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