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