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Unbundling Time Warner

Having lived through decades of M&A in the media industry, we are now on the cusp of another major restructuring of the industry. The previous rounds of M&A focused on two objectives: vertical integration tying content businesses with major distribution channels and efforts to build scale by buying properties across different media types. It is becoming increasingly obvious that neither strategy works very well.

The battle by Carl Icahn and Bruce Wasserstein to mobilize investor support for a break-up of Time Warner is one early indicator of the coming restructuring. Icahn and Wasserstein want to break-up Time Warner into four separate companies – the AOL Internet business, Time Warner Cable, the print publishing business and the video and movie business. Yesterday, Steve Case joined Icahn and Wasserstein in advocating a break-up of Time Warner, indicating that he had proposed this move to Time Warner’s Board of Directors last July, shortly before resigning as a Director of Time Warner.  In a column in the Washington Post, Case indicated that:

Although I played a key role in bringing AOL and Time Warner together six years ago, it’s now my view that it would be best to "undo" the merger by splitting Time Warner into several independent companies and allowing AOL to set off on its own path.

At one level, Icahn, Wasserstein and Case have it right.  The earlier wave of M&A was largely driven by an assumption that physical distribution channels (e.g., broadcast or cable channels and movie theaters) were the key bottleneck in the media business.  If you didn’t own your own distribution channels or build sufficient scale to achieve greater negotiating power with distribution channels, the thinking went, your content businesses would be at a permanent disadvantage.  The growth of the Internet challenges this assumption at its core.

As the bandwidth of Internet connections, both wireline and wireless, steadily increases, physical distribution constraints erode rapidly.  But media companies face a different challenge and opportunity that could provide a basis for restructuring the media business. We are seeing content proliferate and a new bottleneck emerging: our attention. We each have only 24 hours of attention each day – no amount of technology innovation will change that basic fact of life. How we choose to allocate that attention among a growing array of options competing for our attention will determine who creates value and who destroys value. I have posted about the significance of this development in transforming brands.

This same development will also force a restructuring of the media industry.  Content will not be king – audiences will be king.  The largest media companies will restructure around specific audiences.  Several years ago, I used Martha Stewart as an early example of this new strategy. Martha Stewart has a very specific audience focus – homemakers – and she has built a new kind of media conglomerate consisting of media properties all focused on addressing the needs and interests of this one audience.  She has steadily expanded her share of mind of this audience and, increasingly, also her share of wallet (through direct marketing on her Internet properties and through her branded product offerings available in retail channels). Stewart is not alone in this – many celebrities (for example, Oprah Winfrey and Russell Simmons) have started to build media conglomerates targeted to specific audiences.

In contrast to Martha Stewart, I looked at Time Warner three years ago and offered the following advice (reproduced with a few minor edits):

• Divest the distribution business and retain the content business.

• Create audience segment business units to address specific audiences that are economically attractive and fit with some of Time Warner’s existing properties – some natural examples: business executives, sports enthusiasts and teen-agers.

• Assign content businesses to report to specific audience segment business units (e.g., Sports Illustrated would report to the sports enthusiast business unit) or establish content production businesses as shared services units (e.g., Warner Brothers movie studio) to support the targeted audience segments

• Build distinctive overarching audience-centric media brands aggressively

• Invest in businesses and skill sets to deepen database marketing capabilities

• Acquire businesses selectively to broaden share of attention and share of wallet within targeted audience segments and develop licensing relationships to access an even broader range of relevant resources to serve target audience segments.

That was three years ago.  My recommendations still stand, not only for Time Warner, but for the other four major US media companies – Disney (which actually would face the least amount of restructuring, given its traditional focus on parents with small children as a distinctive audience), NBC Universal, News Corporation and Viacom.

For these media conglomerates, this kind of restructuring would be the only viable option to the break-up championed by Icahn and Wasserstein. It would require a significant shift in mindset, organizational structure and skills. In the terms of my broader perspective on the unbundling of companies, these companies would need to morph from a portfolio of product commercialization businesses to a portfolio of customer relationship businesses. If successful, the specific content assets of these reconstructed companies would eventually become secondary. Their primary asset would be deep relationships built with individual members of specific audience segments. Companies targeting large audience segments could achieve significant scale by leveraging powerful network effects.

The alternative is simple: the managers of these unwieldy conglomerates should unbundle their product businesses. This would let the owners of the independent and focused content businesses develop the edge competencies that Umair Haque argues will be required to maximize the value of content assets in the networked media world. Their survival will depend upon it. If they don’t do it to themselves, impatient investors will do it for them.

Dubai – Global Talent Magnet

Dubai is not China or India.  Far from it.  In fact, in terms of population, it is entirely at the other end of the scale.  But, having just returned from a trip there, I came back with a growing sense that Dubai has an opportunity to become a much more significant player in the global economy.

Urgency

What Dubai has in common with China and India is a sense of urgency.  This urgency is deep and it is pervasive, starting at the top with Sheikh Mohammed bin Rashid al-Maktoum, Dubai’s crown prince and de facto leader of the country. Mohamed Ali Alabbar, the founder and chairman of Emaar, one of the leading real estate development companies in Dubai, provided an example of this urgency in a recent article:

This region is way behind all the regions of the world, except sub-Saharan Africa.  There’s no time to stop, the world is so advanced compared to us, we’ve been sleeping for so long.

Unlike many of its Arab neighbors, Dubai’s oil is going to run out soon, some time in the next 5 to 15 years. From the outset, Dubai has been serious about using its oil revenue to bootstrap its way into a much more diversified economy.  While Dubai can continue to prosper from the petroleum wealth of its neighbors, Dubai’s aspirations are much grander.  As grand as these aspirations are, Dubai has even greater potential.

Dubai, along with Abu Dhabi, is one of the most significant participants in the United Arab Emirates, a federation of Arab states along the Arabian Gulf.  The people of Dubai have historically been traders, successfully participating in both regional and global trade flows. Over the past 30 years, Dubai found innovative new ways to play the role of middleman. I spent quite a bit of time in Dubai almost 30 years ago and the transformation since then has been staggering.

The development of a vibrant tourist industry is the most apparent transformation. One source of urgency on this front involves the troubles further north in Beirut.  Thirty years ago, Beirut was a key tourist center for the Middle East.  Famed for its cosmopolitan atmosphere and wonderful climate, Beirut attracted affluent tourists from the rest of the Middle East as well as from Europe.  After the civil war broke out in Lebanon in the 1970’s, Dubai saw an opportunity to step into the vacuum and launched an ambitious program to establish itself as a major tourist destination. But Dubai had a limited window – as the civil war subsided (even if random car bombings continue to scare away more risk averse tourists), entrepreneurs were scrambling to re-establish Beirut as a regional pleasure center. With a less accommodating climate (temperatures in the summer average 104 degrees Farenheit), Dubai sought to compete with Beirut in terms of physical facilities.

The building boom

The construction boom playing out is awe-inspiring as Dubai seeks to establish itself as a combination Miami/Orlando (another analogy would be Las Vegas, but Dubai lacks the gambling) for tourists from Europe, Asia and Africa. Extraordinary resort complexes continue to rise along the beaches of Dubai. Hotels compete for opulence – the winner so far is the Burj al Arab, the world’s tallest hotel built on an artificial island and boasting a distinctive and eye-catching shape like a spinnaker filled with wind. The Burj al Arab bills itself as the world’s only seven-star hotel, with Rolls Royces and helicopters ready to ferry its guests to and from Dubai’s airport. Among many other hotel projects, plans are under way to build the Hydropolis, a large five star hotel completely under water in the Arabian Gulf.

Since beach real estate was relatively limited, Dubai addressed that natural constraint by launching massive programs to fill in land in the Arabian Gulf, initially in the shape of massive palm trees (the first – and smallest – of these covers an area of several square miles) and then in the shape of the world itself (I kid you not, The World is a major real estate development three miles off Dubai’s coast consisting of over three hundred man-made islands designed to mirror a map of the world – interested investors can buy an island in the shape of France or India). These developments will create almost 400 miles of new waterfront property to augment the 40 miles of natural beachfront. Hotels will occupy some of this new land, but an increasing amount of the land is being set aside for posh villas and apartments. Residential developments sell out almost as quickly as they are announced.

Dubai lacks much in the way of natural attractions other than desert (covering over 90% of the 1,517 square mile country), so it is building massive recreational facilities to keep its tourists entertained. Ian Parker’s fascinating article on “The Mirage: The Architectural Insanity of Dubai” in the October 17, 2005 issue of the New Yorker (the article itself does not appear to be online, but an audio slide show based on the article is available here) provides some sense of the scope of Dubai’s ambitious construction projects.

Modern shopping malls sprout up almost overnight, each one out-doing the previous ones in terms of scope and amenities. One of the newest, the Mall of the Emirates, boasts over 400 retailers and an indoor skiing facility (no, I am not kidding, it produces over 6,000 tons of snow), including a choice of five ski and snowboard runs, with the longest measuring 1,300 feet long with a 200 foot vertical drop, a black diamond run of 900 feet and a ski jump.

Offices are going up even more rapidly, with the foundations of the world’s tallest new building, the Burj Dubai, already in place (the final height of the building is a closely guarded secret, but it is expected to be on the order of one hundred and sixty stories). This contender for the tallest building will have an Armani-run hotel on the lower floors, about one hundred floors of apartments and fifty or more floors of office space above that. As one further sign of the urgency in Dubai, the crews on many construction projects work 24 hours a day, seven days per week.

Dubailand – Dubai’s competition to Disney World is under construction. Dubailand, of course, will be bigger.  Covering a one hundred square mile area, the five billion dollar Dubailand project will be three times the size of Manhattan.  When it is built out, Dubailand will include Eco-Tourism World, Sports & Outdoor World, Auction World, Virtual Games World and Themed Leisure & Vacation World.  It will include replicas of the Eiffel Tower (70 feet taller than the original), the Taj Mahal (150 percent bigger than the original) and other major attractions

A vibrant night club scene with hundreds of night clubs featuring a bewildering array of world music from reggae and salsa to hip hop and bhangra attracts some of the hottest DJ’s from around the world, keeping tourists entertained until late at night. In this context, the Las Vegas analogy becomes more appropriate – a vast entertainment complex is arising out of the desert.

Insourcing human capital

But the physical facilities, as impressive as they might be, aren’t the most interesting aspect of Dubai’s tourism play.  It’s the human capital that Dubai has mobilized to support this initiative.  Just the construction projects alone require more people than Dubai has (there are only about 120,000 citizens of Dubai), so Dubai imports construction workers by the hundreds of thousands from a broad range of countries, especially India and Pakistan. In fact, over 80% of Dubai’s population consists of expatriates from over 160 countries.  About 200,000 of these expatriates provide a diversified managerial class for many of Dubai’s commercial enterprises. Unlike many other countries where immigrants are resented as potential competitors for jobs, Dubaians recognize that they cannot realize their ambitions without lots of foreign labor.

Richard Florida in his book The Flight of the Creative Class reports one study showing that Dubai leads global cities in the proportion of foreign born population to native born population.  Even more significantly, Dubai ranks third in the world on Richard Florida’s Mosaic Index, measuring immigrant population diversity.

In staffing its hotels and entertainment facilities, Dubai has taken a very targeted approach to attracting appropriate talent.  Tourists could spend weeks in Dubai without ever meeting a native of Dubai.  The hotels are largely staffed by people imported from countries known for their hospitality, including Thailand, the Philippines and Indonesia. Tourists venturing out into the desert for a camel ride are apt to find that the “Bedouin tribesman” tending to the camel is actually an immigrant from Tunisia. In effect, Dubai has become a new kind of tourism middleman – it attracts tourists from around the world and serves them in great style with highly trained hospitality staff also imported from around the world. This strategy is paying off – the World Tourism Organization recently declared Dubai to be the fastest growing tourism destination on earth.

Expanding the role of middleman

In commercial activity, Dubai has also capitalized on its role as a middleman, spawning a growing financial services industry (it has created a free zone known as Dubai International Financial Centre) and trading industry (it built the world’s largest man-made harbor in 1976 to expand its role in the shipping industry).  I wrote earlier this week about Dubai’s growing role as a global outsourcing provider of containerized port management services.

Building a global e-business hub in Dubai

Dubai also has aspirations in the e-commerce and Internet arena.  It is building Dubai Internet City in the hope of attracting and incubating a growing set of e-businesses.  It is in this area that Dubai’s aspirations fall short of its potential.  Dubai’s government and business leaders tend to talk about its opportunities in this area in terms of becoming a center of e-business for the Middle East.  Why stop here? Why not seek to become a center of e-business for the world by pursuing the same kind of human capital insourcing strategy that has driven its success in the tourism industry?

Given Dubai’s growing attraction as an entertainment and pleasure center, it could potentially attract techies from around the world to build entrepreneurial e-businesses targeting global markets.  With enterprise zones offering modern telecommunications infrastructure and office facilities along with the lure of no corporate or personal income tax, many Internet entrepreneurs might be willing to brave the summer heat to build promising e-businesses headquartered in Dubai and staffed with skilled techies imported from Eastern Europe and Asia.

Of course, potential tech immigrants would have to forego the pleasures of pornography and drugs (Dubaians tend to be pretty unforgiving about such vices, even though they are in general much more liberal than their Saudi neighbors).  Those with families might find it an attractive environment to raise their children and others might be enticed to come for a few years in search of interesting business and technology opportunities. Given the growing global shipping, trading, financial services and travel and leisure businesses being built in Dubai, there are ample opportunities to extend these business initiatives on the Internet.

Opportunities in global education

On a related note, Dubai has a similar opportunity to use its insourcing strategy to build out innovative educational businesses targeting faculty and students on a global scale.  By creatively using the Internet to extend its reach, Dubai could establish itself as a major educational destination for students from Asia and Africa as well as the rest of the Middle East to come for technical and professional training. It could then provide continuing learning services over the Internet after the students return to their home countries.  Once again, Dubai’s growing status as an entertainment and pleasure center might be helpful in attracting both faculty and students from around the world.

The bottom line

If they play their cards right, Dubai’s leaders could establish their country as much more than a tourism and trading center.  Harnessing the capabilities of global technology networks and an innovative insourcing strategy attracting talent from around the world, Dubai could become a global e-business and educational center as well.  Dubai’s leaders have the sense of urgency and the ability to think big in their construction projects.

The irony is that they just may not be thinking big enough.  The formula driving the success of their tourist industry is much more robust than they realize.  The tourism industry could serve as a powerful bootstrapping device to position Dubai as a global talent magnet. Sure, it is hot in Dubai but, with some creative promotion, business investment could get a lot hotter – and it is tax free.

Private Equity and Offshoring

Buried on page 22 of the Financial Times today is a brief news item announcing that Michael Marks, the outgoing CEO of Flextronics, is joining Kohlberg, Kravis and Roberts.  Marks was a key architect of the aggressive move by Flextronics, one of the world’s leading contract manufacturers for the high tech industry, into China and India.

This is a significant signal regarding the growing interest of private equity firms in the offshoring market.  Private equity firms look for situations where companies are slow to restructure their operations in response to intensifying competitive pressure.  Many Western companies have been slow to exploit the potential created by offshoring, both to reduce cost and, more importantly, to participate in skill-building arbitrage.

Private equity firms see a substantial opportunity to accelerate this process. They can take companies private that are under-performing, re-structure them by stripping out operations that can be better performed offshore and then take the company public at a much higher valuation. There is a key message to senior executives – if you don’t move aggressively to take advantage of offshoring opportunities, private equity firms may step in to do it for you.

Dubai as Router for the World – Containers and Packets

It was probably a mistake for me to begin my last post talking about a bad case of the flu and then to go radio silent for three weeks.  A lot of people sent messages asking if I was OK. Not to worry, I’m fine, having finally beat the flu that would not leave.

In fact, I have just returned from another edge – Dubai.  Dubai represents a geographic edge, sitting near the intersection of Asia, Africa and Europe (OK, the latter is a stretch, but in this jet age it is close enough).  I want to blog more extensively about Dubai in a separate posting – my focus here is on the recent announcement that DP World concluded an agreement to acquire the venerable British company, Peninsular & Oriental Steam Navigation Co., created by a royal charter back in 1840, at a price exceeding $5 billion.

This news received a lot of play in the international business press, but barely received any comment in U.S. publications even though it marks a significant milestone in the restructuring of the global trading infrastructure.

It is significant on a number of levels.  First, it drives home the growing prominence of Dubai in world trade. With this acquisition, DP World, which is owned by Dubai’s Ports, Customs and Freezones Authority, catapults from the sixth largest port operator in the world to third in terms of capacity. It also significantly expands DP World’s presence in China and India. Earlier this year, DP World made another significant acquisition when it bought CSX World Terminals, the international terminals business owned by CSX, the U.S. railroad and shipping company.

The scale of Dubai Ports (the parent of DP World) is in part due to the size and growth of its Dubai operations.  In 2004, its Dubai operations ranked among the top 10 container ports in the world, surpassing Antwerp in throughput.  Dubai Ports has been growing its throughput at a rate exceeding 20% over the past several years at a time when most other ports were growing at less than half that rate. Its growth rate last year was exceeded only by the Shanghai Port and the Shenzhen Port in China.

But that is only part of the story.  DP World was formed as an international arm of Dubai Ports in 1999. It has been growing by leveraging the expertise acquired in operating Dubai’s own port operations to provide port management services to large container ports around the world.  It has in effect become a major outsourcing services provider in the container port business, offering a broad range of services including management of container terminals, free zones and related infrastructure. In the words of the company, DP World “can completely turn around the performance of ports, rather than just achieve small incremental improvements solely through better management practices.”

In effect, DP World has been capitalizing on an even more fundamental shift in world shipping that has played out over the past 50 years.  Back in 1955, an American entrepreneur, Malcolm McLean, came up with the ingenious idea that the efficiency of loading and unloading ships could be dramatically improved by modular design.  Rather than having shippers use any size container they wanted, McLean defined and tirelessly promoted adoption of a new shipping standard – the twenty foot container.  McLean formed Sea-Land, one of the most successful contemporary shipping companies, to pioneer container shipping techniques.  The fascinating story of the impact of this innovation is told by Stewart Taggart in a great article entitled “The 20-Ton Packet” that originally ran in Wired magazine back in October 1999.

Why did Taggart call the article “The 20-Ton Packet”?  Simple – he was making a compelling case that containerization did for the global shipping industry what packet switched networks did for global information flows decades later:

Just as the Net and deregulated telephony spelled the death of distance for telecommunications, containers spelled the death of distance for manufacturing.  By breaking down cargo into standard units, greater amounts  could be more efficiently pushed through a network.

While other factors were certainly at work, containerization played no small role in the dramatic growth in world merchandise trade over the past 50 years and has been instrumental in facilitating the offshore movement of manufacturing.  As Taggart reports,

From a small base of 6.3 million in 1972, the number of containers handled by the world’s ports had risen 26-fold, to 163.7 million, by 1997. As scale efficiencies grew, prices dropped.  Over the past 20 years, nominal unit-transport costs on the key Asia-US route have fallen by about one-third, or roughly two-thirds in inflation adjusted terms.

For those interested in a great techie build on the original Taggart article, please see the PowerPoint presentation by Nick Gall of the Meta Group on “TCP/IP and Shipping Containers: How to Architect Freedom” delivered to OSCON 2005.  This presentation was covered by both Daniel Steinberg and Phil Windley.  Gall draws attention to an even more techie piece by David Clark at MIT on “Interoperation, Open Interfaces and Protocol Architectures” which highlights the importance of “spanning layers” in achieving interoperability. The standards around container format represent just the kind of spanning layer that Clark is talking about.

Containerization has not only transformed the maritime shipping industry; it has led to a transformation of truck and rail transport as the need to unpack and repack goods disappeared with the spread of containers across all forms of transport.  Containerization has posed a challenge for older ports as they sought to re-tool for this new technology.  DP World has been riding this transition, offering world-class management techniques to take full advantage of the efficiencies created by containers.

But here’s a key lesson.  Modularization does not necessarily lead to fragmentation.  In fact both the container shipping business and the port operation business have been rapidly consolidating.  As containerized shipping becomes more pervasive, both sets of players are realizing significant economies of skill.

Both of these businesses are what I call infrastructure management businesses – businesses that focus on high-volume routine processing activities.  As the unbundling of the corporation proceeds, these businesses are getting carved out of traditional companies and, in the process, rapidly consolidating.  Modularized technology and management techniques are accelerating this consolidation on a global scale.

Modularization will intensify fragmentation for another kind of business – product innovation and commercialization businesses – but that’s another story for another time.

So why should business executives care about what is happening in the container port business in Dubai?  It provides insight into much more fundamental trends that are re-shaping our global economy at an awesome pace.  It shows that countries and companies on the edge have an opportunity to become significant global players by understanding and harnessing the forces at work.  It also drives home that our most well-known and well-established companies, even those granted royal charters in 1840, are vulnerable to these same changes and can succumb quickly to the initiatives of more aggressive competitors, even those just formed in 1999.

Drucker’s Gone

I am laid up with the flu so I am still having trouble processing the reality that Drucker’s gone.  Drucker was an iconoclast who lived on the edge throughout his life.   Prolific until the very end of a long life (he was 95 when he passed away last Friday), he always sought to move beyond established boundaries, believing that they limit the potential for insight and understanding.

It is hard (and unfair) to distil work of enormous insight that spans more than thirty books and thousands of articles but, for me, the key themes that pervaded all of Drucker’s work were people, processes, direction and simplicity.

People. Drucker insisted throughout his writing that enduring economic value creation depends ultimately on people – as he liked to say, "people are a resource, not a cost".  Finding ways to help people discover and develop their talents and then working to amplify the efforts of people – that is the real rationale for any firm and, indeed, any institution.  For Drucker, economizing on transaction costs was far too narrow and sterile a way to characterize the role of the firm. In many different forms, he kept reiterating that the role of all institutions is to make human strengths effective and human weaknesses irrelevant.

Processes. Drucker also took a process view of the world.  By process, I don’t mean the static boxes and lines that we tend to associate with business process maps.  Again, this was much too narrow for Drucker.  Drucker instead focused on the basic insight that our world continues to evolve through dynamic processes that continually re-shape the landscape we play on.

Static views of the world were anathema to Drucker.  He had little patience for most of the economic profession with its obsession with equilibria and closed systems.  He saw that real understanding came from focusing on dynamic processes shaped by new knowledge, technological progress, entrepreneurs, innovation and growth – exactly those areas that conventional economists have the most difficult time explaining with their “rigorous” mathematical models.

Perhaps this was why he had such affection for two fellow Austrian émigrés – Joseph Schumpeter who shifted attention to the gales of creative destruction that re-shape our economic landscape and Friedrich Hayek who championed a process view of economic activity and institutional development (although, ever the individualist, Drucker resisted efforts to group him with the Austrian school of economics).

Direction. Drucker also understood that the only way to harness these processes was to have a clear sense of direction – not only at the institutional level, but at the level of each individual.  He was not a big fan of adaptation as a business strategy.  Of course, he believed that firms had to be flexible and responsive to their environments but, in his view, that mattered little if the people in the enterprise did not have a shared sense of long-term direction and persistence in pursuing that direction.

Simplicity. Drucker was also a strong proponent of simplicity.  He believed that most of the problems that businesses (and indeed all institutions) run into stem from making things more complicated than they need to be. People and dynamic processes are complicated enough.  Simplicity was one of the reasons he emphasized the importance of a sense of direction.  Direction helps people to make choices and to prioritize their actions – it helps them to decide what not to do, as well as what to do. He applied this principle in his own writing – it was a model of simplicity, using rich metaphors wherever possible to communicate simple but powerful points.  As he observed, “my best ideas have only one moving part.”

Now, at one level, these are pretty basic and obvious themes.  But that was part of Drucker’s genius.  He took basic and obvious themes and relentlessly applied them to a broad range of business issues.  His great insights on concepts like “management by objectives” and “knowledge workers” all stemmed ultimately from his focus on these four basic pillars. By staying focused on the basic and obvious, Drucker managed not only to be relevant, but at the center of innovative management thinking throughout a career that spanned almost sixty years from the publication of his path-breaking Concept of the Corporation in 1946.  One small indicator of Drucker’s continuing relevance is that his name remained in the top 10 search items on Technorati for several days following his death – even the new generation of "technorati" seem to have an abiding interest in his perspectives.

The following excerpt on outsourcing from an interview almost ten years ago provides one example of how Drucker ties his core themes together while addressing new themes:

One of the things to understand about outsourcing is that the woman who works for the hospital, cleaning floors, is very bored by the job. But if she works for ServiceMaster, an outsourcing company, she’s very excited by it because people listen to her, people challenge her. She is expected to improve the job and gets paid for doing it — whereas before no one would listen. These days, her supervisor had a broom in her hands only five years ago. So the outsourcing people have a great strength in making what we might call a dead-end job much more challenging, because they take it seriously.

Although a participant in the academic world for most of his professional career, Drucker was always suspicious of his academic colleagues with their narrow focus on disciplinary boundaries.  His audience was business managers and he wrote for them, not for his academic colleagues. Tom Peters in the FT obituary on Drucker commented on the curious absence of Drucker’s writings from any of his graduate college courses:  “Drucker effectively by-passed the intellectual establishment. So it’s not surprising that they hated his guts.”

There’s a lot being written about Drucker on his death, but for my money, two of the best obituaries are the ones by Steve Forbes in the Wall Street Journal today and by Simon London in the Financial Times a few days ago (my colleague Christian Sarkar somehow has a more detailed version of the column than the one that is available on the FT web site). The Wikipedia entry on Peter Drucker has a pretty good bibliography and there’s also an interesting audio interview with Drucker done just a few months ago that is available from WBUR (hat tip to Christian Sarkar). There’s also a very good intellectual biography of Drucker – Shaping the Managerial Mind by John E. Flaherty.

Drucker’s gone and we will all be poorer for it. If there is one lesson we should take from his writing and his life, it is that living on the edge has its rewards in terms of insight and understanding.

Innovation and R&D

Michael Schrage wrote a great op ed piece for the Financial Times on November 8. Under the headline of “For innovation success, do not follow where the money goes”, Michael rips in to those who equate R&D spending with innovation in response to a recent UK Department of Trade and Industry report focusing on global R&D spending.

I urge you to read the whole piece; it is unrelenting in its attack.  Let me just quote some of the juicier pieces:

Any policymaker, chief executive or innovation champion who relies on R&D intensity and R&D budgets as a meaningful or usable metric to assess global competitiveness virtually guarantees shoddy analysis and distorted decisions.  Few things reveal less about a company’s ability to innovate cost-effectively than its R&D budget.  Just ask General Motors.  No company in the world has spent more on R&D over the past 25 years. Yet, somehow, GM’s market share has declined.

Michael makes clear that R&D spending is only an input:

The simple fact is that R&D spending – whether in euros, dollars or as a percentage of sales – is an input, not a measure of efficiency, effectiveness or productivity.  Ingenuity, invention and innovation are rarely functions of budgetary investment.

He also makes an important point about some of the most innovative companies in the world today:

While Wal-Mart, Texco and Dell have miniscule R&D budgets, their quality, procurement and growth requirements have probably done more to drive productive innovation investment than any five European Union funding initiatives.

Finally, Michael draws some important implications for public policy:

Growing market competition, not growing R&D spending, is what drives innovation.  A successful innovation policy is a competition policy where companies see innovation as a cost-effective investment to differentiate themselves profitably.

Right on!  In my consulting career, I have participated in many analyses seeking to draw a correlation between R&D spending and business performance in specific industries.  The conclusion: there is absolutely no correlation – what you get is a scatter diagram.

I only wish that Michael had gone a bit further and spent more time attacking a related fallacy: equating patents with innovation.  At least this approach focuses on outputs, rather than inputs, but it focuses too narrowly on only one kind of output.  In effect, it equates innovation with invention.  This immediately narrows the focus to product innovation and largely ignores process and business model innovation. The longer I work on innovation, the more convinced I have become that process innovation is far more powerful than product innovation – it has a multiplier effect that product innovation can rarely match.

Bottom line, the only effective measure of innovation activity is the rate of productivity improvement in an enterprise – the growth in value added generated per employee.  There are lots of ways to “game” productivity in the short-term – for example, by raising prices or by cutting staff and forcing the remaining people to work harder. But these can’t be sustained – over time, they generate diminishing returns or, in the extreme case, lead to productivity erosion. That’s why static productivity measures can be misleading. What really counts is the ability to sustain and amplify productivity improvements through innovative products, process improvements or new business models.

From a competitive viewpoint, what matters is the relative rate of productivity improvement. R&D spending and patent filings will matter little if they do not translate into faster productivity improvement – in fact, they can be a significant distraction.  Those who understand this will have a significant edge as competition intensifies in the global economy.

Bra Blowback

Regulation usually has unintended consequences.  This is a difficult lesson for those who turn to the government for protection from the pressures of the market.  Markets are extraordinarily robust formations. They usually find a way around regulation and often produce outcomes far less attractive from the viewpoint of those seeking regulation in the first place.

The Wall Street Journal ran a great story on November 9 driving this lesson home one more time.  Under the lead of “Chinese Textile Companies Aim to Build a Better Bra” , Mei Fong chronicles the response of Chinese bra makers to the trade agreements between China and both the U.S. and Europe to curb the growth of textile imports.  These trade agreements give preferential treatment to higher priced items – this makes sense if the goal is to protect Western manufacturers from lower priced apparel items.

So what has been the response of Chinese bra manufacturers?  The article focuses in particular on Top Form, Inc., a company that produces 61 million bras a year for such leading brands as Victoria’s Secret, Playtex and Maidenform. Top Form has set up a laboratory near Shenzhen to aggressively pursue research into bra technology.

Top Form has already made a lot of progress in rapidly improving its design and production processes.  Mei reports that

Top Form has evolved from primarily making cut-and-sew brassieres – simple designs easily put together by China’s nimble and low-cost seamstresses.  Now, its bra production is a process more akin to car assembly: fusing together the many components needed to make a bra, eliminating much of the need for hand-sewing, or using high temperatures to mold sheets or synthetic fibers into wafer-thin sheets. . . Productivity has improved since it takes about five minutes to make a seamless bra, compared with about 15 minutes for an average cut-and-sew bra . . .

These productivity improvements help companies like Top Form to generate significant growth in profits.  These profits in turn are being reinvested into research labs like the one established by Top Form to develop entirely new bra designs.  Top Form is morphing from a contract manufacturer into a source of innovative new designs. 

Not only are individual companies investing in bra-research centers, but the article reports that “bra towns” have emerged where the businesses all focus on various aspects of bra manufacture.  Hong Kong’s Polytechnic University has even established a degree course in bra studies.

What is the result of all this activity?  The article quotes one expert as follows:

David Morris, a university professor who teaches brassiere studies at United Kingdom’s De Montfort University, says it is clear that China’s bra makers aren’t just relying on cost advantages anymore.  Some of these Chinese bra makers are “the top end of seamless constructions – we couldn’t duplicate it.”

Now, this rapid incremental improvement probably would have been pursued in any event.  It is a pattern that JSB and I discuss at length in a variety of industries in China and India in The Only Sustainable Edge. Nevertheless, the article makes clear that the trade regulations have played a major role in accelerating these investments in capability building.  US apparel manufacturers who were worried about competition at the low end of the apparel business from Chinese manufacturers now find that competition is intensifying at the higher end of the apparel business. This is just one more form of innovation blowback that Western companies are experiencing as they seek to cope with the challenges and opportunities created by emerging economies like China and India.

Of course, this kind of regulatory dynamic plays out in many industries.  But the temptation to turn to regulation is especially pronounced on the edge – whether it is the edge of industries, regional economies, cultures or technologies.  It is on the edge that established practices confront new threats (as well as new opportunities).  Rather than confronting the threats head-on and embracing the new opportunities, there is a strong temptation to hide behind the walls of regulation.  These walls create complacency for those inside and increase urgency for those outside.  The results are rarely what those inside the walls intended.

Symposium on Social Architecture

I hate red-eye airline flights, but I am going to be taking one so that I can participate in Corante’s Symposium on Social Architecture in Boston next Tuesday.  The topic and the people coming together are just too good to pass up. Billed as an “un-conference”, the gathering is going to focus on: the overarching themes and underlying technologies that are driving the massive uptake of people-centered, user-driven, individual-connecting applications, communities, content, and services.

The organizers (or is it “un-organizers”?) are promising a series of highly interactive sessions with strong audience participation. The sessions will be covering the following topics:

• Is Business Ready for Social Software?
• Engines of Meaning: How Will We Scale Our Understanding?
• Is Social Software A Mirror Or a Lens?
• How Will The Social Web Change Media?
• A Case Study in Web-Based Civics: Katrina and Recovery 2.0.

Stowe Boyd and David Weinberger are key ringleaders of this event, but some of the featured participants include Seth Goldstein, Kaliya Hamlin, Mary Hodder, J.D. Lasica, Liz Lawley, Kevin Marks, Chris Nolan, Andrew Rasiej and Thomas Vander Wal.

I am going because I am convinced that social software will play a central role in driving the next wave of value creation for the enterprise.  For the past couple of decades, the primary focus of IT investment in the enterprise has been to standardize and automate business processes.  Over the next couple of decades, the real opportunity will be to amplify practices by supporting collaboration on demand – helping people both within and across enterprises to connect more flexibly and richly with each other around real business needs.

I am looking forward to being at the symposium, but I am going to need some strong coffee when I arrive – did I tell you I hate red-eyes?

Return on Attention and Infomediaries

Attention is getting a lot of attention. Most recently, Robert Scoble from Microsoft blogged about an epiphany he had earlier this week during a visit to Silicon Valley.  He is beginning to see the importance of attention and how it will shape value creation on the Internet.

Attention is hugely important.  It is the asset that will determine who creates value and who destroys value in the years ahead. Among other things, it will transform the nature and power of brands, as I discussed recently here, here and here. It is also reshaping the media business as I hinted in a posting on Martha Stewart a few years ago.

But I worry that we are confusing attention with attention profiles – the historical record of where we have allocated our attention in the past. In the process, we may lose sight of what is really valuable and how to harness that value.

Attention refers to the choice we each make regarding where we will focus at any point in time. It is also highly dynamic – each moment we have an opportunity to re-visit our choice and make a different choice. Attention is ultimately what counts – attention profiles have value only because our attention has so much value. I remain indebted to Michael Goldhaber for his seminal article on this topic – "The Attention Economy and the Net".

Why is our attention so valuable? Because it is so scarce or, more accurately, because its relative scarcity has been rapidly increasing.  Attention is a constant resource for each of us – we only have 24 hours in the day. It is up to us how we use those 24 hours.  What’s changed is that we have more and more options competing for our attention. We face increasing abundance both in the production and distribution of goods and information about those goods. Some people think this is a curse.  I happen to believe it is a blessing for many reasons.

But it does pose a challenge.  Each of us feels more pressure to increase our return on attention – given more and more options competing for our attention, we run significant risk of fragmenting our attention and diverting our attention to lower value options.  Anything or anyone who can help us increase our return on attention will likely get more of our attention over time, especially if they can further increase our return on attention over a broader scope of activities. A powerful increasing returns dynamic  can be unleashed if the game is played right.

Attention profiles have the potential (but only the potential – there are serious challenges in harnessing this potential) to increase our return on attention. They can make filters and finders much more effective in connecting us with the people and resources that are most relevant. Given new technologies, we are finally acquiring the tools required to capture and store our own attention profiles and to make these profiles selectively available to others who offer the promise of further enhancing our return on attention.

In a nutshell, this is the infomediary opportunity that I originally outlined with Jeffrey Rayport in a Harvard Business Review article (purchase required) back in 1997 and developed in much greater detail in Net Worth: Shaping Markets When Customers Make the Rules (co-authored with Marc Singer), published 6 years ago in 1999. It is also, as I understand it, the basic proposition driving the recent formation of AttentionTrust.org by Steve Gillmor, Hank Barry and Seth Goldstein, among others.

Unfortunately, the web site and the founders do themselves a disservice and muddy the waters in the way they frame the undertaking. The home page of AttentionTrust.org is framed entirely in terms of rights, concluding with the call to action: “Assert your right to you!”  This theme is further developed in a blog posting by Seth Goldstein entitled “AttentionTrust.org: A Declaration of Gestural Independence”.

Having spent a lot of time in this field, I am skeptical whether an appeal to rights or independence is going to be sufficient to get mass adoption.  What matters to most people is whether they are going to get greater return on their attention – it is a much more pragmatic concern.

In a posting on March 28th earlier this year, Steve Gilmor presented part of an IM exchange with Kevin Werbach where he responded to Kevin’s question about the significance of attention.xml (a standard being developed by AttentionTrust.org).  Steve’s response is interesting – it does a great job of explaining how this new standard can help Kevin deal more effectively with a flood of information by connecting with the information that is most relevant.  Not once does Steve talk about rights to attention or attention profiles – it is a very pragmatic and compelling pitch based on increasing return on attention.

In reflecting on the disappointing experience of the first wave of infomediaries, I draw two key lessons.  First, many of these businesses led with the proposition of privacy protection, but most people most of the time are not that concerned about protection of privacy – they will readily trade information about themselves for something of perceived value.  Witness the frequent fliers who will not board a plane until they know the airline has captured detailed information about their itinerary. 

Second, these businesses also emphasized the monetary value of attention profiles and offered subscribers the opportunity to receive money in return for information about themselves. The problem with this approach is that the cash value of attention profiles is actually quite limited from the viewpoint of an individual consumer.

As I emphasized in Net Worth, the real value of the infomediary comes from using attention profiles to reduce interaction costs and increase return on attention. The infomediary can help customers to sort through all the options competing for their attention and to connect rapidly and conveniently with the resources that matter the most to them – not only through search but, increasingly, through recommendation services based on deeper understanding of their interests and preferences.

Unfortunately, this is a much more challenging proposition to deliver on than either blocking access to attention profiles or selling attention profiles to the highest bidder. But it is also a compelling proposition that creates interesting opportunities for increasing returns dynamics. AttentionTrust.org ought to lead with this proposition and focus on developing the technology standards that will help individuals and their infomediary agents to increase return on attention.

For Robert Scoble, the question is whether Microsoft will take a customer or provider lens when thinking about the technologies required to increase return on attention.  If Microsoft plays this game right and approaches this from the viewpoint of the customer, it has an opportunity to leapfrog past Google and Yahoo and carve out a leadership position in the consumer arena.  Scoble might want to ask around about Microsoft’s acquisition of Firefly back in 1998.  The company has taken some initiatives in this direction in the past but without much success.  The game is still open.

Ambient Findability

Information architecture – the words themselves are enough to cause the eyes of most executives to glaze over.  It’s abstract, likely to be complicated and expensive and unlikely to produce near-term revenue, much less profit, impact.  “Ambient Findability” – these words won’t help the average executive much either. Even my Microsoft Word application doesn’t like findability – it keeps suggesting that I change it to fundability (there’s a certain perverse logic here because, as I will suggest below, findability will lead to fundability).

So I hesitate to say it – Ambient Findability is a great new book about an increasingly important aspect of information architecture.  Wait! Stop! Before executives tune me out, hear me out.

Companies today realize that push approaches to marketing are less and less effective. As I have written about elsewhere, we are entering the era of reverse markets.  Ask business executives to define a market and they will likely say that it is a place where vendors can find customers and sell them more and more stuff.  Instead, we need to view markets through the reverse lens of customers who are trying to find appropriate vendors at relevant times and get the most value they can out of the their vendor. Powerful forces are re-shaping markets to make this reverse market lens much more helpful in determining how to create value.

If businesses are going to succeed in the future, they need to master pull approaches to marketing – how do you get potential customers to seek you out and how do you pull complementary resources together to become ever more helpful to customers? These pull approaches hinge upon the ability to improve findability. So, what does that mean? Peter Morville, the author of Ambient Findability (and, incidentally, one of the founding fathers of the discipline of information architecture), helps the reader with a dictionary-style definition:

Find-a-bil-i-ty n

a. The quality of being locatable or navigable

b. The degree to which a particular object is easy to discover or locate

c. The degree to which a system or environment supports navigation and retrieval

For those who are interested, Morville posted a fascinating blog entry  preceding his book by a few years where he explores the relationship between findability and information architecture.

Later in the book, Morville sums up why executives need to pay attention: “. . . . findability will be a key source of competitive advantage. Finders, keepers; losers, weepers.” Blunt, but accurate.  In a world of increasing choice, findability becomes an essential dimension of competition.  Of course, it’s always been important – it’s the wisdom behind the maxim in retailing that there are only three things that matter: location, location, and location.

But now the traffic is not just flowing down well-defined city streets – it is working its way through the global web from link to link in highly idiosyncratic ways. And it’s not just the local retailers that are competing for the customer’s attention and wallet – it is every vendor and information producer around the world.  In this environment, becoming findable makes the difference between life and death.

Morville believes that push and pull will continue to co-exist, but he suggests that

. . . in today’s attention economy, fitness requires a new balance between push and pull.  The playing field has shifted, and yet few companies understand the new rules. In their bias towards push, marketing is missing opportunities to make products more findable.

Morville comments that a lot of businesses worry about usability of their products or their web sites, but they fail to recognize that “findability precedes usability.”  If a potential customer can’t find you, usability doesn’t really matter.

Findability is not just about new design or marketing techniques.  Morville observes that “findability is at the center of a quiet revolution in how we define authority, allocate trust, and make decisions.”  Its implications are profound not just for those who want to be found, but for those who are doing the finding.  As the dust jacket of the book maintains, “what we find changes who we become.” This is a thoughtful meditation on the implications for both finder and findee in a world where finding becomes increasingly important and challenging.

Morville provides us with a very well-written, even eloquent, book, drawing much needed attention to a key dimension of competition going forward. Business executives of all types will profit from reading this provocative book.  At the very least, it will put squarely on the table some key questions:

• How findable are your products and services?
• How findable is your business?
• How findable are you personally?
• What can you do to improve your findability for those who matter?

For those who want to find Morville, he has begun a blog findability.org