Networks and the Evolution of Business
This summer, my wife and I took our two boys to visit the famous Ford Rouge Complex in Dearborn, Michigan. This Ford Motor Company factory was once the wonder of the industrial world, where Henry Ford pioneered America’s leadership in last-century manufacturing.
Hub Controls the Spokes
The Rouge Plant was the first large-scale example of “vertical integration” – where companies control all the inputs needed for their manufacturing processes.
Ford built the Rouge plant to run like a giant machine, sucking in iron ore and timber on one side and spitting out automobiles and automobile parts on the other. You can think of the Rouge plant’s vertical integration as a giant hub, with all the spokes of inputs and outputs running into and out of an all-powerful center. Ford used the humming, machine-like efficiency of this hub and spokes model to minimize the threat of interruption to his manufacturing processes and turn this self-reliance into the pinnacle of operating efficiency for its time.
The Evolution of Business: Steps to Radical Connectedness
The day after our visit to Dearborn, we drove through Detroit – headquarters to General Motors, the automotive giant that later took vertical integration to gargantuan proportions. I won’t dwell on the impact of GM’s fall, or what it’s done to that community, but it’s clear that vertical integration is no longer the key to manufacturing growth. In fact, you could say it’s the exact opposite of where modern organizational design is now moving: from self-reliance to a radical connectedness.
Our first, awkward, blocky steps in this direction were outsourcing, where companies hand off pieces of what they don’t do well to other organizations that can do it better. I say “blocky” because, in our first steps in this direction in the 1990’s, most of what got outsourced were big blocks of a company’s activities. For example, firms might outsource all of their customer support to call center specialists that were better at that kind of work. Back then, we relied on legal contracts to ensure each party upheld its responsibilities in a collaborative value creation process because we lacked the tools to coordinate lots of small, loosely joined pieces of work (or “business processes”) between firms.
The Internet changed all that. Today’s radical connectedness is largely fueled by “connection technologies” like websites, email, SMS, databases that take for granted the “always-on” reliability of our new communications networks. These new technologies are essential to an organization’s ability to coordinate work with people outside its org charts.
Essential, but not sufficient.
You can think of these tools are “enabling technologies” in the sense that they enable a new generation of organizational strategies and processes. And of these, one of the most important, if still under-appreciated is the “modularization of business processes.”
Modular: composed of standardized units or sections for easy construction or flexible arrangement.
Without getting too geeky, let’s just say that when we make it easy to connect small pieces together, we make it easy to connect things in unexpected ways. Think Legos, but with the various tasks and jobs companies do in order to create value. Modularizing business processes gives us greater flexibility in who does what, which enables us to specialize and more effectively collaborate with others. And that is the key to radical connectedness.
The radical connectedness that connection technologies and business process modularity bring transforms the old hub and spoke model into a new model: the network model.
The Original Cellular Network
There came a point in the evolution of the cell when physics prevented it from getting any bigger, and life’s innate drive for intelligence nudged it to a different strategy: modularity.
Think Legos, but with biology.
The cellular membrane is the ‘connection technology‘ that enables cells to connect with each other in cellular networks. This protective structure doesn’t just surround the cell and separate it from its environment, like some simple barrier or wall. It’s a permeable boundary embedded with connections that enable the cell to exchange physical resources as well as information with its environment. These connections, which include both receptors and ion channels, are what give the cell its intelligence of, and ability to coordinate with, other cells.
Over time, evolutionary forces helped some cells specialize in certain functions and others in others. Their membranes gave them the standardization they needed modularize for “easy construction and flexible arrangement” across their networks. Through this radical connectedness, cells became amazing collaborators, coordinating and combining themselves into the remarkable array of biological forms we see all around us – our eyes and hands, tigers and armadillos, bamboo and mosquitos — everything we think of as alive.
Why Vertically Integrate, When You Can Network?
Like the cell, companies eventually hit a roadblock when they use size to compete and create value. Bureaucracy, sluggishness, rigidity, risk aversion, and a preoccupation with internal affairs are just some of the problems associated with this strategy, and they point to a new direction – the direction of radical connectedness.
For today’s startups, the richness of connection technologies, and the easy-to-connect with partnerships they enable mean that there are all kinds of work they just don’t have to do. Why worry about doing it all, when partners can pick up pieces of the value chain that aren’t really your thing? Why vertically integrate, when you can network?
As I’ve noted before, today’s value-creation networks aren’t limited to traditional outsourcing partnerships. They also include value creation with customers. Think about companies like Twitter and Facebook and their amazing collaborations with customers. Without these users interacting with these services, there would be no Twitter or Facebook.
The radical connectedness of modularity and connection technology extends to all points of contact with the firm. The companies that really get that are the leaders of tomorrow.
The Nature of the Firm
We’ve come a long way since the days when the Ford Rouge Complex was the cutting edge of organizational design. But in some ways, we’re still stuck in the old model. Though we might not say it explicitly, we still tend to think of the corporation as a kind of machine; a mechanical, deterministic thing that we wind up and point in the direction of making money.
That is the old model, where connections are deliberate, planned and controlled, and it is not the true nature of the firm. The true nature of the firm is nature, and it is now time to look to biology for guidance on how it creates value in the new, networked era — the era of radical connectedness.
Model T image modified from original by neonbubble