Esko Kilpi on Interactive Value Creation

The art of interaction, the design of digital and the science of social complexity

Category: New value creation

From transaction costs to network effects

Resonance occurs whenever two things vibrate in tune. If you strike a tuning fork, an identical fork on the same table will begin to vibrate. Energy is continuously exchanged between the forks, which are in resonance. Resonance is such a powerful phenomenon that soldiers marching across a suspension bridge break stride just in case their coordinated marching should resonate with the natural vibrations of the bridge. If this would occur, the bridge would absorb the energy of the marching soldiers and the structures could even oscillate out of control and break.

Quantum theory says that each (quantum) entity has both a wavelike and a particle like aspect. The particle like characteristic is fixed but the wavelike is a set of potentialities that cannot be reduced to the existing parts of the entity. If two or more of these entities are brought together, their potentialities are entangled. Their wave aspects are interwoven to the extent that a change in the potentiality in one brings about a corresponding change in the potentiality of the other. A new shared reality emerges that could not have been predicted by studying the properties or actions of the two entities. It is really about learning that scales.

The famous experiments with the fundamental entities of visible light have proven that we cannot claim that a photon is a wave or a particle until it is measured, and how we measure it determines what we see. “If you change the way you look at things, the things you look at change” as Max Planck put it.

The basic units of the industrial era were transacting entities enabled by market, price and coordination mechanisms. It was a world of particles separated from other particles.

As a social innovation the industrial era enterprise was born when the volume of economic activity reached a level that made administrative coordination more efficient and more lucrative than market coordination of these particles.

The important innovation of the modern firm was to internalize activities by bringing many discrete entities under one roof and under one system of coordination. The multi-unit business corporation replaced the small, single-unit enterprise because administrative coordination enabled greater productivity through lower (transaction) costs per task than was possible before.

Managers essentially carried out the functions formerly handled by price and market mechanisms.

The practices and procedures that were invented at the dawn of industrialism have become a standard operating system and are still taught in business schools. The existence of this managerial system is not questioned. It is the defining characteristic of the business enterprise.

But two aspects of work have changed dramatically.

The most successful firms are themselves multi-sided markets in interaction with entities “outside”, customers and network partners. These firms are the new platforms.

Secondly, the products/services the platform firm sells to its clients are not offerings of the firm per se, but offerings created by specific network players in specific situations of “local” network interaction.

Thus, aiming to become a platform requires a vision that extends beyond one’s firm and aims to build and sustain an ecosystem that benefits from more partners joining the network. During the industrial era, economists called this phenomenon network “externalities”. Now it is more properly called network effects.

This conceptual difference is hugely important because what assets were for the industrial firm, network effects are for the post-industrial firm.

We all have mindsets of the world that serve as maps that guide what we see and how we understand the world around us. The maps can be helpful but also outdated and incorrect. The approach that managers do the coordination is just too slow and too costly in the low transaction cost environments we live in. It is now more expensive to internalize than to link and network.

Traditional business economics focus on supply side economies of scale derived from the resource base of the company. It scales much more slowly than the demand side network effects the new firms are built on. Network effect based value can increase exponentially at the same time as costs grow linearly. If you follow the valuations of firms today there is an ever-widening gap between the network-economy platforms and incumbents driven by traditional asset leverage models. Investors and markets have voted.

People participate based on transparent information and high quality communication systems enabling “resonance”. The contributing individuals are not managers but customers and other network partners. The more of them there in active “resonance” the more assets there are.

The main mission of digital platforms is to make network effects possible. Platforms are (just) means to tackle network effects the same way the industrial corporations were (just) means to tackle transaction costs.

The big shift is from market transactions to network interactions. The world of business looks very different when we change the way we look at things from transaction cost economics to network effect economics.

The past and the future of work

The most modern definition of work is “an exchange in which the participants benefit from the interaction”. Interestingly, cooperation is also described as “an exchange in which the participants benefit from the interaction”.

The way we view work life is influenced by the way we view the world. This view rests on the most fundamental assumptions we make about reality. In the present competitive view of the world, we often think that the most capable are those who are the most competitive, and accordingly that competition creates and secures capability and long-term viability in the world (of work).

But what if high performance is incorrectly attributed to competition and is more a result of diversity, self-organizing communication and non-competitive processes of cooperation?

Competitive processes lead to the handicapping of the system that these processes are part of. This is because competitive selection leads to exclusion: something or somebody, the losers, are left outside. Leaving something out from an ecosystem always means a reduction of diversity. The resulting less diverse system is efficient in the short-term, competition seems to work, but always at the expense of long-term viability. Sustainability, agility and complex problem solving require more diversity, not less.

As losers are excluded from the game, they are not allowed to learn. The divide between winners and losers grows constantly. Losers multiply as winning behaviors are replicated in the smaller winners’ circles and losing behaviors are replicated in the bigger losers’ circles. This is why, in the end, the winners have to pay the price of winning in one-way or another. The bigger the divide of inequality, the bigger is the price that finally has to be paid. The winners end up having to take care of the losers, or two totally different cultures are formed, as is happening in many places today. Psychologically, competitive games create shadow games of losers competing at losing. These start-ups are trained in jails and the pitching takes place on streets very far away from the Sand Hill Road.

The games we play have been played under the assumption that the unit of survival is the player, meaning the individual or a company. However, at the time of the Anthropocene, the reality is that the unit of survival is the player in the game being played. Following Darwinian rhetoric, the unit of survival is the species in its environment. Who wins and who loses is of minor importance compared to the decay of the (game) environment as a result of the actions of the players.

In games that were paradoxically competitive and cooperative at the same time, losers would not be eliminated from the game, but would be invited to learn from the winners. What prevents losers learning from winners is our outdated zero-sum thinking and the winner-take-all philosophy.

In competitive games the players need to have the identical aim of winning the same thing. Unless all the players want the same thing, there cannot be a genuine contest. Human players and their contributions are, at best, too diverse to rank. They are, and should be, too qualitatively different to compare quantitatively. Zero-sum games were the offspring of scarcity economics. In the post-industrial era of abundant creativity and contextuality, new human-centric approaches are needed.

Before Adam Smith wrote “The Wealth of Nations” and came out with the idea of the invisible hand, he had already written something perhaps even more interesting for our time. In “The Theory of Moral Sentiments” he argued that a stable society was based on sympathy. He underlined the importance of a moral duty — to have regard for your fellow human beings

Cooperative processes are about interdependent individuals and groups defining and solving problems in a shared context. Individuals competing on job markets may be one of the historic mistakes we have inherited from the industrial age. It made sense a long time ago but now we should think differently.

Interaction creates capability beyond individuals. Cooperative performance can be more than what could ever be predicted just by looking at the performance of the parties involved in a competitive game. The higher performance and robustness are emergent properties of cooperative interaction. They are not attributable to any of the parts of the system or to functioning of the markets.

Networks provide problem-solving capability that results directly from the richness of communication and the amount of connectivity. What happens in interaction between the parts creates a reality that cannot be seen in the parts or even all of the parts. What we have called the “whole” is an emergent pattern of interaction, not the sum of the parts.

The same principle explains why we have financial crises that no one planned and wars that no one wants. On the other hand, the great societal promise is that interaction in wide-area networks, with enough diversity, can solve problems beyond the awareness of the individuals involved.

What defines most problems today is that they are not isolated and independent but connected and systemic. To solve them, a person has to think not only about what he believes the right answer is, but also about what other people think the right answers might be. Following the rhetoric of game theory: what each person does affects and depends on what everyone else will do and vice versa.

Most managers and decision makers are still unaware of the implications of the complex, responsive properties of the world we live in. Enterprises are not organized to facilitate management of interactions, only the actions of parts taken separately. Even more, compensation structures normally rewards improving the actions of parts, not their interactions.

Work that humans do used to be a role, now it is a task, but it is going to be a relationship: work is interaction between interdependent people. The really big idea of 2016 is to reconfigure agency in a way that brings relationships into the center. The mission is to see action within relationships.

Amyarta Sen has written that wealth should not be measured by what we have but what we can do. As we engage in new relationships and connect with thinking that is different from ours, we are always creating new potentials for action. In competitive/cooperative games the winners would be all those whose participation, comments and contributions were incorporated in the development of the game.

From the industrial economy to the interactive economy

Over the past years, mobile technologies and the Internet have laid the foundation for a very small size, low-cost enterprise with the potential for managing large numbers of business relationships.

The impact of these new actors has been hard to grasp because we are used to thinking about work from a different perspective. Our thinking arises from a make-and-sell economic model. Most managers still subscribe to this and think that the core of creating value is to plan and manage a supply chain. A supply chain is a system of assets and transactions that in the end make the components of the customer offering. At the beginning of the supply chain are the raw materials and the ideas that start the sequence leading, hopefully, to a sale.

This is now being supplanted by a different paradigm; a relational, network approach enabled by new coordination technologies. The manufacturer may even be just one of the nodes in the network and the customer is not a passive consumer but an active part of the plan.

The old model companies are ill equipped for this digital transformation. Mass-production and mass media organizations are still much more prepared to talk to customers than to hear from them, not realizing that one-way communication was just a fleeting accident of technological development. It is not that customers didn’t have needs and reflections they would have liked to communicate.

We are passing through a technological discontinuity of huge proportions. The rules of competition may even be rewritten for the interactive age. The new interactive economy demands new skills: managing the supply-chain is less important than building networks and enabling trust in relations. You could perhaps call the new reversed sequence an on-demand-chain. It is the opposite of the make-and-sell model. It is a chain of relationships and links that starts from interaction with the customer and leads up to the creation of the on-demand offering. As Steve Jobs put it in a different context: “you start with the customer experience and work backwards to the technology. You can’t start with the technology and try to figure out where you’re going to try to sell it.”

Adapting the interactive model is not as easy as identifying customer segments or a niche market because communication can no longer be confined to sales and marketing, or to the ad agency, as in the make-and-sell model. Also to talk about a “segment of one” is misleading because one-way communication changes here to true two-way dialogue. The interactive enterprise must be able to integrate its entire network around the needs of each individual customer context. The on-demand-chain means continuous on-demand learning and continuous change. Your dialogue with an individual customer will change your behavior toward her and change that customer’s behavior toward you. People develop together in interaction.

A learning relationship potentially makes the whole network smarter with every individual interaction creating network effects. Accordingly, the enterprise increases customer retention by making loyalty more convenient than non-loyalty as a result of learning. The goal is to create more value for the customer and to lower her transaction costs. This kind of relationship ensures that it is always in the customer’s self-interest to remain with the people who have developed the relationship to begin with. The main benefit for the network partners may not be financial. The most valuable thing is to have access to “community knowledge”, a common movement of thought. It means to be part of a network where learning takes place faster than somewhere else.

In the mass-market economy, the focus was to create a quality product. With increased global competition and with so many quality products around that is not enough any more. To succeed you need high-quality relationships. When customers are identified as individuals in different use contexts, the marketing process is really a joint process of solving problems. You and your customer necessarily then become cooperators. You are together trying to solve the customer’s problem in a way that both satisfies the customer and ensures a profit for you.

The relational approach is the third way to work. It is not about having a fixed job role as an employee or having tasks given to you as a contractor. The most inspiring and energizing future of work may be in solving problems and spotting opportunities in creative interaction with your customers.

The industrial make-and-sell model required expert skills. The decisive thing was your individual knowledge. Today you work more from your network than your skills. The decisive thing is your relations.

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Not firms but commons and market networks

Many people see peer-to-peer platforms as game changers in the world of work with the potential of reinventing the economy and giving individuals the power of the corporation. Others are sceptical and warn that the new architectures of participation and choice are in reality architectures of exploitation, giving rise to a new class of workers, “the precariat”, people who endure insecure conditions, very short-term work and low wages with no collective bargaining power, abandoned by the employee unions, rendering them atomized and powerless.

I have just finished reading “PEERS INC”, an excellent book by Robin Chase. It is both a practical guide and a textbook that explains what is happening today in the (almost) zero transaction cost economy, the digitally enabled new world that has given rise to peer-to-peer platforms as the most modern iteration of the firm.

Robin Chase explains well how the patterns of work and the roles of workers are becoming very different from what we are used to: the industrial production of physical goods was financial capital-intensive, leading to centralized management and manufacturing facilities where you needed to be during predetermined hours. The industrial era created the employers, the employees and the shareholder capitalism we now experience.

In the network economy, individuals, interacting voluntarily with each other by utilizing the new platforms/apps and relatively cheap mobile devices they own themselves, can create value, and, even more importantly, utilize resources and available “excess capacity” as Robin Chase calls it, in a much more sustainable way than was possible during the industrial era.

Work systems differ in the degree to which their components are loosely or tightly coupled. Coupling is a measure of the degree to which communication and power relation between the components are predetermined and fixed or not. Hierarchies and processes were based on tight couplings. The new post-industrial platforms are based on loose couplings following the logic of the Internet. Some people will work on one platform every now and then, while others will work simultaneously and continuously on many different platforms. The worker makes the decision about where, with whom and how much to work. The old dichotomy of employers and employees is a thing of the past.

In creative, knowledge-based work it is increasingly difficult to know the best mix of capabilities and tasks in advance. Recruiting is becoming a matter of expensive guesswork. Matching the patterns of work with the capabilities of individuals beforehand is getting close to impossible. What, then, is the use of the organizational theater when it is literally impossible to define the organization before we actually do something? What if the organization really should be a process of emergent self-organizing in the way the platforms make possible?

Instead of thinking about the organization let’s think about organizing as an ongoing thing. Then the managerial task is to make possible very easy and very fast emergent responsive interaction and group formation. It has to be as easy as possible for the best contributions from the whole network to find the applicable contextual needs and people.

Instead of the topology or organizational boxes that are often the visual representation of work, the picture of work is a live social graph. In markets the signalling may change; It is not just a system of prices that brings people together, but purposes, capabilities and reputation .

If you follow the valuations of firms today there is an ever-widening gap between the network-economy platforms and those companies driven by traditional asset leverage models. Investors and markets have voted very clearly. Traditional business economics focus on economies of scale derived from the resource base of the company, which scales much more slowly than the network effects the new firms are built on. The start-ups have a huge advantage over the incumbents.

In practice this means that the peer-to-peer platforms can attain the level of customer reach and network size required to capture almost any market, even as the size of the core (firm) stays relatively small.

The principles behind these trends are crucially important for the future of firms and society. It used to be argued that goods for which the marginal costs, the cost of producing one more unit of customer value, were close to zero were inherently public goods and should be made publicly available. Before the digital era, roads and bridges were commonly used as examples of these platforms. The maximum societal benefit from the initial investment is gained only if the use is as unrestricted as possible. People should have free, or almost free access to the – “platform”. Once the capital costs have been incurred, the more people there are sharing the benefits, the better it is for the whole value system.

This was the economic explanation for why roads were, and still are, under public ownership. The same logic applied to public libraries: a book can be read repeatedly at almost no extra cost.

A platform (company) should therefore be as open, as accessible and as supportive as possible to as many users as possible. This is unequivocally the route to optimum value creation. The scale of the Internet can create almost boundless returns without the core company growing at all. And against mainstream thinking, services do scale now as much as products did yesterday. One person can have a million customers and ten people can have a hundred million customers. The sheer size of an enterprise will tend to mean less in the digital network business than in the world of physical goods. The flip side is that companies don’t grow and create jobs in the way they used to. It is the networks that grow creating new earnings opportunities for people who are part of the network!

The central aggregator of enterprise value will no longer be a value chain, but a network space, where these new firms are fully market-facing and the customer experience is defined by apps. Our management thinking is slowly shifting towards understanding the new kernel of work: participative, self-organizing responsiveness.

Platforms are a valuable, shared resource making interactive value creation possible through organizing and simplifying participation. Sociologists have called such shared resources public goods. A private good is one that the owners can exclude others from using. Private was valuable and public without much value during the era of scarcity economics. This is now changing in a dramatic way, creating the intellectual confusion we are in the midst of today. The physical commons were, and still often are, over-exploited but the new commons follow a different logic. The more they are used, the more valuable they are for each participant.

The ongoing vogue of business design transforms asset-based firms to network-based platforms. Perhaps the next evolutionary step in the life of the firms is a transformation from platforms to open commons with shared protocols. Perhaps Bitcoin/Blockchain is going to be part of the new stack, the TCP/IP of business.

In the new commons and market networks, people with more potential ties become better informed and have more signalling power, while those outside and with fewer ties may be left behind. This is the new digital divide. Network inequality creates and reinforces inequality of opportunity.

In the age of abundance economics, public is much more valuable than private. Governments have always been platform creators. I sincerely hope they understand the tremendous opportunity we all face. The old demarcation line between public and private does not make any sense any more.

The principles of digital peer-to-peer commons can also enable the massive multi-stakeholder participation that is urgently needed to meet the challenge of climate change, as Robin Chase writes in her important book “PEERS INC”.

Disrupting Unemployment

The concepts that govern our thinking and language in relation to work are not just semantic entities, but influence what we perceive and what we think is possible or not possible. Usually we are not aware of how these concepts prime our thinking. We simply think and act along certain lines.

A seminal concept related to how we perceive work is the division of labor, the notion of work as activities separated from other activities, as jobs. The industrial management paradigm is based on the presupposition that activities are the independent governing factors of creating value. The organizational structure of jobs comes first. Then an appropriate system of co-ordination and communication is put into effect. The scheme of interaction conforms to the planned division of labor as a secondary feature.

What if the increasing global competition, the Internet and the huge advances in communication technologies made it possible, or even necessary, to think differently? What if interaction was seen as the governing factor? The smartphone has now become information technology’s key product. Surely, then, it has an impact on the way we work. As jobs and communication are mutually dependent, it means that if there are changes in interaction, so the activities will change.

In the mainstream conceptual model of communication (Shannon & Weaver 1948) a thought arising within one individual is translated into words, which are then transmitted to another individual. At the receiving end, the words translate back into the same thought, if the formulation of the words and the transmission of those words are good enough. The meaning is in the words.

Amazingly, our conceptualization of value creation has followed the very same model. Companies transform ideas into offerings that are delivered to customers. At the receiving end, the products translate back into the same value that the company has created. The meaning is in the product.

Management scholars have lately made interesting claims saying that although the product is the same, different customers experience the value potential of the product differently. They say that it is in fact wrong to say that companies create value. It is the way the offering is contextually experienced and used that creates value, more value or less value. The bad news is that our present conceptualizations of work make it very hard to do anything about it. The good news is that for the first time in history we can do something about it. Companies can connect with users and be digitally present when and where their products are used.

Tor Arne

But we need a new conceptualization of communication if we want to have a new conceptualization of work. Luckily, there is one. A completely different approach to communication exists. The alternative view is based on the work of George Herbert Mead. This model does not see communication as messages that are transmitted between senders and receivers, but as complex social action.

In the social act model, communication takes the form of a gesture made by an individual that evokes a response from someone else. The meaning of the gesture can only be known from the response, not from the words. There is no deterministic causality, no transmission, from the gesture to the response. If I smile at you and you respond with a smile, the meaning of the gesture is friendly, but if you respond with a cold stare, the meaning of the gesture is contempt. Gestures and responses cannot be separated but constitute one social act, from which meaning emerges.

Gestures call forth responses and products call forth and evoke responses. Value lies not in the product but in the (customer) response. Accordingly, work should then be conceptualized as an interactive process, a social act, because the value of work cannot be known in the separate “job” activity or be understood through the capabilities of the worker.

If we subscribe to this relational view, it means that people and actions are simultaneously forming and being formed by each other at the same time, all the time, in interaction. Perhaps in the future it will not be meaningful to conceptualize work as jobs or even as organizational (activity) structures like the firms of today. Work will be described as complex patterns of communicative interaction between interdependent individuals.

All interacting imposes constraints on those relating, while at the same time enabling those people to do what they could not otherwise do. Enabling and energizing patterns of interaction may be the most important raison d’être of work.

The relational view is a new conceptualization of work, potentially opening up new opportunities to disrupt unemployment. Perhaps it is time to change the focus from creating jobs to creating customers – in new, innovative ways. To quote Max Planck: “If you change the way you look at things, the things that you look at change.”

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Thank you Katri Saarikivi

The magic power of transparency and links

Eugene Garfield founded the Institute for Scientific Information in 1960.  His pioneering work was in citation indexing. This allows a researcher to identify which articles have been cited most frequently and who has cited them. Garfield’s studies demonstrated that the number of citable items, i.e. the number of papers, together with the frequency of their citation, meaning how many scientists link to the paper, is a good measure of scientific success. The system effectively measures quantity and quality at the same time.

The whole Web is a densely interconnected network of references. It is no different from the practice of academic publishing and citation indexing. Links on the Web are also citations, or votes, as the founders of Google realized. The observation of Larry Page and Sergey Brin that links are in fact citations seems commonplace today, but it was a breakthrough at the time Google started on September 7, 1998. What Google did was essentially the same as had been done in academic publishing by Eugene Garfield.

But at this time, relevance and importance were measured through counting the number of other sites linking to a Web site, as well as the number of sites linking to those sites. What Google has proved is that people’s individual actions, if those actions are performed in a transparent way, and if those actions can be linked, are capable of managing unmanageable tasks.

Cooperation and collective work are best expressed through transparency and linking.

The mainstream business approach to value creation is still a predictive process designed and controlled by the expert/manager. This is based on the presuppositions that we know (1) all the linkages that are needed beforehand, and (2) what the right sequential order in linking and acting is. Neither of these beliefs is correct any more.

The variables of creative work have increased beyond systemic models of process design. It is time to learn from the Internet

By relying on the unmanaged actions of millions of people instead of experts/managers to classify content on the net, Google democratized scientific citation indexing. To be able to manage the increasingly complex organizations of today, the same kind of democratization needs to take place in the corporate world. The transparency of tasks is the corporate equivalent of publishing academic articles. Responsive linking, rather than predictive linking, as in hierarchies and process charts, acts as a measure of contextual relevance.

Complex, creative work requires new approaches to organizing. The Google lesson for management is that the more work is based on responsive processes of relating and the more organizing is an ongoing process in time, the more value we can create!

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On the perceived relevance of academic papers.

The Social Graph of Work

The approach of the industrial era to getting something done is first to create an organization. If something new and different needs to be done, a new and different kind of organizational form needs to be put into effect. Changing the lines of accountability and reporting is the epitome of change in firms. When a new manager enters the picture, the organizational outline is typically changed into a “new” organization. But does changing the organization really change what is done? Does the change actually change anything?

An organization is metaphorically still a picture of walls defining who is inside and who is outside a particular box. Who is included and who is excluded. Who “we” are and who “they” are.

This way of thinking was acceptable in repetitive work where it was relatively easy to define what needed to be done and by whom as a definition of the quantity of labor and quality of capabilities.

As a result, organizational design created two things: the process chart and reporting lines, the hierarchy.

In creative, knowledge based work it is increasingly difficult to know the best mix of people, capabilities and tasks in advance. In many firms reporting routines are the least important part of communication. Much more flexibility than the process maps allow is needed. Interdependence between peers involves, almost by default, crossing boundaries. The walls seem to be in the wrong position or in the way, making work harder to do. What, then, is the use of the organizational theatre when it is literally impossible to define the organization before we actually do something?

What if the organization really should be an ongoing process of emergent self-organizing? Instead of thinking about the organization, let’s think about organizing.

If we take this view we don’t think about walls but we think about what we do and how groups are formed around what is actually going on or what should be going on. The new management task is to make possible the very easy and very fast emergent formation of groups and to make it as easy as possible for the best contributions from the whole network to find the applicable tasks, without knowing beforehand who knows.

The focal point in organizing is not the organizational entity one belongs to, or the manager one reports to, but the reason that brings people together. What purposes, activities and tasks unite us? What is the cause of interdependence and group formation?

It is a picture of an organization without walls, rather like contextual magnetic fields defined by gradually fading rings of attraction.

Instead of the topology of organizational boxes that are still often the visual representation of work, the architecture of work is a live social graph of networked interdependence and accountability. One of the most promising features of social technologies is the easy and efficient group formation that makes this kind of organizing possible for the first time!

It is just our thinking that is in the way of bringing down the walls.

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Why companies don’t grow – The idea of the platform company

The effects of Moore’s law on the growth of the ICT industry and computing are well known. A lesser-known but potentially more weighty law is starting to replace Moore’s law in strategic influence. Metcalfe’s law is named after Bob Metcalfe, the inventor of the Ethernet. The law states that the cost of a network expands linearly with increases in the size of the network, but the value of the network increases exponentially. When this is combined with Moore’s law, we are in a world where at the same time as the value of the network goes up with its size, the average costs of technology are falling. This is one of the most important business drivers today. The implication is that there is an ever-widening gap between network-economy companies and those driven by traditional asset leverage models. Traditional business economics focus on economies of scale derived from the capital base of the company, which tends to scale linearly

In practice this means that digital services can attain the level of customer reach and network size, required to capture almost any market, even as the size of the company stays relatively small. This is why network-economy based start-ups have such a huge advantage over asset leverage based incumbents.

The principles behind this are not totally new.

It used to be argued that goods for which the marginal costs, the cost of producing one more unit of customer value, were close to zero were inherently public goods and should be made publicly available. Before the digital era, roads and bridges were commonly used as examples. Maximum benefit from the initial investment is gained only if the use is as unrestricted as possible. People should have free, or almost free access.  Once the capital costs have been incurred, the more people there are sharing the benefits, the better it is for the whole value system in the future. This was the economic explanation for why roads were, and still are, under public ownership. The same logic applied to public libraries: a book can be read repeatedly at almost no extra cost.

What used to be called “public goods” is today called “platforms”. A new form of a company is being born!

Once the up-front costs have been incurred and the platform is established, the more people there are who are sharing the benefits, the greater the net present value of the whole value system becomes.  A platform company should therefore be as open, as accessible and as supportive as possible, to as many users as possible.  This is unequivocally the route to optimum value creation.  Moreover, the higher the value of the system, the costlier it becomes to all its members to replace it – creating a major barrier to entry.

Restructuring a firm for the new world would require concurrent relative downsizing of legacy systems and upsizing of the new open platforms.  As both are explicitly costly things to do and the financial rewards of the latter are typically deferred, the exercise becomes challenging for incumbents to implement within the constraints of the existing financial frameworks. But it is happening!

Internet scale economies can create almost boundless returns without the company growing at all. The goal of Supercell is to be “as small as possible” as Ilkka Paananen has said. At the beginning of 2013 Tumblr had only 145 employees and 100 million visitors. That meant it had 700.000 visitors per employee. The sheer size of an enterprise will tend to mean less in the digital network business than in the world of physical goods. Companies don’t grow any more in the way they used to! It is the networks that grow!

But something else needs to change too: customer focus has been the dominant mantra in business. Everybody knows that everything should focus on the customer. However this is not enough any more. Up to now, business has focused on the customer as an audience for products, services and marketing communications. In the world of digital networks, the customer will be transformed from being an audience to an actor. The activity of the customer focuses corporate effort.

The central aggregator of enterprise value will no longer be a value chain, but a network space, where these platform companies are fully market-facing and the customer experience is defined by applications connecting to the platform.

The basis of executive power is shifting from being in charge to being connected. New leaders understand that power with people is much more effective than power over people. It is about integrating the best of networked thinking and leveraging the new platforms for value creation.

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Thank you Sasu Ristimäki for the iterations and thank you for developing my thinking.

More on the subject: Jeremy Rifkin.

A Christmas Letter

Gregory Bateson wrote that the major problems in the world are the result of the difference between how nature works and how people think. Mainstream economics still sees the economy and society as ultimately predictable and controllable (machines), although the repeated financial crises have shown how deeply flawed this view of the world is.

Luckily, during 2013, more scholars than ever before saw organizations as being more analogous to nature. There, it is not about predictions and control, but about perpetual co-creation, complex responsive processes and fundamental interdependence. Their claim is that we should study links and interactions. Many aspects of our social and economic world would start to look completely different from this complex network perspective.

2013 also brought us closer to understanding how work itself is changing.

Knowledge work is creative work we do in interaction. Unlike the business processes we know so well, where tangible inputs are acted on in some predictable, structured way and converted into outputs, the inputs and outputs of knowledge work are ideas, information and decisions. Even more, there are no predetermined task sequences that, if executed, would guarantee success. Knowledge work is characterized by variety and exception rather than routine. It is thus impossible to separate a knowledge process from its outcomes. Knowledge work is not “just work”, a means to doing something else! Knowledge work is about human beings being more intensely present. Thus, a business today needs to be human-centric – by definition.

The good news then, is the advances during 2013 in network theory and knowledge work practices. The bad news, as we now look ahead to 2014, is that today we are as far from being human-centric, as we have been for ages. As one example, people still tend to see their work and personal lives as two separate spheres. Although this conflict is widely recognized, it is seen as an individual challenge, a private responsibility to manage.

It is now time to challenge this and see the conflict as a systemic problem. It is a result of the factory logic, which saw human beings as controllable resources and interchangeable parts of the main thing, the production machinery. The context and logic of work are dramatically different today. In knowledge work we need to create an explicit, new connection between work and personal life. We talked earlier about balancing work and life. Here we are talking about connecting work and life in a new way, with a new agenda. Human beings are the main thing.

Traditional management thinking sets employee goals and business goals against each other. The manager is free to choose the goals, but the employee is only free to follow or not to follow the given goals. This is why employee advocates mainly want socially responsible firms, nothing else, and the management of those firms wants committed employees who come to work with enthusiasm and energy. Must we then choose between the goals of the people or the goals of the business, or can the two sides be connected? As we know, passion and commitment are best mobilized in response to personal aspirations, not financial rewards. We need a new agenda connecting people and businesses! The aim, however, is not to have a single set of common goals, but complementary goals and a co-created narrative for both!

Linking personal lives with corporate issues may seem like an unexpected, or even unnecessary connection. But if we don’t learn from network theory and knowledge work practices, and continue to deal with each area separately, both individuals and organizations will suffer. The lack of a connecting agenda may also be one of the big challenges facing the emerging post-industrial society.

We need to study the intersection of business strategy and personal narrative and use the new agenda to challenge our industrial age practices and flawed ways of thinking. Knowledge work needs whole human beings. People who are more fully present, people with responsibility and ownership. We are accustomed to taking work home, but what would the opposite be? This may be the next frontier of social business. More on this next year!

Christmas is a special time for family and friends. Perhaps the rest of the year can also be made very special through rethinking and reinventing some of the basic beliefs we have about work!

Happy New Year!

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Thank you Deborah Kolb, Lotte Bailyn, Paul Ormerod, Ken Gergen, Ralph Stacey, Joyce K Fletcher, Doug Griffin, Kim Weckström and Katri Saarikivi

More on the subject:

Futurice. A company that is already in the future. HBR: “To Optimize Talent Management, Question Everything” HBR: “The Ideas that Shaped Management in 2013” “Essential Zen Habits” “The Third Way of Work” “a way of working where the people doing the work matter as much as the work being done” “Bring Your Own Device is really Bring Your Own Mind” “work is you, you are the work. So what is the future of You?

The Internet of Things

Industrial era enterprises viewed customers through the lens of a fairly uniform set of features, leading to customers being seen as having relatively uniform needs. But even commodity products are always a bundle of use contexts, buying patterns, complementary goods and delivery options. Just because a product is a commodity doesn’t mean that customers can’t be diverse in the ways they use the product.

All use cases are somewhat the same and somewhat different. This means that different customers and processes use products that are manufactured in the same way, with the same product features, differently. It is contextual. Customers and the way products are used, are today understood to be active contributors to value creation. The word “consumption” really means value creation, not value destruction. Companies don’t create value for customers, the way the products are used creates value, more value or less value.

The parties explicitly or implicitly “help each other to help each other”. Value creation is a process of interaction. As the goal is to create more value together, a critically important element would be to implant context aware intelligence and interaction capability to a product.

The Internet of Things refers to embedded computing power and networking capability of the physical objects through the use of sensors, microprocessors and software that can collect, actuate and transmit data about the products and their environment. The gathered data can then be analyzed to optimize, develop and design products, processes and customer services. IoT is often about two new digital “layers” for all products: (1) an algorithmic layer and (2) a network layer.

The algorithmic layer “teaches” the customer and the product itself to create more value in a context-aware way, and accordingly teaches the maker the product to develop. As a result, the customer’s need set is expanded beyond the pre-set physical features of the offering. This changes the conceptual definition of the product and it becomes more complex. The more complex the product, the more opportunities there are for the maker to learn something that will later make a difference.

From a marketing standpoint, when a customer teaches the firm behind the product how she uses the product, what she wants or how she wants it, the customer and the firm are also cooperating on the sale of a product, changing the industrial approach to sales and marketing. The marketing and sales departments used to be the customer’s proxy, with the exclusive role of interpreting changing customer needs. Internet-based business necessarily transforms the marketing function and sales specialists by formally integrating the customer use case into every part of the organization. Thus the customer of tomorrow interacts with, and should influence, every process of the maker through the connected, intelligent products.

In the age of the Internet of Things, all products are software products. The value of the code, computing power and connectivity, may determine the value potential of a product more than the physical product itself. The effectiveness of an offering is related to how well it packages the learning from past activities, other use cases and from other similar products and how it increases the users options for value creation through network connections in the present. The offering actuates data via algorithmic smartness and through live presence (in the Internet). Connectivity also enables some functions of the product to exist outside the physical product in the product system, the cloud.

A product or a service should today be pictured as a node in a network with links to supplementary services and complementary features surrounding the product. The task today is to visualize the product in the broadest sense possible.

Visualizing these connections changes the strategic opportunity space dramatically. The study of isolated parts offers little help in understanding how connected parts work in combination and what emerges as the result of network connections. Every link and relationship serves as a model for what might be possible in the future. What new relational technologies are making possible for manufacturing industries is a much, much richer repertoire of business opportunities than what we were used to in a traditional industrial firm.

The ability to create value in a remarkably more efficient and resource-wise way corresponds to possibilities for interaction with relevant actors, information and products. If interdependent links are few, poor, or constraining, the activity and value potential will be limited.

The Internet of Things and technological intelligence in general, create transformative opportunities for more efficient and more sustainable, resource-wise, practices and also higher margins!

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Thank you Rafael Ramirez

More on the subject: Ford’s OpenXC. Bosch. Kari A. Hintikka (In Finnish)