On Structural Change, Part 4

The Paradigm Shift: Looking at the old familiar through a new lens

First, we've seen a significant change in the organizational paradigm that defines our lives - in the early 20th Century world of relatively static hierarchies, we could reliably predict that five years from now, much would be the same in our fairly structured and controlled lives. Any changes that did occur would be evolutionary. Not anymore. Today we face a world where dynamic networks hold sway, where life has become more and more unstructured and unpredictable. Change has become emergent, we don’t know where the next change is coming from, but we know it's coming. We’ve become more reactive to what we see happening around us, placing a premium on observation, analysis, and information processing and organization.

As for our economy, in the first half of the 20th Century, we counted on a large industrial base to provide the engine for economic growth. Smokestack industries made heavy equipment and headlines. With the advent of the transistor and the integrated circuit in the 1960s and 70s, however, the Information Age was begun and the transition was underway to an economy more characterized by IBM and Microsoft than US Steel and Ford. But now we've moved even beyond those times, shifting from that older Information Age to the new Network Age, where companies like Google and Apple drive the discussion of how the Internet and mobile access with devices like the iPhone will change our lives in the coming years.

How has this transition affected power and control? While it still holds true that core players act as insiders to attempt to set an agenda and drive mass consumption, we see more and more power shifting to the players out at the edge, where networked consumers increasingly determine exactly what they want and when they want it. While "hits" and "blockbusters" are still much in the news, they hold less sway; we now have more independent markets. Where we once had a nation that watched the same TV shows and listened to the same Top 40 songs, now we have niche markets of YouTube viewers and iTunes users, who load their iPods with exactly what they want and consume it on their own schedules. While we may still hear discussion of American Idol, "What's on your iPod?" is more likely to be heard than "What did you think of Sienfeld last night?" We have incredible freedom of choice, from customized Firefox browsers to TiVo watch lists, to NetFlix downloads.

How is the world of business to react to such consumer liberation? Well, starting with strategy, one way to look at things is to contrast two popular games of strategy. The analogy has shifted. In the 20th Century, strategists could be compared to medieval kings, lining up their troops along a battlefront, as in the Western game of Chess, where a variety of moves and countermoves of pieces on squares played to a defined finish, Checkmate or Stalemate. A better analogy for strategy today is the Eastern game of Go, where players compete to cover a map of lines by placing beads on the intersections of those lines, but in this case, the map constantly shifts as alliances and territories transition - the game goes on without end, with the winners fading in and out.

The premium in society and business may always have been on innovation, coming up with new ways of doing things, but where before it took years or even decades for dramatic change to occur, now that cycle has shorted to months and years. The impact of such churning cannot be underestimated. Where once we stood on terra firma, we now stand on a shifting deck underfoot; we all need to find our sea legs.

The world of production has changed dramatically as well. Where high production costs in the 20th Century once led producers to invest heavily in planning, centralized production facilities, and complex distribution strategies, now, digital products enjoy next to zero cost of reproduction and distribution - the tables are turned. Consequently, one new strategy is to rapidly gain market share by introducing products in the beta stage of development, followed by further changes and price drops along the way. Another is to start out offering a service for free and then move the other way, charging a nominal monthly fee after the customer has grown accustomed to the service (i.e., the freemium model as practiced by Web 2.0 companies). Producers now must stress flexibility and local customization in order to compete for customer attention in crowded marketplaces.

And what about financing? In the old days, even into the 1970s and 80s, large companies relied on bank loans, small companies on SBA loans, and credit was tight. Lenders could loan money on prudent risks and count on stable markets with long depreciation and product life cycles. But as the supply of money increased, lenders became more competitive and aggressive, and there was a shift to venture capital - in the old days of first the Information Age Boom and then the Dot Com Boom, the VCs took risks and many enjoyed big hits. But following the Dot Bust, investors became more conservative and company founders faced a drought of financing alternatives. They learned the virtues of self-reliance, eschewing financing that diluted ownership in the hopes of a big exit, whether buy out or IPO. They turned their focus to new 21st Century Internet models, which saw them keeping their costs radically low, maintaining ownership and control, and working first on gaining a loyal following and revenue based on such new concepts and tools as the Long Tail and social networks like MySpace and FaceBook. Instead of getting millions from a few investors, start-up entrepreneurs could get a few dollars from millions of consumers, while retaining ownership and control of their businesses.

Finally, back then, both risks and risk management were different. Businesses tended to rely on expert opinions and long-term plans, and while taking big risks, they did so under what they perceived were much more controlled conditions. They took calculated risks and could afford to wait for their payoffs. Now, cycles are shorter, conditions are less predictable, and the nature of risk has transformed. The perceived risk in the heady days of the Dot Boom was missing the boat, so fools rushed in. But hindsight indeed proved to be 20/20, and the real risk turned out to be investing real dollars in business plans based on false premises. As fundamental assumptions proved wrong, billions in investments were lost. Once bitten, twice shy, investors first withdrew, then learned to look closer at concepts like the Wisdom of Crowds and portfolio management. We understand better the benefit of feedback loops that enable smaller, more incremental risks to test the market and provide more information, which in turn lowers risk and enables further investment. Risk will always be present, but alternatives for risk management have become more sophisticated, given our lessons learned and the potent new tools that risk managers have at their disposal.