Chapter 1: Setting the Stage: Technology and the Modern Enterprise

1.1 Tech’s Tectonic Shift: Radically Changing Business Landscapes

This book is written for a world that has changed radically in the past decade.

At the start of the prior decade, Google barely existed and well-known strategists dismissed Internet advertising models.M. Porter, “Strategy and the Internet,” Harvard Business Review 79, no. 3 (March 2001): 62–78. By decade’s end, Google brought in more advertising revenue than any firm, online or off, and had risen to become the most profitable media company on the planet. Today billions in advertising dollars flee old media and are pouring into digital efforts, and this shift is reshaping industries and redefining skills needed to reach today’s consumers.

A decade ago the iPod also didn’t exist and Apple was widely considered a tech-industry has-been. By spring 2010 Apple had grown to be the most valuable tech firm in the United States, selling more music and generating more profits from mobile device sales than any firm in the world.

Moore’s Law and other factors that make technology faster and cheaper have thrust computing and telecommunications into the hands of billions in ways that are both empowering the poor and poisoning the planet.

Social media barely warranted a mention a decade ago, but today, Facebook’s user base is larger than any nation, save for China and India. Firms are harnessing social media for new product ideas and for millions in sales. But with promise comes peril. When mobile phones are cameras just a short hop from YouTube, Flickr, and Twitter, every ethical lapse can be captured, every customer service flaw graffiti-tagged on the permanent record that is the Internet. The service and ethics bar for today’s manager has never been higher.

Speaking of globalization, China started the prior decade largely as a nation unplugged and offline. But today China has more Internet users than any other country and has spectacularly launched several publicly traded Internet firms including Baidu, Tencent, and Alibaba. By 2009, China Mobile was more valuable than any firm in the United States except for Exxon Mobil and Wal-Mart. Think the United States holds the number one ranking in home broadband access? Not even close—the United States is ranked fifteenth.S. Shankland, “Google to Test Ultrafast Broadband to the Home,” CNET, February 10, 2010.

The way we conceive of software and the software industry is also changing radically. IBM, HP, and Oracle are among the firms that collectively pay thousands of programmers to write code that is then given away for free. Today, open source software powers most of the Web sites you visit. And the rise of open source has rewritten the revenue models for the computing industry and lowered computing costs for start-ups to blue chips worldwide.

Cloud computing and software as a service is turning sophisticated, high-powered computing into a utility available to even the smallest businesses and nonprofits.

Data analytics and business intelligence are driving discovery and innovation, redefining modern marketing, and creating a shifting knife-edge of privacy concerns that can shred corporate reputations if mishandled.

And the pervasiveness of computing has created a set of security and espionage threats unimaginable to the prior generation.

As the last ten years have shown, tech creates both treasure and tumult. These disruptions aren’t going away and will almost certainly accelerate, impacting organizations, careers, and job functions throughout your lifetime. It’s time to place tech at the center of the managerial playbook.

1.2 It’s Your Revolution

The intersection where technology and business meet is both terrifying and exhilarating. But if you’re under the age of thirty, realize that this is your space. While the fortunes of any individual or firm rise and fall over time, it’s abundantly clear that many of the world’s most successful technology firms—organizations that have had tremendous impact on consumers and businesses across industries—were created by young people. Consider just a few:

Bill Gates was an undergraduate when he left college to found Microsoft—a firm that would eventually become the world’s largest software firm and catapult Gates to the top of the Forbes list of world’s wealthiest people (enabling him to also become the most generous philanthropist of our time).

Michael Dell was just a sophomore when he began building computers in his dorm room at the University of Texas. His firm would one day claim the top spot among PC manufacturers worldwide.

Mark Zuckerberg founded Facebook as a nineteen-year-old college sophomore.

Steve Jobs was just twenty-one when he founded Apple.

Tony Hsieh proved his entrepreneurial chops when, at twenty-four, he sold LinkExchange to Microsoft for over a quarter of a billion dollars.M. Chafkin, “The Zappos Way of Managing,” Inc., May 1, 2009. He’d later serve as CEO of Zappos, eventually selling that firm to Amazon for $900 million.S. Lacy, “Amazon Buys Zappos; The Price Is $928m., Not $847m.,” TechCrunch, July 22, 2009.

Sergey Brin and Larry Page were both twenty-something doctoral students at Stanford University when they founded Google. So were Jerry Yang and David Filo of Yahoo! All would become billionaires.

If you want to go a little older, Kevin Rose of Digg and Steve Chen and Chad Hurley of YouTube were all in their late twenties when they launched their firms. Jeff Bezos hadn’t yet reached thirty when he began working on what would eventually become Amazon.

Of course, those folks would seem downright ancient to Catherine Cook, who founded MyYearbook.com, a firm that at one point grew to become the third most popular social network in the United States. Cook started the firm when she was a sophomore—in high school.

But you don’t have to build a successful firm to have an impact as a tech revolutionary. Shawn Fanning’s Napster, widely criticized as a piracy playground, was written when he was just nineteen. Fanning’s code was the first significant salvo in the tech-fueled revolution that brought about an upending of the entire music industry. Finland’s Linus Torvals wrote the first version of the Linux operating system when he was just twenty-one. Today Linux has grown to be the most influential component of the open source arsenal, powering everything from cell phones to supercomputers.

BusinessWeek regularly runs a list of America’s Best Young Entrepreneurs—the top twenty-five aged twenty-five and under. Inc. magazine’s list of the Coolest Young Entrepreneurs is subtitled the “30 under 30.”D. Fenn, “30 Under 30: For Young Entrepreneurs, Safety in Numbers,” Inc., October 1, 2009. While not exclusively filled with the ranks of tech start-ups, both of these lists are nonetheless dominated with technology entrepreneurs. Whenever you see young people on the cover of a business magazine, it’s almost certainly because they’ve done something groundbreaking with technology. The generals and foot soldiers of the technology revolution are filled with the ranks of the young, some not even old enough to legally have a beer. For the old-timers reading this, all is not lost, but you’d best get cracking with technology, quick. Junior might be on the way to either eat your lunch or be your next boss.

1.3 Geek Up—Tech Is Everywhere and You’ll Need It to Thrive

Shortly after the start of the prior decade, there was a lot of concern that tech jobs would be outsourced, leading many to conclude that tech skills carried less value and that workers with tech backgrounds had little to offer. Turns out this thinking was stunningly wrong. Tech jobs boomed, and as technology pervades all other management disciplines, tech skills are becoming more important, not less. Today, tech knowledge can be a key differentiator for the job seeker. It’s the worker without tech skills that needs to be concerned.

As we’ll present in depth in a future chapter, there’s a principle called Moore’s Law that’s behind fast, cheap computing. And as computing gets both faster and cheaper, it gets “baked into” all sorts of products and shows up everywhere: in your pocket, in your vacuum, and on the radio frequency identification (RFID) tags that track your luggage at the airport.

Well, there’s also a sort of Moore’s Law corollary that’s taking place with people, too. As technology becomes faster and cheaper and developments like open source software, cloud computing, software as a service (SaaS), and outsourcing push technology costs even lower, tech skills are being embedded inside more and more job functions. What this means is that even if you’re not expecting to become the next Tech Titan, your career will doubtless be shaped by the forces of technology. Make no mistake about it—there isn’t a single modern managerial discipline that isn’t being deeply and profoundly impacted by tech.

1.4 The Pages Ahead

Hopefully this first chapter has helped get you excited for what’s to come. The text is written in a style meant to be as engaging as the material you’ll be reading for the rest of your management career—articles in business magazines and newspapers. The introduction of concepts in this text are also example rich, and every concept introduced or technology discussed is always grounded in a real-world example to show why it’s important. But also know that while we celebrate successes and expose failures in that space where business and technology come together, we also recognize that firms and circumstances change. Today’s winners have no guarantee of sustained dominance. What you should acquire in the pages that follow are a fourfold set of benefits that (1) provide a description of what’s happening in industry today, (2) offer an introduction to key business and technology concepts, (3) offer a durable set of concepts and frameworks that can be applied even as technologies and industries change, and (4) develop critical thinking that will serve you well throughout your career as a manager.

Chapters don’t have to be read in order, so feel free to bounce around, if you’d like. But here’s what you can expect:

Chapter 2 “Strategy and Technology: Concepts and Frameworks for Understanding What Separates Winners from Losers” focuses on building big-picture skills to think about how to leverage technology for competitive advantage. Technology alone is rarely the answer, but through a rich set of examples, we’ll show how firms can weave technology into their operations in ways that create and reinforce resources that can garner profits while repelling competitors. A mini case examines tech’s role at FreshDirect, a firm that has defied the many failures in the online grocery space and devastated traditional rivals. BlueNile, Dell, Lands’ End, TiVo and Yahoo! are among the many firms providing a rich set of examples illustrating successes and failures in leveraging technology. The chapter will show how firms use technology to create and leverage brand, scale economies, switching costs, data assets, network effects, and distribution channels. We’ll introduce how technology relates to two popular management frameworks—the value chain and the five forces model. And we’ll provide a solid decision framework for considering the controversial and often misunderstood role that technology plays among firms that seek an early-mover advantage.

In Chapter 3 “Zara: Fast Fashion from Savvy Systems”, we see how a tech-fed value chain helped Spanish clothing giant Zara craft a counterintuitive model that seems to defy all conventional wisdom in the fashion industry. We’ll show how Zara’s model differs radically from that of the firm it displaced to become the world’s top clothing retailer: Gap. We’ll see how technology impacts product design, product development, marketing, cycle time, inventory management, and customer loyalty and how technology decisions influence broad profitability that goes way beyond the cost-of-goods thinking common among many retailers. We’ll also offer a mini case on Fair Factories Clearinghouse, an effort highlighting the positive role of technology in improving ethical business practices. Another mini case shows the difference between thinking about technology versus broad thinking about systems, all through an examination of how high-end fashion house Prada failed to roll out technology that on the surface seemed very similar to Zara’s.

Chapter 4 “Netflix: The Making of an E-commerce Giant and the Uncertain Future of Atoms to Bits” tramples the notion that dot-com start-up firms can’t compete against large, established rivals. We’ll show how information systems at Netflix created a set of assets that grew in strength and remains difficult for rivals to match. The economics of pure-play versus brick-and-mortar firms is examined, and we’ll introduce managerial thinking on various concepts such as the data asset, personalization systems (recommendation engines and collaborative filtering), the long tail and the implications of technology on selection and inventory, crowdsourcing, using technology for novel revenue models (subscription and revenue-sharing with suppliers), forecasting, and inventory management. The case ends with a discussion of Netflix’s uncertain future, where we present how the shift from atoms (physical discs) to bits (streaming and downloads) creates additional challenges. Issues of licensing and partnerships, revenue models, and delivery platforms are all discussed.

Chapter 5 “Moore’s Law: Fast, Cheap Computing and What It Means for the Manager” focuses on understanding the implications of technology change for firms and society. The chapter offers accessible definitions for technologies impacted by Moore’s Law, but goes beyond semiconductors and silicon to show how the rate of magnetic storage (e.g., hard drives) and networking create markets filled with uncertainty and opportunity. The chapter will show how tech has enabled the rise of Apple and Amazon, created mobile phone markets that empower the poor worldwide, and has created five waves of disruptive innovation over five decades. We’ll also show how Moore’s Law, perhaps the greatest economic gravy train in history, will inevitably run out of steam as the three demons of heat, power, and limits on shrinking transistors halt the advancement of current technology. Studying technologies that “extend” Moore’s Law, such as multicore semiconductors, helps illustrate both the benefit and limitation of technology options, and in doing so, helps develop skills around recognizing the pros and cons of a given innovation. Supercomputing, grid, and cloud computing are introduced through examples that show how these advances are changing the economics of computing and creating new opportunity. Finally, issues of e-waste are explored in a way that shows that firms not only need to consider the ethics of product sourcing, but also the ethics of disposal.

In Chapter 6 “Understanding Network Effects”, we’ll see how technologies, services, and platforms can create nearly insurmountable advantages. Tech firms from Facebook to Intel to Microsoft are dominant because of network effects—the idea that some products and services get more valuable as more people use them. Studying network effects creates better decision makers. The concept is at the heart of technology standards and platform competition, and understanding network effects can help managers choose technologies that are likely to win, hopefully avoiding getting caught with a failed, poorly supported system. Students learn how network effects work and why they’re difficult to unseat. The chapter ends with an example-rich discussion of various techniques that one can use to compete in markets where network effects are present.

Chapter 7 “Peer Production, Social Media, and Web 2.0” explores business issues behind several services that have grown to become some of the Internet’s most popular destinations. Peer production and social media are enabling new services and empowering the voice of the customer as never before. In this chapter, students learn about various technologies used in social media and peer production, including blogs, wikis, social networking, Twitter, and more. Prediction markets and crowdsourcing are introduced, along with examples of how firms are leveraging these concepts for insight and innovation. Finally, students are offered guidance on how firms can think SMART by creating a social media awareness and response team. Issues of training, policy, and response are introduced, and technologies for monitoring and managing online reputations are discussed.

Chapter 8 “Facebook: Building a Business from the Social Graph” will allow us to study success and failure in IS design and deployment by examining one of the Web’s hottest firms. Facebook is one of the most accessible and relevant Internet firms to so many, but it’s also a wonderful laboratory to discuss critical managerial concepts. The founding story of Facebook introduces concepts of venture capital, the board of directors, and the role of network effects in entrepreneurial control. Feeds show how information, content, and applications can spread virally, but also introduce privacy concerns. Facebook’s strength in switching costs demonstrates how it has been able to envelop additional markets from photos to chat to video and more. The failure of the Beacon system shows how even bright technologists can fail if they ignore the broader procedural and user implications of an information systems rollout. Social networking advertising is contrasted with search, and the perils of advertising alongside social media content are introduced. Issues of predictors and privacy are covered. And the case allows for a broader discussion on firm value and what Facebook might really be worth.

Chapter 9 “Understanding Software: A Primer for Managers” offers a primer to help managers better understand what software is all about. The chapter offers a brief introduction to software technologies. Students learn about operating systems, application software, and how these relate to each other. Enterprise applications are introduced, and the alphabet soup of these systems (e.g., ERP, CRM, and SCM) is accessibly explained. Various forms of distributed systems (client-server, Web services, messaging) are also covered. The chapter provides a managerial overview of how software is developed, offers insight into the importance of Java and scripting languages, and explains the differences between compiled and interpreted systems. System failures, total cost of ownership, and project risk mitigation are also introduced. The array of concepts covered helps a manager understand the bigger picture and should provide an underlying appreciation for how systems work that will serve even as technologies change and new technologies are introduced.

The software industry is changing radically, and that’s the focus of Chapter 10 “Software in Flux: Partly Cloudy and Sometimes Free”. The issues covered in this chapter are front and center for any firm making technology decisions. We’ll cover open source software, software as a service, hardware clouds, and virtualization. Each topic is introduced by discussing advantages, risks, business models, and examples of their effective use. The chapter ends by introducing issues that a manager must consider when making decisions as to whether to purchase technology, contract or outsource an effort, or develop an effort in-house.

In Chapter 11 “The Data Asset: Databases, Business Intelligence, and Competitive Advantage”, we’ll study data, which is often an organization’s most critical asset. Data lies at the heart of every major discipline, including marketing, accounting, finance, operations, forecasting and planning. We’ll help managers understand how data is created, organized, and effectively used. We’ll cover limitations in data sourcing, issues in privacy and regulation, and tools for access including various business intelligence technologies. A mini case on Wal-Mart shows data’s use in empowering a firm’s entire value chain, while the mini case on Harrah’s shows how data-driven customer relationship management is at the center of creating an industry giant.

Chapter 12 “A Manager’s Guide to the Internet and Telecommunications” unmasks the mystery of the Internet—it shows how the Internet works and why a manager should care about IP addresses, IP networking, the DNS, peering, and packet versus circuit switching. We’ll also cover last-mile technologies and the various strengths and weaknesses of getting a faster Internet to a larger population. The revolution in mobile technologies and the impact on business will also be presented.

Chapter 13 “Information Security: Barbarians at the Gateway (and Just About Everywhere Else)” helps managers understand attacks and vulnerabilities and how to keep end users and organizations more secure. Breaches at TJX and Heartland and the increasing vulnerability of end-user systems have highlighted how information security is now the concern of the entire organization, from senior executives to front-life staff. This chapter explains what’s happening with respect to information security—what kinds of attacks are occurring, who is doing them, and what their motivation is. We’ll uncover the source of vulnerabilities in systems: human, procedural, and technical. Hacking concepts such as botnets, malware, phishing, and SQL injection are explained using plain, accessible language. Also presented are techniques to improve information security both as an end user and within an organization. The combination of current issues and their relation to a broader framework for security should help you think about vulnerabilities even as technologies and exploits change over time.

Chapter 14 “Google: Search, Online Advertising, and Beyond” discusses one of the most influential and far-reaching firms in today’s business environment. As pointed out earlier, a decade ago Google barely existed, but it now earns more ad revenue and is a more profitable media company than any firm, online or off. Google is a major force in modern marketing, research, and entertainment. In this chapter you’ll learn how Google (and Web search in general) works. Issues of search engine ranking, optimization, and search infrastructure are introduced. Students gain an understanding of search advertising and other advertising techniques, ad revenue models such as CPM and CPC, online advertising networks, various methods of customer profiling (e.g., IP addresses, geotargeting, cookies), click fraud, fraud prevention, and issues related to privacy and regulation. The chapter concludes with a broad discussion of how Google is evolving (e.g., Android, Chrome, Apps, YouTube) and how this evolution is bringing it into conflict with several well-funded rivals, including Amazon, Apple, Microsoft, and more.

Nearly every industry and every functional area is increasing its investment in and reliance on information technology. With opportunity comes trade-offs: research has shown that a high level of IT investment is associated with a more frenzied competitive environment.E. Brynjolfsson, A. McAfee, M. Sorell, and F. Zhu, “Scale without Mass: Business Process Replication and Industry Dynamics,” SSRN, September 30, 2008. But while the future is uncertain, we don’t have the luxury to put on the brakes or dial back the clock—tech’s impact is here to stay. Those firms that emerge as winners will treat IT efforts “as opportunities to define and deploy new ways of working, rather than just projects to install, configure, or integrate systems.”A. McAfee and E. Brynjolfsson, “Dog Eat Dog,” Sloan Management Review, April 27, 2007. The examples, concepts, and frameworks in the pages that follow will help you build the tools and decision-making prowess needed for victory.