The War of the Worlds — 2. The Traditional Industry

What we call the “traditional” industry today is the result of a major upheaval: the industrial revolution. The industrial revolution reduced the value contribution of labor in the world’s economies by shifting from craft to mechanization and automation. The scientific and technological foundation is a mechanistic and reductionist understanding of the physical world — the Newtonian world. The conceptual model of this world is deterministic: you can predict the result of any action based on the knowledge of the behavior of the components — all you need is sufficient resources to compute this output. This understanding of the material world also forms the basis of a deterministic model of human motives and behavior. Societal behavior is the aggregate of the behavior of individuals. This understanding was aptly described by Adam Smith in his Inquiry into the Nature and Causes of the Wealth of Nations [Smith 1776]:

Adam Smith: Inquiry into the Nature and Causes of the Wealth of Nations, 1776

“… every individual is continually exerting himself to find out the most advantageous employment for whatever capital he can command. It is his own advantage, indeed, and not that of society, which he has in view. But the study of his own advantage naturally, or rather necessarily, leads him to prefer that employment which is most advantageous to the society.”

This is still the fundamental dogma of capitalism. This is not meant as an oversimplified presentation of Adam Smith’s work. We are not intending to write a detailed historical account, we are looking for patterns, for drivers, which influence the governance of organizations. And the quote from Adam Smith’s work is still the credo of society: man is first and foremost selfish. This paradigm has influenced the development of modern society and the organization that make up the “traditional” industry we are examining.

The industrial revolution was not uniform geographically nor continuous over time. Around the beginning of the 20th century a second wave re-invigorated the industrial revolution. Telephony and electricity came together and provided the communication possibilities and the energy needed for mass production and globalization.

Kondratieff Waves
[http://www.kondratieff.net]

Kondratieff waves [Nefiodow 2001] of cycles of a few decades, caused by the rise and demise of a base technology provide a rich tool to analyze this history and to project into the future. Jeremy Rifkin [Rifkin 2009] explains different stages of development based on coinciding advances in technologies for harnessing energy and advances in communications technologies — or the co-evolution of these. Rifkin’s model applies not only to the industrial age, but to the whole of the history of human society and is very close to our own understanding. The Sumerian society needed writing — they invented cuneiform — in order to manage the hydraulic technologies used for agriculture, so that the division of labor could be organized, which was necessary to improve agricultural yield, storage and transport. During the Renaissance, book print and cheap pencil and paper allowed architecture and other disciplines to develop and written plans and documentation become commonplace. With the invention of the steam engine, printing performance reached an unprecedented level, and this combined with the deployment of coal-fired steam engine technology in many other disciplines. The (first) industrial revolution is the result of these two developments. Public schooling increased literacy. This was necessary to deal with the increasing degree of specialization. The establishment of public schooling was enabled by high volume of and faster and cheaper printing. The foundation for a rapid expansion of the industrial revolution geographically, and across industry sectors had been laid. The number and the size of enterprises increased.

Markets are seen as territories to be conquered from and defended against competitors. The markets “consume” the products, if necessary demand is stimulated. The underlying principle is the product “push” towards the consumers. If necessary industry may call upon the state to support the  introduction of new products through regulation, tax concessions or direct subvention. Eventually a “consumer society” was generated, in which demand drives the supply. This is not the introduction of a “pull” principle into the market relationship, since the market — the consumers — are still passive.  This “push” into a (passive) market, which is like a territory to be conquered and defended is another key driver for the structure and behavior of organizations.

Competition can be fierce, depending on the attractiveness of the market — its purchasing power. Competition eventually is mainly based on price, unless one is able to achieve protection or exclusivity. Protection through monopolies or patents has a long and interesting history, but the frameworks for intellectual property protection developed especially with the second phase of the industrial revolution in the latter part of the 19th century to (more or less) the standards of today. Information and knowledge are to be guarded and shielded from prospective competitors. Intellectual property became a mechanism of power in “defending one’s territories.” Consequently distrust is the default relationship between organizations in “territorial proximity.”

The mainstream mechanistic view is that products are the sums of their parts. Similarly companies seen as composed of staff “who know their place,” just as every member of society has their place. Throughout the industrial revolution society remained very hierarchical and developed a “Darwinian Social Order” besides the already existing order based on aristocracy. Whilst the term “Social Darwinism” was only coined at the end of the Second World War, Herbert Spencer’s “survival of the fittest” [Spencer 1870] was generalized from biology to include social systems and was commonly used to justify a social order based economic prowess. It is only fair to point out that this “Social Darwinism” is not in line with Darwin’s own thinking [Darwin 1874.]

New technologies continued to develop throughout the industrial revolution and this continues today. New technologies have allowed new products to develop, and slowly the industries as we know took shape. They are divided in sectors and generally each industry constitutes a domain of specialization, with own products and markets.

Technologies and the capabilities to exploit them developed rapidly. Organizational structures and the management function did not change substantially [Hamel 2007.]

Key paradigms remained:

Quality = Compliance
Compliance = Control
Efficiency = Control
Fast = Central
Bigger = Better
Hierarchy = Fast

Suddenly a new force emerged, it was as if the traditional world started to feel the gravitational effect of another world. The third and last phase of the industrial revolution had begun.

More about that in our next blog.