The structure of the economy is changing

The presentation describing this pathway within the 3rd epoch domain explores what is happening to organizations and to their role within the larger society?

Digitalisation is changing the balance-of-power between the supply-side and the demand-side of the economy, moving organisations towards having to deal with the multi-sided nature of clients’ demands. Capturing value in this competitive environment depends on a demand-side ability to attend/align to the particular situation of each client and to wrapping any solutions around that client situation as it unfolds over time. This fundamentally changes the way organisations need to compete.

The interest here is in the larger context in which all organizations are working, regardless of whether private, public or not-for-profit.  The assertion is that all organizations are having to place increasing emphasis on the customer journey – the particular experiences of their customers over time within the contexts of their lives. No one organization can ever contain all of a customer’s needs in doing this, as the customer’s demand is always multi-sided and any one organization is always at least implicitly having to collaborate with other organizations in supporting effective responses to the customer’s journey over time.  The larger context is thus always an ecosystem in which the organizing hand of any one organization is increasingly a vanishing hand as organizations develop varying degrees of platform strategy capable of supporting these collaborations, collaborations in which what is doing the organizing is frequently shaped behind the scenes by the way software works. 

From the perspective of the organization, this means seeking to survive in an environment that is volatile, uncertain, complex and ambiguous (VUCA), an environment referred to as turbulent. Not all organizations feel able to respond to this requirement for agility, in which the primary emphasis shifts from the interests of employees to those of customers. An organization’s response to these turbulent environments can be defensive as it holds on to its one-sided relations, but which leads to long term stagnation within the larger ecosystem through a failure to learn and adapt while at the same time being perceived by citizens as prospering at their expense. This defensiveness gains support from the one-sided way of defining GDP, so that no account is taken of the effects of digitization on utility itself.  This leads to an understating of both GDP and productivity measures, and to a systematic blindness to the changes taking place on the demand-side of the economy.

In order to understand what is driving this turbulence, we thus need to understand how the structure of economies is changing.  Globalization, enabled by free-trade agreements, has accelerated the commoditization of products, shifting the focus of all economies towards providing services supported by increasingly complex supply chains.  At the same time, digitalization has intensified this shift towards services by enabling the development of knowledge-based sectors in which value is driven from the way attention is paid to the situation of the customer and from the way suppliers’ behaviors are made to cohere for the client. Thus in 2017, nearly 60% of the US GDP was in the knowledge-based sectors even though only about 40% of the jobs.

So the challenge presented by turbulence involves an organization having to compete within the client’s ‘experience space’, requiring changes in the way it competes and in the way it adds value. This shift means giving primary emphasis to horizontal linkages to the situation of the client, albeit subject to vertical constraints. This involves not just leveraging well-established economies of scale and scope, but adding the ability to deliver economies of alignment to the situation of the client. Competition becomes not just about creating asymmetries between the supplier and its competitors in how to make and deliver things, but also about reducing the asymmetry between itself and its clients in order to know more than its competitors about how to embed services within the client’s experience space at a tempo that fits the life of the client. The life of the organization can no longer be divorced from that of its clients but instead becomes entangled. Faced with such challenges, one-sided responses of defensive organizational cultures prevent the learning and adaptation needed for survival, ultimately being toxic for the life of the organization itself, although not before being toxic in the lives of its citizen-clients.

In order to take up the challenge of these turbulent environments, an organization must master all three asymmetries, the third of which presents a new kind of organisational challenge, namely to be driven from its edges, where it encounters the client’s situation, rather than from a priori assumptions made at its center. If a strategy ceiling is the level above which it is nobody’s business (except the center’s) questioning things, then becoming edge-driven means lifting the strategy ceiling to make everything questionable in the interests of creating value for the client in a way that is sustainable for the organization. Instead of working up-and-over, following the center’s lead, the organization must work across-and-up from its edges.

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