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What will power next-generation businesses?

The ongoing and seemingly inexorable decline of traditional media continues to be the canonical example of what happens when the ground rules get changed in an industry that is fundamentally unable to adapt to new market conditions. A great analysis recently posted by Umair Haque at Harvard Business underscores the point: The so-called new normal is starting to seem more and more foreign the deeper we go into the 21st century than most organizations may yet be willing to believe.Here's an exploration of what will likely drive forward next-generation businesses in the 21st century.
Written by Dion Hinchcliffe, Contributor

This is a new Internet-powered business landscape. Self-organizing peer production is the motive force and network effects are the new market share. The ongoing and seemingly inexorable decline of traditional media continues to be the canonical example of what happens when the ground rules get changed in an industry that is fundamentally unable to adapt to new market conditions. A great analysis recently posted by Umair Haque at Harvard Business underscores the point: The so-called new normal is starting to seem more and more foreign the deeper we go into the 21st century than most organizations may yet be willing to believe.

The old question about the innovator's dilemma has become more urgent as the new business landscape looks increasingly unfamiliar: We now live in an age where things that were historically scarce are now available abundantly -- at least on the network -- in seemingly unlimited quantities (new ideas, existing knowledge, and productive capacity, never mind that all your customers and competitors are there too), and what was formerly abundant is now scarce (broad demand for big ticket, high margin, low volume products and services in the form of large advertisers, big corporate customers, or anything else.)

Denial is also not just a river in Egypt in this discussion. The reality is that businesses are often very uncomfortable about talking about their future in such an uncertain and rapidly changing landscape. There's even been serious discussions recently about "putting the genie back into the bottle." This includes otherwise shrewd business leaders such as Rupert Murdoch suggesting they seriously explore charging for online news in an attempt to roll the clock back on their industry and put pay walls back in place.

Moves like these are desperate measures from shrinking, even dying, industries that are breathtakingly misguided while also being insufficiently imaginative in their response, to put it somewhat mildly. These periodic debates also show us the future of our own corner of the business world and the need for effective vision.

Next-Generation Businesses Powered by Open APIs, Social Computing, Self-Service, Open Data

But it's the monumental misunderstanding of how the network actually functions and creates value that is the more serious error here. This is not to say, however, that the new business models of the Web are completely understood either, or that there's a straight line of travel that we can take to adopt them. We still have much to learn about how the global economic cornucopia that is the Internet really works and yet the broad outlines are indeed steadily emerging. More specifically, organizations on the front line of this transformation of the business landscape right now actually do have some options today as we'll see.

Related: Twenty-two power laws for the emerging social economy.

Haque himself has an interesting set of suggestions for the media industry in his Nichepaper Manifesto. It's a set of perspectives and strategies that every industry will have to adapt to theirs if any part of their business model competes with free. Because, in the Web 2.0 era, free is seemingly equivalent to whatever the network can reliably peer produce, which appears to be almost anything these days.

Are businesses focusing on what really matters?

In an age when traffic and visitor counts seem to be the metric everyone cares about, the crux of the problem seems to be a question of this: The actual item being created by the majority of online businesses today are worth a great deal only in terms of low-value customers. In other words, next generation businesses must scale up dramatically if they are to repeat the value levels of old. These newly emerging business models are thus terrifyingly efficient in comparison -- at least from a competitive standpoint -- yet the economics don't seem to make sense at first. If there is a conundrum wrapped in an opportunity here, unraveling this knot is where it lies.

How then do we get across this divide? Clearly, new competencies must be acquired that can respond to today's market forces: Relentless commodotization of information supply, costs to create outputs collapsing towards zero (at least for knowledge-based inputs), and rampant product abundance dividing demand into countless tiny and seemingly unreachable channels and markets. Social media and user generated content is doing this to media, open source is doing this to the software business as well, crowdsourcing is taking on the rest, and if your business depends on the value of information as a product component in any way, you're in the firing line too.

An example of how foreign yet novel these new ways of doing business will be: I was studying the story of reCAPTCHA the other day and was stunned to learn that the little text snippets we type into Web sites to prove that we are really human are actually doing useful, productive work. The company takes the 200 million online verification forms that are filled out every day around the Web and uses them as correction for failed OCR jobs (the text displayed is actually scanned from somewhere). The creators of the product realized they had unintentionally "created a system that was frittering away, in ten-second increments, millions of hours of a most precious resource: human brain cycles." No longer, they tapped into a huge reservoir of highly cost-effective value that can tackle even enormous problems. The result is a business we can barely recognize with potential we can clearly see yet struggle to fathom.

Now the service is digitizing over a century of newspaper and print archives and will be able to accomplish far more in the future. If your business competes with this service in any way, you'll have your work cut out for you. This seemingly limitless and free source of mental and physical effort (both recognition and keying) has been acquired at virtually no cost. But the essential point is they also don't really control it, their partners that use their badge do -- thereby contributing their users -- and everyone gets shared benefit from it. This loosely shared cooperative partnering on the network is a simple example of the enormous scale and value possible with 21st century business models. More to the point, there are parallels in seemingly every business when you take a close look.

An Analogy Not Far From the Mark?

In one (increasingly not so) extreme version of this view, the advent of the Web has had the effect of a massive asteroid impact to the classical business ecosystem. This has triggered a still-ongoing and just-ramping up global extinction event as the old environment changes radically. Only the hardy species isolated from its effects or the successful adapters will survive. The resulting Internet cloud that has been kicked up now almost completely surrounds the original inhabitants and is relentlessly starving them of the nutrients they used to thrive on. This is caused by newly emerged "gazelles" (Web companies in this analogy) and other much more nimble and resilient alternatives (communities) on the landscape that can do what the dinosaurs could do for a fraction of the cost and effort, driving the value right out of their food chain.

But enough with the over-used dinosaur extinction metaphors. What does this actually look like? What exactly are these putative next-generation business models? How do they create real value for customers and shareholders by generating growth, revenue, or other value in some form? Hint: These businesses will only not compete with the corporate giants created in the 20th century but define success on completely new terms that the old businesses just can't relate with or even respond to meaningfully.

For the sake of giving these new institutions a name in this discussion, let's call them edge businesses. The word edge here means that they are not large, monolithic organizations, at least not in the way we regard them today, though we'll still have the habit of thinking of them that way. Instead, they will be deeply decentralized. Most of their power and value will come from their profound integration into the lives of both the people and businesses that they touch upon and integrate with, and not from some large centralized market presence. Again, think of the reCAPTCHA example.

What does a next-generation business consist of?

An "edge business" seems to have several new unique and important hallmarks: 1) It creates and delivers most of its value over the network, usually indirectly (i.e. not centralized production), 2) it consists of a loosely coupled entity of partners comprised of (usually very large number of) customers and suppliers who have as much control over outcomes as any other part of the business, and 3) they will have effective strategies to take advantage of the new balance of abundance and scarcity, along with greatly reduced dependencies on the old balance. In other words, their business models and operating structures are tuned to operate smoothly using the post-Great Recession resource and demand landscape. The trick of course, is to understand what those new resources and demands are and how to tap into them.

And it's this new balance of resources and demand that companies, if indeed they resemble such entities, will need to completely attune to in order to thrive. Let's not forget the context here: This is a new Internet-powered business landscape. Self-organizing peer production is the motive force, network effects are the new market share, and social power structures are what drives forward businesses internally and externally, which then become perpetuating communities of self-interested, like-minded individuals.

Related: Reconciling social computing with the enterprise.

Let's put aside for now the legal, societal, and cultural impacts and challenges of all this (indeed, it's one big and unavoidable reason why this transformation has taken so long, when the Web came out in 1993) and focus on the business side. Here is an attempt to capture the the drivers of edge businesses:

The value drivers of next-generation businesses

  • Strategic control over valuable data drives market dominance. The real, irreplaceable value of the knowledge economy is high-value information. It is the currency of the realm on the network, which will always route to the best source. Only the best data sources will stand a chance of value extraction and they will have inordinate market power as well. 20th century companies greatly undervalue and underexploit their vast data assets today. Edge businesses don't. They relentlessly use it to their advantage, including as a high-value revenue stream.
  • Peer production as the most efficient and richest source of value creation. Centralized production has value but it's greatly limited when you can tap into the vast capabilities of the global network for mutual benefit. The network will always greatly outnumber your resources. The problem is that traditional means of enlisting contribution (employment) won't work, something new will be required. This leads to..
  • Social power structures as the means of self-organizing and governing. Social models as a more effective and efficient way to run an organization. Like all of this, we don't throw everything out with the bathwater and there is still a key role for hierarchy, but this story is about using community-based relationships to drive forward business activities and objectives. While the open source software project is often looked at as an example (including its tie in with a commercial company to drive business forward in a traditional sense), again a better example of reCAPTCHA or strategies such as the Netflix Prize. The full range of Enterprise 2.0 will be involved here from social collaboration to customer communities.
  • Mass self-servicing of market niches delivers economic scale. Serving the market using online experiences that allow mass customization is the technique here. Google AdWords is a great example of this, offering incredibly detailed control of their product to a wide spectrum of customer types, all without human intervention on the supply-side. Edge businesses will enable self-service as their primary means of interaction with the market, whether that is integrating with their open data or letting customers (again partners) distribute their functionality to the far corners of the world.
  • Cloud and ecosystem-based open supply chains as the basis of growth and agility. The edge business will literally be distributing along the edge of the network, becoming both a volume supplier and a consumer of others best-of-breed services (again, doing it all yourself in the 21st century is a recipe for failure.) Edge business will build upon other best-of-class and trustworthy edge companies, building a vibrant and deeply meshed supply chain while carefully exposing and protecting their strategic data.
  • Ability to dynamically adapt and rapidly respond to the current needs of the cloud. Continuing the emergent architecture discussion of this summer, everything continues to point to highly federated business models that enable highly fluid evolution and development based on near real-time market feedback.

Of course, I'm not representing this as a complete and fully-formed vision yet, just what seems to be happening from what we know today. I do believe this is roughly in the right direction however and it's very clear that the business landscape is transforming in a generational way, even if it will take longer than some think. But these changes will almost certainly happen (indeed, are happening) more pervasively than it once seemed, most likely because it's a more bottom-up and from the side than top-down. And it's happening a day at a time, every day, so it's also harder to directly get a sense of discontinuity as organizations seriously look at adopting next-generation business strategies.

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