The key to this disruptive innovation is the elimination of friction in digitally connected enterprises: distance collapses, infrastructure becomes pop-up, paperwork goes digital. We can make connections, harness resources and start engaging without ever having to wait for physical stuff to happen first. All of this is summed up in the phrase, 'frictionless enterprise'.
Innovative new challengers have already begun to displace the old guard in industries such as media and retail. Now it's spreading into other sectors including transportation, software, professional services and even banking. Sometimes it can feel like it's sheer chaos out there. But there is an underlying logic that helps make sense of it all and map a path for the future.
What we're experiencing is a fundamental transformation in the nature of the enterprise, brought on by ubiquitous connectivity and pervasive computing. Netscape founder and technology VC Mark Andreessen speaks of software eating the world, but while this is a powerfully evocative phrase, I think the shift goes further than merely supplanting one set of enterprises based on older technologies with a new generation based on software.
In today's connected, digital world, all enterprises of whatever age and size must harness the power of software, not only to run their operations but also to supercharge their connections. This is enabled by the rise of what business guru Geoffrey Moore calls 'systems of engagement'.
Let's not underestimate the impact of this new wave of digitalization: it's huge. We are automating interactions and activities that we would never have dreamed of automating with previous generations of technology: all those social interactions both within and outside the enterprise; all those previously disconnected marketing activities that traditionally caused so much friction as the enterprise went about its day-to-day business.
In the era of frictionless enterprise, these distributed, outward-facing systems of engagement are becoming more economically significant to the success of an organization than the centralized, core systems of record. The change underlying that shift is that, in breaking down the previous barriers to interaction, today's connectivity and pervasive computing are transforming the fundamental dynamics of how business gets done and how enterprises are organized.
Why enterprises exist
Back in 1937, British economist Ronald Coase wrote a landmark article for the journal Economica that defined why enterprises exist. At its core is a very simple notion: that it all comes back to transaction costs. Here's a summary from Wikipedia of the core message of that article, The Nature of the Firm:
The traditional economic theory of the time (in the tradition of Adam Smith) suggested that, because the market is 'efficient' (that is, those who are best at providing each good or service most cheaply are already doing so), it should always be cheaper to contract out than to hire.
Coase noted, however, a number of transaction costs involved in using the market; the cost of obtaining a good or service via the market actually exceeds the price of the good. Other costs, including search and information costs, bargaining costs, keeping trade secrets, and policing and enforcement costs, can all potentially add to the cost of procuring something from another party. This suggests that firms will arise which can internalise the production of goods and services required to deliver a product, thus avoiding these costs.
Today's connected digital infrastructure has completely transformed the economics of those transaction costs, fundamentally changing the equilibrium of the enterprise. Much of the friction caused by time, distance and lack of information has been swept away, forcing a complete recalculation of the cost-benefit analysis that led to the creation of the twentieth-century enterprise.
This doesn't mean that Nobel prize-winner Coase was flat-out wrong. He was a remarkable man, who continued his work as an economist right up until his death last year at the age of 102. His sparse but telling contributions to the economic literature are just as relevant as ever — we simply have to apply them to the changed reality that shapes the new era of frictionless enterprise in the twenty-first century.
Two sets of winners
In today's digitally connected business world, transaction costs have been driven lower than ever before. Many smaller, specialized enterprises will thrive that never could before. But since this is the real world, not some idealized economic model, it is not always cheaper to contract out. Certain types of large enterprise will still be able to leverage economies of scale, provided their internal network is more efficient than the market's. Thus there are two sets of winners in this new era of frictionless enterprise:
- Enterprises can thrive by being smaller and more focused, benefitting from lower external transaction costs that allow them to more easily market a more specialized offering than was ever possible before. They can either target nearby customers more accurately or reach a larger geographic market more cost-effectively: becoming 'global minnows' able to swim with the big fish.
- At the opposite end of the scale, larger enterprises can lower their internal transaction costs, both to co-ordinate and organize their in-house resources and to engage with external contractors. Many will become platforms that specialize in providing efficient networks of interactions between an ecosystem of smaller firms and the markets they address.
Thus the enterprise as a generic business entity is not going away — but the specific enterprise that you personally work for, own or manage might be. To survive in this new age, established enterprises have to rethink every aspect of their operation and examine what parts are no longer compatible with this new, digitally connected world.
There are five key characteristics of frictionless enterprise, taking advantage of those lower transaction costs by eliminating previous barriers to engagement:
- Everywhere: The connected global cloud infrastructure has collapsed distance, making it possible to reach a global market for virtually no cost and to collaborate and interact with others irrespective of geography or time zone. Smart mobile devices allow us to access and collect rich information and participate fully in business activities anyplace, anytime. In the future, the emerging field of robotics will extend our reach even more.
- On demand: We don't have to put plans on hold while we wait to build infrastructure or recruit teams. Self-serve resources are available instantly from the cloud — not just computing infrastructure and applications but business and human resources such as crowdsourced professional services or end-to-end business services. Automated subscription infrastructure lowers the transaction costs of making these services available on highly configurable, responsive, pay-as-you-go or pay-by-result contracts.
- In real time: We no longer have to wait around for paperwork to arrive or for the data to be updated. A globally connected digital infrastructure makes it possible to have the latest information at our fingertips and to take immediate action in response to it. Indeed, our customers, employees and partners increasingly expect real-time information and instant reaction as a routine standard of behavior, and become impatient whenever they deal with an organization that can't deliver it. In the future, innovation in the field of 3D printing — also known as accretive manufacturing — will mean that we can even have solid, real-world artefacts delivered digitally without having to wait for them to be physically transported.
- Change ready: Since we no longer have to wait days or weeks for the latest status, it is no longer sufficient to rigidly plan months in advance. The digitally connected business environment is always changing and therefore the business processes of the enterprise must be able to adapt rapidly and iteratively to that continuous change. This is a huge break from the past and demands smarter organizations that can embrace scalable learning that fosters institutional innovation, as John Hagel and colleagues have written. Machine learning — through developments in data analytics and artificial intelligence — will play an increasingly important role in augmenting enterprise adaptability.
- Collaborative: Removing all those barriers to interaction at the same time as automating many formerly time-consuming processes of information discovery and sharing provide the means to supercharge teamwork within the enterprise. Even more significant is frictionless collaboration at a macro level, making it possible to pool resources, aggregate data, share context and innovate communally across networked platforms. That's why there's no definite article in the phrase 'frictionless enterprise'. Whatever the impact on a single enterprise, it is far outweighed by the impact collectively across many digitally connected individuals, entities and organizations. Frictionless enterprise is the result of the Internet itself becoming a shared global platform for the automation of commerce and of every other form of collaborative human endeavour.
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