The Information and Services Economya.k.a.

Business Architecture and Services Science

IS210, Week 5Profs Bob Glushko & Anno Saxenian

UC Berkeley School of InformationFall 2006

Emergence of Info and Services Economy

1950-1980: Mass production as blind destinyAssumption that economy driven by large firms

(hierarchies)

John Kenneth Galbraith The New Industrial State (1957) “The size of General Motors is in the service not

of monopoly of the economies of scale but planning…and (thanks to) this planning—control of supply, control of demands, provision of capital, minimization of risk—there is no clear limit to the desirable size (of the company.)”

The Fortune 500 industrial corporations

Sales ($B) Share of GNP (%) Jobs (M)

1954 137 37 8 1969 445 46 15 (3/4of

mfg LF)

1970 1,400 58 16.21989 2,200 42 12.5

1970s Discovery that small firms are big job generators 1980s Discovery of Emilian and Japanese model 1990s Discovery of dynamism of Silicon Valley

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

“Network” as a metaphor for the current era

Network theorySocial networks, social network theoryBusiness networks, old boys networksEntrepreneurial networksElectrical network, transportation network,

digital networks, radio networksNetwork economicsEtc.

W. Powell: illustrative cases of networks

Networks in crafts industries Publishing Construction Hollywood

Regional economies and industrial districts Emilia Romagna Silicon Valley

Strategic alliances and partnerships International joint ventures Biotechnology

Case: US auto industry circa 1980

The “Big Three:” vertical integration of production, low trust, arms-length relations with dependent suppliers, cost-minimization as goal. Closed, hierarchical. Insures guaranteed supply, secrecy, low costs in stable, slow

changing environment But overwhelmed when technological change increases,

product cycles shorten, and competition intensifies Inflexibility of tight technological coupling of production No internal ability to innovate due to cost cutting No autonomy to suppliers for innovation, experimentation,

capability building (remain dependent)

Womack, Jones and Roos The Machine that Changed the World: The Story of Lean Production (1991)

Japanese auto industry: lean production

Toyota System: vertical disintegration and long term relationships with suppliers--collaborative risk sharing, cost sharing and information sharing. Flexible, open. Suppliers have autonomy to experiment and innovate Partners jointly improve quality, productivity

Other elements taken directly from Taylor and Ford Benchmarking, design for manufacturability Concurrent, simultaneous engineering Just-in-time-manufacture, error correction and detection Total quality management, etc.

Toyota System relies on “pull” feature for production scheduling (not “push” driven by sales targets)

Network organization of production

Fragmentation of production into distinctive, complementary specialist units (firms or teams)

Information-sharing and joint problem solving across unit boundaries, both vertically and horizontally

Concurrent engineering, iterated co-design Reciprocal risk sharing w/ multiple partners Open search networks and routines; entrepreneurship

Creation of localized ecosystems of specialized skills and know-how that support joint experimentation and learning i.e. Silicon Valley, Toyota City, Bangalore

Organizational design trade-offs

complex

simple

Product

Stable, predictable

Dynamic,uncertain

Environment

Hierarchy

Market

Network

Organizational design: info exchange

Market: price mechanism/transaction primary mode of exchange; radical decentralization, limited, unpredictable info flows

Firm (Chandler): formal administrative channels enforce centralized vertical flows of information, creates silos and subject to severe bottlenecks

Hierarchical organization: info access

Access to relevant information

Low

High

Strategic

Middle managers

Operational

Information

Line employees

Senior managers

Hierarchical organization: info access

Access to relevant information

Low

High

Strategic

Middle managers

Operational

Information

Line employees

Senior managers

Separation of conception & execution

LT strategic planning, R&D

Upper level managers

Technicians and lower level managers

Unskilled operatives

Organizational design: authority

Hierarchy maximizes control by centralizing authority, but limits incentives for initiative

Market maximizes initiative by decentralizing authority, but limits ability to manage complexity

Need for coordination mechanism that provides autonomy provides accountability.

EXIT – VOICE – LOYALTY

Network organization revisited

Network organization: long term informal and formal relationships between specialized teams/ firms provides local autonomy, facilitate inter-unit knowledge sharing, collaboration, and co-design but also provide mechanism for monitoring.

“Studied” trust, not “blind” trust Mutual orientation and co-evolution of network

members without lock-in.

Networks as fractal design

In colloquial usage, a fractal is a shape that is recursively constructed or self-similar, that is, a shape that appears similar at all scales of magnification and is often referred to as "infinitely complex." See below, the Mandelbrot set.

Supply chain as self-similar pyramid

Prime contractor

Self-similar pyramid across scale

Nishiguchi and Beaudet, 1998

Fractal link design: a cognitive map

SUPPLIER

CUSTOMER

SUPPLIER

SUPPLIER

SUPPLIER

supplier customer

supplier customer

Nishiguchi and Beaudet, 1998

The next revolution in interactions

Once firms become more focused they must learn how to manage complex interactions with customers, suppliers, and partners.

Types of work by dominant type of interactions Tacit interactions dominate: fastest growing Transactional interactions: routine, declining Transformational: small and declining share

Most jobs today require both tacit and transactional interactions; key is to build talent based competitive advantage by improving performance in tacit activities.

The 21st-century organization

Importance of “knowledge workers” as innovators--need to increase productivity

Streamline and simplify organizational structures and allow teams of professionals to focus on clearly defined tasks with clear accountability, e.g

Line managers responsible only for current earnings Off-line teams research new opportunities for wealth

creation Develop knowledge marketplaces, talent marketplaces

and formal networks to stimulate the creation and exchange of know-how,

Replace traditional supervision with a combination of freedom and measures of performance.

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 An ongoing social and economic process Inherently customer-oriented and relational Goods as distribution/delivery mechanisms for services

Services-centered model of exchange

Skills and knowledge are the unit of exchange; Knowledge is key source of competitive advantage; Individual customers increasingly specialize and

turn to relationships for services outside of their own competencies;

Promotion is two-way communication process of dialog, asking and answering questions;

Customers are always co-producers of services.

A services economy curriculum

1. Marketing strategy: competences and capabilities in creation of value, resource advantage theory

2. Management of cross-functional business processes to support development of capabilities & competences for market-driven organization

3. Integrated marketing communication

4. Consumer behavior: relational

5. Pricing: building and maintaining value propositions, management of long-term customer equity

6. Marketing channels: coordinating marketing networks and systems

7. Supply chain mgmt: management of value constellations and service flows