Most natural systems are open systems, working mutually with their environment. The human body is a prime example. You breathe air, which provides your cells with oxygen; then you exhale carbon dioxide. You drink water and eat food to survive, and you expel what you don’t need. Companies are open systems, too – exchanging information with customers and suppliers.
A closed system is self-contained and isolated from its external environment. Most machines are designed as closed systems, consisting of a hard shell to protect their delicate insides from the surrounding environment. For instance, a watch has a hard case that protects its inner workings from the outside world. As long as the case is not violated, the watch can operate efficiently. Some businesses work in a similar way because internal processes are isolated from the outside world.
Because it’s isolated from the environment, a closed system is easier to control. Performance is simpler to measure because the environment inside the shell or company boundary is stable. In contrast, an open system exchanges energy continuously with its environment, taking in information and adjusting itself based on feedback. This constant flux makes open systems more difficult to measure and control.
Nevertheless, this emerging era of hyperconnectivity is an assault on the stable environments that have been the foundation of businesses in the knowledge economy. A key aspect of these stable environments is the ability to play in well-defined sectors and industries, which have not been subject to change. A business could say with some certainty that it competed in the utilities industry without thinking this designation would change in the immediate future. This level of stability dovetails perfectly with how businesses in the knowledge economy were structured and managed – up until now.
If we look at the utilities industry, for example, the forces impacting businesses are customer demand, raw materials, and regulatory issues, among others. Twenty years ago, these were slow-moving forces. Companies would gather supply and demand information, analyze it, and ensure the organization could act on that insight – they knew about the industry they were in and how to measure performance to deliver results.
Fast-forward to today, the advent of cost-effective solar power has changed the equation: Now, the consumer is generating power and selling it back to the utility. And now, the utility industry is trying to redefine itself.
By gathering granular data from smart meters, utility providers offer power as a service. Managing distribution networks and cross-billing services help them maintain continuity. The cozy world of understanding what industry they are competing in and how to grow has been upended, changing how utilities measure performance as the external stimuli on the business explodes. In effect, they are now dealing with tens of thousands of sub-utilities that are selling them power, and it’s their responsibility to distribute and store it.
However, such changes are not just remaining within the utilities industry. Take hotels, for example. The forces that shaped that industry were customer demand, local business climate, economic conditions, and available local hotel rooms. All of these factors are quantifiable and fit within the scientific management theory pioneered by Fredrick Taylor and serve as the fundamental foundation of the knowledge economy. In effect, this industry runs as a closed system because its interaction with the much wider world is somewhat isolated, easy to control, and simple to measure.
Then, comes along Airbnb. Although this new competitor is not a hotel company, it is an accommodationbusiness that is diverting revenue from established hotels. If you think about it, this is the actual consumer need the hotel industry grew to resolve, but the solution became the industry along the way. Nothing should have stopped any of the major hotel chains from coming up with the idea for a service like Airbnb. However, since their environment had been stable for so long, hotels probably would have just built more hotels!
From Airbnb’s perspective, it looked at the situation as a software and analytics problem. In this case, the accommodation is viewed as the first-order problem and the hotel room is a part of the solution. The startup designed a method that allows anyone to offer a couch or room for rent and present the offer to a consumer looking for a similar accommodation. The instantaneous connection between supply and demand is made possible through hyperconnectivity.
In the past, the environments used to govern industries were slow-moving, which then allowed business model innovation to be evolutionary in nature. In the hotel business, you could see a competitor emerging as they assimilated physical assets to compete in your markets. Yet, in the era of Airbnb, a startup can become the biggest competitor and remake the industry without acquiring a single asset.
Do you have the capacity to see that happening in your marketplace right now?
For more on the digital economy and its impact check out the research paper “Live Business: The Digitization of Everything.”
Dinesh Sharma is the Vice President of Digital Economy at SAP.