Aging and Global Capital Markets

The McKinsey Global Institute (MGI) is in the process of releasing some major new research on the impact of aging populations around the world on global capital markets and, ultimately, the global economy.  It is thought-provoking and rich with implications for the evolution of the global business landscape.

For those of you not familiar with MGI, it is an independent economics think tank operating within McKinsey & Co. It does great research, focusing on the intersection of economics and business.

The findings of this latest research project were presented at the Davos meeting of the World Economic Forum in January of this year.  Diana Farrell, the Director of MGI, did a brief interview with Business Week on the research.  Now the full report can be accessed on the MGI web site. Premium subscribers to content at the McKinsey Quarterly web site can now access an article summarizing the findings and I believe the article will be appearing in the next print issue of the McKinsey Quarterly.

The article abstract gives you the key message:

As people in Japan, the United States, and the countries of Western Europe grow older, bank accounts in these nations, where most of the world’s wealth is created and held, are likely to stop growing. Because people save less after they retire, and younger generations in their prime earning years are proving less frugal than their predecessors, savings rates are set to fall dramatically—with dire consequences for living standards in wealthy and poor nations alike.

The take-away

If no action is taken, the coming slowdown in global savings and the decline in projected financial wealth could depress investment and slow economic growth. A concerted effort to boost savings rates, shrink government deficits, and increase returns on financial assets can help avert this outcome.

I’ll give you my bottom line on this.  It means intensifying competition over the next several decades in financial markets around the world.  It also means growing pressure on corporations of all types to generate improved financial performance.  The quest for higher returns will only accelerate the broader restructuring trends (unbundling and rebundling) that I have been writing about over the past six years.  The dwindling number of safe harbors are rapidly drying up and financial markets will become catalysts for widespread restructuring. If you run a company or invest in companies, you owe it to yourself to look for this important new research from MGI.

Geoffrey Moore on Open Source

Ross Mayfield provides notes of a talk Geoffrey Moore gave at the Open Source Business Conference in San Francisco yesterday (April 5).  Geoffrey is always an insightful analyst and this is no exception.  He discusses the open source arena using many of the frameworks he has become famous for: chasms and bowling alleys, core and context, etc. His key assertion: Open source’s most important role is to commoditize context processes so people can extract them and re-purpose them for the core. Geoffrey also offers a fascinating classification and contrast of corporate cultures in the tech world.

On another note, if you haven’t seen Geoffrey’s recent presentation "Orchestrating the Stack" – you ought to check it out.  It provides an interesting overview of competitive dynamics in the enterprise computing space.

Google Satellite Navigation

I have always been a sucker for satellite imagery of the earth.  Google is embedding this in its new map search service which is still in beta.  To give it a trial run, go here.  Press the satellite imagery service in the upper right hand corner, then press the "local search" tab at the top of the page and enter something you’re looking for – let’s say "sushi" – and the city and state you want. Let Google do the rest – fascinating. Another way of accessing this is through Google’s Local service, also in beta – for an example, go here, especially the next time you are looking for sushi before catching a flight from the San Francisco airport.

The World is Flat

Those of us waiting to get Thomas Friedman’s new book, The World is Flat: A Brief History of the Twenty-First Century, enjoyed an early preview of his perspective in "It’s A Flat World, After All" an article in the April 3 Sunday New York Times Magazine excerpted from Tom’s new book. My God, this guy can write! He is a master of the memorable phrase – but it is more than style, there is real substance here as well.

Tom begins with an admission: "I wish I could say I saw it all coming. Alas, I encountered the flattening of the world quite by accident." By the flattening of the world, he means the pervasive impact of globalization (actually, Globalization 3.0 in his terminology) – the leveling of the playing field created by the systematic removal of barriers to movement across a growing portion of the globe.

In many respects, Tom’s article (and book) is meant as a wake-up call to the U.S. about the implications of the leveling of the playing field:

But Globalization 3.0 not only differs from the previous eras in how it is shrinking and flattening the world and in how it is empowering individuals. It is also different in that Globalization 1.0 and 2.0 were driven primarily by European and American companies and countries. But going forward, this will be less and less true. Globalization 3.0 is not only going to be driven more by individuals but also by a much more diverse — non-Western, nonwhite — group of individuals. In Globalization 3.0, you are going to see every color of the human rainbow take part.

He then adds:

When the world is flat, you can innovate without having to emigrate. This is going to get interesting. We are about to see creative destruction on steroids.

Toward the end, he really pushes the alarm button:

As a person who grew up during the cold war, I’ll always remember driving down the highway and listening to the radio, when suddenly the music would stop and a grim-voiced announcer would come on the air and say: ”This is a test. This station is conducting a test of the Emergency Broadcast System.” And then there would be a 20-second high-pitched siren sound. Fortunately, we never had to live through a moment in the cold war when the announcer came on and said, ”This is a not a test.” That, however, is exactly what I want to say here: ”This is not a test.”

Tom’s article certainly whets my appetite for his new book – its official release date is tomorrow (April 5) and I can’t wait to read more of his perspective. I certainly agree with his analysis of the leveling of the playing field on a global scale and I support his view that Americans (not to mention Europeans) are much too complacent about the implications of these trends.  I am hoping, though, that he spends more time in his book on  what companies should do about this.  His article doesn’t really address this – he talks mainly about public policy responses, in particular, the need to improve educational programs.

At the business level this gets very interesting. Who will create value and who will destroy value in this new world? To be provocative, let me assert that, if properly harnessed, the globalization trends Tom so eloquently discusses may in fact generate new sources of advantage that are far more powerful in terms of value creation on a global scale.  This in fact is the focus of the new book that JSB and I wrote – The Only Sustainable Edge.  Tom beat us to most bookstores (but not Amazon, where you can buy our book today, even though Tom’s book is still listed as a pre-order!) by a couple of weeks. That actually may be OK – the way I read it, Tom sets up the challenge in very compelling terms while JSB and I help executives to understand what it takes to turn a level playing field to their advantage.

The EPIC death of traditional media?

JSB originally introduced me to an interesting video produced by Robin Sloan that has been circulating on the Internet.  It purports to be a history of the media produced in the year 2014 and provides an interesting scenario of how traditional media gets trounced by the growth of a major new competitor Googlezon (you guessed it, arising from the merger of Google and Amazon, which the video indicates will occur in 2008). The transcript of the narration on the video is available here.

The video ends on a somewhat worried note suggesting that the outcome could represent an undermining of democracy and ethics of media, but I’m not sure I share the concern.  The way I "read" the video, it is chronicling the transition, in words that JSB and I would use, from traditional push media to a very different form of pull media. I believe that this transition will result in much more democratic media forms.  One possible reason for the disconnect is that the makers of the video seem to assume that this transition will occur in isolation.  JSB and I maintain that this is merely one element in a much broader transition that will also change the identities that we assume and the ways we participate with each other.  When you put the media transition into this broader context, there is much more ground for optimism about the outcomes.

Unbundling 7-Eleven

Harvard Business Review ran an interesting article, "Strategic Sourcing: From Periphery to the Core", written by three Bain partners in its February 2005 issue. As usual, the article is not available online for free, although a relevant excerpt of the article should be available here.

The article focuses on the story of the restructuring of 7-Eleven over the past decade.  Beginning in 1991, the company systematically looked at all of its activities and over time relinquished direct ownership of many parts of its business.  In fact, if you step back from what they did, 7-Eleven morphed into a much more focused customer relationship business – concentrating on in-store merchandising, pricing, ordering and customer data analysis – and turning to others to do everything else.

Those of you who have followed my writing know that I have long predicted a systematic unbundling of most corporations into one of three more focused businesses – infrastructure management, customer relationship or product innovation and commercialization.

When I explain this to most executives, they pull back, driven by visions of a shrinking business.  On the contrary, I maintain that this unbundling is a necessary precursor to aggressive and profitable growth. Witness the experience of 7-Eleven which consistently outperfomed its competitors.  As the HBR article reports, same store merchandise growth has been almost twice the industry average over the past two years, revenue per employee comes in at about 2.5x higher and inventory turns are 72% more than the industry average.  Over the past five years, 7-Eleven’s stock appreciation has outpaced all major competitors.  So much for a shrinking business.

As the article indicates, 7-Eleven has exploited the economies of scope of a customer relationship business by working with a broad range of product and service vendors to define new products and services tailored to the needs of their customers.  In one example, 7-Eleven has deployed multipurpose kiosks in its stores to deliver ATM functions through American Express, money wires through Western Union and check-cashing from CashWorks.

Unbundling does not mean fragmentation of business.  On the contrary, two of the business types – infrastructure management and customer relationship – have strong economies of scale and scope that will lead to significant concentration – ultimately, on a global scale.  The 7-Eleven story is just one example of the growth and profitability potential created by sharper focus. 

Growth of the blogosphere

David Sifry, founder and CEO of Technorati, has been posting some great surveys of blogging activity.  Part 1 "Growth of Blogs" looks at the growth in the number of blogs from March 2003 to February 2005 – no surprise: huge growth in number of blogs. Technorati tracks 7.8 million weblogs with 937 million links with the number of blogs doubling in size every 5 months (this doubling pattern has now persisted every five months over the past 20 months).  Part 2 "Posting Volume" measures blogging activity in terms of the rate of posting to blogs, showing that we have gone from a rough average of 100,000 posts/day in January 2004 to about 500,000 posts/day in February 2005, although with quite a bit of volatility, driven at least in part by current events. Part 3 "The A List and the Long Tail" measures the influence or authority of a site as indicated by the number of people who are linking to it – the key finding here is that the mass media dominate the fat part of the distribution, with some notable exceptions (15 of the top 37 sites are blogs) and some fluidity in rankings between October 2004 and March 2005.  Part 4, due any day now, will focus on tags and tagging activity.

What’s my take on this? Well, growth continues to be explosive, power laws in terms of blog linking are alive and well and yet there is still a lot of potential for shifting position in terms of rankings.

More fundamentally, we are being inundated with options in terms of information sources and we are only at the earliest stages of figuring out how to harness this wealth of information.  When media explodes, the scarce resource becomes attention and anything that can help individuals maximize their return on attention will be very valuable indeed.

The tagging debate continues

One of the hot topics at PC Forum was tagging – a topic I have covered before.  At PC Forum, David Weinberger and Esther Dyson led an informal afternoon discussion on tagging that wandered quite a bit, but did a good job of exposing the tension between those who welcome an emergent approach to organizing resources and and those who yearn for more structure.  Adam Bosworth weighed in after the session with a lengthy blog praising tagging as a sloppy KISS innovation and warning against the ontologists that want to impose order in this arena.

The discussion around tagging and folksonomies continues to build steam.  In addition to the contributions I mentioned in my earlier post, there is a somewhat cryptic transcript of the discussion on the Folksonomy panel at ETech here.  A more nourishing blog of discussions on tagging and folksonomies from the Information Architecture Summit in Montreal earlier this month is available here. Lou Rosenfeld has a good set of comments on folksonomies and meta-data ecologies in his blog.

While I am sympathetic with Adam’s celebration of bottom-up, emergent (and, yes, therefore very sloppy) systems, I can’t help but wonder if it will take more than a purely bottom-up approach to develop really useful (i.e., scalable) social tagging systems.  If I reflect on the successful virtual communities, they combine an effective moderator with emergent discussions. Open source software, slashdot, Wikipedia – all of these emergent systems have developed sophisticated governance structures to shape the bottom up contributions of their participants.

Why am I spending so much time thinking about this topic?  Because the challenge of dealing with abundance in resources will be a growing issue in networked environments.  Any mechanisms that help us to sort through the proliferation of options and find the resources that are truly useful to us will have great value.  Mechanisms that capture and build on the insights and experience of others will be even more valuable because they will create a classic increasing returns opportunity.  That’s the potential of tagging – if it can scale.

Btw, here’s a question for everyone – who owns the tags?

Offshoring mistake

Western executives often make a big mistake in assessing offshoring and outsourcing options.  They undertake a detailed comparison of current capabilities and then make their decisions based on this snapshot.  But snapshots miss the point.  This approach misses the fact that many offshore locations, especially in China and India, are building capability at a much faster pace than comparable companies in the U.S. and Europe. It’s relative pace that counts – executives need to watch videos, rather than staring at snapshots.

Here’s a case in point. The Economist ran a story in January 2005 called "The struggle of the champions" that expressed considerable skepticism about the real capabilities of many of China’s leading companies, including Huawei, the country’s leading telecom equipment vendor. Here’s one brief excerpt:

Yet the true extent of Huawei’s international reach is hard to gauge. Much of its overseas business is in emerging markets where there is little competition. Though it is pushing into Europe, it lacks the muscle of rivals. . . . That Cisco, the industry leader, successfully sued Huawei for intellectual-property theft suggests weaknesses in its technological base.

Three months later, in its March 3 issue, the Economist ran another story "See Huawei run" with a much more positive spin on the company.  What changed?  Well, for one, the Economist covers a recent survey of over 100 telecommunications service providers worldwide conducted by Heavy Reading, a market-research firm based in New York.  It turns out that, in the course of the twelve months since the last survey, Huawei had increased its ranking among global wireline-equipment providers from 18th to 8th. Not only that, Huawei ranked fourth in the world in terms of service and support. So much for the skeptics who are inclined to attribute Huawei’s growth simply to low prices.  As the Economist reports:

The report calls Huawei’s ascendancy “astounding” and says it has already surpassed several incumbent vendors in perceived market leadership.As a result, incumbent western firms should be “very scared” of Huawei, says Jean-Charles Doineau of Ovum, a consultancy.

What a difference a year makes or, in the case of the Economist, three months. This underscores the importance of relative pace. Western executives need to figure out how to position their companies in these offshore locations in ways that enable them to leverage this significant difference in relative pace.

PC Forum

I just got back from Esther Dyson’s PC Forum where JSB and I had an opportunity to talk to the group about our new book The Only Sustainable Edge in a session provocatively titled "Friction Can Be Good!". Some notes on that session can be found here and here.

As always, Esther did a great job of bringing together a very interesting group of people and creating ample opportunity for connection and interaction with new people as well as many old friends. To me, the most interesting paradox was that Chris Anderson from Wired was in the audience but was not a featured speaker even though virtually every speaker made at least one reference to The Long Tail. In fact, toward the end, it became a bit of a game to see how soon the speaker mentioned the topic.This is clearly a theme that has been widely adopted, at least within the tech/media industry.

Some of the interesting companies featured at PC Forum this year included Rearden Commerce, Grouper Networks, Jotspot, StreamBase Systems and SpikeSource.

Rearden Commerce, formerly known as Talaris, is a really great company that has only recently started to get some real coverage.  In the spirit of full disclosure, though, I should mention that I am on their Board of Advisors. Rearden Commerce has deployed a service-based application designed to help enterprises manage employee business services (spend on services like travel, package deliver, teleconferencing).  But the real story about Rearden imho is about the SOA based delivery platform they have created – it represents a great example of the service grid concept that JSB and I have been evangelizing for years now.

Grouper Networks launched late last year a new generation of peer-to-peer file-sharing network that emphasizes community and privacy – two favorite themes of mine. It is particularly designed to facilitate the exchange of large files among small groups of friends. One limitation: groups cannot exceed 30 members – a limitation the company established to avoid potential legal liabilities encountered by larger peer-to-peer file-sharing networks.

I have written about Jotspot before in my blog. It’s a next generation wiki company focusing on helping work groups to create tailored application platforms to support collaboration.  What is particularly interesting to me about this platform, the brainchild of two co-founders of Excite, is that it seeks to help participants design their own applications, including integrating information feeds from third parties, data feeds from other applications like salesforce.com and even application modules designed by specialized third parties taking advantage of Jotspot’s intent to publish its API’s.  I believe that for social software to really take off we will need to develop and commercialize truly open collaboration environments that can effectively integrate a lot of point solutions emerging in this space.

StreamBase Systems tackles the problem that exists in financial markets today but will soon pervade a broad range of other markets – especially markets that deploy RFID technology. Torrents of information are generated by RFID tags. Most of it isn’t worth keeping but the challenge is to quickly isolate the information that is meaningful and deliver it where it matters. This will potentially become a powerful tool to spot exceptions and provide information necessary to handle and resolve the exceptions.

Kim Polese talked about her new venture SpikeSource, a company she joined as CEO in August of last year. Think of it as a testing and certification  infrastructure for open source software. One interesting feature of the company is the relationship it has established early on with Cognizant to access offshore capability.  My sense is that SpikeSource will be a key player in helping to move open source methodologies more broadly into the application realm, unleashing a large number of narrowly focused applications. It’s a great example of a specialized infrastructure management business.

I could go on, but these were some of the highlights of the conference for me.  I should also mention Emily Levine who gave us a great after-dinner talk that was both extremely funny and thought-provoking at the same time.  If you get a chance to hear her talk, take it.