ParisTech Review / Editors / 2014-10-11
Come year 2030, what will business enterprises look like? Almost every qualified answer points in the same direction, or at least provides a foreseeable trend: if as predicted instability becomes the rule and not the exception, and in a context of an entirely new ecosystem stemming from pervasive digital technologies, business enterprises will have to evolve quite considerably if they wish to remain efficient, sustainable and resilient. What factors come to bear here?
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This article is the first of a series which will be published within the next three months.
How could tomorrow’s economy be best described? If we simply extrapolate from today’s situation, there are three points worth underlining. The economy tomorrow will beopen, with increased accessibility to new technologiesenabling new actors to move into hitherto protected areas, and, consequently, business environment will beintrinsically unstable. Depending on countries and sectors, the evolution may vary considerably in terms of speed and level of impact. But the global digital tsunami will continue and a set of radical innovations will redefine the market-place, its production models and even the roles each stakeholder will play.
The end of competitive advantage?
Some of these innovations are being implemented today: new business models (free model payback and freemium, crowdfunding, social innovation, functionnal economy), decentralized production with the makers revolution promoted by Chris Anderson, the reinvention of distribution/delivery modes with giants like Amazon, deep-reaching changes in the rules of intellectual property with the advent of open source and hackers… Other major changes are in the pipeline, while others are still on the drawing boards, or designers’ visions.
But even those sectors which have not, to date, been submerged by the digital revolution are beginning to worry. The luxury goods industry carefully protected its monopolistic precinct and companies have managed to flourish, but they may well could soon run into failure modes. The space sector, which for a long period was a de facto public sector monopoly, is now open to private actors. The automobile sector has begun a metamorphosis and newcomers here, such as Tesla, are placing the traditional car builders under pressure. Furniture, building and public works, hotel and restaurants are also now faced with an influx of new actors, often inventive in their ideas and occasionally voracious in their ambitions. None of these activities will disappear, but the value chains are reshaping, allowing newcomers to gain their place and forcing the traditional actors to adapt, or even reinvent themselves. What is happening in the music industry and in the newspaper and magazine industry, caught as they are between free access offers and the sheer commercial power of the net giants, is symptomatic.
The only certain fact is the ‘adventure’ that follow suit, taken in the etymological acceptation of ad venturus (what has still to happen). Something will happen, someone will arrive. And in the context we are considering, it will not just be a new competitor, someone who has the same weapons. But rather it will be a total disruption, a game the rules of which have changed, and with radically different actors, viz., a collective, co-operative group or an adventure-seeking billionaire, some hackers or again maybe an ambitious small SME entrepreneur supported by venture capitalists. The Paris based start-up accelerator The Family has given a theoretical analysis of this threat, under the heading “The Barbarians attack!”
Tomorrow’s enterprises will no doubt evolve in a world where “competitive advantage”, the basis of Michael Porter’s famous theory will, to a very large extent, be a thing of the past. Rita Gunther McGrath, a professor at Columbia Business School, has specialized her work on the theme of corporate strategies in a volatile environment. In her book The End of Competitive Advantage, she clearly shows that, in numerous sectors, digital technologies have broken down market access barriers and that any letting up of efforts in innovation can threaten an enterprise’s existence.
Under these conditions, the ability to fully understand the environment, to adapt one’s strategy, or even reinvent one’s business lines, will be an asset, that will affect not only the company’s development but may engage its survival. We all recall the demise and collapse of Kodak, swept away by the success of a technological breakthrough invented by one of its own engineers, but which was turned down by the Rochester based company so as not to disturb its most profitable line of business, the light-sensitive silver salt films.
What happened to Kodak is now a case study for business schools but it brings with it an ambiguous message: the success of a business model is also a source of fragility. What defines the right moment to move away from a model that has proved profitable in the past? Till recently, this sort of question was only raised when major strategic reorientation was decided. It could become a constant question for any enterprise.
The very size of a company can be an important factor here, as can the composition of the share-holders. We can recall how the major conglomerates in the late 1970s and 80s were made fragile. If certain players in the field – such as the digital platforms Google or Amazon – managed to pull through because of their huge size, for others the question of size or variety of activities can be a handicap. As was underlined in a recent McKinsey report, larger companies adapt less well. But smaller ones too can crash, if and when one of the digital majors decides to move into that sector, as Brad Stone reports in The Everything Store: Jeff Bezos and the Age of Amazon.
As always, and even more than ever, there will be losers. But also there will be winners. The question arises: can we build an identikit picture for enterprises that will prove able to develop positively in this new digitized context? Several authors have been thinking about this possibility. And even though their work sometimes turns out to be controversial, it can nonetheless be used as a guideline.
Matter and flow
Let us begin the analysis by a holistic overview of the entire economic logic, the framework in which enterprises are born, live, thrive or die. Jeremy Rifkin talks about a third industrial revolution where communication technologies and renewable energy sources converge. The industrial economy associated with this convergence would no longer be based on mass production but on distributed, decentralized, cooperative processes and products.
Without necessarily agreeing with Rifkin’s stance – he is not consistently rigorous in his demonstrations – we can however give due consideration to some of his intuitive visions, those that throw light on some of today’s observed changes and trends. The neo-Taylorist company the model of which emerged in the 1970s and 80s was based on a certain economic and social trends which called for individual accumulation of material wealth. The objective of the company is to supply more and more items, with increasing sophistication and for a continuously lower price per item. A perfect example here is the Swedish company Ikea, but in fact the most interesting industrial cases are (with the Japanese essentially) to be found in the car manufacturing sector.
These new models have now reached their limits. It is far from certain that our lifes will continue to turn around the sole possession of objects? In fact, we must recognize that many things have changed without our realizing what has happened. Cars that were emblematic of the second industrial revolution can now be shared or rented. Cars are nowadays seen less as a possession than as a service. Mass production items are somehow losing their value always faster. We buy them, use them and discard them in a couple of years. The future horizon of mass production will not be the objects produced but the flow rates of the same coming into our lives momentarily then disappearing. E-books and downloadable films symbolize new utilizations: we buy them but do not actually possess them. We “acquire” them, consume them but in fact they are immaterial and the originals are stored remotely elsewhere. With, for example, Deezer or Spotify, or certain Amazon offers or again Netflix; we in fact purchase an access right, which can be almost unlimited, but lies beyond the notion of property. Connected objects are physical. But their value lies in the immaterial data they handle and forward, and in the data processing systems to which they connect.
The companies who will be producing the new service-goods, flow-objects, will not see their activities the same way as today’s industrialists or service providers. This will lead on to the definition of new business models, new value chains: goods and services will necessarily be integrated. Only a very few actors will be able to hold their position throughout the chain. Most players will be forced to associate themselves, not in a vertical configuration, in the framework of sub-contractors, but horizontally. The 21st century enterprise will be based on coproduction and collective accumulation of immaterial capital.
The Hollywood model: relation capital
To move successfully from one model to another, one needs to totally revise the notion of performance. If only because future enterprises will be members of a network, or co-enterprises or even a federation of companies… grouped together in clusters.
Enterprises will no longer be classified according to size (SMEs up to major companies) but as a function of their more or less close links with corporate networks that will form clusters to do business and create added value. The “Hollywood” model, in which companies join forces to make a movie together and then separate to join another project, allows us to better understand the new paradigm: sharing and coordinating material resources, accessing skills and knowledge as need at least cost. Harbouring a minimum amount of own-resources while guaranteeing access to all other resources – that is the recipe.
This trend has already started and rather soon the neo-Taylorian model of the 1970s and 80s could be a thing of the past: in a collaborative model, there is no point in planning and controlling every phase or step: work management and organization are now closer to gaming models and occasional collaboration is now the rule of the day.
For prospectivist Denis Ettighoffer, “modern enterprises have become relation-intensive and in this context must build up their relationship capital. The methods used to produce new ideas and the ways used to create added value have no connection with traditional productivity seeking management. In a networking company, function oriented logic is replaced by relationship logic. The continuous expansion of our knowledge bases leads to a radically new understanding of what wealth means. What contributes to added value is no longer the physical dimension of work but the creative and relation-intensive component of each human operator’s activities. Accessing ideas and new, relevant knowledge sources has become every bit as vital to corporate survival as the possession of rare materials or even capital, inasmuch as using the knowledge part appropriately will enable us to offset the shortfall of a given physical resource as and when it occurs.”
In a relation-intensive economy, knowledge circulates and exchanges gather in intensity forming together a heaven-sent road to creation of added value. But such exchanges depend on scrupulous, systematic opening of the corporate strategies to events and considerations outside, bearing in mind the empirical rule that says that 80% of process innovations come from within the company structure and 80% of innovation in products and service come from the partners and customers. Denis Ettighoffer warns the executives: “too often, use of networks is limited to attaining better productivity levels rather than ideation (creation via new ideas), the very key to conjugate added value.” Cross-fertilization of ideas and knowledge via the networks will be just as important in the future as any past productivity gains. Talent, skills, creativeness and imagination will now top the bill, inasmuch as everything else is (or will be) standardized.
In the same vein, professor Paul Romer, when in the chair of Economics at UC Stanford’s Graduate School of Business, advocated a theory for an idea-based economy that has spawned a fierce controversy, a theory in which ideas at the origin of a growth phenomenon every bit as important as that gained through better productivity levels using systemic computer science. In his research, a demonstration is given that an idea-based economy would be structurally different from a material object-oriented economy. The latter is physical in essence, is finite and leads to cases of shortfall and decreasing outputs. The former draws its strength from the almost infinite potential in sharing and incrementally improving on ideas, with concomitant improved output. This valuation of immaterial assets is now often referred to as the quaternary economy.
Organization: a foreseeable upsurge in intrapreneurial policies
How, we wonder, will enterprises survive in their present format, given that the bases of their existence have been undermined? They have been destabilized in the digital wave that has eliminated frontiers, the frontier between inside and outside the company and the frontier between corporate functions. Today, the private sphere uses of ICTs are progressively taking root in the entrepreneur’s environment, bringing with them a network of parallel knowledge that puts traditional hierarchies under pressure. Digital devices that were originally designed for the home are now being adapted to this professional sphere and employees are building up what is called a “shadow ICT,” or parallel information handling system; everyone can bring in and use his/her preferred tools and thereby sidestep the standard procedures.
Lastly, the new organization seeks to break down the silos, encouraging “start-up mode” work practice and stimulating intrapreneurship to induce workers to perform as entrepreneurs even within the company. Another architectural major change is that for a company integrated in knowledge-intensive economy, the power lies with those who are in contact with the best external knowledge sources. Pyramidal fordian organization charts that draw their power mainly from holding back information are gradually becoming obsolete since they tend to slow down circulation and dissemination of knowledge.
Some experts have been on record for a long time now in regards to the limits of a fordian type company and also underscoring the opportunities that would stem from a digital multiplier. John Hagel, a former McKinsey digital strategist, insists in the early years of 2000 on the inevitable fall of corporate asset efficiency: a drop of some 75% between 1965 and 2010, despite spectacular increases in productivity levels. Hagel even suggested that large companies should be broken down into smaller entities.
In regard to this new patchwork breakdown of the entrepreneurial context, Charles Handy in the 1980s proposed a “three leaf clover” to describe the silhouette of tomorrow’s companies. The first leaf, the business core in essence, only has a few, highly competent, very well paid, permanent staff who oversee and administer the other work force components, on one hand, the part time interim workers and, on the other, sub-contractors, including independent companies. This creates a sort of zero staff company, which builds its relationships with each concentric circle of partners in formations, occasionally called “contract nodes.” In this model, the statuts of labor is highly fragmented.
Whilst advocating adaptation of those faced with these changes, John Hagel does nonetheless express some doubts about the justification to carry out a complete integration of the corporate data processing systems – integrating front and back office, inter-enterprise co-operation, out-sourcing… His argument here is that the more a system is integrated to others, the higher the risk of errors and consequent impacts on the company as a whole. Moreover, in an age where we see chronic industrial reorganization, data processing integration can be an obstacle to change. As John Hagel sees it – even when he bears in mind the unwanted effects of an endless race in pursuit of technological progress – the solution lies in adopting modular structures, subdividing the organization into smaller specialist, self-reliant entities, that connect to the other entities via “loose links” – which in practice are simple, standardized interfaces.
What may be the strategic perimeter for ‘extended’ companies?
The other change is that enterprises are now moving beyond their traditional frontiers. The operational mode of a so-called ‘extended company’ spreads naturally inasmuch as it perfectly reflects the need to take peripheral partners into account when defining corporate policy. A partnership model that enhances project management is now a desirable target for the major groups, redefining the way they interact with their eco-system of sub-contractor SMEs. In out-sourcing their activities, the companies will be efficient if they successfully build a strong client, supplies and partner eco-system. In doing so, they are now able to concentrate on their business core.
But the question does arise: how do you define the strategic perimeter of a company, or its “business core”? For John Hagel, the strategic activities of a company can be placed in one of three categories: developing relationships with the company‘s clients; innovating in both services and products; implementing an efficient corporate infrastructure. When we think about it, these three activities are assigned objectives and constraints that are not away compatible. To be somewhat schematic, if your priority is the client relationship, then you will want to maximize the sales and order books and therefore propose a very wide range of products, running the risk of having to sell products and services that in fact come from external partners and not your own company. If again your priority is to implement an efficient infrastructure, you will want to specialize is a given field so as to make the sometime heavy investments pay off, even if you gave to set up a network for indirect sales so as to find the largest number of potential prospects for a reduced range of products; lastly, if you decide that the company must innovate at all costs, you must recruit appropriate talents and skills, pay them high salaries and cultivate their egos, i.e., exactly the reverse of the characteristics you would want to see in staff that focus on the infrastructure.
Perpetual motion
These forms of strategic activity could well spell out the shape of tomorrow’s industrial scenery. They share the fact of paying extreme attention to their environment issues, contrasting with the managerial models of the 20th century, which concentrate more on what was taking place within the enterprises.
We can imagine – and it is indeed one of the aims of the series of papers we launch today – different types of manager and different types of management practices. But the question already arises: is such constant attention to the environment a tenable stance? Rita Gunther McGrath in The End of Competitive Advantage recommends a sort of perpetual reorganization policy, seen as a guarantee to future corporate survival. But this prospect carries a sort of déjà vu feeling. We know today the shortcomings of “permanent revolution” when advocated as a management model. The past three decades have shown how difficult it is to induce shifts in organizations that had spent decades ensuring expansion via stable management practices. Faced with the stability culture, some corporate chiefs have sought to destabilize at any cost their collaborators, sometimes with really dramatic results.
One of the difficulties facing future companies will be to keep the heading. We can observe this with what happened to certain majors in the Internet universe who, long before the others, faced a hyper-volatile environment. Most of their top executives, from Steve Jobs to Jeff Bezos, come half-way between sheer genius and maniacs, and they share the trait that their immediate collaborators are worn out and management is disorganized, to say the least. Bezos, for example, is aiming a totally intangible strategic objective, but in the same time he can overthrow the cart and switch from one major project to another one in less than two minutes. Constant mobility allows you to build empires, but it is no easy thing to work with such characters.
It is perfectly plausible that salaried staff in the future will be able to adapt to this phenomenon of general mobility, given that is corresponds to the values and practice of the now famous “y generation.” In this case, the forecasts made my Rita Gunther McGrath could be defining a new, socially acceptable and economically efficient model.
But again, it is just as plausible that this nomadic ideal will come up against real world inertia. Should we then imagine a two-speed world, with a set of hyper-innovative companies and other reduced to the subaltern role of supplying goods and services without much added value, and seen indeed as simple commodities? Or a vast movement in favour of ‘braking’ regulations, thereby translating the difficulties of societies to accept a generalized form of volatility? But one thing, for sure, is unescapable. The observed trends are powerful and the destruction-creation wave which is advancing, along with the digital tsunami, is only in its early days. There is far more yet to come.
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