Edge Perspectives with John Hagel

Unbundling 7-Eleven

Harvard Business Review ran an interesting article, "Strategic Sourcing: From Periphery to the Core", written by three Bain partners in its February 2005 issue. As usual, the article is not available online for free, although a relevant excerpt of the article should be available here.

The article focuses on the story of the restructuring of 7-Eleven over the past decade.  Beginning in 1991, the company systematically looked at all of its activities and over time relinquished direct ownership of many parts of its business.  In fact, if you step back from what they did, 7-Eleven morphed into a much more focused customer relationship business - concentrating on in-store merchandising, pricing, ordering and customer data analysis - and turning to others to do everything else.

Those of you who have followed my writing know that I have long predicted a systematic unbundling of most corporations into one of three more focused businesses - infrastructure management, customer relationship or product innovation and commercialization.

When I explain this to most executives, they pull back, driven by visions of a shrinking business.  On the contrary, I maintain that this unbundling is a necessary precursor to aggressive and profitable growth. Witness the experience of 7-Eleven which consistently outperfomed its competitors.  As the HBR article reports, same store merchandise growth has been almost twice the industry average over the past two years, revenue per employee comes in at about 2.5x higher and inventory turns are 72% more than the industry average.  Over the past five years, 7-Eleven's stock appreciation has outpaced all major competitors.  So much for a shrinking business.

As the article indicates, 7-Eleven has exploited the economies of scope of a customer relationship business by working with a broad range of product and service vendors to define new products and services tailored to the needs of their customers.  In one example, 7-Eleven has deployed multipurpose kiosks in its stores to deliver ATM functions through American Express, money wires through Western Union and check-cashing from CashWorks.

Unbundling does not mean fragmentation of business.  On the contrary, two of the business types - infrastructure management and customer relationship - have strong economies of scale and scope that will lead to significant concentration - ultimately, on a global scale.  The 7-Eleven story is just one example of the growth and profitability potential created by sharper focus. 

Growth of the blogosphere

David Sifry, founder and CEO of Technorati, has been posting some great surveys of blogging activity.  Part 1 "Growth of Blogs" looks at the growth in the number of blogs from March 2003 to February 2005 - no surprise: huge growth in number of blogs. Technorati tracks 7.8 million weblogs with 937 million links with the number of blogs doubling in size every 5 months (this doubling pattern has now persisted every five months over the past 20 months).  Part 2 "Posting Volume" measures blogging activity in terms of the rate of posting to blogs, showing that we have gone from a rough average of 100,000 posts/day in January 2004 to about 500,000 posts/day in February 2005, although with quite a bit of volatility, driven at least in part by current events. Part 3 "The A List and the Long Tail" measures the influence or authority of a site as indicated by the number of people who are linking to it - the key finding here is that the mass media dominate the fat part of the distribution, with some notable exceptions (15 of the top 37 sites are blogs) and some fluidity in rankings between October 2004 and March 2005.  Part 4, due any day now, will focus on tags and tagging activity.

What's my take on this? Well, growth continues to be explosive, power laws in terms of blog linking are alive and well and yet there is still a lot of potential for shifting position in terms of rankings.

More fundamentally, we are being inundated with options in terms of information sources and we are only at the earliest stages of figuring out how to harness this wealth of information.  When media explodes, the scarce resource becomes attention and anything that can help individuals maximize their return on attention will be very valuable indeed.

The tagging debate continues

One of the hot topics at PC Forum was tagging - a topic I have covered before.  At PC Forum, David Weinberger and Esther Dyson led an informal afternoon discussion on tagging that wandered quite a bit, but did a good job of exposing the tension between those who welcome an emergent approach to organizing resources and and those who yearn for more structure.  Adam Bosworth weighed in after the session with a lengthy blog praising tagging as a sloppy KISS innovation and warning against the ontologists that want to impose order in this arena.

The discussion around tagging and folksonomies continues to build steam.  In addition to the contributions I mentioned in my earlier post, there is a somewhat cryptic transcript of the discussion on the Folksonomy panel at ETech here.  A more nourishing blog of discussions on tagging and folksonomies from the Information Architecture Summit in Montreal earlier this month is available here. Lou Rosenfeld has a good set of comments on folksonomies and meta-data ecologies in his blog.

While I am sympathetic with Adam's celebration of bottom-up, emergent (and, yes, therefore very sloppy) systems, I can't help but wonder if it will take more than a purely bottom-up approach to develop really useful (i.e., scalable) social tagging systems.  If I reflect on the successful virtual communities, they combine an effective moderator with emergent discussions. Open source software, slashdot, Wikipedia - all of these emergent systems have developed sophisticated governance structures to shape the bottom up contributions of their participants.

Why am I spending so much time thinking about this topic?  Because the challenge of dealing with abundance in resources will be a growing issue in networked environments.  Any mechanisms that help us to sort through the proliferation of options and find the resources that are truly useful to us will have great value.  Mechanisms that capture and build on the insights and experience of others will be even more valuable because they will create a classic increasing returns opportunity.  That's the potential of tagging - if it can scale.

Btw, here's a question for everyone - who owns the tags?

Offshoring mistake

Western executives often make a big mistake in assessing offshoring and outsourcing options.  They undertake a detailed comparison of current capabilities and then make their decisions based on this snapshot.  But snapshots miss the point.  This approach misses the fact that many offshore locations, especially in China and India, are building capability at a much faster pace than comparable companies in the U.S. and Europe. It's relative pace that counts - executives need to watch videos, rather than staring at snapshots.

Here's a case in point. The Economist ran a story in January 2005 called "The struggle of the champions" that expressed considerable skepticism about the real capabilities of many of China's leading companies, including Huawei, the country's leading telecom equipment vendor. Here's one brief excerpt:

Yet the true extent of Huawei's international reach is hard to gauge. Much of its overseas business is in emerging markets where there is little competition. Though it is pushing into Europe, it lacks the muscle of rivals. . . . That Cisco, the industry leader, successfully sued Huawei for intellectual-property theft suggests weaknesses in its technological base.

Three months later, in its March 3 issue, the Economist ran another story "See Huawei run" with a much more positive spin on the company.  What changed?  Well, for one, the Economist covers a recent survey of over 100 telecommunications service providers worldwide conducted by Heavy Reading, a market-research firm based in New York.  It turns out that, in the course of the twelve months since the last survey, Huawei had increased its ranking among global wireline-equipment providers from 18th to 8th. Not only that, Huawei ranked fourth in the world in terms of service and support. So much for the skeptics who are inclined to attribute Huawei's growth simply to low prices.  As the Economist reports:

The report calls Huawei's ascendancy “astounding” and says it has already surpassed several incumbent vendors in perceived market leadership.As a result, incumbent western firms should be “very scared” of Huawei, says Jean-Charles Doineau of Ovum, a consultancy.

What a difference a year makes or, in the case of the Economist, three months. This underscores the importance of relative pace. Western executives need to figure out how to position their companies in these offshore locations in ways that enable them to leverage this significant difference in relative pace.

PC Forum

I just got back from Esther Dyson's PC Forum where JSB and I had an opportunity to talk to the group about our new book The Only Sustainable Edge in a session provocatively titled "Friction Can Be Good!". Some notes on that session can be found here and here.

As always, Esther did a great job of bringing together a very interesting group of people and creating ample opportunity for connection and interaction with new people as well as many old friends. To me, the most interesting paradox was that Chris Anderson from Wired was in the audience but was not a featured speaker even though virtually every speaker made at least one reference to The Long Tail. In fact, toward the end, it became a bit of a game to see how soon the speaker mentioned the topic.This is clearly a theme that has been widely adopted, at least within the tech/media industry.

Some of the interesting companies featured at PC Forum this year included Rearden Commerce, Grouper Networks, Jotspot, StreamBase Systems and SpikeSource.

Rearden Commerce, formerly known as Talaris, is a really great company that has only recently started to get some real coverage.  In the spirit of full disclosure, though, I should mention that I am on their Board of Advisors. Rearden Commerce has deployed a service-based application designed to help enterprises manage employee business services (spend on services like travel, package deliver, teleconferencing).  But the real story about Rearden imho is about the SOA based delivery platform they have created - it represents a great example of the service grid concept that JSB and I have been evangelizing for years now.

Grouper Networks launched late last year a new generation of peer-to-peer file-sharing network that emphasizes community and privacy - two favorite themes of mine. It is particularly designed to facilitate the exchange of large files among small groups of friends. One limitation: groups cannot exceed 30 members - a limitation the company established to avoid potential legal liabilities encountered by larger peer-to-peer file-sharing networks.

I have written about Jotspot before in my blog. It's a next generation wiki company focusing on helping work groups to create tailored application platforms to support collaboration.  What is particularly interesting to me about this platform, the brainchild of two co-founders of Excite, is that it seeks to help participants design their own applications, including integrating information feeds from third parties, data feeds from other applications like salesforce.com and even application modules designed by specialized third parties taking advantage of Jotspot's intent to publish its API's.  I believe that for social software to really take off we will need to develop and commercialize truly open collaboration environments that can effectively integrate a lot of point solutions emerging in this space.

StreamBase Systems tackles the problem that exists in financial markets today but will soon pervade a broad range of other markets - especially markets that deploy RFID technology. Torrents of information are generated by RFID tags. Most of it isn't worth keeping but the challenge is to quickly isolate the information that is meaningful and deliver it where it matters. This will potentially become a powerful tool to spot exceptions and provide information necessary to handle and resolve the exceptions.

Kim Polese talked about her new venture SpikeSource, a company she joined as CEO in August of last year. Think of it as a testing and certification  infrastructure for open source software. One interesting feature of the company is the relationship it has established early on with Cognizant to access offshore capability.  My sense is that SpikeSource will be a key player in helping to move open source methodologies more broadly into the application realm, unleashing a large number of narrowly focused applications. It's a great example of a specialized infrastructure management business.

I could go on, but these were some of the highlights of the conference for me.  I should also mention Emily Levine who gave us a great after-dinner talk that was both extremely funny and thought-provoking at the same time.  If you get a chance to hear her talk, take it.

The Emerging Battle in Meta-Data

One of the problems with consulting is that I often have to miss really interesting conferences in order to be responsive to my clients. Of course, my clients are pretty interesting as well - my problem really is that I want to be in too many places at once - which is probably a good segue to the topic at hand.

If you work in the world of ideas or information, one of the biggest challenges is how to organize those ideas or information.  Ideas and information rarely fit into neat categories, yet we have long favored trees and branches as a way to classify and organize ideas and information.

David Weinberger, one of my favorite thinkers on the new worlds we are creating, has written a fascinating essay in the February 2005 issue of Release 1.0 on alternative ways of organizing ideas or information - it's called "Taxonomies and Tags: From Trees to Piles of Leaves".  Unfortunately, the full essay is only available here for sale, but David was able to get permission to produce an excerpt of the essay here for free.

In this essay, David focuses on the notion of tagging as a particularly promising alternative way of organizing ideas or information. A variety of interesting new businesses are emerging on the Web using tags as a key way to add value for users - see, for example del.icio.us for organizing bookmarks and Flickr for organizing photos. David is especially interested in the opportunity to create self-organizing taxonomies through tagging - these new forms of taxonomies have been described as folksonomies. Although tagging can have enormous individual value, the real power and opportunity may come from the use of tagging in a social context to help each other find ideas or information more easily.

Which brings me back to missing conferences - specifically, O'Reilly's Emerging Technology conference in San Diego last week where Clay Shirky, another favorite of mine, spoke on "Ontology is Overrated: Links, Tags, and Post-hoc Metadata" and David led an informal evening discussion on "From Trees to Tags".

I am particularly interested in this topic both because of the interplay between the individual and the social and because I see it as one more manifestation of a much broader trend playing out in multiple domains - the shift from push to pull mechanisms in organizing and mobilizing resources.  Traditional taxonomies are designed in advance by experts and work best when there is a lot of material that is relatively unchanging and that has clearly defined edges.  The material itself may be pulled by the user when needed, but the taxonomy is pushed from above.  Tagging operates differently - it enables an emergent taxonomy, developed by users themselves at the time of use, it tolerates enormous ambiguity, accommodates rapid change and provides much more flexible ways of sorting on demand.  In other words, users can "pull" taxonomies - create and modify them on the fly to serve their unique needs, but enhanced and amplified by the efforts of others.

As tagging moves from a purely individual way of organizing meta-data to a more social phenomenon, power becomes a more central issue.  Traditional taxonomies like trees clearly embody power relationships, as eloquently discussed in Geoffrey Bowker and Susan Starr's book, Sorting Things Out. Matt Locke has a great post extending this notion of power relationships in traditional taxonomies to emergent folksonomies. I have an intuition that the key to scaling folksonomies and making them useful to a much broader set of users will hinge upon sorting through these power issues. I also have an intuition that there are some business opportunities here in providing mediation services . . .

Fortunately, I am in Scottsdale, Arizona and looking forward to PC Forum, where I will hopefully have a chance to pursue some of these topics with David Weinberger.  At least this is one conference I get to go to . . . since I am speaking there, I have a good reason to hold off client meetings until after the conference is over.

Power of (Mis)Perception

At a conference yesterday, I finally got to watch a really great video that I had often heard about but never seen. I was pleased to find out that it is actually on the Web (isn't everything?).  Go here and click on the "View the 'basketball' video" link - it may take time to load - it's about 7.5 MB - but, trust me, it's worth the wait, even if you're not that much into basketball.  Be sure to follow the instructions in terms of what to look out for in the video.

Once you've looked at the video, then go here and look at some of the resources to learn some of the lessons of the video.  It's a great example of "the more we focus, the less we see".  Unfortunately, I can't say too much more about it or else I will spoil the experience.

Outsourcing Innovation

The cover story of the current issue of Business Week is on "Outsourcing Innovation".  It's generally a pretty good report on the rise of Original Design Manufacturers (ODMs) in Asia and the growing trend to outsource product innovation.  The stats on the role of ODMs are impressive - they supply the designs for 65% of the world's notebook PC's, 70% of the world's PDA's, 65% of the MP3 players, 30% of digital cameras and 20% of mobile phones.  And that's just the beginning - their growth rates show little sign of slowing down and they are expanding their activities into other product categories like networking equipment. So much for the notion that offshoring just involves low skill manufacturing operations.

But the article is frustrating on a number of levels.  First, it reflects the Western bias by talking about innovation only in terms of product innovation.  In fact, some of the most impressive achievements of offshoring operations involve process innovations, rather than product innovations. These process innovations often provide a foundation for interesting product innovations. When Western companies outsource product design to ODMs, they are in fact outsourcing the process of product design.  The ODMs configure and manage this product design process in very different ways relative to Western companies.  In many respects,the process innovations are the really interesting story, but largely missing in this article.

Second, the article tends to talk about outsourcing in zero sum terms. That is, if you outsource, you lose that activity.  It misses entirely the positive sum relationships that a few companies are establishing - by outsourcing to highly specialized and aggressive companies, companies can build relationships that help them to get better faster in the activities that they retain while at the same time creating opportunities for their outsourcing partners to get better faster as well. 

Third, the article tends to generalize too much.  For example, it asserts that "ownership of design strikes close to the heart of a corporation's intrinsic value." Well, maybe.  I have argued in an HBR article on "Unbundling the Corporation" (sorry, it's only available on the Web for purchase from HBR) that most companies are an unnatural bundle of three very different businesses - customer relationship businesses, infrastructure management businesses and product innovation and commercialization businesses.  Offshoring and outsourcing are manifestations of more fundamental trends that are forcing companies to make strategic choices about what business they are really in.  If you choose to be in product innovation and commercialization, then design is central to your company's value.  But if you focus on one of the other two businesses, then you will end up shedding design.  The problem is that few companies are making this strategic choice explicitly - it is being made on a de facto basis by incrementally slicing out design activities in the quest for near-term operating savings. That can get you into trouble.

Finally, the article gives very little sense of the trajectory and pace of capability building.  The real story about offshoring is not a snapshot of activity or relative skills at any one point in time.  It is about the extraordinary speed with which offshoring service providers are building capability through rapid incremental product and process innovations.  Look at where many of these ODMs were just three years ago versus today and then listen to them talk about their investments for capability building over the next three years.

Oh, and then there's the Western arrogance talking about a new division of labor between left brain routine tasks that will get farmed out to offshore locations and right brain "creative" tasks that will stay onshore.  This kind of complacency could get us into real trouble.

PS - the BW article talks about Apple's iPod as an example of in-house product design. That's not entirely true - Apple orchestrated a very interesting design process network to mobilize a variety of third party players, most notably PortalPlayer, in designing the guts of the iPod.

Podcast economic models

Doc Searls has a nice posting on the potential economic models for podcasting, challenging us to think beyond the models that worked for traditional media.  My question would be whether technology alone can support this economic model or whether there would be a need for a new form of intermediary to harness this technology and act as an agent on behalf of the customer. Years ago, I described an infomediary business model in Net Worth that becomes much more feasible with the technology that Doc describes.

Relationship Revolution

Jerry Michalski recently did a great service by re-posting a really nice essay called "The Relationship Revolution" by Michael Schrage. It originally appeared in 1997 but  has not been available on the Web for a while. Michael's essay took head-on the widespread view that digital technologies were driving us into an "Information Age". Instead, it argued persuasively that the real importance of these technologies has been to bring about a "Relationship Revolution". Michael concluded the essay by observing:

Ultimately, the issue boils down to value: How do organizations, markets and individuals create and manage value? The fact is, people -- not information -- create the value that matters, and information is merely one of many ingredients that people use. Consequently, the real future of digital technologies and networks rests with the architects of great relationships -- not just the architects for timely bits and bytes of information. People who believe in the hype of the Information Age are -- pun intended -- badly misinformed.

It frustrates me that, eight years later, many still need to learn this vital lesson.