Edge Perspectives with John Hagel

Scale and IT Services in Asia

The McKinsey Quarterly earlier this year published a research brief asking "Can China Compete in IT Services?"  Briefly the argument of the authors was that China is disadvantaged in competition with Indian IT services providers because its industry is more fragmented.  I'd like to take a contrarian view on this.

Fragmentation may actually be an advantage, especially if it means higher specialization.  One of my concerns about the way the Indian IT services industry is evolving is its propensity towards monoliths who try to do everything for everyone.  Especially if we are talking about leading edge software development, specialization is critical.  It is very difficult for a single company to develop world-class skills in all areas of software development, particularly if we include deep business domain expertise as a requirement.

Now, admittedly fragmentation can be challenging in the marketing and sales side of the business.  Fragmentation becomes an advantage only if there are more specialized customer relationship businesses that focus on acquiring customers and orchestrating the more specialized expertise available from a variety of independent software providers.  What the Chinese industry needs is the equivalent of Li & Fung or Taiwanese ODMs for the software industry.  By the way, that is a role that the major Indian IT services providers themselves might play in China, but only if they adopt a different mindset.  They must begin to appreciate the value of independent specialization and resist the temptation to try do do everything themselves.

Hitchhiking through the Galaxy

If you're not a nerd, you probably don't appreciate the significance of this day.  Today is the release of the long-awaited movie version of The Hitchhiker's Guide to the Galaxy by Douglas Adams.

I had to go all the way to Norway (well, figuratively, not literally) to Espen Andersen's Applied Abstractions to find this really great blog note offering a link to the video of a presentation by Douglas Adams at the University of California at Santa Barbara on "Parrots, the Universe and Everything". It is a real treat.  A couple of Espen's observations that hit home in particular:

I thought the most interesting idea, however, was his point that science is changing - that we no longer (at least not to the same degree) take things apart to understand them but instead put them together so that we can watch them interact.

And:

Nice quote: "We don't need to save the world. The world is fine. It has been through at least five periods of massive extinction before. [..] The world is big enough to look after itself." Though he is less specific on what to do about saving the world for human habitation.

Douglas unfortunately died four years ago, at the untimely age of 49, so he did not live to see the long-awaited movie project come to fruition.  For nerds around the world, though, his death left another powerful message - he died while exercising at a gym.  Maybe exercise really isn't all that good for you, after all . . . 

What, Me Worry?

The Only Sustainable Edge, the new book that JSB and I wrote, will be officially released on Monday, May 2nd.  We got some powerful advance publicity from Thomas Friedman in his column, entitled "What, Me Worry?", in the New York Times this morning.

Tom zeroed in on the public policy implications of our perspective and suggested that this might provide a focusing theme for Bush's domestic policy during his second term. Here's an excerpt from his column:

Meeting this challenge requires a set of big ideas. If you want to grasp some of what is required, check out a smart new book by the strategists John Hagel III and John Seely Brown entitled "The Only Sustainable Edge." They argue that comparative advantage today is moving faster than ever from structural factors, like natural resources, to how quickly a country builds its distinctive talents for innovation and entrepreneurship - the only sustainable edge.

Economics is not like war. It can always be win-win. "But some win more than others," Mr. Hagel said, and today it will be those countries that are best and fastest at building, attracting and holding talent.

There is a real sense of urgency in India and China about "catching up" in talent-building. America, by contrast, has become rather complacent. "People go to Shanghai or Bangalore and they look around and say, 'They're still way behind us,' " Mr. Hagel said. "But it's not just about current capabilities. It's about the relative pace and trajectories of capability-building.

"You have to look at where Shanghai was just three years ago, see where it is today and then extrapolate forward. Compare the pace and trajectory of talent-building within their population and businesses and the pace and trajectory here."

Tom concludes his column by observing

India and China know they can't just depend on low wages, so they are racing us to the top, not the bottom. Producing a comprehensive U.S. response - encompassing immigration, intellectual property law and educational policy - to focus on developing our talent in a flat world is a big idea worthy of a presidency.

Tom did a great job of capturing the essence of our perspective, but we're not going to be holding our breath waiting for a call from the White House.  By the way, Tom's new book, The World is Flat, is doing great - #2 both on the New York Times bestseller list and on Amazon.  If you haven't read it yet, click on the link and order it - it is a powerful statement of the challenge confronting businesses around the world.

Flight of the Creative Class

JSB pointed me to a new interview with Richard Florida in Salon.  It is a great introduction to Richard Florida's new book, The Flight of the Creative Class.  Richard gained quite a bit of attention with his earlier book, The Rise of the Creative Class, which made the case that economic growth essentially depends on three elements: technology, talent and tolerance.  His new book is basically a wake-up call to U.S. policy makers regarding the "creative talent drain" we are starting to experience.  His thesis is summed up in an article on "America's Looming Creativity Crisis" in Harvard Business Review he wrote in October 2004:

The United States of America is on the verge of losing its competitive advantage. It is facing perhaps its greatest economic challenge since the dawn of the industrial revolution. . . . Terrorism is less a threat to the U.S. than the possibility that creative and talented people will stop wanting to live within its borders.

In his Salon interview, Richard summarizes the two factors which drive his current concern:

There are two factors interacting here. The first, which would have happened anyway, is that other countries realized how important talent is and cities in those countries have become really effective in competing for talent. So the playing field has been leveled. In the past, people would have said, "Absolutely, my first choice is to move to New York or Boston or San Francisco or Seattle or Chicago ..." Now cities like London, Dublin, Amsterdam and Stockholm have become extremely attractive to talented people, not because of any particular public policy but because of the way they've developed over the past decade. And I'm not just talking about the relocation of Americans, I'm talking about the location decisions of people on a world scale.

The second factor is that -- obviously spurred by this so-called threat of terrorism -- we've become far more restrictive in our ability to absorb and attract foreign talent. The numbers are all there, showing the decline of foreign students in the U.S. and the decline in the number of visas issued. So many foreigners have visa troubles now, even great scientists, artists and musicians. . . . Not surprisingly, there's a general sense in the world that the United States isn't as welcoming.

For those who think that Richard is an alarmist, I can only say that I share his concerns.  BTB and BTC are back in Silicon Valley, only this time they mean "Back to Bangalore" and "Back to China", as talented immigrant entrepreneurs here pick up stakes and head back to their homelands.

JSB and I observed in our new book, The Only Sustainable Edge, that

Where value originates and who captures it will increasingly depend on the evolution of talent markets and the relative capability of firms (and nations) to rapidly develop and amplify the value of this talent.  Product markets and financial markets will of course still matter, but the center of gravity for value creation and capture will inexorably migrate to global talent markets

I worry that the U.S. is far too complacent about its ability to compete in global talent markets. Richard Florida provides a timely warning.

Remix at ETech

I continue to regret that I didn't make it to O'Reilly's Emerging Technology Conference last month.  O'Reilly Radar has now posted Rael Dornfest's presentation on Rules for Remixing - both audio and slides.  It's a very nice overview of remixing in a broad range of domains. In contrasting remixing with hacking, Rael makes an important distinction:

Remixing is inherently more conversational than hacking

More on cities

To follow up on my post yesterday on Kotkin's new book, The City, I just came across a great blog posting by Tim O'Reilly at O'Reilly Radar on a talk that Stewart Brand recently gave for the Long Now Foundation on urbanization.  I wish I could have been there - it is filled with classic Brand insight.  Here are some of the notes:

I conjured some with a diagram showing a pace-layered cross section of civilization, whose components operate at importantly different rates. Fashion changes quickly, Commerce less quickly, Infrastructure slower than that, then Governance, then Culture, and slowest is Nature. The fast parts learn, propose, and absorb shocks; the slow parts remember, integrate, and constrain. The fast parts get all the attention. The slow parts have all the power.

I found the same diagram applies to cities. Indeed, as historians have pointed out, "Civilization is what happens in cities." The robustness of pace layering is how cities learn. Because cities particularly emphasize the faster elements, that is how they "teach" society at large.

This is consistent with my view that cities are powerful concentration points for flows of people, goods and ideas to accelerate capability building.

Stewart Brand has a related article that was just published in Technology Review.

Speaking of aggregation . . .

There's a great chart making the rounds on the Internet that shows Wikipedia surpassing the New York Times in terms of daily traffic ranking - as usual, the real message is not in the snapshot, but in the trend line over time.  Contrast the no growth traditional media site with a high growth open source media site. As I keep telling my clients, it is relative performance that counts - and trajectories in relative performance count even more.  If you are curious about what other sites Wikipedia is more popular than, check out this listing - it's impressive.

Scale Doesn't Scale

A nice rant from Jerry Jarvis on how decentralization of markets is changing the economics of competition. Here's an excerpt:

: Scale doesn't scale anymore.

The old days of big players in the economy collecting consumers, audience, distribution, manufacturing efficiency, buying power, or capital in the grip of centralized control are waning. That used to be the way to find efficiency and size. That used to be the way to scale.

But they are being foiled by our new distributed world. And they are being replaced by a more efficient means of finding size and efficiency.

Aggregation is the new scale.

He's clearly on to something, but I am not sure that "aggregation" describes the essence of the new model.  JSB and I are starting to write about this, so we'll have more to say on this shortly.  Jerry also is much more effective in discussing how customers are using aggregation to get more value out of vendors, but his few examples about how vendors can use aggregation aren't nearly as satisfying.

Kotkin's The City

I just finished Joel Kotkin's The City, a stimulating historical survey of the rise and fall of cities around the world.  He uses this survey to make the case for the "universality of the urban experience", cutting across the enormous diversity of individual city experiences, and to argue that "urban areas have performed three separate critical functions - the creation of sacred space, the provision of basic security, and the host for a commercial market."  In effect, Kotkin argues that cities prosper when they perform these three functions well and they inevitably decline when they fall short on one or more of these functions.

Kotkin's book led me to reflect on the role of cities.  My own view is that the three functions he cites are really secondary.  The primary role of cities has been to provide robust concentration points for people and information flows in order to accelerate capability building.  Kotkin quotes Socrates as remarking: "The country places and the trees don't teach me anything, and the people in the city do."  This captures for me the primary role of cities.  In this context, sacred spaces, security and markets support the primary role of cities.  Sacred spaces have historically been important in creating shared meaning and values that are essential for building trust.  Security provides an environment conducive to learning and development.  Markets generate flows of people, goods and ideas to advance learning and development.  But the reason people come to cities and stay in cities is to get better faster by exposing themselves to a much more diverse and rich set of interactions than they could in less densely settled areas.

As uncertainty increases, I believe this role of cities will become even more valuable.  Rather than seeing more dispersion, supported by the capabilities of robust technology networks, I expect that we will see even more concentration, supported by the need to connect with other people in much richer face-to-face settings.  Concentration points of flows of people, goods and ideas  become strategically important in uncertain environments and cities provide these concentration points.

Although he doesn't refer to him explicitly in the text, it is clear that Kotkin is highly skeptical of Richard Florida's focus on cities as concentration points for the "creative class" (see Florida's great book The Rise of the Creative Class) - at least in the absence of a "sacred place" that can provide a common set of values.  Shared values and a common sense of purpose are important in accelerating capability building, but I believe these are emerging within the creative class while at the same time leaving ample room for diversity.

It is also remarkable to me that Kotkin only makes one passing reference to Jane Jacobs in the text of a book devoted to cities.  Jane Jacobs remains a seminal thinker on this topic and her books - especially The Economy of Cities and the Death and Life of Great American Cities - describe with great insight how cities must continue to evolve in order to survive.

Given this perspective, I believe that a key element of business strategy will be choices about how to most effectively participate in the economies of cities that have the greatest potential to accelerate capability building.  Companies that decide to move their headquarters out to pastoral suburbs may be heading in exactly the wrong direction.

Disney, HP, Morgan

Disney, HP, Morgan Stanley - all companies experiencing executive turmoil, investor dissatisfaction and less than stellar stock performance. yet from very different industries.  Is there anything that these companies have in common that might explain their current troubles?  Most of the business press coverage focuses on CEO personalities, management styles, "culture" clashes and acquisitions that never lived up to their potential.  Analysts call for breaking up the companies to unleash hidden asset values.

These commentaries miss something more fundamental.  These three companies are great examples of once "excellent" companies that lost sight of what business they were in.  Each of these businesses were highly focused product or service innovation and commercialization businesses. They had perfected techniques for designing and introducing new products and services for clearly defined market segments they knew and understood well.  All three companies departed from this focus in the 1990's and made significant investments designed to enter a completely different business - the customer relationship business.  Disney bought ABC, Morgan Stanley purchased Dean Witter and HP invested heavily in building enterprise marketing and sales capability (the Compaq acquisition was related to this broader investment thrust, but in a way that most analysts have missed.

The performance challenges confronted by these businesses can be traced to these choices.  Product innovation businesses and customer relationship businesses have completely different economics, skill set requirements and cultures.  My article on "Unbundling the Corporation" in Harvard Business Review in makes the case that these are incompatible business types that cannot co-exist successfully within a single corporation. By trying to straddle both, these companies found that they could not be excellent in either. All three of these companies have experienced significant turnover in senior management ranks over the past several months. This turnover will yield little in terms of turnaround unless the more basic issue is addressed and difficult choices made: what business are you really in?  If this question is seriously confronted, spin-offs will surely follow, but they may not be the kind of spin-offs that most analysts are anticipating.