Digital Determinants for the Future of the Firm

What stands out in considering the fastest growing technologies is how many of them are about two things: faster communication of better information or more convenient and efficient processing of mundane tasks. We are telling ourselves something, if only we were willing to take the time to listen.

To a very real extent humanity is internalizing Moore's Law by demanding more power delivered less expensively in more effective packages.

Enterprises, however, are having some trouble following suit. The reasons are rooted in human factors similar to those driving consumer, voter and employee behavior. Institutions are still structured to optimize through-put, usually for a profit. Strategy, compensation and organizational design are predicated on managing those variables. The iconic measurement for gauging success in that effort remains return on investment (ROI). The problem is that those strategies and structures, not to mention the measures used to validate them, may no longer apply in an age when the degree of influence and acceptance is falling as rapidly as the size of the container in which it is packaged.

In a world where size frequently determined outcome - and bigger was almost always better - it is taking a while for institutions created, financed and organized to monetize that advantage to adapt. Survival may well depend on the speed and effectiveness with which that transition is executed. Knowledge cycles and the technologies that make them possible are simultaneously shortening, broadening and deepening in ways that deliver greater benefits and greater power.

The fundamental nature of these changes is unsettling as is the rapidity with which they occur. As individuals we are becoming inured to all this dislocation and disruption: for most Boomers it has become the new reality. For most Xers and Yers, it is the only truth they have ever known. Institutions built to endure are designed not to bend too much, which is why they survive. But size and the rigidity that supports it may become less of an absolute advantage while the often intangible digital determinants of future success may depend on the sometimes uncomfortable embrace of that understanding. JL

Greg Satell comments in Digital Tonto:

Winston Churchill once wrote that “The empires of the future are the empires of the mind.”
I think it’s clear that’s never been more true than today.
As old line industrial firms struggle to survive, web based startups less than two years old become billion dollar enterprises.  While the past few decades have been characterized by offshoring to cheap labor markets, now manufacturing is coming back, albeit to factories that are largely ran by algorithms.
The underlying trend is the rise of informational content in the products and services that make up our economy and, increasingly, that information is managed by machines rather than humans.  That is the essence of digital business and it’s changing everything we thought we knew about creating value.  Here are 3 keys to understanding the new era.

1. The Singularity is Near

In The Singularity Is Near, technology pioneer Ray Kurzweil argues that the Moore’s Law concept applies far beyond processing power.  In his view, “all technologies will essentially become information technologies, including energy.”  Therefore, all industries will eventually enjoy the same exponential advancement as computer chips have.
Buy a box of cereal at Wal-Mart and you’re not purchasing a mere assortment of grains packaged in cardboard, but also logistics and marketing which, increasingly, are managed by computers rather than humans.  In some cases, even the genetic algorithms that drive those processes are largely self-organizing, with minimal human intervention.
The upshot is that technology cycles are significantly truncating:

That’s all very exciting, but it does create a problem.  As I pointed out in a post about Facebook’s purchase of Instagram, when technology cycles become shorter than corporate decision cycles, we need to change our entire basis for formulating strategy.  Planning is giving way to hacking and our mindset needs to change accordingly.

2. The End of the Computer Age

I remember when people first started buying computers in the early 1980’s.  They were primarily for fun, mostly used to horse around and play games.  Eventually, VisiCalc invented the electronic spreadsheet and computers became more useful, but we were still constrained by limits of processing speed, storage and, once we got online, by bandwidth.
The typical family today owns a few laptops, a bunch of smartphones and maybe a tablet or two.  That’s an enormous amount of computing power and far more than we really need.  Moreover, in ten years our technology will be 100 times more powerful; in 15 years, a thousand times more powerful.
Obviously the present course is unsustainable.  We don’t really need computers anymore, but processing, storage, bandwidth and a means of interface (i.e. keyboard, screen, voice and gesture), none of which necessarily need to be tethered to a box anymore, but can be integrated into native environments.
That becomes important as digital business becomes predominant.  The question is becoming less about how a company can “go digital” and more one of how consumers and partners can interface with the internal architecture of our organization.

3. The Rise of the Machines and the Post-ROI World

A decade ago, the marketing world became enamored with the concept of ROI as a practice.  The idea was that technology could not only build efficiencies, but transparency and accountability.  That effort, although still underway, has largely been successful.
As this article in explains, in the few milliseconds it takes content to load on our screens, dozens of companies collaborate to parse a sea of data in order to deliver the right message to the right person at the right time.  However, much like the workerless factories and logistics noted above, this process is driven by algorithms more than people..
The ROI effort, while still important, faces diminishing returns as more and more processing power chases smaller and smaller efficiencies.  The great opportunity today is to deploy technology toward processes that up till now we have assumed to require uniquely human intuition.

The cartoon above points the way to the next phase.  Artificial intelligence methodologies, particularly natural language processing, are advancing quickly will soon take over more qualitative marketing functions.  Companies like Networked Insights and Open Amplify have already built impressive platforms in that regard.
These new technologies will integrate with existing platforms and do much of the analysis (e.g. consumer conversations) that we have come to think of as innately intuitive and they will do it in massive volumes at blazing speed.  Emphasis will shift from creating efficiency to creating value.

The Nature of the Firm and The Passion Economy

In 1937, Ronald Coase wrote his groundbreaking paper, The Nature of the Firm, which would later be cited when he was awarded the 1991 Nobel prize for economics.  The basic concept can be summed up in this equation:

The Firm = Transaction Costs (i.e. contracts, search costs, etc.)  = Organizational Costs

In other words, the organizational economy was made up of firms that could grow by diminishing transaction costs until organizational costs built up and nullified that advantage.  Digital technology, however has diminished many of those transactional costs and what firms produce today, to a large extent, are designs.
So the role of firms has changed considerably.  In the organizational economy, they mainly served as efficient entities to get men and materiel from one place to another.  Today, however, successful firms must direct passion toward a unified purpose.
As machines automate mundane tasks, creativity is coming to the fore as a primary source of competitive advantage.  The future of digital business, ironically, is all too human.