Transcript The Information and Services Economy a.k.a. Business

The Information and Services Economy
a.k.a.
Business Architecture and Services Science
IS210
Profs Bob Glushko & Anno Saxenian
UC Berkeley School of Information
Fall 2006
What are services?
 Services: residual category that accounts for
over 70% jobs and value added in economy
 The Economist: “Services are anything sold in
trade that cannot be dropped on your foot.”
 “There are no such things as service industries.
There are only industries whose service
components are greater or lesser than those of
other industries. . .” Theodore Levitt, 1972
 We’re all in services now, more or less . . .
What are information-based services?
 Data and information of any sort can be
considered raw materials, inputs
 In physical form (book) takes great effort to
search, retrieve, store, manipulate, transform
 When digitized, information is:
Easily stored and processed – databank, data
warehouse, data mining
Easily customized, enriched, accumulated, transformed
Easily distributed - infinite scalability
Drucker on the knowledge economy
 Industrial economy: scarce resource is fixed
assets (capital, expensive machinery, tools)
 Knowledge economy: scarce resource is talent:
quality of knowledge & productivity of knowledge
 Growing importance of specialists and
specialized knowledge (v. generalists)
 Shift from knowledge to knowledges: requires
workers to work in teams (v. individuals)
Drucker on the knowledge economy (II)
“The essence of management is to make
knowledges productive.”
 The 21st c. organization will have to put as much
effort into developing talent as to recruiting it
Replace silo-based hierarchies with talent markets
Allow workers to find new challenges & managers
to identify talented people for new roles
 Value of talented people goes beyond
predefined tasks: building brands, relationships,
reputations, and other intangibles (high value)
Industry v. services: a matter of degree
The two worlds or production
Back stage
 Product excellence
and scale
Division of Labor
Standardization
 Limits
 Controlled Product
Process
 Zero Defects
Scale economies
Front stage
 Solutions and
customer experience
1-off: Moment of truth
Seamless interaction &
integration
Proximity to customers
Zero defections
Co-production
Scope economies
Theoretical foundations: the classics
 Economics: Organize in firm v. market
Adam Smith
Ronald Coase
Oliver Williamson
 Production: How to maximize output
Karl Marx
Henry Ford
Frederick Taylor
Alfred Chandler
Adam Smith & the wealth of nations
 An Inquiry into the Nature and Causes of the Wealth
of Nations, 1776
The founding work of “modern” economics and
political economy
Written on the eve of industrial revolution in Britain
 Smith’s main theoretical contributions:
The wealth of nations is a result of increasingly
specialized “division of labor” (pin factory)
The “invisible hand” of self-interest/ the market
insures that the process continues without role for
organized intervention
Ronald Coase “The nature of the firm”
 Coase’s question: Why is there any economic
organization? Why is economic activity organized
into firms rather than by individual proprietors?
For mainstream economists, prices and
markets are exclusive mechanisms for
allocating resources and coordinating
economic activity
When do organizations/ firms supersede the
price mechanism, eliminate market, and allow
“entrepreneur” to coordinate economic activity
Ronald Coase ”The nature of the firm”

Firm will expand until costs of organizing an extra
transaction within the firm becomes equal to the costs
of carrying out the same transaction by means of an
exchange on the open market or the costs of
organizing in another firm.
Why? There are costs associated with using the market
1. Cost of discovering prices (imperfect
information)
2. Costs of negotiating and concluding contracts
for each transaction
Williamson: transaction cost economics

Williamson identifies key dimensions of individual
transactions and maps every transaction to
optimal (most efficient) institutional arrangement

Assumptions
1. In the beginning there were (efficient) markets
2. Bounded rationality: human behavior
intentionally rational but only limitedly (Simon)
3. Opportunism: “self-interest seeking with guile”
(economic agents use strategic behavior to gain
self-interest)
Opportunism: the “hold-up problem”
Classic version: Klein, Crawford, Alchian (1978)
One party makes a relation-specific investment to
transact with another (value is lower, or zero, to
other uses than transaction between those parties)
Impossible to draw a complete contract that will cover
all possible issues that might arise in transaction –
might affect returns on investment
 e.g. Very expensive dies used to shape steel into specific forms
needed for sections of body of a particular car model, paid for
and owned by supplier
Supplier vulnerable to hold-up; the efficient solution is
vertical integration
Firm and hierarchy
Advantage of firm for Williamson:
Hierarchical relationships in which one party has control over
both sides of the transaction and power to resolve disputes.
A Hobbesian solution to opportunism:
Market for Williamson is like Hobbes’s state of nature, and only
possible resolution is through internalization of transactions
within hierarchical structure
Hierarchy: originally, rule by priesthood, heavenly beings; today,
rule by single ruler with control over organization, authority
passed through a series of subordinate rules, and so on
through a pyramid.
Karl Marx on Capitalism
 Karl Marx Capital: A Critique of Political Economy,
Volume 1: The Process of Capitalist Production 1867
 In capitalism, labor power is a commodity that can
be bought and sold.
 Below this surface of free exchange, value is created
through “exploitation” of labor by capitalist.
 Capitalist production: large numbers of laborers
working together to manufacture commodities
 Social nature of large scale production (cooperation)
reveals the “collective power of the masses” &
requires concentration of the means of production
Marx on the division of labor


Manufacture is prevalent characteristic of capitalist
production process
Two-fold rise of manufacture from differentiated
crafts production:
1.
2.

Loss of general handicraft skills via separation and
application to production of single commodity
Specialized division of labor isolates detailed operations,
further reduces breadth of skills
In capitalist manufacture, the detail laborer
converts body into specialized implement; no
longer produces (or able to produce) a complete
end product
Karl Marx and Adam Smith
 Marx studied Smith, was clearly influenced by him
 Marx’s distinction:
 Division of labor in society: means of production dispersed
among multiple independent competing producers, anarchy
versus
 Division of labor in manufacturing (the workshop): means
of production controlled by capitalist authority/despotism
 Division of labor in society exists in many economic
systems, division of labor in manufacture exists only
in capitalism.
 Labor as appendage of capitalist’s workshop
Frederick Taylor: scientific management


Ordinary management: “initiative and incentive”
Scientific management: task management
Scientific management
1. Develop science to replace old rules-of-thumb
2. Scientifically select, train, teach, develop worker
3. Insure all work is done according to scientific
principles
4. Division of labor between management and
workmen: each does what they are best fitted to
Scientific management
 Management’s role: planning ahead according to the
“laws of science”
 Defining the tasks involved in a job, subdivision of labor
 Establishing many rules, laws, formulae to replace judgment
of workers (“one best way” via time and motion studies)
 Tasks must be systematically recorded and indexed
 Requires thousands of pages of scientific data just for an
ordinary machine shop
 Workers: execution of tasks defined by management
 The “science” amounts to so much that the man who is
suited to handle pig iron cannot possibly understand it, nor
even work in accordance with the laws of this science,
withouth the help of those who are over him”
Henry Ford on mass production (1926)
 Mass production not about amassing men and
machinery: failure of pure financial emphasis in
manufacturing becomes evident with labor revolt,
social strife
 Critique of early 20th c. “efficiency movement” with
its time and motion studies: need a wholly new
method
 e.g. Don’t just rationalize pig iron loading by making worker load
47 1/2 tons a day (rather than 12 11/2 tons) for $1.85 rather than
$1.15/day) , but make it unnecessary for workman to carry 106,400
lbs for $1.85/day
 Goal is productive organization that delivers in
continuous quantities a useful commodity of
standard material, workmanship and design at
minimum cost
The principles of mass production
The keyword to mass production in shop is simplicity;
three plain principles:
1. Planned orderly and continuous progression of
commodity through the shop;
2. Delivery of work instead of leaving it to workman’s
initiative to find it;
3. Analysis of operations into their constituent parts.
Importance of consistent quality: small spring leaf
must be identical strength, finish and curve with
millions of others designed to fulfill the same
purpose. Requires automatic machinery, the most
accurate measuring devices, controls, etc.
The effects of mass production (Ford)
1.
2.
3.
4.
5.
6.
Increase in industrial control and engineering
Products of highest standard of quality ever
attained in output of great quantities.
Creation of a wide variety of single-purpose
machines that reproduce skill of hand
Elimination of hard work in the form of wasteful
and laborious burden-bearing.
Growing need for skilled artisans and creative
genius in mass production.
Rising wages for workers, higher living standards
Chandler and the “visible hand”
Thesis: From 1950s to 1920s, the formative years of
modern capitalism, the US saw the emergence of a new
business institution and a business class.
Growth of the “modern business enterprise”
Emergence of new class of salaried managers
 Rise of managerial capitalism; the visible hand of
management replaces the invisible hand of the market
 By mid 20th c. emergence of a relatively small number of
large mass producing, large mass retailing, and large
mass transporting enterprises in which the salaried
managers coordinated production and distribtuion and
allocation in major sectors of the American economy
Chandler’s modern business enterprise
 By WWII modern business enterprise was the most
powerful institution in the American economy, its
managers the most influential group of economic
decision-makers.
 Definition of modern business enterprise:
 Many operating units, each with distinct administrative
office; multi-product, multi-location enterprise
 Units are hierarchically ordered and monitored and
coordinated by full-time middle and top salaried managers
 Traditional American business firm was a single-unit,
single product, single location enterprise, with
individual or small number of owners/ managers,
governed by market and price mechanisms.
What changed?
1. Macroeconomic instability
2. International competition intensifies
3. Accelerating pace of technological change
Undermines stability required for LT
investment and corporate planning: costs
fluctuate, consumers unpredictable, new
competitors
Network forms of organization
Networks: organization typified by reciprocal patterns of
communication and exchange, interdependent
v.
Market: spontaneous coordination of self-interested
individuals and firms via prices, invisible hand
Hierarchy: administrative coordination with visible hand
of management, authority, internal transactions
Not points along a continuum, but a distinct and viable
organizational model with historic antecedents
Fractal link design: a cognitive map
SUPPLIER
SUPPLIER
supplier
supplier
SUPPLIER
customer
CUSTOMER
customer
SUPPLIER
Nishiguchi and Beaudet, 1998
A new dominant logic for marketing
 Marketing in the goods economy: financial
optimization and the 4 P’s
 Product
 Price
 Placement
 Promotion
 Marketing in the services economy: communication
across organizational boundaries
 An ongoing social and economic process
 Knowledge is fundamental source of competitive advantage
 Inherently customer-oriented and relational
 Goods as distribution/delivery mechanisms for services
The core competence of the corporation
“Competitiveness in long run derives from ability to build,
at lower cost and faster than competitors, the core
competencies that spawn unanticipated products.”
 Core competences are collective learning in the
organization—particularly how to coordinate diverse
production skills & integrate multiple technology streams
Sony’s miniaturization capabilities
Citicorp’s operating system for 24/7 operation
 Core competence is communication, involvement, and
deep commitment to working across organizational
boundaries: need to blend deeply specialized and
different types of expertise
Complexity and the economy
Complexity economics as non-equilibrium theory
(vs. standard economics seeks static patterns in
behavioral equilibrium) with nonlinearities and
positive feedbacks: multiple equilibria, increasing
returns, importance of small events.
 Complex systems with multiple elements adapting or
reacting to patterns created by the elements;
 In natural sciences: elements (cells in immune system,
ions in a spin glass) co-create; systems evolve
 Application to economics: human agents become the
elements in the systems (bankers, consumers, firms,
investors) but they do have strategic intent, behavior
Six degrees: science of a connected age
 Why does a large complex connected systems behave
differently than a dissociated collection of components?
 Small disease outbreak => epidemic
 Crickets chirping => synchronization
 Single genes => genetic traits
 How does individual behavior aggregate to collective
behavior? Parts don’t sum up in a simple fashion, but
interact to generate “bewildering” emergent behavior
 The “science of networks” recognizes that “what
happens and how it happens depends upon the
network” which itself has evolved historically.
Paradigms of the economy
 Schumpeter’s creative destruction
Entrepreneurs and technological change as main
drivers of growth
Incentive to innovate: short term monopoly rents,
enforced created by copyrights and patents
Continuous innovation creates losers in a
“continuous gale of creative destruction”
Network effects (increasing returns) amplify costs
 Challenge of continuous displacement of older firms,
products, regions, workers, and inherent inequality
Services innovation
Two kinds of services innovation:
1. Improve services productivity
2. Develop new service models
Service productivity lags behind manufacturing productivity
In 2003 (Indexed to 100 in 1997)
manufacturing productivity: 219
grocery retail, wholesale, merchandise stores: 141
commercial banking: 102
Creation nets
 “Networks of creation” in which hundreds or
thousands of participants from diverse institutions
collaborate to create new knowledge, learn from one
another, and appropriate and build on one another’s
work—under guidance of a network organizer.
Rather than protecting and hoarding knowledge, offer
to others to gain access to broader knowledge flows.
Opportunity to jointly create new knowledge and
deliver innovations to market by collaborating closely
with diverse people/institutions
Not joint ventures or arms-length technology
licensing, but long-term, interactive relationships with
networks of suppliers, customers, specialists, even
amateurs
What comes next?
Transformations:
Wisdom
Experiences:
Knowledge
Services: Information
Goods: Data
Commodities: Noise