May 7, 2009

Future Proof: The Disaggregation of Business

91. Our allegiance is to ourselves—our friends, our new allies and acquaintances, even our sparring partners. Companies that have no part in this world, also have no future.

Cluetrain Manifesto

The following blog is written in support of Cluetrain Plus Ten, a celebration of the 10th Anniversary of the Cluetrain Manifesto.

The news today in the papers was rather stunning - the United Auto Workers union was buying part of GM and Chrysler. General Motors, once the largest and most powerful car companies in the world, is being sold to its workers because the company became too fixated upon the business of making money and not fixated enough upon the business of making cars. Presumably, those workers, who still are in the business of making cars, may actually understand where their priorities really are.

This process is going on everywhere. The newspaper publishing industry is disintegrating, not because there's not enough news, but because there's too much of it - millions upon millions of "citizen journalists" who are reshaping the fabric of news, armed with inexpensive camcorders and laptops and iPods. Big box stores are being replaced by hundreds of thousands of specialized retailers, operating over the Internet or with minimal brick and mortar presences. Office parks are emptying out, as the workers of the companies that used to be in them work from homes and coffeeshops and conferences a thousand miles away. The giant businesses loom over all of this like hulking dinosaurs, scary until you realize that most are dying, and that what you are seeing are the skeletal ribs of decaying corporate carcasses.

Recessions come and go (though most in the last eighty years have not been quite so bad as the current one) and in most of them, older, less efficient businesses often disappear along the wayside, beat out by newer, flashier, more nimble opponents. Yet it is likely that this time around, we're going to see a mass extinction event, because the very nature of business itself is changing.

The large-is-better business model evolved through much of the late 19th and 20th centuries because it was the most efficient mode for communication channels - a hierarchical business model is a network with a bias towards centralized information dissemination and execution. Direction was passed from a leader to his subleaders, who would then break down the tasks pertinent to their domain and pass it down to their respective subleaders, until eventually you had specific tasks assigned to individuals at the leaf ends of the network. It also had the advantage of working well in a geographically centralized manner - each subtree usually represented a geographic aggregation of some sort.

Additionally, such command and control structures had the additional benefit of pushing information back up through a series of management filters - if it was not perceived as being important enough to engage the time of a given lieutenant, it wouldn't pass beyond that lieutenant to his superiors. This meant that, in theory, only the most important information would make it up to the top, and the role of the centralized decision maker became at least somewhat rationale.

In practice, however, such filters also served to isolate these same decision makers from interacting with the outside world. Hierarchies by their very nature tend to promote privilege - the higher up the chain you are, the more you are rewarded, and in practice the less you are likely to interact with the people that actually use your business products or services - instead, you interact with your counterparts at other businesses or organizations. And as a consequence, hierarchies can become forts, with the leaders of the hierarchy only vaguely aware of (and usually far less mindful of) the actual work done collectively by the others in the organization that in turn pay his paycheck and bonuses - or of the people who pay for that work.

The hierarchical model is well suited for broadcast - information from a centralized source gets disseminated through the hierarchy, while the hierarchy in turn acts as a filter to analyze and consequently respond to this data in aggregate. This has the side-effect, however, of dehumanizing the response channel - you are less interested in whether Jane Doe was motivated by your messaging (advertising or otherwise), but far more interested in the fact that a 32 year old Caucasian single woman who makes $64,000 a year, lives in a $550,000 house and is a vegetarian purchased your product. Jane Doe is a person, the latter is a demographic profile that can be used to see whether Product X is successful in getting Jane Doe to fork over her hard-earned money.

The Internet establishes an alternative set of communication channels that are very different from the hierarchical model. In effect, it makes for ad hoc, collaborative, overlapping interest groups. It makes aggregate collectivist behavior far easier to accomplish, and it means that information can spread very quickly, as it passes from interest group to interest group through common members.

Most companies originally thought that such interest groups were a good thing - after all, most of marketing involves targeting your message toward a given interest group while trying to reduce the exposure of the message outside of that interest group (as the non-interested groups produces far fewer responses - it's not as cost effective to advertise to people who either lack the means or the desire to purchase your goods or services). Company X could market its new organic power bar to such interest groups, and expect a much higher conversion ... which in fact did happen.

What these companies were not expecting was that the members of this interest group would also pass negative information about the products (and the company) to one another ... and that they would talk back. This wasn't supposed to happen. If the power bar didn't taste very good, this was information that would spread just as quickly, and it was beyond the control of the company to fix. If the organic components really weren't, if the green message on the wrapper was at odds with the fact that bar was produced in a factory in China under less than ideal conditions, if the CFO was involved in an affair with the CEO's wife, all of this information would get passed on ... and the company had no way of controlling this back-channel communication.

Corporate communication is very impersonal - its intent is not necessarily to inform, but rather to protect the hierarchy - to promote the successes, to spin damaging news, to obfuscate the communication access to the primary decision makers and in general to reduce potentially embarrassing contacts between the decision makers and the outside world. The problem of course is that as the dialog channels between people improved, the cold, mechanistic nature of corporate speak also became far more obvious - and more sinister. People react negatively when they realize that communications are one-sided - that while there may be a semblance of human communication going on, there's actually no one on the other side that is in a position to actually do anything about it ... it's a waste of time.

Beyond this, corporations are made up of people, and when those people feel that they have been abused by the company, they now have at their tools powerful ways of disrupting those corporations. When people are laid off in a poor and demeaning way, when they are customers who have been "shafted", they will lose whatever loyalty they may have had to the company in question - and will become increasingly shy about giving loyalty to any corporation. They will develop ideas and tools outside of the context of companies - something especially significant because it is often those very ideas and tools that the company would otherwise turn into products and sell themselves. They will encourage others to boycott companies and suggest alternatives that will reduce sales for the company in question.

In one scenario I saw recently, a disgruntled former customer of a cable company established a website and devoted himself to convincing others to take their business elsewhere. In the end that one customer probably cost the company $1.5 million dollars in revenue, all over a cap on services that might have cost the company perhaps $30. Such anti-customers really didn't make much of a difference pre-Internet - the company could have acted with impunity because the real ability of that customer to affect the company was limited. Today, a single Twitter from the right person (who might either be the anti-customer or sympathetic to the anti-customer) could have hugely negative consequences for a company.

The real difference between a company and an interest group (a social community) is surprisingly small - usually an agreement for revenue sharing. This means that whereas fifty years ago it may have taken several thousand people to establish and run a business of any complexity, today you can get by with perhaps fifteen or twenty - which in turn mean that such companies need a much lower threshold of net revenue to be viable concerns. This is increasingly as true in capital intensive sectors as it is in information services. Componentization and modularization of parts in various sectors mean that you can construct and customize even durable goods at only a slightly higher margin than a much larger factory, and because you don't have the significant overhead associated with the larger factory, the marginal costs even out.

This means that, even as dinosaurs like GM thrash about in their death throes, there are dozens of smaller companies making specialty cars that are far more responsive to new technology and market demands, at a small fraction of the overall costs that GM needs to develop a given car line.

The upshot of this is that we are in for a long period of business disaggregation - where huge conglomerates spin off companies to sink and swim, where small, ephemeral companies navigate more effectively than large ones, where the distinction between consumer and producer becomes blurred to irrelevance. People won't be any less loyal, but they'll be loyal to those "projects" that they themselves have a controlling interest in. Brand names are only significant as ways of identifying those prosumers who are most adept at navigating this world, and are increasingly tied into the "personal brand" - "I trust Jane Doe because I can communicate with her, her ventures generally succeed, and she knows how to involve others in her ideas."

It should be an interesting decade.

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