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Why 'Bottom Up' is on its way up

New style of business birthed by the Internet

By David Kirkpatrick
FORTUNE.COM

New style of business birthed by the Internet

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(FORTUNE.COM) -- What do these things have in common: the TV show American Idol, Howard Dean's presidential campaign, eBay, and the open-source Linux operating system?

They're all manifestations of a key trend of our time: the shift in power away from centralized institutions and toward the individual -- from the center to the edge.

We're entering what might be called the Bottom-Up Economy. As the Internet's influence grows, we're seeing its intrinsic egalitarianism and tendency to empower the small start to change many aspects of modern life. Customers today have more options and less loyalty. They will migrate to businesses that see them as participants in a process rather than as just consumers.

Smart companies are already embracing this: Motorcycle maker Ducati is posting specs for several new prototype motorcycles online and asking for customer feedback as it decides whether to put them into production. American Idol demonstrates that the trend is hopping offline too. People got used to having more input on the Web. Now they can choose their own pop stars on TV.

Those forces are also reshaping politics. Everyone knows that Howard Dean's Web-driven campaign is a huge factor in his success. But Gen. Wesley Clark is another example of the Net's bottom-up changes. He didn't put together an exploratory committee before deciding to run for President. Instead he responded to a draft movement that was built online. And grassroots support on the Web transformed the 2002 race for South Korea's presidency, propelling into office relative unknown Roh Moo-hyun.

In technology the bottom-up open-source software movement is putting new pressure on Microsoft and database giant Oracle. Open-source programmers -- again connected by the Internet -- are not employees but customers, proposing and often implementing improvements to make easier the tasks that matter to them. Linux inventor Linus Torvalds mostly decides which changes to accept from those proposed by the volunteer army. Other open-source projects lack even that vestige of centralization.

This new style of business, birthed by the Internet, is ignored at any company's peril. In an excellent new book, "The Future of Competition: Co-Creating Unique Value with Customers," authors C.K. Prahalad and Venkat Ramaswamy describe the consumer's new role: "from isolated to connected, from unaware to informed, from passive to active."

They tell the story of a GlaxoSmithKline drug called Lotronex. It was sold for irritable bowel syndrome until side effects led the FDA to order it off the market in late 2000. Patients who had come to rely on the drug organized largely online and fought back, insisting they would risk the side effects. Glaxo executives, working with patients and the FDA, finally reached a compromise in mid-2002 involving additional patient disclosures along with enhanced doctor training and oversight.

In the bottom-up economy, presuming you know what the customer wants is the ultimate error. Prahalad and Ramaswamy instead call for "co-creation of value": The successful products and services from now on will be those developed jointly -- company and customer working hand in hand.

To Pierre Omidyar all that sounds very familiar. As the founder of eBay, he is the Adam Smith of the Bottom-Up Economy. From the beginning, eBay set out to level the playing field between big and small.

Says he: "At eBay the managers don't control the brand or the customer experience -- our customers themselves do."

Scary. But then, eBay's $42 billion market cap suggests that the benefits of working bottom-up make it worth the risks.


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