Edge Perspectives with John Hagel

Drucker's Gone

I am laid up with the flu so I am still having trouble processing the reality that Drucker’s gone.  Drucker was an iconoclast who lived on the edge throughout his life.   Prolific until the very end of a long life (he was 95 when he passed away last Friday), he always sought to move beyond established boundaries, believing that they limit the potential for insight and understanding.

It is hard (and unfair) to distil work of enormous insight that spans more than thirty books and thousands of articles but, for me, the key themes that pervaded all of Drucker’s work were people, processes, direction and simplicity.

People. Drucker insisted throughout his writing that enduring economic value creation depends ultimately on people - as he liked to say, "people are a resource, not a cost".  Finding ways to help people discover and develop their talents and then working to amplify the efforts of people – that is the real rationale for any firm and, indeed, any institution.  For Drucker, economizing on transaction costs was far too narrow and sterile a way to characterize the role of the firm. In many different forms, he kept reiterating that the role of all institutions is to make human strengths effective and human weaknesses irrelevant.

Processes. Drucker also took a process view of the world.  By process, I don’t mean the static boxes and lines that we tend to associate with business process maps.  Again, this was much too narrow for Drucker.  Drucker instead focused on the basic insight that our world continues to evolve through dynamic processes that continually re-shape the landscape we play on.

Static views of the world were anathema to Drucker.  He had little patience for most of the economic profession with its obsession with equilibria and closed systems.  He saw that real understanding came from focusing on dynamic processes shaped by new knowledge, technological progress, entrepreneurs, innovation and growth – exactly those areas that conventional economists have the most difficult time explaining with their “rigorous” mathematical models.

Perhaps this was why he had such affection for two fellow Austrian émigrés - Joseph Schumpeter who shifted attention to the gales of creative destruction that re-shape our economic landscape and Friedrich Hayek who championed a process view of economic activity and institutional development (although, ever the individualist, Drucker resisted efforts to group him with the Austrian school of economics).

Direction. Drucker also understood that the only way to harness these processes was to have a clear sense of direction – not only at the institutional level, but at the level of each individual.  He was not a big fan of adaptation as a business strategy.  Of course, he believed that firms had to be flexible and responsive to their environments but, in his view, that mattered little if the people in the enterprise did not have a shared sense of long-term direction and persistence in pursuing that direction.

Simplicity. Drucker was also a strong proponent of simplicity.  He believed that most of the problems that businesses (and indeed all institutions) run into stem from making things more complicated than they need to be. People and dynamic processes are complicated enough.  Simplicity was one of the reasons he emphasized the importance of a sense of direction.  Direction helps people to make choices and to prioritize their actions - it helps them to decide what not to do, as well as what to do. He applied this principle in his own writing – it was a model of simplicity, using rich metaphors wherever possible to communicate simple but powerful points.  As he observed, “my best ideas have only one moving part.”

Now, at one level, these are pretty basic and obvious themes.  But that was part of Drucker’s genius.  He took basic and obvious themes and relentlessly applied them to a broad range of business issues.  His great insights on concepts like “management by objectives” and “knowledge workers” all stemmed ultimately from his focus on these four basic pillars. By staying focused on the basic and obvious, Drucker managed not only to be relevant, but at the center of innovative management thinking throughout a career that spanned almost sixty years from the publication of his path-breaking Concept of the Corporation in 1946.  One small indicator of Drucker’s continuing relevance is that his name remained in the top 10 search items on Technorati for several days following his death - even the new generation of "technorati" seem to have an abiding interest in his perspectives.

The following excerpt on outsourcing from an interview almost ten years ago provides one example of how Drucker ties his core themes together while addressing new themes:

One of the things to understand about outsourcing is that the woman who works for the hospital, cleaning floors, is very bored by the job. But if she works for ServiceMaster, an outsourcing company, she's very excited by it because people listen to her, people challenge her. She is expected to improve the job and gets paid for doing it -- whereas before no one would listen. These days, her supervisor had a broom in her hands only five years ago. So the outsourcing people have a great strength in making what we might call a dead-end job much more challenging, because they take it seriously.

Although a participant in the academic world for most of his professional career, Drucker was always suspicious of his academic colleagues with their narrow focus on disciplinary boundaries.  His audience was business managers and he wrote for them, not for his academic colleagues. Tom Peters in the FT obituary on Drucker commented on the curious absence of Drucker’s writings from any of his graduate college courses:  “Drucker effectively by-passed the intellectual establishment. So it’s not surprising that they hated his guts.”

There’s a lot being written about Drucker on his death, but for my money, two of the best obituaries are the ones by Steve Forbes in the Wall Street Journal today and by Simon London in the Financial Times a few days ago (my colleague Christian Sarkar somehow has a more detailed version of the column than the one that is available on the FT web site). The Wikipedia entry on Peter Drucker has a pretty good bibliography and there’s also an interesting audio interview with Drucker done just a few months ago that is available from WBUR (hat tip to Christian Sarkar). There's also a very good intellectual biography of Drucker - Shaping the Managerial Mind by John E. Flaherty.

Drucker’s gone and we will all be poorer for it. If there is one lesson we should take from his writing and his life, it is that living on the edge has its rewards in terms of insight and understanding.

Innovation and R&D

Michael Schrage wrote a great op ed piece for the Financial Times on November 8. Under the headline of “For innovation success, do not follow where the money goes”, Michael rips in to those who equate R&D spending with innovation in response to a recent UK Department of Trade and Industry report focusing on global R&D spending.

I urge you to read the whole piece; it is unrelenting in its attack.  Let me just quote some of the juicier pieces:

Any policymaker, chief executive or innovation champion who relies on R&D intensity and R&D budgets as a meaningful or usable metric to assess global competitiveness virtually guarantees shoddy analysis and distorted decisions.  Few things reveal less about a company’s ability to innovate cost-effectively than its R&D budget.  Just ask General Motors.  No company in the world has spent more on R&D over the past 25 years. Yet, somehow, GM’s market share has declined.

Michael makes clear that R&D spending is only an input:

The simple fact is that R&D spending – whether in euros, dollars or as a percentage of sales – is an input, not a measure of efficiency, effectiveness or productivity.  Ingenuity, invention and innovation are rarely functions of budgetary investment.

He also makes an important point about some of the most innovative companies in the world today:

While Wal-Mart, Texco and Dell have miniscule R&D budgets, their quality, procurement and growth requirements have probably done more to drive productive innovation investment than any five European Union funding initiatives.

Finally, Michael draws some important implications for public policy:

Growing market competition, not growing R&D spending, is what drives innovation.  A successful innovation policy is a competition policy where companies see innovation as a cost-effective investment to differentiate themselves profitably.

Right on!  In my consulting career, I have participated in many analyses seeking to draw a correlation between R&D spending and business performance in specific industries.  The conclusion: there is absolutely no correlation – what you get is a scatter diagram.

I only wish that Michael had gone a bit further and spent more time attacking a related fallacy: equating patents with innovation.  At least this approach focuses on outputs, rather than inputs, but it focuses too narrowly on only one kind of output.  In effect, it equates innovation with invention.  This immediately narrows the focus to product innovation and largely ignores process and business model innovation. The longer I work on innovation, the more convinced I have become that process innovation is far more powerful than product innovation – it has a multiplier effect that product innovation can rarely match.

Bottom line, the only effective measure of innovation activity is the rate of productivity improvement in an enterprise – the growth in value added generated per employee.  There are lots of ways to “game” productivity in the short-term – for example, by raising prices or by cutting staff and forcing the remaining people to work harder. But these can’t be sustained – over time, they generate diminishing returns or, in the extreme case, lead to productivity erosion. That’s why static productivity measures can be misleading. What really counts is the ability to sustain and amplify productivity improvements through innovative products, process improvements or new business models.

From a competitive viewpoint, what matters is the relative rate of productivity improvement. R&D spending and patent filings will matter little if they do not translate into faster productivity improvement – in fact, they can be a significant distraction.  Those who understand this will have a significant edge as competition intensifies in the global economy.

Bra Blowback

Regulation usually has unintended consequences.  This is a difficult lesson for those who turn to the government for protection from the pressures of the market.  Markets are extraordinarily robust formations. They usually find a way around regulation and often produce outcomes far less attractive from the viewpoint of those seeking regulation in the first place.

The Wall Street Journal ran a great story on November 9 driving this lesson home one more time.  Under the lead of “Chinese Textile Companies Aim to Build a Better Bra” , Mei Fong chronicles the response of Chinese bra makers to the trade agreements between China and both the U.S. and Europe to curb the growth of textile imports.  These trade agreements give preferential treatment to higher priced items – this makes sense if the goal is to protect Western manufacturers from lower priced apparel items.

So what has been the response of Chinese bra manufacturers?  The article focuses in particular on Top Form, Inc., a company that produces 61 million bras a year for such leading brands as Victoria’s Secret, Playtex and Maidenform. Top Form has set up a laboratory near Shenzhen to aggressively pursue research into bra technology.

Top Form has already made a lot of progress in rapidly improving its design and production processes.  Mei reports that

Top Form has evolved from primarily making cut-and-sew brassieres – simple designs easily put together by China’s nimble and low-cost seamstresses.  Now, its bra production is a process more akin to car assembly: fusing together the many components needed to make a bra, eliminating much of the need for hand-sewing, or using high temperatures to mold sheets or synthetic fibers into wafer-thin sheets. . . Productivity has improved since it takes about five minutes to make a seamless bra, compared with about 15 minutes for an average cut-and-sew bra . . .

These productivity improvements help companies like Top Form to generate significant growth in profits.  These profits in turn are being reinvested into research labs like the one established by Top Form to develop entirely new bra designs.  Top Form is morphing from a contract manufacturer into a source of innovative new designs. 

Not only are individual companies investing in bra-research centers, but the article reports that “bra towns” have emerged where the businesses all focus on various aspects of bra manufacture.  Hong Kong’s Polytechnic University has even established a degree course in bra studies.

What is the result of all this activity?  The article quotes one expert as follows:

David Morris, a university professor who teaches brassiere studies at United Kingdom’s De Montfort University, says it is clear that China’s bra makers aren’t just relying on cost advantages anymore.  Some of these Chinese bra makers are “the top end of seamless constructions – we couldn’t duplicate it.”

Now, this rapid incremental improvement probably would have been pursued in any event.  It is a pattern that JSB and I discuss at length in a variety of industries in China and India in The Only Sustainable Edge. Nevertheless, the article makes clear that the trade regulations have played a major role in accelerating these investments in capability building.  US apparel manufacturers who were worried about competition at the low end of the apparel business from Chinese manufacturers now find that competition is intensifying at the higher end of the apparel business. This is just one more form of innovation blowback that Western companies are experiencing as they seek to cope with the challenges and opportunities created by emerging economies like China and India.

Of course, this kind of regulatory dynamic plays out in many industries.  But the temptation to turn to regulation is especially pronounced on the edge – whether it is the edge of industries, regional economies, cultures or technologies.  It is on the edge that established practices confront new threats (as well as new opportunities).  Rather than confronting the threats head-on and embracing the new opportunities, there is a strong temptation to hide behind the walls of regulation.  These walls create complacency for those inside and increase urgency for those outside.  The results are rarely what those inside the walls intended.

Symposium on Social Architecture

I hate red-eye airline flights, but I am going to be taking one so that I can participate in Corante’s Symposium on Social Architecture in Boston next Tuesday.  The topic and the people coming together are just too good to pass up. Billed as an “un-conference”, the gathering is going to focus on: the overarching themes and underlying technologies that are driving the massive uptake of people-centered, user-driven, individual-connecting applications, communities, content, and services.

The organizers (or is it “un-organizers”?) are promising a series of highly interactive sessions with strong audience participation. The sessions will be covering the following topics:

• Is Business Ready for Social Software?
• Engines of Meaning: How Will We Scale Our Understanding?
• Is Social Software A Mirror Or a Lens?
• How Will The Social Web Change Media?
• A Case Study in Web-Based Civics: Katrina and Recovery 2.0.

Stowe Boyd and David Weinberger are key ringleaders of this event, but some of the featured participants include Seth Goldstein, Kaliya Hamlin, Mary Hodder, J.D. Lasica, Liz Lawley, Kevin Marks, Chris Nolan, Andrew Rasiej and Thomas Vander Wal.

I am going because I am convinced that social software will play a central role in driving the next wave of value creation for the enterprise.  For the past couple of decades, the primary focus of IT investment in the enterprise has been to standardize and automate business processes.  Over the next couple of decades, the real opportunity will be to amplify practices by supporting collaboration on demand – helping people both within and across enterprises to connect more flexibly and richly with each other around real business needs.

I am looking forward to being at the symposium, but I am going to need some strong coffee when I arrive – did I tell you I hate red-eyes?

Return on Attention and Infomediaries

Attention is getting a lot of attention. Most recently, Robert Scoble from Microsoft blogged about an epiphany he had earlier this week during a visit to Silicon Valley.  He is beginning to see the importance of attention and how it will shape value creation on the Internet.

Attention is hugely important.  It is the asset that will determine who creates value and who destroys value in the years ahead. Among other things, it will transform the nature and power of brands, as I discussed recently here, here and here. It is also reshaping the media business as I hinted in a posting on Martha Stewart a few years ago.

But I worry that we are confusing attention with attention profiles – the historical record of where we have allocated our attention in the past. In the process, we may lose sight of what is really valuable and how to harness that value.

Attention refers to the choice we each make regarding where we will focus at any point in time. It is also highly dynamic – each moment we have an opportunity to re-visit our choice and make a different choice. Attention is ultimately what counts – attention profiles have value only because our attention has so much value. I remain indebted to Michael Goldhaber for his seminal article on this topic - "The Attention Economy and the Net".

Why is our attention so valuable? Because it is so scarce or, more accurately, because its relative scarcity has been rapidly increasing.  Attention is a constant resource for each of us – we only have 24 hours in the day. It is up to us how we use those 24 hours.  What’s changed is that we have more and more options competing for our attention. We face increasing abundance both in the production and distribution of goods and information about those goods. Some people think this is a curse.  I happen to believe it is a blessing for many reasons.

But it does pose a challenge.  Each of us feels more pressure to increase our return on attention – given more and more options competing for our attention, we run significant risk of fragmenting our attention and diverting our attention to lower value options.  Anything or anyone who can help us increase our return on attention will likely get more of our attention over time, especially if they can further increase our return on attention over a broader scope of activities. A powerful increasing returns dynamic  can be unleashed if the game is played right.

Attention profiles have the potential (but only the potential – there are serious challenges in harnessing this potential) to increase our return on attention. They can make filters and finders much more effective in connecting us with the people and resources that are most relevant. Given new technologies, we are finally acquiring the tools required to capture and store our own attention profiles and to make these profiles selectively available to others who offer the promise of further enhancing our return on attention.

In a nutshell, this is the infomediary opportunity that I originally outlined with Jeffrey Rayport in a Harvard Business Review article (purchase required) back in 1997 and developed in much greater detail in Net Worth: Shaping Markets When Customers Make the Rules (co-authored with Marc Singer), published 6 years ago in 1999. It is also, as I understand it, the basic proposition driving the recent formation of AttentionTrust.org by Steve Gillmor, Hank Barry and Seth Goldstein, among others.

Unfortunately, the web site and the founders do themselves a disservice and muddy the waters in the way they frame the undertaking. The home page of AttentionTrust.org is framed entirely in terms of rights, concluding with the call to action: “Assert your right to you!”  This theme is further developed in a blog posting by Seth Goldstein entitled “AttentionTrust.org: A Declaration of Gestural Independence”.

Having spent a lot of time in this field, I am skeptical whether an appeal to rights or independence is going to be sufficient to get mass adoption.  What matters to most people is whether they are going to get greater return on their attention – it is a much more pragmatic concern.

In a posting on March 28th earlier this year, Steve Gilmor presented part of an IM exchange with Kevin Werbach where he responded to Kevin’s question about the significance of attention.xml (a standard being developed by AttentionTrust.org).  Steve’s response is interesting – it does a great job of explaining how this new standard can help Kevin deal more effectively with a flood of information by connecting with the information that is most relevant.  Not once does Steve talk about rights to attention or attention profiles – it is a very pragmatic and compelling pitch based on increasing return on attention.

In reflecting on the disappointing experience of the first wave of infomediaries, I draw two key lessons.  First, many of these businesses led with the proposition of privacy protection, but most people most of the time are not that concerned about protection of privacy – they will readily trade information about themselves for something of perceived value.  Witness the frequent fliers who will not board a plane until they know the airline has captured detailed information about their itinerary. 

Second, these businesses also emphasized the monetary value of attention profiles and offered subscribers the opportunity to receive money in return for information about themselves. The problem with this approach is that the cash value of attention profiles is actually quite limited from the viewpoint of an individual consumer.

As I emphasized in Net Worth, the real value of the infomediary comes from using attention profiles to reduce interaction costs and increase return on attention. The infomediary can help customers to sort through all the options competing for their attention and to connect rapidly and conveniently with the resources that matter the most to them – not only through search but, increasingly, through recommendation services based on deeper understanding of their interests and preferences.

Unfortunately, this is a much more challenging proposition to deliver on than either blocking access to attention profiles or selling attention profiles to the highest bidder. But it is also a compelling proposition that creates interesting opportunities for increasing returns dynamics. AttentionTrust.org ought to lead with this proposition and focus on developing the technology standards that will help individuals and their infomediary agents to increase return on attention.

For Robert Scoble, the question is whether Microsoft will take a customer or provider lens when thinking about the technologies required to increase return on attention.  If Microsoft plays this game right and approaches this from the viewpoint of the customer, it has an opportunity to leapfrog past Google and Yahoo and carve out a leadership position in the consumer arena.  Scoble might want to ask around about Microsoft’s acquisition of Firefly back in 1998.  The company has taken some initiatives in this direction in the past but without much success.  The game is still open.