together and
are seen as core functions and are rarely outsourced. But there is tension between the
strategic and cultural positions of the three functions. Hagel and Singer summarise these
differences as:

Customer relationship Product innovation Infrastructure

Economics High cost of customer Early market entry High fixed costs
acquisition makes it allows for a premium make large
imperative to gain price and large volumes essential
large wallet share: market share; speed to achieve low unit
economies of scope is the key costs; economies
are the key. of scale are key.
Competition Battle for scope; rapid Battle for talent; low Battle for scale;
consolidation, a few barriers to entry; rapid consolidation,
big players dominate. many small players a few big players
thrive dominate
Culture Highly service Employee centred; Cost focussed;
oriented; customer- coddling the creative standardisation,
comes-first mentality stars predictability and
efficiency

(Source adapted from Hagel & Singer 2000)

There is some evidence that this unbundling is beginning. Most people think of Yahoo as a
search engine, but in fact it out-sources the search engine business and is a pure customer
relationship business. Already the majority of credit card transactions in the United States
are processed by a third party (e.g. First Data) and not by the company facing the customer.

Web Services

The technological foundation for contemporary netcentric computing is the new technology
called Web Services. Many of the ingredients of Web Services technology are not new, but
they are combined and empowered in a new way to produce new functionality. You have
seen something of the technology in the Systems module and we will be looking at in more
detail in Unit 4 of this module.

Web Services provide an application communication service. The applications might be

under the immediate control of human input (e.g. running in a window on your desktop) or
might be running without immediate human supervision (e.g. an accounting or ERP system).
Web Services provide the equivalent of Yellow Pages in which an application can discover
what services are provided by a remote system, and the protocols it needs to use to access
them.

A system 'wanting' a service (it is hard not to be anthropomorphic when discussing this topic)
would use Web Services to find out where the service it requires is available. Using the same
system it would interrogate a number of the sources it found to obtain the information it
needed to make a decision. It might then use the same procedure to enter into a contract
with one of those remote systems.
Web Services also enable users to make use of contentless software,: for example not only
can Web Services allow a system to interrogate an existing remote stock database, it can
ask a software provider for the minimum functionality needed to open and use a new stock
database. The local system gets the ability to add, remove, update etc using the Web
Service, without needing to know what sort of machine or what sort of software is being used
by the provider.

Web Services technology enables computers to talk to each other, to exchange semantic
messages, and to do so even though they are in terms of hardware and software,
incompatible technologies.

It is not yet a pervasive technology. But it is gaining ground and it is the future. The key
features which will drive its widespread adoption are

It honours diversity in existing systems

there is no need to rip out old systems and replace them with something entirely new. The
existing investment is not lost since web services can be implemented as overlays on
existing systems.

It is relatively simple to implement

The software needed for implementation is mostly available as ready made modules which
can be readily adapted, leading to faster and relatively inexpensive roll out of new features

It is loosely coupled

Unlike existing integration technologies it is not tied into existing systems and so provides
flexibility in .....

It can be incremented gradually

Unlike legacy technology there is no need for an all-or-nothing decision. It is possible to test
the water by Web Service enabling part of a system.

The adoption of Web Services by major ERP vendors like SAP and JDE will lead to a new
generation of high level reusable ERP components which have their interfaces exposed as a
series of Web Services.
What are the forces that are driving changes in the way firms are
owned and organised?

Why are Web Services likely to accelerate the process?

The nature of the firm is not arbitrary. It is a product of the costs and risks of carrying out
external transactions. Where it is difficult to research, negotiate and control transactions the
functions are likely to be brought in-house. Where they are easy to research, negotiate and
control they will tend to be outsourced.

The Internet has already greatly reduced research costs and in some areas distributed
applications already enable loosely coupled firms to operate as a virtual organisation. One of
the firms, typically one with established branding, market or expertise, orchestrates the other
partners in the organisation to produce and deliver the goods or services. We will be looking
at some examples of this business model in the next unit.

The adoption of Web Services technology will accelerate this process and extend it into new
areas because it:

can overlay rather than replace existing systems;

can be implemented from existing building blocks;

can be implemented quickly and at less cost than legacy technology;

can be introdiuced incrementally.

It will be most easily implemented where there are relatively settled relationships in value
chain networks but the flexibility and low barriers to entry associated with Web Services will
also make possible more transient ventures. It will be possible, perhaps for the first time, to
bring together expertise, plant and marketing resources for an acknowledged limited time
operation.

This is not just academic theory. It is informing the strategic planning of businesses and the
changes are already happening.
REFERENCES

Anghrn A 1996 The Strategic Implications of the Internet [On-line]

Available: [Link]
Changed to [Link]/facultyresearch/faculty/personal/aangehrn/
[Accessed 10/10/03]

(Goodyear & Chang 1999)

The Next Computing Wave : Gift or Pandoras Box
Goodyear Mark & Chang Richard
Accenture Outlook 1999 Number 1 [On-line]
Available: [Link] (search for Outlook, then for the title)
[Accessed 11/03/2011]

Hagel & Singer (2000) [On-line]

McKinsey Quarterly 2000 Number 3 pp 148-161
Available: [Link]
[Accessed 10/10/03] No longer available

Williamson, Oliver and Winter Sidney (ed) (1993)

The Nature of the Firm: Origins, Evolution, and Development
Oxford University Press; ISBN: 0195083563