Edge Perspectives with John Hagel

What is Web 2.0?

Listening to the wide-ranging conversations regarding the Web 2.0 meme, I keep coming back to the old Buffalo Springfield lyric in “For What It’s Worth”: “There’s something happening here, what it is ain’t exactly clear.”

The skeptics like Tim Bray point out that this concept has come to mean anything that the speaker wants it to mean. The champions, most notably Tim O’Reilly, volley back that the rapid spread of the meme indicates that it “does capture the widespread sense that there’s something qualitatively different about today’s web.”

There’s no denying that the meme has taken hold, having been developed only about 18 months ago by Dale Dougherty of O’Reilly Media. Unfortunately, as the Wikipedia entry on Web 2.0 reports, Dale never really defined the term, using examples rather than a definition to communicate its meaning: "DoubleClick was Web 1.0; Google AdSense is Web 2.0. Ofoto is Web 1.0; Flickr is Web 2.0."

Many people since have attempted a definition, most notably Richard MacManus here and here, Martin at the Mediatope blog, Jay Cross and Dion Hinchcliffe.  Tim O’Reilly promises an article on “What is Web 2.0” while in the meantime offering a list of Web 2.0 “design patterns” and a Web 2.0 Meme Map (hat tip to Chris Anderson).  There are even dedicated Web 2.0 blogs here, here and here.

It is striking to me that virtually all of these definitions end up being lists of one type or another. They seem to be focusing on examples, components or dimensions of Web 2.0 without really getting to the essence of the concept.  Since I have enormous respect for the folks who have tried to capture the meaning of this term, I suspect there is probably good reason why they have stayed at the level of examples, components or dimensions and avoided the temptation to try to capture the essence.

Yet, in looking at these lists, I can’t help but feel that there is an essence behind the term that is waiting to be captured.  So, in the spirit of entering the conversation, let me suggest that Web 2.0 ultimately refers to “an emerging network-centric platform to support distributed, collaborative and cumulative creation by its users.” Let's look at each element of the definition separately:

Platform. Platform is an important concept because it suggests a foundation that is meant to be built upon rather than self-contained. 

Emerging. It is emerging because it supports extensions to itself, facilitating a bootstrapping process to create very complex functionality from very simple building blocks. Web 2.0 is far from a finished product, it is a rapidly evolving platform.

Network-centric. In contrast to other technology platforms like PCs or mainframes, it is not a standalone platform, but instead Web 2.0 is built upon an open network, making it pervasive, extending across the entire globe. As a network-centric platform, it is device-independent – it is meant to be accessed by devices of all kinds, ranging from PCs and mobile phones to RFID tags and bio-sensor devices.

Creation. The ultimate purpose and significance of the platform is to support creation, not just communication or participation in sharing of interests. This is what makes it truly distinctive relative to previous generations of networks. We’re also not just talking about creation of media or digital products and services – this platform is becoming central to the creation of a broad range of physical products as well.

Users. Rather than viewing creation as a highly specialized activity, this platform encourages users of all types to become involved in the creation process.  The well-established boundaries between producers and consumers and professionals and amateurs are rapidly eroding.

Distributed. Because it is pervasive, Web 2.0 facilitates distributed creation – it doesn’t matter where the individuals or communities reside, they can access the platform.

Collaboration. Because it is built upon a network, it also enhances the potential for collaboration.  We are not talking about isolated nodes of creation, but instead the ability for individuals and communities to connect together in the creative process in ways that were never possible before.

Cumulative. Perhaps the most important aspect of this platform is that it encourages cumulative creation.  This stems from the modularity that is a key design principle of Web 2.0 and it has profound implications for creative activity.  It means that wherever and whenever creative activity occurs, it can be appropriated and built upon by others, further strengthening the bootstrapping process. Since what is being created is meant to be shared, it becomes less and less useful to think of the output as products and much more important to view the output as services that in turn support the creation of other services.

Because of the focus on creation, I am very taken with Ross Mayfield’s formulation that “the web is increasingly less about places and other nouns, but verbs.”

In many respects, Web 2.0 represents a return to origins of Internet.  The original goal of the pioneers developing and deploying the Internet was to connect researchers and their computers together so that they could more effectively pursue their research in distributed locations.  The addition of the World Wide Web in the early 1990’s, despite the best intentions of its key developer, Tim Berners Lee, ended up representing a detour from that original vision.  Although there were certainly exceptions, Web 1.0 largely consisted of stand-alone web sites for specialized publishers and vendors seeking to more effectively reach audiences and consumers. It was a broadcast and distribution medium, rather than a creation medium.  Web 2.0 changes all that.

While the Web 2.0 definition I propose may lead some people to focus attention on the technologies required to build this emergent platform, I agree with Tim O’Reilly that it is more helpful to describe it as a mindset.  Technologies alone can only do so much – they are ultimately only enablers.  The real power is in the mindset that will be required to re-shape economic, social and legal frameworks to exploit the full potential of the technology.

I hope that these economic, social and legal issues get as much, if not more, attention in the forthcoming Web 2.0 conference organized by Tim and others.

Attention on China

Executives often ask me what are the biggest uncertainties shaping the evolution of the global economy.  My immediate answer is that political forces are by far the most uncertain.  Demographic, technological and economic forces are playing out in relatively predictable patterns. But the big wild card is in the political arena, ranging from intellectual property regulation to global geo-political tensions.

We are experiencing accelerating change on a global level. New economic forces are rising and challenging entrenched institutions within enterprises and across enterprises, industries and countries. History tells us that rapid economic change usually signals political instability, often leading to violence either in the form of revolution or war (or both). Entrenched interests resort to political means to protect their positions and emerging interests often resist these efforts with increasing intensity.

I have written about the fragility of the globalization process earlier in this blog.  One of the deepest fault lines emerging on the global stage is the economic rise of China and its potential challenge to more established Western powers, especially the United States. We have seen growing media attention to this fault line in recent months, attention that seems to have been catalyzed in particular by the recent failed bid by Chinas’s CNOOC to acquire Unocal Corp.  In fact, while this media attention is relatively recent, policy makers have been focused on this for a lot longer.

The Wall Street Journal published a front page article on September 8, 2005 entitled “Inside Pentagon, A Scholar Shapes Views of China”, chronicling the significant influence of Michael Pillsbury on Pentagon thinking.  The article reports:

Chinese writings, Mr. Pillsbury says, show a military establishment obsessed with the inevitable decline of the U.S. and China’s commensurate rise. On the economic front, he cautions that Americans shouldn’t be taken in by the profusion of fast-food restaurants in China or other signs that make China look like the West.  Beneath the growing trade ties with U.S., he says, runs a nationalistic fervor that could take American investors by surprise.

The Pentagon is planning to publish a new book this fall by Pillsbury entitled “The Future of China’s Ancient Strategy” which argues that “China’s history and culture posit the existence of a ‘hegemon’ – these days, the United States – that must be defeated over time.” Pillsbury’s influence suggests that policy makers in the Pentagon have been concerned about China’s rise for quite some time.

A flavor for the discussions within policy making circles can be garnered from a debate published in the January- February 2005 issue of Foreign Policy entitled “Clash of the Titans”.  Zbigniew Brzezinski and John J. Mearsheimer (a Professor of Political Science at the University of Chicago, a leading “realist” international affairs theorist and author of the extremely insightful book The Tragedy of Great Power Politics) debate the possibility of peaceful co-existence between the US and China. Mearsheimer is blunt:

China cannot rise peacefully, and if it continues its dramatic economic growth over the next few decades, the United States and China are likely to engage in an intense security competition with considerable potential for war.

On the other hand, the Financial Times published a lengthy commentary by the always insightful Martin Wolf in its September 15, 2005 issue entitled “Though Precedents Are Ominous, China’s Rise to Greatness Need Not Bring Conflict” (only available to subscribers).  Wolf begins on a cautionary note:

The precedents are also ominous. In the late 19th century, the rise of four new powers – the US, Germany, Russia and Japan – shattered global stability.  The results included two world wars, the communist revolutions in Russia (towards the end of the first world war) and in China (in the aftermath of the second world war) and, finally, the cold war.  Only with the fall of the Soviet Union did the US emerge as victor in a struggle that lasted a century.

Wolf goes on to outline three powerful reasons that he believes make conflict less likely as China rises on the global stage. Wolf concludes by observing that:

Relations between the two powers will never be warm.  But they could be workmanlike . . . . Both powers should see the benefits of co-operation rather than conflict. . . . Provided their leaders recognize the need to sustain peace and co-operation, they should be able to manage their relations.  We must hope they do so. The fate of the world depends heavily on it.

Tom Friedman is even more of an optimist on this front.  In his book The World Is Flat he outlines his “Dell Theory of Conflict Prevention” (complementing his earlier “Golden Arches Theory of Conflict Prevention”):

The Dell Theory stipulates: No two countries that are both part of a major global supply chain, like Dell’s will ever fight a war against each other as long as they are both part of the same global supply chain.  Because people embedded in major global supply chains don’t want to fight old-time wars anymore. They want to make just-in-time deliveries of goods and services – and enjoy the rising standards of living that come with that.

I wish I could be that definitive.  Market relationships without a doubt have a significant dampening effect on political conflict.  But the gales of creative destruction that markets bring with them can have the opposite effect. The rapid growth of a market economy will undoubtedly disrupt and threaten traditional social and political relationships in China.  Those who hold political power there are making an enormous bet that markets and authoritarian political rule can co-exist.  If the bet holds and they can sustain authoritarian political rule, they will certainly be tempted to leverage greater economic power into greater military power and ultimately challenge established powers for regional hegemony. If the bet begins to falter, they may well resort to nationalism and international conflict as a way to unify the domestic population and tighten their political control.

As the Chinese economy continues to grow and Chinese companies begin to pose a greater competitive challenge to Western companies, the latter may be tempted to lobby at a minimum for protectionist measures and perhaps even begin to push for more aggressive actions by Western governments to counter the Chinese “threat”.

We are already hearing growing concern about rising Chinese demand for raw materials in the global market. For example, see the article by David Zweig and Bi Jianhai on “China’s Global Hunt for Energy” (only abstract available without purchase) in the September/October 2005 issue of Foreign Affairs (this issue contains a number of other important articles on China’s increasingly important role in international affairs).

There is enormous uncertainty in how this will play out.  In such circumstances, business executives need to be careful to design robust strategies that have the potential to succeed in multiple scenarios.  The Financial Times featured an article on September 23, 2005 entitled “Fortune Favours the Forward-Thinking” (for the life of me, I can't find it online at the FT site - it appeared in a special section labeled "Mastering Risk") by Eric K. Clemons, Steve Barnett and Jaron Lanier presenting four scenarios regarding China’s evolution.  The scenarios are interesting, but I think they reveal a lot more about Western biases towards China than they do about the likely evolution of China.

For example, two highly plausible scenarios are not even captured in the article.  One scenario is that China evolves as a global center of management innovation, creating enormous economic value for its own enterprises and for consumers around the world, undermining its authoritarian government, posing significant competitive challenges for Western companies and catalyzing wrenching economic and political changes in Western countries, leading ultimately to a fundamental realignment of global political power.  Another scenario is that China’s vigorous economic growth strengthens the country’s nationalist traditions and that an authoritarian government becomes increasingly confrontational with the US on the global stage, mobilizing support from other prominent countries who are seeking to contain US power internationally while at the same time strengthening domestic support.

One thing is certain.  If lobbying by business and/or labor interests succeeds in restricting trade, the chances for highly disruptive political and military confrontations will rise dramatically.  In this regard, the insight of Frederic Bastiat, the brilliant 19th century French economist, is critical: “When goods cannot cross borders, armies will.” Unfortunately, the converse is not always true. Tom Friedman notwithstanding, trade can threaten entrenched economic interests and these interests may in turn resort to political means, including military action, to protect their income and assets.

The best way to reduce potential political disruptions is for Western companies to focus on increasing their competitiveness in global markets, not just on a stand-alone basis but also in collaboration with many of the entrepreneurial companies emerging in China and other parts of Asia. As JSB and I suggest in The Only Sustainable Edge, public policy needs to be re-conceived in terms of accelerating talent development. There will continue to be significant potential for political disruptions domestically in China but, by focusing on China’s economic growth in a constructive way, in terms of strengthening our own competitiveness, we will reduce the risk that these domestic political disruptions will spill over onto the international stage. 

Bootstrapping

I write a lot about business trends and concepts.  I also spend a lot of time reading through business literature (is that an oxymoron?). We are drowning in business concepts – there seems to be a new one introduced every five minutes. I admit that I am partially to blame for burdening over-stressed executives with even more concepts.

And yet . . . there’s one concept that I haven’t seen developed very systematically in serious business analysis – it’s the management technique of bootstrapping. It’s been on my mind recently because I have been doing a lot of work recently with JSB on new management techniques in China and India that represent a form of bootstrapping.  I am also familiar with the concept from work on the evolution of complex adaptive systems. And the concept seems to be resurfacing in technology circles as part of the continuing interest in Doug Engelbart’s work back in the 1960’s (see for example the book by Thierry Bardini on Bootstrapping: Douglas Engelbart, Coevolution, and the Origins of Personal Computing).

Wikipedia does a nice job of exploring the meanings of bootstrapping in a variety of disciplines and contexts.  At its core, though, in the words of Wikipedia, bootstrapping refers to “processes whereby a complex system emerges by starting simply and, bit by bit, developing more complex capabilities on top of the simpler ones.”  In other words, bootstrapping is about capability building.

It is a widespread phenomenon, visible in biological evolution (indeed, it may even have played a role in the emergence of life itself) and a wide range of other complex adaptive systems. In this context, most of the discussions treat bootstrapping as an emergent process – it is something that plays out on its own, governed by its own dynamics.

I am more interested in bootstrapping as a set of management techniques that can be applied to build capabilities more rapidly and more effectively.  This has been discussed a bit in the context of entrepreneurial startups – for example, Guy Kawasaki’s new book The Art of the Start devotes a chapter to the topic. A Google search turns up a lot of stuff in a self-help genre (e.g., “10 easy ways to bootstrap your business”).

I am curious why more serious work hasn’t been done on this topic. Maybe I just haven’t run across the right material.  If so, I would welcome pointers to serious and systematic treatments of the management techniques involved in bootstrapping.

It is a powerful concept with implications for business far beyond the startup world. It potentially helps businesses to cope with accelerating change and growing uncertainty, provides an interesting new way to think about leverage, learning and innovation, enhances scalability of business operations and may even provide a key to at least one form of increasing returns. It is also a critical concept for economic development.

Perhaps as businesses grow larger and gain access to more resources they lose interest in bootstrapping as a management technique.  That would be a big mistake.  Bootstrapping imposes both a discipline and a creativity that has enormous value regardless of the scale of operations.  If we need a reminder of that, just look at the bootstrapping that continues to shape the vast ecosystems encircling our globe.

Rethinking Risk

Edges are risky places.  Yet they are also rich in learning and innovation potential. To successfully explore and navigate along edges, executives must learn how to more effectively manage risk.

Steve Weber (a Professor at UC Berkeley and the author of a great book, The Success of Open Source) and Eamonn Kelly (the CEO of Global Business Network and the author of a forthcoming book - Powerful Times: Rising to the Challenge of our Uncertain World) wrote a nice piece for the Financial Times on “The Changing World of Risk”, calling for a shift in mindset and focus in managing risk.

Weber and Kelly suggest that “most risk management today is based on coping strategies that manage downside risk.”  These coping strategies involve the use of increasingly sophisticated risk models, elevating the risk function within the corporate hierarchy and acting conservatively.  They argue that these coping strategies are increasingly inadequate: “Loss aversion is not a long-term way to win.  In expanding markets the smart hopeful will always beat the fearful.”

Weber and Kelly go on to observe:

We believe that coping strategies, while remaining a necessary part of any corporate strategy, will in the future increasingly be seen, used and priced like utilities that everyone simply must have. But they will not be a source of significant and sustained advantage – that will come from seizing the upsides of risk. . . . . the ‘unknown’ or at least ‘the uncertain’ will become increasingly important as a source of competitive advantage.

As a balance to coping strategies, Weber and Kelly encourage executives to “re-embrace risk as a source of adaptive advantage”, observing that

When advantage lies most profoundly in the unknown and the uncertain, the ability to sense and learn faster, to correct mistakes and drop losing bets, to tolerate ambiguity and live with, even embrace, ambivalence, becomes absolutely essential

Unfortunately, their focus on adaptation obscures one of the best ways to manage risk.  Rather than just treating the environment as a given, executives need to realize that in times of rapid change and uncertainty, significant opportunities to shape the environment arise.  Opportunities often exist to shape the environment in ways that would just not be possible in more stable times. By being alert to these opportunities, executives can both increase the potential upside from their business initiatives while reducing the potential downside.

Edges often provide the most significant shaping opportunities.  This is one more reason to seek out, rather than avoiding, the edges on the business landscape.

EBay and Skype

I use and love both eBay and Skype. I admire their management. They are extraordinary businesses and epitomize the disruptive potential of the Internet and the creative potential of virtual communities. And yet I am struggling to make sense of eBay’s acquisition of Skype. The deal makes more sense for Skype and its shareholders, but I have a hard time buying into the deal from eBay’s perspective

My best read on the acquisition is that it is one more example of “The Curse of the High Multiple.”  Many of the CEOs that I serve as a consultant struggle with low P/E ratios and look longingly at the high flying companies that sport high multiples.  I certainly sympathize with their frustration and work with them to boost the performance of their companies. At the same time, I warn them that high multiples have their own challenges.

What do you do for an encore?  Once your company ascends into the stratosphere and convinces shareholders that it has extraordinary potential for profitable growth, what does it do then?  Well, you have to deliver.  The higher the multiple goes, the more challenging it is to meet those expectations.  And that’s just to hold your stock price at current levels.  If you actually want to raise your stock price further (and most CEOs with large stock and options holdings certainly want nothing less), then you need to somehow raise expectations even further – and then deliver against this even higher bar.

The pressure can become overwhelming. It pushes companies to look for really big plays that can feed the expectations engine (and potentially divert attention from the slowing growth in existing businesses).  Since organic growth rarely delivers big enough impact (especially once a company moves beyond a certain threshold of size), management starts to rev up the acquisition engine.  Unless the industry is extremely fragmented and there are lots of consolidation plays, the pressure to find large new growth vehicles pushes management far afield from their core business. With the stock price at such a high level, capital is cheap and the temptation to acquire new businesses becomes even stronger. At the extreme, it can push companies like Enron and WorldCom over the edge, where executives end up manipulating numbers in fraudulent ways to keep the treadmill going faster and faster.

Even in businesses like eBay and Skype with strong increasing returns characteristics, increasing expectations begin to outpace the increasing returns. From my experience, CEOs of high multiple businesses rarely sleep any better than CEOs of low performing businesses – unless they are coming up to their retirement date and are about to cash out on their stock holdings in the company.

If I look at the materials released by eBay (warning: 3.5Mb PDF download) at the time of the announcement, I can’t help but feel that we are seeing the curse of the high multiple in action.  It’s a good presentation with lots of helpful material, but when I step back from it, I still get the feeling that this is ultimately about entering a new, high growth business to compensate for slower growth in the core business. As a result, I share some of the early skepticism of folks like Rob Hof at Business Week and Om Malik at Business 2.0.

The eBay presentation talks eloquently and at length about the role of Skype in accelerating commerce on eBay and opening up new lines of business, new monetization models and new geographies.  I agree that adding voice to transactions makes for richer communication and reduces friction, especially in certain types of transactions and certain national cultures.  But then again, adding shipping services helps to reduce friction as well – does that mean eBay should go out and buy FedEx? Yes, markets are conversations as Ross Mayfield reminds us, but does that mean you need to buy a phone company to participate or even orchestrate those conversations?

Pay per call lead generation models are an interesting step beyond pay per click models, at least for certain kinds of businesses.  There clearly are interesting opportunities to cross market to each other’s user base (one interesting statistic from the presentation – there is only a 1% overlap in their US user base – although this can be read both ways, as either an opportunity or a challenge).

But here are the bottom line questions:

• Is this acquisition going to improve the performance of the individual businesses in ways that either would not be possible or at least would be much more expensive without an acquisition?
• Are there any other business relationships short of acquisition that could have produced these improvements in performance?
• Will the improvement in performance be sufficient to earn an acceptable return on the very high price paid for Skype?
• Why couldn’t eBay simply have licensed Skype’s (or any other VoIP provider’s) service and embedded it in its platform to deliver voice-enriched transactions or pay per call lead generation programs?
• Why couldn’t they have negotiated cross-marketing programs to reach each other’s user base?

Both companies face intense competitive challenges in the years ahead.  EBay is clearly concerned about Google.  Skype should be concerned about a growing array of challengers in the VoIP arena.  Acquisitions have a way of distracting management attention from challenges in the core business. They also reduce the sense of urgency – if my core business is under attack, I will be much more aggressive in my response if I have no other business to fall back on.

In fact, both companies face very similar competitive challenges:

• They need to reposition their businesses as more open platforms encouraging applications and services to be built on top
• They need to deliver more value to their users based on profiles of their activities
• They need to develop more of the virtual community opportunities latent within their user base.

Umair Haque presents some interesting charts highlighting the challenge of eBay’s economics relative to Google’s economics, but I am not sure he is compelling about why the acquisition is a necessary step in addressing this challenge.

In the end, I worry that high multiples produce dysfunctional behavior, as we saw in the Internet bubble at the end of the 1990s.  Two big warning signs of dysfunctional behavior have emerged in the discussion surrounding this acquisition.

First, David Kirkpatrick proclaims that eBay may be creating the “first genuine conglomerate of . . . the Contribution Economy”, arguing that the companies are actually very similar.  We have spent most of the past thirty years unwinding the conglomerates that destroyed shareholder value, but now we are going to inaugurate a new age of conglomerates? On what basis?

Second, one commenter to a posting on a blog asserted that “it’s all about eyeballs and traffic” without any apparent hint of irony or sarcasm. This is what got us into trouble during the last bubble – have we learned nothing? 

Look, I am the first one to concede that my views are jaded by several decades of working with senior executives who embarked on large acquisitions in the hope of creating value, only to discover that they destroyed value.  My comments probably suggest a profound failure of imagination on my part, but I just don’t get it.

Katrina and Institutional Resiliency

In the aftermath of Katrina, the only thing more discouraging than the sad images of people struggling to cope with the devastating impact of a natural disaster is the finger-pointing that overwhelms our media.  The search for the guilty is well under way.  Our national instinct appears to be that individuals are to blame and they need to be exposed and held accountable.  No doubt at this level there is a lot of blame to go around – I have a feeling that few of the decision-makers in the various government agencies from local parishes in New Orleans up to the federal government will escape unscathed.

But I also have a feeling that this search for guilty individuals is missing the real point. It assumes that if we can just find the guilty parties and remove them, everything will be OK.  Perhaps this natural disaster will serve as a wake-up call to reassess the systems we put into place to deal with such unforeseen events and, even more basically, to challenge the assumptions that shape these systems.

John Robb points to an NPR radio interview with Yossi Sheffi, a professor of engineering systems at MIT, who contrasts the proactive actions of a number of companies in dealing with this natural disaster with the bureaucratic response of the government.  Sheffi, who is about to publish a book on The Resilient Enterprise, highlights a number of elements required to respond to unforeseen disruptions:

• push decision-making to the periphery
• instill a culture of communication throughout the organization
• create a sense of urgency in responding to events before they become even more damaging.

Sheffi also emphasizes the importance of standardization, modular design and collaborative relationships with other institutions as important tools to build resiliency. These themes help to explain why global process networks are becoming more prevalent in the global economy.

Now, to be clear, few companies have successfully implemented these elements. But it seems that our government, if anything, has moved in the opposite direction, adding more layers of decision-making in new bureaucracies like the Department of Homeland Security, rather than exploring ways to push effective decision-making to the periphery. As part of this institutional reassessment, the government might also want to figure out more effective ways to harness and amplify the many examples of spontaneous order that emerged both within and outside New Orleans in the aftermath of Katrina, rather than seeking to suppress or limit these efforts. Katrina provides an expensive lesson that our public institutions are still ill-equipped to handle unforeseen disruptions.

Gladwell's Cellular Church

What do the Communist Party, Alcoholics Anonymous, evangelical Christians and al-Qaeda all have in common?  They adopted and refined the technique of organizing in small cells to achieve change.  This is the fascinating theme of Malcolm Gladwell’s new article, “The Cellular Church” (alas, not available online), in the September 12, 2005 issue of The New Yorker (actually, I added al-Qaeda to the list based on a posting that I will mention later).

Gladwell uses the story of Rick Warren’s Saddleback Church in Orange County, California to make this theme come alive.  For those of you not familiar with Rick Warren, he is the author of The Purpose-Driven Life (23 million copies sold so far and it is just getting started) and founder of the Saddleback Church, an evangelical Christian church with 20,000 members in its congregation and the hub of a global network of 1,100 other evangelical Christian churches.

Gladwell focuses on a core challenge confronting any voluntary organization – how to make it scalable.  On the one hand, many voluntary organizations want to grow so they need to have low barriers to entry. But if they grow too fast or too big, they begin to lose the sense of community and identity that is necessary to retain members. He notes that “historically, churches have sacrificed size for community” but that this changed back in the 1970s and 1980s when the evangelical movement began to build megachurches. It turns out the cellular model has been key to the success of megachurches – cells helped them to solve the scalability challenge.

What are these cells?  Gladwell observes that they are “exclusive, tightly knit groups of six or seven who meet in one another’s homes during the week to worship and pray.” It turns out, at least 40 million Americans now participate in a religious cell of this type. This is also the organizational model that led to the early success of the Communist Party and the continuing success of Alcoholics Anonymous and its many spin-offs.

As Gladwell reports,

Warren’s great talent is organizational. He’s not a theological innovator. . . . What he wanted to learn was how to construct an effective religious institution. His interest was sociological . . . The contemporary thinker Warren cites most often in conversation is the management guru Peter Drucker, who has been a close friend of his for years.

In his article, Gladwell focuses on the role of cells in building tight social bonds among people who share common interests – he mentions one church cell of mountain bikers that “go biking together and . . .are one another’s best friends.” But there is another even more fundamental theme in the article that makes this story more relevant to business executives.

Gladwell draws a distinction between self-help books that are inward-focused, “focusing the reader on his own experience,” and Warren’s book which begins with “It’s not about you” and instead draws the reader into a program of personal and social change that requires the participation of others. Warren’s book serves as a powerful coordinating mechanism for a highly distributed network.

Gladwell quotes Robert Wuthnow, a Professor of Sociology at Princeton who has spent many years studying the evangelical movement (Wuthnow is also the author of the interesting book Loose Connections: Joining Together in America’s Fragmented Communities):

Small groups cultivate spirituality, but it is a particular kind of spirituality. . . . They provide ways of putting faith in practice.  For the most part, their focus is on practical applications, not on abstract knowledge, or even on ideas for the sake of ideas themselves.

These groups are not just worshipping and praying together, they are contributing time and money to change the world. They provide a forum for taking initiative, building something very new and making a difference.  Depending on your religious and social views, you may not necessarily agree with what they are building, but they are driven by the desire to create something quite different, rather than passively listening to sermons and reading scripture.

I look for patterns. I see the spread of the evangelical movement with its cellular structure as just one illustration of a much more profound shift in society.  I blogged earlier about distributed creation and production in such diverse domains as music (remix), extreme sports and even illegal drugs, not to mention open source software and electronics devices.  We are seeing this same pattern play out in the evangelical movement.  We are moving from consuming religion in central locations to producing (or re-producing) it in our living rooms.

In the process, considerable diversity is emerging in these living rooms (far more than secular liberals are willing to acknowledge). To quote Gladwell again:

Scratch the surface, and the appearance of homogeneity and ideological consistency disappears . . . . The members of Warren’s network don’t all dress the same, and they march to the tune only of their own small group, and they agree, fundamentally, only on who the enemy is. It’s not an army.  It’s an insurgency.

Which brings me to al-Qaeda. John Robb posted “The Bazaar’s Open Source Platform” almost a year ago on his blog discussing the implications of the disruption of al-Qaeda’s hub of operations in Afghanistan and the evolution of an even more distributed virtual network behind the guerilla war in Iraq.  He makes the case that this virtual network is pursuing many of the same principles outlined by Eric Raymond in The Cathedral and the Bazaar, one of the inspirations behind the open source movement.

Now that’s a pattern – from the Sunni strongholds of Iraq and the Afghanistan-Pakistan border (not to mention working class neighborhoods in British and German cities) to the living rooms of affluent Orange Country, we’re seeing loosely coupled networks surface as spearheads of social change. I certainly have no intention of equating Islamist guerillas with evangelical Christians.  My point in fact is that remarkably diverse movements inspired by deep religious conviction are embracing similar models of organization.

The patterns on this edge map to patterns on other edges that are more directly relevant to business executives, including the emergence of global process networks reshaping the creation and production of goods as diverse as khaki pants and digital still cameras. People are also becoming more involved in the production and creation of the items that are most meaningful to them.  At the same time, these production and creation activities are becoming far more distributed, even on a global scale.  New ways of organizing are creating the potential for significant scalability, flexibility and innovation as well as much deeper relationships with participants. Companies need to figure out what these developments mean for them, both in terms of how they organize their activities and how they build relationships with their constituencies.

Onshore Manufacturing

Executives are scrambling to figure out how to respond to growing competition in manufacturing from China and other emerging economies. They should check out Louis Uchitelle’s article “If You Can Make It Here . . .” in the September 4, 2005 issue of the New York Times. The article profiles three U.S. manufacturing companies that have maintained manufacturing operations in the U.S., rather than following the broader trend towards offshoring.  One of these companies is well-known – Harley-Davidson.  The two others – Haas Automation and Hiwasse Manufacturing – are much less well-known.

The individual stories are interesting but, as always, it is the patterns of behavior that are most informative. What do we learn?  First, the CEO’s of these companies all have deep experience in manufacturing operations.

Second, Uchitelle observes:

Innovation is often compulsively pursued at the manufacturing companies that stay in America.  The engineers and designers at Harley-Davidson and Haas are constantly altering the companies’ products in ways that are not easily imitated by lower-priced foreign competitors.

Third, these companies “eschew layoffs, but in exchange for job security they require their workers to help squeeze out labor costs through automation and other efficiencies.” The companies are continually looking for opportunities to automate their operations, but at the same time they are committed to redeploying their workers in other parts of the business. In this way, they enlist the active participation of workers in the search for process improvements to generate greater operating efficiency. The high levels of productivity enable these companies to compete against low wage rate suppliers from China. For example, Haas Automation estimates that its productivity rate is 50 times greater than equivalent Chinese manufacturers, more than making up for a 10 times higher wage rate.

Fourth, these companies focus on new sources of growth.  This is a necessary corollary if the companies are to honor their commitment not to lay off workers while at the same time pursuing greater operating efficiency.  Harley Davidson and Haas are both targeting China as a promising export market for their products.

Fifth, these companies have remained relatively specialized.  In fact, Harley-Davidson almost went under about 25 years ago after being owned for more than ten years by a diversified company, AMF. A leveraged buy-out by Harley-Davidson’s management in 1981 marked the beginning of a successful turnaround. In pursuing growth, these companies have concentrated on leveraging their core product expertise rather than diversifying into unrelated businesses. (I would argue they will need to become even more specialized, but that is the subject of another blog.)

Sixth, these companies work closely with their suppliers to enhance quality and support their rapid incremental innovation. They don’t buy from suppliers just on price, but instead focus on building deeper relationships with suppliers that can help them differentiate their products.

Seventh, private equity has played a key role in the success of each of these companies.  Both Haas Automation and Hiwasse Manufacturing are privately owned and the leveraged buy-out was instrumental in the successful turnaround of Harley-Davidson.

Haas Automation also seems to be focusing on modularity and parts commonality to become more competitive.  Although it has a common design for its machine tools, this basic design can be configured “into 100 models and variants to suit specific customers’ needs.”

OK – so what does this all mean?  Bottom line, it means that U.S. companies can still compete in manufacturing with offshore locations. But this means they must adopt the management practices and strategies that companies in offshore locations are pursuing.  Many U.S. executives continue to be misled into believing that the success of offshore locations hinges on low wage rates and that there is no way to compete, especially in the manufacturing arena.  Sure, low wage rates are an important factor, but far more important are the aggressive management practices and strategies being pursued by companies in offshore locations.

What are these management practices and strategies? Well, they include deep senior management experience in manufacturing operations, rapid incremental innovation, aggressive talent development, focus on growth that is consistent with specialized capability, close relationships with suppliers to accelerate innovation, modularity in operations and access to capital that takes a long-term view of business opportunities. These are the focus of the book that JSB and I just wrote – The Only Sustainable Edge.

The New York Times story suggests that these management practices and strategies work just as well here in the U.S. as they do on the edge in emerging economies like China and India.  The problem is that a lot of Western companies have lost sight of these basic management practices.  They have become excessively focused on short-term financial performance, especially short-term cost reduction.

This is the challenge we face in competing with geographic edge companies.  Financial metrics are lagging indicators – they tell us how well we did. We need to restore our focus on the operating metrics of the business and the talent required to drive these operating metrics to higher levels of performance. This is the leading indicator that will tell us whether or not we are really on track in addressing the challenges created by competition on the edge.

By the way, the New York Times article also has an interesting chart showing that U.S. share of global manufacturing value added has declined by only about one percentage point over the period 1982-2004, while the big losers have been Germany, France and Japan.  Over the same time period, China gained global share by 7.5 percentage points.  It is a stunning growth in share. It reinforces my advice to executives to focus on trajectories and relative pace of growth, rather than static snapshots of performance.

DIY Drugs

The edge takes many forms.  One form of edge arises as we move from legal to illegal activity.  Another form of edge occurs as we strive to push our bodies to new experiences and performance levels as I have discussed here and here.  Like all other edges, these become areas of intense innovation and the patterns emerging on all edges play themselves out in interesting ways.

One of the common patterns I have discussed here and here involves the movement toward distributed creation and production – “do it yourself” approaches reign supreme as participants push the boundaries of current capabilities and seek to tailor products for their own needs.

Peter Schwartz, the founder of Global Business Networks, has an interesting piece in the current issue of Foreign Policy on The War on Drugs suggesting that this pattern may also be playing out in the production and use of illicit drugs:

The model drug of the future is already here in the form of crystal methamphetamine, a drug that is sweeping the United States and making inroads abroad.  It’s cheap and easy to make – little more than Sudafed doctored up with plant fertilizer.  One hundred percent of the profit goes to the manufacturer; no intermediary or army of couriers required. Made of locally acquired materials in the garage or the basement, the drug’s production is nearly impossible to stop.  Only the stupid and the incompetent get caught.

Thirty five years from now, the illicit professionals who remain in the business will be the custom drug designers catering to the wealthy.  Their concoctions will be fine-tuned to one’s own body and neural chemistry. . . .

The boundary between legal performance enhancement (Viagra) and the illegal drugs of pleasure and creativity will blur.  The political and social pressure against drug use will remain, but it will increasingly resemble the campaigns against performance-enhancing drugs for athletes.  Widespread use will spark debates about fairness and authenticity: Is a drug-using musician better than one who composes and performs naturally?  Is it fair for only the wealthy to have the richest sexual and culinary experiences?

Just as the legal system is struggling with new realities of intellectual property in a digital age, it will struggle to control innovation in the chemistry of pleasure.

As in other domains, this move towards distributed creation and production is being driven by more affordable and accessible tools of production. At a more fundamental level, it is being driven by a continuing desire to shape one’s own experiences and to push established boundaries. In the case of drugs, the drug of choice may be different, but the backwoods meth producer is a direct descendant of the backwoods hootch producer during the Prohibition. We may not like what they are producing, but history has shown they will be quite creative in finding ways to produce it themselves. The MIT fab lab participant, the remix DJ at the local hip nightclub, the extreme sports enthusiast and the backwoods meth producer all share a common passion – producing goods and experiences on their own terms.

In the process, they will spark a fundamental restructuring of industries and enterprises.  Executives had better start figuring out how they can provide their customers with better tools to make their own products and services. This won’t happen everywhere, and it certainly won’t happen all at the same time, but it will be a significant edge where a lot of economic value will be created by those who understand what is happening.

Thanks to Alex Soojung-Kim Pang on his excellent blog IFTF's Future Now for the pointer to Peter’s article.

Product Innovation and the Red Queen Effect

I'm back from vacation and staring at an inbox that brings to mind the Red Queen from Through the Looking Glass - a metaphor that comes up with greater and greater frequency in my conversations with executives. So, I was especially vulnerable to a videoblog posting from Dave Bayless, at Evergreen Innovation Partners, on "Innovation, Clockspeed & the Red Queen Effect."

Basically, Dave constructed a highly simplified model to demonstrate what happens when the average product life in a business declines by a relatively modest 10% per year. In fact, this is roughly the rate of decline occurring in recent years across a broad range of industries. It may seem like a relatively modest decline each year, but the compounding effect means that product lives shrink in half every seven years. Dave's model quantifies the Red Queen effect in a particularly compelling way.

There are some other effects that Dave doesn't address that make life even more challenging.  For one, a steady decline in product life cycles also significantly increases the level of uncertainty in a business.  In Dave's simplified model, each new product produces a predictable revenue stream. In real life, each time a new product is introduced, the company takes a big gamble - will the product succeed or will it fail?  In increasingly competitive global markets, product success rates are likely to decline. Even if the products succeed, the margins generated by the new products are likely to be squeezed.  His model focuses on maintaining steady revenue levels.  If the goal is to maintain steady operating margins, the hurdle becomes even more challenging.

One quibble I would make is with Dave's definition of innovation as "the adoption of products by customers".  This is a product-centric view of innovation and ignores the impact of process innovation (which also includes innovations in work practices).  In fact, process innovations are ultimately much more powerful in terms of generating business value because, if done right, they can generate a compounding effect of their own - they keep on giving, in contrast to most product innovations where the tyrrany of product life cycles limits the potential value creation.  Rapid incremental process innovation combined with aggressive leveraging of third party resources may in fact hold the key to diminishing, if not overcoming, the Red Queen effect.

By the way, Dave's reference to "clockspeeds", prompts me to recommend the excellent book that really developed this concept in a business context - Charles Fine's Clockspeed: Winning Industry Control in the Age of Temporary Advantage.