The break-up of behemoth, vertically integrated enterprises commenced in the 1970's, got a boost from junk bond financing in the 1980's, and accelerated in the 1990's with globalization. Now, late in the 2000's, Social Media (aka Web 2.0) is adding another gear that will accelerate the fundamental restructuring of the enterprise.
This is a big story. That is why ReadWriteWeb is dedicating a new "channel" to Enterprise 2.0. I will be editing this channel and we are looking for part time writers to contribute. More on that later.
Peter Drucker, the greatest management thinker of all time, pointed out that the "firm" is a relatively recent innovation, designed to do the things that individuals cannot easily do on their own. Ronald Coase later created a theoretical model (Coase's Theorem) to describe why firms exist, based on the difference between internal and external transaction costs. If the transaction cost was lower internally, then it made sense to organize that work internally. If the transaction cost was lower externally, then it made sense to organize that work externally.
Coase's Theorem underlies countless management books on subjects around reengineering, outsourcing, core competency, spinoffs, spinouts and so on.
This is a fascinating story for me. For 20 years I worked in traditional IT enterprise vendors selling to large enterprises. It was a great game for a while, based on the fact that you could get license fees for copying a tape, effectively 100% margin. At scale, after paying for a base level of R&D and sales, it was fantastically profitable.
Around the turn of the century, it became clear that this game was in the final innings. Larry Ellison, one of the masters of that game, announced that it was game over. Innovation in enterprise software was over, the problems had all been solved, the only thing left to do was sell to Oracle and let them restructure you. Ellison may actually believe this, but mostly it is self-serving. He, and other big incumbents would like start-ups and their investors to believe that the enterprise market is worthless. Leave it to the big boys. That is clearly self-serving.
And wrong. As Salesforce, Basecamp, Google Apps, Zoho, LinkedIn and countless other start-ups that we cover here on ReadWriteWeb, prove every day. One game is over, a new one is in its first innings. This is the best time to be a start-up in enterprise software. We will profile the vendor landscape and the opportunities for new vendors in the next post. For now, I want to focus this from the point of view of the enterprise, the buyer.
The fundamental restructuring of enterprises is mostly a developed world story. In developing countries such as India, Brazil and China, huge new companies are being created. They have totally different challenges and a different opportunity. They are still in the phase of organizing scarcity, which requires the deployment of large resources - scale is an advantage. America and Europe did this in the years after the Second World War, the Asian tigers (Japan, Korea, Taiwan, Singapore) followed a few years later with a similar strategy. Now China is doing the same and, to a lesser extent India, Russia and Brazil.
We will write more about the emerging giants from the developing world and how they are impacted by social media in future posts. This post is focused on the challenges faced by large enterprises in the developed world. They don't need to organize scarcity, they need to organize for innovation. Nobody really knows how to organize for innovation, certainly not within traditional organizational structures. But we do know that scale is not an advantage and is often a disadvantage when the prize is innovation.
Large enterprise face a "perfect storm". These are huge challenges. Start-ups that help them navigate these challenges in real and fundamental ways will do very well:
This is a massive shift. A bit of historical perspective helps. In 1955, 1/3 of the US GDP was controlled by Fortune 500 companies. By 2000 that share had tripled to 2/3. Within that cold statistic lies thousands of human stories of family farms, Mom & Pop stores and other small businesses trampled by WallMart, Agribusiness and other large companies. The drivers mentioned above may reverse that trend. It is not written in stone that large companies should control 2/3 of the economy.
That is huge opportunity for a lot of start-ups. There has never been a better time to be an entrepreneur. It also a huge challenge for the incumbents. Big companies need to re-define themselves in fundamental ways to find new ways to be big in a meaningful way.
Adoption of social media will be the central theme in that story.
The next post will focus on the Enterprise 2.0 market landscape and the opportunity window for start-ups. At a time when advertising is challenged and the VC window is a less open, this is a vital area of opportunity for start-ups.
Tell us what you think? Tell us where you sit - within the large enterprise trying to figure out how to manage this huge wave of change? Within a start-up or VC looking at the opportunities?
You can subscribe now to our special RSS feed for the Enterprise channel.
UPDATE: Part 2, 11 Things Startups Should Know About Enterprise 2.0, is available now.
TrackBack URL for this entry: http://www.readwriteweb.com/cgi-bin/mt/mt-tb.cgi/4700
Comments
Subscribe to comments for this post OR Subscribe to comments for all Read/WriteWeb posts
America banked on its highly specialized, value-added, technical manufacturing mid-tier companies. These often family-owned, private entities were decimated throughout the 80's and 90's.
In order to drive the profit up the executive chain, and to remove most of the revenue gains from productivity from the workforce, these firms were sold, acquired, outsourced, and shut down. They had primarily local workforces.
Some of them, in the high value technical services vertical, could possibly benefit from some of the social media technology, on order to share this highly specialized, hard-won knowledge more effectively. But here are few to no good applications for there technical verticals, yet.
As these Web apps are corporate or blue collar in their application, the VCs have turned a blind eye, although many of these companies have participated in surveys that show that are willing to pay decent annual fees for such SAAS systems that streamline knowledge productivity.
Some of the business social networking out there is laughable - these companies know Nothing about delivering technical services in the field; some of the true specialists that have pitched real, researched web apps with a social aspect for technical services have been laughed off of Sandhill Road for not offering Facebook Apps, or YASN.
Posted by: Alan Wilensky | August 20, 2008 5:28 AM
Bernard, great topic, I'm looking forward to read more from this channel!
I'm working in one of the big corporations and the imminent change is visible, actually my company is doing quite well in adapting to the changes internally. Internal corporate blogs, wikis, social software shift the power to employees by allowing them to share and manipulate information.
I'm also very much interested in the virtual organizations, thinking how to lead and structure work in online communities. I hope you will cover these topics as well, which can trigger interesting conversations.
Posted by: Darek | August 20, 2008 5:53 AM
I am an ed tech coordinator who works in a public school and see first hand how we are not getting the next generation worker/citizen ready for the social media work place. After reading Wikinomics and Here Comes Everybody I submitted a proposal to give a workshop at the Massachusetts superintendents technology conference. Education is one of those large enterprises that will/is facing a "tectonic" shift, as Clay Shirky says.
I will be reading your Enterprise 2.0 post with interest.
Posted by: James Walker | August 20, 2008 6:32 AM
Great post Bernard. You hit the nail on the head with:
Enterprises are all about secrecy, structure and control
Social media is almost the exact opposite. This is a big shift for large organizations. And, the speed of change/new start-ups/new technolgy does not fit in well when decisions are made by multiple(death by) committee's. A culture and structural change will need to occur in many places.
Looking forward to reading more on the Enterprise channel.
Posted by: Mark | August 20, 2008 7:43 AM
Love this introduction Bernard. I agree that there is a whole lot of opportunity and restructuring that's going to occur. It happens more slowly at the enterprise level. Embedded systems and processes are not as easy to switch as a consumer going from Twitter to Identi.ca.
Having worked in big companies, I understand the opportunities that are missed. They either haven't had good ways of tapping into and socializing a wider view of what their employees know, or they haven't wanted to.
Looking forward to these posts, I'm subscribing.
Posted by: Hutch Carpenter
|
August 20, 2008 8:34 AM
This is a very great article. A good perspective view (big picture) of what is happening today and for the next 10 years in our occidentals organizations.
Geoffroi
Posted by: Geoffroi Garon | August 20, 2008 9:48 AM
I'm a Gen Xer within a large organization (the government). I loved this quote, "GenY are not enticed by rigid command and control structures controlled by a generation that does not want to hand over power." I'd say that's true for Gen Xers and a lot of Baby Boomers as well. Any creative person has problems with a command and control structure.
These centralized structures are slowly being undermined, even in government, by the rise of social media. Employees are not stupid and will use tools like YouTube, Facebook, Flickr, etc... to accomplish their jobs. These web 2.0 tools are easier and more effective than what's available in-house. Right now, there's a debate over these tools. Many government agencies ban use of YouTube while others have their own YouTube channels. Some have adopted blogging while others fear it. The most enlightened approach is for agencies to offer guidance and best practices to their communicators, rather than outright bans or attempts to control use of these tools.
Enter
Posted by: joe flood
|
August 20, 2008 10:20 AM
Enterprise 2.0 is indeed coming and coming fast. Large corporations are going to be hit hardest due to the very structure that makes them large. I do think they will still be able to get top talent though because they can just throw money around and entice people that way. Is that a long term solution? No.
Colleges and universities are going to make the change pretty easily, but I am scared to death for K-12 education. The education needs to start there and I have a feeling that it will be the last place for it to start.
Brian
http://www.konnects.com
Posted by: Brian | August 20, 2008 11:19 AM
Bernard - great intro to a really interesting topic.
While the consumer side of Web2.0 gets a lot of press, there are massive efforts underway within large enterprises to try and come to grips with what this new wave of social software means. How disruptive will it be?
I work at one of the small companies delivering these new capabilites to the enterpise and it's truly fascinating to watch the interplay of technology, sociology, paranoia and innovation.
Looking forward to the ongoing conversation.
Dan
Posted by: Dan Short | August 20, 2008 12:57 PM
You say "In 1955, 1/3 of the US GDP was controlled by Fortune 500 companies. By 2000 that share had tripled to 2/3."
The triple of 1/3 is 1, not 2/3 ;)
Posted by: Dan | August 20, 2008 3:37 PM
I think you're spot on, Bernard. Enterprise 2.0 _will_ change the we work over the next few years.
Enterprises need to improve and interact better and more effectively with customers, partners, suppliers, competitors, the community etc etc.
And the new wave of Enterprise 2.0 startups will help these companies help deliver these (we will hopefully be one of them!)
Roll on for more insights into Enterprise 2.0 and spreading the word!
Posted by: Alpesh Doshi | August 20, 2008 3:38 PM
Terrific overview of the changes facing the business focused organizations. There are hints of social activism that I look forward to hearing more about.
The only thing that I don't abide by is the statement "Adoption of social media will be the central theme in that story."
I share the belief that the concept of social media is a false one. Were LP records a social media of the time? Radio? Walkmans?
I look at all as plain old technology. It is nothing new that harnessing technology to your organizations advantage will be the central theme....
Sure the tech changes but mastery and exploitation of the tech du jour is what will give you a an advantage over competitors.
Posted by: sean808080
|
August 20, 2008 4:00 PM
You can paint it any color, so long as it’s black.
- Henry Ford, the Mass Producer
Dear Mr. Ford, Let me paint my car.
- Slowblogger, the Mass Nicher
I agree much with the post. I actually have a writing about it.
http://paragraphr.com/pages/show/42
Posted by: hyokon | August 20, 2008 7:46 PM
This should be a good forum!
Our view is that web 2.0 platforms are taking the internet by storm. New internet technologies, social behaviours, approaches to content creation and business models are changing the way we think about information, collaboration and intellectual property. We marvel at the net-generation’s use of Myspace, Facebook, YouTube and Wikipedia, but how relevant really are these platforms for the ‘serious’ business of work?
It is fun observing the different personalities creeping out of the organisational farmyard when the conversation turns to ‘enterprise 2.0’, or the use of web 2.0 platforms in a private or public sector organisation.
Of Toad, Eeyore and Chicken Little
The first, and most charming, character is ‘Toad of Toad Hall’. Toad is famous, in the book The Wind in the Willows, for his irrational exuberance for shiny new motor cars. ‘Poop poop!’
Proponents of enterprise 2.0 exhibit Toad’s boundless, and slightly crazy, enthusiasm and optimism. They see an inevitable flow of web 2.0 style wikis, blogs, profiles, tagging and social networking behaviours from the consumer realm into the enterprise. Enterprise 2.0 will be demanded by net-generation employees and will act as a catalyst for increased information sharing, collaboration and innovation.
Then there’s ‘Eeyore’ who, in the Winnie the Pooh stories, is famous for his despondent outlook. Eeyore sees enterprise 2.0 as inherently naïve and sure to stumble upon the harsh reality of hierarchical organisation culture. Not everyone in the farmyard is equal – to mix story metaphors. Eeyore is sceptical about the ability of technology or software platforms to cut through structural and cultural barriers to collaboration. Eeyore sees collaboration as an un-natural act between non-consenting adults in the harsh competitive corporate world.
Even more negative is ‘Chicken Little’, famous for her hysterical, and ultimately mistaken, belief about an impending disaster in the fable The Sky is Falling. Chicken Little sees enterprise 2.0 as creating security and operational threats and risks much greater than the speculative benefits of social networking. Risks include network penetration, authentication, data ownership, disclosure of sensitive data, publication of unauthorised positions, proliferation and integration headaches, problems archiving and versioning information, identity theft and general time wasting. Phew!
Who is right?
It is not obvious which of Toad, Eeyore or Chicken Little offer the right perspective on enterprise 2.0. The ‘right’ view, of course, depends a lot on the type of organisation, or part of an organisation, you are working in and the type of work being done.
The primary purpose of enterprise 2.0 platforms is to lubricate the social networking effect of collaboration to stimulate knowledge sharing, idea exploitation and innovation. This begs the question, “to what extent does an enterprise need, or desire, this lubrication?”
‘Open’ and ‘Closed’ organisations
Ovum has developed a framework to assess the receptivity of organisations to enterprise 2.0 platforms. Factors include: pressure to develop new products and services, customer/stakeholder intimacy, inter-relatedness with other organisations, reliance on creative processes to solve novel problems, the culture of abundance, brand and reputation flexibility, data anonymity and intellectual property openness.
A large financial institution or public sector service delivery agency, for example, may have a relatively closed social character in terms of web 2.0 thinking. It seeks to optimise and control a mature set of products and services. It manages a range of serious brand, data security and compliance risks. An over-riding efficiency bias means that staff often see opportunities for promotion through the lens of internal competition – typically in a near constant climate of budget squeeze and restructuring. Such organisations are more into tuning for efficiency and predictability than lubricating for innovation.
A creative design studio or public sector policy agency, on the other hand may have a more open social character – seeking to solve novel problems, manage complex interactions with many parties and harness creative energies. There is typically little at risk in terms of customer data or brand sensitivity. Staff see an abundance of opportunities in the creative and policy industries and network widely to do their work and develop their professional careers.
These two examples illustrate the extreme ends of a continuum upon which any organization can be placed to examine the extent and nature of its social interactions – its ‘social character’.
Beauty is in the eye of the beholder
Some organisations are inherently ‘anti-social’ in terms of enterprise 2.0 platforms and welcome Eeyore and Chicken Little with open arms (legs/wings?).
Others are happy to have Toad blundering about the place with his wild enthusiasms if he acts as a catalyst for a bit more energy, creativity and innovation.
We can’t really have a proper conversation about enterprise 2.0 until we start to frame it within a more structured understanding of the social character of individual organisations, and the functions they perform.
Posted by: Steve Hodgkinson | August 20, 2008 10:18 PM
You're right when you say the big companies need to redefine themselves. It's proved by the recent study conducted by Andrew Mc'Afee. He proved that Enterprise 2.0 technologies represent huge opportunities for becoming more competitive.
Enterprise 2.0 brings new emerging trends, like Project Management 2.0 . Tools like Basecamp, or Wrikebecome more and more popular as users see the potential of becoming more productive at almost no cost in them.
Posted by: Alice Mc'Lane | August 21, 2008 12:52 AM
I definitely agree that most of the very traditional companies will have the biggest problems. The more hierarchical the company is the more repulsive the top management will be in internalizing this new innovation which will disrupt their hierachrical structures which are the same as in Roman times. But for innovative companies with more modern matrix organisation form is the advantage to accept that trend which is broad be early adopters to smaller teams. This will not bring the major competitive advantage compared to a big move in the compoany strategy but opens the possibility to adapt the new trends slower but with lower risks for the top management which is one major point for them to accept the new evolution.
Well, 2/3 of GDP by big companies. I remember that Microsoft only is responsible 1-2% of the US GDP...
Posted by: Michael Altendorf | August 21, 2008 1:40 AM
Dan(#10) thanks for the math correction.
Steve (#14) I love the idea of a debate between Toad, Eeyore and Chicken Little :-) I actually can do a very good Eeyore voice, even if my temperament tends more towards Toad. Hmm... Got any good avatars? This would make a wonderful YouTube.
Posted by: Bernard Lunn
|
August 22, 2008 4:29 AM
From hierarchy to wirearchy?
Posted by: Jon Husband | August 23, 2008 3:36 PM