The Building Blocks of Digital Transformation: Community, Tech, Business Models, and a Change Platform

I’ve been making the argument lately that the single largest obstacle in successful digital transformation is change itself. Surprisingly, the arrival of new technology is generally not the large hurdle to becoming more digital in a meaningful way, though it certainly represents a large and growing learning curve. Yet learning the new technology is manageable by most organizations in my experience, if they have the will to do so.

Finding the right business models can be a bit more of a challenge, but the process of discovering the best ones is increasingly well understood these days. One somewhat ironic lesson is that we’ve also learned that we usually have to build an audience first, often well before we decide on new digital business models, that are centered around some activity or capability of significant shared interest with the market, before we can experiment and find the right path forward in terms of generating value, such as revenue from sales, subscriptions, advertising, etc.

Online Communities Are the Business Construct That Create the Most Value

From my Enterprise Digital Summit 2016 Paris Keynote Deck

Why Digital Needs a New Mindset

It actually turns out the most important and challenging building blocks for digital transformation is people and the processes that can change them. Thinking in digital terms requires a significant shift in mindset, such as designing for loss of control, understanding the power laws of mass connectedness, the startling revelation that the network will do most of the work, and understanding how open participation is the key to unleashing digital value in scale to our businesses.

However, shifting the mindset en masse of the large number people that exist in the average enterprise (i.e. tens or even hundreds of thousands of workers) is not something that can be done to them, but can only be done with them as Euan Semple frequently likes to point out. So, what’s the single best venue in which to engage significantly in a time efficient and sustainable fashion? I now suggest that the most likely and cost-effective vehicle for this that we know today is online community.

The building blocks of digital transformation is a topic that I recently had time to study in depth as I prepared my closing keynote for the always terrific Enterprise Digital Summit 2016 (formerly the Enterprise 2.0 SUMMIT) in Paris this month.

Step 1: Gather Stakeholders into Communities of Digital Change

The fundamental building block of digital transformation is therefore not technology, but people, a much more challenging proposition. However, if we can somehow connect the collective workforce in the organization together in an effective fashsion to begin a shared and dialogue-based process of learning, understanding, experimenting with, and then carrying out the tasks of digital transformation across the enterprise as a much more aligned and self-supporting way, then we are much more likely to succeed. As I’ve discussed, we’ve even started to witness evidence that IT is shifting in this direction steadily, with the rise of empowered change agents and even unexpected source of pre-existing tech change using forces like shadow IT as a key resource for creating decentralized technology adaptation across the organization.

But it all starts with community, for which I believe the evidence is now clear is the most powerful way of organizing human activity and creating shared value yet developed.

Step 2: Assemble a Modern, Market-Facing Technology Stack

From there, we do need to look at the technology lens at what our business does and how it does it. We can no longer realize all tech change ourselves, as our competitors have already learned that the single greatest force for value creation is capturing and wielding community contributions of customers by the millions via mass co-creation, and business partners by the thousands (see APIs + hackathons). I recently summarized the many other emerging enterprise technologies we must consider all the time as well, but the most important ones are customer facing and involved in co-creation.

We therefore must instead now becoming highly competent in building strong and effective architectures of participation, as most digital leaders harness the vast capacity of the Internet to do most of the value creation:

The Digital Business Stack: Marketplace Driven Engagement & Value Creation

Step 3: Create and Nurture Digital Experiments

From there we can combine people-led digital change at scale with a portfolio of digital engagement and experience technologies and processes — that must prominently include market-facing community — to begin creating, launching, and growing healthy and vibrant new products and services. Growing hacking in fact, has become an important new technique used by top Internet companies to ensure early lift and adoption, and has been a key subject of interest by top technology leaders like Microsoft CEO Satya Nadella. So grow the results of digital transformation this way, then generate revenue:

Digitally Transforming a Business with Growth Hacking, Business Models, and Community

Step 4: Get Serious About Revenue Models

Finally, the last building block is digital business models, which one the service has a successful audience or community, can be experimented with and validated, though certainly some services, such as sharing economy ones, can monetize from the outset, though often at break even levels. Below is a representative list of some of the most common Internet business models, though by no means all the possibilities. For example, there are at least 18 separate known business models for open APIs alone. The high level Internet business models break down like so:

Common Internet Business Models

For a more complete exploration, please view the video of my closing keynote on this subject in Paris on June 2nd, 2016:

Or download a copy of the Slideshare deck that I presented with.

Additional Reading

How IT Can Change For the Digital Era and What Leaders Can Do About It

The digital transformation conversation shifts to how

The Long Game is Winning in Digital Ecosystems, and Other Global Tech Trends

I’ve traveled nearly 70,000 miles all over the world since the beginning of the year, talking with digital practitioners in the trenches. Most often these are passionate but often frustrated change agents, IT managers grappling with tech evolution, and corporate leaders on both the technology and business side looking towards their futures and feeling uncertain.

Where to best focus digital enablement efforts in their organization, while coming from behind, with scarce time and resources is question that is top of mind right now. Worse, leaders at the very top often don’t seem motivated to make the necessary moves.

From these conversations and many observations at conferences and events so far in 2016, it’s obvious to me at this point that we appear to be entering a new inflection point with digital: Those who began early, made the right decisions, and stuck to their Internet identity in terms of rethinking the future — as opposed to chasing traditional firms back into their own industries — are seeing outsized rewards in an increasingly winner-takes-all online marketplace. The rest of us are watching them pull away.

In short, the early entrants to the global digital business competition that were either a) lucky enough to discover the digital rules of success from the outset, or b) followed a positive market feedback loop to the same place are quite clearly sucking the air out of the room. Perhaps most importantly, they also had the ability to execute without the many constraints of our legacy organizations.

The Impact of Leading Digital Ecosystem Methods for Digital Transformation

Of course, I’m talking about Amazon, Google, Facebook, and Apple — sometimes referred to as the Four Horsemen of the Digital Apocalypse, for good reason — on the consumer side as well as Salesforce, and now surprisingly Microsoft, on the enterprise side, the latter two which are making major new inroads to enterprises I speak to. Microsoft in particular seems to be suddenly winning a lot of enterprise-wide “Microsoft company” deals as their digital/cloud vision matures. As a whole, these technology companies are increasingly seizing broad swaths of digital territory as they move at near light speed compared to their non-digital native brethren, breaking into new category after category with with relatively high levels of repeatable success. Certainly, their track record is head and shoulders better and much more rapid than most Internet startups, or most traditional enterprises that is.

Using the Inherent Power of Networks and Sustained Tech Investment

Why this is has been the subject of endless analysis, scrutiny, and speculation about this very small cohort of tech companies eating the world, but I propose that the core reasons are actually fairly basic. To restate the above: There are certain fundamental rules to digital ecosystems and the businesses built on top of them. While it helped enormously to be early, organizations that understand these rules and can also execute and invest for a sustained period of time can still dominate if they understand a few crucial pivot points.

Networks effects, one of the most basic measures of a successful digital ecosystem, quickly become exponential yet look relatively minor at the beginning, fostering complacency in competitors at the worst time, when a new digital market seems small and uninteresting. It’s not until critical mass has been reached a little later on, that a digital platform grows very swiftly into a market dominating and self-sustaining force. Then it’s relatively easy to crush lessor players that aren’t utterly focused on k-factor and other measures of these effects.

Simultaneously, and harder to prevent, is the tendency of make basic subsequent design changes to online products that then impede the carefully built channels that have created the initial growth and scale. I’d argue that many digital contenders frequently make this last mistake, making simple but disastrous changes — often when turning over the product from the 1.0 team to the maintenance team — by not staying true to the inherent power laws of digital systems that got them there (patterns such as “enabling networks effects by default” or “anyone can participate.”)

Needless to say, the aforementioned tech leaders managed to navigate past all these obstacles, including shooting themselves in the foot later on as they had to bring on fresh talent to grow the company. The critical design parameters that enabled growth stayed in place, and long enough to provide returns. This also highlights the big difference between most of these organizations and traditional companies: They had venture backing that isolated them from the quarterly financial cycle of immediate and continuous returns. Some would argue that Amazon has been doing this anyway, despite being a public company, and reaping enormous rewards in the long game of digital, where increasingly it’s apparent the winners reside. As BCG has noted, “even sharp minds can fail to grasp the power of sustained exponential forces.”

The primary lesson here: Deeply understand the rules of digital ecosystems and build one that solves a real pain point for a lot of people. Optimize the results relentlessly and pour the returns back into growth. Don’t stumble along the way.
This is a playbook that is simple enough to understand, but that most industrial era organizations fully embrace in a meaningful way, despite all the marketing talk — and I’m guilty as many of us in this regard — about digital transformation.

What does this have to do with the conversations I’ve been having? To person, almost everyone thinks their organization is moving too slowly, tentatively, and uncertainly towards becoming effective digital organizations that can compete, what I’ve called a next-generation enterprise. As SAP’s excellent Sameer Patel — and fellow Enterprise Irregular — once famously said, businesses have digitized quite a bit, but they haven’t really transformed.

Getting Past the Digital Innovator’s Dilemma

The real obstacle is one which I’ve been exploring in various forms over the last several years: Most organizations have accumulated and/or designed in enormous amounts of legacy culture, process, mindset, and infrastructure that got them where they are, but now has to be undone to a large extent to be fully realized and effective digital organizations. The world of agile, lean startup, OKRs, open APIs, devops, relentless A/B testing, and growth hacking are all words or phrases sometimes heard in the halls of the average classical business, but they just don’t lie at the heart of them, and won’t any time soon.

Worse, we’ve greatly over-centralized technology enablement so that it’s become a profound chokepoint in many organizations. CIOs and CMOs feel this acutely when this is the case, and yet a few are now reaping the benefits of going in the opposite direction. There are indeed solutions, but they require more ideas that traditional organizations aren’t good at: Open innovation, Kickstarter-style ideation programs, app stores, customer co-creation, change agent programs, hackathons, employee incubators, BYOT, enterprise architecture that’s designed for loss of control, and more.

The second big observation from my travels this year is that the technology world is maturing in some interesting ways. These trends too tend to favor those that invested early or invested big, or both. One is the realization that digital success stories aren’t coming from very many places. The United States and Asia dominate the top of the list, arguably having an unfair advantage through better investment policies for startups and very large markets that make it easy to take advantage of power laws. Larger markets, even ones relatively undeveloped, seem better to attract both talent and the numbers required to build market presence that can’t be ignored.

So what are organizations to do? I’ve suggested some digital transformation blueprints for both boards of directors as well as for the C-Suite that can help develop and grow true digital native lines of business in a sustainable way. But I also think that there is now a very steep curve to climb to respond to the network effects that Internet startups have created in many new and existing industries.

Become a Network Orchestrator and Harness the Market

The reality is that there is really only two ways for companies behind the digital maturity curve — which is still almost all of them right now — to catch up: a) Invent new industries that are irresistible in terms of the value and utility they offer b) employ the latest lessons learned on how to play to the strengths of the digital marketplace and turn the knob all the way to the right, beating the existing players at their own game by more purely and deeply plumbing the inherent factors that make digital ecosystems such an uneven playing board. Most digital contenders fail to understand even the most basic concepts of digital, such as the network itself is the single biggest resource you can and must use to digitally fuel your ecosystem to transform. It will do almost all the work, as long as you have a vision, a value proposition, and a platform which truly embodies and orchestrates both. Network orchestrators, in fact, are at the top of the Internet food chain. Organizations must live there, or become fodder for those that are. As Forrester’s Dan Bieler noted recently:

Digital ecosystems empower the CIO [Dion: and other internal tech leaders, official and unofficial] to become a critical business enabler by providing a technology platform to redefine approaches toward innovation, knowledge management, supply chain optimization, product development, and sales and marketing. In particular, traditional firms put survival at risk due to slow innovation cycles. CIOs who define a clear strategy to exploit the possibilities that digital ecosystems offer for their organizations position themselves as powerful change agents.

I’d only add that it’s not just about defining a strategy, but leading and executing on it sustainably. I’ll be exploring more about my travels and lessons learned on the emerging edge of digital shortly. In the meantime, your insights on this challenge are very welcome in comments below.

Additional Reading

Going Beyond ‘Bolt-On’ Digital Transformation

Is it IT’s last chance to lead digital transformation?

Why the Underlying Laws of Cloud, Social, and Digital Business Matter

I’ve spent much of my Memorial Day Holiday here in the United States pondering the Red Queen effect vs. network effects, seminal laws of technology and business both, that are often held as gospel by their adherents who believe they are the natural and intrinsic properties of their operating environments (digital ecosystems in this case.)

Both hypotheses apply to any connected, relatively closed environment of some kind, which very much includes everything from traditional marketplaces, online communities, app stores, cloud services, SaaS, enterprise social networks, social media, and cable/video networks to e-mail, telephones, and package delivery. I cite these, as many practitioners don’t even consider system concepts when trying to figure out why they aren’t succeeding as hoped, despite those very ideas defining the rules of the playing field they’re working upon.

Both Red Queen and network effects have years of rigorous research and thinking to back them up, and as far as they go, they make real sense of the modern world as explanations for why things are the way they are in various places. This includes how organisms compete, survive, and thrive in the natural world or how networked products and services grow and maintain dominance on the Internet, respectively. These combined environments will ultimately lead to what I’m currently calling the 4th Platform.

Digital Business: Network Effects and Red Queen

The issue here is looking at why there are so many so-called ‘winner-take-all’ players at the top of the technology industry, especially on the Internet. In the shadows, nowhere near as successful, there are usually hundreds — sometimes thousands — of also-rans, depending on the sector, who struggle mightily, but usually fail. Rarely are the winners dethroned, though it does occasionally happen (see: AOL, MySpace, Friendster, RIM/Blackberry, all top digital players in their day.)

What triggered this line of thinking was Gartner’s fascinating new report on the Magic Quadrant for Cloud Infrastructure, which makes the stunning claim that Amazon now has 10 times more cloud computing capacity in use than the entire total of all the other 14 providers combined. The company is deeply wired into over a million customers’ ecosystems, and thousands of online products. By any estimation it is uncatchable.

Sidebar: Interestingly, this hasn’t stopped technology leaders such as Staples CIO Tom Conophy from stating last week that they’re going after Amazon “in a big way.” This despite the fact that both organizations aren’t even playing on the same digital meta-level.

Or is Amazon uncatchable? Don’t we just need to go ‘up the stack.’ As it turns out, not if it just leads to commoditization.

If traditional enterprises — and yes, more likely, startups — can only understand the fundamental rules by which the Amazon, Apple, and Facebook et al became leaders, the reasoning goes, we should be able to use those very rules against them. We should then be collectively able to out-innovate, out-invest, out-maneuver our competition and get to the top of an increasingly shallow but very, very steeply inclined pile of winners.

Deep thinkers in this space like my industry colleague Simon Wardley note that network effects create enormous inertia for change that make it very hard for a new player to get started, even if they’re much, much better. Worse, this is true even if you realize this and try to organize and optimize for it. You are simply spitting in the wind. Market-leading network effects, in fact, nearly always easily trumps the seemingly-powerful Red Queen Effect.

None of this is a new discussion of course, and the power laws of digital networks, such as Reed’s Law, have been relatively well-understood for at least decade. But their effects are now inexorably felt in the traditional business world like never before.

Using Networked Relationships Built on Enduring Digital Values

Ultimately, as organizations increasingly perceive the imperative to put a digital layer over their entire organization, even completely re-imagine it for the new models of digital business, there are some key fundamentals that we have to remember to close the gaps:

  1. Count on nearly everything in the ecosystem to eventually drop to effectively zero cost. Do not build your digital business along the commoditization axis. Only the underlying properties, like network effects, are exempted from this rule and this is a potent realization. We will eventually get the cost of nearly all technology to nothing, making replication and competition both easy and rampant. This isn’t where most businesses would like to be. However, network relationships like communities, total aggregate API integrations of partners, total daily users contributing value, these cannot never be copied whole cloth on an increasingly low cost scale. When people are involved, commoditization is not possible, and real, meaningful human relationships then become the strategic coin of the digital realm.
  2. Use differentiated models for commodity elements of digital business, versus the methods you employ for the innovative (and most important) elements. Social business, bi-modal IT (actually, tri-modal), devops, and even agile, are still the mantra here. These methods have been discovered to operate on the scale, speed, and collaborative dimensions required of today’s rapid digital cadence. Even better, they connect people the best way — that we know of so far — with how modern technology profoundly alters and — mostly — improves the way we work.
  3. If you are a large organization, you’ll have to operate in sometimes truly unexpected new ways to deliver well on digital. In particular, this means powerful new network models of organization structure — in IT and everywhere else — as well as new widespread digital workplace skills to be able to change at a sufficiently high and sustained rate.
  4. In other words, most organizations must rapidly evolve their operating models to adapt to the rules of the digital networks. A few have, but most still have not. There’s still time in a few industries however, but not a tremendous amount. For most, however, it’s now later than they think.

Defining the Next Generation Enterprise for 2014

Many of you know that over the last several years I’ve tried to make the case that most organizations are currently falling behind the advancing pace of technological change. That business is so centered around technology today is the reason why addressing this has become a top competitive issue. Becoming better adapted to tech change is even tied to the medium-term survival of many organization as I recently explored in my look at digital transformation.

But to say that technology alone is what is disrupting traditional businesses would be inaccurate. We ourselves have changed — have co-evolved — along with technology. Our mindsets have become expanded by the new possibilities of super-connectedness, new models of working, and pervasive data-based insight that today’s networked revolution has wrought.

That’s not to say there aren’t important pros and cons to these advances as well. Along this journey of global, open, and social digital networks, we’ve also encountered enormous challenges in grappling with issues such as individual privacy and equal access, as well as the inherently large inequalities that emerge from the gaps between the digital haves and have-nots. This is precisely because technology is a profound force multiplier of just about everything it touches. There are other potential worries as well.

As The Economist fretted over recently, most technology revolutions have created more employment, not less. We hope that this is true for the next generation, but we’ll see, given how current models show that producer power is generally moving outside of traditional organizations to external networks that have less well-defined employment models:

Everyone should be able to benefit from productivity gains—in that, Keynes was united with his successors. His worry about technological unemployment was mainly a worry about a “temporary phase of maladjustment” as society and the economy adjusted to ever greater levels of productivity. So it could well prove.

Yet to most of us, it’s quite clear that digital channels combined with engagement at scale within them amongst all our stakeholders is at the core of the future of business. But what does this actually mean? What does it look like to most organizations? How can we articulate the changes to structure, process, and management of our organizations in a deeply digital age? It’s my belief we need a comprehensive yet eminently understandable model of how all this reshapes our organizations.

Ecosystem View of the Next Generation Enterprise for 2014: Workforce Community, Customer Community, Partner Community, Market, Social Business

I’ve come to realize we’re trying to hit a fast-moving target with poorly aging models for service delivery and IT governance when it comes to digital transformation. The reality is that it usually takes several years for a large organization to achieve large scale change. By this I mean three to five years, and often more, and that’s just for an individual enterprise-wide initiative.

In today’s operating environment of yearly — sometimes quarterly — waves of highly disruptive enterprise technologies and products, that’s just too long. We need a clearer and more updated sense of where we need to take our organizations, and it must also show us how to increase our technology metabolism as well. This model should include the broad strategic outlines as well as specific adaptations to the latest powerful new digital capabilities such as big data analytics, omnichannel customer engagement, the Internet of Things, social business, and so on. These subjects are all highly strategic to the future of our organizations at the moment, yet they are also interrelated and must fit together relatively well in this model somehow.

Related: Digital Business Ecologies: How Social Networks and Communities Are Upending Our Organizations

Motivation for an Infinitely Renewing Model of Tech & Business

Over the last few years, I’ve adopted a term known as the next generation enterprise or NGE for short. It’s the idea that we can maintain an up-to-date strategic model when it comes to digital transformation. The vision for the next generation enterprise is different from one year to the next and has specific technological phases as well as overall strategic themes at any given time. This vision has its own management theories as well, such as shifting from organizational hierarchy to networked community or reorganizing how we operate to the three new top-level modes, to name just two examples.

In other words, the idea of the next generation enterprise is a relatively complete view — including both business and technology — of the target that typical organizations should be aiming for in their objectives for digital adaptation and growth. For the moment, let’s put aside whether there even is a typical organization, since many of the most important technology innovations are usually agnostic to your particular industry or unique company attributes. In other words, most major technology advances will derail your boat if you ignore them long enough, no matter what business you’re in.

To give us a shared roadmap and a point of reference, I’d like to start putting a clearer definition behind what we think is meant by a next-generation enterprise. Early this year, I mapped out the most important strategic new enterprise technologies, but it was a purely technology view and included a good many tactical elements that aren’t that important when it comes the big picture.

Instead, I’d like to have a more enterprise-centric view that includes the most important advances in business that technology has directly enabled. Some would say that the advent of being digital connected to every human being on the planet at all times (at least in the developed world) is one of those advances, and I agree. This realization is that communities are moving increasingly to the center of our businesses. But it’s more than that. The enclosing strategic conception is really one of ecosystem, whether that’s inside a segment of the enterprise with a single networked team, an external customer community, or a full-on developer network of thousands of application development partners who have welded your digital supply chain to their apps. All of these are ecosystems that must be created (or identified), grown, cultivated, managed, secured, and governed.

In fact, one of the largest issues we have in digital transformation today is that we look at business in a far too simplistic traditional model. In this legacy view, there are functional silos with workers combined with management hierarchies that together actually make decisions and operate our organizations. Then there are suppliers, business partners, and customers, and that’s about it for the big moving parts.

Baseline for Next Generation Enterprise 2014: Networks, Communities, and Support Programs (Social Media Center of Excellence)Today’s next generation enterprise plays on a much larger and more complex chessboard. There are thousands of relevant ecosystems that now exist for most businesses, most informal, and across thousands more channels, all with a long tail structure.

This means that while the head of the distribution consists of big channels you’ve heard of — from major social networks and call centers to traditional media and Amazon’s cloud — there are thousands you haven’t heard of and will never be able to deliberately consider and plan for. Business architecture has thus moved from simple planned models to complex and highly dynamic emergent networks across every business function we have. We’ve gone from a few dozen groups of stakeholders to ultimately tens of thousands that we must still manage to somehow. Ultimately, our org structures must adapt to reflect this.

I’ve previously proposed a set of enterprise strategies which have a good chance at addressing many of this issues, which were originally brought forth by the channel fragmentation, scale, and decentralization that we saw greatly exacerbated by IT consumerization a couple of years ago. But I now see that bring-your-own-device was just the forefront of a wave of grassroots led network-enabled change, including bring-your-own-application, bring-your-own-community, and soon, even bring-your-own-workforce.

Related: Designing the New Enterprise: Issues and Strategies

The Element of The Next Generation Enterprise for 2014

So I’d like to put a stake in the ground and define what I think the next generation enterprise for 2014 should look like. There are several views here, but I’ll start with the more business-centric view of ecosystem and expand to other views as I’m able. In this ecosystem view we have the following components:

  • A more network-centric enterprise. Less hierarchical and consisting much more of online communities for achieving cost-effective outcomes at scale. This will happen within and amongst the workforce (network/social collaboration), business partners, customers, and the marketplace. Management and leadership through networks will become an essential skills and will require knowledge of the concepts and operation of digital and social businesses.
  • Workforce communities. While we’ve had a primitive model of team in the legacy workplace, it becomes much more fluid, dynamic, and high scale in the networked world, often directly supported by powerful new collaboration capabilities. Teams-based, project-centric, and — still evolving — process-based work conducted by communities will increasingly become the norm. Why? Because the data has consistently supported that the network/community model provides better business results.
  • Business partner communities. One of the least developed models of networked communities, there are however good examples that can be pointed to. Strategic partners, affiliates, and suppliers can be engaged together in operations, in particular — as John Hagel famously pointed out — with exception handling scenarios.
  • Customer communities. This is one of the strongest and most easily started models for strategic community. The evidence for business value is strong enough that I’ve wondered if the window is already closing on customer communities in certain industries. Certainly in my research I’ve found that customer care communities can reduce costs by 30% in the first year alone over traditional approaches. Social support also at the very top of Ray Wang’s social business use cases.
  • Marketplace. The single most scalable asset that businesses have is networked access to their customers and the broader marketplace. While this constituency also includes regulators and influencers, two groups that can be hard to manage, it also includes online advocates, crowdsourcing participants, software developers, and other interested parties. If you’re surprised to see developers in this list, then don’t be: Developers have become one of the single most important new constituencies as their innovations can drive primary growth and network effects. This is a very different view of business than before, where companies directly engaged their stakeholders.
  • New channels. The next generation enterprise will still have some legacy aspects including physical offices/stores — just smaller and more virtual — it will be the Web and especially on mobile devices that value is primarily created and captured, both. Social business environments (communities of all functional types and audiences) and the application as the new CRM will be key channels here as well. Ultimately, however, APIs — which I define as open digital supply chains — will be the most strategic channel for many industries because it scales faster and creates far more robust outcomes for very little investment.

Using this model, we can also baseline the various states of maturity of each part of the modern enterprise ecosystem for comparison, as in how far along are we? The essential point here with this view of the next-generation enterprise is that it’s the current target model, not what you should look like today. It’s what you should be aiming for, although you should certainly have some elements of it in place today (see figure 2.)

What do you see as other essential views of the next generation enterprise? What else needs to be added?

Related: The Second Wave of the Contemporary Workforce

How We Gave Up Control Over The Social Web

A short but pithy piece over the weekend by Dave Winer titled “Why the Web 2.0 model is obsolete” got me thinking about where we’ve ended up with social media after nearly ten years. Blogs, wikis, and other tools of easily shared self-expression from the early days have given away in recent years to a much less diverse social media monoculture. A few large social networks now control our social identity, content, and behavior, and through their terms of service, often literally own our online existence legally and de facto.

This evolution was perhaps inevitable given the rules through which networks operate and certainly the result has its strengths. It’s far easier for consumers and businesses to adopt a hosted service than set up their own social presence, with all the complicated bits it requires to set up a fully functional social identity on your own these days. It’s also probably more secure, safe, and reliable long term. It’s certainly the shortest route to connecting with the vast captive audiences that the leading social networks now wield.

Yet in the process of making many short term decisions in the name of reach and convenience, many of us have given away our social capital, and along with it much of our online autonomy and freedom. I’ve long since stopped advising companies to drive their traffic to Facebook (disclaimer: I am a shareholder) and build their own online communities and digital ecosystems if they are intending to be strategic about things like social business and open APIs.

Network Effects, Social Media, and Centralized vs. Federated

The impressive thing is that we’ve largely achieved the original vision of Web 2.0 and it’s just how we do things now. We share by default. We use social media more than any other digital activity. Social media is now woven into so much of what we do today. Yet the majority of all of this user generated content and online community is now centralized in a few large social silos that can no longer talk to each other.

Even worse, if we go the opposite direction that might seem better long term, we’ve discovered issues with that model too. For example, we’ve learned that when we create many smaller, self-controlled, and more autonomous social environments we then create fragmentation. We can’t easily communicate or collaborate with each other across these social islands. Thus, for as many downsides as the monolithic social networks have, they do achieve one important thing: They create a very large single social universe that we can all communicate across.

So what should we collectively do? Should we cave in and trust that the corporate owners of the social world will be benevolent, even when they clearly have business models that are very often at cross purposes to our needs and desires? Or should we find a way to solve the problem of creating our own social corners on the Web and then connecting them together, all while making it very easy to do so? Personally, I’m hoping it’s the latter. Certainly I’ve explored previously how open social standards have a genuine shot at helping with this, even if it might be a bit of a long shot.

The reality is that social media silos are now holding us back, both as individuals and as businesses. We can do much better if we want. But getting there requires a little long-term discipline and plenty of widespread demand. That makes it pretty unlikely in the face of the enormously strong network effects of the largest social networks today. But perhaps there’s a third option to regaining control over our social lives. In fact, I predict the next big breakthrough in social media is likely to come from the need to resolve this tension between the unfortunate long term consequences of centralized social media and the benefits of a much more federated and user controlled model. Unfortunately, recent history has been a steady march towards the former.

So until then, we all need to mull over where our collective decisions are taking us, for as social media is perhaps the greatest communication revolution in history, its intrinsic power cuts both ways.

Imagining the Future of the Enterprise

This afternoon at a workshop in Stuttgart, Germany at the KnowTech conference I explored our latest conception of the many transformative technology changes happening within our organizations today. The majority, if not most of these trends, are now being driven by the so-called “big shifts” — and our response to them as people, organizations, and society — that are largely being imposed from outside the walls of the enterprise. Consumerization is clearly here to stay. This is not to say that businesses aren’t innovating. Certainly they still are. But they are greatly outnumbered and frequently outclassed by the tsunami of new ideas sweeping across us from the consumer world.

The pace of advance today can seem overwhelming. It is new mobile devices, social media, cloud services, avalanches of sensor or crowd-created data, all brought to our doorstep via new digital channels and platforms such as mobile apps, app stores, open APIs, new social networks, gamification tools, to name just a few of the bigger and more disruptive technologies.

To proactively deal with all this, I currently advise most companies to develop a “strategy book” that they can readily use to identify important new advances, understand their abilities and ramifications, and then determine the impact to their business, both in terms of opportunity and challenges. Note: The aforementioned workshops typically provide the basis for such a strategy book and the processes required.

Unfortunately for most companies, there are often more challenges than opportunities, since many of these new technologies go against the grain of how traditional companies are structured and operate. Openness, decentralized processes, mass participation, network effects, and radically new distribution models for communication and work are not merely typical of today’s consumer technologies, it’s how they fundamentally work and compete against each other.

Put simply, to survive these generational shifts, organizations must figure out how to absorb new technology changes effectively and at scale. This will require potent strategies that will begin with requiring genuine rethinking of service delivery within our organizations and ultimately arrive at a profound transformation of the company. This will ultimately include its business models, motivations, and sometimes even its reasons for being. One can look at Amazon as an exemplar of this, starting out in e-commerce, and ending up a true and surprisingly pure digital platforms company, successfully wielding mobile, platforms, cloud, and big data to achieve market domination. Amazon is the most well known, but there are others and the route is repeatable, just as it is sometimes difficult.

The end point of all this is where everything is a service, as Dave Gray famously predicted. But also it’s more than that. The future of the enterprise, what I’m calling the next-generation enterprise, requires a mindset that doesn’t think in terms of fixed markets or point products or services. Instead, we must create, cultivate, and control fast-moving and highly competitive ecosystems of people, information, and value across a virtually unlimited number of channels. Those who can move first, co-create, and own the best class of information and then deliver it in forms the market wants, when it wants it, will be the winners in the short-term and long-term. Companies organized to do any less than this will falter and fade.

Over the last couple of years, I’ve been spending a lot of time thinking about and exploring how organizations can get there. There’s still a lot we need to learn, but we’re beginning to see the broad outlines. Unfortunately, there still more questions than answers, even today. Can most organizations make the transition? Does the transition to a next-generation enterprise have multiple routes, if so, what are they? How much investment is required and what is the likelihood of failure? Can we quantify and manage the risk of transforming? All of these questions and more remain difficult to answer.

Related: How Digital Business Will Evolve in 2012: 6 Big Ideas

However, we do know with a fair degree of certainty that most large organizations will need to begin changing faster — starting now — if they intend to survive. Most will need to become next-generation enterprises in a meaningful way within the next half-decade. And they need to have started several years ago.

As we enter the age of digital engagement, the untapped possibilities still largely exist. Most organizations should be utterly thrilled by the uncharted territories in front of them. Unfortunately, I see that most do not even see these as more than a threat, if they see them at all. That then is the first challenge: Changing how we regard our connection and relation to the world, for the biggest changes happening today are not only digital, but to ourselves and what makes our companies work.

Enterprises and Ecosystems: Why Digital Natives Are Dethroning The Old Guard

Why is it that so many traditional companies with an enormous wealth of assets largely fail to transform them for the digital era? By assets here, I mean established customer base, closely held relationships with trading partners, mountains of data and IP, as well as their bread and butter, the actual products and services they offer. For large organizations, these assets typically represent many billions in long-term investment and accumulated value that is being stranded beneath a digital ceiling they cannot seemingly break through. The lesson has been a hard one: It’s been surprisingly difficult for many companies to make a genuine transformation to digital.

For those just joining this conversation, this transformation is about opening up and digitally enabling the strategic assets of our organizations for better consumption and participation, with as low a barrier as possible. It’s also means doing so in a way that continually maximizes their value over time in today’s deeply networked marketplace. Achieving this triggers the primary engine of growth for digital ecosystems, namely network effects. This is how Apple, Facebook, Google, Amazon (new guard), and Microsoft, IBM, SAP, Oracle, and many others (old guard) eventually built hundreds of billions in combined value. They tapped into the relevant power laws of networks by carefully and deliberating cultivating and then closely managing them by harnessing peer production over the network.

Digital Business: Cultivating and Managing Digital Ecosystems (Open APIs, Social Supply Chain, Web Services, SOA, Online Communities, Peer Production, OEMs)

How exactly was this accomplished? They did it by digitally platforming their businesses in specific ways: Enabling self-service on-boarding, viral adoption, open participation, best-of-breed data capture, ownership and control, and took advantage of the fact that relationships — and therefore, ultimately transactions — must take place on the network with as little friction and cost as possible. They realized that we are now all connected together continuously in a single global network and then designed their organizations around this central fact of the digital age. They are now reaping the results of this mindset:

Networked ecosystems must be a core focus and competency of modern business.

This begs the increasingly urgent question: Why then are a large number of older organizations neglecting their digital ecosystems, often failing to meaningfully cultivate them at all for many of their most valuable assets?

This is a key question that fellow Enterprise Irregular Vinnie Mirchandani recently asked in an internal EI mail thread and later posed on his blog:

But for every Apple which has gone one way, I see so many others piss away this huge asset that is their ecosystem. I hear about musicians and filmmakers auditing, even suing studios for accounting disagreements. I hear SAP mentors complain about legal issues getting licenses and other access to new technology. It’s easy to dismiss Joe Konrath’s litany of complaints against book publishers as one from an unhappy author, but the 230+ comments it has drawn shows a deeper angst about how poorly publishers are managing their author ecosystems.

Ecosystems, communities – call them what you want. They are a vibrant organism which deserve far more ink from all of us. And they need professional managers at the companies at the middle who nourish them and not just treat them as railcars to be hustled away whenever inconvenient.

As companies remain inadequately connected to their customers, partners, and workers via digital ecosystems, many of which they do not control, they are missing a rapidly narrowing opportunity. That’s because it’s very, very hard to disrupt a well-established network effect, which is much more powerful than the equivalent notion in the pre-digital era: traditional market share. Network effects are primary focused on pull distribution, while marketshare is heavily based on push, which is much harder and much more expensive to sustain. As digital natives sew up more and more industries and lay down network effects years ahead of their traditional brethren, any chance to reclaim the throne will be very unlikely.

For leading examples of potent digital ecosystems, see open APIs, social customer care, and app stores.

Why is this? There are a number of reasons but a few are particularly significant. What I wrote in the EI thread in response to Vinnie’s original question was this:

I find that in general, the farther you are from the tech business, the less native skill or familiarity there is with system thinking, which is perhaps the critical capacity to have in order to regard your business in ecosystem terms. This is something that in tech is standard fare with constant discussion and focus on platforms, network effects, SDKs, open APIs, app stores, etc.

Traditional publishers are typical of the technically challenged industries that are being blind-sided by newer, much savvier, techno-centric, network-oriented new digital businesses.

Business leaders that can’t deeply see the way forward for their organizations as flexible, highly dynamic, and organic digital networks of customers, partners, workers, and other (likely and unlikely) participants will ultimately fail. But this isn’t the set of skills or mindset that made them successful in the first place, so they don’t value it and don’t think in these terms. They literally throw off digital rethinking like a sort of corporate immune system. Surprisingly, from my talks in the C-suite the last few years, everyone individually seems realizes they have to change, but collectively they are resistant, it’s fascinating to watch.

A big part of the problem boils down to this: Companies are inherently designed to perpetuate the problem they were invented to solve. It’s a particularly thorny instance of the Innovator’s Dilemma, which ensures that a company is unlikely to aggressively re-invent itself until it’s in the process of being disrupted. Unfortunately, this often means it’s already too late.

In fact, it may be too late for a growing number of industries to fully make the transition to being ecosystem-centric. This includes media, publishing, telecom, retail, and many software companies. Under looming threat is real estate, higher education, financial services, professional services, accounting, and even venture capital. In each of these categories, ecosystem-centric firms are building network effects with open network-based products increasingly built by worker/open communities and delivered to customer communities. Those products are in turn built upon by hundreds or thousands of loyal 3rd party partners to bring their own customers and ecosystems to the table. This is an embarrassment of riches that only a few companies, again mostly digital natives, seem interested or able to tap into.

As Fred Wilson once said, the Web (and therefore digital business) is all about “building networks on top of networks“, which leads to even more powerful outcomes, like 2nd order network effects.

Fortunately, the force multiplier of the ecosystem model can be stated in a simple, fundamental way: It allows one to tap into the vast size and strength of the external network to drive growth, innovation, and revenue for your own ecosystem. As Peter Kim and I wrote in our new book, the fundamental principle of business in the ecosystem era must be to let anyone participate in every aspect of the business, primarily by inverting the facilitation process of driving shared value (i.e. network effects by default.) Being able to elicit the network (Internet, community, shared data, whatever) to maximum effect to fuel and growth your ecosystem is thus the core competency of the digital era. Unfortunately, this lesson is being lost to most organizations that were built well before this next-generation business model was understood. It will be a great loss that doesn’t necessarily have to happen in my opinion, but will ultimately result in the needless disruption of a large number of companies that just aren’t able to become digital natives.

For additional reading see:

4 Ways to Create Sustainable Business Ecosystems

Why Information Power Is The Future of Business

What Will Power Next-Generation Businesses?

A View of Digital Strategy in the Ecosystem Era

Are We Building Businesses Or Are We Building Platforms? Yes.

How Digital Business Will Evolve in 2012: 6 Big Ideas