Internet Strategy - Red Ocean or Blue Ocean?

The management shuffle announced by Yahoo last evening is only the latest evidence of strategy decay that pervades the leading ranks of the Internet business world.  Yahoo says it made the changes to allow the company to move faster.

Fine, but in what direction do they want to move? What does Yahoo! want to be when it grows up? And what does that imply for what it will choose not to do?

In our celebrity culture, we love to focus on people.  Decker gained, Rosensweig is out, Braun is out, Semel’s still there, Yang’s mentioned, but where’s Filo and who the Hell is going to head up the audience group (and why can’t Yahoo find anyone internally to take this on)?

People matter, of course, but in this context strategy matters even more. Faster movement is dangerous if you have no sense of direction.  It just means you do more things more quickly, spreading that peanut butter even more thinly.  To paraphrase an old quote by Casey Stengel: “if you don’t know where you are going, you will never get there.”

And let’s not just single out Yahoo.  I have a growing sense that all the major Internet players – Google, MSN, Amazon, Ebay and AOL – have lost their sense of direction and differentiation. Rather than carving out and rapidly enhancing areas of distinctive advantage, these major players appear to be leaping like lemmings into the red ocean. Here are some of the red flags that give me cause for concern:

• Rather than helping people to connect more effectively with resources across the Web, they all seem increasingly focused on aggregating their own resources.

• They are becoming more and more obsessed with advertising revenue and risk losing focus on what is required to add more value to users. Advertising revenue is a dangerous narcotic – it shifts you more and more into a vendor mindset rather than a user mindset.

• They are investing large sums of money on infrastructure, further diverting time and attention away from development of new services for users (infrastructure services like Amazon’s EC2 and S3 are a very different business).

• They seem to be looking more and more at each other and trying to replicate each other’s services rather than focusing on the user and trying to be truly innovative in terms of new services.

Now, this growing homogenization of the leadership ranks might be understandable if the Internet were a maturing business arena.  Given the rapid and sustained pace of innovation in the underlying technology, the rapid growth of usage, the continuing shift of spending to the Internet and the proliferation of new businesses created on the Internet, I find it hard to characterize this space as “maturing” – my sense is that it is still in its infancy.

Some observers have even begun to hail the emergence of “Internet conglomerates” as the wave of the future. Looking from the outside in, one can make explicit the assumptions that seem to be driving the investments, business initiatives and strategies of these leaders. These assumptions seem to converge on this view of the future: leading companies will be vertically integrated and horizontally integrated, offering a broad range of their own resources to users who will “settle” into their spaces.  Certainly, the strategies of these companies seem to assume that Internet conglomerates are the wave of the future. Is this really the way the Internet will evolve as a business platform?

As I have written in Harvard Business Review, I believe that a quite different future will unfold, marked by a distinctive process of unbundling and re-bundling of firms. This perspective suggests that all the Internet leaders confront the same difficult choices that more traditional companies also face.  Over time, will these companies choose to be customer relationship businesses, product innovation and commercialization businesses or infrastructure management businesses? None of the Internet leaders appear prepared to confront these choices yet.

Of course, there’s another interpretation of the initiatives pursued by the Internet leaders.  They may be explicitly avoiding any view of the future and instead spreading their bets across many initiatives in the hope that some of these bets will pay off while others will prove to be dead-ends. Nick Carr refers to this as the spaghetti strategy – “throw a lot of stuff against the wall and see what sticks.”

As uncertainty increases, this has become the preferred “strategy” of many companies, not just in the Internet sphere.  While strategy used to be viewed as the discipline of making choices, this approach proudly rejects the need to make any choices. It is a particularly seductive approach for large companies with lots of resources.

And yet this approach stands in sharp contrast to the strategies that enabled the Internet leaders to carve out their leadership positions in the first place. Unlike the thousands of other dot.com start-ups that embraced hustle as strategy and speed without direction, the founders of these companies started with a very clear, even though high-level, long-term destination in mind.  It helped them to make difficult choices in the near-term and to launch waves of initiatives that cumulatively built very large and successful businesses. It has stood them very well in the first decade of their business.

In my own work, I use a FAST strategy methodology. It emphasizes the need to have a clear, but high-level view of a long-term destination while in parallel focusing on a limited number of high impact initiatives in the operations and organization that can accelerate movement towards this destination. What the Internet leaders seem to have lost is any distinctive long-term view of what kind of business they will need to build to remain successful in a rapidly evolving business landscape.

People can be moved in and out of executive positions. Large, high visibility acquisitions can be announced.  "Strategic" relationships across leading companies can be negotiated. But without a clear and differentiated sense of long-term direction, all of these initiatives will make for good newspaper copy, but count for little in terms of sustained value creation.

Comments

[Brian Glassman]

Hello Mr. John Hagel

I order my comment as a response to your bullet points and other material.

John mentioned “Rather than helping people to connect more effectively with resources across the Web, they all seem increasingly focused on aggregating their own resources”

1. Mashups and other programs which are allowing content to be merged from many sources were popularized by Blogging software like Wordpress. Software like these have been emulated to some degree Yahoo and Google and can be seen in your customizable home page, like http://my.yahoo.com. However, they have not seen a return on these efforts and the low user adoption has shifted their employee’s enthusiasm and energy to other projects.

John mentioned “They [major internet players Google…] are becoming more and more obsessed with advertising revenue and risk losing focus on what is required to add more value to users. Advertising revenue is a dangerous narcotic – it shifts you more and more into a vendor mindset rather than a user mindset.”

2. I agree they are becoming more obsessed with advertising; however, I have not seen any major advances in their technologies in this area.

John mentioned “They [major internet players Google…] are are investing large sums of money on infrastructure, further diverting time and attention away from development of new services for users..”

3. Both Google is currently building up infrastructure to create an online operating system, they have kept this very hush hush. Microsoft caught wind of this and a retailing in a similar fashion because that is their company culture.

John mentioned “They seem to be looking more and more at each other and trying to replicate each other’s services rather than focusing on the user and trying to be truly innovative in terms of new services.”

4. There is a high degree of imitation due to the low entrance barrier. However, there is a good deal of difference in the service portfolios of companies like Yahoo and Google. For instance Yahoo has a focus on providing service for website development. http://tools.search.yahoo.com/about/forsiteowners.html
The funny thing is that when Google or Yahoo rolls out new services which could be considered innovative they only provide them to a number of chosen or self-selected users. For example, to find new Yahoo service you have to dig through their website and get to http://next.yahoo.com/ . Another way is Google and Yahoo would select a few users out of the millions to display a new service on their homepage and see the click through usage. When you own the core distribution channels (namely the search engines) you have tremendous power in distribution.
Also I totally agree with your comment “ ‘maturing’ – my sense is that it is still in its infancy.” We are nowhere near maturity; in my opinion, I think looking at the internet as a whole is the wrong reference frame. If you could say anything about market and their maturity I would recommend picking a technology market like “directory services ex. www.dmoz.org” on the internet. Then you could make a determination about its maturity. The internet is a communication and IT platform, not a particular market.
Additionally, I really disapprove of spaghetti strategies, due to their unfocused nature. I would take a guess and say, if you did a statistical study on the return on research and development dollars for companies in the technology field which had spaghetti R&D strategies it would be below the average in returns to stockholder. Maybe I should conduct that study.
It is very unfortunate as you have mentioned that companies on the internet have pushed away the strategic planning riggers and knowledge which have been built up over the past 30 years. I myself being a student of management will never forget those lessons, and may choose to re-enlighten the internet community to these well proven thoughts.
Thank for your post John

Brian Glassman
www.techrd.com

[V-+a%S(p#E*rsT=`hE..]gra_Te[]

Again you exhibit a brilliant and wise vision.

You echo what Al Ries, Jack Trout, and Laura Ries have been preaching from the 1980s: focus, be specific, position yourself as the leader of only a small, limited area of expertise.

A brand cannot be "all things to all people". Good Lord, that is so freaking 1950!

It's arrogance and greed, which lead to mediocrity and "spreading yourself too thin".

I understand the tempting allure of being a "know it all". I have a consuming interest in all computer and web topics, psychology, electronic music, philosophy, art, gardening, etc.

But my blog tends to focus on business blogging and web usability, with occasional tangents into music and etc.

Keep up the combative, confrontational, controversial, contrarian genius insights!

[Ricardo]

One of the reasons could be in the rapidly changing technology and, more importantly, the user approach to technology. At this point the social connection to internet is shifting from a source of news and commerce, external and new, to a common place in our lives. Much like other media before. The change, even in the places and social situations in which we use "the internet" -let's see how long we call it that way, even we call it something- is moving so fast that probably their strategy, as you mention, tries to cover all possible corners in order to make sure opportunities are checked. The lack of focus, and the disconnect of the business leaders with this changing reality translates into opportunities lost, and statements like the one by Yahoo being just a silent reality for most big companies in the industry. The difference is only in the names. Some call it innovation or managing chaos, just to hide reality.

[Prabir]

John:

On this topic I totally agree with you. In fact, I wrote the same in my blog (What Is A Good Idea?: A Global Brand Crisis - http://www.manageinnovations.com)

It seems that two marketing approaches that failed against genuine global marketing. The first is trying to sell the same things in the same way everywhere. This is, after all, what exporters of the bad old school have always done: build up a business in the home market, and then tried to extend it to another countries without making any allowances for differences in culture, laws labor costs, demographics, competitors, climate, distribution system etc. The second, approach is trying to sell different things in a different way everywhere, with a loose network of national profit centers, jealously guarded by feudal barons, each with inadequate scales of production and R&D and a purposive ignorance about what is happening in the rest of the world.

What is a global brand? The real global brand adapts with culture, demographics and competition in the complex adaptive system. They connect with the people irrespective of any geographical boundaries. They appeal to their customers’ sensory, rational and emotional behaviors. Customers, in return, respond according to their behavior, attitude, experience or perception. Customer wants variants and options, frequent model changes, fashion and style changes, trade-off between quality and price, seasonal availability. The crucial choice is about where to standardize it and where to differentiate.

All the major Internet players – Google, MSN, Amazon, Ebay and AOL - are struggling to adapt in the global marketplace.

[Britton Manasco]

You seem to argue that Internet companies commit a fatal strategic error by "spreading their bets across many initiatives." I guess I agree if this error prevents them from clearly defining themselves and their missions. But I wonder if this point is true in principle.

I am of the mind that strategic focus and portfolio thinking can somehow be reconciled. Managers at all levels are given a set of chips to play. The question is whether they should "let it all ride on lucky 7" or "hedge" their bets. I think hedging is a smart strategy -- at least at some level. Sure, we need to discover our strengths and capitalize on them, as Marcus Buckingham eloquently argues. But don't we also need to avoid putting "all our eggs in one basket"?

How do we reconcile these competing principles? I'd love to hear your thoughts on that.

[Vera Bass]

I remember, once upon a time, when 'lateral thinking' was the newly termed advantage of brilliant strategists.

The only way I can describe what I see of many internet and web development strategies today is lateral thinking turned into 'circular thinking'. Watching it makes me slightly dizzy.

Vera

[Rob]

Hi John,

One thing I have noticed as a consultant, in corporate America and even in the military is that few people want to follow someone else's strategy. I agree in theory that strategy should be something separate from executive personality, but I'm beginning to question whether this can be the case.

Just take the sheer proliferation of "strategy teams" in most corporations and government agencies. My cold assessment says that there are way too many people trying to put their stamp on strategy given the maybe 100 important decisions are made each year at a large corporation.

So although I agree that strategy and executive shakeup should be separate, as CEO I'm not sure I could keep this as separate.