More on business strategy in a networked world

Following on from my previous post on networked business strategy – which was itself a response to a post from Dave Cushman) – I thought it’s a topic worth expanding upon in light of the constant debate over online publishing revenue.

Flicking through Seth Godin’s ‘Tribes’ reminded me of the work of Ronald Coase, the Nobel laureate in Economics.

Back in 1937 he wrote the highly influential ‘The Nature of the Firm‘ which looks at the fact that “production could be carried on without any organization that is, firms at all”, he sets out the transaction costs ( which means the cost of obtaining something through the market is generally more than the actual price, plus search and information costs, bargaining costs, keeping trade secrets and policing and enforcement costs) which mean that ‘firms will arise when they can produce what they need internally and somehow avoid these costs’.

Or as Seth says, ‘we start formal organisations when it’s cheaper than leading a tribe instead’.

This is where the kernel of your business is located.

Or for the flipside:

As my former boss at Bauer Media, Carl Lyons, wrote today ‘people will pay for digital content – if it’s easy enough‘. (Now I’ve left, I can say his blog is well worth reading, without sucking up!)

The flipside is this:

‘Consumers (Customers/users/whatever terminology you like) will accept using a firm for their needs when it avoids the transactional costs of circumventing it.’

By that I mean that I’ll happily pay for a Pro account on Flickr simply because it was a lot easier and more convenient than finding an alternative when I needed it, despite the fact I know I could find a reasonable alternative. I’ll happily buy books from Amazon (My recommendations are all here) or sell via either Amazon or Ebay because although I could find alternative routes to the market, they involve a cost of time, effort, organisation etc I’m not happy about paying at the moment.

So the key seems to be:

1. Figure out what people want to achieve when they are in the area of the market you serve

2. Figure out what you might offer which allows them to achieve what they want in a way which reduces their transactional costs (Time, effort, cost, etc)

3. Figure out how you might offer that service in a way which allows your service to benefit from an internal reduction/removal of transaction costs over/above/with the network.

Does this seem to make sense?

Applying this to a content model:

If we accept that there will always be free content available from somewhere, the transactional cost for a consumer is finding it, judging reliability, going into more background, possibly acting upon it, sharing it, discussing it etc (Any I’ve missed?)

As a content producer, the cost of content creation in many circumstances has already been hugely disrupted by online publishing, digital audio, video etc. The cost of a live broadcast for a major television company over recording it on a mobile and broadcasting via Qik? And the difference in terms of the technology gap will only reduce in line with Moore’s Law.

But the content curation (rather than aggregation) aspect raises big transactional costs via the network – what relative percentage of trust do you place in Wikipedia? Digg? Reddit? Is it cheaper to organise a network, build a system, or use a specialist journalist? And they have contacts to relevant industries which could come under Trade Secrets in transactional costs etc.

And this is also why I despair when online publishers only talk about display advertising revenue (or now subscriptions), as if they’re the only possibilities for revenue. (If a blogger puts Google Ads on his site and then claims he can’t monetise he gets a lot of feedback very quickly!).

The transactional cost for me of finding a product to buy is either in terms of locating reviews and hoping a relevant display advert is close by. Googling it and finding what I’m looking for. Or posting a message on Twitter. And the subscription model has the flaw of inviting/inciting the network to either reproduce content outside, or finding ways to beat the pay wall.

Comments

  1. Some services are far too complicated to learn in a hurry. For example, are you willing to learn midwifery on the internet – well yes, if I had no choice or was going to use the skill often.

    The problem with a lot of the institutions that are now in trouble is this. It is hard to see a service. How good is the midwife for example. The only way to tell is the way the service is made tangible: props (for want of a better word) and accreditation or rather, the group of people who know the business and will vouch for her/him (and preferably share cost of mistakes).

    Two things follow. 1. Amateurs can join in, display the right props, and it will take time to catch them. It is amazing how long doctors and university teachers, who aren’t qualified, go without being caught.

    2. Professions stop controlling themselves and get into selling qualifications. After all you don’t get caught. Right?

    Well sometimes the profession does get caught – Enron, credit crunch, newspapers. Sometimes the failure is not game changing. Somethimes they simply have to pay off the damages collectively – the accounting firms had to sell their consulting arms, for example. But it is all an accident waiting to happen and everyone in the game nows. Everything is slightly off. Too much compromise. Too many nepotistic appointments, and so on.

    The critical damage comes when they stopped delivering value. It happens for lots of reasons – probably what went wrong with the dinosaurs.

    I’m afraid in the professions there is nothing to it but to do our jobs properly. When we do, then we see the process that you described. People are relieved to deal with us – palpably. (We set that as the goal, second yr out of varsity – ‘immediate relief’). But there is another level too that must be managed and that is hard for the ordinary person to judge. When the profession has outlived its competence, for whatever reason, people notice and start complaining but it is hard to put your finger on what is wrong and every small issue can be dealt with as an isolated mistake rather than a system failure. In established institutions, there is a long delay before there is the big blow up. When it happens all manner of people who exited feel vindicated but that is small consolation.

    Just as I saw your tweet, I had been looking up definitions of back, middle and front offices and I am still perplexed as to why we haven’t had accounts of what happened in the bank. Banks are set up to to manage risk and it is puzzling what all those people were doing all this time.

    That said, cars run for a while without maintenance. So do insitutions. Best always to move to something that feels vibrant. Value proposition – competence. We have to have faith to deliver the services we spent years learning in formal education and practically. And sometimes it takes faith because doing a good job is not always correlated with reward and pragmatism is hard to distinguish from corruption.

    Happy to thrash this out more. As a business psychologist, I am used to the difficulty of differentation. Can’t always differentiate ourselves from amateurs but I am used to the problem. And I know that once a customer has experienced better service, they will be back. When they experience bad service, they are willing to DIY or to go with charlatans, and for the profession, the gig is over. It is a matter of time, that’s all.

    The role of the internet has been to allow alternative institutions to spring up. We’ll see more old occupations disappearing the way of old trades. If they have been on the ball, they would have take the internet on board and morphed to fit in with it.

    Enough. Plenty. Hope you enjoyed your break. Good luck with the next venture!

  2. Some services are far too complicated to learn in a hurry. For example, are you willing to learn midwifery on the internet – well yes, if I had no choice or was going to use the skill often.

    The problem with a lot of the institutions that are now in trouble is this. It is hard to see a service. How good is the midwife for example. The only way to tell is the way the service is made tangible: props (for want of a better word) and accreditation or rather, the group of people who know the business and will vouch for her/him (and preferably share cost of mistakes).

    Two things follow. 1. Amateurs can join in, display the right props, and it will take time to catch them. It is amazing how long doctors and university teachers, who aren’t qualified, go without being caught.

    2. Professions stop controlling themselves and get into selling qualifications. After all you don’t get caught. Right?

    Well sometimes the profession does get caught – Enron, credit crunch, newspapers. Sometimes the failure is not game changing. Somethimes they simply have to pay off the damages collectively – the accounting firms had to sell their consulting arms, for example. But it is all an accident waiting to happen and everyone in the game nows. Everything is slightly off. Too much compromise. Too many nepotistic appointments, and so on.

    The critical damage comes when they stopped delivering value. It happens for lots of reasons – probably what went wrong with the dinosaurs.

    I’m afraid in the professions there is nothing to it but to do our jobs properly. When we do, then we see the process that you described. People are relieved to deal with us – palpably. (We set that as the goal, second yr out of varsity – ‘immediate relief’). But there is another level too that must be managed and that is hard for the ordinary person to judge. When the profession has outlived its competence, for whatever reason, people notice and start complaining but it is hard to put your finger on what is wrong and every small issue can be dealt with as an isolated mistake rather than a system failure. In established institutions, there is a long delay before there is the big blow up. When it happens all manner of people who exited feel vindicated but that is small consolation.

    Just as I saw your tweet, I had been looking up definitions of back, middle and front offices and I am still perplexed as to why we haven’t had accounts of what happened in the bank. Banks are set up to to manage risk and it is puzzling what all those people were doing all this time.

    That said, cars run for a while without maintenance. So do insitutions. Best always to move to something that feels vibrant. Value proposition – competence. We have to have faith to deliver the services we spent years learning in formal education and practically. And sometimes it takes faith because doing a good job is not always correlated with reward and pragmatism is hard to distinguish from corruption.

    Happy to thrash this out more. As a business psychologist, I am used to the difficulty of differentation. Can’t always differentiate ourselves from amateurs but I am used to the problem. And I know that once a customer has experienced better service, they will be back. When they experience bad service, they are willing to DIY or to go with charlatans, and for the profession, the gig is over. It is a matter of time, that’s all.

    The role of the internet has been to allow alternative institutions to spring up. We’ll see more old occupations disappearing the way of old trades. If they have been on the ball, they would have take the internet on board and morphed to fit in with it.

    Enough. Plenty. Hope you enjoyed your break. Good luck with the next venture!

  3. Cheers for the comment, and really interesting points – I’m always amazed in the few conversations I’ve had about why banks need to change.

    The answer for me is the fact I’ve gone to moneysavingexpert for financial advice on numerous occasions, rather than dealing with a lengthy wait on hold in a phone queue, a queue in branch, and then sitting down with someone who spends their time trying to upsell me to something I don’t want before managing to screw up my details for the thing I actually need.

    Those organisations that operate as middlemen simply have to figure out what value they can provide, and fast, or they’ll be gone and no-one will miss them.

  4. Cheers for the comment, and really interesting points – I’m always amazed in the few conversations I’ve had about why banks need to change.

    The answer for me is the fact I’ve gone to moneysavingexpert for financial advice on numerous occasions, rather than dealing with a lengthy wait on hold in a phone queue, a queue in branch, and then sitting down with someone who spends their time trying to upsell me to something I don’t want before managing to screw up my details for the thing I actually need.

    Those organisations that operate as middlemen simply have to figure out what value they can provide, and fast, or they’ll be gone and no-one will miss them.