Government may be susceptible to the same forces that are currently changing many major industries. Software is eating government, too.
Therefore government must use customer development to better serve customers else it risks becoming the next Blockbuster, Borders, or what the large publishing and financial services companies are at risk of becoming.
In a free market economy, an enterprise must relentlessly serve the needs of its customers in order to compete. Otherwise, the customers will stop paying and go to another provider. Entrepreneurs who don't serve customers go broke.
Government Duopoly
Democrats and republicans have a duopoly on the government industry in the United States. Just as a private sector monopoly reduces customer power, leading to high prices and a lack of incentive for companies to serve it's customers, this political duopoly reduces voting power, and disincentivises government to serve "customers" to the best of its ability.
Government is currently one size fits all. In a free market, there is unblunding and multiple offerings for different segments of a market. For example there's Natural Light, Budweiser, and Guinness. Competition forces companies to serve customers because if customers don't like one offering they will simply choose a different one. If you don't like your laundromat, restaurant, or job, you can simply go somewhere else. In contrast, switching governments is really hard.
Why Now
Government has been able to go a very long time without significant innovation. However now is the time for government to begin adapting because the forces changing nearly every industry may do the same to government. I will reiterate a few themes that Fred Wilson cited in a talk at LeWeb while talking about several different industries and add some more thoughts.
1. Organization: Technology driven networks replacing bureaucratic hierarchies
Bureaucratic hierarchies involve chains of command with lower levels of management making more detailed decisions and reporting back to higher levels of management. These systems often entail long communication lags, high costs, and principal/agent problems.
Technology driven networks are providing more efficient systems for organization and communication. For example, Amazon has changed the publishing industry by enabling anyone to publish content and enabling customers to decide what they want. Twitter has created a network around communication and news, enabling anyone who people want to hear to be heard.
2. Competition: Unbundling of product and service offerings
Technology advancements have made it cheaper and easier than ever before to produce a product and bring it to market. One result is that it's become easier for an entrepreneur to provide one offering of a larger offering as a standalone offering. It provides customers with the option to buy what they want without having to pay more for stuff they don't want. In addition, the offerings can be improved because producers are completely focused on that specific offering. For example, we used to buy one newspaper and get world, local, sports, etc. Now it's all from different sources.
Bundling exists because it was more efficient than attempting to contract in the market for every tiny service. However some of the technology driven networks (as described above) are helping markets become more efficient and giving customers more customizable buying options. For example, you can buy a half hour of education, or borrow money from a peer.
We're starting to see some of the governments offerings begin to be unbundled. For example, Uber and Hyperloop are providing transportation. A neighborhood in Oakland crowdfunded private security.
3. Finance: Lower payment transaction fees and crowdfunding
Innovation in payments, including Bitcoin, has made it cheaper and easier than ever to transfer money. It's as easy as sending an email, clicking a hyperlink, or scanning a QR code. In addition, Bitcoin is not controlled by any regulators or intermediaries like the government, credit card companies, or even PayPal.
Crowdfunding enables the collective efforts of individuals to connect and pool their money to back initiatives, make purchases, or fund new projects. A school in Houston crowdfunded some exercise equipment instead of using government funding.
4. Communication: We are all connected and graphed
Mobile devices have become nearly as powerful as desktops or laptops. There are many things we can do with our phone that we can't do on our desktop/laptop. For example, smartphones have sensors, are location aware, can be carried with us at all times, and are cheaper than desktops or laptops. These factors have lead to mass adoption of mobile devices across the world, including in countries with high poverty where people could not previously afford a desktop or laptop. Mobile is making innovative offerings like Uber and mobile payments possible.
Platforms like Facebook and Twitter provide everyone with access to millions of people. In addition, companies like Klout and Quora are measuring our reputation and social graph improving our ability to transact with each other. For example, when market participants trust one another (through the vehicle of a reputation system) many transactions that wouldn't otherwise happen can now happen.This illustrated in the rise in popularity of collaborative consumption platforms and peer to peer marketplaces.
Serving Customers
The current government duopoly inhibits us from selecting the government that we want as well as from receiving the best possible service because of lack of incentive. However the technologies described above are making it possible to get services previously provided by the government through more efficient and effective means. They're enabling a more free market for government services.
As a result, government will need to either need to do some "customer development" to stay "competitive," or make it illegal for such companies to operate.
There is more precedent for the latter then the former. Increasing regulation could stifle innovation and prevent customers from getting the best possible service. For example, if the government wanted to maintain its monopoly on mail (USPS), it could outlaw Amazon's drones, which could provide major improvements to customers. AirBnB and Uber have had trouble entering some markets.
If government were to take the customer development route, it could try things like unbundling (see above) so that people could opt for the specific solutions they desire. Given the US government's current balance sheet, it may actually need to start relying on other providers.
It could also rely more on "economic feedback" to inform its actions. Currently economic feedback is given through voting. Most people vote once every two or four years and then hope they get what they "paid" for. Can you imagine paying for a college without knowing which one you would be going to, know what they would be providing, or being able to request a refund or switch colleges? With more economic incentive, services would need to improve. For example, if there was a free market for roads, people would pay for and use the roads that were most safe.
Conclusion
If the government acted more like a startup, it would solve one or more citizen pain points with economic incentive to do it in the most effective and efficient way possible. Depending on how you measure, government is somewhere around a trillion dollar "industry." This presents enormous opportunity.
It has historically taken massive amounts of money to get elected to government. And Unlike Kodak and Fujifilm, the government's "customers" (citizens) are required to pay (taxes), and it gets to write its own rules. However the demonstrated empowerment of entrepreneurs and citizens to create innovative solutions has made the government duopoly less secure.