Strategic Implications of Cloud-Enabled Business Models- Valutrics
The business and financial potential of cloud makes it a special trend for us to embrace.
Cloud computing offers business agility in a simple, clearly understandable model: For a new startup or for emergent business requirements of established enterprises, cloud computing allows an organization to implement a rapid time-to-market model by securely accessing a ready-to-use IT infrastructure environment, hosted and managed by a trusted third party, with right-sized, scalable computing, network and storage capability, that we pay for only as we use it and based on how much of it we use.
Cloud-Enabled Business Models
A cloud-enabled business model is a business that leverages cloud computing to enable specific aspects of its business model to gain competitive advantage. This is particularly applicable to end-user enterprises that apply cloud to their IT operations, or to new business units that with new business models or new business processes.
A cloud-enabled business model differs in that the adopting organization is leveraging cloud on a narrowly defined and bounded portion of its enterprise, and only insofar as cloud helps it drive out costs or achieve time-to-market for a small segment of its operations.
In a cloud-enabled business model, cloud merely augments the primary business model concept already committed to by the adopting enterprise. A cloud-enabled business model is superior to one that is not cloud-enabled, but is less sophisticated than a cloud-based business model, which is a cloud pure play in terms of strategy definition, envisioning, and execution.
A cloud-enabled business model ‘‘layers’’ cloud computing approaches onto its legacy business model to drive enhanced competitive advantage, but again, the incremental competitive advantage is a value overlay to the current business model concept. For example, a manufacturing enterprise under competitive pressure from China may leverage cloud to drive incremental costs out of it current domestic headquarters and administrative operations thereby lowering its IT costs. In addition, the same enterprise might also leverage a cloud infrastructure to establish a new overseas manufacturing site, leveraging contract manufacturing from several outsourced manufacturers but implementing its international hub quickly through cloud enablement provided by third-party cloud providers.
In both scenarios, the core business model is manufacturing of goods, leveraging domestic and offshore manufacturing capabilities. However, cloud-enabling this manufacturing business model may provide the incremental margin necessary for profit, or to support research and development of new products to be manufactured in the future.
The following are some examples of cloud-enabled business models where aspects of a business might be transitioned into a cloud deployment to drive value for an existing enterprise:
• Cloud-Enabled Supply Chain. A cloud-enabled supply chain is a scenario where a large manufacturing enterprise elects to push demand management, inventory management, and supplier management into a cloud such that the information and data can be globally managed virtually worldwide, while ensuring authoritative, real-time reporting of stock levels, raw materials, work in process, and finished goods inventory. The value of supply chain management in the cloud is being able to manage massive amounts of data, in real time, from global suppliers, manufacturing partners, and distribution and warehouse management partners on the end-to-end supply chain.
• Cloud-Enabled Sales and Marketing. Cloud-enabled sales and marketing can benefit by aggregating lead generation, web site contacts and customer inquiries into a globally-deployed cloud to develop a worldwide view of business development efforts, marketing program effectiveness, and customer feedback and interactions from global web site activities, help desk and customer support contacts, all from call centers integrated into the same cloud. A cloud-enabled sales and marketing operation can enable similar real-time operational pictures of customer data to help react and respond to market signals.
• Cloud-Enabled New Business Unit. A cloud-enabled business can be entirely bootstrapped on a cloud-based platform to test a new business model or expand an existing business into a new geography without acquiring dedicated IT infrastructure to support a highly prospective business venture. The risk profile of starting new business ventures changes if it is not necessary to acquire, implement, and maintain an IT datacenter to support the new business. An organization can quickly onboard its new business operations onto a cloud deployment, managed by a cloud service provider, which can be quickly ramped up based on actual business demand from the new business, or ramped down if the business experiment does not succeed. This application of cloud computing will encourage more risk-taking with new business models, and should spur a burst of new business innovation as a result of a much lower risk profile for new business experimentation enabled by cloud computing.
• Cloud-Enabled Call Centers. In many ways this is a natural fit with the recent evolution of associated call-center technologies, such as Voice over Internet Protocol (VoIP), which is intrinsically cloud resonant. A truly cloud-enabled call center could be fully distributed and incremental, able to expand or contract as demand warrants, in increments as small as one agent at a time. In this manner this could enable call centers to become even more responsive and efficient, in that infrastructure costs can more precisely scale proportionate with labor costs.
Strategic Implications of Cloud Computing
Asymmetric Competition
A critical strategic implication of cloud computing is that it will enable a host of new asymmetric competitors to enter various existing markets without an installed base of rigid IT infrastructure and legacy applications that anchor them to their accumulated past investments. These new competitors will not have an installed base of legacy applications, nor will they have fixed costs invested in physical data centers and related IT infrastructure. In fact, these new asymmetric cloud-based competitors will not even approach business problems the same way as their more established competitors.
This is the real threat: the mindset of a cloud-based asymmetric competitor. Asymmetric competitors do not view IT infrastructure and data centers as necessary because they have never had them, nor have they ever needed them. IT infrastructure does not convey competitive advantage to them, so they simply do not acquire it.
Moreover, they do not want it, as it limits agility and flexibility of the business model more than anything else. The next generation of cloud-based asymmetric competitors view IT infrastructure with disdain and suspicion. They want nothing to do with any physical assets that will hold their business models back.
Rather, these asymmetric competitors will compete on business model differentiation and speed, and instead of building infrastructure when they are larger more mature enterprises, they will continue to leverage the variable cost model of cloud to extend the inherent advantage of agility, capacity alignment, and fixed cost avoidance to outpace their competition. Cloud offers new rules of competitive differentiation, and these nimble new asymmetric competitors will press the advantage.
Furthermore, asymmetric competitors know of no other operating model than a cloud computing paradigm. Therefore, they will accumulate expertise and skills at leveraging cloud-based business models, and thus will outpace their entrenched traditional rivals on a knowledge and experience basis with cloud. Their cloud-based competitive advantage will rapidly accrue based on accumulated knowledge through more cycles of learning of their cloud-enabled business model. A cloud-based business model can learn and adapt faster than a typical IT-infrastructure based business model, which is one reason why cloud-based businesses will run roughshod over their traditional competitors.
Legacy business models suffer from installed base and aging IT infrastructures. Such legacy business anchors are impairing many firms and preventing them from innovating their IT capabilities to better support today’s emerging business requirements. Ask any CIO, and they will concur that they spend 70–80% of their IT budget maintaining their current installed base and legacy applications, as opposed to being able to shed legacy applications and invest capital in new innovations on behalf of the business. Asymmetric competition is already occurring through the widespread adoption of cloud computing to create new, nimble cloud-based competitors.
For mature enterprises, the need for agility becomes a critical requirement to counter the tactics of these new asymmetric competitors. However, the real battle is not protection of the current business model, but the development and innovation of new business models through the aggressive adoption of cloud computing.
This is the new frontier where asymmetric competitors will be hard to match.
Speed of Competition
Another strategic implication of cloud computing is the speed of competition. In addition to enabling a new pack of asymmetric competitors, cloud enables a new pace of competition from current competitors as well. Cloud offers a new model to get to market with new solutions, services, and capabilities that can literally pop onto your radar and take market share before you can blink an eye. This is a unique feature of cloud-based business models and even cloudenabled business models. As Stalk and Hout (in their book Competing Against Time1) advocate, cloud-based competitors have a clear advantage simply on the basis of speed, cycles of learning, and accelerating up the learning curve for new business model innovations.
Cloud-based competitors have many of the time-based advantages that are identified in Stalk and Hout’s groundbreaking book, and will therefore be formidable to entrenched competitors in similar markets. Cloud-based competition will center on agility and speed, and both are related to having no internally-owned and operated IT infrastructure. Speed of competition is supported by a number of variations, which are explored in the sections below.
• Speed to Market. A cloud-based business model can bring a new product or service to market faster than its traditional competitors. The speed to market benefit of cloud computing is a key feature of this computing evolution, and will be a compelling reason why all organizations will explore cloud for aspects of their business models. Compressing relative time to market enables an organization to get to market with its products and services faster, which has direct implications for revenue generation, market share capture, and for their competitive position against other firms. As history clearly shows, first to market very often wins, and cloud enables that competitive advantage.
• Speed of Innovation. Cloud-based business models will enable rapid cycles of innovation for new business models, new products and services, and new business tactics that can leverage the speed and agility of cloud to gain competitive advantage over competitors. An organization’s speed of innovation will increase dramatically based on its ability to leverage cloudenabled research and development to innovate, experiment, and bring to market new concepts and ideas.
• Speed of Learning. Another critical dimension of cloud computing is the speed of learning enabled through cloud-based business models. Related to many of the other dimensions of speed and time-based competition, cloud-based business models will benefit from speed of knowledge and speed of learning, a dynamic that supports rapid change, evolution of business models, and a higher cadence or pace of innovation.
For a new business, the speed of learning has everything to do with that organization’s ability not only to survive but to thrive in any business environment.
• Speed of Business Model Evolution. The pinnacle of cloudbased competition is the speed and pace of business model evolution and innovation that cloud enables. By simply focusing more personnel resources on its business model, an organization can rapidly evolve and adapt its business model concepts to better compete against its competitors. Cloudbased business models offer a superior business model evolution framework because of the absence of internal integration to an installed base of legacy systems, without the need to wait for the IT infrastructure to adapt in lockstep with your business model.
Infrastructure Avoidance: Today’s Entrepreneurial Mindset
A critical cloud benefit that we must emphasize is the ability to bypass IT infrastructure investment and operations completely.
Today’s startups are averse to the entire concept of buying and maintaining IT infrastructure, data centers, server farms, and the like. Why waste money and effort on infrastructure when we can be focusing on a cool new innovation, a new technology or a completely new business model? This IT infrastructure avoidance mindset is the current reality of today’s generation of entrepreneurs. In fact, if you acquire IT infrastructure you are considered an old school startup right away. It is neither ‘‘cool’’ nor ‘‘hip’’ to buy IT infrastructure.
Infrastructure avoidance allows the ultimate in flexible and agile business models. We must understand, however, the mindset of today’s entrepreneurs in order to fully appreciate this dynamic.
Today’s entrepreneurs exhibit the following characteristics:
• Web-Centric Culture. Today’s new entrepreneurs grew up on the web, the whole web, and nothing but the web. They live their lives on the web. They represent a culture that embraces all things web. They are digital natives. This generation of entrepreneurs will be extremely comfortable with cloud-based competition because they are comfortable with the web-based dimensions of cloud computing.
• Remote Distributed Anonymous Collaborators (RDAC). Today’s generation of new competitors is extremely comfort- able with remote collaboration, often anonymously, with peers and partners that they have never met. This generation of entrepreneurs can achieve their goals via a highly virtualized web-enabled collaboration process with peers and partners with shared vision and goals. Because the network or commu- nity is defined and aligned with shared ideals, vision, and objectives, they can succeed by leveraging a remote anony- mous collaboration model. This organizational construct is ideal as a precursor to cloud-based business models—a web- based collaboration business model can be migrated to a cloud-based execution model.
• Web Application Ecosystems. Today’s entrepreneurs are inti- mate with ’’all things web’’, Google, Amazon, Facebook, Apple/iPhone, Android, pervasive mobile devices, and wire- less communications—they grew up with these applications, models and computing paradigms, and care little about tradi- tional computing models based on installed software on fat clients connected to a conventional datacenter. If the capabil- ity is not provided via the web and a browser, they do not want it.
• Open Source and Everything Is Free. This generation of new entrepreneurs wants software for free—in fact they want every- thing for free if they can get. Open source and free is always the first choice. If they cannot get their software for free, they will alternatively look to rent it as cheaply as possible over the web. They will almost always avoid buying physical assets or li- cense software, as much to avoid having to manage installed base as to avoid paying for software tools they believe should be free for a common good. Open source web-based business models are what they know and want.
• Mobile Devices and Untethered Telecommunications. Today’s entrepreneurs are most likely to skip a physical land line for their home telephone requirements, and instead rely on wireless communications. This generation eschews physical connections, physical infrastructure, and being physically tethered to anything. This further feeds the mindset that avoids infrastructure at all costs.
• Distributed Collaboration. Today’s entrepreneurs are commit- ted to highly distributed collaboration models, where their partners, peers, and colleagues are connected via the web into loosely coupled business processes in support of the shared vi- sion of the business model. The physical distribution of the team, the processes, and organization model make cloud- based competition models ideal for these new competitors.
• Put It All on the Web. They do not have the fear of the web that more traditional competitors display. In other words, while there are most certainly security and performance challenges of web-based business models and operations, today’s young entrepreneurs do not view them with suspicion and dismay; they view them as the current reality and work around these obstacles to launch their business models in spite of them.
The entrepreneurial mindset of today will create a new genera- tion of cloud-based business models that will soon be attacking leg- acy marketplaces and industries, as well as creating entirely new ones. The discussion above develops a profile of the likely cloud- based competitors that will become asymmetric competitors. These asymmetric competitors will be a force to reckon with, and cloud computing will be the fundamental technology foundation that they will be competing with. Combine the mindset of these new entrepreneurs with the technology approach of cloud computing, and there is real danger for naysayers along with tremendous oppor- tunity for adopters of cloud.
There are many scenarios where cloud makes perfect sense for a business executive. Often, new business model concepts are tested and piloted on a limited basis in order to wring out the kinks and nuances of a new business model or limited aspects of a new busi- ness strategy. Many times, speed to market is a major driver of a new business model innovation, and along with that comes security and intellectual property protection. The longer you wait to launch, the sooner critical trade secrets can fall into the hands of your competi- tion. For a business executive, cloud provides a means to conduct limited scope business-model experiments to pilot a new service or product, quickly and securely, without having to conduct normal IT acquisition of hardware, software, and network infrastructure. As the business model innovation proceeds, and if it is successful, cloud offers a scalable on-demand model to add new capacity pre- cisely as it is needed, no more and no less. If the business model pilot is cancelled, the cloud capacity is relinquished, and you stop paying for the cloud resources immediately. If you had acquired the IT infrastructure to support the new business model construct, you would still be paying for it, and you would still have the capacity— probably unused capacity—going forward. Excess capacity is waste, both in hard dollar terms, physical computing and storage terms, and in manpower and IT human resources terms.
The business agility and rapid time-to-market value of cloud is particularly attractive as a means to respond to new markets quickly, to innovate and test new business model concepts quickly, and to offer new startups a rapid model to go to market without up-front costs and time delays in acquiring and operating IT infrastructure. These are all reasons why a business executive should care about cloud. The strategic implications are clear.