The corporation represents a pillar of modern capitalism. With the rise of a global peer-to-peer platform for identity, trust, reputation, and transactions, we will be able to re-engineer deep structures of the firm for innovation and shared value creation. In this module, we explore blockchain’s role in decentralizing the enterprise and its implications on the roles and boundaries of the firm.
Learning Objectives
- Explain how blockchain enables the decentralization of the enterprise
- Identify four kinds of transaction costs of a firm and explain how blockchain reduces these costs
- Describe three ways that blockchain search differs from Internet search
- Describe some of the factors that firms should consider when defining their corporate boundaries
- Week 1 Re-achitecting the firm
- Content
- 1 Course Introduction
- 2. Decentralizing the Enterprise
- 3. Opportunities for Blockchain
- 4 Corporate Boundary Decisions
- 5 Module 1 Recap
The enterprise of the future
- more like a group of networks.
- networks of organizations, individuals, and autonomous agents connecting via smart contracts to deliver all the value of today's big centralized behemoths.
In this course, you'll learn
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how blockchain technology will penetrate into the structures of organizations encouraging innovation
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how blockchain enables decentralization of value creation, and of the enterprise
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understand 4 kinds of transaction costs of a firm
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explain how blockchain reduces each kind of cost
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how blockchain search differs from Internet search
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the factors business leaders should consider when to finding their corporate boundaries.
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define 4 types of blockchain organizations:
- Distributed Application (DApp)
- Autonomous Agent
- Open Networked Enterprise
- Distribued Autonomous Enterprise
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7 new business models
- and how blockchain technology could enhance these models.
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how to find new ways to manage and protect intellectual (IP) property on a blockchain
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how blockchain will transform the rules of the C-suite executives
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difference between regulation and governance of blockchain, and the challenges of regulating in this new environment.
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identify the different layers of the blockchain technology stack, and how these layers help or hinder the governance of blockchain systems.
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10 types of governance networks
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7 qualities that a region and the world needs to attract technology startups and build a vibrant ecosystem
CEOs and government leaders asked big questions:
- How will this technology transform specific industries?
- What are the real challenges facing blockchain development today?
- How can we overcome those challenges?
- How will block chain change the nature of the enterprise, the way we manage our companies?
- What will it mean for government architecture and the creation of services of public value?
- How could this technology help us solve some big problems such as climate change?
Big Ideas
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- Cryptoassets
- largest transformation of assets in human history, from an analogue to a digital media.
- Bitcoin is but only one type of digital asset
- 7 types of cryptoassets,
- that we can create, record, and trade on the blockchain.
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- Self-sovereign identity
- our own digital identities
- can't be given or taken away by any central administrator.
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- Smart contracts
- It's a means of codifying the terms of a deal in software.
- Smart contracts ensure contractual compliance, they hold parties accountable.
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- Decentralized business models
- These are business models distributed across a blockchain network, not centralized in a traditional corporation.
- They can be fully autonomous too, meaning, no humans involved.
- There's big potential for true peer-to-peer models like ride-sharing without Uber as a middleman taking fees.
- Owners of driverless cars will someday be able to put their autonomous vehicles to work.
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- The Ledger of Things
- Future, most transactions will happen between devices and not between peopl
- smart home
- Home owners were adding smart devices such as thermostats and solar panels, and soon potentially trillions of devices will be connected to the Internet. Doing everything from driving us around to keeping our house lit, to managing our affairs, and managing our health information. These devices need to be resistant to hacking. They need to be able to communicate value such as money or assets like electricity peer-to-peer.
- electricity
- your neighbor's home is generating energy from a solar panel and you've got a device that needs to buy that electricity, then those two devices need a way to be able to contract, bargain, and execute a payment peer-to-peer. It's not going to happen through the Visa network, it can only happen on the blockchain.
- smart home
Technology alone doesn't solve problems, people do. It doesn't create prosperity, people do.
You will learn
- blockchains role in decentralizing organizations,
- re-engineer the deep structures of the firm with blockchain
- a global platform for identity management and peer-to-peer transactions
- change how companies do business, and this will pave the way for greater innovation and shared value creation
You will be able
- how blockchain makes decentralization possible.
- consensus systems
- identify 4 types of transaction costs to business.
- over all the costs of creating trust
- search costs,
- negotiation, contracting costs,
- coordination costs, and
- the costs of enforcing agreements
- over all the costs of creating trust
- explain how blockchain reduces these costs
- identify 3 ways blockchain search differs from Internet search.
- list some factors firms should consider when defining their corporate boundaries
- Blockchain won't replace the need for corporate structures, but infusing blockchain principles into corporate culture can help companies decide how and when to use outside partners for increasing productivity and innovation.
Ethereum and the company ConsenSys
- ConsenSys works really more like a blockchain platform itself than a traditional corporation.
- Blockhain challenges those top-down structures.
- co-founder, Joseph Lubin told us, "Global human society can now agree on the truth and make decisions in 10 minutes or even 10 seconds."
- ConsenSys is a blockchain-based company or blockcom as opposed to what we call a .com.
- A blockcom is a company formed and functioning on blockchain technologies. The company runs on Ethereum really as much as possible.
- This includes funding, day-to-day tasks and projects, as well as software development and testing. That also includes hiring, it uses reputation systems where members can rate one another as collaborators. Boundaries are blurred in this new model.
it epitomizes what it means to be a blockchain company.
Consider 7 new business models that can innovate better and create better value at lower cost.
- Peer producers
- Rights creators
- Blockchain cooperatives
- Metering economy
- Platform builders
- Blockchain makers
- Enterprise collaborators
first era of the Internet brought us organizational forms
- the networked enterprise,
- the flat organization,
- the open innovation movement and
- business ecosystems
3 types of transaction cost in economy
- Nobel Prize winning economist Ronald Coase 80 years ago
- 1 the cost of search
- Finding all the right people and information and resources outside of a company to create something.
- 2 the cost of coordination
- getting all those people to work together efficiently
- 3 contracting costs
- Keeping trade secrets, negotiating the cost of labor and materials, and policing and enforcing those agreements
- a firm would expand until the costs of performing a transaction inside the firm exceeded the cost of performing it outside the firm
Internet's impact
- It dropped transaction costs somewhat in an open market.
- It dropped search costs through browsers and the worldwide web.
- It dropped coordination costs through email, social media, cloud computing. It lowered the barriers to entering some markets.
- Lots of companies benefitted from outsourcing customer service and accounting, as these costs in an open market became lower than doing things inside the boundaries of a firm. Marketers engage customers direct with product planners, crowdsourced innovations manufacturers tapped into vast supply networks.
But Internet has limited impact on corpoate architecture
- classic industrial age hierarchy
- The old corporate model concentrates power at the top of the hierarchy, and in many cases it can stifle innovation
- There's strong evidence of an increase of oligopolies in some industries even monopolies.
- The Web didn't come from monopolies; it came from the edge. Google didn't come from Microsoft. Twitter didn't come from AT&T, or even from Facebook.
- Why? Because they lack what he calls the internal culture of pure and open exploration required for innovation.
next era of the Internet
- there's real value in the next era of the Internet and real incentives to join in.
- These platforms based on blockchain hold promise for protecting user identity, respecting user rights, ensuring network security, and dropping these transaction costs.
- Unlike traditional firms, blockchain platforms don't need a brand to convey the trustworthiness of their transactions,
- Using consensus mechanisms to make decisions and conducting their businesses more openly.
Outsourcing was just the beginning.
- Sixty percent of PNG's innovation now comes from this sort of open market for brainpower.
- global contests to solve problems
How will innovative business leaders harness the World Wide Ledger?
- who's sold which discovery to whom?
- And at what price?
- Who owns this intellectual property?
- Who's qualified to handle this project?
- How many carbon credits has this company saved?
- Which suppliers have experience in China?
- Which subcontractors delivered on time and on budget according to their smart contract records?
- Query results won't be resumes, or advertising links.
- You'll get transaction histories, proven track records of individuals and enterprises, may be ranked by reputation score.
companies are working on search engines for blockchain.
3 key distinctions between Internet search and blockchain search
- 1 user privacy
- People own their personal data in a digital black box. They can choose their level of anonymity.
- Parties will be able to search for information that users have made open.
- Firms will need to rethink recruiting.
- Human resources will learn to query the blockchain with yes-no questions. Do you have a PhD in applied mathematics? Can you code in Java or Python? Can you work from January through June next year? These queries will yield a list of matches from job seekers black-boxes.
- Hiring managers will use reputation systems to assess candidates without knowing necessarily age, gender
- upside
- is an end to subconscious or institutional bias.
- No headhunter or executive recruiting fees either.
- downside
- is that precise queries lead to precise results. T
- Human resources will learn to query the blockchain with yes-no questions. Do you have a PhD in applied mathematics? Can you code in Java or Python? Can you work from January through June next year? These queries will yield a list of matches from job seekers black-boxes.
- Black box marketing will call for new approaches too.
- Companies may pay to query these black boxes of prospective customers to see who might meet their target audience.
- Marketers will need to rethink strategies based on email, social media, and mobile marketing. Customers will need to charge whatever makes reading at firm's message worthwhile. So you'll be paying customers to listen to your elevator pitch.
- But it'll be tailored to reach exactly the people you want to reach without invading their privacy. You can test different queries to learn about niche markets at every stage of product development.
- Firms will need to rethink recruiting.
- 2 search can be multi-dimensional.
- A search on the web today finds a snapshot in time as index over the last few weeks.
- Blockchain adds a new dimension to search, sequence: seeing records in the order they were hashed or uploaded.
- 3 value
- Blockchain Search offers more powerful performance at a lower cost.
- Information on the Internet is abundant, but unreliable and perishable.
- On the flip side, information on the blockchain maybe scarce, but it's tamperproof and permanent.
- Imagine a permanent searchable record of important historical information.
- an irrefutable view of their firm for developing their financial statements, their annual reports,
- Companies could have transaction, ticker tapes, and dashboards.
- So firms will have huge incentives to look for resources outside of their boundaries.
- Previous: how companies can use the blockchain to reduce search costs?
- Now: how companies can use the blockchain to reduce the cost of agreeing on terms and sealing the deal.
Contractual costs:
- negotiating the price of labor or an actual resources
- spelling of the terms and conditions
- one of the primary reasons that firms exist
companies will grow:
- if it's cheaper to do things inside the boundaries of a firm than in an open market
- If transaction costs, such as contracting, were to drop to zero, then we would be free to connect and build value in an open market rather than inside the confines of the corporation
Contract:
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Contracts are a way of establishing trust and setting clear expectations.
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Contracts are a more recent phenomenon.
- We began trading promises, not property, but oral agreements proved to be as unreliable as the eyewitnesses to them.
- There had to be some legal framework for recognizing contracts and preserving each parties' rights.
- Contracts within an organization are enforced by management.
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corporate entities are nothing more than a collection of contracts and relationships.
- Members of the blockchain industry have picked up on this view.
- economists Michael Jensen and William Meckling
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A corporation is, therefore, nothing more than people and contracts all the way down.
- Smart contracts on the blockchain create some new opportunities both inside and outside of corporate boundaries.
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Today, contracts are still largely made up of atoms in the form of paper, not bits in the form of software.
- That means they still have some big limitations, serving only to document an agreement.
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But if contracts were software,
- smart and distributed on the blockchain, they could open up a world of possibilities.
- One important change would be to make it easier for companies to use external resources.
- By reducing contracting costs, the blockchain makes it easier for firms to develop relationships outside their boundaries.
- smart and distributed on the blockchain, they could open up a world of possibilities.
- Previous Previous: You already searched and found them.
- Previous: You've agreed on terms and you've sealed the deal.
- Now, you need to manage them.
the cost of coordinating different people, products, and processes into an enterprise for creating value.
2 significant coordinating systems:
- 1 market
- a price system for decentralized allocation of resources.
- 2 hierarchy
- the organizing principle of traditional firms where some centralized authority allocates resources.
hierarchy Pros:
- Managerial hierarchy is the most efficient, the hardiest, and the most natural structure ever devised for large organizations. Properly structured, hierarchy can release energy and creativity, rationalize productivity, and actually improve morale. (Elliot Jaques, defended hierarchy in the Harvard Business Review,)
hierarchy Cons:
- The trouble is, in recent businesses history, hierarchies have often been ineffective. Managers often rise to a level where they lack the knowledge required for effective leadership.
many hierarchical business structures have not been effective because:
- Hierarchies have the propensity to kill creativity, undermine initiative, disempower human capital, and scapegoat responsibility through opacity
- Managers often rise to a level of power where they lack the knowledge required for effective leadership
- There is often a huge gap between executive pay and the value executives actually contribute
how to build effective and innovative organizations? (troubles)
- first generation of the Internet, the Internet of Information, helped these forward thinking managers to change the top-down assignment of work.
- Companies are making an effort to empower employees and improve collaboration. Decentralization, networking, and empowerment, these things make sense.
- Teams and projects have become the basis for internal organizations.
- Email and video conferencing let people work together across company silos and across boundaries.
- But
- today's social media tools are helping lots of firms achieve new levels of internal collaboration.
- Agency costs - Businesses are focused on giving employees a voice.
- Now there's a wide spread agreement about what happens when firms distribute responsibility and power.
- It usually leads to better business functioning, customer service, and innovation.
- However, in practice, it's still easier said than done.
- The Internet still hasn't really dropped the agency costs. The cost of making sure everybody inside the firm is acting in the owner's interest.
- agency costs have increased even as transaction costs have plummeted, because firm's sheer size and complexity
- there's a huge pay gap between chief executive officers and frontline workers.
how can blockchain technology change how firms are managed and coordinated internally?
- The blockchain's smart contracts and transparency should reduce agency costs at all levels of management to a dramatic degree.
- these changes will make it harder to game the system.
- So firms could go beyond transaction cost to tackle the real elephant in the boardroom, agency costs.
- blockchain technology can enable people to function together, with the persistence and stability of an organization, but without the hierarchy.
- managers are intermediaries which should be cut out
- Managers should brace for radical transparency and how they coordinate and how they conduct themselves. Shareholders will be able to see the inefficiencies, the unnecessary complexity in the huge gap between executive pay and the value executives actually contribute. Remember, managers are intermediaries between owners and workers. The blockchain is known for cutting out intermediaries.
trust
- in business and society
- is the expectation that the other party will act with integrity.
- That means acting with honesty, consideration, accountability, and transparency. It's a lot of work to establish trust
lots of work to establish trust
- We have vertically integrated firms because building trust is easier to build within corporate boundaries than in an open market.
- the challenge for firms is figuring out what makes it possible to trust external parties?
- integrity on the part of individuals or organizations, has enormous economic implications for value, productivity, quality of life, and more.
- Integrity is as important as labor, capital, and technology.
What if parties didn't trust one another?
- We could still act with honesty, accountability, consideration, and transparency.
- What if those qualities were coded into the financial system?
- Blockchain developers have coded it into the software protocols and deployed it across this network.
- the industry can reestablish trust and keep it going forward.
- Blockchain is cutting the cost of searching, contracting, coordinating, and creating trust.
- So it should be easier for firms to open up and forge trusting relationships with external parties.
- Acting in one's self-interest serves everybody's interests, cheating the system costs more than using it.
- Blockchain helps ensure integrity and trust in transactions between peers, it also helps achieve transparency a critical factor in trust.
- Corporate brands and ethical actions, these things still matter. Trusted brand are about more than reliable transactions.
- Smart contracts can hold executives accountable, they must stand by their commitments because the software enforces them.
- Companies can program relationships with radical transparency. So everyone has a better understanding about what each party has agreed to.
- Above all, they must be considerate of the interests of other parties when they conduct business, the platform demands it.
What opportunity/ies does blockchain technology offer for reducing the costs of (re)building trust?
- Blockchain technology helps ensure the integrity of transactions between peers
- Blockchain technology helps achieve transparency—a critical factor in establishing trust
- In principle, cheating the system would cost more than using it as designed
how big should our company really be?
- blockchain platforms are dropping transaction cost in an open market, causing the boundaries of firms to become more porous.
- The boundaries separating a company from its vendors, consultants, customers, and peers, are becoming harder to define, and they're constantly changing.
companies will still exist no matter how blockchain affects them.
- because, of all the acts of searching, and contracting, and coordinating, and establishing trust, will remain more cost effective within a corporate ecosystem than in a completely open market.
- there will be more "Flexible business entities made up of individuals and groups partnering around projects
- We will still need organizations acting as coordinating mechanisms
leaders should be strategic in determining what gives their company a competitive advantage
Core Competencies concept
- very famous Harvard Business Review article.
- They said companies gain competitive advantage by mastering a distinct competence. Those could be specialized skills, proprietary techniques, and unique knowledge.
- Companies could go outside to acquire other resources.
- But a company may have mastered some activities not critical to its core.
- So it needs to decide whether to continue doing them.
- On the other hand, you have strategist, Michael Porter who argued, "Competitive advantage comes from networks of activities. If the activities were organized to reinforce the value of each other, the network would be harder to copy as a whole".
- Competitive advantage comes from entire systems of activities. Any individual activity within the system may be copied, but competitors won't get the same benefit unless they somehow manage to clone the entire system.
keep mission critical functions inside their boundaries
- Others argue that companies should keep mission critical functions inside their boundaries.
- Those are the ones that they must get right to survive, and to succeed.
- But what's mission-critical isn't always obvious.
"Some mission-critical functions like the collection and analysis of big data, may be just too risky to move outside corporate boundaries, even if you don't have unique abilities in that area."
We believe the starting point for corporate boundary decisions is to understand your industry, your competitors, and your opportunities for profitable growth.
one thing you can't outsource is a corporate culture.
9 questions that you can ask yourself when you're deciding where to set the boundaries of your business
- 1 are there partners who could do certain activities better?
- Could we benefit from peer-to-peer production, for example, or open platforms or other blockchain business models?
- 2 what are the new economics of corporate boundaries in any situation?
- What are the transaction costs of partnering versus doing activities in-house?
- Can you develop a suite of smart contract templates to reduce your coordination costs? That's what consenSys does.
- 3 how much of your business relies on technological interdependence, and how much is modular?
- Business modules have greater flexibility. Define these components, and you can reconfigure them outside corporate boundaries.
- ConsenSys sets standards for software development, then provides access to various software modules that its partners can build on.
- Business modules have greater flexibility. Define these components, and you can reconfigure them outside corporate boundaries.
- 4 how good is your firm at managing this external or outsourced work?
- How good is your company at managing networks?
- Can smart contracts improve the process and lower the costs overall?
- Well, from the get-go, consenSys was a blockchain business, and its founder, Joe Lubin, embraces that technology. They're good at it.
- 5 is there a risk a partner might invade fundamental parts of your business?
- Some have suggested that the huge electronics manufacturer, Foxconn, may do this to their customers, the OEM smartphone companies, and eventually start competing directly with them selling phones.
- ConsenSys tries to reduce this risk of partners ending up competing with you by building loyalty through incentives. So its members share in the wealth they create.
- Some have suggested that the huge electronics manufacturer, Foxconn, may do this to their customers, the OEM smartphone companies, and eventually start competing directly with them selling phones.
- 6 are there legal, regulatory, or political obstacles to change and to networking more?
- Have you cut deals to lock you into your current structure or location and so on? Well, that hasn't been a problem for consenSys yet
- 7 will working with partners help you improve your overall competitive advantage, your ability to create differentiated value?
- Speed and pace of innovation are important to boundary decisions.
- Sometimes companies have no choice but to partner because they can't develop something fast enough in-house.
- A partner arrangement can be a place holder.
- This is consenSys strategy, build a network of collaborators around the Ethereum platform, grow the platform and its ecosystem, and increase the probability of success and competitive advantage for all of its components.
- Speed and pace of innovation are important to boundary decisions.
- 8 is there a danger of losing control of something fundamental, say a product or a network architecture?
- Business leaders need to deeply understand the elements and links in their value chains or networks.
- Which ones will be key to creating and capturing value in the future?
- The Ethereum platform is key to the success of consensus, and so Joe Lubin and other members of consensus are active in its governance. He doesn't leave it to others.
- 9 can you rapidly expand your market or value proposition while at the same time shutting out a competitor by vertically integrating, by moving in the other direction at least temporarily?
- Foxconn,
- the Taiwanese electronic services manufacturer, has grown far larger than its competitors by vertically integrating. It's a unique situation. It manufactures many of the components used in electronics equipment, and using the profit from that, it undercuts its manufacturing services competitors like Solastica and J. Wall.
- CVS
- Pharmacies need to change or else be undermined by the e-commerce onslaught of companies, in particular Amazon. So in 2018, drug retailers, CVS, expanded its offerings to enter the health insurance industry by purchasing a large insurance company, Aetna. Drugstore purchases an insurance company. In this case, it made sense to vertically integrate at least for now
- Foxconn,
review how blockchain technology will change the firm operation.
- Not just how it does business, but how it sets and where it sets its boundaries.
- consenSys company systems,
- the ethereum software development studio. This is really a new model for running a business on a blockchain.
- It has a decentralized structure that makes it agile and helps members collaborate.
- Smart contracts include incentives for innovation and productivity.
Boundaries
- The Internet did drop transaction costs outside corporate boundaries, but these boundaries of course remain and the architecture of the firm is pretty much still intact.
- monopolies
- companies like Google and search or Amazon retail or Facebook, social media can really behave like monopolies because they're so popular and credit to them for creating great value for consumers.
- But users have only recently come to understand how these big companies have been using their personal data.
- companies like Google and search or Amazon retail or Facebook, social media can really behave like monopolies because they're so popular and credit to them for creating great value for consumers.
3 differences between Internet and blockchain search make it easier for companies to find external resources when using blockchain.
- 1 is user anonymity with implications for recruiting and marketing
- 2 is the sequencing of data with a history of all transactions as they occurred.
- 3 is value, the ability to gain insights at a lower cost.
- Others we learned in previous courses
- The cost of finding money are lowered radically through new crowdfunded models like ICO on a blockchain.
- contracting costs are lower on blockchain because smart contracts are self-enforcing
- Companies won't need to rely on dispute mechanisms in the open market.
- Blockchain lowers coordination costs in and outside boundaries of firms. It can reduce agency costs for executives learn far more than they contribute in value.
- Integrity is built into the blockchain platform, so it's easier to build trust with outside entities.
- Trust is the expectation that other parties will act with integrity.
- But still companies need to be strategic in determining what gives them competitive advantage, when activities should stay inside corporate boundaries and what can be outside
- Trust is the expectation that other parties will act with integrity.