Back in the day, value creation was very different from what it is today. Large organizations (think IBM, P&G, General Motors) were needed to build something of value. Lots of engineers, lots of quality-assurance (QA) people were involved. That weighty size and scale formed the traditional corporate hierarchy.
Do you remember when large-scale companies were considered mini-governments because of their global influence? So do I.
Unlike that hierarchy and power model, the Web enables some thing entirely different. The Web creates a model of talent and ideas and self-organization. People seek out others with similar interests. Collaboration on a scale previously impossible now occurs on an ongoing basis. Mass sharing ideas on a global basis is easy using BaseCamp, wikis, and other software that makes your physical location in the world immaterial.
There are two fundamental "value chain" shifts in the last few years. And perhaps it's so early that few have caught on to the full implications of it. But let me try to name it and identify what it means to companies today.
- Manufacturing costs reduced
Open source and a worldwide talent pool have brought in efficiencies in software creation. You no longer needed a team of software developers and QA team to produce. Monolithic applications required a certain amount of engineering resources to code, QA resources to test, etc.
Now, with lots of little developers each tackling a piece of an overall solution, development—and especially innovation—can occur much more rapidly. No one has to live near you, work near you—heck, even know you—to join together to create something.
And, in the hardware domain, even injection molding is now readily available to the "common man"; concepts can be built quickly and contract manufacturers can deploy things with Chinese-based production. Being able to lower the cost of production and the access to tools lower the cost of entry into any market and create many alternatives.
- Investment costs reduced
Production costs have changed. With the AJAX architecture and then the ability to "mash-up" technologies online through sites like programmable Web.com, the Web has changed the fundamental production model from "make it all" to "make some piece" of the highest value. This has meant that very small teams of 5-6 people can enter a new market and make money from their specific vertical application or knowledge.
This allows not only more creativity to enter the production system but also a different way to create a "product."
Layer on top of that the software as a service (SaaS) model, and any company can enter a market without needing to invest upfront dollars to buy applications, storage, etc. This has lowered the cost of entry to any market and created many alternatives or substitutes.
But what do those two disruptions mean?
It means that there is a new type of David vs. Goliath model in play.
Small beats large at innovation
Small companies with greater flexibility and imagination are taking advantage of this change in economics far better than large ones. Big companies like Dell or Adobe are trying to figure out how to rationalize it with their existing systems and investment models, while smaller companies are simply creating.
Nilofer Merchant is the CEO of Rubicon Consulting (www.rubiconconsulting.com), a strategy and marketing consultancy based in Silicon Valley that solves complex business challenges for high-tech companies.