Unanswered Questions at Supernova 2007

I have been unusually quiet here recently because I have been going through a major transition.  About six weeks ago, I joined Deloitte & Touche USA LLP with a mandate to establish a major new research center in Silicon Valley.  The Center will explore key business issues created by the intersection of business strategy and information technology.

I will be serving as Co-Chairman of the new research center along with John Seely Brown and we have already enlisted the support of Lang Davison as Chief Content Officer.  Until co-founding the center with us, Lang had been the Editor of The McKinsey Quarterly. Lang and I go way back in terms of our collaboration – in fact, he was a key collaborator in the development and writing of both Net Gain and Net Worth and has edited all our subsequent Quarterly articles.

Last week, Kevin Werbach asked me to address his Supernova conference and offer a preview of some of the questions that will form the foundation of the research agenda for the new center.  We are still at a very early stage in defining the research agenda, but it was a great opportunity to get some feedback and input from very smart folks. It occurred to me that I could throw the net even broader through my blog and seek out further input to help shape our research agenda. So, here’s an abbreviated version of the presentation I gave at Supernova – please let me know your thoughts and ideas on how to increase this research agenda's relevance and power.

Questions are often as valuable as answers

It’s appropriate to step back occasionally and reflect on what we don’t know, rather than simply sharing what we know. In times of rapid change, asking the right questions is often as important as the answers – at least they help us figure out where we might start looking for answers. There is no shortage of questions – the key is to focus on questions that are not just intellectually interesting, but also where significant economic impact is at stake. These are the questions that will focus our research agenda.

Foundation questions – what is going on in the world around us?

1.  What if there is no equilibrium?

We all understand that the component technologies of our new infrastructure – computing, storage and networking – continue to advance at exponential pace.  In fact, this is the one central difference between this new generation of infrastructure and all the previous generations of infrastructure – for example, railroads, electricity and telephones – that shaped our economies in the past. All of these earlier generations were characterized by a major technology breakthrough, followed by the adoption of key standards and a diminishing rate of performance improvement. Our new infrastructure defies this pattern and proceeds with exponential rates of performance improvements.

Here’s the paradox: at the same time, we cling to traditional equilibrium concepts and institutions  that emerged and prevailed in more stable times. Nathan Mhyrvold highlighted in his talk yesterday the contrast between the exponential advance of technology performance and the linear thinking of most executives. Clayton Christensen got the attention of the business world with his perspective on disruptive innovation – but even that is a punctuated equilibrium view – it holds on to the assumption that equilibrium will eventually return.

A more specific question might be: what are the institutional architectures required to operate in a world where there is no equilibrium? Early conventional wisdom suggest that these architectures should focus on agility and flexibility, but that misses the real opportunity – balancing agility with the persistence and stability required to build and deepen long-term trust based relationships. Being able to discern what needs to change and what needs to remain stable may be the greatest challenge of all.  In looking for early indications of what these architectures might look like, the richest sources of institutional innovation will be China and India, not the U.S. or Western Europe

2. Can the firm survive as the action flows to the edges?

The early view of the Internet was that it would be a catalyst for the fragmentation and marginalization of firms. Tom Malone at MIT wrote an interesting book forecasting the rise of the E-Lance economy.

An alternative view suggests that firms will unbundle and rebundle in ways that lead to even greater concentration and consolidation (although paradoxically at the same time facilitating more decentralization and power at the edges). In the process, the rationale for the firm will fundamentally shift – from Ronald Coase’s classic view of the firm as an institution designed to economize on transaction and coordination costs we are likely to shift to a rationale focused on accelerating talent development.

3. Are all ecosystems created equal?

The term “ecosystem” is used so broadly and loosely along with lots of related words – networks, webs and communities– that it runs the risk of losing all meaning and blending into the banal. At one level, we are all interdependent and operate in a broader fabric of cooperation – from the earliest hunter gatherers to today.

We desperately need a workable taxonomy, not just for its own sake but to help us see what is new and help us to choose what forms of cooperation have the greatest power to create more business value in specific contexts.

Looking ahead, I would suggest that networks of creation and economic webs will trump all other ecosystems in value creation and capture opportunities because these have the ability to embrace and extend the value creation potential of other ecosystems

4. If the world is so flat, why are spikes becoming more prominent?

Once again, the early view was that geography doesn’t matter in the age of electronic networks – we were finally going to see “the death of distance.” Tom Friedman captured our imagination with his view of The World Is Flat.  But we need to pay attention to the perspectives of Richard Florida, the author of Cities and the Creative Class and The Flight of the Creative Class as well as a provocative Atlantic Monthly article, who keeps focusing on an inconvenient truth: the trend towards coming together in dense urban areas to create spikes of talent is accelerating, rather than disappearing, on a global scale. How to resolve the paradox of greater spike formation in a flat world?

In fact, geography may matter more than ever. The flat world may be making spikes even more necessary, attractive and scalable. Spikes appear to be playing an increasingly important role in talent development. If talent development is becoming more critical to the success of firms, what is the explicit spike strategy of each of our firms?

Strategic questions – what are the most promising actions to create and capture value?

1. Is adaptation all there is?

Conventional wisdom holds that, in the absence of equilibrium, adaptation is the best strategy – we need to develop the capability to sense and respond to the changes going on around us.

While adaptation is certainly necessary it misses the real opportunity. With accelerating change and growing uncertainty, there are increasing opportunities to shape outcomes in ways that were simply not feasible in more stable times. In particular, these shaping strategies focus on generating positive incentives that can mobilize and align large numbers of other participants.

2. Can we escape the Red Queen effect?

There’s a powerful image that resonates in corporate boardrooms around the world – the image of the Red Queen running faster and faster just to stay in the same place. Adaptation in a world of more rapid change implies running faster just to stay in same place

Product and process innovation only provides temporary relief for the Red Queen effect as companies become more adept at copying the advances of others. We need to harness institutional innovation and move from scalable efficiency to scalable learning so that we can begin to learn faster and find ways to get ahead of the pack in a more sustainable fashion

3. As “L curves” replace “Bell curves”, what are the most promising routes to the head?

As I have written recently, we are shifting from a Gaussian world of bell curves where averages have meaning to a Paretian world where extreme events prevail. Chris Anderson in his book The Long Tail showed great insight in focusing on the long tail of Pareto “L curves” and how to play there, but in the process he may have distracted us from the real opportunity. Perhaps the most interesting question is how to use the long tail as a launch pad for head strategies. In this context, developing privileged access to concentrations of knowledge flows on the edge holds great promise.

4. We have a growing realization that stocks of knowledge are diminishing in value relative to flows of knowledge, but what is required for effective participation in the highest value flows of knowledge? How do we avoid drowning in proliferating flows of knowledge while ensuring that we tap into the most relevant flows?

Stocks of knowledge diminish in value much more rapidly in times of rapid change. As a result, strategic advantage increasingly depends on privileged access to knowledge flows.

A point of view about destination helps to generate and filter knowledge flows, but productive friction helps to sustain flows.  Here’s a paradox – the more uncertain the environment becomes, the more important it is to have a destination clearly defined in order to make sense and make progress. One of the biggest risks is that companies spread themselves too thin in rapidly changing environments and fail to really nurture the knowledge flows that matter the most.

5. What are the opportunities for the bottom of the pyramid to attack the top?

C. K. Prahalad has helped us to understand the fortunes that are waiting to be made by creatively serving customer needs at the bottom of the pyramid. Once again, though, this perspective may distract us from another opportunity – the bottom of the pyramid may become a launch pad for successful attacker strategies challenging incumbents in more developed economies – the institutional innovation required to serve customers at the bottom of the pyramid can also be used to carve out significant share in more developed economies – something that JSB and I have described as “innovation blowback”.

6. How do we measure success when so many of the rules are changing?

Financial metrics matter more than ever, but the problem is they are lagging indicators – what we need are leading indicators. We need a new set of leading indicators tied to two sources of power within networked economies – talent and customers. As I have written before, some interesting new measures are return on attention (ROA), return on information (ROI) and return on skills (ROS) – measure both from the perspective of the firm and of the customer/employee.

Platform questions – how can various types of platforms augment our capabilities?

1. When is self-organizing not enough?

In focusing on various forms of decentralized collaboration, we have tended to celebrate the self-organizing characteristics of these systems. Perhaps we need to shift back and recognize that successful collaborative creation initiatives are never completely self-organizing. Every one of these efforts depended on an orchestrator who carefully and thoughtfully defined a minimal set of rules required to kick-start collaboration – we need to better understand what these rule sets are and to be thoughtful about the different rule sets required for different types of creation efforts.

A lot of work has been done on governance mechanisms in open source software, but there’s a lot of uncertainty about how broadly these governance mechanisms might be applied beyond open software.  What modifications might be required to governance mechanisms or what modifications to the creation process might be necessary to extend these mechanisms to other domains beyond software?

2. How are pull platforms likely to evolve?

As the pace of change accelerates, we are in the midst of a broad transition in terms of how we access and mobilize resources. As JSB and I have written elsewhere, we are moving away from push programs that attempt to forecast demand and make sure that the necessary resources are available when and where needed. In their place, we are seeing the emergence of much more flexible pull platforms that help people connect with the resources that are most relevant to them whenever and wherever they need the resources.

Push programs treat people as passive consumers (even when they are producers like workers on an assembly line) whose needs can be anticipated and shaped by centralized decision-makers. Pull platforms treat people as networked creators (even when they are customers purchasing goods and services) who are uniquely positioned to transform uncertainty from a problem into an opportunity.

The pull platforms that we now have are only the earliest stages of development. To harness the full potential of these pull platforms we will need to move to much more robust federation governance structures that accommodate services from a growing number of independent and diverse participants.  The lean manufacturing approaches of leading edge manufacturers succeed only because they dramatically narrow the number of participants. Different governance structures are likely to be required to scale pull platforms.

3. What is the next generation of IT architecture?

Until now, the trajectory of IT architectures has been from the inside out. Starting in the centralized glass house of large enterprises, these architectures slowly evolved to embrace departments and then the desktop, until finally, in tentative fashion, they reached out to connect selected business partners. These architectures are not likely to be scalable in terms of the ability to connect and coordinate activities across large numbers of independent business partners. As SOAs are held captive by IT architects within the enterprise, attention will shift to outside-in, relational architectures that first take shape across enterprises.

What is different about these architectures? They are designed from the outset to support sustained collaboration across large numbers of enterprises, robustly addressing a number of key challenges, including the reality of many autonomous entities, rather than one control point and the need to effectively connect the extraordinarily heterogeneous technology platforms and skill sets likely to prevail across these autonomous entities. Rather than assuming fine grained, short-lived transactions are the rule where one can be optimistic about completion, these architectures must cope with coarse grained, long-lived interactions where one needs to be more pessimistic and develop appropriate compensation mechanisms in case of failure. More broadly, I expect to see a move from transactional architectures to relational architectures, shifting from supporting discrete transactions like a request for inventory availability or the booking of a sale to architectures designed to support enduring and deepening relationships of individuals and institutions.

Without these outside-in architectures, companies will be constrained in accelerating talent development because existing technology architectures limit the ability of individuals to connect into rich networks of specialization and push themselves to get better faster by working with others. Individuals and institutions will still find ways to connect into these networks, but the scope and scale of the interactions will be much more limited

There you have it, three broad sets of questions – dealing with foundations, strategies and augmentation platforms. They get to very basic issues regarding value creation and value capture –and they’re more than enough to keep a research center fully occupied for some time

This is a first cut at the questions that John Seely Brown and I, along with our senior colleagues, will be pursuing through the new Deloitte research center. We’ll have a critical mass of research staff within the research center itself but we want to pursue this research with an open architecture approach. We’ll be reaching out to, and collaborating with, people across many institutions with relevant experience and interests. We look forward to collaborating on some of the most challenging issues confronting executives today.

Once again, I encourage anyone with thoughts or ideas on this research agenda to connect with us and help us to refine this “alpha” version of our research agenda.

Comments

[RalfLippold]

Just a couple of minutes, drawn by a blog post while searching for something else (a book on GoogleBooks to read online, due to the fact that currently without paid job, the internet is my source of learning in large part), I found myself here.

The extended way of "finding" this post: http://www.diigo.com/user/ralflippold/edgeperspectves

Researching very much in the same field whereas my background is slightly different. Being pulled by the story of the Hunt Brothers on their silver buys back in 1980 I wanted to become a stock broker. Entered a apprenticeship at a bank in the mid-80s, only to shift from the banking and brokerage perspective after a sticking experience during an internship at Merill Lynch, Frankfurt/Main, in 1989. Being invited for pizza with some of the colleagues to a pizza place next I learned that for the three of us they spent 300,- Deutsche Mark (!) - this was the Turning Point.

I shifted the focus towards wanting to the creating value at the tangible level, and found myself studying economics, and business administration with a focus on production logistic, innovation, strategic and exponential information technologies.

It took not long to learn about Lean Thinking and creatively turning challenges into value-creating future chances.

Interesting to see how much we as a world society have moved since the days of 2007 - still pretty much on the horizontally looking part of the exponential curve of change that information technology is already changing in large part. Otherwise I would have never found this article by you John!

The challenge is that, in my perception, and experience the "Red Queen" is even more prevalent in board rooms, institutions than was in 2007. Now as the changes become inevitable, and are shared in various networks (not so much in the traditional media as the print media, or television rather on all "free to use" social networks, which enables a collaboration, and knowledge flows across boundaries of time, space, disciplines, cultures and different speeds of change.

Happy New Year to you John, John, and David for not only writing a most compelling book "The Power of Pull" but pulling us all into the FUTURE of what is POSSIBLE by taking SMART SMALL STEPS

In my own words this is the Road to #abundance via #LeanThinking :-)

Cheers, and looking forward bring our research findings together

Ralf

[T S Venkatakrishnan]

I liked the idea of staying with the question and the emphasis on the act of framing the question correctly.

As per citations in the post, each researcher including yourself seem to need new phrases (example - Red queen effect etc) to describe what we see.

As Chris Argyris pointed out about single loop and double loop learning, there seems to be a need for a more robust language constructs to express analysis and intent; Like societies, may be one day businesses will need to be valued in terms of how evolved and developed they are on the strength of the "language in action"..

Great Post..Best wishes for the research center.

[Javier Cabrerizo]

Very deep questions indeed.
One angle I would love to see explored here that probably is an amalgamation of several of your questions is: Will firms adopt a Wikipedia type of innovation approach? If we're moving away from push programs and there is a permanent non equilibrium, how are corporate structures adapting? From me perspective, what I call the Wikipedia style assumes:
1- that an innovation is rolled out when it's not finished,
2- letting other constituents finish the job and actually influence it's direction
3- loosing control of it's evolution
Are companies ready for that? How does this affect the monetization of innovations? What are the implications to IPRs?

[Greg Lowes]

This is very interesting research, that hopefully will spur an exponential growth in understanding the 'new world economy' that surrounds us all - yet alludes our ability to actually 'see' it.

A very good taxonomy of and for Ecosystems may be a major catalyst for the research to open our eyes and intellect. A poor taxonomy could potentially blind us permanently!

Perhaps beginning with a comparison between what we CAN see now - the Value Chain based economy - with this pervasive "Ecosystem" economy would be instructive.

[John Horrigan]

I wanted to share some reactions to your recent blog posting.

• If firms will increasingly have to bundle and unbundle to adapt to shifting equilibria, then coalition building is likely to be at the center of business strategy. The questions then become: Under what conditions do coalitions form? What sustains them? There is, as you may know, a literature on this, a good bit of it pioneered by Avner Greif at Stanford, as well as Paul Milgrom. One part of the answer to the sustainability of coalitions is the flow of information among participants. These flows create and manage expectations, and provide an avenue for enforcing cooperation (e.g., working out problems that arise in ensuring proper commitment to a goal when benefits are uncertain and out into the future).
• If the cost of assembling and maintaining networks that enable information flows has fallen (relative to 20-25 years ago), then it should be easier to create coalitions. Sure – if a coalition is created when the value of its expected benefit exceeds the costs of keeping it together (with communication networks being one of the costs), then we should see, in the internet age, more coalitions, or other collaborative forms of business organization.
• Although this seems sensible with respect to the creation of coalitions, the issue of the sustainability of coalitions is another matter. This, it seems to me, is an important research question: If coalitions, what you term “networks of creation” or “economic webs”, are the best hope for capturing value, what sustains them?
• Part of the answer to that question lies, I believe, in looking at online user behavior. If talent is increasingly important, more decentralized (yet “assemblable” at lower cost than in the past), then users are likely to play a role in supporting & sustaining coalitions. Research from the Pew Internet Project (where I work) sheds light on some relevant user behavior, namely the user-generated content phenomenon, the size of the population of those who truly embrace Web 2.0, and the sense among users that the wealth of digital information contributes to a sense of empowerment across several realms (e.g., civic/political participation, health care). However, we don't know much about the mechanisms which might bring these diffuse behavioral patterns to bear on assembling and sustaining coalitions. That, it seems to me, is an important research issue to address.

[rhhfla]

Your framework basically addresses the issue of value creation or perhpas said differently-differential advantage. Issues appear particularly germaine to your new sponsors at Deloitte. Will be interesting to see how your research indirectly shapes the strategy at Deloitte.

[David Phillips]

If the nexus of contracts (Coase) or nexus of conversations (Sonsino) do not fit the bill, nexus of relationships does.

Relationships, the convergent value systems held at a time between actors, resolves a number of your questions. Relationships do not have to be easy and are also edgy (dissonant values in otherwise common value systems).

Relationships (based on a common value system conceptualisation) seem to be the only common asset in your questions.

Barry Richards at Bournemouth (UK) and I will be looking at this as a research topic this Autumn.

[Hemant Puthli]

Interesting compilation of questions - I think they cover most of the issues the global economy is facing today.

My 2 cents: I would venture to postulate that at the root of most trends observed, is 'free market anarchy'. Increasing empowerment at the edge is leading to a collapse of authoritarian, process- and rule- centric institutions, and the emergence of libertarian, knowledge- and service- centric open markets of individuals / small enterprises. I don't think this rather nebulous subject has been studied in adequate depth. I believe such a study would be necessary to better understand the ecosystems and architectures of the world of the future as they evolve. At the very least, it is necessary to develop a taxonomy through an ontological study of such phenomena. Concepts like 'governance', 'regulation', 'management' require an object or an entity (which will be governed / regulated / managed) and a fresh approach to management necessitates a new framework for understanding and classifying these objects or entities.

You talked about a 'desperate' need for a taxonomy. Do you plan to develop one as part of your research agenda?

[Raimo van der Klein]

Wow..Those really are the questions..

I believe that large structures cannot be maintained in a fast changing place. (from solid to gas)

Thrive for excellence in small cells..

From profit to purpose orientation

Inclusion/adoption is only generated by focus on sentiment. Jointly make wishes come true..

[David J. Miller]

Really great questions and glad to see that this is taking shape. The question of measuring success is important at the individual level as well. The recent focus on positive psychology (happiness) and the rise in individuals choosing or desiring self employment/entrepreneurship speaks to need for some kind of new measurement.

Individuals seem to be doing it on their own, but some kind of new language/metrics would be helpful. Salary/income is not as instructive as it once was.

[William RAISER]

I would shift from "adaptation" to "co-evolution." This implies a more active role on both sides of the equation.

I would also question the fundamental purpose of an enterprise. Profit? No. Societal wealth generation, i.e., a better society for all. What does this suggest in terms of enterprise organization?

If joy in work represents one key aspect of societal wealth creation, what does that suggest for enterprise organization?

In a world where national boundaries count for less and less, what will it mean for business to take the lead in societal development issues such as: climate change, sustainable development, global health-care...