Edge Perspectives with John Hagel

Halloween Goblins

It is Halloween, a wonderful pagan ritual with occult overtones that began with the Celts.  It is a day and, more importantly, a night when fear runs rampant as goblins, ghosts and ghouls take over and roam far and wide.  It is a fitting time to step back, reflect on and perhaps even embrace one’s greatest fears. 

Since this is not a personal confessional blog but instead a professional perspectives blog, I’ll spare you an exploration of my personal fears and instead focus on my professional concerns this Halloween eve. What do I fear as the greatest obstacles standing in the way of executives as they seek to create and capture more value for their stakeholders? Here’s my list of goblins:

Data

In a rapidly changing world, data can hold us prisoner to old mindsets and old behaviors.  If executives need lots of data before they feel comfortable making a decision, chances are they will not act until it is way too late.  Don’t get me wrong, data are extremely valuable.  It’s just that, if we insist on too much data, we will often miss significant changes on the horizon.  This isn't just about analysis paralysis; it's much more insidious. Data inevitably draws us into the past; after all, there is not much data about the future (or even very recent events), but an abundance of data about the past. Data not only draw us into the past, they also draw us into the core because the core is so well documented and analyzed relative to various edges where data are at best fragmentary and often contradictory. To avoid being blind-sided, we need to pay equal attention to stories and train ourselves to detect patterns in the stories, even if the data supporting the stories remains fragmentary. Stories are generally our first indicators that something really interesting is about to happen; something that data will only reveal to us in full force much, much later.

Core businesses

Everyone’s got a core business and we all know we are supposed to focus on our core. But core businesses can consume our attention and we run the risk of losing perspective on what’s happening on the edge.  As the title of this blog suggests, the edge often provides us with early, faint signals of significant new opportunities and threats – if we’re not paying attention, we may miss those signals until they get amplified into clear and present threats.  Core businesses also tend to breed complacency – they generate cash that can often reduce the sense of urgency required to aggressively exploit new opportunities (see “Complacency” below).

Portfolios

Everyone (well, almost everyone) has them.  The theory is that by creating broad portfolios of investments, executives can more effectively manage risk.  Well, I’m not so sure – count me as a contrarian on this one.  Portfolios of investments work great if you are an investor, but work less well if you are business manager.  They create risks of their own.  First, I see a pronounced tendency to spread resources too thin across too many bets even in the largest of companies.  The result?  Risk actually increases because no single program has the critical mass of resources required for success. But it gets worse.  Complacency also increases as the portfolio expands (see “Complacency” below).  If some of the investments start to hit rough times, executives tend not to worry because there are a lot of other investments that might pay off.  This can become a dangerous mindset.

Adaptation

This has been a buzzword du jour for too many years now. The adaptive enterprise has become the nirvana all large companies strive to achieve. Cognoscenti draw on complex adaptive systems theory to make the case that adaptation ought to be the primary goal of strategy.  Well, maybe . . . if we are reptiles or honey bees.  Here’s my concern.  Adaptation may be much too modest a goal.  Adapting may help to ensure survival, but we will likely miss many of the real opportunities created by rapid change.  When environments go through rapid changes, these changes create far more degrees of freedom for action than more stable environments.  There is more opportunity for purposeful strategies to shape the environment, rather than simply adapting to it, and to reap the rewards that can accrue to successful shapers.  Both Wal-Mart and Microsoft reaped significant rewards as shapers, not as adapters. Here’s the catch – the mindsets, skills and actions required to be a successful adapter are quite different from those required to be a successful shaper, so executives have to choose between these strategies.  Too often, adaptation becomes the default strategy or, even worse, companies try to straddle between the two without making an explicit choice.

Efficiency

Efficiency is a diminishing returns game – there are natural limits.  There’s nothing wrong with efficiency in small doses, but when it becomes an obsession, it leads to dysfunctional behavior.  Efficiency initiatives are seductive because they generally yield more predictable results, at least in the near-term.  But there are problems. Efficiency focuses us back on the core business (see above) because that’s where the biggest gains are.  We also seek to eliminate edges because edges are always messy and often horribly inefficient. The problem is, of course, we can never eliminate edges; we can only shrink our field of operation and vision.  JSB and I talk a lot about productive friction – from our perspective, it is the source of significant innovation – the clash of different perspectives and skill sets is often required to break through to different beliefs and behaviors. But, seen through the lens of efficiency, productive friction is deeply suspect, especially since it tends to be most prominent on the edges of our operations.

Consensus

This goes with efficiency.  Who could argue with it?  Wouldn’t it be better if we all agreed?  Problem is – from my experience, if senior management all agrees, that’s a real red flag.  It means one of several things.  Often it means that no one is asking the right questions – it’s easy to agree if no one is posing hard questions about the future of the business or priorities in near-term allocation of resources.  In other cases, it could mean that everyone’s talking at such a high level that they can say the same words, but mean completely different things.  Other possibilities: management has developed a culture of conflict avoidance or they have been together far too long, drinking from the same kool-aid bowl.  Sometimes it is all of the above.  In any case, high performing and innovative companies generally have lots of friction – it’s just that they have figured out how to make it productive rather than dysfunctional.

Education

OK, now I am really going after a sacred cow.  And it is not just because I was almost expelled from third grade for playing hooky by forging notes from my parents.  Education (and let’s throw in training while we are at it) is bankrupt – we don’t need to fix it; we need to start from scratch and re-think it, starting with the terminology. It represents a huge drain on resources at best and, at worst, takes bright and inquiring minds and slowly but inevitably extinguishes passion for learning. As the very term indicates, education starts with a push mindset. What we really need are more effective pull platforms to foster learning. There are actually a lot of these pull platforms rising up around us, in such diverse and unlikely places as World of Warcraft and the tea houses of Chongqing, China. We need to learn from these experiences to develop new institutional learning architectures recognizing that learning is a life-long requirement and that push approaches play an increasingly marginal role in successful
learning.

Complacency

This is a big issue, although this fear is mainly focused on Western companies.  As JSB and I have noted before, we are struck by the contrast between the complacency we find among many Western executives and the sense of urgency that marks all of our meetings with executives in emerging economies like China and India. Much of this complacency comes from taking a snapshot view of the world versus focusing on the movie. Enough said.

Backlash

When complacency confronts the harsh reality of intensifying competition, we run the risk of flipping into resistance and using whatever means are necessary to protect us from competition. I guess if I had to single out the goblin that I worry about the most, it is the risk of a public policy backlash.  This could play out in two different scenarios.  In one scenario, large established economic interests in more developed economies join forces with domestic workers feeling more insecure about their jobs and push through a set of protectionist measures that roll back much of the liberalization that has occurred in public policy over the past several decades.  Alternatively, the backlash could surface in emerging economies and established political and economic interests capitalize on the growing frustration of the rural populations bypassed by globalization to implement their own protectionist measures.  Either way, the results are likely to be disastrous with public policy retaliation in other parts of the world and growing potential for political and perhaps even military conflict. Boo! Now that’s a really scary thought.

Social Networks and Urbanization

Danah Boyd, one of the most insightful analysts of social network sites, got some great coverage by the Financial Times in an extended article entitled “The high priestess of internet friendship” by Graham Bowley on October 28-29, 2006. The article provides an interesting overview of social network sites and the various roles they tend to serve, especially for kids.  As I read through the article though, I began to crave for a more explicit typology to make sense of the diversity of social network sites that continue to emerge and evolve.  I also began to want a more systematic discussion of the relationship between these virtual sites and physical space.

Here’s an early typology of social network sites that I sketched out after reading the article. Rather than categorize sites themselves it may be more useful to think about three primary functions of these sites – connection, creation and collaboration.  Individual sites can then be analyzed in terms of their relative emphasis on these three functions. It turns out that sites differ significantly in terms of their relative emphasis.

Connection
Connection is the first function – it emphasizes the ability of social network sites to connect participants effectively and conveniently with each other and with resources that are useful to them. An extreme example of this is LinkedIn, the social networking site helping to connect business people based on profile data and knowledge about networks of relationships. In terms of connecting people with relevant resources, think of Digg and del.icio.us. In this context, the primary value is a filtering function, helping participants to sort through a growing array of options and quickly connect to relevant people or resources.

Creation
Creation is the second function.  In this context, let’s differentiate two different forms of creation – identity creation and content creation - by contrasting MySpace with sites like Flickr and YouTube. 

Identity creation. The overwhelming growth of MySpace stems from its success in helping participants to create and evolve distinctive identities.  It does this by providing a robust platform for appropriating and mixing different elements, combining music clips, video clips, graphics and text in engaging ways, to create and communicate a distinctive identity. Bowley’s article does a nice job of communicating how MySpace rapidly gained share against an earlier social network site, Friendster, by emphasizing this functionality.  Bowley reports on her conversation with the two founders of MySpace:

They were getting “antsy” about doing something new, especially in social networks, they told me, and thought they could get away from the pre-programmed “box” that Friends locked users into and instead let people “really open up and do all sorts of things with their profiles.”

“Our site worked,” said DeWolfe. “You actually could log on, surf, customize your web pages and really be creative.”

In contrast to Friendster, MySpace encourage people to put up wacky art or even pipe music on to their pages. . . . As Friendster fell back, MySpace became the leading social network site, its millions of pages a cacophony of teenage self-declarations, friends’ testimonials, flirting, provocation, scrawls, art and music.

Content creation. Now let’s contrast this with Flickr or YouTube.  Here, the emphasis is on a different form of creation – it’s more about content creation than identity creation.  Surf through Flickr and you encounter impressive photography.  YouTube provides a great platform for presentation of videos, some appropriated from other sources, but an increasing number produced by the contributors themselves. On these sites, you get some sense of the identity of the contributors, but the real focus is on showcasing the content itself. Networks in these sites begin to organize around a shared interest in certain forms of content. The content is the anchor and shaper of social networks.

It is interesting to note that MySpace really took off initially as a showcase for indie bands and their music.  As music fans flocked to this site, MySpace was able to evolve into an environment for broader identity creation and experimentation because of the flexible platform it had created.  Sites like Flickr and YouTube are likely to have a harder time doing this because their sites are optimized for content capture and display.

Collaboration
Collaboration represents a third function that defines social networking sites. Collaboration in turn breaks down into three very different types of collaboration – commentary, conversations and construction.

Commentary. Commentary is pretty pervasive across most social networking sites – even the narrowly focused LinkedIn offers an ability to provide testimonials regarding the work of participants and sites like Flickr and YouTube offer participants an opportunity to comment on the contributions of others. In most cases, though, this commentary consists of one-off postings and rarely evolves into sustained conversations.

Conversations. Conversations represent more sustained interactions around topics of shared interest.  True to form, the conversations at MySpace tend to revolve around the individual profiles, although forums and interest groups have begun to form as well. In general, though, on most of the recent wave of high profile social networking sites, structured and sustained conversations take a back seat to other types of functionality.  If they exist at all, they tend to be awkwardly tacked on.  The social networking sites that do the best job of promoting these kinds of conversations remain places like Yahoo! Groups and other forms of virtual communities that have emerged around an extraordinary diversity of topics.  These sites tend to be highly fragmented in contrast to social networking sites focused on other types of functionality.

Construction. Construction is a third form of collaboration.  Here we are talking about shared creation initiatives that are undertaken across a large number of distributed participants.  If you look at the creation sites discussed earlier like Flickr and YouTube, the creation there is largely confined to individuals or, at best, small groups who come together in physical space to make a video and then post it on YouTube. Construction requires platforms for participants to come together in shared practice. At this point, we are no longer talking about purely technology platforms, but instead also need to define a set of governance mechanisms that can help structure and focus the collaboration. Here we encounter a diverse set of sites ranging from World of Warcraft, with its emphasis on collaboration in guilds, to Wikipedia and a variety of open source software sites.  Complex and more structured social networks emerge as participants wrestle with the challenges of coming together online to create shared objects or engage in joint efforts.

Some broader observations on social networks
All social network sites are likely to have some elements of all three functionality types – connection, creation and collaboration – but, as I hope the examples illustrate, there are significant differences in relative focus.  I don’t have the time now to explore all the implications of the differences in focus, but I will assert that these difference matter, not only in terms of design, but also in terms of business model and growth potential.

By the way, learning is a potentially interesting overlay on all three types of functionality.  In other words, these sites can be largely configured as a way to organize and present existing social networks and related resources or they can be designed with a more dynamic view to accelerate and amplify the ability of participants to learn more rapidly.  While much learning is certainly going on today on a variety of social network sites, I suspect there is a much greater opportunity to foster learning than is currently being addressed. The Financial Times article quotes Fred Stutzman at the University of North Carolina at Chapel Hill regarding Facebook:

One of the things students do is they test out identities. Maybe that is one new thing we are seeing now – more rapid changes of identity. Online you can get feedback and you can change at a moment’s notice.

We can also analyze social network sites in terms of attention economics.  In some cases, these sites are very good at enhancing return on attention by acting as filters to connect people with relevant resources.  In other cases, they can help attract and amplify attention from others. These ought to be two sides of the same coin but, in practice, design of social networking sites can favor one side over the other. In general, there's a lot of untapped potential to focus on the attracting attention side of the coin, but to do it in a way that accelerates learning rather than fostering attention-getting Ponzi schemes. Especially as we move from connection to creation and then to collaboration, social network sites will become more powerful platforms to attract and amplify attention from others.

In trying to anticipate the likely direction of social network sites, pay attention to the edges.  The FT article quotes Danah Boyd on an important point in discussing the early success of Friendster, one of the early social network sites:

Freaks, geeks and queers all invaded Friendster in the early days and they made certain that all of their friends were there.

Often, the fringe elements in our society find the greatest value in amplifying social networks that exist in physical space.

Urbanization
I mentioned the relationship between social network sites and physical space at the beginning of my post.  Too often, social network sites are viewed as a substitute for coming together in physical space. In fact, quite the opposite is true – social network sites are more often a supplement to physical space relationships.  Even when participants first meet online, there is a natural and strong desire to connect in face to face meetings in physical space – witness, as one small example, the growing number of offline World of Warcraft guild gatherings.  In the FT article, Danah Boyd is quoted as observing that social network participants

. . . . were using [social network sites] to reinforce existing relations with the group of friends they already had from their offline lives.  For them, MySpace had become an electronic version of the local mall or park, the place they went to with their friends when they just wanted to hang out.

A lot of forces are at work on a global scale that increase the need for us to both broaden and deepen our network of social relationships. These forces will continue to drive the growth of even richer social network sites online but, in parallel, we will see a growing tendency to aggregate in physical space as well.

Those of you who have been following my blog for a while know that I am a strong believer in the growing value of cities as we seek to broaden and deepen our network of social relationships.  Urbanization trends are very strong on a global basis. In fact, one interesting study suggests that 95% of the world’s population growth over the period 2000 to 2025 will occur in urban areas.

This is clearly a strong trend in less developed economies, but the tendency for urbanization will become even stronger in developed economies.  Over the past several decades, we have seen a pattern of dispersal of population in the US into edge cities on the periphery of more traditional urban areas.  I anticipate that we are going to see a growing reverse migration into urban centers, led two broad demographic groups – young people entering the job market for the first time and aging boomers who are less and less content with traditional retirement models. Rather than isolating themselves in retirement centers, boomers will want to go where the action is so that they can refresh and renew. The collision of younger and older generations in our urban centers will reshape social networks in interesting ways.

When you reflect on the three functions of social network sites described above – connection, creation and collaboration – it is useful to keep in mind the key insights of urban champions from Alfred Marshall to Jane Jacobs regarding the unparalleled ability of cities to create and nurture dense and productive networks of social relationships.  These social relationships span significant edges – age, culture and vocational – just to name a few.  The relevant edges are no longer on rural frontiers; they are deep in our urban fabric. As we all begin to appreciate the importance of rapid and sustained learning, more and more of us will make our way into city centers to extend and deepen our social networks. Urban centers foster both specialization and serendipity – two key elements in learning.

Far from substituting for urbanization, social network sites will increase the value we reap from locating in urban environments. The two will play off each other in interesting and unexpected ways.

Offshoring and Healthcare

Events have a way of overtaking analysis, as the contrast between a Foreign Affairs article earlier this year and a New York Times article last week drives home with great force. 

Executives seeking to understand the offshoring challenge became very excited about an article on “Offshoring: The Next Industrial Revolution?” (subscription required) which appeared in the March/April 2006 issue of Foreign Affairs.  The article drew considerable attention in part because it was written by Alan Blinder, a prominent economist at Princeton University and former Vice Chairman of the Federal Reserve.

In brief, the article sought to define what kinds of jobs were vulnerable to offshoring and what kinds were not.  Highly critical of the focus on manufacturing jobs in discussions of offshoring, Blinder observed that

. . . the boundary between what is tradable and what is not is constantly shifting. . . . this change . . . moves in only one direction, with more and more items becoming tradable.

The old assumption that if you cannot put it in a box, you cannot trade it is thus hopelessly obsolete. . . . the key distinction will no longer be between things that can be put in a box and things that cannot.  Rather, it will be between services that can be delivered electronically and those that cannot.

So far, so good.  Anyone who has watched the phenomenal growth of the IT services business in India and the move of call centers to offshore locations certainly understands that the provision of many services has already started to move offshore. But Blinder is really interested in trying to define the boundaries between what is tradable and what is not in services. He draws the line between “personal services” and “impersonal services”.  Blinder elaborates:

Services that cannot be delivered electronically or that are notably inferior when so delivered, have one essential characteristic: personal, face-to-face contact is either imperative or highly desirable. Think of the waiter who serves you dinner, the doctor who gives you your annual physical, or the cop on the beat.  Now think of any of those tasks being performed by robots controlled from India – not quite the same.  But such face-to-face human contact is not necessary in the relationship you have with the telephone operator who arranges your conference call or the clerk who takes your airline reservation over the phone. He or she may be in India already. 

The first group of tasks can be called personally delivered services, or simply personal services, and the second group impersonally delivered services, or impersonal services.

For those seeking to find a “safe haven” from the challenges of offshoring, this seemed like a compelling distinction.  After all, who could imagine a waiter, physician or police officer providing their services from India?

Well, not so fast.  This is where that New York Times article on October 15, 2006 comes in. Written by Jennifer Alsever under the headline “Basking on the Beach, or Maybe on the Operating Table”, it provides an interesting view of the emerging “medical tourism” industry.

It turns out more and more patients in need of expensive operations are traveling to distant locations to have these procedures performed. Certainly one of the key drivers of this trend is the escalating cost of medical care in developed economies. There's a potential for significant cost savings when the procedures are performed in countries like India or Singapore. The New York Times article tells the story of Gary Hulmes, a furniture store manager from Florida who went to New Delhi to have spinal surgery done and paid a total of $9,000 including airfare, a five-day hospital stay, and a total stay of three weeks in India (with some sightseeing thrown in).  If performed in a US hospital, the same procedure would have cost $36,000 – 50,000.

But like the broader offshoring trend, cost is only part of the story.  The interesting part (only briefly addressed in the article) has to do with the emergence of highly specialized hospitals in offshore locations that offer state of the art equipment and highly trained physicians that can equal or better the quality record of US physicians. The surgeries being performed include very challenging cardiac, spinal and ophthalmologic procedures. 

In part, the sophistication of these hospitals stems from a high degree of specialization in terms of procedures performed (something that US healthcare providers are also starting to do). But many of these offshore facilities are also pioneering innovative organizational approaches that give the surgeons exposure to higher volumes of procedures than their counterparts would typically see in a US or European facility. The organizational approaches also provide much more rigorous performance feedback to physicians and analysis of complications that may arise during the procedures.

The New York Times article does a great job of describing the rich and varied ecosystem that is emerging to support the medical tourism business.  For example, specialized travel services like Medical Tours International in the US have nurses and doctors on staff to help patients plan medical treatment and trips. The article observes that

. . . medical tourism has spawned a cottage industry of travel agencies willing to book hotels and air travel, find doctors and arrange surgeries. Often, they provide concierges who pick up patients at the airport, provide them with cellphones and wait with them at the hospital, consulting with doctors and keeping relatives apprised.

Books like Patients Without Borders: The Smart Traveler’s Guide to Getting High-Quality Affordable Healthcare Abroad (to be published in 2007 by a new imprint – Health Travel Communications) will help to raise awareness and reduce the perceived risk of heading abroad for medical care. According to the article, Joint Commission International, an arm of the US-based Joint Commission on Accreditation of Healthcare Organizations “. . . ensures that hospitals [overseas] have translators, qualified doctors and nurses and are up to American standards for safety and cleanliness."

On the other side of the healthcare equation, a growing number of insurers are becoming interested in the medical tourism option and offering it to their clients. The article reports that the British government in certain cases is now authorizing patients to seek medical care overseas.

Both the tourism and the healthcare industries in a number of offshore locations are joining forces to create attractive destinations for patients from the US and Europe. The projections for growth are very promising. A joint study performed by the Confederation of Indian Industry and McKinsey & Company in 2004 estimated that the medical tourism business in India alone might generate revenues in excess of $2 billion by the year 2012.

So, bottom line, Blinder got blindsided by focusing on personally delivered services. He assumed that the customers of these services will remain in developed economies rather than seeking out higher quality experiences at more affordable prices in offshore locations.

So, large segments of the healthcare industry might move offshore over time under the banner of medical tourism (of course, Emergency Room facilities will remain onshore, but big ticket elective procedures all seem vulnerable).  This is bad enough, especially given Michael Mandel’s recent analysis of the role of the healthcare sector in job creation over the past five years, both in a cover story on "What's Really Propping Up the Economy?" in Business Week and in his blog postings.

But is this the only personal services sector vulnerable to movement offshore?  A broad range of leisure businesses like health spas and gambling are already on the radar screen of ambitious entrepreneurs in offshore locations.  Anyone who has watched the construction frenzy in Macao will think twice about the complacency of destinations like Las Vegas that card dealers cannot be offshored (even though the US Congress is doing its best to protect domestic gambling businesses from Internet based competition).  Similarly, the notion that masseurs and masseuses are protected from offshoring crumbles when one looks at the rapid growth of the health spa business offshore. You can't find much more of a high touch business than massage. Those counting on serving aging boomers also better study the migration of a growing number of retirees offshore.

We need to broaden our horizons on offshoring.  This is not just about service providers moving offshore.  In a growing number of cases, it is also about service customers heading offshore in the quest for higher quality experiences at lower cost.  OK – I can’t resist one more pun – let’s not put blinders on and assume that the customers stay fixed.  In this flat world, that is a dangerous assumption.

Peace and Entrepreneurship

The media coverage of the award of the Nobel Peace Prize last week drew attention to the microfinance movement but, in the process, missed the real significance of this movement.

Last week the Norwegian Nobel Committee awarded the Nobel Peace Prize to Muhammad Yunus, one of the most prominent evangelists for micro-credit in developing economies, and to the Grameen Bank in Bangladesh, the lending institution that Yunus founded. As the official press release indicates, the award was made

. . . for their efforts to create economic and social development from below. Lasting peace can not be achieved unless large population groups find ways in which to break out of poverty. Micro-credit is one such means. Development from below also serves to advance democracy and human rights.

This award left many people scratching their heads – certainly Yunus and Grameen Bank are not playing any direct role in promoting peace.  The Economist magazine even raised the question whether it was appropriate to award the Nobel Peace Prize at all this year.

Now, if Yunus and the Grameen Bank are making a significant contribution to the elimination of world poverty, they are certainly indirectly helping to foster global peace.  The problem is that the evidence for this contribution is mixed at best, as suggested by analysts here, here and here. 

Truth be told, it is likely that micro-credit will be only one element in helping to address global poverty. Its impact can be, and likely is, greatly over-stated. Without the broader institutional reforms that are required to release and amplify the entrepreneurial energies of people in developing economies around the world, micro-credit is likely to remain a band-aid that fails to address the more profound causes of global poverty.

The growing hype about the role of micro-credit in relieving third world poverty, intensified by this award, risks diverting attention from the real significance of the broader microfinance movement and parallel business innovations.

Muhammad Yunus and the Grameen Bank, founded thirty years ago, created significant innovations in terms of distribution approaches for delivering low monetary value products to dispersed populations of very low income customers. Initial loans from Grameen Bank start at about $15 and the average size of a loan is only about $200.

How does Grameen Bank do this?  It fosters social networks in remote villages that take on a lot of the administration and monitoring costs that banks traditionally assumed. Rather than establishing expensive branch offices in each remote village, Grameen Bank sent “center managers” out into the villages.  Yunus, in his book Banker to the Poor, outlines his philosophy:

Conventional banks ask their clients to come to their office. It’s a terrifying place for the poor and illiterate. . . . The entire Grameen Bank system runs on the principle that people should not come to the bank, the bank should go to the people. . . . If any staff member is seen in the office, it should be taken as a violation of the rules of the Grameen Bank. . . .It is essential that [those setting up a new village Branch] have no office and no place to stay. The reason is to make us as different as possible from government officials.

Rather than setting up a branch office, the center managers help to organize lending groups of 5 – 10 borrowers, typically women, the target customer segment of Grameen Bank. These lending groups assess each participant's needs and this determines  sequence of who will get loans first - the most needy get the first loans. The loans are not covered by any legal documents or collateral. As loans are made, Grameen Bank relies on a variety of mechanisms to manage risk – for example, initial loans are for very small amounts and weekly payments are required as a way to get early visibility on potential default risks.

But the most potent risk management mechanism is the lending group itself.  Since a default by any member of the lending group means that the entire group will be unable to obtain any further loans, there is both significant support from the group as well as peer pressure to keep default rates low (how low is actually open to some debate). Over the years, Yunus has used this innovative distribution model, relying on locally organized groups of consumers, to spin out a series of affiliated enterprises.  These enterprises offer a broad range of services, ranging from cell phone service to equipment leasing services. For more information about Yunus and Grameen Bank, check out Banker to the Poor, written by Yunus and David Bornstein's The Price of a Dream: The Story of the Grameen Bank.

Looked at through an innovation lens, Grameen Bank represents one of the earliest examples of a powerful form of business innovation that I have described as open distribution.  This innovation is being pioneered by a range of companies in South Asia (primarily India) to deal with the challenges of cost effectively reaching dispersed populations of low income, rural customers. Early pioneers of this model in India include ICICI Bank, ITC with their e-chaupal network, Tata Motors and Cummins (a US company pursuing these innovations through their Indian subsidiary). (For great summaries of the first two pioneers, see C.K. Prahalad's The Fortune at the Bottom of the Pyramid, for a brief discussion of Tata Motors, see Manjeet Kripalani's article in Business Week "Asking the Right Questions" and for the Cummins Story, see my article (with JSB) on "Innovation Blowback".)

As I indicated in the earlier blog posting, this open distribution model has several key components:

• increased modularity (both in products and processes)

• aggressive leveraging of existing third party (and often non-commercial) institutions in rural areas to more effectively reach target customers

• creative use of information technology carefully integrated with social institutions to encourage usage and deliver even greater value

This open distribution model stands in sharp contrast to Western forms of innovation in retail distribution by companies like Wal-Mart, Tesco and Metro. Rather than leveraging economies of scale and scope in the branches and regional distribution centers as these Western companies have done, the pioneers of the open distribution model seek to tailor the value delivered to customers through creative leveraging of third party institutions and social networks.

Western distribution models work great if the customers know exactly what they want or are prepared to invest in the search through endless aisles of products (and not a salesperson in sight!) to find what they need. In contrast, the open distribution models represent a promising cost-effective approach to help customers find products that are most relevant to them and then help them to get the most value out of the use of the products.

Now, reading this, some will see that this is a very interesting business innovation in developing economies but will remain skeptical about its relevance for Western economies.  This is where innovation blowback comes in.  There are some interesting opportunities to use innovations being pioneered in developing economies to fashion attacker strategies designed to take market share from established incumbents in the larger, more developed Western economies.

Think about it.  As competition intensifies, why couldn’t the open distribution approaches emerging in South Asia be used to create powerful new ways to significantly reduce the costs of reaching customers in more developed economies while at the same time delivering much more tailored value to these customers? Of course, some modifications may be required.  Rather than lending groups in remote villages, why not think of creative ways to catalyze and shape social networks in cyberspace?  Rather than tapping into local social institutions, why not find interesting ways to leverage the shared experiences that give rise to reputation systems or other social institutions emerging on the Internet?

Let’s tie this in to another popular concept shaping business initiatives today – the long tail.  As Chris Anderson defines the long tail business opportunity, it is shaped by three forces – and one of them is something he calls “democratizing distribution”.  In particular, he is talking about reducing the cost of access to small niches of customers.

Now, Chris is a media guy so the examples he uses for democratizing distribution generally come from the media business and especially digital media. But when I look at the open distribution models emerging in South Asia, I see some powerful examples of democratizing distribution that extend well beyond digital media products or services to include such hard core physical products as automobiles and diesel engines.  Surprisingly, Chris doesn’t even acknowledge, much less discuss, these innovations in democratizing distribution in his book. Yet, these examples add powerful evidence of the opportunity to extend the long tail business opportunity into a much broader range of physical products.

As the long tail unfolds, customers are going to look for more and more help in finding the products and services that matter most to them.  As I have discussed before, they will look for agents and partners that can help them to significantly increase their return on attention. Massive, standardized “big box” retail formats will continue to play a role in driving efficient physical product distribution.  The real value, though, will increasingly be created and captured by those who harness open distribution models to develop a much deeper understanding of individual customer needs and use that understanding to be more helpful in connecting customers with the products and services that matter most to them.

In this context, the business innovations pioneered in remote rural villages of South Asia may be more relevant than we might first perceive.  Perhaps Yunus and the Grameen Bank will end up having less impact on eliminating world poverty than they might hope.  But they might just be early pioneers in a much bigger trend – business innovation seeking to deliver more value at lower cost to customers around the world.

Entrepreneurship and business innovation are key ingredients in shifting economic activity from zero sum to positive sum games.  Positive sum games, by expanding the overall returns, tend to dampen conflict and foster collaboration while zero sum games, with a fixed set of resources, intensify conflict.  In this respect, the entrepreneurship of Muhammad Yunus indeed may contribute to global peace by inspiring entrepreneurs everywhere.