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Tuesday
Feb032009

A Forrester Technology Analyst on Web 2.0 and the Theory of the Firm 

DateTuesday, February 3, 2009 at 6:00AM

As my readers might guess, I subscribe to the beliefs outlined in the perspective below.


I've been suggesting something similar for some time now ... a dynamic two-way flow etc. (see his point below re: fundamentally open value creation)


Thanks for the link to Bertrand Duperrin.


.



Web 2.0 Represents A Fundamental Rethinking Of Business, And The Theory Of The Firm


[ Snip ... ]


As an economist — and a micro-economist specifically — I look at Web 2.0 through the lens of Coase’s The Nature of the Firm and the eventual refinement and expansion of his theory over the last 80 years. So what do I see when I look at Web 2.0, social media, social software, and whatever else you want to call this thing? I see a fundamental rethinking of the definition and function of the firm; the single biggest change since the industrial revolution.

Yes, that is some over the top rhetoric, but consider the facts: Since the industrial revolution the basic creation of economic value has followed a pretty simple path. Firms acquire capital, labor, and resources, combine them into a valuable product or service, and sell the product or service to individuals or other businesses who consume that value. In this system is it incumbent on the firm to create value, and the role of the buyer is to consume value. End of story.

What Web 2.0 software has done is give firms the tools to blow the doors to value creation wide open and invite customers, partners, experts, and prospects into the process. Think of a social network like the ones run by Communispace; here businesses are opening the doors to the product development, marketing, packaging, and distribution process to customers who add value every step of the way with their preferences, ideas, and reactions. The firm is no longer creating value alone, it now has help.

Skeptics will argue that this sort of value has always been provided to the firm through focus groups and other market research. While it is true that these functions have brought in outside opinion and value in the past, they have never before operated at the scale that truly social software allows. Instead of a one-off focus group for 8 hours with 20 people, firms now have the ability to conduct perpetual focus groups with as many people as care to join. This, needless to say, is a big change.

Over the next 10 to 15 years, on the back of social software, we will go from a fundamentally closed value creation system to a fundamentally open one.


The firms that get their first and with the greatest depth stand to profit wildly, while those that do not embrace this change will be stuck with a slower pace of innovation and industrial revolution-era economics and resource constraints. Firms that embrace the community will harness vast amounts of community value at almost no explicit cost. Again, this is a huge transformation.



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