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Concentric Waves of Creative Destruction: Why OPEN is the answer

Last week the Open Networking and OpenStack Summits kicked off yet another fun-filled adventure at the edge of chaos. While some may be getting sick of the term 'disruptive technology' by now, I for one can’t get enough.

This post is the first in a two-part series that will highlight some notable progress in business and ecosystem disruptions reported at recent Open Summits. This first part will focus on laying some groundwork and background understanding of creative destruction and some history of governance and management strategy. In the coming weeks I will follow it up with more specific recent observations on new innovations that are continuing to disrupt the past and bring forth a new future.

Once again this year Open Summits brought news of major industry inflections, new disruptions in their own right yet all an unfolding part of larger and more complex, multi-faceted disruption currently happening across the whole of internet and computer technologies. To me, the very idea that some are getting sick of the term ‘disruptive’ marks an interesting phenomenon that is now playing out before our eyes as these industries are transformed. The history behind the knowledge of how creative destruction takes place is a fascinating one that shows how simple access to knowledge has been used to completely blindside and topple some of the largest and most powerful companies in the world. And it has also been fascinating to observe years after this knowledge became well-known in some circles, many businesses were still being completely blindsided due to the slow dissemination of knowledge that used to be a critical advantage for businesses that had access to closed, elite circles where the knowledge was held.

However, in recent years as the internet has continued to grow at an amazing pace, the democratization of knowledge itself has somewhat silently, radically transformed the dissemination of advanced management strategies and research. Academics have always been fairly open about sharing advanced findings, however their reporting of these findings is often found in academic papers that few in society have the knowledge to break down and even fewer have the ability to transform into actionable strategies and practices. And so in the past the pattern by which this knowledge was disseminated was through elite consultancies who could afford the PhD’s needed to break down new findings, transform those into practices, and then sell them to the largest and wealthiest companies that could PAY. Eventually, this knowledge would trickle down in bits and pieces to middle management, employee churn trickled down the knowledge to other companies, then someone writes a book and eventually knowledge would become commonplace by the time it was stale and no longer differentiating.

This sheds light on just how drastically society’s attitudes towards sharing knowledge has changed, where not long ago secrecy was such a significant and valuable priority, and today we have moved to a polar opposite where now ‘thought leaders’ rush to share their deepest insights with the world. As leading consultants and practitioners go and apply new techniques and strategies, they report a blow-by-blow accounting of these experiences in real time to the blogosphere, making this knowledge free to the world, completely disrupting the traditional models of knowledge dissemination that have been the practice since the printing press. And correspondingly causing companies like Google to move ‘up-market’ in their knowledge gathering methodologies to drive further advancements in identifying ever faster and newer methods to understand consumers and ecosystems.

Despite this radical transformation of the dissemination of knowledge, perhaps the majority of conservative corporate execs are still riddled with paranoia over pressure to share more advanced knowledge while fighting the plague that toppled the first internet bubble: how to monetize. And while I am all about free and open stuff, monetization is important. Without it, none of the cool stuff we love gets funded. Yet the frustrating part for much of society today is that we can see clearly that newer business models and newer ways of monetizing can actually be far better for the investing company and for the whole of society at the same time.

A great example of this is iTunes and online MP3 markets, where, prior to their arrival, the record industry was settled in a paradigm. With any paradigm, those that are getting the spoils also happen to be very powerful and wealthy, and for them the idea of change only represents risk. Yet through some amazing maneuvering, Apple was able to successfully disrupt this industry and, to the surprise of some, this transition created far greater monetization than almost anyone could have imagined. This democratization of the dissemination of music created radically new ways to find new artists, which, combined with the growth of the internet, social media and communities of interest, has created a massive expansion for the entire ecosystem where we have seen hundreds if not thousands of new disruptive business models play out – and this is only the beginning. Yet, compare this transformation to the one that is still trying to happen for the dissemination of the television and movie industries and we can see clearly how political entrenchment and industry politics can slow the potential growth of massive industries to a crawl.

This latter story highlights the dangers of using government regulation to attempt to control greed – I am not anti-regulation, but this is important to understand to create new forms of governance that can better support a constantly growing and evolving society. The flip side of regulation, however, is handing the society over to the greediest of sharks that have turned the whole of society into their own spoils, ignoring fundamental principles of reality like you can’t simply plant crops in the same soil over and over again or it stops yielding crops…period. The same is true for society. You can’t fleece and fleece and fleece while letting society flush down the tubes. You can blame the problems in our populace on whatever you like, but that still doesn't change the fact that if we as a nation and as a world don’t address our problems, we are all screwed. We cannot have sustained prosperity when 90% of its citizens are not doing well and not in a position where we can maximize their potential.

This takes me to another example - I read recently in the New York Times where, the story goes, a few years back executives at numerous major food companies attended a meeting where some called for creating some shared, cross-industry goals for improving food quality and aiding the nation's obesity epidemic. And, as would be expected, a few execs got up and argued for support before one exec basically got up and said ‘no way, I’m going to laugh all the way to the bank,’ and things fell apart from there. Without consensus here, there was no support because we know how market’s work; without a level playing field many will continue to manipulate a desperate and weary populace living paycheck to paycheck too weary to know what actions will create a healthy society and a flourishing economy.

There is a saying, "lest not the fires of war rage so intensely the spoils of war are ruined for the victor." And today it seems clear we have allowed and fostered a scorched-earth style of capitalism that is leaving the world economy looking like the aftermath of Sherman’s march. It is a nice fantasy to think that a completely unregulated capitalism will yield a perfectly balanced market, but how have we been fooled into thinking this could be reality? Is not one of the first things taught in every introductory economics course the world over that there is no such thing as a perfect market, that human nature will always yield many powers that will fight constantly to tip the market in their favor whatever the cost? And this brings us back to a chicken and egg scenario; without regulations we end up with scorched earth, yet the very regulations meant to address these problems end up being used as tools by incumbents to prevent innovation and protect entrenched powers.

And this brings me to the Open movement as a trailblazing case study on the evolution of the governance of consensus building. A nice thing about regulation is that it doesn’t have to be legally enforced – and as we can see with the open movements today, we can push innovation and create healthier ecosystems without waiting on a congress that will never do anything good in its current form. Healthy regulation is about creating powerful checks and balances, structuring ecosystems where each aspect of an ecosystem is properly represented and powers are pitted against each other in such a way to create a healthy balance. And, most importantly, that we approach this structuring with a rational framework of how innovation happens and how creative destruction of paradigms occurs, we must build these systems with the proper framework to support continuous innovations in society and in regulations and standards themselves.

Joseph Schumpeter, the original source inspiring the more recent theories on technology disruption, demonstrated a more thorough understanding of industry disruption than most of the leading scientists with mounds of data and powerful modeling tools can do today. He arrived at these conclusions by approaching the problem with the proper perspective, understanding that people and the whole of society operates as a complex adaptive system. Yet despite having access to Schumpeter’s insights since the early 1900’s today we still find government, regulatory and business processes established on a paradigm that seems designed to never change…or at least change effectively. And in modern business strategy, much of this can be traced to misinterpretation and misapplication of the research of Harvard’s Michael Porter.

Porters research itself when viewed holistically and with his peers work can be seen as tied to a sustainable approach to capitalism. However most research is fairly complex, and when these finding hit the business community they often like to write off the things they don’t like and focus on the things they do. Or in other words skip past the common sense and go straight into manipulating the research to make the most money as quickly as possible. This is often unintentional which highlights a problem with specialization, management strategists get to specialize and get placed into roles where often the purpose of the role is to make as much money as quickly as possible … not that the more ‘touchy feely’ stuff doesn’t matter, but that is handled by someone else’s department. And of course who do you think execs turn to and empower more, especially in a world where our financial systems print lottery tickets for execs who cash in on short term scorched-earth tactics?

Porter’s work set the bar for maximizing tactical strategies within a given paradigm, but where it fell short is at its core, Porter’s models were based on an equilibrium-based view of economics; the model did not account for disruptions. Yet if people had followed the well-rounded guidance I find in Porter’s broader approach, this should not have created much of a problem. But greed-entrenched wall-street sharks fell in love with Porter’s headline: creating sustainable competitive differentiation. Porter’s work was perhaps plagued by the analytical tools available at the time which made it difficult to analyze large data sets over extended periods of time. And correspondingly, most of Porters research fell within established industries and established paradigms where it seemed very clear that his tactical strategies created compelling returns. And this evidence was exactly what execs wanted to hear … they could make significant technology investments that would leave them permanently ahead of their competition. It was perceived that if one invested 10 years of man-hours into new business software then competitors would also have to invest the same amount of time and expense to catch-up, giving the incumbent a ’10-year advantage’.

The only problem is that Porter’s evidence in this case was flat-out wrong. As computing capabilities grew and it became possible to analyze larger mounds of data, researchers including Harvard’s Clayton Christensen discovered that Porter’s sustainable competitive advantage wasn’t actually sustainable. Evidence began to mount that over longer periods of time, high-performing companies consistently failed. And a deeper look into this evidence pointed researchers nearly 100 years into the past, to the findings of Joseph Schumpeter whose work elegantly predicts the exact course the global economy has been on, rooted in an understanding of how economics actually does work … as a complex system.

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