The rise of the information

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The rise of the information service economy

• The information and service economy
• September 5 2007
• Bob Glushko and Anno Saxenian

2
Outline

1. Paradigms of economic change
2. The manufacturing economy
3. The co-evolution of technology institutions
4. From niches to riches the long tail

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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

4
Kondratiev waves

• 45-60 year cycles of global economic growth

4 periods prosperity, recession, depression,
improvement
5
Schumpeterian long waves

• Innovation-driven growth cyclical co-evolution
  of technology, business models, institutions
• The industrial revolution, 1771
• Age of steam and railways, 1829
• Age of steel, electrical heavy engineering,
  1875
• Age of oil, automobile mass production, 1908
• Age of information telecommunications, 1971
• Variations in patterns of investment, geography,
  etc

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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 worlds 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.

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Mass production as blind destiny

• The size of General Motors is in the service not
  of monopoly or the economies of scale but
  planningand (thanks to) this planningcontrol of
  supply, control of demands, provision of capital,
  minimization of riskthere 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

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Fords River Rouge plant

Aerial view of River Rouge plant Dearborn,
MI 1942
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Rouge tool die works, 1944
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The age of information telecom

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

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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

12
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

13
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.

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New models of info distribution

• Old model of sales in bricks and mortar locations
• New business models exploit intangibility of
  information goods highly disruptive
• Direct 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
• Open access, scholarly publishing
• Software as a service

15
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 . . .

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Loose coupling rise of standards

• Old model proprietary standards and silos
• Open 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)

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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

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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.
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Amazons above rank 100,000 sales
Top 100,000 most popular books
Less popular, not found in bricks mortar stores
(30-40 of sales)
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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

21
Anatomy of long tail demand

• Demand-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

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The Long Tail