Esko Kilpi on Interactive Value Creation

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

Tag: Network

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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A new theory of growth

For most of human history, creativity was held to be a privilege of supreme beings, initially, the gods who shaped the heavens and the earth, and then it was extraordinary human beings who were the creators and not the helpless, dependent subjects of the wrath of the gods. We switched our views further as we began to understand more how the world worked. Whether this has helped the human race is debatable. But it would help us if we realized the responsibility that comes with our new role.

Our future is tied to human creativity.

You would think that given its importance, creativity would have a very high priority among our concerns, but we face a disturbing reality if we look at what is really going on today. The arts are seen as unessential luxuries and instead of exploring creative new solutions, cutting expenses is the approach of most managers trying to deal with global competition.

What holds true for the arts and the economy, also applies to education. The models of mass society and mass production still prevail in the world of mass education. The industrial society is re-born daily at the expense of a different sociocultural context that would embrace creativity.

The sociocultural context matters because creativity is a systemic rather than an individual phenomenon. Workable new solutions to our most pressing concerns will not appear by themselves as isolated ideas of independent people. Creativity is born in connections and in enriching interaction.

To say that Thomas Edison invented electricity or that Albert Einstein discovered relativity is a popular, but misleading simplification. These breakthroughs would have been inconceivable without (1) the social and intellectual network that stimulated and advanced their thinking and (2) the people who recognized the value of their contributions and spread them further. A good, new idea is not automatically passed on. From this standpoint a lighted match does not cause a fire. Rather the fire took place because of a particular combination of elements of which the lighted match was one. One cannot be creative alone. These qualities are co-created in an active process of mutual recognition.

The creative era is about interdependence, not about superhuman individuals.

MiinaAn inspiring person is only inspiring by virtue of others who treat her this way. A good decision is only good if there are people around to agree with it. It is not enough to look at the individuals who seem to be responsible for a new idea. Their contribution, although important, is always a node in a network and a phase in a movement of thought. Creativity takes place in connections and communication. The network is the enabler and amplifier. It is time now for a new epistemology; new ways of talking about knowledge creation.

However, people have always networked. Scholars depended heavily on correspondence networks for the exchange of ideas before the time of the universities. These communities, known as the “Republic of Letters” were the social media of the era, and resembled the communication patterns of today astonishingly closely. The better-networked scientist was often the better scientist. Today, the better-networked knowledge worker is usually the better worker. In the future, the better-networked student will always be the better student.

The main difference from the time of letters and the printing press is the transformative efficiency of our new interaction tools. A “man of letters” may today be a man of tweets, posts and updates, but the principle is the same: what matters most is the way we are skilfully present and communicate using all the different means that are available.

Mutually recognizing and mutually supporting relationships are the core of creative progress and growth.

To be human means communicative interaction. Creativity is an emergent pattern of that interaction.

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Thank you Ari Manninen, Pasi Aaltola, Katri Saarikivi, Kenneth Gergen, Doug Griffin, Edmund Phelps, Esa Saarinen and Mihaly Csikszentmihalyi

More on creativity and non-routine work

The wiki way of working

Physical tasks can normally be broken up in a reductionist way. Bigger tasks can be divided by assigning people to different smaller parts of the whole. For intellectual tasks, it is much harder to find parts that make for an efficient workflow. Intellectual tasks are by default complex and linked. Knowledge work is a social construct.

The machine metaphor led to the belief that if we can only arrange the parts in the right way, we optimize efficiency. The demands of work are different now: how efficient an organization is reflects the number of links people have and the quality of the links they have to the contexts of value, the things that matter.

How many handshakes separate them from one another and from the things that matter most? We are beginning to see the world in terms of  relations.

We have examples of new social architectures that redefine some basic beliefs about work and cooperation between people.

At the moment the wiki is the best departure from the division of labor and workflows. Wikis let people work digitally together in the very same way they would work face-to-face. In a physical meeting, there are always more or less the wrong people present and the transaction costs are very high. Unlike email, which pushes copies of the same information to people to work on or edit separately, a wiki pulls non co-located people together to work cooperatively, and with very low transaction costs. Email and physical meetings are methods which exclude. They always leave people out. A wiki, depending on the topic, the context and the people taking part, is always inviting and including. The goal is to enable groups to form around shared contexts without preset organizational walls, or rules of engagement.

In 1995 Ward Cunningham described his invention as the simplest online database that could possibly work. An important principle of the wiki is the conscious emphasis on using as little structure as possible to get the job done. A wiki does not force a hierarchy on people. In this case, less structure and less hierarchy mean lower transaction costs. A wiki always starts out flat, with all the pages on the same level. This allows people to dynamically create the organization and, yes, also the hierarchy that makes most sense in the situation at hand.

People work together to reach a balance of different viewpoints through interaction as they iterate the content of work. The wiki way of working is essentially a digital and more advanced version of a meeting or a workshop. It enables multiple people to inhabit the same space, see the same thing and participate freely. Some might just listen, some make comments or small edits, while others might make more significant contributions and draw more significant conclusions.

New work is about responsive, free and voluntary participation by people who contribute as little, or as much as they like, and who are motivated by something much more elusive than only money. Society has moved away from the era of boxes to the time of networks and linked, social individualism. Being connected to people, also from elsewhere, is a cultural necessity and links, not boxes, are the new texture of value creation.

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Architectures of work and Internet-based firms

The characteristics of work in the network economy are 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 at during predetermined hours. The industrial era also created the shareholder capitalism we now experience. In the network economy, individuals, interacting with each other by utilizing free or low cost social platforms and relatively cheap mobile, smart devices, can now create information products.

The production of information goods requires more human capital than financial capital. And the good news is that you are not limited to the local supply. Because of the Internet, work on information products does not need to be co-located. The infrastructure of work does not resemble a factory but a network.

Decentralized action plays a much more important role today than ever before.

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 between the components is predetermined and fixed or not. The architecture of the Internet is based on loose couplings and modularity. Modularity is the design principle that intentionally makes nodes of the network able to be highly responsive.

The Internet-based firm sees work and cognitive capability as networked communication. Any node in the network should be able to communicate with any other node on the basis of contextual interdependence and creative participative engagement. Work takes place in a transparent digital environment.

As organizations want to be more creative and knowledge-based, the focus of management thinking should shift towards understanding participative, self-organizing responsiveness.

The Internet is a viable model for making sense of the new value creating constellations of tomorrow.

But something crucially important needs to change:

The taken for granted assumption is that it is the independent employer/manager who exercises freedom of choice in choosing what is done and by whom. The employees of the organization are not seen autonomous, with a choice of their own, but are seen as rule-following, dependent entities. People are resources.

Dependence is the opposite of taking responsibility. It is getting the daily tasks that are given to you done, or at least out of the way. We are as used to the employer choosing the work objectives as we are used to the teacher choosing the learning objectives. The manager directs the way in which the employee engages with work, and manages the timing and duration of the work. This image of work is easy to grasp because it has been taught at school where the model is the same.

In contrast to the above, digital work and the Internet have brought about circumstances in which the employee in effect chooses the purpose of work, voluntarily selects the tasks, determines the modes and timing of engagement, and designs the outcomes. The worker here might be said to be largely independent of some other person’s management, but is in effect interdependent. Interdependence here means that the worker is free to choose what tasks to take up, and when to take them up, but is not independent in the sense that she would not need to make the choice.

The interdependent, task-based worker negotiates her work based on her own purposes, not the goals of somebody else, and chooses her fellow workers based on her network, not a given organization. The aim is to do meaningful things with meaningful people in meaningful ways utilizing networks and voluntary participation.

It is not the corporation that is in the center, but the intentions and choices of individuals. This view of work focuses attention on the way ordinary, everyday work-tasks enrich life and perpetually create the future we truly want through continuous learning.

The architecture of work is not the structure of a corporation, but the structure of the network. The organization is not a given hierarchy, but an ongoing process of organizing. The main motivation of work is not financial self-interest, but people’s different and yet, complementary expectations of the future.

The factory logic of mass production forced people to come to where the work is. The crowdsourcing logic of mass communication makes it possible to distribute work/tasks to where the right/willing/inspired people are, no matter where on the globe they may be.

Knowledge work is not about jobs or job roles but about tasks. Most importantly knowledge work can, if we want, be human-centric. Through mobile smart devices and ubiquitous connectivity, we can also create new opportunities and a better future for millions of presently unemployed people.

It is possible!

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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.

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)

Social business and the changing theory of management

A manager recently voiced his concerns: “Most employees prefer being told what to do. They are willing to accept being treated like children in exchange for reduced stress. They are also willing to obey authority in exchange for job security.” That is the way we have seen it: managers inspire, motivate, and control employees, who need to be inspired, motivated, and controlled. These dynamics create the system of management and justify its continuation.

If we want to meet the challenges of the post-industrial world, this relationship needs to change. The workers changing their role is often seen as a matter of the extent to which the managers are willing to allow it and give up responsibility. In reality it is as much a matter of how much the workers are willing to develop their (management) capacity and take more and wider responsibility.

The dysfunctional relationship between managers and employees creates a self-fulfilling prophecy and a systemic failure in creative, knowledge-based work. What is tragic is that neither side normally understands the predictability of what is going on. The pattern is a mutually reinforcing self-destructive process that manifests itself as a steady decline in the authority of management and productivity of work.

A few researchers have started to dispute the assumption that the present system of management is a fact of life that will always be with us. It may be time for us to question whether the recent problems created by bad management are isolated and should be tolerated. Or to ask whether the fault is in the system itself and not in individual managers?

Luckily, management theory and practice are slowly starting to catch up with the dramatic changes brought about by the loosely coupled, modular nature of creative work and the ideals of social business.

A social business does not behave in the way our dominant management thinking assumes. What is it, then, that has changed?

Organizations are always assemblies of interacting people. The reason for an organization to exist is to simplify, support, and enrich interaction.

At present, there are three types of organizational cultures depending on the type of management and the alternative mechanisms for the coordination of tasks. The different task interdependencies accordingly place different and increasing burdens on our communication practices .

I call these the administrative culture, the industrial culture and the creative, social culture.

The administrative culture, which is found in most governmental organizations is about function-specific independent activities. Two functions or tasks are independent if it is believed that they don’t affect each other. The most important communication exists between the employer and the employee, the manager and the worker. The principle is that the execution of two independent tasks does not require communication between the tasks. The architecture consists of black boxes that are not coupled directly, but in an indirect way by higher-level managers, who coordinate the work. Work as interaction is mainly communication between hierarchical levels.

The industrial culture of process-based organizations is about dependent and sequential activities. Manufacturing work is about dependent tasks. Being dependent means that the output of one task is the input of another. The reverse cannot normally take place. In sequential dependence, those performing the following task must comply with the constraints imposed by the execution of the preceding task. Since the process architecture is typically quite clear, management coordination is mostly about measuring and controlling whether the execution conforms to the planned requirements. The architecture consists of tightly coupled tasks and predetermined, repeating activities. Work as interaction is a sequential process with one-way signals.

A creative, social culture is different. It is about loose couplings and modularity, about interdependent people and interdependent tasks. Two people/tasks are interdependent if they affect each another mutually and in parallel. Interdependent tasks call for peer-level responsiveness and coordination by mutual adjustments, not coordination by an outside party such as a manager.

Most of the information that is relevant will be discovered and created during the execution of the task, not before. As a result it is not always possible for a manager and a worker to agree on a coherent approach in advance. Nor is it normally possible to follow a predetermined process map.

The basic unit of corporate information in creative, social work is not content in the form of documents but interaction in the form of conversations. Knowledge is perpetually constructed in interaction. Work as interaction is complex, situational communication between loosely connected nodes of the network! The structure of work resembles the structure of Internet.

The three cultures and corresponding architectures differ in the degree to which their components are loosely or tightly coupled. Coupling is a measure of the degree to which communication between the components is fixed or not. In most creative work, and always in a social business, any node in the network should be able to communicate with any other node on the basis of contextual interdependence and creative participative engagement.

As organizations want to be more creative and social, the focus of management theory should shift towards understanding participative, self-organizing responsibility and the equality of peers. It is a systemic change, much more than just kicking out the bad managers and inviting new, better managers in. It is not about hierarchies vs. networks, but about how all people want to be present and how all people want to communicate in a way that was earlier reserved only for the people we called managers.

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Eric Brynjolfsson video on TED. Steven Johnson video on peer networks. Gary Hamel interview.