Web 2.0 Represents A Fundamental Rethinking Of Business, And The Theory Of The Firm

January 20th 2009 Posted to Economics, Enterprise 2.0, Market research, Marketing

Open_door[UPDATE:  Andrew McAfee has critiqued my post on his blog here. Valid points, all. My reply is below, and on his original post.]

My former colleague Pete Kim has been on a roll lately. A week ago he challenged the blogosphere to become more than just an echo chamber — he even challenged me personally to “really turn it on.” This weekend he clarified further to say that social business is business. And today he goes on to explain why he believes Web 2.0 still matters. Like any good colleague, Pete has pushed me to clarify my own thinking on the subject.

As an economist — and a micro-economist specifically — I look at Web 2.0 through the lens of Coase’s The Nature of the Firm and the eventual refinement and expansion of his theory over the last 80 years. So what do I see when I look at Web 2.0, social media, social software, and whatever else you want to call this thing? I see a fundamental rethinking of the definition and function of the firm; the single biggest change since the industrial revolution.

Yes, that is some over the top rhetoric, but consider the facts: Since the industrial revolution the basic creation of economic value has followed a pretty simple path. Firms acquire capital, labor, and resources, combine them into a valuable product or service, and sell the product or service to individuals or other businesses who consume that value. In this system is it incumbent on the firm to create value, and the role of the buyer is to consume value. End of story.

What Web 2.0 software has done is give firms the tools to blow the doors to value creation wide open and invite customers, partners, experts, and prospects into the process. Think of a social network like the ones run by Communispace; here businesses are opening the doors to the product development, marketing, packaging, and distribution process to customers who add value every step of the way with their preferences, ideas, and reactions. The firm is no longer creating value alone, it now has help.

Skeptics will argue that this sort of value has always been provided to the firm through focus groups and other market research. While it is true that these functions have brought in outside opinion and value in the past, they have never before operated at the scale that truly social software allows. Instead of a one-off focus group for 8 hours with 20 people, firms now have the ability to conduct perpetual focus groups with as many people as care to join. This, needless to say, is a big change.

Over the next 10 to 15 years, on the back of social software, we will go from a fundamentally closed value creation system to a fundamentally open one. The firms that get their first and with the greatest depth stand to profit wildly, while those that do not embrace this change will be stuck with a slower pace of innovation and industrial revolution-era economics and resource constraints. Firms that embrace the community will harness vast amounts of community value at almost no explicit cost. Again, this is a huge transformation.

If you have spent any time speaking with me or reading my research in the last two to three years you have likely heard some version of this before. My colleagues as well have been writing about this change — see Peter Burris’ Community Marketing report for a great marketing focused example. Over the next year my goal is to expand and deepen Forrester’s coverage of this shift, eventually providing firms with a road map of how the move towards open business will play out, and where they can take confident steps forward. First up is a report tentatively title “Community Evolution: How Loosely Coupled Communities Of Interest Will Mature Into The Tightly Bound Economic Actors Of Tomorrow.” The report will aim to answer:

  • What types of products and services will communities provide in the future?
  • What business models will facilitate those communities? Will they be for-profit?
  • How will communities evolve over time?
  • What should businesses do today to prepare for the change?

If you are interested in contributing to the research please let me know in the comments, or via email. Pete, expect a call for an interview shortly.

This, as you can probably tell, is something I get very excited about, and I am thrilled to share my findings with you, and the rest of the world. It may sound self-serving, but I don’t think there is a better job in the world right now than an economist focused on technology. It’s an exciting time to be in research!

(photo courtesy of hagit, via flickr)

View Comments

  • Well said Oliver.

    It is time organizations shift from a hierarchical structure ruled by the bosses to a more open and participatory framework.

    The first stage needs to be internal, where internal team has a say into the affairs of the organization, its strategy, roadmap, processes.

    We have built a tool that allows organizations to engage their entire team at http://www.openteams.com
  • Hi Jon, thanks for the comment. You hit the nail on the head with your post. My (very) lightweight and flip version of that post is here: http://blog.strategicheading.com/2009/01/15/what-would-happen-if-we-replaced-every-employee-with-a-social-software-using-gen-yer/

    At times I get a bit jealous of someone like Andrew McAfee and all the folks teaching MBAs. It's got to be a fascinating time to be in management research and education as well as tech research and education.
  • Jon Husband
    I've been thinking about this for a while too ... example: "Will Enterprise 2.0 Drive Management Innovation ?"
  • Aaaah, now you're really hitting into my territory. This reminds me of a post I wrote a while back related to this topic (http://coinnovative.com/user-led-innovation-report-the-australians-get-it/) in which I discussed a report called "User-led Innovation: A New Framework for Co-creating Business and Social Value" (http://www.smartinternet.com.au/ArticleDocuments/121/User_Led_Innovation_A_New_Framework_for_Co-creating_Business_and_Social_Value.pdf.aspx). And THAT also references a book by Eric Von Hippel called Democratizing Innovation. (Oh and another related post: http://coinnovative.com/part-3-digital-suggestion-box-how-big-corporations-are-asking-for-help/)

    To Andrew McAfee's point, no we should not be overly optimistic about the future, pessimistic about the past and, yes, these concepts have been around but the tools to execute on them as well as the mindset of an engaged consumer-base (or prosumer, if you prefer) have been improving rapidly.

    I generally agree with the thrust of Oliver's argument here. Firms have been moving towards a more open stance in the last decades and enterprise 2.0 tech -- which has made progress but has a long way to go -- will help them become more so as time goes on.

    While on the subject: this also seems to skirt near the edge of another idea: that in a knowledge based economy in which outside innovation tools, outsourcing, APIs, specialized services that plug right into your infrastructure (or soon will), etc. become more refined and prevalent, the size of the knowledge based firm will likely decrease as well. Intuitively, it seems the marginal return due to economies of scale turn negative much, much earlier in a knowledge based company in relation to old industrial era firms. Yet time and time again we see (knowledge) firms grow far too large and crumble under their own weight and inefficiency.

    Smaller, more open, and more responsive companies... sounds pretty good to me. Guess you just have to help them implement all this stuff, huh?
  • Oliver,

    Have you read Yochai Benkler's work?

    - Ethan
  • Great post. I totally agree with your statement "I see a fundamental rethinking of the definition and function of the firm; the single biggest change since the industrial revolution."

    I am stoked about this exciting theory based discussion. The nature of the firm is a great explanation of where Web 2.0 will get us to and its a theory to show that collaboration with other organisations can be helpful to the firm. However, what I found with Coase's theory is that it doesn't tell me how to get there.

    Collaborating with external organisations (and internally) can be very tricky. What I found is that theories like institutional theory, social network analysis, social capital theory, intellectual capital theory are great theories to guide us to our final objective. I also think that the above theories will be a great start in answering your proposed research paper.

    Feel free to get in touch if you would like to discuss more.
  • Hi Andy, thanks for the critique on the post. My characterization is most definitely a straw-man and my intention was not to put out a full nuanced treatment of the subject; that work will be done in upcoming research.

    That said, I do think this is a more fundamental shift that you are giving it credit for. Peter [in the comments on Andrew's post] starts to hit at the big reason here: scale. Outsourcing, joint ventures, industry consortia, partnerships with academia, network organizations, etc. all bring outside value into the enterprise, but all require major infrastructure and expenditure to manage. The average enterprise simply cannot execute these initiatives in any sort of repeatable, scalable manner. Today it is almost all bespoke.

    I will be the first to tell you that Web 2.0 tools today require a major investment of time and effort, but once the tools and processes are in place the economies of scale should kick off in earnest. Once this happens I really do believe that most of what we have done thus far to open the value creation process will feel like child’s play. I wouldn’t call it a revolution in capitalism either, but I do believe we are at a major phase shift after which community will be thought of on equal footing with land, labor, and capital.

    Anyway, thanks again for the critique. I’ll be sure to take the more nuanced approach in the future. The last thing I want is to be a breathless fawner — it would kill my curmudgeon rep!
  • "Community Marketing" - looks like the report was written in May but this is actually the first I'm hearing of the term. It makes more sense than 'Social Media Marketing' which is being thrown around in the Twitterverse.

    As the community manager for the Web 2.0 conferences, I always think that my title is an oxymoron... do communities really want to be managed? Do communities want to be marketed to?

    Re: demand creation from a marketing / advertising / product development perspective, it means that the creation funnel goes in reverse - communities hold the power and dictate creative development of any kind.

    Figure out how they listen and create content / products / services that cater to those channels.
  • Oliver,

    I posted some comments in reaction to this post here: http://andrewmcafee.org/blog/?p=544

    Would love to hear your reactions.

    - APM
  • Great thinking and eager to see where you will take your research. I'm most interested in looking at it from a marketing/advertising perspective? How does this shift redefine advertising? Demand creation? Etc.
  • Agreed, the innovation networks stuff fits right in here, thought with social software the trust model does not need to be nearly as rigid which allows for much better scale. I'll put you on the list of interviews for later this quarter.

    As for the title, I figured everything after the colon would be subtitle. "Community Evolution" sounds pretty catchy, right?
  • Hmm...lots to think about here. If Navi Radjou is still around, you could surely draw on some of his innovation networks thinking to inform your research. I'd definitely love to chat with you on this - looks like we should be briefing you once we're at a point of critical mass as well. (I'll see if I can help you with a more catchy report title, too.)
  • Hi Jennifer, thanks for the pointer; I will be sure to check out the article and likely the book.

    Now that I'm thinking of it, Wikinomics tries to make some claims along these lines as well, however Tapscott completely botches the execution. Instead of focusing on how social software, community, crowdsourcing, et al. expand traditional economic systems through the introduction of economies of scale, he makes the claim that this is a completely new set of economic principles. I was not at all shocked to lean he is a psychologist.
  • Jennifer Belissent
    Take a look at the book Crowdsourcing: Why the power of the crowd is driving the future of business, by Jeff Howe. He makes the argument about how the crowd has changed the nature of the firm. The book is a great read but here is the original article that it sprouted from: http://crowdsourcing.typepad.com./
  • As I recently tweeted, "Community is the new Social." And "Social is just an attitude (leading to just lots of talk). Community is a mindset (leading to real action and real change & progress)." That last quote is the long version of one of my tweets. :-)

    Many of our customers have already established the community mindset (both outwardly towards their customers, partners, and even competitors as well as inwardly towards their employees and local communities) and are leading the way for positive change within their respective industries. And so has Telligent. I look forward to contributing to your research.

    http://twitter.com/lliu
blog comments powered by Disqus