The Digital Future: Services Oriented Architecture and Mass Customization, Part 1

Part1: The Digital Future

I was challenged to forecast changes in economic systems based on both my knowledge of spatial economic systems and on my experiences with computers, data networking, and automation.  What I have come up with is a four part article on the digital future.

Since I normally tend to build to a thesis like any good engineer designing a product, instead of stating my thesis and then defending it, like lawyers, and journalists normally do, I will take a shot at the thesis of this paper first.

 

We have entered the Digital Age in which Capitalism, which describes the economic system of the Age of Print will be succeeded by Economic Services Oriented Architecture producing Mass Customization.  It will be an age where consortiums are formed small and entrepreneurial organizations to produce products, systems, and services the customer wants.  This architecture will replace the current organizational architecture of a single large organization producing a large quantity of products that “satisfice”, that is, they come somewhat close to satisfying the customer’s requirements—they suffice.

The article is constructed in five parts.  This part, Part 1, discusses the economic history of humankind based on how they have communicated and stored data and information.  I feel it’s important to provide the context for my forecast.

The Second Part is a discussion of the coming of the Digital Age based on my experiences seeing it over the past 50+ years.  I’ve found a structure in pattern in the seeming chaos of change in data and information storage.  This pattern leads me to architectural pattern changes that lead to my forecast.

The Third Part is a more detailed discussion of this new architectural pattern called Services Oriented Architecture (SOA).  I will give a couple of examples to demonstrate how SOA will work economically.

The Fourth Part will consider how SOA and the Digital Age will change an individual’s life by giving three examples.

The Fifth Part will show how converting to SOA will create changes as drastic as the changes from the feudal economic architecture to the Industrial architecture.   In this part, I will forecast the change to a number of industries.  Most of these changes are already starting to occur, though in a very minor way.

An Exceedingly Brief History of European and American Civilization

There have been four ages for humankind. 

The Age of Speech

The age of speech (verbal communication), from circa 300,000 BC to circa 6,000 BC  was when for the first time data, information, and knowledge could be transferred and store within and between generations.  This was the first time when clans and tribes formed.  And, according to archeologists, there was a glacially slow revolution from hunting and gathering and stone to agriculture and metals.  This was the economic architecture of the time.  During this period, the shaman, or priest was holder of the tribal information base.

The Age of Writing

The age of writing (written communication), from circa 6,000 BC to 1455 AD, was when data, information, and knowledge could be more accurately transferred longer distances and stored for much longer time periods (in fact, there are documents and records over this entire period).  Political institutions increased from tribes migrating all over the landscape to settled (or at least apparently) settled city states, and then to regional and national states.  This was the second form of an economic architecture.

During this age the first known libraries and colleges formed; for example, the library and museum (college/research center) at Alexandria.  And again, more than 600 years later, after the various barbarian tribal invasions sent Europe back to the talking age, (during the dark ages) up to 900 AD when Carolus Magnus (or Charlemagne) manage to very slightly reintroduce writing and then colleges were formed in what is now Italy.

The Age of Printing

 The age of printing, (printed communications), from 1455 AD to between circa 1942 to 1992, data, information, and knowledge, became much more readily available to humankind.  Thanks, in large part to Martin Luther insistence that everyone should be able to read the Bible, Northern Europe learned to read and read ideas and concepts that were not part of the Catholic Church Doctrine.

By 1776, Adam Smith had described how wealth was created, together with the growth of engineering knowledge, and the ability of individuals to take risks and fail or succeed, Humans entered the era of Mass Production and Liberty.  This is the basic economic architecture of the Age of Printing.

Included in the mass production was mass production of education, based on a school for all teaching reading, writing, and arithmetic.  This has led to the mass production educational systems of today.

Knowledge and Wealth

You should note that with the speech, humanity grew significantly wealthier than other animal species.  The reason is that they could accumulate more and better data, information, and knowledge through speech.

With writing, humanity accumulated a much more wealth.  This wealth was exceedingly badly distributed. Nonetheless, looking at places like Pompeii, even some of the slaves could accumulate small wealth (while “the bread and circuses” form of socialism led to the eventual destruction of the Roman Empire).

With printing, a much large chunk of humanity created orders of magnitude more wealth.  The accumulation of knowledge of how the Universe works has led to mass production, which meant mass wealth.  For example, if there is a disaster now, people expect the restoration of power, water, fuel, and communications immediately; this was never true for even the “wealthiest in the age of speech, writing, or even for most of the age of print.  This demonstrates how exceedingly rich even the poor are today, when compared with the rest of human history (This is something the liberal entitlement generation has forgotten).

The Digital Age: The next Age

The next Age has begun.  It began, in a real sense with WWII.  It gestated throughout the 1950s to the mid-1960s.  I will discuss this period and beyond in the next part of this article.

Housing, Finance, and Government: Three "industries" that produce Minimal Value

The thesis of this post is that it is pretty silly to base an economy, like that of the United States, on housing, finance, and government, which is what Wall St. and Pennsylvania Ave. seem to want to do.

Types of Industries

All organizations are constructed from three types of sub-organizations, which are within their domain.  The Domains would normally be considered as political unit as per example, a city, county, state, or country.  However, even in private organizations, these types of organizations exist, within the organization’s functions and departments.  These organizational categories[i] are:

·         Primary Industry – Organizations that are in an industry that creates a product or service that is exported beyond the boundaries of the domain within which it is produced. 

·         Secondary Industry – Organizations that are in an industry that enables and supports one or more of the processes of the primary industry within the domain it operates.

·         Tertiary Industry – Organizations that in an industry that enable and supports both the primary and secondary industries by providing services that support the environment in the domain within which the primary and secondary industries operate.

As I demonstrate in my book, Organizational Economics: The Formation of Wealth, the primary industry (or industries) is the economic engine that forms the value of the organization for other organizations. Hamel and Prahalad called the turbine of this engine, the organization’s core competence.[ii] It produces the value for the organization.  All other “industries” enable and support this engine.  For example, the economic engine and primary industry for Detroit Michigan, has been and continues to be the automotive industry; in “silicon valley” it’s information technology, the State of Iowa is agriculture, and so on.

Secondary industries are sub-contractors and suppliers of hardware, software, and services to the primary industries.  These industries would include auto parts suppliers, tool manufacturers, transportation within the organizational domain, and other organizations directly supporting the primary industry or industries.

Tertiary industries are organizations that enable and support the personnel, or the domain’s infrastructure.  Schools, colleges, and universities, banks and other financial services, municipal services (e.g., electric, communications, roads and bridges, sewer, water, and so on), food stores, and other stores, hospitals and other medical services, restaurants, fast food outlets, and so on.  In other words, the majority of economic activities within an organizational domain.  Additionally, tertiary industries includes all types of construction.  It also includes the defense (see   Security a Mission of Government).  These industries are where most of the economic activity of an organization occurs.

Some organizational theoreticians include quaternary industries as a category.  These activities include standards and policies (see Standards a Mission of Government) and infrastructure (see Infrastructure a Mission of Government and Organizational Control).

Types of Value

In the first chapter of Organizational Economics, I describe three types values, knowledge value, capacity value, and political value. 

Knowledge value (see Knowledge Value) is value created by an increasing knowledge-base and includes research and development (invention and innovation), and knowledge transfer (education). Products based on new scientific discoveries and transferred into production are the most high valued.  Unique user interface designs like the iPhone or innovative medicines are examples of knowledge value. 

Capacity value (see Capacity Value) is “more of the same” value.  Once a product has been perfected and competitors have brought out versions, then what Adam Smith called “the invisible hand” starts to force reduction in cost of the product.  Many economists refer to the as commoditization of a product, but its value is in capacity production—which produces capacity value.

Political value (see Political Value) is of two types, mediating and exploitive.

·         Mediating (or mediated) political value is created by reducing the organization’s internal process friction.  Examples of mediating political value include contracts, laws, customs, codes, standards, policies, and so on.  In the military, mediating political value (reduction in process friction) comes from “the rules of engagement” (e.g., don’t shoot your fellow military).  The reduction in process friction is very often the difference between a process adding value and a process absorbing value.  The regulation of markets (and the processes of markets, themselves) is such an example.

·         Exploitive political value is indirect or “siphoned” value.  It is caused by someone in the position of responsibility or authority using the position for the reaping of value to their own benefit; “The Lord of the Manor” is the archetypal example, those these include dictators, lobbyists, bankers, day traders, and many judges and legislators.  Further, as I describe in my book, in many cases it includes various religious authorities.

Housing, Finance, and Government as Value creators

My thesis is  that housing, finance, and government either do not create value or very little value.  I base this on the understanding on how these fit within the dimensions described in the previous sections.

Housing

A house is worth a house.  While that seems to be a tautology (and it is), too many people forgot that during “the housing bubble”.  What that saying means is that the value of the house is only what value it imparts to the consumer of the house’s value.  The house is never worth more than when it was built, unless it is maintained and upgraded.  And even when it is upgraded the value of house begins to decrease as it is used (what’s being used, at the most abstract is its value).  The problem, recently, has been that governments tend to inflate their money supply—money being a reserve of value.  With the inflation of money (that is, the decrease in the value of money) the price of a house to increases—though its value remains the same; it’s worth one house.  Likewise, when the housing market “goes down”, the price of the house goes down, but the value remains the same; one house.

House construction and remodeling is a tertiary economic activity.  It produces some capacity value (more of the same value) for the builder and construction workers, but once completed and purchased, it starts loosing value.  In giving the people of the organization a place to live, a house supports the secondary and primary industries of the organization.

Obviously, this is not an activity that enables and supports the formation of wealth for an organization.  Consequently, basing an economy on housing, or at least a significant portion of an economy is foolish and silly.  Yet, in the period from 1995 to 2007, that is what many Americans built the perceived wealth on, and what the United States did.

Finance

Finance includes two subtypes; banks and markets.  The Wall Streeters, (e.g., bankers, hedge fund managers, stockbrokers, pension fund managers and so on) have forgotten that a bank is a value battery and “a market” is the transfer point for the value.

Banks dilute stored value of money through investments that increases risk and potentially increases the amount value through the implementation of discoveries and inventions as new products, systems, or services.  In and of itself, investing cannot increase the amount of value only reduces it.  Only when the money is invested in innovative ideas or the production capability (seeROI Vs VOI) does the value increase, so that, for example, loaning money for a house does not increase the value of the house or create value of any sort.   However, if a bank loans money to a farmer to buy seed or farming implements, the bank has made an investment that does create capacity value—food.  Consequently, banks are tertiary activities that do not produce an increase value, but they loan their repository of potential value (Money) to primary and secondary activities that do.

In the process of each transaction, the bankers siphon off some of the value as a “transaction” fee.  This siphoning is converting potential value into exploitive political value; and exploitive political value is value that is quickly destroyed.

Markets have two missions.  The first is to measure the value of a material, product, or organization. The second is to transform value from real to potential and back; that is trade materials or stocks for money (potential value) or money for materials and stocks.  “Making a market” does both of these; and in this Internet age, anyone can do this.  That is, the person can buy commodities, hold them, and sell them.  In the process, the price of the commodity (be it materials, products, or stocks) converges on a price.

Again, market are tertiary activities that can convert knowledge and capacity value into potential value and the reverse.  And, again, the “market makers” and “stock brokers” that siphon a percentage off, because they are “providing a service” (which to some degree they are), are converting some of the value and potential value into exploitive political value.  Unfortunately, a good many Wall Streeters have turned the markets into legal mega-slot machines, gaming them through “day trading” and even “micro-second trading” to siphon off a much value as possible as quickly as possible, converting it into exploitive political value.

Government

According to my Book, Organizational Economics: The Formation of Wealth, and as note above in this post, a government has three  missions—security, standards, and infrastructure (see. Internal and External security, standards, and infrastructure are mediating political value and all three are tertiary activities, that is, necessary but not sufficient conditions for the growth of value within the domain of the organization.  Further, the second and third activity can be Quaternary.  That is activities, like the enactment of laws and determination of regulations, policies, and standards that enable the standards and infrastructure activities.  These activities are very susceptible to manipulation for personal gain.  The personnel that enact or fund the activities can enjoy an extreme amount of exploitive political value, as I describe in my book.  In the past, it has been the lord of the manor, dictator, duke, king, emir,  priest, shaman, rabbi, Imam, or other religious leader.  Today, lobbyists must be included as they encourage the lawmakers to create uneven economic playing fields that favor one activity or one industry over another; this includes unions and other “not for profit” organizations as well as economic organizations. Consequently, mediated political value is at best much more easily converted into exploitive than either knowledge or capacity value, and is the catalyst for the conversion of these.

In this age, “Entitlements” are the single biggest place that creates exploitive political value.  These safety nets drain value from the infrastructure portion of government.  They are popular because the exploitive value goes into the pockets of the many rather than the few and popular with politicians because Entitlements buy votes.  But, entitlements are unsustainable for any organization as Greece and Italy have proven, and like the United States is likely to prove, now that the population is addicted to Entitlements.  For example, the occupy Wall St. movement feels that all college graduates are “entitled” to jobs (so what value is art history or black studies to an economic organization?).

The Net Result

Too much “unearned income” in too few wallets; too much “Entitlement income” in too many wallets.  I think what I’ve shown is that having an economy based on housing, finance, and government, like that toward which the United States is heading, is a sure recipe for going out of business.

We still have time, but do we have the leadership?

[i]These categories of industries were generally accepted in the 1920s onward, as primary: mining, and agriculture, secondary, manufacturing, and tertiary, services—these definitions are outdated and don’t get at the underlying concepts.  Therefore, I’ve redefined them for a more general meaning of the concepts.

[ii]G. Hamel and C. Prahalad, Competing for the Future: Breakthrough Strategies for Seizing Control of Your Industry and Creating the Markets of Tomorrow, (Boston: Harvard Business School Press, 1994).

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ROI Versus VOI

Return On Investment

According to Investopedia (http://www.investopedia.com/terms/r/returnoninvestment.asp#ixzz1bcKSKpx9)::

"A performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. To calculate ROI, the benefit (return) of an investment is divided by the cost of the investment; the result is expressed as a percentage or a ratio.

The Return On Investment formula:

In the above formula "gains from investment", refers to the proceeds obtained from selling the investment of interest."

 ROI is simple and straightforward, but does not enable or support an organization's ability to make investment decisions.  It is a lagging indicator; it tells you what were good and bad decisions in the past, but nothing about deciding on investments to increase the long-term effectiveness or agility of an organization, which are vital in today's "bonkers" business environment (to use Tom Peters' term), and disruptive technology environment.

One famous example demonstrates this point.  When Jeff Bezos founded Amazon.com in 1994, he knew that he needed customers to create what he envisioned as "The Walmart of the Web".  This meant that he had to decide on a mission, which was to create a highly visited website.  He then settled on at least four strategies.  First, concentrate on selling books, don't try to sell all the products initially.  Second, create a website with a superb user experience.  Third, ensure that Amazon has access to all books any of its customers could possibly want.  Fourth provide value to the customer, to the point of selling books below wholesale cost, to generate website traffic.

Value On Investment

None of these strategies are designed to produce an ROI, but especially the fourth.  In fact, the mission of creating a highly visited site does not create ROIObviously, if the vision of creating the "Walmart of the web" is realized, there will be a good deal of ROI.  But the mission to start to realize the vision does not support ROI--but it does create Value On Investment (VOI).  A decision-maker creates Value On Investment when his or her decisions increases the organization's Production Capability (after Dr. Stephen Covey), that is, the ability of an organization to be more effective at achieving its vision and mission.

Jeff executed and persevered in the mission to increase Amazon's growth to these disciplined strategies to increase Amazon's VOI, which is the point of the mission to create a highly visited website, that is, a highly visited site is much more valuable than a site that is visited very little.  In executing this mission, it did not turn a profit until 2000, much to the ire of many of its investors, but it took an increasing share of the customer base that itself has been growing at an increasing rate.  Therefore, Jeff met this mission for Amazon.

The enterprise architecture for Amazon was constantly upgraded, including software, hardware, and physical infrastructure.  The net result is that Amazon is now competing with all other major retailers for customers.

Unfortunately, too many CEOs give into the nanosecond market that expects an increasing ROI every quarter or sooner.  It is like expecting George Washington to beat the British in every battle in the Revolutionary War.  Washington lost far more often than he won, but together with the other founding fathers, he did create an enormous VOI that subsequent generations have transformed into ROI.  Likewise, NASA in the Moon Mission created VOI that Jeff Bozos, Bill Gates, Steve Jobs, and the world have profited from.

If the people of the "Occupy Wall St." movement have a point, its that there is too much focus on Wall St. for ROI and too little on VOI.  Wall St. is using the wrong metric for the wrong duration.  And they are "leading" the rest of us into bankruptcy as a result.