Chapter 7: Capture

I’ve talked about the levers of value in the Social Era—how social can be used to organize how to create, what to deliver, and the ways to interact in the marketplace.

Specifically, I’ve drawn three conclusions.

• Work is freed from jobs. This means that human resources change when most of the people who create value are neither hired nor paid by you. And competition has changed so that any company can achieve the benefits of scale through a network of resources: for example, designing a product from anywhere, producing it through a 3-D printer, financing it communally, and distributing it from anywhere to anywhere.
• The value chain has changed. The customer is no longer just the buyer but also a co-creator. Co-creation, crowdfunding, and customization can lend a deeper value to the pricing.
• With, not at. It used to be that capturing value was about hiding price or appearing perfect, when in reality, we return to a truly social construct of how connection happens. Instead of sales and marketing, exchanges follow the arc of relationships: romance, struggle, commitment, and co-creation. Connection supersedes control. Capitalization changes when a community invests in an idea; it also co-owns its success. In other words, it’s not just socially funded; it’s socially meaningful, which of course changes the value proposition.

Competition has changed. Value proposition has changed. Work has changed. Yet our business models have not changed to keep pace with these shifts. Until we understand both how these combined factors let social be the backbone of our organizations and how we make money, we’re not answering the strategic question: what are the ways the Social Era affects everything we do?  This chapter tackles that question: what changes in the business models of the Social Era, and what is the implication for winning in the marketplace?

Shifts in Economic Terms

The insights I just covered in detail in chapters 4 through 6 affect the economic model. They change the cost structures, they change what defines “premium value,” and they change how flexibility leads to a different type of competitive advantage.

What I’ve discussed so far is not transitory or reversible, but fundamental and irrevocable. Remember when Nicholas Carr said IT was a commodity and then people got into a huff? The uproar was deafening for about six months until it became clear that Carr was right. IT cost had decreased and its adoption had increased to the point where IT no longer offered the distinct advantage it had previously.

In the previous chapters, I’ve described a similar evolution in many once-core business functions, from manufacturing to HR to accounting. Organizations went from needing to build it themselves to having a variety of globally outsourced resources. Organizations no longer need to own everything to create value.

The net effect is that an org chart drawn in the 1990s would have had different parts: engineering, manufacturing, IT, HR, and finance, and each would be drastically different. That same org chart drawn today would be more fluid and flexible—and economically leaner, for sure.

Here are few implications:

• Many fixed costs have become variable costs. And where gorillas also had buying power that kept costs low and distribution to keep volumes up, these levers are no longer as powerful.
• Marginal cost plays a bigger role in the value equation. In many parts of value creation, the marginal cost approaches zero.
• Barriers to entry have fallen. Massive fixed costs, in the form of space, capital equipment, and staff, no longer keep out smaller firms. Size is indeterminate as a threat factor.

The Business Model

Now let’s think of what that means in terms of business models in the era of Traditional Strategy:

The value equation from forty years ago would be represented economically as:

The value equation in the Social Era has very few fixed costs:

 

Reinventing the “How” as a Way to Handle Disruption

In Clay Christensen’s iconic work, TheInnovator’s Dilemma, he describes how small newcomers eat off bits of an established leader’s business through lower cost structure and a willingness to accept lower margins. This phenomenon has been seen in industry after industry, and it is usually focused on the cost of delivering goods and services. In other words, “Look how the steel mini-mills making rebar disrupt the established integrated steel mills making sheet steel.” At each point in the disruption, it makes economic sense for the big company to surrender that bit of the market to the disruptor, so big companies logically put themselves out of business.

An analogous process is going on with the organizational structures of businesses themselves. Aside from market-specific competition from below, there is also competition from disruptive organizations that are finding new ways to get work done. This change is just as threatening to established businesses as the process competitors Christensen identified, and just as difficult to respond to.

Where once the reexamination of an organizational structure happened every decade or so to support a change in the business model, the ability to rapidly reinvent the structure—the how—becomes a disruptive skill in itself.

This, in part, kills Traditional Strategy. With Traditional Strategy, it was important to have a right strategy and it was possible to own an advantage for a relatively long time. Thus, you wanted a stable structure to execute a plan once it was put into play. It was expensive to change your mind because you were turning a battleship. And, changing organizational design midstrategy was incredibly risky. In the Social Era, the idea is to get the general direction right and rely on feedback loops to iterate and adjust direction.^[1]

In this framework, it is cheap to change your mind, and you don’t need to make big commitments; therefore, you set a course, adjust as needed, and learn until you get it right. This is what enables customers to be a part of your business rather than “out there.” Having work freed from jobs enables it. And it benefits from the fluidity of design. Course correction in the Social Era is more like a kayak shooting the rapids. 

An organization can—and should be—perpetually reinventing its constructs.

How does the structural fluidity lead to disruptive ability?

To answer this question, let’s look at Singularity University, which I mentioned earlier. You might recall that it delivers an education curriculum of three hundred hours with seven full-time staff. Its organizational model lets it fluidly reinvent what it creates next, thus baking in innovation with its disruptive design. In particular, some 80 percent of its business resources—the value levers just covered in chapters 4–6—are flexible. So its “how” is very different. But this new “how” also enables a new “what.”

The business model allows Singularity University to persistently review “what’s the next big thing” and adjust. That’s not a realistic option for institutions that have a tenured staff of experts wrapped up in things that were innovative fifteen years ago. Using Christensen’s metaphor, educational institutions are the sheet steel—with ever-increasing tuitions to support their tenured staff—while Singular University is the rebar. But its flexible design has become a lever of value and gives it the chance to keep being the “new rebar.”

Fast, fluid, flexible organizations that are made with this social-era backbone can assess needed changes, be quick to respond, and be nimble in how they assemble people. In net, this lets them quickly address both problems and opportunities in the markets.

Business Models for the Social Era

The Web 2.0 world, with its related efficiencies, was the bridge between the industrial era and the Social Era. This does not mean that every Internet company has an innovative, new, “social” business model. Far from it. For instance, one could argue that Amazon (the book- and product-selling side of the business, not Amazon Web Services) and Netflix are examples of companies that have maximized the efficiencies of the information age but still (largely) operate by the traditional strategy rules. However, Web 2.0 did bring us several new business models:^[2]

• Freemium model, as the MySQL option showed, where you give away first and create a conversion funnel for some users to pay you. This works because the value equation of distributing things online has relatively low marginal cost.
• Platforms as marketplaces, as eBay and Amazon have demonstrated. Today, you can find just about anything in discrete online marketplaces. Today there are many marketplaces, already described, such as Etsy and Kitchit.  
• Open business models. Henry Chesbrough shows that firms can and should use external ideas as well as internal ideas, and internal and external paths to market. Open Source is probably the best iconic example of a way an organization can use a community-made product to enable its own business value. Certainly, we know Xerox, IBM, GE, Intel, and others are using open source as core to their own development process.
• The Web’s efficient way of letting any size business access consumers means that the advertising-supported models get a lot of visibility through Google and Facebook.
• Collaborative consumption points to the declining need to own piles of products (and services); some business models will allow us to share and use things only when needed. In San Francisco, and many other cities where many folks use public transportation for commuting and shopping, few need to own a car. So, there’s Zipcar, which allows you to “own” a car for a few days or a month, on an as needed basis. The idea of renting has been around for awhile, but the Web gave us a new way to share (a depreciating asset) for the benefit of the earth.^[3] Another version of this on the enterprise side was software as a service (SaaS), which allowed people to rent software instead of buying it outright, lowering the capital acquisition cost.

These models are all valuable but only partly social.

Let’s face it, every business model has already been done in some form already. Free was around before social. For example, as I was growing up, the local candy store owner would hand out one relatively cheap Lemon Tarts candy to any kid who came in the store, knowing that it would continue to draw a crowd, and some percentage of parents would buy the more expensive product lines. The Web just took an already existing business model (free) and made it easier to do on a broader scale. In the case of software, the Web allowed easier distribution of products (and a lower marginal cost) to enable freemium pricing as a core new business model. The same is true for rental models that were around in the traditional world, as you likely remember from high school prom tuxedos to bowling alley shoes. In the Web 2.0 era, we saw that in SaaS models that allow a lower cost of ownership of software for enterprises. It was just rental with a more efficient cost structure. My point is that every business model has already been done in some form already—sponsorship, advertising, free, rental—in the traditional era and the Web era.

The question is really what could any business look like when all the business levers are socially oriented; what could happen next? We have yet to see the full range of business models we can create when all the levers are exercised. The Social Era, with its fundamentally different ways to create value through connected individuals, will surely bring more options.

We need innovative business models to go hand-in-hand with innovative ideas.^[4]

Importantly, these new constructs will give us more than money. If we can use assets more effectively, we will lower our impact on the earth. If we can find local resources, we can connect to our community in a different way. Maybe this means we will generate more prosperity, not just more wealth. Maybe it means people will see and sense their community. Not only will social models provide a way to build in resilience, they could enable a deeper connection to community in which we are creating. The next big ideas, the next big companies, or the next business models won’t be created by those who say that what we already have works well enough.

The way we create value and the business models need to be reinvented. Perpetually. We may not yet have all the metrics we need to fully understand how, and who is winning, and by how much. But what’s more important is to recognize that we’re in a new game.

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