The Information and Services Economy
a.k.a.
Business Architecture and Services Science
IS210, Week 5
Profs Bob Glushko & Anno Saxenian
UC Berkeley School of Information
Fall 2006
Emergence of Info and Services Economy
1950-1980: Mass production as blind destiny
Assumption that economy driven by large firms
(hierarchies)
John Kenneth Galbraith The New Industrial State (1957)
“The size of General Motors is in the service not
of monopoly of the economies of scale but
planning…and (thanks to) this planning—control
of supply, control of demands, provision of
capital, minimization of risk—there is no clear
limit to the desirable size (of the company.)”
The Fortune 500 industrial corporations
Sales ($B)
Share of GNP (%)
Jobs (M)
1954
1969
137
445
37
46
8
15
1970
1989
1,400
2,200
58
42
16.2
12.5



(3/4of mfg LF)
1970s Discovery that small firms are big job generators
1980s Discovery of Emilian and Japanese model
1990s Discovery of dynamism of Silicon Valley
What changed?
1. Macroeconomic instability
2. International competition intensifies
3. Accelerating pace of technological change
Undermines stability required for LT
investment and corporate planning: costs
fluctuate, consumers unpredictable, new
competitors
Network forms of organization
Networks: organization typified by reciprocal patterns of
communication and exchange, interdependent
v.
Market: spontaneous coordination of self-interested
individuals and firms via prices, invisible hand
Hierarchy: administrative coordination with visible hand
of management, authority, internal transactions
Not points along a continuum, but a distinct and viable
organizational model with historic antecedents
“Network” as a metaphor for the current era
Network theory
Social networks, social network theory
Business networks, old boys networks
Entrepreneurial networks
Electrical network, transportation network,
digital networks, radio networks
Network economics
Etc.
W. Powell: illustrative cases of networks
 Networks in crafts industries
Publishing
Construction
Hollywood
 Regional economies and industrial districts
Emilia Romagna
Silicon Valley
 Strategic alliances and partnerships
International joint ventures
Biotechnology
Case: US auto industry circa 1980
 The “Big Three:” vertical integration of production, low
trust, arms-length relations with dependent suppliers,
cost-minimization as goal. Closed, hierarchical.
 Insures guaranteed supply, secrecy, low costs in stable, slow
changing environment
 But overwhelmed when technological change increases,
product cycles shorten, and competition intensifies
 Inflexibility of tight technological coupling of production
 No internal ability to innovate due to cost cutting
 No autonomy to suppliers for innovation, experimentation,
capability building (remain dependent)
Womack, Jones and Roos The Machine that Changed
the World: The Story of Lean Production (1991)
Japanese auto industry: lean production
 Toyota System: vertical disintegration and long term
relationships with suppliers--collaborative risk sharing,
cost sharing and information sharing. Flexible, open.
 Suppliers have autonomy to experiment and innovate
 Partners jointly improve quality, productivity
 Other elements taken directly from Taylor and Ford
 Benchmarking, design for manufacturability
 Concurrent, simultaneous engineering
 Just-in-time-manufacture, error correction and detection
 Total quality management, etc.
Toyota System relies on “pull” feature for production
scheduling (not “push” driven by sales targets)
Network organization of production
 Fragmentation of production into distinctive,
complementary specialist units (firms or teams)
 Information-sharing and joint problem solving across unit
boundaries, both vertically and horizontally
 Concurrent engineering, iterated co-design
 Reciprocal risk sharing w/ multiple partners
 Open search networks and routines; entrepreneurship
Creation of localized ecosystems of specialized skills
and know-how that support joint experimentation and
learning i.e. Silicon Valley, Toyota City, Bangalore
Organizational design trade-offs
complex
Hierarchy
Network
Product
Market
simple
Stable,
predictable
Environment
Dynamic,
uncertain
Organizational design: info exchange
 Market: price mechanism/transaction primary
mode of exchange; radical decentralization,
limited, unpredictable info flows
 Firm (Chandler): formal administrative channels
enforce centralized vertical flows of information,
creates silos and subject to severe bottlenecks
Hierarchical organization: info access
Line employees
High
Access to
relevant
information
Middle
managers
Senior managers
Low
Strategic
Operational
Information
Hierarchical organization: info access
Line employees
High
Access to
relevant
information
Middle
managers
Senior managers
Low
Strategic
Operational
Information
Separation of conception & execution
LT strategic
planning, R&D
Upper level managers
Technicians and lower
level managers
Unskilled operatives
Organizational design: authority
 Hierarchy maximizes control by centralizing
authority, but limits incentives for initiative
 Market maximizes initiative by decentralizing
authority, but limits ability to manage complexity
 Need for coordination mechanism that provides
autonomy provides accountability.
EXIT – VOICE – LOYALTY
Network organization revisited
 Network organization: long term informal and
formal relationships between specialized teams/
firms provides local autonomy, facilitate inter-unit
knowledge sharing, collaboration, and co-design
but also provide mechanism for monitoring.
 “Studied” trust, not “blind” trust
 Mutual orientation and co-evolution of network
members without lock-in.
Networks as fractal design
In colloquial usage, a fractal is a shape that is recursively
constructed or self-similar, that is, a shape that appears similar at all
scales of magnification and is often referred to as "infinitely
complex." See below, the Mandelbrot set.
Supply chain as self-similar pyramid
Prime contractor
Self-similar
pyramid
across scale
Nishiguchi and Beaudet, 1998
Fractal link design: a cognitive map
SUPPLIER
SUPPLIER
supplier
supplier
SUPPLIER
customer
CUSTOMER
customer
SUPPLIER
Nishiguchi and Beaudet, 1998
The next revolution in interactions
Once firms become more focused they must learn how
to manage complex interactions with customers,
suppliers, and partners.
Types of work by dominant type of interactions
 Tacit interactions dominate: fastest growing
 Transactional interactions: routine, declining
 Transformational: small and declining share
Most jobs today require both tacit and transactional
interactions; key is to build talent based competitive
advantage by improving performance in tacit
activities.
The 21st-century organization
Importance of “knowledge workers” as
innovators--need to increase productivity

Streamline and simplify organizational structures and
allow teams of professionals to focus on clearly
defined tasks with clear accountability, e.g
 Line managers responsible only for current earnings
 Off-line teams research new opportunities for wealth
creation
 Develop knowledge marketplaces, talent marketplaces
and formal networks to stimulate the creation and
exchange of know-how,
 Replace traditional supervision with a combination of
freedom and measures of performance.
A new dominant logic for marketing
 Marketing in the goods economy: financial
optimization and the 4 P’s
Product
Price
Placement
Promotion
 Marketing in the services economy
An ongoing social and economic process
Inherently customer-oriented and relational
Goods as distribution/delivery mechanisms for services
Services-centered model of exchange
 Skills and knowledge are the unit of exchange;
 Knowledge is key source of competitive advantage;
 Individual customers increasingly specialize and
turn to relationships for services outside of their
own competencies;
 Promotion is two-way communication process of
dialog, asking and answering questions;
 Customers are always co-producers of services.
A services economy curriculum
1.
2.
3.
4.
5.
6.
7.
Marketing strategy: competences and capabilities in creation
of value, resource advantage theory
Management of cross-functional business processes to
support development of capabilities & competences for
market-driven organization
Integrated marketing communication
Consumer behavior: relational
Pricing: building and maintaining value propositions,
management of long-term customer equity
Marketing channels: coordinating marketing networks and
systems
Supply chain mgmt: management of value constellations and
service flows