How Cloud Computing Technologies are shifting the basis of Competitive Advantage

Exec­u­tives need to under­stand how the increas­ing avail­abil­ity and depth of Cloud Com­put­ing tech­nolo­gies are impact­ing their orga­ni­za­tions’ com­pet­i­tive advan­tages. After respond­ing to A. McAfee’s chal­lenge of a good cloud com­put­ing metaphor in a pre­vi­ous post, I felt com­pelled to clar­ify and com­plete. My metaphor described this shift as if all busi­nesses, no mat­ter how small, had an ever-expanding Har­rods store just round their cor­ner. Cloud Com­put­ing tech­nolo­gies are not a mir­a­cle answer to all IT woes, nor are they suited for all types of use. But you need to take advan­tage of them where you can, oth­er­wise you are at risk of see­ing your com­pet­i­tive advan­tages slowly erode at many lev­els. The sin­gle slide below encap­su­lates the frame­work detailed in this post:

Cloud Com­put­ing tech­nolo­gies stack of Ser­vices (CCS)

CCS are a suite of tech­nolo­gies deliv­er­ing an inte­grated set of IT capa­bil­i­ties. Ama­zon Web Ser­vices is the arche­typal illus­tra­tion. CCS are a dis­rup­tive tech­nol­ogy mainly due to their:

• scal­a­bil­ity: scale up and down with­out any per­for­mance impact
• util­ity pric­ing: pay only what you use, no upfront costs
• imme­di­ate pro­vi­sion­ing: get a server run­ning in min­utes for example
• reli­a­bil­ity: ben­e­fit from redun­dancy and secu­rity invest­ments at the plat­form level (across sev­eral data cen­ters, etc.)

Ama­zon Sim­ple Stor­age Sys­tem (S3) for instance, has enabled a whole gen­er­a­tion of start-ups to pro­vide data stor­age ser­vices while dis­burs­ing absolutely zero in upfront cap­i­tal costs. They were able to scale their use and pay exactly what they con­sumed. No cap­i­tal invest­ments on the bal­ance sheet either to con­strain their flexibility.

These CCS can be whole Infrastructure-as-a-service offer­ings (AWS for ex.), Platform-as-a-service (Google App Engine for ex.), or any other sub­set of tech­nolo­gies. CCS can be deployed inter­nally (Appistry for ex.) as well—the util­ity pric­ing is done inter­nally as cross-charges.

These tech­nolo­gies pro­vide part or whole of the infra­struc­ture on which IT appli­ca­tions are deployed, and this is our next layer.

The Appli­ca­tions layer

Com­pa­nies take advan­tage of CCS in 3 main ways.

Use generic Appli­ca­tions hosted on CCS

The low­est level of exploita­tion is to switch exist­ing, generic appli­ca­tions to CCS. Instead of run­ning MS Share­Point and Exchange servers in your own data cen­ters, you run them from Microsoft data cen­ters and ben­e­fit from the economies of scale on their end.

What you gain is bet­ter exe­cu­tion through cost-savings, per­for­mance improve­ment and bet­ter pro­vi­sion­ing and reliability.

Migrate or develop your in-house Appli­ca­tions using CCS

The next step is to use CCS to improve the capa­bil­i­ties of your in-house, indus­try spe­cific appli­ca­tions. This is what hedge funds and other finan­cial insti­tu­tions are doing when run­ning their mod­els on the AWS infra­struc­ture. In this case, the nature of the appli­ca­tions is not chang­ing. You just ben­e­fit from a bet­ter exe­cu­tion, as in the pre­vi­ous case.

But you can also develop new appli­ca­tions, that are made pos­si­ble only through the use of CCS. In that case, you don’t just migrate your exist­ing appli­ca­tions to CCS, you develop entirely new appli­ca­tions that were not pos­si­ble with­out the capa­bil­i­ties of your cho­sen CCS.

Ama­zon recent imple­men­ta­tion of MapRe­duce is a good exam­ple, as this class of capa­bil­i­ties was pre­vi­ously too expen­sive, by an order of mag­ni­tude, to be used in any­thing but the excep­tion­ally crit­i­cal busi­ness cases. Thanks to Amazon’s incor­po­ra­tion of it in AWS, it is now pos­si­ble to use it in many more situations.

Imple­ment 3rd-party appli­ca­tions devel­oped using CCS

The last use of CCS for com­pa­nies is a sec­ond order effect. CCS dra­mat­i­cally lower the cost of devel­op­ing a web appli­ca­tion, or extend­ing the func­tion­al­i­ties of a desk­top appli­ca­tion. This has cre­ated an explo­sion in the num­ber, vari­ety and sheer per­for­mance of third-party appli­ca­tions avail­able to organizations.

They can be used directly from the CCS, like Base­camp for exam­ple; or devel­oped while tak­ing advan­tage of the CCS, but pro­vided to large orga­ni­za­tions as self-hosted appli­ca­tions not directly using CCS: enter­prise twitter-clones Presently and Yam­mer pro­vide both options for example.

In either case, the economies of scale from the CCS used in the devel­op­ment are trans­ferred to clients, albeit at dif­fer­ent lev­els depend­ing on the host­ing options.

The key point here is that, in order for orga­ni­za­tions to take advan­tage from these appli­ca­tions, they will have to adapt their man­age­ment processes to the appli­ca­tions. It won’t be pos­si­ble to deploy them and suc­ceed with­out some degree of change. This is the whole “Enter­prise 2.0″ trend for example.

Exe­cu­tion and New capa­bil­i­ties: the two lev­els of Com­pet­i­tive Advan­tage impacted by CCS

Bet­ter Exe­cu­tion: must have but not sustainable

CCS enable first and fore­most bet­ter exe­cu­tion of exist­ing processes and effi­ciency given the cur­rent man­age­ment struc­ture and cul­ture. Migrat­ing your Microsoft Exchange server to CCS will lower your costs, improve your exe­cu­tion, but not cre­ate a sus­tain­able com­pet­i­tive advan­tage for your firm. While not there yet, this use will be com­mod­i­fied in the near future and will spread glob­ally to orga­ni­za­tions of all size and in all industries.

In-house appli­ca­tions migrated to CCS, with­out any improve­ment, will pro­duce the same effects: bet­ter exe­cu­tion, noth­ing more. Again, this will be a require­ment but also a com­mod­ity. orga­ni­za­tions will only be able to dif­fer­en­ti­ate them­selves neg­a­tively, not positively.

Using CCS to develop new capabilities

By far the most pow­er­ful use of CCS is to enable orga­ni­za­tions to develop entirely new capa­bil­i­ties. This is the area where com­pet­i­tive advan­tages spe­cific to each firm, and thus much more sus­tain­able, will appear. The metaphor of CCS as an ever-expanding, round the cor­ner and very cheap super­store for each orga­ni­za­tion describes this poten­tial use:

In the world you oper­ate today, imag­ine that lit­er­ally all busi­ness man­agers, from CEOs of pub­lic com­pa­nies to sole busi­ness own­ers, includ­ing would-be busi­ness cre­ators, have a huge super­mar­ket just round their cor­ner. A spe­cial super­mar­ket in fact. It sells a tremen­dous array of prod­ucts and ser­vices, for every indus­try, need, or activ­ity. It is also ever expand­ing: if you make two trips at just 1 hour inter­val, new prod­ucts will have already been stocked and avail­able for sale, in addi­tion to the old ones and on new shelves con­stantly being added. On top of that, the price of each prod­uct is incred­i­bly cheap: new cars for exam­ple, are sell­ing for 1/1000 of their nor­mal price, or even cheaper.

The last char­ac­ter­is­tic of this store: you don’t own what you buy, you just lease it. It can be a one-time fee, reg­u­lar pay­ments, or any other scheme, you lease it. What’s more, if for any rea­son the provider of your prod­uct dis­ap­pears, then your prod­uct dis­ap­pears as well. Let’s illus­trate this with the car exam­ple: you can lease a car for, say $30 a month, and use it as you own it. You would then leave your “stuff” inside the car: some books, some papers, per­haps a watch, etc. If the pro­ducer or your car dis­ap­pears, your car van­ishes as well, with your stuff inside.

The trade-off begins to appear: $30 a month for a car is a really good price, but you are at risk of this dis­ap­pear­ance. You can mit­i­gate it how­ever: choose a well-known and estab­lished ven­dor, or just leave only non valu­able “stuff” inside. Many par­al­lels can be made with this metaphor.It is for exam­ple really dif­fi­cult to find your way in an ever-expanding, huge store, and find the exact prod­uct that would fit your needs. Then, how do you know if its pro­ducer is not on the verge of dis­ap­pear­ing? You can stick to the big names only, but what this prod­uct taht would really fit your needs, would you try it?

Now, con­vert­ing this poten­tial into real com­pet­i­tive advan­tages sus­tain­able at the firm level will require bold lead­er­ship. But the “Schum­peter­ian” pres­sure will only increase, so orga­ni­za­tions will have to explore and act on this new con­text to main­tain their mar­ket leadership.

There are no free lunch

Of course, the dis­tinc­tions made at all 3 lev­els (Appli­ca­tions, Com­pet­i­tive Advan­tage, Sus­tain­abil­ity) are heuris­tic. Google Apps, for exam­ple, can be used either as a migra­tion of com­mod­ity email sys­tems to the cloud (replace your expen­sive, self-hosted MS Exchange server with $50/user/year all man­aged Gmail) or be used cre­atively as an inte­grated col­lab­o­ra­tive suite to deeply mod­ify the cul­ture and level of agility of your company.

Busi­nesses should of course aim to develop com­pet­i­tive advan­tages at the firm level, lever­ag­ing a range of inno­v­a­tive appli­ca­tions draw­ing most of their infra­struc­ture on CCS. Some firms won’t sur­vive the shifts in cul­ture and man­age­ment prac­tice prompted by these tools though. But the main dan­ger is ignor­ing the threats and felling into decay.

Note: An email exchange with Louis Naugès caused me to write this clar­i­fi­ca­tion post.

Photo credit: extra­noise