3 Fundamental Shifts in the Basis of Competition

Cornelius Vanderbilt and Andrew Carnegie.  Henry Ford and Alfred Sloan.  David Ogilvy and Leo Burnett.  These men, each in their own way, heralded a new age and recreated society in their image.

In fact, they so personified their era it’s difficult to separate them from it.  Vanderbilt and Carnegie brought us the age of corporations; Ford and Sloan, mass production; Ogilvy and Burnett, mass marketing.  After them, the world was never quite the same.

Their enormous success drove and was driven by a transformation in the fabric of society by technologies like the steam engine, the automobile and television.  We are now going through a transition which is perhaps even more profound – that of atoms to bits – which is already proving to be even more disruptive and is changing how businesses compete.

1. From the Organization Economy to the Passion Economy

When Alfred Sloan created the modern corporation at General Motors in the early 20th century, what he really did was create a new type of organization.  It operated much like a military would and its success was largely a function of how well it could move men and materiel from one place to another in the service of specific objectives.

That’s when the economy was made up of atoms.  Companies made stuff and sold it to the masses.  As the Economist reports, there is a revolution in manufacturing underway, which is overturning old assumptions of how our society operates and creating sweeping changes in the skills needed to compete.

We are entering a new economy made up of bits of information, new technologies like additive manufacturing and programmable matter are putting a much greater emphasis on design. Machines are taking the place of manpower, it’s the ideas behind products that make the difference between success and failure.

Ideas can’t be organized the way physical objects can.  They must be inspired.  That’s the essence of the new passion economy.  Whereas before corporate generals dictated, now the lunatics run the asylum.  Senior management’s role is increasingly one of helping them run it right.

2. From the Scale Economy to the Semantic Economy

Economists have long had faith in returns to scale.  Bigger organizations had increased bargaining power, informational advantages and could consolidate costs.  As long as a corporation was efficient enough, those benefits would exceed organizational costs and profits would roll in.  Quantity had its own quality.

Michael Porter embedded the benefits to scale in his concepts of the value chain and five forces analysis.  In his view (which became predominant in the latter part of the 20th century), companies should seek to capture value out of each part of the process, from procurement to production to sales and marketing.  Big organizations can do that better than small ones.

However, in the semantic economy that’s emerging, information and transaction costs have become far less of a factor.  Start-ups can outsource many of the same capabilities and infrastructure that big companies once had a monopoly on.  What’s important these days is not so much the information you can capture, but the information you can create.

As a case in point, Instagram was purchased last week for $1 billion, more than the value of the New York Times.  It has 13 employees.

3. From the Push Economy to the Hack Economy

As I noted above, in the organization economy, brands were planned much like a military operation.  The field of battle was surveyed by performing market and technological research, strategic discussions ensued, plans drawn up, resources allocated and operational units implemented the strategy on the ground.

In other words, if you wanted to make a better mousetrap, you studied mice.  In the new hack economy, on the other hand, the mice are actually helping to build the trap.  Co-creation and open innovation are the order of the day and open API’s and SDK’s are becoming essential elements in every marketer’s toolset.

Much of the value consumers derive from their smartphones comes not from the devices themselves, but from 3rd party apps. Proctor and Gamble is generating 35% of their new products through their connect and develop program and increased their R&D productivity by 60%.  When hackers got hold of Microsoft’s Kinect, they didn’t sue them, but partnered with them.

Marketers used to try to gain market share through brand extensions, now they are making their brands extensible.  Consumers used to be passive (an assumption even implied by the term), now they are becoming active participants.  In other words, brands are becoming platforms as much as products.

Where Do We Go From Here?

Things are moving fast.  No one can deny that, but where are they going?  Is there some endpoint, some singularity that we are hurtling towards?  Or are these simply trends of the moment, to be surpassed in time by new ones?  Those are questions without easy answers, but I do think if we step back a bit, several things are becoming clear.

First, power is shifting to smaller entities: from nations to corporations and from corporations to consumers.  Second, planning is being replaced by algorithmic processes, which are more emergent than deductive.  Third, successful firms are creating ecosystems that harness collective intelligence and not relying solely on internal brain trusts.

I think it is the last point that is most instructive and most unnerving because it undermines our need for heroes.  We’ve come to covet our Vanderbilts and Carnegies, Fords and Sloans, Burnetts and Ogilvys.  Stories need protagonists.  Entities that evolve through algorithmic processes lack romance and adventure.

However, in the new economy of bits, information rules and it can come from anywhere.

– Greg