14 Oct 2002  Research & Ideas

The Widening Rift Between
Corporations and Society

Managerial capitalism is hanging on by its fingertips, say James Maxmin and HBS professor Shoshana Zuboff. In this e-mail interview with HBS Working Knowledge and in an excerpt from their new book, The Support Economy, the authors lay out the problem and offer savvy solutions for business and consumers.

 

Editor's Note— Society is evolving and it is leaving business behind, say HBS professor Shoshana Zuboff and James Maxmin. In their new book, The Support Economy: Why Corporations are Failing Individuals and the Next Episode of Capitalism, they address this very issue and offer some bold solutions. Below, they field questions from HBS Working Knowledge senior editor Martha Lagace in an e-mail interview.

Lagace: In The Support Economy, you make the case that managerial capitalism, invented a hundred years ago, desperately needs an overhaul. How and why do you believe managerial capitalism is failing people now?

Zuboff and Maxmin: A century ago mass consumption was on the rise. People wanted more things. The answer was to produce more goods at an ever-lower cost—mass production. Corporations were organized around a managerial hierarchy invented to provide a tight inward focus on the increasingly complex processes of production and distribution. This was a massive innovation over the older model of a single owner who tried to oversee everything. Under managerial capitalism, ownership became dispersed, but control remained concentrated in the management group.

The evolution from one episode of capitalism to another is a normal historical process.
—Shoshana Zuboff and James Maxmin

Management's inward focus allowed it to succeed beyond anyone's dreams. But that success further insulated managers from the society they were supposed to serve. The elite hierarchy and the self-interested male culture of management became a central focus. This organizational narcissism not only produced the Enron effect, but it cost managers a front-row seat in a changing society marked by the dramatically different yearnings and needs of its own end consumers, especially women.

It also prevented them from grasping the revolutionary potential of the new digital medium. As a result, corporations have failed to adapt to the true nature of their markets in the twenty-first century. Organizational change programs, visionary leadership, or increased regulation cannot fix this situation. The problem runs deep in the structure of managerial capitalism.

Our book addresses this growing chasm between today's people and the organizations upon which they must depend for consumption and employment. The last fifty years have seen the rise of a new society of individuals, but corporations continue to operate according to the logic of managerial capitalism, invented a century ago for different people, different markets, and different needs. The chasm that now separates individuals and organizations is marked by frustration, mistrust, disappointment, and even rage. But that chasm also harbors the possibility of a new era of wealth creation and a new episode of capitalism.

People's desires, needs and wants have radically changed, but corporations have remained distant and indifferent to the true nature of this change.
—Shoshana Zuboff and James Maxmin

The evolution from one episode of capitalism to another is a normal historical process. Just as mercantile capitalism was displaced by proprietary capitalism, and that new form was later displaced by managerial capitalism, it makes sense that managerial capitalism will be displaced by a new, more comprehensive form that better serves today's populations.

Capitalism's capacity to evolve and its incredible versatility have proven to be the single most important source of its robustness and success. In fact, capitalism has avoided devastating crises not because it is fixed, but because it changes. Each historical episode of capitalism has a limited range of adaptation, however. As markets and technologies undergo historic change, so too must the current model of capitalism.

Each new episode of capitalism emerges from the complex interplay of three forces: (1) New human yearnings that create a new approach to consumption and new kinds of markets, (2) technologies capable of addressing the demands of the new markets, and (3) a new enterprise logic that can link employees, technologies, and markets in new ways.

Today's environment holds the potential for these three forces to converge once again.

First, in the last fifty years, a new society of individuals has emerged. There has been a psychological reformation as powerful and decisive as the religious reformation of the sixteenth century. Today's individuals seek psychological self-determination. They are the origins of their own meanings, not a passive mass audience. This new phenomenon is expressed in myriad ways, from the success of the Vietnam Memorial Wall to the proliferation of laws extending human rights in every domain. The new individuals have plenty of things. They have access to plenty of services. But they now yearn for something that corporations have not perceived, let alone put on offer: the kind of support that will enable them to live the lives they choose.

People's desires, needs and wants have radically changed, but corporations have remained distant and indifferent to the true nature of this change. As a result, we have a business environment in which people are chronically disappointed and frustrated by their experiences as consumers and employees. We no longer trust large organizations to serve our needs. On every level, we are experiencing a divisive "us vs. them" mentality.

Now, after decades of being forced to put up with the consequences of corporate indifference, individual end consumers are striking out on their own to blaze new trails in a new approach that we call the individuation of consumption. They want to be treated as individuals, not as anonymous transactions in the ledgers of mass consumption. They want to be heard and they want to matter. They no longer want to be the objects of commerce.

Instead, they want corporations to bend to their needs. They want to be freed from the time-consuming stress, rage, injustice, and personal defeat that accompany so many commercial exchanges. They seek advocacy in place of adversarialism, relationships in place of transactions. They want to take their lives in their own hands and they are willing to pay for what we call the deep support that will enable them to do so. These new markets for deep support are an important force in the shift from an industrial or service economy to a support economy.

The second of the "three forces" is represented by the new digital medium whose networked intelligence, flexibility, ubiquity, and complexity make it ideally suited to meeting the demands of the new markets for deep support. Until now, though, it has been bent to the purposes of the old consumption, according to the principles of the old capitalism. The new medium will not fulfill its historic destiny without a new enterprise logic capable of liberating its revolutionary potential.

The presence of new markets and new technologies create the urgent need for a third force: a new enterprise logic capable of marrying the new markets for deep support and the new capabilities of the digital medium.

The fire is laid. What's needed is the match. Many people already sense that there must be a better and more relevant way of doing capitalism. The search is on for a new enterprise logic that will fundamentally alter the orientation, purpose, and economics of commerce. The Support Economy is intended to contribute to that search as it invites discussion of a new enterprise logic that we call distributed capitalism. Watch the flames when these three forces finally combine. That will mark the real discontinuity between the economy of the twentieth century and that of the twenty-first.

Q: You have drawn on other fields in addition to business, such as history, science, even contemporary architecture. Why did you decide to look outside business for answers to issues of capitalism?

A: Think of a Russian doll. Business is inside capitalism, but capitalism is inside society, and society is inside history. The forms that capitalism takes in different eras reflect the social changes that ultimately shape markets.

In our chapter called "Rediscovering the End Consumer, Over and Over Again" we show how most "new" business concepts are simply self-referring. They do not move beyond the rules of a certain way of doing capitalism, and therefore they cannot possibly alter the problems they target. Instead, just the opposite occurs—the status quo overpowers new ideas and turns them into variations on the same old themes. That is why every innovation from quality circles to reengineering to customer relationships turns out to be another road to cost reduction.

The status quo overpowers new ideas and turns them into variations on the same old themes.
—Shoshana Zuboff and James Maxmin

To get outside this vicious circle, it is necessary to understand the ways in which today's capitalism grew out of the social conditions that existed more or less a century ago, and thus the ways in which a new capitalism, what we call distributed capitalism, can grow out of the social conditions that exist today.

Who are today's people? What are their dreams? What do they yearn for? The answers to these questions do not exist inside business but everywhere else. They are inscribed in our culture in thousands of ways, many of which we discuss—master bedroom suites, home schooling, the passion for genealogy, extreme sports, organic foods, alternative health, and the profound popularity of the Vietnam Memorial Wall.

Capitalism will find its renewal in these social realities, not in spite of them. To quote The Grateful Dead, "Once in a while you get shown the light in the strangest of places if you look at it right."

Q: In your book you emphasize the difference between self-support and what you call deep support. All our readers understand self-support: ATMs at the bank, automatic check-in with e-tickets at the airport. What is deep support, in a nutshell? How will concerns for privacy affect the use of deep support?

A: Deep support, as we describe in our book, is an entirely new way of thinking about commerce. In the support economy, the very purpose of commerce is redefined around the objective of supporting individuals.

Deep support is not just an enhanced version of conventional customer service. Nor can it be reduced to a flow of goods. Instead, products and services merely punctuate the ongoing relationships between individual end consumers and the new federations of enterprises that support them. Deep support is the "meta-product" under which all aspects of commerce are subsumed.

Deep support means "getting my life back." In order to provide this, deep support means that commercial entities absorb both accountability and responsibility for every aspect of the consumption experience. Deep support enables psychological self-determination. It produces time for life. It facilitates and enhances the experience of being the origin of one's life. It recognizes, responds to, and promotes individuality. It celebrates intricacy. It multiplies choice and enhances flexibility. It encourages voice and is guided by voice. Deep support listens and offers connection. It offers a collaborative relationship defined by advocacy. It is founded on trust, reciprocity, authenticity, intimacy, and absolute reliability.

Deep support can be scaled and configured in infinite ways to suit each individual's style, predilections, tastes, and choices. People will determine what qualities of deep support and self-support they desire at any given moment. They can opt into federations that provide what they seek, and their choices can change as they themselves change. Right now, self-support is the best option we have to avoid the adversarialism of what we call the transaction crisis. But self-support takes a lot of time. In a commercial world based on advocacy instead of adversarialism, our choices will change.

In a networked world, privacy concerns can never be completely overturned. In today's world, we are each on our own. We must each be vigilant to protect our right to privacy. We have to worry about protecting ourselves from the people who sell us things as well as those who employ us.

But in the world of distributed capitalism that we describe, federations are advocates who utilize technology to ensure individual privacy. In this world, the system works in favor of privacy, not against it. The distributed imperative we describe recognizes that all value is located in individual end consumers and all cash flows from their needs.

These principles are operationalized in the practical dictate that no cash is released into the federation until the individual end consumer pays. A consequence of this kind of practice is that violations of trust and advocacy are likely to result in non-payment. Enterprises that violate such relationship requirements would simply be dropped from profitable federations.

Q: You have written that e-commerce in the recent boom years failed "not because it wasn't revolutionary, but because it wasn't revolutionary enough." In your view, there is "truly explosive economic potential" awaiting businesses that can marry new digital technologies with a new logic of capitalism. What kinds of businesses and services do you think could be first in line?

A: Exactly how distributed capitalism will emerge and develop will be an adventure in society—wide experimentation, innovation, creativity, risk-taking and execution not experienced since the early part of the 20th century. It will not happen overnight but rather over decades, as in the case of the evolution and refinement of managerial capitalism.

In the early stages of this new movement, we anticipate major efforts to reduce fragmentation, bundle goods, services and information, and reconfigure activities and industries that today are separated by artificial boundaries.

We have already seen entrepreneurs explore some of this territory with ventures aimed at home delivery, portals, concierge services, and the integration of business processes, as in the case of Internet banking. We expect these efforts to be further refined and developed. We also anticipate that anything that can be automated will be automated. Systems and process that once could not "talk" with one another will be integrated.

The automation and integration of these functions and processes are likely to lead the merger of such activities as logistics and financial services. This can provide large-scale platforms with common protocols (the precursors of digital platforms and what we call infrastructure convergence) that will begin to unite the physical and digital world. (UPS has already made significant strategic moves in this direction.)

Other early moves are likely to involve the reconfiguration of fragmented and mutually adversarial businesses that dramatically suboptimize wealth creation. The classic examples are in the broken business models of transportation and health care. For example, all aspects of travel (e.g. airports, flights, hotels, car hire, rebooking, monitoring payments, etc.) can be integrated into a single stream of activity that not only centers on individual support, but that can finally make money.

With health care, the fragmented and adversarial activities of insurers, practitioners, hospitals, etc. can be integrated in new ways that actually support individuals seeking care, while wringing out the massive replication of administrative effort across these enterprises.

Exactly how distributed capitalism will emerge and develop will be an adventure in society —wide experimentation, innovation, creativity, risk-taking and execution not experienced since the early part of the 20th century.
—Shoshana Zuboff and James Maxmin

Both of these examples are illustrated and expanded in our book in the case of the Acero family.

Q: Professor Zuboff, in your previous book, In the Age of the Smart Machine: The Future of Work and Power, you wrote eloquently about the advent of computers in the workplace for individuals, organizations, and society. In 1988 you wrote, "Choices that appear to be merely technical will redefine our lives together at work." As you and James Maxmin researched and wrote The Support Economy, how did you feel about the way in which technology has entered the workplace, and about the ways in which organizations have been using it both for customers and employees?

A: In my last book I described the difference between using new information technologies to automate and to informate. Automation strategies stress labor substitution and cost reduction. Informating strategies stress information diffusion for effectiveness and added value.

There is little doubt that companies have invested far more in automating than in informating. Consumers have been forced to conform to the rigors of automation as they track their own packages, make their way through infinite branches in automated telephone systems, waste their time waiting for call center operators, and so on. We write about this state of affairs in our chapter in The Support Economy called "The Transaction Crisis."

Cost reduction has continued to be the dominant strategy under managerial capitalism because new sources of wealth creation are increasingly elusive. That very problem is the target of The Support Economy. It illustrates the exhaustion of the current model, but also identifies the unmet needs of today's individuals as the epicenter of a new wave of wealth creation.

Relationship Mimicry

by Shoshana Zuboff and James Maxmin

Book Cover: The Support Economy

As the family sits down to dinner, the phone rings. You hesitate, then decide to answer. The voice announces itself as from your long-distance telephone company, and it asks for a garbled version of your name. In an animated but strangely impersonal style, the voice launches into selling you a new long-distance service. It doesn't take you long to realize that not only doesn't this person know your name, he doesn't know how many phone lines you have, or your telephone numbers. In fact, he doesn't know anything about you at all. You are on the list, and the list is the job. You decline the new service. Several evenings later the phone rings again. This time it's for yet another version of your name. It's the same pitch. In this way you become familiar with the company's "relationship marketing" strategy.

Relationship mimicry is designed to seduce, and it often succeeds. In the case of this little murder, the transaction is presented to look like a relationship. For example, many firms have tried to convert transactions into relationships with the promise of "after-care" to support new products. This may take the form of an 800 number for technical support, or even a technical service contract priced as an add-on to the product. But as long as aftercare is subordinated to transaction economics, it frequently turns into relationship mimicry instead. This was the case for a man who bought his daughter a computer.

The objective was a new personal computer and printer for my daughter as a Christmas present. I chose a company famous for its ability to customize your personal computer choices. A magazine ad with great prices drew my attention, so I went to the Web site. But the site would not accept the product codes from the magazine. Nor could it provide information on the printer options. After a couple of hours, I gave up and called their 800 number to order the computer rig from a person.

I spoke with Steve. He was congenial and very helpful, walking me through the options. I made the choices, including a twenty-four-hour home-service option, agreed on the price, and was given a delivery date three weeks before Christmas. Steve gave me his direct number and encouraged me to call him if I needed further help. It was easy and pleasant.

The gear arrived on time but without the printer. I made several phone calls to Steve, but none were returned. On Christmas Eve, someone called to say the printer would be delayed until late January. I began to complain, and she hung up on me.

We unpacked the computer on Christmas Day, set it up, and plugged it in. The next day, we could not turn the unit back on. We called Steve—no answer. We left a message. No return call. We called the 800 number and waited for over half an hour. When I finally reached someone, they said it was a faulty component, not a faulty computer, and we would have to ring the company that sold the component. After some arguing, they gave me a trouble-shooting routine. It was then concluded that we had a faulty power drive. Since I had the twenty-four-hour home-service contract, they told me someone would be calling me by 1 P.M. the following day to arrange a service call for that afternoon. The next day came and went, but no call. Once again, I had to ring the 800 number. This time I was given another number to call. That person gave me another number, and that person gave me still another number. Four calls later I was speaking with someone who said the new component had never even been ordered. Three days later, someone finally showed up to fix the thing.

January came and went, and still no printer. Six more phone messages to Steve went unanswered. I tried getting a sales supervisor, but he said he did not deal with delivery issues. I tried the 800 number, and they told me I would have to call the printer company directly. I calculated that I had already spent twelve hours on the problems related to this purchase. I felt really bitter and would have liked to send the whole rig back, if it were not for all the hassle involved in even doing that! Who would I send it to? That afternoon, I went to Wal-Mart and bought my daughter a great printer. I never did hear from the computer company.

People also invest in special credit and frequent buyer cards, in the belief that they are entering into a relationship with a firm that will treat them as especially valued customers. Firms tout their commitment to these premium customers. How do you know if it's relationship mimicry? What happens when the "relationship" hits a pothole and the ensuing conflict hits the profit-and-loss statement? In relationship mimicry, the veneer of relationship peels away as soon as commitment begins to have a cost. At that point the end consumer is face to face with the raw heart of the transaction crisis. The disaffection that follows is far worse than if those false expectations had never been aroused in the first place. One frequent business traveler with ample needs for interdependence was willing to pay the $300 annual fee for a platinum card for the additional support he thought its services might provide. This is how he discovered relationship mimicry:

I found that the front-line personnel working for platinum services were well trained. They found me a way out of Malaysia when my own flight was canceled. They had helped me with lost luggage and a stolen passport. For eight years it seemed that maybe this was the real thing, until the first dispute arose. When checking my statement I found that an airline ticket had been double-charged to my account. One ticket had been canceled and a new one purchased, but both showed up as charges on my statement. The total airfare amounted to less than the annual fee, but I wanted the charge removed. I expected it to be easy, but it certainly wasn't. There were several frustrating phone calls, arguing with successive layers of accounting management. They demanded more and more paperwork from me. Finally I exploded. I told them I was simply going to rip up my platinum card, despite heavy usage over the past eight years. They had absolutely no response. I ripped up the card and never heard from anyone in that company again!

The airline industry offers the promise of relationship to its travelers with frequent-flier miles and gold cards. Today, there are more than 3 trillion frequent-flier miles lodged in customers' accounts, but the annual redemption rate has remained steady, averaging about 200 billion redeemed miles a year. The cost to an airline of honoring a free ticket is only about $20, but the profits from selling frequent-flier miles are enormous. 71 In addition to the miles directly awarded to passengers, the airlines generate about $1.5 billion a year "selling miles" to marketing partners, who sell them on to their customers through credit card purchases, hotel stays, and the like.

The sine qua non for frequent fliers is the gold card, said to distinguish its holders for special treatment. At least that's what Jon Wiener believed. He was a gold card holder at American Airlines when a letter arrived informing him one day in October that unless he racked up 548 more miles in his account by December 31, he would lose his membership status. "They reminded me that I belong to an exclusive group that enjoys a number of benefits. They reminded me that these things have to be earned . . . ." Gold card points could be derived only from actual flying. So Jon decided to fly round-trip from Los Angeles, where he lived, to Orange County, 36 miles away. Since each flight segment carried an award of 500 mileage points, one round-trip flight would put him solidly into "elite" status for another year.

Jon arrived at the airport only to learn that fog had canceled his flight. A van was hired to take the four passengers to the Orange County airport. He made sure that he would get his mileage credit anyway. Of the four people in the van, two were there solely to qualify for their gold miles. By the time Jon reached his destination, it was time for him to check in for his return flight. It too was canceled. Once again, he was shepherded toward a van. This time there were only two people traveling, Jon and another man, both traveling only to qualify for gold. "The other guy was just starting out, and he needed three times what I needed—four segments with five hundred miles credit for each would give him more than he needed. When he found out they were putting us in a van, he had a bold idea: He called AAdvantage Gold Customer Service in Dallas-Fort Worth and asked to make a deal: If he could stay home and still get the miles, the airline could keep his money for the ticket. He had bought a ticket, he had checked in, now could he go home, please? They told him no deal: Rules are rules. You earn qualifying miles only by actually flying or, in this case, taking the van. 72

Jon eventually arrived back at the Los Angeles airport; it had been a long day on the freeway. What appeared to be a relationship was actually a transaction cynically decked out in the paraphernalia of relationship. It was relationship mimicry that promotes transaction value as it suffocates relationship value, wildly ricocheting between hope and disappointment.

A hammerlock on change

Commercial organizations continue to operate on the aging premise that the purpose of business is to make a profit on transactions for products or services. An individual's complexity and yearning for psychological self determination are imperceptible in these commercial transactions. The markets for deep support to which they give rise are equally invisible. Customer satisfaction may or may not figure prominently in the equation, depending on where a firm sits in the distribution between resource-reduction and revenue-generating strategies. But in either case, the transaction crisis is perpetuated as generally well-intentioned men and women do the "right" thing, based on a now tragically limited set of assumptions about value and consumption that have their origins in an earlier social and economic universe. It matters little whether their limited mandate is achieved with a smile or stony indifference, with a lot of sophisticated concepts and technology or none at all. Under none of these circumstances is the borderland into individual space ever traversed. Each time an individual's needs for deep support are ignored, firms lose an opportunity for wealth creation. Multiply this effect across the economy and ponder the unrealized relationship value and lost wealth associated with the vast new and wholly uncharted markets for deep support.

Transaction economics, however, is not the only legacy of managerial capitalism to maintain a hammerlock on the current enterprise. If managerial capitalism is limited by its own economics, it is also prisoner to its own psychology and social dynamics. Specifically, the "inward focus" dictated by the standard enterprise logic is responsible for a range of chronic behaviors and attitudes that help maintain the status quo and foster the distance between producers and consumers. In the next chapter we will explore this social psychology of the standard enterprise logic in order to better understand why the transaction crisis appears to be both ubiquitous and intractable—even in the face of new opportunities for wealth creation—and why relationship value remains invisible. That understanding necessarily takes us back to the crucible of today's enterprises, where the habits and frames of mind that govern modern organizational life were forged.

Excerpted with permission from The Support Economy by Shoshana Zuboff and James Maxmin. Copyright (c) Shoshana Zuboff and James Maxmin, 2002. Reprinted by arrangement with Viking, a division of Penguin Putnam Inc.

Footnotes:

71. Marchand, Advertising the American Dream, p. 70.

72. Marchand, Advertising the American Dream, p. 343

About the author

James Maxmin was chairman and CEO of Volvo-UK, Thorn Home Electronics, and Laura Ashley PLC. He founded the private investment company Global Brand Development, and is currently the advisory director at Mast Global, the investment banking arm of the Monitor Company.