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CHAPTER I - A Look Back and the Road Ahead

The Shape of Things to Come: Two Views of the Future
In 1987, back at the dawn of the Internet age, two studies were published that provided perceptive looks at the evolution of electronic networks and the impact that they would likely have on the way business is conducted in the U.S. and globally. Both studies concluded that rapidly evolving information technologies were helping to break down old hierarchical business structures in favor of new, more decentralized models of economic activity.

The first of these was a report titled The Geodesic Network.1 It was prepared as part of the first triennial review of the telephone industry that was mandated as part of the Modified Final Judgment. This judgment resulted in the 1984 break-up of AT&T and the creation of the seven “Baby Bells.”2 The judicial review was intended to examine the state of competition in the telecommunications industry and determine whether the restrictions placed on the Bell Operating Companies (BOCs) at the time of the break up should be maintained, modified or eliminated. Known as the Huber Report (after its author, Peter Huber), the 600-page study was commissioned by the Department of Justice to supplement its own review of the industry. Because Huber happened to be a thoughtful analyst and a good writer (he was a lawyer with a doctorate in electrical engineering and had served as a clerk to Justice Sandra Day O’Connor), the report was quite readable and became a surprise best seller (the first edition quickly sold out and had to be reprinted). One reviewer described it as “a comprehensive, refreshingly different, indeed lyrical, overview of telecommunication network technology and market structures in the U.S.” 3

The main thesis of Huber’s report was that the proliferation of computer-based intelligence was having a transformative effect on the architecture of the national public telecommunications network. According to Huber, the network was evolving from a hierarchical structure to one that resembled a geodesic dome in which control (most notably in the form of switching capacity) was increasingly distributed among multiple participants and end users. While most of the report focused on the public switched telephone network (PSTN), Huber recognized the growing importance of computer-driven data services and stated that “getting the regulation of data communications right will be enormously important for economic prosperity and national security in the age of information.”

Huber did not foresee the emergence of the Internet, which would become the dominant telecommunications network (eventually eclipsing the PSTN) with virtually no government regulation, but his essential insight proved right. The old pyramidal structure of networks was disappearing in favor of a distributed architecture that involved both a relatively small number of very large firms that provided the basic infrastructure, as well as many smaller firms that operated in the nodes of the network, and took advantage of its capabilities to do business in new ways. In other words, the evolution of telecommunications technology was supporting both concentration and decentralization of businesses at the same time.

The second study, also published in 1987, proved even more prescient. In an article on “Electronic Markets and Electronic Hierarchies,” authors Thomas Malone, Joanne Yates and Robert Benjamin looked at the likely impact that networked information technology was having on the way business is conducted. The authors began by distinguishing between two alternative ways of “organizing economic activity”—markets and hierarchies. Markets coordinate the flow of goods or services in a value chain through the process of supply and demand among a group of buyers and sellers; hierarchies manage the flow of goods or services by coordinating each step through an established structure (such as a single firm). The authors then identified the strengths and weaknesses of each approach: production costs are usually lower in markets because buyers can compare different possible suppliers who compete for the buyers’ business and who can take advantage of economies of scale across multiple buyers. In hierarchies, production coordination costs are typically higher where such competition and economies of scale are absent. At the same time, coordination costs are typically higher in markets, because of the effort required to gather information from multiple potential suppliers, and are lower in hierarchies where options are fewer and less negotiation is usually necessary.

Relative Costs for Markets and Hierarchies
Organizational Form Production Costs Coordination Costs
Markets Low High
Hierarchies High Low
Source: http://is.esade.edu/faculty/wareham/Teaching/StratNetComp/Readings/Electronic%20Markets%20and%20electronic%20Hierarchies.pdf ;

The main focus of the paper is to explore the effects that the growth of “new information technologies” is likely to have on these fundamental processes. Overall, since “the essence of coordination involves communicating and processing information,” these technologies are likely to make both markets and hierarchies more efficient. However, since IT is reducing the costs of coordination—on which markets have a disadvantage—the authors conclude that IT is likely to have a greater positive impact on markets than on hierarchies. Thus, “The overall effect of this technology will be to increase the proportion of economic activity coordinated by markets.” The rest of the paper is devoted to exploring how electronic markets and electronic hierarchies are likely to evolve and what specific types of business activities are most appropriate for each. In particular, the authors recommend that virtually all companies should consider how they can participate in, or even create, new electronic marketplaces, but should also determine in what circumstances they should invest in building more efficient electronic hierarchies.

The paper ends with a vision of a future that is very different than the past:

If our predictions are correct, we should not expect the electronically interconnected world of tomorrow to be simply a faster and more efficient version of the world we know today. Instead, we should expect fundamental changes in how firms and markets organize the flow of goods and services in our economy.

The View from 2013
A quarter century after the publication of these two studies, a group of participants in the Aspen Institute Roundtable on Institutional Innovation gathered to explore the institutional landscape of 2013 and how it has been influenced by the continued evolution of technology. In many ways, the technology environment that has emerged goes well beyond even the most expansive visions of 1987—a global broadband Internet providing access to vast online libraries of information and services; pervasive wireless communications; a seemingly endless proliferation of intelligent devices that continue to get smaller, cheaper and more powerful; and the rise of social media that connect people in addition to machines and data.
But what are the social and economic implications of all this change? As John Hagel, John Seely Brown and Duleesha Kulasooriya of the Deloitte Center for the Edge note in a background paper prepared for the 2013 Roundtable, there is considerable uncertainty even about the basic direction of the changes that are taking place. There are, they point out, two fundamentally different views about where technology is taking us:

The first is that companies will fragment to smaller and smaller entities and even down to individual providers; the second is a "winner take all" world where only the largest survive.6

Hagel, Brown and Kulasooriya believe that both of these views are “too simplistic,” and that we live in a world in which “both of these narratives co-exist and are mutually reinforcing rather than conflicting.” But if this is true, the question remains: in what specific circumstances is fragmentation likely to dominate and when is concentration likely to prevail? And what are the implications of each for workers, for the economy and for society? These questions were the central focus of the 2013 Roundtable.

Mapping the Territory Ahead
To provide a starting point for group’s exploration of this question, Thomas Malone, Professor of Management at MIT and the lead author of the 1987 paper on “Electronic Markets and Electronic Hierarchies,” presented a sort of road map that identifies the key environmental forces that are driving institutional change and traces their impact and their interactions. According to Malone, there are three basic technological developments that are altering the economics of business: cheap transportation, which is expanding the reach of a market for goods that can be served competitively from a single location; cheap (fast) communication, which makes it possible for ideas to travel faster and lowers the cost of coordination across institutional boundaries; and cheap automation, both for activities involving the production of physical goods, but increasingly for information-centric tasks, which makes it possible to substitute machines for human labor for almost any sort of task. Cheap transportation is a product of the combination of low-cost energy (mainly based, unfortunately, on the abundant availability of fossil fuels) and the development of highly efficient modes of mass transport. Cheap communications has been based on the continuous improvement in performance and falling costs provided by digital electronic media; while cheap automation is also being driven by ongoing improvements in digital technology.

Even more powerful than the impact of these factors individually has been their combined impact. For example, the combination of cheap transportation and cheap communications is shifting the nature of the markets in which companies compete: firms can take advantage of ever greater economies of scale as the practical limits to a single organization’s potential sphere of operation continue to shrink. As markets expand, they become more volatile and competition grows, which increases the need for rapid innovation. And thanks to cheap communication, the cost of information falls, allowing more people to get access to information, which also drives innovation. Similarly, the combination of cheap communication and cheap automation is driving major changes in how organizations function internally and externally. Outsourcing of non-core activities becomes more attractive as coordination across boundaries becomes easier and less costly. But at the same time, digital technologies are contributing to the creation of “digital businesses,” which can enjoy increasing returns to scale and benefit from network effects that can lead to natural monopolies.
The bottom line is that this environment is conducive to both the creation of more large companies and more small companies. As internal costs go down, scale economies increase and companies get bigger; as coordination costs fall, production can fragment, with more work being outsourced to small, specialized companies. An enterprise like Wal-Mart can succeed by building an intensely integrated retail delivery system that has made it the largest private employer in the country. By contrast, eBay has been able to flourish with a relatively small number of employees by building a platform that allows millions of individuals to buy and sell goods.

Peers, Inc.
What we are seeing, according to Robin Chase, Founder and Chief Executive Officer of Buzzcar, is nothing less than a phase shift from one model of the firm, which prevailed for at least a century, to a new model, which she described as “Peers, Incorporated.” The former (and current) industrial model is all about enjoying the benefits of scale: striving to be as big (and standardized) as possible in order to reap the benefits, scale economies and reduce transaction costs. The Internet has transformed the costs of engaging with small players (individuals and/or local companies). The new emerging collaborative economy delivers on the best of small and large through this new Peers Incorporated collaboration. The large entities fund multi-year projects that involve the aggregation of many diverse parts, give economies of scale and establish rules regarding standards and consistency. The “Peers” deliver on localization, customization and specialization. Each side of the partnership is providing what the other side either cannot or does not like to do. Making use of excess capacity (wherever it is found) also binds the economics of the two sides. The result is an organizational structure that can deliver innovation at very low cost, resource efficiency and value maximization on assets and the ability to scale very quickly. While the key strength of the old model was the ability to realize economies of scale, the new model is more agile: able to experiment, adapt, iterate and evolve quickly to changes in the market.

Peers Incorporated

INDUSTRIAL STRENGTHS

  • Large investments
  • Multi-year efforts
  • Aggregation of many parts
  • Diverse technical expertise(s)
  • Standardization
  • Brand Promise (trust)
  • Global

INDIVIDUAL STRENGTHS

  • Small investments
  • Short-term sporadic efforts
  • Delivery of small services
  • Single specific expertise
  • Customization, specialization
  • Personal social networks
  • Local
Source: Robin Chase

A Brave New World—with Glitches
One thing is certain: the combination of cheap transportation, cheap communication and cheap automation is producing sweeping changes that are having big impacts on the economy, on society, and, especially, on the nature of work. In the old, hierarchical world—the world of “the organization man”—jobs were largely standardized. Now, according to Irving Wladawsky-Berger of Citigroup, the whole nature of what a job is, is being redefined. If creative people were stymied in the old construct, that polarity is being reversed: now, the most desirable workers are those who have the ability to work creatively and autonomously. Instead of being a small cog in a big machine, every individual potentially has the ability to leverage powerful resources to do their jobs in new, more productive ways.

Technology is empowering individuals, providing them with more opportunities for freedom. It is also helping to shift innovation from large enterprises to much smaller entities. For decades, space exploration was the exclusive domain of massive government agencies like NASA; now, much of the cutting edge of new approaches to exploration are coming from entrepreneurial ventures like SpaceX, the company founded by Elon Musk, who is also responsible for Tesla.

Though we can clearly see that big changes are happening, it is nearly impossible to foresee with any degree of clarity the kinds of jobs people will be doing in the future. One hundred years ago, some three-quarters of Americans were farmers; today it is less than two percent. Trying to predict what kinds of work people will be doing 30 years in the future is as difficult as it would have been to imagine jobs as web site developers or online community managers three decades ago. John Clippinger, Co-Founder and CEO of ID3, noted that the rate of change is likely to accelerate still further, making it even more difficult to anticipate what will happen. He proposed that we need to shift from thinking in terms of mechanistic models of business to biological models. Rather than conceptualizing work in terms of defined inputs and outputs, it is more useful to use an ecological model where individual actions can affect an entire system in far-reaching ways. Rather than trying to “plan” in systematic ways that assume the existence of a stable structure that can be understood and reliably controlled, it may be more effective to focus on preparing to respond to changing conditions by staying attuned to the feedback from one’s actions.

Young people get it. They recognize that the world is changing fast and that they need to change with it. Millions of them want to move to the new economy and are reinventing work. They are finding new ways to collaborate, working to solve problems in their local communities or globally. In many cases, they are doing useful things, even if they are not making a lot of money. They may be contributing to Wikipedia or participating in open source communities. But they are not looking for a traditional job. As Robin Chase put it, “My father had one job in his career. I will have seven jobs over my working life. My kids are doing seven different things all at once.”

Technology is enabling new ways to work. One of the things it can do is give businesses access to talented workers wherever they may be. More than 160,000 companies have hired workers through oDesk, which matches employers’ needs with people with the right skills and allows them to work remotely. While people used to need to travel to their jobs, now work can travel to where they are. The technology even makes it possible for people to keep their jobs while moving from one location to another.

But it is not enough to just invent new jobs. We also need to reinvent old jobs. The organizations that flourish in this new environment will be those that recognize this new reality and empower their workers to function more autonomously. Surprisingly, one of the organizations that has moved decisively in this direction is the U.S. military, which recognizes that the nature of warfare has changed fundamentally: no U.S. plane has fought with another plane since 1974; there have been no engagements between naval fleets since World War II. In the age of terrorism and asymmetrical warfare, the armed forces have endeavored to transform themselves to support the autonomy of decision-making, to collapse communications and command systems and to enable fast learning at all levels. (One dramatic example: the Special Forces team that went after Osama Bin Laden had virtually complete autonomy to act, even though they were being watched in real time by the Commander-in-Chief and top military leaders.)
Finally, and perhaps most fundamentally, technology is provoking a shift in how young people construct their identities. According to John Seely Brown, for most of the 20th century, Americans based much of their identity on what they wore and what they owned. But for Millennials in the U.S. who are growing up in an intensely connected world, identity is much less a matter of physical possessions and more a matter of what they create and share and what they contribute that others can build on. Financial capital is not the only type of capital that matters today; social and intellectual capital are at least as important. The key factor that determines individual success in this world is a sense of agency, the ability to set goals and mobilize the resources needed to reach them.

Education has always been and is still critical in preparing young people to succeed in the world, but the traditional school system is based on the old 19th century model of a factory where groups of young people move through the system grade-by-grade, acquiring knowledge in a more-or-less lockstep fashion. Unfortunately, such a system can take away students’ sense of agency. One hopeful sign of change are kids who are “hacking education,” using the technologies at their disposal to create their own “learning networks” that allow them to pursue their own interests..

The Rise of Platforms
One of the most distinctive manifestations of the new tech-enabled environment, and a critical means for creating value, has been the rise of platforms—a resource that may originally be created by a single entity, but is made widely available for others to build on by contributing their own content. In this sense, a platform can serve as the nucleus for a much larger ecosystem of innovation. One place where the transformative power of this approach has been clearly manifested is in the IBM Corporation. For much of its existence, according to Irving Wladawsky-Berger who worked at Big Blue for many years, the company operated on the principle that the only products that it needed were those that it invented. But it eventually recognized that it could not continue to operate completely independently in a world of constant change. It has remade itself as a “platform” company that acquires and integrates smaller companies that have developed new, innovative products, providing them with the resources to operate on a larger, global scale.

In fact, platforms that can be used by many people to create new kinds of value are one of the key mechanisms that allow big enterprises to coexist synergistically with smaller organizations. eBay, in the example cited previously, created a platform that supports millions of independent businesses. More than one thousand companies built businesses on the platform provided by Salesforce.com, which makes it possible for even a small company to create new products and deliver them to a large number of customers at relatively low cost. Peter Schwartz, Senior Vice President of Salesforce, describes this as an ecosystem that allows mutually beneficial collaboration between a large central organization and many smaller participants, including individuals.

Like the idea of platform, the concept of standards also plays a large role in shaping economic growth. Joe Justice, Founder and CEO of Wikispeed, noted that the development of standardized pallets and shipping containers in the 1950s had a transformative impact on global trade by making it easier and cheaper to transport goods anywhere in the world, and made the U.S. the least expensive country in the world to ship freight.7 Standards have also been critical to the development of the Internet and the World Wide Web. But the danger of standards is that they can stifle progress if they become overly rigid. We need to make sure that standards remain sufficiently agile to support continued innovation around them.

Making the Grade
But it may be unrealistic, even under the best of circumstances, to expect that everyone will be able to make the transition from the old, hierarchical world of work to the new networked world. After all, not everyone is above average. Jon Taplin, Director of the USC Annenberg Innovation Lab, noted that not everyone can or even wants to be creative. Many people want jobs that are structured and predictable. But these are precisely the kinds of jobs that will most likely be eliminated by “cheap automation.” Foxconn, the Taiwan-based manufacturer that assembles iPhones and many other electronics products, currently employs 1.2 million workers and has about 10,000 robots in operation. But last year, the company announced that it planned to install one million new robots in its factories. By the time this happens, its workforce is likely to be considerably smaller. By the same token, the good manufacturing jobs at places like Ford and GM that paid well and only required a high school diploma are also going to be eliminated by automation. And while the initial wave of automation affected relatively structured, repetitive jobs, the next wave of smarter automation is likely to impact higher level jobs.

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