DIY Drugs

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

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

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

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

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

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

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

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

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

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

Product Innovation and the Red Queen Effect

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

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

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

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

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

JSB on NPR

I am stuck in Paris on vacation (I know, things could be worse!), but my co-author and collaborator, John Seely Brown, is going to be interviewed by Neal Conan on "Talk of the Nation" on NPR this Wednesday Thursday, August 24th 25th (sorry, in my enthusiasm about this, in my original posting I had this listed as occurring one day earlier – the show will be broadcast live on Thursday, August 25th – blame it on excess absinthe consumption). "Talk of the Nation" is doing a special series on China and JSB will be interviewed on some of the key themes covered in our book, The Only Sustainable Edge, regarding the extraordinary innovation emerging in China. I expect that JSB will be as controversial as ever, stirring up more than a few hornets nests with some provocative views on what is going on in China.

The interview is scheduled to air live at 2 PM EDT, but to check for specific NPR affiliated radio stations that will broadcast the interview, check out this link. Also, this is a call in show, so if you want to engage with JSB on this topic, you can call in to "Talk of the Nation" during the live broadcast by dialing 800-989-8255 or pose questions via e-mail at TOTN@npr.org.

Patterns of Business Innovation in China and India

Sorry for the gap in postings, but I have finally escaped to my first vacation in three years.  While on vacation, I came across the special August 22-29 Business Week double issue focusing on “China and India: What You Need to Know Now” (the online edition has a lot of material not available in the print edition). It is full of interesting articles on these two emerging economies and reflects growing interest in the business impact of these two countries – the focus of The Only Sustainable Edge.

Unfortunately, though, the articles reflect the weaknesses of much Western coverage of China and India.  This coverage tends to veer from eye-opening macro-economic statistics to interesting stories about individual companies.  From a strategist’s viewpoint, though, what I miss in such coverage is any deep analysis of the patterns of business innovation that might help to explain the explosive growth in both economies or the implications for Western companies.

Open distribution – the first pattern of innovation

In this respect, Business Week does a better job on the India front. Manjeet Kripalani has a particularly good article, “Asking the Right Questions” on innovation among Indian companies. She tells interesting stories about Indian companies like ICICI Bank, Indian Tobacco Company (ITC) and Tata Motors. (For more detail on the efforts of ICICI Bank and ITC in particular, see the case studies included in C.K. Prahalad’s The Fortune at the Bottom of the Pyramid.) If you step back from these stories an interesting pattern emerges across three very different industries in India – let’s call it “open distribution” innovation. In our article on innovation blowback, JSB and I discussed the experience of a U.S. company, Cummins Inc., which has successfully pursued a similar pattern of innovation in India.

These companies are extraordinarily innovative in re-conceiving the economics of distribution.  They are focused on the enormous challenge of reaching the mass domestic market. Their target customers are distributed in rural areas with very limited physical infrastructures and the customers are far less affluent than the typical customers in Western economies. They need to deliver more value at lower cost than they could with the traditional business approaches of Western companies. 

What have the companies done to address these challenges?  They have innovated both in terms of products and processes.  The innovations cover a number of dimensions:

• 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.

These innovations are quite different from the innovations in U.S. retail distribution pioneered by such companies as Wal-Mart and Dell.  These U.S. companies developed completely self-contained and highly standardized customer-facing facilities and services.  The open architecture approach pioneered by Indian companies may offer much greater opportunity to deliver more tailored value to customers than the closed architecture U.S. approach. In this respect, the techniques initially developed to reach poor and rural customers may have even greater potential when used to reach highly demanding affluent and urban customers in Western economies.

Lean process management – the second pattern of innovation

This pattern of open distribution innovation in India is quite different from the innovation of the IT enabled services companies clustered in Bangalore and other high tech outposts in India.  These companies largely serve the export market – especially large Western companies who are increasingly offshoring both software development activities and a growing variety of administrative business processes like human resources management and finance and accounting.

Steve Hamm, in his article “Taking a Page From Toyota’s Playbook”, describes how companies like Wipro and Infosys have been heavily inspired by Toyota’s disciplined focus on rapid process improvement and are applying Toyota’s methodology to their business process outsourcing businesses. These companies have become so sophisticated in their use of process innovation techniques that they are now offering consulting services to help their clients in Western companies apply similar techniques in their own operations.

So, here we have a second pattern of innovation – let’s call it “lean process management” – quite different from the “open distribution” innovations pioneered by Indian companies focused on the domestic market.  Lean process management as applied by the Indian IT companies focuses on activities within a single enterprise while open distribution innovation seeks to reach out and mobilize specialized institutions already in place in rural areas to deliver more value to customers.

Open production – the third pattern of innovation

Now, what about China?  This is where the Business Week coverage is most disappointing. In fact, one of the articles makes the observation that “China is surprisingly weak in innovation.”  I beg to differ.  In fact, I would argue that China, along with India, is rapidly becoming the global center of management innovation.

What explains this divergence of views?  First, at least in its coverage of China, Business Week seems to equate innovation with product innovation, while I give at least as much emphasis to the importance of process innovation.  Second, Business Week seems to ignore the fact that there are three Chinas: rural China, the state-owned enterprises (SOEs) and the private, entrepreneurial sector.  Much of Business Week’s coverage concentrates on the state-owned enterprises which still account for the bulk of China’s industrial production and are usually the partners that Western companies choose to affiliate with when they enter China.  But, the state-owned enterprises, favored with massive subsidies from the government and low-cost loans from the state-owned banking system, have almost no incentive to innovate. In this arena, it is not surprising that Business Week finds little innovation.

The cauldron of management innovation is in the third China – the growing array of privately-held companies emerging on the edge of the Chinese economy.  These companies rarely receive much attention from the Western press, in part because they have developed a culture of keeping a low profile. JSB and I have written extensively about the management innovations being pioneered by these companies in The Only Sustainable Edge.

The contrast with the patterns of innovation among Indian companies is intriguing.  These entrepreneurial Chinese companies (which also include a number of high tech Chinese companies in Taiwan) are focused primarily on competing in global markets in product categories like electronics hardware, textiles and motorcycles where product lives are compressed and demand is highly uncertain.  These companies are pursuing a third pattern of business innovation focused on re-conceiving the economics of production in order to more effectively mobilize distributed expertise for both product development and manufacturing – let’s call this the “open production” pattern of innovation.  The process innovations in this case include:

• modular design of products and processes
• management techniques to flexibly configure highly customized business processes encompassing hundreds, if not thousands, of specialized business partners
• management techniques to encourage business partners to work together in ways that enable them to get better faster than they could on their own.

These are innovations in their own right, but their real power comes from the fact that these management techniques establish the conditions for even more rapid incremental innovation in products and processes. Think of it as meta-innovation – management innovations that spawn a continuing series of innovations.

Comparing the three patterns of innovation

So, what is the bottom line here?  We are seeing three powerful forms of business innovation propelling the economic growth of India and China.  The second form – lean process management – is heavily inspired by Toyota’s management innovations, but Indian companies are applying these management techniques to rapidly improve the performance of a broad range of administrative business processes. If Western companies do not master these techniques in their administrative business processes, they had better be prepared to outsource and offshore these business processes to Indian companies who are mastering these techniques.

The two other forms of business innovation emerging in India and China – open distribution and open production – are largely being pioneered within these countries – they are not inspired by management practices in other countries. Open distribution innovation focuses on customer facing business operations while open production concentrates on product development and manufacturing activities. These innovations are not mutually exclusive – in fact, their real power may only be realized when they are combined.  Both forms of innovation share some basic principles:

• focus on rapid incremental innovation – both in products and processes
• design both products and processes in modular fashion so that flexibility and innovation can be maximized
• use this modularity to aggressively mobilize the resources of third parties to add more value to your own companies products and services.

Western companies would do well to study, understand and, wherever possible, adopt these business innovations in their own companies. To some extent, these management techniques can be accessed through outsourcing relationships, but these innovations span the full scope of a company’s operations. Outsourcing is not a panacea – ultimately, Western companies will need to master these management techniques in at least some areas of their operations or they will find their businesses rapidly eroding through a combination of outsourcing and intensifying competition from companies which were quicker to recognize and adopt these management innovations.

Three Variations on Offshoring

For those of you who haven’t seen it, I wanted to point out a column on “The Benefits of a Long Distance Relationship” that JSB and I wrote for the Financial Times Summer School series in today’s issue of the newspaper.

In this article, we explore the various motivations driving offshoring decisions by Western companies.  Unfortunately, most Western executives still make these decisions based on near-term operating considerations, especially driven by the quest for rapid operating savings given lower wage rates in emerging economies like China and India.  Elsewhere, we describe this as “wage arbitrage”.  This motivation frequently leads to disappointing results and, over time, can create a vicious cycle that ultimately threatens the viability of the enterprise itself.

More sophisticated companies view offshoring from the perspective of “skill arbitrage”.  They understand that offshoring creates an opportunity to access distinctive skills.  We point out that offshoring locations are evolving rapidly.  Any decision based on comparative skills must be based on an understanding of the dynamic context, rather than on a static “snapshot” of comparative skills at any point in time.

This leads to a third way of viewing offshoring – as “skill-building arbitrage”.  We believe that the real opportunities created by offshoring can only be captured by companies that adopt this view. Rather than merely seeking to access distinctive skills, Western companies will benefit a lot more from offshoring if they view it as a powerful opportunity to participate in relationships and environments that can build capabilities more rapidly than would be possible elsewhere. In this context, we highlight three levels of opportunity:

• Different management techniques made possible in part by lower wage rates
• Specialized business ecosystems emerging in cities like Bangalore and Shenzhen
• Global process networks to help connect companies across distributed regions.

This is a more dynamic, long-term view of the opportunity – offshoring is not just about accessing the distinctive skills or cost advantages that exist today, but positioning for longer-term capability building. With this perspective, offshoring relationships change from relatively narrow and opportunistic transactions to much more enduring and evolving relationships designed to help both parties get better faster.

Just like any relationship, the benefits are great but offshoring requires deep understanding and sustained effort to reap the rewards.

Silicon Valley’s Risky Complacency

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

Confronting the Offshoring Challenge

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

Colvin begins by outlining three familiar drivers:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Beware “Berrybite” Blowback

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

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

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

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

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

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

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

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

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

Renminbi Blowback

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Brands and Advisors

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

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

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

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

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

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

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

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

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

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

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