Friday, 20 January 2017

Value creation in a digital economy and why it matters for businesses



How does Facebook work?  We know it is based on social (as a business model) and that crowdsourcing enables it.  And by mining the data that we, the users create, turns it into information to support ads sales.

When we use social media, it is crowdsourcing at work.  As the term imply, the crowd (public) is sourced.  In this context, crowdsourcing is a technique employed to engage the public with intent but in an informal manner to participate in an activity and which taps on the participant’s resources.  It can be as simple as time, say, to use an online service, effort to work on a communal task or assets such as a spare room.  In the case of online services like Facebook, it is people’s time to use a free service.  They use it because there is value. It’s free because Facebook monetises that usage.  For crowdsourcing to work, it has to be mutual.

From an organisation perspective, crowdsourcing is a tool used to accomplish an organisational function.  From a participant perspective, value is exchanged in the transaction.

This is another way to look at it.

Facebook is a modern factory.  We, via crowdsourcing are the ‘workers’ producing the raw material – data.  Facebook processes this input, manufacturing informational and quasi-informational products and adding value to physical ones.  These ‘finished products’ – specific and tailored information are used for sales of ads.

Now compare this to a factory producing steel?  The steel mill takes in raw material (iron, coke, etc) from mines as inputs and with workers turn them into steel bars for sale.

What’s the difference?

The difference is that instead of a factory, this modern version is a digital platform.  Instead of miners, consumers produce the raw material.  Instead of the assembly line, networks of computers use analytics, machine learning and AI to assemble insights of information from the data. 

This suggests that a new form of production is emerging just as factories did in the industrial one. 

And if history is asked, this is only the start.  Expect enlargement and further developments in digital forms of production as we move deeper into the information era.  But unlike the industrial age that limits production to factories, in the information era it will cut across all sectors, including the government and the public.  It is beyond this post to ponder further but perhaps the effects of datarisation may offer some hints.  And the following three points too.

1.  Redefinition of the term ‘consumer’

Until the internet, consumers only consume, now they also produce.

We produce the data, willingly and unwittingly, for Facebook’s factory or LinkedIn’s.  We provide the cars and drivers for Uber’s ‘taxi’ services.  And our spare rooms for AirBnB’s virtual hotel.  We produce answers for Quora’s Q&A business engine.  There is value to all these ‘production’.

Businesses should bear this in mind.  Digitisation partly derives from this. 

2.  The digital platform

This ‘new’ factory is not your firm’s website.  It is much more.  A corporate website is mostly passive, designed to be read while a platform actively engages the consumers using crowdsourcing initiatives for branding exercises, pre-sales, sales, business development, product development…..

A digital platform is central to this production process.  It is likely to see significant changes in function, role and technology in time to come.  Certainly in 10 years, it’ll be quite a different animal!

3.  Data

Old culture tends to view data as a by-product, not the way to reimagine your organisation planning for transformation.

Firms have always used data but in the digital economy, the role of data has been elevated.  What Google sees, telcos do too but little is done to monetise it while Google built a billion-dollar search business out of data.  Github’s business model is information around software development while Microsoft saw its huge development community as a cost centre.  Many other startups are taking advantage of data that traditional firms could not see.  As they succeed, the latter becomes mere followers.  Witness banks copying fintech startups.  Being an early-mover would have equipped them to better compete in sectors being disrupted.

To do that they have to respect data.

Merely thinking in terms of big data or analytics is not quite it.  Senior leaders could make ‘data’ a part of their strategic thinking.  Better if it’s ‘culturised’.  And should they reason that this is the job for the IT director or CIO, well, that’s an example of not respecting data and a wrong way to think.  IT should be involved but this is mostly a business function. 

Executives who work and breathe ‘data’ are assets.  They would collect emails contacts (clients, public) even before thinking what they can be used for.  If it’s about selling herb plants, they don’t just write the names on the tag but how it can be used for health and in cooking, with a website address (used to engage consumers, some of whom will become customers.)  This is an example of using information to sell, like Facebook.

New organisation culture is partly data-driven. 

Conclusion


A new production process is evident of the digital economy resulting in value creation that is markedly different from the conventional.  Internet startups have taken advantage of this, disrupting traditional sectors in the process.  There is nothing to stop conventional firms adopting the same, except perhaps the momentum of old organisation culture and the fear of change.  For those who can unshackle itself, New Culture is data-driven, customer-centric and open with a mentality that melds externalisation to the traditional internalisation of work.  They should be aware of the redefined role of consumers and what they can do for businesses.

Briefly, externalisation is a means to utilise external resources (manpower, property) and is best understood by comparing it to internalisation which is how most organisations operate today.  With internalisation, tasks are carried out internally and in some specific cases by close partners governed by strict contracts.  This is because of trust and to maintain better control.  But as Ronald Coase in his famous theory of firms dissected it, it is really about cost – it cost less to trust internal staff and processes compared to the external.  That was pre-internet.  Today, the cost structure has changed.  Trust can now be engendered without (rating systems is one way), at little cost.  It is also a way to tap better skills.   Externalisation in fact lower costs.

Well then Facebook is not only about face-time!

Ref.


Saturday, 31 December 2016

Is facebook a tech or media firm?



Neither.

A year back, media mostly classified Facebook and other internet firms like Google as tech companies.  And recently ‘is Facebook a tech or media business?’

Let’s take a look.

Is AirBnB in the hotel sector?  It owns no physical assets.  Its only asset is information and it profits from it.  It does this by getting a cut every time its platform provides the information for a consumer to select then book accommodation from a home owner.  Perhaps AirBnB is really an information business, in hospitality?

Is Google a tech company? (Its search business is considered here.)  Sure, it is staffed mostly by engineers but like AirBnB, owns little physical assets.  It does however have a lot of data centres but that’s like telcos. Telcos depend on data centres but they are not considered core assets, connectivity is.  Google’s core asset is data.  Searching turns it into information.  It’s monetised through the act of searching, with ad sales. 

An aside, PageRank, the algorithm (it is now only one mechanism alongside data analytics, machine learning and other algorithms) that made Google by significantly improving search results uses a peer-to-peer model.  In PageRank, the more a website is linked by other websites, the higher it’s ranked in search results.  Website-to-website is peer-to-peer (p2p).  Similarly, AirBnB (sharing economy), Alibaba (markerplaces) and SnapChat (IM) use the p2p model in their business model.

What about internet messaging (IM)?  WeChat, WhatsApp and Line are little more than platforms that allow us to communicate with one another, while allowing them to gather information on our chats.  Of course ads are also placed because we spend so much time on these platforms.  Ad sales are normally associated with businesses that deal with information.  Perhaps IM firms are information businesses, in communications.

Isn’t text messaging and voice the traditional business of telcos/celcos?  This makes a classic case study of an industry transformed by the internet.  Telcos today are essentially broadband providers. Their traditional business is being taken over by IM players (Dichotomy of a modern telco).

EBay and Alibaba?  (Their original marketplace business is considered here.) They are primarily marketplaces, holding no stocks, not unlike AirBnB, connecting sellers to buyers.   Buyers make purchasing decisions based on the information provided by sellers.  Isn’t this a new model of trading, based on information?

And so to Facebook.  We create data when we posts on our timeline and like Google, it’s mostly staffed by engineers, running off data centres, on a digital platform.  The revenue model is similar – ad sales via the information mined from the data and placements from our copious face-time on the platform.  Perhaps this is why media is confused.  On the one hand, like media firms, Facebook is an ad-based business.  On the other, it appears tech-like.  And both target consumers.

Let’s dwell deeper.

                          Media (news)                Facebook

    Core biz          news, content                data/information
    Revenue          ads, sales (content)       ads, revenue sharing (content not sold)
    Method           provide news/content      provide a service through a platform
    News              write news articles         through third parties, not internally written
    Content           news                            social in nature
    Mechanism     internal (reporters)          external (crowdsourced, 3rd party)
    Staff (core)      editorial                         tech
    Biz model       content                          social, data

Is Facebook a media firm?  They don’t provide news or content except indirectly and even these are miniscule compared to user-generated content.  Furthermore such content (latter), social in nature, are certainly not what traditional media produces.  New media, if that’s an appropriate term may apply to internet-inspired startups like Reddit, Buzzfeed or Quartz.  Reddit in particular could proof to be one model of the future of news media.

Is Facebook a tech firm?  They don’t provide technical services but consumer services that have nothing to do with tech.  Tech is only used internally and as an enabler.  Among the internet plays, Github, used by the software development community is unquestionably a tech firm as is Red Hat.

Facebook’s core business revolves around social content, not news per se, and is crowdsourced unlike media firms that write content in-house. And while Facebook is heavily tech-dependent, that doesn’t mean it is a tech firm.  Using is not the same as providing.  Perhaps Facebook is really an information business (in the sub-category of social media).

This also applies to Pinterest, Uber, Craiglist, Change.com, Foursquare, Twitter, Snapchat, Telegram, Instagram, Uber, Alibaba, Lending Club, LinkedIn, Quora, Yelp, Tinder, Glassdoor, upWork, Evernote,.....

“..and Google is expanding into everything to do with information’ – Economist, 17 sept 2016


In time, perhaps 10 years, Fortune 500 (Fortune magazine’s annual list of the largest companies in the US and the world) would add an ‘information’ category.  So will the stock exchanges globally.  Media firms of today will be reclassified into this category as will social media and internet businesses that rely on information.  Even further out, this information category itself may break out back to its sub-categories; news/content, social media, search, marketplaces, communications as each sector enlarge.  Tech is the enabler of all these information age firms.

Since we’re on the subject of Facebook, the post next week will show an angle on how it works that may shed light on how value is produced in a digital economy.