The Second Curve: Managing the Velocity of Change

Ian Morrison

Slide 2

The Second Curve

First Curve Second Curve

Slide 3

The Curves

First Curve– The established way of doing business– Most of the current Profit and Revenue– Slowing in the long run

Second Curve– New business or new way of doing business– Radically different from the first– Source of future growth

Slide 4

Drivers of the Second Curve

New Technologies– Faster, better, cheaper

New Consumers– Anything, any time, any place

New Emerging Geographic markets– Asia, Latin America, Eastern Europe

Slide 5

New Consumers

Better educated Discriminating Skeptical and demanding Better informed Individualistic With changing values

Slide 6

Public’s Satisfaction with Industry Decreases: Managed Care Loses More Ground than Others

Industries Doing Good Job Serving Consumers

1997 1998 1999 2000Change

1997-2000% % % % %

Computer hardware companies 80 78 80 76 -4Computer software companies 80 77 80 78 -2Banks 75 72 68 73 -2Hospitals 77 73 71 72 -5Car manufacturers 70 69 70 67 -3Airlines N/A 78 71 66 N/ATelephone companies 80 76 67 64 -17Life insurance companies 64 63 61 62 -2Pharmaceutical and drug companies 79 73 66 59 -20Oil companies 59 64 55 39 -20Health insurance companies 55 48 41 39 -16Managed care companies 51 45 34 29 -22Tobacco companies 34 32 31 28 -6

Slide 7

Births (millions)

0

1

2

3

4

5

The Greatest Generation

The Forgotten Few

The Baby Boom

The Baby Bust

The Echo Boom

The Echo Bust

Slide 8

California Demographics: Everyone’s a Minority

0%

20%

40%

60%

80%

100%

1995 2000 2010 2020

Native Americans

Blacks (Non-Hispanic)Asian/PacificIslandersHispanics

Whites (Non-Hispanic)

Slide 9

New Technology

Computers Communications Internet

Slide 10

America’s Technology Boom 1997-2000

Demographics of the Baby Boom The 401 (K)ing of America The NASDAQ Wealthy: betting with the

house’s money Day trading by individuals and institutions The Real Y2K Bug Dot.Commers had free money to buy servers,

ad space, brands, people, and real estate

Slide 11

The Ugly Correction 2000-2001 The Internet is the engine of change and

productivity or we have a problem Forced the Establishment into e-business, but

the sense of urgency has waned If it ends it will end badly, but……. This is not 1929 yet because

– Leverage is less– Markets are more regulated– Instruments are more diverse

Slide 12

The Long Boom

Openness in technology, trade and communication

New technology– Internet and E-commerce– Genetics and genomics– Nanotechnology

Markets and networks over government and hierearchies

Slide 13

Knowledge as ValueProduct Price per PoundPentium III 800 Mhz $42,893.00Viagra 11,766.00Gold 4,827.20Hermes Scarf 1,964.29Palm V 1,726.92Saving Private Ryan on DVD 874.75Cigarettes 100.00Mercedes-Benz E-Class Sedan 18.98Chevrolet Cavalier Sedan 6.76Hot-Rolled Steel 0.19

Source: Fortune, March 20, 2000 p. 68

Slide 14

The Internet

Commerce

Computers

Communications

Content Community

Slide 15

Americans On Line

Percent of Adults Online from Home or Work

010203040506070

1995 1996 1997 1998 1999 2000

All OnlineOnline at HomeOnline at Work

Source: Harris Interactive, 2001

Slide 16

The growth of Internet access worldwide

372.32

313.13

257.67

197.6

95.43

130.63

0 100 200 300 400 500

2003

2002

2001

2000

1999

1998

= 5% of pop’l

= 9% of pop’l

(Source: eMarketer, eGlobal Report, March 2000)

Number of adults with Internet access (millions)

Slide 17

Comparative estimates by region (2000)

407.1

2.4

3.11

16.45

113.14

167.12

104.88

0 100 200 300 400 500

Total

Middle East

Africa

Latin America

Asia/Pacific

Europe

North America

(Source: NUA Internet Surveys, November 2000)

Number of adults with Internet access (millions)

Slide 18

Internet access for OECD nations

88

1219

2526

2934

3842

50

25

0 10 20 30 40 50 60

Italy

Germany

France

Japan

Finland

UK

Netherlands

Canada

Australia

Norway

US

Denmark

(Source: OECD, 2000)

Percent of adults with Internet access

Slide 19

Technology Diffusion

Drugs, sex, and rock ’n roll B 2 B usually before B 2 C Media accumulate

Slide 20

Morrison’s Five Laws of the Internet

Law 1: The Mother of all Commoditizers Law 2: The margin is captured by the

consumer not the innovator Law 3: It is a 1 to 1 medium but the

race is on to build mass brands Law 4: The Alberta Tar Sands Model of

internet advertising Law 5: There is a lot of physical

fulfillment in e-commerce

Slide 21

Business to Business Infrastructure Players

Hard Infrastructure: Cisco, Nortel Soft Infrastructure: Ariba, Oracle, I 2 New Plumbers: Razorfish, Sapient Hosters: Exodus, Worldcom Market Makers: Commerce One, FreeMarkets Vertical Markets: Neoforma, Metalsite Toolmakers: Kana, Siebel, BEA Systems

Slide 22

Market Capitalization of B2B PlayersSelected Market Capitalizations (Billions of Dollars)

March 2000 March 2001I-2 26.7 6.4 Exodus 25.7 4.7 Ariba 25.6 2.6 Commerce One 15.7 2.1Kana Communications 7.2 0.2FreeMarkets 6.6 0.4

Slide 23

Alternative B 2 B Models

Electronic Spot Markets E-Brokers Demand Collection Systems Reverse Auctions Auctions Electronic Marketplaces

Slide 24

Business to Business Models

Auctions

Sellers

Buyers

Slide 25

Business to Business Models

DCS

Sellers

Buyers

Slide 26

Business to Business Models

DCSAuctions E-Markets

Sellers

Buyers

Slide 27

Markets: From First Curve to Second Curve

First Curve– Capital– Producer – Atlantic– Japan– International Trade– Computers– Money– Market Segments

Second Curve– Knowledge– Consumer– Pacific– China– Electronic Commerce– Internet– People– Business Ecosystems

Slide 28

Organizations: From First Curve to Second Curve

First Curve– Mechanistic– Engineering– Corporations– Horizontal

Integration– Business Processes

Second Curve– Organic– Ecology– Individuals and

Networks– Virtual Integration– Culture

Slide 29

The 21st Century Organization

Hyper-Focused Firm Cultural Juggernaut Extended Enterprise Shared-Risk Alliance The Object Organization The Fishnet Organization The Self Generating Organization

Slide 30

Individuals: From First Curve to Second Curve

First Curve– Hard-Working– Security– Current Career– Faith– Loyalty

Second Curve– Hyper-effective– Uncertainty– Future Career– Hope– Courage

Slide 31

Issues and Impacts

Commoditization or Mass Customization The Rise of Perfect Markets Powerful New Intermediaries

– Re-intermediation versus disintermediation Digital cannibalization of overhead Don’t disrespect the First Curve (2000) Don’t disrespect the Second Curve (2001) Learn to play both curves

Slide 32

Staying on the First Curve

Own the First Curve Slide down the demand curve into

oblivion Export the First Curve Kill the Second Curve If at first you don’t succeed, rename it

Slide 33

Jumping to the Second Curve

Eat the Corporate Lunch Turn a small base into big bucks Develop a brass neck Look for exponential marketing Take up paradigm surfing

Slide 34

Playing Both Curves

Redefine the Value Chain Create Second Curve Portfolios

– Isolate, incubate, insulate, integrate Prune the Second Curve Shift Curves based on culture and competency Organize for Two Curve success:

– Scale, incentives, organization, people