The Network Imperative

How to Survive and Grow in the Age of Digital Business Models

Barry Libert, Megan Beck, Jerry Wind

• Publisher: Harvard Business Review Press
• Year: 2016
• Print ISBN: 9781633692053
• eBook ISBN: 9781633692060
• Topic: Business
• Subtopic: Business Strategy
• Index: Business

Digital networks are changing all the rules of business. New, scalable, digitally networked business models, like those of Amazon, Google, Uber, and Airbnb, are affecting growth, scale, and profit potential for companies in every industry. But this seismic shift isn’t unique to digital start-ups and tech superstars. Digital transformation is affecting every business sector, and as investor capital, top talent, and customers shift toward network-centric organizations, the performance gap between early and late adopters is widening.So the question isn’t whether your organization needs to change, but when and how much. The Network Imperative is a call to action for managers and executives to embrace network-based business models. The benefits are indisputable: companies that leverage digital platforms to co-create and share value with networks of employees, customers, and suppliers are fast outpacing the market. These companies, or network orchestrators, grow faster, scale with lower marginal cost, and generate the highest revenue multipliers.Supported by research that covers fifteen hundred companies, authors Barry Libert, Megan Beck, and Jerry Wind guide leaders and investors through the ten principles that all organizations can use to grow and profit regardless of their industry. They also share a five-step process for pivoting an organization toward a more scalable and profitable business model. The Network Imperative, brimming with compelling case studies and actionable advice, provides managers with what they really need: new tools and frameworks to generate unprecedented value in a rapidly changing age.

DIGITAL NETWORKS ARE EATING THE WORLD

Why is it so difficult for established companies to pull off the new growth that business model innovation can bring? Here’s why: they don’t understand their current business model well enough to know if it would suit a new opportunity or hinder it, and they don’t know how to build a new model when they need it.

—Clayton M. Christensen, author, The Innovator’s Dilemma

DIGITAL NETWORKS ARE CHANGING ALL THE RULES OF BUSINESS. It is clear that new, scalable, digital, and industry-hopping business models, like those of Amazon, Google, Uber, and Airbnb, are affecting growth, scale, and profit potential for companies across the board. Investors are already shifting capital toward the latest business models. The question isn’t whether your organization needs to change, but when and how much.

Established non-digital, non-network business models make up more than 98 percent of the market and have a lot of work to do. Most of these companies are racing to update their strategy, leadership, technology, and organizational design, but the performance gap is widening. This book is intended to help those firms that are not digital start-ups or technology superstars bridge the gap and create unprecedented growth and value in the age of hyperscale digital networks.

You may feel that network disruption is a distant concern for your business or irrelevant for your industry, and that you have more-pressing concerns, but be aware: investor capital, customer revenue and affinity, top talent, and market buzz are shifting away from established firms toward network organizations. Further, our research indicates that digital networks are entering almost every industry, even some of the most mundane. Consider a few striking examples of industries that have been turned upside down by digital networks—where young upstarts, many of which are still private, are rapidly outperforming established firms.

These companies, with digital network business models, have sent shockwaves through their respective industries, and, remarkably, they did it without the traditional assets considered requirements for success. Our work with boards and leaders, as well as our angel investing in start-ups, has shown us that a key differentiator between network firms and traditional firms is the thinking of the leadership team. Network leaders think differently about value and value creation. In fact, their thinking is the opposite of many traditional business beliefs.

Network firms versus traditional firms

What does the opposite thinking of these network leaders look like? Here are a few examples.

• Traditional leaders ask what value their firm can provide. Network leaders ask what value their customers and other networks have to offer.
• Traditional leaders think the goal is to sell more products to customers. Network leaders see the value in customer co-creation, advocacy, and sharing.
• Traditional leaders think they’re operating at full capacity. Network leaders see the world differently and full of additional potential.

This different thinking helps digital network leaders see and invest in a world of abundance, where there are excess assets everywhere, both tangible and intangible. Whether these assets are houses, cars, photos, knowledge, skills, or networks, there are people in the world willing to share them in order to earn money, garner recognition for their expertise, or connect their stories and experiences to the world around them.

In contrast, most organizations believe they’re working at or near full capacity. Most business leaders believe that the only way to generate more value is to make, market, and sell more of what they have or do. But that old thinking limits their profitability and growth. Many of our most admired companies won’t stand a chance when the most valuable digital networks take on their markets. Nigel Fenwick of Forrester Research said that by 2020, every organization will be either digital predator or digital prey.¹

Your Strategy Needs a Business Model Face-Lift

To return to the quote by Clayton Christensen at the start of this chapter, the problem is that most organizations don’t know where they are starting, much less where they are headed and how to get there. We wrote this book to help the leaders of traditional firms—those focused internally on using their own assets and employees to make, market, and sell—enter the world of digital network business models and leverage an external network to contribute its assets, ideas, skills, and relationships and share in the value created. Savvy investors and employees will also find that business model perspective is useful in allocating their capital and energy.

This book began twenty years ago, when Barry Libert, a strategist by background, was researching the sources of value and their migration from tangible to intangible. His first book on value was called Cracking the Value Code, and his research resulted in a simple finding: that traditional beliefs about value were wrong. One such belief was that physical things, such as real estate and equipment, should be accounted as secure and enduring assets, whereas the people who built, managed, and used those assets should be accounted as expenses. Now we realize that whereas physical assets often depreciate, people assets often appreciate—increasing in skills, knowledge, and value over time. This is just as true for customers, properly cared for, as it is for employees. Consider the value of Facebook, whose 1.6 billion customers create all the content for the platform, acting as both contributors and subscribers.

At around the same time that Libert was researching value at a large consulting firm, Jerry Wind, a senior faculty member at University of Pennsylvania’s Wharton School, was researching how firms were organized. Wind’s work on network organizations versus traditional firms resulted in the formation of the SEI Research Center at Wharton.

The two men met in 2001 and together started examining how the beliefs of leaders and boards shaped the actions and outcomes of firms, including their organizational design and financial performance. Libert’s book on networks was called We Are Smarter Than Me, and Wind’s, The Network Challenge.

In 2013, Libert partnered with Megan Beck, who applied her experience analyzing complex problems and managing organizations through change to explore this dramatic shift, document what it means for legacy organizations, and create a practical guidebook for change. Over the past several years these authors, along with a team of researchers, writers, and technologists, have worked to create this thinking, this book, and the accompanying digital platform.

The team examined the S&P 1500 index, which includes large-cap, mid-cap, and small-cap companies, over a forty-year time horizon, seeking to understand how capital allocation, business models, and economic outcomes were changing with the digital and network revolutions. Their findings are included here. But this book is much more than just research about business models. It also shows you what to do, and how to do it, in order to achieve growth and value in a world dominated by digital networks. In short, your existing strategy and organizational design need a business model face-lift.

Adopt New Thinking

The way most of the world thinks about assets is wrong. Physical assets, the darlings of the Industrial Revolution and the basis of today’s largest firms, depreciate, become obsolete, can be destroyed by flood and fire, are expensive to move, and aren’t capable of innovation (because, after all, they don’t think). People, on the other hand, have a lot of potential. Whether employees, customers, or partners, people can generate new ideas, solve problems on their own, promote and share brands, and serve various other functions. With proper training or cultivation, people appreciate, rather than depreciate, in value to your organization.

Sometimes leaders make a mistake by thinking they’ve captured the value of people by hiring them as employees or gaining them as customers. This view is simply too narrow. Our consumer spending and our efforts at work represent only slivers of our overall capabilities and assets. Most employees are hired to do a specific job in a specific way; ask yourself how many of your own jobs have accessed your full potential for innovation and productivity. Consider how Airbnb has gained far more than the revenue from lodging rentals. It has accessed the underutilized resources of entire populations—resources that simply were wasted before.

The internet spelled the demise of closed-source business models based on physical assets. For example, Wikipedia and its network of unpaid contributors disrupted a 250-year-old company called Encyclopedia Britannica. Since then, millennials are turning to Yelp instead of Zagat for a restaurant recommendation, to Angie’s List instead of Yellow Pages for service providers, and to LinkedIn rather than a headhunter when they need a job. These digital, open-source, open-platform business models are creating new, exponential insights and connections that yield extraordinary value. Consequently, the emerging power of networks presents new risks for established firms in all industries.

We are at the beginning of a rapid upending of traditional ways of creating value, and it is occurring in every industry. Firm-centric organizations that use their own resources to create and keep all the value for themselves are slowly being replaced by those that share value creation with networks of individuals connected by digital technologies. And these new network-centric businesses offer many economic advantages.

Make It Valuable and Practical

In preparing to write this book and document our research, we regularly heard the same refrain: whatever you do, make it practical and actionable, with the emphasis on actionable. As long-standing authors, advisers, and investors, we have heard the refrain from those we work with: “We get the message. There is work to do—but how do we actually do it? Most of the companies you and others write about (such as Uber, Airbnb, Alibaba, and Etsy) were born as digital networks. They never had to upend their existing business model and become something other than what they are. The rest of us need practical advice and tools so that we can compete, grow, and prosper.”

So we bring this book down quickly from the high-level research to the practical how-tos. Whether you make widgets, provide services, or offer technologies, whether you lead a billion-dollar corporation or a family business, we will help you join the digitally networked world. We have worked hard to make this a how-to book, not a why-to book.

In part I, “The Promise,” we share our research on business models (from firm-centric to network-centric models) and discuss how investing capital in network business models has a dramatic impact on economic value creation.

In part II, “The Principles,” we examine how network organizations operate differently from traditional organizations. Each principle represents a significant shift from the legacy firm to the network organization. You can use these ten principles as levers to accelerate your transition to augmenting your business with the networks that exist around it.

In part III, “The PIVOT,” we share our PIVOT process—five specific steps that you can take, beginning Monday morning, to plant the seeds of digital networks within your own organization and set the path for greater co-creation and shared rewards. Adopting a new business model is not easy, and it is not simple, but these steps will help you define what you need and identify how to implement it in a practical sequence.

In part IV, “The Practice,” we examine what it takes to lead a digital network organization and help you examine the unstated and unrealized mental models that guide your thoughts, actions, investments, and ultimatel...

Table of contents

• Cover
• Title Page
• Copyright
• Dedication
• Contents
• Part One THE PROMISE
• Part Two THE PRINCIPLES
• Part Three THE PIVOT
• Part Four THE PRACTICE
• Notes
• Index
• Acknowledgments
• About the Authors