Life and the internet

The death of distance: how the communications revolution is changing our lives, Frances Cairncross, 2001

In 'The death of distance,' Frances Cairncross of The Economist set out to analyze as many facets as possible of the internet in our lives. Her book was initially published in 1999, though she thoroughly revised it for the 2001 edition. Two (or worse, four) years are an eternity in internet time, so it is all the more remarkable that 'The death of distance' remains interesting and relevant. Cairncross covers social and economic topics from the design of homes and new work modes to global trade and network economics.

Firm structure and alliances
In the 1990s there was a marked increase in the number of alliance between firms. This trend was reinforced through the availability of the internet and the world wide web.

The Internet gives companies new incentives to work together: to build a trading hub, say, or to offer links to one another's products on their Web sites. Alliances provide an insurance policy against risk - the risk of new technology and the risk of new business models. They also allow companies to deepen their relationship with customers by offering them bundles of products, some created by alliance partners. On top of all these incentives, the Internet provides the means. It enables the construction of links not just between the folk at the top of two allied companies, but at many levels on the way down.

Openness becomes a corporate strategy as companies allow customers and suppliers unprecedented access to their databases, staff, and inner workings. New opportunities for building alliances and relationships demand greater trust in corporate life. Learning to manage these new relationships in novel ways will clearly be an important - perhaps the most important - competitive advantage for businesses in the new century.

Similarly, a study by Powell et al. found that managing R&D alliances had the beneficial side-effect of building a firm's competence in alliance management in general and thereby improving its competitiveness. In addition, companies increased their reputation as a trustworthy partner the more they engaged in alliance - another gain in competitiveness. As a firm becomes a more valued and more connected alliance partner, it moves closer to the center of the information network in the industry.

Technologically enabled alliances began with companies using proprietary systems to give suppliers or customers access to their databases. However, installing these systems was associated with very high costs and a risk of being locked in with the wrong partners. The internet introduced a cheaper, more flexible and often more user-friendly method of sharing data.

Cairncross (like David and Chakravorti) emphasizes the importance of adapting business models to technology - and points out the radical changes that the internet has facilitated. However, she also says that this process is taking place much faster than for earlier innovations because a) the Internet is being adopted much faster than earlier technologies, and b) there is a greater awareness of the potential of technological change to increase efficiency and a more focused search for ways to make it do so. In a 'reverse product cycle' these efficiency gains can spur further technological improvements or even new product development.

For most companies the road-to-Damascus moment comes when they realize that the Internet offers a way to reorient the entire business so that customers at one end of the chain and suppliers at the other are linked seamlessly together.

Knowledge and innovation
Cairncross's description of the organizational changes in supply chain management suggests that business model innovation is as dramatic as technological innovation. Each builds on the other: On the one hand, firms adapt to exploit new technologies as efficiently as possible. On the other hand, direct customer feedback is a significant driver of further technological innovation.

It seems to me that this may have consequences for the location of innovation. If customer feedback is channeled through electronic systems, this may improve the chances of conducting cutting-edge innovation outside the dominant industry cluster (e.g. Silicon Valley). Although few studies have been done so far on the cooperation of industry clusters, an analysis of the medical instruments industry showed that lack of customer contact and feedback was a significant factor in the failure to keep up technologically in a more distant and technologically less advanced location.

Cairncross points out that collaborative working was the Internet's original function back in the days of the ARPANET.

Goods and services
The distinction between goods and services is no longer clear.

Three distinctions were important in the past. First, manufacturing produced a tangible object; services did not. Second, manufacturing operations could be at a distance from the final consumer; service operations could not. Third, manufactured goods could be mass-produced; services had to be individually created. Now, manufacturing is becoming increasingly intangible, more manufacturing is tailored to the individual's tastes, more services are being produced at a distance, and more services are being mass produced.

Cairncross introduces a new categorization: in the future it will be more important whether a product requires physical delivery or whether it is 'weightless,' ie. digitally deliverable.

The fact that immediacy and the need for personal contact may become less important for some services but more so for some products will probably also be important for innovation in these two domains. While immediacy and personal contact might be seen as drivers of innovation, it appears that the exact opposite is happening. Services have traditionally engaged in very little R&D. Now, they are catching up; especially those services that are mass-produced are benefiting from a large increase in R&D.

Service industries have traditionally been slower to innovate than manufacturing, but some are now more innovative than manufacturers and concentrate on making similar improvements, in quality, market, and range.

The rest
The book covers many more aspects from politics and government to private and social life. Some of Cairncross's conclusion seem a bit rosy, especially when compared to her very balanced analysis of economic and business topics. Well worth a read.

No comments: