A recent tweet by @rossdawson alerted me to a new post by Oliver Young at his Strategic Heading blog titled “Web 2.0 Represents A Fundamental Rethinking Of Business, And The Theory Of The Firm.”
This is a self-explanatory title, and an accurate summary of Young’s beliefs about the impact of 2.0 technologies. As he states:
”So what do I see when I look at Web 2.0, social media, social software, and whatever else you want to call this thing? I see a fundamental rethinking of the definition and function of the firm; the single biggest change since the industrial revolution” (emphasis in original)
Young believes this rethinking of the firm comes about because “businesses are opening the doors to the product development, marketing, packaging, and distribution process to customers who add value every step of the way with their preferences, ideas, and reactions. The firm is no longer creating value alone, it now has help.” (again, emphasis in original). This is in contrast to the previous model of capitalism in which “firms acquire capital, labor, and resources, combine them into a valuable product or service, and sell the product or service to individuals or other businesses who consume that value. In this system is it incumbent on the firm to create value, and the role of the buyer is to consume value. End of story.”
Young believes that “Over the next 10 to 15 years, on the back of social software, we will go from a fundamentally closed value creation system to a fundamentally open one” (emphasis, yes, in original).
Most of us who study the new technologies of interaction, collaboration, and collective intelligence agree that they have great potential to enable more open systems for creating economic value. But we need to be very careful with our claims about how closed things are at present.
It’s not useful to present our current system a fundamentally closed one in which firms work only within themselves to create value. That’s not a helpful strawman; it’s a counterproductive caricature.
Outsourcing, joint ventures, industry consortia, partnerships with academia, network organizations, vertical disintegration, a focus on ‘core competencies,’ comparative advantage, transaction cost economics, the theory of the firm, lead user innovation, and countless other trends, concepts, arrangements, and bodies of theory all predate the 2.0 Era and the current crop of social software. And they are all about ways to create value than are more ‘open’ than doing all work within individual firms.
The function of the firm is to add (and capture) economic value. This was the case before 2.0 technologies came along, and will the the case after they’re widely deployed. It’s also the case that many entrepreneurs and other innovators of capitalism have realized that they could add (and capture) more value by being more open to outside influences and outsiders, and have found very clever ways to become more open. Some of these ways have involved technology, some have not.
I am sorry if this sounds like I’m picking on Young, a very smart guy who I’ve met and whose work I find valuable and insightful. I’m singling out his post because it’s an example of a harmful tendency that I’ve seen many times over the years. This is the tendency that many of us technology enthusiasts have not so much to oversell the virtues and power of new tools, but instead to talk and write as if there was no progress on important topics before they came along.
I agree with Young that we’re headed into an era of overall higher levels of openness, but I strongly disagree that what’s coming is going to be like day after night. 2.0 technologies give us revolutionary capabilities in some areas, but they’re not going to revolutionalize capitalism. Capitalism’s been doing that to itself for quite a while now anyway.
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Paul Romer’s New Growth Theory supports your position that companies have always used their competitors’ products, customer focus groups, university research and other sources of information to improve or develop entirely new products.
Web 2.0 accelerates the process by capturing ideas from large numbers of loyal or disgruntled users. Web 2.0 also empowers product managers, engineers and marketers to bypass the internal organizations that traditionally mediated conversations with customers.
Hi Andy, thanks for the critique on the post. My characterization is most definitely a straw-man and my intention was not to put out a full nuanced treatment of the subject; that work will be done in upcoming research.
That said, I do think this is a more fundamental shift that you are giving it credit for. Peter (above) starts to hit at the big reason here: scale. Outsourcing, joint ventures, industry consortia, partnerships with academia, network organizations, etc. all bring outside value into the enterprise, but all require major infrastructure and expenditure to manage. The average enterprise simply cannot execute these initiatives in any sort of repeatable, scalable manner. Today it is almost all bespoke.
I will be the first to tell you that Web 2.0 tools today require a major investment of time and effort, but once the tools and processes are in place the economies of scale should kick off in earnest. Once this happens I really do believe that most of what we have done thus far to open the value creation process will feel like child’s play. I wouldn’t call it a revolution in capitalism either, but I do believe we are at a major phase shift after which community will be thought of on equal footing with land, labor, and capital.
Anyway, thanks again for the critique. I’ll be sure to take the more nuanced approach in the future. The last thing I want is to be a breathless fawner — it would kill my curmudgeon rep!
I must agree with you. Especailly on the following point.
“The function of the firm is to add (and capture) economic value. This was the case before 2.0 technologies came along, and will the the case after they’re widely deployed. It’s also the case that many entrepreneurs and other innovators of capitalism have realized that they could add (and capture) more value by being more open to outside influences and outsiders, and have found very clever ways to become more open. Some of these ways have involved technology, some have not.”
I may be reading this wrong. But knowlege, attitude, strategy and the ability to use technology the right way at the right time all must be in place before all this new great software will truly revolutionize anything. Man often creates new technology far in advance of his ability to deal with it effectively.
I think that the concept of openness and collaboration has always been there, in business and since the dawn of man. History is replete with examples of open systems for value creation. Taking the example of human development, hunter gatherers drew together in settlements as a way of exchanging goods, generating trade and developing paticular skills. Gathering in a settlement, be it a village or city, was often a practical way of generating value and many of these places became great cities where people would meet to exchange ideas and participate in trade.
The emergence and bedding in of social technology is another phase in business evolution and is in itself not the reason and creator for open systems and processes but an accelerator for the inherent need to collaborate and be open. Business models I believe will adapt themselves to take advantage of social technology to drive further benefit and value where there is an advantage to do so.
I think it as i bit early to say what levels are under/overselling Web 2.0. What is interesting as that Kamal’s points are scaled to a previously unseen level (Mass Collaboration).
It will be very interesting to observe what happens with innovation models for existing companies, and how it will help startups compete with the established ones.
Through history it can be technological and sociological shifts has turned things up side down, where yesterdays winners became loosers. The velocity of this will probably decide if it is a revolution or not.
Lately there has been talk of the Tipping Point theory coming into play here. When social media and open innovation models reaches a certain level it will evolve “epidemically”.
I am no academic about this matter, but nevertheless I’ve written a blog post about it on my name link provided.
Certainly, new social technologies have the potential to reduce barriers to participation and create value for businesses at the same time as they deliver value to customers (e.g. aggregating and connecting content, ideas, behaviours and resources to create personalised buying recommendations, and new product and service offerings).
However, familiar longstanding challenges remain and are compounded by the effect of those technologies. Namely, that people still need the skill to spot opportunities for creating value, and must now do so from increasing flows of information and interaction. Furthermore, a more open value creation system means companies must relinquish (to a certain degree) control over the creation process. Traditionally this has been very difficult for companies to do. The technology may be there, but it needs to be accompanied by the right mindsets and skills to be truly useful.
Too much time figuring out the fastest way to collect too much data. Then additional wasted capacity trying to analyze that data. Capacity is being wasted and that's a slice of the economic crisis.
I've spent the last decade watching our profit being invested in digital media. That department now is four times the investment of our real product manufacturing yet they only bring 15% of the total revenue after a true seven-year run-up. It started with fantastic speeches about how this was the future and technology would simplify our work and cut costs.
Now, we are being told it's over and we've got to go all in for digital. The new CEO comes in and the speeches are the same as the ones from 2001-2002, but the terminology has slightly changed. This time, we've got to do the work and it's going to be hard and it's pretty much 24/7. Interesting how it's changed. Now websites and digital products are expensive and hard to produce and we all have to sacrifice and do more.
Why do we have to go all in? Because that's what the business media says. Here's the reality, we don't need a social site and we don't even need a website. We need to keep that digital brochure out there and direct people to the our website re-sellers. Cut that digital to the bone and focus on building real products.
What about the revolution that happens within the companies? Workers will be able to communicate and figure out things much faster because Web/Enterprise 2.0 can be thought as a huge communication pipeline.
Andrew –
I couldn't agree with you more. After reading Young's post, my first thought was that juxtaposing the words “fundamental” and “rethinking” should be banned from usage.
And while I agree that many bloggers (in particular) talk and write as if there was no progress before they came belong, I think there's another motivation underlying their thoughts: The desire to be a part of the “revolution”.
And this is something that not just today Gen Yers are guilty of. Twenty-five years ago it was the revolution that PCs would bring about, then it was the client/server revolution, followed by the knowledge management revolution, then the Internet (Web 1.0) revolution, and now the Web 2.0 revolution.
What IS different this time around, however, is — thanks to blogs — the number of people who are able to make their thoughts about the so-called revolution publicly heard. And when you're surrounded by a lot of people who echo your thoughts about the need for a “fundamental rethinking”, then you start believing it.
What's that old adage … ?
We tend to over-estimate impacts in the short term because of all the “machinery” of the existing systems, and under-estimate the (cumulative) impacts in the longer term because our necessarily limited view on the scope and reach of the activities and systems.
I do agree it will not be day and night, in terms of difference, but I also believe that the accumulated changes will eventually create something clearly different than today's capitalism.
While I don't fully understand all this Web2.0 business talk, it's got me excited to see some shifts that really are the difference between day and night. Can you proffer some drastic vision of the future for us?
I don't fully understand all this Web2.0 business talk.
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