The Information and Services Economy a.k.a. Business Architecture and Services Science

1. The Information and Services Economya.k.a.Business Architecture and Services Science IS210, Week 5 Profs Bob Glushko & Anno Saxenian UC Berkeley School of Information Fall 2006

2. Emergence of Info and Services Economy 1950-1980: Mass production as blind destiny Assumption 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.)”

3. The Fortune 500 industrial corporations Sales ($B) Share of GNP (%) Jobs (M) 1954 137 37 8 • 445 46 15(3/4of mfg LF) • 1,400 58 16.2 1989 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

4. What changed? • Macroeconomic instability • International competition intensifies • Accelerating pace of technological change Undermines stability required for LT investment and corporate planning: costs fluctuate, consumers unpredictable, new competitors

5. 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

6. “Network” as a metaphor for the current era • Network theory • Social networks, social network theory • Business networks, old boys networks • Entrepreneurial networks • Electrical network, transportation network, digital networks, radio networks • Network economics • Etc.

7. 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

8. 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)

9. 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)

10. 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

11. Organizational design trade-offs complex Hierarchy Network Product Market simple Stable, predictable Dynamic, uncertain Environment

12. Organizational design: info exchange • Market: price mechanism/transaction primary mode of exchange; radical decentralization, limited, unpredictable info flows • Firm (Chandler): formal administrative channels enforce centralizedverticalflows of information, creates silos and subject to severe bottlenecks

13. Hierarchical organization: info access Line employees High Access to relevant information Middle managers Senior managers Low Strategic Operational Information

14. Hierarchical organization: info access Line employees High Access to relevant information Middle managers Senior managers Low Strategic Operational Information

15. Separation of conception & execution LT strategic planning, R&D Upper level managers Technicians and lower level managers Unskilled operatives

16. 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

17. 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.

18. 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.

19. Supply chain as self-similar pyramid Prime contractor Self-similar pyramid across scale Nishiguchi and Beaudet, 1998

20. Fractal link design: a cognitive map SUPPLIER SUPPLIER CUSTOMER supplier customer supplier customer SUPPLIER SUPPLIER Nishiguchi and Beaudet, 1998

21. 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.

22. 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.

23. 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

24. 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.

25. A services economy curriculum • Marketing strategy: competences and capabilities in creation of value, resource advantage theory • Management of cross-functional business processes to support development of capabilities & competences for market-driven organization • Integrated marketing communication • Consumer behavior: relational • Pricing: building and maintaining value propositions, management of long-term customer equity • Marketing channels: coordinating marketing networks and systems • Supply chain mgmt: management of value constellations and service flows