Business' Digital Transformation

 

Takeaway

  • The Internet is accelerating the normal pace of business transformation, making it critical for businesses to keep up
  • Businesses that can't keep up with fast waves of change are likely to get swept away by them

In 2005, when the multi-billion-dollar Google bought up a small company called Android, some observers scratched their heads. What did a search-engine giant want with a firm that made software for mobile phones?

Two years later, when Apple released the iPhone, the answer became clear. Smartphones exploded from a niche market for executives sending email into worldwide sales that now top 400 million units a year. Google had placed a bet on the future of the Internet, and the future was in smartphones, tablets, and other wireless, mobile devices.

To Andrew Whinston — professor, Hugh Roy Cullen Centennial Chair in Business Administration, and director of the Center for Research in Electronic Commerce at the McCombs School of Business — Google is a prime example of how to survive in the $1.5 trillion world of e-commerce. Economics has always involved creative destruction, a process in which old industries crumble as new ones arise. But never have the waves of creative destruction churned as fast or as furiously as in the Internet economy.

“You’ve got to be thinking about the next big thing and getting there before the next company,” says Whinston. “You have to be there right at the beginning, and you have to have an innovative business model.”

If a business doesn’t catch the next wave, it’s likely to get swept away by it. Ask major record labels, bookstore chains like Borders, or dozens of daily newspapers. Or ask a couple of corporations that ruled the high-tech roost just a decade ago.

“Yahoo was a venture financier of Google,” notes Whinston. “Now, Yahoo is struggling, cutting costs, and laying off people. Microsoft was invincible years ago. Now, where is Microsoft in the wireless and tablet world? Nowhere. Windows revenues are falling because of open-sourcing. Companies that feel they’re insulated, because of their tremendous position in the technology world, end up at the bottom of the heap.”

Google, by contrast, has managed to surf from one wave to another, following the evolution of online advertising.

The earliest online ads, Whinston explains, were display ads. Like newspaper ads, they aimed at a broad market: the geographic address at which an Internet user lived. Then came Google’s AdWords program. It upended both Yahoo and newspapers by targeting consumers’ interests instead of their locations. Users revealed those interests through their search terms, then saw ads that were specific to those words.

Social networks like Facebook helped advertisers read consumers’ minds with even greater sophistication, thanks to the wealth of personal information their members were willing to make public.

But today, says Whinston, the AdWords model is getting rusty. The reason is that netizens are no longer standing still. As laptops, tablets, and smartphones swamp the sales of desktop PCs, mobile advertising has become the next wave. Advertisers can target consumers at the very moment they’re about to consume.

“As you’re ambling along Sixth Street, the GPS on your phone knows how to locate you,” Whinston explains. “Various organizations and establishments can offer you deals on drinks, shows, and meals.”

In an ironic reversal, he adds, mobile advertising can pump fresh life into brick-and-mortar businesses. “Older companies, with physical locations, will have a renaissance as they get into the whole world of wireless technology. I still like to eat a meal at a restaurant.”

That’s the good news for older industries, says Rosental Alves, Knight Chair in Journalism at the Knight Center for Journalism in the Americas. Miss one wave, and there’s always another one coming along. In his own field, newspapers, he sees plenty of opportunities to catch it.

The coming wave, he says, will break apart a printed product that bundles too great a variety of information. “Nobody’s interested in more than 25 percent of what’s in a newspaper. Why receive a huge Sunday edition with a sports section, if you don’t care about sports?”

Within 10 years, Alves predicts, news will separate itself from paper. It may even dispense with a screen and be projected by a mobile device directly onto a wall or tabletop. “Newspapers will still have a paper edition, in most cases,” he says, “but it will be a secondary revenue stream, something like a cult for older people who still want the feeling of the paper. But the newspaper at that point will be a digital company. The main activities and revenues will be coming from digital platforms in different ways.”

Meanwhile, back at Google, the company continues scouting for the next big thing. Says Whinston, “Google requires, to the extent they can, that their engineers spend at least one day a week thinking about something different from their jobs. It’s a company that does 10 experiments every day to see what works. Most things fail. A few succeed.”

The key to survival in e-commerce, he says, is to stay in a state of permanent anxiety. “Google is in a panic from competition from Facebook and Apple. They’re properly panicked. There’s always sometime the music stops, and you’ve got to be ready to dance to the new music.”

 

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Andrew B. Whinston

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Andrew B. Whinston is a professor in the department of Information, Risk, and Operations Management at the McCombs School of Business. He also...

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Steve Brooks

In a quarter-century as a journalist, Steve Brooks has won two Neal awards for excellence in trade reporting and a Press Club of New Orleans award...

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