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Detroit ford factory

Technology

How best to design the virtual architecture of startups?

Published 31 March 2022 in Technology • 9 min read • Audio availableAudio available

Henry Ford’s Model T factory in Detroit set the blueprint for manufacturing in the 20th Century, but today’s enterprises require a very different set of raw materials.

The pandemic has been catastrophic for people and communities around the world. And while Big Tech has flourished in an online-first world, achieving unheard-of valuations, small businesses have faced existential challenges. In spite of this, one surprising trend stands out: the rate of new business startups is booming. According to the US Census Bureau, the number of new business applications increased to over 4 million in 2020 and more than five million in 2021, jumping by over 50% compared to prior years. This is especially surprising because, by some measures, the rate of business startups in the US has been in long-term decline since the late 1970s.  

One reason for this flood of startups is that information and communication technologies (ICTs) have radically reduced the costs of starting a business. As I have described in previous columns, ICTs allow founders essentially to “rent” factories and distribution channels rather than buying them, and to rely on contractors for direct work. Markets have displaced traditional organizations in large swaths of the economy. The parts for an enterprise are like Lego bricks that one can snap together quickly and snap apart almost as easily. 

But what form will these new enterprises take? Will they enable innovation and variety and enrich their communities, or will they push us toward a precarious world of unstable work and popups for everything – like plastic bricks left on the floor that are excruciating to step on? The answer, I would argue, depends on how we teach design, and how we center humane values in the ways we create enterprises. We have been here before, and we can learn lessons from the past. 

Ford model T assemblyFord’s Highland Park plant, designed by Albert Kahn, inspired industrialists around the world. But business infrastructure in the 21st century is no longer defined by concrete and glass Model Ts on the Detroit production line in 1913

Raw materials and architecture 

Detroit has a strong claim to being the birthplace of the 20th century. The mass production methods of the auto industry spread from Henry Ford’s Model T factory to nearly every country and industry on Earth, changing how we produce goods, grow food, educate children, fight wars, and heal the sick. And while Henry Ford receives most of the credit for refining the moving assembly line, his architect Albert Kahn was perhaps equally crucial for his innovations in factory architecture. 

The Model T, the car that changed the world, was conceived in a small corner workspace in Ford’s Piquette Avenue plant in Detroit. The 1904 facility is tiny, constructed of lumber and brick, with a design suited to a 19th century New England textile mill. Parts arrived in batches from suppliers in the neighborhood, and teams of men assembled each car in separate bays. Completed vehicles were lowered one by one in an elevator to the yard below, where they could be loaded onto trains for distribution.  

For the Model T to achieve its world-changing potential required new kinds of architecture, both organizational and physical. And while Ford and his engineers schemed about mass production, Albert Kahn designed the buildings where it could happen, drawing on newly available raw materials.  

Kahn’s first factory for Ford was the Highland Park plant, an astonishing facility where Ford’s moving assembly line was born. It was vast and unshakably strong: buildings from four to six stories connected by ramps, acres of concrete flooring held up by massive concrete pillars, and so much window area the initial building was called a “crystal palace.” Such construction would have been unthinkable a decade before but producing thousands of cars a day on a moving assembly line required a different kind of architecture. Innovations in materials such as machine-rolled plate glass, structural steel, and particularly reinforced concrete (with steel bars inside) opened new possibilities for designers. It happened that Albert Kahn’s brother was one of the creators of cost-effective reinforced concrete, and Albert was a visionary innovator who had some practice with these materials in designing the Packard Plant. 

If you have ever seen a factory from the first half of the 20th century  (concrete floors, ceilings and pillars; endless windows; heavy-duty ramps from floor to floor) you have Albert Kahn to thank for its design. His Highland Park plant was visited by industrialists from around the world, and its innovations were emulated from Fiat’s facility in Turin to the hundreds of Kahn-designed factories in the new Soviet Union. All a tribute to Detroit’s genius for design. 

New technologies, particularly the smartphone, have radically expanded the range of possibilities for organizing enterprise – for better or worse

The new raw materials for business 

We are at a similar turning point today when it comes to the design of enterprise, as innovations in information and communication technologies, from the Web to the smartphone, enable new and surprising designs for organizing business. 

What are the raw materials of enterprise today the analogs of structural steel, reinforced concrete, and plate glass in 1910? To create a business normally requires a mix of capital, labor, supplies, distribution, and methods of management, ideally along with a legal form. The digital revolution has changed how business organizers can access all these core materials in fundamental ways over the past generation. In particular, it is often cheaper for entrepreneurs to rely on outside markets for inputs rather than “making” them internally. 

For access to capital this takes the form of financialization, in which markets displace other sources of funding such as banks. Since the JOBS Act of 2012, online crowdfunding platforms have established themselves as a vibrant new format for raising capital. And vendors such as payment processors often find that the data they gather allows them to get into the financing business, as they have far more fine-grained information about prospective borrowers than banks. 

The Web has enabled enterprises to shop the world for suppliers, from generic factories to providers of accounting, payroll, and IT infrastructure a process I call “Nikefication” after the company that designs and markets sneakers but contracts out their production.

“Imagine explaining to yourself in 2015 a TikTok-based virtual restaurant enabled by ghost kitchens”

Amazon and its ilk have transformed the distribution of tangible goods, enabling almost anyone to sell online. With Fulfillment By Amazon, sellers can distribute products that they have never seen or touched. Ubiquitous quick-delivery services like DoorDash and Gopuff enable even more rapid distribution from ghost kitchens and dark stores. And for books, music, software, and video content, the Web enables vendors to sell into a global marketplace at minimal cost. 

Labor can now be recruited and managed virtually by the task, from getting a ride across town to virtual physician housecalls. Management-by-algorithm enables “bossless” work, from mind-numbing microtasks paid by the penny on Mturk to specialized legal work. Many businesses now declare themselves “remote first”, foregoing the cost of physical facilities entirely. 

In light of these other changes, it is increasingly feasible to create an enterprise that looks more like a webpage than an organization, with management taking the form of algos that call on resources and coordinate outputs. 

Lastly, the available legal strictures for enterprise have exploded, from Public Benefit Corporations to e-Estonia. If you’re going to incorporate a virtual business online, there is little reason to be provincial when legal vendors around the globe offer a kaleidoscope of options. 

New technologies, particularly the smartphone, have radically expanded the range of possibilities for organizing enterprise for better or worse. I have written previously about the unnerving changes in the restaurant industry changes in the restaurant industry, where ghost kitchens and smartphone-enabled delivery services are creating challenges to the local restaurants that have served our communities for generations. In December TikTok announced that it was contracting with delivery service Grubhub and 300 ghost kitchens to create a national-scale virtual restaurant. The delivery-only venue would compile dishes that had gone viral on TikTok into menus each quarter for online ordering, and their creators would get a cut of the proceeds. Imagine explaining to yourself in 2015 a TikTok-based virtual restaurant enabled by ghost kitchens. 

Or how about flashmobs of shoplifters who descend on retailers in groups to steal specific high-value items in bulk? The business model here is enabled by Amazon, which serves as an unwitting fence for non-legal entrepreneurs. One latter-day Fagin “paid recovering drug addicts to steal razors and health products from stores such as Target, CVS and Publix and take them to his warehouse, according to court documents. The man, Robert Whitley, then sold the items online through businesses called Closeout Express and Essential Daily Discounts. He sold more than 140,000 items on Amazon’s marketplace, totaling $3.5 million, according to federal prosecutors” (New York Times, 3 December 2021).

Design for the future 

What should we be teaching the founders of the future? And how should current businesses adapt – what kind of talent and capabilities do they need to make the smartest use of newly available materials? The short answer: design.  

It is perhaps no coincidence that General Motors and Harvard Business School were simultaneously founded in 1908: GM became the iconic American corporation of the 20th century, and HBS trained people to work in and lead iconic American corporations. This genealogy is still reflected in the typical business curriculum: finance, accounting, operations, marketing, management, all imagine that GM (or Eastman Kodak, or Westinghouse) is the prototypical business. But the newer enterprises may not sell shares on a stock market, own factories, employ people, or connect to consumers through Superbowl ads. It is as if business schools were training future Albert Kahns about best practices for building textile mills out of wood and brick, rather than exploring new possibilities enabled by new raw materials. 

Design is the new distinctive capability that business needs, both for startups and established enterprises. What are the available materials, and how do we combine them in new ways to create value? Today when I teach business students, I train them in tools of equitable design. Our flagship course draws on expertise in each of the raw materials to explore the next frontiers for recruiting capital, labor, and supplies; connecting with customers; and organizing internally. What if your customers and neighbors could also provide you with equity financing via a platform? What if employees had access to information about daily internal resource flows through a smartphone app? What if the business were organized as a Perpetual Purpose Trust and was not required to put profit first? What if your packaging were edible? What if… 

Knowing the materials combines with a focus on equitable design practices to create enterprises with fair wages and a community orientation. Our theory is that, in an era of rampant disruption led by new technologies, design is the new essential skill in business. Instead of being shackled by approaches that venerate past success, we encourage a future orientation. A focus on design discards tradition in favor of “How might we…?” 

We are inspired by the new ways of building business coming out of Detroit. As Suntae Kim and Anna Kim describe it in a recent article in Harvard Business Review, the new model focuses on scaling deep, not scaling up, as a way to build stronger and more self-sufficient communities. Focusing on creating enterprises that build their community, rather than rapid but often unsustainable scaling, pays off in creating a more vibrant urban economy. It turns out Detroit still has a genius for design.

Issue 5

Current Issue

Inventory of change

The disruption of production from smartphones to furniture wrought by the COVID-19 pandemic has brought home the importance of global supply chains to every customer. But what have been the fundamental shifts and advancements in supply chain management over the period? Inflation, e-commerce and geopolitcal conflict are all driving change. In Issue V of I by IMD, we explore what is next for supply.

Explore issue VMore about Supply chain

Authors

Jerry Davis

Jerry Davis

Professor of Business Administration and Professor of Sociology, University of Michigan’s Ross School of Business

Jerry Davis is the Gilbert and Ruth Whitaker Professor of Business Administration and Professor of Sociology at the University of Michigan’s Ross School of Business. He has published widely in management, sociology, and finance. His latest book is Taming Corporate Power in the 21st Century (Cambridge University Press, 2022), part of Cambridge Elements Series on Reinventing Capitalism.

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