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Disney, Pixar and Jobs

Disney’s purchase of Pixar is exciting a lot of media attention, including a cover story from Business Week. The coverage generally welcomes the acquisition. What’s interesting to me, though, is that most of the attention seems to be on the energizing effect that Steve Jobs’ arrival at Disney (as Board member and the company’s largest shareholder) might have on the company, rather than the specific creative assets being purchased at Pixar.

Here’s what Business Week had to say:

The alliance between Jobs and Disney is full of promise. If he can bring to Disney the same kind of industry-shaking, boundary-busting energy that has lifted Apple and Pixar sky-high, he could help the staid company become the leading laboratory for media convergence.

Let me offer a somewhat different perspective.  Pixar is a great product company. The creative talent at Pixar offers great potential in strengthening Disney’s product offerings in the animation arena.  But I am frankly skeptical about the broader benefits of this acquisition that seem to be exciting the reporters and analysts covering this event.  In particular, I am skeptical about the role that Jobs can play in a broader turnaround of Disney.

There’s no question about it, Steve Jobs is an extremely accomplished entrepreneur – he is brilliant, energetic and has an instinctive feel for great product design. In many respects, though, Jobs’ greatest strengths are also his greatest weaknesses. These weaknesses could undermine the turnaround that Disney so badly needs. Here are four concerns:

Jobs is a product guy when large media companies need to figure out how to become relationship companies. As I have written before, today’s large media conglomerates emerged in an environment of scarce distribution.  Scale and scope mattered in negotiations with distribution channels. Distribution scarcity is rapidly eroding and being replaced by attention scarcity.  As these changes play out, if media companies want to maintain scale and scope, they will need to build relationships with specific audience segments (and use the Internet to build relationships with individual members of the audience segments). They will then need to develop the skills required to use the deep understanding of these audience members to become ever more helpful in connecting them with content (and other relationships) regardless of who produced the content. The mindset shift required to do this should not be under-estimated.

Pixar produces great content that appeals to broad audiences, but its entire culture and mindset is that of a product company: build insanely great products and audiences will come.  The notion of offering somebody else’s products to their customers would be anathema, yet this is the hallmark of the customer relationship businesses that will sustain scale and scope in the next wave of the media business.

Don’t get me wrong. Great product companies in the media business will still be enormously profitable. The question will be whether they can scale.  Creative talent generally seeks smaller, more intimate organizational homes.  Many of the most creative folks at Pixar today are refugees from larger organizations (including, ironically, Disney). As competition intensifies in the media business, it will also be harder to sustain success as a product business – continuously coming up with compelling products that can rise above the flood of other products will become more and more challenging. Unless Disney plans to unbundle into a set of independent product businesses, it has to find a way to leverage scale and scope economies.

Jobs knows and loves products.  In his mind, relationships only exist to support products.  He will help Disney to create great products, but he is likely to undermine efforts to shift the focus to audience relationships. The irony is that Disney’s early success hinged on a very clear audience segment focus (parents with small children) and its ability to mobilize great content across many different media to serve the needs of that audience segment. Through a series of acquisitions and diversification initiatives, Disney has lost its audience segment focus. Disney needs to re-discover that heritage. Jobs is not likely to help Disney in this quest.

Jobs is a product guy at a time when media products need to become platforms. In a world of scarce attention, creators of media products will need to compete with those who re-conceive media products as platforms.  What is the difference? Products are designed to be used on a standalone basis – you buy it and you view it or listen to it in the specific way the content creator intended.  Platforms are designed to be built upon – they create opportunities for the original creator, third parties or the customers themselves to extend, enhance and tailor the content in ways that the original creator never anticipated. Offered as a platform, content can create far more value than any equivalent standalone product.

Jobs is such a passionate product guy that he has trouble embracing platforms.  After all, if the product is perfect (and he won’t tolerate anything less), how could anyone possibly make it better? Perfection is the enemy of platforms.

The story of Apple’s decline as a computer company can be traced to Jobs’ efforts to close up the early Apple computers in the transition from the Apple II line to the Lisa and Macintosh product lines.  Jobs had similar instincts with his NeXT Computer venture – a beautiful but largely standalone computer that made it difficult to connect peripherals. The iPod is tied to a service (iTunes) but it steers far short of being an open platform.  In working with Disney, Jobs is likely to push the company to create insanely great media products, but not platforms.

Jobs builds tightly integrated products when the future of large media companies hinges upon the mindset and skills required to build loosely coupled products. In a world of distribution scarcity, the game was all about creating large, integrated products that could justify the large distribution expense involved in reaching the customer.  As just one simple example, this is why singles gave way to albums in the music business. As distribution scarcity erodes, the advantage shifts to content creators that can modularize their products to facilitate broader reach and re-use – what Umair Haque refers to as micro-chunking (in fact, a lot of my concerns about Steve Jobs could be summarized in his lack of “edge competencies” – another Haqueism).

From the beginning, Jobs resolutely resisted efforts to unbundle the Macintosh operating system from the hardware. This contributed significantly to the long-term erosion of both Apple’s hardware and software market share in the computer business relative to more focused players like Microsoft and Dell.  From his perspective, perfection requires tight integration. In working with Disney, Jobs is likely to push for larger, more tightly integrated content – exactly the opposite direction from the one required to maximize returns on content development in a world of attention scarcity. 

Jobs tends to focus inward in building talent rather than creating networks to get better faster. The media business has always relied on assembling creative talent.  The trend in the media business over time, though, has been for creative talent to unbundle from larger institutions and establish more loosely coupled relationships, coming together for specific projects but maintaining independence.

My colleague, John Seely Brown, pointed me to an interesting article by Bill Taylor and Polly LaBarre entitled “How Pixar Adds a New School of Thought to Disney” that appeared in the January 29 issue of the New York Times.  In this article, Bill and Polly explain how Pixar took a different approach to organizing talent relative to Hollywood:

In the Hollywood model, the energy and investment revolves around the big idea — the script — and the fine print of the deal. Highly talented people agree to terms, do their jobs, and move on to the next project. The model allows for maximum flexibility, to be sure, but it inspires minimum loyalty and endless jockeying for advantage.

Turn that model on its head and you get the Pixar version: a tightknit company of long-term collaborators who stick together, learn from one another and strive to improve with every production.

The article quotes Randy S. Nelson, the Dean of Pixar University, the company’s education and training arm, as follows:

The problem with the Hollywood model is that it’s generally the day you wrap production that you realize you’ve finally figured out how to work together. We’ve made the leap from an idea-centered business to a people-centered business. Instead of developing ideas, we develop people. Instead of investing in ideas, we invest in people. We’re trying to create a culture of learning, filled with lifelong learners.

Wow!  This is a big red flag.  Don’t get me wrong, it is really great that Jobs and his colleagues at Pixar have such a great focus on attracting, developing and retaining talent. Jobs in particular has a reputation for recruiting and motivating teams with great talent, pushing them hard to discover and go beyond their performance limits.

But the red flag is the narrowness of the vision.  No matter how many smart people Jobs manages to recruit, there needs to be a recognition that, in the words of Bill Joy, "there are always more smart people outside your organization than inside." The challenge is to find ways to connect with as many smart people as possible, wherever they reside, and to develop relationships that motivate and enable all participants to get better faster by working together.

The quote from Randy Nelson paints a much too narrow picture: either you bring talent inside and hold on to them or you are doomed to live in a project world where relationships are short-lived.  The challenge and opportunity for all companies, not just media companies, is to develop a much richer network of long-term, trust-based relationships extending well beyond any individual firm that can accelerate capability building.

Disney desperately needs to build these kinds of relationships to tap into creative talent wherever it resides. If Jobs leads Disney to focus primarily on internal talent, he will distract Disney from another key imperative.

A key lesson out of all of this is that companies need to approach acquisitions explicitly in the context of the most basic question of all: what business should we be in?  The acquisition of Pixar and the arrival of Steve Jobs in the halls of Disney suggests that Iger and Disney’s Board believe Disney’s future is ultimately in the product innovation and commercialization business.  If they are right, Jobs will be a great addition. He is a brilliant product guy.

On the other hand, I believe scale and scope economies in the media business are migrating away from products. Media companies that want to remain large and drive even more growth need to focus on establishing platforms and relationships designed to more deeply connect with specific audience segments and individual audience members.  If that is the most promising direction for Disney, then Jobs may not be the man for the job.    

Centennial

I’m not even sure this is the right word for it. I certainly haven’t been blogging for one hundred years (although sometimes it feels like it),  but I noticed that I just made my 100th post to this blog.  It struck me that this might be a good time to step back and solicit some feedback from those of you who frequent this blog.

I view this blog as a work in progress.  I am still trying to find the right formula that works for me and hopefully works for you.  I have to admit that I find significant personal value in writing here so I would likely continue even if no one came by to read it.

At the same time, I view this as an exercise in connecting with others who share my interests.  While I certainly welcome feedback on the substance of my postings on an ongoing basis, my primary interest at this point is to solicit any reflections regarding the style of the blog.

• Is the scope of the blog too far ranging in terms of the topics covered or (hard to believe) too narrow?
• Are the individual postings too long or (again, hard to believe) too short? Am I posting with the right frequency?
• Does the blog have the right balance of theory and stories?
• Is the writing clear and compelling?
• What are the things that annoy you about the blog?
• What could I do to make the blog even more interesting, useful and engaging?

Any input would be greatly appreciated.

Making Connections in Davos

I am heading back from the Annual Meeting of the World Economic Forum in Davos, Switzerland.  As usual, it has been an incredibly stimulating yet exhausting event where the value comes from the rich diversity of participants and topics covered in meetings extending from 7am to midnight and later.

I have been coming to this meeting for a number of years because I find it invaluable to do pattern recognition in terms of issues that are drawing the attention of global leaders. What is discussed and drawing the crowds here is revealing, but what is not discussed is perhaps even more revealing.

When I first came here in 1997, the hot topics were the two “I’s” – information technology and the Internet.  Older CEO’s crowded into sessions to listen to young dot com entrepreneurs talk about how the Internet was going to change the world.  In the years following 2000, the enthusiasm for technology has substantially waned, even though one can still find sessions on IT. This is definitely not the crowd draw that it once was.

This year’s overarching theme was “The Creative Imperative” and one of the hot topics was innovation.  Executives gathered in a variety of venues to try to figure out what they can do to ramp up their innovation performance and enhance the creativity of their organizations.

On another dimension, many of the sessions this year focused on “the emergence of China and India” as a key management challenge. The sessions on China and India drew large crowds – there was clearly much interest in the extraordinary growth of these emerging economies and the implications for global business.

What’s interesting to me, though, is that few people drew a connection between innovation and the emergence of China and India – for all intents and purposes, these were treated largely as independent topics.  In some cases, executives would observe that the emergence of China and India increases the innovation imperative for Western companies, but that was generally the extent of the connection.

That really misses the point of the management challenge posed by China and India.  In fact, the rise of China and India can largely be traced to some very distinctive innovation being pioneered by companies in these regions.  Western executives tend to overlook this innovation for a variety of reasons.

• They are often still locked into mindsets that attribute the growth of these economies purely to wage rate arbitrage – leveraging lower wage rates to capture a growing share of global economic activity.
• They also miss a lot of the innovation that is going on because they deal primarily with large, traditional (and in the case of China, often state-owned) enterprises in these countries.
• Finally, Western executives too often tend to equate innovation with breakthrough product innovation.  As a result, the management innovations that are being pioneered by companies in China and India tend to fall below the radar screen. These innovations are largely innovations in management techniques designed to foster rapid, incremental innovation rather than breakthrough product innovation.

As I have written elsewhere, three different patterns of management innovation are driving the growth of companies in China and India

• Open production
• Open distribution
• Lean process management (in this case, taking techniques originally pioneered by Japanese companies in manufacturing and supply chain operations and applying them to a broad range of other business processes).

As the discussions at Davos confirmed, few Western companies even see this innovation, much less understand its importance. That’s a big shame. It can be a source of great vulnerability for Western companies. In the near-term, there’s a significant opportunity for all companies to harness these innovative management techniques to deliver more value to their customers.  If Western companies wait too long, though, they will be exposed to increasing global competition from the companies in China and India that are pioneering these techniques. These companies are increasingly active in a broad range of industries ranging from cell phones and software to motorcycles and apparel. 

As these management techniques come together, they create powerful bootstrapping platforms that build capability very rapidly.  As I have emphasized in other writing, Western companies should not be misled by static snapshots of relative capability. What matters are trajectories and the relative pace of capability building.

The two “I’s” that shaped this year’s discussions at Davos – innovation and India (along with China) are actually much more tightly linked than most executives recognize. If there is one lesson that everyone should take back from Davos, it is to better understand the connection between these two vital topics.

Zero-Sum Thinking

In a conversation with Jack Welch earlier this week, he raved about Rich Kaarlgard’s recent column in Forbes on “World’s Worst Disease”.  No, Rich is not talking about cancer, AIDS or avian flu – he is talking about “zero-sum thinking” – the belief that if one person gains, other people must inevitably lose.

Rich focuses on a significant rift in our society.  In fact, this is perhaps the most fundamental rift in any society. It ultimately determines whether the society is progressive and dynamic or stagnant and conflict-prone.

Unfortunately, both of our political parties appear to be captives to zero sum thinking. Rich asks:

Why do so many opinion makers promote the zero-sum view? I think that politicians, even the best and brightest, become zero-sum thinkers because they occupy a zero-sum world. Only one person can be President of this country; only 50 can be governors; only 100 can be senators. . . . Politicians live in a world in which one person’s gain is another’s loss.

Rich goes on to target economists and journalists as being particularly prone to this disease. Now, I agree with all of this, but I wonder why Rich leaves out business leaders in his discussion of this disease. My concern is that many senior executives of our largest companies have fallen prey to this disease.

As JSB and I wrote in the opening pages of The Only Sustainable Edge:

We believe that a new opportunity and a new imperative – the acceleration of capability building – will shift our institutional and collective mind-sets from a worldview that focuses on static, zero-sum relationships to one that emphasizes dynamic non-zero-sum relationships.  As we adopt these different perspectives, we will find that most of our institutions today are fundamentally lacking.

Static, zero-sum worldviews generally arise when people focus on the allocation of existing resources.  Existing resources have a fixed quantity, and with relatively modest exceptions, if one party acquires a resource, other parties are deprived of that resource.  This worldview is a natural orientation for large, well-established players – they become more concerned with defending existing resources because they have a lot to lose on this front, compared with the opportunity to create more resources.

I spend a lot of time with senior executives and I am struck by the inroads made by this disease in corporate boardrooms.  Here are just a few of the areas where zero-sum thinking rears its ugly head in our business arena:

• Squeezing suppliers. In our quest for cost-cutting, we have focused on squeezing the prices of our suppliers as much as possible.  The result has been deteriorating trust and relationships with key business partners. Too many executives under-estimate the opportunity of working together to make both parties stronger and deliver even more value to the marketplace.

• Growing focus on intellectual property protection.  There are certainly valid concerns here, but too often executives seek to protect their existing stocks of knowledge at the expense of the opportunity to participate in broader relationships that could significantly refresh these stocks.

• The militarization of marketing.  Military metaphors abound in our marketing efforts – campaigns, blitzes, targeting – yet war is perhaps one of the most extreme examples of zero-sum games.  What new value could we create if we focused instead on how we could be more helpful to customers so that they will make the effort to seek us out, rather than having us search for them?

• The marginalization of innovation.  With some obvious exceptions, large enterprises have generally become consumed with the quest for cost-cutting – again,  for understandable reasons.  In the process, though, the opportunity to create new forms of value through innovation has been shunted aside.  Innovation has been compartmentalized into R&D departments that have been squeezed for cost-savings along with everyone else.  Rather than assigning innovation to the ghetto of R&D, why not liberate innovation and view it as an activity that everyone in the enterprise should be pursuing every day? Of course, that means breaking the mindset that innovation is about product development. After all, innovation is ultimately about finding ways to deliver new value to the marketplace from existing resources, whether this value is in the form of products, new work practices, improved business processes, new management techniques or new business models. Innovation is the antidote to zero-sum thinking.

Rich also doesn’t talk about this disease in a global context.  Certainly every society has it to some degree.  But I think the story of the rapid growth of China and India in the past decade hinges on the ability of significant segments of the population to find an antidote to this disease and to embrace a positive-sum view of the world.

I fear that the disease is more pervasive than Rich acknowledges.  We need to identify the symptoms in all areas of our life and work hard to find appropriate antidotes.  Our continued growth and prosperity depend upon it.

Stock Buybacks – A Red Flag?

As we move from one year into the next, it is a good time to step back and reflect on patterns emerging in various areas of the business landscape. One pattern that I find disturbing is the growth of stock buyback activity.

Barry Ritholtz recently drew attention to this in his posting on “An Unprecedented Mass of Buybacks” at his blog The Big Picture. Some other articles on this topic have appeared in Barron’s (subscription  required) and the Wall Street Journal (purchase required). In his blog, Barry indicates that the S&P 500 companies bought back $456 billion worth of stock last year.  That’s almost one-half trillion dollars!

When you add in dividends (the other major form of payment to shareholders), the S&P 500 increased their payments to shareholders by 30% over another record year of payments in 2004. What’s going on here?

Now, there are many explanations for why this is happening, some more benign than others.  At one level, this outflow of cash to shareholders is refreshing.  There are strong institutional incentives for managers to hold on to any cash they generate.  Too often, senior management will re-invest this cash in low return business ventures rather than return it to shareholders. Classic finance says that if managers can’t find investment opportunities above the cost of capital, they should return cash to shareholders and let them find more attractive investment vehicles.

And yet, there’s another explanation that causes more concern.  Most large American companies for years have been pursuing aggressive cost-reduction strategies, especially in the aftermath of the 2001 recession.  They have generally been very successful at cutting costs and substantially increasing cash flow generated from operations. But then the question becomes, what to do with the cash? Companies with a high rate of innovation generally have no problem in answering this question – they use the cash to fund the next wave of innovation initiatives.

But, companies with low innovation capacities run into a real problem.  The accumulation of cash becomes an embarrassment and they start paying it out.  So, one way to interpret the surge in dividend and buyback activity is that it reflects a fundamental imbalance in management focus: aggressive cost-cutting initiatives combined with low innovation capabilities.

This is a real danger signal in a global economy with intensifying competition.  In this environment, cost savings are generally not sustainable – they rapidly get competed away and captured by the customer.  Unless companies have the innovation capacity to redeploy these savings rapidly into productive new business initiatives, they will end up shrinking.

Now, many managers will reply that this is unfair.  In fact, one of the often cited reasons for share buybacks is management’s belief that the public capital markets have undervalued their stock. If this is the case, buying the company’s own stock may in fact be one of the best investments available – when public investors finally come to their senses and realize the true value of the company’s stock, the stock repurchases will earn a healthy return on investment.

While this may be true in some isolated cases, there’s something that just doesn’t ring true.  There’s growing liquidity in capital markets around the world.  Investors are competing with each other to find attractive investment vehicles.  Can it really be the case that there are so many instances of undervalued stock among the S&P 500 to justify such widespread and massive buyback activity?  Maybe investors are appropriately skeptical about the innovation capacity of these companies and discounting management’s rosy projections about sustainable profitability and growth potential.

For those who are interested in understanding recent trends in share repurchases and their financial consequences, Michael Mauboussin, the Chief Investment Strategist at Legg Mason Capital Management, has recently released a great report on “Clear Thinking about Share Repurchase".

What’s the bottom line here?  Simple – a growing number of US companies have reached a point where short-term cash generation exceeds their innovation capacity.  In the short-term, they are doing the right thing – giving cash back to shareholders and relying on them to find more attractive places to invest their funds.  But in the long-term, this is a formula for shrinking the business.  Senior management teams have got to find ways to unlock the innovation potential that resides in all their companies.  If they don’t, they will find recent cost-savings competed away, cash flows eroding and shareholder value shrinking.

Consumer Electronics Show – in Shanghai?

I have real affection for the Consumer Electronics Show held every January in Las Vegas. I have attended it off and on since 1982 when I first made the trek as an executive at Atari.  Unfortunately, this year I was not among the 130,000 people who descended on the city for the show.  Watching from afar, I was struck by what was not covered as much as by what was covered.  The media paid lots of attention to the keynotes by tech leaders and gave lots of coverage of the latest gadgets.

One thing that the media failed to cover was the continuing shift in production and design of more and more of consumer electronics devices to Taiwan and mainland China. It would have been interesting to do an analysis of how many of the products on display in Las Vegas were manufactured in Taiwan or mainland China and then to determine how many of these products were also designed in those countries.

A good news hook for the story might have been the recent announcement that “China has replaced America as the world’s largest exporter of IT goods” according to new figures released by the OECD.  Actually, this happened in 2004, but it was just reported last month. Also, the statistic applies to all IT goods, not just consumer electronics. 

OK, I know all the objections.  Most of China’s exports are in low-end IT products.  A lot of the exports are sub-systems and components that get integrated into IT devices sold by US companies.

Granted.  But those of you who read my writings know that my focus is not on the snapshot.  My focus instead is on the trajectory and relative pace of change. This is what the Economist had to say about the dynamics:

Given China’s importance as a centre of low-cost manufacturing, its rise as an industrial power in technology goods is hardly surprising. What is startling is the speed of its ascent. From $36 billion in 1996, its world trade in tech goods – both imports and exports – has grown as much as 32% a year, to reach $329 billion in 2004.

China’s rising share of the market has been matched by a fall in the dominance of America – which invented the electronic computer and transistor that launched the digital era.

The contrast would be even starker if we focused on consumer electronics where the relative competitor would have been Japan.  China surpassed Japan as a global exporter of IT goods even earlier – in 2003. The impact of China’s competition with Japan was aptly summarized in a Financial Times editorial (registration required) last November 22 headlined “Threat of oblivion in consumer electronics: Japan’s once invincible giants are fighting a losing battle.”  The editorial observed:

How the mighty have fallen.  Two decades after Japan’s once invincible consumer electronics industry consigned most western competitors to the graveyard, it too is fighting to avoid oblivion – and for many of the same reasons.

Pioneer yesterday became the latest company to be forced into emergency restructuring after plunging into heavy loss, following Sony and Sanyo.  Others, such as JVC, Toshiba and NEC are struggling.  So poor is the industry’s health that Japanese media have started publishing league tables of the companies most likely to go bankrupt.

The main cause of the industry’s woes are Chinese competition and the switch from analogue to digital technology. . . . .

Of course, if the reporters wanted to take an even broader lens, they might have also built upon the news that broke in late December indicating that China’s economy was actually bigger than previously believed.  The New York Times ran an article (purchase required) on December 21, 2005 headlined “That Blur? It’s China Moving Up In the Pack.”  The reporters suggested that:

With China’s announcement on Tuesday that its economy was considerably bigger than previously estimated, economists and financial prognosticators are scrambling to rethink their assessment of China’s rise and its role on the world stage.  China’s new figures suggest that it probably has passed France, Italy and Britain to become the world’s fourth-largest economy.

Some economists are even accelerating their timetables for when China may eclipse the United States as the world’s biggest economy.  With the new figures offering a more expansive view of economic activity, some said China could overtake the United States as early as 2035, at least five years earlier than previous projections.

Now that would have been a story with global dimensions from CES.  Add it all up and I expect that we may not see CES in Las Vegas that much longer.  Any bets on when it will move to Shanghai?

B2B – Back to Bangalore

In Silicon Valley, B2B is back with a vengeance, only now it stands for something else – Back to Bangalore (we also have a new version of B2C – Back to China, but that’s another story).

Saritha Rai wrote an article titled "Indians Find They Can, Indeed, Go Home Again" (purchase required) for the New York Times over the holidays (January 26, 2005) that did a nice job of discussing this trend. She reports that:

Nasscom, a trade group of Indian outsourcing companies, estimates that 30,000 technology professionals have moved back in the last 18 months.  Bangalore, Hyderabad and the suburbs of Delhi are becoming magnets for an influx of Indians, who are the top-earning ethnic group in the United States.  These cities, with their Western-style work environment, generous paychecks and quick career jumps, offer the returnees what, until now, they could only get in places like Palo Alto and Boston.

30,000 in the past 18 months! That’s a lot of movement.  I have been looking for statistics on this reverse migration (comments would be appreciated from anyone who has seen more systematic views of inflows and outflows over time of Indian technology professionals in the US).  Anecdotally, I have to tell you that this is becoming a significant trend – and it is not just low level engineers, but some of the best and brightest of technology architects and entrepreneurs. Rai quotes one of the returnees:

“When I left India 25 years ago, everybody was headed to the United States,” said Mr. [Ajay] Kela, who pursued a Ph.D. at the University of Rochester and stayed two decades, working for companies like General Electric and AutoDesk.  For India’s best and brightest, a technology or engineering career was an irresistible draw to the United States, even until four or five years ago.  “But now they all want to get on the plane home,” said Mr. Kela, who returned with his wife and two children.

Now, to be fair, not all of these returning Indians are leaving U.S. companies. Rai does a good job of illustrating the range of opportunities to return to India through her profiles of the Indians on a street of Palm Meadows, a residential community outside Bangalore:

One of his neighbors recently returned to India from Cupertino, Calif., to run a technology start-up funded by the venture capital firm Kleiner, Perkins, Caufield & Byers. Across the street from Mr. Kela [who returned from Foster City, Calif., and is president of Symphony Services, an outsourcing firm based in Palo Alto], is another Indian executive, this one from Fremont, Calif., who works with the outsourcing firm Infosys Technologies. On the other side is the top executive of Cisco Systems in India, who returned here after decades in the Bay Area and New York.

As a denizen of Silicon Valley, I can’t help but notice that these returnees have all left Silicon Valley.  Many are still working for American companies, at least for now – that’s the good news. The bad news is that this is a significant loss for Silicon Valley as a geographic location for innovation, especially if their departures are not matched by arrivals of equally talented Indians.

I know, geography is not supposed to matter any more in this flat world.  As I wrote in an earlier posting on "The World Is Spiky", I think this is only part of the story.  I worry about the future of Silicon Valley as a spike aggregating talent on a global scale and creating an incredibly rich environment for innovation, learning and capability building.

Make no mistake about it, the entrepreneurial success of Silicon Valley in the past has depended heavily on the technical and entrepreneurial talent of immigrants from Asia – as anyone can see by walking into a meeting room of a Silicon Valley start-up and looking around the room.

If we lose our ability to attract and retain the best talent from around the world, I believe that our ability to innovate and to get better faster will suffer as a consequence, even with high bandwidth connections to Bangalore and other ecosystems across the globe.  Spikes still matter, big time.  I will go further and suggest that, in a world of accelerating change, spikes matter more than ever.  We lose sight of this at our own peril.

Detroit – The Pressure Mounts

There was little holiday cheer in Detroit this year as US manufacturers announced significant layoffs in response to intensifying competition. As I discussed in an earlier posting, the most depressing aspect of this drama (or, more appropriately, tragedy) is that the US manufacturers show limited understanding of the real obstacles to competitive success in a globalizing economy. These companies have made some improvements, but they have been unable to break out of continuing pressure on market share and market capitalization performance.

The McKinsey Global Institute has just published an in-depth report on "Increasing Global Competition and Labor Productivity: Lessons from the US Automotive Industry"(Executive Summary pdf). Although the report only covers trends in the auto industry up to 2002, it yields some interesting insight into the drivers of competitive performance. In particular, it highlights the role of process innovation in driving labor productivity in the US auto industry.  It turns out, on this dimension, US auto manufacturers have done quite well, at least relative to the rest of US business and even relative to "transplants" – non-US auto companies with US manufacturing operations.  Over the period 1987-2002, labor productivity for US auto companies grew more than 50% faster than the rest of the non-farm business sector in the US.

This productivity growth stemmed from a number of factors, but the most significant one by far was process innovation – specifically, the adoption and deployment of lean manufacturing techniques pioneered by Japanese car companies. The report is clear that process innovation alone is not sufficient – capability building is the key to significant productivity improvement:

. . . we show that far more important to overall sector productivity than the innovations themselves are companies’ capabilities in rolling out process innovations company wide and product innovations into the market.  It is the widespread diffusion of innovations that drives significant improvements in industry productivity rather than innovation itself.

US auto companies differed significantly in their pace of capability building, in part shaped by their perception of threat:

The weaker the company’s financial position at the outset, the more keenly it felt the competitive threat, and the faster and more comprehensive its response.  Ford’s serious financial troubles after the 1981-82 recession had prompted it to focus on lean production before 1987, while the more financially comfortable GM did not see the need for process transformation until 1992, when the Gulf War recession hit its performance.

One problem with the MGI report is that it tends to focus on process innovations within the enterprise rather than across enterprises, especially in the supplier networks.  It is in this area that US auto companies still fall very short relative to their Japanese competitors.

This challenge was particularly highlighted in an article on “Building Deep Supplier Relationships” (purchase required) by Jeffrey Liker and Thomas Choi in the December 2004 issue of Harvard Business Review. The authors draw a compelling contrast between the way US auto manufacturers continue to treat their suppliers with the way Toyota and Honda build long-term supplier relationships. These Japanese manufacturers have successfully transported this approach to relationship building to their US manufacturing plants dealing with US suppliers, refuting the view that differences in these relationships are culturally determined.

In short, US auto manufacturers continue to squeeze their suppliers for short-term cost-savings, generating an adversarial relationship that effectively precludes mutual understanding, collaborative innovation and shared learning.  In contrast, Toyota and Honda take a long-term perspective on relationship building, emphasizing the opportunity for all parties to get better faster by working together:

To be successful, an extended lean enterprise must have leadership from the manufacturer, partnerships between the manufacturer and suppliers, a culture of continuous improvement, and joint learning among the companies in the supplier network. That’s what Toyota and Honda are ultimately trying to achieve through their remade-in-America keiretsu.

US auto manufacturers still have a lot to learn from the Japanese in managing supply networks, but that alone is not sufficient.  These companies should be striving to achieve competitive advantage, not just struggling to reach competitive parity.  So, what else can they do?

They could start by exploring more radical ways to restructure their firms.  An interesting article in Forbes on “The Fabless Car Company” (purchase required) suggests one option:

. . . another idea gaining speed would transform the industry more radically: give smaller contract manufacturers responsibility to build entire vehicles, like the Solstice. The big automakers, under this model, would do less automaking and more designing, engineering and marketing.

To some extent, this process has already been playing out within the auto industry as car manufacturers have handed off more and more of the sub-system manufacturing and assembly operations to their suppliers. But take this to its extreme: shed all manufacturing.  To use the terms of my broader perspective on unbundling the enterprise, get rid of the infrastructure management business.

This alone would not do the job, but it would force US auto executives to focus more tightly on potential sources of competitive advantage in design and marketing.  Once they do this, they might look to China and the evolution of its motorcycle industry for inspiration on how to organize broad networks of specialized suppliers to quickly come up with innovative product designs.  Chinese motorcycle assemblers are rapidly taking global share from Japanese motorcycle companies.  It is only a matter of time before these design process networks begin to emerge in the automotive industry.

Look, I know this is a stretch, but what’s the alternative?  Death by a thousand cuts? A desperate race to achieve competitive parity – made difficult, if not impossible, by a significant wage and benefits disadvantage? Maybe it is time to break the mold and come up with a new wave of process innovations that go well beyond the boundaries of a single enterprise.

Globalization and Diversity

It’s a new year – and a time to step back and reflect on some of the broader changes going on.  My writing has increasingly focused on the implications of globalization from an economic and business perspective, but globalization also has profound social and cultural implications. We should all be worried about the risk of economic protectionism halting the process of globalization, but there is also a risk of cultural protectionism.

Kwame Anthony Appiah, a professor at Princeton University, wrote an interesting article for the New York Times Magazine last Sunday on “The Case for Contamination.” (registration required)  No, the article is not about environmental pollution, but instead it is a thoughtful defense of globalization from a social and cultural perspective.

Appiah makes the case that we must develop a new cosmopolitanism. He rejects efforts of cultural preservationists to block cultural change shaped by the process of globalization:

If we want to preserve a wide range of human conditions because it allows free people the best chance to make their own lives, we can’t enforce diversity by trapping people within differences they long to escape. . .  Cultures are made of continuities and changes, and the identity of a society can survive through these changes.  Societies without change aren’t authentic; they’re just dead.

He is particularly scathing in his critique of efforts to preserve an “authentic” culture:

Talk of authenticity now just amounts to telling other people what they ought to value in their own traditions . . . Trying to find some primordially authentic culture can be like peeling an onion.  Traditional West African cloths arrived in the 19th century with the Javanese batiks sold, and often milled, by the Dutch.

Appiah recognizes that living cultures evolve:

Living cultures do not, in any case, evolve from purity into contamination; change is more a gradual transformation from one mixture to a new mixture, a process that usually takes place at some distance from rules and rulers, in the conversation that occur across cultural boundaries.  Such conversations are not so much about arguments and values as about the exchange of perspectives.

Appiah’s article reminded me of the perspectives of two friends of mine who have a lot to say about globalization and cultural diversity.  Tyler Cowen, a professor of economics at George Mason University has written Creative Destruction: How Globalization is Changing the World’s Cultures.  It is a great book focusing on the impact of trade on cultures. Tyler discusses an interesting paradox: as trade spreads, diversity tends to increase within a society, even as cultures become more like each other. Tyler observes that:

The observed increases in homogeneity and heterogeneity are two sides of the same coin, rather than opposing processes.  Trade, even when it supports choice and diverse achievement, homogenizes culture in the following sense: it gives individuals, regardless of their country, a similarly rich set of consumption opportunities.  It makes countries or societies “commonly diverse” as opposed to making them different from each other. . . . Cross-cultural trade does not eliminate difference altogether, but, rather, it liberates difference from the constraints of place. . . . Ironically, individuals become more diverse only when their societies become more alike.

Tyler embraces the value of cosmopolitanism and, in particular, the value judgment that “poorer societies should not be required to serve as diversity slaves” (italics his).  Citing Appiah among others, Tyler notes that “Third World writers have been some of the strongest proponents of a cosmopolitan multiculturalism.” Appiah also zeros in on the elitist assumptions of cultural protectionism:

Talk of cultural imperialism ‘structuring the consciousness’ of those in the periphery treats people . . . as blank slates on which global capitalism’s moving finger writes its message, leaving behind another cultural automaton as it moves on.  It is deeply condescending.  And it isn’t true.

Chandran Kukathas, a professor at the University of Utah, has written The Liberal Archipelago: A Theory of Diversity and Freedom.  Chandran’s insightful book on political philosophy is not explicitly about the processes of globalization, but it offers a creative approach to governing societies marked by significant diversity. If we accept Tyler’s observation that cross-cultural trade increases individual diversity within societies, then Chandran’s perspectives take on added importance. If we cannot effectively govern across this diversity, we risk violent conflict. Chandran wrestles with the challenges of creating appropriate principles for a free society marked by cultural diversity and group loyalties:

Liberalism is a doctrine about human freedom responding to a world of diversity and disagreement.  The solution it presents to the problems posed by diversity is not a theory of how the many can be made one, but of how the many can coexist – since many of the many do not wish to be a part of the one.  It advocates mutual toleration and thus peaceful coexistence.  A liberal regime is a regime of toleration.  It upholds norms of toleration not because it values autonomy but because it recognizes the importance of the fact that people think differently, see the world differently, and are inclined to live – or even think they must live – differently from the way others believe they should.  It upholds toleration because it respects liberty of conscience.  It upholds toleration by protecting freedom of association so people can live as they think they should – as conscience dictates.

Appiah, Cowen and Kukathas certainly have their own differences, but they  all focus on understanding social and cultural diversity and its implications for how we conduct our economic and political affairs. Business executives ignore these issues at their own peril.

To continue to benefit from the processes of globalization, we must resist both economic and cultural protectionism.  The most potent resistance to globalization will ultimately come from the convergence of these two forces. Rather than recognizing the value of flows of trade and ideas, these forces seek to preserve the status quo.  In the process, they foster a zero-sum view of the world – the gains of one party inevitably come at the expense of the losses of another party.

In contrast, we must strive to understand how the economic forces of globalization re-shape and strengthen diversity.  By adopting a more dynamic view of these forces, we can begin to see the potential for positive sum outcomes, where all benefit from enhanced access to resources and markets.  Static views of diversity inevitably build walls.  Dynamic views of diversity help us to see the pathways towards growth and expanding options, not only as firms, but as individuals.

Ready for Web 3.0?

Are we really ready for Web 3.0?  Phil Wainewright seems to think so.  In a series of postings here, here, here and here, he  argues that we are embarking on a transition to Web 3.0.

I have enormous respect for Phil, one of the most insightful analysts regarding software trends.  I am a loyal reader of both his Loosely Coupled and Software as Services blog. But, having participated in the discussion about the emergence of Web 2.0 here and here, I have to admit that I am a bit skeptical about rushing to announce the arrival of Web 3.0.

What Phil really seems to be talking about is the migration into the enterprise space of many of the technologies that are shaping Web 2.0 in the consumer arena. As Phil suggests, this is part of the broader “consumerization” of IT.  This is an important development and it is only in its earliest stages.

One significant barrier delaying deployment of these technologies is the cultural gap separating many of the early pioneers of Web 2.0 initiatives and enterprise CIOs. The pioneers of Web 2.0 generally view large enterprises as dinosaurs. Enterprise CIOs, if they are even aware of developments associated with Web 2.0, tend to dismiss them as marginal novelties with little relevance for “real” business. 

One of the few large enterprise CIOs to anticipate and act on Web 2.0 developments is JP Rangaswami, CIO of the global investment bank Dresdner Kleinwort Wasserstein. Phil has just returned from a gathering organized by JP to explore new principles of software architecture for the enterprise that he discusses here and here.

Phil believes the on-demand architectures that are re-shaping Web 2.0 consumer applications will have an even more profound impact on the enterprise marketplace:

Don’t be surprised, then, if Web 2.0 also turns out to be just a staging post on the way to a much more mature and durable Web 3.0 era. . . . As with any shift from one generation to the next, there’s plenty of scope for new leaders to emerge – and for established front-runners to stumble – in the battle for supremacy.

I take all that as a given, but I still resist categorizing this change as “Web 3.0” (I have even more trouble with Phil’s more recent efforts to label this change as “Enterprise 3.0” – by my count, enterprises have been through at least five or six major generations of technology shifts).

Phil is focusing on two related changes. First, the emergence of the traditional enterprise as a significant new customer set for the technologies that are shaping Web 2.0.  Second, and related to the first, an urgent need to define and deploy more sustainable business models. In particular, he has been hammering appropriately on the need to define other revenue models beyond advertising for the enterprise market. But these are not profound technology shifts.  These are marketing opportunities and business challenges created by Web 2.0 technology.

Certainly the building blocks in the form of XML, RSS and Ajax (among others) are all in place. Yes, a profound re-architecture of software applications will be required to effectively exploit these technologies in the enterprise market (a while back, Phil did a great riff on Same old Software, as a Service driving home this point), but there is still a profound re-architecture of software applications pending in the consumer space as well.

Bottom line, if you take the definition of Web 2.0 that I offered in a previous post – "Web 2.0 refers to an emerging network-centric platform to support distributed, collaborative and cumulative creation by its users" – the issues identified by Phil all fit comfortably within this definition. Phil is discussing with great insight how Web 2.0 will play out in the enterprise market, something that few others have even addressed – but he is not pointing to a new generation of foundation technology.

I have two reservations about Phil’s specific perspectives on the migration of these new technologies into the enterprise:

• Phil suggests that application services will be the most economically attractive layer in this new software architecture. I am more skeptical – these application services will certainly be profitable, but will they be scalable?  I suspect that most application services will address very profitable, but very small, niches. The real way to create scalable value in this new world will be to find out how to become someone else’s platform – in other words, to persuade others to develop services on top of one’s own services. Rather than thinking about software as a service, from my perspective, it will be much more productive and rewarding the re-conceive software as a platform, but that’s the topic for another posting.

• Phil doesn’t explicitly discuss the potential for service grids in his topology (although they might be implicitly covered in his notion of aggregation services).  JSB and I have written about service grids here (pdf) and here (abstract only, purchase required).  We continue to believe these will be a significant source of value creation, especially as Web 2.0 technologies disseminate into and across enterprises. Ensuring that services are reliable, secure and warranted will be critical – and more and more challenging as services get nested in more complex ways within other services.