Chapter 5

How Business Will Make the Transition

It's far easier for small and medium-sized companies than large ones to change the way they work. The methods through which they interact and stay connected to the marketplace and their customers are easier to change when there are fewer constraints. In contrast, large companies are challenged when making the transition to social business because they have to deal with change on a large scale. People are the primary element of any successful business transformation, and changing people is notoriously difficult. Thus, the larger the business, the greater the difficulty encountered.

The ongoing and seemingly inexorable decline of a traditional industry such as old media continues to be a canonical example of what happens when the ground rules change in an industry fundamentally unable to adapt to new market conditions. In this chapter, we explore some of the more traditional limitations that virtually all organizations face as they realize they have to literally destroy what are often hallowed processes, traditions, and internal institutions. The resulting so-called new normal has begun to seem more and more foreign than most organizations are willing to accept. The shifts of control required by social business are challenging: how we communicate (from point-to-point to social), how we organize (hierarchies to communities), how we create (central output to peer output), and where value comes from (hierarchies to networks).

The old question about the innovator's dilemma has become more urgent as the new business landscape looks increasingly unfamiliar. We now live in an age when historically scarce resources have become abundantly available in seemingly unlimited quantities: new ideas, existing knowledge, productive capacity, and access to an organization's customers and competitors. Conversely, what was formerly abundant is now scarce: broad demand for big-ticket, high-margin, low-volume products and services in the form of large advertisers, big corporate customers, and anything else. Business has become increasingly finely grained, scaled, and oriented around mass customization as opposed to traditional scaling of one-size-fits-all.

Businesses frequently remain uncomfortable about exploring the future in an uncertain and rapidly changing landscape. The feedback cycles of social media are relentlessly real time, affecting every major business function, though some certainly more than others, particularly marketing, customer care, and human resources. One response that occurs frequently is serious discussion about “putting the genie back into the bottle” and reverting to old models for collaborating on and producing work. One of the most famous examples of this was when newspaper magnate Rupert Murdoch decided to ignore new Internet business models and require that many of his news outlets charge for access to their Web sites, despite the fact that companies like Google were much more successful in monetizing in entirely new ways with advertising and other indirect fees.¹ Industries directly in the firing line of social media, including Hollywood and virtually all media, have been exposed to profound disruption, such as when Amazon decided in 2011 to directly connect authors with its global online publishing network, cutting out publishers and editors altogether.²

Responses like these are near-desperate attempts from fading industries deeply affected by changes brought about by the digital revolution. These efforts are usually misguided, shortsighted, and insufficiently imaginative. These periodic debates also show the future of social business and the need for effective vision and transformation.

Old media have felt the impact of social media, and the software industry has been dramatically affected by open source (software peer produced by global communities). Other industries are lining up for similar disruptions, including most industries involved in services and knowledge work that can be recast in social business terms. In the near term, these include financial services, education, information services, consulting, and most administration and government. Over the longer term, social business will transform most human activity. Ultimately everything that can be social will be social.

Next-Generation Business: Open, Social, and Self-Service

How do businesses cross the divide between the traditional business era and the social business era? An example of how foreign yet novel these new ways of doing business will be is the story of reCAPTCHA, a service that puts brief, hard-to-read text snippets on forms in Web sites so that users can prove that they are really humans and not spammers or bots. The service was designed to process the several hundred million online verification forms that are filled out every day around the Web. The creators of the product soon realized they had unintentionally “created a system that was frittering away, in ten-second increments, millions of hours of a most precious resource: human brain cycles.”³ In response, they pivoted the reCAPTCHA service to tap into a huge reservoir of highly cost-effective labor to tackle enormous problems. Turning individual work into collective productivity, the system started using images from failed optical character recognition (OCR) jobs in its human verification tests (the text displayed is actually scanned from a printed source).

reCAPTCHA subsequently went on to digitize over a century of newspaper and print archives from the New York Times and plans to accomplish far more going forward.⁴ Businesses that employ OCR correction staff and compete with this service are at primary risk for disruption if they don't change their methods. This seemingly limitless and free source of mental and physical effort (both recognition and keying) has been harnessed by reCAPTCHA at virtually no cost. The service taps into community output—the community of all Web users. reCAPTCHA doesn't actually control its own product; its partners that use its badge do, thereby contributing their users and delivering shared benefit to all involved. This loosely shared cooperative partnering using the network is a simple yet powerful example of the enormous scale and value possible with social business models.

In the social business era, successful organizations will be open to participation, tapping into far-flung communities and social networks to accomplish work on larger scales than they ever imagined. In the process, they must overcome organizational, cultural, structural, legal, and regulatory barriers and rethink how business gets done.

What Social Business Consists Of

Emerging new institutions—social businesses—will look very different from most organizations today. They will derive power and value from deep integration into the lives of both the people and businesses they touch on, not from a large centralized market presence. Think of reCAPTCHA as the twenty-first-century organization: deeply networked to millions of partners, highly participative by enlisting millions of participants, and both delivering and providing value in an integrated and profoundly connected way.

A social business consists of three unique and critical aspects:

1. It creates and delivers most of its value over the network, usually indirectly (not centralized production, but peer production).

2. It consists of a loosely coupled entity—usually a very large number of customers and suppliers who have as much control over outcomes as any other part of the business.

3. It has effective strategies to take advantage of the new balance of abundance and scarcity, along with greatly reduced dependencies on the old balance.

Social business models and operating structures are tuned to operate smoothly using the post-Great Recession resource-and-demand landscape.

Self-organizing peer production is the motive force, network effects are the new market share, and social power structures are what drive businesses forward, becoming perpetuating communities of self-interested, like-minded individuals. Figure 5.1 depicts these changes, including the series of major shifts taking place in the consumer and business landscapes today. The premise is that organizations must begin organizing differently to embrace these trends and remain successful. We believe that operating like a social business is at the core of many of the changes required by companies to thrive today and avoid disruption.

Figure 5.1 Societal and Economic Shifts Leading to Social Business

Putting aside for now the legal, societal, and cultural impacts and challenges of all this (barriers explaining why the transformation to social business has taken so long, despite the Internet having existed for decades), let's focus on the business side. The new business landscape will still take a half-decade or more to arrive, and these drivers explain how markets will get there:

• Strategic control over peer-produced community data drives market dominance. The irreplaceable value of the social business economy is high-value information. It is the currency of the realm on the network, which will always route to the best source. Only the richest and most up-to-date data sources will have market dominance, and they will have inordinate market power as well. Traditional companies greatly undervalue and underexploit their vast data assets today. In contrast, social businesses can't and don't. They relentlessly use these assets to their advantage as a high-value revenue stream, monetizing it in ways their communities and their own organizations benefit from.
• Peer production is the most efficient and richest source of value creation. Centralized production is inefficient and less optimal compared to social business methods. When you can tap into the vast capabilities of the global populace for mutual benefit, delivering it through a central production route is not competitive for most purposes. Networked resources will almost always greatly outnumber whatever classic business processes can bring to bear. The traditional means of enlisting contribution (employment) won't work; something new will be required.
• Social power structures are the means of self-organizing and governing. Organizational hierarchy remains in place to set business goals and objectives, but social models are leveraged as effective and efficient ways to run organizations. Work itself, however, takes place through community-based relationships that drive business activities and objectives forward. The commercial and community motivations that have made open source software so successful as a productive model based on social power structures serve as powerful examples of how this is taking place. Many others are presented in this book. With the adoption of social business, a full range of social business models will be involved, from internal social collaboration to customer care communities.
• Mass self-servicing of market niches achieves the highest economic scale. Social businesses will use self-service as their primary means of interaction with the market, whether integrating with open data or letting customers and partners distribute their functionality to the far corners of the world. Google's industry-leading AdWords online advertising service is a great example of this, offering incredibly detailed control to a wide spectrum of customer types, all without human intervention on the company side.
• Cloud- and ecosystem-based open supply chains are the basis of growth and agility. Social businesses will literally be distributed along the edge of the network in the cloud, becoming both a volume supplier and a consumer of others' best-of-breed services. Social business will build on other best-of-class and trustworthy social companies and noncommercial communities, building a vibrant and deeply meshed supply chain ecosystem while carefully exposing and protecting strategic data.
• The ability to dynamically adapt and rapidly respond to the current needs of the cloud is vital. Because of the self-organizing aspect of social media, change will be more rapid and unpredictable than in the past since it will often be led on the community side. People in social business ecosystems will make decisions and change course, affecting businesses and customers much faster than traditional business models do. Success requires designing for low levels of central control and enabling highly fluid evolution and development based on near-real-time market feedback.

How Social Businesses Will Emerge

So far we have painted a high-level picture of how the business landscape will become transformed over the next decade or so. However, for some protected and highly regulated industries, it may take longer than expected. There are macrotrends that also affect how social businesses will either emerge from the successful transformations of existing organizations, or grow as successful start-ups. These trends will have a direct impact on how successful an existing organization will be as it tries to become a social business by design:

• New resource constraints. Today's economic baselines (the Great Recession, green business models, and peer production, for example) require organizations to find new ways of accomplishing goals using fewer resources. This includes identifying the means to capture opportunity and transform in-process business activities using newer, more efficient models. Social businesses will need to effectively link information technology and operations much more so than in the past to accomplish movement to this new baseline. Only certain inputs, such as access to traditional workforces or centralized business infrastructure, are constrained. On the output side, abundance is increasingly produced in such great quantities that it would overshadow shortcomings in the business side.
• Sustainable value moving from business transactions to relationships. This represents the growing realization that the traditional business transaction as the core source of organizational value is diminishing. Value now comes from relationship dynamics, so it's more important to have community capacity to create on demand than it is to have stocks of inventory or knowledge, which quickly age and become irrelevant. The relationships and their ability to produce what is needed in the moment matter more in a fast-moving, real-time marketplace. Among the many implications are using new management methods (for example, from top-down command-and-control to community curator and facilitator), tapping into new reservoirs of innovation, adopting new ways of interacting with customers, or driving better tacit interactions. The tenets of social business will ultimately enable organizations to accumulate deep reservoirs of relationship capital.
• Industries in flux with new ones emerging. Previously stable industries, such as finance and media, are feeling the pinch the strongest, but most others will be disrupted as well. The Great Recession has created a bigger gap between healthy and unhealthy businesses, while many industries are being unbundled or transformed into new ones (for example, software as a service and cloud computing, or the rise of crowdsourcing competing with outsourcing at the low end). Today's dynamic Web-driven global knowledge flows and agile online models for computing and collaboration—as well as economic and intellectual production—are now a leading change agent.
• Moving from change as the exception to change as the norm. The world is already seeing faster consumer behavior shifts, quicker pricing changes, more rapid product cycles, and faster media feedback loops. This can lead to more extreme market conditions, but it also opens opportunities to be turned into bottom-line impact for organizations that can adapt to market realities quickly enough. The network is the culprit (and solution) for much of this. We now have pervasive social media instantly transmitting and shaping cultural phenomena and faster financial cause-and-effect in the markets, real-time online markets, and so on. Following a plan is increasingly less important than responding actively and effectively to change.
• A shift of control to the edge of organizations. This has been accurately predicted at least as far back as the Cluetrain Manifesto, which said that because of a direct result of the user-shaped Internet, “markets are getting smarter—and getting smarter faster than companies.”⁵ It's not even really a shift; it's more of an addition of a new dimension to how business operates organizationally and is the hallmark of social business. This new addition changes the dynamics of where useful information comes from, how decisions are made in an organization, and how more autonomy and self-determination will be needed—and tolerated—in modern organizations to meet more dynamic and changing global workplaces comprised of communities instead of traditional employees.

Putting together all of the concepts that have been presented here so far into a strategic plan to redesign an organization can seem like a daunting task. Multiple forces are competing for change today. A vast legacy landscape of existing business models, customer needs, learned behaviors, and instilled culture must be overcome. Fortunately, a large part of the early transition to social business is not only incremental but naturally complements what most organizations are already doing today with their early forays into social media. Whether it's social marketing, social customer relationship management, social collaboration, or social product development, getting started is not the big challenge. The real challenge is acting strategically enough to matter.

Part One has presented a number of successful social business case studies that have illuminated key strategies, as well as the proposition that organizations will have to change in order to transform how they engage the marketplace, produce output, generate revenue, and even define their very existence. In Part Two, we take a much more detailed look at the specific techniques of social business, how they are effectively used, and how to be successful at applying them in a large organization as part of a strategic change management process.