STRATEGY

4 THE McKINSEY QUARTERLY 1996 NUMBER I

 Are "webs" a new strategy for the information age?

The key question: should you adapt or shape?

How much ofthe wealth do you share?

Managing the dynamics of increasing returns

John Hagel III

W
I would like to thank HAT DOES IT MEAN when oiie of the
Eric Beinhocker. world's biggest matiufacturers of
Dick Foster, Joe Heel.
Will Lansing. Tetsuya
personal computers fitids it difficult
Mori, Mike Nevens, to stay itidependent? In the old days, bigger
Patil Sagawa. Olivier meant more powerful - and often a high
Sibony, Jayanl SInha, market multiple too. But now, just the opposite
Chuck Stucki. and
Soimi Subtamaniam may be true.
lor their contributions
to the thinking on web Think of Netscape, a company that barely existed
stmlcgics. In addition.
McKinsey's Strategy 18 months ago, and even today numbers only
Theory Initiative a couple of hundred employees. Is Netscape
and the Multimedia overvalued? Perhaps. But if you consider how
Practice have actively
supported the
quickly it has mobilized other eompanies to sup-
development of the port and implement its technology, you begin to
ideas presented in see why the excitement may be justified.
this article. 1 have
also benefited from
the writings of, and Netscape exemplifies a new form of industrial
conversations with, structure. "Webs" are clusters of companies that
Brian Arthur and collaborate around a particular technology.
Stuart KaulTman of Probably the best-known is the Microsoft and
the Santa Fe Institute.
Intel personal computer web, in which hardware
and component makers, software developers,
John llafivl is a channel partners, and training providers com-
principal in McKinsey's bine to deliver the overall value proposition of a
Silicon Valley office. Windows PC. Other webs have formed around
Copyright 'C 1996
McKinsey & Company. Novell's PC networking systems and SAP's inte-
All rights reserved. grated enterprise IT solution for manufacturers.

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Webs emerge from the turmoil wrought by uncertainty and change. They
spread risk, increase flexibility, enhance an industry's innovation capa-
bility, and reduce complexity for individual participants. They are
characteristically the work of a single architect or shaper, which (unlike a
monopolist) maximizes the size of the web by givitig away value lo other
companies. The more companies - and customers - that join, the stronger
the web becomes.

Webs create powerful new ways to think about strategy, risk, technological
uncertainty, and innovation. They help us see why the virtual company may
be more than just an abstract concept. They influence management focus,
organizational structure, perfortnanee measurement, and information
systems. They may even represent the opening salvo in the transition frotn
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
the set. Before a web can form, two Webs may represent the
conditions must be present: a tech- • ^.^.^^ ;^ ,|^g transition
nolog.cal standard and increasing ,._.^^ industrial-age to
returns." The standard reduces risk informatiotvage strategies
by allowtng cornpanies to make
irreversible investment decisions in
the face of technological uncertainty. The increasing returns create a
mutual dependence that strengthens the web by drawing in more and more
customers atid producers.

Webs are not alliances, however. They operate without any formal relation-
ships between participants. Each company in a web is wholly independent;
only the pursuit of economic seif^-interest drives it into web-likc behavior. It
prices, markets, and sells its products autonomously

Webs are a natural response to environments fraught with risk and uncer-
tainty - which is why they are so prevalent in high-technology arenas. The
"safety net" created by the other participants in a web allows a firm to focus
exclusively on activities in which it can offer distinctive value. In this way,
webs reduce overall itivesttncnt requirements, focus individual participants'
investments on areas most likely to succeed, and promote the emergence of
multiple suppliers for bottleneck components.
" See W Brian Arthur, Increasing Returns and Path Dependence in the Econtwiy. University of
Michigan Press, Ann Arhor, 1994; also "Positive leedhacks in the economy," The McKin.sey
Quarterly. 1994 Number I. pp. 81 95.

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In such industries as multimedia, where companies are dealing with more

than a dozen major technological discontinuities at once, it is only natural
for this latest evolution in industrial dynamics to have occurred. But webs
are by no means confined to technology providers, as we shall see.

Within economic webs, technology webs organize around specific tech-

nology platforms. One prominent example of a technology web is the
desktop computing business. Back in the 1960s, mainframe computer
companies like IBM exhibited strong vertical integration and provided total
solutions for large business customers. In the desktop computing business
of the 1980s, by contrast, highly specialized participants acted both
independently and interdependently to assemble a complex package of
technology components and services.

Some companies manufactured microprocessors and semiconductors;

others assetnbled printed circuit boards or CPUs and peripherals. Some
developed system software or software tools; others, specific application
software. Yet others focused on integrating cotnputer systems, supplying
consulting or training services, or offering after-sales support. Their
relationships with one another were cotnplex and fiuid, but they were united
in their quest to provide users with desktop computing capability that
cotnpcted with more traditional mainframe and mid-range solutions.

Online services represent a more recent example of a technology web. When

Prodigy entered this field in the late 1980s, it had to develop a vertically
integrated busitiess that included not just content but also network design
and operation, server design and operation, and billing and network
operating systetns. Later, the industry unbutidled rapidly as specialized
providers emerged to supply virtually every element of an online service
technology platform. The growth ofthis web has lowered barriers to entry;
now. new competitors can concentrate on
content creatton or packagmg, and source , u • J *• i.- J-
,. . . I . r .L .- In such industries as multimedia,
the remaining elements from other parti- • , ,. .,
. . , . " , '^ companies are dealing with more
cipants in the web. *u J • * i. I • I
' than a dozen major technological
.,,.... , , , , r- , discontinuities at once
Within technology webs, clusters of players
participate in competing value webs, which
seek to capture a disproportionate share ofthe 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 are in competition. One is organized and shaped by
Apple, and promotes the Macintosh as the standard desktop computing
platform; the other is controlled by Microsoft and Intel, and champions an

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alternative standard defined by the use ofthe Intel microprocessor and the
Microsoft operating system.

What strategic roles are created by webs?

Two different strategic roles may be played in webs: adaptation and shaping.
Each 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
and responding to changes in the business environment. Rather than
attempting to influence events, these companies endeavor to stay at the
edge of them, and to capture value by spotting opportunities earlier and
moving more quickly than the competition.

Shapers, on the other hand, focus on thefiuidityof events and on oppor-

tunities to determine or influence outcomes. They believe it is possible
to mold the environment in such a way that it enhances their ability to
create value.

Too often, senior management selects one of these approaches without

explicitly considering either the choice itself or what it means for business
strategy. Yet whether a company decides to be an adapter or a shaper has
profound implications for the strategy and tactics that it must pursue to be
successful {see exhibit). 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 mobilize winning value webs.

Winning strategies for major web players

Web formation Web mobilization Web evolution

Get into the flow Build momentum —•^ Encourage lock-In

Shaper Pick the right technology Manage perceptions Enhance platform

as platform
Enter market quickly
Accelerate adoption
Adapter Identify winning web early
Focus on near-term profit
opportunities
Establish dense intormation
links with other web
participants
actively
Create economic
incentives for others
Evangelize opportunity
Compete aggressively for
web share
Link up with web shaper's
strategy
technology frequently
Promote standardization
Link and leverage
Exploit customer lock-in
Undermine supplier/shaper
lock-in or diversify into
" * ^ ^^''^

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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
it access to a further leverage point, the microprocessor. The operating
system and microprocessor represent leverage points because the func-
tionality of the core technology influences the evolution of broader desktop
computing architectures, thereby shaping the investments made by other
web participants. The alliance with Intel also helped Microsoft to accelerate
standards adoption and strengthened
..- ft -ii J . I • the architectural leadership ofthe
Microsoft will undertake niaior , . *^
„, , , 4 two companies,
investments with long lead ^
times in order to pursue its ... c^, , , ,, ,
1 , . . . L. i,u ^ Microsoft s technology focus has
leadership in web architecture , . . . . . . . .
always straddled the 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 an individual product. For this reason, Microsoft tries to get its core
technologies adopted as de facto standards. Its marketing tends to center on
differentiating the architecture ofthe 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 architectural leadership,
Microsoft will undertake major investments with long lead times in order
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. It
maintains a sharp focus on product excellence, and its marketing accord-
ingly stresses differentiation at the product level. Rather than trying to define
new standards, it concentrates on promoting product standards within the
established architecture ofthe web. In line
with this overall strategy, Compaq invests ^ • . - i
.^. , ^ u I Compaq invests with an eye to
with an eye to near-term paybacks. ^ ^. , ,•' ,
promoting product standards
..,, ,, u * u u within the established
Whether a company chooses to be a shaper ,. ^ , ,
, , ,, , . , . . .^ architecture of the web
or an adapter has much more to do with its
senior management's degree of ambition
and willingness to take risks than with objective market conditions. Even
small companies can pursue shaping strategies in web-based environments,
as Netscape attests. Small companies should stop thinking of themselves as
mere adapters and followers. No longer is it just the top revenue earners
that can shape markets, particularly in high-growth industries. The game
has been reversed; the tail really can wag the dog.
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Netscape has pursued an aggressive shaping strategy by commercializing a

series of technologies designed to enable commerce on the Internet.
Around these core technologies, it has mobilized a web of other companies
that are developing complementary technologies to establish a broad
platform for electronic commerce. These companies recognize the value
of de facto standards on the Internet and
r: 11 • believe that Netscape will be able to shape
Even small companies , ,- ,,
, • them successiully.
can now pursue shapmg ^
strategies in web-based ^ . . . . .
Companies supporting or implementing
environments r-1- => r- =
hardware
Netscapeproviders
technology as Sun. Silicon
include Graphics,
such major
DEC, IBM, and Apple, and such network providers as MCI and AT&T.
Leading content providers are also adopting Netscape server software as a
platform for their web sites on the Internet. While the success of this
strategy has yet to be proven, Netscape's recent public offering indicated
that it has been able to generate over $2 billion in shareholder value.
Success factors for shapers
Within technology webs, the success of shaping strategics ultimately hinges
on four conditions:

• Ownership of a key platform technology that shapes broader archi-

tectures and provides the basis for longer-term lock-in. Take IBM's role in
the emergence ofthe PC value web. By integrating numerous off-the-shelf
technologies into a new desktop computing platform and helping to
mobilize industry participants behind it. IBM created an attractive alter-
native standard. But it failed to retain ownership of a key platform
technology within the new architecture, and thus lost its ability to shape the
evolution ofthe value web. Instead. Microsoft and Intel seized architectural
control and captured a disproportionate share of value.

• Unbundling of 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 its
revenue. Writing off such a large chunk of income seemed a very risky move
but this unbundling proved essential. By freeing up opportunities for
other companies to launch products and allaying concerns that it 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 from 40 to 75 percent, and its
revenues rose from $120 million to almost $2 billion.

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• Reliance on economic incentives, rather than alliance structures or

contractual relationships, to mobilize other web participants. Apple was one
of the early creators of a value web. It established an entirely new category
of employees known as "evangelists." Though not salespeople, they were
charged with telling companies about the business opportunities generated
by the Apple II. This simple and relatively cheap product could be easily
expanded through add-in boards or peripherals, and enhanced through
application software. Through the efforts ofthe 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 had direct
contractual relationships 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 web

growth and promote customer and participant lock-in. Again, Netscape
provides a useful example. Its first product was a browser that built on the
established Mosaic technology developed at the University of Illinois by
one of the company's founders. The browser
also exploaed the r,ch resources already Netscape's controversial
available: on the Internet. Leveraging ex.s- ^ ^f ^- -^^
ting technology and infrastructure allowed . ^^^,^ ^^^ •^ ^
Netscape to enter the market quickly and its ^^^^^ ^^ ^^^^ ^
controversial strategy oi givmg the browser
away soon won it a market share of over 75
percent. All these steps encouraged rapid customer adoption and helped
convince industry participants including AT&T and News Corporation to
adopt the core technology. The resulting momentum hastened Netscape's
entry into the web server software business and positioned it at the center
of a powerful new value web emerging on the Internet.

Web shapers can reap enormous rewards, but the source ofthis wealth is
quite different from that of traditional monopolist returns. These tend to be
generated by powerful economies of scale that accrue at the firm level.
Monopolist strategies focus on expanding capacity, acquiring competitors,
and employing predatory pricing to inhibit entry and discipline competitors.
In contrast, shapers strive to catalyze and accelerate increasing returns
dynamics at the web level.

By speeding the adoption of core technologies, expanding the range of web

participants, and generating expectations of web success, shapers set in
motion increasing returns dynamics that raise entry barriers for competing
shapers and switching barriers for web participants. For the web shaper, the
source of advantage - and ofthe ability to extract above-average returns -

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lies at the level not ofthe firm, but ofthe 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 size and growth ofthe web.
Success factors for adapters
For those inelined to pursue adaptation strategies in technology webs,
success depends on three factors:

• Early participation in winning value webs. Aldus was able to build a

sizable software business by recognizing at an early stage the value ofthe
Macintosh computer as a platform for desktop publishing. It established a
preemptive position in this attractive market and was able to form a close
relationship with Apple that gave it
insights into future architectural -rt. i r*u * i l
, J I he value ot the technology
^ ^' component, and thus the ability
to extract high returns, depends
• Aggressive competition for ^, ^u r*i- i.
.. ..L- .1. . ._ . .. on the growth of the web
share within the value web. In the
1980s, Compaq emerged as one of
the early participants in the PC value web, but it 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
relationships with Intel and Microsoft and improved its access to
information generated within the web.

• Linking and leveraging (or diversifying) position. Value web partici-

pants 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 straddling positions across
several value webs to protect against unexpected shifts in the strategies of
web shapers or in the fortunes ofthe webs themselves. Compaq pursues a
linking strategy through its close partnership with Microsoft in such
ventures as the effort to make Microsoft NT 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?

Web strategies are becoming prominent in high-technology arenas because
they can help manage risk and generate innovation in complex, changing,
and uncertain environments. Risk is reduced through focus, through the

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leverage eonferred by increasing returns dynamics, and through enhanced

flexibility Innovation is promoted through distributed information flows.

The emergence of a technology web enables all participants to unbundle

their businesses and focus only on activities where they can offer distinctive
value. The web promotes specialization by gathering many players around a
common technology platform. 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.

Technology webs' ability to provide such a safety net - and indeed, even
their very existence - is closely related to the advent of open architectures
with widely available interface specifications, like the Windows/Intel
computing platform and the Internet. The proprietary architectures of the
mainframe computer platforms of the 1960s, and even the early mid-range
platforms designed by DEC and Wang, did not allow technology webs to
form and imposed major internal development burdens on the company
defining the architecture. While value creation could be enormous if the
proprietary architecture gained widespread adoption, the risk was equally
huge because of the concentrated investment required to make the
architecture successful.

Technology webs also limit risk by unleashing powerful drivers of

increasing returns that help to create early advantage and reduce
vulnerability. They do so by accelerating and extending investment around
technology platforms, thereby speeding customer adoption. Apple's
evangelists, for example, succeeded in mobilizing far more investment
around the Apple II platform in the year or two after its introduction than
the company could ever have mustered by itself With risk shared between
many players, more investment got made
sooner. In turn, this investment boosted the „,., . ^- . r *i
i ,c ^ r .- ,-. J • . Wide adoption drove a further
platforms lunctionality and gave rise to a c- * * i.
'. . r . . wave ot investment by even more
rich service lnirastructure. • . i ..L . .1
companies convinced tbat tbe
rr. c . J . . platform would be a winner
These factors encouraged customers to ^
adopt the technology, and wide adoption
then drove a further wave of investment by even more companies convinced
that the Apple platform would be a winner. In this way, a virtuous cycle was
set in motion that helped to guarantee the platform's success.

Ironically, when Apple migrated to a new generation of technology, it

strayed from the design principle that had made the Apple II such a

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powerful platform for web formation. The Lisa and the Macintosh were
more self-contained, with only limited expansion slots and interfaces for
peripherals. At about the same time, IBM and its partners were striving to
shape a value web around their competing architecture. Apple's change of
approach gave IBM the chance to spread the word about opportunities
to design add-in boards and peripherals for its own platform. Apple
subsequently introduced much more open CPUs in its Macintosh line, but
it had lost considerable momentum.

Another way in which webs limit risk is by enhancing the flexibility of

participants. Companies in a web enjoy expanding sourcing and distribution
options, while their fixed investment and
Companies in a web expand f " '<=^""<'"^^"^^, f""- As a result, they face
their sourcing and distribution '^^^ severe petialties for making wroiig bets,
+• Ul +u • • * » and can shirt to new bets more quickly,
options, while their investment ^ ^
and skill requirements fall ^ , , , , • , ,-
^ ^ Technology webs also improve the climate
for innovation. Webs are largely shaped by
information flows; in them, information is distributed far more widely and
intensely than in conventional markets. Webs disperse innovation to many
participants and provide robust mechanisms for disseminating learning via
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 soft-
ware. Both innovations shifted the position ofthe core technology platform;
probably neither would have occurred if innovation had been tightly
concentrated within Apple.

What is distinctive about web strategies?

Web strategies demand a completely different mindset from that employed
in traditional strategic thinking. For one thing, they tend both to narrow
and to broaden management focus. The former, because they encourage
unbundling and the outsourcing of undifferentiated business activities.
(The extreme form ofthis is the virtual corporation, where the scope of
activities conducted within the enterprise and subject to direct manage-
ment control is radically reduced.) The latter, 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 enterprise within it.

Admittedly, web value maximization does not necessarily translate into

enterprise value maximization, as IBM's experience with the PC web
suggests. But to neglect web value maximization is certainly dangerous;
consider what happened when Apple did just that while focusing on near-

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term profitability in the late 1980s and early 1990s. 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. By choosing not to license its Macintosh operating system. Apple was
able to capture the lion's share ofthe revenues in its web, but the web itself-
at least in terms of market share - began to shrink.

In contrast, Microsoft captures only about 4 percent ofthe revenues in its

web, but that web has grown to a size of more than $66 billion. 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 dictates that firms first define their own
strategy and then negotiate alliances that are consistent with this strategy
and advance its 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, ln other
words, firm strategy follows web strategy.

In addition, web strategies have a profound impact on organization,

especially for companies seeking to be shapers. Performance measurement
for managers, for example, needs to
T, * * r J c • * * expand to place much greater
The context ror detitime strategy ^, . , ,. '^
. ,- . *^. . ^-^ emphasis on web periormance.
expands rrom maximizing ^ ^
value for the enterprise to ^- -, • •• , ••, .
• •• 1 r *u u Similarly, aspiring shapers will need
maximizing value (or the web , , * , , .,,
to develop the skills to create
appropriate economic incentives for
other web participants, to manage increasing returns dynamics, 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 not only in terms of the
value it delivers to customers, but also in terms ofthe appeal it holds for
providers of complementary products 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 ofthe economic benefits of joining a web, yet who do not themselves
generate any revenue?

Companies participating in webs must learn to manage organizations

whose boundaries have become much more porous, with denser infor-
mation links to other web participants. Just as MIS is coming to grips with

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the enormous challenge of reengineering IT platforms to integrate an entire

enterprise, it will encounter the even more daunting task of integrating
systems aeross the web. Since value webs tend to concentrate information
flows in the key leverage points occupied by web shapers (indeed, this is one
ofthe 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 environ-
ment: multimedia. Other forms of web are emerging that are likely to be far
more relevant to non-technology providers.

New technologies are enabling the formation of powerful customer webs,

for instance. Unlike technology webs, which focus on technology archi-
tectures, customer webs are organized around the behavior and spending
patterns of specific target customer
segments. Whereas technology webs /- * . • j
° . . . . . I- c Customer webs are organized
are shaped by the ownership of a J .i i_ i_ • j
y ^c . \. y u around the behavior and
platlorm technology such as an ,- ^^ r. .^
^ ,. , ^ . spending patterns of Specific
operating system or microprocessor. \ * . .
^,
ownership . customer
of , , .1.
relation- target customer segments
customer webs
ships. Owning revolve around
a platform the offers the ^opportunity to establish
technology ^ a de
facto standard; owning customer relationships provides the chance to build
a unique customer database.

Such a database creates the necessary economic incentives 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.

Customer webs already exist today, albeit in a rudimentary form. Thanks to

its sophisticated approach to compiling profiles of its target audience,
Reader's Digest has shaped one such web. It has leveraged its database
to deliver a broad range of new products and services to its customers.
Another example is provided by American Express, which has developed
a vast direct marketing business based on its detailed knowledge of
chargecard users.

The advent of interactive multimedia networks provides an opportunity for

customer web shapers to deepen their customer databases and thus
enhance their shaping power. Before customer webs can truly fiourish.

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shapers will need to become adept at mobilizing a cluster of other

participants that seek access to customer profiles.

Market webs represent a third form of web. Unlike customer webs, which
focus on the behavior and preferences of an individual customer segment,
market webs are organized around a specific type of transaction. The
customer web shaper wants to develop the broadest possible relationship
with its chosen segment, and to serve these 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 ^. , , , , •, ,
The market web shaper builds
transaction. , , . ,. • , ,, ,
deep relationships with all the
A ^ \ * u u • K* f 1 buyers and sellers involved in a
A market web shaper might, tor example, .• t t • . c
(. , |,- „. . ^ particular kind of transaction
locus on buildmg a compelhng environment __^
for the formation and evolution of a market
in residential mortgages. Its objective would be to assemble a critical mass
of buyers and sellers and serve all their needs in relation to the purchase
and sale of residential mortgages. However, it would take little or no interest
in the broader needs of these buyers and sellers beyond the transaction
category that defines the market web. While customer web shapers exert
their influence by owning unique customer profiles and databases, market
web shapers exert theirs by controlling a physical or virtual space where
Once again, market webs exist so far only in a rudimentary form. The New
buyers and sellers
York Stock come
Exchange, to execute
with a specific
its critical mass oftransaction.
buyers and sellers, represents
an early example. The efforts of financial information providers such as
Reuters to offer certain kinds of electronic trading capability illustrate
the formation of market webs on electronic networks. In fact, as common
electronic networks that are "commerce-enabled" become increasingly
available, opportunities for market web formation may well multiply.

Consider Microsoft; adept at shaping a technology value web. it is now

trying to leverage its leadership position to build related technology value
webs and shape customer and market webs. While its current technology
web focuses on the architecture of desktop computer devices, it is actively
moving into related technology webs such as enterprise servers, multimedia
broadband networks, and portable access devices. At the same time, it is
working to develop a powerful customer web through the launch of
Microsoft Network, which will enable it to assemble detailed profiles of its
subscriber base and mobilize other web participants to deliver services to
these customers. Bill Gates has also stated his intention to build electronic
market environments, or market webs, that will act as the locus for certain
transactions.

THE McKINSEY QUARTERLY 1996 NUMBER I 17

 SPIDER VERSUS SPIDER

Not only is there potential for other forms of web, but webs are likely to
become important in markets beyond multimedia. We believe tbat webs will
form in any environment characterized by rapid and profound change, by
the prospect of increasing returns that are appropriable by consumers, and
by the need for providers and consumers to make large and irreversible
commitments of resourees. 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.
^V -V -V
In multimedia, at least, webs are becoming a prominent new dimension in
competition. They can make or break a company in this rapidly changing
world, yet traditional models of strategy offer little help with decisions
about when and how to participate in them.
.., , * 1 I Some of the most expert players in
Webs represent a whole new way , . j. -.•.*-• i^
,..-,• , .• J . ' multimedia - companies like Mierosort,
ol thinking about lnduslry ^ v, „ j v, . • . -.- •
1 ^- , • . . Compaq, Novell, and Netscape - intuitively
structure, relationships between K M^ • ^ • I I I
J , ^. pursue web strategies. Survival, let alone
companies,
•_
and value creation ^ „ ^ , •,, .
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 Iraught with technological and
regulatory upheavals.

Webs represent a whole new way of thinking about industry structure,

relationships between companies, and value creation. Though not
monopolies, they are just as powerful. For the rest ofthis decade perhaps
much longer - we shall see industries being shaped by competing webs that
relentlessly devour one another. O

18 THE McKINSEY QUARTERLY 1996 NUMBER 1