The Enterprise Evolution: From Hierarchical Institutions To Protocols

From the early days of cap­i­tal­ism, when from 1633 the Hol­lan­dis­che Mer­curius referred to cap­i­tal­ists as the own­ers of cap­i­tal, on to David Ricar­do who, in his Prin­ci­ples of Polit­i­cal Econ­o­my and Tax­a­tion is seen as the one who actu­al­ly coined the term cap­i­tal­ism, until today: the struc­ture and behav­ior of the enter­prise as the main cap­i­tal­ist enti­ty, hasn’t changed that much. With the advent of blockchain tech­nol­o­gy, the evo­lu­tion of the enter­prise could pick up pace, dra­mat­i­cal­ly: The Enter­prise Evo­lu­tion: From Hier­ar­chi­cal Insti­tu­tions To Protocols.

Hav­ing been active in the blockchain space for more than 2.5 years, I’ve learned that this tech­nol­o­gy, after the Inter­net 1.0 (eCom­merce) and the Inter­net 2.0 (Social Media), is the Inter­net 3.0 (Inter­net of Trans­ac­tions), that sows the seeds for a real par­a­digm shift of the cor­po­rate world. Depend­ing on how mar­ket par­tic­i­pants use blockchain tech­nol­o­gy and what legal frame­works reg­u­la­tors will come up with, the ways of busi­ness is being done can be rein­vent­ed. But, before div­ing into the details, let’s start with some ini­tial thoughts.

An enter­prise can be defined as the largest par­tic­i­pant of an eco­nom­ic sys­tem with an ide­ol­o­gy based on — in most cases — pri­vate own­er­ship of the means of pro­duc­tion and their oper­a­tion for prof­it. In the early days, the own­ers of an enter­prise would man­age its oper­a­tions them­selves. With the advent of the pub­lic cor­po­ra­tion, own­er­ship and man­age­ment were sep­a­rat­ed from each other: in most cases, the own­ers did not par­tic­i­pate in the man­age­ment of the com­pa­ny but del­e­gat­ed this to employed exec­u­tives. With this sep­a­ra­tion of own­er­ship and man­age­ment and a trend towards larg­er enti­ties with hun­dreds to thou­sands, to hun­dreds of thou­sands of employ­ees, enter­pris­es had to be struc­tured in a way that would enable prop­er man­age­ment and con­trol. In demo­c­ra­t­ic coun­tries, there are spe­cif­ic sets of reg­u­la­tions and laws that pro­vide the frame­work for own­ers’ and man­agers’ scopes of action.

The Enter­prise As An Institution

Through­out the his­to­ry of cap­i­tal­ism, enter­pris­es have been regard­ed as stand-alone, sin­gu­lar enti­ties, exist­ing because of the prod­uct and ser­vice port­fo­lios they would offer to the mar­ket. Aspects of enter­pris­es’ inter­de­pen­den­cies and con­nec­tions with their envi­ron­ments played a minor role: one of the better-known exam­ples of this is James Buchanan’s Pub­lic Choice the­o­ry that describes people’s decision-making process with­in the polit­i­cal realm. When, with the Indus­tri­al Rev­o­lu­tion, peo­ple became aware of the sig­nif­i­cant exter­nal effects enter­pris­es could have not only on the lives of their employ­ees but on the envi­ron­ment, etc., some­thing changed with­in the enter­pris­es: own­ers and man­agers start­ed won­der­ing how they could address their enter­pris­es over­all impact on the out­side world.

Anoth­er aspect that made man­agers think of the inter­de­pen­den­cy of their com­pa­ny with oth­ers, was mar­ket­ing. Com­pa­nies dis­cov­ered that it wasn’t enough to pro­duce high-quality prod­ucts — they had to tell poten­tial cus­tomers about it and even had to com­pete with other com­pa­nies offer­ing sim­i­lar products.

The Enter­prise As A Platform

Acknowl­edg­ing exter­nal impacts of enter­pris­es and the shift from supply-side to demand-side dri­ven mar­kets mark a clear behav­ioral change for enter­pris­es: trade unions, envi­ron­men­tal reg­u­la­tions, but also pure­ly eco­nom­ic aspects, such as just-in-time pro­duc­tion or sup­ply chain opti­miza­tion, all have led to a new kind of enter­prise — evolv­ing from insti­tu­tion­al con­structs into a plat­form, act­ing as hubs main­ly respon­si­ble for orga­niz­ing a net­work of part­ners mak­ing sure a final prod­uct will be pre­sent­ed to the customer.

The enter­prise as a plat­form: these days, most com­pa­nies would be happy being regard­ed as a plat­form. After all, that pro­pels them into the top ranks of the inno­v­a­tive minor­i­ty accord­ing to Accen­tureBain, and other consultancies.

And yet, the plat­form enter­prise isn’t state-of-the-art

Plat­forms may offer many pos­i­tive aspects but they lack all advan­tages of a decen­tral­ized, trust­less sys­tem, such as a blockchain pro­to­col. Apple, Ten­cent, Siemens, or other giant plat­forms are cen­tral­is­tic struc­tures that are suc­cess­ful as long as each plat­form part­ner plays along: as soon as one enti­ty in the sup­ply chain fails, the prod­uct can’t be deliv­ered on time or with a cer­tain qual­i­ty. Costs of man­ag­ing and con­trol­ling the plat­form process­es them­selves have become immense. In the event of an exter­nal irreg­u­lar­i­ty, e.g. an activist group’s protest on the basis of alleged mis­be­hav­ior, fol­lowed by a con­sumer boy­cott, could force even mar­ket lead­ers to halt the pro­duc­tion process or even to dis­con­tin­ue a prod­uct line. Plat­forms are high­ly sen­si­tive against irreg­u­lar­i­ties because of their cen­tral­is­tic architecture.

The Enter­prise Evo­lu­tion: From Hier­ar­chi­cal Insti­tu­tions To Protocols

There is a cure for this sen­si­tiv­i­ty: if plat­form enter­pris­es improve them­selves fur­ther and evolve into pro­to­cols, they become resilient against inter­nal as well as exter­nal attacks and they can regain what most of today’s com­pa­nies have con­tin­u­ous­ly lost in the past years: cred­i­bil­i­ty and trust in the eyes of con­sumers. A pro­to­col can be described as a defined set of rules and reg­u­la­tions that deter­mine how data is trans­mit­ted in net­works. A blockchain pro­to­col is a decen­tral­ized data­base and ledger that allows all par­tic­i­pants of the net­work to work with the iden­ti­cal, con­sis­tent data set at any time.

Con­ver­gence: Blockchain + Smart Technologies

A pro­to­col enter­prise uses blockchain tech­nol­o­gy to share the data­base and its addi­tion­al, exter­nal intel­li­gence, such as AI, autonomous machines, VR or AR, to col­lab­o­ra­tive­ly man­age and con­trol a sup­ply chain process. The sys­tem is com­plete­ly decen­tral­ized, fea­tur­ing auto­mat­ed process­es in line with a set of rules and reg­u­la­tions all par­tic­i­pants have agreed on — the gov­er­nance model. A liq­uid feed­back mech­a­nism ensures that all par­tic­i­pants have the abil­i­ty to par­tic­i­pate in the network’s opin­ion mak­ing process. Depend­ing on the intend­ed level of open­ness, either select­ed third par­ties or the gen­er­al pub­lic may also join the net­work. In the first case, a pri­vate, per­mis­sioned blockchain would allow a pre-defined group of par­tic­i­pants to join the net­work. If every­body should be grant­ed access to the net­work, a pub­lic blockchain would be used.

Cryp­toe­co­nom­ics & Token Design

Par­tic­i­pants of blockchain net­works need tokens to com­mu­ni­cate or, more cor­rect­ly, to trans­act on the blockchain. These tokens can take dif­fer­ent shapes: they can rep­re­sent a value store only, or they come with a set of instruc­tions defin­ing the so-called token design, or crypto-economics of the net­work. Cryp­toe­co­nom­ics describe the incen­tive mech­a­nism that moti­vates par­tic­i­pants to active­ly engage in the network.
In the same way, the token design is the reg­u­la­to­ry frame­work for behav­ing with­in the net­work, it’s the (re-)presentation of each participant’s behav­ior and value sys­tem. In other words: the token is the rep­re­sen­ta­tion of the brand equi­ty of the network’s or protocol’s par­tic­i­pants. Cus­tomer per­cep­tion will be cre­at­ed through the design and use of the blockchain net­work tokens. Since all trans­ac­tions in a blockchain are immutable and, there­fore, rep­re­sent an accu­rate, con­sis­tent his­to­ry, all actions of a pro­to­col enter­prise are open for scruti­ny by third par­ties, s.a. audi­tors, or the gen­er­al pub­lic, i.e. (poten­tial) cus­tomers. CEOs of pro­to­col enter­pris­es won’t have to fear mis­lead­ing accu­sa­tions by activist groups. How­ev­er, they have to be aware that omni­scient audi­tors or cus­tomers form their opin­ions on the com­pa­ny on the basis of a com­plete behav­ioral his­to­ry. Bad times for fraudsters!

A Tokenised Economy

It pre­sum­ably will take years, if not decades, for exist­ing enter­pris­es to evolve in pro­to­cols. Also, many of today’s plat­forms will not join this evo­lu­tion and will remain plat­forms or even morph back into insti­tu­tions before the end of their busi­ness cycle. But for a new breed of con­tenders, blockchain tech­nol­o­gy pro­vides the basis for a tok­enized prod­uct offer­ing already today. These ven­dors won’t nec­es­sar­i­ly be regard­ed as enter­pris­es in the first phase, but they might take over the role of today’s mar­ket lead­ers. The key aspect of a tok­enized econ­o­my is the token rep­re­sent­ing the behav­ior and val­ues, or, the brand equi­ty, of mar­ket participants.
Blockchain tech­nol­o­gy is still in its infan­cy: most sys­tems are not enterprise-ready, yet. How­ev­er, the decen­tral­ized and open nature of blockchains pro­vides the basis for mar­ket pen­e­tra­tion in an insane mode. Bit­coin, the first blockchain pro­to­col, has evolved into the world’s 6th largest cur­ren­cy by cir­cu­la­tion accord­ing to the Bank for Inter­na­tion­al Set­tle­ments. The fig­ure is based on a value of bit­coin at $10,765 each, mean­ing that the total value of all bit­coins in cir­cu­la­tion is $180 bln. Bit­coin evolved into this wide­ly used cur­ren­cy with­in nine years of exis­tence — being the very first of its kind, ini­tial­iz­ing the cat­e­go­ry of cryptocurrencies.

A New Breed Of Tokenised Vendors

Solar­coin, anoth­er cryp­tocur­ren­cy, and token, was launched in 2014. It’s a glob­al rewards pro­gram for solar elec­tric­i­ty gen­er­a­tion: 1 Solar­coin rep­re­sents 1 MWh (megawatt hour) of solar elec­tric­i­ty gen­er­a­tion. Ver­i­fied solar elec­tric­i­ty pro­duc­ers, may get Solar­coins for free when par­tic­i­pat­ing in the net­work. 99% of Solar­coins will be given to solar elec­tric­i­ty pro­duc­ers of 97,500 TWh (ter­awatt hour) over 40 years. The cre­ators of the Solar­coin foun­da­tion expect a mar­ket price of $30 per MWh in unreg­u­lat­ed and unsub­si­dized mar­kets. As of today, a Solar­coin costs $0.50 — so, there us a long way to go to reach a $30 price tag. How­ev­er, at $0.50, Solar­coin has the third-largest mar­ket cap­i­tal­iza­tion of all cryp­tocur­ren­cies, reach­ing over $45 bln. Since renew­able ener­gies, espe­cial­ly solar power, cover more and more of the world’s ener­gy con­sump­tion, we could expect the Solar­coin net­work becom­ing the or one of the main ven­dors with­in this space. And, what else is Solar­coin than a rea­son­ably tok­enized prod­uct offering?

The Enter­prise Evo­lu­tion: From Hier­ar­chi­cal Insti­tu­tions To Protocols

For us, blockchain tech­nol­o­gy is more than a data­base and a ledger: it’s the basis of a tok­enized econ­o­my. Done right, blockchain pro­to­cols not only allow new ven­dors enter a crowd­ed mar­ket, their decen­tral­ized and open char­ac­ter­is­tics pro­vide the tools for decen­tral­ized and open busi­ness mod­els, such as (a renais­sance of) coop­er­a­tives, col­lec­tives, etc.. Blockchain tech­nol­o­gy pro­vides the tools — cre­ators and entre­pre­neurs may now use them and start mor­ph­ing cen­tral­ized, vul­ner­a­ble plat­form enter­pris­es into decen­tral­ized, resilient protocols.

5 Replies to “The Enterprise Evolution: From Hierarchical Institutions To Protocols”

  1. […] The Enter­prise Evo­lu­tion: From Hier­ar­chichal Insti­tu­tions To Pro­to­cols­From the early days of cap­i­tal­ism, when from 1633 the Hol­lan­dis­che Mer­curius referred to cap­i­tal­ists as the own­ers of cap­i­tal, on to David Ricar­do who, in his Prin­ci­ples of Polit­i­cal Econ­o­my and Tax­a­tion is seen as the one who actu­al­ly coined the term cap­i­tal­ism, until today: the struc­ture and behav­ior of the enter­prise as the […] […]

  2. […] was a great day: I could wit­ness the oper­a­tional­iza­tion of my enter­prise pro­to­col evo­lu­tion mod­el. Of course, nobody at the MunichRe sym­po­sium specif­i­cal­ly talked about the model,. […]

  3. […] This arti­cle in the FT adds a dif­fer­ent per­spec­tive, but comes to the same con­clu­sion regard­ing the nec­es­sary re-modeling of the cor­po­ra­tion, that I described in a more boroad­er sense here. […]

  4. […] leave their uni­ver­si­ties to actu­al­ly devel­op new prod­ucts? Does this require the enter­prise to devel­op a new model, or to enter a new phase in its own evo­lu­tion? And — will we see a lot mote […]

  5. […] Devel­op­ment Goals. In decen­tral­ized sys­tems, enter­pris­es become part of an over­all pro­to­col to which they add their organization-specific ele­ments, s.a. brand, exper­tise, prod­ucts, and […]

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