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Friday, September 26, 2014

Why Social Media Will Fundamentally Change Business 09-27

Reproduced from MITSloan Management Review.

Why Social Media Will Fundamentally Change Business

Social media is here for keeps — and big changes are coming as a result.
Social media is still new enough that many executives wonder what, if any, long-lasting impact it will have on how business is conducted. Is it worth jumping on the bandwagon? Or conversely, is it wiser not to jump, but to wait until there’s greater clarity on whether social is here to stay?
Both these questions have a one-word answer.
This is not simply my opinion. It is shared by many executives who have jumped. Our recent social business report suggested that 67% of executives thought that social media had the opportunity to fundamentally change their businesses. The number was higher for companies that were deriving greater business value from these technologies. Compelling reasons, rooted in fundamental concepts of economics and business strategy, support this belief that social media will fundamentally reshape not only individual organizations, but also the business environment as a whole.
It should come as no surprise that social media technologies could have such a transformative impact on business, because information technology has been transforming the shape of modern business for decades. Its impact was first felt in the finance industry with the introduction of ATMs in the 1960s and 1970s and the dawn of high-speed trading algorithms in the 1980s. In the 1990s, enterprise resource planning (ERP) systems began to change the internal operations of companies across multiple industries.
More recently, Internet technologies have allowed companies to integrate their information sharing more tightly with other organizations, creating opportunities for greater specialization, increased outsourcing and globalization. Social media is simply the next step in this trend of technology influencing the shape of business.
Social media technologies may be particularly disruptive for business, because they undermine some of the key reasons why companies survive or thrive. One of the key competitive resources for modern organizations is knowledge, and knowledge integration — the ability to combine, exchange and integrate the diverse knowledge of its employees — is a key function in any firm. Getting people to coordinate knowledge and cooperate on a common task is inherently difficult, and the firm has been the best mechanism for enabling the type of collaboration essential to create, store and apply valuable knowledge.
Yet social media is now replete with examples of companies enabling knowledge integration outside the confines of traditional organizations. Wikipedia and open source software are perhaps the classic examples, where groups of volunteers come together to create products that directly challenge commercially produced competitors.
Even in more traditional organizations, knowledge integration increasingly happens outside firm boundaries. Online customer-support communities, such as those created by SAP and Dell, allow customers to share knowledge with one another and require minimal employee involvement. As social media increasingly allows knowledge integration to occur outside and across traditional organizational boundaries, it will change fundamental aspects of the firm and how it is managed.
Another key function of companies is to lower transaction costs. It is too expensive and time-consuming to turn to markets for every aspect of production. Instead, companies cultivate their own readily available, in-house accounting, procurement, marketing, or R&D departments, to facilitate essential transactions and streamline operations.
Social media is also lowering these transaction costs. The rise of the so-called collaboration economy allows companies like Uber, Airbnb, and TaskRabbit to create a market that allows people to bypass traditional companies that provide these services and transact directly with individuals for needs such as room rental, ride sharing, and simple tasks. Similar trends are also occurring for traditional companies. Platforms like Innocentive allow traditional firms to tap a market for addressing specific research and development problems. In some ways, LinkedIn is becoming a standing market for talent, creating a searchable database for employees that employers can consult when certain skillsets are needed.
Social media will have a particularly disruptive effect on business because it provides an alternative mechanism for realizing these key functions of the firm — knowledge integration and transaction cost reduction. As a result, successful companies may look entirely different because of social media.
Consider the example of IBM, a forerunner in the field of social business. Over the past two decades, IBM has transformed from the most traditional of companies to one that is largely virtual, with nearly 40% of employees working outside of traditional IBM offices. But it’s not just established companies that benefit from social — not by a long shot. Companies who fail to change with these new technologies may suffer from smaller, nimbler competitors. Craigslist, for example, is a company of 40 people who took $5 billion of revenue from the newspaper industry.
Many executives are wary of social business, associating it with unsustainable hype. To be fair, this reputation is not necessarily unfounded. Many social media platforms and trends once full of promise ultimately failed to deliver long-term value. The classic example: MySpace, once at the top of the social media world in late 2008, and now existing only as a rebranded memory of its former self. Many companies invested heavily in the virtual world Second Life, only to see the platform fall flat and its business promise evaporate.
Because of these and other past examples, executives may be wary of beginning social business initiatives, believing that social business as a whole will follow a similar fate. I can’t say they’re wrong to be suspicious of the hype surrounding any particular social media technology or platform, but executives should also remain open to the very real likelihood that social media can fundamentally transform business, just as other technologies that preceded it have done. “The early bird catches the worm” doesn’t always apply in business — we’ve all heard stories about “early adopters” who wound up wishing they’d adopted a little later — but it is universally true that a bird who doesn’t arrive winds up with nothing at all.

Reproduced from MITSloan Management Review

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