Edge Perspectives with John Hagel

Diamonds and China

The New York Times ran an interesting article by Keith Bradsher today called “Suddenly Sparkling” (available only with registration). It’s about the rapidly growing diamond polishing industry in China, which currently represents 6 percent of the world-wide value add in diamond polishing.

It’s fascinating on a number of levels.  It is another example of China’s ability to compete on skill, rather than simply wage rate advantages. As the article reports,

“With a potent mix of experience, cheap labor, advanced technology and strict quality controls, they are challenging the industry leaders . . . China took over much of the international costume jewelry business in the late 1980’s and 1990’s. . . . diamond businesses in China have rapidly moved beyond  . . . the polishing of the smallest, poorest-quality diamonds. . . . workers in China ae moving to bigger and bigger diamonds.”

China in this case is competing with highly experienced masters of the craft in Antwerp, Belgiumand Tel Aviv that specialize in handling diamonds of a carat or more.  But China is also competing with India, a country with a million diamond workers and an 80% share of the diamond polishing industry.  While China has a distinct labor cost advantage relative to Antwerp and Tel Aviv – compare labor costs for cutting and polishing diamonds at $17 a carat in China with $100 a carat in Israel and $150 a carat in Belgium– it actually competes at a substantial labor cost disadvantage relative to India, where workers are paid $10 a carat. Yet India is on the defensive and expects to lose share. Antwerp, which still specializes in polishing larger diamonds, also expects to lose share to China.

The story is also interesting because the diamond polishing industry in China has concentrated in Panyu in Guangzhou province, about 80 miles from Hong Kong. Much of the competitive strength of China comes from highly specialized local business ecosystems like Panyu, where businesses in particular niches tend to concentrate. In this case, Panyu is reproducing the history of cities like Antwerp, Tel Aviv and New York’s diamond district, where specialized expertise and trust-based personal networks developed.  No doubt this gathering of highly specialized businesses helps to explain the rapid capability building reported in the New York Times. Apparently, one of the big reasons Panyu emerged as a center for diamond polishing is because in the late 1990’s local officials chose not to enforce strict laws of the Chinese government restricting transactions in diamonds.

Finally, there is an interesting personal dimension of who is behind the highly entrepreneurial diamond polishing businesses emerging in Panyu.  In many cases, they are Belgian and Indian.  In this case, China appears to be able to attract talent from other specialized ecosystems to be able to bootstrap its growth in this industry. One of the Indian entrepreneurs in Panyu, Vijay Nahata, is quoted as predicting that, in the highly competitive diamond polishing industry, “China is going to be the leader of the world in two years.”

Accelerated capability building, specialized local business ecosystems and competition for talent – these are all key themes in The Only Sustainable Edge.  We didn’t think to look at the diamond industry but even here these dynamics are playing out with a vengeance.

Re-Making Ourselves

Perhaps the sharpest edge of all is the edge between life and death.  It is an edge that we will all personally experience.  It is also an edge that is spurring significant technological innovation, with widespread economic, social and ethical implications.

Medical science and technology historically has focused on treating diseases of the body.  Increasingly, scientific inquiry and technology innovation are taking on two broader goals: extension and enhancement.  Extension involves understanding the aging process and developing technology to extend our lifespans.  Enhancement involves the development of software (in this case including pills) and hardware (e.g., implants) designed to augment our performance on a variety of dimensions, including cognitive capabilities, resistance to disease, strength and endurance. What used to be considered fringe(another form of edge, if you will) is now rapidly becoming mainstream.

It may be my imagination, but I have a sense that technological innovation is accelerating in these domains.  In the words of Joel Garreau, author of the intriguing new book, Radical Evolution: The Promise and Peril of Enhancing Our Bodies, Our Minds - and What It Means to Be Human, four related technologies are now advancing at an exponential pace to enhance our performance and, indirectly, extend our life spans. Garreau refers to these as GRIN technologies: genetic, robotic, information and nano.

Certainly there has been a wave of publishing in this domain over the past several years. In addition to Garreau's book, some of the better books providing an overview of developments in extension and enhancement technologies are:

• Ramez Naam, More than Human: Embracing the Promise of Biological Enhancement
• Gregory Stock, Redesigning Humans: Our Inevitable Genetic Future
• Ray Kurzweil and Terry Grossman, Fantastic Voyage: Live Long Enough to Live Forever
• Andy Clark, Natural-Born Cyborgs: Minds, Technologies, and the Future of Human Intelligence

For a different take on these developments, focusing more on the people and personalities shaping the innovation in these two domains, I can recommend:

• Brian Alexander, Rapture: How Biotech Became the New Religion
• Stephen S. Hall, Merchants of Immortality: Chasing the Dream of Human Life Extension

Both of these provide an intriguing view of how the fringe and the mainstream have interacted and shaped innovation.

This posting has become more of a book citation list than I had intended. I have a strong interest in this topic because it  reflects some broader trends in society and in turn is being shaped by these trends.

Just as we are becoming more involved in making the products and services that we consume (see my previous post), we are becoming more involved in making, or more accurately, re-making our bodies rather than simply taking what we were given at birth.  Whether we look at trends in plastic surgery or body modification or some of the technology innovation described earlier, the pattern is clear: we are taking a more active role in shaping what we are and not just who we are.

JSB and I in our new book have written about the importance of accelerating capability building in a globalizing world.  This puts an entirely different, and more personal, lens on the notion of accelerating capability building.

Fab Labs

Rapidly evolving technologies for creation will unleash waves of distributed creation - that is the key message I took away from a fascinating new book called Fab: The Coming Revolution on Your Desktop - From Personal Computers to Personal Fabrication. While at the Microsoft CEO Summit last week, I met Neil Gershenfeld, the author of Fab.  He is the Director of MIT's Center for Bits and Atoms and he is writing about some of the technology he has developed while teaching a course call "How to Make (almost) Anything". It's an ambitious title, but Neil is serious.  As he writes:

At the intersection of physical science and computer science, programs can process atoms as well as bits, digitizing fabrication in the same way that communications and computation were earlier digitized.  Ultimately, this means that a programmable personal fabricator will be able to make anything, including itself, by assembling atoms.  It will be a self-replicating machine.

Using the analogy of the evolution of computers, Neil estimates that we are roughly at the minicomputer stage of development for personal fabricators.  A versatile personal fabrication station today consists of tools using a combination of supersonic jets of water, lasers and microscopic beams of atoms and costs about $20,000.  With these tools, Neil has been busy creating "fab labs" or laboratories for fabrication in areas as diverse as inner city Boston, rural India, Costa Rica, northern Norway and Ghana.

Neil writes about some of the surprises he encountered in his initial course at MIT:

The overwhelming interest from students with relatively little technical experience (for MIT) was only the first surprise.  The next was the reason they wanted to take the class. . . . they were motivated by the desire to make things they'd always wanted, but that didn't exist . . . The final surprise was how these students learned to do what they did . . . the learning process was driven by the demand for, rather than the supply of, knowledge . . . As students needed new skills for their project they would learn them from their peers and then in turn pass them on. . . This process can be thought of as a "just-in-time" educational model, teaching on demand, rather than the more traditional "just-in-case" model that covers a curriculum fixed in advance in the hopes that it will include something that will later be useful.

Neil's work becomes even more significant when placed in the context of broader trends towards more distributed creation.  Daniel Roth at Fortune wrote a brief article on "The amazing rise of the do-it-yourself economy" (requires subscription) in the May 30, 2005 issue.  His core observation:

. . . a number of factors are coming together to empower amateurs in a way never before possible, blurring the lines between those who make and those who take.

He quotes Noah Glass, the co-founder of Odeo, in a way that makes a connection to the work of Neil (although it is interesting that this article never mentions Neil's book):

Before, only the rich had access to tools and so only the rich were professionals, and the rest were amateurs. But now, as the creation tools have become easier to use and more freely distributed through open source, through the Internet, through awareness, more people have more access to more tools, so the whole amateur-professional dichotomy is dissolving.

The article also cites the launch of Tim O'Reilly's new publication, a magazine called Make, targeted to do-it-yourself technology enthusiasts. Estimating a potential circulation of 10,000 subscribers, the publishers were surprised to find they had 25,000 subscribers four months after the launch - and with virtually no advertising.

Something interesting is happening here.  To paraphrase the Fortune article, the boundaries between takers to makers are blurring.  The results will be profound.

Quality and the Long Tail

Chris Anderson continues his exploration of the Long Tail by acknowledging in a blog posting that "the Long Tail is indeed full of crap". Of course, he is not referring to the concept, but instead is referring to the variability in quality of the goods or services available, especially as one moves down the the Long Tail.

While Chris is doing a masterful job of developing his powerful concept, I confess that I have some problems with this particular post.  For one, he seems to switch gears in mid-post when he describes quality.  Toward the end of the post, he acknowledges that "high quality" and "low quality" are "of course, entirely subjective. . . . there are no absolute measures of content quality. One person's 'good' could easily be another person's 'bad'; indeed it almost always is." Yet, he devotes the early part of his post to broad generalizations suggesting that quality is more objective.  For example,

"note that you have high-quality goods in every part of the curve, from top to bottom. Yes, there are more low-quality goods in the tail and the average level of quality declines as you go down the curve."

He also asserts that signal to noise ratios decrease as one move down the tail.  Really?  Isn't that subjective?  I may be a real outlier (aren't we all?) but, at least for me in the realm of music, the signal to noise ratio decreases as I move up the tail. The real point, I think, is that the sheer quantity (rather than the quality) of items increases as we move down the tail and the ready availability of information about these items diminishes - that's what increases the difficulty of connecting with relevant resources as we move down the tail.

Chris also strikes me as much too cavalier, at least in this post, about the ability of filters to help people find the goods and services they perceive as high quality.  For example, "the ratio of good to bad is simply a signal-to-noise problem, solvable with information tools.  Which is to say it's not much of a problem at all. You just need better filters . . ." Well, at least from my perspective, this is still a huge problem, which is to suggest that it is also a huge opportunity.  The filters we have today are still primitive.  They have only limited ability to help us find resources we are actually looking for and discover valuable resources that we did not even know about - and to know how to strike an appropriate balance between these two goals.

As shelf space constraints give way to the abundance of the Long Tail, the new scarce good is our attention.  We each only have 24 hours in the day - that is one constant we can count on.  So, those who can help us maximize our return on attention by providing more effective filtering will in turn maximize their own financial returns.  They will also create a next generation of powerful brands that will make existing brands looks weak by comparison, something that I will shortly be writing more about over on my personal web site.

FUSE and Search

John Battelle has an interesting posting regarding the vision statement for the Yahoo Search group.  Apparently, it is "to enable people to find, use, share, and expand all human knowledge" known, in short, as FUSE.

This vision statement captures two key elements that are often missing from discussions of search: the social dimension of sharing and the notion that search is often a prelude to the act of creation - we search for resources in order to create something new with them.  I also like the focus on human knowledge, rather than information, because it expands the scope of search from finding codified information to helping people to connect with other people that have relevant knowledge (at least, that's what I would infer from the choice of words).

The vision statement is still too narrow, though, in the sense that it focuses exclusively on human knowledge, thereby revealing one of the major shortcomings of search as it has been implemented to date.  What if I want to find a hammer or a special widget of some type?  That's still a real pain.  Search will realize its full potential when the tool can be used to enable people to find, use, share, and expand resources of all types - physical resources as well as human knowledge.

Sex cells

This is the headline of an article in the May 12, 2005 issue of the Wall Street Journal.  It is great to see that certain patterns play out with remarkable consistency.

In this case, the WSJ observes that "wireless operators in Europe [and] Asia find that racy cellphone video drives a surge in broadband use."  As one example, "Orange, a unit of France Telecom SA, says as much as a quarter of all videos accessed from its portal are erotic - the equivalent of about 3,330 hours of viewing each month." More broadly, the article reports that "world-wide, analysts expect spending on such content for cellphones to top $1 billion this year, up from virtually nothing a few years ago.  Spending could triple or more within a few year, some say, particularly as the number of cellphones with video downloading capabilities grow."

What a surprise.  As the article briefly notes, "pornography helped drive the early adoption of new technologies such as the VCR and the Internet."  That's putting it mildly.  Someday, someone is going to write the full history of the role of pornography in driving the early adoption of virtually every major consumer-oriented entertainment technology over the past 30 years.  Pornography not only helped drive early adoption of the VCR, it played a non-trivial role in the victory of the VHS standard relative to the Betamax standard. It certainly played a significant role in the rapid take-off of DVD's, the rise of the consumer-oriented World Wide Web, the growth of broadband connections to the home, the early adoption of electronic payment media and content syndication and the spread of digital cameras, Web-based video cameras and video streaming technology, to mention just a few products and services. Ever seen an uncensored view of the most requested search terms on Internet search sites?  Sex and sexually oriented topics remain very popular.

In fact, if you want to understand the technology and business models that are shaping network-based digital entertainment, you can learn a lot from studying the leading adult content sites.  In Eric von Hippel's terms, these are often the "lead customers" pioneering and shaping the use of new technology.  JSB and I talk about the edge as the source of innovation - this isn't what we had in mind, but it is in fact another meaning of edge.

Catholic Church - Under New Management

My friend and old colleague from McKinsey, Fred Gluck, published a fascinating analysis of the management challenges facing the Catholic Church under the heading of "God's line manager" (actually the headline in the paper edition was different, but I like the one on the FT web site better) in the May 7, 2005 Weekend section of the Financial Times.

True to his style, Fred pulled no punches. He looks at the Church through the eyes of a management consultant applying the standards of good management. Anticipating some skepticism, he asks (and answers):

Is it fair to apply these standards to the Church? While it is not a corporation, the Church's financial assets, spending and workforce dwarf those of the largest companies in the world. In the US alone (with about 7 per cent of the world's Catholics), the Church has operating expenses of more than $100bn a year, employs more than one million people and controls an investment portfolio (including property) which, while not publicly disclosed, is probably of equally daunting proportions. Scaled up, the church could well be approaching a $1 trillion enterprise worldwide.

What does he find?

In a word, the Church is in crisis and, most certainly, in a managerial crisis. It will not be able to give effective leadership to either the faithful or the clergy until it acknowledges the immense challenge of leading and managing a worldwide organisation and rejects its addiction to a feudal system that was developed when most people were uneducated, life was local, and communications were extremely primitive.

In particular, Fred dwells on the human resource challenge:

The Church has significant human resources problems. Its ability to recruit has declined dramatically during the past 40 years and the workforce is rapidly aging. It is no longer the first choice of the best and the brightest.

It was interesting to see many of the same talent issues facing large corporations also plaguing another global institution, albeit in a much more severe form.  I found it interesting that Fred only tangentially mentions the competition from other global religions faced by the Catholic Church.  The Catholic Church is losing "market share" to Islam and, within Christianity, to evangelical and pentecostal denominations.  I suspect that the human resource challenges faced by the Catholic Church are not simply a function of internal management practices, but are in fact tied to the competitive challenges more broadly.

Institutions that grow have an intrinsic advantage in attracting, developing and retaining talent.  Talent seeks environments that will provide opportunities to develop more rapidly.  Institutions that are growing provide these kinds of opportunities in the form of exposure to a broader range of experiences and more rapid advancement. Institutions that are shrinking have a corresponding disadvantage.  Virtuous cycles and vicious cycles play out in the relationship between institutional growth and talent development.  The Catholic Church appears to be afflicted with a vicious cycle.  Adopting better human resource management practices may help, but only if the institution at the same time addresses the broader competitive challenges and finds new ways to grow its base of adherents.

Fragility of Globalization

I am generally an optimist when it comes to business.  I see opportunities where others see challenges. In particular, I see enormous opportunity from the processes of globalization and I believe that we will all be better off as a result of these processes.  For this reason, I have been particularly distressed over the past couple of days to come across two respected analysts who are sounding the alarm bell, warning us not to take these processes for granted and, in fact, suggesting there is considerable risk that these processes may not only be stopped, but reversed.

One of these analysts is Peter Drucker, a deeply insightful man with considerable historical perspective.  He has a new article in the Spring 2005 issue of The National Interest entitled "Trading Places" (for some reason, on the cover of the print version of the quarterly, Drucker's article has the more ominous title of "Our Mercantilist Future").

In classic Drucker style, he paints on a broad canvas, discussing the evolution of the global economy, suggesting that

what is emerging is not one but four world economies: a world economy of information; of money; of multinationals (one no longer dominated by American enterprises); and a mercantilist world economy of goods, services and trade. These world economies overlap and interact with one another. But each is distinct with different members, a different scope, different values and different institutions.

(As an aside, I find it interesting that Drucker doesn't focus on a fifth global market - the talent market - that is having a profound impact on reshaping both the economic and political landscape of the world.) From my perspective, it's that fourth world economy that is most worrisome. In this context, he suggests that we are seeing the emergence of a new form of mercantilism, this time focused on regional blocs of nations rather than individual nation-states:

The world economy is thus fast coming to look far more like the mercantilism of Alexander Hamilton than like Adam Smith's free trade. It is fast becoming an "interzonal" rather than an "international" world economy.

Drucker argues that much of this new mercantilist rivalry is focused on containing the economic power of the United States:

But a new kind of mercantilist rivalry is emerging in this new economy--one in which the United States suffers from little-noticed disadvantages. For instance, the EU is seeking to export its regulations (and to impose its high regulatory costs on the United States) through international agreements, the reinterpretation of WTO rules, and the growing acceptance of EU standards in third markets. It is also promoting its new currency, the euro, as a rival and alternative to the dollar as the world's reserve currency--a step that, if it succeeded, would greatly reduce the U.S.government's ability to attract foreign funds to finance its deficit and thus maintain the Bush Doctrine. . . . The United States could therefore find itself with a smaller "home market" than rival blocs, but with the same high-cost regulations, in a world of intense mercantilist competition.

The other analyst weighing in on globalization is Niall Ferguson, the historian and prolific writer of such books as  The Cash Nexus, The House of Rothschild and Empire. He has a new article entitled "Sinking Globalization" (available only by purchase online) in the March/April 2005 issue of Foreign Affairs. 

Ferguson warns that we take globalization for granted but that history shows it can reverse very quickly. He focuses on the historical parallel with the era leading up to World War I:

The last age of globalization resembled the current one in numerous ways. It was characterized by relatively free trade, limited restrictions on migration, and hardly any regulation of capital flows. Inflation was low. A wave of technological innovation was revolutionizing the communications and energy sectors; the world first discovered the joys of the telephone, the radio, the internal combustion engine, and paved roads. The U.S. economy was the biggest in the world, and the development of its massive internal market had become the principal source of business innovation.

World War I wrecked all of this. Global markets were disrupted and disconnected, first by economic warfare, then by postwar protectionism.

China was opening up, raising all kinds of expectations in the West, and Russia was growing rapidly.

These two articles are timely warnings for those of us who take globalization for granted.  Make no mistake about it: globalization is a fragile process - there is nothing inevitable about it.  As it unfolds, it deeply threatens entrenched economic and political interests.  Those interests may spark a backlash and we may well find ourselves thrust back into a much more protectionist era.  I do worry that, here in the United States, we do not have enough corporate executives willing to publicly champion the more controversial aspects of globalization, including offshoring and immigration reform.  In the absence of this corporate voice, we are unlikely to find many political leaders willing to resist pressures to build more barriers.

O'Reilly on Paradigm Shifts

Tim O'Reilly is one of the deepest thinkers about the continuing evolution of technology and its impact on economic and social domains.  Two years ago, he gave a talk at a Warburg Pincus gathering on "The Open Source Paradigm Shift".  A version of the talk will soon be published in a new book, Perspectives on Free and Open Source Software.  The talk pinpoints some of the fundamental changes re-shaping the software industry.  Early in his talk, O'Reilly drives home a different way of thinking about software:

I have a simple test that I use in my talks to see if my audience of computer industry professionals is thinking with the old paradigm or the new. "How many of you use Linux?" I ask. Depending on the venue, 20-80% of the audience might raise its hands. "How many of you use Google?" Every hand in the room goes up. And the light begins to dawn. Every one of them uses Google's massive complex of 100,000 Linux servers, but they were blinded to the answer by a mindset in which "the software you use" is defined as the software running on the computer in front of you. Most of the "killer apps" of the Internet, applications used by hundreds of millions of people, run on Linux or FreeBSD. But the operating system, as formerly defined, is to these applications only a component of a larger system. Their true platform is the Internet.

It is in studying these next-generation applications that we can begin to understand the true long-term significance of the open source paradigm shift.

If open source pioneers are to benefit from the revolution we've unleashed, we must look through the foreground elements of the free and open source movements, and understand more deeply both the causes and consequences of the revolution.

Artificial intelligence pioneer Ray Kurzweil once said, "I'm an inventor. I became interested in long-term trends because an invention has to make sense in the world in which it is finished, not the world in which it is started."

I find it useful to see open source as an expression of three deep, long-term trends:

• The commoditization of software
• Network-enabled collaboration
• Software customizability (software as a service)

Long term trends like these "three Cs", rather than the Free Software Manifesto or The Open Source Definition, should be the lens through which we understand the changes that are being unleashed.

Much later in his talk, he highlights one of the key economic consequences of this paradigm shift:

The lessons of previous paradigm shifts show us a more subtle and powerful story than one that merely pits a gift culture against a monetary culture, and a community of sharers versus those who choose not to participate. Instead, we see a dynamic migration of value, in which things that were once kept for private advantage are now shared freely, and things that were once thought incidental become the locus of enormous value.

Towards the end, he urges us to consider the open software movement in a much broader historical, economic and social context:

In short, if it is sufficiently robust an innovation to qualify as a new paradigm, the open source story is far from over, and its lessons far from completely understood. Rather than thinking of open source only as a set of software licenses and associated software development practices, we do better to think of it as a field of scientific and economic inquiry, one with many historical precedents, and part of a broader social and economic story. We must understand the impact of such factors as standards and their effect on commoditization, system architecture and network effects, and the development practices associated with software as a service.

We are just beginning to understand the contours of a new software world where services are developed and managed collaboratively, building in layers on the contributions of others, pulled by users over networks to a broad array of access devices whenever and wherever they are required and tailored by users to meet their individual needs. Many believe this will lead to a fragmented world. That may only be partially true.  Fragmentation creates its own opportunities. O"Reilly appropriately reminds us of Clayton Christensen's "law of conservation of attractive profits":

When attractive profits disappear at one stage in the value chain because a product becomes modular and commoditized, the opportunity to earn attractive profits with proprietary products will usually emerge at an adjacent stage.

In fact, I believe fragmentation will give rise to global and highly concentrated businesses focused on providing increasingly valuable services around testing, rating, reputation, mediation, aggregation and orchestration.

Process versus Practice

A former colleague of mine, Ken Norton, announced earlier this week that he is leaving Yahoo to join Jotspot as VP of Products.  I have written about Jotspot before and I think it is great that Ken will be joining that team.

In the course of his announcement, Ken made some observations that touch on some broader patterns emerging in the enterprise software business:

When I sat down with Joe to talk about JotSpot, I was a bit skeptical of serving the enterprise.  I'd sworn off enterprise software, and really wanted to keep building consumer Internet products.  What I realized is that Joe and Graham feel the same way, and that JotSpot is decidedly not an enterprise company.  My epiphany was recognizing that I don't hate products that are used in a corporate setting.  I just hate products that aren't built for users.  The vast majority of enterprise products are built for the people who are going to purchase, administer, configure, deploy, and provision them.  And these products are often despised by the people who ultimately do try to use them (duh).  No wonder a large percentage of enterprise software efforts go up in smoke.  The enterprise software market is broken for this reason.

And:

JotSpot also pushed some of my hot buttons around collaboration and community.  I've spent the better part of my career building applications that help people connect to each other and share knowledge (search is the best example of that).  I've always preferred solutions that let the users take charge to ones that assume an engineer knows better.  There's something empowering about offering users a product that helps them kick ass - like the spreadsheet, the original Macintosh, desktop publishing, or the web itself.  The best products are the ones that slowly reveal complexity as you use them.

I think Ken is on to something really important here.  The primary driver behind enterprise software was efficiency and automation, removing people from business processes wherever possible and imposing standard procedures on people wherever they remained.  Business processes were the primary focus of business performance and companies generated considerable cost savings from this focus.

JSB and I have a strong sense that the focus on business performance is shifting from process to practice.  The real frontier for business performance going forward is on helping people to connect with each other and to build their capabilities more rapidly by engaging together on challenging problems and opportunities.  This will require a fundamental mindset shift on the part of executives and a different approach to technology infrastructure and tools, creating an opportunity for a new generation of products and services.  As people come back into the center of focus, enterprise software products once again will have to be built for users, rather than buyers. They will also have to focus on enhancing collaboration and community.  Ken is on to something significant here. The enterprise software game is starting to get interesting again.