Edge Perspectives with John Hagel

Silicon Valley's Risky Complacency

JSB and I just published a column on Business Week's web site regarding "SIlicon Valley's Risky Complacency".  We are both struck by how complacent U.S. business executives are regarding the business implications of offshoring. It is in sharp contrast to the intense urgency we see when we talk to executives in China and India.  Complacency has always been risky and it is even more so today.

Confronting the Offshoring Challenge

Geoffrey Colvin wrote a cover story entitled “America Isn’t Ready [Here’s What To Do About It]” in the July 25 issue of Fortune magazine.  It is a real wake-up call to American workers regarding the growing challenge from offshore labor pools.  It’s a very good article, but it ultimately diverts attention from the key element required to address the challenge.

Colvin begins by outlining three familiar drivers:

• the increasing importance of information in economic activity
• the ability to digitize this information and stream it anywhere in the world more and more cheaply
• the large number of college graduates, especially engineering graduates, being produced in China and India relative to the U.S.

In discussing these trends, he reviews the findings of the recent study from the McKinsey Global Institute that I blogged earlier. Bottom line?  More and more U.S. jobs are vulnerable to offshoring and the U.S. educational system is producing fewer graduates able to compete in technology-related jobs. Some of the most interesting charts in his article contrast the number of Asian students earning doctorates in the U.S. versus in Asian universities.

What’s the answer?  If you read Colvin, the most urgent priority is to fix the educational system.  Other prescriptions include immigration reform, more spending on R&D (especially government funded research), more investment in communications infrastructure. But then Colvin warns that all of this still might not work.  The more fundamental problem is that American workers are more expensive than similarly skilled workers in Asia, raising the most important question: “How can they be worth what they cost?” Colvin suggests that “what happens next in the U.S. depends on how workers respond.”

I beg to differ.  What happens next depends on how U.S. companies respond. Despite cursory references to companies like Trilogy, the article largely lets companies off the hook.  According to the article, the answers either involve public policy initiatives or efforts by workers to get the training required to justify their higher cost (despite the earlier point in the article that workers at all skill levels are available for lower wages in Asian countries).

In searching for a more satisfying answer, we might start with the observation of Robert Litan, an economist at the Brookings Institution, quoted in a side-bar to the article: “By and large government retraining programs don’t work. The best training takes place on the job.” Amen.

Let’s also add that the best way to protect American jobs is not to focus narrowly on the training of individual workers. Instead, we need to figure out how aggressively build the capabilities of groups of workers – it’s not just about skills, it’s about shared practices and  the processes required to amplify the value of these shared practices.

Finally, let’s also recognize that this is not a one-time challenge, but an ongoing requirement.  What matters is not just relative skill levels or organizational capability at any point in time, but the relative pace and trajectory of capability building. The growing competitiveness of Asian companies is not just due to their lower wage rates or access to large pools of educated workers. It increasingly stems from their mastery of management techniques that enable them to get better faster by working with others.

If we recognize all this, the search for answers shifts squarely onto companies, not individual workers or government policy. Companies need to re-conceive their role. American companies, responding in part to impatient financial markets, have increasingly focused on efficiency, especially in terms of near-term cost reduction.  This focus is driving the current trends towards offshoring and outsourcing. Efficiency is essential, but it is not sufficient.

Rather than viewing themselves as narrow efficiency engines, companies need to re-conceive their roles in terms of accelerating capability building. In an increasingly competitive global economy, the reason people will join companies is because they believe that they can get better faster by working with others in a company rather than acting as free agents.  If companies don’t deliver against this expectation, they will find it harder and harder to attract and retain talented employees. Delivering against this expectation will require a much greater focus on growth and innovation, rather than narrow efficiency.  It will also require deeper skill in collaborating with other highly specialized companies to get better even faster.

Let’s face it, one reason our schools are not graduating more engineers is that students look out into the job market and don’t see as much advancement opportunities for engineers and scientists as in years past.  This is not just a problem of our educational system – it’s a problem of opportunity creation by our companies.

I have a growing concern that corporate executives are beginning to use our educational system as a scapegoat. Sure, it is broken – severely broken. It may even need to be fundamentally re-conceived rather than reformed. But it is far too convenient for CEO’s to point the finger at our educational system and avoid looking at what their own companies need to be doing to create more opportunities to pull and develop talent.

A similar concern applies to immigration policy.  One of my biggest concerns is the growing trend of Asians who already reside in the U.S. deciding to return to their home countries.  What is driving this?  There are many factors, but one that my Asian acquaintances increasingly cite as they pack up and move out is that they have become convinced that the most significant opportunities for advancement are now over in Asia rather than here. We can relax immigration policy as much as we want but, if the best and brightest in Asia perceive that their best opportunities for advancement are at home, these policy reforms will have little impact.

The answers to the challenges outlined in the Fortune article begin in the executive boardroom.  Before pointing the fingers at others, executives need to ask themselves three basic questions:

• What is the really distinctive capability that will allow us to compete successfully in the global economy?
• What do we need to do to get better faster in these areas?
• How can we learn to work with other companies in ways that help all partners to get better even faster?

The Fortune article asks “where to start?”  Senior executives should start by looking in the mirror and asking themselves hard questions about what their own companies need to do to get better faster.  By spending so much time on public policy and the workers themselves, Fortune did its readers a disservice. Sure, there is a lot to be done on those fronts as well, but the senior executives that Fortune targets as its readers can have the greatest impact by focusing on their own companies first. The article would have been a lot more powerful if Fortune had begun with what its own readers could do.

Beware "Berrybite" Blowback

In our quest to stay connected, we have embraced powerful new technology.  Some of the best new products include the increasingly ubiquitous Blackberries and Treos, combining e-mail and telephone functionality.

In recent weeks, however, JSB and I have been exposed to the dark side of this new technology.  JSB has even coined a name for it – he calls it ‘Berrybite”, merging Blackberry with soundbite.

We are all familiar with the pressure to condense messages into soundbites for broadcast media.  Blackberries and Treos exert a similar pressure, both on the sender and the receiver.  To preserve compact form factors, the keyboards on these devices are minimal at best.  Anyone seeking to input a long message acquires first hand experience with a new syndrome – “thumb fatigue”.  Similarly, anyone seeking to read a long message on one of these devices soon develops eye strain.  On both sides, the pressure is on to keep it simple and keep it short.

Now, there’s clearly a lot of value in that.  Learning how to be concise is something that could benefit many of us.  It is a discipline that forces us to clarify in our own minds what we are really trying to say and zero in on the essence of the message.

On the other hand, these devices also can receive attachments to messages. This is where the danger occurs.  We attach documents to e-mails expecting that they will be read on PC’s or printed out and then read.

Both JSB and I have had experiences where documents we sent were read by people on a Blackberry or Treo. They weren’t long documents – basically the equivalent of two or three pages of text. The  recipients were initially highly critical of the material.  But, when we pressed them to read the documents again, they came back after reading them more carefully on a PC or in print form and apologized for their initial reactions. They said the material was excellent and they didn’t really understand why they had such a negative initial reaction.

Well, we think we know why initial reactions were so negative.  The Blackberry or Treo is not conducive to a careful read – it encourages skimming. It also encourages people to find a quick way to capture what is in the document and then move on to the next message.  As a result, people tend to try to fit these documents into familiar categories based on some key words rather than thinking deeply about the topic and absorbing new perspectives. It also doesn’t help that documents on these devices are typically accessed in environments with lots of distractions – meeting rooms, airports, automobiles, etc. – making it difficult to concentrate on the message at hand.

Bottom line, if you send a document to someone and they don’t like it, ask them how they accessed and read it.  If it was on a Blackberry or Treo, ask them to read it again in a different format. You (and they) might be surprised at how their reactions change.

If we don’t appreciate the differences in how we read material in different formats, we are likely to increase the pressure on everyone to condense all communication into “berrybites”.  That would be a shame because then we would lose all sense of nuance and texture and that is usually where the greatest insight resides.

Renminbi Blowback

On Thursday, the Chinese government responded to intense U.S. government pressure and revalued the renminbi. The revaluation was very modest – only 2% - and the government indicated it would permit a tightly managed float going forward, allowing the renminbi to fluctuate in a band of 0.3% on any given day.

The business press naturally is giving this a lot of coverage - for example, see The Economist, the Financial Times and the Wall Street Journal.  While highlighting many dimensions of this move by the Chinese government, this coverage generally does not address the potential for blowback in global competition.

Let’s put aside whether this is just a symbolic move by the Chinese government or will lead to more significant changes in the exchange rate over time.  Let’s also not get mired in a debate about what the “real” value of the renminbi is or ought to be.

Let’s assume instead that Washington gets what it wants – a meaningful revaluation of the renminbi as a way to dampen competitive pressures on U.S. manufacturers, slow the growth of offshoring activity and enhance our balance of trade.  While there is still time, we may want to explore the unintended consequences that a meaningful revaluation of the renminbi might have on business competition.  Then perhaps we should reconsider whether this is a course we really want the Chinese government to pursue. (We’ll also leave aside the unintended consequences in public policy domains like the continued funding of U.S. government deficits or the potential for increased political instability in China if economic growth significantly slows or the prospect of growing nationalism in China if the US is perceived as pursuing a protectionist agenda.)

Why are policy makers so focused on the value of the renminbi?  In part, because they believe that Chinese companies rely on wage arbitrage as the basis for competition in global markets.  Chinese companies pay their workers anywhere from one quarter to one tenth of the wages that American companies can afford to pay here in the U.S.  This is a significant competitive advantage, especially in labor intensive industries like assembly based manufacturing. It may even be at least in part an "unnatural" competitive advantage if the Chinese government is artificially holding down the value of its currency.

Even if this assumption is correct, what does the revaluation of the renminbi accomplish?   Few believe that a market-based revaluation of the renminbi would wipe out the wage advantage of Chinese companies. At best, any market driven revaluation of the renminbi would marginally reduce this wage advantage. It would still leave significant competitive pressure on U.S. companies and strong incentives for U.S. companies to set up offshore operations to participate in wage arbitrage.

But we need to dig deeper and challenge the basic assumption that wage arbitrage is the sole, or even primary, basis of competition for Chinese companies.  In fact, in a growing number of areas like mobile phone technology, Chinese companies have already developed world-class capabilities. More importantly, they are building capability at a very rapid rate across an even broader range of industries, ranging from consumer electronics to motorcycles and fuel cells.

What is driving this pace of capability building?  It’s simple.  They have an enormous sense of urgency.  Chinese executives are driven by an overwhelming sense that they were blocked from participating in the world economy for fifty years and that they have to work very hard to make up for lost time.  They are also aware that any wage advantages are likely to be temporary at best.  They face growing competition from emerging economies that offer even lower wages.  They even face growing competition in major urban areas from other Chinese companies willing to offer higher salaries for experienced managers and employees with distinctive skills.

Chinese executives are channeling this sense of urgency into aggressive and creative bootstrapping – working with other specialized companies in distributed networks to get better even faster than they could on their own.  In the process of doing this, Chinese companies are developing a whole new set of management techniques to foster rapid incremental innovation – both at the product and process level.  Few Western companies yet understand the significance of this innovation at the level of management techniques. Global process networks and productive friction are just two of the techniques that these companies are perfecting to accelerate capability building.

So what does this have to do with the revaluation of the renminbi? Any revaluation of the renminbi will only intensify this sense of urgency on the part of Chinese executives. Even the 2% revaluation on Thursday, as modest as it is, will serve as an early red flag (no pun intended) of the risk of further revaluation ahead.  Chinese executives will have no choice but to redouble their efforts to build capability even faster and pursue additional innovation in management techniques to bootstrap even more aggressively. At best, the revaluation of the renminbi may offer only a brief respite for U.S. companies, while intensifying the longer-term competitive challenge from Chinese companies. Paradoxically, this same revaluation is likely to lead to greater complacency by American executives, many of whom believe that, if they can only reduce the impact of wage arbitrage, their competitive positions will be secure.

Let’s also not forget an even more subtle impact from the revaluation of the renminbi. U.S. companies to date have benefited disproportionately from the opportunities created by offshoring to participate in wage arbitrage.  European companies, through a combination of different mindsets and restrictive labor laws, have been much less aggressive in exploiting offshoring opportunities. To the extent that a renminbi revaluation reduces the potential for wage arbitrage, it also reduces a competitive advantage for U.S. companies in global competition with European companies.

So, let’s see - more rapid capability building by Chinese companies, greater complacency of U.S. companies and reduced competitive advantages for U.S. companies in global competition with European companies – why again are we pushing so strongly for renminbi revaluation? What’s the alternative? Maybe U.S. companies should use the growing competitive pressure from Chinese companies to get better faster themselves.

There may well be other reasons to seek a revaluation of the renminbi.  But let’s not pursue this course in order to “protect” U.S. companies or U.S. workers from growing competitive pressures. If that is our goal, we may in fact find that we have accomplished just the opposite – intensifying economic competition from China and increasing the vulnerability of U.S. companies in the global economy. The blowback may take us by surprise.

Of course, I may be jumping the gun with my concerns. Thursday’s move was symbolic.  Maybe both governments intended the move to be symbolic and nothing more. This way, the U.S. government can claim a victory and the Chinese government can show its “accommodation” to U.S. concerns in advance of the visit to Washington by President Hu Jintao in September. For the sake of U.S. companies, let’s hope this is the case. There may yet be time to re-evaluate our policies.

Brands and Advisors

Chris Anderson responded to my previous post on brands with some very helpful additional discussion on filters and why he believes people are and will remain the best filters.

As I read his comments, I don’t think we are far apart at all.  His comments provide me an opportunity to clarify what I mean by customer-centric brands and why I believe companies, and not individuals, will ultimately hold the strongest brands in this next wave of branding.

The customer-centric brand promise is: “I know you as an individual customer better than anyone else and you can trust me to use this understanding to help you find and get more value from the products and services you buy”.  To use Chris’s terminology, this is a post-filter promise or, to use his less geeky term for it, this is the promise of any good advisor. A really great advisor does two things very well: the advisor knows you as an individual and the advisor knows the relevant domain in great depth. (There’s also a third element of advisors – they show they really care about your well-being and they can be trusted to act on your behalf – but this isn’t really relevant to the points I’m developing here).  A classic example of an advisor?  Our primary care physicians (well, at least hopefully).

Now, when I hear Chris talk about the options for these kinds of advisors, I think he is wrestling with the limitations of advisors to date.  On the one hand, you can go to friends who know you well, but Chris has talked about the limitations of friends (at least as advisors).  I made the point in my previous post that there are in fact occasionally “expert friends” who have deep domain expertise and know me well enough to be helpful in connecting me to the products that will really suit my needs (without imposing their own value judgments about what I should need). The problem in terms of brand potential is that these friends are not scalable – their helpfulness depends upon knowing their friends well.

Chris then shifts over to talk about celebrities as advisors. By celebrities, he doesn’t just mean Britney Spears or Paris Hilton, but also deep experts in specific domains.  He asserts: “it doesn’t matter that they don’t know you; you pick them to emulate because they represent values you admire.”

Well, here we may diverge.  I certainly agree that well known experts or tastemakers in a field can be very helpful in terms of advice and recommendations even without knowing me as an individual customer.  As Chris emphasizes these experts are particularly valuable as you move down the Long Tail where there are an increasing number of products to search through and less generally available information about the products to support the search.

But is it really true that “it doesn’t matter that they don’t know you”?  It matters to me.  I think they would be a lot more helpful as advisors if they really knew me as an individual.

To build on an example from my previous posting, I find my neighborhood wine store much more helpful as an advisor on wine purchases than Robert Parker.  Why?  Because the folks at my neighborhood wine store know me and are much more effective in connecting me with wines that I would really like, even if their tastes diverge from mine.

To illustrate the limitations of experts or celebrities further, let me take an example from one of my obscure musical genre interests – rockabilly.  There are a few well-known (at least within the rockabilly community) experts that I listen to for recommendations because they share my passion for rockabilly and have invested an enormous amount of time navigating through this part of the Long Tail hunting for musical gems.  But they don’t understand that my interest in rockabilly veers more towards the rock side versus the hillbilly or country side or that I look more for great vocals rather than great instrument playing.  This is particularly a problem out in the Long Tail where there aren’t a lot of experts to pick from, so I can’t find a great fit with my musical tastes within the genre.  As a result, I have often been burned by recommendations from these experts because they really don’t know me.

Bottom line, I believe we are now entering an era when we will no longer have to make the choice between celebrities and experts who don’t know us or friends who don’t know the domain. We already have lots of examples of advisors who know both the domain and my individual needs as illustrated by my neighborhood wine store or my personal physician.  The technology is now becoming available to make these advisors much more scalable.

People will always be at the center of these kinds of businesses – I am certainly not one who believes that technology tools can replace expert advisors, but these tools can amplify their reach and richness. By bringing together people and technology, companies can create even more scalable platforms for advice that will be especially helpful in navigating the Long Tail.  The real opportunity in my mind is to build much more scalable expertise in the needs of individual customers, combining both personalization and socialization. This is an opportunity that only companies can address and that is why I believe they ultimately will be the ones to own the most powerful and lucrative customer-centric brands.

Restoring the Power of Brands

Several days ago, I posted on Restoring the Power of Brands on johnhagel.com.

In brief summary, I made the case there that the power of brands is not eroding.  Instead, brands are going through a period of disruptive change as we shift from product-centric brands to customer-centric brands. Many well-known brands will die or drift away into irrelevance. At the same time, new brands will emerge and attract the attention and loyalty of broad markets.  In fact, brands have gone through several stages of evolution over the past 100 years, shaped by evolving sources of scarcity in the economy.

By understanding and acting upon this deeper process, we have an opportunity to build much more powerful and lucrative brands, shaped by network effects that traditional brands can never replicate. However, these new brands will require very different marketing techniques and even a different marketing approach – something I describe as “collaboration marketing” (much of the thinking regarding this approach evolved from my work with Marc Singer and led to the writing of Net Worth). Even more broadly, this is just one more example of changes at the edge of the enterprise that are re-shaping opportunities for innovation and value creation. 

Seeking feedback

I urge you to take a look and let me know what you think – I am still developing this perspective and welcome opportunities for some productive friction with all of you (well, maybe not all . . . ) to help me tighten and refine my views.

Chris Anderson’s comments

On that note, Chris Anderson, the developer of The Long Tail concept - one of the richest and most powerful memes floating through cyberspace and executive boardrooms today, has already commented on my posting on his blog. Chris’s thoughtful comments provide me with an opportunity to clarify some of my own concepts and, ideally, kick off a conversation with Chris on this topic. I especially welcome this because the Long Tail plays a central role in the re-definition of brands that is only starting to play out.

Broadly, Chris agrees with me that brand power will shift downstream from producers to the consumers.  But, we diverge over who will own the most powerful brands – I believe it will be companies, he believes it will be the customers themselves. He especially singles out tastemakers as the brands that will really matter because they will provide the filters you trust. As examples, he gives Jessica Simpson, Instapundit and Jon Stewart.

Who will own the most powerful brands – people or companies?

At one level, we don’t disagree.  People have always been brands, in the sense of trusted guides to the purchase of products and services, whether it is the power computer user down the street who helps me to pick the best wireless LAN or the friend who has a 40,000 bottle wine cellar (did I forget to say “rich friend”?) who points me to a particularly smooth Burgundy. Celebrities have also been trusted guides and brands for a long time.  Remember when the Beatles embraced Maharishi and set off a wave of interest across an entire generation in Indian music, apparel, meditation and yoga?

But let’s look a little more closely at these two types of people – let’s call them “expert friends” and celebrities.  Expert friends are the most valuable guides because they combine a deep understanding of certain product categories with a deep understanding of my individual and evolving needs as a user of these products.  Chris emphasizes the importance of filters - and uses the term “advisor” to describe the most valuable kind of filter in the Long Tail world. Well, the most valuable advisors are those who know me as an individual and can help to guide me as an individual to the best set of products and services to meet my needs.  Here’s the problem, though, in physical space, expert friends don't scale well. Even the most gregarious friends have a circle of a few thousand friends and, at this point, their knowledge of the needs of each friend is probably pretty superficial. These limits can only be overcome by companies using network-based technology.

Celebrities come from a different end of the spectrum.  They don’t have a clue who I am as an individual customer.  When they’re good, as in the example of Oprah Winfrey or Martha Stewart, they have a deep understanding of a certain customer segment like homemakers and they can introduce this segment to products or services that they might like.  But their value as a trusted advisor is ultimately limited by the fact that they don’t really know me – my trust would be a lot greater if they knew my individual tastes.

In the terms used in my earlier brand posting, these celebrities are great examples of “customer segment” brands – they develop a deep understanding of customer segments and use this understanding to be helpful to members of the segment.  Companies also can build customer segment brands – Disney (at least in the old days) and Nike being two of the most successful examples. Their brand promise is: “because I understand your segment, you can trust me to provide you with the products and services that will be most valuable to you.” They have achieved scalability, but at the expense of deep knowledge of the individual customer.

These customer segment brands are important, but transitional – they offer superior value relative to traditional product-centric brands, they will give way over time to true customer-centric brands.  Customer-centric brands will create more value than customer segment brands, because they offer superior return on customer attention.  Their brand promise is: “because I understand you as an individual customer better than anyone else, you can trust me to provide you with the products and services that will be most valuable to you.” This is the brand promise of an expert friend, but new technology makes this promise more scalable.

People will certainly continue to hold this kind of brand power.  My interest, though, is where economic value at the brand level will tend to concentrate. And I definitely diverge from Chris if he maintains either that companies cannot build customer-centric brands or that companies will not capture significant economic value with these brands. In fact, companies will ultimately be required to harness the enormous potential power that these brands now offer.

So where are the examples?

Chris indicates that I don’t name any examples of customer-centric brands.  He seems to suggest this means that I am wrong.  I like to think it means I am ahead of the curve and anticipating opportunities that haven’t emerged yet.  In fact, if there are lots of great examples, I worry that I am not anticipating far ahead enough. Great examples rarely exist at this stage of emergence, but lots of partial examples exist and much can be learned by looking at their limitations.

1. Business to business brands

Some of the best examples of customer centric brands exist in the business to business arena. In this arena, customer purchases are sufficiently large to justify significant investment in understanding the needs of individual customers.  Li & Fung, a Chinese company, helps apparel designers around the world to connect with highly specialized providers of production and logistics services.  In the IT arena, a company like Everest Group helps enterprises to get much more value out of outsourcing services by deeply understanding their individual customer’s needs and the capabilities of a broad array of outsourcing service providers. Now, these brands are not well known outside their relevant customer segments, but they are known and deeply trusted among the customer’s they serve. And these companies can become quite large and profitable – Li & Fung generates over $5 billion in revenue and return on equity in the range of 30 – 50%.

2. Niche brands

Many great examples of customer centric brands are either highly localized or limited to the very wealthy.  This is because, until recently, building detailed understanding of individual customers required significant investment of effort and money and was not very scalable.  Some examples?  Start with Weimax, a wine store in my neighborhood.  They carry a great selection of wines on their store floor, but that is just the beginning.  As they get to know you as a customer, they will recommend and help you to search out wines around the world and special order them. The personal financial advisory service that I rely on is another example (sorry I won’t reveal its name, because it’s already too busy). Finally, look at Mayo Clinic.  Their brand is built on the proposition that they will invest an extraordinary amount of effort in learning about you as an individual patient and then connect you with a broad network of specialized medical services based upon your individual needs.

3. Martha Stewart

Chris referred to Martha Stewart in passing, linking to an earlier posting of mine.  Now, of course, Martha Stewart is an individual, but she is a lot more than that.  She founded a company, Martha Stewart Living Omnimedia that has had its share of challenges in recent years (not the least of which was the incarceration of its founder).

Nevertheless, it provides a very interesting early (and far from perfect) indicator of the opportunity to take a strong customer segment brand and evolve it into a customer specific brand. Omnimedia is doing this through the use of direct marketing and the Internet to build profiles of individual customers.  Celebrities alone can’t do this, but companies built around the celebrities can take this value to the next level. Omnimedia has built $1.5 billion in market cap so far – in spite of all of its troubles.

4. Amazon and Google

Chris says that these new brands probably won’t be held by companies at all, but rather by people, but then goes on to mention Amazon and Google as providers of filters that helped them become trusted aggregators. There’s a lot to be learned by contrasting the two.

Google is extraordinarily helpful in navigating through the Long Tail of the Web.  Yet it is still a very traditional product-centric brand.  Its brand promise?  “Trust us because we have a great algorithm to help you find what you need.”  Google doesn’t even pretend to know me as an individual – it treats me as a transaction.  Each time I come, it is like they have never seen me before.  They do not use any persistent profiles of me that will enable them to be even more helpful to me.  They are a tool company.  As soon as someone comes along with a significantly better tool, people will switch rapidly.

Contrast that with Amazon.  Amazon strives to get to know me and then, based on that knowledge, seeks to connect me not only with books that I might like, but also with experts (in the form of lists) that can also help me.  Again, this is far from perfect at this stage (Amazon recommends that I buy the book that I just wrote, not realizing that I’ve been there, done that, don’t need to read it again). But Amazon is on its way to building a customer centric brand.  It is becoming my expert friend on steroids. Question for Chris: why won’t Amazon become a viable customer-centric brand? Why won’t its value ultimately far exceed the value of an individual tastemaker or expert friend?

Bottom line

Here’s the point.  We’re on the cusp of a major transition.  We haven’t made it over to the other side yet, but there are enough early suggestions of the potential and a longer-term trajectory to suggest that there’s a lot of opportunity over there.  The opportunity starts with building enduring, rich and multi-dimensional relationships with customers.  Use the understanding that emerges from these relationships to become even more helpful and even more trusted as an advisor, helping people to navigate through the Long Tail.  People can do this themselves, but companies can amplify that capability. In the process they can become platforms for significant wealth creation and build a very different kind of brand from the ones that dominate our business landscape today.

Why couldn’t this be done before and why are there still only very limited examples of these new brands? Three reasons: technology, skills and mindset. On the technology front, the convergence of the Internet, Web services, customer profiling technology and deep analytic tools creates an opportunity to scale customer-centric brands in ways that were never economically feasible before. Using these technologies effectively requires a new set of skills and these take time to develop and deploy.

And then mindset.  Even among some of the best aggregators in the Long Tail, the mindset focuses on search through larger and larger numbers of objects.  They sometimes forget that there are people on the other end. They can become even more helpful by getting to know those people and using that understanding to become even more trusted advisors.

Tour de France - The Razor's Edge

We’re approaching the mid-point of the Tour de France bicycle race. I came across some material related to the Tour de France that also illustrates some of the themes I have been working on.

Daniel Coyle has written a fascinating book called Lance Armstrong’s War.  In the book, he eloquently captures the quest of all cyclists:

Ultimately, what every rider is aiming for is a quasi-mystical state known as being “on form.”  Note the preposition.  One does not get in form; rather, one tries to get on it, as one might walk across an ice-covered ridge, a visit made even trickier by the fact that even the rider is never quite sure where the edge begins.

The phrase was originally used to describe racehorses in the 18th century, and its meaning remains unchanged, referring to the elusive moment when all systems are working at optimum efficiency.  It is made possible by supercompensation, that physiological tendency of bodies under stress to protect themselves by getting stronger . . .up to a point.  After that point – the edge of the icy ridge, so to speak – the body protects itself by shutting down.  For Tour riders, the trick is to get as close as you can to the edge without slipping over.

For most riders, steeping out onto the razor, as the riders call it, is part science, part magic, the most magical part being that you get better at it as you get older.

Razors, icy ridges . . . edges.  This description of competitive racing highlights an important meaning of edge in The Only Sustainable Edge.  In this book, JSB and I use “edge” with multiple meanings.  Edge means advantage.  Edge also means periphery, in the sense of places where the familiar encounters and has to interact with the unfamiliar, as in the edges of companies, geographic edges (e.g., emerging markets) or demographic edges (e.g., the emergence of new generations of consumers).  But edge also means limits of performance and capabilities.

Peripheries are important because they test and ultimately expand the limits of our performance and capabilities.  By confronting us with the unfamiliar, they force us to get better faster.

But the process is not a comfortable one.  JSB and I use the term “productive friction” to describe what happens when groups of people come together at the edge.  They clash, they argue, they challenge each other.  Performance requirements are demanding, the deadlines are tight and everyone at the outset seems to be complicating things, rather than moving the group towards a solution.  Pressure builds and stress levels mount.  For those who enjoy testing their limits and who derive satisfaction from successfully addressing challenging problems, this experience can be exhilarating – and they emerge much more capable than they were before. For those who want stability and security, this can be pure hell.

The edge forces all of us to confront our fears, for danger lurks on the edge.  In Daniel Coyle’s words again:

That is the great open secret of bike racing – how often and how terribly they crash. They crash in sprints and on downhills, on greasy roundabouts and on sun-melted tar.  They lose eyes.  They go into comas. They break their backs with such regularity that they have a nifty-sounding term for it: “percussion fracture.”

. . . But there is something far worse than crashing: being left behind.

JSB likes to remind executives that the high corporate mortality rate is a key to Silicon Valley’s success.  If we don’t allow – even encourage - people to fail, they will be far more reluctant to push the boundaries of their performance.  In Silicon Valley, if you haven’t failed at least once, it probably means you haven’t pushed your boundaries hard enough.

That is the essence of the world we are building.  We all need to learn how to push the limits of our performance and capabilities by finding and spending more time on the relevant edges of our lives and our businesses. If we don’t get better faster, we will get left behind. On the other hand, if we get better faster, we will enjoy significant rewards, including the satisfaction of creating and contributing in ways that we never thought possible.  And, for those of us who learn that we can get better even faster by working with others, we will also benefit from deeper and more lasting relationships forged on the edge – the greatest reward of all.

Lean Consumption

A few months ago, Harvard Business Review published an article on “Lean Consumption” (purchase required) by James P. Womack and Daniel T. Jones, two of the leading champions of the concept of lean management (Strategy + Business recently did an interesting profile of them here - registration required). 

The HBR article is interesting, both for what it says and what it neglects to say.  It reflects a broader trend in business management to apply many of the same management techniques that have worked well in other business processes to customer relationship management.

The authors quickly present their key thesis:

Just as businesses around the world have embraced the principles of lean production to squeeze inefficiency out of manufacturing processes, these innovative companies are streamlining the processes of consuming.  In the early 1990’s we popularized the term lean production to describe the ultra-efficient process management of our examplar firm, Toyota.  We believe it is now time to recognize lean consumption as its necessary and inevitable complement.

To adopt the lean consumption view, we need to view consumption as a process, rather than as an event:

Think about consumption not as an isolated moment of decision about purchasing a specific product, but as a continuing process linking many goods and services to solve consumer problems.  . . . For producers and providers (whether employees, managers or entrepreneurs), developing lean consumption processes requires determining how to configure linked business activities, especially across firms, to meet customer needs without squandering their own – or the consumer’s – time, effort and resources.

The principles of lean consumption

Womack and Jones highlight six principles as the foundation of lean consumption:

1. Solve the customer’s problem completely by insuring that all the goods and services work, and work together.
2. Don’t waste the customer’s time.
3. Provide exactly what the customer wants.
4. Provide what’s wanted exactly where it’s wanted.
5. Provide what’s wanted where it’s wanted exactly when it’s wanted.
6. Continually aggregate solutions to reduce the customer’s time and hassle.

At one level, this seems like common sense. Of course, that is what businesses should have been doing all along. But I have spent enough time on customer support calls being reassured by an endlessly repeated tape that “your call is very important to us” and then finally connecting with someone who has no clue how to provide what I want, much less when or where I want it, to know that these principles are all too rarely applied in practice. There is certainly tremendous opportunity to apply the principles of lean consumption to improve customer satisfaction while at the same time enhancing the profitability of vendors.

Pay attention to relationships, not just processes

And yet, I had a growing sense as I read the article that Womack and Jones view the consumption process far too narrowly.  What if customers don’t know what they want? Much of the value in a customer relationship can come from helping customers to define their needs more clearly and then providing them with the tools to satisfy their own needs. To avoid thinking too narrowly about processes, it is important to pay attention to relationships.  Relationships are difficult to build – they are time consuming and often generate friction as the various parties seek mutual understanding and mutual benefit from the relationship. In their relentless focus on process efficiency, the authors may undermine the ability to build deeper relationships with customers.

Relationships are also fundamental to learning and capability building.  Of course, as the authors suggest, companies can learn a lot simply by reflecting more systematically on their performance with customers in terms of time consumed in the process and identifying root causes of customer support calls.

But the real learning occurs when companies engage with customers in the context of a trust-based relationship where each party is pushing the other to become better at what they do. This is the real value of customer communities, where customers connect with each other in more systematic and helpful ways, often (although far too rarely) facilitated by the vendors themselves.The recent gathering of vendors in eBay Live! illustrated this learning opportunity, as noted by Rob Hof from Business Week in a recent blog. Hof suggests that the friction generated by such interactions can often be mistaken for unhappiness, rather than as an encouraging sign that people are engaged and care about outcomes. The learning that comes from this kind of engagement with customers in the context of deep trust-based relationships is generally very different from the learning that occurs through making processes more efficient.

Is there a role for offshoring?

It also adds a different twist to the way the authors view offshoring.  They are generally skeptical of the benefits of offshoring to distant countries because of the greater difficulty and costs imposed in terms of rapid response to customer needs.

At one level, they have a valid point – companies often focus too narrowly on labor cost savings and do not take into account potential increased costs in supply chain areas like shipping and inventory.  On the other hand, companies increasingly are resorting to offshoring because they want to find ways to get better faster by working with other world class companies in environments where capabilities can be built much more rapidly. This introduces a more dynamic view of offshoring. Don’t just look at cost and efficiency trade-offs, even if you do it broadly across an entire supply chain. Focus as well on the opportunity to get better faster by working with more specialized partners.

Toward a more dynamic view of lean consumption

So, on the one hand, there is an opportunity to get better faster by working with highly specialized and motivated supply chain partners even if (and perhaps because) they are in distant locations. On the other hand, there is an opportunity to engage in a deeper way with customers around unmet needs.  Bring these two together and you begin to see a much more dynamic view of lean consumption than the vision presented by Womack and Jones. Perhaps lean consumption needs to be balanced by rich relationships. Think of the capabilities that could build.

A Cautionary Spectacle

As I left London yesterday morning to the sound of multiple explosions, I happened to read an International Herald Tribune article that provides a cautionary tale regarding the evolution of Chinese companies.  The article covered the current crisis of Moulin Global Eye Care, a company that had evolved from a small workshop founded in Hong Kong in 1960 to make spectacle frames and sunglasses into the third biggest manufacturer of eyewear in the world.

The rise and fall of a hot company

Moulin was a hot company.  It went public in 1993 and its market capitalization has increased by a factor of nine since its listing on the Hong Kong exchange. As the article recounts:

In the mid-1990’s, Moulin embarked on a rapid series of acquisitions in Europe to build its distribution network.  Under a second generation of management, the company tried to make the leap from being a low-cost Chinese supplier of licensed brands to designing, making, distributing and retailing its own products worldwide.

Working in partnership with Golden Gate Capital, a private equity firm in the U.S., Moulin recently paid $250 million to acquire a controlling interest in Eye Care Centers of America, a 378 store U.S. retail chain.

Well, things are now unraveling at a rapid pace.  In mid-April, the company asked the Hong Kong exchange to suspend trading of its shares. The IHT article indicates that shortly afterwards

. . . banks had called in debts of . . .$300 million, and liquidators were sent in. [Cary] Ma [chief executive of Moulin] and his father, Ma Bo Kee, the company’s founder and chairman, were arrested as the police began a fraud investigation. The speed of Moulin’s collapse has stunned investors.

Some broader lessons

Now, I certainly don’t know whether there was fraud, but I believe this story offers a broader message.  Many Chinese companies are tempted to emulate Western companies. They want to diversify beyond specialized manufacturing activities and develop brands of their own.  This is likely to be a mistake.  It may undermine the deep advantage that is driving the success of these Chinese companies.

Chinese companies have deeply specialized.  In many cases, they are focused on what I call infrastructure management businesses – high volume, routine processing activities, like contract manufacturing or operating logistics networks.  They have aggressively built capabilities in these businesses and possess a distinct advantage over many Western companies that were more diversified.

Through its acquisitions over the past decade, Moulin tried to simultaneously enter two other businesses – product innovation and commercialization (design and branding of eyewear) and customer relationship businesses (retailing).  These are very different kinds of businesses and inevitably represent a loss of focus (no pun intended).

Moulin would have been much better advised to focus on aggressive growth as an infrastructure management business.  These businesses have the potential to become very large and profitable, especially if Chinese companies continue to focus on accelerating capability building.  The success of many Chinese companies to date has come from much tighter focus.  Rather than emulating Western companies, these Chinese companies should recognize that their success hinges on challenging the traditional model of Western companies. They depart from that path at their peril.

Contrast with Lenovo and Haier

It is useful also to distinguish Moulin’s expansion from the recent acquisition by Lenovo of IBM’s personal computer business and Haier’s recent bid for Maytag.  These latter Chinese companies that have been primarily focused on serving the domestic Chinese market, unlike the highly specialized offshoring service providers that focus on global markets. These companies are already playing across the three business types mentioned above – in this respect, they look like more diversified Western companies.  They have one big difference with their Western counter-parts. Their close relationship with the Chinese government gives them access to virtually zero cost capital through the country’s state-owned banks, earning them the title of “aberrant buyers”, to use the term employed in a recent Financial Times article (subscription required).

These buyers are likely to run into a different sort of trouble as they go on the prowl for Western assets, especially Western brands.  Cheap capital creates the risk of overpaying for assets, especially for product brands, at a time when product brands are actually diminishing in economic value.  Many of these companies are fleeing shrinking margins in the domestic Chinese market, but the challenge of integrating and strengthening weak performers in global markets may distract them from effectively addressing the growing challenges of their domestic market.

Like their Western counterparts, these Chinese companies would be better advised to unbundle and specialize in one of three business types – infrastructure management businesses (contract manufacturing), product innovation and commercialization businesses or customer relationship businesses. Trying to straddle all three businesses will only lead to trouble - especially if they have access to cheap capital that diminishes their sense of urgency about the difficult choices ahead.