If you could change the culture at a traditional organization. If you could get everyone connected? Would that transform you into a networked organization that is able to compete with ones that started as Networks from the outset?
Many think so. I don't.
Even if you have done the impossible and made the cultural shift, (See Part 1) even if everyone is connected, even though you are really listening to your customers, even though your suppliers are connected, even if you focus your business on the general good, if you still use the traditional business model, you have to fail.
It's all about how the traditional model scales. Let's look at a few examples.
Holiday Inn's core process is selling commodity hotel rooms. It sells a transaction. All that use this model sell a transaction.
As the chain grows, the balance sheet, the managerial complexity and the social friction grow until they set a limit to further growth.
The reasons for this are that in this model, direct costs rise in tandem with the size of revenues. You can easily double a $100 million business but not a $5 billion dollar business. There is a natural ROI limit set by the model. Worse, in this model, the managerial and social friction rises exponentially whereas the business grows in a linear way. It's like having more children. 2 babies are not twice as complex as one. 4 babies is not 4 times more complex. Social complexity scales in a non linear way. So 10 hotels in one state is a complicated managerial task. 5,000 hotels situated globally is very complex and is beyond the capability of the human to grasp. 200 employees drives a social environment where social friction is manageable naturally. 5,000 demands many rules. 50,000 demands an oppressive bureaucracy.
All these forces set a limit to natural growth. Many now are in the end game.
The end game is this. Business today is judged by ROI. As traditional business reaches the system limits, they have 3 options for continuing growth. They have to acquire another organization and rationalize the costs. They have to squeeze the employees and the quality of the core product or process. They have to capture the regulator and shut out competition. This in turn ultimately sets a limit which we see in many sectors today such as Banking or Automobiles. There is very little room now for more acquisition. So every effort is being made to squeeze the employee, the quality and the regulator.
Let's scan a few other sectors to see the universality of the scaling problem.
This is why the New York times is stuck. In this model news is a commodity that sells advertising. The core process of the NYT is the production of the paper. Not just the press itself with all its capital costs and the costs of distribution. But also the work that is devoted to serving this process. The deadline. The editing. The staff. The control. These costs and this friction are embedded in the process. So long as the NYT prints a paper, it cannot compete with the new entrants who don't.
It's costs are all driven by this core process. These include its direct costs and also all the friction costs of centralization and standarization. Also the costs of being slow and stupid which are a product of size.
It's the same in Tech and Code when the organization uses a proprietary process that makes all the labour involved into a commodity. A good example of this is Microsoft. Microsoft builds all its own code using an industrial process. So, it has armies of staff/serfs that have to be managed and housed. Updates become more and more complex. Managing the complexity becomes more and more overwhelming. This industrial approach to code cannot compete with the network model where the coders have a relationship and an ownership.
So I ask, how can MSFT open up its code? Would it be technically possible? Could it change the relationship with coders? I doubt it.
Now let's look at non profits. In education today, the model is to sell seats in a classroom. In healthcare, it is to sell transactions such as a pill, a test or a process. Vast costs are connected to this transactional model that has little to do with the real needs of the "customer". Education and health care costs have risen faster than in any other sector of the economy. And what have been the outcomes? Are people being better educated? Is health on the increase?
And what about the food system? What about government services?
Now look at what is coming. Here we see how the new model works and how it must defeat the old.
It's all about how a network scales versus a machine.
Airbnb can scale its available rooms infinitely and while doing so improve its ROI.
In the new model, as scale increases so do revenues but costs and friction do not increase in tandem. Revenues increase in a non linear way. Costs and friction in a linear way. ROI improves all the time. This is because nearly all the capital is supplied by the rentees. None of the rentees need to be "managed" all they have to do is to obey the network rules. Margins increase with growth.
Friction in the organization remains very low as almost no one needs to work with another or be managed directly. The system is held together by a few protocols not by millions of rules.
So it can scale almost infinitely. As it scales, the benefits for all increase. As it scales, the quality improves.
More and more users experience how well the system works. This experience drives more business. More and more owners make a living too and their success attracts more rentees.
In this model, everyone does well not just Airbnb. Airbnb distributes wealth to all parties.
Airbnb is a good example of the new business model that we see all over the place now.
Online news sources such as Huffington Post can scale in the same way as Airbnb. Using a true network model, HP has none of the scale limiting processes that are tied to the NYT paper. It has a fraction of the staff and running costs. It has small production and distribution costs. It has a tiny effort in editing.
So it can scale almost infinitely. With lower core costs, it can make money as online attention rises. It offers writers a platform to build a name on. It offers readers an infinite and current news space that can meet the need of the most esoteric.
The best code is now written for truly networked brands such as Wordpress. Wordpress has thousands of programmers that are not on the payroll. So long as they abide by the network rules, they can make a good living. They do not need to be managed. The massive complexity of code as it scales is coped with by having such a distributed system.
So the overall quality of the WP system grows over time, thus driving more market share and so more programmers. It is a virtuous cycle. Everyone wins. The user gets a better and better site. The programmers get more opportunity and Automattic makes more and more money.
History is rhyming.
Just as the industrial model beat the artisan because it scaled better. So the network will beat the industrial. It too scales better. The irony is that it brings back the artisan in a new context.
The issue is always scale and who benefits economically.
Think of a single person potter or programmer. As a single skilled artisan, your opportunities are limited to the hours of your day. On your own as an artisan you cannot compete with the industrial model. This is why most businesses like this died off.
What Airbnb and Automattic are doing in the 3rd diagram is that they are connecting up NOT EMPLOYEES BUT ARTISANS.
They are enabling what was small, personal and skilled to get power from being part of a larger network.
In such a network, the coder, the appartment owner, still have immense freedom. They do have to obey the network rules but how much they earn is largely up to them.
The traditional model is truly feudal by definition. You can't ask the Barons to give it up. They can't. We are wasting our time with them.
I focus on my own life, on people who have made the change in themselves and on new organizations that have the new culture and the new model.
Our collective future depends on speeding up their success.