Strategy and Technology

The Rise of Cloud Computing

There is a paradigm shift beginning in the world of computing. Over the next decade, increasing numbers of businesses will stop purchasing their own computer servers and mainframes, and instead move their applications and data to “the cloud.” The cloud is a metaphor for large data centers or “server farms” collections of hundreds of thousands of co located and interlinked computer servers. Corporations will be able to “host” their data and applications on cloud computing providers’ servers. To run an application hosted on the cloud, all a person will need is a computing device with a Web browser and an Internet connection.

There are significant cost advantages associated with shifting data and applications to the cloud. Business will no longer need to invest in information technology hardware that rapidly becomes obsolete. Cloud providers will instead be responsible for maintenance costs of servers and hardware. Moreover, businesses will no longer need to purchase many software applications. Instead, businesses will utilize a pay as you go pricing model for any applications that they use, which also holds out the promise of reducing costs. (Some studies have concluded that 70% of software purchased by corporations is either underutilized, or, not used at all.) The Brookings Institute estimates that companies could reduce their information technology costs by as much as 50% by moving to the cloud.

Early adopters of cloud computing services have included Inter  Continental Hotel Group (IHG), which has 650,000 rooms in 4,400 hotels around the world. Rather than upgrade its own information technology hardware, IHG has decided to move its central reservation system onto server farms owned by Amazon. com, the online retail store that is also emerging as an early leader in the cloud computing market. Similarly, Netflix has decided to utilize Amazon’s cloud services for distributing its movies digitally, rather than investing in its own server farms. Another early user of cloud services is Starbucks, which has moved its entire corporate e mail system off its servers and onto Microsoft’s cloud computing system.

Amazon and Microsoft are two of the early leaders in the embryonic cloud computing market. The other significant player is Google. All three companies had to build large server farms to run parts of their own businesses (online retail in the case of Amazon, and Web searching capabilities in the case of Google and Microsoft). When these corporations soon realized that they could rent out capacity on these server farms to other businesses, the concept of cloud computing was born. Other companies that have announced their intentions to enter the cloud computing market as providers of hosting services include IBM and Hewlett Packard.

Right now the cloud is small estimates suggest that it accounts for just 5% of the $1.5 trillion in corporate information technology spending in 2010. But many analysts believe that this share will grow very rapidly. Amazon, with an estimated $750 million in revenue from cloud services, is currently the leading company. Both Microsoft and Google, recognizing how crucial the cloud will become, are investing heavily in this technology.

Microsoft has developed an operating system, known as Windows Azure, which is designed to run software applications very efficiently on server farms, allocating workloads and balancing capacity across hundreds of thousands of servers. Microsoft is rewriting many of its own applications, such as Office and SQL server, to run on Azure. The belief is that this will help the company retain existing clients as they transition their data and applications from their own servers onto the cloud. Microsoft has also developed tools to help clients write their own custom applications for the cloud; they have recognized that the shift to the cloud threatens its existing Windows monopoly, and that its best strategy is to try and become the dominant company on the cloud.

Microsoft’s rivals are not idly standing by Google, for example, has developed a cloudbased operating system, Google App Engine, which will allow clients to efficiently run their custom software applications on the cloud. Amazon, too, has its own cloud-based operating system, known as “EC2.” Other companies, including IBM and VM Ware, are developing similar software. Software applications that are written for one cloud based system operating system will not run on another cloud operating system without a complete rewrite meaning that there will be significant switching costs involved in moving an application from one cloud provider to another. This strongly suggests that we are witnessing the beginnings of a format war in cloud computing, much like the format war during the early-1990s between Microsoft, IBM, and Apple to dominate the desktop computer a war that Microsoft won with its Windows Operating System. If business history is any guild, at most only 2–3 formats will survive, with most other formats falling by the wayside.

Business Level Strategy and the Industry Environment

Groupon’s Strategy to Become the Leader in the Online Coupon Industry

 

In 2010, Google offered to buy Groupon, the online “daily deal” coupon startup company for $6 billion an astonishingly high offer many analysts said but Groupon rejected Google’s offer, leaving analysts surprised. Why? Groupon’s founders decided that they could make much more money from their new company if they could develop strategies to allow the company to stay ahead of potential competitors (such as Google), and establish it as the dominant company in this segment of the online advertising market. Facebook had refused early takeover offers from companies such as Microsoft and Google, and Facebook’s initial public offering was expected to exceed $120 billion! If Facebookcould do this, so could Groupon.

Groupon was originally a website called “The Point” founded by Andrew Mason in 2007, which was designed to allow a sufficient number of people to connect online and participate as members in a joint endeavor. When enough people joined, a “tipping point” was reachedthat allowed them to act as a group, and to take advantages of opportunities that could not be obtained by any single person acting alone. As Mason stated in a letter to prospective investors in 2011: “I started The Point to empower the little guy and solve theworld’s unsolvable problems.”1 A big idea. It quickly became clear to Mason that Internet users really liked the opportunity to act together and get great deals on location specific goods and services; online coupons that changed day by day brought people together

Mason transformed The Point into “Groupon,” and quickly began hiring software engineers and salespeople who shared his vision: people acting together to increase their buying power. As Mason wrote: “. . . as an antidote to a common ailment for U.S. city-dwellers there’s so much cool stuff to do, but the choice can be overwhelming. With so many options, sometimes the easiest thing is to go to a familiar restaurant, or just stay at home and watch a movie. As a result, we miss out on trying all the cool things our cities have to offer.”2 In 2009, Groupon’s online coupon service was launched in major cities around the United States, and the strategy was focused upon providing one specific coupon that offered big discounts on a particular good or service each day, in a specific geographic location. Groupon’s strategy was now based on leveraging its member’s collective buying power to obtain great deals from companies that online customers found hard to resist. Its strategy was clear it needed to expand its user base. To do this, Groupon had to attract companies that were anxious to captivate new customers by offering good deals and samples of their goods and services, such as restaurants or recreational experiences. To increase Groupon’s user base and encourage users to buy its coupons it had to offer them protection; so Groupon promises that if users feel disappointed they can call it to obtain a refund. Groupon’s website states that nothing is more important than treating customers well; the companies offering coupons know they must also work to attract and keep Groupon users their customers.

Groupon’s revenues increased 15 times between 2009 and 2011 as its user base grew to 50 million spearheaded by Mason’s vision and business level strategy. While global sales were nonexistent in March 2010 they were 53% of Groupon’s revenues by March 2011, just 1 year later. Its explosive growth led Google to realize the potential of Groupon to leverage its own competences in Internet advertising in new ways, and build its online advertising market share.

Building Competitive Advantage Through Business Level Strategy

Zynga Finds a New Strategy to Compete in Online Social Gaming

Zynga Inc., based in San Francisco, is the most popular maker of online social games a rapidly growing and highly competitive segment of the game software and content industry. Every month, 1 out of 10 users of the Web play one or more of Zynga’s 55 games, which include FarmVille, CityVille, Zynga poker, and Mafia Wars. About 4/5 of the U.S. population, approximately 250 million people, plays its games each month.

In 2011, Zynga released its newest online game, Empires & Allies, which expanded the company’s repertoire, moving it into a new gaming arena“action and strategy” games, which have been dominated by leading game developer, Electronic Arts (EA), (whose blockbuster games include Crysis 2, Star Wars: The Old Republic, The Sims, and Portal 2). Microsoft, Nintendo, and Sony are also major developers of action games that can be played on their proprietary gaming consoles the Xbox, Wii, and PlayStation, respectively. Today, many of the games these companies develop can also be purchased and played on desktop PCs, laptops, and mobile computing devices such as smartphones and tablets.

Leading game developers like EA and Sony utilize a business model that innovates blockbuster games, which will sell millions of copies at a price of $ 50 – $ 75 each game, generating billions of dollars in revenues and profits. Each game is produced by a team of hundreds of developers, who may work for 2 years (or more) to create a new game before it is finally released for sale. The popularity of the games the team creates determines the success of established game developers ; as such, they are pursuing a differentiation strategy based on creating a unique product that can be sold at a premium price.

How did Zynga manage to enter and successfully compete in the highly competitive social gaming industry against giants such as EA and Nintendo? Its principal founder, Mark Pincus, armed with only $29 million in venture capital, decided to pursue a focused differentiation strategy to develop games using an approach that was unique within the software gaming industry. Pincus’ approach was to start small, and hire 20 or more game developers to work interactively in teams of 10 15 members to continuously create, develop, and then perfect new games such as FarmVille. As each new game was launched, and revenue from online users started to roll in, Pincus could recruit new teams of game developers. By 2011, Zynga employed over 1,200 game developers and designers, and promoted a relaxed, university campus like environment in which employees could even bring their dogs to work if they chose.

Building Competitive Advantage Through Functional Level Strategy

Lean Production at Virginia Mason

In the early 2000s, Seattle’s Virginia Mason Hospital was not performing as well as it should have been. Financial returns were low, patient satisfaction was subpar; too many errors were occurring during patient treatment, and staff moral was suffering. Gary Kaplan, the CEO, was wondering what to do about this when he experienced a chance encounter with Ian Black, the director of lean thinking at Boeing. Black told Kaplan that Boeing had been implementing aspects of Toyota’s famous lean production system in its aircraft assembly operations, and Boeing was seeing positive results. Kaplan soon became convinced that the same system that had helped Toyota build more reliable cars at a lower cost could also be applied to health care to improve patient outcomes at a lower cost.

In 2002, Kaplan and a team of executives began annual trips to Japan to study the Toyota production system. They learned that “lean” meant doing without things that were not needed ; it meant removing unnecessary steps in a process so that tasks were performed more efficiently. It meant eliminating waste and elements that didn’t add value. Toyota’s system applied to health care meant improving patient outcomes through more rapid treatment, and eliminating errors in the treatment process.

Kaplan and his team returned from Japan believing in the value of lean production. They quickly set about applying what they had learned to Virginia Mason. Teams were created to look at individual processes in what Virginia Mason called “rapid process improvement workshops.” The teams, which included doctors as well as other employees, were freed from their normal duties for 5 days. They learned the methods of lean production, analyzed systems and processes, tested proposed changes, and were empowered to implement the chosen change the following week.

The gains appeared quickly, reflecting the fact that there was a lot of inefficiency in the hospital. One of the first changes involved the delay between a doctor’s referral to a specialist and the patient’s first consultation with that specialist. By examining the process, it was found that secretaries, whose job it was to arrange these referrals, were not needed. Instead, the doctor would send a text message to the consultant the instant he decided that a specialist was required. The specialist then needed to respond within 10 minutes, even if only to confirm the receipt of the message. Delays in referral- to treatment time dropped by 68% as a consequence of this simple change, which improved patient satisfaction.