The rise of the information & service economy

The information and service economySeptember 5 2007

Bob Glushko and Anno Saxenian

Outline

1. Paradigms of economic change2. The manufacturing economy3. The co-evolution of technology &

institutions4. From niches to riches: the long tail

Paradigms of economic change

Mainstream economics (physics) Perfect competition in free market Price as key differentiator Incremental change, equilibration

Schumpeterian model (evolution) Entrepreneurship drives change Innovation in search of monopoly rents Continuous gale of creative destruction

Kondratiev waves

45-60 year cycles of global economic growth

4 periods: prosperity, recession, depression, improvement

Schumpeterian long waves

Innovation-driven growth: cyclical co-evolution of technology, business models, institutions

1. The industrial revolution, 17712. Age of steam and railways, 18293. Age of steel, electrical & heavy engineering, 18754. Age of oil, automobile & mass production, 19085. Age of information & telecommunications, 1971

Variations in patterns of investment, geography, etc

The age of oil, autos & mass prodn

General Motors earned as much in profits as 10 biggest cos. from France, UK, Germany combined (30 cos. total)

All but two of the world’s largest companies based in US

US cos. produced 50% of world output; this amounted to more than the next 9 industrial nations combined

Oligopoly industry structure: The “big three” auto companies; the oil giants, consumer electronics, food, rubber, tobacco

Mass production and consumption; Big labor (UAW); etc.

Mass production as blind destiny

The size of General Motors is in the service not of monopoly or 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.)

John Kenneth Galbraith The New Industrial State (1957)

Economy is driven by large-scale hierarchical and vertically integrated firms that produce standardized products for mass markets

Ford’s River Rouge plant

Aerial view ofRiver RougeplantDearborn, MI1942

Rouge tool & die works, 1944

The age of information & telecom

How are technological capabilities: Effectively free bandwidth, memory Close to unlimited computing power InternetCo-evolving with new business models?

From hierarchy to networks

Market: spontaneous coordination of self-interested individuals and firms via prices, invisible hand

v.Hierarchy: administrative coordination with visible

hand of management, authority, internal transactions

Networks: organization pattern typified by reciprocal patterns of communication and collaboration, high degrees of information exchange, interdependence

Value chains not firms

Vertical specialization of production, intense inter- firm exchanges of information & collaboration provide flexibility, innovative capacity

Competition is now between entire value chains rather than individual firms.

Restructuring information collection, aggregation, and redistribution in firm, ecosystem

Shift from linear information supply chains to marketplace or hubs; virtual enterprises connect bus processes from multiple firms electronically

Information as a good

Information about goods becomes a good.e.g. bar codes, RFID tags, etc.

As information about location and movement of goods is increasingly available, the boundary between physical and virtual worlds blurs:Inventory and information are equivalent.

New services from aggregation of information about business transactions.

New models of info distribution

Old model of sales in bricks and mortar locationsNew business models exploit intangibility of

information goods; highly disruptiveDirect sales of information goods that can be delivered digitally: music, books, news, movies, software

Peer-to-peer exchange of information goods, services

Other new patterns for creation and distribution:1. Open access, scholarly publishing2. “Software as a service”

Demand or event-driven models

Old model: Forecast customer demand based on past trends, data and then produce and sell

Now use regular and up-to-date information on actual demand and events to drive production

Make-to-order (mass customization)Constrained set of possibilities given modularity, inventory, manufacturing, etc.

Make-to-stock (mass productionn) Engineer-to-order (customization) But, privacy concerns . . .

Loose coupling & rise of standards

Old model: proprietary standards and silosOpen and heterogeneous technological

environment of internet makes business more receptive to standard, non-proprietary models

Loosely-coupled internet architecture with standards allows flexible document exchange and network effects : e.g. use XML documents to define interfaces allows

transparent scalability of business process automation (browser-based tasks become application mediated ones)

Rise of reusable components

Organization, process, architecture, information models being composed from smaller, more common building blocks, providing more reusable, flexible, robust results

Componentization and reuse: agreements on information, context easier to describe and implement using common components

Service-oriented architecture (SOA) derives business models from components defined using web-services: “plug and play” business

From niches to riches

The internet allows companies to produce and sell a far wider range of products than ever before. This profoundly changes both consumer behavior and business strategy.

Amazon’s above rank 100,000 sales

Top 100,000 most popular books

Less popular, not found in bricks & mortar stores (30-40% of sales)

Anatomy of the long tail: supply

Supply side effects (producers, retailers)First order:

Cost: virtual shelf space, made to order production, electronic delivery

Benefit: aggregation of consumers

Second order: Incentives to develop new products increase Restructuring of marketing strategies New intermediaries and industry structures

Anatomy of long tail: demandDemand-side effects (consumers)First order:

Active: Powerful search tools, sampling tools Passive: Recommendation systems, advisers,

dynamic web-based storefronts Combination: Customer reviews, online communities

Second order: Changing consumer tastes and demand patterns due

to exposure to new products Positive feedback within niches from consumer

advisory tools and their users Cultural changes from access to more varied sources

of information

The Long Tail